Morocco - Second Urban Development Project

Document of FLE COPY The World Bank FL CO FOR OFFICIAL USE ONLY Report No. P-29 38-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR A SECOND URBAN DEVELOPMENT PROJECT December 31, 1980 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.  KINGDOM OF MOROCCO SECOND URBAN DEVELOPMENT PROJECT FISCAL YEAR January 1 - December 31 CURRENCY EQUIVALENTS Currency Unit Dirham (DH) DH 1 US$o.263 US*l DH 3.80 WEIGHTS AND MEASURES Metric System British/US System 1 meter (m) 3.28 feet (ft) 1 kilometer (km) 0.62 miles Cmi) 1 hectare (ha) 2.47 acres ACRONYMS AND ABBREVIATIONS MHAT Ministry of Housing and Regional Development DRHAT Provincial Delegation of Ministry of Housing and Regional Development MOI Ministry of Interior MEN Ministry of Education MJS Ministry of Youth and Sports MSP Ministry of Health BCP Central Popular Bank ("Banque Centrale Populaire") FEC Communal Infrastructure Fund ODI Industrial Development Office FNAET National Fund for Land Purchase and Infrastructure ERAC Regional Planning and Construction Agency RADEM Meknes Public Utility Authority RAK Kenitra Public Utility Authority PTU Project Technical Unit HB Housing Bureau  FOR OFFICIAL USE ONLY MOROCCO SECOND URBAN DEVELOPMENT PROJECT Loan and Project Summary Borrower: Kingdom of Morocco Amount: U.S. $36.0 million equivalent Terms: Amortization in 17 years, including a 4-year grace period, at an interest rate of 9.25 percent per annum. Relending Terms: The Government would make $21.6 million available as budgetary allocations to the Ministry of Housing (MHAT). Residential and business plots developed under the project would be sold to project beneficiaries at nominal interest rates of 7 and 10 percent per annum, with maturities of 20 and 10 years, respectively. $6.7 million would be made available as budgetary allocations to the relevant ministries for the construction and equipment of community facilities. $5.1 million would be on-lent to the beneficiaries through the Banque Centrale Populaire (BCP) for self-help construction, at an interest rate of 7 percent per annum over a period of 10 years. $2.6 million would be on-lent by the Ministry of Finance to the project Municipalities for the improvement of municipal services at the same terms as the Bank loan. Project Description: The project would support the Government's efforts to provide shelter, basic services and employment to low- income urban families, through a program to be implemented in the cities of Meknes and Kenitra. The project would finance: i) upgrading of squatter settlements; ii) provision of affordable serviced residential plots; iii) credit for self-help housing improvement; iv) construction of community facilities; v) development of serviced land for business activities; vi) provision of facilities, equipment and technical assistance to improve municipal services in the project cities; and vii) studies for the preparation of new urban development projects. About 66,000 persons in the urban poverty group, representing 39 percent and 57 percent of the urban poor in Meknes and Kenitra, would benefit directly from the project. Improved municipal services would benefit about 70 percent of the urban poor in the project cities. The primary risks relate to the need for adequate staffing of the project implementing agencies in order to monitor, supervise and coordinate project implementation, particularly in view of the relatively limited experience in Morocco with beneficiary selection and cost recovery for this kind of project. These risks have been reduced by ensuring the timely provision of appropriate qualified staff and by careful review of beneficiary selection criteria and procedures and cost recovery arrangements. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Estimated Cost: ----- US$ Million---------- Local Foreign Total Slum upgrading 13.4 3.5 16.9 Sites and services 14.2 4.2 18.4 Building materials loans 7.9 2.3 10.2 Community facilities 5.8 1.9 7.7 Employment generation-! .9 .1 1.0 Municipal services2/ 1.6 1.4 3.0 Advisory services and project administration 2.9 1.2 4.1 Studies for new projects 1.2 .5 1.7 Base cost 47.9 15.1 63.0 Physical contingencies 2.6 1.2 3.8 Price contingencies 10.0 4.3 14.3 Total Project Cost 60.5 20.6 81.1 of which estimated taxes and duties 8.0 8.0 Total Cost (net of taxes) 52.5 20.6 73.1 Financing Plan: Kingdom of Morocco 45.1 - 45.1 World Bank Loan 15.4 20.6 36.0 60.5 20.6 81.1 Estimated Disbursement: US$ Million Bank FY 1982 1983 1984 1985 1986 Annual 2.7 6.1 11.0 10.6 5.6 Cumulative 2.7 8.8 19.8 30.4 36.0 Rate of Return: 18 percent (for components totalling 93 percent of project cost) Appraisal Report: Report No. 3118-MOR, dated September 30, 1980 1/ Includes costs for Kenitra only. Costs for Meknes are included within the slum upgrading and sites and services components, since the several economic activity areas are scattered within the residential zones. 2/ Includes technical assistance for this component.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR A SECOND URBAN DEVELOPMENT PROJECT l. I submit the following report and recommendation on a proposed loan to the Kingdom of Morocco, for the equivalent of US$36 million, to help finance a second urban development project. The loan would have a term of 17 years, including 4 years of grace, with interest at 9.25 percent per annum. PART I - THE ECONOMY 2. A report entitled "Country Economic Memorandum on Morocco" (1473-MOR) was distributed to the Executive Directors in June 1977. A basic economic mission visited Morocco in February 1979, and updating missions in September and December 1979 and in May 1980. A draft basic economic report was discussed with the Government at the end of 1979, and is due to be issued shortly. The findings and conclusions of this report and the missions are reflected in the following paragraphs. Country Data Sheets are attached as Annex I. 3. Morocco has now moved towards a constitutional monarchy. While the regime remains highly centralized, the establishment of elected assemblies at the national and local levels has had a marked effect on the political structures and on the debate on major social and economic issues. The dependence of the elected assemblies oii popular support has made them and the Government increasingly aware of and sensitive to local aspirations, including the needs of the poorest members of the population. 4. Compared with many developing countries, Morocco is well endowed with natural resources. It has a considerable agricultural potential. Intensive irrigated agriculture has expanded in the Northwest plains, where the humid and temperate Atlantic climate combines with fertile soils. Extensive coastlines on both the Mediterranean and especially the Atlantic offer considerable fish resources. Morocco also has the world's largest and most easily recoverable phosphate reserves, which makes the phosphate sector a key one in the economy as regards the generation of foreign exchange. Other minerals such as iron ore, manganese, lead, zinc, etc. are also exported, but in much smaller amounts. Coal and hydropower plants help to meet part of the country's energy requirements, which are essentially met with imported oil. Morocco has however uranium and oil shales in very sizeable quantities which could become profitable to exploit in the near future. In addition, Morocco's geographical location gives it other advantages; its proximity to Europe has been a factor favorable to the development of international trade, tourism and labor migration with the EEC countries.  -2- 5. During the Second and Third Development Plans, which covered the 1968-77 period, national income grew distinctly faster than population, with per capita income growing at an annual real rate close to 3 percent. The conservative approach which had tended to predominate in the post-independence (1956) years gave way after 1970-71 to a greater emphasis on growth. Thus, the 1973-77 Plan aimed at a marked acceleration of economic growth and also an improvement in income distribution. To accomplish this, it was initially based on an export-oriented investment strategy and a much intensified savings effort. However, taking advantage of the sudden but short-lived rise in phosphate prices in 1974-75, the Government launched in 1975 an ambitious investment program which brought about a considerable increase in demand for imported goods and services (their share in GDP rose from 20 percent in 1972 to 40 percent in 1977). Growth of GDP averaged 7.3 percent p.a. during 1973-77 and imports grew rapidly. At the same time, however, exports of phosphates and agricultural products lost their dynamism, altbough exports of manufactured goods continued to increase at the rapid rate of 11 percent per year in real terms. These various factors produced a skewed growth pattern in which the weakness of exports and savings contrasted with the dynamism of investment and Government consumption, and by 1977 the economy's resource gap exceeded 20 percent of GDP, whereas it had never exceeded 5 percent before 1974. Recent Developments. 6. After the 1973-77 period of rapid growth which led to financial disequilibrium, the Moroccan economy entered in 1978 a phase of adjustment, characterized by a substantial retrenchment of investment and import levels and a significant reduction in the rate of growth. In 1978, the first year of the adjustment, public investment was cut back by 40 percent and the growth of current budget expenditure held down to about 13 percent (or less than 3 percent in real terms). These measures of fiscal restraint were combined with tight credit policies and stringent import controls. As a result, the economy's resource gap was reduced from 22 percent of GDP in 1977 to 14 percent in 1978, while the overall Treasury deficit declined from 17 percent of GDP to about 11 percent. Since then, however, progress towards stabilization has been slow and both fiscal and external imbalances remain substantial. This loss of momentum can be attributed in part to the deterioration in the terms of trade related to the recent oil price increases. The Government was also led to relax its austerity program in 1979 in order to meet the pressing needs of its social programs, and to keep the rate of growth of the economy from falling below the rate of population growth (about 3 percent p.a.). 