World Bank Document

Document of The World Bank

FOR OFFICIAL USE ONLY

Public Disclosure Authorized Report No. 16521

IMPLEMENTATION COMPLETION REPORT Public Disclosure Authorized

CZECH REPUBLIC

TELECOMMUNICATIONS PROJ ECT (Loan 3644-CZ)

Public Disclosure Authorized April 24, 1997

Infrastructure Operations Division Central Europe Department tl Public Disclosure Authorized Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS

Currency UJnit= Koruna Ceska (Kc) = CZK Parity: CZK I = tJS$ 27.4 Dec. 1996

Equivalency of I US$ in (CZK since 1993 (Annual Average) 1993 29.45 1994 29.23 1995 27.33 1996 27.00

Appraisal year average (1 99)2/93) was C/K 29.0 per US$ 1.

WEIGHTS AND MEASURES Metric System

FISCAL YEAR OF BORROWER Giovernment and SlT Telecom: .January 1 - December 31

ABBREVIATIONS AND ACRONYMS

CR - Ceske Radiokomunikace EU - European UJniioni EBRD - European Bnak for Reconstruction and Development EIB - EuropeaniInvestment Bank GSM - Global Systcmi Mobile ICB - International Competitive 13idding IDP - Institutional Development Program I'J'U - International Telecommunications Union (Geneva) JV - Joint Venture MIS - Management IntformiiationSystem MoE - Ministry of Econom1y MTPT - Ministry of ''ransport, Post & Telecommunications (Ministerstvo Dopravy a Spoju) PHARE - EU grant program PllJ - Project Implementation Unit l'PO - I'roject lProgran Oft'icc S PT - Sprava PJosta 'I'eikomunikaci (Cech Republic's !ormer Post and Telecommunications Organization) SR - Sprava Radiokomlunikaci

Vice President: Johannes F. Linn Acting Director: Hlans J. Apitz Acting Division Chief: Henk Busz Staff Member/Task Manager: Alberto Cruzat FOR OFFICIALUSE ONLY

Table of Contents Page No.

Preface ......

Evaluation Summary...... i

Part I: Project Implementation Assessment .1

A. Background and Project Objectives. I B. Sector Reform, Regulation and Privatization. 2 C. Achievement of Project Objectives. 4 D. Implementation Record and Major Factors Affecting the Project ...... 6 E. Project Sustainability...... 7 F. Bank's Performance...... 7 G. Borrower Performance...... 8 H. Assessment of Outcome...... 8 I. Future Operation...... 9 J. Key Lessons Learned...... 9

Part II: Statistical Tables ...... 10

Table 1: Summary of Assessments...... 11 Table 2: Related Bank Loans/Credits...... 13 Table 3: Project Timetable...... 13 Table 4: Credit Disbursements: Cumulative Estimated and Actual...... 14 Table 5: Key Indicators for Project Implementation...... 15 Table 6: Key Indicators for Project Operation...... 16 Table 7: Studies Included in Project ...... 17 Table 8A: Project Costs ...... 18 Table 8B: Project Financing...... 18 Table 9: Economic Costs and Benefits...... 19 Table 10: Status of Legal Covenants...... 20 Table 11: Compliance with Operational Manual Statements...... 21 Table 12: Bank Resources: Staff Inputs ...... 21 Table 13: Bank Resources: Missions...... 22

Appendices: ...... 23

A. Map IBRD24.627

This documenthas a restricteddistribution and may be used by recipientsonly in the performanceof their official duties. Its contentsmay not otherwisebe disclosedwithout WorldBank authorization. I IMPLEMENTATION COMPLETION REPORT CZECH REPUBLIC TELECOMMUNICATIONS PROJECT (LOAN NO. 3644-CZ)

Preface

This is the Implementation Completion Report (ICR) for the Telecommunications Project in Czech Republic, for which Loan 3644-CZ in the amount of US$ 80.0 million was approved on September 9, 1993 and made effective on January 14, 1994.

The Credit had a Closing Date of June 30, 1998; however, after privatization of SPT Telecom in July 1995, the new owvnersdecided to cancel the un- disbursed amount of the Loan (US$ 69.7 million) and pre-pay the disbursed amount (US$ 10.3 million). Final disbursement took place on March 12, 1996. The Loan balance was canceled and the amount disbursed pre-paid on May 1, 1996; with this action, the Loan was closed before the agreed Closing Date of June 30, 1998, and there are no additional obligations due to IBRD under this loan. Cofinancing for the Project was provided by the European Investment Bank (EI13)and the European Bank for Reconstruction and Development (EBRD).

The ICR was prepared by Alberto Cruzat of the Telecommunications and Informatics Division (IENTI) and reviewed by James Bond, Chief, Telecommunications and Informatics Division (IENTI); Henk Busz, Acting Chief, Energy/Transport Operations Division (EC2ET), and Franz Kaps, Project Adviser (EC2DR).

Preparation of this ICR was begun during the Bank's December 1996 Mission, which was organized after the cancellation and pre-payment of the Loan amounts which took place on May 1, 1996. It is based on material in the project file. The borrower contributed to preparation of the ICR by discussing a first Draft during the December 1996 Mission, and expressed its inability to provide additional written comments.

