PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE. Nicaragua Rural Telecom

Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Nicaragua Rural Telecom Region LATIN AMERICA AND CARIBBEAN Sector Telecommunications (100%) Project ID P089989 Borrower(s) REPUBLIC OF NICARAGUA Implementing Agency TELCOR Environment Category [ ] A [X ] B [] C [ ] FI [ ] TBD Date PID Prepared January 4, 2006 Date of Appraisal December 30, 2005 Authorization Date of Board Approval March 16, 2006 1. Country and Sector Background Report No.: AB1956 Sector-Related Country Assistance Strategy (CAS) Goal Supported by the Project CAS/ Strategy Task ID: Report No. 25043-NI Date of board approval of CAS: December 18, 2002 The Rural Telecommunications Project is considered high priority for the GON for the following main reasons: (1) it will benefit rural areas where some of Nicaragua s poorest and most isolated inhabitants live; (2) it will build critical infrastructure at a very low cost compared with other infrastructure projects; (3) the infrastructure built by the project will be used by other important government initiatives in the finance, decentralization, education and public health sectors, and it will support more transparent and accountable governance; and (4) it will promote increased private sector investment and facilitate communications and remittances to rural populations from Nicaragua s sizable immigrant communities. The reasons cited above are aligned with the first and third pillars of the Poverty Reduction Strategy Paper (PRSP), and Country Assistance Strategy (CAS), which are: (a) broad-based economic growth and structural reform, (b) greater investment in human capital, (c) protection for vulnerable groups, and (d) good governance and institutional development. The project will also contribute to the country s decentralization efforts through the provision of infrastructure, considered an integral part of Nicaragua s modernization and reform process and a cross-cutting theme of the PRSP. The PRSP expects the future economic expansion to be led by urban services such as tourism, banking, commerce and communications, but the success of poverty reduction requires a special effort to ensure that the rural economy also expands. With that purpose in mind, the PRSP and this project focus on increasing investments in rural infrastructure that will enable rural communities to reduce their economic and social isolation and marginalization. Sector Issues

Telecommunications and Internet Infrastructure Deficit As a result of GON s privatization and liberalization efforts, teledensity increased fivefold from 3.33 fixed and mobile phones per 100 people in 1998 to around 17 phones (fixed and mobile) in 2004. Despite these achievements, Nicaragua continues to have one of the lowest teledensity and ICT levels in Latin America. In 2004, Nicaragua (see annex 1 - table 1), had one of the lowest penetration rates in Latin America for fixed and mobile telephones (17.03 telephones per 100 people), computers (3.57 per 100 people), and Internet users (2.23 per 100 people). Even within Central America, Nicaragua s telephone penetration level is one half that of countries such as Guatemala. Not only does Nicaragua have insufficient telecommunications infrastructure to enable it to compete with its neighbors and members of CAFTA-DR, but the cost of accessing and using this infrastructure is also higher as illustrated by the World Economic Forum which indicated that Nicaragua had the second most expensive Internet access fees in Latin America, second only to Haiti. 1 Rural Access Deficit, High Costs and Poor Quality of Service In addition to lacking sufficient and affordable telecommunications, a dramatic disparity in access to services exists between urban and rural areas. Urban centers, such as Managua, have up to 12.7 fixed phones per 100 compared to less than 0.4 per 100 in rural areas, where 48.6% (2.14 million people) of the population live. 2 As a result, rural inhabitants have to travel an average of 19 Km to reach a telephone. Approximately 750 towns with populations of 500 or more do not have access to telephones or the Internet. A recent study carried out by the Fondo de Inversion en las Telecomunicaciones (FITEL) confirmed that rural areas in Nicaragua lack sufficient telecommunications infrastructure and also found that accessing the Internet is extremely expensive US$400 to $600 a month. Nicaragua also has amongst the highest domestic telephone rates in the region and international rates are more than triple those charged in El Salvador and Guatemala. Affordable telecommunications is a significant determinant of international investment decisions of foreign companies, leaving Nicaragua at a competitive disadvantage to its neighbors. Despite these high costs, the consultants found that there is significant demand for Internet and telephone services in rural areas by a wide range of stakeholders, including municipal governments and students who walk long distances to use commercial Internet cafes to access online training programs. Finally, the quality of ICT services in Nicaragua is very low. Approximately 20 percent of large firms in Nicaragua consider telecommunications a major obstacle to operating their business effectively, which adversely affects investment decisions. On average it takes 166 days to have a telephone line installed, and in general, the quality of the service is considered poor. 3 Lack of Sector Regulations. 1 World Economic Forum, The Global Information Technology Report. 2003-2004. p. 259. 2 Unless indicated otherwise, all population data is based on the last reliable census -- l995 census figures. 3 Nicaragua Investment Climate Assessment, World Bank, 2004.

