Morocco - Second Credit Immobilier Et Hotelier Project

CIRCULATING COPY RESTRICTED TO BE RETURNED TO REPORTS DESK Report No. P-1109 FILE COPY This report is for official use only by the Bank Group and specifically authorized organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or complctcncss of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SECOND LOAN TO THE CREDIT IMMOBILIER ET HOTELIER WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A HOTEL DEVELOPMENT PROJECT June 19, 1972  CURRENCY EQUIVALENT US $1.00 = DH 4.66098 DH 1.00 = US $ 0.21454 7  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDEN T TO THE EXECUTIVE DIRECTORS ON A PROPOSED SECOND LOAN TO THE CREDIT IMMOBILIER ET HOTELIER WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A HOTEL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Credit Immobilier et Hotelier (CIH) with the guarantee of the Kingdom of Morocco, for the equivalent of US$15 million to help finance tourism development in Morocco. Amortization would conform substantially to the aggregate of the amortization schedules applicable to the specific investment projects to be financed out of the proceeds of the loan. The interest rate would be 7.25% per annum. I. THE ECONOMY 2. An economic report entitled "Current Economic Position and Prospects of Morocco" (Sec. R 71-222) was distributed oh September 20, 1971. An economic mission visited Morocco in April. Its findings are reflected in the present Report. The Government has asked the Bank to review the next Five-Year Development Plan (1973-77) presently in pre- paration. The Bank intends to organize a basic economic mission for this purpose as soon as the preparation of the new Plan is sufficiently advanced, possibly in the spring of 1973. Characteristics 3. Forming for centuries a well-defined geographical unit between the Mediterranean, the Atlantic, the Atlas Mountains and the Sahara, Morocco has developed a distinctive civilization with a traditional monarchy. Independence was achieved in 1956, after 44 years as a French protectorate. The Government is highly centralized with supreme power held by King Hassan II, who acceded to the throne in 1Q61. Arab-Berber cultures are predominant, and conservative Islamic tradition, in which the King is the religious as well as the political leader, remains an important unifying force. France left a deep imprint on culture, busi- ness and administration, and French is the prevailing language,in govern- ment circles, and in education above the primary level. 4. In the period since independence the tra'ditional social and political order has been essentially maintained while the economic struc- ture began to change gradually. Traditional subsistence rainfed agricul- ture still absorbs more than half of the active population. A small but growing modern type agriculture provides a substantial part of the com- mercialized agricultural production. Phosphate mining has remained the major industrial activity. The relative importance of manufacturing industry is growing only slowly and is oriented toward import substitution.  -2- The traditional crafts and trades provide substantial employment and supply the Moroccan population as well as a growing number of tourists. Construction of hotels and the fast growing tourism traffic have made tourism the most dynamic sector of the economy. In 1971 foreign ex- change earnings from tourism amounted to $151 million; from phosphate, $117 million; from workers remittances, $95 million; and from citrus exports, $77 million. Major constraints to balanced economic growth continue to be the vulnerability of agriculture to drought, low savings, and insufficient dynamism of the private sector, especially in industry. Unemployment in cities and on the coLutryside is high and large differ- ences in cultural and economic level between regions and population groups exist. Rapid growth of the population aggravates the problems. Policies 5. The objectives pursued by successive governments since indepen- dence include: (i) acceleration of economic growth; (ii) preservation of social and political stability; and (iii) promotion of "Moroccaniza- tion", i.e. a larger share for Moroccan ownership and management in foreign-owned land, commercial and financial companies and selected industries. 6. The moroccanization policy has been consistent but moderate. Foreign businesses have not been nationalized with the exception of the take-over in 1963 of land held under concession by foreign owners. The number of foreigners declined from 400,000 in 1960 to 100,000 in 1971. "Moroccanization" of the services sector implies the gradual increase of the share of Moroccan capital and labor in foreign-owned commercial, financial and transport concerns, often associated with the expansion of capital. At the same time new foreign investment in industry, tourism and mining continues to be encouraged by the Government. Other recent economic measures include: tariff cuts and trade liberalization on the occasion of Morocco's association with the Common Market, slight increases in long-term interest rates applied by certain financial institutions to reflect better the opportunity cost of capital, and increases in tariffs for water supply helping to increase public savings in that sector. 