IMPLEMENTATION COMPLETION REPORT CZECH REPUBLIC TELECOMMUNICATIONS PROJECT (LOAN NO. 3644-CZ)

Evaluation Summary

Background

1. The first telecommunications project in the Czech Republic, which was supported by IBRD Loan 3644-CZ in the amount of US$ 80.0 million, was implemented by the Sprava Post a Telekomunikaci (also called SPT TELECOM, s.p. or SPT, s.p.). SPT, s.p. was established by decree of 1989 as a State -owned enternrise. Before 1989 postal and telecommunications services were in the hands of a traditional PTT, part of a Ministry, without financial independence, though not a State enterprise. In September 1991 a joint-venture was set up, under the name EUROTEL, by SPT TELECOM, s.p. with the consortium Atlantic West (Bell Atlantic and U.S. West International) to install and operate the analog mobile cellular and the data networks. The separation of postal and telecommunications activities took place on January 1, 1993, with the creation of Czech Post, s.p. and SPT TELECOM, s.p. This coincided with the split of the Federation between Czech and Slovak Republics (see paragraph 5).

Project Objectives and Description

2. The 1993-1995 expansion plan of SPT TELECOM supported by IBRD Loan 3644-CZ for US$ 80.0 million equivalent, and was co-financed by the European Bank for Reconstruction and Development (EBRD) with a Loan of ECU 70.0 million, and the European Investment Bank (EIB) with a Loan of ECU 65.0 million. The main objectives of this operation were: (A) to support the digitalization and expansion of the network to: (a) reduce congestion on key network elements; (b) rapidly provide modem digital communications for businesses (especially export oriented businesses); and ( c) provide a sound foundation for future modernization and expansion of the entire network; and (B) to make institutional and policy improvements aimed at: (a) increased efficiency in telecommunications investment and operations; (b) improved quality of service; and ( c) transition to full commercial operation.

The privatization process

3. The Government of Czech Republic approved in September 1993 a privatization project, as a result of which SPT TELECOM, s.p. was transformed on January 1, 1994 into SPT TELECOM, a.s. (joint-stock company). On 11 July 1994 SPT TELECOM, a.s. issued bonds for the second round of the voucher scheme privatization process. In this Voucher or Coupon privatization, every Czech citizen of ii at least 18 years of age chose the company which shares he/she would prefer to own. As a result of this process the Government kept 70% of the shares, 26% went to Voucher shareholders, 3 % to the Restitution Fund and 1% to the Donation Fund. In June 1995, all 23,512,565 shares of SPT TELECOM, a.s. were quoted on the Prague Stock Exchange. The second step in the privatization of SPT was the selection of a Strategic Partner, based upon an increase of 37% in the number of shares; the number 37% was chosen in order to keep the Government as dominant shareholder with 51% (70%/1.37 = 5 1%). As a result of the increase of 37% in the number of shares, the Government ended with 51 %, the Voucher Shareholders with 19%, the Restitution Fund with 2%, the Donation Fund with 1% and the Strategic Partner with 27% (37/1.37 = 27%).

Selection of a Strategic Partner

4. The strategic partner was selected by international bidding. On July 10, 1995, TelSource became the Strategic Partner of SPT by payment of US$ 1.32 billion in cash plus US$ 0.13 billion in the form of management, software and other services, for 27% of SPT's shares. The privatization process as designed by the Czech Government included the re-injection of the full amount paid by TelSource (US$ 1.32 billion) into SPT TELECOM, a.s.. TelSource is an international consortium comprising the Swiss PTT (49%), and the Netherlands PTT (NEPOSTEL) (51%), plus technical support from AT&T. The contract by which this strategic partner was brought into SPT established an exclusivity period for Domestic Long Distance and International services until year 2000. The management contract with TelSource expires on December 31, 2000.

Project Achievements and Results

5. Institutional Objectives. In the framework of this project, the institutional objectives focused on the operating entity: they included changes in SPT TELECOM, a.s.' s statutes and organization and improvements in its management. The specific studies focused on institutional improvement are listed in Table 7, and commented in what follows.

6. Staff productivity. SPT improved its productivity during Project implementation by going from 13.9 staff/1,000 working lines in 1992 to 9.4 staff/1,000 working lines in 1996. It is estimated that this ratio will improve to 7 by year 2000 (see Tables 5 and 6).

7. Operational targets for telecommunications activities. SPT increased the switching capacity from 1.99 million lines in 1992 to 3.1 million lines in 1996, and expects to reach 4.89 million lines in year 2000. The number of working lines has increased from 1.82 million in 1992 to 2.8 million in 1996, and it is expected to reach 4.4 million by year 2000. With this rapid expansion plan, the telephone density iii

(working lines per 100 population) has improved from 17.6 in 1992 to 28.0 in 1996, and it is expected to reach 44.0 in year 2000.

8. Implementation schedule. The massive increase in new subscriber lines started in September 1995 with the entry of the Strategic Partner. During the first full year of operation under the new management/ownership SPT jumped from the level of 200,000 new lines per year to 448,000 new lines installed in 1996. The objectives of expansion and modernization of the network were exceeded (Part II, Table 5).

