Document of

The World Bank

FOR OMCIAL USE ONLY

Reprt No. 7517

PROJECT COMPLETION REPORT

SRI LANKA

FIRST TELECOMMUNICATIONS PROJECT

(CREDIT 1020-CE)

NOVEMBER 22, 1988

Industry and Energy Operations DivisionCountry Department IAsio Regional Office

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

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

THS W ORLD BANK FOt OFmFCIAL USE ONLYWashington DC 20433

uSA

Olke W D4gmECewfl

November 22. 1988

MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT

SUBJECT: Pass-Through kudit Report on Sri LankaFirst Teleconxiu'iicaticns Project (Credit 1020-CE)

Attached, for information, is a copy of a report entitled 'Pass-Through Audit Report on Sri Lanka - First Telecommunications Project (Credit1020-CE)' prepared by the Sri Lanka Telecommunications Department. Fullevaluation of this project has not been made by the Operations EvaluationDepartment.

Attachment

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

FOR OUfCIAL I ONLY

PROJECT COKPLETZOI 33101

SRI LANKA

FIRST TILXCOOC ICATIOUS PPOJZC?1Ltm?T 1020-Cl)

SA ULOr TtnmPat

. .AC. ............................................... IYSSIC DATA SEW S li

zGLoI T S ....... ........................... 1 £1

U PQRT *PARIPND SY TME SRI LAMA T*LICO1WNICAIIOUDEPARSTMEN

1. IVTODUCSTON ......................................

it. PROJECT DESCUIPTION AND COVUANTS ................. I

Preparation, Appraisal and Negottltt on 2 ........... 2Project Objectives ................................ 2Project Deesr£p tlon ............................... 2Project Cost Z8t1i1te ............................. 3Covenants.......................4....................

lII. PROJtCT TKPLHNTAT!IO ..................... 8

Credit Zffectivezess and Project Start-up. 8Procuremt. .aProject Revision .Ipl.mntation.9 gCo-financing .................................,, 9Project Costs ................................ 9Diabureant ................................ 11Reallocation of Credit ............................ 12

IV. OPERATING PERFOANCE ............................. 13

V. FINANCIAL PERFORMANCE ............................. 16

Introduction .............................. 16Accounting .......... .................... 16Audit ................................. 6Financial Performance ............................. 18Tariffs ................................ 19Accounts Receivable ............................... 20

VI. INSTITUTIONAL PERFORMANCE ......................... 21

Organization and Management ....................... 21Staffing, Recruitment and Training ................ 21

VIz. PROJECT JUSTIFICATION ............................. 23

Project Spin-off ............... z4Rate of Return . 24

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

TABLE OF CONTENTS (Cont.)

ANNEX I: Telephone Growths (Appraisal vs Actual)... .... 26

ANNEX 2: Income Statemnts . . 37Balance Sheets and Funds ... 38Flow Statements. 191-1984 . . 39

ANNEX 3S Notes on Financial Statements .40

ANNEX 4i Physical and Financial Performance Indicators... 44

ANNEX 5: Principal Telecommunications Tariffs. 45

ANNEX 6: Rate of Return on Investment Programme .50

ANNEX 7: Organisation Chart of TelecommunicationsDepartment .52

ATTACHMENT

Comments from the Borrower .. ....................... 54

PROJECT COMPLETION REPORT

SRI LANMA

FIRST TKLECOMMUNICATIONS PROJECT(CREDIT 1020-CE)

PREFACZ

1. This Project Completion Report (PCR) presents a review of theTelecomiunications Project for which an IDA credit 1020-CE was provided forUS$30.0 million to the Government of Sri Lanka for telecommunicationsdevelopmnt undertaken by its Ports and Telecommunications Department (PTD)which subsequently became the Sri Lanka Telecommunications Department(SLTD).

2. The PCR was prepared by SLTD and submitted to IDA and reviewed inSri Lanka in March 1988 by an IDA supervision mission. It provides a gooddescription of the origins, ac, vements and problems in projectimplementation. The quality of report is acceptable and is attached assuch. A few aspects noted or absent from SLTD's version have beenincorporated in the wHighlights* section of the report.

3. In accordance with the revised procedures for project performanceaudit reporting, this Project Completion Report was read by the OperationsEvaluation Department (OED), but the project was not audited by OED staff.OED sent copies of the draft report to the Borrower and the Executing Agencyfor comments and the comments received have been annexed to the Report as anAttachment.

- ii -

PROJECT COMPLETION RPOR?

SRI LANY

FIRST TKLZCOHMUNICATIONS PROJECT(CREDIT .020-C&)

BASIC DATA SHEET

ISY PROJECT DATA

Actual orAppraisal current

Item expectation estimate

KEY PROJtCT DATA

Total Project costs (US$ million) 36.3 57.1Overrun (1) - 58Credit amount (VSS million) 30.0 30.0Cancelled - S24 onlyDate Physical Components completed 12184 916? l1Proportion completed at 12/84 (2) 100 10Proportion of time overrun (2) - 55Economic rate of return (t) 12 29Financial performance GoodInstitutional performance Good

Original Actual orItem Plan Revisions Expected date

OTHER PROJECT DATA

First mention in files ortime table 1/79

Government's application n/aNegotiations 4180 4180Board approval 6l80 5115180Loan agreement date _ 6/24/80Effectiveness date 9124/80 9110,80Closing date 6/30/85 6130/86 6130/86Borrower The Democratic Socialist Republic of Sri. LankaExecuting agency Posts and Telecommunications Department (later

became Sri Lanka Telecommunications DepartmentFiscal Year of Borrower January 1 to December 31Follow on Pruject A PPF for $750,000 was agreed to in 1986 for a

possible second telecommunications project.

z/ Substantial part of project was completed by this date; the situationin the Northern and Eastern areas has not permitted implementation Inthese areas (para. 3.06).

- iii -

HISSION DATA

Number Number of Date ofItem Month/year of days persons Man-weeks Report

Identification 2-3/79 12 2 5 3/20/79Prepa-ationjPreappraisal 6/79 7 1 1 7/16/79

Appraisal 11/79 18 2 5 12/6/79Total 37 11Supervision I 5/80 5 1 1 5/20/80Supervision II 10/80 2 1 1 11/6180Supervision III 2-3/81 5 2 2 3/31/81Supervision IV 10/81 5 2 2 11/12/81Supervision V 5/82 4 2 2 6/1/82Supervision VI 11/82 7 2 3 12/21/82Supervision VII 6/83 8 2 3 6/17/83Supervision VIII 2184 5 2 2 3126/84Supervision IX 5/85 6 2 2 6/28/85Supervision X 3/86 8 1 2 4/15/86Supervision XT 12/86 5 1 1 2/11/87Completion XII a/ 3/87 12 2 5 6/22/88

COUNTRY EXCHANGE RATES

Name of currer:y Sri Lankan Rupee (SLR)Appraisal year average US$1 - SLRs 15.60Intervening year average US$l - SLRs 25.4Completion year average US$1 - SRLs 29.6

a/ This mission was combined with the supervision of the PPF and thepreparation of the telecommunication componLent of a Public EnterpriseRestructuring Project.

- iv -

PROJECT COMPLETION REPORT

SRI LANKA

FIRST TELECOMMUNICATIONS PROJECT(CREDIT 1020-CZ)

dIGHLIGHTS

The Projoct Completion Report was prepared by the So;rower's Sri

Lankan Telecommunication Department (SLTD) as agreed under the project(DCA, Section 3.04), and initially submitted to IDA Ln 1987. The report

was reviewed in the field by an IDA mission in March 1988 and subsequently

amended. The revised report provides a good description of the project'sorigins, execution, achievements and problems. It is of good quality and

acceptable. To comply fully with standard Bank requirements, the following

revisions have been made:

- a basic data sheet has been prepared;- project cost tables have been revised (Attachment 1); and

- IRR calculations have been revised (Attachment 2).

The main objective of the Bank support for this first

Telecommunication Project in Sri Lanka was to assibt the Government (GOSL)

and SLTD in overcoming the major constraints that impeded the developmentof the sector: underinvestment, reliance on obsolete equipment and

institutional deficiencies. Substantial progress was made in the

development of the sector and institutional building.

The mai.. Project achievements are set out below:

(a) addition if about 38,700 subscribers;

(b) improvement in local and long distance facilities with the

increased digitalization of the network;

(c) extension of the telecommunication service to rural areas

with the establishment of 110 PCOS and multi-access radio

system;

(d) improvement in organizational structure with the separation

of the Postal from Telecommunications services. This

development initiated under the project was followea Lp with

proposed legislation in 1988 to create an independent,commercial telephone company;

(e) improvement of SLTD's financial performance with the ability

to substantially fund its investments from internal sources;

and,

- v

(f) turning a net outflow of hard currency into a net inflow($10.0 million equivalent in 19a7) under revenue sharingagreemet,ts for international calls.

The Borrower's Performance

2.1 The overall performance of GOSL., the Borrower, and SLTD, thebeneficiary, has been quite satisfactory. Given that this was the firstBank-financed project in the telecoinunivations sector, SL-D very quicklyadapted to the Bank procedures and procurement practices. The projectreporting was regular. There were, however, substantial delays in projectimplementation, largely due to a late decision to move from analogue todi&ital technology and consequently the need to redesign part of thenetwork. Digital technology has now become the world wide standerd fortelecommunications switching and the delay caused by the change to thistechnology was well justified by the benefits in the form of loweroperating costs, flexibility, additional services and advantages related tofuture expansion of the network. The conflict and unsettled conditions inthe Northern and Eastern Provinces also delayed project implementation bydisrupting the installation program in these areas. Governmetnt budgetaryconstraints resulted in a local currency shortage for SLTD and impeded thetimely installation of some of the c.ble network for the Project.

2.2 Performance in the institutional areas has been exemplary. TheGovernment moved quickly to establish a separate telecommunicationsdepartment (August 15, 1980) wll in advance of the covenanted date(December 31, 1981). SLTD also established a Fundamental Planning Unit andintroduced commercial accounting practices from 1981 as agreed under theproject. The number of SLTD staff was brought down from 31,200 in 1981 to8,600 in 1986, when the project was substantially completed, and the ratioof staff to 1,000 telephones was brought down from 117 in 1981 to less than70 in 1986, which is better than SAR projections.

2.3 As agreed (DCA Section 4.06), in 1981 SLTD introduced newcommercial accounting procedures, including revaluation of fixed assets.These procedures consisted of some new accounts and ye&r end adjustments ofsome SLTD cash accounts, which had to be maintained for GOSL budgetarypurposes. This whybrid' (commercial and cash) accounting system providedadequate information on SLTD's commercial performance as well as servingGovernment cash accounting purposes. To avoid the need co maintain twocomplete accounting systems in public utilities required by Government tomaintain cash accounts, this hybrid system could also be considered underother projects. Audited commercial accounts have been received up to 1986,although later than covenanted (DCA, Section 4:07).

2.4 SLTD's financial performance was satisfactory during the wholeproject period. The rate of return on ravalued assets in operationincreased from 182 in 1981 to 262 in 1986 -- well above SAR projections ofabout 19% and the covenanted level of 152 (DCA, Section 4.09). Tariffincreases in 1983 and 1985, together with lower operating costs persubscriber (para. 2.2) explain SLTD's good financial performance. At the

- vi-

end of the project period in FYs 86-87, SLTD generated over US$40.0 millioninternally , which permitted GOSL to take more funds out than invested inthe sector.

2.5 In 1980, SLTD increased the collection rates for internationalcalls as agreed under the project (DCA, Section 4.03) and has, except fortraffic to India, maintained these rates above corresponding accountingratei thereafter.l/ This change in tariff policy has been highlysuccessful, and Sri Lanka now has more incoming than outgoiL; internationalcalls from all major countriet (except India). In moretary terms, thismeans that a net outflow of hard currencies to pay for incominginternational calls in 1980 has been turned into a net har_ "rrencysurplus of ovez US$10.0 million in 1987, with a corresponding beneficialeffect on Sri Lanka's balance of payments.

IDA's Performance

3.1 IDA played a significant role in the development of thetelecommunications sector under this project by supporting sectorreorganization and institutional improvements, integrated nationwidedevelopment of telecommunication facilities with modern digital technologyand extension of services to rurai areas through installation of multi-access radio system. The supervision of the project by IDA missions wasvery regular and helped Government and SLTD to focus on the priority needsof the sector and the project and to overcome implementation problems.Government's willingness to substantially restructure the sector can partlybe attributed to the Bank's efforts (IDA has continued its support forfurther restructuring towards an independent, commercial telephone companyunder a PPF (P-372-CE)). In retrospect IDA's performance under thisproject has been constructive and flexible, and a continuing role for theBank is foreseen it: IDA supporting Government's efforts to restructure thesector under the proposed Telecommunications Act of 1988.

Project Costs

4.1 In SLTD's draft PCR the estimated project costs appeared to be onthe high side, apparently due to inclusion of some non-project components.As a result of a review carried out in Sri Lanka during March 1988, SLTDsubmitted revised project cost estimates (Attachment 1) which have now beenincorporated in the text and analysis of the PCR.

Incremental Rate of Return (IRR)

5. 1 In SLTD's PCR, the IRR was estimated at 28Z. This IRR wasrecalculated with substantially different assumptions (Attachment 2) toconform to normally accepted Bank standards. This recalculation resultedin an IRR of 29Z, well above the appraised IRR of 172.

1/ In Annex 5 of the PCR, the main international rates are indicated. Theheadings to the tables in this annex have been switched, however,(accounting instead of collection and vice versa); the same erroroccured in the SAR.

- vii -

Conclusions

6.1 Substantial delays were caused by the need to adopt moderm digitaltechnology in the switching and transmissions systems and ethnic conflictsin the North and Eastern areas; otherwise, the project was executedreasonably well. The expansions of substantially integrated digitalfacilities, local and long distance, improved the access totelecoumnunication service both in urban and rural comunities. Theperformance of the Borrower *nd the executing agency (SLTD) has been good.

6.2 The "hybrid" (commercial and cash) accounting system (para. 2.3)proved useful and could also be used in other Bank projects for publicentities that are required by law to maintain cash accounts. The revisionof collection rates for international calls led to sharply increasedforeign exchange earnings; such revision should be made standard fortelecommunications projects.

6.3 The results in the area of institution building have been verypositive. The creation of a separate Departmex.t of Telecomwunications, theintroduction cf commercial accounting and the current effort to create anew regulatory framework and an independent, commercial operating entityunder the proFzsed Telecommunication Act are very encouraging. ContinuedIDA support for restructuring of the sector and a possible leading role incofinancing would help considerably to consolidate the institutionalimprovements achieved under this Project.

- viii -

-__ ATTACHMENT 1Si |*> DPage 1 of 2

Qh4J~ PIL4A ~OW&OLM

SW } q¢ SW5gmL. i

rteis I fIt/0l s I_*o ~ ~~~~~~~~~~~~ * f

z_*~~ ~ ~ I- - I4Nl o n ¢.s AIIfOA *sWNOI

Vaahimgto. n0- One ).* 0 433 ,06daw 327 TAS* qW l13 l wt*

0. am W&t Cqml 1- MA 1wd

5th O11 I gm aw-iannoial AArolt

A4e' Fr E?.Setg. e 0 O Ineasty Dep iomrA en100t Poetot

.t lerld Beeo h iluat 38.tract J.V. \, Whshimton D*04433, 9

a r M -.-Sorg

Al U 3". t020 Ox jPO 1521.

