Document of

The World Bank

FOR OFFICIAL USE ONLY

MICROFICEjE COPY

Report No. 10062-NEP Type: (SAR) Report No. 10062-NEPCRUZAT, A./ X82675 / F9 041/ ASTI'

STAFF APPRAISAL REPORT

NEPAL

NEPAL TELECOMMUNICATIONS CORPORATION (NTC)

FIFTH TELECOMMUNICATIONS PROJECT

APRIL 8, 1992

South Asia Country Department IAsia Technical Department

This documeut has a restricted distribution and may be used by recipients only In the perfonnance oftheir official duties. Its contents may not otherwise be disclosed without World Banik authoiizatlon.

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CURRENCY EOUIVALENS(As of September 1991)

Currency Unit - Nepalese Rupee (Nrs)US$1.00 - Nrs 42.3Nrs 1,000 - US$ 23.6Nrs 1 - 100 paisa

FISCAL YEAR

July 16 - July 15

ABBREVIATIONS AND ACRONYMS

DANIDA - Danish International Development AgencyEIRR - Economic Internal Rate of ReturnFINNIDA - Finnish International Development AgencyFIRR - Financial Internal Rate of ReturnIBRD - International Bank for Reconstruction and DeNelopmentICB - International Competitive BiddingITU - International Telecommunications UnionISD - International Subscriber DialingHF - High Frequency (3 - 30 Mhz)JICA G Japan International Cooperation AgencyLCB - Local Competitive BiddingMARTS Multiple Access Radio Transmission SystemsMOC Ministry of CommunicationsNTC Nepal Telecommunications CorporationO&M - Operations and MaintenancePABX Private Automatic Branch ExchangePCO - Public Call OfficeSTD - Subscriber Trunk DialingUNDP - United Nations Development ProgramVHF - Very High Frequency (30 -300 Mhz)

FOR OFFICIAL USE ONLYNEP

FIFTH TELECOMMUNICATIONS PROJECT

Credit and Rr2iegt-Summary

His Majesty's Government of Nepal (HMG)

Beneiieaay Nepal Telecommunications Corporation (NTC)

Amunt: SDR40.1 million (US$55.0 million equivalent)

Lendine Terms: Repayable over 40 years, including 10 years of grace onrepayment of principal.

Relending HMG would onlend the funds to NTC in US$ at a variableTerms: interest rate based upon the six month LIBOR plus a spread of

3.5X for a period of 15 years, including 5 years of grace inrepayment of principal.

Proiect The proposed project aims to expand telecommunications,blectivesa facilities ane provide new services, improve the quality of

existing services, strenghten NTC and address major sectororganization issues. It would provide about 60,850 netadditional telephone lines, expand national and internationallong distance facilities, and engage consultants tostrehgnthen NTC and address sector organization issues. Itwould benefit all sectors of the economy through improvedaccess to telecommunications facilities and improved servicequality. About 50,000 new subscribers would gain access tothe network, which would provide a partial substitute for, andcontribute to the overall efficiency of physicaltransportation. The project faces no special risks.

EstiMated Costs:

US$ Million --Local Foreign Total

Equipment & Services 5.6 80.0 85.5

Civil Works 9.0 6.0 14.0

Consultanoy 0.0 3.0 3.0

Total page Coat 14.5 89.0 102.5Physical Contingenoy 1.6 4.6 6.0Price Contingency 3.0 5.0 8.0

Total Prolect Cost La 19.0 97.6 116.5Int. During Construction 6.5 1.0 7.5(lD%Z')

total Flnanolnu Required 25.6 98.5 124.0

La the prolect cost Inoludes an estimated IJ9t.3 mililon equivalent In duties.

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

it

Fiancming Plan:

US$ million

Source of Financing Local Foreign Total

DANIDA, Denmark 0.0 18.0 18.0FINNIDA, Finland 0.0 11.0 11.0Japan 0.0 8.6 8.6Nepal (NTC) 25.5 6.0 31.5IDA 0.0 55.0 55.0

Total Financing 25.5 98.5 124.0

Eatimated IDPA DisburseMent:tMIA I7isca yen£

93 1.24 1995 196 1299 ?-------- (US$ million)

Annual 5.5 11.0 13.5 11.0 6.0 8.0Cummulativo 5.5 16.4 30.0 41.0 47.0 55.0

Rate of retun: 22X

NEPAL

FIFIH TELECOMMUNICATIONS PROJECT

NEPAL TELECOMMUNICATIONS CORPORATION (NTC)

Staff Appraisal Report

Male of Conat

CREDrr AM1 PROJECr SU1SN ARY . ........ .......... .. . . . .. . i

1. THE TELECO MUDM NIC.ATIONS SECTOR . ........................ 1A. Background ............... . 1B. SectorStructure ................ . 2C. Service ....................................... 2D. SectorGoals andStrategy ................. 6E. Sectorallssues. ...................... 7F. IDA's Role .................... . . . . . . . . . . . . . 9

2 THIE TB[LECOA84IUNICATIONS ENTTY .................. . .... 11A. Organization ................................ 11B. Management ssues . . .............................. 12C. Staffng ............................ 6. . . . . . . ..... 13D. Training ..... ................................... 13E. Accounting System and Financial Management ...... 6 ............... 14F. Bfllingand Colleaion .................................... 14G. Audit ......................................... 15H. Operations and Mainteanc ................................. 16

This report is based on the findings of: (1) preappraisal and appri misions to Nepal in August 1990and July 1991 which included Messrs. H Lantzke and A. Cruzat (ASTIF), (2) a Tariff Study mission inDecember 1990, which included Messrs. P Smith, A. Cruzat (ASTIF) and consultant from Analysys(UK), and (3) a Sector Reform Seminar misskm.n in June 1991, which included Messrs. B. Wellenius, PSmith, A. Cruzat (ASTIF) and consultant from Debevoise & Plimpton (USA). The peers reviewers forthis project were Messrs. B. Wellenius, D. Joshi and N. Hughes (ASIE). The Division Chief is Mr.Frederick T. Temple, and the Country Director Is Mr. Jochen Kraske.

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3 TIiEPROJECT ............ .... .......... 17A. NTC's Investnent Progran .. . . . . . . . . . . . . .. . . . . . . . . . . . . 17B. Project Objectives ............ ........................ . 17C. Project Description ............. ......... ......... I ... ..... ... . 17D. Project Cost ............................................. 19E. Project Financing . ...... ..... .*.... .. .. .. ... .................. 20F. Procurement ............................................. 21G. Disbursement .................................. o. o............... 23H. Progress with Project lnplementation .............................. 241. Project Implementation ... ................................... 24J. Monitoring and Reporting .......... .... . ................... 25K. Supervision Plan .......................................... 25L. Environmental and Health Aspects .... .. ..... ...... .. ....... ....... . 26

4 FINARNCILLARNALYSIS ................................ @ 27A. Past and Present Financial Performance . ........................... 27B. Projected Financial Perbrmance ...................... ... 29

5 ERCONOMIC ANALYSIS ............. ........ ....... 4.. 31A. Benefits ................................ 31B. Tariffs ...................................... o. . 32C. Retum on nvestment ............. ............ 33D. Least Cost Solution ...... ................ . ..... .33

E. 1tojectRisks ..... .. .................................... 34

6 AGREEMENTS TO BE REACHED AND RECOMMENDATION ... ........ 35A. Agreements ............................................. 35B. Recommendation ............. ............................. 37

V

AM=

1.1 Access to Telephone Service . ............................ . 391.2 Coverage of Service by Region, Zone, District and Urban Center ....... 411.3 Telephone Demand and Supply ............................ 471.4 Telecommunications Sector Organization Seminar ................. 491.5 Telecommunications Sector Structure Consultancy - TOR ............ 55

2.1 NTC Organizadon Chart . . ....... ...... .. 4.4a.4444..4. . 592.2 ManagementConsultant -TOR . . ............ 4444.44. 4a...... 612.3 NTC's Employees by Category and by Region ....... ......... o .. 632.4 Performance Indicators ............ 4..........4......44 . 65

3.1 Telephone Expansion Progranm ............ . . . . .... .......... 673.2 NTC's Institutional Development Program ........... o . 733.3 Project Cost by Year .. .......................... * 773.4 Proposed Procurement Arrangements ........................ 793.5 Disbursement Schedule .. 4*................................ 813.6 Construction Schedule .......... ....... . ... . .. .... . .... 833.7 Supervision Consultant -Tems of Reference .... o ........ ... 85

4.1 Historical Financa Statements ........................... .. 894.2 Breakdown of Revenues .............. ............. o .... 934.3 Assumptions for Financial Statements Projections . . 954.4 ProjectedFinancialStatements . . ................... . 99

5.1 Transfers to/from EOG - NTC .o ... .. . . .. . ... . ...... .. 1035.2 Evolutionof0NTC5sTaffs ... .. ........ .lOS5.3 ComparisonbetweenExisting andProposedTariffs ...... . ...... 1095.4 Returnon Investnent ........................ * ......... 113

6.1 ListofDocuments i ProjectFile . . . ....... .. ...... .... .. . . 117

MAP IBRD map No. 23473

1. THE TELECOMMUNICATIONS SECTOR

A. Background

1.1 Over the past decade Nepal's governments have increasingly recognizedthe important role which effective telecommunications play in political, socialand economic development. Given Nepal's mountainous terrain and the KathmanduValley's separation from the densely populated areas of the Terai near the borderwith India, telecommunications has become a vital element in governmentadministration and commercial operations. Furthermore, duting the late 1980's,an estimated 9% to 10% p.a. of Nepal's foreign exchange earnings (excludingforeign aid) was derived from tourism for which telecommunications is of primaryimportance. Currently Nepal has one of the lowest densities of telecommun-ications service in Asia (para. 1.6); although from 1985 to 1990 services grewat a very good rate of 22% p.a. this relatively high growth is mainly the resultof the low starting base. Despite this low penetration of services, because ofthe .-or's relatively recent development, the facil.ities provided are generallymodern and perform reasonably well. The investment In the sector (Table 1.1)averaged 0.5% of GDP during 1982 to1991; this is just below the typical growth rate for developing and developed gpu t.. ......... , ......2...countries', and too low to satisfydemand.

1.2 The proposed project wouldcontinue to expand the availability oftelecommunications services. While notex dea.expected to meet demand fully (para.18.1.12), the proj ect would increase :services by about 64% from 1993 to .ond ..19982. The resulting 10% p. a. growth il/ suoh *trate would be low compared with the * o sr'od

previous period as a result of HMG's r ,,tconservative approach to sector ...... O 4 8 >development, mainly due to financial ~constraints. The proposed project also ~'WD~l U4*A~

aims to improve the operator's " * *V~Pt $N*performance and develop a sector reformstrategy - - especially in the light ofinternational trends - - in a way thatwould best suit Nepal's political and cultural environment. In this way theproject would lay the foundation for appropriate continued improvement in theperformance and development of telecommunications in Nepal over the next decade.

Developed countries (e.g. France and Japan) invest about 0.7Z of GDP in t.lecoomAmiostions, whereas LDCsInvest as an average O.X of GDP. Special oases suoh as Malaysia, which is still building up itsinfrastructure bass, invested about 2% pas. during the same period.

'An Increase in working lines from 72,950 to 119,980; equivalent to a growth of 10.47X p.a.

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B. Sector Structure

1.3 The Ministry of Communications (MOC) of His MaJesty's Government (HMCis responsible for communications in Nepal. Under this Ministry services areprovided by the Nepal Television Corporation (NTVC), the Postal ServiceDepartment, the Broadcasting Services Development Committee (BSDC), and the NepalTelecommunications Corporation (NTC). NTC is responsible for all puLlictelecommunications services. While' dedicated networks by other public sectorentities are not prohibited, no other entity owns or operates dedicated networkfacilities of significant size.

1.4 The first public entity for providing telecommunications services inNepal, the Telecommunications Departmerit of Nepal (TDN), was established withinthe Ministry of Works, Transport and Communications in l959. This department'smandate was defined in the Telecommunications Act 2019 of 1963. The Act prim-arily addressed the provision of telegraph services and still applies to layingwire lines and erecting posts. In October 1969, as a condition of the first IDAcredit (Credit 166-NEP), TDN was transformed into the Nepal TelecommunicationsBoard (NTB), under the same Ministry, and given expanded telecommunicationsresponsibilities. Under the subsequent Communications Corporation Act 2028 of1972, a separate MOC was formed, and in June 1975, the formation of the existingNepal Telecommunications Corporation (NTC) further separated the telecommun-ications operator from the Government.

1.5 Various Ministries and NTC share regulatory functions for thetelecommunications sector in Nepal. The Cabinet approves tariffs based onproposals by the Ministries of Finance and Communications. The granting oflicenses to users of the electromagnetic spectrum is handled by the FrequencyControl and Monitoring Section of the XOC which is currently being reorganizedand strengthened under an International Telecommunication Union (ITU) sponsoredproject. The Ministry of Communications, which lacks technical expertise, relieson NTC for type approval of terminal equipment, the provision of which is opento the private market.

C. Service

Accems to Service

1.6 Telphone. Nepal's telephone density, with only 0.32 working lines per100 population9 is among the lowest in the world (e.g. Kenya 0.66, India 0.57,Malawi 0.28, Bangladesh 0.17). Furthermore, telephone services are concentratedin the urban areas where 1.5 million people are served with a telephone densityof only 4.0 per 100 population (compared with Indonesia 6.1, Papua New Guinea5.9, Kenya 5.0). Most rural areas have little or no access to telecommunicationsservice of any kind. As of July 1991 about 300 telephones, Including 40 longdistance public call phones, served rural areas with a population of 17.5 millionpeople. However, on completion of the ongoing IDA-financed Fourth Project

' As of July 1991, Nepal had 61,650 working lines for 19.32 mllion people.

3

(Credit 1588-NEP), some 3,200 additional telephones will be provided (para.1.17). Annex 1.1 summarizes the telephone coverage by urban and rural areasA.

1.7 For development purposes the country is d1iided into five Regions, butreal authority rests with the 14 Zones and their subdivisions, the 75 Districts,which are headed by Chief District Officers. Thirty of the 75 districts havetheir own telephone exchange; 26 are served with long distance public calloffices (extensions from exchanges in neighboring districts) plus some extendedlines for direct subscribers; and 19 lack modern telephone facilities and dependon poor quality voice radio lirks or telegraph services. Further details ofgeographical coverage of telephone service by administrative area are presentedin Annex 1.2.

1.8 Telx and Telgraph. Telex se4-vice is provided to 599 subscribers inKathmandu and 8 other localities through a single 768 line exchange. In linewith world trends, telex is gradually being replaced by facsimile service whichis particularly appropriate for Nepal because it can easily transmit both Englishand Sanskrit characters.

1.9 Public telegraph service provides the basic telecommunicationsfacilities throughout rural areas. It operates in all 75 districts, and in manytowns it is the only telecommunications link. The quality of the service variesconsiderably. Modern telegraph service with bi-lingual teleprinters and storedprogram display facilities connected to an automatic gentex network is availablein the Kathmandu Valley and the 8 major urban centers along with telex service.Manual telegraph service relying on voice communication is provided through avariety of modern digital transmission and older VHF radio links. Also thereremain telegraph services to 30 localities which rely on morse code. Thesegenerally use low quality links over HF radio systems which sometimes are usablefor limited voice cowmunication.

Usage of Service

1.10 The available data is inadequate to determine service use by customertype accurately because NTC's existing telephone rates and records r;o notdifferentiate among business, government and residential subscribers. However,a sample of subscribers in various exchanges suggests that 15 to 20X of the linesare for government services (including lines to public officers' residences paidby the government). Since many telephones in residential homes are usedextensively for business, differentiating between business and residential useis virtually impossible and not relevant for the proposed project as there is nodifferentiation under existing or proposed tariffs.

4 As of th. end of the Fourth Project exohauge program (October 1991) Nepal had: A manual exob1-gee with600 lins, 2 cross-bar *xchanges with 10,000 lines, and 41 digitol electronio exohanges with 67,100lines.

4

Demand for Service

1.11 In Nepal, the percentile gap between expressed demand for telephoneservica and available telephone lines has remained about the same In the last tenyears (Figure 1.1). Although during that period the number of Installed linesIncreased by a factor of six, the unsatisfied expressed demand also increased bya factor of six. It is difficult to estimate true demand for service. Thehistoric demand figures, based on waiting lists, tend to reflect the supplyconstraint rather than the real demand for service. From this low demand basethe rate at which demand will grow tends to be underestimated. Waiting lists arenotoriously inaccurate because telephone demand is not registered in areas wherethere is no service, the waiting list registration fee was a nominal NRsl.00,which encourages multiple registrations for a single applicant (the registrationfee was increased to NRs5O in October 1991), and the very long waiting time forservice discourages many from applying.

1.12 In order to improvethe accuracy of its forecasts,NTC has undertaken detailed Demand and Supplyfield surveys. Based on these Working Lines v's Expressed Demandsurveys, the total demand for Ines (Thousands]service at July 1995 is 120 Lexpected to be about 133,000 ........

line.s. The project's size hasbeen set to approximately meet .. ....-....

this demand. However, as the do ..... .... ........proJect's preparation has been.- . ...

delayed due to political reform 20,in the country, completion is .

not expected until 1997 or 191i1990 1591 1991 1193 1194 1359 1998 1137 1999 1999 1990 1911998, and therefore some unmet Yearsdemand for telephone service atthat time is expected. There wOrkigtd* -- xpr,s,,d Ogad

is little risk, therefore, that Expressed demand beod on waiting fltl.the project would provideassets that would remain idle.Annex 1.3 contains supply and FIGURE 1.1: Expressed Demand and Supplydemand data for 1980-1996. of Telephone Service

Existing Facilties, Service Quality and Proposed hnprovements

1.13 Loeal Exchange Networks. Following a major program to install modernequipment under the Third and Fourthi Projects (IDA Credits 799-NEP and 1588-NEP),Nepal enjoys relatively modern exchange facilities. Over 992 of exchange linesare automatic, of which 87X are now digital. Consequently, about 86X ofsubscribers have access to Subscriber Trunk Dialing (STD) service. Despite thenew network, there is evidence that local network congestion during busy hoursof the day has begun to increase above acceptable levels. Until the FourthProject, NTC had inadequate means of measuring and controlling such congestion.With the modern digital exchanges, indicators are now available but NTC is still

developing the skills to monito. these indicators properly and take effectivecorrective action.

1.14 NTC is spending considerable effort during the Fourth Project toupgrade its outside plant network, and, as a result, these facilities' perform-ance has improved considerably. For Kathmandu Valley, monthly faults5 per 100subscribers have fallen from 65 in 1983/4 to 33 in 1985/6 and 16 in 1989/90.Concerted efforts are being made to improve this performance which is still farbelow international standards (1 to 3 faults per 100 subscribers per month) andworse than fault levels in other Asian countries (e.g. Philippines and Indonesiahave about 9 faults per 100 subscribers per month).

1.15 The proposed project would increase the number of installed lines from77,700 to 138,550 (78% increase). 'n addition, to handle the additional trafficfrom the increased lines, a signi>, ant expansion of the inter-exchange networkand a new tandem exchange would be 'rovided. The additional circuits would bedesi ned to improve network security and reduce congestion, thereby Improving thecall completion rate. Also under the proposed project the remaining four manualexchanges (0.8% of the lines) would be replaced with digital equipment. NTCplans to replace the remaini-nZ. analog exchanges (10,000 lines) during the nextdevelopment phase. The project would also focus on monitoring and imprGving thenetwork's performance, with special emphasis on outside plant.

1.16 Long-slanceNetwori. The development of Nepal's main long-distance networkbegan with an analog microwave system (still in operation) covering the centralpart of the country. Under the Fourth Project, this network was extended withdigital microwave links to the east from Kathmandu up to Bhadrapur and Ilam andto the west from Nepalgunj up to Mahendra-Nagar. Spur links, based upon threeradial systems originating in Biratnagar, Kathmandu and Nepalgunj, feed regionalexchanges. Under the proposed project a new digital microwave link will providephysical diversity to the aging analog microwave link Kathmandu-Pokhara-Nepalgunj, thereby completing the basic digital trunk network. Some additionalspur links will also be provided.

1.17 Raml Long.dlstance Network. Due to Nepal's mountainous terrain and highpercentage of rural population, NTC has paid special attention to developing itsrural networks economically. Rather than install exchanges in every town,transmission links are often used to more economically bring traffic to largercenters for switching. These links comprise a combination of small capacitymicrowave systems installed under a Japan International Cooperation Agency (JICA)program, multi-access radio transmission systems (MARTS) funded by IDA under thecurrent Fourth Project, and miscellaneous Very High Frequency (VHF) and HighFrequency (HF) systems. The JICA-supported network reaches 32 of the largerurban centers, of which nine are equipped with small telephone exchanges, and theremaining locations are provided with a minimum of 6 telephones each, therebyproviding basic service. The MARTS systems are still under construction underthe Fourth Project. When installed, four large systems (capacity of about 500lines each) and sixteen small systems (capacity of about 130 lines each) willprovide service to 425 localities, allowing for connection of about 3,200 rural

' About 85X of faults ae from outside plant f*iluzes.

6

telephones to provincial And rural exchanges. The proposed project would includean extension to the JICA network f.rom, three exchanges in the Eastern Region(Rajbiraj, Biratnagar and Ilam) to feed eleven localities and the provision ofthree additional MARTS systems.

1.18 About one hundred VHF links provide service to prorincial and ruralsubscribers; about fifty of them will be replaced by MARTS. HF links providebasic emergency-type communications to thirty places. As modern services areprovided to more of the rural localities, VHF and HF systems will be relocatedto extend service to the smaller towns and villages. Under the proposed projectadditional VHF and HF services will also be provided.

1.19 Intemadond Seriee. International service is provided through theSagarmatha satellite earth station, which is connected to the INTELSAT system andprovides 72 telephone circuits and 52 telex circuits througn 69 channels, and onemicrowave transmission system to India which carries about 100 telephone and 10telex circuits. International Subscriber Dialing service (ISD) is available to36 countries. The increase in international traffic during the past year hasresulted in a gradual increase in circuit congestion, and an expansion offacilities is planned under the Fifth Project.

D. Sector Goals and Strategy.

1.20 The Government has announced the following medium-term developmentobjectives for the telecommunications sub-sector:

(a) To provide telephone connections, with automatic long-distancefacilities, in all 75 districts;

(b) To install exchanges in places where demand for telephone is 100 ormore and trunk circuits are available;

(c) To satisfy the demand in areas with existing exchanges;

(d) To reach a density of one telephone (0.8 main lines) per 100population by the year 2000;

(e) To enhance the long-distance network's reliability by providingalternate routing;

(f) To introduce new services, such as data communications, paging andmobile telephone, as required; and

(g) To promote a well-conceived organizational structure and managementsystems and practices that enable NTC to operate efficiently.

1.21 These objectives are reasonable and achievable in the medium term, andHMG's development of a clear set of targets reflects the positive and progressiveattitude of HMG and NTC. However, the targets are very specific regardingdevelopment and technical issues, reflecting NTC's strong involvement in their

7

preparation. As a result, they do not address important aspects of franchise,ownership or operational performance.

E. Sectoral Issues.

1.22 Over the past four projects, with IDA's active encouragement, HMG hastransformed the telecommunications operator from a Department into al independentGovernment-owned corporation. Although NTC's overall performance is relativelyweak when measured against international standards,it has gradually developedinto one of the best performing government corporations in Nepal as a result ofproject-related institutional development. In particular, its network structureis sound, and national and international service quality is reasonable andsteadily improving.

1.23 Recent rapid technology change has created opportunities for indepen-dent private operators to provide a variety of services efficiently. This,coupled with an international trend of countries reforming the structure of theirtelecommunications operations plus a growing demand for more and varied services,compels a review of the sector's structure. That review should include areassessment of the roles of the government, NTC, and private companies, and ofcompetition. HMG has expressed an interest in sector reform. In June 1991, IDAheld a two-day seminar in Kathmandu attended by representatives of HMG, NTC,DANIDA and FINNIDA6 (see Annex 1.4). The seminar's goal was to alert HNG tointernational telecommunications reform trends and discuss the current sectorstructure and issues. IDA concluded from the seminar that an organized reviewof the sector was timely. That review should examine, inter-alia, the followingsector issues:

(a) Policy Mechanism: HMG needs a mechanism for developing and regularlyreviewing sector policy. Although some long-term targets fortelephone development have been set, HMG still needs to develop abroader policy framework and mechanism for reviewing and updatingpolicies.

(b) Lector Structure and Options for Privatization: HMG needs to reviewthe public and private sector's roles in delivering a variety oftelecommunications related services. The Act creating NTC providesfor part private ownership, but HMG has not pursued this option.However, NTC already uses the private sector in a variety of smallways in providing tel )hone services. These include civil works,provision of terminal equipment, and public call office management.HMG needs to determine how the private sector could play a greaterrole in providing telecommunications services more effectively thanNTC -- either in competition with or as a substitute for NTC.Provisions for further private sector involvement would need toconsider the type, quality and coverage of service, the provision ofsocial and unprofitable services, and ownership arrangements and

0 DAN7IDA li the Danish InternationalL Dovelopment Agency; FINNIDA Is the Fianiuh International DovelopmentAgency.

access to capital. Access to adequate foreign exchange funds forsector development has been and will be a key consideration as HMG,and hence NTC, has been largely dependent on grant aid and IDA creditsfor sector investment.

