Morocco - Second Small-scale Industry Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 35V2-MOR MOROCCO STAFF APPRAISAL REPORT SECOND SMALL SCALE INDUSTRY PROJECT June 10, 1981 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$l = DH 5* FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS BCM Banque Commerciale du Maroc BCP Banque Centrale Populaire BdM Banque du Maroc BMCE Banque Marocaine pour le Commerce Exterieur BMCI Banque Marocaine pour le Commerce et l'Industrie BNDE Banque Nationale pour le Developpement Economique BRP Banque Regionale Populaire CCG Caisse Centrale de Garantie CDM Credit du Maroc CMPE Centre Marocain de Promotion des Exportations DFC Development Finance Company EEC European Economic Community EIB European Investment Bank ERR Economic Rate of Return FRR Financial Rate of Return ITC International Trade Center LIBOR London Inter-Bank Offered Rate MCI Ministry of Commerce and Industry ODI Office pour le Developpement Industriel PSA Procedure Simplifiee Acceler4e SGMB Societe Generale Marocaine de Banques SSI Small Scale Industry TAU Technical Assistance Unit (of ODI) * US$l = DH 5.26 as of 5/25/81; DH 4.33 as of l/1/81; DH 3.76 as of 1/1/80.  FOR OFFICIAL USE ONLY MOROCCO SSI-II PROJECT Table of Contents Page No. I. INTRODUCTION ............................................. 1 II. THE INDUSTRIAL SECTOR .................................... I A. Performance and Constraints .......................... 1 B. The 1981-85 Plan ..................................... 2 III. THE FINANCIAL SECTOR ..................................... 4 A. The 1978-1980 Stabilization Program .................. 4 B. Interest Rates and Cost of Capital ................... 5 C. Financial Intermediaries for Financing Industry ...... 6 IV. SMALL SCALE INDUSTRIES (SSI) .............................. 8 A. Definitions .......................................... 8 B. Characteristics and Performance ...................... 8 C. Institutional Framework for SSI ...................... 10 D. Existing Mechanisms for Lending to SSI .... ........... 13 E. Problems and Prospects ............................... 15 V. BANQUE POUR LE DEVELOPPEMENT ECONOMIQUE (BNDE) ............ 16 A. BNDE's Role in the Project ........................... 16 B. Structure ............................................ 17 C. Bank Loans to BNDE ................................... 18 VI. THE PROJECT ............................................... 18 A. Objectives ........................................... 18 B. Justification ........................................ 19 C. Loan Features ........................................ 19 D. Procurement and Disbursement ......................... 21 E. Benefits and Risks ................................... 22 VII. AGREEMENTS REACHED AND RECOMMENDATIONS ................... 22 This report was prepared by Messrs. J.M.R. Feige, M. Diop, E. Forestier and J.F. Landeau, who visited Morocco in November 1980 to appraise the project. 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.  Table of Contents (Continued) ANNEXES Annex 1: Structure of Interest Rates Annex 2: Sectoral Characteristics of SSIs (1977) Annex 3: Project File Annex 4: Estimated Disbursement Schedule for the Proposed Loan  I. INTRODUCTION 1.01 The proposed SSI-II project is in support of the Government's basic objectives for industrial development in Morocco, which include creating low-cost employment through support of small scale industries (SSIs), fostering entrepreneurship and broadening the industrial base in Morocco, and continuing technical assistance to and improving the incen- tives for SSI. 1.02 The project would provide a loan to the Treasury of US$70 million, r of which at least $68.75 million would be on-lent to BNDE and commercial banks with the objective of providing further assistance to small labor- intensive industries. This loan will also include provisions for (a) technical assistance to SSIs ($l.0 million) if continuation of present funding by the EEC cannot be obtained and (b) consultants to help the SSI Policy Making Unit of the Ministry of Commerce and Industry (MCI) to carry out its program of studies ($0.25 million). 