Document of

The World Bank

Report No: 22955-NEP

PROJECT APPRAISAL DOCUMENT

ONA

PROPOSED CREDIT

IN THE AMOUNT OF SDR17.50 MILLION (US$22.56 MILLION EQUIVALENT)

TO THE KINGDOM OF NEPAL

FOR A

TELECOMMUNICATIONS SECTOR REFORM PROJECT

October 29, 2001

Policy Unit, Global Information and Communication Technologies DepartmentSouth Asia Regional Office

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CURRENCY EQUIVALENTS

(Exchange Rate Effective August 2001)

Currency Unit = Nepalese Rupees (NRp)1.0 NRp = US$0.01334US$1.0 = 74.79 NRp

FISCAL YEARJuly 1 -- June 30

ABBREVIATIONS AND ACRONYMS

CAS Country Assistance StrategyDANIDA Danish Agency for Intemational Development AssistanceERR Economic Rate of ReturnFCGO Financial Comptroller General's OfficeFMD Frequency Management DivisionGATS General Agreement on Trade in ServicesGSM Global System for Mobile CommunicationsHMG Hlis Majesty's GovernmentICB International Competitive BiddingICT Information and Communication TechnologiesIDA International Development AssociationMOF Ministry of FinanceMOIC Ministry of Information and CommunicationsNCB National Competitive BiddingNTA Nepal Telecommnunications AuthorityNTC Nepal Telecommunications CorporationPCU Project Coordination UnitPMR Project Management ReportPMU Project Management UnitRFA Request for ApplicationRFP Request for ProposalsRFPDC Radio Frequency Policy Determination CommitteeRTS Rural Telecommunications ServiceSDR Special Drawing RightsSOE Statement of ExpenditureTA Technical AssistanceUNDB United Nations Development BusinessVDC Village Development CommitteeVSAT Very Small Aperture TerminalWLL Wireless Local LoopWTO World Trade Organization

Vice President: Mieko NishimizuCountry Director: Kenichi OhashiSector Manager: Pierre A. Guislain

Task Team Leader: Ritin Singh

NEPALTELECOMMUNICATIONS SECTOR REFORM PROJECT

CONTENTS

A. Project Development Objective Page

1. Project development objective 22. Key performance indicators 2

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project 22. Main sector issues and Government strategy 33. Sector issues to be addressed by the project and strategic choices 7

C. Project Description Summary

1. Project components 82. Key policy and institutional reforms supported by the project 103. Benefits and target population 104. Institutional and implementation arrangements 11

D. Project Rationale

1. Project altematives considered and reasons for rejection 122. Major related projects financed by the Bank and other development agencies 153. Lessons learned and reflected in the project design 154. Indications of borrower commitment and ownership 175. Value added of Bank support in this project 17

E. Summary Project Analysis

I. Economic 172. Financial 193. Technical 204. Institutional 205. Environmental 216. Social 227. Safeguard Policies 23

F. Sustainability and Risks

1. Sustainability 232. Critical risks 243. Possible controversial aspects 26

G. Main Conditions

1. Effectiveness Condition 262. Other 26

H. Readiness for Implementation 27

I. Compliance with Bank Policies 27

Annexes

Annex 1: Project Design Summary 28Annex 2: Detailed Project Description 33Annex 3: Estimated Project Costs 38Annex 4: Economic and Financial Analysis Summary 39Annex 5: Financial Sumnmary 42Annex 6: Procurement and Disbursement Arrangements 43Annex 7: Project Processing Schedule 54Annex 8: Documents in the Project File 55Annex 9: Statement of Loans and Credits 56Annex 10: Country at a Glance 58

MAP(S)IBRD 26085

NEPALTelecommunications Sector Reform Project

Project Appraisal Document

South Asia Regional OfficePolicy Unit, Global Information Communications Technology Department

Date: October 29, 2001 Team Leader: Ritin SinghCountry Manager/Director: Kenichi Ohashi Sector Manager: Pierre A. GuislainProject ID: P050671 Sector(s): CC - Telecomnmunications & InformaticsLending Instrument: Specific Investment Loan (SIL) Theme(s): Telecom & Informatics

Poverty Targeted Intervention: Y

Program Financing Data[ ] Loan [X] Credit [ ] Grant [ Guarantee [ Other:

For LoanslCreditslOthers:Amount (US$m): 22.56

Proposed Terms (IDA): Standard CreditFinancing Plan (US$m): Source Local Foreign TotalBORROWER 1.99 0.00 1.99IDA 0.53 22.03 22.56Total: 2.52 22.03 24.55Borrower: KINGDOM OF NEPALResponsible agency: MOIC/NTAMinistry of Information and CommunicationsAddress: Singha Durbar, Kathmandu NEPALContact Person: The SecretaryTel: 977-1-220150/225556 Fax: 977-1-221729 Email: moicpl@ccsl.com.np,

moicppme@ntc .np

Other Agency(ies):Nepal Telecommunications AuthorityAddress: Singha Durbar, Kathmandu, NEPALContact Person: The ChairmanTel: 977-1-221944 Fax: 977-1-260400 Email: ntra@mos.com.np

Estimated disbursements ( Bank FYIUS$m):FY 2002 2003 2004 2005 2006

Annual 1.00 7.07 9.05 3.96 1.48

Cumulative 1.00 8.07 17.12 21.08 22.56Project implementation period: 5 yearsExpected effectiveness date: 03/01/2002 Expected closing date: 09/01/2007

OCS F/AD Flm F F Mnrd,, 210

A. Project Development Objective

1. Project development objective: (see Annex 1)

A1.1. After the adoption of a National Telecommunications Policy in September 1999, His Majesty'sGovernment of Nepal (HMG) initiated the implementation of an ambitious telecommunications sectorreform program. The primary focus of the reforms is to increase access by developing a competitive andliberalized market structure. 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 andmanage the radio spectrum; (b) assisting the Nepal Telecommunications Authority (NTA) to establish itselfas an independent and effective regulator; and (c) enabling private provision of telecommunicationinfrastructure and services in rural areas.

2. Key performance indicators: (see Annex 1)

(a) Telephone (fixed and mobile) penetration of 3 per 100 inhabitants by the end of 2005.

(b) Private operator commences mobile cellular service by June 2002.

(c) Full competition in all market segments through private sector operators from 2004.

(d) Private rural telecommunications service (RTS) operator to provide a minimum of two publicaccess lines to the 534 unserved village development committees (VDCs) in the EastemDevelopment Region by the end of 2004.

(e) Radio frequency assigned within 15 days of application by end of 2005, for 90 percent ofapplications.

(f) Pilot public Information and Communications Technologies (ICT) access center begins operationsby October 2003.

B. Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1)Document number: 18578 Date of latest CAS discussion: 12/15/98. A CAS progress report will be prepared inthe second half of FY02.

B. 1.1. The project is fully consistent with and supports the CAS (1998), which specifically mentionsthe need to: (a) facilitate competition and private sector participation in the telecommunications sector; (b)strengthen the regulatory framework; and (c) increase access to adequate and efficient telecommunicationsservices. The project supports HMG in key areas that are consistent with the World Bank Group's ICTSector Strategy (August 6, 2001), that include broadening and deepening sector reform and increasingaccess to information infrastructure. Furtherrnore, the licensing of a rural telecommunications serviceprovider under the project is designed on the principles of output-based aid.

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2. Main sector issues and Government strategy:

B.2. 1. An overview of the sector management/structure is summarized and shown in Table 1.

Table 1: Existing Institutional Framework (May 2001)Category Description

Ministry responsible for policy Ministry of Information and Communications.Regulatory and licensing authority Nepal Telecommunications Authority.Legislation Nepal Telecommunications Act 2053 (1997) establishing NTA; Amendment of

January 2001Basic services- Local services Nepal Telecommunications Corporation (NTC); In addition NTA has selected a

private operator to provide basic services using wireless local loop (WLL); thelicense will be issued in November 2001.

- National long distance services NTC: monopoly will end in 2003. However, until then, WLL operator maycarry its own long distance traffic in its area of operation.

- International services NTC: monopoly will end in 2003.

Cellular service NTC: In addition NTA has selected a private operator to provide nationwidecellular services; the license will be issued in November 2001.

Internet Liberalized (including access to international bandwidth).Paging/VSAT/Data Liberalized.Radio spectrum allocation Interministerial committee - Radio Frequency Policy Determination Committee

(RFPDC).

B.2.3. NTC, a wholly government-owned corporation, was until recently the monopoly provider ofbasic and cellular services. Prior to the approval of the National Teleconimunications Policy in 1999, NTChad exclusive rights to build telecommunications infrastructure and to provide all telecommunicationsservices, including basic and cellular services. The private sector's role has been limited to retailingteleconmnunications equipment. Competition has begun with the entry of private sector operators ininternet, very small aperture terminal (VSAT), data communications and pay phone services. In additionthere are approximately 1,000 public call centers offering telephone, telex, and fax services. In line withthe National Telecommunications Policy, NTA selected through a transparent competitive process, privateoperators for the provision of basic services using WLL and cellular global system for mobilecommunications [global system for mobile communication (GSM)] service. Under the project, NTA willalso award a RTS license to a private operator selected through a market mechanism, to provide services inthe Eastern Development Region.

Key Sector Issues

B.2.4. Low level of telecommunications service. Nepal has an overall low level of telephone densityat approximately 1.13 lines per 100 inhabitants, compared to a world average of 10.5 lines; it is lower thanin Indonesia (2.9), Pakistan (2.21), and Sri Lanka (3.64). Approximately two-thirds of the telephones arein the Kathmandu valley which accounts for less than 5 percent of the population. Kathmandu has ateledensity of 18.2 lines per 100 inhabitants compared with 1.13 for the country as a whole, and 0.06 inrural areas (including the Eastern Development Region). Low telephone density is coupled with a highlevel of unmet demand for basic telephone services. There is a current waiting list of more than 289,000subscribers, which translates into a waiting period of more than five years for service connection.

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Furthermore, the expansion of the mobile market (currently with only about 14,700 customers compared toabout 391,000 in Pakistan, and 390,000 in Sri Lanka) has been much slower than expected. This low levelof teledensity for both fixed and cellular services reflects the need for bold reform initiatives to attractgreater private investments in the sector to bridge the supply/demand gap.

Table 2: Performance of the Nepal Telecommunications Sector, a Comparative Perspective

Nepal Pakistan Sri Thailand Indonesia India Low IncomeLanka Countries

Main lines per 100 persons 1.13 2.21 3.64 8.57 2.90 2.65 2.54(1999)Mobile subscribers per 100 0.01 0.18 1.48 4.58 1.15 0.19 -

persons (2000)Internet hosts (1999) 290 4,740 1,210 40,200 21,100 23,400 -

Waiting time for fixed 5.8 1.4 2.7 1.1 NA 0.8 0.3telephones in years (1998)

No. of lines per employee (1999) 54 51 61 154 135 63 63Source: International Telecommunications Union

B.2.5. Inadeguate access to telecommunications service in rural areas. As a result of resource andgeographical constraints, access within the country is uneven and there are many large rural areas withvirtually no telecommunication services. Approximately 80 percent of Nepal's population resides in ruralareas, and out of 3,914 VDCs only about 1,761 (about 45 percent) have access to telecommunicationservices as indicated in Table 3 below.

Table 3: Distribution of Telecommunications in Nepal

Eastern Central Western Mid-Western Far-WesternRegion Region Region Region Region

Population 4,842,407 6,20,039 4,160,968 2,763,767 1,838,939Number of VDCs 893 1,199 864 575 383VDCs with service 359 547 417 207 181VDCs with no service 534 652 447 368 202

Source: Ministry of Information and Communications, 2001

Given recent advances in wireless and satellite technologies, the potential has increased for thesepopulations to benefit from access to affordable communications as well as information for commerce,education, health, and other sectors. While HMG's objective, as stated in its policy, is to provide at aminimum two public access lines in each of the 2,163 unserved VDCs by 2004, ensuring this rural accessshall be difficult and challenging since: (a) NTC has limited capacity to implement rollout of rural servicesin a timely and efficient manner; and (b) the level of public investments required are not within thefinancing capabilities of the Ministry of Finance (MOF). Moreover, the traditional approach of publicinvestment in rural communications has not led to notable and timely increase in access. To address theseissues, HMG has decided to allow the private sector to provide telecommunication and information servicesin rural areas as well. As a first step, NTA intends to license a private RTS operator for the EasternDevelopment Region which is also considered a commercially viable region. Initially, this RTS operator is

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expected to provide service in the 534 unserved VDCs. In addition, based on community demand andpotential economic and social benefits, HMG plans on establishing public ICT access centers.

B.2.6. The lack of an adequate separation of policy, and service provision functions. The sectoralresponsibilities between MOIC and NTC are being changed and clarified. Presently, MOIC is responsiblefor policy-making, but the secretary of MOIC is also the chairman of the board of NTC, and MOIC isdependent on NTC for technical advice. HMG recognizes that the effective separation of these functions iskey in a multioperator environment advocated under the National Telecommunications Policy. In line withthe Bank's dialogue, HMG has initiated actions to convert NTC into a public limited company. In order topernit NTC to compete in the emerging multioperator environment, NTA has issued licenses to NTC toprovide mobile, internet, and fixed services.

B.2.7. 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. Inthe previous monopoly market structure, MOIC depended on NTC. With the adoption of the NationalTelecommunications Policy of 1999, it is imperative that MOIC's capacity is strengthened to formulate andimplement policy, independent of operator biases. Hence, MOIC's Planning Section must be strengthened,and a change is needed for the transition from planning and managing operations to a role of policy review,formulation, and implementation to support the orderly development of a multioperator environment.

B.2.8. The need to modernize NTA's regulatory practice. Since its establishment in 1998, NTA hasdone a remarkable job creating competition in the small but less complex value added services market byauthorizing over 65 operators to provide various value added services. In addition, it will issue licenses toa second cellular mobile operator and a fixed line operator for basic services. NTA is also in the process oflicensing a private operator for the provision of RTS in the Eastern Development Region. TheInternational Development Association (IDA) has provided limited support to NTA through trust funds andgrants. The Danish Agency for International Development Assistance (DANIDA) had also provided interimsupport on regulatory issues until September 2001. NTA's focus to date has been to containanticompetitive behavior in a multioperator environment. NTA also recognizes the need to modernize itsregulatory practices to address issues in line with international best practice. However, NTA staff lack thetraining in terms of ensuring effective interconnection between service providers, compliance with licenseconditions, establishing tariffs, monitoring the carrier's quality of service performance, reviewing the WorldTrade Organization (WTO)/General Agreement on Trade in Services (GATS) offer, and the type approvalsfor radio and telecommunications equipment to ensure interoperability of systems. Effectively addressingthese and newly emerging regulatory issues is critical to the strengthening NTA's institutional capacity.