(C) RegUlatign: NTC is effectively unregulated, however explicitregulation of telecommunications services would be necessary once thestructure differs from the self-regulating state monopoly model.Apart from regulating the frequency spectrum, interconnectionarrangements, service quality, and technical standards, a regulatorshould be the arbitrator between the government and NTC to ensuretariffs are kept at reasdnable levels. However, setting up effectiveregulation in developing countries has proven difficult. The sectoris technically and legally complex, and the high levels of capitalinvestment involved can be distractive to fair decision-making. Also,low government salaries and restrictive civil service rules constrainregulators from attracting quality staff. Within these constraintsHMG needs to determine what to regulate, who should regulate, and howto enact regulation and set up the regulator.

(d) Independence of NTC Qperat,on: NTC's Board members, politicalappointees from within the government, have little or no experiencein commercial business. Yet the Board has over-managed NTC'soperations by becoming unnecessarily involved in day-to-day decisionmaking. In the event that NTC would remain fully or partiallygovernment owned, any review should consider mandating that most Boardrepresentatives be independent private and business persons ofnational repute. Furthermore, any restructuring should aim to limitthe Board's involvement in NTC's day-to-day operations by delegatingmore responsibilities to NTC management and then hold management moreaccountable for the quality and efficiency of service performance.

1.24 Under the proposed project HNG would engage consultants to review thecurrent sector arrangements and identify options for addressing the above issues.The consultants would present their initial findings and recommendations to aforum of appropriate Nepalese and IDA representatives. Based on the forum'sfindings the consultants would refine their report. HMG would then use thereport to determine what actions to take on the above and any other pertinentissues. If necessary, HMG would engage consultants also to help in draftinglegislation and implementing any organizational changes. During creditnegotiations, HNG agreed to: (a) not later than December 15, 1992, to engageconsultants, acceptable to IDA, to review the sector's structure and policiesunder agreed terms of reference; (b) not later than March 31, 1993, based on theconsultant's report, and in consultation with IDA, establish an appropriate time-bound sector reform program; and (c) implement that reform program (para. 6.1 a).The timetable and draft terms of reference are given in Annex 1.5.

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F. IDA's Role

Past Experience

1.25 IDA's involvement in Nepal's telecommunications sector began in 1969with a credit of US$1.7 million (Credit 166-NEP of November 1969). Since thenIDA has financed three more operations: Credit 397-NEP for US$5.5 million in June1973, Credit 799-NEP for US$14.5 million in August 1978 and Credit 1588-NEP forUS$22 million in April 1986 (t:he ongoing Fourth Project). Through these projectsIDA has played a significant role in funding and guiding the expansion offacilities, the structuring of the sector, and institutional development of theoperator. NTC has complied with on time presentation of its financial statementsand has satisfied IDA's finan,cial covenants. The December 1977 PPAR report forCredit 166-NEP and the April 1.989 PCR for Credits 397-NEP and 799-NEP rated theseprojects as successful overall, contributing significantly to the development ofinfrastructure, improving the quality of telecommunications services andsupporting NTC's institutional development. The main problems in the past weredelays in start-up, deciding new technologies, and commissioning some systems.Important lessons were to: (i) make more realistic implementation schedules, (ii)assist NTC in making organizational changes before projects start, (iii) advanceprocurement actions, and (iv) help NTC finalize financing arrangements in timefor project implementation. NTC, IDA, DANIDA and FINNIDA have jointly takenthese lessons into account. As a result, this project has undergone signif-icantly more preparation than others in the past. In particular, IDA has alreadyprovided assistance to HMG and NTC in the preparation of the proposed project,including consultants engaged to assist in rural planning, review NTC's humanresource and management arrangements, and participated in tariffs study leadingto specific recommendations on tariff structure, level and adjustment policy(para.5.5). In addition, ITU consultants helped prepare the Kathmandu part ofthe project, and DANIDA consultants helped with outside plant planning.Moreover, to ensure procurement begins on time, NTC is required to prepare fivespecific bid documents prior to credit negotiations (para. 3.23). Projectfinancing aill come from a variety of Government bilateral supported loans andcredits for which approval-in-principle has been given and final approval isbeing processed.

Rationale for ]IDA Involvement.

1.26 IDA's continued support for Nepal's telecommunications sector throughthe proposed Fifth Project and possibly future operations is justified for thefollowing reasons:

(a) to support the reform of the telecommunications sector in Nepal. Theproposed project is part of long-term IDA involvement in the sectoraimed at helping HMG make the telecommunications sector a contributorto sustained economic growth, a positive agent in the country's socio-economic developmernt and aimed at making it largely self reliant formeeting its investment needs. The Bank's cross-country experience inthe telecommunications sector in developing countries is directlyrelevant in advisiing HMG on sector structure, management andorganization, on financial relations with the operating entity, on

10

tariff structure, level and adjustment policies, and on the timing andopportunity for introducing elements of competition and private sectorparticipation.

(b) to help maintain a necessary balance between physical andinstitutional development of NTC. IDA involvement would provide NTCwith necessary assistance for its institutional development, inparticular to strengthen planning, project management, and staffmanagement, extend the use of computer systems for daily operations,and provide general strategic-technical guidance.

(c) to achieve economy in investment costs of equipment. Apart fromminimizing costs through use of ICB to procure IDA-funded equipment,IDA's in- ,lvement has created pressures on bilateral suppliers tomaintain competitive prices for their goods. In the case of switchingequipment, the alternative of competition to bilateral appears to havereduced the cost of goods. In cases where grant funds have beenallocated in a lump sum, the use of ICB prices as benchmarks haspressured suppliers to lower their costs, allowing more equipment tobe supplied within the same funding limits.

(d) to mobilize and coordinate co-financing. IDA has helped coordinatethe in-depth and extended preparation of this project (para. 1.25),clarifying the role and conditions of other donors and reaching a highlevel of coordination.

II. THE TELECOMMUNICATIONS ENTITY

A. Organization

2.1 The Nepal Telecommunications Corporation (NTC) is administered by agovernment-appointed Board of Directors which includes the Chairman, who is theSecretary of the Ministry of Communication, and five voting members. The Boardincludes NTC's General Manager who chairs meetings in the absence of theChairman, and the Financial Controller, who is usually elected as its non-votingsecretary. The remaining four voting members are appointed by the Government,usually from other government agencies and state enterprises. The CommunicationsCorporation Act 2028 allows, inter alia, for a degree of privatization of NTC byprescribing the following ownership percentages: a minimum of 51Z for HMG, 25Xfor NTC employees, and a maximum of 24X for the general public. However, thisprovision has not been implemented, and shares have not been issued.Nevertheless, NTC's other four Board Members are designated with reference to theprovision: (i) one nominal representative of government shares, usually theAdditional Secretary, Ministry of Finance; (ii) one nominal representative of theemployee shareholders, who has been one of NTC's Deputy General Managers;(iii) one member among well-known persons related to the telecommunicationssector, who usually is a University professor; and (iv) one nominalrepresentative of private shareholders. The tenure of the Directors is twoyears, and they may be re-appointed.

2.2 -NTC, like other government-owned corporations, is subject togovernment regulations for investment plan approval, foreign credit access, andstaffing and employment conditions. Staff-related matters are governed by PublicService Commission (PSC) rules. Recently the PSC delegated its authorityregarding NTC to a Committee comprising NTC staff and one non-NTC member. Thisis a positive step in providing more autonomy to the entity.

2.3 NTC's General Manager is the chief executive officer and is appointedby HHG, not by NTC's Board of Directors. NTC's organization chart is shown inAnnex 2.1. Three Deputy General Managers (DGMs) head the following Divisions:(i) Operations and Maintenance, which includes five O&N Regions (Biratnagar,Kathmandu, Birgunj, Butwal and NepalgunJ) and has 801 of the staff; (ii) Planningand Development, which includes Planning, Procurement, Engineering and theTraining Center; and (iii) Finance and Administration, which includes Personnel,Finance, Financial Management, Business and Administration, and the InternalAuditor. The Legal Section reports directly to the General Manager.

2.4 NTC recognizes the need for organizational changes to strengthenplanning, upgrade project management capacity, and increase the responsibilitiesof regional operations groups. Accordingly, NTC proposes to keep the planningfunction under a Planning Division, and create a separate Planning Division tohandle project implementation and procurement. Minor works responsibilities willbe delegated to Regional Operations Groups; and will create Accounts and Sales,and Operation units in the Kathmandu Regional Office. New technical positionswill be created and staffed to strengthen these new divisions. The proposedchanges are appropriate and timely. However, in conjunction with the proposedproject, NTC will make additional organizational changes, such as decentral-ization of the personnel functions to permit line managers greater participation

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in personnel decisions (see Management Issues below). During negotiations anagreement was reached to (i) implement the proposed new organization structureby December 15, 1992, and (ii) undertake a review of its personnel structure anddecentralize and delegate appropriate personnel functions to the variousdivisions by December 31, 1992 (para 6.2 a).

B. Management Issues.

2.5 A major constraint to NTC's performance is the ineffectual managementtechniques used by upper and middle level managers. During project preparationIDA engaged a management expert to review NTC's management performance andrecommend improvements. The expert identified the following main concerns:(i) the lack of effective day-to-day management practices coupled with a completelack of management training, and (li) significant human resource problemsincluding the lack of a regular manpower plan and serious delays in fillingvacancies (much of these problems stem from the highly centralized personnelstructure which is out of touch with operational needs and is to be decentralizedas noted in para. 2.4). IDA proposes to address this issue as one of the keycomponents of NTC's Institutional Development Program (IDP) (para. 3.8 and Annex3.2). Rather than rely on traditional management training classes, in line withthe expert's recommendations, it is proposed that NT( engage foreign consultantsto develop and then guide NTC through a long-term in-house program to developmore effective management processes and practices. The consultants would berequired to engage a local counterpart to work with them and learn from thatprogram, provide advice and support on local cultural issues, and gradually takeover the program's longer term management. While NTC's management has agreed toproceed with the strengthening program, they are cautious about using foreignconsultants to address problems related to imbedded local cultural values, yetlocal consultants are not equipped to handle this task. Therefore, beforeengaging foreign consultants, three of NTC's top management would visit a numberof telecommunications companies which have undertaken similar programs. As astart the Australian and Overseas Telecom Corporation (AOTC) and British Telecomhave agreed to the proposed visit. The NTC managers would meet staff involvedin successful management reform programs, sensitize themselves to the key rolethey themselves would need to play in the process, and meet involved consultants.During negotiations, NTC agreed to appoint, by June 30, 1993, managementconsultants acceptable to IDA, for initiating and implementing a managementdevelopment program (para 6.2 b). NTC also agreed on the draft terms ofreference for the consultants given in Annex 2.2.

2.6 Another constraint is NTC's limited planning capacity. The survey,planning, and design of outside plant cable networks is in most need of streng-thening. NTC has already begun to strengthen the responsible unit with theassistance of DANIDA consultants. One specialist has been engaged for two yearsunder the Fourth Project; this program will be continued and additional DANIDAconsultants engaged under the Fifth Project. Strategic, switching andtransmission planning functions also need to be strengthened. This would be donethrough the reorganization proposed by NTC, part of which would include theseparation of planning from implementation responsibilities (para. 2.4).

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2.7 A further constraint is NTC's lack of modern, integrated managementand operations tools. The majority of NTC's operations and maintenanceprocedures rely on manual systems. Computer-based systems are used for faultcontrol and subscriber inquiries, and, under the Fourth Project with the help ofconsultants, NTC has developed its own computer billing system for processingbills (see para 2.13). But these systems are not integrated, and NTC needsadditional integrated computer-based systems for accounting, operations andmaintenance, and planning and development. This deficiency will start to beaddressed under a Institutional Development Program (IDP) component of theproposed project with the development of a corporate data base. Using continuedFINNIDA technical assistance, and with the provision of additional computers andassociated equipment (to be provided under the project), the corporate data basewill bring together common elements of existing systems and form the foundationfor new systems ultimately to be developed. In the near term NTC plans todevelop computerized (i) customer record data base, (ii) cable and plant recordsystem, (iii) order processing system, and (iv) financial and ledger system. NTCis separately developing systems for inventory control and a fixed assets controlregister.

C. Staffing

2.8 NTC's staff numbered 3,494 as of July 15, 1990, equivalent to 74 staffper 1,000 operating lines. This ratio is marginally better than Sri Lanka (85)and Bangladesh (97) but very high in comparison with industrialized and otherdeveloping countries where staffing levels range from 5 to 15 staff per 1,000lines. Staffing details are given in Annex 2.3. As is typical in countrieswhere staff salaries are low, NTC employs too many low and unskilled workers.About 57X of staff are classified as "other" which includes semi-skilledadministrative and field staff, and unskilled laborers, drivers, messengers, tea-boys, etc. NTC has embraced a policy of restraining the growth and restructuringthe composition of its staff by maintaining the level of unskilled and semi-skilled staff at existing levels and increasing only the number of skilled staffrequired as the network expands. Under this policy it is expected that NTC willreduce its staffing levels to 50 staff per 1000 lines by 1995.

D. Training

2.9 NTC's Telecommunications Training Center (TTC) was established in thelate 1970s with the assistance of ITU and UNDP. The TTC has a staff of 54, 15being instructors and assistant instructors. The Center is well equipped for itspresent purposes: it provided 2,910 staff-weeks of training to 386 persons during1990. The training is basically technical; administrative and management train-ing as well as on-the job training are almost non-existent in NTC. In addition,in FY90 about 80 employees were trained overseas, mostly on technical subjects.

2.10 Non-professional technical staff are recruited only after they havesatisfactorily passed ten months qualification training at TTC. Aspiring NTCworkers compete annually for places in this program and, if selected, are paidan allowance of NRs350 per month. Professional level staff are hired fromstudents with engineering degrees from foreign universities. Recently there has

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been an abundance of qualified applicants for engineering positions. TheTribhuvan University of Nepal plans to provide electronic/electrical engineeringcourses starting in 1993. Staff for switching, transmission, power and airconditioning are hired from Certificate Level (C.L.) graduates; School LeavingCertificate (S.L.C.) is required for lower technical skills.

2.11 NTC has applied to the International Telecommunications Union (ITU)for assistance to engage experts to (i) review and redevelop the TTC coursematerials; (ii) train TTC staff in developing new programs for TTC and on-the-jobtraining; (iii) initiate ways of improving coordination between TTC and fieldsupervisors; and (iv) establish a system of measuring the adequacy of trainingreceived.

E. Accounting System and Financial Management

2.12 NTC prepares commercial accounts on an accrual basis. Accounts aremaintained at an acceptable standard, however, they are prepared manually,resulting in unnecessary delays and lack of on-time detailed ledgers. NTC plansto use computers being procured under the Fourth Project to (i) automate storesand fixed assets registers and (ii) automate parts of the ledger systemassociated with subscriber accounts. The full computerization and integrationof the accounting and financing data bases with NTC's operational systems is amid-term target which will depend first on the completion of a corporate database to be developed under the Fifth Project (para. 2.7).

F. Billing and Colection

2.13 During some years NTC was producing its bills through a contract withthe Nepal Computer Center (NCC), however, the service received lacked reliability(as a result of a NCC strike NTC customers did not receive bills for 5 months in1990). Under the Fourth Project NTC developed, with consultant support, its ownbilling system and now prepares its own bills. Due to an inadequate streetaddress system in Nepal, customers are required to collect their bills monthlyfrom NTC at which time they pay the previous month's bill. This arrangementdelays collection by NTC. The bill includes amounts due for services renderedfrom the previous month, including rental and per call charges. Average accountsreceivable for 1991 was 93 days. A large proportion of this amount is due toGovernment arrears and for services yet to be billed. To reduce thesereceivables NTC is considering charging rental fees in advance (as do mosttelecommunications operators) and directly delivering bills to the 400 customerswith the highest accounts and requiring payment within 14 days. It is estimatedthese techniques may reduce accounts receivable by up to 15 days.

2.14 Private subscribers generally pay on time to avoid disconnection.Some ministries, however, do not make timely payments, and NTC is unable toenforce disconnection for political reasons. The accumulation of arrears fromGovernment services continues to be a serious problem. Government arrears at theend of FY89/90 (July 15, 1990) amounted to NRs4O million. New arrears estimatedat NRs30 million were added during FY90/91, bringing the total Government arrears

15

to about NRs7O million at July 15, 1991. NTC's total annual revenues amount toabout NRs67O million, of which the Government's ihare is in the range NRslOO-130million.

2.15 Although HMG settled with NTC in installments its arrears whichexisted at the beginning of the Fourth Project, little progress had been made onstemming the accumulation of new arrears. Before negotiations of the proposedcredit HHG reduced its arrears to NTC, as of July 15, 1991, to NRs47 million, andbrought to negotiations an installment plan for settling its July 15, 1991arrears with NTC. In addition, HNG agreed to (i) implement a detailed actionplan for preventing the accumulation of new arrears (see Annex 3.2) and (ii)annually, beginning in FY93, eliminate arrears by reducing the amount of anypayments due from NTC to HMG by the value of outstanding government arrears toNTC at the end of the previous financial year through the appropriate budgetarytransfers (para. 6.1 b). The detailed process agreed was for NTC to report HMGon the arrears accumulated as of July 15, 1993, by October 1993, and for HMG topay those arrears before the end of that Fiscal Year (by June 1994). A draftplan to mti.mize future arrears has already been discussed with IDA. Itincludes: (i) the creation of a ledger system in NTC which would make availablemore timely and accurate details on the source and amount of arrears; (ii) thedesignation of Government coordinators to work closely with NTC on managingGovernment connections; and (iii) agreement on a sanction system whereby NTCwould progressively bar access to international and domestic long distanceservices for services with delinquent accounts.

G. Audit

2.16 NTC prepares draft commercial accounts which are audited by privateauditors designated by the Auditor General. Based on the audit, the Auditor Gen-eral prepares its own accounts for NTC which are submitted for Parliamentary ap-proval. Only then are the audited commercial accounts made available to IDA.The auditing of public corporations in Nepal is subject to the following unnec-essary constraints under Acts related to the old Constitution: (i) the AuditorGeneral considers that External Auditors have to be designated at the end ratherthan beginning of the Fiscal Year; (ii) the Audit Act is interpreted as requiringthe External Auditor to present its report only to the Auditor General, withoutcopy to the corporation; additionally under the new Constitution, which has notcorrected the previous issues, (iii) the Auditor General has no authority overpublic corporations. HMG has advised that the last two constraints will becorrected under a new Audit Act under consideration. During negotiations, NTCagreed to (i) furnish to IDA, by April 15 of each year, unaudited financialstatements for the previous year and (ii) furnish to IDA, by July 15 of eachyear, audited financial atatements for the previous year, together withcertification and the related report prepared by an acceptable auditor(para. 6.2 c). These audits will cover (a) NTC's corporate financial statements,(b) project accounts, (c) special account documentation and (d) Statements ofExpenditures. Similar audit arrangements have worked well under the FourthProject and are considered acceptable for the proposed project.

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H. Operations and Maintenance, and Institutional Development.

2.17 Over the last decade NTC has steadily improved its operations andmaintenance skills and systems. In particular, under the Fourth Project, NTCsuccessfully engaged management consultants to assist them in strengthening avariety of management areas with emphasis on operations, personnel and manage-ment. NTC has made good progress in implementing the consultant's recommend-ations, and the more recent improvement in NTC's performance is largely due tothese efforts. Nevertheless, NTC's operational efficiency and service qualityare weak compared to industrialized country standards. Measures of operationalefficiency have been discussed above under staff, billing and collection andaccounting; service quality has been discussed in Section I. Therefore, follow-ing from the management consultancy, IDA helped NTC develop a rolling in-stitutional development program. That program has formed the basis of NTC'srelated efforts since 1989 and will continue to form the basis for institutionaldevelopment actions under the proposed project. The program identifies keydevelopment initiatives, sets objectives, assigns responsibilities and setstarget dates. A summary of the program's main components is given in Annex 3.2.In order to measure the effect of NTC's efforts, special attention will be paidunder the project to the performance indicators proposed in Annex 2.4. Theseindicators include installed exchange capacity and connected working lines tomeasure NTC's construction progress; staff/1000 lines, subscriber fault rates,fault restoration effectiveness and call completion rates to reflect NTC'soperational effectiveness and efficiency; and a range of financial performanceindicators to measure company financial performance. During negotiations NTCagreed to the set of performance indicators proposed and their target values.In addition, NTC agreed to (i) review annually with IDA, during projectimplementation, progress on their Institutional Development Program (IDP) and itsactual performance measured against the agreed construction and operationalperformance targets and (ii) take whatever measures are determined appropriateduring those reviews to improve its IDP or construction and operationalperformance.

III. THE PROJECT

3.1 The proposed project has been prepared as a time slice of NTC's devel-opment program (1993-98) primarily to support implementation of thetelecommunications component of the Government's Eighth Development Plan 1991-1995. The project would almost double exchange capacity from about 78,000 linesto over 138,000 lines and provide complementary transmission, telephoneinstrument, and outside plant equipment. The proposed project would integratewith and expand on network development under the Fourth TelecommunicationsProject (Credit 1588 - NEP) which was included in the Seventh Development Plan.IDA's appraisal mission examined and found the proposed investment program fullyconsistent with the HNG's sector objectives (para. 1.20).

A. NTC's Investment Program

3.2 NTC's 1993-98 investment program comprises two principal elements:(i) parts of the Fourth Project (Credit 1588-NEP), which are currently undercompletion; and (ii) the proposed project. Although most of the Fourth Projecthas been completed, some urban outside plant cabling for exchange networks andmost of the MARTS rural transmission systems have yet to be installed(para. 1.17). Although the rural component of the Fourth Project will not becompleted until 1994, because of appropriate scheduling, the proposed project canbegin immediately without conflict with this uncompleted works.

B. Project Objectives

3.3 The proposed project aims to (a) address network shortages and improvenetwork quality by (i) increasing telephone penetration in a balanced manner inurban areas, (ii) completing the provision of automatic, long distance, telephoneservice in all of Nepal's 75 Districts, (iii) expanding the national and inter-national telecommunications infrastructure to cope with increased traffic fromthe enlarged network, and (iv) replacing and upgrading obsolete equipment; (b)improve NTC's performance, especially related to planning, administration andmanagement, project management, and quality of service and efficiency through abalanced institutional development program; and (c) address the major sectorissues (para. 1.23) by establishing an agenda for review and reform of thesector.

C. Project Description

Main Components.

3.4 The project's main components are:

(a) expansion of telephone services in Kathmandu valley through theprovision of about 43,000 new lines of exchange and associatedtransmission, outside plant and subscriber terminal equipment(para. 3.5 and Annex 3.1);

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(b) expansion of telephone services outside of Kathmandu Valley in bothprovincial and rural areas through the provision of about 18,000 newlines of exchange and associated transmission, outside plant andsubscriber terminal equipment and special satellite facilities forsome extremely remote locations (para. 3.6 and Annex 3.1);

(c) expansion of the interconnecting national and international networksthrough the provision of a new toll/gateway exchange, expansion ofnational international transmission systems and internationalsatellite facilities, and provision of a data network (para. 3.7 andAnnex 3.1);

(d) an institutional development program which includes consultantservices for improving NTC's management, planning and corporatecomputer facilities (para. 2.17, 3.8 and Annex 3.2); and

(e) consultant services to review and make recommendations concerningsector reform issues (para. 1.23, 3.9 and Annex 1.5).

3.5 KAhmandu Valley Telephone Expansion. Installation of about 43,000 lines ofnew exchange and related telecommunications equipment (transmission, outsideplant cables and accessories, and teruinal equipment) to (i) provide newtelephone services at eight new exchange locations in the Valley and (ii) expandexisting telecommunications facilities at five existing exchange locations. Inconjunction with this program, NTC will undertake a program of (i) recovery andreinstallation of about 2,000 lines of outmoded electronic exchange equipment inoider to rationalize the use of old and new equipment at least cost and (ii)upgrading of lines of digital exchange equipment to make them compatible with newequipment to be installed. The location of new exchanges in Kathmandu Valley hasbeen planned on the basis of long-term demand estimates derived from detailedarea surveys. About 15X of outside plant equipment in this component will beused for pre-investment for ongoing works (para. 3.22).

3.6 Expansion of Telephone Serices Oate Kwhmandu VaUey. About 18,000 lines of newexchange and related telecommunications equipment will be installed in urban,provincial and rural centers outside Kathmandu Valley to provide (i) newtelephone services at sixteen new exchange locations, including ten very smallexchanges at remote towns, (ii) expand existing telecommunications facilities atsix existing exchange locations, and (iii) replace the four remaining manual withautomatic exchanges. This component will include, similar to the KathmanduValley component, an extensive recovery and reinstallation program of older typeelectronic exchanges involving about 7,000 lines. This component will alsoinclude the provision of (i) three small MARTS systems and fifty single channelradio systems for providing service to remote localities, (ii) satellite servicesto six extremely remote towns in districts north of the Himalayas; and(iii) transmission links to connect eleven rural locations. Although this lastitem will be financed by JICA and proceed independently from the remainder of theproposed project, the transmission links it will provide have been planned tointegrate properly with the project and are fully consistent with NTCs overalldevelopment plan.

