Morocco - Housing Loan To Credit Immobilier Et Hotelier Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 4151-MOR STAFF APPRAISAL REPORT MOROCCO FIRST HOUSING LOAN TO CREDIT IMMOBILIER ET HOTELIER February 8, 1983 Urban Projects Division Europe, Middle East and North Africa 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 CURREZNCY EQUIVALENT Currency Unit - Dirham (DH) US$ = DH 6.00 DH 1 = US$0.17 GLOSSARY OF ABBREVIATIONS BCM Banque Commerciale du Maroc BCP Banque Centrale Populaire BdM Banque Du Maroc BNDE Banque Nationale pour le Developpement Economique CDG Caisse de Depot et de Gestion CEN Caisse d'Epargne Nationale CGI Compagnie Generale Immobiliare CIFM Compagnie Immobiliere et Fonciare Marocaine CIH Credit Immobilier et Hotelier CNCA Caisse Nationale de Credit Agricole ERAC Etablissement Regional d'Amenagement et de Construction MHAT Ministere de l'Habitat et de l'Amenagement du Territoire MOF Ministere des Finances SOPHAL Societe pour la Promotion de 1'Habitat Locatif Fiscal Year January 1 - December 31  FOR OFFICIAL USE ONLY TABLE OF CONTENTS PAGE INTRODUCTION. . . . . . . . . . . . . . . . . . . . . . . 1 II. THE HOUSING SECTOR. . . . . . . . . . . . . . . . . . . . 2 A - Background. . . . . . . . . . . . . . . . . . . . . . 2 B - Housing Construction and Policies . . . . . . . . . . 3 C - Housing Finance . . . . . . . . . . . . . . . . . . . 5 D - Bank Strategy in the Sector and Project Rationale . . 6 III. THE PROJECT . . . . . . . . . . . . . . . . . . . . . . . 8 A - Project Objectives. . . . . . . . . . . . . . . . . . 8 B - Project Scope . . . . . . . . . . . . . . . . . . . . 8 C - Project Description. 8 D - Project Financial Features. . . . . . . . . . . . . . 13 E - Procurement and Disbursement. . . . . . . . . . . . . 15 F - Accounting and Auditing . . . . . . . . . . . . . . . 16 G - Monitoring. . . . . . . . . . . . . . . . . . . . . . 16 H - Supervision .16 IV. THE INSTITUTION .16 A - Institutional Aspects .16 B - CIH's Performances and Prospects. . . . . . . . . . . 19 V. PROJECT BENEFITS AND RISKS. . . . . . . . . . . . . . . . 24 VI. ASSURANCES, AGREEMENTS AND RECOMMENDATIONS. . . . . . . . 25 This dscbrnent has a restricted ditribultzio and mnay be used by recipients only in the performafnGe of I their official duties. Its contents maay not Qtherwise be disclosed without World Bank au,thorization.  I  Annex I Pipeline of Identified Subprojects (1983-85) Annex II Subproject Eligibility Criteria Annex III Household Models Annex IV Technical Assistance; Implementation Schedule Annex V Disbursement Schedule Annex VI CIH's Audited Income Statements (1977-81) Annex VII CIH's Audited Balance Sheets (1977-81) Annex VIII CIH's Performance Indicators (1977-81) Annex IX Major Assumptions Underlying CIH Projections Annex X CIH's Projected Lending Operations (1982-86) Annex XI CIH's Projected Income Statements (1982-86) Annex XII CIH's Projected Balance Sheets (1982-86) Annex XIII CIH's Projected Sources and Application of Funds (1982-86) Annex XIV CIH's Projected Financing Plan for 1983-86 Annex XV CIH's Projected Performance Indicators (1982-86) Annex XVI Documents Available In the Project File This report, prepared by B. Verdier and J-F. Landeau is based on the findings of an appraisal mission which visited Casablanca in June-July 1982. Mission members included; B. Verdier, Mission leader, and J-F. Landeau (World Bank); and C. Hovnanian and A. Komorn (Consultants).  I  MOROCCO APPRAISAL OF THE FIRST HOUSING LOAN TO CREDIT IMMOBILIER ET HOTELIER (CIH) I. INTRODUCTION 1.01 The Urban Sector Review Report on Morocco 1/ concluded that the Moroccan authorities will be confronted with three broad challenges: (i) to sustain a balanced growth of the urban centers and promote their economic activities; (ii) to increase local government efficiency and resources for providing utility and transport services to all urban areas and in particular to squatter settlements; and (iii) to increase the efficiency of public and private housing production and mobilize additional institutional and private savings to the sector. 1.02 Previous Bank activities in the sector (para. 2.20 below) have mainly addressed urban employment and the upgrading of infrastructure (items (i) and (ii) above). The proposed project aims exclusively at assisting the Government in increasing the efficiency of public and private production of low cost housing (item (iii) above). It complements existing urban projects and addresses an urgent need. The construction industry in Morocco is suffering from a deteriorating economic climate. The market for bighly priced houses is eroding. This is providing an incentive for private developers to move into the low cost housing market. They are also encouraged to do so by the Government which bas authorized by decree (April 1981) the single largest housing finance institution in Morocco, the Credit Immobilier et Hotelier (CIH), to finance such units. 1.03 The proposed project is designed to help implement this objective. It consists of a US$60 million loan to CIH to finance low cost housing and also includes a technical assistance program to CIH. The project has been designed to increase the attractiveness of low-cost housing production to private and public developers, while at the same time increasing CIH's efficiency to finance such developments. 1.04 CIH has received four loans from the Bank, all for hotel construction (amounting to US$139.2 million net of cancellations as of January 1, 1983). This report updates this information and concentrates on CIH's operations in the housing area. 1/ Morocco - Urban Sector Review and Project Identification Report No. 3860-MOR. March 19, 1982.  - 2 - II. T_E HOUSING SECTOR A. Background I/ 2.01 Morocco's urban population has increased rapidly over the past two decades, expanding from 29% of the total population in 1960 to over 40% in 1981, or at an annual growth rate close to 5%. In recent years, this rapid urbanization has taken place in the context of a deteriorating economic situation. During the 1978-80 period, the annual rate of growth of Morocco's GDP fell to 4% from the 7% achieved in previous years; the balance of payments deficit increased dramatically, as did unemployment; and real income remained constant. These unfavorable conditions have spurred out-migration from rural areas, and, despite Government attempts at containment, it is expected that such migration alone will add 600,000 people each year to the urban centers, which are projected to account for about 57% of the country's 36 million inhabitants by the year 2000. 2.02 Morocco's urban settlement pattern is well balanced. The primacy of Casablanca with a 1981 population of 2.3 million (about a quarter of the total urbanized population) is compensated for by the dynamic growth of Rabat-Sale with a 1981 population of about 1 million and a substantial network of small-and medium-sized cities, 9 of which have 1981 populations of over 100,000. Nonetheless, the rapid pace of urbanization will heavily tax the absorptive capacity of these urban centers. It will also exacerbate the urban problems currently exemplified by widespread poverty, deteriorating utility networks, inadequate municipal services and a growing housing shortage. 2.03 In 1980, the Government estimated the housing shortage at about 700,000 units and the additional dwellings needed per year for new urban households at 90,000 units. Though these figures are probably on the high side, they underscore the magnitude of the urban housing problem in Morocco, particularly when compared to the recent production of about 45,000 to 50,000 units per year (including informal housing). As a result of the gap between the demand for, and supply of housing, conditions during the last decade have progressively deteriorated with 40% of the housing stock either aged or lacking basic sanitary facilities and another 20% made up of shacks. In addition, severe overcrowding has occurred. It is estimated that the number of households presently sharing a dwelling corresponds to over 20% of the total urban households. The average number of persons per room in urban dwellings is estimated at 2.5, with more than 70% of all urban households living in one-to two-room units. 2.04 The housing shortage has particularly affected low income groups. Although no accurate statistics are available, it is estimated that about 30% of the urban population is living in squatter areas; and that 30 to 40% of the squatter population has income below the 1981 Bank defined relative urban poverty threshold of US$170 per household per month. The low level of home ownership in Morocco (about 40% in 1981) further indicates that rental accommodation is the predominant form of shelter for low income groups. 1/ A full description of the housing sector can be found in Morocco-Urban Sector Review and Project Identification - Report No. 3860-MOR. March 19, 1982.  B. Housing Construction and Policies 2.05 The Government's traditional response to the urban housing shortage has been to encourage public agencies, namely the Ministry of Housing and Urban Development (MHAT) and the Regional Development and Construction Agencies (ERAC), to move into housing production. Given the constraints implicit in this approach, the policy is being reconsidered and the Government now intends to enhance private production and investment activities in the housing sector. 2.06 MHAT's direct activity in urban areas focuses on the production of core housing units targeted at households with income less than US$170 per month. Beneficiaries are expected to acquire the units on a lease-purchase basis and to complete construction according to their needs and financial resources. About 19,000 such units have been produced since the program started in the early 1970s. The development of this program has been impaired by MHAT's limited implementation capacity and lengthy administrative procedures, particularly regarding delays in payments to contractors, which have resulted in substantial cost overruns. Moreover, the program is not financially sustainable since it relies exclusively on the Government budget for its financing, and does not provide for appropriate enforcement of cost recovery procedures. The program, although animated by a desire to alleviate the situation, is not substantially resolving the housing needs of the poor. 2.07 The ERACs are among the most important urban bousing developers in Morocco, with one agency in each of the seven economic regions of the country. They are technically coordinated by a central office of the MHAT and their programs and budgets are approved by the Ministry of Finance (MOF). Sites for ERAC projects are generally acquired by the Land Department within MOF. 2.08 Following their establishment in 1974, the ERACs began operations with a total working capital of US$5 million (supplied through a Government grant) and a total short-term loan of US$34 million from a consortium of Moroccan banks. Combining these financial resources with advances from project beneficiaries, the ERACs launched, simultaneously, US$200 million of construction works. Because the construction programs were overextended and relied excessively on advances from the beneficiaries, several ERACs became severely strained financially and, in many cases, had to cease all construction activity. As a result the ERACs total production since 1974 has, like that of MHAT, been fairly modest; 16,000 units. However, since 1978 the Government has taken a number of corrective measures, including an increase in the equity base of the ERACs for a total of about US$10 million and the consolidation of their short-term debt into long-term eight-year loans. Their financial management has also been strengthened as a result of their dealing with CIH and competent new staff have been hired. These changes have increased the overall efficiency of the ERACs. 