Document of. The World Bank

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of. The World Bank FOR OFFICIAL USE ONLY STAFF APPRAISAL REPORT OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT April 22, 1980 Report No OM Transportation, Water and Telecommunications Department Europe, Middle East and North Africa Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS Currency Unit - Rial Omani (RO) US$1 RO RO 1 = US$2.895 FISCAL YEAR (FY) January 1 - December 31 LIST OF ABBREVIATIONS AND ACRONYMS USED IN THE REPORT Arab Fund ARM, ARF, ARK C 23 C&W DELs GHz HF/VHF/UHF IAN ITU MHz OMANTEL, SAO OMANTEL PABX PBX PCOs PDO PTT Saudi Fund SCPC UAE UNDP : Arab Fund for Economic and Social Development : Crossbar exchange systems developed by L. M. Ericsson, Sweden : A crossbar switching system developed in Japan : Cable and Wireless, Ltd. (British company) : Direct Exchange Lines : Gigahertz (109 Hz) : High Frequency (HF) up to 30 MHz/Very High Frequency (VHF) between MHz/Ultra High Frequency (UHF) between 300-3,000 MHz : International Account Number used by OMANTEL for charging international services : International Telecommunication Union : Megahertz (106 Hz) : Oman Telecommunications Company : Oman Telecommunication Corporation : Private Automatic Branch Exchange : Private Branch Exchange : Public Call Offices : Petroleum Development Oman, Ltd. : Ministry of Posts, Telegraphs and Telephones : Saudi Fund for Development : Single Channel per Carrier : United Arab Emirates : United Nations Development Programme

3 FOR OFFICIAL USE ONLY OMAN OMAN.TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT STAFF APPRAISAL REPORT Table of Contents Page No. I. THE TELECOMMUNICATION SECTOR Background and Organization Access to Service Usage of the Service Quality of Service and Existing Facilities Demand for Service Sector Goals Sector Constraints The Bank's Role II. THE PROGRAM AND THE PROJECT The Plan and the Program Project Concept The Project Project Costs Contingencies Project Financing Items for Bank Financing Disbursement Procurement Project Implementation Performance Indicators III. ECONOMIC ANALYSIS Telecommunications and Development Distribution of Benefits Tariff Policies Least Cost Solution Return on Investment Risk Environmental and Health Aspects This report is based on the findings of a Bank mission which visited Oman in June/July 1979, comprising Messrs. A. Gravell (Engineer), D. Lomax (Senior Financial Analyst) and J. Chang (Financial Analyst) and updated by another mission of Messrs. Gravell and Chang in February This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 Table of Contents, Continued Page No. IV. THE IMPLEMENTING AGENCY Organization Management and Control Staff and Training Staff Numbers Accounting and Budgeting System Billing and Collection Audit Inventories Insurance V. FINANCIAL ANALYSIS Past Financial Performance Present Financial Position Accounts Receivable Valuation of Assets Financing Plan Future Financial Performance Future Capital Structure VI. RECOMMENDATIONS

5 LIST OF ANNEXES AND CHART Page No. 1. Examples of Economic Development Since International Telephone Statistics Existing Facilities at December 31, Programmed Growth of Direct Exchange Lines Construction Program, Details and Scheduling of Items in Bank Project Cost Bases for Items in Development Program Schedule of Disbursements Performance Indicators Summary of Basic Telecommunications Tariffs Return on Investment CMANTEL Organization Chart Draft Job Description for Technical Expert Draft Job Description for Financial Expert Income Statements, Balance Sheets, Funds Flow Statements, Debt Statements, Notes and Assumptions on the Financial Statements Related Documents and Data Available in the Project File Map - IBRD No

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7 I. THE TELECOMMUNICATIONS SECTOR Background and Organization 1.01 Until 1975, public telecommunications services in Oman were operated by the British company, Cable and Wireless Ltd. (C&W). This company was granted an exclusive license in 1939 to provide international telecommunications into and out of Oman, and in 1950 it obtained a license to install and operate local telephone systems in Muscat and Mutrah. It was not until 1971, however, that telephone service was introduced into Salalah, the second most important city in Oman, and about 1,000 km south of Muscat During 1974, the Government of Oman decided to take over the operation of the telecommunications services from C&W and in 1975 the Government bought C&W's telecommunications assets in Oman, and the Oman Telecommunications Company, SAO (OMANTEL SAO) was formed for the purpose of operating and maintaining the public national and international telecommunications services. The company was established with shareholdings as follows: The Ministry of Posts, Telegraphs and Telephones 17,999 (on behalf of the Government) The Central Bank of Oman 1 Cable and Wireless Ltd. 12,000 Total 30,000 The shares have a face value of RO 10. From July 1, 1980 OMANTEL, SAO will change over to a new public corporation, Oman Telecommunication Corporation (OMANTEL), which will be 100% owned by the Government of Oman (paragraph 4.03) The Ministry of Posts, Telegraphs and Telephones (PTT) which, until 1978 was a Department within the Ministry of Communications, is currently responsible for the regulation of telecommunications services within the country, allocates radio frequencies for all services, and licenses private radio installations. The Minister of Posts, Telegraphs and Telephones is to be Chairman of OMANTEL Responsibility for radio broadcasting and television services is with the Ministry of Information and Culture, which provides and maintains broadcast transmitters but leases relay transmission facilities from OMANTEL SAO. The Civil Aviation and Defense Departments both maintain and operate their specialized telecommunications services, and the country's oil company, Petroleum Development Oman Ltd. (PDO), has installed and operates a fairly extensive private telecommunications network. OMANTEL SAO provides some leased circuits to these three entities and meets the telecommunications needs of all other government agencies.

8 Oman has no local telecommunications manufacturing industry and nearly all the material requirements for the sector must be imported. Most of the installation works are also contracted to foreigners leaving OMANTEL SAO staff with operation and maintenance activities, and subscribers' lead in and telephone instrument installation. Access to Service 1.06 Access to telephone service in Oman is inadequate, particularly in the rural areas. At May 31, 1979, there were 10,692 direct exchange lines (DELs) in Oman of which 7,169, or 67%, were in the capital area of Muscat 1/, 1,602 (15%) were in the southern city of Salalah and 1,921 (18%) were in smaller settlements in rural areas. Of the 27 existing telephone exchanges in Oman, 18 are in smaller communities in rural areas but much of the country remains without telephone access. Registered waiting applicants are mainly in the capital area (where some applications for service have been unsatisfied for as long as five years) and in Salalah. There is an unknown number of potential subscribers in areas where the network has not yet penetrated The estimated present and future DEL and telephone densities 2/ for the capital area around Muscat and the rest of the country are shown in the following table: LA December 1978 December DELs Telephones DELs Telephones Capital Area Rest of Country Oman Total /1 The estimates for 1985 are based on implementation of the Five Year Plan and program of which the proposed Bank financed project is an integral part. 1/ The capital area is defined as the coastal strip about 50 km in length stretching from Al Bustan, a little south east of Muscat, to Seeb on the west of the capital city. 2/ The density is defined as the number of DELs or telephones per 100 of population and is based on population estimates and projections assessed by the consultants (financed under TA Loan 980-OM) who assisted OMANTEL SAO in the preparation of their national telecommunications development plan (paragraph 1.22). In Oman the DEL density is a better measure of telephone access because telephones include a large number of private branch exchange (PBX) extensions.

9 -3- The telephone density for the country as a whole (1.9) is about average for Middle East countries and is generally above that for Africa and Asia excluding Japan (Annex 2). The DEL density in the capital area at 5.2 is also about the same as in other Middle East capital cities, e.g., Damascus - 7.0; Tehran - 8.2; Baghdad - 4.9; Riyadh - 6.5; and Amman Usage of the Service 1.08 Existing telephones are classified according to their location in residences or offices. At present, about 55% are residential and 45% business. An unknown percentage of residential telephones are used primarily for business due to the past and current difficulty of obtaining connections in the business districts At the present time there are virtually no Public Call Offices (PCOs) in Oman which provide non-subscribers with telephone access. International calls may be made only by those subscribers who have a special account number for charging purposes or by using the "pay station" telephones at OMANTEL headquarters in Muscat. The average telephone revenue per DEL in 1978 was approximately RO 352 (US$1,019) which is among the highest in the world. About 75% of this is call revenue. Existing tariffs are discussed in paragraphs 3.06 and The telex network is presently manual with about 350 subscribers. The recorded waiting list is 150 but the real unsatisfied demand is considerably higher than this figure. An automatic electronic telex exchange is currently being installed in Muscat and all telex subscribers in the country will be transferred to it when it is completed in mid It will have an initial capacity of 1,200 lines. There is no domestic telegraph service in the country. Quality of Service and Existing Facilities 1.11 The quality of the existing service is generally acceptable outside of the busy hour period. The maintenance standards are reasonable, exchange buildings housing switching and transmission equipment are airconditioned, and outside plant is of fair quality. The hot dry climate of Oman during most of the year, and particularly in the capital and inland areas, provides a good environment for outside telephone plant as moisture is normally the main source of performance degradation There are shortages of junction circuits in parts of the capital area and this causes some call congestion during busy hours. There is also a shortage of national trunk circuits in general and insufficient circuits on the subscriber dialing route to the United Arab Emirates (UAE) The majority of existing switching equipment is of the crossbar type and has been installed within the last six years. The long distance network comprises coaxial cable, microwave radio and some satellite circuits. The latter operate between Muscat and Salalah where there is a satellite television relay facility. Satellite television relay facilities are also provided between Muscat and several inland centers to enable programs to be rebroadcast by regional transmitters. The existing technical facilities are described in more detail in Annex 3.

10 -4- Demand for Service 1.14 The demand for telephone service in Oman has exceeded the supply, at least in the capital area and Salalah, since the provision of telephone service in these areas began The only comprehensive study of existing and potential demand that has been undertaken to date is that made by a team of Bank-financed telecommunications consultants (paragraph 1.22), with the help of OMANTEL SAO staff, during This study was made difficult by among other things the absence of reliable demographic data and the existing inadequate telephone penetration. Based on best available estimates of existing population and growth rates for the capital area, Dhofar, the interior, Musandam, offshore Islands, and desert areas 1/, on limited historical telephone data, and on assumptions relating to forecast changes in economic activity and income level, future demand for DEL's in Oman was projected as shown in the following table: Total Annual Per- Installed Registered Expressed centage Year DELs Waiting List Demand Growth Rate For DELs NA NA NA NA ,116 NA NA ,126 NA NA ,900 NA NA ,700 NA NA ,649 NA NA ,699 NA NA ,122 6,451 17, ,900 6,700 19, ,400 5,450 21, ,400 6,000 24, ,000 6,100 27, ,000 4,900 30, ,600 5,100 33, ,500 5,800 37, ,900 4,100 42, ,400 3,600 47, ,400 2,600 52, ,100 2,100 58, ,500 1,500 65, / The capital area is as defined in paragraph 1.06, Dhofar comprises Salalah and its environs in the south and the interior consists of the areas northwest of Muscat and Nizwa and southeast to Sur. The desert areas comprise the large bulk of Oman where there is currently no telephone access.