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3.7 &vpanstnofNadonalandIntenmaonainetworks. This component involves (i) theexpansion of the national transmission network to accommodate additional trafficand provide a degree of network security through diversity, (1i) the expansionof international service access through an increase In the number of links to andthrough NTC's satellite earth station as well as the provision of a newtransmission link to India, and (iII) the provision of a small data switchingnetwork.

3.8 NTC*'sInstIutIonalDeve?opmentProgram. Special emphasis has been placed oncontinuing institutional development which was a major thrust under the FourthProject (see Annex 3.2). Key areas to be addressed under the project includo(i) strengthening of planning functions (para 2.6), particularly for outsideplant; (ii) strengthening NTC's management skills (para. 2.5); (ii) thedevelopment of a corporate data base as the foundation fo= improved management,operations and customer support facilities (para. 2.7); and (iv) strengtheningof project management. NTC will use consultants to assist with most elements ofthis program (para. 2.17, 3.8). In support of this component, additional trainingequipment, office equipment and computers will be provideJ.

3.9 Sector Refonn Program. In conjunction with the project, the Governmentwould, under this T/A component, engage consultants to help review and developpolicy positions regarding sector's structure, NTC's future ounership, andprivate sector's role in providing telecommunications services. Sector reformissues are discussed in para. 1.23, 3.9 and Annex 1.5. Conditionalities linkingsector reform to the project are detailed in paragraph 1.24.

D. Project Cost

3.10 The total project cost is estimated at US$116.5 million (excludinginterest during construction), of which US$97.5 million is projected to be theforeign cost (direct and indirect). Detailed cost estimates for the project arepresented in Annex 3.3 and summarized in Table 3.1.

3.11 All costs are in December 1991 prices and based on recent price quota-tions from equipment suppliers. Physical contingencies are 5X for equipment and10 for civil works. The price escalation of foreign costs is calculatedaccording to anticipated international price movement of 3.91 per annum duringthe project's implementation period (1993-98). The price escalation for localcosts is calculated according to the projected local inflation rate, which isestimated at 8% in FY92/93, 7% in FY93/94, 6.5% in FY94/95, and 61 per annumthereafter. Interest during construction is calculated by applying an on-lendingrate of 9.5% p.a. (para. 3.13) to the average value of the project capital worksexpected to be classified as work in progress for each year. The proportion ofinterest during construction attributable to the proposed foreign loans andcredits to the Government is allocated to foreign cost; the remainder isallocated to local cost.

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Table 3.1: PROJECT COST ESTIMATE

Foreign CostNrS Million us. Million as % of

Looal Foreign Total Local Foreign Total Total

Lculoment & Services 231.5 3.35a.0 3,659.6 5.5 80.0 85.6Telephone Exchanges 66.0 1,086.0 1,162.0 1.5 28.0 27.5 94.3Transmission 53.0 986.0 1,039.0 1.5 23.5 25.0 94.9Outside Plant 102.6 993.0 1,096.6 2.5 23.5 26.0 90.8Customer Premises 3.5 96.5 100.0 0.0 2.5 2.5 96.7Office & Training 2.0 44.0 46.0 0.0 1.0 1.0 96.2Power, Vehicles & Misc. 4.5 142.5 147.0 0.0 3.5 3.5 97.1

Civil Works 375.5 204.0 578.6 9.0 5.0 14.0Outside Plant Duoting 120.5 109.5 230.0 3.0 3.0 6.0 47.7Buildings and Sites 265.0 94.5 349.5 6.0 2.0 8.0 27.0

CongUltgnov 1.0 130.0 131.0 0.0 3.0 3.0Management 1.0 10.5 11.5 0.0 0.0 0.0 92.6Project Support 0.0 119.5 119.5 0.0 3.0 3.0 100.0

Total Base Cost 608.0 3.692.0 4,300.0 14.5 88.0 102.5 85.9Physical ContIngenoy 52.5 198.5 251.0 1.5 4.5 6.0 79.0Price Contingency 124.5 221.5 346.0 3.0 5.0 8.0 64.0

total Prolect Cost La 785.0 4,112.0 4,897.0 19.0 97.5 116.6 84.0Int. During Construction (IDC) 271.0 46.5 317.5 6.5 1.0 7.6 14.6

lotal Financina Required 1056.0 4,158.5 6,214.5 25.6 98.6 124.0 79.8

L The project cost Includes an estimated US 1.3 million oquivalent In duties.l Costs are rounded to nearest 0.5 million.

E. Proj g

3.12 Table 3.2 presents the project financing plan. The proposed IDAcredit of US$55.0 million would provide about 44X of the total required finanicingand cover about 58X of the foreign cost component. The local costs of theproject (excluding interest during construction-IDC) amounting to NRs785 million(US$19.0 million) plus the indirect component of the foreign costs and some minordirect foreign payments would be financed from NTC's internal cash generation.Additionally, NTC will pay HMG interest on credits proceeds made available to NTCfrom the date of withdrawal as stated in the Subsidiary Loan Agreement. Thebalance amounting to about US$39.5 million is expected to be financed by grantsto HHG from DANIDA (Denmark), FINNIDA (Finland) and the Japanese Government. Theamounts shown in Table 3.2 reflect the initial parallel fi-aancing offers to HMG.These offers are currently under negotiation by HMG and NTC with the respectiveagencies and the suppliers in those countries in respect of quantities ofequipment and their unit costs. Hence, the amounts quoted above are subject tochanges although any changes are expected to be minor.

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Tiable 3a: PROJECT FINANCING PLAN(US$ million equivalent)

Source of Financing Local Foreign Total % of Total

Belgium 0.0 0.0 0.0 0.0DANIDA, Denmark 0.0 18.0 18.0 14.5FINNIDA, Finland 0.0 11.0 11.0 8.9Japanese Government (JICA) 0.0 8.5 8.5 6.9Nepal (NTC) 25.5 6.0 31.5 25.4IDA 0.0 55.0 55.0 44.4

Total Flnancina 25.5 98.5 124.0 100.0

&I Costs sro rounded to nearest 0.5 million.

3.13 The proposed credit would be made to the Government of Nepal for 40years, including 10 years of grace on repayment of principal, at a service cbargerate of 0.75Z p.a.. HMG would on-lend the proceeds of the IDA credit to NTCaccording to a Subsidiary Credit Agreement acceptable to IDA (para. 6.3 a). HMGwould on-lend the credit to NTC in US dollars at a variable rate based on the USdollar six (6) months LIBOR plus a spread of 3.5X p.a. and for a period of 15years including 5 years grace on repayment of principal (para. 6.1 c). Basedupon average six month LIBOR rates from 1988 to 1990, this would imply anonlending rate of about 82 to 10, which would approximate internationalcommercial lending rates plus an allowance to compensate HHG for the guaranteeit provides to IDA and the cross currency risk between US dollars and SDRs.Execution of than Subsidiary Credit Agreement would be a condition of crediteffectiveness.

3.14 Other project-related financing will be passed on to NTC underdifferent arrangements. Under previous projects, rather than on-lend grantmoney, the Government increased its equity in NTC. Under the proposed project,a more commercial arrangement wil' be employed whereby grants from DANIDA andFINNIDA for project equipment would be passed on to NTC as loans; the terms haveyet to be determined, however initial agreement with HMG/NTC seeks for termssimilar to on-lending of IDA funds. Technical assistance not directly relatedto increased assets would not be reflected in NTC,s books, although these costshave been included in the project cost table. The total financing allocated tothe JICA project is estimated to be US$8.5 million, which contract has beensigned and HMG has agreed to pass on as equity contribution to NTC. This amountis included in the project cost table.

F. Procurement

3.15 Procurement arrangements for the proposed project are summarized inTable 3.3. Details are provided in Annex 3.4. Contracts for about US$52.0million (including contingencies) for goods and services would be awarded

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according to International Competitive Bidding (ICB) procedures using the Bank'sstandard procurement guidelines. NTC is preparing a revised Invitation to Bidand draft Contract which, when cleared by IDA, would be used for all ICBprocurement financed under the proposed credit. Items to be procured according

TAble_ 33: SUMMARY OF PROCUREMENT ARRANGEMENTS(US$ million equivalent)

P___ueMent MethogdProject Element lCD LCB Othee NRF Total

1. Equipmont:

Telephone Exchanges 24.5 3.0 2.5 30.0(24.5) 03.0) (27.5)

Transmission Equipment 4.0 2.56b 21.0 27.6(4.0) 12.5) (6.5)

Outside Plant 13.0 17.0 30.0(13.0) (13.0)

Customer Premises Equipment 2.5 2.6(2.5) (2.5)

Offioo & Training Equipment 1.0 1.0(1.0) (1.0)

Power Equipment, Vehicles 4.0 4.0& Miscellaneous (4.0) (4.0)

2. CivDi Works:

Outside Plant Duoting 7.0 7.0

Buildings and Sites 10.5 10.6

3. Consultancles:

Toohnloal Assistance 0.5 3.5 4.0(0.5) (0.6)

Total 48.0 0.0 7.0 61.5 116.5(48.0S 0.0 17.0) (65.01

Ig: Figures In parentheses are the respeotive amounts finanoed by the IDA oredit. N.B.F.: Not Bank Financed. Costs arerounded to nearest 0.6 million.

a. Includes Direct purchase, International and local shopping, IDA prooedures for solootion of consultants, expenditures onenginooring and administrative overheads end custom duties of the order of US$1.3 million.

b. Includes direot purchase of proprietary Multi Access Radio equipment (US$1.2 million), equipment to extend oxisting PCM,mlorowave systems and earth station facilities (US$ 1.6 million).

o. Inoludes computers, copiers, printers and other miceollaneous office and training equipment to be procured underInternational and looal shopping (US$0.9 million).

to ICB include (1) switching exchanges, both for expansion of existingequipment and new exchanges; (ii) some transmission equipment, including smallsatellite earth stations; (iii) a portion of outside plant items such as coppercablo and miscellaneous jointing materials; (iv) subscriber terminal equipment;

23

(v) smal rural telephone exchanges and data switching equipment; and (vi) otheritems including powerplant and airconditioning equipment, and vehicles.Depending on the outcome of the tender for switching equipment, whether is to beprocured from existing suppliers or from new suppliers, it could be necessary tohave direct purchase of some interphase switching equipment; a provision ofUS$2.7 million has been set aside for this eventuality. Transmission equipmentto the value of US$2.8 million would be procured through direct negotiation.This would include (i) three systems of multi access radio equipment -- tostandardize and allow NTC flexibility in deployment, direct purchase from thesupplier of the same system type provided under the Fourth Project would bepermitted, and (ii) a variety of proprietary items needed to expand existingfacilities including PCM, microwave, and satellite earth station ezjuipnent. Con-tracts for computers, office equipment and specialized training equipment costingless than US$100,000 each with a total value estimated at US$1.0 million may beprocured through international shopping. The remainder of equipment is beingprocured bilaterally as follows: (i) outside plant equipment through DANIDA; and(ii) transmission equipment through FINNIDA. Because arrangements for supply ofswitching equipment have not been finalized, as a condition of effectiveness,IDA should have received for its approval bids documents for the procurement ofswitching equipment (para. 6.3 b). Contracts for civil works associated withunderground cable routes, erection of masts and towers, and construction ofbuildings would be funded by NTC and bid under HMG LCB. Specialized equipmentsfor those works, such as ducts and towers, amounting to about US$3.0 million willbe funded by IDA and procured separately under ICB.

3.16 All ICB contracts for goods estimated to cost more than US$0.2 millionindividually, and all contracts for consultants services, will be subject toprior review by IDA. This would involve about 85X of the total value of con-tracts to be financed by IDA. The remaining IDA-financed contracts would be3ubject to post-award review. Domestic bidders would be eligible for 15X pricepreference when competing under ICB for supply of goods. Some localmanufacturers may compete for ducts and masts. Consultants will be selectedaccording to IDA Guidelines.

G. Disbursement

3.17 In line with the proposal to finance part of the Eight Five-YearDevelopment Plan, the proposed credit would be disbursed over a six-year period.Disbursements would be made as follows: (i) lOOX of foreign expenditures forequipment and material imported directly; lOOX of ex-factory costs of local ex-penditures for equipment and materials manufactured locally and 80X of expen-ditures for other items proctued locally; and (ii) lOOX of total expenditures forconsultant services. Full documentation would be required by IDA to supportwithdrawal applications for all consultant services. Disbursements for goods(equipment and material) contracts for less than US$100,000 equivalent would bemade on the basis of Statements of Expenditures (SOEs). The documentation forSOE expenditures would be retained by NTC and made available for review by IDAsupervision missions.

3.18 To facilitate project disbursement, a Special Account of US$200,000would be established at the Nepal Rastra Bank. The account would be used for

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both foreign and local expenditures of less than US$20,000 equivalent, under allcategories. All other expenditures above US$20, 000 equivalent would be submitteddirectly to IDA for payment. Replenishment of the Special Account would be madequarterly or whenever the available balance in the account dropped below 50X ofthe initial deposit. Audit arrangements for SOEs and the Special Account arediscussed in para. 2.16. The project completion date for the proposed creditwill be December 31, 1998, and the closing date of the credit will be June 30,1999. The estimated disbursement schedule, given in Annex 3.5, is based on thestandard disbursement profile for all Bank telecommunications projects in Asiaduring FY78-FY91.

H. Progress with Project Preparation

3.19 HMG/NTC made good progress in project preparation before coming forand during negotiations which were held between 16 and 20 March, 1992: (i) HNG'sarrears to NTC as of July 15, 1991, were reduced to NRs47 million, and moreimportant, this reduction was made through direct payments from HMG' s Departmentsas a result of better coordination between HKG and NTC (see Annex 3.2); (ii)during negotiations agreement was reached on an installment plan for settlingHKG's arrears as of July 15, 1991 plus a clear agreement for payment before endof the following Fiscal Year of any new arrears; (iii) there was agreement on aschedule for the procurement of switching equipment (evaluation by May 31, 1993and contract signed by August 1993) and engagement of a consultant (by April1992) who will assist NTC in the preparation of the tender document; (iv) it wasalso agreed that a provision of US$2.7 million will be established to cover theeventuality of direct purchase of switching interphase equipment if the tendersare awarded to other than the suppliers of the existing equipment; (v) NTCsubmitted and IDA approved a manpower plan for reorganization of the Developmentand Planning Division; (vi) NTC presented and IDA approved four tenders documents(microwave transmission, distribution frames, telephone instruments, primarypower and air conditioning); (vi) progress was achieved in coordinating projectactivities with DANIDA and FINNIDA; and (vii) NTC provided documentation of theagreement signed with the Government of Japan.

1. Project Implementation

3.20 As with previous projects, NTC will undertake all technicalconstruction related to the project. Where equipment installation and operationsprocedures are new to NTC, suppliers will be contracted to provide adequatetraining to NTC staff and to supervise the installation and initial operation oftheir respective equipment. NTC will contract out civil works for buildings,outside plant ducts and some transmission tower works. NTC will be assisted indetailed engineering by suppliers and consultants. For switching equipment,suppliers will undertake detailed engineering, although NTC plans to engage anindependent consultant, funded under the Fourth Project, to help with technicalcontract negotiations. FINNIDA will engage a consultant to help NTC withspecifications and path designs for the more complex transmission systems.Consultant support is already being provided by DANIDA to help NTC with detailedplanning and engineering of outside plant; additional consultant support is tobe provided to help supervise construction. NTC staff will wire customer premis-

25

es and install new customer telephone facilities. A schedule 3f construction ac-tivities is given in Annex 3.6. In order to smooth the demand for specializedconstruction staff, NTC has paid special attention to scheduling equipmentdeliveries and works progressively throughout the time slice of the projectperiod. For this reason NTC has included a small portion of outside plant cablesand civil works related to future expansion in the current project.

3.21 NTC has recognized the importance of adequate project management andtaken steps to strengthen its management for this project by (i) proposing toseparate development responsibilities from its Planning and Development Division,thereby creating a separate and far stronger division to take responsibility forproject management, and (ii) already preparing draft detailed projectimplementation plans. During negotiations, NTC: (l) presented a satisfactorydetailed manpower plan demonstrating how sufficient adequately trained staff willbe made available to manage the project and undertake the construction work and(ii) obtained IDA clearance for bid documents for the procurement of the five keyitems needed to begln project work. In addition, a project supervisionconsultant, engaged by DANIDA but under IDA management (para. 3.25), would assistNTC to develop and integrate its implementation plans further to form a soundbase for efficiently managing the project. The consultant would then provideregular technical and project management supervision.

J. Monitoring and Reporting

3.22 Satisfactory procedures for monitoring (i) the physical execution ofthe project, (ii) project expenditures, and (iii) NTC's technical, commercial,and financial performance were developed at appraisal. NTC will furnish progressreports to IDA every four months, the form and content of which will be agreedduring negotiations. Special performance indicators, which include indicatorsfor measuring the rate of construction, will be agreed with NTC and details ofactual performance provided to IDA. These indicators are included in Annex 2.4.

K. Supervision Plan

3.23 Supervision of this project will focus upon the following key imple-mentatlon aspects: (i) timely and effectlve procurement of goods and servicesthroughout the project's life, (ii) implementation progress and coordination ofthe various project elements of civil works, switching, transmission, outsldeplant and connection of subscribers, (iLL) proper coordination of the projectwith related elements of NTC's other expansion program components,(iv) implementation of institutional reforms, (v) compliance wlth financial cove-nants to assure NTC's financial health while it undertake a large investmentprogram, (vi) implementation of the agreed coordination between H¢G and NTC inorder to avoid accumulation of arrears, and (vii) ongoing dialogue with HZG todevelop s'-tor reform rlans. A consultant, paid for by DANIDA and supervised byIDA, ls to be engaged to assist by supervising in detail the project's technicaland project management aspects. Draft terms of reference for the supervislonconsultant are given in Annex 3.7. The consultant would not substitute fornormal IDA supervision, but would enable more-than-normal in-depth supervisionof technical aspects. DANIDA, FINNIDA and IDA decided that this special

26

supervision was warranted because some technical and project management problemswere discovered too late during the last project, to enable timely and effectiveremedial actions to be taken. In addition to the special supervision consultant,three missions annually for three years, then two missions per year for theremainder of the project are foreseen as adequate supervision for this project.The total estimated staff inputs are: (a) a telecommunications engineer and fi-nancial analyst, with assistance from an economist being drawn as required -- 50staff-weeks; and (b) a specialist in telecommunications regulation and policy --10 staff-weeks.

L. Environmental and Health Aspects

3.24 The proposed project is not expected to cause any adverse health orenvironmental problems. Construction would involve some minor site clearing,and access roads may be needed to reach transmission tower sites. Disruptionof road and verge surfaces will occur through the laying of ducts forunderground cable. IDA will supervise to ensure that civil works contractsrequire full surface restoration. The disruption of virgin land is expectedto be minimal. No special environmental studies are required. Indeed, theproposed project should afford more than compensating improvements throughmore efficient use of transportation facilities and better delivery of healthcare to isolated rural communities.

IV. FINANCIAL ANALYSIS

4.1 NTC maintains its own accounts on a commercial basis and manages itsown financial affairs. However, its financial authority is 1.mited: pricesetting and investment programs have to be approved by HMG. Furthermore,although the entity can generate a substantial surplus in local currency, countrywide scarcity of foreign currency forces NTC to restrict its investment programto the availability of grants and soft loans, and HMG has to allocate thesesources considering their fungibility and other sectors' needs.

A. Past and Present Financial Performance

4.2 NTC's financial performance for 1987-92 is presented in Annex 4.1 andsummarized in Tables 4.1 and 4.2.

able 4.: NTC'S KEY HISTORICAL FINANCIAL INDICATORS 1987 - 92(Nrs million)

Year Ended 16 5July 1987 1988 1S89 1990 1991 1992-- Actual. -- Et...

OPERATING REVENUES 260 331 516 899 807 927

OPERATING EXPENSES 141 211 255 396 451 548

OPERATING INCOME 109 120 282 304 356 378

NET PROFIT 37 30 96 97 84 90

CAPITAL EXPENDITURES 718 744 134 217 280 614

AVRG. OPERATING ASSETS 400 879 1,24 1,461 1,826 2,073

TOTAL ASSETS 1,745 2,514 2,860 3,192 3,237 3,509

4.3 NTC's past financial performance has been acceptable, reflectingexpansion of telecommunications facilities and traffic and a decrease in realterms of operating expenses per working line. This efficiency gain helped tocompensate for politically delayed tariff adjustments. The local monthly rateand charge per pulse had not been adjusted since 1985, although internatioimalratXs have approximately followed exchange variations with adjustments every 2or 3 years. Although these factors have contributed to maintain NTC's totalrevenues per line in real terms, it has led to increasing dependency oninternational revenues (see Annex 4.2). Operating revenues and expenses haveincreased 30X annually in nominal terms, while average operating assets haveincreased 39X annually, compared with 15X annual increase for total assets; thispattern reflects a better use of invested capital.

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Table A.2: NTC'S KEY HISTORICAL FINANCIAL RATIOS 1987 - 92

Year Ended I 5July 1987 1988 1989 1990 1991 19929 --, Aotuals .t

OPERATING RATIO 68% 64% 49% 57% 68% 68%

RATE OF RETURN 21% 12% 16% 16% 16% 15%

OPER. REVENUEIWRK.LINE US$ 483 474 603 508 458 360

OPER. EXPENSINRK. LINE us$ 272 302 248 287 2568 208

ACCOUNTS RECEIVABLE-MONTHS 3.65 3.34 4.66 4.28 3.21 3.29

CURRENT RATIO times 1.62 1.37 1.18 1.37 1.64 1.29

DEBT/EQUITY RATIO 42:58 37:63 47:63 46:54 465.4 42:58

DEBT SERVICE RATIO 2.19 1.85 1.53 1.53 1.22 1.09

SELF-FINANCING RATIO 43% 29% 26% 70% 28% 7%

4.4 NTC's key financial ratios for 1987-92 all portray a picture offinancial strength. The rate of return has been around 15X, well above the 12Xcovenanted under the Fourth Project. The sharp decrease in operating revenuesand expenses per working line in 1991 and 1992 reflects an increase in workinglines resulting from completion of the ongoing project. However, operatingrevenues per line are expected to recover rapidly starting in 1993. Accountsreceivable of 3.3 months reflects the effect of HHG arrears (para 2.15); arrearsfrom private customers are minimal because of NTC's policy of immediatedisconnection when payments are delayed. The low debt equity ratio up to the endof the Fourth Project reflects the fact that only IDA funds have been on-lent oncommercial terms, while grants from DANIDA, FINNIDA and JICA have been passed onas HMG equity contributions; this will change during the proposed project, underwhich only JICA funds would continue to be passed on as equity contributions,while funds from DANIDA and FINNIDA associated with purchase of equipment wouldbe on-lent on terms similar to those used for IDA funds. The very variable self-financing ratio is not a useful indicator for an entity with NTC's financingstructure: net internal cash generated is only required to pay the local currencycomponent of the annual investment and excess cash in NRs cannot be effectivelyused.

4.5 NTC is subject to corporate income tax, charged.at a rate of 45X onnet income after interest. Up to FY 91, HMG has not requested NTC to paydividends on its equity; although HMG has indicated dividends will be requiredin the future (see also para 4.9).

4.6 Until now NTC has revalued its assets periodically to reflectexchange variation of its foreign currency debt through the introduction of aspecial line item "Deferred Charges" in its Balance Sheet. An audit consultancyand IDA have recommended a change in this procedure. Beginning with thefinancial statements for Fiscal Year 1991 (ended July 15, 1991) NTC willimplement this new monetary correction method, i.e., a system which uses a directincrease in the value of operating and/or work-in-progress assets.

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B. Projected Financial Performance and Targets

4.7 NTC's financial statements were projected as explained in Annex 4.3.Financial Projections for 1993-97 are presented in Annex 4.4; projected keyfinancial indicators are summarized in Table 4.3 and projected key financialratios in Table 4.4. NTC's financial statements were projected for 15 years (upto year 2008) in nominal NRa and subsequently converted into real NRs of July1991 to ^.alculate the return on investment (Annex 5.4). The most basicassumptions are: (i) implementation of new tariff structure (Annex 5.3) no laterthan January 1992; although another tariff adjustment would be required towardsthe end of the implementation period of the proposed project, no additionaltariff adjustment was included in the projection; (ii) NTC's ratio of staff per1,000 working lines will continue decreasing, with a target of 50 staff/l,000lines in 1995; (iii) salaries per employee and operating and maintenance expensesvary with inflation in NRs and number of working lines; and (4) treatment ofgrants and bilateral funds as explained in para. 3.12 to 3.14. In addition,operating revenues ate projected on a by-service basis, considering the increasein the number of operating lines and the additional traffic per line (details inAnnex 4.3). Average operating assets and total assets include the effect of therevaluation resulting from exchange rate variation (see para. 4.6). Most of theproposed Fifth Project investment is scheduled for FY93-97, resulting inincreases in installed lines up to FY97; therefore the projection beyond FY97reflects a scenario without further investment, which is required for rate ofreturn calculations, but is unlikely in reality.

