Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 794 3

PROJECT PERFORMANCE AUDIT REPORT

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS(LOANS 162j-TH, 2143-TH AND B-1-TH)

JUNE 30, 1989

Operations Evaluation Department

This document has a restricted distribution and ma-, 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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ACRONYMS

Bank - International Bank for Reconstruction and DevelopmentBB - Budget BureauCAT - Communications Authority of ThailandCIF - Cost, Insurance and FreightFPU - Fundamental Planning UnitGA - Guarantee AgreementICB - International Competitive BiddingLA - Loan AgreementMOC - Ministry of CommunicationsHOF - Ministry of FinanceNESDB - National Economic and Social Development BoardOECF - Overseas Economic Cooperation Fund of JapanPCM - Pulse Code Modulation Transmission SystemPCR - Project Completion ReportPERT - Project Evaluation Review TechniquesPPAH - Project Performance Audit MemorandumPPAR - Project Performance Audit ReportPTD - Posts and Telegraphs DepartmentSTD - S-ibscriber Trunk DialingTOT - Telepnone Organization of ThailandTTC - Telecommunications Training Center

CURRENCY EQUIVALENTS

Currency Unit - Thailand Baht

FISCAL YEAR

October 1 to September 30

THE WORLD BANK FOR OMTICIAL USE ONLYWash*nton. DC 20433

US A

Olue no De"NW-CMeMaIOpestobfs aeatun

June 30, 1989

MMOMRANDUM TO THE EXECUTTVE DIRECTORS AND THE PRESIDENT

SUBJECT: Project Performance Audit Report on Thailand

Third and Fourth Telecommunications Projects

(Loans 1620-TH, 2143-TH and B-l-TH)

Attached, for information, is a copy of a report entitled "Project

Performance Audit Report on Thailand - Third and lourth Teleconnunications

Projects (Loans 1620-TH, 2143-TH and B-1-TH)" prepared by the Operations

Evaluation Department.

Attachment

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.

FOR OFFICIAL USE ONLY

PROJECT PERFORMANCE AUDIT REPORT

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS(LOANS 1620-TH, 2143-TH AND B-1-TH)

TABLE OF CONTENTS

Page No.

PREFACE ................................................................. iBASIC DATA SHEET ..................................................... iiiEVALUATION SUMMARY ................................................... viii

PROJECT PERFORMANCE AUDIT MEMORANDUM

I. BACKGROUND ... 1....................................... 1

II. THE PROJECTS ....... 2................................. 2

A. The Third Project (Loan 1620-TH) ..................... 3Content and Objectives of the Project .............. 3Disbur3ements 5...................................... 5Results . ........................................... 5

B. The Fourth project (Loan 2143-TH) .................... 6Content and Objectives of the Project............... 6Implementation 6..................................... 6Costs of Project 7................................... 7Disbursements 7...................................... 7

Prepayment 7......................................... 7General Comments 8................................... 8

III. SUPPLEMENTARY ISSUES AND COMMENTS ...................... 8

A. Compliance with Covenants and Guarantees.............8B. Institutional Performance............................8

(1) Organization and Management......................8(2) Performance of Consultants.......................9(3) Cocrdination of Project Components...............10(4) Accounts Receivable. .............................. 11(5) Financial Performance............................. .(6) Economic Rate of Return..........................13(7) Fiscal Impact. .................................... 14(8) Training..................................8.... 14

IV. THE BANK'S PERFORMANCE............................8.... 14

A. General. .............................................. 14B. Specific Issues.................................... 15

This document has a restricted distribution and may be used by recipients only in the performanceof tl , official d Its c, tents - not otoerwise be disclosed without World Bank authorization.

TABLE OF CONTENTS (cont'd)

Paze No.

V. THE SECTOR ..................................... 16

A. Organization ................................. 16B. Local Manufacture of Equipment ... ......... 16

VI. CONCLUSIONS ............................................... 17

VII. SUSTAINABILITY ........................................... .18

VIII. LESSONS TO BE LEARNT ..................................... 19

ATTACHMENTS

1. Comments from the Telephone Organization of Thailand ......... 212. Comments from t%e Office of The National Economic

and Social Development Board ............................... 233. Comments from the Ministry of Finance ........................ 24

PROJECT COMPLETION REPORT

I. Introduction ............................................. 27

II. Project Preparation and Appraisal ........................ 28

III. Implementation ............................................ 33

IV. Operating Performance..................................... 44

V. Financial Performance..................................... 45

VI. Institutional Performance................................. 47

VII. Project Justification..................................... 51

VIII. Bank Performance......................................... 53

IX. Conclusions .............................................. 55

PCR ANNEXES

1. Physical Installations ................................... 582. Project Implementation Delers ............................ 593. Project Costs: Esti-nated and Actual ...................... 604. Project Costs and Sources of Financing ................... 615. Cumulative Loan Disbursements .......................... 626. Original and Revised Loan Allocations and

Actual Disbursements ................................. 637. Key Performance Indicators ............................... 64

TAPLE OF CONTENTS (cont'd)

Page No.

8. Estimated and Actual Income Statements 1978-87 ........... 59. Estimated and Actual Balance Sheets 1978-87 .............. 66

10. Estimated and Actual Funds Flow Statements 1978-87 ....... 6711. Summary of Basic Telephone Tariffs ....................... 68

. 12. Compliance with Covenants ................................ 6913. Return on Investments .................................... 71

PROJECT PERFORMANCE AUDIT REPORT

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS(LOANS 1620-TH, 2143-TH AND B-1-TH)

PREFACE

1. This Project Performance Audit Report (PPAR) presents the resultsof a performance audit of the Third and Fourth Telecommunications Projectsin Thailand for which Loan 1620-TH, for $90 million was approved onSeptember 12, 1978; Loan 2143-TH, for $142.1 million, approved on May 13,1982; and Syndicated Loan B-1-TH, under which the Bank provided Yen 2billion, approved on September 13, 1983.

2. The funds were made available to the Telephone Organization ofThailand (TOT). The Bank had been associated with the development of thetelecommuiications sector in Thailand since 1972 and had made two previousloans to TOT totalling $63 million.

3. The Agreement for Loan 1620-TH was signed on October 4, 1978, andthe loan became effective on January 3, 1979; the Agreement forLoan 2143-TH was signed on December 20, 1982, and the loan became effectiveon April 13, 1983. Loan B-1-TH was signed on September 22, 1983, andbecame effective on Ncvember 7, 1983.

4. At the time Loan 1620-TH was approved, major changes in bothswitching and cable technology were taking place. After approval of theloan, TOT, who had originally wished to use the earlier cwitchingtechniques, decided with the support of the Bank to install Stored ProgramControl Digital Exchanges at their main centres. The physical aims of theproject were substantially unchanged although quantities were increased.The change in technology necessitated considerable redesign work. Therewere, in consequence, major delays in procurement which, together with comedelays in execution, resulted in physical completion of the projecL beingdelayed by three years. The closing date was September 30, 1984, asagainst the appraisal forecast of September 30, 1983. The loan was fullydisbursed on June 4, 1985.

5. Despite the continuing need to expand facilities, the appraisal ofthe project financed under Loan 2143-TH was delayed until all procurementaction had been taken for Loan 1620-TH. On grounds of standardization,provision was made for TOT to order switching equipment for theLoan 2143-TH project without escalation over the prices tendered underLoan 1620-TH. The project to be financed under Loan 2143-TH was originallyexpected to be completed by September 30, 19e5, but completion was delayedby two years to September 30, 1987. The actual closing date wasDecember 31, 1987. The amount of $24.4 million was cancelled from the loan

at the Borrovir's request. The balance of $117.7 million was fullydisbursed by December 31, 1987. Funds under Loan B-1-TH were used for bothprojects and disbursed as expeditiously as possible. The loan was fillydisbursed on January 8, 1988. Loan 2143-TH was prepayed by Thailand inAugust 1988.

6. The PPAR consists of a Project Performance Audit Memorandum (PPAM)and a Project Completion Report (PCR) dated June 28, 1988. prepared by theAsia Region. Industry and Energy Operations Division. In view of the closeassociation of the two projects and the fact that they ran concurrentlyduring the latter stages with an interrelationship in respect ofachievements and financial results and a commorality of problems, it wasdecided to prepare a combined completion report for the two projects.

7. The PCR, which was based on both a TOT report and a visit by AsiaRegional staff to Thailand in January 1988, accurately covers mostimportant aspects of the project experience. The PPAM covers a few pointswhich were not dealt with in the PCR and should be brought out inendeavcring to highlight the lessons to be learnt and substantive pointsfor consideration in the future development of the sector. Whereverpossible, the PPAM avoids repetition of the data contained in the PCR.

8. The audit has involved reviews of the PCR, the Appraisal andPresident's Reports, the legal documents, Bank files, consultants' reportsand the transcripts of the Executive Director's meetings at which theprojec-s were approved. A number of clarifications and conclusions havebeen discussed with the Bank staff who dealt with the projects.

9. Following standard OED procedures, copies of the draft PPAR weresent to the Government, the Borrower, and the Co-iinanciers. The commentsreceived from the Telephone Organization of Thailand, the Office of TheNational Economic and Social Development Board, and the Ministry of Financeare reproduced as Attachments to the PPAR and have been incorporated in thereport as appropriate.

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PROJECT PERFORMANCE AUDIT REPORT

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS(LOANS 1620-TH, 2143-TH AND B-1-TH)

BASIC DATA SHEET

LOAN POSITION(Amounts in USS Million)

As of Dec. 81, 1988Original Disbursed Cancelled Repaid Outstanding

Loan 1620-TH 90.0 90.0 - 30.0 60.0Loan 2143-TH 142.1 117.7 24.4 117.7 -Loan B-1-TH /a 8.5 8.2 - - 8.6

a Loan B-1-TH was a syndicated lovn with Japanese commercial baks. Total loan amount

was Yen 8 billion (834 million equivalent) in which Bank participation was Yen 2billion (88.6 million equivalent). The loan financed part costs of both the Third andFourth Telecommunications Projects.

PROJECT DATES

(Loan 162C)

Original Revised/Actual

First Mention in Files n.a. 02/07/76Government's Application n.a. 09/21/77

Appraisal

Negotiations 05/31/78 06/31/78Board Approval 09/12/78 09/12/78Loan Agreement 10/04/78 10/04/78Effectiveness 01/03/79 01/03/79Closing Date 09/30/83 06/04/85

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PROJECT DATES (cont'd)

(Loan 2148)

Oriall-al Revied/Actual

First Mention in Files n.s. 10/16/79Governmest's Application n.s. n.e.AppraisalNegotiations n.e. n.s.Board Approval 05/13/82 05/18/8kLoan Agjreement 12/20/82 12/20/82Effectiveness 04/13/88 04/18/83Closing Date 12/31/87 12/81/87

(Loan B-1)

Original Revised/Actua!

First Mention in Files n.e. 06/20/83Government's Application n.e. 06/06/18Appraisal n.a. n.a.Negotiations n.s. 08/22/88Board Approval n.a. 09/18/88Loan Agreement n.a. 09/22/88

STAFF INPUTS

(staff weeks)

(Loan 1820)

FY77 FY78 FY79 FY80 FY81 FY82 FY88 FY84 FY85 FY86 FY87 FY88 Total

Preappraisal 2.0 9.9 0.7 - - - - - - - - - 12.6

Appraisal - 51.1 0.2 - - - - - - - - - 51.8

Negot.iations - 6.9 5.4 - - - - - - - - - 12.8

Supervision - - 10.4 21.1 22.4 15.8 6.1 7.6 1.8 1.5 - 5.0 91.6

Other - - 0.2 0.5 ).2 - - - - - - - 0.9

Total 2.0 67.9 16.9 21.6 22.6 16.8 6.1 7.6 1.8 1.5 - 6.0 168.7

(Loan 2148)

FY79 FY80 FY81 FY82 FY88 FY84 cY85 FY88 FY87 FY88 Total

Pre*ppraisal 0.8 6.4 4.0 3.9 - - - - - - 15.1

Appraisal - 0.1 14.3 33.1 - - - - - - 47.5

Negotiations - - - 7.8 - - - - - - 7.8

Supervision - - - 8.0 18.7 18.0 10.7 14.7 5.7 10.7 81.6

Other - 0.1 - 0.2 - - - - - - 0.8

Total 0.8 6.6 18.8 48.0 18.7 18.0 10.7 14.7 5.7 1017 152.2

. y .

MISSION DATA

(Loan 1620)

NO. of Ne. of Steff Date ofMonth(Year eak* Persons Weeks Regort

Identification 08/77 8 1 1.1 09/12/77Appraisl 10/77 27 8 11.6 08/17/73Supervision I 10/76 4 2 1.1 11/27/78Supervision II 06/79 7 2 2.0 06/09/79Supervision III 04/00 6 2 1.4 06/04/30Supervision IV 10/80 4 2 1.1 11/10/30Supervision V 01/81 8 1 0.8 03/10/61Supervision VI 06/81 4 2 1.0 07/07/61Supervirlon VII 10/31 4 4 2.8 11/13/81Supervision VIII 01/82 8 2 0.9 02/18/62Supervision IX La 06/82 2 1 0.4 06/10/92Supervision X 10/82 8 1 0.6 01/05/88Supervision XI 12/82 4 1 0.5 01/05/38Supervision XII 03/83 4 2 1.1 05/10/38Supervision XIII 07/83 1 1 0.1 08/03/88Supervision XIV 12/83 4 1 0.6 02/12/84Supervi.ion XV 10/85 2 4 1.1 11/01/85Completion 01/88 7 1 1.0 ??

Total 96 28.2

(Loan 2143)

No. of No. of Staff Data ofMonth/Year Weeks Persons Weeks Report

Identification 04/80 7 2 2.0 -Preappraisal 10/80 22 3 9.1 11/10/80Appraisal 10/81 10 4 5.8 04/19/82Supervision I b 05/82 8 1 0.4 06/10/82

Supervision II 10/82 5 1 0.7 01/06/83

Supervision III 12/82 4 1 0.6 01/05/83Supervision IV 03/^3 7 2 2.0 06/10/88Supervision V 07/83 1 1 0.1 08/08/88

Supervision VI 06/84 7 2 2.0 0S/18/84

Supervision VII 12/84 7 1 1.0 12/27/84Supervision VIII 10/85 3 4 1.7 11/01/85Supervision IX 02/86 5 1 0.7 08/04/88

Supervision X 05/88 7 3 3.0 06/24/86

Supervision XI 10/88 7 2 2.0 -Completion 01/88 7 1 1.0 T?

Total 102 32.1

/a Supervision missions IX to XV and completion mission were combined missions for the

Third and Fourth Projects. Data shown are specific to the Third Project./b Supervision missions I to VIII and completion mission were combined missions for the

- 1 A P , a ific to F rth Proi t.

- vi -

(Loan 8-1)

No. of ho. of Staff Date ofMonth/Year Weeks Peres Week* 1

Identification 06/88 7 2 2.0 07/0/8Apprei*aI - - - 0 0/17/48Negotiations 08/88 5 4 2.0 08/25/88

Total 12 4.8

OTHER PROJECIr DATA

Borrower: Telephone Organization of Thailand (TOT)Executing Agency: Telephono Organization of Thailand (TOT)

Follow-on Project:

None

- vii -

PROJECT PERFORMANCE AUDIT REPORT

THAILAND

THIRD AND FOUR TELECOMMUNICATIONS PROJECTS(LOANS 1620-TH, 2143-TH AND B-1-TH)

EVALUATION SUMMARY

1. There are three entities, under the control of the Ministry ofCommunications, which are responsible for providing Thailand's telecommuni-cations services. These are the Telecommunications Organization ofThailand (TOT) respcnsible for inland, and some international, telephoneservices, the Communications Authority of Thailand (CAT) provides otherinternational ser.ices and operates telegraph and telex networks and thePosts and Telegraphs Department (PTD) is responsible for radio licensingand international telecommunication relations. PTD is a government depart-ment. TOT And CAT are public sector corporations wholly owned by Govern-ment with their own Boards. They also have cloce .zorking arrangements withthe Ministries of Communications and Finance and the National Economic andSocial Development Board. TOT was the Borrower for the Bank-financedprojects and the Government of Thailand the Guarantor (PCR, para. 1.1;PPAM, para. 1.02).

2. The Bank has been involved in financing telecommunicationsdevelopment in Thailand since the early 1970s and under two previous loansapproved in 1972 and 1976 has made available $63 million for *elecommunica-tions development. The two lending operations (Loans 1620-TH and 2143-TH)discussed in this audit report were a continuation of the Bank's earlierlending in the sector (PCR, paras. 1.1-1.2; PPAM, para. 1.03).

3. The projects financed under Loans 1620-TH and 2143-TH have beentitled the Third and Fourth Telecommunications Projects and consisted ofthe first and second phases of TOT's 1977 to 1984 Development Program.These were designed to be overlapping with the first phase being undertakenin the 1977 to 1982 period and the second phase during 1979 to 1984. Thephases were subsequently modified to cover the 1978-82 and 1982-85 periods(PCR, paras. 1.3-1.4; PPAM, paras. 2.01, 2.03-2.04).

4. The third project was estimated at appraisal to cost US$307.2million with a foreign exchange component of US$180 million. Loan 1620-THprovided $90 million. The balance of the foreign exchange financing was tobe provided by an OECF loan of US$60 million equivalent and US$30 millionfrom commercial sources. Local costs were to be financed by internal cashgeneration, a Government loan of B 100 million and some borrowing fromcommercial banks. The fourth project was estimated to cost US$492.2million with a foreiga exchange component of US$276.9 million. Of this,Loan 2143-TH provided US$142.1 million with the balance to be provided from

- viii -

suppliers' credits, bilateral loans and comercial bank loan3. The localcost of the project was to be financed from internal cash generation.Government subsequently, in 1983, sought Bank assistance in obtaining theoutstanding balance for foreign exchange financing of the projects, andLoan B-1-TH was arranged in the sum of Yen 8 billion with Japanese banks,providing Yen 6 billion and the Bank the balance of Yen 2 billion (US$8.5million equivalent) (PCR, paras. 2.06, 2.11, 2.14; PPAM, paras. 2.08, 2.12,2.19).

5. The third project was designed to connect 170,000 additionalsubscribers, 6,000 call offices in the cizies and 210 in rural areas.Additionally, it provided for two new microwave systems and expansion ofinter-exchange and long distance switching facilities. The 'ourth projectwas designed to connect 278,000 additional subscribers, 1,100 call officesin the cities, call office facilities in an additional 300 rural areas,provision of 42 microwave systems and additional channeling, long distanceand inter-exchange switching equipmen, (PCR, paras. 2.5, 2.11; PPAM,paras. 2.06, 2.16).

6. Major institutional improvements were planned under the twoprojects. These were generally designed to fit TOT to meet its increasedresponsibilities in line with the expansion of the network. They includedintroduction of a Management Information System, recommendations forimprovements in TOT's policy direction, external relations and internalorganization by consultants financed under the fourth project, togetherwith assistance in implementing the proposals and use of other experts toimprove planning procedures and study the tariff structvre. Detailedrequ irements covered establishing subscribers waiting lists, improvingarrangements to connect subscribers as soon as new facilities becameavailable, improved collection procedures, prompt settlement of governmentaccuunts, restrictions on fragmentation resulting from the provision ofprivate networks, and an annual review of tariffs. The usual financialcovenants were applied, but, in the case of the fourth project, the rate ofreturn covenant was replaced by one requiring TOT to maintain internal cashgeneration from 20Z to 35Z of average annual capital expenditure. Aneconomic study of telecommunications in Thailand was provided for under thethird project and a study of the use of telephones in rural areas was sub-sequently undertaken under the fourth project (PCR, paras. 2.7, 2.15; PPAM,paras. 2.07, 2.17).

7. Loan 1620-TH was appraised in October/November 1977, approved onSeptember 12, 1978 and became effective on January 3, 1979. There was atwo-year delay in start up due to a decision, supported by the Bank, tointroduce digital switching technology for the main exchanges. This neces-sitated network redesign and the production of new and complex specifica-tions. Given the improvements in facilities, accommodation and line plantsavings, and network modernization, the decision was considered justifiedeven though it resulted in economic cost to the community resulting fromthe delay in providing needed facilities (PCR, para 3.2; PPAM, paras. 2.05,

2.09, 3.17).

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8. Appraisal of the fourth project was held up until such time as TOThad placed all orders for the equipment required for the third project.The project was finally sopraised in October 1981, was approved on May 13,1982. and became effective on April 13. 1983 (PCR, para. 2.10; PPAM,para, 2.05).

9. Following the initial start up delay of two years caused by thechange in technology, the third project was subject to a further delay ofone year in execution so that it was delayed by a total of three years.The loan was closed on September 30, 1984, and disbursements up to thetotal loan amount completed on June 4, 1985. The fourth project suifered adelay of two years during execution. The loan was closed on December 31,1987, and disbursements completed on January 8, 1988. A total sum of$24.395 million was cancelled from the loan as a result of alternativefinancing, lower unit costs and changes in exchange rates. Some six monthsafter closing, Thailand requested prepayment of the loan. This was agreedwithout penalty in August 1988 (PCR, paras. 3.09, 3.27; PPAM,paras. 2.21-2.23).

10. The third project met its physical objectives and achieved anincrease in the number of subscribers connected by over 102. Cost in USdollars iacreased by 12.5Z but allowing for the increase in subscribersunit cost only increased by 2%. Local costs became a larger part of totalcosts as a result of additional items being purchased locally. The fourthproject also met its main physical objectives and achieved an additionalincrease in subscribers connected of about 12. The cost of the project inUS dollars was 2.7% below the appraisal estimate (PCR, paras. 3.1, 3.26;PPAM, paras. 2.12, 2.19).

11. Although all but two covenants were met, the institutional aims ofthe two projects were only in part achieved. There was a significantfailure in coordinating the interrelated components of the project provi-sions and also in the connection of subscribers when the facilities werefully available. These resulted in both fiscal and economic losses. Therewas a delay in approving a tariff increase necessary to meet the covenantrequiring TOT to maintain internal cash generation as a percentage ofaverage annual capital expenditure. This did not, however, create problemsin the execution of the projects. The most serious problem was, however,that of failing to improve the policy control and external relations ofTOT. The economic studies were svccessfu"ly completed (PCR, paras. 4.1,6.3, 6.10, 8.2; PPAM, paras. 2.15, 3.02, 3.04-3.05).

12. Disbursements for the third project were delayed by about twoyears substantially in line with the two-year delay in project start up.Disbursements for the fourth project were delayed by about one year partlydue to bidders representations. Some of these had little substance. Theaudit finds that TOT dealt well and fairly with procurement under theprojects with the Bank finally accepting all recommendations for awards(PCR, paras. 3.9-3.12, 3.27-3.30).