11 Long distance telephone traffic has been substantially depressed in the past due to congestion. Hence, a future growth rate of initially 35% followed by 20% per annum has been assumed. This is in line with growth rates experienced in other similar countries The telex network is rudimentary at present but a new electronic national and international telex switching center is now being installed and modern electronic teleprinters are being purchased. The telex growth rate has been estimated at 25% per annum over the next several years, falling to 15% per annum, in the late 1980s. These projections are also based on growth rates experienced in other similar countries. Sector Goals 1.18 Telecommunications sector goals are in harmony with those of national development plans which, by resolution of the Development Council, are required to give priority to income generating projects in non-oil sectors to supplement oil receipts and to effect a wider geographical distribution of investments in order that the benefits may be shared by different regions of the country. It is envisaged that such wider distribution would narrow the gap in the standards of living in different regions with special emphasis on the least developed regions thereby maintaining and developing existing areas of population and protecting them against the danger of mass migration to those already densely populated. Equally important are those national goals to develop local human resources to increase Omani participation in economic activities and to improve the efficiency of government administration There are two main thrusts in the objectives of the Government of Oman for the telecommunications sector. One is to provide an effective national telecommunications service satisfying all areas of the country's business and community needs and providing the essential support necessary for continuing national economic development. The other is to establish a fully government owned telecommunications organization with effective and competent technical and financial management. This includes moving towards Omanization of management and operational staff as quickly as possible, becoming financially selfsufficient within the next decade, and raising necessary capital through its own borrowings. Sector Constraints 1.20 To date, the major sector constraint in developing the telecommunications sector has been the inadequate capacity of OMANTEL SAO to formulate an integrated technical and financial development plan, which complements national investment programs and goals in other priority sectors. This has been due in part to the short time OMANTEL SAO has been in existence, its limited charter, and to some lack of national planning guidelines. The establishment of a Development Council in November 1974 (with the Bank's assistance) provided the basic national guidelines for telecommunications planning, and two consultants, employed by OMANTEL SAO and funded by the Bank under a technical assistance loan, have put together the national telecommunications master plan (paragraph 1.22) Despite the limited life of OMANTEL SAO and the constraints mentioned above, the management has coped with reasonable success with its first

12 - 6 - network development Venture, increasing the DELs from about 3,000 at the end of 1974 to over 11,000 at the end of 1978, and is currently further extending the network capacity. Based on its past performance and with the assistance proposed as discussed in Chapter IV, the management of OMANTEL SAO will be able to execute new telecommunications projects, including the proposed Bank financed project, in an efficient and timely manner, after the new corporation is established. The Bank's Role 1.22 The Bank first became associated with the telecommunications sector in Oman through a project identification mission carried out in May Following this mission, the Bank assisted OMANTEL SAO by preparing terms of reference to secure consultants to prepare a national telecommunications master plan, and to help design a project which might be suitable for Bank financing. Part of the cost of the consultancy was financed by the Bank under Technical Assistance Loan No. 980-OM as amended on June 27, 1978, following a request by the Government. Several subsequent visits were made by Bank staff to advise the consultants and OMANTEL SAO staff. The Bank's role in the telecommunications sector in Oman is primarily focused on promoting institution building, and providing independent technical and economic advice. The funding proposed allows for this, and in addition will assist the new OMANTEL in gaining the expertise necessary to take advantage of the international competitive bidding process, and in becoming familiar with the lower prices which such a process can bring. II. THE PROGRAM AND THE PROJECT The Plan and the Program 2.01 The telecommunications development program derives from the Master Plan prepared by consultants during the period August 1978 through March 1979 (para 1.22). This plan deals with a twelve-year period from 1979 through The consultants recommended an implementation program divided into three overlapping phases, each phase covering approximately five years and containing a package of inter-related works. This was designed to allow reviews of plan assumptions and progress of works to be made at appropriate intervals and, if necessary, enable timely variations in investment to be made to keep it closely matching the needs and objectives The program presented in the Master Plan has been accepted by the management of OMANTEL SAO and by the Development Council and the Finance Ministry in Oman. The phase of the program, however, was modified slightly with the assistance of Bank staff at the time of project appraisal. The modifications, which are not substantial, relate to the early years of the program and have been agreed with OMANTEL SAO management.

13 2.03 The total construction program costs, including contingencies, over the period including 1980 and up to 1985 are as follows: /1 Cos ts Item RO Millions US$ Millions Ongoing Works Bank Project Future Works Total /1 These costs represent the value of the construction over the period from 1980 through The figures will differ slightly from figures quoted in paragraph 5.07 and Annex 17 because these latter figures represent funds flow. A portion of the funds will be expended prior to receipt of material and a portion will be retained after completion of construction thus leading to minor differences in the timing of the construction program and the funds flow accounts. More details of the program are shown in Annex 5, page 1 of which shows details of the construction program while page 2 shows in addition to the construction program the year by year value of the contracts to be placed, the amounts estimated to be transferred to fixed assets each year and the consequential cash requirements each year. Project Concept 2.04 The proposed project has been selected from the program based on the following criteria: (a) it should comprise a time slice of the development program somewhat less than the initial five year phase proposed in the consultants' Master Plan. The critical "take off" period of approximately three years has been selected cqmprising in the main 1981, 1982 and 1983 but picking up some earlier 1980 costs and some tapering off costs in 1984 and 1985; (b) it should pick up as its commencing point all of the construction program investment in the initial years that is not already included in the ongoing works which are committed; and (c) it should be designed around items which require longer lead time--the core elements of the program--which will be put to contract in 1980 and These items comprise mainly the switching equipment for local and transit purposes and the long distance transmission systems. In addition to these, it would include some items such as subscribers' telephone and telex terminal equipment which could be ordered and brought into service within the same time frame.

14 -8- The Project 2.05 The proposed project, designed on these concepts, provides for the following network additions: (a) 15,700 new lines of subscribers' local telephone switching equipment and the replacement of 3,900 lines of obsolescent equipment; (b) ducts and main subscribers' cables to provide for about 16,000 new DELs and provide capacity for future growth; (c) telephone terminal equipment for about 14,000 new subscriber services and about 5,500 new PABX extensions; (d) about 350 public call offices (PCOs) to be located in both urban and rural areas; (e) 6,000 lines of switching capacity in new private branch exchanges; (f) international and national trunk switching and transmission systems to carry the projected traffic loads with acceptable congestion standards; and (g) switching and miscellaneous equipment to increase the automatic telex network to about 1,800 subscribers, commence the public telegraph service in 1981 or 1982, and cater for any data transmission requirements In addition, the project includes: (a) construction of buildings, provision of motor vehicles, training and test equipment and furniture and fittings; and (b) consultants' services and technical assistance in management, training and engineering A more detailed description of the project's composition is included in Annex 6. Project Costs 2.08 The total cost of the project is RO 33.6 million (US$97.2 million) which includes a foreign exchange component of RO 21.2 million (US$61.3 million). The cost details are shown in Annex 5 and are summarized in the following:

15 -9 - RO Millions US$ Millions Item Foreign Local Total Foreign Local Total 1. Local switching External plant Subscribers' plant PABX switching Transit switching Telex and telegraphs Long distance terrestrial Long distance satellite Technical buildings Non-technical buildings Motor vehicles Training equipment Furniture and fittings Test equipment Medical equipment Technical assistance Total Base Cost Contingencies Physical Contingencies Price Total Estimated Cost The project cost estimates are based on OMANTEL SAO recent experience with international competitive bids and analysis by the consultants during their six months study while defining the Master Plan. The consultants' fees under technical assistance are estimated at an average man/month cost of about US$8,500, including travel, subsistence and other costs. Details of the bases for the costs of the more important items are included in Annex 7. Costs do not include duty or other excise taxes as OMANTEL SAO is not required to pay such charges, and the new OMANTEL will also be exempted from these charges Telecommunication construction costs in Oman must allow for the fact that OMANTEL will not reach the stage where it can carry out its own installation work in the near future (Chapter IV). The costs of expatriate labor used * by installation contractors is high because of some difficult enviromental conditions. External plant construction costs are also significantly increased by the rocky ground conditions, especially in the capital area. Virtually all construction materials have to be imported. Project costs as estimated make allowance for all these factors. Contingencies 2.11 An allowance of 4% has been added to the base cost estimates for physical contingencies to cover possible increases in plant requirements which might be found necessary on completion of detailed designs. Price contingencies have been added based on differing escalation rates for local and foreign costs. For local costs, an annual escalation rate of 10% has been adopted and for foreign costs, an annual escalation rate of about 7.5% has been used.

16 Project Financing 2.12 The financing plan for the project and the program is given in Annex 17 and is summarized in paragraph This plan indicates that, based on projections of revenues and operating costs, OMANTEL will fund from its net internal resources RO 43.6 million (US$126 million) of its requirements for the years 1980 through The estimated total cost of the construction program through those years, and including the increase required in working capital, is RO 56.7 million (US$164 million). The RO 13.1 million (US$38.0 million) gap will be covered by external borrowings (US$33.7 million) and by funds already committed by the Government to cover ongoing works (US$4.3 million). Based on this financing plan, OMANTEL will finance from its own resources about US$67.2 million of the total estimated cost of the proposed project (US$97.2 million); the remaining US$30 million will be financed by the proposed Bank loan (US$22 million) and by funds from the Oman Government (US$8 million). Items for Bank Financing 2.13 The items proposed for Bank financing are as follows: % of Total Foreign Cost Financed by the RO US$ Bank for Each Item --- in millions-- (a) Local switching equipment % (b) External plant % (c) Subscribers' plant % (d) Long distance terrestrial systems % (e) Testing equipment, and other equipment for training center % (f) Consultants' services and technical assistance % (g) Unallocated Total

17 Disbursement 2.14 The proposed loan would be disbursed against 100% of foreign exchange expenditures for imported equipment under items (a) to (f) in paragraph The estimated schedule of disbursements is given in Annex 8. The closing date for the loan would be June 30, Procurement 2.15 All items of material or equipment to be financed from the Bank's loan would be procured through international competitive bidding in accordance with the Bank's guidelines. This form of procurement would apply to most other equipment and materials with possible exceptions of increasing the capacity of the national trunk switching center where it may prove to be justified on standardization grounds to expand with the same type of equipment, and for growth of the telex system, in which area there would be similar compatibility and standardization considerations. It is not proposed that these items be financed by the Bank It is envisaged that the technical assistance covered by 2.13(f) will be provided by persons working under contract with OMANTEL rather than by employing a consultancy organization, although the latter possibility is not excluded. The terms of reference or job descriptions for these people would be drawn up with the assistance of the Bank and would be agreed upon between OMANTEL and the Bank. The Bank would have an opportunity to comment on the proposed selections (paragraphs 4.07 and 4.13). Project Implementation 2.17 The implementing agency will be OMANTEL with most of the installation work being carried out by contract. The critical step in meeting the scheduled implementation plan contained in Annex 6 is the preparation and issue of tender documents for subscribers' telephone switching, external plant, subscribers' plant and transmission equipment. Draft specifications are already available for switching equipment. Most of the cable and duct reticulation planning and design, which is necessary for the external plant bidding documents, has been completed and there should be no undue delays in the remainder. Tender documents for these should be ready for issue by March, It will be necessary for some survey work to be carried out before tenders can be invited for the microwave radio systems and it is envisaged that this would be carried out by ITU consultants. Buildings, which are on the critical path of most projects, can be constructed quickly in Oman. Architectural and engineering designs can also be arranged expeditiously. OMANTEL will be responsible for the execution of the project and will have the necessary authority and autonomy to carry out this task (paragraph 4.04).