7. The political and social stnructures have been resistant to change, but the Government recognizes that their stability is increasingly in question unless growth and change are achieved at a more rapid pace, and are accompanied by a more equal income distribution. In recent speeches, the King has stressed several social-economic objectives, in particular redistribution of income, creation of jobs, land distribution, extension of education and reform of administration and justice. A new constitu- tion has been enacted and a Government formed to prepare elections which would provide a wider basis for the next administration. The Government has increased civil servantst basic salaries and workers' minimum wages by 15%, extended family allowances, introduced a modest progressive income tax-and reduced the price of sugar, an important consumption item of the low income classes. It intends to accelerate the distribution of ex-colon land, to extend pension and health insurance sphemes, to embark on a wide- scale replacement of slum areas, and to help set up small farms.  - 3, Deielopment Plan 80 The 1968-72 Development Plan is nearing completion and a new Five-Year Plan (1973-77) is under preparation. During the present Plan period the production growth in most sectors has surpassed the Plan targets substantially: (percent average annual growth) Actual Plan 1968-71 Targets Agriculture 6.4 2.1 Energo 7.2 5.4 Mining 2.1 7.9 Industry and-handicraft 5.7 4.3 Building and public works 5.9 8.5 Non-government services 5-4 46 Total (government services excluded) 5.6 4-3 9. Results in agriculture appear better than they really were be- cause of a mediocre crop in the base year. But even taking more normal periods as a base, the average growth of agricultural output has been about 3.5%, well above expectations. Only mining fell below the Plan target. largely because competition on the world phosphate market de- pressed production, and 1971 output was only three quarters of the volume planned. Prospects have recently improved and the government phosphate company expects to reach the Plan target in 1973. Most other mining de- clined due to depletion of resources. The political events of mid-summer 1971 had limited immediate effect on the overall growth rate. The acce- leration in manufacturing output and construction activity was interrupted, but good weather helped to increase agricultural output. Total production _..-reazed by 5%in real terms, only slightly lower than that of the pre- ceding three years. 10. The volume of total fixed investment increased by 6% annually during the 1968-71 period, slightly lower than was assumed in the Plan. Central Government investments accounted for about half of the total and was close to the targets which were revised upward in 1969. About 70% of the government investment program in agriculture was allocated to large scale irrigation schemes. While dam construction proceeded on schedule, land preparation lagged behind and progress with regard to rainfed agri- culture and livestock was slow. Construction of power stations is in line with Plan targets. Other government investments did not differ by more than 10% from Plan targets except for delays in investments for urban development, health, education and communications. 11. Since the abortive coup of July 1971, many private investors seem to be awaiting the outcome of the political reorganization which iB under way, and public investments have also been stagnant largely due to some reconsideration of policies and changes in cabinet and civil service. Total fixed capital formation in 1971 dropped by about %o in real terms  -4- and represented 14.1% of GDP. Consumer demand was sustained by good crops and the social measur'es taken by the Government since mid-1971. The im- pact of these measures on government savings was offset by better perfor- mance of public enterprises, while the good crops and remittances from emigrant workers stimulated private savings. However, total gross national savings remain around 12%o of GDP, which is low for a country at Morocco's stage of development. The current account deficit was reduced from $144 million to $78 million, and thanks to larger public capital inflow and SDR allocation, the reserve position improved and reached a level of $235 million in March 1972, equivalent to about two and a half months of im- ports of goods. Development Prospects 12. Appropriate fiscal, monetary and trade policies could ensure that GDP will continue to grow at about.5% per year until 1977. However, to achieve this modest target, per capita annual consumption would have to be limited to 1.5%. This would not be easy in view of the increased attention given by the Government to social progress, but would be neces- sary because a growth rate of 5% would require savings and investments to be raised from about 12%o and 14% of GDP respectively to 14% and 17% of GDP in 1977. The other growth assumptions could probably be achieved without major difficulty. On the basis of present trends, foreign aid disbursements in 1977 might be projected as follows, although the actual flow will depend on future commitments still to be made by the respective donors: (millions of dollars) Annual Average Actual Projection 1966/68 1969/71 1971 -21977 Bilateral 112 125 144 156 USA 48) 56) (56) (6) France 59) 27) 30) 54) Germany (19) (17) 28 17) Other Countries ( 6) (25) (3O 49) Bank Group 11 