Morocco - Fes - Karia - Tissa Agriculture Project

Document of The World Bank FIL E COPY01 FOR OFFICIAL USE ONLY Report No. P-2340-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR A FES-KARIA-TISSA AGRICULTURE PROJECT June 14, 1978 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Equivalents US$1.00 DH 4.30 DH 1.00 = US$0.233. Fiscal Year: Calendar Year ABBREVIATIONS CNCA - Caisse Nationale de Credit Agricole (National Agricultural Credit Institution) CLCA - Caisse Locale de Credit Agricole (local branch of CNCA) MARA - Ministere de l'Agriculture et de la RUforme Agraire (Ministry of Agriculture and Agrarian Reform)  FOR OFFICIAL USE ONLY KINGDOM OF MOROCCO FES-KARIA-TISSA AGRICULTURE PROJECT LOAN AND PROJECT SUMMARY Borrower: Kingdom of Morocco. Amount: US$65.0 million. Terms: Amortization 24 years including a 6-year grace period at the ,standard Bank interest rate. 1/ Relending Terms: US$12.7 million equivalent would be on-lent by the Govern- ment to the National Agricultural Credit Institution (CNCA) at the same interest rate as the proposed Bank loan. The Government would bear the foreign exchange risk. Project Description: The Project aims to (i) improve the standard of living of about 33,900 farm families cultivating about 256,000 hectares in the Fes-Karia-Tissa region of Morocco and (ii) contribute to growth of agricultural production and to a decline in Moroccan dependence on imported food commodi- ties. These aims would be achieved through a reorganiza- tion and strengthening of agricultural services and provision of infrastructure. The Project would provide funds and facilities to increase the productivity of about 20,000 small farmers through access to an improved exten- sion se!rvice and short term credit for the purchase of recommended input packages. A pilot erosion control program on 23,000 ha would include a hillside farming and a wasteland improvement component supported by an adaptive research program. Infrastructure components include road construction, village water supply, and creation of health and education facilities. The Project would be implemented by the Agriculture Ministry's Provincial Service in Fes. Ninety percent of the farm families who would benefit from the Project presently live below the absolute poverty level. The Project would improve Morocco's balance of trade through saving foreign exchange equal to about US$23 million per annum. Risks typical for agriculture and rural development projects have been assessed through risk analvsis and have been accounted for in Project design. The Project is potentially replicable in the remainder of the country's cereal growing region. 1/ These terms are justified on project grounds; it is planned to make com- pensating adjustments in the terms of forthcoming loans to Morocco in order to maintain the standard terms (20 years including a 5-year period of grace) on the country lending program for Morocco. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Project Cost US$ Million Estimates: Local Foreign Total (i) Agricultural Production Services 20.6 6.2 26.8 (ii) Incremental Farm Inputs and Farm Investments 5.0 7.4 12.4 (iii) Roads & Water Supply 22.9 22.6 45.5 (iv) Credit Outlets and Input Supply 3.6 0.3 3.9 (v) Health & Education Infrastructure 6.6 1.3 7.9 (vi) Studies 0.8 1.3 2.1 (vii) Price & Physical Contingencies 37.0 25.9 62.9 Total Project Cost 96.5 65.0 161.5 Financing Plan: US$ Million Local Foreign Total IBRD Loan - 65.0 65.0 Government 85.9 - 85.9 CNCA 8.4 - 8.4 Farmers 2.2 - 2.2 Total 96.5 65.0 161.5 Estimated Disbursements: US$ Million FY 80 81 82 83 84 85 86 Annual 3.0 7.0 12.0 14.0 12.0 10.0 7.0 Cumulative 3.0 10.0 22.0 36.0 48.0 58.0 65.0 Rate of Return: 21 percent. Staff Appraisal Report: No. 2017 MOR of June 12, 1978 Regional Projects Department EMENA  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR A FES-KARIA-TISSA AGRICULTURE PROJECT 1. I submit the following report and recommendation on a proposed loan to the Kingdom of Morocco for the equivalent of US$65 million, to finance a proposed Fes-Karia Tissa ALgriculture Project. The loan would have a term of 24 years including 6 years of grace with interest at 7.50 percent per annum. PART I - THE ECONOMY 2. A report entitled "Country Economic Memorandum on Morocco" (1473-MOR) was distributed to the Executive Directors in June 1977. An economic mission visited Morocco in February/March 1978 in preparation of a basic economic mission scheduled for November 1978. The findings and conclusions of this mission are reflected in the following paragraphs. Country Data Sheets are attached as Annex I. Recent Developments 3. Over the past year, Morocco completed the return towards a parlia- mentary regime. Following the national consensus that had resulted from the Western Sahara issue, King Hassan II called municipal, provincial and national elections between November 1976 and April 1977. Opposition parties with platforms stressing social reform scored strongly in municipal elections in the larger cities, whi]Le at the provincial level, the rural constituencies supported Government candiidates, who obtained a majority of 141 seats out of 264 in the National Assembly. The post-election Government formed in October 1977, brought back into political responsibility the Istiqlal party which had been in the oppositioni since 1963, and the Mouvement Populaire whose main support is in the Berber areas of the country. The new Cabinet was appointed with the explicit mandate to prepare and implement economic austerity measures, the first of which were included in the 1978 Budget Law, and to pursue the social development objectives introduced with the 1973-77 Development Plan. 4. Morocco's economic and financial situation has been less balanced in 1977 than in previous years. The rapid growth of investments and imports, carried over from 1974-75 when phosphate export receipts reached an all-time high, did not slow down despite Government restrictions, while the world demand for Morocco's main exports, especially phosphate, recovered only moderately. At the same tLime, efforts to increase budgetary savings were insufficient to meet the continued increase in expenditures on investment and security. As a resulit, Morocco registered a large resource gap (15 per- cent of GDP) and overall lbudget deficit (15 percent of GDP), not including special military import payments and offsetting external grants. To cover these deficits, Morocco sharply increased external borrowings to $1.7 billion  - 2 - (commitments), from $878 million in 1976 and $710 million in 1975; most were from commercial sources. Despite these borrowings, the country's net foreign assets stayed at a-rather low level (1.2 months of 1977 imports by year's end). On the domestic side, external borrowings have fueled monetary expan- sion which remained rapid in 1977; consumer prices rose nearly 13 percent over 1976 compared to about 8 percent in the previous two years. 5. The Government intends to reverse these unfavorable trends. A first policy package was introduced last fall with the 1978 Budget Law, which cut Government investment expenditure by DH 2 billion (4 percent of 1977 GDP), introduced tax measures which should yield an estimated DH 550 million (1 percent of 1977 GDP) and contained current expenditure in sectors other than education, health and defense. Private credit expansion was limited to 3 per- cent for the first six months of 1978 and a number of imports were subjected to quantitative restrictions or higher tariffs. Implementation of major public projects has been postponed including that of a steel plant at Nador. These measures may cause total investment to decline by 22 percent in 1978 and reduce GDP growth to less than 4 percent, resulting in a substantial reduc- tion in demand for imported capital and intermediate goods. Simultaneously, favorable weather conditions during the past winter should result in record crops enabling Morocco to reduce imports, particularly of cereals. Further, external demand for phosphate rock is picking up and phosphate exports may reach their 1974 peak level without a recovery of prices, however. As a result, Morocco's resource gap may narrow to about 9 percent of GDP in 1978, and external borrowing needs may be reduced to around $1 billion in commitment terms. 