1 FTETUJRN TO l RESTRICTED ORTS DESK< Report No. TO-379a REPORSDS WITHIN ONE WEEK This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accurocy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE TELEPHONE EXPANSION PROGRAM THE NATIONAL TELECOMMUNICATIONS ADMINISTRATION (ANTEL) EL SALVADOR September 13, 1963 Department of Technical Operations CURRENCY EQUIVALENTS US $1 = 2. 5 Colones (Z 1 = US $0.40 US $1 million = , 2. 5 million 1 million Colones = US $400, 000 APPRAISAL OF THE TELEPHONE iiPANSION PROGRAM THE NATIONAL TELECONI'UNICATIONS ADMINISTRATION (ANTEL) EL SALVADCR TABLE OF CONTENTS Page No. SU'ARY i I. INTRODUCTION 1 II. THE BORROMER 1 Present Organization 2 III. EXISTING FACILITIES 2 Existing Facilities 2 IV. DEMJAND FOR TELEPHONE SERVICES 3 Local Service 3 Long Distance Service 4 V. THE PROJECT 4 Telephones 4 San Salvador 4 Santa Ana 4 San Miguel 5 Urban Outside Plant 5 Long Distance Facilities 5 Engineering and Construction 5 Procurement 5 Schedule of Construction 5 Cost Estimate 6 VI. FUTURE CONSTRUCTION 6 VII. ECONOMIC CONSIDERATIONS 7 VIII. FINANCIfL ASPECTS 7 General 7 Past Structure and Financial Results 8 Tariffs 8 Financial Plan 9 Estimated Future Earnings 12 Rate Covenant 12 Debt Service 12 Debt/Equity 12 Accounts and Auditors 13 IX. CONCLUSIONS 13 LIST OF ANNEXES 1. Principal Existing Tariffs 2, Sources and Applications of Funds (1963-1970) 3. Operating Statements (1961-1970) 4. Balance Sheets (1963-1970) Map of Proposed Telephone Systen APPRAISAL OF THE TELEPHONE EXPANSION PROGRAM THE NATIONAL TEMECOPI4UIC,.i IONS AD1iNISTRATiON (ANTEL) EL SALVADOR SUTMThARY i. The Government of El Salvador has asked the Bank for a $9.5 million loan to finance the foreign exchange costs of a program to ex- pand and improve telephone and telegraph services in the country. The estimated total cost of the program is $13.6 million equivalent. ii. The project, to be completed by mid-1967, includes the first phase of a comprehensive long-range development of telecommunications facilities for San Salvador. It will provide automatic central office equipment for 26,000 telephone lines in the cities of San Salvador, Santa Ana and San Miguel plus toll dialing between these cities over an ade- quate microwave radio network. The project includes only the immediate and more essential telecommunication needs, thus holding local currency requirements to a sum that is practicable. The limitation will also provide time for the new operating organization to meet the test of experience before additional investments are undertaken. However, unit costs will in no way be prejudiced as basic design lpill from the start provide for subsequent expansion in later stages. iii. On August 27, 1963, the Congress of El Salvador approved an act creating the National Telecorm-unications Administration (ANTEL) for the purposes of providing national telecommunication service. Existing telephone and telegraph facilities, presently operated under the 1Hinistry of Interior, are to be transferred to this autonomous public agency. In accordance with the act creating ANTEL, its five- member Board of Directors is to have three members appointed by the Government and two members from business and financial circles. iv. The justification of the proposed expansion is well established by the pent-up demand alone. In addition, the serious inadequacies of the present system will be eliminated in the principal cities. v. Initial tariffs for ANTEL's services would be those charged at present by the Telecommunications Branch. These present tariffs have been used in the estimates. They would be reviewed by consultants engaged to recommend, among other things, desirable tariff modifications. Even at present rates, however, the estimates show that in the first years after completion of the project the earnings would result in rates of return on average net fixed assets in operation of about 9%. - ii - vi. All equipment to be financed under the proposed Bank loan would be purchased through international competition and in accordance with plans and specifications prepared by competent consulting engi- neers. vii. The proposed project is technically sound and economically justified. It is suitable for a Bank loan of $.5 million equivalent for 20 years, including a grace period of 42i years. APPRAISAL OF THE TELEPHONE EXPft!SION PROGRAM THE NATIONAL TELECO12i NICATIONS XDNINISTRATION (ANTEL) EL SALVADOR I. INTRODUCTION 1. The Government of El Salvador has asked the Bank for a loan of 19 5 million equivalent to cover the estimated foreign exchange cost of a program to expand and improve telephone and telegraph services in the country. The estimated total cost of the project is $13.6 million equivalent. The requirements of local currency financing will be met by the sale of bonds to applicants for telephone service and by internally generated funds. 2. The Borrower will be the National Telecommunications Admini- stration (ANTEL), an autonomous government agency now being established to own and operate the country's telecommunications facilities. Existing telecomrmunications operated by the Ministry of Interior are to be trans- ferred to this agency following an appraisal in accordance with existing legislation. 