Morocco - Second Sebou Irrigation Project

i'o~~~'L FILE COPY TO DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1466-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OP MOROCCO FOR A SEBOU II DEVELOPMENT PROJECT June 10, 1974 This report was prepared for official use only by the Bank Group. It mnay not be published, quoted or cited without Bank Group authorization.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.  Currency Unit =Moroccan Dirham (DH) DH 1 = UV$O.23 US$1 Ili 4.35 Exchange rate fluctuates with weighted average of major currencies; rate used in Appraisal Report is US$1 = DH 4.08 (November 1973) Fiscal Year: January 1 to December 31  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR A SEBOU II DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Kingdom of Morocco, for the equivalent of US$32 million to help finance the Sebou II Development Project. The loan would have a term of 25 years in- cluding 5 years of grace, with interest at 7.25 percent per annum. PART I - THE ECONOMY 2. An economic report entitled "Current Economic Position and Prospects of Morocco" (No. 329-MOR, dated February 7, 1974) was distributed to the Executive Directors on March 6, 1974. The report is based on the findings of an economic mission which visited Morocco in September 1973 and completed its analytical work in December 1973. The impact on the Moroccan economy of more recent increases in the prices of crude oil, which Morocco has to import, and phosphate, which is the country's main export, is assessed in a preliminary way in para. 11. Country data sheets are attached in Annex I. Past Developments 3. The overall performance of the Moroccan economy improved during the Second Five-Year Plan (1968-72), despite difficult political circumstances in 1971 and 1972. Aided by favorable weather conditions and good crops in 1968, 1971 and 1972, real GDP growth accelerated from an average annual rate of about 3 percent in 1960-67 (barely above the rate of population growth) to 5.6 percent in 1968-72, thus exceeding the modest Plan target of 4.3 percent, and permitting real gains in private consumption of about 2 percent a year per capita. At the same time, the implementation of prudent fiscal and mone- tary policies contributed to a significant improvement in Morocco's domestic and external financial situation, despite sh,rtfalls on planned capital in- flows from official external sources. Government saving and investment slightly exceeded the modest Plan targets, while price stability was maintained. Fol- lowing a decade of recurring deficits, the balance of payments registered size- able surpluses in 1969-72, mainly because of sharply rising receipts from merchandise exports, tourism and Moroccan workers in Europe. At the end of 1972, Morocco had accumulated net foreign assets worth $280 million, equiv- alent to 3.5 months' imports of goods and non-factor services. Performance in 1973 was affected by poor weather conditions; agricultural output declined, and GDP increased only by an estimated 1.3 percent. The balance of payments continued to strengthen however, and by the end of 1973, net foreign assets amounted to $453 million.  4. Although the acceleration of GDP growth in 1968-72 was in part due to generally favorable weather conditions, it appears that the economy has moved onto a path of more rapid long-term growth. Agriculture, export industries, tourism and sectors with derivee demand (energy, transportation, communications and modern services) seem to have acquired a capacity for sustained growth, in part because of past investment and training. In agri- culture, expansion of irrigation, increased 'Use of key inputs in rainfed areas (improved seeds, fertilizers and timely ploughing) and a larger number of trained extension personnel have caused faster output growth. In the export sector, the phosphate company (OCP) has regained leadership in the world mar- ket as a result of internal reorganization and investment carried out during he Second Plan; the export company (OCE), which has a monopoly over Morocco's exports of fresh and processed foodstuffs, improved its management and market- ing, while a broad range of industries, including sub-contracting companies, built up a strong competitive position and sizeable sales abroad. 5. These achievements should not detract attention, however, from the serious difficulties which Morocco still had to overcome at the end of the Plan period. There was a need to revive private investment, which had stag- nated in 1971 and 1972 mainly because investors took a wait-and-see attitude in the light of political developments and the expectation of new incentives and new regulations regarding the association of Moroccan and foreign capital in business ventures (Moroccanization laws). There was also a need to raise private saving which remained at an insufficient level, in part because of the relatively low returns on domestic financial assets. Finally, the Gov- ernment had to increase the investment capacity in the public sector by appropriate changes in staffing and organization. 6. Difficult social problems also had to be tackled. Unemployment re- mained at a high level, averaging 9 percent of the labor force nationwide and ranging between 12 and 16 percent in large urban centers. The urban popula- tion in substandard housing was large and rising. Wealth and income differ- ences between cities and villages, among regions, and between rich and poor were widening, while about one third of the rural population in the less fer- tile agricultural areas was experiencing a slow decline in real consumption. Long-term Development Prospects 7. Recognizing these problems, the Government began in 1971 to revise Its development policies, paying increasing attention to social objectives. Reflecting the changed orientations, the Third Five-Year Plan (1973-77) aims at: - sustaining real GDP growth of 7.5 percent a year from 1973 to 1977, mainly through a 10 percent annual rise in exports and a doubling of investment over the Plan period; and - improving the distribution of growth benefits, mainly through further land distribution to poor farmers and more emphasis on rainfed farming in agriculture, the association of Moroccan nationals with foreigners in services and several industrial  sub-sectors, large increases in Government spending on social services and low-cost housing, a mDre progressive tax system, and appropriate changes in wages aad the prices oif basic agricultural commodities. Depart:ng from past financial orthodoxy, the Plan calls for an expansionary fiscal policy and a liberal credit policy, accepting the risk of less price stability. It recognizes that, in spite of faster economic growth, an in- creased public works program and continued emigration, unemployment may rise in absolute, and perhaps also in relative, terms because the growth of the working-age population is accelerating (from 2 percent a year in the 1960's to 4 percent a year in the 1970's). 