Document of The World Bank Report No. 13548-CH& STAFF APPRAISAL REPORT CHINA TELECOHOMNICATIONS PROJECT NOVEMBER 18. 1993 (Revised Version September 19 Industry and Energy Operations Division China and Mongolia Department East Asia & Pacific Regional Office CURRENCY EOUIVALENTS (as of July 15, 1993) Currency Name Renminbi Currency Unit Yuan (Y) - 100 Fen US$ 1.00 = Y 5.8 FISCAL YEAR January 1 - December 31 WEIGHTS AND MEASURES 1 meter = 3.28 feet 1 kilometer = 0.63 miles ABBREVIATIONS AND ACRONYMS AT&T - American Telephone and Telegraph BITS - Swedish Board for Investments and Technical Support CoCom - Co-ordinating Committee on Multilateral Export Control CTBSC - China Telecommunications Broadcasting Satellite Corp. DDD - Direct Distance Dialing E-Mail - Electronic Mail System ERR - Economic Rate of Return FAX - Facsimile Service FRR - Financial Rate of Return GDP - Gross Domestic Product ICB - International Competitive Bidding IDD - International Direct Dialing KDD - Kokusai Denshi Denwa Mb/s - Megabits per second MOF - Ministry of Finance MOFTEC - Ministry of Foreign Trade and Economic Cooperation MPT - Ministry of Posts and Telecommunications NPG - National People's Congress PBX - Private Branch Exchange P&T - Posts and Telecommunications Enterprise PTA - Posts and Telecommunications Administration ROR - Rate of Return SAA - State Audit Administration SOE - Statement of Expenses SPB - State Pricing Bureau SPC - State Planning Commission TOR - Terms of Reference VSAT - Very Small Aperture Terminal i CHINA TELECOMMUNICATIONS PROJECT Loan and Project Summary Borrower: People's Republic of China Beneficiaries: Ministry of Posts and Telecommunications (MPT) and Posts and Telecommunications Administrations (PTAs) in Heilongjiang, Jiangsu and Liaoning Provinces. Amount: US$250.0 million equivalent Terms: 20 years, including five years of grace, at the Bank's standard variable interest rate On-lending Loan funds will be made available by the MOF to the MPT for Terms: the long distance and sector reform components, and directly to the three provincial PTAs for the local investments, under the same terms and conditions as the Bank's loan, the foreign exchange risk being borne by the MPT and the PTAs. Proiect The objective of the proposed project is to help develop a Obiectives: modern commercial telecommunications sector that will evolve increasingly towards allocation of resources on the basis of market forces. The project will include priority tasks that are part of an agreed Medium Term Policy Action Program of sector reform for 1994-97, thus helping develop conditions for increasing competition and private participation. The Government expects the reforms will enable sustained rapid sector development as needed to overcome widespread telecommunications shortages which result in high costs throughout the economy and impede effective implementation of development programs in other productive and social sectors. In the course of helping the Government achieve these objectives, the project will finance investments in modern technology for fiber optic long distance links connecting eleven provinces and local digital switching in three provinces. ii Benefits: Accelerated reforms supported by the project will contribute to sustained telecommunications expansion and modernization, which will benefit all sectors of the economy countrywide. The project also directly supports development of the basic infrastructure in three provinces included in the local network expansion program and in 11 other provinces served by the long distance cables. This will benefit businesses and consumers in the rapidly growing market economy, improve delivery of social services and government administ,ration, and enhance the quality of life. Risks: There are two main risks regarding the reform component. First, there is some uncertainty regarding the pace of the reform program agreed with MPT. However, the Government's formal commitment to the Action Program for 1994-97 and MPT's interest in subsequent Bank loans which would be linked to further progress in sector reform, provide support for change. The second risk is that MPT may be unable to change as fast, as needed. Measures to contain this risk have included Bank assistance in legal and regulatory matters during project preparation and would be followed up as part of the project. The main risk regarding the investment comPonent is delayed procurement of local switching equipment. However, MPT recognizes the urgent need to greatly expand the urban telephone network in developing industrial centers, and is likely to seek prompt action by the PTAs. Poverty Cateqory: Not Applicable liii Local Foreign Total (US$ million) ESTIMATED COSTS: Equipment & Services 18.6 242.3 260.9 Construction and Installation 262.7 0.0 262.7 Training and Consultants' Services 0.0 1.6 1.6 Total Base Cost 281.3 243.9 525.2 Physical Contingencies 34.2 12.1 46.3 Price Contingencies 12.8 9.4 22.2 Total Project Cost /a 328.3 265.4 593.7 Interest During Construction /b 0.0 29.3 29.3 Total Financing Required 328.3 294.7 623.0 -----------------------------------------------------------------_ FINANCING PLAN: MPT and PTAs 328.3 43.4 371.7 Grant from BITS /c - 1.3 1.3 IBRD - 250.0 250.0 Total 328.3 294.7 623.0 DISBURSEMENT: Bank FY 1994 1995 1996 1997 1998 1999 (US$ million) ---------------------------------------------------------------__ Annual 5.8 170.2 64.7 7.3 1.0 1.0 Cumulative 5.8 176.0 240.7 248.0 249.0 250.0 Economic Rate of Return: 36t Mar-: IBRD No. 25093 /a Project-financed goods are exempt from import duties and taxes. /b Interest during Construction (IDC) is based on onlending rates for projected disbursement of loan proceeds. Foreign exchange portion of IDC is based on the Bank's standard variable interest rate. /c Co-financing from the Swedish Board for Investments and Technical Support (BITS). iv PEOPLE'S REPUBLIC OF CHINA TELECOMMUNICATIONS PROJECT Staff Aprraisal Report Table of Contents Page No. LOAN AND PROJECT SUMMARY. . . . . . . . . . . . . . . . . . . . i I. THE TELECOMMUNICATIONS SECTOR . . . . . . . . . . . . . . 1 A. Sector Organization . . . . . . . . . . . . . . . . . . . B. Telecommunications Services and Networks . . . . . . . . 2 Local Telephone Services ... . . . . . . . . . . . . . 3 Long Distance Network ... . . . . . . . . . . . . . . 4 Nonvoice and Other Facilities . . . . . . . . . . . . . 4 C. Service Access and Quality . . . . . . . . . . . . . . . 5 Access to Service .5.. . . . . . . . . . . . . . . . . S Unmet Demand . . . . . . . . . . . . . . . . . . . . . . 6 Quality of Service ... . . . . . . . . . . . . . . . . 6 D. Manufacturing, Construction, and Procurement . . . . . . 7 E. Financial Performance ... . . . . . . . . . . . . . . 7 Accounting and Financial Management . . . . . . . . . . 7 Tariffs . . . . . . . . . . . . . . . . . . . . . . . . a F. Lessons from Previous Bank Involvement in the Sector . . 9 II. SECTOR REFORM . . . . . . . . . . . . . . . . . . . . . . . 10 A. Sector Strategy and the Beginnings of Reform (1988-91) 10 B. Sector Reforms Accelerate (1991-93) ... . . . . . . . 11 C. Next Stage of Reforms (1994-97) ............ . 11 This report is based on the findings of a June/July 1993 appraisal mission comprising Bjorn Wellenius (task manager), Alberto Cruzat, David Delgado, and Peter Wright. Alfred Kennefick, Natalie Lichtenstein, Naiqin Lu, Nicholas Miller (consultant), and R. Venkateswaran assisted in selected matters. The peer reviewers were Dinshaw Joshi (engineering), Selina Shum (finances), Peter Harrold (economics and country strategy), and Timothy Nulty (sector policy). The Division Chief is Richard Newfarmer and the Department Director is Shahid Javed Burki. v Table of Contents (Cont'd) Page No. III. THE PROJECT ... . . . . . . . . . . . . ....... . 14 A. Project Objectives . . . . . . . . . . . . . . . . . . .14 B. Rationale for Bank Involvement . . . . . . . . . . . . . 14 C. Project Description ... . . . . . . . . . . . . . . . 14 D. Reform Components ... . . . . . . . . . . . . . . . . 15 Enterprise Accounting .5.. . . . . . . . . . . . . . . iS Tariffs ... . . . . . . . . . . . . . . . . . . . . . 17 Legal and Regulatory Framework . . . . . . . . . . . . . 18 E. Investment Components ... . . . . . . . . . . . . . . 19 Long Distance Investments . . . . . . . . . . . . . . . 19 Local Telephone Switching Investments . . . . . . . . . 19 Project Investments and the Overall Investment Program . 20 F. Status of Project Preparation . . . . . . . . . . . . . 21 G. Project Costs and Financing . . . . . . . . . . . . . . 21 H. Project Implementation . . . . . . . . . . . . . . . . 23 I. Procurement ... . . . . . . . . . . . . . . . . . . . 24 J. Disbursement . . . . . . . . . . . . . . . . . . . . . 26 K. Audits ... . . . . . . . . . . . . . . . . . . . . . . 26 L. Environmental and Health Aspects . . . . . . . . . . . . 26 M. Monitoring, Reporting, and Supervision . . . . . . . . . 27 IV. FINANCIAL AND ECONOMIC ANALYSES . . . . . . . . . . . . . . 28 A. Past and Present Financial Performance . . . . . . . . 28 B. Projected Financial Performance and Targets . . . . . . 32 C. Tariffs ... . . . . . . . . . . . . . . . . . . . . . 35 D. Financial Covenants . . . . . . . . . . . . . . . . . . 35 E. Economic Benefits and Rate of Return . . . . . . . . . . 36 F. Project Risks ... . . . . . . . . . . . . . . . . . . 37 V. AGREEMENTS REACHED AND RECOMMENDATION . . . . . . . . . . . 38 A. Agreements . . . . . . . . . . . . . . . . . . . . . . . 38 B. Recommendation . . . . . . . . . . . . . . . . . . . . . 39 vi ANNEXES 1.1 Access to Telephone Services in Selected Countries . . . 43 1.2 Basic Statistics of Networks and Services . . . . . . . 44 1.3 Installed Local Exchange Capacity . . . . . . . . . . . 45 1.4 Long Distance Exchange Capacity . . . . . . . . . . . . 47 1.5 Telephone Lines and Service/100 Population . . . . . . 48 1.6 Telephone Demand and Supply in Urban Areas . . . . . . 49 1.7 Quality of Telephone Service . . . . . . . . . . . . . 50 2.1 Summary of Recommendations of Sector Study . . . . . . . 51 2.2 Outline of Sector Reforms in 1994-97 . . . . . . . . . . 53 2.3 Policy Letter from Vice-Minister of MPT . . . . . . . . 59 3.1 Accounting Systems Development & Training TOR . . . . . 67 3.2 Study of Telecommunications Tariffs Terms of Reference . 71 3.3 Long Distance Investment Component . . . . . . . . . . . 75 3.4 Fiber Optic Cable from Beijing to Lanzhou . . . . . . . 81 3.5 Fiber Optic Cable from Hangzhou/Fuzhou to Chengdu . . . 85 3.6 Heilongjiang Province . . . . . . . . . . . . . . . . . 89 3.7 Liaoning Province . . . . . . . . . . . . . . . . . . . 97 3.8 Jiangsu Province . . . . . . . . . . . . . . . . . . . . 105 3.9 Project Cost by Year . . . . . . . . . . . . . . . . . 113 3.10 Project Timetables . . . . . . . . . . . . . . . . . . . 115 3.11 Procurement . . . . . . . . . . . . . . . . . . . . . . 117 3.12 Schedule of Disbursements . . . . . . . . . . . . . . . 121 3.13 Environmental Protection . . . . . . . . . . . . . . . . 123 3.14 Performance Indicators . . . . . . . . . . . . . . . . . 125 3.15 Progress Reports and Supervision Plan . . . . . . . . . 127 4.1 Historical Financial Statements 1988-1992 . . . . . . . 131 4.2 Rate of Return by Service . . . . . . . . . . . . . . . 137 4.3 Financial Statements Projection Methodology . . . . . . 139 4.4 Projected Financial Statements 1993-2000 . . . . . . . . 145 4.5 Tariffs . . . . . . . . . . . . . . . . . . . . . . . . 151 4.6 Return on Investment . . . . . . . . . . . . . . . . . . 153 5.1 List of Documents in Project Files . . . . . . . . . . . 155 FIGURES AND TABLES IN THE TEXT 1.1 Telephone Lines In Service and Telephone Density . . . . 2 3.1 Estimated Project Costs . . . . . . . . . . . . . . . . 22 3.2 Project Financing Plan .23 3.3 Summary of Procurement Arrangements . . . . . . . . . . 25 3.4 Disbursement of Bank Loan . . . . . . . . . . . . . . . 26 4.1 Summary Historical Financial Statements, 1988-92 . . . . 29 4.2 Key Ratios and Historical Financial Indicators, 1988-92 30 4.3 Summary Projected Financial Statements, 1993-2000 . . . 33 4.2 Key Ratios and Projected Financial Indicators, 1993-2000 34 MAP IBRD Map No. 25093 I. THE TELECOMMUNICATIONS SECTOR 1.1 The Ministry of Posts and Telecommunications (MPT) is the functional organ of the State Council responsible for postal and telecommunications services throughout China. Its main responsibilities are: to formulate the policies, laws, plans, and reform programs related to these services and to supervise their implementation; to participate in international telecommunications organizations on behalf of the state; to set and enforce telecommunications standards; to coordinate the dedicated telecommunications networks of numerous ministries and state enterprises; to oversee and regulate the posts and telecommunications operating entities and administrative agencies throughout the country; and to engage directly in the operation and management of various telecommunications and postal services. The MPT, including its reporting entities, has 15 headquarters departments and about 1,200,000 employees (of which 49% are attached to telecommunications) in the whole country. A number of other agencies, mainly the Ministry of Finance (MOF), the State Planning Commission (SPC), and the State Pricing Board (SPB), also have jurisdiction over certain telecommunications sector matters. A. Sector Organization 1.2 Public telecommunications networks and services are operated by MPT through some 2,500 Posts and Telecommunications Enterprises (P&Ts) at the municipal/city and county levels, organized in a hierarchical structure. Each of about 2,150 county P&Ts provides local service in the county capital and extensions to the county's rural areas. At the next higher level, each of some 350 municipal/city P&Ts provide local service in the respective urban and close rural areas, and coordinates development and operation of the long distance network with and among the subordinate county P&T enterprises. Thirty of these municipal/city P&Ts are in the provincial capitals. One further step up, coordination of long distance networks among municipal/city P&Ts is the responsi- bility of each of 30 provincial P&T Administrations (PTAs), which are distinct from the municipal/city P&Ts that provide local service in the provincial capitals. Paralleling the provincial PTAs, the central MPT is responsible for coordinating inter-provincial and international long distance services, investment planning, consolidated accounts, and other operational functions on a nation-wide basis. Administrative functions follow the same hierarchy. 1.3 Large industrial complexes (e.g., oil fields, mines) are allowed by MPT to provide public telecommunications services in their limited areas. Many other ministries and public enterprises (mainly the ministries of railways, water resources, electric power, petroleum, forestry, river and coastal navigation, and the armed forces and police) have their own dedicated networks to meet their specialized needs and overcome shortages in the public network. Likewise, small exchanges, financed and installed partially or wholly by rural communities, are allowed connection to the public network. - 2 - B. Telecommunications Services and Networks 1.4 China has the largest public telecommunications system among developing countries, the third largest in Asia (after Japan and the Republic of Korea), and the twelfth largest worldwide (Annex 1.1). 1.5 In support of economic reforms taking place in the country, steps were taken as early as 1978 to accelerate telecommunications development. Targets under the Seventh Five-Year Plan (1986-90) were directed at (a) development in medium-size, coastal cities which are open to foreign joint venture investment, and (b) modernization and expansion of the long distance and international networks. During this period the telecommunications sector's growth rate began surpassing that of the national economy (twice the GDP), marking an important turning point. The Eighth Five-Year Plan (1991-95) targets continued expansion of the domestic long distance network, with 21 projects providing about 100,000 km of fiber optic cable and microwave radio facilities, and the installation of 20 million additional lines of local digital switching equipment (to a total of over 32 million lines installed). The Ninth Five-Year Plan (1996-2000) is yet to be fully formulated, but MPT expects to exceed 90 million installed telephone lines by the year 2000. 1.6 The number of telephone lines in service experienced an average annual growth rate of 15% for the period 1986 to 1990. This high rate of growth continues. In 1991, the number of lines in service grew to 9.3 million representing an increase of 21% over the previous year. In 1992 it grew to 12.2 million representing an increase of 32%. Over the first six months of 1993, more than 2.2 million telephones lines were installed in cities. This marks a record increase for a half year. MPT forecasts a sustained growth equivalent to at least 20% annually to the year 2000 (Figure 1.1) . These achievements and targets are well above what any other developing nation has ever experienced. 60 10 509 S Lines 6 .30 .E20 204 3 10 2~~~~~~~~~~~~~~~~~~~~~~~ 0 0 oo 4 co c- o2 go co g co co °0 C) °> °% > Year Figure 1.1 - Telephone Lines in Service and Telephone Density -3- Local Telephone Service 1.7 By the end of 1992 there was an installed switching capacity of 19.2 million lines. This included 13.5 million lines in the urban network, of which 9.4 million, or 70%, were in digital exchanges, and 5.7 million lines in the rural networks. The local telephone system is still dominated by analog technologies, despite recent progress in modernization. Many towns are served with obsolete electromechanical equipment manufactured in China in the 1960s and 1970s, and in rural areas most of the local exchanges are still manual. 1.8 The total number of lines in service in 1992 was 12.2 million, of which 9.8 million were in the urban network, and 2.4 million lines in rural areas (Annex 1.2). Lines in service vary considerably among provinces, from about 2.1 million lines in Guangdong to 10,600 in Tibet (Annex 1.3). In 1992 local traffic totaled approximately 32 billion calls. MPT indicates that about 24 billion calls were made in the first six months of 1993, a rise of 70% over the same period in 1992. 1.9 Development of the local telephone access cable networks has lagged behind that of exchanges, resulting in idle switching capacity. Nationwide in 1992 only 64t of the exchange lines were connected to subscribers. In the urban areas 72% of capacity was utilized, compared with over 90% that normally should be expected given the existence of large unmet demand. This is a major problem in many developing countries, resulting from the complexity of constructing underground cable works on a continuing basis and the relative ease of cutting back on cable network construction when funds are limited. This has been recognized by several of the PTAs and considerable effort and funds are planned to be directed to correcting this situation.l/ 1.10 Extensive use is made of private branch exchanges (PBXs) to provide telephone service in urban office and residential developments. In 1991, although only about 6% of the urban lines in service were used as trunks for PBXs, they supported about 47% of the connected telephones. This proportion is far higher than in other countries (e.g., India 18%, Thailand 26%) where direct lines are also in short supply. 1.11 Rural telephone service is mainly provided by the municipal/city and county P&Ts. However, many of the rural telephone lines are operated by cooperatives and local governments in townships and villages. This mixed operation is the result of a demand that cannot be satisfactorily met by the P&Ts. Although the percentage of installed lines which are in operation in small rural exchanges can be expected to be lower than in larger urban exchanges, out of the total installed rural capacity of 5.67 million lines in 1992, the ratio of only 42% is low, and provides some opportunity for expansion. jI/ Support from the municipal governments to attact foreign investment for development of the local economy has led the local P&Ts to plan for grmater expenditure in expanding urban access cable networks in the 1993-2000 period. In Heilongjiang province their objective is to improve urban utilization from 79% in 1991 to 90% by 2000. Similar utilization improvement objectives in Jiangsu are from 62% to 90%. and in Liaoning from 67% to S7%. -4- Long Distance Network 1.12 Backbone routes mainly use medium- and low-capacity coaxial cables, and analog microwave radio systems of indigenous design and manufacture installed in the late 1960s. Modern 34Mb/s and 140Mb/s capacity digital microwave and fiber optic systems are increasingly being added beginning from the late 1980s. 1.13 The domestic long distance satellite network is composed of two geostationary satellites (which were designed, built, and launched by China), transponders leased and bought from INTELSAT and ASIASAT, and 42 large (30 m diameter) earth stations. In addition to TV channels, there are approximately 2,000 satellite backbone telecommunications trunks linking 7 major cities. Completion of a further 19 large earth stations by 1994, equipped with digital transmission terminals, will increase the satellite backbone capacity by approximately 10,000 channels. In addition, there are presently more than 600 VSATs (Very Small Aperture Terminals) and other earth stations (6m up to 16m in diameter) of various types. It is estimated that the total number of VSATs required to serve private networks and smaller access points will grow to several thousands by 1995. 1.14 International service is provided through gateways in Beijing, Shanghai, and Guangzhou using more than 5,000 satellite circuits via five earth stations as well as terrestrial microwave and optical fiber cable circuits to Hong Kong and Macao and submarine cable circuits accessed though the Sino- Japanese submarine cable. AT&T (USA) and KDD (Japan) have agreed to build a new 1,200 km submarine optical fiber cable between Shanghai and Kyushu (Japan) to expand communications capacity with both Japan and the USA. International direct dialing (IDD) calls can be made to 198 destinations throughout the world. 1.15 In 1992, domestic long distance traffic was 2.67 billion calls, representing an increase of 68% over the previous year. MPT indicates that in the first six months of 1993 2.09 billion domestic direct dial (DDD) calls were made, an increase of 89% over the same period in 1992. International long distance traffic was 207 million calls in 1992, representing an increase of 46% over 1991. Eighty-six percent of long distance calls in 1992 were completed by the automatic network. 1.16 By the end of 1992 there were 234,276 domestic and international long distance circuits available in the national network (Annex 1.2). Long distance domestic exchange circuit termination capacity (which leads the actual number of connected circuits by a period of one to two years) almost doubled from 1990 to 1992. Future planned growth of exchange capacity at 24% annually (over the period to 1997) recognizes the vast unsatisfied demand (Annex 1.4). Nonvoice and Other Facilities 1.17 The telex network connects about 14,600 telex subscribers in 118 cities (Annex 1.2). Telex uses both the public switched telephone network access and separate telex switches. Telegraph in China continues to be widely used. The annual volume is about 282 million telegrams, with more than 80% handled through the use of intelligent terminals. Traffic is expected to remain at about the present level through the year 2000. Other services include public facsimile (FAX), with about 200,000 machines in use and generating 1.7 million messages per - 5 - year; videotex, in an experimental stage, expected to grow to about 5,000 users by 1995; and electronic mail systems (E-Mail), with a capacity of 18,000 mailboxes, currently being put into operation in six major cities. 1.18 A public packet switched data network for domestic and international data traffic began service in 1989 and presently has more than 800 users. This network allows telephone and telex subscribers in all provincial capitals to access computer communication, high-speed facsimile, data bases and other advanced services as and when these become available. A new network is 'being put into service in 1993 to provide service to all the capital cities of provinces or municipalities. The total number of ports is expected to reach 10,000 by mid- 1993, with forecast annual growth rates of 50% through 1995. 1.19 Cellular telephones have proliferated, particularly in the coastal cities and special economic zones, and help to overcome local wired telephone shortages. By the end of 1992, cellular telephone systems had been put into operation in 350 cities with about 177,000 subscribers. Radio paging systems were in place in about 1,075 cities with some 2.2 million subscribers. C. Service Access and Quality 1.20 Despite rapid growth in recent years, the Chinese telecommunications system is nowhere near meeting pent-up and rapidly growing demand. Local and long distance service quality is still poor in many areas, and many parts of the system are obsolete and costly to maintain and operate. Access to Service 1.21 China's density of 1.03 telephone lines in service per 100 inhabitants as of 1992 is one of the lowest among large developing countries, and lags far behind the newly industrialized and developed countries. Even with forecast telephone density of 2.5 by 1997, this situation will remain for many years. Annex 1.1 gives some comparative examples for telephone density as of 1991. 1.22 Telephone line density varies considerably among provinces, ranging from 0.4 in Henan to 5.9 in Shanghai. While the municipalities of Beijing, Shanghai, and Tianjin average 4.7 lines per 100 inhabitants, the provinces and autonomous regions have only 0.9 (Annex 1.5). 1.23 Although the number of P&Ts' public pay phones is extremely low, the public is also served by private entrepreneurs who offer "sidewalk" telephone service for a charge - a practice which appears to receive tacit approval by the P&Ts. 1.24 Rural telecommunications are widely spread and most communities have access to service. However, recent telecommunications investment is being directed mainly to the major cities and industrial development zones. Although almost 20% of all telephone lines in service is in rural areas, average growth of subscribers from 1988 to 1992 was only 6.4% annually as compared with 26% in urban areas. -6- Unmet Demand 1.25 In 1988 there were 0.5 million outstanding registered applicants for telephone service in the urban areas. In spite of rapid growth in connected lines, this increased to 1.6 million in 1992. Over 29% of these applications were in the municipality of Shanghai and another 201 were in the province of Guangdong. Nationally, outstanding registered applications equalled 17" of urban lines in service (Annex 1.6) . Registered applications continue to increase, and this is not expected to change appreciably until after 1995. 1.26 Total unmet demand is likely to be much higher. Experience in other developing countries indicates that when, as in China, there are acute service shortages, the number of outstanding registered applicants greatly understates total unmet demand. Furthermore, demand registration is being restricted by high installation fees. While high installation fees are useful to price-ration scarce supply and help finance investment, they cloud the full magnitude of potential demand for service. Quality of Service 1.27 Fault Rate and Repair Time. The incidence and duration of faults appears to be considerably better than in other developing countries. China's reported average of 5.3 faults per 100 telephone lines per month is lower than in other Asian developing countries (e.g., Indonesia 6.5, Philippines 12, India 19) and comparable to that in some developed countries. In recent years the average duration of faults in switching and inter-office facilities has improved significantly (from 4.7 hours in 1988 to 0.2 hours in 1992), as a result of the introduction of digital stored program control (SPC) exchanges and fiber optic digital inter-exchange facilities (Annex 1.7). 1.28 The fault rate varies considerably among provinces and municipalities, from 0.03 faults per 100 lines per month in Jiangsu to 21 in Shaanxi (including eleven regions in excess of five faults per 100 lines per month). Performance is probably affected by important differences among PTAs regarding maintenance organization, reporting and recording practices, availability of fault location and test equipment, and other factors. 1.29 Call Completion Rate. Telephone service is severely congested and is probably unusable in many places during peak business hours. On average, only about 58% of local calls and 31% of domestic long distance calls are completed (Annex 1.7). These results are slightly better than in some other Asian developing countries (e.g., Indonesia 40t and 20% respectively in a sample of 50 cities), falling far short of about 70% in well developed systems. Experience in other developing countries suggests that the low completion rate of local calls is largely due to shortages in telephone lines. When the supply of lines falls far short of demand, the few available lines are in use an excessive proportion of the time, frustrating incoming call attempts. Extensive use of PBXs, while making it possible to provide service to more urban subscribers than could be otherwise achieved with the small number of available lines, results in average traffic per line well in excess of normal design ranges, contributing to local traffic congestion. 1.30 The low completion rate for domestic long distance calls indicates the existence of major shortages in transmission facilities (cables and microwave systems) . Completion rates vary somewhat among provinces, with the lowest being 42% in Shanghai, perhaps indicative of its high usage of long distance services. In a few provinces the averages are in the range of what would be expected in well-developed networks (Annex 1.7). In recent years, domestic long distance call completion rates have improved in most of the country, which is a reflection of the rapid expansion in long distance circuits, averaging 39% annual growth since 1989. D. Manufacturing, Construction, and Procurement 1.31 Telecommunications equipment and materials required by P&Ts at all levels are procured from domestic and international markets. Modern switching equipment is imported or manufactured in China in association with leading world suppliers. Network construction and installation is carried out mainly by China National Telecommunications Construction Company2/, with five regional branches, 71 other companies reporting to provincial PTAs, and other construction companies. 1.32 Procurement, both domestic and international, is generally based on inviting quotations from a wide range of suppliers. Competitive bidding is used in projects financed by foreign loans. The P&Ts procure telecommunications equipment from the international market when domestic products or manufacturing capacity cannot meet their needs. The main criteria for the P&Ts to choose telecommunications equipment relate to technical standards, quality, cost (including future operating and maintenance costs), and after-sales service. MPT is responsible for setting and enforcing standards of equipment quality and performance, closely related to the set of technical specifications that govern the manufacturing, procurement, installation, and operation of every component in the network. MPT advises provincial PTAs regarding the procurement, and in turn these provide advice and guidance to subordinate P&Ts. E. Financial Performance 1.33 MPT's services are overall profitable. Financial performance, however, varies considerably among services and provinces, and large cross-subsidies take place within the telecommunications sector, and between telecommunications and posts, indicating a need for revising tariffs. Successive increases in postal tariffs in recent years to reduce the transfer from the telecommunications sector have been rapidly offset by inflation. Accounting and Financial Management 1.34 MPT's accounting system is based on norms prescribed for all Chinese state enterprises. Historically, MPT's accounts had some features that were consistent with internationally accepted principles (e.g., double entry, historic valuation of assets), but differed from these principles in important ways -- treatment of personnel expenditures, debt, equity, and work in progress -- common to all Chinese enterprises. Other differences with international accounting principles include the treatment of depreciation, various earmarked funds, and 2/ An enterpnse established from former constrution depaunents of MPT. - 8 - the grouping of expenses, which were specific to MPT. Effective July 1, 1993, MOF introduced a moc .fied accounting system which reflects the decision to follow the basic principles underlying accounting practices in developed market-oriented economies. 1.35 Financial statements for the urban network are prepared by the 2,500 municipal/city P&T enterprises and county operating entities; they are consolidated at the level of provincial PTAs. Each PTA prepares an income statement up to the point of determining the difference between revenues and expenditures. However, the final enterprise net profit is determined after calculating the long distance revenue re-distribution using the so-called "economic accounting system". After calculation of the net profit, calculation of taxes, personnel bonus and welfare payments, and own investment funds is done. Each PTA also produces a balance sheet. Separate financial statements, with less detail than those for the urban network, are prepared at the provincial level by each P&T rural branch. 