Reference to rweqetotd to off telex mssae et 4eh Maqy* t9a inreplto your tele 13o3 d.0od 261h Aprl2 198.

ffie lbo: t Costs for lnoluoton in Table 3tt of tbo Pr-joot

wovadi be As X 3ovs t

(in millions)

1 Lonal geilies 3.02 8.050 13.652 11.48 28.36 39.64

2* La. 4Lotm

Facilties t.53 I1.-50 t13.03 1. g5 t12.91 U14t6

39 lllnodlanowo

¢wwelnd) ~~1.76 8.00 9*76 3.31 O. 3; 3.64

E~S bJMMI~~ ~ oji ju.uu 36.31Coot8;^. uw UA. j1S -w -o -

5. otual Cost 16.04 41.40 57.44

6. fetal 36*31 Note 1 57.44

110" t s lWho foreign cost fUnding as asoertained fr.u Rweign Itt4nt filesanA Lttorm of Ctodit ffiles ie an fellowas-

cantd. . 2.

- ix -

ATTACHMENT 1Page 2 of 2

(1) SO n Ulh.. 30.00 idllion

yLbj p:f.we*9 'To ftodiv U.S..l 7.44 million(iii) 1he ano.n.e U.S.$. _ million

U.*$*. 41.40 million-mu.

A l1 costs are @onvirttd to USebollars t aAvernge rantes at

UW for the petlrod 1981 to 1986 aooor4ng to vnrying rntesfor Letteso of Credit.

I shall &o pratodtl to have your observntiona for finalising

the value as indicatud. in tho nabvo 'Tblo.

ith Beat Regards,

Tours fnithtully,

U ~

'Drootor of Toleoomunientions

nkm/

Attachment 2

Page 1 of 1

SRI LANKATELECOMMUNICATIONS PROJECT (1020-CE)

PROJECT COMPLETION REPORT

Rate of Return on SLTD's 1981-86 Investment Program

1. These IRR calculations were made on the same assumptions as theones stated in Annex 6 of SLTD's PCR, with the following exceptions:

(a) part of 1986 capital expenditures have been excluder as theybelong to subsequent investment programs;

(b) price and wage increases for material and labour requiredfor the operation of pre 1982 installations have beenexcluded from incremental operating costs;

(c) additional revenues from pre 1982 installations due totariff increases have been excluded; and

(d) cash flows have been inflated by the CPI up to 1988 (ratherthan the revaluation index used in SLTD's PCR).

2. A summary of resulting cash flows is given below in millionsof Rot

IndexedCapital Incremental Net Index Net

Year Expenditures Op. Cost Revenues Benefits 1988-1.00 Benefits

1981 298.5 - - (298.5) 1.91 (570.1)1982 348.4 12.2 108.9 (251.7j 1.72 (432.9)1983 597.8 20.0 296.7 (321.1) 1.51 (484.9)1984 590.3 30.0 480.6 (139.7) 1.29 (180.2)1985 444.0 40.0 688.6 208.6 1.28 267.01986 331.1 45.0 847.2 471.1 1.18 555.91987 - 50.0 1,040.0 990.0 1.09 1,079.11988-2004 - 55.0 1,150.0 1,095.0 1.00 1,095.0

The above net benefit stream (at 1988 prices corresponds to an IRR of29.2X. This compares favorably with appraised return of 16.6Z and thereturn calculated by SLTD in its PCR (28.O).

REPORT PREPARED BY

THE

SRI LANKA

TELECOMMUNICATIONS DEPARTMENT

(SLTD)

MARCH 1988

SRI LANKA

FIRST TLELCOS MICATIONS PROJECT(CUDIT 1020-Cl)

I. INTRODLICTION

1.01 Telecommunication Services in Sri Lanka are a Governmntmonopoly provided by the Sri Lanka TelecommunicationsDepartment functioning under the aegis of the Ministry ofPosts & Telecommunications. A seperate Departmont knownas the Department of Posts provides Postal Services butPost Offices are utilised by the TelecommunicationsDepartment for the bulk of the work in handling telegraphservices. Overall telecommunications sector policy isdetermined by the Ministry of Posts & Telecommunicationsthrough which the Government Treasury allocates the fundsr-equired by the Telecommunication Department both forcapital investment as well as the recurrent costs. Therevenue c4erived from its services is channelled directlyinto the Consolidated Ftind of the Treasury. The Directorof Telecommunications heads the TelecommunicationsDepartment with one Deputy handliing internationaltelecommunications and 4 other Deputies handling the workof the domestic network.

1.92 Recognition has been given by the World Bank to the factthat Telecommunication services in the Island form avital part of the infrastructure necessary for economicdevelopment and this has resulted in an appraisal of theTelecommunication sector by the World Bank Staff in April198C. On the basis of this appraisal and the associateddiscussions with the Government, the Bank agreed toprovide a loan of US.$ 30 Million for improvements to thedomestic telecommunication network. This loan whic h wasguaranteed by tthe Government in the normal manner wasscheduled to close on 30th June 1985. The projectenvisaged to be implemented with this loan is the subjectof this report.

1.03 Particulars of telephone gr owth (Appraisal vs Actual) isgiven in Annex 1. The broad indications are that thetargets expected were reached after about one year formthe expected date.

II. PROJECT DESCRIPTION AND COVENANTS

2.01 Prep4ration, Appraisal and Negotiations

As mentioned earlier the appraisal of the project underconsideration was carried out in April 1980 and wasfollowed by negotiations which ultimately resulted inapproval of the loar. by the Executive Directors of theBank. The Loan Agreement was signed on June 24, 1980 andbecame 'effective on September 24, 1980.

-2-

2. C2 Project Ob.lectives

Th? broad objectives of the project were to improve thequality of ser5vice to existing subscribers, provideincreased access to service in areas currently served andextend communications to the more important rural areasnow unserved. The specific project objectives were:

(a) To develop the internal network by installingswitching equipment to replace some equipment whichhad served their ec:oiomic life.

(b) To provide additional subscriber cable pairs tomatch the switching equipment, and,

(c) To providep tih, t.r uni and iL rnction equipmentnecessary including cables for- a balanced andi ntegrated devel opmerrt.

It was accepted that the above measures would go a longway towards meeting the existing unsatisfied demand forTelecommunication Services in the relcevant parts of thecountry.

2.03 Project Description

(a) Installation of about 9,300°) lines of local autoMaticexchange equipment in 68 excharnges about 41,600pair-kilometres of telephone cables, and associatedsubscriber plant for connection of about 16,200lines and 250 local public call offices;

(b) Replacement of 7,900 lines of antiquated, worn--outlocal switching equipment in 268 exchanges (144manual exchanges and 46 rur-al automat c exchanges tobe absorbed by other exchanges and 78 eXchanges tobe replaced) and about 31,400 pair--km. of oldcables.

(c) Installation of three riew trunk automatic exchangeswith about 65C.0 terminations, and expansion ofexisting eight trunk automatic exchanges by about65E) terminations;

(d) Installation of automatic number identificationequipment (ANI) in all existing local exchanges andautomatic message accounting equipment (AMA) in fourtertiary trunk automatic exchanges for intr oductionof toll-ticketing and installation of bill processor;

(e) Upgrading of two mict'owave routes and installationof five new microwave systems, about 150 UHF/VHFsystems and associated multiplex equipment for about5,250 channel ends

-3-

(f) Installation of about 500 long distance call officesfor extension of service to rural population centreswith post offices, but currently without telephoneservice: and

(g) Civil works and other facilities for implementingthe project.

2.04 Project Cost Estimate

The total cost of the project was estimated at SL Rs.566.4 Million (UJ.S.* 36.3 Million) with foreign cost of

U .S.$ 30 Msil1lio-n) as indicated.

Table 2

Estimated Project Costs

Item SL Rs Million US $ Million

Local Foreign Total Local Foreign Total

Local Facilities

Switching equipment 16.06 76.0'0 94.06 1.03 5.00 6.03Cable & accessories 26.05 78.00 104.05 1.67 5.00 6.67Subscriber's Plant 5. 00 7.680 12.80 0.32 0.50 0.82

Sub-to.tal 47.11 163.80 210.91 3.02 10.50 13.52

Long DistanceFacilities

Switching equipment 2.50 15.60 18.10 .0.16 v.00 1.16Microwave Systems 5.92 46.80 52.72 0.38 3.00 3.38UHF/VHF systems 14.82 78.00 92.B2 0.95 5.00 5.95ANI & AMA equipmentand bill processor 0.62 39.00 39.62 0.04 2.50 2.54

Sub-total 23.86 179.40 203.26 1.53 11.50 13.03

-4

Air conditioning 1.10 7.80 8.90 0.07 0.50 0.57equipment

Standby generators 1.IC) 7.80 8.9C0 0.07 0.50 0.57

Vehicles & cablelaying equipment 2.zS 15.60 17.93 0.15 1.00 1.15

Training equipmenit& office machirnes 1. 00>C 7. 8X: 8. 8C) C0. 06 0.50 0.56

Consultancy ser vice 0.10 7.80 7.90: 0.01 0.50 0.51

Estimated base costs 76.68 390.00 466.60 4.91 25.00 29.91

ContingericiesPhysical 1.56 7.80 9.36 I1) 50) 0.60Price 20.28 70.20 90.48 1.30 4.50 5.80

Total contingencies 21.84 78.00 99.84 1.40 5.00 6.40

Estimated totalprpject costs 98.44 468.00 566.44 6.31 30.00 36.31

2.05 Covenants

In addition tc the banks standard covenants on theprocurement, management and reporting, the main covenantsin the Loan Agreement provided that:

Section 4.03 -

The Borrower shall increase, by September 30, 1980 theCollection Rate for interndtional telephone and telexcalls originating in its territory, to the level of theAccourting Rate. For the purposes of this Section, theterm "Accounting rate" means the rate on which paymentsto, or payments received from, foreign telecommunicationentities, a-e based. This requirement has been met.

Section 4.C)4 -

The Borrower shall establish by December 31, 1981 andthereafter maintain within its Ministry of Posts andTelecommunications, a f eparate TelecommunicationsDepartment with powers, resources and staff satisfactoryto the Association, for the efficient and effectivemanagement,operation and development of telecommun4cationservices. A seperate SLTD has been established witheffect from 15th August, 1980.

Section 4.05 -

The Borrower shall cause PTD, by December 31, 19Y2, toestablish and thereafter maintain as part of itsorganizational structure a fundamental planning unit in amanner and under terms of reference satisfactory to theAssociation, among others, to study the long-term (10 to20 years) development needs of the public tele-communications sector in Sri Lanka, establish theobjectives and priorities in that sector, and determinethe means and plans most suitable for the achievement ofsaid objectives and priorities. A unit has bee.established to meet this requirement.

Section 4X)6 -

The ourrower shall Lause FTDa

(a) by January 1, 1981, to commence implementation ofaccounting practices satisfactory to theAssociation; and

(b) beginning with its fiscal year 1981, to maintainrecords, including financial statements, adequate toreflect the financial performance of its tele-communications operations in accordance with suchaccounting practices.

The requirements of both (a) and (b) have been met.

Section 4.07

The Borrower shall cause PTD to:

(i) have its accounts and financial statements (balancesheets, statements of income and expenses andrelated statements for its telecommunicationsoperations) for each fiscal year audited, inaccordance with appropriate auditing principlesconsistently applied, by auditors acceptable to theAssociationg

(ii) (A) furnish to the Association as soon as availablebut in any case not later than eight months afterthe end of each such year copies of its financ4elstatements for its telecommunications operationsfor such year; and

(B) furnish to the Association as soon asavailable-but in any case not later than ton monthsafter the end of each year, the report of suchaudit by said auditors, of such scope and in suchdetail as the Association shall have reabionablyrequested; and

(iii) furnish to the Association such other informationconcerning the accounts and financial statements ofPtD and the audit thereof as the Association shallfrom time to time rea,onably request.

Audited accounts upto 1985 have been forwarded tothe World Bank; unaudited accounts for 1986 arealso with the Bank and steps are being taken tohave them audited early while accounts are beingfinalised for 1987.

Section 4.08

For the purpose of calculating the rate of returnspecified in Section 4.09 of this Agreement, the Borrowershall cause PTDs

(a) by March 31, 1981, to complete an inventory andclassification of its fixed telecommunication assetsand propose to the Association a method for theirvaluation or revaluation to be carried out at alltimes in accordance with consistently maintainedprocedures satisfactory to the Association. Themethod of re-valuation of fixed assets had beenagreed with the World Bank Mission and steps arebeing taken to complete inventory and classifictionof fixed assets; the extent and complexity of thetask as well as the current conditions in Sri Lankahave resulted in a delay in implementing theinventorisation

(b) commencing with fisca- year begining January 1,1981, to calculate said rate of return on the basisof the average value of its net fixedtelecommunication assets in operation as determinedeach year in accordance with the methods ofvaluation and revaluation referred to in paragraph(a) above- For the purpose of this Section, theterm "value of PTD's net fixed telecommunicationassets in operation" has the meaning assigned to itin Section 4.09 (c) (ii) of this Agreement.

-7-

Section 4.09

(a) The Borrower shall cause PTD tos

(i) maintain its tariffs at not less than theOctober 1, 1990 level, and

(ii) take, from time to time all such measures(including adjustment to the structure andlevel of its tariffs) as shall be required torealize an annual rate of return of not lessthan fifteen per cent (15%) in each of itsfiscal years 1980-1984 on the average value ofits net fixed telecommunication assets inoperation. The Borrower shall cause PTD todetermine by June 30, 1984 a rate of returnsatisfactory to the Association, to be realizedfor the period after December 31, 1984.

(b) Before June 30 each year, the Borrower shall causePTD on the basis of realistic f-recasts, to reviewthm adequacy of its tariffs to meet the requirementsset forth in paragraph (a) above for the nextfollowing fiscal years, and shall furnish to theAssociation a copy of such review upon itscompletion.

(c) For the purposes of thic Sections

(i) the term "net operating income" means grossrevenues from all sources related to PTD'stelephone operations less all expendituresincurred on account of such operations,including expenses of administration, adequatemaintenance and taxes or any payments in lieuof taxes, and provision for depreciation,interest and other charges on debt shall not bededucted from gross revenues; and

(ii) the term "value of PTD's net fixedtelecommunication assets in operation" meansthe gross value of PTD's fixedtelecommunication assets in operation less theamount of accumulated depreciation, both asvalued from time to time in accordance with themethods of valuation or revaluation referred toin Section 4.08 of this Agreement.

These requirements have been met.

- 8.-

III - PROJECT IMPLEMENTATION

3.t:)1 Credit Effectiveness and Project Start Up

The Credit Agreement specified Seitember 10, 1980 as theinitial date of Credit Effectiveness with no specialconditions. Although the intention was to commenceprocurement immediately after the start of the projectthe process of procurement suffered some delay due totechnical considerations, in particular, the decisio,i togo in for digital technology instead of analogueequipment originally envisaged. Another factor which ledto some delays in procurement was the divergent sourcesthat were involved.

