Morocco - Credit Immobilier Et Hotelier Project

Document of The World Bank IE CoPY FOR OFFICIAL USE ONLY Report No. 1926 PROJECT PERFORMANCE AUDIT REPORT MOROCCO: CREDIT IMMOBILIER ET HOTELIER (CIH) (LOAN 704-MOR) February 23, 1978 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its ecatents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT MOROCCO: CREDIT IMMOBILIER ET HOTELIER (CIH) (LOAN 704-MOR) TABLE OF CONTENTS Page No. Preface Basic Data Highlights PROJECT PERFORMANCE AUDIT MEMORANDUM I. CIH and Its Relations with the Bank Prior to 1970 1 - 2 II. Project Objectives 2 - 3 III. Tourism Development 3 - 5 IV. Project Appraisal and Supervision 5 - 6 V. Operations of CIH 6 - 7 VI. Financial Management and Rcle of CIH 7 - 9 VII. Conclusions 9 Attachment:, Project Completion Report I. Introduction A.1 - A.2 II. Objectives and Expectations of the Bank Loan A.2 - A.5 Evaluation of Bank Objectives A.5 - A.7 III. Evaluation of Institutional Developments A.7 Management and Staff A.7 - A.8 Organization A.8 Policies and Procedures A.8 - A.11 IV. Evaluation of Financial Developments A.11 Current Position A.11 - A.12 Capital Structure A.12 - A.13 Profitability A.13 - A.14 Quality of CIH's Portfolio A.14 - A.15 Operations A.15 - A.17 This document has a restri,ted 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. -2- Page No. V. Allocation of Loan Funds and Sub-project Analysis A.17 Cancellations A.17 - A.18 Geographic Distribution A.18 Financial and Economic Impact A.18 - A.19 Project Cost Estimates and Operations A.19 - A.20 VI. Conclusions A.20 - A.21 Annexes: 1. Income Statements: Projected and Actual (1970 - 1974) A.22 2. Cash-flow Statements: Projected and Actual A.23 3. Balance Sheets: Projected and Actual 1970-1974 A.24 4. Loan Operations Actual (1970-1974) and Forecasts 1970-1974) A.25 5. Loan 704-MOR: Hotel Projects Financed A.26 6. Loan 704-MOR: Economic Impact and Financial Operations A.27 PROJECT PERFORMANCE AUDIT REPORT MOROCCO: CREDIT IMMOBILIER ET HOTELIER (CIH) (LOAN 704-MOR) PREFACE This is an audit of performance under Loan 704-MOR for an amount of US$10 million approved to Credit Immobilier et Hotelier (CIH) in Morocco in 1970. This was the first Bank loan exclusively for financing hotels, and had, besides the normal DFC objectives regarding improving appraisal and supervision capabilities, sectoral objectives intended to improve Morocco's competitive ability in the tourism sector. The Project Completion Report (PCR) was prepared by the DFC Division of the Europe, Middle East and North Africa Regional Office and is competent. The audit report is based on the PCR and related documents and discussions with the Bank staff. An OED mission to Morocco was also undertaken in February 1977, when extensive discussions took place with the: Government and with the borrower. The assistance provided during the mission is gratefully acknowledged. PROJECT PERFORMANCE AUDIT REPORT MOROCCO: CREDIT IMMOBILIER ET HOTELIER (CIH) (LOAN 704-MOR) BASIC DATA SHEET Amounts (in US$ m1n) As of 12/31/77 Original Disbursed Cancelled Repaid Outstanding Loan 704-MOR 10.0 8.8 1.2 1.2 7.7 Project Data Actual Eoard Approval August 11, 1970 Loan Agreement August 12, 1970 Effectiveness Jan. 28, 1971 Loan Closing Dec. 31, 1975 Mission Data Month, No. of No. of Year Weeks Persons Manweeks Date of Report Pre-Appraisal May /69 2 4 8 Appraisal Sept/69 2 4 8 July/70 Supervision I Feb /71 *5 2 1 Feb /71 Supervision II May /71 3 3 9 June/71 Supervision III Jan /72 2 2 4 Feb /72 Supervision IV June/73 3 3 9 July/73 Supervision V Feb /74 .5 1 .5 Mar /74 Supervision VI Nov /74 3 4 12 Nov /74 Supervision VII Mar /75 5 1 .5 Apr /75 Follow-on Projects Loan 848-MOR of US$15 million, signed June 1972 for CIH II DFC Project. Loan 1279-MOR of US$25 million, signed July 1976 for CIH III (DFC) Project. FROJECT PERFORMANCE AUDIT REPORT MOROCCO: CREDIT IMMOBILIER ET HOTELIER (CIH) (LOAN 704-MOR) HIGHLIGHTS Loan 704-MOR was the first Bank loan exclusively devoted to hotel financing. Because of the Bank's lack of expertise in tourism at the time this first loan to CIH was made (1970), little progress was achieved during the commitment period of the loan towards the institutional strengthening of CIH and the improvement of related Government policies in the tourism sector. Significant progress in strengthening CIH, however, took place during the period covered by the two following Bank loans to this institution. Other points of interest are: - Slow disbursement under the loan because of sub- borrowers' inability to provide satisfactory documenta- tion for reimbursement (paras. 16 and 17 of the PPAM). - Government's role in the selection process of hotel projects (para. 14 of the PPAM). - CIH's promotion of related activities through subsidiary companies (para. 25 of the PPAM). PROJECT PERFORMANCE AUDIT MEMORANDUM MOROCCO: CREDIT IMMOBILIER ET HOTELIER (CIH) (LOAN 704-MOR) I. CIH and Its Relations with the Bank Prior to 1970 1. The potential of the tourism sector as an engine of development has been evidenced since the mid-1950s in several countries bordering the Mediterranean basin. In 1964, in the context of a master plan for the development of the Mediterranean coastal area, the Government of Morocco asked the Bank for assistance in the development of its tourism infra- structure, and to finance hotel projects through the Government-owned Caisse des Prets Imnobiliers du Maroc (changed to Credit Immobilier et Hotelier (CIH) in 1967). At that time, CIH was a mortgage lending insti- tution with very little project appraisal capability. Since the Bank considered then that tourism was not an appropriate field for Bank financ- ing and since the majority of CIH's capital was Government-owned, it declined to finance the infrastructural components of the tourism master plan or to finance CIH. 2. The Bank, instead, authorized the Banque Nationale pour le Developpement Economique (BNDE), which had by that time received assis- tance from the Bank, to use part of the Bank's loan to finance individual hotel projects, provided that these projects passed the same appraisal tests which vere applied to the industrial projects financed by the Bank. The Government, however, refused to let BNDE take advantage of this line of credit for financing hotels as its policy was to use specialized credit institutions for different types of credit needs and to establish CIH as the only source of lending for the tourism sector. The Minister of Finance then proposed as a compromise that Bank funds be channelled to CIH through BNDE and, in 1966, an arrangement was worked out, setting out the modalities of the BNDE/CIH partnership. Twenty projects for DH25 million were eventually credited to the Bank line under this arrangement, all of which took the form of refinancing by BNDE of loans already made by CIH. 3. In 1968, partly to secure Bank financing, the Government accorded private capital a nominal majority in CIH; by then, however, the Bank's attitude towards lending to publicly-owned DFCs had changed, and CIH became, in 1970, the first institution to receive a Bank loan devoted exclusively to hotel financing. - 2 - 4. Although CIH had been operating as a traditional mortgage lend- ing institution since its establishment, its lending to hotels increased rapidly in the late 1960s and exceeded its housing finance by 1970. Two royal decrees issued in 1962 and 1968 regulate the general operations of CIH and, for all practical purposes, assign exclusively to it the role of financing hotel projects, in addition to financing private residential construction and state-subsidized low-cost housing. The Government took various measures to encourage domestic and foreign entrepreneurs to enter the hotel industry and Government funds became increasingly available to CIH through advances and rediscounting facilities with the Central Bank (Banque du Maroc) to supplement the long-term borrowing obtained from local bond issues to which CDG (Caisse de Depot et de Gestion) and other private financial institutions subscribed at the suggestion of the Govern- ment. From 1960 to 1972, CDG's Director General presided over CIH's Executive Committee which consisted of a Central Bank and SBD (Societe de Banque du Maghteb) representatives. This committee met monthly and handled all loan approvals and general business without need for Board ratification. The management of CIH could not vote in its Executive Committee and in its Board prior to 1970. II. Project Objectives 5. The first US$10 million Bank loan was signed on August 12, 1970; it was guaranteed by the Kingdom of Morocco and the foreign exchange risk was covered by the Government. The loan was for a term of 18 years, including 2.5 years of grace, with interest at 7% and a standard commit- ment charge of 3/4 of 1% per annum on the undisbursed amount of the loan. Disbursements were to be made for the construction, expansion and moderniza- tion of hotel enterprises by financing 100% of the CIF cost of imported equipment, 65% of the cost of imported goods purchased in Morocco and 15% of hotel construction costs which had been estimated as its import compo- nent. A free limit of US$100,000 was set for investment projects above which the Bank's prior approval would be required for the use of Bank funds, and an aggregate free limit of US$2 million was established. The loan was to become effective on November 12, 1970 and to be