FOR OFFICIAL USE ONLY

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY PROJECT APPRAISAL DOCUMENT ON A PROPOSED GRANT IN THE AMOUNT OF SDR 9.8 MILLION (US$ 14.9 MILLION EQUIVALENT) TO THE DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE FOR THE CENTRAL AFRICAN BACKBONE PROJECT UNDER Report No: ST THE SECOND PHASE OF THE CENTRAL AFRICAN BACKBONE PROGRAM (APL2) ICT Sector Unit Africa Region December 23, 2010 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS (Exchange Rate Effective November 30, 2010) Currency Unit = São Tomé and Príncipe Dobra (STD) STD = US$1 US$ = SDR 1 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS $ United States dollar, all dollars are US dollars unless otherwise indicated ACE Africa Coast to Europe AFAP Agência Fiduciária de Administração de Projecto (Fiduciary Agency for Project Administration) AfDB African Development Bank AGER Agência Geral de Regulação (General Agency for Regulation) APL Adaptable Program Loan BP Bank Procedures CAB Central African Backbone CAB2 STP Central African Backbone Program APL 2 São Tomé and Príncipe Project CAGR Compound Annual Growth Rate CAR Central African Republic CAS Country Assistance Strategy CEMAC Economic and Monetary Community of Central Africa C&MA Construction and Maintenance Agreement CQS Consultant Qualification Selection CST Companhia São Tomense de Telecomunicações DA Designated Account DFIs Development Financial Institutions DRC Democratic Republic of Congo EEZ Exclusive Economic Zones EIA Environmental Impact Assessment EMP Environmental Management Plan ESIA Environmental and Social Impact Assessment ESMF Environmental and Social Management Framework ESMP Environmental and Social Management Plan FM Financial Management FMR Financial Management Report FY Financial Year GDP Gross Domestic Product GoSTP Government of São Tomé and Príncipe HIPC Heavily Indebted Poor Countries ii

3 ICB ICPC ICT ICS IDA IFC IFR IRR ISO ISP ISR ITU IXP Kbps Mbps MDRI MIGA MoFIC MoPWNR M&E NCB NEPAD OP PAD PASS PCU PDO PM PPA PPP PRA PRGF PRSP PT QCBS RAP RFS RPF SME SPV STP UNCLOS USD WACS WARCIP WBG International Competitive Bidding International Cable Protection Committee Information and Communication Technology Individual Consultant Selection International Development Association International Finance Corporation Interim Financial Report Internal Rate of Return International Organization for Standards Internet Service Provider Implementation Status Report International Telecommunication Union Internet Exchange Point Kilobit per second Megabit per second Multilateral Debt Relief Initiative Multilateral Investment Guarantee Agency Ministry of Finance and International Cooperation Ministry of Public Works and Natural Resources Monitoring and Evaluation National Competitive Bidding New Partnership for Africa s Development Operational Manual Project Appraisal Document Projecto Apoio Sector Social (Social Sector Support Project) Project Coordinating Unit Project Development Objective Prime Minister Project Preparation Advance Public-Private Partnership Príncipe Autonomous Region Poverty Reduction and Growth Facility Poverty Reduction Strategy Paper Portugal Telecom Quality and Cost Based Selection Resettlement Action Plan Ready For Service Resettlement Policy Framework Small and Medium Enterprises Special Purpose Vehicle São Tomé and Príncipe United Nations Convention on the Law of the Sea United States Dollar West African Cable System West Africa Regional Communications Infrastructure Program World Bank Group iii

4 Vice President: Regional Integration Director: Sector Director Acting Country Director for CAB2 STP Sector Manager Task Team Leader for the Program: Task Team Leader for CAB2 STP Obiageli Katryn Ezekwesili Yusupha B. Crookes Jose Luis Irigoyen Olivier Godron Philippe Dongier Yann P. Burtin Isabel Neto iv

5 Table of Contents I. Strategic Context... 1 A. Country Context... 1 B. Sectoral and Institutional Context... 1 C. Higher Level Objectives to which the Project Contributes... 3 II. Project Development Objectives... 3 A. PDO... 3 B. Beneficiaries... 3 C. PDO Level Results Indicators... 4 III. Project Description... 4 A. Project components... 4 B. Project Financing... 5 C. Lessons Learned and Reflected in the Project Design... 7 IV. Key Risks... 8 V. Implementation... 8 A. Institutional and Implementation Arrangements... 8 B. Results Monitoring and Evaluation... 8 C. Sustainability... 9 VI. Appraisal Summary... 9 A. Economic and Financial Analysis... 9 B. Technical C. Financial Management D. Procurement E. Social and Environment F. Grant conditions and covenants Annex 1: Results Framework and Monitoring Annex 2: Detailed Project Description Annex 3: Implementation Arrangements Annex 4 Operational Risk Assessment Framework (ORAF) Annex 5: Implementation Support Plan Annex 6: Team Composition Annex 7: Economic and Financial Analysis Annex 8: CAB Program Background and Vision v