9. Objectives of service quality. The expansion was accompanied by a renovation of the outside plant network. As a result, the quality of service has improved from 5.5 faults/100 working lines per month, as estimated in the appraisal for 1992, to 2.5 faults/100 working lines per month in 1996

Major Factors Affecting the Project

10. The Government implemented a sound tariff policy as part of the privatization process, and has been moving towards the creation of an adequate regulatory framework for the sector.

11. The Project benefits are significant; they include: (a) an increase in the quality and coverage of telecommunications services; (b) the transformation of SPT from a Government enterprise into a commercially oriented operating entity with private sector participation in the ownership and management; (c) the organizational split between post and telecommunications activities; and (d) the implementation of sectoral reforms leading to an open competitive market by year 2000.

12. Most of the Project's major physical, institutional and financial objectives have been achieved and some of them, in particular the sectoral structure, have been exceeded The above benefits and substantial results from the Project provided favorable conditions for the project sustainability and the continuation, through the life period of the new facilities, of the support to the country's economic and social growth. Based on the above, the Project is ranked satisfactory in achieving its development objectives and in its implementation.

Key Findings, Future Operation, and Lessons Learned

The key lessons learned are as follows:

(a) The full realization of the institutional objectives, and in particular of the sector reform, was made possible by the involvement of the Government authorities and company managers in the changing process;

(b) Bank's procurement guidelines may be difficult to follow by a company with private sector participation in its management-ownership due to the iv

delays introduced and the need to award to the lowest responsive Bidder after following an ICB process (see paragraph 22); and

(c) Some of the traditional Bank's legal covenants may prove constraining to a newly privatized company with an ambitious development program, and even when the Bank may amend the legal covenants (as opposed to the Procurement Guidelines which are more permanent), the time and processing required to amend those covenants add to the non-attractiveness of the Bank's loan. IMPLEMENTATION COMPLETION REPORT CZECH REPUBLIC TELECOMMUNICATIONS PROJECT LOAN NO. 3644-CZ

PART I: PROJECT IMPLEMENTATION ASSESSMENT

A. Background and Project Objectives

1. The first telecommunications project in the Czech Republic, which was supported by IBRD Loan 3644-CZ in the amount of US$ 80.0 million, was implemented by the Sprava Post a Telekomunikaci (also called SPT TELECOM, s.p. or SPT, s.p.). SPT, s.p. was established by decree of 1989 as a State -owned enterprise. Before 1989 postal and telecommunications services were in the hands of a traditional PTT, part of a Ministry, without financial independence, though not a State enterprise. In September 1991 a joint-venture was set up, under the name EUROTEL, by SPT TELECOM, s.p. with the consortium Atlantic West (Bell Atlantic and IJ.S. West International) to install and operate the analog mobile cellular and the data networks. The separation of postal and telecommunications activities took place on January 1, 1993, with the creation of Czech Post, s.p. and SPT TELECOM, s.p. This coincided with the split of the Federation between Czech and Slovak Republics (see paragraph 5). Even when after this split SPT, s.p. was dedicated only to telecommunications activities, they decided to keep the name SPT which implies postal functions.

2. The 1993-1995 expansion plan of SPT TELECOM supported by IBRD Loan 3644-CZ for US$ 80.0 million equivalent, and was co-financed by the European Bank for Reconstruction and Development (EBRD) with a Loan of ECU 70.0 million, and the European Investment Bank (EIB) with a Loan of ECU 65.0 million. The main objectives of this operation were: (A) to support the digitalization and expansion of the network to: (a) reduce congestion on key network elements; (b) rapidly provide modem digital communications for businesses (especially export oriented businesses); and ( c) provide a sound foundation for future modernization and expansion of the entire network; and (B) to make institutional and policy improvements aimed at: (a) increased efficiency in telecomnmunicationsinvestment and operations; (b) improved quality of service; and ( c) transition to full commercial operation. 2

B. Sector Reform, Regulation and Privatization

Sector Reform

3. The project was designed in 1992-93 in a monopolistic environment. The policy objectives did not address the liberalization of the sector, the introduction of competition, or active participation of the private sector in development and operations. The project concept was consistent with the traditional public utilities approach practical at that time, including only the preparatory work related to company commercialization necessary to proceed with company privatization. All institutional objectives were concentrated on relieving organizational, management and financial constraints existing within SPT TELECOM. However, during the implementation period, a constructive dialogue started between the Bank and the sector authorities and led toward a new policy approach to the sector issues and the determination of sector policy objectives in line with the current worldwide trends, which resulted in the privatization of SPT TELECOM and introduction of competition earlier than expected during appraisal..