1.36 The accounting system in use up to July 1, 1993 was not well suited for managing the P&Ts as commercial enterprises, and full implementation of the new commercial accounting system will take some years. However, the general direction of the recent changes is correct. For instance, among the changes introduced, the payment of bonuses, which was earlier reported outside the income statement, will be incorporated into this statement, and the payment of pensions, which was included as a negative Net non-Operating Revenue, will also be incorporated into the income statement. Additionally, new depreciation rules recognize shorter useful lives for some telecommunications equipment, and allow accelerated depreciation for switching equipment. Two of the main outstanding issues are: (a) adjustment to the long distance revenue re-distribution system resulting from a tariff study to be carried out under the proposed project (see para. 3.15), and (b) changes in the housing system which could result in an increasing amount of welfare funds being transferred to salaries. Tariffs 1.37 Tariffs mainly comprise (a) charges to apply for service and become connected to the network (installation fees), (b) access charges to remain connected to the network (sometimes including a limited number of local calls), and (c) call charges (local, domestic long distance, and international) . In the past, countrywide uniform telecommunications tariffs were set by the central MPT subject to approval by the SPB. However, MPT has been delegating more pricing responsibilities to the P&Ts. At present, the MPT rates are mainly used as guidelines by the P&Ts to set their own local rates, and add surcharges on local and long distance rates, with the approval of the provincial pricing bureaus 3/ . 1.38 Compared with other large countries, initial telephone connection fees in China are high, access and local call charges are low, and international call charges are high. Annex 4.5 presents a summary of basic tariffs with indication of typical surcharges. 3/ The difference between officially established rtes and locally applied surcharges is that the provincial financial statements to MPT only reflect the effect of the official rtes - revenues generted by the surharges are not reponed to MPT. 1.39 The connection fee (Yuan 1,000-5,000, varying by city) is very high compared to the incremental cost of connecting a subscriber to the network and also in terms of Chinese incomes. This serves both to finance investments and to ration scarce new connections. The high connection fee, however, has adverse welfare effects, since it essentially places the telephone outside the reach of the vast majority of the population. The high initial payment is partly offset by the low local service monthly charges, which may include up to 300 calls, and which are about one-tenth of those in other countries (including North America where some subsidy of local service still remains). This practice, if sustained in the long term, is likely to both suppress connections demand and lead to insufficient revenue to meet operating costs. F. Lessons from Previous Bank Involvement in the Sector 1.40 Although this would be the first telecommunications loan to China, there have been substantial telecommunications components in railway projects, and special efforts are under way to coordinate Bank work in both sectors. The Financial Sector Technical Assistance Project (Credit 2423-CHA) also includes support for developing a satellite-based bank payments system, which is consistent with Bank policy recommendations in the telecommunications sector. Accounting reform under the telecommunications project is consistent with the more general activities under the Financial Sector Technical Assistance Project and the Planning Support and Special Studies Project (Credit 2423-CHA) being implemented by MOF. 1.41 From the late 1980s, the Bank has been involved in an increasing number of telecommunications restructuring programs in other countries. Traditional state monopoly utilities are giving way to market-driven business structures featuring greater private sector participation, increasing competition, and a shift of government role from ownership and operation to policy and regulation. These reforms aim at overcoming persistent shortages of telecommunications services, which have come to be widely perceived as critical constraints on economic development. The reforms under way in China are consistent with this trend. In particular, the private sector already has a strong presence. For example, major telecommunications equipment is manufactured in China by joint ventures with the world's leading suppliers, and independent companies provide paging services in over 1,000 cities. The next steps of reform supported by the project are expected to create new opportunities for private participation. For example, some operating enterprises to be spun off from MPT will become joint- stock companies; P&Ts will start issuing bonds; cellular and other advanced services will be opened to competition, presumably by a wide mix of public and privately owned companies; and several large Chinese consortia are reportedly vying to enter the long distance and other fast-growing market segments currently reserved for MPT. State Council decisions expected by the end of 1993, and legislation and regulations being prepared as part of the project, will further clarify the prospects for domestic and foreign private investors and operators. 1.42 More detailed information on the telecommunications sector is available in Report No. 9413-CHA, "People's Republic of China, Telecommunications Sector Study: Survey, Assessment and Strategy Recommendations, " issued February 14, 1992. - 10 - H. SECTOR REFORM 2.1 The Government has underway an ambitious program for telecommunications development, the success of which is central to realizing the economic growth objectives of China. The development program comprises accelerated expansion and modernization of the telecommunications network, as well as a process of sector reform begun in the 1980s and likely to continue beyond the 1990s. The main thrust of sector reform aims at transforming the operating entities into commercial enterprises and developing an increasingly competitive market of telecommunications equipment, networks, and services. This strategy is consistent with the Bank's overall approach to economic reforms in China. A. Sector Strategy and the Beginnings of Reform (1988-91) 2.2 The reform process began with a reorganization of MPT initiated in 1988 aimed at gradually (a) separating enterprise from government functions, (b) decentralizing management decisions, (c) making each operating enterprise responsible for its profits and losses, and (d) separating telecommunications and postal operations. By 1991, important progress had been made along these lines. In particular: - decision-making with regard to operations, network development, and financing had been shifted from MPT headquarters to the 2,500 city and county P&Ts; - as a step towards increasing P&T accountability as well as day-to-day management independence from local and central governments, a contract responsibility system was established focusing on output, quality, and financial targets; - at MPT headquarters, two directorates-general, one each for posts and telecommunications, had become mainly responsible for operations, while government functions started to cluster around existing and new administrative departments; - postal operations had been separated in all provincial capital cities, trials were under way in several other places, and accounts were separated at all levels; and - manufacturing, construction, and purchasing departments of MPT were transformed into separate legal entities and began to operate more like businesses in increasingly competitive markets. 2.3 The Bank's Sector Study (para. 1.42) recognized the importance of these initial changes, and recommended taking the reform process much farther. This was deemed necessary to attract new sources of capital and entrepreneurial talent to sustain rapid network growth and modernization, as well as to enhance efficiency and encourage innovation. Five main areas for further reform were emphasized: - 11 - (a) reorganize operations along fully commercial lines, including reform of P&T enterprises, (b) diversify the supply of telecommunications services and networks and develop competition, (c) rationalize tariffs and reduce cross-subsidies, (d) develop regulation, and (e) separate posts from telecommunications. A summary of the main recommendations is in Annex 2.1. Further details are in the Sector Study, pp 21-40. B. Sector Reforms Accelerate (1991-93) 2.4 In the early 1990s, growth of the telecommunications system continued to accelerate to new world record levels while unit investment costs dropped to about one-half of the average in Bank projects in other countries. At the same time, the reform process gathered considerable momentum. In particular, by 1993: - the P&Ts effectively are permitted to choose among competing domestic (and to some extent foreign) suppliers of network equipment; prices recently paid by the P&Ts for major equipment, which accounts for about 38% of MPT's $5 billion 1993 investment program, are among the lowest in the world 1/; - subscriber terminal equipment 2/ is provided to end users under competition by many domestic manufacturers, mostly associated with foreign suppliers; as a result, a wide range of products, of better quality and at lower prices, has become available; - a vibrant market for residential and small-business telephone service has built up, where virtually none existed only a few years ago; - many companies compete to provide radio paging services, and now have some 2.2 million users in about 1,075 cities and towns 3/; and - major users are developing new networks for their own use and for use by related entities as alternatives to MPT's public network, and existing dedicated networks by Government entities have been expanded and modernized. C. Next Stage of Reforms (1994-97) 2.5 The Government intends to move considerably further along the reform road in the next four years, mainly as follows (further details are in Annex 2.2): I/ Major nerwork equipment is manufactured in China through joint ventures with the world's leading suppliers (e.g.. Alcatel. Ericsson, Siemens). In addition to manufacturing capabilities, the foreign partners are investing in building up domestic research and development. The latest additions have been the highly publicized contract with AT&T and, more rccently, a memorandum of understanding with Northern Telecom of Canada. 2V Such as telephones sets, fax machines. data modems, PBX, and PABX. 3t For example, in the city of Hangzhou, in addition to the city P&T there are 10 companies. - 12 - - Restructure APT: the State Council will decide on a reorganization of MPT. DGT and DGP will become autonomous operating units respectively. This will eventually lead to the MPT's operation departments being reorganized as separate state-owned enterprises, and the MPT focusing mainly on policy, regulation and strategic planning; spin off new national enterprises for non-basic services; further separate telecommunications and posts; take steps towards transferring responsibility for workers' welfare to other organizations; and refocus the scaled-down MPT on policy, regulation, and strategic planning. - Develop ccopetition: competing providers of cellular, trunk mobile, domestic VSAT, and other wireless services will be licensed; dedicated networks will be allowed to lease capacity, provide service to others, and interconnect with the public network; and there will be open entry for providers of value added services. - Rationalize tariffs and reduce cross-subsidies: revise tariffs in relation to costs; revise and further decentralize tariff setting and approval procedures; raise postal tariffs and gradually end cross- subsidy from telecommunications to posts. - Introduce modern management tools: design improved enterprise accounting systems and procedures; implement these in two pilot provinces; and extend them to all provinces, including training of some 25,000 staff. - Attract new capital: manufacturing, construction, and non-basic services enterprises spun off from MPT that meet Government require- ments will become organized under the new companies law; P&Ts will start to raise long-term financing by issuing bonds in the domestic markets; and users and others will be encouraged to invest in new business networks and possibly to build-out local infrastructure. - Develop legal and regulatory framework: issue basic telecommunications regulations for competitive services, dedicated networks, and interconnection of dedicated and public networks; submit a telecom- munications law to the National People's Congress. 2.6 A Medium Term Policy Action Program is presented in Table 2.1. The Action Program was agreed with MPT in 1991 and updated in July 1993. It reflects the main sector changes achieved and planned by the end of 1993 and further reforms expected in 1994-95 and 1996-97. The pace and extent of these reforms exceed those envisaged at the time of the Sector Study, and are consistent with its recommendations. 2.7 The Government's intention to carry out the Action Program has been confirmed in a policy letter to the Bank from a Vice Minister of Posts and Telecommunications (Annex 2.3). 2.8 The proposed project will support the implementation of three priority tasks in the Action Program: improvement of enterprise accounting systems, - 13 - policies and procedures; undertaking of a study of telecommunications tariffs and preparation of a plan and timetable to adjust tariffs; and development of a basic legal and regulatory framework for the sector. 2.9 In addition, in supervising the proposed project, the Bank will monitor closely the Government's progress in implementing the Action Program. - 14 - m. THE PROJECT 3.1 By developing a modern commercial telecommunications sector that will evolve increasingly towards allocation of resources on the basis of competitive market forces, the Government hopes to overcome acute and widespread telecommunications shortages that impose high costs throughout the economy and impede effective implementation of development programs in other productive and social sectors. While in the immediate future investments will continue to be self-financed to a large degree, sustaining the growth pace will eventually require substantial private investment and access to domestic and international capital markets. A. Project Objectives 3.2 The overall objective of the proposed project is to help create conditions for increasing competition and private participation, including setting up an appropriate policy, legal, and regulatory framework. In the course of helping the Government to achieve this objective, the Bank will assist in financing selected investments to expand and modernize the infrastructure for both long-distance and local telephone service in designated regions and provinces now experiencing rapid market development. B. Rationale for Bank Involvement 3.3 Through sector work and project preparation the Bank has helped the MPT articulate policies that enhance sector efficiency and responsiveness to user needs, develop competition, and gradually open the sector to a wide range of public and private sources of investment capital. The Bank's continued support of the reform process is a necessary complement to its interventions in most other sectors and in general economic reform. The prospect of Bank financing of some investments has added weight to the policy dialogue. 3.4 The proposed project will give the Bank the opportunity to continue this policy dialogue, taking it from MPT headquarters to a sample of provincial administrations and enterprises as well as working with the central MPT in greater depth on key policy, regulatory, and enterprise reform issues. Implementation of commercial accounting, rationalization of tariffs, and preparation of a telecommunications law and regulations will, in addition to supporting priority improvements, provide specific focal points for this broad involvement. The proposed loan may be followed with other loans linked to further stages of sector reform. C. Project Description 3.5 The project comprises a reform component and an investment component. The reform component would support implementation of the accounting, tariff and legal/regulatory reforms included in the Government's Action Program. Such - 15 - support would include, inter alia, financing for: (a) consultant assistance to help MPT develop an appropriate accounting system as well as a program to train about 25,000 P&T accountants in enterprise accounting; (b) expert assistance to carry out a study of telecommunications tariffs and prepare an implementation plan for tariff adjustment; and (c) overseas training of MPT staff to enhance their expertise in legal and regulatory fields. 3.6 The investment component comprises: (a) provision of two segments of the long distance interprovincial network - one in the north (Beijing - Lanzhou) and the other in the south (Fuzhou/Hangzhou - Chengdu) of China and (b) expansion of 920,000 lines of the local telephone systems in three provinces (Heilongjiang, Jiangsu and Liaoning). Technical training for installation and operation of new equipment would also be included in the contract with suppliers. D. Reform Component Enterprise Accounting 3.7 As identified in the Bank's Sector Study, a significantly revised and enhanced enterprise accounting system is needed as a basic tool for business management at all levels, from MPT headquarters to the smallest P&T enterprise. Such a system is also needed to respond to new MOF accounting guidelines (effective July 1, 1993) which require that enterprise financial transactions be recorded and reported according to generally accepted market-oriented accounting principles. This would enable MPT and its enterprises to calculate undistorted financial indicators that provide an accurate picture of the operating enterprises' financial position and performance; it would also provide a basis for reviewing the system for revenue settlements and profit redistribution currently in place.'/ 3.8 MPT is moving rapidly toward establishing an enhanced enterprise accounting. In response to new MOF enterprise accounting rules, MPT made some basic revisions to its enterprise chart of accounts and summary report formats. The accounts and reports were tried on a pilot basis during May 1993 in several P&Ts in Fujian and Liaoning Provinces, and they now are being used in all provinces. A first training course for senior accountants, one from each province and several from MPT headquarters, took place in March 1993. Additionally, a program to train about 50 senior accountants and 500 middle-level accountants and teachers in the next two years at higher education establishments has been started. These are important achievements. 3.9 A full appreciation of the accounting reform objectives, however, indicates that considerably more work and training is needed for MPT to have truly effective enterprise accounting systems based on market-oriented principles: 1/ The 'economic accounting system' used by MPT is, according to MPT, essentially a system for the settlement of revenues reccived from services provided jointly by two or more enterprises. particularly interprovincial long distance services. This also seems to be a mechanism for substantial cross-subsidy among provinces, which weakens P&T managemnent incentives to contain costs and develop long distance services. The nature of the accounting data available has not permitted an informed discussion of this topic. It has been agreed, however, that as accounting data following internationally accepted practices build up, the subject could be revisited on an objective basis. - 16 - a detailed analysis based upon P&T transactions is needed to fully develop requirements for revised computerized journals and ledgers, charts of accounts, and various types of financial reports; detailed accounting policies and procedures need to be developed and documented for the various types of MPT and P&T financial transactions; - the new systems, policies and procedures have to be implemented throughout all P&Ts; and - extensive training is needed for MPT, P&T, and PTA financial staff in the new systems as well as in the principles underlying the new accounting policies and procedures. 3.10 At least one full year of pilot implementation will be necessary to test the new system and procedures, including closing of accounts at P&T, provincial, and MPT levels. A plan and timetable to train the 25,000 P&T accoun- tants countrywide must be drawn up with the provincial administrations that will be largely responsible for implementation. Plans also need to be prepared for computerization of new journals, ledgers and other accounting records. Careful review of the experience gained will be needed after full pilot trials, and again some time after implementation has been completed countrywide. 3.11 Under the project, MPT will carry out a work and training program to attain these goals. The program comprises selecting a major international accounting firm to assist and guide MPT in improving the existing systems, and developing and implementing the needed systems, policies, and procedures in two pilot provinces (Jiangsu and Liaoning). Key MPT staff would receive intensive training in the application and practice of market-oriented accounting principles and standards. These key MPT financial personnel would then play the lead role in replicating the process of systems development and training in other provinces. During negotiations, assurances were obtained that MPT would, by December 31, 1995, develop accounting standards for the sector, undertake pilot implementation of the new system in two provinces in accordance with terms of reference acceptable to the Bank, and prepare and furnish to the Bank an assessment of this experience, including a plan for extension of the new accounting system to other provinces. 3.12 The Swedish Board for Investments and Technical Support (BITS) has confirmed its interest in supporting the accounting reform program outlined above with grant funds of about US$1.0 million equivalent. The grant would meet the full cost of consultants and their travel to China, as well as expenses in Sweden of MPT staff during professional visits and training. MPT would cover the consultants' expenses in China (e.g., subsistence per diem, domestic travel) and the cost of travel of MPT staff to Sweden. Any foreign exchange costs of training not eligible for BITS financing could be met from the proposed Bank loan if other sources are not available. 3.13 Draft terms of reference for the consulting firm are in Annex 3.1. During negotiations, MPT agreed to submit to the Bank, by November 30, 1993, a detailed timetable for processing the contracts with BITS and the consultants. - 17 - Tariffs 3.14 For effective commercial operation of P&T enterprises and MPT's long distance and other national services and facilities, whatever corporate form they may take after restructuring, it is essential that tariffs increasingly reflect the structure and level of costs to produce each type of service by major region of China. Tariffs must also reflect expected system capacity shortages and the need to generate funds for accelerated investment. In the past, MPT supported a centralized, uniform tariff system that inevitably resulted in major imbalances between prices and costs. Since 1989, MPT has taken a more flexible position. For example, for telephone monthly fee and local call charges MPT issues indicative tariffs, but each P&T has some latitude to deviate from these indicative tariffs and set tariffs in consultation with the corresponding local government authorities. Likewise, P&Ts levy and retain surcharges on MPT-defined long distance tariffs. Telecommunications and postal tariffs have been adjusted in recent years to better reflect costs. However, tariffs are still very distorted and result in significant cross-subsidies and inefficiencies. Some tariff elements (e.g., telephone rental and local call charges) are still probably well below cost, while some others (especially international calls) are overpriced. A more systematic review of tariffs structure, level, and management practice is needed. This need becomes more urgent due to the sustained rapid network growth, increasing operational autonomy and commercial orientation of the P&Ts, government policies that require postal services to be financed separately from telecommunications and open up parts of the non-basic telecommunications business to competition, and inflation that has partially eroded the gains from recent tariff adjustments. 3.15 Under the project, MPT will carry out a study of telecommunications tariffs and prepare a plan and timetable to change tariffs and tariff management taking into account the study's recommendations. The objectives of the study are to (a) recommend changes to the current tariff structure and level and a program to implement these changes, (b) establish a methodology for reviewing tariffs from time to time, (c) recommend improvements in the process of tariff change and approvals, and (d) make recommendations on accounting rates and settlements for international traffic. The tariff changes are expected to reinforce MPT's current trend toward giving the individual P&Ts greater freedom in setting tariffs within broad principles and quantitative guidelines. During negotiations assurances were obtained that MPT would, by June 30, 1995 complete the tariff study and present to the Bank a plan for implementing tariff adjustments, taking into account the findings of the study. 3.16 A team of telecommunications experts has been established by MPT's Department of Finance to carry out the tariff study. This team includes experts drawn from the Department of Finance, the Directorate General of Telecommunica- tions, the Directorate General of Posts, the Center for Economic and Technology Development, and the Beijing P&T University. One member of the team has been designated by the Department of Finance to lead the team. The team leader and most members are assigned on a full-time basis to the study for its duration. 3.17 Technical assistance to the study team under the project will include (a) about 6 man-months of experts mainly in the areas of cost analysis, tariffs - 18 - management, and economic and financial analysis of telecommunications tariffs and (b) about 15 man-months of professional visits to foreign operating companies and regulatory agencies to become familiar with their approaches to tariffs, and training abroad over a period of about two years, by members of the team and other MPT staff. MPT will employ a specialized consulting firm to provide experts and help organize the program of visits and training abroad. The study will take about 12 months, starting about one month after the contract with consultants has been signed. 3.18 BITS confirmed interest in providing about US$250,000 equivalent in grant funds to meet the cost of technical assistance for the tariff study. The grant would cover the cost of Swedish experts who would visit China on several occasions to assist MPT in carrying out the study, as well as training of MPT staff in Sweden. Any foreign exchange costs of technical assistance not eligible for BITS financing could be met from the proposed loan if other financing is not available. Draft terms of reference for the consultants, including further details of the tariff study outline and timetable, are in Annex 3.2. During negotiations, MPT agreed to submit tot he Bank, by November 30, 1993, a detailed timetable for processing the contracts with BITS and the consultants. Legal and Regulatory Framework 3.19 Successful implementation of the reforms expected to materialize in 1994-97 require an appropriate legal and regulatory framework. The National People's Congress (NPC) has entrusted MPT with preparation of a draft telecommu- nications law, and substantial consensus had been reached through an extensive consultative process. However, in order to reflect accelerated reforms, it is currently being revised. By the end of 1993, the State Council is expected to make key policy decisions on MPT's structure, functions, and number of staff. 3.20 As part of the reform program, a draft telecommunications law that reflects these policy decisions will be prepared and sent by mid-1994 by MPT to the State Council's Bureau of Legal Affairs for review and consultations. The NPC is expected to promulgate a law by 1995 which will help consolidate the emerging legal framework as needed to sustain the reform process beyond 1997. However, at least a partial legal framework will be needed to accompany key sector structural changes likely to come into effect before the law is passed. 3.21 In parallel with preparing and processing the telecommunications law, MPT is developing guiding principles for regulating competitive services. Under the project, MPT will prepare and issue in 1994 basic regulations for competitive services, as well as for dedicated networks and their interconnection to public networks. Basic regulations will be critically important to implement competition and interconnection among networks. 3.22 During the project period, MPT is expected to seek the Bank's advice for preparation of the law and regulations, as well as assistance in arranging grant financing for training visits by senior MPT officials abroad. The foreign exchange costs of such training will be financed from the proposed loan if alternative sources are not available. - 19 - E. Investment Component Long Distance Investments. 3.23 The project would provide fiber optic digital transmission networks to increase the number of long distance transmission circuits, in conjunction with other financing sources (Annex 3.3) to: (a) alleviate existing long distance facility shortages and resultant low call completion rates; (b) digitalize the network, which has already started through the installation of digital telephone exchanges for local and LD services; (c) discontinue expenditures for costly digital/analog conversion equipment; (d) improve transmission quality; and (e) provide the medium for a diversity of future services. 3.24 The project includes two segments of the east-west inter-provincial long distance networks, connecting the nation's capital and industrial coastal provinces in the southeast with vast zones in the country's central areas, which are rich in energy and mineral resources and agricultural products: (a) a 2,084 km long fiber optic cable in the north of China will link the regions of Beijing, Hebei, Inner Mongolia, Ningxia and Gansu from east to west, connecting 45 population centers including some 35 cities (see Annex 3.4); and (b) a 4,461 km long fiber optic cable in the south of China will start in the eastern provinces of Zhejiang and Fujian, join in Jiangxi, and run through Hunan, Guizhou, and terminate in Sichuan Province, connecting up to 80 population centers consisting of provincial capitals, major cities and county towns (see Annex 3.5). 3.25 These transmission routes are based on the 140 megabits per second (Mb/s) standard presently available to China. It is expected that 565 Mb/s technology will be available when required by traffic growth, and higher rates when a synchronous digital hierarchy (SDH) is justified. For the first expansion of the fiber optic systems, expected around 1998, the spare fibers in the cables will be activated with 140 Mb/s or 4x140 Mb/s transmission systems. Local Telephone Switching Investments. 3.26 The project would provide digital switching equipment to increase telephone penetration in urban areas and newly instituted industrial zones to expand the availability of lines and services, reduce existing waiting applicant intervals, and improve network local call completion rates in three east coast provinces experiencing rapid telecommunications growth demand as a result of foreign investment: (a) 160,000 lines of digital switching equipment in six offices in the three district capital cities of Qiqihar, Mudanjiang and Jiamusi in the most north-easterly agricultural, mineral and oil rich province of HeilonqiianQ, bordering on eastern Russia (see Annex 3.6); - 20 - (b) 170,000 lines of digital switching equipment in seven offices in the three district capital cities of Dandong, Jinzhou and Yingkou plus in Bayuquan, a new port city, in the northeast industrial province of LiaoninQ, situated at the head of the Yellow Sea (see Annex 3.7); and (c) 590,000 lines of digital switching equipment in 30 offices in seven districts - including the district capital cities of Changzhou, Huaiyin, Nanjing, Suzhou, Wuxi, and Yancheng; the major industrial cities of Wujin and Yangzhou; and industrial suburban areas (Jiangdu, Jintan and Taixing) of two of the above cities in the industrial province of Jiancsu, which bridges the Yangtse River, sits on the Yellow Sea, and is just west and northwest of Shanghai (see Annex 3.8). 3.27 For both the long distance network and local telephone switching expansion components, the associated facilities of buildings, local access and inter-office cable networks, long distance switching, and ancillary equipment needed to fully utilize the Bank-funded components, are being provided separately under MPT and PTAs' financing. Project Investments in Overall Investment Program. 3.28 Bank-assisted investments would be carried out from 1993 to 1997. The long distance investment program would be part of China's Bth Five Year Plan (1991-95). The local telephone expansion program would include investments in the 8th Five Year Plan as well as some in the 9th Five Year Plan (1996-2000), although the latter is not yet fully articulated. 3.29 During the 8th Five Year Plan, fiber optic cable facilities for the long-distance network will be expanded by 50,000 km (34,000 km interprovincial) from 3,000 km to a total of 53,000 km of installed fiber optic cable, and will expand the microwave facilities by 50,000 km (15,000 km interprovincial) from 33,000 km for a total of 83,000 km of installed microwave facilities. Interpro- vincial long distance facilities would increase by around 500,000 circuits (from 112,000 to 610,000) and LD terminals in toll exchanges would increase by 1,100,000 (from 360,000 to 1,460,000). The project would provide for expansion of 6,550 km of fiber optic cable (19 percent of the total interprovincial network expansion), spanning 11 provinces. Bank financing includes two of the 21 fiber optic cable projects scheduled, and represents an investment of 12.4% of total fiber optic expansion (see Annexes 3.3, 3.4 and 3.5). 