Morocco - Agricultural Credit Project

RETURN TO REPORTS ESK RESTRICTED WITHIN Report No. TO-494a ONE WEEK Y1 tilt ctr This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVW INTERNATIONAL DEVELOPMENT ASSOCIATION _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ ~~ ~~ ~~z m m C 0 z m C,, X - 0 0 AGRICULTURAL CREDIT PROJECT C MOROCCO # m C,, October 21, 1965 Projects Department  CURRENCY EQUIVALENTS U. S. $1. 00 = Dh 5.06 1 Dirham = 0. 1976 U.S. Dollar  M O R O C C O AGRICULTURAL CREDIT PROJECT TABLE OF CONTENTS Page No. Is IN4TRODUCTION. . . . . . . . . . . . . . . . . . . . . . . . . 1 II. AGRICULTURAL PRODUCTION AND CREDIT BACKGROUND . . . . . . . . 1 III. CAISSE NATIONALE DE CREDIT AGRICOLE (CNCA). . . . . . . . . . 3 A. Organization and Management . . . . . . . . .. .. . . . . 3 B. Lending Policies and Procedures . . . . . . . . . .. 4 C. Operations. . . . . . . . . . . . 9 . . . . . 6 D. Financial Situation . 6 IV* THE PROJECT . 9 9 9 9 9 9 7 A. CNCA's Lending Program. . . . . . . . . . . . . . . . . . 8 B. Lending Procedures. . . . . .. .. . ... .. .... . 10 C. Financing . . 9 9 9 9 9 9 9 9 9 9 9 9 9 a 9 9 9 9 9 9 11 V. JUSTIFICATION OF THE PROJECT.. . . . . . ......... . . 12 VI. CONCLUSIONS AND RECOMENDATIONS . . . . . . . . . . . . . . . 13 AN1NEXES 1. Summary Term and Conditions of Various Short-Term Loans 2. Summary Term and Conditions of Various Medium- and Long-Term Loans 3. Operations on Short, Medium and Long Term Approved and Paid Out by Categories of Borrowers 4. Short-Tern Credit Operations Approved 5. Medium- and Long-Term Loans 6. Condensed Balance Sheet June 30, 1964 and December 31, 1964 7. Portfolio of Short-, Medium- and Long-Term Loans 8. Profit and Loss Account 9. Cost and Returns of Credit Operations 10. Actual Lending Operations and Forecasts 11. Proposed Lending Program 12. Cashflow for the Years 1962/63 & 1963/64 (Actual) 1964/65--1967/68 (Forecasts) 13. The Centrale de Gestion des Exploitations Agricoles (CGEA)  M O R 0 C C O AGRICULTURAL CREDIT PROJECT SUMARY i. The Caisse Nationale de Credit Agricole (CNCA) has asked the Bank for a loan of Dh 50 million (US$10 million) to expand its agricultural development lending activities. ii. * CNCA proposes to undertake a three-year agricultural lending operation (1965/66 - 1967/68) of about Dh 260 million (US$52 million). The Bank loan would help to finance CNCA's medium and long term lending for on-farm development (exclusive of livestock financing and land acquisition), light processing and storage facilities and purchase of machinery for farms of the Centrale de Gestion des Exploitations Agricoles (CGEA) 1/, Total lending for this part of the program is estimated at about Dh Ioo million (US$ 20 million) of which Dh 60 million (US$12million) is for on-farm develop- ment processing and storage and Dh 40 million (US$8million) is for CGEA. In addition, farmers are expected to contribute about Dh 30 million from their own resources to the investment program. Thus, investment for on-farm develop- ment, processing and storage would be financed as follows: 33% by farmers, 44% by the Bank loan, and 23% by CNCA from its own resources and local borrowings. Financing of CGEA's requirements would be 100% by CNCA and the Bank would con- tribute Dh 10 million (US$2 million) towards the financing. iii. Since its establishment, CNCA has made fair progress in building up its organization and expanding its operations, But the quality of its work and the pace of its development has suffered as a result of government restrictions on recruitment of new personnel. These restrictions have recently been lifted and salaries offered by CNCA have been adjusted upwards to be in line with those prevailing in the private banking sector. CNCA's staff can now be expected to increase by about 50% within a year or two. This should allow CNCA to handle an increasing amount of business and to improve substantially the quality of its appraisal and supervision work. iv. In the past, CNCA has been handicapped by the following factors: shortage of funds, pressures to handle socially oriented credit and lending rates set too low. After discussions in connection with the proposed Bank loan, the government has agreed to provide CNCA with its own capital and with permanent access to borrowed resources on favorable terms from the Treasury and the central bank. Furthermore, the government is taking steps to set up a special fund for socially oriented credit within CNCA and to increase CNCA remuneration for the services which it performs on behalf of the government. Finally, CNCA has agreed to raise its lending rate from the average of 4.5 per cent to a minimum of 6 per cent. Together, these measures should provide the basis for sound financial management of CNCA operations. v. The financial and personnel requirements have been assessed on the basis of various assumptions about the overall prospects of Moroccan agricul- ture; the capacity of the extension services and the impact of CNCA's new 2/ CGFA farms are "lots de colonization", i.e. land leased to foreign settlers during the Protectorate and progressively taken over by the government.  - ii - lending procedures on the demand for credit. In view of these uncertainties, it has been agreed that the disbursement of the third year trancla of the Bank loan earmarked for on-farm development would be subject to a full follow-up review by the Bank of ONCA's performance, organization, financial position and prospects. vi. CNCA is the only agency providing substantial short-, medium- and long-term credit to farmers and institutions for agricultural development in Morocco. CNCA's role in stimulating private on-farm development, particularly in special areas where government development efforts are concentrated, will be a major factor in the implementation of the Government's Three-Year Development Plan (1965/66 - 1967/68). vii. The other major component of CNCAkts program, the provision of machinery and equipment for use on land managed by CGEA, is of urgent economic priority. CGEA farms are located on some of lvlorocoOs most fertile land and