0.n2 Procurement

Althoucjh the intention was to commence procurementimmediately after the commencement, there was a certainamount of ur-avoidable delay due main7ly to the technicalconsiderations. These arose mainly as a result of thedecision to go in for digital tethnology instead of theanaloque equipment originally envisaged. Moreover due toth-e somewhat wide geographical dispersion of the areas tobe cover-ed by the project, on the spot appraisals becamenecessary. However-, these problems were overcome duringthe course of time.

.0:,.( The other aspect affecting procurement was the fact thatth7e local funding which was accepted on a year by yearbasis from the Sri Lanka Treasury was found to beinadequate to meet the supplementary local expenditure.In addition there was also the fact that throughout theduration of the project tthere was a continuingdepreciation of the Sri Larka.

3.0.4 Project Revision

Technically a major revision in the project arose is aresult of supplanting analogue equipment by digitalequipment. This resulted in a certain measure of-e-lesign particularly of the microwave radio systems andin some instances it was necessary even to change therouting of the radio path. Pulse code modulation wasalso extensively used in the provision of junctioncircuits while the number of multiaccess systems a,so hadto be increased.

The above revisions were necessitated by the fact thatthe time appraisal was one of transitiou; in technologyfrom analogue to digital. However, although the changesresulted in a certain amount of delay in theimplementation of the poject and an increase in projectcosts they also provided a rapid transformation in theisland's telecommunications system from one of analoguetechnology to digital technology.

9-

Implementation_____ ________

3.05 At appraisal the project was sch-dul-d for completion by31.12.1984. Several forces contributed towards the delayin implementation. One of the initial reasons was thenecessity to do a considerable amount of re-thinking onthe *change over from analogue to digital systems oftransmi-sion based on rapidly changing trends in thetechnology. The project covered in a geographical senseseveral areas which would be considered as rural andpractically all these were a considerable distance awayfrom tolombo and apbrt from each other by long distances.As a matter of fact the Nothern most area Jaffna whichwas included in the project has up to date not benefitedfrom the project since it has not been possible becauueof terrorist activity to install the equipment which hasbeen transported there. Another factor that contributedtowards the delay was that although the bank had agreedto loan U.S * 30 million, loc-al funds were not providedby the Government as scheduled due to constraints in theNational Budget as a tesult of the ethnic problems in thecountry. Hence some of the -equired equipment such asgenerators air-conditioning and even the PCM equipmenthad to be pr3cured from the subsequent annualallocations. This led to a situation where itemsprocured under the bank credit could be installed, butnot commissioned and utitised meaningfully until thebalance inputs wore fourtd and installed.

3.06 The Major part of the project was completed by December,1986 w*'cept for two or three areas that were commissionedin 2987. Howevor, the situation in the Northern anf-iEastern parts' of the Island has not permitted thb,implementation of the.Projec.t in the Jaffna & Trincom'rnAleareas. In Jaffna 2,00. lines of switching equipment hA'been lying in the crated in which they were taken aboutyears ago and th. condition of the equipment cannot 1ascertained at present. At Trincomalee too the MastcExchange has been lelstroyed completely.

The credit wau fully utilised by 31st December 1986.

Co-financinqg.

3.07 No co-financing was envisaged, but wherever appropriatuse was made of commodity credit from Japan and foreigi,exchange allocations from thq Treasury.

Project costs

3.06 A comparison of the cost of the project as estimated asappraisal anld the actual costs as of December 31, 1986'summariasd below in Table 3.1.

- 10 -

Table 3.1: ESTI)4TED AND ACTUAL PROJZCT COSTS(in LSS million)

Appraisal Estimate Actual CostLocal Foreign Total Local Foreign Total

Local facilities 3.02 10.50 13.52 11.48 28.16 39.64

Long distancefacilities 1.53 11.50 13.03 1.25 12.91 14.15

Miscellaneous(includingcontingencies) 1.76 8.00 9.76 3.31 0.33 3.64

Total 6.31 30.00 36.31 16.04 41.40 57.44

1.11 Actual total costs up to 31.12.86 increased by almost 58Z. The main

reasons for the cost variations are explained below:

(a) General. The scope of the project as envisaged earlier was expanded

considerably in order to eliminate as many imbalances in the network

as possible in each of the individual areas taken up under the

project. This required modificatio .s of the extent and capabilities

of local network and the routing of trunk circuits. These

modifications coupled with heavy local reinstatement costs and the

variations in exchange rates between the US Dollar, the Japanese Yen

and the Sri Lanka3 Rupee gave rise to an unanticipated increase.

(b) Local Costs. Apart from the design modification, local costs also

increased about 154Z (in equivalent US$) due to inflation and payment

of custom duty and turnover tax.

- 11 -

(c) Forelgn Costs. The increase in foreign costs of about 361 resulted

from the expanded scope of the work and the devaluation of the Sri

Lankan Rupee relative to both US Dollar and the Japanese Yen.

1.12 Accuoulated Disburemeant Alainst IDA Proiect. Estimated and actual

disbursements of the IDA credit is shown below in Table 3.2:

Table 3.2: ACCUMULATED DISBURSEMENT($ '000)

IDA FY Actual as Percent ofend Appraisal Actual of Appraisal Estimate

1980 - Nil z1981 4.0 Nil1982 16.0 Nil -1983 27.0 6.60 M 24.4418R4 29.0 23.80 M 82.061985 30.0 29.17 M 97.231987 30.0 29.99 M 99.96

- 12 -

3.11 The rate of disbursement was not unsatisfactoryconsidering the aforementioned impediments that wereencountered after the initiation of the project. Althoughtthe nrojrect was expected to be implemented by 30 June1984, in actual fact there was a timte over-run of about2-1/2 yFiar s, buit it was possible tO eISisure thatpraLtic:ally the whole of the credit available wasutilised within the expanded time-frame.

3.12 The oriqinal and revised allocation and actualexpenditure of loan proceeds is presented below in Table3. Z

TABLFE - .3

Cr etli t. 1l20-CE

Reallc,cation of Credit

Description of Item Original Revised Actual

1. Local tele-phone 5, 7t5-0,)Q00 11,5)00,000 1/ 12, 3,01,769. 51-excharncqe equipniinrit

2. Telepho,ne CablIe-s, 'J 75': 000 I 'C, 000)1C00I0C 7,161,342.17assc..ciat.ed P:1 cnt.tnd J 'c.essor1es

..kSbt>criber fFici-- 7 It5u . .-11tieS, UbliiC.telephone i nritru-nient. anda Si 1 at e p 1 ¢, I t

4. Tr unki: A.ttomttic I 1 , I Vi, fICL k (n: t l .] fi I ter n 1e>:xc hange eqUi pinentR rraur-,Ltal trUnk

e; Aut(:TIatC- r-, nUmbe.:bFr C Od)I , iL)U,C)W-) 2', 1 4 1 5, 802.161 d ent i f i cat i Ct-r, ndI)e~ sa qe a.C C on t. 1 r- geq.*i pmint: , andLill] pr OcLe-s sor

6. Mi c:r owa VFe UHF , VHF 9 000 ,) C) 8, 0 )0 ) 9, 107 ,81 2. 16and cd oa(: L i al c ab l e

syst.ernC , mLnltipl ,

equipment andassc.ciated plant.

- 13 -

7. Air conditioning 2,250,000 -3/equipment standbydiesel generatorvehicles and cablelaying equipment.

8. Training equipmef,t 750:),0(0O -3/and office mechines

9. Consultance service 500,000 -3/

10.Unallocated 1,l00,000

TOTAL 30, 0C)00, 000 30, oCoc. 000 29,986,726. 00

1/ Inclusive of trunk automatic exchange equipment (category4).Cost overrun of US$ 5.4 Million party due to the higheroverrun of cost per- line of the digital equipment forremote exchanges (whic:h will be compensated by the reducedcost per line orn expansion) and the additional cost forinstallation of the digital equipment. (At appraisaltime, the analogue equipment proposed to be purchased wasexpected to be irn,talleu by SLTD's own staff).

2/ For bill processor only. ALutomatic number identification- and message acCounting eqLuippment was finanr:ed from other

sources.

--3/ Financeci fr-om other SonUrec:s.

IV - Operating Performance

4.01 At the time of 'appraisal the SLTD had drawn Ltp adevelopment programme for Telecommunications containingon-going works from the previous period and other worksto be executed during the programme period as well asplans for investment tu be undertaken at a subsequer-ntstage, in addition to the dievelopment proposed under theIDA project. While the on-going works carried over werecompleted, all other aspects proposed suffer-ed serioussetbacks dcue to the scarcity of foreign and localfunding. Under the F4ank project, some 17,200) lines oflocal automatic exchange equiprrent were to be installedby December 31, 1986 and approximately 13,600 lines had

- 14 -

been completed. Of the 73,000 pair kilometers oftelephone Lables and associated subscribers plantenvisaged, abouIt 71,000 pair ki lometres comprisingappro-timately 95% of work had been done. It is expectedthat the balance of switchirg equ.ipment would becompleted and commissioned by the enci of 1987.

4.02 As regards the three new Trunk Automatic- Exchanges withabout 650 terminations proposed, the work has beencompleted with 750 terminations while the existing 8trunk automatic exchanges tave been expanded by about 780terminations as agairnst. the expected 650.

4.03 Number identification equipmcnt has been installed andtested and partialy commissioned. The commissioning willbe completed when the processor capacity of the existingtertiary centres is augmented.

4.04 In respect of the 150 UHF/VHF systems and the multiplexequipment for about 5250 channel ends for the radiosystems, the designated parameters hadi been changed andabout 60 UHF systems commi ssi oned with some 2600 channelends.

4.05 One aspect in which the implementation +ell far short wasthe installation of about 500 long distance call officesfor rural population centres. Only about 110 of thesehave been installed.

4.06 At the time of appraisal, the number of applicantsawaiting service in the Island were about 40,000 withabout 20,000 of these beiing in Colombo and the balancebeing in the rest of the Island.The lor-ng waiting time ismairnly attributable to lach of traff:iccable capacity inthe networ-k to accept new subscribers. Si1nce such longperiods of waiting would reflect on the accuracy of thesenumbers, in 1985 the SltTD decided to call for freshregistrations with a registration fee of 9L Rs.2505/- fromall those who had been registered up to that time. As aresult of this e++ort, tte number of registrationsreduced drastically to some 23, 000. Pr- i or to theapp' ication of a regi-stration fee about 9,0)Cio newapplications were registered annually and the average

- 15 -

waiting period around 31st December 1986 was about twoyears. The present indications are that the number ofnew applicants would continue to increase every year at arate of approximately double the number of the previousyear. During the period of implementation of the Projectthe number of new connections provided was approximately6,000 per year. Without taking into account'any newconnections the demand i.e. existing subscribers (95,C00)plus those waiting for service (75,000) for the nextthree years is estimr,ated at around 170,000 about 60% ofwhich would be in Colombo Metropilitan area. The majordifficulty in expanding the services continues to be lackof funds allocated by the Treasury and hence the accessto service continues to be poor. As at 31st December1986, the average telephone penetration was about 6 DELand e telephone stations per thousarnd of population.

4.07 Deficiencies in the Telecommunications network identifiedat the tirr.e of &ppraisal have been remedied to a certainextent by the implementation of the Project. The projectalso facilitated a major change from analogue to digitaltechnology and provided subscriber direct dialling tomany areas. This in turn has stimulated the growth oftelephone traffic and incidentally resulted in increasedpressure on the system.

The multi access systems installed under the Froject havefacilitated provisiion of service to remote subscribers,thus improving the quality of service but the increasednumber of subscribers has occasionally introducedcongestion into the system.

- 16 -

V - FINANCIAL PERFORMANCE

Intrgductigon

5.01 The Financial Performance of the TelecommunicationsDepartment, throughout the project period, was moresatisfactory than was forecast at the appraisal stage, aswill be seen from the graphical illastration Annex 6 and7 and para.5.O8 to 5.10 below.

Account inas

5.02 The accounts o' the Sri Lanka TelecommunicationsDepartment (SLTD) are maintained on a Cash Basis. Inaddition, Year-end adjustments are made to these accountsin order to produce commercially oriented financialstatements. The accounts of SLTD are kept manually butsome computerisation is expected to take place withinabout a year including the possible use of P.Cs.

5.03 During negotiations, assurances were given thatcommencing January 1, 1981 SLTD would introducesatisfactory accounting routines and that these would bereflected on financial statements for the fiscal year1981 onwards. This has been achieved and auditedcommercial accounts for 1981 and 1982 have already beenforwarded to the Bank. Provisional commercial accountsfor 1983 through 1985 were prepared for internal purposesby the SLTD staff and these were forwarded to the worldBank in June 1986. Commercial accounts for 1986 are alsobeing prepared by the SLTD staff and are expected to beforwarded to the World Bank shortly.

5.04 As a Government department, SITD's accounts are by lawaudited by the Auditor-General and his staff.In addition,SLTD has its own internal audit unit.

5.()5 During negotiations, assurances were given that SLTDwould provide thze Association with financial statementswithin eight months of the end of each fiscal year andthe corresponding audit report about two months later.Unfortunately, it has not been possible to achieve thesedeadlines.

5.06 M/s Kulatunqa and Company (who ar-e a firm of localChartered Accountants) were engaged by SLTD to preparethe accounts of SLTD for the calendar years 1981 to 1984inclusive on commercially accepted principles. Theaccounts for 1981 and 1982 were prepared and submitted tothe Auditor-General for audit and copies were forwarded

--17 -

to the World Bank. Ever, before the Auditor-General hadcompleted his audit of the 1981 and 1962 accounts,Messrs. kulatunga & Co., prepared provisional accountsfor 1983 and 1984 and these too were sent to the WorldBank. The Auditor-General's Report of 21st July 1986mentions a number of adjustments which require to be madein the 1981 and 1982 accounts and similar adjustmentswill also need to be made in the provisional accountsprepared for 198:3 and 19B4.

5.07 M/s. KLulatL.nga and Company attended meetings on25.05.87, 28.0:5.87 and 24.06.87 irn the Chief Accountant'sOffice in SLTD and completed adjustment of the 1981 and1982 commercial accounts by 30.06.1987 and estimated thatthey would be in a position to prepare the Final Accountsfor 1983 and 1984 by 30.11.1987.

5.08 Income Statements, Balance Sheets and Funds FlowStatements oh a commercial basis for the calendar years1981 to 1984 ate presented .n Annex. 2 and comments onthe Financial Statements are given in Annex.3.TheFinancial Performance of the TelecommunicationsDepartment was better than had been forecast, at theappraisal stage, and this was partly due to slightlyhigher Operating Revenue than forecast and partly due tolower Operating Expenses apparently resulting from thereductior, of man power and other resour-ces.

5.09 Summarised performance details are given in Table 5.1.The Actual Rate of Return was better than forecast,particularly for 1983 and 1984. The Operating Revenueper DEL was higher than forecast from 1983 onwards.Lastly, the Operating Ratio was better than forecast forthe years 1981 and 1982 and significantly better for theyears 1983 and 1984.