Lab; 4,3: NTC'S PROJECTED KEY FINANCIAL INDICATORS, 1993 - 98(NRs million)

YoarEnded ISJuly 1993 1994 1995 1998 1997 1S98

OPERATING REVENUES 1,394 1,691 1,856 2,173 2,384 2,485OPERATING EXPENSES 621 701 827 1,046 1,313 1,583OPERATING INCOME 772 8e1 1,028 1.127 1.071 902NET PROFIT 308 376 449 477 420 310CAPITAL EXPENDITURES 646 1,424 2,094 1,971 1,685 1,406AVRG. OPERATING ASSETS 2,246 2,442 3,153 4,605 6,313 7,855TOTAL ASSETS 3,986 5,246 7,308 9,202 10,768 12,387

4.8 Projections of NTC's financial performance for this period show asatisfactory financial situation with an increasing lebt/equity ratio andacceptable levels of revenue and expenses per operating line. The decrease inthe rate of return towards the end of the period to levels below the covenanted12% is indicative of the need to revise NTC's tariffs and proceed to necessaryadjustments in level and structure around FY95 (para. 5.6). During negotiationsNTC agreed to maintain an annual rate of return on revalued assets, for thecorporation, of no less than 12% p.a. after income tax and before interestpayments (para. 6.2 d), and that before September 30 in each of its fiscal years,NTC shall, on the basis of forecasts prepared by NTC and satisfactory to IDA,

30

review whether it would meet the 12X rate of return requirement, and if suchreview shows that NTC would not meet the required rate of return, take allnecessary measures to do so, including adjustments of the structure and level ofits tariffs (para. 6.2 e). Other financial indicators such as debt/equity ratioand self-financing ratio are not appropriate as covenants in this case: thedebt/equity ratio will vary according to the on-lending agreements, and the self-financing ratio is not a useful measure in NTC's case where generation of localcash, beyond local investment and dividends requirements is of little benefit(para. 4.4).

bln 4.,.4: NTC'S PROJECTED KEY FINANCIAL RATIOS, 1993 - 98

Yeor Endad 1I JuIy 1993 1994 1996 1996 1997 198

OPERATING RATIO 45% 44% 45% 48% 55% 64%RATE OF RETURN (1) 23% 24% 21% 16% 12% 8%OPER. REVENUE/WRK.LINE US$ 455 456 462 460 439 422OPER. EXPENSIWRK. LINE US$ 203 201 206 221 242 269ACCOUNTS RECEIVABLE-MONTHS 3.12 2.96 2.63 2.63 2.63 2.63CURRENT RATIO times 1.21 1.33 1.77 2.71 4.83 0.00DEBT/EQUITY RATIO 36:64 42:58 52:48 57:43 60:40 63:37DEBT SERVICE RATIO 1.52 1.72 1.98 2.19 2.31 2.76SELF-FINANCING RATIO 45% 29% 26% 36% 49% 70%

Note 1: ROR after Interest and Income tax payments.

4.9 Although it is expected that NTC would begin paying dividends to HMGin FY94, the projected financial statements do not include this payment and showthe corresponding increase in working capital. The issue of dividend policywould be discussed with HMG in relation to the sector reform agenda (para. 3.9).Although the June 1991 Seminar on Sector Reform provided the opportunity to begindiscussion of these issues with HMG, it is clear that further discussions arerequired to convey to HMG the message about the interrelationship among tarifflevels, dividend policy, on-lending arrangements, rural and remote areas servicecoverage and NTC's access to the foreign exchange market. Annex 5.1 providesquantitative data on net financial flows from NTC to HMG including taxes,interest differential between grants and on-lending and equity contributions.

V. ECONOMIC ANALYSIS

A. Benefits

5.1 The proposed project's benefits would accrue to all sectors of theeconomy through improved access to telecommunications facilities and improvedservice quality. Users would benefit from the almost doubling in access, from77,700 installed lines to 138,500 installed lines, and around 50,000 newsubscribers would gain access to the network. Telecommunications provide apartial substitute for and contribute to the overall efficiency of physicaltransportation, which is especially valuable in a country with Nepal's difficulttopography. Additionally, business activities would benefit from expandedtransmission facilities for data and information. Extended facilities wouldwiden the reach of emergency and government services and add to the quality oflife by providing voice communication opportunities among separated familymembers.

5.2 In addition to the business community in Kathmandu valley and majortowns, the rural community would also benefit from the proposed project throughthe provision of telecommunications facilities. Serving the rural communities,which account for more than 90% of the total population, represents a specialchallenge in Nepal due to their scattered distribution. Unlike other countriesmost of the rural population is more or less evenly scattered in mountain andplains areas and not concentrated in small farming villages. HMG recognizesaround 4,000 rural villages, which account only for a fraction of the ruralpopulation. In what remains to be implemented under the current IDA-fundedFourth Project (para. 1.17) many of these localities will be served through MARTSand JICA links. This investment represents a significant effort to integrate thecountry and would be continued under the proposed project with three additionalMARTS systems, funded by IDA, which would connect some 120 new locations,providing around 800 rural telephones lines; simultaneously, the current JICAproject would provide three links in the Eastern Region to connect eleven rurallocalities. Additionally, six communities in the most remote and inaccessibleareas of the Himalayas would be provided with small satellite dishes to replacelow quality, unreliable HF radio links. The provision of services to rural andremote areas may represent a financial burden to NTC; the recent IDA tariff studydid not analyze these services in detail. However, their limited number andspecial tariffs (Annex 5.3) help to minimize any cross-subsidy. The basic tariffpolicy has been to recover average costs from most direct exchange customers,which represent more than 95% of total traffic. The special cases of rural andremote public call phones would be the subject of a separate study.

5.3 HMG would also benefit -- first, as a user of the services, andsecond, through increased transfers. from the sector. Crants from DANIDA andFINNIDA would be on-lent to NTC on commercial terms, generating an inflow offunds to HMG. The IDA credit and Belgium and French soft loans would also be on-lent to NTC on commercial terms, thereby increasing the flow of funds from thesector to the Treasury (due to interest rate differential). Furthermore,increased payments from NTC to HMG for sales tax and income tax would add tototal net transfers of around US$104 million in the period 1992-2000 (equivalent

32

to 2.5 years of NTC's revenues). Annex 5.1 shows the detailed transfer to/fromHMG/NTC for the period 1992-2000 without including payment of dividends, whichwould most probably begin around FY93/94, increasing the size of the transfer.

5.4 Continued emphasis on NTC's institutional strengthening would improveits performance as an effective telecommunications entity operating on a soundcommercial basis, increasing its responsiveness to users and the costeffectiveness of its investment.

B. Tariffs

5.5 Annex 5.2 shows the evolution of the telecommunications tariffs sivne1978. It shows that rates for local and domestic services were adjusted everyfive to seven years, while charges for international services were adjusted everytwo to three years, resulting in NTC's increasing dependence on them. Analysisof revenue by service (Annexes 4.1 and 4.3) shows that there is a minimum amount(previously negative) resulting from international settlements; this topic wouldbe studied in detail through a project-financed consultancy. Annex 5.3 comparescurrent tariffs with the new rates and structure resulting from the Tariff Studyundertaken by IDA in December 1990 and reviewed by NTC's Special Committee during1991. These new tariffs, which are acceptable to IDA, were submitted andapprzved by HMG's Cabinet in October 1991, with validity starting November 17,1991.

5.6 The current rates (up to November 16, 1991) were overall somewhat low.Increases in the number of subscribers and efficiency gains have allowed NTC toabsorb decreasing tariff levels in real terms. This has resulted in a distortedtariff structure, with local monthly rental charges below long-run marginal costsand international tariffs above the long-run marginal cost. However, the overalllevel of the tariff and the resulting revenues needed only a 10% average increaseto stupport and justify the proposed network expansion. The main features of therecently approved tariffs compared with existing rates are: (a) an effectiveincrease in the installation fee by keeping it at NRs2,000 but with the amendmentthat the telephone set will be now procured by the subscriber; (b) increase inthe monthly rental from NRslOO to NRsl5O with annual review of this rate; (c) 20%increase in domestic long distance rates, introducing off-peak discounts; and (d)50% increase of international rates (less than cumulative exchange ratevariation). HMG did not approve: (a) establishment of special rates (cost-basedrates) for rural extensions of exchange lines through JICA, VHF or MARTS links,and (b) the increase in the registration fee from NRsl to NRs500 (which wasrecommended to avoid frivolous registrations and make the waiting list a valuableplanning data).

5.7 It is expected that NTC's efficiency improvements can absorbinflationary further cost increases for a few years. In addition, anunderstanding was reached, during negotiations, that NTC will engage a consultantto prepare by December 15, 1993 a report reviewing the tariff structure and thatthe joint review with IDA of the consultant's recommendations will take placeduring the first quarter of 1994. Also, as a component of NTC's institutionalstrengthening program, a study would be made to review all internationalsettlement agreements. The study's objective would be to optimize the number of

33

routes and circuits per route, according to transit and revenue sharingagreements, in order to reduce NTC's international operating costs.

C. Return on Investment

5.8 The estimated real financial internal rate of return of the projectbased oni incremental financial flows (FRR) is 19X which is considered to be abovethe cost of capital for NTC. A summary of the calculations is given in Annex5.4. The economic internal rate of return (ERR) is estimated to be 22X. Theeconomic rate of return is higher than the financial rate of re;urn due to theelimination of custom duties, the reduction in civil work costs resulting fromthe application of a conversion factor of 0.9 to local investment costs, and theadjustment of the unskilled labor rates using a conversion factor of 0.9. Theresultant ERR is considered conservative and does not take into account consumersurplus and the benefits that accrue to the economy in general as a result ofimproved telecommunications services because these factors are difficult toquantify. In testing the ERR's sensitivity, the most likely worst case scenariosand their effects on the ERR were considered, with the following results:

(a) a delay of 12 months in connection of new subscribers resulting in adelayed revenue stream (ERR - 20X). This case represents an additionaldelay of a year in new subscriber connections; the basic case assumes thatinstallation occurs one year after investment and that commissioning takesplace 6 months after installation;

(b) an increase of 10% in operating costs simultaneous with a 5X increasein investment costs (ERR - 17X). Combining the above would result in afall in the estimated ERR to 16X. Therefore, even under this improbableworst case scenario, the project would be acceptable.

D. Least Cost Solution

5.9 The proposed project has been planned carefully and represents theleast-cost solution for expanding and modernizing NTC's existing network. Demandforecasts are considered to be as accvrate as possible under conditions prevalentin Nepal. In preparing the project, NTC received special help on KathmanduValley from ITU-funded consultants, and for the rest of the country NTC'sdetailed plans were reviewed by a Bank con-ultant and found to be appropriate andleast cost. A DANIDA consultant has provided considerable assistance inpreparing outside plant plans with an emphasis on minimizing costs. DANIDA hasagreed to provide additional consultants to train and assist NTC with detaileddesigns. In a similar way, FINNIDA proposes to engage a consultant to check thattransmission system designs are appropriate and least cost. An exchangemodernization program has been developed to minimize expansion costs, and NTC isstudying the use of even more recent technological techniques for reducingswitc.hing costs. In view of these complexities, NTC has agreed to engage aconsultant to assist it to prepare the switching equipment contract and ensureplans are technically appropriate and least cost. The project appropriatelyincludes the replacement of all existing manual exchanges (four exchanges with

34

a total of 600 lines) but defers the replacement of existing cross-bar exchanges(two exchanges with 10,000 lines) for the time being, because these exchangescontinue to perform acceptably. These arrangements are satisfactory to IDA.

E. Project Risks

5.10 The project has been well designed and does not present anysignificant technical risks, The potential risks for the project fall into twocategories: (i) delays in procurement and (ii) shortfalls in NTC's institutionalcapacity to implement the project. These risks have been recognized and actionsinitiated to minimize their impact. As a condition of credit negotiations, NTCwill be required to prepare bid documents for five items needed early in theproject (para. 3.23), and continuation of IDA sponsored institutional developmentwould be a key component in the proposed project.

VI. AGREEMENTS REACHED AND RECOMMENDATION

A. Agreements

6.1 During negotiations HMG agreed to:

a. SECTOR REFORM CONSULTANCY. (i) Not later than December 15,1992, employ consultants, whose qualifications and terms andconditions of employment shall be acceptable to IDA, toreview the sectors structure and policies under agreed termsof reference; (ii) not later than March 31, 1994, based onthe consultant's report, and in consultation with IDA,establish an appropriate time-bound sector reform program;and (iii) then implement that reform program. (para. 1.24)

b. ARREARS. Implement an action plan satisfactory to IDA forthe prevention of accumulation of arrears from governmentalsubscribers for telecommunications services provided by NTC.(para. 2.15).

c. ON-LENDING RATE. On-lend the proceeds of the IDA Credit toNTC according to a Subsidiary Credit Agreement in US dollarsat a variable rate of interest based on the six-months LondonInter-Bank Offered Rate (LIBOR) plus a spread of 3.5%(para. 3.13).

6.2 During negotiations NTC agreed to:

a. NTC REORGANIZATION. (I) Not later than December 15, 1992,implement a modification to its organizational structure, and(ii) undertake a review of its personnel structure anddecentralize and delegate appropriate personnel functions tothe various division. by December 31, 1992. (para. 2.4)

b. MANAGEMENT CONSULTANCY. Appoint, by June 30, 1993,management consultants acceptable to IDA, for initiating andimplementing a management development program. (para 2.5)

c. UN-AUDITED AND AUDITED FINANCIAL REPORTS. (i) furnish toIDA, by April 15 of each year, unaudited financial statementsfor the previous year; and ({i) furnish to IDA, by July 15 ofeach year, audited financial statements for the prevlousyear, together with certification and the related report pre-pared by an acceptable auditor (para. 2.16).

d. RATE OF RETURN. Maintain an annual rate of return onrevalued assets of no less than 12X per annum after tax andbefore interest (para 4.8).

36

e. TARIFFS. Review before September 30 in each of its fiscalyears whether it would meet the required 12X rate of return,and if any such review shows that NTC would not meet therequirement, take all necessary measures to do so, includingadjustments of the structure and level of its tariffs(para. 4.8).

6.3 CONDITIONS OF EFFECTIVENESS ARE:

(a) the signing of a Subsidiary Credit Agreement between HNG and NTC ac-ceptable to IDA including on-lending arrangements for the proceeds ofthe IDA credit to NTC (para. 3.13).

(b) that IDA should have received for its approval bid documents forswitching equipment (para. 3.15).

37

B. Recommendationi

6.4 Subject to the above conditions, the proposed project is suitable foran IDA credit of SDR40.1 million (US$55.0 million equivalent) on IDA standardterms with a 40 year maturity to His Majesty's Goverrment of Nepal.

- 39 -

ANNEX 1.1NEPAL

FIFTH TELECOMMUNICATIONS PROJECTNEPAL TELECOMMUNICATIONS CORPORATION (NTC)

ACCESS TO TELEPHONE SERVICE(July 1991)

,;PA' ptono , I. Main Working L nes On-o,

City 1 Aret 1,er % ofTotal Number %:of.Total dest

UJrban Are

Kathmandu Valley 517 2.68 37,576 61.0 7.26

Biratnagar 176 0.91 3,163 5.1 1.80

Birgunj 115 0.60 1,954 3.2 1.70

Dharan 82 0.42 1,053 1.7 1.28

Pokhara 73 0.38 1,887 3.1 2.58

Janakpur 70 0.36 986 1.6 1.41

Nepalgunj 54 0.28 1,284 2.1 2.38

Butwal 49 0.25 975 1.6 1.99

Hetauda 45 0.23 1,088 1.8 2.42

Rajbiraj 43 0.22 566 0.9 1.32

Bharatpur 32 0.17 1,792 2.9 5.60

Tansen 20 0.10 476 0.8 2.38

Lahan 8 0.04 196 0.3 2.45

Others 253 1.29 8,354 13.6 3.34

oq<tt - U ? i ~1'532 'W $0 41'1,537 8.00 61,350 4.5 .40

;kl __ _ _. 1,*783 9 2.00 . ' 0* 5 0 .

19,320 100.00 61,650 00,0 0 32..

120mDn AiNEPAL ANNEX 1.2a_np FFl3 1UECGIWWWIZIT71E0W S PROEcrT Page 1 of aNEPAL 7E.ElCC NlICA1OSCORPFRA470N(NIC

COVERAGE OF SERVICE BY REGION, ZONE, DISTRICT AND URBAN CENTER

N NZ N N _ I O

ZON , I |EXCHA E tqk TOTA' , R=~EW ,.~NE MAIbE < ,,'De-ENS_ _

3 llsm lI m** llam X 703 240.511 a.422 25GI ' Ž' ~E D 21"DITRC lOI " N

{Damd;~~~~~~~~~~~~~\ N7 DunlIW~ un,0s 50 151rLu6

ZTOTAHl¢ZONEPAL 147181 _t;1%tO$0 _1.538*05 _7 '178 68`-J

20" A~~~~~~~~~~~~~~~~~~~N N N

I ASTERN REGION 3,~480 17T4,5336741.9 101%

o Tapejn Tapeun 3.64 124.073

2 Pasnchlhag _hdl .41 203 11a Urn Du1aml 1732NA1 . 250 2183734 taps c *-a1~ InewdiaS9 t40 s~iO6 N NAn '.t ka 0.92

......... 0 5Z BN badaur* B ia 16.75, 1000 512 1.02

12 PaluXMuno ko 1.0741 286,e

1 Khtamad 0(Damak" ) Damak 13088 S500 151 1.15%Ohulabarl 0

5, Snlcjwnnav IG.adbarl 3.480 174.5136 Ttshsum TodjaIwn 59 124737 7hoipw BboJp 18 Jo 259.93.8 Ohankula Obankutas Obanlwl 891 175.008 9.124 750 381 4.18%9 Sunmfi

......wYw x ~ . '~ Nt.7(Dhaan") Chars 82.45D I'M0 1.053 1.28%Du Si NA 250 137bwwwa~~ ionew 14.633 140 134 0.82%10 oIlg aba NA 50404

Blmtnaar0 SRatnagai 15046.000 3,163 1.80%(400 ~ ~~RngR0

11 SDoUctIumbu Samle 3.31218.712 Okhaldunga otusldhungp 1.074 i85.60613 Khotan Dike! 1.591 285680m14 Udaympu Galghal 2.063 215.49I15 Sapa RaIblra Rabibrsi 13 511.152 42.62 750 656 1.33

Laban ~~~~~~~~~8,488 Boo18 ,Gtrabs Girabs NA 250 952.%

IW5svc.U7Kr ANNEX 1.2COVERAGE OF SERVICE BY REGION, ZONE, DISTRICT AND URBAN CENTER PageR2o6

FL $TRIANoT_ A _It' ~CrzNTRAL RWGON 274i S5I4j84?5 6 ~" 13

17 Dda1ba ClSajkoa 2,191 192,13218 Rachbap Ramechap 1.546 201,00019 Sindchu Madi Slndhu77 Madi 2.491 234.40420 Dhanusa Janakpur^ Janakpur 1.180 651.050 70.448 1.2S9 886 1.40%21 Mahiott Jaleswor Jsaeswor 1,002 460.698 11,27 260 152 1.31%22 Sadahl Malangawa " Malangawa 1.259 508.818 22,439 16o 133 0.56%

23 Asuwa(Rasuma) Dhunchh 1.544 38.58724 Dhading Dhading Booi 1.92e 310,675 tX725 Sindttupaihok Chautara 2.542 296.44326 Nuwakdo Sidur 0* BlduriTrlnhui) 1.121 258.993 8.053 250 232 2.88%27 Kanro Palanchoc Dhulikhel Banepa '4OhuIiie1 1S9B 391,917 17.433 500 47 2.71%

28 Kalhnmandu ~ ~Balanibu 08badrawn 0Cent 1 7.000 4.630Centra It 10.000 9,128Chabahfl 5.000 4,171Chhauni "250 2,951Gongabu 0Indrayenl 0Kfrtipur 0Naxa1 10.000 9.516

20 8haltapur tg'Q N-.Bhaklapur 1,610 1,184Thimi 0

30 Laur4i Z0 d6-Patan 7,000 SIMThnba 0Thecho G O0

roisD wRhW ANNEX 1.2COVERAGE OF SERVICE BY REGION, ZONE, DISTRICT AND URBAN CENTER page 3Of6

Z~~~~~~~~~~~~~~~~~

Si makawanpur Btdmphfl- Hehauds *-426 31OX58 44,941 1,400 1.08a 2.42§68hwdpur ̂- B Satpur 31,5 2,000 1.762 .6.

ATandl MA 2533 Pakar Birgunm - Hetrun] 1.353 362.810 1144885 2.240 1.84 1.706%34 Bara

iWalaya* Kalalya 19.712 250 239 2t%Simara NA 250 1§8Jitpur NA OPaanipur NA 035 Rautahat Gaur Gaur 1,126 411,537 NA 200 149

O0t%X

AMNEX1.2COVERAGE OF SERVICE BY REGION, ZONE, DISTRICT AND URBAN CENTER Page 4 o16

3B Goldch Ghda 3.010 2014,GWl37 Lamjun BadSalw 1.092 194,6838 Tanahu Damauli Oamauli 1.54 284,e52 039 KaidW fkd - Pddwa 2.017 281,89a 72Ji2 2,000 i,S8 2.600z40sy Syu Sania 114 34 "4tMn O O JananA 2,246 8Q945 .

62 lAus onwon 3,S7 18,47243 Mysai 8eni 2,29 123,45244 BWa8rV aRghm 1.784 274,1S343 PaFbao uadna 494 1234607

48 TauW Tamhna 1.146 3D3,24047 kghakdhancid Scnha o 1.1937 200.40040 Palpa Tangi* Tan1n 16373 2 9341S2 19,8S8 SW 478 2642 Kaupvag

K4idm2a Na21 NA 250 233Tau4hawa 4Tauhawa 11B004 25 213 17,41

so PwpaLndeh i _4 A _Siddhaff Na46 S7ddha7aaBaawa) 49 9M 1.0DO 978 1.954 ldwal Tuawal 48,763 11000 975 2.00%

Manalapur °51 Nawaiparai Pasi Parssi 2,162 3s3.436 0 I w

18wn ~~~~~~~~~~~~~~~~~~~~~~~ANNE) 1.22r_" ~~~~~COVERAGE OF SERVICE BY REGION, ZONE, DISTRICTANSD URBAN CENTER Pa 50f 6

62~~~~~~~~~~~~~~~~~ -.1. 8.- - ,e ------ SS~~~~~~~~~~~~~~~~~~~~~~~~~N PM_ MWX % t

SC PkM m dm 2,l 19.7

T~~~~ ~ ~~~~~~~ ~~ ~ Hl I9Q I2 I

~~~~~~~~N" 8d mma_8bndt 9,43 21J . S 6 Z.m^

Ean B"dxdlw t4s$*- Nlwunl 2.W 257,46 U,t180 2,000 t,2mODB"dp RAuWh Us12 2U122

Ot J^_ ~~~~~~~~~~~~2,2M 124AU2

~~~~~~~~~~~~~~~12 1741 t COI>.Hum SWbo CM16 26.45BJunhs J_i 2" So.

ell D ~~Dund_ 7,l8 27.8W0

ANAV( 12COVERAGE OF SERVICE BY REGION, ZONE, DISTRICT AND URBAN CENTER Page 6o16

.Me<FM,,WEb~~~~~~~~~ - :......... . . ................ ,.__ .. . . ......... g __ _ ,~fQ~ # _ ~ 00~c

57 Doti

DIpayaI* Dipayai 5.719 100 77 1.35%S. Doi 250 10568 Kaflai Dhangadhi' Ohangadh 3.235 318.231 13,838 2.000 t16 9.876 769 Bapha Chalnpur 3.422 153,017 - >70 BauMa Martadi 2.188 92.110 o71 Achham Mungalsaln 1.680 228.534

75 Dachua Darchula 2,322 111.32174 9tdI BaHt 1,519 221.03773 Dadeldhura Dadoldhua 1,638 1107.16872 Kanchainpur MahendmaNagar MahendmaNagar 1,610 206.484 80S0 1.100 1.074 10.74%

Noto1:** indIcates.thuubancentoF,baDiastletlHandoneofthe33Towns(-'ilnd!catosthii u,ban center i nota Distict 1i10 but it i one of the 33 Towns

4 a

t3UPy.N NESPAL ANNEX 1.3

NEPAL MEEMfWNCA 7ONS CORP"fi rcN 4

TELEPHONE DEMAND AND SUPPLY(1980-1996)-~~~~~~~~~~~~AU "-n"--n*xn*w*sm-s -9|-~w>tw*eaw---------- t =;=iGtl ...- * PgD0*|Swd t-$ 2jw-§n

I;Ubmandis ~~~ ~~~7St 7e 3te- 8s 93 7 ,01b- t, - . 1,1t2 1.dE t214 Itwa 1= t.8PA"u t3,ea t4fllt lb"7 1B,216 1tk 17,007 17,417 tJ,8 18.0 t@,68 tLg 196 1971 2D.10

: P " S~~~~~~~~~.7 MOX 7.68 10.78 12ZM ISA MOS 3O,W S.1460 3W 34072 384 4*I27 ,77700 7770 et1.e2s 9W.4t6 G16 11 al,719.M

tX'i ........ <N.5;~~~~~~.12 1,u 16..... S ,4r 21,3 M*786 2i,M 3W5 , 40.700 4A 4,132 MM KWP&M 4.6N 6.0t4fl G.8" 7,SSO SANS 165 16,30 20,U9 23,61 24.=O 20.004 31t54 5.:776 4t,ZO