1.03 The SSI-II loan follows the Bank's first loan in this sector (Loan 1687-MOR, US$25 million), which was fully committed well ahead of schedule within one year after it became effective in December 1979. The Banque Nationale pour le Developpement Economique (BNDE) will play a central role as the administrator and beneficiary of part of the loan. The same insti- tutional mechanisms and procedures provided under the first SSI loan, including the SSI sub-loan guarantee system through the Government owned and operated Caisse Centrale de Garantie (CCG), shall be retained under this project considering that they have worked smoothly and successfully as demonstrated by the speedy commitment of the SSI-I loan. 1.04 As the first SSI loan to Morocco has not yet been fully disbursed, no Project Performance Audit Report is available. However, the experience gained so far from the first SSI loan has been reflected in SSI-II; in particular, the allocation of the loan to different SSI groups (para. 6.07), and the policy and technical assistance to be provided (paras. 4.08 and 4.11). II. THE INDUSTRIAL SECTOR A. Performance and Constraints Performance 2.01 In order to redress a rapidly deteriorating external financial situation, the Government initiated an interim Austerity Plan (1978-80). The Plan curtailed the growth of large capital intensive industries and developed an industrial policy more adapted to the conditions and limited resources of the country: continuation of economically justified long-term investments (cement and sugar for local market; phosphoric acid for exports); development of the manufacture of intermediate and capital goods; strenathening of the industrial exports policy; industrial decentraliza- tion; and the promotion of SSI for employment creation. At the same time  - 2 - the Government reassessed its industrial development strategy, which previously had been based on investments in large, capital intensive and mainly public sector enterprises, and on a policy of import substitution for consumer and intermediate products. Investments decreased substan- tially in that period, imports of manufactured goods (mainly intermediates and capital goods) dropped by 15% in volume in 1978-79; the growth of manufacturing slowed down from 8.8% p.a. during 1975-77 to 4.5% p.a. in 1978-79. In 1980, the ec6nomic climate improved. Exports of manufactured goods increased in volume at about 17% p.a. in 1980, as compared with 10% p.a. during 1973-77, contributing to a reduction in the deficit of the balance of payments from 17% of GDP in 1977 to an estimated 8% in 1980. Textiles and chemicals emerged as significant export industries with food processing, which has traditionally exported about 7% of its production; these three sectors account for about 90% of manufacturing exports. The share of manufactured exports in total exports increased as a result from 23.6% in 1975 to 38.5% in 1979. The export potential for manufactured goods will be more fully developed under the new 1981-85 Plan (para. 2.04). Constraints 2.02 There are several constraints that limit the possibilities of growth of the manufacturing sector: the balance of payments deficit remains substantial, and limits increases in imports of equipment and raw materials for industry resulting in under-utilization of capacity; the pervasive lack of well-trained technicians and foremen in manufacturing; and the current incentive system (para. 2.09). 2.03 Foreign investments have been limited as a result of the "moroc- conization" policy introduced in the early 70's, administrative delays, and the shortage of skilled labor, even though guarantees are provided for the transfer of dividends and the repatriation of capital. The incentives of the Investment Code (duty exemptions on imported equipment, 2% interest rebates on long and medium term BNDE loans to manufacturing, and income tax exemptions) have not encouraged industrial enterprises to select labor intensive processes, and the exports incentives (tax exemptions on import generated profits, and lower interest rates on short-term export credits) have been insufficient to offset the negative impact of protection on the price of local inputs and on the relatively higher profitability of the domestic market. B. The 1981-85 Plan 2.04 General Objectives and Strategy. A rapid rate of population growth (over 3% p.a.) and a high level of unemployment (9.7% in 1980) require an acceleration of the growth of output and employment. The Plan targets a GDP growth of about 6.5% annually, which would allow an annual increase in consumption of about 2.5% per capita in real terms and an annual growth of employment of 3.7%, i.e. slightly more than the projected  3.3% annual growth of the labor force during the period. To achieve these objectives while overcoming the severe foreign exchange and savings constraints of the past few years, the Plan emphasizes export-oriented growth with a projected real growth of exports of 8.5% p.a., and a major domestic savings effort. However, the large volume of investments, esti- mated at DH 110 billion in 1981 prices, to support this strategy means that external financing requirements will remain substantial over the 1981-85 period. 