3. A feasibility study and expansion program was first irade in 1960 by a combination of two consulting engineering firms - Allen K. Hamilton Associates of Wioodstock, Illinois, and Preece, Cardew & Rider of London. Commencing in late 1962, a team of consultants from the French Telegraph and Telephone Department have been carrying out a regional telecommunications survey under a U.N. Special Fund grant ad- ministered by the Bank. The project as now presented comprises the provision of the telephone facilities recommended in the 1960 study, brought up to date and incorporating the recommendations of the French team of experts. II. THE BOFROU M 4. The National Telecommunications Administration (ANTEL)I/ is an autonomous public agency, entirely owned by the Government, established by an act approved August 27, 1963, by the Legislative Assembly of the Republic of El Salvador. Prior to enactment, the project of law was reviewed by the Bank and found acceptable. The act gives ANTEL the right to plan, acquire, construct and operate tele- comrunications. At its discretion, ANTEL may make arrangements with others, private or public, for the purpose of providing telecommunication service. ANTEL will also have authority, subject to the prior approval of the Government, to fix tariffs and other charges for telecommunication services. 1/ Administracion NTacional de Telecomunicaciones - 2 - 5. ANTEL will be governed by a five-member Board of Directors, serving for four-year terms and designated as follows: (a) One regular full-time director to hold the office of Chairman, the appointment being made by the Executive Power acting through the Ministry of Interior; (b) Two regular directors and two alternates, appointed by the Execu- tive Power acting through the I.iinistry of Economic Affairs and the Mlinistry of Public Works; (c) One regular director and one alternate, elected by the private banks operating in El Salvador; (d) One regular director and one alternate, elected by the agri- cultural, industrial and commercial associations of El Salvador. 6. Administration of the day-to-day business of ANTEL is to be the responsibility of the Chairman of the Board of Directors and of a Manager, to whom the Chairman may delegate such administrative powers as he considers necessary. The Mianager is appointed by the Board and is to attend Board metings as Secretary with the right to speak but without vote. Present Organization 7. The existing staff and telecommunication facilities of the Telecommunications Bureau of the iiinistry of Interior, are to be trans- ferred to ANITEL under the provisionsof the law creating ANTEL. 8. The Telecommunications Bureau is inadequately organized and staffed. For example, there are no graduate engineers in the organiza- tion. The administration now depends upon suppliers for engineering. Top management has been subject to frequent changes. 9. Extensive reorganization is necessary before ANTEL can provide efficient and economically sound services. This will require for some time the help of qualified consultants to provide continuing management guid- ance, to establish training courses and to advise on organization and re- cruiting of personnel. Appropriate steps have been taken to obtain these consultant services. III. EXISTING FACILITIES Existing Facilities 10. The existing comrunications facilities to be taken over by ANTEL consist basically of about 16,000 local subscriber telephone lines and an extensive telegraph network. Of the telephone plant, 7,000 lines are automatic equipment located in the capital, San Salvador. This equip- ment is in good condition, 5,000 lines having been installed in 1951 and 2,000 lines having been added in 1958. Some existing cables in San Sal- vador can be continued in service but a large amount of the underground cable should be replaced as should the uncommonly large number of single pair wires strung along the streets. The rest of the telephone exchange equipment in the country is manual and in extrerely bad condition. 11. The bulk of the telegraph traffic is carried by a network of 32 simplex circuits superimposed on telephone toll lines. Outlying regions have telegraph connection by means of single wire lines with ground return and are in poor condition. 12. International communication is carried by seven radio-telephone and seven radio-telegraph channels. The El Salvador ends of four of the radio-telephone circuits are operated by the government-owned Radio Nacional, and the other three ends by the Tropical Radio Company, a sub- sidiary of United Fruit Company. The El Salvador terminals of all inter- national telegraph circuits are operated by Radio Nacional. IV. DEiPAND FOR TELEPHONE SERVICES Local Service 13. In El Salvador there are only about 6 telephones per 1,000 population, a little below average for the whole of Central America. It compares with 80 per 1,000 in Europe and 410 per 1,000 in the United States. By the end of 1967, upon completion of the first stage of the proposed expansion program, it is estimated that El Salvador will have about 11 telephones per 1,000 population. 