Document ofThe World Bank

Report: 18157 - TT

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED LOAN

IN THE AMOUNT OF US$14.85 MILLION

TO THE REPUBLIC OF TRINIDAD AND TOBAGO

FOR A

POSTAL SERVICES REFORM PROJECT

February 25, 1999

Finance, Private Sector Development and Infrastructure Sector UnitCaribbean Country DepartmentLatin America and Caribbean Regional Office

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CURRENCY EQUIVALENTS

(Exchange Rate Effective December 15, 1998)

Currency Unit = TT$1 TT$ = US$0.161US$ = TT$6.25

FISCAL YEAR IS: January 1 - December 31

ABBREVIATIONS AND ACRONYMS

CAS Country Assistance StrategyCODE Committee on Development EffectivenessDMA Delegated Management ArrangementEMS Express Mail ServiceGoRTT Government of the Republic of Trinidad and

TobagoIDF Institutional Development FundJGF Japanese Grant FacilityLACI Loan AdmiLIL Leaming and Innovation LoanLTA Long Term AgreementNZPIL New Zealand Post International Limited.PDAG Postal Development Action GroupPIU Project Implementation UnitPMR Project Management ReportP0 Post OfficePPF Project Preparation FacilityPSB Postal Savings BankRIC Regulated Industries CommissionT&T Trinidad and TobagoTTPost Trinidad and Tobago Postal CorporationUPU Universal Postal UnionVSEP Voluntary Separation Employment Package

Vice President: Shahid Javed BurkiCountry Manager/Director: Orsalia Kalantzopoulos

Sector Manager/Director: Danny LeipzigerTeam Leader/Task Manager: Anil Kapur

Trinidad and Tobago

POSTAL SERVICES REFORM PROJECT

CONTENTS

A. Project Development Objectives .......................................................... 3

1. Project development objectives ....................................................... 32. Key performance indicators .......................................................... 3

B. Strategic Context .......................................................... 3

1. Sector-related CAS goal supported by the project ................................. 32. Main sector issues and Government strategy ......................................... 43. Sector issues to be addressed by the project and strategic choices ........ 8

C. Project Description Summary .......................................................... 9

1. Project components ................................................... 9 ..92. Key policy and institutional reforms supported by the project ............. 113. Benefits and target population ......................................................... 124. Institutional and implementation arrangements ..................................... 13

D. Project Rationale ......................................................... 13

1. Project alternatives considered and reasons for rejection ...................... 132. Major related projects financed by the Bank and/or other

development agencies ......................................................... 153. Lessons learned and reflected in proposed project design ..................... 164. Indications of borrower commitment and ownership ............................ 175. Value added of Bank support in this project .......................................... 18

E. Summary Project Analyses ...................... ................................... 18

1. Economic ................................................... 182. Financial ................................................... 193. Technical ................................................... 194. Institutional ................................................... 195. Social ................................................... 196. Environmental assessment ................................................... 207. Participatory approach ................................................... 20

F. Sustainability and Risks ........................................................... 20

1. Sustainability ........................................................... 202. Critical risks ........................................................... 213. Possible controversial aspects ........................................................... 21

G. Main Loan Conditions ........................................................... 21

1 Conditions of effectiveness ........................................................... 212. Others ........................................................... 22

H. Readiness for Implementation ........................................................... 22

I. Compliance with Bank Policies ........................................................... 22

Annexes ...................................................................................................................

Annex 1 Project Design Summary ........................................................... 22Annex 2 Detailed Project Description ................................................ ........... 27Annex 3 Estimated Project Costs ........................................................... 30Annex 4 Cost-Benefit Analysis Summary, or

Cost-Effectiveness Analysis Summary .................................................... 31Annex 5 Financial Summary for Revenue-Earning Project Entities . ................... 35

Financial Summary .................... ....................................... 37Annex 6 Procurement and Disbursement Arrangements ....................................... 38

Table A. Project Costs by Procurement Arrangements ............................ 40Table B. Thresholds for Procurement Methods and Prior Review ............ 41Table C. Allocation of Loan Proceeds ...................................................... 42

Annex 7 Project Processing Budget and Schedule ............................... ................. 43Annex 8 Project Implementation and Documents in Project File ......................... 44Annex 9 Statement of Loans and Credits ........................................................... 47Annex O Country at a Glance ........................................................... 49

Trinidad and TobagoPostal Service Reform Project

Project Appraisal DocumentLatin America and Caribbean Region

Date: February 16, 1999 Task Team Leader/Task Manager: Anil KapurCountry Manager/Director: Orsalia Kalantzopoulos Sector Manager/Director: Danny Leipziger

Project ID: TT-PE-40108 Sector: Private Sector Program Objective Category: Private Sector DevelopmentLending Instrument: Investment Loan Program of Targeted Intervention: [ ] Yes [X] NoProject Financing Data [x ] Loan [] Other [Specify]

For Loans/Credits/Others:

Amount (US$m): 14.85 millionProposed terms: [X ] Single currency

Grace period (years): 5 years [X ] LIBORYears to maturity: 15Commitment fee: .75%

Front end fee: 1%

Financing plan (US$000s):Source Local Foreign TotalGovernment 8,230.0 --- 8,230.0IBRD 3,160.0 11,540.0 14,700.0Japanese Grant Financing 110.0 --- 110.0Total 11,500.0 11,540.0 23,040.0

Borrower: Republic of Trinidad and TobagoGuarantor:Responsible agency: Ministry of Public Utilities

Estimated disbursements (Bank FY/USS000s) 1999 2000 2001 2002 2003Annual 2,880.0 7,365.0 3,565.0 620.0 420.0Cumulative 2,880.0 10,245.0 13,810.0 14,430.0 14,850.0

For Guarantees: [] Partial creditProposed coverage:Project sponsor:Nature of underlying financing:Terms offinancing:

Principal amount (US$)Final maturityAmortization

profileFinancing available without guarantee?: [ Yes [ ] If yes, estimated cost or maturity:Estimated financing cost or maturity with guarantee:

Project implementation period: 5 years. Expected effectiveness date: May 1999; Closing date: December 31, 2004

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A: Project Development Objectives

1. The proposed postal service reform project's development objectives are two-fold:

(i) Greatly improve postal service by expanding its coverage and quality, achieve majorefficiency gains and introduce new products and services in response to growingclient needs. Extremely poor service quality and coverage would be replaced byfaster, more secure mail delivery for almost all citizens, with an increase in the varietyof services provided.

(ii) Increase private sector participation. Two separate actions will be undertaken toincrease private sector participation. Firstly, the management and operations of theexisting post office will be transferred to the private sector in two phases. DuringPhase 1, a Delegated Management Arrangement (DMA) in the form of aperformance-based, incentive management contract that will lead to privatemanagement of the newly corporatized post office; and in Phase 2, the deepening ofthe involvement of the private sector in the form of a Long Term Arrangement(LTA). Secondly, there will be further deregulation of postal products, with newprivate operators entering the market.

2. The key performance indicators for these objectives are:

(i) The transformation of the present post office, a government department, into acommercially viable and responsive corporation. The transformation would result inthe increased use of per capita postal services, an elimination of annual fiscal transfersin the range of TT$10-15 million, an estimated 40 percent reduction in manpower, thedelivery of mail to 90 percent of the country within 24 hours of posting (and within48 hours in more remote areas); a major improvement in customer satisfaction; and aclose to universal mail delivery to homes and businesses. The newly corporatized postoffice would include new services such as money transfer facilities, access to faxmachines, and payment of utility bills.

(ii) Agreement with a new international postal operator that will achieve theperformance indicators outlined above. The key performance indicators agreed tobetween the GoRTT and the private operator include significant improvements inuniversal service, customer satisfaction, transit time, total revenues, and net income.In addition, the deregulation of the domestic postal market may lead to at least two ormore new private operators, particularly in the courier services market. Some of themany (about 15) international courier operators can be expected to broaden theirdomestic operations as the mail monopoly is reduced.

B: Strategic Context

1. Sector-related Country Assistance Strategy (CAS) goal supported by project. Date oflatest CAS discussion, 03/30/95. Since 1992, two successive Governments have been makingprogress in redefining the scope and reducing the size of the public sector. Despite these efforts,public sector employment is about 25% of total employment compared with a combinedemployment of only 20% for the agricultural, manufacturing and mining sectors. The structure

4of public employment remains bottom heavy in spite of recent attritions. In addition, lessprogress has been accomplished in strengthening the capacity of the public sector as it continuesto be centralized and lacks a client-oriented focus. As such, enhancing the efficiency of publicmanagement and strengthening the delivery and quality of public services remains a key priorityof this Government.

2. The Governnent's preferred strategy is to implement reforms in a phased manner in orderto minimize the potential destabilizing political effects. In addition, the Government does nothave adequate technical skills and institutional capacity to undertake a comprehensive reform atthis stage. Therefore, the Bank approach is to closely collaborate with the development partnersactive in T&T, such as IFC, the IDB, the European Union, the IMF, and the civic society, insupporting the Government with highly selective Non-Lending Services (NLS), TechnicalAssistance Loans (TALs) and small focussed investment projects. To this end, the Bank isfocused on supporting the Government in: (i) Modernizing the public sector (e.g. proposedprivate management of postal services and water, strengthening the regulatory frameworks in oiland natural gas, power and telecom, undertaking judicial and civil service reforms, implementingthe on-going strengthening of the Central Bank and the financial system, and the restructuring ofthe Tourism Development Corporation; (ii) Reducing poverty and developing human resources,'and (iii)Eensuring environmentally sustainable growth.

3. The proposed postal reform project is an integral component of the accompanying CASas it: (i) creates a favorable policy environment for private sector participation; (ii) refocuses therole of the public sector; and (iii) improves infrastructure services. The Government hasderegulated the postal market allowing for greater private participation, has refocused the role ofthe public sector from owner to that of an overseer, and is embarking on improving the efficiencyand effectiveness of postal services. These actions will also help to reduce the annual fiscaltransfers (though small) in covering operational losses and in reducing the size of publicemployment.

4. In addition to supporting these objectives, the proposed project complements the Bank'sassistance program in that it is selective, small, and front-loaded. The size of the proposed loanis small and many of the policy actions have already been undertaken by the Government.

5. Main sector issues and Government strategy: Prior to the creation of the new postalcorporation (under Postal Act 1999), the Trinidad and Tobago Post Office (PO) and PostalSavings Bank (PSB) were divisions of the Ministries of Public Utilities and Finance respectively.Their services were both unreliable and of poor quality; so poor that postal demand wasrepressed and stagnant. For example, Trinidad and Tobago's per capita volume of mail usage in1996, was less than half that of the Bahamas, Barbados, and the Leeward Islands, and well belowthat of Jamaica. It had grown hardly at all during the 1990's, in spite of an expanding economy,and was fast losing market share in the faster-growing segments of its industry; parcels andexpress mail service (EMS). Because of the PO's poor service, 15 courier firms were servicingthe nation, reducing the PO's share of the international EMS market to about 5 percent. A recentspot check by consultants found parcels still to be processed six weeks or more after arrivingfrom abroad. Not unsurprisingly, the PO's revenues from its parcel service had been decliningfor years. According to UPU's 1996 data, the parcel usage was so low that the average T&Tcitizen could be said to have mailed only one parcel in his lifetime (per capita mailing of parcels

5in comparable countries was usually between a hundred and a thousand times more frequent thanthat of T&T). While the quantitative evidence is less, the security of the system was equallypoor. Members of Parliament were deluged by complaints from elderly Trinidad and Tobagocitizens who had not received remittance checks mailed from abroad. The Minister responsiblenoted--after mentioning the many complaints of non-receipt of mail, tampered packages, andmissing material--that there was a "total lack of confidence in the way the present service hasbeen provided."

6. As a result of its poor service, the PO's customers were increasingly becoming restrictedto public utilities (55 percent of revenues) and government and financial institutions (35 percentof revenues), that used the system for billings and other mandatory transactions. Given the poorsecurity of the system, the mail was mostly one way--from the utilities, government, and banksto individuals, but not vice versa. It was a courageous consumer that trusted his utility paymentto the PO. Most preferred to wait in long, monthly lines to pay their bills directly.

