Morocco - Second Agricultural Credit Project

RETURN TO RESTRICTED REPORTS DESK Report No. PA-95a WITHIN 11E COPY ONE WEEK This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE SECOND AGRICULTURAL CREDIT PROJECT MOROCCO June 2, 1972 Agriculture Projects Department  CURRENCY EQUIVALENTS DH 1 = US$0.2169 DH 4.61 = US$1 DH 1,000 = US$217 DH 1,000,000 = US$216,970 WEIGHTS AND MEASURES Metric System i Quintal (ql; plural qx) = 100 kg ABBREVIATIONS BNDE : Banque Nationale pour le Developpement Economique CGEA : Centrale de Gestion des Exploitations Agricoles CLCA : Caisses Locales de Credit Agricole CNCA : Caisse Nationale de Credit Agricole OCE : Office de Commercialisation et d'Exportations OCIC : Office Cherifien Interprofessionnel des Cereales SOCAP : Societes de Credit Agricole et de Prevoyance  MOROCCO SECOND AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS Page No. SUMMARY AND CONCLUSIONS ................................ i-ii I. INiTRODUCTION ........................................... ........ .s.. 1 II. BACKGROUND ............................................. 1 A. General ........................................... 1 B. Agriculture ....................................... 2 C. Agricultural Credit and Subsidies ................ . 3 D. Evaluation of First Credit Project . ............... 5 III. THE PROJECT .................................. 7 A. Definition ....... ................................ 7 B. Detailed Features ...... ..................... 8 C. Cost Estimates and Financing ...................... 10 D. Procurement and Disbursement ...................... 12 E. Organization and Management . ...................... 13 IV. CAISSE NATIONALE DE CREDIT AGRICOLE (CNCA) ......... ... 13 V. PRODUCTION, MARKFTING, PRICES AND FARMERS' BENEFITS .... 19 A. Production ....... ................................. 19 B. Markets and Prices ................. .. ............. 20 C. Producers' Benefits ...... ......................... 21 VI. BENEFITS AND JUSTIFICATION ..... ........................ 22 VII. AGREEMENTS REACHED AND RECOMMENDATIONS ........ ......... 24 This report is based on the findings of an appraisal mission which visited Morocco in November/December 1970, consisting of Messrs. H. von Oppenfeld and A.H. Stoneham (IBRD) and P. Rava and A. Doreau (Consultants), and an updating mission in April 1972, consisting of Messrs. H. von Oppenfeld (IBRD) and A. Dockx (Consultant).  -2- ANNEXES 1. Agricultural Background Table 1 Agricultural Output Table 2 Value of Agricultural Exports and Imports 2. Banking and Agricultural Credit 3. Caisse Nationale de Credit Agricole (CNCA) Table 1 Analysis of Loans by Type of Borrower Table 2 Analysis of Loans by Purpose Table 3 Collection of Individual Loans Table 4 Condensed Balance Sheets Table 5 Income and Expenditure Statements Table 6 Some Comparative Ratios Based on Tables 4, 5, 8, 11 and 12 Table 7 Comparison between Estimated and Actual Development Loans under the First Credit Project Table 8 A Proposed Separation of CNCA's Accounts from those Operated on Governments Behalf Table 9 Project Cash Flow Table 10 Cash Flow Projections of CNCA Table 11 Projected Income and Expenditure Statements Table 12 Projected Balance Sheets Appendix 1 Organigram of CNCA Appendix 2 Members of CNCA's Administrative Council 4. Grain Farm Mechanization Table 1 a. Area Cultivated with Cereals, Legumes and Maize b. Yields of Cereals Table 2 Model 1: Tractors Table 3 Model 2: Combines 5. Citrus and Other Fruit Table 1 Model 3: Citrus Appendix 1 Market Prospects for Citrus Table 1: World Production and Export of Citrus Table 2 Morocco's Export of Oranges Table 3 Morocco's Exports of Oranges, Mandarins and Clementines Table 4 Oranges - Wholesale Price in Selected Markets 1960 to 1970 Table 5 World Exports of Oranges 6. Winter Vegetables  - 3 - Table 1 Model 4: Winter Vegetables Table 2 Producer Prices for Export Vegetables 7. Dairy Farm Development Table 1 Model 5: Dairy Farm Development 8. Beef Cattle and Sheep Fattening Table 1 Model 6: Beef, Cattle and Sheep Fattening 9. Allocation of Proceeds 10. Estimated Schedule of Disbursements 11. Economic Rate of Return Table 1 Economic Rate of Return MAP   MOROCCO SECOND AGRICULTURAL CREDIT PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a Second Agricultural Credit Project for which an IBRD loan of US$24 million and an IDA credit of US$10 million equivalent are proposed. The First Credit Project (Loan 433-MOR, US$10 million) was a 3-year agricultural development project, completed in 1969, with a total cost of about US$26 million, covering medium- and long-term loans to farmers and institutions, for machinery and equipment, and processing and storage facilities, to help improve agricultural productivity. This second Project, a 3-year development program, would finance medium- and long-term investments for mechanization of grain farms (where productivity is currently very low); development of citrus and winter vegetables, dairy and cattle/ sheep operations; and provision of marketing facilities. Agriculture is the most important sector of the Moroccan economy, providing employment for about 60% of the active population, accounting for 28% of GDP and contributing 54% of export receipts. Accordingly, Government continues to give high priority to its development including the diversification of agricultural production and production of export oriented crops. The Project aims at assisting this development process. The Caisse Nationale de Credit Agricole (CNCA) would be the borrower of the Bank loan and be responsible for Project administration. Government would be the borrower of the IDA credit. ii. Estimated cost of the Project is US$69 million, with a foreign exchange component of US$34 million (49%), which would be met by the proposed loan/credit. The Bank loan would be extended to CNCA at 7.25% interest per annum and would be repaid in 15 years including 4 years of grace, while the IDA credit would be passed on to CNCA as capital. Government would bear the foreign exchange risk. Farmers and other borrowers would contribute 30% of the cost. CNCA would contribute the balance of 21%. Terms of loans to farmers and other borrowers would vary from 4 years for winter vegetables to 12 years for citrus development. CNCA would ensure that bor- rowers received adequate seasonal credit to enable them to obtain full benefit from their investments. All borrowers having a fiscal income of DH 6,000 and above, and those obtaining loans for mechanization under the Project, would be charged 8% per annum, while those having a fiscal income of less than DH 6,000 would be charged 6.5%. About 53% of Project costs would be for grain farm equipment; 22% for citrus plantations; 13% for winter vegetable production; 10% for dairy, beef cattle and sheep operations; and the rest (2%) for marketing facilities. Project loans for marketing facilities above US$110,000 equivalent would be submitted to the Bank/IDA for approval. CNCA has competent management. Its financial situation was not entirely satisfactory but some corrective measures have been taken and arrange- ments are satisfactory for effective Project implementation. iii. The range of items to be financed under the Project is varied, the quantities to be procured by individual farmers are small and not suitable for bulk procurement, and the farmers' own choice is essential.  - ii - A sufficient number of Moroccan and foreign firms are represented, assuring satisfactory competition. Procurement would therefore be through normal commercial channels, as in most agricultural credit projects. Tariffs and other taxes account for about 12% of tractor costs and 22% of combine costs. iv. The Project would expand financial support for farmers in the modern sector and would assist farmers of agrarian reform cooperatives to make the transition from the traditional to the modern sector. By encouraging investment and modernization it would help accelerate growth in agricul- ture, which for the past decade has grown more slowly than other sectors. The incremental production generated by the Project would increase (a) cereal and milk production for import substitution; (b) beef and mutton supplies for the expanding local demand; and (c) fruit and winter vegetable supplies for export. At full production it would improve Morocco's annual balance of payments position by an estimated US$24 million. v. The investments under the Project are technically feasible, with financial rates of return ranging from 20% to 43%. The economic rate of return of the Project as a whole would be 18%. The Project is suitable for a Bank loan of US$24 million repayable over 15 years, including 4-years grace, and an IDA credit of US$10 million on IDA's usual terms.  MOROCCO SECOND AGRICULTURAL CREDIT PROJECT I. INTRODUCTION 1.01 In 1965, IBRD agreed to lend US$10 million to the Caisse Nationale de Credit Agricole (CNCA), which is a statutory body responsible for agri- cultural credit, to help finance a 3-year development project, costing about US$26 million. The project (Loan 433-MOR) included medium-and long-term loans to farmers and institutions for on-farm machinery and equipment, pro- cessing and storage facilities. The Loan became effective in February 1966, and despite difficulties and temporary suspension in 1968 (para 2.19), was fully disbursed by September 1969 (for further details, see paras 2.16 to 2.20). 1.02 Apart from the above loan, IBRD has made two irrigation loans to the agricultural sector: Loan 389-MOR (1965), Sidi Slimane for US$17.5 million; and Loan 643-MOR (1970), Sebou for US$46.0 million. The Sidi Slimane project was satisfactory for civil works and agricultural production but difficulties arose with regard to management and coordination. For the Sebou project, US$5.4 million had been disbursed by the end of April 1972. Construction of the dam is progressing satisfactorily, but the implementation of some other parts of the project, particularly land consolidation, reorgani- zation and redistribution, is somewhat slower than orginally expected. 1.03 The FAO/IBRD Cooperative Program helped CNCA prepare this Second Agricultural Credit Project and in October 1970, CNCA asked for a loan of US$34 million towards financing it. This report is based on the findings of an appraisal mission to Morocco in November/December 1970, consisting of Messrs. von Oppenfeld and Stoneham (IBRD) and Messrs. Rava and Doreau (Consultants), and an updating mission in April 1972, consisting of Messrs. von Oppenfeld (IBRD) and Dockx (Consultant). II. BACKGROUND A. General 2.01 The Kingdom of Morocco has a population of about 15.5 million, growing at a rate of 2.6% a year over the last 10 years. Most of its total land area (440,000 km2) is mountain, forest and desert, and only 17% is cultivahle. Seventy percent of the people.live in rural areas, while Moroccan urban population is heavily concentrated in the six cities with populations in excess of 100,000: Casablanca, Marrakech, Fez, Rabat, Meknes and Tangier. In 1971 the per capita GDP was US$242.  2.02 Following the period 1960-1966 during which GDP in real terms rose by 2.7% a year, it rose by 5.8% in 1966-1971 and a growth of at least 5% is estimated for 1972. Agriculture, which employs 60% of the labor force and still accounts for the largest component (28%) of GDP and contributes the major share of export earnings, remains the keystone of the Moroccan economy. Annual fluctuations in the volume of crops, largely influenced by rainfall, have pronounced repercussions on the entire economy and its rate of growth. Government policies aim to reduce the dependence of agriculture on climatic conditions by promoting irrigation, use of fertilizers and soil conservation. Aside from agriculture, public investment has, in recent years, concentrated on transport, mining and power, while private investment has mainly gone into construction, tourism and industry. 2.03 Fundamental economic problems include the fast rate of growth of population and labor force in relation to the growth of employment oppor- tunities and the slow rise in agricultural production, particularly in the predominantly traditional areas. The average annual growth of agricultural output from 1963 to 1971 was 3.2%, thus lagging behind that of the overall economy. B. Agriculture 2.04 A detailed background to agriculture is in Annex 1. While about 17% (7.7 million ha) of the total land area is cultivable, only three-fourths of the cultivable area is in use in any one year, due to the extensive alternate year cropping system, which keeps over 2 million ha in temporary fallow. Major farm areas are between the Atlantic coast and the Atlas and Rif mountains within the zone that receives from 400 to 600 mm of annual rainfall. Climate is Mediterranean in the north, becoming increasingly arid towards the south. In the extreme south and east of the Atlas, the desert climate limits land use to oasis-type cultivation and extensive stock breed- ing. As in the other countries of North and Northwest Africa, Morocco's annual agricultural production is heavily dependent on the weather. There was a record harvest in 1968, and above average harvests from 1969 through 1971. 