turn out a substantial share of the country's cash and export crops. CGEA is well managed and competently staffed and its operations to-date have been highly profitable. Future performance will depend on maintaining a proper balance between CGEA's management responsibilities and the qualified staff which it is able to attract and retain. Furthermore, efficient operation will require that adequate provisions be made for maintenance, for improved accounting and for an inventive system based on the profitability of individual production units. The Bank has received assurances that prompt action along these lines will be made a condition of CNCA lending to CGEA. Moreoever, CNCA loans to CGEA are fully guaranteed by the government. viii. The future status of CGEA farms depends on the future land reform policies and programs of the government. Distribution of land to cooperatives has been stated as a long-term objective but no detailed plan or time-table for such actions has yet been devised. Given this uncertainty, only limited Bank support of the CGEA program is considered suitable. ix. Disbursement of the Bank loan in respect to equipment purchased by CGEA will be limited to the current fiscal year and to a maximum aggregate amount of Dh 10 million (US$2 million), representing approximately one-fourth of the total cost or one-half of the foreign exchange component of medium term loans disbursed by CNCA for the benefit of CGEA during the year. Dis- bursement of the Bank loan for on-farm development will be on the basis of 67 per cent of the amount actually disbursed by CNCA. The exchange risk on the proposed Bank loan will be borne by the government. x. Procurement by farmers under their loans would be through normal trade channels. A number of international firms handling farm machinery and equipment are represented in Morocco. Equipment for CGEA farms is being pur- chased through the official tender system which provides for international competitive bidding under which local as well as foreign suppliers can submit proposals. Orders have already been placed for part of the CGEA equipment in order to have it available for the planting season which starts in November. Disbursements against such orders will be subject to the Bank's review of the tender procedures. xi. The benefits of the project would be: (a) increased production from farms of commercial sizes located mostly within development perimeters con- trolled by the Office de Mise en Valeur Agricole (OMVA); (b) maintenance  - iii - and increase of production on CGEA farms; (c) increased value added to farm products through the provision of agricultural processing and marketing facilities; (d) strengthening of the only credit institution providing size- able and suitable credit facilities to farmers; and (e) other indirect benefits, including extension of modern farm techniques and increased productive employment. xii. The project is suitable for a Bank loan to CNCA of US$10 million for a term of sixteen years, including a grace period of four years.  M O R O C C O AGRICULTURAL CREDIT PROJECT I. INTRODUCTION 1. The Caisse Nationale de Credit Agricole (CNCA), a public auto- nomous body responsible for the provision of agricultural credit, has requested a loan of US$ 10 million from the Bank to expand its lending operations for agricultural development, The loan would supplement ONCA's existing and anticipated resources to enable it to carry out a lending program of medium and long term credit of about US $ 20 million over a three-year period. 2. The original request was submitted to the Bank in October 1964. It was appraised by Messrs. P. A. Courbois and H. Kordik in early 1965, after additional documentation supporting the request had been received, A supplementary mission including Messrs. P.C.H. Goffin, A. Rose and W. H. Cummings (consultant) visited Morocco in mid-1965 to review the operations of the Centrale de Gestion des Exploitations Agricoles (CGEA), an im- portant client of CNCA. This appraisal report, to which Messrs. S. Takahashi and R. Picciotto also contributed, is based on findings of the two field missions and on understandings reached during negotiations held in lWashington with representatives of CNCA and the government in September 1965. II. AGRICULTURAL PRODUCTION AND CREDIT BACKGROUND 3L Agriculture produces about one-third of the gross national product and one-half of the exports and provides employment for 70 per cent of the population, Most of the farmers operate small subsistence farms on tradit- ional lines and about 1.5 million ha., or about 10 per cent of the agricul- tural land, is being farmed with modern methods. 4. The modern sector consists of about 480,000 ha. farmed by European settlers, 220,000 ha. farmed by the government through the Centrale de Gestion des Exploitations Agricoles (CGEA), and about 700,000-800,000 ha. in the hands of relatively large-scale Moroccan landowners. Most of the growth in farm output and exports has come from this modern sector. Sub- stantial investments in land clearing, irrigation, drainage, farm equipment and orchards have produced a mechanized intensive agriculture based mainly on cereals, fruit and vegetable production. 5. Since Independence, in 1956, the position of European settlers and large-scale Moroccan landowners has been uncertain. The departure of many Europeans and prospects of agrarian reform have hindered new investments and tie government has found it difficult to find experienced managers for lands taken over from the European settlers. The result has been a decline in the output of Moroccan agriculture. 