7. The service was not only poor and insecure, it was restricted as well. Transport andfinancial constraints led delivery schedules to drop from twice daily to daily, to (recently) muchless than daily. Many new residential areas had no mail service, since the financial constraintsforced the PO to freeze mail-carrier positions, and union rules prohibited more than 500deliveries per carrier "walk." Many rural, and even some suburban, sites with poor roadsreceived no service. Thus almost half of first class letters received were mailed to "generaldelivery;" i.e., picked up at the post office.

8. The postal savings system was equally defunct. Not only were almost half of its savingsaccounts inactive--accounting for 40 percent of the PSB's deposits-- their average size was quitesmall. Even as a ratio of per capita GNP, the average PSB account size was between one thirdand one tenth the account size of other countries with postal savings systems. This isunderstandable, since the average interest rate actually paid was about 1.5 percent.

9. Declining or stagnating demand and poor service had led to poor utilization of assets andlow levels of labor productivity. In 1996, T&T had 76 post offices and 161 postal agencies; and30 percent of them received two or less customers each day. Based on its product mix andvolume, a consulting firm retained by the Government estimated that the PO should be able toreduce its workforce by about 40 percent. In 1993, mail carriers in Port-of-Spain (the capitalcity) were delivering on a daily basis between 115 and 308 items (an average of 170), anextraordinarily low number for an urban community. Carrier routes were both designed andassigned in an arbitrary manner; the workload of carriers thus varied greatly. The financialconstraints suffered by the PO had led to a deferral of virtually all capital outlays The system--from counter processes to mail and parcel registration; from most financial recording topersonnel files--was almost wholly manual, with automation virtually nonexistent. The buildingsused by the PO are mostly old and inappropriate; some are close to a state of collapse. A largepercentage of the transport fleet was purchased in the early 1980s; less than half was in service atany one time.

10. This situation has led to repeated losses by the PO. During the 1990s, the system hadannual net deficits that varied from TT$10-16 million, about 0.2 percent of GDP. Revenuesprovided less than two-thirds of its current outlays. In 1997, the operating deficit had increased toabout TT$28 million, mainly due to decline in revenues. This further exacerbated the problem

6and continued the downward spiral in service and quality. The Government's decision to bothcontain its subsidy and freeze staffing (wages being, by far, the largest cost item) has led to adeferral of maintenance of buildings, transport fleet renewal, training, and major equipmentprocurement. Equally important, a consulting firm retained by the Government to assess the POrecommended that capital investments of almost TT$150 million (about US$24 million) will berequired if the postal system is to be modernized. This is about three times the PO's annualrevenues.

11. The Government's reform strategy aims to improve significantly the efficiency, coverage,and security of the postal system. It has decided these goals cannot be met without majorchanges in the policy framework, management structure, and role of the public sector. TheGovernment has decided that it will distance itself from the operational aspects of postal service,revising its role from one of operator and financier to one of policy setter only. The relinquishedroles will be assumed by the private sector, which is not only expanding its present activities,given a more benign and supportive environment, but initially managing the activities previouslyundertaken by the PO and ultimately owning it. While it has been aggressive in revising thepolicy framework, the Government has decided on a slower, two-phased approach for the reformof the Post Office itself; first because of the present poor situation of the PO, and secondly toensure the positive participation of the labor force and unions that represent them in this labor-intensive operation. The first phase will change the PO from a government department to anautonomous corporation, subject more to corporate than governmental laws and procedures.While the responsible Minister will still retain ultimate authority for key strategic decisions,given the continued state ownership of the corporation, greater flexibility in hiring, firing,procuring, and general operational management will be devolved to the Board and managementof the new corporation. As part of its first phase, the Government has selected and placed themanagement of the new corporation--Trinidad and Tobago Postal Corporation; TTPost--with aproven, international operator that will also undertake an investment program to upgrade thetechnology and efficiency of the system, and a detailed program to provide quality and universalpostal service to all T&T citizens. The second phase of the reform will be to fully privatizeTTPost, while virtually completing the liberalization of the postal system. The details of thereform are as follows:

(i) A Reformed Policy Framework. Passage of the TTPost law, has led to theliberalization of parcel and letter service, although TTPost will have a monopoly onletters (excluding newspapers, catalogs, magazines) of under two kilograms. Mostof the major international courier firms have established themselves in T&T, butthree (DHL, UPS, and Fed Ex) account for 80 percent of the business. SinceExpress Mail Services (EMS) usually weighs far more than a standard letter andsuffers higher rates for speedy delivery, this means most domestic courier/EMSmail may be liberalized as well. Within five years, the authorities expect tocompletely open the market, with no monopoly at all for TTPost. The recentpassage of the Regulated Industries Commission (RIC) Act has also created aninstitution that could be used ultimately to regulate monopoly mail service. Whilethe RIC will concentrate first on electricity, water, sewerage, andtelecommunications--since these are already in an advanced process of privatizationand the regulatory aspects of postal service are defined in a management contractwith a private operator--it may well include postal regulation, if the privatizedsystem retains a de facto monopoly position. The labor conditions have been

7liberalized as well. TTPost has far greater flexibility in labor management than theprior postal department, and the Government has begun to provide VoluntarySeparation Employment Packages (VSEPs) to about 40 percent of the postalemployees; it expects to complete the voluntary staff reduction by the end of 1999.

(ii) Increased Private Sector Participation. The TTPost law not only permits thecorporatization of T&T's postal system, it also permits the Government to offer aDelegated Management Arrangement (DMA) to another corporation (or consortia)to manage the operations of the new TTPost. After a period of preparation andconsultation, the T&T Government offered the management of TTPost in aninternationally competitive process consistent with World Bank procedures. Theinterested parties included a consortia of British Post with the Swiss Post, theGerman Post with two local firms, Canada Post with Nepostel, and New ZealandPost International Ltd.(NZPIL), a wholly owned subsidiary of New Zealand Post.In the event, only the latter two placed formal offers, and NZPIL was selected inJuly 1998. Through TTPost, NZPIL will implement a US$10 million investmentprogram during the period of the DMA. The key incentive driving NZPIL is theDMA, which has annual performance targets for postal coverage, consumersatisfaction, mail transit times, TTPost revenues and net profits. These targets arelinked to the payment of NZPIL's management fees. In addition to its managementfee, at the end of the second year, NZPIL could be paid an incentive payment in anamount equal to 30% of the Net Income of TTP. Prior to the completion of theDMA phase, the authorities will decide on the detailed strategy for the second phaseof the reform program.

(iii) Improving postal coverage and efficiency. While the DMA provides an incentivefor private management to improve postal service, effecting that change will requirea series of changes and capital outlays. NZPIL and the Government have agreed ona business plan that includes automation of postal and financial transactions, thereplacement or rehabilitation of retained post offices, the construction of a newcentral mail exchange near T&T's international airport, replacement of the presentvehicle fleet (which will likely be resold to individual subcontracted drivers), amodern, computerized management information system, a security program toensure safer mails, a new Universal Postal Code for T&T, and a detailed trainingand personnel incentive program to bring about a more commercial and responsiveapproach among TTPost's staff. The result of this program is expected to improvelevels in service and revenues as shown in the following table:

Table 1: Level of Service, Revenues, and Net Income1999-2003

Year Universal Customer Transit Growth in Net IncomeService Satisfaction Time Total as a % of

Revenues Total Revenues

1999 60% 50% 80% 36% (10.8%)2003 94% 84% 96% 9%/ 10.4%

'Reflects growth in total revenue over the previous year (2002)

8

Universal service will be measured by the share of urban and rural households andbusiness sites with direct mail delivery. Customer satisfaction will be based oncustomer surveys, common in assessing national mail systems. Transit time will bethat share of mail reaching addresses in all principal areas one day after mailing,and to all other areas two days after mailing. Growth in total revenue is the sum ofthe change in revenues generated from new businesses and existing products,including tariff increases. In addition, there is also a net income performanceindicator which has been defined and agreed to in the management contract. NetIncome is defined as total revenues minus (operating expenses + depreciation +payment of management fees + interest payments on all borrowings undertaken byand for the purpose of TTPost + principal payment of the World Bank loanbeginning in the 5h year).

(iv) Capital investments. The Government, NZPIL, and the World Bank have agreed ona major investment program, to be implemented by TTPost and financed by theWorld Bank and Government (both directly and out of TTPost's cash flow). Thisextensive program will finance the proposed new, modem systems, buildings,transport fleet, and equipment -- from computers to ergonomically designed satchelsfor mail carriers and more efficient letter trays. It will be a virtual revamping ofalmost every edifice, equipment, and process used by TTPost, resulting inupgrading the postal technology used in the country.

12. Sector issues to be addressed by the project and strategic choices: The project willaddress four principal issues in the postal sector: (i) improving labor efficiency which will befinanced principally by the Government from local counter-part funds; (ii) increasing privateparticipation which will be financed principally by the World Bank; (iii) modernizing postalfacilities and equipment; and (iv) continuing to strengthen the institutional capacity to supportand sustain the implementation of the postal reform program.

(i) Improving labor efficiency. No amount of training and systems development canturn around a labor intensive system which remains overstaffed. The Government'searlier estimate that the PO workforce is overstaffed by about 40 percent wasconfirmed by the NZPIL proposal. But the reductions would be extremelyselective; sorters would be significantly affected by the introduction of newmachinery, and virtually all mail drivers replaced with contractors (probably thesame drivers); but inspectors and delivery staff would increase. Moreover, wellover a fifth of the employees are more than 50 years of age, and might findretirement or VSEPs attractive. VSEPs have been used successfully in the reform ofthe electricity and water sectors. Postal workers belong to two unions, the PublicService Association (mostly clerical staff), which represents most T&T civilservants, and the Trinidad and Tobago Postmen's Union (mostly letter carriers).After the initial reduction, however, postal employment would increase as newservices and products are introduced One major success of the Government hasbeen to convince both unions of the need for the reform and acceptance of asignificant labor retrenchment. The management operator, NZPIL, is concerned thata more general VSEP would lead to some of the best or most crucially trainedworkers departing, and has asked the authorities to consult with it before agreeingon VSEPs. As a result, the authorities will be undertaking a labor retrenchment

9through a combination of retirements/attrition and VSEPs. The latter will takeeffect over the first two years of the DMA, and be totally financed by theGovernment.

(ii) Increasing private participation. Preparation of the project, which began in 1994,included discussions, seminars, and analyses of how to bring about private sectormanagement and incentives to a postal system in obvious distress. It was partlythrough this cautious and thoughtful approach that the prior and presentGovernments decided on the reforms and convinced the unions and otherstakeholders of their importance. The project has included not only this conceptualwork, but a detailed diagnosis and recommendations by a major consulting firm,financed by a Project Preparation Facility. The choice of the operator, NZPIL, wasundertaken in an international bidding process consistent with World Bankprocedures. The proposed project also includes financing of the management feesof the chosen international operator; at first directly and in the outer years from theprofits of TTPost. Finally, the project includes the development of the secondphase of TTPost's institutional reform, both the analysis and decisions on the finalstructure--concession, franchise, sale--as well as the process to achieve it.

(iii) Rehabilitating facilities and modernizing equipment. While the newly corporatizedTTPost, along with its new management, should provide a far better environmentfor postal improvements, and the newly reduced workforce will be more consistentwith good management and staffing practices, key to the attainment of the project'sobjectives will be the new technology, cost reductions, and systems incorporated inthe agreed capital investment program. New or rehabilitated postal facilities,including buildings, equipment, and management information systems, will becombined with a complete revamping of the transport fleet, and new deliverysystems. The new services to be added will be crucially dependent on theseinvestments as well.

