Morocco - Large Scale Irrigation Improvement Project

Document of The World Bank FORonMCaL USE ONLY IRkt No. P-41710--MOR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL RANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$46.0 MILLION TO THE KINGDOM OF MOROCCO FOR A LARGE SCALE IRRIGATION IMPROVEMENT PROJECT January 23, 1986 ITh doemet F a refktsi dIsbNdmmd nay he ted by recipients sly in the peffn.ne of their SM Isi. Id co"bmab amy n otherwise be diosed whout Wedd Bank ath.kulzadm.  CURRENCY EQUIVALENTS Currency Unit = Di.rham (DH) I Dirham (DH) = US$ 0.10 1 US Dollar (US$) = DH 10.0 FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS ASAL Agricultural Sector Adjustment Loan CMV ORMVAs' Local Development Centers (Centre de mise en valeur) CNCA National Bank for Agricultural Credit (Banque nationale de credit agricole) DEAR MARA's Central Department of Training and Research (Direction de 1'enseignement agricole et de la recherche) DER kMURA's Central Department for Rural Construction (Direction de l'quipement rural) DPA MARA's Provincial Directorate for Agriculture (Direction provinciale de I'agriculture) DPAE MARA's Central Department for Economic Affairs (Direction des affaires economiques) DPV MARA's Central Department of Crop Production (Direction de la Production Vegetale) FERTIMA: National Fertilizer Marketing Company (Sociit6 Marocaine des fertilisants) 1NRA National Institute for Agricultural Research (Institut national de la recherche agronomique) LSI : Large Scale Irrigation MARA : Ministry of Agriculture and Agrarian Reform (Ministere de ['agriculture et de la reforme agraire) ORMVAs : Regional Agricultural Development Offices (Offices regionaux de mise en valeur agricoLe)  FOR OFFICIAL USE ONLY K[NGDOM OF MOROCCO LARGE SCALE IRRIGATION IMPROVEMENT PROJECT LOAN AND PROJECT SUMMARY Borrower: Kingdom of Morocco.. Beneficiaries: Nine Regional Agricultural Development Agencies (ORMVAs) Amount: US$46.0 million equivalent Terms: 20 years, including 5 years of grace, at the standard variable interest rate. Project The proposed project would help implement and complement the Description: reform package agreed upon under the First Agricultural Sector Adjustment Loan (2590-MOR) with regard to the irrigation subsector. The project's objectives are to provide for greater efficiency in the use of existing resources in the 400,000 ha of large scale irrigated lands (LSI) and improve the financial performance of the nine ORMVAs in charge of LSI schemes to reduce their dependance on the Government's budget. The project would consist of (a) rehabilitation or upgrading of existing irrigation infrastructure serving about 150,000 ha; (b) provision of equipment, vehicles and houses for O&M operations; (c) setting up an efficient management information system and improved planning, financial, accounting and operating procedures; (d) technical assistance; and (e) on-farm development. Because of the important institutional development and policy reform component of the project, the net flow of benefits is expected to be maintained beyond the project execution period. The risks of slower project implementation and production response and of lower rehabilitation cost savings are manageable given the government's commitment to the project and its implicit reforms, which has been demonstrated by actions already initiated under the ASAL. 'This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Estimated Proiect Costs: a/ Local Foreign Total -(US$ million) -- Civil works 17.7 11.1 28.8 Equipment and vehicles 7.3 10.3 17.6 Maintenance contracts 0.7 0.5 1.2 Technical assistance, studies and training 1.1 2.8 3.9 On-farm investments 3.1 2.8 5.9 Incremental recurrent costs 4.8 3.6 8.4 Total Base Costs 34.7 31.1 65.8 Physical contingencies 3.9 3.3 '.2 Price contingencies 10.7 8.8 19.5 Grand Total 49.3 43.2 92.5 Total Excluding On-farm Investments 45.2 39.2 84.4 Financing Plan: Local Foreign Total =- -CUS$ million) -- World Bank 6.8 39.2 46.0 Government 18.9 - 18.9 Beneficiaries 2.4 - 2.4 CNCA 1.7 4.0 5.7 Net Project Costs 29.8 43.2 73.0 Taxes and Duties 19.5 - 19.5 Total Project Costs 49.3 43.2 92.5 Estimated Disbursements: Bank FY 1987 1988 1989 1990 1991 1992 1993 ----(US$ million)--- Annual 1.9 4.1 7.7 L0.0 10.7 6.5 5.1 Cumulative 1.9 6.0 13.7 23.7 34.4 40.9 46.0 Economic Rate of Return: 26% Staff Appraisal Report: No. 5846-MOR, dated January 22, 1986. Map No.: IBRD 19063 a! Includes US$19.5 million of taxes and duties.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT A-ND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN [N AN AMOUNT EQUIVALENT TO US$46 MILLION TO THE KINGDOM OF MOROCCO FOR A LARGE SCALE IRRGATION IMPROVEMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Kingdom of Mcrocco for the equivalent of US$46.0 million to help finance a Large .,cale Irrigation Improvement project. The loan would have a term of 20 vears, including 5 years of grace, at the standard variable interest rate. PART I- THE ECONOMY 2. An economic report, entitled "Morocco: Priorities for Public Sector investment (1981-85)" (No. 4156-MOR), was issued on June 15, 1983. Another economic report entitled "Morocco: Industrial Incentives and Export Promotion" (No. 4893-MOR) was distributed to the Board on January 11, 1984. An economic mission on financial intermediation was in Morocco in September 1983 and its report (No. 4957-MOR) was issued on December 12, 1984. The following section reflects the findings of an economic updating mission that went to Morocco in July 1984 to prepare a paper, entitled "Morocco: Medium-term Adjustment Policies and Prospects", for presentation to a meeting of the Consultative Group for Mlorocco in Paris on January 9-11, 1985. Data and analysis have been updated to reflect the findings of the ITPA II appraisal mission that visited Morocco in March 1985. Country data are given in Annex I Introduction 3. During nearly two decades after Indepenidence in 1956, Morocco followed relativeLy conservative economic policies. Cautious external borrowings supplemented a weak savings effort to permit onlv a slow rise in investment, so that the economy grew only at about 4 percent per annum. Primary products - principally phosphates - accounted for 90 percent of merchandise exports. During the mid-1970s, after a sudden increase in phosphate prices, Morocco launched an ambitious pubLic investment program which boosted GDP growth to 7.5 percent annually during the period 1973-77. The phosphate boom, however, began subsiding as early as mid-1975. Meanwhile, the petroleum import bill, which had quadruipled in 1974, continued to place considerable pressure on the balance of payments, and the current account deficit reached 16.5 percent of GDP in 1977. Domestically, the large public investment program and increased defense expenditures in the Western Sahara caused the treasury deficit to rise to 15.8 percent of GDP in L977. Morocco resorted to considerable foreign borrowings to finance these deficits.  4. To redress the rapidly deteriorating financial situation, the Moroccan Government introduced a three-year stabilization program in 1978 centered on reductions in public sector outlays and stricter import controls. These reforms were only partially successful. They did little to stimulate exports. The exchange rate was kept overvalued and trade barriers were raised. They did not adequately tackle the excessive budgetary exposure and made inadequate attempts to increase the efficiency of resource use. The agricultural sector failed to grow, while value-added in manufacturing declined. Meanwhile, public investment was not restrained; a number of costly, poorly-targetted social programs were expanded and investment in infrastructure was undertaken often well ahead of need. Efforts to stabilize the economy were compromised by severe external shocks - most notably the 1979 oil price increase, the rise in international interest rates, the international recession which reduced phosphate earnings and workers' remittances, and the prolonged drought. Continued internal pressure to provide social services and affordable basic foodstuffs to a rapidly growing population put considerable strains on a budget already stretched by the need to finance expenditures in the Sahara. The 1981-85 Development Plan aimed at an ambitious 6.5 percent per annum growth rate in GDP. Notwithstanding the difficulties confronting the economy, Morocco did not appear willing to introduce a comprehensive program of policy measures which could have confronted the economic crisis. The sthortcomings in the adjustment performance caused the IMF to convert a three-year EFF into a one-year Stand By Arrangement in 1982 and prevented the Bank frum proceeding with a SAL at that time. Recent Economic Developments 5. By 1983 it had become clear that the Government's room to maneuver was becoming very restricted by debt service payment requirements. In 1982 external public long-term debt (excluding military debt) had risen to about two-thirds of GDP and 235 percent of exports of goods and services while the debt service ratio reached 35 percent. Morocco was confronted with the prospect of a very large external payments gap for 1983. With exchange reserves virtually depleted and debt service rising, the Government imposed emergency import controls and budgetary cutbacks in early 1983. In November 1983 the Government entered into an 18-month standby agreement with the IMF (SDR 300 million, or 98 percent of quota) supporting a stabiliLztion program which included fiscal and credit restraints and a flexible exchange rate policy. Shortly thereafter, official creditors agreed to reschedule external debt interest and principal payments coming due between September 1, 1983 and December 1984, as well as arrears as of August 31. 