5.10 sash Flow remained satisfactory over the project period.Net Internal Cash Generation, as a precentage ofconstruction requirements (which is also referred to ascontribution to expansion) was better than forecast. Inaddition, the Actutal Debt Service Coverage was also moresatisfactory than had been forecast at the appraisalstage.

- 18 -

TABLE - 5. 1

FINANCIAL PERFORMANCE SUMMARY

1981 1982 1983 1984 Uot&&

1. DELs Appraisal 62,50C) 71,400 83,400 90,400 As at 31stActual 66,013 70,381 73,500 80,770 December of

each year2.FY Endig December 31

Operating revenue (Rs. Millions)Appraisal 538.6 664.3 822.9 995.1 DetailsActual 536.6 645.5 833.4 1,117.2 from Income

Statement3. Operating Expenses (Rs. Millions)

Appraisal 369.5 444.6 531.4 632.1 -do-Actual 329.1 393.6 430.3 525.2

4. Operating Ratio (%)App:-aisal 68.60 66.92 64.58 63.51 -do-Actuat 61.33 60.98 51.63 47.01

5. Rate of Return (%)Appraisal 18.4 16.9 18.2 19.3 -do-Actual - 17.9 23.7 27.6

6. Debt-Equity Ratio (%)Apparisal 64 59 52 43 DetailsActual 4G 40 21 17 from Balance

Sheets7. Current Ratio (times)

Appraisal 2.2 2.4 2.7 3.2 -do-Actual 1.1 1.3 C.5 0.8

8. Debt-Service Coverage(times)

Apparisal 1.9 2.1 2.5 3.1 DetailsActual - 9.5 9.2 7.1 from Fund

FlowStatement

9. Operating Revenue/DELApparisal Rs. 8618 9304 9867 11008 Item 2 -Actual Rs. 8129 9171 11338 13831 Item 1

IO.Operating Expensas/DELApparisal 5912 6227 6372 6992 Item 3 -Actual 4985 5592 5854 6502 Item 1

- 19 -

5.11 The Staff Appraisl Report of 18th April 1980 gave detailsof SLTD's dome3tic telecommunications tariffs which cameinito force on 1st March 1980. Subsequently, tariffs werealtered in December- 198C0, Dec:ember 1983 and December1985. A summary of the principal tariffs effective from1st December 1983 and 1st December 1985 are given inAnnex.5 and 5.A respectively.

5.12 Local calls through some old exchanges are charged for onan untimed basis but lo-al calls from newer exchanges arecthar-ged f .wr on a timed basis. All long distance callsare charged for on a timed basis. Long distance callsare priced higher during prime business hours than duringnights and early morning.

5.13 Rental charges for business and commercial entities arehigher than rentals for private and non commercialsubscribers and for religious institutions.

5.14 Due to high traffic congestion and long waiting times,subscribers in areas with STD facilities often requireoperator assistance to connect their long distance calls.Such "operator connected STD calls" have a surcharge ofRs.1.00 per call, as compared with the rate for normalSTD calls. Unlike STD calls, full three minute periodsare charged tor even if cnly a fraction is used.

5.15 As regar-ds SLTD's international tariffs, the StaffAppraisal Report of 18th April 1980 mentioned (in 3.09)that Collection Rates were substantially belowinternational Accouriting Rates and that this was thereason for the high outgoing international traffic ascompared with incoming traffic. Since March 1960,Collection Rates have been increased -substantially and,at the present time there is an excess of inconmingtraffic over outgoing traffic on all major routes excbptIndia. It is believed that the principal reason whyincoming traffic from India is lower than outgoingtraffic is because STD facilities in the direction India-Sri Lanka was not available from India until August thisyear.

5.16 The Accounting Rate shown for each country is shared,between Sri Lanka and the country concerned, usually on a50/50 basis and this matter needs to be borne in mindwhen comparing Accounting Rates with Collection Rates.In order words, while a particular Collection Raterepresents the amount collected for an outgoing call only50% of the corresponding Accountinig Rate would be paid tothe relevant foreign administration.

- 20 -

5.17 Accounting Rates are fixed in agreement with otherAdministrations and the trend is towards lower AccountingRates, because of the lowering of costs due totechnological advances. There would be no advantage inSri Lanka pressing for lower Accounting Rates becausett?re is an excess of incoming traffic over outgoingtraffic. As regards Collection Rates, howevwr, these arekept under review and are amended from time to time. Itis proposed to introduce reduced tariff off peak hours toharniess the available idling capacity.

5.18 Tele..;ommunication tariffs are designed to generateadequate funds to meet the goals of efficiency andequity. The tariff revisions in December 1980, December1983 and December 1985 were made in conjunction with theTariff Committee of SLTD. When the NationalTelecommunications Commission is established,Tariffs willbe reviewed in consultation with the Commission.

Accounts Receivable

5.19 SLTD's billing for the Greater- Colombo Area is done bythe EDP Department which receives the input from theBilling Centres in the Colombo Metropolitan Areas. Inaddition, the billing for three outstation BillingCentres has rece-tly been transferred to the EDPDepartment and, once this work is running satisfactorily,consideration will be given to computerising the billingfor other outstations. At present, billing for 25outstations is done manually by the respective billingcentres situated in the regional telecommunication areas.A uhification of the procedures has been achieved forbilling in Colombo and in the outstations.

5.20 Rental is billed annually in advance and call charges arebilled monthly. Once the difficulties experienced withthe transfer to computer billing have been resolved, itis expected that computer bills will be despatched by theend of the month following the month to which they refer.It is expected that this will be achieved before the endof December,1987. Bills in respect of 25 outstations,billed manually are despatched within three weeks afterthe end of the month to which the bills relate, which isconsidered satisfactory.

. 9

- 21 -

5.21 At present the procedures for enforcing payment ofarrears are operating fully In the manually billedexchanges and partially in resp.ct of others due to thearrears in computer billing. However, it is hoped thatthese arrears will be brought up-to-date by the end ofDec,1987. If arrears exceed an upper limit stipulated bythe Department, subscribers will be debarred from calloriginating facilities. If arrears go back beyond fourmonths, a subscriber will be disconnected. Subscriberswho make a guaranteed deposit are not disconnected untilthe total amount due exceeds their deposits.

5.22 The same general principles for enforcing payment ofarrears apply to Government subscribers except for theArmed For-ces, Police and Hospitals. Negotiations arebeing carried out to improve the procedure of debtcollection from Government Departments.

5.23 At the time of preparation oa the Staff Appraisal Reportin April, 1990, accounts receivable had to be estimated.However, at the present time it is possible to know theexact amount of accounts receivable.

24 Where fre. service is provided (e.g. for Members ofParliament, for staff of the SLTD and the PostalDepartment) the value of such services is included inbillings and in operating expenses. This free service isnot extended for international calls.

VI - INSTITUTIONAL PERFORMANCE

h)ranisation and Man&-emont

1 One of the assurances obtained during creditnegotitation for the Project was that the Government willcreate by Deceomber 31,1981 a separate TelecommunicationDepartment instead of continuing to function under theaegis of the Department of Posts & Telecommunications.This measure had been a long-felt need for the adequatedevelopment of the telecommunications system and happilywas achieved during the project peroid. On 15th Aug. 1980the telecommunication entity broke away from the Postaladministration and started to function as a separateDepartment although it continued to work under theumbrella of the Ministry of Posts and Telecommunications.

- 22 -

The planning unit envisaged in the appraisal was set upwith a Deputy Director as its Head who also had thefunction of Electronic Date Proce-sing. This i-,perhap-,not a happy grouping which would need to berectified at a later stage. During the project periodseveral changes were necessitated at senior levels due toattrition and this also had its impact on theimplementation of the project. Towards the last phasesof implementation of the project the Government of SriLanka also made a tentative policy decision to privati-ethe Telecommunication sector and adequate measur-s havebeen taken by the setting up of a "Shadow" Board whichhas made fair progress up to now. It is expected thatthe privatisation concept would be a reality by 1988.The organisational structure of the proposed compar-i iscurrently under consideration and would be based on theneed to permit the proposed company to function as aviable commercial concern unfettered by governmentalrequlations. It is envisaged that a NationalTelecommunications Commission would alsc be establisheoconcurrently in order to minimally regulate theactivities of the company and provide the neess-arybalance between the requirements of the company, theGovernment, telecommunication subscribers and the generalpublic. It is expected that the company once it isformed would be provided with a certain measure of WorldBank credit on a Project for development of telecommuni-cations for which this Project Completion Report wouldserve as a basis.

The current Organisation Chart of the TelecommunicationsDepartment is given in Annexe.7. The separation of theTelecommunication sector from the Postal department hasmade it possible to develop the telecommunications systemin the country to an extent that it has not been possiblebefore. It is now evident that a TelecommunicationsDepartment which can be operated independently couldindeed be not only profitable but also provide thenecessary infrastructure development for the growth ofthe economy.

-4ff Recruitment and Training

"2 The number of staff associated with telecommunication asat April, 1980 was 10,405 which worked out to an averageof about 130 personnel per 1,000 telephones. The numberof employees as at the end of 1986 had been brought downto 9,856 indicating that there has been a substantialreduction during the project period. The average numberper 1,000 telephones on this basis is about 94.

- 23 -

6.03 During the project period the exodus of senior personnelcontinued practically unabated and this naturally had it-

impact on the availability of staff to man the senior

posts in the newly formed Departmentl the internationalmarket for telecommunication engineers, perhaps, drewaway people whose experience and training would have been

immensely useful. This in turn had some adverse effectson the implementation of the project.

6.04 The period in question has happily seen a vast

improvement achieved in the field of training of staff.

The planning that had gone into this aspect has now

manifested itself in the establishment of a substantialCentral Telecommunic tion Training Centre about 8 miles

North of Colombo e;clusively for training in internalplant practice. The earlier Training Centre, which had

been establisned with UNDP/ITU assistance,is at Moratuwa,about 12 miles South of Colombo, and is providingtraining in external plant. The new Central TrainingCentre has residential accommodation up to about 150

trainees at any time and includes residentialaccommodation for some of the senior staff as well. A

former senior telecommunication engineer eminentlysuitable for the task is in charge of the TrainingProgrammes and is being remuneratLd by the UNDP/ITU. Thenew Trai'ing Centre is being equipped and hat alsoreceived turther assistance from the ITU by way of the

servicms of a manpower planning expert. The TrainingCentre at Moratuwa continues to function mainly fortraining in external plant work while two other RegionalTraining Centros have also been established at Kandy andSalle for the same purpose.

VII - PROJECT JUSTIFICATION_____________________

C^X The Physical Installation Targets projected weregenerally achieved albeit with some delay except for asmall number of exchanges which remained to becommiseioned at the end of 1996. A substantial portion

of the network has now been digitalized and in particularthere has been a considerable improvement of telephoneservices in rural areas, particularly those which

-24-

have been included n the project. Had the fundingexpec:ted from the Treasury materialised the scope of theproject would have had far reaching effects by way ofa-cess to service as well as quality of service. Thefigures of revenue countrywise r-eflect a heavy increa-eit, the use of telecommunication services and there is nodoubt that the project. has been more than partiallyresponsible for this situation. An importantcontribution towards project achievement could also beexpected from the new traininrg facilities available andthe training programmes envisaged. Since the projectcovered mnriy rural areas which have long suffered fromJack of coniir,u.-ication for economic advancement, it isreasonable to conclude that, apart from increases inrevenue, a substantial contribution has been made towardsthe econimic upliftment of these rural areas.

7.02 Project Spin-off

Frior to the project period the only telecommunicationmaterials manufactured in Sri Lanka were procelaininsulators, overhead fixtures, concrete posts andconcrete/cement ducts, the latter for use in the layingof underground cables. During the period PVC ducts forlaying of cables were also introduced in the SLTD and thesmaller sizes of FVC covered cable is also beingmanufactured in Sri Lanka. For some tima to come, itwill probably be unlikely that the country can create asufficiently large market for- the local manufacture ofmore sophisticated items in the telecommunicationssector.

Rate of Return

7.03 The Internal Rate of Return (IRR) for the 1981-1986investment programme is estimated at 28.03% using thebasis outlined in Annex.6. This rate represents thereturn for the project and compares favourably with theestimated IRR at the appraisal stage of 16.6%. TheEconomic Rate of Return (ERR) canriot be dccuratelycalculated due to insufficiency of data, but is estimatedto be in excess of 40%. The ERR is substantially higherthan the IRR because:

(i) In calculating the IRR, rio increase in revenuehas been considered after- 1986, in respect ofthe 1981 - 1986 investment programme, whereasthe ERR would include the increase in revenue.

- 25 -

(ii) Some of the equipment installed under theproject has spare capacity and can handlehigher traffic with a small additianalinvestment. However, when calculating the IRRthe increase in revenue due to the highertraffic has not been taken into account whereaswhen calculating the ERR this would beinrcluded.

(iii) When calculating the IRR no estimate has beenmade of the indirect external benefits to othersectors (such as transport, agriculture, publicservice etc., from improved and expandedtelecommunication services), whereas whencalculating the ERR such benefits would beincluded.

(iv) When calculating the IRR no attempt was made toestimate the consumer surplus (which isundoubtedly large given tne high unsatisfieddemand for telecommunication services) whereasthe consumer surplus would be included whencalculating the ERR.

2* -

arnnex IPage 1 of 12

(see section 1.03)

aEI LANKA TELECQMMUNICATIONS DEPARTMENT (SLIFrrSTI TELgC0MMUNICATIONS PROJECT

CREDIT 1020-CE

Tele2hanr Growth -rsja1 Actual)

A. LINES---- Apprai sal - ----- Actual ----

Year ending Connected ConnectedDecember 31 Capacity LInes Capacity Lines

1980 72,300 56, 80C) 63,800 50, 0501981 100), 100o 62,50:)) 91,140 53,3001982 111,80IBo 71,40;;0 102, 3;00 61,9001983 117,60') 863,400 106,640 73,5001984 1 2 1, 60C) 9C) 0t400 1 09,2240 80,7701985 -- - 131,919 87,6861986 -- 136,607 91,9651987 - *131,526 93,543

E. FHyS I CAL FPROGMAMh-L

(i) Local ExchanraesNo. of Lirnes Year of

Telephone Area (Capacity) Installation

Actual onTrertiary Secondary Appraisal 31 12 .86 Appr aisal Actual

Anuradhapura Anur adhapur-a 1,1 C0)0 ) 1,056 1982 1986Jaffna 2,200 916 1982 -Maar,nar 300 169 1983Trincomalee 65() 115 1982 -

Culombo Avissawella 11000 722 1982 1986Ch il aw * 1, MO 05 1983 -Gampaha 300() 400 1983Negombo 600 624 1983 1986

Galle Gal le 900)( 770 1982 1986Ratnapura 1,000 518 1982 1985

Kandy Badulla 1,350 1,045 1963 1985Bandar awela 11,50.)(.) 1,397 198- 1985kI.eyalIe 1,6600) 1,520 1983 1985AurLInegala 1,650 1,832 1983 1985Matale 350 33 6 1982 1986Nawalapitiya 200 86 1982 -

Nuwara Eliya 1,500 1,478 1983. 19a5

Total 17,20(C) 13,591

* The reduction iri capacity was dlue to the damages caused to theplaot irn the Northern and Eastern areas.