(iv) Further strengthening the institutional capacity. Finally, there is the institutionalsupport required by the Government if it is to push the reform ably. The DMA is,in essence, a contract between the Government and NZPIL, and it is theGovernment, through the Ministry of Public Utilities, that must disburse Bank fundsfor the capital investment program, monitor performance of the operator, devisingand agreeing on changes when appropriate, and develop the second phase of thepostal reform. The project thus includes a Project Implementation Unit (PIU) undera high-level civil servant as coordinator, and sufficient staff and expertise to carryout its responsibilities.

C: Project Description Summary

1. Project components:. To support the objectives and the Government's postal reformprogram, there are five project components: (i) Voluntary separation assistance to support thereduction in the work force (12% of total project cost); (ii) Private participation assistance todevelop and implement a strategy for increased private participation (30% of total project cost);(iii) Rehabilitation and Modernization of postal facilities and equipment (45% of the totalproject cost); (iv) Institutional strengthening to ensure the timely disbursement of funds and themonitoring and evaluation of the management contract during the five years of the management

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contract (5% of the total project cost); and (v) contingency baseline costs which representsabout 8% of the total project cost. About 36% of the total project cost would be financed fromthe Govermment's counterpart funds, principally to support the reduction of the postal laborforce, payment of the management fees, and improving facilities. These counterpart funds arenot dependent on budget transfers as they would be sourced directly from TT Post's operationsand the sale of "excess and obsolete" assets. The following is a brief description of the majorproject components:

(i) Voluntary Separation Employment Assistance (US$ 2.7 million)

This component is the government's-financed Voluntary Separation Employment Package(VSEP). It represents about 12% of the total project cost and 33% of the total projectcontribution from the Government. The VSEPs would be consistent with Trinidad andTobago's labor laws, and granted after consultation with the union.

(ii) Private Sector Participation Support (US$ 6.75 million)

This component is to finance all the phases in increasing private participation in thepostal sector. Though it represents about 30% of the total project cost, the managementfee paid to the international operator for the five year period accounts for about 80% ofthe total component cost. The early preparation included consensus-building among thepolitical and labor parties which began with discussions, seminars, and analyses of howto bring about private sector management and incentives to a postal system in obviousdistress. This early phase (seminars and consultants) has been funded under a JapaneseGrant Facility (JGF) and the previously approved Project Preparation Facility (PPF). Theselection of the international management operator (NZPIL) was undertaken in aninternational bidding process consistent with World Bank procedures. The managementfees for NZPIL will be paid under the PPF (for the first quarter of operations as the loanmay not be effective) and under the proposed Bank loan for the first three years on adeclining basis (100% in the first year, 70% in the second year, and 30% in the thirdyear). The financing gap for the second and third year will be paid from the operations ofTT Post, while the fourth and fifth year will be paid entirely from internally generatedfunds. Finally, this component includes the development of the second phase of TTPost'sownership reform, both the analysis and decisions on the final structure--concession,franchise, sale--as well as the process to achieve it.

(iii) Rehabilitating facilities and modernizing equipment (US$10.4 million)

This includes the replacement, refurbishment and rehabilitation of existing buildings.Extensive rehabilitation and upgrading are expected to be undertaken at all locationsretained as post offices. It also includes the equipment required to upgrade and modernizethe postal sector: vehicles, counter automation, scooters, surveillance equipment,information systems, modern cancellers, culling/facing machines, registry automation,sorting systems, private boxes, collection boxes, inventory, and operations andmaintenance.

(iv) Strengthening institutional support (US$ 1.19 million)

This component includes the establishment of a small Project Implementation Unit (PIU)within the Ministry of Public Utilities. The PIU must disburse Bank funds for the capitalinvestment program, monitor performance of the operator, devising and agreeing onchanges when appropriate, and develop the second phase of the postal reform. The

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project thus includes a Project Implementation Unit (PIU) under a high-level civil servantas coordinator, and sufficient staff, including external advisors, to carry out itsresponsibilities. The terms of reference and consulting contracts will be made availableprior to Board presentation.

2. In addition to the project cost annexes, Table 2 below is a summary of the total projectcost.

Table 2: Project Cost Summary

PROJECT COMPONENTS _ _._ _I. Improving Labor Efficiency

* VSEP Support 2,700.0 2,700.0

H. Increasing PSP

* Preparation of PSP 50.0 20.0 30.0* PSP Phase 1 800.0 80.0 720.0* Management Fees 5,400.0 2,500.0 400.0 2,500.0* PSP Phase 2 500.0 500.0

HI. Modernizing Facilities* Rehabilitating Facilities 6,700.0 2,000 4,700.0* Modernizing Transport 1,700.0 1,700.0

Fleet* Automating Post Office and 2,000.0 2,000.0

Upgrading Info. System

IV. StrengtheningInstitutional Capacity* Project Coordinator 340.0 140.0 100.0 100.0* Project Implementation 500.0 370.0 30.0 100.0* Project Evaluation 350.0 150.0 200.0

V. Baseline Cost* Contingencies 2,000.0 500.0 1,500.0

%ALLOCATION 100% 36% 1% 6% 57%

3. Key policy and institutional reforms supported by the project: The project addressespostal sector reform in a comprehensive way. Indeed, this comprehensive approach explains thelong lead time that was required for project preparation. The key sectoral policies, developed aspart of the preparation, encompasses the following major features: (i) a reduction in the scope ofthe public monopoly, containing it to a narrow segment in the letter mail segment; (ii) the fullcost recovery and financial autonomy for the newly established TTPost; (iii) the elimination of

12cross-subsidization of the non-reserved services by the reserved service segment undermonopoly; (iv) the collection of revenue (at full tariff levels) from all users of mail, includinggovernment agencies; and (v) a new partnership with the private sector in PO and PSB. Thesepolicy changes have been approved in the parliament, and new legislation incorporating thepolicy changes was drafted, considered, and awaiting passage by parliament during thepreparation of this project.

4. The institutional changes were equally far-reaching. The PO, once a division of theMinistry of Public Utilities, has been transformed by an act into a state-owned corporation. Itscorporate and legal structure provides the entity with increased powers over critical areas such asemployment, investment, capital expenditure, joint ventures and new businesses. Another newinstitution, the Regulated Industries Commission (RIC) has also been established by law, andwill soon begin its regulatory work. While the RIC will concentrate first on non-postal servicemonopolies, it can be easily refocused on postal services as phase 1 of the postal reform (and theDMA, which incorporates all regulatory issues) ends. Finally, the Postal Savings Bank (PSB)will be transformned during the project period. The new postal operator, NZPIL, will beproposing ways by which the PSB can either be sold to a private bank or otherwise transformedinto an effective ancillary financial arm of TTPost.

5. Benefits and target population. Since they are used by all the country's businesses andhouseholds, improvement and development of the postal service will generate very majorbenefits for the nation as a whole. By supporting the development of PO into an efficient,market-driven, high quality provider of postal communication and financial services, the projectwould specifically benefit:

(i) Consumers, by providing them with a reliable, low-cost, high quality and market-responsive portfolio of postal services. In particular, the major beneficiaries arethose who do not have communication alternatives and do not now receive directmail delivery; e.g., rural and low-income communities. Particularly assistedwould be those, often elderly, residents that depend on remittances from familymembers abroad, since the greater security and speed of the new system will makethese transfers far more dependable.

(ii) Local businesses, by providing mass mailers (publishers, news media, advertisers,bill distribution and collection, etc.) a reliable, low-cost communications mediumand by reducing the amount of their working capital tied up in the mail system.Internationally oriented firms--hotels, exporters, and importers-wouldparticularly benefit from a more secure and rapid means of communication.

(iii) Government, through a reduction in the fiscal burden of supporting a large, loss-making enterprise. It is expected that the operating subsidy will be eliminated bythe end of the second year of the DMA; and.

(iv) Labor, although some workers will receive VESPs, the remainder should greatlybenefit through increased training, improved working environment and practices,and introduction of performance linked rewards. Furthermore, the image andstandards of the postal workers will be enhanced considerably with theintroduction of new uniforms and equipment.

136. Institutional and implementation arrangements: The borrower is the Government ofthe Republic of Trinidad and Tobago, and loan funds would be disbursed into a Special Accountat the Central Bank. The Project Implementation Unit (PIU) within the Ministry of PublicUtilities will be responsible for the overall project management, monitoring, and coordination. Itwill prepare, and transmit to the Bank, quarterly Project Management Reports (PMRs) whichwill summarize project progress in terms of financial activity, key performance indicators, andprocurement. The PMRs will also serve as disbursement requests (See Annex 6). It will also beresponsible for conducting annual project reviews and for compiling and/or obtaining fromTTPost, periodic reports (some of which will feed into the PMRs) on performance against agreedDMA performance indicators, and the physical and institutional components of projectimplementation.

The PIU will review design specifications, prepare tender documents, evaluate tenders andensure the timely finalization of contracts for technical assistance. It will also develop theproposed second phase of the reform, within the context of the LTA framework. Since the Boardof TTPost has legal responsibilities-placed in the legislation in anticipation of phase two-members of the PIU and other government staff will compose a majority of the TTPost Board toensure full compliance of the DMA. Finally, the PIU will conduct, with the Bank, a mid-termevaluation of the reform's progress within 30-months after the DMA has become effective. ThePIU will maintain a consolidated account of all expenditures under the project, maintainingproper records and accounts in accordance with sound accounting practices to reflect theresources and expenditures on the project. It will provide within six months of the end of eachfiscal year an audit report prepared by auditors satisfactory to the Bank.

D: Project Rationale

1. Project alternatives considered and reasons for rejection:

T The various alternatives increasing private participation--lease/concession arrangements,Rehabilitation-Own-Operate (R-O-O) and through partial equity sale--were considered andrejected. During an international conference which included many potential investors, itbecame clear that the investors were reluctant to take over the financial and investmentrisk in the current network, but were prepared to undertake a management contract. Sincethere are still few truly private basic mail delivery corporations, many of the state-ownedmail systems found it difficult to invest and otherwise accept international risks withintheir existing national institutions. NZPIL, a wholly-owned subsidiary of New ZealandPost, is one of the exceptions. The following table shows the status of postal services inselected countries:

14

Table 3: Status of Postal Services in selected countries2

SELECTED STATUS OF POSTAL SERVICESCOUNTRIES

Germany Joint-Stock Company managed under private law. State currently holds 100% of shares

Netherlands 45% state-owned, 55% in private hands

Sweden Limited liability company under private law. State currently holds 100% of shares.Monopoly on letter deliveries abolished 1993.

Singapore Private limited company. Has monopoly until 2007

Argentina State-owned but privately operated. Has 30-year concession on postal services.

South Africa State-owned. Operating on commercial principles.

Australia State-owned business enterprise. Pays 60% of after-tax profits to government.

France State-owned

New Zealand State-owned under corporatized structure

Italy State-owned

United States State-owned under corporatized structure

Japan State-owned

* Since Trinidad and Tobago, particularly the Ministry of Public Utilities, has had recentexperience with a management contract in the water sector, it was not averse to thismodality. While the water reform has not been fully satisfactory, both the Bank andTrinidad and Tobago have learned much from the process.

* Another alternative considered was separating the Postal Savings Bank immediately fromthe new postal corporation and otherwise disposing of it. This alternative was rejected bythe Government, since it wanted to improve postal service first. By including a decisionon the PSB in the project, the authorities will ensure that at least some improvement inmail service (and consumers' capacity to pay utility bills) will occur before the PSB isotherwise disposed of.

2 Financial Times, "Privatization of Post Office is Ruled Out", December 8, 1998, pg. 8

152. Major relatedprojectsfinanced by the Bank and/or other development agencies(completed, ongoing andplanned):

Project Sector Issue Latest Supervision (Form 590)Ratings

(Bank-financed projects only)Implementation Development

Trinidad & Tobago Progress (IP) Objective (DO)Bank-financed:Technical Assistance Loan The project complements the S S(Loan No. 31530) accompanying SAL (LN 3152-TR)

to implement its medium-termadjustment program.

Water Sector Institutional Strengthen water resources U UStrengthening (Loan No. management, support introduction37840) of private sector management in

WASA, and prepare a drainage andflood control project.