Regulatory and Sector Structure

4. Since 1964, the telecommunications sector in Czechoslovakia has been regulated by the 1964 Telecommunications Law. Major amendments to this Law were issued in 1992 and 1993; these amendments authorized the creation of a Regulatory Agency and, following the principles stated in the European Union Green Paper, prepared the sector for future demonopolization, liberalization and private sector participation. The regulatory authority was the Czechoslovakian Federal Ministry of Posts & Telecommunications (FMPT), under vkhich the main operating entities were: (a) Sprava Pogt a Telekomunikaci (SPT), Praha, s.p.; (b) Sprava Post a Telekomunikaci (SPT), Bratislava, s.p.; (c) Sprava Radiokomunikace, Praha, s.p.; and (d) Sprava Radiokomunikace, Bratislava, s.p.. In October 1992, a new Ministry was created, the Ministry of Transport, Communications and Public Works (MTCPW).

5. On January 1, 1993 the Federation was split into the Czech and Slovak Republics, and as a result, the following new entities were created: (a) SPT Praha, was split into SPT TELECOM, s.p. and Czech Posts, s.p.; (b) Czesche Radiokomunikace (CR) remained unchanged; (c) SPT Bratislava was split into: Slovak Telecommunications (ST), s.p., Slovak Posts, s.p. and Slovak Newspaper Distribution, s.p.; and (d) Sprava Radiokomunikace, Bratislava was merged into ST, s.p.. With effect from January 1, 1993, the Ministry of Economy (MOE) assumed all responsibilities within the sphere of telecommunications activities in the Czech Republic. Inside MOE, the Czech Telecommunications Office administers all regulatory issues related with the sector, while the Department of Telecommunications Policy determines the strategy for the sector, and represents the Government in its ownership function of SPT's shares. Tariff approval for domestic services are under the Ministry of Finance (MOF). 3

6. On August 10, 1994, the Government of the Czech Republic approved the "Main Principles of the State Telecommunications Policy", which includes the following principles/targets: (a) to double the number of telephone lines by year 2000; (b) to maintain the integrity of the existing operator, SPT TELECOM, a.s.; (c) to enable the entrance of a strategic partner in the ownership of SPT, by tendering by March 1, 1995; (d) to maintain Government ownership of not less than 51% in SPT after the entrance of the strategic partner; (e) to complete the regulatory framework by June 30, 1995; (f) to keep SPT's exclusivity in the provision of domestic and international long distance up to year 2000; (g) to authorize the entrance of new operating companies for the provision of local network services; and (h) for the MOE, to license two companies for the provision of mobile telephone cellular GSM service.

The privatization process

7. The Government of Czech Republic approved in September 1993 a privatization project, as a result of which SPT TELECOM, s.p. was transformed on January 1, 1994 into SPT TELECOM, a.s. (joint-stock company). On 11 July 1994 SPT TELECOM, a.s. issued bonds for the second round of the voucher scheme privatization process. In this Voucher or Coupon privatization, every Czech citizen of at least 18 years of age chose the company which shares he/she would prefer to own. As a result of this process the Government kept 70% of the shares, 26% went to Voucher shareholders, 3 % to the Restitution Fund and 1% to the Donation Fund. In June 1995, all 23,512,565 shares of SPT TELECOM, a.s. were quoted on the Prague Stock Exchange. The second step in the privatization of SPT was the selection of a Strategic Partner, based upon an increase of 37% in the number of shares; the number 37% was chosen in order to keep the Government as dominant shareholder with 51% (70%/1.37 = 51%). As a result of the increase of 37% in the number of shares, the Government ended with 51%, the Voucher Shareholders with 19%, the Restitution Fund with 2%, the Donation Fund with 1% and the Strategic Partner with 27% (37/1.37 = 27%).

Selection of a Strategic Partner

8. The strategic partner was selected by international bidding. On July 10, 1995, TelSource became the Strategic Partner of SPT by payment of US$ 1.32 billion in cash plus US$ 0.13 billion in the form of management, software and other services, for 27% of SPT's shares. The privatization process as designed by the Czech Government included the re-injection of the full amount paid by TelSource (US$ 1.32 billion) into SPT TELECOM, a.s.. TelSource is an international consortium comprising the Swiss PTT (49%), and the Netherlands PTT (NEPOSTEL) (51%), plus technical support from AT&T. The contract by which this strategic partner was brought into SPT established an exclusivity period for Domestic Long Distance and International services until year 2000. The management contract with TelSource expires on December 31, 2000. 4

C. Achievement of Project Objectives.

Institutional Development

9. Institutional Objectives. In the framework of this project, the institutional objectives focused on the operating entity: they included changes in SPT TELECOM, a.s.' s statutes and organization and improvements in its management. The specific studies focused on institutional improvement are listed in Table 7, and commented in what follows.

10. Organization. Supported by consultant's studies, SPT TELECOM's internal structure was reorganized. The Project assisted SPT's reorganization by financing a study on Corporate Strategy, Service Planning & Organizational Development. The organizational aspects of the institutional objectives as designed at project appraisal were satisfactorily reached.

11. Management. Management improvements were achieved under the Project through a Human Resource Study and the funding for Training Material for Project Management Courses.

SPT's obligations

12. Staff productivity. SPT improved its productivity during Project implementation by going from 13.9 staff/1,000 working lines in 1992 to 9.4 staff/1,000 working lines in 1996. It is estimated that this ratio will improve to 7 by year 2000 (see Tables 5 and 6).

