Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Public Disclosure Authorized. Report No.

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Report No. PID5930 Project Name Nepal-Telecommunications Region Sector Project ID Borrower(s) Implementing Agency Environment Category Reform Project South Asia Regional Office Telecommunications & Informatics NPPE50671 Kingdom Of Nepal MOIC/NTA Ministry of Information and Communications Address: Singha Durbar, Kathmandu NEPAL Contact Person: The Secretary Tel: / Fax: moicpl@ccsl.com.np, moicppme@ntc.np Nepal Telecommunications Authority Address: Singha Durbar, Kathmandu, NEPAL Contact Person: The Chairman Tel: Fax: ntra@mos.com.np Date PID Prepared July 10, 2001 Projected Appraisal Date April 12, 2001 Projected Board Date September 6, Country and Sector Background C An overview of the sector management/structure is summarized and shown in Table 1. Table 1: Existing Institutional Framework (May 2001)CategoryDescriptionMinistry responsible for policyministry of Information and Communications Regulatory and licensing authoritynepal Telecommunications Authority (NTA)LegislationNepal Telecommunications Act 2053 (1997) establishing NTA; Amendments of March 1999 and October 2000.Basic servicesnepal Telecommunications Corporation (NTC); NTA has selected a private operator to provide basic services using wireless local loop (WLL). License will be issued shortlynational long distancentc: monopoly will end in However, WLL operator may carry its own long distance traffic in its area of operation.international servicentc: monopoly will end in 2003.Cellular servicenta has selected a private operator to provide nationwide mobile services. License will be issued shortly.internetliberalized (including access to international bandwidth)pagingliberalizedradio spectrum allocationinterministerial committee - Radio Frequency Policy Determination Committee (RFPDC)NTC is a wholly government-owned corporation, and was until recently the monopoly provider of basic and cellular services. Competition has begun with the

2 entry of private sector operators in internet, very small aperture terminal (VSAT), data communications and payphone services. In addition there are approximately 1,000 public call centers offering telephone, telex and fax services. NTA selected, through a transparent competitive process, private operators for the provision of basic services using WLL and cellular global system for mobile communications (GSM) service. NTA is also in the process of awarding a rural telecommunications service (RTS) license to a private rural operator to provide services in the Eastern Development Region. Key Sector IssuesLow level of telecommunications service. Nepal's overall level of telephone density is very low at approximately 1.13 lines per 100 inhabitants, compared to a world average of 10.5 lines; it is lower than in Indonesia (3.2), Pakistan (1.78), and Sri Lanka (3.5). Approximately two-thirds of the telephones are in the Kathmandu valley which accounts for less than 5 per cent of the population. Kathmandu has a teledensity of 18.2 lines per 100 inhabitants compared with 1.13 for the country as a whole and 0.06 in rural areas. Low telephone density is coupled with a high level of unmet demand for basic telephone services. There is a current waiting list of more than 260,000 subscribers, which translates into a waiting period of more than six years for service connection. Inadequate access to telecommunications service in rural areas. As a result of resource and geographical constraints, access within the country is uneven and there are many large rural areas with virtually no telecommunication services. Approximately 80 percent of Nepal's population resides in rural areas, and out of 3,913 VDCs only about 1,540 (about 40 percent) have access to telephone facilities.while it is HMG's policy to provide at least two public access lines in each of the 2,373 unserved VDCs by 2004, ensuring this access is difficult and challenging since: (a) the level of public investments required are not within the financing capabilities of the Ministry of Finance (MOF); and (b) NTC has limited capacity to implement rollout of rural services in a timely and efficient manner. Moreover, the traditional approach of public investment in rural communications has not led to notable and timely increase in access. The lack of an adequate separation of policy, regulatory, and service provision functions. The current close working arrangements among MOIC, NTA, and NTC are being changed. Presently, MOIC is responsible for policy-making, but the secretary of MOIC is also the chairman of the board of NTC, and MOIC is dependent on NTC for technical advice. HMG recognizes that the effective separation of these functions is key in a multioperator environment which is advocated under the National Telecommunications Policy. The lack of institutional capacity within MOIC to effectively carry out its policy function. MOIC lacks the institutional capacity to effectively formulate policy and execute sector liberalization. With the adoption of the National Telecommunications Policy of 1999, it is imperative that MOIC's capacity is strengthened to formulate and implement policy, independent of operator biases. Hence, MOIC's Planning Cell must be strengthened, and a cultural change is needed for the transition from planning and managing operations to a culture of policy review, formulation, and implementation to support a multioperator environment. Limited regulatory capacity in NTA. Since its establishment in 1998, NTA has done a remarkable job to create competition in the small, but less complex value added services market by issuing over 53 licenses for various value added services. In addition, it has awarded licenses to a second cellular mobile operator, a fixed line operator for basic services, and a rural operator for the provision of RTS in the Eastern Development Region. However, NTA staff - 2 -

