Document of

The World Bank

FOR OFFICIAL USE ONLY

C; "I

Report No. 8106-LA

STAFF APPRAISAL REPORT

LAO PEOPLE'S DEMOCRATIC REPUBLIC

SECOND TELECOMMUNICATIONS PROJECT

FEBRUARY 6, 1990

Industry and Energy Operations DivisionCountry Department IIAsia Region

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

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CURRENCY EQUIVALENTS(As of July 1989)

Currency Unit - Kip

US$ 1.00 - Kip 600Kip 1000 - US$ 1.67

GOVERNMENT AND IMPLEMENTING AGENCY FISCAL YEAR

January 1 - December 31

WEIGHTS AND MEASURES

Metric System

ABBREVIATIONS AND ACRQNYMS

BCEL - Banque pour le Commerce Exterieur LaoCEM - Country Economic MemorandumEDL - Electricite du LaosEPTL - Entreprise d'Etat des Postes et

Telecommun catiins LaoERR - Economic ITternal Rate of ReturnFRR - Financial Internal Rate of ReturnFX - Foreign Exch9ngeGDP - Gross Domestic ProductHF - High Frequency (Radio)ICB - International Competitive BiddingITU - International Telecommunications UnionLao PDR - Lao People's Democratic RepublicLCB - Local Competitive BiddingLIB - Limited International BiddingMCTPC - Ministry of Communications, Transport,

Post and ConstructionNSEM - New System of Economic ManagementP&T - Post and TelecommunicationsPABX - Private Automatic Branch ExchangeSOE - Statement of ExpenditureUHF - Ultra-high FrequencyUNDP - United Nations Development Programme

FOR OMCIL USE ONLY

I.AO PDR

SECOND TELECOMMUNICATIONS PROJECT

CREDIT AND PRQOCjSIRY

Borrower: The Lao People's Democra* ic Republic (Lao PDR).

Beneficiary: Entreprise d' Etat des Postes et Telecommunications Lao (EPTL).

Amount: SDR 19.1 million (US$24.5 million equivalent).

Terms: Standard IDA Terms with 40 years maturity.

Onlending Terms: Proceeds of the IDA credit, along with financing from othersources, will be passed on by the Government to EPTL as amixture of equity (US$9.3 million, 38%) and loan (US$15.2million, 62X); the terms of the loan are: 8% interest, 20years, including 5 years of grace; EPTL will bear the foreignexchange risk.

Pr2oect Objectives: The objectives of the proposed Project are to: (a) carry outpriority investments in the sector, particularly the firstphase of a nation-wide digital telephone network, and improveirnternational telecommunications services; (b) strengthenEPTL's capabilities in the areas of planning, projectimplementation, operations, maintenance and financialmanagement; and (c) develop EPTL's human resources.

Project Description: The proposed Project is an integral part of EPTL's ectoralTelecommunications Investment Program 1990-95 (the Program)and will include the following components: (a) installation ofautomatic digital telephone exchanges in Vientiane and fiveprovincial capitals with a capacity of 15,000 lines; (b)construction of local cable networks, subscriber connectionsand installation of public call facilities in the six cities;(c) installation of a backbone network of digital microwavelinks, connecting all new telephone exchanges; existingHF-radio links will be relocated into regions with lowertraffic demand; and (d) training and technical assistance tostrengthers EPTL's project implementation and operationscapabilities. To assist in project implementation, training,institutional and financial development, EPTL w-ill employconsultants which are presently assisting in detailed designand preparation of tender docume.itation.

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

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Benefits: The Program represents an important first step in the Govern-ment's strategy of national integration and simultaneouseconomic decentralization through improved telecommulicationsinfrastructure. It will help develop a comprehensive,integrated, nationwide network, providing the criticalbackbone from north to south. It will significantly improvetelecommunications services (including automatic access tointernational networks) to about 5,200 existing Lelephone sub-scribers and provide services to about 9,500 new subscribersin six major locations throughout the country. Redeploymentof existing HF equipment will benefit other provinces. TheProgram is expected to yield an economic rate of return ofabout 13X.

Risks: The major project risk is that implementation may be slowerthan expected because of EPTL's weak implementationcapabilities. The proposed Project includes measures tomitigate this risk: (a) a substantial program of technicalassistance (including project management) and training of EPTLstaff; (b) early appointment of project implementationconsultants; and (c) structuring of procurement around a smallnumber of packages which can be awarded on a turn-key basis.

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Estimated Project Costs: Local Foreign otal--- (US$ million)----

Telephone exchanges 0.0 9.9 9.9Transmission 0.9 8.7 9.6Outside Cable Plant 0.6 7.5 8.1Ancillary Equipment 0.0 0.9 0.9Buildings 0.3 0.3 0.6Project Management & TA 0.3 2.3 2.6Training 0.1 0.6 0.7

Total Base Cost __ 30.2 32.4

Physical contingencies 0.2 1.5 1.7Price contingencies 0.3 4.2 4.5

Total Prolect Cost 2.7 35.9 38.6

Interest During Construction 2.2 0.6 2.8

Total Financing Reauired 36.5 41.4

Project Financing Plan:

IDA 1.4 23.1 24.5UlDr.p 0.1 1.1 1.2Japanese Government Grant 0.0 11.7 11.7EPTL LA2 0.6 4.0

Total Financing 4. 3. 41

Estimated Disbursement:IDA El 1221 12 1993 1994 1995 1996 19.7

-------------(US$ million)--------------Annual 1.0 2.7 4.1 4.9 3.7 4.7 3.4Cuaulative 1.0 3.7 7.8 12.7 16.4 21.1 24.5

Rate of Return: 13X

Map:L IBRD No. 21 898

A Based or, an Exchange Rate of Kip 600 - US$1.00; the Project is exempt fromduties and taxes.

SECOND TELECOMMUNICATIONS PROJECT

Table of ContentsPage No.

CREDIT AND PROJECT SUMMARY .i................... . .

I. INTRODUCTION .1.. . . . . . . 1

II. ECONOMIC BACKGROUND ........ .. ... . ...... . .

III. THE TELECOMMUNICATIONS SECTOR . . . . . . . . . . . . . . . . . 2Sector Organization ................... 2Existing Facilities ................... 3Quality of Service ................... 3Access to and Usage of Service . . . . . . . . . . . . . . 3Demand for Service ................... 4Sector Constraints ................... 5Government Objectives and Strategy for the Sector . . . . . 5Ban': Group's Experience in the Sector . . . . . . . . . . 5Rationale for IDA Involvement in the Proposed Project . . . 6

IV. THE BENEFICIARY - EPTL ..................... 7Responsibilities . . . . . . . . . . . . . . . . . . . . . 7Organization and Management . . . . . . . . . . . . . . . . 7Human Resources and Training . . . . . . . . . . . . . . . 7Technical Assistance ................... 8Financial Management and Accounting System . . . . . . . . 8Billing and Collection . . . . . . . . . . . . . . . . . . 9Audit.10. ................. Performance Monitoring . . . . . . . . . . . . . . . . . . 10

V. THE PROGRAM AND THE PROJECT ... . . . . . . . . . . . . . . . 11Introduction .... . . . . . . i . . . . . . . . . . . . 11Investment Program 1990-95: Objectives . . . . . . . . . . 11Investment Program 1990-95: Description . . . . . . . . . . 11The Proposed Project ... . . . . . . . . . . . . . . . . 12Project Objectives . . . . . . . . . . . . . . . . . . . . 12Project Description . . . . . . . . . . . . . . . . . . . . 12Project Cost . . . . . . . . . . . . . . . . . . . . . . . 13Project Financing and Terms ... . . . . . . . . . . . . . 14Retroactive Financing .... . . . . . . . . . . . . . . . 16Status of Preparation .... . . . . . . . . . . . . . . . 16Project Implementation . . . . . . . . . . . . . . . . . . 16Procurement .... . . . . . . . . . . . . . . . . . . . . 16Disbursements .... . . . . . . . . . . . . . . . . . . 18Performance Indicators, Project Monitoring, Auditing, and

Reporting .... . . . . . . . . . . . . . . . . . . 19

This report is based on the findings of an appraisal mission to Lao PDR inJuly/August 1989, comprising Christian Duvigneau (Task Manager), DavidDelgado (Telecommunications Engineer), and Aldo Baietti (Consultant).