B.2.9. Limited spectrum management and monitoring capabilitv. In MOIC, the FrequencyManagement Division (FMD) is a small unit with limited capacity and capability, which makes it difficultto efficiently manage and monitor the radio spectrum. In a monopoly environment there was little need tomanage the spectrum, so this important function was not critical. However, in a competitive environmentwith the increased use of wireless technologies by new entrants, this has the potential to become a seriousbottleneck. Procedures need to be put in place, supported by infrastructure and trained staff, to ensure thatoptimal use is made of the radio spectrum. The existing frequency management and monitoringinfrastructure is outdated and needs to be modernized. As a result of FMD's limited capacity for spectrummonitoring and management, there has been growth in the illegal use of transmitters, and HMG has lost theopportunity to reap the fiscal benefits from the optimal use of this national resource.

B.2. 10. The need to rebalance NTC's tariff levels. NTA has adopted a progressive tariff regimeconducive to private investment in the sector. New entrants are free to charge tariffs with the provision that

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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 TelecommunicationsPolicy requires that NTC's tariffs be rebalanced to reflect costs by 2004. The tariff structure and levelsneed to be adjusted, as current tariffs are distorted with local and long distance rates generally low, andinternational rates very high. The tariff levels for each service need to be aligned towards the cost ofproviding services; and it is necessary to rebalance NTC's tariffs to ensure that revenues are not adverselyaffected by ongoing trends in the sector (i.e., a fall in revenues from international settlements), so that NTCremains competitive in a multioperator environment. NTC has submitted a draft tariff rebalancingstrategy, and NTA is currently reviewing it. At present, a three-minute local call in Nepal costs $0.01, themaximum charge for a one-minute long distance national call is approximately $0.10, and the per minutecost of a call to the US is approximately $1.70. NTC's tariff rebalancing plan broadly proposes raisinglocal and national long distance call charges while reducing international tariffs. Further, monthly rentalcharges are likely to be increased to a maximum of $3.00 (approximately) by 2004.

Government Strategy

B.2. 11. HMG recognizes the importance of telecommunications as a key factor for economicdevelopment, social inclusion, and enhancing the welfare of the population. HMG has taken a number ofimportant actions to improve sector performance, such as:

(a) Parliamentary approval of the Telecommunications Act in January 1997 which was enacted inNovember 1997, and amendments in January 2001, that established a modern framework toregulate the sector. This regulatory framework is aimed at creating a level playing field for alloperators and increasing competition in the sector;

(b) adopting a new and progressive National Telecommunications Policy in September 1999. Thepolicy objective is to liberalize the sector by promoting private participation and competition inall market segments;

(c) articulating a rural access strategy in its National Telecommunications Policy of providing at aminimum two public access lines per VDC by 2004; and

(d) establishing the NTA as stipulated in the Act, and appointing its chairman and two boardmembers.

B.2.12. Progress has been made in the implementation of the policy as evidenced by the following keyactions taken by the HMG and NTA:

(a) authorizing over 65 new operators to provide value-added services (VSATs, radio paging, andinternet 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 May2001;

(d) deciding 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; and

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(e) deciding to use a market mechanism to involve the private sector in the provision of RTS byallocating a capital subsidy to the operator bidding the lowest subsidy amount. Thismechanism is being tested with the assistance of the Bank for the 534 unserved VDCs of theEastern Development Region. Based on the outcome, HMG expects to replicate this approachin other regions. HMG recognizes that in some areas of Nepal the provision of rural servicesmight be associated with less attractive financial returns. Accordingly, HMG included anincentive framework whereby all rural operators: pay a notional license fee of $1,500; get awaiver on charges for the use of the radio spectrum; and postpone contributions to a ruraldevelopment fund for five years.

3. Sector issues to be addressed by the project and strategic choices:

Sector Issues to be Addressed by the Project

B.3. 1. The project is designed to: address key sector reform issues necessary to create anenvironment that will facilitate private sector participation and competition in the telecommunicationsmarket; and assist HMG to bring timely and efficient telecommunication services to rural areas. Theproject specifically addresses the aforementioned sector issues through the following:

(a) Strengthening MOIC's capacity to carry out its policy making function through technicalassistance (TA) for institutional development; review and formulation of the policy agenda;and professional development and training for staff.

(b) Strengthening spectrum monitoring and management. FMD will be strengthened through TAto effectively carry out the radio spectrum management functions, including: establishing radioregulations, a national frequency allocation plan, and spectrum pricing policies. TA will alsobe provided to improve frequency management procedures and processes, and to develop asuitable organization plan to strengthen FMD as a professional agency. FMD will be givenassistance for procuring spectrum management and monitoring equipment.

(c) Strengthening NTA 's capacity to regulate the sector in the emerging multioperatorenvironment, and ensure a level playing fieldfor all operators. NTA will be strengthenedthrough TA to carry out consultative studies on regulatory issues including, inter alia, sectorliberalization, licensing, interconnection issues, tariffs, numbering, monitoring carrierperformance, convergence, universal access and fostering fair competition, and training andprofessional development of NTA staff. In particular, TA will be provided to help NTA steertowards a more modem and simple regulatory regime.

(d) Increasing rural access to telecommunications services through the licensing of a privateATS operator and establishing public ICT centers. IDA will support HMG in implementingits rural access strategy to provide services in the 534 unserved VDCs of the EasternDevelopment Region. HMG is using a market mechanism that catalyzes innovative andsustainable private provision of services in rural areas and ensures the efficient allocation oflimited public resources. Under a grant-funded TA, NTA carried out an internationalcompetitive bidding (ICB) process for the award of the RTS license and capital subsidy. Theresponse was satisfactory, with two out of three applicants submitting offers. NTA followeda transparent bidding process and selected an international consortium. However, the RTSlicense was not awarded as the selected bidder withdrew from the process in July 2001, citingpolitical uncertainty. IDA has agreed to HMG/NTA's request for a new round of bidding

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based on an updated Request for Application (RFA). This new round is expected to beinitiated in November 2001, and will take approximately six to nine months to conclude. Tosupplement the minimum of two public access lines per VDC, establishing public ICT centersis also planned for rural areas.

Strategic Choices

B.3.2. HMG's strategy for dealing with telecommunications sector issues is predicated on theexpectation that the successful implementation of sector reform should trigger private investment flows inthe sector. The proposed project, therefore, focuses on initiatives that: (a) enhance broad sectordevelopment; (b) position telecommunications as a major enabler of sustained economic growth, notably inthe IT and service sectors; (c) facilitate equitable access of services to the rural poor; (d) commandwidespread support and HMG commitment; and (e) are clearly feasible in the next five years.

B.3.3. Sequencing liberalization and privatization. IDA fully supports HMG's strategic approach todeal with the issues and constraints identified above. There is ample evidence that proper implementationof market liberalization, followed by transparent privatization transactions, have resulted in dynamiccompetition. This strategy is currently being followed by countries implementing telecommunicationssector reforms with the assistance of the World Bank (Kenya, Malawi, Mauritania, Morocco, Sri Lanka,and Tanzania). The proposed project will assist HMG to implement a new sector structure in whichprivate ownership, management, and capital become the principle drivers of investment and development.The emphasis is to open all segments of the telecommnunications market to competition, including ruraloperations. While privatizing NTC is important, it is less critical for sector development and reforms atthis stage and so is not part of the project's primary focus.

B.3.4. Choosing the appropriate rural access delivery vehicle. In the past, HMG has investedconsiderable public resources through NTC to provide telecommunication services in rural areas. HMGdecided not to depend entirely on NTC for the delivery of rural access services but to license a privateoperator for the Eastem Development Region. This decision was based on the conclusion that NTC wouldfind it difficult to implement its rural access strategy in a timely manner. Moreover, the operation andmaintenance costs would also have to be bome by NTC/HMG. Based on intemational experience, it isexpected that competition and private management of operations will stimulate network growth andincrease coverage of previously unserved areas, which should give the poor access to telecommunicationsand information services. However, HMG recognized that creating the enabling conditions for opening thetelecommunications sector to private investment may not provide the adequate incentives to attract newentrants in rural areas. HMG therefore decided to use a market mechanism to award a capital subsidy tothe private operator for the provision of RTS. This approach will ensure the efficient allocation of publicfunds and will also provide a benchmark for the allocation of funds to other operators. Other than thecapital subsidy payment there will be no public investment obligations by HMG.

C. Project Description Summary

1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed costbreakdown):

C. 1.1. A detailed description of the project components and estimates of detailed cost breakdown areprovided in Annex 2 and 3 respectively; a summary of the project components, estimated costs andproposed Bank financing are provided in the following table. The total project cost is estimated at $24.55million.

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Indicative Bank- % ofComponent Sector Costs % of financing Bank-

(US$M) Total (US$M) financingA. MOIC Component

(i) Strengthen MOIC's capacity Telecommunications 0.83 3.4 0.70 3.1& Informatics

(ii) Strengthen spectrum monitoring and 5.95 24.2 5.18 23.0management

(iii) Support to the project coordination 1.26 5.1 1.10 4.9unit (PCU)

B. NTA

(i) Strengthen NTA's capacity 2.43 9.9 2.05 9.1

(ii) Rural access subsidy 10.00 40.7 10.00 44.3

(iii) Public ICT access centers 3.53 14.4 3.53 15.6

(iv) Support to the project management 0.55 2.2 0.00 0.0unit (PMU)

Total Project Costs 24.55 100.0 22.56 100.0

Total Financing Required 24.55 100.0 22.56 100.0

C. 1.2. The project includes two main components. The MOIC component will provide financing forlocal and international consultant services, training, studies and equipment to strengthen MOIC's policy andspectrum management functions by supporting: (a) the Planning Section to effectively carry out its policyfunctions; (b) FMD to effectively manage and monitor the radio spectrum; and (c) the Project CoordinationUnit (PCU). The NTA component will finance local and international consultant services, studies andtraining to strengthen the NTA's capacity to respond in a timely manner to regulatory issues in acompetitive sector. It also includes support to NTA to implement HMG's strategy for provision oftelecommunications services in rural areas.

C. 1.3. HMG recognizes that rural access service might be associated with less attractive financialreturns. On the advice of HMG, NTA is using a market mechanism to finance a capital subsidy for aprivate RTS operator to provide services in 534 unserved VDCs. The operator will serve approximately3.22 million people in the Eastern Development Region. This approach is expected to meet the dualobjectives of extending access in rural areas and encouraging private participation in developing the sector.Details of the licensing process are in the draft RFA which was prepared in accordance with IDA'sProcurement Guidelines. The key features of the rural licensing are summarized in Annex 2. In addition tothe minimum rural access, the NTA component will also finance the establishment of public ICT accesscenters in rural areas. Initially, assistance will be provided to NTA to plan and implement a pilot phase.Subsequently, this will lead to evaluating and developing replicable models for sustainable public ICTaccess centers. Upon the successful implementation of the pilot phase, the program will be scaled-up to

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cover a larger geographical area.

2. Key policy and institutional reforms supported by the project:

C.2. 1. The project supports key reforms in the telecommunications sector to increase private sectorparticipation in the provision of infrastructure and services. Specific institution building goals will beachieved through capacity building within:

(a) MOIC to independently define policy directions and particularly coordinate the strategies forliberalization and privatization;

(b) NTA to manage regulatory issues; including making NTA fully functional to intervene onissues, such as facilitating new entry; NTC's tariff levels (noncompetitive services);anticompetitive practices (including settling interconnection conflicts); licensing, quality ofservice issues; and information collection and dissemination;

(c) NTA in the RTS licensing process, and during certification and monitoring of the private RTSoperator in the Eastern Development Region. This also includes the payment of the capitalsubsidy to the operator over a two-year period, upon NTA certification that the RTS operatoris meeting its license obligations. Based on the success of this approach to rural serviceprovision, NTA will consider licensing operators in other regions along the same principle;and

(d) FMD to ensure effective allocation, monitoring and management of the radio spectrum.

3. Benefits and target population:

C.3. 1. The project would benefit all of Nepal's telecommunications users by increasing theavailability and quality of telecommunications services. Expanding and improving telecommunicationsservices will create opportunities to enhance the lives of the people, and to contribute to economicdevelopment through the timely delivery of information. The rural access component specifically targetslow-income, rural, and other disadvantaged populations; and is expected to improve equitable access totelecommunications and information services, often for the first time. This will give rural populationseasier access to market and other information, and will facilitate the delivery of social services to ruralareas. The RTS operator will initially provide a minimum of two public access lines in the 534 unservedVDCs of the Eastern Development Region. The total population expected to be covered is approximately3.22 million. In addition, it is expected that the private RTS operator will create opportunities for localentrepreneurs to provide ICT services through franchises and other models.

C.3.2. Businesses that increasingly depend on telecommunications services to be competitive willbenefit from lower costs of international communications, and the availability of an increased variety ofvalue-added services. Enterprise development will increase as a result of a wider array oftelecommunications services being offered, and the investment opportunities in newtelecommunications/information-related businesses. Nepal will be more attractive to foreign investors if ithas a modem telecommunications sector with a well-established legal and regulatory framework.

C.3.3. Supporting the regulator in effectively implementing reform initiatives will lead to moretransparent and accountable governance of the sector. It will also reduce the risks to private investors(particularly foreign) and increase their interest, since operators will know the rules for licensing, tariffadjustments, interconnection, etc. MOIC will benefit from developing its capacity to manage radio

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spectrum and thereby ensuring the availability of frequencies and reducing radio interference problems.This will improve the quality of services offered to the public and will make private investment in wirelesstechnologies more attractive.

C.3.4. Supporting FMD will allow it to assign frequencies based on recommendations by theInternational Telecommunications Union. This will make private investment in the deployment of wirelesstechnologies more attractive, cost effective, and will improve the quality of service. Improved licensing andmonitoring of the frequency spectrum will enable HMG to collect license fees and royalties and efficientlyuse the scarce national resources.

C.3.5. Supporting the establishment of public ICT access centers will provide the marginalized ruraland peri-urban Nepalese population with: (a) access to affordable information and related services; (b) anenabling environment to create local information content; and (c) improved information exchange,dissemination, and opportunities in sectors such as health, education, and agriculture.

4. Institutional and implementation arrangements:

C.4. 1. The project will be implemented over five years, from March 1, 2002, to February 28, 2007.

C.4.2. The PCU in MOIC will be responsible for overall project coordination. The PCU will beheaded by the project coordinator (chief of the Planning Division has been appointed from MOIC) who willreport to the Secretary of MOIC, and will include a senior accounts officer and accountant, a procurementspecialist and secretarial staff. To fulfill its responsibilities for project implementation, NTA will besupported by the recently established PMU, that will be headed by a project manager who will report to theChairman, NTA. In addition, the PCU and PMU will be staffed by existing MOIC and NTA staff who willsimultaneously carry out their policy and regulatory functions.

C.4.3. The PCU will be responsible for overall reporting on the progress of the project'simplementation, preparing consolidated project accounts and project management reports (PMRs). Interms of technical implementation of the project, MOIC and NTA will be completely responsible for theirrespective components. The PMU is independent of the PCU in its operations, and only provides therequired reports to the PCU for compilation and submission to IDA.

C.4.4. NTA and IDA have agreed to retain consultants to monitor and supervise the RTS rollout andservice quality obligations as per license conditions. The consultants will also monitor expansion ofservices as dictated by demand. NTA will report to IDA on a quarterly basis, including certification of theRTS operator's compliance with the license.