81f6D0 64,900 7zm 79^m 91,W los9

t * l : Kw- innfu B,2 9,$6S '- tO M'- 2D59 26 9133' .1 3072 47M MM 569 M166 9.60 $0.7t2 PAN S,2 7,265 Q,OOO 9s13 lt,76 M8,et 19,tM3 Zkt7S 28' 2,04 34M 3 6 4ZW 42t4"

t_~~~~606 446 MM 1_ O-O -A _ AIN 4- 301

~~~~~4AQ2 e,zo la,7ti @,7Z tO@t7 96 1.760 16,602

1d43 21. 2t,62 ,In 47J,1 6B,2S7 509,Xt . ,0

P t~~~~~P K?L 4Z4 W32 44.S 47.0 S59 44.9 569

VANUV=sa44 OA °^--- 1.12 -tV.77 I 221 -A 9 3A SO M2 S an42t 4.66P " t~~~~~b 0.03 Qt04 e4 oAs 9.00 0.07 0,09 0.11 e.s3 o.1a 0.16 &Je -18 02t

:.t zj$g KSw_ ~~~~1.10 I.J 1,47 1.S3 221 z76 3.20 373 4.Z 4.W 4.ti2 4.74 627 U3t t ...... *;:§,1 ~~~0,0 OAS Om 0................. O.OB 0.09 604 O.t 0.14 O t5 0.10 0.t6 0.2 0S2 *as

g_ _ tX_~~~~~~~~~~~~~~~~~~~~~~~~K

- 49 ANNEX 1.4Page I of 6

NEPALFMiH TELECOMMUNICATIONS PROJECT

NEPAL TELECOMMUNICATIONS CORPORATION (NTC)

TELECOMMUNICATIONS SECTOR ORGANIZATION SEMINAR

KATHMANDU, NEPAL 17 - 18 JUlNE 1991

I. The Opening Session of the Seminar included a Welcome Address by Mr.B. Risal, Minister of Communications and was chaired by Mr. K. P. Rizal,Secretary, Ministry of Communications and Chairman of NTC's Board. It alsoincluded Opening Remarks by the World Bank Resident Representative, Mr. NigelRcoberts and Introductory Remarks by Mr. Bjorn Wellenius. In addition to some 15NTC managers, the Seminar was attended by representatives from the Ministry ofFinance, Ministry of Industry, and the Planning Commission. The Association ofIndustry and Commerce and Hotel Association represented some of NTC's largestcustomers. Also present were representatives from cofinanciers DANIDA andFINNIDA; JICA sent its excuses for not being able to attend. The presence ofthese donor agencies permitted the arrangement of a donors' meeting after theseminar to discuss with NTC some important issues related to the Fifth Project.

Main Issues resulting trom the Seminar.

II. Privatization. The consensus was that privatization of NTC wasimpractical at this time because of country rather than sector factors,particularly relating to access to foreign currency and exchange control. Nepalis strongly dependent upon donor agencies and soft loans for covering its foreigncurrency needs, and not even a profitable entity like NTC could be easilyprivatized because it would create the need for HMG to replace these sources offoreign currency, since NTC produces mainly local currency with a very smallcomponent of net direct foreign currency generation. Even in this environment,some participants of the Seminar expressed strong views in favor of immediateprivatization of NTC. However, there was extensive support to the idea ofcontracting out (either through NTC subsidiaries or through the private sector)NTC's non-essential services like civil works construction, cable laying, dataprocessing and janitorial. In addition, the Seminar attendants supported theidea of continuing to open new telecommunications services (i.e. enhancedservices, cellular) and provision of terminal equipment to the private sector;but, it was stated, this have to be done in a competitive environment which couldbe created though licensing two competing private entities (if demand allows),or one competing with NTC.

III. Cross-subsidization. The seminar discussed the position held byHMG/NTC about the social obligations of NTC and the alleged 30X of totalinvestment aimed at non-profitable rural networks. It was clarified that thebeneficiary of that investment was mainly HMG which is interested in providingtelecommunications services to public administration (police, local authorities),rather than poor segments of the population which are not main telecommunicationscustomers in Nepal. However, these services do, by and large, cover operating

-50- ANNEX 1.4Page 2 of 6

expenses. The extend to which there is a cross-subsidy is unclear. If it exist,this cross-subsidy from local private customers to HMG for its ruraladministration needs is a complicated form of taxation, and could be done betterdirectly. The remaining purely social obligation is more related with theprovision of public call offices (PCO) in urban and rural areas. To have a moreaccurate assessment of these social needs the appraisal mission should proposeto NTC the creation of separate accounting entries for these sub-projects.

IV. Regulatory Body. Almost every speaker at the Seminar was in favorof the need of establishing a strong regulatory body as a way of separating HMGoperating and regulatory functions, and of creating the basic framework for afuture more competitive environment.

V. Communication Act of 2028 (1972). Although mentioned several times,no definitive position was reached in relation to the possibility of implementingthe share structure authorized in the Communication Act of 2028 (1972), whichallows for 51% of the shares in HMG hands, 25% in NTC's employees hands and theremaining 24% for the general piblic. It is unclear at this time whether thisownership structure, if implemented, would by itself result in significantperformance improvements. Rather it should be considered in the context ofbroader public sector enterprise reforms.

VI. Partly as a result of discussions at the seminar, two items can beidentified for possible follow-up in the 5th Project:

VII. Review of International Settlements. International settlements makeup only 1.7% of NTC's operating revenues. Much of this traffic is handledthrough Cable and Wireless, a private international carrier. A review of allaspects of NTC's international settlements is proposed for inclusion in the 5thProject.

VIII. Review Feasibility of Private Sector provision of Cellular MobileTelephony and Paging. Although there is no prospect of privatization of NTC inthe immediate future, private sector provision of cellular mobile telephoneservice and paging service may be possible if sufficient demand exists.Therefore, we would propose to include in the 5th Project a feasibility study forprivate provision of these services. If the study indicates a service isfeasible, the creation of an alternative (albeit high cost) provider of telephonyservice could be good for customers and for NTC.

IX. Tariffs and Arrears. In informal discussions senior Ministry ofFinance officials mentioned that tariffs adjustments should have to wait one yearuntil local elections have taken rlace. Especially given that there are onlyapproximately 50,000 telephone in Nepal, the mission view is that IDA should takea firm stand in regarding tariffs adjustments (together with payment of arrears)as a condition for negotiations.

- 51 - ANNEX 1.4Page 3 of 6

TELECOMMUNICATIONS SECTOR ORGANIZATION

REGULATORY BODY AND COMPETITION

KATHMANDU, NEPAL

SEMINAR 17 - 18 JUNE 1991

Place and Date

Kathmandu, Nepal Monday 17 and Tuesday 18 June 1991. Two working days.

Organization of the Seminar

The World Bank and Nepal Telecommunications Corporation (NTC)

Participation

Maximum 25 persons, high level officials representing the Ministries of Finance,Communications, Planning Commission, donor agencies (DANIDA, FINNIDA, JICA), mainusers, NTC and the World Bank.

Background and Objectives of the Seminar

The rapid development of NTC during the last years, together with world-widetransformations in the telecommunications sector and a pro-reform politicalclimate in Nepal, make the timing appropriate for having an in-depth discussionand review of current trends and development possibilities for thetelecommunications sector.

The Seminar would help Nepalese Government and NTC to outline a strategy fordealing with the Telecommunications Sector Reform process and Identify areas forWorld Bank support under the proposed 5th Project.

Format

The Seminar will consist of two full days of plenary sessions which will includepresentations and discussions.

Monday 17 June 1991

OPENING SESSION

Clairman: Mr. K. P. RizalSecretary, Ministry of Communications

and Chairman of NTC Board

- 52 ANVEX 1.4Page 4 of 6

11:30 - 12:30 (A) Welcome AddressMr. Bhoop Raj PandeyGeneral Manager, NTC

(B) Opening Remarks

(a) Mr. B. RisalMinister of Communications

(b) Mr. Nigel RobertsResident Representative, World Bank

(C) Introductory Remarks

Mr. BJorn WelleniusPrincipal Telecommunications SpecialistThe World Bank

12:30 - 13:00 COFFEE BREAK

WORKING SESSION

13:00 - 14:30 Session 1: Current State and Trends of TelecommunicationsPolicy and Structure. Recent Experiences in IndustrializedCountries.

Mr. Jeffrey CunardTelecommunications Sector Organization and RegulationSpecialistDebevoise & Plimpton

The session will review the general issues, options andcurrent trends in telecommunications policy and structure.These subjects will be introduced through the analysis ofrecent developments in industrialized countries.

14:30 15:30 Session 2: Recent Experiences in Developing CountrLes.

Mr. Bjorn WelleniusPrincipal Telecommunications SpeclalistThe World Bank

This session will review recent policy, structural andregulatory developments, In particular the introductiou ofelements of competition and increased participation of theprivate sector, in several developing countries and will befollowed by a discussion of these issues.

15:30 * 15:45 COFFEE BREAK

- A- NNEX 1.4Page 5 of 6

15:45 - 17:00 Session 3: Recent Experiences in Mexico andMalaysia.

Mr. Peter SmithTelecommunications Policy SpecialistThe World BankThe session will continue the review of options and currenttrends in telecommunications policy and structure through theanalysis of recent changes in Mexico and Malaysia.

Tuesday 18 June 1991

10:00 - 11:30 Session 4: NTC's View of the Telecommunications Sector inNepal.

Mr. Bhoop Raj PandeyNTC's General Manager

This session will examine NTC's view of their future in achanging Telecommunications Sector structure. Specificallywill address: investment financing, social obligations of acommercially oriented entity, potential for attracting privatecapital, scope for introduction of some competition, andseparation of ownership control from enterprise management andregulatory functions.

11:30 - 12:45 Session 5: The Telecommunications Sector in Nepal: HMG'sPerspective.

Mr. Thakur N. PantJoitit SecretaryHinistry of Finance

This session will examine NTC's current position and itsestimated development during the 5th Project from the viewpoint of HMG. In particular It will refer to possible reformaaffecting State owned public utilities, like implementation ofshare-ownership allowed in the Communications Act, and HMG'sview on the role of Government in this changingTelecommunications Sector environment.

12:45 - 13:15 COFFEE BREAK

- 54 - ANNEX 1.4Page 6 of 6

13:15 - 14:00 Session 6: The Telecommunications Sector in Nepal: HNG - NTCrelationship.

Mr. Alberto CruzatFinancial AnalystThe World Bank

This session will highlight the constraints in the HMG-NTCrelationship.

14:00 - 15:15 Session 7: Summary Discussion and Conclusions

Moderator:

Mr. Bjorn WelleniusPrincipal Telecommunications SpecialistThe World Bank

15:15 - 16:00 Towards an Action Plan

Mr. Alberto CruzatFinancial AnalystThe World Bank

ANNEX 1.5-55- Page I of 3

NEPALFIFTH TELECOMMUNICATIONS PROJECT

NEPAL TELECOMMUN.ICATION CORPORATION (NTC)

TELECOMMCATIONS SECTOR STRUCTURE CONSULTANTCYTERMS OF REFERENCE

General:

I. The current telecommunications sector structure in Nepal correspond to theclassical self-regulated state-owned monopoly. This type of structure had servewell in the development of the telecommunications sector in many Europeancountries and until recently was prevalent in most Asian countries. However,during the last years even the most traditional European PTTs have began a reformprocess to adapt their structures to the new competitive and interconnectedenvironment. This change results from new technologies which offer alternativesto the traditional cable network, allowing for overlay networks and economicprovision of parallel facilities for a variety of new services. Although thedevelopment of the sector is still in his infancy in Nepal, some of these newalternatives may affect even that small market, and the effect of the possiblechanges could be catastrophic for a structure highly dependent in his revenuesof services such as international telephony where a handful of customersgenerates a high percentage of total revenues. As discussed in the recentseminar on sector reform, the problem is not how to isolate Nepal from the forcesgenerating the current reform process, but how to be best prepared for absorbingthe inevitable reforms.

Objective:

II. The objective is to study, with the assistance of a consultant, alternativesector structures, considering different degrees of private participation, therequired level of regulation and regulatory approach, the effects on NTC'sposition as recipient of foreign grants and soft loans, the impact on NTC'sstaff, the effect on transfers to HMG in the form of dividends and othercontributions, the impact in the provision of social services (rural and remotelocations, and public call offices), and the impact on the availability of variedmodern serviees.

Scope of Work:

Task A. The consultant will identify, describe and assess, inter alia, thefollowing scenarios:

1 - implementation of part private ownership clause contained in theCommunications Act 2028. This case requires special attention tothe effect on NTC's position as receptor of grants from DANIDA,FINNIDA and JICA, and to the impact on total transfers to HMG andrequired regulatory structure.

ANNEX 1.5- 56 - Page2of3

2 - keeping NTC in its current position as an HMG owned corporation, butallowing private provision of enhanced or value added services:paging, cellular, resale of leased lines to business customers.This case requires special attention to the effect on NTC'sfinancial position, necessary regulatory approach, impact on totaltransfers to HNG, provision of social services.

3 - full privatization of NTC, with possible participation of severalprivate competitors.

Task B. The consultant will assess each of the scenarios in respect of thefollowing criteria:

a - required level of regulation, its structure and availability ofpersonnel,

b - HMG's objectives for the provision of services to rural and remoteareas and urban public call offices,

c * effect on reception of grants and soft loans, and

d * - effect on total transfers from the sector to HMG.

Task C. The consultant will also study the followlng matters which would bepresent in any of the analyzed scenarios:

1 * Set up of a tariff regulatory mechanism in HMG, with provision fordetermining interconnection policies in case of having more than oneoperating entity.

2 - Dividend policy to be applied while HMG owns whole or part of NTCtogether with policy for designation of NTC's Board members andtheir functLons.

Contraet and length of Consultancy:

III. The consultant would be contracted by HMG for a period of six months.

Timing:

IV. The consultant would be required to begin work not later than six monthsafter Board approval of the Fifth Credit (estimated date: September 1992).

ANNEX 1.5Page3 of3

Reportng:

V. The consultant will be required to report to HMG and IDA with copies toNTC. The following reports will be required:

A. An initial report after two months and regular monthly reportsthereafter.

B. A comprehensive draft report at the end of the fourth month withsummary of analyzed alternative scenarios and specificrecommendation. This report will be presented to and discussed inan ad hoc torum with HHG, IDA and NTC representatives.

C. Final report not later than a month after the forum, which willpropose specific actions, such as engagement of other consultantsfor preparation of specific legislation, and training of staffrequired for regulatory body. The report also should include areform Implementation program with Gantt charts and critical pathsteps.

NEPAL ANNEXJ 1* . FiFIELECCI WUNICA7NS PROJECT Page 1012

NEPAL TELECOMMUNICATIONS CORPORATION (NTC)

ORGANIZATION CHARY - ExdsUng

Ministry of Communications

I Board of Directors I

| Mr. Bhoop Raj Panday |

U'DGIU Rnancel & 06131 en Da ttG^5 atoonsAdminltlonw Pbanlndg QDowt* and MtdUla

MFl. Ramesh Nepal] lSr. e.s. Masr. V. S. Bsakea

-Finanspartment -Swvthing Planning -Maeri Management -O&M DepatmentDepment -Long Diance

-Human Rrnourcs -Transmiss Pnning LW oiD pnmetgOepL 4Pnct Depautmen

Sectlen -Cable Nehtork lmp*m.ntaon -ntemaornl Syan-usines"&Genea Plannin Dept Depamen -MuOia nagme "nt&AdmrnntaonDopL RepairCenter

-Computer and Data -Exchange Pojct Dept4iandd Mnlagment mmunkleatins -Rinal Olles

& Panning DepL Depatnt -Trainin Centr ncwar_ mS d~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~Ktmnu

Audftor 1tBrunjBhsb*hawa43utwat

Nepa4unlNcte: NTC pans to spit this dhivon Into the to _ia shwn, each headed by Itsown DGM. Ohangadlid

The eft DMslon wAl be Planning. l dght Diviion will be Development

NEPAL ANNEX21FFTH TELECOMUNICAWONS PROJECT Pag 2of2

NEPAL TELECOMUNICATIONS CORPORATION (NMC

ORGANIZATION CHART - Under Implementation

lMlnisry of Cornmun.callons

-Board of Directors

General MangerMr. Shoop Rai Pandwey

} OMRUFlnnc& DamOI DaM l l 0a1Sak0 cAdmLibaon Pb2nnk Deveknet and MbinbnMir.Rr_h Nem WI.G.G.Bor Mr. _ MfJV.8.B

4inance Departmnt -Gaitino Panning -Material Langmt -O&U DePaitmentDepa_Men -Lon Difane-Human RFeaurce -Tianunleon Plnning MahInrLegal O HIopen rDept. -Trnuinlsulon DepazientSecton -cable Nohor -IntenatIonal Sytatm-aualneus&Qnerad PZlagDp -Switching -Quality Managme&AdmindmronDepL

Repa* Cent-Computerand0Dta -Cable Network-nanlManagemen Comunklations

-Reionaloffee& PlannD Depanent Civi 81rgrinteral KatumanduAdaidtor

-Dewlopfent Biruni

-Trainng Center Npagunj X, , .dbl

- 61 - ANNEX 2.2Page I of 2

NEPALlFI TELECOMMUNICATIONS PROJECT

NEPAL TELECOMMlNICATIONS CORPORATION (NTC)

MANAGEMENT CONSULTANTDRAFT TERMS OF REFERENCE

General.

1. Nepal Telecommunications Corporation (NTC) is a government-ownedcorporation responsible for construction, operation and maintenance oftelecommunications infrastructure in Nepal. The corporation employs about3,500 staff and as of July 1991 had about 61,000 working telephone lines. NTCis about to undertake a further expansion of its network and facilities withthe objective of increasing the working lines to about 120,000 by 1996. ThisFifth Telecommunications Project will be funded in part by the World BankGroup's International Development Association. NTC will undertake a varietyof institutional development programs as a part of that project. One suchprogram will be to develop and improve its managerial skills; specificallyhigh level and middle level management. NTC will engage a consultant, underthese terms of reference, to assist with this task.

2. Oblectives. The objective of this consultancy is to identify NTC'smajor constraints to effective management. Then, through a carefully designedprogram, supervise and lead NTC's management through a series of self-initiated steps designed to remove constraints and improve overall managementperformance.

SgoDe of or.

3. Task A. The consultants will familiarize themselves with NTC, itsstaff, operations and management and identify the major procedural, cultural,organizational and skill level constraints to effective management.

4. Task-B. The consultants will then develop, in conjunction withselected high level management and with the close involvement of the GeneralManager, a management education and change program designed to significantlyimprove NTC's managerial performance. That change program will involve all ofthe key management staff within NTC. Through the program the consultants willfacilitate NTC's evaluation of its own performance, help staff identify keymanagement and performance constraints, and then assist NTC management indeveloping its own program of management change actions. The change programwill be designed to extend over a period of one to two years. This gradualapproach to a change program will be necessary because

a) many of the management problems result from embedded culturaland work values which will take time to modify;

b) many inefficient practices are the result of inappropriateprocedures which will need to be changed;

- 62 -ANNEX 2.2Page 2 of 2

c) NTC's management is already heavily committed to otherdevelopment activities; and

d) the change evaluation and practices process should form aroutine part of good management and should continue after theconsultant leaves.

5. Task C. In conjunction with the reform program, the consultantwill design and present a variety of management training courses and workshopsthrough which NTC's managers would be able to learn and practice effectivemanagement tecnniques and strengthen their interpersonal skills. Theconsultant will also work with NTC to identify a local academic institution ormanagement company properly qualified to run similar management trainingprograms in the future. The consultant will work with the selected body tojointly develop a training program to meet NTC's needs.

Local Consultant,

6. The foreign consultant will be required to engage a local Nepalesefirm as a partner in the consultancy. The objective would be (a) for thelocal consultant to bring into the partnership an intimate understanding oflocal culture which would be taken into account in the design of the changeprogram, (b) to train and develop the local consultant in modern managementchange practices that could be used effectively in Nepal, and (c) makeavailable a skilled local consultant to closely monitor t1TC's progress,provide regular support and follow through when the foreign consultant isabsent.

Reports

7. The foreign consultant would be required to prepare an initialdiagnostic report and draft action program after a period of one month. Theconsultant would present his/her recommendations to the General Manager andhis selected support team. After their review of that program, the consultantwould take into account NTC's comments and finalize the development program.Thereafter, the consultant, in conjunction with his local consultantcounterpart, would prepare monthly reports summarizing progress of theprogram.

Length of Consultancv

8. An initial period of 4 to 5 months is recommended for initiatingthe program and undertaking the initial training. Thereafter the consultantwould visit the country for 3 or 4 weeks every three months or so to ensurethe program maintains its momentum over the 12 to 18 month period.

- 63 -

AWrn.*Ma ANNEX2.3NEPAL

RFI7H TELECOMMUNICATIONS PROJECrNEPAL 7ELECOMMUNICA77ONS CORPORA77ON (NTC)

A. EMPLOYEES BY CATEGORY

Managementandadminle(aon 10 12 14 17 22 22

Engineer 88 101 127 125 132 150Teohnloans 592 6 663 674 723 7eoOperation 670 o11 671 ee1 761 758Other 1,202 1,300 1.635 1,671 1.788 1,706

C. EMPLOYEES BY REGION (AS OF JULY 15, 1990)

... ........ ~4Wp 5

Managementandadmlnloatlon 16 2 1 1 22

.gln.r go 26 10 a a 10 IS.

Toohnlolans ISO 911 103 as 112 124 701Opemlon 73 262 124 103 go 101 768Other 340 M3 2211 " 201 100 I'm0_~~~~~~~~~~~~~~~~~~~~~~~~

-- ANNEX24NEPAL

RPM T&EXMMUNI7IONS PROJECTNEPAL EECOA#MUNIcAT70AS CORP OR017T

CONSTRUCTION & OPEhIATIONAL PERFORMANCE TARGETS

1. Installed Exchange Capacity - 76 78 82 94 112 130 139year-end equipped lines 000)

2 WoddngUnes- yearend('009) 62 65 73 80 92 106 1163 Stafllo000WouwdngUnes 65 62 59 55 50 47 464. AvwageFaultsll00UnesMonlh 16 15 14 13 12 11 105. %FaultySees Restored .

Within48houus NA so 91 92 93 94 956. Callompletion Rate(% NA. 50 52 54 56 So 597. GrossRevenues(NRaBillion) 8W 927 1,394 1.591 1,655 2,173 2,384. DOebtSeniceCwmeage Ratio 1.2 1.1 1.5 1.7 2.0 22 2.3

9. DebtEqulty 42% 369 4A 52% 57% 60Wj10. Rate ot Ratum on 1 15% 23% 24% 21% 16% 12m9

Reaued Assets11. Internal Cash Genemon Ratio 2 - 7% 45% 29% 26% 36% 49%

Notes:1. WodIng Unes - Exchange lines In service:7 Call Completion Rate Is a measure of the % of time calls are sccessfully made after the subscrdber lifts the handset.

Unsuccessful calls Include Incompletion of dialling, do not answer, network congestion and technical failure3. tems 4,5 & 6 are annual averages of monthly resuts Others are year end values.4. Date of year-end: July15

NEPAL ANNEX 3.1RFTH TELECOMMUNICA77ONS PROJECT Pags e of 5

NEPAL TELECOMMUNICA77ONS CORPOR477ON(NTC)

TELEPHONE EXPANSION PROGRAMMEA -TELEPHONE EXCHANGES PROGRAMME

.TAIEJNSR TfPLEJUN3 76 1 t68 t6 2C4 160 150 ?R 160PAHCHTK1 PtDDII 112 lea ldlb 269 IbD 1SD ?R 1EDJIWAP EMDJU 21 700 700 1.425 E 1,oW UM3468 E 1,0SMAMOD 27S so3 61 956 MD Me SD ECS SOY

DAMAK 2M1 456 4 56 5 ECS S0o UM346S E-CS 600CHLXASM 241 478 476 7986500 Me 600 ECS 600

HAWCTHAA DW1 UTA 3 12 407 718 236 10 E1 760 E 1IJOflAP IITHADAR 25D W0 700 070 7.14 E .00 1,D 1. E .4000XB SAWD XB 3.PANGM 193 40S 40f 720 2&D 600 ECE 260

OWJLHARW 1,6 5 476 46 78 a500 3 , f OD ECS 600o

1,44 ~ ~ ~ ~ ~ ~ ~~^ .':6 %076%" 4,98 '-65, %,,25 'o ;399:'.oB; b

DUHA 1 IAM 4 279 279 412.660 ECS 250 ECS 250UMRWA 300 E 03 5 03 e 7.70 :E 3.0 1503 1. 4.500 . 4.600. 5

ffAHAR 318 52B 529 89l EO S00 Et: 6D0

SAMI PAJBIRIJ 213 60D 852 1,78 E 250 76E 720SUN UAHAN 307 62D s26 82D ECS 500 ECS D00SW ~~~ ~~136 3W 3DD 337 ECE 250 EE 25D

OHAUSM JAHAL 943 1.7ao 2,147 3,M5 SA 1,000 1, * 1,00 Sh 2pSAR i : 9Q> .

AHOTTAN JALESDNA 113 272 279 413 CSA 250 2C0 280

SARLAIG MALMMM ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ 26 OMW(22232502EC 26

SHANAFI 318 528 528 891 "^,os~' S .'oo r________ _ _

~006 10,575 11,991 * 19,930 ' %ti ________________ _______ ______

ANNEX 3. 1TELEPHONE EXCHANGES PROGRAMME Page 2of5

OISIAOT ~~~XO~1AI4G~~ OEMA1Q FOWIC.AUT W csfiJ~ NrQo iV400., KYa a * .' AI) 9. .4 IJ , . ..: ,

SA 8 MALAA 2Z0 3S4 347 45 SMR 250 SAR 250SURA SMA 2i0 SAR 250CQEWA EBIARmPIJR 1,7U 3.016 8.016 4.471 E 20 780 ill 7 27TAIB 100 20 250 340 EM 280 UM218 ECE 280IMAW&AJ SEAD GM *,5RI 1,98 511 SBAR 1,400 370- 370 SAR 1,710PARSA BhIGMN 1.40 3.170 3.98 8045 BrA 2.260 1.21 w128 BA *A48§MffAMTY Igo~ j 100 210 210 800 MIS. * 0 : .. ' ; ..x. >M(,),240 240 BR 2U0

GII=APR HKTAPUM 2,107 3,07 3,607 4.S44 SA 1,0 1,640 UM3416 1,640 SA 3.0SAR 20 F140 BAR 210TlD go s 1t 1.1 2.9A 1.0 P140 F.U0 0 ? I.'m0KAITIUANM SAUM Ws5 1l 1,393 2.40 1,500 1,500 7 t600 J

FZtl40FAIUPWLS 1S8 7 75 7M5 .190 760 F34 70 ? 75 0

CE8IW.LI 19011 M $,42 25,ti 31.143 XB 7.00D X) 7?00CENnVu 13.000 F140.P2X140 5o000 4,000 4,000 7 M3oogCENTRAL6 (-210) (2 23) BA 10.000 F3X140 AS 10,00CHABAIL 4.=5 7M 7.50 10,210 sA 4,000 7.0w F34.F2140 20oo aoo0 3OD0 SE 11.000(.2100) AR 1,0D0 SMR 10o0CHIAUIa 3.54 77n 7.s7 10.518 BA =i '.0

M SAM 1.418 D.00 a F140 ae0o 2 2A0D(419) (1

famW < 414 am 6m .4 780 U34 780 2 78DUNIWUR 408 ?5 786 1.282 780 F34.F140 780 2 780KAXAL 9t29 14U06l 14.04 17.M0 BA 1.00U, 4.00 F14o.PX4 a e 0D 200 SE 14,00-10o0 (Lim") FZX140PATAN PATAN 4,160 11.931 1 l W4.65 SA 7?.0 4.00 DOENDDT 2,0 200 SE lQ0THARA WS 68 67 .42 70 P34 780 2 780TIECD 602 1.053 1.03 1.5#5 _ _ t100 F34 1.000 2 1.000.VAL5.or^ 4.7 - .'._,101 , 6i'%.78 't :C.-9 4li.': .464 S''t.s$' . N ;N -- ; -#0O S00 \1^0 . -s' 4.0 0sKAVIE A1SA 875 9.000 2.098 3.50 SM 800 . SM 800

1.000 1000 ~~ ~~~~~~~~~~2 1,000MI WO tRSI SD t 180 140 :- SM 21b MAR 2M0

4N

nEaMWiO ANNEX & ITELEPHONE EXCHANGES PROGRAMME Page 3o5

ZO,E: .. , ., N N' ~ '~' ',, ¾'. > ,9e ,,Pv,\: '.,, ; . .... N 0,~~~~N

.. 33 . OKHAPA ts#2 3.814 4. Sx SA ½N IU8E

TUWINAM AAU OI N 2 U?V 26D 2so 8 ER 25vOUFM GDK to 230 313 160 ISO 751 IS. rAN 2 212 ' 42 ISO ISO 'V '7 ' "> s - a ".

ua ocu1# ua 3s7 Z7s 16D ISO M t6D

KAPi$= W AR 2ZS Wsi S4 610 50 SAR 20sE 4,D0TATUHD M 210 G0 6U4 71 SAR 25D * U 26D 80 10 IoaVS W GARM 1 so so aD 2i5 i20 UR 250 0VMLSF TVAtI 413 Sln f 41 1 1CSm 1MD t_ ~~~EAWUOU RII I= 1.9W Z2 Slt *p 1.00> * mobo $A ZOO*

OUTVVL gm aZ a zm As SAR ii',,\,,'\.>.,°,.$'

WANlMM 742 1.32 l.Si 2 ,MO- .6Q00" N NGUA M T/lU09Ai 11 1W tnSO :JOO lS 1 ISO

KFWZTU LOM ZA mlS OS l60 GAB E ao ECA 2D

T L*W 210 m m8 7.t EAB:S 690 M5 EGSB 6100

nM TREPB MO 5 i 32 E 20o0 Wc aO O E so.

BAMVA% GLV.&%% m MO SW ameeoc nm 7V amD

9AWLAFTI Vt t172 1.7U0 2$11 600 so El:S 1...

GEESE Tfl I S 12D 5 9tO 00 1t0 N ' 1O60lSI ________ || 0 lAS 7,00 1.;7 '. r d0 4,0 'A *0 \41 »S t*iu zu3E- CN

ANNEX 1ITELEPHONE EXCHANGES PROGRAMME Page 4 0f5

ZOM~~~~~~~~~~~~~~~~~~~

GPP OP1~ AomoE OF.VPJf 'p ie s Viwq.u ~ m r . x wO F 'P P p f iid PG . -. Ti> E . 0i t N ..