2.05 The Industrial Sector. Industrial investment is projected to total DH 20.9 billion (19% of total investments) during 1981-85 and generate a growth rate of 8.4% p.a. in industrial value added increasing industrial employment by 5.3% p.a. The increase of industrial exports is the first priority; without such exports Morocco could not continue importing the raw materials and equipment goods it needs without further destabilizing its balance of payments. Investments in exportoriented projects would total about DH 11.6 billion, of which DH 10.7 million are for large projects for phosphate derivatives in which Morocco has a marked competitive advantage. Exports of industrial products are projected to grow by 13.3% p.a. and their share in total exports should continue rising, reaching 45% by 1985 compared to 38.5% in 1979. 2.06 The other major objectives for industry in the new Plan are (i) the promotion of labor intensive small and medium scale industries (12% of total industrial investment or DH 2.6 billion); and (ii) the selective development of engineering industries (15% of total industrial investments or DH 3.1 billion). 2.07 Bank Support. The Bank supports the Plan's objectives and would, through a ninth loan to BNDE and its sector work,help the Government reach these objectives. The recent review of the engineering industries by the Bank 1/ should help to develop this subsector where imports represented 60% of total manufacturing imports in 1977. In addition, a number of measures will be taken to strengthen exports and to reform the incentive system for industry. 2.08 The recently created Centre Marocain de Promotion des Exportations (CMPE), assisted by the International Trade Center (ITC) in Geneva, is becoming the central institution for tne promotion and the development of exports. ITC has proposed a 3-year (1982-84) assistance program to CMPE to be financed by UNDP. 2.09 A revision of the incentives system (Protection, Investment and Export Codes) will be undertaken by the Government after a series of studies to assess the current system and to recommend appropriate changes are completed by the end of the year; these studies, supported by the Bank, have been in progress since 1979. Government recommendations for reformu- lating the structure of protection and of the incentive codes are expected 1/ Morocco-Review of the Engineering Industries - February 2, 1981.  in the first quarter of 1982 and the promulgation of a new Export and Investment Code is scheduled for the end of 1982, while completion of a gradual reform of the protection structure and tariffs is envisaged by mid-1983. The new Codes are expected to reduce administrative delays, and the various biases that exist presently between sectors and between firms. They are also expected to offer more effective incentives to foreign investors to award sub-contracting contracts to Moroccan firms, and encourage transfers of technology particularly needed by the engineering industries. III. THE FINANCIAL SECTOR 3.01 Morocco has a well-developed financial sector. It consists of fifteen commercial banks, five specialized institutions, and two savings banks, which are controlled by the Banque du Maroc (BdM), Morocco's Central Bank. Medium- and long-term financing is provided to private investors mainly by three of the specialized institutions: the agricultural credit bank (CNCA), the housing and tourism bank (CIH), and the industrial bank (BNDE), all of which have received Bank loans. There is also a capital market at the Casablanca stock exchange where shares of private companies are listed and traded, but its role is limited (less than 300,000 shares traded in 1979) and has been declining (volume of shares traded declined by 75% between 1975 and 1979). A. The 1978-1980 Stabilization Program 3.02 Late in 1977, the Government recognized the need to bring public consumption, investment, and imports under control to avoid a liquidity crisis. To restore the balance between investment and savings, several deflationary measures were taken in 1978. Public capital expenditures were curtailed by limiting Government reliance on both Central Bank advances and foreign loans with maturities of less than ten years; short-term credit by commercial banks to the private sector was tightened; and interest rates on time deposits were increased to stimulate domestic savings, the low level of which is a serious weakness of the Moroccan economy. 