14. The demand for telephones in El Salvador far exceeds availa- bility. For example, in the San Salvador area with 7,000 lines in service, the telephone administration held approximately 12,500 unfilled applications. These were accumulating at the rate of 25 per month in spite of the known non-availability of telephones. Although the standard installation charge is 040.00 (I1il6.00), it has been telephone admini- stration policy to require customers to pay the cost of poles, wire, and the telephone set necessary to connect them to the system; a cost that frequently exceeded 2,500 Colones. Under the proposed policy, whereby ANTEL would provide this connection at considerably lower total connection costs, additional applications can be expected. 15. The experience of the present limited automatic office in San Salvador provides an indication of probable future demand. This office was installed in 1950 and an extension made in 1958. In that period the rate of growth was 10% annually and limited only by insufficiency of facilities. 16. Present service is far from satisfactory. Exchanges are overloaded and this, combined with the poor condition of the equipment, causes a disproportionately large percentage (over 20% during a typical week) of uncompleted calls. Improvement in service after the new plant is built and extended should increase the demand for new telephones. - 4 - 17. The consultants estimate that when the present backlog of orders is satisfied (about three years after beginning wJork on the project) future telephone growth would be 10% per year. The facilities for 26,000 new telephones proposed under the project will all be uti- lized shortly after completion of the installation and extensions, which can readily be made, will then be needed to meet this e stimated 10% annual growth. Long Distance Service 18. The present long distance facilities are so inadequate and unreliable that actual traffic figures provide little basis for estima- ting future reauirements. Two teams of consultants, using such statisti- cal information as is available coupled with their observations in the field and judgment related to experience in countries having a level of development similar to El Salvador, have established the traffic that could reasonably be expected once an adequate grade of service is provided. From this they developed the facilities required and the related costs. It has been the experience throughout the world that when adequate facilities are provided, long distance services will have a higher rate of growth than urban telephone facilities; also, that the rate of net earnings on investrent in long distance facilities will exceed that of urban telephone facilities. V. THE PROJECT 19. The project consists of the purchase of land, construction of buildings and purchase of equipment, materials and services for the necessary engineering and installation as shown below. Telephones 20. Under this project provision is made for the installation of a total of 26,000 automatic telephones in the cities of San Salvador, Santa Ana and San Miguel. San Salvador 21. The project covers the installation of 20,C00 lines of automatic exchange equipment, distributed over 2 new main exchanges and 2 new satellite exchanges, plus modifications to the existing 7,000 line Centro exchange for its interconnection to the new exchanges and its conversion from four to six digit operation. 22. In the principal new main exchange to be called "Flor Blanca," would also be installed the equipment for long distance, information, repair and other special services. Santa Ana 23. A new automatic exchange of 4,000 lines initial capacity would be provided, replacing the existing worn-out inadequate common battery equipment. -5- San Miguel 2h. A new automatic exchange of 2,000 lines initial capacity would be provided to replace the existing worn-out magneto equipment housed in a building one side of which is open to the weather. Urban Outside Plant 25. With the exception of some underground conduit and main under- ground cables in the central part of San Salvador that can be reused, practically the entire outside plant (cables, wires and poles) in the above cities is to be rebuilt under this project. Long Distance Facilities 26. A microwave radio system is to be constructed through the center of the country from Santa Ana in the northwest via San Salvador to San Miguel in the southeast. Subscriber dialing between these three cities will be provided; also, microwave connections to Sonsonate and to Usulatan and a VHF radio link to Santiago de hiaria. For a later stage, radio connections are planned to 13 other towns. No specific provision is made for additional telegraph circuits but, as a by-product of the telephone facilities proposed, improved telegraph service between the principal cities would result. Engineering and Construction 27. Engineering assistance is being provided by the team of con- sultants from the French PTT. This has included the preparation of specifications for the urban automatic exchanges as well as the long distance plant engineering. To assist in further detailed engineering, the review of tenders, supervision of installation work and the training of staff, ANTEL plans to make arrangements to continue with assistance from the French PTT. Should negotiations to this end not be successful, ANITEL will engage other qualified consultants. 