Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No. 16521

IMPLEMENTATION COMPLETION REPORT

CZECH REPUBLIC

TELECOMMUNICATIONS PROJ ECT(Loan 3644-CZ)

April 24, 1997

Infrastructure Operations DivisionCentral Europe Department tlEurope and Central Asia Region

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

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CURRENCY EQUIVALENTS

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

Equivalency of I US$ in (CZK since 1993(Annual Average)

1993 29.45 1994 29.231995 27.33 1996 27.00

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

WEIGHTS AND MEASURESMetric System

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

ABBREVIATIONS AND ACRONYMS

CR - Ceske RadiokomunikaceEU - European UJniioniEBRD - European Bnak for Reconstruction and DevelopmentEIB - Europeani Investment BankGSM - Global Systcmi MobileICB - International Competitive 13iddingIDP - Institutional Development ProgramI'J'U - International Telecommunications Union (Geneva)JV - Joint VentureMIS - Management Intformiiation SystemMoE - Ministry of Econom1yMTPT - Ministry of ''ransport, Post & Telecommunications

(Ministerstvo Dopravy a Spoju)PHARE - EU grant programPllJ - Project Implementation Unitl'PO - I'roject lProgran Oft'iccS PT - Sprava PJost a 'I'eikomunikaci

(Cech Republic's !ormer Post and TelecommunicationsOrganization)

SR - Sprava Radiokom lunikaci

Vice President: Johannes F. LinnActing Director: Hlans J. ApitzActing Division Chief: Henk BuszStaff Member/Task Manager: Alberto Cruzat

FOR OFFICIAL USE ONLY

Table of Contents Page No.

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

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

Part I: Project Implementation Assessment .1

A. Background and Project Objectives. IB. Sector Reform, Regulation and Privatization. 2C. Achievement of Project Objectives. 4D. Implementation Record and Major Factors Affecting the

Project ................... 6E. Project Sustainability .................. 7F. Bank's Performance ................. 7G. Borrower Performance .................................................... 8H. Assessment of Outcome .................................................... 8I. Future Operation .................................................... 9J. Key Lessons Learned .................................................... 9

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

Table 1: Summary of Assessments ................................................... 11Table 2: Related Bank Loans/Credits ................................................. 1 3Table 3: Project Timetable ................................................... 13Table 4: Credit Disbursements: Cumulative

Estimated and Actual ................................................... 14Table 5: Key Indicators for Project Implementation .......................... 15Table 6: Key Indicators for Project Operation ................................... 16Table 7: Studies Included in Project .................................................. 17Table 8A: Project Costs ....................................... 18Table 8B: Project Financing ................................................... 18Table 9: Economic Costs and Benefits .............................................. 19Table 10: Status of Legal Covenants .................................................. 20Table 11: Compliance with Operational Manual Statements ............ 21Table 12: Bank Resources: Staff Inputs ........................................... 21Table 13: Bank Resources: Missions ............................................... 22

Appendices: ......................................................... 23

A. Map IBRD24.627

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

I

IMPLEMENTATION COMPLETION REPORTCZECH REPUBLIC

TELECOMMUNICATIONS PROJECT(LOAN NO. 3644-CZ)

Preface

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

The Credit had a Closing Date of June 30, 1998; however, afterprivatization of SPT Telecom in July 1995, the new owvners decided 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 Loanbalance was canceled and the amount disbursed pre-paid on May 1, 1996; with thisaction, the Loan was closed before the agreed Closing Date of June 30, 1998, and thereare no additional obligations due to IBRD under this loan. Cofinancing for the Projectwas provided by the European Investment Bank (EI13) and the European Bank forReconstruction and Development (EBRD).

The ICR was prepared by Alberto Cruzat of the Telecommunications andInformatics 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 1996Mission, which was organized after the cancellation and pre-payment of the Loanamounts 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 duringthe December 1996 Mission, and expressed its inability to provide additional writtencomments.

