Morocco - Second Credit Immobilier Et Hotelier Project

RESTRICTED Report No. DB-93a 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 It may not be published, quoted or cited without Bank Group authorization.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 FINANCE CORPORATION APPRAISAL OF THE CREDIT IMMOBILIER ET HOTELIER MOROCCO June 1, 1972 FILE COPY Development Finance Companies Department  Currency Equivalents Currency Unit = Dirham (DH ) US$ 1 = DH 4.66 DH 1 = US$ 0.215 DH 1,000,000 = US$ 215,000 This report is based on a visit to CIH from January 27 to February 11, 1972 and was prepared by Messrs. Jacques Coudol and Andre Cracco.  MOROCCO APPRAISAL OF CREDIT IMMOBILIER ET HOTELIER (CIH) TABLE OF CONTENTS Page No. BASIC DATA SUMMARY AIiD CONCLUSIONS ..................**.**.**. * ** i I. INTRODUCTION 1 II. TOURISM DEVELOPMENT IN MOROCCO 1 Traffic ... . . **-* . ... . . .. 1 Hotel Development ............. *...... 2 Government Incentives to Tourism Investments .............. 3 III. CIH'S ROLE IN THE MOROCCAN ECONOMY ........ oo ................ 6 CIH as a Mobilizer of Resources * ......* . ... 6 CIH as an Allocator of Funds ..... ..................... 7 Economic Justification of CIH's Hotel Prqjects .........o ... 8 IV. CIH'S ORGANIZATION AND PROCEDURES .............o........... 10 Board of Directors ........... ................. 10 Management and Staff ............00......909............... 10 Organization and Procedures .. 1 Overall Assessment of CIH's Organization ........... o ..... 12 V. CIH'S FINANCIAL POSITION ... ............................... 13 Balance Sheet and Portfolio .................. .. 13 Evaluation of CIH's Portfolio ......... ....... ...... 13 Earnings ....... . .............. 16 VI. BUSINESS OUTILOOK ..... ......................... 17 Housing Business ............o,....................... 17 Hotel Business ...................... . . 17 Resources Needed . ...... .....................0 .. . . . lo Financial Projections ,................................. 19 VII. CONCLUSIONS AND RECOMMENDATIONS . ...... o, . ...... 21 Conclusions ............. ................ 21 llecommendations ..................................... 22   LIST OF ANNEXES 1. Tourist Traffic: Five-Year Plan, Forecast (1968-1972) and Actual (1968-1971) 2. Tourist Arrivals in Mediterranean Based Countries (1966-1971) 3. Stop-over Visitors to Morocco by Origin, Actual (1965-1971) and Forecast (1972) 4. Tourism Development Incentives 5. Resources as of December 31, 1971 6. Shareholders as of December 31, 1971 7. Board of Directors and Executive Committee as of December 31, 1971 8. Organization Chart, February 17, 1972 9. Summary Balance Sheets as of December 31, 1968 to 1971 100 Profit and Loss Statements for Years 1968 to 1971 11. Projected (1972-1976) and Actual (1971) Balance Sheets 12. Projected (1972-1976) and Actual (1971) Income and Expense Statements 13D Projected Sources and Applications of Funds (1972 - 1976) 1h4 Financial Ratios Derived from 1971 Accounts and Projected Accounts for 1972 to 1976 15. Resources Available and Uncommitted at January 1, 1972 16. Estimated Schedule of Disbursement for Proposed Bank Loan   CREDIT IMMOBILIER ET HOTELIER BASIC DATA Year of Establishment: 1920 Ownership No. of Shares % of Total (DH 125/share) Public institutions 85,950 53.72 Private Moroccan institutions 39,774 24.85 Moroccan individuals and others 34,276 21.43 Total: 160,000 100.00 Bank Group Financing IBRD Loans: Status of Loans as of April 3Q, 1971 Loan No. Date Rate of Net Authorized for Disbursed Signed Interest Amount withdrawal or credited 704-MOR August 12, 1970 7% 10,000 8,951 1,237 Operations (DH million) I. Housing 1968 1969 1970 1971 Approvals 15.7 20.8 36.9 54.8 Commitments 13.5 17.9 30.1 48.5 Disbursements 12.1 16.4 24.8 36.8 II. Hotel Approvals 37.7 35.0 37.8 64.4 Commitments 45.o 93.8 40.5 31.9 Disbursements 12.1 16.4 24.8 36.3  -2- Financial Performance 1968 1969 1970 1971 I. Financial Position (DH million) 1. Total Assets, 203.3 267.5 329.7 392.0 of which Loan Portfolioi/ 166.1 226.2 302.6 356.5 2. Total Equity 24.3 25.3 29.3 34.0 3. Long Term Debt 162.4 224.3 271.8 329.4 of which Bank Loans - - - 4.6 4. Long Term Debt/ Equity 6.6 8.8 9.2 9.7 II. Financial Results (in %) 1. Earnings before interest, tax and provisions as , 7.0 7.2 8.2 7.9 of average total assets 2. Profit before tax as % of average equity 16.3 19.6 39.1 34.6 3. Profit after tax as % of year-end share capital 10.6 13.1 28.3 27.1 4. Administrative costs as % of average total assets 1.9 1.7 1.7 1.4 5. Reserves and provisions as % of total portfolio 5.2 5.4 3.5 5.5 6. Book value as % of par 121.5 126.5 146.6 170.0 7. Dividends as % of par 8.0 8.0 8.0 8.0 1/ Net of provisions for doubtful loans  MOROCCO CREDIT IMMOBILIER ET HOTELIER SUNMARY AND CONCIUSIONS i. This report brings up to date the situation ad prospects of CIH which were described in detail two years ago in report R70-153, dated July 30, 1972. ii. Tourism is one of the key sectors in Morocco's economic develop- ment and, as Morocco is now preparing a new Five-Year Plan (to be effective during the period 1973-1977), considerable efforts need to be made in the definition of objectives and in making policies and regulations relating to tourism development. In this process, the system of financial incentives provided to tourism investors also needs to be reviewed so that it is consistent with national objectives. As the tourism sector is one to which the Bank expects to lend considerable funds, the Bank has offered its advice to Morocco in respect of the formulation of policies and the review of incentives. The Government has welcomed this offer and the Bank intends to follow this up. iii. In 1970, and 1971 in spite of a slow-down following the abortive coupd'4tat in July, tourism traffic continued to follow an upward trend. However, the pressure from demand was not accompanied in these two years by a parallel increase in tourism infrastructure and hotel construction. The slow rate of growth of capacity for tourists and related facilities was due in large part to the lack of a well established tourism policy and a slow-down in investment in the second half of 1971. Thus, CIH's hotel operations in 1971 have not grown as originally expected and hotel commit- ments in 1971 were only about DH 30 million as compared to nearly DH 100 million in 1969. On the other hand, CIH housing operations, in response to a high demand and following the adoption by CIH in 1969 of more liberal policies, continued to expand at a fast rate; comnitments in 1971, which reached nearly DH 50 million, exceeded,for the first time since 1966, hotel loan commitments. iv. Over the last two years, CIH organization and management suffered some dislocations. A new Director General, appointed in July 1971, has, however, started a substantial reorganization of CIH. Appraisal work has improved recently, and arrangements for further improvements are being made to give CIH's appraisal a firmer assessment of the marketing aspect of its projects and better economic Justification. Follow-up, which was particularly weak, is being strengthened though it will take some time before a well- functioning system is fully operational. v. CIH's delinquent loans had increased considerably in 1971; two hotel companies, representing 24% of CIH's hotel portfolio, and in which the Government has substantial equity holdings interest, were of special concern. During negotiations, the Government agreed to take measures to protect CIH against possible losses on these loans. Given these assurances, CIH's portfolio is reasonably sound and CIH is creditworthy for a new Bank loan.  - ii - vi. Given a stable investment climate and sound tourism policies, CIH has good business prospects both in its housing and hotel fZinancing operations. Indications are that the decline in hotel investment in 1971 has been reversed and CIH is now facing a brisk demand for loans to finance hotel construction. If CIH makes further progress in strengthening its organization, it should be able to carry out its present forecast, implying an increase in its total commitments fram DH 80 million in 1971 to DH 175 million in 1976. The present Bank loan is expected to be fully committed shortly. Though CIH is able to raise a sizeable amount of capital in the domestic market, it also needs to borrow abroad to maintain its hotel lend- ing operations, 55% of which calls for import financing. CIH has asked the Bank to help cover its commitments,that result in imported goods. A suitable amount for the second Bank loan to CIH would be $15 million. Such a loan should enable CIH to carry its estimated import financing commitments through the end of 1973. vii. The proposed loan to CIH should be made on the standard terms and conditions of Bank loans to development finance companies, including standard commitment fee. The free limit above which Bank approval of a project is required should be raised from $100,000 to $200,000; the aggregate free limit should be US$ 4 million.  