Morocco - Information Infrastructure Sector Development Loan Project

Document of THE WORLD BANK FOR OFFICIAL USE ONLY Report No. P-7451-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMMENT TO THE EXECUTIVE BOARD OF DIRECTORS ON A PROPOSED INFORMATION INFRASTRUCTURE SECTOR DEVELOPMENT LOAN IN THE AMOUNT OF US$65 MILLION TO THE KINGDOM OF MOROCCO April 16,2001 Finance, Private Sector and Infiastture Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the perfbrmance oftheir official duties. Its contents may not otherwise be disclosed without World Bank authorizatioaL  Curresiy and Excdawn Rakt (as of March 28,2001 ) Currency Unit = Dirham (MUAD) US$1.00 = MAD 10.9 FiSCAL YEAR July I - June 30 ABBREVIATIONS AND ACRONYMS AFDB African Development Bank ADM Societt des Autoroutes du Maroc Al Alternative Infrastructures ANRT Agence Nationale de Reglementation du Secteur des TMlecommunications AOL Administration on line BAJ Barnamaj al Aoulaouiyat al Ijtimaiya (Social Priority Program) BAM Barid Al-Maghrib (the postal operator) CAS Country Assistance Strategy CCP Comptes Cheques Postaux CDG Caisse de Dipot et de Gestion CEN Caisse d'Epargne Nationale CMU Country Management Unit CTF Consultant Trust Funds EU European Union FDI Foreign Direct Investment GIPE Gestion Integree du Personnel de I 'Etat GDP Gross Domestic Product GMPCS Global Mobile Personal Communications System GOL Government on line GOM Government of Morocco GPCS Global Personal System for Mobile Communications GSM Global System for Mobile Communications IAM ItissalatAl-Maghrib (the incumbent telecommunications operator in Morocco) ICT Information and Communication Technologies IDA Interchange of Data between Administrations IDF Institutional Development Fund IFC International Finance Corporation INPT Institut Nationai des Posies et Telhicommimications IIS Information Infrastructure Sector IISDL Information Infrastructure Sector Development Loan IMF International Monetary Fund IPO Initial Public Offering IT Information Technology MAD Moroccan Dirhams MSPP Ministere du Secteur Public et de la Privatisation OED Operation Evaluation Department ONCF Office National des Chemins de Fer ONE Office National de l 'Electricite ONPT Office National des Postes et Telecommunications PA Public Administration PBAX Private Branche Automatic Exchange PHRD Policy and Human Resources Development PTO Public Telecommunications Operator SEPTI Secretariat d'Etat Charge de la Poste et des Nouvelles Technologies de lI 'nformation TA Technical Assistance TPI-SAL Telecommunications, Post and Information Technology Sector Adjustment Loan UNCITRAL United Nations Commission on International Trade Law USAID United States Agency for International Development VAS Value-added Services VSAT Very Small Aperture Terminal WTO World Trade Organization Vice President: Jean Louis Sarbib Country Director: Christian Delvoie Sector Director: Emmanuel Forestier Task Team Leader: Clemencia Tonres  FOR OFFICIAL USE ONLY KINGDOM OF MOROCCO INFORMATION INFRASTRUCTURE SECTOR DEVELOPMENT LOAN TABLE OF CONTENTS Loan Summiary I. INTRODUCTION 1 H. POLMCAL AND ECONOMIC CONTEXT 2 A Political Context 2 B. Recent Economic Performance 2 C. Economic Outlook Fimcncing Requirements, and Risks 4 Ill. REFORM PROGRAM IN THE 1NFORMATION INFRASTRUCTURE SECTOR 5 A. Government's Strategy 5 B. Poverty Impact of the Reforms in the Information Infrastructure Sector 6 C. Progress to Date 6 D. Reform Agenda 7 E. BankStrategy 11 IV. THE PROPOSED LOAN 12 A Loan Rationale and Country Assistance Strategy 12 B. Loan Objectives andActions to be taken prior to the Board 12 C. Technical Assistance 13 D. Fiscal Impact of the Reforms 14 E Disbursement andAuditing 14 . Cofinancing 15 G. EnvironmentalAspects 15 H. Social Aspects: Program Objectives and Poverty Category 15 I Monitorable Indicators 15 J Benefits andRisks 16 V. RECOMMENDATIONS 17 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not be otherwise disclosed without World Bank authorization.  KINDGOM OF MOROCCO INFORMATION UNFRASTRUCTURE SECTOR DEVELOPMENT LOAN TABLE OF CONTENTS ANNEXES Annex I Letter of Sector Development Policy Annex II Matrix of Policy Objectives And Actions Annex III Key Information Infrastructure Program Milestones (2000 - 2002) Annex IV Key Sector Data: Information Infrastructure Sector Overview Annex V Monitorable Indicators Annex VI Fiscal Impact of the Reforms Annex VII Timetable of Key Processing Events Annex VIII Status of Bank Group Operations in Morocco: Operations Portfolio Annex IX Key Macroeconomic Indicators Annex X Morocco at a Glance Annex XI Map of Morocco TEXT FIGURES AND TABLES Table ll.1. Morocco - Financing Plan Table 111.1. TPI-SAL Indicators Table IV. 1. Monitorable Indicators This report is based on the work of missions to Morocco during July 1999 to March 2001. The mission team comprises: Clemencia Torres (Task Team Leader) (LCSFE, since October 2000); Pierre Guislain i(PSAEU), Paolo Zacchia, Karim El Aynaoui, Amine Khene (MNSED); Carlo Maria Rossotto, JUrgen Lohmeyer, Isabelle Andress, Catherine T. Doody (CITPO), Lorenzo Savorelli, Leila El-Hafi (MNSIF) and Bjorn Wellenius (consulant). Maude Jean-Baptiste (MNSIF) contributed to the editing of the document. Nicole Wautiez de Blaye translated the main document into French.  KINGDOM OF MOROCCO INFORMATION INFRASTRUCTURE SECTOR DEVELOPMENT ADJUSTMENT LOAN LOAN SUMMARY Borrower: Government of the Kingdom of Morocco Amount: US$65 million equivalent, including a standard front-end fee of I per cent, to be made available in a single tranche upon loan effectiveness. Terms: Fixed Spread loan in US$ with a commitment-linked schedule, and a 20 year final maturity, including an 8 year grace period. Disbursement is expected to take place upon effectiveness of the loan. Objectives: The proposed Information Infrastructure Sector Development Loan (IISDL) is designed to achieve three main objectives: (1) to support the Government's program to deepen market liberalization, increase private participation, extend services and strengthen the regulatory environment of the telecommunications sector; (2) to assist the Government in the formulation and implementation of a strategy for the use and development of information technologies; and (3) to formulate a national strategy for the postal sector, including the financial services provided through the postal network, which will serve as a basis for further specific reforms. Description: The IISDL supports a wide range of actions in the telecommunications, information technology and postal sectors, outlined in section IV.B, in Annex I (Letter of Sector Development Policy) and in Annex II (matrix of policy objectives and actions). Benefits: The development of a modern and diversified information infrastructure will have a positive impact on private sector development and economic growth, thus contributing to poverty reduction. Extension of communication and postal financial services to remote, mainly rural areas will improve the living standards of the rural population thereby reducing the urban/rural gap. Risks: The main risks associated with the implementation of the Government program include: (a) a possible slow down in the introduction of effective competition in the telecommunications sector (fixed line voice services); (b) weak institutional capacity to design and implement reforms, specially in the IT and postal sector; (c) challenges to the regulatory agency's autonomy and its capacity to perform efficiently, (d) delays in the elaboration and adoption of a new legal and regulatory framework in the postal sector; and (e) insufficient coordination among ministries for the development of IT-based initiatives. Risk mitigation:. The results already achieved by the Government, notably the successful privatization and issuing of the second GSM license, which led to lower tariffs, increased access to telecommunications and significant capital inflows, represent the best protection against a possible po!icy setback. In addition, the Bank team will maintain a continuous dialogue with all parties concerned. Furthermore, the African Development Bank (AFDB) two-tranche operation will provide additional leverage to monitor the implementation of subsequent reforms in 2001-02.  Poverty Category: The loan supports a program of targeted intervention aimed at facilitating the access of poor peri-urban and rural areas to a modern means of information and communication services, as well as to basic financial services provided through the postal network. ii  I. INTRODUCTION 1. Morocco is at the forefront of the liberalization reforms in the telecommunications, postal and information technology sectors in the MENA Region. The Government's program of market-oriented policies and regulatory capacity building in telecommunications has transformed the sector in less than three years. The introduction of competition in the mobile market was an unmitigated success. In a single year, prices dropped four times, the number of mobile customers grew by over 2 million, capital inflow surpassed US$1.3 billion and 20,000 new jobs were created. Private participation was introduced in several market segments as the competent independent regulator, Agence Nationale de Reglementation des T6lecommunications (ANRT) awarded several licenses to VSAT and GMPCS operators. In 1999, the Bank supported this program through the Telecommunications, Post and Information Technology Sector Adjustment Loan (TPI-SAL), now fully disbursed.] Building on these achievements, Morocco recently introduced a second phase of reforms aimed at bringing the benefits of the information and communication revolution to a larger share of its population, in particular low income groups, and at establishing the foundation for a knowledge-based economy. This program, supported by the proposed IISDL, includes three components: (a) further liberalization of the telecommunications market and the privatization of the incumbent operator through a transparent and competitive tender; (b) the implementation of a strategy for broadening the use and access of information technologies; and (c) the formulation of a national strategy for the postal sector, including postal financial services. 