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The World Bank

FOR OFFICIAL USE ONLY

Report N.e P-3891-PH

REPORT AND RECOMMENDATION

OF THE

PRESIDENT OF THE

INTERNATIONAL BANK FOR RECONSTRUCTION AMD DEVELOPMENT

TO THE

EXECUTIV DIRECTORS

ON A

PROPOSED LOAhN

IY AN AMOUNT EQUIVALENT TO US$4.0 MILLION

TO THE

REPUBLIC OF THE PHILIPPINES

FOR A

TELECOMMUNICATIONS TECHNICAL ASSISTANhCE PROJECT

January 28, 1985

This document has a restricted distribution and may ;e used by recipients only in the performance oftheir official duties. Its oatents may not otherwise be disclosed without World Bank authoruiation.

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CURRENCY EQUIVALENTS

Currency Unit Peso (P)US$1.0 - P 20.00

P 1.0 = USSO.05

GOVERNMENT OF THE PHILIPPINES FISCAL YEAR

January 1 - December 31

ACRONYMS

BUTEL - Bureau of TelecommunicationsJICA - Japan International Cooperation AgencyMOTC - Ministry of Transportation anxd CommunicationsNTC - National Telecommunications CommissionPLDT - Philippines Long =stance Telephone CompanyPPF - Project Preparation Facility

FOR OmCIAL USE ONLY

PHILIPPINES

TELECOMMUNICATIONS TECHNICAL ASSISTANCE aGi-CT

Loan and Projrct Summary

Borrower: Republic of the Philippines

Beneficiary: National Telecommunications Commission (NTC) within theMinistry of Transportation and Communications (MOTC)

Amount: US$4.0 million

Terms: fayable over 20 years, including five years of grace, atthe standard variable interest rate.

ProjectDescription: The Philippine Government has postponed the major elements of

its telecommunications sector investment program until themacro-economic situation improves. However, iP order tomaintain the momentum of the institutional and policy reformsfor the sector initiated over the past few years, thistechnical assistance project would promote and support thesound regulatory, institutional and financial development ofthe telecommunications sector. The project thus providesconsultancy services and equipment for: (a) strengthening NTCwithin the MOTC; (b) a tariff study; (c) radio frequencymanagement; (d) network planning; and (e) reviewing trainingneeds, plus fellowships. The project would provide MOTC/NTCwith the means to adequately regulate existing sectoroperations, lay the groundwork for future major physicalinvestments once the macro-economic situation improves, andensure viable private sector operation, consistent with thepublic interest. There are no major risks to the project perse, but achievement of the potential long-run benefits of thTeproject would be subject to boch political risks and thepossibility of delay in the ecoaonxic recovery.

This document has a restricted distribution and may be used by recipients only in the performanceof their official duties. [ts contents may not otherwise be disclosed without World Bank authorization.

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Project Cost: Local Foreic Total

Strengthening of NTC 90 432 522rariff study 90 216 306Radio frequency management:

consultancy 130 576 706equipment and services 208 700 908

Updating of network plan 60 72 132Training 60 250 310

Subtotal 638 2,246 2,884

Physical contingencies - 225 225Price contingencies 162 529 691Refinancing of PPF - 1,000 1,000

Total project cost /a 800 4,000 4,800

Financing Plan: Local Foreign Tctal(USS '000)

IBRD - 4,000 4,000Government 800 - 800

Total 800 4,000 4,800

Estimated Disbursements: Bank FY 1985 1986 1987 1988 1989 1990(US$ M)

Annual 1.0 0.6 0.8 0.8 0.6 0.2Cumulative 1.0 1.6 2.4 3.2 3.8 4.0

Rate of Return: N/A

Staff Appraisal Report: There is no staff appraisal report.

Map: IBRD Map Nb. 17234

/a Taxes and duties are insignificant.

REPORT AND RECOMM!ENDATION OF THE PRESIDENTOF THE INTERNATIONAL BANK FOR

RECONSTRUCTION AND DEVELOPKENTTO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN

TO THE REPUBLIC OF THE PRILIPPINESFOR A TELECOMMUNICATIONS TECHNICAL ASSISTANCE PROJECT

1. I submit the following report and recommendation on a proposed loanto the Republic of the Philippines for the equivalent of $4.0 million, to helpfinance a technical assistance project for the telecommunications sector. Theloan would be repaid over 20 years, including five years of grace, at the

* standard variable interest rate.

PART I - THE ECONOMY

2. An economic report entitled "The Philippines: An Agenda for Adjust-ment and Growth" (No. 5258-PH) was distribluted to the Executive Directorsunder Sec. M84-1038, dated December 14, 1984. A special report, "The Philip-pines: A Review of External Debt" (No. 4912-PH), was distributed to theExecutive Directors on November 2, 1984. Country data are given in Annex 1.

Performance in the 1970s

3. During the 1970s, the Philippines followed a much more dynamic,growth-oriented development strategy than in earlier decades. The growth rateof GDP rose from 5.1% in the 1960s to 6.2% in the 1970s, a rate well abovethat of lower middle-income oil importers (5.6%) but lower than that of com-parable Asian countries. During the 1970s, the agricultural sector grew atabout 4.5% p.a. and manufacturing industry at 7.2%. ManuractarTng, however,did not play a leading role in the country's economic development. Althoughmanufactured exports grew rapidly, the greater part of the sector remainedoriented to the domestic market and was affected by severe inefficiencies.

4. Although economic performance was relatively good in the 1970s,structural weaknesses held it below its full poteitial. GDP growth wasachieved at a high investment cost - the incremental capital/output ratio(ICOR) was about 35% higher thaa those of comparable Asian countries.Although inherently capital-intensive infrastructure investments explain partof the high ICOR, ineFf:ciency of industrial investment was the more importantcause. Inappropriate trade, industrial, financial, and exchange rate policiesdesigned to foster import substitution provided high protection for domesticmanufacturers, and led to investments in which the Philippines did not have a

1/ This section is substantially the same as that contained in thePresident's Report for the Agriculture Sector/Inputs Project which wasdistributed to the Executive Directors on July 17, 1984.

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Llear comparative advantage. External borrowing and imports expanded rapidlywhile traditional exports and domestic resource mobilization lagged. Thisresulted in a chronic shortage of foreign exchange and increasing externaldebt.

5. Despite satisfactory aggregate growth during the 1970s, the inci-dence of poverty remained around 40%, income distribution continued to beskewed, and regional risparities remained pronounced. The incidence ofpoverty reached 60-7C7 in the least developed regions. Large numbers ofpeople, especially in the rural areas, still suffer from malnutrition andlack safe water, basic education, and health facilities. An increasinglyunfavorable man/land ratio, the resulting expansion of cultivation intomarginal lands, limited employment opportunities in the industrial sector, andthe sharp deterioration in the external terms of trade put downward pressureon real incomes. Although the Government instituted several programs toimprove directly living conditions of the poor, most of these were implementedon any significant scale only during the last few years and are yet to have amarked impact on reducing poverty.

6. Population growth in the Philippines was reduced from 3% in the1960s to 2.5% in the early 1980s; the labor force continues to grow at over 3%per year, reflecting the rapid population growth of past decades. Thus, rapidpopulation and labor force growth continues to strain available landresources, aggravate the already serious unemployment and poverty problems,and burden the public budget with a high growth in demand for basic publicservices. The Philippines has a family planning program which expandedrapidly during the 1970s; however, participation in the program is still lowby East Asian standards.

7. Growth of productive employment, particularly in the industrialsector, has lagged behind the rapid expansion of the labor force, and consid-erable underemployment exists. During the 1970s, the agriculture and servicesectors had to absorb an excessively high proportion of new entrants to thelabor force. Manufacturing employment stagnated in the first half of thedecade, and picked up only slightly thereafter as labor-intensive export pro-duction grew. Overseas employment, especially in the Middle East, increasedrapidly, providing a temporary income opportunity.

Structural Problems and Adjustment

8. The structural weaknesses of the Philippine economy have become moreapparent in recent years as unfavorable world economic conditions haveexacerbated the balance of payments, debt, and resource mobilization prob-lems. In the late 1970s, the country's terms of trade deteriorated sharplydue to oil price increases, accelerated international inflation, and depressedprices for major export commodities. The continued heavy reliance on exportearnings from a few primary products (coconuts, sugar, copper, and timber)kept the Philippines extremely vulnerable to international commodity pricefluctuations, while continued high dependence on imported oil furtheraggravated the balance of payments problem.

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9. Excessive protection and an artificially low cost of capital led tolow efficiency of investment and stagnant employment in industries producingfor the domestic market. The industrial sector remained a net burden on thebalance of payments; although manufactured exports grew rapidly, their netforeign exchange earnings were limited due to a high import content. Exportpromotion measures induced rapid growth in nontraditional manufacturedexports, e.g., garments, electronics and handicrafts, from S50 million in 1970to $2.4 billion in 1982. However, export expansion was concentrated on a fewitems, and backward linkages were limited by high cost and low quality ofdomestic inputs. As part of an adjustment program supported by SAL lending,the Governnent has initiated major policy reforms designed to move towards anindustrial structure utilizing more effectively the country's comparativeadvantage with respect to labor cost and raw material availability and whichis internationally competitive. The program includes major tariff reform,liberalization of import controls, realignment of industrial incentives andimproved export incentives. The implementation of the program has been good,despite the international recession which has hampered the adjustment processin the manufacturing sector and slowed down the sector growth rate from around4Z in 1980-81 to an estimated 1% in 1982-83.

10. Financial Sector. Although well developed, the Philippine financialsector has not performed adequately in raising private sector savings and pro-viding investment financing. 4mong the main reasons have been the level andstructure of interest rates which were not geared to mobilize sufficient sav-ings and encourage longer maturities; their low level contributed to rela-tively inefficient and capital-intensive investment. Further, the CentralBank's rediscounting scheme frequently resulted in encouraging over-investmentin some sectors while others were relatively neglected. In 1981, the Govern-ment introduced far-reaching financial policy changes. The banking system wasgiven greater flexibility, interest rates were deregulated, and the CentralBank was given a stronger position in its role as "lender-of-last-resort,t allof which produced positive real interest rates (for the first time since 1978)and a significant increase in domestic savings. Government-owned lendinginstitutions have made less progress; as a result of insufficient autonomy inthe selection of their portfolios plus a depressed domestic economy, loancollection rates continue to be very low and substantial government budgetarysupport is required. Rehabilitation of several government-owned institutionsis necessary to reduce strains on the budget and to continue importantdevelopment banking operations.

11. Agriculture and Rural Development. While the performance of ''teagricultural sector was satisfactory during the 1970s, some policy problemsstill remain unresolved. Although the sector has made commendable progress infood production in the last ten years, it could have made a stronger contribu-tion to the balance of payments under a more favorable policy environment.Trade policies have discriminated against agriculture. Similarly, pricing andexchange rate policies have had a negative impact on agricultural incomes.The institutional framework for agricultural policy formulation and implemen-tation suffers from serious fragmentation. Overall, there is a need to dealdirectly with the problem of the rural poor, particularly farmers engaged inrainfed agriculture, coconut growers, municipal fishermen, and landless sugarworkers. Increasingly, investment programs will have to be directed towards

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rainfed agriculture and include innovative appro_ches to reaching smallholderfarmers.