7. The policies adopted in 1978 had an immediate impact on the external payments situation, which improved considerably in that year. The current account deficit of the balance of payments was reduced by $500 million in 1978 to $1.3 billion (excluding special grants). This reflected a $400 million improvement in the trade balance on goods and non-factor services, along with a substantial increase in factor service income induced by the establishment of an exchange rate premium on workers' remittances. Merchandise imports  - 3 - declined more than 25 percent in constant 1969 prices. Except for food and petroleum, most import categories showed considerable declines in current terms. As a result of this performance, the growth of external borrowing (excluding grants) slowed considerably in 1978, but remained at about $1.4 billion. 8. Since 1978, there has been relatively little change in the overall balance of payments situation, which continues to require large amounts of borrowing. The trade deficit on goods and non-factor services widened in 1979 as imports began to rise again and the cost of petroleum imports jumped to $710 million from $430 million a year earlier. The total import bill for goods and non-factor services increased from $4.0 billion in 1978 to $4.7 billion in 1979. On the export side, although weather conditions adversely affected several key agricultural export crops, overall export growth in 1979 was reasonably satisfactory at about 5 percent in constant 1969 prices, and workers' remittances continued to rise. The current account deficit of the balance of payments increased by about $250 million to $1.6 billion in 1979, reflecting both the rise in the import bill and a substantial increase in interest payments on the external debt. As in 1978, this deficit required a net external funds inflow of about $1 billion, in addition to $350 million in special grants from Saudi Arabia. Gross borrowing (excluding grants) remained at about $1.4 billion as in 1978, requiring the use of nearly $1 billion in financial credits. In 1980, favorable export prospects and a substantial rise in the price of exported pbosphates suggest that the resource gap will decline despite the impact of the most recent petroleum price increases. However, there will again be a substantial increase in debt service costs, so that a gross external inflow of around $1.4 billion would be needed to fill the gap. 9. The budgetary and balance-of-payments constraints have had a serious impact on the levels of investment and economic activity. Annual GDP growth dropped from 7.3 percent in 1973-77 to 3.1 percent in both 1978 and 1979. Gross fixed capital formation was reduced to DH 13.4 billion in 1978, compared to DH 15.4 billion in 1977 (current prices). According to official estimates it dropped further to DH 12.9 billion in 1979 but should recover slightly in 1980. The adverse impact of the retrenchment on employment has probably been substantial. A rapid rate of employment creation had been one of the major achievements of the 1971-77 period. Since then, the growth of employment is estimated to have slowed significantly. To offset this, the Government has initiated programs for municipal and regional investment and for small and medium enterprises in industry, construction and modern services. The rate of inflation, as measured by the cost-of-living index, dropped from 12.5 percent a year in 1977 to 8.3 percent in 1979, as the Government continued to rely on subsidies and controls to moderate the rate of price increases of basic commodities. In addition, domestic inflationary pressures have been kept under control as a result of the Moroccan Treasury borrowing policy, which has generally been to finance the bulk of its deficit abroad in order to avoid putting excessive pressure on the local banking system.  -4- Economic Development Issues and Prospects 10. Confronted with the need to overcome the large imbalance in external payments, the aim of Government policy since 1978 has been to cut back investment and increase domestic savings until the resource gap is reduced to a size comparable with the level of external borrowing available. Initially, the Government had hoped to achieve this goal by 1980. The difficulties encountered internally in maintaining the necessary degree of financial austerity led to some relaxation in these efforts. It is now apparent that the rapid adjustment originally envisaged may not be feasible. The adjustment process may instead have to be spread over several years into the 1980's. Morocco now seems to face a period of relatively slow growth, during which the Government would seek to further restrain current public expenditure and improve domestic resource mobilization in order to maintain a desirable rate of investment. In the external accounts it needs to accelerate the growth of exports and to minimize net borrowings on commercial terms in order to restrain the growth of debt service and maintain its creditworthiness. 11. While the unexpectedly large increase in petroleum prices in 1979-80 has made the adjustment more difficult, Morocco should benefit over the next few years from quite favorable market prospects for some of its major exports, notably phosphates and phosphate-based intermediate products. Bank projections summarized in Annex I reflect the likely outcome of a continuation of present policies of gradual adjustment, with continued austerity but no major structural reforms. According to this base case scenario, the annual rate of growth would remain in the 4.0-4.5 percent range throughout the 1980's. Efforts to increase domestic savings would bear fruit only slowly. The ratio of gross domestic savings to GDP would rise from 9.5 percent in 1980 to 12.2 percent by 1985 and 14.6 percent by 1990 (in constant prices). Under these curcumstances, it would not be possible to finance a level of gross fixed investment in excess of about 15 percent of GDP (in constant prices) throughout the 1980's and the rate of employment creation would slow down significantly, with the level of employment rising by 2.7 percent a year, against 3.4 percent in 1971-77. Open urban unemployment would thus rise above 10 percent in the short run. On the basis of the GDP growth rates and investment levels envisaged in the base case scenario, it should be possible to keep the overall growth of imports relatively moderate. This, combined with favorable export trends (exports of goods and non-factor services are expected to rise by more than 6 percent a year in the 1980's) should permit a slow reduction in Morocco's external resource gap from about 14 percent of GDP in 1979 to 8 percent in 1985 and 6 percent in 1990 (calculated in current prices). 12. Medium-term prospects could however be considerably more favorable if the next few years were used to initiate a number of far-reaching policy changes designed to overcome the structural weaknesses which are at the root of the present disequilibrium while implementing a larger and more selective investment program. The major policy adjustments that would have to be undertaken in order to achieve these objectives would have to do with deliberate and closely pursued policies with respect to agriculture, energy,  - 5 - export priorities, savings and investment criteria. A dialogue has already begun with the Government on the need to proceed vigorously on each one of these issues, and the Government has recently requested Bank consideration of a structural adjustment loan. If these structural changes were to be introduced, preliminary projections suggest that the rate of growth of the economy coul- go back to 6-7 percent a year, gross fixed investment could rise to 17 percent of GDP by 1985, and the level of employment could increase at 3.4 percent a year during 1980-90, thus keeping pace with labor supply. It would simultaneously be possible to bring the external disequilibrium under control in a few years. Under the structural adjustment scenario, the resource gap would go down to about 5 percent of GDP in 1985 and 2 percent by 1990 (current prices). Gross external capital requirements would rise much more slowly than under the base case scenario. 