3.03 As a result of these actions and other austerity measures, the Moroccan economy entered a recession cycle. The industrial production index did not rise between 1978 and 1979, and capital expenditures declined (in current prices) by 27% in 1978 and 13% in 1979. Preliminary data for 1980 seem to indicate, however, a turnaround in both production and invest- ment trends in the manufacturing industry. 3.04 To curb inflationary pressures, the Government limited the growth of short-term credits to 10% in 1979, but freed the growth of rediscount- able medium-term credits and of loans to exporters. The results did not meet the Government's expectations, because short-term credits granted by  the banking system increased by 13% in 1979 while medium-term credits decreased by 2%; the same undesirable pattern, but more pronounced, was observed during the first ten months of 1980. The credit squeeze worsened the traditional poor liquidity of the Moroccan commercial banks, leading them to rely considerably more on the Central Bank rediscount and on the interbank short-term money market, where interest rate reached 10.5% in late 1979. This situation did not ease in 1980 and, for the first time since 1975, the Central Bank raised its basic rediscount rate, from 4.5% to 6%. B. Interest Rates and Cost of Capital 3.05 The Government determines interest rate ceilings on both deposits received and loans granted by financial institutions in Morocco. The interest rate structure was overhauled on October 1, 1980 in consultation with the IMF; the new structure is detailed in Annex 1. Interest rates were increased on the average by one-half percent on term deposits to attract more savings, and lending rates were also raised by 1-2% because of higher inflation and increased cost of borrowing for financial institutions (para. 3.07). This followed a previous raise in interest rates on term deposits in mid-1978. Term deposits increased by 36% in 1978 and 24% in 1979, and the share of deposits maturing beyond four months in the total rose from 61% in 1977 to 65% in 1979. The recent restructuring is expected to continue this trend. 3.06 Cost of Resources. The cost to the commercial banks of local currency resources varies widely depending on their maturity: sight depo- sits yield no interest, except for Moroccan workers abroad on repatriated savings (3% p.a.), and insurance companies (4% p.a.); short-term deposits yield from 4% p.a. for one-month deposits to 9% for eighteen-month depo- sits, and there is no ceiling for deposits maturing beyond eighteen months. The cost of rediscount facilities at the BdM ranges from 3.5% for commercial paper for agriculture to 5% for medium-term paper, while the basic rediscount rate is 6%. Local currency bonds carry interest rates up to 10% p.a. and can be issued only by specialized financial institutions (CIH, BNDE, CNCA) and large public enterprises. The cost of directly contracted foreign exchange resources is not regulated by the Government and thus reflects international rates, although the Government influences the choice of borrowed currencies for financial intermediaries, and indirectly their cost, because it bears the exchange risk. 3.07 Lending Rates. For the first time since 1975, lending rates were raised across the board. The maximum rates charged by commercial banks on rediscountable loans were increased from 8% to 9% p.a. for short-term loans, and from 8% to 10% p.a. for medium-term loans. BNDE, the major source of industrial financing, is now charging a single rate (12% p.a.) on all its loans regardless of maturity, instead of 10% for medium-term loans and 11% for long-term loans as was the case until October 1980.  - 6 - 3.08 Effective Cost of Borrowing. The effective cost of capital for industrial borrowers is, however, 10% p.a. regardless of maturity. This is because industrial projects approved under the 1973 Investment Code are eligible for a 2% interest rate rebate. The same would apply to any Bank-financed SSI subloans with a maturity of more than seven years. 