Though Nicaragua has a telecommunications law that established a sector regulator (i.e. TELCOR 4 ), it has not yet established regulations to deal with critical issues, such as licensing, interconnection, tariffs, long distance and local services and competition since Nicaragua has only had competition in the mobile sector and value-added services, but a monopoly for fixed and long distance telephone services (that expired in April 2005). The regulatory agency needs to put in place clear, fair and effective regulations to deal with critical issues in order to ensure that the transition from a monopoly to a competitive market is smooth, effective and to make Nicaragua attractive for increased investments by existing operators as well as new entrants. Organizational Structure and Staffing of the Sector Regulator The current sector regulator (i.e. Telcor) needs to be restructured and needs to have more qualified staff in order to effectively meet the challenge of regulating the telecommunications sector as it transitions to a competitive market. The sector regulator needs more economists, financial analysts, and lawyers and needs to provide these with on-going training. Furthermore, the organizational structure of the sector regulator needs to be modified to better respond to the challenges it will face. Government Strategy The GON believes that telecommunications and ICTs will help diversify its economy, attract investment, improve productivity, reduce poverty, and significantly reduce the economic and social isolation of rural areas at a lower cost than other infrastructure projects. Furthermore, the GON believes telecommunications and ICTs are an integral part of its state modernization efforts aimed at improving governance and education, increasing decentralization, accountability, and transparency. What follows is an overview of the government strategy aimed at reaching these goals. Liberalization and deregulation of the sector The GON, with the assistance of the IDA-financed Telecommunications Sector Reform Project, fully privatized ENITEL, the state-owned incumbent in 2001; established a regulatory agency for the telecommunications and postal sectors (TELCOR 5 ); increased tariffs for local telephone services to fully recover costs and a reasonable rate of return on investment; and awarded national licenses to two new cellular operators to compete with the incumbent, Bell South of Nicaragua, whose license was extended to the Atlantic Region 6. This market liberalization has resulted in a five-fold increase in the number of fixed and mobile phones from 194,000 in 1999 to more than 700,000 phones in 2004. The three mobile operators installed networks, covered all departmental capitals of the country, and actively competed for the market. Further to this, 4 See paraghaph Creation of the Superintendency, below. 5 Decree No. 1,053, dated June 5, 1982 (Ley de Orgánica del Instituto Nicaragüense de Telecomunicaciones y Correos) 6 Recently, Telefonica of Spain adquired Bell South of Nicaragua S.A.