I. INTRODUCTION 1.01 This report updates the situation and prospects of CIH which were described in detail two years ago in Report R70-153, dated July 30, 1970. The first Bank loan to CIH of $10 million was made on August 12, 1M70 and becarne effective on January 28, 1971. Twenty-six projects have so far been authorized for withdrawal under this loan for a total amount of $9M million. The balance of the loan is expected to be fully commit- ted shortly; this report appraises CIH for a new loan for its hotel financing. II. TOURISM DEVELOPMENT IN MOROCCO 2.01 A Bank economic mission visited Morocco in April 1971. Its report (alA-L2 dated September 9, 1971) dealt in detail with the develop- ment of tourism. Traffic 2.02 In 1971, tourism traffic in Morocco has continued to follow an upward trend. However, following the abortive coup d'etat of July 10, 1971, and several cholera cases in the summer of 1971, the growth was somewhat below expectation (see Annexes 1 and 2). Tourist arrivals in 1971 were 915.00C including 623,000 stop-over visitors. This represented only a 7.4% increase in 1971 as compared to an increase of about 19% in 1970. Still, the rate of growth of Morocco's tourism traffic over the past three years was one of the highest among countries of the Mediterranean area. 2.v3 So far, Morocco's main clientele have been European visitors who account for roughly 50% of the stop-over traffic. Since 165, the number of European visitors more than doubled, with the French retaining the first promotion and the establishment of direct airlines service with the United States, North Americans (157,400 visitors in 1971) have increased their share from 7.5A in 1965 to 19.2% in 1971. 2.04 Another structural change is occuring in demand: vacation tourism, particularly in beach resorts, is increasing in importance as against business travel. As a result, there has been an accentuation of the seasonal pattern of overall demand for accommodation and a growing concentration of tourism in coastal centers. Indeed, future development of tourism in Morocco will probably occur primarily on the coasts. The seasonal pattern has mainly affected the facilities in the Northern coast of Morocco while hotels in the South, principally around Agadir, maintained a high level of occupancy all year around.  -2 - Hotel Development 2.05 The past decade has seen a rapid development of hotel capacity in Morocco. Since the beginning of the current Plan (1968-1972), Morocco's hotel capacity increased by over 50% and amounted to 35,700 beds as of the end of 1971; 5,500 beds were in five-starJi, 6,500 in four-star, 6,000 in three-star category and 8,500 beds in vacation villages. During 1968-1971, against ?4,000 beds foreseen in the Plan, only 12,000 beds were constructed (two-thirc. by private investors), at a total investment cost of DH 295 million, averaging about DH 24,000 per bed. Of about 12,000 beds now under construction, 4-5,000 should be completed before the end of 1972 and the balance in 1973. This would bring the total beds built since the beginning of the Plan (1968) to approxi- mately 16-17,000 by December 1972, as against the target of 30,000 beds. The rising occupancy rates in Morocco (55% bed occupancy on the average in 1970, one of the highest among Mediterranean countries) indicate that capacity is lagging behind demand. The shortfall in construction of accomodation for tourists is due in part, to a lack of implementatinn of needed infrastructure programs, particularly to complete the programs in Tangiers, Smir and Al Hoceima zones and to develop the Agadir zone. 2.06 The current five-year Plan gives priority to the construction of cheaper accomodation in view of the desirable and forecast increase in mass (group, charter, etc.) tourism. Therefore, three-star and vacation village units were expected to expand more rapidly than luxury or expensive four- and five-star hotels. The Plan however, or subsequent regulations, provided little incentive favoring particularly moderately priced accomodations. As a result, there has not been, until recently, a significant up-swing in hotel develop- ment, officially classified for service to mass tourism. (From the nearly 36,000 beds available at the end of 1971, 17% were still in hotels in the five-star category as against the planned percentage of 11%). However, the official classification may not do justice to the actual development because quite a number of hotels classified as four-star hotels are really only three- star hotels in terms of their actual tariffs and facilities. Furthermore, more recently, there has been some movement in building three-star hotels and vacation villages - about one-third of total hotel capacity being built in the last three years - and hotels in these categories now take up about 40% of total hotel capacity. This development is largely due to the high returns associated with the operation of vacation villages and 3-star hotels. It would seem therefore that the interest of investors has to some extent fulfilled the Plan's objectives, but it is likely that this development would have been greater if it had been supported by more selective incentives. 2.07 Execution of the current tourism Elan lags considerably behind targets and, although the advances achieved in the past few years are encouraging, the tourism sector in Morocco still has some way to go to 1/ MToroccan hotels are given five principal classifications expressed in stars and reflected in tariffs. A 5-star hotel is luxury class, 3-star facilities offer comfortable accommodation and 1-star hotels are generally not attractive to international tourism. Unless specified in this report, vacation villages are included under the general designation of hotel enterprises.  -3- achieve its full potential. Morocco is now in the process of formulating the next five-year Plan and therefore needs to take stock carefully as to the direction and pace of tourism development in the future, and how to coordinate the development of infrastructure, with efforts to promote hotel investments and traffic, and related incentive policies for hotel investment. Such coordination should result in a basis for a more rational incentive system and an integrated, consistent tourism plan. Government Incentives to Tourism Investments 2.08 The spurt in Morocco's hotel development in the sixties has been enhanced by a considerable assistance fram the Government. Such assistance comprises a variety of incentives (Annex 4). The leading ones are: a. an equipment grant of up to 15% (usually about 10% of the fixed investment in a hotel project), in the form of a one-time contribution to the needed financing; b. an interest subsidy of 4.25% per annum on CIH loans which reduces the effective cost of such loans to h.5% to hotel sponsors. 2.09 Investment Cost Subsidies. Since investors are also often reimbursed for custom duties and value added taxes, which typically amount to approximately 6% of fixed investment, the Government contributes at the outset about 16% of fixed investment costs. As CIH, as a matter of policy, finances on the average about 50% of the value of the hotel property, the sponsors need only contribute about one-third of the fixed costs. Thus, a typical hotel project in Morocco is financed by the following sources of funds: Equity 34.0% Government contribution 16.0% p CIH loan 50.0% 100.0% 2.10 Interest {late Subsidies. One attraction to investors in tourism projects is CIH's low effective rate of interest, 4.5% p.a., resulting from the interest rebate. The discounted present value of interest subsidies alone (they come on top of the Government's typical contributions of 16'p p.a. of investment costs) are equivalent to about 9% of these costs. Several foreign investors have reported that the low effective rate of interest had been a major attraction to invest in Morocco. Any proposal to change the effective interest rate on CIH's hotel loans should therefore be made, and implemented, with great care. A review of the incentive system will have to focus particularly on the economic justification for continued rebates of CIH's interest rate on hotel loans. 1/ This does not take into account interest subsidies and accelerated depreciation detailed in Annex 4.  - 4 - 2.11 The importance to both CIH and the hotel investor of the interest subsidy is shown below (DH million): 1968 1969 1970C 1971 Interest rebatel/ 4.4 7.2 7.2 12.1 Interest paid by CIH clients 2.5 3.4 8.3 9.5 Total interest received by CIH (at 8.75% p.a.) 7.2 10.6 1'f 21.6 2.12 While in the past the Government was late in paying CIH the interest subsidies due to it, thus creating cash flow problems for the company, this problem has disappeared following negotiations for the first Bank loan. The administration of the subsidy by CIH has proved to be efficienit and has not compromised CIH's autonomy. 2.13 The substantial amount of Government subsidies increases the finan- cial leverage available to the investor in financing a hotel project, and investors have responded rapidly and willingly to these encouragements. The Government's sizeable contribution indicates the importance tlhe authorities give to the launching of new hotels. Also, since CIH estimates that about 40% of all hotels in Morocco are owned or sponsored by foreigners, a sub- stantial part of the Government's contribution is an "aid" to foreign invest- ments. CIH estimates that, exclusive of IBRD loans, actual foreign exchange transfers oo Morocco for hotel investments amounted to about 10% of total investments since 1967 (i.e. about one-third of total equity investment in hotels). This percentage includes investments from large foreign investor groups (Club Mediterranee, Holiday Inn, Ramada International, etc). 