2. The IISDL was originally designed in 1999, jointly with the AFDB, as a US$100 million two- tranche operation. Balancing the Government request for further Bank support in a sector where its performance has been very good with the overall fiscal triggers of the base case program being advocated by the new CAS was a delicate question. It was decided to restructure the operation as a one-tranche loan, to reduce its size, and to present it jointly with the CAS. This decision is predicated upon (i) Morocco's substantial sector achievements underpinned by a strong policy dialogue with the Bank; (ii) the new avenue for economic development that ICT offers in terms of growth, job creation and potential to reduce exclusion by extending access to communication services to remote areas and low-income groups at an affordable cost; and (iii) the quality benchmark and demonstration effect that the reform program in the ICT sector has had throughout the MENA region and beyond. While the operation has been redesigned as a single-tranche loan, it maintains its original purpose of supporting the reform program of the Government in the IIS, as defined in the Sector Development Policy Letter of May 2001 (Annex II). The AFDB has maintained the two tranche structure and the original amount of its loan (US$ 100 million equivalent), with a first set of actions and policies identical to those supported by the IISDL, and a second tranche supporting actions and policies that are fully consistent with the overall Government reform program agreed with the Bank. Finally, the proposed operation will enable the Bank to continue a dialogue in the area of ICT applications, notably in postal modernization, and E-Government which is expected to lead to the preparation of follow-up operations, consistent with the new CAS. i The US$10 Imillion TPI-SAL was approved by the Board on May 12, 1999 (Reort No P-7265-MOR and SeM2000-734). The second tranche of US$50 million was released on December 20,2000.  II. POLITICAL AND ECONOMIC CONTEXT A. Political Context 3. Morocco's political context has undergone a phase of extraordinary opening during the past three years, with important potential effects on development policies. In September 1997, the Hlouse of Representatives was elected by universal suffrage for the first time, as called for under the new Constitution of 1996. Following the elections, late 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. This Government marks the first time in independent Morocco's 42-year history that the historical opposition has had the opportunity to govern. Following a limited reshuffle in September 2000, which inter alia brought a new secretary of state for p)ost and information technologies and saw the absorption of the privatization ministry into the ministry of finance, Mr. Youssoufi's Government is generally expected to remain in office until the next legislative cilections in 2002. 4. Political democratization and modernization have been gaining further momentum since Mohammed VI's accession to the throne in July 1999. The new King has strongly stressed social, poverty, governance and gender issues in his speeches, as well as the need for 'a new concept of authority' based on the rule of law, and on a public administration supporting development rather than maintaining tight control on society. These are precisely the huge challenges the Government is f-acing in its pursuit of policies aiming at strengthening economic growth and fostering social development while maintaining a sound macroeconomic framework. In this context, foreign investment and the opening of Morocco to information technologies will be crucial to a successful program of economic restruicturing, liberalization and trade opening that should lend to faster growth, that would in turn reduce unemployment, social disparities, and poverty. 5. The Government's general economic and social program combines: (i) commitment to maintain a stable macroeconomic framework, and current policies that ensure a satisfactory degree of short-term macroeconomic stability, (ii) reforms to improve public sector performance and promote administrative decentralization; (iii) economic and social reforms that have achieved clear progress on access to basic social services, an acceleration of rural infrastructure development, and an active partnership of the Government with civil society; and (iv) measures to harness the potential for private-sector-ledl growth including the liberalization of the financial markets, reforms in the customs and tax administration, establishment of commercial courts, adoption of competition laws, and introduction of private participation in many infrastructure sectors. The liberalization and privatization of the telecommunications sector has brought a windfall of license and privatization revenues. The way the Government uses these resources will, to a great extent, determine its future prospects. The services sectors, however, such as tourism and information technologies, are emerging strengths, showing great potential for diversifying Morocco's economic structure in the years ahead. B. Recent Economic Performance 6. Starting in 1983, and triggered by external financing pressures, Morocco implemented a forceful adjustment program that implemented deep structural reforms, cut the fiscal deficit, devalued the Dirham, and liberalized trade. Growth was driven by a very good performance of agriculture, and by a diversification of the country's exports, with a strong surge in manufacturing goods. Total exports expanded at an impressive 15 percent per year in dollar terms over the period This performance enabled 2  Morocco to make encouraging progress towards poverty reduction, with the poverty incidence decreasing from 21 to 13 percent of total population between 1984/85 and 1990/91. 7. But, whereas GDP grew at an annual average rate of 4.4 percent during the second half of the 1980's, it dropped to well below 2% p.a. in the 1990's. This slower economic growth and the drought- induced rising volatility translated into decreasing private consumption, and in turn into an increase in poverty, that soared to 19% of total population in 1998/99. While the slowdown in economic growth was partly driven, directly or indirectly, by the situation in agriculture, non-agriculture GDP growth also slowed down: the trend of non-agriculture GDP growth was roughly 3 percent in the 1990's. 8. Stabilization has remained a paramount objective of economic policy. It has been by and large successful, and allowed Morocco to regain strong international credibility. As a result, in the 2nd half of the 1990s, Morocco has kept inflation under 3 percent p.a. and the current account deficit at around 1 percent of GDP, and further reduced central Government external debt below 40 percent of GDP by the end of 2000. However, despite the pursuit of a prudent fiscal policy, fiscal management remains more constrained than suggested by the deficit figures that, until recently, remained in the range of about 3 percent of GDP.2 Consequently, the underlying fiscal problems have started to surface, and have translated into much higher deficits in the 2000 and 2001 budget laws. In 2000 (annualized), the budget deficit is estimated to have reached a record level of 6.4 percent of GDP. Due to the delay in the privatization of IAM Telecom, the debt creating deficit increased from less than 1 percent of GDP in 1999/00 to 6.4 percent in 2000. 9. Structural reforms have continued to be implemented but with less momentum than in the late 1980s. Private participation in infrastructure has been promoted much more forcefully and recently, privatization picked up remarkably with the partial sale of IAM. However, a recent private sector survey suggests that administrative procedures remain the main constraint impeding business development. The unfinished agenda of structural reforms remains in any case substantial. There remains an important portfolio of public participation in 700-odd enterprises, and very large public groups or conglomerates. Trade liberalization has clearly lost pace since the turn of the 1990s, with protection typically remaining at 30-35% for one-third of non-agricultural imports. It was recently revived through the Association Agreement with the EU, now in force, and the conclusion of several international trade treaties with other Arab countries. 10. In the balance of payments, the current account deficit improved to 0.4 percent of GDP in 1998 (from 1.7 percent in 1996), reflecting faster growth in phosphate and re-exports, and slower growth in imports. Despite slow exports growth and an acceleration of imports, the current account deficit remained well below 1 percent of GDP in 1999. Morocco's external position has remained sound in 2000, despite a significant deterioration in the trade balance mainly driven by unfavorable terms of trade developments resulting from rising oil prices, subdued export performance, and the growing structural effect on imports of the tariff reduction under the partnership agreement with the EU. As a result, and despite substantial tourism receipts and migrant transfers, the current account deficit is estimated to have grown to 2.5% of GDP in 2000. In the meantime, external financing needs were eased by lower long- term debt amortization and the use of external reserves, which remain however at a conformable level after an all time high in 1999. 2The last two budgets relied heavily on one-time measures, such as exceptional 'dividends' imposed on public enterprises; lump sums paid by private enterprises as part of a tax amnesty scheme; and the sale of State assets. The INF has estimated the 'structural' deficit at 4.8 percent of GDP for FYOO, and 5.5 per:ent for the curent fiscal year. 3  C. Economic Outlook, Financing Requirements, and Risks 11. Following the two consecutive years of drought, characterized by almost no grov,th, the Moroccan economy is expected to expand by 8 percent in 2001, mainly reflecting a rebound in agriculture production, a slight increase in non-agriculture GDP and strong recovery in key services sectors, such as tourism. Non agricultural GDP is foreseen to increase moderately from 3.5 percent in 1999, to 3.9 percent, mainly reflecting the impact of the fiscal impulse and the 5 percent adjustment of the exchange rate. At the sector level, the expansion rebound in the tourism, communication, and construction sectors is expected to continue. The current account deficit, fuelled to 1.6 percent of GDP in 2000 by the (irought, higher oil prices, and subdued export performance, would remain at this level in 2001, mainly clue to a higher fiscal deficit. 