3 lack the training in terms of ensuring effective interconnection between service providers, compliance with license conditions, establishing tariffs, monitoring the carrier's quality of service performance, and the type of approval for radio and telecommunications equipment.limited spectrum management and monitoring capability. In MOIC the FMD is a small unit with limited capacity and capability; which makes it difficult to for FMD to efficiently manage and monitor the radio spectrum. In a competitive environment with the increasing use of wireless technologies by new entrants, this has the potential to become a serious bottleneck. In order to ensure that optimal use is made of the radio spectrum, robust and effective procedures need to be put in place; and these procedures need to be supported by appropriate infrastructure, and adequately trained staff to monitor and efficiently monitor and manage the spectrum. Need to rebalance NTC's tariff levels. NTA has adopted a progressive tariff regime conducive to private investment in the sector. New entrants are free to charge tariffs with the proviso that the maximum ceiling on the rate of return is 25 percent. To ensure fair competition NTA only regulates (in detail) the tariff levels and structure of the incumbent operator. The National Telecommunications Policy requires (by 2004) NTC's tariffs to be rebalanced to reflect costs by Government StrategyHMG recognizes the importance of telecommunications as a key factor for economic development, social inclusion and enhance the welfare of the population. HMG has taken a number of important actions to improve sector performance, such as:(a) Parliamentary approval of the Telecommunications Act in April 1997, and amendments in March 1999, and October 2000, that established a modern framework to regulate the sector. (b) Adopting a new and progressive National Telecommunications Policy in September The policy objective is to liberalize the sector by promoting private participation in all market segments;(c) Articulating a rural access strategy in HMG's National Telecommunications Policy of providing at least two telephones per VDC by 2004; and(d) Establishing the NTA as stipulated in the Act and appointment of the NTA chairman and three board members.progress has been made in the implementation of the policy as evidenced by the following key actions taken by the government and NTA:(a) Issuing of over 53 licenses for value-added services (VSATs, radio paging, and internet service providers);(b) Selecting a second private sector cellular GSM operator in March 2001;(c) Selecting a private national operator to provide basic service based on WLL technology in May 2001;(d) The Cabinet's decision in December 2000 to convert NTC to a limited company under the Company Act. Subsequently NTA also issued a license to NTC for its fixed services in January, 2001; (e) HMG decision to use a market mechanism to involve the private sector in the provision of rural telecommunication services by providing a one time capital subsidy to the RTS operator bidding for the lowest subsidy. This mechanism is being tested in the Eastern Development Region and based on the outcome will be appropriately replicated in other regions. HMG recognized that in some areas of Nepal the provision of rural services might be associated with less attractive financial returns. Accordingly, HMG included an incentive framework whereby the RTS operator would not be exempt from telecommunication tax, custom and import duties, royalties, and renewal and license fees. However, the license fee was kept at a notional value of $1,500, radio frequency charges were waived and the contribution to the RTDF, was postponed for five years (or until the new entrant is profitable). Similarly, the initial terms of the RTS license are for ten years, renewable based on the operator's performance. -3 -