28. The detailed plans for the long distance facilities will be prepared after the French PTT team has completed the plans for the Central Arerican regional telecorriunication network - so assuring co- ordination of these facilities. Procurement 29. All main contracts for this project will be awarded on the basis of international competition. Schedule of Construction 30. Assuming a loan will be made by the autumn of 1963 and allow- ing for completion of engineering, bid invitations, bid analysis, 30 months for equipment manufacturing, shipping, installation and test- ing, the first major automatic exchange is expected to be in service in the latter part of 1966 and construction completed by mid-1967. 31. Some sections of the microwave relay system can be expected to be in operation by the middle of 1966 and all sections by the end of 1966. The construction schedules are reasonable. Cost Estimate 32. The construction of this project is estimated to cost (in thousands): Foreign Cost Local Cost Total Costs in$ in in $ in ¢ Land _ 813 337 8h3 Buildings 250 1,710 934 2,335 Central Office Equipment 4,150 1,063 4,575 11,437 Telephones 455 112 500 1,250 Urban Cable Network 1,850 3,667 3,317 8,292 Radio Equipment 1,450 375 1,600 4,000 Furniture and Office Equipment 170 325 300 750 Overhead Admin. and Consultants 280 800 600 1,500 Sub-Totals 8,605 8,895 12,163 30,407 Interest during Construction 895 1,310 1,419 3,548 Totals 9,500 10,205 13,582 33,955 33. The estimate is a consolidation of aIl data available, in- cluding the Hamilton-Preece, Cardew & Rider study, the survey of the French PTT team and recent proposals from a number of large suppliers of telecommunication equipment. The estimate contains an allowance for contingencies of approximately 10%. which is reasonable. VI. FUTURE CONSTRUCTION 34. For financial planning purposes further expansion of the telephone system after completion of the present project has been envisaged. Taking a reasonable estimate of costs and growth of 10% per year in the years immediately following 1967, new annual construction requirements of about 1;1.5 million rray be expected. The plans for financing these re- quirements will have to be developed on the basis of ANTELts actual opera- tional results achieved during the next few years. - 7 - VII. ECONOMIC CONSIDERATIONS 35. The present comriunication system in El Salvador is grossly inadequate. There are more names on the telephone waiting list than persons who have service. Some hO business enterprises, in order to carry out their function under the present lack of suitable communica- tion services, have provided their own private radio links. Such pro- cedure is costly of investment, uneconomic in operation and inefficient in the usage of available radio frequencies. 36. Except for 7,000 lines of modern automatic telephone central office equipment in San Salvador, the telephone and telegraph installa- tions are in such poor condition that service is unreliable. The plant is over-loaded and much of it obsolete. In attempting to telephone, long delays are suffered with a consequent wastage of time and effort. 37. By means of the proposed project, that is, the establishment of adequate telephone service within and between the principal cities, these obstacles to efficient government and business services will be alleviated and so assist the economic development of the country. The projected commlunications system should aid in fostering tourism, industry and commerce. By means of better communications, facilities for trans- portation can be more efficiently utilized and the important agricultural products of El Salvador be more readily marketed. VIII. FINANCIAL ASPECTS General 38. The law establishing ANTEL provides that, subject to prior approval of the Chief Executive and Mlinister of Economy, this entity can fix its tariffs and other charges. It also states that these charges shall be such as to provide, with adequate margin, for operating expenses, development and expansion, interest and other charges on capital obligations and the amortization of capital. Following the completion of the construction pro- gram, the earnings in excess of these requirements and provisions are, under the law, to be applied to the general revenues of the nation as amortization of the value of the telecommunication plant transferred to ANTEL. Commencing January 1, 196h, the Government is to be billed for its telephone service. 