Morocco - First municipal finance project

 ICRR 10545 Report Number : ICRR10545 ICR Review Operations Evaluation Department 1. Project Data : Date Posted : 02/29/2000 PROJ ID : P005517 OEDID: OEDID : L3616 Appraisal Actual Project Name : First municipal US$M ) Project Costs (US$M) 182.3 121.0 finance project Country : Morocco Loan /Credit (US$M) Loan/ US$M ) 104.0 100.0 Sector, Major Sect .: Urban Management , US$M ) Cofinancing (US$M) 0.0 0.0 Urban Development L/C Number : L3616; L3617 FY ) Board Approval (FY) 93 Partners involved : Closing Date 06/30/1999 06/30/1999 Prepared by : Reviewed by : Group Manager : Group : Roy Gilbert Alice C. Galenson Gregory K. Ingram OEDST 2. Project Objectives and Components a. Objectives (i) enhance the quality of communal infrastructure projects through restructuring the Fonds d'Equipment Communal (FEC), introducing consistent economic, financial, and technical criteria for project selection, and upgrading the institutional capacity of local governments; (ii) improve procedures and criteria for allocating value -added tax (VAT) among local governments and local intergovernmental finance generally; (iii) expand and rehabilitate urban and rural communal infrastructure and related services throughout the country; (iv) improve financial discipline of local governments to enable them to borrow from commercial banks in the long run; and (v) improve management systems in the local sector b. Components (i) Funding for local investments in roads, water and sewerage, solid waste, and productive and recreational facilities (US$176.5 million - 96.8% total cost through sub-loans to finance about 250 subprojects); (ii) Technical assistance, training, and equipment to improve FEC ’s institutional capabilities (US$0.8 million - 0.4% total cost); (iii) Training for local governments’ staff, including the construction of a training center, training of trainers, and related consultant services (US$2.3 million - 1.3% total cost); and (iv) Technical assistance, training and equipment to improve intergovernmental finance, and central government management systems related to the local sector (US$2.7 million - 1.5% total cost). c. Comments on Project Cost, Financing and Dates Project costs of US$121 million reported at completion amount to only 66% of the total cost estimated at appraisal, but the ICR indicates that reported costs may not fully account for all final costs, especially since 238 of the 254 sub-projects intended at appraisal were financed through the project . More accurate and timely reporting would have allowed a more accurate estimate of final costs at completion . For this reason, not too much should be read into the fact that the Bank share of project financing rose from 57% estimated at appraisal to 83% at completion. More complete cost accounting would probably reduce this share . The project was completed on time, within the six years scheduled at appraisal. The Loan was 96% disbursed. US$4 million, intended for financing components (iii) and (iv) was cancelled. 3. Achievement of Relevant Objectives : (i) FEC was restructured and local investments are of better quality, since local governments are able to prepare and evaluate them more thoroughly. FEC itself introduced more rigorous criteria and eligibility requirements for allocating resources. (ii) There has been a radical improvement regarding VAT; instead of being used to cover local governments' current deficits as in the past, 70% of the VAT share with local governments is now formula -driven and the resources are used to finance investments . (iii) 238 sub-projects, including from solid waste, commercial facilities (e.g. souks and markets), roads, public facilities, water supply and sewerage, electrification and buses, were financed by the project throughout the country . (iv) Although not systematically quantified, ICR provides anecdotal evidence that some municipalities are now able to borrow from commercial banks and that these banks are now competitors to FEC . (v) Improved management systems have been achieved at two levels : (i) FEC now operates like a full-fledged bank; and (ii) local government management has become more rigorous in order to meet project eligibility criteria and in response to VAT incentives . 4. Significant Outcomes /Impacts : New "rules of the game" now apply to Morocco's local government sector, with greater responsibilities resting upon shoulders of local governments and a more rigorous regulation and supervision by FEC as an agency of central government. Success in putting into practice, methods and procedures learned but not applied under the earlier project (notably in sub-project evaluation and framing eligibility criteria ). Project has laid the ground-work for future efforts to deepen and broaden the market for municipal credit in Morocco. 5. Significant Shortcomings (including non -compliance with safeguard policies ): Project cost data and economic evaluation of project investments could be more thoroughly reported . Apart from better control, this would allow an accurate assessment of the efficiency with which the project achieved its objectives. The ICR makes clear that the component of TA to municipalities was not well designed . Key components conceived at appraisal--mostly training that was not implemented --were clearly redundant as far as the project's final ID impact was concerned . The government was unwilling to borrow for such expenses, when grant funds were available, notably through USAID . 6. Ratings : ICR OED Review Reason for Disagreement /Comments Outcome : Satisfactory Satisfactory Institutional Dev .: Substantial Substantial Sustainability : Likely Likely Bank Performance : Satisfactory Satisfactory Borrower Perf .: Satisfactory Satisfactory Quality of ICR : Satisfactory 7. Lessons of Broad Applicability : The development and improvement of an inter -governmental finance system is a necessary condition for decentralization. Establishing a good framework for intergovernmental finance and a hard credit culture are very big steps toward greater efficiency in local investment . Two key elements of an improved inter -govermental finance system are : (i) commercial bank-style of management; and (ii) the systematic application of eligibility rules governing financial transfers . Local government sector reform is a gradual process that requires sustained efforts over a period of time . This project's success was built upon the experience of an earlier pilot effort financed by the Bank (Loan 2272 approved in 1983) and laid the foundation for follow -on efforts (Loan 4231), thus involving three Bank-financed operations over a sixteen year period . 8. Audit Recommended? Yes No Why? In order to update project cost information and assess project efficiency and to learn more about the causes of the substantial ID achievements when ID /TA components were not implemented. 9. Comments on Quality of ICR : The ICR provides a satisfactory account of a successful project experience, and makes candid admissions of project weaknesses and lack of data (notably on costs). It provides good coverage of the many and broad topics relating to the project. If the lessons had been more forward looking, Section 8 of the ICR would have demonstrated how these lessons are being addressed in the future operation of this project itself and how they are relevant for similar projects elsewhere.