TELCOR has begun to put in place regulations to open the fixed-line telephone services 7 to competition after ENITEL s exclusivity period expired in April 2005. In order to develop regulations on issues critical to market liberalization; such as interconnection, tariffs and competition; Telcor carried out a public consultation process between October 13 and November 24, 2004. As a result of these consultations, Telcor published on January 4, 2005 a Sector Policy Document that, among other things, summarized changes that would be made to regulations that were put in place by Telcor under the 1995 Telecommunications Law (i.e. Law 200). On January 7, 2005, Telcor published the full version of regulations that will help Nicaragua transition to a competitive market. However, ENITEL appealed the issue of these regulations to the Presidency of the Republic. The President has not yet responded to the appeal. Finally, and in order to reduce legal disputes regarding the exact date of the opening of Nicaragua to competition, the Legislature adopted on December 14, 2004 a resolution that clearly set the date for the end of the Enitel s monopoly as April 15, 2005. Creation of the Superintendency In January 2005, Congress approved a law to create a Superintendency of Public Services (Superintendencia de Servicios Publicos, SISEP) that will be responsible for regulating the telecommunications, electric and water sectors as well as protecting consumer rights. The adoption of this law triggered a nine-month debate in Nicaragua on whether public utility regulation should be carried out by sector-specific regulators or by a multi-sector regulator as well as over which branch of government should appoint the head of regulatory agencies. 8 This debate, which was part of a larger debate between the three branches of government, was resolved on October 11, 2005 when the President and the main opposition party agreed that the law would not take effect until the end of the current administration set for January 10, 2007. While the Superintendencia law changes the organization of Nicaragua s regulatory agencies, it does not change or modify the sector laws or regulations which remain in force (including the establishment and funding of FITEL). As a result, Telcor and its staff would continue to operate though it would be called the Intendencia de Telecomunicaciones and it would be headed by an Intendente of Telecomunicaciones. FITEL would continue to operate as a Fund managed by the Intendencia of Telecommunications. All major regulatory decisions would need to be approved by the Board of Directors of the Superintendencia which would be comprised of a Superintendente and the four Intendentes (one for telecommunications, one for electricity, one for water and one for consumer rights). The Superintendente and Intendentes would be nominated by the Executive and the Legislature and approved by the Legislative Branch though they must meet minimal professional criteria in order to ensure their neutrality and qualifications. However, the Executive did not accept the creation of the Superintendencia, as well other legislation approved by Congress, on the grounds that, on their opinion, these Laws reduced the powers of the Executive, guaranteed under the Constitution. After long debates between the 7 Local, long distance and international telephony. 8 The law was adopted by the Legislature on November 27, 2004. The President vetoed the law on December 17, 2004 and the legislature overrode the veto on January 14 and appointed the Superintendente and Intendentes on February 28 th, 2005.

Legislative and the Executive, the President and the main opposition party reached an agreement to delay the implementation of these laws until a new Administration takes office in January 2007. At that time, the new elected officials will decide whether to implement the Superintendencia Law. In the interim, Telcor will continue to carry out its work under the auspices of the existing sectoral law. A new framework law 9 confirming this agreement was approved by Congress. Irrespective of whether the new administration and new Congress decide to maintain the Superintendencia Law or repeal it, the sector regulator will need strengthening to cope with the new demands of a competitive market and will continue to be responsible for increasing access to ICT infrastructure though FITEL. Furthermore, if the Superintendencia Law is implemented and Nicaragua transitions from a sector-specific regulator to a multi-sector regulator this project is designed to provide critical assistance to the Superintendencia/Intendencia to help ensure this transition is carried out in a manner that does not delay or hinder the transition to a competitive market or the implementation of effective universal access programs. Creation of FITEL In December 2003, the President of Nicaragua issued an executive decree creating FITEL 10, the investment fund for telecommunications and postal services that was established in Nicaragua s telecommunications law 11. This fund, to be managed by TELCOR, is responsible for fostering the expansion of telecommunications, ICTs and postal services in rural areas. Although the Director General of TELCOR appoints the Director of FITEL, the GON is required, by law, to allocate at least 20% of TELCOR s budget to fund FITEL and its projects. In October 2004 US$1 million was allocated to the accounts of FITEL for the first round of projects that will be co-financed by the current World Bank project. To make its operations more transparent FITEL must prepare a bi-annual project plan ( Plan Bi- Annual de Proyectos, or PAP ) and a Project Preparation Manual ( PPM ) that must be approved by the head of TELCOR. A draft of 2005-2006 PAP and PPM have been prepared and are scheduled for adoption. The FITEL PPM, modeled on similar best practice manuals from other countries, provides extensive details on how FITEL is managed, its objectives, and details how projects will be identified, prioritized, selected and implemented in a competitive and transparent manner. The manual, among other things, establishes that FITEL can only fund projects that are included in the PAP and that the PAP will be developed through a transparent, participatory and open process that allows input from all operators, NGOs and the public-at- 9 Law No. 558, dated October 19, 2005 (Ley Marco para la Estabilidad y Gobernabilidad del Pais) 10 Decree 84-2003, as an addition to TELCOR s Organic Law Regulations. However, the President issued Decree 128-2004, reforming TELCOR s Organic Law Regulations. This Decree abolished the previous Regulations, and therefore, it might have derogated the creation of FITEL. However, this issue is not clear, and the Bank requested a legal opinion to Nicaragua s Attorney General clarifying FITEL s legal status. In case that Decree 84-2003 has been derogated, the Bank requested TELCOR to draft and submit to the Presidency a new Decree for the creation of FITEL 11 Nicaragua s 1995 Telecommunications Law (Ley 200) called for the establishment of a universal access fund. The formal establishment of the fund, known as FITEL, was delayed until the state-owned operator was privatized and until competition in the mobile sector was established.