12. Energy. Since the 1973-74 oil price increase, the Philippines hasmade a considerable effort to reduce its dependence on imported oil. Througha combination of pricing, taxation, and conservation measures, the Governmentexerted downward pressure on commercial energy consumption. Steps to increaseand diversify domestic energy supply, i.e., the development of hydroelectric,geothermal, nuclear and coal based power sources, have contributed to reducingimport dependence. Limited domestic petroleum production also began in1979. However, due to the long gestation period of energy projects, domesticenergy production still Lonstituted only 232 of total commercial energy supplyin 1983. In response to the second oil crisis, the Government included in itsadjustment program policy measures for the energy sector which aim at furtherreducing the country's dependence on oil imports through improving theefficiency of energy use and increasing the share of domestic sources tonearly 50% of commercial energy supply by 1987. Pricing policy will continueto support conservation and revenue objectives.

13. Public Sector Resource Management. The weak management of publicsector resources has been a chronic problem in the Philippines, and has beenfurther aggravated by the current recession. The fiscal stress generated bythe growing imbalance between public investment and public sector resourcemobilization has manifested itself in a number of ways. Government currentexpenditures (exclusive of interest payments) have been reduced to only 9% ofGNP, as compared to an average of 14% of GNP in middle-income developing coun-tries. Implementation of projects has been stretched over longer periods thanis economically efficient. The overall public sector deficit has becomeexcessively high and has threatened the stability of the economy, particularlyin 1981-1982. A rapidly rising level of public investment and an unsatisfac-tory financial performance of public corporations contributed towards increas-ing the fiscal deficit despite a reduction of recurrent expenditures. Thepublic sector deficit, which traditionally had been relatively small, reacheda peak of 5.8% of GNP in 1982.

14. As a short-term response, the Government is now implementing a fis-cal austerity program. To reduce the national budgetary deficit to manageablelevels, the Government has enacted revenue measures and reduced its investmentprogram and equity contributions to public corporations. However, to improvethe medium-term outlook for public finances, structural problems of the systemneed to be addressed.

The Current Economic Situation

15. The econom±c situation of the Philippines has deteriorated seriouslyin the last three years. The global recession, with low commodity prices,high interest rates on external borrowing, and an increasingly unfavorabletrading climate has stifled economic growth, slowed down export growth,depressed domestic demand and private investment activity and aggravated thefiscal and balance of payments problems. Real GDP growth is estimated to havebeen only about 1Z in 1983, and -62 in 1984.

16. During 1979-82, the terms of trade deteriorated, through a combina-tion of higher import prices, particularly for petroleum, and declining orstagnant prices for many primary exports, such as sugar, copper and copraproducts. Since 1981, the volume of exports has levelled off, reflecting thestagnation in the world's economy and a serious drought which reduced produc-tion of export commodities. Despite the severe external situation, theGovernment launched a major increase in its investment program in 1979,designed to make up for deficiencies in domestic infrastructure, expand indus-try, and reduce the dependence on imported petroleum. As a result the publicsector investment program rose from less than 6% of GNP in 1979 to 10% by1982. A large portion of the investment program, however, went for largescale projects with limited economic benefits and long gestation periods.Projects funded by the private sector often used public financial institutionsfor funding and loan guarantees, and when these projects began to fail, thepublic financial institutions had to turn to the Government for budgetarysupport. At the same time, public sector resource mobilization declined,producing a large and growing government budgetary deficit. This deficit wascovered in large part by foreign borrowings; in 1982, foreign borrowingfinanced 70% of the Government's deficit and over 50% of the deficit of thepublic corporations.

17. The impact of all these factors has been a growing balance ofpayments deficit and an increasingly difficult debt service burden. Thecurrent account deficit rose from $2.1 billion in 1980, to $3.1 billion in1982 and $2.8 billion in 1983 (8% of GDP). The total debt service ratio,including interest on short term debt, increased from 21X in 1980 to 38% in1982. During 1983. with growing economic problems, a mounting debt burden andmajor debt problems in other developing countries, foreign banks beganreducing their exposure in the Philippines. The Government was increasinglyforced to resort to short-term borrowings to finance the balance of paymentsgap, which further exacerbated the debt service problem. While the terms oftrade improved in 1983, a severe drought reduced agriculturaf exports, andoverall export earnings fell. The situation was further exacerbated bypolitical disruptions, a flight of capital out of the country, and a cessationof short-term lines of credit from the commercial banks. In October 1983, theGovernment announced a 90-day moratorium on debt repayments, a further 21!devaluation of the peso, and new controls over the allocation of foreignexchange for imports. Substantial reductions were made in the investmentprogram, and some new tax measures were announced. As a result of theseausterity measures, the public sector deficit was reduced to 3.7% of GNP in1983, compared with 5.8% in the previous year.

18. Discussions with the ITF on a new Standby Agreement began in June1983, as did discussions with the commercial banks on debt rescheduling. Theagreement with the IMF was delayed by problems involving the accuracy of someof the basic data, and Government difficulties in reaching agreed monetary andfiscal targets. The latter problems were caused, in turn, by the need toprovide Central Bank supporc to weakened public and private financial institu-tions, slower than expected growth in Government revenues, and increasedspending. As a result, the money supply increased 36% between September andMarch 1984, and inflation has been averaging about 50% (annual rate). InOctober 1984, the peso was allowed to float, and exchange control restrictions

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imposed during the crisis in 1983 were dropped. Price controls on many basiccommodities were also eliminated. In addition, a series of new tax measureswere announced which substantially increased public sector resourcemobilization and shifted taxes on the foreign trade sector to domesticlevies. Agreement with the committee of commercial banks on a package of newfinancing and debt rescheduling has been reached, and the IMF Board approvedan eighteen month standby agreement in the amount of SDR 615 million onDecember 14, 1984.

Medium-Term Prospects

19. The medium-term outlook for the Philippines remains difficult. Evenwith the successful completion of the IMF standby agreement and debt resche- e

duling, the government expenditures and imports will remain severelyconstrained. Except for those new inflows to come as part of the debt resche-duling exercise, the country is faced with little or no access to freshprivate capital flows. As a consequence, the current account deficit willneed to be reduced from $2.8 billion in 1983 to $1.1 billion in 1985. As aresult of constrained government spending and reduced import levels, GDP fell65 in 1984 and is likely to be stagnant in 1985. As a result, the unemploy-ment problem has become severe, and real wages have declined.

20. A period of low growth is likely to last for several years after1984, particularly in view of current reductions in the investment program.The length of this period of slow growth, stabilization and adjustment can beshortened to the extent that the Government can take the necessary measures toaccelerate exports, increase public and private savings, and use investmentresources as efficiently as possible. The present crisis has increased theGovernment's awareness of the severity of the problems and increased itswillingness to adopt the policies necessary to correct the situation. In thelonger term, the combination of increased external assistance and Governmentactions could permit a resumption of growth at an average rate of about4-5%. Over the longer term, therefore, the country remains creditworthy fornew Bank borrowing on conventional terms, despite current short-term difficul-ties. Because the country faces an exceptionally tight resource position,local cost financing for selected projects will continue to be justified.

PART II - WORLD BANK OPERATIONS

21. As of September 30, 1984 the Philippines had received 96 Bank loans(of which two were on Third Window terms) amounting to $4,192.7 million andsix IDA credits amounting to $122.2 million. TFC investments totalled$159.7 million. The share of the Bank Group in total MLT debt disbursed andoutstanding is currently about 13% and its share in total debt service isabout 15%. These ratios are expected to be about 23% and 14%, respectively,

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by 1988 2/ Annex II contains a summary of IDA credits, Bank loans, and IFCinvestments as of September 30, 1984.

22. Bank Group lending to the Philippines expanded from an average ofabout $90 million per year in FY71-75 to an average of about $460 million inFY79-83. However, the lending program decreased dramatically in FY84 becauseof the current economic situation and the limited scope for traditionalprojects. Although the Bank has financed projects in virtually all sectors ofthe economy, particular emphasis has been given to agriculture as it is thedominant economic activity, and the sector has accounted for almost one-thirdof total Bank/IDA lending. Lending for industry, transportation, power, andsocial sectors followed in declining order of size. With regard to thefuture, the lending program is being revised to make it more responsive andrelevant to the country's current needs. During the next two years, theoperations would focus on essential macro-economic and sectoral policyreforms,and high priority activities that would require little or no budgetarysupport.

23. In agriculture, lending initially focused on expanding the irriga-tion system, credit programs, and other services to support rice production.The experience with irrigation has been positive with the establishment of astrong institution and expansion in irrigated areas, although cost recovery isstill a problem. Efforts have also been made to diversify agriculturalproduction through loans for tree-crops, livestock, fisheries, and integratedrural development projects. Recently the Bank provided assistance under theAgricultural Sector/Inputs project to support the Government's "Agenda forAction in Agriculture, 1984-88". This agenda provides for specific policyactions and institutional reforms to gradually improve production and invest-ment incentives, strengthen sector management and improve the allocation ofresources. Future lending will seek to continue the policy reforms initiatedunder the Agricultural Sector/Inputs Project.

24. In the industrial and financial sectors, lending has supportedpolicy reforms under the Government's structural adjustment program. Struc-tural adjustment lending in 1980 and 1983 ($502.3 million, total), has suppor-ted a series of reforms of the tariff structure, the system of industrialincentives, energy pricing and export promotion. The reforms suffered asetback in the current economic crisis but the Government remains committed toprogress in these areas, which we expect will be resumed and expanded. AnIndustrial Finance Loan supported improvements in financial sector policiesincluding liberalizing interest rates, reducing bank specialization andincreasing the availability of longer term funds. It also introduced a newinstitutional concept to broaden the reach of Bank lending by channellingloans through an "apex" unit in the Central Bank. In addition, the Bank hascontinued to provide financial support and technical assistance to small andmedium industries.

2/ These projections are based on preliminary estimates on the debtrescheduling.

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25. In the energy sector, sector work and the structural adjustment pro-gram initiated under SAL II provide the basis for future lending operations.While previous Bank lending focused on the power subsector, the Bank now seeksto support a broad range of activities; in addition to recent energy explora-tion loans, the Bank plans to continue assisting the accelerated developmentof geothermal and coal, power generation and transmission, energy conserva-tion, and rural electrification.

26. Implementation of Bank-financed projects in the Philippines, whichhad been satisfactory in the past, has suffered in the last three years. Thedisbursement factor (amount disbursed during the fiscal year as compared tothe total undisbursed at 51e beginning of the fiscal year) increased from 15%in FY82 to 19.6% in FY84 - although this largely reflects the impact of theSpecial Action Program (SAP) (see below). The Eas%,Asia Regional average was20.1% and the Banik-wide average was 21.2% in FY84;- the comparable ratios forThails?d and Morocco were 19.7% and 24.5% respectively in the same fiscalyear- Implementation problems increased in the last few years, reflectingin part problems caused by inflation, tight budget constraints, and changes inthe scope of the Bank's lending operations (a substantial increase in thenumber of projects, new areas of lending, emphasis on institution-building,and efforts to reach specific target groups and lagging regions). TheGovernment and the Bank have instituted a process of joint Country Imple-mentation Reviews. Five reviews have been held since May 1980 and will becontinued on a regular basis. As the country's economic crisis worsened, theSAP for the Philippines was designed to deal with the financial constraintsaffecting high priority projects. A comprehensive program of assistancemeasures was formulated and under the SAP, selected projects have benefittedfrom increased cost sharing and disbursement ratios, the establishment ofspecial accounts and in some cases, supplementary financing. These actionshave facilitated project implementation and resulted in significant improve-ments in disbursement performance.

27. This will be the second loan to the Philippines to be presented tothe Executive Directors this fiscal year. In addition, loans for an agricul-tural credit project and a coconut rehabilitation project are now beingprocessed for Board consideration.