18 Performance Indicators 2.19 Performance indicators to help monitor OMANTEL's project implementation and operational and financial performance are given in Annex 9. These were discussed during negotiations and confirmed for inclusion in OMANTEL's project progress reports to be sent to the Bank. III. ECONOMIC ANALYSIS 3.01 The economic analysis discussed in this chapter relates to the development program for OMANTEL of which the project forms an integral part. The program is designed towards achieving the objectives for the telecommunications sector, which are in turn derived from the national development plan (paragraphs 1.18 and 1.19). Telecommunications and Development 3.02 One of the major thrusts of the national development plan is to establish a wider base for the national economy than at present. It is also the Government's objective to direct the benefits resulting from the country's oil reserves over a wide geographical area and to narrow the gap in the standard of living between different regions and between different groups of people. The national plan attempts to strike a balance between investment expenditure on income generating projects on the one hand and on infrastructure projects on the other The "Master Plan" for the development of telecommunications in Oman has been framed against this background and its implementation program provides for a significant expansion of telecommunications services in all forms and in all areas of the country. In the early stages of implementation, the major part of investment in local networks will take place in the two important developing areas--one along the 50 km coastal strip known as the capital area and the second around Salalah in the south. Without such improved and extended telecommunications services, the implementation programs in other sectors of the national plan would be difficult and more costly. In fact, achievement of some of the most important national goals such as increasing social, educational and administrational bonds between the central capital area and regions like Salalah and, more importantly, the Musandam peninsula area, the offshore islands, and numerous rural settlements is very much dependent on the efficient least cost development of the telecommunications network. Distribution of Benefits 3.04 The distribution of the benefits resulting from the proposed investment program will either directly or indirectly be felt by all segments,of the Omani society. The upgrading of health and educational facilities, greater efficiency in business, transportation, building industry, etc., which will flow from improved communications should impact throughout the nation.

19 The establishment for the first time in Oman of about 350 PCOs in both urban and rural areas will extend public access to telephone facilities to a broad spectrum of the population, both in geographic and economic terms. In the rural areas PCOs will be installed first in the larger and more economically viable settlements. In Oman these rural settlements are tightly clustered units of population and one telephone in the center provides immediate communication access to all inhabitants. Furthermore, the expansion of the long distance network will provide television relay to several rural areas, and the establishment and upgrading of microwave radio long distance links will provide the skeleton structure from which small capacity single channel radio links may be subsequently extended to many more isolated villages and settlements. Tariff Policies 3.06 Overall, the Government's objective for tariff policy is to convert OMANTEL, SAO present position of drawing funds from the government budget to a position of breaking even or contributing funds to the budget in the future after the new OMANTEL is established. Financial projections indicate that Government's objective can be achieved during the next decade. OMANTEL's operations during the period are expected to require a net cash outflow from the Government of about RO 7 million (US$16 million). However, increased earnings from the new investment should eliminate the net outflows in the late 1980s and produce net inflows from the sector thereafter The telephone tariff structure is framed in such a way that business firms in urban areas pay higher installation charges than do urban residential users, and all users in the smaller towns and communities. Since 1976, installation charges in the capital area and Salalah have been RO 100 (US$290) for business connections and RO 10 (US$29) for residential connections. In all other areas of the country, the installation charge is RO 10 (US$29) for all connections. The tariff structure has other favorable facets such as lower nighttime rates for long distance calls. However, during the present period of acute shortage in the urban areas, price is not being used to effectively ration subscriber demand for connections--normally service is provided in the order of applications, but at present the few additional DELs which become available are allocated by the President of OMANTEL SAO. By the time the project is completed, it is expected that the unsatisfied demand for connections will be reduced to the level where waiting times in those areas which have access to service would be less than 12 months. As a result, it is expected that price will then begin to serve to allocate supply more effectively. Telecommunication tariffs have been increased twice since In January 1976, annual telephone rental was increased from RO 16 to RO 56 (350% increase) and unit charge for national calls was increased from RO to RO 0.03 (333% increase). In January 1977, annual telex rental was increased from RO 288 to RO 480 (167% increase), followed by increases in charges for international services in June A summary of telecommunications tariffs is given in Annex 10. Least Cost Solution 3.08 The telephone network design has been based on standard engineering/ economic techniques for minimizing capital and recurring costs. Expatriate

20 engineers have carried out most of the planning and design for the network expansion. The current technologies adopted are acceptable and effective in providing low maintenance costs for the future. Appropriate provisioning periods for the various types of plant have been adopted and international competitive bidding will be used in procurement. Contractor installation, which is proposed for the major plant items should assure the earliest possible utilization of plant for revenue earning purposes The automatic telex network will be implemented with modern electronic switching and teleprinters. The long distance and international networks will comprise a mix of coaxial cable, microwave radio and satellite circuits which should provide an efficient and reliable network. Satellite circuits will be utilized on those connections where cost-effective technical alternatives are not available. The extension of the local switching system will be either crossbar or electronic switching, depending on the prices offered to an open international tender, so ensuring that the most costeffective technology is adopted. The continuation of subscriber dialing in the long distance network and the extension of it to international operations will minimize expenditure on manual switchboards and operator training. The new international switching center nearing completion is an electronic system which will provide efficient manual assistance positions with visual display units and keying of charging information. All these individual elements of the program have been or will be engineered in detail to provide a sound telecommunications network capable eventually of meeting most of the demands of the country in a cost effective manner. Return on Investment 3.10 The internal financial rate of return on the investment for the program is 18% (Annex 11). This rate has been calculated as the discount rate which equalizes the present worth (in 1979 prices) of the stream of revenues based on existing tariffs with the streams of capital and operating costs attributable to the program over the life of the installed equipment The use of conversion factors is not required in deriving an estimate of the economic rate of return from the above internal financial rate of return. This is because, in Oman, (a) the Omani currency is freely convertible; (b) import tariffs are negligible or nil for most goods, (c) trade restrictions do not exist; (d) there is no major distortion in terms of pricing structure; and (e) there is no restriction on labor mobility and wages reflect international market prices. However, the above internal financial rate of return does understate the real economic benefits to be derived from the investment program. Benefits are understated partly because the internal financial rate of return is based on the existing tariff for telecommunications services. Hence it does not reflect part of the consumer surplus which new subscribers and other callers receive, nor does it reflect a portion of the indirect benefits received by the total community through better and faster communication, e.g., increased business and government efficiency and improved service and administration in other sectors such as health, transportation, agriculture, etc Benefits are also understated because the calculation of the internal rate of return includes costs for extending the network and providing facilities

21 in the newly served areas, while the full benefits of the extension are not included. This is because the available capacity of various components of equipment will not be fully utilized until additional incremental investment is made and additional lines are connected at some future time. Risk 3.13 There are no unusual risks associated with the project, although some risk is inherent in any project such as this, involving as it does a relatively immature organization operating in a high cost country where virtually all materials and most of the labor has to be imported, and where there is little past growth and development to provide data for economic and demand projections. The development program and the project have been designed in a manner which allows periodic checks of assumptions and forecasts against actual happenings, and adjustments may be made if necessary. The experience of OMANTEL SAO management in its operations to date indicates that with the help of foreign technical assistance it will be able to implement the project. Sensitivity analysis on the internal rate of return calculation shows that on the most unfavorable combination of main parameters considered (increase of 10% each in capital and operating costs and 10% decrease in revenues), the rate of return on the investment program would be not less than 12%. Environmental and Health Aspects 3.14 Telecommunications projects have very little direct impact on the environment. The plant is mostly unseen and it consumes little energy. Through its use as an alternative to communications involving physical movements, however, telecommunications has the potential to conserve energy, reduce environmental pollution, and facilitate such items as health delivery and emergency care. IV. THE IMPLEMENTING AGENCY Organization 4.01 At present, OMANTEL SAO is a joint management company owned 60% by the Oman Government and 40% by C&W. It has the sole license to operate and maintain the public national and international telecommunications services in Oman. It does not, however, presently own the plant and assets over which the telecommunications systems operate--these are owned by the Oman Government through the Ministry of Posts, Telegraphs and Telephones (paragraph 1.02) Under the 1975 agreement between the Government and C&W, the Government has the right to "not earlier than the third anniversary of the date of formation of the (OMANTEL SAO managment) Company and at any time during the currency of this Agreement from such day... to serve twelve-months notice on C&W of its desire either: (a) to acquire all C&W's shares in the Company...; or

22 (b) to require C&W to enter into negotiations... variation of this Agreement." 1/ for the 4.03 On June 17, 1979, the Government informed C&W of its intention to exercise its option to purchase OMANTEL SAO and nominated July 1, 1980, as the terminating date of the twelve months' notice. In addition, the Government has decided that, from July 1, 1980, OMANTEL SAO will cease to exist and that a new public corporation, Oman Telecommunication Corporation (OMANTEL) will be established to take over all telecommunications operations from OMANTEL SAO. The management, staff and net assets of OMANTEL SAO will be transferred to the new OMANTEL, which will be 100% government owned. OMANTEL will be the borrower for the proposed Bank loan and the implementing agency of the Bank financed project Under the new arrangements, OMANTEL will become an autonomous entity taking over the ownership of the telecommunications assets under a new charter which has been promulgated by Royal Decree. The new charter will enable OMANTEL to continue its present ability to borrow foreign exchange, and empower OMANTEL to own telecommunications facilities including those to be built under the proposed project The present organizational structure of OMANTEL is shown in Annex 12. The Managers of Finance and Transmission are at present expatriates while the other top level managers are Omani. The Telecommunciations advisor is also an expatriate and he reports directly to the President. Management and Control 4.06 The management, budgeting and control systems operating in the present organization need considerable strengthening. There is no internal budgeting system, and the flow of management control information is erratic and non-structured. There is a need for a disciplined management information system to provide condensed and relevant information to the President, the General Manager and the Departmental Managers OMANTEL SAO and the Finance Ministry recognize the management shortcomings within OMANTEL and propose that they be defined in more detail, and that remedial actions be specified and implemented by experts retained by OMANTEL. Job descriptions for two persons, one with technical and the other with financial background, have been prepared to assist OMANTEL in hiring appropriate persons for this purpose. These are contained in Annexes 13 and 14 and were discussed and agreed upon during negotiations. Provision for two experienced experts has been included in the proposed loan to enable them to design, specify and introduce effective management systems in conformity with the job descriptions over a period of about two years. Assurance was obtained during negotiations that the two experts would be appointed in consultation with the Bank not later than September / Extract from Article 2(f) of Agreement between the Government of the Sultanate of Oman and Cable & Wireless Limited dated January 27, 1975.