18 25 59 Total Gross Official Flow 123 143 169 215 Repayments 45 50 64 95 Net Offical Flow 78 93 105 120 13. While the above projections appear feasible, the Government's targets are likely to be more ambitious . It is considering an annual growth target of 6.5% for the next Five-Year Plan, and is working out its implications. These would clearly include stronger growth of gross na- tional savings and additional foreign aid. If more aid could be obtained, it would be desirable for it to be on concessionary terms, since the terms  -5- of aid which is already in prospect are likely to deteriorate as a result of the decline in grants, especially from the United States, and of the increase in medium-term credits which would be the normal form of part of the projected larger French aid. External Debt 14. Disbursed foreign debt is at present $804 million and may grow to about $1,500 million in 1977. The debt service ratio may rise from 8.9% in 1971 to 12% in 1977 and further thereafter. While Morocco remains creditworthy for substantial additional loans on conventional terms, a substantial proportion of new external assistance should be made available on concessional terms if the growth of the debt service burden is to be restrained in the long run. The share of the Bank Group in Morocco's total outstanding external debt is increasing. From about 7% at the end of 1968 it had reached 10% at the end of 1971 and may rise to 20% by the end of 1975. Projects already approved and those under consideration would lead to disbursements equivalent to about one fifth of Morocco's projected foreign capital needs in the mid-seventies. II. BANK GROUP OPERATIONS IN MOROCCO 15. Bank and IDA lending since the first Bank Group project in 1962 amounts to $211.4 million, net of cancellations, for 12 projects, three of which were financed under IDA credits totalling $28.4 million. These loans have helped finance industry ($85 million), agriculture ($71.1 mil- lion), transportation ($14.6 million), education ($10.5 million), and tourism ($17 million). IFC has made investments totalling $2.4 million in the Banque Nationale pour le Developpement Economique (BNDE) and a canning factory. Annex I contains a summary statement of Bank loans, IDA credits and IFC investments as of May 31, 1972 and notes on the execution of on-going projects with particular reference to those which are encoun- tering problems. 16. The Bank Group strategy is to respond to the requirements of Morocco's economic and social objectives, which appear in line with most previous Bank recommendations. Specifically the Bank Group program aims at assisting Morocco in maintaining a growth of GDP at roughly 5% per year, the rate achieved in the recent past, financing key projects in priority sectors, and devising and implementing policies to limit unemployment, develop agriculture and improve urban and rural living conditions. It contemplates primarily lending from the Bank, but with some blending of IDA funds, in order to moderate the build-up of external debt service requirements. In the last three years, Bank and IDA lending ranged between $45 and $75 million. Projects now in course of preparation could lead to a higher level of lending of the next two or three years, but this much depends upon Morocco's capacity to prepare projects, upon solving the defficulties encountered in creating new institutions or in improving existing ones and upon finding competent management.  Sectors and Projects 17 The key sectors on which the Bank concentrates its action are agriculture, tourism, urban infrastructure, industry for export and trans- port. Amongst these key sectors, agriculture and urban infrastructure provide special opportunities to help devise and implement policies re- sponding to the Government's new emphasis on social developmient. 18. In agriculture the proposed $34 million second financing for agricultural credit would help develop modern farming. The problems of traditional agriculture would be dealt with through a project for the integrated development of rainfed agriculture now being prepared with the help of the FAO/IBRD Cooperative Program; this project would combine con- solidation, basic infrastructure, soil preparation and credit, and could have a substantial effect on rural underemployment. It may be ready for consideration by FY 1974. A study of the Oum er Rbia basin development was recently completed in cooperation with the Bank, and an irrigation scheme is now under preparation. Originally planned for financing in FY 1972, it has been postponed to FY 1974 because of delays in initiating the feasibility studies. The Bank is also helping the Government define and prepare a project to develop the production of off-season fruits and vegetables for export. 19. Tourism has becomne the largest source of foreign exchange for Morocco and its further expansion should help finance the substantial im- ports necessary for future development. Besides it financing of CTH, the Bank might also be Executing Agency for a proposed UNDP study which could lead to a tourism infrastructure project for VY 197T, and it is helping the Government to coordinate a number of other studies and reviews of the sector. 