implementation completion report federal republic … filedocument of the world bank for official...

Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No. 16623

IMPLEMENTATION COMPLETION REPORT

FEDERAL REPUBLIC OF NIGERIA

TELECOMMUNICATIONS PROJECTLOAN 3236 - UNI

June 11, 1997

West Central Africa

Africa Region

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

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Currency Equivalent

Currency Unit Nigerian Naira(As of December 1989) (As of October 1995)

US$1= 7.90 82.0

Fiscal Year of the Borrower

January 1 - December 31

Abbreviations and Acronyms

NITEL = Nigerian Telecommunications Plc.FMFED = Federal Ministry of Finance and Economic

Development of NigeriaMOC = Ministry of CommunicationsNCC = National Communications CommissionPPF = Project Preparation FacilitySAR = Staff Appraisal ReportDEL = Direct Exchange LineIRR = Internal Rate of ReturnNFA = Net Fixed AssetsMIS = Management Information SystemFGN = Federal Government of the Republic of

Nigeria

Vice President Jean-Louis SARBIBDirector Yaw ANSUDivision Chief/Manaaer Surjit SINGHStaff Member Paul BERMINGHAM

FOR OFFICIAL USE ONLY

TABLE OF CONTENTSPage No.

Preface ..........................................

Evaluation Summary .......................................... i

Part I Project Implementation Assessment

A. Statement and Evaluation of Objectives . .........................1B. Achievement of Objectives ............................... 2C. Major Factors Affecting the Project ............................... 8D. Project Sustainability ............................... 8E. Bank Performance ............................... 8F. Borrower Performance ................................ 9G. Assessment of Outcome .............................. 9H. Future Operation ............................ .. 91. Key Lessons Learned ............................... 10

Part II: Statistical Tables

Table 1: Summary of Assessment .12Table 2: Related Bank Loan .13Table 3: Project Timetable .13Table 4: Loan Disbursements: Cumulative Estimated.

and Actual .14Table 5: Key Indicators for Project Implementation .15Table 6: Key Indicators for Project Operations .16Table 7: Studies Included in Project .17Table 8A: Project Costs .17Table 8B: Project Financing ............................ 18Table 9: Economic Costs and Benefis .18Table 10: Status of Legal Covenants .19-20Table 1 1: Compliance with Operational Manual Statements .21Table 12: Bank Resources: Staff Inputs .21Table 13: Bank Resources: Missions .22

Appendices:

A: Mission's Aide Memoire ........................... 23-37B: Borrower Contribution to the ICR ............. .............. 38C: M ap ........................... 39-40

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.

Federal Republic of NigeriaTelecommunications Proiect

Loan 3236 - UNI

Implementation Completion Report

Preface

1. This Report covers the Telecommunications Project in Nigeria, supported by Loan3236-UNI. The Loan for US$ 225 million was presented to the Board on June 26, 1990,signed on December 10, 1990 and became effective on June 10, 1991. The loan wasclosed on December 31, 1995, the expected closing date.

2. This report has been prepared by Bank staff based on information available in theproject files and information supplied by Nigerian Telecommunications Plc. (NITEL)

3. NITEL has not prepared any reports as yet to give its perspective of the design,implementation and development impact of the project, nor provided comments on thedraft ICR.

i

NigeriaTelecommunications Project

Loan 3236 - UNI


Evaluation Summary

Back2round

1. Public telecommunications services in Nigeria are provided by the NigerianTelecommunications Plc. (NITEL), a fully Government-owned corporation under the overallguidance of the Ministry of Communications (MOC) of the Federal Republic of Nigeria (FGN).

2. This was the first Loan for the Telecommunications sector in Nigeria.

Project Obiectives

3. The main objectives of the project were to support and strengthen the institutional andpolicy framework and to facilitate the commercialization of NITEL; improve the access to andquality of telecommunications services; and improve NITEL's financial performance.

4. The project included the following:

(a) an institutional development program including technical assistance to: develop along-term network development strategy and realistic investment program; undertaketechnical audit of the Lagos network; review NITEL's accounting and financial systemsand procedures as well as its billing and collection systems; implement integratedManagement Information Systems; review tariff levels and structure; revalue fixedassets; improve project management, financial management, material management, andnetwork planning; and human resource development for NITEL; and

(b) a physical development program including: rehabilitation of existing facilities;supply, installation and commissioning of new exchanges and matching external lineplant in the Lagos metropolitan area and major cities (200,000 new lines); rehabilitationof the Lanlate satellite earth station; expansion of long distance transmission links;establishment of the teleprinter and telex module repair center; construction of buildings;and provision of telephone instruments, vehicles and ancillary equipment.

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5. In July 1987, a PPF advance of about US$ 800,000 was provided to NITEL for 50 man-months of consultancy for the preparation and design of the project. Most of the institutionaldevelopment program was established as a result of the recommendations of the consultants.

Experience and Results

6. Project implementation suffered continuing delays which ultimately resulted incancellation of US$ 198 million (88 percent of loan amount). Signing of the loan documents wasdelayed by more than three months because authorization by the Federal Ministry of Finance andEconomic Development of Nigeria (FMFED) and NITEL was not granted on time. Loaneffectiveness was delayed by more than nine months to June 1991 because the employment offinancial consultants, one of the conditions of effectiveness, was delayed until that date.

7. Although contract awards worth US$ 46 million were cleared by the Bank by November1991, only two contracts worth US$ 15.5 million had been signed by February 1993.Throughout the project implementation period little progress was made with the criticallyimportant institutional development component of the project. The consultancy to improvefinancial management and accounting systems was awarded after considerable delays and theassignment was completed in 1994, but realized very little real change in the target areas. Theconsultancy for technical services and project management was signed after delays of almost twoyears. This assignment played a critical role in achieving the little progress that was made.

8. Due to the continuous delays, new technology superseded the need for one projectcomponent resulting in the cancellation of US$ 30 million in 1994. As of September 1994, theproject was about two and a half years behind schedule and only US$ 11.7 million had beendisbursed (of which US$10 million was for the special account). In addition to procurementdelays, NITEL breached several of the provisions of the Loan Agreement. By November 1994 ithad become evident that the project development objectives would not be achieved to anysatisfactory standard.

9. Following a detailed revision of the status of the project and a series of communicationswith both the FGN and NITEL, the Bank by telex dated March 16, 1995 canceled a further US$168 million from the Loan amount. Only US$ 27 million equivalent was retained in the Loan tocover disbursement related to on-going contracts.

Proiect Costs

10. The Bank financed portion of the overall project was expected to be US$ 225 millionequivalent. Due to the cancellation of US$ 198 million equivalent, the estimated Bank financedproject cost fell to around US$ 27 million.

Proiect Results

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11. Most of the objectives of the project were not achieved. Very little of the physicalcomponent of the project was achieved because of delays. It is expected that switchingequipment for 30,000 lines will be rehabilitated and external line plant for an additional 39,000lines will be installed. This compares with SAR targets of 265,000 additional lines to beconnected including switching, cabling and external line plant. Due to the failure to implementthe institutional development components, none of the development objectives were achieved.

12. NITEL 's financial performance has improved since 1992, but major problems remain.As a result of the Government converting N5.5 billion of debt into equity, NITEL has becomesolvent. Profits have also been recorded since 1992, mainly due to the large tariff increases,lower interest charges (as a consequence of debt conversion) and the use of the official exchangerate (which is less than the market rate) for converting foreign currency liabilities. With theexception of the level of accounts receivable, NITEL complied with the key financialperformance covenants since 1992. However the overall financial relationship between NITELand the Government remains unsatisfactory. The Government has been in serious arrears toNITEL for telecommunications services throughout the period of the project (one of the maindebtors to NITEL). The on-lending arrangements from the Government to NITEL in respect ofdonor financing have broken down and like other state-owned enterprises (SOEs) with foreignexchange earnings, NITEL's substantial cash balances were (and still are) required to bedeposited to the Central Bank or in low interest Government bonds. Even though the auditedstatements of NITEL have seldom been qualified, the auditors have not been able to confirm thebalances of deposits or arrears or loan amounts in these cases.

Institutional Performance

13. Progress on the institutional development program has been unsatisfactory on mostcounts. The key objective of commercializing NITEL has failed. Although there were somesignals of commitment to this end, when NITEL was converted to a public limited company andthe Government converted outstanding debt to equity, in reality the Government remainedinvolved in all significant elements of NITEL's operations. The Government's approval wasrequired for the award of all contracts over US$ 1.5 million, as well as changes to the tariffs andsalary levels. More importantly, the serious lack of independence from the Government resultedin serious delays in contract approvals and disbursements. The Government suspended theentire management of NITEL and replaced it with a sole military administrator. This lack ofindependence seriously hampered the objective of commercialization and NlTEL's ability toimplement the project.

14. The two-year delay in the recruitment of project management consultants combined withthe tragic death of one of the members significantly limited the contribution of the consultants.Consequently, NITEL with its restricted institutional capacity was unable to fulfill several of therequired institutional objectives. For example, NITEL was unable to develop a realistic longterm network development and investment program; to prepare a human resource developmentprogram; and to prepare satisfactory bid documents. Although consultants for financialmanagement and accounting services were contracted on time, little was achieved in terms of

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establishing a satisfactory accounting and management information system. Billing andcollection systems continue to be ineffectual.

