ASIAN DEVELOPMENT BANK PCR: PRC 26410

Transcription

1 ASIAN DEVELOPMENT BANK PCR: PRC PROJECT COMPLETION REPORT ON THE SECOND TELECOMMUNICATIONS PROJECT (Loan No PRC) IN THE PEOPLE S REPUBLIC OF CHINA 2000

2 CONTENTS Page BASIC DATA MAP ii-v vi I. PROJECT DESCRIPTION 1 II. EVALUATION OF IMPLEMENTATION 1 A. Project Components 1 B. Implementation Arrangements 1 C. Project Costs and Financing Plan 2 D. Project Schedule 2 E. Procurement of Goods and Services 2 F. Performance of Consultants, Contractors, and Suppliers 3 G. Conditions and Covenants 3 H. Disbursements 3 I. Environmental and Social Impacts 3 J. Performance of the Borrower and the Executing Agency 4 K. Performance of ADB 5 III. EVALUATION OF INITIAL PERFORMANCE AND BENEFITS 5 A. Financial Performance 5 B. Economic Performance 6 C. Attainment of Benefit 7 IV. TECHNICAL ASSISTANCE 7 V. CONCLUSIONS AND RECOMMENDATIONS 8 A. Conclusions 8 B. Lessons Learned 8 C. Recommendations 9 APPENDIXES 10

3 ii BASIC DATA A. Loan Identification 1. Country People's Republic of China 2. Loan Number 1382-PRC 3. Project Title Second Telecommunications 4. Borrower People's Republic of China 5. Executing Agency Ministry of Posts and Telecommunications/ Directorate General of Telecommunications 1 6. Amount of Loan $100.0 million 7. PCR Number PCR: PRC 585 B. Loan Data 1. Appraisal - Date Started 2 May Date Completed 18 May Loan Negotiations - Date Started 28 Aug Date Completed 31 Aug Date of Board Approval 26 Sep Date of Loan Agreement 25 Jul Date of Loan Effectiveness - In Loan Agreement 25 Oct Actual 15 Oct Number of Extensions Nil 6. Closing Date - In Loan Agreement 31 Dec Actual 31 Mar Number of Extensions Nil 7. Terms of Lending - Interest Rate US dollar-denominated variable lending rate - Maturity (number of years) 23 - Grace Period (number of years) 3 8. Terms of Relending Same as the terms of lending 1 At appraisal, the Ministry of Posts and Telecommunications was the Executing Agency. Subsequently, as a result of sector reforms, the Directorate General of Telecommunications (DGT) became the Executing Agency in In 1999, DGT was divided into China Telecommunications Corporation for fixed phone service, and other, non-fixed phone service companies.

4 iii 9. Disbursements a. Dates Initial Disbursement Final Disbursement Time Interval 15 Nov Dec years, 1 month Effective Date Original Closing Date Time Interval 15 Oct Dec years, 2 ½ months b. Amount ($) Category Original Allocation Amount Canceled Net Amount Available Amount Disbursed Undisbursed Balance 1A 1B 1C National Trunk Transmission Network (NTTE)- Optical Fiber Cables NTTE-Cable Connectors and Boxes NTTE-Transmission Equipment, Installation Supervision and Training 36,830,000 6,501,000 30,329,000 30,269,635 59,365 1,070, , , ,154 (154) 37,060,000 10,712,000 26,348,000 26,707,571 (359,571) 1D NTTE-Test Equipment and Tools 2,880,000 1,101,000 1,779,000 1,778, Interest During Construction 10,550,000 _ 10,550,000 5,944,674 4,605,326 3 Unallocated 11,610,000 8,372,000 3,238,000 _ 3,238,000 Total 100,000,000 27,000,000 a 73,000,000 65,456,770 7,543,230 b a b Cancelled on 27 January Cancelled on 31 March Local Costs ADB did not finance any local costs. C. Project Data 1. Project Cost ($ million) Item Appraisal Estimate Actual Cost Foreign Exchange Cost Local Currency Cost Total Cost a a Including costs incurred for toll exchange expansion undertaken by provincial telecommunications agencies in association with installation of three optical fiber cable trunk lines under the Project. The costs were included in the Project at appraisal, and were financed by the Government.

5 iv 2. Financing Plan ($ million) Item Appraisal Estimate. Actual Cost. Implementation Costs Foreign Local Total Foreign Local Total Borrower financed ADB financed Local Commercial Financing Subtotal IDC Costs Borrower financed ADB financed Subtotal Total ADB = Asian Development Bank 3. Cost Breakdown by Project Component ($ million) Component Appraisal Estimate. Actual Cost. a (a) (b) (c) (d) (e) (f) (g) National Trunk Transmission Network (NTTE) Optical Fiber Cables NTTE Cable Connectors and Boxes NTTE Transmission Equipment, Installation Supervision, and Training NTTE Test Equipment and Tools Physical Contingencies Price Contingencies IDC and Other Charges a Total Foreign Local Total Foreign Local Total other charges include import duties and other local taxes

