World Bank Document

- FIL-O-

DOCUMENT OF INTERNATIONAL DEVELOPMENT ASSOCIATION

Not For Public Use Public Disclosure Authorized

Report No. P-1575a-ET

REPORT AND RECOMMENDATION

OF THE

Public Disclosure Authorized PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED CREDIT

ETHIOPIA

Public Disclosure Authorized FOR

A TELECOMMUNICATIONS PROJECT

April 23, 1975 Public Disclosure Authorized

This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. CURRENCY EQUIVALENTS

US-$1.00 = 2.07 Ethiopian Dollars (Eth.$)

Eth.$1.00 = US$0.48

Eth.$ 1 million = US$480,000

Government of Ethiopia Fiscal Year

July 8 - July 7 iNTERNATIONAL DEVELOPMENT ASSOCIATION

REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED DEVELOPMENT CREDIT TO ETHIOPIA FOR A TELECOMMUNICATIONS PROJECT

1. I submit the following report and recommendation on a proposed development credit to Ethiopia for the equivalent of US$16.0 million on standard IDA terms to help finance a telecommunications project. The proceeds of the credit would be relent to the Board of Telecommunications of Ethiopia for 20 years, including 5 years of grace, with interest at 7-1/4 percent per annum.

PART I - THE ECONOMY

2. Events in Ethiopia during the past year have been dominated by the political revolution which began in late February 1974. Widespread political and economic discontent, inflamed by the Government's slow response to the famine in the drought areas of Wollo and Tigre provinces, and to other press- ing economic and social needs, gave rise to demonstrations in the streets of Addis Ababa. Riots over the cost of living, strikes by teachers, taxi drivers and others, and pay mutinies by the armed forces, led to a general military revolt that precipitated the resignation of the cabinet on February 27. From February to September a new cabinet, appointed by the Emperor and apparently acceptable to the armed forces, administered the country, but power gravitated increasingly to the military.

3. The first actions of the new cabinet were to grant pay increases to the armed forces, police, teachers and civil servants, and to promise political and social reforms, including a new constitution and a free press. In spite of these moves, political and economic unrest, as well as criticism of the regime, continued through the spring. In late April, at the demand of the armed forces, the Emperor agreed to the arrest of some 20 former ministers and certain military officers on charges of corruption. From June through September the armed forces ordered further arrests of some 200 con- servative leaders, including senators, provincial governors and members of the Emperor's Crown Council. Additionally, they moved to take over or dissolve the institutions used by the Emperor to rule the country. Finally in September the armed forces arrested the Emperor, suspended the constitution and Parliament, and proclaimed rule by a Provisional Military Administrative Council (PMAC) pending the election of a new parliament and the approval of a new constitution. General Aman Michael Andom, the Defense Minister, was appointed head of the Provisional Government. The former Prime Minister was appointed Minister of Information and other cabinet ministers, government officials and civil servants were requested to continue in their posts. - 2 -

4. On November 23, the revolution, which until then had been almost completely bloodless, took a violent turn. In an apparent confrontation over control of the revolution, the PMAC attempted to arrest General Aman, who was killed in an ensuing gun battle. Following the death of General Aman, the Provisional Government, apparently fearing a counter-revolutionary coup, carried out summary executions of 59 political prisoners, including two former prime ministers, other former ministers, provincial governors, senior army officers and aristocrats. The killing of Aman and the executions sent shock waves through Ethiopia and the international community. In recognition of the adverse reaction at home and abroad, the Government declared that all prisoners still being held would be given a fair trial. Recently, however, the press has reported that persons caught organizing armed opposition to Government reform measures have been executed.

5. On December 20 the PMAC declared that Ethiopia would become a socialist state. This was followed on January 1, 1975, by a decree nation- alizing the financial sector (banks, insurance companies and savings associations). In early February some 100 medium- and large-scale manufacturing and distributing firms owned by Ethiopians and foreigners were nationalized; seventy-t'wo were taken over entirely, and the Government acquired a majority ownership in twenty-nine others. The Government declared its intention to pay full compensation.

6. In early February, fighting broke out between the armed forces and the Eritrean Liberation Front. Most of the fighting has been concentrated in and around the principal city of Asmara, which is still held by the Government. At this time fighting apparently continues, but since no international press coverage is permitted, little is known about the situation.

7. On March 4, 1975 the PMAC issued the long-awaited land reform proclamation which nationalized all land and restricted individual holdings to a maximum of 10 hectares. This brought to an end the old feudal structure oF land ownership under which about 90 percent of the rural population were engaged in agriculture as tenants. In preparation for this step, the Govern- ment had replaced the old provincial and district governors with carefully chosen administrators who were given training and orientation in land reform and other rural development measures. In addition, about 30,000 students were sent to the rural areas for the purpose of explaining to the peasant farmers the implications and beneflts of land reform while participating in a work campaign for rural development. There have been, not unexpectedly, some reports of resistance and opposition to the land reform measures, but it appears the measures have received general acceptance by the vast majority of the Ethiopian population. Another development in early March was a change in the civilian cabinet which brought in a number of well trained technocrats who had in their previous positions demonstrated considerable ability and achievement.

8. Throughout this period of upheaval, the civilian cabinet and the Ethiopian bureaucracy have continued to function reasonably well. The Govern- ment's takeover of banks and industries has led to a diversion of some scarce, -3-

trained manpower from Government ministries to the management of the nationalized enterprises. In addition, the Government has transferred a large number of officials from the ministries and other government agencies to local government institutions as a part of a government program to decentralize functions to the subprovincial and district levels. The effect of these transfers on the efficiency of operation of the ministries and agencies of the central government is not immediately clear but some loss of efficiency is likely.

9. In this changing atmosphere, Bank Group operations for the most part have proceeded satisfactorily. Appraisals and supervisions are continuing to proceed normally, and an economic updating mission visited the country in March. Regarding existing projects, the execution of two projects (Humera Agricultural Development, IDA Credit 188-ET, and the Lower Adiabo, IDA Credit 516-ET) have been adversely affected due to their proximity to Eritrea. Other projects have not been seriously affected by recent developments, and decisions have continued to be made and normal work has continued. The Government has indicated to us that, despite its preoccupation with political events, it is desirous of pursuing an accelerated program of economic development, with emphasis on the lower-income groups.

10. A report, "Recent Economic Performance and Future Prospects in Ethiopia," Report No. 9a-ET (R73-162) was circulated on June 15, 1973. An economic updating mission was carried out in March of this year. Annex I contains country data.

11. Ethiopia, with an annual per capita income of only US$80 in 1972, is classified by the UN as one of the 25 least developed countries of the world. The population is predominantly rural and depends on agriculture for its livelihood. In recent years the agricultural sector has contributed 50 to 60 percent of GDP and over 90 percent of export earnings. The leading exports are coffee, hides and skins, pulses and oilseeds. Manufacturing, including handicrafts and small-scale industries, contributes only 10 percent of GDP, and the output of the mininR sector is negligible.

12. An estimated 85 to 90 percent of the people are subsistence farmers living in isolated rural villages. Although some large commercial farms did exist, most farming units were small. A recent survey in one province showed that 92 percent of the cultivated holdings were less than one hectare. Agri- cultural productivity is, in general, very low. Methods of cultivation used by most farmers have changed little over many centuries; the soils in many highland areas are seriously depleted from prolonged overgrazing and over- cropping, and the prevailing systems of land tenure generally did not provide adequate incentives for investments which would raise farmers' productivity. The development of agriculture is also inhibited by the lack of transportation. There are few secondary and tertiary roads, and perhaps three-fourths of Ethiopia's farms are more than one-half day's walking distance from a road. This means transport costs are often too high to make it profitable for subsistence farmers to expand production for the market. As a consequence, - 4 -

there has been little or no improvement in rural living standards in recent years. Difficult though the development of agriculture may be, the lack of other resources means progress in developing the Ethiopian economy rests almost entirely on developing agriculture.

13. The land reform proclamation mentioned in paragraph 7 has major implications for the development of agriculture and the rural economy. As noted, all rural land has been nationalized. Farm families are to be given user-rights on land up to a maximum of 10 hectares. Subject to this ceiling, sufficient land for maintenance of family will be allotted to cultivators; previous landowners will also be eligible for such allocation. All land must be cultivated by family labor; land cannot be sold or transferred, but children would have the same user-rights in the land as their parents. In communal and nomadic areas peasants and pastoralists will have rights to use of the land for cultivation and grazing; they will be encouraged to form peasant associations, to organize cooperative farms and otherwise cooperate in the use of grazing and water rights. In settled areas, peasants' associations will be formed around 800-hectare blocks of land. These associations will distribute the land to the cultivators, establish judicial committees to hear land disputes arising within the area, establish credit and marketing cooperatives, anc assist in building schools, clinics and the like. Peasants' associations will also be established at the awraja (sub-province) and woreda (district) lcvels; they will appoint judicial committees which will adjudicate land di.sputes brought to them directly or on appeal from lower levels. Civil courts will have no jurisdiction on matters relating to rural land. The Government will have responsibility for settling peasants and establishing cottage industries to accommodate those who cannot be allotted sufficient land.

14. The ultimate disposition of large-scale farms is not entirely clear. The proclamation provides that large-scale farms shall be owned and run bv the State or by cooperatives or distributed to tillers for individual use. 'he Government is now assigning managers to some of these farms, which will be operated as state farms under the supervision of the Ministry of National Resource Development. The Government will pay appropriate compensation for nmvable property and permanent works on all nationalized land, but no compensation will be paid for land.