closed on December 31, 1973, the last date for receiving sub-projects being set at December 31, 1971. However, these dates were postponed several times for reasons discussed in subsequent sections and the loan eventually became effective on January 28, 1971 and was closed on December 31, 1975, after the cancellation of US$1.2 million. A second loan (Loan 848-MOR) was made to CIH in 1972 for US$15 million and a third (Loan 1279-MOR) for US$25 million in 1976. Another tourism loan (Loan 1202-MOR) for US$21 million was made to the Government in 1976 for the development of tourism infrastructure at Agadir. - 3 - 6. The first loan was to cover CIH's foreign exchange requirements for hotel lending operations for only about one year in order to encourage CIH to accelerate the implementation of the institutional changes needed to improve its performance, and in order to give some urgency to discus- sions with the Government on the development of the tourism sector, in general, and the incentive system with its subsidized interest rates, in particular. These discussions on institutional and sectoral issues had been initiated with the Government, BNDE and CIH in the mid-60s and focused on the achievement of three broad objectives: a. General Strategy: The planning and administration of a tourism development strategy which would identify the critical elements needed to enable Morocco to benefit fully from its comparative advantages in tourism. b. InveStment Policy: The development of technical expertise which would ensure the establishment of hotels of suffi- cient financial attractiveness to promote the economic objectives outlined above and the most effective use of resources provided to the sector. Improvements were to be made through a variety of measures including strength- ening project evaluation criteria, particularly as regards the calculation of minimum acceptable financial and economic rates of return on investment, and intensifying follow-up on hotel projects in operations. c. Institution-building: Finally, the contribution of the Bank was aimed at improving the financial strength and management of CIH through a variety of measures including limiting its senior debt to a maximum of six times its borrowing base consisting of its net worth plus subordinated debt; correcting the imbalance existing between the terms of its obligations and those of its lendings by making available to it additional subordinated long-term capital; and establishing better and separate accounts for its hotel and housing operations which would be audited by an internationally reputed firm. In reviewing these objectives, it is impractical to separate the perfor- mance of this first loan from some of the impact of subsequent Bank loans to CIH. Indeed, the development of this first project has to be seen against the background of the discussions and negotiations related to the two following loans. III. Tourism Development 7. The tourism sector has received high priority in Government plans since the early 60s due to the significant impact which its develop- ment was expected to have on foreign earnings and on employment. Hotel construction has been provided with an incentive system which has been the subject of some discussion between the Government and the Bank. As revised in 1973, the incentive system comprises various fiscal and financial reliefs and administrative measures. Fiscal measures cover (i) a 10-year tax holiday for hotels built in tourist resorts and 50% tax reduction for hotels in other areas; (ii) accelerated depreciation in specified cases; and (iii) reduced rates on capital registration and real estate taxes and exemption from purchase taxes on construction materials. Financial incentives comprise (i) an interest-free loan of up to 15% of the investment cost, repayable over 10 years, including 5 years of grace; (ii) a Government-paid rebate on interest on long-term borrowing from CIH -which usually amounts to about 55% of the investment cost -in an amount up to 65% of investment cost, so that the cost of borrowing is reduced to 4 1/2%; and (iii) Government guarantees for 50 to 100% of borrowing from CIH. Finally, the granting of these privileges was made largely automatic by a procedure of clearance through a Technical Committee which comprised representatives of all concerned ministries. 8. In spite of these various incentives, hotel capacity did not reach the ambitious targets of the two last five-year development plans as indicated by the following table: 1968 - 1972 1973 - 1977 1967 Projected Actual Projected Actual Additional hotel capacity (beds) 6,000 3,000 10,000 3,000 (public sector) n.a. n.a. ( 4,400) (2,400) (private sector) n.a. n.a. ( 4,600) ( 600) Hotel capacity (beds) at end of period 55,000 39,000 94,000 54,000 Tourist arrivals (000) per year 400 1,000 1,000 2,500 n.a. Gross annual foreign exchange earnings (DH million) 555 831 n.a. n.a. 9. This shortfall in the expansion of hotel capacity is attributable partly to the slow development of supporting infrastructure and partly to a lower than expected participation by the foreign private sector. However, it is also clear that the targets for hotel construction were seriously over-estimated. 10. Since the mid-1960s, the Bank had identified three major areas where it believed improvements would be made. The first area was the improvement of statistics to acquire better knowledge of the market. A second was the development of an effective method of formulating develop- ment plans and strategies including the types of facilities to be constructed, - 5 - the areas to be developed, the markets to be tapped, and the target growth rate to be adopted. Finally, administrative improvements were needed to implement the plans and the policies which were required to attract domestic and foreign entrepreneurs. 11. The Bank made several suggestions to the planning authorities for improvements in these areas and it also expressed concern about the incentive package on the grounds that it was not based on a proper study of needs (and, therefore, was not selective and might be over-generous) and that it involved a negative rate of interest. However, the Government did not accept these arguments; it considered that, given that the economic return on tourism was higher than the opportunity cost of capital, the Bank's objections were not warranted. 1.2. The resources committed by the Bank in the late 60s and early 70s to the problems of tourism were relatively small. Moreover, little technical assistance was available in this field. Hence, the project did not have any significant impact on the tourism sector. The Government's tourism policies were formulated with little contribution from the Bank except for the role which CIH was expected to play in discussions on the sector with the authorities. However, in connection with the two sub- sequent loans to CIH, discussions on tourism policy were continued. The appraisal of the most -recent loan, made in May 1976, included a preliminary assessment of the incentive system as a result of which it was agreed that the Government and CIH would undertake a more comprehensive study of tourism development including the incentive system. IV. Project Appraisal and Supervision 13. The dialogue between the Bank and the country on the development of the tourism sector formed the background within which the role of CIH and the objectives of the Bank in providing funds to CIH have to be analyzed. If the new hotels, the need for which appeared unquestionable, were to be profitable and of maximum economic benefit to Morocco, they had to be designed, constructed and operated with much more attention to financial and economic parameters. The Bank therefore focused on CIH as a filter that would weed out eneconomic projects. 14. However, at least during its early years, CIH's effectiveness in eliminating unsound projects was limited. There were two major reasons for this. Firstly, CIR had to build up an appraisal capability at a time when little assistance was available to it for this purpose, either from the Bank or anywhere else. CIH's early appraisals were hampered by the 'Lack of experience of its staff, but also by an acute lack of reliable data about the tourism industry. The second reason was that in Morocco all hotel projects had to be approved by a "Technical Committee" wbich checked the technical specifications. Once a project had been approved by the Technical Committee, it was virtually impossible for CIH to turn it down. Moreover, the Committee's own standards and specifications were not published, which also hampered CIH's appraisal and supervision work. - 6 - It was not until 1973 that this situation began to improve and, particularly after a reorganization of CIH which occurred in 1974, the results are now beginning to show. CIH now has at its disposal much improved market infor- mation and it is improving its economic evaluation of projects. These improvements did not, however, have much, if any, impact on the commitment of Loan 704-MOR. Supervision of hotels under operation was not initiated until 1973, with the consequence that there was limited feedback to the appraisal process. There has been an improvement in supervision and further improvements in both appraisal and supervision work should be forthcoming in connection with the most recent loan to CIH which was signed in May 1976. V. Operations of CIH 15. Since the beginning of the decade, the evolutidn of CIH's opera- tions has been characterized by a significant difference between the growth in hotel investments and that in non-tourism--mostly housing--projects. From 1970 to 1974, hotel loan approvals, commitments and disbursements were about half those projected by CIH and the Bank, while housing opera- tions were higher than projected by about a third. As a result, hotel loans as a percentage of total loan commitments dropped from 84% to 34% during this period. Hotel approvals were surprisingly high during 1971 and commitments during 1972, when the investment climate was unfavorable, but disbursements on prior commitments were particularly low during these years. The scale of CIH operations has been constrained by the slower than expected expansion of tourism as already mentioned. 