large. Each PAP will include a description of the objectives and rationale of the projects included in the PAP and will identify the priorities for the projects that are included in the PAP for a two-year period, with updates to the PAP made on an annual basis. FITEL s First and Second Rural Projects FITEL s universal access strategy, as outlined in its PAP, is to increase cellular coverage, public payphones and access to the Internet in rural areas. FITEL will carry out this strategy with a two-part approach. During the first part, FITEL will carry out an Output Based Aid (OBA) tender to extend cellular coverage and public payphones in certain rural areas (i.e. FITEL s First Project). During the second part (i.e. FITEL s Second Project), FITEL will ensure all rural communities with populations greater than 400 inhabitants have at least one public payphone and all municipal heads have access to the Internet at affordable rates. On December 7, 2004, TELCOR published the tender for the first FITEL project using OBA methodology. The tender would be awarded to the bidder that required the lowest amount of FITEL funding to carry out the project. In December, 2004, four companies purchased the tender documents. TELCOR awarded the Bid to ENITEL in April 2005. This project, which will use up to $400,000 from TELCOR/FITEL funds but no resources from the Telecommunications Reform Project, is expected to triple the number of communities with public payphones in Nicaragua to 366 communities in the Central and Pacific zones benefiting over 256,000 people currently not served, while the increased cellular coverage will benefit a further 67,000 people not currently covered by cellular networks. The Project is under installation and will be completed in May of 2006. The Government and IDA agreed to use the remaining $1 million IDA funds from the Telecommunications Reform Project to carry out a second FITEL Project. This project would connect 300 rural villages of more than 400 inhabitants in the Northern and Atlantic areas of Nicaragua to the rest of the country (and the world) by installing public telephones. TELCOR published the Bid for this Project in November 2005. Bids will be received in February, 2006 and the Project is expected to be completed on June 30, 2006. 2. Indications of Government Commitment to the Project and Rationale for Bank involvement As a result of the success of Telecommunications Sector Reform Project, the GON has repeatedly requested that the Bank finance a follow-on telecommunications project addressing the issues described above. The GON believes that continued improvement in Nicaragua s telecommunications sector hinges on providing adequate follow-up work to the Telecommunications Sector Reform Project. The GON proposed this new follow-on project during a mission in October 2002 when it requested the Board to change the proposed project from standby High Case to Base Case in the 2003 CAS. 12 Moreover, the GON s commitment to the new operation was reiterated during 12 Memorandum of the President of the International Development Association and International Finance Corporation to the Executive Directors on a Country Assistance Strategy of the World Bank Group for the Republic of Nicaragua; Report No. 25043-NI, December 18,2003.