- 27 -

Annex LPage 2 of 12

tii) Trunk ExchancesNo.of Terminationsto be added

Appraisal Actual Appraisal Annual

Expansions 8 10 650 790

New 3 5 650 750

(iii) Lgna Distance System

Channel Capa-tNo.of Channel,Year ofIcity IInstalla-

(a) Microwave I I Ition_________ ________-----: : -- - - - - -:-- - - - -

IAppra-I lAppra-: Appr- lisal IActualltisal lActuallaisal Actuall

1. Bale - Ensallwatta 2400 1 960 1 540 120 19862. Co. B/Hm - a a I a

Prinston Hill 12400 1 960 1 600 1 720 1 :1985 a

3. Co-Cw-Px-Ad t 2400 960 1580 1 360 19864. Kirimetiyakanda- i a a a a Ia

Gunner's - Bc 1200 - 360 t - I -

5. Gunner's - Tc I 1200 1 960 120 90 i 19856. Kegalle - O t a a a

Kirimetiyakanda 1200 1 240 120 120 19857. Namunukula - BW 1 1200 960 1 120 1 120 1 1985

(b) Replacement of Long Distance Open Wire Routes

Route Pair-kmsDistance to be Year of

Name of Route (kms) Replaced Recovery

Colombo-Kegalle 90 270 1983Negombo-Chilaw 50 100 1983Chilaw-Puttalam 50 100 1983Nuwara Eliya-Bandarawela 60 60 1983Miscellaneous junctionsto RAXs 6,700 13,400 1983

- 28 -

ANNE X1Page 3 of 12

(c) UHF/VHF

UHF/VHF SystemsChannel Endsto be Year of

Telephone Area Installed Installation

Tertiary Secondary Appra- Actu- Appra- Act-I. 60 channel UHF Systems Route isal al isal ual

1. Anuradhapura Jaffna Jaffna-Nelliadi 72 - 1982 -

2. Anuradhapura Jaffna Jaffna-Sittankerni 72 90 1982 -

3. Anuradhapura Jaffna Jaffna-Tellippalai 72 150 1962 -

4. Colombo Chilaw Chilaw-Puttalam 72 - :983 -

5. Galle Ratnapura Ratnapura-Balangoda 48 60 1982 1985

6. Galle Ratnapura Ratnapura-Kahawatta 48 - 1982 -

7. Galle Ratnapura Ratnapura-Pelmadulla 48 60 1982 -

8. Galle Ratnapura Ratnapura-Rakwana 48 60 1982 -

II. 36-channel UHF Systems----------------------

1. Anuradhapura Anuradhapura Anuradhapura-Kekirawa 48 120 1982 1986

2. Anuradhapura Mannar Mannar-Talaimannar 28 - 1983 -

3. Anuradhapura Jaffna Jaffna-Chavakachcheri 32 90 1982 -

4. Anuradhapura Jaffna Jaffna-Kilinochchi 48 90 1982 -

5. Colombo Gampaha Gampaha-Mirigama 48 - 1983 -

6. Colombo Negombo Negombo-Dunagaha 48 60 1983 1986

7 Balle G .lle Galle-Elpitiya 48 60 1983 1986

8. Galle Galle Galle-Baddegama 48 60 1983 1986

9. Kandy Badulla Badulla-Mahiyangana 48 120 1983 1985

1O.Kandy Badulla Badulla-Moneragala 48 60 1983 1985

- 29 -

ANNg, ITelaphone Area Page 4 of 12-------------- Channel Ends

Tertiary Secondary to be Year ofRoute Installed Installation

App. Act. App. Act.III. 24-Channel VHF System

_____________.________

1. Anuradhapura Anuradhapura Anuradhapura-Kahatagas-digiliya 6 30 1983 1986

2. Anuradhapura Anuradhapura Kekirawa-Galnewa 10} - 1983 -

3. Anuradhapura Anuradhapura Migawella-Thambuttegama 6 90 1983 1986

4. Anuradhapura Jaffna Jaffna-Pallai 16 30 1983 -5. Anuradhapura Mannar Mannar-Madhu 12 - 1983 -

6. Anuradhapura Mannar Mannar-Vidataltiva 12 - 1983 -

7. Anuradhapura Mannar Murunkan-Chilavaturai 12 - 1983 -

8. Anuradhapura Trincomalee Trincomalee-Kantalai 24 60 1982 -

9. Anaradhapura Trincomalee Trincomalee-Kiniya 24 30 1982 -

10. Anuradhapura Trincomalee Trincomalee-Muthur 24 3C0 1982 -

11. Galle Galle Galle- Kosgoda 12 30 198312. Galle Gallo Galle-Udugama 12 30 1983 198613. Galle Ratncipura Ratnapura-

Godakawela 12 - 1983 -14. Galle Ratniapura Ratnapura-

P-iriella 12 3C0 1983 198515. Galle Ratnapura Ratnapura-

Nivitigala 12 30) 1983 -16. Kandy Badulla Badulla-Bibile 12 30 1983 198517. kandy Badulla Badulla-

Ettampitiya 6 3C' 1983 198518. Kandy Badulla Badulla-

Kandaketiya 12 30C 1983 198519. Kandy Badulla Badulla-

Lunugala 12 60 1983 198520. Kandy Badulla Badulla-

Wellawaya 18 60 1983 198521. Kandy Bandarawela Bandarawela-

Ampitikanda 28 3C) 1983 198522. KIandy Bandarawela Bandarawela-

Ella 2B 30 1983 198523. Kandy Kegalle Kegalle-

Aranayake 24 30C 1983 198524. Kandy Kegalle Kegalle-

Rambbukkana 36 60 1983 1985

- 30 -

ANNE X Page 5 of 12

Telephone Area Channel Ends-------------- to be Year of

Tertiary Secondary Route Installed Installation

App. Act. App. Act.25. Kandy Kurunegala Kurunegala-

Kuliyapitiya 16 90 1983 198526. Kandy Nawalapitiya Nawalapitiya-

Dolosbage 24 - 1983 -27. Kandy Nawalapitiya Nawalapitiya-

Kotmale 24 - 1983 -28. Kandy Nuwara Eiiya Nuwara Eliya-

Maturata 24 30 1983 198529. Kandy Nuwara Eliya Nuwara Eliya

Udapussellawa 24 30 1983 1985

IV. 12-Channel VHF Systems_________________________

1. Anuradhapura Anuradhapura Anuradhapura-Galenbindunu-wewa 6 30 1983 1986

2. Anuradhapura Anuradtapura Kahatagas-digiliya-Horowpatana 6 60 1983 1986

3. Anuradhapura Anuradhapura Medawachchiya-Kebitigollewa 6 60 1983 1986

4. Anuradhapura Anuradhapura Tambuttegama-Eppawela 6 30 1983 1986

5. Anuradhapura Trincomalee Trincomalee-Gomerankadawelal2 - 1982 -

6. Anuradhapura Trincomalee Trincomalee-Killiveddi 12 30) 1982 -

7. Anurdhapura Trincomalee Trincomalee-K.uchchaveli 12 60 1982 -

B. Anuradhapura Trincomalee Trincomalee-PLtlmoddai 12 3f) 1982 -

9. Colombo Chilaw Chilaw-Mundal 6 - 1983 -lO.Colombo Chilaw Puttalam-

Kalpitiya 6 - 1983 -ll.Colombo Chilaw Puttala-Mampuri 6 - 1983 -12.Colomba Negombo Negomibo-

Badalgama 6 30 1983 198613.Colombo Negombo Negombo-

Sandalankawa 6 60 1983 196614.Galle Galle Galle-Imaduwa 6 30 1983 198615.Galle Galle Galle-

Talgaswela 6 30 1983 198616.Galle Ratnapura Ratnapura-

Kalawana 6 30 1983 198517.Galle Ratnapura Ratnapura-

iuruwita 6 - 1983 -18.Galle Ratnapura Ratnapura-

K'olonna 6 30 1983 198619.Kandy Badulla Badulla-

Migahakiula 12 30 1983 1985

- 31 -

* ~~NNEX IPage 6 of 12

Telaphone Area Channel Ends--------------- to be Year of

Tertiary Secondary Route Installed Installation

App. Act. App. Act.20.Kandy Badulla Badulla-

Padiyatalawa 6 30 1983 198521.Kandy Badulla Buttala-

Monaragala 6 60 1983 198522.Kandy Kegalle Kegalle-

Salapitamada 12 60 1983 198523.Kandy Kegalle Kegalle-

Kotiyakumbura 12 30 1983 198524.Kandy Kegalle Keqalle-

Udugoda 12 30 1983 198525.Kandy Kururegala Kurunegala-

Galgamuwa 8 30 1983 198526.Kandy Kurunegala Kurunegala-

Hettipola 4 30 1983 198S27.Kandy Kurunegala Kurunegala-

Maho 12 90 1983 19852S.Kandy Kurunegala Kurunegala-

Nikaweratiya 12 60 1983 198529.KanSy Matale Matale-

Welgamuwa 6 30 1983 198630.Kandy Matale Naula-Elahera 6 30 1983 198631.Kandy Nuwara Eliya Halgranoya-

Watumulla 6 60 1983 1985

V. multi-access VHF Systems of Different Sizes - 80 (approx.) 1984- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -__

- 32 -

Page 7 of 12

(i v) EAgmage; C&1o£ite Qr ttl Pr5t t , '.SUi%.

Si To kv:reg Name of Appr.wizal Actual on Actual onNo. Tertiary SecoCindarA Exchange Capacity 31.12-84 31.12.86

1. Anuradhapura Anurdh1apur a Galneuwa 1 0o, --2. Kahatagas--

cJigiliya 200 44 983 . K:eiirawa 30ci 444 . MPedaiwCch--

chi ya Ats.} O O BE 1445. Nochch i ya--

9itfitd4 IOU * 966. Tarnbuttecama 2O'" 6 "8U7-23 17 eHctianges

to be closed - 96

ubt tot d I 1 1,00 21 88 1 ,06sb

24. Anutradhapura L, 41 na v aIva:ach' -

cht-r i . )3 88

25. V 1 1 i nluhLi.h i

26. MN( I1 Ii adi jk)'14 427. Pal 1ai Ito) '4 4 I28 . Si thlankerr i 'J4)0 -

29. Tel 1 ippal el30. Ve* Iai lou 2131-35 2-3 0"-NLL1WaFl9jYLi

to be L1.tsed

iSubtotal 22, )0C)

54. Anuradhapura Matinar aht.1 1 1) I55. Mur ur, It: -.in I ' .I056. IaIa3 iri ar Ihar,qe,57-69 13 ex chanqee?s

toe: b c! 1 oseci - i I 181 :

Subt (iti k4" IC'

-33-'Pace % QL U

S1 T!Lbchgnn Area Name of Appraisal Actual on Actual onNo. Tertiary Secondary Exchange Capacity 31.12.84 31.12.86_ _ - - - - - - - - - _ _ _ _ _ _ _ _ _._ _ _ _ _ - - - - - - -_ _ _ _ _ _ _ _ _ _

70. Anuradhapura Trincomalee Gomarah-kada,.ella sn - -

71. K&.ntalai 100 21 2172. Kiliveddi 50 -73 Kinniya 100 10 1074. Kuchaveli 100 9 975. Mutur 100 20 2076. Nilaweli 100 6 677. Thampalakaman 50 5 578. 1 exchange

to be closed - 44 44

Subtotal 650 115 115

Total Anuradhapura Tertiary Areas 4,250 1,488 2,256

79. Colombo Avissawella Bulath-kuLnupitiya 200 44 44

80. Eheliyagoda 300 44 96a1. Kitulgala 20)0 44 4482. Kosgama 300 21 28883--97 15 exchanges

to be closed - 318 250

Subtotal 1,C0710 471 7;2

98. Chilaw Bingiriya 100 1Q 1099. Mar-awi 1 a 300;C 88e 20((I 00. Puttalam 6( )e_ 301) }>101-112 12 exnchanges

to be closed - 131 95

Subtotal 1, 000 429 6 C:!'.S

113. Gampaha Mirigama 200 44 200114. Veliveriya 1 0 44 15ct115-119 5 exchanges

to be closed 91 5')

300 179 400(")

120. Negombo Dunagaha 200 44 192121. K:ochchikade 2C'0 44 144122. Lunuwila 200 50 286123-130 8 exchanges

to be closed - 130) -

Subtotal 600 268 624

Total Colombo Tertiary Area: 2,900 2,885 5,755

- 34 -

St Tffihgs Arg,; Name of Appr-aisal Actual on Actual onNo. Tertiary Secondary Exchange capacity 31.12.84 31.12.86

131. Galle Galloe Baddegama 200 44 144132. Elpitiya 200 se 192133. Habaraduwa 200 21 192134. Hikkaduwa 100) 44 1501 35. Kosroda 10C 21 48136 Nakiyadeniya 100 44 44137-151 15 exchaniges

to be closed - 153

Subtr3tAl 9(0 415 770

152. Ratnaput-a HIalangoda SIC) 8 192153 . Godakcria" 1 00 44 44154. Kahawait a 20)Q 44 44155. fPel nadcJl ; 1C w 44 44136. Rakwarla 44 44157-o 1 tD *?w.1...119e<

to be t1t?ed - 1/7 15v

LiLtt.Al t (it tl.:) 441 iB

Total Galle lertiary Areas: 1, ,'C" 1, ;2.33

16B8. Katiady Etdul I'd I-jib) I6. I .u044 e169. ;:.dndak:et i 'a I 0C-1 70* Ms; as III itr Y 7.'t4 4 (IlI :A'

171. M- CIr ACJ :t I 3't '

172. V|cd 1 ya *t al i '1173. Fassara 2) : 2Qu174. W-zi 1 *i.'ax 20 ,"% 4u175- 186 12' E-iic:artqes

ttc_J be c1(jFjed 2

SUbL t' t t A 1 , 750 644 1 O-4i

187. Oandar- awe?1 a Atnmpi t i IVanda 1 4 4 44188. Eir-cdar awel a . 3Qu) lb #4-)169. I.- 1 1 l 21 21190 Hliputale S0O- u38 192191. W-l i inadi2a A 13;'2 266192-196 3j er. :char)nweE.

toj be closud 7 7 '

subtutal 1, 5s0O 73' 1,397

-35 -

.4.iNX.t.l

1 re.qph!1r. AOrk# Name of Appraisal Actual on Actual onNo. Tet ti dtr y SSecondarv Exctiangq calpac 't' v 1. 12.84 31.12 I . 86

1/7. K Et l le Ar-anayake 1.U 21 96t )93. K:eqal loe 80(.) '399 800Iv99. Mcwad )el I a 30.0 88 288,.' 0:4. , Rambukkatna '200 88 192, o1, Warcd::aol a 2X)0 44 144

Q .2 211 .1 excthanqesto be clos1 d - 93

Subtotal 1, 60C 733; 1, 52QNl

.s.*r-unecia a C; A I muw- 14m u 22 i 9G i t i Lt 1 .01) 44 r96

1 4. Hettipol a 50 9 96

. ! CJ. , ~~~~~~~~~k.U1 i \'dpi ti y'a .2j% 8 Q'8Mah bbI CK) T18LI ~~~ . t1~~ahc 10 t3t5:3 14 1

Nar ammala 1:a 44 t '.4. I '. . Ni1 adal Lpcjta '.-; 0) 99

NiI weratiya 10:)) 21 144. :'. Pcalgrhal c l sCIt )>' 3,r,,17

* **.:3. mRambridagalla 100 1o !84. Wariyapola 10( 21 1 7,

242 18 c Jxchanc.esto be closec1 - 388

Subtotal I, t.-53) 74S 1 ,8'.