3.09 Interest rates have been positive in real terms in most recent years and are expected to remain positive given projected inflation rates. Inflation remained moderate through 1976 because of an array of price controls and subsidies, which shielded domestic prices against rapid changes in international price levels. Inflationary pressures, however, developed in 1977 and prices as measured by the cost-of-living index rose 12.5%. Austerity measures imposed in 1978 slowed down the inflation rate to 9.7% in 1978, 8.3% in 1979, and 9.4% in 1980. For SSI, the onlending rates will be 10% p.a. for subloans up to seven years, and 12% p.a. for subloans over seven years but with a 2% interest rate rebate which brings the effective interest to 10% p.a. as well; this corresponds to the rates on rediscountable medium-term credits and on BNDE's long-term loans respec- tively. The same principle was applied under the first SSI loan, where the demand for SSI subloans remained at a high level. Over the commitment life of the proposed loan (1981 through 1983), the interest rate will be posi- tive compared with projected inflation rates of 8-9% p.a. C. Financial Intermediaries for Financing Industry 3.10 The Commercial Banks. At the end of October 1980, Morocco's fifteen commercial banks had total assets of DE 20.5 billion ($4.1 bil- lion). The degree of concentration is high: two banks (BCP and BMCE) accounted for 44% of total assets at the end of 1979, and five other banks (BCM, BMCI, CDM, SGMB, and CMCB) accounted for another 43%. The banking network totalled 543 branches at the end of 1979, but its geographical distribution is uneven because 25% of all branches are located in Casa- blanca and another 50% in cities along the Atlantic coast. 3.11 Moroccan law requires that commercial banks be at least 50% Moroccan-owned, and this has led to the Government taking major partic- ipations in the largest banks. They appear, nevertheless, to be free of major Government interference and they are efficiently and profitably run. As Table 3.01 indicates, commercial bank lending is predominantly short- term. Transformation of deposits into medium-term credits is low and has been steadily declining, from 7.1% to 5.5% between the end of 1978 and October 1980. The main reason for this situation is the relatively high spread of 7.5% the commercial banks enjoy on their short-term lending, compared to the spread of only 1% on medium-term credits financed with term deposits.  - 7 - 3.12 Financial intermediaries are responsible for the bulk of medium- and long-term credits to the economy, and had granted 84% of outstanding loans at the end of 1979, compared to 16% by the commercial banks. Finan- cial intermediaries are specialized by sector of activity. CNCA lends primarily to agriculture and to agro-business operations 1/, CIR lends to tourism projects and housing 2/, and CDG is a Government institution in charge of public fund management (e.g., pension and insurance funds, postal savings, etc.). BNDE plays a key role in financing capital expenditures of the Moroccan industry. Table 3.01: SUMMARIZED BALANCE SHEETS OF COMMERCIAL BANKS AND FINANCIAL INTERMEDIARIES (End of 1979 - DH million) 15 Commercial 5 Financial (DH 5 = $1) Banks Institutions Liabilities Equity 822 698 Sight Deposits 11,742 3,049 Term Deposits 4,432 Medium and long-term Borrowings 145 3,364 Others 2,661 1,438 Total Liabilities 19,802 8,549 Assets Credits to the Economy 10,287 6,224 Short-term (9,299) (1,115) Medium-term (940) (5,109) Long-term (48) Equity Investments 166 363 Credits to the Treasury 6,344 844 Others 2,735 1,118 Total Assets 19,532 8,549 Source: BdM, 1979 Annual Report. 3.13 Financing of industrial investment takes various forms, from medium- and long-term credits granted by commercial banks and BNDE, to supplier credits from abroad, leasing, and equity participation. There 1/ See Staff Appraisal Report on CNCA IV (No. 2426-MOR, dated April 30, 1979). 2/ See Staff Appraisal Report on CIH IV (No. 3014-MOR, dated December 18, 1980).  -8- are no data on supplier credits. Although discussions with industrial promoters showed that these credits are available, the exchange risk involved is often a deterrent. Banks, such as BMCI, offer 3-year loans limited to the financing of equipment; processing delays are short, but the cost is higher than medium-term credits. Leasing, introduced in 1965, is offered by three institutions (Maroc-Leasing, Maghrebail, Credico), but its impact is still marginal with financing peaking at DH 121 million in 1977. Equity participations are taken occasionally by the banks and BNDE, but there is no company specializing in venture capital although the idea is under consideration. There are also less orthodox forms of financing such as short-term credits to promoters to help them raise the necessary equity, and short-term revolving credits to allow banks a greater spread than on straight medium-term loans; the extent of such practices is not known. IV. SMALL SCALE INDUSTRIES (SSI) A. Definitions 4.01 Generally in line with the eligibility criteria used under SSI-I project (Loan 1687-MOR), SSIs are currently defined as enterprises having (i) a total project cost (new SSIs), or total net assets after expansion, of less than DH 5 million ($1 million) excluding land but including build- ing