6 PAD DATA SHEET AFRICA DEMOCRATIC REPUBLIC OF SÃO TOMÉ AND PRÍNCIPE Date: December 23, 2010 Country Director: Yusupha B.Crookes Sector Director: Jose Luis Irigoyen Sector Manager: Philippe Dongier Team Leader: Isabel Neto Project ID: P Lending Instrument: Adaptable Program Loan CENTRAL AFRICAN BACKBONE - APL2 SÃO TOMÉ AND PRÍNCIPE PROJECT PROJECT APPRAISAL DOCUMENT AFRICA ICT Sector Unit Sectors: Telecommunications (60%); General information and communications sector (20%); General industry and trade sector (20%) Themes: Infrastructure services for private sector development (40%); Regional integration (50%); Regulation and competition policy (10%) Environment Assessment Category: B Project Financing Data: Proposed terms: Committed charge of up to 0.5 percent per annum on the un-withdrawn financing balance[ ] Loan [ ] Credit [X] Grant [ ] Guarantee [ ] Other: Source Total Project Cost: Total Bank Financing: IDA Recipient: Democratic Republic of São Tomé and Príncipe Total Amount (US$M) Responsible Agency: Agência Fiduciária de Administração de Projecto (AFAP - shared Project Coordination Unit with PASS Project, Fast Track Initiative) Contact Person: Alberto Leal Telephone No.: (00 239) / afap2@yahoo.com.br Estimated Disbursements (Bank FY/US$ m) FY Annual Cumulative vi

7 Project Implementation Period: Start: January 20, 2011 End: June 30, 2014 Expected effectiveness date: March 15, 2011 Expected closing date: December 31, 2014 Does the project depart from the CAS in content or other significant respects? If yes, please explain: Yes No Does the project require any exceptions from Bank policies? Have these been approved/endorsed (as appropriate by Bank management? Is approval for any policy exception sought from the Board? Yes No Yes No Yes No If yes, please explain: Does the project meet the Regional criteria for readiness for implementation? Yes No If no, please explain: Project Development objective: The development objective of the proposed project is consistent with the PDO for the CAB Program: To contribute to increase geographical reach and usage of regional broadband network services and reduce their prices in the territory of São Tomé and Príncipe. Project description The main project components will consist of (i) technical assistance for legal and regulatory reform and to launch a second mobile operator; (ii) financing for STP s contribution for participating in the ACE cable and associated investments, (iii) project management. Safeguard policies triggered? Environmental Assessment (OP/BP 4.01) Natural Habitats (OP/BP 4.04) Forests (OP/BP 4.36) Pest Management (OP 4.09) Physical Cultural Resources (OP/BP 4.11) Indigenous Peoples (OP/BP 4.10) Involuntary Resettlement (OP/BP 4.12) Safety of Dams (OP/BP 4.37) Projects on International Waters (OP/BP 7.50) Projects in Disputed Areas (OP/BP 7.60) Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No Yes No vii

8 Conditions and Legal Covenants: Financing Agreement Description of Reference Condition/Covenant Effectiveness condition Adoption of Project Implementation Manual. Effectiveness condition SPV duly created and registered in the territory of STP. Effectiveness condition With CST s acquiescence, the ACE Consortium has transferred to the SPV all the rights and obligations of the CST in the Construction and Maintenance Agreement and has fully substituted the CST with the SPV as the member of the ACE Consortium. Effectiveness condition Contractual Arrangement has been entered into between STP and the SPV. Dated covenant Appoint Technical Advisor to the MoPWNR. Dated covenant Acquisition of an accounting software. Dated covenant Establishment of the Project steering committee. Dated Covenant Hiring of External Auditor for AFAP. Dated covenant Distribute the bidding documents inviting bids for a second global license to operate in STP s territory, including at least partial divestiture of the GoSTP from the SPV. Dated covenant Submit audit report within 6 months after the end of the fiscal year. Date Due By effectiveness By effectiveness By effectiveness By effectiveness Within 3 months of effectiveness Within 3 months of effectiveness Within 3months of effectiveness Within 4 months of effectiveness Within 6 months of effectiveness Annually viii