2.14 Without the large and attractive form of incentives to assist tourism investments, tourism growth to the extent experienced would probably not have occurred. However, it is difficult to quantitatively assess to what extent available incentives nave resulted in accelerated investment and contributed to an economically advantageous allocation of resources -n the tourism sector. The Moroccan authorities are aware that such an assess- ment would have an important contribution to the work now underway in formu- lating Morocco's 1973-77 tourism development program. As the tourism sector is a key one in the Moroccan economy and one to which the Bank envisages to lend considerable funds, the Bank has offered Morocco its advice in this work. 2.15 A number of important questions deserve consideration in view of the substantial deployment of resources to hotel incentives, namely: 1/ The growth of the rebate is not directly proportional to the increase of the portfolio because the system of incentives, prior to 1969, was substantially different from the present one.  a. the economic returns to Morocco resulting from the above investment; b. whether the aggregate level of incentives should be increased, decreased or left unchanged; whether the particular mix of incentives should be modified; whether the system should be made more selective in favor of specific regions and types of accommodations; and whether only the hotels and vacation villages should (as is now the case) receive incentives; c. whether the administration of incentives can stay as it is or needs to be changed in light of the suggested review. Appropriate incentives are inevetably linked with the overall approach that Morocco wishes to follow. CIH's lending terms are an integral part of the incentive package. It is those terms, their relations to other incentives, and the relation of investment incentives to an appropriate tourism development strategy which must also concern the Bank directly. The Moroccan Government has agreed to systematically review these matters with the Bank and a Bank mission left at the end of May for Morocco to initiate a program along these lines. During negotiations, the Bank indicated to the Government that the outcome of the Bank review of Morocco's tourism development policies, including a satisfactory incentive program, would have a strong bearing on its future lending to the tourism sector in Morocco.  6 III. CIH'S ROLE IN THE MOROCCAN ECONOMY 3.01 CIH has had a major role in the economy for some years, first in financing housing in urban centers, but increasingly, since 1962, in the construction of hotels and vacation villages in Morocco. CIH continues to provide mortgage financing for houses and apartmants. It has been doing this for over 50 years and this part of its operations is efficiently performed. More recently, CIH has had an important role in the growth of tourism in Morocco, now the country's leading source of foreign exchange earnings ($137 million in 1970 and an estimated $131 million for the first ten months of 1971). The increase in CIH financing of hotel and housing construction has also resulted in the important development of suppliers' industries (essen- tially cement, wood and other construction materials), the output of which has increased at an average,estimated,by CIH of 1% per annum over the past three years. CIH as a 1Mobilizer of Resources 3.02 Over the past four years, 1968-1971, CIH raised resources (see Annex 5) amounting to about DH 350 million, roughly half of which was in long-term marketable debentures placed with CDG. These debentures are for 15 years and yield about 6%. Access to themarket is closely controlled by the Government; indeed, to date, only the Government, CIH, the Electricity Authority and, for the first time in 1971, BNDE, have been allowed to sell such debentures. For the bulk (over 80%) of its resoEce needs, CIH has depended on official sources: its parent company, CDG- , the Banque du Marc, the Banque du Credit Populaire and the World Bank (indirectly via BNDE/ during 1966-1970, and directly since CIH got its first Bank loan). Efforts have also been made to tap the narrow capital market of Morocco. CIH has floated medium-term bonds since 1968 and issued DH 15 million of 15 year-bonds in 1969 which were subscribed by the public. CIH is aware that the Bank will not in the long run cover the entire foreign exchange requirements for its hotel financing and it has just started to investigate with foreign lenders the 1/ Caisse de Depots et de Gestion is the depository and administrator of several public funds, most notably savings and social security funds. Through investment of these funds, CDG has a pervasive role through Morocco's economy, especially in financing various infrast- ructure activities and through participation in several affiliates including CIH, the Societe Maroc Tourist and the Societe Nationale d'Investissement. 2/ Banque Nationale pour le Development Economique is the provider of long-term funds, essentially for industrial purposes. To date ,BNDE had received five Bank Loans. Until CIH received its first loan, BNDE had been financing hotels either for its own account or through loans to CIH0 The ENDE loans CIH obtained were provided by IBRD in accord with a convention of September 1966 between BNDE, CIH and the Bank. As of IMarch 31, 1972, 20 projects had been financed under this convention for a total of DH 36.5 million. The convention lapsed in 1970 and, since, CIH relies almost entirely on direct Bank financing for the import component of the hotel projects it finances.  -7- prospects of obtaining foreign capital. CIH forecasts that such capital could be obtained for commitments starting in 1974. CIH as an Allocator of Funds 3.03 Since CIH has so far not experienced any problems in raising resources, it has been able to lend to projects according to demand. The following table summarizes the trend since 1968 in hotel and housing lend- ing operations (DH million): 1968 1969 1970 1971 No. Amount No. Amount No. Amount No. Amount I. Hotel Loans Approved 37 37.7 55 35.0 35 37.8 47 64.4 x Committed 24 45.0 53 98.3 47 40.5 44 31.9- Disbursed - 40.1 - 56.4 - 60.9 75 40.1 II. Housing Loans Approved 278 15.7 278 20.8 442 35.3 795 54.8 Committed 274 13.5 289 17.9 360 30.1 632 48.5 Disbursed - 12.1 - 16.4 - 24.8 - 36.3 3.04 CIH Housing Loans. In housing, following a liberal policy change in 19691/, CIH faced a strong demand for financing new houses in major cities and resort areas, where it is the principal source for housing finance. 3.05 Between 1968 and 1971, over 1,500 housing loans for new units of accomodation were signed, most of them in the medium price range. Over one half of these have been for amounts up to DH 100,000, and approximately 31% of these loans exceeded DH 200,000, including about 15% for apartment build- ings. Most of CIH's housing loans have been in the cities, primarily in Casablanca, Rabat and Fes. CIH did little to support housing in rural areas, an activity involving other specia1ized financial organizations such as Credit Populaire. 1/ This temporary decline is explained in paragraph 6.03. 2/ At CIH's Annual General Meeting in June 1969, policies on loans and mortgage evaluation were revised, as regards both individual dwelling and apartment buildings. The new policy permits greater flexibility in that CIH now takes more reali6tic cognizance of (i) the market values of the properties, (ii) the personal creditwTorthiness of the borrowers, and (iii) in the case of apartments, expected return on investment and debt-service coverage.  3.06 CIHI Hotel Loans. Between 1969 and 1971, the total capital coot of hotel projects supported by CIH amounted to about Di 200 million, approximate- ly 67% of total hotel investments which were authorized in Morocco during that period. As of December 31, 1971, CIH had signed 2hh hotel loans with about 124 hotel enterpri3es. Hlotels financed by CIH are located mainly in Agadir (43 loans), Tangiers (38 loans), Marrakech (22 loans), and Casablanca (19 loans), in addition to those in other resort areas, such as Al Hoceima, Restinga and Mohamedia. Since 1967, an important development in CIH's hotel financing has been the impact of large loans in its portfolio. Fifteen loans to hotel companies, each over DH 5 million, out of a total of 241h loans made by December 31, 1971, represented about 5O//J of CIH's outstanding hotel loans at that time. 3.07 Of all the hotel loans signed by CIH since its inception, about 111 out of 224 were made to the luxury and semi-luxury class (77 loans to 36 four-star and 34 loons to 17 five-star hotel units). In monetary terms, CIH's commitments to the building of upper class hotels totalled approximately DH 201 million over the past four years, i.e. about 78%) of its commitments to the hotel sector. Since 1969, however, in response to a change in the pattern of demand, CIH's involvement in new four-and five-star hotel projects has decreased. In 1971, only 8 such projects wiere committed, as compared to 15 in 1969. In view of the good prospects for mass tourism traffic in Morocco, the recent emphasis in CIH financing three-star hotels and vacation villages is good, although CIH cculd even do more in encouraging and. advising hotel developers to move in this direction. Economic Justification of CIH's Hotel Projects, 3.08 Return on Investment. Under the first Bank loan, CIH agreed that th hotel projects financed with Bank funds would stand a minimum return test. The aim was to achieve an efficient use of resources and to establish a warning signal against marginal projects, because there were indications that the projected capital costs of hotels were excessive relative to the accented standiar(ds in Morocco and th-tot nrofits were being siphoned of ! in the construction contracts. The risks of uneconomic investments are accentuated by the availability of grants and low cost loans for hotel projects. A minimum internal rate of return of 10% (eliminating the impact of subsidies) was chosen as an acceptability criterion for all projects financed by CIH with Bank funds. 