cost and permanent working capital needs, and (ii) an investment cost per job created of less than DH 40,000 to 50,000 ($8,000-10,000) depending on location and type of industry. Special emphasis is placed on the smaller of these industries, which are those with total net assets after the investment project of less than DH 2.5 million ($500,000). Because firms in the target group will generally employ between 5 and 50 workers, the characteristics of the SSI can be identified with those of the 5-49 workers segment covered by the latest published industrial survey (1977). B. Characteristics and Performance 4.02 Estimates from the 1977 Industrial Survey show that about 3,160 SSIs employed some 42,100 people, representing 74% of all industrial estab- lishments and 20% of manufacturing employment. About two-thirds of all SSI establishments are concentrated in the three largest urban areas (Casablanca, Fez and Marrakech). The very small enterprises, or handi- crafts, with less than five employees are more scattered in rural areas because they tend to specialize in supplying local markets. A detailed study of handicraft has not been undertaken. Handicrafts will be eligible for financing under the SSI scheme, but as a separate scheme to finance handicrafts is already in operation and offers very favorable terms, any handicraft financing under the SSI scheme is expected to be negligible.  4.03 Two sub-sectors dominate SSI activities: food industries and textiles/leather. In 1977 together they represented 56% of employment, 55% of SSI total value added, 95% of total SSI exports, and 59% of SSI investments. Table 4.01 shows that small scale food industries (canned fruits and vegetables, and olive oil mainly) contributed to almost half of all exports by the food processing sector in 1977, demonstrating a strong capacity to export. SSIs play a substantial role in food processing, mechanical/electrical industries, construction materials, and the wood and furniture industries, in particular by supplying local markets where they take advantages of transport economics (e.g. brick, tiles, furniture, etc.); SSIs in textiles/leather have a strong potential for employment creation with 34% of total labor force, but contribute little to exports. This is due to several reasons: (i) local demand is scattered in small towns and rural areas where SSIs can easily use their advantage of proximity to consumers; (ii) the SSIs have difficulty in coping with the quality and delivery requirements of foreign buyers; and (iii) there is no adequate organization in Morocco able to assist SSIs in exporting. 4.04 In future, export opportunities could develop by large foreign companies sub-contracting production to SSIs and, in the process, providing technical assistance. Some recent promising examples of such subcontract- ing arrangements with large European firms have been for automotive and electronic components. Further studies by the Policy-Making Unit and CMPE to identify the subsectors most promising for such arrangements, as well as possible promoters, will be undertaken. Table 4.01: MOROCCO: SUB-SECTORAL DISTRIBUTION OF SSIs - 1977 (5-49 workers) SSI Employ- SSI Value SSI Exports SSI Invest- ment as % of Added as % of as % of ment as % of Total Total Total Total SSI Sub- SSI Sub- SSI Sub- SSI Sub- Sub-Sector Total Sector Total Sector Total Sector Total Sector Food Processing 22 16 40 22 77 45 39 18 Textiles, Leather 34 20 15 20 18 12 20 20 Mechanical/ Electrical 12 17 12 12 2 12 8 12 Chemicals/ Construction Materials 15 18 18 16 2 2 16 11 Others (Wood, Paper, etc.) 17 34 15 31 1 4 17 48 TOTAL MANUFACTURING 100 20 100 19 100 22 100 17 Source: Ministry of Industry; Industrial Survey, 1977  - 10 - 4.05 Until the mid-seventies, little attention was given to SSI in terms of economic policy. Morocco's industrial development strategy in the last decade gave priority to large public enterprises. Despite this SSIs contributed significantly to industrial development during the 1969-77 period as shown in Table 4.02. SSI represented about 19% of industrial value-added by 1977. Between 1969 and 1977, labor productivity of total manufacturing (measured by the value added per worker) was greater in larger enterprises than in small ones because of economies of scale exist- ing in most sub-sectors; however, it increased faster in SSI, thus indicat- ing a potential competitive edge of some SSIs vis-a-vis large firms in some subsectors. In 1977, value added per worker in textiles/leather, and more significantly in food industries, was greater in SSI than in large enter- prises. Table 4.02: MOROCCO: MAJOR CHARACTERISTICS OF SSI IN 1969 AND 1977 (5-49 workers) 1969 1977 Growth % 1. Number of SSI establishments 2,840 3,160 11.3 2. SSI employment 37,200 42,100 13.2 3. Average employment per establishment 13.1 13.3 4. 