missions in July and October 2004 when the project s implementation arrangements were discussed. 13 A new operation would not only respond to the GON s development priorities, but it would also, by linking isolated rural communities, benefit other initiatives in Nicaragua, such as the Bank s PERZA-CDCF Umbrella Project and other donor initiatives such as USTDA s project to assist Nicaragua s electric transmission company (ENTRESA) to operate a $3 million fiber optic network to link Nicaragua to the ARCOS submarine cable. As further indication of the GON commitment to this project especially the rural access component TELCOR devoted substantial resources to establish FITEL during the last year, including appointing one of its senior engineers as head of FITEL, reallocating several TELCOR staff members to FITEL, adopting regulations governing FITEL and hiring an international consultant to carry out a demand study and design the first FITEL projects. Furthermore, the GON allocated in October 2004 US$1 million of its funds to FITEL to co-finance with the Bank the first round of tenders to extend cellular and public payphone coverage in rural areas. The rationale for Bank Involvement is: (1) this project is a high priority for the GON, which has repeatedly requested that the Bank finance a follow-on telecommunications project, as described above; (2) this project is aligned with Nicaragua s PRSP and CAS as described in Country Issues section of this document (Sector Related Country Assistance Strategy Goal Supported by this Project); and (3) the track record of the GON effectively implementing reforms in the telecommunications sector is good as demonstrated by the government s success in privatizing ENITEL, establishing a sector regulator, establishing a clear date (April 15, 2005) for the end of the ENITEL monopoly on basic telephone services, developing and adopting regulations to prepare Nicaragua for the transition to competition and establishing a universal service program which promptly designed and convened the first tender for universal access project. These accomplishments set the stage for a successful project aimed at market liberalization and regulation that will lead to extended coverage, lower prices and better services for consumers, especially those who live in rural areas. Though Nicaragua became an open market after April 15, 2005, the experience with similar transitions to competitive markets in Latin America indicates that regulators need continued or increased assistance and technical advice from multilateral organizations to prevent the reestablishment of a de-facto monopoly. Furthermore, the largest component of this project, rural access, will bring telecommunications and ICT services to rural areas that would not be served if left entirely to market forces. In order to increase support for the reforms and to increase the legitimacy of the regulator it is important to demonstrate that the regulator has put in place programs to protect consumer rights and extend services to poor and un-served communities. The increased access to telecommunications and Internet services that result from this project will also provide an important foundation for other important economic development and good governance initiatives. For example, the Ministries of Finance, Education and Agriculture all have programs that will benefit from and will use the Internet POPs to provide existing and new government services to rural populations. The Ministry of Education would sign an Implementation Agreement with TELCOR, defining the obligations each party would assume 13 Aide Memoire and Back to Office Report for the July and October 2004 missions to Nicaragua.

under the Project, to give access to the Internet to Schools in the Municipal Heads covered by the Project. The Internet POPs may also reduce the costs and increase the flow of remittances to rural populations. The economic importance of remittances to Nicaragua s economy is significant as they comprise nearly 30% of Nicaragua s annual GDP. 3. Higher level objectives to which the project contributes This project directly addresses the key sector issues facing the government identified in the previous section. The project will assist the sector regulator to put in place new regulations and universal access projects that will foster competition, and increase sector investment, which will lead to reducing the high costs of accessing and using basic telecommunications infrastructure. The project will enable TELCOR to develop a second generation of universal access projects targeted at increasing private sector investment in rural telecommunications infrastructure notably public payphones and Internet access in rural areas. This project will provide technical assistance to enable the sector regulator to restructure and ensure it has adequate and sufficiently trained staff to enable it to develop, put in place and enforce effective pro-competition regulations and universal access initiatives. 