12. The 2001 budget law plans a deficit of 8.4 percent of GDP. However, thanks to the privatization of IAM, for an amount of DH23.3 billions, or 5.4% of GDP, non-debt creating deficit should be set at 3 percent. While the debt-creating fiscal deficit remains manageable, and despite a track record of strict budgetary execution in the last three years, the new budget confirmed the serious deterioration- in the structure of public expenditures started in 2000: it results in a very low level of government savings that could, in the medium-term, represent a threat to fiscal sustainability. 13. In the medium term, it is projected that, barring any significant modification of the macro framework, trend GDP growth would not increase much, and average around 3.5 percent from 2002 tom 2004. A detailed account of medium-term prospects is provided in the 2001 CAS document. 14. Risks. The reliance on exceptional revenues (exceptional tax amnesty in 1998/99, GSM license receipts in 1999/2000, privatization of IAM in 2001) to finance increased deficits is not sustainable in the medium term. On the macroeconomic side, the situation should remain manageable in 2001. However, with this fiscal policy, the country's exposition to exogenous shocks, such as further increases in oil prices, a surge in international interest rates, is higher. In the medium term, a pursuit of the current policy could lead to instability by stimulating inflation, eroding further the external competitiveness and lead to an increased current account deficit. 15. Major exogenous risks on Morocco's growth performance and external position include: (i) vulnerability to consecutive severe droughts and related volatility of output; (ii) contingent liabilities; and (iii) external shocks, such as a hike in international interest rates, fast deterioration of terms of trade, and an important dependency on EU economic performances. Also, the fact that the Hassan II Fund is now entitled to receive half of all privatization receipts constitutes an important reduction in the margin of maneuver of the fiscal policy, and a potential source of higher expenditures with weak Parliament control. On the whole, the Government has the capacity to ensure base line fiscal sustainability but it would be damageable if the adjustment is again realized by cutting drastically public investment. 16. Financing requirements and Bank support. The current account deficit is predicted to improve slightly from its projected 2001 level, -1.5 percent of GDP, to around -1 percent in the medium term. Tourism receipts would be sustained and workers remittances would grow moderately. The current account deficit would remain manageable thanks to substantial net foreign capital inflows - around 2 percent of GDP p.a. - resulting from privatization operations and foreign direct investment. In addition, important concessional funding from the EU is expected as the MEDA program is projected to improve its disbursement ratios. Morocco's financing needs would also be driven by external debt repayments increasing from around US$2 billion to US$2.8 billion between 2000 and 2003, especially as rescheduled London Club private debt comes on stream in the next few years. Total external debt outstanding would as a result decrease further by 2003 to reach 46 percent of GDP. In the context of the CAS, the 4  Government and the Bank have drafted a medium term financing plan which projects IBRD commitments of the order of 250m US$ per year in the base case. Table 11.1: Morocco - Financing Plan (Mln US$) :~ ~~~~~~~~~ _ Financing Requirement 2263 2763 2152 3766 2552 4937 2866 3129 3284 Current Account (excl. grants) 35 -87 -144 -156 -548 -537 418 -409 432 Debt Servicea 3352 3190 2782 3047 3534 3614 3496 3656 3344 Amortization 2006 2123 1761 1971 2413 2541 2480 2706 2440 Interest 1346 1068 1021 1076 1121 1073 1016 949 905 Reserve Build_Upb 292 553 247 1638 -409 1858 -32 13 413 Financing Sources 2263 2763 2152 3766 2552 4937 2866 3129 3284 FDI and Portfolio Capital 469 1108 337 846 113 2647 1000 1000 1000 Medium and Long Term Loans 1757 1313 1586 2541 2290 2199 1766 2057 2178 a. Multilateral 797 568 641 781 594 776 717 738 789 b. Bilateral 532 283 214 243 575 558 497 552 493 c. Private Guaranteed 337 187 393 432 892 595 437 547 501 d. Private Non-Guaranteed 91 275 338 1085 230 270 115 220 395 Official Capital Grants 0 0 0 0 50 0 0 0 0 Other Capitalc 38 342 228 380 99 91 100 73 106 a. Includes IMF interest payments b. Includes IMF credit purchases and repurchases c. Mostly net short term capital, changes in assets holdings of commercial banks and private citizens III. REFORM PROGRAM IN THE INFORMATION INFRASTRUCTURE SECTOR A. Government's Strategy 17. Developing a high-performance information infrastructure sector (IIS) is a centerpiece of the Government's economic and social agenda. A modern IIS will make a major contribution to accelerating economic growth and reducing social disparities. It will enhance the competitiveness of Moroccan enterprises, bring them closer to international markets, and facilitate the integration of the country in a global information-based economy. A modern and extended IIS will also bring additional benefits to the society as a whole through a more efficient provision of social services like education and health and through the modernization of the public administration. Additionally, the modernization of the postal sector will lead to a more efficient provision of some basic financial services, taking advantage of an extended postal network that reaches many marginal and remote areas without access to other forms of banking services. 18. The Government has adopted an integrated approach to telecommunications, postal and IT reforms. Such a comprehensive approach is necessary, as the convergence of technologies used by the three sectors is increasingly blurring traditional boundaries among them, and businesses often demand integrated solutions to their communication, information and delivery needs. As detailed below, the sharp 5  decline in the cost of these technologies represents not only an opportunity for accelerated growth and job creation but also for reaching out to lower income populations in remote areas and extending communication services at an affordable cost. In sum, in terms of creating opportunities, reducing the cost of exclusion borne by the poor and improving access to government and public services, ICT offers a whole new avenue for economic development with particular relevance to the poor. B. Poverty Impact of the Reforms in the Information Infrastructure Sector 19. Growth and job creation. IIS reforms are expected to foster growth and employment creation, a key contribution to poverty reduction. As an example, with the introduction of competition in the m-nobile market, the total of IAM's GSM subscribers jump from 116,600 in 1998 to over 2.4 million by end December 2000. There has been around 6,200 new direct and indirect jobs created since 2000 in the telecommunications sector.3 20. Development of sustainable business opportwities in remote areas, through increased access to communication, information and delivery services. IIS reforms facilitate the extension of telecommun.ication and postal services to the poor, especially in rural areas. The liberalization of all segments of the telecommunications market can also lower the cost of doing business in remote areas. This, in turn facilitates information and retail opportunities for farmers and artisans in more remote areas. The Virtual Souk, launched in 1998 as a collaborative effort between the World Bank Institute and local commnunity associations in various MENA countries, is an example of the potential that the internet offers to small businesses and micro entrepreneurs from isolated areas. 4 21. Contribution to other sectors of the economy. The Government intends to promote the sectoral applications of ICT. Expanding the use of computers in schools through a country wide program is a priority outlined in the Government's strategy for the development of the IT sector. The Government will promote the provision of basic financial services to populations without access to any other b;mking services, taking advantage of an extended postal network that reaches many poor urban and ruraml areas throughout the country. C. Progress to Date 22. Telecommunications, information technologies and postal activities are emerging as a modern and vibrant sector of the Moroccan economy. A description of the sectors' performance and of the most recent developments is presented in Annex IV. In 1999-2000, the Government implemented an ambitious reform program supported by the Bank with the TPI-SAL. This program focused on (i) fostering competition in the telecommunication sector; (ii) establishing the legal and regulatory foundation of competitive telecommunication markets; and (iii) laying groundwork for development of the information technology (IT) and postal sectors. As shown below in Table 111. 1, most of the indicators agreed at the time of TPI-SAL have been met. The Government, and in particular ANRT, have been widely praised for the openness and transparency of the bidding process for the second GSM license. These were important factors in explaining the success of introducing competition in wireless as shown by the price of the 3 Medi Telecom, the operator of the second GSM license began operations on March 29, 2000 employing 2:30 and generating indirect employment for about 2000 people. Atento, a subsidiary of Telefonica de Espana, has opened their first call center in Casablanca which is expected to generate over 4000 direct and indirect jobs by the end of the year 2001. 4 This intemet site gives poor artisans, often illiterate women, of Morocco, Tunisia, Lebanon and Egypt, the oppornity to show and sell their handicrafts on the Web ( http://www.elsouk.comi/elsouk.htm). 