13. Operational targets for telecommunications activities. SPT increased the switching capacity from 1.99 million lines in 1992 to 3.1 million lines in 1996, and expects to reach 4.89 million lines in year 2000. The number of working lines has increased from 1.82 million in 1992 to 2.8 million in 1996, and it is expected to reach 4.4 million by year 2000. With this rapid expansion plan, the telephone density (working lines per 100 population) has improved from 17.6 in 1992 to 28.0 in 1996, and it is expected to reach 44.0 in year 2000.

14. Financial targets. The Revenue per Working Line has improved from CZK 7,323 in 1992 to CZK 11,084 in 1996. The rate of return on operating fixed assets has been larger than 30% for the period 1993 through 1995, which is higher than estimated at Appraisal. 5

Financial Objectives

15. Annual audit requirements. Audits of the SPT TELECOM, a.s. accounts have been performed by Coopers and Lybrand in full compliance with the provisions of the Loan Agreement

16. Accounting system. The reliability of the accounting system has improved through the introduction of more computerized systems. However, still today the accounts are initially prepared following Czech accounting rules and later transformed following International Accounting Standards. There is a legal obligation to continue using domestic accounting standards as long as the Income Tax Forms are supported by accounting books using domestic accounting standards.

17. Tariffs. A tariff study was concluded by consultants as a condition for effectiveness. The Request for Proposals leading to the privatization of SPT (selection of Strategic Partner) included the Government commitment to re-balance tariffs. In compliance with this clause, tariffs were re-adjusted in 1995 and 1996, resulting in a 16% increase in local and domestic long distance rates and a decrease of international rates by 20%. The Czech Government has agreed to continue with annual adjustments under a typical Price-Cap formula; i.e.: tariff adjustments in a percentage equal to the annual inflation minus an efficiency improvement factor of I to 2 %.

18. Financial situation. The self-financing ratio, the operating ratio, and the debt equity ratio, as defined in the Loan Agreement, were satisfied from 1992 to 1995 (see paragraph 32).

Physical Objectives

19. Implementation schedule. The massive increase in new subscriber lines started in September 1995 with the entry of the Strategic Partner. During the first full year of operation under the new management/ownership SPT jumped from the level of 200,000 new lines per year to 448,000 new lines installed in 1996. The objectives of expansion and modernization of the network were exceeded (Part II, Table 5).

20. Objectives of service quality. The expansion was accompanied by a renovation of the outside plant network. As a result, the quality of service has improved from 5.5 faults/100 working lines per month, as estimated in the appraisal for 1992, to 2.5 faults/i 00 working lines pei month in 1996.

Cost of the Project

21. The cost of the project was estimated to be $ 891.5 million at appraisal, with the Bank contributing $ 80.0 million (See Part II. Tables 8a and 8b). The actual cost of the Project is estimated to be $ 1,226.90 million. The cost increase is due to: (a) the increase in the number of lines installed in the project period 1993 - 1996, with 669,000 6 lines installed compared with an appraisal estimate of 538,000 lines; and (b) the increase in transmission and outside plant investment necessary to support the larger expansion plans for the period 1996- 2000 resulting from the new operational targets as stated in the tender for selecting the Strategic Partner,

Procurement

22. The very limited use of funds under this Loan was mainly due to the reluctance of the management of the company to follow World Bank's Procurement Guidelines. In particular, once the process of selection for a Strategic Partner started, SPT considered: (a) that the Bank's Procurement Guidelines are too lengthy to follow; (b) that International Competitive Bidding (ICB) w.s against their new internal policy which calls for restricting bidding to only some four or five Bidders, well known to SPT, for each major type of equipment; and (c) that the Bank's policy to always award to the lowest responsive Bidder was not always in compliance with the new policies of the company. These objections are not related with the type of equipment (telecommunications in this case) but with an approach which prefers to optimize costs by relying on a limited number of known suppliers, rather than risking procurement from new suppliers. These reservations against Bank's Procurement Guidelines were discussed at Project Appraisal, and were considered in allocating procurement packages among EBRD, EIB and IBRD; however, when the entrance of the strategic partner provided with extra funds, SPT decided to cancel the loans from EBRD and IBRD.

Disbursements

23. No particular difficulties and no delays were encountered in the disbursement against applications for withdrawals made by SPT TELECOM, a.s. in accordance with the provisions of the loan agreement.

D. Implementation Record and Major Factors Affecting the Project

Factors not generally subject to Government control

24. One important factor that positively affected the overall cost of the project is the substantial reduction of international market prices for the high technology digital switching and transmission equipment. In addition to lower costs, the new technology systems provide better and more reliable services and require less maintenance. This has a positive impact on staff productivity.

Factors generally subject to Government control

25. As explained above, the Government implemented a sound tariff policy as part of the privatization process, and has been moving towards the creation of an adequate regulatory framework for the sector. 7

E. Project Sustainability

Project Benefits.

26. The Project benefits are significant; they include: (a) an increase in the quality and coverage of telecommunications services; (b) the transformation of SPT from a Government enterprise into a commercially oriented operating entity with private sector participation in the ownership and management; (c) the organizational split between post and teiecommunications activities; and (d) the implementation of sectoral reforms leading to an open competitive market by year 2000.