2 as % of manufacturing employment 29.4 19.9 5. SSI Value Added (Million DH 1969 constant prices) 575 672 16.9 6. 5 as % of Manufacturing Value Added 28.5 19.3 7. Value Added per employee in SSI (1969 DB '000) 15.4 16.0 3.9 8. Value added per employee in non SSI (1969 DH '000) 16.1 16.5 2.5 9. Exports in SSI (M. DH) n.a. 462 10. 9 as %of manufacturing exports n.a. 21.9 11. Investments in SSI (M. DH) n.a. 223 12. 11 as % of manufacturing investments n.a. 17.4 Source: Ministry of Industry; Industrial Surveys 1969 and 1977. C. Institutional Framework for SSI 4.06 As a result of the dialogue between the Government and the Bank during the preparation of the SSI-I project, the Government set up two units to address the specific needs and problems of SSIs: the PolicyMaking Unit, and the Technical Assistance Unit (TAU). 4.07 The Policy-Making Unit was established under the supervision of the Director of Industry in the Ministry of Industry and Commerce in October 1978. In the last two years, the Unit, staffed with two full-time  - 11 - professionals, has completed two studies on the characteristics and impor- tance of SSIs in Morocco and another one on promotion of SSI development in general (in the area of fiscal and credit policy, custom regulations, pro- curement), and participated in several promotional seminars. The Unit made a few policy recommendations which were incorporated in the 1981-85 Plan (e.g., to broaden access to public contracts for SSI, to ease the import licensing system, to encourage sub-contracting, and to give SSI priority in industrial zones). The already completed studies, contributed to raising general consciousness about the key role and specific needs of SSIs, but failed to either formulate strategy guidelines for SSI development or propose basic policy changes. This is due to the insufficient staffing of the Unit as well as its limited influence on policy making. During 1981, the Unit plans to conduct a survey of about 250 SSIs to identify specific problems and requirements of small entrepreneurs, and these data will be reviewed by Bank supervision missions. 4.08 The work and guidance of the Unit could be enhanced by strengthen- ing its staff and by closer supervision of the Unit by the Technical Committee. The Technical Committee, made up of representatives from the Ministry of Finance, BdM, ODI, the Ministry of Industry, and BNDE, reviews and approves SSI subprojects proposed for Bank financing. The Technical Committee has the right (not exercised thus far) to propose specific policy and administrative measures to be studied by the Unit to remedy the draw- backs mentioned above, and to follow-up their implementation; to increase the effectiveness of the Technical Committee, a permanent secretariat will be established. The Moroccan authorities recognize that SSIs do not fit well into the existing standard incentive scheme to industry, which is mainly oriented towards large scale modern enterprises. To remedy this situation, a major review of the Industrial Investment Code is scheduled for 1982 on the basis of sectoral preparatory work, being undertaken with Bank assistance. Incentives specific to SSIs could thus be introduced. The Unit should also investigate promotion of subcontracting between small and larger enterprises, involvement of SSIs in carrying out public con- tracts, quality control of products, and marketing especially for exports. A program of work for these undertakings has been identified during nego- tiations, and financing for foreign experts will be provided under the loan of up to $0.25 million to review in detail the existing policy and incen- tive systems relating to SSI, and to make recommendations on how this should be changed to foster efficient SSI development (includes provision for up to 18 man months of consultants time at $10,000 per man month). The terms of reference for any consultants will have to be approved by the Bank, and supervision missions will monitor the progress and review the results of any studies undertaken. 