3.09 Two years have passed since CIH started using this criterion. It has become a primary tool in CIH's appraisal, and has served a good purpose. Projects entailing high capital costs and which did not achieve the desirable return have received special scrutiny by CIH with a view to achieving econo- mies of scale. This has been possible through the effective contribution of CIH's Technical Division. Under the proposed second Bank loan, CIH has agreed to apply the criterion not only to projects financed with Bank funds, but to all its hotel projects.  _9 _ 3.10 Judging from a sample of 23 hotel projects approved by CIH since HMay 1, 1970 (the date from which CIR has applied the criterion), these projects are expected to yield an average (weighted by their costs) internal rate of return of about 17% per annum. The three-star hotels (1i%) show higher returns than the four-and five-star projects (14%). But the vacation village projects show by far the highest return which, on the basis of this sample, averages about 24L/. 3.11 The reliability of these figures depends, in part, on the validity of CIH's forecasts. As noted in paragraph 4.15, the weakness of CIH in follow-up, and the resulting weakness in market analysis in its appraisals, seem to have led, in a few instances to somewhat unrealistic forecasts of rates of return. However, CIH has recently established an Economic and Statistical Division which is bringing about improvements in its market surveys and occupancy forecasts. 3.12 Balance of Paymrents Implications. CIH's hotel projects make a good contribution to Morocco's balance of payments. The net amount of foreign exchange that CIHts projects are able to earn annually exceed the expenditures in local currency for these projects by about 30%. This percentage would be even higher if one took into account the additional foreign exchange spent by tourists outside hotels. 3.13 Impact on Employment. Few data are available on the impact which tourism in general, and the hotel industry in particular, have had on Morocco's unemployment problem. It is estimated, however, that hotels alone provide employment at the rate of one job for every two beds. This assumption would imply that about 20,000 people are now employed by the hotel industry. The number may double by the end of 1976. The investment cost per job created amounts to about $10,000 - a figure well below the cost per job created in industry in Morocco and comparing well with the cost per job in the hotel industry in other Mediterranean countries. So far, CIH has financed two-thirds of the hotel beds in Morocco and thus CIH makes a creditable employment contribution. A significant secondary effect can also be seen in the increased employment in the construction industry, transportation and the various industries supplying hotel construction and hotel operations.  - 10 - IV. CIHNS ORGANIZATION AND PROCEDURES, 4.01 There has been no change in the legal and institutional background surrounding CIH, nor in CIH's policies, since the Bank first appraised CIH in 1969. CIH's purpose and powers are governed by Royal Decrees issued in 1962 and 1968, its statutes and general laws of the cuuntry. Under these, CIH has wide powers to lend, invest and guarantee, as long as these trans- actions are related to the construction for housing, to hotel investments and to other specifically authorized operations. As of December 31, 1971, public sector ownership represented about 54% of CI0H's share of capital, including 34% owned by CDG (Annex 6). Board of Directors 4.02 The composition and functions of the Board and the Executive Committee, the membership of which is detailed in Annex 7, have not changed significantly since the first Bank loan, except that CIH's Director General became a voting member of the Executive Committee in November 1970. Public sector representatives predominate. CIH's Executive Committee does not actively discuss the details of investment proposals, although it must formally pass on all projects. 4.03 This lack of probing of hotel projects by the Executive Conmhittee could possibly be explained by the moderate experience of a number of Executive Committee members in tourism financing. However, Some of the Directors belong to organizations which are important shareholders of CIH, such as the CDG and SNI and which also finance hotels. They also sit on the Government's Commission which checks on the technical features of a hotel project with a view to determining the projects that are eligible for Govern- ment incentives and for CIH financing. 1lanagement and Staff 4.04 After five years with CIH, Mr. Mohamed Lazyak, Director General, resigned in April 1971 to become Minister of Tourism. . Eis successor, Mr. Mohammed Benchekroun, a former Director of the Budget in the Finance lMinistry, was designated in July 1971. In the interim, CIH was run by its Deputy Director General. 4.05 The present Director General has contributed considerably during his first year to solving CIH's problems and he decided that a general reorganization of CIH was required. 1/ He was a victim of the attempted coup d'etat on July 10, 1971.  - 11 - 4.06 To head the Credit Department, which encompasses both hotel and housing operatinns, a competent administrator, who was previously CIH's legal advisor, was appointed. A new qualified Finance Director was also appointed. Eight recent university graduates were hired who, though still inexperienced, should eventually strengthen CIH's work on hotel credits. As discussed in paragraph 4.12, the Director General is keenly aware that follow-up must be substantially improved. 4.07 The major problem at this point is that, at the senior level, there is still little actual experience in hotel financing and CIH is searching for a senior officer who will contribute such experience, especially as regards market assessments, the promotion of appropriate hotel investments, and generally guidance of CIH's hotel appraisal and follow-up work. CIH has asked the Bank to help in locating such an officer, and the Bank has agreed to do so. Organization and Procedures 4.08 CIH has a staff of 80, of which 41 are at the professional level. The company has recently been reorganized as shown in Annex 8. The organ- ization provides for appropriate delegation of authority and offers efficient lines of communication within the company. Essentially, CIH is now divided into two departments, one dealing with lending operations (itself split in two sections, Housing Credit and Hotel Credit) and the other dealing with the financing of CIH itself. The former should be able, with proper help from an advisor, to further develop good appraisal and supervision work. The Finance Department has experienced personnel and it performs its functions adequately, including disbursements. It is, however, headed by a part-time Director. The Department needs full time direction, and CIH has been urged during negotiations to make systematic efforts to have a permanent Financial Di rector. 4.09 Housing Credit. Fifty years of experience and a good staff in the housing sector have led to good quality of CIH's housing business. Procedures for housing loans are standard and the Housing Credit Division is operating smoothly. 4.10 Hotel Credit. CIH's hotel work still requires strengthening. As said earlier, the main need is for a senior level officer with considerable hotel financing experience to improve CIH's ability to make sound judgments on the market aspects of hotel projects. 4.11 The Technical Division is the most experienced unit in CIH's Hotel Credit Section. It consists of three experienced engineers and two assistants, and it has played a decisive role in helping investors plan their projects on a sound basis. Its role has also been important in advising the Government's Hotel Investment Commission, which approves project proposals at the stage of conception. CIH's technical work on hotel projects is performed reasonably well, but there is an immediate practical possibility for one improvement which was discussed during negotiations. Stemming from a requirement in the first Bank loan,control bureaus have assisted large CIH hotel borrowers  - 12 - by reviewing the cost and design and subsequently supervising the con- struction of their projects. The review of the cost and designs occurred when CIH's own appraisal work was well along. Experience has been quite good and in some circumstances the bureaus contributed to an -improvement in design or reduction in costs of projects. Both CIH and the Bank have come to the conclusion that the role of control bureaus could be even more useful if the bureaus' review started earlier, namely at the time of project conception. In this manner,when a project is not yet officially approved by the Government's Hotel Investment Commission, worthwhile technical modifi- cations can still be introduced. CIH has advised the Bank that it is trying to arrange with the Ministry of Tourism a way to involve control bureaus at an earlier stage. 