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13. Performance by the equipment suppliers was generally good althoughteething troubles were experienced with the new digital switching systemand some difficulty was experienced with the diesel generator supplier.The consultants employed under Loan 2143-TH performed most of their tasksin a satisfactory manner but, possibly due to a change in their terms ofreference which was accepted by the Bank, failed to adequately address theproblem of TOT's external relations. Performance of the experts employedto improve planning procedures and study the tariff structure was satisfac-tory as was that of the consultants employed in studying the use of ruralfacilities (PCR, paras. 3.18-3.20, 3.30-3.35; PPAM, paras. 3.09-3.13).

14. TOT's financial performance was, on the whole, satisfactory butdeteriorated towards the end of the project period due to the delay inincreasing tariffs. Despite this, TOT had no problem in generating thefunds required to complete the projects. TOT's rate of return averaged18.62, the operating ratio averaged 50Z, the debt/equity ratio was below60/40 through 1983 but then increased to 83/17 due to currency devaluationand high borrowings, the current ratio averaged 2.0 times. The specifieddebt service ratio of 1.5 times was met throughout the project period.TOT's internal cash generation, as a percentage of average capital expendi-ture, averaged 17.5Z from 1983 to 1986 which was below the minimum of 202specified (PCR, paras. 5.1-5.9; PPAM, paras. 3.17-3.26).

15. -he ec.onor:c rate of return for the third project was expected tobe 192 and that for the fourth project 262. The recalculated rate ofreturn for both projects was 131. Allowing for the delay in the tariffincreases, unquantified benefits resulting from the change in technology,with longer plant and equipment lives, the rate of return is consideredsatisfactory (PCR, Annex 13; PPAM, paras. 3.30-3.31).

16. The problem of timely payment of government accounts had existedfor a inumber of years. These accounts were finally settled. TOT mightconsider charging interest on amounts outstanding in the e-rent of futuredifficulty (PCR, para. 2.08; PPAM, paras. 3.15-3.16).

17. The issues of TOT's external relations, policy direction andinterference by TOT's Board in day-to-day management matters might moreadequately have been resolved. They led to serious operating problems,poor morale, indecision and high top level staff wastage. This matter wasoriginally a major component in the consultants' study but, due partly tochanges in terms of reference, delays by the Thais themselves and insuf-ficient pressure from the Bank was not adequately dealt with (PCR,paras. 5.7-6.2; PPAM, paras. 3.04-3.09).

18. Efficiency in execution of the projects and maximizing initialfinancial benefits was limited by a failure to coordinate projectcomponents and connect subscribers Dromptly. TOT substantially improvedits performance in the connection of subscribers towards the end of thefourth project. There appears still to be a weakness in project coordina-tion instanced by an advance large order for switching equipment for future

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development. TOT should review its coordination arrangements baJed on PERTprocedures (PCR, para. 6.3; PPAM, paras. 3.13-3.14).

19. The issue of increasing tariffs became a major one and was ener-getically pursued by the Bank. Government were prepared to increasetariffs, but the increase was opposed by the Chairman of TOT's Board untilsuch time as the quality of service had been improved. File researchindicates that the Bank should perhaps kept the Chairman directly informedof its views in this matter. When tariff increases were finally approved,the Subscribers Bond system was waived as a quid pro quo. This was anundesirable step, until such time as total demand could be met, as itsubstantially removed price rationing (PPAM, paras. 3.27-3.29).

20. Political considerations appear to have been involved, partly as aresult of the importance of the Chairman of TOT's Board, in the two issues,,f TOT's relations with its Board and government and the tariff increase.The Bank's failure to achieve the project aims is to some extent under-standable. Leaving these two issues aside, the Bank's performance wasexcellent on both the Country Programs and Projects side. The ResidentMission also made valuable contributions to the success of the projects.First class technical and financial advice was given. In particular, theBank's advice and assistance on the issue of change in technology should bementioned. Valuable assistance was also given in obtaining the B-Loan(PCR, paras. 8.1-8.4; PPAM, paras. 4.01-4.05).

21. It was noted that the bidding documents for digital switchingeaipment required bidders to submit proposals for local manufacture.These were not to be evaluated. This is believed to be a matter ofsignificant future importance to the economy and further thoughts on it arecontained in the PPAM, paragraphs 5.03-5.05.

22. It was concluded by the audit that the fourth and fifth projectsmore than achieved their physical aims although subject to considerabledelay, partly accounted for by the change in technology. The failure tomore fully meet demand remained a continuing problem on project completion.The institution aims were not fully met for the reasons already commentedon. The Bank could make continuing major contributions to development ofthe sector if its assistance was sought (PPAM, paras. 6.01-6.04).

23. Due to the low price elasticity and the major outstanding demand,sustainability of the financial results is not likely to be a problem.Obsolescence and plant wastage is also unlikely due to the use of modernequipment with long-life periods. Sustainability of the institutionalimprovements, made under the project, is also likely although the projects'aims, in this respect, were not fully achieved (PPAM, paras. 7.01-7.03).

24. The PCR outlines the lessons to be learnt from the projects as theneed for early review of procurement procedures, closer supervision of theconsultants' work and a need for greater assistance in the reorganizationprocess. The PPAM additionally sees a need for better definition of

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management responsibilities and lines of command, better coordination inthe provision of project components in order to increase financial andeconomic benefits and the need to design projects to more fully meet thetotal demand for service (PCR, para. 9.06; PPAM, paras. 8.02-8.03).

PROJECT PERFORMANCE AUDIT MEMORANDUM

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS(LOANS 1620-TH, 2143-TH AND B-1-TH)

I. BACKGROUND

1.01 In Thailand, as in many other developing countries, tae absence ofadequate telecommunications facilities is a major factor in delayingsocial, administrative and economic development and consequent benefits tothe society as a whole. Telecommunications are substantially the nervoussystem of both the society and economy. Industrial development, commerce,agriculture and professional services are reliant on telecommunications forefficient operation. Tourism must have adequate facilities for effectiveuse of hotel and transport facilities. Telecommunications are also essen-tial to administrative and social services, particularly where expertisemay be limited and centralized.

1.02 There are three entities, under the control of the Ministry ofCommunications (M Z), which are responsible for providing telecommuni-cations services within Thailand and to other countries. The TelephoneOrganization of Thailand (TOT) is responsible for the internal telephoneservices and service to a number of neighboring countries. The Communica-tions Auttority of Thailand (CAT) provides the telegraph and telex networksand othcr international services, and the Posts and Telegraph Department(PTD), is responsible for radio licensing and international telecommunica-tions relations. PTD is a government department reporting to the UnderSecretary for Zommunications. TOT and CAT are public sector corporationswholly owned by Government with their own policy boards. These boards areappointed by government but with the managing directors of TOT and CATmembers of the boards cf both organizations. TOT has a close workingrelationship with both the Ministry of Communications and National Economicand Social Development Board (NESDB) on development/economic policy issuesand with the Ministry of Finance (MOF) and Budget Bureau (BB) on financialissues.

1.03 The Bank has been involved in the telecommunications sector inThailand since the early 1970s with its first loan, for development ofTOT's facilities, in the amount of $37 million, approved in November 1972.A second loan for $26 million was approved in May 1976. The two projectsfinanced by these loans were successfully completed in October 1976 andDecember 1980. A combined PPAR (No. 4268) was distributed in December 1982and outlines the project experience.

1.04 At the time of the appraisal of the first telecommunicationsproject in 1972, TOT hdd 162,000 working subscribers lines and a telephonedensity of about 0.42 per 100 persons. Details of total demand were notknown in the absence of reliable waiting list data. On completion of the

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first two projects, in 1980, the number of working lines had increased to387,000 with a telephone density of 0.81. The total demand had at thattime been established as 716,000 so that only 54Z of total demand was beingmet. On completion of the third and fourth projects, there were 902,000working lines with a telephone density of 1.67. Recorded total demand wasabout 1,300,000 lines so that some 692 of total demand was being met.Malaysia. with a somewhat similar economy, had, at that time, a telephonedensity of 6.3 per 100 with 882 of total demand being met.

1.05 Major improvements were made under the projects in extending longdistance facilities, with the provision of direct distance dialing to themain centers, and installing public call offices in rural areas. Servicequality has continued to be a problem although major improvements have beenmade. There has also been major improvement in technical facilities withthe use of the most modern techniques. Having said this, it is apparentthat with about 400,000 people still waiting for service and the need forfurther extension of facilities in rural areas, there is a pressing needfor additional development. There is also a continuing need to improve thequality of service.

1.06 The World hank's involvement in the sector has, it is considered,been highly successful both in facilitating the development of facilitiesand in the institutiLn building process. Had an increased level of fundingbeen available, a more adequate expansion of facilities would have beenpossible.

II. THE PROJECTS

2.01 The Third and Fourth Bank Telecommunications Projects which areunder audit were a continuation of previous Bank lending for develLpment ofthe sector.

2.02 On the recommendation of NESDB, the Thai Cabinet considered andapproved TOT's 1977-84 Development Plan on September 24, 1977, and agreedthat a request for a loan should be made to IBRD. The plan wFs scheduledto be undertaken in two phases. Phase I was intended to co-,er immediatepriorities and be executed during the period 1977-82. Phase II wasdesigned to start in 1979 and cover the period 1979-84 (Files). As aresult of its knowledge of the sector, gained during the execution of thetwo previous projects, the Bank considered that the size of the physicalexpansion proposed was inadequate both in the cities and rural areas. TOTagreed but felt at the time that the program was the largest which could beundertaken within the limit of the then available financial resources. Asa result of the Bank's comments, it was later agreed to enlarge Phase I, tobe now undertaken during the period 1978-82, to nr--ide for a higher rateof growth in urban areas and provision of service in additional ruralareas. This was the third project eventually financed under Loan 1620-TH(Files).

2.03 A further review of TOT's development program was made by the Bankin May 1980 and suggestions made for improvements in size and design

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including additional penetration into rural areas. This modification ofPhase II of the program was now to be undertaken during the period 1981-84.This was the fourth project eventually financed under Loan 2143-TH.

2.04 Some of the balance c' foreign exchange costs for the projectsundertaken under both the third and fourth projects was financed by the B-1-TH loan of Yen 8 billion involving a Bank component of Yen 2 billion(Files).

2.05 Phases I and II of the original plan were designed to be over-lapping and form parts of a total program. This association continuedthrough the execution of both projects. The third project was appraised inOctober/November 1977, and the loan became effective January 3, 1979. TheBank had earlier suggested that TOT should consider introducing electronicexchanges for its new development. At the time TOT had not accepted thesuggestion partly because they had extensive experience with their existingelectromechanical systems and partly because electronic techniques werestill developing. After approval of Loan 1620-TH, TOT wisely decided toorder Stored Program Control Digital electronic systems for their mainexchanges. This meant considerable redesign of the network and preparationof an original and highly complex specification and bidding documents (TOTwere subsequently asked if these might be used to help in preparation ofspecifications elsewhere). The delay in procurement of this main item wastherefore fully explainable; however, the Bank, with justification, decidedthat there was little point in proceeding with the appraisal for the fourthproject until all orders had been placed for the third project. Theproject was finally appr&ised in October 1981 and rescheduled as a 1982-85project. The loan became effective on April 13, 1983. One other point ofcommonality was that in the documents for the SPC Digital exchanges, provi-sion was made for purchase of an additional 40,000 lines for the fourthproject with the proviso that a further 200,000 lines could be orderedwithout price escalation for the fourth project. These provisions werefully justified on grounds of standardization (PCR. paras. 2.1-2.3, andFiles).

A. The Third Project (Loan 1620-TH)

Content and Objectives of the Project

2.06 The main physical aims of this project were to provide:

(a) 185,000 lines of telephone exchange equipment together withcables and subscribers apparatus to connect an additional170,000 subscribers, provide 6,000 call offices and replace3,000 lines of old exchange equipment;

(b) for major expansion of inter-exchange atd long distanceswitching facilities; and

(c) two new microwave systems (PCR, paras. 2.4-2.6).

2.07 Proposed institutional improvements, which were subject tocovenants, or guarantees from government, included:

(1) setting up a Fundamental Planning Unit (FPU);

(2) developing a Management Information System;

(3) establishing subscribers waiting lists.

(4) improving coordination in tne installation of exchanges andcable networks and the connection of subscribers lines;

(5) undertaking an economic study of the sector;

(6) restricting the development an' imposing a license fee onprivate telephone networks in order to limit fragmentation;

(7) clearance of outstanding government accounts and settlement ona current basis;

(8) reviewing tariffs annually to maintain a 101 rate of return onrevalued ass-ts; and

(9) standard piovisions for revaluation of assets, debt serviceratio and submission of audited accounts (PCR, paras. 2.7-2.8).

2.08 The estimated cost of the project was B 6,266.1 million(US$307.2 million equivalent) including a foreign exchange component ofUS$180 million (PCR, para. 2.6).

2.09 S rt up of the project was delayed by about two years by thedecision to adopt SPC Digital techniques for the main exchanges as thetechnology had by then reached a stage where it offered many advantagesover the earlier electromechanical systems. 1 TOT also decided to adoptthe less fault-prone jelly-filled cables for their subscribersdistribution network. These decisions were fully supported by the Bank.The project scope was also modified to:

(a) provide an additional 23,000 lines of exchange switchingequipment and connect an addition 17,800 subscribers;

(b) increase the provisions for inter-exchange and long distanceswitching;

(c) change the technology in the junction switching network; and

(d) increase subscribers local cable provisions in line with theexchange expansion (PCR, para. 3.3 and Annex 1).

2.10 In general, installation of the main project items proceededreasonably well after procurement was initiated although there was a

1/ Government comments that agreement on the change in technology shouldhave been agreed at appraisal rather than after project start (see

t r' t 3)

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further delay of one year in project completion making the total delaythree years (PCR, para. 3.5).

2.11 There were some expected teething troubles resulting from theintroduction of a completely new switching technology and partly caused bydeficiencies in TOT's network. The most serious problem which took placeduring project execution was the failure to coordinate the provision andcompletion of the main project items and even when these were all avail-able, there was delay in connect.ing the subscribers lines. These problemswere common to both projects ard are commented on later (PPAM, paras. 3.02,3.15; PCR, paras. 3.20 and 3.24; Files).

2.12 A comparison of the appraisal cost estimates as against the actualcost is as follows:

Baht Millions US$ MillionsLocal Foreign Total Local Foreign Total

Appraisal 2.594.1 3,672.0 6,266.1 127.2 180.C 307.2Actual 3,781.3 4,197.8 7,979.1 161.5 184.2 345.7Percentage

Increase 45.8 14.3 27.3 27.0 2.3 12.5

2.13 The increases were caused by the increase in the scope of theproject and delays in implementation. The larger increase in local costwas due to increased purchases from domestic suppliers. The differencesbetween the Baht and US dollar figi-es are due to changes in currencyparities (in the conversion of costs zo US dollars, annual exchange ratevariations have been applied to establish a pro forma rate). While thetotal cost in US dollars increased by 12.5Z, the nurber of subscribersconnected under the project increased by 10.4Z. The net increase in costper subscribers line was therefore 2.1% (PCR, para. 3.1).

Disbursements

2.14 The delay in disbursements was substantially in line with the two-year slippage in start up of the project which has been commented onseparately (PCR, para. 3.9).

Results

2.15 Despite the delays, which were to a large extent conditioned bythe change in technology which the Bank fully supported, the project was avery successful one. It substantially exceeded its physical objectives,introduced new and improved technology and achieved some, althnugh not all,of its institutional aims. As there is a commonality between the third andfourth Projects, the institutional, fiscal, economic and external relatiorsissues affecting the project are dealt with in the following section ofthis report dealing with Supplementary Comments and Issues.

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B. The Fourth Project (Loan 2143-TH)

Content and Objectives of the Project

2.16 The physical aims of this project were:

(a) to install 373,000 lines of telephone exchange equipmenttogether with cables and subscribers apparatus to connect anadditional 278,000 subscribers and provide about 1,100 publiccall offices;

(b) to provide public call office facilities in an additional 300rural areas;

(c) to provide for further expansion of inter-exchange and longdistance facilities through additional terminating andswitching equipment and the provision of 42 microwave systems,other radio and cab.e systems and multiplexing equipment; and

(d) provision of management consultants, technical assistance andtraining to improve institutional capabilities (PCR,para. 2.13).

2.17 The institutional requirements were:

(a) to employ the management consultants required to review andassist in the introduction of the institutional improvements;

(b) improve procedures for allocation of telephones and rational-izing priorities through the subscribers bond system;

(c) maintain internal cash generation over a range of 20Z to 35% ofaverage annual capital expenditures over the project executionperiod; and

(d) other standard provisions (PCR, para. 2.15).

The estimated cost of the project was B 11,320.5 million (US$492.2 million)including a foreign exchange cost of (US$276.9) (PCR, para. 2.14).

Implementation

2.18 There were delays in awarding contracts due to bidders represen-tations, poor coordination in the provision of project components anddelays in te connection of subscribers lines due to organizational weak-nesses. These resulted in idle plant Lad equipment. The problem wascommon to both projects and is commented on later. Completion of theproject was, in consequence, delayed by two years. The project scope wasincreased during execution to:

(a) provide an additional 37,000 lines of exchange switching equip-ment and connect an additional 3,800 subscribers; and

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(b) provide major increases in tandem and long distance switchingequipment for inter-exchange and long distance traffic (PCR,para. 3.24 and Annex 1).

Costs of Project

2.19 A comparison of the appraisal costs as against the Actual costs isas follows:

Baht Millions US$ MillionLocal Foreign Total Local Foreign Total

Appraisal 4,950.8 6,369.7 11,320.5 215.3 276.9 492.2Actual 5,398.5 5,578.4 11,976.9 215.9 262.9 478.8Percentage

Increase 9.0 3.3 5.8 0.3 (5.1) (2.7)

There were substantial building cost increases. Quantity increases forsome items were compensated for by decreases in unit costs for switchingequipment. The table also reflects the changes in currency parities in thedifferences between ht and US dollar figures (in the conversion of coststo US dollArs. annual e;change rate variations have been applied to estab-lish a pro forma rate) (PCR, para. 3.26).

Disbursements

2.20 Disbursements were delayed by about one year partly due to biddersrepresentations which delayed procurement. After this, they weresubstantially in line with forecasts. An amount of US$24.395 million wascancelled from the loan. This was partly the result of alternative sourcesof financing being used. It also resulted from lower unit costs andchanges in currency exchange rates (PCR, para. 3.27-3.28).

Prepayment

2.21 In order presumably to obtain the advantage of lower costfinancing, the Thai Government has, in March 1988, requested prepayment ofthis loan. This was about six months after project completion (Files).

2.22 The advice and assistance of the Bank were major factors inachieving the physical aims of this project in network expansion, intro-ducing technologically advanced systems and effecting institutionalimprovements. During the period from project inception to completion, theBank has devoted considerable resources to the succes., of the project.Using details of time spent on the project, visits to Thailand and overheadcharges, the audit has estimated the approximate cost to the Bank as about$350,000. Thailand has, of course, paid a front-end fee and commitmentcharges.

2.23 As the loan was at an interest rate of 11.6%, the desire of theThai authorities to refinance in order to reduce foreign exchange expendi-tures is understandable.

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General Commentc

2.24 Despite the delays and the failure to fully utilize availablefacilities, and the institutional and financial problems which plagued thesector, the project is considered to have been successful in meeting taemajority of its objectives. As they were common to both the third andfourth Projects, the institutional, fiscal, economic and external relationsissues affecting the project are dealt with in the section of this reportdealing with Supplementary Issues and -omments, which follows.

III. SUPPLEMENTARY ISSUES AND COMMENTS

A. Compliance with Covenants and Guarantees

3.01 Although compliance was, in certain cases, delayed, TOT andGovernment met the covenants and guarantees except in the case of twoitems. These related to the requirements that TOT should connect newsubscribers lines a facilities became available and that TOT shouldgenerate sufficient i ids from internal sources, after debt service, tomeet a specified percentage of average annual capital expeaditures (PCR,para. 2.7 and Annex 12).

3.02 In the case of new line connections, the consultants recommendedand TOT set up a task force to improve coordination of subscribersinstallation work. TOT's Board, however, intervened in TOT's internalorganization and orderLd that the task force should be disbanded. Sub,sequently, following Bank pressures, improvements were made in the handlingof applications and a greatly improved rate of connection was achieved,with monthly reports to the Bank on the number of connections made (PCR,para. 3.24 and Files).

3.03 In the case of the internally generated contribution to capitalexpenditures, major difficulties were met in obtaining a rate increase tomeet tha covenant due to the TOT, Board view that tariffs should only beincreased after (unspecified) service improvements had been made. Thetariff issue is dealt with in PPAM, paragraphs 3.28-3.30. In fairness, itshould be stated that partly due to the delay in execution of the projectsTOT never ran short of the funds required to implement the projects.Tariff increases were, however, necessary to insure TOT's longer-termfinancial viability (PCR, para 6.3).

B. Institutional Performance

(1) Organization and Management

3.04 While TOT's management capabilities had been adequate to developand operate the network during the first and second projects, it becameapparent during execution of the third project that the organization wasbecoming inadequate due to the ongoing and future planned increases in thesize of the network. In fact, TOT themselves financed consultants duringthe period of execution of the third project to introduce a Managehient

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Information System. The fourth project provided, therefore, for managementconsultants to examine and report on TOT's external relations and internalorganizatior and assist in the implementation of improvements. Addi-tionally, provision was made under the loan for financing experts to designand set up a Fundamental Planning Unit (FPU) and study tariff structur4s(PC&, paras. 6.1-6.3).

3.05 Consequent to these provisions. major improvements were made inTOT's internal organization. Even in the case of the setting up a TaskForce to improve subscribers installation procedures, the need for whichwas not accepted by TOT's Board, the problem seems to have been met bystrengthening the existing organization.

3.06 The Bank has provided valuable advice and assistaace throughout inthe design and implementation of these improvements.

3.07 The PCR indicates that TOT's senior and middle management staffare experienced, competent and qualified. The PCR indicates, however, thatthere is an unwillingness to both make decisions and delegate authority.This problem appears to be the direct result of management's relationshipwith the TOT Board, government ministries and agencies (PCR, para. r.2;PPAM, paras. 5.01, 6.02).

3.08 The fact that there have bet!,; eix Ma7;g:n1 Directors during theperiod of implementation of the projects is an indication of a veryunhealthy situation. File research indicates that some of these indivi-duals resigned and others were discharged. According to a press cutting,one individual was awarded damages of Baht one million for wrongful dismis-sal. In line with the findings of the PCR (paras. 6.2, 9.3), this auditconcludes that the major problem has been the division of policy responsi-bilities between Government and the TOT Board and the interference of theBoard in day-to-day management matters. This has led to indecisiveness onthe part of management and a tendency for the managers themselves to refernon-policy issues to the Board. Hopefully, these problems have now, atleast in part, been resolved by the issue of new regulations, and as aresult of the views expressed by the Bank's staff.