39. The telephone department, as presently operated, keeps no proper records of its expenses and capital expenditures. This complete lack of any data of actual operating results and investment makes the estinates of future operations and financial results moie uncertain than usual. After AMTEL has been functioning and more adequate data becomes available, the estimates on operating results should be re-examined and, if necessary, suitable action be taken to obtain satisfactory financial performance. - 8- Past Structure and Financial Results 40. The Telecomiunications Bureau of the IMinistry of Interior at present provides the telecorrxunication services of the country. It operates under an annual budget, drawing funds from and paying revenues to the National Treasury, 41. It files with the Government memoranda statements of income and expenditures. These memoranda include neither depreciation nor charges for service to other Government branches, since it follows the practice of providing free service to these Government branches. The expenditures comprise both operating expenses and capital additions to telecommunica- tions plant. On this basis its records are as follows: Calendar Year Income Expenditures Surplus (deficit) (expressed in thousands of Colones) 1958 3,781 5,o64 (1,283) 1959 4,048 4,624 (576) 1960 h,435 4,022 413 1961 4, 825 4,161 664 1962 4,899 4,319 580 42. ANTEL will establish an accounting system, patterned on accepted practices in the communications field. The consultants will advise and assist in setting up such a system and in establishing a training program. They will also assist in the preparation of budgets and an appropriate tariff structure. Tariffs 43. The principal existing urban telephone, long distance telephone and telegraph tariffs are presented in Annex 1. 44. The tariffs for urban telephone service produce revenues per telephone closely approximating those obtained in the self-sustaining communication entities of developed countries. However, the low message charge of 5 centavos (2 US cents) per urban call and the rather excessive monthly call allowance deserve re-examination to secure the maximum of revenues with the minimum of subscriber resistance. It will be an important duty of the consultants to advise on such desirable tariff adjustments. 45. For long distance national service, a unified charge of 30 centavos (12 US cents) is applied for calls of up to three minutest duration, regardless of distance. This too should be re-examined. 46. For the purpose of determining the revenues forecast in this report, the tariffs at present in force have been used. The Bank has, however, obtained assurances that adequate rates will be established and maintained. -9_ Financial Plan 47. Under the terms of the financing plan, A1ITEL is to be financed entirely by debt. The value of the existing plant to be transferred to ANTEL from the Telecommunications Bureau of the ilinistry of the Interior is to be considered as a redeemable government advance. The local funds required are to be obtained from an issue of State Bonds; and the foreign exchange requiremrents of the project are to be financed by the proposed Bank loan. 48. An eight-year (1963-70) Forecast of Sources and Application of Funds is shown in Annex 2. This covers the proposed project and the transfer to ANTEL of the existing old plant. For the purpose of the fore- cast the plant to be transferred was assumed to have an appraisal value of ¢7.5 million (W3 million). The actual valuation will be made by the Director of the Budget as provided under existing legislation. The borrower has agreed to have the valuation completed within one year and to give the Bank an opportunity to comment thereon. 49. The valuation estimated at t7.5 million will be a non-interest bearing obligation due the Government. Amortization will be made by offsetting against the debt the charges to the Government for telephone service. 50. Total capital expenditures during the period 1963-1970 are estimated at 063.3 million ($25.3 million). A breakdown of the require- ments and the expected sources of funds is as follows: - 10 - Requirements of Funds 1963-1967 1963-1970 (in thousands of ColonesT Construction Expenditures Acquisition of Existing Plant 7,500 7,500 Construction of New Plant 30,407 509417 Sub-Total 37,907 57,917 Capitalized Interest 3,548 5,338 Total Construction 41,455 63,255 Increase in Net Current Assets 1,990 5,379 43,445 68,634 Sources of Funds Internal Cash Generation 7,316 26,037 Less: Debt Service: Interest Charged to Operations 680 5,582 Amortization 1,9[1 11,071 Total Debt Service 2,621 16,653 Net Internal Cash Generation 4,695 9,384 Borrowings Proposed IBRD Loan 23,750 23,750 Local Bonds 7,500 7,500 Redeemable Governmnent Advance 7,500 7,500 Future Foreign Exchange Loans - 18,500 Future Local Loans - 2,000 Total Borrowings 38,750 59,250 Total Sources 43,445 68,634 - 11 - 51. During the construction period (1963-1967) internal cash genera- tion would represent about 11% of total requirements. During the total period considered (1963-1970) this share would increase to about 14$. The proposed Bank loan would represent 55% of the funds required during the initial period and 35% during the total period. 