Environmental Management To support GoRTT's efforts to(Loan No. 38630) establish institutional and legal S S

framework for environmentalprotection.

Business Expansion and Development and/or restructuring U SInvestment (Loan No. 34320) of private manufacturing or service

firms, especially to compete inexport markets.

Other Development Agencies None identifiedOther Countries -BankTogo: Public Enterprise The project supports liberalization NA NARestructuring and Privatization of postal sector and providesSupport Project (Credit institutional strengthening through aNo.3045) management contract

Sri Lanka: Postal Service The project supports the financial NA NAReform Project (under viability of the Post Office andpreparation) private partnership in postal

financial services.Cameroon: Privatization and Separation of telecommunications NA NAPrivate Sector Technical from post operations, liberalizationAssistance Project (Credit No. of the postal market28820) .1 1IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory)

163. Lessons learned and reflected in the project design. The project has been designed totake into account lessons learned regarding how to address three types of problems posed bysimilar performance-oriented reforms of public agencies supported by the Bank: (i) managementcontract approaches, (ii) postal sector-specific problems, and (iii) technical assistance problems.

(i) Management agreement lessons. Management agreements have not been the mostsuccessful modality to provide private approaches for public services; the lack ofequity participation by the managing firm has proven difficult to overcome. As aresult of this experience, this project incorporates a series of steps designed toensure a more satisfactory result:

> The management contract itself has been designed to be as clear and specificas possible. In the past, misunderstandings and disputes have occurredbecause the contracts referred to many other documents and proposals, whichled to disagreements as personalities and business conditions changed. In thiscase, the management contract is totally self contained. It has specificannexes used to indicate only the key actions and timing expected inimplementing business plans, human resource plans, etc.

S The contract is--as much as possible--between only two parties; theGovernment and the managing operator. All too often, management contractshave three and even four parties-the boards of the state enterprise to bemanaged, a regulatory agency, cabinet-wide committees, other Ministries-and these lead to constant crossed signals for the manager. In this case, everyeffort has been made to keep the contract as much as possible between theGovernment, as represented by the PIU in the Ministry of Public Utilities, andthe management operator. While the Board of TTPost has responsibilities thatcould conflict with monitoring the agreement, since the TTPost legislationwas designed for a possible private corporation that could develop duringPhase II of the reform, the authorities will appoint government staff from thePIU and other ministries to ensure the Board is responsive to the letter andspirit of the agreement, Regulatory matters that could have been passed to theRIC to monitor will be retained in the PIU for clarity of responsibility.

> Incentives and remedies have been built into the contract. All too often, "riskcontracts" have only contract abrogation as a penalty, thus forcing agovernment to decide if it will continue with a poorly performing manager orabrogate the contract, leaving a vital public service unmanaged for aconsiderable time as it seeks a replacement. It often decides on the former. Inthis case, clear performance indicators on coverage, transit time, consumersatisfaction, and real revenue increases are key to the contract.Noncompliance with the indicators will lead to a reduced management fee.

> Finally, there are labor issues. Many management contracts fail because themanagers have no control over a largely over-dimensioned labor force, ill-motivated for productivity and change, and unresponsive to new equipment,technology, and systems. In this case the authorities and the two unionsinvolved have agreed on a major work force reduction to be legally and

17generously achieved through VSEPs. Moreover, a solid preparation by theGovernment seems to have convinced the workforce that change is vital totheir continued existence. Finally, the managing company was chosen both onits experience in other, similar situations and its proposed Human ResourcePlan as well as Change Management Strategy. The key actions of both havebeen incorporated in the management contract.

(ii) Postal-sector specific lessons. The project has also been designed to reflectlessons learned from similar reforms in the postal sector in particular. Newlegislation for the postal service was prepared and passed as part of projectpreparation; it provides the clear basis for postal reform and private partnershipsin the postal sector. The project also supports the creation and maintenance of amonitoring unit that provides on-the-ground support to the Government onaspects relating to regulation, supervision and control of the managementoperator. The postal reform experiences of other countries is reflected in theinstitution building. A comprehensive review of the postal sector worldwide bythe World Bank noted that mere corporate transformation in the postal sector hasnot led to performance improvements3 In fact, in some instances, unfocusedcorporatization has led to service deterioration. Corporate transformation is solelya vehicle to provide a conducive environment for change. In the postal sector,three other important components of reform are: (i) policy that provides thefreedom and flexibility to the postal entity whilst protecting social interests; (ii)sustainable capacity building; and (iii) access to capital in order to improve andexpand the postal network. This project addresses all three of these needs in thefollowing manner: (i) as part of project preparation, a new policy was designedand new legislation reflecting the policy was drafted and passed; (ii) sustainablecapacity building through private sector partnership is included in the DMA; and(iii) provision of funds for network rehabilitation, and private sector involvementin the operation and ownership of retail network.

(iii) Technical assistance lessons. Based on the Bank's most recent review of itstechnical assistance experience:4 the project has been designed to set quite narrowand specific objectives (improvement of the quality and coverage of postalservices). It has also been structured to provide strong incentives to themanagement operator to meet project and performance targets. The task team hasdevoted considerable time and resources to bringing the client along in the postalsector reform process and in building ownership. Project design reflects lessonslearned from considerable experience in both postal sector reform effortsworldwide as well as regarding the implementation challenges typically posed byefforts to modernize public agencies.

4. Indications of borrower commitment and ownership: While there are, indeed, multiplestakeholders affected by the proposed project--the Government, postal management,employees-all have been consulted throughout project preparation. Finally, the means of

3Ranganathan (July 1996).4 Committee on Development Effectiveness (CODE), Perspectives on Technical AssistanceLoans, draft (The World Bank: Washington, D.C., June 26, 1997).

18delivering and using consultants has been carefully designed in full consultation with the clientand potential bidders on the management contract to ensure complete buy-in. The Ministry ofPublic Utilities is strongly committed to the reform program and is eager to implement theproject as indicated in the letter of sector policy. The following is a brief summary of the actionstaken:

* Postal legislation has been approved by Parliament;* The prior Post Office has been transformed into Trinidad and Tobago Postal

Corporation with defined roles and responsibilities for the Board of Directors;* The recent legislation includes far-reaching policy changes (such as reduction of

monopoly, abolition of free mail, ability to enter into private partnerships)5 ;* The Govermnent has designed, consulted with the unions and announced voluntary

separation employment packages;* A public relations program for the internal and external communication of the reform

program has been underway for more than two years;* Support of the two unions has been secured; and* An NZPIL has been selected via international competitive bidding.

5. Value added of Bank support in this project: Without World Bank support, the postalreform program may not have been undertaken and possibly not implemented. In the past fewyears, the Bank has developed a strong postal sector reform practice by pioneering a large scalestudy exclusively on postal sector reform and providing technical assistance to numerouscountries on issues such as regulatory policy reform, network expansion, corporatization andcommercialization, and private participation. Through its collaboration with internationalorganizations such as the Universal Postal Union (UPU) and Postal Development Action Group(PDAG), the Bank is in a unique position to provide advice and technical assistance to theGovernment. This permits the Bank to tap into a worldwide network of experts and integrate thelessons from other countries that have undertaken or are undertaking similar reforn efforts. TheUPU has funded some of the project preparation activities.

Bank support to Trinidad and Tobago for postal reform began in 1994, and encompasseda series of conferences, seminars, and analyses for two different administrations. While the sizeof the project is modest, the budgetary cost to the Bank has been consistent with the ambitiousreform efforts. Bank association with the project was also useful in attracting internationaloperators; both final bidders were clearly eager for Bank participation in the project.

E: Summary Project Analysis

1. Economic (supported by Annex 4):

[ x] Cost-Benefit Analysis: NPV=US$4.29 million (at a discounted rate of 12%); IRR= 30% [] CostEffectiveness Analysis:[ Other (Specify)

5 See, e.g., H. Atwal, "Re: Public Sector Reforn Project: Postal Service Reform Component,"letter (May 22, 1997).

192. Financial (see Annex 5): NPV=US$4.6 million (discount rate of 12%); IRR= 37%. Thefinancial return is high due to the turnaround in profitability anticipated in TTPost's operationsbeginning in the third year of the DMA.

Fiscal impact: A savings of about 0.2% of GDP resulting primarily from annual operationalsubsidies and collection of taxes from TTpost. Secondary fiscal benefits resulting from increasedbusiness activity have not been assumed in fiscal impact calculations.

3. Technical: The project is technically sound. It attracted four serious operators-evenmore during the pre-bid conference-to seek pre-qualification, and the final bidders werereduced to two only because two others found they could not assume international obligationsthat would be key to a risk-management contract. The chosen operator has successfully reverseda poor postal system in its home country and has extensive international experience. Proposedinvestments may be relatively high compared to well-run postal enterprises, but given the lack ofinvestments over the past several decades, the proposed investment levels seem appropriate.Cost estimates for capital improvement are within acceptable margins of error. Projectmanagement skills and implementation expertise will be mobilized through the managementcontract; the PIU will retain a senior, experienced postal expert and a lawyer for its monitoring.

4. Institutional: The Post Office is a division of the Ministry of Public Utilities. Thecentralized administrative unit structure insulated the Post Office from responding to thechanging market forces and delivering an acceptable service. Unclear, ambiguous andconflicting enterprise objectives resulted in overall deterioration in efficiencies and marketperformance. There were no clear controls on the Post Office's financial and operatingperformance. The state of physical assets had deteriorated, primarily due to neglect and to thefailure of the state to determine priorities. Capital expenditure has been minimal over the recentyears, largely due to the heavy subsidization of the postal service by the Treasury.

Continued restrictions on the enterprise would have endangered its capacity to meet itsmajor public service obligation (universal service), as users searched for better communicationmodes and other providers of communication, resulting in progressively declining volumes andincreasing unit costs. From the perspective of the mailing industry, greater freedom wasbeneficial both for the mailer and the Government. At the same time, that greater autonomy hadto be provided within a framework that ensured adequate accountability.

The proposed project addresses these institutional problems. The new postal service lawestablishes an institutional framework within which a restructured TT Post enjoys the autonomyit needs to improve its performance. The incentive-based management contract with NZPIL willprovide the needed performance incentives and accountability. Finally, the proposed project hasbeen designed specifically to support this institutional change process and ensure that theimplementation challenges identified above (see "Lessons leamed and reflected in the projectdesign" - Section D.3) are adequately addressed.

5. Social: The project primarily benefits rural residents, more importantly the rural poor,by making postal communications and postal financial services accessible to them. The projectalso promotes private sector development, both at the retail end of the market as well as paralleloperations. In improving efficiency in operations, the project calls for a structured voluntarydeparture program. Due to the voluntary nature of the retrenchment, coupled with financialassistance for the affected workers, the negative impact is believed to be minimal. The Bank is

20coordinating with the Inter-American Development Bank to provide additional assistance to theaffected workers in the forn of re-training and job placement assistance. Moreover, theGovernment has had positive prior experience with its VSEP, which made that the only reallyviable option.

6. Environmental assessment: Category C. The project is not expected to pose anyimportant environmental risks. Aside from technical assistance, the project will financerehabilitation of existing postal facilities and acquisition of equipment required to modernize thePO's operations. None of these investments would pose environmental risks.