Sustainability

27. Most of the Project's major physical, institutional and financial objectives have been achieved and some of them, in particular the sectoral structure, have been exceeded The above benefits and substantial results from the Project provided favorable conditions for the project sustainability and the continuation, through the life period of the new facilities, of the support to the country's economic and social growth. Based on the above, the Project is ranked satisfactory in achieving its development objectives and in its implementation.

F. Bank's Performance

Preparation, Appraisal

28. At the beginning of the transformation process from a centrally planned economy towards a market driven economy, the Government of Czech Republic identified the telecommunications sector as a major priority for investment and reform and approached the Bank for support in implementing these changes. The Bank sent, on December 1992, a mission to consider separate Projects for Czech and Slovak Republics. Although the company pre-paid the full disbursed amount from this Loan, the operation was successful in assisting the Czech Government in achieving the final objectives of moving the telecommunications sector from the traditional Government-owned monopoly to a modern, more competitive sector with private sector participation.

29. Negotiations for this Project took place in April 1993, in Luxembourg, together with EBRD and EIB. The project was approved by the Board on September 9, 1993, and became effective on January 14, 1994. At the time of appraisal, it had been estimated that each of the Financial Institutions would provide a loan of US$ 80.0 million equivalent, which was modified by the time of effectiveness, with EBRD providing ECU 70 million; EIB providing ECU 65 million; and IBRD providing US$ 80.0 million. The eventual shortfall was covered by SPT. 8

Supervision

30. Regular supervision took place with two visits in 1994 and one each in 1995 and 1996. The cooperation between SPT and the Bank's project team was excellent. (see Table 13).

G. Borrower Performance

31. SPT TELECOM, a.s. was the Borrower and the Government of Czech Republic was the Guarantor. With respect to the achievement of physical objectives, SPT's performance was highly satisfactory, particularly by the efficiency with which it handled an investment program double the size of the previous years; regarding the institutional component and the sector reform, both SPT and the Government of Czech Republic showed a remarkable performance in introducing fundamental changes in the sector and the company without affecting the provision of services.

Compliance with Loan Covenants

32. The status of compliance with legal covenants is shown in Table 10. SPT complied with all legal covenants. However, the World Bank's legal covenants were considered too constraining for the new privately owned company with an ambitious development program. Specifically, the Bank's covenants obliged SPT to: (a) produce funds from internal sources equivalent to not less than 55% of annual average capital expenditures; (b) maintain a ratio of total operating expenses to total operating revenues not higher than 65%; and (c) not incur any debt unless the estimated net revenues be at least 2.5 times the estimated maximum debt service. The World Bank was aware of the limitations introduced by these covenants in the new privatized environment, and discussed in 1994 with SPT the possibility of amending the legal covenants as required under the new circumstances; additionally, the self-financing ratio covenant for 1995 was lowered from 55% to 35%. However, SPT later decided that: (a) due to the difficulties in following Bank's Procurement Guidelines, (b) the availability of funds provided by the entrance of the strategic partner; and (c) the limitations in financial freedom introduced by these obligations and the time necessary to amend the Loan Agreement was more appropriate for SPT to request cancellation of the un-disbursed amount of the Loan (US$ 69.7 million) and pre-pay the disbursed amount (US$ 10.3 million).

H. Assessment of Outcome

33. The Project outcome is satisfactory. The Project exceeded its physical and institutional objectives and achieved major changes in the sector structure far beyond the targets envisioned during project appraisal. 9

I. Future Operation.

34. The Project achieved the ultimate goal of creating an open competitive market with private sector participation in the provision of services. Therefore, no further participation of the Bank is necessary.

J. Key Lessons Learned

The key lessons learned are as follows:

(b) Bank's procurement guidelines may be difficult to follow by a company with private sector participation in its management-ownership due to the delays introduced and the need to award to the lowest responsive Bidder after following an ICB process (see paragraph 22); and

IMPLEMENTATION COMPLETION REPORT CZECH REPUBLIC TELECOMMUNICATIONSPROJECT (LOAN NO. 3644-CZ)

Part II: Statistical Tables

Table 1: Summary of Assessment Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Credit Disbursements: Cumulative Estimated and Actual Table 5: Key Indicators for Project Implementation Table 6: Key Indicators for Project Operation Table 7: Studies Included in Project Table 8A: Project Costs Table 8B: Project Financing Table 9: Economic Costs and Benefits Table 10: Status of Legal Covenants Table 11: Compliance with Operational Manual Statements Table 12: Bank Resources: Staff Inputs Table 13: Bank Resources: Missions

