Morocco - Telecommunications, Post, and Information Technology Sector Adjustment Loan Project

Document of THE WORLD BANK FOR OFFICIAL USE ONLY Report No. P-7265-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED TELECOMMUNICATIONS, POST, AND INFORMATION TECHNOLOGY SECTOR ADJUSTMENT LOAN IN THE AMOUNT OF EUR 85.21 MILLION TO THE KINGDOM OF MOROCCO April 9, 1999 Private Sector Development and Finance Department Middle East and North Africa Region 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.  CURRENCY AND EXCHANGE RATE (as of March 1999) Currency Unit = Dirham (MAD) US$1.00 = 9.712 DH FISCAL YEAR July 1 - June 30 ABBREVIATIONS AND ACRONYMS ADB African Development Bank ADM Societe des Autoroutes du Maroc ANRT Agence Nationale de Reglementation du Secteur des Teldcommunications BAJ Barnamaj al Aoulaouiyat al Ijtimaiya (Social Priority Program) BAM BaridAl-Maghrib (the postal agency) CAS Country Assistance Strategy CDG Caisse de Dep6t et de Gestion CEN Caisse d 'Epargne Nationale CPI Consumer Price Index CRAPP Comite de Reflection, d 'Acceleration du Processus de Privatisation CSE Casablanca Stock Exchange DEPP Direction des Etablissements Publics et des Participations EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product GMPCS Global Mobile Personal Commnunications System GOM Government of Morocco GSM Global System for Mobile Conununications IAM ItissalatAl-Maghrib (the incumbent telecommunications operator in Morocco) IBRD International Bank for Reconstruction and Development IDF Institutional Development Fund IMF International Monetary Fund INFODEV World Bank Program on Information for Development INPT Institut National des Postes et Telecommunications IPO Initial Public Offering ISDN Integrated Services Digital Network IT Information Technology LIL Learning and Innovation Loan ONCF Office National des Chemins de Fer ONE Office National de l 'Electricite ONPT Office National des Postes et Telecommunications PE Public Enterprise PHRD Policy and Human Resources Development PPI Private Participation in Infrastructure PRSL Policy Reform Support Loan PSA Private Sector Assessment PSD Private Sector Development SA Societe anonyme VAS Value-added Services VSAT Very Small Aperture Terminal WTO World Trade Organization Y2K Year 2000 Vice President: Kemal Dervis Country Director: Christian Delvoie Acting Sector Director Deane Jordan Task Team Leader: Michel Kerf  FOR OFFICIAL USE ONLY KINGDOM OF MOROCCO TELECOMMUNICATIONS, POST, AND INFORMATION TECHNOLOGY ADJUSTMENT LOAN TABLE OF CONTENTS LOAN SUMMARY ............................................... .i I. INTRODUCTION ................................................1 H. POLITICAL AND ECONOMIC CONTEXT ................................................1 A. Political Context .............................................. .I B. Economic Performance ...............................................2 C. Economic Outlook, Risks, and Financing Requirements .............................................4 HI. REFORM PROGRAM IN THE TELECOMMUNICATIONS, POST, AND INFORMATION TECHNOLOGY SECTORS ................................................9 A. Government's Objectives and Overall Strategy ............................................9 B. Progress to Date ..............................................9 C. Reform Agenda ............................................. . 12 D. Bank Strategy .............................................. 15 IV. THE PROPOSED LOAN ............................................... 16 A. Project Description ............................................. 16 B. Technical Assistance ............................................. 17 C. Fiscal Impact of the Reforms ............................................. 17 D. Rationale for Bank Involvement ............................................. 18 E. The Present Operation and the Country Assistance Strategy ............................................. 19 G. Disbursement and Auditing ............................................. 19 H . Cofinancing ............................................. 19 I Environmental Aspects ............................................. 19 J. Program Objectives and Poverty Category ............................................. 20 K Monitorable Indicators ............................................. 20 L. Benefits and Risks ............................................. 20 V. RECOMMENDATION ............................................... 