7. Participatory approach:

a. Primary beneficiaries and other affected groups: The primary beneficiaries are the ruralpoor, rural non-poor (through increase in access to services); rural businesses (byproviding a financial linkage through the postal network for funds transfer and promotetrade with urban markets); Government (through ending subsidies); other users of mailand postal financial services. The Government has taken a pro-active approach toenlisting the support of these constituencies for these reforms. For instance, through itspublic information efforts, the Government managed to give sufficient salience to thePostal Sector reform effort prior to the July 1996 pre-bidders' conference, that a localtelevision station devoted an entire hour of air-time to coverage of that conference.That coverage included about one-half hour of open phone line time, during whichcallers were encouraged to voice their concerns about both the then current performanceof the PO as well as about the proposals for reforming the PO. Responses during thatcall-in time revealed considerable dissatisfaction with the PO's performance andinterest in the proposed reforms. Subsequent press coverage reveals considerablepublic awareness of and interest in the PO reform process.6

Affected by the project are also the workers who would accept the VSEPs. The twopostal unions have been involved in the design of the project and will be involved in itsimplementation. The Government held periodic consultation and information-sharingmeetings with postal workers at critical stages of project preparation. The unions werealso fully involved in the pre-bid conference for the management contract, and weregiven the opportunity to share their views with the bidders. This participative strategyhas so far been quite successful in enlisting the cooperation of both affected unions,despite initial caution on the part of the Postal Workers Union and initial resistance onthe part of the Public Services Association.

b. Other key stakeholders: Private sector operators. Local operators have been encouraged toparticipate in the reform program and have demonstrated considerable interest.

F: Sustainability and Risks

1. Sustainability: Sustainability of project benefits will depend on three elements: (i) theGovernment's continued commitment in improving the policy environment; (ii) the managementoperator (NZPIL) to meet the specified project and performance targets; and (iii) a well-developed and smooth transition to Phase II of the reform. The commitment of the Governmenthas so far proven quite strong, and it is fully determined to concentrate on policy, monitoring and

6 See, e.g., press clippings in Project File.

21enforcement issues. A carefully designed management contract is expected to maximize theoperator's incentive to perform well while penalizing poor performance. In addition, over thelong term, sustainability of benefits also would depend on further private sector activitydeveloped to take advantage of the more open policy environment.

2. Critical Risks (reflecting assumptions in the fourth column of Annex 1):

Risk Risk Risk Minlimization MeasureRating

Objectives to CAS Goals:

1. The business environment may not be N 1. Management Operator selected with aconducive for private participation well-defined performance-based

management contract.

2. Eliminate fiscal transfers, improve postal 2. Postal Act eliminates fiscal transfersand communications efficiency and M and management contract definesincrease customer satisfaction project and performance targets

Outputs to Sectoral Objectives:

1. Management Operator may fail to meet M 1. Incentive-based contract provisionsproject and performance targets minimizes this risk.

2. Reduction of postal workforce of 40% M 2. Voluntary package in place and beenmay not take place in a timely manner well accepted in other sectors

3. Management operator may fail to M 3. Incentive based contract minimizes thisundertake the entire capital investment riskprogram in a timely manner

Overall Project Risk MRisk Rating -H (High Risk), S (Substantial Risk), M (Modest Risk), N (Negligible or Low Risk)

3. Possible Controversial Aspects: There are possibly two controversial aspects of the project;the VSEPs and the Long Term Arrangement of Phase II of the reform. Early participation andconsultation with the unions and workers seems to have brought acceptance of the VSEPs.Moreover, they have been used in other reforms and are now less controversial. The care, indeedprudence, with which the authorities developed the first phase, and their successful consultationswith affected stakeholders, augurs well for acceptance of a more aggressive Phase II.

G: Main Loan Conditions

1. In order to ensure immediate and effective disbursement upon approval of the loan, thefollowing loan conditions are proposed at each stage of loan processing: During loannegotiations (held on February 1-3, 1999), the Government complied with all loan conditions andactions identified. These actions included the satisfactory submission of copies of: (i) theapproved Postal Act 1999; (ii) the signed Delegated Management Contract; (iii) the signed letterof sector policy; and (iv) the draft terms of references for the various initiatives to be financedunder the proposed loan. For loan effectiveness, the Government would have implemented thefinancial management system, for purpose of making disbursements under the LACI system.

22Other key government obligations during project implementation include the submission of theproposal for: (i) the Postal Savings Bank; and (ii) the Long Term Arrangement. In addition,other project related loan conditions are outlined in the loan agreement.

2. Others [classify according to covenant types used in the Legal Agreements.]:

None identified.

H. Readiness for Implementation

[ ] The engineering design documents for the first year's activities are complete and ready forthe start of project implementation. [ x ] Not applicable.[ x I The procurement documents for the first year's activities are complete and ready for thestart of project implementation.[ ] The Project Implementation Plan has been appraised and found to be realistic and ofsatisfactory quality.[ x ] The following items are lacking and are discussed under loan conditions (Section G):

1. Compliance with Bank Policies

x ] This project complies with all applicable Bank policies.

Task TerTask Manager: Anil Kapur

Sector Manager/Directo : y Leipziger

Country ger/Direc r: Orsalia Kalantzopoulos

Trinidad and Tobago: Postal Services Reform Project

Project Design SummaryI. Sector-Related CAS Goals

1. Rcfocus the public sector by 1. Delegated Management 1 Conduct periodic 1. Management (Operator willsupporting the strategy of Arrangement (DMA) in assessments of undertake the necessary actions topiloting small, focused place for the first five management operator meet the project and performanceinterventions for early, years against targets targetsdemonstrable results.

2. Design and Implement 2. Undertake supervision 2. The Government does not changeLong Term Agreement missions to assess its intentions for having a(LTA) prior to expiry of performance under competitive LTA process, ifDMA Phase 1. performance is not achieved under

the DMA

2. Eliminate fiscal transfers, 3. Phase-out fiscal subsidies 3. Annual financial 3. Management Operator will meetimprove postal and to the Postal Service reports of TT Post the project and performancecommunications efficiency beginning in year 3 targetsand increase customersatisfaction 4. Achieve project and 4. Undertake supervision 4. Tariff increase for selected postal %

performance targets missions products is made effective asplanned

Project Design Summary

II. Project Development Objectives

1. Greatly improve postal service 1 Transform the PO into a I PIU's progress reports, 1. Improvements in the quality andby expanding its coverage and commercially viable and TTPost's audited quantity of postal services willquality while achieving major responsive corporation: financial reports, and increase efficiency and reduceefficiency gains and introducing * eliminate government UPU Annual Statistics communications costsnew products and services, subsidies and transfers; and Yearbook

* meet universal, transit,customer satisfaction,revenue, and profit targetsas defined in the contract

2. Increase private sector 2. Select international 2. Selected management 2. Ability of management operator toparticipation management operator operator based on perform according to contract

interniatioinal bidding

3. Monitor project and 3. Mid-term evaluation of 3. Effective implementation andperformance targets management operator's enforcement of the contract by PIU t

performance staff4. Develop Long Term

Agreement for Phase II 4. Design of LTA 4. Retention of consulting firm todesign LTA

5. Competitive Bids for 5. Competitive bidding for the LTA, ifLTA under Phase II existing performance is poor

Project Design Summary

III. Project Components

I. Improve Labor Efficiency

1. Voluntary Separation I. Reduce postal workforce by I. Receive quarterly manpower 1. VSEP is found to be anEmployment Program (VSEP) about 40% from current reports on reduction of postal adequate instrument in

levels workforce; addressing retrenchment2. Conduct periodic supervision 2. Government commitment

missions to evaluate social continues and counterpartimpact of program funds avail in a timely manner uL

II. Increase Private Participation

2. Consensus building among 2. Undertake seminars and 3. Participate and attend seminars 3. Completedstakeholders hold news conferences to on ensuring success of private

build consensus participation in postal sector

3. Develop stratcgic privatization 3. IJd(lertake situldy of postal 4. participate in progress revicws 4. ComlpletcdOptions sectfl willi thea ssistance oU' and ncistulc satistiactory

an international consultant implementation

4. Select Management Operator 4. Make quarterly payments 5. PIU and TT Post's submit 5. Ability of manager to meetagainst performance periodic reports; conduct performance targets

supervision missions

5. Develop LTA 5. A transparent and well 6. Prepare LTA for competitive 6. Government commitmentdefined LTA bidding continues on competitive

process

IProject Design Summary

III. Project Coinponents Continuiedr Narrative Sumiimary Key Perforimiance In(licators Moniitoring andl EvaluationW. Cdtlri A24ii

IlI. Motlcriiizatioin of Facilities

6. Refurbish postal buildings, 6. Undertake capital investment 7. Monitor disbursements and 7. Assets and other properties areimprove facilities, modernize program of US$10 million performance of capital disposed in a timely mannertransport fleet, introduce equivalent, outlined in investment plan as perautomation and new supplementary proposal of DMA. Key indicators are e 8. Capital investments contribute tomanagement information the management contract the completioni of the new yielding the expected project andsystems in the postal system post office, moderinizationi performanice targets

of the transport fleet, andnew security system

8. Conduct periodicsupervision missions andreceive periodic investment

._____________________ _________ reports capital program

IV. Developnmtent of IitstitiitiovlCapacity

7. Strengthen and complement 7. Recruit local and 9. Draft terms of reference 9. Government would notthe staff, where necessary, of interinationial advisors to assist completed; draft consulting reorganizations and introducethe Project Implementation the PIU implemenit the reform contracts to be prepared changes to the PIUUnit (PIU) programii

* 2 interinationial advisors on 10. Condtict periodicshiort term assignimlenits for supervisioni missionis amidscm ii-amitial evaluiation, or evalumatel U1's licedismanagement contract

* 2 local advisors for day-to-day adminiistrative tasks

27

Annex 2

Trinidad and Tobago: Postal Services Reform Project

Project Description

1. To support the Government's objectives and postal reform program, the total project costis US$23.04 million equivalent. 36% of the total project cost would be financed by theGovernment while the remaining 64% from a proposed World Bank loan and the JGF. TheGovernment's counter-part funds would be used principally to support the reduction of the postallabor force, payment of the management fees, and improving facilities. These counter-part fundswould be sourced from TT Post's operations and the sale of "excess and obsolete" assets. Theproject is expected to be effective May 1999, with a closing date established for December 31,2004. Due to heavy front-end actions to be undertake by the management operator, more than85% of the total loan is expected to be disbursed during the first two fiscal years.

2. There are five project components: (i) provide voluntary separation assistance to supportthe reduction in the work force (12% of total project cost); (ii) increase private participation inthe existing T&T Post (30% of total project cost); (iii) modernize the postal facilities andequipment (45%of the total project cost); (iv) strengthen the institutional capacity to ensuretimely disbursement of funds and the monitoring and evaluation of the management contract (5%of the total project cost); and (v) contingency baseline costs, representing 8% of the total projectcost. The following is a description of the five project components:

(i) Voluntary Separation Assistance (US$ 2.7 million)

This component is the government's-financed Voluntary Separation Employment Package(VSEP). The VSEPs would be consistent with Trinidad and Tobago's labor laws, andgranted after consultation with the union.

(ii) Private Participation Support (US$ 6.75 million)

This component is to finance all phases in increasing private participation in the postalsector. The early preparation included consensus-building among the political and laborparties which began with discussions, seminars, and analyses of how to bring aboutprivate sector management and incentives to a postal system in obvious distress. Thisearly phase (seminars and consultants) has been funded under a Japanese Grant Facility(JGF) and the previously approved Project Preparation Facility (PPF). To developalternative strategic privatization plans, the Government retained the services of amanagement consulting firn (Booz, Allen and Hamilton). The "technical" consultants,under Phase 1 of increasing private participation was financed by the Bank under the JGFand PPF. This study provided the necessary analytical underpinnings for the selection ofthe international management operator (NZPIL), undertaken in an international biddingprocess consistent with World Bank procedures. NZPIL will provide managementservices under a contractual agreement (DMA) for a period of five years. On completionof the DMA period, this component also includes the development of the second phase of

28TTPost's ownership reform, both the analysis and decisions on the final structure--concession, franchise, sale--as well as the process to achieve it.