3/ Excludes disbursements under the first and second Structural AdjustmentLoan. If included, the ratio increases to 28.9% in FY84 and 19.9% inFY82.

4/ Regional and Bank-wide figures also exclude disbursements under SALs.

5/ Thailand and Morocco are useful as comparators as they have similar percapita income levels and Bank Group lending programs. Figures alsoexclude SALs.

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PART III - THE TELECOM!MUNCATIONS SECTOR

Sector Structure and Services

28. The telecommunications services in the Philippines are mainly pro-vided by private companies. These companies operate on the basis of fran-chises obtained from the Government and permits from the National Telecommuni-cations Commission (NTC), a regulatory entity within the Ministry ofTransportation and Communications (MOTC). The telephone services aredominated by the Philippine Long Distance Company (PLDT), a privately ownedcompany which accounts for more than 90Z of all available telephone installa-tions in the country. The remaining telephone subscribers are served by some60 operating companies, which are small local enterprises. The recordsservices (telex, telegraph) are handled bv a nmmber of competing companies;there are seven domestic records companies, three data communication carriersand five international record carriers. The Bureau of Telecommunications(BUTEL), a government agency, also provides telegraphic and a very limitedamount of telephone services in the rural areas.

29. There is limited interconnectibility of the privately owned tele-phone networks, and duplication of telephone, telegraph and telex facilitiesin the more profitable areas. Installations are concentrated in Metro Manilaand in other major cities. Smaller towns and rural areas, and even relativelypopulous outskirts of the principal cities, have little if any access toservice. Table I illustrates the situation with regard to telephone services.

Table 1: AVAILABLE TELEPHONE LINES, *ESTLMAIED DEMAND, ANDDENSITY AT THE END OF 1982

TelephoneTotal density

Number of estimated Demand (linesworking demand satisfaction lb per 100

Area lines for lines /a (Z) population)

Metro Manila 422,000 614,000 69 6.4Rest of the country 57,000 594,000 10 0.1

Total Country 479,000 1,208,000 40 0.9

/a Working lines plus unmet demand.

lb Working lines as a percent of total demand.

The telephone line density is similar to that of Thailand, where a significantexpansion program is now underway, but inferior to Morocco (1.2), H4alaysia(3.3) and Korea (6.3).

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30. The limited access to telecommunication services nationwide, com-pounded by poor service quality and at times long outage and heavy circuitcongestion, renders the services inadequate to support the country's economicand social development. Given the geographic features of the Philippines,with 11 major and more than 7,000 smaller islands, an integrated and reliablecommunication network is essential for: (i) overcoming co0municationbottlenecks which at present constrain economic activity and industrialdecentralization; (ix) enabling producers and the business community torespond quickly to cnanging market conditions; and (iii) facilitatinggovernment administration and social services to remote rural areas.Currently, efficient management of enterprises in outlying areas is almostimpossible if reliance is placed on the public telecommunications system. Thesituation has forced many institutions, in agriculture, irrigation, and othereconomic and developmental activities, to procure and install privatetelecommunications equipment that is of restricted use and not cost-effective.

Sector Development Constraints

31. The major constraint to sector improvement has been the lack of awell-defined institutional and regulatory framework. Operating franchises arevariously issued by the Presidency and provincial and municipal administrativebodies. Political interference often takes the place of regulation. NTC,although in theory the central regulatory authority, functions merely as anadministrative body. NTC currently has over 400 employees, including regionaloffices, which should be sufficient for regulation of the sector. However,its middle management is weak and it lacks specialists in telecommunicationslaw, tariffs, financal analysis and engineering. It also lacks test instru-ments and other equipment for monitoring licensees' compliance with regula-tions or for working on technical standards, equipment approvals, etc. Conse-quently, regulatory control over operations of the various private companieshas been weak. The result is that the telecommunications sector suffers fromexcessive fragmentation, with duplication of services, lack of scale economies,low standards of service and virtually no coordination between the companiesin provision of facilities. In addition, little attention has been given tothe need to design an integrated nationwide network. The bigger privatecompanies have therefore concentrated their activities in the most profitableareas (e.g. Metro Manila) or on providing the more profitable services (telexand long distance and international telephone services).

32. One particular problem area has been tariff setting. Currently, thetelephone operating companies are allowed to set their tariffs to enable themto earn a 12% rate of return on total net assets, including revalued fixedassets in operation. As NTC only monitors the rate of return objective, theresultant tariff structure is complicated and non-uniform. Furthermore, dueto their small size, high costs and competition, only a few operating compa-nies produce a return near this maximum, and most of the operating companiesare in poor financial condition. They have lacked the confidence and beenunable to attract the capital to undertake investments to improve theirservices significantly and, in particular, to cross-subsidize operations ininitially unprofitable provincial towns. A tariff review be6an in 1983, butdue to the lack of funds the review was limited mainly to identifying thedemand for telecommunication services and the various tariffs currently in

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operation. The project would supplement this with a comprehensive studyfocusing on future tariff policy.

33. The management in the Philippines of the radio frequency spectrum isan NTC responsibility, but NTC has lacked the staff and equipment to do itproperly, which has contributed to slow and disorderly development.

34. The telecommunications sector has, ia the Dast, been able to recruitstaff with good educational background, benefitting from the comparativelyhigh standard of education in the Philippines. Both PLDT and the JapanInternational Cooperation Agency (JICA) are providing specialized training.However, due to a large exodus of Philippine specialists to other countries,there is currently a shortage of adequately qualified staff. This will befurther aggravated in the future by the requirement of staff to cater for anexpanded program, system changes and adoption of new technologies.

Sector Objectives

35. The MOTC was created in 1979, to, inter alia, facilitate improve-ments in the sector. In 1982, with the help of consultants, MOTC drew up aNational Telecommunications 'Saster Plan, 1983-2000 (para. 39), designed toremove the sector constraints, and enable a rapid and significant improvementof the sector services. The Plan calls for:

(a) strengthe.aing NTC and giving it the legislative basis both foradequate sector regulation and for overall policv development(including tariffs) and planning;

(b) continued private operation of the sector facilities, under suchconditions as will enhance the sector's attractiveness for privateinvestments and will enable the sector to finance its expansion,while at the same time protecting the public interest;

Cc) eliminating excessive fragmentation of services, and achievingoptimum utilization of available facilities;

(d) creating an integrated long distance transmission ("backbone")network with access for all kinds of services;

(e) programmed expansion and new construction of local networksnationwide; and

(f) gradually modernizing the installations to upgrade the quality ofservice to internationally-accepted levels.

36. These objectives constitute a significant and positive policy changedirected towards improving and rationalizing sector organization and invest-ments. However, given the current foreign exchange and budgetary constraints(paras. 15-18), the Government has postponed the major elements of the invest-ment program. It intends to use the interim period to maintain the momentumof institutional development, particularly focussing on strengthening NTC.The proposed project is in line with the Government's objective, as it would

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assist in ensuring that the institutional and policy bases, which are indis-pensable for the sound regulation and development of the sector, are estab-lished, and that the interim period is used constructively.

Sector Reorganization

37. Some aspects of the Plan and NTC's institutional deveiopment arealready under implementation. A draft telecommunications and broadcastingcode has been prepared by MOTC, uith the assistance of a consultant from theInternational Telecommunications Union, and submitted to the new Parliament,where it is being examined by a committee. The current regulatory powers ofNTC are defined in the executive order that established MOTC in 1979. Theexecutive order has been revised to incorporate, inter alia, Bank comments,e.g. on the need to provide NTC with -jore independence. The status of thelegal framework for the telecommunications sector was reviewed and a timetablesatisfactory to the Bank (mid-1986), for the effectiveness of the revisions tothe NTC organization and a comprehensive telecommunications and broadcastingcode were agreed on (Section 3.02(b) of the draft Loan Agreement). During ti:esupervision of the proposed project, this timetable and the develepment of thelegal framework will be closely monitored. NTC's general organization, workprogram and procedures will be reviewed to update the rules and regulations,as required; preparatory work on this would be assisted under the proposedproject (para. 46(a)).

38. An important part of the sector consolidation process is the inte-gration of the available intra and interregional transmission facilities intoa principal long-distance "backbone" network with the capacity and coveragerequired for the lo...g-distance carrying of all services: telephone, telex,telegraph data, and leased channels. Negotiations are underway to merge thepresent inland records services operations into one private company operatingcooperatively with BUTEL, which will continue to provide records service tothe rural areas. The international services will be provided as at present byfive carriers. The organization of data maritime and land-mobile sexvices isstill being discussed. The small telephone companies are intended to begradually merged into viable regional companies or bought out by PLDT. MOTCis in the process of preparing new guidelines for NrTC that will encouragemergers and discourage establishment of new operating companies. This ration-alization of the network will improve efficiency and provide the basis forformation of strong operating companies capabale of attracting the necessaryloan and equity capital for system expansion. However, rehabilitation andreplacement of obsolete equipment in the numerous small regional companieswould also be needed to obtain the full benefits from sector consolidation.This issue should therefore be addressed in connection with future expansionplans for the sector.

Telephone Investment Program

39. An invastment program for expansion of the telephone network hasbeen provisionally established within the framework of the National Telecom-munications Master Plan. The program calls for the interconnection of alltelephone installations in the country, a significant increase of the traffichandling capacity of long distance transmission facilities, and provision of

- 13 -

facilities to meet about 80% of the demand for telephone connections both inMetro Manila and the provinces. The program will be implemented in stages.Phase I was engineered as a least cost national network with the help ofconsultants financed partly by two $500,000 Project Preparation Facility (PPF)advances from the Bank. The first PPF was approved for consultancy servicesfor initial studies on regulatory and institutional aspects, and detailedengineering studies for the telephone network in Regions IX-XII (Mindanao).The Government subsequently requested, and the Bank agreed, that all the fundsbe utilized for engineering studies; the preliminary work on the institutionalaspects was then done by local consultants using local funds. The second PPFadvance provided for the consolidation of the regional engineering studiesinto a national program, the preparation of tender documents and of a nationaltraining program. A consortium formed for the purpose was led by Arthur D.Little International Inc. (US). The current undisbursed balance is aboutUS$35,000. The proposed project would continue the work begun under the PPF'sbecause it provides for the updating of the network plan, the provision ofsome of the needs identified in the training program, and would improve andexpand on the work done on institutional aspects.

40. The cost of Phase I (1984-1988) had been estimated at aboutUSS1.7 billion (in 1983 prices), to finance 600,000 lines. As a result of theworsening macro-economic situation of the country, Phase I was scaled down tohigh priority items to provide about 105,00067ew lines. In parallel with on-going work (particularly PLDT's X-4 program - and a JICA/Government-financedprogram for a regional transmission network in Regions I and II in NorthernLuzon), the cost of this program was estimated at about US$186 million (withcontingencies), including funds for sector strengthening. However, the imple-mentation of this investment program will now have to wait until the macro-economic position improves and resources become available.

Bank/Country Sector Lending Strategy

41. In line with its objective to support structural and policy reforms,the Bank has stressed the necessity for restructuring the sector and improvingTM'cs regulatory functions. The original Bank financing envisaged was a loanfor US$125 million, to finance:

- consultancy services for the development of an adequate institurtional and regulatory framework, including a tariff structure thatwould attract necessary private funds for the sector while at thesame time protecting the public interest, and the design of a least-cost countrywide telephone network;

- the balancing equipment in the existing network for optimumutilization of the available facilities; and

6/ The PLDT X-4 program will establish new electronic exchanges to supple-ment old exchanges and provide an additional 200,000 main stations byend-1984.

- 14 -

- the balanced and cost-effective expansion of telecommunicationservices outside Metro Manila.