6  license - US$ 1.1 billion and by the unprecedented subscriber growth that followed competition.5 As a result of the Government' sound performance, the second tranche of TPI-SAL was disbursed in December, 2000. Table 111.1 TPI-SAL Indicators Indicator Measure 1998 1999 2000 Actual Planned Actual Planned Actual Market share of Revenue Share (%/o) 0 10 0 22 30 the new operator in the cellular market Number of fixed Number of lines 690 747 860 804 906 lines outside 2 (000) main cities _ _ Fault Rate No. of faults per 100 lines 42 35 37 30 24.5 per year Suppliers of No. of suppliers of leased I At least 3 1 At least 4 4 Leased Lines lines D. Reform Agenda 23. In a second phase of its reform program, which the proposed IISD loan supports, the Government intends to: (i) deepen the pro-competitive reforms, including privatization, in the telecommunications sector; (ii) bring the benefits of the information and communications revolution to lower income groups, in particular in rural areas, by redefining its universal service policies in both the telecommunications and postal sectors; and (iii) establish the legal foundation of an information society. The Government has spelled out its reform agenda with respect to telecommunications, post and IT in its Letter of Sector Development Policy (Annex I). The main components of this program are detailed below. 1. Telecommunications 24. Privatization of Itissalat Al Maghrib (Maroc Telecom) As part of its overall sector liberalization program, the Government decided to transfer 35 per cent of the capital, as well as a majority on the management board (directoire), of historical operator Itissalat Al Maghrib (IAM) to a strategic private investor, following an international competitive bidding process. The arrival of the strategic partner in February 2001 provides IAM with the financial and managerial resources needed to face increasing competition in its domestic market and to expand in other markets. 6IAM's regional ambitions have been expressed through its recent acquisition of a majority stake in Mauritel, the Mauritanian incumbent operator. 5 See Wellenius B. and Rossotto C-M.: "Introducing Telecommunications Competition through a Wireless License: Lessons from Morocco" ViewPoint N. 199, November 1999. The World Bank Group, Wasing D.C. 6 After an expression of interest phase lastng about 6 months, the formal tender was launched in October 2000 with a bidding deadline of December 20, 2000. The Govemment had set a minimum price of 20 billion DH . Vivendi Universal, the buyer, paid 15% above this price, or US$2.1 billion. Financial closure took place on February 20, 2001. The strategic partner controls the management board, and the government the supervisory board All major decisions require agreement of both. 7  25. Following the strategic sale, the Government will continue to lower its ownership in IAM. In consultation with the strategic investor, it will offer shares to IAM's employees and retirees. In addition, to favor wider spread ownership and to attract additional capital, the Government intends to sell an additional 15% to 20% of IAM's capital through an initial public offering (IPO). The IPO will probably be launched in 2002, depending on market conditions, on the Casablanca stock market and on an international exchange. 26. Deepening competition in telecommunications infrastructure and services. The Government has adopted a timetable to grant new licenses for networks and services to accelerate liberalization. The new licenses will include fixed telephony licenses (local access licenses especially in large metropolitan areas, as well as a second national license) to be launched in 2001. In a first phase (up to end-2002), the new fixed license-holders would not be allowed to provide public telephony services (i.e. public voice to end customers), but would provide data, Internet, leased lines, private network and other services. The licensees will be required to deploy broadband networks enabling fast Internet access and multimedia applications, which should set the stage for a major growth in the use and application of these new technologies. From January 2003 on, the prohibition of these new operators to provide voice serv ices to end-users would terminate and they would thus become full-fledged competitors to L&M in their respective market segments. Additionally, starting January 1, 2002, the second GSM operator will launch an international services for its own customers, introducing competition in this segment for the first time. This trend will be reinforced with the award of additional international licenses in 2002. 27. To promote the introduction of competition, the Government is taking measures (including legislative) to facilitate the use of "alternative infrastructures": other utility and transport companies (such as the power, water, railways or highways companies and authorities) will in this way be encouraged to make their networks and rights of way available to new telecommunications operators, hence reducing the cost and lead time needed for infrastructure roll-out. 28. Extending access to telecommunication services in poor and rural areas: The Government has set objectives to increase rural teledensity from 0.6% in 2000 to 7% in 2012, and to have at least one payphone per 250 inhabitants by 2005. Additionally, the Government will present to Parliament a draft law to expand the definition of universal service to include telecommunications and information services in general, rather than telephony only. The Government considers that telecommunications liberalization is the most effective tool to achieve increased access to services. The award of the second GSM license demonstrates the effectiveness of this approach. In two years, due to rapid expansion of the GSM network, the percentage of the population without access to telephone service has decreased from; about 25% to 10%. 29. The Government expects that competition among private operators will achieve most of its universal access objectives. Nonetheless, some gaps will remain and to address these GOM has taken the following steps. First, prior to privatization, IAM's license conditions were modified to include obligations to maintain existing services in all covered areas and to extend services to 700 additional rural villages. In return, IAM is temporarily exempted from the levy on turnover which other licensed operators have to pay. From 2003, IAM may also seek authorization from ANRT to end rural pavphone services and subject these to the prevailing rules for universal service support. Second, a decree is being drafted defining a new universal service regime, under which operators will contribute initially 4% of turnover to a universal service fund. This percentage is set to decline over time, as access to services reaches Government targets. This fund will be used to provide limited investment subsidies to com panies (including IAM if interested) bidding for universal service licenses. 30. Strengthening the telecommunications legal and regulatory environment. ANRT has been a pioneer in Morocco (and the region) in making extensive use of the Internet and meetings to consult with 8  industry and other parties and to disclose its policies and decisions. ANRT is committed to expand this consultation process and adopt more systematic procedures for public consultations and records on important decisions of the Agency. New staff rules were adopted by ANRT in 2000, strengthening the ability of the agency to hire and retain qualified staff and providing a code of ethics. Parliament is in the process of approving a proposed amendment to the telecommunications law (Law 24-96) that would remove the a priori financial controls on ANRT and replace them with a posteriori controls. Moreover, the Government intends to submit to Parliament additional amendments in order to strengthen ANRT's powers and effectiveness in dealing with operators. Under the proposed amendments, ANRT would be able to impose a wide range of sanctions (including financial penalties) for non-compliance, in addition to suspension of the license. 31. To strengthen the financial autonomy and accountability of ANRT, the Government intends to review by March 2002 the sources of funding of the agency and adjust regulatory fees to bring them more in line with the cost of regulation. The financial review of ANRT will be preceded by an evaluation of the economic value of the spectrum, as well as an assessment of the appropriate mechanism for spectrum allocation, the level of spectrum fees and the distribution of revenues between spectrum management and regulation fees accruing to ANRT, and spectrum scarcity fees accruing to the Treasury. 2. Information Technology 32. The Government's Program in Information Technology development is focused on three main areas: (1) development of an enabling environment for information and communications based industries, including electronic commerce; (2) establishment of inter-administration networks; and (3) promotion of ICT applications. 33. Development of an enabling environment for information and communication based industries, including electronic commerce. The Government program of reforms in this area addresses two critical factors of a dynamic IT sector: an adequate legal and regulatory framework for e-commerce, and a low cost and modern broadband information and communications network. To this end, an inter- agency commission7, created in June 1999 has prepared a draft Law on data transmission, which addresses various issues, including the recognition of electronic signature, and incorporates the principles of the UNCITRAL Model Law in the areas of electronic commerce. Further activities in this area include the elaboration of other draft laws addressing, inter alia, certification of electronic transactions, cryptography, privacy, technology neutrality, and consumer protection in the field of electronic media. These additional legal initiatives will complement and integrate the draft Law on data transmission and constitute a coherent and reliable legal framework for electronic commerce in Morocco. 