16. Problems with the documentation required for disbursements and the cancellation of two large projects for which funds amounting to 20% of the loan had been committed accounted for the slow rate of disburse- ments and the subsequent cancellation of US$1.2 million from the loan. Some 38 subprojects were financed by the loan as compared to 35 subprojects projected at appraisal. Eight subprojects absorbed about 60% of project financing. In addition, half of the larger subprojects applied to CIH for a second loan to finance equipment requirements; most of these follow- up subloans were funded under the following Bank loan (Loan 848-MOR). 17. About 12% of project funds committed were subsequently cancelled because some sub-borrowers could not provide the necessary evidence of payment of goods and services to the suppliers, which had to be submitted to the Bank prior to disbursement. Since the subloans were to be disbursed for construction rather than for specific items of equipment, the loan agreement had originally specified that disbursement would be made on the basis of an agreed percentage of total construction costs, which varied from about 37% for 5-star hotels to 30% for 3-star hotels. However, by mid-1974, the backlog of disbursement requests not supported by invoices and awaiting refinancing by the Bank amounted to a third of the loan, a situation which induced CIH and the sub-borrowers to resort to a substan- tial amount of short-term credit to ease their liquidity situation. The problem was caused by local practices in hotel construction where, more - 7 - often than not, there was no prime contractor for the project and a large proportion of the works was carried out by small-scale entrepreneurs or by the sub-borrower's own work force. Disbursement procedures were consequently revised in 1972 and 1974 to allow CIH to submit its applica- tions on the basis of the statement prepared by its technical department and certified by the sub-borrower and his architect to the effect that the work for which financing was requested had been completed. Formal evidence of payment was generally retained by CIH and was to be made available to the supervision mission for on-the-spot checking and submit- ted to the Bank as a condition for subsequent disbursements for the same subproject. 18. The estimated economic rates of return on the subprojects financed under this loan range from 11% to 19% (PCR, para. 5.03). These estimates are approximate in that they do not exclude all taxes, the costs do not reflect shadow prices and no benefits external to the hotel are taken into account. Economic return calculations are hampered by the lack of data about the tourist trade, but the situation is improving and, in connection with the most recent loan made to CIH in May 1976, improved methods of appraisal were agreed upon. There is no doubt, however, that the economic benefits to Morocco of the growth of tourism have been substantial. Foreign exchange records from tourism have recently been estimated at US$165 million a year and employment is provided for perhaps 170,000 people. VI. Financial Management and Role of CIH 19. The design and contribution of the first Bank loan to CIH has to be seen in the context of the predominant role assumed by the Govern- ment in the mobilization and allocation of CIH resources. The bulk of CIH resources was mobilized through the financial and monetary institutions of the Government, with IBRD as the only source of external borrowing until 1976. CIH examination of specific hotel projects was made on the basis of approvals ("'visas conformes") given by an interministerial committee, following which CIH appraisal reports were prepared. The CDG, the largest financial institution in Morocco, played a major role in the financing and operations of CIH at the time the loan was made. CIH represented CDG's largest investment in any single enterprise and tourism accounted for about 50% of CDG's total investments. At the time the loan was made, CDG in turn accounted for about a quarter of the equity and a third of the debt raised by CIH. 20. Because of the special position of CIH as an instrument of Government policy in the development of subsidized housing and hotel capacity, its financial management and performance cannot be compared readily with that of private financial institutions. The creditworthiness of CIH is based on the credit and support of the Government, as well as on its mortgage portfolio, rather than on the soundness of its loans for - 8 - hotel projects. CIH has obtained the bulk of its resources through market borrowings, partly from publicly-owned institutions and partly from private institutions at the direction of the Government. The Bank remained until recently the only source of foreign exchange. CIH estimates that over one-half of its portfolio was directly guaranteed by the Government. 21. The ratio of CIH's long-term debt to net worth varied from 17:1 in the mid-1960's to about 8:1 in 1969. Moreover, at the time the project was appraised, the average maturity of CIH's borrowings was about 9 years whereas its lending operations had an average term of about 13 years. 22. The Bank sought to improve the financial structure of CIH by having it observe a prudent debt/equity ratio, and by a policy of match- ing the maturities of its lendings and borrowings and diversifying its sources of external capital. The debt/equity ratio generally remained below the agreed limit of 6:1, until 1976 when it was increased to 7.5:1. 23. CIH did increase its share capital and lengthen the maturities of its borrowings. In addition to retained earnings, CIH raised addi- tional equity of DH20 million (not originally planned for) in 1972. Moreover, between 1970 and 1972, CIH issued bonds subordinated to Bank loans and in term equivalent to a 30-year loan including 15 years of grace, which were subscribed to by CDG. In addition, short and medium term rediscounting facilities from the Banque du Maroc were given long-term standing. 24. The imbalance between the terms of CIH's debts and its lendings persisted, despite some increase in the maturity of its local borrowings. CIH!s efforts to diversify its sources of external capital, aggravated the situation on its foreign account. CIH borrowed US$10 million from the Kuwaiti International Investment Corporation with a 10-year maturity and US$25 million from Citycorp of London with a 5 1/2-year maturity, which were the best terms it could get in the international financial markets. Some imbalance between the terms of CIH's borrowing and its lending still remains but the risk arising therefrom is small in view of CIH's close relation to the Government. 25. CIH made a significant contribution to institutional development by promoting a large number of associated and subsidiary companies. Consortium Morocco Kuwaitian (CMKD), an investment company engaged in real estate, teurism, industry and services, was established in 1976, with CIH holding 35% of its shares and a consortium of Kuwaiti banks 50%. Societe Immobiliere de Construction et de Participation (SICOPAR) was set up in 1973, at the initiative of the Government to produce prefabricated apartment homes and was expected, at least at first, to build for upper and middle income families to relieve the housing shortage in Rabat and Casablanca. Another CIH subsidiary, Farah Maghreb, a hotel promotion compay, was set up to construct hotels. IFC reviewed the project but had doubr about its profitability; it is likely to achieve all but two of its construction projects. SAFIR (ex Europa Maroc), a hotel management - 9 - subsidiary, was set up jointly by CIH, a German hotel chain and private investors; it manages two hotels and is expected to take over management of part of the hotels built by Farah Maghreb. Two other subsidiaries were also established: Promoconsult, to provide technical and engineer- ing advice on hotel investment projects during their construction and operation (mainly to work with Farah Maghreb), and IMEG, a data processing company, to set up an EDP system for CIH and its subsidiaries. Finally, CIH is associated with the creation of a DFC in Gabon with a 50% capital participation. Conclusions 26. The first Loan to CIH, made in December 1970, marked the start of the Bank's involvement with tourism development in Morocco, an involve- ment which was continued with a second loan in June 1972 and a third in May 1976. The objectives relating to the institutional strengthening of CIH and the need for improved policies in the tourism sector have to be seen as long-term objectives rather than as applying to just one loan. In fact, little progress towards them was made during the commitment period of the first loan. To some extent this reflected the fact that, at that time, the Bank's own experience with tourism was limited and it could not arrange sufficient technical assistance for CIH. After the second loan was made, and especially after 1973, there was more significant progress in strengthening CIH, which has now become an effective tourism financing institution. Although, the effective decisions on hotel projects are still largely made by the Government's Technical Committee, CIH is becoming more able to influence the design and organization of the projects. There was less progress towards the objective of rationalizing tourism policy although some gains were made, including, in August 1973, the issue of a revised incentive code for Tourism. However, discussions on general policies for the tourism sector are still continuing. 