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IMPLEMENTATION COMPLETION REPORTCZECH REPUBLIC

TELECOMMUNICATIONS PROJECT(LOAN NO. 3644-CZ)

Evaluation Summary

Background

1. The first telecommunications project in the Czech Republic, which wassupported by IBRD Loan 3644-CZ in the amount of US$ 80.0 million, wasimplemented 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 -ownedenternrise. Before 1989 postal and telecommunications services were in the hands ofa traditional PTT, part of a Ministry, without financial independence, though not aState enterprise. In September 1991 a joint-venture was set up, under the nameEUROTEL, by SPT TELECOM, s.p. with the consortium Atlantic West (Bell Atlanticand U.S. West International) to install and operate the analog mobile cellular and thedata networks. The separation of postal and telecommunications activities took placeon 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 Loan3644-CZ for US$ 80.0 million equivalent, and was co-financed by the European Bankfor Reconstruction and Development (EBRD) with a Loan of ECU 70.0 million, andthe European Investment Bank (EIB) with a Loan of ECU 65.0 million. The mainobjectives of this operation were: (A) to support the digitalization and expansion of thenetwork to: (a) reduce congestion on key network elements; (b) rapidly providemodem digital communications for businesses (especially export oriented businesses);and ( c) provide a sound foundation for future modernization and expansion of theentire network; and (B) to make institutional and policy improvements aimed at: (a)increased efficiency in telecommunications investment and operations; (b) improvedquality of service; and ( c) transition to full commercial operation.

The privatization process

3. The Government of Czech Republic approved in September 1993 aprivatization project, as a result of which SPT TELECOM, s.p. was transformed onJanuary 1, 1994 into SPT TELECOM, a.s. (joint-stock company). On 11 July 1994SPT TELECOM, a.s. issued bonds for the second round of the voucher schemeprivatization process. In this Voucher or Coupon privatization, every Czech citizen of

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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 toVoucher shareholders, 3 % to the Restitution Fund and 1% to the Donation Fund. InJune 1995, all 23,512,565 shares of SPT TELECOM, a.s. were quoted on the PragueStock Exchange. The second step in the privatization of SPT was the selection of aStrategic Partner, based upon an increase of 37% in the number of shares; the number37% 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, theGovernment ended with 51 %, the Voucher Shareholders with 19%, the RestitutionFund 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 incash plus US$ 0.13 billion in the form of management, software and other services, for27% of SPT's shares. The privatization process as designed by the Czech Governmentincluded the re-injection of the full amount paid by TelSource (US$ 1.32 billion) intoSPT TELECOM, a.s.. TelSource is an international consortium comprising the SwissPTT (49%), and the Netherlands PTT (NEPOSTEL) (51%), plus technical supportfrom AT&T. The contract by which this strategic partner was brought into SPTestablished an exclusivity period for Domestic Long Distance and Internationalservices until year 2000. The management contract with TelSource expires onDecember 31, 2000.

Project Achievements and Results

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

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

7. Operational targets for telecommunications activities. SPT increased theswitching capacity from 1.99 million lines in 1992 to 3.1 million lines in 1996, andexpects to reach 4.89 million lines in year 2000. The number of working lines hasincreased from 1.82 million in 1992 to 2.8 million in 1996, and it is expected to reach4.4 million by year 2000. With this rapid expansion plan, the telephone density

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(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 startedin September 1995 with the entry of the Strategic Partner. During the first full year ofoperation under the new management/ownership SPT jumped from the level of200,000 new lines per year to 448,000 new lines installed in 1996. The objectives ofexpansion and modernization of the network were exceeded (Part II, Table 5).

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

Major Factors Affecting the Project

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

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

12. Most of the Project's major physical, institutional and financial objectives havebeen achieved and some of them, in particular the sectoral structure, have beenexceeded The above benefits and substantial results from the Project providedfavorable conditions for the project sustainability and the continuation, through the lifeperiod of the new facilities, of the support to the country's economic and socialgrowth. Based on the above, the Project is ranked satisfactory in achieving itsdevelopment 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 thesector reform, was made possible by the involvement of the Governmentauthorities and company managers in the changing process;

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

iv

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

(c) Some of the traditional Bank's legal covenants may prove constraining to anewly privatized company with an ambitious development program, and evenwhen the Bank may amend the legal covenants (as opposed to theProcurement Guidelines which are more permanent), the time and processingrequired to amend those covenants add to the non-attractiveness of the Bank'sloan.