4. Project development objective and key indicators This project development objective is to increase access to and reduce costs of telecommunications services in rural areas of Nicaragua. Key performance indicators: Increase in the number of minutes of use of telephone service Increase in the number of hours of use of Internet access. Reduction in the average distance that residents in rural Nicaragua have to travel to the nearest public telephone. Reduction in the price of international calls due to increased competition. 5. Project components The Project, at a total cost of $10.2 million, will allocate US$7 million of IDA funds to the following components: (a) Component 1: Rural Access This $7.9 million component (IDA financing $5.3 million) will co-finance the proposed FITEL project detailed in Annex 4. This component will use competitive OBA mechanisms, such as those used for the first two FITEL rural access projects, to award and allocate funds that will enable private sector operators to build, own and operate on a commercially-sustainable basis the ICT infrastructure that will be established in rural communities as a result of this project. This component will have two subcomponents that taken together seek to stimulate the demand and supply of telephones and broadband Internet services in underserved rural communities. The

first subcomponent will provide at least one public payphone in 347 rural communities with populations greater than 400 inhabitants not covered by the first two FITEL projects. The direct beneficiaries of this initiative will be more than 346,934 people that, according to the 1995 census, live in these unserved rural communities. This project will double the number of rural communities with populations greater than 400 people that have public payphones. As a result of this component and the prior FITEL projects, nearly 70% of Nicaragua s rural communities with populations greater than 400 people will have at least one public payphone. This subcomponent will also create incentives for the private operators to increase the coverage of mobile networks that will enable more public entities (including national and municipal government institutions), individual consumers and business to become individual phone subscribers. The second subcomponent will establish a pilot telecenter in one secondary school in each of the 103 municipal heads that currently lack Internet access and that are covered by this project as well as 103 Internet points of presence (Internet POP) in the same municipal heads. The 103 Internet POPs and 103 pilot telecenters in schools will enable nearly 830,000 people (16% of Nicaraguans) to access the Internet in their rural municipalities for the first time. A recent FITEL study and information provided by the Ministry of Hacienda and Credito Publico (MHCP) found that many government officials, individuals and business in rural communities travel to other municipalities in order to connect to the Internet in order to communicate or carry out transactions. This component will enable Nicaraguans living and working in rural communities to stay in their communities in order to use the Internet and carry out online transactions. The 103 pilot school telecenters that will be established by this project will enable the public-atlarge, ministries, municipalities, local businesses and NGOs to access the Internet on a shared community basis. The 103 pilot telecenters will be located in public secondary schools that will be selected by the Ministry of Education, Culture and Sports (MECD). The MECD and TELCOR will enter into an agreement aimed at ensuring the sustainability of the pilot school telecenters and that will define the roles and responsibilities of each institution as well as that of the private sector operator that will provide the connectivity to the Internet. The private sector operator that wins the OBA tender, for example, will be required to provide each pilot telecenter with 10 computers, a local area network (LAN) as well as connectivity to the Internet for the pilot telecenter for one year without charging any fees. After the first year, the MECD and school will be responsible for paying for Internet connectivity costs at regulated rates that will be far lower than the monthly rate of $725 that MECD is currently charged for Internet connectivity. The pilot school telecenters subcomponent is also designed to dovetail and complement several ongoing MECD e-education initiatives. The 103 Internet POPs established by this project will enable approximately 704 public entities (including offices of all ministries and municipalities), NGOs, businesses (including commercial telecenters/cyber-cafes) and individual consumers in the 103 municipal heads that currently lack affordable access to the Internet to connect to the Internet from their homes or offices at regulated rates far lower than the monthly rates of $400 to $725 that they are currently paying for Internet access. As detailed in Annex 4, several ministries have indicated an interest and ability to become clients of the Internet POPs given their lower connection costs.