Manpower and Training

15. The objectives of the project as outlined in the management contract between NITEL andthe Government were: (i) to develop and implement improved personnel management policiesand a staffing plan aimed at streamlining the work force to match job requirements withappropriate skills and eliminate overstaffing; and (ii) to promote operating efficiency. The firstobjective was not fulfilled. No satisfactory staffing policies were put in place, NITEL wasunable to prepare a satisfactory needs list for overseas fellowship training despite intensive helpfrom the Bank's resident mission.

Proiect Sustainability and Outcome

16. Telecommunications sector development strategies have changed considerably since thetime this project was prepared. At the time of the project preparation, the key elements of sectorreform centered around commercialization and efficient institutional arrangements. The capitalcosts of technology did not at that time warrant developing countries to deviate from amonopolistic structure for the provision of basic services. However, with the dramatic change intechnologies and prices, the core of sector reform now focuses on competitiveness and privatesector participation. Unless the Government institutes real changes in its policies to includemore service providers and private sector participation, the objectives of the project cannot beachieved or sustained.

17. The overall project outcome is highly unsatisfactory. NITEL did not have the capacity orappropriate institutional environment to implement such a large and complex project, eventhough it had sufficient technical staff to handle the technical aspects the project. This is evidentfrom the constant delays in preparation of bid documents involving several revisions in eachinstance; inability to prepare relatively simple documents such as a needs list for overseasscholarship; inability to prepare realistic business plans even for the following fiscal year. TheProject Management consultancy was included in the project to overcome this constraint and todeveloped NITEL's institutional capacity. But by the time the consultants were contracted andadequately staffed, the project implementation was already delayed by two and a half years.Also, due to the poor management of the financial and accounting systems, consultants achievedvery little in terms of institutional capacity development. On a broader context, the relationshipbetween NITEL and the Government was never at arms length as was originally intended andprescribed in the management contract. Severe delays in approvals for procurement and at timescancellation of contracts resulted in the ultimate cancellation of most of the Loan. On the whole,there was a lack of due diligence on the part of both the Government and NITEL and a breach ofseveral provisions of the Loan Agreement.

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Summary of Findings and Lessons Learned

18. The main findings and lessons learned from the project are summarized below:

(a) Institutional development of monopolies is ineffective in Bank-financed projects inthe absence of Government commitment, or suitable readiness, to an appropriate policyand regulatory framework and operating environment of the enterprise in the concernedsector;

(b) Autonomy is not an automatic result of corporatization;

(c) The Bank should consider portfolio remedies when systematic problems occur withproject implementation. Major project reviews should be made about two years of loaneffectiveness in countries where implementation problems are common.

(d) Consultants can play a critical role in project implementation.

1

Federal Republic of Nigeria

Telecommunications Project

Loan 3236 - UNI


PART I: PROJECT IMPLEMENTATION ASSESSMENT

A. Statement and Evaluation of Obiectives

1. Project Objectives: The overall project objective as stated in the Staff Appraisal Reportand presented to the Board on May 16, 1990 was to support the Government's developmentstrategy in the sector. The specific objectives were as follows:

(a) to support strengthening of the institutional framework and facilitate fullcommercialization of NITEL;

(b) to improve the quality of service and system efficiency through better utilization ofexisting facilities, reducing faults and increasing call completion rates;

(c) to improve NITEL's financial performance so as to reduce, and finally eliminategovernment subsidies and enable NITEL to be a net contributor to the Treasury; and

(d) to expand available facilities so as to satisfy the most urgent demand.

2. Project Setting: A major objective of the Federal Government of Nigeria (FGN) duringthe mid-eighties was to commercialize the operations of selected public sector enterprises, thenational telecommunications operator being one of them. In 1984, the two maintelecommunications service providers at the time, the Posts and Telecommunications Departmentof the Government and Nigeria External Telecommunications Limited were merged to formNITEL, a single telecommunications service provider. The responsibility for the postal servicesremained with the Ministry. In 1985 NITEL was incorporated as a 100 percent Government-owned joint stock company under the Nigerian Company Law. The Bank, in support of theunderlying agenda for reform, identified a project which would support early stages ofliberalization of the telecommunications sector in conjunction with funding for desperatelyneeded expansion of telecommunications facilities throughout Nigeria. In a later developmentthe Technical Committee for Privatization and Commercialization (TCPC) was developed (underthe Presidency) to deal with the commercialization and privatization of selected publicenterprises, including NITEL. The TCPC was converted in 1994 into the Bureau of Public

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Enterprise (BPE). The Nigerian Communication Commission, the principal body for regulatingthe telecommunications sector was established in 1993 as the next step toward liberalizing thesector.

3. Evaluation of Objectives: The project objectives were reasonable in the context of thethen prevailing accepted views on telecommunication sector reform. In most countries at thetime they would have been considered appropriate and feasible for the following reasons:

(a) In the mid-eighties the predominant telecommunications reform strategy was toprivatize the operator. A prerequisite was the creation of a joint stock company.The first objective, centering around commercialization and efficient institutionalarrangements, was therefore benchmark practice at the time. Even so, this was amajor step forward for Nigeria. Most developing countries, especially in Africa,were not ready to take the first step toward privatization, and investors were notready to buy into a government-owned telecommunications regime. Also, thecapital costs of technology did not at that time warrant developing countries todeviate from a monopolistic structure for the provision of basic services.

(b) The second objective was appropriate but not well supported by the projectcomponents. Consultant services focused more on planning and staffdevelopment and less on systems and procedures. Late in the project, the Bankdid, however, commission a study to review NITEL's operations. The findings ofthe study would have been used to address sustainability issues if the project hadproceeded.

(c) Improving NITEL's financial position was a key and appropriate component. Theobjective was to make NITEL more responsible for its profitability, assist insetting appropriate tariffs, and strengthening financial management.

(d) The investment component of the project was crucial for building Nigeria'stelecommunications facilities. It was fairly straightforward to implement andwould have provided a major improvement in telecommunications services,which was vital for economic growth. A project of much larger scope (US$3.3billion equivalent) was initially proposed as part of the Government's Fifth Five-Year Plan (1986-90). With the Bank's involvement, this investment plan wasreduced to about US$ 680 million equivalent and the program period was rolledover to 1990-1994. NITEL did not have the project management capability toimplement a project of a larger size, even though it had ample technical staff of ahigh skill level who could readily handle the technical aspects of the project.

B. Achievement of Obiectives

4. Project Components. The project sought to achieve its objectives through the followingcomponents which were included in the Loan Agreement signed between NITEL and the Bank:

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Part A: Institutional Development

(a) Preparation of a long term network development strategy and a medium terminvestment program for NITEL; carrying out of a technical audit of NITEL'sLagos network; and carrying out of a review of NITEL's accounting, financial,billing and collection policies, procedures and systems;

(b) Establishment of a Project Management Team;

(c) Design and implementation of financial management systems and procedures forNITEL including an accrual accounting system and improvements to NITEL'sbudgeting, forecasting, cost control and other operating procedures;

(d) Improving NITEL's network planning;

(e) Establishment of comprehensive and integrated materials and storagemanagement control systems and procedures by NITEL;

(f) Establishment of a Management Information System for monitoring technical andfinancial performance at different levels of NITEL's management;

(g) Revaluation of NITEL's fixed assets;

(h) Computerization of NITEL's subscriber records; and

(i) Provision of training fellowships to NITEL staff.

Part B: Rehabilitation and Expansion

(a) Rehabilitation of existing switching, transmission, power and air-conditioningequipment, including the acquisition of spare parts and test equipment;

(b) Installation of about (i) 143,000 lines of switching equipment in the Lagosmetropolitan area; and (ii) 122,000 lines of switching equipment in the othermajor cities;

(c) Installation of external line plant to match lines of switching equipment includedin (b) above;

(d) Installation of digital microwave radio systems in high priority areas;

(e) Establishment of a teleprinter and telex module repair center;

(f) rehabilitation and upgrading of Lanlate satellite earth station;

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(g) Acquisition of about 100,000 telephone instruments and about 8,000 pay phones;

(h) Acquisition of about 300 motor vehicles for planning, construction andmaintenance works;

(i) Construction of buildings; and

(j) Acquisition of ancillary equipment, including software for the ManagementInformation System.

Part C: Ministry of Communication

(a) Strengthening the capability of the Ministry of Communications to regulate thetelecommunications sector and monitor performance in the Sector.

5. Loan Effectiveness and Start-up: To ensure timely implementation of the project,conditions of effectiveness included: (i) appointment of financial management consultants; (ii)furnish the Bank with audited financial statements for 1987; and (iii) issuance of letters ofinvitation for project management consultants. Conditions (ii) and (iii) were fulfilled by the endof 1990. However, the appointment of financial management consultants was delayed by almosta year. The loan became effective on June 10, 1991.

6. Chronology of Project Implementation: Within one year of Board approval, the projectappeared to be going well. By November 1991, contract awards worth US$46 million equivalenthad been agreed to by the Bank. Thereafter there was a change in NITEL's top management andvery little progress was made in project implementation for three years. By early 1993 only twocontracts for outside plant extension, amounting to US$15.5 million, had been signed and NITELwas not making any progress on preparing of bid documents for new components. Furthermore,the project management consultants were not in place. British Telecom Telconsult (BTT)consultants were appointed in September 1992, but because of the tragic killing of one of theconsultants, BTT withdrew their staff from Nigeria in December 1992.