Matale GaIal weIla 5() 44 96244. Naul a 1 00 2( 48£,45. Rattot.a I )Q 44 '4^246. Wilgamuwa I ('0 96247-259 13 exchanges

to be clobL?d - 74

Subtotal 35( 1 a 2,

260. Nawalapitiya Dolosbage 10 21 21261. Kotmale 10.0 44262-264 3 excha,eges

to be closet! - 23

Subtotal 2C.00 8H E)0

-36 -

PANNEX, 1Pae. 10 Qo I1

Si Tgleho Area Name of Appraisal Actual on Actual onNo. Tertiary Secondary E:> rhanrje capacity .1i2.84 31.12.86

265. NtAwara Eliya Halgranoya 200 44 144266. Maturata 1o0 44 96267. NuwaraEliya 1,0oo BOO 1,046268 . Ramboda 100 21 96269. Uda-

pussellawa 100 44 96270-278 9 exchanges

to be closed - t S0

Subtotal 1,500 1,103 1,478

Total Kandy Tertiary arease 8,150 2.750 4,344

Grand Total Sri Lanka 1 7.200 7,919 13,591

SRIl LANA ~lTELECOMMINCAT 10NS DEPAvRTM1E41--------------------------------------- ~Annexc 2

Income Statements fs00 Page I of 3toee also 5.09 to S.Alt

Forecast IN. tL:a

…-- - - -- - - - - - ---- -…-- - - - - - -- - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Years ending December 31a 2 196±- 2 1902 2 1993 2 1984 1. 19811 19982 1903 1964q

- ----- ----- -- -------------- ---------- -- ------------------------- -

Operating Revenum I

Rentals .1 26,500 2 29,400 2 33,400 1 37,300 1 29100 31,900 2 45,300 2 "'S500

Metered calls I 157,000 2 205,300 !266,700 2 320,100) I 164, 100 2 225,10 2LO 356,300 2 440,300

Manual trunk calls. . 1.. 12,000 2 12,000 2 12,000 2 12,000) 2

Foreign calls - - 131,300 2 164,100 2 205,200- 2 256,480 -1 133,300 162,300 2107,400 I- 347,-400

Total Telephone Revenue,-' - 327,6"Q- Li.41L,00. 317,500 I 626,300 I - 36, 500 2 419,300 2 93W9,50 'I 35.200

Telex 2. ~~~~~126,000 2 157,500 1 9p0 4,0 --I 193,000 2 165,300-- 2 172,700 12 30,Telegra*ph - 60,500 2 64,600 73,200 1 30,500 - 34,000 2 35,200 I 30,500 2 26,30Iiiscellaneous 2 !24,500 2 - 29,400 1 530 42,300. I 13.100 2 25,700 I- 32,700 1 .26,0

TOTAL OPERATING REVeV. 536,600 2 464,300 0'92,900 I 995,200 A 534,600 2645,500 8333,400 211117,200

Operating Expense. I … --. 22 . 1 11 21

Salaries 2 115,200 2 129,1 2o "S 1450 2 1461,900 2 73,200 2 99300 2 106,300 I 116,406-

Maintenance I 39,900 2 45,900 -2 52,700 2 60,700 I 56,700 4 1,500 142,600 2 44.40tf

Operation and Administration I 132,100 2 145,100 2 206,400 2 256,000 2 73,600 2 66.200 2 95,60 2 140.304

Depreciation z Historic-Cot I. 42,100 2 73,000 2 93,400 2 107,700 2 56,700 2 61,400 I 101,300 I 130,90

Revaluation 2 20,200 2 24,000 2 34,400 I 43,800 2 59,900 I 65,000 I 61,500 1 92,700

Total Operating Expense- 2 369,500 2444,60 2 531,400 2 632,100 -, 329,100 2 393,600 1 430,300 2 W525200

Operatinv Income 2169,100 1 219,700 I'- 219,500 2 343.100 -- 207,500 2 251,900 I 403,100 I 592,~

Loes t Interea.t - 91,400 2 106,400 2 113,400 2 110,900 2 16,200 2 26,500 2 39.400 2 79,6

Exch.Losses & Wtrite Offs2 - I-22 10,900 2 (700) 2 492,200 2 2S,4

NET INCONIE - 77,700 I 113,300 2 L71,1t)0 1 252,200 Leo6,400 2 226,1.00 2 321,500 2 484, 00

Average Net- s Fixed Assets Historic Cost 751,500 1,072,600 1, 299,700 1,496,500 W939450 1.221,200 1,579

Revalued 920,100 1,300.300 1,599,200 1,879,400 + 1,403,500 1,699,600 2,4.

Operating Ratio aHistoric Cost ) 65 8Z3 60, 50 42 39

Revalued 69 A7 0564 6i J ,1 52 47

Rate of Return Historic Cost XI25.2 22.9 25..1 27.I39.7 43.4

Revalued CX 19.4 16.9 4 .2_.: 423.7 27.6

* arinot be calculated as a BalAnce S2'et was n.ot i -- -;- A1 .

,--;- - -TELEC;i--'-J- -- ' -'-- ---r- .ot 3

racr- Sho-eE k=. .., .

Forecast

Years ending December 31 : 1961 1992 1983 192 19t.. 162 ; 1983 : 1984

--- --- --- --------- ------------------- -- -------__-------_----_---__ _ _---- --------- _- - -_-_----- ---- ----- _------ - ----- - _ - - - _

Assets

Fixed assets in operationHiatoric Cost 1 1,242,000 : 1,559,100 : ;,s67,200 2,153,900 : 1,146,300 : 1,444,800 1,793,200 1 2,391,000

Revaluation adjustments 404,200 530,500 976,500 876,500 1 L,209,800 1,323,400 1.687,400 1,943,000

Less depreciation on a I

Historic Cost 288.800 366,800 : 460,200 : 567,900 285,300 3 346,900 : 440.700 .1 -79.600.

Revaluation adjustments 208,700 270,000 : 349,000 449,400 797,400 907,700 : 1,146,300 2 1,346,700

-- . : ::-- --------- --------- ---------

Net fixed assets in operation 1,148,700 : 1,452,800 : 1,745,600 : 2,013.100 : 1,29Z,40(, 1:,5U.600 : 1,995,600 : 2,407,700

Wts-r in prograss 317,100 : 308,100 286,700 281.500 : 298.500 34R.400 : 597,800 590,300

: : : :------ : -- -- --- - -- ------ ------ ---- -- -- -- -- _- -- ----- -

Tot l fixed Assets 1.465,800 : 1,760,900 1 2,032,300 2 2,294,600 : 1,591,900 1.862.000 :2.483,400 2,998,000

Stcres 72,600 : 79,900 I 07.800 : 96.600 : 230.000 : 195.1o0 : 146.500 : 87,700

* 119,500 : 149,400 1137.400 228.700 181.20t 1466.20( :' .7,0.700 498.200

: ~ ~ ~ ~ ~ ~ ~ ~ ----- :-:-: -:---- --- ----- -- -- -- - -- ---- - - - - - _--_

TOPTAL ASSETS 1,657.900 : 1,990,200 : 2,307,500 2,619.900 : 2,003.100 : 2.253.300 2.939.600 3,589,900

Liabilities

Equitv t Accumulated Profits 2 305.BoO 419,100 t 597,200 2 49.400 408-e.c,0 2 834. 00 2 956,1C0 2 1,440.101

Revaluation reserve 260,100 351,650 : 464,100 596.400 472.300 : 540.b00 2 747,500) s95.400.: : : : --: -- -

- - - - ---- - ---- - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

Total Equity 565.900 : 770,750 2 1,061,300 : 1,445.800 2 GO8.800 1.175,200 : 1.703.600 2.335,S00

Debt to Government long term 1,005.400 : 1,123,400 1.145,100 1.072.200 2 75b,900 767.900 453.500 : 477.700;

current 2 6.600 2 96.100 2 101. ' *.) °- 365.4..' 2 14:: 2 b92,x0 2 770,700

: ……- :… : -------- --------- ------

TOTAL LIABILITIES 1,657,900 1,990.200 2.307.500 2 .61.900 t 2.003.100 2,253.300 22.839.600 : 3,583.900:&: : -En -q -: -u it:y_ ----) 64 _ .…2--------_ 2 --------- - --- _---- ----- - --- ---

Dent/Debt & Enquity ( 64 59 52 4 46 4t. 21 17

Current ratio (Times) 2.2 2.7 -.2 1.1 1.26 0.52 0.76

Sh! : TEL ECOMMtwINI irf I!,,-IF$ '.'4JE 2

FLinds Flow State.e-t Rs y5of 3

Forecast AC t.u_

Years ending December 31 2 1981 : 1982 : 1983 i984 1981 1982 : 1993 1904

Sources

Net income before inter-st 169,100 : 2:9,700 2 219,500 363,100 - : 252.600 : 360.900 563S,00

Depr-ciation I 82,300 1 104,500 2 127.900 151,500 : 146,600 193,300 2 223,600

Internal cash generation 1 251,400 324,200 2 419.300 1 514.600 :_ 399.200 1 544,200 4 --707,200

Borrowing : 224,700 : 168,300 : 77,800 : (15.700) 2 86.690 : (237,6101 1 69,550

TOTAL SOURCES : 476,100 492,500 497,100 :98,900 : 485.B90 I 3k&;590 : 856.750

Requirements 2 :

Cacitol Constructionz 2

Pro.r)osed Project : 72,400 246,800 213,300 : 30I,00 : 29e.soo * S48.400 597.000 *

(tetE- WonIs * 244,700 61,300 : 73,400 251.500 : 49.900 : 249.400 W (7,500)

:~~ ::::-____ … _… _ _-_ ___

lotzl PrDgram 3 317,100 3:S08,100 1 286,700 ; 281,500 : : 348,400 5 597.800 : 590.300

bebt Services: Interest : 91,400 106,400 113.400 110,900 : 26,500 39.400 : 79.600

Amortization : 41,100 50,300 56,100 5 57.2(0 : 75,690 76.79C0 45,350

Total Debt Service 132,500 : 156,700 169.500 i 168.100 102-.190 2 116.190 : 124,950

Change in working capital 2 26,500 2 27,700 : 40,900 49.3S0 : 35.300 : (407,400) : 141.500

rOTAL REQUIREMENT I 476,100 492,500 2 497,100 498.900 :485,890 *506.590 t 956,750

Debt Service ratio (tises) 1.9 2.1 2.5 -. 1 _.9 4.7 6.3

Contribution to expension 2/ 29 45 73 106 75 140 se

1) For 1961, the amortization and change in Working Capital cannot be provided because a Balance Sheet

was not prepared as at 31.12.198(3. Accordingly, Fund Flow fioures are not glven for 1961.

2. Defined as the part of the investment program covered by internaJ cash oener-ation after debt

service and increase in workinq capital.

- 40 -

Annex 3 P. 1(see also 5.09 to 5.11)

SRI LANKA TELECOMMUNICArTIONS DEPARTEIlENTNOTES ON FINANCIAL STATEMENTS

Introductio,n

1. Forecasts were prepared for 1980 to 1984 inclusive butCommercial Accounts were prepared by Messrs Kulatunga & Co. for1981 to 1984. Accordingly, it is possible to compare actual andforecast results for 1981 to 1984 only. The 1981 and 1982accounts have been amended, where necessary, by Messrs Kulatungat Co., in the light of the Auditor-General's Report of 21st July,1986. The provisional accoLunts prepared for 1983 and 1984 havebeen used in Annex. 2 because Messrs Kulatunga & Co.,requiretime until 3t8st November 1987 to prepare the Final Accounts forthe years dnd the Auditor --Gener-al 's Report will be availableabout four months after submission of these accounts for audit.

2. Messrs Kulatunga & Co.have prepared he Commercial Accountsfor 1981 to 1984 inclusive in accordance w.th guidelines providedin February and March, 1984 by World Bank Staff.

3. Provisional Commercial Accounts for 1985 were prepared forinternal purposes by SLTD staff and a copy of these accounts wasforwarded to the World Bank in June, 1986. Commercial accountsfor 1986 also are being prepared by SLTD staff and it is expectedthat a copy will be forwarded to the World Bank by 3oth November1987.

Income Statement

4. Total operating revenues for 1981, 1982 and 1983 were veryclose to the forecast operating revenues for these years and for1984 the actual revenue was only 12% higher than the forecast.The fact that the forecast and actual figures are so close'indicate that a great deal of care was exercised when preparingthe forecasts. It will be seen that actual revenue from telexand telagraph charges in 1983 and 1984 was somewhat lower thanthe corresponding forecast figures: this was mainly because ofincreased use of facsimile facilities the income for which hasbeen included as telephone revenue.

5. The Forecast "Salaries" for 1981 to 1984 are appreciablyhigher than the Actuals and this is probably due to the fact thatthe Forecast figures include certain items(e.g. Overtime, Traveland Other Aliowances, Meals, Medical supplies etc) which havebeen treated as "Operation and Administration" expenditure in theactual figures.

- 41 -ANNEXXPage. 2

6. Actual expenditure on "Maintenance" for the four years wasonly 4% higher than forecast which appears acceptable.

7. The Forecast of "Operation and Administration" expensesassumed that this expenditure would increase by 25% p.a.However,the actuals were much lower mairly due to severe Treasuryconstraints on actual expenditure in these four yea;s. Thesubstantial increase in expenditure in 1984 was mainly due to thefact that the Turnover Tax payment was SL Rs. 41.2 millionhigher than in 1983. The 1984 payment included settlement ofarrears of Turnover Tax for prior years.

8. The depreciation charges, because of revaluations, werehigher than forecast because an index was used for Fixed Assetrevaluations and the Sri Lanka rupee depreciated against the SDRto a greater extent than was forecast.

9. The Forecast Interest payments have been calculated at 10%on SLTD's average long term debt to the Government in each year,inclusive of loans obtained in foreign currency for SLTD. Theactual interest figures however have been calculated at 12% p.a.on the Zoreign Currency Loans only in each year. In effect, thebases used are different and the interest figures are nottherefore comparable.

10. The "Exchange Losses and write offs" are in fact mainlyExchange losses on Foreign Currency Loans, caused by theprogressive depreciation of the SL Re. against the US $ and theYen.

11. "Net Income" for each of the four years was well abovethe corresponding forecast figure and the actual net income forthe four year period exceeded the forecast by 95%, which must beregarded as highly satisfactory.

12. "Operating Ratio", which is operating expenses expressed asa % of operating revenue, is more favourable than forecast forall years from t981 to 1984.