2.05 The principal reason for the slow rate of growth in agriculture is low productivity of cereal and livestock farms in the subsistence-oriented traditional sector. In addition, Government's concentration on major irrigation works (60% of agricultural investment over the last decade) has not yet resulted in substantial production increase, partly because of the time lag between construction of major works and on-farm development, and partly because of the difficult task of inducing traditionally oriented farmers to change to modern crop regimes. More recently Government has succeeded in stepping up the pace at which irrigated land is levelled and equipped. It has also concentrated technical services under a coordinated program in newly irrigated areas (Annex 1, paras 9 to 12). Major crops are cereals (particularly wheat and barley), citrus, sugar beet, olives, legumes,  -3- grapes, tomatoes and potatoes. Livestock products account for about one-third of total agricultural production. The most important export crops are citrus, tomatoes, other vegetables, cotton and diminishing quantities of wine. Processed exports include canned fish, fruit and vegetable juices, dried vegetables and cork. Over the past 5 years the value of agricultural imports has averaged about half the value of agricultural exports. Imports include sugar, food oil, tea, soft wheat, butter, cheese, milk and coffee. 2.06 The modern sector, which occupies about one-fifth (1.4 million ha) of the cultivated area, produces about one half of the exports, and has been growing at an annual rate of 9%. About half of the land in this sector is occupied by medium- and large-scale Moroccan farmers, and one quarter by European settlers. Of the remainder, about 250,000 ha (formerly farmed by foreign settlers) are owned by the provincial authorities, and are scheduled for redistribution to small Moroccan farmers in units of about 5 ha irrigated, 15 to 20 ha rainfed, in accordance with the Land Reform Act of 1966. Farmers benefitting from the land distribution are organized in service cooperatives. 2.07 Under the current Five-Year Plan, 1968-1972, there were 4 pri- orities within the agricultural sector: (a) intensification of production through irrigation; (b) progressive improvement of traditional rainfed agriculture; (c) extension of soil conservation; and (d) livestock develop- ment. Large irrigation schemes, which account for about 60% of the planned agricultural investment, have received the highest priority. According to the Plan about 550,000 ha would be irrigated by the end of 1972, including areas to be watered from major works still under construction and those re- ceiving only intermittent irrigation from traditional schemes. C. Agricultural Credit and Subsidies Banking and Credit 2.08 Details of banking and agricultural credit are in Annex 2. Commer- cial banking is regulated by a 1967 decree, administered by the Minister of Finance through the Bank of Morocco (Central Bank). There are 18 commercial banks and some 8 specialized institutions for financing industry, agriculture, tourism and commerce. Of these, the Banque Nationale pour le Developpement Economique (BNDE), which finances industrial development, has received 5 loans from IBRD, totalling US$117 million. 2.09 At the end of 1971 total outstanding bank credit was DH 3.3 billion (US$716 million) of which about 70% came from commercial banks and the rest from the specialized institutions. Of the total, about three-fourths was short-term (less than a year). Credit to industry was 44% of the total, to commerce 21%, and to agriculture about 17%, with smaller proportions for hotels and transport.  -4- Agricultural Credit Background 2.10 By the early 1960's the complex agricultural credit system had deteriorated to such an extent that in 1962 Government established a new system under which CNCA was set up and became the principal credit source for commercial farmers (Annex 3), while small farmers (those with an annual taxable income 1/ of less than DH 1,400) continued to obtain their credit through Societes de Credit Agricole et de Prevoyance (SOCAP). SOCAP advances have been designed to assist subsistence farmers. The more important credit sources at present are CNCA (on its own and government account), commercial banks, suppliers and equipment dealers. At village level moneylenders and merchants remain a substantial source of seasonal credit, but its magnitude is unknown. 2.11 In mid-1967 Government set up Caisses Locales de Credit Agricole (CLCA) to provide both seasonal and longer term credit to farmers with an annual fiscal revenue of between DH 1,400 and DH 4,000 under simplified procedures, which did away with individual appraisal of loan applications. CNCA was appointed to operate CLCA. In addition, CNCA is financing farms taken over from foreign settlers and (since 1966) managed by the provincial governments. Impact of Credit 2.12 At the end of 1971 agricultural credit outstanding for production and marketing through CNCA and the commercial banks was about DH 597 million, of which about 73% was seasonal. CNCA's share was about DH 340 million (57%), of which just over half was seasonal. 2.13 The principal credit institutions together made about 230,000 farm loans in 1971. The institutions involved were: SOCAP and CLCA reaching about 208,000 small farmers; the Centres de Mise en Valeur in irrigated areas, reaching about 60,000 farmers; and CNCA lending to about 12,000 or 32% of 38,000 farmers whose farms generally range from 5 to 50 ha of irrigated land or 15 to 200 ha of dry land, with a fiscal revenue above DH 4,000. To make additional farmers eligible for its loans, CNCA has recently instructed its branches to approve loans to farmers whose fiscal revenue exceeds DH 3,000, if their individual farm plans meet the essential criteria of loan appraisal. Interest Rates 2.14 Annual interest rates for agricultural credit loans vary from 3% through SOCAP, 4% seasonal and medium-term through CLCA, to 6% seasonal and 6.5% medium- and long-term through CNCA 2/. Commercial banks 1/ Taxable income is the assessed amount of a farmer's income for taxation purposes. In very general terms, it currently averages around 40% of his annual gross income, but there are marked variations in different districts. 2/ Medium-term: 1 to 5 years; long-term: over 5 years.  -5- charge around 8% for seasonal loans, and do not usually finance longer term. These rates compare with 7% charged by BNDE for industrial development loans 1/, 6.25% (discountable) to 7.75% (non-discountable) by banks for commercial credit, and from about 8% to 12% for advances against goods. In 1969, the estimated weighted average interest rates charged by the specialized banks was 5.7%, by the commercial banks 7.1%, and by all banks (excluding the Bank of Morocco) 6.8%. The basic discount rate is 3.5% per annum, but CNCA enjoys a special rate of 3%. Subsidies 2.15 Under the Agricultural Investment Code of 1969, subsidies are given for fertilizer, farm machinery, forage production, selected wheat seeds, and for plantations, with minor amounts for on-farm improvement, draft animals and equipment, aimed especially to improve the traditional rainfed agriculture. They can be given to owner and tenant farmers and to groups of farmers 2/, and vary from 10% for machinery to 60% for selected seeds. Subsidy payments 1968 through 1971 are shown in Annex 1, page 6. Subsidies for mechanization would, to a large extent, offset import duties and other taxes levied on farm machinery. D. Evaluation of First Credit Project The First Project 2.16 The project was a 3-year development program by CNCA costing DH 130 million (US$26 million), of which DH 30 million was to be financed by participating farmers. The lending program (DH 100 million) consisted of Part (A) on-farm development (DH 60 million) involving land improvement, farm buildings, machinery and plantation development, and processing and storage facilities; and Part (B) farm machinery and equipment (DH 40 million) for the Centrale de Gestion des Exploitations Agricoles (CGEA), the agency then responsible for managing more than 200,000 ha of land taken over from European settlers. The Loan became effective in February 1966. 2.17 Part (A) was intended to encourage on-farm development in the private sector, where productivity had been stagnating, and to strengthen CNCA's ability to meet agricultural credit needs. Part (B) was to enable 1/ These rates were 8% from July 1, 1971 and 9% from January 1, 1972. 2/ Mainly "groupements de mecanisation", consisting usually of 5 to 10 farmers forming a group to purchase a tractor or combine. The group is registered with the Ministry of Agriculture, has legal status, and is required to keep financial records and machinery log books. Groups also include agrarian reform cooperatives formed under the land reform and settlement programs resulting from the Land Reform Act of 1966 (para 2.06).  - 6 - CGEA state farms to replace their worn-out farm machinery. European settlers, expecting their departure, had not maintained and replaced their equipment. Since CGEA farms included Morocco's most fertile land, maintaining its pro- ductivity through equipment renewal was of high priority. 2.18 Initial progress of the project was disappointing. On-farm invest- ment loans (Part A) lagged behind schedule, mainly because CNCA's shortage of qualified personnel and successive changes in its management had resulted in inadequate contact at the farm level. Moreover, substantial changes had occurred in credit policy and programs, seriously affecting CNCA's financial soundness. Loans outside the project (at 4% interest) were disbursed through newly established branches of CLCA without on-farm appraisal, although approved by local loan committees. These changes, on which IBRD had not been consulted, had adverse effects on CNCA's staff and financial resources. 2.19 Investments under Part (B) were made on schedule and 90% of this loan portion was disbursed as of December 31, 1967. However, CGEA had been dissolved as of November 1967, without prior notification to IBRD and its assets were transferred to provincial authorities. Because of these developments, the unused balance of Part (B) was cancelled and further withdrawals under Part (A) were suspended (February 1968). IBRD recommended that CLCA's operations be separated from those of CNCA, both in staffing and financing, and that CNCA be paid a fee to operate CLCA. After the Minister of Finance agreed to the separation and CNCA agreed to revise its lending program, update its accounts and strengthen its staff, Part (A) of the loan was reinstated. The Loan was fully disbursed by September 1969. Since the reinstatement, CNCA's management and operations have improved considerably, and this has been the main benefit of the project. Impact 2.20 Available data permit only limited quantifiable evaluation of the project's impact on development. Data furnished by CNCA are based on case studies rather than on representative sample surveys. For on-farm invest- ments which had not yet reached full development (mainly plantations) CNCA could merely assume standards of performance observed elsewhere. A summary of developments financed under the Project is in Annex 3, Table 7. The three principal development categories were:  -7- Loans Loan (Estimated Amount Number) (DH millions) On-farm development, involving about 8,000 ha: plantations, land improve- ment, surface and groundwater irri- gation and drainage 1,120 27.5 Farm mechanization, including packaging equipment 1,550 58.8 Buildings and other minor items 1,600 9.8 Total 4,270 96.1 Based on its case studies and other observations, CNCA estimates that the value added from the project during the 1969 crop season was of the order of DH 20-25 million. Despite reservations about CNCA's sampling, this estimate of the project's impact is considered reasonable. Under the proposed second Project, arrangements are being made for more systematic procedures to estimate the impact of investments under the Project. III. THE PROJECT A. Definition 3.01 The Project, which would be part of CNCA's lending program and would be administered by CNCA, is the development of farm enterprises selected because of their development potential and priority. It would help finance, over 3 years, farmers' investments in: grain farm development in rainfed areas through provision of tractors and harvesting machinery; citrus development through groundwater and plantation development; winter vegetable production through land and groundwater development; livestock development including dairy, beef cattle and sheep fattening; and packers' marketing facilities mainly for export produce. The Project would involve about 8,000 loans to individual farmers, contractors and farmer groups. Farms receiving loans would generally range in size from 5 to 50 ha of irrigated or from 15 to 200 ha of dry land, as indicated in paragraphs 3.04 to 3.08. 