6. The government has recently reorganized its agricultural ser- vices in an effort to coordinate agricultural policies and to make more  effective use of available personnel. The Ministry of Agriculture has been given wider responsibilities in determining policies and has taken over research activities which were formerly under an independent agency. The two separate boards responsible for agricultural development in irrigated and unirrigated areas have been combined in November 1964 into the Office de Mise en Valeur Agricole (OMVA) to handle agricultural exten- sion and services in all development areas. The new agency was formally established in May 1965 and is short of experienced and qualified field personnel as a result of the departure of many of the expatriate and Moroccan staff. OMVA's success will depend on considerable internal reorganization, improvement of methods, better coordination and adequate financing. The Moroccan Government is preparing a separate loan request to the Bank to finance on-farm developments initiated by OMVA. 7. The positive aspects of Moroccan agriculture are the availa- bility of soils of good fertility, substantial water resources along with considerable local knowledge derived from the experience of foreign settlers and an elite of Moroccan farmers. There are also the results from past research and the existence of a well developed infrastructure, including roads, dams, irrigation networks and some storage, processing and marketing facilities. 8. On-farm development and intensification of agriculture over most of the country lags behind these other developments. A large pro- portion of the land is farmed on a subsistence level by operators with limited resources and very inadequate education. The government, in its attempts to improve the situation of these farmers, faces difficult problems of management and staffing made more difficult by personnel losses already referred to. 9. Development requires that a sizable amount of resources be made available to farmers. These must include capital for investment in development as well as for recurring inputs such as fertilizers, pesti- cides and improved seeds. 10. For some years after Independence, a comprehensive, but complex, agricultural credit system, including commercial banks and semi-governmen- tal credit institutions continued to provide credit mostly to modern type agricultural producers and agricultural institutions. Credit for small farmers was provided mainly by the government initiated Provident and Agricultural Credit Societies (SOCAP)1/ whose members were all rural taxpayers. Moneylenders and merchants also played a part. Dealers in agricultural supplies and farm machinery, who were important sources of credit for the modern sector during the Protectorate, abruptly reduced their credits after Independence. The withdrawal of commercial banks from agricultural lending was more gradual. After a time, the situation of government institutions deteriorated because of bad repayment records and shortage of resources. 1/ Societes de Credit Agricole et de Prevoyance.  - 3 - 11. It became necessary to fill the gap left by the loss of private sources of credit by improving the government initiated agricultural cre- dit system. The various government credit institutions continued to carry out lending operations on a decreasing scale until a new agricul- tural credit system was established under the CNCA in 1962. This insti- tution is now the only significant institutional source of agricultural credit for commercial farmers, both for investment and for short-term production purposes. Only one element of the previous government agri- cultural credit system, SOCAP, has been maintained. It has continued to make about 300,000 loans per year /Dh 35 million (US$7 million) for the five years up to June 30, 19647 to small farmers for social rather than economic objectives. Its functions are to be gradually turned over to agricultural credit cooperatives as they are established. After discus- sions with representatives of CNCA and the government,it has been agreed that, while CNCA lending to small farmers through SOCAP will continue for some time, it will be financed from a special fund administered by CNCA on behalf of the government and segregated from CNCA's own accounts. III. CAISSE NATIONALE DE CREDIT AGRICOLE (CNCA) A. Organization and Management 12. CNCA is a statutory body operating within the policy framework laid out by the Minister of Agriculture. It was createdin 1961 to provide credit for promotion and improvement of agriculture and related activities. It started operations in September 1962 and was entrusted with the liquidation of the complex agricultural credit system developed during the French and Spanish Protectorates. In 1964, it was entrusted with the supervision and control of CGEA accounts and with government- guaranteed financing of CGEA's short, medium and long term requirements. These public agency functions notwithstanding, CNCA is devoting the bulk of its efforts to the financing of private agricultural enterprise in Morocco. 13. An important obstacle to the effectiveness of CNCA as an auto- nomous credit institution has been the precarious nature of its financial resources. Although CNCA has had the use of the proceeds of liquidation of previous credit institutions, advances from the Treasury and discounts with the central bank, it has had no funds of its own and permanent access to Treasury and central bank borrowings has not been guaranteed. Pro- posals for strengthening the capital structure of CNCA emerged during conversations held in Washington between representatives of CNCA, the government and the Bank. Implementation of these proposals are expected to provide CNCA with a sound financial basis for operations over the next two or three years. 14. CNCA is administered by an eight-member management committee, including representatives of the Ministries of Finance, the Interior and Agriculture, the Bank of Morocco and the Development Boards and the General Manager of CNCA. The Management Committee, which meets frequently,  is responsible to a larger Board under the chairmanship of the Minister of Agriculture, consisting of 10 ex-officio members representing the government and 11 represent ing the farming cdmmunity. The Board holds regular annual meetings and extraordinary meetings when necessary. The General Manager is the dhief, executive; he is appointed and can be dismissed by Royal Decree on the joint proposals of the Ministers of Finance and Agriculture. 