27. Some of these subsidiaries, such as SICOPAR and Europa Maroc have a promising potential. However, the financial and economic viability of some of the other ventures, such as Farah Maghreb, is not evident, since there are other similar semi-autonomous agencies in Morocco which have the same overall objectives but have not carried them out very success- fully so far. The launching of all these ventures has changed significantly the institutional structure and role of CIH and their financial and economic prospects need to be taken into account in any analysis of the development and efficiency of CIH. Operations Evaluation Department February 23, 1978 - A.1 - COMPLETION REPORT ON THE CREDIT IMMOBILIER ET HOTELIER LOAN 704-MOR I. INTRODUCTION 1.01 This completion report reviews the now fully disbursed loan 704-MOR to the Credit Immobilier et Hotelier of Morocco (CIH), a hotel and housing mortgage financing institution which was founded in 1920. Following a request of the Government in 1965 a Bank appraisal of CIH concluded that CIH was not yet prepared to appraise hotel projects with Bank standards. However, Bank assistance to CIH began indirectly in 1966 when a two-tier arrangement enabled CIH to finance some 20 hotel projects through loan 447-MOR to Banque Nationale pour le Developpement Economique of Morocco (BNDE). The arrangement, however, was cumbersome and somewhat unsatisfactory and was agreed upon merely because the Bank did not feel that CIH's appraisal and supervision procedures would be satisfactory unless they were closely reviewed and monitored in Morocco. However, late in 1968 following a Bank survey of tourism prospects in Morocco, a decision was made to send an appraisal mission. The $10 million loan under review was appraised in May and September 1969, signed on December 8, 1970, and became effective on January 28, 1971. The free limit was set at $100,000 and the aggregate free limit at $2 million. An additional loan to CIH (848-MOR) was signed on June 30 1972 for $15 million and became effective on November 1, 1972. 1.02 The setting and background against which this loan was approved, committed and disbursed are important factors for the present review. In certain respects, this loan was a first-timer. It was the first time that a Bank loan was fully committed to the tourism sector (hotel industry financing). Previously, only one or two DFC Bank loans had financed hotel - A.2 - construction, but only as a limited portion of the overall lending program of a DFC. In 1969, statistical information in Morocco, on tourist bednights, regional development, investment costs and patterns, foreign exchange earnings, seasonalities, etc.,were generally inadequate. Nevertheless, there were sufficient motivations to permit the Bank to share the official view in Morocco according to which the attraction of Morocco to foreign tourism, its natural beauties and advantages and its relative proximity to the European centers made a good case to identify tourism as one of the key priority sectors (together with industry and agriculture) in the country. Overall the Bank knew that this loan to CIH.would be difficult to monitor and that the institution building objective, which was one of the more important aspects of the loan, would represent a serious burden and would be slow. II. OBJECTIVES AND EXPECTATIONS OF THE BANK LOAN 2.01 The Bank's objectives and expectations proceeded from a two pronged strategy aiming at improved Government policies and planning for tourism, based on better statistical information, and institution building through CIH. In broad terms, the Bank's objectives can be summarized as follows: - A.3 - i) make the Government more conscious of the need to base its tourism policy on analyzed priorities. The accent was to be put on determining the most effective system of incentives in order to prevent misallocation of resources. ii) supplement this broad dialogue with the Government by suggest- ing specific criteria for CIH to use to minimize risks of resource misallocation for individual investment projects; CIH's appraisal would thus focus on: a) a critical assessment of investment costs of hotel projects, which so far was not under control; b) the financial soundness of investment projects. ro start with, CIH's projects financed under the loan would have a so-called minimum internal economic rate of return of 10%; c) improving CIH's assessment and knowledge of the tourism market. 2.02 In Oarallel to these broad objectives the Bank also agreed with CIH on corrective measureo related to CIH's operations and finances: (i) the inadequate accounting system needed improvement; (ii) the financial position which was weakened as a result of unpaid claims on the Government and of arrears on the accounts of large hotels; (iii) the imbalance that existed between the terms of CIH's borrowings and the terms of its lending (i.e. loan amortization periods were longer than for borrowings) constrained CIH's debt servicing capability; - A.4 - (iv) CIH's borrowing base which was inadequate as a result of the above and particularly in view of the projected resource requirements; (v) inadequate supervision of hotel borrowers which had led to accumulation of arrears; (vi) the need to-monitor closely project construction, especially with a view to vrevent major cost overruns. 2.03 Specific organizational and financial undertakings were aSreed upon as follows: a) CIH's accounts would be audited by an internationally reputed firm and CIH would continue its recent progress towards better and separate accounts for its hotel and housing operations. b) In order to improve the financial position CDG, CIH's major shareholder,agreed to subscribe to two new 30-year (including 15 of grace) subordinated bond3issued by CIH, totalling to DH 30 million; in order to cover a debt service deficit projected in 1973-74 (and stemming from Government's failure to repay its arrears of payment), CDG also agreed to subscribe to additional 15-year bonds in the necessary amounts. The Government agreed to guarantee the execution of the foregoing arrangements. c) A commitment was obtained from the Banque du Maroc that a short term rediscounting ceiling of DH 85 million granted to CIH would be routinely renewed every year, making it a de facto term facility; should this facility be cancelled at any time - A.5 - the Government agreed to provide long-term resources in the equivalent amount. d) On the basis of the foregoing agreement and of a projected share capital increase of DH 10 million in 1973, CIH's debt/equity ratio would remain below 6:1; given that CIH's portfolio would continue to contain 20 to 25% of well secured mortgage loans a 6:1 debt/equity ratio was deemed prudent and agreed upon. e) Supervision of hotels under construction and hotels in operation would be intensified. f) CIH's organizational structure, management and staff required a complete overhaul as the institution was basically a mortgage financing bank not geared to undertaking appraisals in line with the Bank's standards. However, it was felt that the staff and management could be upgraded to handle the new procedures through intensive on-the-job training and assistance to be provided in the course of World Bank normal supervision. The hiring of an architect and an engineer and the provision that CIH would resort to independent consultants to assist in the appraisal and supervision of large hotel projects, were expected to improve performance in that area. Evaluation of Bank Objectives 2.04 An evaluation, in abstracto, of Bank objectives cannot be meaningful if limited only to the two years of commitment. The evaluation has to be seen as a continuous process of developments up to the present. An importantfea- ture of this loan and of the relationship between the Bank, Morocco's government and CIH regarding tourism, is related to the Government incentives policy in - A.6 - favor of hotel investments. Up to August 1973, Government provided Tourism investors with a substantial package of incentives relying mostly (but not exclusively) on three major components: (a) an equipment grant of 15% of the estimated project cost, b) an interest subsidy of 4.25% p.a. on CIH loans which reduced the effective cost of such loans to 4.5% p.a. for hotel sponsors and, c) various direct and indirect tax exemptions. In 1970, and subsequently, the Bank strongly took issue with the incentives system for two reasons. First, it felt that, due in large part to the inadequacy of appraisal criteria and supervision practices, investment costs were often overestimated by the investors in order to enable them to finance an excessive portion (at times 100%, if not more) of the investment through credit and Government grants. Secondly, it was felt that the low cost of money to hotel investors was, in the absence of monitoring mechanisms, conducive to misallocation of investment and laxity in debt repayment. In August 1973, the Government changed the system of incentives by abolishing the equipment grant which,was replaced by a 10-year interest free loan equivalent to 15% of project cost (excluding land) - other changes included the elimination of exemption from import duties for hotel sponsors. The new code, though an improvement over the previous one in that it shifted incentives away from investment costs towards operations costs, still remains inefficient. The lack of reliable data in the past did not permit a quantitative analysis of the efficiency of the system. 