9 I. Strategic Context A. Country Context 1. São Tomé and Príncipe is Africa s smallest economy and one of the poorest countries in the world. The per capita income of US$424 places the country below the average for Sub- Saharan Africa. While economic performance improved and real GDP growth increased to an average 5% over the period from 2.0% in , approximately 54% of its population of 166,000 is poor and 15% live in extreme poverty. The country ranks 131 out of 182 countries in the 2009 UNDP Human Development Index. Life expectancy is 67 years and adult literacy rate is estimated at 83%. The small archipelago has consolidated democracy since 1990 but is still characterized by frequent turnover of governments. The last legislative elections took place in August 2010 and there has been a change in government. 2. Notwithstanding significant economic growth over recent years, and debt relief achieved under the HIPC and MDRI in 2007, STP s insularity, remoteness, small size and systematic constraints in human and institutional capacity, including inadequate accountability and transparency of public resources, act as impediment to sustainable growth and poverty reduction. Furthermore, the US$77.8 million in oil bonuses received from petroleum companies since 2005 will not be sufficient to respond to the social and development needs of the country until STP starts producing oil. Despite government instability, all successive governments have implemented policies in line with the Poverty Reduction Strategy Paper (PRSP) adopted in 2003, consolidating macroeconomic stability and poverty reduction. They have moved forward with substantial structural reforms to improve overall governance in the public sector and the nascent petroleum sector and raise public sector efficiency and reduce poverty. A Poverty Reduction and Growth Facility (PRGF) program was implemented successfully during and underpinned the HIPC Completion Point in A new PRGF-supported program was approved in March 2009 and supports the macroeconomic policies, including the peg of the domestic currency (dobra) to the Euro adopted in 2010 with the support of Portugal. B. Sectoral and Institutional Context 3. There is currently only one operator for all services: CST (Companhia São Tomense de Telecomunicações 1 ). Fixed line teledensity is currently about 5% and mobile telephone penetration stands at about 62%, with mobile telecommunications network signal reaching around 70% of the population and less than 30% of the territory. Internet penetration was about 0.7% in Prices for voice and internet services are above average in the region. The Government of São Tomé and Príncipe (GoSTP) has attempted to introduce competition in the mobile telecommunications market in 2007, but has not been successful. 4. The Bank has provided non lending technical assistance to the sector between 2000 and 2002, which included significant capacity building for the newly established multi sector regulator in the country, the development of a telecommunications sector strategy and a revised regulatory framework. The GoSTP continues to be committed to embarking on additional reforms. GoSTP has submitted to the Bank a letter of sector policy dated November 10, 2010, 1 CST is owned 51% by Portugal Telecom and 49% by the state. 1

10 which reaffirms the GoSTP commitment to open the mobile telecommunications sector to competition and improve the provision of international telecommunications bandwidth capacity into the country through alternative technical means and with a possible entrance of new investors and/or telecommunications operators. 5. Poor access to international telecommunications capacity, over-dependence on costly satellite technologies and absence of competitive access to capacity via submarine cables are important constraints limiting opportunities for growth and development in West and Central Africa. STP is among a handful of countries in the region which is not connected to the global network of broadband optical fiber infrastructure. Small states in the region are often by-passed by submarine cable consortia, because their markets are not attractive enough. 6. Being dependent on satellite communications with average satellite prices between US$4,000-5,000/Mbps/month, STP is ill-placed to compete in the global economy. Countries connected to submarine cables can access international capacity at much lower prices. East Africa in particular has seen three submarine cables arrive in the last three years: results show that the volume of traffic has increased almost twenty-fold, and prices have been divided by a factor of almost ten - from $3,750/Mbps/month before arrival of the cables in 2007 to $400/Mbps/month today. Prices are also as low as US$100 in Morocco and Australia, dropping to as low as US$10 in Europe. High connectivity prices translate into some of the highest prices in the world for international calls and Internet costs - even compared to other countries in the region. STP finds it difficult to attract the attention of international cable investors. The lack of access to low price and high quality telecommunications services is a factor that limits the potential of these countries to create jobs, expand production of goods and services, and trade competitively with the rest of the world. 7. The Central African Backbone Program is a regional instrument aimed at catalyzing private sector investment to improve connectivity in Central Africa, and is designed to provide broadband connectivity in Central Africa to all capital cities, main secondary cities and establish redundancy. The CAB program is structured as both a horizontal and vertical APL. The STP operation constitutes the second horizontal APL under CAB. The first phase of the program included Cameroon, Central African Republic and Chad. By the end of the program, all capitals and major cities in Central Africa should be linked to the global Information and Communications network through competitively priced high-bandwidth connectivity. Similar programs are being developed for other regions: the Regional Communications Infrastructure Program (RCIP) in Eastern and Southern Africa (which is now in phase 4), and the West Africa Regional Communications Infrastructure Program (WARCIP), currently being prepared. 8. For purposes of international connectivity along the coast of West Africa and with the rest of the world, the most attractive and efficient viable option for these countries is to connect to the Africa Coast to Europe project (ACE), which is anticipated to be an approximately 17,000 km submarine cable system 2. ACE is expected to connect South Africa to Europe, potentially connecting up to 23 countries along the route, including STP as a result of the proposed project. There are no other opportunities for STP to connect to another submarine cable for many years to come. Analysis has confirmed that the other submarine cable projects or satellite projects under 2 See Map IBRD 38139, November 2010 at the end of this document. 2