3.09 The consultants' recommendations on the question of policy direc-tion and TOT's external relations were limited and inconclusive (PCR,para. 3.34). The audit suggests that considerable improvement in policycoordination and direction might be possible if the departments andagencies, directly concerned with TOT's activities, were represented onTOT's Board. MOF has normally been so represented but MOC and NESDB mightalso be added (MOC were represented some years ago). It has also beenfound in other countries that there are major public relations advantagesin having consumer representation.

(2) Performance of Consultants

3.10 TOT employed consultants during execution of the third project todesign and introduce a Management Information System. The consultants'

2/ See comments in Attachment 2.

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performance was satisfactory (PCR, para. 3.18). Under loan 2143-TH,consultants were employed to advise on, and assis in the improvement of,TOT's internal organization and its relationship with its Board and othergovernment agencies. While performance was generally satisfactory, the PCRrightly concludes (para. 3.34) that the TOT's Board and external relationsproblems were not adequately addressed possibly through weaknesses in theterms of reference and inadequate review of the consultants' work at anearly stage.

3.11 The initial terms of reference and contract clearly refer to thefunctions of TOT's Board and TOT's relations with PTD and CAT. TheDecision Meeting on the project raised the question of overall review ofthe sector but accepted that the division between TOT and CAT was welldefined and redundancies minimal. In its comments to TOT on the terms ofreference, the Bank has suggested that first priority should be given tothe organization of TOT at headquarters and in the field (Files).

3.12 In January 1985, an addendum to the terms of reference was issuedreducing the scope of the study of TOT's external relations and reducingthe time for this work from six man-months to one man-month. A press leakreferred to later in this report included crit.cism of the consultants'failure to comply with their terms of reference and deal with the Board andexternal relations issue. The consultants then complained that not onlyhad they been held up by TOT's failure to approve plans but the Bank'sSupervision mission had agreed changes in their work plans in order toinsure useful employment. Although there were pressing problems in otherareas, where the consultants could usefully be employed, it is the opinionof this audit that the i6sue of overall policy control of the sector, asagainst day-to-day management, was one of the major organizational problemsand the 'ank shculd have taken a stronger line in insuring action was takenby 1 parties and priority given to the external relations/policy issue(Files).

3.13 the AT&T Company supplied experts, financed under the loan, to setup a FPU and study the tariff structure. An American study group, alsofinanced by the Bank, separately undertook an economic study of the usageof telephone service in rural areas. Performance of the experts and thestudy were satisfactory (PCR, paras. 3.34-3.35).

(3) Coordination of Project Components

3.14 There are repeated references in files to the poor coordinationbetween provision of the related project components and the placing of alarge order for switching equipment for a future project (Files and PCR,para. 6.3).

3.15 The coordination of project components was a matter addressed inthe consultants' terms of reference. Based on the consultants' recommer.-dations and under Bank pressure to imvwe coordination, a ProjectCoordinator was appointed. It has not been possible to confirm, however,how far Proje:t Evaluation Review Techniques (PERT, are being followed. Itis considered that, in the case of provisions of the magnitude coveredunder these projects, critical path diagrams should be prepared. These

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should cover the period from design to commissioning and show all projectcomponents such as buildings, exchange equipment, external network, sub-scribers connections, etc. They should circulate regularly to managementand provide a basis for deciding when orders should be placed, and anyspecial action necessary. They reduce losses due to idle equipment andthey help in bringing to notice and resolving problems while the project isbeing planned or under execution.

(4) Accounts Receivable

3.16 Government guaranteed, under the third project, to settle theoutstanding accounts for all departments and agencies and maintain paymentson a current basis. It took five years, however, for this matter to befinally settled (PCR, para. 2.8).

3.17 Whilst the fact that payment was finally made by Government isreassuring, the improvement in many countrie has often been only short-term as the telecommunications administration can seldom, for Governmentand essential services, take recourse to their usual solution of discon-necting service until payment is made. A number of administrations havetherefore adopted the solution of charging interest, at rates up to 22 permonth, on overdue accounts. This usually reduces the volume of thesecases, even for government subscribers, as officials, who are accountablefor payments, seldom wish to face criticism for unnecessary expenditures.

(5) Financial Performance

3.18 TOT's financial performance, as compared with the appraisal fore-casts, is very adequately described in the PCR, paragraphs 5.1-5.9 andAnnexes 7-10. Factors affecting the position which were not foreseen atappraisal were:

(a) the delay in iritiating the start of the third project due tothe change in technology;

(b) subsequent delays in the completion of both projects;

(c) inadequate coordination in the provision of project componentswith consequent high debt servicing charges for idle equipment;

(d) the failure to connect subscribers promptly even when facili-ties were available;

(e) delays in approval of the second tariff increase required tomeet the capital contribution covenant of the fourth loan;

(f) the cancellation of the subscribers bond system as a quid proquo for the second tariff increase; and

(g) increased debt servicing charges due to the devaluation of theBaht.

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3.19 Despite these factors, TOT's profitability in terms of the rate ofreturn on revalued net fixed assets was above the covenanted level of 102per annum throughout the period and averaged 18.62.

3.20 The operating ratio, at a satisfactory average level of 502, wasconsistently better than the appraisal forecasts. The debt/equity ratioremained below a satisfactory 60/40 through 1983 but then increased to83/17 in 1986 falling to 78/22 in 1987. This wa6 in part caused by theBaht devaluation associated with foreign currency borrowings.

3.21 The current ratio was substantially in line with appraisal fore-casts and averaged 2.0 times.

3.22 Due to the delay in tariff increases, the increase in debt ser-vicing charges, and the Baht devaluation, the ratio of net income to totalassets fell to an unsatisfactory ratio of 1.12 in 1985 but, following thetariff increase, had increased to 6.4Z in 1987.

3.23 The debt/service ratio of 1.5 times was met throughout the projectperiods although it fell to the marginal 1.5 times in FY85 ane FY86.

3.24 Rather than apply a rate of return covenant for the fourthproject, the Bank specified that TOT should maintain internal cash genera-tion at, at least, 20Z of average annual capital expenditure up to FY85, atleast 252 for the entire FY82-85 period and 352 for FY86. Due to the delayin approving tariff increases, TOT failed to meet these requirements from1983 through 1986 with an average of only 17.5Z for that period. Followingthe tariff increase in March 1986, the figure for 1987 increased to 462(PCR, para. ?.15 and Annex 7).

3.25 Despite the failure to meet the internal cash generation covenant,TOT's cash flow position was, on average, satisfactory during the period ofexecution of the projects, and they had no difficulty in financing thelocal cost component of the projects. The Bank was, however, correct inhighlighting the issue and pressing for the tariff increase as TOT's finan-cial position was showing a progressive deterioration through the period1984 to 1986.

3.26 Despite its failure to use the new installations on a timelybasis, TOT's performance in increasing productivity and reducing operatingexpenses was admirable. Over the 1978 to 1987 periods, the number of staffper 1,000 telephones was reduced from 24 to 16. Revenue per working lineincreased at constant 1978 prices from B 4,433 to B 6,454, or 452. Cashoperating expenses at constant 1978 prices were reduced from B 2.246 toB 1,922, a reduction of 14Z (PCR, Annex 7).

3.27 In common with many administrations in developing countries, TOThas faced a major accounts receivable problem. By 1982 the position hadbecome extremely serious with the outstanding amount equivalent to 152 daysof annual revenues. As a result of the requirement under the third projectfor payment of government accounts and increased attention to billing andcollection, the level as at the end of FY87 had been reduced to 76 days.

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This is still considered to be overlonj and falls short of the appraisaltarget of 58 days (PCR, para. 5.5).

3.28 The one major issue bearing on TOT's financial positions whicharose during the period of project execution was the failure to raisetariffs in order to meet the internal cash generation covenant. Despiterepeated representations by the Bank, there was an inordinate delay inraising tariffs and even when these were finally increased, a most undesir-able elimination of entry fee price rationing was made as a quid oro quo.presumably to reduce public criticism.3 The major objection to theincreases appears to have been from the Chairman of TOT's Board, who,perhaps with some justification, considered that tariffs should only beincreased after the quality of service had been improved. This is, how-ever, to some extent, a "chicken and egg' situation as adequate funding isnecessary for development projects in order to obtain service qualityimprovements (PCR, para. 6.3).

3.29 One aspect of this matter where the Bank could perhaps be criti-cized is that the Chairman of TOT's Board appea:s not to have alwaysreceived direct advice of the Bank's views in this matter. The Chairmanwas Commander in Chief of the Armed Forces and a very important and busyperson. Visiting supervision missions found it difficult to meet TOT'sBoard and discuss the Bank's concerns even though the Board together withGovernment was responsible for policy decisions affecting TOT. Even somecorrespoidence, addressed to TOT, although copied to MOC, MOF, BB andNESDB, was not copied to the Chairman. The only direct letter to himduring this period, found in files, did not get beyond the draft stage andwas never sent as, by that stage, it had been finally agreed that tariffswould oe increased (Files).

3.30 At the time the revised tariffs were being introduced it isthought that the Chairman should have been directly informed by the Bankthat the elimination of the subscribers bond was a retrograde step which,beside removing a source of low-cost funding for TOT. would lower economicefficiency, in the allocation of telecommunications facilities, until suchtime as demand could be fully met (Files).

(6) Economic Rate of Return

3.31 Separate rates of return were calculated at the time of appraisalfor the two projects under audit. These were 19Z for the third project and26? for the fourth project. The rate of return for the two projects as awhole has been recalc,ilated as 132. The delay in approving increasedtariffs substantially reduced the benefit stream during the early years.

3.32 The actual rate of return, as recalculated, understates the actualbenefits due to consumer surplus plus indirect ani external benefits. Inthis case also due to the changes in technology and increased capacity,further benefits are likely to accrue due to the use of facilities for

3/ Government comments that other measures increasing revenues or reducingcosts should also have been taken into account (see Attachment 3).

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subsequent projects and the expected longer life of filled cables and elec-tronic equipment (PCR, paras. 7.5-7.6 and Annex 13).

(7) Fiscal Impact

3.33 In view of Government's equity investment in TOT, a substantialcontribution is made annually to the Treasury. For the project period ofFYs 1978 to 1987, this averaged 43Z of net income and amounted in total toBaht 7,800 million. Due to the delays in project execution and inincreasing tariffs, this fell short of the concribution of Baht 14,500million estimated at appraisal (PCR, para. 7.7).

(8) Training

3.34 TOT has placed an adequate emphasis on training at its well-equipped training centre. Output increased from 5,510 staff weeks in 1981to 10,700 in 1987. Overseas and local training was arranged for the newdigital technology (PCR, para. 6.5).

IV. THE BANK'S PERFORMANCE

A. General

4.01 The PCR paragraphs 8.1 to 8.4 raise a number of points relating tothe Bank's performance and limited failures under the project. Earliercomments in the PPAM also relate to the few areas where performance mighthave been improved. Generally speaking, however, the Bank's performance onboth the Country Programs and Projects sides was excellent.

4.02 First class technical and financial advice was given and difficultissues were handled wisely and well. The relations with the borrower werealso extremely good. The position was undoubtedly helped by the fact thatthe engineering staff member who appraised the projects remained in chargeof supervision through to completion. There was also continuity, for aconsiderable period on the Country Program side. The value of continuityin projects of this nature cannot be overstressed.

4.03 The Bank's Field Office in Bangkok also performed extremely wellin helping to resolve many of the difficulties that arose during projectexecution, in keeping Headquarters advised of the latest position andgiving well-considered advice at all times.

4.04 Through a continLation of the association established with TOTduring the two previous Bank-financed projects, the relations with theBorrower were very satisfactory. TOT management and staff fully appre-ciated the contribution Bank staff were making through their input into theproject. They themselves were fully responsive to requests for informationand data. The Bank also had a good relationship with the government minis-tries and agencies concerned with the operation of the sector. One areawhere perhaps improved understanding would have been valuable was in theBank's relationship with the TOT Board.

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B. Specific Issues

4.05 In addition to its financial contribution through the two regularloans, the Bank made a special contribution in assisting TOT to obtain thebalance of its foreign exchange financing requirements through the B-Loan,the first to be processed in the Bank (PCR, para. 8.1).

4.06 It was largely on Bank staff's advice that TOT decided to make thechange to SPC Digital switching technology. Although this delayed thedevelopment program, it was a change which considerably improves facili-ties, should reduce operating co-ts, bring about accommodation savings andreduce future obsolescence.

4.07 The Bank encouraged TOT to include in its projects proposals forgreater expansion into rural areas. Included also was a study of use offacilities in these areas. These factors should have a significant bearingon improving the living standard in those areas through increased develop-ment and better social services (PCR, para. 8.2 and file research).

4.08 As in many projects involving major procurement of equipment,there were a number of representations from bidders on the fairness of theprocurement process and the awards made. The Thai Government, TOT and theBank were very sensitive to these representations, and award approval washeld up in a number of cases delaying implementation of the projects. Thiswas unfortunate as many of the complaints seem to have lacked substance orjustification. File research indicates that TOT dealt with its procurementof equipment, under ICB, both fairly and well. In the final analysis theBank accepted TOT's award r --mmendations for all contracts financed underthe two loans avid gave TOT vJluable support (PCR, para. ..14).

4.09 The PCR (para. 3.34) indicates that the consultants, :nder thefourth project, did not adequately address the problem of TOT's relation-ship with its Board and other goverr...-nt agencies. This matter has beendealt with in PPAM paragraphs 3.10 to 3.12. This is an area in which theaudit considers that there was a significant shortfall in bringing suffi-cient pressure on the Board and Government to support a change in policycontrol and coordination in the sector.

4.10 The approval of increased tariffs necessary to insure TOT's futurefinancial health became a major issue between the Bank and the Thai author-ities. File research indicates that, even after the Cabinet had approvednew tariffs, the Chairman of TOT's Board asked that the issue should beheld up until such time as TOT had improved its services. The events areoutlined in PPAM paragraphs 3.27 to 3.29. It would appear that the Bankhad some difficulty, for which it was not wholly to blame, in establishingcontact with and making its views directly known to the Chairman.

4.11 Bank supervision of the two projects was generally good and thesupervision reports maintain a high standard throughout. There were atotal of 20 supervision missions over the 10-year period (six of these werecombined missions). The average of two missions a year is consideredadequate in view of the fact that the Bank's Field Office also made a

- 16 -

valuable contribution in keeping Bank staff at headquarters advised ofdevelopments.

4.12 There is one issue involving confidentiality which should, webelieve, be commented on. In October 1985 the contents of an aide memoire,prepared during a supervision mission, and containing sensitive material,was published in almost verbatim form in the press. Although investiga-tions were made at the time by the Resident Representative, and presumablyby Government, it was not possible to identify the source of the leak. Itwas found, however, that the memo had been typed on a word processor inTOT's Office of Economics and Statistics and the disc filed in that office.Although it was the intention, after clearance, to make the informationavailable to TOT's management, and this was actually done before the leak,it is considered unfortunate that confidentiality within the Bank's organi-zation vas not insured by arranging typing in the World Bank Field Office.In this case, the only unfortunate result of the leak was a protest fromTOT's consultants that criticism, indicating that they had not fullycomplied with their Terms of Reference, was unjustified as the changeswhich had been made were with the Bank's agreement. There could have beena potential for much more serious repercussions.

V. THE SECTOR

A. Organization

5.01 The Bank's association with the sector and the employment ofconsultants has brought about many improvements in TOT's internal organi-zation, and they now appear well set to efficiently fulfill their responsi-bilities to government for the operation and continuing expansion oftelephone facilities in Thailand. There is, however, a continuing need forrationalization in the process of policy direction. As indicated in PPAMparagraph 3.09, this might be achieved through wider government representa-tion on TOT's Board and reduction of direct government direction to TOT onpolicy matters. It should also be insured that authorities are adequatelydefined and the Board does not intervene in TOT's day-to-day operations.

5.02 Although the position is not clear from file research, TOT appearsto collect a flat fee from CAT for connection of international calls. Thismay be appropriate when the majority of calls termnate in Bangkok. As,however, international traffic increases from other centers, the agreementbetween TOT and CAT should allow a fair division of international revenuesbased on the divisions applying in other countries. This is, of course,-ustified by the use of TOT's long distance and local networks for thec0llection and distribution of international traffic.

B. Local Manufacture of Equipment

5.03 There are presently three cable/wire factories and a subscribersarraratus factory operating in Thailand (Files).

- 17 -

5.04 The bids for Stored Program Control Digital Exchange equipmentunder the third project required bidders to submit general proposals forpossible future local manufacture of switching equipment. This request wasnot subject to evaluation and is not therefore mentioned in the PCR but isconsidered to be of major importance in future import substitution andsaving on foreign exchange expenditures. Thailand has now reached a stagewhere a demand in excess of 100,000 lines per annum for exchange equipmentmay well justify local production, even though the early stages will sub-stantially be in assembly of components. (The local production componentwill increase as experience is gained, and expansion of manufacturingfacilities extended.) There is likely progressively to be a spin off ofmajor importance to the economy, in the production of other electronicequipment. For example, the Gold Star factory in South Korea is now pro-ducing a wide range of electronic equipment and is a major TV and VCRmanufacturer. This factory was set up in cooperation with a telecnmmuni-cations equipment manufacturer.

5.05 Other important aspects of local production are that:

(a) the industry progressively becomes an important employer oflabor and contributes, through the development of better paidindustrial skills, to raising the stand&rd of living:

(b) it is easier to respond quickly to increases in demand whichare normal where growth rates are high; and

(c) there is greater cooperation between the operating entitiesplanning section and the production units;

In planning for local production, Thailand should ensure that:

(1) the licensing and component supply agreements are equitable andwill not force up prices of the end product to levels abovethose for similar equipment in world markets. This is alsoimportant to possible future export such as South Korea hasachieved;

(2) factory production should be based on reasonable productionruns. Expensive machine tools and equipment can significantlyincrease prices over imported items if their use is limited;

(3) unit costs can only bp maintained at a reasonable level througheconomies of scale and adequate labor training; and

(4) orders must be at a level related to production capacityallowing an even flow of the production process.

VI. CONCLUSIONS

6.01 The third and fourth projects more than achieved their physicalaims in expanding the metropolitan and urban telephone networks and in

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extendiig telephone facilities into rural areas. They also introduced moreadvanced techniques which should improve the quality of service and loweroperating and depreciation costs. On the other hand, the three- and two-year delays in project completion are serious negative factors and left TOTwith 400,000 waiting applications for service, at the time of completion ofthe fourth project. A substantial proportion of these were for Governmentand business users (PCR, paras. 9.01-9.02).

6.02 The planned institutional improvements within TOT's organizationwere designed, and largely implemented, with the assistance of consultantsand experts. The needed improvements in TOT's external relations and inpolicy direction were not fully achieved. The projects contributed to amore efficient organization as a result of which TOT is better geared toundertake the increased responsibilities consequent on the growth of thenetwork and required for future expansion. It is, however, necessary tocomplete the reorganization and, in particular, improve TOT's externalrelations and policy direction (PCR, para. 9.03).

6.03 Although the 1986 increase in tariffs. was not essential toproviding local funds necessary for execution of the projects, due partlyto the delays, the Bank was correct in pressing for the increase, in orderto insure TOT's future financial well-being, particularly in the light of amajor order placed for switching equipment for subsequent development. Itis unfortunate, however, that the Bank did not manage to persuade Govern-ment to retain the subscribers bond system. Some form of price rationingis impertant to the economic allocation of resources in cases where supplydoes not meet demand.

6.04 In view of the contribution the Bank has made to both the develop-ment and modernization of the sector and to iriproving its organization overa period of 16 years, it would seem a pity that a proposed further projectwas discontinued and no further Bank lending appears presently to be con-templated for telecommunications development in Thailand. The Bank hasgained an almost unique knowledge of the sector, it is fully aware of theremaining institutional problems, and it has some knowledge of the localmanufacture of telecommunications equipment in countries, such as India,where it has helped finance manufacturing activities. It is concluded thatfurther lending to the sector might result in a significant contribution toefficiency and development.

VII. SUSTAINABILITY

7.01 Sustainability is not normally a problem in the telecommunicationssector. Telecommunications administrations, as monopolies, have the advan-tage of providing an essential service to a captive market. A high propor-tion of the subscribers in the developing countries are businesssutscribers with a large consumer surplus and low elesticity. Even intimes of recession, the reductj sn in demand for service is negligible. Theposition is further protected by the large waiting list which, in Thailand,was 400,000 on project completion.

- 19 -

7.02 A further factor in sustainability is plant wastage and obso-lescence. Telecommunications plant has lives of from about 10 to 30 years.Recent changes in technology may lead to some obsolescence of the oldersystems previously in use although most developing countries admini-strations cannot afford the luxury of updating their systems and willsubstantially leave them in operation as long as they provide a reasonablestandard of service. In the case of the projects under review, plantobsolescence is not an issue as the latest technologies have been utilized.

7.03 The sustainability of TOT's institutional improvements is notbelieved to be in question. With its continued expansion of facilities.TOT will rather be forced to build on these. Having said this, there isstill the outstanding question of policy control of TOT's operations. Thiswas not resolved under the projects but remains an issue to be dealt with.

VIII. LESSONS TO BE LEARNT

8.01 The PCR (para. 9.06) summarizes the lessons to be learnt as:

(a) review of procurement procedures before start up might haveavoided some of the delays;

(b) closer supervision of the consultants' work might have ensuredthat the tasks were more adequately addressed; and

(c) the Bank might have provided increased assistance in obtainingGovernment clearance for TOT's reorganization.

8.02 Additional lessons uncovered as a result of the audit are:

(a) It is essential that policy direction should be properly coor-dinated, management responsibilities defined and authoritiesdelegated to an appropriate level in the organization. Afterthis has been done, interference from a higher level should beavoided. Such interference can only destroy morale and thedecision-making process. These are truisms but they appear notto be fully realized.

(b) Almost every project undertaken in the telecommunicationssector is "tca little too latp" and frequently results in alarger waiting list at the completion of the ' roject thanexisted at its inception. There were militating factors inthis case in that the Bank pressed for an increase in the sizeof the program and this was accepted by the borrower. Addi-tionally, the projects were unavoidably delayed by the changein switching technology. However, even if the projects hadbeen completed on time, a sizable waiting list of about 100,000woul have still existed. Restricted development should beconsidered in relation to the higher rearrangement and unitcosts of undertaking smaller programs and the economic costs ofhaving insufficient facilities.