23 Staff and Training 4.08 Below the top management level, there is a high proportion of expatriate staff in the middle management and senior technical levels. This is seen in the following table: Number (at 12/31/78) Percentage Staff Classification Omani Expatriate Total Omani Expatriate Administrative Technical (section heads, asst. engineers, technicians) Operators Mechanics Subtotals Linesmen, cable jointers, drivers and unskilled Total Although one of the Government's objectives of telecommunications development is the design and implementation of a training program to achieve as rapidly as possible the total "Omanization" of the personnel and staff engaged in the public telecommunications systems in the Sultanate; it will be a number of years before this can be achieved. Training of local staff of technical and middle management levels is currently constrained by the lack of sufficiently pre-qualified local people. To assist in dealing with this problem a training plan has been devised and a training center and training equipment, which are necessary to carry out the envisioned training program, have been included in the project. Currently, several expatriates are employed as trainers and they are generally competent for the task OMANTEL's maintenance capability and training needs have been considered in project design; PCO sites will be selected taking into account geographical distribution and maintenance requirements. No major difficulties are anticipated for OMANTEL to maintain and operate the installed facilities. However, a disappointing feature of the present organization is its inability to carry out installation work, apart from the subscriber's lead in and telephone instrument, with its own labor force. While the capability to install switching equipment and transmission equipment comes only after

24 some years of training and experience, and contractor installation generally does not add unduly to switching costs, the use of contractor installation for subscriber's cables is expensive. During project supervision, the training program will be reviewed and continually updated to ensure that adequate training will take place, including in the area of cable installation. The annual updates of OMANTEL's total training program will be included in appropriate progress reports. Staff Numbers 4.11 At December 1978, the total staff of 952 represented a ratio of about 45 per 1,000 telephones or 85 per 1,000 DELs. While this is high, it is explained by two factors; first, the network is very small at present, there being only about 11,000 DELs, and diseconomies of scale are incurred, and secondly, there is overstaffing because of the use of untrained or partly trained staff. It is proposed that the staff ratio be progressively reduced with a broad target of halving the ratio of staff to DELs by The proposed progress towards the 1990 objective is included as item 3 of the performance indicators shown in Annex 9, which were discussed and agreed upon during negotiations. Accounting and Budgeting System 4.12 The accounting system in OMANTEL SAO is on a cash basis and its finances form part of the government budget. All payments for capital expenditures have been made directly through government channels. OMANTEL will be operating as an autonomous entity under a fully commercial practice. Some progress is being made towards improved procedures but the accounting and budgeting systems are still in need of substantial improvement OMANTEL SAO has begun preliminary works to convert from present cash accounts to accrual accounts. To assist in the implementation of the full commercial accounting system, OMANTEL will employ a qualified financial expert with experience in telecommunications operations. Provision for the employment of this expert has been made under technical assistance in the proposed Bank loan and a draft job description has been prepared to assist OMANTEL (paragraph 4.07 and Annex 14). Billing and Collection 4.14 The fixed annual rentals are billed in advance and call charges are billed after they have been incurred. All bills are paid at OMANTEL SAO headquarters or local branches of commercial banks. The billing for local calls is presently staggered on a quarterly basis while international telephone and telex calls are billed on monthly basis. For international calls, subscribers are required to obtain an international account number (IAN) against which calls are billed; no deposit is required when opening this account with OMANTEL SAO. The IAN is individual to the subscriber irrespective of the number of telephones held. Subscribers and the public can also make international calls by paying cash at the OMANTEL SAO headquarters in Muscat.

25 The separate billing process for local and international calls will be combined and computerized utilizing the computer service facilities at the Finance Ministry. OMANTEL SAO expects that the computerization of the whole billing process will be completed during 1980 and this should reduce the billing cycle from three months to about one month. Audit 4.16 OMANTEL SAO cash accounts are pre-audited internally and postaudited on a continuing basis by its internal auditor's office. However, the internal audit and control has not been effective in the past. To correct this situation, the job description for the financial technical assistance provides for the review of the internal audit and control procedures and helping OMANTEL implement the necessary changes after the commercial accounting system is introduced (Annex 14) A local accounting firm, Shair and Company, has been the external auditor of OMANTEL SAO since its inception. However, no audited report has yet been published mainly because Shair and Company has been involved in rewriting OMANTEL SAO past accounts to bring them up-to-date. During negotiations, assurance was obtained that OMANTEL would engage an independent auditor acceptable to the Bank. It was also agreed that OMANTEL would submit, for FYs8O to 82 its unaudited annual financial statements to the Bank within six months of the close of the fiscal year and its audited annual financial statements with auditor's report within eight months of the close of the fiscal year, as it is considered unlikely that OMANTEL can do better than this during the next several years. However, OMANTEL should be able to improve its accounting practice after its staff becomes familiar with the new commercial accounting system and thereby reduce the time needed for accounts preparation and consolidation. During negotiations, OMANTEL agreed to submit, from FY83 and onward, its unaudited and audited annual financial statements with auditor's report, respectively within four and six months of the close of the fiscal year. Inventories 4.18 Stores inventories and a material management system do not exist. The specification of a system, and its implementation, will be included in the job description referred to in paragraph Insurance 4.19 In view of the dispersion of OMANTEL SAO assets, and the consequential diversification of risks, OMANTEL SAO does not insure against fire and other loss or damage. This same policy will continue in the future and is in line with the policy adopted by most telecommunications administrations and is acceptable.

26 V. FINANCIAL ANALYSIS Past Financial Performance 5.01 There has been no cash surplus since the inception of OMANTEL SAO in 1975 and deficits up to 1977 have been financed by the Government. After the two major tariff increases in 1976 and 1977 (paragraph 3.07) and with the expansion of its services, OMANTEL SAO operating results have been improving steadily. Preliminary figures for 1978 show a cash surplus of about RO 1.8 (US$5.2) million. A summary of the cash statements of OMANTEL SAO during the period FY75-78 is given below: Fiscal Year Ending December RO Thousands Operating revenues 204 2,557 3,738 5,767 Operating costs 832 4,102 3,882 3,972 Operating (deficit) surplus (628) (1,545) (144) 1,795 Present Financial Position 5.02 At present, OMANTEL SAO is a management company and does not own the telecommunications assets it operates (paragraph 4.01). However, to obtain an assessment of its financial position when it changes over to a 100% government owned corporation and takes over the telecommunications assets in the future (paragraph 4.04), a notional estimation of the financial position of OMANTEL SAO as of December 31, 1979, has been prepared as follows: (millions) As of December 31, 1979 RO US$ ASSETS Fixed Assets Net plant in operation Work in progress Total Net Fixed Assets V Current Assets Total Assets LIABILITIES Equity and Government financing Current Liabilities Total Liabilities

27 Accounts Receivable 5.03 The overall level of subscribers' accounts receivable as of December 31, 1979 is estimated at RO 3.2 million, which is about five months of the current year's revenues. However, this amount includes overdue accounts which are about three months of the year's billings; this is not unreasonable given the present quarterly billing system. The management of OMANTEL SAO is aware of the need to improve its overall accounts receivable position and is beginning to pursue a rigorous disconnection policy. The computerization of the billing process is expected to further improve the accounts receivable position (paragraph 4.15) About half of the overdue accounts as of December 31, 1979 belong to government subscribers. The Government is aware of this problem and has provided in the FYs79-80 budget for each department special funds which are earmarked for the current payments of telecommunications services. As regards the overdue payments, the Government has instructed OMANTEL SAO to identify the accounts that should be paid and any that may have been written off. During negotiations, assurance was obtained that the Government would settle all existing arrears promptly and cause all public agencies to settle their future accounts within two months of the billing date and that OMANTEL would maintain the overall level of its accounts receivable at about three months' billings from FY81 through FY83, and at about two months' billings from FY84 and thereafter. Valuation of Assets 5.05 At the time when OMANTEL SAO was formed, the assets of C&W as of December 31, 1974 were taken over by the Government under a conveyance agreement of August 2, 1975 and were subsequently valued at RO 1.6 million (US$4.6 million). Since then, the Government has been directly providing funds for capital expenditures, but no plant accounts have been kept. In preparation for the transfer of the assets after the complete ownership by the Government, OMANTEL SAO has begun the process of evaluating these fixed assets and stores, and is expected to advise the Bank by June 30, 1980 of the result of this evaluation Preliminary estimate of the net fixed asset value by OMANTEL SAO as of December 31, 1979 is about RO 21.7 million (paragraph 5.02). To reduce possible distortion in future assets value by price inflation on the one hand and declining unit costs from improved technologies and economies of scale on the other, the net fixed assets in operation have been tentatively adjusted to reflect the current value of the assets and revalued on a trial basis, by 4.5% per annum for the forecast period (Annex 19). During negotiations, assurance was obtained that, starting from FY81, OMANTEL would review and determine annually the value of its fixed assets and notify the Bank of the results not later than June 30 of each fiscal year. The purpose of the review is to determine whether adjustments to the value of fixed assets are necessary for calculating the rate of return and to assure that, if necessary, appropriate revaluation would be made in a manner acceptable to the Bank.

28 Financing Plan 5.07 The forecast of sources and applications of funds is based on OMANTEL's capital expenditure program for the period and a summary of the financing plan is given below. Detailed funds flow statements are presented in Annex 17. (in Millions) For the period RO US$ % Requirements Ongoing works Proposed project Future works Working capital increase Total requirements Sources Internal cash generation Less: Debt service Net internal cash generation Borrowings: For the proposed project: Proposed Bank Loan Government loans Subtotal For ongoing and future works Total borrowing Total Sources During the period , OMANTEL's net internal cash generation is expected to contribute about 77% of total financial requirements. This contribution will be supplemented by external borrowings. For the proposed project, in addition to OMANTEL's internally generated funds and the proposed Bank loan of US$22.0 million, the Government will provide for about US$8.0 million from its own resources. The Bank loan of US$22.0 million would represent about 73% of the total borrowings needed for the implementation of the proposed project.

29 In the financial forecasts, the Bank loan is assumed to carry an interest rate of 8.25% per annum with ten years repayment including four and a half years' grace period. Borrowings from the Government are non-interest bearing and repayable in ten years including a six year grace period; these terms and conditions are in line with the current practices in Oman for government loans to organizations similar to OMANTEL During negotiations an assurance was obtained that the Government would provide funds, on terms in line with the Government's policy and satisfactory to the Bank, to meet any required foreign or local expenditure necessary to complete the program. Future Financial Performance 5.11 Financial statements projected for FYs are given in Annex 15 through Annex 18. A summary of OMANTEL's future financial performance is given below: Fiscal Year Ending December 31 Operating revenues (million RO) Operating expenses (million RO) Operating income (million RO) Operating ratio (%) Rate of return on revalued assets (%) Current ratio (times) Debt/equity ratio (%) 7/93 11/89 17/83 20/80 19/81 16/84 Debt service coverage (times) OMANTEL's projected financial performance over the project period is satisfactory. The operating ratio will be about 70%, the current ratio will be above 2.0 and the debt coverage ratio will be above 6.0 through the project period.