4.12 Follow-up. CIH follow-up of hotel projects in operation has been practically non-existent in the past. CIH's management is anxious to establish this activity on a systematic basis. Three staff members of CIH have been appointed to this task. More than 40 hotels in operation (out of about 80) were visited and supervision reports made. CIH plans to have visited at least once, most, if not all, its clients in operation in 1972. A related matter is that CIH is still not doing enough to keep after borrowers in arrears. This factor has contributed to the considerable increase in 1971 of overdues in CIH's portfolio (see paragraph 5.07). The Director General is concerned about the situation, and has instituted tighter collection procedures. A review during negotiations of the limited results of these more intensive procedures indicates that these efforts can be effective and would, over the long run, keep CIH's overdues within manageable limits. 4.13 Disbursement. CIH's disbursement procedures are adquate; verification of exDenditures is carefully controlled. However, disbursements under the first Bank loan were only $1.2 million as of April 30, 1972, against $9 million committed. This slow disbursement of Bank funds appears to be related to difficulties CIH has had with obtaining particular parts of supporting documentation for its Bank withdrawal applications. This matter has now been resolved and CIH should be able to increase its rate of disbursement of funds committed under the Bank loan. 4.14 Procurement. Procurement practices are generally satisfactory: but they could be improved. Although competitive bidding is arranged in most cases by investors for some elements of their projects, CIH relies essentially on its general experience about prices _nd contracts and reacts when these are substantially out of line with established norms. Also, CIH claims that competitive bidding on construction contracts in Morocco may be difficult to apply given the lack of nationwide competition between contractors. Still, CIH feels that it could improve its evaluation of contract prices. In this respect, CIH agreed during negotiations to strengthen its supervision of procurement practices and to get the control bureaus' views on such matters for large projects (over DH 6 million). Overall Assessment of CIH's Organization 4.15 CIH's effectiveness has improved markedly since the Bank made its first loan. Some of the momentum in developing its competence was lost duringthe past year due to the departure of some key personnel. However, the company's new Director General has taken vigorous action to regain the momentum. It is yet too early to evaluate the success of his efforts. An important number of staff members have been recently hired but on balance,the changes instituted appear to be in the right direction.  13- V. CIH'S FINANCIAL POSITION Balance Sheet and Portfolio 5.01 CIH's accounts up to 1970, have been audited by Price Waterhouse without qualification. The audit of CIH's 1971 accounts is currently underway. CIH's balance sheets and income statements for the period 1968-71 reflect a continuing growth in CIH's volume of business, principally in its hotel portfolio. 5.02 Balance sheets for the years 196d and 1971 are given in Annex 9. During 1971, CIH's portfolio increased by 16% as compared with 45% in 1970. This slowdown in growth, related solely to hotel loans, resulted mainly from a decline of commitments in 1970 and 1971 and, in part, from several hotel investors delaying withdrawals because of the political uncertainty prevailing in the second half of 1971. In 1971, CIH's total disbursements for hotel projects amounted to DH 40 million, compared to DH 61 million in 1970. CIH's 1971 outstanding housing loans continued to develop even faster (at an average 45% growth rate p.a.) than in the past. 5.03 In accordance with an agreement reached at the time of the first Bank loan to CIH, the debt of the Government to CIH, which amounted to DH 10.5 million at the end of 1970, had been further reduced to DH 4.25 million by the end of 1971. As can be foreseen now, it will be fully repaid before December 31, 1972. 5.04 CIH's liquidity position is sound. As of December 31, 1971, CIH's current ratio amounted to 1.8. 5.05 As of December 31, 1971, CIH's ratio of totallong-term borrowing to net worth was 5:1 as against the 6:1 limit specified in the first Bank Loan Agreement. The total debt/equity ratio at that date was 9.7:1. Evaluation of CIH's Portfolio 5.06 The following table summarizes the arrears status of CIH's portfolio:  - 14 - December 31 1970 December 31, 1971 Amount of Total Amount % of Total (DH million) Portfolio (DH million) Portfolio Total portfolio j 309.1 100.0 362.0 100.0 Amounts overdue / on principal and interest (i) less than 5 mos 6.6 2.1 6.3 1.7 (ii) 5 months or more, 6.3 2.0 13.1 3.6 of which: (hotel loans) (2.4) (0.b) (b.9) (2.4) (housing loans) (1.6) (0.5) (1.9) (0.5) (other loans) (2.3) (0.7) (2.3) (N.7) Portfolio outstanding in arrears Long-term loans, 14.3 4.6 56.2 15.5 of which: (hotel loans) (7.7) (2.5) (44.3) (12.2) (housing loans) (6.6) (2.1)) (11.9) (3.3) 5.07 CIH's loans in arrears increased considerably during 1971. As of December 21, 1971, amounts overdue over five months, both in principal and interest, represented about 3.6% of CIH's total portfolio as compared to only 2.0% in 1970. If, in addition, one takes into account the overdues for less than five months, CIH's total overdues aggregate about 5.3i of the total portfolio at the end of 1971. The deterioration is almost exlcusively attributable to hotel loans and more particularly to a DH 30 million loan to an important hotel company (see paragraph 5.11), whose arrears (all interest) amounted to about 36% of CIH's total arrears. The outstanding balance of this loan represented 63% of the total hotel portfolio affected by arrears over 5 months, as of December 31, 1971. Even without this loan, the increase in hotel overdues (from DH 14.3 million in 1970 to DH 26.2 million in 1971) is significant and reflects the weakness of CIH's supervision activities in the past, the lack of a systematic collection policy, and, to a certain extent, deficienQies in past appraisals. j Including maturities on loans of less than one year and before provisions for doubtful loans. 2/ CIH classifies overdue debts as "maturities receivable" when the debt is overdue for less than five months, and as "arrears" when amounts are overdue for five months or more. Only the latter category is considered as delinquent; i.e., at that point penalty interest commences, provisions are established and legal action may start.  - 15 - 5.06 CIH h&s never experienced a loss on loans related to a mortgaged house or apartment which had to be sold due to delinquencies. CIH considers the prospects for recovery in housing arrears satisfactory, particularly in view of the continuing increase in the value of land. 5.09 CDi's risk rests essentially with its hotel portfolio. In an assessment of this risk, the following has to be taken into account: a. Although about b5% (DH 230.7 million) of CIH's hotel portfolio represent hotels which have started operation, more than half of these are still paying only interest to CIH, because of the long grace periods (up to 5 years) available on the bulk of CIH's hotel loans. b. CIH's follow-up and collection procedures have been weak and have encouraged CIH's clients to delay repayment of their debts. 5.10 Except for the two cases discussed in the next paragraph, it appears that CIH's portfolio is basically sound, given the fact that the bulk of CIH's hotel loans are covered by a 50% State guarantee and that the mortgages securing these loans in general have a substantial value. On a conservative basis, CIH's hard core loss prospects (apart from the two cases reviewed in the next paragraph) should not exceed, say, DH 2-4 million. CIH's'provisions on these losses of DH 5.5 million are thus adequate. 5.11 Two major hotel clients of CIH, however, are in difficulty. The Government has an inportant interest in these companies which borrowed from CIH in 1967-68. CIH's financing of these companies represents about 24% of CIH's hotel portfolio and three times CIH's net worth. The hotel company mentioned in paragraph 5.07 has been repeatedly in arrears over the past three years. The other company, which is caught up in a legal dispute is still benefitting of a six-year grace period on principal and interests and is not therefore delinquent; the outcome of the dispute may affect CIH in the long run. Risks of losses are large enough to put CIH's credit- worthiness in question. During negotiations for the proposed second Bank loan, a number of measures were agreed by CIH and the Government to protect CIH, and have already in part been taken: a. The amount overdue from loans to the hotel company referred to in paragraph 5.07 has been entirely paid to CIH. A guarantee on these loans will be provided to CIH. Because of administrative and legal delays in Morocco for making such guarantee effective, an effective guarantee would be a condition of effectiveness for the proposed Loan. b. The Government has covered the second case by an irrevocable agreement toprotect CIH from any loss arising therefrom.  - 16 - 5.12 Provisions Policy. Until last year, CIH has made provisions equivalent to the yearly increase in arrears. This policy in the past enabled CIH to set aside provisions in sufficient amount, until the problews referred to in the above paragraph occurred. For its 1971 accounts, CIH started to systematically review its portfolio on a case by case basis for loans which were delinquent to establish provisions. During negotiations for the proposed loan, CIH agreed that in the future it would also submit its loans which are not delinquent to the same scrutiny,and establish the provisions it needs to cover foreseeable risks on a case by case basis for all the loans in its portfolio. However, since there may be tax advantages, CIH might, for the purpose of its published accounts, also continue to make provisions up to the limit allowed by law, if provisions needed to cover foreseeable risks were below that level. 5.13 Exosure Limits. The large loans in difficulty referred to in paragraph 5.11 point to the necessity of CIH adopting a policy for limiting its exposure to hotel development, programs, which call for a large amount of finance. Such caution - and a policy to that end - is necessary, even though the Government continues to provide guarantees for half of each CIH hotel loan. CIH agreed during negotiations to normally limit its financial exposure to a single corporate entity to 20% of CIH's net worth. (This does not include portion of CIH's loan covered by suitable guarantees.) Exceptions to this limit could be considered for special reasons. Earnings 5.14 In 1971,CIH's net profits reached DH 5.4 million as compared with DH 4.d million for the preceding year. This amounted to a return of 27% on share capital and 16% on net worth, as against 24% and 16% respectively in 1970. In 1971, CIH's net operating income before provisions and taxes amounted to DH 11.9 million, as against DH 7.6 million in 1970 and DH 7.6 million in 1969. This result is quite satisfactory and reflects the growth in portfolio. As a result of CIH's new policy on provisions (paragraph 5.12) there was no new allocation to provisions in 1971. In fact provisions decreased further in 1971 from DH 6.3 million to DH 5.5 million. These provisions seem adequate following the agreement reached during negotiations on how to deal with the two large projects in difficulty, referred to in paragraph 5.11. Over the past four years, CIH has maintained an d6 dividend; this represents a payout ratio of about 55%. CIH's stock is listed on the Casablanca Stock Market and, although it is not actively traded, its value has been steadily increling over the past years to DH 145 by the end of 1971.  - 17 - VI. BUSINESS OUTLOOK Housing Business 6.01 Housing loans are likely to remain a significant part of CIH's operations. Buoyancy in demand and the more liberal housing criteria introduced in June 1969 have resulted in an increase in the number and value of loan approvals which totalled in 1971 DH 64.4 million, as compared to DH 37.6 million in 1970. The buoyancy in the housing market is expected to continue further and CIH projects a continuous increase in the level of commitments for the years 1972 through 1976, including the financing of two large apartment development projects in Casablanca and Rabat. CIH's housing projections (see paragraph 6.03) stand a good chance of being met. Hotel Business 6.02 CIH's hotel financing business will be affected by the investment climate and by the Government's policies in the tourism field. Major elements in such policies are the implementation of critical infrastructure, the attitude taken toward foreign investors and the incentive system. 6.03 CIH's forecast of operations shown in the table below, is based to a large extent on hotel applications received by CIH, a large number of which have already been subjected to preliminary review. Account is taken of the present uncertainty which delays some foreign sponsored projects. The hotel loan commitment figures shown in the table below, DH 31.9 million in 1971 (actual) and DH 115.0 million in 1972 (forecast), need to be explained. The low level of commitments in 1971 reflected the general uncertainty of investors. (At the-end of 1971, about DH 60 million of projects approved were uncommitted.) However, DH 27 million ready for commitment in 1971, were committed at the beginning of 1972. Thus, a more appropriate commitment figure for 1971 would be DH 58.9, 7eaving DH db million as the forecast of hotel commitments in 1972. The projections allow for CIH's intention to start financing public sector hotel projects Which already accouxt in the 1972 forecast for DH 22 million in commitments. After having worked off its pipeline of firm projects, CIH might, given improvements of its appraisal capacity, well face a hotel investment demand that would enable it to maintain its financing of hotels at about DH 90 million per year of somewhat better. Thus CIH's program of hotel loans for 1972 thrcugh 1974 calls for loans to perhaps as many as 70 hotels, including large projects of more than 500 beds each (two with about 1,000 beds), for a total investment cost of about DH 560 million. These 70 hotels would probably have about 1b-19,000 beds and be completed over the period 1972-1976., The CIH program implies that Morocco would have a total capacity of about 60,000 beds in 1976, about 50% more than expected at the end of 1972. If political uncertainties in Morocco do not increase, CIH's projections appear plausible. CIH's 1972-1976 forecast of both housing and hotel loans, as compared to actual approvals, commitments and disbursements follows (in DH million):  - 18 - Approvals Commitments Disbursements HousiU Hotel Total Housing Hotel Total Housing Hotel Total Actual 1966 15.7 37.7 53.4 13.5 45.0 5b.5 12.1 40.1 52.2 1969 20.o 35.0 55.8 17.9 93.o 111.7 16.4 56.4 72.8 1970 36.9 37.8 74.7 30.1 4o.5 70.6 24.lt 6o.9 85.7 1971 54.d 64.4 119.2 48t.5 31.9 60.4 36.3 4o.2 76.5 Estimate 1972 56.0 72.0 130.0 55.0 115.0 170.0 44.0 73.0 117.0 1973 60.0 94.0 154.0 56.0 90.0 146.0 4a.0 60.0 10d.0 1974 63.0 110.0 173.0 58.0 90.0 14d.0 52.0 96.o 14h.o 1975 66.o 120.0 166.0 61.0 95.0 156.0 56.o 90.0 154.0 1976 70.0 130.0 200.0 65.0 110.0 175.0 60.0 102.0 162.0 Total 1972- 76 317.0 526.0 643.0 295.0 500.0 795.0 260.0 429.o 6o9.o Resources Needed 6.o4 On January 1, 1972, CIH had the following uncommitted resources (DH million): Local currency 17.5 Foreign exchange 5.4 Total 22.9 On the basis of CIH's expected business over the 5-year period 1972-76, CIH would have a resource gap of DH 736 million (the details are shown in Annex 15), of which DH 275 million will be needed to finance import needs. With tourism remaining a priority sector, there is no reason to beLieve that CIH will fail to obtain the local resources it needsfrom the CDG, the Banque du Maroc and the Banque du Credit Populaire. Therefore, CIH should face no difficulty in financing the DH L67 million gap in domestic resources through medium and long- term borrowings and two increases in share capital projected during the period. Whether it will obtain the $54 million needed in foreign exchange is problematic. 6.05 Through the end of 1973, CIH would need to mobilize DH 202 million in fresh resources (in addition to existing resources and self-generated funds). As to foreign exchange, CIH will look, at least for the next two years, exclusively to the Bank for funds to cover the import component of its hotel loans. TyIpically, the import component in a hotel project amounts to about 55% of the hotel cost and CIH's lending to hotel, as between local and foreign currency, reflects this mix. Currently, 55% of CIH's financing  - 19 - has been directed to foreign procurement and this proportion is expected to hold for the next two years. Resource needs to finance the import component of hotels amount to an estimated DH 107 million, i.e. about $23 million. 6.06 CIH is looking to the Bank to cover the bulk of its need in foreign exchange. However in lending to CIH the Bank should take into account that CIH is just emerging from a difficult period and that CIH needs further strengthening. Also CIH should systematically seek to diversify its sources of foreign capital so that the Bank would no longer be called upon to cover CIH's entire foreign exchange requirements. For the proposed loan, the Bank should therefore cover CIH's needs for a shorter period than usual, namely only for about eighteen months. (Also, by the end of this period the discussions between the Bank and the Government on Morocco's tourism development policy and the related incentive system should have been well advanced to give the Bank a better base for formulating its long term lending program to the tourism sector in Morocco.) A $15 million loan (DH 70 million) would approximately cover CIH's need for eighteen months, i.e. close to the end of 1973. It would be disbursed as estimated in Annex 16. Financial Projections 6.07 Annexes 11 through 13 are CIH's 1972-1976 projected balance sheets, income statements and cash flow, based on CIH's forecast of operations in paragraph 7.03. Ratios derived from these projections are given in Annex 14. 6.o0 Earnnags. A factor of increasing importance for CIH's income will be the growing cost of resources due to a large share of Bpnk funds (assumed to cost 7 1/4% p.a.) in CIH's borrowings. On the average, financial charges as a percentage of CIH's total assets will grow from 4.5% in 1971 to 5.5% in 1976. The relative cost of administrative expenses is expected to decrease steadily over the next five years because of likely economies of scale. Even with the projected growth of business, net income as compared to average total assets will remain largely unchanged over the next five years, at about 1%. Revenues derived from CIH's hotel operations would remain high as compared to revenues from housing,but the latter will grow in relative importance over the next five years. As shown in Annex 14, CIHi's profitability over the next five years is also expected to remain satisfactory: net profits after tax would represent 14-20% of CIH's share capital over the period, the variation being due to share capital increases in 1972 and 1974, and about 10% of its net worth. 