6 v 4. Project Schedule Item Appraisal Estimate Actual Equipment and Contracts First Procurement Sep Sep 1997 Last Procurement Jan Jun 1998 Completion of Installation Jul 1998 Jul 1999 Start of Operations Dec 1998 Dec 1999 D. Data on ADB Missions Name of Mission Date Number of Persons Number of Persondays Specialization of Members a a b c d Fact-Finding b 20 Feb 8 Mar a, b, e, f Appraisal b c 2 18 May a, c, d, e, g Inception Review c 28 Mar 2 Apr a Review c Nov a, g Review 30 Jun 2 Jul a, g Project Completion Review d 29 May 5 Jun a, e, g a-engineer, b-financial analyst, c-counsel, d-economist, e-consultant (financial analyst/economist), f-programs officer, g-assistant/senior assistant. Done in conjunction with other projects. Mission visited the project sites. The Project Completion Review Mission comprised Kenji Ono, Project Engineer (Mission Leader); John Spurr, Consultant; and L. Pascual, Assistant Project Analyst

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8 I. PROJECT DESCRIPTION 1. The Project is the second loan extended by the Asian Development Bank (ADB) to develop the telecommunications sector in the People s Republic of China (PRC). 1 The Project s objectives were to (i) relieve congestion in the long distance telephone network, (ii) meet traffic growth resulting from local network expansion, (iii) improve network quality and efficiency, (iv) enhance network reliability and flexibility, (v) modernize the network for new services, (vi) contribute to a more equitable distribution of the benefits of telecommunications, and (vii) promote the continuation of sector reform in the PRC s ninth five year plan ( ). ADB provided technical assistance (TA) to help prepare the Project. 2 Together with the loan, ADB provided an advisory TA 3 to help the Government promote more market-oriented planning, operation, and management of the telecommunications sector. The loan was signed on 25 July 1996, became effective on 15 October 1996, and was closed on 31 March A chronology of the main project events is provided in Appendix The Project developed three optical fiber cable trunk transmission routes linking Hohhot to Beihai, Xián to Hefei, and Kunming to Nanning. The scope included (i) supplying about 7,300 kilometers (km) of optical fiber cable with associated technical support and training; (ii) providing transmission line terminating and multiplex equipment, system training, and technical supervision; (iii) supplying junction boxes and miscellaneous equipment associated with installing the optical fiber cable and transmission equipment; (iv) supplying transmission testing measuring equipment; (v) expanding power supplies and toll exchanges; (vi) laying cables and carrying out related civil works; and (vii) providing consulting services for detailed design and installation. II. EVALUATION OF IMPLEMENTATION A. Project Components 3. The project components were implemented as envisaged at appraisal. For the three trunk transmission routes, ADB financed 7,050 km of optical fiber cable; 4,322 connectors and junction boxes; three sets of optical fiber transmission systems; and 450 sets of testing equipment, including optical fiber fusion splicers, stabilized light sources, optical power meters and time reflectometers, variable optical attenuators, and oscilloscopes. Civil works and consulting services were locally financed. Expansion of power supplies and toll exchanges were undertaken by provincial telecommunications administrations (PTAs) as part of local network expansion. B. Implementation Arrangements 4. At appraisal, the Ministry of Posts and Telecommunications (MPT) was the Executing Agency, under which the Directorate General of Telecommunications (DGT) was responsible for overseeing the Project and coordinating the activities of project management units (PMUs) established at PTAs in the provinces of Anhui, Guangxi, Guizhou, Henan, Hubei, Hunan, Inner 1 The first, Loan 1243-PRC: Telecommunications Project, for $100 million, was approved on 17 August 1993 and completed on 15 December The project completion report circulated to ADB s Board of Directors on 16 November 1999 rated the project as generally successful. 2 TA 2080-PRC: Second Telecommunications, for $282,000, approved on 21 April TA 2405-PRC: Institutional Strengthening of Provincial Telecommunications Authorities, for $715,000, approved on 26 September 1995.

9 Mongolia, Shaanxi, Shanxi, and Yunnan. 4 The PMUs were adequately staffed with qualified financial, engineering, and administrative personnel to ensure timely and efficient project implementation. No substantial change was made in the organization of DGT and PMUs during project implementation. C. Project Costs and Financing Plan 5. The actual project cost was $175.2 million equivalent, lower by $148.8 million, or 46 percent, than the appraisal estimate of $324.0 million. Actual foreign exchange cost was $65.5 million (37 percent) and the local currency cost was $109.7 million equivalent (63 percent) (Appendix 2). There were several reasons for the major cost underruns in foreign exchange and local currency of 42 percent and 48 percent respectively: (i) rapid technological innovation dramatically reduced the cost of installing equipment, (ii) there was intensive competition among suppliers, (iii) transmission equipment required for the Project was covered by a Government policy exempting selected high technological products from import duties, and (iv) contingency funds were not needed because inflation has been low since ADB financed $65.5 million covering the Project s direct foreign exchange cost. The remaining $109.7 million equivalent of the indirect foreign exchange and local currency costs was financed from DGT s own funds ($76.7 million equivalent) and a loan from the Construction Bank of China ($33.0 million equivalent). D. Project Schedule 7. The appraised and actual implementation schedules are compared in Appendix 3. The Project was generally implemented smoothly and did not encounter any major engineering problems. The Project was physically completed in December 1999, nine months behind schedule. The commencement of procurement was delayed by about one year because of the Government s protracted final approval of the feasibility study and the consequent delayed startup of project implementation (para. 9). However, the time taken to manufacture, install, and test the optical fiber cable and equipment took three months less than anticipated. E. Procurement of Goods and Services 8. As envisaged at appraisal, DGT engaged domestic consultants, under local financing arrangements, to design project facilities and manage procurement through international competitive bidding (ICB). 6 For implementation of TA 2405-PRC (footnote 3), ADB engaged international consultants in accordance with ADB s Guidelines on the Use of Consultants. 9. ADB-financed procurement of the optical fiber cables, cable connectors, junction boxes, digital transmission equipment, and testing equipment was conducted through ICB procedures 4 As the result of a reorganization of MPT in 1998, DGT assumed the position of the Executing Agency under the Ministry of Information Industry (MII). In May 2000, the China Telecommunications Corporation was formally set up as a successor to DGT for providing fixed phone services. 5 Annual change in consumer price in the PRC was 17.2 percent in 1995, 8.3 percent in 1996, 2.8 percent in 1997, percent in 1998 and -1.6 percent in MPT s design institutes undertook detailed design, installation drawings, and procurement specifications as well as the feasibility study of the Project. The international tendering department of the China National Instruments Import and Export Corporation was engaged for procurement arrangements. DGT s Construction Department took responsibility for supervising civil works for laying optical fiber cable, installing transmission equipment, and constructing buildings.