42. The worsened economic conditions caused Government to postpone itsoriginal telecommunications investment plans. However, Government recognizedthe importance of continuing the work on institutional reforms to assist MOTCin formulating adequate policies for sector development and to strengthenNTC's capabilities to regulate the sector. The MOTC has been unable toidentify other untied aid sources besides the Bank to provide the necessarysupport during the current hiatus. Without Bank iuvolvement, the momentum ofinstitutional and policy reforms is unlikely to be maintained, and the effortsmade during the last few years would be lost.

43. It is also important that some high priority items in the physicalexpansion program can be implemented despite the current macro-economic pro-blems. These investments, e.g. necessary equipment for interconnection andhandling of crucial traffic, are relatively modest, and would address the mosturgent problems caused by imbalances in the telephone network. PLDT is cur-rently discussing the possibility of utilizing part of the Bank's IndustrialFinance (Apex) Project (Loan 1984-PH) funds, together with its internal cashgeneration, to finance such items. (Under Loan 1984-PH which became effectivein July 1981, a special Apex Development Finance Unit was created in theCentral Bank of the Philippines to relend project funds to participatingfinancial institutions for financing economically viable industrial invest-ments.) These investments could improve utilization of available facilities,and thereby help traffic flow and increase revenue.

PART IV - THE PROJECT

Background

44. The proposed project evolved during the preparation of a major tele-communications investment program. W'hen it became evident that the proposedphysical investments would have to be postponed due to resource constraints,the Government decided that the momentum for improvement of the institutionaland policy aspects should be continued, and Bank support in the form of atechnical assistance project was requested. Negotiations for the proposedproject were completed on January 14, 1985. The Government delegation washeaded by Mr. Antonio Locsin, Deputy Director General, National EconomicDevelopment Authority. Annex III of this report provides supplementaryproject data.

Project Objectives

45. The main objective of the present project is to establish NTC as aneffective agency to help achieve sector goals. In addition, the project aimsto lay the groundwork for rationalizing the telephone tariff structure andlevels, create procedures for the efficient assignment of radio frequencies,improve network planning based on realistic demand forecasts and availabletechnology, and expand training to ensure availability of suitably qualifiedstaff for the long-term development of the sector. Even if no major invest-

- 15 -

ment program is undertaken, the proposed project would bring substantial bene-fits to the sector in the form of improved regulation and coordination andreduction of duplicated services.

Project Description

46. The project would provide the following:

(a) Strengthen NTC's ability to promote sound sector development andregulation. In the Philippines, with private operation of mosttelecommunications facilities, it is essential that NTC develop anappropriate organizational structure and adequate staff, togetherwith technical and financial resources, to enable it to act indepen-dently in safeguarding the public interest as well as that of theprivate operating companies. Sixty-six man-months of consultancyservices are planned.

(b) Tariff study. This study would aim at: (i) simplifying and stan-dardizing the current system; x ii) promoting timely tariff adjust-ments when needed; (iii) making tariffs more equitable; (iv) assist-ing the operating companies in spreading peak hour demand to lesscongested periods; (v) increasing sector revenues for further expan-sion and to attract private investments; and (vi) providingincentives for the operating companies to expand service in lessprofitable areas and to improve service quality. Forty-eightman-months of consultancy services are planned to study economic,engineering and financial aspects of the tariff system.

Cc) Strengthen NTC's ability to manage the radio frequency spectrum. Avalidation of the actual allocations and assignments and a computer-ization of the records and the assignment calculations are longoverdue. NTC will acquire a number of remote terminals (a computerin another entity will be utilized), assistance of outside exper-tise, finance for the test running of its program, monitoringvehicles, and various instruments. Ninety-one man-months ofconsultancy together with funding for specialized equipment andprogram test running will be provided.

(d) Updating of MOTC's telephone network plan on the basis of demand andtechnology changes. The plan has to be reviewed and brought up todate by NTC, using the latest demand/supply targets and othernecessary revisions to the least-cost network design, equipmentspecifications, standards, etc. Twenty-six man-months ofconsultancy are planned.

(e) Training. The current training needs of the telecommunicationssector have recently been studied by consultants. These studiesshould be followed up by a review of the need for more advancedtraining in new technologies, e.g. electronic digital switching andfiber optics. It is also important that MOTC/NTC's specifictraining requirement be studied to ensure that its staff is ade-quately qualified to regulate the operations of the sector. A

- 16 -

significant effort should be made to design course curricula andprovide teaching and learning aids. About f-fty man-months offellowships are needed to permit MOTCJNTC staff to stuldy theoperation of sector regulation in other countries. Some localconsultancies will also be provided for training.

Project Costs and Financing

47. The project cost is estimated at US$4.8 million (in December 1984prices), of which about US$0.8 million equivalent is in local currency. TheBank loan of $4.0 million would cover the full foreign exchange cost, andrefinancing of two PPF advances of $0.5 million each. The Bank loan would befor 20 years, with 5 years grace, at the standard variable interest rate.

48. Local consultants would be used to a substantial extent under theproject, particularly in areas where they have already done some preliminarywork. However, much of the consultancy needed under the project requiresspecialized skills which are unavailable in the country. Such consultancyservices are expected to be provided by foreign individuals or firms, possiblysubcontracted or in a joint venture with a local firm. US$0.2 million (10% ofbase costs) has been allocated for physical contingencies. US$0.5 million(about 23% of base cost) has been allocated for price contingencies, basedupon projected international inflation rates of 8.0% in 1985 and 9.0% p.a.thereafter.

Procurement and Disbursement

49. The equipment to be procured ($0.8 million, including contingencies)is a variety of small items for radio frequency monitoring, each contractexpected to cost less than $100,000. Considering the -elatively small amountsinvolved and that most equipment are off-the-shelf items that can be providedby a limited number of suppliers, they would be procured by prudent interna-tional shopping, based on at least three quotations. All equipment contractsabove US$30,000 would be subject to prior Bank review and approval. Consul-tants ($1.9 million) would be recruited in accordance with the Bank's guide-lines. Disbursements would be made on the basis of: 100% of foreign exchangeexpenditures on consultancy, training and other services, and directlyimported equipment, and 80% of expenditures for imported equipment procuredlocally. All disbursement requests would be fully documented. The closingdate would be June 30, 1989. The projected disbursement schedule is consi-derably faster than the disbursement profile for technical assistance projects(Annex IX) because of the $1.0 million in PPF-advances, which are expected tobe repaid as soon as the loan is declared effective, the advanced state ofproject preparation (para. 50) and the short duration (up to three years) ofmost of the consultancies.

Project Execution

50. MOTC would have overall responsibility for project execution. Ithas appointed a project manager with terms of reference acceptable to theBank, for the coordination and control of project activities and liaison withthe Bank and with the private operating companies. MOTC/NTC would also pro-

- 17 -

vide counterparts to work with the consultants (Section 3.04(c) of the draftLoan Agreement). Draft terms of reference for consultancy services and a listof goods and other services to be procured has been agreed upon. The terms ofreference are attached as Annexes IV-VIII. The necessary consultants, withqualifications and experience and on terms of reference satisfactory to theBank, would be appointed by September 30, 1985 (Sections 3.03 and 3.04(a) ofthe draft Loan Agreement). The consultancy services would be for up to threeyears and some services may be for only a couple of months. On the basis ofprogress reports (para. 51), MOTC and the Bank would assess the projectachievements and make the necessary modifications in the work plan. Uponcompletion of the consultancy services, MOTC would consult with the Bank onthe conclusions and recommendations, and take all the necessary steps toimplement the mutually accepted recommendations, in accordance with a time-table satisfactory to the Bank (Section 3.04(b) of the draft Loan Agreement).

Accounts, Audits and Reporting

51. The project manager will prepare quarterly reports on the progressof the project and transmit these reports, through MOTC, to the Bank withinone month of the expiration of each quarter. Project accounts will be main-tained by MOTC, and audited annually by independent auditors acceptable to theBank (Section 4.02 of the draft Loan Agreement).

Project Justification and Risks

52. The proposed project represents a high priority step in Government'sefforts to strengthen the institutional and regulatory framework of thetelecommunications sector. An adequate regulatory framework would alleviatesome of the current problems of the sector (paras. 31-34) and would be aprerequisite for a much needed expansion of telecommunications services in acoordinated and equitable way, once current macro-economic constraints arerelieved.

53. There are no major project risks per se; however, achievement ot allpotential longer run benefits of the project would be subject to several risks.Implementation of the main physical investments planned for the telecommunica-tions sector might be delayed by continuing macro-economic problems. Further-more, the introduction of a regulatory framework in a sector where regulationhas been totally inadequate may be subject to political risk and oppositionfrom vested interests. But even if physical sector investments are postponedindefinitely and under adverse political developments, the proposed projectwould considerably benefit the telecommunications sector by providing MOTC/NTCwith the means to adequately regulate existing sector operations, to reduceduplication of services, to introduce technical standards, to improve coordin-ation between the operating companies, and to introduce a tariff structurewhich would attract necessary capital for sector expansion while at the sametime protecting the public interest.

- 18 -

PART V - LEGAL INSTRUMENTS AND AUTHORITY

54. The draft Loan Agreement between the Republic of the Philippines andthe Bank and the Report of the Committee provided for in Article III,Section 4 (iii) of the Articles of Agreement of the Bank are being distributedto the Executive Directors separately. Special conditions of this loan arelisted in Section III of Annex III.

55. I am satisfied that the proposed loan would comply with the Articlesof Agreement of the Bank.

PART VI - RECOMMENDATIONI

56. I recommend that the Executive Directors approve the proposed loan.

A. W. ClausenPresident

AttachmentsJanuary 28, 1985Washington, D.C.

- 19 - ANNEX ITAIL!t 3A Page 1 of 5

pnuIvpn - SOCIAL DDICATO DTA SlAWRiLtPSn uu clous (IlOU IClTD AVQA4S) a

HOST (HOST R31 KSrDAUTE) lbuRnWr H"IDIZ nos moow INUN

xo1k 197auok sUmTniL ASIA 6 PACIFIC LAT. ANEICA4 CAt

a (Tiaw S41q. in)TOTAL 300.0 300.0 300.0AGRICULTURlAL 98.5 104.0 109.9

CGP P CPIOT (CUSS) 150.0 250.0 820.0 1091.2 2108.6

-OO minuKPMt a cAnn(KILOGRAMS OF OIL EQVALENT) 109.0 231.0 Z61.0 567.3 99S.5

POPUTIO - VTDAL SUTISTICSPOPUIATION*NID'YEAR (THOUSANSI) 27394.0 36848.0 50740.0URBAN POPULATION (Z OP TOTAL) 30.3 32.9 37.9 34.7 66.5

POPUILAnON PROJECTlONSPOPULATON IN YEAR :eoo (HILL) 73.3STATIONARY POPULATION (KILL) 126.7POPULATION MUIEN3M( 1.8

POPULATION DExNSTPER SQ. DI. 91.3 122.8 165.1 261.9 35.7PER SQ. DK. ACRI. LAND 278.1 354.3 450.7 1735.1 92.4

POPUIATION AGE STRUCTURE (Z)0-14 YRS 44.6 45S5 43.0 39.0 39.9

15-f4 YRS 52.4 51.6 53.7 57.6 56.065 AND ABOE 3.0 2.9 3.1 3.3 4.1

POPLULATION CRO0WT RATE (:)ToTAL 3.0 3.0 2.7 2.3 - 2.4URBAN 4.1 3.8 3.8 4.3 3.6

CRUDE BIRTH RATE (PER T00US) 46.7 44.0 30.8 30.1 31.3CRUDE DEATH RATE (PER THOS) 14.6 9.8 6.8 9.5 8.1CROSS REPRODUCTION RATE 3.4 3.1 2.2 2.0 2.0

