Morocco - Integrated Small Scale Industry Development Project

Document of p y The World Bank L COP FOR OFFICIAL USE ONLY Report No. 2365-MOR MOROCCO STAFF APPRAISAL REPORT INTEGRATED PROJECT FOR SMALL SCALE INDUSTRY DEVELOPMENT March 26, 1979 Regional Projects Department Europe, Middle East and North Africa Region 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 EQUIVALENT Currency Unit = Dirham (DH) US$1 = DH 4.00 (average 1978) FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS BCM Banque Commerciale du Maroc BCP Banque Centrale Populaire BdM Banque du Maroc BMCE Banque Marocaine pour le Commerce Exterieur BMCI Banque Marocaine pour le Commerce et l'Industrie BNDE Banque Nationale pour le Developpement Economique BRP Banque Regionale Populaire CCG Caisse Centrale de Garantie CDM Credit du Maroc CNCA Caisse Nationale de Credit Agricole DFC Development Finance Company ISCAE Institut Superieur de Commerce et d'Administration des Entreprises MCI Ministere du Commerce et de l'Industrie MSI Medium Scale Industrie ODI Office pour le Developpement Industriel PSA Procedure Simplifiee Accelerge SGMB Societe Generale Marocaine de Banque SSI Small Scale Industry SSE Small Scale Enterprise  FOR OFFICIAL USE ONLY MOROCCO INTEGRATED PROJECT FOR SMALL SCALE INDUSTRY DEVELOPMENT Table of Contents Page No. I. INTRODUCTION .................,.,,,.... 1 II. THE MANUFACTURING SECTOR ........................... 2 r A. Past Performance ...................... ... 2 B. Prospects .....................,,,. ... 4 III. THE SMALL SCALE INDUSTRY SUBSECTOR ................. 5 A. Characteristics and Past Performance of SSIs 5 B. Main Development Constraints for SSIs .......... 9 C. Strategy and Prospects for SSI Development , 12 IV. THE FINANCIAL SECTOR ............................... 14 A. Introduction ................................... 14 B. BNDE .......... , ............ 15 C. The Commercial Banks ........................... 15 D. Cost of Capital ......,,,,,,....... 17 E. Existing Mechanisms for Lending to SSIs ........ 18 V. PROPOSED INTEGRATED SSI DEVELOPMENT PROGRAM .21 A. Objectives .............., , . ...... 21 B. Beneficiaries .......................,,.. 21 C. Institutional Arrangements ., , 22 D. Subprogram and Costs .23 E. Policy-Making Unit and Promotional Activities 24 F. Technical Assistance Unit (TAU) ................ 25 G. Lending and Guarantee Subprogram ............... 28 H. Project Justification: Benefits and Risks ..... 33 VI. RECOMMENDATIONS .................................... 35 1. Selected Documents and Data Available in the 38 Project File This report is based on the findings of missions which visited Morocco in April, June and November, 1978. All three missions comprised Messrs. F. Ibanez, M. Diop and F. Ettori. Mr. J.F. Landeau and Ms. K. Nguyen participated in the June mission. Mr. J. Levitsky participated in the November mission. 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.  MOROCCO INTEGRATED PROJECT FOR SMALL SCALE INDUSTRY DEVELOPMENT I. INTRODUCTION 1.01 After a few years of constructive dialogue, the Bank and the Govern- ment of Morocco have now agreed to launch the first integrated SSI development program in the country. Exchange of ideas about an SSI project started in 1975, during preparation of the seventh loan to BNDE. As a result, the eighth loan to BNDE (loan 1428-MOR, 1977) included a pilot component of $5 million, for SSI subloans, to be channeled through BNDE and Banque Centrale Populaire (BCP). In addition, the pilot component proposed a sector study to identify the potential and constraints for development of SSI in Morocco. The study was completed in early 1978 by a consultant 1/. The proposed project will expand the activities initiated under the pilot project and draw upon the conclusions of the above sector study to help get underway the first inte- grated SSI development program in Morocco. Two preparatory missions, in April and June 1978, discussed the project concept and agreed with the Government on a basic project design and on the necessary institutional requirements. A third mission, in November 1978, appraised the proposed project for a possible Bank loan of US$25 million to the Government of Morocco. 1.02 The SSI integrated program would entail creation or build-up of institutions in the areas of policy-making, technical assistance, financial guarantee and financial assistance. Th,-- institutional "software" tc carry out this program was set-up as part of the project preparation and started opera- tions, on a limited basis, before apprai-sal. The proposed Bank loan would aim at: (i) financing small industries through the commercial banking s)stem and BNDE; (ii) financing the establishment c.f a technical assistance uni: in ODI; (iii) financing promotion and identification of SSI by the participating agencies; and (iv) assisting the Government of Morocco in the establishment and strengthening of the institutions involved in the program. The proceeds of the loan are expected to finance over 200 sub-projects and to generate some 5,000 productive jobs, mainly in urban areas. 