6. The policy measures introduced in early 1978 should therefore be quite effective towards re-balancing the economy. They essentially mean retrenchment and will be costly in terms of foregone GDP growth and employ- ment creation. Furthermore, the Government is aware that additional measures will probably be needed late in 1978 in order to achieve the objective of putting the economy back on a financially sound growth path for the medium term. The Government is likely then to adopt a policy mix which will put less emphasis on retrenchment, and give more weight to export promotion and addi- tional tax measures. Status of Planning 7. The Government has decided to postpone introduction of the 1978-82 Plan to take proper account of the country's financial circumstances. It will soon submit to Parliament its policy objectives for the 1978-82 Plan periods. On the basis of discussions in Parliament, an investment program with detailed sectoral proposals would be prepared by the State Planning Secretariat, and the final 1978-82 Plan presented for approval to Parliament early in 1979. In the meantime, ministries and other Government agencies will be operating under the 1978 budget law, which includes projects carried over from the 1973-77 Plan, and a few new projects, and under next year's budget law which is to be approved by Parliament in the fall of this year.  - 3 - 8. Bank projections summarized in Annex I respond to the new Govern- ment's keen concern of avoiding a liquidity crisis in the next two to three years. They assume sharp policy adjustments in order to keep the economy on a financially viable growth path over the long run, but also reflect the Government's desire to maintain adequate GDP and employment growth during the adjustment period, and to achieve further progress towards the country's social objectives. The projections show that investment and GDP growth will have to be curtailed for the next three to four years, given the short-term constraints on savings and exports. In this period, Morocco will need substantial capital transfers from abroad to sustain the projected investment and GDP growth levels; these transfers should be on terms as favorable as possible in view of the debt service limits. Beyond 1982, Morocco's good export prospects should enable it to resume rapid growth of investments, output and employment while progressively reducing the burden of debt and debt service. Economic Development Issues and Prospects 9. In the original 1973-77 Plan, annual GDP growth was to average 7.5 percent, sustained by rapid export expansion (10 percent p.a.) and a doubling of investments between 1972 and 1977. Following the large windfalls in foreign exchange and domestic savings caused by high phosphate prices in 1974-75, the investment target was raised to meet cost increases and some real expansion of original investment programs, and especially to undertake large capital- intensive projects geared to import substitution (in particular sugar, chemi- cals, shipping and steel). 10. The GDP growth target for 1973-77 was nearly met. Investment rose to nearly 32 percent of GDP in 1977 from less than 14 percent in 1972. In the process, Morocco built up its capacity to prepare, implement and absorb projects, not only in traditional sectors such as irrigation, import- substitution industries and physical infrastructure, but also in new and more difficult sectors such as rainfed and small-scale agriculture, export industries, and socially-oriented programs. There is little doubt that Morocco can achieve the investment levels assumed in the Bank projections. 11. The major shortcoming in the past, and the main problem for the years ahead, concerns domestic savings, which returned in 1977 to about the same level (14 percent) as in 1972 after a brief increase to 16 percent during the phosphate windfall years. The reasons lie mainly with the low Government savings of only 4.5 percent of GDP in 1977. Successful efforts to raise current Government revenues to 23 percent of GDP in 1977 were offset by increases in current spending, partly for education and health, but also for price subsidies and military expenses. To increase public savings in future will require tax reform measures, which were called for in the 1973- 77 Plan but were not implemented, and unpopular price policy decisions, such as reducing subsidies to urban consumers, farmers and industrial investors. In particular, improving domestic resource mobilization would require adjust- ing interest rates to reflect changes in the rate of domestic price inflation.  12. During the 1973-77 Plan period, exports rose by less than 2 percent p.a. in real terms (the Plan target was 10 percent). This lackluster per- formance was largely due to weak external demand for Morocco's main export products since 1974, especially phosphate, other minerals and agricultural products. Moreover, with some exceptions, such as textiles, export production and marketing were not sufficiently improved, and new markets were not aggres- sively sought; the dependence on EEC (especially French) demand continued. Yet, Morocco has considerable export potential which can be realized if product and market diversification is pursued aggressively. Export programs are under preparation especially in phosphate, its derivatives, fresh and processed foodstuffs, and tourism. Regarding phosphate, Morocco and the USSR have signed agreements in March, under which Morocco should be able to export phosphate rock and phosphoric acid for the next thirty years in amounts possibly rising to 10 million tons per year by 1985-86; in return, the USSR will lend Morocco up to $2 billion on favorable terms to develop its phosphate export capacity and will export various commodities and goods to Morocco, including crude oil. These agreements substantially improve Morocco's long- term prospects for phosphate exports. 13. While the new Government's stress on completion of high-return proj- ects will have to be continued, a qualitative shift in investment, away from the recent emphasis on highly capital intensive, import substitution invest- ments, as well as from some of its ambitious programs for physical infrastruc- ture, will also be needed. A major study on industrial investment strategy, which consultants are currently completing for the Government, should facil- itate a better investment selection. A changed investment pattern should help both to reduce the external resource gap, and to contribute to growth and employment at lower investment and import costs than in recent years. Social Development Strategy 14. Comparatively slow economic growth and employment creation up to the early 1970's were accompanied by widening income disparities and per- ceptible declines in real consumption for the weaker sections of Morocco's population. The 1973-77 Plan set out, as a national objective, to reverse these unfavorable trends. The Government's strategy since 1973 has empha- sized: (i) acceleration of employment creation; (ii) general measures aimed at reducing income disparities, and (iii) specific investment programs tar- getted on the least favored population groups. 15. Progress has been made towards attaining these objectives, as wit- nessed for example by the increased expenditures for social sectors (from DH 1.3 billion in 1972 to DH 3.7 billion in 1977). However, institutions, often newly established to meet social sector objectives, are in many instances still fragile. Understaffing and weak policy analysis and program formulation are still common in many such institutions. Public programs to improve pro- ductivity, collective amenities and social services are, as a result, reaching relatively small proportions of the large groups, especially in rural areas. To add to this, in the period of financial stringency ahead, Morocco may not be able to sustain the current level of expenditures on socially oriented  - 5 - sectors, and cuts may becomes inevitable in 1979--they were spared in 1978--as part of the measures to re-balance the economy. 