8. In accordance with its export-oriented strategy, the Plan gives priority to sectors contributing to exports (agriculture, fishing, mining, food processing, sub-contracting industries, transportation and tourism). This priority is reflected in the allocation of Government resources to in- vestment in these sectors, as well as in the new measures taken in August 1973 to encourage industrial exports and private investment. Achievement of the Plan's export target will depend on further improvements in some export sectors (fresh and processed foodstuffs, tourism and sub-contracting), and also on continued external demand. While external demand for phosphate is expected to remain strong, demand for other Moroccan goods and services may weaken over the next few years as a result of an economic slowdown in de- veloped countries following the recent increases in petroleum prices. On balance, real export growth, which exceeded Plan expectations in 1973, will probably be somewhat below Plan targets during most of 1974-77. 9. The Plan proposes significant changes in investment strategy to increase labor intensity, and improve the situation of less favored groups of society and less developed areas of the country. Education, health and housing together receive a significantly higher share (23 percent) of planned Government investment than during the Second Plan (11 percent). Among sectors, the main change concerns agriculture. The Plan places less emphasis on dam construction and favors equipment of existing irrigation areas, intensification of rainfed cropping, improvement of animal husbandry and implementation of land reform. New incentives for private investment are less biased in favor of imported equipment than the previous system and encourage efficient operations and location in less developed areas. 10. In changing its investment strategy, Morocco is breaking new ground, and significant shortfalls on planned investment could well be experienced in new priority sectors as a result of staffing and organizational constraints, which can only be relieved progressively. Shortfalls will probably affect rainfed cropping, livestock production, low-cost housing and tourism infra- structure. In addition, most of 1973 was lost for the revival of private in- vestment, since the new incentives were introduced only in August, and the start of new public investment programs was delayed, since the Plan was issued only in July. Finally, measures taken in 1973 to complete the recovery of foreign-owned farms andl to 'Norocanise" business imply management changes  which may temporarily restrain production and investment. For these reasons, investment may fall short of the Plan's target, and GDP growth may not exceed 7 percent a year in 1974-77. The attainment of the Plan's income distribution objectives will to some extent be compromisel by the investment shortfalls affecting programs designed to increase the ,roductive capacity and situation of less favored groups in rural and urban areas. Ia. Financial resources are not expected to be a constraint in the meciur. term provided increased inflows of official assistance are forthcoming. The strengthening of the balance of payments since 1969 continued in 1973, and in 1974 Morocco will benefit from a tripling of the price of phosphate rock. Increased earnings from this source vill exceed the increase in the country's petroleum import bill (due to higher prices) by an estimated $300 million in 1974. This net gain may be eroded in later years, since the price of phosphate is likely to decline due to increased supply by Morocco's compet- itors, while the prices of imports and import requirements will keep rising. Nonetheless, until the end of the Plan period, phosphate and other exports, workers' remittances and capital inflows should provide enough foreign exchange to meet import requirements and maintain reserves at a sufficient level. On the domestic side, the phosphate company (OCP) will be able to make large, additional remittances to the Government, which will help finance the planned level of public investment. However, the Government will have to proceed with planned tax measures in order to-make the tax system more responsive to econ- omic growth and more equitable, and with planned development of the capital market to facilitate the mobilization of private saving and the financing of private investment. 12. The financial situation may become more difficult beyond 1977, if the predicted trends in exports (with no further gains from phosphate prices) and import requirements continue. To prepare for this eventuality, Morocco needs to increase, as planned, the level of external borrowing on favorable terms from official sources, and this will require improved project prepara- tion. Preliminary IBRD estimates are that Morocco's disbursed external debt amounted to about $890 million at the end of 1973, and that public external debt service represented close to 8 percent of 1973 exports of goods and non- factor services. Although lorIg-term prospects are for more pressure on the balance of payments than at present and a rise in the debt service ratio, Morocco can service substantial additional debt. PART II - BANK GROUP OPERATIONS IN MOROCCO 13. Bank and IDA lending to Morocco has supported 19 projects with fi- nancing totalling $428.0 million (net of cancellations), of which $221 million was lent since the beginning of 1972. IDA credits, totalling $36.8 million, have been made available for four projects. IFC investments have amounted to $2.9 million. Implementation of projects has often been slow to start, but with time performance .aas usually improved. The water supply project (Loan 850-MOR of July 19, 1972 for $48 million) suffered from initial difficulties  - 5 - and delays in implementing a number of basic measures aimed at reorganizing the major agency in the sector. Following substantial efforts by the Govern- ment, significant progress has been made. Difficulties which arose in the course of 1973 concerning procurement procedures for a major contract under this project have been resolved satisfactorily. Project implementation by the three autonomous financial institutions in agriculture, industry and tourism to which the Bank lends, has been geaerally satisfactory. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of April 30, 1974, and notes on the execution of on-going IBRD/IDA projects. 14. The Bank Group's lending strategy is to support the achievement of the objectives of the third Five-Year Plan through projects which (a) contri- bute to production and improve the balance of payments, (b) support institu- tion building and sector development, and (c) attack the problems of poverty in Morocco. Particularly in agriculture and urbanization and to a lesser ex- tent in industry, projects are expected to yield substantial benefits in tradi- tional economic terms and at the same time contribute directly to improving income distribution. The program includes projects, mostly in agriculture, which might serve as pilot schemes for repeater projects. Because the pace at which Bank Group lending can be carried out will continue to depend largely on the speed at which the Government prepares projects and takes related policy decisions, special efforts will be made to help prepare projects. 15. In the agricultural sector, previous projects have helped to develop large-scale irrigation schemes and agricultural credit. The Bank now stresses the importance of efficient organization of the sector, land reform and the development of small farms with emphasis on attacking the problem of rural poverty. The Government has accelerated land distribution to smallholders and landless families and is preparing a number of projects aimed at small farmers, some of them in rainfed areas, for which it is likely to seek Bank financing. 16. Education is a critical bottleneck in Morocco's development. Two IDA credits have been made to improve technical and vocational training. A UNESCO project identification mission, in the framework of the Bank UNESCO cooperative program, visited the country in September 1973 to review the sector's development and to help formulate future Bank projects. 17. Industry and tourism development has so far been financed through the two DFC 's ("Banque Nationale pour le Developpement Economique" and "Credit Immobilier et Hotelier"). These DFC's are expected to remain the main channels for Bank lending in these sectors. However, as Executing Agency for a UNDP financed study, the Bank is helping to prepare a tourism infrastructure proj- ect which would alleviate the scarcity of improved land for hotel development. On May 30, 1974, the Bank approved a loan to Maroc Phosphore, for the develop- ment of a large phosphoric acid plant. Projects in these sectors help Morocco to increase its foreign exchange earnings and provide an opportunity for the Bank to help improve sectoral policies.  - 6 - 18. A substantial share of Bank lendin; has financed infrastructure development. The first transportation loan, a $14.6 million Bank/IDA blend, was for a highway project and included financing of a sector review which served as a basis for a second loan of $29 million approved in December, 1973, as well as recommendations on transport policy. The first Bank financing of public utilities in urban areas was the $48 million Water Supply loan signed in July 1972. A second loan of $25 million, for a power project, was signed in October 1973. Both prcjects aim to improve the organization of public utilities. The social problems due to rapid urbanization are expected to be tackled through a site and services project presently being prepared by the Government, in line with the emphasis on urban housing and infrastructure in the Third Plan. 19. A Consultative vroup for Morocco was formed in April, 1967 under the chairmanship of the Bank. It presently includes Belgium, Canada, France, Germany, Italy, Japan, Kuwait, Spain, the U.K., the U.S., IMF, UNDP, OECD/DAC, the African Development Bank and the European Investment Bank. The last meet- ing of the Group, on March 28 and 29, 1974, expressed satisfaction with the improvement in Morocco's economic performance in recent years, and the em- phasis in the Third Five Year Plan (1973-77) on improving the distribution of growth benefits. 20. The gross inflow of official loans and grants to Morocco rose from $129 million in 1966 to $159 million (of which $18 million in grants) in 1971, but temporarily fell to $115 million in 1973. Major sources were the U.S., Germany, the Bank Group and France. At the end of 1973, the Bank Group's share in Morocco's external public debt was estimated at 13.4 percent on a disbursement basis. The share of the Bank Group in debt service was 11.2 percent in 1973. By the end of the 1970's the Bank Group's share in public debt and debt service are estimated to rise to about 20 percent. PART III - AGRICULTURE IN MOROCCO 21. Agriculture is the most important economic activity in Morocco. Some six million ha are presently cultivated, of which about 1/3 million ha have modern sad efficient irrigation systems. About 70 percent of the popu- lation is dL*cUv dependent upon agriculture for a livelihood. The sector contributes about 30 percent to GDP and accounts for over 50 percent of merchandise exports. Poor perfor-manice of the agricultural sector in the decade after independence contributed to general economic stagnation, while 4s- the years 1967-72 more rapid growth of agriculture -- mainly because previous large investments in t.ae moderm sector began to oear fruit - was accompanied by overals expansion. In 1973, inadequate rainfall seriously affected crop production and as a result, overall GDP only increased by about 2 percent, despite rapid expansion in mining and manufacturing.  - 7 - 22. The Government's intervention in the agricultural sector until recently concentrated on the expansion of irrigated farming, while rainfed agriculture received less attention. During the Second Five Year Plan, 29 percent of total Government investment expenditure was devoted to dams and irrigated farming and 12 percent went to the development of rainfed agricul- ture and livestock. Moreover, investment in irrigation facilities was con- centrated on the construction of dams but the construction of irrigation networks and on-farm development lagged behind. Thus during the Second Plan, while three dams capable of irrigating 106,000 ha were completed (and three more, capable of irrigating a further 96,000 ha, were under construction), main canalisation was provided for only 83,000 ha., and on-farm irrigation works for 71,000 ha. (excluding private irrigation schemes, which covered an additional 8,000 ha.). 23. The Third Five-Year Plan (1973-1977) proposes to remedy these defi- ciencies. Greater attention is being given to improvement of rainfed agricul- ture and livestock production, within an expanded overall development program for agriculture. Within the program for irrigation, the emphasis is upon completing irrigation systems served by newly constructed dams, to reduce the lags already mentioned. Only two new dams are to be started during the Plan period. Greater emphasis is being given to training, improvement of the ex- tension service, credit to small farmers, research and marketing. Farmgate prices have recently been sharply increased to encourage the production of cereals, sugar and edible oil seeds. 24. In many parts of the country, the small size and fragmentation of holdings, and complex traditional tenure systems, frequently involving joint ownership, have been major obstacles to improving agricultural productivity. To overcome these problems, and to encourage the adoption of modern cultiva- tion methods, particularly on lands with high production potential, the Gov- ernment has taken various measures. First, under legislation introduced in 1963, the Government has successfully started a program of land consolidation; during the Second Five Year Plan, 1968-72, 190,000 ha, mainly in irrigated perimeters, benefitted. Secondly, the Government has acquired land previously held by foreigners for distribution to the rural poor, both small farmers and landless. Two hundred and twenty thousand ha. were acquired between 1963 and 1965, and legislation passed in 1973 provides for the acquisition now under way of at least a further 326,000 ha. Under a law of 1966 (amended in December 1972) the Government is distributing this land to Moroccan farmers meeting competence, poverty, age and character criteria, recipients being obliged to group themselves into production cooperatives. Some 180,000 ha were distri- buted by the end of 1972, and the Plan target is to distribute a further 395,000 ha by end 1977. Thirdly, the Agricultural Investment Code enacted in 1969 gave powers to the Government to organize agricultural development in irrigated areas. The code provides for transformation of some collectively held land into individually held freehold plots, prevents excessive fragmenta- tion of holdings and obliges farmers to follow a cropping pattern in exchange for various subsidies. The legislation as a whole has been carefully designed to ensure that changes in the tenure system, particularly the transfer of foreign-owned farms to small Moroccan farmers, do not lead to declines in  - 8 - productivity. Implementation, however, is complex and slow due to the limits of the Government's administrative capacity. So far the land reform program has touched only a very small proportion of poor farmers (about 1 percent), and this proportion will rise to only about 5 percent with the implementation of the 1973-77 program. Its impact will, nevertheless, be substantial in irrigated areas, including the Sebou project area, which are being given priority. 25. Government activity in the agricultural sector in Morocco is the primary responsibility of the Ministry of Agriculture and Agrarian Reform. The Ministry's activities are concentrated in the Directorate of Agricultural Development, which operates through prorincial services in rainfed areas, and largely autonomous regional development offices (ORWJA's) in irrigated areas. There are also three public institutions with country wide responsibilities in the sector: The Agricultural Bank (CNCA), the Cereals and Pulses Office (ONICL) and the Export Trade Company (OCE). Two state-owned companies are responsible for managing the land acquired by the Government from foreigners; SODEA, established in 1972 is primarily responsible for managing plantation while SOGETA, established in 1973, is primarily responsible for managing the annual crop land acquired from foreign owners in March 1973, prior to its eventual distribution under the land reform programme. PART IV - THE PROJECT Background 26. The project is located in the Rharb plain, which lies northeast of Rabat and close to the major centers of consumption in Morocco. The Sebou river, the largest river in the country, flows through the plain. The excel- lent agricultural soils on the plain and the large amount of presently un- utilized water in the Sebou river give the region a high potential for the development of agriculture through irrigation. The Bank has been associated with the development of the Rharb plain since 1964, when a loan of $17.5 mil- lion (389-MOR) was made for the Sidi Slimane Irrigation Project, which involved the raising of an existing dam, and the improvement and extension of an exist- ing irrigation network. 27. At the time the Sidi Slimane Project was being executed, a UNDP/FAO study was under way, to determine the optimum outline plan for the overall development of the Sebou basin. This study was completed in 1968, and recom- mended the development for irrigation of 200,000 ha. on the Rharb plain, and the construction of storage dams. In November 1969 the Bank made a loan of $46 million (643-MOR) for the Rharb-Sebou Irrigation project covering the first phase of development. The project consisted of: (a) The construc:ion of the Idriss ler dam at Arabat on the Inaouene river, a tributary of the Sebou.  - 9 - (b) Land reorganization over the project area of 90,000 gross ha., and redistribution of former foreign and state owned land to smallholders and landless families. (c) Land preparation and the construction of new irrigation and drainage systems covering 38,300 net ha. and the improvement of existing irrigation on 5,000 net ha. (d) The improvement of rainfed agriculture over 26,700 net ha. (e) The improvement of roads and crop processing facilities in the project area. (f) Engineering and supervision, including geological studies of the project area; experiments and investigations to determine design criteria for subsurface drainage; and feasibility studies for sugarcane cultivation, and (h) The strengthening and reorganization of the management of ORMVAG, 1/ the regional agricultural development office. 28. The proposed Sebou II Development Project arises from events which could not be foreseen at the time of appraisal of the Rharb-Sebou Irrigation Project, and from studies financed under the project: (a) At the time of appraisal of the Rharb-Sebou Irrigation Project, the risk of severe flooding was not considered sufficient to warrant immediate flood protection works. However, in early 1970 a disastrous flood occurred, affecting almost the entire project area and causing damage estimated at $7.5 million. The flood risk was reassessed, and the Bank agreed to add to the Rharb-Sebou Irrigation Project a study to determine meas- ures to control flooding. The foreign exchange cost of the study ($1 million) was covered by reducing the unallocated cat- egory of the loan. The study showed that in the long-term the development of further upstream storage together with construc- tion of a diversion channel would eliminate the risk of serious flooding but that interim measures were justified to protect against flooding the area already being developed for irrigation under the Rharb-Sebou Irrigation Project. After making allow- ance for the land required for flood protection works and the results of a more detailed land survey, the area to be newly equipped for irrigation was reduced from 38,300 to 35,200 net ha. 1/ Office Regional de Mise en Valeur Agricole du Gharb (Rharb).  l 10 - (b) Experiments carried out under the Rharb-Sebou Irrigation Project have confirmed that the project area is well adapted for the cultivation of sugarcane. However, these experiments also showed that the sugarcane and beet harvesting periods overlap, so that it has not been possible to provide sugarcane processing capacity by adapting the existing sugar beet factory at Mechra-bel-Ksiri, as had originally been envisaged. A new cane processing factory is therefore needed. Traffic congestion arising from the overlap of the harvesting periods also necessitates the strengthening of the road network in the project area to a greater extent than envisaged under the Rharb-Sebou Irrigation Project, and the con- struction of a new bridge over the Sebou River at Mechra-bel-Ksiri. In response to the new situation created by these events, and in order to ensure optimum development of the project area it is proposed to finance flood control works, a new sugarcane processing factory and the improvements to the project area road network mnder a Sebou II Development Project. The project was appraised in November 1973. At negotiations held in Washington in May, 1974, the Moroccan delegation was led by Mr. Abdelaziz Belghiti of the Prime Minister's office. Progress with the Rharb-Sebou Irrigation Project 29. After a slow start, progress in the physical execution of the Rharb-Sebou Irrigation Project has been good, and initial delays have been largely recouped. Construction of the Idriss ler dam is complete, and re- servoir filling is now in progress. Land consolidation is nearly complete for all the area to be irrigated under the project. Work on land levelling and on constructing the irrigation and drainage network is proceeding on schedule. While construction of the irrigation distribution system is slightly delayed, this will not affect the schedule of new areas to be irri- gated each season. Five irrigation sectors, totalling 13,240 net ha., are now operational, practically in line with the rate of development estimated at appraisal. 30. The estimated cost of the Rharb-Sebou Irrigation Project has sub- stantially increased due to physical contingencies, currency realignments and higher actual and forecast inflation rates, particularly since 1973, than envisaged at the time of appraisal in early 1969. The total cost of the proj- ect, excluding the crop processing facilities and road network (originally estimated at $10.3 million), which would now be provided under the Sebou II Development Project, is now estimated to be about $117 million, compared to the appraisal estimate of $86.7 million (in both cases including contingen- cies but excluding interest during construction). This represents an in- crease of 34 percent. The increased costs will be met through the realloca- tion to other items of the $4.6 million included in the Rharb-Sebou Irrigation Project Loan for sugar processing facilities and the road network, and by an increase in the Government's contribution.  - 11 - 31. The Rharb-Sebou Irrigation Project envisaged a major improvement in the structure of land tenure in the project area. The appraisal report for that projeict suggests that up to about 23,500 ha., (out of a project area of 90,000 ha.) of previously foreign owned or private state annual crop land would be arailable for distribution to all smallholders and landless families in the pro:ect area, under the terms of the 1966 Agrarian Reform Law. Progress with land reform has been slower and the amount of land available for redistri- bution may be less than the appraisal report envisaged. By the end of 1973, 3,500 ha. had been distributed to smallholders and landless families and a further 14,500 ha. is available for distribution in the project area; up to about a further 5,300 ha., whose legal status is presently under dispute might also eventually be available for distribution. Furthermore, recent data sug- gest that the number of candidates for land reform benefits is much greater than estimated at appraisal. In this situation, the Government has decided that beneficiaries will be selected from amongst the very poorest smallholders and landless families in the project area. The beneficiaries of land distri- bution will have holdings of at least 5 ha. when distribution is complete, which the Government regards as the minimum viable size for irrigated holdings. The Government has submitted to the Bank a timetable which states that distri- bution of the remaining 14,500 ha., will be completed by the end of 1978. Any additional land which becomes available following the resolution of litigation would be distributed as soon as possible. 32. A part of the land in the project area which has been taken over from foreign owners is under tree crop plantations. The Government is present- ly considering arrangements for the long-term future of these plantations to ensure that their productivity is maintained while the benefits from their operations are spread as widely as possible. Until these arrangements are decided upon, the plantations will not be distributed as smallholdings, and will remain under the management of SODEA and SOGETA (see para. 25). 33. Moroccan legislation provides for the recovery from each farmer of the average operating and maintenance costs and a maximum of 40 percent of the average capital cost of all irrigation and drainage works, including the share of the cost of the dam attributable to irrigation development under the project. Recovery is made through a land betterment levy of DH 1,500 per hectare, and through a water charge which is presently fixed at a base rate of DH 29 per thousand cubic meters within the area of responsibility of ORMVAG. For hold- ings up to 20 ha, the first 5 ha. are exempt from the betterment levy; in ad- dition, farmers can choose to pay the betterment levy through annual instal- lments over 20 years, with 3 years grace and at 4 percent interest. In the early years of irrigated cultivation the amount of the water charge is increased linearly, to reach the full base rate by the fifth year of irrigation. The Government recently carried out a review of these charges as provided for under Section 5.09(b) of the Loan Agreement for the Rharb-Sebou Irrigation Project. No actual data for the operation and maintenance cost for the irrigation net- work is available, since irrigated cultivation has only just begun. Esti-mat- ing depreciation and operation and maintenance costs as percentages of capital costs at current prices, but excluding interest (the method followed in the Rharb-Sebou Irrigation Project Appraisal Report), the review shows that the present level of the charges is the maximum permitted under legislation.  - 12 - The Government has agreed that;in the future water charges will also cover the operation and maintenance cost of the flood protection works (Section 4.06, draft Loan Agreement). It has also agreed to maintain separate accounts for operation and maintenance costs and for revenues derived from the betterment levy and water charges, and that future reviews of water charges would be based on actual rather than estimated costs (Section 4.05(a), 4.05(b), draft Loan Agreement). 34. Cost recovery through the betterment levy and the water charge is progressive with incomes, since the first 5 ha of holdings up to 20 ha are exempt from the betterment levy and since cropping patterns which yield high returns tend to be intensive in water use. Incomes to farmers in the project area are subject to an Agricultural Income Tax and, for higher income groups, a Complementary Income Tax, both of which are progressive. It is estimated that at full development and depending on the cropping pattern, the betterment levy, the water charge and the two incomes taxes will absorb between 14 and 20 percent of income gross of such charges and taxes for a 5 ha holding, rising to 42 to 43 percent for a 50 ha holding. Project Description 35. The project consists of: (a) Construction of earth flood protection dikes and ancillary works to protect the 35,200 ha being developed for irrigated agriculture under the Rharb-Sebou Irrigation Project and to confine flood overspill from the Sebou River to three flood escape channels; resettlement of families now living in the channels; (b) Strengthening of roads and railway tracks in the flood escape channels to prevent damage during floods; (c) Surveys, design and supervision of construction of the flood protection works; (d) The Construction of a sugarcane factory at Mechra-bel-Ksiri with a capacity of 2,500 tons of sugarcane per day over a six-month harvesting season; (e) A study of existing industrial pollution of the lower Sebou River and, if justified by such study, construction of an effluent treatment plant to prevent pollution of the Sebou River by the wastewater of the new sugarcane factory and the existing sugar beet factory at Mechra-bel-Ksiri; (f) Improvement of about 100 km of primary and secondary roads, bituminous surfacing of about 100 km of tertiary and unclassi- fied access roads and construction of a new bridge over the Sebou River at Mechra-bel-Ksiri;  - 13 - (g) Improvement of about 230 km of tertiary and unclassified access roads; (h) Procurement of equipment for maintenance of the roads improved under (g) and for a study by the Regional Office of sugarcane transport; (i) A study of bilharzia infestation iii the Rharb plain and the possibility for its eradication; (j) Training, through a program of fellowships and on-the-job training, of staff of the Regional Office, of the Ministry of Agriculture and Agrarian Reform (Development Service) and of SUNACAS in sugarcane production and processing and exten- sion services. 36. A loan and project summary is given in Annex III. Appraisal Report No. 429-MOR dated June 7, 1974 is being distributed separately to the Executive Directors. Project Execution 37. Execution of physical construction of the project is the respon- sibility of three separate government departments. The flood protection works will be built under the supervision of ORMVAG, assisted by consultants accept- able to the Bank and with technical assistance from the Hydraulic Directorate of the Ministry of Public Works and Communications. Final designs and bidding documents would be prepared for the Hydraulic Directorate of the Ministry of Public Works by consultants. Final designs will be submitted to the Bank for approval and will avoid any risk to the population living within the sectors, should flood-water breach or overtop the dykes. On-going studies for the overall protection of the Rharb plain against floods will continue under the responsibility of the Hydrauli( Directorate. The Government has undertaken that adequate provision will be made in the ORMVAG annual budget for mainten- ance of the flood protection dykes (Section 4.07, draft Loan Agreement). 