IMPLEMENTATION COMPLETION REPORTCZECH REPUBLIC

TELECOMMUNICATIONS PROJECTLOAN NO. 3644-CZ

PART I: PROJECT IMPLEMENTATION ASSESSMENT

A. Background and Project Objectives

1. The first telecommunications project in the Czech Republic, which wassupported by IBRD Loan 3644-CZ in the amount of US$ 80.0 million, was implementedby 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 1989postal and telecommunications services were in the hands of a traditional PTT, part of aMinistry, without financial independence, though not a State enterprise. In September1991 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 installand operate the analog mobile cellular and the data networks. The separation of postaland telecommunications activities took place on January 1, 1993, with the creation ofCzech Post, s.p. and SPT TELECOM, s.p. This coincided with the split of the Federationbetween 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 nameSPT which implies postal functions.

2. The 1993-1995 expansion plan of SPT TELECOM supported by IBRD Loan3644-CZ for US$ 80.0 million equivalent, and was co-financed by the European Bank forReconstruction and Development (EBRD) with a Loan of ECU 70.0 million, and theEuropean Investment Bank (EIB) with a Loan of ECU 65.0 million. The main objectivesof 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 digitalcommunications for businesses (especially export oriented businesses); and ( c) provide asound foundation for future modernization and expansion of the entire network; and (B)to make institutional and policy improvements aimed at: (a) increased efficiency intelecomnmunications investment 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. Thepolicy objectives did not address the liberalization of the sector, the introduction ofcompetition, or active participation of the private sector in development and operations.The project concept was consistent with the traditional public utilities approach practicalat that time, including only the preparatory work related to company commercializationnecessary to proceed with company privatization. All institutional objectives wereconcentrated on relieving organizational, management and financial constraints existingwithin SPT TELECOM. However, during the implementation period, a constructivedialogue started between the Bank and the sector authorities and led toward a new policyapproach to the sector issues and the determination of sector policy objectives in line withthe current worldwide trends, which resulted in the privatization of SPT TELECOM andintroduction of competition earlier than expected during appraisal..

Regulatory and Sector Structure

4. Since 1964, the telecommunications sector in Czechoslovakia has beenregulated by the 1964 Telecommunications Law. Major amendments to this Law wereissued in 1992 and 1993; these amendments authorized the creation of a RegulatoryAgency and, following the principles stated in the European Union Green Paper,prepared the sector for future demonopolization, liberalization and private sectorparticipation. The regulatory authority was the Czechoslovakian Federal Ministry ofPosts & 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) SpravaRadiokomunikace, Bratislava, s.p.. In October 1992, a new Ministry was created, theMinistry of Transport, Communications and Public Works (MTCPW).

5. On January 1, 1993 the Federation was split into the Czech and SlovakRepublics, and as a result, the following new entities were created: (a) SPT Praha, wassplit 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) SpravaRadiokomunikace, Bratislava was merged into ST, s.p.. With effect from January 1,1993, the Ministry of Economy (MOE) assumed all responsibilities within the sphere oftelecommunications activities in the Czech Republic. Inside MOE, the CzechTelecommunications Office administers all regulatory issues related with the sector,while the Department of Telecommunications Policy determines the strategy for thesector, and represents the Government in its ownership function of SPT's shares. Tariffapproval for domestic services are under the Ministry of Finance (MOF).

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6. On August 10, 1994, the Government of the Czech Republic approved the"Main Principles of the State Telecommunications Policy", which includes the followingprinciples/targets: (a) to double the number of telephone lines by year 2000; (b) tomaintain the integrity of the existing operator, SPT TELECOM, a.s.; (c) to enable theentrance 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 ofthe strategic partner; (e) to complete the regulatory framework by June 30, 1995; (f) tokeep SPT's exclusivity in the provision of domestic and international long distance up toyear 2000; (g) to authorize the entrance of new operating companies for the provision oflocal network services; and (h) for the MOE, to license two companies for the provisionof mobile telephone cellular GSM service.