2.05 As regards the institution building aspect of the loan, the objectives set out at the time of appraisal of CIH were predicated upon three assumptions (i) CIH, as an institution, would be responsive to Bank prodding and assistance, and would in the short to medium term evolve into - A.7 - an acceptable (by Bank standards) development finance company; (ii) tourism demand would continue to grow,.and (iii) investment in tourism would follow as a result, and CIH would put into practice the Bank's appraisal techniques. However expectations regarding tourism demand did not materialize to the extent foreseen by the Moroccan Government and the Bank (see para. 4.07). Unforeseen political and economic development in 1971-73, and resulting investors' behavior contributed to slowing down CIH's hotel lending operations (see paras. 4.07 and 5.01). That CIH was able, in the face of such odds, to develop at all into a fairly sound development institution, as this report will try -to demonstrate, is an indication that on the whole the Bank's objectives were well tailored in substance. III. EVALUATION OF INSTITUTIONAL DEVELOPMENTS Management and Staff 3.01 During the 1970-72 period CIH's management changed three times; its Board of birectors was chaired by the Director General of CDG, CIH's main shareholder, while CIH's director-general was not a voting member of the Board. Lack of continuity in leadership greatly affected staff morale and efficiency and led to frequent resignations and changes. This situation was not conducive to implementing Bank objectives and stemmed principally from the unstable polizical climate and ensuing investment slumps between 1971-1973. In Decembe:r 1972, Mr. El Habib El Fihri was appointed General Manager and Chairman of the Board. This change should prove to be a significant one. Mr. El Fihr; a former cabinet minister, was keenly aware of the need for CIH to establish for itself a stronger reputation of professionalism in its decisions and operations. This had also been one of - A.8 - the Bank's major objectives. Mr. El Fihri immediately set out to strenghten the staff, reorganize the institution and make the Board more aware of its role and prerogatives. A program to diversify CIH's operations was initiated in 1973 and led to lending in commercial real estate operations (e.g. land improvement, office buildings) and to the creation of subsidiaries and regional offices. By 1975 CIH's total staff numbered 227, of whom 71 professionals compared to a total staff of 68 in 1970 of whom about 20 were professionals. The caliber of staff has improved in relation to the new stability and impetus provided by Mr. El Fibri's leadership, and in relation to lending operations which grew substantially (para. 4.06). Continued Bank assistance was also instrumental in improving and maintaining the quality of operations. Organization 3.02 A restructuring of CIH's organization was initiated in 1973 and implemented in 1974 following the recommendations of a management consulting firm. The new organization resulted in the establishment of regional branches and the regrouping of operational divisions by functions rather than by sector of activity. Better definitions of responsibilities and smoother work flows were among the first tangible objectives reached. Although some transitional problems surfaced, they have been smoothed gradually and the new organization is now well suited to CIH's requirements. Policies and Procedures 3.03 Policy statement. CIH's objectives and prerogatives are governed by Royal Decrees of 1962 and 1968, its statutes and general laws of the country. Under these laws and regulations CIH has wide powers to lend, invest and guarantee. CIH's Board issued a Policy Statement for the -A.9- _irsL time in 1974 when CIH started investing in new subsidiaries to. implement its promotional policies. Though the Statement was designed principally to monitor ClII's equity investments, it also provided qualitative invest- ment: criteria for CIH's hotel lending operations. While its impact is still limited in practice, owing to insufficiently specific and precise guidelines on either CIH's financial activities, or on its project work, the Policy Statement constitutes an important first step toward CII's Board becoming a more professional and responsible body. 3.04 Appraisal Procedures. Hotel project appraisal by CIH was slow to improve owing both to the complexity of the tourism industry and the lack of experience in CIH and in the Bank itself. The Bank's supervision (i.e. sub-project reviews) had to be deliberately intensive and inquisitive, for the purpose of giving CIH whatever guidance (or education) possible. In order to simplify matters and allow CIH to gradually master the techniques involve , only a simplified economic rate of return calculation was required under Loan 704-MOR. The difficulty in deciding on a methodology for the economic rate of return for tourism resided in the nature oE the "product" involved. Tourism is a service industry and the notion of a tradeable product, while applicable, turns out to be difficult to value (e.g. shadow pricing) when calculating the ERR (see para. 5.03). CIH's first appraisal reports were deficient in many respects, lacked coherent organization and were io.t well substantiated. In many respects the Bank took a calculated risk in approving some projects, (e.g., Bahia I and II in Agadir,. Palais Jamai in Fez, etc.). Improvement was gradual as the unstable management and staff situations hampered the achievement of lasting results until early in 1973. As a result of the 1974 reorganization, the staff is now organized for higher efficiency; morale - A.10 - is high and the desire to achieve high professional standards is starting to show results. CIH, thanks to the systematic collection of market information through a wide-scale program of projects supervision launched in 1974 (see para. 3.06) is now more realistic about its forecast and about the viability of the hotel projects it appraises. Through this process, CIH has gained considerable respect with the Government and the business community. CIH has become increasingly sensitive to its role on the economy and to the need to improve its economic approach to project evaluation. These recent developments had little impact on the commitment of Loan 704; nevertheless, they have had an impact on the disbursement of that loan and on CIH's follow-up of sub-projects. It is also important to recognize that CIH, has been in very close touch with the Bank, asking the Bank for advices and support in a considerable number of issues. Much remains to be done, however, as appraisal criteria need to be reconsidered in light of new findings regarding the system of incentives, and considering that weaknesses persist as regards market studies and economic analyses (see attached appraisal report). 3.05 Project Supervision. Hotels under construction have been routinely supervised by the Technical Division for initiating disbursement procedures. Formal reports on the progress of construction work are not drawn up since the technical division is also heavily involved in appraisal work. For investments exceeding DH 6 million, CIH was required to seek the assistance of independent engineering firms. In the area of project supervision during construction some progress has been achieved in 1969-72. Subsequently, however, with the increase in the number of hotel projects under appraisal or in construction, the technical division became overburdened. CIH - A.11 - resorted, unsuccessfully, to the threat of suspending disbursements to prompt borrowers into closer adherance to construction schedules. Moreover borrowers were reluctant in many instances to pay the fees for the services of the independent engineering firms, as they were required to. Expectations in this regard were only partly met (see para. 5.01). 