52. If the above program is carried out as planned, ANTELJs fixed assets in operation at the end of 1970 would be valued at Z54.8 million ($21.9 million), more than 7 times the estimated valuation placed on the existing plant. 53. The proposed Bank loan of $9.5 million would finance the esti- mated foreign exchange requirements of the telecommunications project including interest charges during the construction period. For the pur- pose of calculation, an interest rate of 512% and a term of 20 years including a grace period of four and one-half years has been assumed. 54. On July 3, 1963, Decree No. 340 authorizing the issue of 07.5 million in State Bonds for the local financing of the telecommunica- tion project was approved by the Legislature. Under this Decree, the bonds are to: (a) bear interest at 6% per annum, payable semi-annually commencing January 31, 1966. (The interest for 1964 and 1965 will be accrued and paid January 31, 1966. There- after interest will be paid as it becomes due); (b) be free of all existing or future taxes, as to principal and interest; (c) have a term of ten years with the principal to be anortized over five years, beginning January 31, 1968; (d) be acceptable at par value for the payment of inheritance and gift taxes. 55. Under the Decree, provision is nade that applicants for tele- phone service will be obliged to purchase bonds in amounts to be esta- blished by the Government. The amounts as presently proposed are: (i) A 0200.00 bond for private service, (ii) A ¢500.00 bond for professional service, (iii) A /1,000.00 bond for commercial service. 56. No Government grants or credits other than the ¢7.5 million transfer of the existing plant, have been assumed. 57. The required working capital (Net Current Assets) has been estimated at approximately one-fourth of the annual gross revenues. - 12 - Estirated Future Earnings 58. A statement of Actual and Forecast Operating Statements for the period 1961-1970 is shown in Annex 3. This covers the operations of the telecommunications branch of the IPiinistry of Interior for the actual years 1961 and 1962 and the forecast year 1963. It is assumed that ANTEL will begin operations of telecommunications at the first of 1964 and the forecast operations for 1964-1970 are assigned to ANTEL. 59. In the period of forecast ANTEL operations, depreciation was computed on a straight-line basis at 4% per annum on average gross plant in service during each year. 60. Net income before interest is expected to increase from 1897,000 ($358,8CO) in 1964 to 04.7 million ($1.9 million) in 1970. 61. The estimated return on net fixed assets in operation would reach 9.0% in 1968 (the first year of full operation) and would continue at this level. Rate Covenant 62. To ensure the continued soundness of its financial position, ANTEL has agreed that it will maintain (and the Government has agreed that it will authorize) tariffs and charges at levels sufficient to provide a rate of return of 9% on net fixed assets in operation and, should experience indicate this rate of return is not sufficient to ensure the efficient operation and continued improvement, extension and expansion of telecomF,unication services, further adjustments in rates and charges will be made. Debt Service 63. Because of the relatively short life of the State Bonds, the annual debt service requirements are high. In 1968 (the first full year of automatic operation) the debt service would be covered about 1.1 times. This ratio would increase to 1.2 times in 1969 and 1.3 times in 1970. 64. In order to protect the Bank's interest in ANTEL, ANTEL has agreed that it will not borrow, without the Bank's prior consent, unless its net revenues, adjusted to reflect the rates in effect at the time of such borrowing, shall be at least 1.5 times the maximum future debt service requirerents on all of ANTEL's long-term indebtedness (including the debt to be incurred), Debt/Equity 65. The only equity accruing to ATELL will be the surplus which will be retained to finance a reasonable portion of future construction. The debt/equity ratio, therefore, will be 100/0 at beginning of the project and is estimated to become 79/21 in 1970. - 13 - Accounts and Auditors 66. Under the law establishing it, ANTEL is to prepare a two- year budget which will be presented every second year to the Legislature through the Ninister of Finance. This budget rust include estimates of all sources of funds and all expenditures (both operating expenses and capital investments) for the Lns-uing two. years. 67. This law also requires that ANTEL be subject to two audits. One audit is to be performed annually by a firm of Certified Public Accountants to be named by the Central Reserve Bank of El Salvador. ANTEL has agreed to submit to the Bank copies of this auditor's annual reports. The second audit is to be performed continuously by an auditor named and paid by the Court of Accounts of El Salvador. He will work permanently in ANTEL's office and will issue an annual report to the Board of Directors. IX. CONCLUSIONS 68. The project is well designed to meet the more immediate and most essential telephone needs of the principal cities of El Salvador. The planning is coordinated with the regional telecommunications feasi- bility study for the Central American countries that is being effected under a U.N. Special Fund grant. 