Morocco - Second Banque Nationale Pour Le Developpement Economique (BNDE) Project

Report No. DB-27b REPORTE DESK REWITHIN QN _E WEEK C "his report was prepared foar use within the- Bantk orn its adfitiated orgonizations. Th*y do riot accept responsibility for its accuracy or completeness. The report may nost bte pubrisJhed rwo mnay it be quoted cis representing their Views. iNTERNAIONAL BANK FOR RECONSTRUCTION AND DEiVELOPMENT INTERNATIONAL FINANCE CORPORATION INTERNATIONAL DEVELOPMENT ASSOCIATION RE-APPRAISAL OF THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE (BNDE) April 26, 1966 Developmexit Finance Companies  CURRENCY EQUIVALENTS Currency - Dirham (DH) DH 5.06 = U.S. $1 DH 1 = U.S. $0.198 DH 1,000,000 = U.S. $1938 000  BANQUE lNATIONALE POUR LE DEVELOPPEMJET ECONIOMIQUE This report was prcpared by Messrs. Sekse and Blondel of IFC on the hasis of iuformation which they obtained in Morocco in November/December 1965. TABLE OF CONTENTS Page SUIN4ARY I. INTRODUCTION 1 II. ENVIRONMENT 1- 4 The Industrial Setting 1- 2 Financial Institutions 2- 4 TII. DESCRIPTION OF BNDE 4-10 Objectives 4 liesources 5- 6 Ownership 6- 7 Organization and Staff 7-10 IV, OPERATING POLICIES 10-11 Investment Policy 10-11 Exchange Risk 11 Interest Rates 11 V. ACTIVITIES 11-14 Equity Investments 11-12 Loans 12-13 Promotional Activity 13-14 VI. FINANCIAL RECORD AND POLICIES 14-17 Capital Structure 14-15 Financial Results 15-16 Reserves and Dividends 16-17  -2- Page VII. FUTURE PROSPECTS 17-20 Investment Goals 17-18 BNDE's Projected Operations and Resources Required 18-19 Capital Structure 19 Profitability and Reserve Policy 19-20 VIII. EVALUATIONS, CONCLUSIONS AND RECOMMENDATIONS 20-22 General Conclusions 20-21 Financial Condition and Profitability 21 Need for Resources 21 Recommendations 21-22  ANNEXES 1. Indices of Manufacturing Production 2. Investments Made Under Incentives Granted by the Investment Commission 3. List of Specialized Financial Institutions Operating in Morocco 4. Structure of Interest Rates in Morocco 5. Estimated Cost and Financing of Projects for which Loans and Equity Investments Approved 6. Shareholders and Ownership Structure as of November 30, 1965 7. Board of Directors as of March 7, 1966 8. Organization Chart as of February 15, 1966 9. Policy Statement 10. Equity Investments Made and Sold 11. Equity Investments as of December 31, 1965 12. Summary of Operations Approved 13. Summary of Direct Loan Activity 1.a. Analysis of Assistance Approved (I) lLb, Analysis of Assistance Approved (II) 15. Balance Sheets 1962-1965 16, Operating Results and Allocation of Income 1962-1965 17. Projected Cash Flow Statement 1966-1969 18. Projected Balance Sheets 1966-1969 19. Projected Operating Results and Allocation of Income 1966-1969  SUMMARY i. The Bank made a loan of $15 million to the Banque Nationale pour le Developpement Economique (ENTDE) on December 21, 1962, and IFC signed a $1.5 million investment in BIME's capital stock on January 16, 1963. BNDE has now approved loans and other investments requiring foreign exchange in an amount greater than the 1962 loan. ii. BNDE was established in July 1959 and began operations in September 1959. The capital structure was reorganized in 1962, with an increase of the share capital from DH 20 million to DH 30 million, and the granting by the government of a long-term loan of DH 20 million, sub- ordinated to other debt. Since the reorganization, the government has been in a minority position. iii. The economy of Morocco has not expanded very fast over the past few years, and industrial investment has been somewhat sporadic. As a consequence, BNDE's annual volume of business has not expanded much. Nevertheless, BNDE has assisted during its life new or expanding indus- trial enterprises which probably accounted for some three quarters of industrial investment in the country. Under the circumstances, therefore, the progress made by ENDE has been satisfactory, and its contribution to Moroccan industry significant. ENDE being the major institutional source of long-term finance to private industry in Morocco, it should have an equally important role in the future. iv. In the sunmer of 1965, BNDE's top management was changed and the adviser to the management left. All parties concerned have agreed that reinforcement of management is needed, and IFC is now seeking a senior adviser to BNDE. BNDE's junior staff is mainly Moroccan, while all departmAent heads are non-Moroccan. There is a lack of qualified staff in the middle echelons, a weakness which the management is trying to remedy. v. In 1965, BNDE approved 21 direct loans totalling DH 34 million, and five equity investments totalling DH 4.8 million. This compared with DH 19 million and DH 2.1 million, respectively, in 1964, and DH 32 million and DH 2.2 million, respectively, in 1963. More than half of the amount of loans in 1965 was one large loan to a government-owned sugar mill, exceptionally accepted for financing by BNDE. Vi. The quality of BNDE's portfolio of loans is generally good. Although many borrowers have problems of one kind or another, few are really serious, and loans in arrears are not significant. Equity investments are not of the same standard. Some losses appear unavoidable, and the average return on all investments is low. BNDE's management recognizes