15. CNCA headquarters is in Rabat. It operates nine branches in the major agricultural provinces. Additional branches in the other five provinces are planned as trained personnel become available. Rural credit societies of farmers and farmers' associations, one in each of the 72 administrative circles, will be established progressively to replace SOCAP and to serve as intermediaries for facilitating their members' operations with CNCA. This is, however, a long-range program which should not affect CNCA's operation during the next several years. 16. At mid-1965, CNCA staff numbered about 140 of which about one third were located at headquarters and two-thirds at the branches. The staff includes expatriate advisors and European personnel, mostly taken over from predecessor credit institutions. CNCA has close informal links with the French Caisse Centrale de Cooperation Economique which greatly facilitate recruitment of French advisers and enable CNCA to make use of the Caisse's training facilities for junior staff. CNCA has also access to training assistance from USAID, mainly study scholarships for senior staff. CNCA's management recognizes the need to develop the quality of its staff through training and recruitment of qualified personnel from Morocco and abroad. Elployment of adequate personnel has been hindered by past austerity measures imposed by the government. But the ban on replacement and staff recruitment has now been lifted and CNCA's salaries have been adjusted to be competitive with other Moroccan banking institu- tions. Given these actions, and a well-planned recruitment effort, CNCA should be able to expand its staff by about 50% over the next two years, which should be adequate for staffing of the field offices and reasonable expansion of CNCA operations. 17. The administrative and accounting organization of CNCA has been carefully devised. Accounts are kept up to date and statistical and accounting data are readily available to management. A government appointed permanent financial supervisor and chief accountant are assigned to CNCA in accordance with rules governing government autonomous bodies. CNCA is also subject to periodical special government control and auditing. The auditing procedures appear efficient. B. Lending Policies and Procedures 18. CNCA extends short, medium and long-term loans to farmers and to public and private institutions involved in agricultural and related activities. The basis of these operations is defined under the Organic Law. Circulars approved by the Management Committee set forth the details  required in applications. Terms and conditions for the various types of loans as of mid 1965 are given in Annex 1 (short-term loans) and Annex 2 (medium and long-term). 19. The guiding objectives of CNCA operations are the development of an agricultural infrastructure, mostly marketing facilities; on-farm development within government development schemes; intensification and increase of production of crops such as sugar beets, cotton, oil seeds, dairy and meat products; and the development of economically viable, preferably family, farm units. CNCA also assumes that borrowers can provide an appreciable proportion of their operating or capital needs in kind or cash. 20. Short-term loans of under one year to farmers are for annual crop production and harvesting expenditures, including purchase of seeds, fertilizers, pesticides and small implements, contractual work, purchase of livestock and animal feeds and other requirements of livestock fat- tening. Terms are fixed so as to fit the production cycle, including a period to allow for marketing delays. Renewals are permitted in the event of crop failure. 21. CNCA also extends lines of credit on short-term to OMVA to enable it to make loans to farmers who carry out specific agricultural development projects under its control. During the past year it has also financed operating costs of CGEA farms as well as a number of SOCAP units which have inadequate resources of their own. In all of these operations with government agencies, repayments are guaranteed by the government and CNCA is not concerned with individual loans. 22. CNCA extends medium-term loans of up to five years for machin- ery and equipment to modernize farm operations. Its long-term loans of up to 15 years, including grace periods, are for such purposes as purchase or establishment of farms, land improvement, irrigation and drainage, purchase and construction of farm buildings, including dwellings, estab- lishment of permanent plantations, and the construction and equipment of warehouses, processing and marketing facilities, and pasture improvement. 23. Security requirements include assignment of proceeds of sales, crop liens, and chattel mortgages for short-term loans, chattel mort- gages on livestock and machinery for medium-term loans and mortgages on real property for long-term loans. 24. Interest rates practiced by CNCA in the past have ranged between 4.0 and 5.5 per cent,exclusive of commissio; significantly below the current rates of commercial banks (which charge 8 per cent on overdrafts). Pursuant to an understanding reached during negotiations, CNCA has in- creased its lending rate to a minimum of 6% on all loans made, after October 15, 1965, out of CUCA's own and borrowed funds. 25. Under present rules,short-term individual crop production loans must not exceed two-thirds of the related standard production cost.  -6- Medium and long-term loans for on-farm development or storage and process- ing facilities should not exceed two-thirds of the project cost. Loans for government and autonomous agencies are not subject to these ceilings when the Government Fund of Guarantee secures the operations. Loans for purchases of land in connection with the establishment of smallholders must not exceed two-thirds of CNCA assessed value. Absolute ceilings have also been fixed for various categories of loans, but a single borrower can receive loans in several categories. There are no ceilings for loans to agricultural institutions. 