30 No tariff increase is expected to be required during the project period. The present forecasts show that a 10% rate of return on revalued assets would be adequate to meet OMANTEL's future financial requirements. During negotiations, assurance was obtained that OMANTEL's tariffs would be maintained at levels sufficient to achieve at least 10% rate of return on revalued net fixed assets in operation, starting from FY81 (paragraph 5.06). Future Capital Structure 5.14 The Government has decided that the transfer of telecommunications assets to OMANTEL will take the form of equity. OMANTEL SAO is presently evaluating the fixed assets and stores associated with its telecommunications operations (paragraph 5.05) and the final result will be used as the basis to determine the amount of government's equity to OMANTEL. OMANTEL would transfer its net profits to the Government only after making due allowance for OMANTEL's requirements for debt service, investment programs, increase in working capital and allocation for any statutory requirements. During negotiations, assurance was be obtained that any modification of OMANTEL's future capital structure would be made in consultation with the Bank. VI. RECOMMENDATIONS 6.01 During negotiations, assurance was obtained from the Government that it will: (a) promptly settle existing arrears and introduce procedures to ensure that all government agencies pay current bills within two months of the billing date (paragraph 5.04); (b) make available appropriate funds to cover any financing gap for the funding of the project (paragraph 5.10); and (c) inform the Bank and seek its comments prior to any future change in OMANTEL's capital structure (paragraph 5.14) During negotiations, assurance was obtained from OMANTEL that it will: (a) employ, not later than September 1980, internationally recruited personnel with technical and financial background, satisfactory 9 to the Bank, for assistance in the design, specification and implementation of appropriate management systems (paragraphs 4.07 and 4.13);

31 (b) engage an independent auditor acceptable to the Bank (paragraph 4.17); (c) provide the Bank with unaudited and audited annual financial statements with auditor's report, respectively, within six and eight months of the close of the fiscal years for FY80 through FY82, and within four and six months for FY83 and onward (paragraph 4.17); (d) maintain the overall level of its subscriber accounts receivable at about three months' billings from FY81 through FY83, and at about two months' billings from FY84 and thereafter (paragraph 5.04); and (e) starting from FY81, review and determine annually the value of its fixed assets, and notify the Bank of the results not later than June 30 of each fiscal year. If necessary, appropriate revaluation of its fixed assets will be made in accordance with methods acceptable to the Bank (paragraph 5.06) During negotiations, assurance was obtained from the Government and OMANTEL that they will set and maintain OMANTEL's tariffs at levels sufficient to achieve at least 10% rate of return on revalued average net fixed assets in operation, starting from FY81 (paragraph 5.13) The proposed project constitutes a suitable basis for an IBRD loan to OMANTEL of US$22.0 million equivalent for a term of ten years including a grace period of four and a half years.

32 OMAN OMAN TELECOMMUNICATION CORPORATION-(OMANTEL) FIRST TELECOMMUNICATIONS PROJECT Examples of Economic Development Since Annual Growth % No. of schools Pupils 6,941 15,332 24,481 35,565 49,929 55,752 64,975 75, Hospital beds ,000 1,252 1, Post offices Telephones ,208 2,226 2,937 3,701 6,649 9, Roads (blacked topped) ,272 1, kms Roads graded kms 1,817 2,168 3,060 3,620 4,105 5,495 8,500 10, Gross power generated x 106 (government) Employment (Omani) 1,630 2,857 4,765 7,403 9,035-15,668 17, Expatriates ,670 3,000-6,643 9, Petroleum 106 barrels Exports (RO million) Imports (RO million) Government revenue Source: 1. Oman Current Economic Position and Prospects, October 1979, IBRD. 2. Master Plan for the Development of Telecommunications in the Sultanate of Oman, March 1979, OMANTEL.

33 - 27- AS1EX 2 OMAN OMAN TELECOMMUNICATION CORPORATION (OMIANTEL) _FIRST TELECOMMUSNICATIONS PROJECT Iste-onio..al Telephon Stetistine P TELEPHONES - JANUARY 1978 OUL NP PER CAPITA-' D- NATIONAL PRENCIPAL CITIES P-REST OP COUNTRY TION Y7 Pee A-. Ann nch-nre Auto- cenlage Ocetege capits Seouth Lines Tntel Tele- Per eati- Total Per of Total Pee of COUNTRY Mid-1977 us4 (Pe-net) (DELs) Telephoses ph-ne 100 cr1105 Telephone 100 Nat'1 Telephone 100 Net'1 (nlin) (ONUs) (SONs) EEL Pop. 7. (NOSe) Pop. 7, (COOs) Pop. 7. AFRICA Algeria , n ne 13.4 Burondi ne C-nr..n Central African Rep n. n na e.- Chad Egypt n..3/- na. - -n. - - Ethiepie ' Gha : s I-ory Coas.t Kenya : Liberia n.e Melt ne.. - -ne M-uitania n.. ne -- - n.ne. - -na - - Meorltius ne Morocco n Niger n n. n e - - R..nde ne. - -s. - - Sene gal Sudes T..n..nie Egend / uippee Volta Zseoie AMERICAS BReail , , , , , Cana.da , , , , C.l.sbia , , , Custa Ripe 2.1 1, go Sal-d-r Osatesala Mesics , , , , Trinidad & Tehago 1.1 2, United Scarce , , , , , liruguap 2.9 1, n V.e...ela , ASIA Bangladesh n.ea n.e Beea China Rep , , , , India , , , , Ind.neeia Iran , Iraq , n Japan , , , , , Koera. Rep , , , Lebanon 2.9 n.a. n.&. n.a. n.a. - - n.a. n.e n.a. - - Malaysia Napal 1~~~ ~ ~~~~ j/ **O.= ~~~~0.8 2,540 n.e '.4/ 1.9 4/ _ ~~ :7 ~~~~~~~~~~~~~i 5.~-: :4 o.i Pakistan n.e. n n..a-. Philippines Singapore 2.3 2, A-Sri Lanka O Syria Thailand EYse, Arab Rep n.. n.e.. na.. ne n EUROPE, France , , , , , Oe.sany, Fed. Rep , , , , , Sweden 8.3 9, , , , , S.iteerland 6.3 9, , , , , United Kingdea , , , , , USSR , ,0 19, , , Yugosla-Ia , n.e. 1, , OCEANIA Asetralia , , , , , Fiji 0.6 1,210 n.ea New Zealand 3.1 4, , , n.ea. 56, n.e Fepus Nas Guinea n, P/Fpulation and GNP statistics: Werld Devalepsent Indicatora. The Wurld Sash, June / Telephone statistics : The Weeld's Telephones, AT&T, January / Stetistics for these co..ntries are derived fren ceisus reports in, the Wenld Rank, ass tatistirs ar -vilahie ia The Weed's TeIephonee, AT&T. 4/ Deenehee 1978 estinates and statistics prepared hy the Bank-finan.ced tesm of cenaultanta with OMANTEL.ei. ane 5/ Including capital area and Dhufr region. 6/ Including internal are.. Noe-b-e 1979

34 ANNEX 3 Page 1 of 3 pages OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT Existing Facilities at December 31, Basic Data Telephones 21,000 (estimated) DELs 11,122 (at Sept. 30, 1979) Local switching capacity 15,960 Telephone exchanges 27 Waiting list 6,451 PCOs 0 Telex services 354 Telex waiting 437 Public telegraph offices 0 2. Local Telephone Services 2.01 The local telephone service is 100% automatic. The type of switching equipment is shown in the following table: Number of Number of Equipment Type Exchanges Lines Capacity C ,700 ARF ,500 ARK ,500 ARK Strowger 1 1, The C 23 crossbar exchanges were supplied by Hitachi and are housed in containers as are all of the exchanges in the network except those at Mutrah, Greater Mutrah, Qurrum, Seeb and Salalah. The buildings which accommodate these exchanges are air conditioned and of good quality The step-by-step exchange does not have automatic number identification and there is no room for expansion in the existing building. Its numbering does not conform to the national numbering system and it will not be able to access the new automatic International Gateway exchange.

35 ANNEX 3 Page 2 of 3 pages 2.04 The L. M. Ericsson crossbar exchanges have been provided within the last five years and are in good condition A large number of PABXs (more than 340) of a variety of types are in use. Most are within the capital area. There is a total of about 7,300 working PABX extensions and about 2,800 extensions to DELs giving in all about 10,100 additional telephones compared with DELs. That is a telephone to DEL ratio of 1.9 (21,222 to 11,122) The external plant comprises the following cable types: (a) polythene insulated and sheathed, moisture barrier; (b) polythene insulated and sheathed, jelly filled; and (c) self-supporting aerial, polythene insulated and sheathed, screened. Primary cables in the capital area are installed in PVC ducts. 3. Trunk Network 3.01 Trunk circuits are generally of high quality and are provided over coaxial cable (four tube and single tube, small diameter) and microwave radio. The existing systems comprise of the following: Coaxial Cable Mutrah-Azaiba : 4 tube, 12 MHz Azaiba-Sohar : 4 tube, 4 MHz Azaiba-Nizwa : 4 tube, 4 MHz Nizwa-Bahla : Single tube, 120 ch. Suwaiq-Rostaq : Single tube, 120 ch. Sohar-Khatmat : Single tube, 60 ch. Azaiba-Risail : Single tube, 120 ch. Microwave Radio, 960 Channels Izki-Sur Sohar-Buraimi Buraimi-Ibri

36 ANNEX 3 Page 3 of 3 pages 3.02 A domestic satellite system is operating over a leased transponder in an Indian Ocean satellite of INTELSAT. The main earth station is at Al Hajar near Muscat. This is the site of the standard earth station for international traffic. For the national network nonstandard 30 feet earth stations are located at Al Hajar and Salalah and are being installed at Buraimi, Saham, Nizwa and Sur. Between Al Hajar (Muscat) and Salalah, 24 SCPC telephone circuits are provided, and TV relaying is possible in either direction. The other earth stations have "TV receive only" capability There is currently no public telecommunication service to or within the Musandam peninsula There is a national trunk switching center at Muscat, located in the main OMANTEL building at Ruwi. It is an L. M. Ericsson ARM 201/2 type 4 wire exchange equipped for 500 incoming and 500 outgoing trunks. At present 396 incoming and 354 outgoing circuits are operating with traffic of 130 and 125 erlangs respectively. 4. International Telephony 4.01 International traffic is carried primarily over the Indian Ocean, INTELSAT satellite. The standard earth station is at Al Hajar, 40 kilometers from Greater Mutrah to which it is connected by a dedicated 1+1 microwave radio system. The manual international exchange is located at Greater Mutrah and an electronic exchange is being installed. International subscriber dialling with automatic message accounting (AMA) will be possible when this installation is completed, probably towards the end of Traffic to the United Arab Emirate is subscriber dialled, via the national ARM exchange and is bulk billed. It is carried over the national system to Buraimi and hence over 24 channel VHF, coaxial cable and microwave systems to the UAE Gateway exchange at Abu Dhabi. 5. Telex 5.01 The telex network is presently manual with switchboards at Muscat and Salalah. An electronic exchange manufactured by Siemens is being installed and should be ready about mid International telex links are provided from both Salalah and Muscat. Siemens electronic teleprinters are being standardized for the telex network There is no domestic telegraph service. 6. Other Facilities 6.01 Apart from OMANTEL, other agencies operate telecommunications facilities in the country. The principal such agencies are The Defense Department and Petroleum Development Oman Ltd. (PDO). PDO operates some private exchanges and an extensive microwave radio network for pipeline control and monitoring purposes.