15. iTn tile short run, the land reform measures may result In some dis- ruption In agricultural production because of problems relating to making credit, work animals, Implements, fertilizer, seeds and pesticides available. These requirements are being met in some parts of the country under the Minimum Package Program and a few comprehensive agricultural development projects like the Wolamo Agricultural Development Project and the Chilalo Agricultural Development Project. However, in large parts of the country, these requirements have traditionally been met by landlords, and such arrangements have been disrupted. The proposed peasants' associations are intended to form the nuclei of cooperative societies for channeling required inputs -5-

and possibly also for storage and marketing. However, a large force of trained extension workers will be required, along with credit and storage facilities and timely supply of inputs, to keep planting and production going. An effective nationwide organization to plan, program and provide a wide variety of services to the rural areas has to be built up. In the long run, the distribution of land to the cultivator should lead to increased incentives, efficiency and better morale for the peasant farmer and ulti- mately to a better life in the rural areas.

16. The Ethiopian population of approximately 27 million (mid-1974 estimate) is heavily concentrated in the youngest age groups, with 45 percent under the age of 15. As a result of this age distribution, the proportion of the population which is economically active is relatively low and the dependency ratio is correspondingly high. Average life expectancy at birth is only 39. The urban population presently comprises less than 10 percent of the total, but it is growing at an estimated rate of 6.5 percent per annum. At this rate the urban population will rise from 2.3 million in 1970 to almost 6 million by 1985. While there are no comprehensive data on employment and unemployment, it is evident that opportunities in the towns have not kept pace with the supply of workers with the result that urban unemployment is growing. There is also significant underemployment in both the rural and urban areas. Fragmentary evidence suggests that maldistribution of income has increased in recent years. Although data on wages are scanty, they suggest that the income of agricultural laborers and unskilled workers in general have been virtually stagnant at a low level. The slow growth of agriculture where the majority of the people are engaged, the unchanging rural wage, and apparently rising urban unemployment, are indications of a worsening of income distribution.

17. While enrollment in primary schools has risen at an average rate of 11 percent per annum over the last 15 years, only about 20 percent of primary school-age children (ages 7-12) were enrolled in 1973-74. Only about 6 percent of the secondary-school-age population attends school, and the adult literacy rate is estimated to be only 7 percent. Inequality of educational opportunities between rural and urban areas remains a serious problem, and achieve- ments in the special adult literacy program lag substantially behind targets. Thus, despite creditable efforts on the part of the Government, overall educational attainment remains low in comparison with the rest of Africa and the developing world in general.

18. Ethiopia's First and Second Development Plans gave priority to the development of infrastructure and to the establishment of manufacturing industries (mainly government-financed) based on import substitution. The Third Plan (FY69-74) emphasized more balanced development of agriculture and industry, and the new Government is expected to give increased attention to agriculture, rural education, rural health and water supplies, and to other activities such as rural roads which directly support agricultural development. During the past two decades, the Government has made efforts to accelerate the pace of development by controlling expenditures on defense, -6- increasing expenditures on education, introducing some new taxes (including an agricultural income tax), and improving the effectiveness of the public service. However, these efforts have been only a beginning, and progress to date has generally fallen short of objectives. There are severe institutional shortcomings in Ethiopia; institutions are changing slowly, and the modest pace of institutional improvement has inhibited economic growth. Additional constraining factors in the past have been inadequate levels of domestic savings and low absorptive capacity.

19. During the period 1961-1968, the GDP grew at an average rate of 4.7 percent per year in real terms. However, during the first five years of the Third Plan (FY69-73), the average rate of growth was only 3.9 percent, well below the Plan target of 6 percent. With population expanding at an estimated 2.4 percent per year, growth in per capita incomes has been low, varying from about 2.5 percent per year in the early 1960's to 1.5 percent or less in recent years (as compared to the Third Plan target of 3.5 percent).

20. One cause of slow growth in GDP during the first four years of the Third Plan period was the slow expansion of exports. During 1968-71 export earnings increased by only 5.6 percent per year compared with the Plan target of 8 percent, and export volume grew at a disappointing rate of only 2.5 percent. In 1972-74, however, the situation has been much improved due both to higher prices for Ethiopia's traditional exports of coffee, hides and skins, oilseeds and pulses, and to increases in the volume of exports (except coffee). Total commodity exports increased from US$125 million in 1971 to US$167 million in 1972, US$240 million in 1973 and to US$305 million (estimated) in 1974, while imports rose much more slowly, from US$188 million in 1971 to US$268 million (estimated) in 1974. Largely as a result of these trade surpluses, net foreign exchange reserves increased from US$51 million at the end of 1971 to US$300 million at the end of 1974.

21. The medium-range balance of payments forecast for Ethiopia was favorable until the recent increases in petroleum prices and the attendant rises in the costs of fertilizers, chemicals, and other intermediate goods. While it now appears that Ethiopia will be able to meet the added cost of petroleum imports in the short run, despite an increase from about US$16-20 million in 1971 and 1972 to US$40 million in 1973 and to an estimated US$60 or US$70 million in 1974, in the longer run the terms of trade are likely to turn sharply against her. The Bank's latest commodity price forecasts indicate that Ethiopia's terms of trade index will decline from a base of 100 in 1974 to 80 in 1980. This substantial deterioration in the terms of trade, other things equal, could produce a reversal of recent current account surpluses.

22. Another cause of the disappointing growth of the Ethiopian economy in recent years has been the failure to reach investment targeta for both the public and private sectors. The gross investment rate increased steadily from 12 percent in 1961 to 14.4 percent in 1967, but since then has fallen back to an average of 12 percent in 1970-72. Similarly, the share of domestic -7-

savings in GDP increased from 11 percent in 1961 to 12.5 percent in 1968, but has fallen below 12 percent in more recent years. Central Government capital expenditures averaged only Eth$109 million a year over the six years of the Third Plan (FY69-74) as compared with an initial plan objective of Eth$190 million per year. Despite this shortfall, however, the Government was able, during the Plan period, to raise the level of investment spending from Eth$65 million in FY69 to Eth$130 million in FY73.

23. Because of the low domestic savings capacity, the Government depends heavily upon foreign borrowing to finance the public investment program. Foreign loans and credits accounted for 33 percent of public capital expenditures in FY69-74. However, annual gross public capital inflows have been only about US$1.32 per capita over the past five years. Very few developing countries receive so little aid on a per capita basis. Unlike many other African countries which were formerly dependent, Ethiopia has no traditional source of technical and financial help. For this reason, a relatively high level of assistance from the Bank Group is justified. The Bank/IDA share of public capital inflows has increased from about 25 percent in 1962-65 to 35 percent in 1966-69 and to approximately 40 percent in 1970-73. In addition, to assist Ethiopia in obtaining additional external assistance, the Bank has sponsored a Consultative Group of aid donors. The second meeting of this Group, under the Bank's chairmanship, was held in July 1973.

24. It must be recognized that Ethiopia has faced, and still faces, serious constraints in manpower, resources and institutions. In certain areas, such as education, foreign trade, tax collections and overall public investment, significant progress has been made. Viable institutions have been built up in the highways sector, power and telecommunications, and both intensive and extensive agricultural development programs have been launched successfully. A basis exists upon which the new Government can build an accelerated development effort, with emphasis on the rural areas. If such a program is undertaken, a substantially increased volume of foreign assistance will be needed. Because of Ethiopia's poverty, it is desirable that future inflows should be provided to the greatest extent possible on concessionary terms. Furthermore, it is appropriate that external donors should finance a large proportion of the costs of projects, including local costs.

25. Finally, a serious drought during 1972 and 1973 culminated in famine conditions in large areas of Wollo and Tigre provinces in 1973 and early 1974. It has not been possible to quantify accurately the economic impact or the loss of life, but the effects have been unquestionably grave. While rainfall during 1974 was adequate throughout most of the original drought regions, it will require perhaps as long as three to five years for agricultural production to return to pre-drought levels. The Bank Group is assisting in the drought rehabilitation program through a US$10 million IDA credit which was approved in June 1974. -8-

PART II - BANK GROUP OPERATIONS IN ETHIOPIA

26. From '950 to the present, Bank Group lending in Ethiopia has totalled US$298 million, conprised of eighteen IDA credits totalling US$189 million and twelve Bank loans totalling US$109 million. Additionally, the IFC has made five commitments in Ethiopia totalling US$15.7 million. One-half of the amount of lending (US$145 million) was committed in the last three years. In addition to the substantial increase in the size of its operations in the last three years, the Bank Group has softened its terms to Ethiopia; all but US$10.8 million of FY72's US$49.5 million program and all of FY73's US$53 million and FY74's US$43.4 million programs were IDA credits.

27. Until the late 1960's, our help concentrated on assisting the construction of trunk roads, power and telecommunication facilities. In the late 1960's, our program shifted in emphasis to agriculture and education, and in the past five years we have made ten credits for agricultural development totalling US$82.3 million and two credits for education totalling US$19.5 million. In addition, in 1972 we made a US$17 million credit for transporta- t.'on with emphasis on the construction of agricultural roads. This program reflects t'.e increased opportunity for agricultural lending brought about by improved sectoral knowledge, and the heavier emphasis on agriculture and education in the Government's priorities. This shift has been greatly assisted by the Bank's Regional Mission in Eastern Africa (RMEA), which has played a maj.r role in project identification and preparation in the agricultural sector.

28. Implementation of Bank Group-financed projects is generally satisfactory. Using the rate of credit disbursements as a measure of implementa- tIon, the pattern of disbursement in Ethiopia falls within the norm of the Bank Group as a whole. Implementation problems are generally concerned with delays in effectiveness and in initiation of project works rather than with problems of a technical nature. Delays in effectiveness have in the past 'ceen largely caused b-y delays in parliamentary ratification, while delays in implenmentation have been related to slowness in initiating and completing start-up activities, such as the appointments of consultants and project staff and the issuance of invitations to bid. Generally, however, once project staffs are mobilized and initial activities are underway, implementation is good. We are faced Iowever withi substantial cost overruns on three Bank Group-financed projects, the Amibara Irrigation Project (Credit No. 418-EM), the Addis Ababa Water and Sewage ?rolect (Loan No. 318-E , and the Fifth Highway Project, (Credit No. 332-Eri, Additionally it appears that price escalations will necessitate cutbacks and restructuring of other projects. Annex II contains a summary statement of Bank loans, IDA credits, and IFC investments as of February 28, 1975 and notes on the execution of ongoing projects.