3.30 The number of local switching lines is forecast to increase in the 8th Five Year Plan by 22 million, from 12 million to almost 34 million (as well as replacement for a number of analog lines with digital switching equipment) .2/ During 1995-97 the network is expected to grow by a further 18 million lines to almost 52 million total lines installed (with a continuing replacement of analog and rural manual lines to digital equipment) (see Annex 1.3). In the case of the 2/ Urban lines increase by 18 million lines from 8 million to 26 million. and rural switching lines increase 4 million, fmm 4 million to 8 million lines. - 21 - three provinces of Heilongjiang, Liaoning, and Jiangsu, the Bank would finance a small part of the local exchange expansion planned from 1993 to 1997; 920,000 lines of digital switching equipment, about 14.4 percent of the urban local network line expansion program of 6,392,800 lines. All ancillary network expenditures and all rural network additions and replacements would be funded through local financing, with the Bank investing approximately 1.6 percent of the total projected construction program expenditures (see Annexes 3.6, 3.7 and 3.8). F. Status of Project Preparation 3.31 Draft terms of reference for consultants in accounting and tariffs were agreed in July 1993. During negotiations, it was agreed that contracts with the consultants would be signed by June 30, 1994. The team responsible in MPT for carrying out the tariff study has been designated. 3.32 Feasibility studies for the two fiber optic cable projects were prepared by the Beijing Design Institute (Beijing - Lanzhou route) and the Zhengzhou Design Institute (Fuzhou/Hangzhou - Chengdu route) under the direction of the MPT Planning Department. Studies for the expansion of local telephone networks were prepared by staff from each of the Municipality or County Engineering Departments under the direction of the Planning Department for the three concerned PTAs. 3.33 Procurement documentation was prepared by MPT, the concerned PTAs, and the China National Machinery Import and Export Corporation (CMC), which has been appointed to manage all procurement of foreign goods for the project and is familiar with the Bank's procurement procedures. G. Project Costs and Financing 3.34 The total project cost is estimated at US$593.7 million equivalent (excluding interest during construction), with a foreign exchange component of US$265.4 million equivalent or 44.7% of the total cost. Detailed cost estimates for the project are presented in Annexes 3.4 to 3.8 and summarized in Table 3.1. Annex 3.9 provides a yearly distribution for project costs. 3.35 Project costs have been estimated based on recent contracts resulting from competitive bidding for similar projects in China. Physical contingencies for the two long distance components are 5* for imported goods and 15% for local goods and works. While the equipment in the Bank-financed components is specified in detail, the locally financed components for procurement and construction of ancillary works are less well quantified, so a more significant physical contingency has been utilized. Physical contingencies for the digital switching equipment components are 5% for imported goods and 10% for local goods and works. The price escalation for costs expressed in terms of local currency equivalent is calculated to the following projected local inflation rates: 10.5% in 1993, 7.5% in 1994 and 6% thereafter. The price escalation for costs expressed in terms of US dollars equivalent is calculated according to anticipated international price escalation of 2.8% per annum. - 22 - Table 3.1: ESTIMATED PROJECT COSTS Yuan Million US$ Million Foreign Cost ----------------- ------------------- as % of Project Element Local Foreign Total Local Foreign Total Total Eauipment & Services 102.3 1,332.2 1,434.5 18.6 242.3 260.9 92. 9 Fiber Optic Cables 0.0 281.3 281.3 0.0 51.2 51.2 100.0 Optical Digital 0.0 353.0 353.0 0.0 64.2 64.2 100.0 Transmission Equipment Telephone Exchanges 0.0 684.5 684.5 0.0 124.4 124.4 100.0 Tools & Instruments 19.5 9.7 29.2 3.5 1.8 5.3 34.0 Power, A/C, Miscell. 82.8 3.7 86.5 15.1 0.7 15.8 4.3 Construction and 1,445.1 0.0 1,445.1 262.7 0.0 262.7 0.0 Installation Works Cables 360.9 0.0 360.9 65.6 0.0 65.6 0.0 Transmission Equipment 111.9 0.0 111.9 20.3 0.0 20.3 0.0 Telephone Exchanges 25.4 0.0 25.4 4.6 0.0 4.6 0.0 Outside Plant (Material 685.7 0.0 685.7 124.7 0.0 124.7 0.0 & Construction) Buildings & 154.0 0.0 154.0 28.0 0.0 28.0 0.0 Site Preparation Miscellaneous 107.2 0.0 107.2 19.5 0.0 19.5 0.0 Technical Assistance 0.0 8.9 8.9 0.0 1.6 1.6 100.0 Training 0.0 1.7 1.7 0.0 0.3 0.3 100.0 Consultancy /a 0.0 7.2 7.2 0.0 1.3 1.3 100.0 Total Base Cost 1,547.4 1,341.1 2,888.5 281.3 243.9 525.2 46.4 Physical Contingency 187.9 66.6 254.5 34.2 12.1 46.3 26.2 Price Contingency 400.5 305.0 705.5 12.8 9.4 22.2 42.3 TOTAL PROJECT COST /b 2,135.8 1,712.7 3,848.5 328.3 265.4 593.7 44.7 Interest during 0.0 189.1 189.1 0.0 29.3 29.3 100 Construction /c TOTAL FINANCING 2,135.8 1901.8 4,037.6 328.3 294.7 623.0 47.3 REQUIRED NOTE: Costs ore rounded to the nearest 0.05 mitlion. (a) LocaL counterpart costs of consultencies are not shown as study teams training and introduction of new accounting procedures are being handied as ongoing operations. (b) The project is exempt from import duties and taxes. (c) Interest during construction CIDC) is based on ontending rates for projected disbursements of loan proceeds. The foreign currency portion of IoC is based on the Bank loan variable rate. - 23 - 3.36 The financing plan for the project is presented in Table 3.2. The proposed Bank loan of US$250.0 would finance 40.1% of the total project cost and 84.8k of the foreign exchange costs. A grant of US$1.3 million from the Swedish BITS would finance 0.2%. The remaining cost of US$371.7 million (59.7%) would be covered by MPT. Table 3.2: PROJECT FINANCING PLAN (US$ million equivalent) Local Foreign Total % of Total MPT 328.3 43.4 371.7 59.7 Swedish BITS Grant - 1.3 1.3 0.2 IBRD - 250.0 250.0 40.1 Total 328.3 294.7 623.0 100.0 3.37 The proposed Bank loan would be lent to the People's Republic of China for 20 years, including 5 years of grace on repayment of the principal, at the standard variable interest rate. 3.38 On-lendinQ Terms. Loan funds will be made available by the MOF to the MPT for the long distance and sector reform components, and directly to the three provincial PTAs for the local investments, under the same terms and conditions as the Bank's loan, the foreign exchange risk being borne by the MPT and the PTAs. H. Project Implementation 3.39 MPT would be responsible for implementing the sector reform component of the project, and would, in collaboration with the PTAs of Jiangsu and Liaoning Provinces, be responsible for implementing the accounting reform. The consultancies associated with the sector reform components are under the responsibility of the MPT. 3.40 Detailed design, specifications and tender documents for the two fiber optic cable routes have been completed, and issued to potential bidders with receipt of bids due by December 15, 1993. Detailed design, specifications and tender documents for the local digital switching equipment will have been cleared by the Bank for issue to the bidders prior to Board presentation. 3.41 The long distance investments will be carried out by MPT, using CMC as purchasing agent and construction companies with experience in installing and commissioning optical fiber systems under supervision of the suppliers of the equipment. 3.42 The expansion of urban exchange facilities will be carried out by the P&Ts, under the direction of the respective PTAs, in the three provinces. The - 24 - contract with suppliers will include supervision of installation and commissioning of the telephone exchanges. Specialized construction companies or the P&Ts' own staff will build the associated cable networks. Where equipment installation and operations procedures are new to the P&Ts, the suppliers will be contracted to provide adequate training abroad and locally. A schedule of project implementation activities is given as Annex 3.10. 3.43 The project is expected to be completed by December 31, 1998. I. Procurement 3.44 Technical assistance, following terms of reference as agreed with the Bank, will aid MPT in accounting reform implementation and training, as well as in carrying out the tariff study. Action has been initiated to retain consultants. 3.45 Procurement of equipment and related services has been structured around the major network components of fiber optic cable systems for the two long-distance transmission routes, comprising five bidding documents for: (a) fiber optic cables, (b) jointing closures, (c) measuring instruments, (d) fiber splicing equipment, and (e) optical digital transmission equipment, for procurement in 1994. Procurement of subscriber switching equipment is comprised of one tender document (including a lot for each of the three provinces included in the project) for procurement in 1994. A summary of items to be procured through ICB is given in Annex 3.11. 3.46 Local manufacturers are likely to compete for cables (fiber optic and multipair cables), jointing closures, instruments, digital switching equipment, ducts, power plants, air conditioning, and other accessories. 3.47 Contracts for about US$263.1 million (including contingencies) for supply of foreign goods, services and technical training will be awarded following international competitive bidding (ICB). A preference limited to 15% of the CIF price of imported goods or the customs duty, whichever is lower, would be extended to domestic manufacturers meeting the criteria of a minimum of 20% value added, in evaluating bids. Prior Bank review of procurement documentation for ICB would be required for those contracts estimated to be larger than US$1.0 million. Six bidding documents, with a price equivalent to US$263.1 million (including contingencies) have been reviewed before negotiations. Procurement of consultants (US$1.3 million) is in accordance with BITS procedures. The procurement arrangements are summarized in Table 3.3. - 2 5 - Table 3.3: SUMMARY OF PROCUREMENT ARRANGEMENTS (a) (US$ million equivalent) Procurement Method __ ____________________ Project Item ICB Other(b)N.B.F.(c) Total Equipment: Fiber Optic Cables 55.2 - - 55.2 (55.2) - - (55.2) Optical Digital 69.3 - - 69.3 Transmission Equipment (69.3) - - (69.3) Telephone Exchanges 136.7 - - 136.7 (123.3) - - (123.3) Power Equipment, Air - - 18.1 18.1 Conditioning & Misc Tools & Instruments 1.9 - 4.1 6.0 (1.9) _ _ (1.9) Constzuction/Installation Works: Cables - - 77.8 77.8 Transmission Installation - - 24.3 24.3 Outside Plant (Material & - - 143.8 143.8 Construction) Telephone Exchange Inst. - - 5.3 5.3 Buildings & Site Preparation - - 32.4 32.4 Miscellaneous - - 23.2 23.2 Technical Assistance: Training - 0.3 - 0.3 - (0.3) - (0.3) Consultancy - - 1.3 1.3 Total Procurement: 263.1 0.3 330.3 593.7 of which Bank Financed: (249.7) (0.3) - (250.0) NOTES: Figures in parentheses are the amounts financed by the Bank loan. (a) Including contingencies. (b) Includes direct purchases, international and local shopping, and Bank procedures for selection of consultants. (c) N.B.F.: Not Bank Financed items which include equipment, services, works, and expenditures on engineering design and administrative overhead. - 26 - J. Disbursement 3.48 The Bank loan would be disbursed against: (a) 100% of foreign expenditures for equipment and materials imported directly, or 100t of the ex- factory cost (excluding taxes) of locally procured equipment, and (b) 100% of expenditures for consultants' services and training abroad. The estimated disbursement schedule and a profile of disbursement performance under previous Bank-assisted telecommunications projects in Asia is given in Annex 3.12. A summary of projected disbursement is summarized below: Bank FY 1994 1995 1996 1997 1998 1999 Annual 5.8 170.2 64.7 7.3 1.0 1.0 Cumulative 5.8 176.0 240.7 248.0 249.0 250.0 3.49 It is envisaged that due to the size of the projected equipment contracts, the use of a Special Account will not be necessary. The training and consultancy component, which is expected to be about US$300,000 equivalent, would be pre-financed by MPT, with the Bank reimbursement based on SOE procedures. The loan would be closed on April 30, 1999. K. Audits 3.50 The State Audit Administration (SAA) will have overall responsibility for auditing project accounts. The actual audit work, in the case of the provincial PTAs, accounts, will be conducted under SAA's supervision by the Audit Bureaus of the respective provinces. During negotiations, assurances were obtained that the following annual audited reports will be submitted to the Bank within six months after the end of the financial year: (a) project accounts, with separate opinions on any SOEs; and (b) financial statements of the three PTAs involved in the local network expansion investment. projects. L. Environmental and Health Aspects 3.51 The proposed project is not expected to cause any adverse health problems and would have only minor environmental effects. The Anti-Earthquake and Environmental Protection Office of MPT, granted a certificate to act on behalf of the National Environmental Protection Agency, has completed an environmental assessment of the two long distance cable routes, and issued construction specifications to address environmental matters. The long distance fibre optic cables will be buried mostly along existing roads and river crossings, so no disruption of virgin land is expected. Standard construction practices will prevent ground erosion and minimize vehicular and pedestrian traffic disruption while digging trenches for local networks, and preparing sites and undertaking construction of new equipment buildings in urban areas. See Annex 3.13 for details. - 2 7 - M. Monitoring, Reporting and Supervision 3.52 The Bank will monitor overall performance of MPT and the PTAs during the project implementation period aided by selected performance indicators relating to subscriber connection, financial performance, staffing, and measures to attain institutional improvements as shown in Annex 3.14. In addition, the Bank will monitor procurement and project implementation. Continuous monitoring will assist MPT and the PTAs in improving management and will allow timely corrective action to be taken where necessary. During negotiations assurances were obtained that MPT and the three PTAs would monitor financial and operational performance in accordance with annual targets indicated in Annex 3.14. 3.53 MPT will prepare progress reports on the project's investment and reform components in a form acceptable to the Bank, and will submit them to the Bank within one month of the end of the period. Project accounts will be maintained currently by MPT's Project Coordinating Unit, so that the cost of each project component and the disbursement flow can be clearly established. Reporting requirements are summarized in Annex 3.15. 3.54 Supervision of the investment components of the project will focus upon the following key aspects: (a) implementation of the agreed institutional reforms; (b) timely and effective procurement of goods and related services in the early stages of the project; (c) implementation coordination of the various project elements of civil works, fiber optic cable placement, transmission and switching equipment installations, outside plant construction, and progress towards connection of subscribers; (d) proper coordination of these projects with related elements of MPT's other fiber optic cable projects; (e) compliance with financial covenants to assure provincial PTAs' financial health while they undertake a large investment program; and (f) assurance that adequate steps are taken to protect the environment. A substantial amount of supervision time will be spent reviewing and assisting MPT's efforts toward institutional reforms. The total estimated staff inputs are: (a) specialists in telecommunications policy, law and regulation -- 1B staff-weeks; and (b) telecommunications engineers and finance specialists, with assistance from an economist being drawn as required-- 44 staff-weeks. A supervision plan is given in Annex 3.15. - 28 - IV. FINANCIAL AND ECONOMIC ANALYSES 4.1 The financial and economic analyses of the project investments are based on the whole program of regional or provincial investments, of which each project investment is an integral part. For the long distance investments, the program is defined as the total investment to develop the network in the 11 provinces linked by the two fiber optic cable systems funded by the Bank. For the local telephone expansion investments, the program is the total investment for telephone development in the three respective provinces. This approach has been taken because attempts to separate the costs and benefits exclusively attributable to the investment components alone would give results that are excessively dependent on assumptions regarding the separation of costs and benefits from the overall programs, and the performance of these separate investment elements would be difficult to monitor because there are no separate financial statements for these investment elements. 4.2 The financial data used in these analyses are based upon those presented in Annex D of the Sector Study, updated from 1989 to 1991. Hence, the concerns about the Government accounting results discussed in the Sector Study are applicable here. However, several changes already decided by MPT to be introduced in 1993 were considered in this new presentation of the financial statements. The methodology used for projection of, and the details of, financial statements for each of the provinces included in the local and long distance expansion projects are in the project files (Annex 5.1). A. Past and Present Financial Performance 4.3 Historical financial performance, key financial ratios, and historical indicators for 1988-92 for the three local expansion investment components under evaluation are summarized in Tables 4.1 and 4.2, respectively. In general, the key ratios and financial indicators for 1988-92 portray a picture of financial strength. The ratio of staff per 1,000 operating lines shows healthy decreases from around 75 staff/l,000 lines to around 30 staff/l,000 lines. While still high compared to Latin America (about 15) or developed countries (about 5), this is an unprecedented improvement in labor productivity. The range of telephone density for the urban network provincial population increased from 1.3-1.6 in 1988 to 2.6-3.4 in 1992. All three provinces have more than doubled their number of operating lines in the past five years, with annual investments between US$150 million to US$200 million. The average value per operating telephone line 1/ is in the range of US$500 to US$1,000, which is low by international standards, but it is credible for China due to the low labor cost. A more detailed presentation is in Annex 4.1. 4.4 It is important to note that Jiangsu and Liaoning are provinces that make a substantial contribution to the long distance distribution fund as a result of the "economic accounting system", while Heilongjiang is a receiving i/ Value of Gross Fixed Operating Assets divided by the number of working lines. - 29 - Table 4.1: SUMMARY HISTORICAL FINANCIAL STATEMENTS, 1988-92 (values in million Yuan, except when other unit indicated) Year Ended 31 December 1988 1989 1990 1991 1992 HEILONGJI4NG PROVINCE GROSS OPERATING REVENUE 265,027 314,649 398,770 533,560 692,699 TOTAL OPERATING COST 208,586 258,632 320,855 458,488 603.796 REVENUE LESS EXPENSES (a) 48,195 46,212 64,919 57,694 68.121 GROSS OPERATING ASSETS 710,163 855,881 1,083,663 1,364,476 1,807,973 CAPITAL EXPENDITURES 149.689 165,381 251,721 444,898 905,309 RETURN ON ASSETS 19.6% 16.1% 17.8% 17.7% 24.5% SELF FINANCING RATIO 88.3% 90.2% 82.5% 65.8% 60.3% LIAONING PROVINCE GROSS OPERATING REVENUE 381,211 481,713 642,703 928.522 1,296,429 TOTAL OPERATING COST 292,047 331,036 430.019 618,116 762,412 REVENUE LESS EXPENSES (a) 77,178 135,329 191.725 280.111 495,124 GROSS OPERATING ASSETS 1,162.877 1,405,305 1,831,909 2.660,226 3,111.637 CAPITAL EXPENDITURES 216,925 481,753 504.416 889,859 703.327 RETURN ON ASSETS 4.9% 25.7% 22.4% 20.0% 31.2% SELF FINANCING RATIO 48.2% 73.2% 77.4% 57.7% 144.7% JIANGSU PROVINCE GROSS OPERATING REVENUE 444,093 520,014 677,670 988,690 1.390.205 TOTAL OPERATING COST 294.540 344,146 419,186 694,652 858,129 REVENUE LESS EXPENSES (a) 135.536 159,215 236.306 261.670 490,370 GROSS OPERATING ASSETS 978,197 1,215,603 1,669,204 2,380,416 3.332.937 CAPITAL EXPENDITURES 255,526 402,729 421,408 873,564 1.043.112 RETURN ON ASSETS 21.7% 23.6% 20.4% 19.4% 25.0% SELF FINANCING RATIO 81.9% 73.6% 80.1% 73.5% 96.6% Note (a): this difference is before the long distance revenue re-distribution: therefore, does not include bonuses, surcharges and connection fees. - 30 - Table 4.2: KEY RATIOS AND HISTORICAL FINANCIAL INDICATORS, 1988-92 (values in Yuan, except when other unit indicated) Year Ended 31 December 1988 1989 1990 1991 1992 HEILONGAIANG PROVINCE t INSTALLED LINES 239,800 296,560 375.360 395,660 563,000 t OPERATING LINES 187,320 197,291 247,958 309,892 412,631 URBAN NETWORK DENSITY (lines/100 people) 1.3 1.3 1.6 2.0 2.6 STAFF11,000 OPER. LINES 71 69 57 47 38 LOCAL TELEPH. REV/OPER. LINE 336 353 391 520 438 TOTAL TELEPH. REV/OPER. LINE 911 938 1,081 1,174 1,235 TOTAL EXPENSES/OPER. LINE 735 772 835 988 1,165 LIAONTNG PROVINCE # INSTALLED LINES 386,260 446,767 500,367 616,800 798,210 # OPERATING LINES 258,101 305,154 351,811 415,809 564,516 URBAN NETWORK DENSITY (lines/100 people) 1.6 1.9 2.2 2.5 3.4 STAFF/1,OOOOPER. LINES 53 46 42 36 28 LOCAL TELEPH. REV/OPER. LINE 435 479 581 683 749 TOTAL TELEPH. REV/OPER. LINE 999 1,151 1.391 1,797 2,052 TOTAL EXPENSES/OPER. LINE 768 758 851 1,064 1,093 JIANGSU PROVINCE # INSTALLED LINES 331.390 382,126 463.698 684,356 926,000 I OPERATING LINES 216.135 265,053 322,378 426,849 666,479 URBAN NETWORK DENSITY (lines/100 people) 1.6 1.9 2.3 3.0 3.3 STAFF/1,OOOOPER. LINES 73 61 51 39 26 LOCAL TELEPH. REV/OPER. LINE 478 519 555 712 761 TOTAL TELEPH. REV/OPER. LINE 1.150 1.178 1,347 1.659 1.871 TOTAL EXPENSES/OPER. LINE 788 810 820 1,119 1,040 - 31 - province where final availability of self-generated funds for investment depends heavily on the amount received through redistribution. The current and projected financial statements are based upon the existing revenue redistribution scheme. It is assumed that any change in the existing revenue redistribution mechanism resulting from the proposed tariff study, which is an integral part of the proposed project's sector reform component, and/or of a possible re-structuring of the sector, would be compensated through tariff level adjustments. 4.5 The local total telephone revenues per operating line show healthy increases and are in the acceptable international range. The total telecommunications expenses per operating line are also in line with international averages; however, in Heilongjiang Province they account for a high percentage of revenues per line, another indicator of the relatively lower development of this province. All provincial PTAs collect sales tax, currently around 3%, on behalf of the Government. They are also subject to corporate income tax, normally around 10% of Net Allocated Profit; pay a dividend to MPT of about 20% of the same Net Allocated Profit; and send remittances to MPT equal to 70% of their interprovincial long distance depreciation charges. The percentage of custom duties is dependent upon the type of equipment and the specific financing, being lower for more concessional financing. Assets were not revalued in the fund accounting system nor will be in the new commercial accounting system. If inflation continues at current levels for several years, it would be necessary to incorporate "inflation accounting" in the system. 4.6 In Heilongjiang and Liaoning, PTAs' past financial performance has been characterized by a robust rate of return (ROR) on local and long distance services, together with substantial losses in post and in telex and telegraph services. In Jiangsu, the results are very variable (Annex 4.2). However, there is a pattern of constant improvement in the consolidated picture of the three provinces. 4.7 Heilongjiang, more than the other provinces, shows a very modest impact of international traffic in its total revenues (around 5%), which is another indicator of its relative remoteness and lower economic development. Tariff surcharges are applied to local and long distance telephone services. These surcharges are variable by county, but as an average, they represent 40% of local revenues for business subscribers (no surcharges are applied to residential subscribers and public phones), and around 1% for domestic and international long distance calls. The revenue resulting from the surcharges is neither included in the long distance revenue re-distribution, nor is accounted for taxes and dividends. It goes directly to investment. 4.8 In Liaoning Province the percentage participation of international traffic in its total revenues has increased from 2.5% in 1988 to 12% in 1991, showing the effect of rapid economic development during the last years. Tariff surcharges in Liaoning Province are applied to local and long distance telephone services. These surcharges are variable by county, but as an average, they represent 40% of local revenues for all subscribers and around 8% for domestic long distance calls. No surcharges are applied to international calls. 4.9 In Jiangsu Province the percentage participation of international traffic in its total revenues has increased from 2.1% in 1986 to 11% in 1991, - 32 - showing the effect of rapid economic development during the last five years. Tariff surcharges in Jiangsu province as an average represent 20% of local revenues for all subscribers, and around 6t for domestic long distance calls and 0.2% for international calls. 4.10 The historical financial performance of the group of four northern provinces covered by the Beijing-Lanzhou Fiber Optic Cable and the group of six southern provinces covered by the Fuzhou/Hangzhou-Chengdu Fiber Optic Cable was analyzed using the provincial financial statements of the four and six provinces respectively involved, which are available in the project files. B. Projected Financial Performance and Targets 4.11 The provincial financial statements for Heilongjiang, Liaoning and Jiangsu were projected for the period 1993-2000 as explained in Annex 4.3. The projected financial statements and the key ratios and projected financial indicators for 1993-2000 are summarized in Tables 4.3 and 4.4, and Annex 4.4. The provincial financial statements were projected up to the year 2000 in nominal terms. In order to calculate the return on investment, some items from these projections were transformed into real yuan of December 1992 and projected up to the year 2007 (12 years average life for project components). Basic assumptions used in the financial projections are: (a) data refer only to the urban network; (b) operating revenues are projected by service using the current tariff structure and levels, and the projected number of working lines, but assume changes in the proportion of business and residential subscribers; (c) even when the projections include revenues and expenses for postal services, postal amounts are frozen at their 1992 values; and (d) salaries in all provinces include a projected strong decrease in the ratio of staff per 1,000 lines and adjustments in the salary per staff for inflation. 4.12 The projected financial statements for this period have a satisfactory outlook with around 40% of investment to be financed by depreciation, 10 by direct net profit, and 40t to 50% by surcharges and connection fees. The external requirements are only around 10% cumulatively for the three provinces. However, there are important differences among the provinces which are discussed below. During negotiations, agreement was reached on a minimum internal cash generation ratio of 40% as a financial requirement for each of the three PTAs. 4.13 Heilongjiang PTA's projected financial performance is based upon the assumption of increasing the number of installed lines from 563,000 in 1992 to 4,630,000 in the year 2000, which would permit an efficiency improvement from 38 staff/l,000 lines in 1992 to 6 staff/l,000 lines in year 2000, assuming an increase from 15,536 to 23,086 staff, respectively. The urban network density would increase from 2.6 to 23.8 operating lines per 100 people in the same years. A key factor in analyzing Heilongjiang's projections is the feasibility of accomplishing their ambitious plan of installing 4 million lines between 1993 and the year 2000 starting from a position where the province receives a net contribution from the long distance revenue re-distribution, and where the impact - 33 - Table 4.3: SUMMARY PROJECTED FINANCIAL STATEMENTS, 1993-2000 (values in million Yuan, except when other unit indicated) Year Ended 31 December 1993 1994 1995 1996 1997 2000 HEELONGJILANG PROVINCE GROSS OPERATING REVENUE 981,970 1,388,718 1,850,983 2,384,302 3,067,954 6,481.507 TOTAL OPERATING COST 918,728 1,587,423 1.731,136 2,157,955 2,674,163 5.191,895 REVENUE LESS EXPENSES (a) 33,783 (240,366) 64,318 154,818 301,752 1,095,166 GROSS OPERATING ASSETS 3,991,785 6,636,285 8,960,865 11.859,7531 15.355,088 34,340,372 CAPITAL EXPENDITURES 1,722,000 2,644,500 2,324,580 2,898,888 3,495,334 8,874.965 RETURN ON ASSETS 23.1% 22.6% 23.1% 21.7% 21.9% 22.2% SELF FINANCING RATIO 66.1% 82.7% 112.0% 111.1% 115.8% 94.8% LIAONING PROVINCE GROSS OPERATING REVENUE 1,788.511 2,526,769 3,442.537 4,260,040 5,171.252 9,098,102 TOTAL OPERATING COST 1,061,023 1,710,753 1.851,613 2,310.523 2,846,130 4,813,349 REVENUE LESS EXPENSES (a) 673,833 740.213 1,487,648 1,821,717 2,169,984 4,011,810 GROSS OPERATING ASSETS 4,378,589 6,970,134 9,704,934 12.603,822 16,291,208 28,734,718 CAPITAL EXPENDITURES 2,410.740 2.580,000 2,734,800 3,478,666 -3,687.386 4,391,735 RETURN ON ASSETS 38.9% 39.5% 34.9% 39.1% 32.3% 34.0% SELFFINANCINGRATIO 68.5% 112.9% 116.1% 126.9% 132.0% 177.6% JIANGSU PROVINCE GROSS OPERATING REVENUE 1.788,578 2,281.529 2.961.820 3,704,290 4,640,165 8.656.295 TOTAL OPERATING COST 1,173,825 1.972,547 2.088.543 2,624,739 3.258,967 5,292,525 REVENUE LESS EXPENSES (a) 561,095 240,536 784,422 968,422 1.241.992 3,10440813 GROSS OPERATING ASSETS 5,024,040 8,210,340 10,808,400 14,432.010 17,965,754 29,890,785 CAPITAL EXPENDITURES 2,964,000 2,451,000 3,418.500 3.333.721 3,533,744 4,208,746 RETURN ON ASSETS 19.0% 11.2% 12.2% 14.0% 12.8% 13.7% SELF FINANCING RATIO 44.4% 82.6% 66.7% 94.9% 106.6% 143.2% Note (a): this difference is before the long distance revenue re-distribution; therefore, it does not include bonuses, surcharges and connection fees. - 34 - Table 4.4: KEY RATIOS AND PROJECTED FINANCIAL INDICATORS, 1993-2000 (values in Yuan, except when other unit indicated) Year Ended 31 December 1993 1994 1995 1996 1997 2000 HEILONGJILNG PROVINCE # INSTALLED LINES 850,000 1,260,000 1,600,000 2,000,000 2,455.000 4,630,000 t OPERATING LINES 690,000 1,050,000 1,360,000 1,720,000 2,155,000 4,166,000 URBAN NETWORK DENSITY (lines/100 people) 4.3 6.4 8.2 10.3 12.7 23.8 STAFF/1,000OPER. LINES 24 17 13 11 9 6 LOCAL REV/OPER. LINE 470 497 518 534 544 541 TOTAL TELEPH. REV/OPER. LINE 1,293 1,284 1,308 1,368 1.438 1,682 TOTAL EXPENSES/OPER. LINE 1,335 1,614 1,285 1,283 1,286 1.344 LIAONING PROVINCE I INSTALLED LINES 1,200,000 1,600.000 2,000,000 2,480,000 2.960,000 4.400,000 # OPERATING LINES 815,000 1.125,000 1,409,400 1,852,040 2,266,040 3.814,920 URBAN NETWORK DENSITY (lines/100 people) 4.9 6.7 8.3 10.9 13.2 21.7 STAFF/1,000OPER. LINES 20 15 12 9 8 5 LOCAL REV/OPER. LINE 786 802 793 816 792 755 TOTAL TELEPH. REV/OPER. LINE 2,161 2,297 2.480 2.428 2,365 2,488 TOTAL EXPENSESIOPER. LINE 1.209 1,530 1.282 1.278 1.272 1,297 JLkNGSU PROVINCE # INSTALLED LINES 1,420,000 1,800,000 2,300,000 2,760,000 3.220,000 4,600,000 # OPERATING LINES 931,000 1,231,000 1,550,000 2.068,000 2.586,000 4,140,000 URBAN NETWORK DENSITY (lines/100 people) 4.5 5.9 7.4 9.7 12.0 18.7 STAFF/1,0000PER. LINES 19 15 12 9 8 5 LOCAL REV/OPER. LINE 739 716 740 720 699 638 TOTAL TELEPH. REVIOPER. LINE 1,779 1,771 1.866 1.845 1,836 2.136 TOTAL EXPENSESIOPER. LINE 1.107 1,557 1,294 1,291 1,276 1.289 - 35 - of the newly implemented commercial accounting system will be a substantial increase in depreciation for 1994. After analyzing several scenarios, it is found that the project is viable only if surcharges and connection fees are increased to the level set by Liaoning Province. Under the proposed scenario the required external funds would be around 10% of investment, plus an increased participation of long distance revenue redistribution, equivalent to around 1% of investment, which is assumed to be treated as a loan. 4.14 Liaoning and Jiangsu PTAs' projected financial performance are based upon the assumptions of increasing the number of installed lines from 798,200 in 1992 to 4,400,000 in year 2000 in Liaoning Province, and from 926,000 in 1992 to 4,600,000 in year 2000 in Jiangsu Province, which would permit an efficiency improvement from 28 staff/1,000 lines in 1992 to 5 staff/1,000 lines in year 2000 in Liaoning Province (assuming an increase from 15,697 to 19,075 staff, respectively), and from 26 staff/1,000 lines in 1992 to 5 staff/1,000 lines in year 2000 in Jiangsu Province (assuming an increase from 17,296 to 21,910 staff, respectively) . The urban network density would increase from 3.4 operating lines per loo people in 1992 to 21.7 operating lines per 100 people in year 2000 in Liaoning Province, and from 3.3 operating lines per 100 people in 1992 to 18.7 operating lines per 100 people in Jiangsu Province. C. Tariffs 4.15 Annex 4.5 shows the current telecommunications tariffs, including notes about the surcharges applicable in the three provinces, with local expansion partially financed by the proposed project. A conclusion from the detailed financial statements for the three provinces is that the total rate of return is satisfactory for local and long distance services. However, the proposed tariffs study should analyze, inter alia, the merits of the current mix of a very high connection or installation fee followed by a very low monthly payment. Additionally, the tariffs study should analyze the effect of the current international rates, which are among the highest in the world. 