10 according to ADB s Guidelines for Procurement. While the Government approved the project proposal in 1995, final clearance of the feasibility study report by the State Development Planning Committee was delayed until September 1996 due to extensive discussions on the detailed project design, and caused a year s delay in initiating procurement. The advance procurement action and retroactive financing approved by ADB was not used. 7 By December 1997, 19 ICB contracts (10 for optical fiber cable and 9 for equipment) had been awarded to 15 foreign suppliers and 4 domestic suppliers (Appendix 4). The number of contracts was reduced from 27 at appraisal to 19 to expedite procurement. A domestic contractor for civil works for cable laying and related construction works was directly engaged as envisaged at appraisal. 8 There were no disputes or contractual difficulties during the implementation of contracts. F. Performance of Consultants, Contractors, and Suppliers 10. The performance of the domestic consultants and civil works contractor was satisfactory. Suppliers of the optical fiber cable and equipment completed the manufacturing, delivery, and installation of goods ahead of schedule and in accordance with the terms and conditions set forth in the contracts. Consequently, their performance is also rated as satisfactory. G. Conditions and Covenants 11. The status of compliance with the loan covenants is shown in Appendix 5. The loan conditions and covenants were generally complied with, including the specific covenants for telecommunications sector reforms. As approval of the telecommunications law by the National People s Congress is still awaited, a copy of the law has not been provided to ADB. 9 H. Disbursements 12. Of the $100 million loan, $65.5 million had been disbursed by the loan closing date of 31 March The actual disbursement schedule is in Appendix 6. While commencement of loan disbursement was initially delayed by 12 months, loan disbursement procedures were generally smooth. Of the unused loan proceeds of $34.5 million, $27.0 million was canceled on 27 January 1999 on account of the significant savings on optical fiber cable and equipment. The remaining $7.5 million was canceled at loan closing. I. Environmental and Social Impacts 13. At appraisal, ADB assigned the environmental category C to the Project, indicating that no adverse environmental impact was expected from the Project. The major physical components of the Project consisted of optical fiber cable, which was buried underground, and transmission equipment. The Project involved only minor civil works and did not require any relocation of local residents. Based on the mitigation measures suggested by the environmental impact assessment for the Project, most optical fiber cables were placed along existing road and railway rights of way to minimize interference with agriculturally productive land and avoid ecologically sensitive areas. The cables were laid after the harvest season to avoid disrupting 7 The advance procurement action and retroactive financing of a maximum of $10 million were approved by ADB on 20 April 1995 to expedite procurement. 8 The China International Telecommunications Construction Corporation was engaged to provide skilled technical labor to install and test the optical fiber cable and equipment. The corporation, assisted by the PTAs, engaged unskilled labor for the physical works. 9 The Borrower was to furnish to ADB a copy of the telecommunications law following its approval (Loan Agreement, Schedule 5, para.9).

11 2 agricultural activities. As the result of technological innovation, the size of transmission equipment was significantly reduced, enabling DGT to install it all in the existing facilities, and avoid construction of new buildings. No major adverse environmental or social impacts have been observed during project implementation. J. Performance of the Borrower and the Executing Agency 14. The performance of the Government, MPT, and DGT was generally satisfactory. Communications with ADB were timely, implementation arrangements were well established and maintained, and conditions and covenants stipulated in the Loan Agreement were generally complied with. In spite of an initial delay, due mainly to protracted internal procedures for the feasibility study approval, the loan was closed as scheduled at appraisal. MPT and DGT implemented the sector reforms identified during the policy dialogue associated with the Project. 1. Sector Reforms 15. ADB's policy dialogue with the Government during the appraisal of the first telecommunications project in 1993 (footnote 1) led to the formulation of the Telecommunications Sector Reform Program. This program focused on (i) commercializing the operating entities, (ii) developing a market pricing mechanism, (iii) expanding competition, and (iv) diversifying resource mobilization. The implementation status of the program is shown in Appendix 7. The main achievements of policy reform under the Project include (i) reorganization of MPT and the Ministry of Electronics Industry in April 1998 to create the MII, under which telecommunications operations were undertaken by DGT on an independent and much stronger commercial basis, (ii) separation of posts and telecommunications operations at the central and provincial levels, completed in 1998, (iii) the State Council s initiative in 1999 to reorganize DGT into four separate enterprises for paging, mobile, fixed lines, and satellite communications, (iv) cessation of subsidies from telecommunications to posts in 1999, and (v) tariff adjustment in March 1999 on the basis of a tariff study (Appendix 8). DGT s financial statements were fully separated from posts in In May 2000, the China Telecommunications Corporation (China Telecom) and China Mobile Telecommunication Corporation were formally set up as independent enterprises. The paging service spun off from DGT was merged with the United Communication Corporation (China Unicom). 10 China Satellite Communications is expected to be formally set up soon. Reform is ongoing to improve management, further restructure the new companies, and pursue direct financing from the capital market. In line with the PRC s efforts to participate in the World Trade Organization, the Government will establish a new legal framework to foster the development of the telecommunications sector, promote sector restructuring, optimize the telecommunications network structure, meet consumer needs, and supports the expansion of the telephone network in the country s less developed inland areas. Since current laws are not sufficient to provide a legal basis for sector reform, the Government is preparing regulations on the administration of telecommunications for the State Council s approval by the end of 2000 as an interim arrangement until the telecommunications law is approved by the National People s Congress. Regulations on the administration of foreign investment in the telecommunications sector and on computer networks and information safety management are also under preparation for submission to the State Council. These laws and regulations for administration and supervision of the industry and market will provide (i) service charge system, (ii) market 10 China Unicom was formed in 1994 by the Government as a second telecommunication service provider in the PRC to introduce competition with DGT.