29. In addition to its lending program, the Bank is pursuing a number of activities to support the Government's development strategy. As already mentioned, a mission visited Ethiopia to make a comprehensive study of the -9- agricultural sector. The Bank is executing agency for the UNDP project to help the Government in improving its planning, and the Bank has supplied advisors in project identification and preparation to the Planning Coimmission and the Ministry of Agriculture.

30. Lending to Ethiopia increased during FY72-74, and further expansion of the lending program is planned for the future if reasonable stability pre- vails. Since the economy is essentially agricultural, and because agriculture offers the greatest opportunities for development and for improving income distribution and employment, the main thrust of our lending program will be in that sector. A second sector of priority is the education sector where the Government is planning major investments to make education more relevant to development and more equitably available. Given the inadequate infrastructure of the country, and the low level of foreign and domestic capital available for investment, we shall also continue to provide some assistance to the development of other sectors, and to investment in the infrastructure which is necessary to support development. In order to relieve the constraint caused by Ethiopia's limited capacity to prepare and implement projects, especially in education and agriculture, we intend to continue providing technical assistance in project preparation, and to help strengthen through technical assistance the administrative capacity in the beneficiary institutions so that they will be able to utilize larger flows of assistance. In our lending for infrastructure, we plan to continue lending to such institutions as the Ethiopian Highway Authority (EHA), the Board of Telecommunications of Ethiopia (BTE), and the Ethiopian Electric Light and Power Authority (EELPA). These are institutions with which the Bank has worked for some years and which now have substantial capacity for channeling resources into development programs.

31. An IDA credit of US$32 million for a sixth highway project has been submitted to you for your consideration on April 29, 1975. We plan to present for your consideration in the next 18 months, a fourth education project, and four, or five, agricultural projects. Several of the projects will be follow- up projects and others will be breaking new ground. Included in the first category will be the Third Livestock Project, and a follow-up credit for the Coffee Processing Project. Included in the second category are proposals for a grain storage and marketing project, and an agricultural settlement project. Because of institutional and policy changes in Ethiopia, some restructuring of these projects has been necessary. Thus, completion of appraisals and negotiations of some of these projects could be delayed somewhat. Before presenting each of the above projects we shall take a careful look at the prospects for implementation and the availability of local resources necessary for implementation.

32. During 1970-73, the Bank and IDA contributed 40.5 percent of gross inflows of official loans. This share is expected to increase substantially during the next few years as amounts disbursed under Bank loans and IDA credits rise. As of December 31, 1974, the Bank/IDA share of total public debt disbursed and outstanding was 40.8 percent and the Bank/IDA share of total public debt service was 27.8 percent. Because of the relatively low - 10 -

levels2 f assistance expected from bilateral donors, Bank Group debt out- staidit-g as a Tuercent of outstanding external public debt is expected to rise to 55-60 percent by 1980, and debt service payments to the Bank Group will incre6,se to ap;proximately 40 percent of total public debt service by the same year. `swever, the IBRD share of external public debt-outstanding and disbursed will fall from 25 to 15 percent over this period. The debt service ratio in 1973 was less than 8 percent and is likely to remain below 10 percent in the 1980i'.

FART III - TELECOMMUNICATIONS IN ETHIOPIA

33. Ethiopia is a large country with rugged topography, and a large populatioT.. Presently Ethiopia has a telephone density of 0.25 per 100 population; only five of the other 38 African countries for which statistics are available have lower densities. Given the large distances involved and the sparse road network, economic integration and improvement in administra- tion are dependent to a large degree on expansion of telecommunications. The difficult topography, the wide area over which agriculture is distributed and the scarcity of good all-weather roads make telecommunications particularly important for coordinating the movement, distribution and marketing of agricultural products. Also manufacturing, industry, tourism and commerce are making increasing demands on national and international telecommunications facilities.

34. The Eoard of Telecommunications of Ethiopia (BTE), which would be the beneficiary of the proposed credit, was established in 1952. It is solely responsible for all public telecommunications services in Ethiopia and between Ethiopia and other countries. BTE is organized as a Government- owned commercial corporation under the overall direction of the Ministry of Cormunications and has considerable autonomy to administer its day-to-day operations WThile there is a need for further improvement, all services -- urban, inter-urban, and international -- have grown and improved significantly since BTE's establishment. The expansion and improvement have been assisted by external loans and technical assistance.

Local Telephone Service

35. As of mid-1974, Ethiopia had 17 automatic telephone exchanges, two of which were in Addis Ababa. The installed capacity was 55,300 lines, 35,500 of them in Addis Ababa. Most of the equipment is modern, well maintained and should provide good service for many years. In addition, there are 285 manual exchanges, with an installed capacity of 12,515 lines, serving small towms and rural areas; service is usually provided only in the daytime. The increase in telephones installed in these small exchanges over the pe-;iod 1968-73 averaged about 13 percent per annum. Based on past growth trends and detailed development studies of subscriber demand in each exchange area, BTE has forecast an average rate of growth during the project period of about 11 percent which is reasonable.

Long Distance Service

36. The long distance network consists of a 960 channel microwave system linking Addis Ababa and Asmara, a number of VHF systems and open-wire lines, which are supplemented by carrier systems on main routes. The network comprises 260,000 trunk-circuit kilometers.

37. The microwave system, Addis Ababa to Asmara, provides good service between the two largest cities in the country. Three other microwave systems will be put in service by mid-1975 and will improve service between Addis Ababa and Dire Dawa/Harrar, Jima and Shashamane. The four microwave systems are all part of BTE's Fourth Development Program (1968-1973) financed by a previous Bank loan.

38. Three automatic trunk exchanges were put in service in May 1973. Along with the microwave systems, they make possible subscriber trunk dial- ing (STD) between the most important cities in Ethiopia. These works would also facilitate provision of good quality long distance service to new areas.

39. BTE has proposed an increase in the number of long distance circuits based on traffic projections on each route, taking into consideration all the circuits which would be available on completion of microwave communication systems provided in the Fourth Development Program. The additional circuits would remove congestion on various routes, reduce delays in obtaining service and generally improve service and meet the growth of demand.

Telegraph and Telex Service

40. Telegraph service is provided over the telephone network and high frequency radio. Installation of a public telegraph system with terminals in 14 cities is almost completed. The telegraph service provides access, often the only one, to remote areas of the country.

41. Telex service is offered from one automatic exchange in Addis Ababa and from manual exchanges in Asmara, Assab and Dire Dawa. The number of telex subscribers at mid-1974 was 271. The service offered to the subscribers connected to the manual exchanges is rather poor. The number of telex subscribers lhas increased by 14 percent annually during the last five years. Since the backlog of demands has already been met, BTE has now forecast a 12 percent annual growth for telex subscribers for the project period based on demands and applications for this service largely in Addis Ababa.

International Services

42. International telephone, telegraph and telex service is offered via high frequency (HF) radio to 19 destinations abroad and via an open- wire line equipped with a carrier system to Djibouti. The existing plant - 12 -

has not been able to meet the demand. This has resulted in long waiting periods, sometimes more than 24 hours, and a generally poor quality of ser- vlce. Despite these limitations, international telephone traffic increased 24 percent and telex traffic 27 percent annually, during 1968-73.

Bank Group Assistance to the Sector 43. Starting in 1951, the Bank Group has made four loans and one credit, totalling US$35.1 million, for telecommunications development in Ethiopia. The projects financed by the first three loans (42-ET, 314-ET and 441-ET) have been completed. The fourth loan (605-ET) for $4.5 million with participation from the Swedish Iinternational Development Authority (SIDA) which provided an equal amount, was made in 1969 to cover part of the foreign cost of the 1968-73 expansion program (Fourth Development Program). Progress on this project has been satisfactory; however, certain items originally scheduled for completion in 1973 were delayed by about one year. The credit (453-ET) for US$21.4 million and covering the first phase of the foreign exchange requirements of BTE's Fifth Development Program (1974-78) was made in Januarv 1974; after some six months of initial delays, project implementation is p-rogressing satisfactorily.

PART IV - THE PROJECT

The Project

44. A report entitled "Board of Telecommunications of Ethiopia, Apprais- al of a Telecommunications Project" (Report No. 717-ET) is being circulated separately. A Credit and Project Summary is provided in Annex III.

45. The project proposed for IDA financing is BTE's Fifth Development Program (1974-1978), except for a small part which will be completed in mid- 1979 becatuse of some initial delays. This project was first appraised in january 1973 to determine the feasibility of an IDA credit to finance the foreign exchange component. Due to the shortage of IDA funds in FY74, it was decided that the project would be financed through two credits. The first credit (453-ET) for an amount of US$21.4 million, covering part of the project, was approved by the Board in November 1973. The same project was reappraised in September 1974 in order to update the information collected and confirm the conclusions reached during the previous appraisal. On the basis of the second appraisal, and after careful assessment of recent political and economic developments in Ethiopia, we are satisfied that the project is still of high priority and is economically, technically and financially Justi- fied in the changed circumstances. Thus, a credit of US$16 million is now proposed to finance the remaining foreign exchange requirements of the project, except US$1.4 million in respect of equipment which has already been contracted and financed by BTE. Negotiations for this second credit were held in Washington from March 31 through April 3, 1975. The Ethiopian Delegation was led by Ato Legesse Tickeher, Economic and Financial Counsellor of the - 13 -

Ethiopian Embassy in Washington, D.C. and Ato Girmaw Ingidayehu, Acting General Manager of the Board of Telecommunications of Ethiopia.