21 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  KINGDOM OF MOROCCO TELECOMMUNICATIONS, POST, AND INFORMATION TECHNOLOGY ADJUSTMENT LOAN TABLE OF CONTENTS ANNEXES Annex I: Key Economic Indicators Annex II: Letter of Sector Development Policy Annex III: Matrix of Policy Objectives And Actions Annex IV: Key Sector Data Annex V: Monitorable Indicators Annex VI: Fiscal Impact of the Reforms Annex VII Telecommunications: Past Investment and Capital Efficiency Ratio Annex VIII: Timetable of Key Processing Events Annex IX: Status of Bank Group Operations in Morocco Annex X: Morocco at a Glance Annex XI: Map of Morocco TEXT FIGURES AND TABLES Table II.1 Key Macroeconomic Indicators, 1980-96 Table II.2 Key Macroeconomic Indicators, 1990-97 Table 11.3 Key Macroeconomic Indicators, 1998-2002 Table 11.4 Status of CAS Macroeconomic Benchmarks Table 11.5 Budget Financing, 1997/98 - 98/99 Table 11.6 Balance of Payments Financing, 1997-99 Table IH. 1 Morocco Telecommunications Sector Performance in Comparative Perspective Table L.2 Morocco Postal Sector Performance in Comparative Perspective Table I11.3 Morocco IT Sector Performance in Comparative Perspective This report is based on the work of missions to Morocco in April, June, September, and October 199'3. The mission teams comprised: Emmanuel Forestier (Sector Manager, EMTTI), Jacques Genet (Consultant), Pierre Guislain (Coordinator, Program on Private Participation in Mediterranean Infrastructure, World Bank/EU), Michel Kerf (Task Team Leader, MNSPF), Kirsten Pehrsson (Consultant), Carlo Maria Rossotto (EMTTI), Jean-Patrick Th6veny (Consultant), and Bjom Wellenius (Telecommunications Adviser, EMTTI). Important contributions were made by Fran,oise Clottes (EMTDR) and Oliver Godron (Morocco Resident Representative). Catherine Doody (EMTTI) and MaudLe Jean-Baptiste (MNSPF) contributed to the editing of the document. PHRD funding is gratefully acknowledged.  KINGDOM OF MOROCCO TELECOMMUNICATIONS, POST, AND INFORMATION TECHNOLOGY ADJUSTMENT LOAN LOAN SUMMARY Borrower: Government of the Kingdom of Morocco. Amount: EUR 85,210,000 (US$101 million equivalent), including standard front-end fee of 1%. Terms: Standard amortization term, grace period, and interest rate for a fixed-rate EUR single- currency loan with expected disbursement in two tranches over a period of nine months; closing date: December 31, 2000. Objectives: The loan supports the implementation of a comprehensive package of pro-competitive reforms in the telecommunications, post, and information technology (IT) sectors designed to increase the competitiveness of the Moroccan private sector, to broaden access to communications services to the poor, particularly in rural areas, and to facilitate Morocco's transition to a global, information-based economy. In telecommunications, the primary objective of the loan is to promote increased competition, greater private participation and investment, and autonomous regulation. With respect to postal services, the operation seeks to increase the competitiveness of service provision and to ensure that public service obligations are adequately defined, financed, and met. The loan also supports the development of a national strategy aimed at facilitating Morocco's integration into the global information society. Description: The operation supports the adoption of measures in six specific areas: (i) telecommunications liberalization; (ii) telecommunications regulation; (iii) privatization of the incumbent telecommunications operator; (iv) access to telecommunications services by poor and remote households; (v) competitiveness of postal services; and (vi) development of a national IT strategy. A policy matrix detailing the specific actions supported by the operation is presented in Annex III. Benefits: The Moroccan private sector will be a major beneficiary of competitive telecommunications, post, and IT services. The service industry, in particular, which accounts for an increasingly important share of GDP in most developing economies, stands to benefit from a broader array of competitively priced communication and IT services. The project will address some of the needs of poor and remote households by increasing their access to communication and IT services, a critical factor for developing local economic activities. In addition, the reforms supported by the loan will bring substantial revenues to the Treasury (higher taxes levied on enlarged telecommunications and IT sectors, the award of new telecommunications licenses and the privatization of the incumbent telecommunications operator). Risks: The main risk associated with the implementation of the Government program is the reversal of some key policy measures, notably: (a) the introduction of competition in the telecommunications sector; and (b) the strengthening of the regulator's autonomy. Other less serious but still significant risks for the operation stem from the complexity of some of the measures to be implemented. Risk mitigation: The adoption of a new legal and regulatory framework in 1997/98 and the attached Letter of Sector Development Policy (Annex II) demonstrate the Government's commitment to the reform program. Also, the general consensus in favor of the program, which particularly  ii benefits the private sector, makes a reversal of Government policies unlikely. A comprehensive assistance package funded by the EU will help ensure the sustainability of the reform program by strengthening the regulator's capacity to successfully implement complex reform measures. Poverty category: The loan supports a program of targeted interventions aimed at facilitating the access of poor and remote households to telecommunications, postal, and 1T services.  REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED TELECOMMUNICATIONS, POST, AND INFORMATION TECHNOLOGY ADJUSTMENT LOAN 1. I submit for your approval the following report and recommendation on a proposed Telecommunications, Post, and Information Technology Adjustment Loan (TPI-SAL) to the Kingdom of Morocco in the amount of EUR 85.21 million (US$101 million equivalent). It is a single currency, fixed rate loan with a repayment schedule of 15 years, including a grace period of 3 years. The proceeds of the loan would be made available in two tranches. Measures required for release of the first tranche (EUR 42.44 million; 49.81% of the loan amount) have been adopted, and the first tranche would be released upon loan effectiveness. Measures required for release of the second tranche (EUR 42.77 million; 50.19% of the loan amount) are expected to be met over a period of 9 to 12 months after Board presentation. The African Development Bank (ADB) has prepared the TPI-SAL jointly with the Bank and is contributing parallel financing in the amount of 80 million Units of Account (US$113 million equivalent), with disbursement in two tranches also, predicated upon the adoption of the same sets of measures. The European Union has also been closely associated with the preparation of the reform program and has approved a substantial technical assistance program to facilitate its implementation. The project has been prepared jointly with all the main stakeholders in Morocco.' 1. INTRODUCTION 2. The TPI-SAL would support the overall objective of the Government reform program to accelerate Morocco's integration into the global information economy. Access to competitively priced and efficient communication services and information technology (IT)2 determines to a large extent the ability of economies to grow, create jobs, and reduce social disparities. The service sector, which is heavily dependent upon communications and IT, accounts for an increasing share of GDP in most economies, while the IT industry itself is emerging as a major source of growth, job creation, and export earnings in those economies. Adequate provision of telecommunications, postal, and IT services to poor and remote households also constitutes a powerful means to reduce social exclusion and to broaden the scope of economic opportunities provided outside of the main cities. H. POLITICAL AND ECONOMIC CONTEXT A. Political Context 3. Morocco has recently achieved substantial political liberalization. Following elections in November 1997, King Hassan II appointed Abderrahmane Youssoufi, the leading opposition figure and a onetime exile, as Prime Minister in February 1998. Mr. Youssoufi heads a Government backed by a seven-party center-left coalition, the Koutla, which holds 102 of the lower chamber of parliament's 325 seats. The alternance Government marks the first time in independent Morocco's 42-year history that the Including: Ministere Charge des Affaires Generales du Gouvernement; Ministere de I 'Economie et des Finances; Ministere du Secteur Public et de la Privatisation; Secretariat d'Etat Charge' de la Poste et des Technologies de lI 'nformation; Agence Nationale de Reglementation du Secteur des Telecommunications (ANRT); Itissalat al-Maghrib (IAM-the incumbent telecommunications operator in Morocco); Barid AI-Maghrib (BAM-the postal agency); and representatives from the private sector. 2 The term information technology refers to the broad range of technologies that transmit, store, and manipulate information (voice, data, images) electronically, generally in digital format, as well as related software and services.  2 opposition has had the opportunity to govern. It also marks a break from the recent succession of' technocratic, "transitional" Governments, although the alternance Government has re-appointed the Ministers for Foreign Affairs, Interior, Islamic Affairs and Justice. 