FAMILY PLIANINCACCEPTORS. ANNUAL (THOS) 1. 91.7 37S.0USERS t: OF IIARRED ONna) .. 15.0 IC 36.0 Id 52.7 40.3

PWS AID NUIRITrIMINDEX OF FOOD PROD. PER CAPtTA

1969-71-100) 102.0 101.0 124.0 123.0 114.3

PER CAPITA SUPPLY OFCALORIES (: OF REQUIREFIENTS) 99.0 104.0 116.0 114.4 110.6PROTrEINS (CRAIS PER DAY) 46.0 51.0 53.0 57.0 67.3

OF WHICH ANIMAL AND PULSE 17.0 20.0 21.0 /e 14.1 34.1

CHILD (AGES 1-4) DEATh RATE 13.8 7.9 4.0 7.2 5.7

LIFE EXPEcT. AT RIRTH (YEARS) 52.S 59.0 64.2 60.4 64.7INFANT MOMT. RATE (PER TIDUS) 105.3 75.0 51.3 66.3 60.6

ACCESS TO SAFE WATER (SPoP)TOTAL .. 36.0 43.0 If 37.0 65.4URIIAN .. .. 66.0 7f 54.8 78.:RURAL ,. .. 33.0 7 26.4 46.2

ACCESS TO EXCRETA DISPOSAL(: OF POPULATION)

TOTAL .. 57.0 56.0 /f 41.3 52.9URBAN .. .. 76.0 /f 47.4 67.0RURAL , .. 44.0 7f 33.3 24.5

POPULATION PER PHYSICIAN 6940.0 9100.0 7970.0 7749.4 1917.7POP. PER NURSING PERSO! ,. 5390.0 4000.0 Z460.4 815.8POP. PER HOSPITAL SED

TOTAL 1210.0 820.0 560.0 /d 1044.2 367.2URBAN 540.0 390.0 .. 651.2 411.5RlUAL ,, ,. .. 2594.6 Z636.3

AlMISSIONS PER HOSPITAL BED ,. 30.0 ,, 27.0 27.3

rnU-nAVERACE SIZE OF HOUSEHOLD

TOTAL 5.8 5.9URBAN .. 6.2RURAL ,. 5.8

AVERAGE NO. OF PERSONS(R004TOTAL .. 2.3URBAN ,, 2.3RURAL .. 2.4

ACCESS TO ELECT. (I OF DWELLINGS)TOTAL 16.5 22.7 36.0LRBAN .. 59.9 82.6RURAL .. 6.7 10.0

- 20 - ANNEX ITABLE h Page 2 of 5

PUIIIESOCS -SOCIAL INDICATORS DATA SHEETPULFW FINE REFERENCEC amOps (IIEINTE AVERASE)

MOST (HST RECWI ZuTmAz)RECENT M~IDDLE INCONE KIDDLZ

1960.1b 1§70t! EST ATB ASIA PACIFIC LAT. AI CAR

ADJUSTED CllOLLNDUi RATIOSPRIKAYt TOTAL 95.0 108.0 110.0 102.0 103.4

tmUZ 96.0 .. 111.0 105.9 106.3TEMALE 93.0 .. 108.0 98.2 104.5

SECONDRY: TOTAL 26.0 46.0 63.0 46.0 43.2lUZ 28.0 .. 58.0 U0.7 42.3

FALEZ 25.0 .. 68.0 43.1 44.5

VOCATIONAL (2 OF SECONDARY) 14.3 8.9 33.9 /I 17.5 33.6

PUPIL-TEACHER RATIOPRDIARY 36.0 29.0 30.0 31.0 30.1SECONDARY 27.0 33.0 34.0 23.5 16.8

ADULT LITRACY RATZ (E) 71.9 82.6 75.0 ^ 72.9 79.5

PASSENGER CARS/THOUSAND POP 3.2 7.6 10.2 /d 10.1 46.0RADIO RECEIVERS/THOUSAND POP 21.9 40.7 43.5 113.6 225.6TV RECEIVERSITUSAJID POP 1.4 10.9 20.7 50.1 107.2N PAPER ("DAILY GENEtAL

INTEREST") CIRCULATIONPER THOUSAND POPULATION 17.7 13.6 20.7, 53.9 63.5

CINENA ANNUAL ATTENDANCE/CAPITA 0.6 /h .. 7.4 7r 3.4 2.8

Lam FORCX.WTOAL LABOR FORCE (THWS) 10915.0 13877.0 18101.0

FEKUE (PERCENT) 34.2 33.1 32.2 33.5 23.2AGRICULTURE (PERCEhT) 61.0 53.0 46.0 52.2 31.5INDUSTRY (PERCENT) 15.0 16.0 17.0 17.9 23.9

PARTCIPATION RATE (PERCENr)TOTAL 39.8 36.6 35.7 38.7 32.2MALE 52.1 48.6 47.9 50.9 49.3FEKLAU 27.6 24.4 23.2 26.6 15.2

ECONOMIC DEPENDENuT RATIO 1.2 1.3 1.3 1.1 1.4

PERCEIT OF PRIVATE INCOMERECEVED BY

HICHEST 52 OF HoUSEHLDS 30.1 25.Z1 , 2L2NICHEST 202 or MOUSEHOLDS 56.3 54.0 , 486.0LOWEST 201 OF HOUSEOLDS 4.2 5.2 ,. 6.4LOWEST 402 OF HOUSEHOLDS 12.0 14.2 ,. 15.5

F TU m_SESTIKMTED ABSOLUIZ POVER INCOMELEVEL (USS PER CAPITA)

UUAII .. .. 260.0 1U8.6 288.2RURAL ,, ,, 195.0 152.0 184.0

ESTDIATED RELATIVE POVERT! INCMELEVEL (USS PER CAPITA)

URBAN ,, ,, 266.0 177.9 522.8RURAL .. .. 200.0 168.6 372.4

ESTMATED POP. SEWLN ABSOLUTEPOVETY rInE LEVEL (z)

URBAN ,. .. 32.0 23.4RIIAL .. .. 41.0 37.7

NOT AVAILABLENOT APPLICABLE

NOTE S

/s The group averages for each indicator are populAtiow-%elghted arltlmtic means. Coverage of countries a8m theIndicators depende on availability of data and Is not uniform.

/b Unlesm otherwie noted. 'Data for 1960" refor to any year between 1959 and 1961; 'Data for 1970" betven 1969 and1971; and data for "ost Recent Eatimate' between 1990 and 1982.

/c 1968: Id 1978; /e 1977; If 1975; A 1979; /h 1958.

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-22 - Page 4 of 5

PHILIPPINbS - CONOMIC INDICATORS

Amount(million US5 at Annual growtb ratem CZ) (conctant price)current prices) Actual lot. Projected

Indicator 1983 1979 1980 1981 1982 1983 1934 1985 1986 1987 1983

NATIONAL ACCOUNTS

Croa. domestic product 34.266 5.9 4.9 3.8 2.9 1.0 -6.0 0.8 2.2 3.5 4.5

Agriculture 7.388 5.3. 5.0 3.6 3.1 -2.1 1.0 2.0 3.0 3.5 3.5Industry 12,364 6.7 3.5 4.7 2.4 0.7 -8.0 -2.0 1.0 3.5 4.5Services 14,514 5.5 6.3 3.0 3.5 3.5 -7.9 2.5 2.7 3.5 5.0

Consumption 26,959 4.8 4.8 4.0 3.5 2.6 -2.8 -0.3 0.6 0.7 2.5Groas investment 9.151 7.4 1.0 2.3 -2.9 -4.4 -25.5 1.1 4.2 9.1 7.6Exports of CNFS 6.650 7.4 16.0 1.6 -2.6 1.7 4.9 5.1 6.0 6.3 6.7Imports of CNFS 8,382 10.3 3.7 -. 9 1.5 -2.0 -24.0 0.2 1.5 2.1 2.6

Crose national saving. 7,400 7.7 3.4 3.1 -6.5 -3.1 - - - - -

PRICESCDP deflator (1972 - 100) 249.4 286.9 317.3 343.5 380.4 - - - - -Exchange rate (USSI - ) 7.4 7.5 7.9 8.5 11.1 - - - - -Export price index (1980 - 100) 98.9 100.0 99.4 87.9 92.0 98 103 113 123 134

Import price index (1980 - 100) 81.6 100.0 112.7 101.6 95.0 99 105 114 125 136Terms of trade index (1980 - 100) 121.2 100.0 88.2 86.5 97.0 101 98 99 98 99

Share of CDP at market prices (M)- Average annual increace (2)

(at current prices) /a (cenet out prices)1960 1970 1975 1980 1985 1990 1960-70 1970-75 1975-80 1980-85 1985-90

Cross domestic product 100.0 100.0 100.0 100.0 100.0 100.0 5.1 6.1 5.q 1.2 4.0Agriculture 28.1 27.8 29.0 23.2 24.3 22.0 4.5 4.3 4.8 2.1 3.5Industry 25.8 29.6 33.5 36.9 36.1 38.9 6.0 8.6 7.6 0.2 4.5Services 46.1 42.6 37.5 39.9 39.6 39.1 5.2 5.4 5.7 1.8 4.0

conaumption 85.3 79.2 75.8 73.8 79.0 76.0 4.8 5.5 5.2 1.9 1.9

Cross investment 16.3 21.5 31.0 30.5 21.0 22.0 8.2 11.5 6.5 -4.7 6.5

Exports of CNFS 10.8 19.4 18.5 20.1 23.0 25.0 5.8 3.2 10.0 4.4 6.7Import, of GNFS 10.6 19.7 25.3 26.4 21.0 22.0 6.8 6.8 8.0 -3.2 2.4

Cross national savings 16.2 20.5 25.3 22.1 18.0 19.0 7.4 9.7 5.8 - -

As Z of GDP1960 1970 1975 1900 1983 Labor force in 1983 Millions (1)

PUBLIC FINANCE Agriculture 9.8 48.8

Current revenue 9.8 9.5 15.0 13.1 12.1 Industry 9.3 ) 46.2Current expenditures 9.6 10.9 13.2 9.3 9.6 Services ) )Surplus (+) or deficit (-) 0.2 -1.4 1.8 3.7 2.5 Unemployed 1.0 5.0Capital expenditure 2.3 1.9 3.2 5.Z 4.5Foreign financing - 0.1 0.3 1.5 2.0 -Total Labor Force 20.1 100.0

1960-70 1970-75 1975-40 1930-85 1985-90

OTHER INDICATORSAnnual GNP growth rate (Z) 5.1 6.1 5.9 1.2 4.0

Annual GNP per capita growth rate (2) 2.0 2.7 3.2 -1.1 1.7Annual energy consumption growth rate (2) 7.4 6.2 4.2 0.7 4.0

ICOR 3.7 4.3 5.2 23.8 7.1

Marginal savings rate 0.29 0.33 0.26 0.35 0.62Import elasticity 1.33 1.12 1.20 -1.3 0.6

/m Projected years at constant prices.