13. The "Rate of Return" which is operatirig income expressed asa % of Average Net Fixed Assets, is also more favourable thanforecast for all years from 1981 to 1994.

- 42 -

FNE X ;I

.Paaet.lBalance Sheet

14. The actual "Stores" figures for 1981 1982 and 1983 weresubstantially higher than forecast mainly because stores couldnot be charged to Capital and Revenue Expenditure because ofbudgetary constraints imposed by the Treasury. However, thevalue of stores on hand as at 31.12.1984 was below thecorresponding forecast figure.

15. Forecast "receivables" for 1981 to 1983 represent between21.65 and 2.75 months of billings for the years, whereas theactual receivable represent about 4 months billings in 1981, 3.6months billings in 1982 and about 3 months billings in 1983.There was therefore a definite improvement in actual debtcollection during the 1981 to 1983 period. The actual receivableat the end of 1984 however represented about 5.3 months billingsand this was mainl,' due to delays in billings and collectionsfollowing the ethnic problems in the 3rd quarter of 1983. Itshout-d also be noted that the 1983 and 1984 receivable fiqireswere estimates made at the time the provisional accounts wereprepared. However, more accurate figures will be available whenMessrs Kulatunga & Co., prepare the final accounts for 1983 and1984 by the end of November, 1987.

16. The actual "accumulated profit' figures are higher than theforecasts, because the "Net Income" earned annually was higherthan forecast.

17. The actual "revaluation reserve" figures are higher thanthe forecast for the reason mentioned in paragraph 8 above.

18. "Debt to Bovernment - Long Term" includes funds receivedfrom the Treasury (other than those mentioned in 19 below) andthe SL Re equivalent of Foreign Currency Loans obtained by theTreasury on behalf of SLTD. These debts also are in fact part ofGovernment Equity and a better appreciation of the variation inGovernment Equity from year to year can be obtained byconsidering "Debt to Government-Long Term" as Government Equity."Debt to Government - Long Term" decreased in 1983 and 1984because of the increased short-term Government funding in theseyears mentioned in paragraph 19 below.

- 43 -

Annem E

eaat 419. "Debt to Government - Current" rose substantially in 1983and 1984 because of substantial increases in Treasury advancesfor stores. The increase is due to the practices used inGovernment accounting: if severe budgetary restraints had notbeen imposed in 1983 and 1984 more stores items would have beencharged to Capital and Revenue expenditure, and TSA StoresAdvance Account (and consequently the "Debt to GovernmentCurrent") would have been reduced. The reduction in "Debt toGovernment - Current" would of course have been offset bycorresponding increases in "Debt to Government - Long Term", toreflect the increased long term investment in the business in thetorm of fixed assets.

Funds Flow Statement

20. The Funds Flow figures are obtained entirely from the IncomeStatements and Balance Sheets. As figures in the IncomeStatements and Balance Sheets have been specifically commented onin paragraphs 4 to 19 above, no additional comment is provided onthe Funds Flow Statements.

- 44 -ANNEX 4Page 1 of 2'

SRI LAW4iA TELECOMP1JN.TIONS DEPARTMEN' rS '

FIRST TELECOM14UNlIlINS PROJECT______________________________

CREDIT 1080-C__________..__

Physical and Financi Perc re-nce Indicators--------------------------------------------------- __-------------------

As of December 31.1984 As of December 1.1986AporaisalTarget Actual Actual

Local T-lephone System

%umber of exchanges - 88Equipped capacity 121,600 109,240 150,200Direct exchange lines(DELs) 90,400 i 0,770 93.000Number of Telephones 133,50O 104.000 130.000Public Call OfficesUtfilled Demand 27,900 17.850 (Subsequent tor

revision of walter'sLong Distance Network_____________________

Interurban autowatic exchanges 11 8 15Total termination aninterurban exchanges 1.300 - 1.530Total available channels

Internacional Services

International automatic exchangesTotal terminations on Not includedInternational exchanges in projectTotal international telephonecircuits

Telex Service

Telex exchangeEquipped capacity -dc-Number of subscribersUnfilled demandInternational telew; circuits

Staff

Emplnvees 1 .50 9 5E- EStaff ratio I 'C'

(oe-c oes'I1'i(ri telephc-nes'

AiP- ac'e v eerLep'r- bicrber

.- Tr;Lf.^7

,4; , ,

-45-ANNEX. S

Page 1 of 2(see 5.12 to 5.15)

SRI LANKA TELECOPMMUNICATIONS DEPARTMENT (SLTD)

Principal Telecommunications Tariffs(As from 1st December, 1985)

1. Local Cnrazs

Connection FeesSTD exchangsn Estimated Cost with minimum of SL Rs.7,500.00Other exchanges: Estimated cost with minimum of SL Rs.2,750.00(If a priority connection is required, additidnal fees arepayable)

Unit Call Charge: SL Rs.1.10 (SL Rs.2.10 fpr call office)

ennual Rentali

Business and Peofessional : SL Rs.1,000.00Non Business and Non Professional z SL Rs. 400.00Religious institutions a SL Rs. 225.00

2. Long Distance Charges(a) Manual exchanges, operator connected calls

Distance Charae gr 3Minute of Fraction

Within the same group switching centre SL Rs.2.t:)0Less than 64 KIlometres SL Rs.3.0)0Between 64 and 177 Kilometres SL Rs.4.00Over 177 Kilometres SL Rs.6.C00

Above charges are standard rates. Between 6 p.m. and 8a.m.the charges are 50% of the standard rate.

(b) Automatic echanges, "operator connected STD calls":

From B A.M. to 6 P.MDistance First I minutes additional ; minutes-------- aor fraction or fractionWithin the samegroup switchingarea SL Rs 3.00 SL Rs 2.00Less than 32 K.M. SL Rs 5.00 SL Rs 4.00Between 32 and 80 K.M. SL Rs 7.60 SL Rs 6.60Between 80 and 112 " SL Rs 12.00 SL Rs 11.00Between 112 and 193 " SL Rs 14.20 SL Rs 13.20Over 193 SL Rs 20.80 SL Rs 19.80

- 46 -

ANNE X 95Page 2 of 2

Distance--------- From 6 _M. to 8 A.M.

First *3 minutes 8dL.ional 3 minute5or fraction or fraction

Within the samegroup swit;chi ngarea SL Rs 3.00 SL Rs 2.00Less than 32 K.M. SL. Rs 3.00. SL Rs 2.00Between 32 and 80 IK.M. SL. Rs 4.30 SL Rs 3.30Between 80 and 112 " Sl Rs 6.50 SL Rs 5.50Between 112 and 193 " SL Rs 7.60 SL Rs 6.60Over 193 SI Rs 10.90 SL Rs 9.90

(c) Automatic exchanget, STD calls:

Di;stance fluse Rate Qharpe for a------ 3-"-- minute callLess than 32 K.M. 50 seconds SL Rs 4.00Between 32 and 80 K.M1. 30 seconds SL Rs 6.60Between 80 and 112 18 seconds SL Rs 11.00Between 112 and 193 15 seconds SL Rs 13.20Over 19.3 10 seconds SL Rs 19.80

Cheap rates exist (between 6 P.M.and 8 A.M) for alldistances: 50.% discount on the standards rate.

3. International Ca.ls

The Tariff introdurced with effect from 1st December 1983 wasnot altered.

4. Telex

The Tariff introduced with effect from I st December 1983 wasnot altered.

- 47 -ANNEX SF

Page 1 of 3

SRI LANKA TELECOMMUNICATIONS DEPARTMENT (SLTD)

Principal TelecoMmunications Tariffs(As from 1st December, 1983)

1. L,ocal Charoes

Connection Eggs Per Line

STD Exchanges: Estimated Cost with minimum of SL Rs 7,000.00Other : Estimated Cost with minimum of SL Rs 2,000.00

Unit Call Charge: SL Rs 0.09 (SL Rs 1.40 from call office)

Annuga Rntal.

Business and Professional i SL Rs 900.00Non Business and Non Professional i SL Rs 360.00Religious Institutions : SL Rs 200.00

2. L_oqQ Distance Charggs

(a) Manual exchanges, operator connected calls.

Distance Clarae p_r 3 minutesor fraction

-------- ik A.M. to 9 P.M.

Within the same group switching center SL Rs 2.00Less than 64 Kilometres SL Rs 3.00Between 64 to 177 SL Rs 4.00Over 177 SL RS 6.00

Above charges are standared rates. Between 9 p.m. and 6 a.m.the fees are 50% of the standared rate.

(b) Automatic exchanges, "operator connected STD calls":

From i A.M. to 9 P.M.Distance First 3 minutes Additional 3 minutgs-------- or fraction or fraction

Within same groupswitching area SL Rs 2.65 SL Rs 1.65Less than 32 Kilometres SL Rs 4.30 SL Rs 3.30Between 32 and 80 K.M. SL Rs 6.40 SL Rs 5.40Between 80 and 112 8 SL Rs 10.00 SL Rs 9.00Between 112 and 193 SL Rs 11.80 SL Rs 10.80Over 193 SL Rs 17.20 SL Rs 16.20

- 48 -

ANNEX Z A

From 9 P.-M to . A.M.Distance First 3 minutes Additional p minutes-------- qor fra.ztion o_r fraction

Within the same groupswitching area SL Rs 2.65 SL Rs 1.65Less than 32 Kilometres SL Rs 2.65 SL Rs 1.65Between 32 and 80 K.M. SL Rs 3.70 SL Rs 2.70Between 80 and 112 " SL Rs 5.50 SL Rs 4.50Between 112 and 193 " SL Rs 6.40 SL Rs 5.40Over 193 SL Rs 9.10 SL Rs 8.10

(c) Automatic exchanges, STD calls

Charge for aDistance Pulse Rate 3-minute call

Less than 32 Kilometres 50 seconds SL Rs 3.24Between 32 and 80 " 30 seconds SL Rs 5.40Between 80 and 112 " 18 seconds SL Rs 9.00Between 112 and 193 15 seconds SL Rs 10.80-Sver 193 10 seconds SL Rs 16.20

Cheap rates exist (between 9 P.M. and 6 A.M.) ;or aildistances: 507% discount on the sta_nddrd rate.

3. International Calls________.____________

(a) Operator assisted Call Lharges for the 10 countries withwhich there is the greatest traffic)

First 3 Minutes Each Additionaior Fraction minute

Distance Collection Accounting Collection AccountingRate Rate Rate Ratp

S.L.Rs. b ._ .L.Rs. S.L.Rs.

U.K. 186 210 62 70India 120 105 40 35Singapore 162 141 54 47U.S.A. 222 219 74 73Japan 162 258 54 86F.R.G. 186 309 62 103Hong Kong 162 141 54 47Australia 162 210 54 70U.A.E. 186 240 62 80France 186 309 62 103(a two minute personal call surcharge is applied for person toperso,n calls)

-49 -

Page 3 of 3(b) International subscriber Dialled Call charges for the

10 countries with which there is the greatest traffics

Pe__ Min,teDestination Collection Rate Accounting Rate

S.L.Rs. S.L.Rs.

U.K. 62 58India 40 29Singapore 54 39U.S.A. 74 73Japan 54 86F.R.G. 62 103Hong Kong 54 39Australia 54 58U.A.E. 62 80France 62 103

Notes On all routes mentioned above, except India, there ismore incoming traffic than outgoing traffic

4. Telex

(a) Loop Rental s S.L.Rs. 15,000 per annumEquipment Rental : S.L.Rs. 36,000 per annum

(b) Connection ChargestColombo Area : S.L.Rs. 1,250Other areas the estimated cost with no minimum or maximum.

(c) Call charges for the It countries with which there is thegreatest traffic:

Distination Collection Rate Accounting RateS.L.Rs. S.L.Rs.

U.K. 48 58Singapore 48 39Japan 48 77U.S.A. 54 B7India 41 29Hong Kong 48 39F.R.G. 54 69Pakistan 41 69Taiwan 54 87Australia 48 58

- 50 -

ANNEX 6(Please see 7.04)

SRI LANKA TELECOMMUNICATIONS DEPARTMENT (SLTD)

RtAe of Return on Investment Proqramme

1. SLTD's Investment Programme for 1981 to 1986 includes theproject and ongoing and other works. The close relationshipbetween the project, the ongoing and other works, makes anyseparation very arbitrary, as regards incremental costs andrevenues. Accordingly, the rate of return calculation is basedon the whole investment programme for the years 1961 to 1986.

2. The deflator used in the calculations is based on thecomposite index suggested by World Bank Staff and used to revalueassets when preparing the draft commercial accounts for 1986. Ascommercial accounts were first prepared for the calender year1981, 1981 has been treated as the base year.

3. The benefit period extends to 2004, by which time it isenvisaged that the equipment will have substantially completedits useful life.

4. The incremental costs and revenue for each year have beencalciulated by reference to 1981. From 1986 onwards, it has beenassumed that the incremental costs and revenues will rEmainconstant in real terms - this same assumption was made whenpreparing the STaff Appraisal Report in 1980. Operating costsare exclusive of depreciation and interest - which was the basisused when preparing the staff appraisal report in April, 1980.

5. No residual value for the programmed investmens has beentaken into account, because the 1981 discounted value of thesewould be insignificant.

6. A summary of the costs, revenue, and net benefits is givenbelow: -

Year Deflator Capita] Incremental Net BenefitsExpenditure Operating

Cost Revenue

Rs. Rs. Rs. Rs.1981 1.00 298.5 - - (298.5)1982 0.94 327.5 34.3 102.4 (259.4)1983 0.83 496.2 30.3 246.3 (260.2)1984 0.77 454.5 70.1 447.1 ( 77.5)1985 0.70 310.E8 64.5 552.0 176.71986 0.54 286.8 50.0 602.2 265.41987-2004 0.54 - 50.0 602.2 552.2--- - - - - - - --- - - - - - - - - - - - - - - - - - - - ---.- - -_- -- _ - - - - - - - - - - - - - - - - - - - - - - - -

- 51 -

ANNEX 6Page. 2

The net benefit stream results in a rate of return of 8.03% asagainst 16.6% calculated when preparing the Staff AppraisalReport in 1980.

7. A sensitivity analysis performed gave the following resultin place of the figure of 28.033% shown above.

(a) 10% increase in capital expenditure 25.22%.(b) 10x. increase in operating costs 27.62%(c) 10% decrease in revenue 24.55%.(d) Combination of (a), (b, and(c) above 21.71%

8 The economic rate of returri is substantially higher than therate of 28.03% shown above for the following reasons:

(a) No attempt has been made to estimate the consumer surplus.It is known, however, that an unauthorised market fortelephone exists islandwide and inside Colombo inparticular.

(b) No increase in revenues due to this project investment hasbeen considered after 1986. When additional facilitiesare installed under subsequent projects, the investmentduring 1981 to 1986 will produce additional revenue.

(c) Some of the equipment installed under the project hasspare capacity and could handle higher traffic with lowmarginal investment. Despite this, the full capital costof the project has been included when calculating the rateof 28.03% shown above.