6.og Balance Sheets. CIH's total assets are likely to double over the next five years. The projected balance sheets raise a few points of interest:  - 20 - a. The declining current ratio position in 1973 and 1974 (1.02 and 1.07 respectively) is explained by large maturities on medium-term borrowings (5-year bonds) falling due in these years. However, CIH's cash position in this period will remain acceptable, provided it has by then achieved efficient collection procedures. b. CIH's debt-service coverage would be adequate throughout the life of a second Bank loan. c. CIH's dividend policy (6% of share capital) is reasonable and allows for a satisfactory growth of reserves. 6.10 CIH plans two share capital increases in 1972 and 1974 of DH 10 million each. The former was approved by CIH's General Assembly in 1971 and should be completed in the Fall of 1972. Even with such increases, CIH would,by the end of 1973,exceed its borrowing limit of 6:1. (Included in equity for purposes of the debt limit ratio are the maturities of the DH 30 million subordinated bonds (see Annex 5) falling due after the last maturities of Bank loans.) Such limit is high for a company like CIH which provides two-third of its financing to a single sector. CIH has agreed to the 6:1 limit and in the next few months will decide on a new program of equity expansion that will keep it within this limit.  - 21: - VII. CONCLUSIONS AND RECOMMENDATIONS Conclusions 7.01 As the major instrument of the Moroccan Government for financing hotels, CIH has a crucial role to play in the economic development of Morocco. Its role in financing hotel and housing construction has been considerable, particularly during the past five years. CIH's relationship with the Bank in recent years has had two important results: CIH has put its financial structure in order; and, in the past year, CIH has started applying better criteria in selecting hotel projects. 7.02 These results have been made despite the fact that CIH went through a period of organizational difficulties in 1971. CIH's new management has already given evidence of its determination to improve CIH's organization and operation. Still, because of a lack of experienced staff. there is significant roomfor improvement in CIH 's appraisal of hotels and in the supervision of its hotel portfolio. While the technical aspects of project analysis are now adequately handled, the appraisal of market and financial aspects of hotel projects requires further strengthening. The Bank has agreed to help CIH locate a senior staff member to provide assistance in these areas. CIH housing operations are well handled. 7.03 Hotel development, as in earlier years, has benefited greatly from the Moroccan Government's incentive system. To forestall possible distorting effects of the incentive system, CIH has agreed to use a minimum economic rate of return as an acceptability criterion in its appraisal. This criterion has proved to be a useful tool in screening out marginal projects. There remain questions, which will have now to be dealt with, about the utility of the present form and extent of the Moroccan incentive system. Other policy questions regarding the planning of infrastructure to support the targeted increase in tourist traffic over the next five years need to be settled. These matters are important to the work now underway in Morocco in formulating the country's tourism development program for 1973-1977. The Bank has offered its advice to the Moroccans in this effort, and the Moroccan Government has welcomed this offer. 7.o4 CIH's projections are reasonable. Should the investment situation improve and the new tourism policy be favorable, CIH could even expect a higher volume of hotel loans than forecast, but in this case CIH would have to strengthen its working capacity further. Moreover, because tourism is expanding quickly, CIH may have to promote not only hotel investments, as it now does, but also other types of tourism investments, such as tourist villas, villages (where entertainment will play a major role), marinas, camping, and caravaning sites. CIH should perhaps also consider equity investments in tourism facilities.  - 22 - Recommendations 7.05 About 95% of the first Bank loan to CIH is committed; CIH will soon need further resources. For the reason stated in paragraph 6.06, a second loan in an amount of US$ 15 million is proposed which would cover part of CIH's resource needs through the end of 1973. The measures agreed upon during negotiations to strengthen CIH's portfolio and particularly to guarantP.- the. loan to two large clients referred to in paragraph 5.11 indicate that CIH remain creditworthy and a suitable borrower for a eecond Bank loan. 7.06 As for construction projects financed by the Bank, the proposed loan would be disbursed to finance: a. 100A of the CIF cost of imported equipment; b. 65% of the cost of imported goods, or goods assembled or processed locally from imported components purchased in Morocco, and c. a percentage of total construction costs representing the import component of such costs as established by a reputable control bureau. The percentages vary as indicated below: Class of Hotel Import Cost Element 5-star - 37% 4-star - 36% 3-star - 31% 2-star - 24% 1-star - 20% 7.07 The proposed loan to CIH should be made on the standard terms and conditions of Bank loans to development finance companies, including standard commitment fee. In view of the size of CIH's sub - project), the free limit above which Bank approval of a project is required should be raised from $100,000 to $200,000. There should be an aggregate free limit of us$ 4 million. The Bank will, therefore, continue to be in a position to review the bulk of the projects being financed out of the Bank loan.  ANNEX 1 MOROCCO Tourist Traffic: Five-Year Plan, Forecast (1968-72) and Actual (1968-71) (in thousands) Stop-over Visitors Cruise Visitors Total Forecast Acvual Forecast Actual Forecast Actual 1968 550 481 110 107 660 588 1969 640 621 120 95 760 716 1970 740 747 130 105 870 852 1971 850 823* 140: 92* 990 915* 1972 1,000 - 150 - 1,J50 * Estimate Source: Ministry of Tourism DFCD February 17, 1972  MOROCCO Tourist Arrivals in Mediterranean Based Countries (1966-71) Avg. Annual Dj E1966 % 1967 % 1968 % 1969 % 1970 % 1971 % Growth Rate (000) Increase (000) Increase (000) Increase (000) Increase (000) Increase (000) Increase 1966-71 so Algeria 127.6 16.7 111.6 -12.5 137.4 23.1 213.11/ 55.1 235.8 10.7 184.5-/ -21.8 16.9 France 11,800.0 6.3 12,000.0 1.7 10,800.0 -10.0 12,100.0 12.0 13,700.0 13.2 n.a n.a. 4.0-/ Greece 997.6 17.8 849.1 -14.9 879.5 3.6 1,139.4 29.6 1,609.2 41.2 1,8774.6_/ 16.4 17.5 Israel 289.7 11.3 268.6 - 7.3 404.3 50.5 385.1 - 4.8 436.9 13.4 601 .4J/ 37.6 21.5 Italy 12,700.0 14.4 12,600.0 - 0.8 11,239.6 -10.8 12,086.8 7.5 13,000.04/ 7.5 14,222.04/ 9.4 11.2 Lebanon5/ 666.3 16.8 497.3 -25.4 687.0 38.1 754.1 9.8 822.0 9.0 n.a. n. a. 5.87L/ Libya-/ - - - - 134.1 - 109.1 -18.7 76.6 -29.8 97.2-/ 26.9 12.1-/ Morocco 424.0 12.1 400.1 - 5.6 481.1 20.2 621.0 29.1 747.0 20.3 823.5 10.2 18.8 Spain 15,835.3 29.2 16,399.1 3.6 17,720.3 8.1 20,221.4 14.1 24,105.3 19.2 24,142.0- 0.1 15.2 Tunisia 218.8 32.0 231.1 5.6 330.3 42.9 373.3 13.0 410.2 949 485.9-/ 18.5 24.4 Turkey 382.0 27.0 345.7 - 9.5 383.2 10.8 434.7 13.4 446.3 2.7 n.a. a.a. 4.27/ UAR- 578.7 6.8 344.9 -40.4 317.6 - 7.9 345.3 8.7 357.6 3.6 331.1 - 7.5 - 8.6 Yugoslavia 3,437.0 29.3 3,679.0 7.0 3,887.4 5.7 4,746.3 22.1 4,748.0 0.0 4,777.2/ 0.6 7.8 Note: This table is based on Stopover Visitor Arrivals unless otherwise indicated. 1/ Including excursionists. 2/ IUOTO figures Jan - Sept 1971 3/ IUOTO figures Jan - Nov 1971 17/ Own estimate based on IUOTO's figures for 1970 and 1971 7/ Excluding all visitor arrivals from Syria T/ IUOTO figures Jan - Oct 1971. 7/ Average annual growth rate between 196'-1970 8/ Average annual growth rate between 1965-1971 Source: IUOTO and OECD experts.  MOROCCO Stop-over Visitors to Morocco by Origin, Actual (1965-71) and Forecast ( 1972 (Number in thousands) 1965 1966 1967 1968 1969 1970 1971 1972** Nationality/ % of Tof % of -F % of % of % of Origin No. Total No. Total No. Total No. Total No. Total No. Total No. Total No. French 94.2 24.9 98.2 23.2 100.4 25.1 119.1 24.8 149.0 24.0 173.8 23.3 188.1 22.8 American and 25.3 6.7 37.8 8.9 43.1 10.8 56.4 11.7 94.1 15.2 117.8 15.8 136.7 16.6 Canpdiqn 3.2 o.8 4.5 1.1 5.1 1.3 9.3 1.9 15.2 ,2.4 17.1 2.3 20.7 2.6 British 44.o 11.6 66.8 15.8 58.4 14.6 64.4 13.4 79.7 12.8 84.4 11.3 80.8 9.8 ('ther Europe 98.6 26.1 121.7 28.7 131.8 32.9 160.0 33.3 188.6 30.4 204., 27.3 217.3 26.4 (of which German) (22.4 5.9 n.a. - 27.9 7.0 n.a. - n.a. - 55-4 (/4 70.7 8.6) Moroccan 20.5 5.4 10.3 2.4 15.2 3.8 '1.6 2.4 14.4 2.3 45.9 6.1 66.3 8.0 Algerian 69.2 18.3 61.3 14.4 24.2 6.o 28.4 5.9 46.2 7.4 60.3 8.1 66.6 8.1 Others 23.5 6.2 23.4 5.5 21.9 5.5 31.9 6.6 33.8 5.5 43.1 5.8 47.0 5.7 _ Total 378.5 100.0 424.o 100.0 400.1 100.0 481.1 100.0 621.0 100.0 747.0 100.0 823.5 100.0 1,000.0 Cruises 103.1 97.7 104.3 106.9 95.4 105.0 9i.7 150.0 Grand Total 481.6 521.7 5o4.4 588.o 716.4 852.0 915.2 1,150.0 *s Five-Year Plan Estimate (details by country not available).   