1983. Commercial bank creditors agreed in principle to provide comparable relief on amortization. The total amount of debt relief obtained in 1983-84 under these agreements was estimated at more than $2 billion (including $575 milLion of relief on military debt). In November 1983, a Donors' meeting sponsored by the IMF, generated pledges of about $500 million of exceptional balance-of-payments assistance for 1983-84. To meet its fiscal targets the Government restricted public service recruitment and salary increases, raised the prices of electricity, water, petroleum products and subsidized foodstuffs (by between  - 3 - 17 percent and 60 percent), and cut capital outlays by one third. At the same time, it began a significant adjustment effort supported by the Bank, with the January 1984 Industrial and Trade Policy Adjustment Loan (ITPA I) (No. 2377-MOR), to improve its balance of payments situation with a package of measures to restructure its trade regime. This included a reduction in import taxation, an easing of quantitative restrictions, and a reduction in export licensing. Following a Financial Sector Study conducted by the Bank in 1984 (4957-MOR), the Government extended these reforms to the Financial Sector with the objective of raising domestic resources and improving resource allocation. Greater flexibility was introduced in setting interest rates, measures were designed to increase competition among banks, and taxation reforms to benefit the financial sector were implemented. 6. As a result of the policies adopted since 1983, macroeconomic balances improved. The economy's resource gap shrank from 13 percent of GDP in 1982 to 8 percent in 1984 (at constant L980 prices). This was achieved through a significant decline in the GDP share of consumption and investment relative to their high levels earlier in the 1980s. Meanwhile, import growth has been restrained by appropriate demand management and by the depreciation of the exchange rate, while the share of exports 1nd gross domestic savings increased substantially. The Government budget deficit was reduced from 12 -percent of GDP in 1982 to about 7 percent in 1984 (8 percent before taking into account the impact of external debt rescheduling on interest payments). Although the improvement stemmed chiefly from a sharp reduction in investment outlays, there was also a significant slowing down in the rate of growth of current expenditures. As was to be expected, the rate of GDP growth has been low (a little over 2 percent p.a.), reflecting the impact of stabilization policies on consumption and investment demand, along with the effect of drought on agricultural sector incomes in both 1983 and 1984. A good harvest is expected to help boost the growth rate to about 4 percent in 1985. 7. The current account of the balance of payments improved considerably, reflecting both the better resource balance of the economy and the impact of the debt relief obtained by Morocco from its official creditors on interest and military debt service payments. In 1983, the external current account deficit was reduced by half, from $1-9 billion and 12.7 percent of GDP in 1982 to $873 million and 6.6 percent of GDP. The balance subsequently worsened in 1984, particularly in relation to GDP, but still remained under $1 billion. In both 1983 and 1984, about half of the roughl.y $1 billion improvement in the current account in relation to 1982 was attributable to debt relief. I' The net inflow of public medium and long-term capital (including grants) has declined sharply from about $1.5 billion in 1982 to an average of only $400 million during 1983-1984- In 1985, the net inflow rose to about $1 billion, including an exceptional $300 million grant from Saudi Arabia. Nevertheless, these inflows had to be supplemented by continued debt relief along the lines of the 1983-84 debt rescheduling, and demand management poLicies to keep import growth under controL. 1/ Over $200 million in interest payments were rescheduled in each of the two years- In addition, the current account balance benefitted from military debt relief in the amount of $325 million in 1983 and $250 million in 1984.  -4- 8. Further progress in reducing both external and fiscal imbalances is envisaged under a new stand-by arrangement with the IMF approved on September 13, 1985. Preliminary data indicate some slippage in fiscal performance in the first half of 1985 and disappointing results on external trade, attributed essentially to weak demand in the phosphate market. These suggest that stronger corrective measures would be needed to keep the stabilization program on course including, in particular, restraining current expenditures and reducing subsidies on foodstuffs and public services. A formal debt rescheduling through the Paris Club covering maturities from September 1985 to February 1987 was agreed on September 17, 1985. Ninety-five percent of the total debt due were rescheduled along l1aes similar to those obtained under the 1983-84 debt relief arrangement. The 1983-84 rescheduling agreement between Morocco and the commercial banks was signed, after long delays, on October 21, 1985. These recent developments should help Morocco reach a balance in its external accounts for the next two years. Medium Term Policies and Prospects 9. Since 1983, the Government's objective of achieving viable external and fiscal positions along with satisfactory growth has been translated into a coherent medium-term strategy to restrain domestic absorption and increase the efficiency of resource throughout the economy. The principal elements of Morocco's medium-term adjustment program involve a shift to outward-looking trade and exchange rate policies; far-reaching reforms of price, credit, tax and regulatory policies to remove institutional and other obstacles to efficient mobilization and use of resources in key productive sectors of the economy; considerable improvements in the efficiency of government investment; more cost-effective methods and better targetting of social programs; and a thorough overhaul of the public enterprise sector. 10. The shift to an outward-oriented development strategy is the cornerstone of Morocco's medium-term adjustment program. Continued adjustments in trade and exchange rate policies will be made to complete the reform of the overall incentive framework designed to accelerate export growth and reduce and rationalize import protection. Key instruments are to be a flexible exchange rate, the elimination of the special import tax (expected by January 1987); a general reform of the tariff level and structure, with the objective of reducing the overall level of protection to 25 percent through decreasing maximum duty rates and evening out the spread in tariff rates within and between sectors; and finally, a paasing out of quantitative restrictions on imports. Domestic price controls, which were already removed in 1983-84 on many manufactured products, are planned to be fully eliminated, in parallel with progress in import liberalization. Remaining export licensing requirements will be abolished, with exporters to be entitled to import all inputs on a duty-free basis. ii. At the same time, appropriate sector strategies for the key productive sectors, particularly agriculture and industry, will be promoted. In industry, although the development of Morocco's potential for export of phosphate fertilizers will continue to be an important objective, the  contribution of this highly capital-intensive sector to employment and to the establishment of a broader industrial base through forward and backward linkages wilL remain limited. Moreover, a high degree of dependence on phosphate and phosphate fertilizer exports has made Morocco extremely vulnerable to cyclical fluctuations in the volatile world phosphate market. For this reason, the industrial strategy must be based on the diversification of manufactured exports, including processed foods and nontraditional manufactures where MorGcco may have a comparative advantage on world markets. In agriculture, Morocco needs to continue developing an appropriate package of policies designed to overcome existing constraints to rational land use patterns, to ensure that farmers have adequate incentives to improve farming techniques and use modern inputs, and to provide the support services needed to bring about these changes. A first Agricultural Sector Adjustment Loan (2590-MOR) in Line with such policy direction was extended by the Bank in June 1985. 12. The low productivity of investment has been one of the major factors in the poor performance of the Moroccan economy in the past ten years. The allocation of capital and the efficiency of investment need to be improved considerably both in the public and in the private sector. In the private sector, the reform of the protection framework described above should go a long way towards removing distortions in investment patterns. However, it will also be necessary to review the bias in favor of capital-intensive activities inherent in the current investment incentive system, including tax exemptions and interest rate subsidies which artificially depress the cost of capital. In the public sector, increasing the efficiency of investment will require a considerable improvement of existing planning and budgeting mechanisms, including better procedures for setting investment priorities, strengthening of project preparation and monitoring capability, and placing more emphasis on the economic evaluation of projects before they receive Government sanction. Policy actions to improve the public investment and enterprise framework as well as continuing reform of trade policy and a comprehensive approach to financial sector reform are supported by the Bank's second IndustriaL and Trade Policy Adjustment (ITPA II) loan (2604-MOR) approved in July 1985. 