37 OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) Programmed Growth of Direct Exchange Lines Area Capital 7,087 8,041 10,751 11,857 13,505 16,388 18,839 22,090 25,145 28,411 31,716 35,625 39,709 Interior 2,309 2,835 3,249 3,669 3,885 4,183 4,455 4,546 5,648 6,907 8,518 10,183 12,100 Dhofar 1,726 2,057 2,439 2,822 3,399 3,897 4,469 5,046 5,972 6,681 7,521 8,411 9,410 Special ,130 1,372 1,630 1,924 2,238 Total 11,122 12,933 16,439 18,447 21,043 24,949 '28,453 32,482 37,895 43,371 49,375 56,143 63,457 x

38 OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) Construction Program (RO Thousands) TOTAL F-riga Local Total Forign Local Total Forign Local Total Forign Local Total Forign Loca Total Forign Local Total F-rega Local Total A. BANK FINANCED PROJECT Local snitching , , , _ - 2, ,000 Eltoroal plant (main) ,068 2, ,477 1,955 - _ - - 1,169 3,945 5,114 Suhbcribers' and ,407 distribution plant Prioate branch enohangas Tranait anitching Telen and telegrapha , ,319 Lung distance tra--miaaion , , ,832 1,061 3,893 (terrestril) Long dintanun transmission ,238 1, , , ,898 (satellite) Technical buildinga , ,449 Non-technical bhildings , ,670 Motor oehicles , ,388 Training equip-ent Furniture and fittinga Tet equipm-nt Medical eqipment Technical assistance Total Bare Cost 2, ,595 2,784 1,351 4,135 4,684 3,488 8,172 4,581 2,094 7,475 2, , ,360 9,055 25,415 Physical toutingencies ,200 Price contingencies ,945 1,590 1,250 2, , J Total 2, ,940 3,116 1, ,875 4,625 10,500 6,406 4,294 10,700 3,081 1,119 4, ,156 12,426 33,582 B. ONGOING WOR S (Including 1, _ ,704 Contingencies) C. FUTURE WORK0 (Including 1,050 7,140 9,500 17,690 Contingencie-) D. TOTAL CONSTRUCTION PROGRAM ,500 11_750 11_340 10,017 F n ~~~~~~~~~~~~~~~~~~~~64~~ ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~

39 0' G O S FO10 N ANNEX 5 POF'O 2 of 2 c0 Fg S IR J o5f - 0 o,.0.0.k o l 'F 'F. ' ,-1 N... 0 F g l R * _F _jo c olfol o s<8 OOi 0 ' 3, 25 OF F < R S 4 0s' ' 01 F o o4 ' 0 F i ~ I I - ;3' o s O.,. 03 o 4 I - R H O I OD FR0 I R ao~~~~~. 0' OF o0'ho I t 44 I o *~ O * * F. 14 4, b..> I F 10 FIOD 0' OFF1 O I I ~~ 3,~ OFF3 e I~ 0'~ ~ 10 0' _j '.. * S 1 e 2F4 I FF4 F' G ' e F' Z f

40 ANNEX 6 Page 1 of 5 pages OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT Details and Scheduling of Items in Bank Project 1. Local Switching Equipment (a) To be contracted in Muscat (new exchange) 5,000 lines - Greater Mutrah (extension) 5,000 lines - Unspecified (new exchanges) 400 lines (b) To be contracted in Qurum (extension) 2,000 lines - 'Wattayah(new exchange) 2,000 lines - Azaiba (replacement) 2,000 lines - Al Hajar 200 lines - Qurayat (new exchange) 200 lines - Masnah (replacement) 200 lines - Salalah (extension) 2,000 lines - Raysut (new exchange) 200 lines - Unspecified (new exchanges) 400 lines Total 19,600 lines (c) The initial 5,000 lines installed at Muscat will allow the recovery of two container type C 23 exchanges, one of 1,000 lines and the other of 700 lines, now serving the area. The initial extension at Greater Mutrah of 5,000 lines will allow recovery of a 1,200 line step-by-step and a 1,000 line C 23 container type exchange. Thus, the net increase in capacity from (a) and (b) is 15,700 lines. External Plant 2. Provision is made for main subscribers' cables, junction cables, ducts, manholes, etc., to match about 16,000 net additional lines of local switching equipment in accordance with section 1 above. Subscribers and Distribution Plant 3. The project provides for subscribers' equipment and external distribution plant such as poles and drop wire in the program years 1980

41 ANNEX 6 Page 2 of 5 pages through 1983 plus about halfway through This would provide for additions of new subscribers as follows: ,500; ,000; ,600; ,900; 1984 (half year) - 1,800; making a total of about 13,800. In addition, provision is included for PABX extensions, amounting to approximately 5,500 and for the terminal equipment for about 360 PCOs. Private Branch Exchanges 4. The project provides for additions of about 6,000 lines of capacity for PABXs through the period up to about halfway through Transit Switching 5. The project includes provision in the transit switched network for additional capacities to carry the extra traffic generated by the new subscribers and to improve the present grade of service in the traffic carrying components of the network. It covers the national and international network. Telex and Telegraphs 6. The project includes expansion of the telex network to about 1,800 subscribers by the end of 1984 and the commencement of a gentex service in 1981 or Long Distance (Terrestrial) 7. Included under this item are the following microwave radio transmission systems: Nizwa-Salalah (approximately 1,000 km) Nizwa-Ibri (approximately 130 km) Greater Mutrah-Azaiba (approximately 30 km) Long Distance (Satellite) 8. The project includes a standard (large) INTELSAT earth station at Al Hajar to work into the Arabsat system and four small (11 meter) nonstandard earth stations with TV receive only facilities and SCPC terminals equipped for 12 channels. Of these four small stations, three would be situated in the Musandam peninsula at Bukha, Bayah and Khasab, and the fourth on the offshore island of Masirah. Technical Buildings 9. This item covers buildings required for accommodation of switching or transmission equipment.

42 ANNEX 6 Page 3 of 5 pages Non-Technical Buildings 10. The project includes phases 1 and 2 of a new OMANTEL headquarters building, each phase costing about RO 600,000, a central stores building at a cost of about RO 170,000 and a training center estimated to cost RO 300,000. Motor Vehicles 11. The project provides for increasing the motor vehicle fleet to service the larger organization required for the development of the telecommunications system as well as vehicles required for replacement through the period Training Equipment 12. This provides for measuring and testing instruments, model electromechanical and electronic switching exchanges, PABXs radio and other transmission equipment, etc. Furniture and Fittings 13. Included under this item is office furniture and equipment and household furniture for additional staff quarters. Test Equipment 14. This includes provision of testing and measuring equipment to supplement that which will be provided with the exchange and transmission equipment orders. Medical Equipment 15. This includes equipment necessary for the establishment of in-house medical centers to provide better employee facilities, help reduce staff turnover and lost time through medical courses. Technical Assistance 16. This item covers five manyears for two high level and experienced telecommunications personnel--one finance and accounting oriented and the other engineering planning and programming oriented who will work separately in their own fields and together to prepare comprehensive specialized systems and general management information systems, budgeting systems and the like. Their job descriptions are set out in Annexes 13 and 14.

43 ANNEX 6 Page 4 of 5 pages Scheduling for Significant Items 17. The implementation of the project will require scheduling for important items of equipment generally in accordance with the following timetables. It will be necessary to arrange supply of other items such as telephone instruments, multiplexing equipment, etc., in conformity with indicated scheduling of the major equipment items and the actual demands as they occur. More detailed scheduling is shown in the Master Plan. (a) Exchange Equipment and Main Cables Bids Contract Delivery Requested Placed Commenced Commissioning Location By By By By Muscat June 1980 March 1981 December 1981 June 1982 Greater Mutrah June 1980 March 1981 December 1981 June 1982 Extension Qurum June 1980 March 1981 January 1983 December 1983 Extension Wattayah June 1980 March 1981 January 1983 December 1983 Azaiba June 1980 March 1981 March 1982 December 1982 Al Hajar June 1980 March 1981 March 1982 December 1982 Qurayat June 1980 March 1981 January 1983 December 1983 Masnah June 1980 March 1981 March 1982 December 1982 Salalah June 1980 March 1981 January 1983 December 1983 Extension Raysut June 1980 March 1981 March 1982 December 1982

44 ANNEX 6 Page 5 of 5 pages (b) Microwave Radio Sstems Bids Contract Delivery Requested Placed Commenced Commissioning System By By By By Nizwa-Salalah January 1981 October 1981 October 1982 December 1983 Nizwa-Ibri September 1980 April 1981 April 1982 December 1982 Mutrah-Azaiba September 1980 April 1981 April 1982 December 1982 (c) Satellite Earth Stations Bids Contract Delivery Requested Placed Commenced Commissioning Location By By By By Al Hajar June 1981 March 1982 January 1983 December 1983 Bukha December 1980 June 1981 March 1982 December 1982 Bayah December 1980 June 1981 January 1983 December 1983 Khasab December 1980 June 1981 January 1983 December 1983 Masirah December 1980 June 1981 January 1983 December 1983

45 ANNEX 7 Page 1 of 3 pages OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT Cost Bases for Items in Development Program 1. General 1.01 The costs for the development program and for the project have been based on estimates prepared by the telecommunications consultants who produced the Master Plan. The bases are described in detail in the report entitled "A Master Plan for the Development of Telecommunications in the Sultanate of Oman: " 1.02 There are two major roots for the cost estimates. One is the general ruling prices for telecommunications equipment obtained through the Bank's experience with international competitive bids and the second is the actual prices bid to OMANTEL in international competitive bids over the past five years. 2. Local Switching and Main Cables and Ducts 2.01 Costs were estimated for different sizes of individual installations and are reduced to a "per line" basis. The switching equipment allows for high traffic which is experienced in the commercial areas and for some tandem switching The external plant is based on unit prices from previous bids because detailed design work is not yet possible for cable and duct reticulation due to lack of road alignments, etc. Subscribers' reticulation has been laid out on an "office plan" basis. Junction cables, ducts, manholes and cabinets are included in the external plant figure. Plant on the sub'- scribers' side of the "distribution point" is not included Prices are shown in Rials Omani with US dollars in parentheses.

46 ANNEX 7 Page 2 of 3 pages Cost per Line Ducts, Cabinets, Size of Switching Switching Main Cable etc., plus Cable Installation Equipment Installation Material Cost Installation (Lines) RO (US$) RO (US$) RO (US$) RO (US$) (666) 60 (174) 93 (269) 330 (955) (585) 45 (130) 84 (243) 232 (672) 1, (388) 44 (127) 75 (217) 232 (672) 2, (301) 42 (122) 66 (191) 232 (672) 5, (264) 39 (113) 66 (191) 232 (672) 3. Subscribers' Distribution 3.01 Studies in Oman of past installations give an average of four poles to three subscribers. The cost of a pole plus its hardware and dropwire has averaged about RO 30. Installation costs, including transport, etc.,. add another RO 30 giving an installed cost of RO 60 and a "per subscriber" cost of RO 80. Installation of the telephone instrument is RO 10 for material and RO 10 for labor, etc., giving a total figure of RO 100 or US$290 per subscriber Additional cost of approximately RO 400 (US$1,160) has been included for the terminal equipment for each PCO to be provided. This is designed to cover the cost of the multi-coin instruments and appropriate housing. 4. Telex 4.01 Costs of about RO 525 (US$1,500) per line have been estimated for the telex exchange capacity and about RO 1,000 or US$3,000 per teleprinter. The additional miscellaneous telex equipment has not been separately estimated as its cost is covered by the unit cost per teleprinter used. 5. Long Distance Transmission 5.01 Transmission system prices have been determined taking into account the difficult conditions in Oman. The following average prices have been adopted:

47 ANNEX 7 Page 3 of 3 pages Transmission System RO (US$) Microwave radio route survey 60 ( 174) per km Microwave radio system purchase and installation 2,670 (7,730) per km Small tube coaxial cable system, 4-tube, one-pair equipped, 1.3 MHz 3,200 (9,300) per km Single small tube coaxial cable, 120- channel capacity 1,800 (5,200) per km Multiplex equipment 220 ( 640) channel end Standard A earth station 1.66 m (4.8 m) per station 11 meter earth station, including telephony SCPC equipment 0.3 m (0.87 m) per station 6. Buildings 6.01 An average cost of RO 20 (US$60) per square foot has been taken for all buildings. This rate includes air conditioning and services.