East Asla and Pacific RegionOctober 1984

23 - Pge 5 of S pages

PHILIPP S - UATASZ OF PAMOOMS AN mAL CAPrL AND DD8T(S illio at current prices)

Actual Ret. Projected1979 1980 1981 19 983 1984 1985 1986 1987 1988

Sarr of °a1ance of Psuents

Exports of goods and services 6,177 7.863 8,624 8.004 8.132 8.755 8.891 10,101 11.572 13.336Of Whichc exports of goods 6.602 S.788 5.722 5,021 5,005 S.300 6.097 7.059 8,212 9,56S

;mports of goods * services 8.108 10.348 11.389 11.611 11_361 9.547 10.490 Il.535 12,658 13.922Of ubich: a-ports of goods 6,142 7,7J7 7,946 7.667 7.487 S.787 6,236 6,919 7,738 8.709

Transfers (ne:) 355 434 472 486 72 250 450 480 S0 550

Current Account Balance -1,576 -2.051 -2.'3 -3.121 -2,757 -1,560 -1,149 -954 -586 -36

Direc Investment (net) 99 45 407 112 -20

MLT loans (net) 1.091 1.032 1.382 1.721 1.392Official-source loans (net) 449 375 691 434 I.177Privare-source loans (net) 642 657 691 1,S27 215

Other capital Coet) la -193 593 -56 146 -739

Overall RaLance /b -579 -381 -560 -1 S142 - Z1Z

International reserves (e=d-year)Lc 2.43 3.155 2.707 2,543 903Reserves as montbs of imports 3.6 3.7 Z29 2.6 1.0

External Capital and Debt

Cross disborasente 2,13 1,887 2136 2,693Concesaional oans 185 168 Z12 176

BLSateral T113 1-T T_ 5-9IDA 3 2 7 8Other moltilateral 69 59 7 9

Nonconcessioosl Loans 1929 1_719 1.924 2,518

Off ical export cedits 152 8 58 66IMD 210 2Z29 641 251

Otber miltilateral 81 83 119 It5Private sources 1,506 1,3" 1,306 2,076

External DebtDebt outstanding and disbLrsed 7,204 8,415 10.148 12.145

Official-souree 2.286 2,730 3.355 3.971Private-source 4.918 5.685 6.793 8,174

'Tndisbarsed debt /d 3.645 4.W86 4,546 3.999

Debt ServiceTotal service payments /e 1,480 1,013 1.560 2,048

Of wihch: interest 488 568 806 1,076Payments so : of exports of goods

and services le 24.0 12.9 18.1 26.1

Average interest rate on new loansOfficial-soaurce 5.5 7.4 7.7Private-source 10.5 14.3 15.5 15.4

Average maturity of new loonaOfficial-source 23.4 20.2 20.9 {Private-source 11.1 10.1 10.0 ( 9

Is Non.onetary short-term capital, monetixation of gold, allocation of SDR*, and errors and omissions.lb Equals change In net international reserves. plus arrears.7% Cross reserves of the Central Bank (-Internstional reserves,- IFS).T Public and publicly guaranteed only.7e Includea prepaysents of $401 million in 1978, S492 million in 1979 and $92 million in 1980.

Note: Since the Philippines Is In the process of rescheduling Its debt, It is not poasible to project capital inflow figuresin detail.

East Asia and Pacific RegionOctober 1984

*uIIA 1 e -24- Page 1 of 2

THE STATUS OF MMN COP O0giff11= IN MME P3XIPPX11Z

A. STAT OF Or Ma W S AND rDA cnDfls /nA of Septeebr 30. 1984

iT. 2rcredt Autmt Clem cancellations)nb_r FI 3Drrer Sunk ID Wgiehrue

Forty-fle loms Ad three credtts fully disbursd 1,339.18 32.22 -1227-P 1976 Pop. of the Pilippineas aco Irrition S0.00 - 3.7J1272-T-PH 1976 nwa Urban 10.00 - 0.1012825-P 1976 WAILa Urben 22.00 - 0."1353-PH 1977 ThIrd ighmys 95.00 - 9.611367-P 1977 Jalaur Irriation 15.00 - 0.111414-P 1977 Nat. Irrig. S"tm Improvmnt 50.00 - 15.651l6-PR 1977 -Sral DEw. Land Settlemet II 15.00 - 2.601460-PR 1978 Nat±omsl Power Corp. Seventh Poemr .d.00 - 6.701506-PR 1978 Sup. of the Philippines SeithoLder Tree &mimg 3.00 - 4.33I526-PR 1975 Nat. Irr. Syem Impraevmt II 65.00 - 30.67790-PH 1978 D Sural Infrastructure - 28.00 13.26

1567-PH 197S - MSgat II - 150.00 - - 4.81572-PH 1978 _ InastrSal Investment III 80.00 - 8.S31615-PR 1979 M a-nila Weter Supply II8 ss.o - 29.031626-PH 1979 - Natioinl Extension 35.00 - 19.451639-PH 1979 - Sugat RSier multipurpose 21.00 - 0.431646-PH 1979 - S ll Parser Dev. (Lmad Sunk) 16.50 - 2.851647-PR 1979 - Second Urban Dwelndment 32.00 - 5.261661-PR 1979 lgbmys IV 100.00 - 36.601710-PR 1979 water Supply Ii 16.00 - 16.00920-PR 1979 w ater Supply II - 22.00 ItOS9Z3-PR 1979 - Population II - 60.00 29.37

1772-PR 1980 _ Ser Island nral Development 27.00 - 17.271786-PR 19W Training (Educ. VI) 38.00/c - 27.711809-PR 1980 - Idti-Scale Irrigaion. 71.00 - 53.991814-PH 1980 Wails Sewerage & Snitation 63.00 - 34.681:85-PR 1980 -;hinfed Agrie_ Dew. (nollo) 12 - 7.411821-PR 1980 Third urrb 72.00 - 39.561855-PR 1980 Tbi Ports 67.0o - 34.391860-PH 1980 R ral Roads IWraesent 62.00 - 36.681890-P 19;81 - _tered Snegemnt 38.00 - 22.371894-PR 1981 7 Third Livestock & nishers. 45.w - 24.431903-P 1981 - Structural dslcmnt 200.00 - 0.531984-PH 1981 Central Sunk of the Phil. ludatrial nance (CApex) 150.00 - 123.222030-PR 1981 ]*P. of the Philfippins Elementry Educ. Sector Leoa 100.00 9303200-P 198 Agric. Su"ort Serie 45.00 - 43.622067-R 1982 - Urbea hglinering 8.00 - 1.952127-PR 1982 - Texte Sector Restructue 157.40 - 113.912156-PR 1982 NatiOn Pieries Development 22.40 - 22.032169-PR 1982 - i inl 132.00 - 110.242173-P1 1982 Camal Irr1gacn - 71.1O - 60.772181-PR 1982 estionel Poer Cbrp. Coal Exploration 17.00 - 13.462200-PR 1983 Rcp. of the Phillppines Zdmcation VlII 24.40 - 21.342201 -PH 1983 Philippins Net. Ol1 Co. Petroleum Exploration Promotion 9.00 - 3.372202-PR 1983 * Petrolem Exploratlon Prmotton 24.00 - 18.672203-PR 1983 * Geotl -s_l Explorstlon 36.00 - 30.502206-PR 1983 3*p. of the Pbllippines Watet Supply nd Senitation 35.50 - 27.262257-PR 1983 Regienal Cities Dewelopment 67.-1 - 65.S12360-PH 1984 Central Vtaayas S1gional Developeent Z5.60 - 22.631282-1 1984 ' Psail Urban Dewelopmeut Supplement 10.50 - 10.471639-1 1984 * Stgat Rtver fNltipurpose Suppleeunt 5.10 - 4.262418-PH 1984 - Highys V 102.00 - 101.752435-PR/b 1984 Mmatitpal Developent (Second) 40.00 -2469-PR 1985 - Agricultural Sector lnputs 150.00 - -

Total 4,192.68 122.22 1,630.81of iblch a b en repaid(Dsnk and third parties) 435.13 0.46

Total now outstendlng 3.757.55 121.76Amount sold 31.94

Of which ha been paid(third parties) 26.37 5.57 -

Total now beld by Sunk and IDA(prior to exchange rate adjustments) 3.751.9t 121.76

Total udLurned 15773 53.38 1,630.81

la The status of the projects listed in Part A is described in a separate report on all Bnk/lIDa-fianced projectsIn teetion. wichb it updated twice yearly and circulated to the Executive Directors oan pril 30 endOctober 31.

lb Not yet effectlve.7 Includes $7.6 millio NAD fuAd.

AMNEX II-- 25 - Page 2 of 2

B. STATEMENT OF IFC INVESTMENTSAs of September 30, 1984

Fiscalyear Company Loan Equity Total

1963 & 1973 Private Dev. Corp. of the Philippines 15.0 4.4 19.41967 Manila Electric Company 8.0 - 8.01967 Meralco Securities Corporation - 4.0 4.01970 Philippine Long Distance Telephone Co. 3.7 0.8 4.51970 & 1972 Mariwasa Manufacturing, Inc. 0.8 0.4 1.21970 Paper Industries Corp. of the Phil. - 2.2 2.21971 & 1977 Philippine Petroleum Corporation 6.2 2.1 8.31972 Marinduque Mining and Industrial Corp. 15.0 - 15.01973 Victorias Chemical Corporation 1.9 0.3 2.21974 Filipinas Synthetic Fiber Corporation 1.5 - 1.51974/1979 Maria Christina Chemical Industries, Inc. 1.6 0.6 2.21974 Republic Flour Mills Corporation 1.2 - 1.21975 Philippine Polyamide Industrial Corp. 7.0 - 7.01976/1980 Philagro Edible Oils, Inc. 2.6 0.2 2.81977 Acoje Mining Company, Inc. 2.3 1.2 3.51977 Sarmiento Industries, Inc. 3.5 - 3.51978 Cebu Shipyard and Engineering Works, Inc. 2.1 - 2.11979 General Milling Corporation 4.0 1.1 5.11980 PISO Leasing Corporation 9.S 0.2 10.11980 Ventures in Industry and Business - 0.3 0.3

Enterprises, Inc.1980 Consolidated Industrial Gases, Inc. 4.5 - 4.51981 Loans to Seven Corp. f-r SMSE 18.5 0.6 19.11981 Philippine Assoc. Sme cing & Refining Corp. - 5.0 5.01981 Davao Union Cement Corp. 16.0 - 16.01982 NDC-Guthrie Plantations 11.0 - 11.0

Total Gross Commitments 136.3 23.4 159.7

Less sold, acquired by others, 89.1 14.5 103.6repaid nr cancelled

Total Commitments Now Held by IFC 47.2 8.9 56.1

Total Undisbursed 14.48 0.02 14.50

- 26 - ANNEX IIIPage 1

PHILIPPINES

TELECOMMUNICATIONS - TECHNICAL ASSISTANCE PROJECT

Supplementary Data Sheet

Section I: 1imetable of Key Events

(a) Date of presentation to the Bank: July 1980

(b) Date of identification mission: May 1982

(c) Date of preparatory mission: April 1984

(d) Date of appraisal mission:

Ce) Completion of negotiations: January 1985

(f) Planned date of effectiveness: May 1985

Section II: Special Bank Implementation Actions

Bank mission starting Janulary 28, 1985 to finalize arrangements forrecruiting consultants.

Section III: Special Conditions

(a) Through appropriate legislation and in accordance with a timetablesatisfactory to the Bank, the Borrower will ensure that NTCpossesses the full powers to regulate and administer the sector andthat an updated and comprehensive telecommunications and broad-casting code will be brou-ht into effect (para. 37);

(b) the necessary consultants would be appointed by September 30, 1985,(para. 50); and

(c) upon completion of the consultancy services, MOTC would consult withthe Bank on the conclusions and recommendations, and take the neces-sary steps to implement the agreed recommendations in accordancewith a timetable satisfactory to the Bank (para. 50).