2.09 Although the ERACs' responsibilities were mostly to provide social housing affordable to the lower half of the urban population (in terms of income), the costs of bousing units produced by these agencies have escalated  - 4 - sharply, mainly because of increasing construction standards. Typical ERAC units currently cost more than US$16,700 (1982 prices) or US$ 160 per m2 and are becoming less affordable to the target group. At the same time, the market for housing units above that price is eroding. In an administrative memorandum dated April 1982, the Government instructed the ERACs to focus on the delivery of lower cost housing units. 2.10 Public housing production in Morocco is complemented by the activity of several Government controlled companies such as the Compagnie Generale Immobiliere (CGI) which produces about 800 units a year (mostly comparable to those of the ERACs), the Societe pour la Promotion de L'Habitat Locatif (SOPHAL) and the Compagnie Immobiliore et Fonciere Marocaine (CIFM) which builds and manages housing, mostly for government employees. 2.11 The limited housing production of the public sector has been compensated for by that of the private sector which delivers about 35,000 to 40,000 units a year (about 90% of the new urban housing units put annually on the market). The sector is dynamic and is characterized by the presence of many small firms, though the larges.t firms (more than 50 employees) produced more than 60% of the output. Private developers are active throughout the country, the largest being located in Casablanca. Traditionally, developers have catered to a high income clientele. Moreover, with the erosion of the housing market for high priced units due to the stagnation of real income, developers are increasingly turning to a middle income clientele, and a few are specializing in building houses for low income people. The costs of housing units targeted to such clientele vary between US$100 to US$150 per m2 depending on the quality of the finishing. The production of such units, however, has been constrained by three factors; (i) the low rate of participation by financial institutions in the financing of such projects (40 to 60% of the total cost) which obliges developers to raise a substantial part of the financing either from equity or from other sources of funds (usually from commercial banks that charge up to 17% interest on such bridge financing), (ii) the shortage of housing finance for low income groups, a situation which increases the marketing risk for developers, and (iii) the scarcity of developed land. 2.12 Formal private construction is now being encouraged by the Government, which recently (April 18, 1981) enacted legislation providing for various substantial tax exemptions for developers and companies which build or acquire housing units for their own use, for sale and for rent. These include exemptions from: property tax, corporate profit tax (on the housing projects), and sales tax. It is expected that the legislation will further encourage the private sector to invest in housing and will free undeveloped urban land which has so far been held from the market for speculative purposes. The response to this legislation has been positive as demonstrated by the substantial increase in construction loans requested from CIH in 1981-82. 2.13 In summary, the above analysis demonstrates that the limited public sector implementation capacity and the private sector's historic focus on upper income housing are the main causes of the poor housing production in  Morocco. The problem has been worsened by the increasing gap between stagnating real incomes and the increasing costs of housing. The Government has initiated appropriate steps to help correct this situation by requesting that public agencies focus on the production of units with lower standards, and by fostering the production of the private sector. Such a move, however, can only bear fruit if enough financial resources are channelled to low income groups to enable them to pay for the housing, and if technical expertise is provided to public and private developers to ensure their adherence to low cost design. The proposed project aims at assisting the Government in these undertakings. C. Housing Finance Institutional Setting 2.14 Morocco has a well developed financial sector comprising 15 commercial banks, five specialized institutions, and two savings banks (Caisse d'Epargne Nationale (CEN) and Chbques Postaux). Long-term finance is available principally through four of the specialized institutions: CIH, the agricultural credit bank (CNCA)j and the industrial bank (BNDE), all of which have received Bank loans; and the Caisse de Depot et de Gestion (CDG) a wholly-owned Government institution in charge of public fund management (e.g. pensions and insurance funds, postal savings, etc.). The fifth specialized institution, Banque du Maroc (BdM) is Morocco's Central Bank. 2.15 The mobilization of private individual savings is undertaken by commercial banks (such as the Banque Centrale Populaire (BCP) and the Banque Commerciale du Maroc (BCM)), Caisse nationale de Credit Agricole (CNCA) and Banque Nationale de Developpement Economique (BNDE). -' Only a small part of these savings, however, is converted into housing finance. Contractual savings schemes were introduced in 1973 by a number of commercial banks, but neither the interest rate on deposits, nor the repayment period (5 to 6 years) were considered attractive enough by the potential clientele to boost these programs. They have now virtually ceased to operate. Since 1974, BCP has been funding a low cost housing program referred to as Habitation Bon Marche (HBM). However, because of the financial structure of BCP and the sound tradition of risk specialization in the Moroccan banking system, BCP is not in a position to commit a large portion of its resources to the funding of this program. Therefore, its financing of housing operations has been very limited. Generally, while commercial banks have, since March 1982, been required to earmark 1.5% of their deposits for housing financing either directly or by buying medium or long term securities issued by CIH, it is expected that the financing of housing programs by commercial banks would remain small, and that CIH will benefit most from this legislation. 2.16 Institutional savings are mobilized in the form of medium to long term securities subscribed to chiefly by CDG and the insurance companies. CIH, the only institution specializing in long term housing mortgages and truly active in this field, is the major borrower on this market. In 1981, 1/ Details on the volume and saving structure are available on file.  CIH alone issued US$54.8 million worth of long term bonds, or 28.4% of all issues. The volume of institutional savings available for long term finance is, however, limited since its principal sources --pension funds, insurance company reserves and social security funds-- have heavy recurrent commitments and depend for their growth on the relatively small number of salaried Moroccans. 2.17 Overall, the domestic financial market of Morocco is tight. The funds available for housing finance are affected by this situation. In recent years, formal mortgage financing in Morocco, mostly allocated by CIH, accounted for only an average of 15% of the total yearly capital investment ina the housing sector. Most of these funds benefitted high income groups. To maximize the use of funds available for housing finance, the Government decided in April 1981 to redirect many of these funds to low income groups mainly by instructing CIH to concentrate on the financing of low cost housing. This major shift in resource allocation complements Government instructions to the ERACs to focus on low cost housing construction and also opens the way for the private sector to produce low cost housing. Interest Rates for Housing Loans 2.18 The Government determines interest rate ceilings on deposits and loans and these apply to all institutional credits in Morocco. Local currency resource cost varies widely from 3% to 11.5% depending on the nature and maturity of the resources. The cost of directly contracted foreign exchange resources reflects international rates. 2.19 Lending rates range from a minimum of 5% to a maximum of 17%. The lending rates for construction and mortgage loans are pegged at 14%, well above the projected inflation rate for Morocco (9% in 1983 and 1984 and 7% thereafter). The Government, however, subsidizes mortgage interest rates. The final interest rates charged to beneficiaries depend on their income and on the real estate value, and range between 6% and 14%. The subsidy is paid directly to the lending institutions and, therefore, does not affect their profitability. However, in view of- the financial burden that such subsidies impose on the Treasury and the serious resource constraints facing the Moroccan economy, the Government, after discussion with the Bank carried out a realignment of the interest rate structure for mortgage loans (para. 3.17). D. Bank Strategy in the Sector and Project Rationale 2.20 The overall Bank strategy in the urban infrastructure sector is to assist the government in (i) focusing its social expenditures on target groups; (ii) improving access to government-provided services; (iii) lowering the cost per beneficiary of its services; and (iv) increasing institutional capacity. The two existing Bank supported urban projects fall within this strategy. The first project, the Rabat Urban Development Project (Loan 1528-MOR), was prepared by Government and approved by the Bank in February 1978. This project was instrumental in introducing a major change in Government policy from systematic demolition of squatter areas to upgrading settlements when appropriate. Equally important, the project introduced low  cost upgrading and shelter concepts which ensure affordability to the lowest income groups and incorporated improved cost recovery. The project provides infrastructure and shelter improvements in three sites along with an industrial zone and a wide spectrum of community facilities from vocational training center for women to health centers. About 60,000 people, of whom 70% are below the urban poverty threshold are being affected by the project. The project is expected to be completed by December 1983. As a further step towards strengthening the institutional framework, a Second Urban Development Project was prepared by MHAT and approved by the Bank in 1981 (Loan 1944-MOR). This second project addresses the needs of about 100,000 people in the Cities of Kenitra and Meknes. Besides providing infrastructure and community facilities to the selected sites, the project aims at strengthening the implementing capacities of the Cities of Kenitra and Meknes. 