~~~~~~~~~i IN S .(3 '.' '' " "' r ;12Efl -

OMfl AVAL D 45 4.... .

U8 2s ElE 250

.. . 30D ~~~~~~~~~ECS 300AUS c~" 2SD I, ,,s 2 E 02 s

M14c)wefUF W.AI4GA 1.0109 2,5 2 ws 4.m ECS 1,100 SQO a 8DO 0 ECW ZaaxCA1ELHUMA GADEtHLA 41 a s 6 108 1S I50 ?R ISO3A TAS6 aAZA 10 25 ISO 150 ?1i 1501AHLA DWRt.ZA 225 225 367 150 1SO 7A 160

_.= 3 3.105 4.96 0 .10w 1 O° 4 . 0 ":o.o s>.45 >460 ,

TCTiAL( 2 122.W2 1== 81 .'- .' 7.200 . . 1.... .'j 4354M -

3aL 67.100 6t1#4 0.250 11.110 100=00 17.640 121 81CF4SSEm 10.000 0 0 0 0 0 1D.000MA_ UA. Gm :5':) 0 (240) (J60) 0 a

EXHA4GE1PTVIVSS1tIS~U

Sk SvSot 12AUCVERSON PAM:T M& UIOWAVESYSTEM OMBS/U7. amS SAM SY061 12AUCJVER $0NEMtlUNWT UNri UM384f68 Ut'GRPAEEX1N34MIWSUICROWAVESVSTEM1899 0047JU0 TO O UShSI= t 98AN2 S5 SE:I T26E.0 VERS0 PARBEN

T1193 1504 SER stora 12ac V ,EIJM FOTEUNIT UK: REIlEE6ING MICROWAIVESYST

105 C!illG E: SYSIEME-lOB PJA1f VMUX(2134: ODITAL MULTPI281STO 84MB) EQUIPMENTECS SYSTEMC-IO. SEMOTEUNJCSEC SStMEM E-WiL9REYOTE UNITCNE F140D 14OUMS S FllE SYSTEM

7: SYSTEMO TETENI3ERJ________ IR~~~~~~~~7 WRIALEXC)ANGE 9t

ANNEta 1;anep31.vtl

Pages of5

MU CWFTEMMON -XTNUADIMUVAUIEV 3.MTMOEAL nW^oLE-S;'OFNEPAL MD( PA.Uw7m uEC TNA 120%000

AJCct;NDIT t9SSES CAMIEOWC1s -THIIANDlVMl& 4W. R~~~~~~~~~~~~~~~~FES1'OMHPAL mD1PU1ERIUSPWIEF . 1TSFTESTOTAL 701

-~ ~~~~~~~ ,.

IAU `E , OUTSDEVAEU

t. OIPT LQS 76 (1X- W~~. J 1X4IIUI =t2XI40USIS 1. NEWRAW4SMIsON20MTG7LfSJEK 90(W- A2S1%1F4A2 a :oe 4 SVmull uxo usi 2 S~EttS ZlXeMWs TOTALHUW3EROF 2Wi(WPDEz-424 TOTAWL UUER8OFaIX(GROUP ENOU,-

2. SMlPBP.ROO.C le.9S S2 UPGRADING ('"Pt2GNZtMtUNK(S)TOTALmBUMSMF2SrW 0UfG6IPEN*-1tO

69GZ. 2J04M813-1 VSVS7v * Oe?EWU llVVELNU1X08Ia 70)WS&1XIX I8JM SYISTEMS 2GeHZ ZXIUI-1 SYSTEMTOTALNLUMBER MGS4B1ROLIPENDS)' TOTAL NUMMEMOMa2MBX (GROUP 8S9)-12

4. F63EXTNUM 3MEXTExNS IAI4HOTAL#JUNWF 2M=!(OWPENDS)-4

ST. N llURWILTOTALNLU4Oi2FBIWROUPEBN)-790

TOTAL RFIBAI5OP2M3=(GRIPEHD3)-a6

lWALtGF2W5"0W E?lG M NAIA11OILA?D 1OEF AV TWUNDERV ASE, t. OP1t:ALIBEROFORhNTEWNAT1NUAt lX140MBIS2 SY US21 WCAPACIIY-3SVSTES.TOTAL UBS$ O TOTALNWBEMOF2MBfS(RUP0NWS)-12

2. MATMW3.SLJS(GHRi§ULVWASEHVMC WoXs-esSTEMY

2X1OUSI$.-i SYSYBIMCiAJD-6SYSiSELMTOTAL 24C TOTAL: UMOER OF 21WS (GROUP E1S)-04

3. EMCOFOW EXTENSIO IMwVKTAThANMIO1ST61UM OIR SYSTEMS

2 svsY 3 4. SBA=N H WClRCUfEXTENCSS1ONTOTAL NUMBMOROF 2MWSI (GROUP ENDS)-20

73 ANNEX 3.2Page I of 4

NEPAL

FIF)H TELECOMMUNICATIONS PROJECTNEPAL TELECOMMUNICATIONS CORPORAT7ON (NTC)

NTC'S INSTITUTIONAL DEVELOPMENT PLAN

1. As a result of the IDA funded Bell Canada International ManagementConsultancy, NTC implemented a dynamic system for monitoring progress in itsInstitutional Development Plan (IDP). Under this system the list of specificinstitutional development projects is variable: finalized projects are taken outof the monitoring list, and new projects are entered into the it. As an examplethe list as of December 1990, included: (1) Tariffs, (2) Outside Plant, (3)Switching Network Management, (4) Material Management, (5) Billing andAccounting, (6) Training, (7) Human Resource Management and Planning, (8)Standardization of Procedures, (9) Computer Systems Development, and (10)Customer Relations. As of November 1991, the projects Tariffs and Billing Systemwere finalized and taken out of the list; however, during project preparation newprojects were suggested to NTC, which will form part of its IDP.

2. The following new IDP projects have been discussed with NTC and will bepart of its IDP during the proposed project implementation:

a. Corporate Data Base, this project is jointly funded by FINNIDA.

b. Set of Actions aimed to avoid generation of HMG4's arrears.

C. Enhancement of NTC's Management Skills

d. Review of InternatLonal Settlements.

e. Study of Telegram Service.

f. Establishment of Policies for the Private Provision of PCOs.

3. The first three now IDP projocts are In a more advanced stage and aredescribed in more dotail as follows:

Corporate Data Base.

4. Following the completion of the Billing System under tho Fourth Tolecommun-Ications project, NTC has continued to dovolop and refino its various computerbased systems (Billing, Ledger, Sales, Enquiry, and MCC) and is ready to beglnIntegrating a number of them Into a Corporate Data Base (CDB) arrangement. It Isproposed that FINNIDA would provido technical assistanco under the Fifth Projectto guide NTC in this noxt step. The following arrangemonts aro proposed:

-74 A NNEX 3.2Page 2 of 4

i. FINNIDA would include a systems specialist in their project preparationteaml which has yet to visit Nepal. This expert would work with NTC todefine the broad objectives, development steps and ciming for the CDBproject. The expert would also identify any actions required to becompleted by NTC before proceeding with the next step.

it. Following the signing of the Project Agreement between HMG and Finland, asystems specialist (possibly the same as above) and a software/projectmanagement specialist would visit Nepal to develop with NTC a detailedproject specification and development plan.

iii. The software/project management specialist woulJ then remain in Nepal toguide NTC staff in developing the defined system. Occasionally, highlyspecialized consultants may need to be sent to Nepal for short periods oftime to help solve particularly complex problems. The systems specialistwould be required to visit NTC at regular intervals to review projectprogress and participate in any major changes to the agreed specificationthat are found necessary.

iv. Hardware for this project component will be financed by IDA.

Arrears.

During discussions with HMG/NTC the following actions aimed to clarify thearrears situation and to avoid the creation of new arrears were agreed:

i. Designation of Telephone Services Coordinators by Ministry and Department:considering that each Department or Service in HMG has a budgetaryallocation explicitly lntended for telephone service, but that thisbudgetary allocation is not rigid, permitting to pay other services orgoods with these funds or using more of NTC's services than the budgetaryallocation, there was consensus in the need to establish a direct contactbetween each Ministry/Service or Department and NTC. This clo-er contact-will be instrumented through the Telephone Services Coordinator in eachMinistry, the designation of these coordinators was requested by themission to the Minister of Communications and the Joint Secretary,Ministry of Finance and is discussed in the following paragraph.

Li. Restriction In the Acceas to Tolephone Service according to Needs and asa Penalty: 11MG telephones which sorvices exceed the budgetary allocationor where services are not paid, even having the budgetary allocation, willbe restricted in service access as follows: (a) first, ISD service willbe disconnectod, (b) second, STD service will be disconnected, and (c)third, all services will be disconnected. NTC will propose a detailedprocedure to Ministries of Finance and Communications, with copy to IDA,

'Pio project preparation team would prepare the project document needed by FINNIDA for processing the proposedgrant for the Fifth Telecommunications Project.

- 75 - ANNEX 3.2Page 3 of 4

not later than August 30,.1991. This detailed procedure will include thedesignation of Telephone Coordinators by Ministry/ Department or Serviceat 2 different levels: one higher level coordinator will be the maincontact with NTC for requesting new telephones or services, TelephoneServices Coordinators at the exchange level will review and discuss withNTC the specific budgetary allocation for that unit and decide on theaccess (ISD,STD) to be granted to each phone.

iii. The mission agreed with NTC the implementation of a new project: Updatingof HMG's Services Data. This project is beginning with the introductionin the data base for the Billing and Ledger systems of the manuallyrecorded data presented to HMG in March 1991 containing additionalinformation on the specific Department or Service in HMG where eachtelephone is installed. Once this first phase is completed, the computerprint-outs will be sent to the exchanges by the Project Task Manager (theGeneral Managet designated Mr. S. Poudyal for this function). The TaskManager will check the information with the staff of the respectiveexchanges and then will contact the Telephone Services Coordinator in eachMinistry/ Department or Service to verify the accuracy of the data andpropose the specific restrictions in relation to access to service (ISD,STD) to be applied to each telephone, according to the level ofoutstanding arrears.

iv. Ledger System Project: The implementation of the Ledger System Project,which is crucial for providing detailed information on HMG acrears,requires more PCs and training of staff of the outside valley exchanges.The mislsion agreod with NTC that the Ledger System project will beimplemented in all outside valley exchanges of more than 1,000 lines(approximately 17 exchanges), and that some 5 to 8 PCs will be immediatelyprocured locally for this purpose. The mission also agreed with NTC onthe procurement of heavy duty printers to replace the three DFX-5000printers which are not suitable for the heavy duty billing system work.

Enhancement of NTC's Management Skills:

5. Telecommunications is of growing importance to Nepal; the new politicalenvironment in tho' country has placed a greater emphasis on democracy andpersonal needs; and telecommunications technology is rapidly changing. In viewof these factors, NTC has recognized that it must cultivate improved managementskills and style in order to become an organization that is more adaptable tochange, has greater internal coordination and improved information flows, and ismore sensitivity to staff needs. Any changes should be aimed at developing agreater awareness and concern for staff while at the same time introducinglasting changes to management and work habits that would bring about asignificant Improvement in NTC's performance.

6. To initiate this change process, NTC proposed that they should first learnabout similar changes being introduced by other Telecommunications corporationsthroughout the world. It was agreed, and strongly supported by IDA, that a groupof NTC staff visit a number of countries where these change processes are under

ANNEX 3.2Page 4 of 4

way. The group would comprise a variety of NTC managers with functionallydiverse responsibilities (eg engineering, operations, administration etc).

7. Countries with telecommunications corporations known to be deeply involvedin introducing a change in management style, and therefore appropriate for NTCto visit, include Canada and Australia. IDA agreed to inform NTC of any othercountries that may be appropriate to visit.

Telecou.nications V ProjectProject Cost by vear

Totals Including Contingencies Totals Including ContingenciesNRa (million) Ust (million)........ ............... . o....................................................................... .........................................................

92193 93194 94195 9516 96/97 97n98 Total 92193 93194 94/95 95/96 96197 97/98 Total1. IHESTIENT COSTS....................

A. EquIpwnt1. Telephonm Exchanges 72.9 307.7 458.0 302.4 115.8 8.7 1265.5 1.7 7.3 10.9 7.2 2.8 0.2 30.12. Trnmission Equl.pnt 79.1 279.2 505.3 197.6 88.2 11.9 1161.2 1.9 6.6 12.0 4.7 2.1 0.3 27.63. Outside Plant 115.2 315.2 305.7 280.4 160.3 68.8 1245.6 2.7 7.S 7.3 6.7 3.8 1.6 29.74. Customr Premises Equip. 4.2 23.6 34.1 33.6 16.3 0.5 112.3 0.1 0.6 0.8 0.8 0.4 0.0 2.7S. Operstions & Training 0.0 0.0 0.0 19.3 20.1 8.9 56.3 0.0 0.0 0.2 0.5 0.5 0.2 1.36. Power. Vehicles a Hmic 10.8 33.4 58.3 55.2 5.0 0.0 162.7 0.3 0.8 1.4 1.3 0.1 0.0 3.9......... ................. ................. ............................. .............................................................

,000Sib-Total 282.2 959.1 1369.4 388.5 405.7 98.8 4003.6 6.7 22.8 32.6 21.2 9.7 2.4 95.3B. CivIl Works

1. Outside Plant 18.2 46.8 63.9 66.6 68.8 32.3 296.7 0.4 1.1 1.5 1.6 1.6 0.8 7.12. Suildings 9 sites 40.5 129.3 131.6 96.2 39.0 10.4 446.9 1.0 3.1 3.1 2.3 0.9 0.2 10.6 'Sib-Total 58.8 176.1 195.5 162.8 107.7 42.7 743.6 1.4 4.2 4.7 3.9 2.6 1.0 17.7C. Cwiltay

1. mangmnt , 0.0 2.2 4.5 4.5 2.3 0.0 13.5 0.0 0.1 0.1 0.1 0.1 0.0 0.32. Project SiWart 12.5 39.2 65.8 19.0 0.0 0.0 136.5 0.3 0.9 1.6 0.5 0.0 0.0 3.3Sib-Total 12.5 41.4 70.2 23.6 2.3 0.0 150.0 0.3 1.0 1.7 0.6 0.1 0.0 3.6

Total PEOJECt COSTS 353.4 1176.6 1635.1 1074.8 515.7 141.5 4897.2 8.4 28.0 38.9 25.6 12.3 3.4 116.6z==zszzzz=uzzm u.zuuin

Values Scaled by 10Q0000.0 9/11J1991 9:06

.~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ -

- 79 -

ANNEX 3.4Page I of 2

NEPAL

FIFTH TELECOMMlUNICATIONS PROJECT

NEPAL TELECOMMUNICATIONS CORPORATION (NTC)

Proposed Procurement Arrangements for IDA Financed Items

IDA/ Type of Est.V No. Procurement Package Goods Services Procure US$

ment

1.1 Main Telephone Switching Equipment, Power, Engineering Design, Supv. ICB 19.1Exchanges (New) Installation Material etc of install/commissioning,

Technical Assistance,Training, Repair service

1.2 Main Tel. Exchs. as above asabove Direct 2.7(Proprietary) purchase

2 Supply of small rural as above as above ICB 1.2telephone exchanges

3 Main distribution frames MDF equipment for telephone ICB 3.4- MDPs exchanges

4 Outside plant equipment Copper cables, jointing ICB 10.2materials, cabinets, poles andaccessories.

5 Outside plant equipment Cable Ducts. ICB 2.9for civil works

TrasmisinBuoen

6 Microwave systems 11 Ghz Digital Microwave Installation supervision, ICB 2.0systems 34 MBIs Training

7 Earth stations Small satellite earth stations Installation supervision, ICB 1.3for remote areas training

8 Multi access Radio MARTS radio equipment Direct 1.2Telephone tjystems including power, antennas etc Purchase

9 VHP and HP radio Radio equipment ICB 0.4systems

10 Miscellaneous Transmultlplexers ICB 0.3trnsmission equip.

- Rn -ANNEX 3.4Page 2 of 2

IDA/ Type of Est.V No. Procurement Package Goods Services Procure- USS

ment

Transmission PEginment (cont.)

11 Expansion of existing PCM equipment, addition of Direct 1.5transmission systenm cicuits to microwave systems, Purchase

expansion of Earth Stationfacilities.

Other Ecuinment

12 Telephones A variety of telephone ICB 2.4instruments

13 Other terminal PABX for NTC, Fax hnstallation supervision, ICB 0.2equipment machines Training

14 Digital data equipment Smal packet switching Instation supervision, ICB 0.9exchange, modems and Triningassociatde equipment

15 Primary power Diesel Generators Training, supervision of ICB 1.4equipment testing

16 Airconditioning Packaged A/C for exchanges Installation supervision, ICB 1.4equipment training

17 Office facilities and Computers, copiers, printers Internation- 0.8training equipment and miscellaneous al & Local

Shopping

18 Vehicles Motor vehicles ICB 1.2

19 Consultancy Management training, Sector Bank's 0.5reform & Tariff study. Guideincs

(ncl. contingency)

MONUR.WKI ANNEX3.5

NEPALFIFTH TELECOMMUNICATIONS PROJECT

NEPAL TELECOMMUNICATIONS CORPORATION

DISBURSEMENT SCHEDULE(US$ MILLION)

cornulat Te1ecm iniIaTn

1993 I Dec. 31,92 0.0 0.0 0.0 011 June 30.93 5.5 5.5 5.5 10

1994 I Dec. 31,93 2.5 8.0 8.0 14If June 30,94 8.5 16.5 16.5 30

1995 I Dec. 31,94 6.5 23.0 23.0 4211 June 30,95 7.0 30.0 30.0 54

1996 I Dec. 31,95 4.0 34.0 34.0 6211 June 30,96 7.0 41.0 41.0 74

1997 I Dec. 31,96 4.0 45.0 45.0 8211 June 30,97 2.0 47.0 47.0 86

1998 I Dec. 31,97 7.0 54.0 54.0 981I June 30,98 1.0 55.0 55.0 100

i Ditburs emnt prfiDleia8ed on 8an1 profile foral communicatlons A81a Region.

5uCaa^t NAEAL ANNEX3.6WhI2 RM~~~~~FJJTELECOMMLIM0I4TIONSPRWJECT

NIEPAL TELECOMMUNMCA1ONS CORPORA77ON

Schedule of Constuction

Telephone Exchanges c.. <-- .........