13. An exceptionally strong savings effort will be essential for the success of Morocco's adjustment process. In the private sector financial savings have been repressed in the past due to inadequate financial policies and negative real interest rates. Savings are now being encouraged through increases in deposit rates and a program of financial sector reforms to improve financial intermediation and develop the domestic money and capital markets. But the most intense savings efforts in the next few years will have to take place in the public sector, which continues to be a major source of dissaving, particularly through the Government budget. In the medium term, sustained improvement in the mobilization and utilization of resources by the public sector will require fundamental reforms in a number of key areas, including social expenditure policies, taxation, and cost recovery and efficiency in the public enterprise sector. In the social sectors, where coverage oF the population is still inadequate, Government activities need to be restructured so that basic services (particularly education and health) can  -6- be delivered more effectively but at substantially lower cost. More cost-effective methods and better targeting will be prerequisites to a further broadening of access to these services in the future. Food and other subsidies also need to be targeted to the groups most in need rather than directed to the general population. 14. Macroeconomic projections based on the Government's reform programs indicate that it may take the better part of the next ten years for Morocco to complete its adjustment process and become fully creditworthy. The growth of the economy is likely to be severeLy constrained in the early years of the adjustment process. However, as the restructuring measures designed to promote exports, improve resource use and increase domestic savings begin to work their effects through the economy, the external imbalance should lessen, and restraints on domestic demand could gradually be relaxed. Moreover, the growth of external demand expected to result from the trade liberalization and export promotion policies, and the switch in the composition of domestic demand from imported to domestic goods, fostered by the adjustment of relative prices, should help mitigate the temporary negative impact of slower public expenditure growth on incomes and employment. L5. The projections suggest that GDP growth is likely to remain low (below 3 percent p.a.) until 1990, accelerating thereafter. Domestic demand is expected to grow very slowly until 1990, reflecting the impact of stabilization policies on both investment and consumption. Investment, which has been declining since 1978, should continue to fall in real terms and in relation to GDP until about 1987, then rise somewhat until 1990, recovering strongly thereafter. Assuming that central government investment expenditures would remain constant in real terms in the medium term, the adjustments would occur primarily in the public enterpises and private sectors. Government consumption, which had grown very rapidly until recently, is projected to decline marginally in real terms and to drop by 3 percentage points in relation to GDP between 1985 and 1990. The growth of private consumption, which already slowed significantly in the early 1980s, would remain just below that of GDP in 1985-90, and accelerate only slightly in the 1990s. Restructuring policies should bring about an acceleration in the growth of exports of goods and nonfactor services. The acceleration of export growth would help sustain a modest recovery of imports, the overall trend of which has been downward since 1978. Imports, however, should rise much more slowly than exports between 1985 and 1990, as a result of the demand restraint and expenditure switching policies. 16. As a resu?t of the drop in the GDP share of both investment and CGnsumption, there should be a steady decline in the economy's resource gap, with a small surplus projected for 1990. Gross domestic savings are expected to rise much faster than GDP throughout the period, initially as a result of improved savings mobilization by the public sector, and later reflecting continued substantial improvements in private savings as well. The marginal savings rate with respect to GNP will need to be very high (about 50 percent) in 1985-90, as a necessary concomitant to reducing the external deficit; it should slacken slightly thereafter. High domestic savings should enable the  - 7 - economy to finance the recovery of investment without recourse to external savings in1 the early 1990s. This will be essential, since, throughout the remainder of the 1980s, the balance of payments will remain under considerable pressure because of continuing high debt service payments. By the end of the decade, reforms of the overall economic incentive framework and increased efficiency of public investment should have raised the productivity of new investment considerably, and the ICOR should drop substantially from the high levels prevailing in the early 1980s. 17. It is important to recognize that the implementation of the stabilization policies and measures for structural adjustment envisaged in this scenario will entail some transitional social costs. With population growth at about 2.5 percent p.a., GNP and consumption per capita, which have been essentially stagnant since 1980, are not likely to show much improvement in real terms until the end of the present decade. Stabilization policies and measures to increase efficiency will initially be reflected to some extent in depressed domestic demand, increased unemployment, and some decline in real incomes, particularly the real income of urban populations, Government employees, and workers in less competitive industries. On the other hand, the real income of farmers, who constitute by far the poorest segment of the population, should rise as a result of increases in agricultural producer prices and improvements in support services and marketing institutions and infrastructure. This will be particularly true of farmers in rainfed areas. The political and social implications of these welfare shifts are likely to be significant, and to keep them manageable will be a major concern of the Government in the next few years. While the cost of not undertaking the required economic adjustments would in any case be greater in the long run, it will be important to minimize the negative short-term impact of these adjustments on the poorest groups. After 1990, as a result of the reforms undertaken in the 1980s, the economy could return gradually to a higher growth path without endangering external equilibrium. Per capita Levels of income and consumption could begin to rise again, and the restoration of economic dynamism would greatly improve Morocco's ability to deal with its serious unemployment problem. 18. A steady improvement in Morocco's external payments position should result from the acceleration of export growth relative to import growth anticipated in 1985-90. The economy's negative resource balance, which averaged more than $2 billion in 1980-82. and dropped to $1.2-1.3 billion in 1983-84, is projected to decline steadily, and virtually disappear by 1989. Assuming that the growth of workers' remittances can be sustained at a modest pace, the current account should improve roughly in parallel with the overall resource balance and could reach approximate equilibrium around 1989. However, the overall balance of payments can be expected to continue to show large deficits because of the heavy principal repayments coming due on the external debt, including substantial repayments to the IMF. Because of mounting debt service obligations, gross public long-term capital requirements are projected to average close to US$2.5 billion annually during the period 1985-90.  -8- 19. It is clear, under these circumstances, that Morocco will continue to require debt relief for several more years. The projections include the effects of the recently concluded 1985-87 debt rescheduling agreement through the Paris Club, and assume debt relief from private creditors during 1985-87, essentially along the lines of the debt reschedulings obtained in 1983-84.* Normal public long-term capital inflows could then be approximately sufficient to cover the remaining financing requirements in 1985-87 (about US$1.2 billion annually), assuming that new loan commitments from Moroccos official lenders can be maintained at their current rate (about US$800 million a year). Recourse to commercial bank financing, outside of these guaranteed programs, is likely to remain constrained and overall private capital flows are expected to remain sporadic, at US$100-300 million per annum, probably strongly conditioned on, if not directly tied to, speciflc adjustment programs (such as co-financing of the ITPA II and PERL operations) during this period. 20. For the years 1988-1991, Morocco is going to need around US$2 billion annually to meet its capital requirements. Providing that US$800-900 million a year are forthcoming from official creditors; and assuming a reasonable recovery of private source financing of about US$700 million a year, around US$400 million still remain to be generated each year to cover the gap. With Bank and IMF transfers stretched to the limit, Morocco's remaining financing requirements will have to come in the form of further debt relief, grants, or some concessional assistance. Only beginning in 1992, with debt repayments from past borrowings and successive reschedulings starting to level off, could equilibrium in the overall balance of payments appear assured on the basis of normal official capital inflows and a sustainable recourse to private financing. If the envisaged external capital flows do not materialize, the Government will have to resort to severe corrective measures to finance its resource gap. 21. In view of the continuing large capital inflows required in the next few years, the long-term external debt outstanding and disbursed would continue to rise rapidly until 1988, but would begin to stabilize thereafter. The ratio of debt outstanding and disbursed to exports of goods and services, which had risen to 260 percent in 1984, would start to decline, progressively dropping to 175 percent by 1990 and 114 percent by 1995. In the absence of debt rescheduling, the long-term debt service ratio would have risen above 50 percent of exports of goods and services in 1985 and 1986. With debt relief obtained for the period 1985-87, on the other hand, the debt service ratio could be kept manageable at 24-25 percent during the next few years. Assuming no further debt relief, it would rise sharply in L988, with repayments on the 1983-84 rescheduled maturities (including military debt) falling due, but would then start declining gradually in the 1990s. 1/ About US$230 million of military debt service payments coming due each year until 1988 are assumed to be rescheduled along the same lines as other obligations.  -9- PART H - OTHER BANK GROUP OPERATIONS IN MOROCCO ' 22. Bank lending to Morocco has supported 65 projects, financing a total of $2,675.5 million (net of cancellations), of which $25 million from a Third window loan. IDA credits, totalling $45.2 millicn, have been made available for five projects. IFC investments have amounted to $104.7 million ($59.9 million after cancellations, terminations, repayments and sales). Annex II contains a summary statement of Bank loans and IDA credits, and of TFC investments, as of September 30, 1985. 23. Until recently, performance in project execution has been satisfactory overall, although in some cases management problems have caused delays in project implementation, and in others insufficient tariff adjustments have affected project entities' financial performance. However, during 1983, as budgetary constraints became more severe, projects relying on the Government budget for a substantial part of financing have been seriously delayed because of inadequate budgetary allocations. The appreciation of the dollar vis-a-vis the dirham in recent years has reduced considerably reimbursable expenses in dollar terms, thus lowering disbursements vis-a-vis appraisal estimates. The ratio of disbursements to appraisal estimates averaged 43 percent as of September 30, 1985, low in comparison to other countries in the region. 24. The objectives of Bank Group activities in Morocco are to support (a) investments and policy reforms aimed at structural adjustment and strengthening the balance-of-payments; (b) measures to reduce the Treasury deficit; and (c) efforts to redress poverty and improve income distribution, particularly through lowering the unit costs for the delivery of basic services, in order to increase access by lower-income groups. Important structural reforms must be undertaken in the coming years, in order to return to a path of reasonable economic growth compatible with a sustainable external payments position. A major objective of Bank economic and sector work is to provide the analytical basis for the development of specific proposals for structural reform, which in several cases is being supported by Bank lending. At Government's request, in addition to ongoing work on the public investment program, the Bank is assisting in developing reform proposals relating to the public enterprises. Because severe budgetary constraints are likely to persist over the medium-term, projects now under preparation or consideration, like the proposed project, are timed and designed to be consistent with the investment strategy which aims to minimize their reliance on incremental budgetary funds and, if applicable, support Morocco's efforts to reform its public enterprises within the framework and to complement the agreed structural reforms in various sectors. 1/ Part II is essentially the same as Part V in the Second Industrial and Trade Policy Adjustment loan (Report No. P-4075-MOR of May 6, 1985).  - 10 - 25. Agriculture continues to represent an important sector in Bank lending for Morocco. Past Bank lending has primarily supported rural development and irrigation projects focusing on particular geographical regions, in parallel with successful series of agricultural credit projects. There are no major covenants in default. Bank's operations in those fields will continue at a pace consistent witb the country's investment capacity while paying special attention to maximizing non-budgetary financing and improving cost recovery. At present increased attention is being given to agricultural support services at the national level, which are essential for backstopping regional development projects. In parallel, the Bank has helped the Moroccan authorities to review the sector policy framework and to formulate its medium-term adjustment program covering investment strategy, pricing and incentive policy and role of the public sector. The recently approved Agricultural Sector loan was in support of a first phase of such a sector adjustment program and is expected to be followed by similar operations, as further specific measures to adjust the prices and incentives framework are developed. 26. Energy and mining. The Government has given high priority to reducing the oil import bill, a major factor in the current account deficit, through development of domestic energy supplies. The Bank has supported this effort through loans for the exploration and appraisal of petroleum (primarily natural gas) and oil shale resources as well as for power generation and transmission and coal mining modernization and expansion. Future projects would assist in the development of domestic energy supplies, including gas, and hydropower. Through these projects as well as in our sectoral policy dialogue, efficiency in energy development and use would be promoted through attention to pricing, cost recovery and management issues. 27. Bank lending for infrastructure and utilities has helped to build a number of technically competent agencies in the fields of road transportation, electricity, water supply, housing finance, and community infrastructure finance, as well as to expand the provision of essential services. Future projects will place greater emphasis on improving the productivity and efficiency of existing infrastructure through improved financial and management performance. Mobilization of private and non-budgetary financing as well as improved cost recovery in these subsectors through tariffs should also help reduce the Treasury deficit. In addition to continuing support for the above-mentioned subsectors, projects are under preparation for railways, sewerage and telecommunications. 28. Industrial development in Morocco has been supported in the past through strengthening the financial and institutional resources of the Banque Nationale de D6veloppement Economique (BNDE), the major source of industrial medium-term credit. In addition, policy changes were introduced to widen access to credit by small-scale labor-intensive industries. Other projects focused on phosphate processing and cement production. The Bank's efforts are now focused on the development and implementation of medium-term policy reforms aimed at encouraging exports and improving incentives to domestic production. The first phase of such reforms was supported by the Industrial  - 11 - and Trade Policy Adjustment (ITPA) loan of 1984 and was successfully implemented. Further stages of reform of trade policy, as well as a comprehensive reform of the financial sector, and policy actions on public investments and pubLic enterprises are supported by the on-going Second Industrial and Trade Policy Adjustment Loan. 29. Education, health and urban development projects will increasingly concentrate on lowering unit costs in order to widen the access by low-income groups. Policy dialogue in these sectors continues to encourage the shift away from capital-intensive investments benefitting limited clientele and the development of more cost-effective delivery systems for basic services. While previous Bank-financed projects have supported technical education, rural primary education and improved teacher training, these should be complemented by efforts to expand basic education and skill training, as well as restructuring of the formal education system, which has represented a major drain on the recurrent budget. A loan in support of this kind of reforms is now being negotiated with Government. The recently approved first health development project will test new health care delivery systems in order to improve basic health services in rural areas. Finally, the experience of projects in urban upgrading will be continued and expanded, with increased efforts to mobilize private financing in order to reduce budgetary costs. PART m - THE AGRICULTURAL SECTOR AND THE IRRIGATION SUBSECTOR 30. Of Morocco's 60 million ha only 7.7 million have soils and moisture suitable for cropping, with another 20 million ha in semi-arid or mountain regions suitable only for grazing and forests. Of the cultivable land, about 507 receives an erratic rainfall of under 400 mm, which can only be put under a relatively high risk, low value barley/fallow cropping system. Only about 1.3 million ha are estimated to be irrigable economically. Fruits, vegetables, forage crops and industrial crops are grown under the more favorable irrigated conditions; but cereals and pulses which dominate the cropping pattern on 807 of the land are mostly grown under rainfed conditions where cultivation practices remain, for the most part traditional. Given the high variability in rainfall, considerable efforts have been made to develop irrigated agriculture. 31. The performance of the agricultural sector has been uneven. Following a period of solid growth in the sixties, when agriculture grew at more than 3% p.a. and accounted for 25X of the total growth in GDP, Moroccan agriculture has since developed more slowly. During the seventies and early eighties, the sector's average annual growth rate, held back by successive droughts which not only affected rainfed production but caused a serious shortage of water in the irrigated areas, averaged only 1.27. among the slowest-growing relative to other middle income countries. Currently, the agriculture sector accounts for about 17% of GDP and provides about 40Z of all employment compared with 28% of GDP and 55% employment in 1974. Since the mid-seventies, Morocco has seen a continued widening of the "food gap", with its adverse consequences on the trade balance. Agricultural imports now account for about 25% of the merchandise imports (approximately the same level as petroleum imports) and agricultural exports have declined as a share of  - 12 - total exports. The agricultural trade balance has gone from a surplus up to 1974 to a deficit of about US$200 million per year at present. The recent poor performance of Moroccan agriculture, however, conceals highly contrasting trends between the irrigation sub-sector and the rainfed sub-sector. The progress in use of improved farming techniques and production inputs for commodities grown under irrigated conditions has been significant. 