7. Therefore, in early 1993, the Bank began a series of measures aimed at getting the projectmoving. A high level mission in March 1993 set agreed implementation targets with NITEL andaround this time considerably strengthened its support from the resident mission. However, bythe third quarter of 1993 still little progress was evident. The Bank formed a new project team inOctober 1993 to provide renewed focus on project supervision. The team sought to (a) ascertainFGN and NITEL's commitment to the project and, if that commitment was established, (b)ensure the consultants resumed work as quickly as possible, (c) set out an agreed ultimateimplementation schedule; and (d) ensure the Bank provided whatever additional support wasneeded to help NITEL meet the schedule. The schedule comprised ten key implementation stepswhich were to be met by September 1994. It was made clear to FGN and NITEL that the Bank'songoing support for the project would be determined on the basis of project performancemeasured against this schedule.

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8. By September 1994, NITEL had made some progress on the agreed schedule. Theconsultants were in place, new bids had been issued and evaluated and NITEL had, at the Bank'ssuggestion, canceled US$30 million equivalent from the loan for an item which had beensuperseded by a new optic fiber transmission system financed outside of the project. However,the most critical step, signing of the switching contract, was not done pending governmentagreement to the award decision for which the Bank had given its no objection. The project wasnow about two and a half years behind schedule. Only US$11.7 million had been disbursed (ofwhich US$10 million was for the special account), leaving an undisbursed balance of US$183.3million equivalent, excluding the canceled portion of US$30 million. Overall, it became evidentthat the project could not be completed as planned and therefore the project developmentobjectives could not be attained due primarily to lack of due diligence on key implementationmatters. In addition to the unacceptable procurement delays other problems persisted. Forexample, (i) NITEL had not been able to get close to meeting the covenant on the size ofaccounts receivable; (ii) although financial management consultants had helped NITELstrengthen the skills of its financial management group, virtually no progress had been made onthe much needed new accounting and management information systems; (iii) the trainingprogram was seriously behind schedule; (iv) a needs list for overseas fellowships training, due onMay 1994, was still not provided by NITEL; (v) little progress had been made in strengtheningNITEL's planning competencies; and (vi) NITEL had not developed adequate projectmanagement arrangements.

B.1 Institutional Performance

9. The key objective of commercializing NITEL was partially achieved on paper, but not inoperational reality. In line with FGN's commercialization policy at that time, NITEL wasconverted to a public limited company and the Government converted outstanding debt to equity.NITEL then signed a performance contract with the Government. In reality these steps did notcreate the desired level of NITEL independence from Government nor significantly improveNITEL's operational or financial performance. The government retained considerable day-to-daymanagerial and financial control over NITEL. For example; (i) NITEL was required to depositsubstantial cash in low interest government accounts; (ii) NITEL had limited autonomy to awardand sign contracts (amounts over $1 .Om had to be approved by Government) and (iii) in 1994,the Government suspended all of NITEL' s top management layer pending the results of aninquiry. A sole administrator was placed in charge but eventually was also replaced. Theappointment of a sole administrator reporting directly to the Minister clearly undermined theautonomy of NITEL and its Board. The lack of actual independence from Government seriouslyhampered any attempts by NITEL to realize true commercialization and in the end constrainedNITEL's ability to implement key aspects of the project. Neither was the Government receptiveto engaging in a dialogue of meaningful sector policies or reform. Government policy was forNITEL to remain the monopoly provider of infrastructure. The Government did create theNigerian Communications Commission (NCC Decree No. 75 - November 1992) with theobjective of facilitating new entry and fair competition. However, although numerous small

6

"provisional" licenses have been issued, new entrants on value-added services were subject toNITEL's dominant market presence, over which NCC has little control.

10. The delays in assembling the project management consultant team coupled with NITEL'slimited institutional capacity were one of the major limiting factors in not fulfilling several of therequired institutional objectives. For example, NITEL was unable or unprepared to develop (i) arealistic long term network development and investment program; (ii) a human resourcedevelopment program; and (iii) satisfactory bid documents (e.g. for vehicles).

B.2 Expansion and Rehabilitation - Proiect Implementation

11. The only physical components of the project to be completed were (a) rehabilitation of30,000 lines of switching equipment and (b) installation of external line plant to connect 39,000customer lines.

12. Although very little of the project was completed, it is important to note that during theproject period, NITEL improved somewhat the quality of service, reduced the fault rate andincreased call completion, and, by using bilateral and other sources of funds, met more than 80%of the SAR targets on switching capacity and installed lines. All of these achievements withregard to the physical components were financed by non-Bank loans, Government transfers andinternal cash generation and were not linked to the Bank-financed project. It is apparent thatduring the process of setting up the SAR targets, NITEL's plans to implement additionalcomponents were not discussed with the Bank prior to Loan signing. These componentsincluded, among others, a fiber optic ring transmission link in Lagos in 1992-93 and a 20,000line cellular mobile network in 1993-94. One of the reasons for the successful implementation ofthe non-Bank financed components was that most of the physical components procured usingnon-Bank funds did not have to follow International Competitive Bidding procedures, whereas,Bank-financed components followed normal Bank procurement guidelines.

B.3 Technical Assistance

13. Project Preparation: Under a Bank-financed PPF advance, 50 man-months of consultancyservices were used for the preparation of the project. The consultants' major tasks were to: (i)review NITEL's investment program and propose a realistic program which would address themost urgent medium-term requirements; (ii) investigate the specific problems of the Lagosnetwork and propose a rehabilitation program aimed at removing existing bottlenecks; and (iii)prepare basic financial data for project preparation and examine NITEL's financial systems. As aresult of the consultants' findings, the original investment program earmarked for the Fifth Five-Year Plan was substantially scaled down. The consultants provided considerable assistance tothe Government in developing long term sector policy which formed the basis for the Bank-financed project.

14. Project Implementation: Consultants were engaged to assist with project implementationand institutional development in financial management and accounting, and project managementand planning. The objectives of the financial consultants were to: (i) strengthen the skills of the

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finance group in NITEL; and (ii) review existing financial systems, make recommendations forimprovement and establish a management information system in NITEL. The employment offinancial consultants was a condition of loan effectiveness and was complied with in June 1991.The consultants, who were NITEL's auditors at the time, made extensive recommendationsbased on their prior knowledge and review of NITEL's systems. The consultants made progressin strengthening the skills of financial group in NITEL but the management information systemsdid not improve.

15. The consultants' main tasks were to assist NITEL in: (i) developing its planningcapabilities; (ii) project procurement; (iii) supervising project implementation; and (iv)developping a long-term network plan. The consultants provided essential support in preparingbid documents and assisting with project management. Some progress was made in trainingNITEL's planning staff. The consultants' work was hindered on occasions by lack of supportfrom NITEL. As mentioned above, there was a long delay in fully staffing the projectmanagement consultants due to the death of one of the team members. This delay seriouslyhindered project implementation.

B.4 Operational Performance

16. Technical Performance. The technical objectives of the project in improving services andexpanding the network were not achieved. This ultimately resulted in the cancellation ofUS$198 million from the loan. The only items completed were rehabilitation of 30,000 lines ofswitching equipment, installation of some external line plant for about 39,000 lines, the purchaseof miscellaneous switching spares, and part of the project management consultancy.

17. Financial Performance. The accounts of NITEL were audited by qualified externalauditors acceptable to the Bank. Although there have been some delays in presenting auditedfinancial statements, NITEL eventually met the due dates as required by the Loan Agreement.NITEL 's financial performance has improved since 1992, but major problems remain. As aresult of the Government converting N5.5 billion of debt into equity, NITEL has become solvent.Profits have also been recorded since 1992 mainly due to the large tariff increases, lower interestcharges (as a consequence of debt conversion) and the use of the official exchange rate (which isless than the market rate) for converting foreign currency liabilities. With the exception of tileunacceptably high level of accounts receivable, NITEL appears to have complied with the keyfinancial performance covenants. However, the overall financial relationship between NITELand the Government remained unsatisfactory. The Government was in serious arrears to NITELfor telecommunications services throughout the period of the project, the on-lendingarrangements from the Government to NITEL have broken down and all of NITEL's substantialcash balances were required to be deposited with the Central Bank or in low interest Governmentbonds. Even though the audited statements of NITEL have rarely been qualified, the auditorswere not able to confirm the balances of deposits or arrears or loan amounts with the FGN inmost cases.

18. Even though the financial performance of NITEL improved, the important improvementsto the Management Information System and the computerization of the financial accounting

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system were never implemented. Consultants undertook detailed studies and maderecommendation regarding these components, but contracts for the recommended systemswere never signed.

C. Maior Factors Affecting the Proiect

19. As has been described in the preceding sections, there were several factors whichconstrained the implementation of the project.

(a) Lack of NITEL and Government commitment to the project

(b) Lack of autonomy by NITEL from Government day-to-day control coupled with adeteriorating political environment; and

(c) Institutional and managerial limitations within NITEL as reflected by the delays inprocurement, poor project management and lack of coordination with the consultants.

The Bank could have perhaps moved earlier to address the mounting project delaysand problems, but it seems unlikely that this would have affected the ultimate outcome.