The privatization process

7. The Government of Czech Republic approved in September 1993 aprivatization project, as a result of which SPT TELECOM, s.p. was transformed onJanuary 1, 1994 into SPT TELECOM, a.s. (joint-stock company). On 11 July 1994 SPTTELECOM, a.s. issued bonds for the second round of the voucher scheme privatizationprocess. In this Voucher or Coupon privatization, every Czech citizen of at least 18 yearsof age chose the company which shares he/she would prefer to own. As a result of thisprocess 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 23,512,565shares of SPT TELECOM, a.s. were quoted on the Prague Stock Exchange. The secondstep in the privatization of SPT was the selection of a Strategic Partner, based upon anincrease of 37% in the number of shares; the number 37% was chosen in order to keepthe Government as dominant shareholder with 51% (70%/1.37 = 51%). As a result of theincrease of 37% in the number of shares, the Government ended with 51%, the VoucherShareholders with 19%, the Restitution Fund with 2%, the Donation Fund with 1% andthe 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 incash plus US$ 0.13 billion in the form of management, software and other services, for27% of SPT's shares. The privatization process as designed by the Czech Governmentincluded the re-injection of the full amount paid by TelSource (US$ 1.32 billion) intoSPT TELECOM, a.s.. TelSource is an international consortium comprising the SwissPTT (49%), and the Netherlands PTT (NEPOSTEL) (51%), plus technical support fromAT&T. The contract by which this strategic partner was brought into SPT established anexclusivity period for Domestic Long Distance and International services until year 2000.The management contract with TelSource expires on December 31, 2000.

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C. Achievement of Project Objectives.

Institutional Development

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

10. Organization. Supported by consultant's studies, SPT TELECOM's internalstructure was reorganized. The Project assisted SPT's reorganization by financing astudy on Corporate Strategy, Service Planning & Organizational Development. Theorganizational aspects of the institutional objectives as designed at project appraisal weresatisfactorily reached.

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

SPT's obligations

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

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

14. Financial targets. The Revenue per Working Line has improved from CZK7,323 in 1992 to CZK 11,084 in 1996. The rate of return on operating fixed assets hasbeen larger than 30% for the period 1993 through 1995, which is higher than estimated atAppraisal.

5

Financial Objectives

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

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

17. Tariffs. A tariff study was concluded by consultants as a condition foreffectiveness. The Request for Proposals leading to the privatization of SPT (selection ofStrategic Partner) included the Government commitment to re-balance tariffs. Incompliance 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 by20%. The Czech Government has agreed to continue with annual adjustments under atypical Price-Cap formula; i.e.: tariff adjustments in a percentage equal to the annualinflation minus an efficiency improvement factor of I to 2 %.

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

Physical Objectives

19. Implementation schedule. The massive increase in new subscriber linesstarted in September 1995 with the entry of the Strategic Partner. During the first fullyear of operation under the new management/ownership SPT jumped from the level of200,000 new lines per year to 448,000 new lines installed in 1996. The objectives ofexpansion and modernization of the network were exceeded (Part II, Table 5).

20. Objectives of service quality. The expansion was accompanied by arenovation of the outside plant network. As a result, the quality of service has improvedfrom 5.5 faults/100 working lines per month, as estimated in the appraisal for 1992, to 2.5faults/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, withthe Bank contributing $ 80.0 million (See Part II. Tables 8a and 8b). The actual cost ofthe Project is estimated to be $ 1,226.90 million. The cost increase is due to: (a) theincrease 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 increasein transmission and outside plant investment necessary to support the larger expansionplans for the period 1996- 2000 resulting from the new operational targets as stated in thetender for selecting the Strategic Partner,

Procurement

22. The very limited use of funds under this Loan was mainly due to thereluctance of the management of the company to follow World Bank's ProcurementGuidelines. In particular, once the process of selection for a Strategic Partner started, SPTconsidered: (a) that the Bank's Procurement Guidelines are too lengthy to follow; (b) thatInternational Competitive Bidding (ICB) w.s against their new internal policy whichcalls for restricting bidding to only some four or five Bidders, well known to SPT, foreach major type of equipment; and (c) that the Bank's policy to always award to thelowest responsive Bidder was not always in compliance with the new policies of thecompany. These objections are not related with the type of equipment(telecommunications in this case) but with an approach which prefers to optimize costsby relying on a limited number of known suppliers, rather than risking procurement fromnew suppliers. These reservations against Bank's Procurement Guidelines werediscussed at Project Appraisal, and were considered in allocating procurement packagesamong EBRD, EIB and IBRD; however, when the entrance of the strategic partnerprovided 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 disbursementagainst applications for withdrawals made by SPT TELECOM, a.s. in accordance withthe 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 isthe substantial reduction of international market prices for the high technology digitalswitching and transmission equipment. In addition to lower costs, the new technologysystems provide better and more reliable services and require less maintenance. This hasa positive impact on staff productivity.