11 preparation in the region are not viable options for STP 3. Other countries have also mobilized World Bank financing to join ACE, including Liberia and Sierra Leone through the WARCIP regional program. 9. The preparation of the ACE projects has taken place at an accelerated pace: signature of the cable agreement by all the consortium members, including STP, took place on June 5, 2010, and payment of the first installment for the membership fee was on July 23, In order to make initial installment payment of the membership fee to join the ACE telecommunications undersea cable consortium, the Bank provided São Tomé and Príncipe a Project Preparation Advance of $5million, after a waiver was obtained to go beyond the PPA ceiling of $3 million (In addition to a $0.7 million PPA for normal preparation activities). Similar waivers were obtained for Liberia and Sierra Leone under the proposed West Africa Regional Communications Infrastructure Program. A subsequent installment to ACE to be covered by GoSTP is due in March The challenge for the team and STP is to ensure that the project becomes effective in time for these payments. C. Higher Level Objectives to which the Project Contributes 10. The CAB2 STP project is consistent with the government s goals of accessing regional and global markets to unlock additional growth opportunities. Improved communications capacity, ability to access information and affordability of international communications will be fundamental for the development of São Tomé and Príncipe and for reducing isolation and insularity of the small state islands. Lower communication costs are also enablers to sustain private sector development and economic growth. The project is expected to benefit a wide variety of beneficiaries in STP, including the female population. The project aligns with the regional infrastructure strategic pillar of the World Bank Regional Integration Assistance Strategy for Sub-Saharan Africa. II. Project Development Objectives A. PDO 11. The development objective of the proposed project is the same as the PDO for the Central African Backbone (CAB) Program: to contribute to increase geographical reach and usage of regional broadband network services and reduce their prices in the territory of São Tomé and Príncipe. B. Beneficiaries 12. Direct beneficiaries of the project include people who are connected to the communications network in STP (including telecommunication services and internet users, schools, hospitals, banks, corporations, government and public administrations), to be measured as the number of active fixed and mobile subscribers 4. Indirect beneficiaries potentially include 3 A comparative analysis of various connectivity options and its respective costs was performed in mid-2010 by an independent consultant. See document on project file. 4 Internet subscribers not accounted to avoid double counting. 3

12 all of the country s population, since increased communications capabilities at affordable rates for some of the population may eventually have externalities for all. C. PDO Level Results Indicators 13. The CAB Program will seek to achieve the objective by focusing on investments linked to fostering open and cost-effective access to communications infrastructure. The São Tomé and Príncipe project (CAB2 STP) will follow the same outcome indicators as the overall CAB program. Achievement of the development objective will be assessed through increase in the volume of international traffic, the volume of national traffic (using as proxies internet penetration and teledensity), and the average price of international communications. Key monitoring and evaluation indicators are summarized in the Table 1 (also see Annex 1). Project Development Objective (PDO) Contribute to increase geographical reach and usage of regional broadband network services and reduce their prices in the territory of São Tomé and Príncipe. Table 1. Monitoring and Evaluation Framework Outcome Indicators for CAB2 STP [same indicators as for CAB Program] Volume of international traffic International Communications (Internet, Telecoms, and Data) bandwidth per person Volume of national traffic using 2 proxies: Internet subscribers per 100 inhabitants Total teledensity (active fixed and mobile subscribers per 100 inhabitants) Average price of international communications using the proxy: Average monthly price of international capacity link (E1 or 2Mbps) from the capital city to Europe Project beneficiaries: Number of project direct beneficiaries (% female) By the closing date of the Project % 76% $6, ,300 (50.5%) III. Project Description A. Project components 14. The main proposed project components correspond to a total investment cost estimated at $26.8 million of which $14.9 million are to be financed by IDA resources, with the remaining funds coming from the private sector. These components will consist of: 5 The price is expected to fall to about $2800 two years after project closing. 4

13 Component 1 Enabling environment (US$1.1 million IDA financing). Technical assistance and capacity building for legal and regulatory reform, to develop public private partnership (PPP 6 ) arrangements for the infrastructure to be developed and to launch a second global telecommunications operator licence to provide fixed and mobile services, environmental studies and M&E support; Component 2 Connectivity (US$13.3 million IDA financing, with additional US$11.9 million financed by the private sector). Financing for STP s contribution (consortium fee) for participating, via a special purpose vehicle company, in the ACE cable on an open access basis 7 using PPPs, leveraging private sector investment, and associated investments such as the setup of an IXP; Component 3 Project Management (US$0.5million IDA financing) This component will consist of support to the establishment of an effective coordination, management and M&E system for the implementation of the project. To that end, this component will support consultancy services (internal and external audits, communication expertise, etc.), equipment, office supplies, workshops and short-term training, small refurbishment works, and operating costs. 15. While the CAB Program includes the possibility of egovernment related components, given the scarce IDA resources, the Bank and Government team have decided that the project will focus on connectivity elements only, which are a priority. B. Project Financing Lending Instrument 16. The instrument is an Adaptable Program Loan. CAB2 STP is part of the second phase of the Horizontal APL for the Central African Backbone (CAB) Program, discussed and approved by the Board on September 24, 2009, with whose objectives it is fully consistent. 17. Activities under the proposed project meet the regionality criteria and therefore are eligible for regional IDA funding. In addition, STP benefits from the IDA 15 policy framework that caps a country s contribution to regional projects to a maximum of 20% of its yearly national IDA allocation, the balance coming from regional IDA funding. Table 2 below provides a summary of the regional/national IDA breakdown for CAB2 STP. US$million Table 2: IDA Funding Regional National IDA IDA Total CAB2 STP PPP means the contractual, governance and financing arrangements between a government agency and one or more private sector entities participating in the Special Purpose Vehicle Company to be created for the Project. 7 Open- access means permitting access to capacity by new entrants on transparent and non-discriminatory terms (price and non-price). 5