3.02 The following table shows the expected investments:  -8- Aver- Total Typical Farm Size Number of Loans age Invest- Irri- Rain- Invest- ment gated fed -------Year ---------- ment (DH mil- (ha) (ha) 1 2 3 Total (DH'O00 lions) Grain farm equipment Tractors & attachments 100 1,050 1,150 1,300 3,500 39 136.5 Grain harvesters & balers 200 130 150 180 460 70 32.2 Citrus plantation development 20 100 120 140 360 196 70.6 Winter vegetable production 12 48 200 250 300 750 54 40.5 Dairy farm development 13 65 40 50 60 150 71 10.6 Beef and sheep fattening 40 850 970 1,100 2,920 8 23.4 Marketing facilities 6.0 TOTAL 2,370 2,690 3,080 8,140 319.8 B. Detailed Features Grain Farm Equipment 3.03 Grain farmers investing in tractors and harvesting machinery would be concentrated in rainfed regions averaging at least 400 mm of annual rainfall, located mainly between the Atlas mountains and the Atlantic Ocean (see Map). Their main crops would be hard and soft wheat, barley and pulses, alternating with fallow in marginal rainfall areas. There is a substantial demand for farm machinery among these farmers which would come from three main farmer categories: (a) those shifting from animal-drawn to mechanized equipment; (b) those whose need for mechanized cultivation and harvesting has outgrown the capacity of the Government's tractor stations to satisfy the growing demand for custom services; and (c) those needing replacement equipment. The selective use of power equipment is especially advantageous when associated with the other improved practices that would be employed under the Project: use of high-yielding wheat seed, increasing use of fertilizer and chemical weed control.  - 9 - 3.04 About 3,500 tractors with suitable attachments and about 370 grain harvesters and 90 balers would be financed. Tractor loans, averaging about DH 27,000, are generally given to farms of from 50 to 150 ha; harvester loans averaging about DH 49,000 to farms of about 200 ha with evidence that (with custom services) about 400 ha would be harvested annually. Employment effects of mechanization are further discussed in Chapter VI. Annex 4 gives further details on mechanized grain farming. Citrus Development 3.05 Development would be concentrated near Agadir, El Jadida, Casablanca, the Gharb, Marrakech, Tada and Oujda. Some groundwater development would be necessary in all areas not served by irrigation. About 7,000 ha of citrus would be planted; mainly "Clementines" (50 to 60%), late maturing Navel and Valencia oranges (about 30%), and other promising export varieties. About 360 farmers are expected to plant an average of 20 ha each (range 5-50 ha), either for expansion of existing orchards or for establishment of new plantations. Farmers would intercrop vegetables among young citrus trees to help offset the high investment cost before the trees begin to bear. Loans would average about DH 138,000 each, and would cover land and groundwater development, planting materials, fertilizer, pesticides, machinery and labor. Annex 5 gives details about the citrus industry. Winter Vegetable Production 3.06 Development would be concentrated in the same areas as for citrus. About 750 farmers would develop an average of about 12 ha each (range 4-20 ha) for intensive, export-oriented vegetable production. Loans would average about DH 38,000 each, and would cover land and groundwater development and mechanized equipment. Background about vegetable production and marketing is at Annex 6. Dairy Development 3.07 Development would be mainly near Casablanca, Kenitra, Marrakech and Oujda. Loans would be made to about 150 farmers already established on rainfed grain farms, and would cover: (a) pump irrigation (except in areas already irrigated) on about 12 ha to ensure year-round supply of forage (alfalfa, bersim, sudan grass), which would be planted to match the herd build-up from about 12 to 20 dairy cows: (b) barn construction, including watering and milk handling facilities; (c) forage harvesting attachments for existing tractors; and (d) purchase of about 12 in-calf heifers. About 900 of the 1,800 heifers required would be imported. Loans would average about DH 48,000 each. Background about the dairy indus- try is at Annex 7. Beef Cattle and Sheep Fattening 3.08 Development would be over a wide area, including some mountainous regions. Loans would be made to about 2,900 established grain farmers with  - 10 - at least 15 ha of dry land and would cover construction or improvement of fattening stables, including watering facilities. Loans would average about DH 5,600 each. Purchase of feeder cattle and sheep would be outside the Project, and would be financed by short-term loans from CNCA. Annex 8 gives further details about production and marketing. Marketing Facilities 3.09 Present facilities for pre-packaging, conditioning and packaging are owned and operated by individuals, consortia of growers (cooperatives), and commercial packers. There is a need in some areas for further capacity for sorting, grading and packaging of citrus, tomatoes and other vegetables, both for export and for sale in the larger urban areas. Although CNCA has previously made loans for such facilities, it is difficult to estimate the size and nature of future requirements and CNCA's experience in evaluating them is limited. Assurances were obtained during negotiations that where the total loan exceeded US$110,000 equivalent, the application, with CNCA's technical and financial appraisal, would be referred to IBRD for its prior concurrence. C. Cost Estimates and Financing Project Cost 3.10 Total Project cost is estimated at DH 320 million (US$69 million), of which 49%, DH 157 million (US$34 million), would be foreign exchange, as follows: DH Million US$ Million Foreign Local Foreign Total Local Foreign Total Exchange Grain farm equipment Tractors and attachments 50.0 86.5 136.5 10.9 -18.7 29.6 63 Grain harvesters and balers 12.2 20.0 32.2 2.6 4.4 7.0 62 Citrus plantation development 49.9 20.7 70.6 10.8 4.5 15.3 29 Winter vegetable production 24.3 16.2 40.5 5.3 3.5 8.8 40 Dairy farm development 6.1 4.5 10.6 1.3 1.0 2.3 42 Beef and sheep fattening 18.4 5.0 23.4 4.1 1.0 5.1 20 Marketing facilities 2.1 3.9 6.0 0.4 0.9 1.3 65 TOTAL 163.0 156.8 319.8 35.4 34.0 69.4 49  - 11 - Estimates are based on present prices allowing for a 10% cost increase. All figures are rounded. Financing 3.11 Of the total Project cost, US$24 million would be financed by a Bank loan and TJS$10 million by an IDA credit. The loan/credit of DH 157 mil- lion (US$34 mdllion), /49% ' f Project eo. would cover the estimated foreign exchange component. Farmers end commercial packaging firms would contribute an average of 30%, and the remainder, PH 67 million, about 21%, would be financed by CNCA. The financing of individual components would be as follows: Total Farmers CNCA Bank/IDA Project Cost ----------------DH million ---- % of total Grain farm equl1ment Tractors and attachments 40.9 28.7 66.9 136.5 43 Grain harvesters and balers 9.7 6.7 15.8 32.2 10 Citrus plantation development 21.2 14.8 34.6 70.6 22 Winter vegetable production 12.1 8.5 19.9 40.5 13 Dairy farm development 3.2 2.2 5.2 10.6 3 Beef and sheep fattening 7.0 4.9 11.5 23.4 7 Marketing facilities 1.8 1.3 2.9 6.0 2 TOTAL 95.9 67.1 156.8 319.8 100 Total in US$ million (20.8) (14.6) (34.0) (69.4) Percent of total 30 21 49 100 CNCA would be the borrower of the Bank loan and Government of the IDA credit. Government would carry the foreign exchange risk of the loan/credit. Loans to farmers would be repayable over periods ranging from 4 to 12 years, i.