12 3 access system, (iii) business licensing administration, (iv) interconnection rules, (v) examination and approval of network access for telecommunications equipment, (vi) management of coding resources, and (vii) arbitration mechanisms. MII is preparing a new five-year plan for and long-term goals up to Formal operation of an Internet protocol phone service began in the PRC in April Five companies were licensed as Internet protocol phone service providers Performance Indicators 17. Performance indicators for DGT are shown in Appendix 9. Between 1995 and 1999, the penetration of fixed lines increased 2.7 times and that of mobile telephones 12.0 times, and the number of domestic long-distance calls doubled. 12 The exchange utilization ratio, which reached 68.7 percent in 1999, indicated that the trunk exchange lines still had sufficient capacity to accommodate rapidly growing traffic demand and further expansion of the local exchange network. The exchange utilization ratio will increase only gradually as a result of large-scale investment in the local telephone network by China Telecom. Due to staff reductions and network expansion, DGT s staff per 1,000 working lines was 4.9 in 1999, far below the agreed target of 15 by The quality of services also improved. The connection rate for long distance calls reached the 2000 goal of 99 percent in 1997 and the answer seizure ratio (percentage of calls answered) for incoming direct long distance calls has exceeded the goal of 50 percent since Overall, the capacity and efficiency of the PRC s telecommunications sector improved significantly during project implementation. 3. Year 2000 (Y2K) Problems 18. DGT had upgraded all trunk transmission circuits and telephone exchange equipment, including the project facilities, by the end of August 1999 and established contingency plans. Suppliers of telecommunications equipment under the Project provided DGT with a legally valid guarantee of Y2K compliance. There was no major Y2K problem. K. Performance of ADB 19. ADB s performance was satisfactory. There were no major disagreements between the Government, DGT, and ADB on implementation arrangements, including specifications of the optical fiber cable and equipment, bid evaluation, and contract awards. Communications between the Government and ADB were generally smooth and effective. DGT stated that ADBs project administration helped DGT implement the Project smoothly and achieve the project objectives. III. EVALUATION OF INITIAL PERFORMANCE AND BENEFITS A. Financial Performance 20. In 1996, tariffs were increased for shorter distances and decreased for longer distances with longer distance tariff structure being simplified from a 12 band system to a 4 band system (Appendix 8). International tariffs were reduced again in In overall terms, average per line revenues have declined for local, domestic long distance, and international calls. 11 China Telecom, China Mobile, China Unicom, Jitong Communications, and China Netcom. 12 Including China Unicom s services.

13 4 21. A summary of the projected and actual financial performance of DGT is provided in the table below. Between 1994 and 1999, operating revenues grew more than 4.5 times, operating expenses 3.5 times, and the net profit 5.9 times. DGT s financial performance has exceeded appraisal expectations and its financial condition is still strong, even though the highly profitable mobile service is now provided by another corporation. Detailed financial statements and projections of DGT and its successor China Telecom from 1993 to 2002 are shown in Appendix 10. The projections for exclude the mobile service. The magnitude of China Telecom s operations and financial strength can be demonstrated by the fact that its capital expenditure in 1999 was $17.4 billion equivalent, 87 percent of which was funded from the company s own resources. Projected and Actual Financial Performance Item Projected Actual Projected Actual Projected Actual 1 Revenue (Y million) a 40,878 47,831 65, , , ,164 2 Operating Expenses (Y million) 25,311 37,078 49,554 70,691 98, ,536 3 Net Profit (Y million) 8,446 9,510 7,059 42,952 10,067 56,405 4 Operating Ratio (%) Self-Financing Ratio (%) a Excluding business tax. Source: Staff estimate based on data from China Telecom. 22. The financial reevaluation for the Project is based on up-to-date information provided by China Telecom (Appendix 11). The scale of network expansion during greatly exceeded the forecasts made at appraisal, when about 66 million fixed-line subscribers nationwide were expected by This figure was reached by 1997, and by the end of 1999, there were 109 million subscribers. The revised forecast for 2000 is about 128 million fixed-line subscribers. The faster network growth has resulted in higher traffic growth, with the Project s incremental revenue being about 15 percent higher than the appraisal estimate. 13 The capital cost in yuan was 47 percent lower owing to lower prices of optical fiber cable and transmission equipment, lower civil work costs, and import duty exemption. The value of the yuan against the dollar was stable during project implementation. The financial internal rate of return (FIRR) in yuan terms is reevaluated at 20.9 percent, well above the appraisal estimate of 15.0 percent. B. Economic Performance 23. The economic reevaluation is based on the incremental project costs and the value of the corresponding incremental calls (Appendix 11). Two economic internal rate of return (EIRR) estimates are made based on (i) amounts actually paid by users in accordance with their telephone bills (case 1), and (ii) an estimate of the economic value of calls to users based on ADB s Guidelines for Economic Analysis of Telecommunications Projects (case 2). In the latter case, an economic evaluation factor of 1.3 is chosen for residential users, and 1.2 for other users. The reevaluated EIRRs are 21.4 percent for case 1 and 25.9 percent for case 2, compared with 19.7 percent at appraisal. 13 Comparison of the incremental revenue was made by excluding business tax from the latter.