32. In response to the worsening macro-economic situation and recent poor performance by the sector, the Government developed in 1984 a five-year agricultural sector adjustment program which has been supported by the Bank through a Sector Adjustment Loan (2590-MOR) in June 1985. The program's prime objectives are: (a) to restructure the public investment and expenditure program in agriculture towards quick maturing and high return investments; (b) to correct the prices and incentives framework to encourage economically sound shifts in agricultural activities; (c) to strengthen the agricultural support services offered by the Goverment while rationalizing the role of the public sector in provision of commercially viable services, and improving cost recovery in other services; and (d) to build up institutional capacity for agricultural policy planning and analysis. Experience with past lending 33. Bank group lending for agriculture began in 1965, and to date 10 projects have been completed and 10 projects are underway. They include six irrigation projects, five agricultural credit projects, an agro-industries and flood control project, five rainfed agricultural development projects, an export-oriented project, a Forestry Project, and an Agricultural Sector Adjustment Loan. Performance under these projects has generally been satisfactory. 34. Performance under past irrigation projects has been good once initial problems of land distribution and organizational delays in construction and procurement of irrigation equipment were overcome. Inadequate cost recovery was a major issue in the seventies, but improvements in cost recovery legislation and sizeable increases in irrigation water and pumping charges since 1980 are contributing to a satisfactory resolution. The project performance audit report (PPAR) for the Sebou I Project (Loan No. 643-MOR) stresses the project's success in institution building and in providing infrastructure to achieve production increases in irrigated crops. It also highlights the importance of successful extension work, timely allocation of funds to O&M, and collection of water charges, as well as the need to complete the land reform programs before the start of irrigation works. The PPAR for the Doukkala I Irrigation Project (Loan No. 1201-MOR) indicates that the project was successfully completed with actual production and cropping intensity exceeding appraisal targets. The Doukkala II project (Loan 1416-MOR), to be completed in 1986, is expected to achieve a similar performance. The PPAR of the Souss Groundwater Project (Loan No. 1123-MOR) stresses the successful Land consolidation of private freehold and distribution of state and collectively owned land and the establishment of service cooperatives. It, however, warns against the neglect of operation and maintenance caused by inadequate funding and lack of qualified staff. The  - 13 - proposed project would contribute to resolving the issues highlighted in the audits of the completed projects by improving operation and maintenance, increasing ORMVAs' revenues for better funding of O&M, improving collection of water charges and reorganizing extension services. The hrrgation Subsector 35. The total irrigated area has more than doubled over the last twenty years and presently covers some 900,000 ha. This represents less than 70% of the country's potential for irrigation. The Large Scale Irrigation (LSI) schemes cover 400,000 ha or 45% of the total area and are concentrated in nine large schemes each controlled by one Regional Agricultural Development Authority (ORMVA)'; a high proportion of investment resources and managerial talent has been concentrated in the past in these areas. Water is provided in these schemes from twelve major storage reservoirs or from tubewells. At present surface irrigation covers 80% of the LSI area and sprinkler irrigation 20X. 36. The Government introduced substantial changes in its irrigation development policy under the 1981-85 Plan. The previous expansionist and interventionist policy has gradually shifted towards: (a) ensuring optimal use ot water through rehabilitation of existing schemes and more efficient operation and maintenance; (b) allocating a larger share of investments for the development of small- and medium-scale schemes because of their lower development cost per hectare and their more rapid build-up of benefits; (c) favoring investments in those LSE areas which are served by existing dams; (d) increasing farmers' contribution to water management and to recovery of 0&M and investment costs incurred by the Government; and (e) establishing more effective extension services to promote more appropriate cropping patterns, agricultural farming practices and water saving technologies. These objectives are further pursued under the Agricultural Sector Adjustment Program, under which Government plans to: (a) reduce its administrative and financial controls over the ORMVAs to expedite and facilitate their operations; (b) establish a system of medium-term contracts b-tween the Government and each ORMVA; (c) improve the ORMVAs' financial autonomy by introducing user charges to gradually recover the full cost of those commercial services provided by them, while transferring to the private sector or cooperatives those services which are viable to them; and (d) improve cost recovery levels in order to reduce the total budgetary support to the ORMVAs. Measures to achieve these objectives would be taken under the proposed project. Lssues 37. Operation and Maintenance has been long neglected because of higher priority given to expansion of the schemes. Since 1980, however, improvements have taken place through the creation of separate O&M units in most ORMVAs, appointment of skilled engineers and other technical personnel and the 11 The nine ORMVAs are: Loukkos in the high rainfall zone of the country, Moulouya and Gharb in the medium rainfall zone, and Doukkala, Tadla, Haouz, Souss, Tafilalet and Ouarzazate in the low rainfall zone (See Map).  - 14 - introduction of improved O&M methods. Budgetary constraints and expansion of complex irrigation systems have limited the effect of such improvements. Matters requiring further attention are the following: (a) the need to establish clear procedures for planning and budgeting well defined O&M programs; (b) preventive maintenance is often neglected in favor of emergency maintenance thus increasing the need for rehabilitation; (c) insufficient qualified middle-level staff to operate and maintain the pumping stations and tubewells; d) aging O&M equipment of ORMUAs and communications deficiencies; and (e) insufficient efforts are made to ensure adequate maintenance of on-farm irrigation systems as compared with maintenance of headworks and distribution systems. The proposed project would help tackle these issues by rationalizing O&M organization and management, securing funds for O&M, providing adequate O&M equipment, training middle-level staff and encouraging the farmers to play a role in O&M. 38. Exte-asion has been insufficient and not well organized or linked to research, particularly for the non-industrial crops. Insufficient number and training of agents, ambiguous lines of responsibility, loose supervision and lack of discipline account for most of the deficiencies. Government is preparing a national plan to improve agricultural extension including changes in the field organizational structure, detailed work programs, increased mobility and training of the extension staff and linkage with research. The proposed project would support the reorganization of the extension of services of ORMVAs along the lines of the T&V system decided by Government under the ASAL. 39. Research undertaken by ORMVAs has had little impact on production in the irrigated areas. Lack of coordination of the ORMVAs research stations with agricultural research organizations, and lack of focus of the work programs of such stations on the farmers problems, together with inadequate training of the research staff and funds, are responsible for the inefficiency of the ORMVAs' research programs. The proposed project would help reorganize the research activities of the ORMVAs in line with the national plan for reorganization of agricultural research currently being prepared under the ASAL. 40. Cropping patterns are determined by the Ministry of Agriculture and Agrarian Reform (MARA) for each perimeter on the basis of feasibility studies which were cdrried out in the seventies for most perimeters and not updated despite important changes in the relative prices of products. Although only sugar production has been closely monitored by ORMVAs in order to assure sufficient raw material for the sugar mills, the system has not led to optimal utilization of land. The proposed project would ensure that cropping patterns are reviewed to improve the crop mix and intensity of irrigation. 