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(c) There is a need for adequate coordination in the provision ofthe interrelated project components and for the connection ofsubscribers when the complete facilities become available.Failure to do this results in financial losses with the debtservicing and dep.aciation of the plant not covered by theadditional revenues. There is also a loss to the economy inthe delay in obtaining much needed communications facilities.

4

4/ The Industry and Energy Operations Division of Country Department II,Asia Regional Office, has indicated that it considers that the PPAM,in suggesting that the projects should have been more adequatelydesigned to meet demand, does not take into account theimplementation and operational limitations of the entity and thetendency for expressed demand to rise as more telephones becomeavailable.

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Oa -iTsSwilliods: inoil numumij nsranw, wo V 02) 257-1000Than w chi, Cable: TELTHAI BANGKOK

Telephone Organizotion of Thailand rkngok M pok 10500, Thailand Telex 82886 TELTHA TH

KK 23 GA./ d5/

ay'h , 1989

Mr. Alexander NowickiChief, Policy-Based Lending, Industry,Public Utilities and Urban Sectors DivisionOperations Evaluation DepartmentInternational Bank for Reconstruction and Development1818 H Street, N.W.Washington D.C. 20433U.S.A.

Dear Mr. Nowicki,

Re : Third and Fourth Telecommunications Projects(Loans 1620-TH, 2143-TH and B-1-TH)Draft Project Performance Audit Report [

With reference to your letter dated April 5, 1989, we wouldlike to present the following comments on financial aspect which you mayinclude in your final evaluation ocument.

1. We would like to inform the Bank that the main reason to eliminate thebond system altogether in December 1985 is not relating to a quid proquo for approval of the March 1986 tariff increases. The main reasonof the elimination of the bond system was based on the economicalsituation of the country during that period which had the strong impactto the purchasing power of the population to apply for the installationof telephones.

2. We would like to explain about the incorrect financial data in thefollowing documents:

a) The data on page 3 No. 2.4 in the Project Completion Report (PCR)and the data on page 6 No. 2.12 in the Appraisal Report of ThirdProject:

1) The average investment expected to be increased of US.$ 135million equivalent per annum should be between FY 78 and 82instead of FY 78 and 92.

2) The average number of new lines connected each year to increasethreefold from 20,820 per annum should be 63,930 instead of73,930.

3) Telephone density was equivalent to 0.83 in FY 77 not in FY 72.

b) The data on page 4 No. 2.7 in PCR and the data on pages 6 and 8 inLoan Agreement No. 1620-TH:

1) Sub section (b) is identical to No. 4.05 not 4.04 as stated inthe Loan Agreement.

2) Sub section (i) is identical to No. 5.06 not 5.07a as stated inthe Loan Agreement.

- 22 - ATTACHMENT 1Page 2 of 2

c) Data on page 42 of PCR, Annex 11, Tariff Schedule, the figures

apRcifIed are not identical with the actual figures as follows:

PCR Correct

1985 1986 1987 1985 1986 1987

Installation Charges (Baht)

Rotary dial 5,000 5,000 3,500 5,000 5,000 3,700

Push button 3 500 3,500 3,500 5,000 5,000 3,700

1985

PCR Correct

Subscriber Bond (Baht)

Bangkok : Subscriber who prefers installation with

High priority 30,000 15,000

Low priority 30,UO 15,000

Rest of Thailand : Exchange capacity of

Over 1,000 lines 3,000 5,000

Under 1,000 lines 1,000 3,000

Comments other than financial matter will be further submitted.

Best regards.

Sincerely yours,

X -. SL 4& -

Kiat SitibharpDeputy Managing DirectorBureau of General Affairs

4 oim-i5n5Wtwiajt:Inft1inFjTeephone Organization of Thagand

-23 - ATTACHMENT 2Page 1 of 1

No 0908/ J Office of The National Economicand Social Development Board.

962 Krung Kasem Road,Bangkok 10100, Thailand.

' May B.E. 2532 (1989)

Dear Mr. Alexander Nowicki.

Reference is made to your Project Performance Audit Report onthe Third and Fourth Tlecommunications Projects being sent for the NESDB'scomments. Considering the report, we do agree with most of the report andwould like to raise some other issues as follows:

1. The presentation of the facts is quite clear and veryinformative on part of the loan disbursement plan and itsimplementation.

2. The Bank covenants, such as the establishment of FundamentalPlanning Unit, and the maintenance of debt service ratio etc.have significantly contributed to the improvement of TOT'sefficiency. However, the improvement of TCT particularlyon organization and management have not been adequatelyaddressed, and should be given more emphasis.

Our very best wishes of you.

Yours sincerely,

(P11151TTPK~3

Mr. Alexander NowickiPublic Utilit'es and Urban Sectors Divison

Operations Evaluation DepartmentInternational Bank for Reconstruction and Development

1818 H Street, N.W.Washington, D.C. 20433

USA.

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ATTACHMENT 3Page 1 of 1

'o. 0304/31c Fiscal Policy Office

Ministry of Finance

Rama VI Road

Bangkok 10400, Thailand

J5 May B.E. 2532 (1989)

Dear M". Nowicki,

Reference is made to your letter dated April 5, 1S89,

asking me to reply the comments by May 19, 1989 on drafts Project

Performance Telecommunications Projects.

I had read your excelent reports and wish to advise my

general comments as follows.

1. As you mentioned in your report concerning the

project delay because of the change in switch system. I do agree with

your comment, but I feel that this technology of the switching rhoulo

be discussed and agreed when tne appraisal report had been made

therefore, the project may not delay and TOT can save time and cost.

2. As for the tariffs, if the tariffs are increased

to meet the requirement of 10% rate of return throughout the project

period as suggested, I think that there should be more alternatives

againt tariff increased such as, improving day-to-day management for

bill collecticon, introducing time zone metering and restructuring

the number of the responsibility organizations for Teleco=munication3.

I hope that you will take my comments into your

considerations. Thank you very much indeed.

Yours sincerely,

Mr. Alexander Nowicki,Chief.Po iy-Based Lending,

Induetry,Public Utilities and (Sommal Phasee)

Urban SectorsDivision Dire-tor

Operation Evaluation Loan Policy and Management DivisionDepartm.nt,

The World Bank,1818 H Street, N.W.,Washington, D.C. 20433,

- 25 -

PROJECT COMPLETION REPORT

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS

LOANS 1620-TH, 2143-TH, and B-1-TH

Industry and Energy Operations DivisionCotntry Department IIAsia Regional Office

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THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS

LOANS 1620-TH, 2143-TH & B-1-TH

Project Completion Report

I. INTRODUCTION

Telecommunications Sector

1.1 Three entities under the Ministry of Communications - the TelephoneOrganization of Tnailand (TOT), the Communications Authority of Thailand (CAT)and the Posts and Telegraphs Department (PTD) - are respcnsible fordevelopment of all public domestic and international telecommunicationsservices in Thailand. TOT and CAT are wholly government-cwned public sectorcorporations, and PTD is a government department. TOT operates the domesticlocal and long-distance telephone services and some international serviceswith neighboring coantries, and CAT the domestic telex and all other inter-national services. TOT also leases domestic point-to-point circuits forvoice, telegraphs, radio and telev,sion transmission. The chief executives ofTOT and CAT are members of the Board of the other sister organization andprovide the necessary coordination between the two entities. PTD regulatesand monitors radio frequencies, licenses private networks and representsgovernment on international telecommunications matters.

Bank Involvement in the Sector

1.2 The Bank has been involved in the telecommunications sector inThailand since the early 1970s through four telecommunications projects. TheBank's first loan to TOT, Loan 864-TH for US$37.0 million in November 1972,primarily financed the rehabilitation of the then deteriorating domestictelephone network and minimal essential expansion. The second loan to TOT,Loan 1253-TH for US$26.0 million in May 1976, financed provision of limitedlocal telephone facilities in Bangkok and major provincial towns to meet thegrowing demand for telephones and the establishment of a basic network oflong-distance switching and transmission facilities for gradual introductionof the fully automatic Subscribe. Trunk Dialing (STD) service. The First andSecond Telecommunications Projects were successfully completed in October 1976and December 1980, respectively. A combined Project Performance Au.it Reportwas issued in December 1982.

1.3 A third Bank loan to TOT, Loan 1620-TH for US$90.0 million, wasapproved in October 1978 and a fourth, Loan 2143-TH for US$142.1 million, inDecember 1982 to support further expansion of local telephone facilities inuroan areas, expansion cf long-distance telephone facilities and extension oftelephone service to rural areas hitherto without access to service. TheThird and Fourth Telecommunication Projects were also supported by a 'B' loan,

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B-1-TH, for Yen 8 billion approved in September 1983 in which the Bank parti-cipated with Japanese commercial bankq with a contribution of Yen 2 billion.The Th2rd and Fourth Telecommunications Projects, completed in September 1985and September 1987 respectively, are the subject of this combined ProjectCompletion Report (PCR).

1.4 The PCR was prepared by the Bank, based on a mission to Thailand inJanuary 1988, a draft report prepared by TOT, and on the data and informationcompiled by TOT from its records and collected from the Bank files, theappraisal and supervision reports and the legal documents for the twoprojects.

II. PROJECT PREPARATION AND APPRAISAL

A. Third Telecommunications Project

Preparation, Appraisal and Loan Approval

2.1 In early 1976, TOT prepared a two-phase development program up tothe end of 1984 - Phase I for FY77-82 and Phase II for FY79-84. The FY77-84program was approved by the Government in September 1977 and TOT requested theBank's financial assistance for Phase I. A Bank mission in August 1977rev;.ewed TOT's proposed development program and found that: (a) the proposedrate of expansion was inadequate to meet a reasonable proportion of theexpected telephone demand in urban areas; (b) the proposed improvement inaccess to service in rural areas was inadequate; and (c) based on the thencurrent tariffs, TOT's financial performance would be unsatisfactorythroughout the program period.

2.2 Reacting to the Bank's comments, TOT: (a) enlarged Phase I of theprogram to provide for a higher rate of growth in urban areas, and provisionof service to more rural areas; (b) proposed to the Government a '.riffincrease to finance the higher development costs and provide for i higher rateof internal funding of such costs; and (c) rescheduled the first phase of thedevelopment program to cover the FY78-82 period. The Third TelecommunicationsProject comprising TOT's revised FY78-82 development program was appraised inOctober 1977. After Government's approval of the enlarged program and theproposed tariff increase, a Bank loan of US$90 million to TOT was negotiatedin June 1978. The Bank's Board of Executive Directors approved the loan onSeptember 12, 1978 and the Loan/Guarantee Agreements were signed on October 4,1978.

2.3 Subsequently, in September 1983, ,oan B-1-TH was approved to provideadditional resources for activities under the Third and Fourth Projects.Further details of the "B" loan and its processing are given in para. 2.11.

Project Objectives

2.4 The objectives of the Third Project were further development of thetelecommunications facilities started under the previous two Bank projects and

- 29 -

achievement by 1990 of the following long-term objeccives agreed between TOTand the Bank: (a) telephone density (telephones per 100 population) to beraised to 25.0 in Bangkok and 5.1 in the rest of the country; an (b) alltowns and villages with a population over 2,000 each to have access totelephone service. Under the Third Project, the level of investment wasexpected to increase from an average of US$23 million equivalent per annumbetween FY72 and FY77 to US$135 million between FY78 and FY82, and the averagenumber of new lines connected each year to increase threefold from 20,820 perannum to 63,930 per annum. The telephone density was expected to increasefrom 0.83 telephones per 100 population in 1977 to 1.54 on completion ofproject in 1982, and telephone availability (the ratio of working lines tototal demand) from 0.47 to 0.61 during the same period. The Third Project didnot have any specific objectives for the institutional development of TOT.

Project Description

2.5 The main components of the FY78-82 project were the following:

(a) installation of about 185,000 lines of loco! exchange equipment andassociated cables and subscribers plant to connect about 170,000 newsubscribers and 6,000 public call offices, and replace 3,000 linesof old exchange equipment;

(b) installation of about 13,000 lines of tandem exchange equipment and15,000 lines of trunk automatic exchange equipment;

(c) installation of microwave radio systems on two new routes, 200 otherradio systems to serve 210 public call offices and upgrading ofradio equipment on 12 routes; and

(d) provision of vehicles and execution of civil works.

Project Costs and Financin

2.6 The total cost of the project was estimaLed at B 6,266.1 million(US$307.2 million) including a foreign cost of B 3,672.0 million (US$180.0million). The foreign cost was to be financed by the Bank loan of US$90million, a loan from the Japanese Overseas Economic Cooperation Fund (OECF) ofUS$60 million equivalent and a commercial bank loan of US$30 million. Thelocal cost was to be financed by TOT through internal cash generation,subscriber bonds and customer deposits (B 2,451 million), a Government loan (B102 million) and a Japanese bilateral loan (B 41 million).

Covenants

2.7 In addition to the standard Bank covenants, Loan Agreement (LA)1620-TH required TOT as the Borrower to:

(a) establish by September 30, 1979 a Fundamental (Corporate) PlanningUnit (LA 4.04);

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(b) undertake by January 1, 1979, an economic study oftelecommunications in Thailand (LA 4.05);

(c) develop and adopt by September 30, 1979, a Management InformationSystem (LA 4.06);

(d) establish by March 31, 1979, a waiting list of subscribers(LA 4.07a);

(e) implement by March 31, 1979, measures to connect new subscriberssimultaneously with the commissioning of telephone exchanges andcable facilities (LA 4.07b);

(f) adopt and initiate by October 1, 1980, a changeover to a new systemof bill collection and complete changeover by September 30, 1982 (LA4.08);

(g) complete by June 30, 1979, a revision of asset valuation andrevaluation procedures (LA 5.03a);

(h) commencing with the fiscal year beginning October 1, 1979, calculatethe rate of return based on revalued assets (LA 5.03b);

(i) submit to the Bank audited financial statements within four monthsof the close of each fiscal year (LA 5.04);

(j) maintain a debt service ratio of at least 1.5 times (LA 5.06a);

(k) maintain a rate of return (on revalued basis) of 10% per annum (LA5.07a); and

(1) before June 30 of each year, review the adequacy of its tariffs toachieve a rate of return (on a revalued basis) of 10% per annum andsubmit a copy of the report of such review to the Bank (LA 5.07b).

2.8 The Guarantee Agreement (GA) 1.620-TH required the Government to:

(a) settle on a current basis all accounts submitted by TOT for servicesrendered to government departments and agencies (GA 3.02a);

(b) settle by September 30, 1983, all outstanding accounts due from thegovernment departments and agencies to TOT as of September 30, 1979(GA 3.02b);

(c) restrict by December 31, 1980, the licensing of new privatetelephone networks (GA 3.03a); and

(d) impose by December 31, 1980, a license fee on all private teleph'nenetworks (GA 3.03b).

2.9 The status of compliance with the covenants by TOT and theGovernment is discussed in para. 6.11.

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B. Fourth Telecommunication Project

Preparation, Appraisal and Loan Approval

2.10 A Bank identification mission in April-May 1980 first reviewed TOT'sproposals for a FY81-84 Fourth Telecommunications Project and suggested someimprovements in its size and design (e.g., by increase in exchange sizes,improvements in network configuration, reduction in cable provision, moreurban public call offices, deeper telephone penetration of rural areas,etc.). The project was appraised in October 1980. However, noting implemen-tation delays on the ongoing Third Projecc in respect of procurement andfulfillment of institutional covenants, the appraisal mission recommendedpostponement of the processing of the Fourth Project by the Bank tillsatisfactory progress was achieved on the ongoing Third Project. Based on thefindings of a Bank mission which visited TOT in May 1981, the Fourth Project(rescheduled as a FY82-85 project) was reappraised in October 1981. A loan ofUS$142.1 million was negotiated in March/April 1982 and the Bank's Board ofExecutive Directors approved the loan on May 13, 1982. The Loan and GuaranteeAgreements were signed on December 12, 1982.

2.11 In June 1983, the Government requested Bank's additional assistancetowards financing part of the balance costs of the Third and the FourthProjects through World Bank participation in a proposed Japanese commercialbanks' syndicated loar to TOT. On July 28. 1983, the BAnk's Board ofExecutive Directors authorized the Bank to negotiate with TOT and the Japanesecommercial banks its participation in the syndicated loan of Yen 8 billion(equivalent to US$34 million) including Bank participation of Yen 2 billion(US$8.5 million equivalent). The loan was negotiated in August 1983, and theBank's Board of Executive Directors approved Loan B-1-TH on September 13,1983. The Loan and Guarantee Agreements for Loan B-1-TH were signed onSeptember 22, 1983. There were no specific covenants in the agreementaffecting project implementation. The terms of the loan were as follows: (a)Interest - (i) Fixed Rate Tranche (Yen 3 billion, commercial banks' portion):for each drawdown, 0.3% per annum above the long-term prime lending rate inJapan on each drawdown date; (ii) Floating Rate Tranche (Yen 3 billion,commercial banks' portion; Yen 2 billion, Bank's portion): for each drawdown,,0.1% above the long-term prime lending rate in Japan which will be adjustedevery six months; (b) Term - 161 years (14 years for the commercial bankportion with an additional 2 years for the Bank's portion at the end of thecommercial bank portion; (c) Repayment: commercial banks' portion - 15 equalsemi-annual installments commencing 5 years from the final drawdown; Bankportion - 4 equal semi-annual installments after the final repayment of thecommercial banks' portion.

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Project Objectives

2.12 The development objectives under the project were to assist TOT inachieving the long-term objectives up to 1990 agreed between TOT and the Bankunder the Third Project (para. 2.4). In addition, the Fourth Project wasfocussed on providing assistance to TOT to design and implement acomprehensive package of organizational and managerial improvements to enableTOT to undertake a sustained and rapid service development and operate andmanage the services without external assistance, and to develop guidelines forfuture investments responsive to national priorities set by the government.

Project Description

2.13 The main components of the FY82-85 project were:

(a) provision of management consultants, technical assistance andtraining fellowships to improve TOT's institutional capabilities;

(b) installation of about 373,000 lines of local switching equipment andassociated cable networks and subscriber plant to connect about278,000 new subscriber lines including about 1,100 public calloffices;

(c) installation of about 19,400 circuit terminations in four existingand one new tandem exchanges;

(d) installation of about 16,000 circuit terminations in long-distancetrunk automatic exchanges;

(e) installation of about 42 microwave and 303 other radio, PCM andcable systems, and about 22,000 channel-ends in the main and rurallong-distance transmission networks;

(f) provision of about 1,200 rural public call offices in about 300locations in rural areas; and

(g) provision of about 300 vehicles and execution of civil works.

Project Costs and Financing

2.14 The total cost of the project was estimated at B 11,320.5 million(US$492.2 million) including a foreign cost of B 6,369.7 million (US$276.9million). The local cost of the project was to be financed entirely by TOTfrom its internal cash generation, subscriber bonds and customer deposits.The foreign cost was to be financed partly by the Bank loan of US$142.1million, and the balance from suppliers' credits, bilateral loans orcommercial bank loans. The exact sources and level of funding had not beenidentified at appraisal but TOT and the Government assured the Bank duringnegotiations that no difficulty was anticipated in arranging these funds asneeded, and, in retrospect, no difficulties were encountered and projectimplementation was not affected.

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Covenants

2.15 In addition to the standard Bank covenants, the Loan Agreement 2143-TH required TOT, as the borrower to:

(a) employ management and technical experts (LA 3.02);

(b) review and improve by March 31, 1983, procedures for telephoneallocation and the subscriber bond system to ensure priority forhigh bond applicants anu' simplify its bond system administration (LA4.03);

(c) submit to the Bank audited financial statements within six months ofthe close of each fiscal year (LA 5.04);

(d) maintain internal cash generation of at least 20% of average annualcapital expenditure up to FY85, at least 25% for entire FY82-85period and at least 35% for FY86 (LA 5.06a); and

(e) review before June 30 each year, the adequacy of its tariffs to meetthe requirements of LA Sec. 5.06(a) and submit report to the Bank.

2.16 There were no covenants specific to the project either in theGuarantee Agreement (GA) 2143-TH or in the Loan and Guarantee Agreements B-1-TH.

2.17 The status of compliance with the covenants by TOT is discussed inpara. 6.11.

III. IMPLEMENTATION

A. Third Telecommunications Project

Loan Effectiveness and Start-up

3.1 There were no specific conditions for loan effectiveness and theloan was declared effective on January 3, 1979, three months after the date ofloan signature.

3.2 TOT had initially prepared the network designs and procurement biddocuments based on pure analog technology and electro-mechanical switching.With the availability of the "PC (stored program controlled) analog switchingtechnology, soon followed by digital technology for switching and trans-mission, TOT decided in late 1980 to adopt the latter for the country'stelecommunications netvork, a decision fully supported by the Bank. TOT alsodecided to change from the then existing 24-channel (1.54 mbt/s) PCM systemconfiguration to the more universally used 32-channel (2.048 mbt/s) PCMsystem. TOT also decided to adopt foam-skin jelly filled cables (instead ofpaper core cables) for its underground cable distribution network. All thesechanges in technology necessitated redesign of both local and long-distancenetworks. In consequence, procurement action on major components of the

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project lagged by nearly two years. However, considering the long-termtechnical and economic benefits of digitalization and the penalties and costsTOT would have otherwise incurred in integrating older technology equipmentwith the new digital equipment in the future, TOT's decision to adopt digitaltechnology was timely and wise and the achieved benefits of the new technologyexceeded the opportunity cost of the project delay.

Changes in Project Scope

3.3 The decision to adopt digital technology and the consequent need toredesign both the local and long-distance networks based on that technologyresulted in some changes in the scope of the project. Annex 1 gives detailsof the appraisal estimates of the different components and the quantitiesactually installed. Some important changes are given below:

(a) local switching equipment: from 187,800 lines as appraised to210,800 lines. (This was also occasioned partly by a decision onstandardization of two sizes of mobile telephone exchanges insteadof the three earlier planned and the need to install additionalequipment in existing exchanges to meet the demand for newconnections);

(b) tandem switching equipment: from 15,000 circuits in seven existingexchanges to 38,244 circuits (5,300 in three existing exchanges and32,944 in four new digital exchanges). The change was necessitatedby a new traffic routing pattern for digital local and trunkexchanges;

(c) trunk switching equipment: from 15,000 circuits in existingexchanges to 16,339 (11,500 circuits in existing analog exchangesand 4,839 in new digital exchanges);

(d) junction cable network: use of PCM systems instead of physical cablepairs for junctions because of digital environment led to large-scale substitution of planned cables by PCM systems;

(e) Local cable network: from 826,850 pair-kms to 934,615 pair-kms tocater to increased local exchange capacities and to provide forexpansions planned along the same routes under the follow-onproject;

(f) transmission system: changes in network configuration due toadoption of digital technology; and

(g) civil works on cable laying: due to the increase in network size andto overcome restrictions imposed by local civic authorities onrepeated digging along the same route; TOT also put in ducts asexisting roads were renovatei or as new roads were constructed.

3.4 These changes were re'viewed as they occurred by Bank staff. InAugust 1983, TOT requested the Bank for a revision in the project scope and,based on known contract prices and revised procurement arrangements, an

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amendment of the loan allocatiot.. These were approved by the Bank on November30, 1983.

Implementation Schedule

3.5 Annex 2 compares the appraisal implementation schedule with actualresults. The main reasons for the overall three-year delay in projectcompletion were the following:

(a) the decision in late 1980 on digitalization of the network;

(b) the decision to standardize digital exchange sizes and type of PCMsystem (32 channel against existing 24 channel);

(c) the delay by TOT in preparing the of bid documents and particularlyin evaluating bids received and in awarding contracts;

(d) the ielay in securing agreement on procurement of items jointlyfinanced by the Bank and OECF;

(e) the delay in procuremenlt af land in rural areas; and

(f) the delay in connection of new lines.

3.6 The decision on adoption of digital technology and the change fromthe existing 24-channel to 32-channel PCM systems, both of which were fullysupported and encouraged by the Bank, delayed procurement by nearly t4o years,as the configuration of both local and long-distance networks had to be re-engineered. However, in the final stages, there were delays in connection ofnew lines to exchanges already installed due to lack of required local cablenetworks or, in rural areas, of transmission systems to connect remote lineunits to main parent exchanges. The project was completed in September 1985,three years behind schedule.

Project Costs and Financing

3.7 Annex 3 gives the estimated and actual local and foreign costs ofthe project components and the percent variation. Annex 4 gives the sou-cesof financing of local and foreign costs. TOT did not experience any problemsin arranging for cofinancing and the availability of local or foreign fundswas not a cause for project implementation delays.

3.8 Table 3.1 below summarizes the total project costs in Baht and USdollars. In conversion of costs to US dollars, annual exchange ratevariations have been applied which result in a proforma exchange rate of US$1= B23.08 for total project costs against US$1 = B20.4 at appraisal.

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Table 3.1: TOTAL COSTS OF THE THIRD PROJECT (LOAN 1620-TH)

Baht (Millions) US$ (Millions)Local Foreign Total local Foreign Total

Appraisal Estimate 2,594.1 3,672.0 6,266.1 127.2 180.0 307.2Actual 3,781.3 4,197.8 7,979.1 161.5 184.2 345.7Percent Increase 45.8 14.3 27.3 27.0 2.3 12.5

Table 3.2 indicates the differences in unit costs of project components in USdollars as assessed at appraisal and the actual contract price in dollars.The increase in total project costs (in terms of Baht) was in part due todelays in project implementation (assessed at about 15% of the total costincrease) and in part due to an increase in scope of project works (about12%). The substantially higher increase in local costs vis-a-vis foreigncosts was due to TOT's procurement of vehicles and subscriber terminalequipment (except coin boxes) using local funds instead of foreign funds asexpected at appraisal in light of a government directive to encourage domesticindustries.

Table 3.2: UNIT COSTS OF MAJOR COMPONENTS OF THE THIRD PROJECT(US$)

PercentAppraisal Increase

Item Unit Estimate Actual (Decrease)

Local Switching EquipmentBangkok Line 326 447 37Provinces Line 491 448 (9)

Trunk Switching Equipment Circuit 1,433 875 (39)Cables and Outside Plant

Bangkok Pair-km 97 126 30Provinces Pair-km 65 47 (28)

Subscriber PlantBangkok Set 79 113 43Provinces Set 70 127 81

Transmission Equipment Channel-end 4,342 5,192 20Rural Public Call Offices Set 3,254 825 (75)Vehicles Vehicle 12,849 9,497 (26)

Disbursements

3.9 Annex 5 gives details of the semi-annual cumulative disbursements ofLoan 1620-TH. Table 3.3 below summarizes the annual cumulative estimated andactual disbursements:

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Table 3.3: CUMULATIVE DISBURSEMENT OF LOAN 1620-TH(US$ Millions)

End of IBRDFiscal Year Appraisal Estimate Actual Actual as % of Estimate

1979 1.0 01980 20.0 - 01981 60.0 0.2 01982 80.0 11.7 151983 90.0 38.0 421984 68.1 76

June 4, 1985 90.0 100

3.10 The loan was closed on September 30, 1984, 12 months later thanscheduled date of September 30, 1983. At appraisal, disbursements wereexpected to be completed by December 31, 1982, but the final disbursement wason June 4, 1985. The delay was mainly due to delay in award of contracts formain components due to decision on adoption of digital technology and partlydue to delay by contractors in delivery and commissioning of equipment.

3.11 Loan B-1-TH for Yen 8 billion (US$34.9 million equivalent) wasclosed as scheduled on January 1, 1986. TOT applied 10.9% of the proceeds ofLoan B-1-TH to finance the costs of the Third Project and 89.1% to finance thecosts of the follow-on Fourth Project as follows:

rable 3.4: DISBURSEMENT OF LOAN B-1-TH(US$ Million Equvalent)

Third Project Fourth Project GrandLocal Foreign Total Local Foreign Total Total

Bank - 0.9 0.9 1.9 5.8 7.7 8.6Commercial Banks - 2.9 2.9 5.9 17.5 23.4 26.3

Total - 3.8 3.8 7.8 23.3 31.1 34.9Percent of Total (%) 0 10.9 10.9 22.3 66.8 89.1 100.0

Loan Allocation

3.12 Annex 6 gives the disbursement profile as a percent of the originaland revised allocation approved by the Bank on November 30, 1983, includingthe unallocated category. Table 3.5 below indicates the allocation of Loan1620-TH at appraisal, revised allocation and the actual disbursement againsteach category.

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Table 3.5: ALLOCATION AND DISBURSEMENT OF LOAN 1620-TM(US$)

Original Revised ActualCategory Allocation Allocation Disbursement

Local exchange equipment 31,000,000 45,700,000 46,009,274.46Telephone cables and accessories 15,000,000 13,600,000 13,580,731.77Subscriber facilities 5,000,003 2,600,000 3,432,767.64Transmission equipment 18,000,000 26,600,000 26,977,226.13Station equipment for rural PCOs 3,000,000 1,000,000Vehicles 1,000,000 -Unallocat:ed 17,000,000 500,000 -

Total 90,000,000 90,000,000 90,000,000

The vehicles were procured locally using Baht funds. Station equipment forrural public call offices was procured together with other coin boxes, andtheir costs debited to the "subscriber facilities" category.

Reporting

3.13 TOT regularly submitted good quality bi-annual progress reports onphysical implementation of the project, combined in later years with similarreports for the follow-on Fourth Project.

Procurement

3.14 TOT prepared on its own all bid documents, including technicalspecifications for the new digital equipment. In general, the quality ofdocuments was good. There were, however, delays in the preparation of the biddocuments occasioned mainly by the decision to adopt digital technology whichrequired redesign and re-engineering of the local and long distancenetworks. In addition, internal procedures within TOT, including therequirement of getting clearance at several levels up to TOT's Board ofDirector- also delayed procurement action. Representations by bidders againstTOT's bid evaluation and award decisions even before they were final affectedTOT staff morale and led to their over-cautious approach and procedures,requiring clearance of evaluation and award decisions by committees at variousmanagement levels. Procurement of radio transmission equipment for ruralpublic call offices was substantially delayed by a representation includingthreats of legal action by a bidder to various levels in TOT and theGovernme,.t and to the Bank. However, while they delayed the award decision,none of the representations and complaints received by the Bank against TOT'sevaluation could be sustained and, in all cases, TOT's award decisions wereaccepted by the Bank.

3.15 In order to ensure satisfactory performance of the digital switchingequipment which TOT was adopting for the first time, TOT had specified

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detailed technical performance criteria and the weightage to be given to suchcriteria in evaluation. This evaluation took an inordinately time, withoutaffecting the final outcome. Learning from this experience, TOT decided notto use such detailed criteria in future evaluations but to restrict itself toa few important performance criteria.

3.16 The Bank had required that, to ensure wider competition and lowerprices, TOT should permit suppliers to offer separate bidi for one or more ofthe components forming part of the Rural Public Call Offices tender, namelyradio equipment, power equipment, diesel generators, solar cells, etc. Bidsfor each component were to be evaluated and awarded separately. While thisenabled suppliers of special items (e.g. solar cells) to bid for a particularitem, leading to wider competition and lower prices, it caused problems to TOTduring physical implementation as it required coordination between differentsuppliers at each of the large number of work sites involved. In retrospect,award of contract to a single contractor for all components would haveeliminated this problem of coordination, resulting in earlier commissioning ofequipment; the revenues and benefits thereof would have at least partiallyoffset the higher cost.

3.17 In summary, the change in decision on technology, TOT's internalprocedures for bid document preparation and evaluation of bids, and biddersrepresentations against TOT's award decisions, all contributed to the three-year delay on procurement of major equipment items for the project.

Performance of Consultants, Contractors and Suppliers

3.18 TOT e.loyed consultants for design and introduction of a ManagementInformation System for customer services and operations; finance and accounts;construction planning and programming; service orders; etc. The originalcontract of 77 man-months was extended to 142 man-months to enable theconsultant to complete the assignment. The performance of the consultant wasadequate. The systems introduccd by the consultant have since been amended tomeet internal procedural changes and/or new needs.

3.19 The performance of equipment suppliers was in general satisfactory.They assisted TOT in resolving of problems that arose in actual operation oftheir equipment, the only exception being the supplier of diesel generatorsagainst whom TOT had to impose penalties (para 3.20).

3.20 The digital switching equipment from suppliers for both Bangkok andfor the provincial areas did not perform well initially, primarily because of(a) inadequate line protection, and (b) fading on long-distance digitaltransmission systems. Both factors led to serious exchange problems varyingfrom loss of calls in the process of being established (calls in progress notaffected) to loss of all calls including those in progress, and finally tocomplete exchange shut-down, requiring restart of the exchange. TOT providedmore sophisticated line protection to overcome the first problem but has yetto resolve fully the problem of digital transmission line fade-outs which areunder investigation. TOT also experienced problems with multi-frequency pushbutton telephones after these were placed in service with subscribers; thiscaused serious dissatisfaction among TOT's customers, eroded TOT's image with

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its customers and damaged general public perception of TOT's ability toprovide high quality service. The problems with telephone sets were resolvedwith the assistance of the manufacturer. However, TOT was not successful withthe contractor for diesel generators for rural areas, some of which weredelivered late and those delivered did not pass TOT's acceptance tests. Thisled TOT to impose penalties on the contractor in addition to withholdingpayments. The performance of other equipment items and their suppliers wassatisfactory.

B. Fourth Telecommunications Project

Loan Effectiveness and Start-up

3.21 The loan was declared effective on April 14, 1983, about three weeksafter the date specified in the Loan Agreement, after TOT met the stipulatedconditions of loan effectiveness.

3.22 Due to delay in preparation of designs and bid documents,procurement action on major components was delayed by about 6-9 months (exceptfor repeat or4ers on contractors for switching and transmission equipmentselected after ICB under the Third Project).

Changes in Project Scope

3.23 Annex 1 indicates the actual list of equipment installed as againstappraisal estimates. The changes were made primarily to cater to growingdemand for new connections in local areas and an increase in long-distancetraffic. Some changes arose out of standardization of five sizes for mainexchanges and four for remote subscriber units.

Implementation Schedule

3.24 Annex 2 compares the actual implementation with the schedule atappraisal. The primary causes for the two-year delay in final completion weredue, first, to delay in award of contract for rural transmission equipment dueto a bidder's representation (para 3.16) and, second, to delay in connectionof new lines to subscribers due to poor organization of this work. The latterresulted in large idle assets in the form of costly newly-installed equipmentand was a major issue in discussions between TOT and Bank supervision missionsin 1984 and 1985. The situation improved after TOT reorganized the work basedon consultants' recommendations and created a special group with soleresponsibility for connecting new lines. Hcwever, the program suffered a set-back when the TOT Board of Directors disbanded this group and transferred thework back to the "Operations Department" although the tempo of new connectionssubsequently increased with the use of private contractors for housewiring,etc. under TOT supervision. Connection of rural public call offices was alsodelayed due to delays in commissioning of the necessary transmissionsystems. The project was finally completed in September 1987, two yearsbehind schedule.

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Project Costs and Financing

3.25 Annex 3 gives the estimated and actual costs of the projectcomponents, and the percent increase (decrease) in local and foreign costs interms of local currency. Annex 4 gives the sources of financing. Financingof the project presented no problems.

3.26 Table 3.6 summarizes the total project costs in Baht and USdollars. In conversion of costs to US dollars, annual exchange ratevariations have been applied which result in a proforma exchange rate of US$1= B25.01 for total project costs against US$1 = B23.00 at appraisal.

Table 3.6: TOTAL COSTS OF THE FOURTH PROJECT (LOAN 2143-TH)

Baht millions US$ millionsLocal Foreign Total Local Foreign Total

Appraisal estimate 4,950.8 6,369.7 11,320.5 215.3 276.9 492.2Actual 5,398.5 6,578.4 11,976.9 215.9 262.9 478.8Percent increase 9.0 3.3 5.8 0.3 (5.1) (2.7)

(decrease)

There were substantial increases in costs of land and buildings, transmissionequipment (due to the increased scope of works) and rural public call offices(due to adoption of digital technology) but tl;ese were compensated bydecreases in costs of local switching equipment and miscellaneous items.Table 3.7 below indicates the differences in unit costs of differentcomponents in US dollars as assessed at appraisal and the actual contractprices.

Table 3.7: UNIT COSTS OF MAJOR COMPONENTS OF THE FOURTH PROJECT(US$)

Appraisal % IncreaseItem Unit Estimate Unit (Decrease)

Local Switching Equipment Line 414 319 (23)Trunk Switching Equipment Line 792 406 (51)Cables and Outside Plant Pair-km 107 81 (24)Subscriber Plant Set 80 60 (25)Transmission Equipment Channel-end 1,435 1,212 (84)Rural Public Call Offices Set 47,192 58,291 24

(including associatedtransmission equipment)

Vehicles Vehicle 9,280 6,295 (32)

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Disbursement

3.27 Annex 5 gives details of semi-annual cumulative disburse.mnt of Loan2143-TH. Table 3.8 below summarizes the annual cumulative estimated andactual disbursements:

Table 3.8: CUMULATIVE DISBURSEMENT OF LOAN 2143-TH(US$ Millions)

End of IBRD Appraisal Actual Actual as % ofFiscal Year estimate disbursement estimate

1983 16.1 2.4 151984 36.1 26.7 741985 70.1 71.9 1031986 110.1 92.2 841987 142.1 112.3 79

Tanuary 8, 1988 117.7 83

3.28 The loan was closed as scheduled on December 31, 1987. The finaldisbursement was on January 8, 1988, during the grace period. The total loanamount disbursed was US$117,704,967.38; the balance amount of US$24,395,032.3?was cancelled in three installments at TOT's requests in November 1984 (US$17million), August 1986 (US $3.7 million) and January 1988 (US$3.7 million).Loan cancellations were due partly to lower unit costs than forecast andpartly to variations in exchange rates, particularly that of the Japanese yen(the currency of major contracts) against the US dollar.

3.29 A portion of the project cost was also financed through part of thesyndicated Loan B-l-TH. Details of Loan B-1-TH and its disbursement are givenin para. 3.11 and Table 3.4.

Loan Allocation

3.30 Annex 6 gives loan disbursement as a percent of the orginal andrevised allocation approved by the Bank on November 16, 1984 including theunallocated category. Table 3.9 below indicates the loan allocation atappraisal, revised allocation and the actual disbursement against eachcategory.

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Table 3.9: ALLOCATION AND DISBURSEMENT OF LOAN 2143-TH(US$)

Original Revised ActualCategory allocation allocation disbursement

Local and trunk switchingequipment 60,000,000 38,900,000 34,024,921.00

Transmission equipment 63,000,000 77,500,000 78,739,548.92Consultants' services

and training 3,000,000 2,900,000 2,840,497.46Front-end fee 2,100,000 2,100,000 2,100,000.00Unallocated 14,000,000 3,700,000

Total 142,100,000 125,100,000 117,704,967.38

Reporting

3.31 TOT submitted regular good quality bi-annualprogress reports onphysical implementation of the project. The audited financial statements werereceived within the stipulated six months of close of TOT's fiscal year.

Procurement

3.32 Except for general delays in evaluation of bids and on awarddecisions by TOT, there were no specific problems on procurement of equipmentunder this project. However, there was a strong representation by a bidderagainst TOT's evaluation of bids for rural public call offices transmissionsystem (which included quantities for both the Third and Fourth Projects)(para. 3.16). There we - also substantial delays in the acquisition of sitesin some rural areas whica delayed completion of the rural component of theproject.

Performance of Consultants, Contractors and Suppliers

3.33 The performance of major equipment suppliers and contractors wassatisfactory except in respect of diesel generators and telephone sets, bothot which were procured in common with the previous Third Project (para. 3.20).

3.34 Performance of the organization and management consultants whoprovided about 125 man-months of services was generally satisfactory and theirrecommendations appropriate and acceptable to TOT. However, because of thelong (3-year) lead time for approval of their recommendations by TOT's Boardof Directors and the Government, the consultants could not be used for actualimplementation of the recommendations; they, however, provided the necessaryjob descriptions and training to the TOT staff pending Government clearance ofreorganization proposals. One of the tasks of the management consultants on

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which their final recommendations lacked substance and failed to address thereal problems was that of TOT's relationship with other government agenciesand the extent to which the performance of these agencies affect TOT's ownperformance. In retrospect, the terms of reference for the task did notclearly define the objectives, specific scope of work and intention. Throughbetter supervision and review of consultants work at an early stage, the Bankcould have noted problems and redirected the consultants work.

3.35 The performance of other technical experts for tariffs, the economicstudy and demand forecasting financed by the Bank was satisfactory.

IV. OPERATING PERFORMANCE

4.1 Annex 7 lists the key indicators relating to TOT's operatingperformance between FY78 and FY87. In general, TOT achieved and at timesexceeded the objectives of the two projects and their combined physicaltargets, though with substantial delays. The only physical target that wasnot achieved was in respect of inter-exchange junction network in Bangkok.This resulted from a technical decision to route calls of traffic betweenlocal exchanges via tandem exchanges instead of direct via cable/PCM curcuitswhich, however, did not affect the quality of service.

4.2 In addition to the multifold increase in the network size andworking lines, the projects contributed to significant improvement in thequality of both local and long-distance service. There were initial problemswith the performance of the new digital equipment introduced for the firsttime in Thailand, but, with suppliers' assistance, these were soon overcome.There was improvement in the call completion rate because of the newexchanges. The fault rate in the outside planz network did not show anyparticular improvement (because of continued use of the highly fault-proneaerial cables and long spans of drop-wires from cable terminals tosubscribers' nremises) but there was improvement in the speed of faultclearance evidenced by the gradual increase in the percentage of total faultscleared within 24 hours. In the long-distance service, complete eliminationof all manual operations (except for calls from rural and some urban publiccall offices) enabled most trunk calls to be dialed directly by subscribers.

4.3 There was also significant increase in access to service in newrural areas for the first time through rural public call offices and access toservice to non-subscribing general public in urban areas was improved throughprovision of a large number of public call offices, some with facility ofsubscriber dialing of long-distance calls.

4.4 In summary, with the adoption of the consultants' proposal forreorganization and revision of internal rules and regulations, TOT was able tohandle, without major problems, the increased volume of work generated by the304% growth in working lines between FY78 and FY87 and by the opening up ofnew areas to telephone service, and simultaneously improved the overallquality of both local and long-distance services. A measure of the overallimprovement is the substantial increase in average revenue per working Line

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between FY78 and FY87--over 40% at 1978 constant prices and nearly 148% atcurrent prices. TOT is also much better placed for future long-termdevelopment because of the establishment of a Corporate Planning Unit and thetraining given to TOT staff by the Bank-financed experts in the economic studyof telephone services in rural areas, demand forecasting, tariff studies, etc.

V. FINANCIAL PERFORMANCE

Financial Performance

5.1 TOT's actual overall financial performance for FY78-87 as comparedwith the appraisal forecast is indicated in Annex 7. (The appraisal forecastswere prepared up to FY86.) Detailed financial statements are provided inAnnexes 8, 9 and 10.

5.2 The actual amounts of operating revenues and profits lagged behindappraisal estimates substantially throughout the project periods because ofdelays in physical implementation (particularly in connection of new lines)and in tariff increases. However, sharp increases in revenues and profitswere recorded in FY86 and FY87 largely due to the impact of the March 1986tariff increase averaging 30% and to substantial improvement in the rate ofline connection from FY85 onward. The operating ratio was above the appraisalestimate throughout the period (except 1982) though it fell to 49% in FY87.TOT's profitability measured in terms of the rate of return on average netfixed assets in operation was satisfactory and the rate of return on arevalued basis was above the covenanted level of 10% and comparable to theappraisal estimate throughout the period. However, the ratio of net incomebefore tax (after interest) to average total assets was consistently lowerthan the appraisal estimate (except 1982) due to a continuing increase infinancial charges and substantial foreign exchange losses associated withforeign currency long-term debt incurred since FY81. The actual ratio forFY83 and FY84 was 3.5% as compared with the appraisal estimates of 7.8% inFY83 and 8.8% in FY84. The ratio further declined to 1.1% in FY85. However,the ratio improved substantially from 2.8% in FY86 to 6.4% in FY87 because ofthe full effect of the March 1986 tariff increase and increased growth inlines connected.

5.3 The operating revenue per line and cash operating cost (beforeinterest and depreciation) shown in Annex 7 have been calculated at constantprices as a measure of TOT's efficiency in the operation of Thailand'stelecommunications network. TOT was successful in containing cost increases,mainly due to an improverent in staff productivity (para. 6.4). Operatingrevenue per line rose steadily until FY82, and its slight declines in FY8? andFY85 were rectified by the March 1986 cariff increase.

Financial Position

5.4 TOT's financial position was generally below expectations. The netlong-term debt/equity ratio was lower than the appraisal estimate untilFY83. But, from FY85 onward, the ratio was higher than had been anticipated

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with net long-term debt at 83% and 78% of total capitalization, respectively,in FY86 and FY87, compared with the appraisal forecast of 63% in FY86. Thiswas primarily because of a lower level of profits than forecast, andaccumulation of deferred losses for the Baht devaluation associated withforeign currency borrowings. The current ratio dropped to 1.1 times in FY86and FY87, though it was the level forecast for FY83-86.

5.5 The level of accounts receivable peaked in FY82, equivalent to 152days of annual revenue; it then decreased progressively, as a result ofincreased attention to billing, bill collection and arrears monitoring. Thecurrent level of 76 days at the end of FY87 is considered satisfactory, thoughthe appraisal target of 58 days by the end of FY86 was not realized.

Financing Plan

5.6 TOT's funds flow statement is shown in Annex 10 and summarizedbelow:

Table 5.1: SUMMARY OF SOURCES AND USES OF FUNDS(Baht millions)

FY82-85 Total FY78-86 Total FY78-87 TotalAppraisal Actual Appraisal Actual Appraisal Actual

SourcesInternal cash

generation 14,015 8,334 27,595 16,116 - 21,533Less debt service 6,582 4,742 13,019 9,120 - 12,403Net internal cash

generation 7,433 3,592 14,576 6,996 - 9,130Customer deposits 955 838 1,949 1,660 - 1,981Borrowings 19,988 12,692 35,806 18,393 - 19,823Total sources 28,376 17,122 52,331 27,049 - 30,934

UsesCapital construction 29,506 15,778 51,814 26,857 - 31,464Changes in workingcapital (1,130) 1,344 517 192 - (530)

Total uses 28,376 17,122 52,331 27,049 - 30,934

Net internal cashgeneration ratio (%) 25 23 28 26 - 29

Debt service averageratio (times) 2.1 1.8 2.1 1.8 - 1.7

5.7 For the entire project period, TOT's cash flow position was onaverage satisfactory, but it deteriorated substanially during the last few

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years, FY83-86. The annual funds requirements, and thus total borrowings,were much less than expected due to delays in project implementation. At thesame time, internally generated funds were also lower than forecast as aresult of delays in line connection and tariff increases. For the entireFY78-87 period, net internal cash generation was 29% of capitalexpenditures. This is comparable to the appraisal forecast of 26% for FY78-86. However, the annual net internal cash generation ratio was belowexpectations during the later half of the project period. The covenant oninternal cash generation under the Fourth Project required TOT to maintain a20% ratio for each year during the period FY82-85 at least 25% for the wholeFY82-85 period and at least 35% for FY86. These targets were only partiallyachieved. Between FY82 and FY85, except for 1982, the ratio was below boththe covenanted 20% and the appraisal estimate. The ratios for the entireFY82-85 period and fGr FY86 were 23% and 20% respectively, compared with thecovenanted levels of 25% and 35%. But the internal cash generation improvedsignificantly in FY87, when it reached 46% as result of a substantial increasein internally generated funds due to both the March 1986 tariff increase andincreased lines in service.

5.8 The debt service ratio covenant (1.5 times) under the Third Projectwas met throughout the project period. However, the actual ratio for eachye&r was consistently lower than the appraisal estimate and from FY83 onwardwas close to the covenanted level.

5.9 The subscriber bond system, which accounted for about 30% of TOT'sexternal financing during the project period, was abolished in December 1985(para. 6.10). For future investment programs, which would be much larger thanthe Third and Fourth Projects, TOT will need to pay greater attention tosecuring sufficient local currency funds to compensate for the suspension ofthe bond system.

VI. INSTITUTIONAL PERFORMANCE

Organization and Management

6.1 Under the Second Project (Loan 1253-TH), some organizational changeswere instituted within TOT. While the organization had been adequate todevelop, manage and operate the network in 1970s, during implementation of theThird Project some deficiences were noted which needed correction, especiallyconsidering the much larger volume of operations expected in future years.Accordingly, the management consultants were appointed under the FourthProject to review TOT's structure and procedures. The consultants' report wasreceived in January 1984, but it took over three years for the proposed newstructure and the work organization above the divisional level to be reviewedand approved sequentially by TOT's management, Board of Directors and theMinistry of Communications before it was made fully effective in October1987. Details of the organization, work tlow charts and job descriptionsbelow the divisional level are still to be prepared. Delays in completing therestructuring of the organization, combined with the reallocation of personnelto new divisions and location of TOT's headquarters staff in different

- 48 -

buildings across the city affected TOT's work in FY84-87. TOT has had plansfor a new TOT headquarters building for some years but for lack of a firmdecision on its location--mid town or outside the main city-it had to delayinviting bids for construction. A decision has now been taken on a site inthe outskirts of Bangkok and bids for construction have been received and areunder evaluation.

6.2 TOT's senior and middle management staff are experienced, competentand qualified. However, a problem with delegation of authority and a lack ofwillingness on the part of the managers to take decisions persisted throughmost of the two project implementation periods. This was exacerbated by,first, frequent changes in the Chairman of the Board of Directors and theManaging Director who is the chief executive officer of TOT--there were eightChairmen and six Managing Directors (five of them appointed from outside TOT)between 1978 and 1988; and, second, representations and complaints against TOTstaff's evaluation of bids and award recommendations. Also, the TOT Board ofDirectors' involvement in the day-to-day management of TOT furthernecessitated the referral to senior management and theBoard, of many minordecisions which caused delays.

6.3 One decision of the Board of Directors which seriously jeopardizedTOT's financial viability was their refusal to agree to TOT management'srequest in 1984 for raising telephone tariffs despite financial projectionspointing to the need for a substantial increase. This became a major issuebetween the Bank and TOT in 1984 and 1985, during which period TOT's financialperformanec deteriorated sharply till the increase was finally agreed by theTOT Board and became effective in March 1986. Other decisions of the Boardwhich, in the Bank's view, were not in TOT's overall interests were theabolition of the special task force for connection of new lines, and theabolition of the subscriber bond system (under which new subscribers had topay a lump sum to TOT as a condition of service). The latter decisionresulted in elimination of both a source of low-cost funds and the system ofprioritizing the allocation of new lines. Another TOT Board's decision wasits directive to TOT management to place very large repeat orders on suppliersof digital switching equipment for the Fourth Project to meet the requirementsof future development programs in spite of the fact that, at that juncture,over 200,000 lines or 20% of the installed exchange capacity was idle andunutilized for new subscriber lines. On all these issues, the TOT Board wasunmoved by strong Bank recommendations drawing attention to the detrimentaleffect of those decisions on TOT's performance. The Bank had no effectivemeans of persuading the Board to take the required actions as, by that time,the Bank loans had been fully committed a.id TOT had decided not to seek fortheir Bank's assistance for its future development programs. The Bank wasalso unsuccessful in its attempts to seek Government interaction with the TOTBoard on these issues.

Staff, Recruitment and Training

6.4 TOT had no difficulty in recruiting staff and staff turnover isnegligible. At the beginning of the Third Project in 1978, the total staffwas about 9,500 which increased to 17,700 by the end of the Fourth Project in1987. However, with the number of working Lines increasing from 295,634 to

- 49 -

901,622 during the same period, staff productivity improved from 24 staff per1,000 telephones in 1977 to 16 in 1987.

6.5 TOT places adequate emphasis on training. Training in its wellequipped Telecommunications Training Center (TTC) increased from 5,50 staff-weeks in 1981 to 10,700 staff-weeks in 1987. Over 67% of the training volumewas for technical courses, the balance for accounting, business administrationand other items. With the adoption of digital technology, TOT took steps toidentify 250 staff for special local training in digital technology and afurther 50 staff were sent abroad for training in hardware and softwaresupport and for centralized operations and maintenance functions. Trainingexchange models were obtained from suppliers of switching equipment andinstalled in TTC and all digital training is now primarily conductedlocally. In respect of the reorganization of TOT, the management consultantsconducted a large number of seminars and training courses to acquaint themanagement staff at different levels with the essence and thrust of theirproposals and their effect on the internal working of the TOT, and alsotrained, where feasible, the staff in their new positions.

6.6 In general, TOT's staff recruitment and training arrangements areadequate for its needs and satisfactory.

Accounting

6.7 As an autonomous state enterprise, TOT has an acceptable degree offiscal autonomy. Its financial operations and reporting are commerciallyoriented and its accounting and budgetary systems are satisfactory. Anaccrual-based commercial accounting system is employed in line with acceptableprinciples and practice. Monthly and annual operating budgets are preparedand each department or office controls its own budgetary expenditures andreports to the Managing Director. The budget division maintains a monthlyvariance analysis which is submitted quarterly to the Managil,g Director. TOThas gradually improved its financial analysis and forecasting capability withthe use of micro/personal computers. A comprehensive Management InformationSystem which among other items, covers the finance and accounts aspects ofoperations, was implemented by April 1983. TOT revalued its fixed assetsusing acceptable methods in 1980, a year later than covenanted under the ThirdProject, and has continued to do so annually as covenanted under the FourthProject.

Audit

6.8 TOT has an internal auditor, supported by suitably qualifiedstaff. The internal audit division carries out audits of procedures andfinancial records in a satisfactory manner and issues regular audit reports toTOT's management. The Office of Ehe Auditor General of Thailand is respon-sible for the external auditing of TOT's accounts. Under the Third Project,TOT was required to submit its audited statements to the Bank within fourmonths of the close of each fiscal year. Occasionally, there were delays ofabout one or two months. The covenanted requirement was difficult to achievedespite TOT's efforts because TOT's accounts in Thai are first audited andthereafter the English version has to be audited again. Because of this,

- 50 -

under the Fourth Project, the deadline for submissions of audited statementswas extended to six months. This is well within the norm and TOT has beenable to comply with the revised covenant. The financial statements have beenaudited in a satisfactory manner throughout the project period. In addition,to assist Bank supervision, unaudited financial statements were submitted tothe Bank as soon as they were available, generally within four months of theclose of each fiscal year. Also, medium-term detailed financial projectionswere submitted to the Bank upon request. On the whole, TOT's performance inrespect of audit and meeting the Bank's requirements was satisfactory andcommendable.

Billing and Collection

6.9 TOT bills its subscribers on a monthly basis. Telephone bills forall areas of Thailand are prepared using computers located in Bangkok. Thesecomputers are currently shared with the accounting system. Bill preparationis efficient and takes about eight to ten days after local exchange meterreading. However, the historical bill collection system employing billcollectors for house-to-house collection of dues had been weak and costly.Consequently, under the Third Project, TOT agreed to implement a new billcollection system under which bills were sent by mail to subscribers who werepermitted to remit payments at commercial banks, post offices or TOToffices. The new bill collection system became fully operational in September1982 and is working well. In addition, TOT is currently examining thefeasibility of introducing an automatic bank account transfer system on atrial basis which would enable TOT to debit subscribers' bank accounts automa-tically with the value of their bills. TOT also plans to pre .ure a separatecomputer system for billing and revenue accounting in view of the increasingvolume of transactions with network expansion.

Tariffs

6.10 Changes in TOT's tariffs during the project period are indicaled inAnnex 11. TOT's tariffs were raised by about 25% in late 1979. Thereafter,except for increases in the one-time connection charge for new connections in1982 and 1985, there was no major revision of tariffs in spite of deteriorat-ing financial performance till the general increase in tariffs averaging 30%in March 1986. While these increases enabled TOT to meet the covenant requir-ing review and, it necessary, adjustment of its tariffs to achieve annuallythroughout the project perio, a 10% rate of return, the adjustments wereinsufficient for TOT to generate adequate internal cash (para. 5.7). TOT'sinternal cash generation capacity improved only after the March 1986 tariffincrease. An uncommon feature of the TOT tariffs was, till 1985, a two-tiersubscriber bond system used both for operating a system of priority inallocating new connections and as a source of low-cost funds. However, sincethe design of the priority allocation system was flawed and the system had notbeen functioning effectively, under the Fourth Project TOT agreed to reviewand improve, by Mau,11h 1983, the bond system and its procedures for allocatingnew lines to ensure priority in allocation to high-value bond applicants andsimplify the bond system administration. Whiie the bond system was underreview by TOT management as covenanted, the TOT Board eliminated the bondsystem altogether in December 1985, primarily on political considerations, as

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a quid pro quo for approval of the March 1986 tariff increases. One aspect oftariffs which was not addressed during the project period is the revenue-sharing arrangement between TOT and CAT by which CAT pays a portion of itsrevenues to TOT for the use of TOT's domestic network. Considering that CAThas started to offer various domestic telecommunications services such asmobile telephones which use and benefit from TOT's national network, andrevenues from CAT's telecommunications operations are subsidizing its loss-making postal services, the arrangement needs to be reviewed carefully by theGovernment in the process of establishing policies for optimizing the sectorstructure.

Compliance with Covenants

6.11 The status of compliance by TOT and the Government with thecovenants under the Loan and Guarantee Agreements 1620-TH and 2143-TH isindicated in Annex 12. The covenants were generally complied with, thoughcompliance was behind schedule in respect of institutional covenants, and thecovenants on connection of new lines and internal cash generation were notcomplied.

VII. PROJECT JUSTIFICATION

Project Achievements

7.1 The two projects achieved, though with some delay, the physicaltargets and the objectives of meeting partly the demand for new telephone con-nections and improving the access to service in rural areas, the quality ofboth local and long-distance services, and the institutional capability ofTOT. Some key indicators of achievements under the two projects are givenbelow:

- 52 -

Table 7.1: PROJECT ACHIEVEMENT INDICATORS

FY72-77 FY78-87 Percent Increase

Average annual investment(Baht millions) 469 3,146 571

Average number of lines connectedper year 20,820 64,082 208

FY77 FY87 Percent Increase

Exchange capacity (lines) 307,650 1,251,102 30/(1,081,400)

Working lines 260,826 901,622 246(857,700)

Working lines per 100 population 0.59 1.69 186(1.63)

Waiting list 39,337 401,659(463,300)

Working lines as percent of totaldemand (working lines plusregistered waiting list) 47% 69% 47

(65%)Tambons with access to service 666 1,282 92

(1,282)

Note: Figures in brackets are appraisal targets on completion of FourthProject in 1985.

7.2 Apart from the quantitative achievements, the technological andinstitutional developments under the two projects contributed significantlytowards building up TOT and its facilities for a gustained and rapid provisionof modern telecommunications services needed for the country's future economicdevelopment. With the adoption of digital technology at the very early stageof development prior to undertaking major expansion of its facilities and withproper design and engineering, TOT'c telecommunications network now has aninherent built-in capability to handle future development and introducingmodern services as may be required by business and commercial customers.Simultaneously, TOT's institutional capability has been significantly enhancedin all disciplines--planning and development, operation and maintenance, andadministrative and financial management.

Project Spin-off

7.3 There were no particular spin-off activities which could be specifi-cally attributed to the two projects.

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Least-Cost Solution

7.4 The develcpment of local and long-distance networks was based oncirrect technical and economic decisions and followed optimum design andaccepted telecommunications practices designed to minimize costs. In particu-lar, through the adoption of digital technology at a very early stage of itsnetwork development, TOT will reap long-term economic and technological bene-fits. It resulted in considerable savings in local network costs, spacerequirements (with consequent savings in building costs) and in costs ofoperation and maintenance.

Return on Investments

7.5 Given the difficulty of separating the economic benefits of theThird and Fourth Projects, the economic rate of return was calculated forTOT's FY78-87 investment program which encompasses both projects. The overallrate of return was 13% (Annex 13). The rate of return estimated at the ThirdProjcct's appraisal for the FY78-82 total investment programs was 19%. Therate of return estimated at the Fourth Project's appraisal for the FY82-85total investment program was 26%.

7.6 The actual rate of return as calculated understates the economicbenefits of the projects because: (a) due to delays in project construction,the useful life of some of the assets financed will probably be longer thanthat estimated at appraisal; and (b) it does not account for consumer surplusor indirect and external benefits due to the improved telecommunicationsnetwork.

Fiscal Impact on Government Treasury

7.7 TOT's operations contributed substantially to the Governmenttreasury, though the actual amount paid by TOT to treasury was much lower thanthe appraisal estimates due to delays in project implementation. TOT isrequired to pay customs duties on all equipment and materials averaging about20% of the CIF value of imports. In addition, the actual remittances totreasury during FY78-87 averaged 43% of net income (compared to the appraisalestimate of 41%), which appears high compared to other state enterprises inThailand. The net amount paid to the Government from TOT's operations duringFY78-87 were about B 7,800 million compared with the appraisal estimate ofB 14,500 million for FY78-86. Though the actual amount was about 54% of theappraisal estimate, the Government benefited substantially from TOT's contri-butions considering that its equity investments in TOT remained constant atonly B 516 million through the two project periods.

VIII. BANK PERFORMANCE

Overall Performance

8.1 The Bank's performance in the telecommunications sector during FY78-87 was in general satisfactory excepc, as under the previous projects, in

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respect of detailed supervision of some aspects of the work of managementconsultants. Apart from its financial contribution through the two regular'A' loans and its participation in the first-ever 'B' loan, the Bank madeother very positive contributions to the development of domestic telephonefacilities and services in Thailand under the two projects. In particular,the processing of the first 'B' loan in the Bank (including obtaining initialapproval of the 'B' loan scheme by the Bank's Board of Executive Directors),drafting of the necessary documents, negotiations with the Covernment, TOT andJapanese commercial banks, and final Bank Board's approval were notableachievements completed in record time.

8.2 In the techiiical area, the Bank's repeated recommendations led TOT toprocure only digital switching equipment under the Third Project (insubstitution of the electro-mechanical equipment proposed by TOT initially)and to substitute the 24-channel digital configuration whose use is limi-ed toonly a couple of countries world-wide with Lhe more universally used 32-channel configuration. The Bank was also instrumental in encouraging TOT toprovide deeper penetration of telephone service in rural areas than TOTinitially proposed. In the later years of project implementation, the Bankwas concerned about the large idle assets in switching equipment and cablenetworks and worsening cash flow situation of TOT. And, it pointed out to theGovernment and the TOT management the need for (a) adoption of specialmeasures by TOT to increase its rate of connection of new subscriber linesboth to satisfy the large pending demand and to earn revenue from the largequantities of costly idle investments; and (b) raising tariff increases. TheBank was successful on the first issue as TOT instituted the required specialmeasures, but failed for a very long time to reach agreement with TOT on thetariff issue. Institutional improvements such as the introduction of aManagement Information System, an improved system of billing and revenuecollection, establishment of a Fundamental (Corporate) Planning Unit,development of an internal TOT capability for tariff review and for economicstudy of benefits of rural telephones in Thailand, etc., all have enhancedTOT's capabilities in the field of long-term planning, development, projectimplementation, and operation and management.

Supervision

8.3 Bank supervision of the two projects, including the frequency ofsupervision missions during the project implementation period, was adequate.While supervision of implementation of the physical components and monitoringof TOT's financial performance was satisfactory, insufficient dttention waspaid to the work of the consultants handling institutional aspects. Moreattention and better monitoring of consultants' work by the Bank could haveresulted in management consultants completing their assigned task by actualyimplementing their own recommendations on TOT's reorganization.

Working Relationship

8.4 In spite of differences on the issues of non-implementation of anessential tariff increase, the slow rate of utilization of installed switchingequipment, the ordering of additional switching equipment despite existingspare capacity, etc., the Bank maintained an excellent and harmonious working

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relationship with TOT management and staff, as also with the government

agencies involved, throughout the two projects' implementation period. TOTmanagement was fully responsive to all Bank requests for information and datarelating to the two projects and its operations.

IX. CONCLUSIONS

9.1 In general, the Third and the Fourth Projects both achieved theirphysical and institutional objectives. They helped in establishing anintegrated modern digital telecommunications network in Thailand which fOTcould further develop to provide adequate and efficient telecommunicationsservices to meet the needs not only of the general public for traditionaltelephone services, but also of the business customers for enhanced voice andnon-voice (e.g. data) telecommunications services. TOT also introducedtelephone services in many rural areas for the first time, and the long-distance network established under the projects will enable it to e=tendservice to other areas currently unserved at small additional cost.

9.2 On the other hand, there were considerable delays in projectimplementation. The long start-up delay on the Third Project was mainlyoccasioned by TOT's post-appraisal decision on full digitalization of thedomestic telecommunications network--a decision fully supported and encouragedby the Bank. This delay will be compensated in the future by the considerablelong-term techno-economic benefits of digitalization; in addition, proceedingwith such a major expansion with older technology would have caused futureproblems and costs in integrating that equipment with new digital equipment.However, some delays were a'oidable such as those on procurement and

appointment of consultants and experts, which were mainly due to its internalbureaucratic procedures and requirement of clearances at se7eral levels. Theneed for TOT to get clearances from different government agencies in respectof its investment programs and any changes thereto, important procurementdecisions, financing plans, internal institutional changes, etc. alsocontributed to the delays. For all these reasons, the expectation at the endof the Second Project (Loan 1253-rH) that TOT was better preparedinstitutionally to undertake a faster rate of growth was only partiallyrealized.

9.3 In the institutional area, the reorganization of TOT expected to becompleted by the end of the Fourth Project did not occur, primarily because ofdelays in reaching internal agreement and external clearances of thischange. However, the reorganization is now well under way and is expected tobe completed by the end 1989. The extent to which the reorganization willultimately improve TOT's efficiency and ability to move rapidly and respondquickly to changing conditions and meet its customers' demands will depend,first, on the extent to which senior management is willing to delegateresponsibilities to lower levels and on the ability and willingness of theindividual managers to take OLI such responsibilities and be held accountablefor their decisions; and second, on the Board's willingness to focus on broadpolicy issues, leaving day-to-day management to TOT's Managing Dizector.

- 56 -

9.4 In the financial area, the TOT Board did not agree for over a yearto management's request--strongly supported by the Bank--for a much-neededtariff increase and instead exacerbated the situation by ordering TOT toprocure additional switching equipment when the available equipment washeavily underutilized. When the Board did finally agree to the tariffincrease in March 1986, it simultaneously required TOT to abolish thesubscriber bond system which deprived TOT of a source of low-cost capitalfunds. Such actions affected the cash generation capacity of TOT. With timelyaction on tariffs as and when needed, TOT should be able to internally financea high proportion of its future development costs. The Bank was successful inpersuading the TOT management to take steps necessary to significantlyincrease its pace of connection of new lines but, after a few months, the TOTBoard directed the management to disband the special task force specificallyset-up in response to the consultants' recommendations. In spite of its deepconceis on these issues expressed at all levels in TOT and the Government,the Bank hr.d no effective means of persuading the TOT Board to take therequired actions as, by that time, the Bank loans had been fully committed orbalance loan amount cancelled by TOT, and TOT had decided not to seek furtherBank's assistance for the next phase of its development program.

9.5 With the completion of the Fourth Project in September 1987, theBank has been involved with the telecommunications sector in Thailand for 15years. During this period, the network size increased from about 195,500lines at the end of FY71 to over 1,251,000 lines at the end of FY87, and anation-wide modern long-distance network has been established to serve allparts of the country. The network is also technologically ready and capableof providing the modern enhanced telecommunications requirements of thebusiness community. On the other hand, large number of rural communities arestill without service and there are still large pending demands for telephoneservice in urban areas (over 400,000 at end of FY87). Institutionally, TOThas grcwn into a mature organization. Once the reorganization is complete,the current internal problems overcome and the external constraints on itsoperations removed, it should be capable of developing, operating and managingefficiently and effectively the telecommunications services of Thailand.

9.6 From the Bank's point of view, the lessons learned during theseprojects could be summarized as follows:

(a) detailed review by the appraisal missions of TOT's procurementprocedures and internal regulations and the streamlining of theserules before project start-up might have avoided many of theproblems and delays that arose during implementation;

(b) Bank supervision missions should have supervised the consultants'work more closely to ensure that all the tasks specified in theirterms of reference were adequately addressed; and

(c) The Bank should have foreseen the difficulties faced by TOT ingaining government clearances of the TOT's reorganiztion and shouldhave assisted TOT in the clearance process.

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9.7 Much remains to be done in the telecommunications sector inThailand, particularly in the areas of telecommunications policy,privatization, regulation, domestic manufacture, etc. In the last five years,the sector has undergone major technological changes combined with rapidexpansion. In particular, demand from the business community for enhancedvoice and non-voice services has grown rapidly. Although TOT is doing itsbest to meet such demands, without any explicit government policy orregulatory structure, other participants are entering the lucrative market.For example, the Communicat"ins Authority of Thailand (CAT), a public sectorcompany set-up to provide and operate primarily internationaltelecommunications services, has started offering services for mobiletelephones, data transmission, leased long-distance circuits, paging, etc. inthe domestic market. Considering the future importance and high growthpotential of these and other enhanced and value-added services, there is anurgent need for the Thai Government to formulate overall sector policies toensure an optimal future sector structure and a framework for regulating theoperators within the sector.

-58 - ANNE I

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS (LOANS 1620-TH AND 2143-TR)

PROJECT COMPLETION REPORT

Physical Instaislltions

ActualAppraisal as % of

Unit estimate Actual estimate

Local Exchan e CapacitytI pro ect Lines 187,800 210,800 112.2Fourth project Lines 373,000 410,172 110.0

Total Lines 560.800 620.972 110.7

Local CablesThird project Pr-km 826,850 934,615 113.0Fourth project Pr-ka 1,068,000 1,430,734 134.0

Total Pr-km 1,894,850 2,365,649 124.8

Junction CablesThird project Pr-ka 174,000 110,210 63.3Fourth project Pr-km 52,000 14,960 28.8

Total Pr-km 226,000 125,170 55.4

Junction PCM SystemsThird project Number - - -

Fourth project Number 1,731 1,453 83.9

TotAl Number 83.9 1453 83.9

Tandem Switching EquipmentThird project Circuits 15,000 38,244 255.0Fourth project Circuits 19,555 35,303 180.5

Total Circuits 34,5 3 7 212.8

Trunk Switching EquipmentThird project Circuits 15,000 16,339 108.9Fourth project Circuits 16,547 41,114 248.4

Total Circuits 31.547 57,543 182.1

New Lines to be ConnectedThird project Number 177,000 190,200 107.5Fourth project Number 278,000 281,800 101.4

Total Number 455,000 472,000 103.7

Teleipone InstrumentsThrdproject Number 188,000 200,250 106.5Fourth project Number 367,900 367,900 100.0

Total Number 555,900 568,150 102.2

Transmission Sy stems(Radio a Cable)Third project Route 213 210 98.6Fourth project Route 350 348 99.4

Total Route 563 557 98.9

Multipex uIpmentti project Ch-ends 12,480 10,746 86.1Fourth project Ch-ends 35,843 4',120 143.2

Total Ch-ends 48,323 51.866 107.3

Station Ecuipment for

Third project Number 1,260 1,091 86.6Fourth project Number 1,193 1,183 99.1

Total Number 2Li53 2.274 92.7

THAILAND

THIRD AND FOURTH TELECONUNICATIONS PROJECTS (LOANS 1620-TH AND 2143-TH)

PROJECT COMPLETION REPORT

Project Implementation Delays

Third project Fourth project

Total completion period Months beyond Total completion period Nethe beyomd

Item Eatlested Actual fore, ' cow- rstimated Actual forecast coa-

(months) (months) 2 /a plet-on date (months) (months) l /a plettom date

Land and buildings Procurement 36 99 175 63 24 68 183 44

Installation 42 79 88 57 24 S4 125 30

Local switching equipment

Rangkok Procurement 33 52 58 27 14 20 43 7

Installation 36 57 58 29 I 73 28 6

Provinces Procurement 24 46 92 33 14 18 29 4

Installation 27 1P 78 31 is 39 116 24

Cable network

Bangkok - Ducts Procurement is 55 205 38 - - - -

Laying 24 62 158 37 24 SI 112 27

- Cables (local) Procurement 24 2' (13) 28 15 24 60 9

Laying 33 30 (9) 39 18 30 67 1

Provinces - Ducts Procurement 12 30 250 33 - - - -

Laying 15 40 167 45 24 27 12 3

- Cables (local) Procurement is Is - 26 15 24 60 9

Laying 21 24 14 35 30 43 43 21

Subscriber faciliti2s

Bangkok Procurement 24 12 (50) Is 12 28 133 16

Installation 27 33 22 36 18 31 17 14

Provinces Procurement 24 12 (50) 18 16 16 - -

Installation 27 36 33 39 24 51 112 27

Transmission equipment Procurement 21 22 5 34 17 26 53 9

Installation 21 43 105 59 15 32 113 23

Rural PCOs Procurement 15 12 (20) 42 17 26 53 9

Installation 15 18 20 47 is 37 106 26

/a Number of months exceeded as percent of estimated period.

- 60 -ANNEX 3

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS (LOANS 1620-TH AND 2143-TH)

PROJECT COMPLETION REPORT

Project Costs: Estimated and Actual(3 million)

Loan 1620-TH Loan 2143-THItem Local Foreign Total Local Foreign Total

Local Switching EQuipmentAppraisal esti;ate la 324.5 1,076.0 1,400.5 719.6 2,839.0 3,558.6Actual 446.2 1,653.3 2,099.5 718.1 2,426.6 1,144.72 /b 37.5 53.7 49.9 (1.0) (14.5) (11.6)

Cables and Outside PlantAppraisal estimate 810.8 1,078.1 1,889.9 1,195.4 1,554.9 2,750.3Actual 1,223.8 1,380.6 2,604.4 1,565.4 1,355.2 2,920.62 50.9 28.1 37.8 31.0 (12.8) 6.2

Subscriber PlantAppraisal estimate 52.2 244.3 296.5 679.4 - 679.4Actual 479.7 60.0 539.7 528.2 - 528.22 819.0 (75.4) 82.0 (22.3) - (22.3)

Trunk Switching EquipmentAppraisal estimate 98.4 336.9 435.3 71.7 230.4 302.1Actual 49.5 251.9 301.4 77.6 308.2 385.8z (49.7) (25.2) (30.8) 8.2 33.7 27.7

Transmission EquipmentAppraisal estimate 268.7 837.7 1,106.4 223.6 722.7 947.3Actual 485.3 841.7 1,327.0 259.6 1,044.2 1,303.8% 80.6 0.5 19.9 16.1 44.3 37.6

Riral Public Call OfficesAppraisal estimate 10.5 74.5 85.0 349.7 944.3 1,294.0Actual 11.0 10.2 21.2 449.2 1,371.4 1,820.6% 4.8 (86.3) (75,1) 28.5 45.2 41.0

ap a mate 598.6 598.6 1,321.6 - 1,321.6Actual 853.1 - 853.1 1,616.3 - 1,616.3

42.5 - 42.5 22.3 - 22.3

VehiclesAppraisal estimate 68.5 24.5 03.0 123.3 - 123.3Actual 71.6 - 71.6 66.2 - 66.2

% 4.5 (100.0) (23.0) (46.3) - (46.3)

Consultancy and TrainingAppraisa estiNate - - - 17.2 77.4 94.6Actual - - - 17.3 72.8 90.1

*- - - 1.0 (5.9) (4.8)

Miscellaneous WorksAppraisal estimate 361.9 - 361.9 249.3 - 249.3Actual 161.2 - 161.2 100.6 - 100.6

% (55.5) - (55.5) (59.6) - (59.6)

Total Costs (B million)Appraisal estimate Ic 2,594.1 3,672.0 6,266.1 4,950.8 6,369.7 11,320.5

Actual 3,781.4 4,197.7 7,979.1 5,398.5 6,578.4 11,976.9% 45.8 14.3 27.3 9.0 3.3 5.8

Total Costs (US$ million)Appraisal estimate /c 127.2 180.0 307.2 215.3 276.9 492.2

Actual - 161.5 184.2 345.7 215.9 262.9 478.8

% 26.8 2.3 12.5 0.3 (5.1) (2.7)

/a Appraisal estimate includes proportionate contingencies shown separately in appraisalreport.

/b Percent increase (decrease) of actuals over appraisal estimates.77 Appraisal e3timate of total costs for Fourth Project excludes front-end fee of US$2.1

million (B 48.3 million).

TRAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS (LOANS 1620-TH AND 2143-TH)

PROJECT COMPLETION REPORT

Project Costs and Sources of Financing

Sources of financing (US$ Nil"ion)

Total costs Swedish WhC lii ydcated beided

B US$ Cov't IBRD export supplier Ten bond Comercial leao at

Category million million TOT/a loan 1253-TH 1620-TM 2143-TH B-1-THjb Total OECF credit credit bond I 6 I bak lean bl-[-T1 /c appralIal

Third ProjectLocal Appraisal 2,594.1 127.2 120.2 5.0 - - - - - 2.0 - - - * - *

Acturl 3,781.3 161.5 161.0 - - - - - - 5 - - - - - -

Foreign Appraisal 3,672.0 180.0 - - - 90.0 - - 90.0 60.0 - - - - 30.0 - -

Actual 4,197.8 184.2 3.7 - 0.5 77.1 - 0.9 77.6 72.1 12.3 8.3 10.2 - - 2.9 -

Total Appraisal 6 266.1 307.2 120.2 5.0 - 90.0 - 90.0 62.0 - - - - 30.0 -

Actual 343.1 1=5T - 0.5 7T - 0.9 W._ 7F1 12.3 8.3 10.2 - * 2.9 -

Fourth ProjectLocal Appraisal 4,950.8 215.3 215.3 - - - - - - - - - - - - - -

Actual 5.398.5 215.9 201.5 - - - - 1.9 - - - - 10.9 3. - 5.9 -

Foreign Appraisal 6,369.7 276.9 - - - - 140.0 - 140.0 - 0.1 - - - - - 136.8

Actual 6,578.4 262.9 11.8 - - 12.9 115.6 5.8 128.5 - 0.3 39.0 37.0 46.3 - 17.5 -

Total Appraisal 11 320.5 492.2 215.3 - - - 140.0 - 140.0 - .i - - - - - 136.8

Actual j,j. T7TT Tj. - - 12.9 ll5.6/d .7 -13F. - T 39.0 4f9 49.8 -

Third 6 Fourth ProjectsLocal Appraisal 7,545.9 342.5 335.5 5.0 - - - - - 2.0 - - - - - - -

Actual 9,179.8 377.4 362.5 - - - - 1.9 - 0.5 - - 10.9 3.5 S.9 -

Foreign Appraisal 10,041.7 456.9 - - - 90.0 140.0 - 230.0 60.0 0.1 - - - 30.0 - 136.8

Actual 10,776.2 447.1 15.5 - 0.5 90.0 115.6 6.7 20.t 72.1 12.6 47.3 47.2 46.3 - 20.4 -

Total Appraisal 17 566.6 799.4 335.5 5.0 - 90.0 1,10.0 - 230.0 62.0 0.1 - - - 30.0 - 136.6

Actual J 024.5 W_.0 - 0.5 W/d 8.6 206.1 T .6 47.3 58.1 49.6 - 263 -

/s Includes subscriber bonds and telephone bonds.

7b IBRD participation in Japanese comercial banks syndicated loan 1-1-TH to TOT. TOT did not segregate disbursement of Loan 9-1-TN between IUD and Japanese comercial boaks.

For purposes of this table, disbursements have been distributed between 1810 (251) and Japanese comercial banks (1) in the soe ratioe as their respeetive contributions to

the total loan amount (IBRD: Ten 2 billion; Japanese banks: Yen 6 billion).

/c Japanese comercial bank portion of Loan §-1-TH. See note /b above.

71 Excludes Front-end Fee of US$ 2.1 million. Total disbursement was US$ 117.7 million.

-62 - ANNEX 5

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS (LOANS 1020-TH, 2143-TH AND B-7-TH)

PROJECT COMPLETION REPORT

Cumulative Loan Disbursements

Loan 1620-TH (US$ million) Loan 2143-TH (US$ million) Loan B-1-TH (Yen billion)IBRD fiscal Accumulated Actual as Accumulated Actual as Accumulated Actual assemester disbursements % of disbursements 2 of disbursements 2 ofending Appraisal Actual appraisal Appraisal Actual appraisal Appraisal Actual appraisal

Jvn 30, 1979 1.0 - 0.0 - - - - - -

Dec 31, 1979 7.0 - 0.0 - - - - - -Jun 30, 1980 20.0 - 0.0 - - - - - -

Dec 31, 1980 40.0 - 0.0 - - - - - -Jun 30, 1981 60.0 0.2 0.3 - - - - - -

Dec 31, 1981 70.0 2.7 3.9 - - - - - -Jun 30, 1982 80.0 11.7 14.6 - - - - - -Dec 31, 1982 90.0 18.6 20.7 - - - - - -Jun 30, 1983 90.0 38.0 42.2 16.1 2.4 14.9 - - -

Dec 31, 1983 90.0 50.4 56.0 22.1 11.0 49.8 2.0 2.0 100.0Jun 30, 1984 90.0 68.1 75.7 36.1 26.7 74.0 2.0 2.0 100.0Dec 31, 1984 90.0 77.0 85.6 56.1 55.4 98.7 5.0 5.0 100.0Jun 30, 1985 90.0 90.0/a 100.0 70.1 71.9 102.6 7.0 7.8 111.4Dec 31, 1985 85.1 89.7 105.4 7.8 7.8 100.0Jun 30, 1986 110.1 98.2 89.2 8.0 8.0 100.0Dec 31, 1986 121.4/b 104.9 86.4Jun 30, 1987 121.47w 112.3 92.5Dec 31, 1987 121.47b 116.8 96.2Jan 07, 1988 117.77b 117.7/c 100.0

'a Loan 1620-TH was closed on September 30, 1984; final disbursment was on June 4,1985.7 For Loan 2143-TR, a total of US$24.4 million were canceled as shown below. Appraisal estimates have

been adjusted to reflect these cancellations.

US$17,000,000.00 effective November 16, 1984USS 3,700,000.00 effective August 18, 1986USS 3,695,032.62 effective January 8, 1988

/c Loan 2143-TH was closed on December 31, 1987; final disbursement was on January 8, 1988.

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS (LOANS 1620-TH AND 2143-TH)

PROJECT COMPLETION REPORT

Original and Revised Loan Allocations and Actual Disbursements(US$ million)

Allocationincluding Actual Disbursement as

Allocation unallocated /c disburse- % of allocation

Loan/Category Original/a Revised/b Original Revised ment Original Revised

Loan 1620-THLocal exchange equipment 31.0 45.7 38.2 46.0 46.0 120.4 100.0

Telephone cables & accessories 15.0 13.6 18.5 13.7 13.6 73.5 99.3

Subscriber facilities, publictelephones 5.0 2.6 6.2 2.6 3.4 54.8 76.5

Microwave & UHF systems, etc. 18.0 26.6 22.2 26.' 27.0 121.6 101.1

Station equipment for rural PCOs 3.0 1.0 3.7 1.0 - 0.0 0.0

Vehicles 1.0 - 1.2 - - 0.0 0.0

Unallocated 17.0 0.5 - - - - -

Total 90.0 90.0 90.0 90.0 90.0 100.0 100.0

Loan 2143-THSwitching equipment 60.0 38.9 66.7 40.1 34.0 56.7 87.4

Transmission equipment 63.0 77.5 70.0 79.9 78.7 80.0 101.6

Consultants' services & training 3.0 2.9 3.3 3.0 2.8 93.3 96.6

Front-end fee 2.1 2.1 2.1 2.1 2.1 100.0 100.0

Unallocated 14.0 3.7 - - - - -

Total 142.1 125.1/d 142.1 125.1 117.7/e 82.8 94.1

/a Original as per Loan Agreement.7 Revised as approved by the Bank.

7E Unallocated allocation distributed proportionately to other categories (except front-end fee in Loan

2143-TH)./d US$17.0 million was canceled in November 1984.7-e US$3.7 million was canceled in August 1986 and US$3.7 million in January 1988.

- 64-

TWIBO ANM MOURTIM TELKCOMPIWAT180 pGOJCS (LOAMs 1620-TH AND 2143-TP)

P~R8CT COMPIETop0N U8PORT

gel Pefe nce .dtcötore

44 df etofb* 30 li7 79 I980 181 1982 191 184 1985 96 1987

Appråill etti2026 ,08 .200 92.#66 60,200 47,400 219,000 284,800 269,600/ 321I000la

Atel101,506 12,646 640 11,544 6161 19,0r9 52,4li 259,661 17 7,2 24- 11,093E ctee 0, ,77n ;, 4.6 45,7 23,, 2i, ii1 67.1 9,

Tmnål at and df the -. rApproaIsl iettstc k1,00 421,400 ]400 i 29,1 0 4%,2n 577,00 796,00 1,n91,400 l,346,r00 1, ml70008Acu2 409.116 421,844 422,484 43,402 499.661 sie,677 570,819 830.480 1.008.009 1,21102

I «sceed 97,5 " 00, 96,8 4 2.4 100.7 89.8 71,7 76.9 74,9 75.1

rug the yeorAppralsl ..tt.an 38,894 47,00 31,.00 18.200 3 M ,762 49.000 1?0,000 217.700 213,700/4 295.200/.Actuel 1,828 I n,870 14,"90 234 ,41 17,332 56.260 07,007 172,314 102,710

2 acht.9ed 111.7 7..2 .. 29,9 87.1 54.4 46.9 45.0 73.7 34.4Tot.1al at ea of the ye8ar

Apprtst etlmsta 299,700 346,800 398.100 476,500 431,000 500,000 6 20,000 817,700 1,091.400Q4 I,386,40WLActuoc 295,634 131,584 365,494 384,23 425,79 46).231 51949.1 b624.48 798.912 901.422

I ce ed 98.6 95.4 97,9 8t.6 98.8 92.S R3.4 71.0 73.2 644

llnveel E.ch"age Cpacity as

ApprscI 0ett8ete 28,6 7?8 8.A , 0 11.1 13.4 22.2 20.7 18.9 14.8

ACCu4 27,7 21,4 7., 10,7 '...8 0,7 9.0 24.6 20.4 27.9

9taft per 1000 r.lephon..Appraissaee ate 22 23 .1 8s 22 22 20 76 - -

4ctua1 24 27 22 2! 2i 27t 27 20 77 76

Operating, 8.evenues (B .n)Appral.aI 7,274 !,94 2.'74 ,87 .83,409 5,A71 A.148 [7,706 [4,032

MctuaL 7,239 7,472 2.253 2.926 3,544 1,9 8 4,5648 5,216 7.82C 9.406

Operating Espenses (j8 in)

A ae,1t11 421 ,499 '.57 2.07 2.048 2,A7I 3.280 4,247 5,521 -ActueI 828 t,082 1.130 1,h36 17.58 2,228 2.374 2,896 1.552 4,594

Api6 iH I4 7e4 t 0 34 34 -

Actual h7 37 79 74 52 '7 32 56 83 49

Rate *tt eturn (Z)Appraål.. 7 12 l '7 '1 79 27 21 -

Actual 7 ,1, 1,a. 7.a. .7 7I . 27 27 24

M%t 12o esfor, Tax/T.talAssej2 _iAp ... 1Apprasal 2.4 2.-7 4.7 7.. 3.7 '.0 8,8 9,3 8.! -

Actual 2. 2,7 7. 7.7 4,5 '.3 7.3 '.. 2,8 4

Reeu/DIEL ( 'rn 81Appealsal 4,470 3.247 '."A 4.'" 8,144 ,7.l' '.73 'C,., .4,457 -

An0 8o41 .) 3.371 7..'' ',70 8,'17 3.,l7 02 0.''3 7 [•,4 77,062

Revenue/DEL. ( Con.tant 9788

price) (8)a4,43 4,8 ',916 5,228 S,5'9 .-49 ",4 h ,.7 4,44 5.,27

'7pere ing Espensee /DEL 8>e

Apr.pais 2,929 7.400 4.,152 ,594 4,7t' 3 ,4 )3447Actual 2,976 ),43r 3,614 4,333 4,55 ,.. i, ,.- ',9. 3,403

ras tpra 1 n Exnse/DE

Appraiset 2,744 2,470 7,Olo 7,277 7.423 4, 4,477 4.!74 7,932 -

Actual 2.246 2,554 2,876 3.297 7.517 1 77 1135 7427 ,387

7(constant 787 price) (8)m tual 2,246 2,324 2,147 2.22 2.267 2,4m 2,75 2,36 2,28 1,922

tng-tcirm Deb8 'f.giy Ratto

App1,.r1 2,48 38741 1'7? >3 3 37'7 42/38 4A'34 43,33 "3/37Acl 12 .8 74 46 77 43 38 42 "7 47 59/41 A., 16 76 28 83/ 77 78/22

C Ret t. (tt~#s)Appraimjö 2.4 2.8 ,1 7,4 2,0 1.1 7.7 -0 7•

00844 7.' 2,8 ,3 2, 7. , 13 7.) 2.[

AppraLeal7 32 '.2 73 ' 85 2 3

8ctual t'l .4 92 09 732 747 714 90 82 76

7nter,al Cash Genration

p~sa4 27 2' 22 l 12 27 32 29 35

Actual 16 79 30 'g 2 74 72

Debt Service Coveragc itleo.)Appratsa 1.2 2,2 2.7 7.0 2,4 2.4 2.0 2.0 7.9

Act.41 1,0 2.9 2.8 7.5 2,9 7. 7.7 7,5 ,3 7

lo Thc... fguret inclde ple-ned Irtellatione fter te cofletton of th. Forth prj.Iet to 18, but which dta not mtertaitse

becau~e of d41y on ?ourth Project,

b 3n *Grage nct revalued et.ed as8e88 in operation.

THA I LAND

TH-IRD AND _FOURTH TFLFCO~MPRNICATSIMS P1I!CTS (I.OANS 1620-TH AND 2141-TH)

PROJECT COM,LETON RFPORT

Est atedS ansd A.tosl 5ncome Stategenta 1978-87 /a

(Rait aISi"¯n

A. of Septraher 10 1 5979 5980 !98 1982 1981 1984 1995 I96 __ 17

Fat. Al¯ciseat t¯ . tua¯l ast. Actua f Artua EWt. A[..I E-. Ar -A,t 5mt. Actfafl %t, #r, i Ett, ActuC l tt. Artual

Operat ing Revenue

L-,al serce 696 7713 10 1,101 913 1,-?1 1,105 1,711 2,0,& 2,0i1 2,396 2,Ift 2,972 2,464 , 2,1703 4,868 3.91- 5,052

Tr~nk ser lc 266 268 281 18 641 428 826 925 1,271 1,231 1.768 1,418 2,5,9 1,713 1,877 1, 9 5,0 2.816 -5.

Other ser.[c- 194 198 247 25t 299 2%6 149 288 484 302 (109 317 782 375 1.021 614 1,124 I06 - hl9

Effect of tarl ncrease 80 - 350 - 901 - 1,413 - 0 - I550 - I.K00 - ),000 - 4,000 -

Total j2, j ,219 1 694 l,672 2_8 j74 2 2%5 3 6At 226 -l

9 3 ,46 5 673 3.918 8.140 46 11.706 5.221 16.032 7.626 9,46

erat Iag Expens

Staf( remnerahto, bonst 408 444 15 364 718 690 912 81 1,015 .,051 1.287 ,178 ,57 1.27 I,807 1. , 2,16 1,625 - 1,749

-aintenance expense, ml 6Q 558 87 172 106 223 151 568 130 598 208 263 252 16! 262 497 3%0 - 31A

Operating and ad.tn. .apen-e 552 112 147 1M) 211 207 27ø 280 171 260 359 600 693 451 916 "3 I,217 606 - 77

eprcilation 220 201 299 28l 424 127 6t4 391 494 41t 374 442 7717 469 1.161 67 1,69 971 - 1.714

Total 821 828 -i99 I.M2 47 110 2,7 .616 2.04 1,852 _.618 2.228 3.290 2.11 4,2 2,96 1.121 3.552 - 4.19

Netl 411 595 590 ,227 925 .676 13 96I ,1690 & 86 2. 1.674 _120

50g554 6,276 -_2,

1h Income 9 12 1 im 7 23 48 -- 402 - 402 - åle - 2m9 - 277 - 141

,therp xpense. - 24 - 28 - 15 - 131 - 24 - 133 - 63 - 619 - 67 - 951

Financial Charge.

9

Ingteat 142 147 211 224 157 218 427 281 368 141 450 410 721 670 5.165 1,127 2,12 1.426 - .L2

Co~etent ch.tge 6 54 Il il 17 6 17 - 25 - 27 - 6 - 32 - t9 - 47

Total Finan~ciaCha es 143 531 24. 217 328 233 411 300 6s 316 450 457 725 724 1.345 .I59 7a152 5,45 -1 5,j29

Remlttance to the Treasry 0 0 0 il 279 400 41 460 608 750 1,41 s85 5,789 850 2.98 370 3,458 I,1ns - 751

net in-ome 279 266 139 124 648 121 838 -S 783 966 5464 7 2.158 999 3.16 605 6.741 1,- - 5.664

Rate of ret,,rn (2)

Book valu. ba.le 12 14 13 15 14 10 l, in i8 5 26 I8 10 22 30 28 29 3 - 29

Ieavalued basl. 5l n.a. I1 n.a. 12 ,.a. Il 5 ø Il 53 15 16 59 l8 20 21 25 27 - 24

Operatina ratio (1) 66 67 63 63 " 59 %4 N 34 52 46 57 40 52 6 54 14 45 - 49

Re,enue/DFLC.rrent 4,450 4,453 5,241 5,111 7.446 6,466 8,420 7.70 8,194 8.701 12,187 8,815 54,116 9,297 1,844 9.01 B6.451 10,94 - 1t,062

co.stant (1978 price) - 4.451 - 4.f85 - 4.916 - 5,228 - 1,579 - 5,449 - 5,6% - 1,4ås - 6,45 - 6.271

Operating e.pene.1DIEL 2,929 2,976 3,400 1,450 4,152 1,814 4,S5 4,111 4,1l3 4,4% 5,624 5,05311 , ,315 1,749 1,06 1.643 6,994 -5,403

ash operating expe-.eeg/DFLCureren 2,544 2,246 2,475 2,%>4 1,014 7.87> 1,27 3,2A7 1,42n 1,5>V 4.1 4,018 4,470 1,977 4,174 1,815 3,912 1.625 - 3,17

Conetant (5978 price) - 2.246 - 2,124 - 2,187 - 2,223 - 2,267 - 2,484 - 2,375 - 2,16 - 2,529 - 1,922

i. Ftim.entr for FYYH to VYRI i,e -f,- th l 1ThSrd Proe t app,rsl frp, ;',- I I..e fr R. 5 8YR7 efr-, the Fouri, Proect appratmal report.

þi00

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS (LOANS 1620-TH AND 'g ppNPROJECT CONPLFTION REPORT

Estimated and Atual slance Sheets 1978-87 /(ih sillion)

_f September 30 1978 1979 1980 1981 1982 1983 1984 1 965 19"816Eat . Actual Est. At .l Y.t. t iT. '&tu&I Est. Actual G -Att t -i;- Eat. A-tual at. -tes et. Atual

ad Assets-ross plant In service-book value 5,416 4,639 7,062 6,053 10,246 7.997 13,754 8.632 9,450 9.040 [1,434 9,383 16.806 9.731 25,487 11.963 35.923 15,660 - 23,339

Less: Accumulated depreciaton 1.432 1,413 1,732 1,653 2,156 1,969 2.755 2.351 2,873 2,736 3,447 3,131 4.224 3.688 5,387 4,053 7.076 4.702 - 6,206

Net plant In service-bookvalue 3.984 ILIL 5.330 8 8.09 6.028 19 6281 6-5

17 305 !LIE ALnZ 12,562 6.243 20.100 7.910 2.649 to,we 16.933

Add: Plant under construction 1,453 !,782 1,646 1,787 2,123 1,076 2.339 946 3,592 2.108 9,259 5.203 13.597 10,163 l,082 13,024 18.760 15,836 - 12.609

Total Fixed Assets S 6.976 1 3.A23 7,104 1 7.227 10,16 8.413 17,246 11,455 26.379 16.406 36,182 20.934 7 28.14 29,542

Ither Noncurrent Avets 144 92 198 85 367 617 31 374 - 206 - 595 - 941 - 684 - 624 - 768

rent Assetssh 594 594 972 592 100 1,057 978 1.831 1,762 1,799 1,299 981 2,123 13.43 3,059 2,411 5,334 1,059 - 585

Accounts rt-eivable 2!0 343 288 476 416 5/0 553 792 928 1,419 1,226 1,5135 1,614 1,331 2,081 1,283 2.529 1.766 - 3,946Inver ories 153 478 181 416 211 215 253 447 238 650 298 1.452 399 1,906 519 2.429 678 2,101 - 1,462 4Other cur. nt assets 90 73 114 66 154 54 191 46 658 107 745 161 743 136 725 153 728 234 - 253 I

Total t 0 ,488 3,S55 o 2 9 1 975 3.122 6 4,031 3 6 879 476 o 6.276 9.269 5 160 4.226

TOTAL ASSETS 9 6188 8t786 9.622 15,348 10,72333,YS5 12,654 20,814 16,19 3 22.063 42.566 27.894 676 32.698 34,536

.vernment gontribution 516 516 516 i. 516 516 516 516 516 516 16 516 516 16 536 516 516 516 - 51Capital reserve and customers'

-ontribution 6 3 6 5 6 16 6 18 6 22 6 30 6 41 6 71 6 113 - 180Lie9&: Loss from Baht devaluation - - - - - - - (128) - (117) - (1) - (93) - (1,490) - (3.864) - (3.832)Retained -arnings 2,200 2,192 2,559 ?,515 3,207 2,837 4,064 3.181 4,26% 4,148 5,730 4,865 8,088 5,853 13I604 6,254 16,344 7,610 - 9,074

Total Equity 2 2 'it 3.083 0 1229 3,369 4,186 3,187 4,787 4,1 6.252 _,306 8.610 9 517

12.126 5.351 16.k 4J75 5.938

g-Term Debtsrces long-term debts 3,117 2,954 4,741 1.686 6,649 4,S67 8,866 ,198 - 5,400 - 7,946 - 11,794 - 18 52 - 22,206 - 22,607Les: Current maturities 161 61 268 77 204 525 402 251 - 262 - 417 - 718 - 1,266 - 1,480 - 1,401

Net Long-ters Debts 2.956 2.893 4473 60 645 4042 8.64 6 138 10.232 7,129 16.600 11076 22.482 16,786 29.113 20.728 21,206

astomer Deposit 486 482 599 589 726 698 911 788 892 894 3.067 1,014 1,367 1,183 1.741 1,599 2.212 2,013 - 2.320

rer Liabilities "1 48 15 3b 9 17 8 26 - 118 - 262 - 404 - 611 - 947 - 1,338

rent Liabilitiesccounte and notes payable 168 143 151 1W5 238 208 259 197 - 359 - 537 - 869 - 963 - 1,082 - 530Accrued staff bonus and remit-ta.ce te the Treasury 27 25 315 65 368 467 533 560 - 907 - 745 - 1,013 - 509 - 1,607 - 1,041urrent "truritt*s 363 61 268 77 204 525 4C2 251 262 - 417 - 718 - 1,266 - 1,480 - 1,403ther current liabilities 77 225 107 225 142 291 385 365 - 407 - 369 - 483 - 609 - 6"8 - 762

Total 433 454 561 552 952 1,491 1,379 1,373 3.88 1 935 3.263 2,088 4 3.03 6.217 3547 a 67 4.635

TOTAL LIABILITIE AN EQUITY 6628 6,188 8.729 7.822 llqu6I 9,617 15,348 10,723 13755 12.454 20.814 16,179 31.058 22.063 62,58 27A6± .6,76 32.66 34,536

rrent ratio (times) 2.. 3.3 2.8 2.8 L.3 1.3 1.4 2.3 2.0 7.1 1.1 2.0 1.1 1.5 1.0 1.8 1.1 1.1 - 1.1long-term debt/equity ratio (1) 52/48 52/48 59/41 54/46 63/37 55/45 65/35 58/42 517/43 53/47 62/38 59/41 66/34 64/36 65/35 76/24 63/39 83/17 - 78/22counts receivable (days) 62 101 62 104 55 92 55 99 69 152 79 143 72 106 65 90 s8 82 - 76

Estimates for FY78 to FY83 are from the Third Project appraisal report; estimates for FY82 to FY87 are ir- the Fourth Project appraisal report.

1u8_5im_rosen lsuceslmcaIos om n2cis (I 110-2-_! 01 n15-ij

Poleg - co~uram asseu

l.9...l.e .. I an..I r9.. nI.. 0.1.. .. 5020-42 2.

1. .f Sept..be, 10 iii SM 1921 sio 862 li1631 5604 1983 ni0 si j 3 .3M

L.a. Art2 2.. Arl..I 6... Ari~ 0.t.s e .. Ar.l rt..I Is. Art..I N i¯ Ar.. ha. *r..I bst. Irt..! b.s. 4rt..!

~ 1.. r~ a..g.. e . . e l ir.i n B l2 4 e l 0 I 9 e s t 1 2 1 s s I I . n f 9 e In i 9 m. 1 . f t . 6 3 i.n b 2.~ 1 j.~ . H E S

.... . ... 9 . .- 0 .ii 6, en . 4. 9 aiii me é u.u 1., sOu s., ,..,i 1.21 ±.06 ien i,.i an : i. san 12 umm2 40.22 - 6an12 2n 24i 208 *28 122 4l0 i Le 1 4 4s1 92 469 1.16, v.s 1.402 ,45 - .214 l.6 2,% 6,me0 4., - 6.9n

s.......6 ,, s I . . , .. ,.1, ,2 » .- - . . 2. .. - ..- >• •• ••. . 3 n a 2 - - lag - i - 141 0

öm.. 908 9? .m 31 Iet1.4 _ l .59 173 .1 »~ 1.2

O'abe..18 241 21n 596 62 211 4 4 12. _ 96 D.m41 i 2.9? 6 2 7.4 ." . 0 A~15*l8l 9 i 2 5 0 2 0 1 I 6 0 0 .U 42 122 5 .1 .0 .1 .1 .0 .2 1.00 - 1.01

bo49 1olo,.. C.. 4.D .t1 . 40 412 49> 1_6 006 004 n4 40 9lo mal taI 607 A.1x5 Ute . -8.

a.te..r d.p.Is il 92 IIB r0a 127 104 50s il 1? 190 81 620 10 29 121 421 412 424 - 321 91 09 .0.

Io2r..0.. 1,02 04 s.01 2s 1.94 5se, 1.11 94# s.u 217 4.4m 2.499 0.0 4-.4m 6.In 4.604 6.408 2.19 - 011 t.e n. n,e~ n 0.2n - 8.1

.4. . .16 6, 19e R44 L 02 .2n9 1a Ioe 1as 1 s.44 , * j2 131 G.M i mn . 2 - 2.1 11.1 el.&a 38.398 fR.40 1 1.9

I... 9.m 1.n2 5.81 1.6n 2.42 1.0s 1.n2 602 1 0n 1,m 2.62 1.901 9.0 :.4n 0.91 1.22 1.2 1.2 -%,- T..1M n.0 1.0ns 20.012 -1s.66m

908 . 6 bel (1.. 10 16 44 >> <1> 26 44 06 12< 0 1 >216) 61 2 6 2 .1 .2 föla Il %22 la20 8.16 12 1 Dt <111

,*lI 9....s 1..6. I 8110 3 2 sen 3907 11 4 s60 6 1. 1 201 sin 1.216 9 196 1 3e.l e n .2 l. .no se,an 1,91 f,. 20.9

S 2 27 VD 22 60 4 3 1 91 n l 29 si n 21 46 n9 n an n - n

(1...) 9.2 1.0 2.7 1.9 2-1 2-9 1.0 1.1 2.6 2.9 2.6 1.6 2.0 1.7 2.0 1.1 1.9 1.3 D.? 2.1 1. 2.1 1.0 - 1.

t- e r b. .. »-O

. .AMDE 11

TRAILAND

THIRD AND FOURTH TELACOMNICATIONS PROJECTS (LOANS 1620-TH AND 2143-TH)

PROJECT COWLETION REPORT

.%imary of Basic Telephone Tariffs(Bebt)

As of September 30 1978 1979 1982 1965 1986 1987

Installation ChargesXmin te5eplone

Rotary dial 1,500 1,500 3,500 5,000 5,000 3,700/sPush button 2.500 2,500 3,500 3,500 3,500 3,700J

Rental (per month)=ino and main telephoneRotary dial 30 50 50 50 50 50Push button 100 100 100 100 100 100

Lrom subecriber telephones, untied 1.5 2.0 2.n 2.0 3.0 3.0From public telephones, 3 einutes 1.0 1.0/b 1.0 1.0 1.0 1.0

Long-distance callsSubscriber-dised, per minute /c

0-100 km - 4 4 4 6 6100-200 km - 6 6 6 9 9200-350 ka - 8 8 8 12 12350-500 km - 10 10 10 is 15500-800 km - 12 12 12 18 18Over 800 km - 15 15 15 18 18

Surcharge for operator assistance /d7 PH to 6 AM 20 20 20 20 30 306 AN to 7 PM 10 10 10 10 20 20

Operator-assisted /c .0- 25 ka 3 3 3 3 3 326- 50 km 6 6 6 6 6 651- 75 km 9 9 9 9 9 976-125 km 12 12 12 12 12 12126-200 km 15 15 15 15 15 15201-350 km if 1M 18 18 18 18351-600 km 24 24 24 24 24 24601-900 ha 30 30 30 30 30 30Over 900 km 36 36 36 36 36 36

Customer Oeposit (to be made by sub-scribers for each new line)

Bangkok 3,000 3,000 3.000 3,000 3,000 3,000Rest of Thailand 1,000 3,000 3,000 3,000 3,000 3,000

Subscriber Bond (to be purchased bysubscribers as condition of service)

Bangkok: Subscriber who prefersinstallation with-

High priority 30,000 30,000 30,000 15,000 -/f -

Low priority 10,000 10.000 10,000 15,000 - -Rest of Thailand: Exchange capa-city of

Over 1,000 lines 3,000 3,000 3,000 5,000 - -Under 1,000 lines 1,000 1,000 1,000 3,000 - -

/a TOT stopped providing telephone sets to private subscribers In 1987.7- Untined until 1978.7- Fifty percent discount between 7 PM and 6 AM.

IL dilI I ti

- 69- ANNEX 12Page 1

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS (LOANS 1620-TH AND 2143-TH)

PROJECT COMPLETION REPORT

Compliance with Covenants

Section ofagreement Covenant Compliance/comments

Loan 1620-TH

LA 4.Z4 Establish, by September 30, 1979, a Yes, later changed to Corpo-Fundamental Planning Unit rate Planning Office

LA 4.05 Undertake, by Janury 1, 1979, an Yes, but started in April 1984Economic Study of Telecommunications and completed in Janaury 1986.in Thailand

LA 4.06 Adopt, by September 30, 1979, a Yes. Development of MISManagement Information System (MIS) started in April 1980 and

system was in full operation

by April 1983

LA 4.07 /a Establish, by March 31, 1979, Yes from January 25, 1979waiting lists of potentialsubscril)ers

LA 4.07 lb Implement by March 31., 1979, No. Though, based on con-administrative and technical sultants recommendations, pro-procedures to connect new lines as cedures were revised, delaysexchange and cable facilities become continue in connection of newavailable lines

LA 4.03 Initiate change over to a new bill Yescollection system by October 1, 1980and complete change over bySeptember 30, 1982

LA 5.03 /a Complete, by June 30, 1979, revision Yesof its assets valuation andrevaluation procedures

LA 5.03 /b Commencing with FY80, calculate rate Yesof return on revalued assets

LA 5.04 Submit audited financial statements Yes, though occasionally latewithin 4 months of en,i of fiscal by a monthyear

ANNEX 12- 70 - Page 2

Section ofagreement Covenant Coup 1 iance/comments

LA 5.06 Debt service coverage ratio of 1.5 Yestimes

LA 5.07 Rate of return of 10% Yes

GA 3.02 /a Government to ensure settlement of Yesaccounts of government agencies withTOT on a current basis

GA 3.02 /b Government to adopt, by September Yes, but all accountn rettled30, 1979, procedures to settle all only by September 1985outstanding accounts with TOT as ofabove date and complete settlementby September 30, 1983

GA 3.03 /a Government to restrict, by December Yes31, 1980, licensing of new privatenetworks

GA 3.03 /b Levy, from December 31, 1980, a Yeslicense fee on private newtorks

Loan 2143-TH

LA 3.02 Employ mana-ement consultants and Yes. Management consultantstechnical experts on July 29, 1985 and experts

by June 30, 1986.

LA 4.03 By March 31, 1983 adopt a system of Yes. But from April 1985, TOTtelephone allocation to ensure adopted a uniform rate ofhigher priority to high bond bonds and from December 17,applications 1985 completely suspended the

bond system

LA 5.03 Complete by June 30, 1983 revision Yesof its assets valuation and reval-uation procedures

LA 5.04 Submit audited financial statements Yeswithin six months of end of fiscalyear

LA 5.06 /a Generate, upto FY85, funds from No. Except for FY82, theinternal sources not less than 20% ratio was below 20%. Theof average annual capital expendi- ratio for FY82-85 was 23% andture, not less than 25% for entire for FY86 20%period FY82 to FY85 and aot lessthan 35% for FY86

ANNEX 13

71- Page 1

THAILAND

THIRD AND FOURTH TELECOMMUNICATIONS PROJECTS (LOANS 1620-TH AND 2143-TH)

PROJECT COMPLETION REPORT

Return on Investments

1. The benefit period of the program extends from 1978 to 2001 when onaverage the equipment provided under the projects would have exceeded itsuseful life. TOT's 1978-87 investment program included parts of the SecondProject, the Third and Fourth Projects, and ESDP 1984-88. The overlapping ofthese projects and the close elationship between equipment installed underthe two .Bank projects and the total investment program make any attempt toseparate incremental costs and revenues for the Third and Fourth Projects veryarbitrary. The rate of return calculated in this annex, therefore, is forTOT's total 1978-87 investment program.

2. All costs and benefits streams have been expressed in 1978 prices,using the inflation rates actually recorded in Thailand. All streams arestated net of taxes, duties, interest.

3. Incremental operating costs and benefits associated with the invest-ment program have been calculated on the basis of the DELs actually added to1987.

4. The following summarizes the 1978-82 investment program'sincremental cost and benefit streams projected at 1978 prices at the appraisalof the Third Pfoject (Loan 1620-TH):

(Baht million)

Fiscal Capital Operating Netyear expenditures Costs Revenues benefits

1978 1,498.8 22.1 60.0 -1,460.91979 1,662.8 102.8 316.9 -1,448.71980 2,096.1 210.6 902.9 -1,403.81981 2,375 - 353.3 1,431.5 -1,297.01982 2,454.- 530.4 2,016.1 -968.71983 616.7 2,512.2 1,895.51984-99 685.5 2,663.4 1,977.9

The rate of return of these streams is 18.5%.

AMEX 13

- 72 - Page 2

5. The following summarizes the 1982-85 investment program'sincremental cost and benefit streams projected at 1981 prices at the appraisalof the Fourth Project (2143-TH):

(Baht million)

Fiscal Capital Operating Netyear expenditures Costs Revenues benefits

1981 2,718 - - -2,7181982 2,746 242 674 -2,3141983 6,134 909 1,669 -5,3741984 5,031 1,504 3,174 -3,361I985 1,566 2,168 5,201 1,4671986 - 2,802 7,424 4,6221987-200' 3,663 9,934 6,271

The rate of return of these streams is 26%.

6. The following table summarizes the actual 1978-87 investmentprogram's incremental cost and benefit streams at 1978 prices:

(Baht million)

Fiscal Capital Operating Netyear expenditures Costs Revenues benefits

1978 1,079 - - -1,0791979 1,191 84 174 -1,1001980 687 154 345 -4951981 361 208 489 -801982 701 295 726 -2711983 2,156 416 913 -1,6591984 2,922 532 1,275 -2,1781985 2,769 763 1,802 -1,7311986 3,597 1,071 3,248 -1,4201987 2,360 1,165 3,804 2791988-2001 - 1,165 3,804 2,639

The rate of return of rhese streams is 13%.