13. Comparatively slow economic growth and employment creation up to the early 1970's were accompanied by widening income disparities and a decline in real consumption for poorest households in Morocco. The limited data available indicate that in the 1970's, while disparities have continued to grow, household incomes increased in both urban and rural areas, and the lower income groups shared in the real increase in incomes. In addition; infant mortality has declined and life expectancy has increased since 1960, both significantly. More recently, partly in response to the demands of locally elected assemblies, the Government has shown more awareness of social problems and greater interest in the issue of basic needs. Social expenditures have been at a high level in recent years, accounting for more than one-third of total budgetary spending and more than one-half of current outlays. However, social indicators still apear to be at low levels in Morocco. This is partly due to institutional weaknesses, including policy evaluation capacity and the lack of a clear definition of target groups and type of services to be provided. The limited effectiveness of past social policies in reaching the lower income groups, especially in rural areas, is increasingly recognized as a major issue, and a new strategy is being prepared in the context of the 1981-85 Development Plan, which would emphasize rural development in rainfed areas, where most of the poorest households in Morocco currently live, and improved mechanisms to deliver services to meet basic needs at an affordable cost, especially in rural areas. An effort is also being made to increase the involvement of local communities in providing basic needs particularly for sites and services for low cost housing, water supply, sewerage and electrification. Although rapid results cannot be expected in any of these areas, it is urgent to proceed with the implementation of these policies in order to better meet the needs of low-income groups, while holding down the budgetary cost of social programs. External Debt and Debt Service 14. Morocco sharply increased external borrowings after 1974. Nearly all of the increase came from Arab and commercial sources. Morocco also drew on the IMF automatic credit facilities in early 1976, and obtained about $70 million in IMF compensatory financing in August 1978. Agreement was reached with the IMF in 1980 for Morocco to draw on the Extended Fund Facility (EFF); the agreement provides for the use of IMF resources in the amount of SDR 810 million over the 1980-83 period. From the low levels of 1974-75, Morocco's  - 6 - external debt rose rapidly to an estimated $6.2 billion (disbursed only) by December 1979. In 1979 debt service amounted to $799 million (21 percent of total exports of goods and services). As a result of recent and projected borrowings, debt and debt service may be expected to fluctuate around 21-22 percent in the early 1980's; it would reach 25 percent by 1985 in the case where no structural adjustments would take place, but would remain at approximately 21 percent under a structural adjustment program. Because of the growing burden of debt service, external debt management has become more restrictive and selective since 1978. If debt service is to stay manageable, Morocco will have to continue this policy over the next few years. Additional commercial borrowing should be limited, and efforts should be continued to seek loans on softer terms. 15. Loan commitments from multilateral and bilateral official sources to Morocco rose from $286 million in 1975 to $296 million in 1976, and to $862 million in 1977, dropping to $434 million in 1978. Major sources of aid were France, Saudi Arabia, the UAE, the U.S., Germany and the Bank Group. At the end of 1979, the Bank Group's share in Morocco's outstanding and disbursed external public debt was 8.4 percent. The share of the Bank Group in debt service was 21 percent in 1976 and declined to 15 percent in 1977, and 8 percent in 1979. By 1985 the Bank Group's shares in debt outstanding and in debt service are expected to be about 10 percent and 11 percent respectively. PART II - BANK GROUP OPERATIONS IN MOROCCO 16. Bank and IDA lending to Morocco has supported 47 projects, financing a total of $1,471.9 million (net of cancellations), of which $986 million has been lent since the beginning of FY1975. IDA credits, totalling $50 million, have been made available for five projects. A Third Window loan for $25 million for the third education project was approved in March 1976. IFC investments have amounted to $42.5 million ($40.4 million after cancellations, terminations, repayments and sales). Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of November 30, 1980, and notes on the execution of ongoing IBRD/IDA projects. In some cases delays in project implementation have been caused by management problems and budgetary constraints; however, overall performance in project execution has been improving and is satisfactory. Total disbursements as of June 30, 1980, amounted to 63 percent of original appraisal forecasts, and 71 percent of revised forecasts. 17. Past Bank Group lending has been concentrated in the agricultural and industrial sectors, which have accounted for 35 and 25 percent respectively of total commitments; the balance is represented by utilities (12 percent), education (11 percent), roads (7 percent), tourism (5 percent), energy (4 percent) and urban development (1 percent). While limited as regards the transfer of resources to Morocco (Bank Group gross disbursements amounted to 2.2 percent of total fixed investment during the 1973-77 Plan period), the main objectives of Bank lending in the early years of Bank operations in Morocco were to foster and strengthen development institutions, provide technical assistance, especially for project preparation, and increase productive capacity, in order to improve the balance of payments.  - 7 - 18. While these objectives remain, over the last few years Bank lending has increasingly focussed on supporting a number of more concrete policy objectives: to promote exports and other foreign-exchange earning activities; to reduce imports, particularly of food and energy; to lower unit costs for the delivery of basic services, widen their distribution among regions and increase access by lower-income groups; and to increase employment and improve income distribution. 19. Since FY1975, lending in agriculture has emphasized improvement in the productivity of rainfed agriculture and livestock, which employ over 80 percent of the rural population, primarily small farmers. The Fes-Karia-Tissa Agriculture Project, approved in June 1978, directly addresses these objectives in the favorable cereal producing zone. The Loukkos project, approved in May 1980, extends support of these objectives to a less favorably endowed region and finances investments for agricultural development, erosion control, forestry and livestock. It should have a significant poverty impact and address major issues in developing Morocco's relatively densely populated but poorly endowed mountainous regions. Continued Bank support of rainfed agriculture is expected to be provided through an extensive livestock project in central Morocco and an integrated rural development project in the Khemisset province, both under preparation. A fourth line of credit to CNCA has helped provide credit to small and medium farmers, and a fifth project is under preparation. Increased export earnings are expected to result from a Bank-supported project for fruit and vegetable marketing and production, as well as from a project currently under preparation to improve tne efficiency of the coastal fishing industry. 20. Increased foreign exchange earnings or savings and, more recently, job creation, have been the key objectives of Bank projects in industry and tourism. A fourth loan to Credit Immobilier et Hotelier (CIH) which has encouraged the adoption of important sectoral policies, is being submitted concurrently for consideration by the Executive Directors. The ninth project in support of the Banque Nationale pour le Developpement Economique (BNDE), planned for presentation to the Board in late FY1981, will incorporate a pilot component for export-oriented industries and a substantial component for small-scale industries to replenish the successful first line of credit for this purpose approved in FY1979; this component is expected to generate increased employment opportunities. Preparation is underway on a project to increase the incomes of artisanal and small-scale miners in southeastern Morocco, a region largely bypassed by previous development efforts. 21. Projects to improve basic infrastructure and services have concentrated on improving the efficiency of existing investments and extending services to rural and low-income urban groups. A third highway project approved in FY1980 supported the Government's road maintenance efforts and a fourth project would continue support for maintenance and improve rural access roads. A loan for village electrification approved in FY1979 will help bring power to over a hundred small towns and villages. A third water supply project, to be presented to the Board in late FY1981, will provide access to safe water in small towns and semi-rural areas as well as expanding a pilot component initiated under the second project to provide credit for house connections to low-income urban populations. In addition, a project to strengthen the capacity of local communities to prepare and implement their own development  - 8 - programs and provide financing for such programs through the Communal Infrastructure Fund (FEC) is being prepared. It will not only help to widen the distribution of infrastructure and services but will also support the Government's policy of encouraging administrative decentralization and local participation. 22. Education continues to need attention to ensure Morocco's manpower development. While recent projects have focussed on secondary level technical education and teacher training, attention has also been given to expanding basic education in the rural areas and ensuring a greater orientation in primary schooling towards practical training. This would be complemented by future projects in non-formal education and vocational training. The Government's recent policy supporting primary health care would be tested through a project currently being prepared as a first phase in a nationwide program to reorganize medical and paramedical training, health education, nutrition, environmental sanitation and family planning services, especially in rural areas. 23. In order to reduce the impact of the oil import burden on the Moroccan economy, a project was approved in April 1980 that would contribute to the Government's efforts to accelerate the exploration and development of its petroleum potential. Preparation is also underway of an Engineering Loan to finance studies and a pilot unit to test the potential for commercial extraction of oil from oil shale. 