The DMA is a performance and incentivized based management contract for a duration offive years. Under the DMA, NZPIL will provide selected key personnel as wellspecialized focus teams. NZPIL will appoint the Managing Director, the Manager forHuman Resources, the Manager for Marketing, all to be resident in T&T for a five period.In addition, the Manager for Postal Operations will be based in T&T for a period of twoyears. The total management fees plus related expenses to be paid to NZPIL is US$5.4million. The payment of the management fee is linked to NZPIL achieving specifiedperformance targets. If these targets are not achieved at the end of the 12-month period,the GORTT may impose penalties for each of the performance targets on an incrementalbasis. Due to the higher than anticipated costs during the early transitional years, themanagement fees to be financed under the loan will be paid on a declining basis (100% inthe first year, 70% in the second year, and 30% in the third year). The difference in thepayment of the management fee for the second and third years, and the remaining periodof the DMA, will be paid from internally generated funds of TT Post. The total fees to beunder the PPF and the loan is about US$2.9 million. In addition to the performancebased management fees, NZPIL could receive an incentive payment in an amount equalto thirty percent of the net Income of TT Post. This incentive payment is to be paid eachyear within thirty days of the completion of the audited accounts of TT Post.

(iii) Rehabilitating facilities and modernizing equipment (US$10.4 million)

Due to limited historical investments, T&T Post requires substantial facilityimprovements in order to adequately manage the delivery of postal services.

* Rehabilitating facilities: Postal service locations consist of 75 full service postoffices (6 in Tobago) and 161 "agency" post offices (27 in Tobago). Of the fullservice operations, the GPO in Port-of-Spain serves essentially as the national sortingcenter. Only 5 of the 66 owned Post Office buildings have been built within the last10 years and many are 30 to 40 years old. Extensive rehabilitation and upgrading areexpected to be undertaken at all locations retained as post offices. The totalinvestment required for rehabilitating facilities is estimated at US$6.7 million.

a Improving postal surveillance, delivery services and modernizing transport fleet:Currently, the PO has a large nunber of incidences involving pilferage, leading to alack of confidence amongst its customers. Delivery of mail is undertaken by carriers(door delivery), private boxes located at 30 post offices, and general delivery (postrestante), of which about half of the households receive their mail through generaldelivery services. The PO transports mail throughout T&T primarily through the useof half-ton and one-ton vans. Of the 60 vehicles in the fleet, less than half arecurrently in service, due largely to the lack of fleet maintenance. Therefore, majorareas for efficiency improvements include security of mail, refinement andstandardization of work processes of carriers and the transport used by the carriers.The total investment program for improving surveillance, delivery services andmodernizing the transport fleet is estimated to be US$ 1.7 million.

* Automating and upgrading information systems: It also includes the equipmentrequired to upgrade and modernize the postal sector: vehicles, counter automation,

29scooters, surveillance equipment, information systems, modem cancellers,culling/facing machines, registry automation, sorting systems, private boxes,collection boxes, inventory, and operations and maintenance. The total investmentprogram for automating and upgrading information systems is estimated to be US$2.0 million.

(iv) Strengthening institutional support (US$ 1.19 million)

This component includes the establishment of a small Project Implementation Unit (PIU)within the Ministry of Public Utilities. The PIU must disburse Bank funds for the capitalinvestment program, monitor performance of the operator, devising and agreeing onchanges when appropriate, and develop the second phase of the postal reforn. The projectthus includes a Project Implementation Unit (PIU) under a high-level civil servant ascoordinator, and sufficient staff, including external advisors, to carry out itsresponsibilities. The organization structure and reporting responsibilities for members ofthe PIU are discussed in the Letter of Sector Policy. The terms of reference and consultingcontracts will be made available prior to Board presentation.

(v) Contingencies (US$2.0 million)

This component includes baseline contingencies in the amount of US$2.0 million whichrepresents about 9% of the total project cost. The major reason for this level of thecontingency amount is due to the unanticipated investment costs that could arise in therehabilitation and refurbishment of the post office.

3. The total estimated project cost and financing sources are shown in the followingAnnex 3. It is estimated that about 50% of the total project cost is financed from localcurrency sources, mainly due to the large local components for rehabilitation of facilitiesand payment under the VSEP.

30

Annex 3

TRINIDAD AND TOBAGO

POSTAL SECTOR REFORM LOAN:ESTIMATED PROJECT COSTS AND FINANCING SOURCES

(USSOO0s)

IMPROVING LABOR EFFICIENCY

VSEP Program 2,700.0 -- 2,700.0

INCREASING PSPPreparation of PSP 50.0 30.0 20.0PSP Phase I 800.0 800.0 ---Management Fees 5,400.0 2,900.0 2,500.0PSP Phase II 500.0 500.0

REHABILITATING AND MODERNIZING FACILITIES

Rehabilitating Facilities 6,700.0 1,700.0 5,000.0Modernizing Transport 1,700.0 1,700.0 ---Automating Post Office 2,000.0 2,000.0 ---

STRENGTHENING INSTITUTIONAL CAPACITY

Coordinating Unit 340.0 200.0 140.0Project Implementation 500.0 130.0 370.0On-going Project Evaluation 350.0 350.0 ---

__ ~~~~~~~~A

_Ew~~~~~g 0 f ._§gO"

31

Annex 4Postal Services Reform ProjectCost Benefit Analysis Summary

[For projects with benefits that are measured in monetary terms]

(TT$ thousands)Present Value of Flows Fiscal Impact

Economic FinancialAnalysis Analysis Taxes Subsidies

Benefits 82,575 82,575 20,316 16,875

Costs 117,640 61,494

Net Benefits: 64,935 53,585.0 20,316 16,875IRR: 30% 37%

Introduction

The economic analysis of this type of project presents special difficulties. This is dueessentially to the difficulties in assigning monetary values to the various economicbenefits that are to be achieved under the project.

Summary of Benefits and Costs:

Benefits under the project are significant. The benefits are linked to the cost of themanagement contract. Without the implementation of the management contract, theproject would not realize improvements in market position (sales and revenues),improvements in market share through network rehabilitation and cost containmentthrough focussed productivity improvements. In terms of financial performance, thecumulative losses for TTPost for the period 1996-99, were about TT$67.8 million.During the next four years (2000-2003), the cumulative profit is expected to be aboutTT$37.2 million, representing a change of about TT$105 million (US$16.8 million). Inaddition, customer coverage and transit time will be improved significantly during thecourse of the DMA. Other public utilities will incur additional savings from improvedcash management and commercial banks, who employ staff solely for purposes ofdelivering documents, will achieve greater efficiency in the delivery of documents andmanpower savings.

32

The graph bellow illustrates the profitability with and without the project.

Operating Income with and without the Project (in TT$ million)

400003750035000 /3250030000 /27500 /25000 -

225002000017500

15000 -

.= 12500 - eE 10000 w Project

5 7500

5000 /2500 /

-2500 1 1998 1999 2000 2001 2002 2003-5000 j-7500

-10000

-12500

-117:500 --20000-

Year

No operating subsides are provided under the project. However, the Government'ssupport would be limited to VSEP payments for the reduction of staff from the PO. Theloan, though initially would be paid by the Government, TTPost, would in later years(beginning in year 5) be responsible for repaying all debt obligations. The Governmentwould realize these payments upon the eventual sale of TTPost which is contemplated onexpiry of the DMA.

Sensitivity Analysis

Under alternative sensitivities on revenue growth and cost reductions, the project is viableand both economic and financial rates of retums are positive. The following are theresults of the sensitivity analysis:

* The project's success is dependent largely on revenue growth. Assuming thatrevenue growth follows historical patterns (i.e. no change in "real" projections fromthe base year (1998), the project's NPV would be negative at the discount rate (16%).Alternatively, assuming that revenues increase by only 95% (as opposed to 115%) ofthe projected amounts, the project's financial NPV would be TT$ 20.52 million at thediscount rate (16%) and the IRR of 31% ; while the economic NPV would beTT$18.48 million (discounted rate of 12%) and an internal rate of return of 25%.With a 50% increase in tariffs during the first year of the DMA, there is a very lowprobability that the project would not achieve its targets.

33Major Assumptions underlying the financial and economic analysis:

+ A tariff increase of 50%, beginning in the second quarter of 1999 has been assumedfor the life of the project. The effective rate is 36% increase in postal revenues withonly a marginal decrease in decline (14%). TTPost will continue to enjoy a monopolyin letter mail for the duration of the DMA. An indicator of reliable mail service is thePony express which currently charges TT$10 for delivery of a domestic letter incomparison to TT$0.50 that is charged by the PO. DHL and FedEx charge TT$94 andTT$78 respectively for delivery of international mail, as compared with TT$65charged by the PO.

* About 80% of TTPost's current revenues come from the sale of stamps. This revenuesource and ratio is expected to continue.

* The voluntary separation of a staff and the capital investment program will completedwithin the first three years of the project.

* No principal and interest payments will be made by TTPost until 2003.

Quantifying Benefits

It should be noted that project economic and financial benefits are identical in these analyses.No account has been taken of the following benefits of an improved postal system.7

3 Lowered customer waiting time and the opportunity costs that represents.- Customer savings from not having to use far more expensive alternatives to the post.v Savings to utilities who are now themselves arranging for bills to be carried to different

towns and only then mailing them.* Savings and improved cash flows of utilities, which now bill their customers at 2-3 monthly

intervals rather than monthly.* Savings to the large banks, which currently employ staff solely for the purpose of delivering

documents to their branches* Marginal Productivity of laid-off employees elsewhere in the economy.* Sale revenue proceeds would generate positive results after the sale of TTP

Most of the above expected benefits would occur in the medium term since the project isexpected to facilitate institutional development. Expected non-monetized benefits from theproject include improved management, changes in quality and quantity of services, conducivebusiness environment. After the restructuring of the postal office, GORTT would be in a betterposition to negotiate a higher price for the sale of TTP.

Profits generated by the post office have been used for the calculations as a benefit measure. Wehave included new business revenues and revenues with tariff increase and GDP. However, wehave not considered economic externalities from gains in productivity and output and theadditional contribution to the economy that the workers will be able to make by working where

' This section relies on information telephonically provided by Mr. H. S. Atwal of the Ministryof Public Utilities, Trinidad and Tobago.

34there is an effective demand for their services. In the absence of precise information on thesetypes of considerations, it seems most practical to assume financial and economic benefits valuesare coterminous.

35

Annex 5Postal Services Reform Project

Financial Summary for Revenue Earning Project Entities8

Years Ending: 1997 through 2003 7

1996 1997 1998 1999 2000 2001 2002 2003Actual Forecast

Income Statement ItemsUnit Volume (000's)

REVENUES 47,205 30,400 45,010 60,821 70,877 78,338 87,076 95,020

OPERATINGEXPENDITURES

Payments to Staff 44,030 45,446 47,314 42,979 32,905 27,921 28,018 28,865Staff-related Costs 2,549 1,981 2,765 2,765 1,007 857 859 885Utilities 1,644 903 1,227 1,040 797 677 678 700Vehicle Costs 625 474 550 1,016 637 541 543 560Contracted Services 4,268 4,498 6,200 5,165 7,836 9,336 10,336 10,869General Costs 6,166 4,962 5,964 8,809 13,781 12,896 13,696 14,780Sub-total 59,282 58,264 64,020 61,774 56,963 52,228 54,130 56,659

OPERATING (12,077) (27,864) (19,010) (953) 13,914 26,110 32,946 38,361INCOME /(LOSS)

AdjustmentsDepreciation 755 755 755 2,972 5,427 5,931 4,932 4,319Interest Bank Loan 2,666 5,220 6,250 6,689 62,079Management Fees --- 2,495 3,883 4,731 4,426Principal payment9 --- --- 13,569Sub-total of 755 755 755 5,638 13,142 16,064 16,352 28,521Adjustments

TOTAL EXPENSES 60,037 59,019 64,775 67,412 70,105 68,292 70,482 85,180

8 Income Statement based on Ministry of Public Utilities submission9 Payment of World Bank loan amortized beginning in the last year of the DMA contract. Futureprincipal payments will be negotiated in the sales price

l

36

Postal Services Reform Project

Balance Sheet and Selective Financial Indicators for TT Post

1996 ACTUALS ACTUALS/FORECASTSP.O. P.S.B. TOTAL 1997 1998 1999 2000 2001

BALANCE SHEET

Current Assets 27,065 13,032 40,097 27,065 27,065 27,065 27,065 27,065Fixed Assets 30,064 30,064 29,309 28,554 48,580 74,973 76,918

TOTAL ASSETS 57,129 13,032 70,161 56,374 55,619 75,645 102,038 103,983

Current Liabilities 4,230 9,770 14,000 4,230 4,230 4,230 4,230 4,230Capital Contributions 52,899 3,262 56,161 52,144 51,389 71,415 97,808 99,753

TOTAL LIABILITIES 57,129 13,032 70,161 56,374 55,619 75,645 102,038 103,983Capital Expenditures --- 22,747 31,820 8,976Working CapitalIncrease (Decrease)Debt ServiceTotal Applications l_L_I__

Financial Ratiosll," ___

Operating Income as a% of Revenue = (26%) (92%) (42%) (2%) 20% 33%

Net Income as a% of Revenue (27%) (94%) (44%) (11%) 1% 13%

Return on Investment (23%) (55%) (38%) 9% 1% 10%Debt Service CoveragePercent of Total CapitalExpenditures financed byInternal SourcesCurrent Ratio 6.4- 1.3 2.9 6.4 6.4 6.4 6.4 6.4Debt as % of Total 23% 63% 84%Capitalization

10 When feasible, comparative data on other enterprises in the same industry should be shown.1 Guidance on financial ratios for financial intermediaries is given in OD8.30 Annex A and in anFSD note on performance indicators ("The Use of Sectoral and Project Performance Indicators inBank-Financed Sector Operations," March 1995).

