Morocco - Second Municipal Finance Project

Report No. PIC1328 Project Name Morocco-Second Municipal Finance Project (@+) Region Middle East and North Africa Sector Finance Project ID MAPE5523 Borrower Fonds d'Equipement Communal (FEC) Lead Implementing Agency Fonds d'Equipement Communal 1, rue Oued Beht Rabat, Morocco Contacts: Mr. Mohamed Oudor Director, Credit Department, FEC Tel. 212.7.77.05.74/34 Fax. 212.7.76.38.49 Mr. A. Guezzar Director, Finance Department, FEC Tel. 011.212.7.77.80.91 Fax. 011.212.7.77.69.41 Date this update prepared February 1997 Date initial PID December 1994 Project Appraisal date December 1996 Project Board date May 1997 Background 1. The municipal sector in Morocco generates about 5 percent of GDP and accounts for about percent of total public sector investments. It is composed of 1,600 municipalities which form citywide administrations (communautes) in major cities, and municipal enterprises (Regies) responsible for providing water and sewerage, power and transportation services in those cities. Municipalities are responsible for providing solid waste collection, local road maintenance and lighting, slaughterhouses and market services, while communautes are responsible for solid waste disposal and maintenance of major roads. The Ministry of Interior (MoI) oversees the municipal sector and, with clearance from the Ministry of Finance, approves municipal budgets which include revenues from allocations out of the national value added tax, centrally managed local taxes, municipally managed local taxes and fees, and loans (mostly from FEC). 2. The first major step towards decentralization took place in 1996, under the First Municipal Finance Project, when Morocco replaced an ad hoc system for distributing the local share of the VAT, with one based on objective criteria (mainly the size of the population and of the tax base for centrally managed local taxes). The Government recently transferred responsibility for approving large-city expenditures from the Governor to the communautes.  Project Objectives 3. The overall development objectives of the project are to: (i) increase the provision of basic infrastructure services in small and medium-size municipalities; (ii) strengthen the Fond d'Equipement Communal (FEC) as a viable, autonomous financial institution, and establish a market-based municipal finance system; and (iii) support decentralization, in particular improving financial discipline at the municipal level and simplifying the tax system managed by local governments. Project Description 4. The project is made up of the following three components: (a) Municipal Infrastructure: The proposed loan will finance municipal infrastructure investment subprojects. All beneficiaries will have to comply with FEC's lending policies and environment guidelines which are detailed in FEC's Policy Statement and found satisfactory to the Bank. FEC will on-lend Bank funds to eligible beneficiaries through subloans at domestic, market-determined interest rates with a maturity of not more than 15 years, including a grace period. As in the previous loan (Municipal Finance I), the Moroccan Treasury will operate a foreign exchange risk coverage system which can be expected to be self- financing. For its participation in this coverage system, FEC will pay the Treasury an insurance premium which equates the cost of Bank funds with that of domestic resources of comparable maturities. Free limit and sub-loan approval. As in the first Municipal Finance loan, the Bank will continue to review a selected number of sub-projects (above US$2 million per subloan) as a means of strengthening FEC's internal capabilities. (b) Institutional Development: FEC will implement an institutional development plan based on the results of a strategy study, to be carried out with the assistance of international consultants to be financed by a grant from the French Government. (c) Training Program for local Governments:. Likely to focus on: (i) municipal accounting and budget preparation; (ii) municipal budget control; (iii) environmental awareness; and (iv) basic economic analysis of the project. Component funded by the central Government budget. Project Cost and Financing 5. The estimated total cost of the proposed project is US$114 million, with a Bank loan estimated at US$70 million. The project has been prepared in close consultation with the German Kreditanstalt fhr Wiederaufbau (KfW) which is expected to provide a parallel loan to FEC which will complement the Bank loan. Project Implementation 6. The project will be implemented over a period of 4 years principally by FEC, together with the ministries of Interior and - 2-  Finance, and local governments. FEC (the borrower) will be responsible for the line of credit component and the implementation of the institutional development plan. It will on-lend Bank funds to eligible beneficiaries at domestic, market-determined interest rates. The Government will maintain the same foreign exchange coverage system which has been operating satisfactorily under the previous Municipal Finance I loan. The training program for local governments will be implemented by the Ministry of the Interior (MOI). Sustainability 7. The project includes several measures to help ensure its sustainability. At the municipal level, a training program for local governments' staff will be implemented and a comprehensive assessment of the functioning of the new VAT allocation will take place during the course of the project. In addition, a set of complementary institutional and financial measures will facilitate FEC's integration in the banking system while strengthening its position as the Moroccan leader in the municipal credit market. Benefits and Target Population 8. The main direct and indirect benefits of the project will be: (i) improved living standards of about 4 million people living in some 90 small and medium rural and urban communes, and integration of these communes, which account for a large portion of Morocco's least developed areas, into the modern economy; (ii) the borrower, Fond d'Equipement Communal (FEC), will be strengthened through a set of financial and institutional measures, including its new statute of bank which implies full compliance with Central Bank regulations on capital adequacy and loan loss provisioning and the possibility given to FEC to finance private concessions of municipal services; and (iii) sustainable decentralization. A national training program will benefit elected councils and municipal staff. It will aim, in particular, at improving preparation and implementation standards of municipal budgets. 9. The target population is local communities, especially small and medium-size cities (under 150,000), which are expected to account for the vast majority of municipal infrastructure projects financed by the Bank loan. Risks 10. The experience gained under the first Municipal Finance project and the set of financial and institutional measures to be introduced should enable FEC to implement the project without delays and to improve its own performance. However, FEC's transition to a more autonomous and financially regulated institution in a more competitive municipal finance environment, represents a major challenge for its management and staff. Bank monitoring of the timely implementation of these measures will therefore be essential to ensure that the project meets its development objectives and that FEC maintains a sound financial performance. Lessons Learned -3-  11. The on-going Municipal Finance I project has demonstrated the need for rigorous economic analysis of sub-projects. The need for a comprehensive training program which was identified under Municipal Finance I remains and the proposed project has included it in its scope. Environmental Assessment 12. The project is ranked as a Category B project. Please see attached Annex. Contact Point: Mr. E. Forestier, Task Manager The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)458-4765 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending Feb.28, 1997 - 4 -  Annex Environmental Annex The proposed project has been reviewed and classified as Category B. Most operations financed by FEC are geared towards the delivery of municipal infrastructure services and are expected to contribute to the enhancement of the living conditions of the population in the beneficiary municipalities. Some of these municipal infrastructure investments could possibly raise environmental concern, if not addressed properly, especially in the case of large size operations in areas such as: construction of slaughterhouses, market facilities, solid waste disposal, sewerage and waste water treatment, major road construction and neighborhood rehabilitation. To this effect a new procedure is being established in the proposed project. In coordination with the Ministry of Environment, the Bank's project team will assist FEC in the design and implementation of an Environmental Impact Assessment or Environmental Analysis Procedure. This new procedure will be made part of the appraisal process of the sub-projects and their selection for financing will take into account compliance with environmental criteria. EIAs will be carried out by the borrowing municipalities as part of the feasibility studies of the proposed sub-projects. (Terms of reference for the EIA will be approved either by FEC or the Ministry of Environment depending on the level of environmental assessment required.) The Bank, through its regular supervision of the project, will also assist FEC (and the municipalities) in building adequate environmental capacity in order to undertake the proposed Environmental Review. - 5 -