41. Irrigation cost recovery policy in Morocco is sound. It aims at recovering, through water charges and a land betterment fee, the full cost of O&M plus up to 40% of all investment costs attributable to irrigation. To carry out this policy water charges were doubled in 1980 and in 1984 increased by a further 65%. A nation-wide formula for indexation was also adopted. Moreover, adequate pumping charges, where applicable, were introduced in 1980  - 15 - and updated in 1984, and an indexation formula based on power tariffs was adopted. These actions need to be complemented by ensuring that the charges are revised on the basis of the indexation formula by September 30 every year (thus eliminating the late issuance of ministerial orders to that effect) and introducing legislation to charge for water distributed by ORMVAs for non-agricultural purposes, which represent about 5Z of total water distributed. More important, however, is to improve the collection rate which at present is about 43% of total amounts due. Under the ASAL the principle of increasing such rate to 90% by 1990 was accepted. The specific actions required to achieve this would be supported under the proposed project. Regional Agricultural Development Authorities (ORMVAs) 42. The Regional Agricultural Development Authorities (ORMVAs) are state-owned enterprises with separate legal identity and financial autonomy responsible for the development of irrigation, operation and maintenance of irrigation schemes and promotion of crop and livestock production. In practice, however they have expanded considerably their operations by providing a growing number of services to farmers in the irrigated perimeters. Recently, government has decided to expand ORMVAs formal development responsibility to the rainfed areas surrounding their respective perimeters and new organizational charts together with ministerial orders governing their reorganization will be issued shortly (para. 52). The main problems regarding ORMVA's operations and performance include: (a) their organization and management which is lacking strategic and operational planning capability, management information systems, financial audits, staff training programs and plhces over-emphasis on commercial services at the expense of extension, research and O&M; (b) the administrative and technical control of ORMVAs by MARA which represents an obstacle to their operating efficiency; (c) the financial control by the Ministry of Finance on an a priori basis from Rabat; and (d) the poor financial performance of all o2 them that has resulted from low water charges until 1984, poor collection rate and low contribution of beneficiaries to the cost of providing commercial services. These factors have resulted in a deficit of DH 320 million in 1983 for the nine ORMVAs, or about 40% of total government operating subsidies to public enterprises. PART IV - THE PROJECT 43. The proposed project was identified in 1984 and prepared by the Government with the assistance of the FAO/IBRD Cooperative Program. Project appraisal took place in April 1985. Negotiations were heLd in Washington, D.C. on December 2-11, 1985; the Moroccan delegation was Led by Mr. Belkoura from the office of the Minister of Economic Affairs and included Mr. Oulad Chrif, Director of the Central Department for Rural Construction (DER) in the Ministry of Agriculture. The main features of the project are outlined in the Loan and Project summary at the beginning of this report, and a Supplementary Project Data Sheet, and Map No. IBRD 19063 are also attached. A Staff Appraisal Report (No. 5846-MOR, dated January 22, 1986) is being circulated separately.  - 16 - Project Objectives and Description 44. The project's overall objectives are to provide for greater efficiency in the use of existing resources in the 400,000 ha of large scale irrigated land and to improve the financial performance of the nine ORMVAs in charge of the LSI schemes to reduce their dependance on the Government's budget. These objectives are to be achieved through: (a) improvements in the use of developed water resources to increase water availability by 25% in about 150,000 ha; (b) improvements in O&M operations in all perimeters; (c) improvements in extension services and research; and (d) improvement of actual cost recovery by increasing water charges collection rates. 45. The proposed project would be implemented over six years (mid 1986 to mid 1992) and would consist of: (a) an investment component including rehabilitation or upgrading of existing infrastructures serving a total area of 150,000 ha, improvement of O&M works over 400,000 ha through contracts with specialized firms for complex tasks, purchase of O&M equipment, vehicles and construction of houses for key O&M staff; (b) technical assistance to ORMVAs for management support and studies and training of ORMVAs and Government staff; (c) an institutional and policy reform component which would provide for improvements in the organization, operation, management and financial performance of ORMVAs, rationalization of their relations with the Government, improvement of recovery of water and service users charges, increased farmers participation in O&M, revision of cropping patterns, and help in the solution of problems posed by the historical water rights and collectively-owned land in some of the perimeters; and (d) on-farm investments. Costs and fnaancing 46. Total project costs, including $19.5 million of taxes and duties, are estimated at $92.5 million of which about $43.2 million in foreign exchange. Base costs are estimated in December 1985 prices. Physical contingencies have been included at 15% for civil works and 10% for equipment, vehicles, supplies, studies and technical assistance; these amount to $7.2 million or 8% of total project costs. Price contingencies have been calculated on the basis of projected annual price increases in local currency costs of 10% in 1986 and 6% thereafter; for costs in foreign exchange the projected increases are 7% in 1986 and 1987 and about 7.6% in 1998-90 and 4.5% thereafter; price contingencies amount to $19.0 million or 21% of total project costs. 47. The proposed $46 million loan would finance 100% of foreign exchange costs and 23Z of local currency costs of the project (net of taxes and credits), excluding on-farm investments which would be financed by beneficiaries and CNCA, operating under its current lending policies ar.u procedures, and partly making use of Loan 2367-MOR of March 1984, and future loans which are currently planned. Overall, external financing of the project from this loan would represent 63% of total project costs, net of taxes. The Government would finance the balance of the project costs, or $46.5 million.  - 17 - Procurement 48. Procurement arrangements are summarized in the table below. Equipment, vehicles and other goods, estimatetd to cost US$200,000 equivalent or more each and valued at a total of $20.6 m;llion would be awarded through international competitive bidding (ICB). Qualifying domestic manufacturers of equipment and vehicles would recei'-e preference in bid evaluation of 15Z or the prevailing import duty, whichever is less. Contracts for equipment and vehicles estimated to cost less than $200,000 but not less than $10,000 equivalent each and aggregating no more than US$4.8 million could be awarded on the basis of local competitive bidding (LCB) in accordance with procedures acceptable to the Bank. Procurement of miscellaneous supplies costing less than US$10,000 equivalent each and aggregating no more than US$0.3 million would be made in small lots on the basis of local shopping with quotations from at least three suppliers. Automatic water control equipment of a proprietary or specialized nature would be procured under contract awarded on the basis of direct negotiations up to an aggregate amount of $0.8 million. Contracts for civil works, including irrigation, drainage and road networks and buildings, valued at a total of about US$36.0 million would be awarded through LCB procedures. Works for the placement of tertiary canals in Tadla (US$1.5 million), the rehabilitation of the road systems in Gharb and Moulouya (US$1.4 miLlion) desiltation of Tafilalet irrigation network and for the dune fixation in Tafilalet and Ouarzazate (US$1.6 million) would be carried out by the corresponding rJRMVA under force account using equipment partly procured under the Project through ICB. These rehabilitation works are scattered throughout the perimeters and must be carried out without disrupting irrigation operations so that force account is the most efficient method of procurement. Contracts for training, studies and technical assistance would be awarded in accordance with Bank guidelines on consultants. All bidding documents and contract awards greater than (a) US$300,000 for civil works and (b) US$200,000 for goods and (c) regardless of price for automatic water control and data processing equipment and the first two contracts awarded by each ORMVA would require the Bank's prior approval. 49. Local competitive bidding procedures are generally consistent with the need for economy and efficiency in the execution of the project. There are, however, a few procedures which are inconsistent with Bank procurement guidelines and others which require clarification. During negotiations, agreement was reached regarding the changes needed to make the procedures acceptable to the Bank, and assurances that such changes take place were obtained. Disbursements 50. The proposed loan would be disbursed over a period of seven years, consistent with the historical disbursement profiles for irrigation projects in Morocco. It would be disbursed as follows: 65Z of total expenditures for civil works, 65Z of local and lOOZ of foreign expenditures for equipment, vehicles and materials, and 100% of total expenditures for training, technical assistance, studies and maintenance contracts. Disbursement requests will be  - 18 - - ------US$ million---- Procurement Methods Total Proiect element ICB LCB Other N.A Cost Civil Works - 36.0 4.5 - 40.5 (23.3) (1.8) (25.1) Equipment and Vehicles 19.0 4.5 1.L - 24.6 (12.6) (2.7) (0.7) (16.0) Maintenance Contracts 1.6 - - - 1.6 (1.3) (1.3) Technical Assistance, Studies - - 5.2 - 5.2 and Training (3.6) (3.6) Incremental Operation Costs - - - 12.5 12.5 On-farm Investments - - - 8.1 8.1 TOTAL 20.6 40.5 10.8 20.6 92.5 (13.9) (26.0) (6.1) (-) (46.0) a/ Figures in parenthesis are the respective amounts financed by the proposed Bank loan. fully documented except for works done under force account and services provided under contracts of less than $100,000 for civil works and $50,000 for goods where statements of expenses will suffice. Supporting documentation will be kept by the implementing agency and will be available for inspection by Bank supervision missions and external auditors. Total amount of the loan disbursed on the basis of statement of expenditures would not exceed $5.5 million. Retroactive financing of goods and consultant services incurred after June 1, 1985 for an amount of up to $500,000 is being proposed. To * contribute to the efficient and timely implementation of the project, a revolving fund of up to $2.5 million would be established in a special account at the Bank of Morocco- This fund would be used to pay the Bank's share of eligible expenditures and the Bank would replenish the fund upon receipt of * satisfactory evidence that expenditures paid were eligible for financing out of the fund. Project implementation 51. The project would be implemented over a period of six years by the ORMVAs in their respective areas except for the studies on farmers cooperatives and on the environment, training of MARA staff and provision of related equipment and vehicles which would be carried out by MARA, and the training of financial controllers of the ORMUAs which would be carried out by the Ministry of Finance. CNCA would provide credit for financing on-farm investments. 