14 5 C. Attainment of Benefits 24. The optical fiber systems provided under the Project have helped remove severe bottlenecks in the national telecommunications network by increasing the capacity and quality of trunk transmission circuits. A project benefit monitoring and evaluation system was established, which included performance indicators to measure DGT s operational efficiencies and service qualities. The beneficiaries are existing telephone subscribers as well as new subscribers, who are predominantly residential. The benefits of the Project s network transmission facilities will not accrue solely to the provinces in the project area. Virtually all telephone users nationwide will benefit because their access to the national network will increase in line with improvements in call completion ratios. 25. The three optical fiber cable trunk lines pass through 10 provinces, including 9 provinces with rural household per capita net income less than the national average in In 3 of those 9 provinces, such income is less than 65 percent of the national average. Of the 10 project provinces, only Hubei matches the national average. The average penetration of fixed telephones in the project provinces was 3.6 subscribers per 100 population in 1998, two thirds the national average. The number of subscribers to and Internet services per 10,000 population was 0.1 and 2.3 respectively, about half the national averages (Appendix 12). The optical fiber cable trunk lines increased the telecommunications capacity of relatively poor inland areas and enhanced local business opportunities based on information technology by linking inland areas with (i) the economically advanced coastal area of the PRC, and (ii) the international business community. Telephone subscribers in rural areas increased more rapidly than in urban areas, to reach 34.2 million in 1999 from 8.1 million in 1995, up 4.2 times. Over the project implementation period, the share of rural subscribers rose to percent in 1999 from 19.8 percent in 1995 (Appendix 13). The Project also provided about 7.6 million persondays of employment for unskilled laborers in civil works. This employment, at wage rates above the provincial average, involved total wages of Y230 million, increasing the per capita income of poor rural households. The Project and the economic developments facilitated by it are expected to have considerable poverty reducing impacts. IV. TECHNICAL ASSISTANCE 26. The primary objective of the advisory TA (footnote 3) was to support the Government's reform agenda by helping the PTAs develop more market-oriented planning, operation, and management functions. International consultants were engaged for the TA and the Yunnan PTA was selected as a case study company to prepare draft guidelines for a business plan and market-oriented operation and management. The TA also studied British Telecom s experiences in transforming itself from a public monopoly into a competitive private company. The business planning guidelines, finalized by MPT, comprise two main parts: (i) managing business strategy and (ii) the business planning process. A business planning seminar was held in Beijing on 11 June 1997 to share the findings of the TA and discuss best business practices. The guidelines were well received by the PTAs as a reference for improving their marketing, forecasting, and business planning practices to facilitate further commercialization of the industry. The consultants produced quality outputs, including the guidelines, reports, and arrangements for the seminar. Their performance was rated as satisfactory.

15 6 A. Conclusions V. CONCLUSIONS AND RECOMMENDATIONS 27. The Project is rated as successful. The Project met its main objective of promoting economic growth and market-oriented reforms in the poorer provinces by relieving congestion in telecommunications networks and improving network quality and efficiency (Appendix 14). The optical fiber cable trunk lines pass through nine relatively poor provinces, of which three are among the five poorest in the PRC. The optical fiber cable trunk lines have provided the interior area with an information technology infrastructure to boost the local economy and expose local industry to the international business community. During project implementation, the penetration of fixed telephone lines increased 2.7 times, and the productivity of DGT staff exceeded 3 times the 2000 goal. The connection rate of long distance calls reached 99 percent in The Project was completed at a cost 46 percent lower than estimated at appraisal. While completion of the Project was nine months behind the appraisal schedule, mainly due to a delay in the Government s final approval of the feasibility study, all facilities were operational by December 1999 without any initial operational problems. No significant contractual disputes or problems occurred during implementation. 28. The reevaluated FIRR is much higher than at appraisal and indicates that the Project is financially sound. Depending on the assumptions made, the reevaluated EIRR ranges between 24.1 percent and 29.5 percent, compared with 19.7 percent at appraisal. These results demonstrate that the Project is economically viable. 29. The Project helped implement the sector reforms stipulated in the Telecommunications Sector Reform Program, except for the enactment of the new telecommunications law. Policy reforms will continue under the new five-year plan ( ) to facilitate commercialization, market-oriented pricing, competition, and resource mobilization. The business planning guidelines and seminar provided under the advisory TA were well received by PTAs and will assist in reforming the telecommunications sectors. 30. All project facilities are in operation, and no defects or malfunction of the installed equipment have been observed. DGT ensured preparedness for potential Y2K problems and no major Y2K problem has been reported. 31. The overall impact of the Project is positive. The Project contributed to more integrated and balanced development in the telecommunications sector to support continued economic growth in the PRC. A total of 14,700 km of optical fiber cables were laid under the two ADB-financed telecommunications projects, amounting to 6.6 percent of all interprovincial optical fiber cable lines installed by the end of 1999 in the PRC. Nine of the 10 provinces served have less than the national average income. The Project strengthened the traverse trunk transmission circuits connecting the coastal and inland provinces to facilitate economic growth in the less developed inland provinces. B. Lessons Learned 32. Due to rapid technological innovation and intensive competition among suppliers through ICB, unit prices of optical fiber cable and transmission equipment were 85 percent and 67 percent of appraisal estimates, resulting in a much lower foreign exchange cost and unused loan proceeds of $34.5 million, or 34.5 percent of the original loan amount. Sound project