- cluding 1 to 6 years of grace (para 4.19). With loans commencing in 3 successive years, the last repayments to CNCA would be 15 years after the Project's start, which would enable CNCA to repay the Bank loan within the same period, with 4 years of grace (Annex 3, Table 9). Government  - 12 - would transfer the IDA credit to CNCA as capital. Assurances on the foregoing were obtained during negotiations. If demand for credit under any of the above categories should decrease, the amounts no longer required would, in agreement with IBRD/IDA, be reallocated to other categories. The proposed transfer of the IDA credit would pass on to CNCA the principal benefit of the IDA credit and would enable CNCA to use farmer repayments for relending for similar operations. Seasonal Credit 3.12 For a successful Project, farmers and groups obtaining medium- and long-term credit must be assured of adequate seasonal credit. This would be obtained through CNCA's existing seasonal credit program which is satisfactory. D. Procurement and Disbursement Procurement 3.13 The range of items to be financed is varied, and the quantities to be procured by individual farmers are small and would not be suitable for bulk procurement. Farmers would purchase the tractors and attachments, combines, and pump sets of their choice through existing commercial channels. Major farm machinery manufacturers from at least six IBRD/IDA member countries are represented in Morocco, their prices are competitive and they have adequate after-sale services through well established dealer networks. Tractors are assembled locally, using a few locally manufactured parts. Most accessories are made locally. Pump engines are imported while most pumps are made local- ly. Duties and taxes, as percent of prices paid by farmers, range from about 12% for tractors to about 22% for grain combines. Although no difficulties have been experienced in the past, assurances were obtained during nego- tiations that Government would continue to issue licenses for importation of tractors, harvesting machinery and pump engines in accordance with the needs of the Project. Farm buildings are constructed by local artisans or contractors. Dairy development would require about 1,800 in-calf heifers (mainly Friesian), which would be partly supplied from Government and private dairy farms. However, not all Project requirements would be readily available locally. Provision has therefore been made for importing about 900 heifers. Existing livestock procurement channels are satisfactory, but assurances were obtained during negotiations that Government would import or authorize private dealers to obtain licenses to import about 900 in-calf heifers for farmers obtaining dairy loans from CNCA. Disbursement 3.14 Disbursement categories are shown in Annex 9. While CNCA's commit- ments under the lending program would be made over 3 years, disbursements to borrowers would require about 3-1/2 years. Assuming a time lag of 6 months between CNCA disbursement to borrowers and IBRD/IDA disbursements to CNCA, Bank/IDA disbursement is expected to take about 4 years (Annex 10). IBRD/IDA would reimburse CNCA 70% of individual subloans, against documents evidencing  - 13 - amounts paid in respect of subloans. In addition these documents would be accompanied by appropriate statements evidencing the purchase of the goods and services procured by the borrowers. The IDA credit would be disbursed before the Bank loan and would be exhausted by the end of 1973. IBRD/IDA would reimburse CNCA up to a total of US$34 million which represents the estimated foreign exchange cost. E. Organization and Management Project Administration 3.15 CNCA, assisted as required by technical officers of the Ministry of Agriculture, would administer the Project. Coordination between them and the other ministries and institutions concerned is adequate, both through CNCA's Administrative Council, and more particularly through its Management Committee (para 4.02). The latter meets at least once a week; it includes representatives of the Ministries of Finance, Agriculture and Interior, and the Bank of Morocco. Groundwater Development 3.16 Ultimate responsibility for control of groundwater resources is vested with the Ministry of Public Works. In accordance with legislation (Dahir No. 670 of 1925), that Ministry's approval is required for use of groundwater in excess of 200 m3 per day. Under a subsequent decree (Arrete du MTPC of 1967), the authority for groundwater control has been delegated to the Regional Offices of the Ministry of Agriculture (OrMVA) in regions where major irrigation works exist. Although ORMVA itself may not have competent hydrogeologists, it can call on those of the Ministry of Public Works. Moreover, groundwater resources in ORMVA regions are relatively well known. Farmers' requests for groundwater development are generally approved within 1 or 2 months. By contrast, approval is frequently delayed in regions not administered by ORMVA, partly because groundwater studies have not yet been completed, partly because of staff shortage and partly because procedures are cumbersome and time-consuming. CNCA has made proposals for simplified procedures so as to avoid unnecessary delays in meeting the requirements for loan approval. IV. CAISSE NATIONALE DE CREDIT AGRICOLE (CNCA) General 4.01 CNCA was set up by decree and started operations in 1962 to provide credit for the promotion and improvement of agriculture and related activities. It was also made responsible for the liquidation of the complex credit system that preceded it. By 1972 it was providing on its own account seasonal and longer term production credit to farmers with  - 14 - a fiscal revenue of over DH 3,000 (US$650), cooperatives, farmer groups and provincial governments for operation of state-owned farms. It also makes loans to Government marketing organizations to finance surplus stocks of agricultural produce accumulated during good harvests. Finally, CNCA provides accounting services for SOCAP and administers 3 other Government funds (amounting to DH 1.7 million) for distribution of fertilizer and seeds to subsistence farmers, and seed multiplication of Mexican wheat. Additionally, it manages the operations of the Caisses Locales (CLCA) for a fee. CNCA is more fully described in Annex 3. Organization and Management 4.02 CNCA is administered by a Board of Directors consisting of 22 members, with the Minister of Agriculture as President. A Management Committee of 6 to 8 members is responsible for day-to-day management under the overall direction of the Council. CNCA's General Manager (or his deputy, the Secretary General) is Chairman, and members include representatives of the Ministries of Finance, Agriculture and Interior. The General Manager is the Chief Executive (Annex 3, Appendices 1 and 2). 