24. The sectoral objectives implied in these projects as well as other objectives relating to price policy, efficiency and composition of the public sector investment program, and measures to mobilize domestic savings, would be reinforced by the policy changes envisaged to be supported by a first Structural Adjustment Loan, planned for consideration by the Executive Directors in FY1981. These policies would address structural issues that underly the present disequilibrium and would improve the medium-term prospects for economic growth and balance of payments. PART III - THE URBAN SECTOR Background 25. With 41 percent of its population of 19.5 million living in urban areas, Morocco ranks among the rapidly urbanizing countries of the Middle East and North Africa. Historically, Morocco's urban population has concentrated in large centers, mainly along the north western Atlantic coast. More recently, secondary cities have also experienced rapid increases, under the pressure of rural immigration and natural population growth. If the current urban growth rate, estimated at 5 percent per annum, continues, the urban population will reach 15 million, or half the total population, by the end of the 1980's.  -9- 26. Until the last few years, public investment focussed heavily on the modern industrial and agricultural sectors, bypassing over 80 percent of Morccco's rural population. Despite recent Government attention to rural infrastructure and rainfed agriculture, urban per capita income still averages three times that of rural areas, attracting large numbers of rural migrants to the cities in search of job opportunities. 27. Responsibility for meeting the needs of the urban population is shared by central and local governments. Most public services are provided through the Provincial Delegations of the central ministries. The Ministry of Housing and Regional Development (MHAT) has particular responsibility for financing and implementing public housing programs and coordinating land use planning and building standards. The municipalities are generally responsible for providing environmental services such as sewerage, garbage collection, street cleaning and solid waste disposal, and for maintaining the relevant infrastructure. In major cities, water and electricity distribution is the responsibility of local autonomous authorities ("Regies"), and in other areas this is carried out by the national water and power agencies. Coordination among the various public entities is the responsibility of the provincial Governor, responsible to the Minister of Interior (MOI). Although the municipalities were invested with wider powers for planning and organizing municipal services under the 1976 Communal Charter, they are severely hindered in practice by their lack of qualified staff and their dependence on the central government for financial resources. About half of the municipal operating budgets comes from local taxes; the remainder comes from Government subsidies. Most capital expenditures are financed through grants from special central government funds or through borrowing from financial institutions such as FEC. Municipal investment has been very limited up until now, due as much to lack of effective capacity to prepare and implement such programs as to lack of funds. Proposals for the reform of local government finance are now being prepared. Urban Conditions 28. The inability of Moroccan cities to provide serviced land and financing for housing construction for their rapidly increasing populations has led to the proliferation of squatter settlements, now estimated to contain 25 percent of the urban population. Since these settlements are illegal, the cities have not provided them with basic infrastructure. Moreover, the lack of security of tenure discourages slum residents from improving their neighbourhoods or dwellings. 29. Lack of access to basic utilities by large portions of the low-income population constitutes an acute problem in most Moroccan cities, creating serious health hazards. In 1971, the time of the latest survey, 48 percent of urban households were without water connections, 32 percent without electricity and 45 percent without sanitary installations. This situation has probably worsened in recent years because of the rapid increase in the low-income urban population. Sewage is generally discharged untreated. On the average, provision of social services in urban centers is better than in rural areas, but health and education facilities in low-income areas are usually severely overcrowded and are often inaccessible to squatter settlements.  - 10 - 30. Over 2 million people, or about 28 percent of the urban population, have annual incomes below the 1979 Bank-defined absolute urban poverty threshold of US$400 (DHI,516) per capita. Urban unemployment (13 percent in 1977) is estimated to be twice as high as in rural areas, and is particularly severe among the age group of 15-24 years, many of whom are unskilled rural migrants. About 40 percent of the urban labor force is etxoloyed in small artisanal and commercial enterprises, whose development is critical to relieving urban unemployment. However, lack of adequate facilities and working capital often prevents small labor-intensive units from growing. Past Government Policies 31. Despite considerable efforts by the Moroccan Government during the past decade to provide adequate housing, public investments have mainly benefitted middle and high-income households. The Ministry of Housing and Regional Development (MHAT) was created in 1973 in recognition of the urgent nature of urban problems. MHAT's early policies with regard to slums and squatter settlements basically consisted of their replacement through urban redevelopment and public housing programs. Because of this costly approach and limited implementation capacity, only one-quarter of the projected low-cost housing program was completed during the 1973-77 Plan. Two new public agencies were created which were to improve performance during the 1978-80 Plan: the National Fund for Land Purchase and Infrastructure (FNAET), intended to purchase land and develop it for low-cost housing construction, and the Regional Planning and Construction Agencies (ERAC), for the construction of middle-income housing. However, due to financial and managerial constraints as well as high unit costs, these agencies fell far short of their program targets. In addition, inefficient land-use, costly design and infrastructure standards as well as restrictive lending criteria for housing finance, put the serviced plots and social housing units beyond the reach of the low-income groups. 32. Similarly, because of their limited financial and staff resources, cost recovery policies and regulations regarding squatter settlements, municipalities and public utility agencies have in the past primarily extended their services to central and higher-income peripheral areas. In addition, poor management and organization of municipal services have resulted in inefficient delivery systems and high unit costs. The high cost of initial connections to basic utilities has further constrained access to these facilities by the urban poor. New Policy Responses and Bank Strategy 33. Conscious of the shortcomings of past policies, the Moroccan Government has adopted a two-pronged approach to rapid urbanization. On the one hand, administrative and economic decentralization has been promoted, with a view to improving infrastructure, services and employment in secondary cities and small towns and thus deflect migration away from the heavily congested cities of Casablanca and Rabat-Sale to communities where urban growth may be more manageable. The Bank has supported these efforts through  - 11 - projects for village electrification and rural education and is planning projects for water supply in secondary centers and rural areas and for local community development (paras. 21-22). 34. On the other hand, the Government has introduced new policies designed to integrate existing slums and squatter areas into t,,e cities and develop more cost-effective methods of meeting their needs for shelter and basic services. This new approach capitalizes on existing resources by upgrading slum areas, providing low-income households with affordable serviced sites for self-help housing construction and increasing employment opportunities for the urban poor. The Rabat Urban Development Project (Loan 1528-MOR) was instrumental in achieving this policy breakthrough. This new approach, which will be continued under the new Five-Year Plan, has been reflected in similar projects recently launched in Tangiers and Casablanca, the latter financed through a loan guarantee program of the U.S. Agency for International Development. The Government has also prepared a program for upgrading infrastructure in small squatter areas ("bidonvilles moyens") throughout the country, and is studying possible reforms of the housing finance system. 35. The Bank has supported a pilot program to provide credit for individual house connections to the water supply system in low income urban areas (Loan 1724-MOR). The Third Water Supply Project would help extend this program to all Moroccan cities. The Bank has also financed the provision of credit to labor-intensive small-scale industries (Loan 1687-MOR). The replenishment of this loan, expected in late FY1981, would generate increased employment both in large urban centers and secondary cities and in particular, would complement the development of serviced industrial land in the project zones financed under the proposed Second Urban Project (paras. 