37

Annex 5

Postal Services Reform Project

Financial Summary

Years Ending 1999 - 2003(TT$ million)

Implementation Period

99 00 01 02 03Project Costs

Investment Costs 22.7 31.8 9.0 0.2 0.1

Recurrent Costs 67.4 70.1 68.3 70.5 85.2

Total 90.1 101.9 77.3 70.7 85.3

Financing Sources(% of total projectcosts)

Government 40% 30% 70% 80% 90%World Bank 60% 70% 30% 20% 10%

Total (TT$ millions) 30.0 64.0 30.0 10.0 10.0

Main assumption:

With the exception of the management fees to be paid to NZPIL, the management operator, therecurrent cost for TTPost will be financed from internally generated operating revenues. Theinvestments costs would be financed by the Government and the under the proposed World Bankloan. About 85% of the Bank loan funds are expected to be disbursed during the first two years.

38

Annex 6

Trinidad and Tobago: Postal Services Reform ProjectProcurement and Financial Management Arrangements

Procurement

1. Goods and works will be procured in accordance with Bank Guidelines, "Procurementunder IBRD Loans and IDA Credits" (January 1995, revised in January and August 1996, andSeptember 1997 and January 1999). Procurement of goods will consist of postal equipment andmotorization (i.e. vans; scooters). Works will consist only of refurbishing and rehabilitation ofexisting facilities. Consultants will be hired following the World Bank's Guidelines for the"Selection and Employment of Consultants by World Bank Borrowers" (January 1997, revised inSeptember 1997 and January 1999).

2 Procurement methods (Table A): Project costs and procurement methods applicable aresummarized in Table A. The main contract under the Project is the retaining of a managementoperator under the period of the Delegated Management Agreement (DMA). The Borrowerselected a management operator following acceptable ICB procedures. Due to the limitednumber of suppliers of postal equipment, goods estimated to cost between US$50,000 andUS$250,000 per the contract will be procured following Limited Intemational Bidding (LIB)procedures. Goods estimated to cost less than US$50,000 per the contract will be procuredthrough international shopping. Works under the project will consist of refurbishing andrehabilitation of existing facilities. Works estimated to cost between US$250,000 andUS$3,000,000 per contract will be procured following NCB procedures, under biddingdocuments acceptable to the Bank. It is not expected there will be any contracts for workscosting more than US$400,000. For works estimated to cost more than US$250,000 percontract, procurement will be made on the basis of quotations obtained from three qualifieddomestic contractors. With respect to consultant services, the Borrower has retained the servicesof an international consulting firm for the preparation of a privatization strategy at a cost ofUS$800,000. The selection of this consulting contract has been concluded and found satisfactoryto the Bank. At the mid-term evaluation phase of the DMA, the Borrower will retain aconsulting firm according to Quality and Cost Based Selection (QCBS) procedures. Individualconsultants will be retained, according to standard Bank procedures, by the Borrower for theimplementation of the postal reform program

3. Prior review thresholds (Table B): The thresholds for the applicable procurementmethods are identified in Table B.

39

Financial Management Assessment

4. The Borrower and the Bank have agreed on an Action Plan for the establishment of afinancial management system for the project. The scope of this plan would include a system forcash management, accounting, internal control and financial reporting which would be in placeprior to loan effectiveness. In this pursuit, the Borrower has hired a project accountant,established adequate facilities within the Ministry of Public Utilities, and opened a SpecialAccount at the Central bank for the PPF. The Action Plan specifies that prior to effectiveness,the PIU would prepare a financial procedure manual, retain the services of an accounting systemsspecialist who would assist the PIU in establishing a computerized accounting and procurementmonitoring system, and an external auditing firm would be contracted.

The Action Plan incorporates the use of procedures under the Bank's Loan AdministrativeChange Initiative (LACI). In accordance with LACI, the PIU would on a quarterly basis, submitto the Bank PMRs, which would allow for the simultaneous monitoring of financial, physical andprocurement activities of the project, while also serving as an application for disbursement fromthe loan account. The physical monitoring information--consisting of technical evaluation--would be submitted on a semi-annual basis, and thus would only be incorporated into the PMRsfor the quarters ending March 31 and September 30 of each year. It is expected that the projectwill be "LACI ready" prior to loan effectiveness. It will thus request its first PMR-based (asopposed to SOE-based) disbursement when it requests the initial deposit of loan funds into theSpecial Account.

Annual Audit: In addition to the submission of quarterly PMRs, the project will be required tosubmit an annual audit report to the Bank. The audit will be undertaken by an independentauditor. The audit report will be submitted to the Bank no later than six months after the close ofthe project's financial year.

Allocation of loan proceeds (Table C): The project would be disbursed over a period of fiveyears against expenditures net of taxes and duties, as follows: (i) 100% of goods purchased in theinternational market; (ii) 100% of works for foreign expenditures and 87% for localexpenditures; (iii) 100% of consultant services; (iv) 100%, 70% and 30% of the managementoperator fees during the first, second and third years of the DMA respectively. About 95% of theloan proceeds will be disbursed during the first three years. The remaining 5% planned fordisbursement has been set-aside for the implementation of the reform program during the lasttwo years.

5. Retroactive Financing: Eligible expenditures incurred within one year before Loansigning would be retroactively financed up to a maximum of US$ 1.3 million (about 10% of theLoan value).

6. Special account: To facilitate disbursements against eligible expenditures, the Governmentwill establish in the Central Bank a Special Account (SA) to be operated by the PIU under termsand conditions satisfactory to the Bank. The Bank would, upon request, make a deposit into theSpecial Account based on the information provided in the quarterly PMRs. The PMRs would be

40

accompanied by a withdrawal application (Form 1903) and the Special Account bank statement.The Special Account would be audited annually by independent auditors acceptable to the Bank,in conjunction with the financial audit referred to above.

TABLE A: PROJECT COSTS BY PROCUREMENT ARRANGEMENTS(in US$million equivalent)

Expenditure Category Procurement Method Total Cost(including

contingencies)ICB/i NCB Other N.B.F

1. WORKSRefurbishing/rehabilitation 7.7 7.7of postal facilities. (5.7) (5.7)

2. GOODS 3.0 1.1 0.5 4.6(3.0) (1.1) (4.1)

3. SERVICES

Management Operator/2 5.4 5.4(2.9)/3 (2.9)

Other Advisors/4 2.2 0.4 2.6(2.2) (2.2)

4. M ISC EL LA NE O US/5 2.7 2.7

Note: N.B.F. = Not Bank-financed.Figures in parenthesis are the amounts to be financed by the Bank loan, PPF and the JGF

1/ Limited International Bidding and International Shopping2/ Management Operator - A contractor has been hired to manage and operate the T&T postal system. World

Bank financing will be on a declining basis: 100% the first year, 70% the second year; and 30% the third year.3/ Limited International Bidding.4/ Other Advisors will be hired using Quality and Cost Based Selection (QCBS) procedures and the hiring of

individual consultants will be undertaken according to standard Bank procedures.5/ Miscellaneous includes Voluntary Separation Employment Program (Retirement), PPF and Front-end Fee

41

TABLE B: THRESHOLDS FOR PROCUREMENT METHODSAND PRIOR REVIEW

Expenditure Contract Value Procurement Contracts SubjectCategory (Threshold) Method to

Prior Review

1. WORKSRefurbishing and 250 to 3,000 NCB First two contracts.rehabilitation of <250 Three quotations Firstpostal facilities.

2. GOODS >250 ICB All>50-250 LIB All

<50 Inter'l Shopping First

3. SERVICESFirms > 100 All

< 100 Review TORs only.Individuals > 50 All

<50 Review TORs only.

42

TABLE C: ALLOCATION OF LOAN PROCEEDS

Expenditure Category Amount in Financing PercentageUS$million

1. WORKS

Refurbishing/Rehabilitation 4.5 100% of foreign expenditures; and87% of local expenditures

2. GOODS 3.9 100% of foreign expenditures;100% of local expenditures ex-factory; and 87% of localexpenditures for goods procuredlocally

3. CONSULTANTS

Management Operator Fees 2.5 Fees to be paid on a decliningbasis; 100% in the first year; 70%second year; and 30% third year

Other Advisors 0.9 100%

4. PPF 1.4 100%

5. FRONT-END FEE 0.1485 100%

6. UNALLOCATED 1.5015

Total 14.85

43

Annex 7

Trinidad and Tobago: Postal Services Reform ProjectProject Processing Budget and Schedule

A. Project Budget Planned Actual(US$000) (At Appraisal) 230.9

B. Project Schedule Planned Actual(At Appraisal Stage)

Time taken to prepare 60the project (months)First Bank mission 04/27/1994 4/27/1994(identification)Appraisal mission 09/08/1998 09/08/98departureNegotiations 02/01/1999 02/01/1999Planned Date of 05/01/1999EffectivenessPrepared by: Ministry of Public UtilitiesPreparation assistance: PHRD Grant No. TF25275

Bank staff who are currently working on the projectName SpecialtyAnil Kapur Task ManagerPeter Kyle Lawyer (LEGPS)Jose Carvalho Lawyer, (LEGLA)Paul Meo Consultant, Privatization ExpertHannah Koilpillai DisbursementsDaniel Boyce Financial Management SpecialistSonia Plaza and Sheoli Pargal Economic Analysis

Bank staff who previously worked on the project:Gary J. Reid Task Manager; Public Sector Reform, Institutional DevelopmentKumar Ranganathan Postal Sector Reform, Private Sector DevelopmentRohini Dey Research Assistant: Postal Sector Reform; Private Sector DevelopmentAndrea Fernandez Research Assistant: Postal Sector Reform, Private Sector DevelopmentEfraim Jimenez ProcurementNorma Rodriguez ProcurementHannah Koilpillai DisbursementDaniel Boyce Project Management, Accounting and AuditDavid F. LawyersVarela/Alberto NinioJyoti Shukla Public Sector Reform; Private Sector DevelopmentGraham Scott Public Sector Reform

44

Annex 8

Trinidad and Tobago: Postal Services Reform ProjectProject Implementation Plan and Key Documents in the Project File*

A. Project Implementation Plan

New Zealand Post International Ltd. (NZPIL), the selected management operator, willundertake virtually all the substantive work (outlined in the DMA) in reforming the PO under theproposed project. The following is a summary of the project implementation plan for the keyactivities under the postal services reform program:

PROJECT IMPLEMENTATION TIMETABLE FOR KEY ACTIVITIES(For the period 1998-2000)

Main Activities 1998 1999 20002 4 6 8 10 12 2 4 6 8 10 12 2 4 6 8 10 12

Public Infonnation Campaign

Enactment of Postal Act

Management Contract

VSEP Program

Monitoring Unit: Operation

Expected Implementation ofKey Equipment by

Management OperatorRehabilitating Facilities

Modemizing Transport Fleet

Automating Post Office

Upgrading Infornation Systems

45

B. Bank Staff Assessments

"Initial Project Concept Paper: Trinidad and Tobago Public Services Strengthening Project,"(Washington, DC: The World Bank, December 7, 1994).