26. Appraisals are made by field credit officers attached to the branches after the extension officers of Development Boards or field agents of the Department of Agriculture have reviewed and checked the applications in the field. Administrative authorities provide information about the borrower's character. Decisions are made by branch credit com- mittees which include representatives of the local administration, local agricultural services and farmers in equal numbers. Loans over Dh 10,000 (US$2,000) must be approved by the lending committee at the head office. This ceiling is expected to be revised as the branches gain experience. The appraisal standards are on the average moderately good considering the existing shortages of field officers and the impossibility of checking all projects. CNCA is now strengthening its staff in order to implement its policy to appraise projects with a view to grant loans only to development schemes on viable farm units where the potential for increased production is clearly established. C. Operations 27. Annexes 3, 4 and 5 give details on loan operations since CNCA started operations. Short-term credit operations (Annexes 3 and 4) are predominant because of significant credits made to cooperatives in the form of commodity loans and to the Development Boards for relending to growers of sugar beets, cotton, oilseeds and users of their custom ser- vices and for operating expenditures of the colonization lots taken over by the government. The number and amounts of medium and long-term loans to individuals and institutions are still relatively small (Annexes 3 and 5). Medium-term operations for on-farm development (mostly for machinery), equipment and livestock), however, are expanding fairly rapidly. The low volume of operations reflects the understaffing of CNCA. D. Financial Situation 28. Condensed balance sheets as at June 30, 1964 and December 31, 1964 (provisional) are given in Annex 6. As of December 31, 1964, the major resources were the proceeds of the liquidation of predecessor credit institutions and discounts with the Bank of Morocco. Major assets were medium and long-term loans of about Dh 15 million (US$3 million), short-term loans of about Dh 38 million (US$7.5 million), advances on  - 7 - commodities of about Dh 20 million (US$ 4 million) and cash on hand or in banks about Dh 15 million (US$ 3 million). Accumulated losses amounted to about Dh 865,000 (US$ 0.2 million). 29. As of December 31, 1964, CNCA had, in addition to its cash assets of about Dh 15 million, possible discount facilities with the Bank of Mlorocco of Dh 55 million 1/. TheLe resources were, in fact, almost fully committed since loans approved and not yet disbursed amounted to about Dh 65 million. Total resources were expected to be fully com- mited by mid-1965, 30. Details of the loan portfolio as of June 30, 1964 and December 31, 1964 are given in Annex 7. The amount of overdue loans and installments is already significant for short-term loans, However, the management policy is to build up reserves equivalent to the loans in arrears for over 14 months. Loans to government agencies and CGEA have a government guaran- tee. Efforts are being made to reduce arrears. 31. Condensed profit and loss accounts for the year 1962/63, 1963/64 and a proforma profit and loss for 1964/65 are given in Annex 8. Heavy losses incurred (Dh 865,000) for the first two years of operations and predicted for 1964/65 (Dh 1.7 million) originate from establishment expen- ditures, insufficient compensation (one-half per cent recoveries) for the liquidation of predecessor institution and low rates of interest for loans. The establishment of reserves to cover arrears of over 14 months (about Dh 1.8 million) will affect especially the fiscal year 1964/65. 32. Annex 9 gives details of cost and returns involved in CNCA operations for the fiscal years 1962/63 and 1963/64. The percentage of general ex- penditures is modest, especially in the second fiscal year after a sub- stantial increase in the operations took place; financial charges are actually very low (one per cent on liquidation funds; 3.5 per cent on discounts). The low interest rates account for the still lower percentage of income. To strengthen its financial position and make significant profits, CNCA has decided to raise its interest rates. Furthermore, the government is taking steps to provide CNCA with higher compensation for the liquidation of predecessor institutions. IV. THE PROJECT 33. The project is the continuation of an agricultural credit operation of CNCA for the period July, 1965 - June 30, 1968 requiring Dh 260 million (U.S.$ 52 million). The Bank will finance part of a medium and long-term lending program of about Dh 100 million (U.S.$ 20 million) to agricultural producers to increase production (including Dh 40 million to CGEA to cover disbursement in 1965/66). The total investment, including the farmer's con- tribution, is about Dh 130 million (U.S.$ 26 million). It would consist mostly of on-farm investments, including land improvements, farm buildings, 1/. 50 million ceiling short term - less 5 million discounts 10 million ceiling medium term - 5 years.  -8- agricultural machinery and implements, tree crops, and some investment in light processing and storage facilities. Loans to producers equivalent on the average to 77 per cent of investments 1/ would be financed from CNCA's own resources and local borrowings to the extent of Dh 50 million (US$10 million) and a Bank loan of Dh 50 million (US$10 million). The producers would finance the balance of Dh 30 million (US$6 million) from their otm resources. 