D. Proiect Sustainability

20. Questions of project sustainability apply only to that minor part of the project that wasimplemented (switching rehabilitation, outside plant and network planning). As mentionedearly, at the Bank's request and with the agreement of NITEL, the consultants undertook areview of NITEL's operational practices. The objective was to determine if improvementwould be needed to ensure project sustainability. The report highlighted the need for seriousreview of most of NITEL's operational practices. Based on this report, plus the poor servicequality standards of NITEL' s network, the prospects for substainability of the completedproject components are low.

E. Bank Performance

21. The Bank's performance under the Project could have been improved. Throughout theproject period from design through implementation, there was a lack of continuity in thecomposition of the team responsible for the project. Between 1991 and 1993, with theexception of the Task Manager, the composition of the supervision team that visited orworked on the project changed from mission to mission. This placed an additional burdenon the missions to understand the difficult country, NITEL, and project circumstances. Italso placed an additional burden on the Nigerian counterparts. To make matters worse, therelationship between the Bank and NITEL's new management deteriorated in 1992/93 dueto disagreement over project issues and this increased delays. It is reasonable to concludethat strong remedial measures should have been taken earlier in the project, especially inlight of the poor performance of the Bank's Nigeria portfolio. The Bank repeatedly

9

communicated to NITEL that steps to suspend the project would be taken unlessimplementation improved, however, very little action was taken in this respect until late1994. It was from 1993 that the Bank substantially increased its effort to improve projectimplementation by strengthening support from the resident mission and forming a newproject team. From then on, the frequency of missions was considerably increased.

22. One of the main complaints of NITEL has been that the Bank procedures andconditionalities were extremely difficult to comply with. This was most evident during thepreparation of the bidding documents and long term investment plans. In this respect, theBank could have provided more support in assisting NITEL to develop these, early in theproject cycle, given that the appointment of the management consultants was delayed byover two years.

F. Borrower Performance

23. The overall performance of NITEL and the Government with regard to the Project wasunsatisfactory. This was a lack of transparency in procurement. The key drawback facingNITEL was the lack of adequate institutional capacity in the areas of design, planning andprocurement. Even though consultants were provided for to overcome the constraint and toeventually rectify them, there were considerable delays in putting into place the consultancyteam. Most of the delays for procurement were caused by the NITEL's inability to prepareand thereafter evaluate procurement documents to the satisfaction of the Bank. In additionto this, further delays were caused by the Government's inaction and delayed approval ofcleared contracts.

24. The inaction and inability of NITEL to satisfactorily comply with the conditions of the LoanAgreement finally led to the cancellation of 88 percent of the loan amount on the grounds of"Lack of Due Diligence".

G. Assessment of Outcome

25. The outcome of the project was highly unsatisfactory. None of the physical, institutional,and policy objectives of the project were fully achieved. Both NITEL and the Bank havespent substantial resources on the project with few tangible results.

H. Future Operation

26. The Bank is unlikely to finance a project of similar scope and size in Nigeria in the future.The possibility of a Bank involvement in the sector would depend on the commitment andaction by the Government to implement substantial sector reform including liberalization ofservice provision coupled with opening up to the sector to private participation.

10

I. Key Lessons Learned

27. Lesson 1 - Institutional development of monopolies is ineffective in Bank-financed projectsin the absence of Government commitment, or perceptible readiness, to an appropriatepolicy and regulatory framework and operating environmentJbr the enterprise in theconcerned sector. International experience has shown that government-owned monopolyutilities are generally poor performers and very difficult to change through institutionaldevelopment projects, even when substantial investment funding is included. Inteleconmmunications, because of advances in technology and the potential profitability of theindustry, liberalization and private participation are much more effective remedies. At thetime of project inception, however, these were not options for a Bank telecommunicationsproject in Nigeria. Nonetheless, it should be noted that telecommunications projects withsimilar objectives and components to this project have been reasonably successful in anumber of other countries. Therefore, there are other lessons to be derived from the failureof the project.

28. Lesson 2 - Autonomy is not an automatic result of corporatization: A major reason forfailure of the project was NITEL's lack of autonomy to make its own decisions on day-to-day management. In agreeing to any corporatization, the Bank should carefully study thedetails of the corporatization, including the structure and responsibilities of the Board andthe day-to-day autonomy of the management to ensure that proper autonomy andaccountability are embodied in the terms. Also, the Bank should have been alert to theprotracted implementation problems and brought stronger action far earlier than it did in theproject.

29. Lesson 3 - The Bank should consider portfolio remedies when systematic and commonproblems occur with project implementation throughout a country. The Bank should theundertake a major project review within two years of loan effectiveness. Bank-financedprojects in Nigeria in recent years, including during the period of this project, have generallyhad serious implementation problems. This project was treated as a stand alone problemproject. The Bank may have had greater success if it had included the project in a portfolioremedial process - particularly since a major part of the problem rested with the Governmentitself.

30. Lesson 4 - Consultants can play a critical role in project implementation. The long delaysbefore consultants were in place seriously jeopardized the project start-up phase. If theconsultants had been in place far earlier, some of the project components may have beencompleted with reasonable success. The Bank should have recognized his and taken actionfar earlier. Better still, the appointment of key project management consultants should bemade a condition of loan negotiations.

11

PART II: STATISTICAL TABLES

Table 1: Summary of AssessmentTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Loan Disbursements: Cumulative Estimated and

and ActualTable 5: Key Indicators for Project ImplementationTable 6: Key Indicators for Project OperationTable 7: Studies Included in ProjectTable 8A: Project CostsTable 8B: Project financingTable 9: Economic Costs and BenefitsTable 10: Status of Legal CovenantsTable 11: Compliance with Operational Manual StatementsTable 12: Bank Resources: Staff InputsTable 13: Bank Resources: Missions

Appendices:

A. Mission's Aide MemoireB. Borrower Contribution to the ICRC. Map (IBRD No. 21860)

12

Table 1: Summary of Assessments

A. Achievement of Substantial Partial Ne2Ii0ible Not ApplicableObiectives (./) (/) (1) ()Micro Policies 00 0 Sector Policies O E0 I 0Financial Objectives 0 El 0 0Institutional Development 0 0 I 0Physical Objectives EJ 0 El 0Poverty Reduction 0 0 0 IAGender Issues 0 0 0 IAOther Social Objectives *0 0 0 IAEnvironmental Objectives 0 0 E IAPublic Sector Management 0 0 0 IAPrivate Sector Development 0 0 0 IA

B. Project Sustainability Likely Unlikely Uncertain(V) (/) (V')0 I 0

HighlvC. Bank Performance satisfactory Satisfactorv Deficient

(/) (/) (/)Identification El IA 0Preparation Assistance 0 IA 0Appraisal 0 IA 0

Supervision 0 IA EHihhlv

D. Borrower Performance satisfactory Satisfactory Deficient(V) (/) (1)

Preparation E IA 0Implementation E 0 IACovenant Compliance 0 E El

Hi2hlv Satisfactory Unsatisfactory Ifi2hlvE. Assessment of Outcome satisfactory (1) (V) Unsatisfactory

(/) El 0 IA

13

Table 2: Related Bank Loans/Credits

This was the first loan to Nigeria for the Telecommunications Sector, therefore there are norelated loans or credits

Table 3: Project Timetable

[| |Steps in Project Cycle [Date Planned | Date Actual/LatestEstimate

1. Identification September 15, 1986 September 15, 1986

2. Preparation 1987 - 1988 1987 - 1988

3. Appraisal April, 1989 April 10, 1989

4. Negotiations March, 1990 March 23-30, 1990

5. Board Presentation June 26, 1990 June 26, 1990

6. Signing July 31, 1990 December 10, 1990

7. Effectiveness March 10, 1991 June 10, 1991

8. Project Completion December 31, 1994 Only a very small part of project hadbeen completed in December, 1995.

9. Loan Closing December 31, 1995 December 31, 1995

14

Table 4: Loan Disbursements: Cumulative Estimated and Actual(US$ OOOs)

Appraisal Estimate Actual Actual as a % ofEstimate

Fiscal Year 1988 200 000 0.0

Fiscal Year 1989 700 000 0.0

Fiscal Year 1990 700 000 0.0

Fiscal Year 1991 20,000 000 0.0

Fiscal Year 1992 78,000 10,860 13.9

Fiscal Year 1993 166,000 10,860 6.5

Fiscal Year 1994 207,000 11,690 5.4

Fiscal Year 1995 (a) 225,000 14.050 6.2

Fiscal Year 1996 225,000 19.785 (b) 8.8

(a) US$ 30 million was cancelled from the loan in November, 1994. A further $ 168 millionwas cancelled in April, 1995.

(b) An undisbursed amount of $ 7.215 million was cancelled on June 27, 1996 when the loanwas closed.