14 Project Financing Table 18. Detailed information on costs and financing sources is provided in Table 3. During project identification and preparation, it was expected that Baharicom (private company supported by the NEPAD Trust) would contribute approximately US$5.0 million for the STP contribution to ACE. To date, Baharicom has failed to pay its dues to the ACE consortium. Therefore, the STP stakeholders (including the private sector namely PT and CST) have decided to share Baharicom s contribution related to ACE in STP in the same proportion as their respective participation in the Special Purpose Vehicle (SPV) setup for STP s participation in ACE 8. Table 3. Project Costs by Component and Use of Financing Project Cost By Component and/or Activity IDA financing US $million Private sector US $million Total US $million Component 1 Technical Assistance 1.1. ICT strategic plan Technical assistance and capacity building for legal and regulatory reform 1.3. Tendering of a second global license Technical assistance for PPP arrangements Environmental studies + M&E Component 2 Connectivity 2.1 Participation in ACE consortium (Consortium Fee) Establishment of IXP Component 3 Project management Project coordinator, other staff (shared by PASS), audits, etc Total Project Costs Total Financing Required The total project cost financed by IDA is US$14.9 million. While financing of taxes is eligible under the Project in accordance with the country financing parameters approved for the country, the government has confirmed that the withdrawal applications submitted for the Consortium Fee under component 2.1 of the Project will not include any taxes. 19. Two Project Preparatory Advances (PPAs) have been mobilized for STP: an initial one to cover project preparation activities consisting mostly of technical assistance (US$0.7m), and a US$5.0 million supplemental PPA to cover initial limited implementation activities and fund the 8 This has been agreed during negotiations between the Government of STP, CST and Portugal Telecom in July The final PPP documents, namely the bylaws and the shareholder agreement of the SPV are currently at advanced negotiations stage and will be required for effectiveness of the Grant in support of the Project. 6

15 initial payment to join ACE consortium 9. As of September , US$5.2 million out of the US$5.7 million has been disbursed. 20. Involvement of IFC and MIGA in the operation has been considered. The current private partner may approach IFC for financing. IFC and MIGA support could also be envisaged downstream once the second global license is awarded, through financing for the new operator and/or through the provision of political risk insurance. C. Lessons Learned and Reflected in the Project Design 21. The project incorporates lessons learned and builds upon experiences from various projects that have taken place within the region. 22. Government commitment and ownership of the project. The team recognizes the importance of client ownership for an efficient implementation of project activities. The project design reflects the intent, interest and priorities of the beneficiaries and stakeholders, which ensures ownership of the project and particularly the reform process. The Government of STP has confirmed its strong interest in participating in the CAB program. In particular, the Government of STP has specifically requested support from the Bank for (i) structuring and providing the financial resources to be channeled to the submarine cable consortium for STP to be connected to the global networks, and (ii) the tendering of a second global license, including a partial divestiture from the submarine cable investment. The arrangements are being structured so that part of the proceeds of the second global license can be reinvested in activities linked to the project. 23. Technical assistance needed to support implementation of project activities. Experience in several countries, and most recently in Burundi 10, has shown that significant capacity is needed for negotiations with the private sector to establish PPP arrangements. Given the low capacity of the institutions involved in project implementation, the project provides financing for extensive technical assistance to allow for detailed design of the PPP agreements and other technical activities under the project. The technical assistance will also provide support, where needed, for the formulation of the bidding documentation and technical specifications in relevant project components. 24. Build on available expertise for project implementation arrangements. Given the limited availability and short supply of qualified staff for project management, procurement and financial management, and following the discussions during a recent CPPR, the team is proposing to use an existing Project Coordination Unit (PCU) for managing project and fiduciary aspects of the project (see paragraph 26 below). The team would be adequately complemented and adequate incentives would be provided to enable the existing team to take on coordination for an additional project. 9 The ACE Construction and maintenance Agreement has been signed by CST and all other consortium members on June 5, The PPAs have covered the two initial payment to the consortium, due on July 22, 2010 ($3.75m) and on September 23, 2010 ($1.25m). 10 There is an ongoing project in Burundi (Regional Communications Infrastructure Project, IDA H-283) which includes the setup a public private partnership (PPP) to build a national backbone network. Experience under this project has shown that solid financial, legal and transaction specific expertise are needed to successfully implement the project. 7