16 7 financing requires proper cost estimation at appraisal. In this case, the appraisal estimate should have been based on the latest market information on optical fiber cable and telecommunications equipment. 33. After DGT was split into four independent commercial enterprises, most of the original organization of DGT and the PTAs was left intact as China Telecom, with 530,000 employees working in fixed line operations. China Telecom has the responsibility for expanding and maintaining local exchange telephone networks, not necessarily a profitable business. From this point of view, further downsizing and management streamlining of China Telecom is vital for continuing to expand telecommunications infrastructure in the relatively poor inland areas and foster regional economic growth through information technology. C. Recommendations 1. Project Related 34. To enhance project benefits, China Telecom should step up its ongoing investment in provincial circuits and local exchange networks to facilitate access to the local telephone terminals and fully use the national trunk transmission network. 35. The performance audit report for the Project should be prepared in 2002, when the project facilities will have been used for two years. 36. The new telecommunications law should be enacted to provide a strong legal basis for establishing sector regulations such as technical standards, pricing mechanisms, financial settlements, licensing requirements for basic and nonbasic services, interconnection arrangements, and foreign participation. 2. General 37. For the efficient financial and technical management of telecommunications projects, China Telecom should carefully monitor technical innovation and market prices of high technology products, such as optical fiber cable and transmission network equipment. 38. Although ADB financing will not be required for further development of the telecommunications sector in the PRC, Government support and external technical assistance should be provided for the institutional restructuring of China Telecom to enable the company to maintain and expand the telecommunications network in the relatively poor inland areas.

17 10 APPENDIXES Cited on Number Title Page (page, para.) 1 Chronology of Major Events in Project Implementation 11 1, 1 2 Project Costs at Appraisal and Actual Expenditures 13 2, 5 3 Project Implementation Schedule 14 2, 7 4 Major Items Financed under the Project 15 3, 9 5 Compliance with Loan Covenants 17 3, 11 6 Actual Disbursement of the Loan 22 3, 12 7 Telecommunications Sector Reform Program 23 4, 15 8 Telephone Tariffs For Fixed Lines 27 4, 15 9 Nationwide Performance Indicators of the 28 5, 17 Telecommunications Sector 10 Telecommunications Financial Statements 30 6, Financial and Economic Evaluation 33 6, Rural Income and Telecommunication Services in , Penetration of Local Network 39 7, Project Framework 40 8, 27

18 11 Appendix 1, page 1 CHRONOLOGY OF MAJOR EVENTS IN PROJECT IMPLEMENTATION 20 Feb-8 Mar 1995 Fact-Finding Mission fielded. 20 Apr 1995 Management Review Meeting May 1995 Appraisal Mission fielded. 13 Jun 1995 Staff review committee meeting. 24 Jun 1996 The Asian Development Bank (ADB) received technical sections of draft tender documents for optical fiber systems and the circulated documents for comments Aug 1995 Loan negotiations held in Manila. 26 Sep 1995 ADB approved a loan of $100.0 million from the ADB's Ordinary Capital Resources to the People s Republic of China (PRC) for the Second Telecommunications Project (Loan 1382-PRC) and a technical assistance grant of $600,000 for the Institutional Strengthening of Provincial Telecommunications Authorities (TA 2405-PRC). 15 Jan 1996 TA 2405: Consultants Selection Committee (CSC) approved the shortlist of consulting firms and invitation documents. 31 Jan 1996 TA 2405: Invitation documents were sent to shortlisted firms. 28 Mar-2 Apr 1996 Inception Mission fielded. 12 Apr 1996 TA 2405: CSC approved evaluation and ranking of consultants proposals. 25 Jul 1996 Loan Agreement signed. 15 Oct 1996 Loan declared effective Nov 1996 TA 2405: Contract negotiations held with the first-ranked consulting firm. 12 Nov 1996 ADB received the commercial section of the draft tender documents for optical fiber systems comprising 17 contracts. 04 Dec 1996 TA 2405: Contract signed with Teleconsult/Deloitte & Touche, Canada. 05 Dec 1996 TA 2405: Notice to proceed issued to the consultants. 13 Dec 1996 ADB conveyed its comments on draft tender documents for optical fiber systems. 15 Dec 1996 Publication of procurement of optical fiber systems in United Nations Development Business and ADB Business Opportunities.