Table 5: Key Indicators for Proiect Implementation

Item Procurement SAR Estimate ActualImplementation

1. Management Consultancy Contract 3rd Quarter 1990 2nd quarter 1992Delivery Through 1994 Through December 1995

2. Training Through the Project period Not Done

4. Switching Contract 4th quarter 1990 Award to contractor in 1994, butCompletion/Installation 3rd quarter 1994 contract not signed

5. External Line Plant Contract 4th quarter 1990 Partially completed in 1995Completion/Installation 3rd quarter 1994

6. Long Distance Contract 1st quarter 1992 Not DoneTransmission Completion/Installation 3rd quarter 1994

7. Space Communication Contract 3rd quarter 1991 Not DoneCompletior/Installation 2nd quarter 1993

8. Power and Air Contract 3rd quarter 1991 Not DoneConditioning Completion/Installation 3rd quarter 1993

9. Telephone Contract 3rd quarter 1991 Not DoneCompletion/Installation through project period

10. Buildings Contract 4th quarter 1990 Not DoneCompletion/Installation through project period

11. Vehicles Contract 1 st quarter 1991 Not DoneCompletion/Installation 4th quarter 1991

Table 6: Key Indicators for Project Operations (Performance Indicators)

Fiscal Year Ending December { 1991 Target [ 1991 Actual 1992 Target 1992 Actual 1993 Target 1993 Actual 1994 Target 1994 Actual

1 Exchange CapacityAdded in Year 89,000 na 0 47,333 0 -519 174,000 89,446Total line Yr end 503,330 450,516 503,330 497,849 503,330 497,330 677,330 586,776

2. Connected LinesAdded in Year 30,140 38,060 26,768 8,000 21,343 44,000 26,428Total line Yr end 328,150 294,166 366,210 320,934 394,510 342,287 438,510 368,715

4. Total Staff 18,048 16,207 18,310 15,800 19,725 15,096 21,925 14,461Staffl/l,000 lines 55 55 50 49 50 44 50 39

5. 'Rate of Return on average 13% 27.01% 14% 66.13% 13% 25.1% 14% 31.13%N FA _ _ _ _ _ _ _ _ _ __ _ _ _ _

6. Operating Ratio 32% 50% 33% 37% 35% 44% 34% 65%

7. Current Ratio 1.5 0.62 1.8 1.18 2.2 1.38 2.9 1.09 O

8. Debt Service Coverage 2.6 na 3.0 9.8 3.5 2.3 4.1 0.9

Even though the Telecommunications Project did not achieve the desired project objectives, except for a small proportion of the physical installations, NITEL hasachieved most of the performance indicators mentioned in Staff Appraisal Report. The additions to the installed capacity have been financed by (i) a Siemenscredit (ii) by Bankers Trust/Alcatel Loan and (iii) by internally generated funds. The decrease in the staffing ratio is commendable. NITEL has not achievedsome other performance indicators like call cotnpletion rate (20% compared to SAR estimates of 70% for local and national calls in 1994), and AccountsReceivable as the number of days equivalent of revenues (230 days compared to 60 mentioned in the SAR for 1994). However, caution is required on respect ofa number of the above indicators. There is doubt as to the accuracy of the number of lines connected and in exchange capacity. It appears that a substantiveportion of these lines are not working. The rate of return on average Net Fixed Assets would be reduced substantially by a fair revaluation of fixed assets.

1 Revaluation of fixed assets would significantly decrease the actual rate of return to below the covenant level of 10%.

Table 7: Studies Included in the Project

Study Purpose Status Impact of StudyLong Term Planning Definition of Long term Completed in 1989 Development of the Project

Requirements for NITELManagent Information To implement a Management Completed in 1994 Not implementedSystem study Information System

Table 8A: Proiect Costs(US$ millions)

Appraisal Estimate Actual/Latest.__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _,__ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ E stim ate (a)

ITEM Local Costs Foreign Costs Total Local Costs Foreign Costs TotalSwitching Equipment -Expans 6.9 112.2 118.1Switching Equipment - Rehab 0.1 5.1 5.2 3.4 3.4External Line Plant - Expansion 18.9 133.8 152.7 2.0 10.8 12.8External Line Plant - Rehab 4.2 37.3 41.6Transmission - expansion 1.3 11.2 12.5Transmission - rehabilitation 0.2 1.3 1.5

Space Communication 0.0 3.5 3.5Telephone 0.1 10.4 10.5Buildings _ 31.3 0.0 31.3Power Rehab 0.2 1.3 1.5Vehicles 3.6 2.3 5.9 _Training ()t. 7.0 7.1Consultancy _ 0.5 8.2 8.7 0.5 4.3 4.8Misc Equipment 0.() 1.2 1.2Customs Duties 45.3 0.0 45.3 2.5 2.5Int. During Construction 0.) 35.9 35.9 .0( 1.0Total Project Cost 112.6 ] 370.9 [ 483.5 1 5.01 19.5 24.5

(a) ICR Estimatcs Of thc total expected project cost of US$483 million, less than 5% has been committed. Of the IBRD financed amount, US$198 million wascanceled. The US$1 10 million loan for foreign costs from other co-financiers (i.e. OECF) is not yet effective. 'Ihe only items quoted in the estimate are thosefunded in part by the loan. No other project cost information was available.

Table 8B: Project Financing(US$ mnillions)

Appraisal Actual/LatestEstimate Estimate (a)

Source Local Costs Foreign Costs Total Local Costs Foreign Costs TotalIBRD/IDA 225.0 225.0 5.0 19.8 24.8Other Sources . 110.1 110.1

NITEL 112.6 35.9 148.5

Total 112.6 370.9 483.5 5.0 [ 19.8 24.8

(a) The only items quoted in the ICR estimate are those which were funded in part by the Bank loan (Table 8A).

Table 9: Economic Costs and Benefits

As only minor physical components of the project, and no sector policy objectives have been implemented, the Economic Financialrate of return for the project has not been calculated.

Table 10: Status of Le2al Covenants

Agreement Section Covenant Type Present Original Revised Description of Covenant Commentsstatus Fulfilim Fulfilim

ent Date ent IDate

Loan 3.01 (b) Project Implementation Complied Establish a Project ManagementArrangements Team

Loan 4.04(i) Project Implementation Complied 10/31/90 Furnish Bank with a draftArrangements performance contract

between NITEL and theGovemment by 10/31/90

Loan 4.04(ii) Policy Complied 1/1/91 Commence implementation ofContract 1/1/91

Loan 4.05 Financial Not Reduce outstanding bills receivable Estimated at 204 days atCompli to the following days December 31,ed equivalent of revenues 1994

(i) 120 days by 12/31/90(ii) 90 days by 12131/92

___________ (iii) 60 days by 12/31/94Loan 4.06(a) Project Implementation Complied Prepare Annual analysis of its

Arrangements performance against selectedperformance targets

Loan 4.06(b) Project Implementation Complied By Oct. 31 each year, determineArrangements jointly with the Bank the

performance indicators to beapplied in the above covenant

Loan 4.06(c) Project Implementation Complied Provide quarterly progress reportsArrangements to the Bank, and, include, in

annual financial reports, ananalysis of progress againstfinancial targets

Loan 5.01 (a) Financial Complied For each financial year have itsrecords and accounts for theSpecial Account audited byindependent Auditors andprovide a copy by June 30each year

Loan 5.01 (b) Financial Soon Furnish the Bank by June 30 each Draft audited accountsyear copies of audited annual provided for 1994.accounts for the preceding Final auditedyear together with the accounts expectedauditor's report. Provide by November 30,copies of unaudited accounts 1995.by April 30 each year

Table 10: Status of Legal Covenants (continued)

Agreement Section Covenant Type Present Original Revised Description of Covenant Commentsstatus Fulfillm Fulfilim

ent Date entDate

Loan 5.01 (c) Financial Complied With respect of Statement of No SOE's used on theExpenses NITEL shall ensure project.that proper records aremaintained and audited inconjunction with the annualCompany audit

Loan 5.02 Financial Complied After December 1991, maintain an However, if assets areannual rate of return on the revalued usingaverage value of net fixed estimates, itassets of 10% appears that the

covenant is notcomplied with.

Loan 5.03 Financial Complied For each year after 1989, produceadequate funds from internalresources to cover local costsof the investment program forthat year

Loan 5.04 Financial Complied For each year after 1989, unless While the availablethe Bank otherwise agrees, information isNITEL shall not incur any debt uncertain, itunless it maintains a debt appears that theservice coverage of at least covenant is1.5 during the period of the complied with.debt

Loan 5.05 Financial Complied Except as the Bank shall agree,NITEL shall not incur any debtif after the incurrance of suchdebt its debt to equity ratio isgreater than 60/40.

Loan 5.07 Financial Soon By Oct. 31 each year, review with Five year capitalthe Bank, NITEL's capital development planexpenditure program for the not yet provided tosucceeding 5 years the Bank

Loan 7.01 (a) Financial Complied NITEL to furnish the Bank withaudited accounts for FY1987

Loan 7.01 (b) Project Implementation Complied NITEL to employ financialmanagement consultants andissue Letters of invitation forother consultant services.

Table 11: Compliance with Operational Manual Statements

Statement Number and Title Describe and Comment on Lack of ComplianceThere have not been any significant lack of compliance with any

N.A. applicable Bank Operational Manual Statement.

N.A. Not Applicable

Table 12: Bank Resources Staff Inputs

Stage of Planned Revised Actual (a)Project Cycle Weeks US$ Weeks US$ Weeks US$

Preparation to Appraisal N.A. N.A. N.A. N.A. 30 71,000 (b)Appraisal N.A. N.A. N.A. N.A. 16 37,920 (b)Negotiations through N.A. N.A. N.A. N.A. 20 47,400 (b)

Board ApprovalSupervision N.A. N.A. N.A. N.A. 146 424,760 (c)Completion N.A. N.A. N.A. N.A. 57,400 (c)Total N.A. N.A. N.A. N.A. 234 638,580

N.A.: Not Available

(a) Data shown are actual at project (reduced) project completion/loan closing, end of December 1995, on the basis of available project's filesand supervision forms 590's.