4.03 Under the Secretary General there are 3 main sections, dealing with credit, finance and accounts, and technical and economic studies. Thec. are 17 Regional Offices, which report directly to the Secretary General. At the end of 1967, total staff was 227, of which just over half were in the Regional Offices, but there was a serious shortage at senior management and the higher administrative and technical levels. In December 1967, after IBRD had pointed out the inefficiency arising from this shortage, CNCA recruited further staff. By 1971 management had improved considerably. Total staff was 487 and the members in the senior grades, mostly well qualified, had increased fourfold. Resources 4.04 Up to 1965, CNCA's effectiveness was hampered by inadequate re- sources. It could use the proceeds of liquidation of previous credit institutions, but had no funds of its own, and only temporary and uncertain access to Treasury funds and discounts with the Bank of Morocco. In mid- 1965, after negotiations for Loan 433-MOR, its capital structure was strength- ened to include equity capital and increased access to Treasury and Bank of Morocco funds. 4.05 As of August 31, 1971, CNCA's total resources (including those of CLCA and other Government accounts) were about DH 365 million, of which about 36% came from capital grants and reserves, 13% from the liquidation account (which is regarded as quasi equity), 13% long-term debt from Loan 433-MOR, and 38% short-term, mainly from rediscounts and deposits. A new source of funds since 1970 was deposits by individuals in the rural areas, mainly small farmers. CNCA started full banking services at 6 of its Regional Offices and extended them to 2 additional offices in 1971. It  - 15 - mounted publicity campaigns and, although it pays only 1.5% interest p. a. (on sight deposits), about DII 26 million had been deposited at the end of August 1971. CNCA expects to raise additional funds from this source (Annex 3, Table 12). Use of Resources 4.06 CNCA gives seasonal loans for farm inputs (mainly fertilizer and improved seeds) and cattle fattening; and medium- and long-term loans for purchase of farm machinery (mainly tractors and equipment, combines, pumps and irrigation equipment), and on-farm improvements (mainly irrigation and drainage, farm buildings and plantations). 4.07 Loans made each year increased from DH 106 million in 1967 to DH 325 million in 1971 (Annex 3, Table 1). Over the same period, short-term loans averaged 83% of new loans made. In 1971, loans made to farmers, farmer groups, and cooperatives were about 57% of the total. On August 31, 1971, total loans outstanding were DH 338 million, of which 46% were short term, 48% medium- and long-term, and the balance (6%) advances against stocks of produce (mainly cotton, with some wheat). Operating Results 4.08 Comparative ratios based on the financial results of the combined CNCA and Government operations from 1967 through 1971 (Annex 3, Table 6) show a satisfactory operating position. Administrative costs, as a percent- age of average capital employed, have averaged 2.9% during the 3 years ending 1971. Interest earned rose from 4.6% of average capital employed in 1967 to 5.7% in 1971, reflecting the effect of the increase in interest rates from less than 5% to a minimum of 6% agreed by CNCA as a condition of Loan 433-MOR. The cost of CNCA's resources (mainly equity capital; rediscounting facilities: 3%; and IBRD funds: 5.5%) was 1.9% of average capital employed in 1971. The spread between interest earned and paid (3.8% of average capital employed in 1971) remained high enough for CNCA to earn surpluses on its operations, and these have been placed in reserves. The average return on capital over the period 1967-71 has been 1.8%. CNCA's debt/equity ratio was 1:3.9 at the end of 1971. Comparative ratios for CNCA's projected operations, after separation from Government accounts, are shown in Annex 3, Table 6. Loan Recoveries 4.09 Overdue loans are charged a further 2% a year if not paid within 2 months of due date. Since 1968, CNCA has made considerable efforts to improve loan recoveries, particularly among individual farmers. At each Regional Office, a separate section is engaged full time in such work. Overall recoveries on individual loans due and overdue show continuous improvement from 68.2% in 1968 to 72.7% in 1971 (Annex 3, Table 3). The following table shows loans to individuals overdue at the end of recent fiscal years:  - 16 - Overdue by Months 8-14 15-26 27-38 Over 38 Total - - - - - - - - - Dmillions - - - - - - - 1968 13.8 2.7 3.8 4.6 24.9 1969 12.0 2.0 2.8 5.5 22.3 1970 10.7 2.2 1.4 6.6 20.9 1971 9.6 3.3 1.2 4.9 19.0 On August 31, 1971, the accumulated sum overdue on individual loans, at DH 19 million, was approximately 10% of individual loans outstanding. As of the same date, CNCA's provision for bad and doubtful debts was DH 10.1 million, or about 53% of such debts. In view of CNCA's efforts to improve collections, such provision is adequate. 4.10 CNCA's short-term loans to cooperatives have good repayment records, well over 90% being repaid within 4 months of the harvest. Members rely on their credit at planting time, and repayment of the previous year's loans has high priority. The repayment position of loans to groups and for agricultural stocks is also satisfactory, since in both cases CNCA has adequate security and in the event of default is generally able to recover in full. 4.11 Recoveries of CNCA's loans to provincial governments for the farms formerly operated by European settlers (not included under para 4.09) are unsatisfactory. These loans were made on behalf of Government but CNCA carried the risk. As of August 31, 1971, outstanding advances were DH 71.2 million of which DH 53 million (74%) was overdue, mostly on short-term loans, and the greater part overdue by more than 6 months. Lending to and recoveries from provincial governments are beyond CNCA's control and CNCA has not been able to make provisions for these loans. These and other opera- tions on behalf of Government should therefore be administered as proposed in paragraph 4.14. Lending Policies and Procedures 4.12 Responsibility for loans