2.21 Experience under the first project has been disappointing although considerable improvement has recently occurred. There have been major problems with the complexity of the institutional arrangements and the poor coordination between the various executing agencies as well as their limited implementation capacities. Most importantly, the lack of adequate counterpart funds has led to substantial delays in project execution. Lengthy land expropriation procedures have delayed the recovery of improvement costs of slum upgrading schemes. The second project built on the experience of the first one and has avoided some of the pitfalls. It is more focused, deals with fewer agencies, and has provided for the strengthening of staff when warranted. Execution is proceeding satisfactorily. Overall, experience under these two projects has shown that the greatly reduced construction standards were very well accepted by the population and well tailored to their financial needs, and that simplified institutional arrangements are a key element for the success of such projects. 2.22 The proposed project focuses on housing production as a complement to the Bank's efforts in the first two projects. To this end, the project will make suitable financing available and will provide a set of financial advantages to private and public developers engaged in low cost housing construction. Funds would be channeled through a well established and effective housing finance institution, the CIH. The project builds on the experience of the on-going projects inasmuch as it will (i) encourage developers to apply the physical standards used under the two previous projects, and (ii) streamline the responsibilities for delivering low cost housing units by channelling Bank funds througb an effective institution. 2.23 Through a proposed increase in interest rates for housing (para. 3.17) and through emphasizing home ownership as an efficient way to mobilize indiviaual savings for housing construction, the project would also address, though in a limited way, the issue of resource mobilization which was a root cause of the implementation delays experienced by the First Urban Development Project. This project would also lay the foundation for a reallocation of the funds available for bousing finance from high income to low income groups. As the market for low income housing has been hardly tapped, this shift, if successful, will be a durable one. The question of the long-term financing of such activities will be addressed gradually in future urban Bank supported projects, mainly through further interest rate adjustments and improved resource mobilization schemes (para. 4.20).  III. THE PROJECT A. Project Objectives 3.01 The objectives of the proposed project are; - to encourage private an,d public developers to produce low-cost housing schemes affordable to income groups on the lower half of the urban income distribution curve (i.e. with a monthly household income below US$330 in mid-1982 prices); and - to develop CIH's capability to appraise low-cost housing schemes and to advise private and public developers on all aspects of low cost housing design. 3.02 To achieve these objectives, the proposed project would consist of a US$60 million loan to CIH. Of this amount, US$59 million would finance the foreign costs component, and 4% of the local component of construction costs (excluding land) of housing schemes and land development targeted to the selected income group, and US$1.0 million would cover the foreign cost component of a technical assistance program for CIH staff (US$0.55 million)9and the capitalized front--end fee on the proposed loan (US$0.45 million). The financing of local costs is aimed at encouraging private developers to produce core units benefitting the lowest income groups (para. 3.20). B. Project Scope 3.03 The size of the proposed line of credit (exclusive of technical assistance) has been estimated on the basis of a pipeline of subprojects which would be eligible for Bank financing (para. 3.07), and CIH's projected activities for the mid-1983-mid-19386 period (expected commitment period for the proposed loan). Thirty six subprojects have been identified for the total construction costs of US$209.5 million with a foreign component of US$73.3 million. Subproject types range from core units to walk-up apartment buildings and include secondary and tertiary infrastructure. Subprojects are at a preliminary design stage and were reviewed with the developers by the appraisal mission. Land for the subprojects has been acquired by the developers. The identification of additional subprojects to substitute for possible dropouts is being carried out by CIH and an updated pipeline was submitted to the Bank during negotiations (see Annex I, page 1 for details). The pipeline so identified would call for a loan of about US$81 million (see Annex 1, page 2). Due to the pilot nature of the project and to allow for possible dropouts in subprojects, the proposed loan has been scaled down to US$60 million. The proposed loan would finance 8.7% of CIH's expected housing operations over the mid-1983-mid-1986 period, and 25% of CIH's foreign exchange requirements for such operations. C. Project Description Financial Assistance 3.04 The main features of the loan have been designed on the basis of suggestions that emerged in formal discussions on the proposed project held  - 9 - between CIH and private and public developers. It is therefore expected that the following package would be attractive to developers. 3.05 Overall Lending Target (see Table III.1). The loan to CIH would finance; (a) Construction loans to private and public developers to build low cost housing developments. Such developments would cover the provision of the secondary and tertiary project site infrastructure and a mix of housing unit types, ranging from core units (unfinished units, including one to two rooms, whose completion is left to the initiative of the owners) to walk-up apartment buildings. Although such developments might include commercial and social facilities, these would not be financed under the proposed loan. The availability of such facilities, however, would be a requirement in CIH's decision to finance the schemes (para. 3.07). Upon completion of the developments (usually 3 years), construction loans would be repaid and CIH would make available to potential buyers of the newly constructed housing units mortgage loans financed out of the construction loan repayments. This conversion of funds is a key incentive to developers to produce low cost housing units. Such mortgage loans would substantially ease the marketing of low cost units, particularly in the low income population which has had very limited access to formal housing finance (para. 2.11). Assurances were obtained at negotiations that the contracts for the financing of eligible projects between developers and CIH include a covenant whereby CIH will assure developers that their potential clientele will benefit from CIH financing, provided such clientele meet the eligibility criteria (para. 3.09). (b) Individual housing construction loans. These loans would be extended to individuals who desire to build their house through self-help or small contractors. (c) Land development loans. Although construction loans would include financing for land development, it is expected that under the proposed project, CIH would finance a few land development projects carried out by public or private developers. 3.06 Allocation of the line of credit. On the basis of the pipeline of identified projects, the line of credit (US$59 million) would be allocated as follows; - US$56 million would finance construction loans. In addition, 25% of this loan portion would be allocated to construction loans to finance core unit construction programs. Construction loans would be converted into mortgage loans; and - US$3 million would finance individual construction loans and land development loans.  - 10 - 3.07 Subproject Eligibility Criteria. Assurances were obtained at negotiations that, as recorded in the Loan Agreement, to be eligible for Bank financing, subprojects would have to meet the following criteria: (a) Price Criteria: Four types of housing units have been identified on the basis of market studies carried out by CIH and reviewed by the appraisal mission. The maximum selling price of these units should not exceed US35,300 for the least expensive type (core unit) and US$13,300 for the most expensive (walk-up apartment). The maximum selling price of developed plots should not exceed US$30 per m2. Prices are in mid-1982 values, include land and land development cost, and would be adjusted on January 31, 1/ of each year to account for inflation using the increase in the general price index (see Annex II for details); (b) Technical Criteria; The general requirement that subprojects should be technically sound (and CIH in this respect has appraisal procedures which are broadly adequate (para. 4.03)) would be refined to ensure that subprojects would meet specific technical requirements regarding (i) land use efficiency, (ii) maximum size of the units, and (iii) building structure and design (type of building materials, numbers and types of rooms etc.). The physical standards developed under the First and Second Urban Development Projects (para. 2.21), particularly for land use and core unit construction, would be applied under the proposed project (see Annex II for details). (c) Economic Criteria. All subprojects should be located in urban areas, in cities where a substantial demand for low cost housing exists as shown by marketing studies carried out by CIH as part of its appraisal procedures, and in sites which are properly serviced by physical and social infrastructure. In addition, all subprojects, whose cost exceeds US$500,000, 21 should have an economic rate of return (computed according to the Bank's standard methodology) at least equal to 12% (the estimated opportunity cost of capital); and (d) Financial Criteria. All subprojects whose cost exceed US$500,000 should have a financial rate of return 3/ at least equal to 14% (the statutory on lending rate of CIH). The methodology (Annex II, page 3) to compute the economic rate of return on housing projects was discussed and agreed during negotiations. 