(b) Component 2: Regulatory Capacity Strengthening and Technical Assistance to Communities. This US$814,000 component (IDA financing US$664,000) will have three subcomponents. The first subcomponent will finance US$464,000 (IDA financing US$364,000) to strengthen the institutional capacity of the sector regulator. This subcomponent would also provide technical assistance to help re-organize the regulator, carry out strategic planning, and to identify hiring needs/profiles in terms of qualified economists, financial experts, and attorneys. It will also be used to obtain technical assistance and provide TELCOR with resources to enable TELCOR to carry out additional detailed pre-feasibility studies to design additional projects and prepare tender documents for additional projects. The second subcomponent will finance US$150,000 (IDA financing US$100,000) in a training program for the sector regulator staff. This subcomponent would finance local training, by bringing experts from outside the country to Nicaragua to dictate courses to the Regulator staff, and also to send key staff from the Regulator to training courses abroad. The third subcomponent will provide US$200,000 (IDA financing (US$200,000) to finance Internet applications and capacity-building for other public institutions (such as the Ministry of Education, Ministry of Agriculture and Ministry of Finance and Public Credit) that will take advantage of the fact that rural communities will gain access to the Internet as a result of the first component of this project. The Internet applications and capacity-building activities will be chosen by TELCOR based on proposals made by the Ministries of Education, Health, Agriculture, Finance, NGOs as well as by municipal governments. As detailed in Annex 2 and 4, TELCOR has identified a number of existing government educational, health, finance and e-government initiatives that will benefit from this program as a result of the improved Internet connectivity in rural and low income communities. (c) Component 3. Project Management This component will allocate US$500,000 (IDA financing US$400,000) for Project Management and Implementation. 6. Financing Source: ($m.) BORROWER/RECIPIENT 3.2 INTERNATIONAL DEVELOPMENT ASSOCIATION 7.0 Total 10.2 7. Implementation There are no partnership agreements in the project. The project will be implemented by two units:

(a) A small, highly specialized unit within the sector Regulator, called Development Division, will be in charge of the management of technical aspects of the project components. This unit will report directly to the head of the sector regulator. The implementation arrangements will be reflected in implementation agreements to be signed by project effectiveness with the Regulator. This unit also acts as an advisor to the Director of TELCOR, on major issues it faces. The unit will prepare the Annual Implementation Plans, the technical specifications of the bidding documents, the terms of reference of the selection of consultants, and the technical requirements of the training programs. It will also be in charge of Project evaluation and monitoring, collecting the data, analyzing it and issuing Progress Reports. (b) Unidad Coordinadora de la Reforma del Sector Publico ( UCRESEP ) will manage the administrative and financial aspects of the Project. UCRESEP, which is part of the office of the vice-president of Nicaragua, was established in 1995 as the project management unit for the IDA Institutional Development Credit. Its performance, both on procurement and financial management points of view, has been rated as highly satisfactory, throughout 11 years of operation and the management of nine World Bank Projects. The Bank has chosen to use UCRESEP for managing the financial and administrative aspects of most of its Projects, not only because of its good performance, but also because costs of doing so are low, as its services are shared among nine Projects. Implementation is carried out well, as UCRESEP ensures the fiduciary aspects of the Project and it is cost effective. For universal access projects, the project will use OBA mechanisms (including contracts and tender mechanisms) similar to those used for TELCOR s first and second OBA projects that were tendered, with the Bank s non-objection, in December 2004 and November of 2005. Disbursal of OBA-based funding will be gradually disbursed as the operator meets installation and operational requirements that will be defined in the contracts of the companies that win the OBA tenders. Disbursal of OBA funds will be managed by UCRESEP in coordination with the Development Division of TELCOR that will confirm compliance with contract requirements. 8. Monitoring and evaluation of outcomes/results The data to monitor and evaluate the outcome and results of the project will be collected by the Development Division of TELCOR. Sources of the information and data will include all telecommunications operators, and national entities in charge of collecting economic and demographic data. Its capacity to collect and analyze data shall be supported and strengthened by resources from the project. 9. Sustainability The project is designed to be fully self-sustainable at the end of the project. As a result of this project the sector regulator would be re-organized in a more effective manner and its staff would have received training which would reduce costs and increase its efficiency and effectiveness. Furthermore, as sector competition and revenues increase, the amount of revenues the GON will raise from assessments (taxes, fines, etc) from sector operators will increase. As a result of these increased efficiencies and revenues, the sector regulator is expected to be self-financing. In a similar manner, as a result of the FITEL projects that will be funded by this project, the major