16. With the population growth rate now at about 3 percent, the pres- sure to provide adequate social services will increase and it will become increasingly incumbent on the Government, despite its short-term financial constraints, to intensify its effort to limiting such growth. Consequently both health and family planning services will have to be quantitatively and qualitatively strengthened to meet the Government's social objectives. External Debt And Debt Service 17. Morocco has sharply increased external borrowings since 1973 (para. 4). Nearly all of the increase came from Arab and commercial sources. With a hardening of terms on new commitments, average maturity shortened from 19 to 10 years and average interest rose from 5 to 7.5 percent between 1974 and 1977. Morocco also drew on the IMF automatic credit facilities in early 1976, and requested an extension into the conditional tranches in March 1978. From the low levels registered in 1974-75, Morocco's external debt has risen rapidly to an estimated $3.8 billion (disbursed only) at the end of 1977, and in that year debt service amounted to nearly $250 million (13 per- cent of exports; 10 percent of exports and workers' remittances). As a result of recent and projected borrowings, debt and debt service may be expected to increase further, and the debt service ratio may reach a peak of about 23 percent of exports and workers' remittances by 1980-82, and decline progressively thereafter. The country's net foreign assets may be expected to remain at a relatively low level. Because of the expected upswing in debt service, external debt management has become more restrictive and selective in 1978. If debt service is to stay manageable, Morocco will have to continue this policy over the next few years. Additional commercial borrowing should be limited, and increased efforts should be made to seek loans on softer terms. External borrowing requirements are likely to be sizeable. Assuming debt service should not in any year exceed 25 percent of exports and workers' remittances, Bank projections foresee average annual borrowing needs of $1.3 billion in 1978-82 and $1.5 billion in 1983-87 in terms of commitments. Beyond 1980, however, the situation should progressively improve with the Government exercising firm control over domestic demand, and good long-term prospects for exports--in particular, of assured sales of phosphate rock and phosphate derivatives. Morocco should therefore be considered creditworthy for further Bank lending. PART II - BANK GROUP OPERATIONS IN MOROCCO 18. Bank and IDA lencling to Morocco has supported 36 projects, financ- ing a total of $853.9 million (net of cancellations), of which $640 million has been lent since the beginning of FY73. IDA credits, totalling $50 mil- lion, have been made available for five projects. A Third Window loan for $25 million for the third education project was approved in March 1976. IFC investments have amounted to $12.6 million ($10.5 million after cancellations,  - 6 - terminations, repayments and sales). Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of April 30, 1978, and notes on the execution of ongoing IBRD/IDA projects. In some cases, delays in project implementation have been caused by management or procurement difficulties, and in 1974 cost overruns increased due to the upsurge in investment activity in Morocco and the acceleration of inflation. However, overall performance in project execution has considerably improved during the last three years. Total disbursements as of December 31, 1977, amounted to 81 percent of original appraisal forecasts and to 85 percent of revised forecasts. 19. Past Bank Group lending has been concentrated in the agricultural and industrial sectors, which have accounted for 31 and 34 percent, respectively, of total net commitments; the balance is represented by utilities (18 percent), tourism (8 percent), roads (5 percent), education (4 percent) and urban devel- opment (2 percent). Apart from the transfer of resources to Morocco (Bank Group gross disbursements amounted to 5.5 percent of total fixed investment in 1970-74), the main objectives of lending were to foster and strengthen develop- ment institutions, provide technical assistance especially for project prepa- ration, and increase productive capacity, particularly in order to improve the balance of payments. 20. While these objectives remain, greater emphasis is being given to prepare projects that support the Government's policy of fostering social development and improving income distribution. An increasing share of Bank Group lending will be devoted to projects directly or indirectly developing the productive capacity of the lowest urban and rural income groups and meeting their basic needs, including, possibly, Bank participation in the Government's program for promoting integrated regional development, which is under discussion. 21. Past lending for agriculture has supported irrigation development, credit and, through a first operation in FY75, the improvement of the produc- tivity of rainfed farming. Continued selective lending for irrigation is envisaged but emphasis will be increasingly given to support small farmers and the development of rainfed areas. The proposed project would be the second, after the Meknes Project (Credit 555-MOR), to directly address these objectives, with the added advantage of being located in the favorable cereal producing zone. An integrated rural development project, including livestock/ forestry development is under preparation in a rainfed zone in northern Morocco, as are projects aiming at extending agricultural credit to rural farmers and at developing production, marketing and processing of vegetables on small holdings. 22. Projects in industry and tourism have had as key objectives increased foreign exchange earnings or savings and the improvement of sectoral policies. The recently approved eighth loan to BNDE included a pilot small-scale industry component. A follow-up project to promote labor intensive investments is under preparation. A loan to finance the addition of a fourth production line of phosphoric acid for the Maroc Phosphore Plant financed under Loan 1017-MOR is  being presented for the consideration of the Executive Directors concurrently. Continued lending for industry through the Banque Nationale pour le Developpe- ment Economique (BNDE) is contemplated as well as further lending to Credit Immobilier et Hotelier (CIH) for tourism development. A project is also under consideration to assist the Government's efforts to further develop Morocco's ports for the general cargo handling. 23. Previous lending for utilities has consisted of one loan for water supply, two loans for power and one engineering loan for the preparation of a sewerage project for Casablanca. A follow up project for water supply and distribution in urban centers is under preparation, as are a sewerage project in Agadir and a village electrification project. 24. Education continues to need attention in ensuring Morocco's develop- ment. Two credits and a loan have been made to develop secondary education and teacher training, to improve technical and vocational training, and to expand facilities in rural areas. A fourth project with emphasis on technical education is being appraised. 25. In the urban sector, the recently approved Rabat project was the first Bank-financed project. Follow up projects are under consideration to support the Government's program for slum upgrading and urban development through the provision of b'asic infrastructure, housing and social services and the creation of employment opportunities. 26. Loan commitments from multilateral and bilateral official sources to Morocco rose from $221 million in 1975 to $294 million in 1976 and $634 million in 1977. The major sources of aid were France, Saudi Arabia, the UAE, the U.S., Germany and the Bank Group. At the end of 1977, the Bank Group's share in Morocco's outstanding and disbursed external public debt was 10 percent. The share of the Bank Group in debt service was 24 percent in 1976 and declined to a 14 percent in 1977. By 1983 the Bank Group's shares in debt outstanding and in debt service are expected to be about 23 percent and 11 percent, respectively. PAtT III - AGRICULTURAL SECTOR 27. Morocco's population is estimated in mid 1977 at 17.5 million, of which about two-thirds live in rural areas. In recent years population growth has averaged 2.9 percent p.a. overall; growth in the urban and the rural sectors have averaged 5.2 and 1.6 percent p.a. respectively, the difference being accounted for by rural-urban migration. Agriculture contributes about 25 percent of GDP and provides employment for about one-half of the labor force. Agricultural exports account for 25 percent of total exports. 28. Morocco's total cultivated area is estimated at 7.6 million hectares, of which 876,000 are irrigated. Major crops are cereals and pulses which are  - 8 - mostly grown in rainfed areas where production is still generally character- ized by traditional farm practices that result in low crop yields and low incomes compared to the potential of the land. Irrigated areas produce the major part of the country's fruit, vegetables, sugar, cotton and forage. There has been a succession of years with unfavorable weather conditions recently (three out of five during 1973-77); partly for this reason, domestic agricultural production has not kept up in recent years with the growing and changing patterns of demand caused by urbanization and population growth. The result has been a rapid increase in food imports. 29. Past agricultural investments have been heavily weighted towards expensive infrastructure projects, notably the creation of large scale irriga- tion perimeters. Funds earmarked for agricultural development were largely used to construct buildings and purchase equipment. The irrigation sector also benefitted from a large share of the operating budgets allocated to agriculture, the assignment of the best agricultural staff and the major part of Government subsidies, notably for irrigation water. As a result, the recent growth in agriculture has benefitted a minority (12 percent) of farmers growing irrigated crops such as sugar beet, vegetables and wheat. Attempts during the last five years to redress this imbalance and to reach a greater number of traditional farmers in rainfed areas have been constrained by tech- nical difficulties in preparing projects that effectively and economically benefit small farmers and landless farm laborers and by the limited albeit growing absorptive capacity of the Government services. These constraints are reflected in the low ratio of actual to authorized disbursements which averaged about 50 percent during the 1973-77 Plan period. The Government appears determined to redress this situation: under the 1978-82 Plan, the Government is expected to launch a major effort to develop the potential of the rainfed sector (while maintaining momentum in the irrigated sector) and to allocate to it a larger share of financial and staff resources. The system of price subsidies is under review and proposals for increasing irrigation water tariffs and the cost recovery provisions of Agricultural Investment Code are expected. The Government is also considering setting up a national center for agricultural studies to assist it in identifying and preparing priority proj- ects. Future Bank agricultural operations in Morocco are aimed to assist Morocco to establish a better balance between projects primarily benefitting irrigated and rainfed areas and would be largely focussed on small and medium farmers. 30. The effectiveness of the agricultural research and extension ser- vices could be considerably increased, especially in the rainfed areas. Research, which suffers from an overly theoretical orientation, could benefit by being increasingly geared to adaptive research based on farm profitability, with tests carried out under actual farm conditions. The extension services are presently burdened with time consuming administrative tasks which limit their ability to provide technical assistance to farmers. They also suffer from a lack of practical farming experience and a high attrition rate. Out- side irrigation perimeters, the adoption of more modern technology has been constrained by the absence of an integrated approach: past efforts have focussed on the adoption of individual modern inputs (e.g. fertilizers, seeds,  etc.) while their isolated introduction into traditional cultivation patterns has not generally yielded the anticipated benefits. Technical assistance in both the above fields would be useful. USAID has offered assistance to improve agricultural research in rainfed farming areas receiving less than 400 mm. rainfall annually. Solutions to these issues, which have been addressed by the Bank in its sector work and the Meknes and Doukkala II Irrigation proj- ects, are at the core of the proposed project. 31. Distribution of private land in Morocco is relatively skewed; about 50 percent of the farm families have 5 ha or less and own about 20 percent of the total agricultural land. A modest agrarian reform program involving the distribution of some 270,ClOO hectares of land taken over from foreign owners to some 18,000 beneficiaries was carried out during 1973-76. An extension of this program by expropriating large Moroccan holdings is not considered politically feasible and could be costly in terms of production losses. Fur- thermore such a program could at best provide viable sized holdings to less than 5 percent of the mass of the rural population that is landless or owns submarginal holdings. However, there are two land tenure issues requiring resolution: (i) fragmentation of private lands which results in an average parcel (0.5 ha) too small for efficient farming. This issue has been success- fully addressed in irrigation projects and a first step towards replicating this experience in rainfed areas is being carried out under the Meknes Proj- ect. Results could be incorporated into the Phase II Project to be prepared in the Fes-Karia-Tissa region. (ii) Regulation of lands owned by absentee landlords for speculative purposes and tenancy provisions pertaining to these lands. An obligation to cultivate the land and introduction of regulations to increase the security of tenure to provide the tenant farmer with an incentive to invest and improve the land are being considered by the Government. Solu- tions to this issue, however, may only be expected in the medium term. 32. About 45 percent of Moroccan farm families live below the absolute poverty level of $220 and are underemployed. The issues discussed above have acted as constraints in reducing rural poverty and generating employment outside of irrigated areas. Other contributing factors include the limited access of the rural poor to institutionalized credit and a somewhat ineffi- cient input supply system which favors large farmers. Government strategy has evolved considerably and a serious effort can now be expected in the rainfed sector, benefitting a greater percentage of small farmers. As mentioned above, agrarian reform offers little scope for significantly reducing rural poverty or increasing employment. The Bank has increasingly targeted its agricultural projects in Morocco on the rural poor: over 45 percent of Bank financing under the Third Agricultural Credit Project (L-1361-MOR) would benefit small farmers who are also the major beneficiaries of the two Doukkala Irrigation and the Meknes projects. The proposed project addresses these issues and most of the social infrastructure components are directed to small farmers. 33. One of the consequences of increasing population pressure in rural areas is the deterioration of some of the nation's crop and grazing land. In areas such as the pre-Rif, the foothills of the Atlas Mountains, the Sebou and other watersheds, insufficient measures have been taken to control erosion  - 10 - and have met with increasing resistance from the population who have tradition- ally benefitted from use of the land. The proposed Project, and the Loukkos Project now being prepared, are both located in areas facing high erosion risks and would seek to introduce new ways of eliciting farmer acceptance and cooperation for the considerable soil conservation components required within respective project areas. 34. Bank Group lending for agriculture in Morocco began in 1965 and to date 10 projects have been undertaken amounting to a total of $278 million, of which $24 million in IDA credits. They include five irrigation projects: Sidi Slimane (FY65, completed), Sebou I (FY70), Souss Groundwater (FY75), Doukkala I (FY76), and Doukkala II (FY77); three Agricultural Credit Projects (FY66, completed, FY73, FY77); an Agroindustries and Flood Control Project (Sebou II, FY74); and a rainfed Agricultural Development Project in the Meknes region (FY75). Performance has generally been satisfactory except for Sebou II and Meknes Projects. An OED report on the First Agricultural Credit Project in Morocco was discussed in the appraisal of a Third Agricultural Credit Project (Report No. 1308-MOR), December 1976. 1/ It highlighted the low economic return to the farm mechanization financed through the project and noted some weaknesses in the management of the National Agricultural Credit Institution (CNCA). The appraisal report cited above found that CNCA had been considerably strengthened since the first Bank loan. The proposed Project includes no credit for farm mechanization. 35. Performance in irrigation projects suffered initially from problems in land distribution, organization, construction, acquisition of equipment, and cost recovery. Implementation delays have also been caused in some cases by insufficient coordination between participating Ministries and government agencies. During the implementation of the Sebou II Project land acquisition held up the construction of flood protection works. This problem is under review by both the Government and the Bank in light of further irrigation development in the Sebou River Basin. The urgency of this problem was heightened by a flood in 1977 which caused serious damage. The major issues in the Meknes Project concern the execution of the land redistribution program and delays in project implementation caused by lack of interdepartmental and ministerial coordination; they are now well on the way to being resolved. Similar problems should not affect the proposed project since it includes no land distribution component and since the Provincial and Central Committees set up to coordinate the execution of the project components have already been established and have participated in project preparation (see para. 45). PART IV - THE PROJECT 36. Background. The proposed Project was identified in May 1976 by a mission of the FAO/IBRD Cooperative Programme (FAO/CP) and was prepared by the Government with the assistance of several FAO/CP and Bank missions. Its identification and preparation are the outcome of ongoing policy discussions 1/ OED Report: Agricultural Credit Programs, Background Paper No. 4.  - 11 - between the Government andl the Bank on the need to attach higher priority and increase investments to bienefit the rainfed areas in Morocco where 88 percent of the farm population lives and 70 percent of agricultural production origi- nates. The project was conceived to serve as a model for the development of high potential cereal growing areas in Morocco and encompasses a number of innovative approaches to agricultural development which would be carried out on a trial basis. It embodies many of the Government's new ideas for soil conservation, farmer organization, increasing the impact of Government agri- cultural services, including extension, training, credit, input supply at an affordable cost which would permit application of the approaches and programs developed under the project in other rainfed areas with high production potential. The Project also includes the rehabilitation and development of the secondary road network as well as complementary social infrastructure for education, health services, and potable water supply. The Project reflects the increased emphasis accorded by the Government to projects with social objectives: about 90 percent of the Project area population are estimated to be living at or below the absolute poverty level, compared to 45 percent nationally, and most of the Project benefits would accrue to them. Bank appraisal of the proposed Project was undertaken in September/October 1977 and in February 1978. Negotiations for the proposed loan were held in Washington May 12 to 19, 1978. The Moroccan delegation was led by Mr. Belkoura of the Prime Minister's Office. A report entitled "Staff Appraisal Report of the Fes-Karia-Tissa Agriculture Project, Kingdom of Morocco" (No. 2017-MOR) dated June 12, 1978 is being circulated separately to the Executive Directors. The main features of the loan and Project are summarized in Annex III. A map (No. 13377R) of the proposed P'roject area is attached. 37. Objectives and Description of the Project. The primary objective of the proposed project is to improve the living standards of some 33,900 farm families (about 160,000 persons) who cultivate 256,000 hectares or 96 percent of the arable land in the Project area. This would be achieved principally through increasing the agricultural production and farm incomes of about 27,000 farmers, including about 20,000 small farmers who would be the main beneficiaries of the project. It would result in lessening Morocco's recourse to imports of foodstuffs, especially basic commodities such as grains, which have grown rapidly in recent years and become an increasing burden on Morocco's balance of payments. The objectives of increasing rural incomes and agri- cultural production correspond to the sector priorities adopted by the Govern- ment and supported by the Bank. A successful replication of the Project methodologies, including experience gained in coordinating production and infrastructure investments, could contribute substantially to resolving rural development issues. The Project includes a proposal for setting up a moni- toring and evaluation unit to monitor the impact of the project. 38. The Project would consist of the following: - reorganization and strengthening of the extension services, construction of facilities and housing, and provision of equipment for extension staff;  - 12 - a farm management training course for extension agents, overseas training for selected specialists and a home economics course for women; agricultural credit to cover project needs for incremental short term credits and medium and long-term credits for fruit tree plantation, introduction of new lending criteria, and provision of six mobile credit outlets and supporting infra- structure and equipment; improvements to the supply of farm inputs, including con- struction of distribution centers and machinery repair shops; implementation of soil and water conservation measures on a trial basis including programs for hillside farming and wasteland improvement, and supported by an adaptive research and demonstration program; rehabilitation and construction of 414 km of secondary roads and strengthening of road maintenance service; construction of two water supply systems serving about 176 villages, including treatment plant and piped distribution to standpipes; construction of 68 classrooms, teacher housing units and related infrastructure; construction of 4 rural health centers, 1 rural dispensary, housing for staff and provision of equipment; and carrying out of a complementary feasibility study for a Loukkos Rural Development Project and of a feasibility study to prepare a follow up project in Fes-Karia-Tissa Project Area. 39. Extension and Training. Under the Project, the extension services would be strengthened by the addition of 48 agents so that a ratio of 1 agent to about 400 farm families would prevail. Agents would operate out of 18 agricultural centers, one in each of the Project Area's administrative dis- tricts, which would coordinate extension work in all subject matters. Super- vision of these activities would be the responsibility of the Project Manager. Four subject matter specialists would provide backstopping in cereals, pulses, olives and livestock production. The extension program would be reoriented to promote the adoption of higher yielding and profit oriented technical pack- ages for land cultivation principally through direct contact with individual farmers and farmer groups but also through village meetings. An audio-visual support unit would be created to back up extension activities. Administrative  - 13 - tasks presently carried out by extension agents would be transferred to admin- istrative officers to be appointed in each agricultural center (draft Loan Agreement, Section 3.01(a)). As a result it is expected that extension agents will be able to spend at least 75 percent of their time in providing technical assistance. An additional year of training in farm management would be offered to some 30 selected graduates of the Sahel Boutahar Agricultural School located north of the Project area who intend to take up careers in agricultural extension. Priority would be given to assigning graduates of this program to the Project area. A program of home economics for women, including nutrition, basic hygiene and family planning, would be also intro- duced in the school. 40. Credit. The Project would provide incremental short term credit to small farmers enabling them to purchase the modern farm inputs, including seeds, fertilizers, pesticides, and machine services. Credit for farm machinery would not be provided under the Project since an adequate amount of mechanization credit is available, and since more rapid mechanization would have a negative employment and income distribution effect. The staff and facilities of the National Agricultural Credit Institution (CNCA) would be increased in the Project area to administer the increased loan volume and to make credit more accessible to small farmers. In order to reduce the adminis- trative cost per farmer and the risk of defaults, and to permit CNCA to reach a larger number of small farmers, a system of mobile credit vans would be introduced. Small farmers would be encouraged and assisted by extension agents to form groups numbering five to ten members, which would submit joint applications for credit. Repayment would be the joint legal obligation of each farmer's group. New criteria for loan approval would be introduced based on the potential income and repayment capacity of farmers. Credit requirements would be estimated on the basis of the technical package appropriate to the farmer, as recommended by ithe extension agent and appraised by the local CNCA agent. It would replace the existing system which relies on tax declarations to estimate farmers' incomes. 41. Input Supply. Under the Project, responsibility for supplying agri- cultural inputs, including seeds, fertilizers, insecticides, and for providing repair services for agricultural machinery would be shifted from the Govern- ment extension centers to private and public sector suppliers and service cooperatives. They would lease from the Government farm input supply stores and repair shops which would be constructed in each of the 18 agricultural centers. The proposed arrangements would increase che access of small farmers to inputs and facilitate communication between extension agents and suppliers owners. Under the terms of the leases, the lessees would be required to supply farm inputs to farmers in adequate amounts in a timely manner, and at reason- able prices (draft Loan Agreement, Schedule 2, Part C (b)). 42. Hillside Farming, Wasteland Improvement and Adaptive Research. About 130,000 ha or one half of the Project's cultivated area, is sufficiently sloping to require soil and water conservation measures. In addition, there are some 70,000 ha of land that is barren or sparsely covered with grasses or  - 14 - bushes and rapidly eroding. In contrast to previous Government efforts in conservation, which have been largely limited to mandatory tree planting programs on eroding public lands and which have encountered increasing resis- tance from farmers and livestock owners, the Project proposes to follow an experimental and integrated approach to introduce conservation measures on private lands based on voluntary cooperation by farmers. A number of small watersheds would be selected and an overall program of hillside farming and wasteland improvement drawn up. Hillside farming techniques would be installed and demonstrated on a pilot basis on about 6,500 ha based on the introduction of contour farming, grassed waterways, and planting of permanent vegetation by specialized teams attached to the extension centers. Following this demonstra- tion program, cooperating farmers would apply the program to the remainder of their holdings. On wastelands, the Project would begin rehabilitation by planting pine, acacia, and olive trees and establishing gully control and range management measures on a total of some 18,000 ha. Such works would be carried out by specialized teams of foresters attached to the extension centers using hired labor recruited locally. These components would be car- ried out within the legal framework of Morocco's Agricultural Investment Code which provides for soil conservation contracts to be entered into between the Government and farmers. The Bank would be consulted in preparing prototype contracts. Cost recovery is expected to be low (about 20 percent) due to the population's limited ability to pay. The Project also includes a pilot program of adaptive research to be carried out partly on a small station to be created in the Project area and partly on farmers' lands in order to address the specific needs of the hillside farming and wasteland improvement components. If suc- cessful, these components would be expanded during the second phase of the Project and could have far reaching effects throughout Morocco's extensive mountain areas. 43. Infrastructure. The project provides for improvement in the area's road network, education, public health, and water supply systems to complement the agricultural components in improving the population's well being. An all weather secondary road network is a necessary condition to the Project's success, both to assure movement of the increased volume of farm inputs, goods and support services in the Project area and to improve the access of the population to schools, health centers and markets. Due to the hilly terrain, difficult soil conditions and the absence in the past of adequate maintenance services, an existing secondary and feeder road network has fallen into a serious state of disrepair with most of the roads being impassable, at least during the rainy season. The project would provide for (i) the rehabilitation of some 275 km of existing roads and (ii) the construction of some 139 km of roads following the profile and alignment of existing dirt tracks. In view of the high cost of building roads in the Project area, all roads would be built to minimum technical standards, unless justified by traffic projections. In addition, for each road falling in category (ii) above an economic analysis of the production related costs and benefits in the zone of influence of the road would be carried out as part of the detailed engineering; disbursements would only be made for roads serving an area for which a satisfactory economic  - 15 - rate of return can be established (draft Loan Agreement, Schedule 4, Part E 1(a)). Two road maintenance brigades would be created and equipped not later than December 31, 1980, and maintained in operation for the life of the Projects (draft Loan Agreement, Section 4.03). 44. Most of the potable water requirements in Project area are met from shallow wells which only allow for a daily human consumption of 10 liters on average. Water is generally of poor quality, especially in summer when the wells tend to dry up. As the first phase of a long term program to remedy this situation, the Project would provide for the construction of two systems covering about 20 percent of the Project area. Treated water would be piped to standpipes serving some 176 villages with about 46,000 inhabitants and 82,000 animals. The proposed systems are costly to construct and maintain as they would utilize surface water resources. This choice was dictated by the inadequacy of supplies from shallow wells and the impracticability of alter- native systems such as the construction of cisterns or trucking in water which, furthermore, could not permit the substantial increase in both human and livestock consumption projected under the project. In addition to providing access to larger quantities of good quality water, the Project's water supply component would also reduce the time spent in and cost of trans- porting water over long distances. The experience gained under the Project would be used in preparing additional water supply systems to be undertaken in the second phase project .now under preparation. Water tariffs would be set up to fully recover operations and maintenance costs and would be collected from the villages served. A study of the beneficiaries' ability to pay higher tariffs and thereby contribute to investment costs, would be undertaken in the context of project monitoring and evaluation (draft Loan Agreement, Section 3.06 (a)). The public health component would consist of the construction equipment and staffing of four health centers and a rural dispensary which are needed to bring public health facilities up to national norms. Under the edu- cation component sixty eight classrooms would be constructed or rehabilitated in existing schools and teacher housing and other facilities provided. These actions would bring faciLities in the Project area up to national standards. 45. Project Implementation and Management. The Ministry of Agriculture and Agrarian Reform (MARA) would be responsible for the overall execution of the project and would imlplement the extension, training, input supply, hill- side farming and wastela!nd improvement and water supply components. The existing Central Project Coordination Committee chaired by the Director of Agricultural Development, MARA, would be expanded to include representation of all MARA departments and of all other ministries and government agencies involved in the project. It would be responsible for coordination of project activities at the national level. A Provincial Project Committee, chaired by the Governor of the Province of Fes, and including the Project Director, would be responsible for ensuring coordination between all provincial services involved in the Project. The Provincial Director of Agriculture in Fes, who heads all agricultural services in the Province, would be the Project Director. He would be responsible for project implementation and serve as the link between the Project and the Government in Rabat. To assist him in project implementation and supervision, a Project Manager would be appointed by  - 16 - October 15, 1978 (draft Loan Agreement, Section 3.01(a)). A monitoring and evaluation system would be established in order to determine on a timely basis the impact of Project components on Project objectives and to provide informa- tion to the Project's management on the various actions taken by the agencies involved in the Project. This unit would prepare a Project Completion Report (draft Loan Agreement, Section 3.04(c)). The Fes Provincial Directorate of Public Works, Public Health and Education would be directly responsible for the construction, operation and maintenance of the roads, health and education components respectively. The Regional Office of CNCA, in close collaboration with CNCA headquarters, would implement and supervise the agricultural credit component. CNCA has received three Bank loans and has been appraised to be an appropriate recipient of Bank financing. The Project would have a six year construction period and would be completed by December 31, 1984. 46. Consultants and Overseas Training. The project would provide (i) 20 man-years of architects/engineers for the design, construction and supervision of works; (ii) 15 man-years of consultant services required by the innovative character of the medic research and demonstration, extension training and hill- side farming and range management programs; and (iii) 22 man-years of consul- tant services to complete the preparation of the Loukkos Project and prepare a second phase project emphasizing small scale irrigation, livestock and agro- industrial development in the Project area. A total of 57 man-years at an average cost of $7,700 per man-month would be provided. Consulting services for establishing the monitoring and evaluation unit and for other short term needs as may be required during project execution are also provided for. The architects/engineers would be employed on terms and conditions acceptable to the Bank by January 31, 1979 (draft Loan Agreement 3.02(a)). The project would also provide for overseas training of eight months each for 30 appro- priately qualified technicians in skills and techniques not yet widely applied in Morocco. 47. Cost Estimates and Financing Plan. The Project is estimated to cost $161.5 million including physical and price contingencies of which $65.0 mil- lion or 40 percent is in foreign exchange (exclusive of interest during con- struction). Of the total, 86 percent are investment costs, 14 percent are establishment costs (operation and maintenance during project start up). Summary cost estimates are as follows:  - 17 - Local Exchange Cost Cost Total --------US$ Million--------- Agricultural production services /a 20.6 6.2 26.8 Incremental farm inputs and farm investment 5.0 7.4 12.4 Roads and water supply 22.9 22.6 45.5 Credit outlets and input supply 3.6 0.3 3.9 Health and education infrastructure 6.6 1.3 7.9 Studies 0.8 1.3 2.1 Subtotal 59.5 39.1 98.6 Price and physical contingencies 37.0 25.9 62.9 TOTAL 96.5 65.0 161.5 /a Extension, training, wasteland improvement, hillside farming, research, and demonstration, livestock, and monitoring and evaluation. Physical contingencies representing 10 percent of all items except salaries were included in the cost estimate. For civil works, price contingencies were estimated on the bas:is of an annual rate of price increase of 12 percent in 1978-79 and 10 percent thereafter. These price contingencies reflect recent trends in Morocco's civil works industry where inflation persists above the international level. Corresponding rates for equipment and salaries were estimated at 7.5 percent and 7 percent respectively. Overall contingen- cies would amount to 64 percent of the base cost due to the long implementa- tion period. 48. The proposed Bank loan of $65 million to the Kingdom of Morocco would finance Project foreign exchange costs. The financing plan is as follows: US$ Million Government Local Foreign Total % Government 85.9 - 85.9 53.2 IBRD - 65.0 65.0 40.2 CNCA 8.4 - 8.4 5.2 Farmers 2.2 - 2.2 1.4 Total 96.5 65.0 161.5 100.0 CNCA would provide $8.4 million equivalent to finance local currency costs of farm credit and credit outlets. Farm credit would cover about 85 percent of incremental farm input and investment costs with the difference being financed by farmers. The Government would finance the remainder of the  - 18 - Project's local currency costs. The Bank loan would have a maturity of 24 years, including a six-year grace period, at an interest rate of 7.50 per- cent. These terms are justified on project grounds; it is planned to make compensating adjustments in the terms of forthcoming loans to Morocco in order to maintain the standard terms (20 years including a 5-year period of grace) on the country lending program for Morocco. The Government would on-lend to CNCA by May 31, 1979, in sufficient time to finance the 1979-80 agricultural campaign, $12.7 million, an amount equivalent to the estimated foreign exchange cost (including contingencies) of the credit and credit outlets components (draft Loan Agreement, Section 3.01 (c)). An understanding was reached that the interest rate on the funds to be on-lent would be equal to the interest rate on the proposed Bank loan and that the term and grace period would be at least 13 and 3-1/2 years respectively (the terms the CNCA III Loan 1361-MOR) but would not exceed the terms of the proposed loan. The foreign exchange risk would be borne by the Government. The prevailing interest rates charged by CNCA were reviewed in the context of the appraisal of the CNCA III Project and found acceptable. These rates would be applied in the Project area. 49. Procurement and Disbursement. Procurement for road construction, road maintenance equipment, water supply construction and vehicles and equip- ment for agricultural extension services and hillside farming would be made on the basis of international competitive bidding (ICB) according to the Bank guidelines. The contracts which would be bulked to stimulate international interest in the project, would amount to about $63.4 million. Contractors would be permitted to bid on all or part of a "package" of contracts in order to attract local contractors. Procurement of civil work for housing, health and education facilities, administrative and marketing buildings, involving a large number of small contracts and amounting in total to $18.2 million equiv- alent, would be handled through local competitive bidding (LCB) procedures already determined to be satisfactory to the Bank. These items would not be suitable for ICB because of their phasing and their dispersion in the Project area. Procurement by Government agencies of equipment and vehicles on indi- vidual contracts not exceeding $100,000 equivalent and the purchase of agricul- tural chemicals and seeds would be made through existing commercial channels, including domestic and international suppliers, who maintain generally adequate supplies and are suitably competitive. Works related to hillside farming and wasteland improvement, which do not lend themselves to other modes of procure- ment and totalling about $15.8 million, would be undertaken by the Ministry of Agriculture under Force Account arrangements, mostly involving hiring of local labor. Consultants' contracts for agriculture and engineering would cost about $6.4 million. 50. The proposed Bank loan would be fully disbursed by June 30, 1986 and would finance the following items:  - 19 - Loan Amount Disbursement Category Item (US$ million) Percentage I Housing and Buildings 5.5 31 II Civil Works - Water Supply 4.5 41 III Civil Works - Roads 24.5 50 IV Equipment and Vehicles 5.0 100 foreign expenditures or 50% local expenditures V Agricultural Credit 12.5 60 VI Hillside Farming and Wasteland Improvement 4.0 26 VII Consultants and Overseas Training 4.0 100 foreign expenditures or 60% local expenditures VIII Unallocated 5.0 TOTAL 65.0 Retroactive financing in an amount of $50,000 would be provided to cover the foreign exchange costs of the roads engineering study. 51. Project Justification. The Project would assist Morocco to meet its national objectives by (i) improving its balance of trade by saving foreign exchange equal to about $23 million per annum or 4 percent of projected food imports in 1985, (ii) raising the living standards and consumption levels of about 33,900 farm families including the incomes of about 20,000 small farmers; (iii) accelerating economic growth through a rate of return of 21 percent, and (iv) introducing approaches to agricultural production which respond to the major issues in Moroccan agriculture, and which would be replicable. These objectives would be achieved through the systematic introduction of improved farm inputs and practices by the extension and veterinary services, facilitated by the increased farmer access to credit, farm inputs and markets. The health, education, and water supply components were each designed as a least cost response to existing deficiencies in the Project area and are justified by the social benefits they generate. 52. Eighty-five percent of the direct production benefits of the Proj- ect would accrue to members of the farm population presently living at or below the absolute poverty level who are estimated to comprise 90 percent of the total farm population in the Project area. As is typical in rural devel- opment projects, about 20 percent of the farm population is not expected to accept the improved farm practices and hence would recuperate little or none of the net production benefits. These would generally be the smallest farmers on the least viable holdings. Increased employment opportunities generated by the Project, in both agricultural and non-agricultural occupations, would  - 20 - be available to these marginal farmers. The entire Project area population would share in the benefits of the social infrastructure. The Government would recover little of the net production benefits since the tax system is not sufficiently responsive to capture much incremental income from agri- culture. The cost of the credit component, 80 percent of the operation and maintenance costs of the water supply component, and about 20 percent of the costs of the wasteland improvement and hillside farming components would be directly recovered through loan repayments, water and land improvement charges, respectively. All other costs involve non-recoverable Government investment and operating expenditures. 53. Project Risks. The risks inherent in agricultural projects discus- sed by the OED have been considered in the design of this Project. The major risk is that of severe adverse climatic conditions, which occur about one in every five years. In the farm budget and economic analyses this is accounted for by assuming that poor climatic conditions reduce incremental Project pro- duction to zero in one of every five years beginning in Project year three (1981). Despite this assumption, the expected rate of economic return to the country (21 percent), and financial rates of return to farmers (above 50 per- cent), are high and therefore the risk is acceptable from this perspective. In addition, however, poor climatic conditions, especially in the early years of the Project, would hurt small farmers' ability to repay short-term credit. Defaults would weaken the credit institution (CNCA). This risk is minimized by CNCA's willingness to reschedule loan repayments if calamity prevents repayment, coupled with the Government's policy of covering the credit insti- tution's losses. Losses, and hence Government outlays to CNCA, would increase slightly in drought years and decline in good years. A second risk results from the increasing tightness of Morocco's public finance situation which may reduce the availability of local funds. This risk may be considered small in view of the high priority attached by the Government to the project. Thirdly, although the Project was designed to increase the access of small farmers to Government services,, farmers' aversion to risk may inhibit acceptance of the Project's input packages, hence reducing benefits. This was accounted for in the Project analysis by assuming that about 7,550 small farmers (20 percent of farm population) would not accept the improved farm inputs and practices. If 50 percent of Project area farmers refused to implement the Project's techni- cal packages, the rate of return would fall to 6 percent. A fourth Project risk which is suggested by experience with previous agricultural Projects in Morocco is that of delay in Project implementation due to administrative pro- cedures and difficulties in coordinating the different Ministries involved. A one-year delay in the flow of Project benefits would reduce the rate of return to 14 percent. To minimize this risk, the mechanism for Project man- agement and coordination was carefully established during the preparation of the Project (para. 45). A quantitative risk analysis was undertaken for this Project in which subjective probabilities based on engineering, agronomic, and economic judgments were attached to the range of possible Project costs, yields, crop and input prices, speed of development, start-up delays, etc., but assuming that Project components are eventually undertaken as specified in this Project. The result indicates a 90 percent probability that the rate of return would fall between 10 and 30 percent.  - 21 - PART V - LEGAL INSTRUMENTS AND AUTHORITY 54. The draft-Loan Agreement between the Kingdom of Morocco and the Bank, the draft Project Agreement between the Bank and CNCA and the Report of the Committee provided for the Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 55. Special conditions of the Project are listed in Section III of Annex III. 56. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 57. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 14, 1978 Washington, D.C.   ANNEX I Page 1 of 5 TABLE 3A WOROCCO - SOCIAL INDICATORS DATA SHEET LAND AREA (THOU KM2) -