38. Improvement of bituminous surfaced primary and secondary roads will be executed under the supervision of the Roads Directorate of the Ministry of Public Works and Communications. These are comparatively minor works, well within the capacity of the Directorate, which has completed implementa- tion of a first Bank highway project and is now supervising implementation of a second. Improvement of tertiary and unclassified roads will be carried out by ORMVAG, with technical assistance from the Roads Directorate of the Ministry of Public Works and Communications. Primary and secondary roads will be main- tained by the Roads Directorate of the Ministry of Public Works, and bituminous tertiary roads will be maintained by the Kenitra Provincial Authority. Ter- tiary gravel roads and the roads which remain unclassified following improve- ment will be maintained by ORMVAG, under the technical supervision of the Ministry of Public Works in the case of roads with a bituminous surface (Sec- tion 4.08, draft Loan Agreement). The Government has undertaken to provide ORMVAG with adequate current funds for the maintenance of the roads which re- main its responsibility (Section 4.07, draft Loan Agreement).  - 14 - 39. The construction of the sugarcane factory is being supervised by SUNACAS, a Government owned company, established to own and operate the fac- tory, under the responsibility of the Ministry of Commerce, Industry, Mines and Merchant Marine. Morocco has substantial experience in sugar production from sugar beet and SUNACAS is staffed by a team which is capable of supervising construction of the factory and operating it, once completed; consultant serv- .ces will only be provided under the Project to SUNACAS for acceptance of the factory. The Government has agreed that SUNACAS will appoint a Chief Engineer and a Chemist, with clearly de.'ined responsibility for operation and maintenance of the factory and for processing and process control respectively (Section 4.04(c), draft Loan Agreement)). 40. The timely supply and quantity and quality control of sugarcane to be delivered to the SUNACAS factory is the overall responsibility of ORMVAG, through its sugarcane office. In order to assist ORMVAG in this task in the early stages of the operation of the factory, the project includes consultant services, particularly a sugarcane specialist who will be responsible for advising ORMVAG in experiments to be carried out during the first, 1975, harvest season to determine the best method of transporting cane from the fields to the factory. 41. To ensure the effective execution of its sugarcane development programme, the Government has agreed to reorganize the Agricultural Production Division of ORMVAG (Section 4.04(b), draft Loan Agreement). The intention is to provide services on a crop-specific rather than a job-specific basis, (see organization chart (World Bank 8610) attached to the Appraisal Report). ORMVAG and the Ministry of Public Works would create separate accounts for the flood control and roads components of the project, and audit reports for each ac- count would be submitted to the Bank within six months of the close of each fiscal year (Section 3.05(c), draft Loan Agreement). 42. Both the first and second Rharb-Sebou Projects involve several different agencies for their implementation, and the complex nature of both projects makes coordination between these agencies important. A Project Coordinating Committee, under the chairmanship of the Minister of Agriculture, was established under the Rharb-Sebou Irrigation Project. However, the Commit- tee has met only on rare occasions and lack of effective coordination has im- peded implementation of the project. The Government agreed that in future the Project Coordinating Committee should meet at least once every three months, to approve quarterly progress reports, review past achievements and future work programs of each of the agencies concerned, and ensure that coordination between these agencies is maintained (Section 4.10, draft Loan Agreement). Cost Estimates and Financing Plan 43. Cost estimates are shown in Annex III and are summarized below (excluding import duties and local taxes):  - 15- Millions of US$ Local Foreign Total Flood Protection 6.8 3.6 10.4 Roads and Bridges 5.2 5.2 10.4 Sugar Processing 3.4 13.6 17.0 Effluent Treatment Plant 0.3 0.5 0.8 Consultants, Studies, etc. 0.3 1.2 1.5 Contingencies 5.7 7.9 13.6 Total 21.7 32.0 53.7 44. The Bank loan will finance the full foreign exchange cost of the project, amounting to $32.0 million, 60 percent of total project cost. The Loan will be made to the Government, and that part for financing the foreign exchange cost of the sugar factory will be onlent by the Government to SUNACAS, on terms and conditions satisfactory to the Bank, and at an interest rate not less than that of the proposed Bank loan (Section 3.01(b), draft Loan Agree- ment). The local costs of the project will be-fully financed by the Govern- ment. In the case of the flood control and roads works the Government will provide its share of project costs through normal budgetary allocations. In the case of the sugar factory, the local cost of the plant as well as all necessary funds for pre-operation costs, start-up and working capital will be financed from SUNACAS' authorized share capital of DH 35 million. The Govern- ment has agreed that SUNACAS' accounts would be audited by an auditor accept- able to the Bank, and that audit reports would be submitted to the Bank within five months of the close of each financial year (Section 4.02(a), draft Loan Agreement). Markets 45. Morocco has a high per capita consumption of sugar, at about 25 kg per year. In 1973 total sugar consumption was about 450,000 tons, of which 200,000 tons were imported. Consumption is expected to increase by about 3 percent per year, to about 550,000 tons by 1980. Domestic sugar production began only, in 1963 