that more weight has to be given to the prospects of return on investment in shares. vii. Financially, ENDE's position is judged sound. Reserves, more than 10% of the portion of loan and equity portfolio not guaranteed by  - ii - the government, are considered adequate, and conventional debt is no greater than the sum of net worth and subordinated debt. viii. BNDE's net income after taxes was 4.1% of net worth in 1963, 5.1% in 1964, and 5.3% in 1965. A first dividend of 3% was distributed in 1965 on 1964 earnings. The government has now granted BNDE a new long-term, subordinated loan of DH 10 million, bringing the total of this kind of capital from DH 20 to DH 30 million. At the same time, the cost of all DH 30 million will be reduced from 4% to 2%. This will improve BNDE's future profitability; assuming the volume of business mentioned below, BNDE's net income, as a percentage of net worth, should gradually improve to over 8% in 1969. With income allocation according to past practice, this would allow BNDE to distribute a 4% dividend in the next two or three years, 5% thereafter. ix. Towards the end of 1965 and in the first months of 1966, there was a marked upturn in BNDE's loan and investment activity. There is reason to believe that this trend could continue throughout 1966 and 1967 and, on this assumption, BNDE should be able to approve new direct loans and equity investments at an annual rate of approximately DH 50 milliorn in these two years. Only a minor part of this would be for expenditures in local currency. On this basis, BNDE should be able during 1966 and 1967 to put to effective use a new foreign exchange loan of $17.5 million. It is a suitable recipient of such a loan from the Bank.  RE-APPRAISAL OF BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE I. INTRODUCTION 1. The Banque Nationale Dour le Developpement Economique (BNDE), was established in 1959 in Rabat. In 1962, after consultations with the Bank and IFC, a reorganization was carried out under which BNDE became a predominantly private company. The Bank made it a loan of $15 million on December 21, 1962, and on January 16, 1963 IFC subscribed at par to 150,000 common BNDE shares, nominal value DHI 7,500,000 (equivalent to $1,495,774). As of April 21, 1966, $14.2 million for 62 different projects had been credited to BNDE's loan account with the Bank, and of this $10.4 million had been disbursed. BNDE has approved projects which will require far more than the small balance of the loan. II. ENVIRONMENT The Industrial Setting 2. Industrial enterprise in Morocco is of relatively recent date, and did not become of real significance until after World War II. From then on, private investment in industry gained momentum, encouraged in various ways by the authorities. Foreign investors, notably French, ac- counted for most of early postwar investment, but some Moroccan capital began coming forth from the late 1950's onwards. As Morocco moved towards independence in 1956, foreign investment slowed down considerably, and the net flow of capital was, in fact, reversed. The majority of industry is still in foreign hands, although private Moroccan ownership has increased in recent years. 3. During the period 1960-64 industrial production in Morocco - manufacturing and handicraft - accounted for about 13% of the gross domestic product. The two most important branches of industry, in terms of value added, are the beverage and food processing industries, which together account for about 40% of the total value added by industrial production. The next most important industries are metal-working, textiles and leather. Major gains during the 1960-64 period were obtained in the textile industry, construction materials and chemicals (see Annex 1). 4. The rate of increase of manufacturing output slowed down consider- ably in 1964, the index rising by only 1.5%. This compared to an increase of 5.7% in 1963, 5.2% in 1962 and 3.6% the year before. The slowdown can be traced to, among other things, a decline in demand caused by crop failures in 1964, by cost and price increases, and by a high rate of departure of non-resident foreigners. Indications are that industrial production gained some momentum again in 1965. 5. It is the Moroccan Government's policy to encourage private in- vastment in industry. The Government will intervene only if private invest- ment is lacking in a sector which the Government deems vital to the economy, or if a bottleneck in a certain sector obstructs further development in private industry, and if this bottleneck can only be removed through Government intervention.  6. Alongside measures intended to stimulate savings, the Government has introduced incentives for investors in industry, enumerated in an Investment Charter of December 1960. They include: (a) exemption from customs duty on imported materials and equipment if it is new and local industry cannot supply it at competitive prices; (b) accelerated depreciation on new plant and machinery; (c) exemption from business profits tax of income earmarked for the purchase of new equipment; and (d) guarantee to non-resident foreign investors that they may repatriate the proceeds of partial or total sale of their investments. 