4. The alternance Government exemplifies the overhaul of Morocco's political institutions, spurred on in large measure by the King. An amended Constitution, adopted in September 1996, responded to long-standing calls for a return to direct election by universal suffrage of members of the House of Representatives, as well as for making Government more accountable to Parliament. Under the new constitution, Parliament is composed of a directly-elected 325-seat House of Representatives and a 270- member upper House of Counselors (representatives of chambers of commerce, labor unions, and local communities). The State's unity and sovereignty continue to be embodied in the Monarchy. The new Constitution paved the way for adoption prior to the November 1997 elections of a "joint declaration of the administration and the political parties", whereby the previous transitional Government undertook to ensure fair and transparent elections while the political parties undertook to abide by the rules of the electoral process and its results. 5. The alternance Government's general economic and social program balances: (i) prudence in macroeconomic and fiscal management; (ii) reforms to improve public sector performance; (iii) measures to harness the potential for private-sector-led growth; and (iv) the need for broad-based human and social development, particularly in the country's least developed areas. The Government has already sent important policy signals confirming its commitment to fiscal discipline. Shortly after assuming office, in the face of a widening 1997/98 deficit, it took steps to contain the deficit to 3.5 percent of GDP. The 1998/99 budget provided for a similar level of deficit (3.6 percent of GDP, with execution thus far on track), despite pressures that might otherwise have raised it to nearly 5 percent of GDP. The Government has also sought to reassure the domestic and international financial and business communities of its commitment to market oriented policies economic liberalism, and has shown continuity in taking forward the legislative agenda initiated by its predecessor, with good initial results. B. Economic Performance 6. Following rapid growth in the latter half of the 1980s, the Moroccan economy's performance has slowed since the early 1990s (Table 11.1). In the late 1980s, growth was supported by a forceful adjustment program that devalued the Dirham, substantially reduced trade protection, and cut the fiscal deficit. GDP grew at an annual average rate of 4.4 percent, with non-agricultural GDP growth reaching over 6 percent in 1988 and 1990. These rates were achieved with relatively modest investment levels (around 23 percent of GDP), but with substantial increases in the efficiency of investment. Growth was also driven by exports, which grew at an impressive 9 percent per year over the period, with a strong surge in manufacturing exports. Meanwhile, foreign direct investment (FDI) also grew exponentially, from only US$1 million in 1986 to US$317 million in 1991. 7. The reduction in average annual growth to well below 3 percent in the 1990s partly reflects greater frequency of drought as well as slower growth in Morocco's principal trading partners. But it also reflects enduring structural problems. In the absence of deep-rooted sectoral and public management reforms, the fiscal deficit has remained around 3-4 percent of GDP. Meanwhile, public expenditure patterns have become increasingly rigid (with the government wage bill, together with interest payments, absorbing around 65-70 percent of revenues), to the detriment of public spending on infrastructure and the social sectors. Further, since the adoption of a nominal exchange rate peg in 1991 (whereby the Dirham's value was held fixed relative to that of a basket of trading-partner currencies), Morocco's currency has appreciated by some 15 percent in real terms, despite a substantial decline in inflation. Together with real depreciation in competitor economies, this appreciation has adversely affected export growth.  3 Table 11.1: Key Macroeconomic Indicators, 1980-96 1980-85 1 1986-90 1991-96 Average Annual Growth (%) GDP 2.7 4.4 2.6 Non-Agricultural GDP 3.1 4.0 2.6 Domestic Inflation 6.8 5.8 4.3 Exports of GNFS 3.7 8.8 5.9 Share of GDP (%) Current Account Balance -8.6 -0.4 -2.4 Foreign Debt 85.5 98.7 72.6 Budgetary Revenue 21.3 21.8 24.8 Budgetary Expenditures 32.9 27.5 28.5 o/w Investment Expenditures 6.6 4.5 4.1 Fiscal Deficit 11.6 5.7 3.7 Gross Domestic Savings 15.1 18.5 16.0 Gross Domestic Investment 25.9 22.9 21.9 8. Structural and institutional reforms have continued to be implemented in the 1990s, but arguably with less momentum than in the late 1980s. Tax administration has been improved, the financial sector has been deregulated and modernized, and a limited but successful privatization program has been implemented. Trade liberalization has also continued, most recently with the conclusion of an Association Agreement with the European Union (EU), which calls for the elimination of tariffs for all European industrial products over the next 12 years. The business environment for the private sector has also been improved, although structural constraints still inhibit firms' competitiveness, underscoring the need for profound institutional reforms. 