C.4.5. Financial management. The proposed financial management system in the implementingagencies was reviewed and these are considered to meet minimum financial management fiduciaryrequirements. In order to make the system more effective in terms of reporting project expenditures, theproject will prepare a project financial management manual. The project will not be immediately ready toproduce a full set of project monitoring reports, or apply PMR-based disbursement methods. In addition,the assessment concluded, in the context of the project supporting the institutional strengthening of NTA,that NTA should enhance its institutional financial management capacity. An action plan outlining steps topermit the project to produce a full set of PMRs and to build NTA's capacity was agreed between MOIC,NTA, and IDA. Detailed findings of the financial management review and the action plan are in Annex 6.

C.4.6. Project accounting. The PCU and PMU will be responsible for maintaining records and

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accounts of the activities under their respective project components. The PMU in NTA will submittrimesterly PMRs to the PCU in MOIC based on agreed formats. The senior accounts officer in the PCUwill review and compile the PMRs for transmission to IDA. The project's reporting, monitoring, andevaluation arrangements will include: (a) trimesterly PMRs; (b) biannual Bank supervision missions; (c)joint MOIC/NTA/Bank annual progress reviews, and a midtern review (about two years after the date ofeffectiveness of the credit); and (d) a completion report to be transmitted by the HMG to the Bank withinsix months of the project's closing date.

C.4.7. Initially disbursements from the credit will not be made on the basis of PMRs, but rather ontraditional transaction-based disbursement procedures. If the project makes good progress with thefinancial management action plans, IDA will assess (by January 31, 2003), the readiness of MOIC andNTA to migrate to PMR-based disbursements.

C.4.8. Disbursements for the rural access component will be made in accordance with the licenseconditions in the RFA. NTA, with the assistance of consultants, will monitor, supervise, and certify theperformance of the RTS operator.

C.4.9. Planning and budgeting: The project will follow HMG's planning and budgeting system.MOIC and NTA will be responsible for preparing their respective budget plans and programs per theiragreed work programs. The PCU will submit a consolidated budget request for MOIC and NTAcomponents to the MOF. HMG will include this project in its list of core projects, and will commit totimely release of counterpart funds.

C.4.I 0. A special account in US dollars with an initial authorized allocation of $500,000 will beestablished at the Nepal Rastra Bank (Central Bank) on terms and conditions satisfactory to IDA. Theauthorized allocation may be increased to $1,000,000 when the aggregate amount of withdrawals from thecredit account, plus the total amount of all outstanding special commitments entered into by IDA is equalor exceeds the equivalent of special drawing rights (SDR) 2,500,000. This limit will be reviewed in theevent that PMR-based disbursements is introduced.

C.4. 11. Audit arrangements: The project, statements of expense (SOE), and special account auditswill be conducted by the Auditor General of Nepal. The NTA fnancial statement audit will be conductedby the auditor general. The audit reports will be submitted to IDA within six months of the end of eachfiscal year.

D. Project Rationale

1. Project alternatives considered and reasons for rejection:

D. 1.1. HMG is currently undertaking a credible reform program to liberalize the sector, which isexpected to increase competition and private investments. The reform agenda is consistent with the Bank'sstrategy for the telecommunications sector, which calls for shifting the government's role from ownershipand operations to policy making and regulation, promoting competition, efficiency, service quality, andincreasing private sector participation. IDA has played a critical role in promoting this reform agenda inNepal, and finds the commitment and ownership appropriate to support. Through ongoing dialogue andtechnical assistance both MOIC and NTA would focus on strengthening their policy and regulatoryactivities over the project implementation period.

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D. 1.2. IDA will play a catalytic role in Nepal by providing technical and investment assistance toextend private sector-led telecommunications service delivery to rural areas. NTA recently carried out anICB process to issue a RTS license which demonstrated that private sector interest exists for the provisionof telecommunication services in rural Nepal. However, commercial operators were not prepared toexpand access to rural areas on their own and required financial support. This is the first time that IDA issubstantially involved in rural telecommunications development and finance, in the context of policies thatadvocate a privately led competitive sector structure and the provision of capital subsidy. In addition toHMG's policy of ensuring a minimum of two public access lines in all VDCs by 2004, there is demand forICT access in the rural community. This will be supported by public ICT access centers which will be firstestablished on a pilot basis.

Other Project Alternatives Considered

D. 1.3. Using existing instruments. Implementation of Nepal's telecommunications sector reform waspartially supported under limited TA from the Policy and Human Resource Development fund, andDANIDA. At this stage, both MOIC and NTA require continued support to effectively meet the challengesof an emerging multioperator environment. HMG has requested IDA assistance over a five-year period toplan, advise, and finance the implementation of its reform program. It is unlikely that reforms would stayon course if HMG was completely dependent on limited grant aid, without being given the opportunity toscale-up the implementation. IDA's impact will be in ensuring that HMG maintains a steady course ofaction, providing advice, and raising concerns during the challenging period of implementation of reforms.

D. 1.4. Institutional location of frequency management. The institutional location of frequencymanagement varies across countries. For example, in Sri Lanka it is located within the regulatory agency,but in India it is a separate agency within the Ministry of Communications. In Pakistan the agency isestablished outside of the ministry and independent of the regulator. One option considered was the upfronttransfer of the frequency management function from MOIC to NTA. However, according to existingNepalese law, the frequency management function has to remain within MOIC. NTA is responsible for theregulation of the telecommunications sector and can legally assign radio frequencies allocated to thetelecommunications sector by MOIC. Given the large-scale reform agenda NTA is currently implementingand insufficient technical staff, the transfer of the radio spectrum management function would beoverburdening its capacity. Because of this, an assessment will be carried out during the second year ofproject implementation to address institutional location issues.

D. 1.5. Subcontracting frequency management and monitoring. Another project alternative consideredwas to subcontract the management and monitoring of radio frequencies to a private firm, rather than tohave MOIC modernize the spectrum management and monitoring system. This alternative is not feasibleas: (a) necessary monitoring equipment does not exist in Nepal, either in the public or in the privatesector; (b) given Nepal's small size it would be hard to attract an interested firm; and (c) it would require achange in legislation. Further, for reasons of national sovereignty, HMG is unwilling to outsource themanagement and monitoring of a valuable national resource.

D. 1.6. Modalities for Bank support. In light of the recent developments in Nepal [see SectionB.3.1(d)] and HMG's decision to rebid the RTS license for the Eastern Development Region, twoalternative modalities for Bank support were considered; specifically: (a) supporting HMG efforts throughtwo separate operations: an initial TA project to assist MOIC and NTA in strengthening their policy andregulatory functions, followed by an investment project to improve rural access; and (b) supporting HMG'sefforts through a single operation that combines the TA with assistance to improve rural access. Based ondiscussions with HMG, it was decided that the second alternative (i.e., a single operation) was the

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preferable approach for the following reasons: (a) HMG's commitment to implement the sector reformprogram, including competition and private sector entry, has been demonstrated and is irreversible; (b)despite the withdrawal of the winning bidder to provide RTS, a number of private sector firms have alreadyexpressed interest in participating in the rebidding; (c) given the private sector perception of politicaluncertainty, the up front commitment of IDA will provide a clear signal to the private sector, and may inturn increase participation and improve the terms of the rebidding process; (d) the TA, especially for NTA,is urgently needed because of the rapid liberalization of the telecommunications market; and (e) packagingrural access with the TA will strengthen the project's acceptability within Nepal, and will help to halt anyattempt to undermnine the necessary TA for strengthening sector institutions that are critical toimplementing reforms. It is recognized that there are risks involved in the rebidding process, namely, therecould be a failure to receive qualified bids and/or the quoted capital subsidy could be excessively high.Adequate risk mitigation measures have been incorporated in the project design to overcome this (SectionF2 and Annex 2). In the event of market failure in the RTS licensing process, the project will assist inmeeting HMG's development objectives of rural economic development through rural connectivity byplacing emphasis on the public ICT access centers component, and using it as a vehicle to provide access.See Annex 2 for details on the public ICT access centers component.

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2. Major related projects financed by the Bank and/or other development agencies (completed,ongoing and planned).

Latest SupervisionSector Issue Project (PSR) Ratings

(Bank-financed projects only)Implementation Development

Bank-financed Progress (IP) Objective (DO)

Expansion of local telephone exchanges First Telecommunications S Sand of international and long distance Project (Credit No. 0166),communication facilities; installation of completed Sept. 30, 1976telex facilities and the employment ofconsultants to assist in thereorganization of the NationalTelecommunications Board.

Further modernization and expansion of Second Telecommunications S Stelecommunications facilities. Project (Credit No. 0397),

completed Dec. 31, 1982

Extension of existing facilities so as to Third Telecomnmunications S Senable about 70 percent of the demand Project (Credit No. 0799),for local telephone service to be met; completed June 30, 1985extend the long distance network toareas presently without service.

Strengthen NTC as an institution, and, Fourth Telecommunications S Sthrough a balanced package of high Project (Credit No. 1588),priority works, expand urban and rural completed June 30, 1994telephone service.

Expansion of telecommunications Fifth Telecommunications HS HSfacilities and provision of new services; Project (Credit No. 2364),improvement in the quality of existing completed June 30, 1999.services; strengthen the NTC andaddress major sector organizationissues.Other development agenciesDANIDA Technical assistance to NTA on

regulatory issues.

IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

3. Lessons learned and reflected in the project design:

D.3.1. The lessons drawn from the evaluations of the previously completed projects have been takeninto account in the planning of this project, and are given below.

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D.3.2. Importance of upfront project preparation. Agreement on key terms of reference (TORs) andbidding documents, as well as the establishment of a sound project implementation unit, should becompleted early in the project cycle. To this end, several studies relevant to this project were completedprior to Board approval. TORs for TA assignments for the first two years of the project implementationperiod have already been prepared by MOIC and NTA and reviewed by IDA.

D.3.3. Measurable performance indicators. Monitorable performance indicators measuring access,competition and transparency have been included in this project (Annex 1) and will be closely monitoredduring project implementation.

Sector-specific Lessons

D.3.4. The Bank has telecommunications operations in over 60 countries. For the planning of thisproject, the lessons from past projects, as well as from the Operations Evaluation Department's (OED's)study, "World Bank Lending for Telecommunications (1994) " and the OED/Operations Evaluation Groupstudy, "Information Infrastructure: The World Bank Group's Experience (2001) ", were taken intoconsideration. These are:

(a) Competition. Sector reform in other countries indicates that a procompetitive frameworkwhich supports a multioperator environment tends to improve service coverage and qualitymore rapidly and fosters more competitive prices than a state monopoly operator. The lessonis that a competitive environment promotes enhanced growth and expanded public access toservices, encourages the incumbent operator to operate more efficiently and eventually leads toincreased service coverage, improved quality, and reduced costs.

(b) Regulation. The existence of an effective regulator within a stable regulatory environmentencourages higher levels of investment, enables fair competition, and accelerates the rate atwhich services are opened to comprtition. HMG has established an independent andself-financed regulatory entity. However, it should be recognized that institutional and humancapacity building take time, and intensive efforts are required to make a regulatory agencyefficient and effective. Newly created regulatory agencies are frequently overwhelmed andhave little expertise to draw upon-, therefore, providing consultant support during the initialstart-up phase has proved to be very useful. There also is a need to constantly modernize aregulatory regime as new issues arise at different stages of the reform process. The lesson hereis that technical assistance provided to a new regulator should contribute to the establishmentof a clear and predictable regulatory framework--a prerequisite for attracting privateinvestment in the sector

(c) Rural access. Telecommunications, investments in rural areas can yield on average, adequateand even high economic and financial rates of return. However, servicing the remote areasrepresents higher costs per line, and greater risk, and therefore may require a subsidy.Universal access strategies have been successful in both industrialized and developingcountries. In Chile, which is consilered a best practice example, the amount of the subsidieswas quite low, but provided considerable leverage to generate much greatertelecommunications development in rural areas. The subsidies were distributed competitively(ranging up to $10,000 per line), using a least-cost approach with a one-time capital subsidy,rather than for recurrent costs.

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4. Indications of borrower commitment and ownership:

D.4.1. Since 1997, despite great political uncertainty, HMG has demonstrated its commitment tosector reform through the following actions:

(a) Parliamentary approval of the new Telecommunications Act in April 1997;

(b) prompt appointment of the NTA Chairman and its Members in 1998;

(c) adoption of the National Telecommunications Policy in 1999;

(d) participation in intensive reforn dialogue on rural access issues and decision to allow theprivate sector to participate in rural licensing initiatives; willingness to include financialincentives and a RTS capital subsidy to conclude the first rural transaction in a timely manner;

(e) selection of new WLL/cellular GSM operators in 2001; and

(f) ongoing licensing of competitive small networks and value-added services.

5. Value added of Bank support in this project:

D.5. 1. International experience in telecommunications sector reform. The Bank has considerableintemational experience in telecommunications sector reform and can contribute significantly intransferring the knowledge gained from within and outside the region. HMG has consistently noted thevalue added of the Bank's experience with restructuring the telecommunications sector. In neighboringSouth Asian countries, the Bank has assisted governments in creating new legal, policy, and regulatoryframeworks; establishing new regulatory agencies; and advised on introducing competition and in theprivatization of public telecommunications operators. By supporting a regulatory reform program,introducing competition and facilitating rural access, the Bank is assisting the HMG in attracting privateinvestment to the most difficult part of the telecommunications market. Through the Bank's dialogue insuch key regulatory areas as interconnection and tariff policies, private operators will be able to competeon a level playing field. This is the Bank's first involvement in supporting a market-based capital subsidyfor promoting private provision of rural telecommunication access. This approach could provide valuablelessons for the use of similar instruments in the rollout of other rural infrastructure.

D.5.2. Experience in radio spectrum modernization. The Bank has developed significant experiencein supporting the international best practice approach to spectrum management and monitoring. The Bankis involved in supporting spectrum management and monitoring in several countries, such as India, Nigeria,Pakistan, and Sri Lanka.

D. 5.3. The Bank's experience in ICB indicates significant cost savings, with respect to procurement ofgoods following World Bank procurement guidelines.

E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8)

1. Economic (see Annex 4):o Cost benefit NPV=US$7.9 million; ERR = (Rural Access Component only) 32 % (see Annex 4)O Cost effectiveness* Other (specify)

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E. 1.1. The project supports the government's objectives for telecommunications sector reform. Thenature of the project is to create regulatory and policy making capacity in the telecommunications sector,and to assist HMG in providing access to services in rural areas. A great number of the project's benefitsare either not tangible or otherwise difficult to quantify. Greater competition in the sector will lead toimproved services, thereby stimulating economic growth, resulting in a broader source of revenues to HMGfrom tax receipts. Network externalities and the use of ICT in health, education, and other social services,may imply social benefits which need to be taken into account when assessing the economic impact oftelecommunications investment. Some of the benefits associated with the policy and regulatory componentinclude:

(a) Support to FMD/MOIC through institutional strengthening and establishing modemn spectrummonitoring and management systems would: (i) minimize radio interference and help improvethe quality of service; (ii) accelerate the process of obtaining frequency licenses; (iii) reduce theinvestment risk for private wireless service operators; and (iv) enable HMG to make effectiveuse of the radio spectrum, bringing benefits to all telecommunications service users.