1/ Time of-publication of the official price index. 2/ In the past five years all mid,dle to low income housing schemes submitted by developers to CIH, involved a total investment above the US$500,000 threshold. 3/ Computed on the basis of the discounted cash-flow of the project.  - 11 - 3.08 On the basis of the identified pipeline, it is expected that most of the subprojects will be located in Rabat, Marrakech, Meknes, Fes, and Agadir, with one-third of the units in Rabat. This spatial distribution is adequate (para. 2.02). The integration of the subprojects in the development plan of these cities would be ensured through the housing development review process established by municipalities for the purpose of delivering construction permits. As shown in Table III.1, the lowest cost option among the housing units to be financed by the project is the core unit, which would be affordable by families with incomes at the 17th percentile of the Morocco urban income distribution curve. At the upper end of the range is a contractor-built three-to-five-storey building with apartments accessible to families at the 50th percentile of the country urban income distribution. Representative household models are shown in Annex III. 3.09 Beneficiary Selection Criteria. Ultimate subproject beneficiaries should meet the following criteria and should abide by the following rules: (a) on the basis of the affordability analysis shown in Table III.1 household monthly income should not exceed US$330 (i.e. the 50th percentile of the urban income distribution curve as of mid-1982). This ceiling would be reviewed annually between the Bank and CIH and may be revised to account for the increase in the cost of living; (b) beneficiary should not be the owner of another dwelling; (c) housing units financed under the proposed project should be used for residential purposes only; and (d) in the case of resale of housing units (i) mortgages financed under the proposed project cannot be assumed by the new buyers, and (ii) the interest subsidy (para. 3.17) would be repaid by the beneficiaries to CIH. TABLE III.1 Lending Target and Affordability Analysis Type of Maximum Down Loan Percentage Monthly Monthly Percentile d/ Housing Selling Payment (us$) of Income Payment Income Reached lUnit a/ US$ (x) Spent on Housing (US$) (uS$) Core Unit 5,300 20 4,240 25 33.1 b/ 132.3 17 36.0 c/ 143.9 20 One Storey House (partially completed) 8,000 25 6,000 25 46.8 b/ 187.4 28 50.9 c/ 203.6 31 One to two Storey House (completed) 10,300 25 7,725 25 60.3 b/ 241.2 37 65.5 c/ 262.0 40 Unit in a Multi Storey Building 13,300 25 9,975 25 77.9 b/ 311.6 47 84.6 c/ 338.0 51 a/ Full details on characteristics of housing types are in Annex.II. b/ Loan is for 25 years at 8% interest rate (unit is part of a housing scheme). c/ Loan is for 25 years at 9% interest rate (unit is built by individuals). d/ Based on 1971 survey of household consumption pattern, and adjusted for increases in cost of living and in real income, assuming no changes in the urban income distribution pattern. Because of these adjustments, income distribution figures should be interpreted with care.  - 12 - With the exception of the income threshold, all other conditions are already applied by CIH, and their enforcenient is satisfactory to the Bank (paras. 4.05 and 4.06). Assurances were obtained at negotiations that beneficiary selection criteria will be as stated above. These criteria are included in Schedule 5 of the Loan Agreement. 3.10 Bank's Review and Approval. All subprojects benefitting from construction loans would be reviewed and approved by the Bank to ascertain that all analyses have been properly performed and that the expected beneficiaries are within the target group. It is expected that an average of 20 projects, ranging in cost from US$0.16 million to US$6.3 million, would have to be reviewed each year from mid-1983 to mid-1986. As projects benefitting from either individual construction loans or land development loans are expected to be small, they would only be reviewed on a sample basis. Technical Assistance Program 3.11 The proposed technical assistance program to CIH is limited in scope, but is essential to acquaint CIH's staff with the appraisal techniques of low cost housing developments and to enhance their ability to advise developers on low cost construction issues. The emphasis of the program would be on cost effective land use, building layout and structure analysis. The program would include: (a) the development of a land use model to evaluate the cost- effectiveness of various land use patterns in the proposed subprojects; and (b) the development of a computerized data information system which would allow CIH's staff to store and retrieve information on previous housing projects financed by CIH, as well as new housing projects proposed for Bank financing. This system would compare the proposed subprojects (or any project) with typical projects considered cost-effective, and would analyse the major discrepancies so identified. Computer equipment would be procured to assist CIH in running the required software. 3.12 An estimated twenty man-months of technical assistance from two specialists in computer aided design for a total cost of US$185,000 would be necessary to set up this program and train CIH's staff in the above techniques. Costs for technical assistance including fees, subsistence and travel are estimated according to recent experience at about US$9,250 per man-month for this type of foreign experts. The selected consultants will work closely with CIH's computer department. A detailed timetable for the implementation of the program is shown in Annex IV. The technical assistance program has been discussed with CIH (details on the program are available on file) and terms of reference for the experts were agreed upon at negotiations. CIH's staff is also receiving additional training in project appraisal as part of the training component of CIH-IV.  - 13 - 3.13 It is expected that the computerized method will allow CIH's appraisal team to devote more time to advising and counselling developers on various aspects of low cost housing design. However, in carrying out this task it is essential that CIH's staff acquires a broad view of all aspects of building activities in Morocco, including the constraints facing the sector (e.g. land and construction material availability). To this end, it was agreed with CIH that a study will be carried out focusing on the residential building construction sector in areas where the potential for CIH intervention in low cost housing is the greatest. Terms of reference for this study were discussed with CIH and agreed upon during negotiations. The study will be completed by July 31, 1985, by CIH's Credit Department with the assistance of one-man year of technical assistance. The total cost of the study is estimated at US$150,000. Costs for this foreign expert including fees, subsistence and travel are estimated according to recent experience at about US$12,500 per man-month. During negotiations, assurances were obtained that this expert and the expert in computer aided design would be selected according to Bank guidelines, that they would be hired not later than October 31, 1983, and that their experience and qualifications would be satisfactory to the Bank. D. Project Financial Features Lending and On-lending Arrangements 3.14 The proposed US$60 million dollar loan would be made directly to CIH on standard Bank terms and conditions for Morocco (17 years maturity, including four years of grace and variable interest rate). The front-end fee would be capitalized and refinanced under the loan. The Government would bear the foreign exchange risk on the loan. As the proposed loan would represent less than 10% of CIH's total borrowing over the mid-1983-mid-1986 period, and since most complementary resources are expected to be borrowed locally at fixed interest rates, CIH would absorb fluctuations in the Bank's variable interest rate. CIH would repay the Bank loan on the basis of a fixed amortization schedule. However, to avoid revolving of Bank funds outside the objectives of the project, the following rule will apply: if five years after granting the construction loans to developers, repayments from such loans have not been used to finance mortgage loans to beneficiaries for the purchase of housing units (para. 3.05 (a)), such funds would be repaid to the Bank. 3.15 The proceeds of the proposed loan to finance low cost housing schemes would be on-lent on the following terms and conditions: Type of loans Beneficiaries Maturity Interest Rate Construction loans developers 3 years 14% Mortgage loans individuals Max 25 years 14% Individual construction loans individuals Max 25 years 14% Land development loans developers 3 years 14%  - 14 - The balance of the Bank loan would cover the foreign cost of the technical assistance program to CIH (US$0.55 million) and the refinancing of the front-end fee (US$0.45 million). 3.16 CIH's on-lending rate, which is presently 14%, is adjusted from time to time 11 by the Government to reflect inflationary pressures in the country and the resulting increasing costs of resource mobilization. On the basis of actual and projected annual inflation rates (13.2% in 1981, 13% in 1982, 9% in 1983 and 1984 and 7.5% thereafter), CIH's effective on-lending rate is positive. However, as indicated in para. 2.19, the actual interest rates charged to beneficiaries for mortgage and individual construction loans, depend on the real estate value of the housing unit (see Table III.2). The lowest rates, referred to as regime special apply to housing units whose real estate value is below US$21,700 provided the beneficiaries have a monthly income below US$420. The other rates are referred to as regime gengral. The interest subsidy is borne and paid directly to CIH by the Government. The Government's record of paying CIH's; interest subsidy is satisfactory. 3.17 For the reasons mentioned in para. 2.19, the Government agreed to make the following interest rate adjustments shown in Table III. 2: Table III. 2 Interest Rate Structure for Housing Real Estate Value Interest Rates (Percentage) of Housing Units (US$) Former New up to 16,700) 6/7 a/ 6/7 ) Regime 'Special 16,700 - 21,700) 6/7 7/8 up to 33,300) 8 10 ) Regime General 33,300 - 50,000) 10 12 50,000 and above 14 14 a/ The 7% interest rate applies only to individual construction loans. 1/ The last adjustment took place in April 1981, when the rate was increased from 13% to 14%.  - 15 - E. Procurement and Disbursement Procurement 3.18 With the exception of the technical assistance component, the proposed loan would finance civil works. As contracts would be small and scattered (subprojects are expected to take place in twenty two various locations in five major cities, and it is unlikely that contracts for any of these subprojects would exceed US$1.5 million), they would not be suitable for international competitive bidding. Public developers would be subjected to Government procurement practices for public works, which are satisfactory to the Bank. Nevertheless, CIH requires that these contracts be reviewed by independent architectural and engineering consultants. Private developers tend to execute the construction either themselves or through a variety of small contractors. They are required to go through a licensed architectural firm to oversee proper execution of construction, and CIH scrutinized their procurement practices closely. CIH's staff has also acquired considerable experience in local construction cost estimating and procurement practices and are able to effectively evaluate cost estimates, invoices and other supporting documents provided by developers and their contractors. It is proposed, therefore, that CIH's procurement practices described above, which are satisfactory to the Bank, apply under the proposed project. The computer equipment under the Technical Assistance component (para. 3.11), would be procured from the original manufacturer to ensure compatibility with existing equipment under terms and conditions satisfactory to the Bank. Disbursement 3.19 The proposed loan of US$60 million is expected to be committed over a period of three years (mid-1983 - mid-1986) with the final date for submission of subprojects to the Bank set at June 30, 1986, and fully disbursed in six and a half years with the closing date set at December 31, 1989. The estimated disbursement schedule is in Annex V. The schedule is based on CIH disbursement rates observed over time for each particular kind of housing loan. This disbursement schedule conform's to the typical disbursement schedule for DFC operations in the EMENA region. 3.20 The foreign cost component (direct and indirect) of low cost housing has been estimated at 35% of construction cost (excluding land and including infrastructure). However, to encourage the production of core units by private developers, the Bank would disburse 50% of CIH loans to private developers provided that 50% of the units in these developments are core unit types. As CIH would provide its customary support from its own resources (para. 4.10) it would then finance nearly the entire construction cost (exclusive of land) of- such developments. This in turn will relieve developers from finding bridge financing, which is usually both expensive and bard to come by (para. 2.11). Loan proceeds would, therefore, cover; (i) 35% of CIH loans for housing construction and land development, or 50% of such financing if the subproject is sponsored by private developers and 50% of its units are core unit types, and  - 16 - (ii) 100% of foreign expenditures and 75% of local expenditures for the services and equipment required for the proposed technical assistance program. 3.21 Disbursements on construction loans to developers will be fully documented. Disbursements on all other loans will be made on the basis of statements of expenditure which would be retained by CIH for review by CIH's auditors and IBRD representatives. F. Accounlting and Auditing 3.22 CIH's accounts have been regularly audited by an independent auditor satisfactory to the Bank. CIH's accounting and internal control procedures are adequate. The quality of CIH';s annual audit is satisfactory and audit reports have been submitted on tim,e. The 1981 Audit Report did not qualify CIH's accounts. Assurances were obtained at negotiations that the above procedures would be continued and that CIH's audit would cover the review of the statement of expenditures referred to in para 3.21 above. G. Monitoring 3.23 The Bank will monitor closely CIH's adherence to the standards proposed for subprojects as well as the characteristics of the beneficiaries of subprojects. Assurances were obtained at negotiations that a review meeting between CIH and Bank representatives will be held annually at the beginning of the fiscal year to assess the achievement of the objectives of the project and to decide on corrective measures if these were warranted. In addition, assurances were obtained at negotiations that by March 31, 1985, CIH will take appropriate actions to evaluate the impact of interest subsidies on low cost housing construction (para. 3.16) and of the tax relief package (para. 2.12) and discuss the results and recommendations of this review with the Government and the Bank. H. Supervision 3.24 The supervision of the project would require about 60 man-weeks over the three years of loan commitment. The basic staff required would include a financial analyst and an architect/engineer. IV. THE INSTITUTION A. Institutional Aspects 1/ Corporate Status, Organization and Management 4.01 CIH started operations in 1920. It is formally a private company subject to corporate law. Its major shareholders, however, are public 1/ CIH's institutional aspects are fully described in; Morocco - Fourth Loan to Credit Immobilier et Hotelier (CIH) Staff Appraisal Report. Report No.3014-MOR. December 18, 1980.  - 17 - entities (CDG and BdM). Since it was last appraised by the Bank in 1980, the only notable changes in CIH's organization and staff have been (i) a decentralization effort which resulted in an increase in CIH's regional branches from 9 in 1979 to 18 in mid-1982 11, (ii) the increase in staff from 250 in 1979 to 340 in 1982 and (iii) the creation of a Commercial Department and of an Identification Division. These changes have been partially prompted by CIH's response to the Government's policy of using CIH as the main channel for the promotion of low cost housing. In addition to the Commercial Department, CIH has a Credit Department and a Financial Department, and five main divisions under these Departments: Studies, Project Evaluation, Identification, Loan Management and Finance. Staff deal with hotel and housing projects and loans, a situation that broadens their exposure to projects and loan processing issues. This situation is also favorable to the accumulation of technical knowledge, particularly in the cost estimation area. The quality of CIH's management has remained high (further details are available in file). Policy Statement 4.02 CIH's Policy Statement approved by the Board of Directors of CIH in 1974 has been reviewed by the Bank and found satisfactory. However, to preserve CIH's creditworthiness, assurances were obtained at negotiations that CIH's financial exposure in any single housing project be limited to 20% of its equity and reserves, except if a full guarantee from the Government or any institution acceptable to the Bank covers CIH's credit risk. Project Appraisal 4.03 In the course of more than half a century's experience in dealing with housing projects, CIH has developed a sophisticated data set concerning building construction costs and standards and also a good feel for housing market conditions throughout the country. It is against this background that housing projects are evaluated. Developers requesting financial assistance from CIH submit a report covering the technical, legal, financial and commercial aspects of the project proposed for CIH financing. CIH staff first evaluate the credentials of the developers, mainly their financial status, experience in similar projects, and the various guarantees and collateral they are offering to back up the requested loan. If the developer is acceptable to CIH, its report is reviewed by one of the three teams of appraisers within CIH 2/. This is the pre-appraisal stage. Following this review, CIH's comments are submitted to developers and changes (or additional analyses) are directly discussed with them. The report, completed as necessary and including a series of official documents (Ne Varietur building plans, land documents, building permits etc.), is summarized by the CIH appraisers in an appraisal report. This report discusses key project features and makes the main recommendations regarding the requested loan (amount, maturity, and special conditions to be met before the loan is approved). This report is reviewed by a Technical Committee made up of the heads of the principal 1/ This includes six branch offices referred to as agences but excludes six information centers. 2/ These teams are adequately staffed with engineers, architects and financial analysts.  - 18 - departments (Finance, Credit, and Commercial) which makes recommendations for approval (or rejection) of the loan to the Managing Committee. The average time between pre-appraisal and final approval is two to three months. 4.04 CIH's appraisals of housing projects are of high quality, but somewhat weak regarding economic aspects. Recently, however, as a result of discussions with Bank missions, CI]H appraisers have paid more attention to the economic analysis of projects and have devoted more time to discussions with developers and to advising them on project concept and design. A housing expert l/ who participated in the preparation and appraisal of the proposed project is already training CIH's staff in such aspects of housing project appraisal. The technical assistance component of the project (paras. 3.11 to 3.13 ) aims at strengthening CIH's appraisal capacity further and at reinforcing its advisory role towards developers. Disbursement on housing loans and follow-up 4.05 The proceeds of CIH's construction and land development loans are made available in three installments to individuals, and in four installments to developers (the fourth installmlent amounting to 10% of the loan is withheld until completion of work). Funds are disbursed only following field inspections by CIH's technical division, which ensures that the portion of the investment to be financed with the borrower's equity has been completed. Subsequent inspections ensure that each CIH loan installment has been utilized in accordance with the loan contract and the project appraisal report. In case of non-compliance with agreed project design, disbursements are suspended until the issue is resolved to the satisfaction of CIH. The proceeds of CIH's mortgage loans are made available directly to the sellers (usually developers, for whom the proceeds of such loans balance out their debt to CIH). These procedures are satisfactory. 