"Project Information Document: Trinidad & Tobago Public Sector Reform Project (PSRP),"(Washington, DC: The World Bank, March 17, 1995).

"Project Appraisal Document: Trinidad & Tobago Postal Services Reform Project (PSRP),"(Washington, D.C. The World bank, December 15, 1998).

C. Other

Bank Reports and other Bank Documents

Memorandum of the President of the International Bank for Reconstruction and Development tothe Executive Directors on a Country Assistance Strategy of the World Bank Group for Trinidadand Tobago, Report No. 14028-TR (March 7, 1995).

Trinidad and Tobago Macroeconomic Assessment and Review of Public Sector Reform andExpenditures: the changing Role of the State, Report No. 15187-TR (June 28, 1996).

Trinidad and Tobago Policy Agenda for Sustained Development, Report No. 10417-TR (June 23,1992).

"Trinidad and Tobago Country Assistance Strategy: Concept Paper," draft (September 26, 1997).

Government Documents

Trinidad and Tobago Postal Corporation Act, 1998

Republic of Trinidad and Tobago, Report of the Auditor General of Trinidad and Tobago on aComprehensive Audit of the Post Office Savings Bank, (June 5, 1992).

Government of Trinidad and Tobago, Private Sector Participation in the Postal Sector: BriefingDocument (July 1996).

Ministry of Public Utilities, Government of the Republic of Trinidad and Tobago, "DevelopmentNeeds of the Post Office," presentation to the Private Sector Participation Workshop (Port-of-Spain, Trinidad and Tobago: July 10-11, 1996).

Ministry of Public Utilities, Government of the Republic of Trinidad and Tobago, "PostalSavings Bank and Other Financial Services through the Post Office: Concept Paper" (Port-of-Spain, Trinidad and Tobago: August 1996).

Ministry of Public Utilities, Government of the Republic of Trinidad and Tobago, "Terms ofReference for Valuation of Postal Sector Assets and Resources," (Port-of-Spain, Trinidad andTobago: September 12, 1996).

"Contract for Consultants' Services between Government of the Republic of Trinidad andTobago and Booz, Allen & Hamilton Inc." to assist Government in the Selection of PrivateSector Operator to manage the Post Office (Port-of-Spain, Trinidad and Tobago: April 4, 1997).

46

Government of the Republic of Trinidad and Tobago, "Postal Sector Reform Project - Report onthe Evaluation of Expressions of Interest by Postal Service Operators for the Operation of thePostal Service of Trinidad and Tobago," (Port of Spain, Trinidad and Tobago: September 10,1997).

Republic of Trinidad and Tobago, "Private Sector Participation in the Postal Services ofTrinidad and Tobago: Delegated Management Arrangement - Request for Proposals," (Port-of-Spain, Trinidad and Tobago: March 1998)

Other Non-BankINon-Government Documents

Trinidad and Tobago Postal Workers' Union, "Restructuring of the Postal Services - TheUnion's view point," presentation to the Private Sector Participation Workshop (Port-of-Spain,Trinidad and Tobago: July 10-11, 1996).

"Should the mail service be privatised?" Trinidad Guardian (Port-of-Spain, Trinidad andTobago: March 17, 1995).

Price Waterhouse, "Postal Services of Trinidad and Tobago: Draft Report on Balance Sheet as at31 December 1996," (Port-of-Spain, Trinidad and Tobago: September 4, 1997).

Status of Bank Group Operations in Trinidad and TobagoIBRD Loans and IDA Credits in the Operations Portfolio

(As of October 15, 1998)

Difference Betweenexpected

Original Amnount in USS Millionts and actual_____________ ~disbursements a!

Project ID Loan or Fiscal Borrower PurposeCredit No. Year IBRD IDA Cancellations Undisbursed Orig Frm Rev'd

Active LoansTT-PE-810 1 IBRD33280 1991 GoRl'T YOU I'l I TRG&EMPL 20.70 0.00 0.00 3.42 3.42 0.00

PROJ

TT-PE-8100 IBRD34320 1992 GoRTT Bl)SINESS EXPANS & 27.00 0.00 0.00 9.57 6.92 -1.06 -4

IN

TT-PE-36007 IBRD38630 1995 GoRTT ENVIRON MGMT 6.25 0.00 0.00 4.02 2.74 0.00

TT-PE-37006 IBRD37840 1995 GoRTT WTR SCTR INS'1'1 STRE 25.00 0.00 0.00 7.82 7.64 0.00

T`-PE-35312 IBRD39560 1996 GoRTT BASIC EDUCATION 51.00 0.00 0.00 48.40 6.47 0.00

Total 129.95 0.00 0.00 73.23 27.19 -1.06

Nuimber of Closed L.oans/crcdits: 15

Active Loans Closed Loans TotalTotal Disbursed (IBRD and IDA): 56.71 137.30 194.01

of which has been repaid : 4.75 106.55 111.30

Total now held by IBRD and IDA: 125.20 30.74 155.94Amount sold : 00() 22.87 22.87

Of whicli repaid : 0.00 22.87 22.87'I'otal Undisbursed : 73.23 (.00 73.23

a. Intended disbursements to date (minus actual disbursements to date as projected at appraisal. >

Note: Disbursement data is updatcd at the end of the first week of the montih. @

'I'Iilii(la(I anid TobagoS'T'A'I'EMEN'I' OF IFC's

Commilit tednd DiI I)iS rII-SCd 11rtffolioAs f I )fccember I 15, 1998(lot; 1 I )ollar Mellioes)

Comiemit(ed 1 Disbur sed

FY Alpiproval Compnly I.,oaM lEqiuily Qlinsi I'arlic I,ono Equpily Qunsi I'artic1984 1 toime Mootgage 0)o .A I 00(0 0.01) (.0(0 .41 0.0 0.001985 TRINGEN 0.00 0.0 12.43 0.0( 0.00 0.00 12.43 0.001989/92 DFL 0.00 .60 0.00 0.00 0.0 .60 0.00 0.001996 Caribbean Ispal 27.40 (.00 0.00 55.00 21.92 0.00 0.00 44.00

Total Portfolio: 27.40 1.01 12.43 55.00 21.92 1.01 12.43 44.00

SO.0D

49 Annex 10

Trinidad and Tobago at a glance 2171Sg

Trinidad Latin Upper-POVERTY and SOCIAL and America middle-

Tobago & Carib. income Development diamond'1997Population. mid-year ,kwfl 1.3 494 571 Life eRpectanogGNP per capita /A4f.l/aawA4U$ .. 3.880 4,520GNP f(Adasnmfoe e5$hen/j .. 1917 2,584

Average annual growth. 1991-97

Population fs 0.8 1.7 1.5Labor Force (4 1.8 2.3 1.9 GNP , Gross

Most recent estimate (latest year avaiable. 1991-97 capita enrollment

Povertg f.e pWMk wnkapw vt 21 ..Urban population f;'d&vdpcw t 73 74 73Life expectanog at birth I.warcrj 73 70 70Infant mortalty 4, wdAt?MoM'fA 12 32 30Childmalnutrition /aa 'QaoX.@ 7 12 Access to safe waterAccess to safe water ItcxpWMkw/ 82 73 79Rliteracy (apqtd/caehW 2 13 15Gross primary enrollment fS ce aeptda6n/ 96 111 107 _ ,kallada,d TcLr,a.

Male 91 .. .. -

Female 102 .. .. :

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1976 1986 1996 1997Economic ratios-

GDP ($Adtwtc 2.5 4.8 5.7 5.9aross domestic investmentlflP 24.8 21.6 17.2 21.8E-ports of goods and servicesfGDP 55.8 33.3 52.6 49.4 TradeGross domestic savingslGOP 40.3 17.3 27.7 14.9Gross national savingslGDP 35.5 11.4 18.4 9.6

Current account balancefGDP 11.4 -8.6 12 -12.7Interest paymentslGDP 0.4 2.5 3.0 2.2 Domestic InvestmentTotal debtfGDP 3.8 39.2 39.6 36.7 SavingsTotal debt servicelemports 5.3 18.9 15.7 18.8Present value of debtGODP ..Present value of debtlexports ..

Indebtedness1976-96 1987-97 1996 1997 1998-02

GDP 4.3 1.0 3.5 32 3.3 -J-.- TotgGNP per capita 1.7 0.1 2.3 7.0 2.5'Exports of goods and services 5.1 -0.3 -6.9 3.9 4.0

STRUCTURE of the ECONOMY

1976 1986 1996 1997 Growth rates of output and inuestmenl

Agriculture 3.9 2.6 .8 1.7 s"Industry 59.5 39.7 46.1 45.9 40

Manufacturing 14.5 7.9 8.6 .4 20 Services 36.6 57.7 52.1 52.4 o

Private conswmption 47.5 59.2 61.4 74.9 -20 94 9F 47General govemment consumption 12.2 23.4 10.9 102Imports of goods and services 40.1 37.5 42.2 56.3 -G DI _-GDP

1976-96 1997-97 1996 1997 Growth rates of ezports and imports l

Agriculture -7.5 2.0 3.8 1.1 s0o Industrg -2.0 0.5 2.7 3.5 40 .

Manufacturing -9.4 2.3 2.0 7.5 zsServices 4.0 0.9 3.6 3.3 0

Private consumption 6.0 3.1 13.0 19.4 -20 #2 ") 4 95 94 9?

General government consumption 5.6 -7.0 -2.9 -8.2 -40Gross domestic investment 1.3 0.7 11.6 0.0 -*oImports of goods and services 8.7 *22 13.4 50.6 - Export, _-- Import,Gross national product 3.3 0.9 3.1 7.9

Note: 1997 data are preliminary estimates.

The diamonds show four key indicators in the country fin bold) compared with its income-qroup averaqe. If data are missinq, the diamond willbe incomplete.

OPTS' OIMO' ~~~~~~~~~~~~~~~~~~~~~~~~~~IBRD 27581.61'30' 61 600' . ds6030'

Tobgo Ca

TRINIDAD AND TOBAGO ply- t a~~~~~~~~~~~ r ib b C3 a r, To / J6mBb

11990 POPULATION BY DISTRICT'* 0 SELECTED CITIES AND TOWNS ' ' rau=

300,000 NATIONAL CAPITAL

200,000 MAIN ROADS

100,000 AIRPORTS

i // 50,000 PORTS

.._._*NOrE: Popolot figures for the districts of ~ RIVERSStd esorge East andWest, and Vicoroi East DISTRICT BOUNDARIESand Wes, ar agqgregteo she -os nod

11°00o o.tc .onpanes.

|-- INTERNATIONAL BOUNDARIES (INSET)URBAN POPULATION:

S........E...... pettans

-:< <' --- 25,000

Redhead ~~~~~A '1 1 As

VENEZUELA

tore f 9471 ''- .ST. GEORGECh'cacheoereI T C C s

0 RE i 10 1 20 2SKILOM10ER0

PORT F-S\PACIn TTe andree oor,deamntaa ndey terirfrsrta

ParI a rCaiiIjKoPC

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erc-wten- atusch b.s.aderies

B- ~~~~~~~~~~~~~~~ ~~~~~~~~CARIBBEAN SEA $tT`Tl.I4

T,t Beoo

-. Per~~~~~~~bI'-'t ' caraT j'o)~S By B-, f.A

CedoT 'PA RFANA '~ et ere 5 Gaeuae Ol,aet 4

to,tA VENEZUELA Ij

C o I utm b u s C h cf n n'-ase

NOVEMBER 1995