(h) Support to strengthen NTA's capacity will lead to the establishment of a credible, stableregulatory environment. This will encourage increased competition, higher levels of privateinvestment, and development of services.

E. 1.2. Rural access. Most of the rural Nepalese population has no access to basic communications.HMG's policy to address these needs is to provide a minimum of two public access lines in every VDC by2004. However, rural operations are unlikely to be commercially viable and thus, alone, would not attractprivate operators. In the absence of a capital subsidy, the private (internal) rate of retumn of this project issignificantly negative. This reflects the high costs of serving rural areas and the low revenues, partlyresulting from low call charges and low incomes. However, from the broad development viewpoint, therural project is highly desirable and therefore a capital subsidy is justified to ensure a positive internal rateof return that is closer to the economic rate of return.

E. 1.3 . Under the first round of competitive bidding, the amount of capital subsidy needed to make theproject attractive to private investors was determined through the market. An ICB process was followedand the winning bid was for $10 million. The bidding documents specified the minimum servicerequirements to be met, including a schedule of unserved VDCs to be connected and quality of servicestandards.

E. 1.4. The economic rate of retumn (ERR) for the project was calculated using this lowest evaluated bidprice of $10 million. The ERR on this public sector investment was calculated to be 32 percent. Adetailed description of the calculation is in Annex 4. The methodology adopted was to calculate the changein consumer surplus and expenditures from expanded telephone access, minus the economic costs to Nepalof the private sector provider. Given the limited availability of data, the approach used relies on a numberof assumptions--the most important of which involves the elasticity of demand for communications--thisfigure is varied as a robustness check. The cost of travel, the weighted cost of calling, number of calls andelasticity estimates are used to calculate the quantity of communications carried out prior to the project. Inturn, these figures were used to calculate the change in consumer surplus and expenditure generated by thelower cost of communication as a result of the project. The estimated ERR of 32 percent is significantlyabove the hurdle rate of 10 percent (as are low-end robustness estimates), as would be predicted frominternational experience of other rural telecommunications access programs. The high ERR, matchingprevious return estimates in other countries, provides a significant margin of confidence in the economic

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worth of the project.

E. 1.5. This is a very conservative estimate and it looks over a short time horizon, and assumes thatconsumer surplus is based solely on travel costs. Other benefits of providing rural access totelecommunications which are not captured in this calculation include:

(a) expansion of rural telephone services significantly increases off-farm employment and incomegeneration across a number of countries, including Nepal;

(b) Nepal's experience that access to telephony has a significant impact on stocks of social capital,increasing the number of noncommercial associations in villages;

(c) access to telephony has been found to correlate with improvements in the quality of servicedelivery by the govemment;

(d) access to telephony guarantees faster response to emergencies;

(e) network extemalities suggest benefits to currently connected customers in Nepal from networkexpansion, not captured in ERR estimates that look only at benefits for new customers;

(f) proximity to a telephone allows customers to easily receive unsolicited information notrequested due to information asymmetries (for example, customers can receive informationabout imminent major storms that they would not know in advance to request); and

(g) equalizing access to information infrastructure has a significant impact on reducing inequalitywithin countries.

2. Financial (see Annex 4 and Annex 5):NPV=US$ million; FRR = % (see Annex 4)

E.2. 1. The total project cost is $24.55 million, of which IDA will finance the equivalent of $22.56million, and HMG the balance of $1.99 million.

Fiscal Impact:

E.2.2. NTA's financial projections clearly indicate that NTA will be able to sustain itself (details aregiven in Annex 4).

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E.2.3. NTA will continue to collect substantial revenues from license fees and royalty payments; andrevenues in excess of NTA's required operational expenses are transferred to HMG. Further, NTA'sfinancial administration regulations ensure accountability in the use of funds. HMG can benefit from theincreased tax base and improved fiscal revenue mobilization as a result of an increased number of licensedoperators, the introduction of a market-based approach to allocation and the use of the frequency spectrum.The reform process will open new avenues for generating levies, as well as possible auction revenues fornew services and through the use of various parts of the frequency spectrum. Increased private investmentin the telecommunications sector is likely to have a significant financial impact by transferringresponsibilities for service provision from the govemment owned NTC to private enterprises, willing andable to take commercial risks in the telecommunications market.

3. Technical:

E.3. 1. Technical viability is mostly a concem for the equipment required for radio spectrummonitoring and direction-finding. While this equipment is readily available, it is highly specialized.Portable monitoring and direction-finding equipment is required for compliance and interference resolution.To minimize technical risks associated with this project activity, the following requirements have been builtinto the component design:

(a) a technical training program for MOIC personnel on radio spectrum management, monitoring,and measuring; and

(b) procurement of the radio spectrum equipment will be on a turnkey basis, and it will includeengineering, installation, commissioning, testing, systems training, one-year warranty, andone-year operational support. Consultants will assist MOIC in preparing the tender documentsfor this activity.

4. Institutional:

4.1 Executing agencies:

E.4. 1.1 The executing agencies are the MOIC and the NTA. These two agencies face a challenge tosuccessfully continue implementing the HMG's reform agenda. A project implementation plan was draftedby MOIC and NTA and discussed during appraisal. It defines the roles, responsibilities, and individualwork programs, and includes a timetable to be closely followed for successful, and timely projectexecution. To strengthen their capacity, local and foreign TA, and training in financial management,procurement, and implementation will be provided to MOIC and NTA.

4.2 Project management:

E.4.2. 1. The main responsibility for overall project management is with the PCU in MOIC. Since theproject needs coordination at an appropriately high level, the PCU will be headed by a senior official of theMOIC. The PCU will be supported by senior officials from NTA, Planning Section, FMD, and adedicated senior accounts officer and an accountant to manage and report on financial aspects; alsoincluded are senior staff with technical, procurement, and economic backgrounds. The PCU will besupported by adequate support staff and facilities. The operating costs of the PCU will be funded underthe project on a declining cost basis only during the project implementation period. These operating costsinclude: commnunications, supplies, materials, and gasoline costs; staff salaries are excluded.

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E.4.2.2. At NTA the responsibility for project implementation is with the PMU. The PMU at NTA willbe headed by a senior NTA official. The other members of the PMU will include a technical specialist,economist/lawyer, and will be supported by NTA's accounts and administrative staff. In order tostrengthen the institutional financial management capacity NTA will, in the short-term, seek outsourcedprofessional services from an accounting firm, and in the medium-term it will hire an in-house professionalaccountant.

4.3 Procurement issues:

E.4.3. 1. MOIC has no prior experience in implementing an IDA project. NTA has limited experiencewith the Bank's procurement procedures. A procurement capacity assessment of the beneficiary agencieswas conducted by a Bank procurement specialist during appiaisal. Given the weak procurement capacityin MOIC and NTA, it was agreed that when needed the PCU will retain a qualified procurement expert toassist both MOIC and NTA in preparing requests for proposals (RFPs), bidding documents,advertisements, and other procurement activities financed by the project. Technical assistance will beprovided to the PCU and PMU under the project.

E.4.3.2. For the rural access component, NTA has already gained considerable experience in managingthe ICB process for the selection of the RTS operator during the first round of bidding. In addition, theBank will provide technical assistance to NTA for the rebidding process.

4.4 Financial management issues:

E.4.4. 1. The beneficiary agencies financial management capacity assessment was conducted by a Bankfinancial management specialist during appraisal. In order to mitigate potential financial management risksand to strengthen capabilities, MOIC will complete the transfer of a senior accounts officer from theFinancial Comptroller General's Office (FGCO) to the PCU. MOIC will retain the existing accounts stafffor the duration of the project. Further, a consultant will assist the PCU in preparing a project financialmanagement manual, that describes the financial policies, procedures, and the implementation of properintemal control procedures. During the assessment, an action plan to improve deficient areas was agreedupon between MOIC, NTA, and IDA. The implementation of the action plan during the project period willimprove the quality of financial management. Given the weak financial management capacity, consultantswill be engaged to assist MOIC and NTA to strengthen their financial management, the preparation ofPMRs, and the financial management manual under the proposed project.

5. Environmental: Environmental Category: C (Not Required)5.1 Summarize the steps undertaken for environmental assessment and EMP preparation (includingconsultation and disclosure) and the significant issues and their treatment emerging from this analysis.

E.5. 1.2. There are no major environmental issues in the project, as it is a telecommunications sectorreform project, which primarily involves policy and institution building components. The radio spectrummonitoring equipment to be financed under the project for use by MOIC/FMD will be housed in existingbuildings and does not involve construction, or other activities that affect the environment. The ruralcapital subsidy component was designed to have minimal efiect on the environment, as the rural operator isexpected to use VSAT and other wireless technologies to deploy services. As a result of this choice oftechnology, there is no need to build access roads or large pcower-supply installations. Moreover, theinstallation of compact, modular VSAT equipment will not adversely affect the aesthetics of rural Nepal.In keeping with company registration requirements in Nepal, HMG will carry out an environmental impactassessment of the RTS operator. The project is rated "C" since it will not have a substantial impact on the

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environment.

5.2 What are the main features of the EMP and are they adequate?

Not applicable

5.3 For Category A and B projects, timeline and status of EA:Date of receipt of final draft:

Not applicable

5.4 How have stakeholders been consulted at the stage of (a) environmental screening and (b) draft EAreport on the environmental impacts and proposed environment management plan? Describe mechanismsof consultation that were used and which groups were consulted?

Not applicable

5.5 What mechanisms have been established to monitor and evaluate the impact of the project on theenvironment? Do the indicators reflect the objectives and results of the EMP?

Not applicable

6. Social:6.1 Summarize key social issues relevant to the project objectives, and specify the project's socialdevelopment outcomes.

E.6. 1. A major focus of this project will be to support the expansion of telecommunications to ruralareas. A study had been undertaken to assess the type of service and number of public access lines ruralcitizens require. During project implementation, rural demand studies will be conducted to ensure thatprivate operators are delivering services. The PMU/NTA will oversee a public relations campaign toeducate the public on the rationale and the benefits of the reform program. Specifically, the campaign willemphasize the development of rural telecommunications, the benefits that increased competition will yield(e.g., improved variety of services at lower costs); and the role of the regulator (e.g., responding toconsumer complaints).

6.2 Participatory Approach: How are key slakeholders participating in the project?

E.6.2. 1. At the outset MOIC, NTA, government agencies, and various stakeholders were fully involvedduring project design, and will continue to be closely consulted throughout the project to ensure effectiveimplementation. During project preparation rural communities participated in a socioeconomic study andgave feedback on the type of services and number of access lines they required. The private sector wasconsulted extensively in the project's design, and their views will continue to be solicited during theimplementation of reforms. Donors in the telecommunications sector have played an important part in thereform dialogue and will continue to be consulted during project implementation.

6.3 How does the project involve consultations or collaboration with NGOs or other civil societyorganizations?

E.6.3.1 Nongovernmental and rural organizations will be consulted during the implementation of therural access strategy. In addition, the design and implementation of the public ICT access centers will beundertaken with civil society's active involvement.

6.4 What institutional arrangements have been provided to ensure the project achieves its socialdevelopment outcomes?

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Not applicable.

6.5 How will the project monitor performance in terms of social development outcomes?

Not applicable.

7. Safeguard Policies:7.1 Do any of the following safeguard policies apply to the roject?

Policy ApplicabilityEnvironmental Assessment (OP 4.01, BP 4.01, GP 4.01) * Yes 0 NoNatural Habitats (OP 4.04, BP 4.04, GP 4.04) 0 Yes * NoForestry (OP 4.36, GP 4.36) 0 Yes * NoPest Management (OP 4.09) 0 Yes * NoCultural Property (OPN 11.03) 0 Yes * NoIndigenous Peoples (OD 4.20) 0 Yes * NoInvoluntary Resettlement (OD 4.30) 0 Yes * NoSafety of Dams (OP 4.37, BP 4.37) 0 Yes * NoProjects in International Waters (OP 7.50, BP 7.50, GP 7`50) 0 Yes * NoProjects in Disputed Areas (OP 7.60, BP 7.60, GP 7.60)* 0 Yes * No

7.2 Describe provisions made by the project to ensure compliance with applicable safeguard policies.

Not applicable.

F. Sustainability and Risks

1. Sustainability:

F. 1. 1. By focusing on creating an enabling policy, legal, and regulatory framework the project willaccelerate private sector investments and operations. The rights and obligations of the incumbent and newoperators are codified in the legislation, policy, and licenses. Improved service coverage, quality, andcompetitive telecommunications prices will be sustained as investment and competition grows inteleconmunications infrastructure and services. Empowering the NTA to charge levies and fees ontelecommunications operators will enable regulatory functions to be sustained without dependence onbudgetary support. Unfulfilled demand for various services in remote and rural regions can be increasinglysatisfied as markets are targeted through specific initiatives. In addition, the future establishment of a ruraltelecommunications development fund will complement ongoing rural service provision initiatives.

F. 1.2. The capital subsidy payment will be made to the RTS operator upon submission of certificatesby NTA to IDA that the rollout of services has taken place as per license conditions. The sustainability ofrural services is ensured as: (a) the business plan of the RTS operator will indicate a positive cash flowand thus will have a business interest to continue providing services; (b) the RTS operator has to furnish aperformance guarantee for five years; and (c) the RTS license will be designed with the assistance ofinternational consultants which will spell out in detail, the tenms and conditions for the provision ofcontinued service.

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2. Critical Risks (reflecting the failure of critical assumptions found in the fourth column of Annex 1):

Risk Risk Rating Risk Mitigation MeasureFrom Outputs to ObjectiveHMG's lack of commitment to implement M A number of irreversible actions are underwaysector reform as articulated in its National to open the sector to competition. A competi-Telecommunications Policy of 1999. tive and transparent bidding process was used to

select the WLL and cellular GSM operators,and NTA will issue the licenses in Nov 2001.HMG has also decided to issue a RTS license toa private operator for rural services in theEastem Development Region. For this purpose,an ICB process will be carried out to select aRTS operator and for the capital subsidy.

Nontransparent competitive bidding M The National Telecommunications Policy andprocess for awarding licenses. NTA's rules and regulations explicitly mention

competitive bidding for new licenses.Moreover, NTA's track record to date has beento award licenses on a competitive basis.

Lack of operator/investor interest in M Selection of licensees for provision of cellularcellular GSM/WLL opportunities. GSM and WLL has been concluded. Investor

response to the ICB process was satisfactory.

Lack of operator/investor interest in the M Two applicants submitted bids for the RTSrebid for the RTS license. license in the first round. This demonstrated

private sector interest in the RTS license.During rebidding, NTA with the assistance ofinternational consultants, will: (a) encourageincreased competition by adopting a morevigorous standard to attract a wider set ofbidders. In addition to following the Bank's ICBprocess, NTA will proactively market thisopportunity through advertisements ininternational publications, such as The FinancialTimes, The Economist, technical magazines,and possibly holding an investors conference,and clarifications meeting in Kathmandu; (b)revise the RFA to build-in incentives such asflexible payments on rollout of service instead ofannual payment arrangements.

In the event that there is still a lack of interest inthe RTS license, HMG with Bank assistancewill implement other rural access options tomeet its development objectives (e.g., public

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ICT access centers).