34. Establish inter-administration networks. A second key area of the IT Strategy for Morocco, is the introduction of IT to reform and modernize the Moroccan public administration. The importance of improving the performance of the Public Administration is reflected in the National Strategy for the IT sector, which includes the implementation of the administration on line initiative (AoL) as one of the priority areas for policy actions in the sector. The AoL initiative aims to gradually develop a government- wide information system, connect different ministries at central and local level, and establish common interoperable procedures. This is expected to streamline administrative procedures, reduce the cost of the public administration and benefit citizens and enterprises. In addition, this infrastructure will allow the 7 This iter-agency commisson, involves SEPTJ, ANRT, Mnistner du Comierce et de l'hndustrie, Minist6re des Finances (in particular, Customs), MNnistere de la Justice, Ministre des Transjrts, BAM and private banks. 9  development of e-government applications and improve services to the public. In terms of implem,ntation of the AoL initiative, the Government has: (a) started to identify key administrative procedures wh ich will most benefit from the implementation of the AoL initiative; and (b) developed a legal framework for the official recognition of administrative documents in electronic fornat. The next step of the iritiative, expected in November-December 2001, will be the launching of a pilot project focused on the Integrated Management of the Government's Human Resources (Gestion Integee du Personnel de l'Etat - GIl'E). 35. Promote the development of ICT-related applications through public-private partnerships. As a first step in developing high-end ICT applications, the Government has created a cyber park near Casablanca and is planning a second park in Bouznika. The parks will host incubators for new ICT enterprises and SMEs. An info)Dex grant is funding a feasibility analysis for the creation of these incubators. Second, the Government has also signed a contract with two enterprises to dev-.lop e- commerce portals for the benefit of economic co-operatives (groups of local artisans, craftsman, ilrmers, etc.). These electronic portals are ready, certified and in operation as of April 2001. To promote their use among cooperatives, the Government has launched a program of ICT-education for cooperative managers and a communications campaign to increase awareness, amongst cooperatives, of the benefits of using e- commerce. Additionally, as part as its long term development strategy for the ICT sector, the Government also intends to promote the developmnent of community-based telecenters, including the provision of internet access. 3. Postal Sector 36. Elaboration of a development strategy. The objectives of the Government are fourfold: (I) to provide a postal universal service in line with international standards; (2) to gradually open the postal service to competition and increased private participation; (3) to strengthen the historical postal operator, notably through its corporatization, as a credible competitor in a liberalized environment; and (4) to increase rural savings mobilization and to allow greater management autonomy of the postal financial services. As in telecommunicationis, a central goal of the strategy is to ensure the provision of adequate and affordable postal and financial services provided through the postal network, in poor urban and rural areas. SEPTI has several studies underway which will provide the basis for the design of a national strategy for the development of the postal sector, including proposals on universal service and market liberalization. 37. Modernizing the main postal operator. To remain competitive in a market-oriented environment which includes universal service obligations, the postal operator has completed, mxith the assistance of external consultants, an action plan for business development and internal restructuring. Increased use of telecommunication services and IT applications play a critical role in this plan to enhance the internal efficiency ( infor.m-ation systems) and to improve the quality of postal services (value- added services). 38. Developing the financial services provided through the postal network. The Ministry of Finance will launch a study, in collaboration with BAM and SEPTI, to identify actions aimed at (1) ensuring the access to financial instruments for a broader range of consumers, without undue distortions to fair competition with the banking and financial system; (2) allowing the historical postal operator to diversify its revenue sources ir, a context of postal sector liberalization, and (3) increasing savings mobilization and improving the allocation of resources towards productive activities. 10  E. Bank Group Strategy 39. Current Involvement. The Bank has been involved in Morocco's telecommunications sector since the 1980s, initially through two investment projects, which focussed on the development of the network and the strengthening of the historical operator. Both operations were implemented successfully. The first was rated satisfactory by OED and the second highly satisfactory. 8 40. From 1993 to 1998, the Bank focussed on assisting the Government in developing a sound institutional and legal framework for opening the telecommunications sector to broad competition. The main instruments used included: (a) the implementation of the 1993 Telecommunications Sector Restructuring Project; (b) several pieces of economic and sector work presentation;9 (c) the award of an IDF grant for the preparation of telecommunications privatization; and (d) the implementation of the 1999 TPI-SAL. Since 1999, the Bank has supported the implementation of the Government program of reforms in the sector through the TPI-SAL (paragraph 22) and the IISDL (paragraph 23). 41. In 2000, the IFC played a critical role helping MediTelecom, the winning consortium for the second GSM license, put together a long term financing package, given the limited availability in the capital markets of sufficient financing with the necessary terms and long term tenor and without multilateral involvement. The total cost of the project was Euro $ 1.1 billion, and the value of the IFC package was Euro $450 million, of which 75 million in Loans A, 25 million in Loans C and 350 million in Loans B. As in the case of the second GSM, the use of IFC's instruments to support operators interested in bidding for the new licenses could also contribute to foster private participation in the sector. The same is true for the development of IT-related industries, or in joint private-public ventures in the postal sector, where IFC could consider contributing to the funding of the investments. 42. Future involvement. The Government has identified the following priorities for the IT sector: (i) enhance the business and competitive environment for firms in the ICT sector; (ii) develop technology parks; and (iii) implement the "Administration on Line initiative". Building on past achievements, some of these initiatives could be supported by the Bank Group. 43. In the postal sector, the SEPTI expressed interest in continuing collaboration with the Bank to implement the strategy to be agreed following the completion of the on-going study. BAM has as well expressed interest in an investment project focused on IT development and universal access. More precisely, BAM intends to develop an e-commerce platform including: on-line tariffs, secured payments, third party certification, an efficient logistical network through which parcels would be delivered and investments in the rural areas. 44. Coordination with development partners. The Bank prepared the IISDL jointly with the African Development Bank, continuing the collaboration initiated with the TPI-SAL. The AFDB operation, which was approved on April 4, 2001, includes a second tranche which will provide additional leverage to monitor the impact of the reforms supported by the one-tranche IISDL and the implementation of additional reforms in 2001-02. Special efforts have been made to coordinate the preparation of the proposed loan with the European Commission, as there are strong complementarities between the EC's ongoing technical assistance to ANRT and several of the policy actions supported in the See OED Evaluative Memrandum L2798-MOR (1995) and OED Evaluation Summary L3557-MOR (1998). 9Kingdom of Morocco, Preparinfor the 21st Cenzey - S&egtlinZgthe Private Sector in Morocco, Report 11894-MOR, World Bank June 1994; Royawne du Maroc, Participation d secteur prive dans les infrastructures, Eh4cks &conomiques & la Banque mondiale sur le Moyen Orient et I'Afrique du Nord World Bang 1997; Kingdom of Morocco, Private Sector Assessment Update, Fudflling the Promise of Private Sector-led Growh Report 17950-MOR, World Bank, December 1999. 11  proposed loan to strengthen the regulatory environment in the telecommunication sector (See section IVC). The Japanese authorities approved a PHRD grant which was used for preparation of the operation. Finally, the proposed IISDL also converges with the program that USAID has launched in Morocco for the development of e-commerce. IV. THE PROPOSED LOAN A. Loan Rationale and Country Assistance Strategy 45. The present one-tranche operation is at the juncture of the 1997 and 2001 CAS. The suistained dialogue during the preparation of the operation supported the complex process that led to the recent privatization of the main operator, and related reforms. This is fully part of the 1997 CAS (R97-2 Board discussion date January 30, 1997) that sought enhanced private sector participation in infrastructure, and broader private sector development. On the other hand, by setting the stage for downstream and retail development of IT-based services, the reforms set forth in the operation will provide the necessary underpinning to the 2001 CAS objectives of supporting a decentralized and participatory approach to fight poverty and exclusion. In particular, this operation would lead towards improving the living standards of rural populations by expanding access to a broad range of information infrastructure services. Although concerns over fiscal management have led to link Bank policy based lending to,) strict macroeconomic triggers under the 2001 CAS, the present operation is justified by the strong track record and excellent dialogue in the sector, and by the possibility of Bank Group follow-up investment operations. Morocco's macro economic framework also remains stable and financing requirements remain important (paragraph 46). The 2001 CAS recognizes the development of IT based-services as one of the main business lines of Bank support over the next three years, and both the Bank and IFC plan to support investment operations in the sector, which can have an important cross-sectoral impact for decentralized economic opportunities, diffusion of basic services, employment and growth. 46. The macroeconomic rationale for a quick disbursing loan operation follows from the overall financing plan of Morocco's balance of payments as presented in section II.C. With limited access to international capital markets, Morocco relies on both bilateral and multilateral donors to ensure a stable financing of its external requirements. This is important, as Morocco's external position is still vulnerable to shocks originating from changes in oil and phosphates prices, and from changes in market conditions for emerging countries. In this respect, allowing Morocco's international reserves to remain above 5 months of imports, while continuing to reduce external debt, is a positive trend that the loan would support. B. Loan Objectives and Actions to be taken prior to the Board 47. The overall objective of this proposed single-tranche US$65 million IISDL is to support the Government's new phase of reforms in the IIS. As detailed in Part III, this program has three main components: (i) deepen market liberalization, increase private participation, extend services and strengthen the regulatory environment of the telecommunications sector; (ii) formulate and implement an ambitious strategy for the development of IT; and (iii) formulate a national strategy for the postal sector. The Government is showing a strong public commitment to this reform program and has agreed to widely disseminate its reform program for the development of the Information Infrastructure Sector. 12  48. Prior to the Board, the Govermnent has carried out a series of actions summarized below and presented in further detail in Annex I. In the telecommunications sector: * Transfer of 35% of IAM's capital to a strategic partner, including signature of: the decree containing IAM's license (Cahier des charges de l'operateur), reflecting the Government's sector strategy; the shareholders' agreement, ensuring transfer of IAM's management control to a strategic partner; and the decree transferring 35% of IAM's capital to a strategic partner. * Definition of universal service obligations included in IAM's license (Cahier des Charges) * Adoption by the Conseil dA'dministration de l'ANRT of the Agency's plan to award licenses in different segments of the telecommunications market during 2000-2002 * Award of a GMPCS license, including voice services, through a competitive bidding process. * Preparation by ANRT of a draft decree defining the new regime for the provision of universal services. * Adoption by ANRT's Board and effective implementation of a new Statute of Personnel, including a professional ethics code. * Adoption by the Council of Government of an amendment to Law 24-96, replacing a priori by a posteriori financial control of ANRT. In the information technology sector: * Elaboration by the Inter-ministerial Committee on Electronic Commerce of a draft Law on data transmission, including principles on recognition of electronic signature and its certification. In the Postal Sector: * Preparation by SEPTI of a national strategy for the development of the postal sector in consultation with the Bank. a Finalization of the terms of reference by an inter-agency committee (headed by the Treasury in collaboration with BAM and SEPTI) for a study to present several scenarios for the development of postal financial services. 49. Prior to the effectiveness of the loan, the Government will have undertaken the following action: Adoption by the Council of Government of several amendments to the Telecommunications Law to, inter alia: (a) broaden the definition of universal service; (b) authorize ANRT to impose financial and administrative sanctions proportionate to the violations; and (c) facilitate the availability of alternative infrastructures to potential suppliers of these infrastructures and to telecommunications operators. C. Technical Assistance 50. Various technical assistance initiatives are currently underway or will be launched shortly to facilitate the implementation of the above reforms and ensure their sustainability. They include: * Assistance of an external consultant to ANRT to define a position on competition policy that has been reflected in LAM's license. (funded by ANRT). * Launching oftwo studies on international experience regarding the impact of accelerated liberalization on the fiscal flows to the Treasury and on the progress towards universal service. (Funded by PPLAF) * Long-term (2001-2004) assistance to ANRT by the EU, to be launched in September 2001. * Study on new universal service regime for ANRT on own fnancing, completed in Febraty 2001. * Assistance to ANRT on design and launch of new licenses, started in February 2001 on own financing. 13  * Assistance of an external legal expert to the inter-ministerial commission led by SEPTI, to draft the Law on data transmission (funded by Belgian and Danish CTFs). * Assistance to the SEPTI to develop an action plan for implementation of its national strategy on the information society (funded by PHRD grant). * Assistance to the SEPTI for the elaboration of a postal sector strategy, including postal financial sevices. D. Fiscal Impact of the Reforms 51. The net fiscal impact of the reforms is expected to be largely positive, as the revenues :rrom a partial sale of IAM are substantial, and additional tax revenues will be paid by new competitors ertering the liberalized market. (See Annex VI). A fiscal cost can be expected in the short run due to: (i) phasing out of the monopoly tax for telecommunications services; (ii) transaction costs of privatizing IAM, and (iii) investment needed for the establishment of inter-administration networks (Administration on line initiative). These costs will be more than compensated by the privatization proceeds of IAM, and in the medium term by: (i) higher tax revenues, both from IAM and from new operators, due to overall mnarket enlargement; (ii) contribution from all licensed telecommunication operators of 5 percent of re,enues (decreasing over time) to fund universal service and R&D; and (iii) additional license proceeds fronm data, VSAT and GMPCS providers and new network operators. E. Disbursement and Auditing 52. Disbursement arrangements will follow the simplified procedures approved by the Board on February 1, 1996. The Borrower will open an account in the Central Bank of Morocco. Upon effectiveness, proceeds will be deposited by the Bank in this account at the request of the Borrower. If the proceeds of the loan are used for ineligible purposes (i.e., to finance items imported from non-member countries, or goods or services in the standard negative list), the Bank will require the Borrower to either (i) return that amount to the account to use for eligible purposes, or (ii) refund the amount directly to the Bank, in which case the Bank will cancel an equivalent undisbursed amount of the loan. Although a routine audit of the deposit account is not automatically required, the World Bank reserves the right to require it. The closing date for the IISDL is December 31, 2001. 53. During negotiations, discussions with the borrower took place about specific measures that will help IBRD to track the flow of funds from the Central Bank of Morocco to the borrower's budgetary accounts, so as to ensure that these funds are used for legitimate purposes and that withdrawals made from the account are used for purposes acceptable to the Bank. To achieve this objective, the following procedures will be established: a) the borrower will open and maintain a dedicated Deposit Account in the Central Banlk of Morocco to receive the proceeds of the adjustment credit; b) the borrower will report the exact sum received into the Deposit account; c) the borrower will indicate to the Bank details of the Government Bank account to which the local currency equivalent of the loan proceeds will be credited. This account will be subject to budget control; d) the borrower will ensure that all withdrawals from the deposit account are for budgeted expenditures, and not for purposes such as military expenditures or for other items cn the Bank's negative list; e) the borrower will report to the Bank the equivalent in the local currency of the US$ amount withdrawn from the Deposit Account producing evidence that the local currency sum was paid into a treasury account used to fund budgetary expenditures; 14  f) the borrower will submit regular reports on receipts and disbursements from the dedicated Deposit Account to enable the Bank to review the consistency of these withdrawals with the Loan agreement and the objectives of the adjustment operation; g) the borrower will provide the Bank with information regarding the Terms of Reference for carrying out and timing of regular audits, and will provide auditors with access to the necessary officials and staff for carrying out this audit. F. Cofinancing 54. The African Development Bank (AFDB) is cofinancing the IISDL with a US$100 million two tranche loan which was approved on April 4, 2001. Disbursement of the first tranche is predicated upon the adoption of the same measures as the single tranche IISDL. AFDB participated jointly with the Bank in the preparation and evaluation missions of the project. G. Environmental Aspects 55. The IISDL is an environmental category C, which does not require an environmental assessment. The proposed policy reforms will not have a negative impact on the environment and the proposed project will not finance any investments derived from these policy reforms. H. Social Aspects: Program Objectives and Poverty Category 56. The proposed loan contributes to the overall development objectives of the Government for sustainable growth, employment generation and reduced social disparities in several ways. First, the reforms will enhance the competitiveness of private firms, and actively promote growth and new job opportunities in the IIS sector and in the economy in general. Second, they will facilitate the extension of telecommunication, postal and basic financial services to the poor, especially in the rural areas. This, in turn, can contribute to a reduction in rural-urban disparities, because it facilitates the development of sustainable business opportunities in remote areas. Third, the policy and actions supported by the IISDL should provide the foundations for using new means of communication and information in sectors with a strong social and economic impact such as health and education. The actual realization of this potential, however, extends beyond the time horizon of the IISDL, and could be further supported in the context of future Bank Group operations. (See CAS and section III.E.). Finally, no significant lays-off are to be expected as a result of IAM's privatization, because the company was a relatively well run company already under public ownership and did not suffer significant over-staffing problems. Adequate severance packages will be provided in the case of eventual lays-off, which will mainly target early retirees. In sum, as a sector reform loan, the proposed IISDL project does not entail any direct or indirect compliance issues with respect to the social safeguard policies of the Bank. I. Monitorable Indicators 57. To monitor the impact of the reform program and agree, if needed, on corrective measures, a set of indicators have been identified by the Bank team and agreed upon with the Government during the negotiations of the loan. These indicators will be jointly monitored by the Government and the Bank. They are designed to help monitor the evolution over the next three years of the structure of the telecommunications, IT and postal sectors, the efficiency of new investments in the sector, as well as the quality, price, and coverage of services. The set of proposed monitorable indicators are summarized in Table IV. 1 below, and detailed in Annex V. 15  Table IV.1: Monitorable Indicators Indicator Measure 1999 2000 2001 2002 2003 Internet Users Number of dial up and 80,000 200,000 400,000 700,000 1,000,000 dedicated lines customers Percentage of the Percentage of the population 75% 90% 92% 94% 96% population with living in a locality with access access to a phone to a phone (fixed, cellular, payphones) Price in US$ of international Price of a 2 M/month 32,000 25,000 8,000 4,000 2,000 leased lines (2 Mbps* month) to London Volume of Revenue of domestically NA 5 20 0 electronic generated and processed e- transactions commerce transactions (US $ millions Letter mail % delivered on day 2 (from end 53 53 65 70 80 to end)) Access to postal Number of postal counters per and financial 10,000 inhabitants: services -- in urban areas 0.89 0.89 0.91 0.95 1.00 -- in rural areas 0.84 0.84 0.87 0.89 0.92 J. Benefits and Risks 58. Benefits. Competitiveness and Growth. The development of a modern and competitive information infrastructure network will provide a wider range of communication, information and delivery services of higher quality and at more competitive prices. It will also provide Moroccan firms with a greater exposure to international markets. The program of reforms supported by the proposed operation will also bring additional flows of domestic and foreign direct investment associated with the privatization of IAM and the issuing of new licenses for a wide range of services and the developrient of infrastructures. The presence of new cellular, VSAT, and VAS operators, as well as new developments in the IT sector, should stimulate the service industry, which accounts for an increasingly important share of GDP in rapidly developing economies. 59. Additional fiscal revenues. The Treasury will gain substantial fiscal revenues from implementation of the reforms, stemming mainly from higher taxes, caused by a competition-induced enlargement of the telecommunications, IT and postal markets, from the fees obtained with the issuing of new licenses, and from the proceeds of the IAM's privatization (Annex VI). 60. Access. Poor residents of rural and outlying urban areas will gain greater access to communications services as more intense competition and reliance on market mechanisms in the sector spur network development and improve quality of service in remote areas. Higher penetration of telecommunications, as well as postal and IT services, will strengthen the informational and economic links between these areas and the rest of the country, thus facilitating the development of local businesses and improving the management capacity of local governments. Improved access to communications will also enable the more effective provision of social services such as health and education, which are c ritical for reducing social disparities and stemming the flow of migrants to cities. 16  61. More efficient Public Administration and reduction of transaction costforfirms and citizens. The benefits related to the establishment of inter-administration networks are essentially three-fold.'0 First, significant cost savings for the Public Administration (PA) from the elimination of unnecessary duplication in information gathering and maintenance. Second, higher efficiency of PA, which facilitates the streamlining of administrative procedures. Third, competitive gains for business and better services for citizens, thanks to more efficient procedures, on-line forms and the recognition of electronic signature. 62. Risks. The main risks associated with the implementation of the Government program include: (a) a possible slow down in the introduction of effective competition in the telecommunications sector (fixed line voice services); (b) weak institutional capacity to design and implement reforms, specially in the IT and postal sector; (c) challenges to the regulatory agency's autonomy and its capacity to perform efficiently, (d) delays in the elaboration and adoption of a new legal and regulatory framework in the postal sector; and (e) insufficient coordination among ministries for the development of IT-based initiatives. 63. Risk mitigation. The success and results already achieved by the Government, notably the successful privatization and issuing of the second GSM license, which led to lower tariffs, increased access to telecommunications and significant capital inflows, represent the best protection against a possible policy setback. In addition, the Bank team will maintain a continuous dialogue with all parties concerned, and the AFDB two-tranche operation will provide additional leverage to monitor the impact of the reforms supported by the one-tranche IISDL and the implementation of additional reforms in 2001-02. The strong interest manifested by the Moroccan authorities and the postal operator to pursue the collaboration with the Bank in the postal and IT sectors through follow up operations shows a commitment to continue the implementation of reforms in these two sectors, including the strengthening of inter-agency coordination and securing of necessary financial resources. V. RECOMMENDATIONS 64. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank, and recommend that the Executive Directors approve it. James D. Wolfensohn President by Shengman Zhang Washington, D.C. April 16, 2001 10These benefits have been evaluated by European Countries (e.g. France, Italy) and are the core of the European Union Programme 'nterchange of Data between Administrations" (1DA). 17   Annex 1 Page 1 of 16 ANNEX I KINGDOM OF MOROCCO INFORMATION INFRASTRUCTURE DEVELOPMENT PROGRAM SECTOR POLICY LETTER Mr. President: Morocco is committed to an open trade policy and integration in the global economy as the means of ensuring sustained economic growth and an improved standard of living for the less fortunate. In this context, information infrastructure becomes a key element in the success of the Government's development strategy. It is expected to increase the competitiveness of Moroccan businesses by lowering their production costs and putting them in closer contact with both domestic and international clients. It is also expected to facilitate the modernization of government services and lessen the burden weighing on the private sector, to secure Morocco's place in the information society, and to lower the cost of delivering social and infrastructure services to the segments of the population that are marginalized today, particularly in the most remote rural areas. Given the new challenges created by the liberalization process set in motion by the enactment of Law 24-96, the Government has adopted a clear strategy and plan of action to energize the telecommunications, postal and information technology sector, the key objectives for which were set out in the Sector Policy Letter of February 24, 1999. This present Policy Letter updates and expands both the Governments major objectives in this field and the measures that have already been introduced. In addition, it describes the strategy the Government proposes to put into effect to achieve these objectives. I Introduction 1. General objectives The Government believes that the telecommunications, postal and information technology sectors are key activities of the Moroccan economy, and that sound policies in these fields are essential to achievement of two of its major objectives, namely to accelerate growth and reduce disparities. The Government wishes to secure Morocco's place in the information society, foster the development of a competitive and dynamic telecommunications sector that will enable the country to meet the challenges of the 21't century, and increase the competitiveness of its postal services by improving management methods and bringing them into line with international standards. It will also: * Provide Moroccan enterprises with access to the telecommunications, postal and information technology services they require to become more competitive. The Government believes that demand by the business community for such services should be met as rapidly as possible, and that the services themselves must be of high quality and competitively priced. Finally, a sufficiently broad range of services should be available to meet business demands.  