~_F ii i 1. +fTransmissTon Equipment - RNNIDA "<- - - >

#9>~~-ICB c.*_ c............ .>^->_............._

Terninal Equipment (Note 1.) <...> r <#I > . >

Outside Plant - DANIDA <[I >. >

- [C -co ......< @ <:#H#M. > + 01>Itll1F

~~~~. ._ ... .. .,Rural transmission systems

MARTS, satellite, VHF,HF c.I... >e *: > #### N

JICA = _ _ _->Other Equipment <......................... ..>

0*-*** *----

# ~~~~>

Cisl Works - Outside Plant ........ . F+ 44>- Buildings c.....~ ,- *-><4-444-. .... +. 1I>N

t~~~f Oc " to

ANNEX 3.7- 85 - Page 1 of 4

NEPALFIFTH TELECOMMUNICATIONS PROJECT

NEPAL TELECOMMUNICATION CORPORATiON (NTC)

SUPERVISION CONSULTANTTERMS OF REFERENCE

General:

1. NTC is about to embark on its Fifth telecommunications expansion project.This project will include, inter alia, the installation of about 61,000 new linesof switching equipment, installation of radio and optical fiber transmissionsystems, the provision of outside plant and appropriate customer terminalequipment. Over the past 4 projects NTC has gradually developed its constructionand operational skills by stretching its responsibilities on each occasion.Again NTC has arranged the implementation of this project in a way that willstretch their construction, operational and management skills and therebycontinue to develop their overall institutional capabilities.

2. The project is being funded through a mixture of grants and bilateral softloans. Grants are being provided by Danish International Development Aid(DANIDA), the Finnish International Development Agency (FINNIDA), and theJapanese International Cooperation Agency (JICA)1/. The World Bank Group willprovide development credit through its International Development Agency (IDA),and bilateral soft loans will be provided by the governments of Belgium andFrance. IDA will be the lead agency for project appraisal and supervision. Aclose degree of cooperation has been established between Danida, FINNIDA and IDA,and based on past experience, these agencies have recognized that continued closeworking and sharing of information between them is important to ensure that anyproject related problems are addressed in an integrated manner.

3. Because the project is complex, relatively to NTC's implementationcapacity, and requires close frequent on site supervision, which the developmentagencies are unable to provide directly, it is proposed to appoint a consultantto undertake detailed technical project supervision on a regular basis. Theconsultant will be funded by Danida; but IDA will act as executing agency and beresponsible for appointing and managing the consultant.

Objective:

4. The objective is to appoint a consultant to undertake in-depth technicalsupervision of the project on behalf of IDA, Danida and FINNIDA. The consultantwould supplement, but not replace, normal supervision by these agencies. Inappointing a consultant to undertake this work, the agencies are sensitive to,and would seek to minimize, any unnecessary workload imposed on NTC as a resultof the consultant's visits. Therefore, it is proposed that the consult would,

I/ JICA is providing, through turnkey operation, a Phase lwo extension to NTC's rural transmission networks. Thisin a stand alone project component construction of which is planned to commence in 1992.

ANNEX 3.7-8a6 - Page 2 of 4

at the time of visiting Nepal to undertake project supervision, provide NTC withtechnical advice and support on project implementation matters.

Scope of Work:

5. Phase One; In order to become familiar with the project and the techniquesused by, and capabilities of NTC, the consultant would be required to visit Nepalfor a period of about 6 months, beginning as soon as possible. So as to add valuefor NTC during this phase, the consultant would be required to provide advice andassistance for preparing the complex project implementation plan that isrequired. NTC is taking appropriate initiatives throvgh organizational andstaffing changes to strengthen its project management capabilities for theproject. During this phase, therefore, the consultant would be required to workwith the new Project Division that is being created and undertake the followingtasks.

(a) Become familiar with the Fifth Telecommunications Project, NTC'spreparations for the project, identify their implementationstrengths and characteristics that may benefit from additionaldevelopment.

(b) Develop with NTC, a plan for supervising the project.

(c) Guide and provide technical assistance to the Project Division indeveloping appropriate integrated computer modeled plans formanaging resource allocation, maximizing project implementationefficiency, and developing a practical and effective projectreporting routine.

(d) Identify potential implementation concerns that may cause delays orproblems; determine the importance priority of these concerns; andhelp NTC by developing solutions which fit withlin their culture andcapabilities.

(e) Work closely with other expatriates who are assisting NTC withproject implementation. As separate expatriato advisors are beingprovided for outside plant planning and construction, the consultantwill not be required to become involved In detailed projectimplementation matters in this project component. Rather, theconsultant will be required to ensure that this group's plans forresource allocation, project timing and programming, and reportingarrangements are consistent with the overall project implementationrequireinents.

(f) provide training to NTC staff on project management principles anduse of the Nlicrosoft Project computer program for projectprogramming as well as one other larger well hnown program whichmeats NTC's needs and operates on a PC.

6. afgg,IM: Following tho Initial period with NTC, the consultant will borequired to regularly return to Nepal to assess progress made on the physicalproject elements and provide further support to NTC, as necessary, to smoothproject implementation and minimize delays. The frequency and lengths of the

- 87 - A NNEX 3.7Page 3 of 4

visits will need to be adjusted as the project progresses, but initially 3 visitsof 4 weeks each per year are envisaged. To the extent possible, the visits shouldbe coordinated to precede and overlap with any supervision visits by IDA, Danida,or FINNIDA. As the project progresses, less frequent visits will be necessary.Specifically, the consultant will be required to undertake the following tasks.

(a) Assess progress made on each of the physical project componentsincluding civil works, outside plant, switching, transmission, andsoftware development. The review should include all relevant projectrelated activities including planning, design, poeurement,implementation, and control and delivery of goods and services.

(b) identify existing and potential problem areas that need additionalattention by NTC management. Discuss, and develop with NTC'smanagement, recommended strategies for overcoming these problems.

(c) Assist NTC refine its project management and coordination skills andprocedures, including preparation of adequate and effective progressreports, and more effective coordination and works procedures andgoods control methods.

(d) At the conclusion of each visit, provide a report to IDA, withcopies to Danida, FINNIDA and HMG/NTC. Each report should summarizeproject progress, identify problems, and propose actions forovercoming them. In addition, the report should comment on NTC'sproject management technique and suggest and institutionaldevelopment actions which should be taken for further improvement.

Contract and Length of Consultancy:

7. It is proposed that the same consultant will be required to undertake bothPhase 1 and Phase 2. In order to operate effectively, it will be essential thatthe consultant is quickly able to gain the confidence of the agencies and NTC.While the consultant will be contracted to undertake both phases of the project,a regular review of the consultant's performance will be made during Phase 1 byIDA, in consul..ation with Danida, FINNIDA and NTC. If at any time after twomonths from project start, the consultant's performance is consideredunacceptable, then the contract will be terminated and a new consultantappointed.

8. The project implementation is expected to be about 5 years. The earlystages of project preparation and supervision will be the most important andduring these periods the consultant would be required to closely supervise theproject. As the project progresses, it is expected that the consultant wouldplay a diminishing role in supervision. The consultant would be engaged for atotal perie)d of 20 months, subject to satlsfactory performance, with the provisothat a reduction in the total work perlod of up to 15X could be made at thediscretion of IDA.

Tiling:

9. The consultant would be requlred to begin work as soon as possible and notlater than [date to be inserted after timing of funds are known).

- 88 - ANNEX 3.7Page 4 of4

Reporing:

10. The consultant will be required to report to IDA vith copies to Danida,FINNIDA, NTC and HMG (the Secretary of Communications). The following reportswill be required:

(a) An initial report after 1 month and regular monthly reportsthereafter. The content of each report should be decided primarilyby the consultant, but should briefly summarize the consultantsactivities and achievements; the status and agreed next steps forproject preparation; and highlight the critical areas of projectpreparation and management that next need attention. Any specificrequirements that IDA may request should be incorporated.

(b) A comprehensive report 3 weeks prior to completion of Phase 1. Thatreport should include details of report status, the next steps to betaken by NTC to minimize project delays, a summary of projectmanagement training given to NTC; recommendations for restructuringand/or changing procedures within NTC to improve projectcoordination, management and implementation and any other importantfindings.

(a) A supervision report at the conclusion of each visit. This reportshould include a summary of project status highlighting problemareas and delays; the next steps and agreements reached with NTC onactions to be taken; and other recommendations.

*" n~~~~~~~~~~~~~~FrU EECOAnMAONS PRECr ftQ9 1014NEPAlL 7ELEWWON1CSMCOfvR0FW=(NT;C

HISTORICAL INCOME STATEMENT(Nlqs mfon)

~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~\ _ _ S,I-REVE#UES

BadcRw_ 69 1140MacdCdE 3D 20 38 0 87 124 141 so so

Tfkd iS 17 20 42 as lie ISO la1 2ilSe tl¢wds 21 tIS 48 as so 182 21B5 35D 421

Ttdltdox 20 30 4S 61 42 as e5 1a tI

Tod T@bW*b 7 * a a a 8 7a

I fbqC b=*i 3 a 7 S _~~~~~~~~~~~~~~~ 3 5 a s9 *t 20- 12 12

-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~-T

&bfi 22 32 3; 43 41h 72 129 is? 2000&1"_cp 9 1O t2 2:! 24 211 :6 30 44D _~M 19 22 33 Go II 122 in 20W 20

0am 9 11 W le 27 5 48 48 5

He Op@s. Rbv (A- O) 30 62 70 109 12D 21s2 3D4 35B S73bblropnS@t( 23 31D 3t 35 57 37 log 162 105Nd nn-p. E =iLn 4 2 1 4 22 3 32 S2 22

InewmTaxI) 7 12 23 28 ll 7a 01 ea 74

. tvo~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~h

FEWT/MMOM WEPAL ANNEX4. tFIFTH TEL ECOMMUNICA77ONS PROJECT Page 2of4

NEPAL T&ECOMMUNICA77ONS CORPORAl47ON (NTC)

HISTORICAL BALANCE SHEET(NRs million)

I - FDE ASSETSM= in Opsratlan(J) 324 387 489 684 1.t02 1.627 2.322 2.741 3S2571nM2 .De9pFataJn (l 98 120 153 209 319 421 weo 806 1,046NetPIntinOpsr.(L) 237 267 ;S7 475 1,282 1.206 1.710 1.35 2,211PWtu1duconIuctiUn(U) 148 222 462 983 810 919 441 302 400TOTAL i < ' ""'S.ETS I. yjw s ' ton i -N St,2rt > <zis ' , ,.:'Fin. Invetnnts 0 20 22 35

TOTAL~~~~~ .:.,.,e$,i, So's .; ,;' .:,: ,;S N :lq'21*)' 'nii - CURRENT AS5ES

CawhsndnBks 32 32 70 107 192 282 467 384 603kAauntsfPAcelable 27 41 S7 7e 92 200 248 211 2541nwuL In Gov. SicurWe 0 3 3 2B 49 49 49 84nventory 13 13 14 S 13 1a 20 23 27

Other 19 8 11 16 16 27 41 77 50 ND

' -ii;.'''. ENtASSETS(F4'. .. 02 102 ,165: ~23' ''' 6si§>%.32'~.,< 0DeferedCharges 13 14 20 50 e0 118 181 184 0

:.TOTAL ASSS :.. ; ;; 2,1 4. ..,I - EQUITY

GoVanment Eqity 76 92 253 779 1.198 923 945 945 945Capiunew I 1 1 1 1 1Rained EaningsBeg. ofysa 34 38 48 50 92 128 223 333 417Add'in 5 9 a 37 35 95 97 84 90Endao year 39 48 55 92 128 223 320 417 507

TOTAQMU(S)" 4.:>;i.. 11' 141 " 0 f .' ' ' . .tYN t 1U - UABIULMES

Grass Lng Ten Debt 299 342 494 680 88 1.109 120 1.350 1,387C>rentpaorton 27 22 as 42 104 148 200 203 318

SUBScRIBERDEPOSloS 2S 34 52 7v 128 to7 ZoS 230 24PENSION FUND 7 9 1 13 1S 17 20 25 30

AccwntsPayable 52 79 109 104 1e0 s9 405 260 250CurrniaupotlonLTflebt 27 22 35 42 104 14U 200 208 310 eOtler 9 119 T G m URRX' A8 I1$(', VP "'"" 1; N ; N v " i.

49.0 N 'f N\'.. N NN. ....... , \ KNg;NN .N'.Afl

Fssvnmma NEFAL ANNEX 4.1FiF7H TELECOMM IUV CAJTS PROJECT Page 3 d4

NEPAL TELECOMMUNLCAINS CORPFO N VTQ

HISTORICAL SOURCES AND APPU(CATIONS OF FUNDS(NRs million)

I- SOURENFtftPM(C-D-F) 5 9 a 37 30 9g 97 U 900_opasm 19 22 33 58 III 122 18 t8 240Gtown 12 22 7 2 3tInei(E) 23 30 31 33 57 87 109 152 193

OebIunimtila1Ioo 22 35 54 113 149 204 287Inte"(E) 23 30 31 33 57 87 109 152 193

T i >" Xi"^ F U ~~31~.K' 41'.S ' 81 ;-<0> 6$X XS7 ; t-+ ¾ 2i w . .;i.s .'.F . mu ; i.s F5 '6s .10^.S.-.3 i.8? \\z s F y 0t NEqultycoaMrbu fiM 0 13 109 526 419 (274) 22 0 0

Excage Lesan Debt 304Bofofwings 71 174 216 250 446 277 150 0Subawlbrdepodts(l 18 24 50 41 S8 49 15

11 -APPLICATIONSInCiem In Fibd Oper. Ae 65 52 103 19S 917 28 595 419 S1IncM"lnW.lnPgwu, 42 74 240 521 1173) 109 (478) (139) 9

changslwoomngCapltsl 8 (9) 24 So a3 So 1S0 (2) (251)Inceae In RFi nt. a 20 2Odsende&Othen 0 0 16 47 .0 109 63

. . . PPEW 4 .......... - t11 - F . ' ' * . %'' .F " ? .

ill - PERFORMANCE INDICATORSDebt SveRlsloch9mioi(VN3 2.03 2.05 157 2.19 1.85 1.53 15.3 1.22 1.09In? Cash Ge. Rlo % (Z-Y)) 22.47T 28.14% 18.79% 42.61% 29.06% 28.11% a6.% 28.47% O0Minc. Subwcrier Dep() in int Cash 22.47% 28.14% 2.8 5523% 44.51% 30.10% 89.35% 45.8924 9.61'A

eSf*

MiMa.x NEPAL ANNX4. 1RFTH7flH7ECOMMUNICA7701HSPRWECr Page 4014

NEPAL 7aEcMMWCATIONS CORPORA7AON (NTC)

HISTORICAL BASIC PARAMETERS

~~~~~i :Aldded dwiaf ft yenr 11000 UW 7,000 14.=2 4.451D ltS,Sfl OrW0 OTddgyearond 20,580 21.580 28.780 35,780 S8000 S5,080 tl,tR20 77,700 77.70DYeuavemp(} 18,C80 21.080 2$.180 322B0 43,19D 52,890 ae2Uo 74,0BD n7007Added durhg te Ir 9,083 Zenl 4,1eo 8,2 7.907 9,840 9,719 3,260Tat year end 15,WN 19,057 2i.719 25,885 34.184 42,091 S1,931 Gl,As0 84,9DYe& &U80(N 15,242 17.511 20.38 23,802 30,035 38,138 47.011 SA791 03,27SFiD Ratio % 78% 88zi 764b 72e8 a%z 76 73% 70% 8411

A,dded BhnpCpcity 0 84 0 268 9 0 0 0Y"uendamwchpan"87 438 UO 6@2 J92 awQ * 2 0122IAdded Wolidng Una* 0 64 98 10 74 as Is 20 xY<rendWoMUnes() 950 Sao 405 479 542 #ID CN OFigRoto #A(0"X 80% 89% SMi es 78% t 84

Ad&hgny 170 9t1 72 949 O8 30S eoiTddWymnd 2,45 2.e28 2.099 3,077 3.425 9.494 S. 9,057Avaoe 2,4S2 2,640 2,814 3,038 S,z62 3,480 3.a9l 3,92

Aw ig aay tsN Rs I'm9 1,t04 I'm6 1,943 1,847 3,096 4.000 4,440AwQukb&whvmUSS eo S2 5S SS as 106 125 104

AVRG. GROSS FoamSSETS IN OPER. so1A2 . 30.63 438.15 588.79 t,t42.88 1.8t4.50 1,074.85 2.631eD 2908.92WORIONG UNES 15,242 17S611 20,98S 23,802 90,o5 sB.13B 47,011 60D9 93,26

Woorid niiibe O+S 17.9 8.8 7.9 6O 3) 3.4 3.4 &99Domstc lnfabn 4.1 16.9 13. 11.0 8.1 ll.S 11.0 11Q0US.SAIDL(bo!Lue) 1,014 1,131 1,e33 1,574 1,434 *.=9 1,110

.. ~~~~~Utban 1,109 1,165 1,223 1,29D 1,300 1,43 1,S12 1,S97Tadl t6,25 1t6.tl7 1f1oB0 17,539 1798 18,43S 18,9a0 19.318 19,74e

3~~~~~~~~~~~ EN,,,.,,.x <~ .N\a<zr 11;

Urban 1.44 1.84 1.78 2.01 2S61 2.94 3.43 4.00 &

M ddddyOper.g teenu 10.S 14.00 2087 27.2 404 5828 e7.28 77721 18Acrou aa(nb0) 18080n21.88 4.07 3.28 S94 4.60 40 4.14 7200Aal ysRendw 5.f9wHMGw057s 2. S.701 2.78 2.81

- 93 - ANNEX 4.2

NEPALFIFT TELECOMMUNICATIONS PROJECT

NEPAL TELECOMMUNICATIONS CORPOmON (NTC)

HISTORICAL FINANCIAL STATEMENTS

BREAKOOWN OF REVENUESN% mintatn

! . i ; ff |l~~~~nstallation 24% |

mTelgrah 0.7%| > W 1 7t asic Pental 8.4%

Intbmatbonal A4djustrent 1.6%

///////i < | . 0 |Trunk Calls.24

E mtoa Cal ,4. .

- 95 ~ ANNEX4.3Page I of 4

8 Aprl 92

NEPALIF171 TELECOMMUNICATIONS PROJECT

NEPAL TELCOMMUNICATIONS CORPORATION (NTC)

ASSUMPTIONS FOR FINANCIAL STATEMENTS PROJECTIONS

1. NTC's Financial Statements were projected in nominal NRs until the year2000 based upon the assumptions discussed herebelow. Necessary items from theseprojections were transformed into real NRs of December 1991 in order to calculatethe Return on investment and were projected in real terms until year 2008 (15years average life for project components). Two sets of projections weredeveloped: (1) the proposed Fifth Project is implemented and meets a demand levelprojected for 1996; and (2) without the proposed project, in which case a rapidincrease in the currently existing congestion leads to a situation of highunsatisfied demand and rapid deterioration of service quality due tounsustainable levels of congestion. Both scenarios assume that the new tariffstructure (resulting from the IDA tariff study of December 1990 and subsequentNTC study) will be approved by HMG in September-October 1991, with validitystarting from January 1992. This new tariff structure will follow NTC's proposedtariff of July 1991. (see Annex 5.3 with Current and Proposed Tariffs).

A. Projection of NTC'S Mnacial Statements AssumingInplementation of the Proposed 5th Project.

General Assumptions.

2. NTC's staff/1000 Working Lines ratio will reach a value of 50 in 1995.

3. The number of installed lines during the proposed project will be asindicated by NTC in Annex 3.1 "Exchanges", i.e.: 8,250 in 1993, 16,930 in 94,18030 in 95 and 17,640 in 96. The number of lines commissioned in a year iscalculated allowing a further 6 months delay. The number of Working Lines iscalculated assuming that 40X of the lines commissioned in a year are connectedto subscribers in the following year, and another 40X in the subsequent year. Theremaining 20X represents the number of available lines (fill ratio of 80X).

Income Statement

4. Rentyiu

Revenues were projected assuming that the proposed new tariff structure isapproved with validity starting from January 1992. Annex 5.3 presents thedetailed current and proposed tariffs. The main assumptions are brieflypresented below in a line-by-line order.

- 96 -ANNEX 4.3Page2o/f4

Installation fee:NRs 3,000 per new subscriber.

Basic Rental:NRs 200 per month per average working line.

Extra Local Calls:106 extra calls per month per working lines. (down from 117 in 1991).

Trunk Calls (STD)-in proportion to the number of working lines, with a 20% increase in FY93.

International Calls (ISD):annual 20% increase in total traffic until 1996, decreasing to 10%, 5%, 0%, 0%from 97 to 2000 to reflect the congestion resulting from lack new investmentafter the end of the 5th project. Tariff increase of 50% starting FY93.

International Calls Adjustment:no change in nominal NRs.

Telex:with revenues declining '.O% per year in nominal terms.

Telegraph:revenues constant in nominal NRs.

Leased Private Circuits:revenues with an annual 10% nominal increase.

Other revenues:constant in nominal terms.

5. E&esBs

Salaries: the average number of staff is calculated from the projected ratio cfstaff/100 working lines and the number of working lines. The average salary perstaff is projected as following the domestic inflation (constant in real NRs).

O&M expenses: the O&M per working line is assumed to increase in nominal termswith inflation (constant in real NRs, this is a conservative assumption).

Depreciation; from total Operating Assets as 8% annual (12.5 year working life).This total operating assets includes revaluation for foreign currency fluctuationand capitalization of interest during construction (IDC).

Other e;,ienses: assumed to increase with domestic inflation plus an annual 3%extra charge.

Interest Payments: from detailed Debt Service Table less capitalized IDC.

nl22me TaLx as 45% of Income Before Tax.

- 97 ~ ANNEX 4.3Page 3 of 4

Fixed Assets

6. Direct Addition to Gross Fi2Sed Assets: includes Foreign CurrencyFluctuation (from Debt Service Table) and IDC (from Financing Table).

7. Additio. to Plan-t Unde Construction (Wo_rk in Progress): sum of the 4th and5th Projects annual investments. The investment plan is based upon figures inUS$, which are converted into NRs at the exchange rate estimated for each year.

8. Deduction from Work-in-Progress: the transfer to Assets in Operation iscalculated as 70% of end of last year balance for Work-in-Progress.

9. 5th Project Investment: i5 the total annual investment from the COSTABtables, including price and physical contingencies but excluding IDC.

Basic Parameters

10. Average Exchange Rate. World Inflation and Domestic Inflation:

(Hemo from Mr. Suriyaarachchi dated July 19, 1991)

Domestic World NRs/US$Inflation Inflation

Actuals

FY85 4.1 0.8 18.2FY86 15.9 17.9 21.2FY87 13.3 9.8 21.8FY88 11.0 7.3 23.3FY89 8.1 -0.3 26.9FY90 11.5 3.4 29.3FY91 11.0 3.4 32.0

Projected

FY92 11.0 3.9 42.7FY93 8.0 3.9 44.4FY94 7.0 3.9 45.7FY95 6.5 3.9 46.9FY96-FY2,000 6.0 3.9 ....

Balance Sheet

11. Accounts Receivable: assumes a reduction from a level of receivables equalto 100 days of total revenue in 1992 to 90 days in 95 days in 1993, 90 days in1994 and 80 days from 1995 onwards.

-98 - ANNEX 4.3

Page 4 of 4

12. Government Eqty: adds every year the value of JICA grants.

13. Addition to Retained Earnings: equals Net Profit

14. Gross Long Term Debt: adds every year borrowing from BELGIUM, DANIDA,FINNIDA, FRANCE and IDA to the increase in past debt due to Foreign CurrencyFluctuation less last year amortization.

15. Current Portion: is the amortization due next year.

16. Subscriber Deposits: number of new working lines times NRs 5,000.

Debt Service

17. Assumes on-lending of all 5th Project grants and loans in US$ at 9.5%annual interest rate. Annual withdrawals from the Financing Table, amortizationbeginning the 6th year.

B. Projection of NTC's Financial Statements withoutthe Proposed 5th Project.

18. The model used for the projected financial statements allows for a simpleconversion to the scenario without the proposed project; it is only required tomake zero the entries for: (1) Project Investment in the Assets Table; (2)installed and working lines in the Basic Parameters Table; (3) borrowing from alldonors; and (4) set to 60 the ratio of staff per 1,000 working lines. Thesezero entries automatically adjust for the scenario without the proposed project;the only additional change is to adjust the growth in international traffic totake into consideration the earlier congestion due to lack of expansion inrequired facilities. The adjustment was done shifting the decrease in growthrate from 20% until 1996, 10% in 1997 and 5% in 1998, to 5% in 1993 and zerogrowth from 1993 onwards to reflect the high congestion resulting from lack ofurgently needed expansion.

w4ram..wm NEPAL ANNEX4.4RiFTH TELECOMMUNC117ONS PROJECT Page o1f4

NEPAL TELECOMMUNICATIONS CORPORAON WC;

PROJECTED INCOME STATEMENT(NRs million)

I-REVENUESlndumlion 24 20 36 42 32 11 0 0Bao Renbt 165 183 200 237 2e7 284 288 288ExtraL eCadl 87 97 108 126 141 150 152 152Tnk cags 264 292 328 378 420 453 4e0 460Intematlona calg 75S 908 1.087 1,305 1.435 1,S07 1.607 1.507Intern.callsadjudmont 13 13 13 13 13 13 13 13

Taotl blex 55 50 4S 41 37 33 30 27

TOdaTelp 6 6 3 6 6 6 a

LunasdP*dalecircuit 10 11 12 13 15 16 18 20Other 12 12 12 12 12 12 12 12

A-EXPENSES

saes 234 258 281 323 377 451 478 507O&Mexpenm 62 e2 74 90 108 122 131 139Drciaon 274 313 399 553 742 915 1.053 1,156Othes 61 57 73 s0 87 95 103 113

NtOper. Rov(A-) S72 891 1028 1.127 1.071 902 721 670Intopaynmt( 196 188 16 24 295 327 306 26Netnon-Op.Expsm 20 18 16 14 12 12 12 12

Income Fx(F 250 308 387 390 344 253 181 131

p ~ ' "' '.4~k~*t

Ow"Immwo NEPAL ANNEC44rFIFIH TEL ECOMMUNICA7ONS FROECT Page2014

NEPAL TELECOMMUNICA77ONS CORPORA TION (7TC)

PROJECTED BALANCE SHEET(NRs million)

I-FrXDASSETSPantinOpraonJ) 302 4.25 S.737 8.090 10.449 12.431 1m 15,018los.wcUM Doprcali (K) l32 1.634 2.033 2.580 3.327 4.242 5.215 6.452Net Pa hIOper. (L) 2282 2601 3.704 5.505 7.122 8.189 8,693 8 560Plantunderandruclmn M 700 1.191 2.082 1.700 1.026 449 135 40TTQ AWL?1lFIXEtASUT 2.13 i?.092 ">~ 'i '~Z0 8.4 > 6~ 9 8. iO0S7:Rn. Inbhr nt.