4.06 After the projects are completed and the housing units sold to their ultimate beneficiaries, the follow-up division, within the Credit Department, makes random checks on units which benefit from interest subsidy to ensure that they (i) are being used for residential purposes only, (ii) are not being sublet, and (iii) are being occupied by the borrower. In case of a breach in these rules, CIH requires the borrower to (i) reimburse CIH for all interest subsidies received 2/, and (ii) pay CIH the statutory on-lending rate on the principal of the loan still outstanding. Since CIH's housing portfolio includes about 40,000 housing loans, there is no assurance that each loan beneficiary will be audited but CIH's follow-up procedures act as a deterrent, and few violations have been so far reported. Further follow-up of housing loans is carried out by the Portfolio Division of the Financial Department. The division closely coordinates with the legal and accounting division to keep up-to-date data on payments and loans in arrears. Legal remedies are strictly enforced and as a result, arrears are limited (para. 4.16). These procedures are satisfactory. 1/ Financed under Loan 1943-MOR. 2/ The proceeds would be returned to the Government or credited against government interest subsidies due to CIH, as the case may be.  - 19 - B. CIH's Performance and Prospects Lending Operations 4.07 The evolution of CIH's lending operations over the past three calendar years is detailed on next page; 1979 1980 1981 Category Amount Amount Amount No. (uS$ million) No. (uS$ million) No. (uS$ million) Hotel and other Loans Approved 44 18.2 42 31.3 49 43.7 Committed 49 26.3 27 20.6 38 26.0 Disbursed - 19.6 - 22.8 - 29.1 Housing Loans Approved 3,439 66.8 2,593 59.2 3,099 81.3 Committed 3,211 63.3 2,306 46.1 2,462 68.5 Disbursed - 67.5 - 53.3 - 66.7 4.08 Hotel Loans. These loans finance the construction, equipment and expansion of hotels of various categories (from one star to luxury hotels). CIH's loans for hotel projects carry maturities of up to 18 years, including three years of grace for construction, and for equipment loans up to ten years with no grace. CIH charges 13% for hotel loans of up to 14 years duration and 15% for other loans (as in the case of housing, the effective interest rate borne by hotel borrowers varies between 11% and 13% p.a.). 4.09 Housing Loans. Details of CIH's housing loan approvals are given in the project file and summarized by type of operation in Table IV-1. Table IV-1. CIH's Housing Loan Activity (Approvals) (1979-1981) 1979 1980 1981 Loan Loan Loan Category No. Total Cost Amount No. Total Cost Amount No. Total Cost Amount (US$ million) (US$ million) (us$ million) Construction Loans 13 31.9 11.1 33 34.8 16.4 29 68.4 25.4 Mortgage Loansa/ - General Regimeb/ 3,425 120.8 55.4 2,557 90.3 47.0 2,665 116.5 51.2 - Special Regime./ - - - - - - 401 4.8 3.1 Land Development loans 1 0.5 0.2 3 2.2 0.8 4 3.4 1.6 Total 3,439 153.2 66.7 2,593 127.3 59.2 3,099 193.1 81.3 a/ include individual construction loans. b/ loans benefiting from none to 4% interest subsidy (see para. 3.15). c/ loans benefiting from the maximum interest subsidy (construction cost below US$21,700 - see para. 3.15).  - 20 - During the period 1979-81, CIH approved housing loans totalling US$207.2 million. The number of housing units financed by these loans amounted to 13,728. Analysis of CIH activities shows that the annual number of housing units financed by CIH reached a peak in 1979 (5,492 units), but decreased sharply in 1980 (3,758). This downward turn reflects the erosion of the market for the high standard housing units that CIH financed until mid-1981 and Morocco's difficult economic situation. The year 1981 witnessed a reactivation of the market mainly due to the publication of the housing investment code and the attention given to the financing of low cost housing. Preliminary data for 1982 indicate that prospects are good for further expansion of the housing market. 4.10 CIH's loans for construction projects by developers carry maturities of three years. CIH can in principle finance up to 80% of the estimated cost of the project (including land). CIH's effective financing, however, rarely exceeds 60% of the actual project cost mainly because CIH's appraisers make conservative estimates of project costs (see Table IV-1). 4.11 CIH's mortgage loans carry maturities of up to 15 years and cover 75% of the estimated construction cost. However, in the case where the construction cost of the unit does not exceed US$21,700 as under the proposed project, the loan maturity can be extended to 25 years _/ and financing can cover up to 90% of estimated construction costs. There is a grace period of three to six months on such loans. 4.12 Land development loans cover up to 80% of the estimated project costs and are repaid as a single payment after three years. Equity Investments 4.13 In 1979, CIH stopped taking new equity participations and instead has initiated a systematic disinvestment effort by either selling or provisioning them. In 1980 and 1981, such provisions amounted to US$3.7 million, which represented 24% of the gross portfolio. This is a necessary policy measure since the quality of CIH's investment portfolio is poor with more than 94% tied to companies experiencing technical difficulties or financial losses. In 1981, dividend income amounted to US$32,900 thus representing a yield of 0.2% on the average gross portfolio. CIH has declared its intention to continue this policy which would be closely monitored during supervision of the proposed project. Financial Position 4.14 Resource Position. CIH's resource position as of December 31, 1981 showed a small surplus of US$5.1 muillion on a commitment basis. However, as of March 31, 1982 there was a resource gap of US$7.9 million. During negotiations, CIH presented data showing that this gap and additional resource needs for the remainder of 1982 had been met by local borrowings, mainly medium-and long-term. 1/ See para. 4.20 for a discussion on the resulting mismatch of maturities of CIH's borrowing and lending terms.  - 21 - 4.15 Financial Performance. Summary audited income statements and balance sheets for FY 1977-1981 are given in Annexes VI and VII. Financial structure indicators are shown in Annex VIII. CIH's financial performance between 1977-81 has been good, especially in the profitability area. The return on equity reached 10.5% in 1981 compared to 6.7% in 1977, and CIH enjoyed a spread of 4.3 points in 1981, an increase of 80% over 1977. CIH's liquidity position is sound, with a current ratio of 1.5 at the end of 1981. Also CIH's debt-equity ratio of 10.8:1 and debt-service ratio of 1.2 at the end of 1981 met the limit of 13.8;1 and 1.0 respectively agreed upon under the CIH-IV loan. Similar covenants were agreed for the proposed loan. 4.16 Quality of Loan Portfolio. As of December 31, 1981, CIH's housing loan portfolio represented 59.8% of its total loan portfolio. Arrears in principal and interest of over 6 months on the housing loans portfolio amounted to US$12.5 million as of December 31, 1981, or 6% of the outstanding housing portfolio. These arrears present no special risks because the real estate value of CIH's mortgage security far exceeds its risk of loss on these loans. It is estimated that CIH's lending operations in low cost housing are not likely to adversely affect its housing portfolio. Experience in developed and developing countries shows that'there is no special repayment risk attached to granting housing loans to low income groups. CIH's hotel portfolio affected by arrears, however, increased from 20% in September 1980 to 40% of the total hotel portfolio outstanding in May 1982. An action plan to reduce arrears associated with three state-owned groups of hotels (Chellah Immobili6re, Holiday Inn and Office National des Chemins de Fer (ONCF)) was agreed with the Treasury. The Government's confirmation of the agreed action plan was obtained during negotiations. A phased reduction of CIH's hotel arrears in the private sector was reviewed during negotiations and agreed upon. Projected Operations and Finance 4.17 Future Lending Operations. CIH's projected lending operations are summarized below and detailed in Annexes IX and X. They have been discussed with CIH staff and have been significantly scaled down to reflect resource mob'ilization constraints (para.4.18). The impact of these operations on CIH's projected income statements and balance sheets for the 1982-86 period is shown in Annexes XI and XII. During the next few years (1983-86), total approvals would increase by 22.3% per year and total disbursements by 25.9% per year. Most of this increase in activity, which CIH's current institutional set-up can manage, would entail a significant shift away from hotel and tourism lending (where there would be no growth in nominal terms) toward housing lending, especially low cost housing where lending would increase to US$40-50 million annually.  - 22 - Table IV. 2. CIH's Projected Lending Operations (1982-86) 1982 b/ 1983 1984 1985 1986 Approvals (US$ million) Construction loans 26.7 50.0 58.3 62.5 66.7 Mortgage loans - General Regime a/ 94.6 66.7 75.0 83.3 91.7 - Special Regime a/ 29.0 33.3 45.8 50.0 58.3 Land Development loans 3.5 1.7 2.5 2.5 2.5 Hotel and otber loans 26.8 28.0 33.8 38.7 43.4 TOTAL 180.6 179.7 215.4 237.0 262.6 Disbursements (US$ million) Construction loans 25.5 34.6 48.4 58.3 63.3 Mortgage loans - General Regime al 49.4 93.8 79.8 78.8 87.1 - Special Regime a/ 3.5 47.1 41.3 50.4 56.7 Land Development loans 1.3 3.8 1.9 2.5 2.5 Hotel and other loans 18.6 44.8 33.1 34.6 39.8 TOTAL 98.3 224.1 204.5 224.6 249.4 a/ See para. 3.16. bl Figures based on 11 months of operation.  - 23 - 4.18 Resource Mobilization. CIH's projected resource requirements on approval basis amount to US$1,070.2 million for 1982-86. Identified resources would cover 51% of the financial needs, leaving a resource gap of US$529.3 million. Details are provided in Annexes XIII and XIV. As CIH's lending is secured exclusively in local currency, it will rely mainly on local borrowings to fill the projected resource gap. Although the yearly amounts to be borrowed from local institutions have not been finalized, CDG, BCP and BdM, traditional lenders to CIH, are likely to meet its resource needs. Given the limited absorptive capacity of the local financial market, however, CIH will have to borrow on the international markets for an estimated amount of US$13.5 million, in addition to the proposed loan. Because these loans carry short maturities (generally 7 years) and floating interest rates (pegged to the LIBOR), excessive borrowings on the international markets could jeopardize CIH's profitability and debt service capacity. Assurances were obtained at negotiations that CIH would take appropriate action to protect itself against interest rate fluctuations. The ratio of borrowings at floating rate to total borrowings will stay below 12% throughout 1986 (See Annex XII). 