19 12 Appendix 1, page 2 03 Feb 1997 Tender documents for optical fiber systems issued. 22 Apr 1997 TA 2405: Consultant submitted interim report. 17 Jun 1997 TA 2405: Consultant completed services and submitted final report. 31 Jul 1997 ADB approved award of contracts 1, 3, 5, and Aug 1997 ADB approved award of contracts 9, 10, 12, and Sep 1997 ADB approved award of contracts 2, 4, 6, 7, and Oct 1997 ADB received signed contracts 2, 4, 6, 8 to 10, 12, and Oct 1997 ADB received signed contract Oct 1997 ADB approved award of contract 14: sub-contracts 1 and Nov 1997 Review Mission (1) fielded. 02 Dec 1997 ADB approved award of contract 14: sub-contract Dec 1997 ADB approved award of contracts 15, 16, and Feb 1998 ADB received signed contract 14: sub-contract 3, contracts 16 and Apr 1998 ADB received signed contract Jun 1998 ADB received signed contract 14: sub-contract Feb 1999 ADB approved cancellation of unused loan proceeds of $27 million and reallocation of loan proceeds. 30 Jun-2 Jul 1999 Review Mission (2) fielded. 4 Aug 1999 ADB received combined report for audited project account for FY1997/98, due by 30 September Apr 2000 ADB received the Directorate General of Telecommunications project completion report. 31 Mar 2000 ADB cancelled the undisbursed loan balance of $7,543, and closed the loan account. 29 May-5 Jun 2000 Project Completion Review Mission fielded.

20 PROJECT COSTS AT APPRAISAL AND ACTUAL EXPENDITURES ($ million) Project Components Cost Estimate at Appraisal Actual Project Cost Foreign Local Total Foreign Local Total Costs Costs Costs Costs Costs Costs A. Equipment and Materials Optical fiber cables (OFC) OFC Connectors, Junction boxes, and Closures OFC trunk transmission equipment Test and measuring equipment Power equipment Toll exchange expansion a B. Construction and Installation Duct Construction and Cable Laying Transmission Equipment and Training Design and Engineering Buildings and Civil Works C. Taxes and Duties Taxes Import Duties BASE COSTS BEFORE CONTINGENCY & IDC D. Contingencies and IDC Physical Contingency Price Contingency IDC TOTAL PROJECT COSTS IDC = Interest during construction a Toll exchange expansion was undertaken by provincial telecommunications authorities as part of local network expansion. Based on discussion with China Telecom Corp., staff estimated the actual costs in line with a methodology used at appraisal. Source: China Telecom. Appendix 2

21 PROJECT IMPLEMENTATION SCHEDULE Task Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Preparation of Bidding Bidding/Signing of Contracts Cable Manufacture and Delivery Transmission Equipment Manufacture and Delivery Cable Laying and Testing 14 Transmission Equipment Installation and Testing Acceptance and Commissioning Warranty period and Final Acceptance Loan Closing Implementation Schedule at Appraisal Actual Implementation Source: China Telecom. Appendix 3

22 MAJOR ITEMS FINANCED UNDER THE PROJECT Tabel A4.1: Contract Packages Supply of Optical Fiber Cable Supply of Connectors and Boxes Supply of Transmission Equipment Including Installation, Supervision, and Training Supply of Test Equipment and Tools a Components ICB = International competitive bidding Source: China Telecom. Number of Contracts At Appraisal Procurement Method a ICB Number of Contracts Actual Procurement Method ICB 10 ICB ICB ICB ICB ICB ICB 15 Appendix 4, page 1

23 16 Appendix 4, page 2 Table A4.2: Details of Procurement Component Quantity Number of Contracts Suppliers a 1. Optical Fiber Cable 7, Huhehante-Taiyuan F Taiyuan-Luoyang D Luoyang-Jiangling F Jiangling-Huaihua F Huaihua-Liuzhou F Liuzhou-Beihai F Nanning-Guiyang F Guiyang-Kunming 1,000 1 D Shangzhou-Xinyang D Xinyang-Hefei D 2. Connectors and Junction Boxes 4,322 3 Huhehante-Beihai Section 2,596 1 F Nanning-Kunming Sectoin 1,106 1 F Xian-Hefei Section F 3. Transmission System/Training 3 3 Huhehante-Beihai Section 1 1 F Nanning-Kunming Sectoin 1 1 F Xian-Hefei Section 1 1 F 4. Test Equipment and Tools Package 1 Optical Fiber Fusion Splicer 46 1 F Package 2 Stabilized Light Source 12 Optical Power Meter 12 Optical Time Reflectometer 46 Variable Optical Attenuator 18 Portable Optical Power Meter F Package 3 SDH Analyzer 40 2Mbit/s Tester 168 Oscilloscope 4 1 F SDH = Synchronous Digital Hierarchy, Mbits = megabit per second. a F = foreign supplier (15 contracts), D = domestic supplier (4 contracts)

24 17 Appendix 5, page 1 COMPLIANCE WITH LOAN COVENANTS Covenant A. Project Implementation Reference in Loan Agreement Status of Compliance 1. Day-to-day coordination of the Project will be the responsibility of a project implementation unit (PIU) established in Beijing. The PIU will consist of representatives of the Ministry of Posts and Telecommunications (MPT) departments of planning and construction, finance, and construction within the Directorate General of Telecommunications (DGT) and the China International Telecommunications Construction Corporation (CITCC). 2. The Project will be undertaken by the CITCC and local subcontractors. With regard to procurement arrangements, the PIU will engage the international tendering department of the China National Instruments Import and Export Corporation (Instrimpex). The provincial telecommunications administrations (PTA) will be responsible for coordinating various construction tasks at the provincial level, including the expansion of the trunk local exchanges. Detailed designs, installation drawings, and procurement specifications will be the responsibility of MPT s two design institutes, the Beijing Institute and the Zhengzhou Institute. 3. MPT and the relevant PTAs will maintain the Project facilities. MPT will be responsible for arranging appropriate training for MPT and PTA staff. B. Financial and Reporting Matters 1. Financial Statements 4. The MPT will furnish to the Asian Development Bank (ADB), on an annual basis, MPT s audited consolidated financial statements, prepared in accordance with internationally accepted accounting standards as set by the Ministry of Finance. Schedule 5, para. 2 Schedule 5, para. 3 Schedule 5, para. 5 Schedule 5, para.6 Complied with. Complied with. Complied with. Complied with.