Factors generally subject to Government control

25. As explained above, the Government implemented a sound tariff policy aspart of the privatization process, and has been moving towards the creation of anadequate regulatory framework for the sector.

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E. Project Sustainability

Project Benefits.

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

Sustainability

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

F. Bank's Performance

Preparation, Appraisal

28. At the beginning of the transformation process from a centrally plannedeconomy towards a market driven economy, the Government of Czech Republicidentified the telecommunications sector as a major priority for investment and reformand approached the Bank for support in implementing these changes. The Bank sent, onDecember 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 operationwas successful in assisting the Czech Government in achieving the final objectives ofmoving the telecommunications sector from the traditional Government-ownedmonopoly 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 beenestimated that each of the Financial Institutions would provide a loan of US$ 80.0 millionequivalent, which was modified by the time of effectiveness, with EBRD providing ECU70 million; EIB providing ECU 65 million; and IBRD providing US$ 80.0 million. Theeventual shortfall was covered by SPT.

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Supervision

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

G. Borrower Performance

31. SPT TELECOM, a.s. was the Borrower and the Government of CzechRepublic was the Guarantor. With respect to the achievement of physical objectives,SPT's performance was highly satisfactory, particularly by the efficiency with which ithandled an investment program double the size of the previous years; regarding theinstitutional component and the sector reform, both SPT and the Government of CzechRepublic showed a remarkable performance in introducing fundamental changes in thesector 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. SPTcomplied with all legal covenants. However, the World Bank's legal covenants wereconsidered too constraining for the new privately owned company with an ambitiousdevelopment program. Specifically, the Bank's covenants obliged SPT to: (a) producefunds from internal sources equivalent to not less than 55% of annual average capitalexpenditures; (b) maintain a ratio of total operating expenses to total operating revenuesnot higher than 65%; and (c) not incur any debt unless the estimated net revenues be atleast 2.5 times the estimated maximum debt service. The World Bank was aware of thelimitations introduced by these covenants in the new privatized environment, anddiscussed in 1994 with SPT the possibility of amending the legal covenants as requiredunder the new circumstances; additionally, the self-financing ratio covenant for 1995 waslowered from 55% to 35%. However, SPT later decided that: (a) due to the difficulties infollowing Bank's Procurement Guidelines, (b) the availability of funds provided by theentrance of the strategic partner; and (c) the limitations in financial freedom introducedby these obligations and the time necessary to amend the Loan Agreement was moreappropriate 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 andinstitutional objectives and achieved major changes in the sector structure far beyond thetargets envisioned during project appraisal.

9

I. Future Operation.

34. The Project achieved the ultimate goal of creating an open competitivemarket with private sector participation in the provision of services. Therefore, nofurther participation of the Bank is necessary.

J. Key Lessons Learned

The key lessons learned are as follows:

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

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

(c) Some of the traditional Bank's legal covenants may prove constraining to anewly privatized company with an ambitious development program, and evenwhen the Bank may amend the legal covenants (as opposed to theProcurement Guidelines which are more permanent), the time and processingrequired to amend those covenants add to the non-attractiveness of the Bank'sloan.