Appendices

Appendix A - Mission's Aide-Memoire

Appendix B - Borrower Contribution to the ICR

Appendix C - IBRD Map No...... II

Table 1: Summary of Assessments

A. Achievement of objectives Substantial Partial Negligible Not applicable

(V) (V) (V) (V) Macropolicies 0l E:1

Sector policies 300C

Financial objectives C1 [F] 0 0

Institutionaldevelopment I [23 0J

Physicalobjectives [SI 0 0 0

Povertyreduction El E El

Genderissues I I II [

Othersocial objectives l l 0 [

Environmentalobjectives j El0

Publicsector management I I a i

Privatesector development l al 0

Other(specify) E E El

B. Project sustainabilitv Likely Unlikely Uncertain

C. Bank performance satisfactory Satisfactory Deficient (if) (if) (if) Identification E [ E

Preparationassistance E IZ E

Appraisal El El

Supervision a El 12

Highly D. Borrowerperformance satisfactory Satisfactory Defiient (/) ~~(.) (V) Preparation [ [>3 [

Implementation I]

Covenantcompliance 0

Operation(if applicable) L 1 L

Highly Highly E. Assessmentof outcome satisfactory Satisfactor Unsatisfactory unsatisfactorv Li) Li) Li)( 13

Table 2: Related Bank Loans/Credits

This was the first telecommunications Project in Czech Republic. There are no related Bank loans/credits,

Table 3: Project Timetable

Steps in project cycle | Date planned Date actual/ l latest estimate Identification (Executive Project Summary) 1992 Preparation 1992 Re- Appraisal December 7 - 11, 1992 (after separation Czech - Slovak) Negotiations (Luxemburg) April 27 - 30, 1993 Letter of development policy (if applicable) Board presentation September 9, 1993 Signing November 1, 1993 Effectiveness January 14, 1994

First tranche release (if applicable) _ Midterm review (if applicable) Second (and third) tranche release (if applicable) Project completion June 30, 1998 June 30, 1998 a/ Credit closing/final disbursement June 30, 1998 June 30, 1998 / May1996 a/ The Loan was pre-paid and the un-disbursement amounts canceled in May 1996. 14

Table 4: Credit Disbursements: Cumulative Estimated and Actual

(US$ million)

IBRD FY ending FY 94 FY 95 FY 96 FY 97 FY 98 FY 99 FY 00 Dec 31

Appraisal estimate 0.0 13.0 29.0 52.0 69.0 78.0 80.0

Actual 0.00 2.52 10.11 10.28 0.0 0.0 0.0

Actual as % of estimate 100.0% 19.4% 34.9% 19.8% Table 5: Key Indicators for Project Implementation

1992 1993 1994 1995 1996

Annual targets or values at SAR Actual SAR Actual SAR Actual SAR Actual SAR Actual December 31 target target arget target

A. TELEPHONE 1. Installed Capacity (Lines*000) 2,178 1,991 2,278 2,260 2,702 2,464 2,518 2,660 3,108 2. Installed during the year (000's) 100 269 424 204 -184 196 448 3. Working Lines (000's) 1,791 1,819 1,875 1,961 2,041 2,151 2,205 2,398 2,800 4. Working Lines added in year (000) 84 142 166 190 164 247 402 5. Fill ratio % 82.2% 91.4% 82.3% 86.8% 75.5% 87.3% 87.6% 90.1% 90.1% 6. Telephone Density 17.4 17.6 20.1 19.61 21.1 20.7 22.2 23.3 28.00 (Lines/100 population) B. QUALITY OF SERVICE 7. Faults per 10OWrkgLines-month 5.5 2.78 5.5 2.59 5.5 2.5 4.5 2.5 C. EFFICIENCY 8. Staff 24,537 25,289 23,813 24,742 24,492 25,544 24,917 26,246 26,242 9. Staff per 1,000 WrkngLines 13.7 13.9 12.7 12.6 12.0 11.9 11.3 10.9 9.4 10. Revenue per WrkngLine (KCS) 7,372 7,323 8,222 9,350 9,070 10,555 9,162 10,134 11,084

15 Table 6: Key Indicators for Project Operation

1996 1997 1998 1999 2000 Annual targets or values at December 31

A. TELEPHONE 1. Installed Capacity (Lines*000) 3,108 3,614 4,163 4,614 4,886 2. Installed during the year (000's) 448 507 549 451 271 3. Working Lines (000's) 2,.800 3,250 3,750 4,150 4,400 4. Working Lines added in year (000) 409 450 500 400 250 5. Fill ratio % 90.0% 90.0% 90.0% 90.0% 90.0% 6. Telephone Density 28.0 32.5 37.5 41.5 44.0 (Lines/100 population) B. QUALITY OF SERVICE 7. Faults per 100WrkgLines-month 2.5 2.5 2.3 2.3 2.3 C. EFFICIENCY 8. Staff 26,242 26,706 27,356 28,256 29,156 9. Staff per 1,000 WrkngLines 10 9 8 7 7

16 Table 7: Studies Included in Project

Study Purposeas definedat appraisal Status Impactof study

CorporateStrategy, Service Planning & Part of InstitutionalDevelopment Program completed basis for StrategicPartner selection OrganizationalDevelopment (IDP) (fundedby PHARE) CostAllocation Study used in tariffs study TariffsStudy to determinenecessary level increases and it was statedas used as tariffspolicy while selling shares r-balancing amongservices Conditionof of ST to StrategicPartner Effectiveness HumanResource Study strengtheningof SPT completed