4.16 Postal, telex, and telegraph services have negative rates of return. The rates for Post must be increased at least up to the point of eliminating the losses which currently demand cross-subsidies from the telecommunications services. Telex service is stagnant and will have little impact on the total operating entity finances; its future should be discussed as a part of the tariffs study. Telegraph is still considered by Government as a social service provided through a combination of telephone and telex facilities, at lower than cost price. This situation should also be included in the tariff analysis. D. Financial Covenants 4.17 With the aim of directing the three provincial PTAs and reporting P&Ts toward prudent financial management, assurances were obtained during negotiations that each of the PTAs would: (a) maintain self-financing ratios of no less than 40%; and - 36 - (b) by May 31 of each year, starting from May 31, 1994, annually prepare and furnish to the Bank for review, until completion of the project, a rolling long-term financial plan (including projected income statements, sources and uses of funds and balance sheets for a period of no less than five years) and exchange views with the Bank on the entities' financial position. E. Economic Benefits and Rate of Return 4.18 The proposed project's benefits would accrue to all sectors of the economy through improved access to telecommunications facilities and improved service quality. Users would benefit from increased access, from around 2,400,000 installed lines in 1993 to 11,850,000 installed lines in the year 2000 in the three provinces, and from greatly increased access to the long distance network. The business community would benefit from expanded transmission facilities for information exchange. Extended facilities would also widen the reach of emergency and government services. 4.19 The proposed project investment components would address the most significant unsatisfied telephone demand for long distance calling and local expansion in major urban areas and economic development zones. Development and modernization of the existing rural manual and analog telephone facilities has been deferred until urban network demand has been satisfied to an adequate level. This strategy represents the highest revenue-generating solution for both long distance and local services. Minimum access to the network is ensured by the past preferential development of rural facilities, even if the quality is low by today's standards. 4.20 The estimated real financial rate of return (FRR) of the investment projects, based on incremental financial flows, is around 34%, which is considered to be above the cost of capital for MPT and the provincial PTAs. A summary of the calculations is given in Annex 4.6. The economic rate of return (ERR) is estimated to be around 36%. The economic rate of return is calculated by: (a) applying an exchange rate of 7.5 yuan/US$; and (b) increasing the skilled labor salaries through a conversion factor of 2.0. The resultant ERR is considered conservative and does not take into account consumer surplus and benefits that accrue to the economy in general as a result of improved telecommunications services but are difficult to quantify. In testing the ERR's sensitivity, the most likely worst case scenarios and their effects on the ERR were considered, with the following results: (a) a delay of 6 months in the connection of new subscribers resulting in a delayed revenue stream (ERR - 29%); (b) an increase of 15% in the investment cost (ERR . 28%); (c) combining the above would result in a fall in the estimated ERR to around 23%. Therefore, even under this improbable worst case scenario, the project component is still well justified; and (d) the implementation of the Heilongjiang province project was tested in its sensitivity to the assumptions on surcharges level and - 37 - connection fees discussed in para. 4.13, finding that the FRR would decrease from 37% to around 14% if those tariffs adjustments are not done. F. Project Risks 4.21 There are two main risks regarding the reform component. First, there is some uncertainty regarding the pace of the reform program agreed with the MPT. The Government's formal commitment to the Action Program for 1994-97, and MPT's interest in subsequent Bank loans which would be linked to further progress in sector reform, provide some incremental support for change. The second risk is that the MPT may be unable to change as fast as needed. MPT reforms are largely driven by powerful technological and market forces unleashed by accelerated economic reform. Measures to contain this risk have included Bank assistance in legal and regulatory matters during project preparation, which would be followed up as part of the project. 4.22 The main risk regarding the investment component is delayed submission to the Bank of digital switching equipment bidding documents and subsequent procurement. The Government's urgent need to greatly expand the urban telephone network in developing industrial centers should help minimize any delay. - 38 - V. AGREEMENTS REACHED AND RECOMMENDATION A. Agreements 5.1 During loan negotiations, assurances were obtained from the Borrower that it will: (a) the Borrower will, by June 30, 1994, employ consultants to assist the Borrower in (i) developing accounting standards for the telecommunications sector, undertaking pilot application of such standards in two of the provinces where local switching systems will be expanded under the Project, and developing an implementation plan for national application, and (ii) undertaking a study of telecommunications tariffs and developing an implementation plan for tariff restructuring (paras. 3.11 and 3.31); (b) the Borrower will develop accounting standards under terms of reference agreed with the Bank; by December 31, 1995, complete pilot application of said standards in two project provinces; and immediately thereafter, prepare and furnish to the Bank an implementation plan for national application of the said accounting standards taking into account the experiences of the pilot applications (para. 3.11); (c) the Borrower will, by June 30, 1995, complete the tariff study in accordance with terms of reference agreed with the Bank, and, immediately thereafter, prepare and furnish to the Bank an implementation plan for tariff restructuring taking into account the findings of the said study (para. 3.15); (d) MPT will, by November 30, 1993, submit a detailed timetable for processing the contracts with BITS and the consultants for accounting and tariffs studies (paras. 3.13 and 3.18); (e) the Borrower will carry out the training financed under the project in a manner satisfactory to the Bank (paras. 3.11, 3.17 and 3.22); (f) the Borrower will monitor various telecommunications performance indicators in the provinces and autonomous regions included in the Project, in accordance with annual targets agreed with the Bank (para. 3.52); (g) the Borrower will ensure that the consolidated financial condition of the telecommunication operating enterprises reporting to each of the PTAs in Heilongjiang, Jiangsu and Liaoning will meet the following financial requirements: (i) Except as the Bank shall otherwise agree, each of the PTAs will produce, for each of its fiscal years after its fiscal year ending on December 31, 1993, funds from internal - 3 9 - sources equivalent to not less than 40% of the annual average of its capital expenditures incurred, or expected to be incurred, for that year, the previous fiscal year and the two next following fiscal years (paras. 4.12 and 4.17). (ii) Before May 31 in each of its fiscal years, each of the PTAs will, on the basis of forecasts prepared by it and satisfactory to the Bank, review whether it would meet the requirements set forth in sub-paragraph (i) above in respect of such year and the next following fiscal year and will furnish to the Bank a copy of such review upon its completion. (iii) If any of such reviews shows that one of the PTAs would not meet the requirements set forth in sub-paragraph (i) for the fiscal years covered by such review, it shall promptly take all necessary measures (such as adjustments of the structure or levels of its tariffs) in order to meet such requirements. (h) the Borrower will (1) by May 31 in each year, commencing May 31, 1994, prepare and furnish to the Bank for review, until completion of the Project, a rolling long-term financial plan of each of the three PTAs (including projected income statements, sources and uses of funds, and balance sheets) covering a period of at least five years; and (ii) thereafter, exchange views with the Bank on its financial position (para 4.17-b). 5.2 Agreement was also reached that loan funds will be made available by the MOF to the MPT for the long distance and sector reform components, and directly yo the three PTAs for the local investments, under the same terms and conditions as the Bank's loan, the foreign exchange risk being borne by the MPT and the PTAs (para. 3.38). 5.3 Approval of the Loan Agreement by the Borrower's State Council was specified as a condition for loan effectiveness. B. Recommendation 5.4 Subject to the above conditions and assurances, the proposed project is suitable for a Bank loan of US$250.0 million equivalent for a period of 20 years, including five years of grace, at the Bank's standard variable interest rate. The Borrower would be the People's Republic of China. ANNEXES - 43 - Annex 1.1 People's Republic of China TELECOMMUNICATIONS PROJECT Acees to Telephone Service in Selected Countries (1991) Popuiation Main Lines I ines100 Rank Countrv (Million) (Mi1lion) Inhabitants () Indonesia 187.8 1.3 0.68 31 India 849.6 5.8 0.68 30 P'R]Cv fQn(i*4) 1,150.1 3 0.73! i- 28 Philippines 62.9 0.6 1.03 25 Thailand 56.9 1.6 2.73 19 D.P.R. Korma 22.2 0.8 3.69 16 Mexico (1990) 85.8 5.2 6.05 -- Brazil (1990) 150.4 9.4 6.26 -- Malaysia 18.3 1.8 9.91 12 Korea (Rep. of) 43.3 14.6 33.68 7 Singapore 2.8 1.1 39.85 5 Japan 123.9 56.3 45.39 3 Hongkong 5.8 2.6 45.92 2 Australia 17.3 8.0 46.41 1 Source: Asia-Pacific Telecommnumcations indicators. May 1993 (Except Brazil and Mexico) ) In Asia-Pacific reeion. * Maun lines increased to 12.2 million and densitv to 1.03 in 1992. 00O&6kaccmzu 111,) - 44 - Annex 1.2 Pple Reublic of CiSna TELECOMMUNICATIONS PROJECT 8eC St astc ot NetWks NW SOre 119921 Total Exchange Caoacitv 19.222 million lines Urban Exchange Caoacitv 13.555 mwiion lines - Automaic 99.0 % Digital 69.7 % Rural Exchange CaaDCtV 5.667 mullOn lines - Feent of Totai Exchange CapaCrtV 29.5 Total Uines in Service 12.208 million -Uban Service 80.3 % *ORiaenu Suscibner 46.1 % DOD Subsacne 56.3 % - 100 Subscnhes 23.0 % Rurtl Service 19.7 % Telephones 18.96l milison in uroan areas 81.6 % in rurai areas 16.2 % L -eam iD OWO Exchange Circuit Terminals 717.300 Automatic 72.7 % Digrtal 96.9 % Domnetic ano international Circuits in Servic 234.276 Microwave Lnks 54,418.0 km Dignite 46.0 % Cable inks 38,757.6 km -Medium Coaxal 17.4 % Small Coaxl 14.4 % - Svmm.tncai 25.8 % OotlCOi 37.1 % Othes 1.6 % Earth Satelifte Stations tor Domestc Traffic 42 Eartn Satelite Stations tor intrnaionI Trafttic 5 Gatowevs tor internationai Tratfic 3 Total 1D Calls 2.874 mfilon Interational Calis 7.2 % Telex Exchange Caoscitv 51.147 lines Telex Circuits 2.304 Cri Connetood by the Telex Network 116 Telex Subacnbe 146643 Tedx CAls 6 757 million Teeron Exchange CSPeanv 10.660 circuits Teapon CircuIs 12.338 Public Tegrasms 281.893 mllion Ctes with Paging System 1.075 Pagi Subabers 2.220 million Cities with Clukar Sevce 350 Cdr Sbernbers 17i6.900 Soume: iPT - J1jv 1993 _ _ - w _ - 45 - Annex 1.3 Page I of 2 People' RepubL;c of hims TEWCONOwUMCATIONS PROJECT IuIhed Local Uiban A Ruml) EFcmg Capsy (OW Line.) AAI Tarut Reion 19339 99 1990 199l i992 1995 1997 MUNICIPALYFIES Beijing 355.9 461.0 524.6 643.0 330.3 902.0 1,366.0 2,1Z6.0 Sbaagbi 429.9 576.2 741.7 u36.8 1,069.3 1,369.0 2,200.0 2,950.0 Tanjin 219.6 259.1 260.9 304.9 397.6 462.0 727.0 1.991.0 Subtotal: 1,005.4 1.2963 1.527.2 1,714.7 2.298.2 2.733.0 4.293.0 7,127.0 PROVINCES Anhui 246.5 n72.5 325.9 393.7 470.3 600.0 1,000.0 1.300.0 Fujian 220.7 300.1 400.4 550.3 300.2 1,400.0 1.300.0 2,200.0 G mu 111.2 122.5 139.3 160.4 201.6 236.0 330.0 426.0 Guangoag 927.4 129.6 1,742.7 2.136.5 3.050.3 2.300.0 3.700.0 9,006.0 Guizhou 111.9 115.4 122.1 124.4 146.8 156.0 240.0 479.0 Haiaan 46.4 57.9 74.2 106.0 131.4 111.0 304.0 553.0 Hebel 429.6 469.9 535.2 637.3 734.5 721.0 1,173.0 1343.0 Hemman 322.4 353.1 407.0 544.6 660.4 433.0 762.0 1,299.0 Hubei 3273 375.6 406.3 415.0 571.7 653.0 1,329.0 1.500.0 Hu _ 291.7 331.5 363.3 416.2 6753 933.0 1,630.0 2.000.0 Jiang,x 206.0 236.5 253.2 297.4 347.4 672.0 1,175.0 1300.0 Jilun 273.3 335.2 3912 465.6 564,3 730.0 o,000.0 1200.0 Qiagha, 37.6 33.5 33.3 42.9 47.3 62.0 95.0 139.0 Sh"aat 132.7 193.5 212.9 281.1 309.6 335.0 590.0 706.0 Shandong 576.4 633.9 695.7 901.6 1.215.5 926.0 1.500.0 2.137.0 Shanui 246.6 233.9 305.3 352.7 475.9 424.0 674.0 30.0 Sichuan 3363 415.3 472.9 600.7 730.4 642.0 1,000.0 1.629.0 Yunna 154.4 163.2 176.0 '67.5 292.9 298.0 497.0 609.0 Zbejiang 603.5 701.3 824.3 1,00.7 1.203.6 950.0 1.360.0 2524.0 Suboul: 7.193.7 7.235.1 9.169.3 12307.9 15.9273 17.415.0 27,924.0 42,325.0 AUTONOMOUS REGIONS Guangxi 157.3 193.5 201.6 7.5 355.2 350.0 700.0 300.0 Inmr Mogoli 214.3 253.9 263.1 373.9 373.9 329.0 490.0 623D0 N - 32.6 33.5 36.3 41.9 49.7 77.0 39.0 131.0 Tibet 12.1 12.7 14.2 16.9 21.9 27.0 40.0 400.0 Xingjiag 109.4 122.5 133.3 174.1 195.9 240.0 347.0 431.0 Subal: 526.7 626.1 650.0 333.0 996. 1.023.0 1.666.0 :.3U50 TITAL 3.725.3 9.157.5 12.046.5 14.975.6 19,222.1 21.171.0 33,23.0 51.97.0 Ragiam whezciaag wl be funded by doe WI Projec an dadowed. Soae: MfT - July 1993 Do Onto U)CWJ 1m - 46 - Annex 1.3 Palo. 2 of 2 Pswpe's Republic of Min TELCOMtOUNICATIONS PROJECr L1 Ulahag. (Ugbea & Ral) Lam - Sow r0oo ACOW ~ ~ ~ ~ ITahgm 1osim 19U 19m 1990 1991 19927 1993 1995 1997 WMUNC1PALZr1ES Raijia 2S3.1 216.9 347.5 414.1 496.3 611.0 77s.0 1s5.0 Slagi 269.4 363.4 412.2 567.7 769.7 M0O 1,352.0 2,065.0 ulu. 11S.6 142.5 117.3 199.7 254.2 349.0 773.0 194.0 Suascaal: 631.1 7923 577.5 1.1322 1,520.2 1.U32.0 2.900.0 4,962.0 PROVINCE Ani 146.3 164.1 190.3 2293 322.4 330.0 514.0 671.0 Fuji. 92.4 192.6 2423 305.5 4S0.5 450.0 1S0.0 I,X1.0 Gamu 72.1 32.1 92.9 104.6 133.5 136.0 212.0 291.0 Guangdong 622.6 169.4 1.160.5 1,553.0 2,101.2 2.630.0 4,661.0 6,304. Guizbou 673 73.1 30.0 36.9 973 126.0 139.0 335.0 Hainan 2S.4 33.7 44.2 59.7 37.1 102.0 196.0 337.0 Hai 244.0 267.0 2943 351.2 412.4 522.0 6U.0 940.0 ::e __ r ____ Hum 1U.5 2123 2S0.2 292 31S.5 415.0 606.0 909.0 Hubei 213.6 23.1 2623 297.7 361.4 491.0 72S.0 930.0 Hum 1933 209.1 225.1 263.5 337. 421.0 630.0 3U0 rumsai 1279 13S3 149.5 175.0 230.5 245.0 294.0 444.7 JiWm 131.7 22.9 262.9 315.9 405. 434.0 610.0 320. Qughotni 22.1 24.5 27.1 29.7 35.4 44.S 66.0 132.0 Shaaa)u 115.7 126.0 137.7 152.4 35.6 190.0 327.0 494.0 Sbhadong 335.9 379.6 436.9 5112. 659.1 776.0 1,142.0 1,531.0 Shbasu 134.8 143.1 161.1 IO6 225.2 259.0 346.0 437.0 Sichuan 239.0 269.4 3m3 356. 411.7 543.0 73S.0 1.140.0 Yunana 101.9 111. 120. 140.6 10.4 150.9 236.0 426.0 Zmuni.. 391.2 560.7 5t33 625.9 314.5 37.0 1,270.0 1,757.0 Suaibma: 4,449.2 53114 6,271.0 7,553.6 10,073.6 12,240.4 19,6W0.0 23,417.7 AUTONOMOUS REGIONS Gu gza 107.3 119.2 133.7 157. 209.5 233.0 331.0 475.0 Imroao g oia 139.4 1592 1I53 190A 222.7 255 336.0 436.0 Niugm 19.6 22.7 27.5 29.9 36.2 44 66A. 920.0 TlR 73 7.9 9.6 10.4 10.6 14.0 193 210.0 Xiaijisz" 72.1 31.2 91.7 109.0 134.1 163.0 217.0 302.0 SubeoeJ: 346.2 390.2 442.1 497.2 613.2 709.5 969.5 2,413.0 TOTAL 5,433.5 6,564.4 7.5913 9.233.0 12,207.6 14,711.9 23.549.5 35.792.7 Ragim whexdnba heM be Amdd by de WS P. anmhjadowed. Soure: MPT -. asy 19 OD imm - 47 - Annex 1.4 People's Republic of China TELECOMMUNICATIONS PROJECT LD Exchange Capacity (Automatic and Maual Circuit Temiadons) - ('0001 I ActuS I Twgets I Region 1989 1990 1991 1992 1993 1995 1997| B^. t . ^ v-.. ...: ~ ; 'i.............. ...... . ; Shangnai 15.8 12.7 14.7 24.6 43.0 90.0 140.0 Tianjin 4.4 4-4 4.8 8.8 15.0 30.0 44.0 PROV1NCS Anhui 10.9 12.0 15.8 18.7 27.0 50.0 71.0 Fupn -13.6 t7.4 Z. 27 45.7' r8.v 97.0 7 1I. Ft*an: ~~~ .* A58 Guangdong 43.1 60.7 67.8 117.4 155.0 250.0 281.0 Hainan 4.4 7.9 7.5 7.1 7.1 1 5.0 21.0 Hebi . :c.-. - --4 19. T2o. tt-.4~ 66.0C TZW Heilongliang 6.8 7.0 8.1 19.2 23.0 51.0 75.0 Henan 9.1 11.7 16.6 20.2 20.2 33.0 48.0 Hubei 7.4 8.0 11.0 16.8 30.0 54.0 85.0 Huma 3Z 2. Jiangsu 14.5 18.8 33.8 65.9 107.0 120.0 174.0 Ji~~~~~~~~~~~~~1. - . 1 tZ.4 U;Q' Jilin 8.1 8.4 14.3 17.9 25.0 30.0 45.0 Qinghai 2.8 2.8 2.9 3.0 3.0 3.0 . 3.0 Shaanxi 8.5 9.1 13.0 16.9 17.0 36.0 52.0 Shanoong 16.2 18.4 32.7 40.3 41.0 63.0 91.0 Shanxl 8.1 10.1 10.7 16.6 16.6 25.0 36.0 Sichuan -1;,,, ... - t7.C 15.0O: list - t ..A. 25.8 ^ 2$ - 43.0 52.0' vunnan 12.2 13.4 17.0 19.5 19.5 22.0 32.0 Zh, ;i ,g:. ,,8.6 22 . 25.0 44B.8 .. ..., 50.0 '0. O ...0. AUTONOMOUS REIONS Guangxi 10.4 8.6 10.0 17.4 17.4 22.0 31.0 Inner Mar.8a.. 5* 6.2 71 IO12_~ ¶6.0 ... ribet 1.1 1.1 1.1 1.4 1.4 2.0 3.0 Xinggiang 7.1 7.0 6.8 8.3 8.3 8.3 20.0 TOTAL 309.8 361.8 483.2 717.3 936.9 1,532.4 2,13S5.0 Regions crossed by cables funded by the WB Project are shadowed. Source: MPT - Jgjy 1993 00 awmas __ - 48 - Annex 1.5 People's Republic of China TELECOMMUNICATIONS PROJECT Telephone Lines in Service perlOO Population (End of 1992) Population Lines Telephone Region (Million) (Thousand) Densiv (%) Beijing 10.58 496.3 4.69 Shanghti 12.97 769.7 5.93 Tianjin 8.98 254.2 2.83 Subtotal: .... .. . ... 4 PROVINCES: Anhui 60.64 322.4 0.53 Fujian 32.34 450.5 1.39 Gansu 23.53 133.5 0.57 Guangdong 67.14 2,101.2 3.13 Guizhou 33.45 97.3 0.29 Hainan 6.77 87.1 1.29 Hebei 66.01 482.4 0.73 Heilongjiang 36.10 472.2 1.31 Hem 92.72 385.8 0.42 Hubei 56.86 361.4 0.64 Hunan 63.09 387.8 0.61 Jianpu 69.33 904.4 1.30 Jiangxi 38.98 230.5 0.59 Jiin 25.32 405.8 1.60 Tiaoing 40.39 665.7 1.65 Qinghai 4.50 35.4 0.79 Shaanxi 34.35 188.6 0.55 Shandong 89.31 659.8 0.74 Shanxi 29.92 225.2 0.75 Sichuan 110.00 481.7 0.44 Yunnan 38.01 180.4 0.47 Zhljiang 42.88 814.5 1.90 Subtotal: ...... ........ AtFMNOMOUS REGIONS: Gui 44.31 209.5 0.47 Imma Mongolia 22.2 222.7 1.00 Ningxa 4.88 36.2 0.74 Tibet 2.22 10.6 0.48 Xingjiang 15.92 134.8 0.85 Subtotal: P.R - 63)$. 1L, TOTAL-- .. Soure: MPT - July 1993 Do Cmmn& Su,In32.8 I IM1 - 49 - Annex 1.6 Peopie's Rebpu of rhim TELECOMMUNICATnONS PROJECT Tepbhooe Demnd and Supply i Urban Arsi (1992) Region Exchange Luie Lues in Outsading Regimred Deman CACItV Servcme Lins ' () MMNICIPALrrS: Beijing 803.000 477.513 65.S13 13.8 Sbaghiai 863.004 664.870 475.630 71.5 Tianjim 349.900 226.380 26.426 11.7 Subeoal: 2.015.904- 1,3K763 ; 416. PROVINCES: Anhui 326.7S6 253.947 19.562 7.7 Fujian 619.516 371.912 62.700 16.9 Gansi 164.144 115.192 7.833 6.3 Guangdong 1.790.41S 1.328.662 318.171 23.9 GuiZbou 106.250 76.425 4.927 6.4 Haman 109.840 78.947 11.628 14.7 Hebei 559.672 3t2.990 30.147 7.9 Heilonejing 563.407 412.631 82.198 19.9 Henan 474.495 309.331 24.331 7.9 Hubei 366.706 258.567 11.096 4.3 Hunan 442.746 268.263 17.707 6.6 Jiagsu 933.736 697.962 110.316 15.3 Jianxi 228.352 175.436 15.387 8.5 Jilin 437.350 330.927 33.973 10.3 Liaonnng 798.210 565.093 52.501 9.3 Qinghai 43.650 33.656 2.68 8.0 Sbaanxi 226.210 148.494 12.894 8.7 Shadong 70S.851 459.246 44.063 9.6 Shamsi 360.902 132.074 8.432 4.6 SwAclan 606.870 387.585 16.591 4.3 Yunnan 217.300 135.342 19.216 14.2 Zhejang 675.292 499.196 82.953 16.6 SuboxsiL iv.T 7471.U53 ;2, AUTONOMOUS REGIONS: Guangal 257.912 160.137 20.604 12.9 Inner Mongo4s 2U.610 L86.641 23.423 12.5 Ningaa 43.562 33.336 1.900 5.7 ribet 20.995 10.390 63 0.6 Xinviang 161.234 120.110 17.253 14.4 Subtal: 7iZ 1A0*4 . '-.' TOTAL: 54S7 .0 ...... .. 5.... -. - ... ( ) Pe..m wih rcrpect mo fines m servce. S ue: MPT - July 1993 DO CHOA4 6.U8L 11Mm - 50 - Annex 1.7 Pps Republic of Chi TELECOMMUNICATIONS PRO1EC!T Quarloy of Telepbos Sernic Indicamrs Reia (1) I (2) (3) (4) (5) (6) MUNICIPALSTIES Beijing 1.75 30.00 70.00 0.10 48.51 30.19 Sh ngt i 7.53 89.00 11.00 0.01 42.20 2SU5 ruSngm 5.051 98.00 2.00 0.05 4 27.50 Aveng-: 4. 43 OW :t36- 2: PItOVNCES [ Anklu 3.l51 97.00 3.00 0.15 54.92 40.78 Fujian 8.991 99.00 1.00 0.04 60.13 34.22 Gau 0.23 62.00 38.00 0.01 65.731 64.54 Guangdong 1 771 93.001 7001 0.121 47.361 30.05 Guizbou 1.371 56.001 44.001 0.02i 65.471 24.30 Haina 1.101 99.00 1.001 0.3S1 46.091 20.68 Hebei 2.211 100.00 0.00j 0.49i 62.351 30.28 HedomWitang 1.94w 983.0 2.00 0.611 61.92 I,.9" Heng 4.001 99.00 I.00 0.561 68.U1 28.90 Hubi 11.77 99.W 1.00 0.05 63.401 23.00 Hum 13.081 99.00 1.00 0.05 56.91 40.16 JinasgiU 0.03 99.00 I.W 0.33 45.62 21.92 Janglu 9.7 100.W 0.00 0.49 56.70 31.36 1idm 3.90 92.00 8.00 0.34 52.31 28.56 Lamoazug 9.52 71.00 29.00 0.49 42.58 27.34 Qighbac 4.001 77.00 23.W 0.02j 66.41 35.41 Shaanai 21.40k 96.00 4.00 0.24 57.52 33.24 Shandong 6.67 100.00 0.W 072 66.04 30.53 Shinma 9.02 99.00 1.00 0.33 65.35 27.2 Sichuan 4.371 89.001 11.00W 0.341 60.21i 24.42 Yunn 0.311 100.001 0 001 0.01 50.741 29.64 Zheiaag 1.201 99.001 I.W1 0.431 66.051 28.20 Aveng iEfSj -ti*ij &uJ: 0a2C 5LS 31ff AUTONOMOUS REGIONS I GUana 3.11 99.00 I.00 0.01 80.201 39.77 lir MoUgoir 4. 14 98.00 2.00 0.01 59.501 Z3.35 N.gxa 1.74 40.00 60.00 0.16 56.291 28.65 Tibet 1.57 100.00! 0.00 0.07 65.01 - Xijnn 15.65 69.001 31W00 0.02 55.471 30.26 Avsmp:~ Couy AveTa.e0 SSS:G .. (1) Fal apes 100 wor.g hiu per _ n(awg) (2) in mk cables and tbscnber lins- 5 (3) - in uwiaglead a facc bfdibs - S (4) Datn of balm ckwd (alung) - Hamm (5) Comlimon rme of ocal calls (effomi calos u-% of ow calls diad) - % (6) Com mm m of doioc LD coals- S Sommm: bMPT - July 1993 Do o__A m*nva llH - 51 - ANNEX 2.1 Page 1 of 2 People's Republic of China Ministnv of Posts and Telecommunications TELECOMMUNICATIONS PROJECT SUMMARY OF RECOMMENDATIONS OF SECTOR STUDY The Bank's report "People's Republic of China - Telecommunications Sector Study: Survey, Assessment and Recommendations" (Report No. 9413 of February 14, 1992) made a number of recommendations for the next stages of the reform process underway. These are summarized below. Cmercialize operations: (a) separate the functions of enterprise ownership control, enterprise management, and government policy-making and regulation, eventually vesting these three types of functions in different entities or persons, dispersing public ownersnip of operating enterprises, and restructuring some enterprises as joint-stock companies; (b) create national enterprises to develop facilities and services that fully decentralized local P&T enterprises cannot effectively undertake; (c) introduce modern business management tools, beginning with a system of commercial accounts linked to MOF s broader accounting reform program; and (d) once commercial accounting data are available, review policies for redistributing profits among P&T enterprises. Diversify supply and develop ccopetition: (a) facilitate commercial interworking of dedicated and public networks; (b) encourage TVEs, other large users, and independent entrepreneurs to build parts of the public local network. and either run them as separate operating enterprises interconnected to the public network or make arrangements for their operation by the local P&Ts; (c) promote schemes wherebv groups of users can build and manage separate networks to meet specialized business needs; and (d) develop competition especially in .SAT, _ellular, and value-aaded services. Rationalize tariffs: (a) change the structure and level of tariffs to better reflect costs and reduce cross-subsidies among services and provinces; (b) revise arrangements for revenue settlement among enterprises for services provided jointly. Develop regulation: (a) complete separation of policy and regulatory functions from enterprise functions in MPT and the provincial P&T administra- tions; (b) develop regulatory policies and procedures especially with respect to tariffs, licensing and interconnection of new providers, service access and quality, technical standards, and radio spectrum use; and (c) enact a telecommu- nications law. Separate posts and telec^-munications: (a) end subsidies from telecommunications operations; (b) extend separation of postal and telecommunica- tions operations to all administrative levels; and (c) where appropriate, - 52 - ANNEX 2.1 Page 2 of 2 continue joint provision of services in small places through contractual arrange- ments between post and telecommunications enterprises. - 53 - ANNEX 2.2 Page 1 of 5 People's Republic of China TELECOMMUNICATIONS PROJECT OUTLINE OF SECTOR REFORMS IN 1994-97 The State Council is expected to decide by the end of 1993 on the directions and first steps of a reorganization of MPT that would eventually restructure MPT's operations as separate state-owned enterprises and refocus the scaled-down MPT on policy, regulation, and strategic planning. At the same time, policy decisions are expected with respect to new entry, competition in non-- basic services and networks, and interconnection of public and dedicated networks. Steps would be taken to attract new resources, including opening opportunities for independent businesses to invest and manage telecommunications facilities, and starting to raise debt and equity capital in domestic capital markets. National legislation and ministerial regulations are being developed to provide the framework to implement these new policies and structures. R~trrL the MF The 1994-97 reform agenda includes the extensive restructuring of MPT. Operations. All telecommunications and postal operations would be reorganized outside MPT. Basic telephone operations, which account for the bulk of MPT's business including the 2,500 P&Ts and remaining enterprise functions of the central MPT and 30 provincial P&T administrations, would be restructured as one or more state enterprises. Various possible corporate forms are being considered. Postal services would be eventually separated fully from telecommuni- cations, and also structured as one or more state enterprises. MPT's non-basic telecommunications operations would become national enterprises separate from those providing basic telephone services. That is already the case of China Telecommunications Broadcasting Satellite Corporation (CTBSC), the domestic satellite company established in 19B8 as a separate legal entity. Several new national enterprises would be spun off from MPT, such as for data transmission and countrywide cellular service. Policy, Regulation, and Strategic Planning. MPT would retain responsi- bility mainly for policy, regulation, and strategic planning functions in both the telecommunications and postal sectors. In particular, the MPT would (a) formulate sector policies and broad sector strategic plans, (b) draft laws for consideration by the State Council and the People's Congress, (c) issue operating licenses and approve types of equipment for connection to the public network, (d) promulgate and enforce regulations and basic technical standards, (e) manage and issue licenses for the use of the radio spectrum, (f) facilitate coordination among sector companies, and (g) carry out government administrative functions in- cluding representing China in international telecommunications organizations and treaties. Some of these functions will be organized in two tiers, as they are now, namely MPT headquarters and 30 provincial P&T administrations. - 54 - ANNEX 2.2 Page 2 of 5 Ownership Control. The restructured MPT may also be asked to exercise ownership control over the operating enterprises, on behalf of the State. MPT would also, for the time being, oversee the operation of the national basic network. This would inevitably result in conflicts of interest between.MPT as owner of operating enterprises and as regulator of an increasingly diverse and competitive market in which these enterprises are major participants. Welfare. Initial steps are also being taken towards spinning off the P&T enterprises' housing, health, and pension responsibilities. Housing is expected to be privatized. In preparation for this, employees of some P&Ts are being required to pay an increasing share of housing costs, offset by higher remunerations; in some other P&Ts, houses are being sold to employees at reduced prices. Some of the P&T hospitals are really public hospitals used by P&T workers, who get part of the cost of these services paid by the P&Ts. Work is also underway to reorganize the pension system. This is complicated by pensions being paid as part of the P&T operating expenses to compensate for insufficiently funded pension reserves. The divestiture of P&T social responsibilities for staff, however, can only pick up speed once the much-awaited reform of government employee salaries is implemented. Real cash income of P&T workers must rise substantially before they can afford to buy services which used to be provided as employment benefits. A related issue is the need to pay skilled P&T staff salaries that are commensurate with those offered by alternative employers in other highly technical sectors (e.g., electronics, computers, air transportation, banking), which are also growing at a fast pace. Developing Competitive Markets There is already effective competition in some lines of business. A number of companies offer paging services, which have grown at a fast pace in major cities. The market for subscriber terminal equipment (e.g., telephone sets, private branch exchanges, facsimile and telex machines) is highly competitive, and equipment is available to the customers from many suppliers whose products have been approved by MPT for connection to the public network. As a result, a wide variety of products, of better quality, has become available.l/ The market of network equipment is also highly competitive, and P&Ts which earlier were bound to purchase equipment for network modernization and expansion from MPT factories and other preassigned sources, now do most of their procurement through competitive bidding. The result is some of the world's lowest equipment prices (e.g., switching). The construction market has begun to open. I/ The liberalization of tie subscriber terminl market has had an impact on the esmblished manufacturers. For example. the MPT factory in Tienjui that supplied much of the telephone set to P&Ts obligated to buy from it. has seen its market taken over by a joint venture manufacturer tn Guangdong producing more modern set of better quality. - 55 - ANNEX 2.2 Page 3 of 5 Several key policy decisions towards more competitive telecommunica- tions markets are expected to accompany the restructuring of MPT by the end of 1993. However, state-owned enterprises to be spun off from MPT would retain the monopoly of basic telephone service and related networks, which accounts for the bulk of the telecommunications business. Dedicated Networks. Of particular importance are steps to encourage construction of dedicated networks and their full use to provide public and private services. Dedicated networks will be allowed to (a) lease or sell excess transmission capacity among themselves and to/from the public network, (b) interconnect to the public network, subject to technical standards and access charges, and (c) offer services to the public (e.g., in mining towns, using facilities built for operation of the mining complex) and extend service to new places. These measures have potential for achieving substantial efficiency gains in both the public and dedicated networks, and for expanding coverage of public services at low incremental cost. The measures also would help develop major trunk networks independent from MPT; these could become competing long distance carriers in the future, should government policy evolve in that direction. Non-Basic Services. A wide range of non-basic public telecommunications services and networks will be opened to competition. Cellular (450 MHz), trunk mobile, VSAT, and other wireless services and networks will be open to competing providers subject to MPT license.2/ A 900 MKz countrywide cellular service, however, will be reserved for state monopoly. Value added services, such as information services, electronic mail, electronic data interchange, and shared data processing, will be open to unlimited competitive entry, subject only to notifying MPT but without requiring licenses. State-owned enterprises to be spun off from the MPT will compete in some of these markets. Construction. The construction market will become fully liberalized. While individual operating enterprises are likely to retain some construction capability of their own, as is customary in other countries, they will rely mainly on independent contractors for civil works, installation of major equipment, laying and splicing of cables for transmission as well as local networks, and other large works. National, provincial, and local firms will compete for these contracts. Attracting New Resources Although at present investments are largely self-financed3/ and hence access to capital is not a critical constraint on telecommunications development in the immediate future, sustained high rate of investment will eventually require raising large amounts of equity and debt from outside the sector. The 2/ The argument for licensing is mauily that the radio spectrum has a limited capacity. For example, with current technology, two or three cellular networks is die mniximum that can be operted in one locality. 