I1-CURRNT ASSCasoumdbU ank 500 n77 1.024 1.424 1t95 3.092 4.129 5.211AccountsPRcebabl. 383 392 407 478 522 545 545 545nw.L In Gov. S wuslmwy 31 35 41 47 E4 62 71 82Ohemr 50 50 50 50 o so G0 o0 TOTAL C .R ........ N 1.003 ; 9 " 1;:...... '0 1.wi< ~ 2 i' t NN45.;SS..:79<.si,?W' o.8R DeferredCh u 0 0 0 0 0 0 0 0TOTALA3SMS- ,..4 ; : , :0 10.746 2 .1.4-5¾:.&I- EOWTVGammmnt Equty 1.154 1I276 133 1,333 3 1.333 13CapitdPndE

BugoI.osp 507 813 1.190 1.638 2.118 2.56B 284S 3.067AddRiSo 306 378 449 477 420 310 221 le1BEdofar 813 1,190 1.038 2.110 2,38 2,845 3.067 3227'TOTAL it2.4 >.AII-UlTILMES

GnraLonTwmDebt I'344 2,00t 3.440 4.845 6.091 7.218 8.124 8.929Cuffentprelon 323 330 336 336 300 223 227 0.~ ~ ~~~~~~~~~~~~~~~~~~~ . . .....- ,I w,, K5USBCRIBERIDEOSITS 287 320 380 451 504 622 622 522PEN;IONFUND 20 42 48 65 02 a8 75 82

& baPcutyabe 260 280 200 260 200 260 260 260Current paorn LT.Debt 323 33 336 3 3900 223 227 0Ctoms 247 280 266 '42 (17) 142 142 142 a;, L~PA8(Et~) , , ..... 79...... m .46X . ......... .'. $#.4 ". NX N 02&>. \ . t40

48~~~~~~~~~~~~~~~ X

N

FsuRwl t/EPAL ANNEX 4.4RFIH TELECOMIUNICA47ONS PROECr Page 3014

PEPAL 7TLECOMUNICATIONS ORPORA71ON(nA)

PROJECTED SOURCES AND APPLICATIONS OF FUNDS(NRs million)

I-SOURCESNot Pwfoit(CO--E-F 306 376 449 477 420 310 221 161Oeprealian 274 313 399 #53 742 915 1.053 1.155

int.est(E) 196 188 196 246 295 327 3PA 26

Debtamo,tmuon 318 323 330 336 336 236 223 227intereZ (E) ¶96 188 196 246 295 327 306 265

iqultycortburonsM 53 155 122 57 0 0 0 0 oExchange Lou on Debt 54 94 364 802 1.103 1.231 1.131 1.031soffowings 239 8BT 1,40 940 478 t20 0 o 60nedberdepotsI7 40 33 eo 71 5S is 0

II - APLCTIONSemu in Fixed Cps. Aso 345 033 1,602 Z,96 2,S58 1.98a 1,457 1,129

Inelr! In W. In Pmgran 299 791 592 (383) (674) (577) (314) (94

ChlalnWokingCapatl 6 112 374 593 776 962 1.030 1.086himm hI Fhi Iror

ID - PERFORMANCE INDICATORSDebt Snvico RPa flo Gimsa,(VNW 1.52 1.72 1.98 2.19 2.31 2.76 299 321

. Cash Gen. Ratio% (Z-Y)) 44.74% 28.01% 2622% 3629% 49.01% 70.38% 91S966 105.33%Mld. Subscdber Dop In lnt Cash 51.54% 31.64% 29283% 89.8% 52.17% 71.6% 91.96% 1V5.339A

a.Qv4864

FWAX.040 NEPAL ANNEX4.4FIFTH TELECOMMUNICATIONS PROECT Page 4014

NEPAL 7ELECOMUNICATIONS CORPORTION (NT7C

PROJECTED BASIC PARAMETERS

=~~~~~~~~~~~~~~~~~~~~~~~~~~, XAdded during tie yew 4125 12590 17480 17835 8820 0 0 0Toa yea end 81,825 94.415 111.885 129,730 138.550 138,650 138.I56 138.650Yea Mave!O) 7.763 88.120 103,156 120.813 134.140 138.550 1 38.650 1

Added during boe yew 8.050 6Me86 12.028 14,126 10.662 3,628 0 0Toal ye end 72.950 79.6W3 91.664 105,790 116.452 198 119,980 119.80Yearaverage (N) 68.625 76.28 85.60 98,727 111.121 t1816 1190 1O9.80Fil Rato % 82% 84% 820% 82% UA% 87% 87% 87%

Added Exchange Capacity 0 0 0 0 0 0 0 0Year end Excane capacity(P) 692 682 692 692 e92 692 692 e92Added Woddr Unee 20 0 0 0 0 0 0 0Yew aend Wong Unes (0) 0oo 600 G0o 6oo e0 600 600 6 Fih Rato % (QIP) 87% 87% 87% 87% 87% 87am 7% 87%

Added in yo 218 41 132 583 0 0 0 0Total yewr end 4.178 4.218 4.49 4.932 5.779 5.779 5.779 5.77sAverage 4.067 4.196 4,283 4.840 5.112 5.773 S.779 S.779

Awg salarmonth N Rs 4.795 5.1S1 5,464 5.792 6.140 6.508 6.899 7.313Awg awlary/mnthaUS$ 108 112 117 121 126 131 136 141AVRG. GROSS FiXED ASSETS IN OPER. 3,429.44 3,918.69 4,988.00 6,913.7 8269.6 11.4402 13,160.1 14,453.3WORKING UNES 68,S25 76.3 85,f50 98,727 111.121 118,216 119.980 119.980

Wodd lnflatlon 3.9 3.9 3.S 3.9 3.9 3.9 9 3.9Domedic lnfaihon 8.0 7.0 0.5 E.0 60 00 0L 60.U.S.$IDEL(bookvalue) 1.121 1,124 1,241 1.464 1.709 1.943 2.15 2.324

Totab 20.1*3 20.630 21,087 21,487 21.9 2231 22.735 23.18

Uwban ~0S

MonfiiyOper. Revenue 116.13 132.60 164.5 181.10 19863 207.07 207.16 207.08 4sAccounbt Recevable in nonths 3.12 2. 2.63 2.63 2.63 2.63 2.3 2.63 &L 44Acot Reewbl months (who HMO awreas

- 1n3 -

NEPAL ANNEK5. 1- oae1 FIFTH TELECOMMUNICA7ONS PROJECT

NEPAL TELECOMMUNICAVONS CORPORA 770N (NTC)

PROJECT'S NEr CONTRIBUTION TO HMG'S REVENUES(NRf million)

A A.. N N x:..&x<x..... '.,*x,.:.-.A.*.-,,...-A. ...,.. ... .. N 4.:.44 .C ..:...........

alestax 47 70 80 94 110 120 125 125 125

Incoomtax 80 255 313 373 397 351 261 188 138

ReulEstatetax 2 2 2 3 3 *4 4 a 6

Proprty tex 0 0 0 0 0 0 0 0 0

Custom Dutis 0 4 14 20 13 6 2 0 0

Import Ucen. Fee 0 2 7 10 7 3 1 0 0

DANIDAIFINNIDAMDA Credit not Intern 0 9 48 127 208 262 292 275 253

BelglumlFrofwh loanslrmlnt not Intern 0 2 17 50 85 106 113 103 94

Bhiteh grant 6 6 6 6 6 0 0 0 0

DMdends 0 0 0 0 0 0 0 0 0

A. . ,~~~~~~~...........

.~~~~~~~~:Zr .... .. fl~~JA

EXCHANGE RAfW! (Note 1) 42.7 44.4 45.7 48.9 47.8 48.8 4.8 50.8 * 51.8

NTC'sRevenus(UStmilion) 22 31 35 40 45 40 50 49 48

Note 1: Financial Statements were projetced In nominal terms.

- 105 -

NEPAL ANNEX52FTHT 7ELECOMUNICAn7ONS PROJECT Page 1 Of 3

NEPAL WEIECOMMUNICATI0NS CORPORA77ON OM

TARIFFS(NRa)

1 - Formal Application 1.00Walting list reglstration walt 5-10 year walt 0-5 years

2 - Installation chargo(non retundbi 200.00 500.00 2,000.00

3 - Security deposit (with IDD SD) 500.00 1,000.00 5,000.00Exch more 200 llnes (ncilDD,STD)less 200011nes (rera) 3,000.00iess 2000 llnes (hilly) 2,000.00remote areas (western) 1,000.00

4 - Monthly rent 50.00 76.00 100.00

5 - No. local calls In flat rate 50.00 100.00

6 -pules per local call 1.00 1.00 1.00(no time limit)

7 - charge per pulse 0.25 0.50 1.00

8 - Automatic long distance charge structure (STM)

pulse length pulses perIn sec. min.

distance standard standard

0- 25 km 60 125 - 60 30 250-100 25 4100 - 200 10 6200 - > 7.5 8

Note: there are no reduced rates at off-peak hours.

- 106 -

wrAnAr*W ANNEX5.2IAWN TARIFFS page2of3

(NRS)

.., ... _J.Ji8~ormtn - pr ...

9 - Long dist. Trunk (oper)minimum Initlal 3 minutesSTD rates plus 20 %

0- 25 km 060 1.0025- 60 1.20 2.0050 -100 2.40 4.00100- 200 3.60 0.00200 - > 200- 400 4.50 8.00

400-. 6.00

...~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~........

10 - International rates Rs per min. Rs par min. rnin.A -ISDIIDD

India 12 20 30

Bangdh, Pakstn 65 45 45Sri Lanka, Maldives 75 45

B - Operator (min 3 min)

Group I 65 8o 0Group II 75 so ¶38

Group III 85 100 IsoGroup IV 95 120 180

(Group V now eliminated) 105

W.uRIP.PM(1 TARIFFSANNEX5.2,^-9 TARIFFS Page 3a o

(NRS)

.. .~ ~ ~ ~ ~ .. . . _.. .....x......

1 - Domestic

Monthly Rent 833 1.000local message (Rs/min) 7 7

2 - Internatlonal

Group 1 70 85Group II 84 105

Monthly rent Soo

Local unlimited

International as per pulse

_~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ _

Domestic

Nepall (Rs/30 Char) 3

English (Rs/l 0 Words) 3

Intemnational

Zone I 6.5Zone 11 9.5Zone III 11.5Zone IV 13.5Zone V 15.5

- 1AQ - ANNEX 5.3

Page of 3

I Apd 92 NEPALFrH TELECOMMUNICATIONS PROJECT

NEPAL TELECOMMUNICAI7ONS CORPORATION (NTC)

COMPARISON BETWEEN EXISTING AND NEW TARIFFS

HMG approved new telecommunications tariffs with validity srting November 17, 1991.Although these new tariffs not fully reflect the IDA proposal, as endorsed by NTC's SpecialCommittee, they are In the right direction. The new rates are sufficient for satisfying NTC'sglobal revenue requirements, but it will be necessary to continue with adjustments (BMGauthorized annual reviews of the tariff level) in the registration fee and the local monithly rateto reach a better tariff structure.

I. Regjtmaion.

NRs 1 Nrs 1 To eliminate frivolous registrations and make theregistration list a valuable planning data, the IDAsponsored tariff study proposed to substantiallyincrease the registration fee. HMG did not approve thischange, however delegated a final decision on NTC.

H. Deposit

hEySine BMoposd

Nrs 5,000 Nrs 5,000 exchanges > 2,000 linesNrs 3,000 Nrs 3,000 exchanges < 2,000 lines in TeraiNrs 2,000 Nra 2,000 exchanges < 2,000 lines in Hilly areasNrs 1,000 Nrs 1,000 exchanges < 2,000 lines in remote areas

The new tariff will make NTC to pay an annual 5Xinterest on this deposit.

mI1. Instaaon Fee

Ehzg frosedNra 2,000 Nrs 2,000 Presentiy the telephone set is provided by NTC free of

cost; under the new tariff the telephone instrument willbe procured by the subscriber.

The proposed tariff included two new system to satisfythose customers for whom the value of the telephoneservice is exceptionally high (these alternatives werenot approved by HMG):

Normal OYT (Own Your Telephone): lOX of the phones inany expansion program would be reserved for thesecustomers. The subscriber would pay Nrs 5,000 deposit(for which amount he would receive interest like any

- 110 ANNEX 5.3

Page 2 of 3

other customer), Nrs 2,000 installation f.e (alternativewithout telephone set) and an extra amount of Nrs 10,000as special deposit, which would not earn interest, andwhich would be applied to their total monthly bill after3 years of se-vice (example: if its monthly bill duringthe 4th year averagjs Nrs 1,000 per month, thesubscriber would recover the total special deposit inthe first 10 months of the 4th year).

Special OYT: the subscriber would pay Nrs 5,000 deposit(for which amount he would receive 5X annual interest,like any other customer), and a special installation feeof Nrs 17,000 (15,000 more than normal subscribers).NTC would accept this deal only in exchanges where itcan provide immediate service.

IV. Monthly Rentl and Per Cal Charges

Nrs 100 Nrs 150 This is the tariff element which is most below theaverage incremental cost (AIC) (est. AIC- Nrs 350). Theproposal recognizes the difficulty in carrying thiscomponent to its AIC, and as a intermediate steprecommended increases to around Nrs 200 by 1992 and toNrs 250 or more by 1994 with several alternativesintroducing different rates for Kathmandu Valley andother areas. HMG approved the lowest of the proposedrates (Nrs 150) with the proviso of annual tariff levelreviews.

100 free 100 freecalli calls The proposal keeps 100 free calls per month and keeps

the charge per extra call at Nrs 1. However, a timelimit of 5 minutes during peak hours was in theproposal, which was not approved by HMG. (Currentlylocal calls are not time limited).

V. Domestc Long Distance (STD)

E PaMRsee Annex 5.2 HMG approved to keep the current structure by distance

adding a 20% rate increase during peak time (7AM - 9 PM)and that rate would be reduced in 25% during off-peakhours (9 IM - 7 AM); additionally, a 20% surcharge wasapproved for operator assisted calls.

- 111 - AANNEX 53Page 3 of 3

VI. Interaonal (ISD)

see Annex 5.2 International calls were last adjusted on 12 February1989; at that time the exchange rate was US $1 - Nrs25.3, the current exchange rate of 42.9 Nrs per US$ 1represents a 70% increase. The new rates include a 50%increase to cover possible delays itl the futureadjustment. HMG authorized international rates reviewevery six-month, if necessary.

VII. Special Serces

The proposal included amendments to the tariffs for MARTS and SingleChannel VHF links; these amendments were not approved by HMG. The basic idea isLo leave single channel (SC) VHF as a good quality service for businesscustomers, charged at a rather high rate, and relocate all VHF SC equipment beingrecovered during MARTS installation to this special market segment which isbelieved to be with high unsatisfied demand.

l I Installationl ~~~~~~~~~~(Nrs)

Service current proposed deposit

JICA 2,000 2,000 5,000

VHF SC 2,000 2,000 5,000

VHF MC 2,000 2,000 5,000

MARTS 2,000 2,000 as normal phone

Monthly Rental (Nrs)Service

.v . . .. - . w . ........current proposed

JICA 1,000 1,000

VHF SC 1,000 2,000

VHF MC 1,000 500

MARTS KTM Valley 300 500

MARTS outside KTM 200 400

NOTE: currently the MARTS rate includes 300 and 200 free calls of 1minute each, the proposed rate would include 200 free calls of 5 minutes each,and this 5 minute limit would applv 24 hours a day.

- 113 ANNEX 5.4

Page I of 4

30oct.91NEPAL

FIFTH TELECOMMUNICATIONS PROJECTNEPAL TELECOMMUNICATIONS CORPORATION (NT`)

RETURN ON INVESTMENT

1. The proposed project comprises NTC's FY93-97 development programwhich also includes ongoing works, other works and initial investment for futureworks. The proposed project benefit period extends from FY93 to FY2008 when, onaverage, all the equipment provided under the project would have completed itsuseful life. No residual value of the assets has been taken into account as thepresent value of these in real terms would be minimal. Benefits attributed tothe project include expected revenues from new telephone subscribers andincreased telephone revenue from existing subscribers as a result of the project.Operating costs attributed to the project are the incremental costs incurred inproviding service to new subscribers less the savings due to the expectedreduction in staff per 1,000 working lines.

Financid Internal Rate of Return (FRR)

2. A summary of the program's incremental costs and benefits is givenin Table 5.4-1 below. NTC's financial statements (see Annex 4.3) were projectedin detail in nominal terms until FY 2000, for two alternative scenarios: with andwithout the proposed project. Relevant items from these nominal term projectionswere transformed into real NRs of December 1991. From FY 2000 onwards, costs andbenefits associated with the proposed project are assumed to remain constant inreal terms. The resulting FRR is 19%, for this base case scenario, is consideredgood for this type of project and is greater than the cost of money for thisentity.

lable 5.4-1: INCREMENTAL FINANCIAL COSTS AND BENEFITS(NRs million)

Fiscal Deflator Capital Total Total Net BenefitYear (Note 1) Expenditures Benefits Costs Stream

1993 1.095 322 97 0 (225)1994 1.177 1,000 258 0 (741)1995 1.257 1,301 456 11 (856)1996 1.335 805 672 39 (172)1997 1.415 365 786 72 3491998 1.500 94 812 112 6051999 1.590 0 767 113 6542000 1.686 0 724 113 611

Note 1: from internal inflation as shown in Annex 4.2.Projections for 2000-2008 were made in real terms.

- 114 ANNEX 5.4Page 2 of 4

Economic Internal Rate of Return (ERR)

3. Financial benefits and costs were transformed into economic benefitsand costs by making three adjustments: (1) the economic cost of the investmentwas determined from the financial cost of the investment eliminating customduties and reducing the value of civil works through the use of a conversionfactor (0.9); (2) revenues were transformed into a minimum estimate of economicbenefit by adding sales tax, reflecting total price to consumers; and (3) costswere corrected by applying the conversion factor (0.9) to one third of thesalaries, to correct for the part of the salaries which does not reflect trueeconomic cost due to mobility restrictions. Resulting economic net benefitsunderstate the real economic benefits of the project because the economic valueof telecommunications services exceeds the pric-i charged. The economic costs andbenefits calculated on this basis are shown in Table 5.4-2.

Table 5.4-2: INCREMENTAL ECONOMIC COSTS AND BENEFITS(NRs million)

Fiscal Deflator Capital Total Total Net BenefitYear Expenditures Benefits Costs Stream

1993 1.095 315 101 0 1214)1994 1.177 978 271 0 (706)1995 1.257 1,271 479 11 (803)1996 1.335 783 706 38 (115)1997 1.415 351 825 71 4031998 1.500 90 852 110 6531999 1.590 0 806 111 6952000 1.686 0 760 111 649

4. The projected economic rate of return is 22%, which is good. Theresult of a sensitivity analysis carried out on the economic rate of return issummarized in Table 5.4-3.

Table 5.4-3: SENSITIVITY ANALYSIS

Assumptions Economic Rateof Return

(a) delay of 12 months in subscriber connection 20%(b) increases: 10% oper. costs, 5% investment 17%(c) combination of (a) and (b) 16%

FIRRORR.wt *WNEPAL ANNEXS.4t8S.pt.ffeh..~91 FIFTH TELECOMMUNICATIONS PROECT Page 3 Of 4

NEPAL TELECOUMUNICATIONSCORPORATION (NTC)

FINANCIAL RATE OF RETURN(NRs million)

5t Prolet lnw: .i-ent. 0

Revenue with Project 1,406 1.605 1.871 2.192 2.404 2.S07 2.508 2,607Revenuewithout Project 1.301 1,302 1;298 1294 1,212 1.289 1t28 1.287

InCren~efltl Ravame ¢ 4 Ws7 * go,', - v i 11a,: . $.* 1 lt,220-% Si

Cost with Project 350 390 432 497 577 674 719 765 iCost without Project 350 391 41B 445 474 505 539 574

Deflao to NR4 ot Deee91 I .... .09 1.177 157 1.i& 11 1.5

Net Incrementa) Benefit 97 259 445 714 e5 ml t(real NRs Dec. 91)

Net Bensfit StreaM 2 (74t' (3$26 t0 ' 4,.

F'IR, prolect,l oI5ye8(00 18498%

et Q

P?RRERR WKP NEPAL ANNEX5.4ssn ~FIFTH TELECOMMUNICA77OWS PRAECT Page 4 of 4

NEPAL TELECOMMUNIJCA 77ONS CORPORA TiON (ATC)

ECONOMIC RATE OF RETURN(NRs million)

19-3 ¶994. 1.9$. 1-96. . 199 1981 1999. 20 tz i;; oz ki200l

5th Project Investment 353 1.177 1.635 1.075 516 141 0 4.897less: custom duties 1.8 8.4 18.6 13.5 82 2.1 0.0 52.6Civi. Works 59 176 198 163 108 43 744less: 10% (tefonversion factor 0.9) 5.9 17.6 19.8 16.3 10.8 4.3 744'NotProject(nves1ment .1 . : .. ' t11 1,9 ;;46 W4?.14i.*.~;... -t> '4.;7.:

Incremental Revenue 106 304 573 997 1.113 1.217 1220 1.220plus increrrenta SatesTax 5 15 29 45 56 61 61 61

Incremental Costs (0) (0) 14 62 102 168 180 191Salaries with Project 234 258 281 323 377 451 478 507Slarisvwithout Project 235 263 280 297 315 334 354 375Incremental Salaries (1) (5) I 28 62 118 125 132less: 10% on 113 of salaries (0) (0) 0 1 2 4 4 4**Tote increr e .:(. -. Xo .... i76, :

"Net Benefit Stream (234) (83) (1.009) (154) 571 97 1.105 1.095

Deflator to NRO of Derlb~i 1I91 . .2. 7*,. 1 ,,,-" 1. - .59' 1.6i:

Net Benefit Steam -. :214) . (700 (80-.4) (ii' G .4'(real NRs of D-c. 91)FIRR projftti1fe=15 eats6(2008) 2t:784

44 46

-1.17

ANNEX 6.1

NEPAL

FlFIH TELECOMMUNICATIONS PROJECTNEPAL TELECOMMUNICATIONS CORPORATION (NTC)

LIST OF DOCUMENTS IN PROJECT FILES

1. Telecommunications Act 21l9 of 1963

2. Communications Corporal. iA Act 2028 of 1972

3. NTC's By-Laws of 1976 and Amendments of 1983

4. NTC's Financial By;-kRules 2044 of 1988

S. Bell Canada International: Management ConsultancyFinal Report, January 1990

6. DANIDA: Feasibility StudyFinal Report (Carl Bro Int.), June 1990

7. Austroconsult: Human Resources and Training ConsultancyFinal Report, August 1990

8. FINNIDA: Preparation of Fifth Telecommunications ProjectIdentification Report II, November 1990

9. Betelcom: Pre-Investment Planning Support to NTCFinancial Report, February 1991

10. Analysys/IDA Tariff StudyFinal Report, February 1991

11. Telecom Australia (International) Ltd.:Consultancy on Provincial Planning in NepalFinal Report, March 1991

12. Debevoise and Plimpton, Sector Organization SeminarNotes on the Seminar, June 1991

IBRD 23473

e. N E P A LF s} f C FIFTH TELECOMMUNICATION PROJECTL / { Humo PROPOSED PROPOSED EXISTING

IaDrrchuIa ( U 0 Y EXCHANGES

MAIN TRANSMISSION LINES

Ba t f E _ / M DIGITALBaitEi | 'XE< / StChI Mugu V ANALOG

4.1< ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~-JICA LINES

< a Silgodh: I<SA R N A L S T S SMALL SATELLITE TERMINALS (VISA SERVICE)

TERMINALS WITH UP TO 30 REMOTE LINES

Mche d or NATIONL CAPITAL

Dolpa llq-\Mut g ZOONE BOUNDARIES('s / 2 > \X ~ 9> Dolpr / \t M0_ rINTERNATIONAL BOUNDARIES

g KDhangurhi % BHERI / -9 +,4? r Manang Kothmandu m himi, Bhod,okoli, Central 111, Gongabu,

Valley Indroyeni K3ipur, Thaiba and ThechoEl Bhoktopur Chbahil,, Chhauni, Noxal and PaEon

= / ~~~~~~~~RAPTI ( GANDAKI 0 9 Cent I ,nd Central 11

Gul.1, Tulsipur Baglun s Pokhara9

/~~~~~~~ ora i 0Ht

_I. sr A*loMnrr6 < ( \ Mvilongge ~z\ i/ Wkya 2 4sh

APRIL 1992