46. The project is designed to meet the growth of demand in the areas now being served and to extend service to some of the areas of the interior where telecommunications services are sparse or non-existent. The project consists of:

(i) installation of about 40,000 lines of automatic exchange equipment, and about 4,500 lines of manual exchange equipment;

(ii) installation of cable distribution networks and subscribers' plant to provide about 45,000 telephone connections;

(iii) provision of four microwave links (Dessie-Assab,Asmara- Tessenei, Shashamane-Moyale, and Addis Ababa-Chimbi) with a total route length of 1,500 km and various medium capacity VHF/UHF radio links or coaxial cables with a route length totaling 200 km; construction of 3,000 km of small capacity VHF radio links and rehabilitation of 2,100 km of open-wire lines; and provision of multiplex and carrier equipment for the above facilities as well as for expanding the capacity of the existing ones;

(iv) installation of 48 manual switchboard positions and provision of about 660 lines of long distance automatic switching equipment;

(v) installation of an earth satellite station for international services and of an associated international telephone transit center which will allow semi-automatic telephone operation with most foreign countries; and

(vi) various extensions of the telex and telegraph networks, including an extension of the capacity of the telex switching equipment in Addis Ababa from 400 lines to about 700 lines.

47. The estimated cost of the project has increased since it was last appraised in 1973 to US$60.6 million equivalent, of which US$38.8 million equivalent (64 percent) is the foreign exchange component -- the estimated cost at the time of appraisal in 1973 was US$55 million equivalent, of which US$35 million equivalent was the foreign exchange component. This increase of roughly 10 percent is due mainly to (i) an increase in the provision for price contingencies, taking into account present worldwide inflation, and (ii) a provision of US$0.7 million equivalent to finance additional facilities required for the telex service. - 14 -

Financing Plan

48. A sumnary of the financing plan for the project is given below:

Million Eth$ US$ % Requirements

Proposed Project 125.5 60.6 100

Sources

BTE's Own Funds 48.1 23.2 38 Credit 453-FT 44.3 21.4 35 Proposed Credit 33.1 16.0 27

Total Sources 125.5 60.6 100

49. BTE's overall financing plan for 1974-1979, during which the project would be implemented,requires US$78.2 million in capital investments of which US$4.9 million corresponds to the remaining portion of the Fourth Telecom- munication Project, US$60.5 million to the Fifth Telecommunication Project (excluding US$0.1 million expended in late 1973), and US$12.8 million for investment beyond the Fifth Telecommunication Project. Of this total requirement, about 40 percent will be financed from BTE's net internal cash generation, including a small reduction in working capital. The remaining 60 percent of the requirement will be financed by borrowings which would include proceeds of IBRD/SIDA Loan 605-ET (Fourth Telecommunication Project), Credit 453-ET (Fifth Telecommunication Project - First Tranche) and the proposed credit.

50. BTE's overall financing plan does not provide for any dividends to be paid during the construction period. During negotiations, agreement was reached that no dividends would be pai d unless a revised financing plan indicates that dividend payments are feasible. (This will be included in the Subsidiary Loan Agreement between the Government and BTE, the conclusion of which is a condition of effectiveness in accordance with Section 5.01(b) the Credit Agreement.) Furthermore, the financing plan shows a need for temporary finance in the intermediate years of the construction program. During negotiations, we obtained assurances that BTE would obtain short-term debt as and when needed (Project Agreement, Section 4.05).

51. The relending terms for the proceeds of the proposed credit would be the same as for credit 453-ET, i.e. 20 years, including a 5-year grace period, with an interest rate of 7-1/4 percent, and deferment of interest receipts of up to Eth.$1.5 million during construction of the project. BTE will bear the exchange risk. (These arrangements will be included in the Subsidiary Loan Agreement between the Government and BTE, the conclusion of whicih is a condition of effectiveness in accordance with Section 5.01(b) of the Credit Agreement.) - 15 -

Earnings and Tariffs

52. Tariffs are on average comparable to those of most developing countries. The annual revenue per telephone connection is US$227, which is significantly higher than that of most European countries despite a con- siderably lower income in Ethiopia as compared with Europe, and the fact that long distance service now in the early stages of development has not yet made a full contribution to revenue. The most recent t4riff revision took place in 1971 when local call charges were increased by 33 percent.

53. The level of tariffs in the period of 1968 to 1973 allowed BTE to earn a rate of return (the ratio of net operating income to the value of net plant in service) varying from 10.7 percent to 12.3 percent annually; this exceeded the 9 percent rate of return covenanted under the Bank loan for the Fourth Telecommunication Project (1968-1973). Internally generated funds during this period were sufficient after servicing of debt to provide about 60 percent of the funds required for investment. Commencing in calendar year 1973, however, the Government withdrew BTE's tax exemptions and BTE must now pay income, excise and property taxes. These taxes will halve a substantial impact on BTE's earnings. Despite the fact that operating revenues during the project period are estimated to increase at an average annual rate of 13 percent, the rate of return will decline from 11.7 percent in 1973 to less than 6 percent in 1979, and net earnings at current levels of tariffs while adequate to finance BTE's contribution to the Fifth Development Program, will not be sufficient to finance a reasonable proportion of subsequent development expansion.

54. During negotiations for Credit 453-ET, therefore, agreement was reached that BTE will take such actions as necessary to achieve an annual rate of return of 7 percent now and of 8 percent by the time the project is completed, and to maintain it at that level thereafter. We have agreed to include a similar provision in the Project Agreement for the proposed Credit (Section 4.04). While there will be some opportunities once the project is completed to achieve more economical operations through increasing system utilization, it is expected that achievement of this rate of return will require a tariff increase of about 12 percent by the end of the project period. Meanwhile, with the assistance of the Bank Group, BTE will begin a study of the economic costs and benefits of telecommunications services, particularly for rural areas, which will help the Government and BTE in making price and investment decisions. This study will also examine the potential contribution of telecommunications to government revenues. It is envisaged that this study would serve as a useful example to other developing countries faced with similar decisions.

Fiscal Impact

55. As a result of the change of its tax liabilities, BTE will pay taxes and duties to the Government in the amqount of Eth.$28 million during the period the project is being implemented (1974-79). Profit taxes alone will equal about Eth.$3.3 million per year in 1979, In addition. BTE will pay Eth.$16 million of interest to the Government over the project period - 16 -

on the onlending of the two IDA credits for the project. BTE will not have recourse to the Government's budget for financing expansion and will be servicing all of its debts from its own revenues. Thus the above payments are net contributions from BTE to the Government for use in other sectors.

Collection Performance

*56. There nas been substantial improvement in BTE's collection practices since the Fourth Telecommunications Project. Current billings are being collected on time or the service of the delinquent subscriber is being terminated, thus limiting the amount of uncollectable accounts. The collection of government accounts is now satisfactory.

Financial Position

57. Before December 31, 1967, BTE's share capital was Eth.$7.7 million. The corporate charter restricts the amount of indebtedness to not more than three times the amount of authorized and subscribed share capital. In order to enable BTE to incur additional debt, its share capital was increased on December 31, 1967, to Eth.$20 million by capitalizing part of the Renewals and Expansion Reserve accumulated from retained earnings. The share capital was similarly increased to Eth.$40 million in 1974 to allow for the lending proposed for the Fifth Development Program by capitalizing part of the Renewals and Expansion Reserve.

58. The debt/equity ratio during the project period will vary from 29/71 at December 31, 1973 to 54/46 at December 31, 1979. This is satisfactory. Internal cash generation will cover annual debt service at least 2.2 times during each year of the period. The debt service covenant of Credit 453-ET requires BTE to obtain the Bank's agreement before contract- ing new debt unless the debt service coverage as usually defined exceeds 1.5. We have agreed to include a similar provision in the project agreement for the proposed credit (Section 4.03).

Organization and Management

59. BTE's organization is generally satisfactory and effective. At present, however, the planning function is mostly handled by the Engineering Department since the Planning and Programming Division, set up for this purpose in 1972 and directly responsible to the General Manager, has not yet been provided with enough competent staff to carry out this function. The current arrangement works well and is acceptable considering the present size of the network and the relative scarcity of competent staff. The management and technical staff of BTE are generally well qualified and competent. With only one exception, the utility is entirely staffed by Ethiopians and many of them have visited abroad for training.

Implementation

60. Competent staff is available within BTE for the preparation of bidding documents, bid evaluations and detailed engineering of the project - 17 -

with the exception of the earth satellite station, for which assistance by a consultant has already been contracted. Except for the earth satellite station, which will be installed by the selected supplier, all other equipment sill be installed by BTE's own staff under supervision of suppliers. Due to current unrest there is some uncertainty about implementation of a few works in northern Ethiopia which is about 5 percent of the totalf project (approximately US$3.5 million in project cost of which US$2.5 million would be covered by the proposed credit). If these works for any reason were delayed abnor- mally BTE would, in consultation with IDA, redirect the equipment and materials for use elsewhere in Ethiopia which would involve minimal cost and effort. Procurement

61. All goods financed by the proposed credit would be procured through international competitive bidding in accordance with the Bank Group's Guidelines for Procurement, with the exception of extension equipment for existing facilities. These latter items, which are estimated to cost US$0.5 million .or about 3 percent of the IDA credit, will be procured through negotiation from the original suppliers.

62. In order to expedite procurement of equlpment financed by the proposed credit and to allow BTE to standardize equipment, it was agreed between IDA and BTE during negotiations of Credit 453-ET that bidding documents for procurement of equipment through international competitive bidding under Credit 453-ET would cover the requirements of the whole project; BTE would thus obtain from suppliers firm proposals for equipment financed by Credit 453-ET and options for purchase of equipment to be financed by the proposed credit. This procedure eliminates the need for a second round of international competitive bidding for part of the project to be financed by the proposed credit.