3.06 Portfolio supervision. It was only in 1974, after the second Bank loan (848-MOR), that CIH set up a fully staffed Portfolio Supervision Division, backed by the Legal Division, to start a thorough follow-up program of hotel borrowers. The belated organization of hotel supervision stems principally from the lack of focus on supervision by CIH's previous management which did not perceive its importance. The division now counts six professionals of good caliber including hotel specialists and financial analysts. The ground lost was being quickly regained as about 40 of the more serious problem projects have received special attention. Moreover, the supervision division has so far carried out regional market surveys in seven of Morocco's main tourist areas and routinely produces detailed supervision reports on problem borrowers, thus building up a yaluable data bank for feedback into appraisal work. CIH's supervision reports are sent to the Bank regularly and are of good quality; they include recommendations to remedy diagnosed shortcomings on all aspects of hotel operations. The supervision division's performance with regard to expectations has been good. IV. EVALUATION OF FINANCIAL DEVELOPMENTS Current Position 4.01 CIH's liquidity remained satisfactory thanks largely to the application of some oE the measures recommended by the Bank (para. 2.03). - A.12 - The current ratio improved to 1.5:1 at end 1974 compared to 1.1 in 1973. However, debt principal repayments remained higher than collection of loan principal installments, particularly at end 1975 (Annexes 2 and 3). As a result proceeds of new borrowings had to be used to meet debt service obligations. Three unforeseen factors are behind this imbalance. Firstly most of CIH's hotel loans were being granted up to five years of grace period whereas virtually all its borrowings are repaid without grace period. Secondly loans are repaid on a level total payment basis (with progressively increasing principal components) while borrowings are amortized on a level principal basis. Thirdly, during the period 1973-74 CIH's loan arrears increased to the point where they were actually affecting the liquidity position (para. 4.04). This situation did not,however,unduly constrain CIH's operations. Under Bank prodding CIH has been implementing measures designed to tighten loan collection procedures, and to better match future loans amortization schedules with those of its borrowings. These measures are beginning to bear tangible results, since the current ratio improved further at December 31, 1975 when it reached 1.8:1. Capital Structure 4.02 Objectives and expectations in regard to CIH's capital structure have geen largely achieved. The share capital reached DH 60 million by end 1974 compared to an expected DH 30 million. The Government granted the DH 30 million subordinated loan; the DH 85 million Central Bank rediscounting facility remained available to CIH, and was increased to DH 100 million in 1974 thus contributing to easing the liquidity position referred to above. - A.13 - The debt/equity ratio remained below 5.5:1, well within the agreed 6:1 limitation. CIH's increased leverage, coupled with renewed investors' interest in tourism, a housing boom and the diversification of CIH's operations in real estate ventures caused its lending to reach record levels in 1975, (para. 4.06). In order to finance this higher level of operation, CIH borrowed slightly more than permitted under the agreed limit during 1975 and was technically in effect in default. CIR had therefore to strengthen its equity base with a new share capital increase but this would have been difficult in the short run as CIH's low profitability would not have allowed for hiAher dividend payments. This required changes in CIH lending rates and an improvement in the arrears situation. In order to allow these measures to take effect, and considering that CIH's well secured housing loans continue to inrease in importance (39% of loans out- standing at end 1975 compared to 29% in 1974),the Bank agreed in May 1976 to permit the debt/equity ratio to increase to 7.5:1. Such a limit is considered prudent in view of CIH's exposure to risks of losses in hotels which are secured not only by valid mortgages but by Government guarantees of up to 60% as well. Profitability 4.03 CIH achieved profitability levels above the forecast figures during 1970-74. Net profits amounted to DH 7.1 million in 1974 compared to DH 5.6 million in 1970, a 27% increase. The interest coverage ratio remained at 1.5:1 and CIH maintained an 8% dividend throughout 1970-74 (Annex 1). This perfornance allowed CIH to raise and remunerate more equity funds as noted above. CIH's profitability,however, did not increase as fast as the volume of its operations, mainly due to lending rates being fixed at 8.75% on both hotel and housing loans during the five - A.14 - year period while financial charges on borrowings increased notably, and administrative expenses more than doubled, reaching DH 8.1 million in 1974. In 1975, interest rates on housine loans were raiRed from R.752 to 10%; hotel lending rates were fixed at 11% in June 1976. Quality of CIH's Portfolio 4.04 At the time of appraisal of this loan in June 1969 CIH's out- standing loans affected by arrears of over 5 months amounted to DH 48 million (24% of total portfolio) of which DH 32.6 million in two hotel loans (23% hotel portfolio). These two loans (to Chellah Hilton and Holiday Inn International) were granted in 1966/67 by CIH under the Government's insistence. Arrears in principal and interest over five months amounted to DH 7.3 million as of June 30, 1969, excluding arrears and dues from the Government on old farm and fisheries loans. Though CIR's risk was considered moderate in view of Government guarantees of up to 60% on hotel loans and first mortgages on all loans, it was deemed necessary to check the growth of arrears. Loarsin arrears of over five months amounted to DH 14.3 million at December 30, 1970; the decrease owes principally to the exclusion of the Chellah Hilton loan of DH 30 million on which a payment was made during 1970. However,in 1971, loans in arrears jumped to DH 56.2 million while arrears, mostly in interest, amointpd to DH 19.4 million. Performance in this regard was thus below ex- pectations, although overdues from the Government were completely repaid by 1972. Persistent weaknesses in CIH's follow-up and collection procedures, delays in construction of hotel projects (para. 5.01) and continued difficulties with Holiday Inn and Chellah Hilton (the latter was again in arrears) com- pounded the arrears situation. Thus,during negotiations for the second loan (848-MOR) to CIH, agreements were reached with the Government to - A.15 - resolve the cases of Holiday Inn and Chellah Hilton, by providing an irrevocable commitment to protect CIH from any loss on its exposure to those borrowers. Furthermore, CIH agreed to limit to 20% of equity its exposure to any single borrower while intensifying supervision procedures and collection of arrears. 4.05 The Holiday Inn and Chellah Hilton loans outstanding amounted to DH 91.3 million at September 30, 1975. CIH's risk of loss in regard to these loans is now fully covered. Following a strengthening of CIH's new legal and supervision divisions, follow-up has improved substantially but should continue to be watched closely as CIH's hotel portfolio continues to grow. While arrears remain a major preoccupation both to CIH and the Bank, a detailed review of the risks involved and securities provided shows that: CIH remains a creditworthy institution. Provisions amounting to DH 7.4 million of December 31, 1975 adequately cover risks of losses on hotel loans. As regards housing loans, CIH has never suffered a loss, and the mortgage guarantee provides more than sufficient security. .Operations 4.06 Annex 4 details CIH's actual and forecast operations during 1970-74. Performance in regard to approvals and commitments is uneven. Housing and other rLon-tourism operations have grown three times as fast as projected with commitments of DH 101 million in 1974 against a forecast of DH 30 million. This is partly due to the diversification of CIH's operations, to the creation of regional offices to reach a wider clientele and to the growing housing shortage in Morocco's sprawling urban centers. Hotel approvals and commitments, however, were generally below expectations except for 1972, when new commitments amounted to DH 72 million compared to a projected DH 70 million. 4.07 The principal cause of the disappointing growth of hotel investments in 1973-75 was that demand for hotel accommodation either did not increase as rapidly as expected or was geographically unevenly distributed. This caused a decline in hotel profitability and investor interest in the sector. Although foreign tourist arrivals reached 1.2 million in 1973 compared to a projected 1 million at the time of appraisal, hotel room occupancy rates were lower than the projected 50% since more tourists were finding accommodations outside hotels than expected, and the average length of stay of hotel customers were shorter than expected. Moreover bed occupancies in the Northern Mediterranean shore(Tangiers) average 30%-40% during the year, with considerable seasonality, compared to over 50% in Marrakech and, particularly, Agadir in the south with less seasonality. However the accommodation capacity of Agadir, which represents 12% of the total in Morocco, has been constrained by lack of serviced land on which to build hotels. 1/ In 1974 tourist arrivals declined by 14% to 1 million as a result of the recession in Europe thus adding more uncertainty to tourism prospects. In 1975 tourist arrivals increased to slightly over 1 million, despite the political events in the Sahara in the last quarter of the year. This is testified to by renewed investor interest during 1975 as measured by CIH's new pipeline of projects. 