7. In addition, the setting up of new companies and increases in the capital of existing companies are exempt from registration taxes; the taxes on licenses to manufacture may be postponed up to five years, and a substantial equipment subsidy may be granted by the Moroccan Government to approved enterprises outside the Casablanca and Mohammedia areas. The maximum grants are 20% in the case of investments in the Province of Tangiers and 15% in the rest of the country. 8. A ministerial Investment Commission is empowered to decide on the grant in whole or in part of privileges requested. Investors must sub- mit their applications, for which rather elaborate guidelines have been established, to a permanent secretariat of the Commission. The privileges provided for in the Charter apply automatically to industrial enterprises in the Province of Tangiers. In 1963, they were extended to include investments in the tourist industry. Only projects seeking the various benefits provided by the Government need approval by the Investment Commission. 9. It is difficult to gain a picture of the total volume of investment in the private industrial sector, and also difficult to judge whether on bal- ance it has been increasing or declining. The Bank's General Survey Mission of 1964/65 estimated total private industrial investment in that year at DH 145 million. In Annex 2 are shown figures of investments made between 1960 and 1964 under incentives granted by the Investment Commission. In the latter year, approvals amounted to DH 136 million, a figure which is not inconsistent with the estimate of the Survey Mission, since some activity took place without special incentives. Investment activity during the period was, on the whole, rather stagnant. This reflects what has generally been considered as being a mediocre investment climate in past years, and may indicate that the various incentives applied have not been considered sufficiently attractive to potential local or, perhaps particularly, foreign investors. In fact, the concessions extended by Morocco to new industries are considerably less than those offered by many other developing countries. Lately, however, there have been signs of increasing investment activity, if an upturn in BNDE's operations towards the end of 1965 can be taken as an indication. This more active trend, which appears to be continuing in 1966, could signify increasing investors' confidence, and, as such, is a good omen for the future. Financial Institutions 10. The central bank (Banque du Maroc) was created in 1959, and is responsible for issuing and maintaining the value of the currency, controlling credit, and acting as the Government's financial agent in domestic and ex- ternal matters. 11. There is a highly developed system of medium-term credit, re- discountable at the central bank, inspired by the French system. The central bank may rediscount from other financial institutions bills of exchange of  - 3 - up to 120 days, renewable for a maximum total term of five years. The credits are usually made by the commercial banks, which need a third signature on the bills (in addition to that of the borrower and its own) to make them acceptable to the central bank. BNDE is the most important of the institutions providing this third signature. A commercial bank wishing to enter into such a transaction must obtain BNDE's, and then the central bank'; prior agreement. By committing its signature to such credits, BNDE normally does not assume a primary risk of default by the borrower - this remains with the commercial bank. The largest part of all rediscountable credit has so far been neld by the commercial banks because of their high liquidity. 12. The medium-term rediscountable credit system has been one of the most important sources of industrial finance in Morocco. Since 1963, the central bank has endeavored to direct this form of credit to the financing of dirham expenditure, encouraging BNDE, as the only important provider of long-term capital to private industry in Morocco, to finance the foreign exchange requirements of industrial investment through its long-term loans and equity investments. Beginning in February 1966, the rediscount of medium-term credits has been subject to the ceilings es- tablished by the central bank limiting the amount of paper which each commercial bank may rediscount. This measure may have some restrictive effect on the policies of medium term-credit. 13. At the beginning of 1964, there were twenty-two commercial banks in Morocco with 164 permanent and 13 seasonal offices. In terms of volume of business, the commercial banks constitute by far the most important part of the banking system. Nearly all of them were originally branches of foreign institutions. Over half of the banks have reconstituted themselves under Moroccan law and now include participations of private Mbroccan capital. Their deposits probably account for close to 90% of total deposits. 14. In addition to making medium-term rediscountable credits, a major activity, the commercial banks make short-term credits on current account for working capital purposes, make short-term advances on merchandise and stocks, discount commercial paper, and undertake other usual commercial banking activities. 