(d) When preparing the Staff Appraisal Report in 1980, theinternal rate of return was shown as 16.6% and theeconomic rate of return as 33.1%. In view of the factthat subscribers and potential subscribers are willing topay c.irrent tariffs and taking into account that tariffshave been increased twice since 1980 and are to beincreased again shortly the economic rate of return wouldbe in excess of 40%.

ORGA lSA1 -ON CHAWT OF ThE TE_t :- AICA' ID0;'.i Dt

Hon. Minister F r IHr. Sunil S. Ab-yeundara

I Secretery P & TMr. A.R.M. Jayawardana

I.~~~~~~~~~~~~~~~~~~~~~~~~~~~

P.hG. I Director T-l-cwm_uncationgI

Mr. A.D. Daaunupola I Mr. M.B. Rodrigo I

Dy. D.T./PL & EDP I Dy. D.T./IPM S FV Dy. D.T./R.S. T Dy. D.T./EFF F Dy. D.1./IS . "stro

Mr. G.J.N.L. Soysa Mr. O.S. Perers h r. W.S.A. F-rers Mr 22 F r tL. Somas ri cr. .S. Kuearapathir _

; C.E./EDh B- C.E. Poe.r & -C C.E./EPn , I C.E.IEPF Mn tro I- C.E.jTranseawsion

H Mr. A. BLsamundaras fiMr. D.R. Wuerasooriya Vacant 2Vacanit I Mr. S. Oa.ramingtI ~~~~~~~~~~~~~~~~~~~~~~~~~~I

- C.E./SW.PL.,Trf.Eng. C.E./RTM - C.E./EFn R Sl - C.E./EPP h 1- C.E / I/OTSa

' Mr. U.D. Munaeanqhe 2 Mr. D.A.C. Abeywardana Mr. M.M.A.L. Fon%ela Mr. M.s. Him.agoonaratne; Mr. S.S. Edariwesra

'- C.E./EF.Pl. h-C.E. HD/Project S.T.E./EPM R 11 S.T.E.'Tra;r.fng 2- C.E.Zsub. Ca. & mum.

2Mr-. A. Dalasundaram Mr. G.S.P. Rodrigo 2 Mr. J.L. Jayaward.rana Mr. T.R. Alah~~ndr& Mr. U.S.N.. Baenayake

- C.E.,Tran%.PL & SM C.E. SE W 11 ' T u & Iranr,sport C E./EPM Metro South

Mr. S.. ' anaheraarachchi: Mr. Li D. Withanr Mr. M.S .. bvmvthHii. I M. IF ... Mandran

2-C.E. LW III :- S.T.E,Ef1" Mtro South

fiMr. M.L.C.- Aiwis Mr. C.b.ft. PWrera

-C.E./Es S.T.ElYrt. & Finance

Mr. GS F Fernando 2 rs F.T .E. AbFemsncare

:- ; ,r. t .2..... , *. .dasa

-J

. LVy.D .T. PFi & EDF' - Deputy Directcr Ielecom,/ fla rmnn, L 3cctr- c r: Lta tC.E./EDP - Chief Fngineer/Electronic Data Pracscsing.C.E./SW.PL.& Trf.Eng. - Chief Engineer-fSwitching --lanni ng -4 ar1 .c FnL .-- :,

C.E./EP. PL. - Chief Engineer / External Flant Planning.

C.E./Trans. PL. & SM. - Chief Engineer /Transmission Flanning t;: '-pectruLn. ,FnagQement

. Dy.D.T./IPM & P - Deputy Director Telecom./Internal Plant Maintenance & Projects.

C.E./Fower & AC - Chief Engineer/Power & Airconditioning.C.E./RTM - Chief Engineer/Radio Transmission Mlaintenance.

C.E./HS Project - Chief Engineer Hambantota Project

C.E./SW. II - Chief Engineer/ Switching II

CE./SW. IlI - Chief Engineer/Switching III.

C.E./ESS - Chief Engineer/Electronic Switching Systems.

S.T.E./SW I - Suptg. Telecom. Engineer/ Switching I

D. Dy.D.T./R.S. & T - Deputy Director Telecom./Regions Supplies & Transport.

C.E./EPM R. I - Chief Engineer/External Plant Maintenance Regions I. a

C.E./EPM R II - Chief Engineer/External Plant Maintenance Regions 1I.

C.E.EPrM R III - Chief EngineerJ External Plant Maintenance Regions Ill. W

S.T.E./S & T - Suptg. Telecom. Engineer/Supplies & Transport.

4. Dy.D.T./EPP & F - Deputy Director Telecom./External FPlant Froject &, Maintenance.

C.E./EPP & Metro - Chief Engineer/External Flant Project & Metro

C.E./EPP R - Chief Engineer External Plant Project/Regions

S.T.E./Training - Suptg. Telecom. Engineer/Training

5. Dy.D.T./IS & Metro - Deputy Director TelecomJ./lnternational Services & .ietro.

C.E./Transmission - Chief Engineer/TransmissionL .E. 'SW/U19 -- Cr,ief EnQcneuerr Switchina/Overseas Telecom. '-ervicesC.E./Sub. Ca. & Mux - Chief Engineer/Subscriber Cable,5. & Miux

C.E./EPM Metro North - Chief Engineer/ Ex:ternal Plant Maintenance Metro Nor th

S.T.E./EPM Metro South - Suptg. Telecon, Enaineer! External Plant Mairntenance Metro South

S.T.EfTrf. & Finance - Suptg. Telecom. Engineer/ Traffic & Finance

-54 - P I of 4gdse :- 6 5 9 I 0 1 5 * e_ Sg4 s( @ ed g

p.bGuSl : 5e. 9 8 0 1 4 _ 5107elephone Gen. Off ice 9 8 0 1 3 dASG1 dMaufdTebx No 22600 LAKTEL CE 3e *euo see a. en. *.w 1HTS,

.Sbe@ - S3.b GobvUs * easO

My No. J 1Ouw,AGrnw. A'S,.p 9-. 7, 6m.Ofeof tMeChiMe T

a Dowd of Si Leeh.&40 Seolermnaike Memorial lnUam.tlefe

Your No. Conference Hall. P. 0. Sng 1576Youuddhua Mewtha. Cokabo 7. Sri Laks

COIQITMS FROM THE BORROJER05 OCIQR 1988.

Mr. Alexander NtwickiChiefPolicy-Based Lmxling, Errgy,Industry, Urban Sector and Public Utilities DivisionCperations Evaluation DepartmentThe World Bank1818 H Street N.W.Washington D C 20433U.S.A.

Dear Mt. Nbwicki

I wish to inform you tiat your letter of 21st September 1988 on the

subject of "First TblecmnmLmications Project (Credit 1020-CE),

Pass-through Audit Iyport' has been received by me today, and I haVe noted

its contents.

As reqmsted, I will study this document and convey niy caments

before the dead-line iudicated, nwiely, 31st OCtdoer 1988.

Yours-sincerely

VEICN L B MENDISCHIRMN.

/cdes.

ATTATIOmdAdSCe 598015 0 C to 0 l S C u 6#0,046up :.ab. I 56 9 8 0 1 4 1001s1a6

'Teephone Gen. Ofice ) 6 9 8 0 1 3 _mweu *ex dw * e_fTelex No 2260 LAKTEL CE e*Ou,.s esee* ua. so. em IUS

Gam ANUA AM,L-A46 SAWA pUGaoq, i.e &as Qf,0fGAVlefWuSibV*

My No. jTBSLWBt. IA. w.a&.Ous&L_d.,a. U. N.6 157*u.A%gaIuf &A,#. 0-64uw 7. 0s*m.

Offieseef e.ChaIvina.. eeemegas& 4.0. Dowd of Sri Lana..ae, a. Benderfmnike Memorial IniemtltonaiYour No. j TBSL,tH Confrmne Hall. P. 0. las 1516Your No. shalaka Mewethe. Coluubo 7. Sri La*.

18th October, 1988.

Xr Alexander Ilowicki,ChiefPolicy-3ased Lending, Energy,Industry, Urban Sector aund Public Utilities DivisionOperations Dvaluation Department,The 1Torld 9aak,1818 11 Stree;~-, NJ.W.'Tashington, 1D.C. 20433U.S.A.

Dear ;r :olfickip

This is with reference to your letter of September 21,1988 inviting my observations on t.2 Project Completion F.eport 1020 CE.,I t:nz. you for giving me this opportunity and I am zlad to submitthe followius observations :-

I Shou.L add that this project commenced at a time wthenthis Board was not in existence and was completed in 1987, many monthsafter this Board was constituted. Whatevqr coi.ments I am making shouldtherefore be viewed in this context.

There is no question t}at the project has iade a majorcontribution to the development of Telecommtnication Services of thiscountry. This is p_:.rticularly true in respect of the extension oftihene services to the rural areas particularLy for the major develop-mental schemes in the country and the change over to digital exchanges.Also a condition of the IDA credit t:..t the Telecommunication Servicesshould be constituted as a separate Department has been a major structur-al change whicl has contributed to tl.e success of t.is project. The re-vision on prices alone has resulted in an increa e in revenue byU3 310 million according to the PCR.

the project reveals t,at if the Telecommunication Servicescould be operated efficiently it could not only be highly profitablebut also be an important earner of foreign exchange for this country.The decision to clange over to digital exchange hias 'oeen a clear demon-stration of the technical capabilities of the staff of the Department.Mis is all the more reason w.y urger.t measures should be taken torestructure the Telecommnications Sector.

I an, glad to find that -our report refers to the proposedrestructuring of the Telecommunications Department by the enactment oft'.e Telecommunicutions Act wkiclh will establish a Teleco.municationsComission and Pet up a C).iprvq to operate the Telecommunication Zervices.71.is will amount to a radical chl:'nc of the exi::ting institutional andtec'nical framework wlich in our vie.; is the sine qua non for the rapid

- /0

- 36 - ATTIAUMTPaCe 3 of 4

development of the Telecommunic-tion Services of this ooLntry. I amalso glad to note that your project has drawn attention to the import-once of a commercialisod approach in the management and conduct ofthe Department as a means of rendering it a highly profitable enter-prise. Mis should help to orient the thinking of tho Department onthese lines ard thereby facilitate the endeavours of this Board tobring about a radical change in the outlook of its personnel froma negative and static departmental approach to a dynamic and creativeco:nmercial outlook.

The importanoe of expediting this restructurine is borneout in the delay in the completion of t_is project. No doubt thisdelay could be attributed to the constraints and red tape within thegovernment bureaucracy as well w the problems of obtaining looal fundsfrom the Government at given times. These delays havu inevitably con-tri'buted to t'e cost over run wLich was also due to the depreci.tionof the rupee. Yet if the -'tork had been expedited this over run wouldhave been reduced considerably. To that extent delays in completionare attributable to the limitations a.nd constraints in t:.e departmentalstructure.

This is clear proof th_t an autonomous entity whic'. is free ofbureaucratic control slueh as is envisaged by this Board could obviatesuch delays not only by providing for the necessary funds but also byimplementation of its plans on a more ratiomal basis. Our attentionhaI been dra-n to the requirement t:.at by 31st .rch 1981 the Departmentshould have finalized a complete inventory of assets for c'assificationand valuation of assets. It does not appe&r that such an inventory-nd classification has been prepared up to now. It slould be mnentionedt!at since its inoeption the TESL has attached urgent importance to thenecessity of a valuation of assets a d appointed an Azsets Committeewhich included the Director of Telecommunications :ad "in,ancial Consult-ant. The Committee sujoested the appointment of a Board consisting of3 engineers and an accountant who were given the task of inventorisingnad classification of assets by personal visits and personal inspection.MTe T3SL in fact even offered to provide the SLTD with f.unds requiredfor t'he purpose of t:is Board of Survey. It is unfortunate th;t therehas been some delays in the work of this Board and it is a matter ofregret th.at up to now their work has not been completed. The 3oard isI.oping that t.is work coald be expedited anid completed -t the earliesto-portunity because it will be appreciated tlh t without such a completeinventory and classification of assets no proper valuation can be made-other than a purel- superficial one arrived at on a hypothetical basis.

-e are also impressed Ly the IR of 29g iwhich has been.chieved which speaks well for the performance o. the project in physical

and financial terms. however, as ire 3re unaware of the ossumptions onwLich this calculation wras made, no detailed comments can be given. Thereport refers to "a lybrid system c. accounting". It should be pointedtut however that at present tLere is no co..;-,ercial accounting system inoperaticn. W.hat is bing done is a "post balance-sheet adjustment" whichprovides information on a commercial basis. It should be mentioned thatas ,art of its work the TBSL is ergajed on revising tlhe accounting systemsaind training of the accounting persownnel to enable a si.ooth transitionto a comnercialised accounting system.

'IV con cusion is that t.e project has been of great valuein a number of respects. It has achieved major improvemLents in the1elecommunicAtion Services of the country and also effected siCniiicant

-/3.

- 57 -

ATTACHMIfPage 4 of 4

1 t t.h.jV.l c': ..c- A ticulc;rl7 in the eztablichcncr.t of a separatcDepartment of Te`eco..'jntuicAtions. Tais ins'itutional ohange in arview :las paved the w.,V L.fd opened tho doors to a ;.ore radical trans-formation in the future. The eperience of the projoct lac also high-lighted tLe ur.jent nced for tlhe radical rostructuring of the Departmentin the intere-ts of accelerating the development of teleoo=nr.inicationsin the country _.L' eacbling t cis rootor to pla; its due rolein its economic advaicemerit. To t,.. .:t ectenit th,e expe_ience of the projectendorses tLie policies waich h_ve been adopted by the government for aradical rectrzcturing of the depart..,ent zic th-e creation oz' a coramer-cially oriented sy;tem .:hich would er.'cle telecor.-runications to bothprovide a bet'er sexvice to the country -nd also realise its fullestpotential a ax profitable cor.s'ercial enterprise.

The preface to the report me.itioned states that it wasprep:.red by the Sri Lx,kca Teleoom:;'qi;icatiozs Depaertment. I .ish tome.ition thlat ;r " D 3 l Aunawardena-, 3enior Coxlsul.-a.it o0 th e Tele-co.rmunicationz Toard of Sri Lai:ia -o is als) Project Co-ordinatorwas a co-author of this report.

Yours sincerely,

(Vernon L B I:endis)Chairman

- 58 -

0.w ih 1 2 1 2 Is 1 ... 4u s;wuao_ bli. 2S 2 5 9 s ath af k8w4 sm-cId*Am. Bn4 AwA-i

my,MINIST T } .Y OF POSTS

MyNs.~~~~C JLMW ROAD

'-"ft. .~~~~~~~els'6 II 21st October. 1988.fay~ ........... b.

Mr. Alexaner NoviddChiefPolicy-Bagod 1ax1ng, Emergy, Indutry,Urban Sector & Public Utilities Divisioncperatimns Evaluation DeparTmntT*u World Bank1818 H Street N.W.Washington D.C. 20433U.S.A.

Dear Mr. Noichi,

Hea First Telecmmziicatios Project(Credit 1020-CE)

Pass- Aiit h

I refer to you letter of 21st SeptTbfer, 1988 on tkaabwe subject.

I an in receipt of the PCR an the above prject,I have ro particular cammnts to mWks on this repot.

Yours s

A.R.M. JaywarnSetaryMinistry of Posts & Telocammicaticns