80% of detailed designs and bidding documents are completed and the rest is expected-for completion by June 1986. Sufficient capable staff to carry out the project is currently available in the ORMVAs. Terms of reference and job descriptions for major technical assistance and training items are available; a draft program contract was prepared prior to appraisal.  I * - 19 - 52. The project includes four components of interest to all ORMVAs. These are: (a) training; (b) planning, management information systems and computer use; (c) operation and maintenance; and (d) cropping patterns. To ensure adequate coordination among ORMVAs and between ORMVAs and MARA, four coordinating units would be created in Central Directorate of MARA to coordinate each component. Creation of these units would be a condition of loan effectiveness. Other conditions of loan effectiveness are that a satisfactory organization for each ORMVA is established by Government (para. 42) and that satisfactory arrangements have been concluded between Government and CNCA for the financing of on-farm investments under the project. 53. Overall coordination of project implementation and institutional development would be carried out at the national level by a Project Coordination Committee, which was created on November 28, 1985 for that purpose. This committee would oversee progress in project implementation and institutional and policy reforms, and resolve problems involving different Government departments. This conmittee would be chaired by the Minister of Agriculture and include ORMVAs' directors, the concerned MARA's central directors, and representatives of the Ministries of Finance and Interior and other interested ministries. Institutional Development and policy reforms 54. The component of institutional development and policy reform of the proposed project addresses the problems identified in the subsector and in the ORMVAs (paras. 37 through 42). As mentioned earlier in the report, neglected O&M has been pervasive throughout 'he irrigated perimeters. Under the project, O&M services would be established in the ORMVAs of Ouarzazate and Tafilalet, and the "bureau technique des irrigations" of all ORMVAs would be made responsible for planning, monitoring and evaluating ORMVAs and farmers' performance in water use and system operation and maintenance. This would include establishing operating procedures, and programs for preventive maintenance of irrigation, drainage and road networks as well as operation of pumping stations. Assurances were obtained during negotiations that these O&M services and planning units are in place by December 31, 1986. 55. For the reasons pointed out in para. 38, the organization of extension services of each ORMVA would be modified to: ( a) include a full department at headquarters in charge of extension services and structure such division along the T&V system model, and (b) assign an extension coordinator at each field subdivision to monitor extension staff in the ORMVAs development centers. On the operational side, extension work would be separated from commercial activities and, to the extent possible, from administrative duties. Each year extension agents will attend a two-week training session on specific subjects and in addition there would be one or two-day briefing sessions per month. During negotiations assurances were obtained that the new extension system is in place not later than June 30, 1987, and that adequate staffing levels be reached in at least one sub-division in each ORMVA by June 30, 1988. The timetable for completion of staffing in the remainder of the ORMVA areas would be established at the time of the mid-term review (para. 63) based on the experience gained. To improve coordination with research  - 20 - activities (para. 38 aad 39) assurances were obtained that each ORMVA would prepare by June 30, 1987, a suitable three-year research program (1988-1990) and that an agreement would be signed between appropriate research organizations and each ORMVA before December 31, 1987 to carry out such program. 56. As part of the reorganization of the ORMVAs introduced under the project, they would start to divest the commercial services they provide to farmers. This would be done gradually so as to avoid the risk of declines in crop production and only when alternative delivery mechanisms exist or are likely to be created in the areas concerned. To that effect MARA has issued a circular to all ORMVAs (except the remote ones in Ouarzazate and Tafilalet) enabling them to transfer over a three-year period input services to the private sector or farmer cooperatives and instructing them to cease over the same period commercial services in which the private sector has been progressively involved, i.e. farm machinery services, animal breeding, poultry production and veterinary services (other than prophylactic). Furthermore, during negotiations assurances were obtained that before August 31, 1986, Government would submit to the Bank a specific program of actions for each of these ORMVAs to divest the input or commercial services provided to fain.ers by September 1989 at the latest, except for the farm machinery services provided by the Loukkos and Gharb ORMVAs which will cease in 1991. 57. A comprehensive set of measures to improve ORMVAs management is foreseen under the proposed project. These include the introduction of a management information system (MIS) based on the restructuring of the ORMVAs accounting system and budgetary procedures and the introduction of an internal system of performance control and input-output system; the strengthening of the planning activities, the adoption of external audit; and the introduction of systematic staff training for ORMVAs and their supervisory bodies. These new arrangements wouljd be first carried out in the Doukkala, Gharb, Loukkos and Tadla and then expanded to the other ORMVAs. Assurances were obtained that the ORMUAs and Government will follow a mutually agreed timetable of actions to gradually introduce such reforms in all ORMVAs by end 1990. 58. Relations between Government and ORMVAs would be rationalized through the adoption of program contracts (PC) which would be first implemented on a pilot basis with the Doukkala ORMVA, starting in 1987, and then expanded to all other ORMVAs. The PC would be designed to facilitate the implementation of an action plan, prepared for each ORMVA and reviewed by the Bank, which would set forth ORMVA's development objectives, activities to achieve these objectives, financial and other resources for these activities, operating and financial performance targets measured by specific and agreed upon indicators, and methods of financial and administrative control to be exercised by the Government over the ORMVA. The action plans would be subject to systematic annual review by the Project Coordination Committee based on previous year performance and new circumstances. Agreement to introduce the first PC for the Doukkala ORMVA was obtained under the ASAL. During negotiations of the proposed loan, confirmation was obtained that a PC for Doukkala ORMVA would be signed by December 31, 1986. In addition, assurances were obtained that: (a) draft PCs for three other ORMVAs (Gharb, Loukkos and Tadla) will be signed by end 1988; and (b) PCs for the remaining ORMVAs will be signed by December 31, 1989.  - 21 - 59. In certain areas of the country, irrigation has been practiced for centuries before the Government constructed modern systems. In such areas traditional grouping of users took place and strong cooperation existed among them for distributing water and maintaining the system. Such cooperation has somewhat declined as reliance on Government has increased. Under the project such farmers' participation in the operation and maintenance of the systems is to be encouraged by the promotion of water users' associations in those ORMVAs with irrigation tradition (Ouarzazate, Tafilalet and Haouz) and a pilot experience with water users' associations in one other ORMVA (Tadla). Should this experience prove positive, such associations would be promoted in the other ORMVAs. 60. Collective ownership of land in LSI areas, and particularly in the Gharb area, leads to less than optimal use of land. Of the 150,000 ha to be ret.ibilitated under the project about 5,600 ha or 4Z is owned by tenancy in common in the Gharb. This land is often farmed by individuals whose ownership rights to the land are not established and who are disinclined to intensify production and pay water charges. Under the proposed project, a strategy would be developed by September 30, 1986 to increase productivity of these lands. A committee composed of Gharb ORMVA, MARA, and the Ministry of Interior representatives would be created by September 30, 1986, to monitor the carrying out of such a strategy. Assurances to this effect were obtained at negotiations. 