20-21). The First Urban Project 36. The Rabat Urban Development Project, approved in February 1978, provides financial assistance to the Government for carrying out an innovative approach to the problem of urban poverty in three major squatter areas of the capital city, comprising some 45 percent of its total slum population. The project includes the upgrading of infrastructure and social services, the development of serviced sites to accommodate households displaced because of project construction works, and the implementation of a program to create additional job opportunities through serviced land for small-scale industries, vocational training and credit. The project introduced reductions in infrastructure standards to ensure affordability to the lowest income groups, the provision of long-term financing so that slum dwellers could acquire secure title to their plots, and cost recovery to permit replicability. A special Slum Upgrading Unit was set up within MHAT to monitor the impact of the project and to prepare similar projects in other cities.  - 12 - 37. The project has suffered initial delays in execution. Start-up of the infrastructure works was affected by delays in contract awards, and problems were also encountered in the identification of beneficiaries of the slum upgrading component and in completing the selection of beneficiaries of the sites and services component. These difficulties, combined with slow payments to contractors, have caused a considerable lag in disbursement of the Bank loan (as of November 30, 1980, only $1.4 million of the $18 million loan was disbursed, compared to an appraisal estimate of $15.2 million). Apart from the innovative nature of the project, the main sources of the delays outlined above have been inadequate staffing of the project unit, limited participation of local government in project implementation and inadequate coordination among the various implementing agencies. Measures are now being taken to resolve the above difficulties by increasing the role of the Rabat Governorate in supervising project execution, including secondment of staff to the project unit. To avoid these problems in the proposed project, the municipal councils and the provincial Governors of the cities concerned, have been involved in project preparation; in addition, an important feature of the project design is a mechanism for coordinating the implementation of the various project components through these Governors (para 53). 38. The socio-economic problems experienced by the low-income families in urban areas obviously extend to major Moroccan cities other than Rabat. Hence, based on the lessons being learned from the First Project, it would appear advantageous to begin coping with those problems in other urban areas. Since the cities of Meknes and Kenitra contain the largest squatter settlements outside of Casablanca, combined with high immigration rates and housing shortages, the Government suggested that these two cities be the focus of the proposed project. 39. Meknes. The fifth largest city, Meknes has a population of 360,000 which is projected to grow at 4.1 percent annually over the next five years. This implies a yearly increase of about 15,000 persons, of whom nearly 30 percent will be below the urban poverty threshold. About a third of the population in the city does not have access to municipal services and infrastructure facilities. New housing construction totalled only half the growth in households over the last decade. The deteriorating housing supply has led to a rapid growtb of squatter settlements, which account for 20 percent of the city's population, or 70,000 persons. 40. Kenitra. Kenitra is the seventh largest city with a population of about 215,000, projected to grow at 4.6 percent per annum over the next five years. This implies an increase in population of 10,000 persons each year, of whom over 20 percent are expected to be below the urban poverty threshold. It is estimated that 40 percent of the population does not have access to municipal services and infrastructure facilities and that 65,000 people (30 percent of the city's population) live in squatter areas. Housing output has amounted to less than two-thirds of the growth in demand.  - 13 - PART IV - THE PROJECT Project Concept and Background 41. The proposed project would continue Bank support for the development of a policy framework for urbanization and for the design of low-cost, replicable programs to provide shelter, basic services and employment to low-income urban families. The project also aims to further strengthen the capacity of the central and local governments to prepare and implement such programs, confirm the appropriateness of the new policy approach and extend the experience gained under the First Urban Project in Rabat to the secondary cities of Meknes and Kenitra. Although the innovations introduced under the First Project have not yet been fully tested, it is important to maintain the policy momentum generated by the Rabat project and to demonstrate the applicability of the new approach to institutional and technical conditions in other Moroccan cities, with a view to building up a solid body of experience with this kind of project in Morocco. The design of the Second Project includes a number of new elements growing out of the Rabat experience: improved affordability, by reducing land-use and infrastructure standards; a larger-scale program for sites and services, in order to address the shelter needs resulting from future urban growth and thus avoid the expansion of squatter settlements; attention to the problems of urban management as key to increased involvement of local governments in planning and executing urban projects; the creation of mechanisms for better coordination of integrated multi-sectoral programs; and a greater reflection of the architectural and urban design traditions of the project cities. 42. The project was identified in May 1978 and prepared by the Government with the assistance of consultants and Bank missions through 1979. It was appraised in April 1980. Negotiations were held in Washington, D.C. in November 1980; the leader of the Moroccan negotiating team was Mr. Hassan Belkoura of the Prime Minister's office. The main features of the project are outlined in the Loan and Project Summary at the beginning of this report; a Supplementary Project Data Sheet, Annex III, is also attached. A Staff Appraisal Report (No. 3118-MOR dated September 30, 1980) is being circulated separately to the Executive Directors. Project Objectives 43. The Second Urban Project will: (a) help meet current and future demand for low-cost shelter and basic services in the project cities; (b) increase employment opportunities for low-income urban dwellers, by promoting the establishment of business activities within the project zones; and (c) improve the management and delivery of municipal services. Project Description 44. The proposed project would consist of the following components: (i) Slum upgrading: provision of secure land tenure as well as basic infrastructure and services to 81,500 residents of squatter settlements in Meknes and Kenitra;  - 14 - (ii) Sites and services: development of 6,400 serviced residential plots in Meknes and Kenitra; (iii) Credit for housing improvement: provision of loans for building materials, for self-help housing construction; (iv) Community facilities: construction of primary schools, dispensaries and youth centers in the project zones; (v) Employment generation: development of serviced land within the project zones for the establishment of business activities; (vi) Municipal services: provision of facilities, equipment and technical assistance for expanded delivery of municipal services in the project cities; (vii) Studies: financing of studies to prepare new urban development projects. 45. Slum upgrading. The squatter settlements of Bordj Moulay Omar and Sidi Baba in Meknes (43,000 inhabitants) and Saknia in Kenitra (38,500 inhabitants), comprise about 60 percent of the squatter populations of the two cities, and cover 130 hectares. Forty-eight and 44 percent, respectively, of their populations have incomes below the urban poverty threshold; the median monthly income per household is about US$200 (DH 760), and the slums exhibit characteristics of the worst housing conditions in Morocco. The project would provide secure land tenure to residents by offering them the possibility of acquiring their plots through long-term lease-purchase financing. Some 1,500 infill plots would also be developed, with priority for acquisition given to 200 families to be relocated due to project works. Access roads, water and sewerage facilities, and electricity networks would be improved or installed, with optional individual connections. Administrative offices for project management will be located in the project zones. 46. Sites and services. About 3,760 and 2,640 serviced plots will be developed for sale to the urban poor on 46 ha. and 26 ha. sites adjacent to the squatter settlements in Meknes and Kenitra, respectively. Plot sizes range between 60m2 and 100m2,and several levels of on-plot housing development will be available, to maximize affordability to lower income groups. All plots would have individual water and sewer connections provided up to the plot boundary. The electricity network would permit optional individual connections. Approximately 60 percent of the plots would be sold with some form of core unit. Some of the larger plots with vehicular access could develop commercial frontages, which would be reflected in higher plot charges. Land use and building regulations for the plots would be submitted to the Bank for approval by December 31, 1981 (Loan Agreement, Section 3.10). 47. Credit for housing improvement. Loans would be provided to the beneficiaries of the slum upgrading and the sites and services programs, for the purchase of building materials to improve their houses or build on the serviced plots. This credit can also be used by beneficiaries to build or  - 15 - improve commercial facilities and to improve pedestrian pathways in the project zones. It is expected that about 7,000 households in the slum upgrading areas and about 85 percent or 5,450 households settling in the sites and services areas, would take advantage of this option. 