10

IMPLEMENTATION COMPLETION REPORTCZECH REPUBLIC

TELECOMMUNICATIONS PROJECT(LOAN NO. 3644-CZ)

Part II: Statistical Tables

Table 1: Summary of AssessmentTable 2: Related Bank Loans/CreditsTable 3: Project TimetableTable 4: Credit Disbursements: Cumulative Estimated and ActualTable 5: Key Indicators for Project ImplementationTable 6: Key Indicators for Project OperationTable 7: Studies Included in ProjectTable 8A: Project CostsTable 8B: Project FinancingTable 9: Economic Costs and BenefitsTable 10: Status of Legal CovenantsTable 11: Compliance with Operational Manual StatementsTable 12: Bank Resources: Staff InputsTable 13: Bank Resources: Missions

Appendices

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)

Macro policies E:1 0l

Sector policies 300C

Financial objectives C1 [F] 0 0

Institutional development I [23 0J

Physical objectives [SI 0 0 0

Poverty reduction El E ElGender issues I I II [

Other social objectives l l 0 [

Environmental objectives j El 0

Public sector management I I a i

Private sector 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

Preparation assistance E IZ E

Appraisal El El

Supervision a El

12

HighlyD. Borrower performance satisfactory Satisfactory Defiient

(/) ~~(.) (V)

Preparation [ [>3 [

Implementation I]

Covenant compliance 0

Operation (if applicable) L 1 L

Highly HighlyE. Assessment of 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 Bankloans/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 (ifapplicable)

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 00Dec 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 % ofestimate 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 ActualDecember 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 atDecember 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 Purpose as defined at appraisal Status Impact of study

Corporate Strategy, Service Planning & Part of Institutional Development Program completed basis for Strategic Partner selectionOrganizational Development (IDP) (funded by

PHARE)

Cost Allocation Study used in tariffs study

Tariffs Study to determine necessary level increases and it was stated as used as tariffs policy while selling sharesr-balancing among services Condition of of ST to Strategic Partner

Effectiveness

Human Resource Study strengthening of SPT completed

Investment Planning Study strengthening of SPT completed

Training Material for Project Management strengthening of SPT completedCoures

Network Management System Study strengthening of SPT completed

Audit

17

18

Table 8A: Project Costs

Appraisal estimate Actual / Latest estimateItem

(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 estimateItem

(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 MillionTotal Total Total Net

Cap. Cost Oper. Cost Incremental Benefitincremental 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 4,6911998 5,730 13,408 6,0161999 5,1,30 15,355 7,1832000 5,730 17,430 8,3152001 5,730 19,639 9,4142002 9,4142003 9,4142004 9,4142005 9,4142006 9,4142007 9,4142008 9,4142009 9,4142010 9,414

IRR with 15 years Project life = 23 %IRR with 20 years Project life = 35 %

Table 10: Status of Legal Covenants

Project Development Objectives Rating:

Original RevisedAgreement Section Covenant Present fulfil1ment fulfillment Description of Comments

Type status date date covenant

5.01 (b) (ii) Financial C 1 July every firnish to the Bank Audited Financialyear Statements

5.01 (b) (iii) Financial C 2 months after firnish to the Bank Statement of Incomeeach Quafter and Expenses, Cash Flow and Balance

Sheet5.01 Financial C I July every furnish toi the Bank Audit Statement on( c) (iv) year use of SOE5,02 Financial C annually produce internal resources not less than 55(a) (1) % of capital expenditures5.02 Financial C annually maintain a Operating Ratio not high-er than(a) (ii) 65 %5.03 (a) Financial C annually to keep a Net Revenue/Debt service ratio of

not less than 2.5 times

Prcsafl stac:

C = covenant complied withCD complied with after delayCP complied with partiallyNC = not complied with

20

21

Table 11: Compliance with Operational Manual Statements

No significant lack of compliance with applicable Bank Operational manual Statements(OD or OP/BP) was observed under the project. Provisional unsatisfactory practices, inparticular 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 ofproject 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-AppraisalseparateCzech-Slovak

Appraisal throughBaoard approval

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

| Board approval Sept 93

Board approvalthrough effectiveness

Effectiveness January94

Supervision

Supervision I Feb 94 3 7 Eng.,FinA S HS JMisin

with EIB &EBRD.Progress inTelecomLaw, TariffsPolicy, SPTJoint StockCo.

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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-48' ~~~Proposed Backbone Network, 1 99548PROPOSED BACKBONENETWORK INCLUDED EXISTING

IN THE PROJECT: AS OF 1992:OPTICAL FIBER CABLES

MICROWAVE LINKS INTERNATIONAL BOUNDARIES

COAXIAL CABLES RIVERS H U N G A R Yo * EXCHANGES

IMAGING

Report No.: 16521Type: ICR