4.19 CIH's creditworthiness might also be jeopardized if it finances public resettlement schemes when upgrading solutions are not deemed appropriate. Experience has shown that the beneficiaries of such schemes are often reluctant to meet their mortgage payments because they consider such schemes as state-supported welfare operations. Although CIH treats these schemes with the same degree of financial responsibility as any other housing development, assurances were obtained at negotiations that resettlement loans would be guaranteed by the Government. Furthermore, CIH will take all necessary action to avoid arrears on mortgage loans for resettlement schemes, and if arrears on such loans reach more than 8%, the Government will promptly pay CIH to reduce arrears to such limit. 4.20 Discussions were held with Moroccan officials about the contemplated introduction of a contractual housing saving scheme that would significantly contribute to CIH's resource mobilization. CIH has prepared a feasibility study which, at time of appraisal, was under review at the Ministry of Finance. Given the complexity and far reaching implications of such a scheme, and pending a Government decision, this potential resource was not included in CIH's resource mobilization plan. A detailed financing plan for the period 1983-85 was reviewed during negotiations and its implementation was pledged by CIH in a supplementary letter. Special attention will be given to preserving an adequate matching of funds because the low cost housing loans, that CIH will be increasingly granting, may have a maturity of up to 25 years. At the end of 1981, the average maturity of resources was 7.9 years compared to 5.6 years for loans. This margin will narrow in the future because of CIH's new focus on low-cost housing lending but, because CIH is required to meet a minimum debt-service coverage ratio and a maximum debt-equity ratio 1/, monitoring will be facilitated thus allowing CIH to take expeditious corrective measures as and when required. 4.21 Projected performance. Indicators are shown in Annex XV. CIH is expected to maintain the healthy profitability it has shown since 1980. By 1/ Under the CIH-IV loan.  - 24 - the middle of the commitment period of the proposed loan, and of 1984, the return on equity is projected to reach 30.7% in spite of a new share capital increase implemented in 1983, and CIH would be operating with a 6.2 point-spread. Over the period 1983-86, both the debt-equity ratio and the debt-service coverage ratio covenants would be met with no difficulty. V. PROJECT BENEFITS AND RISKS 5.01 The project aims at supporting the activities of CIH, which, as the major housing bank in Morocco, is expected to play a key role in the delivery of housing finance to low income groups. In particular, by linking the provision of construction loans to the provision of mortgage loans (para. 3.05), and by increasing CIH's participation in the financing of low cost schemes sponsored by private developers (para. 3.20), the project will encourage the private sector to move into the low cost housing construction area. Also, by subjecting CIH's loans for low cost housing to the fulfillment of financial and economic rate of return criteria,the project will encourage the production of better designed housing, well targeted and with adequate physical standards. Finally, the technical assistance component of the project will strengthen CIH's ability to appraise low cost schemes and to advise developers on all aspects of low cost construction design. 5.02 Although modest in its scope, it is expected that this project would have a substantial impact on the housing sector by promoting home ownership and redirecting funds available for housing finance towards low income groups. The project will therefore increase resource mobilization and allocation in the housing sector. It is expected that about 15,000 new housing units would be made available through this project to benefit the lower half of the urban population (in terms of income). About 37% of these units would benefit people below the urban poverty threshold. 5.03 Economic rates of return computed for subprojects for which costs are known with some accuracy, vary between 18% and 20%. It is expected that the rate of return of all individual subprojects are likely to be in this range and would therefore be well above the opportunity cost of capital. Experience under the First and Second Urban Development Projects in Morocco which has financed housing units with similar standards as those envisaged under the project, show rates of the same order of magnitude (between 19% and 21%). 5.04 There are three main risks associated with the project. The first risk is related to the type of subprojects CIH would finance under the project. As CIH has very limited experience in low cost housing financing, there is a risk that it will tend to finance subprojects in the highest price range allowed by the eligibility criteria (para. 3.07 (a)). This risk has been reduced by (i) encouraging private developers to move into the production of the least expensive housing units (paras. 3.05 (a) and 3.20) and providing CIH with adequate technical assistance to improve its staff's capacity to deal with low cost housing (paras. 3.11 to 3.13). 5.05 The second risk is associated with the target population. There is a danger that the pressures in demand resulting from a shortage of housing could lead to higher income groups obtaining the shelter facilities targeted for the  - 25 - lower income population. A further danger lies in the possibility of speculation that might result from such a shift in target population. These risks have been reduced under the project by (i) setting up selection criteria for the target population (para. 3.09); (ii) introducing the monitoring procedures referred to in para. 3.22; and (iii) building into the project design the necessary incentives for CIH to monitor closely the allocation of housing units (para. 3.14). Of particular importance in this respect is the accrual to a special account of funds from construction loan repayments. Should the mortgage loans to be financed out of these repayments not be extended to the target population, CIH would have to repay the Bank the corresponding amount. Such early repayment would decrease CIH's resource base at a time where funds are difficult to mobilize (para. 4.18). In addition, as far as the risk of speculation is concerned, CIH's monitoring procedures are adequate to reduce it substantially (paras. 4.05 and 4.06), although it cannot be eliminated altogether. 5.06 The third risk is related to CIH's financing of resettlement schemes (para. 4.20). Although CIH's participation in such schemes would be on an exceptional basis, they may represent a risk with respect to its creditworthiness, inasmuch as beneficiaries might refuse to repay (perceiving the cost of the new housing as a welfare grant) or being unable to repay because of the high standards of the construction. Finally the enforcement of guarantees (foreclosure on mortgage and eviction) is rarely if ever used in publicly supported housing projects. This risk has been reduced by limiting financial risks to CIH against arrears above 8% in the financing of such schemes (para. 4.19). It is further reduced by the existing legislation and practices of CIH which enable it to foreclose on deliquent mortgages. VI. ASSURANCES, AGREEMENTS AND RECOMMENDATIONS 6.01 During negotiations, the following documents were reviewed and agreed: (1) An updated pipeline (para. 3.03). (2) The terms of reference for the technical assistance experts (paras. 3.11 and 3.12). (3) The action program for reducing arrears of Chellah Immobiliere, Holiday Inn and ONCF as confirmed by the Government (para 4.16). (4) A program of phased reduction of CIH hotel arrears in the private sector (para. 4.16). (5) A detailed financing plan for CIH operations as well as a fully documented resource mobilization plan for the 1983-86 period (para. 4.20). 6.02 Agreements were obtained on the following and recorded in the Loan Documents; - The Loan Agreements between CIH and developers will include a covenant ensuring CIH refinancing of developers' newly built housing units (para. 3.05(a)).  - 26 - - 95% of the proposed credit line proceeds will be allocated to construction loans of which 25% to those financing core unit programs, and 5% of the proposed credit line proceeds will be allocated to individual construction and land development loans (para. 3.06). - Eligibility criteria for subprojects and beneficiaries will be as indicated in paras. 3.07 and 3.09. - The experts for the technical assistance program will be recruited according to Bank guidelines, their qualifications will be satisfactory to the Bank, and they will start their assignments not later than October 31, 1983 (para. 3.12 and 3.13). - The study for the Housing Construction Industry will be completed by July 31, 1985 (para. 3.13). - Loan proceeds to finance the construction loans will be repaid to the Bank if they have not been used within five years of their granting to make mortgage loans (para. 3.14). - The interest rate structure will be as mentioned in para. 3.17 and maintained throughout the project implementation period (para. 3.17). - CIH will continue to apply its accounting and auditing procedures and CIH's audit will include a review of the statement of expenditure related to the proposed loan (para. 3.22). - A review meeting between CIH and Bank representatives will be held annually at the beginning of the fiscal year to assess the achievement of the project (para. 3.23) - The Government and CIH will evaluate and discuss with the Bank the impact on low cost housing construction of interest subsidies in bousing and of the tax relief package by March 31, 1985 (para. 3.23). - CIH's financial exposure in any single housing project will be limited to 20% of its equity and reserves (para. 4.02). - CIH's debt-equity ratio and debt-service ratio will remain within the limit agreed upon under loan 1279-MOR. (para. 4.15). - Government will pay CIH in case arrears on resettlement schemes go above 8% (para. 4.19). 6.03 Given the above agreements, assurances and conditions, the project is suitable for a Bank loan of US$60 million on standard terms to CIH.  