20. Urban infrastructure projects include one for bulk water supply in the Casablanca-Rabat region for which a $48 million loan will be pre- sented shortly to the Executive Directors, to be followed by a second pro- ject in FY 1974. A Bank sector mission has recently reviewed the Govern- ment's proposed urbanization policies and idetified a site and service project which may be ready for financing in FY 1974. Finally, a power project planned for FY 1973 is designed to meet urban needs. 21. The Government is now placing more emphasis on exports. The Bank has assisted this orientation through an industrial review completed 18 months ago and is now helping define the required policies and the measures to implement them, particularly in manufacturing and mining. In this line, the Bank is considering two proposed loans for FY 1973, i.e. a sixth loan to the industrial development bank (BNDE) and a loan for a phosphoric acid plant whose production would be entirely exported. 22. Morocco's transport network requires some expansion to meet growing needs. After a first loan to finance the road between Marrakesh  -7 and Agadir and a transport survey, a transport sector mission visited the country in late 1971. A second road project is now under preparation for presentation in FY 1973. A port expansion project may also be ready for Py 1974. 23. Education represents a major bottleneck in Morocco's development: students represent a low proportion of the school age population, the pro- portion of drop-outs is high, curricula are not well-adapted to economic development, graduates are too frequently unable to use the skills acquired and, as a result, unrest in the student population is high, leading to strikes and a further lowering of the standard of education. If this de- terioration is allowed to continue social stability could be affected while the qualified personnel needed to ensure economic expansion would be lack- ing. Projects for education in Morocco undoubtedly have a high priority; two credits already have been made and another is planned for FY 1974. However, its presentation will depend on a substantial improvement in the execution of the first two projects and on the completion of the study of higher education whose financing is included in the second credit (Annex I C. para. 2. Other Assistance 24. A Consultative Group for Morocco was formed in April 1967. The Group is chaired by the Bank and includes Belgium, Canada, France, Germany, Italy, Kuwait, The Netherlands, Spain, Switzerland, United Kingdom, United States, IFl, UNDP, OECD/AAC, African Development Bank and European Invest- ment Bank. At its last meeting, in October 1971, the Group welcomed the Government's new policies and affirmed continued support. III. THE TOURISM SECTOR 25. Morocco is particularly well-endowed for tourism. It is close to Western Europe, one of the two major sources of tourists in the world; about one quarter of all visitors to Morocco come from France, about 10% each from Great Britain and Germany, about 206 from the rest of Europe, and almost 20% from North America. Morocco has many attractive beaches on the Atlantic and the Mediterranean, and a great variety of scenery, from fertile coastal regions with historic citis, to the Atlas Mountains and the Sahara desert. Morocco enjoys more diversified tourist resources and easier access by motor car than its North African competitors, and it has a longer season and a distinctly more exotic atmosphere than its competitors to the north of the Mediterranean. 26. Tourism is one of Morocco's most dynamic sectors and the leading source of foreign exchange earnings and the financing of hotels by CIH has played an important role in this growth. Tourist arrivals increased by nearly 20% annually from 1967 to 1970. In 1971, the political uncertain- ties following the abortive coup d'etat in mid-July as well as a few cholera cases depressed the growth rate to only 7.4%. The number of visi- tors is expected to be about 1.1 million in 1972 and is forecast to reach 2.7 million in 1977.  27. Total employment from tourism is estimated at 40,000 workers, about one half in hotels and the other half in tourism-connected jobs outside hotels, together representing about 2.4% of the active labor force outside agriculture. Hotel employment may double by the end of 1976. The investment per job created in hotels amounts to about $10,000, a figure well below the corresponding figure in manufacturing industry. Significant secondary employment is also created in construction, trains- portation, hotel supplies and other activities stimulated by tourism. 28. Investments in tourism during the Plan period (1965-72)are estimated at DH 450 million or about 3.5% of total national investments. These investments have also resulted in significant development of sup- plier's industries such as cement, wood and other construction materials, the output of which has increased at an average of about 11h% over the past three years. 29. Despite Morocco's natural advantages and the rapid growth of tourism in the last few years, the sector is not without problems. Morocco's annual growth of tourist arrivals over the last five years has been below that of Tunisia (over 25%), which is competing for the same market. Rising occupancy rates show that demand for accommodation is outpacing hotel ca- pacity. Hotel capacity, which was 19,000 beds at the beginning of the 1968-72 Development Plan, had risen to 35,700 beds at the end of 1971 and is expected to be only 40,000 beds at the end of 1972, which is well short of the Plan target of l19,000 beds. This reflects the insufficient govern- ment encouragements to investors to build modern mass tourism accomoda- tions. 