16 IV. Key Risks 25. The proposed project is a technically simple project to be implemented by an existing project implementation team (see paragraph 26 below)., which is successfully implementing other projects financed by the Bank. Potential risks are summarized in the Operational Risk Assessment Framework (see Annex 4). The overall project risks are rated Medium driven by the impact for the preparation and by likelihood for implementation. Risks identified are manageable and mitigation measures are in place. V. Implementation A. Institutional and Implementation Arrangements 26. The implementation of CAB2 STP will be lead by the Ministry of Finance and International Cooperation (MoFIC). AFAP (Agência Fiduciária de Administração de Projecto), the Education for All - Fast Track Initiative Project Implementation Unit (established within the Ministry of Finance and International Cooperation and also responsible for the implementation of the Bank financed Social Sector Support Project (PASS) in Democratic Republic of São Tomé and Príncipe (Credit No STP and Grant No. H088 STP)) will be responsible for project coordination and implementation, including all fiduciary tasks such as procurement, financial management, M&E, communications and environmental support. Staff will be complemented and adequate incentives will be put in place as needed to be able to handle the additional workload generated by CAB2 STP. AGER is the multisector regulator and will be responsible for providing the technical inputs for the project. A project Steering Committee will be in charge of overall operative guidance and direction during implementation, and have fiduciary and governance oversight. It will be chaired by the Minister of Finance and International Cooperation and consist of high level authorities including a representative of the Prime Minister s office, Ministry of Public Works and Natural Resources (MoPWNR), and AGER. An Ad-hoc Working Group on the ACE cable will also be setup to follow-up on implementation of the ACE investment in STP. This group will be chaired by MoPWNR and will have representatives from the operators, AGER, AFAP and environmental authorities, when required. B. Results Monitoring and Evaluation 27. AFAP within the MoFIC will be primarily responsible for collecting the relevant data throughout the project implementation. AFAP will get its information from the different project stakeholders, in particular AGER, with the help of the Technical Advisor at the MoPWNR, but also directly from the operators or other stakeholders when necessary. In order to ensure a smooth and regular collection of information, AFAP must identify within each source of data a focal point that will serve as AFAP s counterpart for M&E so that the person can anticipate data collection and the necessary resources. 28. Reporting. AFAP will have overall responsibility for reporting to the Ministry of Finance and International Cooperation. AFAP will put together the M&E report on a biannual basis that will include the updated Results Framework and the Action Table, listing the corrective actions to be implemented with deadlines and persons responsible clearly identified. The report will be sent to the Bank for information (see Annex 3 for detailed information). 8

17 C. Sustainability 29. Sustainability of the proposed project is determined by two factors government commitment and private sector participation. The GoSTP is highly committed to the project, as it sees participation in ACE as likely the only opportunity to be connected to the global communications network within the next few years. The government is also committed to implementing key sector reforms, namely the introduction of competition through the second global license (fully aligned with the activities to be developed under the project) and establishment of open access of the submarine networks (key aspects included in the SPV legal documentation). Private sector financing of a share of the ACE investments will demonstrate the financial viability of the project. Commitments on private sector financing arrangements will be established through appropriate binding legal agreements to ensure sustainability. VI. Appraisal Summary 30. Most of the financing provided by the project will be used for financing STP s contribution for participation in the ACE consortium. While this section covers the overall project, it refers mostly to the ACE investment. A. Economic and Financial Analysis 31. Indicative economic and financial analysis of the proposed investment has been performed and concludes that a full membership in ACE, if accompanied by robust regulation and increased liberalization in STP should provide low cost international access to direct and indirect beneficiaries in STP. The decision process to join ACE is the result of an analytical comparison of available connectivity options and has included public and private stakeholders The Bank commissioned a due diligence review of the process followed by STP to reach its decision to join ACE. The due diligence confirmed that the decision process was in line with the principles of efficiency, transparency and adherence to good practice in the industry, when compared to other options which included buying satellite capacity or joining other submarine cable consortia. Analysis of other possible options for improving international connectivity clearly shows that connecting to other cables or satellites will ultimately result in a less compelling business case than connection through ACE. Cables like MainOne, Glo-1 and WACS did not include the possibility of a landing station in São Tomé and reopening those cables to add such a landing point would be extremely expensive. The option of expanding STP s existing limited international connectivity by increased use of satellites (for example by O3b or inclined orbit satellites) was also analyzed, but the significantly lower bandwidth costs which will be obtained over time through ACE compensates for the higher investment and maintenance cost. 32. The Internal Rate of Return (IRR) on the participation of STP in the ACE project is estimated at 19%. The economic analysis further concludes that the increased penetration resulting from investment in ACE will increase annual GDP per capita in STP by an annual average of approximately 0.8 points over the first 9 years after ACE s RFS (Ready For Service) date. 9