61. As discussed in para. 40 above, Government has now recognized the need to revise cropping patterns. These would now be updated and then revised as necessary. Each ORMVA would carry out a separate study to update cropping patterns in its area. Assurances were obtained at negotiations that (a) by September 1, 1987, ORMVAs would complete the studies for the determination of new cropping patterns; and (b) after exchange of views with the Bank on the conclusions of these studies, MARA would establish appropriate cropping patterns not later than September 30, 1987, and thereafter review them at least once every three years. Central to any assessment of cropping patterns is the role that sugar beets and cane would play in future land use in the irrigated areas. The major problem of sugar is the risk of an inefficient allocation of resources, including land, to sugar production in view of price prospects for this commodity. Under the Agricultural Price and Incentive Study being carried out under Bank supervision, the Government sugar development policy including the identification of areas of relative comparative advantages will be reviewed and appropriate recommendations are expected to be formulated under the second agricultural sector adjustment loan (FY87) to phase out those areas which prove not to be economical for sugar beet and cane production. The studies on the new cropping paterns would determine the most viable alternative crops that would substitute for sugar crops in the areas where these would be phased out. 62. Considerable progress has been made in setting the basis for an improved cost recovery record. A joint circular signed by the Ministers of Agriculture and rnterior was issued in November 1985, instructing the ORMVA regional committees to take actions to ensure satisfactory progress in a program to increase water charge collections from 43Z in 1983 to 90X in 1989.  - 22 - Assurances were obtained at negotiations that (a) the Government would establish, before December 31, 1986, adequately staffed recovery units in Haouz and Souss-Massa, the only ORMVAs where such units are still lacking; (b) by December 31, 1986, take all action required to determine and ensure prompt collection of water charges and betterment taxes owed to Haouz ORMVA by all irrigation beneficiaries; (c) water charges would be revised in September of every year for each ORMVA perimeter starting in September 1986 on the basis of established indexation formulas; (d) water charges in Moulouya would be increased to take into account the investment and O&M costs of the pumping station to be constructed under the Project; the schedule for adjusted water charges would be prepared and submitted to the Bank by the Government by December 31, 1989; (e) the Government would carry out a study to develop an appropriate system of water charges allocated by ORMVAs for non-agricultural use and furnish the results of the studies to the Bank by December 31, 1987; and (f) the annual statement of recovery of arrears for each ORMVA would be made available by the Government not later than June 30 of each year, starting in 1987. Monitoring, Evaluation Reportig, Accounts and Audit 63. The Directorate of Rural Construction (DER) of MARA would be responsible for overall monitoring of Project implementation, including its physical, institutional and policy components. It would also be responsible for monitoring preparation by the ORMVAs of semi-annual progress reports and synthesizing them in an overall annual report to be submitted to the Bank. In addition, MARA's department for Economic Affairs (DPAE) would prepare annual reports to be submitted to the Bank on the implementation of ORMVAs' medium-term development plans, program contracts and annual financial results. DER would also coordinate preparation by ORMVAs and DPAE of a project completion report within six months of the loan closing date. 64. Because of the heavy emphasis -c the Project on institutional and policy reforms, assurances were obtaineci that the Moroccan Government and the Bank would carry out a mid-term review of tre Project implementation before June 30, 1989, three years after the Project's start. This would involve reviewing the physical implementation of the Project and the progress accomplished in meeting its institutional and policy objectives. As an input to this review, DER would prepare, on behalf of MARA and in agreement with the Ministries of Finance and Interior, an overall report on progress, issues and recommendations based on ORMVAs' reports. 65. To prepare for a shift from the present a priori financial control, external audits of the project and ORMVA accounts by independent auditors would be introduced under the Project. Assurances were obtained at negotiations that: (a) the Borrower would maintain separate accounts for the Project, and that these accounts would be audited by independent auditors acceptable to the Bank and their reports sent to the Bank within 6 months of the end of each fiscal year; and (b) ORMVA's would maintain accounts to reflect their operations and financial condition and these accounts and ORMUAs' annual Einancial statements would be audited by independent auditors acceptable to the bank and the auditors' reports, including an assessment of ORMVAs' management efficiency, would be sent to the Bank within six months of the end of each fiscal year.  - 23 - Impact on the Government Budget 66. The measures proposed under the Project on cost recovery for ORMVA's services and irrigation water, along with efficiency gains in the delivery of those services in the irrigated areas would have a highly beneficial impact on the ORMVA's financial situation, and thus reduce Government subsidies. The major impact would come from the expected increase in water charge collection rates from 47% in 1984 to 90% in L990 (and 93% in 1994). Action on improved collection on water charges and cost recovery for services would provide for increased revenues, but this would be offset significantly by increased maintenance expenditures. The incremental cash flow of the Offices due to the project would however be slightly positive, i.e. from an estimated DH 42.3 million in 1986, to DH 45.6 million in 1990. Since maintenance expenditures would stabilize after 1990, the Office's cash flow would increase to DH 88.5 million by 1994 (in constant 1984 Dirhams). By 1994, five out of nine ORMVAs, covering 80% of the irrigated areas, would pass beyond the breakeven point in charging for services rendered, and globally net revenues would more than cover costs by 1994. However, in the case of the smaller traditional schemes covering less than 202 of the irrigated areas, revenues are not expected to completely cover costs by 1994 because of difficulties in resolving traditional water rights. After the investment phase (1986-90), during which the Government budget would accumulate deficits of DH 27.5 million, the Project would have a positive impact on Government's finances from 1991 onwards, with net annual surpluses ranging (in 1990 prices) from DH 11.4 million in 1991 to DH 120.0 million in 2005 (year 20 of the Project). The average annual surplus would amount to about DH 64.8 million. Justification 67. The direct quantifiable benefits of the proposed project would mainly arise from: (a) an increase in agricultural and livestock production caused by increased availability of water; and (b) cost savings in repeated rehabilitation as a result of more efficient operation and maintenance. Other important benefits of the project are the direct foreign exchange savings that it will generate and the positive impact of the improved financial performance of ORMVAs in the Government budget. Annual foreign exchange savings due to the project are estimated at $18.4 million in 1985 prices at full development and the need for overall operating subsidies to ORMVAs exceeding $300 million per year from the Government budget would be eliminated. The project would directly benefit 46,500 farm families (or-about 256,000 people) in the project areas. Employment on the benefitting farms would increase by about 3.5 million man-days, which is equivalent to the creation of 14,000 full-time on-farm jobs, of which 80% would be hired labor and 20% additional family labor. 68. The economic rate of return (EER) is estimated at 26%; the Net Present Value (NPV), at the opportunity cost of capital of 12X, is estimated at DH 1,263 million. The innovative nature of the project design and the pressure on the management of ORMUAs created by the expected reorganization may bring implementation delays; also slower response from the private sector to divestiture by ORMVAs of input distribution and other commercial services  - 24 - may slow down production increases. However, these risks are minimized by the demonstrated priority of the project in Government plans and careful design of project with full participation of Government and ORMVAs. Sensitivity analysis to assess the impact of adverse risks has been carried out and shows that production benefits and rehabilitation cost savings would have to fall 44% to reduce the EER to 12%, the assumed opportunity cost of capital; on the cost side the analysis shows that project costs would have to increase by 79% to threaten the economic viability of the project. 69. The project does not pose unusual environmental hazards. Rather, the project would have a positive effect on the environment by reducing the risk of schistomatosis transmission in the areas where irrigation schemes will be improved. The Tadla perimeter has been determined to be a high risk area for bilharzia, but remedial measures by the Ministry of Public Health are well in hand. No such effort has been made, however, to evaluate and control the risks of contamination of wells by river overspills during floods or the risks of pollution caused by the effluents of the sugar mills. To improve this situation, assurances were obtained during negotiations that DER will conduct in consultation with the ORMVAs by December 31, 1987 a baseline survey on the status of such environmental hazards in the LSI areas. PART V - RECOMMENDATION 70. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Washington, D.C. A. W- Clausen January 23, 1986 President  - 25 - TA ELC 34 ANNEX I mmccc - mcTAiL IDICATORS DATA 5 Page 1 of 7 m cM REFCma Caou (uWRICTUD AERSSI mIST (mmr mACUT urz ) lb l 11 _ MIDDLE 1 01 L0 IINCOM 19a sram m.n ESTITAI-b ** AFRICA & NO ET LAM. A *RICA CA MM lIWSA SQ. MOX TOTAL 446.6 c 446.6 Ic 46.6 Ic ARICULTUML 192.J 200.1 209.2 mW M CAA (U$) . .. 760.0 113&.9 1875.9 -~~~Mw comuru alaM Chr1T (KILYRANS OF OIL EQU1'