34. The Three-Year Development Plan of IIorocco adopted April 3, 1965 proposes an additional lending program of Dh 203 million (US$40.1 million) to support on-farm develooment within development schemes mostly on irrigated areas. This would concern both former colonization lands now settled by IIoroccan farmers and private lands. The loans nould be made under 0NVAt direction mostly to refinance on-farm development works initiated by OMVA on former colonization lands and private lands and for equipment of the respective farms. Proposals regarding this scheme were not finalized at the time of appraisal. At a later stage, they may be considered by the Bank as a separate project. A. CNCA's Lending Program 35. CNCA's three-year lending program proposed for Bank finance is the continuation and expansion of medium and long-term lending operations. Actual lending operations of this type and proposed operations under the project are summarized below. Details are given in Annexes 10 and 13. A c t u a l P r o p o s e d (Estimate) 62/63 63/64 64/65 65/66 66/67 67/68 . . . . . . . (in Dh i000). . . . . . . . . . . On-farm development Land improvement, farm buildings and 833 2,099 3,900 6,0oo 8,500 12,000 On-farm equipment & plantations 2,453 3,777 6,900 7,000 9,000 12,500 Processing & storage 621 608 - 1,000 1,500 2,500 SUB-TOTAL 3,907 6,484 10,800 T4,000 19,000 27,000 Equipment of CGEA farms 3,710 5,00 40,000- - - TOTAL 3,907 10,194 15,800 Sb,000 19,000 27,000 a/ Includes Dh 9 million committed before July 1, 1965, to be disbursed during the 1965/66 fiscal year. On-farm Development 36. The proposed investments under this heading are distributed over two major categories which are described in details in Annex 11. They 1/ One hundred per cent for CGEA, about 67 per cent for all other producers.  - 9 - consist of land improvement, buildings, equipment and plantations. These operations involve mostly individual farmers and some traditional groups of farms and contractors. They are aimed at maintaining and increasing present levels of output on existing modern farms as well as facilitating the modernization and improvement of traditional farms which are economi- cally viable units. This restricts the potential clients of CNCA under the proposed loan to farmers operating more than five hectares under irrigation or 15 hectares of rainfed lands, except for special circums- tances. 37. The proposed increase in this lending reflects a price rise of about 20 per cent and an increase in the average amount of loans (para. 40). The number of loans would remain about the same as in 1964/65 (about 2,000) and would increase slightly up to about 2,500 loans in 1967/68. CNCA could handle the proposed volume of lending without undue risk. However, conti- nued assistance from the Ministry of Agriculture and OMVA would be neces- sary. Assurances have been obtained that CNCA would not undertake addi- tional activities which would hamper the implementation of the project. Processing and Storage 38. This category covers processing and storage facilities of coop- eratives or associations which are too small to be financed by the Banque Naticnale pour le T"evelop)ement Economique (BNDE). Loans for storage and processi.ng facilities are in effect prepared or reviewed by uhe "Genie Rural", a specialized service of the Ministry of Agriculture. Equipment of CGEA Farms 39. The responsibility for mana-ement of former "lots de colonisation", i.e. land formerly leased to European farmers and taken over by the govern- ment, is vested in a service established in the Ministry of Agriculture and administered within the Office de Mise en Valeur Agricole (OMVA) called the Centrale Gestion des Exploitations Agricoles (CGEA). This function is of great economic importance as the farms operated by CGEA are among the most fertile in Morocco. Substantial investments on these farms in land clearing, irrigation, drainage, and orchards have produced a highly mechanized agricul- ture producing mainly cereals, fruits and wines. The output from CGEA farms represents an important share of the countryts cash crops and agricultural exports. 40. Since independence, the departure of many Europeans and prospects of land reform have hindered investment on "colon" farms. As a result, most farms taken over by the government have very little equipment, much of it worn out. Medium term loans from CNCA under the project would be used to purchase machinery and equipment for use on approximately 220,000 ha. taken over from foreign settlers and managed by CGEA. 41. CGEA is an ephemeral institution, organized to help maintain and expand production in the modern agricultural sector, until the government formulates and implements a program for land reform and settlement. A summary of CGEhAs organization, management and financial performance to date appears in Annex 13.  - 10 - 42. T he main conclusion of the appraisal is that CGEA is well managed and competently staffed, that its operations to date have been Drofitable and that future performance will largely depend on the pace of expansion of its management responsibilities in relation to its manpower resourcese A crucial element of the CGEA organization lies at the middle level which includes a substantial number of former French colons and advisers. This manpower is limited and the efficiency of its performance depends on the number of production units which must be supervised. Training and recruitment of qualified Moroccan personnel will necessarily take time. 43. Continued success in CGEA performance will require that appropriate steps be taken for maintenance of the new machinery and for training of drivers and mechanics in sufficient numbers. A reform of the bonus system under which CGEA personnel operates is also needed. In order to avoid waste in the use of inputs, incentives will have to be related to the profitability of individual production units rather than to the gross value of output. T his will in turn call for a strengthened accounting organization. The Bank has received assurances that prompt action along these lines will be taken as conditions for CNCA lending to CGEA. 44. In sum, Bank support of CNCA lending to CGEA is mainly justified by the economic urgency of the machinery requirements. It remains that the operation involves a substantial degree of risk mainly related to the uncertain state of the institutional framework. On balance, a limited Bank contribution to CGEA through CNCA (amounting to about one-fourth of disbursements of medium term loans by CNCA for the benefit of CGEA during the current fiscal year) seems appropriate. This will strengthen CNCA's financial position since the terms of Bank land (5.5%; 16 years) are more favorable than those of CNCA lending to CGEA (6.2%; 5 years). B. Lending Procedures 45. Lending policies and procedures would be as described above with certain modifications. The major changes would relate to the terms of lending by CNCA and the interest rates and ceilings on loans. Relend- ing terms would generally be increased, but would remain within the present statutory limits. Interest rates would be raised to enable CNCA to balance its increasing administrative and financial expenditures and build up reserves for bad debts. The size of the increase, would be of the order of one and a half per cent bringing interest rates to a minimum of 6.0 per cent. The ceilings on medium-term loans would be in- creased from Dh 50,000 to Dh 75,000 for the farm development and farm equipment categories to enable farmers to carry out larger projects. 