3/ Mainly from depreciation, mained earnings, and Ilre mandatory user connection fees an call surharges. - 56 - ANNEX 2.2 Page 4 of 5 policy decisions under consideration should improve the prospects for capital mobilization. Access to Capital Markets. As a first step, MPT expects that selected P&T enterprises will, on a pilot basis, issue bonds in the domestic markets. Some manufacturing and construction enterprises would be restructured as joint-stock companies and raise new capital in domestic markets.4/ Several of the national telecommunications enterprises to be spun off from MPT for the provision of non- basic services would likewise be organized as joint-stock companies. The sector's ability to raise capital in domestic and international markets in the future, however, will be mainly conditioned by the corporate structure and ownership decisions regarding the enterprises that would take over MPT's basic services and networks. Build-Out of Local Networks. Following trials underway in some provinces, joint ventures and private investors will be encouraged to build extensions of the local telephone network (e.g., to serve office or residential complexes) as integral parts of the basic infrastructure. This is expected to play a key role in both sustaining high network growth rates and attracting new sources of capital to the public infrastructure. Various alternatives are being considered to operate these new facilities, including independent management by the developer and leasing to the local P&T. Specialized Business Networks. The development and management of independent national networks to meet the needs of numerous users in particularly communication-intensive sectors, such as banking and civil aviation, is expected to multiply. This will both offer users greater flexibility in meeting their needs, and attract capital and management skills from other sectors to telecommunications. Township and Village Enterprises. TVEs, which in the past have contributed significantly to developing local telephone facilities, are expected to further mobilize investment funds for this purpose. Developing the Iegal and Regulatoy Fraork The legal and regulatory framework for the reformed sector will be provided by a telecommunications law (there is none at present) and basic regulations in key areas. Telecumication Law. A telecommunications law is expected to be promulgated by the National People's Congress in 1995. A draft, reflecting the policy decisions expected by the end of 1993 on restructuring the MPT, will be submitted by MPT to the Department of Legal Affairs of the State Council in mid- 1994. This Department undertake will all necessary inter-agency consultations before finalizing a draft to be sent in 1994 or 1995 to the NPC. 4/ Tbe objective is to zansform all of these enterprises into companies. but not all will meet the govemnment requirements to do so. - 57 - ANNEX 2.2 Page 5 of 5 Basic Regulations. In parallel with preparing and processing the telecommunications law, MPT is preparing guidelines for the regulation of competitive services. In 1994-95 MPT and the State Council expects to issue regulations competitive services, dedicated networks, and the interconnection of dedicated and public networks. Other regulations will follow. ANNEX 2.3 - 59 - Page 1 of 8 Mr. Shahid Javed Burg:i Directcr China and c Department September, 1993 Dear M!r. Burki;, As we approacn the time to negotiate the proposed telecommunications loaib, would like to summarize the scope and mairi directions the reforms underway and planned in the -elecommunic=::ons sectcr. The Government cf Chin;: -- successfully implementing a large program for telecommunications development, the success of which is central to realizing the economic growth objectives of China. The Program comprises accelerated expansion and modernization of the telecommunications network, as well as a process of sector reform begun in the 1980s and likely to continue beyond the 1990s. The sector reform aims at the separation of the government and enterprise functions within the Ministry of Posts and Telecommunications (MPT', and the transformation of the operation entities into the market-oriented enterprises. Meanwhile, it is also our target to aeveiop a prosperous telecommunications market, rationalize economic relations and maintain communications order with the growth of increasingly competitive market of telecommunications equipment, services and networks. Important progress has already been made in these directions. In particular, management decisions have been decentralized to the individual P&T Administrations (PTA), tariffs have been adjusted, and competitive markets have been developed for network and customer equipment and some non-basic services. The next steps include the program on the reorganization of the MPT made public at the end of 1993 and the implementatiorn of it. Government and enterprise functions will be separated within the XPT by means of transferring the enterprise functions from the government functional departments into the Directorate General of Telecommurnications (DGTJ and the Directorate General cf Posts (DOP), while the government functions within these two Directorate ANNEX 2.3 -60- Page2of8 Generals will be transferred into the government functional departments. As v resu't. DGT and DGP will become autonomous operating units respectively. this will eventually lead to the result that the HPT', operation departments are reorganized as separate state-owned enterprises, and the MPT focuses mainly on Policy, regulation and strategic planning. Soon policy decisions will be taken by the MPT with respect to new entry, competition in non-basic services and the networks, and the interworking between public and private networks. Financially independent companies will be established in the field of industry, construction, materials and competitive telecommunications services. and measures will be adopted to attract new financial resources for investment. State legislation and ministerial regulations are being developed in the MPT to provide the framework to implement these new policies and structures. The Medium Term Policy Action Program. attached t_ this letter, summarizes important achievements in telecommunications sector reform until 1993 as well as key steps that the Government expects to undertake in the next four years. Sincerely, Yang .:ianzu Vice Nlinister Ministry of Posts and Telecommunications Attachment: Action Program - 61 - ANNEX 2.3 Page 3 of 8 Table 2.1: MEDIUM-TERM POLICY ACTION PROGRAM OBJECTIVE ACHIEVEMENTS BY EXPECTED IN EXPECTED IN END 1993 1994-95 1996-97 I. RESTRUCTURE MPT 1.1 DZCENTRALIZE Decisions on opera- MANAGEMENT. tions, network devel- opment, and finances shifted from central MPT to P&Ts. 1.2 SZPARATE GOVERN- Contract responsibil- MINT AND ENTERPRISE ity system in place FUNCTIONS. between MPT and 30 provincial PTAs, and between each of these and the city P&Ts, and between city and coun- ty P&Ts. Begin separation of Telecommunications and postal operations government and enter- to be restructured as separate enter- prise functions within prises. MPT to remain responsible mainly central MPT. for policy, regulation, and strategic planning. 1.3 CREATE NATIONAL China Telecommunica- MPT to spin off sev- Pilot projects to ENTERPRISES TO COM- tions Broadcasting eral new national establish joint- PLEMENT LOCAL P&Ts. Satellite Corporation enterprises for data, stock companies. (CTBSC) established as cellular, and other national enterprise non-basic services. under separate manage- CTBSC to initiate ment. Initiated very mobile satellite ser- small aperture termi- vice. nal (VSAT) services. - 62 - ANNEX 2.3 Page 4 of 8 OBJECTIVE ACHIEVEMENTS BY EXPZCTED IN EXPZCTED IN END 1993 1994-95 1996-97 1.4 SEPARATE MAJOR MPT and PTA depart- Some manufacturing and construction en- LINKS OF BUSINESS. ments in charge of terprises to become joint-stock compa- manufacturing, con- nies. struction, and pro- curement reorganized as autonomous enter- prises. Postal operations Gradually extend sep- separated from tele- aration of posts and communications in all telecommunications to provincial capitals lower levels. and on pilot basis in some other c:ties. Postal and telecommu- nications accounts separated at all lev- els. Steps towards transferring responsibility for workers, housing, health, and pensions from P&Ts to other organiza- ions. |I. DEVELOP COMPErTITION 2.1 DEVELOP COMPETI- Effective countrywide TION IN SUPPLY OF competition in provi- EQUIPMENT AND WORKS. sion of subscriber and network equipment. Some competition among Fully competitive national and provin- construction market. cial construction companies. - 63 - ANNEX 2.3 Page S of 8 OBJECTIVE ACRIEVEMENTS BY EXPECTED IN EXPEC`TD IN END 1993 1994-95 1996-97 2.2 DEVELOP COM3PETI- Numerous independent License existing and License competing TION IN PUBLIC SER- providers of paging new paging operators. providers of 450 VICES AND NETWORxS. services. License new providers Mhz cellular and of trunk mobile and other wireless domestic VSAT. services. Open.entry for com- petitive provision of value-added services. 2.3 FACILITATE DEVEL- Large users have built Dedicated networks OPMENT OF DEDICATED own dedicated net- will be allowed to NETWORKS AND INTER- works. Regional dedi- lease excess capacity WORKING WITH PUBLIC cated networks are to each other and NETWORKS, allowed access to the to/from public public network. networks. Interconnection of dedicated networks (including VSAT) to public networks to be allowed subject to access charges and technical standards. I$I. RATIONALIZE TARiFFS AND REDUCE CROSS-SUBSIDIES 3.1 ADJUST TARIFFS -elepnone rentai and TO REFLECT COSTS. ocai cail charges raised, nut still below costs. Postal charges in- End cross-subsidy creased to reduce from telecommuni- postal losses. cations to posts, by adjusting postal tariffs and, if neces- sary, direct state subsidies. Initiate study of Complete tariff study telecommunicartions and im=lement recom- tariffs and tariff mendations. management. - 64 - ANNEX 2.3 Page 6 of 8 OBJECTIVE ACRIEVDMWNS BY E-zCTED IN ErWZCTED IN END 1993 1994-95 1996-97 3.2 STRZAKLZNE TAR- P&Ts given authority Revise and further IFr MANAGEMZNT. to set local telephone decentralize proce- tariffs and surcharges dures for setting and in consultation with approving tariffs. local authorities. IV. ATTRACT NEW CAPITAL 4.1 MOBILIZE LOCAL High subscriber con- P&Ts to start selling PRIVATE CAPITAL. nection fees and long bonds in domestic distance surcharges markets. used to help finance investment in public network. 4.2 ATTRACT RESOURC- Some multi-user dedi- Encourage development IS FROM OTHER SIC- cated networks devel- of specialized net- TORS. oped. works to meet the needs of particular economic sectors (e.g., banking, c:vil aviation) - 65 - ANNEX 2.3 Page 7 of 8 OBJECTIVE ACRISVEMENTS BY FXECT5D SN EXPZCTED IN END 1993 1994-94 1996-97 4.3 ATTRACT TVE RE- incentives available Examine options to SOURCES. to TVEs for building further facilitate TVE networks jointly with participation. P&Ts. V. INTRODUCE MODERN MANAGEMENT TOOLS 5.1 DZSIGN AND IM- General guidelines for Implement new ac- Extend to all PLEMENT COMMrRCIAL commercial accounts counting systems, provinces. ACCOUNTING SYSTDE. agreed by MOF ana MPT policies, and proce- effective July 1, dures in two pilot 1993. provinces. Initial MPT training Train some 25,000 of senior and middle- accountants. level accountants and instructors. VI. DEVELOP LEGAL AND REGULATORY FRAMEWORX AND CAPABILITY 6.1 ENACT TELECOM- Draft law prepared by Draft to be revised in UNNICATIONS LAW. MPT on behalf of line with MPT restruc- Naticnal People's Con- turing and related gress. ;.. consultation policy decisions. with otner agencies. Revised draft law to State Council by mid- 1994. National People's Congress to enact telecommunications law in 1995. - 66 - ANNEX 2.3 Page 8 of 8 OBJECTIVE ACZIEVEMrNTS BY WECTED IN EZ"ZCTZD IN END 1993 1994-95 1996-97 6.2 ESTABLISH TELE- Establish guiding Enact regulations for CO)MONICATIONS REGU- principles for regu- competitive services, LLTIONS. lating competitive dedicated networks, services. and their intercon- nection to public networks. 6.3 ESTABLISH AND Service targets are Service targets to be MONITOR SERVICE TAR- included in contract made public. Improve GETS AND zcEMacAL responsibility svstem. monitoring. Penalties STANDARDS. when targets are not met. Subscriber equipment Additional types of standards set by MPT. equipment to be li- Licenses issued for censed as they reach new types after test- the market. ing by specialized in- stitutes. Networks standards set and enforced by MPT. - 67 - ANNEX 3.1 Page 1 of 3 People's Republic of China Ministrv of Posts and Telecommunications TELECOMMUNICATIONS PROJECT ACCOUNTING SYSTEMS DEVELOPMENT AND TRAIN1NG: DRAFT TERMS OF REFERENCE FOR CONSULTANTS Objectives The basic ob)ectives of this technical assistance and training are: to design required systems enhancements to be used by all MPT enterprises and guide the implementation of these enhancements in two pilot provinces to better enable them to record and report their financial activities according to market-oriented accounting principles and international standards; and to provide intensive training to key MPT financial staff in the application and practices of such principles and standards. Scope of Work Accounting nyst3: Requiremenrs analvsis. Requirements for new systems, or for enhance- ments to existing systems will be analyzed and documented taking into account. inter alia, the kinds and volumes of transactions; required journals, ledgers and other accounting records; and the tvpes and contents of needed financial reports. Evaluacion of software options. Based upon the requirements analysis, options for meeting accounting system software needs will be evaluated. Particular attention will be given to the cost effectiveness of MPT using proven commercially available software packages. Specific software purchases would be recommended to MPT, together with changes to existing software, as appropriate. Hardware and Software procurement. Technical assistance will be given to MPT in the procurement of any needed systems hardware and software. Chart of Accounts. Assistance will be given to MPT in revising, as necessary, ;ts enterprise charts of accounts. Policies and Procedures. Accounting policies and procedures will be documented. The documentation will comprise clear policy statements for the various accounting functions related to the MPT enterprises, as well as step-by- step procedures supplemented by flow charts. - 68 - ANNEX 3.1 Page 2 of 3 Systems Installation. The installation of any new hardware and software systems, as well as the initial application of new policies and procedures and any modifications to existing systems, will be supervised at each enterprise site, as needed. Training of Esterprise Finacial Staff. Formal training will be provided to enterprise financial staff in the operation of any new computerized systems, and in the documented accounting policies and procedures. Operations Assistance. Direct assistance will be provided to enterprise financial staff, and to MPT management, in making new systems operational; in the on-going operation of the systems and in the use of various financial reports. Lazge-scale Implementacion Planning. Prior to completion of the accounting systems work in the pilot provinces, assistance will be provided to MPT in the detailed planning for their replicating the systems in other provinces. Training: In addition to the systems-related training, an intensive program of formal training will be provided to selected MPT financial staff in the application and practice of market-oriented accounting principles, international accounting standards, and of telecommunications industry standards and practices. It is expected that such training will comprise various seminars and workshops ranging in duration from one day to perhaps several weeks. The specific topics and contents of the seminars and workshops will be agreed with MPT management, as appropriate, during the time the accounting systems support is being provided. Levei of Effort The pilot accounting systems work will be undertaken in some 140 separate enterprises with identical accounting requirements. It is expected that no more than six foreign specialists from a major international accounting firm will be required during a period of no more than fifteen months. The foreign specialist team should represent appropriate capabilities and experience in accounting systems design and implementation, training, and telecommunications industry accounting practices. It is expected that the firm will supplement the foreign specialists with full time professional accountants from within China. Their proposed work plan would specify the level of this support. Proposed work and staffing plans should reflect a highly cost effective approach to executing the stated scope of work. 69 ANNEX 3.1 Page 3 of 3 Suggested Evaluation Criteria Criteria Assigned Points Expressed understanding of accounting reform 10 objectives and current MPT accounting practices Proposed work plan 40 Capabilities and experience of proposed foreign specialist team - accounting systems design and implementation 25 - telecommunications industry experience, prior 15 relevant experience in China, and professional credentials (e.g., CPA or CA) Proposed fees and expenses 10 TOTAL 100 - 71 - ANNEX 3.2 Page I of 4 People's Republic of China MinistY of Posts and Telecommunications TELECOMMUNICATIONS PROJECT STIDY OF TELECOMMUNICAIIONS TARIFFS: DRAFT TERMS OF REFERENCE FOR CONSULTANTS A tariff study will be undertaken by the Ministry of Posts and Telecom- munications of China (MPT) as part of a sector reform and investment project supported by a proposed loan from the World Bank. Technical assistance, comDrising consultancy services to MPT and professional visits aoroad of MPT staff, ;s required to help MPT carry out this study. A grant from SITS (Beredningen for Internationellt Tekniskt-ekonomiskt Samarbete), a Swedish government development agency, will cover eligible costs of this technical assistance. Background Telecommunications tariffs have been adjusted in recent years to better reflect the costs of providing service, system capacity shortages, and the need to generate funds for accelerated investment. However, a more systematic review of tariffs structure, level, and management practice is needed. This need is made more urgent by sustained rapid network growth, increasing operational autonomy and commercial orientation of the P&T enterprises, government policies that require postal services to be financed separately from telecommunications and open up parts of the non-basic telecommunications business to competition, and inflation. Objectives The tariff study has four objectives: (a) propose and justify a set of telecommunications tariffs that meet the objectives of economic efficiency and sector financing, and recommend a program to implement these tariffs; (b) establish a methodology to adjust these tariffs to the situation of individual P&T enterprises, and to revise tariffs from time to time; (c) develop and assess options for mechanisms for tariff adjustments and approvals, and recommend any changes in the current arrangements; and - 72 - ANNEX 3.2 Page 2 of 4 (d) examine the present international accounting rates and settlement arrangements and recommend any changes to be pursued by MPT in the international arena. Appmax* A team of about 10 telecommunications experts will be established by the MPT's Department of Finance to carry out the study. This tariffs study team will include experts drawn from the Department of Finance, the Directorate General of Telecommunications, the Directorate General of Posts, the Center for Economic and Technology Development, and the Beijing P&T University. One member of the team will be designated by the Department of Finance to lead the team. The team leader and most members will be assigned on a full-time basis to the study for its duration. Some members of the team and MPT staff will visit foreign operating companies and regulatory agencies to become familiar with their approaches to tariffs. Main Tasks The study will mainly coprise four tasks: l. Review the current situation: (a) describe the present procedures for determining and approving telecommunications and postal tariffs in China, (b) describe the present tariff structure for major categories of services, and their evolution in real and current terms in recent years, Cc) compare present tariffs and their evolution in recent years with that of selected other countries, and (d) identify critical shortages in network capacity and likely future evolution. I:. Estimate costs of services: fa) examine alternative cost concepts (e g. , historical, long-run marginal) and determine which is most appropriate for the study, (b) determine the appropriate level of disaggregation of costs (e.g., by provinces, services), (c) review the cost elements used in China as the basis for pricing, compare with international practice, and recommend any necessary changes, and (d) calculate a set of cost estimates to be used as the basis for determining ideal prices that would maximize economic efficiency. II1. Detezinine optiml tariffs and implementation plan: (a) determine how the set of ideal prices should be modified to meet the enterprises' financial needs and ration excess demand where capacity shortages are likely to continue, (b) determine a set of optimal prices that maximizes economic efficiency taking into account capacity shortages and meets the enterprises' financial require- ments, and (c) propose a plan to implement these tariffs in a reasonable period of time, taking into account government policies and other practical factors. IV. Other: Discuss and make recommendations regarding (a) the management of tariffs setting and approval, separately for monopoly and competitive services and networks, and (b) international accounting rates and settlements. 7 3 ANNEX 3.2 Page 3 of 4 rTmetable The study will be carried out over a period of 12 months, beginning one month after the signing of the contract with the consultants. About one month after the team begins work with the assistance of the consultants, it will report on the methodology and work plan it intends to follow. After about six months from the start, the team will report on progress, which should include the results of tasks I and II above and a revised plan for the balance of its work. About one month before the ena. the team will have prepared a draft final report. These reports will be presented and discussed in workshops attended by officials of MPT and other relevant government agencies. The World Bank and BITS will be invited to attend. The World Bank will monitor progress of the study as part of its supervision of the proposed loan. Tecical Asistsnc - Soope of Work MPT proposes to employ a specialized consulting firm to provide technical assistance to the tariffs study team primarily in the areas of cost analysis, tariffs management, and economic and financial analysis of telecommuni- cations tariffs. The consultants, as a grouD or individually as needed, will join the :ariff study team from t:rne to time, mainly to help the team: 'a) 'ormulate the anaiytic approach, work program, and timetable for the tariff study, (b) organize a program of professional visits abroad, (c) assist in specific tasks and problem areas, (d) review and discuss progress of the tariff study from time to time and assist with preparation of the workshops, and (e) prepare a final report :ncluding recommendations for implementation. Budget and Sources of Funds The study will require about 6 man-months of foreign experts and about 15 man-months of professional study visits abroad. Tentatively, it is estimated that a total of about USS 250,000 will be needed for these purposes. - 74 - ANNEX 3.2 Page 4 of 4 The cost of the consultants, including travel to and from China, will be covered by the grant from BITS. The grant will also meet expenses in Sweden of professional visits by MPT staff. The proposed World Bank loan includes an allocation to meet any remaining foreign COstS. Expenses incurred by the consultants in China, including subsistence per diem and domestic travel, will be met by MPT. MPT will also provide office space, secretarial and language services, computer and communication facilities, and other necessary local support. MPT will meet travel and other costs of professional visits abroad not covered by the BITS grant. Request for Proposals and Selection of Consulants MPT and BITS will invite firms to submit technical and financial proposals for consulting services for the Scope of Work outlined above. The consultants should propose in more detail the scope and manner in which they plan to assist the tariffs study team. The selection of the consulting firm will follow BITS procedures, and will be done by MPT with the assistance of the World Bank. The quality of the technical proposal, including the qualifications of the individual consultants that will participate in the work, will be the prime factor in the selection of the consulting firm. The financial proposal will be reviewed during contract negotiation for determining the final contract price. The costs of preparing the proposal or contract negotiation, including any visits to China for familiarization with conditions in the country or discussions with MPT prior to submission of proposal or contract negotiation are not reimbursaLble. 7 5 ANNEX 3.3 Page 1 of 5 People's Republic of China TELECOMMUNICA TIONS PROJECT LONG DISTANCE INVESTMENT COMPONENT 1. The two long-distance routes included in the project will include two autonomous regions, eight provinces and the municipality of Beijing and are designed to (a) meet a high traffic demand; (b) improve the quality of existing transmission links; (c) digitalize the transmission network; and (d) provide the medium for diversity of future services. 2. The eastern ranges of the cable routes link some of the most developed cities in China and the nation's capital with central and western regions rich in natural resources and agriculture but demanding better infrastructure, including modern telecommunications means, to achieve further development. 3. LD Traffic. :n spite of an overloaded long distance network, the growth of toll traffic shows very high rates in the regions along the cable routes: Million Calls Average _______________________------- Growth Region 1990 1991 1992 p.a. (%) Beijing 36.24 58.76 100.98 66.9 Fujian 46.1: 69.01 117.64 59.7 Gansu 11.45 Z4.62 22.70 40.8 Guiznou 7.05 9 36 12.44 32.8 Hebei 43.05 68.96 124.05 69.8 Hunan 26.30 34.50 56.92 47.1 I. Mongolia 12.58 17.12 26.15 44.2 Jiangxi 19.09 28.53 48.32 59.1 Ningxia 3.44 4.49 6.71 39.7 Sichuan 34.63 50.57 88.16 9. 6 Zhejiang 80.01 117.60 184.59 51.9 The national growth rate in the period 1989-91 was 42.4% 4. Traffic Forecast. To determine the capacity of the two proposed routes, MPT prepared detailed traffic forecasts based on the following considerations: (a) the traffic growth during recent vears: (b) the relationship between growth in the national economy and growth in LD traffic and local traffic; (c) different growth rates for different periods, according to the structure and development of the LD network; and (d) the traffic to be shared with existing cable and microwave links. The total LD traffic for each province along the cable routes was forecast first; then the growth rate at each of the switching centers higher . 76 - ANNEX 3.3 Page 2 of 5 than C3 level was determined, taking into account the proportion of the interpro- vincial traffic with respect to the total traffic in each province. The traffic demand was estimated for three periods (not coincident since the feasibility studies for each route were prepared by a different Design Institute): Beijing-Lanzhou (B-L): 1991-2000, 2001-2010, :011-2015 Fuzhou/Hangzhou-chengdu (F/H-C): 1992-1998, 1999-2007, '008-2012 An exponential model was used for the traffic forecast: Y - Y0 (1 + k in which: Y: outgoing traffic in the forecast year; Y0: outgoing traffic in the base year; k: weighted traffic growth rate; t: number of years. The rate k is weighted with factors that take into consideration the traffic in the five previous years, the national traffic growth rate forecasted for the period t, and the growth of the GNP. 5. Circuit Capaciv. on the basis of a traffic matrix for the forecast year, the required number of switching and transmission circuits is calculated according to the network structure and following the relevant calculation method recommended by the CCI$T. When calculating the transmission circuits. consideration has been given to additional (65k) circuits for non-telephone services (rental circuits, order wire services, etc.). The systems will be divided into first-class trunk systems (linking C1 centers to C2 centers and C2 to C2) and second-class systems (C2-C3, C3-C3, C3-C4, and C4-C4). By taking into account in the pro3ect both interprovincial and intraprovincial requirements along the fiber optic cable routes, considerable savings will be obtained in the construction of the LD network. 6. QUality nsprovement. -he large capacity of fiber optic svstems and their inherent good transmission quality and high reliability will facilitate to meet the transmission requirements of different digital services such as direct toll dialling, data, image and computer communications, and will be the foundation for the Integrated Service Digital Network (ISDN). 7. Dgtaiiznion. Telecommunications in China are in a transition period towards the digitalization of the networks. Although there has been some development of digital microwave systems in the past seven years, the major telecommunications links along the proposed routes are analog overhead lines and coaxial cables that cannot match the Stored Program Controlled (SPC) switching facilities installed in transit centers. The fiber optic transmission systems will be connected directly to those SPC exchanges, avoiding the use of expensive Digital/Analog (D/A) converter equipment. S. Speficaif ons. The design lifetime of the optical cables in the project is 20 years. The cables will be put into operation in 1995 (Annex 5.3), using 140 Mbit/s transmission systems which conform to the digital hierarchy based on a 2,048 Mbit/s rate, and will work at the wavelength of 1310 nm. After - 77 - ANNEX 3.3 Page 3 of 5 1998, the capacity could be expanded to meet the traffic demand using either additional 140 Mbit/s systems or 565 Mbit/s systems on spare fibers. The cables will have 24 or 30 fibers in different sections depending on the traffic demand on each of these sections. There will be no copper wires inside the cable core, as the supervision and order wire functions are fulfilled through an optic path and the repeater stations will have local power supply. In general, CCITT recommendations will be followed for specifying the systems. 9. Instalation and Rlated Construcnon Projects. Installation of the cables and transmission systems will be carried out by the China National Telecommunications Construction Company, which has accumulated considerable experience in similar projects. The local P&T construction companies in the provinces will be responsible for the works associated to the two cable projects: expansion of the local and LD switching systems, construction or reconstruction of station buildings, installation of air conditioning equipment, expansion of power supply facilities, and construction of ducts. Many of the ancillary works have already started and MPT expects to conclude them on time for the installation of cables and transmission equipment. 1.0. Mainenance Organizaion. Mainrenance activities will combine local maintenance and centralized functions and resources (technical staff, vehicles, tools, instruments, etc.) . Sections for maintenance of the cable routes will be as far as possible arranged to coincide with the established administrative regions. These sections would be established every 150 km to 200 km (or longer in Inner Mongolia and Ningxia Autonomous Regions), with 10 workers assigned to each. A patrol worker will be stationed every 25-30 km. Present maintenance standards in China require 12 employees assigned to terminal and branching stations, 10 to regional centers or major cities, 6 to stations in smaller cities, and 2 to repeater stations in small cities. 11. Training. Since the electronic equipment for the project involves advanced telecommunications technologies, adequate training, domestic and abroad, will be organized. Specific requirements will be included in the bidding documents for procurement of eauipment. People's Republic i China TELECOMMUNIFCA11ONS PltOJECT Iltlerprtovinicial Fiber Optic Cable Routes (Eigth Five-Yeat lan: 1991-95) Length No. of 140 Mbiu/s Total lnvesument Consiruction Protect (km) Fibers Sysmems (US$ Million) (a) Fund Source Stans Ends I Beijing-Wuhan-Guangzhou 2.7)0 30 3+1. 1+11 I lOS 7 ADB 1993 1995 2 Beying Wuhan Guangabou (Optn) 3.023 12 5+1 43 6 MPT 1992 1993 3 Beijing-Tianjin Shenyang-Chanebun-Ilatbin 3.089 30.20.14 4 + I 39 5 Japanese Loan 1993 1994 j, 4 ~ ~ ~ ~ ~ $b% 2.03~~~~4 1..1 K651()Wt4~k 915 S Belling-Trnjin-Nanjlng 1.484 24 6+1 7+ 1 43 0 MPT 1992 1993 6 Beijing-Chengde-Fuain faicheng Qiqihar 1.622 16.14.10 2 + 1 30 2 Japanese l oan 1993 1995 7 Beljin*-Taiyuan-Xian 13723 24.18512 3 i 1. 5 1 59 3 ADO 1991 1995 III~ 19*0 1: 'Its t7z t, i:.: ). i; :, Aj 9 Chentdu-KumntI 1,100 1+1 3.0 MPt 1992 1993 10 Cbengdu-Xian 1.090 It 4+1 32 4 Australian Loan 1992 1994 11 Chongqing-Wuhan 1.400 10+1 54.2 MPT 1995 1996 12 Fuzhou-Shanghai 1.241 24 6+1 34.5 MPt 1991 1993 13 Fuaho-Guangahou /Sherezhen 1,383 24 7+1 396 MPt 1991 193 14 Guangahou-lfikou 900 2+ 1 2 5 MPt 2992 1993 13 tGuangzhou-Naming 700 2+1 1 9 MPT 1992 1993 16 Kunming-Nanning 1.200 4+1. 5+1 364 MPt 2995 1996 17 Lantihou-Wuluui 2.270 14-8 4+1. 5+ 1 2 5 . Britkain Loam 1993 295 f3 Latzho-Xian 335 11-20 5+1. 6+1 333 0. Bfitain Loan 1991 M99S 19 Nanjilng-Shangtiai 400 24 5+1 1.5 MPT 1991 1992 20 XIan-Zhengzhou 570 24 4+1 14.5 Australian Loan 2992 2994 21 Xuzhou-Zhengzhou 400 3+1 10.9 MPt 1994 1M5 22 China Japan 1 1.30 4 1 +1 (565 Mbitts) 27 0 MP1 1993 1994 Tool: 35.115 Tou:l 1.025 3 (a) Exchange Rate: USI .00 - Yual 5 5 (b) A 243-tm cable betwees BeijIng sand Zhangjiakou will be insulled under a different project. Between Hubehote and Be. -t exlalUst4-k tcable (12 fben) wil ci Il 20t4 route. (c) A 220-tm cable (14 fiben) wIN be installed by Zhejang Prvince mnder a differemtt projec lo tuqlete the 4.461-km route. 