Annex 1 Page 2 of 16 * Provide poor groups in the population and those living in remote areas with access to modem means of communication and information. To accomplish this, it is important to carefully define the regional development and public service obligations of the telecommunications et postal sector, and to meet these obligations in such a way that :he needs of operators and the country as a whole are covered satisfactorily and at a reasonal]e cost. It is equally important to put mechanisms in place which will ensure that providers of telecommunications and postal services contribute to the sector's public service mission efficiently and in a manner in keeping with the needs of the population. * Continue with the telecommunications sector liberalization program. * Foster modernization and greater efficiency in the delivery of government services, including social services such as education and health care, by expanding reliance on information technologies and increasing capacity to utilize these technologies effectively. * Promote the emergence of new economic activities in Morocco based on the development and use of information technologies. - Improve the overall performance of the postal sector by developing all segments of t;he postal market (new and better-quality services, sustainable upgrading of the general quality of service) and by achieving higher resource productivity. Define what is meant by public postal service and specify the resulting obligations that f all on postal operators, including the historical postal operator BAM (Barid Al-Maghrib), in terms of types of services, availability of access to them, and ways and means of financirig them. - Foster progressive opening up of the postal market, simplify the regulations in force, review the present postal legislation, and offer the private sector opportunities for greaf er participation. * Convert the historical postal operator, BAM into a modern, dynamic enterprise, by vesting it with greater financial and commercial autonomy and providing it with a legal status suited to a commercial and increasingly competitive environment. * Foster the development of postal financial services so as to provide a larger proportion of tlie population, particularly in the country's most remote rural areas, with access to financial services (savings, loans, and insurance products), and to improve the mobilization of savings and their use in the vitalization of private investment and the development of financial markets. * Generate revenues for the Treasury in the field of telecommunications and information technology, primarily in the form of taxes levied on the activities of operators, in the sarme they are levied on other economic activities. 2. Results already achieved Considerable efforts have already gone into achieving the objectives listed above. For example, the number of telephone lines in service rose from 266,000 at the end of 1987 to 1,500,000 in 2000. Average connection time dropped from 80 months to 1.4 months (rural areas  Annex 1 Page 3 of 16 included). Network transmission capacity increased from nearly 4,000 circuits to 466,000, mainly through the use of fiber-optic technology. The use of fiber-optic technology and the digitalization of virtually all transmission and switching systems has greatly improved network reliability and made it possible to expand the range of services offered, including videotex, ISDN, the Internet, and broadband connections. The number of rural municipal districts with automated networks has risen from 65 to 1,298, in other words, all rural municipalities. The number of rural localities with automated systems has risen from 69 to 1923, or 6.3% of all 32,000 rural localities. In addition, expansion of the public telephone network increased the number of public phone booths from 484 at the end of 1987 to 46,000 at the end of 2000, 83% of these booths being managed by private promoters. At the end of 2000, NMT-450 and GSM-900 mobile cellular radiotelephone networks had over three million subscribers. These networks cover the major highways and all urban centers serving as the administrative seats of prefectures and provinces. Thanks to the virtually complete digitalization of transmission and switching systems and the establishment of new networks, the quality and reliability of the services available have improved significantly. Use of the Internet, access to which became available in November 1995, is developing at a sustained pace, with a current group of 1,200 Internet service providers (ISPs) attending to approximately 200,000 users. Since 1991, computer use has increased notably, as a result partly of the drop in hardware and software prices and partly of the lowering of import duties from 42.5% to 17.5% as of January 1, 1996. Current estimates put the total number of personal computers in Morocco at 200,000 units, representing an incidence rate of 0.7%, with annual sales of between 40,000 and 50,000 units. More than 800 information technology companies are estimated to be active in the sector, with an estimated 4,000 persons on their payrolls and roughly DH 2.8 billion in sales. Initiatives are also in progress to upgrade the management of the country's postal services. The creation of BAM (Barid Al-Maghrib) in 1998 provided a platform from which to introduce sustainable improvements focused on greater effectiveness of the services offered. In this context, BAM developed business plan and investment strategy for the years 2000 to 2004. A study currently under way will serve as a basis for recommendations for organizational units and business systems through which strategic options can be put into effect efficiently. New products have been launched and new partnerships have been formed so that a broader range of better-quality financial services can be offered to the public. The expanded network of 2,500 retail outlets provides partners (banks, insurance companies) with an attractive opportunity to link up with new regions and new clients that currently have no access to these services. The administration of postal banking business and the Caisse d'epargne nationale has been computerized, making it possible to offer customers a steadily improving range of services. For instance, new ways of transferring funds, which rely on information technology, have been introduced: electronic transfer of funds and use of the EUROGIRO network for external trade. In the postal services field, new domestic express courier services have been introduced (Poste rapide nationale, Rapid J, and Rapid H). E-mail access facilities have been installed in post offices and on university campuses. International courier express business is the subject of a joint venture between Barid Al-Maghrib and Chronopost S.A. The new corporation is set up under Moroccan private law and named EMS Chronopost International Maroc, with BAM holding a 66% share of its capital and Chronopost a 34% share.  Annex 1 Page 4 of 16 In financial terms, BAM earned significant net profits totaling DH 92.7 rnillion in 1999 compared to DH 55 million in 1998. Its accounting statements for the year 2000 indicate a profit in the vicinity of DH 130 million. However, it is in the legislative and institutional frameworks of the telecommunications and postal activities that the most far-reaching reforms have been introduced. These measures include the following: * Signature by Morocco of the WTO Agreement on Basic Telecommunications Services. * Promulgation of Law 24-96 in August 1997. Its enactment opened up all segments of the telecommunications market to competition and called for privatization of the historical operator. It separated posts and telecommunications by creating a public agency with responsibility for postal services, Barid AI-Maghrib (BAM), and a stock corporation - in which the State currently holds 65% of the shares - for telecommunications, Itissalat.41- Maghrib (TAM). In addition, it created a telecommunications sector regulatory agency (ANRT), attached to the Office of the Prime Minister. e Promulgation of 15 decrees and orders enacted in implementation of Law 24-96. One of these implementing decrees lays down the general principles governing interconnection, establishes a mechanism for the settlement of disputes, specifies the essential elements of interconnection contracts, and prescribes the general technical and cost principles governing the supply of interconnection services. Other implementing decrees regulate leased lines and introduce the list of value-added services that may be provided on the basis of a simple declaration to the regulatory authorities. * Adoption and publication of the "2000-2004 Information Technologies Development Plan." * The " Administration on Line" Initiative, which calls for all ministries and their personnel to be linked electronically to one another, was announced by the Council of Government on October 28, 1999 and is projected to be fully operational by the end of 2004. * The enactment in February 2000, of law 2-00 on Intellectual Property, including a specific component on Information Technology In addition, major progress had already been made following liberalization of the posts and telecommunications sectors and their opening up to the private sector. For example: * The granting, to MEDITEL, in August 1999 of a second license to provide GSM mobile telephone services. The transparent nature of the international competitive bidding process which led to award of this license, plus the existence of a full regulatory framework, clear commercial terms and conditions, and the attractive features of the license, captured the interest of operators of worldwide importance, generated fee revenue totaling DH 11 billion, and served as an incentive to the historical operator to improve its services, expand them rapidly, and lower its prices significantly.