63. Although at present there is no local production of telecommunications equipment, there is local manufacture of electrical cables which easily could be extended to telephone installation cables and dropwire. Provision is therefore made for financing of the ex-factory cost of such equipment if a local manufacturer is awarded a contract (see Schedule 1, para. 1(1) of the proposed Credit). In order to be consistent in this approach for the Fifth Telecommunications Project as a whole,-Credit 453-ET is being amended to permit financing of locally manufactured equipment (see Schedule 1, para. 5 of the proposed Credit Agreement). To encourage local manufacture, a domestic preference of 15 percent or the customs duties, whichever is lower, would be granted for such items, the estimated cost of which would be less than US$200,000. Mloreover, the above-mentioned preferential treatment of local manufacturers will also be made applicable for Credit 453-ET in order to maintain consistent awarding procedures under the project (See Schedule 1, para. B.1 of proposed Project Agreement).

Disbursement

64. Credit proceeds will be disbursed against the CIF costs of imported equipment and the foreign cost of imported services, or the ex-factory cost of any locally awarded contract for locally manufactured goods. - 18 -

Return on Investment and Economic Rate of Return

65. The internal rate of return on the project is estimated at 17.4 percent. Sensitivity analyses reflecting a 10 percent increase in operating costs and a 10 percent decrease in revenues were made which produced a rate of return of 14.7 percent. Although this rate of return is not in itself a complete test of the economic merit of the project, it does provide a guide as to the justification for the investment as indicated by subscribers' willingness to pay for the services provided.

66. The economic rate of return on the proposed project is undoubt- edly higher than the foregoing rate suggests, since the prices charged for telecommunications services are not considered an adequate measure of the full benefits to the subscribers themselves. Moreover, the costs include the full cost of extending service to new areas even though the full benefits will be obtained only in the future as additional lines are connected in these areas. Examples of benefits which are not fully quantified include the availability of marketing information in rural areas which allows farmers or marketing agents to transport products when they are informed that prices are satisfactory.

67. The project would assist in the economic development of the provinces Tlhrough improved long distance services and extension of services to about '00 rural areas which have no telephones now. The project provides for new microwave links, and additions to the microwave network in the Fourth Tele- communications Project which will give reliable communications between the provinces and the capital. The installation of the earth satellite station would provide economical, 24-hour high quality, reliable international tele- co:mmunications to existing and new destinations in other countries and would help in the promotion of exports and tourism.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

68. The drafts of a Development Credit Agreement between the Government of E.hiopia and the Association and of a Project Agreement between the Asso- ciation and the Board of Telecommunications of Ethiopia (BTE), the Report ot the Cormnittee provided for under Article V, Section l(d) of the Articles of Agreement, and the text ef: a draft Resoltition approving- the proposed credit are being distributed to the E.:-ecutive Directors separately. The draft Agree- ments conform to the normal pattc:rn for credits for projects of this type.

69. Conclusion of a satisfactory Sulbsidiary Loan Agreement between the Government and BTE, which would include the onlending terms and conditions as in paragraphs 50 and 51 above, would be a condition of effectiveness of the proposed credit.

70. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association. - 19 -

PART VT - RECOMMENDATION

71. I recomuend that the Executive Directors approve the proposed credit.

Robert S. McNamara President

J. Burke Knapp Attachments April 23, 1975

s 05a ,+ i2- 9-i| Zg >04U sq-t st N;§-2 a

I'l i ej:~~~~~~~~~~~~~~~~~~~~~~~~~~~3 ' i l : ,tslal APli EX I ETHIOPIA Page 2 1MO?IffT7 -DEVEIDFl?EVT DATA ~~Xouts tn muillors of U.S. 7Iars3)

l1'5 - 19 70 795- 19i 29 2w 65 Ac tual Projected 19 6& 1_65 90 1 5 18 1965 190 19-73 91974 9176 19-80 Annual Cro,vth Rates As Percent of CDV 1967-1969 Prices & xE.sa-ge Pastes Averftge NATIONALAC01TNTS ~At 4.9 1,0.0 9j F 103. 1950.3 2122.7 2586.3 5.1 4.3 4.3 Due-.tic Product 1337.1 1651.2 1875.3 Crust 16.9 22.8 29.9 -19.3 -56.0 Gsin- f-'n Terse of Trade(a 5.6 100.0 100.0 100.0 19431.0 207 1.7 2491.0 5.4 4.3 3.5 ScottDomcnetic ncome 1355.9 16-7Z2 190O5.2 13.5 0.7 4.4 4.9 20.0 22,3 23.0 197.0 205.4 234.9 244.3 266,5 324.0 Import (ledl. 81825) 0.9 7.1 2.1 ...i-2< ..Uf..5 UL.2 _Uk~D -2192.7 -2~56.-6 -2L48.5~-2~7 4.4 11.8 Koports(Oscort capaclt7)~~U353,5 . 0.8 1.8 2.0 -57.8 -12.3 18,5 49.5 29.0 0.6 . Resource Gap 28.5 29.4 3.8 3.5 4.4 89.1 87.8 87.2 1470.6 1583.0 1693.6 1809.3 2121.0 5.7 C,-junptios tExpenditures 12271.9- 1.8 8.0 13.7 13.9 14.8 264.3 225.0 280.7 369.5 5.8 -7.6 Invnotment 1 (mnd. stocks) 161.5 232.7 3.8 5.6 10.9 12.2 12.8 322.1 237.4 262.4 370.0 3.2 8.9 Elceestle Savings 133.0 203.4 3.2 20.9 12.2 12.6 238.6 261.5 314.6 4.7 7.3 3.8 9'sxci,a: Savings 143.2 203.6 327.0 As Percent of Total- at Current P~rices MERCF=7ITSE TRADE Annual Data. 1986 1970 2877 1967 1888 196~9 1970 1971 1972 42.1 33.2 38'.5 51.7 56.9 64.0 72.7 Capital fo)ods 48.6 72.9 22.3 23.0 20.9 30).8 38.5 33.5 59.4 43.4 39.6 0Tntermrdjate f:oods (eLfuels) neThsani related materials 2H s7 3Al 10.8 11.'3 13.5 17.7 15.7 , of' which: Petroleum 12.6 .L 3. 312. ______Se 3~~~~~~~~~~0.950.8 5-8 8 100,0 189.1 1010.0 100.0 .r.s(eif) 143.0 173.5 .155.3 171.6 187.8

K".Ort 5 96.4 83.7 95.8 t 99.9 102.6 114.9 114.6 119.7 159.8 Pri-.sr =roducts 5mm1. fuels) Fu~els ylrelated msates,talc 1.4 2.0 1.5 Petroleum - 0.7 1.2 .2 of which: 2 3.1 ~3.0 j 4 .A.~...U No,niif.c:t-,ed 7ionds _1. 108.0 300.0 100.0 122.~3 125.6 166.3 70t 11 Lo,n. Eoerle(fb 101.1 106.4 139.2 Tosr's. end PaeAdsr Trauce 1973 1974 3976 1980 '¶etehoctd'tt -rade Indices 195 1970 3.0 2.5 136.4 151.6 148.3 166.1 3.1 3.0 Es4nert luicr Index - 109.0 126.5 11.0 5.4 116.6 163.0 181.8 223.8 -0.3 2.0 ioso-t Pr,ice Index 92. 7 102.4 -2.8 93.0 81.6 71.2 3.3 3.0 -7.21 Teros of Trade index 117.8 123.5 117.0 3.0 169.7 178.2 216.6 6.3 -1.9 14.9 E:xtorts volume index 97.7 88.8 161.6 Average Annual Growth Rates- As Percent of Total Annuaosi~ a 1ns39o>j.SrI,sle '.:AIK7. APDSt FT 5ECTOR 196C/51-1971172 196/6 16/6 1971/72 1963/64 1967/68 1969170 1971/72 1968/81 ~18616 57.8 31.5 - 1835 9682564.5 A.eriosltssre .~~~~~1504.51608.9 1684.4 17754.2 12.3 14.8 26.5 iuO.9 541.1 a21.0 7 .3 anted MIring 286.6 358.9 a3b.8 7.8 23,2 28.28. 31.0~~~~~~~~~~~~~~~~~3232 ..tlLl 2AA 5 19212. 122jJ. ______.3BA....1..54L0 5 100.0 100.0 1W0. 2855.9 3202.0 3445.5 3761.9 Z722 T ,al 23 32. 1 2652.3 Pecn of CDP 1978/72 1971/72 1972/73 18E67/6-17_73-A 0131 Ii82 P177K 1~~~~~~967/681968/69 1969/70 1967/68 1920/71 1973/73 ca 0-v-covert) -- ~ ~~~~~~~~~~~~~~~~ 8.8 9.6 9.9 10.5 429.1 466.0 494.7 560.0 Curre'r--'aupto ~~~~~362.6396.6 9j0 8L6 _3 58B4.0 4L05.5 434.4 471,8 6_4 "'t-voeu,rditurec 34, 362.0 0.6 1.3 1.6 68.5 60.3 86.2 30.9 LM,etar: Savl,x 22.4 34.6 45.1. 24 24 111.5 125.9 128.9 12.51. 11ccntnr Investment 7. 647 9.0

US $ millios At ened 1969 P and ER? Prelim. Proj. DETAIL ONL EXfTNPiDtiF.F DETAILS Actual Third8Plan %of Total C,1J3DL•ST 1972/73 73'74 p11L11 SECTOR r.tExpred.) S ideS Current1970/71 1971/33 ~~~~~~19 (168 /69- 1972 /73) 19.7 21.0 21.4 INVESTMIENTPROGRAM FakuCoti or, 19.0 46.6 22.3 7.0 7.5 8.3 Social. Sectors Other locl ervices 7.2 25.3 12.1 2.8 3.2 Agriculture 2.8 2.9 24.5 11.7 A.Fr!culture 9.5 ind.ustry and Mining Eleolnr.cDmie 8.8 8.1 8.7 . - - - Other 53.0 50.7 46.6 Pov-er A7s1nintratto~n nd D~efense 53.6 83.5 39.9 9.3 11.2 Transport and communilcations (:11cr 8.6 9.2 .112 Alk2. 100.0 100.0 100.0 100.0 Other oalC-urrent Enpenditures T_otal Expenditures 209.2 100.0