ANNEX IV- 27 - Page 1

PHILIPPINES

TELECOMMUNICATIONS - TECHNICAL ASSISTANCE PROJECT

TERMS OF REFERENCE FOR

INSTITUTIONAL STRENGTHENING OF THE NATIONAL

TELECOMMUNICATIONS COMMISSION (NTC)

A. Objectives

1. NTC, a unit within the Ministry of Transportation and Communications(MOTC), is charged with regulating and planning for the telecommunicationssector. One of its tasks is to see to it that the policies set by the Govern-ment in the National Telecommunications Plan are applied by the sectorentities, mainly private operating companies. The Plan envisages a rapidimprovement and expansion of the sector services, with a concomitant growth inemployment. It also affects in a significant way network facilities, infra-structure, finance and program planning.

2. The project described in these terms of reference aims at developingthe capability of NTC to regulate and coordinate the telecovmunications sectoroperations and to plan for its expansion. NTC should be given such statutesas would allow it sufficient autonomy to consider and, in its decisions, takeaccount of the rightful interests of all parties. It should also be finan-cially self-reliant.

3. The specific objectives of the project are to:

(a) review the overall sector organization and make appropriate recom-mendations in view of NTC's role in the proposed expansion oftelecommunication services;

(b) inventory the tasks of NTC set out in the Plan and elsewhere, anddraft the legislative acts that may be required additionaUy for NTCto carry out those tasks properly;

(c) develop an organizational structure and a staffing, manpower andtraining plan for NTC; and

(d) propose such arrangements for the clients' payment of fees (includ-ing clients in the Government) as will make NTC financially self-reliant.

B. Background and Rationale

4. NTC was organized in July 1979 under Executive Order -:o. 546 creat-ing the MOTC. Its predecessor agencies were the Board of Communications andthe Telecommunications Control Bureau (successors of the defunct Public

ANNEX IV- 2B-Page 2

Service Commission and Radio Control office respectively). Under ExecutiveOrder No. 546, all the franchising, regulatory and radio licensing functionsof the two agencies were merged into NTC. NTC has adopted the practices ofthe defunct Public Service Commission in the exercise of its regulatory andquasi-judicial functions.

5. Two studies of NTC have been carried out by local consultants incollaboration with NTC staff:

(a) Carlos J. Valdes in 1982, on the "systems and organization" ofNTC. The study concentrated on the improvemert of office proceduresfor the filling of an application for a radio frequency assign-ment. In most instances, the licenses for radio stations were eval-uated and granted, with a minimum of cross-reference to the recordsof the previous regulatory units. The study recognized the need forexternal assistance for NTC through the engagement of foreignexperts with experience in private telecommunications administrationas well as knowledge of the rules and regulations procedures of theUS Federal Communications Commission and other similar regulatorybodies; and

Cb) SyCip, Gorres, Velayo and Co. (SGV), completed in April 1984,comprehensively describing the system and nature of NTC's quasi-judicial processes.

6. The consultancy staff to be engaged in the present project will haveaccess to the reports of these two studies and to relevant legal and otherdocuments. It will also have the full collaboration of NTC and its staff.

C. Project Organization

7. The project will be executed by a team consisting of both expatriateand local consultants.

8. The project staff will be formally responsible to a project managerto be nominated by the Minister of Transportation and Communications and beretained within the MOTC.

9. A working Committee will be set up within NTC to coordinate detailsof the project work, to review progress and discuss draft reports. It willdetermine its own procedures and be composed of representatives of NTC, theexpatriate consultancy staff and relevant local consultants.

10. A Project Steering Committee shall be appointed to advise theProject Manager. The composition of this committee will be communicatedlater.

ANIE 1V- 29 - Page 3

D. Scope of Work

11. The consultants are to undertake whatever tasks they deem requiredfor the timely and substantive meeting of project objectives. Among others,the following tasks would be essential:

(a) review and evaluate the existing NTC legal bases and its organiza-tional structure, development function, information systems, plansand programs, and linkages with other sector and governmentinstitutions;

(b) determine the strengths and weaknesses in areas evaluated, andrecommend short-term improvements or courses of action which can beimplemented rapidly;

(c) develop a cost/effective organization plan which will include theidentification and definition of specific tasks (in law, rates andtariffs, financial analysis and engineering) and functions of theorganization units and subunits;

(d) review the qualification and experience of the available staff ofNTC and its capability to undertake the tasks dete-mined under (c),and propose appropriate measures. It is important that the qualifi-cations of future NTC staff at least equal those of the privateoperating companies, clients of NTC. The consultants would proposemeasures for staff strengthening. If required, a reinforcement inthe form of consultants hired on a retainer basis could, forexample, be considered; and

(e) review of the cost of various elements of the NTC's work andproposals for more cost-effective methods and procedures, and con-sider feasible measures whereby NTC could cover its total costs ofoperation by such revenues as license and franchise fees.

E. Expected Outputs

12. The following outputs are expected, in addition to periodic progressreports:

(a) preliminary findings based on the review undertaken by each expertand on the discussion in the working committee of issues and find-ings (six months after the commencement of the project);

(b) recommendations based on the evaluation of existing organizationalstructure [four months after output (a)];

(c) financial forecasts (funds flow statements) for the next ten yearsof NTC's operations, with budget for the next FY and proposeddetailed arrangement for the earning and collection of revenues[simultaneously with (b)];

- 30 - ANNEX IVPage 4

(d) organization manual that would outline the general structure,specific function and tasks of each unit, manpower resources andcorresponding job descriptions (one month before project comple-tion);

(e) planning manual that will provide guidelines for planning activitiesand project preparation (simultaneously with (d)I;

(f) manpower development program that will provide a training program toimprove and develop NTC's available manpower resources[simultaneously with (d)]; and

(g) manual for charging license and franchise fees and for the collec-tion of charges [simultaneouslT with (d)].

F. Project Resources

13. Expatriate Consultants. A total of 36 manmonths of expatriate con-sultancy services are estimated to be required for the project. Theexpatriate consultants would prepare and establish methods and procedures forthe timely meeting of project objectives, and provide overall direction forthe work of local counterparts.

14. Local Consultants. The local consultants (30 man-months) areexpected to provide servicing facilities and personnel for the project. Theywill assist the foreign consultants in terms of logistical support, personnel,equipment sourcing, liaison with other government agencies, and the provisionof data/information necessary for the project. Moreover, the localconsultants will provide administrative support to the foreign consultants interms of in-country transportation, vehicles, accommodations, supplies andmaterials, office space, etc.

ANNEX V- 31 - Page 1

PHILIPPINES

TELECOMMUNICATIONS - TECHNICAL ASSISTANCE PROJECT

TERMS OF REFERENCE FOR

TARIFF REVIEW

A. Objectives

1. The determination and regulation of telecommunications tariffs inthe Philippines is one of the tasks of the National Telecommunications Com-mission (NTC), in the Ministry of Transportation and Communications (MOTC).The structure and functioning of NTC is the purpose of a separate study,likely to propose significant measures for NTC's strengthening. The regula-tion of telecommunications tariffs is a "'ital tool towards the promotion ofgovernment-set objectives for the telecommunications sector. One of theseobjectives is that telecommunications services be provided by private operat-ing companies with such financial viability as will enable them to provideservices of internationally acceptable quality, to expand access to services,and to attract private investment capital. In the long term, the sectorshould also become a good source of Government revenue. The MOTC recognizesthe need to undertake an in-depth review and evaluation of present tariffs tomake them responsive to financing, development and equity requirements of thenational telecommunications system. In order to help remedy the presentshortcomings in regard to the telephone services, a study is being launchedto:

(a) review the principles and procedures guiding the present tariffsetting, particularly the rate base evaluation concept and theretention of a ceiling of rate of return on assets used, and proposeamendments as called for; and

(b) review the financial situation of the telephone operating companiesas against the objective indicated above and propose requiredchanges in the structure and level of the tariff system; specialattention should be given to the consequences of a gradual introduc-tion of local call metering and timing.

B. Description

2. The project will consist of a number of short-term interrelatedactivities. The principal tasks of the study are the specifications of atariff structure consistent with sector objectives and with the institutionalstructure of the telecommunications sector, identification of the cost ofprincipal telecommunications services, determination of the demand character-istic for telephone services, and a financial analysis of the impact oftariffs on the cash generation needed for expansion and rehabilitation of thesector.

ANNEX V- 32 - Page 2

C. Potential Benefits

3. The benefits to be derived from this program would be, inter alia:

(a) improved incentives for the private sector operations to expand andupgrade their services, both in profita'ole high demand areas and ininitially less profitable areas;

(b) a rate structure that is realistic and responsive to the needs ofindustry and the public, and that will enihance aocial, economic andpolitical development;

(c) an equitable toll sharing scheme which will minimize cutthroat competition and enhance cooperation among operators; and

(d) increased fiscal benefits to government and increased foreignexchange earnings of the sector.

D. Inputs from the Philippine Government to the Consultant

(a) all data pertaining to recent studies on tariffs, rate regulationand structure (e.g.: Study of Tariff Structure and Rate SharingArrangement, April 1984, Sy Cip, Gorres & Velayo, Inc. (SGV);

(b) one or more local counterparts to work with each of the expatriateexperts; and

(c) office space, equipment, facilities and support services.

E. Scope of Work

4. The scope of work in the project will be, inter alia to:

(a) review all material available in legislation, previous studies andfiles;

(b) discuss and clarify the telephone subsector objectives with theProject Manager and with other local officials;

(c) identify and define the strategy for the development of the sub-sector;

(d) review, evaluate and recommend alternative approaches and method-ologies for the tariff study;

(e) provide overall direction to, review and assess the performance byvarious consulting groups;

(f) prepare a consolidated report of the tariff study; and

(g) train local counterparts in tariff setting.

ANNEX V- 33 - Page 3 T

F. Organization

5. The project will be executed by a team consisting of both expatriateand local consultants. The project staff will be formally responsible to aproject manager to be nominated by the Minister of Transportation and Communi-cations, and will be retained within the MOTC. A working committee will beset up within the NTC to coordinate details of the project work, to reviewprogress and discuss draft reports. It will determine its own procedures andbe composed of representatives of the NTC, the expatriate consultancy staffand local consultants. A project Steering Committee shall be appointed toadvise the Project Manager. The composition of this committee will be com-municated later.

G. Expected Output

(a) policy recommendations for a revised tariff structure; includingpeak and off-peak rates, cross-subsidies, level of subscriberinvestment plan, toll sharing, metering and timing calls and others;

(b) evaluation of the currently applied rate of return formula, andrecommendation; and

(c) development of a computer assisted tariff evaluation system, and thecorresponding tariff structure manual.

H. Resources

6. About 18 man-months of expatriate and about 30 manmonths of localconsultancy services will be provided. The consultants will conaborate withstaff of the MOTC, the NTC and the private operating companies. To the extentthat instruments will be required for the measurement of traffic flows andsimilar tasks, such instruments will be provided by the operating companies,as coordinated by the Project Manager.

34 - ANNEX VI~~ 34 ~~~~~ Page I

PHILIPPINES

TELECOMMUNICATIONS - TECHNICAL ASSISTANCE PROJECT

TERMS OF REFERENCE FOR

RADIO FREQUENCY MANAGEMENT

A. Objectives

1. The project is specifically directed towards the planning and imple-mentation of an effective frequency management for the National Telecommunica-tions Commission (NTC). The study aims to develop a national frequency allo-cation plan and system using a computerized data base for the effective andefficient management and control of the frequency spectrum.