4 2. Objectives The objective of this project is to support this ongoing reform process by: (a) assisting the Ministry of Information and Communications (MOIC) to develop its capacity to set policy and manage the radio spectrum; (b) assisting the Nepal Telecommunications Authority (NTA) to establish itself as an independent and effective regulator; and (c) enabling private provision of telecommunication infrastructure and services in rural areas. 3. Rationale for Bank's Involvement International experience in telecommunications sector reform. The Bank has considerable international experience in telecommunications sector reform and can contribute significantly in transferring the knowledge gained from within and outside the region. In neighboring South Asian countries the Bank has assisted governments to create new legal, policy, and regulatory frameworks, establish new regulatory institutions, and advised on introducing competition and privatizing the public telecommunications operator. By supporting a regulatory reform program together with introducing competition and facilitating rural access, the Bank is assisting the HMG in attracting private investment to the most difficult part of the telecommunications market. Through the Bank's dialog in such key regulatory areas as interconnection and tariff policies, the long-term returns for private operators could be significant. Since this is the first time that the Bank is involved in supporting a market based subsidy for promoting private provision of rural telecommunications access, other IDA and IBRD members could learn valuable lessons from this transaction, to use similar instruments in the rollout of rural infrastructure. Experience in radio spectrum modernization. The Bank has developed significant experience in supporting the international best practice approach to spectrum management. The Bank is involved in supporting a number of countries such as India, Nigeria, Pakistan, and Sri Lanka in spectrum management.icb. The Bank's experience in international competitive bidding with respect to procurement of goods following World Bank procurement guidelines, indicate a significant cost savings of around 35 percent. 4. Description A summary of the project components, estimated costs and proposed Bank financing are provided below. The total project cost is estimated at $22.04 million. A. MOIC Component (i) Strengthen MOIC's capacity; (ii) Strengthen spectrum monitoring and management; and (iii) Support to the project coordination unit (PCU). B. NTA (i) Strengthen NTA's capacity; (ii) Rural access subsidy; and (iv) Support to the project management unit (PMU). 5. Financing Total ( US$m) IDA Total Project Cost Implementation -4-

5 The project will be implemented over five years, from September 25, 2001 to August 31, The MOIC, supported by the PCU will be responsible for overall project coordination. The PCU will be headed by the project coordinator (chief of the Planning Division has been appointed from MOIC) who will report to the Secretary of MOIC, and will include a senior financial officer, a procurement specialist and secretarial staff. To fulfill its responsibilities for project implementation, NTA will be supported by the recently established PMU, that will be headed by a project manager (advisor to NTA chairman has been appointed) who will report to the chairman, NTA.Financial management. In accordance with OP/BP and the Loan Administration Change Initiative (LACI) requirement, the proposed financial management system in the PCU and PMU were reviewed. An action plan to strengthen the financial management reporting capacity of the PCU and PMU has been agreed upon between MOIC, NTA, and IDA.Project reporting requirements, monitoring, and evaluation. The PCU and PMU will be responsible for maintaining records and accounts of the activities under their respective project components. The PMU in NTA will submit trimesterly PMRs to the PCU in MOIC based on agreed formats. The finance officer in the PCU will review and compile the PMRs for transmission to IDA. The project's reporting, monitoring, and evaluation arrangements will include: (a) trimesterly PMRs; (b) biannual Bank supervision missions; (c) joint MOIC/NTA/Bank annual progress reviews, and a midterm review (about two years after the date of effectiveness of the credit); and (d) a completion report to be transmitted by the HMG to the Bank within six months of the project's closing date. Initially disbursements from the credit will not be made on the basis of PMRs, but rather on traditional transaction-based disbursement procedures. Disbursements for the rural access component will be carried out in two tranches and will be made directly by the Bank to the RTS operator after IDA receives satisfactory certification from NTA that the operator has met its rollout obligations and license conditions. The first tranche (50 percent of the subsidy) will be payable upon provision of the two required public access lines in 50 percent of the targeted VDCs within the first year, and the second tranche (50 percent of the subsidy) will be disbursed upon provision of the two required public access lines in the remaining targeted VDCs.Planning and budgeting: The project will follow HMG's planning and budgeting system since HMG is providing the credit proceeds on a grant basis to NTA. MOIC and NTA will be responsible for preparing their respective budget plans and programs per their agreed work programs. A special account (US dollars) will be established at the Nepal Rastra Bank, the Central Bank, on terms and conditions satisfactory to IDA. Adequate internal control systems will be put in place to ensure that only eligible expenditures are made from the special account. Auditing arrangements for the project, SOE, and special accounts will be conducted by the auditor general of Nepal. Both project accounts and NTA financial statements will be submitted to IDA within six months of the end of each financial year. 7. Sustainability By focusing on creating an enabling policy, legal, and regulatory framework, the project will accelerate private sector investments and operations. The rights and obligations of the incumbent and new operators are codified in the legislation, policy and licenses. Improved service coverage, quality, and competitive telecommunications prices will be sustained as investment and competition grows in telecommunications - 5 -