15. Apart from the commercial banking system, the principal institu- tions for channeling savings of the public into long-term investment are the government-controlled post savings bank (Caisse d'Epargne Nationale), life insuranco companies, pension funds, and the social security system. The post savings bank is obliged to, and the other institutions have the option to (and do in fact) deposit their funds in the Caisse de Depot et de Gestion, another government institution. 16. The Caisse de Depot is entrusted with the management of a large number of special funds. It invests in Government bonds and lends on short- term to the Treasury. It also invests in other bonds, and participates in the share capital of public or mixed enterprises. Insurance companies have boan the other main subscribers to the few public issues of long-term government bonds. They have also Uaken up bonds issued by BNDE and other private bonds.  - 4 - 17. There are a number of institutions established to provide credit for special purposes. A list of such institutions, which are, by and large, under government control, is given in Annex 3. 18. There is a small stock exchange in Casablanca, but so far the public's interest in investing through it has been very small- The total value of shares traded on the Exchange was about DH 21 million in 1964 * and DH 16 million in 1963. In 1964, 49 companies of the listed 80 paid dividends representing an average yield of 10.3% on the quoted price. Some of the securities listed in Casablanca are also quoted on the Paris Stock Exchange but private security arbitrage between the two markets has been prohibited since 1959. Holders of non-resident capital accounts are permitted to invest in Moroccan securities, but there are not many such transactions. 19. The structure of interest rates in .iorocco is described in Annex 4. Although the policy of the government is to maintain a low interest level, the cost of short-term credit is quite high, from about 12% per annum (including commission) upwards. 20. The relative importance of the various sources of finance for industrial investment is indicated in Annex 5, which is a summary of the financial plans for projects approved for financing by BNDE during the past 31 years. As seen, equity in various forms accounts for roughly half of total investment, direct loans from BNDE for 20% medium-term redis- countable credits for 16%, and suppliers', short-term, and other credits for about 15%. III. DESCRIPTION OF BNDE Objectives 21. The chief objective of BNDE, according to its statutes, is to contribute to the economic development of Morocco. It does this, ac- cording to its policy statement, by encouraging private industrial development in Morocco. It assists a non-private or a non-industrial enterprise only in special circumstances, and when capital to carry out the project cannot be found elsewhere on reasonable terms. 22. BNDE is authorized by its statutes to make loans of a term of not less than two years, discount or take "in pension" medium-term credits, provide guarantees, establish enterprises and make equity investments, manage public and private funds, act as agent for the government, borrow short and long-term funds, receive advances or subventions from the State, and undertake any other operation within the scope of its objectives, such as underwriting of securities or providing technical assistance to clients (both specifically called for in BNDE's policy statement).  -5- Resources 23. Share Capital and Reserves - BNDE's authorized, issued and fully paid share capital is DH 30 million, divided into 600,000 coamon shares of DH 50 each. All shares are registered and carry equal rights. As of December 31, 1965, BNDE's reserves and earned surplus were DH 6.0 million. 24. Government Loans - Under an agreement of August 31, 1962, the government loaned. DH 20 million to BNDE, for 30 years, with repayments to start after a 15-year grace period. The interest rate so far has been 4%, but the government has now agreed to reduce the cost to 2%. The loan is subordinated to all other debt and ranks pari passu with BNDE's share capital in the case of liquidation. The Bank has considered the out- standing amount of this loan a supplement to BNDE's equity for the pur- pose of determining BNDE's borrowing capacity. The government has now granted BNDE a second loan of DH 10 million on similar terms. 25. A Treasury interim line of credit of DH 30 million at 4-1/2% interest was made available to BNDE under an agreement dated December 15, 1959. When BNDE received from government the subordinated long-term loan in 1962, it repaid the amount outstanding under the line of credit and has not since had recourse to it. The credit will expire on June 30, 1966. 26. Long-Term Bonds - In 1961, BNDE issued two series of long-term bearer bonds, totaling DH 23 million. The bonds, which are covered by government guarantee, were taken up by Moroccan insurance companies and banks. The first series for DH 8 million at 6-1/2% is to be repaid in ten annual installments, starting February 1968. The second issue, DH 15 million at 6%, is repayable in eight annual installments, starting in July 1964.. 27. IBRD Loan - The Bank loan of $15 million (about DH 76 million) was designed to cover foreign exchange costs of projects financed by BNDE. Prior to August 26, 1964, individual projects involving a loan or an equity investment of $50,000 or more required the approval of the Bank.