1965- 1970- 1974- rIANCINGDR S!EIR,CTED7071J037AT05 . 1960- 1965 1970 1975 1978 GoDricluilnd Pro" 5-year averaged data) 73.8 42.2 1.212 _2.947 5TU Public Sector Savings Ars-p'4F 2.5-0 - - 1.00 Plrogramaid counterpart 2,68 0.31 1.05 57.8 Leport Elasticity 0.08 Foreign Project Aid 101.2 Savings Rate 0.07 0.20 0.13 100.0 21.rgdI:a Dlmcrntie 0.09 Total Financing 175.0 indiosalPete ~~~~0,080.18 0.15 'iar 8 i:nalSavings

Per Worker (19 - P'rices& Et.c.Rates% Labor Force Value kided IAhCq £09C97AND0 Total Percent of Average 19 - MIlions 6 of Tetel 19 in.JrU.S.Dsollesn oicrRrr119619: 1)19 ~~~~In ~ 19 19 19 Growth -rate 19 19 Growth Rate 19 ______- ~~ ~ ~~~~1919

...... Agiuture.. . . Industs-r. . . .. ServIce

not available - less than half the smallest unit shown ETHIOPIA BALANCE OF PAYMEi?TShEXNAL ASSISTANCE AND DEBT lamoants in -illicns of U.5. dollars at current prices)

Avg. Annual Actual Estimated Projected Growth Rate 771P 1972 1973 19 1975 1976 1977 1978 1979 1980 1970-1980

SUF24ARYBALANCE OF PAeIXTS

ExPorts (incl. FFS) 180.3 190.2 246.8 341.2 418.3 425.6 451.2 482.3 515.9 575.8 614.2 13.0 Ir,orts (incl. NFS) 210.4 232.1 236.7 273.8 398.2 438.3 484.5 534.8 391.2 654.7 725.0 13.2 Resource Balance I -K) - -30.1 4 ID.1 67.4 - 1T -12.6 . -33 - S.4 -7 5 . 7 r 13.9

Interest (net) -1.5 -4.5 -6.1 -3.1 3.0 2.6 1.3 -0.1 -2.0 -3.9 -6.6 16.0 Direct Inveatment Income -6.2 -7.2 -13.1 -16.8 -21.0 -22.1 -23.2 -24.3 -25.5 -26.8 -28.1 15,3 Workers' Raittance - - Cuent Transfers (net) 8.0 9.0 17.7 25.5 20.0 20.0 20.0 20.0 20.0 20.0 20.0 9.6 3aane on Cuirrent Accounts -29.8 -44.6 8.6 73.0 17: -12, 3 82.9 r . 6 15.5

Private Direct Investment 3.9 5.7 9.7 30.8 10.5 11.0 11,6 12.2 12.8 13.4 14.1 13.7 official Capital Grants

Public MU4LTLoans Disburesenents 27.4 44.3 33.0 36.9 73.3 -Renavrents -14.8 -13.1 -13.1 -13.1 -12.3 Net Disbursements 12.6 b l ir" 2r.U

Other M< Loans W-sbursesmnts 0.0 0.0 0.0 0.0 0.0 -Repayments 0.0 0.0 0.0 0.0 0.0 Neit Disbursemente O Of O O U. u t. 7 - -

Capital Transactions n.e.i. 14.1 0.9 -11.6 -56.1 - Actul-0t 1974 d Change 1n Net Reservee 0.8 6.8 26.6 -71.5 93.6 DFBT AND D110r SERVICE 1 1 Public Debt Out. & Disbured 169.0 204.9 226.9 256.5 303.8 GRANT AND LOAN DMMN TS Ofricial Grants & (rant-like 11.4 11.3 14.9 14.2 Interest on Public Debt 6.2 7.0 8.1 8.9 8.7 Repayments on public Debt 14.8 13.2 13.3 13.0 12.4 Public MELT Ioana Total Public Debt Service 21.0 20.2 21.4 21.9 2L.1 RD - - 10.8 - Other Debt Service (net) - - - IDA , 3.1 13.9 34.3 53.0 Total Debt Service (net) 21.0 20.2 21.4 21.9 21.1 Other Other Multilateral - - - Burden on Export Earnings (p ) Governments 8.6 26.9 17.3 26.7 Suppliers T 1.3 0.7 - 0.1 Public Debt Service 11.6 10.6 8.7 6.4 5.0 Financial Institutions 3.0 5.0 6.0 Total Debt Service 11.6 10.6 8.7 6.4 5.0 Bonds , _ - TDS+Diroct Invest. Inc. 15.1 14.4 14.0 11.3 10.1 Public Loans n.a.i. Total rublic 17LT Loa.n 04B- -s7b4 5373 Average Terms of Public Debt

Actual Debt Outstanting on Dec. 31,1973 Int. as %Prior Year DO&D 4.0 4.1 4.0 3.9 3.4 UTWTAL DBT Disbursed Onlyv Fercent Amort. as %Prior Year DO&D 9.5 7.8' 65 5.7 4.8 World Bank - 67.4 Z 3 IDA 45.5 17.7 IMD Debt Out. &Disbursed 47.4 57.1 64.2 67.4 69.0 Other ijiltilateral - " as %Public Debt O&D 28.0 27.9 28.3 26.3 22.7 Goverments 112.6 43.9 as %Public Debt Service 27.1 28.7 29.0 34.2 35.8 Suppliers 1.2 0.5 Financial Instituations 29.8 11.6 IDA Debt Out.'& Disbursed 22.7 26.4 33.2 45.5 60.7 Bonds , 't as %Public Debt O&D 13.4 12.9 14.6 17.7 20.0 Public IDbts n.e.i as %Public Debt Service 0.7 0.9 1.3 2.3 2.3 Total Public MScLTDebt 2.5 ou-r

Other MALT Debts Short-term Debt (disb. only) -'

not applicable e staff estirmte not available - nil or negligible not available separatey -- less than half the but included in total smallest unit shown ANNEX I Page4

EXTERNAL ASSISTANCE AND NET PRIVATE CAPITAL INFLOW TO ETHIOPIA

Gross Public Loan Disbursements by Source, 1962-1973 (US $ millions)

Total Percentages 1962 to 1962- 1966- 1970- 1965 1966 1967 1968 1969 1970 1971 1972 1973 1965 1969 1973

IBRD 14.3 7.8 6.4 4.8 6.8 5.6 12.5 9.4 6.0 17.7 24.6 25.6 IDA 5.8 2.7 2.6 4.1 4.4 2.8 3.7 4.5 8.6 7.2 13.2 15.0 USA 43.4 5.2 4.6 9.3 7.8 5.7 15.7 9.5 10.6 53.7 25.7 31.7 USSR 5.9 3.7 3.8 1.8 0.7 - 0.3 - - 7.3 9.5 0.2 Germany 3.4 - 2.0 0.2 0.6 1.4 3.8 3.8 3.8 4.2 2.7 9.8 4.8 Sweden 0.8 - - - 1.6 1.0 1.9 2.0 1.4 1.0 1.5 Italy 0.7 - 1.1 4.3 5.0 2.0 4.3 0.7 - 0.9 9.9 5.3 4.0 0.4 o.6 O.1 0.2 0.1 - - - 5.0 1.2 - Yugoslavia 2.0 United Kingdom ------0.6 2.0 - - Netherlands - 10.9 ------10.4 - Other 2.4 0.4 - 0.3 0.7 2.4 1.9 2.0 1.1 3.0 1.3 5.7 100.0 TOTAL 80.8 31.1 21.1 24.9 27.7 20.9 44.0 32.5 33.5 100.0 100.0

Gross Public Loan Capital Inflow by Sector$ 1962-1973 (US $ millions)

Comminications and Power 59.5 22.4 12.9 8.0 12.2 8.4 26.2 21.0 16.9 73.6 53.0 5574 Industry 13.8 3.6 4.5 4.9 1.5 2.4 2.1 2.0 1.6 17.1 13.8 6.2 15.6 -Agriculture 0.3 0.1' 0.2 - - 0.3 8.7 4.7 6.7 0.4 0.3 7.5 Health 0.8 0.5 1.5 5.9 8.6 3.8 2.9 1.6 1.5 1.0 15.7 Education 0.4 - 0.4 2.4 2.2. 1.2 0.8 1.6 4.0 0.5 4.8 5.8 DFC 3.0 0.1 - 0.7 1.8 4.2 3.2 0.5 2.1 3.7 2.5 7.6 Other 3.0 4.4 1.6 3.1 1.4 0.6 0.2 1.0 0.7 3.7 10.0 1.9 TOTAL 80.8 31.1 21.1 24.9 27.7 20.9 44.0 32.5 33.5 100.0 100.0 100.0

Net Private Capital Inflow 1965-1973 (US $ millions) Total Total 1965 1966 1967 1968 1969 1970 1971 1972 1973 1965-69 1970-73

10.4 6.4 2.8 6.4 -2.0 11.2 14.6 13.2 19.6 24.0 58.6 ANNE II Page 1

STATUS OF BANK GROUP OPERATIONS IN ErHIOPIA

A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of FEBRUARY 20, 1975)

Amount Loan or (iS$ Million) Credit (less cancellation) Undis- Number Year Borrower Purpose Bank IDA bursed