48 ANNEX 8 OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT Schedule of Disbursements IBRD Fiscal Year and Quarter Cumulative Disbursement at End of Quarter (US$ Thousands) 1980/81 December March June /82 September December ,300 March ,700 June , /83 September ,500 December ,500 March ,900 June , /84 September ,900 December ,900 March ,700 June , /85 September ,000 December ,500 March ,800 June ,000

49 ANNEX 9 OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT Performance Indicators A set of indicators which would assist in monitoring OMANTEL's future performance during the period is given below. OMANTEL is expected to indicate in its periodical progress report to the Bank the actual performance relating to the projected figures. For Fiscal Year Ending December Additional telephone connections (DELs) installed 3,506 2,008 2,695 4,296 3,275 3, Additional. telex lines installed Number of employees per 1,000 DELs Gross operating revenues (RO million) Telephone revenues per average DEL (RO) Operating ratio (%) Rate of return on revalued assets (%) Debt service coverage (times) Debt/equi.ty ratio (%) 7/93 11/89 17/83 20/80 19/81 16/ Current ratio (times) Subscriber accounts receivable (in days)

50 ANNEX 10 Page 1 of 2 OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT Summary of Basic Telecommunications Tariffs (Effective June 1, 1977) Telephone 1. Installation Charges (in RO) Business Residential Telex (a) Capital area (including Seeb) (b) Interior area (c) Salalah area Annual Rental (in RO) Telephone Call Charges Local: RO 0.03 per unit call Long distance: (a) Periodic pulse metering principle is being employed by RO 0.03 per unit for subscriber dialled calls. The pulse duration is inversely related to distance; there are two different tariffs for day and night calls. (b) Subscriber dialling facilities are also available for calls to the United Arabic Emerites (UAE). Like domestic traffic, these calls are charged on a periodic pulse metering basis, the pulse duration being four seconds by day or night. (c) Capital to Salalah traffic is handled on a manual basis. Calls are charged at RO for a minimum of three minutes and 375 Baizas for each additional minute or part thereof. There is no concessional night rate. 4. International Services Charges per Minute (RO) Zone Area Telephone Telex' (i) Gulf, etc (ii) Lebanon, Saudi Arabia, etc (iii) East Africa, India, Iran, etc (iv) Cyprus, Europe, Hong Kong, etc (v) Africa, North & South America Telegraph Service Zone Area Charges per Word (RO) (i) Gulf, etc., Indian Subcontinent, Iran 0.1 (ii) Lebanon, Saudi Arabia, East Africa, Iraq, Iraq, etc. 0.2 (iii) Africa, Cyprus, Europe, Hong Kong, North & South America 0.3

51 ANNEX 10 Page 2 of 2 6. Details of other charges for various type of equipment and miscellaneous services such as shifting, barring, reconnection, number changing, etc., are given in the project files.

52 ANNEX 11 Page 1 of 2 pages OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT Return on Investment Benefit Period 1. The benefit period of the program extends from 1980 to 2005, when on average the equipment provided under the program is expected to have substantially completed its useful life. Capital Expenditures 2. Capital expenditures are based on the estimated requirements during the program period ( ) excluding preinvestments for the future program; preinvestments in for the program are included in the capital expenditures. Price contingencies are excluded. Operating Revenues and Costs 3. Incremental revenues assigned to the program are primarily based on the expected additional telephone and telex subscribers and the traffic increase brought about by the program. Incremental costs excluding depreciation and interest are based on the additional assets, traffic and staff requirements expected from the program. All revenues and costs have been deflated with expected local price increases of 10% per annum to bring them to the 1979 price level and make them comparable with the capital expenditures. Net Benefits 4. A summary of the program's cost and benefit streams at 1979 price level is given as follows (in million RO): Capital Operating Net Year Expenditures Costs Revenues Benefits O

53 ANNEX 11 Page 2 of 2 pages Return on Investment 5. The internal rate of return for the above net benefits stream is 18.0%. No shadow pricing has been attempted because the RO is freely convertible and the market prices reasonably reflect the true wages in Oman. Sensitivity Analysis 6. A sensitivity analysis has been performed with the following results: Rate of Return (%) 10% increase in capital expenditures % increase in operating costs % decrease in revenues 14.6 Combination of all factors above 11.6

54 ANNEX 12 OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT Top Level Organization (OMANTEL SAO, December 1979) Board of Directors!/ I President nternaecom Avisor Ma nager Admin istrative AudItemal and ControlAsitn. Secretary Assistant u It 0 ~~Quality * Medical * Accountant 0 Voice Services 0 External Plant * Switching * Housing * Customer 0 Telex 0 Internal Plant 0 Transmission * Personnel Accounts * Telegraphs * Customer Services 0 Drafting 3 Training 0 International * National * Commercial 3 Archives 0 Tariff and Systems 0 Regions 3 Public Relations Traffic 0 International * Transport 0 Statistics Systems 3 Telephone 0 Budget Directory 0 Computer * Purchasing Coordination l/the Board of Directors comprises of The Minister of Posts, Telegraphs and Telephones (Chairman), Minister of Communications (Deputy Chairman), an Officer from the P.T & T, President of Omantel and three nominees by C & W. World Bank

55 ANNEX 13 Page 1 of 2 OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT Draft Job Description for Technical Expert 1. The Oman Telecommunication Corporation (OMANTEL) which is responsible for all public telecommunicationservices in Oman requires the services of an experienced technical and management expert to assist the company in designing and implementing engineering management systems for the control of the planning, programming, budgeting, maintenance and operations functions relating to the service. The person will cooperate with the finance and accounting expert to be engaged over a similar period in the development of financial management systems. 2. In particular, the following specific tasks must be accomplished: (a) National Technical Plans Define procedures to ensure continuing review and updating of the fundamental development plans for the telecommunicationservices of Oman. The Master Plan prepared by consultants in March 1979 will form the basis for these plans; (b) Coordinated Works Programming and Scheduling Define and implement procedures for the establishment of a rolling five year works program containing detailed lists of individual projects (such as exchange installations, trunk and junction circuit provision, subscribers' cable installations, etc.) required to be undertaken in order to implement the plans. The procedures should ensure that the timing and dimensioning of the individual projects are coordinated in such a manner as to enable the utilization of all plant in the most economic way; (c) Material Budgeting and Procurement Define a system for material procurement and stores inventory management and control to ensure that material is available as required to enable implementation of the works program. The system will also provide a schedule for preparation of bidding documents and allocation of contracts for those works to be contracted so as to develop the telecommunications network in an integrated and coordinated manner;

56 ANNEX 13 Page 2 of 2 (d) Manpower and Training P'lans Define a system for the preparation and continuing review of recruitment and training plans to ensure the supply of the appropriate number of persons with the skills necessary to provide, maintain and operate the telecommunications services. These plans would define the rate of "Omanization" of CMANTEL and would cover both technical and non-technical staff; (e) Engineering Costing System In cooperation with the financial expert establish an engineering costing system to provide accurate costs for the control of operations and construction and provide management information for planning, budgeting, tariff setting and similar purposes; (f) Management Information System In cooperation with the financial expert establish a simple management information system to provide the data necessary to measure performance of all facets of the telecommunications system and enable management to react in a timely fashion to remedy potential problems; and (g) Organization Structure Recommend to the OMANTEL management alternative organizational structures including qualifications, experience, skills and numbers of persons and allocation of functions, which would be both effective and efficient in meeting the responsibilities of the entity.

57 ANNEX 14 Page 1 of 3 pages OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT Accounting and Financial Reorganization Draft Job Description for Financial Expert 1. The Oman Telecommunication Corporation (OMANTEL) which is responsible for all public telecommunicationservices in the Sultanate of Oman, proposes to undertake a reorganization of its accounting and financial functions. OMANTEL will employ a financial expert for assistance in the reorganization. 2. The broad objectives of the reorganization are as follows: (a) Organizational Structure and Staffing - To establish a sound organization for the accounting, budgeting and financial services within OMANTEL to ensure effective planning and control of operations. (b) Accounting - To establish a full commercial accounting system which will be responsive to management needs of OMANTEL. (c) Budgeting - To establish an integrated budgeting system which will provide effective budgetary preparation and control for operations as well as capital development (longand short-term). (d) Costing - To establish an efficient costing system which will provide accurate costs and control for operations, capital construction works, and supporting services. (e) Management Information System - To establish an efficient information system which will provide the management with timely and adequate financial and statistical statements and reports to enable it to effectively plan and control all financial operations and to measure the performance of the various services and personnel. (f) Materials Management System - To establish an effective stock control system which will provide adequate control of the requisition, purchase and deliveries of materials. (g) Auditing - To establish an efficient system of internal control and inspection.

58 ANNEX 14 Page 2 of 3 pages 3. OMANTEL's Finance Department has started preparatory works for the institution of commercial accounts beginning January 1, The responsibilities of the financial expert will include, but not necessarily be restricted to, the specific points as given in the following outline of terms of reference: (a) develop an appropriate organizational structure for the Finance Department with special attention to the following areas: (i) the degree of centralization of accounting and financial functions and the scope of regional activities, (ii) the authority and responsibility of staff at headquarters and in the regions, and (iii) staffing requirements and staff qualifications; (b) review the existing staff level in the Finance Department; prepare and implement appropriate short- and long-term training programs including on-the-job, local and overseas training for the finance and accounting staff; the shortterm program should be designed to familiarize the staff with the new commercial accounting system; (c) review the extent and the adequacy of the ongoing works by the Finance Department for the implementation of commercial accounts and develop a full commercial accounting system which will cover, among other things, the following points: (i) asset registers, (ii) depreciation policy and schedule based on the useful lives of the various assets, (iii) inventory accounting for stock valuation, sales and write-offs, etc., (iv) cash management system including accounting procedures of cash income, establishing necessary spending authority procedures and providing adequate internal control, and (v) billing and collection procedures including disconnection policy, write-off policy for unpaid accounts and mechanization and computerization of billing and accounting procedures;

59 ANNEX 14 Page 3 of 3 pages (d) develop and design cost accounting procedures and forms such as Work Orders, which will provide appropriate allocation of administrative expenses and other costs (particularly transportation, material and labor costs) to the construction projects and among various operations; (e) develop budgeting and budget control procedures for budget preparation, modification and approvals, and for periodical comparison of budget and actual expenditures; (f) design and introduce internal reports which will present financial data in a meaningful manner so that it can be effectively utilized by management in their operations; establish timely schedules for the production of these reports; (g) assist the management with the collection and interpretation of financial data and their application in tariff studies; (h) prepare documentations such as chart of accounts, various accounting manuals and materials for the training programs; design and introduce necessary forms, schedules and performance measurements for the efficient functioning of the commercial accounting system, giving considerations to work simplification practices and internal control requirements; (i) inspect storage locations and review storekeeping practices, procurement and ordering procedures, and inspection procedures to ensure that they are efficient and effective; suggest any necessary changes; (j) review audit procedures and practices ascertaining that they are responsive to the new commercial accounting system; make recommendation on the staffing level and qualifications, and suggest any necessary changes; and (k) develop a revaluation method acceptable to the Bank and assist in the preparation of fixed assets revaluation according to the method.