46. Because of its limited staff, CNCA will have to rely upon better support from the Department of Agriculture and OMVA to review investment projects, to provide guidance for the farmer and to exercise supervision. An agreement between CNCA, OMVA and the Ministry of Agriculture on pro- cedures and their respective responsibilities has been worked out and assurance have been obtained that they will work in close cooperation.  - 11 - 47. There has been a marked tendency of government officials and OMVA to consider credit as a primary means to raise the productivity and standard of living of small-scale subsistence farmers. An increase in farm sizes to a level where they become economic is unlikely in view of the overall pres- sure on the land, In any case, such farmers are hardly creditworthy since increases in output are likely to be consumed. Assisting these subsistence farmers should not be the responsibility of CNCA. Assurances have been obtained that CNCA's responsibility for financing such farms would be limited to channeling of special funds provided by government to SOCAP units. C. Financing 48. The estimated program cost is about Dh 130 million (US$ 26 million): the proposed sources of finance are summarized as follows: Proposed Medium- and Long-Term Investment Program Farmers CGEA TOTAL Percentage Dh million Dh million US$MilliDn Financed by: Farmers 30 - 30 6 23.0 CNCA 20 30 50 10 38.5 IBRD 40 10 50 10 38.5 TOTAL 90 40 130 26 100.0 49. The foreign exchange component is estimated at about 50 per cent of the project costs. The high percentage in local currency is due to the importance of local production or assembly of farm machinery and local pro- duction of construction material. These reflect the efforts of Morocco to utilize local resources to save foreign exchange. 50. The proposed Bank contribution is about 39 per cent of the total investment cost and would cover 50 per cent of CNCA's medium- and long-term lending program under the project. In addition, CNCA will also have to finance from its own resources items not included in the project such as loans for the purchase of faraily farms, cattle loans, and all short-term credit operations. These amount to about Dh 160 million (US$ 32 million). Thus on an overall basis the Bank would be providing less than 20 per cent of CNCAts resources. 51. Annex 12 gives a cash flow and balance sheets (actual and proforma) since CNCA started operations to the end of the lending program June 30 1968. Given the current discount facilities with the Bank of Morocco, CNCA could finance the program if it were to receive a Bank loan of US$10 million (Dh 50 million). The financial situation of CNCA is being strengthened by the assignment of CNCA of Dh 50 million as capital, special interest-free resources for social credit schemes such as SOCAP of Dh 20 million, treasury advances of Dh 44 million carrying interest at l % per annum and the fol- lowing rediscounting facilities with the central bank: Dh 50 million at 3% for rediscounting loans made to agricultural producers or institutions, Dh 50 million at 3b% for rediscounting short term loans made to CGEA. The government has provided assurances that access to financial resources of this magnitude, on terms no less favorable, would be permanently guaranteed to CNCA.  - 12 - 52. The berm of the proposed Bank loan would be 16 years, including a grace perioC. of four years. This would take care of the proposed amorti- zation period for loans to sub-borrowers and the necessity of giving CNCA some ease in its finance to meet contingencies due to the large fluctuations in agricultural output. The government would bear the exchange risk. 53. CNLA would continue its past practice of making credit available for approved purchlases by farmers through normal trade channels of their choice. Irternational firms handling farm machinery and equipment are well representec in Morocco. Assurances have been obtained that the existing competitive situation will be maintained. Equipment for CGEA forms would continue to be purchased through the official tender system providing for international competitive bidding. 54. Proceeds of the loan would be disbursed against withdrawal applications submitted directly to the Bank by CNCA. The portion of the loan allotted for on-farm development, light processing and storage facil- ities (US$8 million) would cover an agreed percentage (67 per cent) of CNCA disbursements against loans made for eligible items between July 1, 1965 and June 30, 1968. The remainder of the loan (US$2.0 million) would be dis- bursed, against documents for the foreign exchange costs of equipment pur- chased by CGEA out of the proceeds of loans from CNCA. Orders for part of this equipment have already been placed in order to have it available for the planting season starting November 1965. Disbursements against such orders will be subject to review of the tender procedures. V. JUSTIFICATION OF THE PROJECT 55. The benefits of the project would be : (a) increased production from farms of commercial sizes located mostly within development perimeters controlled by OMVA; (b) maintenance and increase of production on coloniza- tion lots taken over from foreign settlers; (c) increase value added to farm products through the agricultural processing and marketing facilities; farm products through the agricultural processing and marketing facilities; (d) strengthening of the only credit institution providing sizable and suitable credit facilities to farmers; and (e) other indirect benefits, including extension of modern farm techniques and increased productive employment. 