(b) At FY90 (appraisal, negotiations, loan approval time) average staff-week cost of US$ 2,370.

(c) At FY96 (project completion/loan closing time) average staff-week cost of US$ 2,870.

Table 13: Bank Resources: Mission

Number Days Specialized Implemen- Develop-Month/ of In Staff Skills tation/ ment Type of Problems

Stage oi Prolect Cycle Year Persons Field RePresented I a Overall Status Impact

IdentNfication Nov. 86 2 14 Eng., Fin. A -Development planning capability; financial autonomy.Preparation 1 Feb. 87 1 5 Fh. A.; Mgt. Spec. -Investment program financing; tariff structure.Preparation 2 Jun-87 2 8 Erig.; Fin. A -Sector policy; NITELs organization.Preparation 3 Nov. 87 3 18 Eng.; Fin. A. -Sector policy: PPF preparation for Development planning and organization.Pre-appraisal Aug. 88 2 8 Eng.; Fin. A. -Project componentUimpiernentation; NITEL financial situation.

Aooraisa throuah Board Approval

Appraisal Apr. 89 3 14 Eng.; Fh. A.; Mgmt. Spec. -Development program finalization; sector intemal reform.Final EPS Jul. 89 - -

Pre-Negotiations; Appraisal Update Nov. 89 2 10 Eng.; Fin. A. Telecoms policy paper project co-financing.Negotiations (Technical) Mar. 90 4 Eng.; Fin. A; Econ.Negotiations (Final) Mar. 90 Mgmt. Spec.Bard Approval Jun. 90Loan Signing Dec. 90Loan Effectiveness Jun. 91 Effectiveness delayed by 3 months due to late hiring of consutants for project

implementation.

Supervision 1 (project stan-up) Jun. 91 2 10 Fin. A.; Econ. 2 -NITELs financial management

Supervision 2 Feb. 92 2 8 Eng.; Fin. A. 2 -Project implementation start-up;

Supervision 3 Mar. 93 5 8 Eng.; Fin. A.; Econ. 3 -Delayed action on procurement; overall implementation review; no auditsDiv. Chief; Mgmt. Spec.

Supervision 4 Oct. 93 5 10 Eng. TM; Eng.; Fin. A. U/c U -No progress in procurement; Project priorities reconsidered.Proct; Mgmt. Spec.

Supervision 5 Feb. 94 5 12 Eng. TM; Eng.; Fin. A.; U U -Poor project management; $30m rehabilitation component to be canceled; delayProct; Mgmt. Spec. in training program and procurement.

Supervision 6 Jun. 94 5 9 Eng. TM; Eng.; Fin. A. U U -Some progress in implementation, tariffs increased.Econ.; Proct. Spec.

Supervision 7 Aug. 94 4 5 Eng. TM; Fin. A.; Econ.; U U -Review of implementation targets; slow disbursements and procurementMgmt. Spec. commitments.

Supervision 8 Oct. 94 3 7 Eng. TM; Rn. A.; HU -No due diligence and effectiveness in taking actions for project implementation;P. Sec. Spec. NITEL Board suspended.

Suspension of Loan Disbursement, Nov. 95 -onty about USS 20M of total US$1 95M loan committed; no further commitment/Cancellation of US$168M by Bank are canceled.

Supervision 9/Completion Oct. 95 2 8 P. Sec. Spec.; Fin. A. HU U -Overall objectives of reduced project unmet.

M. AW C- -Eng. E %*-.-n, r AR- .i.i. -E, E-o9n* 4-M.iPr, M yW- oP--m t3 5p.v!W -L.9. - L.-y,r TnT..kMn. WtV_; P. S.; PU9iI 5WaSP.d.W

a K.r.tv -.w.p- Ug iFYlr 4 . I - p.W 1,: 2 - idOd. 3 P.- pOhsm- i IPdl l i1. rm -l' FY94 -'I . NS -hi"lY .hdOt S -.SO,.; U -V .ft:M; HU -hhly ,n.dM.

. N PMl.d W - 0r d .nl d. (_I.d FO- r4 - b don.

23

APPENDIX A

TELECOMMUNICATIONS PROJECT (LOAN 3236-UNI)

FINAL SUPERVISION/COMPLETION MISSION

Aide-Memoire

(14 pages)

24

Aide MemoireNigeria - First Telecommunications Project (Loan 3236-UNI)

Completion Mission - October 1995

Introduction

1. A mission comprising Paul Bermingham, Public Enterprises Specialist (mission leader),and Ramendra Basu, Consultant, visited Nigeria from October 11 to 18, 1995. Theobjectives of the mission were to (a) review the status of those components of the FirstTelecomrnunications Project which are in the course of implementation; (b) makearrangements for the closure of the project (scheduled for December 31, 1995) and thepreparation of the Irnplementation Completion Report; and (c) discuss with the Ministry ofCommunications, the National Cornmunications Commission (NCC) and NigeriaTelecommunications PLC (NITEL) the future direction of the sector. The mission wouldlike to thank the Honourable Minister of Communications and officials of the Ministry, theChief Executive and officials of NITEL, and the Chief Executive of the NCC for their kindcooperation and assistance. The mission's findings are set out in this aide memoire.

Background

2. The loan agreement in the amount of $225 million was approved by the Board of the Bankon June 26, 1990, signed on December 10, 1990, and became effective on June 10, 1991.Serious delays arose during project implementation, reflected in disbursements totaling lessthan 5% of the loan amount by early 1994. An action program was agreed with NITEL toget the project back on track. Renewed implementation efforts by NITEL weresupplemented by increased supervision from the Bank. It was agreed by NITEL and theBank that an amount of $ 30 million should be canceled from the loan amount as theequipment which it was intended to finance was superseded by new technology. This waseffected in August 1991. However, further delays arose and by the end of 1994, when itbecame clear to the Bank that the objectives of the project (see paragraph 9 below) could notbe met, the Bank commenced a series of steps which culminated in cancellation of a further$168 million in March 1995. The remaining $27 million was to finance three contractswhich NITEL had entered into prior to the cancellation date. The final amount of loandisbursements is estimated at $ 19 million. The loan is scheduled to close on December 31,1995.

Status of Project Implementation

3. The mission reviewed the status of the continuing components of the project. The provisionby TCIL of external plant for around 39,000 lines in the Lagos area at a cost of $ 12.8million of which $ 10.8 million is financed from the loan, is scheduled to be completed bythe end of November 1995. The rehabilitation by Siemens of switching equipment with acapacity of around 30,000 lines, at a cost of DM 5.1 million all of which is financed fromthe loan, is scheduled to be completed by December. In the light of the reduced scope of the

25

mission agreed with NITEL's suggestion that no further project management services would berequired from BT Telconsult after December 31, 1995.

4. NITEL requested earlier in the year an extension of the closing date to accommodateretention payments which are due to be paid in 1996 under the above contracts. It appears thatonly one such payment arises - an amount of around $600,000 due to be paid to TCIL in late1996. The mission advised NITEL that it would be difficult to justify an extension of the closingdate for almost a year for this amount. However, the Bank would accept an arrangementwhereby NITEL would release the retention payment by the end of 1995 upon submission ofadequate security from the contractor, such as a bank guarantee or performance bond. NITELwould forward the necessary contract amendment to the Bank for its no objection. No extensionto the closing date would therefore be required. The mission advised that disbursements shouldonly be made from the special account until the balance is exhausted, following whichdisbursements will be made directly from the loan. The mission advised NITEL that paymentscould be made up to April 30, 1996 for work done or services rendered before December 31,1995.

5. The mission reviewed the status of compliance with the covenants in the loan agreement.A schedule setting out the position is attached as Annex I. A number of covenants are in breach,namely the level of accounts receivable, the provision of the audited accounts for 1994, andprosision of various items of inforrnation to the Bank

6. Comments on NITEL's operational performance are set out in Annex II.

7. The mission reviewed NITEL's recent financial performance and position. The auditedaccounts for 1994 have not yet been finalized and the review was therefore based on the draftannual accounts. Comments on the financial performance and position of NITEL as reflected inthe draft accounts are set out in Annex III.

8. The mission noted that the Government had taken steps towards restoring norrnalmanagement structures in NITEL. Prof. B. Bajoga has been appointed Managing Director andChief Executive in place of the Sole Adrninistrator. The directors and officials who hadpreviously been suspended and replaced by the Sole Administrator have been retired.Appointment of the remaining directors and senior managers is expected soon.

26


9. The mission discussed the outcome of the project with NITEL. Both parties agreed thatthe project had failed to meet its objectives. The position is summarized in the following table:

Objective StatusSupport the guarantor's No specific project component was identified to supportefforts to develop sound this objective. While value added services have beenpolicies for the sector. opened up to private participation, a regulator has been

established, and several provisional licenses issued, littlesubstantive progress has been made in increasing thelevels of access to and quality of service. The existingpolicies and structures are considered inadequate toattract the investment and expertise considerednecessary to develop the sector.

Facilitate full While NITEL has been converted to a PLC and acornmercialization of NITEL. performance contract has been signed with Government,

it is not managed in a commercial manner. It has beenprovided with minimal managerial and commercialautonomy, with serious consequences for its financialposition.