Capital subsidy quoted for the RTS S HMG will be requested to either (a) meet thelicense exceeds the amount provided under financing gap if HMG agrees that the price isthe project. economically justifiable; or (b) consider

reallocation of funds under the project.

RTS operator defaults on rural M Qualification requirements in the ICB processobligations. will clearly state the financial, technical, and

operating experience for the RTS licensebidders. License terms and conditions willspecify rollout obligations and penalty clausesfor the RTS operator. The licensee will also berequired to provide a performance guarantee(see Annex 2 for details). NTA will closelymonitor and certify rollout progress on aquarterly basis from the time the RTS license isissued, and payments to the operator will be intranches, based on contractual performnance. Inaddition, since the licensed RTS operator will beregistered under the Company's Act as a jointventure between qualified international anddomestic partners, it is also under the purviewof other government agencies.

The security conditions worsen slowing S NTA and the Bank will carry out biannualdown the rollout of service in the Eastern reviews on the progress and the securityDevelopment Region. situation and will adjust the rollout of service by

the RTS operator accordingly.

NTA makes arbitrary decisions in M Private operators have recourse to internationalregulating the newly licensed private arbitration.operators.

NTA does not have sufficiently qualified M Levy from operators to provide funding forstaff and adequate financial resources. NTA; project to support strengthening of

institutional capacity.

From Components to OutputsLow quality of technical outputs. M Bank oversight of terms of reference, selection

and work of technical experts.

HMG delays approval of license awards M Upfront comiitment and award of licenses toto private operators. private operators has already been made. This

is an irreversible process. Moreover, NTA doesnot require HMG approvals for its licensinginitiatives.

Lack of adequate, qualified staff in MOIC M The Cabinet has approved additional staff toand NTA. strengthen MOIC. Technical assistance will be

provided to upgrade staff skills in MOIC and

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NTA.

Procurement of spectrum equipment and M Consultants will assist FMD to strengthenFMD's institutional development is not institutional capacity, and to prepare andimplemented in a timely and effective evaluate bidding documents, and to supervisemanner. installation and commissioning of equipment. In

addition, the Bank will undertake regularassessments to ensure timely implementation.

Overall Risk Rating M

Risk Rating - H (High Risk), S (Substantial Risk), M (Modest Risk), N(Negligible or Low Risk)

3. Possible Controversial Aspects:

F.3.1. There are no controversial issues in the project's social and environmental aspects.

G. Main Credit Conditions

1. Effectiveness Condition

The Grant Agreement shall have been executed on behalf of the Borrower and NTA.

2. Other [classify according to covenant types used in the Legal Agreements.]

Development Credit Agreement (DCA)

(a) The Borrower shall amend, not later than March 31, 2002, NTA Regulationsso as to clearly vest on NTA the power to make its own financialadministration bylaws.

(b) The Borrower shall make available to NTA the proceeds of the credit on agrant basis to enable it to carry out the activities under the project, inaccordance with terms and conditions satisfactory to IDA.

(c) The Borrower shall maintain fully staffed PCU at MOIC throughout theproject implementation period and under terms of reference and with financialresources adequate to carry out its functions.

(d) The Borrower shall submit audit of its project accounts within six monthsafter the end of each fiscal year.

(e) The Borrower shall submit a midterm review report one and a half monthsprior to the midterm review of the project on November 15, 2004.

Project Agreement (PA)

(a) NTA shall maintain fully staffed PMU at NTA throughout the projectimplementation period and under terms of reference and with financialresources adequate to carry out its functions.

(b) NTA shall submit a midterm review report one and a half months prior to themidterm review of the project on November 15, 2004.

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(c) NTA shall submit audit of its financial statements within six months after theend of each fiscal year.

(d) NTA shall certify to IDA on a quarterly basis the RTS operator's compliancewith rollout obligations as set out in its license contract.

H. Readiness for Implementation

a 1. a) The engineering design documents for the first year's activities are complete and ready for the startof project implementation.

1 1. b) Not applicable.

Z 2. The procurement documents for the first year's activities are complete and ready for the start ofproject implementation.

0 3. The Project Implementation Plan has been appraised and found to be realistic and of satisfactoryquality.

C 4. The following items are lacking and are discussed under loan conditions (Section G):

1. Compliance with Bank Policies

Z 1. This project complies with all applicable Bank policies.E 2. The following exceptions to Bank policies are recommnended for approval. The project complies with

all other applicable Bank policies.

Ritin Singh P rre A. Guislain KerachiOhashfTeam Leader ector Manager Country Manager/Director

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Annex 1: Project Design SummaryNEPAL: Telecommunications Sector Reform Project

Key PerformanceHfierarchy of Objectves IndIwators Monitoring4& Evaluation Critical Assumptions

Sector-related CAS Goal: Sector Indicators: Sector/ country reports: (from Goal to Bank Mission)Increase competition and Competition in all market NTA, operators, and statistics HMG's continuedprivate sector participation in segments through private and annual reports from the commitment tothe telecommunications sector sector operators from 2004. International telecommunications sectorand increase access to Telecommunications Union reform as per theadequate and efficient Telecommunications Policy oftelecommunication services, 1999.specifically in rural areas

Increase in total (fixed andmobile) telephone penetrationfrom 1.13 per 100 inhabitantsto 3.0 by end of 2005.

534 unserved VDCs in HMG's continuedEastern Development Region commitments to NTA'stargeted under the rural independence.license will have a minimumof two public access lines byend of 2004.

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Key Performance 1Hierarchy of Objectives - Indicators Monitoring & Evaluation | Critical Assumptions

Project Development Outcome / Impact Project reports: (from Objective to Goal)Objective: Indicators:Strengthen the policy and Full competition in the NTA, NTC, other operators, HMG will maintain itsregulatory environment in the provision of domestic long statistics and annual reports commitment to implement thetelecommunications sector to distance and international from the International sector reform agenda asfacilitate competition and services by 2004. Telecommunications Union articulated in its Nationalprivate sector participation, Telecommunications Policy ofand increase rural access to 1999.services by facilitating privateinvestments and operations.

Private RTS operator to start Issuance of licenses for GSM, NTA follows a transparentproviding service in the rural, domestic long distance, process to issue licenses.Eastern Development Region and other value addedby mid 2003. services.

Transparent licensing and Sufficient domestic andregulatory regime and clear foreign private sector interestrules of business. for investment in the sector,

especially rural service.NTC tariff rebalancingapproved by NTA in 2001 andimplemented by 2004.

NTA has adequate funding tocarry out its regulatoryfunctions.Procompetitiveinterconnection regime inplace by 2002.

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Keoy PerformanceHierarchy of Objectives Indicators Monitoring & Evaluation_ Critical Assumptions

Output from each Output Indicators: Project reports: (from Outputs to Objective)Component:A. MOIC Component

MOIC's policy making ability MOIC to have a fully staffed trimesterly PMRs Adequate capacity in PMUs.strengthened and working planning section HMG approves adequate

as recommended by the staffing for the beneficiaryconsultants six months after agencies.end of assignment.

Nepal's radio spectrum Assessment of FMD's relevant policy Timely HMG approvals.management strengthened. institutional capacity announcements

completed before mid termreview review of progress of studies

to be undertaken byPublish national frequency consultantsallocation plan by June 2003.

Radio frequency assignmnentscompleted within 15 days ofapplications, starting January1, 2005, for 90 percent ofapplications.

B. NTA Component

NTA's capacity to regulate the Define the rules of procedures trimesterly PMRs HMG approves adequatesector strengthened. in all areas that NTA staffing for the beneficiary

regulates by June 2002.' agencies.

Announce interconnection NTA annual reports and Position of NTA is notregime by December 2002. statistics. NTA to make undermined by the lack of

publicly available its rules and institutional independence.procedures.

copy of the interconnectionregime and enforcementmechanism

Adopt a transparent review of progress of studiesconsultative process in its to be undertaken bydeliberation by June 2003. consultants

Rural access capital subsidy Licensed private operator to rural license issued to private Sufficient private sectorscheme implemented in a provide rural service in the operator interest in bidding for ruraltimely and effective manner. Eastem Development Region license.

by the end of 2004.

Effective implementation of Assess pilot public ICT access review of various studies to beICT access and applications center for replicability by undertaken by consultants

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scheme. September 2003

Establish public access centersat the district and VDC levelsby end 2005.

Project Components I Inputs: (budget for each Project reports: (from Components toSub-components: component) Outputs)A. MOIC Component(i) TA to strengthen 0.20 trimesterly progress Adequate, qualified staffinstitutional capacity of management reports from available in MOIC, FMD, andMOIC Planning Section. PCU NTA.

(ii) Advisory services to 0.45 consultants' deliverables and Quality consultant servicesMOIC's Planning Section. reports and pertinent, implementable

reports.(iii) Capacity building of 0.185 supervision missionsMOIC staff, includingworkshops, seminars, andtraining.

(iv) Procurement of 0.30 Procurement of equipment isinformation technology carried out in a timely andequipment and vehicles for effective manner.Planning section and PCU.

(v) Advisory services to FMD. 0.53

(vi) Capacity Building of 0.215FMD staff, includingworkshops, seminars andtraining.

(vii) Procurement of 5.20frequency management andmonitoring equipment.

(viii) Support of MOIC's 0.97PCU.

Subtotal 8.04

B. NTA Component

(i) Studies and advisory 2.18 progress monitoring reports NTA management effectivelyservices on a range of carries out consultancies andregulatory issues including uses consultation papers.RTS licensing,interconnection, tariffs,carrier performance, licensingregime, WTO/GATS offer,and numbering plan, amongothers.

(ii) Capacity building of NTA 0.19

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staff, including workshops,seminars and training.

(iii) Technical assistance to 0.04monitor and superviseimplementation of rurallicense.

(iv) Capital subsidy to be 10.00 HMG approves license awardprovided to RTS operator to RTS operator.based on ICB process.

(v) Public ICT access centers. 3.53

(iv) Support of NTA's PMU.0.55

Subtotal 16.51

Grand Total 24.55

1. Details of the MOIC, FMD and NTA technical assistance program (including terms of reference) and training plansare in the Borrower's Project Implementation Plan.

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Annex 2: Detailed Project DescriptionNEPAL: Telecommunications Sector Reform Project

The objective of the project is to strengthen and implement the policy, legal, and regulatory framework inthe telecommunications sector to facilitate competition and private participation, including increasing ruralaccess to services by encouraging private investment and operations. The project includes two maincomponents, MOIC, and NTA.

By Component:

Project Component 1 - US$8.04 million

The MOIC component will strengthen MOIC's policy and spectrum management functions by fnancinglocal and intemational consultants services, studies, training, and equipment. It focuses on support to: (a)the Planning Section to effectively carry out its policy function; (b) the FMD to efficiently manage andmonitor the radio spectrum; and (c) support to the PCU. This component will include:

I. Stren-thenin- MOIC's Plannin2 Section

(a) Capacity building services: The project will provide support to the Planning Section forcapacity building and will include the following consultancy services and professionaldevelopment activities.

(i) review and form a proposal for institutional changes to organizational structure,management procedures, and administration ifor the Planning Section;

(ii) assist and advise the Planning Section in carrying out policy functions, includingimplementation of the policy agenda;

(iii) assess and recommend options to accelerate the provision of rural communicationsconnectivity, in particular, approaches to deliver new modes of service delivery and othergovernment programs to the rural population; and

(iv) advise on and implementation of the further liberalization of the sector;

(v) technical cooperation arrangement with relevaLnt policy agencies in other countries,information sharing, and formal and informal contacts and advice;

(vi) professional courses dealing with specialized policy issues offered on a periodic basis;

(vii) university fellowships to study of policy and telecommunications issues;

(vii) organization of seminars/workshops in Nepal to address key policy issues.

II. Stren2thenine MOIC's FMD

(a) Capacity building services. FMD will be strengthLened to effectively discharge all functions ofradio spectrum management and regulatory process in line with international best practice.The project will provide support to FMD for capacity building and will include the following

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consultancy services and professional development activities:

(i) prepare a national frequency allocation plan and relevant radio regulations;

(ii) establish spectrum management and monitoring processes and procedures;

(iii) establish an appropriate spectrum pricing policy;

(iv) advise and assist in the implementation of institutional changes to organizational structure,management, procedures, and administration of FMD; and

(v) assist in the procurement process and supervise the implementation of the spectrummanagement and monitoring system procured under the project;

(vi) technical cooperation arrangement with foreign spectrum management agencies, forinformation sharing and advice;

(vii) professional courses offered on a periodic basis;

(viii) training in the operation and maintenance of the equipment for spectrum management andmonitoring.

(b) Install and commission a spectrum monitoring and management system. The project will fundthe procurement, installation, and commissioning of state-of-the-art computerized spectrummanagement and monitoring facilities to facilitate efficient use of the radio spectrum. Thespectrum management system will consist of an integrated system (software applications andhardware) which will automate, and make more efficient the spectrum management process forthe FMD. Spectrum monitoring requirements have already been determined. The system willconsist of both fixed and mobile monitoring stations.

III. Support to PCU. Support will be provided to strengthen the PCU to enable it to successfullyimplement the MOIC and FMD components of the project and in the overall coordination of the project.Equipment (computer hardware and software) and vehicles will also be procured under this component.

Project Component 2 - US$16.51 million

This component will strengthen NTA's capacity to respond to regulatory issues in a competitive sector byfinancing local and intemational consultant services and providing resources for institutional capacitybuilding through studies and training. It will also support the award of a rural license to a private RTSoperator by financing a one-time, upfront capital subsidy to provide services in the Eastern DevelopmentRegion.

I. Strengtheningz NTA's Regulatorv CaPacity

(a) Capacity building services. NTA will be strengthened to effectively discharge its regulatoryduties in line with intemational best practice. The project will provide support to NTA forcapacity building and will include the following consultancy services and professionaldevelopment activities:

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(i) assist in the RTS licensing process;

(ii) assist in the supervision of the implementation of the rural private licenses awarded underthe project;

(iii) consultative studies on NTA's rules of business, interconnection issues, numbering plan,monitoring carrier performance, tariffs, service quality, licensing regime, consumerprotection and new/emerging regulatory issues in the sector (e.g. review of WTO/GATSoffer);

(iv) assist in monitoring and certifying the RTS operator;

(v) technical cooperation arrangements, involving staff exchanges with relevant foreignregulatory agencies, information sharing and professional courses dealing with specializedregulatory issues and general regulatory methods as offered on a periodic basis,

(vi) research fellowships in universities for the study of regulatory and telecommunicationsissues;

(vii) in-house training with classroom facilities in Nepal; and

(viii) organize seminars/workshops in Nepal to address key regulatory issues.