1 (d) The World Bank rmaces only a potdon of the I tOst. A Source: MPT - Mach 1993 nLi *a _ait ta 3 LEGEND Existing New I L; ' X World Bank loan people's Republic of China Inter-Provincial Optical Fibre Cable Proects to bew Consicted during the Eighth Five-Year Plan \ _ /-t h o l $ ) < es" A *DOB_ tlS ' I - 85 - ANNEX 3.5 Page I of 3 People's Republic of China TELECOMMUNICATIONS PROJECT Fiber Optic Cable from Fuzhou/Hangzhou to Chengdu 1. The Fuzhou/Hangzhou-Chengdu fiber optic cable system, with a total length of 4,661 km, extends across six provinces, from the Southwest to the Central-South of the country: 519 km in Fujian, 397 km in Zhejiang, 994 km in Jiangxi, 854 km in Hunan, 1,009 km in Guizhou, and 688 km in Sichuan. This will be the longest trunk route from East to West in China and will collect traffic from many of the national trunk routes. It has two branches in the East, from Fuzhou and Hangzhou to Nanchang, and then continues to Chengdu. From Hangzhou to Jinhua (220 km), the system will use a cable which will be laid early by the Zhejiang province to meet intra-province requirements. 2. The capitals along the route are among the most developed of the country, but the existing telecommunications facilities cannot cope with the rapid economic growth of the provinces and, in fact, become a restrictive factor to further development. Fuzhou (in Fujian) and Hangzhou (Zhejiang) are among the first group of coastal open cities, and Chongqing was one of the first open cities on the Yangtze River. 3. The route traverses mountainous areas in Fujian, Hunan, Guizhou and Sichuan; hills alternating with plains in Zhejiang; the Sichuan Basin; and the Chengdu Plain. About 401 of the areas along the route are mountain regions, 50% hills, and 10% plains. More than 40 rivers are crossed, such as the Minjiang, the Ganjiang, the Xiangjiang,- the Changjiang (Yangtze), and the Tuojiang. Most of the route will go along highways, and short sections along county roads or town roads. 4. The estimated total cost of this cable system is US$205.6 million equivalent (including contingencies), of which US$98.3 million (or 48%) is proposed to be financed by the Bank loan. Equipment and materials that will be procured for the system are summarized in Annex 5.2. People's Republic of China TELECOMMUNICATIONS PROJECT FUZHOU/IANGZHOU-CHENGDU FIBER OPTC CABLE SYSTEM Pmjcxt Costs (Million Yuan) 1992 1993 T 1994 1995 Total Conponents Local Foreign I Totall Local Foreign i Total Local i Foreign i Total I Local i Forei n i Toul| Local I Foreign I Total A. CABLES 1. Fiber Optic Cables 0.0 0.0 0.0 0.0 0.0 0.0 0.0 189.0 189.0 0.0 21.0 21.0 0.0 210.0 210.0 2. Cable Ducts 0.0 0.0 0.0 0.0 0.0 0.0 40.1 0.0 40.1 0.0 0.0 0.0 40.1 0.0 40.1 3. Civil Works 0.0 0.0 0.0 0.0 0.0 0.0 27.5 0.0 27.5 0.0 0.0 0.0 27.5 0.0 27.5 4. Others 0.0 0.0 0.0 0.0 0.0 0.0 15.8 0.0 15.8 6.8 0.0 6.8 22.6 0.0 22.6 Subtotal: 0.0 0.0 0.0 0.0 0.0 0.0 83.4 189.0 272.4 6.8 21.0 27.8 90.2 210.0 300.2 B. EQUIPMENT 1. Transmission Equipment 0.0 0.0 0.0 0.0 0.0 0.0 0.0 230.2 230.2 0.0 25.6 25.6 0.0 255.8 255.8 2. Power Plant and A/C 0.0 0.0 0.0 0.0 0.0 0.0 7.1 0.0 7.1 0.0 0.0 0.0 7.1 0.0 7.1 3. Tools and lnstruments 0.0 0.0 0.0 0.0 0.0 0.0 0.0 5.0 5.0 0.0 0.0 0.0 0.0 5.0 5.0 4. Spare Parts 0.0 0.0 0.0 0.0 0.0 0.0 0.0 23.0 23.0 0.0 2.6 2.6 0.0 25.6 25.6 OD Subtotal: 0.0 0.0 0.0 0.0 0.0 0.0 7.1 258.2 265.3 0.0 28.2 28.2 7.1 286.4 293.4 o C. SERVICES I I. Survey/Design 2.3 0.0 2.3 4.5 0.0 4.5 4.5 0.0 4.5 0.0 0.0 0.0 11.3 0.0 11.3 2. Cable Installation 0.0 0.0 0.0 0.0 0.0 0.0 161.1 0.0 161.1 69.1 0.0 69.1 230.2 0.0 230.2 3. Equipment Installation 0.0 0.0 0.0 0.0 0.0 0.0 35.8 0.0 35.8 53.7 0.0 53.7 89.5 0.0 89.5 4. Staff Training: -Local 0.0 0.0 0.0 0.0 0.0 0.0 0.6 0.0 0.6 0.5 0.0 0.5 1.1 0.0 1.1 Abroad 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.6 4.6 0.0 0.0 0.0 0.0 4.6 4.6 5. Others 0.0 0.0 0.0 0.0 0.0 0.0 33.9 0.0 33.9 33.9 33.9 67.7 0.0 67.7 Subtotal: 2.3 0.0 2.3 4.5 0.0 4.5 235.9 4.6 240.5 157.1 0.0 157.1 399.7 4.6 404.4 Base Cost of Prject 2.3 0.0 2.3 4.5 0.0 4.5 326.3 451.9 778.2 163.9 49.2 213.1 497.0 501.0 998.0 D. CONTINGENCIES 1. Physical (a) 0.3 0.0 0.3 0.7 0.0 0.7 48.9 22.6 71.5 24.6 2.5 27.0 74.5 25.1 99.6 2. Price (b) 0.0 0.0 0.0 0.6 0.0 0.6 72.1 91.2 163.3 49.7 2.6 52.3 122.4 93.7 216.1 Subtotal: 0.3 0.0 0.3 1.2 0.0 1.2 121.1 113.8 234.8 74.3 5.0 79.3 196.9 118.8 315.7 TOTAL PROJECT COST 2.6 0.0 2.6 5.8 0.0 5.8 447.3 565.6 1,013.0 238.2 54.2 292.4 693.9 619.8 1,313.7 (a) Local Costs: 15% Foreign Costs: 5% (b) Bank Update as of July 1993: 10.9% in 1993, 7.5% in 1994. and 6.0% thereafter. Source: MPT - March 1993 S A 4A4t LDcT_ Xth xa Peoplc's Republic of China TELECOMMUNICATIONS PROJECT FUZIIOU/IiANGZIIOU-CIIENGDU FIBER OPTIC CABLE SYSTEM Project Costs (Million US Dollars) 1992 1993 1 1994 1995 Total Components Local Foreign Total Local Foreign Total Local Foreign Total Local Foreign Total Local Forecin Total A. CABLES 1. Fiber Optic Cables (Il 0.0 0.0 U.0 0.0 0 0 0.0 34.4 34.4 00 3.8 3.8 0.0 38.2 38.2 2. Cable Ducts 0.0 0.0 0.0 0.0 0.0 0.0 7.3 0.0 7.3 0.0 0.0 0.0 7.3 0.0 7.3 3. Civil Works 0.0 0.0 00 00 0.0 0.0 5.0 0.0 5.n 0.0 0.0 0.0 5.0 0.0 5 0 4. Others 0.0 0 0 0.0 0.0 0.0 0.0 2.9 0.0 2.9 1.2 0.0 1.2 4 1 0.0 4.1 Subtotal: 0.0 0.0 00 0.0 0.0 0.0 15.2 34.4 49.5 1.2 3.8 5.0 16.4 38.2 _54.6 B. EQUIPMENT 1. Transmission Equipment 0 0 0 0 0.0 0.0 0.0 0.0 0.0 41.9 41.9 0.0 4.7 4.7 0 0 46.5 46.5 2. Power Plant and A/C 0.0 0.0 0.0 0.0 0.0 0.0 1.3 0.0 1.3 0.0 0.0 0.0 1 3 0.0 1.3 3. Tools and Instruments 0.0 0.0 0 0 0.0 0.0 0.0 0.0 0.9 0.9 0.0 0.0 0.0 0.0 0.9 0.9 4. Spare Panrs. 0.0 0.0 0.0 0.0 0.0 0.0 0.0 4.2 4.2 0.0 0.5 0.5 0.0 4.7 4.7 Subtotal: 0.0 0.0 0.0 0.0 0.0 0.0 1.3 46.9 48.2 0.0 5.1 5.1 1.3 52.3 53.4 C. SERVICES I. Survey/Design 0.4 00 0.4 0.8 0.0 0.8 0.8 0.0 0.8 0.0 0.0 0.0 2.1 0.0 2 1 2. Cable Installation 0.0 00 0.0 0.0 0.0 0.0 29.3 0.0 29.3 12.6 0.0 12.6 41.8 00 41.8 3. Equipment Installation 0.0 0.0 0.0 0.0 0.0 0.0 6.5 0.0 6.5 9.8 0.0 9.8 16.3 0.0 16.3 4. Staff Training: Local 0 0 0.0 0.0 0.0 0 0 0.0 0.1 0.0 0.1 0.1 0.0 0.1 0.2 0.0 0.2 Abroad 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.8 0.8 0.0 0.0 0.0 0.0 0.8 0 8 5. Others 0.0 0.0 0.0 0.0 0.0 0.0 6.2 0.0 6.2 6.2 0.0 6.2 12.3 0.0 12.3 Subtotal: 0.4 00 0.4 0.8 0.0 0.8 42.9 0.8 43.7 28.6 0.0 28.6 72.7 0.8 73.5 BaseCOstofPPojCCt 0.4 0.0 0.4 0.8 0.0 0.8 59.3 82.2 141.5 29.8 8.9 38.7 90.4 91.1 181.5 D. CONTINGENCIES 1. Physical (a) 0.1 00 0.1 0.1 00 0.1 8.9 4.1 13.0 4.5 0.4 4.9 13.6 4.6 18.1 2. Price (b) 0.0 0.0 _.0 0.0 0.0 0.0 1.7 2.2_ 3.9 1.7 0.5 2.2 3.4 2.6 61 Sublotal: 0.3 0.0n °! - 0. 0 10.6 6.3 16.9 6.2 0.9 7.1 37.0 7.2 24.2 TOTAL PROJECT COST 0.5 0.0 0 5 1.0 0.0 1.0 69.9 88.4 158 4 36.0 9.9 45.8 107.3 98.3 205.6 (a) Local Costs: 15% Foreign Costs: 5% (b) Bank update as of July 1993: 1.3% in 1993. 1.2% in 1994, 2.4% in 1995. Exchange rate for base cost: US$I.00 = Yuan 5.5 Source: MPT - March 1993 DO ComA . LOCOOT B *a , - 89 - ANNEX 3.6 Page 1 of 7 People's Republic of China TELECOMMUNICATIONS PROJECT HEILONGJIANG PROVINCE 1. Heilong3iang province is in the most northeasterly part of China, bordering eastern Rugsia (with 3,500 km of common border), Inner Mongolia, and Jilin Province. Its capital, Harbin, is some 1,100 km NE of Beijing. 2. The province has an area of 454,000 sq km and a population of 36,430,000 people (densitv of 80 people/sq km) in 1992, projected to grow to over 39,700,000 people by the year _000. _t is divided into 14 districts and subdivided into 67 counties - 15 of which are near ma7or cities and administered as part of the district. Three of the municipalities and 14 of the counties (40%of the area, 20% of the population) are open to foreign investment. 3. The main economic activities are in agriculture and natural resources: (a) the main base for grain in China: (b) large oil and coal deposits; (e) the gold deposit is second largest in China; (d) graphite; and (e) wood. Mechanical manufacturing, chemicals, electronics, textiles, pharmaceuticals, and paper mills play a major role in the four industrial cities of Harbin, Qigihar, Mudanl%ang, and Jiamusi. 4. The Heilong]iang P&T administration is organized around 89 operational units: (a) telecommunications in 14 districts, 67 counties, and Jianshanjiang (agricultural center SW of Suibin); (b) a microwave bureau and a transmission bureau; fz) a rural telecommunications unit; ;d) a post and :elecommunications eauipment company; and (e) a postal unit, a post philately unit, and a post and telecommunications savings comnanv. Additionally, there are Z schools, 2 factories, an installation companv, a researcn institute, a designing institute, and a nospital. S. The telephone network in 1992 was comprised of 150 local exchanges with 563,407 urban lines and 107,693 rural lines, resulting in a telephone density of 1.02 per hundred population; and 150 long distance exchanges with 22,200 trunk circuit terminations (about 26% manual operation). The 8th Five Year Plan (1991-1995) provides for growth of 1,225,000 urban lines, 126,000 rural 1ines and over 30,000 long distance circuits. By the end of the 9th Five Year Plan (2000), the local excnange network is expected to exceed 5,400,000 lines for a telephone density approaching 10.5% with 60,000 toll circuits. ANNEX 3.6 Page 2 of 7 6 Working lines shows a major increase of 63% annually in the years 1991 to 1994, with an ambitious growth target of 27% annually for the remainder of the decade. As supply of telephone services increases in the 1990s, the list of waiting applicants is expected to grow from about St to over 30% of existing subscribers by 1994, before declining towards 5% again (this decrease in percent of waiting applicants is not fully supported by the Bank due to a potentially large, but unidentified, unmet demand not quantified by current registration methods) indicating a strong market for telephone services and a major investment and construction program still to be addressed. 7. The Bank loan would provide for 160,000 lines of main telephone network expansion in six offices in the three cities of Jamusi, Mudanjiang, and Qiqihar. This is approximately 8.3 percent of the total 1993 - 1997 expansion of 1.937,000 urban network lines in the province (2,169,000 local exchange lines including rural development) 8. Parallel investments in the 1993-1997 period in long distance circuits and exchanges, interexchange facilities, access network structures, buildings, and ancillary equipment and works, is expected to cost USS2,377 million equivalent of which the Bank investment project is USS76.5 million equivalent and the loan would be for US$28.2 million (including contingencies) or 1.2 t of the total provincial program costs. Pcople's Republic of China TELECOMMUNICATIONS PROJECT llealonggiang Province Indicalon Actual Tacts Indicaiors 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 I OCAI. TELEPhIONE EXCHANGES Installcd Line Capacily ('0U0) Wi4n 7 365 7 449 1 47K I 671 1 982 0 1.420 U 1.800 0 2,260.0 2.84-0 0 Wtorking lines ('000) 201 4 232 7 287 1 360 6 472 2 770 0 1.150.0 1,4900 1,9000 2.393 0 Ex01.1itc Filll%) 65 7 63 6 639 75 4 70 4 78 4 e10 32.3 84 1 84 3 l ies widj DDDD('11K) 11 1 13 1 337 437 I480 2200 3020 3800 4100 8000 Telephonc Densihy (%j Total 0 59 0 68 0 82 1 02 1.30 2 09 2.82 3 62 4 52 5 61 Telephone Density (%) - Urban Ne,w*oLk 4' 1 25 1 30 1 62 2 00 2 58 4 26 641 8 22 10 28 12 74 D)OMESTIC L.D EXCHIANGES Number of EtchAnges: -Manual 810 81 0 810 10 81 U 81 U 84.0 840 840 840 Automatic: 20 0 33 0 42 0 52 0 69 0 59 0 84.0 84.0 34.0 84.0 -Analog 190 32 0 410 510 550 370 Digiul 10 10 1 0 10 14 0 220 84 1 84 0 84 0 84 04 Trunlk Circuii Tcminagion Capacify ('(KUI) 7 0 3 4 9 2 10 4 22 0 38.3 63 0 75.6 30.0 90 0 lunctin Circuit Terninaiun Capacity ('00(il 6 9 9.9 9 3 10 9 23 9 40 1 65 6 35.6 36 0 100 0 QUAV1.ITY OF SE'RVICIU Call Completion Rae (X) -Local Calls 61 2 60 1 55.2 58 3 61.9 58 5 55 58.7 58 7 60 0 -ODCalls: 433 446 456 43.I 41 1 430 43.5 43 43.9 490 - Operntir Caintrollcd 85 5 32 2 86.3 35 6 31.3 35.3 85.3 35t 35.9 36 0 -DDD 22 7 14 4 17.2 30.1 23 0 30 2 30.3 30.3 30.3 30 3 IDD 657 39 4 42.3 41.3 50.0 51 0 52 0 53.0 54 0 55.0 PRODIICT'IVrTf (0) StafII/I.00 Working Local Lines 72 69 57 47 38 24 15 13 10 8 FINANCIAL. () Teleph. Revenue/Working Line (Yuan) 911 938 1.081 1,174 1.235 1.160 1,074 1.068 1.130 1,201 Operating CosaiWorking Line (Yuan) 735 772 835 983 1,165 1,255 1,567 4,286 1.306 1,327 (0) Local Ncework (cxcluding nral) Source: hledongii ng PTA - July 1993 ftC m OmiAf DM Nj LOCAL TELEPHONE NETWORK HEILONGJANG PROVINCE (IN tHOUSANDS) Tephone Lines Supply & Demand NTOUSANDS 6.000 - 450 j - 400 WAITING APPlICANTS GROWING FROM S TO 30 % OF EXISTING .p I INSTALLED SUOSCRISERS LINE | j 350 4.500* j - ~~~~~~~~~300 250 3,000/ / -9019519019520 200 ~~~/ -~~~~~~150 1.500 - I/ -100 000 ~~~~~~~50 1980 1985 1990 1995 2000 EXPRESSED DEMAND E1W544og6 LOCAL TELEPHONE NETWORK HEILONGJANG PROVINCE Telephone Lines Supply to Subscribers 5500 ANNUAL GROVVTH RATE ACTUAL PROJECTION 4500- 3000 ~~~~~~~~~~~~~~~~~~~~~~991 -1994163-,/ 2500 - __ _ z '.0 Working Lines 1500 19800 196718%) < . !98t -~~ 1991 (23%) 100 - i_ i 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 TELEPHONE 1. DENSONE 032 042 082 362 105 EKA5WsA40 tI People's Republic of China TELECOMMUNICATIONS PROJECT l,OCAL TELEPIIONE NETWORK - IIEII.ONGJIANG PROVINCE Investma Pognmm (Million Yuan) 1991 | 1994 1995 1996 1997 Total ComponetS LocallFom!i n Totall Local Ford n Total Local Fomisn Total Local Forein | Totall LocalF n Tol Forin Totl ONGOING PROGRAM 481 5 1.321 9 1,803 4 2.115 8 528 9 2,644 7 1.680 5 367 0 2.047 5 1.874 6 847 7 2.722 2 2.209 9 1.223 6 3.433 5 ,362 3 4,289 1 12.651 3 FRD PROIECT 1. Local Teleph Litdhanges U 11 Ut U tI t 11l uil 0U0 00 124 5 124 5 t ll 13 8 1318 0 t ll o 0 U tl 138 3 138 3 2.OutsidePlant 00 00 00 00 00 00 600 00 e0 600 00 60.0 400 00 400 160I0 00 1600 3. uncnonNermork 00 00 00 00 00 00 00 00 00 270 00 270 00 00 00 270 00 270 4.PowerSSupplyandA/C 00 00 00 00 00 00 60 00 6.0 90 00 90 00 00 00 15U 00 Is0 S TestEquip.and Others 00 000 00 011 00 00 00 00 0 32 00 32 00 00 00 3.2 00 32 6. Buidings o00 00 00 00 00 00 129 00 12.9 60 00 60 00 00 00 18.9 00 189 7. Training: -Local o0 u t 00u till tIll 00 00 00 00 0o0 (o0 00 00 0 0 0o 0o0 0n0 -Abrad 00 000 00 _ 0 00 00 0.0 1.9 1.9 0.0 !9 1.9 0.0 00 0°0 0°0 3.9 3.9 BaseCosofPmject 0000 00_00 00 0.0 73.9 1264 205.3 105.2 153 121.0 40.0 0.0 40.0 224 1_ 142.2 3663 Coningencies l.Pbyscala (a) Ot uu 0 tl t11i 4ii 0u0 79 63 142 105 08 11.3 40 00 40 224 7 1 29'5 2. Price(b) 0 0 00 00 00 00 0.0 22.9 35.0 57.9 39 3 56 44.9 13.5 00 135 3 0.7 406 121 3 Subtutal: 00 00 00 00 00 00 308 41.3 72.1 493 6.4 56.2 22.5 0.0 225 103.1 47.7 1508 TotaJ Pwjcj Cost 00 UU0 00 I U tll 0.(1 109.7 167.8 277.4 1550 22 2 177 2 62.5 00 62.5 327.2 1899 517 1 TOTAL PROGRAM COST 481 5 1.3219 1.S034 2,115S8 5289 2.644.7 1,790.2 534.7 2,324.9 2.0296 8698 2,899.4 2,272.4 1,223.6 3.496.0 3.6894 4,4790 13,168.4 (a) Local Costs: 10% Foreign Cosis: 5% (b) bank Updatc s of July 199J: 10.9% in 1993, 7 5% in 1994. and 6 11% ilicrcjller Soufce. Heilongjiang PTA - July 1993 so C~ain pa_CO.T At 5.1119 Peoplc's Republic of China TELECOMMUNICATIONS PROJECr locAl.TrELEP1I0NIE NL'WORK - IIlIONGJIANG PROVINCE Iiivestment ProgrAM (Million US Dollars) 1993 _ 199J4 1995 1996 1997 __ Total Components Local Foreign Total Local ForeignI Total LocalForci n Totl LocalFForeig'i n ol| Local Formign Total Local Foreign Toal ONOOING PROGRAM 87 5 240 3 327 9 384 7 ou. 2 480 9 305 5 h6 7 372 1 3t1) 8 154 1 495 0 401 8 222 5 624 3 1.52! 4 77') 8 2,3W1 2 IBRD PROJECT 1. Local Tlepli Lxiliiigcs tIl0 t1 1 (I It II II( 0 III tIj 1 2 226 22ut 11 2 5 2 5 t0l0 t0ll tIl( 1i 25 2 25 2 2 OutsidePlant 00 00 00 on unl 00 10 9 00 10 9 1(19 00 109 73 00 713 291 00 291 3.JunctionlNetwuik 00 00 00 n (i l 0o0 0 0 0o0 00 49 00 4 9 0 0II 00 49 00 49 4.PowerSupplyandAlt 00 00 00 till I 0nn IoI 0 1 1 16 110 16 0 0 n 0o0 27 1n0 27 S.TestEquip.aidOihers 00 00 0 o fill 0) 0 10 0o0 oll 00 0 6 110 06 0 0 10 00 1 0 o 6 00 06 1 6. Buildings 0 0 0n 0 on ll It I 0 23 n0 23 11 1) I I o 00 0o0 34 00 34 7. Training: 'n -Local 00( (II tIll) t ill (II 0 Il III) 110 liii till 00il 0 i ll (Il (Il41 (Il (IlI Abrioad 00 00 0° 0 0 °0 0!0 00 04 04 00 0!4 04 0) 0°0 00 0(1 07 07 Base CostotPruiccl o0 00 00 _ 0 0 -o0 0 143 2_30_ 3763 19! 29 22.0 7.3 00 _ 73 407 259 666 Contingencies 1. Physical (a) 0n l 1 1111 (i 11 n l 4 1 1 2 Ii I 9 11 I 2 I 0 7 til 7 4 1 1 3 5 4 2.Price(b) 00 00 00 0) IlU 00 03 12 20 13 t13 20 10 00 10 35 15 50 Subtotal. 0 0 0 0 0 0 0 l 00 0 2.2 2.4 4 6 3 7 014 4 1 1.7 0 0 1 7 7 6 2 7 10 3 Total Prjec Cost (I nn 1) 1 11 1 411 110 (Ill 166 253 41 9 228 33 261 90) t0ll 91 483 286 76n) TOTAL PROGRAM COST 87 5 240 3 3271 384 7 96 2 480 9 322.I 92 1 414 2 363 6 157 4 521 0 41118 222 5 633 2 1,568 7 808 4 2,377 2 (a) Local COItS.: 111% I;.ucign COSIS 5% (b) Bank update as of liily 1993 1.3% tn 1993. 1 2% Ini 1994. 2 4'; iii I 45. 1 2 , ill In199. Aud 3 4% i5i 1997 Exchange Rate for base cni: IIS$S 110 = Yuan 5 5 Source: licilongitang PI'A Inly 199'3 '.4Z as oHMIAa &_COST U.A 5O16,2 - 97 - ANNEX 3.7 Page 1 of 7 People's Republic of China TELECOMMUNICATIONS PROJECT LIAONING PROVINCE 1. Liaoning province is in the northeast of China, bordering on North Korea to the east, Jilin province, and Inner Mongolia, and is at the north end of the Yellow Sea, on the Bo Sea. Its capital. Shengyang, is some 650 km NE of Bei3 ing. 2. The province has an area of 145,000 sq km and a population of -9,385,000 people (density of 272 people/sq km) in 1992, pro3ected to grow to over 40,700,000 people by the year 2000. It is divided into 14 districts sundivided into 67 countles. -he coastal cities of Dalien, Jinzhou, and Yinkou as well as the industrial centers of Anshan, Dan Dong, and Shengyang are in districts open to foreign investment. 3. The.main economic activities are in agriculture, heavy industry, petroleum processing, machinery, textiles, chemicals, and electric power. The coastal ports, at the head end of railways and roads to northern China, also provides for an economic advantage. 4. The Liaoning P&T administration is organized around 59 operational units: ca) telecommunications units in 14 districts and 44 counties and (b) a postal unit. it also administers a university, a college, a training center, a construction company, a supply company, 3 factories, a research institute, a designing institute, a hospital and two recuperation centers, and operates a hotel and administerS 40,000 apartments for staff housing (the operations and maintenance of apartments Is included in the PTA financial statements). 5. The telephone network in 1992 was comprised of 128 local exchanges with 798,210 urban lines and 208,490 rural lines resulting in a telephone density of 1.84 lines per hundred population, and 14 long distance exchanges with 32,000 toll circuit terminations (all automatic digital operation) . The 8th Five Year Plan (1991-1995) provides for growth of 1,500,000 urban lines, 304,000 rural lines, and over 40,000 long distance circuits. Bv the end of the 9th Five Year Plan t2000), the local exchange network is expected to exceed 5,300,000 lines for a telephone density exceeding 8.5s, with 70,000 toll circuits. 6. Working lines grew at 34% annually in the period 1990 to 1994, and aim at an ambitious trend of 20 to 28% annually continuing through to the year 2000. As supply of telepnone services increases beyond 1993, dormant business demand is expected to appear, :ncreasing waiting applicants on file upwards through 1995 (and possibly bevond, as unidentified, unmet resident demand is recognized) -- creating a healthy demand, and a continuing ma3or investment requirement. - 98 - ANNEX 3.7 Page 2 of 7 The Bank loan would provide for 170,000 lines of main telephone network expansion in seven offices in the four cities of Dan Dong, Jinzhou, Yingkou and Bayuguan (a new port city) . This is approximately 7.9% of the total 1993-1997 expansion of 2,162,000 urban network lines in the province (2,583,000 local exchange lines including rural expansion). 8. Parallel investments required in the 1993-1997 period in long distance circuits and exchanges, Interexchange facilities, access network structures, buildings, and ancillary equipment and works, are expected to cost USS3,156 million equivalent of which the Bank investment project is US$75.2 million equivalent and the loan would be for USS28.3 million (including contingencies) or 0.9 t of the total provincial program costs. Pcople's Republic of China TELECOMMUNICATIONS PROJECT Liatning Province InJicators Actnal Targca Indicators 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 LOCAL TEtLEPIIONE EXCIIANGFS Installed Line Capaclty ('000) 533 4 601 8 697 11 78H3 3 1.U0 7 1,500 U 2.000 0 2,5W3) 3,030 0 3,59' 0 Working lines ('000) 328 0 379 9 430 8 502 1 665 7 950 0 1,300.0 1,630 0 2.122.0 2,586 0 ExchangcFillI%) 61 5 63 1 61 8 642 66.1 633 650 652 700 720 Lines witdi )D)D(u IMIK 156 707 74 1 2176 1150 5000 1.0000 1.2000 1.5000 2,2000 Teleplione Densiry (%) - Toul 0 86 0 98 1 (9 1 30 1 84 2.10 2.94 3 88 5.30 6 46 Telephone Density (%) - Main Network (11 1 61 1 89 2 16 2 54 3 42 4 89 6 70 8 32 10 85 13 17 DOMISTIC I.D EXCIIANGES Number ol ExchAnges: -.Manual 8 0 3 0 - Automalic. 0 0 5.0 10.0 14 0 140 14 0 14.0 15 0 15.0 16 0 - Analog Digttal 5 U 10 0 14.0 14 0 14 0 14 0 is 0 15.0 16 0 Trungk Circuit Terminatlion Capacity (0'(XX 11 2 15.0 17.1 27.9 29.6 450 650 1000 1200 1500 function Circuh Tenmination Capacity ('00() 13 7 17 2 180 22 1 300 400 500 56.8 620 75 0 QIIAI I'IY OF SERVICE Call Completion Rate (%) - Local Calls 589 57 9 594 60 1 60 3 61 0 61.0 61.0 61.0 61.0 ID CAlls 37 3 38.0 40.4 41.0 40.3 41.0 45.0 45.0 45 0 45.0 - Operator Coiittolled f7 6 S7 9 88.3 818.2 7 8 88.0 88 0 88 0 as 0 88r0 DDD 16 4 19 4 26.5 25 0 25.0 25 0 26 0 27 0 28 0 30 0 IDD 65 7 39 4 423 41.3 50.0 510 520 53 0 54 0 550 PROD)IICtIVITY (s) Starfl1000 Working l.ocal Lines 53 46 42 36 28 20 15 12 9 6 FINANCIAL. (') Teleph. Revenue/Working I.mie (Yuan) 999 1.151 1.391 1.797 2,052 2.161 2.297 2.480 2,428 2.365 Operaiting Cost/Working Line (Yuan) 768 758 851 1.064 1.093 1,190 1,539 1,315 1.328 1.335 () Local Network (excluding rural) Source: L.aoning PTA - July 1993 la CM4A tL DM s 0,241) LOCAL TELEPHONE NETWORK LIAONING PROVINCE IN IHOUSANDSJ Telephone Lines Supply & Demand (IN THOUSANDS) LINS WAITING LIST 7,500 - 450 - 400 6,000 - 350 INSTALLED 300 LINES / 4.500 / WAITING APPEICANI S GOWING / - 250 TOlI%OF EXISrwNO / SU1SSCRI4EAS 200 3.000 100 1.500 00'~~~~~~~~~~~~~-5 1980 1985 1990 1995 2000' SAIISFIED 82% 87% 89% 90% 98% EXPRESSED EKW409 4; DEMAQ - LOCAL TELEPHONE NETWORK LIAONING PROVINCE Telephone Lines Supply to Subscribers 8,000 - _ __ ANNUAL GROWTH RATE ACTUAL + _ PROJECTION 4.000 _-2 1s 1993 199.(30%) 2.000 Working Lines 1986 1990 (15!%I 1,000 e _ 500 _ _ 1980 1986 (10%) .4 . 91993 (35%) 100- 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 TEtEPHONE 043 061 1.09 388 10.2 DENS"TY EK/W54409. .A Pcople's Rcpublic of China TELECOMMUNICATIONS PROJECr 1 (XAl. TEI.EPII(INI- Nl-TWORK l.IAONING PROVINCE Investmeiw Program (Million Yuan) 1993 19941 1995 1_ 19961 1997 Total Couponremt Local Fomti n Toul LocalForin Toall LocallForignl Totl| Loal Forignn Toull LocallForei n Total LocalI Foreign Total ONOOINU PROGRAM 1.,794 9149 2t7943 2.03)R4 71'14 2,8177 2.2335 58n0 2.8135 2,8000 I l65n 4.1650 2.9000 1.4560 4,356ht 11,911 3 50353 16.946 6 IBRD PROJECT 1. Local Telephi Eliangcs oil (10 0 1111 i 71 5 77 5 111 65 2 75! 12 0 1( oil U11 UI(l Iul 1511 131 7 152 7 2 OutskiePbant 00 00 00 516 00 516 850 0.0 850 0(0 00 00 00 00 00 1366 00 1366 3.functionNectwlrk 00 00 00 209 00 209 145 00 145 00 00 00 00 00 00 354 00 354 4, PowerSupply and A/( 00 00 00 100 n0o 100 91 00 91 00 0(0 00 00 00 nn 191 00 191 S. Test Equp. aid Oihers 0 0 0 ItI) t 05 112 0 7 0 5 0 0 0 5 o;11 00 0o 0 110 11(I 1 0 1 0 0 2 1 1 6. Buiklings 00 (10 01( 79 t0 79 50 0 0 S 0l 00 00 00 0l 1)0 12.9 00 129 7. Training: -Local Oil I) 1 10 1 1 0 11 fl 119 5 11 1) 5 (I 0 0I 0 0 0( III) (0 0 5 (90 5 l- -Abroad 00 00 00 00 29 2.9 00 22 _ 22 00 00 00 00 00 00 00 Sl 5.1 j BaseCosofProjcl 00 __ 0.0 00 963 756 _1724 129.1 674 196.5 0.0 00Ed00 00 00_00 _2259 _ 1430 3639 Conringencies 1. Physical (a) 11 u u UU 9 7 3 135 129 3) 4 1 J 3 (0 11 ( 10 U U0 00 0U 22 h 7 2 29 7 2.Price(b) 00 00 00 205 153 35.7 37.4 18.7 56.1 00 00 00 00 00 00 579 33.9 918 Suboal: 00 00 00 301 190 492 503 220 72.4 00 00 0.0 0o0 00 0 805 411 1216 Total Pruict Cost0 ( 1u0 00 121I9) 94 6 221 6 17194 89 5 2689 0I11 110 0(1 1f(1 II(1 U 0 306 3 184 1 49) 4 TOTAL PROGRAM COST 1.879 4 914 9 2,794 3 2.225 3 814 11 3.039.3 2.412 9 669,5 3.032 4 2.80111 1.365 0 4.165 0 2,900 0 1,456.0 4.356 0 12,2176 5,219 4 17.43711 (a) Local Costs: 10% Forcign Cosis: 5% lb) Bank Updatc as ol luly 199J: 10.9% in 1993. 7 5% in 1994 t.d h, tllaic.ic Soiurce: Liaoning PTA Jiuoc 1993 is o3 People's Republic of Cbina TELECOMMUNICATIONS PROJECT I WAI. Ti:l l l'11k)Nl Nl.IW()RK l.lAONIIN; PR(JlVNUi InvCstneiR PWhiliful (Million US Dollars) 1993 1994 1 _ 1995 1996 1997 Toul Coamponenust Local Fofti n Toul oaFoti n| Total LocaloinTotal Local Fofti n Toul Local Foreign Totul Local Forcitn| Tooul ONOt1NG PROGRAM 341 7 166 3 53)8 I 381 5 11118 512 3 406 1 l5 5 511 6 509 1 24R 2 757 3 527 3 264 7 792 ( 2.165 7 915 5 3,081 2 IBRD PROJECT I.LocalTelepli L.,itanges 0U0 00 00 1) I) 11 141 111 119 117 fill lit) l 0 Dl I If O U U 2 7 250 278 2.OutidePlant 00 00 00 94 00 94 I55 00 155 00 00 00 00 00 00 248 00 248 3.lunctiunNetw4,Fk 00 00 00 33 00 33 26 00 26 00 00 00 00 00 00 64 00 64 4.PowerSupplyasidAlt 00 00 00 1 o 0 It 16 00 16 00 00 00 0 oo 00 35 00 35 S.TestEqulp.saidOthers 00 00 00 01 00 011 01 00 01 00 00 00 00 00 00 02 00 02 6.Builldings 00 00 00 1 4 00 1 4 09 00 09 O0l 00 00 00 00 00 23 00 23 7. TraIning: o -Local Uo U U l IU u ! u) 112 0U9 00 0 9 (III tll ulJ 00 1 UU tIlt II 00 I I w -Abcomd 00 00 00 00 05 _ 05 0.0 04 04 00 00 00 00 _ 00 00 00 09 09 ease Cost d Prnj 0 00 0 0 16 137 3 1 3 23.5 12.3 3 OIl 00 =00 000 00 _ 411 260 =67. Contingencics I. Plysical(a) 01) 00 1)1 1 8 07 24 2 3 06 3u0 0 00 00 0U0 0U0 0 a 4 1 3 534 2. Price(b) 00 00 0 005 04 09 1.3 0.6 19 00 00 00 00 00 00 13 (0 23 Sub,ial; 00 00 00 2 2 I 1 33 36 1 3 49 00 00 00 00 00 00 59 2.3 32 ToullProjcciCosi Uu( I0 U u( 19'8 148 34J6 271 1)5 4o6 ) 00 0U0 00 0U0 if 469 283 752 FOTAL PROGRAM COST 341 7 166 3 508 1 4101 4 145 6 547.0 433.2 119.0 552 2 509 1 248 2 757 3 527 3 264.7 792 0 2.212 6 943 8 3.156 4 (a) Local Costs: 10% Foreign Cosis: 57% (b) Bank update as lfiiJly 1933. 1 3% in 1993. 1 2% in 1994. 2 4J iit 191iS. 31%7 in 1996. mid 3 4%in 19917 Exmhsnge Rate lor base cost: IISSI 110 - Yuan 5 5 Source: ILiaining I'TA luiuc 19'),1 MonaIaa W" 6?UJ 808* - 105 - ANNEX 3.8 Page 1 of 7 People's Republic of China TELECOMMUNICATIONS PROJECT JIANGSU PROV!NCE 1. Jiangsu province bridges the Yangtze River to its mouth at Shanghai, where it opens onto the East China Sea and the coastal area to the Yellow Sea. Adjacent provinces and municipalities include Shandong, Anhui, Zhejiang, and Shanghai. Its capital, Nanjing ("south capital" of China several times), is some 900 km southeast of Beijing, on the south bank of the Yangtze River. 2. The province has an area of 102,600 sq km and a population of 67,420,000 people (density of 657 people/sq km) in 1992, projected to grow to over 73,000,000 people by 2000. -t is divided into 11 districts subdivided into 64 counties. The districts aiong the Yangtze River are open to foreign investment and have been establishing development zones for joint venture enterprise expansion. Nanjing is ChinaIs biggest inland port, deeply integrated with the economic development of the Yangtze Valley regions in the provinces of Annui, Jiangxi, Hubei, and Hunan. 3. The main economic activities are in agriculture and light industry: (a) rice; (b) fish; (c) mechanical, chemical and electrical products. Its proximity to Shanghai and its location on the Yangtze River are stimulating tourism in the region. 4. The Jiangsu P&T Administration is organized around 84 operating units: (a) telecommunications units in 11 districts and 64 counties; (b) a postal unit, a stamp company, and a postal deposit bureau; kc) an industry company and an engineering companv; (d) a rural telephone company; (e) a material supply company; (f) a long-distance operation; (g) directory companv; and (h) a newspaper office. It also administers 3 schools, a research institute, a design institute, a hotel, and operates housing units for employees. 5. The telephone network in 1992 was comprised of 151 local exchanges with 938,786 urban lines, and 575,081 rural lines (with about 40% of the urban lines in the four cities of Nanjing, Changzhou, Wuxi, and Suzhou) for a telephone density of 0.88 per hundred population; and 81 long distance exchanges with 26,100 toll circuits. The 8th Five Year Plan (1991-1995) provides for growth of over 1,000,000 main lines, 900,000 rural lines, and around 44,000 long distance circuits. At the end of the 9th Five Year Plan period (1996-2000) the local exchange network is expected to exceed 6,825,000 lines, for a telephone density approaching 8.04%, and 150,000 toll circuits. 6. Working lines grew at 34% annually in the period 1990 to 1994, with a continuing target trend of 20 to 28% annually through to 2000. Waiting applicant demand is projected to peak at 6% of existing customers in 1995, reducing rapidly to a PTA target in 1999 of meeting customer basic service - 106 -- ANNEX 3.8 Page 2 of 7 requirements (with continued economic expansion, and unidentified unmet current demand, especially for residence service, the Bank suggests that this may be an overly optimistic objective) - through a continuing heavy investment program. 7. The Bank loan would provide for 590,000 lines of main telephone network expansion in thirty offices in the eight municipal centers of Changzhou (and Jintan suburban area), Huaiyin, Nanjing, Suzhou, Wujin, Wuxi, Yancheng, and Yangzhou (and its suburbs of Jiangdu and Taixing). This is 25.7% of the total 1993 - 1997 expansion of 2,294,000 urban network lines in the province (3,191,000 local exchange lines including rural expansion). 8. Parallel investments in the 1993 - 1997 period in long distance circuits and exchanges, interexchange facilities, access network structures, buildings and ancillary equipment and works is expected to cost USS3,480 million equivalent of which the Bank investment project is US$170.5 million equivalent and the loan would be for US$79.9 million (including contingencies) or 2.3% of the total provincial program costs Peopic's Republic of Cbina TELECOMMUNICATIONS PROJECT Jiangsu Province Indicators Actual Taugets Indiators 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 LOCAL TELEPIIONE EXCIIANGES Installed Line Capacity ('0t0) 639 2 727 7 814 5 1.103 4 1.513 9 2,164 0 2.715 0 3,365.0 4,025 U 4.705 (\ Working Lines ('000) 392 4 455 5 527.0 656 S 904.4 1.3030 1,702.0 2,155.0 2,81S.0 3,570 0 Exchange Fill (%) 61.4 62 6 64.7 59.5 59.7 60 2 62.7 64.0 70 0 75 9 Lines with DDD ('(1)() 133 328 62.1 252 1 400.0 6000 8000 1,(00.0 1,200 0 1.5000 Telephone Densiry (%) - Total 0 65 0 76 0 88 0.96 132 1 90 2.47 3.03 3.97 5 03 Telephone Density (%) - Main Network (t) 1.57 1 91 2.30 3 02 3.26 4 51 5 91 7.36 9 73 12 04 DOMESTIC lD EXCIIANGES Number of Exchanges: Manual 68.0 68 0 68.0 68.0 68 0 68 0 68.0 68.0 68 0 68 0 Automatic: 11.0 11.0 14.0 31.0 400 53.0 63.0 63.0 63.0 680 o -Analog 3 0 2 0 1.0 -Digital 3.0 9 0 13.0 31(1 4(10( 58 0 68 0 68 0 68 0 68 0 Truitk Circuit Termination Capacity ((0X)) 11 4 14 5 189 33.9 580 81.8 95.3 106.3 116.3 1300 Junction Circuit Termination Capacity ('00l) 11.9 14 8 16.3 24.6 34 6 47.6 58 3 70.0 800 90 0 QIIAIITY OF SERVICE Call Completion Rate (%) - Iocal Calls 61.8 55.0 66.2 59.0 60.0 60.0 61 0 65.0 68 0 7 0 - LD Calls: 31.2 32.0 32.0 32.5 33 0 35 0 40.0 42.0 43.0 45.0 - Opetator Controlled 86.5 77.2 37.2 84.7 35.0 36 0 36.0 87.0 33.0 89 0 - DDD 16.4 19 4 26.5 25.0 25 0 25 0 26.0 27.0 23.0 30 0 - IDD 65.7 39.4 42.3 41.3 50.0 51.0 52.0 53.0 54.0 55.0 PRODUCTIVITY (') Stff/1,000 Workting Local Lines 73 61 51 39 26 14 11 9 7 6 FINANCIAI. (0) Teleph. Revcnue/Working Line tYuani) 1,150 1,178 1,347 1,659 1,871 1,779 1,771 1,866 1,845 1,836 Operating Cost/Working Line (Yuan) 738 S10 320 1,119 1,040 1,0S2 1,565 1.328 1,344 1,341 (C) Local Network (excluding rural) Oq Source: Jiangsu PTA - July 1993 ama~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ oa amu- aa UIN TIOUSA?JDS) LOCAL TELEPHONE NETWORK JIANGSU PROVINCE (IN THOUSANDS) LINES Telephone Lines Supply & Demand WAITING LIST 7,500 - 250 6.000 9,/ 200 INSTALLED / LINES/ WAITINGOAPPLICANTS GROMNG 15 TO 61A OF EXISfTING cot< X/ 3,000 ,9 ' // / -100 4.500 - 50 ISG~~~~~~~~~~~~~~~~~~~~OKN LINXE0 1980 1985 1990 1995 2 000 100% 97%: 94 95% lC0% SATISf IED EXPRXESSED t DEMAND EKMW54409Co - LOCAL TELEPHONE NETWORK JIANGSU PROVINCE Telephone Lines Supply to Subscribers 10,000 ANNUAL GROWTH 1997 - 2000 (20-'.I RATE ACTUAL 1 PROJECTION 5000 - / - 1994 1997 (28%) 21000 - 4 10~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~. 500 1980- 1986 101,.16 100- 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 TELEPHONE 0 3 0.5 0 B 3.0 8.6 DENSITY EK/WS4409d People's Republic ol Cbins TELECOMMUNICATIONS PROJECT LOCAL TELEP1ONE NETWORK - IlANGSIt PROVINCE Invesrnetn Program (Million Yuan) 1°93 1994 _ 1995 1 1996 1997 Total Components Local Forel n Toul| Local Forin ;Tta LocalFord n Total LocaFrei n Total L| al Fomign Total LocalI Fomei n Total ONGOING PROGRAM 3.020 4 550 6 3,571 0 2.99( 5 351 1 3,343 6 2.905 3 644 2 3,549 5 2.766 7 999 S 3,766 5 2.520 0 1,4500 3.970 0 14,202.9 3.997 6 I3.2W05 FBRD PROJECT 1. Local Teleph Excianges tl 110 0 0 (III '4 1 94.1 2 4 275 0 277 4 uu 27 4 27 4 00 U u) 0 t 24 396 6 399 0 2.OutsidtPlant 414 00 414 1H 2 00 I1S.2 405 00 405 307 00 307 00 00 00 293S 00 2938 3. Junction Network 0 0 0 0 0 0 19 6 0 0 19.6 11 0 0 0 11 0 2 4 0 0 2 4 0 0 0 0 0 0 32 9 0 0 32,9 4.PowerSupplyandA/C 00 00 00 212 00 21.2 106 37 143 3.5 00 3.5 00 0n 00 352 3.7 390 5.TestEquip.andOihers 00 00 00 60 00 6.0 91 1.0 101 02 00 02 0U0 0 00 153 10 163 6.Buiklings 250 0.0 250 129 010 129 13 7 00 33.1 07 00 07 00 00 00 52.3 00 523 7. Training: -Local 00 0.0 0u0 39J 0U n9 1 2 00 1 2 UUll o0 0 0 00 tIO 00 2 1 0( 2 1 0 -Abtoad 00 00 0.0 _ 0 000 00 0.0 3.0 3.0 00 00 _00 0.0 0_0 00 _ 00 30 _ 30 Base CostorPmject 664 00 664 241.7_ 94.1 335.9 83.4 232.7 373.3 375 27.4 65.0 00 00 0.0 43.1 4043 838.4 Contingencies I. Physical (s o6 01 l 66 24 2 4 7 28 9 e .8 14 1 23.0 3 8 1 4 5 1 00 00 U 0 43 4 20 2 63 6 2. Price (b) 110 0 0 rS0 51 1 19,0 70.1 25.6 73.3 103.9 14.0 9 3 23.3 0.0 0 0 0 0 98.7 107.1 205 8 Subtotal: 14 6 0.0 14 6 75 3 23.7 99.0 34.5 92.4 126.9 17.8 11.2 23.9 00 0.0 0 0 142.1 127.3 269 4 Total PmrectCost 810 00 810 317(1 1178 4348 1229 375.1 498.11 553 38.6 93.9 00 00 00 5762 531.6 1.107,8 TOTAL PROGRAM COST 3,101.4 550 6 3.652 0 3,307 5 471) 9 3.778 4 3,023.2 1,019.3 4,047 5 2,822 0 1,038 4 3,860.4 2,520.0 1,450.0 3,970.0 14,779 1 4,529.2 19.308 3 (a) Local Costs 10$ Foreign Costs: 5% (b) Bank Update as of July 1993: 10.9% in 1993. 