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VI. FINANCIAL ANALYSIS . .... .................. 20Introduction . . . . . . . . . . . . . . . . . . . . . . . 20Past Financial Performance: EPTL Consolidated . . . . . . . 20Past Financial Performance: Telecom. Operations . . . . . . 22Valuation of Assets . . . . . . . . . . . . . . . . . . . . 23Tarifts . . . . . . . . . . . . . . . . . . . . . . . . . . 23Projected Financial Performance. Telecom. Operations . . . 24

Strategy . . . . . . . . . . . . . . . . . . . . . . 24Assumptions . . . . . . . . . . . . . . . . . . . . . 24Projected Performance . . . . . . . . . . . . . . . . 26

Financing, Exchange Risk and Debt Service Coverage . . . . 26Dividends .......... .............. . 27

VII. ECONOMIC ANALYSIS ........ .. 27Benefits . . . . . . . . . . . . . . . . . . . . . . . . . 27Resource Mobilization ...... . ........ .. . . 27Return on Investment ...... ......... .. . . 28Least-Cost Solution ....... . ......... .. . 29Environmental and Health Aspects . . . . . . . . . . . . . 30Project Risks . . . . . . . . . . . . . . . . . . . . . . . 30

VIII. AGREEMENTS REACHED AND RECOMMENDATION . . . . . . . . . . . . . 31Agreements Reached duriag Negotiations . . . . . . . . . . 31Undertakings Obtained during Negotiations . . . . . . . . . 31Conditions of Effectiveness ..... . . . . . . . . . . . 32Recommendation . . . . . . . . . . . . . . . . . . . . . . 32

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Pag-e No.LIST OF ANNEXES

3.1 Telecommunications Facilities . . . . . . . . . . . . . .333.2 Historic Telecommunications Data . . . . . . . . . . . . .353.3 International Traffic, 1987-88 . . . . . . . . . . . . . .383.4 Capacity and Traffic Projections 1989-95 . . . . . . . . .39

4.1 EPTL Present and Proposed Organization Chart . . . . . . .404.2 EPTL Staff by Category . . . . . . . . . . . . . . . . . .424.3 Outline of Terms of Reference for Technical Assistance . .434,4 Program for Reducing Accounts Receivable . . . . . . . . .47

5.1 Program and Project Components ............. .525.2 Program and Project Cost . . . . . . . . . . . . . . . . .545.3 Detailed Financing Plan ................ .555.4 Project Timetable . . . . . . . . . . . . . . . . . . . .565.5 Goods and Services to be Procured . . . . . . . . . . . .575.6 Schedule of Disbursements . . . . . . . . . . . . . . . .605.7 Performance Indicators . . . . . . . . . . . . . . . . . .615.3 Supervision Plan . . . . . . . . . . . . . . . . . . . . .63

6.1 Historic Financial Data (Consolidated) . . . . . . . . . .656.2 Historic Financial Data (Telecommunications) . . . . . . .686.3 Historic Financial Data (Postal Ser.'.ce) . . . . . . . . .69i.4 Teleco'-nications Tariffs . i . . . . . . . . . . . . . . 706.5 Assumption for Financial Projections . . . . . . . . . . .726.6 Financial Projections . . . . . . . . . . . . . . . . . .75

7.1 Return on Investment . . . . . . . . . . . . . . . . . . .81

8.1 Selected Documents and Data Available in the Project File 83

Map: IBRD No. 21898

LAO PDR

SECOND TELECOMMUNICATIONS PROJECT

I. INTRODUCTION

1.01 The Govcrnment of the Lao People's Democratic Republic (Lao PDR)has requested continued IDA assistance with the development of the country'stelecommunications network over the period 1990-95. Following major reformmeasures of the Government towards a more open, decentralized and liberaleconomy, started in 1986, the inadequacy of telecommunications servicesthroughout the country has become a major constraint on its efficient andeffective development, whereas actual telecommunicaticns traffic has growndramatically on a basically obsolete system. Services provided by therecently formed Entreprise d'Etat des Postes et Telecommunications Lao (EPTL)are inadequate to meet rapidly rising demand from Government, business,residential and rural sectors. Quality of both domestic and internationalservices is poor. Key constraints to efficient sector operation anddevelopmen-t have been (a) an inadequate institutional ervironment, (b) agedequipment in need of modernization and/or rehabilitation, and (c) severeunder-investment in the sector due to limited resources and relatively lowsector priority in the past, as well as ineflicient procurement practices.

1.02 The first two of these constraints were addressed with IDAsupport under the Telecommunications Rehabilitation and Technical AssistanceProject (Credit 1684-LA. approved in March 1986), now under implementation(para. 3.12). During preparation of that project, EP'TL was created as anautonomous public sector enternrise and is being developed through technicalassistance and training. Limited improvement of certain HF-radio links, andmarginal rehabilitation of existing crossbar telephone exchanges are also-.cluded. However, the rapidly rising demand for telecommunications servicesunder. the new policies since 1986 has led the Government to place increasedpriority on the sector's development, and to address the above thirdconstraint through major sectoral investments supported by outside sources.

1.03 Thus, EPTL, assisted by consultants under the first project, hasaccelerated the development of a substantial Telecommunications InvestmentProgram 1990-95 (the Program) which will implement the firs- phase of anation-wide telecommunications network. The Program will catapult EPTL froma small company with assets of less than US$3 million equivalent at the endof 1988 to a major public service company with assets of over US$51 millionand annual revenues of about US$7 milliorn by 1995. The proposed SecondTelecommunications Project forms an integral part of the Program.

II. ECONOMIC BACRKGROUND

2.01 The Lao PDR, a landlocked country in Indochina, has one of thelowest per capita incomes (about US$180 in 1988) in the world; its economyis largely based on subsistence farming.! Large in surface (two-and-a halftimes as large as Korea), but small in population (about four million people

I/ See Lao Feople's Democratic Republic, Country EconomicMemorandum, World Bank Report No.7188-LA, September 1988.

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in 1988), it has an extremely low population density. This makes Linfrastructure investments costly and of relatively low return. A moreextensive exploitation of the country's generous natural resources has beenconstrained by the mountainous terrain, difficult access to foreign markets,and lack of know-how and funding. Lack of infrastructure, particularlytransport and telecommunications, has severely compounded these problems.

2.02 In November 1986, the Government introduced a New System ofEconomic Management (NSEM), under which it committed itself to a signiftcantliberalization and opening of the economy. The NSEM is intended to introducenew vigor into the national economic performance which was stagnant duringthe first half of the 1980s. It is considered an integral part of theGovernment's development strategy and reflects the recognition that con-trolled planning should give vay to a more flexible system of indicativeplanning and decentralizei economic management. Under the NSEM, a number ofimportant reforms ha-ve been undertaken, notably (a) the unification ofexchange rates and major devaluation of the country's currency (the Kip), (b)an almost compLite elimination of price controls, (c) a substantialliberalization of domestic and international trade, (d) provision ofincreased managerial and financial autonomy to public sector enterprises, and(e) encouragement of the private sector. The reforms were designed to bringabout greater efficiency and profitability in economic enterprises byaffording them a much greater degree of freedom of action. A StructuralAdjustment Credit (Credit 2037-IA), approved in May 1989, is supporting tlsGovernment's efforts towards reform. Increased economic activity, resultingfrom the liberalization, has led to significantly increased demand fortelecommunications. In addition. efficient telecommunications and transportinfrastructure is needed which would link the country's northern, centraland southern regions, to overcome the segmentation of the economy intoseveral small markets.

III. THE TELECOMMUNICATIONS SECTOR

Sector Organization

3.01 Domestic and international posts atciL telecommunications (P&T)services in the country are developed, operated and managed by EPTL underthe supervision and control of the Ministry of Communications, Transport,Post and Construction (MCTPC). MCTPC supervises the sector through a ViceMinister for P&T. From 1975 to 1982, P&T services were an integral part ofeach provincial administration. In 1982, they were reorganized into 17autonomous provincial P&T enterprises, each one headed by a directorreporting both to the provincial administration and directly to the ViceMinister for P&T. Under the ongoing IDA-supported Project, the 17 provincialunits were merged into a single, autonomous state ent rprise, EPTL, which xaslegally established on January 1, 1986. Its statutes and internal regula-tions were approved by MCTPC on May 13, 1987. EPTL is dtscussed in detailin chapter IV.

3.02 Most piivate and public sector requirements for telecommunica-tions services are met by EPTL's network, although some entities (e.g., thenational power company, air transportation aid defense) operate private radio

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circuits under license from MCTPC. Radio and television are operated by theNational Committee of Press, Radio BroadcastiVg and Television.

Existing Facilities

3.03 As of June 30, 1989, the total telephone exchange capacityinstalled in 17 automatic exchanges and 67 manual exchanges was 8,500 lines,87X of which are automatic lines, with 6,500 lines connected. V'entiane,served by conventional electro-meehanical exchanges, has an installedcapacity of 5,25( lines (62X of total+, and 4,500 connectad lines (S92 oftotal). The exis.ing plant and equipment are very old and largely obsolete.Unavailability of spares prevents the utilization of full capacity. Thelocal cable distribution network is partly underground, but essentiallyconsists of open wire lines, generally in very poor condition. Telephoneservice in main population centers is based on automatic exchanges,interconnected, however, by manually-operated high-frequency (HF) radiolinks. International telecommunications are provided through four outlets:an HF link with Hong Kong, a microwave link with Bangkok, and satellite linkswith Hanoi and Moscow, all of them manually operated. International telexservice is available in Vientiane only, through a manual exchange withcapacity for 190 lines, of which 130 lines have been out of service since1980 due to the lack of parts and accessories. Domestic and internationaltelegraph service is available in about 100 towns, but telegrams aretransmitted manually by Morse code on HF-radio systems using diverseequipment operated on a shared-time basis. Public telecommunicationsfacilities across the country are shown in nnex 3.1.

Ouality of Service

3.04 As yet, there are no reliable statistics on fault rates andservice quality indicators, although this is being addressed under theongoing IDA project. However, practical experience with using the systemindicates that the quality of service is very poor. Equipment malfunctionsand system congestion cause high rates of failure in local (intra-urban),interprovincial and international telephone calls, as well as in telex calls.Telegrams contain many errors in transmission. The unacceptably poor qualityof service is mainly caused by: (a) outdated and often obsolete equipment;(b) lack of spare parts and tools; (c) poor maintenance; (d) practical non-availability of high quality local, long distance, and internationalfacilities; and (e) virtually no traffic management. Under the first IDACredit, EPTL is attempting to marginally improve existing facilities and tobuild up the necessary database which will allow a focused maintenance andoperations program. Under the proposed Project, EPTL would replace obsoleteequipment, introduce modern digital technology, systematize maintenance andintroduce standard traffic management.

Access to and Usage of Service

3.05 The average telephone density in LAO PDR of only 0.16 lines per100 population is among the lowest in the world, although comparable withthat of countries with similar per capita income (eg. Nepal and Burundi).But the quality of service in Lao PDR is considerably worse due toinsignificant investments in the recent past as compared with thosecountries. Limited telephone service is available in all provincial capitals

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and other 66 minor towns. The number of public phones has declined due tolack of spares. Domestic telephone traffic, in practice, is limited to localcalls, since the poor quality of HF-links between cities virtually pzeventssizeable interprovincial traffic from materializing. Even with the new HFsystems being installed under the first IDA project, the domestic long-distance telephone traffic will remain very limited. Instead, telegrams areused widely. International calls, via the limited facilitics available, arepossible only from and to Vientiane, have to be booked through an operator,and encounter long delays. While telex could be a substitute, its extremelylimited effective capacity prevents wide use for internationalcommunications. Data on historic capacities, subscriber numbers, trafficflows, and revenues are shown in Qpnex 3.2.

3.06 In spite of the extreme limitations of the existing network,growth of traffic has been significant and in some cases exceptionally large.As can be seen in Annex 3.2, annual growth rates of several trafficcategories have exceeded 25% between 1985 and 1988, reflecting the risingdemand for service since the introduction of economic reforms. In thedomestic traffic categories, the long distance telephone traffic has shownexceptional growth (70%), albeit from a very low base. As a result of theopening of the country to the rest of the world, international traffic growthhas also been significant (telephone: 26%, telex: 22X, and telegram: 7X p.a.,respectively) in spite of the poor service quality. International trafficin 1988 accounted for 59Z of EPTL's operational r-venues. Detaileddistribution of traffic over the available links, and from and to majordestinations, is shown in Annex 3.3. According to that data, telephonetraffic to and via Bangkok represents over 80% of total internationaltraffic, due among other reasons to the relatively superior quality of thatlink. On the telegraph, US traffic dominates with 62% of incoming and 15%of outgoing telegrams. Telex traffic is more evenly distributed, with majorcorrespondence countries being Thailand, Japan, Australia, USA anId USSR.

Demand for Service

3.07 Recent studies by EPTL consultants have attempted to assessdemand in Vientiane to decide the location of a future exchange and line con-centrators, and to estimate major provincial demand development. Thesestudies suggest that in Vientiane 52% of subscribers are residential, 31%are business subscribers, 9% are official Government lines and 8% are linesof foreign organizations and persons. The seemingly high residential figureis known to include residential connections of government officials andmanagers of state-owned enterprises. Based on the above studies, suppresseddemand in Vientiane alone is estimated at around 1,500 to 2000 lines, but cannot be quantified exactly. Partly because of the virtual impossibility ofgetting a telephone line, and partly because of the poor quality of service,potential subscribers are discouraged from even applying for registration ona waiting list. In the provinces, indications regarding demand areunavailable altogether. Demand forecasts have therefore not been prepared.Instead they have been approximated by supply forecasts for Vientiane andfive major provincial capitals by EPTL staff and its consultants on the basisof present capacities and traffic levels in existing facilities, theevolution and distribution of the population, observed economic activity andgrowth projections, and experience in other countries at similar levels of

development. These estimates, considered reasonable, are contained in theProject Document File, and are summarized in Anpex 3.4.

Sector Constraints

3.08 Operation of the existing telecommunications system anddevelopment of the sector have been constrained by a number of factors,including: (a) obsolescence of much of the existing equipment and m%terialsused in the sector, and the unavailability of spare parts to maintain andoperate the system adequately, causing inadequate service; (b) the lack oflocal expertise and experience at all levels of system operation, resultingin a lack of planning, loose management and poor maintenance of facilities;(c) until recently, the lack of a comprehensive framework for investmentplanning; (d) inefficient procurement practices; and (e) severe under-investment in the sector because of relatively low priority assigned to thesector in the past in the light of limited resources and high initial cost.

Government Obiectives and Strategy for the Sector

3.09 The G-overnment of Lao PDR recognizes the importance of a wellfunctioning telecommunications network to a vigorous economic developmentexpected to be spurred by its new economic policies. Thus, in the comingdecade, the Government's major objectives for the sector are to (a) improvethe quality of telecommunications, (b) increase access to telecommunicationsservices to a larger number of economic agents, (c) increase operationalefficiency through improved management and organization of EPTL, and (d)generate increasing revenues for cost recovery and resource mobilization (fornetwork development investments, as well as, in the future, for transfer tothe Government).

3.10 Government's strategy for future development in the telecom-munications sector is to (a) establish and expand a modern network, based ona comprehensive plan, to assure meeting the rapidly growing demand fortelecommunications services across the country, (b) introduce digitaltechnology to assure high quality service, (c) strengthen EPTL, and (d)separate the telecommunications from postal services, to permit a greaterfocus of attention on telecommunications' specific problems snd to assureadequate revenues for the substantial new investment needed to replace ob-solete equipment.

Bank Group's Experience in the Sector

3.11 The Association's only previous involvement in the sector is theongoing Telecommunications Rehabilitation and Technical Assistance Project(para. 1.02) for which a Credit (1684-IA) of SDR 3.5 million (US$3.9 million)was made available to EPTL in 1986. That project comprises: (a)rehabilitation and limited expansion of the country's telecommunicationssystem; (b) rehabilitation of the postal system; (c) improvement ofwarehousing and repair and maintenance shops, and strengthening of all othergeneral support facilities; and (d) technical assistance and training inmanagement and organization, finance and accounting, investment planning,project engineering, operation and maintenance. The ongoing project is partof the Government's 1986-90 sector investment program, which has a total costof US$8.7 million and is being supported partly (for training and technical

assistance) by the United Nations Development Programme (UNDP), with theInternational Telecommunications Union (ITU) acting as executing agency.

3.12 The project start-up was delayed by over a year, mostly due todelays in appointment of UNDP-financed consultants by ITU. The project scopealso had to be modified: The envisaged rehabilitation and expansion of thetelephone system with second-hand conventional exchanges, an importantcomponent of that project, proved non-feasible due to lack of suitableexchanges which could have been refurbished, transported and installed withinEPTL's system at reasonable cost. Therefore, the envisaged second-handequipment was substituted by a small new digital exchange (1,024 lines) inVientiane to meet the most immediate needs of that city. Care has been takento allow for effective redeployment of that exchange in the future: Theexchange is portable and will be transferred to Pakse under the proposedProject. Having overcome these initial problems, the project has beenproceeding satisfactorily, and is now expected to be completed by June 30,1991 as scheduled.

Rationale for IDA Involvement in the Proposed Project

3.13 The increased pace of the Lao PDR economy as a result of majorreforms will not be sustainable with the telecommunications system now inplace. There is consequently a pressing need to modernize, integrate andexpand the country's existing telecommunications network to support continuedeconomic development. In view of the urgency for this investment,preparati,on of the proposed Project which will initiate major systemmodernization and expansion and continue institutional support, has thereforebeen accelerated at Government's request and with the cooperation of UNDP andITU. Under on-going UNDP financing, a new reinforced consultant team hasbeen selected in 1989 by ITU on the basis of IDA-prepared terms of referenceto accommodate continued implementation of the ongoing project and to advancedetailed preparation of the proposed Second Project (para. 4.07). Theproposed Project reflects IDA's overall strategy for its operations in LaoPDR, namely: (a) to foster economic integration through an emphasis on vitalinfrastructure development; (b) to support Government efforts, directly andindirectly, to upgrade operations of public enterprises; (c) to stimulatedevelopment in distant regions; and (d) to foster growth of the privatesector and development of human resources.

3.14 With the proposed Project, IDA will continue to supportinstitutional improvement in EPTL and development of its human resources.Most importantly, the proposed Project will finance the majority ofinvestments included in the Government' s comprehensive Investment Programfor 1990-95, which was prepared with Association assistance and was designedto assure the first phase of a rational and coordinated network development,with appropriate donor coordination (para. 5.01).

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IV. TEE BENEFICIARY - EPTL

En�ib iii les

4.01 EPTL is an autonomous enterprise in charge of the administrative,technical and commercial activities related to the provision of pe�t andtelecommunications services. Within the supervisory framework of MCTI , EPILis responsible for (a) establishment of its service targets, investmentprograms and operational plans; (b) development of action programs forachieving these targets, including schedules, budgets and procedures; (c)management of its own budget; (d) contracting of goods and services withlocal or foreign firms; (e) collection of revenues and meeting of liabilitiesboth in the country and for international services; (f) proposals for ratesand tariffs; and (g) establishment and implementation of personnel programs.However, limitations in experience of management and staff of EPTL (para.4.03) represent major constraints to its ability to meet these obligationseffectively. This will continue to be addressed iz�der the propoa�ed Project(para.4.06).

Organization and Management

4.02 EPTL is headed by a General Director who, along with theDepartment Directors and the Chief Accountant, is appointed by the Ministerof the MCTPC. EPTL is organized into six departments for Telecommunications,Posts, Projects, Provinces, Finance, and Administration (see Annex 4.1 forEPTL's present organization chart). Operational Unit Chiefs are appointedby the Departmental Directors � concurrence with the General Director.While EPTL's present organization has served the company adequately, themajor investments contemplated under the upcoming Program 1990-95 willnecessitate some changes in its organization, as well as the assistance oftechnical experts. The expected organizational changes will (a) establisha Development Department by reorganizing and strengthening the existingProjects Department, (b) streamline the Telecommunications Operations andFinance Departments, and (c) temporarily provide a Project Management Uniton a departmental level (para. 5.14 and Annex 4.1). During negotiations,EPTL provided an undertaking to establish the Project Management Unit byMarch 31, 1990 and to implement the other changes by end-1990.

Human Resources and Training

4.03 As of December 31, 1988, EPTL's staff totalled about 1,350, ofwhich 591 are assigned to functions of the telecommunications services (Annex�). Only 41 of total EPTL staff are engineers, 34% are technicians ofvarying levels of formal education and experience, and 31 work in finance andaccounting. Vientiane HQ employs 371 of the total staff. Present telecom-munications staff amount to 123 per 1,000 lines, which is high. While thecompany shows over-staffing at many levels of the organization, expertise islimited, and key staff are in need of training.

4.04 While some on-the-job training is being conducted under theongoing IDA-supported project, progress in this regard has been slow becauseof the lack of Lao-speakit� technical experts and the lack of French- orEnglish-speaking EPTL staff. EPTL has started with the development offoreign language skills of high level and technical telecommunications staff

and the proposed Project will support EPTL in these efforts in the contextof the envisaged human resource development program (para. 4.05).

4.05 EPTL's management recognizes the need to reinforce training,formally and on the job, both abroad and at home. The company is alreadymoving in several directions: Several engineering students, presentlystudying abroad, are to join the company shortly. EPTL is also applying forvarious short- and medium-term training opportunities in several countriesincluding Australia, France, and Thailand. Moreover, EPTL has recentlyengaged in a twinning agreement with the Telecommunications Authority ofThailand (TOT), which will allow it to take advantage of the relatedlanguages, Thai and Lao. Nevertheless, EPTL requires a more systematicstaffing and manpower development program to be implemented as part of itsInvestment Program 1990-95. Such a program has been developed recently byEPTL, supported by ITU, and includes a staffing plan and a comprehensivetraining program to the year 1995. The human resource development program(see Project File) was reviewed and agreed at negotiations. EPTL has agreedto implement it under the Project with the assistance of consultants accep-table to the Association.

Technical Assistance

4.06 Whereas EPTL has the required autonomy on paper, the scarcity ofexperienced managem'.nt at all levels in EPTL and the lack of an adequatemaragement information system result in substantial intervention by MCTPCand other Government entities at even routine operational matters on a dayto day basis. The first IDA project has made a start in improving EPTL'soperation, maintenance and planning capabilities but technical assistanceneeds to be continued. The proposed Project is designed to strengthen EPTL'smanagerial and institutional capabilities further. The technical assistanceteam to be provided under the Project will support EPTL in its continuedefforts to improve its policies, organization, procedures and operations inaddition to providing training services (para. 4.05) and project managementservices (para. 5.13). An outline of terms of reference is provided in Annex4 3.

4.07 Recently, a new, increased consultant team has been recruited byITU on tl.e basis of terms of reference prepared by IDA. The new team startedwork in November 1989, to reinforce technical assistance to EPTL under thefirst project, as well as in the context of detailed preparation of theproposed Project. That team, subject to satisfactory performance, will bemaintained by EPTL for technical assistance and project management under theproposed Project. In any case, as a condition of effectiveness of theproposed IDA credit, EPTL will appoint consultants, accepLable to theAssociation (Contract Approval), to provide assistance in project management,as well as to assist in training, institutional and financial development,planning, operation and maintenance.

Financial Management and Accounting System

4.08 According to the NSEM, and based on EPTL's Statutes, the companymanages its financial affairs autonomously. With the goal of financialautonomy in mind, EPTL must apply in a timely manner for tariff adjustments,which are authorized by MCTPC in coordination with the Council of Ministers.

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Whereas tariffs and investment programs are subject to Government approval,the company is empowered to incur and service debt, to charge its customersfor services rendered, and to accumulate retained earnings. While EPTLfinancial data are basically sound, the financial management and informationsystem now in place does not allow EPTL to adequately carry out its rightsand obligations relating to rational financial management: Up to now, EPTLhas used the traditional system of accounts mandatory for all publicenterprises in Lao PDR. This is known as the "CVM" system: C, V, and Mstand for three categories of accounts (material and equipment related, laborrelated, and profit related, respectively) used for reporting operationalactivities to the Government and for assessing taxes and profit shares ofboth the Government and the company. No balance sheets and fund-flowstatements are prepared. EPTL's accounts in the past have been kept on asingle-en;ry cash basis, with revenue accounts in Vientiane separated forpost and telecommunications, but with provincial accounts and all expenditureaccounts on a joint basis. While accounts in Vientiane are kept up-to-date,some provincial accounts, particularly for the more remote provinces, havebeen kept erratically, or not at all.

4.09 Under the ongoing IDA project, technical assistance is beingprovided to improve the company's accounting and management informationsystem. A consultant is assisting EPTL to introduce double-entry bookkeepingand a rationalized charter of accountm, which would eventually allow for theseparation sf postal and telecommunications accounts. However, it has notyet been ponsible to finalize the new charter of accounts, because it mustbe synchronized with a new nation-wide accounting system for publicenterprises developed in the context of NSEM, which was finalized in end1989. EPTL and its consultants have been coordinating their efforts withthese activities. During negotiations, EPTL has agreed to (a) establish,review and agree with IDA by end-1990 , a system of accounts for EPTL, (b)train staff in Vientiane and the five major provinces in its use during 1991-92, tc) apply the system from 1993 in Vientiane and the five major provinces;and (d) submit to IDA bv end-1993 plans for improving accounting systems inthe remaining provinces. EPTL has also provided an undertaking to implementthe plans for an improved accounting system in the remaining provinces during1994-95, and to fully separate its postal and telecommunications accounts inVientiane and the five major provinces effective January 1, 1994.

Billing and Collection

4.10 EPTL's billing and collection performance has improved to someextent in the last two years but still falls short of performance targetsagreed under the ongoing IDA project. Except for international calls, forwhich private and foreign subscribers are billed every 10 days and must payin dollars, billing is on a monthly basis in Vientiane and the major provin-ces, and on a bi-monthly basis in more remote provinces. In theorycollection should be good, given the existence of strict disconnectionprocedures. In reality, procedures have not been enforced rigorously, andEPTL still has accounts receivable with Government and private subscribersg:.ing back to 1983 and 1985, respectively, and, in the aggregate, amountingtv over 5 months and 2.5 months of present billing, respectively. TheGovernment has recently become aware of major problems of bad debts andcross-arrears throughout the economy. It therefore has started to identifythese arrears, and is preparing a clearing mechanism for eliminating them by

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balancing arrears against taxes and payments due to the Government. Duringnegotiations EPTL has agreed that it will implement the program, shown InAnnex 4.4, to (a) collect, or i, not possible, write off, prior to end 1990accounts receivable predating 1988, and (b) maintain arrears of Governmentclients and private customr... to below 3 months of billing thereafter.

Audit

4.11 EPTL is subject to the normal Government audit, carried out bythe Committee of Control and Audit which was established in 1985 with thestatus of a ministry. Independent auditing firms are presently not operatingin Lao PDR. EPTL's financial performance is audiced, in a limited manner,on the basis of EPTL's income statement, derived by the CVM system. Whilethere is room for improvement, for present purposes the existing system isacceptable. Moreover, given the major changes now being introduced in thefinancial information systems of public sector enterprises, improvements ofauditing procedures are expected to evolve as well. On the other hand,technical assistance is needed to establish and finalize a simple buteffective charter of accounts for EPTL, and to train its financial staff inVientiane and the provinces in its use. This is scheduled to take placebetween 1990 and 1992. During that period, EPTL's financial department wouldbe strengthened to permit, starting in 1993, preparation, on a quarterlybasis, of balance sheets and fund-flow statements. in addition to the incomestatements, already being prepared now (para. 4.09). During negotiations,EPTL has agreed that unaudited annual financial statements will be submittedto IDA within six months of completion of the fiscal year. Government-audited annual statements will be submitted within nine months after the endof the fiscal year (para. 5.21).

Performance Monitoring

4.12 Under the first project, EPTL, assisted by consultants and IDAstaff, has started to develop a technical and financial database which willbe an important part of a management information system. This will allowperformance to be assessed against agreed targets and provide a useful toolfor future network planning. Although the poor state of some of the exist-ing equipment does not allow systematic reading of technical data on acontinuous basis, EPTL should, nevertheless, be able to take samplemeasurements at this time to provide some approximation of actual data. Withnew equipmert installed the continuous reading will be feasible. Under theproposed Project, performance monitoring based on agreed indicators projectedfor two years, will be possible (para.5.19).

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V. THE PROGRAX AND THE PROJECT

Introduction

5.01 The Government has recognized that it must improve thetelecommunications system rapidly and comprehensively, but 72cks thefinancial resources to carry out a major modernization and expansion program.Several bilateral donors had earlier expressed interest in providingfinancing for certain parts of the system's development. To allow for arational and comprehensive development across the country, the Governmentrequested the Association to assist in developing and financially supporcinga medium-term investmen_ program, which would provide the first essentialpart of a nation-wide telecommunications network, and would allow forrational donor coordination. In this way, procurement would be possiblebased on predetermined standards and parameters, with individual networkcomponents selected and integrated into a coherent overall network develop-ment plan. A telecomimunications investment program for the period 1990-95(the Program) was therefore recently developed by EPTL, assisted by itsconsultants and IDA staff (Annex 5.1). The Program will help implement theGovernment sector strategy (para. 3.10).

Investment Propram 1990-95: Objectives

5.02 The basic objectives of the Program are, to:

(a) establish the first phase of a national telecommunicationsnetwork that will connect Vientiane with the north (LuangPrabang) and the south (Pakse) through a microwave backbone, willsupport future system development in other provinces and ruralareas, and will provide efficier._ links from that initial networkto internatioral networks;

(b) improve the quality of, and access to, telecommunicationsservices (domestic and international) in Lao PDR, throughmodernization and expansion of existing facilities, replacementof obsolete equipment, and introduction of new technology(digital transmission and switching, international links); and

(c) pursue the institutional strengthening of EPTL, to make it anefficient and effective sector service enterprise able toshoulder increased responsibilities as a result of the autonomynewly granted to state-owned enterprises.

Investment Program 1990-95: DescriRtion

5.03 The Program comprises (a) ongoing works, and in particular (i)the first IDA project (para. 3.11, 3.12), (ii) an earth satellite stationfinanced by Australian aid to improve and expand international telephonetraffic, presently under implementation, (iii) a microwave connection fromVientiane to nearby Paksane, financed by French aid, and (iv) miscellaneousradio telephone installations in remote provinces to be financed out of EPTLcash generation; and (b) the proposed Second IDA Project (paras. 5.04 ff);(see Annex 5.1). The total cost of the Program is estimated to amount toabout US$43.3 million (excluding interest during construction). It is

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important to note that the Program will increase the value of EPTL's assetsby a factor of about 17. Thus, during the next six years, EPTL's mostprominent activity will be the implementation of that Program. The Programis acceptable to the Association and was endorsed by the Government inSeptember 1989. During negotiations the Goverrment and EPTL have agreed thatthey will carry out an annual review and update of EPTL's Program inconsultation with the Association.

The ProRosed Proiect

5.04 The proposed Project is an integral part of EPTL's InvestmentProgram 1990-95 and meets the sector's most pressing needs for equipmentmodernization, network development and expansion. It also provides technicalassistance for project management, staff training, and the institutionaldevelopment of EPTL. Moreover, it will assist EPTL in planning networkevolution beyond 1995, and in developing future investment programs.

Project Obiectives

5.05 The objectives of the proposed Project are to: (a) carry outpriority investments in the sector, particularly th.e first phase of a nation-wide digital telephone network, and improve international telecommunicationsservices; (b) strengthen EPTL's capabilities in the area; of planning,project implementation, operations, maintenance and financial management; and(c) develop EPTL's human resources.

Proiect DescriRtion

5.06 The Project will comprise the following components (details inAnnex 5.1):

Part A: Telecommunications Facilities

(a) Switching Facilities and Cable Plant

(i) Supply, installation and commissioning of digital telephoneexchanges in Vientiane and four provincial capitals, and transferof a small digital exchange from Vientiane to a fifth capital;total capacity of about 15,000 lines.

(ii) Concomitant supply, installation and commissioning of localnetworks, subscriber connections and installation of public cailfacilities in the six cities. Several of the out-lying provinceswill benefit from the transfer and installation of equipment fromVientiane and the five provincial towns which is being replacedwith more up-to-date equipment;

(b) Long Distance Transmission Network

Supply, installation and commissioning of a digital microwave routefrom Luang Prabar.g, via Vientiane, to Pakse, interconnecting the sixcities, mentioned above, for national and international traffic.Access roads to, and foundations of, certain microwave repeaterstations. The system would be expanded in the future to accommodate

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interconnections to other provinces. Multiplex equipment willinitially provide 30 telephone circuits between each two of thesenodes.

(c) Ancillary Eguipment and Civil Works

(i) ancillary equipment for the above facilities and the generaladministration of the network, including about 50 publictelephones and booths;

(ii) buildings for telephone exchanges and cable storage;

(d) Sugervision of Maintenance and Operations

Suppliers for switching facilities and transmission network willsupervise maintenance and operations for one year after commissioningof the equipment.

Part B: Technical Assistance

A total of about 180 staff-weeks for:

(i) Management of the total scope of the work related to EPTL'sProgram.

(ii) Institutional development, including strengthening of EPTL'scapabilities in management, corporate planning, finance andaccounting, engineering, operations and maintenance.

Part C: Training

In addition to training provided by the equipment suppliers (switching: about20 staff-months (s-m) overseas and about 5 s-m on site; transmission: about10 s-m overseas and 5 s-m on site), the Project includes about 6 s-m ofassistance in Lao PDR by a training expert, as well as foreign training forEPTL's staff (total of 300 s-m).

Project Cost

5.07 Total costs of the Project are estimated at about US$38.6 millionequivalent (Kip 23.1 billion), with a foreign exchange component of US$35.9million equivalent (Kip 21.5 billion) or 93X of total Project cost. Projectbase costs have been estimated in mid-1989 prices based on experience withother projects recently financed by the World Bank Group, quotations obtainedby EPTL's consultants, and experience during the first project. Local costs,have been estimated in US dollars and converted to Kip at the exchange rateof US$1 - Kip 600 (July 1989). These costs are shown in Table 5.1 and aredetailed in Annex 5.2.

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Tabl- 6.1: Ea.imated Project Cost

Local Foreign Total Local Forotgn Total Forelon as XComponents Kip, Million a/ USt Million of Total Coat

SECOND IDA PROJECT

Telcphone Exchanges 0 6,916 6,916 0.0 9.9 9.9 100.0Transmission Systes 658 6,284 6,792 0.9 8.7 9.7 90.4Outside Cable Plant Boo 4,610 4,869 0.6 7.6 8.1 92.6 tPower Plant 0 8S6 856 0.0 0.6 0.6 100.0Buildings 16O 162 812 0.8 0.8 0.6 48.8Miscollaneous 0 189 189 0.0 0.3 0.8 100.0Tech. Assist. A Proj. Mgt. 167 1,410 1,667 0.3 2.8 2.6 90.0Training 60 889 898 0.1 0.6 0.7 86.0

Total eess Cost: 1,294 18,106 19,899 2.2 80.2 82.8 98.8

Physical Contingencies 129 906 1,035 0.2 '.5 1.7 67.6Price Contingencies 187 2,528 2,710 0.8 4.2 4.6 98.1

Totel Project Cost: 1,610 21,684 28,14* 2.7 35.9 88.8 98.0

Interest during Construction: 1,820 860 1,680 2.2 0.6 2.8 21.4

Total Financing Required: 2,980 21,894 24,824 4.9 88.5 41.4 88.2

f/ Exchange Rate: US$ 1.00 = Kip 600; tho Project !v exempt from duties A taxes

5.08 Based on Lao PDR legislation the import of goods and servicesunder the Project will be exempt from taxes and duties. Physicalcontingencies are estimated at 52 on foreign components and 102 on localgoods and services. Because all costs, including local costs were estimatedin US dollars, the price contingencies are calculated, based on the expected

international rates of 7.2Z in 1990 and 4.4Z for 1991-95. Costs fortechnical assistance are based on average staff-month costs (includingsalaries, fees and international travel) of US$14,300 for foreignconsultants. Technical assistance including project management and trainingare expected to require about 190 staff-months of experts services.

Capitalized interest during construction has been added at the rate of 82 forthe foreign funds onlent by the Government to EPTL. The foreign portion ofinterest during construction reflects EPTL's assumption of the foreignexchange risk on the IDA credit (para. 5.11).

Project Financing and Terms

5.09 The Project's detailed financing plan with proposed sources offinancing is shown in Annex 5.3 and summarized in Table 5.2.

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Table 5.2: PROJECT FINANCING PLAN

Source Local Foreign Total % of Total(US$ million equivalent)

IDA 1.4 23.1 24.5 59UNDP 0.1 1.1 1.2 3Japanese Government Grant 0.0 11.7 11.7 28EPTL 3.4 0.6 4.0 10

Total 4.9 36.5 41.4 100

5.10 The proposed IDA credit will cover 59% of total financingrequired for the Project, including 63% of needed foreign exchange financingand 29% of local cost financing, and will be made available to the Governmenton standard terms. It will finance the microwave transmission system,including access roads, civil works and steel towers for the repeaterstations- cable, wire, accessories and construction of the outside cablenetworks, subscriber terminals; power plants and other miscellaneousequipment; buildings to house exchanges and other facilities; and asubstantial portion of technical assistance and ..zLaining (see also Annex5.3). UNDP, which has made a written commitment to provide grant funds torProject financing, would cover ani important part of training and technicalassistance, and miscellaneous small supplies and equipmert for institutionbuilding purposes, amounting to a total of about US$1.2 million, or 3% oftotal financing required. The Japanese Government has confirmed that it willprovide a grant to cover the digital switching equipment for Vientiane andthe major provincial cities under the Project, which is estimated to costUS$11.7 million equivalent ( about 28% of total financing required). UNDP andJapanese grants will be administered by the respective cofinanciers. EPTL.based on financial projections (para. 6.12) would contribute US$4.0 milliolaor 10% of total financing required, including US$0.6 million in foreignexchange (foreign portion of interest during construction). EPTL would coverinterest during construction and participate in the financing of local costsof the transmission system and the cabling network. The financing plan, assummarized above and detailed in Annex 5.3, was agreed during negotiations.

5.11 The external funding for the Project will be passed on by theGovernment to EPTL in a manner intended to safeguard the company's financialviability throughout its major expansion. Thus, only a portion of the totalgrants and multilateral credits (US$37.4 million equivalent), i.e., 62% orabout US$23.2 million, will be on-lent on a pro-rata basis to EPTL followingthe standard terms used by the Government for lending to comparabieenterprises, which are: 8X interest, with a maturity of 20 years, includingfive years of grace. EPTL will carry the foreign exchange risk of the IDACredit. The remainder, i.e., 38%, or about US$14.2 million, will be passed

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from the Government to EPTL in the form of equity. During negotiations, thearrangements between the Government and EPTL for on-lending of funds,including carrying of the exchange risk, and for the provision of equity,have been confirmed. The signing of a subsidiary loan agreement between theGovernment and EPTL for the IDA credit and reflecting the above on-lendingterms will be a condition of effectiveness of the credit.

Retroactive Financing

5.12 Provision has been made for retroactive financing, under the IDAcredit, of eligible expenditures incurred after January 1, 1990. Theseexpenditures relate to items on the critical path (training and buildings),and are estimated to amount to about US$0.5 million (2% of the total Creditamount). All items financed retroactively will be procured in accordancewith World Bank Guidelines.

Status of PreRaration

5.13 The Program and Project have been prepared by EPTL and itsconsultants under the first IDA project, assisted by IDA staff. Afeasibility study for the Proje t was completed in September l189. Underthe ongoing project a reinforced consultant team started work in November1989. On the basis of the feasibility study and detailed supportiveanalyses, EPTL, in close cooperation with the reinforced consultant team, ispresently finalizing detailed design of all major Project components and issta'ting to prepare detailed specifications and tender documents forprocurement of goods and services. Assuming satisfactory performance of thereinforced consultant team, EPTL will retain its services during theexecution of the proposed Project under a contract for services in projectmanagement, technical assistance and training (para. 4.06). The Projectwould be executed over 5 years. The proposed schedule of project implementa-tion is shown in Annex 5.4. Effectiveness of the proposed IDA Credit isexpected for July 1990.

Project Implem4ptaion

5.14 EPTL will be responsible for implementation of the Project. Forthat purpose a Project Management Unit comprising EPTL's consultants and EPTLstaff will be in charge of project management (para. 4.02 and Annex 4.1,.Switching and transmission systems will be provided and installed on a turn-key basis (excluding buildings) by suppliers who will also be supervisingmaintenance and operations for one year after commissioning of equipment.Construction of the cable distribution network (including civil works; turn-key basis) and buildings will be contracted by foreign firms or foreign-localjoint ventures. The implementation of contracts for telecommunicationsequipment and cable network will be supervised by EPTL staff and itsconsultants. Supervision of building execution will be contracted with localengineers.

Procurement

5.15 In view of EPTL's limitcd project preparation and executioncapabilities, the proposed Project has been structured around a minimumnumber of three major turn-key packages (telephone exchanges, transmission

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systems, and cable networks), with about 8 smaller packages comprisliigsubscriber terminals (telephones, PABXs, telex terminals), subscriberinstallation, power plant, miscellaneous equipments and supplies, andbuildings. Detailed design and preparation of procurement documentation iillbe carried out by EPTL in close cooperation with the reinforced coinsultantteam, who will provide project managemenc services as well. Provilreie"ittarrangementsg/ are summarized in Table 5.3.

Table 5.3: Project Procurement Plan(US$ rAillion) a/ DJ

Project Item ICB LCB LIB Other Total

Telephone Exchanges 11.7 11.7Transmission System 11.8 11,8

(10.9) (10.9)Cable Network 7.5 7.5

(7.5) (7.5)Subscriber Connections 0.5 0.5

(0.2) (0.2)Subscriber Terminals 1.3 0.2 1.5

(1.3) (0.2) (1.5)Miscellaneous Equipment 0.7 0.3 0.1 1.1

(0.7) (0.3) (1.0)Buildings 0.6 0.6

(0.6) (0.6)Tech. Assist. & Proj. Mgt. 2.6 0.5 3.1

(2.6) (2.6)Training 0.8 0.8

(0.2) (0.2)Total Procurement 24.4 0.6 0.5 13.1 28.6

of which IDA financed (23.2) (0.6) (0.5) (0.2) (24.5)

a/ Contingencie' are included in above figures.h/ Figures in parentheses indicate IDA financing.

5.16 Contracts for about US$23.2 million (including contingencies)frr supply of goods and services (transmission syst A, cable network,

VJ Procurement in Lao PDR was previously centralized through SocieteLao Import-Export, attached to the Ministry of Commerce. While this agencydid acquire considerable experience in international competitive bidding(ICB) under earlier IDA credits, there ,ere frequent delays in the evaluationand approval process by inter-ministerial committees. The Government has nowassigned direct procurement responsibility to the Ministries, provincialauthorities and parastatals concerned, which should result in faster and moreefficient procurement, bearing in mind that many of these agencies havealready become familiar with ICI procedures. Through the first IDA fundedproject EPTL is now well familiar with procurement procedures.

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subscriber terminals and connections, and power plant) will be awardedfollowing international competitive bidding (ICB). Miscellaneous items ofequipment, materials and construction services, in packages less chanUS$100,000 and totalling up to US$1.5 million will be procured underproced.ures of limited international bidding (LIB), local competitive bidding(LCB), or international or local shopping. It is expected that local/foreignjoint ventures will compete for building construction (LCB). IDA-financedcontracts above US$ 100.000, with a total value of about US$23 million, willbe subject to prior IDA review of procurement documentation. IDA-financedcontracts with a limit of up to US$100,000 will be subject to post-awardreview. Procurement of IDA-financed consultant services for technicalassistance and training will be in accordance with the guidelines of theBank. Telephone exchanges, financed by a Japanese parallel grant, will bepurchased after competition among Japanese suppliers. The small amount ofUNDP-financed goods will be procured on the basis of limited internationalshopping, whereas UNDP-financed services (training, technical assistance)will be procured on the basis of ITU rules (ITU acting as executing agency).Details of goods and services to be procured under the Project, including IDAfinanced packages, are indicated in Annex 5.5.

Disbursements

5.17 The proceeds of the proposed IDA credit of US$24.5 millionequivalent will be disbursed against items as shown in Table 5.4. Fulldocumentation will be sent to IDA in support of all contracts for technicalassistance, and all contracts for civil works, materials, and equipmentcosting above US$100,000 equivalent; whereas itemized statements ofexpenditures (SOEs) will be used for contracts (civil works, materials, andequipment) below US$100,000. The SOE supporting documentation will beretained by EPTL and will be made available for review by IDA on request.IDA financing for local expenditures will be net of taxes and duties.

Table 5.4: DISBURSEMENT OF THE PROPOSED IDA CREDIT

Amount Percentage of(US$ Mln.) Expenditures

to be Financed

A. Supply,Installation and Commissioning of:- Transmission System 9.4 1001- Cable Network 6.4 100X- Subscriber Connections 0.2 1001

B. Materials and Equipment- Subscriber Terminals 1.2 1001- Miscellaneous Equipment 0.6 100X

C. Buildings 0.5 1001D. Technical Assistance 2.2 100XE. Training 0.2 '00XF. Unallocated 3.8

Total 24.5

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5.18 To facilitate disbursement, a Special Account of US$1.2 million,representing four months of estimated disbursements over the life of theProject, will be established with Banque pour le Commerce Exterieur Lao(BCEL) in Vientiane. Applications for replenishment will be submitted toIDA on a monthly basis or whenever the aceount is drawn down by one third ofthe authorized allocation, whichever comes first. The proposed credit isexpected to be fully disbursed by June 30. 1997. The estimated schedule ofdisbursement (Annex 5.6) is based on the Bank's standard disbursement profilefor telecommunications projects in Asia. (This choice is reasonable,providing a large sample with a majority of projects in IDA countries. On theother hand, the standard profile for all projects in Lao PDR is not suitable,since the sample is very small and distorted by profiles in sectors verydifferent from telecommunications). The closing date of the IDA Credit willbe December 31, 1997.

Performance Indicators. Project Monitoring. Auditing. and ReRorting

5.19 Historic (1985-88) and projected (1989-91) performance indicatorsare shown in &fX_J.Z. The projected indicator targets have been discussedwith EPTL during appraisal, and will serve as monitoring tools to gaugeEPTL's short and nedium term performance. Agreement with EPTL on targets for1990 and 1991 has been confirmed during negotiations. Agreement has alsobeen obtained that targets for each of the subsequent years, together withany necessary corrective measures, will be reviewed with IDA by Sepcember 30of the preceding fiscal year (para. 4.12).

5.20 A supervision plan is shown in Annex 5.8. During projectimplementation, EPTL will roport progress against pnysical indicators throughquarterly progress reports; progress against financial indicators will bereported by EPTL on a semi annual basis; those reports will be issued withinone month after the expiration of the period under review. Progress ofimplementation of the training and technical assistance programs will becovered in the quarterly progress reports.

5.21 EPTL will prepare and maintain project accounts in accordance withsound accounting practices. Project accounts will be prepared annually andwithdrawal applications will be supported by full documentation, except forexpenditures reimbursed against SOEs (up to 5 of total credit amount)certified by the Project Director. ttnaudited and audited financialstatements will be made available to IDA as stated in para. 4.11 above. Theannual audit reports of the Committee of Control and Audit will cover (a)project accounts, (b) the Special Account, and (c) Statements of Expenditure.The Special Account and SOEs will be audited separately from EPTL accounts.Such audits will contain a sep..ate opinion as to whether the disbursementsmade were used for the purpose for which they were intended under theProject. EPTL will prepare its portion of a completion report two monthsafter the closing date of the proposed credit. That report will contain anevaluation of the execution, initial operation, cost and benefits of theProject, as well as the performance of the Government, the Association andITU. It will also include lessons learned during project implementation.These arrangements have been confirmed with EPTL during negotiations.

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Vr. FINANCIAL ANALYSIS

Introduction

6.01 Given the centralized administration and the shortage of seniorexperienced managers, EPTL still has little autonomy (para. 4.06). While itenjoys operating freedom as a public sector enterprise, and nominally isresponsible for realizing satisfactory financial performance, it operatesunder tight supervision and control by the MCTPC. T1.e Government makes allmajor decisions regarding tariff levels, investment programs, and financialmanagement.

6.02 Until unification of the exchange rate in end-1988, the exchangerate to be used for recognizing foreign revenues, expenditures andinvestments was prescribed by the Government. Results of an historicfinancial analysis of EPTL will vary significantly depending on the exchangerate used. EPTL earns a substantial portion of its revenues (about 541 in1988) in US dollars and other convertible currencies from its internationsaloperations. Also, a significant porticn of its investments and currentexpenditures, directly or indirectly, involve foreign currencies. EPTL keepsseparate accounts for domestic and foreign currencies. The following reviewof financial performance from 1985 is therefore expressed in current dollarequivalents, using the parallel exchange rate obser-ved by the Government (s.'eTables 6.1 and 6.2). In this manner the significant over-valuation of theKip in the past (almost 900Z in 1985, about 300X in 1986 and 1987, and about10% in 1988) is largely eliminated.

Past Financial Performance: EPTL Consolidated

6.03 Considering the poor state of both its postal andtelecommunications assets, which to a large extent are obsolete, thefinancial performance of EPTL's consclidated P&T operations has beensurprisingly strong since its creation. Operations in VientianeMunicipality, where most of the international services are concentrated,account for an average of 801 of rovenue in any one year, but only for anaverage of 65% of operating costs. The substantial profits generated byVientiane, and to a much smaller extent in a few of the larger provinces,have easily offset small losses in all the other provinces.

6.04 Consolidated income statements and estimated balance sheets forEPTL since 1985 are detailed in _nnex 6.1 and summarized in Table 6.1 below.As can be seen, revenues from P&T operations between 1985 and 1988 have showna steady growth of 281 p.a., expressed in US dollar terms. This is very goodperformance, reflecting significant growth of domestic as well asinternational postal and talecommunications traffic. The growth in interna-tional P&T revenue of about 121 p.a. is mostly due to service levelincreases. By comparison, the significant increase of local Kip revenues ofalmost 781 p.a. (Annex 6.1) results both from some growth in domestic servicelevels and from increases of domestic P&T tariffs in 1985 and 1988 to offset,at least partially, the effect of major inflation and devaluations of the Kipat those times (para. 6.10). Annual average growth of about 13X in netincome after taxes from international operations between 1985 and 1988, isin line with international revenue growth. On the other hand, growth of netdomestic income after taxes, expressed in Kip terms (on average about 28X

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during the same period), is significantly below the growth in domesticrevenues (78X), indicating a relative deterioration of the profitability ofthe domestic operations. In other words, net income on domestic operationsgot squeezed between tariffs declining in real terms and costs increasingsignificantly due to inflation. Fortunately, international operations, inspite of relatively poor-quality service, are carrying EPTL financially toa large extent.

Table 6,1: EPTL ConsolidatedFinancial Performance, 1985-89(Current US$ '000) a/

6 MonthsYear 1985 1986 1987 1988 1989

US $ 1.00 - Kip 340 410 395 420 450

Operating Revenues 877 1328 1592 1850 1181Of which in FX 648 835 1031 1005 na 9

Operating Expenses 400 660 810 1007 591(Incl. Depreciation)

Operating Income 477 668 783 843 590Interest Expense 0 0 24 28 12Net Income after Taxes 415 510 575 627 375

IndicatorsCurrent Ratio 1.12 1.30 1.46 1.63 naOperating Ratio 0.46 0.50 0.51 0.54 0.50Return on (Hist) Assets 41% 33X 35% 20% na

a/ Based on the Parallel Exchange Rate as observed by Governmentand shown in the table.

na not available

6.05 On the domestic side, the financial performance of EPTL needscareful monitoring. The substantial devaluations of the Kip in 1986 and 1988were accompanied by relatively small increases on domestic tariffs (onaverage about 200% in late 1985 and about 50% in mid-1988) (para. 6.10).During tFe same period, however, domestic operating expenses expressed inKip, incieased by 640%. Due to continuing inflation and devaluation sincemid-1988, domestic revenue continues to decrease in real terms. Moreover,recently, operating costs in Kip terms have been rising significantly fasterthan general inflation, due to (a) significant increases in wages andsalaries, and (b) the effect of continuing devaluation of the Kip on the costof spares, materials and fuel (all imported). Although the projected 1989performance will be acceptable overall, the tariff increases of 1988 were notsufficient to offset the double impact on profitability from the substantialinflation of operating costs and the relative decline of domestic revenuesin real terms (para. 6.10).

6.06 EPTL's operating ratio, ranging between 46% and 54% during thefour year period, is low. This low ratio reflects the past low level ofinvestments and resulting low levels of depreciation, as well as the low

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level of salaries, particularly for managers and technical personnel. Debtservice coverage ratios remain meaningless, because up to mid-1987 thecompany carried no long term debt.

6.07 As of mid-1989, EPTL Consolidated is financially sound, both interms of liquidity and working capital availakle, and overall capitalstructure. Its recent current ratio of 1.6 is reasonable. Its conservativefinancial structure, with a debt/equitv ratio of less than 20/80, combinedwith high profitability, varying between 15X and 30X, illustrates EPTL'sfinancial strength. On the other hand, accounts payable ( US$975,000 at end-1988), mostly to Government and public sector enterprises, are high. Moresignificantly, EPTL's receivables (mostly public clients) were 30 X of totalrevenues and need to be reduced (para. 4.10).

Past Financial Performance: Telecommunications ODerations

6.08 Selected historic indicators for EPTL's Telecommunicationsoperations are detailed in ADnjLf_ and summarized in Table 6.2.

Table 6.2; EPTL Telecommunicetions OperationsFinancial Performance 1985-89(Current US$ '000) _/

6 MonthsYear 1985 1986 1987 1988 1989

US $1.00 - Kip 340 410 395 420 450

Operating Revenues 647 906 1034 1263 762Of which in FX 532 618 717 739 445

Operating Expenses 370 470 539 723 na(mInl. Depreciation)

Operating Income 278 322 494 540 naInterest Expense 0 0 20 20 naNet Income after Taxes 186 303 299 399 na

Indicators h/Operating Ratio 0.57 0.52 0.52 0.57 naTelephone Revenue/line (US$) 113.4 154.5 171.14 198.9 117.28Cash Op. Exp./line (US$) 14.9 49.8 53.5 62.5 na

A/ Based on Parallel Exchange Rate as shown in table.k/ Balance Sheet Ratios not available: only Consolidated

Balance Sheets exist.

The performance of EPTL's telecommunications operations has shown an upwardtrend similar to that of its consolidated operations, and has out-performedpostal services (Annex 6.3) during the period 1985-88 in terms ofprofitability: The after tax profits of telecommunications have grown fromabout US$185,000 in 1985 to almost US$400,000 in 1988 (i.e., by almost 281per annum), whereas postal services grew from about US$ 180,000 to only aboutUS$225,000 (only 71 p.a.) during the same period. The better performance of

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telecommunications is mainly due to the steady increase of telephone revenue,averaging 44% p.a. in current US$ terms. Using appropriate shadow exchangerates (parallel exchange rates as recorded by the Goverrnent), performanceof telecommunications remains positive, although the net loss on domesticoperations in 1987 (Annex 6.2) emphasizes the need for regular adjustmentsof domestic tariffs in line with inflation and exchange rate changes. Inspite of that good performance and acceptable financial ratios, the highlevels of accounts payable, and, in particular, of receivables, must bereduced (paras. 4.10 and 6.07).

Valuation of Assets

6.09 In the past, EPTL has occasionally revalued assets as a resultof a major devaluation of the Kip to maintain their value in US dollar terms(1986, see Annex 6.1). Revaluation of assets, to reflect replacement valueis a practice not used in Lao PDR. During negotiations EPTL has agreed thatit will (a) continue its practice of maintaining its fixed assets registeredin foreign exchange; and (b) for the purpose of its annual accounts, convertthe value of its fixed asset accounts to Kip at the rate of exchangeprevailing on the last day of its financial year.

Tariffsg

6.10 International telecommunications tariffs, while established inKip, have to be paid in foreign currency by all clients (except Ministriesof the Government). Moreover, these tariffs are converted to US dollars atthe exchange rate valid at the time the tariffs were announced. Thus, theyare being kept constant in US$ terms (except for the Government). While thisis an unusuail practice, it does not restrict the use of internationalservices by private customers, since FX is available in the market.International tariffs were last adjusted in July 1988, with an exchange rateof US$1 - Kip380 (Annex 6.4) and their overall level has remained acceptableas demonstrated by EPTL's past financial performance. For some services,tariffs are even high, when compared with other countries. Domestictelecommunications tariffs have been adjusted only twice since 1984, inOctober 1985 and in July 1988. The latter adjustment came late and bothincreases compensated too little (on average 200% in 1985 and only 50X in1988) for major inflation and devaluation since 1985. Since mid-1988, theerosion of domestic tariffs in real terms has continued. Thus, at present,most domestic tariffs (in particular the annual subscriber rental charge andthe local call rate) are very low, especially when compared with those of asample of other countries (Annex 6.4). Considering the presently high levelof inflation and the repeated devaluation of the kip, the appraisal missiondiscussed with MCTPC and EPTL the need to increase domestic tariffssignificantly. As a result EPTL has applied to the Government for domestictariff increases averaging between 80% and 100%, emphasizing the importanceof this matter for EPTL's financial health. Adjustments in domestic tariffsyielding an increase of about 80% of domestic revenues will, be a conditionof effectiveness. Because of certain inconsisten-.ies in the tariffstructure, EPTL has agreed during negotiations that its consultants willstudy the structure and levels of telecommunications tariffs prior to end-1990, taking account of EPTL's financial commitments and covenants. TheGovernment and EPTL have also provided an undertaking to adjust tariffs asneeded to meet financial covenants. Overall tariff adjustments yielding a

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telecommunications revenue increase of about 10 will likely be needed duringthe period 1991-95.

Projected Financial Performance: Telecommunications Operations

Strategy

6.11 Clearly, the envisaged Program, which will increase EPTL'sassets about 17-fold, will not only strain its technical and managerialcapabilities, but will also have a fundamental impact on its financialhealth. The financial projections, given below, reflect conservativeforecasts of growth in telecommunications subscribers, traffic-flows, andresulting revenues. Nevertheless, delays in program execution, lower thanenvisaged traffic flows, or inadequately adjusted tariffs in the future couldjeopardize the realization of projected revenues and lead to financialdifficulties. Therefore, in addition to the technical safeguards to be takenunder the Project (turnkey contracting, technical assistance in projectmanagement to assure efficient project execution, training of staff, etc.),special financial precautions need to be taken to safeguard the company'sfinalicial viability. The most important of these include the infusion ofsuf f lo ext eauity so that debt remains at or below levels that can be servedwith EPTL cash generation even under adverse conditions (para. 5.11, 6.16,6.18); and the assurance that the Government and EPTL maintain tariffs atadequate levels (para. 6.10). The following projections which deal withEPTL's telecommunications operations only, are based on those importantprinciples.

Assumptions

6.12 Detailed financial projections for EPTL's telecommunicationsoperation for the period 1989-2000 are shown in Annexes 6.5 to 6.6, withassumptions for the projections contained in Annex 6.5. The projections arebased on assumptions regarding the timing of implementation of the Programcomponents (capacities, subscriber connections), and reflect increasinglevels of traffic within the expanding network, and resulting costs andrevenues (with particularly important growth of interprovincial andinternational traffic). All costs and revenues have been derived in USdollars; projections have been carried out in current US dollar terms until1995 and held constant thereafter. Selected indicators of financialperformance, projected for the period 1989-98, are summarized in Table 6.3.

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Table 6.3: EPTL Telecommunications OperationsFinancial Projections 1989-1998(Current US$ '000)

Year 1989 1990 1991 1992 1998 1994 1996 1996 1997 1998

Operating Revenue 1829 2185 2810 8476 4912 6162 7068 7769 8480 9294of which in FX 1089 1217 1880 1924 2677 8417 4065 4652 6041 665s

Operating Expenditure 690 988 1045 1691 2821 8099 8210 8262 8281 8290Operating Income 689 1197 1265 1784 2290 8068 8968 4508 5199 6004Interest 7 1 1 878 962 1924 1861 1861 1787 1618Not Income 607 1009 1054 979 6s5 884 1029 1708 2488 8140

In-dicators and Ratios

Op. Ratio 0.62 0.44 0.46 0.49 0.68 0.60 0.46 0.42 0.89 0.86Current Ratio 8.92 4.44 4.26 6.22 6.76 6.88 1.89 1.91 1.98 1.88Debt/Equlty Ratio 0.46 0.80 1.08 1.07 1.06 1.16 1.16 1.12 1.08 1.08Debt ServiceCoverage (times) 18 216 177 6 2 8 8 2 2 2Self-Financing Ratio 11.8X 12.6X 7.8X 22.9s 9o.5x 846x nc nc ne ncReturn on Equity 8.4 9.3% .63X 4.1% 2.6% 1.4X 4.EX 7.7% 11.6% M12%Roturn on Assets .0OX 5.8% 2.8% 2.1% 1.3% 0.7X 2.2% 8.8% S."% 7.8SRevo,ve/iine (US$) e/ 196 268 248 5 887 89s 879 416 464 497Op. Exp./line (USS) a/ 102 l16 III 168 196 192 172 16 1.76 178

&/ constant 1989 termasnc = not calculated (no further Investment Is assumed In the model)

6.13 The US dollar-based projections imply: (a) on the cost side,domestic inflation is accounted for automatically; (b) on the revenue sideregular adjustments of domestic tariffs take place in line with inflation .Tariffs have been kept constant in current US dollar terms, implying adeclining trend in real terms. However, they have been adjusted for theanticipaLed increase of domestic tariffs by 802 as of January 1, 1990. For1991 and beyond, EPTL would be able to meet its agreed financial performancerequirements (paras. 6.17, 6.18), with only one overall tariff adjustment toyield a revenue increase of about 102 during the period 1990-95 (in currentUS dollar terms). This would still represent a tariff decrease of 232 inreal dollar terms (para. 7.04). With respect to operating costs, the samelevel of inflation has been applied to all expenditures (estimated in mid-1989 terms in US dollars), as is applied to the capital cost streams (para.5.08).

6.14 Given the major expansion of EPTL (17-fold in terms ot assets),and the inability of the Government and EPTL to raise tariffs fast enough toprovide adequate cash generation for the major investments envisaged, theprojections had to call for a sufficient level of equity to allow EPTL toservice debt and contribute to financing out of own cash generation. Theprojections have attempted to maximize the debt burden which EPTL couldreasonably carry, while maintaining an adequate financial health. This callsfor a relatively high level of equity (slightly less than 40% of totalProject investments) to be passed to EPTL out of the external financing tcthe Government. The projections do not assume investments beyond 1995, whichis an artificial assumption and explains why some indicators, e.g. the self-financing ratio, are not in a normal range beyond 1995.

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Proiected Performance

6.15 Based on the above assumptions, the projections show a strongperformance of EPTL telecommunications operations. With envisaged tariffincreases, as derived from the analysis, all financial indicators developfavorably during the two critical periods ahead: (a) the programimplementation period 1990-95, where substantial cash generation is required,and (b) the onset of the period of principal rspayments starting in 1996.Whereas profits show a dip between 1992 and 1994 (due to the start of partialinterest payments related to assets moving from construction to operatingstage), operating cash flow remains healthy throughout the projection period.EPTL's operating ratio is expected to be satisfactory, ranging between 441and 531 after installation and connection of main componertts under tilsproposed Project. The solid equity base and continued generation of cash,which is reinvested during the .rogram period, result ia a maximur,debt/equity ratio of 54/46 (1.16) in 1995, and contribute significantly tothe financially solid performance. Net internal cash generation as apercentage of the average of the current and next year's investment isexpected to exceed 10Q. While this seems low, it would be a commendableachievement in light of the huge invest-ment envisaged and relatively smalltariff adjustments. The annual rate of return after tax on average net fixedassets in operation is expected to range between a low 1X in 1994, 61 at theend of project implementation, and 81 by 1998.

Financinif. Exchange Risk and Debt Service Coverage

6.16 The financing and capitalization plan for the Program wasformulated based on strict guidelines for EPTL's financial condition,including a strong equity base as well as favorable working capital marginsand other desirable conditions assuring financial liquidity. In spite ofEPTL's favorable historic performance and liquid financial condition, therspid expansion of its asset base and volume of transactions could causeserious disruptions with negative consequences for the financial performancewithout a healthy debt/equity ratio.

6.17 Cash generation during the construction period is maintained ata respectable level with the self-financing ratio not dropping below 7.51 butwith the two-year averages above 101. During negotiations, agreement hasbeen obtained that EPTL will take necessary steps to generate sufficientcash, after coverage of costs and debt service, to fund at least 51 of thetwo-year average of its Program during 1990 to 1992, and at least 151thereafter.

6.18 Debt service coverage of EPTL is projected to be verysatisfactory due to the strong equity base. As principal repaymentscommence, it is projected to remain above 2 throughout the projection period.This will be monitored closely. EPTL will take the necessary action tomaintain a debt service coverage on the debt extended to it by theGovernment, of at least 1.5 times. Agreements to this effect have beenobtained during negotiations.

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Dividnds

6.19 The ability to pay out dividends as a result of excess fundsgenerated is an important measure of the company's projected financialhealth. Whereas up to 1993 all generated cash is needed for the Program, in1994 the company could pay out a sizeable dividend of US$2 6 million.Considering the risks of delay or shortfalls of cash generation however,agreement has been obtained from the Government and EPTL during negotiationsthat EPTL will not declare or pay out any dividends until all investmentsunder the Program are completed.

VII. EONOMIC ANALYSIBenefits

7.01 Among the key objectives of the Government of Lao PDR areregional development, integration of the geographically large country witha low population density, and promotion of exports. Inadequate telecom-munications facilities are a major constraint to meeting those objectives ina eountry which is also short of other iiafrastructure, notably transportfacilities. Improvements in the telecommunications sector are crucial forpromoting the growth and efficiency of business in a'l sectors of theeconomy.

7.02 The creation of a basic nation-wide telecommunications network,as proposed under the Program, will provide the basis for further systematicdevelopment of telecommunications even into more remote areas of the country.In this sense, the program will contribute to the Government's efforts todevelop and integrate the country's economy through improved economicefficiency and will permit delivery of improved services throughout thecountry. Specifically the proposed Project will help (a) improve theefficiency of public and private enterprises in the major urban centers,Vientiane, Luang Prabang, Paksane, Thakhek, Savannakhet, and Pakse throughimproved communications with suppliers, clients, fin