1.03 This project involves greater implementation risks than traditional DFC loans and will require more than average supervision, largely because of the innovative features in the institutional arrangements and the limited experience in small industry promotion and assistance in Morocco. These dif- ficulties, however, have been taken into account in the design of the project 1/ SORCA-BMB "Etude du Secteur de la Petite Industrie au Maroc", June 1978.  -2- and the Government of Morocco has already given evidence of its strong commit- ment to it through the rapid establishment of the required institutions and through a very significant contribution to the preparation of this project. Furthermore, while some procedures under the project are elaborate, they represent a considerable simplification over the existing situation. In conclusion, the higher risks seem more than balanced by the Government's commitment to the project and by the expected contribution of the project to the development of SSIs in Morocco. II. THE MANUFACTURING SECTOR A. Past Performance 2.01 Over the past ten years, Morocco's manufacturing sector (including handicrafts) has been growing at a healthy 6.3% p.a. in real terms and, in the Third Plan period (1973-77), growth accelerated to 7.2% p.a. Employment in modern manufacturing (excluding handicrafts) totalled 186,000 in 1976 and has been growing at a rate of nearly 6.0% p.a. during the 70's, which is higher than the rate of growth of active population (3.8% during 1971-76). Despite these rates of growth the share of manufacturing in GDP and employment remains modest (16.4% and 11.1% respectively, in 1977) and leaves ample room for addi- tional expansion. Exports of manufactured products also recorded relatively high growth rates (about 10% p.a.in real terms) but they still represent only 10% of manufacturing output and only 24% of total exports. Past industrial growth has been predominantly centered around import substitution in final and durable consumer goods and in basic construction materials. Import substitu- tion policies followed in Morocco over thie last Plan 1/ had serious effects on the balance of payments. Imports of industrial equipment increased from DH 850 million in 1973 to DH 4,970 million in 1977, while imports of raw materials and intermediate goods for industry grew from DH 1,800 million in 1973 to DH 4,350 million in 1977. The balance of payments deficit for manu- facturing amounted to DH 7,250 million in 1977 representing 85% of the coun- try's deficit in the balance for goods and services. 2.02 Investment in manufacturing during the Third Plan period are esti- mated at over DH 6.5 billion as compared to DH 1.9 billion for the previous Plan period. Implementation of large pubiic sector projects and a favorable 1/ "Import substitution" is in many cases a misnomer. "Import reproduction" would be a more accurate description in cases where new factories have been set up to reproduce as closely as pos;sible facsimiles of previously imported or potentially importable products, using designs, brand names and compo- nents of foreign origin and where lit:tle attempt has been made to promote real substitutes that would better suit Morocco's available resources.  -3- investment climate following the enactment of a new Investment Code in 1973 contributed to this considerable increase. This increase came almost exclu- sively from national sources; foreign investors remained aloof mainly because of the "Moroccanisation" laws making it an obligation for most industrial and commercial firms to be at least 51 percent owned by Moroccan nationals. Private investment in manufacturing rose steadily from DH 887 million in 1973 to DH 2,529 million in 1977.1/ Public investment soared from DH 90 million to DH 2,616 million in 1976, as a result of the Government's decision to use increased resources from phosphate sales to accelerate the pace of industrial- ization through investment in basic industries. The decrease in phosphate prices did not allow the Government to continue this policy and investments, in 1977, fell back to DH 290 million. 