30. The Government applies a number of incentives for hotel con- struction, the two most important being an equipment grant and an interest subsidy on CIH's hotel loans. The equipment grant, which is subject to approval on a case by case basis by the Investment Commission, may be up to 15% of fixed investment cost, but does not usually exceed 10%. The interest rate subsidy is 4.25% per annum and brings CIH's nominal rate of 8.75% down to an effective rate of 4.5% for the investor; this rebate is granted automatically. There are in addition import duty exemptions, re- bates on the value-added tax and accelerated depreciation allowances. These incentives for tourism investment, taken together, may amount to more than 30% of the investment cost of a hotel project, and tourism would probably not have grown to the present extent without them. However, there is evidence that the incentive policy could be improved by more selective application and that it would be useful to examine whether the incentives have contributed to an optimum allocation of resources in the tourism sector. 31. These incentives will be compared to those in force in Tunisia, Spain, France, Italy, Yugoslavia and Greece, in the planned Bank review of incentives in the Mediterranean area, but at present Moroccan incentives do not appear out of line with those in these countries. The Government is also embarking on several studies as a first step towards ah overall review of its tourism sector which should lead to an improved strategy for tourism development. Such strategy would include the development of tourism infrastructure, streng-  -9- thening of institutions serving tourism and a well-defined policy towards foreign and local investors including, in particular, an improved incen- tive system. 32. The Bank started financing tourism projects in September 1966 when it agreed that part of a loan to Banque Nationale de Developpement Economique (BNDE) could be relent to CIH for hotel financing. CIH had at that time only limited experience in hotel lending because its primary activity since its creation in 1920 had been the provision of mortgage and housing financing. However, CIH moved increasingly away from its mortgage-oriented outlook and became a hotel financier, giving increased weight to the commercial prospects and soundness of a hotel venture and achieving a measure of familiarity with the methods and operations of the Bank. In view of this development and of the Government's wish that CIm be the prime source of loans for tourism accommodations in Morocco, the Bank made a first $10 million loan directly to CM in August 1970. 33. The Bank has also reviewed the tourism sector regularly in con- nection with its evaluation of Morocco's economic performance. Tourism being of growing importance both for the Moroccan economy and for Bank lending in Morocco, the Bank has offered its assistance in the work now under way in formulating the tourism part of the next development plan. Bank missions have been discussing the incentive system for tourism in- vestments and other aspects of tourism policies with the Government, and close consultation will continue. They also helped to prepare terms of reference for a study of the infrastructure needed for the Bay of Agadir one of the foremost tourist areas of the country. This latter study will probably be financed by UNDP, with the Bank as Executing Agency. IV. THE PROJECT. 34. An appraisal report on CmH (No. DB 93-a) dated June 1, 1972, is being distributed separately. A Loan and Project Summary is attached as Annex III. The Bank's first loan to CIH will soon be fully committed to hotel projects. The proposed second CIE project was first appraised in April 1971. For the reasons given in paragraph 40, a reappraisal became necessary and took place in January/February 1972. Negotiations for the proposed loan were held in Washington in May 1972. CIH was repre- sented by Messrs. Mohamed Benchekroun, its Director General, and the Guarantor by Messrs. M'hamed Tazi and Lotfallah Cheggour of the Ministry of Finance. CIH's Objectives and Role in the Economy 35. CIH has played a major role in the economy for some years, first in financing urban housing, but increasingly, since 1962, in financing hotels and vacation villages. CIH continues to provide mortgage financing for houses and apartments, and this part of its operations is efficient.  _ 10 - In recent years, it has assumed a significant role in the growth of tourism and has been associated with two thirds of the commitment for hotel investments in Morocco in the years 1969-71. From the beginning of its hotel financing activities, CIH has signed 244 loans with 123 hotel enterprises. 36. The economic returns on CIH-financed hotels are good. CIH has subjected Bank-financed hotel projects to a minimum economic return test of 10% which has become a primary tool of CIM's appraisal, and has led CIH to advise hotel investors on how to prepare better projects. The average rate of return on Bank-financed projects has been about 16%. 