69. Estimates of costs are reasonable. Procurement procedures and financing proposals are satisfactory. 70. The project will make a substantial contribution towards the economic developmient of El Salvador. 71. Forecasts of operations indicate that a sound financial posi- tion should be attained upon completion and placing in service the pro- jected telephone facilities and that further gains are probable in the years following. 72. Legislation has been enacted to create a National Telecommuni- cations Administration owning and operating the telephone and telegraph facilities presently under the ilhinistry of Interior. This law provides the basis for creating a telecommunications operating organization with such autonomy and rights as to facilitate its operational and financial success. 73. Satisfactory agreements have been reached that: (a) The value of the property transferred to ANTEL will be treated as a redeemable government advance and that amortization will be limited, during the construction period, to the charges for telephone service to the Government. Thereafter the amortiza- tion may be increased by the amount gross revenues exceed operating and administrative expenses, interest and other charges on debt, amortization of other long-term debt and provision for future expansion of plant. - 14 - (b) Consultants satisfactory to the Bank will be engaged to guide and assist AN'TEL on: (i) planning and supervising the execution of the project; (ii) assisting in the organization of the services and training of the personnel; (iii) developing and establishing satisfactory tariffs; and (iv) establishing and maintaining an accounting system follow- ing accepted practices of utility accounting and operation. (c) Tariffs will be adjusted from time to time as necessary to maintain a return on net fixed assets in operation of at least 9%. (d) ANTEL will not incur any long-term indebtedness, without the Bank's prior consent, unless net revenues for the calendar year, or a later twelve consecutive nonths' period, immediately preceding the date of such incurrence are at least 1.5 times the maximum debt service requirements (including the debt to be incurred) in any succeeding calendar year, including the calendar year in which the debt is to be incurred. (e) ANTEL will have its accounts regularly audited and its financial statements *2ertified by independent accountants acceptable to the Bank. 74. The project is suitable for a Bank loan of $9.5 million equiva- lent. A term of 20 years including a grace period of four and one-half years would be appropriate. 9/13/63 ANIEX 1 EL SALVADOR Principal Existing Tariffs Urban Telephone Basic Monthly Tariffs Dial CB Manual Magneto Business $25.00 ($10.00) $20.00 ($8.00) ¢15.00 ($6.00) Professional $20.00 ($ 8.00) ¢15.00 ($6.00) $12.00 ($4.80) Residence 015e00 ($ 6.00) ¢10.00 ($4.00) $10.00 ($4.00) An additional charge of five centavos (2 US cents) is applied for each call over the basic monthly call allowance. The basic monthly call allowances are equal to the above tariffs divided by five centavos. A one-time charge of $40.00 (US$16.00) is made for each new telephone installation. Interurban Telephone The tariff structure for national long distance calls is 30 centavos (12 US cents) for the first three minutes and 10 centavos (4 US cents) for each additional minute, both regardless of distance. Telegraph The telegraph tariffs vary as follows, according to the urgency of the message and whether placed in "regular" hours. Telegraph Tariffs Regular Hours Irregular Hours Ordinary messages 1 to 5 words $0.30 ($0.12) $0.50 ($0.20) Each additional word $0.05 ($0.02) $0.10 ($0.04) Urgent messages 1 to 5 words $O.50 ($0.20) $0.70 ($0.28) Each additional word $0.10 ($0.04) $0.15 ($0.06) Very urgent messages 1 to 5 words ¢0.70 (;p0.28) ¢0.90 ($0.36) Each additional word $0.15 ($0.06) $0.20 ($0.08) Telegraph letters 1 to 30 words $085 ($0.30) Each additional word $0.30 ($0.012) EL SALVADOR ADMINISTRACION NAC1OIIAL DE TELSCoOJNICACIONES Forecast of Sources and Applications of Funds (in thousands of olones) Years Ended December 31 1963 1964 1965 1966 1967 1968 1969 1970 Total SOURCES OF FUNDS Internal Cash Generation Net Operating Income - 897 1,008 1,142 2,274 3,689 4,296 4,731 18,037 Depreciation - 300 300 358 1,037 1,708 2,010 2,287 8,0oo Total Internal Cash Generation - 1,197 1,308 1,500 3,311 5,397 6,306 7,018 26,037 Borrowings: Proposed IBRD Loan - 3,691 7,859 7,587 4,613 - _ _ 23,750 Local Bond Issue 975 2,712 2,663 1,045 105 - - _ 7,500 Redeemable Government Advance - 7,500 - - - 7,500 Future Foreign Exchange Loans - - - - - 6,019 6,461 6,020 18,500 Future Logal Loans - - - - - 1,500 500 - 2,000 Total Borrowings 975 13,903 10,522 8,632 14718 7,519 6,961 6,020 59,250 Total Sources of Funds 975 15,100 11,830 10,L32 8,029 12,916 13,267 13,038 85,287 APPLICATIONS OF FUNDS Constraction: Foreign Exchange - 3,425 7,312 6,675 4,100 5,730 5,870 5,260 38,372 Local Currency 975 2,712 2,663 1,o45 1,500 1,650 1,000 500 12,045 Acquisition of Existing Plant - 7,500 - - - - - - 7,500 Total Construction 975 13,637 9,975 7,720 5,600 7.380 6,870 5,760 57,917 Debt Service: Interest: Proposed IBMD Loan - 266 547 912 1,193 1,292 1,240 1,183 6,633 Local Bond Issue - - - 863 h47 427 315 202 2,254 Future Foreign Exchange Loans - - - - - 289 591 883 1,763 Future Local Loans - - - - - 45 105 120 270 Total Interest - 266 547 1,775 1,640 2,053 2,251 2,300 10,920 Amortization: Proposed IBRD Loan - - - - - 963 1,012 1,063 3,038 Local Bond Issue - - - - . 