MOROCCO FIRST HOUSING LOAN TO CREDIT IMMOBILIER ET HOTELIER PIPELINE OF IDENTIFIED SUBPROJECTS 1983 1984 1985 SUBPROJECT AVERAGE NUMBER OF TOTAL NUMBER OF TOTAL NUMBER OF TOTAL CITIES NAMES DEVELOPER TYPE OF LOAN UNIT COST UNITS COST UNITS COST UNITS COST (DH) (DH'000) Bel Ksiri Bel Ksiri Erac-Rabat Construction Loans 62,000 150 9,300 175 10,850 - Ksar Kebir Ksar Kebir " " 71,000 150 10,650 150 9,300 - - Soukelarba Soukelarba " " " 80,000 - - 100 8,000 100 8,000 Tiflet Eddalia " ' 80,000(1983)75,000(1984) 200 16,000 140 10,050 100 7,500 Kenitra Oulad Dujih " 75,700 500 37,850 300 22,710 200 15,140 Khemisset Khemisset 78,000 - - 100 7,800 - - Teinara Temara 74,000 - 150 11,100 150 11,100 Acilah Acilah 70,000 - - 150 10,500 - - Quezzane Quezzane 70,000 - - - - 150 10,500 Various Cities " 62,000 - - 125 7,750 125 7,750 Marrakech Merstane Erac-Tensift "60,000(1983)54,000(1984) 450 27,000 450 24,300 - - Koutoubia " "70,000(1983)62,000(1984) 300 21,000 300 18,600 - - If Menara " 62,000 - - 300 18,600 300 19,500 1 El Harch " 45,000 200 9,000 - - - - Toubkal 46,000 500 23,000 - - 500 23,000 El Messina 45,000 - - 200 9,000 200 9,000 Taouitate Rizq Erac-Meknes " 77,500 44 3,410 - - - - Boufkrane Tarik , 79,000 12 948 - - - _ Fec May liassani Erac-Fes 70,000 300 21,000 - - - - Fes Al Moubabitine 70,000 500 35,000 - - - Agadir Tafouiki Erac-Sud " 39,000 137 5,343 - - - - Ifoulki 39,000 162 6,318 - - - - Yahchech " 37,500 45 1,689 - - - - Marrakech Les Oliviers O.L.M.(Public) " 68,000 150 10,200 - - - - 68,000 150 10,200 - - - - 66,000 - - 200 13,200 - - 64,000 - - 100 6,400 - - 62,000 - - 100 6,200 - - Casablanca Sidi Moumen Chaahi(Private) " 80,000 200 16,000 200 16,000 - - Sidi-Kacem ' " 70,000 150 10,500 150 10,500 - - Mansouriah Mansour Dehbi Serem (Private) " " 60,100 - - 400 24,040 500 30,050 N.A.a/ N.A.a/ N.A.a/ Individual 44,350 250 10,000 300 13,200 300 14,500 e z Construction Loans N.A.-a/ N.A.-a/ N.A.a/ Land Development 9,500 200 1,700 240 2,240 240 2,500 Loans o a/ Non Available. Identified on the basis of CII's past trends of activities.  - 28 - ANNEX I Page 2 of 2 MOROCCO FIRST HOUSING LOAN TO CREDIT IMMOBILIER ET HOTELIER PIPELINE OF IDENTIFIED SUBPROJECTS SUMMARY COST TABLE a/ TYPE OF --- ---CORRESPONDING SUBPROJECT COST b/--------- LOANS DH (Million) US$ (Million) Local Foreign Total Local Foreign Total Construction Loans 788.3 424.6 1,212.9 131.4 70.7 202.1 Individual Construction Loans 24.5 13.2 37.7 4.1 2.2 6.3 Land Development Loans 4.2 2.2 6.4 0.7 0.4 1.1 Total 817.0 440.0 1,257.0 136.2 73.3 209.5 a/ The foreign cost component of ithe pipeline of identified subprojects amounts to US$73.3 million. With Bank financing of local cost (para. 3.20) the above pipeline would call for a loan of US$81 million. However, for reasons explained in para. 4.19, the loan to CIH has been reduced to US$59 million with a corresponding subproject cost amounting to US$153 million. b/ Excluding land.  - 29 - ANNEX II Page 1 of 3 MOROCCO FIRST HOUSING LOAN TO CREDIT IMMOBILIER ET HOTELIER SUBPROJECT ELIGIBILITY CRITERIA 1. Details on eligibility criteria are given in Table II.I. Prices are in mid-1982 value and would be adjusted on January 31, of each year to account for inflation. To this effect, the index of general price increases would be applied to the maximum selling price of each category of housing unit type. 2. The housing unit types listed in Table II.1 correspond to those actually produced by public or private developers. It is clear however that the characteristics of some projects proposed for Bank financing might not match exactly the types listed in Table II.I. They might still be eligible for Bank financing if some of their basic features (i.e. building cost per square meter, land development cost per square meter, plot size, plot layout and selling price) are deemed close enough to those of the type identified in Table II.I. The review by the Bank of all sizeable subprojects will allow to identify such cases.  - 30 - ANNEX II Page 2 of 3 MOROCCO-FIRST HOUSING LOAN TO CREDIT IMMOBILIER ET HOTELIER TABLE II.I SUBPROJECT ELIGIBILITY CRITERIA HOUSING UNIT CHARACTERISTICS TYPES _ TECHNICAL LAND USE PRICE a/ (DEi) Developed Plots - 60% of land should be for residential use Plot I Individual water, sewerage and electricity connection. Access to road. plot sizez 60 to 65m2 Total: 10,000 Plot II idem plot size: 65m2 Total: 12,000 Plot III idem plot size: 65m2 Total: 15,000 Plot IV idem plot size: 100m2 Total; 18,000 Core Units Perimeter wall, (1.8m plot size: 60 to 65m2 Total: 32,000 high), I built room, Built up area: Building cost wet room with turkish 20 to 3Om2 15,000 (25m2) toilet. Water, sewerage Density 90 plots per ha Dev. cost 10,000 and electricity connections Adm. cost 7,000 a! One Storey House 2 rooms, I kitchen, wet plot size: 60 to 65m2 Total 48,000 (partially completed) room with shower. Water, Built up area: 40m2 Building cost sewerage and electricity Density 90 plots per ha 26,000 (40m2) connections Dev. cost 10,000 Adm. cost 12,000 b/ One to Two Storey House(Completed) 2 to 3 rooms. All rooms plot size: 65m2 Total 62,000 completed with furnish- Built up area: 52m2 Building cost ings. Complete wet room Density 90 plots per ha 39,000 (52m2) and kitchen. All service (up to 200 units per ha) Dev. cost 7,500 connections Adm. cost 15,500 b/ Unit in Multi Storey 3 to 4 rooms. All room plot size: lOOm2 Total 80,000 House completed. All service Built up area: Building cost connections 65 to 70 m2 53,000 (66m2) Density 60 plots per ha Dev. Land 6,900 (up to 200 units per ha Adm. cost 20,100 b/ a/ Maximum selling price b/ 33% of building and land development costs  - 31 - ANNEX II Page 3 of 3 MOROCCO FIRST HOUSING LOAN TO CREDIT IMMOBILIER ET HOTELIER SUBPROJECT ELIGIBILITY CRITERIA Methodology for the Computation of the ERR of Housing Schemes 1. The ERR for housing schemes is computed on the basis of the standard comparision between project costs and benefits. Project investment costs include land and infrastructure costs, building costs, studies and administrative costs. Project running costs include all expenses necessary to maintain the project (infrastructure and building) "as is". The following adjustments to the cost computation are necessary to determine the economic costs of the project: (a) Land should be valued at its opportunity costs; (b) Taxes and duties, and interest charges should be excluded since they are internal transfers; and (c) Investment and Running costs should be computed net of inflation. 2. The measure of benefits is either the increase in property value (land development projects) or the increase in annual rental value (all other projects). The underlying assumption in this methodology is that the increase in property value or rent level is a measure of the willingness of the general public to pay for the services provided through the subprojects. Under this project since all construction would be new, the increase in rent value would be indentical to the rent paid in the project city for similar accommodations (size, location, quality of finishing etc.). Therefore, the benefit flow accruing to a subproject will be equated to the estimated rental value, of all the units in the subproject. As in the case of the computation of costs, the flow of benefits should be calculated net of inflation and transfers.  MOROCCO FIRST ROUSING LOAN TO CREDIT IMMOBILIER ET HOTELIER IIOUSEHOLD MODELS Household employed hlousehold of an Urban Household of an unskilled worker in Transport and Service Sectors Craftman Socio Economic Characteristics of The Households Household monthly income; US$330 Household monthly income: US$250 Houisehold monthly income; US$140 Income at the 50th percentile of the Income at the 38th percentile of the Income at the 18th percentile of urban income distribution curve urban income distribution cujrve the urban income distribution (Mid 1982) (Mid 1982) Typical consumption patternl/ (%) Typical comsumption pattern!' (%) Typical consumption pattern (X) Congumption Pattern Housing 21.5!/ Houising 22.6J/ Housing 303/ (based on 1971 expendituire Food 49.0 Food 49.0 Food 53 survey and site surveys for Health 5.0 Health 6.5 Health 4 preparation of Urban I and II) Other 24.5 Other 21.9 Other 13 Estimated income spent on new Estimated income spent-on new housing U) Estimated income spent on new Housing (%) housing (%) Housing: 25 Housing: 25 Housing: 2532/ Estimated Expenditure Estimated savings available for Estimated savings available for purchase Estimated savings available for Pattern Under The purchase (US$) puirchase (us$) purchase (US$) Proposed Project Savings; 3,325 Savings: 2,600 Savings: 1,100 (represents 8.5 years of savings (represents 8.7 years of savings (represents 9 years of savings (estimated rate of savings 10%)) (estimated rate of savings 10%)) (estimated rate of savings 7%)) Type of Units Available Type of housing units available to the Type of housing units available to the Type of housing units available ro The Typical Houisehold family under the project: (see Table family under the project (see Table to the family under the project Under The Proposed Project III.1)4/ III.1)4/ (see Table III.1) Unit in Multi-storey building or one One to two story house Core unit to two storey house One storey house partially completed 1/ With the exception of the figures in the last column which are based on recent surveys in low income areas, the typical consumption pattern reflects that of 1971 - Recent information indicates that over the last decade the share of housing expenditure has increased. (see Morocoo - Urban Sector Report - Opus Citu). The high percentages of housing expenditure retained in the estimated expenditure reflect this change. 2/ Does not include utilities and taxes. > 3/ It is assumed that 5% of the income would be spent to finish the Unit. 4/ It is assumed that for a given level of income, the typical household will buy the most expensive uinit within its financial reach.  - 33 - ANNEX IV MOROCCO FIRST HOUSING LOAN TO CREDIT IMMOBILIER ET HOTELIER TECHNICAL ASSISTANCE: IMPLEMENTATION SCHEDULE Land Use Model Data Information System Month CIH Staff Consultant Consultant CIH Staff Month 0 Analysis of Bertaud Model Formulation of General 0 Project Concept I Infornation Tour on Use of Similar Model 2 Design of the Yodel October 1983 October 1983 Information Tour on the Ilse 2 the Use of Similar Model 3 First Operational Runs Design of the Model 3 First Implementation Test S B Finalization C)f the Model 10 Final test runs Finalization 10 Training of Users 11 Final implemnentation runl ll July 1984 Training of Users 14 November 1984 15 t  -34- ANNEX V MOROC CO FIRST HOUSING LOAN TO CREDIT IMMOBILIER ET HOTELIER ESTIMATED DISE,URSEMENT SCHEDULE IBRD Fiscal Year Estimated Disbursements a/ Cumulative Disbursement Total Percentage (US$ Mil:Lion) (US$ Million) 1983 First Semester - - - Second Semester 0.8 0.8 1.3 1984 First Semester 5.0 5.8 9.7 Second Semester 7.0 12.8 21.3 1985 First Semester 8.5 21.3 35.5 Second Semester 9.0 30.3 50.5 1986 First Semester 10.5 40.8 68.0 Second Semester 8.0 48.8 81.3 1987 First Semester 4.0 52.8 88.0 Second Semester 3.2 56.0 93.3 1988 First Semester 2.0 58.0 96.7 Second Semester 1.2 59.2 98.7 1989 First Semester 0.8 60.0 100.0  - 35 - )ANNEX VI Mrl:::R0O-l-:t:1 -- FIR-.T HClU INCJ LOAN ToI CREDIT IMMrILE EILIER ET HOTELIEFR ( I H) AULI I TED I NC CIME 8;TATEMENT-;: 1977-1981 ( DH. ('00) DECEMBER 3:71 1.77 1j7: 157- 17l0 I C` Ci ,M E TNTEREST CONl ! -IAN"; /: