Morocco - Irrigation Based Community Development Project

Document of The World Bank Report No: 22002-MOR PROJECT APPRAISAL DOCUMENT ON THE PROPOSED ADAPTABLE PROGRAM LOAN IN THE AMOUNT OF YEN 3.8 BILLION (US$ 32.6 MILLION EQUIVALENT) TO THE KINGDOM OF MOROCCO FOR THE IRRIGATION BASED COMMUNITY DEVELOPMENT PROJECT IN SUPPORT OF THE FIRST PHASE OF THE IRRIGATION BASED COMMUNITY DEVELOPMENT PROGRAM April 30, 2001 Rural Development, Water and Environment Department Middle East and North Africa Region  CURRENCY EQUIVALENTS (Exchange Rate Effective March 28, 2001) Currency tJnit = MAD MAD I = US$ 0.09 US$1 = MAD 10.9 FISCAL YEAR January 1 - December 31 ABBREVIATIONS AND ACRONYMS AWUA/AUEA Agricultural Water Users AssociationAssociation des Usagers des Eaux Agricoles BP/PB Bank Procedure/Procedure de la Banque CMU/UGP Central Management Unit/Cellule de Gestion du Projet CRDCICRDR Core Rural Development Committee/Comite Restreint de Developpement Rural DHAW/DAHA Department of Hydro-Agricultural Works/Direction des Amenagements Hydro-agricoles EA/EE Environmental AssessmentlEvaluation Environnementale EC/CT Extension Center/Centre de Travaux EMP/PGE Environmental Management Plan/Plan de Gestion Environnementale GIFIIGF General Inspector of Finance/lnspecteur General des Finances GTK/TGR General Treasury of the KingdomlTresorerie Generale du Royaume IBCD/DRI-PMH Irrigation Based Community Development Program/Programme de Developpement Rural lntegre Centre sur la Petite et Moyenne Hydraulique IM/IME Implementation Manual/Manuel d'Ex&ution LSI/PAGI Large-Scale Irrigation ProjectVProjet d'Amelioration de la Grande Irrigation MARDWF/MADREF Ministry of Agriculture, Rural Development, and Water and ForestslMinistere de I 'Agriculture, du Dveloppement Rural et des Eaux et Forets MRPEIJDH/MATEUH Ministry of Regional Planning, Environment, Urban Development and HousingMinistere charge de lAmenagement du Territoire, de l'Environnement, de l'Urbanisme et de l'Habitat NCC/CNC National Coordinating Cornittee/Comite National de Coordination ND/DR National Director/Directeur National OP/DO Operational Policy/Directive Operationnelle PDA/DPA Provincial Department of Agriculture/Departement Provincial de l'Agriculture PlMRDC/C1PDR Permanent Intemuinisterial Rural Development Council ou Conunittee/Conseil ou Comiti Interninisteriel Permanent Charge du Developpement Rural PMU/UGP Provincial Management Unitl Unite de Gestion Provinciale PPT/EPP Participatory Programnming Team/Equipe de Programmation Participative RADA/ORMVA Regional Agricultural Development Authority/Office Regional de Mise en Valeur Agricole RBA/AB River Basin Authority/Agence de Bassin RC/CR Rural Cornmunity/Commune Rurale RDF/FDR Rural Development Fund/Fonds de Developpement Rural RWSP/PAGER Rural Water Sapply and Sanitation Project/Programme d'Approvisionnement Groupee en Eau Rurale SMl/PM.H Small and Medium Scale hrrigation/Petite et Moyenne H-ydraulique Vice President: Jean-Louis Sarbib Country Director: Christian Delvoie Sector Director: Doris Koehn Task Team Leader: Douglas W. Lister  MOROCCO IRRIGATION BASED COMMUNITY DEVELOPMENT CONTENTS A. Program Purpose and Project Development Objective Page 1. Program purpose and program phasing 3 2. Project development objective 3 3. Key performance indicators 3 B. Strategic Context I. Sector-related Country Assistance Strategy (CAS) goal supported by the project 4 2. Main sector issues and Government strategy 4 3. Sector issues to be addressed by the project and strategic choices 5 4. Program description and performance triggers for subsequent loans 5 C. Program and Project Description Summary 1. Project components 5 2. Key policy and institutional reforms supported by the project 6 3. Benefits and target population 7 4. Institutional and implementation arrangements 8 D. Project Rationale 1. Project altematives considered and reasons for rejection 13 2. Major related projects financed by the Bank and other development agencies 13 3. Lessons leamed and reflected in proposed project design 15 4. Indications of borrower commitment and ownership 15 5. Value added of Bank support in this project 15 E. Summary Project Analysis 1. Economic 16 2. Financial 17 3. Technical 18 4. Institutional 19 5. Environmental 19 6. Social 21 7. Safeguard Policies 21 F. Sustainability and Risks 1. Sustainability 22  2. Critical risks 22 3. Possible controversial aspects 23 G. Main Loan Conditions 1. Effectiveness Condition 23 2. Other 23 H. Readiness for Implementation 24 1. Compliance with Bank Policies 25 Annexes Annex 1: Project Design Summary 26 Annex 2: Detailed Project Description (Appendix - Eligibility Criteria for Project Investments) 30 Annex 3: Estimated Project Costs 39 Annex 4: Cost Benefit Analysis Summary 40 Annex 5: Financial Summary 47 Annex 6: Procurement and Disbursement Arrangements 48 Annex 7: Project Processing Schedule 61 Annex 8: Documents in the Project File 62 Annex 9: Statement of Loans and Credits 63 Annex 10: Country at a Glance 65 Annex 11: Project lmplementation 67 Annex 12: Govemment Letter of Development Program 82 Annex 13: Implementation Schedule - Phase 1 92 MAP(S) Irrigation Based Community Development Program/Programme de Developpement Rural lntegre Centre sur la Petite et Moyenne Hydraulique (IBRD 30945)  MOROCCO IRRIGATION BASED COMMUNITY DEVELOPMENT Project Appraisal Document Middle East and North Africa Region MNSRE Date: April 30, 2001 Team Leader: Douglas W. Lister Country Manager/Director: Christian Delvoie Sector Manager/Director: Doris Koehn Project ID: P056978 Sector(s): Al - Irrigation & Drainage Lending Instrument: Adaptable Program Loan (APL) Theme(s): Rural Development; Poverty Reduction Poverty Targeted Intervention: Y Program Financing Data- ... . ..... :Estim ated:. ... .... -AP LIndicative Financing Plan, Implementation Period' Borrowe-. ________ ~ ~ ~ ~ :.(Bank FY)-- - -- IBRD Others Total Commitment Closing ________ US$ m % US$ m US$ m Date Date APLI 32.57 76.8 9.83 42.40 05/3 112001 06/30/2006 Kingdom of Morocco Loan/ Credit ___ API-2 70.00 70.0 30.00 100.00 01/01/2006 12/31/2009 Kingdom of Morocco Loan/ C rediti_ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ APL-3 70.00 70.0 30.00 100.00 01/01/2010 12/31/2013 Kingdom of Morocco Loan/ C red it _ _ _ _ _ _ _ _ _ __ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ Total 172.57 69.83 242.40 _____ ____________ Project Financing Data [X] Loan j ] Credit ]Grant IJGuarantee ] IOther: For LoanslCredits/Others: Amount (US$m): 32.6 Proposed Terms: Variable Spread & Rate Single Currency Loan (VSCL) Grace period (years): 5 Years to maturity: 20 Commitment fee: 0.75% Front end fee on Bank loan: 1.00% Financing Plan: Source -Local': Frgn::ta BOR-ROWER 6.63 0.00 6.63 IBRD 24.12 8.45 32.57 LOCAL COMMUNITIES 3.20 0.00 3.20 Total: 33.95 8.45 42.40 Borrower: KINGDOM OF MOROCCO Responsible agency: MIN. OF AGRICULTURE, RURAL DEVELOPMENT, AND WATER & FORESTS  Direction des Amrnagements Hydro-Agricoles (DAHA) Address: Quartier Administratif, B.P. 607, Rabat Contact Person: M'hamed Guerdouh Tel: 212 (0)37 75 17 10 Fax: 212 (0)37 75 20 42 Email: NA Estimated disbursements (Bank FYIUS$M): FY~~ 2002 2003 ~~ 2004, 20 06 20 Annual 3.60 3.10 6.40 8.27 8.00 | 3.20 Cumulative 3.60 6.70 13.10 21.37 29.37 32.57 Project Implementation period: 5 years - Due to project start-up in FY01, however, retroactive fnancing cf up to Yen 380.0 million (10% of the Loan amount), equivalent to US$3.26 million, would be provided for eligible expenditures (mainly civil works contracts for which the Bank has given its "no objection") incurred after June 15, 2000, but not earlier than 12 months before loan signing. Expected effectiveness date: 09/15/2001 Expected closing date: 06/30/2006 -2 -  A. Program Purpose and Project Development Objective 1. Program purpose and program phasing: The proposed Irrigation Based Community Development Program (IBCD) would be an "entry point" for the implementation of the Moroccan Government's new "2020 Rural Development Strategy" which calls for a more participatory, integrated approach to rural development (see Annex 12 - Government Letter of Development Program). Under the leadership of the Ministry of Agriculture, Rural Development, and Water and Forests (MARDWF), which has been assigned the role of "champion" within the Government for the new strategy, the IBCD Program would seek to improve the incomes and quality of life of rural communities centered on small and medium irrigation (SMI) in 15 provinces over a 13-year period (2001-13), primarily through demand-driven, coordinated investments in SMI rehabilitation and improvement and complementary community infrastructure, including rural roads, water supply/sanitation, electrification, health and education facilities. Drawing on the budget of MARDWF for the SMI rehabilitation and improvement activities, which have already been launched in Azilal, and on the Rural Development Fund (RDF) under the Prime Minister for the complementary community infrastructure activities, the first phase of the IBCD Program (2001-06) would aim to pilot the new participatory, multi-sectoral approach for incremental rural development activities in selected SMI areas of three provinces (Azilal, Khenifra and Al Haouz). The second phase (2006-09) would seek to expand this approach to cover other rural development activities beyond those financed by the Program in selected SMI areas of a further six provinces (to be chosen). Phase Ill (2010-13) would further expand this approach to cover rural development activities outside the SMI areas in an additional six provinces. 2. Project development objective: (see Annex I) Reflecting the goals of the IBCD Program, the proposed first-phase Project (2001-06) would seek to improve the incomes and quality of life of rural communities centered on SMI in the provinces of Azilal, Khenifra and Al Haouz through investments in SMI rehabilitation and improvemnent and complementary community infrastructure. As a way of piloting the shift to the new demand-driven, integrated approach, additional resources from the Rural Development Fund (RDF) under the authority of the Prime Minister would be made available to the three provinces concerned to finance additional investments in complementary community infrastructure not covered by ongoing sectoral programs in accordance with the priorities of the rural communities, as expressed through a participatory programming process. Similar investments in SMI rehabilitation and improvement and complementary community infrastructure would be prepared on a participatory, multi-sectoral basis for the 6 additional provinces to be covered by the second phase. 3. Key performance indicators: (see Annex I) Progress toward the achievement of IBCD objectives would be measured through a participatory monitoring and evaluation system focusing on the following key performance indicators: (a) increases in fruit tree, vegetable, forage, cereal and other production as a result of the investments in SMI rehabilitation and improvement and adoption of new technology; (b) number of villages equipped with rural roads, water supply/sanitation, electrification, health and education facilities; and (c) extent of beneficiary participation and integration of sectoral programs, as reflected in the number of Participatory Programming Team meetings and Core Rural Development Committee meetings and the share of investments financed by the beneficiaries and rural communities. -3-  B. Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project: (see Annex 1) Document number: R97-2 Date of latest CAS discussion: 01/30/97 The proposed IBCD Program, of which the Project would be the first phase, would contribute tc the new CAS (presented together with this project) objective of reducing disparities between rural and urban areas and reducing rural poverty by: (a) improving incomes from small and medium irrigation; (b) improving access to basic economic infrastructure and social services. The project would also promote the CAS goal of greater decentralization of the planning, design and execution of rural programs and serviccs, but in an integrated way with close involvement of the beneftciaries. It would thus complement the prevailing, Bank-supported sectoral approach reflected, for example, in the Social Priorities Program (BAJ), Water Supply Program for Rural Populations (PAGER), Rural Electrification Program (PERG) and National Rural Roads Program (PNRR), and constitute a step in the direction of the integrated rural development advocated by the Bank's "Rural Development - Vision to Action" paper. 2. Main sector issues and Government strategy: After making relatively good progress in the late 1980s (real agricultural GDP growth of 4.0 % per annum from 1986-91, compared to population growth of 2.0 % per annum), rural sector growth and poverty alleviation deteriorated in the 1990s (real agricultural GDP growth of -5.6 % from 1991-2000 compared to +1.6% for overall GDP). An estimated 27% of the rural population, or 4 million people, liv, on less than US$1.00 a day. The main sector issues are: * An incentives framework which favors production of "strategic commodities" (mainly wheat and sugar) that can no longer provide the dynamism necessary for sustainable broad based growth and poverty reduction: for example, despite many years of heavy protection, cereal yields (1,113 kg/ha) are well below MNA regional and lower middle income country levels (1,341.4 and 2,097.5 kg/ha, respectively); * Lack of drought preparedness in a country which experiences recurrent droughts, with severe consequences for sector growth; * Social indicators in rural areas are similar to those for countries with much lower per capita incomes, and the gap between urban and rural living standards is great, contributing to growing rural exodus: for example, access to potable water is almost universal in urban areas, but only 42% in rural areas: access to electricity is 86% in urban areas, but only 16% in rural areas; illiteracy among 15-24 year olds is 15% in urban areas, but 61% in rural areas; * Untargeted food subsidies go mainly to better-off urban consumers, while social "safety net" programs are weak in rural areas; and * The country's traditionally centralized approach to rural development has provided little encouragement for local participation and cost sharing which are essential for sustainability. However, the Government is committed to addressing these issues, and has recently published a "2020 Rural Development Strategy." It has also established a Pernanent Interministerial Rural Development Council at the ministerial level and a Permanent Interministerial Rural Development Committee (PIMRDC) at the Secretary General level, with the Ministry of Agriculture, Rural Development, and Water and Forests (MARDWF) as Secretary, to guide implementation of the strategy, - 4 -  3. Sector issues to be addressed by the project and strategic choices: The proposed Project is a direct response to three of the above sector issues, namely: the gap in living standards between rural and urban areas; lack of drought preparedness; and the need for greater decentralization of rural development activities. Reform of the agricultural incentives and marketing framework, as well as the design of appropriate social "safety nets" for the potential losers from such reform, is being considered by the Government in the course of preparing an Action Plan to implement the "2020 Rural Development Strategy." 4. Program description and performance triggers for subsequent loans: The Irrigation Based Community Development Program (lBCD) is expected to be implemented in three phases, each involving a new set of provinces. The Project described in this PAD refers to the first phase of the IBCD Program, as does the Project Design Summary in Annex 1. Each new phase would be subject to an appraisal process aimed at evaluating its economic, financial, technical, institutional, environmental and social feasibility, as well as to leam from the experience gained during the implementation of the previous phase. This approach of "learning by doing" will allow for continuous adjustments to the Program design, early identification of risks, and the implementation of corrective measures before geographic coverage expands. The initial focus of the first phase of the Program, and thus of the triggers for Phase 11, will be evidence that the new institutional arrangements designed to achieve greater beneficiary participation and integration of sectoral programs through the Rural Development Fund (RDF) are being piloted successfully. For Phase 111, the focus will be on deepening to include other rural development activities beyond those financed by the RDF, as well as geographic expansion In order to help incorporate required adjustments, facilitate the appraisal process of each new phase and determine its appropriateness and readiness for integration into the Program, trigger indicators or milestones for Phases 11 and Ill have been defined in the Attachment to Annex 1. They would be assessed and measured as part of the monitoring and evaluation system and presented in the reports to be prepared for each phase. At negotiations, it was agreed that the Borrower will: (a) prepare and furnish to the Bank not later than June 30, 2004 a report describing the progress in the fulfillment of the actions referred to in the Program, including the attainment of the milestones agreed between the Borrower and the Bank and required to be reached as a prerequisite to initiate the second phase of the Program; and (b) review with the Bank, not later than December 31, 2004 the report referred to in (a) above, and thereafter take all measures required by the Bank to initiate the second phase of the Program. C. Program and Project Description Summary 1. Project components (see Annex 2 for a detailed description and Amnex 3 for a detailed cost breakdown): Over 5 years (2001-06), the proposed first-phase Project would consist of the following four components: - 5 -  t t;0 0 ; ~~~~~..;;;;::.... = : -06N 1. Rehabilitation of SMI - About Irrigation & 20.90 49.3 16.40 50.4 9,450 ha in total, of which 3,450 ha in Drainage Azilal and an estimated 3,000 ha each in Kheni.ra and Al Haouz 2. Complementary Community AD 13.34 31.5 9.90 30.4 Infrastructure - Additional rural road, water supply/sanitation, electrification, health and education facilities for the selected SMI areas not provided for by ongoing sectoral programs, financed by the RDF 3. Institutional Strengthening - Support Decentralization 5.87 13.8 4.40 13.5 for the participatory, integrated approach and for enhanced agricultural support services in the selected SMI areas, including environmental protection measures 4. Preparation of Phase 11 - Support for AD 1.97 4.6 1.55 4.8 participatory, integrated programming of SMI rehabilitation and complementary comrnmunity infrastructure in 6 additional provinces Total Project Costs 42.08 99.2 32.25 99.0 Front-end fee 0.32 0.8 0.32 1.0 Total Financing Required 42.40 100.0 32.57 100.0 2. Key policy and institutional reforms supported by the project: The Project would support implementation of the Government's recently published "2020 Rural Development Strategy," notably by promoting the "horizontal" integration of previously "vertical" sectoral programs on a demand-driven, participatory basis. This implies substantial decentralization of decision-making authority and flexible programming at the provincial level. - 6-  3. Benefits and target population: The SMI areas targeted for the first phase Project are home to some of the poorest people in Morocco who have historically benefited little from previous development initiatives. The target population consists of the roughly 58,800 inhabitants of rural communities with the potential to improve their livelihood from SMI in Azilal (26,700) Khenifra (17,700) and Al Haouz (14,400). Based on a number of indicators (agricultural income, population density, access to economic infrastructure and social services), Azilal is classified as a province with a low level of rural development, while Khenifra and Al Haouz are classified as average. In all three provinces, water supplies are uncertain, with floods in winter sometimes damaging the irrigation facilities (although under the Project, measures would be taken to guard against this with gabions, lining, etc.). There are also water shortages in summer. Most farms are small, and frequently fragmented into even smaller plots, often located on terraces. Irrigation efficiency is only 30-40%. The water users are often families who co-own a canal. It is around these SMI areas that the economic life of the community takes place. Activities include dairy cattle raising, animal fattening, artisanal activities and small-scale transformation of agricultural products. The SMI areas are also where most villagers live, and roads tend to serve these areas. These conditions explain why investment in SMI provides an opportunity to improve the entire economic and social life of the community. IFAD is financing a similar operation in parts of Al Haouz Province not covered by the proposed Project. Economic benefits would include: * increased household income and food security through the intensification and diversification of irrigated agricultural production; and * greater access to basic economic infrastructure such as rural roads, potable water supply/sanitation and electricity, and social services such as health and education. Social benefits would include: * decreased rural exodus as rural incomes and living standards improve; * improved participation and access of beneficiaries to decision-making processes and investment opportunities, enhancing ownership for project investments and their sustainability; and * increased organizational capacity for the rural communities involved and user groups, contributing to the formation of social capital. Environmental benefits. The SMI rehabilitation and improvement and institutional strengthening components are expected to lead to sustainable intensification of the agricultural production systems in the Project areas, resulting in less conversion of marginal lands for agricultural purposes and improved cultivation practices that would conserve soi} and water. Water points construction and quality monitoring are expected to improve access to reliable drSnking water and reduce the incidence of water bome diseases. Capacity building at the provincial level in environmental assessment procedures and the implementation of environmental management plans, based on the Environmental Assessment (EA) prepared by the Borrower - 7 -  and submitted to the Bank on February 20, 2001, are expected to avoid environmental damage in the Project areas. 4. Institutional and implementation arrangements: Project Coordination To the extent possible, project oversight and coordination would be carried out through existing institutions at the national and provincial levels, as follows: (a) At the national level: (i) the Permanent Interministerial Rural Development Council/Committee (PIMRDC); and (ii) the National Coordinating Committee (NCC) for the IBCD Program; and (b) At the provincial level: the Core Rural Development Committee (CRDC). * Permanent lnterministerial Rural Development Council/Committee (PIMRDC). The Project wculd enable the PIMRDC to consolidate its position as champion of integrated rural development prograrns. The Council, or the Secretary General level Committee attached to it, would receive for approval the IBCD reports which would be prepared at the beginning of the Project on the provinces chosen, including initial estimates of the program and the approximate amount of the investments likely to be proposed. It would also have the power to arbitrate in cases where a member of the provincial level Core Rural Development Committee (CRDC) is in serious disagreement with a decision of this body. The PlMRDC would undertake a technical/economic evaluation of the use of Project funds, including the procedures for dialogue with the beneficiaries and the operation of the CRDC. * National Coordinatiing Committee (NCC). This Committee would constitute a permanent technicaL sub-committee of the PIMRDC. The Department of Hydro-Agricultural Works (DHAW) would be the Secretariat of the NCC whose role would be to: (a) comment on and approve the indicative financial planning for the five years of the Project; (b) approve the "Guide to Integrated Programming;" (c) review each year the IBCD investment programs submitted by the provinces; (d) monitor the progress of the Project; (e) commission annual monitoring and evaluation reports on the project; and (f) at the closure of the Project, commission the completion report in order to prepare for Phase 11. * Core Rural Development Committee (CRDC). The members of the existing Provincial Technical Committee (PTC) most concemed with rural development would form a Core Rural Development Committee (CRDC). Presided over by the Govemor, this committee would be the prolongation of the PIMRDC at the provincial level, and would be primarily responsible for calling upon the Rural Development Fund (RDF) to finance the priorities of the rural communities not covered by ongoing sectoral programs. The Provincial Director of Agriculture (PDA) would be the Secretary of the CRD)C which would also be in charge of supervising the Participatory Programming Teams (PPT) designed to help the rural communities to formulate their requests in the form of an IBCD investment program anid to prepare an IBCD report which would be submitted to the provincial technical authorities and approved by the CRDC. Project Implementation Project implementation arrangements have been designed to incorporate two new dimensions: (a' beneficiary participation in the planning, design, execution and O&M&R of project works and equipment; and (b) integration of the various sectoral programs into a more coherent whole. Existing policies and procedures for SMI rehabilitation and improvement works are already "participatory" in that an Agricultural Water Users Association (AWUA) has to be formed in advance to collaborate in the design, - 8 -  execution and O&M&R of the works. Similar policies and procedures apply to rural water supply/sanitation works, so that under the Project the participatory approach would mainly affect the choice of other complementary community infrastructure investments (rural roads, electrification, schools and clinics). It will be important to take account of the experience of the Lakhdar Watershed Management Pilot Project (Ln. 44260-MOR), now in its second year of implementation, which clearly indicates the need for management and staff continuity and training in the participatory approach for all parties concerned, to achieve the behavioral changes required. Beneficiary participation is one of the cornerstones of the Government's new "2020 Rural Development Strategy" which calls for greater involvement by concerned populations in the planning and execution of rural development programs. It is based on the realization that the top-down approach has largely failed to instill a sense of ownership among the beneficiaries for project works and equipment which leads, in turn, to shortcomings in their O&M&R, ultimately compromising their sustainability. Following existing practice under the various sectoral programs, beneficiary participation also implies a significant contribution to the capital cost of Project works and a commitment to take over responsibility for their O&M&R. For SMI rehabilitation, a 10% capital contribution is normally required from the AWUA. For rural roads, the community is required to contribute at least 5% to the capital cost. For potable water/sanitation, the required capital cost contribution by the community and the beneficiaries is 20%. Integration of the complementary community infrastructure with the SMI rehabilitation and improvement works to be provided under the Project is not an end in itself, but rather the means to create a sense of ownership and the conditions for a sustainable improvement in incomes and living standards, following the priorities of the rural communities concerned. Integration is also a way for the Government to take advantage of synergy's (e.g., rural roads, water supply/sanitation and electricity coordinated with school building or clinic construction). As indicated above, the principal instrument for achieving beneficiary participation and integration of sectoral programs under the first phase Project will be the existing Rural Development Fund (RDF) under the authority of the Prime Minister. Following the precedent set by the recent drought relief effort, additional resources from the RDF will be made available to the provinces of Azilal, Khenifra and Al Haouz, to finance complementary community infrastructure determined in an integrated way in accordance with the priorities of the rural communities concerned, as expressed through a participatory process with the Participatory Programming Teams. As for Project coordination, project implementation would take place as much as possible through existing institutions at the provincial and local levels, as follows: (a) at the provincial level: the Participatory Programming Teams (PPT); and (b) at the local level: (i) the Extension Centers (EC); (ii) the rural communities (RC); and (iii) the Agricultural Water Users Associations (AWUA). * Participatory Programming Team (PPT). A PPT would be created for each province. It would report to the CRDC, and in its day-to-day management be responsible to the Provincial Director of Agriculture (PDA). Its main mission would be to assist the rural communities (RC) to formulate their requests in the form of an IBCD investment program for presentation to the CRDC. Each rural community's five-year investment plan will be an important input into this process, but should not be overriding, to allow the local population to freely express its views. The PPT would be made up of 3 PDA engineers, I staff each from the provincial branches of the Ministries of Equipment, Interior, Health and Education, as well as from the National Electricity Office, and I Social/Participation Specialist. It would be supported by a technical assistance team. -9-  * Extension Centers (EC). In each province, the lowest unit of the MARDWF field structure closest lo the farmers is the EC (Centres de Travaux, CI). After years of neglect, the ECs are sorely lacking itn qualified staff and equipment, but they do correspond roughly with the small rural regions to be developed under the Project, and thus constitute relatively homogenous programming zones. As a rule, they cover the areas where the traditional irrigation perimeters are clustered and where, as a result, the efforts of the technical services of the various ministries can be coordinated. lt is at the level of the EC that the IBCD investment programs would be aggregated and the decentralized data banks on the zores involved would be set up. The EC would be strenthened as required for this purpose. * Rural Communities (RC). As the basic unit of local Government in Morocco, the RC would have a key role toplay in the planning and execution of the Project. With the help of the Extension Centers, each RC would prepare an 1BCD investment program covering the SMI rehabilitation and improvement and complementary community infrastructure which it would like to have financed under the Project. After approval by the CRDC, this program would be the basis for a "partnership agreement" between the RC and the provincial administration. * Agricultural Water User Associations (AWUA). AWUAs would be created for all the SMI perimeters covered by the Project according to the provisions of Law 2/84. They would participate ir the design and execution of the rehabilitation and improvement works, and would take over responsibility for O&M&R. As each province comes on stream, the participatory programming, consultations and execution of rural development activities in the selected SMI areas would go through the following three phases (see Annex 13: Implementation Schedule - Phase 1): * Participatory Programming. This would be implemented at the provincial level by the PPT, backed up by technical assistance as appropriate. Over a period of approximately one year, the following activities would be undertaken: - Definition of the RC to take part in the Project, and an initial estimate of the investments to te carried out. - Based on a participatory planning process, identification of the needs of the concerned RCs without predetermination of the sectoral breakdown. - Establishment of the RC's IBCD investment programs, accompanied by a general feasibility study covering the entire project area. * Consultations. This would take place in three stages: - Meeting of the CRDC to consider the report of the PPT. - Meeting of the PIMRDC at the central level to approve the broad outline of the provincial programs. - Meetings between the CRDC and local elected officials to discuss the IBCD investment programs and translate them into partnership agreements. * Execution. The various components of the Project would be carried out by the different line ministry - 1 0 -  departments concerned following the usual policies and practices of the sectoral programs. For the SMI component, this phase would consist of the following stages: - formation of the Agricultural Water User Association (AWUA) - technical studies of the irrigation network (I year on average); and - execution of the works (2 years on average). To help guide implementation of the required behavioral changes, it was agreed at negotiations that the Borrower will prepare an Implementation Manual (IM) under terms of reference and guidelines agreed with the Bank, and submit it to the Bank within 6 months of loan signing. Project Management Since MARDWF will be responsible for the Project, it will be administratively attached to the Department of Hydro-Agricultural Works (DHAW) in the Ministry. At negotiations, it was agreed that a new Central Management Unit (CMU) for the Project will be established within DHIAW by December 31, 2001. The Director of DHAW will be designated National Director (ND) for the Project. The ND will be assisted by two Engineers, a Financial Management Specialist, an Environmental Specialist and a Monitoring and Evaluation Specialist. At the provincial level, the Provincial Director of Agriculture (PDA) will be responsible for the management of the Project within the province, and will be designated Provincial Director (PD) for the Project. To assist the PD, a new Provincial Management Unit (PMU) will be set up, including an Accountant. Procurement Procurement under the Project would be in accordance with the Guidelines for Procurement under IBRD Loans and IDA Credits, dated January 1995, revised in January 1999, using standard bidding documents and contract forms agreed with the Bank. Consultants would be selected in accordance with Bank's Guidelines on the Selection of Consultants, dated January 1997 and revised in September 1997 and January 1999, using standard contract forms agreed by the Bank. See Annex 6 for details. Disbursement To facilitate project start-up in 2000 and 2001, the Bank has already given its "no objection" to a number of civil works contracts. Other project activities are also planned between now and the anticipated date of loan signing in mid-June 2001. Retroactive financing for eligible expenditures within the limit of 10% of the loan amount (Yen 380.0 million, equivalent to US$3.26 million) would therefore be provided to help cover project expenditures between June 15, 2000 and the anticipated date of the loan signature of June 15, 2001 (but not earlier than 12 months before loan signing). The Borrower would establish a Special Account (SA) in MAD with the Treasury. The authorized allocation would be limited to MAD 24.0 million, representing about 4 months of estimated disbursements from the IBRD loan. Initially, the allocation would be limited to MAD 15.0 million, while the full allocation could be claimed when disbursements reach Yen 8.0 million. Full documentation for expenditures under contracts requiring the Bank's prior review will be submitted with the corresponding application. Disbursements for goods contracts below US$300,000, - 11 -  works contracts below US$500,000 and services contracts and training below US$ 100,000 for consulting firms and US$50,000 for individual consultants would be made on the basis of Statements of Expenditures (SOE). Documentation to support these expenditures would be maintained by the DHAW and made available for review by the Bank supervision missions and project auditors. Financial Management The Financial Management System (FMS) in place in the MARDWF in general and DHAW in particular is based on the principles and procedures defined by the legal framework applicable to the pubic sector administration and more specifically to governmental institutions. DHAW maintains an accounting system on a cash basis and the outline of budget components according to the provisions of the Public Accounting Law. The management information system allows an acceptable monitoring of operational activity. Although satisfactory overall, the existing financial management system should be improved in order to handle the specific requirements of the Project (coordination with other agencies involved), to fieet Bank requirements and to achieve the required efficiency. The Borrower will carry out a time-bound Action Plan acceptable to the Bank for the strengthenling of its financial management system for the Project in order to enable it not later than 12 months after lo;n effectiveness to prepare quarterly Project Management Reports acceptable to the Bank. Financial management arrangements for the project are detailed in Annex 6 and summarized below. Accounting and Financial Reporting. As indicated above, a new Central Management Unit (CMU) would be established within DRAW. As head of the (CMU), the National Director (ND) will maintain acceptable project accounts with the assistance of a Financial Management Specialist. This team will ensure the issuing of annual project financial statements and quarterly Project Management Reports (PMR) acceptable to the Bank, as well as their submission to the Bank and to the auditors. Procedures lor accounts and financial reporting, as well as internal control mechanisms specific to the project aimed at meeting Bank requirements, would be developed by the Financial Management Specialist. Audit. At negotiations, it was agreed that the Borrower would have the records, accounts and annual project financial statements, special account and statements of expenditure audited by independent auditors in accordance with auditing standards acceptable to the Bank, namely international standards on auditing as issued by the International Federation of Accountants, the Bank's Guidelines (Financial, Accounting, Reporting and Auditing Handbook, FARAH) and specific terms of reference acceptable to the Bank. It was further agreed that, on an exceptional basis, the Bank considers the General Inspector of Finance (GIF) to be an acceptable auditor. He will express a professional opinion on the annual project financial statements, special account and statements of expenditure, and submit to the Bank an annual audit report as soon as possible after the end of the fiscal year, but not later than six months. Disbursements. Disbursements from the Bank loan will be initially made using the traditional method (reimbursements with full documentation and against Statements of Expenditure - SOEs, and direct payments). The Government could opt for PMR-based disbursements after the assessment of the financial management system, which aims at ensuring that this system is operating satisfactory. This assessment will be completed no later than September 30, 2002. - 12 -  Monitoring and Evaluation/Progress Reports/Supervision At negotiations, it was agreed that, within 12 months of loan signing, the Borrower will prepare and submit to the Bank a participatory system for monitoring and evaluating all aspects of the project, including environmental activities, under terms of reference and guidelines agreed with the Bank. On this basis, the PDAs of Azilal, Al Haouz and Khenifra, with input from the beneficiaries, will monitor and evaluate implementation of the Project on an ongoing basis in accordance with the indicators given in Annex I and the main features of the environmental mitigation plan as described in section E5, and submit half yearly progress reports to the Bank. The project will be supervised at least twice yearly by Bank teams which will include an Environmental Specialist. Mid-Term Review At negotiations, it was further agreed that the Borrower will: (a) maintain an adequate monitoring and evaluation system, including environmental indicators; (b) by June 30, 2003, prepare an implementation review report on progress achieved to date and the measures required to successfully complete the project, including a specific review of the institutional and financial set-up, especially the workings of the RDF, notably the choice of managers of RDF funds at the provincial level, if applicable; and (c) by December 31, 2003, review the report with the Bank. D. Project Rationale 1. Project alternatives considered and reasons for rejection: The Project was originally designed as a "vertical" sectoral operation (SMI-3), but this was rejected because on the contrary the Government's new "2020 Rural Development Strategy" emphasizes the advantages of the participatory, integrated approach, to strengthen local ownership and effectiveness. Hence the Project will develop and test new institutional arrangements at the provincial level to promote the "horizontal" integration of the previous "vertical" programs of the different sectoral ministries into a coherent whole which reflects the needs and aspirations of the local population. 2. Major related projects financed by the Bank and/or other development agencies (completed, ongoing and planned). - - - - - ~~Latst Supri-sjon-- 'Se us: Projct - PSR) Rat -n- _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ (~ a n -fln n c.d proj.cta. O nly). Implementation Development Bank-financed Progress (IP) Objective (DO) (a) COMPLETED irrigation, drainage, rural First Small & Medium Scale S S infrastructure, rural development and Irrigation (Loan 2253-MOR) participatory management - 13 -  irrigation, drainage, rural Second Small & Medium Scale S S infrastructure, rural development and Irrigation (Loan 2954-MOR) participatory management Improving living conditions in rural Second Rural Electrification S S areas through electrification and rural Project (Loan 3262-MOR) development following a participatory approach Improved natural resource management Second Forestry Project (Loan S S through better planning, forest 3156-MOR) regeneration, watershed management and range management (b) ONGOING Core needs of rural poor by improving Secondary, Tertiary and Rural U S access to social services and markets Roads Project (Loan through road construction, rural 3901 -MOR) development and participatory management Social and rural development, poverty Rural Water Supply and S S alleviation and participatory Sanitation (PAGER) Project management (Loan 42540-1-MOR) Community based natural resource Lakhdar Watershed U S management Management Pilot Project (Loan 4426-MOR) Access to basic education, health and Social Priorities Program (Loan S S public works employment in 14 Nos. 40250, 4025A, 4025S) provinces (BAJ) Protected areas management and Protected Areas Management S S participatory conservation of (GEF) ecosystems Other development agencies (a) European Union Natural Resource Management (b) Kreditanstalt fMr Wiederaufbau Participatory Natural Resource (Germany) Management Small Scale Irrigation Rehabilitation (c) Agence Francaise de Developpement Small and Medium Scale (France) Irrigation - 14 -  (d) UNDP Integrated and Participatory Rural Development IP/DO Ratings: HS (Highly Satisfactory), S (Satisfactory), U (Unsatisfactory), HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design: The proposed project would build on past experience with rural development programs which indicate that flexibility and grass-roots, demand-driven approaches are key in building ownership, defining local priorities and laying the foundation for better implementation and sustainability. The following main lessons can be drawn from these programs: * the top-down "integration" of rural roads, water supply and other socioeconomic infrastructure with agricultural projects during the 1 980s (Fes-Karia-Tissa, Loukkos, Moyen Atlas and Oulmes Rommani) proved unsustainable, due mainly to inadequate counterpart funds and limited beneficiary commitment; * community-based, demand-driven approaches have had mixed success in the promotion of rural infrastructure and social investments because of excessive involvement of local authorities; consequently, it is important that MARDWF and the other Ministries only provide the required technical support, do not interfere in community organization and decisions and do not try to take over infrastructure O&M&R, productive tasks or commercial functions from the beneficiaries; * investment decisions by municipalities tend to favor investments with political impact; and * the current budget process is highly centralized and not conducive to community driven development. The proposed project would address these issues by: (a) establishing a participatory process for the beneficiaries to express their priorities and see that they are implemented; and (b) making available to the participating provinces additional resources from the Rural Development Fund (RDF) to be used flexibly to respond to the incremental needs of the beneficiaries in an integrated way. 4. Indications of borrower commitment and ownership: * The project is the first concrete manifestation of the Govemment's new "2020 Rural Development Strategy" which has strong political support at the highest level. * Through the Second Small & Medium Scale Irrigation Project (SMSI-2), which preceded the proposed operation, and the Lakhdar Watershed Management Pilot Project, MARDWF has been piloting the IBCD program's basic principles, in particular by stimulating community initiatives, ensuring involvement of smallholders and sustaining interest, commitment and participation. * The recent severe drought has raised awareness of the need for sustainable investments in SMI rehabilitation and improvement. * The Borrower has submitted a Letter of Development Program describing the overall objectives of the IBCD Program and means of achieving them, as required for all APLs (see Annex 12). 5. Value added of Bank support in this project: * Morocco was selected as a "Focus Country" under the Bank's "Rural Development - Vision to Action" program and substantial sector work was completed. * Bank support provides continuity to the Government in implementing its long-term national rural development strategy which it also helped design, and may facilitate the involvement of other donors in - 15 -  later phases of the Program; * Having acquired considerable experience in Morocco and around the world in community participation and operations dealing with integrated rural development, and recently championed community driven development, the Bank can facilitate access to information and advisory capacity on design and implementation issues and lessons learned with comparable projects; and * The new APL lending instrument provides greater flexibility in dealing with client needs and local conditions as they evolve. E. Summary Project Analysis (Detailed assessments are in the project file, see Annex 8) 1. Economic (see Annex 4): * Cost benefit NPV=US$3.24 million; ERR = 13.5 % (see Annex 4) O Cost effectiveness O Other (specify) Since detailed design has only been carried out so far for Azilal , this analysis is based on that province. However, similar results are expected for Khenifra and Al Haouz. A cost-benefit analysis was carried out to estimate the Net Present Value (NPV) and Internal Rale of Return (IRR) of the irrigation agriculture components in the province of Azilal. First, financial flows were calculated for both the "with" and "without" project scenarios. Then, conversion factors were estimated and used to translate the financial flows into economic values, and the economic NPV and IRR were estimated. No residual values were included in the analysis. The period of analysis is 30 years. Based on the Bank norm for projects in Morocco, a 10% discount rate was used. The benefits quantified in the analysis are the incremental value of agricultural production. They materialize in three ways: (i) a slight increase in the cultivated area; (ii) increase in yields; and (iii) a shift from low-value crops, basically cereals for home consumption, to higher value crops, such as fodder for livestock and fiuits and vegetables to be sold on the local markets. These benefits are made possible by the combination of several factors: (i) the rehabilitationlmodernization of irrigation infrastructure with the result of improving water use efficiency, equity and reliability; (ii) the transfer to and adoption by farmers of improved farming and irrigation practices; and (iii) a better access to input and output markets through the improvement of rural roads. All these aspects are ensured by different components of the project. Accordingly, the costs included in the analysis are: (i) the investment costs for the rehabilitation and improvement of irrigation infrastructure; improved rural roads; agricultural development and the beneficiary participation and integration process; (ii) the incremental costs of crop production stemming from the increase in the amount of inputs applied (labor, water, pesticides, fertilizer and improved seeds); and (iii) the incremental recurrent costs for irrigation infrastructure, rural roads and support services to farmers. A sensitivity analysis was carried out to deternine the robustness of the NPV and IRR to changes in key variables, with the following results which confirm the economic soundness of the Project: - 16 -  Base case scenario 13.5% Sensitivity Analysis - Reduction of IO% in agricultural production value 11.8% - Increase of I10% in agricultural production value 15.1% - Increase of 10% in capital costs 12.4% - Increase of 10% in total costs 12.4% - Decrease of 10% in agricultural production value and increase of 10% in total costs 10.7% The detailed economic analysis is contained in Annex 4. 2. Financial (see Annex 4 and Annex 5): NPV=US$ million; FRR = % (see Annex 4) Farmers' financial benefits. The main financial benefit accruing to farmers is the increase in revenue stemming from intensification and to a lesser extent, diversification towards higher value crops. On the other hand, production costs are increased by a higher use of inputs (work for land preparation and crop management, pesticides and fertilizers and use of improved seeds). Accounting for these factors, average net income per ha on the area under perennial irrigation would increase by 60% over a 10 year-period, or by an additional 6,800 MAD/ha (prior to payment of O&M charges). An average farm holding is about 5 ha out of which less than 1 ha is irrigated. Almost all farmers own the land they cultivate; therefore cost-sharing between the owner of the land and tenant/sharecroppers is not a major issue. Incrementalfarm incomes per ha of equipped irrigated land under perennialflow - constant prices Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Year 8 Year 9 Year 10 MAD 0 296 962 2068 3474 3308 4190 4794 5695 6838 1 1% I