1,500 1,500 1,500 4,500 Redeemable Government Advance / - 468 476 493 504 _520 528 544 3,533 Total Amortization _ _ 468 _476 493 501 2,983 3.,040 3.lO7 112071 Total Debt Service - 734 1,023 2,268 2,144 5,036 5,291 5,;495 21,991 Total Application of Fands 975 14L371 10,998 9,988 7.744 12,416 12,161 11,255 79,908 Cash Surplus (Deficit) - 729 832 144 285 500 1,106 1,783 5,379 f Cash at Beginning of Year - - 729 1,56i 1,705 1,990 2,490 3,596 - Cash at End of Year - 729 1,561 1,705 1,990 2,490 3,596 5,379 5,379 Debt Service - Times Covered / 2/ 2/ / 1.1 1.2 1.3 f Annual Amortization of Redeemable Government Advance is the billing to Government for Telecommunications Service. / Not included during construction period. 9/12/63 EL SALVADOR ADMINISTRACION NACIONAL DE TELECOMUNICACIONSS Actual and Forecast Operating Statements (in thousands of Colones) Government Operations Actual Forecast Forecast ANTEL Operations Years Ending December 31 1961 1962 196 1964 1965 1966 1969 1970 Operating Revenues: Exchange Revenues ) 3,504 ) 3,538 ) 3,555 ) 3,905 ) 3,930 3,981 6,300 8,650 9,759 10,780 Long Distance ) ) ) ) ) 482 1,270 1,780 1,962 2,163 Telegraph and Cable 1,321 1,361 1,401 1,630 1,740 1,377 1,480 1,618 1,675 1,740 Other Operating Revenues - - - 4 4 240 798 435 04 445 Total Operating Revenaes 4,825 4,899 4,956 5,539 5,674 6,080 9,848 12,483 13,800 15,128 Operating Expenses: Costs of Operation 4,161 4,319 4,330 4,342 4,366 4,580 6,537 7,o86 7,494 8,110 Depreciation - - - 300 300 358 1,037 1,708 2,010 2,287 Total Operating Expenses 4,161 4,319 4.330 4,642 4,666 4,938 7,574 8,794 9,504 10,397 Net Operating Incose 664 580 626 897 1,008 1,142 2,274 3,689 4,296 4,731 Interest Total Interest Charges _ _ - 266 547 1,775 1,640 2,053 2,251 2,388 Less: Interest Charged to Construction - - - 266 547 1,775 960 334 696 760 Net Interest Charged to Operations - - - - - - 680 1,719 1,555 1,628 Net Profit 664 580 626 897 1,008 1,142 1,594 1,970 2,741 3,103 Accumulated Surpluw Beginning of Year - - - - 897 1,905 3,047 4,641 6,611 9,352 Ind of Year - - - 897 1,905 3,047 4,641 6,611 9,352 12,455 Average Net Fixed Assets in Operation - - - 7,350 7,050 9,922 25,228 40,994 47,oo6 52,146 Rate of Return - - - 12.2% 14.3% 11.5% 9.0% 9.0% 9.1% 9.1% Telephone Statistics: Telephones (Lines) at End of Year 16,ooo 16,10o 16,200 17,800 17,900 21,900 38,100 43,860 48,210 53,010 Net Gain in Telephones During Year - 100 100 1,600 100 4,000 16,200 5,760 4,350 4,800 Average Telephones in Service During Year 16,000 16,050 16,150 17,750!/ 17,850 19,900 30,000 40,980 46,035 50,610 y 1,500 Government telephones will be added to the "paying subscriber" list on January 1, 1964. 9/12/63 EL SALVADOR AD'liINISTiGCIOI' NACIUNAL DE TELECOMUNICACIONES Forecast Balance Sheets (in thousands of Colones) As of December 31 1963 1964 1965 1966 1967 1968 1969 1970 ASSETS Fixed Assets Fixed Assets in Operation - 7,500 7,500 13,302 38,558 46,878 53,600 60,755 Less: Depreciation Reserve - 300 600 358 1,045 2,t03 4,063 6,000 Net Assets in Operation - 7,200 6,900 12,944 37,513 44,475 49,537 54,755 Work in Progress 975 7,378 17,900 20,993 1,947 991 1,485 500 Total Net Investment 975 14,578 24,800 33,937 39,460 45,466 51,022 55,255 Current Assets - Net - 729 1,561 1g705 1,990 2,490 3,596 5,379 Total Assets 975 15,307 26,361 35,642 L41,450 47,956 54,618 60,634 LIABILITIES Equity - 897 1,905 3,047 4,641 6,611 9,352 12,455 Borrowings Redeemable Government Advance - 7,032 6,556 6,063 5,559 5,039 4,511 3,967 Proposed IBRD Loan - 3,691 11,550 i9,137 23,750 22,787 21,775 20,712 Local Bond Issue 975 3,687 6,350 7,395 7,500 6,ooo 4,500 3,000 Future Foreign Exchange Loans - - - - - 6,019 12,480 18,500 Future Local Loans - - - - - 1,500 2,000 2,000 Total 3orrowings 975 114, 410 24,456 32,595 36,809 41,345 45,266 48,179 Total Liabilities 975 15,307 26,361 35,642 41,450 47,956 54,618 60,634 Debt/Equity Ratio 100/0 94/6 93/7 91/9 89/11 86/14 83/17 79/21 9/12/63 0Metapt n EL SALVADOR | 7 U1/ J t . t PROPOSED TELEPHONE SYSTEM + P, < / \ Microwave System VHF Rodio System _^ / / /> CholaJtenrJngo ( + ° ll0 20 30 40 50 KM > 4 /'t~~~~~~~~ _t~~ANAN A UJ R A 5 J1-1 Ahuochop6n SENSUNTEPEUE g (? \ O~~~~~~~~~~~~ ~ ~~uetzaltepeque f ESNEPQE0_--- (~~~~~~~~~~~~~~~~ San Francisco Gotera =CENTE , / Santo Roso de Limo ~~~~5 _ / ~~~~~~~~~~~~~~~~~Zaca te c a u> \ Sontirugo 10 La Libertad de IM ~~~~~~~~~~~~~SN IGUELJ aA4 C /E,'. go'~ 0 r ~JUN 96 I B9c e v L I JUNE 1963 IBRD- 1199