25 18 Appendix 5, page 2 Covenant 5. The Borrower will (i) ensure that separate accounts are maintained for the Project; (ii) have such accounts and related financial statements audited annually, in accordance with appropriate auditing standards by independent auditors; (iii) furnish to ADB not later than nine months after the end of each related fiscal year, certified copies of the audited accounts and financial statements and the report of the auditors all in English; and (iv) furnish to ADB other information as requested by ADB from time to time. 2. Reporting Requirements 6. The Borrower will ensure that quarterly reports are furnished to ADB on project implementation and on the operation and management of the project facilities. 7. Promptly after physical completion of the Project, and not later than six months after that, the Borrower will prepare and furnish to ADB a report on the execution and initial operation of the Project. 3. Local Funds for Project Implementation 8. The Borrower will ensure that the portion of the local currency costs required for the Project are obtained promptly from the People's Construction Bank of China, or some other suitable alternative commercial source of local financing, in the sum of $112 million equivalent. 4. Tariff Study 9. MPT will undertake a study on the level and structure of its tariffs, and, by no later than 31 December 1996, make it available to ADB for review and discussion during the midterm review of the Project. Reference in Loan Agreement Section 4.05 (b) Section 4.06 (b) Sec (c) Schedule 5, para. 7 Schedule 5, para. 8 Status of Compliance Complied with. Audited project accounts for FY1998 were submitted to ADB in August Complied with. Complied with. The China Telecommunications Corporation s Completion Report was provided to ADB in April Complied with. Complied with. Tariff study financed by the Swedish Board for investments and technical support was completed in Tariffs were adjusted in

26 19 Appendix 5, page 3 Covenant 5. Telecommunications Law 10. The Borrower will promptly furnish to ADB a copy of the telecommunications law following its approval by the National People s Congress. Reference in Loan Agreement Schedule 5, para. 9 Status of Compliance December 1996 and March Not yet due. The preparation of the telecommunications law has taken longer than expected. Regulations related to telecommunications administration are expected to be approved by the State Council by the end of Separation of Business Functions from Government Functions 11. The Borrower will submit to ADB, by 31 December 1995, a program for implementing the plans for separating business and government functions in each PTA. Schedule 5, para. 13 Complied with. The program was approved by the State Council in May A copy of the outline plan was given to ADB in March MPT will discuss the results of the technical assistance on the institutional strengthening and the preparation of business plans, and the implementation of market-oriented business plans during the ninth five-year plan period. 7. Separation of Posts from Telecommunications 13. The MPT will (i) submit to ADB, by 31 December 1996, plans increasing the efficiency of postal services, increasing postal charges, and making any remaining subsidies explicit; and (ii) periodically inform ADB of increases in postal charges and other steps taken to enhance the profitability of posts and reduce cross subsidies. Schedule 5, para. 11 Schedule 5, para. 12 Complied with. Complied with. Subsidies from telecommunications to posts ceased at the end of Last increase in postal rates was in December 1996.

27 20 Appendix 5, page 4 8. Sector Regulation Covenant 14. Based on the experience of other countries in restructuring telecommunications sectors, MPT will hold discussions with ADB during the midterm review on deepening the implementation of market-oriented reforms, including (i) market-oriented management, (ii) effectiveness of the sector regulatory body, (iii) deregulation of nonbasic services, (iv) increasing competition in the provision of basic services, (v) transparency in the crosssubsidies between telecommunications and posts, (vi) autonomy of the operating entities, (vii) managerial and financial control, (viii) private sector participation, and (ix) progress in further reforming the sector. 15. MPT will continue to implement during the ninth five-year plan agreed recommendations from the ADB-funded TA 1928-PRC, which addressed regulatory issues including competition within various service areas, technical standards, pricing, financial settlements, licensing requirements for basic and nonbasic services, and interconnection agreements. 9. Mobilization of Financial Resources 16. MPT will continue to review further options for mobilizing additional financial resources, discuss such options during the midterm review of the Project, and subsequently implement such options during the ninth fiveyear plan. Reference in Loan Agreement Schedule 5, para. 13 Schedule 5, para. 14 Schedule 5, para. 15 Status of Compliance Complied with. Assisted by ADB technical assistance (TA) 1928-PRC. ADB received a letter from the Vice Minister together with a reform plan for ninth five-year plan. The plan included details regarding the implementation of market-oriented reforms and strengthening the regulatory capacity of MPT. Complied with. Assisted by TA 1928-PRC, MPT considered recommendations from the TA for strengthening the regulatory capacity of MPT. Complied with. State Planning Development Committee and MPT introduced innovative financing for NFYP and listed China Telecom on the Hongkong stock exchange. A leasing company for equipment supply has been established.