2. Specifically, the objectives of the project are to develop:

(a) standards for spectrum management;

(b) an efficient and effective electronic data gathering and processingsystem for radio frequency spectrum planning and management;

(c) a computer based frequency assignment process for existing andfuture users of the radio frequency spectrum;

(d) the capability to provide assistance in the engineering of frequencyassignment; and

(e) accuracy and timeliness in the preparation and submission ofmateri9l for the International Frequency Registration Board (IFRB)reports.

B. Description

3. The study will update technical regulatory standards and norms forthe transmission in any mode of national and international telecommunicationof any kind over radio circuits so as to cater for a most economic use of theallocations to the Philippines of portions of the universal radio frequencyspectrum. The study will, moreover, recommend effective means for controllingsuch technical standards and norms, including inter alia the monitoring of theintended and anticipated use of the electromagnetic spectrum. It will alsoinclude all facets of frequency administration and related electronic dataprocessing aspects.

C. Justification/Rationale

4. In the recent past, interference in the adequate use of frequencyspectrum has grown to alarming proportions. This has not only made thefrequencies reserved for private, government and commercial use unavailable,but it has also created harmful distortions on the co3mmon carrier bands, the

ANNEX VI- 35 - Page 2

military band and the marine and navigation bands, in contravention tointernational commitments of the country.

5. The NTC has started the modest installation of regional monitoringstations. Carlos J. Valdes and Co. has been engaged to assist in the creationof a reliable record on frequency assignments, using an already installedlarge service computer owned by another Philippine institution. However, aplan remains to be prepared, that will implement this program in an integ-rated, coordinated and cohesive manner. The local consultants and thegovernment personnel on the project need to be reinforced by assistance fromforeign experts.

6. The completion of this project will inter alia ensure:

(a) effective and efficient use of the frequency spectrum;

(b) effective and efficient management of licensure, financial andadministrative functions of the NTC;

(c) dependable and healthy growth of telecom and broadcast sectors tothe extent such growth is dependent on the use of radio trans-missions; and

'd) accurate and timely compliance with IFRB's report requirements.

D. Scope of Work

Foreign Consultancy

7. The foreign consultant engaged for this project shall undertake thefollowing assignments:

(a) establish methods and procedures for carrying out the field surveys;

(b) establish the accuracy of the data file previously developed fromavailable national records;

(c) provide the necessary software specifications for propagation modelsand analysis programs to establish a computer-based frequencyassignment process; and

(d) provide the NTC with the essential specifications and staff trainingfor the establishment of a national monitoring resource includingstation location and design together with equipment specifications.

Local Consultancy

8. The local consultants will provide the servicing facilities andpersonnel to maintain the data collection and dissemination required for thecompletion of the project outputs. In particular, the local consultants willprovide:

ANNEX VI- 36 - Page 3

(a) all logistic support required by the foreign consultants;

(b) the field survey staff required to ensure that target dates ofcompletion are met; training required for specialized activities;

(c) all mobile and electronic equipment required for carrying out thesurveys together with the maintenance and calibration of theseequipments;

(d) local liaison with the computer processing for coordination ofspecification and program development; and

(e) other equipment as required.

E. Organization

9. The NTC shall establish a working team consisting of representativesfrom the Commission, foreign consultancy staff and local consultancy staff.Likewise, a Steering Committee shall be created, composed of senior officersfrom the Ministry and the Commission who shall monitor the progress of thestudy, evaluate reports submitted on the project and approve recommendationspresented.

F. Expected Outputs

(a) a system of radio frequency management and licensing procedures;

(b) standards for radio frequency spectrum management;

Cc) training of personnel for the various areas of expertise required bythe project:

(d) an automated information system to support the radio frequencymanagement and licensing procedures; and

(e) documentation of all the above activities in the appropriate regu-latory format.

G. Resource Requirements

10. Thirty-six manmonths of foreign consultancy services and computerexperts for 12 manmonths are required. Foreign consultants will be assistedby local counterparts (43 man-months).

- 37 - Page 1 I

PHILIPPINES

TELECOMMUNICKTIONS - TECHNICAL ASSISTANCE PROJECT

TERMS OF REFERENCE FOR

UPDAIING OF THE TELECO(MUNICATIONS NETWORK DEVELOPMENT PLANS

A. Objectives

1. To continuously maintain and update plans and directions for thedevelopment of the Philippine telecommunications network, in coordination withthe private operators. The plans and directions will serve as the parametersfor the preparation of expansion and/or upgrading programs by the privateoperating entities.

B. Description

2. The master plan for telecommunications development needs to bemaintained and continuously updated. The demand forecasts and supply targetsneed to be validated and adjusted annually, based on the prevailing economicconditions. A local counterpart team, composed of representatives from thegovernment and the private operators, assisted by local consultants shallundertake the maintenance and updating of these plans. Foreign expertise willbe required, from time to time, to provide advice and guidance to the localexperts.

C. Justification

3. In 1981, the government engaged the services of A.D. Little, Tele-consult and Sy Cip, Gorres, Velayo & Col (SGV) to jointly prepare with govern-ment and the private operating companies a broad total master plan fortelecommunications development. In 1983, the same consultants were againcontracted together with DCCD Engineering to prepare a specific nationaltelephone program, within the parameters of the master plan.

4. In the course of these studies, local expertise has been developedviz, the local consultants (SGV/DCCD), the operating company (PLDT) and thegovernment counterpart personnel. Computer models have been developed, usingmicrocomputers, for the least cost network design, traffic forecasts, and theeconomic and financial analyses. The capability of the local consultants toupdate these plans and programs need to be supplemented by foreign expertise,as required from time to time.

D. Expected Output

(a) updated plans and programs for the upgrading and expansion of tele-communications services;

(b) suggestions and directions on the use and application of the data,as generated by the computer models;

- 38 - ANNEX VIIPage 2

(c) priority lists of projects that may be implemented; and

(d) revised least cost network design, equipment specifications andstandards, data on demand and traffic, and on fi.ancial and economicviabilit".

E. Methodology

5. Local consultants with the aid of foreign expertise, shall reviewand revise the existing plans and programs for the network. Specifically, thefollowing items shall be reviewed and modified as necessary. To the extentrequired, the existing relevant microLamputer models shali be revised asneeded.

(a) Integration Plan. General review of systems architecture. Reviewoverall central operations, maintenance, administration and billingprocessing systems.

(b) Future Demand Study. Recheck demand using data gathered in past twoyears.

(c) Future Demand Annex G. Amend as required, depending on national andlocal economic conditions.

(d) Transmission Plan. Updatit_, to include consideration of fiberoptic systems, cellular mobile radio and paging services. Recheckpossible utilization of DOMSAT.

Ce) Switching Plan (Voice). Review in light of new CCITT recommenda-tions and new switches added/to be added to the network in theformer RETELCO area, Visayas and Northern Luzon.

(f) Switching Plan (Data). Updating to include local and wide areane-works (LAN, WAN). Investigation of new options based on recenttechnologies (Broadband/Baseband, Lans, etc.).

(g) Routing Plan. Review and revise to include data gathered in recenttraffic studies and demand forecasts.

(h) Numbering Plan. Updating, to incorporate changes made subsequent tooriginal plan.

(i) Synchronization Plan. Original plan was tentative, needs to befinalized.

(j) Signalling Plan I. Revision, especially of digital subscriberstandard (144 k bit/s).

(k) Signalling Plan II. Review.

_ 39 - ANNEX VII- 39 - ~~~~~Page 3

(I) Outside Plant Plan. Expand, taking into account the availabilityand suitability of fiber optics.

(m) Outside Plant Plan, Annex ES. Review and revise as needed.

(n) System Cost Study. Cost and cost functions require to be updated inaccordance with revisions proposed in (a) through (a).

F. Resource Requirement

6. The services of foreign experts for about six (6) ianmonths isrequired. The foreign experts will be assisted by local counterparts(20 man-months).

Note: The review and general updating of plans will take into account andincorporate the revised CCITT recommendations resulting from theGENEVA 1983 Plenary Session.

ANNEX VIII- 40 - Tgg-e 1T

PHILIPPINES

TELECOMMUNICATIONS - TECHNICAL ASSISTANCE PROJECT

TERMS OF REFERENCE FOR

TELECOMMUNICATIONS MANPOWER DEVELOPMENT PROGRAM

A. Objectives

1. The project will contribute to develop and improve the in-countrycapability and competence of the available manpower resources in the telecom-munications industry. It is also designed to take into account the emergingadditional requirements of a rapidly dev_.oping and expanding telecommuni-cations technology. The manpower development program is a necessary componentof expansion programs formulated within the framework of National Telecom-munications Master Plan. The need to promote and enhance the skills andcapabilities of personnel in the planning, installation, maintenance andoperations of telecommunications facilities and services as well as in therelated marketing, management and administrative tasks must be fully recog-nized. The manpower development is necessary to meet the future demand fortrained manpower, in both the public and private sectors, taking account alsoof the likely continued emigration of trained Filipinos.

B. Description

2. The telecommunications manpower development program is envisioned toprovide the couLatry with highly qualified and trained technical and managementpersonnel in sufficient numbers to staff both the government agencies and theprivate operators of the sector. The training program within the presentproject will center on updating of earlier manpower development studies andapplying the results to rationalization of ongoing training programs, as wellas provide fellowships or on-the-job overseas training of local engineers,technicians, planners and management staff.

3. In addition to the previous JICA grant which provides on-the-jobtraining for certain categories of technical personnel, this project willprovide more opportunities and exposure to more advanced, practical training,specifically in the application of modern technology, vis-a-vis, electronic-digital transmission, satellite communications, telex/data communications andother advanced telecommunications technology. Subsequently, the trainees whohave undergone on-the-job training in advanced systems will develop theconfidence, skill and expertise in handling modern equipments.

C. Justification

4. The project will upgrade the present level of service and perform-ance of telecommunications personnel resulting in overall efficiency in plan-ning, management and operation of the system. The U*ational TelecommunicationsMaster Plan aims at fast, reliable and efficient telecommunications serviceswidely available to more parts of the nation than at the present. The

- 41 - ANNEX VIIIPage Z

expansion of telecommunications infrastructure, facilities and services willrequire better qualified and adequately trained personnel who bave relevantexposure to modern telecommunications technology. The project will updateearlier studies and embody these aspects in the curricula and also provide thetraining for selected higher level technical and management personnel fortelecommunications work. The trained personnel will, subsequently transfer onto the local level the technology acquired from their training experience.

D. Methodology

5. Local consultants will be hired to review available manpower devel-opment programs in the sector. Moreover, the Ministry and the NationalTelecommunications Commission will undertake technical cooperation agreements,or bilateral agreements with foreign regulatory agencies and operating compa-nies for the exchange of personnel who will undergo on-site training inrequired areas of specialization. This will allow, as well, the staff toavail of foreign expertise in required specialized areas.

- 42 - age IX

PHILIPPINES

TELECOMMUNICATIONS - TECHNICAL ASSISTANCE PROJECT

Disbursement Projections

Disbursement profile forEstimated cumulative technical assistanceproject disbursements projects Bankwide

Z ofFY/Semester US$ million total Z of total

/a lb

FY852nd 1.0 0 0

FY86Ist 1.3 10 72nd 1.6 20 10

FY87lst 2.0 33 172nd 2.4 47 27

FY88Ist 2.8 60 332nd 3.2 73 43

FY89lst 3.5 83 532nd 3.8 93 63

FY901st 4.0 100 702nd 77

FY911s t 832nd 90

FY921st 932nd 97

FY931st 100

/a Including $1.0 million reimbursement to the PPF./b Excluding $1.0 million reimbursement to the PPF.

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