InvestmentPlanning Study strengtheningof SPT completed TrainingMaterial for ProjectManagement strengtheningof SPT completed Coures NetworkManagement System Study strengtheningof SPT completed Audit

17 18

Table 8A: Project Costs

Appraisal estimate Actual / Latest estimate Item (US$M) (US$M)

1. LD Network Switching 13.8 23.64 Transmission 68.9 118.04

2. Local Networks Switching 182.9 313.34 Network 443.2 759.29 3. T/A and Training 28.1 4.23 4. Measuring Equipment 69.4 8.36

Total Base Cost 806.3 1,226.90

Contingencies 85.2 0.00 TOTAL 891.5 1,226.90

(a) Information on actual cost was not available, appraisal estimate has been considered as actual cost

Table 8B: Project Financing

Appraisal estimate Actual / Latest estimate Item (US$M) (US$)

1. IBRD 80.0 US$ 10,280,142 pre-paid May 96 2. EIB 80.0 US$ 71.70 million 3. EBRD 80.0 US$ 46.90 million fully pre-paid May 96 4. Export Credits 60.0 US$ 541.10 million 5. SPT Telecom 591.5 US$ 556.92 million TOTAL 891.5 US$ 1,226.90 million 19

Table 9: Economic Costs and Benefits

Years CZK Million CZK Million CZK Million CZK Million Total Total Total Net Cap. Cost Oper. Cost Incremental Benefit incremental Revenue deflacted 1993 6,491 0 0 (6,491) 1994 8,397 2,851 6,083 (4,919) 1995 9,555 5,877 9,862 (5,052) 1996 8,866 5,877 9,862 (4,216) 1997 5,877 11,579 4,691 1998 5,730 13,408 6,016 1999 5,1,30 15,355 7,183 2000 5,730 17,430 8,315 2001 5,730 19,639 9,414 2002 9,414 2003 9,414 2004 9,414 2005 9,414 2006 9,414 2007 9,414 2008 9,414 2009 9,414 2010 9,414

IRR with 15 years Project life = 23 % IRR with 20 years Project life = 35 % Table 10: Status of Legal Covenants

Project DevelopmentObjectives Rating:

Original Revised Agreement Section Covenant Present fulfil1ment fulfillment Descriptionof Comments Type status date date covenant

5.01 (b) (ii) Financial C 1 July every firnish to the Bank AuditedFinancial year Statements 5.01 (b) (iii) Financial C 2 monthsafter firnish to the Bank Statementof Income each Quafter and Expenses,Cash Flow and Balance Sheet 5.01 Financial C I July every furnishtoi the BankAudit Statementon ( c) (iv) year use of SOE 5,02 Financial C annually produceinternal resources not less than 55 (a) (1) % of capital expenditures 5.02 Financial C annually maintaina OperatingRatio not high-erthan (a) (ii) 65 % 5.03(a) Financial C annually to keep a Net Revenue/Debtservice ratio of not less than 2.5 times

Prcsafl stac:

C = covenantcomplied with CD compliedwith after delay CP compliedwith partially NC = not compliedwith

20 21

Table 11: Compliancewith OperationalManual Statements

No significant lack of compliance with applicable Bank Operational manual Statements (OD or OP/BP) was observed under the project. Provisional unsatisfactory practices, in particular in the procurement process, were adequately adjusted or corrected during supervision.

Statement number and title Describe and comment on lack of compliance

Not Applicable

Table 12: Bank Resources: Staff Inputs

Stage of project cycle Planned Revised Actual Weeks US$ Weeks US$ Weeks US$ Through appraisal 12 12.0 Appraisal-Board 10 9.1 Board-effectiveness 10 11.6 Supervision 38.6 43.3 Completion 10 10.0 TOTAL 78.6 86.0 22 Table 13: Bank Resources: Missions

Performance rating /b

Number Specialized Implemen- Develop- Stage of Month/ of Days in staff skills tation ment Types of project cycle year persons field represented /a status objectives problems

Through appraisal

Re-Appraisal mission Dec. 92 3 5 Eng.,FinA. Re- Appraisal separate Czech- Slovak

Appraisal through Baoardapproval

Negotiations April 93 4 4+4 Eng, Fin. A, (Luxemburg) Lawyer,

| Boardapproval Sept 93

Board approval through effectiveness

Effectiveness January 94

Supervision

Supervision I Feb 94 3 7 Eng.,FinA S HS JMisin with EIB & EBRD. Progress in Telecom Law, Tariffs Policy, SPT Joint Stock Co. Supervision 2 Oct. 94 2 8 Eng.,FinA S HS

Supervision 3 Eng.,FinA

Supervision 4 Dec. 95 2 7 Eng.,FinA

Supervision Dec, 96 1 3 Eng.,FinA HS S

Completion

/a Abbreviations: Eng.: Engineer; FinA.: Financial Analyst. /b Keys to overall performance rating (before FY 94) = 1 - problem free; 2 - moderate; 3 - major problems; (from FY 94 on) = HS - highly satisfactory; S - satisfactory; U - unsatisfactory; HU - highly unsatisfactory. MAP SECTION

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ReportNo.: 16521 Type: ICR