following a steep though temporary increase in the world residual market price. By the end of the Third Five Year Plan, 1977, Morocco intends to satisfy two thirds of domestic consumption from domestic production. The incremental production of sugar from the project (45,000 tons per year by 1980) will be easily absorbed on the domestic market. The Government main- tains fixed domestic producer prices, in the past considerably higher than the world residual level. At the present high world residual market price, domestic production of sugar receives no protection but in financially at- tractive. Procurement 46. Procurement of all goods to be financed from the loan will be through international competitive bidding in accordance with the Bank's guidelines, and consultants services will be procured under terms and conditions acceptable to the Bank. The Borrower has agreed to group civil works contracts into amounts of at least $1,000,000 to help attract foreign competition.  - 16 - 47. Construction of the sugarcane processing factory has already started, in order to have processing facilities available in time for the first sugar crop in May 1975. Procurement was carried out in accordance with Bank guide- lines and the contract for construction of the factory was awarded to the lowest bidder, Societe Fives-Cail-Babcock of France, on January 22, 1974, for the equivalent of about $17.0 million. Retroactive financing of up to $2 million is proposed. Disbursements 48. Disbursements would be made against: - 80 percent of total expenditures for the sugar factory; - 60 percent of total expenditures for the effluent plant; - 40 percent of the total expenditures for civil works for flood control and resettlement housing; - 50 percent of the total expenditures for civil works for roads and the bridge; - 100 percent of forei,gn exchange costs of equipment for road maintenance and the sugarcane transport study; and - 100 percent of foreign exchange costs of consultants' serv- ices and the overseas training of local staff. Disbursements are expected to be completed by March 1979 (see Annex III for expected phasing). Justification 49. The benefits from the project consist of protection against flood damage of 40,000 ha of irrigated agriculture, improvement of surface communica- tions in the Rharb-Sebou Irrigation project area, and the provision of sugar processing capacity. On the basis of the weighted average annual cost of flood damage in the absence of flood protection works, the economic rate of return to these works is estimated at 11 percent. However, such an estimate takes no account of the possible occurrence of a more damaging than average sequence of floods of different magnitudes and the risk of a major flood early in the life of the project. The economic return to the sugar factory, the largest component of the project, amounts to 15.8 percent, and remains satis- factory under a range of adverse conditions. Foreign exchange savings from substitution for sugar imports will amount to $14 million per year when full capacity operation is reached in 1980. The overall rate of return to the project, charging the cost of the access road network to the increase in sugar production, is estimated to be 15 percent. The combined rate of return to the first and second Sebou projects is estimated to be 8 percent.  - 17 - Ecological Aspects 50. There are several sources of pollution of the Sebou basin river system, amongst the most important of which are the existing sugar processing factories at Sidi Kacem, Mechra-bel-Ksiri and Sidi Allal Tazi, and the pulp mill at Sidi Yahia. The proposed loan includes financing for a study, to be carried out by the Government with consultant assistance, whose purpose will be to determine the incidence of pollution and to examine the economic and technical aspects of their control. It also includes an allocation for the installation of equipment which would treat the effluent from the proposed sugarcane factory and the existing sugar beet factory at Mechra-bel-Ksiri, if this proves necessary. 51. The proposed loan includes financing for a study of the incidence of Bilharzia in the Rharb plaia, and of measures for its eradication. PART V - LEGAL INSTRUMENTS AND AUTHORITY 52. The draft Loan Agreement between the Kingdom of Morocco and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a resolution approving the pro- posed loan are being distributed to the Executive Directors separately. 53. Features of the Agreement of special interest are described in paragraphs 37-42, 44 and 47 of this report. 54. The making of arrangements satisfactory to the Bank for the on- lending to SUNACAS of the portion of the loan allocated to the sugar factory and for other financial assistance to SUNACAS by the Government, would be a condition of effectiveness of the Agreement (see paragraph 44). 55. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 56. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 10, 1974   ANNED I Page 1 of 3 pages ODtITRY DATA - IROmOc: 5-691F/ km 2 n5 ZLN Biion (mid-) 971) 30 Per km I Peir b2f arable land SOCIAL INDICATORS Moroc,co Ntherlands hn.1g2ua T-U 1. OW PER CAPITA US$ (ATLAS BASIS) a 200/b 230 2,430 390 100 SODB.APIIIC lUrWth rats (per thouand) 47 Ic 50 18.3 28 47 Crude death rate (par thousand) 19 7a e 17 8.4 6 21 Infant mortality rate (per thousand live births) 149 150 12.7 18 /f 160-165 a Life expectancy at birth (years) 50 50 74 68 43 Gross reproduction rate /2 1.3 2.2 3.2 Population growth rate a 2.7 1.3 2.9 2.7 Population growth rate - urban 5 .3 /,i 2.5 / 7 Asg structure (percent) 0-14 44 46/h 27.3 40 44 15-64 52 49 7 62.6 57 53 65 and over 4 57? 10.2 3 3 Denendency ratio /4 1.7 2.4 7r 1.0 /k 1.3 /k 1.1 /k Urban population as percent of total 29 /1 35 /hL 78 /m 61 /f 6 Az Family planning: NKm of acceptors cumulative (thoua. 67 979 No. of users (% of sarried women) 3 44 W-LODJT ioesbor force (thousands) 3,300 4,000 /h 4,700 4,600 5,800 Percentage employed in agriculture Sn 55 79 7.2 /n 91 Percentage unemployed 9 9 7W 1.2 4 INOWS DISTRIBUTION Percent of nationsa income received by highest 5% 22 / Percent of national income received by highest 2C% 49 7 Percent of national incomw received by lowest 20% 3 7 Percent of national incoms recsived by lowest 40% 14 7 DIS7RIBUTION OF LAiND