Improve the quality of The range of services remains restricted due totelecornmunications services inadequate capacity and quality of service is significantly

below projected levels.

Expand the Borrower's As less than 10% of the loan amount has been used,facilities to meet the most minimal expansion of the Borrower's facilities has takenurgent demand. place.Improve the Borrower's While profitability has improved, overall financialfinancial performance. performance is weak. In the absence of a revaluation of

fixed assets, NITEL's rate of return on revalued assets isdifficult to measure, but seems to be well below therequired level; it is in arrears on its debt serviceobligations to Government; accounts receivable remain atvery high level; it is forced to place its cash balances ondeposit at sub-market rates; and a shortage of skilled staffresulting in weak accounting and financial managementsystems, etc.

9. While specific examples can be cited of how both NITEL and the Bank could haveperformed better during implementation, the main reason for the failure of the project was theinadequate policy framework and sector structure within which the project was implemented.The deteriorating macroeconomic environment, in particular distorted interest and exchangerates, also had an adverse impact. While on paper NITEL was commercialized through itsconversion to a PLC and the signing of a performance contract with the Federal Government, insubstance it remains little more than a Government department. The Federal Government mustapprove tariffs, salary levels.staff changes at senior levels, all investments of more than $1million, and all financing decisions. It fails to pay its bills for service on time (it is NITEL's

27

largest customer), compels NITEL to invest its cash with the Central Bank; or in treasury bills atsignificantlv negative real interest rates, and unreconciled differences exist on balances due toGovernment from NITEL. For almost 18 months, the entire board of NITEL, including theManaging Director, and senior management were suspended and replaced by a "soleadministrator". The institutional development components of the project have had little success.

10. In the light of the cancellation of the loan and the above comments on sector policies andstructures, little discussion took place on the operational phase of the project. (See alsoparagraph 12 below on the future direction of the sector).

11. A timetable was agreed for completing the ICR. The Bank and NITEL would exchangetheir contributions to the report by November 30, 1995. Comments will be exchanged byDecember 31, 1995. The Bank aims to complete the ICR by March 31, 1996.

Future Direction of the Sector

12. The mission met with the Honourable Minister of Communications, Major General A.T.Olanrewaju, and officials of the Ministry. The reasons for the failure of the project werediscussed. The mission emphasized the importance which the Bank attaches to the developmentof an efficient telecommunications sector for the overall development of the country andNigeria's ability to compete internationally. The immediate investment requirement is estimatedat not less than $1 billion, with several billion dollars needed over the next decade if Nigeria is tobe integrated in the global information infrastructure. In the Bank's view existing sector policiesand structures have failed. Far-reaching and fundamental chanees are required, within theframework of an improving macroeconomic environment, if the sector is to attract the levels ofinvestment and expertise which it needs. The mission noted the actions which have been takenin recent months to improve NITEL's situation, in particular restoring normal managementarrangements, a vigorous program of following up accounts receivable, and a proposed initiativeto address malpractices. A working group has also been established to address sector policy inthe future. The Government and NITEL indicated that they would welcome continued Banksupport for the sector. The mission advised that such support could only be considered withinthe context of the overall country assistance strategy agreed between the Federal Government. Itwas agreed that the primary initial focus of any support would be on policy and regulatory issues.The Government agreed to provide the Bank with a copy of the draft policy statement when itbecomes available. The mission agreed to provide the Government with information on policydevelopment in other countries.

Nigeria - Telecommunications ProjectImplementation Completion Report

Status of Leigal Covenants

Agreement Section [Covenant Type Present Original Revised [Description of Covenant Commentsl status Fulfillment Fulfillment

Date Date

Loan 3.01 (b) Project Complied Establish a ProjectImplementation Management TeamArrangements

Loan 4.04(i) Project Complied 10/31/90 Fumish Bank with a draftImplementation performance contractArrangements between NITEL and the

Government by 10/31/90

Loan 4.04(ii) Policy Complied I/1/91 Commence implementationof Contract 1/1/91

Loan 4.05 Financial Not Reduce outstanding bills Estimated at 204 days at xComplied receivable to the following December 31, 1994

days equivalent of revenues(i) 120 days by 12/31/90(ii) 90 days by 12/31/92(iii) 60 days by 12/31/94

Loan 4.06(a) Project Complied Prepare Annual analysis ofImplementation its performance againstArrangements selected performance targets

Loan 4.06(b) Project Complied By Oct. 31 each year,Implementation determine jointly with theArrangements Bank the performance

indicators to be applied inthe above covenant

Annex I - Page I


Loan 4.06(c) l Project Complied I - Provide quarterly progressImplementation reports to the Bank, and,Arrangements include, in annual financial

reports, an analysis ofprogress against financial

_______ _____________________ targets

Loan 5.01 (a) Financial Complied For each financial year haveits records and accounts forthe Special Account auditedby independent Auditors andprovide a copy by June 30each year

Loan 5.01 (b) Financial Soon Furnish the Bank by June 30 Draft audited accountseach year copies of audited provided for 1994.annual accounts for the Final audited accountspreceding year together with expected by Novemberthe auditor's report 30, 1995.Provide copies of unauditedaccounts by April 30 eachyear

Loan 5.01 (c) Financial Complied With respect of Statement of No SOE's used on theExpenses NITEL shall project.ensure that proper recordsare maintained and auditedin conjunction with theannual Company audit

Loan 5.02 Financial Complied After December 1991, However, if assets aremaintain an annual rate of revalued usingreturn on the average value estimates, it appears thatof net fixed assets of 10% the covenant is not

complied with.

Annex I - Page 2


Loan 5.03 Financial Complied For each year after 1989,produce adequate fundsfrom internal resour-ces tocover local costs of theinvestment program for thatyear

Loan 5.04 Financial Complied For each year after 1989, While the availableunless the Bank otherwise information is uncertain,agrees, NITEL shall not it appears that theincur any debt unless it covenant is compliedmaintains a debt service with.coverage of at least 1.5during the period of the debt

Loan 5.05 Financial Complied Except as the Bank shallagree, NITEL shall not incurany debt if after theincurrance of such debt itsdebt to equity ratio is greaterthan 60/40.

Loan 5.07 Financial Soon By Oct. 31 each year, Five year capitalreview with the Bank, development plan notNITEL's capital expenditure yet provided to the Bankprogram for the succeeding5 years

Loan 7.01 (a) Financial Complied NITEL to furnish the Bankwith audited accounts forFY1987

Loan 7.01 (b) Project Complied NITEL to employ financialImplementation management consultants and

issue Letters of invitation._________________________ ____________________for other consultant services.

Annex I - Page 3

Annex 11Nigeria - First Telecommunications Project

Final Supervision Mission

ComDarison of Proiect Costs(US$ millions)

Appraisal Actual/LatestEstimate Estimate

ITEM Local Costs j Foreign Costs Total Local Costs Foreign Costs TotalSwitching Equipment -Expans 6.9 112.2 118.1

Switching Equipment - Rehab 0.1 5.1 5.2 3.4 3.4

External Line Plant - Expansion 18.9 133.8 152.7 2.0 10.8 12.8External Line Plant - Rehab 4.2 37.3 41.6Transmission - expansion 1.3 11.2 12.5Transmission - rehabilitation 0.2 1.3 1.5Space Communication 0.0 3.5 3.5Telephone 0.1 10.4 10.5Buildings 31.3 0.0 31.3Power Rehab 0.2 1.3 1.5Vehicles 3.6 2.3 5.9

Training 0.1 7.0 7.1 Consultancy 0.5 8.2 8.7 0.5 4.3 4.8Misc Equipment 0.0 1.2 1.2Customs Duties 45.3 0.0 45.3 2.5 2.5Int. During Construction 0.0 35.9 35.9 1.0 1.0

Total Project Cost 112.6 l 370.9 l 483.5 l 5.0 19.5 [ 24.5

Of the total expected project cost of US$483 million, less than 5% has been committed. Of the IBRD financed amount, US$198 million wascanceled. The US$110 million loan for foreign costs from other co-financiers (i.e. OECF) is not yet effective. Since the loan has not yet beenclosed as yet, the final project cost could be calculated accurately, but it is expected to be less than US$ 20 million equivalent.

Annex II - Page I

Annex I1Nigeria - First Telecommunications Project

Final Supervision Mission

Key Indicators for Project Operations (Performance Indicators)

eFiscaleYearEnding Em1991 Ata991 E e1992 |1992 Em1993 l 1993 A1994 E 1994December 31 Estimate Actual Estimate Actual Estimate Actual Estimate Actual

1. Exchange CapacityAdded in Year 89,000 na 0 47,333 0 -519 174,000 89,446

Total line Yr end 503,330 450,516 503,330 497,849 503,330 497,330 677,330 586,776

2. Connected LinesAdded in Year 30,140 38,060 26,768 8,000 21,343 44,000 26,428

Total line Yr end 328,150 294,166 366,210 320,934 394,510 342,287 438,510 368,715

4. Total Staff 18,048 16,207 18,310 15,800 19,725 15,096 21,925 14,461Staff/1,000 lines 55 55 50 49 50 44 50 39

5. 'Rate of Return on ave. NFA 13% 27.01% 14% 66.13% 13% 25.1% 14% 31.13%

6. Operating Ratio 32% 50% 33% 37% 35% 44% 34% 65%

7. Current Ratio 1.5 0.62 1.8 1.18 2.2 1.38 2.9 1.09 s

8. Debt Service Coverage 2.6 na 3.0 9.8 3.5 2.3 4.1 0.9

Even though the First Telecommunications Project did not achieve the desired project objectives, except for a small proportion of the physical

installations, NITEL has achieved most of the performance indicators mentioned in Staff Appraisal Report. The additions to the installed

capacity have been financed by (i) a Siemens credit (ii) by Bankers Trust/Alcatel Loan and (iii) by internally generated funds. The decrease in

the staffing ratio is commendable. NITEL has not achieved some other performance indicators like call completion rate (20% compared to SAR

estimates of 70% for local and national calls in 1994), and Accounts Receivable as the number of days equivalent of revenues (230 days

compared to 60 mentioned in the SAR for 1994).