ANNEX h Page 1 MOROCCO CREDIT IMOBILIER ET HOTELIER Tourism Development Incentives The Government of Morocco has been providing financial and other incentives to stimulate investments in hotels and vacation villages. (a) Financial incentives are: i) one-time contributions to the fixed investment cost in the form of grants or rebates, and ii) subsidies to operating charges such as interest rate subsidies and accelerated depreciation. (b) Other incentives include the benefit of repatriation of capital and tax guarantees accorded to foreign investors. To be eligible for any of these incentives, a project has to be approved by the State's Investment Commission. I. Financial Incentives (a) Interest rate subsidy, a 4.25% p.a. subsidy on the interest rate payable by hotel investors on long-term loans from CIH reduces CIH's nominal rate of 8.75% p.a. to an effective rate of 4.50% p.a. (b) Equipment grant, a one-time contribution to the fixed investment costs (excluding the value of land) of a hotel project, usually ranging from 10% to 15% of the investment cost as estimated by the State's Investment Commission. The actual equipment grant ap- proved by the Investment Commission usually ranges from 7.5% to 12.6% of the actual investment cost. (c) Rebate of the value added tax charged on the fixed in- vestment cost, on the average, this benefit amounts to about 6% of the fixed investment cost (excluding land). (d) Import duty exemption, applies to construction materials and new equipment, provided there are no Mcroccan-made products of the same type available. This benefit is given only to new Drojects or  ANNEX h Page 2 extensions of existing projects. This benefit amounts to about 1 - 2% of the fixed investment cost. (e) Accelerated depreciation. this benefit enables the invector to double over a five or ten year period, depending upon the State's Investment Commission decision, the normal rate of depreciation of assets as follows: buildings 4% to 5%, heavy equipment 10%, light equipment up to 20%, vehicles 20% to 33%, and installation costs 50% to 100%. (f) Reduction of registration tax. The registration tax for hotel projects is reduced from 1.5% of share capital to 0.5%; it applies to both new ventures as well as to existing hotels increasing their share capital. (g) Exemption from local taxes. These benefits, notably income tax advantages, apply only in certain geographic areas. (h) Reserve fund, a tax-free contingency fund for the pur- chase of new equipment can be established. The reserve cannot exceed 40% of the investment cost or 50% of any year's past profit and needs to be reinvested within three years. This advantage is not granted, however, to projects applying for other tax holidays. II. Other Incentives (a) Foreign investors are guaranteed the repatriation of profits and of liquidation proceeds. (b) During the first ten years of the life of a project, investors are protected against any increase in direct taxes such as income tax. urban tax, or the "patente." On the basis of a sample including 15 hotel projects, the average monetary equivalent of the aforementioned financial government incentives is as follows: Relative weight As a percentage of of each govern- the investment cost ment incentive Equipment grant 10.37 32.24 Reimbursement of Import Duty and Value Added Tax 6.46 20.09 Registration Tax Advantage 0.21 o.65 Present Value of Interest Sub- sidA y 1/ 8.92 27.74 Accelerated Depreciation- 6.20 19.28 Total Value of these incentives 32.16 100.00 2/ The opportunity cost of capital is assumed to be 10%. DFCD February 17, 1972  ANNEX 5 MOROCCO CREDIT IMOBILIER ET HOTELIER Resources as of December 31. 1971 Termination of Net ~mou Inerest ConDate Loan Repay- Net Amount Interest Contracted ment Period (DH 'Ooo) Equity Share Capital 20,000.00 Reserves and Surplusi 10,511.66 Total Equity I0.511.66 Borrowings (i) Long-term Bonds placed with CDG 435.00 4.o% 1947 1982 507.70 5.o% 1948 1983 3,550.00 6.5% 1950 1981 8,000.00 5.5% 1965 1975 22,000.00 6.o% 1967 1982 23,940.00 6.o% 1968 1983 8,660.00 6.o% 1969 1984 4,660.00 6.25% 1970 1985 15,000.00 6.25% 1970 1985 14,040.00 6.25% 1970 1985 15,ooo.oo0-0/ 6.25% 1971 2001 15,OOO.OO _/ 6.25% 1971 2001 (ii) Other Long-term Bonds 13.620.00 6.25% 1969 1984 144,4.12.70 (iii) Banque du Maroc 85,000.00 3.5% 1970 N.A. (iv) Medium-term Bonds 62,000.00 4.75% 1968-71 1973-6 (v) BNDE Loans 27,265.00 7.0% 1966-70 1983 (vi) IBRD Loan (704-MOR) JO.600.00 7.25% 1971 1989 224,865.00 Total Borrowings 369,927.70 Other Resources (i) Guarantee Funds for Fishing Fleet 3,470.80 (ii) Advances from Treasury 2Q0.00 3,710.80 Total Resources 403,500.10 1/ Net of repayment and including principal payable within one year. 2/ Before allocation of earnings. j In the event of liquidation of CIH, these bonds will be subordinated to all debt inciurred for a period of more than a year. including debt to the Bancue du haroc. TJFCD February 17, 1972  ANNEX 6 MORO CCO CREDIT IMMOBILIER ET HOTELIER Shareholders as of December 31, 1971 Public Sector Number of Shares % of shares Caisse de Depot et de Gestion (CDG) 54,535 341.08 Banque du Maroc 16,025 10.02 Banque Centrale Populaire 1,590 0.99 Sofac 1,600 1.00 Ste. Nationale d'Investissement (SNI) 10,200 6.38 Ste. Centrale de Reassurances 2,000 1.25 Total 85,90 537 Private Sector La Providence 800 0.50 COMAR 1,600 1.00 C.M.C.B. 6,oo0 3.75 Banque Conmmerciale du Maroc 1,000 0.62 Credit du Maroc 2,000 1.25 Societe Centrale de Banque 5,090 3.18 Union Maritime d'Outre-mer 13,3814 8.37 Uniban 3,900 2.143 B.M. C.E. 14,ooo 2.50 B.M.C.I. 2.000 1.25 Total 39.77 2485 Others and individuals 34.276 21.43 Grand Total 160,000 100.00% DF CD March 6, 1972  ANNEX 7 Page 1 MDROCCO CREDIT IMMOBILIER ET HOTELIER Board of Directors and Executive Committee as of December 31. 1971 A. Board of Directors Name Principal Position Chairman Caisse de- epots et de Represented by its Director Gestion-i General,Mr. Abdel Kamel Regha Vice-chairman Banque du Maroc / Represented by Mr. Ahmed Bennani Directors Union Bancaria Hispano Represe0ed by Mr. Pedro Marroqui Landa,-Director General Banque Centrale Populaire Represented by Mr. Omar Abdeljhil, President and Director General Compagnie Marocaine de Represented by Mr. Amine Credit et de Banque Benjelloun,Director General Societe Nationale d'Inves- Represented by Mr. Mohamed tissement Lahlou, Director General Ministry of Tourism Repres pted by Mr. Lahlimi Alami , Secretary General Mr. Regis Berland Deputy Director General , Societe Centrale de Banque Mr. Victor Munier Director General, Societe de Banque du Maghreb Mr. Lotfallah Cheggour2/ Director, Treasury Depart- ment, Ministry of Finance Mr. Kalir Skiredj Head of Pension Depart- ment, Ministry of Finance Mr. Mohamed Segat Deputy Director, Budget, Ministry of Finance Mr. Abdelaziz Bensouda Inspector, Ministry of Finance 1/ Nominated by Government or Government institutions Z/ New members.  ANNEX7 Page 2 Be Executive Committee Name Princinal Position Chairman Mr. Abdel Kamel Reghai2/ Director General, Caisse de Depots et de Gestion Members Banque du Maroc Represented by a Director Banque Centrale Populaire Represented by a Director Ministere du Tourisme Represented by a Director C.I.H. Represented by its Director General Government Commissaires Mr. Abdelfattah Ben Ministry of Finance Mansour Mr. Mohamed Ibrahimi-~/ Ministry of Finance / Nominated by Government or Government institutions g/ New members DFCD March 6, 1972  MOROCCO: CREDIT IMMOBILIER ET HOTELiER ORGANIZATION CHART, FEBRUARY 17, 197T BOARD OF DIRECTORS | (C-neil d'Ad,,iniraeien) EXECUTIVE COMMITTEE (Cemite de Oire cli-t) PHNANCOATAPPEArLAC SBURO EMENTDIVISIONFAPPRAISAL &R IENSPECTI SECRETARIAT M TUhi M B h krn DIV M BuOra N d'Ordr HOUSEKEEPING PERSONNEL |DEPUTY DIRECTOR GENERAL| Mr. e-kane- TECHNCA GVSON GVS~~~~OPEGRNUECETVONDERTNTFNAC DEVARTNEN MrO Od or~~~~~~~~~M. --iM. b.1Ai | HOTEL CREDIT I IX~~~~~~~OUSING CREDIT < ] D ~~~~~~~~~~~I VS ION D <1 [ t DFCD *Mr. BJnkirane may have to leave CIIH because at persaoal ditt iMulties with Mr. Benchekraun. Febrtary 17, 1972 World Bank-ESEBIRI   ANNEX 9 MOROCCO CREDIT IMMOBILIER ET HOTELIER Summary Balance Sheets as of December 31, 1968 to 1971 (in thousands of Dirhams) Dec 31, 1968 Dec 31, 1969 Dec 31, 1970 Dec 31, 1971 --.------(audited) ---_ (provisional) A'.SETS Current Assets Cash and Bank 3,850.5 6,992.3 4,394.1 2,459.1 Marketable securities (at cost) 683.2 664.3 763.8 764.0 Maturities on loans 9,209.4 9,799.0 22,673.3 20,408.1 State debts 18,021.6 19,220.3 10,509.4 4,254.3 Other debtors 10,901.4 10,254.8 7,780.8 23,972.6 Total current assets 42,666.1 46,930.7 46,121.4 51,858.1 Loans and Investments-/ Housing loans 51,312.9 59,285.4 71,011.5 91,894.5 Rural loans 2,832.1 1,755.3 1,137.6 734.7 Hotel loans 102,673.4 155,363.6 207,942.2 243,428.9 Other loans 179.9 156.6 0.7 0.6 Total loans net of provisions 156,998.3 216.560.9 280.092.0 336,058.7 Fixed Assets (net) 3,033.8 3,157.7 2,381.6 2,221.4 Other Assets 654.3 879.7 1.125.7 1.859.3 TOTAL ASSETS 203,352.5 267,529.0 329.720.7 391,997.5 (Provisions for doubtful loans) (6,312.5) (9,204.7) (6,349.7) (5,534.1) LIABILITIES AND EQUITY Current Liabilities Accounts payable 7,956.1 7,929.0 18,002.6 15,968.3 Current position of term debt 8.687.3 9,977.6 10,548.1 12,591.0 Total current liabilities 16,643.4 17,9