6 infrastructure and services. Empowering the new regulatory agency to charge levies and fees on telecommunications operators will enable regulatory functions to be sustained without dependence on budgetary support. Unfulfilled demand for various services in remote and rural regions can be increasingly satisfied as markets are targeted through specific initiatives. In addition, the future establishment of a rural telecommunications development fund will complement ongoing rural service provision initiatives. 8. Lessons learned from past operations in the country/sector The following lessons, drawn from the evaluations of the previously completed projects have been taken into account in the planning of this project:(a) Importance of upfront project preparation. Agreement on key TORs and bidding documents, as well as the establishment of a sound project implementation unit should be completed early in the project cycle; to this end, several studies relevant to this project were completed prior to Board approval. TORs for TA assignments for the first two years of the project implementation period have already been prepared by MOIC and NTA and reviewed by IDA.(b) Measurable performance indicators. Monitorable performance indicators measuring access, competition and transparency have been included in this project and will be closely monitored during project implementation.(c) Privatization. The Bank is currently involved in the privatization of incumbent operators in many countries. Experience shows that private ownership in itself does not guarantee improvements in sector performance if the policy and regulatory framework is not appropriate. The government's role in sector reform does not end after concluding a privatization transaction. (d) Sequencing of liberalization and privatization. Proper sequencing and implementation of sector reforms and market liberalization, followed by transparent privatization, has successfully resulted in substantial private investment transactions in the telecommunications sector. (e) Competition. Sector reform in other countries indicates that a pro-competitive framework which supports a multioperator environment tends to improve service coverage and quality more rapidly and fosters more competitive prices than a state monopoly operator. A competitive environment promotes enhanced growth and expanded public access to services, encourages the incumbent operator to operate more efficiently and eventually leads to increased service coverage, improved quality and reduced costs. (f) Regulation. A clear, predictable regulatory framework is a prerequisite to attract private investment in the sector. The existence of an effective regulator within a stable regulatory environment encourages higher levels of investment, enables fair competition, and accelerates the rate at which services are opened to competition. HMG has established an independent, technical, and self-financed regulatory entity to grant new licenses, solve disputes among operators, and protect the public interest. However, it should be recognized that institutional and human capacity building take time and intensive efforts are required to make a regulatory agency efficient and effective. Newly created regulatory entities are frequently overwhelmed and have little expertise to draw upon, and providing consultant support during the initial start-up phase has proved to be very useful.(g) Rural access. Telecommunications investments in rural areas can yield, on average, adequate and even high economic and financial rates of return. However, servicing the remote areas represents higher costs per line and greater risk, and therefore may require a subsidy. Universal access strategies have been successfully - 6-

7 used in both industrialized and developing countries. 9. Program of Targeted Intervention (PTI) Y 10. Environment Aspects (including any public consultation) Issues : 'There are no major environmental issues in the project; it is a telecommunications sector reform project, which involves primarily policy and institution building components. The radio spectrum monitoring equipment to be financed under the project for use by MOIC/FMD will be housed in existing buildings and does not involve construction or other activity affecting the environment. The rural subsidy component was designed to have no adverse effect on the environment as the rural operator is expected to use wireless technologies for the deployment of services and roads and tracks will not be constructed. The project is rated "C" since it will not have a detrimental impact on the environment. 11. Contact Point: Task Manager Ritin Singh The World Bank 1818 H Street, NW Washington D.C Telephone: (977-1) Fax: (977-1) For information on other project related documents contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Fax: (202) Web: Note: This is information on an evolving project. Certain components may not be necessarily included in the final project. This PID was processed by the InfoShop during the week ending November 16,