4.08 Other reasons for the shortfall in new hotel investments were: (a) the cumulation of worldwide inflationary pressures, economic recession and monetary instability, which were unforeseen at the time of appraisal, generally discouraged foreign investors; (b) Morocco's political uncertainties of 1971-72, the expect- ations of new Marocanisation laws, which foreshadowed nationalizations to foreign investors and held the promis of lucrative investment opportunities in industry for Moroccans, further contributed to the investment slump; (c) in 1973, most investments were being held over in expectation of the new investment code which was issued in August 1973. Many hotel constructions were deliberately stopped or 1/ The Bank is helping to solve that problem (see the Appraisal Report on the Bay of Agadir Project No. 918a-MOR dated January 21, 1976). - A.17 - slowed down. Disbursements followed the same pattern as committments with a more marked deviation from projections as regards hotel loans and the use of Bank funds (para. 5.01). Equity investments grew at an unforeseen pace as CIH's new chairman embarked on a policy of creating new subsidiaries to provide CIH with needed institutional backing in the fields of housing, construction, hotel management and investment, and engineering. V. ALLOCATION OF LOAN FUNDS AND SUB-PROJECT ANALYSIS Cancellations 5.01 The loan was fully committed in December 1972, one year behind the original estiutted schedule (paras. 4.06 and 4.07). Subsequently CIH cancelled $1.2 million. The major cause behind the cancellations stems from promoters' inability to adequately justify disbursement requests as required by CIH and the Bank. This question of unsatisfactory documentation also caused disbursements to lag far behind the estimated schedule. Adminis- trative complexities of the system of investment incentives also delayed project implementation as CIH disburses funds only following disbursement of the sponsor's equity and of the Government grant. The creation of a coordinating technical committee under the 1973 Code reduced the red tape without eliminati.ng it. In order to speed up disbursements the Bank agreed to simplify its dis- bursement requirements at end 1974. Thus,the loan was fully disbursed in February 1976 whereas the original closing date was set for December 1973. A consequence of these delays is that about half of the projects financed under this loan are also being partly financed under loan 848-MOR. Some of those projects required equipment loans following completion of construction; for others financing of cost overruns stemming from delays and changes made by promoters was necessary (para. 5.04). Towards the end of 1974 with the return of investor confidence projects started moving again but still slowly. In 1975, the investment pace quickened and as a result disbursements accelerated somewhat. - A.18 - Geographic Distribution 5.02 Annex V gives the geographic distribution of CIH's hotel financing operations. The major tourist areas of Agadir and Marrakech in the South, and Tangiers in the North, received over 75% of Bank funds committed. Generally the geographic distribution of hotel loans reflects the pattern of tourist demand as foreseen at the time of appraisal. Financial and Economic Impact 5.03 As agreed, CIH applied a minimum 10% internal rate of return criterion to screen out marginal projects. Following Bank instructions, CIH calculated first approximation ERR's, without using shadow-pricing techniques, and without deducting indirect taxes from cost estimates. Economic benefits external to the hotels, and economic costs associated to them were also ignored. The Bank proceeded from the assumption that such a criterion would be a good proxy for the full economic rate of return calculation, considering that occupancy rates of financially viable hotels meeting the 10% IRR criterion would attain economically justifiable levels. The criteribn was also predicated upon the availability of reliable infor- mation for CIH to project, with reasonable certainty, future occupancy rates of hotel projects. It appears now that this criterion proved inadequate to screen uneconomic hotel investments, also because early CIH demand projections were often overstated. Following the set-up of the supervision division, a notable improvement was registered in the reliability of CIH's demand and occupancy rates projections. These, however, will not become fully reliable until the quality of basic statistical information in Morocco is radically improved. Projects financed by CIH under this loan depict rates of return ranging from 11% to 19%. Employment and foreign - A.19 - exchange generations are not available in a reasonably reliable fashion for the 25 projects financed over the free limit. The data given in Annex 6 understate the actual employment generated since they provide only jobs in the hotels, excluding indirectly induced employment in tourism linked subsectors (i.e. handicraft, construction)food processing, etc.). It can therefore be inferred that the economic contribution of the projects is important considering the tourism sector's major economic impact detailed in Annex 1 of the attached Appraisal Report. Project Cost Estimates and Operations 5.04 CIH's estimated construction schedules for hotel projects were generally not met owing partly to the many factors detailed earlier (paras. 4.07-5.01). While a number of project constructions were completed on time, delays in granting equipment loans pushed further the scheduled start-up date as CIH required that certain conditions, such as firm management arrangements, be met prior to disbursement of such loans. Another cause for delays stems from promoters who did not fully adhere to original plans, changed design and conception during construction,thus prompting CIH to stop disbursements. In such cases,new loan applications had to be submitted and additional financing from both the promoters and CIH were required in order to avoid foreclosure and minimize losses. Thus the comparison between the originally estimated project costs and the actual cost is a difficult task. On eight projects that were completed roughly on schedule,actual costs surpassed CIH's estimates by 10 to 13%, a good performance considering the degree of uncertainty surrounding CIH's early appraisal work. - A.20 - Twelve out of 25 "A" sub-nrojects are being refinanced partially under Loan 348-11OR: six of those projects ard still under construction. Consequently more reliable data will be obtained at the time of the completion report on Loan 848-MOR. As regards forecast and actual receipts and profits, data were available only on actual receipts. Expectations were not met owing mainly to the negative impact of sagging tourist demand coupled with low hotel prices, especially in Northern hotels. 5.05 It should be emphasized that projects financed under this loan benefitted for the most part from the 1960 tourist investment code which granted them ample fiscal exemptions. Thus, the need to produce accurate financial statements was not there4 in addition, CIH did not carryout appropriate project supervision before 1974. It is indeed to the credit of the newly- created portfolio supervision division to have at all produced the data being used for this corDletion reDort. VI. CONCLUSIONS 6.01 This first Bank loan to CIH had in some respects the characteristics of a sector loan although its institution building impact on CIH turned out to be one of its main achievements. The unforeseen short-falls in tourism demand and investment adversely affected the achievement of some quantitative targets while lack of Government responsiveness and possibly insufficient and inadequately focused Bank prodding considerably delayed the initiation .of a more rational system of ihvestment incentives for tourism and of needed statistical improvements to obtain at least more reliable data on hotel occupancies and tourist arrivals. In spite of these shortconings the Bank can look to a maj.or achievement in regard to CIH which has become a professional and effective tourism development financing institution. - A.21 - Moreover, as thn Government has come to a better perspective of its tourism policies and we have been able to focus our suggestions better the Government has recently agreed with the Bank to accelerate achievement of objectives set out in the first: loan to CIH. Consequently, it may be reasonably said that most of the objectives of loan 704-MOR.are.now well on their way toward being achieved, albeit at a slower pace than initially thought possible. In large degree, this is due to the fact that there has been continuity in the relationship between the Bank and CIH. The Bank's third loan to CIII, which was approved on May 28, 1976 should do much to keep up and strengthen the momentum. EMENA/IC & DFC July 1976 NDW00I CRDIT DMI BIDIn ~ IDT.IJ bomS st~nt Frojsted and Atua ~ 970.1974) (DH Mllion) 1970. Wi W2~ 2 1975 Prol4m Actual ?Meet Actual Projet Achial Project, Actnal Projet ActalawLte iNCO!E Interest and Comid.g±onæ 24.3 23.8 32.2 31.0 39.1 36.5 47.0 42.6 54.3 50.5 66.0 other Income 0.7 2. O.9 . .0.. 