telecommunications and ICT infrastructure needs of Nicaragua should be satisfied by the end of the project and FITEL should be able to finance future projects using its own revenues (barring unforeseen developments or needs). The rural access components of this project will not impose additional financing requirements on the Government beyond those described in this document as they are based on an OBA mechanism. The OBA projects supported by this project are also designed to be sustainable based on the pre-feasibility studies carried out by TELCOR which estimates an internal rate of return of 15% as is detailed in Annex 9 of this document. The operators that win the OBA tender will know up front that their operations must be commercially sustainable. The schools and health centers that receive regulated tariffs to interconnect to the Internet POPs will also be required to pay commercial rates. The commercial viability assumptions of this projects regarding monthly Internet POP connection charges are very conservative and do not assume prices will fall over time, which has been the case. If prices fall by the end of the project as a result of increased demand or technological improvements, the schools, health centers and public entities will have an even lower financial burden. These entities will also receive training and guidance through this project to identify ways of raising funds to finance their Internet and equipment costs. 10. Lessons learned and reflected in the project design The largest component of this project the Rural Access Component is based on lessons learned from international best practice experiences with universal access and OBA-funds. Some of these best-practice OBA projects in other Latin American countries, such as those in Colombia, Peru and Chile, provide the foundation for the design of the current project. Furthermore, this project is focused on addressing ICT infrastructure gaps not covered by FITEL s first projects namely providing public payphones and Internet access in rural areas. The OBA mechanism to be used by the project incorporates lessons learned from the tender for FITEL s first projects namely that OBA projects for rural areas should be structured to attract investment not only from the existing telecommunications operators but also from new and smaller entrants. Finally, this project incorporates lessons learned on Internet access, including: (a) that one of the greatest bottlenecks to increased Internet access is high costs, especially in rural areas; (b) that in order for the Internet to become an effective tool for economic development users must have access to higher speed networks rather than simply dial-up services; (c) that universal service initiatives aimed at increasing Internet access will be most effective if they first improve the quality and lower the costs of Internet access rather than focus on building a large number of telecenters; and, (d) financing at telecenters by projects should be clearly associated with government initiatives (such as education and health centers) to ensure the telecenters will be effectively used, maintained and operated over the long run. Furthermore, with the exception of the telecenters in public schools, this project will not finance the construction or management of telecenters. The pilot telecenters in secondary schools financed by this project are key to ensuring the key infrastructure i.e. the Internet POPs can and will be operational and it will begin to generate demand for the Internet. The project however, will enable public entities,

NGOs and private companies that provide public Internet in rural areas to connect to the Internet at commercial rates that are comparable to urban rates. This in turn will stimulate demand for Internet connectivity, which will increase volume and help reduce prices. The development of applications that foster Internet use will increase the productive and social use of the Internet. This demand and supply-side approach of this project is highly innovative compared to previous projects that were entirely or largely supply-side focused. 11. Safeguard Policies (including public consultation) Safeguard Policies Triggered by the Project Yes No Environmental Assessment (OP/BP/GP 4.01) [x] [ ] Natural Habitats (OP/BP 4.04) [ ] [x] Pest Management (OP 4.09) [ ] [x] Cultural Property (OPN 11.03, being revised as OP 4.11) [ ] [x] Involuntary Resettlement (OP/BP 4.12) [ ] [x] Indigenous Peoples (OD 4.20, being revised as OP 4.10) [ ] [x] Forests (OP/BP 4.36) [ ] [x] Safety of Dams (OP/BP 4.37) [ ] [x] Projects in Disputed Areas (OP/BP/GP 7.60) * [ ] [x] Projects on International Waterways (OP/BP/GP 7.50) [ ] [x] 12. Contact point Contact: Eloy Eduardo Vidal Title: Lead Telecommunications Engineer Tel: (202) 458-2694 Fax: (202) 522-3001 Email: Evidal@worldbank.org 13. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-5454 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop * By supporting the proposed project, the Bank does not intend to prejudice the final determination of the parties claims on the disputed areas