below DH 40,000 (US$8,700) to individual farmers is delegated to Regional Offices. When a request is received, a technician visits the farm and verifies the information. The loan is then referred to a regional Credit Committee and upon approval by the Regional Office, loans are ready for disbursement. Loans above DH 40,000 require approval by the Head Office. Details on terms, conditions and procedures for loans to individual borrowers, farmer groups and agrarian reform cooperatives are in Annex 3, paragraphs 18-24. Average time from receipt of application to approval of loan has been less than 21 days for the past 2 years, which is commendable. Financial Reorganization and Expansion 4.13 Since its inception, CNCA has relied upon Government assistance to finance its needs. Government forewent returns on its equity, thereby  - 17 - enabling CNCA to maintain a low level of interest rates. This policy did not do much to improve CNCA's financial position since the subsidization implied in no-cost Government capital was passed on to the ultimate bor- rowers. As the principal agricultural credit institution in Morocco, CNCA should begin to introduce policies which will ensure that it becomes a strong and viable credit institution with reasonable financial autonomy serving agriculture on a sustained basis. This requires that its earnings be adequate to provide for a return on equity, which should eventually enable it to enter the capital market on a modest scale, and a reasonable level of reserves. Since 1969 CNCA's management and operations have improved substan- tially and it would now be in a position to make the necessary changes to improve its financial structure and operations. The immediate requirements are that (i) the operations CNCA is carrying out on Government behalf (SOCAP, CLCA and provincial farms) be kept in separate accounts with all costs accruing to CNCA chargeable to Government; (ii) CNCA's capital structure be strengthened to cover expansion of the operations on its own account; and (iii) its interest rates be raised. 4.14 Separation of Accounts. To achieve the required separation of accounts, appropriate assurances were obtained during negotiations that: (a) CNCA would maintain accounts and prepare financial statements reflecting separately, the resources, use of resources and operating results of the operations administered on Government behalf; (b) Government would cover CNCA's expenses and losses on these operations and compensate CNCA promptly and adequately for administering such operations; and (c) Government would make arrangements satisfactory to the Bank/IDA to provide CNCA with adequate resources for CNCA's own operations and for the credit operations carried out on its behalf. 4.15 Strengthening Capital Structure. Once the above steps are taken, CNCA's liquidity (and reserves) would be satisfactory. However, the increase in CNCA's medium- and long-term lending from DH 117 million in 1972 to DH 281 million in 1976 (Annex 3, Table 12) would require, in addition to IBRD/IDA funds (DH 157 million), the strengthening of CNCA's capital resources. Accordingly, assurances were obtained during negotiations that Government would authorize CNCA to transfer DH 44 million from the liquidation account (an account for the liquidation of operations of predecessor institutions) to equity capital and would contribute the proceeds of the IDA credit (DH 46 million) to CNCA's capital. 4.16 Projections of income and expenditures for the overall operations on CNCA's own account (Annex 3, Table 11) are based on a combination of interest rates for short- and medium/long-term loans (para 4.17). Require- ments for adequate reserves and provisions were taken into account and assurances were obtained during negotiations that CNCA would build up general reserves (from profits) to 15% of its equity capital by 1976.  - 18 - Terms and Conditions of Project Loans 4.17 Interest rates. Government has made credit available at preferential rates for industry and agriculture (see para 2.14); such measures have made it difficult to arrive at a true market rate of interest. Since 1966 interest rates for agricultural loans have remained unchanged -- 6% for short-term and 6-1/2% for medium- and long-term lending. Commercial banks charge around 8% for seasonal loans and up to 12% for advances against goods. The discount rate is 3.5%, reduced to 3% for agriculture. Despite low interest rates, CNCA has continued to realize slight surpluses, mainly because of the low cost of its resources and nonassumption of risks under special programs (see para 4.08). 4.18 The interest rate to sub-borrowers should be increased to be more in line with the cost of capital which on the basis of market rates would appear to be at least 10%. A rate higher than the existing 6.5% on medium- and long-term loans would be well within farmers' debt service capacity (financial returns on Project investments range from 20% to 43%). Moreover, the cost of CNCA's resources on its own operations is projected to increase from 2.1% in 1971 to 2.7% by 1976 and its administrative costs, expressed as a percent of average capital employed, would increase from 3% in 1971 to 3.4% by 1976. Its present earnings at a rate of 6% on capital employed would be insufficient to cover such increases (Annex 3, Table 6). On all these considerations, a minimum rate of interest at 8% on all agricultural loans would be justified. While accepting that an increase to 8% was justified for the majority of its borrowers, Government felt that this would discourage farmers in the lower income brackets from borrowing and proposed to maintain the present interest rates for lending to farmers having a taxable revenue of less than DH 6,000 (equivalent to a net income below US$2,500). No more than 20% of CNCA's lending under the Project would come into this cate- gory. With these differential rates CNCA's earnings would rise to 7.5% and provide a 3.8% return on equity. This proposal was accepted during negotia- tions and assurances were obtained that an interest rate of 8% for all medium- and long-term lending would be charged to sub-borrowers having a taxable revenue of DH 6,000 and above, and on all mechanization loans under the Project, while subborrowers having a taxable revenue less than DH 6,000 would, as in the past, continue to pay 6-1/2%. 4.19 Borrowers' Repayment Periods. A review of the gestation periods of typical on-farm investments (see also farm model calculations, detailed in Annexes 4, 5, 6, 7 and 8) indicates that the following repayment periods for loans to CNCA's borrowers would be appropriate: Grace Repayment Total Models Period Period Period Number Designation --