48. Community facilities. Primary education and basic health services in the project zones would be brought up to the average level currently prevailing in the project cities, entailing the construction of 6 primary schools and 3 dispensaries, and the extension of an existing primary school. In addition, a youth center would be built in each site and service area. 49. Employment generation. A survey of small-scale enterprises in the project cities by the Industrial Development Office (ODI) indicated considerable demand for serviced land for the creation or expansion of these activities. A small business zone of 6 ha. with basic infrastructure would be established adjacent to the project site in Kenitra, where it is estimated that 45 medium and small-scale enterprises would purchase land, employing about 1,500 of the residents. Four areas totalling 2.5 ha. within the project zone in Meknes would be developed for the installation of about 80 small businesses, creating approximately 770 job opportunities. Selection criteria for the enterprises were agreed during negotiations to be the same as for the Small-Scale Industries Program, in order to facilitate access by such enterprises to the credit for investment and working capital provided through this program, which has been supported by the Bank (Loan 1687-MOR). Land use and building regulations will be furnished to the Bank by December 31, 1981 (Loan Agreement, Section 3.10). Total investment per job excluding land is expected to average $3,570 (DH 13,560). The Second Project would improve on the administrative arrangements for promoting business development used under the First Project by financing 36 man-months of technical assistance from ODI to MHAT to assist in promoting the sale of land for business activities in the project areas (Loan Agreement, Section 3.02(d)), for which terms of reference would be submitted to the Bank for review and comments by September 30, 1981. 50. Municipal services. A municipal depot would be constructed in each city to centralize and reorganize the activities of the municipal public works department. Preliminary engineering studies for the depot are being completed. More efficient and expanded service delivery would be facilitated by the purchase of new equipment and the provision of qualified professional staff (Loan Agreement, Section 3.12). Technical assistance would be provided to improve the organization of the tax and accounting departments of the municipality of Meknes (8 man-months), and to prepare a sewerage master plan for Kenitra (60 man-months). This component was carefully tailored to the technical and financial capacity of the project municipalities. 51. Studies. The Government has requested financing for the studies needed for the preparation of new projects aimed at alleviating urban poverty. The Government would consult with the Bank prior to undertaking these studies (Loan Agreement Section 3.16) and it is expected that the detailed content of the studies would be defined during a comprehensive sector review of urban and regional development policies, including an evaluation of the experience to date of the first and second Bank-financed urban development projects, to be carried out in late 1981.  - 16 - Project Implementation 52. Project construction is planned over a four-and-a-half year period, with an additional year for completing disbursements of the building materials loans to project beneficiaries. Land acquisition is under way and the Government has already initiated the relevant expropriation measures (Loan Agreement, Section 3.05). Final design and bidding documents for the first year's infrastructure works are being completed. 53. In view of the multi-sectoral nature of the proposed project, the initial difficulties experienced by the First Urban Project (para. 37) and the need for liaison between the central government, responsible for overall policy, budgetary allocations and project monitoring, and the local institutions which would actually implement the project, specific mechanisms for project coordination have been created. The Interministerial Project Coordinating Committee, set up at the central level under the First Urban Project, would have a local counterpart Project Steering Committee in each city, composed of representatives of each implementing agency and chaired by the provincial Governor. In addition, each Steering Committee would have a Permanent Unit which would coordinate and monitor the implementation of the project components, and prepare progress reports and consolidated project accounts for the Bank. Its full-time technical staff, including an experienced engineer and an accountant, would be attached to the Governor's office (Loan Agreement, Section 3.12 and Schedule 5, Part B). The establishment and staffing of the Permanent Units would be a condition of disbursement for all expenditures in the relevant city (Loan Agreement, Section 3.07 and Schedule 1, para. 4(a)). 54. Implementation of the slum upgrading, sites and services and employment generation programs would be carried out under the supervision of the Provincial Delegations of the Ministry of Housing (DRHAT) with assistance from the Slum Upgrading Unit within the Housing Department of MHAT whose staff will be reinforced to handle the additional responsibilities implied under the Second Project (Loan Agreement, Section 3.01(b)), and from ODI. In view of the increase in the activities of the DRHATs implied by the project, a major reorganization is under way. A new Project Technical Unit (PTU) has already been established within each DRHAT to manage the execution of the physical works, most of which will be carried out by private contractors with the assistance of local consultants (Loan Agreement, Section 3.02 (a)). The construction and operation of project works relating to water and electricity will be carried out by the public utility authorities of Meknes and Kenitra under contracts with MHAT. The PTU manager has already been appointed for each city and additional staff would include two engineers, one architect, one accountant and para-professional and support staff, for each PTU. Assurances were obtained during negotiations regarding the appointment of the PTU professional staff, according to an agreed schedule (Loan Agreement, Section 3.07 and Schedule 5, Part C). All legal, financial and social aspects of the project, including selection of and assistance to the beneficiaries of the shelter and small scale enterprise components, would be handled by the existing Housing Bureaus within each DRHAT. These tasks have proven to be the most sensitive and difficult under the first project, and additional professional and paraprofessional staff will be required for each Housing Bureau, including at least an accountant and a lawyer. Assurances were obtained during negotiatons  - 17 - regarding the recruitment of this staff, according to an agreed schedule (Loan Agreement, Section 3.07 and Schedule 5, Part C). MHAT would also be responsible for supervising execution of the studies for the preparation of new urban projects. 55. The municipalities of Meknes and Kenitra will implement the municipal services component as well as assume responsibility for the operatXon and maintenance of the project infrastructure once completed, including the new municipal facilities. The Municipal Councils have approved the investment programs to be implemented under the project and reserved the lands required for the construction of the Central Municipal Depots. In order to carry out these responsibilities, the professional staff of the two municipalities would be strengthened (Loan Agreement, Section 3.12 and Schedule 5, Part G)). Technical assistance would be provided for the reorganization of the tax and accounting system of Meknes and for the preparation of the sewerage master plan in Kenitra, on terms and conditions satisfactory to the Bank (Loan Agreement, Section 3.02(b) and (c)). 56. The Banque Centrale Populaire (BCP), a fully government-owned bank, would be responsible for recovering residential and industrial plot charges on behalf of the Government and providing credit for building materials, through branch offices to be established in the project zones by June 30, 1983 (Loan Agreement, Section 3.13). BCP would receive a fee for its administrative expenses in connection with the recovery of plot charges, to be incorporated into the interest rates charged to beneficiaries. It would also earn a spread on the building materials loans. 