,Eight loans fully disbursed 56.7 Two credits fully disbursed 20.7

523-ET 1968 Ethiopia Highways IV 13.5 o.6 111-ET 1968 Ethiopia Highways IV 7.7 0.3 596-ET 1969 EELPA/1 Power II (Finchaa) 23.1 0.4 605-Er 1969 BTE/f- Telecommunications IV 4.5 0.9 169-ET 1969 Ethiopia Wolamo Agriculture 3.5 - 188-ET 1970 Ethiopia Humera Agriculture 3.1 0.2 243-Er 1971 Ethiopia Education II 9.5 5.3 269-Er 1971 Ethioqia Dairy 4.4 3.1 818-ET 1972 AWSA'' Addis Ababa Water 10.8 9.0 Supply & Sewerage 290-Er 1972 Ethiopia Coffee Processing 6.3 5.3 3CO4-r 127 Et-iopia Agricultural & Indus- trial Development Bank 11.0 5.5 332-Er 1972 Ethiopia Highways V 17.0 14.3 365-Er 1973 Ethiopia Livestock II 5.0 4.7 416-Er 1973 Ethiopia Agric. Minimum Package 21.0 19.7 - 417-ET 1973 Ethiopia Educ& ion III 10.0 10.0 418-Er 1973 Ethiopia Amibara Irrigation 17.0 15.9 453-Er 1974 Ethiopia Telecommunications V .21.4 21.4 485-Er 1974 Ethiopia Drought Areas Rehabilitation 10.0 10.0 486-ET* 1974 Ethiopia Wolamo Agriculture II 12.0 12.0 516-Er 1974 Ethiopia Lower Adiabo 9.5 9.5

Total 108.6 189.1 of which has been repaid 31.3 0.2 Total now outstanding 77.3 1UB7 Amount sold 6.o of which has been repaid 6.o - - Total now held by Bank and IDA (prior to exchange adjustments) 77.3 188.9

Total undisbursed 10.9 137.7 148.6

* not yet effective /1 Ethiopian Electric Light and Power Authority 77 Board of Telecommunications of Ethiopia 77 Addis Ababa Water Supply and Sewerage Authority ANNEX II Page 2

ETIHiOP1A B. SrATEMENT OF IFC INVESTMENTS (as of FEBRUARY 28, 1975)

US$ Million T7e of Amount Equity Total Year Obligor Business Loan 2.5 1965 Cotton Company of Ethiopia I Textiles 1.5 1.0 1.9 1.9 1966 Ethiopia Pulr and Paper Co. Paper 9.0 1968 HVA Metahara Sugar 5.5 3.5 0.6 1970 Cotton Company of Ethiopia II Textiles 0.4 0.2

1973 Cotton Company of Ethiopia III Textiles 1.5 0.2 1.7 15.7 Total Gross Commitments 8.9 6.8

less cancellations, terminations, repamernts and sales 4.1 3.1 7.2

Total Commitments now held by !FC 4.8 3.7 8.5

Total TJndishursed ANNEX II Page 3

C. PROJECTS IN EXECUTION - ETHIOPIA 1/

Ln No. 523 Fourth Highway Project; US$13.5 million Loan and US$7.7 million Credit of January 15, 1968; Original Closing Date: December 31, 1973, postponed to June 30, 1974, and subsequently to June 30, 1975.

The project was late in starting because initial bids were high requiring changes in specifications and new bid invitations. Subsequent progress has, however, been good. Of the three civil works contracts, all have been completed -- one a year ahead of schedule and another about fifteen months ahead of schedule: the third contract was substantially completed at the end of 1973, about three months behind schedule, but some repair work and clean up operations extended into the second quarter of 1974. The closing date was postponed to June 30, 1975 to allow for settlement of contractor's claims.

Ln No. 596 Power II, Finchaa Hydroelectric Project; US$23.1 million Loan of May 9, 1969; Closing Date: December 31, 1973, postponed to June 30, 1974 and was subsequently postponed to December 31, 1974, and then to June 30, 1975.

The Project has been completed; apart from some minor outstanding works, all three generating units are now available for commercial operations. An analysis of overall Project costs, taking into consideration the various currency realignments during the course of construction, shows that costs were by about 7% over the original estimate, which is moderate in the inflationary conditions which have prevailed during the construction period. The increased costs are confined entirely to local costs. The original Loan Closing Date of December 31, 1973 was postponed to June 30, 1974 so that payment of retention monies could be withheld pending completion of all outstanding items. The closing date was postponed to June 30, 1975 to allow payment for some minor corrective civil works and replacement of the electric standby generator.

1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the under- standing that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution. ANNEX II Page 4

Ln No. 605 Telecormmunications IV Project; US$4.5 million Loan of June 3, 1969; Closing Date: December 31, 1973, postponed to December 31, 1974, and subsequently to December 31, 1975.

SIDA is providing joint financing of $4.5 million equivalent to finance part of the foreign exchange cost. Overall progress has been reasonably on target. However, installation of three microwave routes will not be accomplished until mid-1975. The delays were mainly due to difficulty in obtainirg suitable consultants to work on the survey of these routes and labor strikes in supplier's country.

Cr No. 1969 Wolamo Agriculture Development Project; US$3.5 million Credit of November 16, 1969; Closing Date: June 30, 1976.

Overall progress is good and in advance of the appraisal schedule. Participation of farmers in the program to increase productivity through the provision of extension services, inputs and credit is in advance of expectations as is participation in the soil conservation program. Construc- tion of feeder roads is behind schedule and will reach only 50 percent of target because of a financial shortfall. Land settlement will achieve only about 90 percent of the project target because of unavailability of suitable land. With respect to the livestock component, the vaccination campaign is proceeding well.

Cr No. 188 Ilumera Agriculture Project; US$3.1 million Credit of May 28, 1970; Closing Date: December 31, 1973, postponed to December 31, 1974, and then to December 31, 1975.

The project is progressing well, but is behind appraisal completion schedule by about one year, due mainly to delays in procurement of heavy road construction equipment and delays in installation of the Humera water system, which had to be undertaken by force account construction due to non-availability of contractors. Construction of facilities on the project farm is satisfactory. Consultant's study on the second phase project was submitted to the Government in February 1974. Only about $200,000 remain undisbursed. The project is located near the Eritrean border and the current unrest and fighting in Eritrea has adversely affected the movement of surplus agricultural produce to Eritrean ports.

Cr No. 243 Education II Project; US$9.5 million Credit of Ma 6, 1971; Closing Date: June 30, 1976.

Physical implementation of the project is about one year behind the appraisal report estimate due mainly to problems in the initial stages with procurement of bulk order construction materials and delays in site acquisition and surveys. The delay was reflected in slow credit disbursement initially. Disbursement is now increasing and further delays are not anticipated. ANNEX II Page 5

The Academy of Pedagogy and its primary teacher training institute have been completed. Nine other project institutions are also near completion; the remaining are scheduled for completion by end-1975. Construction and phased deliveries of furniture and equipment are progressing well, and completion is scheduled for mid-1976.

Implementation of the technical assistance component of the project is progressing and external fellowship students have taken up studies. At the request of the Government, the manpower study by an ILO team has been extended by 3 man-years to a total of 7-1/2 man-years.

Latest cost estimates show that Government will be called upon to increase its project budget by about US$1.2 million to complete the project. This increase is due to cost increases and currency realignments. However, some or most of this increase may be offset by anticipated bilateral project support.

Cr No. 269 Addis Ababa Dairy Development Project; US$4.4 million Credit of August 30, 1971; Closing Date: December 31, 1977.

The credit was slow in becoming effective because of recruitment problems. This project has serious liquidity problems caused by (a) a narrowing margin between purchase price and sales price of dairy products; (b) accumulated expenditures over revenues on DDA operated ranches and farms; (c) over-extension of administrative and technical services all of which caused the project to incur an operating loss through 1974 of Eth$2.2 million. A large part of this loss can be attributed to the fact that the Dairy Processing Plant was expected to support the cost of technical assistance and extension services to dairy farmers, a cost which should appro- priately be borne by the Government budget. Cost increases are also a problem and will cause some cut back of the project. In spite of this adverse situation, we believe the project remains basically sound. We have suggested to the Government a program to restructure the project and put the dairy plant on a more profitable basis. The Ministry of Agriculture has accepted our proposal in principle and will present it to the Council of Ministers.

Cr No. 290 Coffee Processing Project; US$6.3 million Credit of March 20, 1972; Closing Date: December 31, 1977.

Due to delays in obtaining parliamentary approval and recruiting key staff, the credit was not declared effective until December 15, 1972. Further, project implementation has been slow. However, project management and planning have been good; procurement of road construction and coffee processing equipment is now well underway, and project implementation is gaining momentum. ANNEX II Page 6

Ln No. 818 Addis Ababa Water Supply and Sewerage Project; US$10.8 million Loan of May 1, 1972; Closing Date: December 31, 1976.

Project implementation is running eight to twelve months behind the appraisal schedule. When the loan was signed total project costs were estimated at about US$13 million. Based on recent tenders for a number of contracts, cost estimates have increased to about US$21 million. We are awaiting AWASA and Government's proposals to meet the cost over-runs. The alternative of reducing the scope of the project is being considered. This solution would, however, have its drawbacks since delay of installation of part of the works would result in more difficult and costly installation later on. Recently, the African Development Bank indicated willingness to consider assisting the Government in financing cost overruns.

Cr No. 304 Agricultural and Industrial Development Bank Project; US$11.0 million Credit of May 10, 1972; Closing Date: December 31, 1976.

The credit became effective on October 25, 1972. The funds originally allocated to the industrial portion of the credit have been fully committed and $1.4 million have been reallocated to the industrial portion from the agricultural portion which has proceeded more slowly. The report on the agricultural credit study has been completed and is under review.

Cr No. 332 Fifth Highway Project: US$17.0 million Credit of September 29, 1972; Closing Date: December 31, 1976.

The credit did not become effective until July 24, 1973 due to delays in Parliamentary ratification and in the submission to the Association of the required legal opinions. Delays occurred in receipt of bids because of extension of the bidding period to allow for sharp price increases conse- quent to the oil crisis and for Ethiopian taxes and duties imposed at that time on construction equipment and materials. Four of the six road contracts are underway and the remaining two have been retendered. For one road, an Ethiopian contractor submitted the lowest bid, contingent on receiving an equipment loan. No bid was received for the other road which is now proposed for construction by force account. Two roads are proposed for inclusion in the Sixth Highway Project due to cost overruns on all six roads under this project. Cost increases of about 80% over appraisal estimates are due to increased cost of fuel, equipment, materials, and freight.