18 B. Technical 33. The team s assessment is that the ACE consortium is being structured in a manner consistent with international good practices in the industry, and is led by major industry players. Given the experience of key consortium members in designing, commissioning and operating submarine cables, the implementation risk is minimal. As with all cables, there is, however, a risk of breaks on the operational system. 34. The total estimated cost of the ACE submarine cable is approximately US$700 million based on the latest basic system configuration with about twenty one (21) landing points to connect twenty-three (23) countries. As a member of the consortium, STP will obtain a fixed ownership percentage and an allocated capacity (based on kilometers and branch capacity) at a fixed price. It is estimated that for a single landing station, STP will obtain approximately 2.8% of the cable s total capacity at a cost of approximately US$25 million. The percentage and dollar amounts are based on a Consortium cost model developed by ACE management. The model enables members to specifically determine the payment required for membership and the capacity that will be received. While the model and the resulting payment amounts have been finalized when the Consortium Agreement was signed by all members on June 5, 2010, there may be slight variations around the US$25 million estimate depending on final configuration of the system and final list of ACE members. 35. Currently there is a single telecommunications operator in STP, CST which is owned 49% by the government and 51% by Portugal Telecom. There are ongoing efforts to develop a PPP model to secure funding from existing and future private operators: The government in STP is currently forming a local SPV (Special Purpose Vehicle) company with CST, to channel the different parties contributions into the ACE consortium and to access ACE capacity. Telecommunication operators will be able to enter cable ownership and to purchase capacity from cable owners in such a manner as to ensure open access at non-discriminatory conditions 11. The PPP structure and the corresponding documents that formalize it (namely the shareholder agreement and the bylaws for the SPV) are currently at advanced negotiations stage and will be required for effectiveness of the Grant in support of the Project. The private sector is already expected to contribute US$11.9 million out of the US$25.0 million. The project will finance technical assistance for the government to launch a second global license. The new operator would be able to gain access to the cable the forthcoming tender for the award of a second license will include a partial or total divestiture of the government direct ownership in the SPV company - which will further enable competition in the sector (international, mobile and Internet segments). Preliminary market contacts have indicated that there may be a strong interest for additional telecommunication operators to enter the STP market if this also gives them access to ACE capacity. The Project includes a dated covenant requiring the São Tomé and Príncipe to launch the tender for the second global license, including at least partial divestiture of government from the SPV, within six (6) months after the effectiveness date of the Financing Agreement. 11 The government is committed to open access and non discriminatory access conditions to the cable and has prepared a draft sector policy in this regard. The new government which was elected in August 2010 has reaffirmed its commitment to the same policy principles. 10

19 36. There are two areas of legal issues: (a) Transactional Issues. On the transactional side, the network contemplated in the Project can be divided into the wet segment (submarine cable) and the domestic (cable landing station) segment. The transactional issue on the wet segment has to do with (i) succession of the SPV vehicles from the parties to the existing Construction and Maintenance Agreement, and (ii) the ability of the Government of São Tomé and Príncipe to divest its interest in the SPV that is making the investment into the ACE consortium, as well as unbundling the equity interest in the consortium from the capacity allocated to the SPV. It is not assumed that there will be any problem with succession of the Construction and Maintenance Agreement. The C&MA provides that CST can transfer its interest in ACE to an SPV. On the domestic level, strategy for divestiture as well as governance issues related to the ownership and operation of the cable landing station will be dealt with through the provision of Technical Assistance in these areas. (b) Regulatory Issues. The main issue is ensuring open access to the capacity provided by the ACE cable at the domestic level once the capacity comes on shore. This is primarily a domestic regulatory issue. A review of sector regulatory framework, including licensing conditions, will be conducted at the national level. As indicated above, the first PPA was designed to include technical assistance to support these activities. Additional technical assistance will be supported through the project for assisting in removing barriers to entry in the market. C. Financial Management 37. A Financial Management (FM) assessment was conducted in accordance with the Financial Management Manual issued by the Financial Management Sector Board in March Its objective was to determine whether implementing entity has acceptable and adequate financial management arrangements. 38. The proposed FM arrangements were reviewed with the following conclusions: the overall FM risk rating of the project is Moderate, both before and after mitigation measures. The project will make use of the existing financial management framework in place in an on-going World Bank financed project at the Ministry of Finance and International Cooperation. External auditors will be hired within four months of effectiveness to ensure that annual audit reports are submitted in a timely manner. The implementing entity is compliant with Financial Management (OP/BP10.02) and there are no overdue audits. The proposed FM arrangements, as summarized in Annex III, meet the minimum requirements for financial management under OP/BP Disbursements. The grant will finance 100% of eligible project expenditures; inclusive of taxes in line with the approved Country Financing Parameters (CFPs) for STP. Disbursement for ACE payments under Component 2.1 will be done exclusively through the Direct Payment method, as was the case under the Project Preparation Advance (Q7250) which financed GovSTP s initial contributions to the ACE consortium. Disbursements for the remaining project components can be done using any of the four disbursement methods (Advance, Reimbursement, Direct Payment and Special Commitment). To accelerate project implementation, a designated account (DA) to be managed by the PCU will be opened in a commercial bank acceptable to the Bank. The PCU will have the option to submit applications electronically to IDA using the esignatures module available at the Client Connection website 12. Detailed disbursement arrangements are described in Annex Available at clientconnection.worldbank.org 11