7 5% in I)994, and 6 1% ilicre.llt Source: Jiangsu PTA - July 1993 ODD CA A-COSl TS l2*413S People's Republic of China TELECOMMUNICATIONS PROJECT LOCAL TELEPHONE NETWORK - JIANGSU PROVINCE Investment Pmgam (Million US Dollars) 1993 1994 __ 1995 1996 1997 Total Components Local Fori nl Total Local Fore,n |Total Local Formign I Total Local Formi n Total Local Forei n Total LocalI Formign Totai ONGOING PROGRAM 549 2 100 1 649 3 543 7 64 2 607 9 528 2 117 1 645 4 503 0 IRI 8 684 B 458 2 263 6 721 8 2.582 3 726 8 3,309 2 tBRD PROJECT I. Local Teleph. Excluanges 00 00 0 Ot 17 1 17 1 0 4 50 0 50 4 5 0 50 0 0 00) (U 0 U U4 72 1 72 5 2. Outside Plant 7.5 0.0 7 5 32 9 0 0 32.9 7 4 0 0 7 4 5 6 0 0 5 6 00 0 0 00 53 4 0 0 53 4 3.JunctionNetwork 00 0.0 00 3.6 00 36 2.0 00 20 04 00 04 0.0 00 00 60 00 60 4.PowerSupplyand A/C 00 0.0 00 3 8 01) 38 1 9 07 26 06 00 06 00 00 00 64 0.7 7 1 5.TestEquip.andOthers 00 0.0 0.0 II 00 1 1.7 02 1 8 00 00 00 00 00 00 28 02 30 6.Buildings 4.5 00 45 23 00 23 2.5 00 2.5 01 00 01 00 00 00 95 00 95 7. Training: H Local tO) O t (ttt ( 2 (tl It 2 0 2 0 0 (.2 tt I 0 00 0u I) tI 1) t 0 4 I) 04 4 -Abtoad 0.0 0.0 00 00 0U0 00 00 0.5 05 00 0.0 00 0.0 00 _ 00 00 05 05 Base Costof Projct _12.1 00 121 439 71 61.1 161 51.4 6.8 50 11.8 0.0 0.0 0.0 78.9 73.5 1524 Contingencies I. Physical (a) 1 2 UOt I 2 44 U9 5.3 1 6 2.6 4 2 U 7 02 09 00 00 t 0 79 3.7 11 6 2. Prce(b) 0.2 00 0.2 1 2 0.5 1.7 0.9 27 3.6 06 04 1.1 0 0 00 00 2.9 36 6.5 Subtotal: 1.4 00 14 5.6 1 3 6.9 2 5 5.3 7.7 1.3 0.7 2 0 00 00 00 10 8 7 3 is 0 Total Project Cost 13.5 0.0 13.5 496 184 68.0 18.6 56.7 75.2 8 1 5 7 13.8 00 00 00 89.7 808 170.5 TOTAL PROGRAM COST 562.6 100.1 662.7 593.3 826 675.9 546.8 173.8 720.6 511 2 187 5 698.6 458.2 263.6 721.8 2,672.1 8076 3,479.7 (a) Local Costs: 10% Foreign Costs: 5% (b) Bank update as of July 1993: 1.3% in 1993. 1.2% in 1994, 2.4% in 1995, 3 2 % in 1996. and] 3 3% in 1997 Exchange Rate for base cost: US$S 10 = Yuan 5.5 Source: Iiangsu PTA - July 1993 no 04%*,8M A COST mS 3016163 People's Republic of Cbins TELECOMMUNICATIONS PROJECT Project Cost by Year (Yuan Million) 1992 1993 1994 1995 _ __ 1996 1997 Tottl InvestaweoCow LI Fl T L F T Fl TL LI Fl T| LI Fl T L F T LocalIFormitn | Total Equripe and Serviees Cables 0 0 0.0 0.0 00 0 0 00 1 0 0 253 3 2513 0 0 28 0 28 0 0 0 0 0 00 0o 0 0o0 0 0 00 281 3 281 3 Transmission 0.0 00 00 00 0.0 00 0.0 3184 3184 0.0 347 347 0.0 00 00 00 00 00 00 353.0 353.0 Telepbone Exchanges 00 0o 0 0 0 0 0 0o 0 0o 0 00 169 5 169 5 0 0 471 3 471 8 00 43.2 43.2 00 0.0 00 00 684.5 684.5 Toolsendlnsmrnments 00 0 0 00 00 00 o0 65 8.7 152 96 10 106 34 00 34 00 00 00 (95 97 292 Power,AIC,Misc. 00 00 0.0 00 00 011 447 00 44.7 256 3,7 294 125 00 12.5 00 00 0.0 328 37 86.6 Construction/lnstallaion Cables ( 0 0.0 0.0 0 0 0 0 010 267 0 0 0 267 0 93.9 U 0 93 9 0 0 0 0 0.0 0 0 0 0 0 0 360 9 0 0 360 9 Transmission Equipmien 0 0 0.0 0 .0 0 0.0 00 44.9 0.0 44.9 67 0 0 0 67.0 0 0 0 0 0.0 0 0 0 0 0 0 1119 0 0 111.9 TelephoneExchanges 0.0 0.0 0.0 0 0 00 00 6.8 00 6 8 13.6 0.0 18 6 00 00 0.0 00 00 00 25.4 00 25.4 OutsidePlant 00 00 0.0 41.4 00 41.4 273.3 00 273.3 211.0 00 2110 120 1 00 120.1 400 00 400 685 8 00 685.8 H Buildings/SitePrepara'i.n 00 0.0 00 250 00 250 81.5 0.0 81 5 40.3 00 403 67 00 6.7 00 00 0.0 1540 00 1540 H Miscellaneous 2.9 0.0 2.9 5.8 0.0 5 8 52.1 0.0 52.1 46.3 0.0 46.3 0.0 0.0 0.0 0 0 0.0 0.0 107.2 0.0 107.2 Technical Assistance Training. 00 00 00 00 0.0 00 0.0 1.1 1.1 00 06 06 0.0 00 0.0 00 00 0.0 0.0 1.7 1.7 Consulmncy 0 0 0.0 0.0 0.0 0.0 0 0 0.0 5.5 5.5 0.0 1.7 1.7 0.0 0 0 0.0 0.0 0 0 0 0 0.0 7.2 7.2 Total BaneCost 29 0.0 2.9 72.2 00 722 776.7 756.4 1.533.1 512.8 541.5 1.0543 142.7 43.2 185.9 40.0 0.0 40.0 1,547.4 1,341.1 2.888.5 Physical Contingencies 04 00 04 75 00 75 996 37.5 137.1 62.1 27.0 89.1 14.3 2.2 16.4 40 00 40 187.9 66.6 2545 Price Contingencies 0 0 0.0 0.0 17 0.0 8.7 161.4 151.3 319.7 151.6 138.3 289.9 53.3 15.4 63.7 13.5 0 0 18.5 400.5 305.0 705.5 TOTALPROJECTCOST 34 00 34 884 010 88.4 1,0446 945.2 1,989.9 726.5 7067 1.4332 2103 60.8 271.1 62.5 00 62.5 2.1358 1.712.7 3,848.5 L: Local Currency F: Foreign Currency T: Total _e ,m _., *. . .s Peoplc's Republic of Cbina TELECOMMUNICATIONS PROJECT proicci Cosi by Year (lJSS Millinn) Intc Co tst |__ 19,°2 | 1993 __ 1_ 994 -- 1995 | 19 1999979| Total InvesufCosss 1 -Ll Fl Ti I- F T Li Ft -T1 Li Fl Ti LI F T Li F T Local IFomign Toitl- Equipment snd Servies Cables 1)0 0u0 1)0 110 0U0 I0\ 00 46 1 46 1 00 5 1 5 I 00 00 00 00 00 00 00 51.2 512 Transmission 00 00 00 000 00 0Uf 00 57.9 579 00 63 63 00 00 0.0 00 00 00 00 64.2 642 TelephoneExchanges 00 00 00 00 00 00 00 30P 303 00 853 853 00 79 7.9 00 00 00 00 1245 1245 Tools &Wlnstruents 00 00 00 00 00 00 12 16 28 17 02 19 06 00 06 000 00 00 35 18 53 Power.A/C.Misc. 00 00 00 00 00 1)0 81 00 81 47 07 53 23 00 23 00 00 00 151 0.7 15.7 Constiucoon/lnstallaIion Cables 0I0 00 000 0 0U0 t1) 48 5 00t 48 5 17.1 00l 17 1 00 00 0I0 0U0 00 00 65 6 00 65 6 TransmissionEquipmcen 00 00 0.0 00 00 00 82 00 8.2 122 00 122 00 00 0.0 00 00 00 203 00 203 TekpboaeEatcbangcs . 00 00 0.0 0.0 00 00 1.2 00 1.2 34 00 34 0 0 00 00 00 00 00 46 00 46 1 OutsidePlant 00 00 0.0 7.5 00 75 49 7 0.0 49.7 3314 00 38 4 21 8 00 218 7T3 00 7.3 124 7 00 124 7 DuildingSi/S; Preparation 00 00 00 45 00 4 5 141 8 7.4 0.0 7.4 1 2 00 12 0,0 0.0 00 28 0 00 230 H Miscellaneous 05 00 0.5 1.1 00 1.1 9.5 00 9.5 8.4 0.0 84 00 0.0 0.0 0.0 0.0 0.0 19.5 00 19.5 > Techanil AssistanceI Training 00 00 00 00 0U1) o 0.0 02 0.2 00 0 1 I 00 00 0.0 0.0 00 00 00 03 03 Consatancy 0.0 0.0 0.0 0.0 0.0 00 0.0 1.0 1.0 0.0 0.3 0.3 0.0 00 0.0 00 00 00 00 1.3 1.3 ToaIBase Cos 0.5 0.0 0.5 13.1 0.0 131 141,2 137.5 278.7 93.2 98.4 191.7 26.0 7.9 33.8 7.3 0.0 7.3 281.3 243.8 525.2 Ph,ysicalContinge its 0.1 0.0 0.1 1.4 0.0 1 4 18.1 6.3 24.9 11.3 4.9 162 2.6 0.4 3.0 0.7 0.0 0.7 34.2 12.1 46.3 PriceConminge=ik 01 00 0.1 0.2 0.0 02 40 3.6 7.6 5.2 5.1 10.3 2.4 0.7 31 1.0 0.0 1.0 12.S 9.4 22.2 TOTALPROJECTCOST 0.7 00 0.7 14.7 00 147 1633 148.0 311.3 109.7 108.5 218.2 309 8.9 399 90 0.0 90 3283 265.4 5937 L: Local Currency F: Foreign Currency T: Total tout, gs ix gvu alautWNN aa en j so M E[661 Ainr - jldW :2inos - t1 u p6Iuialdwoo )!^AI1V (3) ...... ...... ...... ..... ... ...... ...... ...... .. ...... ...... ...... .... .. . _,. ...... ...... ..... .. .. ..... ..... ............................................................... .... ..... ...... ...... ...... ...... ...... ...... ...... ...... ...... ... . ... ... ...... ...... ...... ...... . . ...... ...... ..... .................................... ............................................. . . . . . . . . . . . . . . . . . . . . . . ...... ...... ...... ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ......I......... ...... ...... ...... ....... ...... ........................ ....................................................................... ........ ...... ...... ... ..... ...... ...... ...... ...... ...... ...... ...... ...... ...... .. .... ... .... ...... .... ...... ...... ............................................................................................................ ...... ...... ...... ...... ...... ...... ...... ..... ...... ...... ...... ...... ...... .... ..... ...... ...... ...... ...... ...... ...I. ...... ............................................... . ..... . ................ ......... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... ...... .. .. .... .... .... ...... ...... ...... ......I.................. ............................................................................... ...... ...... ...... ...... ...... ...... ...... ...... ... ..... ...... ...... ...... ...... ...... ....... ...... ......... ............... ......................................I........... ............................. ........ .... . ........ ... 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J AIIAIIJV L661 9661 . ...... . alqelawu,L iuauodwo3 3aumipx3 auolldalIL .L.33fOHd SNOLLV3INfMU4J03313L euuqj Jo 311qndaJ s,aldoaj - 117 - ANNEX 3.11 Page I of 4 People's Republic of China TELECOMMUNICA7IONS PROJECT Optical Fiber Cables Beiiinc-Lanzhou Fuzhou/Hanqzhou-Chenadu Quantities Quantities Cable Types Unit Class I Class II Class I Class II Duct cable 24 fibers km 91 56 114 375 30 fibers km - - 20 528 Direct buried cable (Type I) 24 fibers km 1,046 760 622 2,156 NMSM 24 fibers km - - 48 168 30 fibers km - - 87 320 NMSM 30 fibers km - - 8 24 Direct buried cable (Type II) 24 fibers km - - 30 117 30 fibers km - - - 8 Direct buried cable (Type III) 24 fibers km 54 21 7 55 30 fibers km - - - 4 Direct buried cable (Type IV) 24 fibers km 19 8 - 9 30 fibers km - - - 3 Anti-termite cable 24 fibers km - - 5 SS 30 fibers km - - - 20 Flame-retardant cable 24 km 2 - - 19 30 km - - 6 Emergency cable and accessories set 13 50 Tools for fiber and cable joining set l8 50 LEGEND: Quantities - Class - refers to attenuation coefficient requirements Cable - duct - direct buried (Type x)) refers to cable protection - anti-termite wrapping standards - flame-retardant } NMSM - refers to non-metallic strength member required - 118 - ANNEX 3.11 Page 2 of 4 People's Republic of China TELECOMMUNICATIONS PROJECT Optical Fiber Cables Beiiing-Lanzhou FUzhou/Har=zhpu Types Unit Quantities Quantities Jointing closures For 24 fiber cables set 1,003 2,700 For 30 fiber cables set 725 Special tools for closure assembly set 26 56 Instruments OTDR set 12 28 Optical fiber fusing splices set 12 28 Stabilized light source set 24 16 Optical power meter set 24 16 Digital transmission analyzer set 6 10 lMbit/s code error tester set 6 17 500 MHz digitizing oscilloscope set 12 10 Optical variable attenuator set 12 10 Optical handy multimeter set 12 83 Transmission EauiDment 14OMbs optical terminal equipment system 145 509 140Mb/s optical repeater 2-way system 279 1,055 Line protective switching equipment set 10 18 14OMbit/s multiplexer system 129 491 34Mbit/s multiplexer system 230 796 8Mbit/s multiplexer system 548 2,093 PCM multiplexer system 12 48 Digital distributing frame (DDF) system 5,200 15,800 Optical distributing frame (ODF) rack 94 218 Central-supervisory equipment set 2 3 Subcentral-supervisory equipment set 4 10 Local-supervisory equipment set 8 90 Order wire equipment (OW) set 105 243 Cables and wires Pigtail (8 meters/piece) piece 270 6,780 Patchcord (8 meters/piece) piece 118 4,007 Coaxial cable for 140 and 34 Mb/s meter 30,000 117,500 Coaxial cable for 8 and 2 Mb/s meter 73,000 62,300 Power grounding wire meter 600 715 Rack power supply wire meter 2,300 19,090 Supervisory system connecting wire meter 8,000 60,350 People's *epslbic of China TELECOPWIJICATIOUS PROJECT LOCAL AM KAIM TELEPNtE KEIUIRK ENPANSIE Exchanse Line CpacIty AdDed - Other Pro ects * d4 t iJ n arp4 , r s Dec '96 Province Area iI~ a*fjJ~ AIuI* Dee '92 po*Wt t Existing 1993 1995 1996 1994 1995 1996 Total LIeonimn 1,006,650 493,350 330,000 500,000 530,000 170,000 3,030,000 (Lot 1) DanrdSrg 41,000 49,000 20,000 70,000 180,000 41-43 KOMoo 31-33 $0 00D Jinzhou 42,000 38,000 50,000 130,000 H C^ox n - 39 10.000 41-42 20,000 26-27 2.0 TIrigkou 34,000 20.000 50,000 104,000 Ch"nllhe - 21-22,41-43 14,000 .0 414,000 25-26 2,500 (2,500) 20,000 20,000 Nelleon-g 671,066 311,000 *38,000 300,000 300,000 160,000 2.260,000 (Lot 2) Jia ini 22.000 24,000 40,000 54,000 50,000 190,000 68 10.000 Nkxani Iang 21,000 14,000 40,000 47,000 50.000 172,000 Teping - 61-63 0o0oo0 42-43 201000 aqiihar 36,000 25,000 50,000 65,000 60,000 236,000 futIaerjl 87-89 30,000 61-63 30o000 .~~~~~~~~~~~~. Echanqe Line CeDcIty Added - Other Pro lects 404s IioiId Iw*l ,Io4ct Dec '96 Province Area World 8u !rol"; lIhe Dec '92 CO* pt t Existing 1993 1994 1995 1996 1994 1995 1996 total 1,513,867 651.133 650,000 210.000 360,000 270,000 320,000 4,025,000 Htmlin 6 16,000 8,000 20,000 16,000 000 100,000 I WO-4: No ~~so yanchew Jlita;;?69< 36 14,000 12,000 14,000 15,000 0,000 75,000 jinjt ... 36 0P ManjIngr4 167,000 183,000 250,000 30,000 24,000 170,000 654,000 DaxIgOI4 40-41,45 64 40,000 30,000 A°000° UhtqteewjIe'< 230 p0,000 ~0. 000 210 loudlj i- iT. :- 235 20.000 Ttibfl~l~ . ......-30-32.63 40,000 ,000 zux I 94,000 31,000 55,000 73 000 42,000 50,000 345,000 Ch e )* ss 20-22 20 000 10 000 lo,800 47 200 568 200071,00 80 H ~~~~~~~~26 so S O Xllu A2gg- 't 05620W YTmzhou 33,000 10,000 20,000 4,000 20,000 37,000 124,000 j~j~'~4 25 lOaC25 C˘ @ ; ~~~0-81 1 ?17 Oo Sanyp 36 10, odO 3 J Imagka 9,000 12,000 5,000 10,000 36,000 Des o pt 2n82 1o,000 laixlng . N> - - , -; 6,000 4,000 10,000 20,000 tOL*fl ..,' .; 4 , 71 Changzhou 43,000 60,000 22,000 30,000 30,Q 185,000 OerqhiSnw : ~86 O0,00Q J intan 5,000 5,000 10,000 20,000 Hua~sp :0 85 Q10,000 WijIn 6,700 21,800 33,000 18,500 20,000 100,000 Panjio 54 10,000 ptt,^sg 24 10,000 SuzIhou 140,000 49,000 51 000 84,000 I3 000 497,000 Chelgt* ;; lG 50-59 20 000 4,W0 3,000 10,000 40 57-9o 8,000 10 000 7 000 10o000 Lftmq 77-70 11,000 10,000 4,000 21-27 35,000 ~j - 121 - Annex 3.12 People's Republic of China TELECOMMUNICATIONS PROJECT Schedule of Disbursements (USS Million) Cumulative Standard IBRD FY and Disbursemient Tbroujh- Disbursement Semester Ending in Semester % Semester Profile (% M* 1994 December31, 1993 0.0 0.0 0.0 0.0 June30, 1994 5.8 2.3 1.8 6.0 1995 December 3 1, 1994 86.5 36.9 92.3 14.0 June 30, 1995 83.7 70.4 176.0 18.0 19g6 December31, 1995 58.7 93.9 234.7 34.0 June 30, 1996 6.0 96.3 240.7 46.0 1997 December 31, 1996 5.3 98.4 246.0 58.0 June 30, 1997 2.0 99.2 248.0 74.0 1998 December 31, 1997 0.5 99.4 248.5 82.0 June 30, 1998 0.5 99.6 249.0 90.0 1999 December 31, 1998 1.0 100.0 250.0 100.0 (*) Standard disbursement profile for telecommunications projects in East Asia and Pacific Region, as issued July 1993 ooCmAA XL5 111IM3 - 123 - ANNEX 3.13 Page 1 of 2 People's Republic of China TELECOMMUNICATIONS PROJECT ENVIRONMlENTAL PROTECTION A. Long Distance Fiber Optic Cables Any adverse impact on the environment will take place mainly during the construction period and will disappear when the project is completed. The impact on the environment will be of short duration and will be along cable routes where trenches are dug (manually or mechanically) for laying of the cables. Installation of the transmission equipment will have a negligible impact. The Design Institute of MPT has prepared an assessment of the environmental risks for the two cable routes and has drawn the following conclusions and recommendations: (a) The cables cross over more crop areas (mostly paddy fields) than natural vegetation areas. Thus the construction period should be chosen appropriately, and trenches should be dug after the harvest season. Special attention must be paid to preserve land resources, to occupy crop areas as little as possible, and to avoid forests, fruit gardens, tea plantations, nurseries and tree farms. (b) Hanging cable across bridges is the preferred method to cross rivers. When underwater cable is required, the construction method should limit any disturbance to the river bed or the water quality, and mechanical (faster) digging will the preferred method. (c) The route should avoid unstable areas such as mining and water networks. (d) The route should avoid buildings and other installations above ground and avoid crossing any kind of underground installations. (e) The cable routes, as designed, should go along roads and highways, bypassing villages, historic relics, cemeteries and other sensitive areas. Since it is not possible to know in advance the location of underground relics, appropriate methods and instructions should be followed to protect any discovery. (f) Damage to soil structure should be avoided during digging and backfilling. Plants on the surface should be kept alive and wherever possible new trees or flowers should be planted to compensate for the loss of vegetation and land occupation. - 124 - ANNEX 3.13 Page 2 of 2 (g) Where no underground ducts exist for entering small cities, the cables should preferably be hung from poles to avoid excavation works. (h) Noise and dust should be reduced as much as possible during digging and construction of equipment rooms. The working program should respect people's rest and sleep periods around construction sites. B. Tranmmaision Equipment and Local Exchanges The installation of stations along the cable routes and of the new telephone exchanges will not have a significant impact on the environment. Some of the equipment rooms are already available and others will be constructed following standard practices to avoid noise, dust and damage to neighboring property. For local networks, standard construction practices will prevent ground erosion while digging trenches and minimize disruption of vehicular and pedestrian traffic. C. Environment Protection Management In respect of the National Environmental Protection Agency (NEPA) law and the NEPA administrative practice, a department of MPT has been issued the "Environmental Impact Assessment Certificate" No. 0641, Class A, which permits that department to act on behalf of NEPA on control for telecommunications projects with minor environmental impact. The Anti-Earthquake and Environmental Protection (AEEP) Office of MPT is the department responsible for the environmental control of the project. On the basis of field visits along the routes and to the sites as identified in the engineering feasibility studies, and discussions with construction organizations as to the appropriate methods for erection and installation activities, an Evaluation Report on the Influence to Environment was prepared. Any significant negative environmental concerns were reviewed with the appropriate Design Institute and route or site changes were instituted. Construction specification are being prepared to include environmental matters and will submitted to the designated regional bureau of the China National Telecommunications Construction Company assigned the contract. The Quality Control Department of MPT and local P&Ts will provide actual supervision of construction at the sites, and local P&Ts will submit acceptance reports on completion of the construction activity within their territory. - 125 - Annex 3.14 Page 1 of 2 People's Republic of China TELECOMMUNICAT.ONS PROJECT Performance Indicators in Domestic Long Distance Service LD Exchange Capacity (a) LD Circuits in Service (b) Region 1993 1995 1997 1993 1995 1997 PROVINCES Fujian 80.0 97.0 115.0 26.0 34.0 46.0 Gansu 8.6 14.0 19.0 2.8 4.9 7.6 Guizhou 8.0 15.0 20.0 2.6 5.3 8.0 Hebei 31.0 66.0 96.0 10.1 23.1 38.4 Hunan 33.6 55.0 82.0 10.9 19.3 32.8 Jiangxi 24.0 50.0 73.0 7.8 17.5 29.2 Liaoning 49.0 100.0 145.0 15.9 35.0 58.0 Sichuan 25.5 43.0 62.0 8.3 15.1 24.8 Zhejiang 50.0 100.0 144.0 16.3 35.0 57.6 AUTONOMOUS REGIONS Inner Mongolia 10.2 16.0 23.0 3.3 5.6 9.2 Ningxia 3.1 3.1 5.0 1.0 1.1 2.0 Figures as of the end of the year (a) Circuit terminations ('000) for local junctions and LD trunks (automatic and manual). (b) Automatic and manual LD circuits ('000): Calculated as a percent of a half of the total number of terminations 1993: 65% - 1995: 70% - 1997: 80% Source: MPT - July 1993 Do0 cUw-u& awowXLS 924IA3 Peopk's Republic of Cbina TELECOMMUNICATIONS PROJECT Target Performanc Indicators for lleilongjiang, Jiangsu and Liaoning IIEILONGJIANG ___ JIANGSU LIAONING Indicators 1993 1994 1995 1996 1997 1993 1994 1995 1996 1997 1993 1994 1995 1996 1997 LOCAL TELEPIIONE EXCIIANGES Installed Line Capacity (' (m)M 982 0 1.4210 11 11 0 2.260 0 2.8401 1) 2.164 1 2.715 11 3.3t.5 11 4.1125 0 4.705 0 1.5IM) ,0 2,0(XI 0 2.50Mx 0 3,030 0 3.590 0 WorkingLimns(000) 770.0 1,150.0 1,4900 1,9000 2,393.0 1,3030 1,7020 2.1S50 2.18 0 3.5700 9500 1.3000 1,6300 2,1220 2.5S60 ExchangeFill(%) 784 310 S28 84.1 843 602 627 640 700 759 63.3 650 652 700 720 IOMESTIC LD EXCIIANGES Trnk Ciruit Terminaslon Capacliy (COMJ) 38 3 63 4 75 6 80.0 90 0 81.8 95.s 106h8 116.8 130.0 45 0 65 0 100.0 120.0 150.0 Juncdon Circuit Ternination Capacity ('000) 40.1 65.6 85.6 86.0 100.0 47.6 58.8 70 0 80.0 90.0 40 0 50.0 56.8 62 0 75.0 a' QIJAI-ITY OF SERVICE Local Call Conpiction Raic ( % Local Calls 58 5 58 5 58,7 58.7 60,0 60 0 61.0 65 0 68.0 70.0 61 0 61.0 61,0 61.0 61.0 - LD Calls 4S30 48.5 48 8 48 9 49.0 35 0 40 0 42 0 43.0 45.0 41.0 45.0 45.0 45.0 45.0 PRODUCTIVITY (e) Stffl/1,000WortingLocalLincs 24 15 13 10 8 14 11 9 7 6 20 15 12 9 6 FINANCIAL (*) Teleph. Revenue/Winking Line (Yuan) 1.160 1,0174 1,0h8 1.130 1.201 1,779 1,771 1,866 1,845 1,836 2.161 2.297 2.480 2,428 2,365 Operating Cost/Working Line (Yuan) 1,255 1,567 1,286 1,306 1.327 1.082 1,565 1.328 1,344 1.341 1,190 1.539 1,315 1,32S 1.335 (M Local network (excludling rurAil Soufce: Heilongjiang. Jsi.ngsu. IVistming - July 1993 0 OM &AA C A 1, A19"24I3 - 127 - ANNEX 3.15 Page 1 of 4 People's Republic of China TELECOMMUNICATIONS PROJECT PROGRESS REPORTS A. Reform Components I1. By December 1995, MPT will prepare and furnish to the Bank an assessment of the pilot implementation of the new accounting system in two provinces, and a plan for extending the system to other provinces. 2. By June 30, 1995, MPT will complete the tariff study and present to the Bank a plan for implementing tariff adjustments. 3. MPT will also furnish to the Bank copy of the progress reports and specific studies that the consultants will prepare in relation to the project. B. Investment Components 1. MPT's Import Planning Division will prepare quarterly progress reports on the two investment components (long distance cables and local switching) in a form acceptable to the Bank, and will submit them to the Bank within one month of the end of the quarter. The general contents of the quarterly reports will be the following: (a) brief description of the major activities executed during the period: contracts signed, equipment and materials received, construction, installation, testing, commissioning, etc.; (b) description of difficulties encountered that can delay the project imolementation or increase its cost, and of the measures proposed or adopted to solve those difficulties; (c) revision of detailed timetables for the Bank financed components and of more general timetables for other goods and services associated to those components (local cable networks, long distance exchanges, buildings, power plant, etc.; (d) disbursements during the period and cumulative disbursement; (e) revised list of Bank financed (or cofinanced) contracts, with indication of procurement method, approval dates, signing date, contractor, price, and disbursement category; (f) performance indicators; (g) training activities relevant to the investment components; - 128 - ANNEX 3.15 Page 2 of 4 C. Annual Reports 1. Within six months after the end of the financial year, audited statements will be submitted annually to the Bank as follows: (a) project accounts from MPT for the two LD cable systems, and from the PTAs of Heilongjiang, Liaoning and Jiangsu, for the provincial switching networks, with separate opinions on any SOEs, and (b) financial statements from each of the three PTAs involved in the project's switching expansion component. - 129 - ANNEX 3.15 Page 3 of 4 People's Republic of China TELECOMMUNICATIONS PROJECT BANK SUPERVISION INPUT INTO KEY ACTIVITIES Approximate Dates Expected Skill Staff Input (month/year) Activity Requirements (staff-weeks) 1-2/94 Supervision Mission Finances 6.0 (Project Launch Engineering, Workshop). Procurement. Disbursement 3-4/94 Review Bid Evaluation Engineering 1.0 and Contracts for LD Systems. 6-7/94 Supervision Mission Policy, law, and 8.0 Review status of regulation. accounting reforms, Engineering tariff study and Finances progress to develop- ing telecommunica- tions law and regula- tions. Review plans for implementation of works associated to LD systems. Review annual financial statements. 9-11/94 Review bid evaluation Engineering 1.0 and contracts for switching systems. 10-11/94 Supervision Mission Engineering 6.0 Review progress in Finances works associated to the investment compo- nents, accounting and tariffs. - 130 - ANNEX 3.15 Page 4 of 4 Approximate Dates Expected Skill Staff Input (month/year) Activity Requirements (staff-weeks) 4-5/95 Supervision Mission Policy, law, 10.0 Review installation and regulation. of LD systems, plans Engineering. for installation of Finances switching systems, training programs, financial situation, progress to developing law and regulation, and studies on tariffs and accounting. 9-11/95 Supervision Mission Engineering, 5.0 Review progress of Finances. installation, outside plant construction, and acceptance testing. Review financial situation. 4-5/96 Supervision Mission Policy, law, and 5.0 Review progress of regulation. installation of Engineering, switching systems and Finances construction of outside plant. Review financial situation. Review progress on sector reform. 9-11/96 Supervision Mission Engineering 5.0 Review of progress Finances in subscriber connections and financial situation. 1997 Supervision Missions Policy, law and 10.0 Two missions to re- regulation. view project imple- Engineering mentation and start Finances preparing PCR. 1998 Supervision Nission Engineering 5.0 Finalize review of Finances project implementation. - -131 - ANNEX 4.1 Page 1 of 6 People's Republic of China TELECOMMUNICATIONS PROJECT HIISTORICAL FINANCIAL STATEMENTS 1986-1992 CHINA - HEILONGJIANG PROVINCE P & T INCOME STATEMENT (thousands of Yuan) year cnded 31 Dec. 19S6 1987 1988 1989 1990 1991 1992 ---------_w==s=-----------================-=s==-=ssss==== I - REVENUES 72 LoCal 37,344 43,524 54,244 67,853 87,000 145,020 158,265 Tnunk calls 45,692 57,S89 88,758 107,942 135.870 150.970 218.320 InterationaI calls 1,474 3,122 4,182 4,554 17,790 31,570 69,614 Intern. cal adjustment Total Teklphone 84.510 104,535 147.184 180,349 240.660 327,560 446.199 Domestioc Telegrph 19,125 23,429 31,037 31,583 27.370 28.390 Domestic Telex 0 1,623 2.191 2,695 2,570 3.280 Inernational messages 397 383 425 598 1,070 1,180 Intern. mesages adjustment Total Telegraph and Telex 19,522 25,440 33,653 34,876 31,010 32.850 37.330 Pou 51,026 61,912 84,190 99,424 127,100 173,150 209,170 =======-^"==== -------=--------------------------------- Gros Oper. Rev. 155.058 191.887 265.027 314,649 398.770 533.560 692.699 % service charge 4,939 6,067 8,246 9,805 12.996 17,378 20,781 Net Oper. Rev. (A) 150,119 185,820 256.781 304,844 385,774 516,182 671,918 Net Non - Oper. revenue (8,816) (16,818) (17,483) (16,886) (21.806) (25.133) 0 TOTAL REVENUE (C) 141,303 169,002 239.298 287,958 363,968 491,049 671,918 ------------====w==e== = w s== -----------a=wa==a=m=m= = a== 11 - EXPENSES 72,400 Salaries 33,050 40,912 54,181 62,413 72,424 92.563 140,910 Mngrial Staff Salaries 7,735 8,847 7,987 10,410 14,819 18.683 19,630 O & M Expenses 34,809 41.012 61,919 77.136 101,960 154.476 176.026 Admin.itration 15,181 17,238 26,726 37,144 37,759 53.645 72,131 Depreciaion 30.980 34,894 45,551 62,797 75.271 110.964 181.713 Administratve Depreciation 8,065 9,094 6,552 8.732 10,322 16.825 22.623 Ncw Tech Dev Fund 3.152 4,000 5,670 0 8,300 11.332 13,8S4 TOTAL OPER. EXPENSES 132,972 155.997 208.586 258,632 320.855 458.488 626.887 Net Oper. Rev (A - D) 17,147 29,823 48,195 46,212 64,919 57,694 45,031 Intemet paymenu (E) Differnce Revenue- Expense 8,331 13,005 30.712 29,326 43,113 32,561 45,031 a,.. ----------- a --------- ,,,- ---... ,_S.==ssw-*------ - 132 - ANNEX 4.1 Page 2 of 6 CHINA - HEILONGJIANG PROVINCE P & T SOURCES ANn A4PPLICATIONS OF FUNDS (thousands of Yuan) year ended 31 Dec. 1986 1987 1988 1989 1990 1991 1992 -----------U-R-C -E-`-- ----- --- ------- - - - ----- I - SOURCES Diflercnee Revenue- Expenses 8,331 13.005 30,712 29,326 43,113 32,561 45,031 les: To/(From) MPTr (11,300) (12.739) (17,862) (16,385) (10.592) (31,965) (38.359) Net Alloosld Profit 19,631 25.744 48.574 45,711 53,705 64,526 83.390 less: Lncomc tax 4,613 5.755 11,795 13,430 3,541 3,131 8,339 After Tax Net Alloc. Profit 15.018 19,989 36.779 32,281 50,164 61,395 75,051 Dividends to MPT 8.,59 3.275 5,783 9.142 (2,355) (15,940) 15,010 Dividends as % of A T N A P 58.99% 16.38% 15.72% 28.32% -4.69% -25.96% Profit for Distribution 6,159 16,714 30.996 23,139 52,519 77.335 60.041 'Production & Expansion Fund 3.080 8,357 15.498 11570 26.260 38.668 30.020 Welfac 20% 1,232 3,343 6.199 4,628 10,504 15,467 30,020 Bonus 30% 1.848 5.014 9,299 6.942 15,756 23.201 Depreciation + Admin Dcprec. 39.045 43,988 52.103 71,529 85,593 127,789 204,336 les: 70% LD Deprec. to MPT 1,870 1,543 3.762 3,170 8,550 8,770 12,770 • Nct Dcpreciation 37,175 42,44S 48,341 68,359 77,043 119,019 191,566 Surmharges 53,924 • New Technology Devciop. Fund 2.206 2.800 3,969 0 5,810 7.932 13,854 • Connection Fees 32,369 44,851 64,356 69,243 98,53 127.285 256.U4S * DifT - borrowsng+Statc Funds 5.033 (3,483) 17.525 16.210 44,072 151,994 359,097 TOTAL SOURCES 79,863 94.970 149,689 165.381 251,721 444.898 905,309 11 - APPLICAnONS Increare in Fixed Oper. Asset 53,524 79,842 106,960 145.718 227,782 280.813 905,309 Incnase in W. in Progress 26.339 15,128 42,729 19,663 23,939 164.085 0 Invesunent (Z) 79,863 94,970 149,689 165.381 251.71 I 444,898 905,309 Changes in Working Capital TOTAL APPLICATIONS 79,863 94,970 149,689 165.381 251,721 444.898 905,309 a - = - _-- _------- = _= = _g= == = = = = = == --- = g=s_s= = = = = == 3= g= = =* =S W PERFORMANCE INDICATORS Int Cash Gen.as * of Invest (Z) sum['-{Brrw+SUJe Fund))/Z 93.7% 103.7% 88.3 % 90.2% 82.5% 65.8% 60.3% connecaon fees 4,246 1,252 6,944 1,945 2,055 2.500 - 133 - ANNEX 4.1 Page 3 of 6 CHINA - LIAONING PROVINCE P & T (85 % FILL) INCOME STATEMENT (thousands of Yuan) year endd 31 Dec. 1986 1987 1988 1989 1990 1991 1992 ----_-"------------------ ---s a -es '---w--''----------- I - REVENUES 70,643 81.239 Local 68,997 94,020 101.892 134,794 190,698 262.040 366,920 TrnmkcaUs 51,224 71,660 122,852 150,399 190,378 243,439 367,400 InteaLtional cas 4,691 6.238 9.521 38,996 75,720 113,440 190,160 Intern. calls adjusucnt Total Telephone 124,912 171,918 234,265 324,189 456,796 689,562 1,005,719 Domestic Telegrmph 17,641 22,358 28,354 26,982 23.317 23,615 Domestic Telex 179 650 835 1,040 940 Intenational mesages 5,101 6,843 10,187 10,032 9,820 9,850 Intern. mesages adjustmenm Total Telegraph aid Telex 22,742 29.380 39,191 37,U49 34,177 34,405 35,480 Post 66,739 81,962 107,755 119,675 151,730 '04,555 255,230 Gru Oper. Rcv. 214,393 283,260 381,211 481,713 642,703 928,522 1.296,429 ! ervice charge 6,893 9,018 11,986 15,348 20,959 30,295 38,393 Net Oper. Rev. (A) 207,500 274,242 369,225 466.365 621.744 898,227 1,257,537 Net Non - Oper. revenue 954 -(2,305) (3,696) (5,475) (21,806) (11.243) (8.331) TOTAL REVENUE (C) 208,454 271,937 365,529 460,890 599,938 886.984 1.249,206 =-w----------- - --w-_saw ----------- ---s -s----s-------- 11 - EXPENSES Sa1lries 33,314 39,621 54,001 65,949 77.473 96,396 123,496 Mngrial Staff Salaries 9,992 10.602 11.992 13.502 19,032 22,935 O & M Expense 45,246 57,572 100,003 96,516 136,409 200,051 229,185 Administration 7,837 12,150 27,032 33,195 31,755 47,634 62,100 Depreciation 46,679 55,724 82,765 109.358 138,045 208,743 297,518 Administativc Depreciton 13,127 14,935 8,981 12.010 15,671 25,397 33.110 Ncw Tech Dev Fund 3,948 5,424 7,273 0 11.634 16,910 25,929 TOTAL OPER. EXPENSES (D)160,143 196,028 292,047 331,036 430,019 618,116 771,337 Net Oper. Rev (A - D) 47,357 78,214 77.178 135,329 191.725 280.111 486,200 Interest payments (E) Difference Revenue - Expenses (OtEI 11 75,909 73,482 129,854 169.919 268.868 477.869 - 134 . ANNEX 4.1 Page 4 of 6 CHINA - LIAONING PROVINCE P & T (85 % FILL) SOURCES AND APPLICATIONS OF FUNDS ;.housands of Yuan) year ended 31 Dec. 1986 1987 1983 1989 1990 1991 1992 I - SOURCES DiffereneJ Rvenue - EApenses 48,311 75,909 73,482 129,354 169,919 268,868 477,869 lea: To/(From) MPT 17,319 11,672 17.036 32,601 58.816 80.271 95,574 Not Alokated Profit 30,992 64,237 56.446 97.253 111.103 188597 382,295 INS: Income tax 7,283 15,114 13.620 29,786 9,734 17,961 38.230 After Tax Nct Alloc. Profit 23,709 49,123 42,S26 67,467 101.369 170,636 344,066 Dividends to MPT 21.630 2,187 3,630 15.094 76.396 102.354 68,313 Dividends as % of A T N A P 91.23% 4.45% 8.48% =.37% 75.36% 59.98% 20.00% Profit for Disribution 2,079 46.936 39,196 52,373 24.973 68.282 275.252 Production & Expamnion Fund 1,040 23,468 19,598 26.187 12,487 34,141 137.626 Welfare 20%, 50 % 416 9.387 7,U39 10.475 4,995 13.656 55,050 Bonus 30%. 0 % 624 14,081 11,759 15.712 7,492 20.485 82.576 Deprecuation + Admin DeCFec. 59,806 70,659 91,746 121.868 153,716 234.140 330,628 leas: "70% LD Deprec. to MV!P 6,052 6,120 13,619 9,190 11.219 33,690 47.573 * Net Depreciation 53,754 64,539 78.127 112.678 142.497 200.450 283.054 Sumharges 199,254 * New Technology Develop. Fund 2,764 3.797 5.091 0 8,144 11.837 18.150 * Connection Fee. 47,090 45,075 1,647 213.626 227-34 267.265 385.007 * Diff - borrowing+Sta±e Funds 35.403 10.923 112,462 129,263 113,941 376.166 (41,663) TOTAL SOURCES 140,050 147,802 216.925 481,753 504,416 889,859 981.428 = --s"------------------------------=-------------------- 11 - APPLICATIONS Increase in FLed Oper. Asmcs 87,741 116,788 222.474 242,428 426,604 828,317 629.903 Increase in W. in Pogress 52,309 31,014 (5,549) 239,325 77.812 61,542 351,526 Investmnent (Z) 140,050 147,802 216.925 481.753 504,416 889,859 961,428 Changes in Woriang Capital TOTAL APPLICATIONS 140,050 147.802 216.925 481.753 504,416 8S9.859 981,428 --------- --------- ===ee========ee.