II. Increased Rural Access

The project will provide support to NTA to implement HIMG's strategy for expandingtelecommunications services in rural areas. HMG recogwnizes that the provision of rural service insome areas of Nepal might be associated with less attractive financial returns. They will, therefore, usea market mechanism to finance a capital subsidy for a private RTS operator. Initially, the license is forthe 534 unserved VDCs of the Eastern Development Region which will provide services toapproximately 3.22 million people. After meeting the minimum rollout obligations of two publicaccess lines per VDC, the RTS operator is allowed to expand services. This approach is expected tomeet the objectives of HMG's National Telecommunications Policy of extending rural access andencouraging private participation in developing the sector. In particular, the market mechanism(following an ICB process in line with IDA procurement guidelines) for rural licensing will ensure theefficient allocation of limited resources and should provide a benchmark to assess other operator'sperformance. It is also expected to catalyze innovative and sustainable provision of rural service in acommercially viable region (namely, Eastern Development Region). Based on the success of thelicensing process HMG and NTA may decide to issue additional licenses in other regions of Nepal.Some of the key features of NTA's approach which were incorporated during the first round of biddingare:

(a) Key license terms and conditions: A single license will be issued for the provision of servicesin the Eastern Development Region. In accordance with the provisions the TelecommunicationsAct, the initial term of the license is 10 years. UJpon application by the RTS operator, thelicense can be renewed for successive terms of five years each, provided there are no materialbreaches of the license, until a full license term of 25 years, is reached. The RTS licensee ispermitted to provide basic public access service plus other services such as internet access andinformation services, e-mail, voice-mail, fax, audio conferencing, prepaid calling cards, and

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data communication services. The RTS operator is allowed to carry long distance trafficbetween its licensed VDC's within the Eastern Development Region and to only carryoriginating international traffic out of its licensed VDCs through NTC's network. Broaderrights to carry long distance and international traffic is, of course, granted in 2004, afterNTC's monopoly expires, as per HMG's National Telecommunications Policy. The licenseeis also obliged to comply with a rollout schedule. Proposed obligations are that the RTSoperator will provide at a minimum two public access lines in 50 percent of the targetedVDCs in the first year and the remaining 50 percent access lines in the balance VDCs in thefollowing year. More specifically, the RTS operator is expected to install and operate aminimum of one single public access line each in two separate wards within each VDC. NTCwill not start rural service provision in the 534 unserved VDCs of the Eastern DevelopmentRegion for at least five years after the license is issued to the RTS operator.

(b) Capital subsidy program and disbursements: The RTS capital subsidy will be paid accordingto the licensing terms agreed at the time of the award. The key obligation by the RTS operatoris the activation of a minimum of two public access lines in 534 unserved VDCs. NTA willmonitor and certify the compliance with network roll out and service obligations. It is expectedthat the subsidy will be in two equal payments, with the first payment made on initiatingservice provision to the first 50 percent of the 534 VDCs within the first year, and the secondpayment made on initiating service provision to the remaining VDCs within the second year.For disbursement purposes, these will be direct payment requests, submitted by the PCUaccording to the license contract terms.

(c) Risk mitigation: The following measures are being taken to mitigate the risks:

(i) RTS operator defaults on license: The project will provide technical assistance to NTA tomonitor and certify that the RTS operator is meeting its license rollout requirements andservice obligations. Failure to meet these obligations will result in the following penalties: lossof eligibility for the RTS capital subsidy; forfeiture of the performance guarantee; terminationof the license; and imposition of fines for breach of license conditions pursuant to theTelecommunications Act. In addition to meeting its roll out and service obligations, the RTSoperator has to furnish a performance guarantee in the minimum amount of 10 percent of theproposed RTS capital subsidy, or $1 million. The performance guarantee will be valid for fiveyears, within which the licensed RTS operator is expected to complete installation,commissioning, and rollout of the RTS service in accordance with the license conditions. Thisperformance guarantee will be forfeited by the RTS operator in the event that the operator:fails to meet the rollout obligations stipulated in the license; and fails to implement a remedialplan acceptable to NTA in order to complete the roll out obligations within the additionalperiod provided for in the remedial plan. The forfeiture will not apply if the rollout delayresults from an event offorce majeure as defined in the license.

(ii) Lack of operator/investor interest in RTS licensing: NTA with the assistance of internationalconsultants, will encourage increased competition in the bidding process by adopting a morevigorous standard to attract a wider pool of qualified bidders. In addition to following theBank's ICB process, NTA will proactively market this opportunity through advertisements ininternational publications such as The Financial Times, The Economist, technical magazines,possibly holding an investors conference, and clarifications meeting in Kathmandu. The revisedRFA will build in incentives such as flexible payments on rollout of service instead of annualpayment arrangements. In the event that there is still a lack of interest in the RTS license,

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HMG with Bank assistance will implement other rural access options to meet its developmentobjectives (e.g., public ICT access centers).

(iii) Capital subsidy quoted for the RTS license exceeds the amount provided under the ruralaccess component. HMG will be requested to either meet the financing gap if HMG agreesthat the price is economically justifiable; or consider reallocation of funds under the project.

III. Public ICT Access Centers

NTA will be assisted in implementing HMG's policy for expanding access to infonnation andtelecommunications services. In addition to the minimum two public access lines for the 534 unservedVDCs of the Eastern Development Region, the project will also finance public ICT access centers. Thiswill be initially established on a pilot basis at district headquarters and VDCs in rural areas. Pilotlocations will be selected on the basis of community demand and those with a demonstrated potential tobenefit economically and/or socially from ICT access. *These could include schools and hospitals, aswell as cooperatives and small businesses. Given the limited experience with rural ICT access centersin Nepal, the initial objective is to support the creation of pilot centers to test alternative institutionalmodels and evaluate the sustainability of the approach. During the first year of the project, NTA willbe provided TA to plan the pilot phase so that the public access centers are modelled in line withinternational best practice, in terms of prices, service offerings and ownership models. The investmentin the pilot phase is limited to $0.53 million. A comprehensive evaluation of the pilot phase will beconducted in the second year of project implementation and will provide the basis for scaling-up therollout of public ICT access centers. Three million dollars has been earmarked to finance the scaled-upoperation. In the event that the RTS licensing is not successful, HMG will consider reallocatingproject funds to implement the roll out of public ICT access centers on a national basis in order to meetits development objectives.

IV. Support to PMU

Support will be provided to strengthen the PMU to enable it to successfully implement the NTAcomponents of the project.

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Annex 3: Estimated Project CostsNEPAL: Telecommunications Sector Reform Project

Local Foreign TotalProject Cost By Component US'$million US $million US $million

Strengthen MOIC's capacity 0.12 0.64 0.76

Strengthen frequency management 0.70 4.71 5.41

Support to PCU 0.91 0.24 1.15

Strengthen NTA's capacity 0.35 1.86 2.21

Rural access subsidy 0.00 9.09 9.09

Public ICT access centers 0.00 3.21 3.21

Support to PMU 0.50 0.00 0.50Total Baseline Cost 2.58 19.75 22.33Physical Contingencies 0.15 0.96 1.11Price Contingencies 0.14 0.97 1.11

Total Project Costs 2.87 21.68 24.55Total Financing Required 2.87 21.68 24.55

Loalt Foreign TotalProject Cost By Category US $mfillion US $million US $million

Goods 0.65 18.37 19.02

Services 0.97 2.86 3.83

Training 0.14 0.45 0.59

Incremental Operating Costs 1.11 0.00 1.11

Total Project Costs 2.87 21.68 24.55Total Financing Required 2.87 21.68 24.55

Identifiable taxes and duties are 0.5 (US$m) and the total project cost, net of taxes, is 24.06 (US$m). Therefore, the project cost sharing ratio is 93.79% oftotal project cost net of taxes.

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Annex 4: Economic and Financial Analysis SummaryNEPAL: Telecommunications Sector Reform Project

1. The project supports three main elements of the government's telecommunications sector refornagenda: (a) strengthening the institutional capacities of agencies (MOIC and NTA) responsible forformulating telecommunication sector policies and regulating telecommunication operations; (b) supportingthe spectrum management unit (FMD) in developing and irmLplementing modem spectrum monitoring andmanagement systems; and (c) supporting private entry in the provision of rural telecommunication servicesin the Eastern Development Region.

NTA's Financial Sustainability

2. NTA's direct costs, and license and royalty revenues for five years have been projected in Table 1.These projections clearly indicate NTA's financial sustainability; with revenues in excess of NTA'srequired operational expenses are transferred to HMG. Further, NTA's financial administration regulationsensure accountability in the use of funds.

Table 1. Financial Projections for NTA (Source: NTA, June 2001)

2001 2002 2003 2004 2005

Total cost of regulator (staff, equipment, 59,869 182,589 110,171 292,885 292,885TA, etc., in_S) ._Regulator revenues 156,743 393,738 886,354 903,451 903,451Increased sector tax revenue due to reform 710,062 1,505,332 2,393,479 3,382,783 4,482,188

(Total sector revenue 1996: 37.9 millionAssume sector revenue growth at 6 percentTorres (1997) estimates the impact of reform ontelecommunications sector tax payments (abovelicences) equal to 13 percent of sector revenue.Conservatively assume 7 percent impact phased inover life of project.) _

Net revenues (regulator revenues only) 96,874 _ 211,149 776,182 610,566 610,566Net revenues (regulator revenues plus tax) 806,936 1,716,481 3,169,661 3,993,349 5,092,754

Source: NTA, June 2001

Policy/Regulatory Component

3. Some of the financial and economic benefits from the policy and regulatory component of theproject include:

(a) In reform experiences around the world, the major impact on government revenues fromtelecommunication reform over the medium-term is not license payments but increased taxpayments due to growing sector revenues and increased general revenues due to the economicactivity supported by a stronger communications sector.

(b) The largest impact of the project on government revenues will accrue as a result of increasedtax revenues from the economy at large, due to faster economic growth fostered by acompetitive telecommunication sector.

(c) Establishing a credible, stable, and transparent telecommunications regulatory framework in

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Nepal will encourage higher levels of private investments in the sector and rapid developmentof telecommunication services in the country.

(d) An improved range and quality of services to customers will be available at reduced prices as aresult of increased competition in the sector.

(e) Improved and efficient use of the radio spectrum will result in minimal interference and betterquality of service; and an accelerated process of obtaining frequency clearances, increasing thescope for public and private wireless service operators.

(f) A policy framework designed to stimulate investment and growth in the telecommunicationssector should have a significant impact on other sectors, e.g., tourism, education, health, andfinancial services, that depend on information and communication infrastructure.

(g) Increased availability of services will increase productivity and income opportunities in ruralareas and improve access to government services.

Rural Access Component

ERR Calculation

4. The methodology adopted is to calculate the change in consumer surplus and expenditures fromexpanded telephone access, minus the economic costs to Nepal of the private sector provider. Given thelimited amount of data available, the approach used relies on a number of assumptions (the most importantof which involves the elasticity of demand for communications, a figure which is varied as a robustnesscheck). The estimated ERR of 32 percent is significantly above the hurdle rate of 10 percent (as arelow-end robustness estimates), as would be predicted from international experience of rural telephoneaccess programs. This high ERR, matching previous return estimates in other countries, provides asignificant margin of confidence in the economic worth of the project.

5. Total call minutes and yearly call revenues are taken from supplier forecasts (to 2005, 2006 to2010 figures are taken as equal to 2005). Total calls are estimated at one third of total call minutes(assuming an average call length of three minutes). Revenues and calls were forecast by the supplier at callcharges of $0.1 per minute for national calls and $0.5 per minute for international calls. The national callcost is in line with rural charges elsewhere, including Chile-although these costs are high compared to localincomes. Recent estimates for the time and travel cost of communication in the absence of a localtelephone in Nepal are available for over 100 sites across the country from No Frills Consulting. Thisallows us to calculate the cost of traveling to a local destination plus the cost of calling from thatdestination as a measure of the price of communication prior to the project. The average (without project)cost of travel is $3.74.

6. International experience suggests that the elasticity of demand for calls at about -0.7 for lessdeveloped countries In order to produce a robust and conservative estimate for the ERR, we estimateconsumer surplus assuming an elasticity of -0.5. The cost of travel, the weighted cost of calling, numberof calls and elasticity estimates are used to calculate the quantity of communications carried out prior to theproject. In turn, these figures were used to calculate the change in consumer surplus and expendituregenerated by the lower cost of communication as a result of the project.

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7. From the proposal of the lowest bid that was received, there is data available on the projectedcapital costs, cost of revenues and expenses (to 2005, 2006 to 2010 figures are taken as equal to 2005).Import tariffs (assumed to cover 50 percent of capital costs and 20 percent of recurrent costs) and royaltypayments were subtracted from these costs to provide an estimate of project costs to the economy. Shadowpricing figures for capital, labor and foreign exchange were: unavailable.

8. The project's ERR is estimated at 32 percent over 10 years, translating to an NPV of $7,915,577

at a 10 percent discount rate. Robustness checks suggest that, even using negative assumptions regardingtelephone usage and benefits, the economic rate of return remains above the 10 percent hurdle level.Assuming a higher elasticity of demand (-0.7), the ERR rises to 46 percent. In order to reach an ERR of10 percent, the average cost of travel without the project must drop from $3.74 to below $2.41, or capitalcosts must rise from $9.1 million to $19.1 million, or call volume must be 34 percent below expectations.

9. The capital subsidy is justified on economic grounds because it is the minimum amount of subsidynecessary to support an investment with a significantly positive ERR. The subsidy supports the capitalcost of the project. The cost-benefit analysis is thus inclusive of the subsidy 'cost'. The reverse-auctionmarket mechanism used to award the capital subsidy ensures that it is the lowest possible to induce aprivate operator to roll out the network. Benefits of the project accrue to rural users oftelecomnunications. Worldwide evidence suggests that even the very poorest use telephony if it isavailable to them. They will therefore be direct beneficiaries of the project, as well as indirect beneficiariesthrough the project's impact on rural employment generation and improved service delivery.

Table 2. Summary of Costs and Benefits ($000s____________ =_________ 2001 2002 2003 2004 2005-2010

Benefits 419 3,091 4,315 5,178 5,178Costs 6,031 5,124 1,900 1,480 1,493

Benefits minus costs (5,612) (2,032) 2,415 3,698 3,685

ERR 1 0.32

1. Information available in No-Frills Consultants Report, October 1998 "Rural Telecommunications in Nepal: ASocioeconomic Impact Study."

2. Saunders, Warford and Wellenius (1983) "Telecommunications and Economic Development" (op.cit.) note thatelasticity of demand is frequently estimated at close to -1.

3. Detailed methodology, numbers and calculations are available in project files.

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Annex 5: Financial Summary

NEPAL: Telecommunications Sector Reform Project

Years Ending

Year I Year 2 Year 3 Year 4 Year S | Year 6 | Year 7Total FinancingRequiredProject CostsInvestment Costs 1.4 7.5 9.6 4.4 1.6Recurrent Costs

Total Project Costs 1.4 7.5 9.6 4.4 1.6 0.0 0.0Total Financing 1.4 7.5 9.6 4.4 1.6 0.0 0.0

FinancingIBRD/IDA 1.0 7.1 9.0 4.0 1.5Government 0.4 0.4 0.6 0.5 0.1

CentralProvincial

Co-financiersUser Fees/BeneficiariesOthersOthersOthersOthersOthers

Total Project Financing 1.4 7.5 9.6 4.5 1.6 0.0 0.0

Main assumptions:Physical contingencies: 5 percent for equipment and 5 percent for consultancy services and professionaldevelopment components.