9. Following 1995's historic drought, GDP growth rebounded to 12 percent in 1996 but fell again to negative 2.2 percent in 1997, once more reflecting poor rainfall; agricultural value-added declined by 26 percent while non-agricultural growth held at around 3 percent. Tight monetary policy and low increases in import prices helped to reduce inflation from 3 percent in 1996 to 1 percent in 1997. In the balance of payments, the current account deficit improved to 0.3 percent of GDP (from 1.7 percent in 1996), reflecting faster growth in phosphate and jobbing trade exports, and slower growth in imports. Even more significantly, foreign investment more than doubled to an all-time high of almost US$1.2 billion as a result of large direct investment by multinationals and the sale of a major state-owned enterprise.  4 Table 11.2: Key Macroeconomic Indicators, 1990-97 1991-96 1996 1997 Growth rates (%) GDP 2.6 12.0 -2.2 Non-Agricultural GDP 2.6 3.2 3.2 Domestic Inflation 4.3 3.0 1.0 Exports of GNFS 5.9 6.2 7.7 Share of GDP1.1 Current Account Balance -2.4 -1.7 -0.3 Foreign Debt 72.6 62.7 61.6 Budgetary Revenue 24.8 24.2 25.2 Budgetary Expenditures 28.5 27.7 28.7 o/w Investmnent Expenditures 4.1 4.2 4.5 Fiscal Deficit 3.7 3.5 3.5 Gross Domestic Savings 16.0 15.8 17.3 Gross Domestic Investment 21.9 20.3 20.7 10. The fiscal stance has remained broadly unchanged since 1996. The overall budget deficit stabilized at 3.5 percent of GDP in 1997/98, the same level as in the preceding fiscal year.3 Both revenues and expenditures increased by around one percentage point of GDP in 1997/98, owing in part to higher tax revenues, the proceeds of a major electricity concession, and larger expenditure on the wage bill (from 10.8 percent of GDP in 1996/97 to 11.3 percent in 1997/98). Domestic financing of the deficit increased from 4.9 percent of GDP in 1996/97 to 5.4 percent in 1997/98. This reflected a continuation of the Treasury's policy of tapping the domestic market in order to reduce its exposure to foreign debt, which had gradually declined from 55 percent of GDP in 1991 to 40 percent in 1996. The Treasury also began an initiative in mid-1996 to manage external debt more actively through private and public debt-equity conversion, refinancing, and pre-payment which has amounted to some US$900 million of external debt. Non-government investment remained stagnant at 16 percent of GDP in 1997. Coupled with roughly stable government investment, this placed limits on growth potential. C. Economic Outlook, Risks, and Financing Requirements 11. Estimates for 1998 and Medium-Term Outlook. The economy is estimated to have grown by 6.3 percent in 1998, reflecting a rebound of agricultural output and steady non-agricultural growth, driven by buoyant tourist and phosphate sectors. This solid growth has had a positive impact on private investment, resulting in an increase in the overall investment ratio of close to one percent of GDP. The current account deficit is estimated to have deteriorated slightly from 0.3 to 0.4 percent of GDP, and 3 Morocco's fiscal year cycle (July I-June 30), which until 1996 coincided with the calendar year, was changed to increase the capacity for gearing the annual budget to the agricultural output cycle (knowledge of winter rainfall allows more refined harvest projections by the time budget preparation is finalized.) The budget data presented in Table 1.2 are fiscal year data, but calendar year data do not present a significantly different picture.  5 exports (including net jobbing trade exports) are forecast to grow at 5.6 percent in dollar terms (3.9 percent in real terms). 12. Based on the 1998/99 Finance Law, the fiscal stance is planned to remain roughly unchanged; the authorized deficit for the fiscal year is 3.6 percent of GDP. Budgetary revenues, which appear to have been prudently forecast, are programmed to increase by over 7 percent relative to 1997/98, but include 1.5 percent of GDP in one-time revenue sources. The authorized increase in budgetary expenditures (8 percent relative to 1997/98) is driven largely by a 7.7 percent increase in the wage bill, one-time expenditure in support of the liquidation of Charbonnages du Maroc (CdM), and the financial restructuring program of Caisse Nationale de Credit Agricole (CNCA). As discussed below, the borrowing requirement amounts to a little over 3 percent of GDP, slightly lower than that for 1997/98, and the mix between domestic and external financing is expected to shift towards the latter. Table 11.3: Key Macroeconomic Indicators (Estimated / Projected), 1998-2002 1998 1999 2000 2001 2002 Growth Rate (/) GDP 6.3 4.0 4.5 5.0 5.5 Non-Agriculture GDP 3.4 4.2 4.6 5.2 5.7 Domestic Inflation 2.8 2.5 2.5 2.5 2.5 Exports of GNFS 3.9 6.0 7.8 8.2 8.6 Share of GDP (