2.4 0.8 _1.2 Gr3s Income 25.0 }O.6 47.Q -i5.2 55.1 .51.7 71. n paid 13.7 .0 18.8 16.6 2h.3 18.6 29.6 23.7 35.1 28.5 39.0 Other financial charges - '0.8 2.1 - 0.2 - 1.3 1.3 Total Fihancial E:pmnes U¿Z 14.o 17-2 2205 29.6 ralaries + Wages 1.1 1.2 2.3 1.2 2.5 1.3 3.7 1.3 5.7 7.5 Other operating expenses 1.3 3.9 1.4 2.0 1.Ji 2.3 1.5 3.0 1.5 2.4 4.4 D:preciation 0.9 1.4 1.2 0.8 1.4 1.0 1.6 1.0 1.9 1.4 1.7 Pr,vision 2.0 2.1 102.) 20 -1 2-2 (0-() (1.0) Total EDoense 190 16 2 21.6 0 28 0 6.2 310 2. 8.1 Profit before taxem 6.0 '0.9 8.8 11.9 10.3 10.8 11.6 14.0 13.0 13.4 12.8 I.cone taxes 3.2 5.3 4.1 5.6 4.8 5.1 5.5 6.6 6.2 6.3 6.0 Net Irofit 2.8 566., 6.1 68 7 6.3 rf TI1 ,S Njet profit as % year end F:,are capital: 15.9 28.0 20.0 31.5 23.2 14.2 17.3 18.6 19.5 11.8 11.3 at Proit på % Year-end equity 11.6 13.1 13.5 9.8 10.7 11.0 7.8 Cash diriaents as % not profit 50.4 6 40.0 25 34.5 28.2 46.o 21.2 71.0 Interest coverage ratio 1.8 1.8 1.8 1.6 1.6 1.6 1.6 1.6 1.5 1.5 1.5 FMMN/IC + DFt Ma, 1976 - A.23 - ANNEX 2 C IT IMDBILIER ET HOTELIER CAS-FLO STATEHENTS: Projected and Actual (DR million) 1972 1973 1974 j!roJected Actgl Ptoected Actual Proj ected Actual Cash generation 8.8 8.4 9.9 7.8 11.1 7.5 1Increase Is: LT borrowings 91.4 73.1 100.3 97.5 123.3 162.1 Other debts 6.0 - - Loan collection 19.5 19.1 25.8 17.8 32.6 17.6 Increa6e "a share capital - 20.0 10.0 - - 20.0 Tota Sources 125.7 120.6 146.0 123.1 167.0 207.2 APPLICATIMUS Equity invasats - 0.2 - 4.3 - 10.5 Loe disburmempasts 100.7 81.1 110.0 93.1 115.0 133.9 Bpymnt term debts 13.3 27.6 25.4 29.2 40.0 44.0 Fixed and other assets - 1.3 - 1.9 - 2.5 Total Applicatio*s 114.0 110.2 135.4 128.5 155.0 190.9 Icrease (decrease) 1p 11.7 10.4 10.6 (5.4) 12.0 16.3 vorking capital (excluding -*= short-term portions of log-term debts and of loans, before allocation of net profits) Note: Prior to 1972 the projected cash-flow statement is not comparable to the actual owing to differences in presen- tation. The actual cash-flow is presented on the basis of net variations in balance sheet items. Debt Coverage Ratio: 2.1 1.0 1.4 0.9 1.0 .0 1/ Defined as the ratio of (cash generation plus loan collection) over term debt principal repayments EOE/IC & DFC ay, 1976 - A.24 - WI0CJO: CR:'T T.MOIIE r 'C :, : 5t'..uica Shcctn: Prýec cl a Actual L'? 1970 )71 1"7? 1971 Prolict Aceit!.1 Proiect eAl Proeet Actur} Pr£oi-,t Ac_-l Projed 7,-Fh and 7 8.6 ".2 10.8 2.4 i6.5 5.3 20.4 o.9 19.6 16.9 less: provislons (11.2) (c.3) (13.3) (L.i) ý15.) (7.7) (i.5) .8) (19.8) (57) current raturirties of loans i6.o 22.7 19.5 20.. 2.b 26.8 32.6 3j.1 39.5 37.9 P-Yttes Jue fron rcverrnent 12.0 10.5 6.0 7.- - 9.4 - 2.. -8 Other receivatles 1/ 10.7 1.1 20.3 24.9 23.8 30.8 27.5 31.2 1 Lnin-- end r.ve:.tm.ntc Fotel loals 221.5 208.0 294.2 251.7 354.9 2773 L20.6 313.4 412.0 35.6 Iusing loane 71.5 71.0 89.9 163.7 1L.4 139.4 116. b 19. 130.5 ;3 .2 Other loans 2.6 1.1.1 2.8 0.7 3.2 3.4 3.8 295.6 3d0.0 3"E5 3716"S =7.T -17.1T u70¶ "3.X 7+" "Jo Le3e: Currer.t maturities - - - (20.4) - (26.) - 33.1 - 37.9 1 , 93.6 2:1 386.6 336. 390.3 50 2 AU 616 3 ä Equity investmente 21u-55 ovn t bonde- - - 1.5 2.1 2.8 3.7 Other assets 1.4 1.1 1.2 0.9 1.1 1.0 1.0 1.6 '0.9 2.1 Net fixei assets 2.3 2.4 2.6 1.4 2.6 1.5 2.6 1.8 2.6 *. TOTAL ASSET }_44.4 }2g .8 kM74§9 TOALASSIS 1*1.1 2t8 13.7 392.0 516-6 >109 606-8 4 690.3 Ch 1.tirt,ITIES • EC"UITf Cccounts payable 4.0 18.0 5.0 30.8 5.8 15.5 6.5 26.9 7.3 31.5 Curre,, maturities LT debt .8 25.4 ?9.2 4. .8. T,6ng-term ~debt -- 3 7 _ Bonds outstanding 10.0 11.5 n7.6 u4.4 129.6 133.9 153.8 112.8 180.1 255.3 Subrodir.ated bonds 15.0 - 25.0 30.0 30.0 3C.0 30.0 30.0 30.0 30.0 medium-term notes 60.0 45.0 75.0 62.0 80.0 62.0 70.0 52.0 50.0 *.0 PedsPcounted notes 2/ 93.0 85.0 93.0 85.0 93.0 85.0 93.0 10.0 96.0 ~0.0 BNDE }/ 19.7 23.8 23.8 ?7.3 23.0 27.8 ?0.4 S.1 17.9 23.8 IBRD 6.3 - 47.0 4.6 92.0 13.7 140.5 25.0 195.2 k5.6 BcP - --- - 51.1 - 6.8 Government 4/ + cDG 3.9 3.9 4.0 30. 7¯,.. f3-7.n 5-4" 3n7 1T-0 -A-N, Less: current maturitics - - - 12.8 - 29.2 -:. 3 57 rM M:3 5T27 r-s m.1 Fr*UITY &hare capital 20.0 20.0 20.0 20.0 20.0 40.0 30.0 .0.0 30.0 60.0 Legal reserve 0.7 3.7 0.8 0.9 1.0 1.2 1.3 1.4 1.5 1.8 Investment Reterves 1.6 1.9 2.3 2.9 3.1 3.7 4.0 .8 5.1 5.9 Gea,-ral reserve 1.9 1.9 3.2 4.8 5.4 8.3 8.2 11.3 10.7 114.0 UnappropriateI earnings 3.4 5.0 4.0 5.4 4 .7 4.8 5.2 6.3 5.9 6.0 TOTPL HiABILITI7:S + EQUITY 329. }<:.i_ 433.7 92.0 5,6.6 460.9 606.8 5-.4 9 6u1o 1/ IncludiL.g past-due loan naturities and annuel interect 5/ Fron Ra.qu du Yaroc 3/ IRD fir.ancing through Loan Uh-W7P. to P:E in 1966 / Tre,Gur, aavance, finhing fund, etc.. / Including DH 22.3 inillion from CIXG LT dcbt/year-eni eqAuty 13.0:1 22.6:1 9.6,1 i3.1:1 6.7:1 10.5:1 7.1:1 10.891 6.593 Tebt/yquity (IBRD Agrewent)* 5.9:1 5.8.1 5.8:1 5.8.1 4.8.1 5.5:1 5.5:1 5.8:1 5431 Curvent Ratics 2.7 3.6 2.7 1.1 2.0 1. 1.3 .1 1.1 1.5 *Asmuming D1119 million ao quasi-equity 3MENA/, 1910 Ma.y, 1v1. CREDIT IMOBILIER HOTELIER Loan Operations Actual (1970-1974) and Forecasts (1970-1974) DH millions Approvals Commitments Disbursements Actual Hotels Others Total Hotels Others Total Hotels Others Total 1969 35.0 20.8 55.8 93.8 17.9 111.7 >o.4 6.4 72.U 1970 37.8 36.9 74.7 40.5 36.9 77.14 60.9 24.8 85.7 1971 64.4 54.8 119.2 33.6 54.4 88.0 40.2 36.4 76.6 1972 32.5 57.6 90.1 71.9 53.7 125.6 29.7 51.0 80.7 1973 50.8 58.0 104.8 24.7 51.3 76.0 47.7 %1.0 101.7 1974 34.5 110.1 144.6 52.2 101.0 153.2 53.6 85.2 138.8 Forecasts 1970 60.0 25.0 85.0 62.0 25.0 87.0 73.2 26.0 99.2 1971 70.0 25.0 95.0 80.0 25.0 105.0 79.3 28.0 107.3 1972 80.0 30.0 110.0 70.0 28.0 98.0 70.7 30.0 100.7 1973 70.0 30.0 100.0 80.0 28.0 108.0 80.0 30.0 110.0 1974 70.0 30.0 100.0 70.0 30.0 100.0 60.0 35.0 115.0 EMENA/IC & DFC May, 1976 caR0IT D0LNI u fiT n.T U IAN 70h-!%-: 0M nM F=M aare Location 1 l Africa Palace (C) Agadir o- &O - 12/1971 12/197? 17.905 26.N 9.20 3.M5 5.3 12 Sodet Benå Mellal (C) ]. .nl 258 60 198,g7 Odu7 h0.300 5.238 1,4Wo 1.200 lj.I 53/10 Si/C. Medit (C+E) Narraksch 798 39 800 beem 1971 1971 16.686 15.961 7.», 2.168 5.173 Salam (c) Tarodant 113 75 38 8 1971 1972 2.780 3.m 1.6 515 905 p5/23 New Salam (c+e) Agadir 625 20 373 4 12/1972 12/1973 10.260 12.363 5.~0 2.110 3.152 86 Safari (c) Asilah 121 10 111 4 2 2.851 I/ - 1.5b0 551 763 7 -Sodoimasa * 41 (EU) Tangiere 472 34 d 8.550 - L.ag 1.870 2.583 5/ Bahia II (C) Agadir 1.470 - - 1975 26.980 1.200 6.670 8.113 59 Bahia II * (C) Agadir 550 - 550 - 11.60 - 5.850 2.490 3.522 1 i Sotift (C) AgadUr a69 - 583 / - 1/1972 15.300 - 7.900 1.900 5.502 p12* Xabila * (C) mr-Meti%ng 214 • 159 55 3/1972 7.656 8.863 3.90w 1.193 2.561 313 Furafrique (C) Tagiere 1.115 1.115 - a 1973 18.563 - 9.900 2.763 5.90 -04 F~ama * (C) Tangiers 200 20 180 d 10/1972 /11 5.900 6.930 3.600 900 1.62 *15 Sdih (C) Rabat 351 100 .251 d 12/1971 6/1972 5.500 5.160 2.800 1.000 1.700 116 Solazur * (e) Tanglere 1.134 - 1.136 - 1973 6/1974 20.900 - 12.600 3.100 5.20') $17 Tislit (C) Agadir 805 M05 - a 8/1973 13.292 - 7.070 2.235 3.983 X13 Tafilalet * (C) Marrökech 169 - 169 - 12/1972 12/ 3.05 G.J 1.=20 2.116 Yo >19 ShoiVa Noria * (C) 0.ed eljsh 126 - 126 - 12/972 2/IM3 2.8 3.J 1.31 529 84a 120 Alibaba * (C) Agadir 238 - 238 - 12/1972 4/197k 3.700 5.906 1.900 600 1.200 121 Rf (C) ?ns 326 - 326 - 12/1973 12/1973 5.879 7.517 . 2.123 1.3»0 22. Sheherazade (E) * ? TagirS 180 - 180 12/1973 1973 2.h00 8.374 1. , 24 Sam.r (E) nohefedia 262 - 262 - 12/1973 1973 3.620 11.031 1.60 590 1.143 225 La Floride * (C) 3. Bouknadel 300 - 300 - 1974 6^974 7.835 - -3.762 1.393 2.68 026 Palais Jaal * (C) Fez 542 - 542 - 12/1972 6/197 17.728 19.502 10.000 Sub-total "" projecte - - - 21 La Roserae 14 33 11 d B2 Sim Agadir 44 34 10 d 213/5 Le Lagen 66 31 bd Somadet 82 73 9 d S Salan Tadudant 28 21 7 e B7 Bourquia 62 13 69 d 38 Hotel du Centre 4 - b . B9 C-rand Hotel Ifran 7 - 7 - B10 Splendid Hotel 4 - 4 - Bli Les Truites 16 16 - a B12 La Freenate 12 12 - Su9-total "B" projecte TOTAL 12.061 2.2 .7 Foonotn 1 to ~gu.latione 11 Undistur3ed : $286.000 a. Projact ithd~ran 2/ bAn rupt - not jperating b. 90-day rul. / jr2C,et Stil under constructions c. Prcureo nt of local equipment Projects with an (*) financed under loan 88-MOR d. Uatiafaotory disrent veu8h.ru / ctual investment cost Jicludes subsequent + equipment and/or extnuions ef capfcity W' 2ubsidies include advantages from both the 1968 and 1973 coden ke) -onstructions (-+F) Constructions f equipnent (F) Fxtensions RCfZA I?/lFC MOROCCO CREDIT IMMOBILIER ET HOTELIER LOAN 704-MOR: ECONOMIC IMPACT AND FINANCIAL OPERATIONS Estimated Employment Generated Forecast Receipts Actual Receipts Name FRR Estimated Actual S Normal Starting 1974 (DH'000) Africa Palace 16% 232 280 5.752 8.053 6.718 9.569 Sodet 14% 54 59 1.284 1.828 945 1.134 Sim 25% - - Salam 13% 37 46 1.273 1.844 367 1.131 N. Salam 20% 130 153 4.991 4.991 3.425 4.743 Safari 24% 117 - 1.701 2.552 Socoimasa - 15% 150 - 2.176 3.461 1/ Bahia II 15% - - - - 1/ Bahia I * - 161 - 4.785 6.221 1/ Sotim * 19% 250 - 6.616 8.503 1/ Kabila* 18% 74 121 1.155 2.079 1.452 1.803 Eurafrique 15% 188 - 6.398 8.806 1/ Facoma* 19% 90 20 2.053 2.380 Sdih 18% 56 126 1.372 2.058 2.109 3.102 Solazur * 19% 160 288 5.548 8.827 Tislit 15% 118 - 4.440 5.627 1/ Tafilalet 13% 72 93 1.729 2.195 2.162 Shom * 15% 62 37 1.829 2.236 Ali Baba 12% 105 112 1.552 2.666 954 2/ - Sheherazade* 11% 90 62 2.413 2.919 1.399 863 Samir 15% 120 99 2.872 2.658 1.818 3.228 La Floride* 15% 91 - 4.643 5.918 1.984 2.676 Palais-Jamai * 11% 110 111 2.539 1.769 (*) Project being financed under Loan 848-MOR 1/ Project still under construction 2/ Six months only EMA/IC + DFC May, 1976