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Annex 6: Procurement and Disbursement Arrangements

NEPAL: Telecommunications Sector Reform Project

Procurement

Capacity to Implement Procurement Actions

Procurement Capacity of the PCU and PMU at the Ministry of Information and Communications,and Nepal Telecommunications Authority

1. During appraisal, an assessment of the PCU in MOIC, and the PMU in NTA was conducted toevaluate their capacity and readiness to implement the proposed procurement plan for the project and theircompliance with the Loan and Administration Change Initiative. Findings and actions required to be takenare summarized below:

MOIC: Except for a small unit involved in small purchases, MOIC does not have a specialized unit,or experienced staff that are qualified to undertake procurement activities. Further, MOIC does nothave experience in procurement cycle management in donor-funded projects. Taking this into account,it is necessary to hire an experienced consultant for the duration of the project, to guide and assist thePCU within the MOIC in all critical procurement actions including: procurement planning, documentpreparation, bid evaluation, and contract management. ][t is also required that one or two members ofthe PCU be given basic training in donor-funded procurement procedures, and to be assigned to workwith the procurement consultant.

NTA: NTA also lacks a specialized unit, and experienced staff dedicated to procurement activities.Although this agency has limited experience in carrying out three ICB contracts during the past year.It is necessary for the PMU within the NTA to also include a procurement consultant for the first twoyears of the project.

Overall Procurement Risk Assessment

2. Assessment results show that the staff proposed to be assigned to the PCU and PMU have eithernone, or limited skills and experience in undertaking procurement in Bank financed projects. Along withthe lack of internal codes and manuals, and lack of a dedicated procurement unit in the agencies concerned,the assessment rates that the project has an overall high procurement risk.

3. Because of the nature of this operation, almost all contracts will be above post review limits. It isexpected that MOIC will have a major contract for the procurement (ICB) of goods estimated to cost about$4.8 million, and about six contracts for consulting services (including individual experts), for valuesranging from $140,000 to $360,000--all above the post review limits. NTA is expected to procure a single,large-goods contract for the rural access component, at an estimated value of about $10 million; someconsulting services contracts; and about four smaller consulting services contracts (including for individualexperts), for values ranging from $140,000 to $220,000. There will be some contracts for goods, toprocure the computers and vehicles that fall under the post review category. The Bank's standardrequirement of ex-post review of one in five contracts for a high risk project, can be achieved in thisproject. Bank staff will conduct post award reviews during supervision missions, and reviews for theremaining contracts will be carried out through the consultant.

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Procurement Planning

4. Prior to issuing invitations to bid for contracts, the project's proposed procurement plan will befurnished to the Bank for its review and approval, in accordance with the provisions of the Guidelines(para I of Appendix 1). Procurement of all goods and services will be undertaken in accordance withprocurement plan as will have been approved by the Bank and with the provisions (para 1). A procurementplan was discussed with MOIC and NTA during appraisal and was confirmed during negotiations. Theprocurement methods applicable to the various expenditure categories are summarized in Table A.

Procurement

5. As part of project preparation actions: (a) consultants are assisting NTA in preparing the RFA forthe RTS license for the Eastern Development Region. Through this procurement, a private operator forRTS service will be selected, and during project implementation a capital subsidy will be paid to the RTSoperator out of the credit; (b) consultants are presently assisting MOIC to draw-up a policy agenda for thePlanning Section; and (c) consultants assisted in drafting the bidding documents for the spectrummanagement and monitoring system for FMD.

Goods, Equipment, and Services

6. The project supports the procurement of the spectrum management and monitoring equipment;computers (including hardware and software) and office equipment; vehicles under the MOIC component;and capital subsidy payment for the RTS operator under the NTA component.

7. Contracts for the purchase of goods and equipment valued at $200,000 or more will be procuredthrough ICB procedures in accordance with the Bank's Procurement Guidelines (January 1995, revisedJanuary and August 1996, September 1997 and January 1999).

8. Contracts for the purchase of goods and equipment and other supplies valued less than $200,000per contract up to an aggregate amount not to exceed $300,000 equivalent would be procured undercontracts awarded on the basis of national competitive bidding (NCB) procedures in accordance with theprovisions of paras 3.3 and 3.4 of the Guidelines.

9. Contracts for the purchase of goods and equipment and other supplies valued less than $25,000 percontract up to an aggregate amount not to exceed $50,000 equivalent would be procured under contractsawarded on the basis of national shopping procedures in accordance with paras 3.5 and 3.6 of theGuidelines.

10. Standard bidding documents as agreed with the Bank will be used for all ICB and NCB contracts.Award of contracts to supply goods and equipment will be the responsibility of the PCU and PMU, whichwill be duly assisted by the consultants under the project.

Technical Assistance, Studies, and Training

11. TA and consultancy services would be contracted following procedures in accordance with theBank's Guidelines for Selection and Employment of Consultants by World Bank Borrowers (January 1997,revised September 1997 and January 1999). Consultants services estimated to cost more than $200,000per contract must be advertised in the national newspapers and in "Development Business ", beforepreparing the shortlist. The shortlist may be comprised entirely of national consultants for contracts

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estimated to cost less than $200,000. It is envisaged that consultant services packages under the MOICand NTA components will be procured through quality- and cost-based selection. The method of selectionfor consultants services for strengthening of the Planning Section and FMD and training estimated to costless than $100,000 per contract, but $50,000 or more equivalent per contract will be based on thequalification of the consultant.

12. Training services and seminars for MOIC staff in th[e Planning Section, FMD, and NTA will be atselected institutions and universities. The method of procurement will be based on the qualifications of theconsultants, on the basis of a training plan, and cost estimates satisfactory to the Bank. Domestic studytours will be arranged by the concemed implementing agencies. In December 2001, the Bank will begin itsannual review of the training program with the names of candidates, costs estimates, courses, period oftraining, and institutions.

13. Services for tasks that meet the requirements set forth in paragraph 5.1 of the ConsultantGuidelines shall be procured under contracts awarded to individual consultants in accordance with theprovisions of paragraphs 5.1 through 5.3 of the Consultant Guidelines.

Review by the Bank of Procurement Decisions (Table B)

14. All ICB packages, irrespective of value, will be subject to prior review by the Bank. Procurementof goods and equipment under national competitive bidding with an individual contract value of more than$50,000.00 will be subject to prior review.

15. The following will be subject to prior review by the Bank:

(a) terms of reference for all consultancies;

(b) contracts for the employment of consulting fimis estimated to cost more than $50,000;

(c) contracts for the employment of individuals estimated to cost more than $10,000;

(d) training;

(e) amendments to contracts for the employment of consulting firms raising the contract value to$50,000 or above;

(f) assignments of critical nature, as reasonably determined by the Association; and

(g) amendments to contracts for the employment of individual consultants raising the contractvalue to $10,000 or above.

16. The contracts below the prior review threshold for goods and equipment will be subject to postreview as per procedure in The Bank's Guidelines (para 4 of Appendix 1).

17. Contracts for the employment of consulting firms estimated to cost less than $50,000 and contractsfor the employment of individuals estimated to cost less than $10,000 will be subject to post reviewprovided that the TORs have been cleared with the Bank.

Procurement Information

18. Procurement Information will be collected and recorded as follows:

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(a) prompt reporting of contract award information by the PCU of MOIC;

(b) comprehensive semiannual reporting by PCU; revised cost estimates for individual contractsand total costs;

(c) revised timing of procurement actions including: advertising, bidding, contract award, andcompletion tirne for individual contracts;

(d) compliance with aggregate limits on the specified methods of procurement.

(e) completion report by the borrower within three months of the credit closing date.

Procurement methods (Table A)

Table A: Project Costs by Procurement Arrangements(US$ million equivalent)

Procurement MethodExpenditure Category ICB NCB Other 2 N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 18.73 0.29 0.00 0.00 19.022. Goods(18.11) (0.26) (0.00) (0.00) (18.37)

3. Services 0.00 0.00 3.83 0.00 3.83(0.00) (0.00) (3.25) (0.00) (3.25)

4. Training 0.00 0.00 0.59 0.00 0.59(0.00) (0.00) (0.45) (0.00) (0.45)

5. Incremental Operating 0.00 0.00 1.10 0.00 1.10Costs (0.00) (0.00) (0.49) (0.00) (0.49)

Total 18.73 0.29 5.53 0.00 24.55(18.11) (0.26) (4.19) (0.00) (22.56)

" Figures in parenthesis are the amounts to be financed by the IDA credit. All costs include contingencies.

21 Includes civil works and goods to be procured through national shopping, consulting services, services ofcontracted staff of the project management office, training, technical assistance services, and incrementaloperating costs related to: managing the project, and relending project funds to local government units.

The capital subsidy is an upfront payment to a competitively selected operator for the provision of ruralservices. This is according to Article 3.13 as stated in the Guidelines for Procurement under IBRD Loansand IDA Credits, January 1995, revised in January and August 1996, September 1997, and January 1999.

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Table Al: Consultant Selection Arrangements (optional)(US$ million equivalent)

Selection MethodConsultant Services

Expenditure Category QCBS QBS SFB LCS CQ Other N.B.F. Total CostA. Firms 3.37 0.00 0.00 0.00 1.05 0.00 0.00 4.42

(2.86) (0.00) (0.00) (0.00) (0.84) (0.00) (0.00) (3.70)B. Individuals 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

(0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00) (0.00)Total 3.37 0.00 0.00 0.00 1.05 0.00 0.00 4.42

(2.86) (0.00) (0.00) _(0.00) (0.84) (0.00) (0.00) (3.70)

1\ Including contingencies

Note: QCBS = Quality- and Cost-Based SelectionQBS = Quality-based SelectionSFB = Selection under a Fixed BudgetLCS = Least-Cost SelectionCQ = Selection Based on Consultants' QualificationsOther = Selection of individual consultants (per Section V of Consultants Guidelines),Commercial Practices, etc.N.B.F. = Not Bank-financedFigures in parenthesis are the amounts to be financed by the Bank Credit.

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Prior review thresholds (Table B)

Table B: Thresholds for Procurement Methods and Prior Review1

Contract Value ContractSubjecttoThreshold Procurement Pnor Review

Expenditure Category (US$) Method1. Works NA NA NA

2. Goods $200,000 and above ICB all mandatory

over $50,000 and less than NCB all mandatory$200,000

3. Services consulting firms: QCBS + short list all mandatory; issue$200,000 and above advertisement in national

newspaper and UNDB toget expressions of interest;

technical evaluationreceives the Bank's "no

objection" before openingfinancial proposals.

between $100,000 and QCBS + short list$200,000 all mandatory; request

expressions of interest;technical evaluation

receives the Bank's "noobjection" before opening

between $50,000 and CQ + short list financial proposals.$100,000

prior review as per paras1, 2 [other than the second

subparagraph of para 2(a)]and 5 of Appendix I to the

Consultant Guidelines;technical and financial

based on consultants proposal to be reviewed byindividual consultants more qualifications the Bank.

than $10,000

all mandatory4. Training training CQ all mandatory

Total value of contracts subject to prior review: 95 percent

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Overall Procurement Risk Assessment

High

Frequency of procurement supervision missions proposed: One every six months (includes specialprocurement supervision for post-review/audits)

Thresholds generally differ by country and project. Consult OD 11.04 "Review of ProcurementDocumentation" and contact the Regional Procurement Adviser for guidance.

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Disbursement

Allocation of credit proceeds (Table C)

Expenditure Category Amount in US$ Financing Percentage(million)

Goods 100 percent of foreign expenditures,* Component A 4.40 100 percent of local expenditures (ex-factory* Component B 12.30 cost) and 70 percent of local expenditures for

other items procured locallyConsultants Services 85 percent

* Component A 1.22* Component B 1.73

Training 100 percent* Component A 0.27* Component B 0.14

Incremental Operating Costs 80 percent of expenditures in the first and second* Component A 0.45 year; 60 percent of expenditures in the third and

fourth year; 40 percent thereafter

Unallocated 2.05TOTAL 22.56

Use of statements of expenditures (SOEs):

19. At least initially, withdrawals from the credit account will be made using traditional disbursementprocedures which include full documentation of expenses and SOEs. SOEs will be used for the followingexpenditures: (a) for goods under contracts costing less than $50,000 equivalent each, (b) for consultants'services contracts costing less than $50,000 in case of firms, and less than $10,000 or equivalent in case ofindividuals, and (c) for all incremental operating costs. A decision on moving the project to PMR-baseddisbursements may be made once the capacity of the implementing agencies to meet all PMR requirementsis fully established.

Special account:20. A special account in US dollars will be established, on terms and conditions satisfactory to IDA.The authorized allocation will be initially limited to $500,000 until the aggregate amount of withdrawalsfrom the credit account, plus the total amount of all outstanding special commitments entered into by IDAis equal to, or exceeds the equivalent of SDR 2,500,000. The authorized allocation may then be increasedto $1,000,000. If the project moves to PMR-based disbursements, the authorized allocation may go up to20 percent of the credit amount.

21. The IDA special account will be managed under the joint signature of the project coordinator andthe senior accounts officer in the PCU. As per government requirements, the special account will bemaintained at the Kathmandu Banking Office of the Nepal Rastra Bank (Central Bank). The project willfollow the prescribed accounting procedures as per the HMG's financial administration rules. The PCUwill ensure that the bank/cash books are reconciled with bank statements regularly every month. The PCUwill submit replenishment applications for the special account on a monthly basis, or when 25 percent ofthe authorized allocation has been used, whichever occurs first. Replenishment applications will be

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accompanied by reconciled statements from the bank in which the account is maintained, showing alltransactions in the special account. Supporting documentation will be maintained by the PCU for at leastone fiscal year after the year in which the last disbursement from the credit took place, and will be availableto be reviewed by IDA staff, and independent auditors.

22. The MOF will designate the PCU project coordinator (jointly with the senior accounts officer) andthe chairman NTA (with the senior accounts officer of NTA.) as the signatories for withdrawing funds fromthe credit for the implementation of respective components.

Financial Management

Project Budgeting

23. Project planning and budgeting will follow HMG's planning and budgeting system. The PCU andthe PMU will be responsible for preparation of their respective budget plans as per their agreed workprograms. The PMU will send its budget request to the PClJ, and the PCU will prepare a consolidatedbudget request for MOIC and NTA components which will be discussed and submitted to the NationalPlanning Commission and MOF. MOF will assign separate budget codes in the Red Book for MOIC andNTA components of the project, to facilitate budgeting and accounting of expenditures.

Fund Flow Arrangements

24. Large payments including the RTS capital subsidy, exceeding the special account threshold, will bemade through direct payments request to IDA. Other payments within the special account threshold will bemade directly through a special account managed by the PCU. The PMU will submit a request to the PCUwith supporting documents requesting payments to be made from the special account. Local expendituressuch as, local training and operating costs, will be prefinanced by MOIC or NTA's own resources and laterwill be reimbursed from IDA. Record of special accounts transactions will be maintained at the PCU.

25. The RTS capital subsidy will be paid according to the licensing terms agreed at the time of theaward. It is expected that this will be in two equal payments, with the first payment made on initiatingservice provision to the first 50 percent of the 534 VDCs w:ithin the first year, and the second paymentmade on initiating service provision to the remaining unserved VDCs within the second year. Fordisbursement purposes, these will be direct payment requests, submitted by the PCU according to thelicense/contract terms.