56. CNCA's lending program is a primary factor in the implementation of the Three-Year National Plan of the Government. This Plan aims at con- centrating public action in the most promising sectors. Sectors involved in the Plan include the development areas under OMVAts responsibility, for which on-farm development has lagged behind infrastructure development works, and development of any agricultural enterprise which may readily pass from traditional to modern techniques of production to maximize output. CNCA's lendings would encourage and support the private initiative of producirs operating viable or potentially viable units who are short of cash resources to make investment. This would include farmers in the Sidi Slimane Develop- ment Project which is being financed under Bank Loan'389-MOR. 57. On farm development to be financed under the loan is expected to improve some 25,000 hectares of land principally in the irrigation perimeters, including improved water supply for about 4,000 hectares. Much of this work is of the type to be financed in the Sidi Slimane project.  - 13 - Farm budget st-tdies made in connection with the Sidi Slimane project showed that an;icipated increases in farm incomes even in small farms would be sufficient to enable farmers to repay loans for farm improvements and to pay water charges and drainage levies. Studies made in the Tadla area also gave similar results. Since the CNCA would concentrate its efforts in development areas and provide financing mainly to medium and large commer- cial farmers, benefits can be expected to be higher than in the above mention- ed studies. 58. The shortage of medium- and long-term credit for farm machinery purchases has created a substantial backlog of demand. Services of govern- ment machinery pools and private contractors have filled part of the gap, but this has prevented the expansion of machinery services in new develop- ment areas. Farm machinery loans to farmers are expected to provide equipment for an estimated 50,000 hectares, permitting more intensive cropping and replacing draft animals which require substantial feed resources. 59. Additional processing and storage facilities will be required for marketing the expected increase of production in development areas. As in Sidi Slimane there is a need for small silos, warehouses, and plants for grading, packing and processing fruits, dairy collection centers and cotton gins. Some of these would be operated by cooperatives on a non-profit basis. However, the Sidi Slimane studies indicated that there would be significant benefits. 60. CNCA's lending program for financing the equipment of CGEA farms was appraised by the Bank during negotiations and was found to be justified for limited support (See Annex 13.) 61. Major products to be financed include industrial crops, sugar, beets, cotton and oilseeds; meat and milk products, all of which, with the exception of cotton, would be for local consumption and would reduce imports. Spain currently purchases the cotton fiber; cotton oil is consumed locally mostly by the fish canning industry; cotton cakes are mostly exported, but their local consumption will grow as modern livestock industry progresses. Fruit production would be mainly for the local markets, 62. As in most broadly based agricultural credit projects, quantitative assessment of the overall benefits of the project cannot be made accurately. Appraisal judgment is that expected increases in farm incomes would be sufficient to provide a reasonable incentive to participating farmers. Expected benefits to the economy are also likely to be adequate. VI. CONCLUSIONS AND RECOMMENDkTIONS 63. The project which the Government of Morocco has asked the Bank to finance CNCA's agricultural lending program designed to support the im- plementation of the Three-Year Development Plan (1965/66-1967/68). It is expected to stimulate private investment mostly within scheduled develop- ment areas where efforts of the Government and Development Boards will be concentrated. And it will help meet urgent machinery requirements of CGEA on some of Morocco's most fertile land. CNCA is the only institution in the country providing short, medium- and long-term credit to agricultural producers on a sizable scale and under suitable terms and conditions.  - 14 - 6h. However, CNCA has been in operation only for about three years. It is well organized, but inadequately staffed. Although steps are being taken to strengthen its staff and to improve its financial performance, it w-sill be necessary for the Bank to provide careful guidance and super- vision. Moreover, since the adequacy of the proposed organization has been assessed on the basis of various assumptions regarding the prospects of Moroccan agriculture, the cooperation with other agencies, and the impact of CNCA's new lending policies on the demand for credit, it has been agreed that disbursement of the third yearts tranche will be subject to a full scale review of CNCA's performance, organization, financial position and prospects. 65. Subject to the above condition, the project is suitable for a Bank loan of US$10 million for a period of 16 years, including a grace period of four years. October21) 1965  ANNEX 1 CAISSE NATICNALR DE CREDIT AGRICOLE Sumaary Term and Conditions of Various Short-Term Loans (As of nid-1965% Period C e i 1 i n g s Interest (in months) -Loan Categories Purposes Per cent Absolute rate Security Max. Usual Disbursements of Proiect (Dh) 1) Individual Farming and harvesting 2/3 actual 50,000 5% TUnder 5,000 DH 12 9 Directly to suppliers for seed, Seasonal cash cost expenses Assignment of crop fertilizers crop loans proceeds to farmers for labor cost, over save fuel crop lien renewals