2.03 Unemployment remains a major problem in Morocco, which has a rate of growth of population of over 3% p.a. In 1977, the number of urban unemployed was estimated to be nearly 340,000 (nearly 13% of the urban labor force). Morocco is one of Africa's most urbanized nations. Since the begin- ning of this century the urban population has increased 15-fold; annual urban population increases have averaged about 4.5% over the last ten years. The country's 1977 population was 17.2 million, with 6.9 million in urban areas. By the end of this century the urban population is expected to have leached 20 million, representing about 60% of Morocco's total population. The most serious problems facing the country's cit:ies are housing shortage and unemploy- ment. 2/ The number of jobs created through investment in the manufacturing sector durir,g the Third Plan period amounited to 75,000 as compared to 30,000 during the previous Plan but fell short of the 90,000 set forth as initial objective. The average cost per job created by manufacturing was about DH 60,000 dLring the Second Plan and increased, in current terms, to DH 90,000 during the Third Plan period. In addition to price increase in capital goods, other reasor,s have favored the increase in capital intensity, among them: the customs exemptions for imported capital ;oods, the interest rebates on indus- trial investment loans and the tax deducJions on investments (acceleiated depreciatior.), which are provided for by the Investment Code. Manuf cturing continued tc be heavily concentrated aloig the Casablanca-Kenitra axis which provides 757 of manufacturing employment3 (54% in Casablanca alone). From the policies adopted and in light of the resalts achieved it appears that over the past five years manufacturing has not sufficiently contributed to either employment creation or to regional development which remain major Go'ernment concerns in Morocco. 1/ Investment in this section is total cost of projects approved under Investment Code provisions, as reported in BNDE Annual Report, 1977. 2/ Urban development issues have been (described in the Staff Appraisal Report (1800-MOR) on the Rabat Urban Development Project, dated February 3, 1978.  - 4- B. Prospects 2.04 Major changes in the economic environment and in industrial policy have recently taken place or are currently in preparation. In 1976, the Government felt the need to take stock of past results and to draw-ut a long term industrial development strategy, with the assistance of a group of foreign consultants. 1/ Drastic measure:; were announced, in May 197&, to rebalance the economy after its record re!source gap (21% of GDP) and budget deficit (19%; of GDP) in 1977; a Three-Year interim Plan has been prelared for 1978-80 stressing the need to reduce non-essential investments and ii,,ports. As a result, GDP is expected to grow by inly 3-4% p.a. over the peri(d 1978-81 and by some 6% p.a. afterwards, with exp)rts increasing 6.5% p.a. M nufactur- ing growth i6-6.5% p.a. during 1978-81) rould be fueled essentially ly the local demanc and substitution of some of the curtailed imports and b, a con- tinuation of the export orientation of s me branches (e.g. textiles, leather). 2.05 Investment in manufacturing is projected by the Plan to reach DH 5.45 billion, of which DH 3.1 billion by the public sector. The sectoral programs for large industries (sugar, cexlent, phosphates) would absorb some DH 3.85 billion. Private investments wouLld comprise DH 1 billion for sugar and cement, and DH 1.35 billion to be in-ested primarily by medium and small industries in their priority subsectors, namely: small chemical units, construction materials, mechanical industries, food processing, wood and textiles/leather. Based on past performance, on analysis of comparative advantages and on resource constraints, i.ndustries based on local resources with adequate supply and those using larl;e amounts of unskilled labor seem to be those with larger growth potential. Among them, construction materials (for the domestic market), phosphates andi some food products (for exports) constitute the first group of industries, the second group of industries comprise essentially clothing, leather products and some metal working indus- tries (e.g. foundries). SSIs using labor-intensive processes are predominant among this latter group (see Table 2.1). 2.06 While the long-term strategy fcr the industrial sector will still require some time to be finalized, the industrial program for the 1978-80 Plan calls for the following Government actions: (i) continuing the on- going sectoral programs for sugar, cement and phosphates; (ii) improving regional distribution of industries through promotion, incentives, industrial estates and other; (iii) strengthening industrial exports by restructaring some subsectors (food industries), enforcing quality controls, and establish- ment of a center for export promotion; (iv) implementing institutionaL mea- sures for development of equipment goods industries; and (v) setting-up the institutional support for development of small and medium industries which 1/ Dar Al liandasah "Etude d'Identification et d'Evaluation des Possibilites d'Investissements industriels." Preliminary reports, August 1977.  - 5 - Table 2.1: MOROCCO: EXPORTS, LABOR INTENSITY, LABOR COST IN MANUFACTURING (1976) Number Exports/ Average Salary of Enterprises Sub-Sector Output Labor/Output SSIs/ Others SSIs/ Others (Manyear/ -(iDH '000 p.a.) 7%) T7T DH Million) Food Industries 11 6 9 14 79 21 Textiles/Leather 21 26 4.5 6.5 85 15 Wood/Paper 12 13 9 13 85 15 Sub-total Traditional Industries 12 12 7 10 83 17 Technological Industries 6 8 13 16 74 26 Overall Manufacturing 10 10 9 12 81 19 /a Defined for statistical purposes as enterprises with 5 to 50 workers. See Chapter II. can create employment at lower cost per job, contribute to regional devel- opment and help integrate the industrial sector. Among several measures under consideration to implement this scrategy are the following: (i) a revision of the investment code to favor labor intensive and selected indus- tries in specific sectors; (ii) various forms of assistance for export-oriented industries; (iii) the starting of a technical assistance scheme for small industries; and (iv) the expansion of vocational training programs. Most of the above actions and measures constitute a welcomed shift in favor of small and medium industries, whose characteristics, as will be seen in the next chapter, allow them to make an important contribution to achieving national goals for employment, regional development and balance of payments. III. THE SMALL SCALI INDUSTRY SUBSECTOR A. Characteristics and Past Peformance of SSIs Definition 3.01 Morocco has a long tradition of craftmanship and business capabili- ties but there is no official definition of SSIs and their importance is not appropriately reflected in the official statistics. The most recent industrial  - 6 - survey, for 1976, which excludes firms with less than 5 employees or activi- ties considered handicrafts 1/, reports about 3,200 small industrial enter- prises with less than 50 employees. Other sources 2/ estimate at 60,000 the total number of small industrial units if firms with less than 5 workers and handicrafts workshops are included. Similarly, employment in the modern industrial sector was reportedly 186,000 in 1976, while total employment in industry, including handicrafts, was estimated for the same year at 400,000. The only admiinistrative definition of SSI presently used is the eligibility threshold for medium term credit by the Central Bank. For that purpose small and medium scale enterprises are jointly defined as those with assets under DH 5 million (US$1.25 million) and annual sales under DH7.5 million (US$1.88 million). 3.02 For the purpose of analysis and for the design of the proposed project the Bank, in consultation with the Government, and taking account of the consultant's survey, defined SSIs as those enterprises having a total cost of project, or total assets after expansion, of less than DH 2.5 million ($625,000) 3/ and a capital/labor ratio under DH 40,000 in prices of 1978 (see para. 4.03 for detailed definition of sub-groups of beneficiaries). Firms in the above target group will generally employ less than 50 workers and, while there will be no lower limit in the size, the majority will most probably employ more than 5 workers. To a large extent, therefore, the charateristics of the target group can be assimilated wuth those of the 5-49 workers segment of the 1976 industrial survey. Sectoral Characteristics of SSIs 3.03 Based on the Industrial Survey of 1976, the target group covers about 3,200 firms employing over 43,000 workers. They represent 81% of all establishments and 23% of manufacturing employment, in the formal sector. The value added by these enterprises is tstimated at DU 1.035 millior, or 21% of manufacturing value added, in l97i,. The subsectoral structurE of SSI's (see Table 3.1) is dominated by three activities: food/beverages, textiles/ clothing, and electro-mechanical industr es. SSIs in these three sut-sectors account for three-fourths of all SSI est,blishments and employment ar,d for 70% of total SSI value added, following a sui,-sectoral distribution similar to that in overall manufacturing. In terms of location, modern SSIs follow the pattern of larger industries, and are coicentrated in the Casablanca-Rabat- Kenitra axis and a couple of large urban areas (Fes and Marrakech), ihich 1/ Handicrafts are defined as enterprisEs producing designated tradicional goods and with an investment cost/jot under DH 5,000/job, regardl