== ----ss ss ss s-- PERFORMANCE INDICATORS Int. Cash Gen.as % of Invest. (Z) sumf*.{Brrw+Sate Fund)l/Z 74.7% 92.6% 48.2% 73.2% 77.4% 57.7% 104.2% connection fees 1.738 35 4.540 4,873 4,176 2.589 Res. ubscribeI 2,000 Bus. subscribers 3.000 - 135 - ANNEX 4.1 Page 5 of 6 CHINA - JIANGSU PROVINCE P & T INCOME STATEMENT (thousands of Yuan) yer ended 31 Dec. 1986 1917 1918 1919 1990 1991 1992 mmmmmmm mm mm m ------------- mmmmmmmmmmmmmmmmmmmmmmmmmmmmmm I - REVENUES LOWal 56,315 72,606 98,035 124,800 163,100 266,U48 416,164 Tnmik calls 50,822 70,648 121,297 129,913 169.100 249,721 425,000 izurnational calls 5,950 10.193 16,756 21,626 63,577 104,820 181.740 In. calls adjustmcat Totl Telephone 113,087 153,447 236,091 283,339 395,777 621.389 1,022.904 Domestic Telegraph 29,n73 39,272 52.642 50,864 50.972 47,772 Domesti Teke 0 6.299 639 1,096 1.150 1.120 Intenaional mussages 4,845 1.962 10.422 9,658 9.680 9,720 Intern. messges adjustment Total Telegraph and Telex 34,718 47.533 63,703 61,118 61,802 58.612 58,612 post 93,461 1157,72 144,299 174.857 220.091 30S,689 308.689 Grous Oper. Rev. 241,266 316,762 444.093 520,014 677,670 938,690 1,390.205 % servioe charge 7,636 9.919 14.017 16.653 22,171 32.368 41,706 Not Oper. Rev. (A) 233,580 306.773 430,076 503,361 655.492 956,322 1.348,499 Net Non - Oper. revenue 127 1.549 (5,589) (1,428) (12.472) (13,467) 0 TOTAL REVENUE (C) 233,707 301,322 424.4S7 501,933 643,020 937,855 1.348,499 u - EXPENSES Saluies 37,492 43.963 67,014 75.496 38,07S 115,066 126,353 Mngrial SLff Salaries 6,661 7,503 8.066 9,795 14.198 16.951 0 & M Expenses 56,002 75,326 116.281 122,139 146,710 272.613 330,923 Adtinzslrzon 9,056 11,159 21,026 23.248 27.353 44,023 68,034 Depreciation 40.428 48,324 63,591 95,563 121,052 213.199 297,730 Administrza ve Depreciation 7,157 8,467 5,783 8.216 10.223 15.579 24.076 New Tech Dcv Fund 4.029 8.467 7,779 9.619 11 572 17,221 23,075 TOTAL OPER. EXPENSES 160.825 203.209 294.540 344,146 419.186 694.652 871.166 Net Oper. Rev (A - D) 72,755 103.564 135.536 159.215 236.306 261,670 477.334 Intere payments (E) Difference Revenue - Expenses 72,882 105.113 129.947 157,787 23.834 243.203 477,334 mm m m mmmm m m mmmm m m mmmm m m- m mmmm mm= m - mm m m - mmmm mm m - 136 - ANNEX 4.1 Page 6 of 6 CHINA - JIANGSU PROVINCE P & T SOURCES AND APPLICATIONS OF FUNDS (thousands of Yuan' year cnded 3l Dec. 1916 1987 1988 1989 1990 1991 1992 -B _ " a " ----------- -------- ----___ ____ ___-___ __e _---- I - SOURCES Diffcrcnee Revenue - Expenes 72.8n 2 105.113 129,947 157,787 23.834 243.203 477,334 nss: Tol(From) MPT 33.613 38,953 53377 72.975 95,642 123.401 Net Allocated Profit 34.269 66,160 76,570 34,812 12S,192 119,802 214.480 less: Income tax s,053 12,568 13,470 27,148 12,769 11,64 21,44S After Tax Net Aloc. Profit 26.216 53,592 58.100 57,664 115,423 107.938 193.032 DividWends to MPT 18,751 4,378 5.566 11,766 2S.746 23,060 38,606 Diveiia a % of A T N A P 71.53% 3.17% 9.58% 20.40% 24.90% 21.36% 20.00% Profit for Distribution 7,465 49,214 52.534 45,989 86.677 U4,78 154.426 Production & Expansion Fund 3,733 24.607 26.267 22,949 43.339 42.439 77.213 Welfare 20%,30% 1,493 9,143 10.507 9,180 17.335 16.976 30.8s5 Bonus 30%. 0% 2,240 14.764 15.760 13.769 26,003 25,463 46.328 Depreciaion + Admin Dcprec. 47,585 56.791 74,374 103,849 131.275 821.778 321.806 las: 70% LD Dcprec. to MPT 4,469 4,200 6,027 6,014 6.741 12.692 17.1S3 Net Depreciation 43.116 52.591 68,347 97.835 124,534 I16.086 303.953 Surcharges 98.146 159,461 New Technology Develop. Fund 2.820 5,927 5,445 6,733 8.100 12.055 16.152 Connection Fecs 59,903 71.196 109,098 163.750 161,614 272,937 462,436 Diff borrowing+Statc Funds 4,562 43,005 46.369 106,462 83,21 231.901 331,888 TOTAL SOURCES 114.134 197,326 255,526 402,729 421.408 873.564 1.351.835 11 - APPLICATIONS Incrceas in Fixed Oper. Asets 71,715 157,446 204.184 237,406 453,601 711.212 1.193.760 Increasc in W. in Progress 42,419 39.380 51.342 165323 (32,193) 162352 113.534 Invctsnent (Z) 114,134 197,326 255,526 402.729 421.408, 873,564 1.307.294 Debt Servicc 44,541 Changcs in Working Capital TOTAL APPLICATIONS 114,134 197,326 255,526 402,729 421.408 873.564 1.351.835 5 ---- _--- *------ ---s -Ss = =C=w= =*=s= *= eg= =5 = == = ==== = ======= PERFORMANCE INDICATORS Int. Cash Gen.as h of Invest. (Z sum(-(Brrw+State Fund)]IZ 96.0% 78.2% 81.9% 73.6% g0.I% 73.5% 78.0% connection fees 1.620 5,000 3.450 2.819 2.613 1.930 Res. subscribers on 96.5% of lines 2.000 Bus. subscriben 2.000 - 137 - ANNEX 4.2 Page 1 of 1 People's Republic of China TELECOMMUNICATIONS PROJECT RATE OF RETURN BY SERVICE HEZLONoJIANo YEAR POST Tg & Tx LD Local Total 1991 -25.82% -19.22% 16.73% 16.57% 8.73% 1990 -25.34% -11.34% 18.91% 18.15% 10.61% 1989 -25.62% -1.72% 16.78% 21.30% 10.61% 1988 -34.78% 5.51% 16.12% 20.80% 11.88% 1987 -23.27% 2.64% 9.82% 22.10% 8.80% 1986 -15.17% 2.21% 7.12% 20.77% 7.80% LIAONINO YEAR POST Tg & Tx LD Local Total 1991 -19.52% -21.10% 32.49% 19.55% 17.89% 1990 -31.07% -14.62% 31.06% 24.87% 19.83% 1989 -26.30% 1.51% 25.77% 27.55% 22.37% 1988 -34.45% 17.83% 15.29% 2.18% 4.75% 1987 -15.70% 15.04% 8.86% 16.49% 10.80% 1986 -5.45% 18.33% 5.73% 19.79% 11.98% JIANGSU YEAR POST Tg & Tx LD Local Total 1991 -6.03% -7.30% 25.92% 22.44% 18.61% 1990 0.15% 5.56% 24.05% 23.36% 19.37% 1989 0.47% 17.10% 20.74% 33.09% 24.37% 1988 -12.89% 29.29% 21.30% 27.01% 21.25% 1987 -0.89% 38.13% 13.24% 28.16% 19.36% 1986 9.73% 45.S9% 9.61% 31.47% 20.94% i 139 - ANNEX 4.3 Page 1 of 5 People's Republic of China TELECOMMUNICAT7ONS PROJECT FINANCLAL STATEMENTS PROJECTION METHODOLOGY Geneml Assumptions 1. All the financial data refer only to the Urban Network where the Bank investment will be applied; therefore, only the number of installed and working lines in the Urban Network will be considered. 2. The projections will be expressed in current currency; hence, they will include the best estimate for inflation compensating adjustments. This adjustment is made using the Price Contingencies Update of July 9, 1993. 3. The revenues will be projected using the current tariff structure, incorporating tariff level adjustments but not changes in the structure. It is assumed that a less than inflation adjustment is consistent with an estimated Improvement in the efficiency of the telephone operators. 4. The projections will be made only for telecommunications services; however, slnce the financial data includes Posts, the projections of revenues and expenses will be made freezing the amounts for Posts related revenues and expenses at their 1991 values. Revenues are clearly separated between Posts and Telecommunications; this separation is more difficult for expenses, and the details are presented in the reports to File. 5. The general assumptions used in the projections are presented below. The Table at the end of this Annex summarizes the comparison of key values among the three provinces. Revenue Projection 6. Local Services. Calculated using: (1) the average revenue per local residential and business line, (2) an assumption about the proportion of residential/business lines in 1992 and in year 2000, and (3) the expected number of working lines. 7. Domestic Long Distance Service. It was calculated considering the availabillity of appropriate long distance circuits and long distance switching equipment and the expected number of working local urban lines. A document to files gives more details of this estimate. - 140 - ANNEX 4.3 Page 3 of 5 20. Nev Technology Development Fund (NTDF). It was agreed to increase it in proportion to depreciation. Sources and Applications 21. Net Allocated Profit. For Jiangsu province, it was assumed that the percentage retained by MPT increases 0.5% every year. Liaoning province estimated a fixed percentage of 20% given to MPT, and Heilongjiang province represents a more complicated case which is analyzed in document to files. 22. Income Taz. It is taken as 10% of net Allocated Profit. 23. Dividend to RPr. It is taken as 20% of the After Tax Net Allocated Profit. 24. Distribution. The traditional distribution of 50% to Production Fund, 20% to Welfare Fund, and 30% to Bonus is being changed to reflect the effect of the new treatment for the Bonus, which since July 1, 1993, is treated as a normal component of salary in the income statement. Heilongjiang and Liaoning assum d a 50% -50% percent distribution between Production Fund and Welfare; Jlangsu province assumed 70% to Production Fund and 30% to Welfare. 25. L.D. Depreciation. It is taken as proportional to Depreciation. 26. Connection or Installation Fe. Jiangsu province used an estimate of 96. 5% of the number of new lines in operation times a fee of yuan 2,000. Liaoning and Heilongjiang provinces assumed increasing charges up to yuan 5,000 for business and 4,000 for residential subscribers in year 2000 (see Table 4.1.1). Special Iues 27. Cost per Line. The total cost per line, including long distance transmission and switching, buildings, etc was estimated to be 6,000 yuan in 1993. This value was subsequently adjusted by the expected domestic inflation index up to year 2000. 28. Custom Duties. The normal custom duties are 16% for switching equipment, and variable, according to capacity for transmission equipment, being the minimum equal to 16% for high capacity systems. However, in the case of financing the project with selected multilateral and bilateral sources, the custom duties are reduced to zero. In the case of commercial bank financing the normal rates are applicable. - 141 - ANNEX 4.3 Page 2 of 5 8. International Service. The growth rate was estimated by year by province depending of the growth in the number of working lines and local conditions. 9. Telegraph and Telex Services. It war assumed a constant value throughout the period equal to the 1991 level. 10. Posts Services. Values are frozen at their 1991 amount. Expenses Projection 11. Salaries. Salary expenses were calculated based upon the projected number of staff per 1.000 operating lines, the projected number of working lines, and the projected average salary per staff. 12. The 1992 salary for Post employees is a constant added; and it is assumed that the Bonus, currently presented in the Sources and Applications of Funds Statement as an application, will be integrated since 1993 as a normal part of the salaries in the Income Statement. 13. O1 Expenses. It was agreed to take the conservative estimate of constant amount in yuan per working line (in current currency). 14. Administration Expenses. starting 1993 the pension related expenses, currently presented in Net Non-operating Revenues, will be transferred to Administration. The projection was calculated assuming a 20% annual increase. Assets and Depreciation 15. Gross P1xed Assets in Operation. This value increases every year in the number of new lines installed, times a value per line updated in yuan according to the exchange rate. The average value per line was taken as US5 762. 16. Depreciation. As a result of the July 1, 1993 decision allowing for shorter depreciation periods and for a type of accelerated depreciation for switching equipment, the average depreciation is around 16% in 1994, and 11% thereafter (see document to files). 17. Plant Under Construction. This value increases every year in the number of new installed lines times 762* exchange rate, and decreases in the same amount that it is transferred into operation. (para. 16 above) 18. Current Assets. It was agreed to use as an estimate an increase of 70% of the growth annual rate of Gross Fixed Assets in Operation. 19. AdkinIstrative Depreciation. It was agreed to increase it in proportion to the Administration expenses. - 142 - ANNEX 4.3 Page 4 of 5 Tiable 4.1.1 KEY COMPARISON AMONG THE THREE PROVINCES (values in Yuan, except when other unit indicated) Itm Yew Jiangsu Liaoning Heiongia Loea 1ued Lims 2000 4,600 4,400 4,630 (000's) 1991 634 617 396 Gain 3.916 3,7t3 4,234 Local Working Ls 2000 4,140 3,t15 4.166 1991 427 416 310 Gain 3.713 2.664 3.856 % Fill Ratio 2000 8S.1 35.0 90.0 1991 65.3 68.7 72.3 Telephone Gmu Revenue 2000 8.289 8.796 6.272 (yuan milion) 1991 621 690 328 Avepge Telephone Revenue 2000 2.136 2,453 1.632 per Working Line 1991 1.659 1.797 1.174 Averap Local Revemi per Working Line Reasdenu i 2000 460 500 360 1992 334 500 240 Dsuai 2000 1,170 1.167 1.030 I992 1.170 657 515 Domemuc Long Disance BDz 1991 250 243 151 (milijon yuan) growth rate 40%.30% 50%.20% 65%.S55S%.40S,35S Lnwntauonal L. D. ase 1991 105 113 32 growth rte 30% 60%.55%,50%.30% 33% ConmnacuoaCog 2000 9-149 9,149 9,149 199s 6.837 6.U37 6.,37 1993 6,000 6.000 6.000 To4a Expenses (million yuan) 2000 5.293 4,313 5.192 1995 2.089 1.,52 1.731 1991 695 613 451 Depeciation (nillion yuan) 2000 3.057 2.919 3.289 195 1.046 917 a51 1,99 213 209 III - 143 - ANNEX 4.3 Page 5 of 5 (coinunuaon) Table 4.1.1 KEY COMPARISON AMONG THE THREE PROVINCES (values in Yuan, except when other unit indicated) Iuwn Year langu Liaoning Heiongilag oau Expene (mailli yuan) 2000 1.461 1.064 1,057 1995 617 442 397 1991 273 200 154 Teleesomaniuca0oa O&M per liae 1991-2000 339 274 262 (YanW-orking ha. year) Sales,. (rnmion yuan) 2000 287 359 337 1995 216 272 268 I°91 115 96 93 Urban Telecom. SLaff 2000 21.910 19,075 23.016 1995 13.900 16.929 18.236 191 16.792 15,141 14.636 SLiOW1.000 working lne 2000 5.3 5.0 5,5 1995 12.2 12.0 13.4 1941 39.3 36.4 47.2 CoaMcuon fees 2000 2.000 5.000 Bue/4,000 Rea 5.000 Bua/4.000 Res 1395 2.000 5,000 Bus/4.000 Res 5.000 Bus.4.000 Res 1994 2.000 5.000 Busa4.000 Res 3.500 Bus/2.500 Res 1993 2.000 3.500 Busl2.500 Re. 2.500 - 145 - ANNEX 4.4 Page 1 of 6 People's Republic of China TELECOMMUNICAT7ONS PROJECT PROJECTED FINANCUIL STATEMENTS 1993-2000 CHINA - HEILONGJDANG PROVINCE P & T INCOME STATEMENT (thouands of Yuan) year ended 31 Dcc. 1993 1994 199596 1997 199S 1999 2000 .--------------------------------- -........... mm m..,,......... , ....... ... * - REVENUES 73 74 75 76 77 78 79 t0 Local 259,326 432,4S6 624,541 822,236 1.053.989 1,325,489 1,633.696 2,016.475 Truk calls 361.12 561.149 787,572 1,065,880 1.442,536 1.952,292 2.642.183 3,575,865 Intemational calls 92,618 123,19 163,849 217,873 289,659 385.033 511.726 679,997 Intern. calls adjustment ToalTelephone 713,072 1,116,834 1,575,962 2,1051989 2,786,184 3,662.814 4,787,605 6,272,337 Domestic Telegraph Domestic Telcx Intcrnauional mssages Intrm. mesage. adjustment Total Telegraph and Telcx 59,728 62,714 65,850 69,143 72,600 0 0 Post 209.170 209,170 209.170 209.170 209,170 209,170 209,170 209.170 Groa Oper. Rev. 981,970 1,388,713 1,350,933 2,384,302 3.067,954 3,871,984 4.996,775 6,481,507 V service charge 29.459 41,662 55,529 71,529 92,039 116.160 149,903 194,445 Net Oper. Rev. (A) 952.511 1,347,057 1,795,453 2,312.773 2.975,915 3,755,825 4,846,871 6.287,062 Net Non - Oper. revenue 0 0 0 0 0 0 0 0 TOTAL REVENUE (C) 952,511 1,347,057 1,795.453 2,312.773 2,975,915 3,755,825 4,846,871 6,287,062 11 - EXPENSES Salaries 223,452 247,060 26,673 287,279 308,521 331.046 358.956 387,122 Mngrial Staff Salaries 31,129 34,413 37.289 40,021 42,980 46,118 50,006 53,930 0 & M Expenses 225,770 309.180 396.861 484.541 588,581 713,951 862.485 1.057.214 Admuiustzon 80.433 90,395 102,349 116.694 133,903 154,565 179,354 209,100 Depreciation 313,079 350,246 857,843 1,145,134 1,496,816 1,955,539 2.511,606 3,289,318 Admninistrtive Depreciaiion 25,227 28,351 32.100 36,599 41,998 48.477 56252 65,581 New Tech Dev Fund 19.639 27.774 37,020 47,686 61,359 77.440 99.935 129,630 TOTAL OPER. EXPENSES 918,728 1,587,423 1,731.136 2,157,955 2,674.163 3,327.135 4,118.593 5,191.895 Net Oper. Rcv (A - D) 33.783 (240,366) 64,318 154,818 301,752 428.690 728,278 1,095,166 Interest payme (O) Difference Revenue - EFxpense 33.783 (240,366) 64,313 154,818 301,752 428,690 728.278 1,095,166 Saries+O&M+Admnin 560,783 681,052 804,172 923,535 1.073,989 1,245,680 1,450,800 1,707,366 - 146 -AN 4.4 Page 2 of 6 CHINA - HEILONGIANG PROVINCE P & T S OU R C ES AND A OPLIC A T1 NS OF FU N D S (thousands of Yuan) ar ended 31 Dec. i193 1994 1995 1996 1997 ls99 1999 2000 = - -------- - ---------_- ---------_ --- - --------- ---------es S -SOURCES Difference Revnue - Expenscs 33,783 (240,366) 64,318 154.181 301,752 428,690 728.278 1.095,166 las: To/(From) MPT 16,217 (241,000) (20.000) (20,000) (20,000) (20,000) (20.000) (20.000) Net AUocaed Profit 50,000 634 84,318 174,818 321.752 448,690 748,278 1,115.166 lett: Income tax 5,000 63 8,432 17,482 32,175 44,869 74,828 111.517 After Tax Net AUoc. Profit 45,000 571 75,886 157,336 289,577 403,821 673.450 1,003.650 Dividends to MPT 9,000 114 15,117 31,467 57,915 80,764 134,690 200,730 Dividends us % of A T N A P Proft for Distribution 36,000 457 6O,709 125.869 231.662 323,057 538,760 802.920 * Production & Expansion Fund 18.000 28 30,354 62.934 115.831 161,528 269.380 401.460 Welfare 20% 18,000 228 30,354 62.934 115,831 161.528 269,380 401,460 Bonus 30% Depreciation+Admin Dcprec. 338,305 s7n,597 889,944 1,181.733 1,538.815 2,004,016 2.567.853 3,354.ss lIss: 70% LD Deprec. to MPT 16,770 20,770 24,770 28.770 32.770 36,770 40,770 44,770 •Net Depreciation 321,535 857,27 865,174 1,152.963 1.506,045 1,967,246 2.527,088 3,31.129 Surcharges 85,257 173.570 250.574 329,889 422,903 531,914 655,736 809.558 ' New Technology Dev Fund 19,639 27,774 37,020 47,686 61,359 77,440 99,935 129,630 - Connection Feca 693,423 1.128,825 1,419,606 1,628.325 1.943,091 2.306,757 2.664,878 3,765,158 ' Borrowing+SSuae Funds 584,146 456,276 (278.147) (322,910) (553,894) (199.814) (951,769) 459.031 TOTAL SOURCES 1,722,000 2,644.500 2,324.580 2.898.888 3,495,334 4.845,071 5.265.249 8,874,965 = == -- ------- ----- --------- --- = = ^ - ^ = = s---------- -------- 1l - APPLICATIONS Incr. in Fixed Oper. Assct 1,722.000 2.644.500 2,324.580 2.898.888 3,495.334 4,845.071 5.265.249 8.874,965 Incrase in W. in Prog. 0 0 0 0 0 0 0 0 Investment (Z) 1,722,000 2,644.500 2,324.580 2,898,888 3.495,334 4.845.071 5.265.249 8.874.965 Investment (Tabic 4) Changes in Working Capital TOTAL APPLICATIONS 1.722.000 2.644.500 2,22450s 2,898.888 3,495s334 4.845,071 5,265,249 8.874,965 PERFORMANCE INDICATORS Int. Cash Gen.as % of Inveat. (Z) sumz*-(Brrw+State Fund)IIZ 66.1% 82.7% 112.0% 111.1% 115.8% 104.1% 118.11P4.8% connection f(es 2,500 3,136 4,579 4.523 4.467 4,411 4,354 4,298 Res. subscribers 3,500 4,000 4,000 4,000 4,000 4,000 4,000 Bus. subscriben 2,500 5,000 5,000 5,000 5,000 5,000 5,000 - 147 - ANNEX 4.4 Page 3 of 6 CHINA - LIAONING PROVINCE P & T (85 % FILL) INCOME STATEMENT (thounds of Yuan) year ended 31 Dec. 1993 1994 1995 1996 1997 1998 1999 2000 I - REVENUES 93,425 107,439 123,555 142,08S 163,402 187.912 216,099 241.513 Local 541,920 777,915 1,005,520 1.330,603 1,630,699 1,986,513 2,313.977 2,670.325 Trank calls 551,100 870,731 1.306,107 1.567,328 1,380,794 2,256,953 2,708,343 3,250,012 IntrnutionAl Calls 304,256 471,597 707,395 919,614 1.195,493 1,554,147 2,020,391 2,626,509 Intern. cls adjustment Total Telephone 1,490,701 2,227,689 3.142,577 3,959,633 4,870,393 5,985,525 7,258,811 8,795,860 Domestic Telegmaph Domestic Telex Intenational messages Intern. mages adjustment Total Telegraph and Telex 42,580 43,850 44,730 45,177 45,629 46,085 46,546 47,012 Post 255,230 255.230 255,230 255,230 255,230 255.230 255.230 255,230 Gross Oper. Rev. 1,721,511 2,26,769 3,442,537 4,260,040 5,171.252 6.286,840 7,560,587 9,098,102 % service charge 53,655 75,103 103,276 127,101 155,138 188,605 226,818 272.943 Net Oper. Rev. (A) 1,734,856 2,450,966 3,339,261 4,132,239 5,016,114 6,098,235 7,333,769 8,325,158 Na Non - Oper. rvenue 0 0 0 0 0 0 0 0 TOTAL REVENUE (C) 1,734,356 2,450,966 3,339,261 4,132.239 5,016.114 6,098,235 7,333,769 8,325.153 11 - EXPENSES Salaries 234,803 255,692 2721,77 286,804 302,412 319,079 336,718 359,494 Mngrial Staff Salrie O & M Expenses 213.61 360,629 442,042 541,623 65,955 734,790 920,530 1,063,546 Administrtion 80,325 88,704 98,759 110,825 125.303 142.672 163,527 188,546 Depreciation 383,436 907,393 917,129 1,226,982 1,589,227 2,007,007 2,449,355 2,919,274 Administrtive Depreciation 42,827 47,294 52,655 59,081 66.803 76,071 87,183 100,527 New Tech Dcv Fund 35,770 50,535 68,851 85,201 103,425 125,737 151,212 131,962 TOTAL OPER. EXP (D) 1,061.023 1,710,753 1,851,613 2,310,523 2.'46,130 3,455,362 4,109,100 4,813349 Net Oper. Rev (A - D) 673,333 740,213 1,487,648 1.821,717 2,169,934 2,642.873 3,224,669 4,011,310 Intest payments (E) Duff Revenue - Exp (C-D) 673,333 740,213 1,417,641 1,821,717 2.169,984 2.642,373 3,224.669 4,011.310 , = _----- -_---------------- _--- _ ____ _._. ___. ____ _... ..._ - 148'- ANNEX 4.4 Page 4 of 6 CHINA - LIAONING PROVINCE P & T (85 S FILL) SOURCES AND APPLICATIONS OF FUNDS (thounds at Yuan) year cnded 31 Dec. 1993 1994 199S 1996 1997 99S 1999 2000 - SOURCES Difference Rev.-Expense 673,833 740,213 1.487,648 1.321.717 2,169,9U4 2,642.873 3,224,669 4.011,810 less: To/(From) MVP 134,767 14U.043 297,530 364.343 433.997 528.575 644,934 302,362 Net Aa ocated Profit 539,067 592,170 1,190,118 1,457,373 1,735,987 2,114,298 2,579,736 3209,44S less: Income tax 53,907 59,217 119,012 145,737 173.737 211,430 257,974 320,945 After Tax Net Alloc. Profit 485,160 532,953 1,071.107 1,311,636 1.562,38S 1,902.868 2,321,762 2.88,503 Dividends to MFP 97,032 106f591 214,221 262,327 312,478 3S0,574 464,352 M,701 Dividends as S of A T N A P20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% Profit for Distribution 383,128 426,363 856,885 1,049,309 1,249,911 1,522,295 1,857,410 2,310,302 *Production & Expansion Fund 194,064 213.181 423,443 524.654 624,955 761.147 923,705 1,155,401 Welfare 20%, 50 % 194,064 213,181 423,443 524,654 624,955 761,147 928,705 1,155,401 Bonus 30%,0% 0 0 0 0 0 0 0 0 Depreciation + Admin Depreo26.263 955,192 969,754 1,236,070 1,656,034 2,083,079 2,537,043 3,019,801 lku: '70% LD Deprec. to MPT61.334 137,441 139,541 185,050 238,4 299,731 365,731 434f514 * Net Depreciation 364,929 817.751 330,243 1,101.019 1,417,751 1,733,343 2,171,992 2fS5,21S Surcharges 295,497 435S557 SU,795 756,145 920,964 1,117,027 1,312,497 1,532.618 * New Tech. Develop. Fund 25,039 35,375 48,196 59,641 72,398 88,016 105,845 127,373 Connection Fees 771,491 1,410,500 1,279,800 1,974,174 1,829,880 2,210,674 2,110,629 2,398,712 Borrowing+Sute Funds 759,721 (332,364) (440,676) (936,965) (1,173.562) (2,051,583) (2,456,524) (3,407,656) TOTAL SOURCES 2,410,740 2,580,000 2,734,800 3,478,666 3,637,386 3.90S,629 4,143,146 4.391,735 =========================== mmmmm ==saS,=ss== ,===== ,=== ====== mm I - APPLICATIONS Incr.in Fixed Oper. Assets 1,03,460 2,591.546 2,734,800 2,898,888 3,637,386 3,908,629 4,143,146 4,391,735 Increase n W. in Progsu 1,322,230 (11,546) 0 579,778 0 0 0 0 Investment (Z) 2,410,740 2,580,000 2,734,800 3,478,666 3,687,386 3.908,629 4,143,146 4,391.735 Investment (Table 4) Changes in Working Capital TOTAL APPLICATIONS 2,410,740 2,580,000 2,734,800 3,478,666 3,687,386 3,908,629 4,143,146 4.391,735 PERFORMANCE INDICATORS Int. Cash Gen.as % of Invest. (Z) sum[*-(Brrw+SLte Fund)l/Z 68.5% 112.9% 116.1% 126.1% 132.0% 152.5% 160.0% 177.6% connection fees 3,080 4550 4,500 4,460 4,420 4,380 4.340 4.300 Re'. subscribers 2,500 5,000 5,000 5,000 5,000 5,000 5.000 5,000 Bus. subscriber 3,500 4,000 4,000 4,000 4,000 4,000 4,000 4,000 - 149 - ANNEX 4.4 Page 5 of 6 CHINA - JIANGSU PROVINCE P & T INCOME STATEMENT (thousnds of Yuan) year ended 31 Dec. 1993 1994 1995 1996 1997 1993 1999 2000 - REVENUES Local 590,015 774,088 1,029,036 1,301,861 1,627,195 1,931,411 2.214,500 2,476,466 Trnlk calls 595,000 U33,000 1,166200 1,516,060 1,970,878 2,562,141 3,330,784 4,330,019 internazionsj calls 236262 307,141 399.283 519,068 674.788 877,224 1.140,392 1,482,509 Intern. calls adjusmen Total Tclephone 1.421,M 1,914,228 2,594,519 3.336,989 4,272,864 5,370,776 6,685,676 8.281,994 Domeawc Telegraph Domestc Telex Interatonal mcages Inten. mesages adjustment Total Tclegraph and Telex 58,612 58,612 53,612 58,612 58,612 58,612 58,612 58,612 Post 308,619 301,689 308.689 308,689 308,659 308.689 308,689 308,619 Gross Oper. Rev. 1,738,578 2,281,529 2,961.,20 3,704,29 4,640.16S 5,733,077 7,052,977 8,656,295 % srvice charge 53,657 68,446 U,55 111,129 139205 172,142 211,539 259,689 Net Oper. Rev. (A) 1,734,921 2,213.084 2.872.965 3,593.161 4,500.960 5,565,935 6,U41,387 8,396,606 Net Non - Opr. revenue 0 0 0 0 0 0 0 0 TOTAL REVENUE (C) 1.734,921 2.213,084 2.372,965 3,593,161 4,500,960 5,565.935 6.841.387 8.396,606 11 - EXPENSES Salaies 191,715 204.332 216,210 225,172 239,712 254,729 270,559 2t7.424 Mngrial Staff Salries 0 & M Expcnses 416.356 512.013 616.912 758.748 934.305 1,109.863 1,285.421 1,460.979 Administration 74,618 32.672 92.252 103,749 117,545 134,101 153.963 177,807 Depreciation 429.911 1,058.750 1,046.031 1,388.223 1,751.877 2,182.250 2.608,646 3,056,505 Adminuistruive Depreciation 26,431 29256 32.647 36,715 41,597 47,456 54,417 62,923 New Tech Dcv Fund 34.726 35,520 84.492 112,133 143.930 176.270 210,550 246,387 TOTAL OPER. EXPENSES. 173.325 1.972,547 2.083,543 2.624.739 3.258,967 3,904,669 4,581.630 5.292,525 Net Oper. Rev (A - D) 561.095 240,536 734.422 968.422 1.241.992 1.661.266 2.259.753 3.104.081 Interest payments (B) Difference Revenue - ExpenwA61,095 240.536 784,422 96S.422 1,241.992 1.661.266 2.259.758 3.104.031 mm mm mm- mm,mm,m,.mm,mm,,m,mm.mm,mm.mm.mm.mm.m...m...mm.mm.mm.mm.mm.mm.mm.mm.mm.mm.mm.mm.mm.mm _ - 150 - ANNEX 4.4 Page 6 or 6 CHINA - JIANGSU PROVINCE P & T SOURCES AND APPLIC ATIONS OF FUNDS (thounds of Yuan) year aeded 31 Dec. 193 1994 1995 1996 1997 199S 1999 2000 ________________________________________________________________- - SOURCES Diffeaenc Revenue- Expeaed61.095 240,536 7S4,422 968,422 1.241,992 1,661.266 2,259.753 3,104.0S1 les: ToJ(Frem) MVI for Redistibution Net Allocated Profit 249,311 105,675 340.698 415,773 527,015 696,619 936,285 1,270.594 les: Income tax 24,931 10,567 34,070 41.577 52,701 69,662 93,629 127,059 Afer Tax Not Albc. Profit 224,3W0 95,107 306,628 374,195 474.313 626,957 842,657 1.143.534 Dividend to MPT 44,876 19,021 61,326 74,139 94,163 125,391 168.531 228,707 Dividends as % of A T N A P20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% 20.00% Profit for Distribution 179,504 76,036 245.303 299.356 379,451 501.566 674,126 914,327 *Production & Expansion Fund12S,653 53,260 171.712 209,549 265,615 351,096 471,888 640.379 Welfae 20%.30% 53,U51 22,826 73,591 t9.307 113,U35 150,470 202,233 274.443 Bonus 30%. 0% Depeciation + Admin Deprc456,341 1.088,006 1.078,677 1,424.938 1.123,474 2,229.706 2.661.132 3,119,423 Iess: 70% LD Dcprec. to MPT 25,317 60,360 59,342 79,052 101.162 123,698 147.633 173,05S eNd Depreciaion 431,025 1,027,647 1,013,S35 1.345,886 1,722.313 2,106,008 2,513.500 2.946,371 Surharg 224,599 303,193 414,305 531,419 677,301 844,352 1.038,391 1.269,431 * New Techn.Develop. Fund 24,303 59,864 59,145 78,493 100,751 123,339 147,335 172,321 * Connecton Fees 510,526 579,000 615.670 999,740 999,740 999,740 999.740 999,740 * Borrowing+State Funds 1,708.181 534,690 1,249,022 280.864 (111,376) (562,562) (1,082,042) (1,716.400) TOTAL SOURCES 3,024,291 2,558,354 3,523,689 3,445,952 3,647,344 3,362,023 4.083,862 4,312,342 _._.,,_,,,_,,_____,,__,,____,,____,,,,,__________________,__,.__- 11 - APPLICATIONS lncr. in FLxed Oper. Assaul.449,8648 3.136,300 2,598,060 3,623.610 3,533,744 3,745,769 3,970,515 4,208,746 Incrcas in W. in Propgmu 1,514,136 (735,300) 320,440 (289,389) 0 0 0 0 Invesunent (Z) 2,964,000 2,451,000 3,4183500 3,333,721 3,533.744 3,745,769 3.970,515 4,201.746 Investment (Table 4) Old Debt Scrvice 60,291 107,354 110,189 112,231 114.100 116.254 118.347 103,596 Changes n Woring Capitl TOTAL APPUCAT1ONS 3,024,291 2,558,354 3,528,689 3,445,952 3,647,844 3,862,023 4,088.862 4,312,342 PERFORMANCE INDICATORS lnL Cash Genas % of InvesL (Z) sumn*-(Brrw+Stute Fund)]/Z 44.4 82.6% 66.7% 94.9% 106.6% 113.1% 132.2% 143.2% connection fees 1,930 1,930 1,930 i,931,930 1,930 1,930 1.930 Res. subscribers 2,000 2.000 2,000 2.000 2,000 2,000 2,000 2.000 Bus. subscriben 2,000 2.000 2,000 2,000 2,000 2.000 2.000 2.000 - 151 - ANNEX 4.5 Page 1 of 2 People's Republic of China TELECOMMUNICATIONS PROJECT TARIFFS 1. INITIAL PAYMENTS RESIDENTIAL BUSINESS (no surcharges) yuan yuan Registration fee 0 0 Guarantee fee 0 0 Connection fee (yuan) 1,000 to 3,000 2,000 to 5,000 Note: the Connection or Installation Fee varies by province. 2. LOCAL SZRVICE MONTHLY PAYMENTS Fixed monthly payment Residential (0 or some free calls included) 5.00 to 20.00 Business (0 or some free calls included) 8.00 to 32.00 Metered service Residential Base Fee zero calls 7.60 to 15.60 per 3 min call 0.10 yuan Business Base Fee zero calls 12.00 to 24.00 per 3 min call 0.16 yuan Note 1: depending on the province, the fixed monthly rate may or may not include a certain number on free calls, and the number of free calls also is different in each province. Note 2: each local (provincial or municipal) Government authorizes surcharges, which are valid in the area under that Government jurisdiction. In most provinces the surcharges are related to the fixed monthly payment and the local per call charge with ranges around 20% to 50% of total local charges. - 152 - ANNEX 4.5 Page 2 of 2 3. LONG DISTANCE RATES 0 - 25 km 0.1 yuan 25 - 50 0.2 50 - 100 0.3 100 - 150 0.4 .50 - 200 0.5 200 - 400 0.6 400 - 600 0.7 600 - 800 0.8 800 - 1,000 0.9 1,000 - 1,500 1.0 1,500 - 2,000 1.1 2,000 - above 1.2 Note 1: These basic rates are uniform throughout the country. Note 2: Each local (provincial or municipal) Government authorizes surcharges, which are valid in the area under that Government jurisdiction. Some local governments authorize a certain charge per 3 minutes of Domestic LD, which is applied to business, residential subscribers, or both types of subscribers. Typical charges are in the order of 0.1 to 0.2 yuan per 3 minutes. 4. INTERNATIONAL SERVICE RATES Japan 11.0 yuan/min USA 16.0 India, Nepal 17.0 Europe 18.0 America (No US) 22.5 Note: International calls may be subject to surcharges in some provinces; however, in general these surcharges are a very small percentage of the uniform rate. - 153 - ANNEX 4.6 Page 1 of 2 People's Republic of China TELECOMMUNICAT7ONS PROJECT RETURN ON INVESTMENT 1. The proposed project comprises the expansion of local networks in throe provinces (Heilongjiang, Lioaning and Jiangsu) and the expansion of long distance facilities in 11 provinces crossed by the two fiber optic long distance cables. The proposed project benefit period extends from 1993 to 2007 when, on average, the equipment provided under the project would have completed its useful life. No residual value of the assets has been taken into account as the present value of theme in real terms would be minimal. Benefits attributed to the project include expected revenues from new telephone subscribers and increased telephone revenue from existing subscribers as a result of the project. Operating costs attributed to the project are the incremental costs incurred in providing the service to new subscribers less the savings due to the expected reduction in staff per 1,000 lines. Financial Rate of Return (FRR) 2. The financial statements of each of the three provincial PTA where the bank loan is financing part of the local network extension were projected in detail in nominal terms until year 2000, for two alternative scenarios: with and without the proposed project. Relevant items from these nominal terms projections were transformed into real yuan of December 1992. From year 2000 onwards, costs and benefIt. associated with the proposed project were assumed to remain constant in real terms. The detailed results are in files and show FRR between 25% and 40% for the three provinces in the cases of assuming project lives of 10 and 12 years. These results are considered good for this type of project and are greater than the cost of funds for these enterprises. 3. The results of a sensitivity analysis on the FRR show that: (a) a delay of 6 months in the connection of new subscribers gives financial IRR in the range 23% to 34% (a decrease of 4 points); (b) a 15% increase in the average cost per line gives financial IRR in the range 20% to 31% (a decrease of around 7 points); and (c) the combination of (a) and (b) would give financial IRR in the range 18% to 27% (a decrease of 10 points). - 154 - ANNEX 4.6 Page 2 of 2 (d) A special test war made for Heilongjiang province to find its sensitivity to the assumed increases in surcharges and connection fees, finding that the effect of not taking those decisions would give a financial IRR between 13% and 15%. This result confirms the convenience of taking those decisions. Economic Rate of Return (ERR) 4. Financial benefits and costs were converted into economic benefits and costs by making three adjustments: (1) the economic cost of the investment was calculated using an exchange rate of yuan 7.5 - USS 1 for 1993; (2) revenues were transformed into a minimum estimate of economic benefit by adding the sales tax, reflecting total price to consumers; and (3) salaries were corrected by applying a conversion factor of 2.0. Resulting economic net benefits understate the real economic benefits of the project because the *conomic value of telecommunications services exceeds the price charged. 5. The projected ERR is around 36%, which is good. The result of a sensitivity analysis carried out on the ERR is summarized in Table 4.3.1: Table 4.31 SENSITIVITY ANALYSIS Assumptions ERR (a) delay of 6 months in new subscribers 29% (b) investment cost increase of 15% 28% (c) combination of (a) and (b) 23% - 155 - ANNEX 5.1 Page 1 of 1 People's Republic of China TELECOMMUNICATIONS PROJECT LIST OF DOCUMENTS IN PROJECT FILES 1. Issues on Regulation and Legal Framework 2. Financial Statements 1986-2000 Heilongoiang, Liaoning and Jiangsu provinces 3. Calculation of the FRR and Sensitivity Analysis 4. Calculation of the ERR and Sensitivity Analysis 5. Effect of New depreciation Rules and Long Distance Traffic Growth Rate Estimate. 6. Note on Accounting Reform 7. Environmental Protection I MAP I l00s CHINA I 2 7 13(r TELECOMMUNICATIONS PROJECT RUSSIAN FIBER OPTIC ROUTES AND LOCAL SWITCHING INVESTMENT 'FEDERATION 5r FIBER OPTIC CABLE ROUTES -5(r o3 LOCAL SWITCHING EQUIPMENT e PROVINCE HEADQUATERS * NATIONAL CAPITAL RIVERS MONGOLIA PROVINCE BOUNDARIES INTERNATIONAL BOUNDARIES KILOMETERS 0 100 200 300 400 500 J > N MLES O 1 oo 200 300 , ,- ) - wJ*' \ \ LtAONING ? 401 C) b N G JIN L Zh"b PEPM. 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