20 D. Procurement 40. The procurement activities for the proposed project will be managed by AFAP (Agência Fiduciária de Administração de Projecto) within the Ministry of Finance and International Cooperation and resourced with a qualified Procurement Officer and Project Coordinator. The AFAP is also the agency currently satisfactorily managing two other Bank funded social sector operations. The additional effort required to manage the CAB Program is marginal as only $1.8m will be subject to procurement procedures and finance an estimated less than 10 contracts. The capacity in place at AFAP was reviewed and found to be adequate to manage the CAB program. The assessment of AFAP was recently conducted and it is concluded that AFAP has adequate experience and capacity to carry out procurement activities related to the proposed project and is available in the project files. As a result, procurement risk is assessed as moderate. Risk mitigation measures have been discussed with PASS and agreed which include the hiring of a procurement assistant. The procurement plan for the project was received by the Bank and found to be acceptable on November 23, It will be updated at least annually (or as required) to reflect project implementation needs. A brief summary of the procurement capacity assessment and project procurement arrangements are provided in Annex 3. More details are available in the project files. 41. Participation in ACE. STP s and CST s decision to join ACE is the result of an analytical process comparing available and potential connectivity options. The Bank s team has also commissioned a due diligence review of the process followed by the three countries to reach the decision to join ACE. The due diligence confirms that it was in line with the principle of efficiency, transparency and adherence to good practice in the industry, when considering options of buying satellite capacity or joining submarine cable consortia. The due diligence also confirms that the option selected is clearly the most economical for STP. IDA funding does not go towards a procurable item subject to compliance with World Bank procurement Guidelines, because such funding is for consortium fees (paid in different installments) against a set of rights including use of a certain amount of capacity at preferred rates and a share of ownership of an indivisible cable infrastructure asset. E. Social and Environment 42. Emplacement of the ACE cable is not expected to have significant environmental impact. The proposed project is rated as a Category B project. The cable system is likely to have a submerged or wet plant part, and a dry plant part which interfaces at proposed Landing Stations. The Landing Station is the location where a submarine or other underwater cable makes landfall. The landing (or termination) station can also be the point at which the submarine cable connects into the land-based infrastructure or network. Deep ocean fiber optic cables are no larger than mm diameter about the size of a domestic garden hose - and are laid mainly upon the surface of the ocean floor ( surface laid ). Sections of the cable (including both wet and dry plants) lie within the territorial waters of the landing parties while remaining sections lie in the exclusive economic zones of such states. All states concerned are parties to the 1982 United Nations Convention on the Law of the Sea (UNCLOS), and have declared areas of enforcement (essentially exclusive economic zones) of 200 miles. In the exclusive economic zones, states have no sovereign rights but can enforce laws on pollution, taxation, customs and 12

21 immigration. Within their territorial waters, on the other hand, countries have sovereign rights. Foreign nations have the freedom of laying submarine pipes and cables in the exclusive economic zones. Throughout the entire length of the deep sea submarine cable and all lateral connections to shore, a detailed Cable Route Survey is conducted to avoid laying the cable on sensitive or high risk benthic features such as deep water coral gardens and rocky or coral reefs. In the case of São Tomé and Príncipe, there will be no lateral connection because the main cable will be brought to shore. As the cable gets closer to the shores in water depths shallower than 1,500m, the cable s diameter may increase to about mm due to the need to add protective wire armouring. For the cable and associated equipment onshore, there may be some temporary, low to moderate environmental and social impacts including localized impacts to nearshore marine life and local fishermen access. 43. São Tomé and Príncipe has prepared a draft Environmental and Social Management Framework (ESMF) 13 (consistent with national laws, any applicable treaty concerning international waters, and OP 4.01) and a Resettlement Policy Framework (RPF). The RPF is being prepared in case the project may require land acquisition and resettlement. The ESMF and RPF have been disclosed to the public and in Infoshop on November 23, The seaward limit of coverage for the ESMF is the seaward limit of STP s EEZ. The draft ESMF that has been prepared indicates that the proposed landing sites have very limited marine activities and not likely to experience significant disturbances. For the purposes of subsequent environmental assessment work regarding benthic habitat and ecology, the Cable Route Survey being undertaken by the Cable Suppliers will provide this analysis between the outer limit of the EEZ and the 50 m isobath. Between the 50m isobath and the shoreline, the Cable Route Survey will provide environmental baseline information regarding benthic habitat and ecology, augmented as deemed necessary by other sources of information. Activities of cable-laying ships and support vessels will be required to comply with national regulations regarding such maritime activities. 44. Once the final sites of the Landing Stations are chosen and the specific civil works identified, an Environmental and Social Management Plan (ESMP) will be prepared, consulted on, and disclosed. An Environmental and Social Impact Assessment (ESIA) may also be prepared along with the ESMP, although the preliminary analysis prepared for the ESMF indicates that the ESMP is the appropriate safeguards instrument for this project. The final decision will be made as the Cable Route Survey identifies the preferred routing in territorial seas and in nearshore shallow water at the landfall site. Although involuntary resettlement or displacement from land-based livelihoods is not expected, the Resettlement Policy Framework (RPF) that has also been prepared as a contingency measure and will be used to prepare a Resettlement Action Plan (RAP) or an Abbreviated RAP, depending on the situation at the Landing Station site. 13 The Letter of Agreement for the second PPA required that, not later than August 31, 2011, the government prepare, consult on, and disclose an environmental impact assessment under the proposed Project for the international waterways in relation to the marine surveys to be carried out under the Construction and Maintenance Agreement. This condition, however, has been deleted by agreement between the Government and the Association as it was considered/concluded that the Cable Route Study includes detailed information to address any environment and safeguard issues, and the likely environmental issues are very minimal in the deep sea. 13