Cr No. 365 Second Livestock Project; US$5.0 million Credit of April 2, 1973; Closing Date: July 15, 1977.

The credit became effective on August 24, 1973. However, the construction program has not started and is now one year behind schedule. A horehole drilling contract has been signed and bids are being evaluated for the construction of markets, stockroute facilities, slaughter houses and hi-e sheds. A review of project costs indicates a 39% cost escalation since appraisal which will result in the credit being fully disbursed by December 1976 with about half of the development program still to be completed. ANNEX I I Page 7

In addition, escalating operating cost estimates coupled with decreased revenue forecasts indicate possible future cashflow problems and Project management have been requested to prepare financial and economic data for review bv RMEA supervision staff. Depending upon the outcome of this review, consideration will be given to advancing the preparation of the Phase II Project to 1977 in order to assist in financing the cost overrun for completing project works. Accounting consultants have started designing and implementing a new accounting system for the Livestock and Meat Board (the implementing agency).

Cr No. 416 Agricultural Minimum Package Project; US$21.0 million Credit of July 5, 1973; Closing Date: September 30, 1977.

The credit became effective on April 15, 1974. Project implementation has gone well, and has exceeded targets for establishment of minimum package areas. Participation of tenant farmers has however been lower than anticipated and is being studied. The increased price of fertilizer poses a serious threat to the program. For this year, the Government has obtained bilateral financing which will assist in the procurement of fertilizer and make possible a subsidy in the fertilizer price to the small farmers.

Cr No. 417 Third Education Project; US$10.0 million Credit of July 5, 1973; Closing Date: December 31, 1978.

This credit was declared effective on August 30, 1974, fourteen months after signing of the Credit Agreement. This long delay was mainly due to delays in Parliamentary ratification of the credit in the context of political and students/teachers' agitation over the Education Sector Review's proposals for educational reform. Even though this was an interim project and was not related to implementation of the reforms, the Parliament went through prolonged examination and discussions before ratifying the Credit. Drafting and signing of an agreement between the Government and the Ethiopian Orthodox Church were also delayed, but were completed soon after Parlia- mentarv ratJfication.

The contract between the University and consulting architects and engineers selected for professional services for the University project com- ponents is being drafted. Work at technical levels relating to surveys, design briefs, bidding documents, furniture and equipment lists for the project is proceeding well. It is expected that project implementation will prugriss more rapidly now that the credit has been declared effective. The project unit will be expanded by appointment of additional staff, some of whom will be financed under the credit. ANNEX II Page 8

Cr No. 418 Amibara Irrigation Project: US$17.0 million Credit of July 5, 1973; Closing Date: March 31, 1979.

The credit became effective on August 30, 1974, fourteen months after signing of the Credit Agreement. The delay in Parliamentary ratification of the credit was the main delay, and was caused by disputes relating to claims on Government land and disagreement in Parliament over the land allocation pattern proposed in the project and over measures for dealing with Afar nomads in the project area. Meanwhile project consultants have estimated a three-to-four times increase in project costs, and questions have been raised whether the project is still financially feasible and economically viable. Consultants have prepared alternative proposals, and an IDA reappraisal mission visited Ethiopia in February 1975 to examine whether a viable project can be designed and agreed with the Government. The mission's report is under preparation.

Cr No. 453 Telecommunications V Project (First Tranche); US$21.4 million Credit of January 17, 1974; Closing Date: June 30, -1979.

This credit became effective on August 23, 1974. The project is a-,proximately six months behind schedule due to initial delays resulting fromi labor disturbances in Ethiopia, but progress is now satisfactory.

Cr No. 485 Drought Areas Rehabilitation Project; US$10 million Credit of June 26, 1974: Closing Date: September 30, 1977.

The project was declared effective on November 7, 1974. Sub-project preparation is proceeding well.

Cr No. 486 Second Wolamo Agricultural Development Project; US$12 million Credit of June 26, 1974; Closing Date: June 30, 1980.

The credit is not yet effective; the terminal date for effectiveness has been postponed from September 24, 1974 to March 31, 1975, and then to May 15, 1975 due to delays in ratification of Credit Agreement and issuance of leases to farmers settled under the First Wolamo Project and conclusion of a subsidiary agreement. The Credit has now been ratified, and leases have been issued to a majority of the farners. The subsidiary agreement between the agricultural and Industrial Development Bank and the Wolamo Farmers' Cooperative Union is expected to be signed shortly. We are awaiting submission of documents for the fulfillment of conditions of effectiveness and neceesary legal opinion.

Cr No. 516 Lower Adiabo Development Project; US$9.5 million Credit of October 18, 1974; Closing Date: June 30, 1980.

This Credit became effective on February 5, 1975. Work on the project and transportation into the project area have reportedly been disrupted by the unrest in nearby Eritrea. ANNEX III Page 1

ETHIOPIA - FIFTH TELECOMMUNICATIONS PROJECT (Second Tranche)

CREDIT AND PROJECT SUMMARY

Borrower: Ethiopia

Beneficiary: Board of Telecommunications of Ethiopia

Amount: US$16.0 million equivalent

Terms: Standard

Relending Terms: 20 years including a 5-year grace period with interest rate of 7-1/4% per annum

Project Description: The project is BTE's Fifth Development Program covering 1974 through 1978 and consists of:

(i) installation of about 40,000 lines of automatic exchange equipment, and about 4,500 lines of manual exchange equipment;

(ii) installation of cable distribution networks and subscribers' plant to-provide about 45,000 telephone connections;

(iii) provision of four microwave links (Dessie-Assab, Asmara-Tessenei, Shashamane-Moyale, and Addis Ababa-Ghimbi) with a total route length of 1,500 km and various medium-capacity VHF/UHF radio links or coaxial cables with a route length totaling 200 km; construction of 3,000 km of small capacity VHF radio links and rehabilitation of 2,100 km of open-wire lines; and provision of multiplex and carrier equipment for the above facilities as well as for expanding the capacity of the existing ones;

(iv) installation of 48 manual switchboard positions and provision of about 660 lines of long distance automatic switching equipment;

(vi) various extensions of the telex and telegraph networks, including an extension of the capacity of the telex switching equipment in Addis Ababa from 400 lines to about 700 lines.

Estimated Cost: The total cost of the project is estimated at $60.6 million equivalent with a foreign exchange component of about US$38.8 million equivalent or 64 percent. Details are as follows:

Eth$ million US$ million Local Foreign Total Local Foreign Total

Local telephone service 11.52 31.74 43.26 5.57 15.33 20.90 Long distance service 6.82 16.60 23.42 3.30 8.02 11.32 Telegraph, telex 0.61 2.89 3.50 0.29 1.40 1.69 International communications 2.55 9.43 11.98 1.23 4.55 5.78 Land and buildings 13.34 0.43 13.77 6.44 0.21 6.65 Vehicles, tools, instruments, etc. 2.65 6.23 8.88 1.28 3.01 4.29 Consultants services 0.02 0.66 0.68 0.01 0.32 0.33 (20 man-mDnths)

Sub Total 37.51 67.98 105.49 18.12 32.84 50.96

Physical contingencies 1.12 2.03 3.15 0.54 0.98 1.52 Price contingencies 6.51 10.39 16.90 3.14 5.02 8.16

Total 45.14 80.40 125.54 21.80 38.84 60.64

Financing Plan: The financing plan of the project would be as follows:

Requirements: Millions Eth$ US$ Proposed Project 125.5 60.6 100

Sources: BTE's own funds 48.1 23.2 38 Credit 453-ET 44.3 21.4 35 Proposed Credit 33.1 16.0 27

Total 125.5 60.6 100 ANNEX III Page 3

Estimated us$'ooo Disbursements: Fiscal Years Annually Cumulative

1977 2,780 2,780 1978 9,230 12,010 1979 3,990 16,000 16,000

Procurement Arrangements: All goods financed by the proposed credit would be procured through international competitive bidding with the exception of some extension equipment for existing facilities. This equipment which is estimated to cost US$0.5 million or about 3% of the IDA credit, will be procured through negotiation from the original suppliers.

In order to expedite procurement of equipment financed by the proposed credit and to allow BTE to standardize equipment, it was agreed between IDA and BTE during negotiations of credit 453-ET that bidding documents for procurement of equipment through international competitive bidding under credit 453-ET would cover the requirements of the whole program; BTE would thus obtain from suppliers firm proposals for equipment financed by credit 453-ET and options for purchase of equipment to be financed by the proposed credit. This procedure eliminates the need for a second round of international competitive bidding for the part of the project to be financed by the proposed credit.

Although at present there is no local production of telecommunications equipment, there is local manufacture of electrical cables which easily could be extended to telephone installation cables and dropwire. Provision is therefore made for financing of the ex-factory cost of such equipment if a local manufacturer is awarded a contract (see Schedule 1, paral(1) of the proposed Credit). In order to be consistent in this approach for the Fifth-Telecommunications Project as a whole, Credit 453-ET is being amended to permit financing of locally manufactured equipment (see Schedule 1, paragraph 5 of the proposed Credit Agreement). To encourage local manufacture, ANNEX III Page 4

a domestic preference of 15% of the customs duties, whichever is lower, would be granted-for such items, the estimated cost of which would be less than US$200,000. Moreover, the abovementioned preferential treatment of local manufacturers will. also be made applicable for Credit 453-ET in order to maintain consistent awarding procedures under the project (see Schedule 1 para Bo1 of proposed Project Agreement).

Consultants: Communication Satellite Corporation (COMSAT). Approximately twenty man-months.

Rate of Return: 17.4 percent.

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