57. The Ministries of Education (MEN), Public Health (MSP) and Youth (MJS) would construct and operate the relevant community facilities and reimburse MHAT for the costs of the serviced land. Project Costs and Financing Plan 58. The total cost of the project including cost of land, taxes and contingencies is estimated at $81.1 million, of which $20.6 million or approximately 25 percent represents the foreign exchange component. Taxes are estimated at $8 million on local costs. Estimated costs for civil works are based on preliminary engineering studies and land prices as appraised by the State Property Commission ("Service Des Domaines"). Estimated costs for vehicles, equipment and building materials are based on the latest quotations from suppliers. Costs for foreign consultant services (totalling 106 man-months) are estimated at $8,000 per average man-month. Costs of local professional services are estimated at an average of $4,000 per man-month. The cost estimates include provision for physical contingencies of 10 percent on all civil works, equipment and consultant services but not on the building materials loans, nor on the studies for preparing new urban projects. Rates applied for price contingencies are 10 percent in 1980, 9 percent in 1981, and 8 percent thereafter. Total contingencies amount to 29 percent of the estimated base cost. 59. The proposed Bank loan of $36 million would have a maturity of 17 years including 4 years of grace. It would finance approximately 50 percent of the total project cost, net of taxes. This would cover 100 percent of the foreign exchange costs and finance about $15.4 million of the project's local  - 18 - currency costs, which is by Morocco's current tight external payments position. The remaining 50 percent of project costs will be financed by the Government through budget appropriations. The Government will assume the foreign exchange risk. 60. The Bank loan proceeds, supplemented by counterpart funds, would be allocated by the Government to the project implementing agencies in the following manner: (a) in the form of budgetary allocations totalling $28.3 million to MHAT, MEN, MSP and MJS for the implementation of their respective components, including the off-site infrastructure which will be handed over to the Municipalities upon completion (see para. 65); (b) in the form of advances of $5.1 million to BCP for providing building materials loans to project beneficiaries. These advances would be repaid to the Treasury as repayments from beneficiaries fall due (see para.62); and (c) in the form of loans to the municipalities of Meknes and Kenitra totalling $2.6 million for financing the extenditures related to the municipal services component. The loan would be made on the same terms as the Bank loan to the Government (see para. 65). Cost Recovery and Selection of Beneficiaries 61. Overall, project costs related to land acquisition, site preparation, on-site infrastructure, on-plot development, project administration buildings, design and supervision, as well as interest during construction (together 57 percent of total project costs), would be fully recovered with interest through down payments and monthly charges for residential and business plots, to be collected by BCP on behalf of the Ministry of Finance (Loan Agreement, Section 3.08). Plots with commercial potential in the sites and services areas would be sold at prices above cost, and the surplus would be used as a cross-subsidy for plot prices in the slum upgrading areas. Residential plots in the sites and service areas would be sold at cost. Building materials loans, representing 18 percent of total costs, would be repaid with interest by the relevant beneficiaries. 62. The costs for the residential plots would be repaid by beneficiaries at an interest rate of 7 percent over a period of 20 years. Existing plots in slum upgrading areas would receive 100 percent financing; a down payment of 10 percent would be required for plots in the sites and services area and for infill plots in the upgraded slum areas. Loans for building materials would be repaid at an interest rate of 7 percent over a period of 10 years. Costs for the business plots would be repaid at an interest rate of 10 percent over a period of 10 years; a down payment of 20 percent would also be required. (Loan Agreement, Section 3.06 (d)). Prospective entrepreneurs would be given the option of acquiring business plots for cash; it is expected that about half would take up this option. The proposed interest rates for residential land and building materials loans are comparable to interest rates currently charged for social housing loans (6-7 percent), beneficiaries of which are generally lower middle-income groups. Interest rates for the business plots are comparable with those presently charged by commercial banks for industrial projects in Morocco. Inflation is projected to be 12 percent in 1980, declining to 8 percent in 1982.  - 19 - 63. In order to prevent speculative sales, plot allottees would be given a lease-purchase contract in exchange for their monthly payments. Resale would not be permitted for 5 years and then only upon satisfactory payment performance (Loan Agreement, Section 3.06 (d) (ii), Part C). Draft lease-purcbase contracts for residential plots were reviewed during negotiations (Loan Agreement, Section 3.14). It was agreed during negotiations that beneficiaries of business plots would be permitted to sell their plots only after having built the relevant facility (Loan Agreement, Section 3.06 (d) (ii) Part D). Terms and conditions for plot charges and repayment of building materials loans (para. 61) and arrangements for collection of payments would be reflected in administrative agreements between the Government and BCP which were reviewed during negotiations and signature would be a condition of effectiveness (Loan Agreement, Sections 6.01 and 6.02). 64. A substantial portion of low-income dwellers in the project cities would be able to participate in the proposed project. Existing plots in the slum upgrading areas would be affordable to 95 percent of the residents, with monthly payments representing about 10 percent of household incomes. Households unable to afford the payments required for their present plots would be permitted to subdivide, to a minimum size of 40m2. Monthly payments for infill plots would represent about 20 percent of household incomes; however, relocated families would pay a lower price for the plots. Surveys indicated that beneficiaries would be prepared to pay 20-25 percent of their monthly income for housing. On this basis, plots in the sites and services areas, including core units, would be affordable to all but the lowest 15 percent of the urban population of Meknes and Kenitra. The 10 percent down payment would not exceed 3 months' average income and corresponds to the amount that households declared they would be willing to contribute. An understanding was reached during negotiations concerniing criteria (including income ceilings) and procedures for selection of beneficiaries (Loan Agreement, Section 3.11). The surveys and cadastral work needed for the demarcation of plot boundaries would be started by June 30, 1981 (Loan Agreement, Section 3.09). 65. The municipalities would incur the costs of the construction of off-site infrastructure carried out by MHAT on their behalf and of the municipal services component (9 percent of total costs). These would be repaid to the Government at the same terms and conditions as the Bank loan. Draft agreements between the Government and the municipalities were reviewed during negotiations and their signature is a condition of loan disbursement for relevant project components (Loan Agreement, Section 3.06 (a) and (b) and Schedule 1, para. 4(b) and (c)). The costs related to the construction of the community facilities (16 percent of total costs) would not be directly recovered but borne by the Government. Procurement 66. Contracts for civil works total about $40 million. Due to the labor-intensive nature and the relatively small size of most individual construction works, it is expected that only local contractors or international contractors locally established will bid on these civil works. Consequently, procurement would be on the basis of locally advertised competitive bidding procedures, which are acceptable to the Bank and which do not exclude international contractors  - 20 - Construction of water and electricity facilities would be carried out by the local public utility authorities, which have a monopoly on such works, and would be charged at cost plus a fee for professional services instead of their more expensive normal billing procedures. Signature of agreements between MHAT and the utility authorities confirming these arrangements would be a condition of disbursement for relevant components (Loan Agreement, Section 3.06 (c) and Schedule 1, para. 4(d) and (e)). Procurement of equipment, totalling about $3.5 million, would be carried out by the relevant implementing agencies. MHAT would be responsible for procurement of the equipment used by the Permanent Unit. All contracts for goods above $75,000 would be awarded through international competitive bidding, in accordance with Bank guidelines. Contracts for equipment and furniture for the community facilities (totalling less than $0.5 million) will be procured as part of bulk contracts by the relevant ministries according to procedures acceptable to the Bank. Other contracts would be awarded according to local competitive bidding. In evaluating international bids for equipment contracts, domestic manufacturers would be allowed a preferential margin of 15 percent of the CIF price of competing goods or the prevailing level of customs duties, whichever is lower. Consultant and advisory services totalling 106 man-months and which would cost about $3.7 million, would be procured by the relevant agencies according to terms and conditions satisfactory to the Bank (Loan Agreement, Section 3.02). Disbursement 67. Disbursements of the proceeds of the Bank loan would be made over the period July 1, 1981-June 30, 1986, on the following basis: (a) 55 percent of expenditures for civil works; (b) 35 percent of building materials loans disbursed by BCP; (c) 100 percent of foreign expenditures for imported equipment and 75 percent of the expenditures for goods procured locally; and (d) 60 percent of expenditures for consultants and advisory services. Retroactive financing will be provided to cover expenditures for the preparation of final design carried out after project appraisal in April 1980, for an amount not exceeding $800,000 (Loan Agreement, Schedule 1, para. 4(f)). Project Benefits and Risks 68. The economic rate of return (ERR) for the slum upgrading, sites and services building materials loans and community facilities components which together represent about 93 percent of total project cost, is estimated at 18 percent. The evaluation of benefits for the upgrading and sites and services programs is based on estimates of imputed rental values for housing and market sale prices for serviced plots. Difficulties in the guantification of benefits for the employment generation and municipal services components prevented a reliable computation of the ERR for these components. However, it is estimated that the small-scale enterprises which would locate in the project-financed serviced land, would employ about 2,270 persons. In addition, project construction works would provide employment to at least 1,000 residents of the upgrading areas. The creation of the central municipal depots and provision of equipment would increase the operating efficiency of the municipal public works departments, reducing current operating costs by 20 percent and freeing staff to expand the delivery of municipal services to previously neglected areas.  - 21 - 69. Of the total population to benefit directly from the project, about 39,200 people in Meknes and 26,400 in Kenitra have incomes below the Bank-defined urban poverty threshold. These represent about 39 percent and 57 percent of the urban poor in the two cities. Improved municipal services would benefit about 70 percent of the urban poor in the project cities. Reduced design, infrastructure and land-use standards improve affordability and ensure cost recovery, maximizing replicability of the project in other Moroccan cities. Project impact would be monitored by MHAT's Slum Upgrading Unit. 70. Technical risks have been minimized by thorough project preparation; nonetheless the innovative nature of the proposed programs may entail certain risks, particularly in view of the limited implementation experience to date under the First Urban Project. Lack of managerial and technical staff could delay project implementation, resulting in substantial cost overruns. This risk has been reduced by providing gualified staff to the Permanent Units and project municipalities, by employing consultants for the preparation of final design and bidding documents as well as for construction supervision and studies, and by requiring assurances regarding the staffing of the provincial delegations of MHAT (paras. 53, 54, 55). The pressure of demand for housing could lead to the displacement of intended project beneficiaries by higher-income groups. This risk has been minimized by establishing precise criteria and procedures for beneficiary selection (para. 64). Moreover, the lower building standards should reduce the attractiveness of the site to middle-income groups. Cost recovery under the project may be hampered by the limited experience of both beneficiaries and Government with this kind of collection procedure. This risk should be reduced by the careful affordability analysis carried out during project preparation to ensure accessibility by the urban poor and by ensuring that particular attention be given to these problems by BCP and the Housing Bureaus in each project cicy. PART V - LEGAL INSTRUMENTS AND AUTHORITY 71. The draft Loan Agreement between the Bank and the Kingdom of Morocco and the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 72. Among the features of the Loan Agreement which are referred to in the text and listed in Section III of Annex III, the following features are of special interest: (a) Signature of agreements between the Borrower and BCP which are satisfactory to the Bank, concerning the terms and conditions for industrial and residential plot charges and repayment of building materials loans, is an additional condition of effectiveness of the proposed loan (Loan Agreement, Sections 6.01 and 6.02). (b) Special conditions of disbursement against related expenditures are: (i) Tne Government shall have established and staffed the Permanent Unit associated with the Project Steering Committee in each project city, as a condition of disbursement for all components in the relevant city (Loan Agreement, Sections 3.07 and Schedule 1, para. 4(a));  - 22 - (ii) The Government shall have entered into agreements with the municipalities concerning the terms and conditions for repayment by the municipalities of the costs relating to the off-site infrastructure and the municipal services component (Loan Agreement, Section 3.06(a) and (b) and Schedule 1, para. 4(b) and (c)); and (iii) MHAT shall have entered into agreements with the local public utility authorities (RADEM and RAK), concerning the execution of and charges for civil works and equipment relating to water and electricity (Loan Agreement, Section 3.06(c) and Schedule 1, para. 4(d) and (e)). 73. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 74. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments December 31, 1980 Washington, D.C.  23 - ANNEX I TABLE 3A Page 1 of 6 MOROCCO - SOCIAL INDICATORS DATA SHEET MOROCCO REFERENCE GROUPS (WEIGHTED AVEaGES LAND AREA (THOUSAND SQ. KM-.) - MOST RECENT ESTIMATE) TOTAL 447.0/e MIDDLE INCOME AGRICULTURAL 203.4 /.c MOST RECENT NORTH AFRICA & MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b NORTH FAST LATIN AMERICA & CARIBBEAN GNP PER CAPITA (US$) 190.0 300.0 670.0 698.2 1384.1 ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) 148.0 180.0 285.0 545.0 1055.9 POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (MILLIONS) 11.6 15.0 18.9 . . URBAN POPULATION (PERCENT OF TOTAL) 29.3 34.6 39.3 45.7 63.4 POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 34.0 STATIONARY POPULATION (MILLIONS) 70.0 YEAR STATIONARY POPULATION IS REACHED 2090 POPULATION DENSITY PER SQ. EM. 26.0 34.0 42.0 40.7 28.1 PER SQ. 10. AGRICULTURAL LAND 59.0 76.0 93.0 598.6 81.7 POPULATION AGE STRUCTURE (PERCENT) 0-14 YRS. 44.0 47.5 46.5 44.0 41.4 15-64 YRS. 53.0 48.3 50.1 52.5 54.7 65 YRS. AND ABOVE 3.0 4.2 3.4 3.5 3.9 POPULATION GROWTH RATE (PERCENT) TOTAL 2.6 2.5 2.9 2.6 2.7 URBAN 6.4 4.2 4.6 4.5 4.1 CRUDE BIRTH RATE (PER THOUSAND) 52.0 47.0 45.0 41.6 34.8 CRUDE DEATH RATE (PER THOUSAND) 23.0 17.0 13.0 13.7 8.9 GROSS REPRODUCTION RATE 3.4jd 3.4 3.2 2.9 2.5 FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) .. 25.1 78.0 USERS (PERCENT OF MARRIED WOMEN) .. 1.0 5.4 16.2 FOOD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA (1969-71=100) 99.0 98.0 79.0 93.5 106.9 PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) 96.0 102.0 105.0 103.6 107.4 PROTEINS (GRAMS PER DAY) 62.0 66.0 67.0 69.8 65.6 OF WHICH ANIMAL AND PULSE 13.0 13.0 13.0 17.5 33.7 CHILD (AGES 1-4) MORTALITY RATE 30.0 22.0 17.0 17.5 8.4 HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) 47.0 52.0 55.0 54.4 63.1 INFANT MORTALITY RATE (PER THOUSAND) .. .. .. .. 66.5 ACCESS TO SAFE WATER (PERCENT OF POPULATION) TOTAL .. 51.0 55.0 62.5 65.9 URBAN .. 92.0 100.0 82.9 80.4 RURAL .. 28.0 25.0 45.1 44.0 ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) TOTAL .. 29.0 .. .. 62.3 URBAN .. 75.0 .. .. 79.4 RURAL .. 4.0 .. .. 29.6 POPULATION PER PHYSICIAN 9400.0/d 12650.0 10136.0 4688.7 1849.2 POPULATION PER NURSING PERSON .. 2820.0 1826.0 1751.5 1227.5 POPULATION PER HOSPITAL BED TOTAL 626.0 688.0 774. 0 635.5 480.3 URBAN .. 460.0 RURAL .. 2980.0 ADMISSIONS PER HOSPITAL BED .. 15.5 16.5 HOUSING AVERAGE SIZE OF HOUSEHOLD TOTAL 4.8 5.5 URBAN 4.3 4.9 RURAL 5.1 5.8 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL 2.2 2.4 URBAN 2.1 2.1 .. RURAL 2.3 2.6 .. ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TOTAL 76.0/e URBAN 85. 47w 68.4 65.0 RURAL 31.0/e .. ..  -244 - ANNEX I Page 2 of 6 TABLE 3A MDROCCO - SOCIAL INDICATORS DATA SHEET MOROCCO REFEBNCE GROUPS (WEIGHTED AVEGES - MOST RECENT ESTIMATE ) iDDLE INCOHE 1OST RECENT 9DRTH AFRICA & MIDDLE INCOME 1960 lb 1970 lb ESTIMATE /b MIDDLE EAST LATIN AlSERICA 6 CARI3E1AN EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: MOTAL 47.0 52.0 68.0 76.4 ".7 MALE 67.0 67.0 86.0 92.2 101.0 FEhALE 27.0 36.0 50.0 59.9 99.4 SECONDARY: TOTAL 5.0 13.0 17.0 33.3 34.4 MfALE 7.0 18.0 21.0 41.9 33.5 ENALE 2.0 7.0 12.0 24.2 34.7 VOCATIONAL ENROL. (2 OF SECONDARY) .. 2.0 3.0 9.8 38.2 PUPIL-TEACHER RATIO PRIMARY 43.0 34.0 40.0 39.2 30.5 SECONDARY .. 20.0 21.0 25.1 14.5 ADULT LITERACY RATE (PERCENT) 14.0 21.0 28.0 39.7 76.3 CONSUHPTIOY PASSENGER CARS FER THOUSAND POPULATION 11.0 15.0 19.6 15.3 43.0 RADIO RECEIVERS PER THOUSAND POPULATION 46.0 60.0 83.0 139.6 245.3 TV RECEIVERS FER TEOUSAND POPULATION 0.4 12.0 29.0 29.0 84.2 NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER SdOUSAND POPULATION 22.0 16.0 21.0 22.2 63.3 CINEnA ASNUAL ATTENDANCE PER CAPITA 2.0 .. 1. 8 2.8 LABOR FORCE TOTAL LABOR FCRCE (THOUSANDS) 3369.7 3951.7 4954.8 TEKrLE (PERCENT) 10.6 15.2 16.0 9.6 22.2 AGRICULTURE (PERCENT) 62.0 56.9 53.0 47.0 37.1 DUSTRY (PERCENT) 13.8 17.4 20.0 23.8 23.5 PARTICIPATION RATE (PERCENT) TOTAL 29.0 26.4 26.1 26.1 31.5 MALE 52.1 45.2 44.4 47.4 48.9 FEMALE 5.9 7.5 7.9 4.7 14.0 ECONOMIC DEPENDENCY RATIO 2.0 1.9 1.9 1.9 1.4 INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY nIGHEST 5 PERCENT OP HOUSEHOLDS 18.0/f 20.0f .O HIGHEST 20 PERCENT OF HOUSEZOLDS 43.3f 49.Of . LOWEST 20 PERCENT OF HOUSEHOLDS 7.O/f 4.0/f . LOWEST 40 PERCENT OF HOUSEHOLDS 18.0Lf 12.0/f . POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US PER CAPITA) URBAN 107.0 157.0 389.0 262.5 RURAL 66.0 101.0 238.0 140.4 190.8 ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAPITA) URBAN .. .. 242.0 202.1 474.0 RURAL .. .. 157.0 122.2 332.5 ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN 51.0 38.0 28.0 22.1 RURAL 49.0 45.0 45.0 33.1 Not available INot applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. /b Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970 between 1969 and 1971; and for Most Recent Estimate, between 1974 and 1978. /c Excludes Morocian provinces in V. Sahara; /d 1962; /e Brick buildings only; /f Consumption expenditures of households. 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