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HUNGARY - Second Telecommunications Project (Loan 3264-HU)

The Second Hungary Telecommunications Project, supported by Loan 3264-HU for US$150 million, was approved in FY91. The Loan was closed in FY96, as scheduled. A total amount of US$62.8 million was canceled as a result of cost savings and the outstanding loan balance was prepaid in 1996. Cofinancing by the European Investment Bank (EIB) and the European Bank for Reconstruction and Development (EBRD) amounted to US$118 million. The Implementation Completion Report was prepared by the Industry and Energy Department and the Europe and Central Asia Regional Office. The Borrower’s comments are included in the ICR. No contribution was received from cofinanciers.

The project’s objectives were to assist the Hungarian Telecommunications Company (Matav) in rehabilitating, modernizing and expanding the country’s telecommunications facilities while strengthening its management and operations. The project consisted of a three-year time slice of Matav’s investment program (1991-93) combining physical expansion and modernization of the network with institutional strengthening plus technical assistance and training. The physical component included: (i) local switching and subscriber line capacities (520,000 lines); (ii) a digital overlay trunk network and two international satellite communications stations under the first phase of the digitalization strategy; and (iii) miscellaneous rural, mobile, telex/data and public call station facilities. The institutional development and sector reform component included technical assistance, studies and training aimed at strengthening Matav’s market and commercial orientation, rationalizing tariffs, and developing a regulatory framework for the sector designed to introduce competition in selected services. To further the latter, the loan incorporated a Government commitment to establish an appropriate sector strategy by 1991 and to implement that strategy within a short period of time.

All of the physical, institutional and policy objectives of the project were either met or exceeded: between 1991 and 1996, about 1.15 million new lines were connected at an average annual growth rate of 15 percent (compared to 11 percent targeted). The ERR for Matav’s overall investment program was recalculated at 32 percent (33 percent at appraisal). The institutional, financial, technical and training objectives of the Action Plan for strengthening Matav’s management and organization were fully implemented within the given time frame and contributed to significant efficiency gains and improvements in quality of service (over and above appraisal targets). And the sector restructuring program implemented by the Government went beyond what had been contemplated at the time of appraisal: a new Telecommunications Law was enacted in 1992; Matav was first corporatized and then privatized in several steps between 1993 and 1995; and several concessions for local service were awarded to private operators in 1995.

The Operations Evaluation Department (OED) rates project outcome as highly satisfactory, institutional development impact as substantial and sustainability as likely (as in the ICR). The Bank’s performance is rated as satisfactory (as in the ICR).

A main lesson learned from this project is that in sectors as rapidly changing as telecommunications, the Bank needs to show a high degree of flexibility during project implementation in reshaping the focus of its policy advice and of its related technical assistance in line with evolving sector characteristics and Government strategy.

The ICR is satisfactory.

An audit of the First and Second Telecommunications projects may be carried out.

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