Financial Management Staffing

26. HMG has sanctioned a senior accounts officer position for the PCU at MOIC. The FCGO willtransfer to the PCU a competent and qualified senior accounts officer with adequate experience in handlingIDA funded projects. In addition MOIC has already assigned an accounts officer to support the PCU asrequired by IDA. NTA has assigned an accounts officer to the PMU to coordinate with the PCU on projectaccounts. NTA will need to build its institutional capacity in the medium-term for both entity and projectaccounting, and will contract with a local accounting firmn to provide financial advisory services until suchtime as it can recruit an in-house accounting professional. These arrangements will ensure that from thestart of the project, there is sufficient financial management. capacity.

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Project Financial Accounting, Reporting, and Internal Controls

27. Project expenditures will follow the government cash-based accounting system. The PCU willsupplement manual records required to be kept under government regulations with simple spreadsheetbased subsidiary records, regularly reconciled to the official accounts, to facilitate the timely compilation ofadditional information required for disbursements and PMR preparation.

28. The PCU will produce from the outset the following PMR components: Sources and Uses ofFunds (Report IA) and Procurement Management Report (Report 3), in formats that were agreed upon atnegotiations. Over an 18-month period, other PMR components (in formats to be agreed upon) will bedeveloped. After 18 months of the project's start, the desirability and feasibility of switching toPMR-based disbursement will be assessed. To match the government planning and reporting cycle, thePMRs will be produced trimesterly and submitted within 45 days from the end of the preceding trimester.

29. The PCU and PMU will adhere to the general financial internal controls established by thegovernment and NTA respectively. Activities of the PCU will be subject to internal audit from the FCGO.The creation of an internal audit section in NTA is envisaged in its bylaws. This has not yet beenestablished but NTA will arrange to recruit a qualified local audit firm to conduct an internal audit of theproject accounts. Internal audit reports will be made available to IDA on request.

External Audit

30. The following audit requirements will be tracked through ARCS:

* MOIC: annual project financial statements, SOE schedule, and special account statement willbe audited by the Office of the Auditor General of Nepal, which is considered acceptable byIDA for this purpose, and submitted to IDA within six months after the end of the fiscal year.A draft TOR acceptable to the IDA was discussed with the Auditor General.

* NTA: entity financial statements will be audited by the Auditor General and submitted to IDAwithin six months after the end of the fiscal year.

31. In order to promote timely audits, it has been agreed that the unaudited financial statements will beprepared within three months after the end of the fiscal year for submission to the auditors, and copied toIDA.

Financial Management Action Plan

32. Action plans to strengthen the financial management capacity of the PCU and NTA were agreedbetween HMG and IDA and are summarized in the following tables:

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Table D.: Financial Management Action Plan for MOIC

I Actions DeadlineActions Required for Adequate Financial Management During Project Pre aration

I. MOIC to complete the transfer of the Senior Accounts Officer March 31 , 2002from the FCGO to the PCU. The other accounts staff required forthe PCU have already been assigned.

Actions Required for Enhancing Financial Management During Project Im lementation1. PCU to implement project financial management April 30, 2002

manual and supplementary (computerized) accounting records tosupport PMR and withdrawal application preparation, withassistance from consultants.

2. Assess financial management system and ]PMRs for readiness and January 31, 2003capacity to migrate to PMR-based disbursements.

Table E.: Financial Management Action Plan for NTA

l Actions DeadlineActions Required for Adequate Financial Management During Project Preparation

1. NTA to engage professional accounting firm to provide March 31, 2002outsourced financial manager service unti [ an in house financialmanager can be recruited

2. NTA will coordinate with MOIC to initiate HMG's approval of the March 31, 2002amendment to the Telecommunications Regulations 1997 toauthorize NTA to approve its Financial Administration bylaws

Actions Required for Enhancing Financial Management During Project Implementation1. NTA to carry out intemal audit as required in its bylaws by March 31, 2002

recruiting a qualified local audit firm (until NTA decides in themedium term to create a separate internal audit section).

2. NTA to complete a needs assessment and plan to upgrade its April 30, 2002institutional financial management capabilities, so that it canprepare its institutional accounts in accordance with internationalaccounting standards.

3. NTA to complete implementation of its institutional financial December 31, 2002management capacity strengthening plan

4. NTA to assess the need for the recruitment of a suitably qualified December 31, 2002in house finance manager and to take appropriate action.

5. NTA and IDA to review/assess the need to create a separate during the midterm reviewIntemal Audit Section in NTA as per the provisions of itsFinancial Administration bylaws. A decision to either establishthe Internal Audit Section or to continue to outsource the internalaudit function to a local auditing fim_ will be made.

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Annex 7: Project Processing ScheduleNEPAL: Telecommunications Sector Reform Project

Project Schedule Planned ActualTime taken to prepare the project (months) 24 42

First Bank mission (identification) 04/12/1998 04/12/1998Appraisal mission departure 04/09/2001 04/12/2001Negotiations 10/03/2001 10/03/2001Planned Date of Effectiveness 03/01/2002 03/01/2002

Prepared by:

The Ministry of Information and Communications and the Nepal Teleconmuunications Authority

Preparation assistance:

PHRD grant and consultant trust funds

Bank staff who worked on the project included:

Name SpecialityRitin Singh Task Team Leader, Senior Telecommunications SpecialistKashmira Daruwalla Procurement AnalystCharles Kenny Infrastructure EconomistIvonna Kratynski Senior Financial Management SpecialistGareth Locksley Senior Telecommunications SpecialistTenzin Dolma Norbu Young Professional, Telecommunications SpecialistClaudia Pardinas Ocana Senior CounselBigyan Pradhan Senior Financial Management SpecialistRajesh Pradhan Lead Financial AnalystAndrea Ruiz-Esparza Copyeditor, Program AssistantDavid Satola Senior Counsel, Peer ReviewerA. Shanmugarajah ConsultantNarayan D. Sharma Procurement SpecialistPeter L. Smith Lead Telecommunications Specialist, Peer Reviewer

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Annex 8: Documents in the Project File*

NEPAL: Telecommunications Sector Reform Project

A. Project Implementation Plan

1. Borrower's Project Implementation Plan

B. Bank Staff Assessments

1. Financial Management System Capacity Assessment2. Procurement Capacity Assessment

C. Other

1. Intelecon Report on Rural Telecommunications in Nepal2. No Frills Consulting Report on Socio-Economic Analysis (on rural telecommunications)3. Application for Rural Telecommunications Service License in Eastern Development Region (December

26, 2000)*Including electronic files

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Annex 9: Statement of Loans and Credits

NEPAL: Telecommunications Sector Reform Project

Difference between expectedand actual

Onginal Amount in US$ Millions disbursements

Project ID FY Purpose IBRD IDA Cancel. Undisb. Orig Frm Rev'dP045052 2000 ROAD MAINTENANCE AND DEVELOPMENT 0.00 54.50 0.00 43.99 29.19 0.22

P040612 1999 BASIC&PRIM. ED. II 0.00 12.50 0.00 9.34 5.82 0.00

P045053 1999 RURAL INFRA LIL 0.00 5.00 0.00 3.62 2.27 0.00

P048026 1998 AGRI RES & EXTENSION 0.00 24.30 5.32 6.44 10.5B -1.91

P010530 1998 IRRIG SECTOR DEVT 0.00 79.77 9.01 30.56 25.84 -1.90

P010509 1998 MULTIMODALTRANSIT 0.00 23.50 0.00 5.37 5.59 0.00

P010516 1997 RURAL WS& SANITATION 0.00 18.30 1.55 4.91 6.97 2.09

P010454 1994 HIGHER EDUCATION 0.00 20.00 1.66 2.43 5.21 1.20

Total: 0.00 237.87 16.54 106.67 91.46 -0.30

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NEPALSTATEMENT OF IFC's

Held and Disbursed PortfolioMay-2001

In Millions US Dollars

Committed DisbursedIFC IFC

FY Approval Company Loan Equity Quasi Partic Loan Equity Quasi Partic1996 BhoteKoshi 21.00 3.00 0.00 36.00 18.49 2.60 0.00 31.681994 Himal Power 28.00 0.00 4.50 0.00 28.00 0.00 4.05 0.001998 Jomsom Resort 4.00 0.00 0.00 0.00 4.00 0.00 0.00 0.001975/93 Soaltee Hotel 0.00 0.02 0.00 0.00 0.00 0.02 0.00 0.00

Total Portfolio: 53.00 3.02 4.50 36.00 50.49 2.62 4.05 31.68

Approvals Pending Commitment

FY Approval Company Loan Equity Quasi Partic2001 ILFC - Nepal 0.00 0.00 0.31 0.00

Total Pending Commitment: 0.00 0.00 0.31 0.00

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Annex 10: Country at a Glance

NEPAL: Telecommunications Sector Reform Project

POVERTY and SOCIAL South Low-Nepal Asia Income OIWPntl damond

2000Popuhation. mid-year (nmilions) 23.9 1,355 Z459 Life expectancyGNI per capita (Alas meod. USS) 230 460 420GNI (Atlas melho ,USSbillions) 5.4 617 1,030

Ave ra nnumi growth 1994-00

Populabon (%) 2.4 1.9 1.9Labor foro6 (%) 2.4 2.4 2.4 GNI GrowG

per 1S e p T

Povery (% ofpulationbelowrnatlapoveay/ine) 42 -Urban population (% of total popAat/on) 12 28 32UtLexpectncy at brh (yes) 58 63 59Infant mortality (per 1,000 live births) 75 74 77Child malnuXton (X of diiren under 5) 47 47 Access to improved water sourceAccess to an improved water source (% of population) 81 87 76Illiteracy (% of population age 15+) 59 45 38Gross pnmary enroliment (% of school-age population) 113 100 98 Nepal -- - Lowvncomegxoup

Male 129 110 102Female 96 90 86 _

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

19f0 1990 1999 2000

GOP (US$ billonis) 1.9 3.8 5.0 5.5 Econc rados

Gross dometiclnvbnerntGDP 18.3 18.1 25.1 25.1Exports ot goods and setviceVGDP 1 1.5 10.5 23.9 23.5 TradeGross domesfe savings/GOP 11.1 7.9 13.2 9.5Gross nationai savinp/GDP 13.2 10.5 20.4 18.9 rCurrent aowunt baknoe/GDP -5.1 -82 0.5 1.3 Domee ZrInterest paymertGDP 0.1 0.7 0.6 0.5TotW debt/GDP 10.5 45.2 59.0 51.4 savingsTotW debt sevic/expols 2.9 14.8 6.4 4.9Present value of debVGDP 32.8Present value of debVexports 99.4

Irdebtedness190.90 1990-00 1999 2000 2000-04

(average a-unw grmvth)GOP 4.6 4.9 4.4 6.4 6.0Nea -LoinmegWGDP per caprta 1.9 2.4 2.1 4 3.6 Nepa/ - Lowincome groupExports ot goods and services 3.9 13.9 4.9 22.9 8.0

STRUCTURE of the ECONOMY

1980 1990 1999 2000 Growth of Invesutent and GOP (%)(% of GOP)

20~AgricAuture 61.8 51.6 40.1 39.1Industry I .9 16.2 21.2 21.7 !0

Manufactunng 4.3 6.1 9.2 9.7 o - -

Services 26.3 32.1 38.7 39.2 9 + 9s 97 98- 99 00

Private consumption 82.2 83.5 76.3 80.3 201

General government consumption 6.7 8.7 10.7 10.2 GDI -0-GDPImports of goods and services 18.7 21.1 36.0 39.1 !

1980-90 1990-00 1999 2000 Growth of exports and Imports(%)(average annual growthJ)Agricuture 4.0 2.5 2.7 5.0 so IIndustry 8.7 7.2 6.0 8.7 -o.

Manutacturing 93 9.2 5.3 13.0SeMces 39 7.1 5.5 6.6 20

Private consumption 4.5 4.1 4.0 6.5 o, -9oGeneral govemment consumption 7 2 5.9 9.2 3-2 201Gross domestic investment 650 6.2 -15.4 9.8 Exors SImp?ortsImports of goods and services 5.8 9.7 -8.2 22.0

Note: 2000 data are preliminary estimates-

The diamonds show four key indicators in the country (in bold) compared with its income-group average. tf data are missing, the diamond wiltbe incomplete.

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Nepal

PRICES and GOVERNMENT FINANCE

Domestic pns 1t980 1990 1999 2000 Inflation(%)(% change) 15Consumerprices 9.8 9.7 11.3 3.3 1D,_ _ _ __ _Imptidt GDP deflator 7.6 10.7 8.9 4.2 . & NGovernment finance t (% of GOP, indudes curent grants) o ,Current revenue 9.0 115 12.2 95 95 97 99 99 00Current bidget baLance -1.6 2 -0.3 4-GDp defiator _CPOverail surplusideficit -10.0 -5.2 -4.8

TRADE

(US$ millions) 198 199 1999 2000 Export and Import levels (USS mill)Total exports (fob) ,, 181 525 748 2.000

Food 81 144 142Pulses 22 64 80 1,500Manufactures 12 156 320

Totai imports (ci) 641 1,389 1,692 1,0 * Food 81 64 169 soo- li* * iFuel and energy , 53 129 132Capital goods 132 263 293 o

Export price index (1995-100) 694 95 9 97 98 99 WImport price index (1995-100) 88 a Expons * Ir4o^rtsTerms of trade (1995-100) 97

BALANCE of PAYMENTS

1980 1990 1999 2000 Current account balance to GDP (%)(US$ millions)IExports of goods and services 224 381 1,257 1,459 12 Imports of goods and services 365 774 1,595 1,902 __, ,_ _ _ , , n,Resource balance -141 -393 -337 -443 s 99 °°

~2Net income 13 33 26 20Net current transfers 29 61 337 497 4.

Current account balance -100 -299 26 74 5.

Financing items (net) 104 391 119 135 5.Changes in net reserves -5 -93 -145 -209 .10 -

memo,o:Reserves induding gold (USS millions) , 354 1,142 1,376Conversion rate (DEC, locaW/USS) 12.0 28.5 68.0 69.1

EXTERNAL DEBT and RESOURCE FLOWS

1980 1990 1999 2000(USS rrillions) Composition of 2000 debt (USS mill.)Total debt outstanding and disbursed 205 1,640 2,970 2,823

IBRD 0 0 0 0 F 13 G:25IDA 76 668 1,147 1,134 £ 313

Total debt service 8 70 107 100IBRD 0 0 0 0IDA 0 7 22 24 5.1,134

Composibon of net resource flowsOfficial grants 79 143 146 3Official creditors 48 153 89 96Private creditors 0 -14 -13 7 D 1,325Foreign direct investment 0 6 9 3Portfolio equity 0 0 0 0

World Bank programCommitments 60 51 85 0 A- IBRD E - slateralDisbursements 25 68 48 50 6 - IDA D -Other multtlateral F - PnvatePrincipal repayments 0 2 14 16 c - IMF G - Short-temNet flows 25 65 34 34Interest payments 0 5 8 8Net transfers 25 61 25 26

The Worid Bank Group: hftp://www.woridbank.org/dat 9/Y01

- 59 -

MAP SECTION

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DISTRICT BOUNDARIES

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AUGUST 1994