4.09 Technical Assistance Unit (TAU). The delivery of technical assistance to SSI promoters, in the form of extension services, was a key component of the first SSI project. The TAU was established in November 1978 and is part of ODI, a Government agency established in 1973 to promote industrial development in Morocco through sectoral studies, general promotional activities in Morocco and abroad, and direct Government  - 12 - participations in large projects. The TAU is adequately staffed with seven professionals, while a further two are being recruited; in addition, four foreign experts joined TAU in 1980. The terms of reference for the TAU, as agreed with the Bank, call for activities in the following fields; (a) Identification and preparation of SSI projects in coordination with banks and the Ministry of Industry. (b) Technical advice to small entrepreneurs in the selection and procurement of equipment and in preparing their requests for financing. (c) Assistance in project implementation and in solving infrastructure and administrative bottlenecks. (d) Basic assistance to small enterprises in identifying and solving management and production problems. (e) Assistance, in cooperation with banks, in identifying and solving accounting and financial deficiencies in operating SSIs. (f) Assistance in locating marketing outlets and/or subcontracting arrangements in local or foreign markets. 4.10 When four foreign experts on SSI financed by an EEC grant arrived in June 1980, they were able to start quickly on a program which had been prepared by the Moroccan staff of the TAU. In three months, they had visited, diagnosed, and started to provide assistance in production and general management to 37 SSIs, 27 of which were Bank-financed subprojects. Because the extension service has been in operation for less than a year, an in-depth evaluation would be premature. However, the support provided to the SSIs assisted by the TAU is both adequate and well received by the promoters. In the future, increased emphasis will be given to assisting with the selection of equipment and appropriate technology. 4.11 The TAU's medium-range objective is to cover progressively all the activities included in the terms of reference set at its inception (para. 4.09). In particular, early attention will be given to the following two activities. First, a data bank of market, technical, and financial data concerning SSIs will be set up to help SSI promoters identify investment opportunities, and a comprehensive analysis of administrative procedures specific to SSI will be undertaken to assist promoters with the problems encountered during project processing (para. 4.09(b) and (c)). Second, the TAU is planning to offer seminars on elementary accounting principles, general management principles, and on other subjects suited for group teaching (para. 4.09(e)). 4.12 The financing of the TAU program is assured through June 1982 with an EEC grant. It is expected that by mid-1981 the EEC Commission will have taken a decision on a possible renewal of this grant for another 2 years.  - 13 - If an EEC commitment is not obtained, ODI has requested financing by the Bank. The needs are estimated at $1 million over two years to cover the foreign currency costs of four experts 1/, participation in promotional campaigns abroad, search for export-market opportunities, etc. Considering the crucial role of the technical assistance component, up to $1 million will be allocated out of the SSI-II loan for covering the foreign exchange cost of the technical assistance program sponsored by ODI over the period July 1982-June 1984. If alternative sources of financing for this com- ponent are obtained, the funds would be reallocated for use under the credit line. D. Existing Mechanisms for Lending to SSI 4.13 The Accelerated Procedure (PSA). The PSA is a simplified proce- dure which allows commercial banks to rediscount loans to SSI with the BdM without the detailed review by BNDE required for other rediscounted loans in the industrial sector. PSA loan approvals have increased from DH 5.6 million for 63 projects in 1973 to a peak of DH 125.2 million for 187 proj- ects in 1977; during the first half of 1980, DH 22 million of loans were approved for 76 projects. The PSA procedure has some drawbacks. It has sometimes taken 3-6 months between appraisal and disbursement; eligibility criteria are also a constraint because annual turnover and total assets, after the project, must not exceed DH 7.5 million and DH 5 million respec- tively; a minimum of 40% equity is also required from the promoters, and PSA loans are limited to DH 1 million per firm. As a result, the PSA has served only a limited number of SSIs. 4.14 The SSI Pilot-Line. The Pilot Line extended by the Bank in con- junction with the eight loan to BNDE (1428-MOR) in 1977 was designed to help remedy some of the PSA shortcoming, to improve knowledge of the sub- sector, and to draw lessons from the experience acquired 2/. The $5 mil- lion allocated for this purpose were shared between BCP (