60 OMAN OMAN TEL.-E:'COMMLJNICAT JON C:UlORPORATION I'NCOMEl' STATEIMENTS FlOR THEE PERIOD BEGINNINO JAN 1 Y 197S THOUS'3AND RIALS REPO F:RT 'PRA R led APR 16Y :1.980 OPERiAT'ING.REVENUES I1963: J1.96B5 1i965 r... E_P ---N E- Tr ot AL rtel..e'.fhone: 'TOTA L. INSTAALAfATIONS R E[:N'T'AAL S A LOCAL CALLS '." I-J:NTERNL CfALL S :' OTHE,R....._ _ _ B 2.._ 3 _ ISUBTOTAL TE-lEX : f TE:L E GR AFPH OT'HER _. _.. _ i _ _ _ SUBTOTAL _ 2631._ B _ TOTAL OPERFATING EXF'ENSES S TAFF E X PENSE OTHERl OPERATING CO D:)EFPRECI:[ ATI ON : ON BOOK1 VALUE : RE:VAL. - ADJUST B TOTAL 762:1 91B OPERATING INCOME' 1S AriD: OlTHER INCOME.: I.EE' SINTERE_ST _._5_ _4QQ _ 5 1B NET INCOME OPFERATING RATIO(%) , RATE BASE: BOOK VALUE REVALUED RATE OF RETURN (%) ON BOON ASSETS ON REVALUED ASSE TP REV/DEL TX REV/LINE

61 ANNEX 16 OlMAN OMAN TEL..ECOMMLJNI[CA''TIO':l:lN CORF:ORAT ION FOR 'IHE lerj:od' BEGINNINl: J JAN l. :1978 REFPORT FP9REP:: ARED' A PR ( ) BALANCE SHEETS THOUSANDl R:[ALS :1985 ASSETS PLANT IN OPERATION BOOK VALUE " REVAL ADJ, _-_ Z4. _ SUBTOTAL ACCUM DEPRECIATION ON BOOK VALUE REVAL ADJ,.-... _._ _. 3522_._ SUBI'OTAL NET PLANT WORK IN F'ROGRESS Q _ TOTAL FIXEDi ASSETS CURRENT ASSETS CASH ANDl BANKS ACcTr IRECEIVABLE t26 INVENTORIES OTHER Q2 -- _.._ _ TO'TAL.- _6223_._.Z L TOTAL ASSETS LIABIL-ITIES CAPITAL CURRENT NET INCOME _._._ _._ , 512Q0 --_6203 TOTAL. CAPITAL REVAL. RESERVE... _._1Q8 _._ _567A 8066._ l814 TOTAL EQUITY i.-ong TERM DEBTS I.ESS CUR POR'TION Q _1382_18QQ TOTAL CURRENT LIABILITIE CURRENT L/T DEBT Q - -- n _1800 TOTAL --- _ _ A _ TOTAL LIABILITIES : I:EBT/DEBT+EQUITY CURRENT RATIO 3.4 3,2 3,

62 OMAN OMAN TEL..Il'l:MMlUNI CATION CORPORA'T'IJON F::'OR THEI PE:RRIOD BEGINNING JAN REEPORT PREPA'P::RREDL APR FUNDS flow 1980 S'T A'TEMENT'S :1.980 : THOUSAND RI ALS TOTAL INT'E RNAL SOURCES NET'T INCOME- BJEFORE:: INTE:REST :L D E--PRE1:CIA'TION _ _ _5QZZ _12340 TOTAL R AWDLOWNS PROPOSED IRID GOVERNMENT AND OT'HER BORROWINGS... _._ _ TO'T'AL TOTAL SOURCES OF 1::'l.lNX:DS UJSES OF F'UNDS ONGOING WORKS PROPOSED PRO.JECT F'-LJTUJRIE- WORKS QQ.8Q32._..._84Q _ TOT AL 566() DEBT SERVICE FR:E PAYMEN'r INTERE:ST 58 F _._ 121 _581.4Q Q... _564..._184 TOTAL C:HANGE IN WORKING CAPrITAl Q TOTAL UJSES.... _ Q _28Z4-1 1 OF FUNDS I:DE:B T C,OVE. RAGE(TIMEE ,

63 - 57- ANNEX 18 OMAN OMAN ETEL..I-C.:)MM(JN:I[CArION CORFPORAT IOCJN FOR THE f'eriod, BEGINNING JAN 1Y 1980 RFEF'ORT PREPFEARE D AFPR 16, 1980 [LEBT STATEMENTS 1980 THOUSAND RIAL.S :1 : TOTA L PROPOSED IBRD LOAN COMMITMENT DRAWDOWNS REPAYMENT OUTSTANDING INTEREST COMM. CHARGES INTEREST&COMM FEE : GOVERNMENT BORROWINGS DRAWDOWNS OJUTSTANDING DEBT SUMMARY DIRAWDOWNS IREPAYMENTS OUTSTANDING INTEREST CHARGES

64 ANNEX 19 Page 1 of 3 pages OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) FIRST TELECOMMUNICATIONS PROJECT Notes and Assumptions on the Financial Statements 1. The Income Statements for FYs78 and 79 are primarily based on draft pro forma accounts prepared by the management consultants and OMANTEL, SAO Finance Department. The following paragraphs relate to the main items of the accounts shown in Annexes 15 to 18, which include changes reflecting additional information obtained during appraisal. 2. The estimated number of Direct Exchange Lines (DELs) and telex lines for the years are given as follows: DELs 16,439 18,447 21,043 24,949 28,553 32,482 - Average DELs 14,686 17,443 19,745 22,996 26,751 30,518 - Net additions 3,506 2,008 2,596 3,906 3,604 3,929 Telex Lines 700 1,000 1,200 1,440 1,728 2,074 - Average lines ,100 1,320 1,584 1,901 - Net additons Income Statements 3. Operating Revenues (1) Telephone revenues include the following items (i) Installation charges are projected on basis of estimated net additons of DELs (paragraph 2 above), and average revenue per addition in 1978 as follows: RO in Capital Area RO in Salalah Area RO in Interior Area (ii) Rentals are projected using the estimated average DELs during the year and an average revenue of RO (iii) Call charge revenues are projected assuming the following annual growth rates:

65 ANNEX 19 Page 2 of 3 pages (a) National (b) United Arab Emerites (UAE) (c) International (iv) Other revenues include charges for shifting, disconnections, reconnections, etc. An average of RO is used with the average number of subscribers during the year. (2) Telex revenues include installation charges (based on an average charge of RO 100 per addition), rental (based on an average rental of RO 480 per subscriber) and call charges. The call charges are projected on the following assumption: (i) National: based on RO per average subscriber in 1978 and expected annual growth rate of 50% in 1980, 30% in 1981, 20% in 1982 and 10% in 1983 and thereafter. (ii) International: based on the expected annual growth rate of 45% in 1980, 60% in 1981, 35% in 1982, 25% in 1983 and 20% in 1984 and thereafter. (3) Telegraph revenues are assumed to remain constant during the project period. (4) Other operating revenues include income from leased facilities and miscellaneous revenues, and are projected to increase at 8% per year. 4. Operating Expenses (1) Salaries and wages are projected on the basis of OMANTEL's estimated staff requirements and an inflation factor of 10% per year. (2) Other operating expenses include maintenance, transportation, administration, etc., and are projected on the basis of OMANTEL's requirements during the project period, in addition to the expected annual increase for each category. (3) Depreciation is computed by using a composite rate of 6% per year on the average gross plant in operation during the year. 5. Other non-operating income includes interest and other income, etc., and assumes an annual growth of 10%. 6. Taxation: OMANTEL, SAO is presently exempted from income tax and customs duties (paragraph 2.09). The forecast assumes the exemption would continue with the fully government-owned OMANTEL.

66 ANNEX 19 Page 3 of 3 pages Balance Sheets 7. Fixed assets are based on OMANTEL's construction expenditure program during FYs80-85 and the expected completion of the major items in the investment program for the purpose of calculating rate of return, the opening value is based on the preliminary results of OMANTEL, SAO evaluation of existing assets, adjusted downwards by some RO 2 million to more accurately reflect current costs of equivalent assets. An average of 8.9% is derived from the foreign (7.5%) and the local (10%) inflation rates weighted by their corresponding foreign and local components of the program costs. After taking into account the impact of technology improvement and economies of scale on reducing the prices of telecommunications equipment, an annual revaluation factor of 4.5% (about half of the weighted average inflation rate of 8.9%) is assumed in the projection to be applied to the gross fixed asset value and the accumulated depreciation from FY80 onward. This revaluation factor is considered reasonable. 8. Work in progress is projected according to the estimated construction schedule. 9. Cash and bank are projected based on OMANTEL's cash operating expenses and capital expenditures. 10. Accounts receivable position is expected to improve over the project period from presently five months of billing to about two months by FY Inventories are expected to increase at approximately the same rate as the gross fixed assets in operation. 12. Other current assets reflect prepayments in respect of property rentals and sundry receivables, and are assumed to increase at 20% per year. 13. Equity is expected to increase through retained earnings and revaluation reserves after the Government takes over the full ownership of OMANTEL. As of January 1, 1980, OMANTEL's equity is estimated at RO 29.0 million. 14. Long-term debts include the proposed Bank loan of US$22.0 million at an annual interest of 8.25% with ten years repayment including four and a half years grace period. Also included are interest free funds to be provided by the Government with ten years repayment including six years grace period. 15. Current liabilities largely reflects sums to foreign administrations for international traffic. Sundry payables and accounts are also included. A 15% per year increase has been assumed

67 ANNEX 20 OMAN OMAN TELECOMMUNICATION CORPORATION (OMANTEL) Related Documents and Data Available in the Project File A. Selected Reports and Studies on the Sector or Subsector Al - A2 - A Master Plan for the Development of Telecommunications in the Sultanate of Oman, , March Training Assistance to OMANTEL, SAO Tripartite Review Report, UNDP, February A3 - Agreement between the Government and C&W, January 27, A4 - Article of Incorporation, OMANTEL, SAO, August 2, A5 - Draft Article of Incorporation, OMANTEL, February 25, B. Selected Reports and Studies Relating to the Project Bl - Project Preparation Report, March 3, B2 - Project Preappraisal Report, February 27, B3 - Project Brief, May 16, B4 - Issues Paper, July 24, B5 - Decision Memorandum, August 7, C. Selected Working Papers and Tables Cl - OMANTEL, SAO Cash Statements, FY75-FY78. C2 - Draft Balance Sheet, OMANTEL, SAO, at December 31, C3 - Rate of Return Calculations. C4 - Network Development Costs, C5 - C6 - Various sets of financial projections under different assumptions for asset valuations, etc. Miscellaneous working papers for financial statements.

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