Revaluation of fixed assets woul(d significantly decrease the actual rate of return to below the covenant level of 10%.

Annlex II - Page 2

33Annex III

Nigeria - First Telecommunications Project (Loan 3236-UNI)Completion Mission - October 1995

Review of Financial Perfomance of NITEL

1. The audited financial statements for 1994 which were due to be provided to the Bank byJune 30 have not yet been signed by the auditors The draft financial statements were provided tothe mission. The audit report on the Special Account for 1994 was provided to the mission andfound to be satisfactory.

2. The draft financial statements indicate that overall financial performance remainedrelatively unchanged for 1993. Profits increased from N 3.57 billion (US$ 162 million) to N3.6billion (US$ 163.5 million) - both amounts converted to US$ equivalent at the official exchangerate of N 22 = US$ 1. Net revenues increased from N9.89 biilion (US$ 449 million) in 1993 toN10.9 billion (US$ 494 million) in 1994.

3 The official exchange rate remained constant at N22 = US$ 1 for both 1993 and 1994. Inearly 1995, the exchange rate regime was partially liberalized through the introduction of aparallel market, in which the exchange rate is currently US$ 1 = N82. However, NITEL appearsto have access to the official exchange rate for all significant financial transactions. Thisprovides it with a substantial (approx. 75%) discount to open market rates in terms of its foreigncurrency loan balances and debt service payments. In addition, if fixed asset were revaluedusing open market exchange rates, it appears that NITEL would not meet the requirement to earna 10% return on revalued assets (see attached calculations). As at December 31, 1994, plant,machinery and equipment had a gross book value of N 9.7 billion whereas the market value at theparallel rate should have been N 26.5 billion.

4. In 1994, international outpayments almost doubled over the level in 1993. Althoughdetailed information is not yet available, it seems that the declining real cost of international callshad a major impact on this increase. Since the international call charges remained constant ataround N 70 per minute for 1993-94, in real terms, it became cheaper tocall from Nigeria andtherefore outgoing traffic increased considerably In 1995, international tariffs have beenincreased from N 70 per minute in 1993/4 to NIOO per minute for most international calls.

5. Of five key financial performance indicators, NITEL is not in compliance with covenantspertaining to accounts receivable and debt service coverage (calculations attached). A reviev ofthe legal covenants is attached as Annex 1.

6 Accounts receivable have increased since 1993 to about 230 billing days (after deductingprovisions for bad debts). The annual bad debts charge has reduced from N 1.4 billion in 1993 toN13 million in 1994. This charge is likely to be amended prior to the finalization of the auditedaccounts. As pointed out in previous years, high accounts receivable have serious repercussionson the financial position of the company. Aside from creating a cash flow problem, in real terms,the outstanding balances are now worth significantly less than their original value.

Annex III - Page 1

34Annex III

Nigeria - First Telecommunications Project (Loan 3236-UNI)Completion Mission - October 1995

Review of Financial Perfomance of NITEL

7. The fixed assets schedule indicates a capital work in progress of N 7.152 billionequivalent to about 54% of total fixed asses. We understand that this will be reduced prior to thefinalization of the annual accounts.

Annex III - Page 2

35Annex III

NigeriaFirst Telecommunications Proiect

Calculation of Key Financial Indicators

1. Accounts Receivable to be less than 60 days equivalent of billingN million

Recorded traffic revenue 10,873Less: outgoing revenues 1.714

9.159

Traffic debtors 10,720Less: provision for bad debts 3,845

due from other administrations 1.743Net debtors 5.132

Nos. of billing days equivalent 205

Conclusion: Not in compliance

2. A rate of return of 10% on average revalued net fixed assets to be maintainedN million

Net profit after tax (PAT) 3,031Add: finance charges 630Add: exchange losses 152Less: other investment income 335Adjusted PAT 3.478

Average net value of fixed assets 11.16910% of above I-117

The above amounts are taken from the draft annual accounts for 1994. On the face of it, itappears that NITEL is in compliance with the covenant. However, if assets are revalued asfollows, using a market exchange rate, it is clear that the covenant is not complied with.

Total Jines (no) 588,000Value per line (net) ($) 750Value of network ($ million) 441Market exchange rate assumed (N =$ 1) 60Value of network (N million) 26,460Annual depreciation charge (10%) (N million) 2,646

N millionAdjusted PAT per above 3,478Less: increased depreciation charge 1_533Adjusted PAT 1.945

Annex 111. 1 - Page 1

36Annex III

NigeriaFirst Telecommunications Project

Value of network (revalued per above) 26.460Rate of return on revalued assets 7.35%

Note Amounts taken from draft annual accounts.

Conclusion: Based on the draft accounts, NITEL appears to be in compliance. However, whileinsufficient information is available to make a definitive calculation, an approximate revaluation of

fixed assets using an estimated market exchange rate (as opposed to the Government's officialexchange rate) indicates that the real rate of return is below the level required by the covenant.

3. Internally generated funds to cover local capital expenditureN million

PAT 3,031Add Back: Depreciation 1,113

Exchange losses 152Decrease in working capital 1,797

Less: Repayment of Loans 0Internally generated funds 6,093

Total capital expenditure 4,980

Notes: (A) Breakdown of local and foreign capital expenditure was not available. (B) The draftaccounts do not reflect the repayrnent of principal made by NITEL.

Conclusion: Appears to be in compliance

4. NITEL shall not incur further debt if the debt service ratio is less than 1.5N rnillion

PAT 3,031Add Back Depreciation 1,113

Exchange losses 152Finance charges 630

Adjusted PAT 4_926

Debt service charges:finance charges 630outstanding interest on loans 4,620estimated principal payrnent due 400total _.65

Debt service ratio: 0.9

Annex 111.1 - Page 2

37Annex III

NigeriaFirst Telecommunications Project

Conclusion: It is not clear whether NITEL has incurred any additional debt in 1994. Even thoughthe debt service coverage is less than the 1.5 it is uncertain whether NITEL is in non-compliance ofthis covenant.

5. NITEL shall not incur any further debt if the debt ration is greater that 60:40

N millionShareholders funds 7,972Long term debt 7,866Debt to Equity ratio 0.99 (50:50)

Conclusion: Appears to be in compliance

Annex 111. 1 - Page 3

38

APPENDIX B

TELECOMMUNICATIONS PROJECT (LOAN 3236-UNI)

BORROWER CONTRIBUTION TO THE ICR

The Borrower and the Guarantor were advised in October 1995, during the finalsupervision/completion mission, that their contribution to the ICR, giving theirperspective of the design, implementation and devlopment impact of the project had to beprepared and sent to the Bank. No reports have been received as yet. The Borrower didnot provide comments on the draft ICR.

39

APPENDIX C

IBRD Map No. 21860

NvICGERIA { ,i'

FIRST TELECOMMUNICATIONS PROJECT .\--

13tURKINA | NiT 1 ( \i F RtF ASO )JrTSINA___.,

9 t . 57>ebbi SOKO~~~50 TO u sa ; \ - KAN /.H ORNO

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BF.NIN KaZo ( 0

Y~NwBussat Z/nkNN t05~/t

( Ogbo.oshl ,I ; KWR -r Lafi 5 fX

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/2)ABE74 ^ < wo ) _ o~~ ~ ~ ~~~ ~~~~~~t.r A/ad ( hatioEris b,vseml lUiarked in red

vOGZJAr bn ~~~ONDt,uc i I witll be trehabilitated'expanded

~ 4 Gos < < t XN-9tl>Ogo;a 3 TY Existing Microwave Links

tAGOS SOUTH\a<PeleX A/I Ib @~~~~n sha J C O 5 /-=-i. ... Existing Cable

L4G;OS ZO..hO\ RVI Standard "A" Earth Stations

',-~~~ Wi;;\ / . >tE {4 % { Xditvntel y yC=;= _ ~~~Zone Boundaries

/ _aoa~~ ) / y.f=s.dA State Capitals

,:,, {.r ].i 4/jaS . uYo) @7 69 ~~~~~~~~~~~~~~~~~~~~National Capital

SOL&-ht A;1 i A b %s >z ~~~~~~~KILOMETERS 1O 40 t80 120 160 Rivers3

X * & ~~~~~~~~~~~~~ ,i > , ~~~~~~~~~~~~~~~~ MILLS O' 210 4'0 60 80 1n _0 StateeBoundariess

_ ~~~~~~~~~~~~~~~~~~~~~~~~~~AKWA-IBOM -IInternational Boundaries

IMAGING

Report No.: 16623Type: ICR

implementation completion report federal republic … filedocument of the world bank for official...

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