37. CIH faces a strong demand for finiancing new houses in major cities and resort areas. (Other specialized institutions cater to finan- cing needs for housing in rural areas.) CIE provides mortgage financing for middle class housing and since more liberal policy for housing loans was introduced in 1969, CIE's housing business has increased substantially. Resources 38. About 55% of CIX's share capital of DE 20 million is held by public institutions, including the Caisse de Depots et de Gestion (CDG) (34.1%), the Banque de Maroc (10%) and other public entities (9.5%). Private shareholders, predominantly Moroccan, own the remaining 45%. Over the period 1968-71, CIH raised resources amounting to DH 350 million. About 56% of its needs were met from CDG, the Banque du Maroc and the Banque du Credit Populaire, another 23% came from the World Bank, indirectly from 1966 to 1970 through BNDE and directly thereafter when it received its first Bank loan. CIM has also tapped the narrow capital market in Morocco by a public issue of long-term bonds of DH 15 million. Except for Barnk loans, CIH has not borrowed abroad but CIH and the Government are aware that the Bank will not cover CIH's entire foreign exchange require- ments in the long run. Recently, CIH has established contacts with poten- tial foreign lenders, and it was urged during negotiations to pursue and intensify these contacts. Management and Organization 39. CIE's Board counts 13 members, including 8 public sector represen- tatives. There is also a seven-member Executive Committee with the Director General as a voting member, which meets about every month to consider all proposed projects. However, it rarely discusses details of investment pro- posals. After five years with CIH, the Director General, Mr. Mohamed Lazrak, resigned in April 1971 to become Minister of Tourism. His successor is Mr. Mohamed Benchekroun, a former Director of the Budget in the Finance Ministry. 40. After the departure of Mr. Lazrak, CIH's organization also sufferea the departure of several key executives. To deal with the ensuing problems, the new Director General embarked on a major reorganization and appointed new senior personnel. Results of these measures are encouraging. Total  CIHI staff now amounts to 80, including 41 professionals. CIH is divided into a Credit Department (consisting of housing and hotel lending divisions), and a Finance Department. The latter has experienced personnel and per- forms its functions satisfactorily. The Credit Department needs streng- thening and CIH proposes to engage a senior executive with experience in hotel financing, particularly in market assessment, appraisal and follow-up, promotion and staff training. At CIG's request, the Bank is helping to find such an officer. At the lower eschelons, the present staff appears adequate for CIH's needs. 41. The appraisal of hotel projects has recently improved, though better judgment on market aspects is still needed. Technical work on hotel proj'Dcts is well-handled by experienced engineers. Greater improve- ments are needed in project supervision, an area which now has the Director General's full attention. Some aspects of loan collection work are also being tightened. Hotel investors are now required to retain con- sultants (bureaux de controle) for the review and supervision of larger projects. This has proved a useful practice. CIE is currently trying to find ways to have the consulting engineers intervene at an earlier stage of project execution when they can play a more constructive role. 42. Procurement practices are generally satisfactory. Competitive bidding is arranged in most cases by investors for the various elements of their projects, but CIE relies essentially on its general experience about prices and contracts and reacts when these are substantially out of line with established norms. CIE has agreed to strengthen its procurement practices and to enlist the l"burea%ude controle" in this task. 43. CIH's disbursement procedures are adequate; verification of expenditures is carefully controlled. However, disbursements under the first Bank loan were only $1.3 million aS of May 31, 1972, against $9 million committed, because CIZ met difficulty in obtaining from its clients oome of the supporting documentation for its Bank withdrawal applications. This matter has now been resolved. Operations L4. Between 1968 and 1971, about 1,800 housing loans amounting to DR 127 million were approved, most of them in the medium price range. During the same period, CIE approved 174 hotel loans for DE 175 million. CIH's hotel portfolio has a substantial number of large loans (15 loans over DH 5 million represented about 50% of all outstanding loans at the end of 1971) and a decreasing share of loans to high-clas category hotels. This development is welcome because demand for accommodation is stronger in lower class categories which cater to mass tourism. 45. CIH's hotel loans carry a nominal interest rate of 8.75% and the State usually guarantees 50%0 of the outstanding balance of CIE's loans. Hotel loans are limited to 20 years for construction with five years of grace, and to 10 years for equipment withl two years of grace. CIH pro- vides btween 40% and 55% of the investment cost. Pending the outcome  - 12 - of the work Morocco is now carrying out in consultation with the Pink on the country's tourism policies and related investor incentives, CIH's lending terms, including its effective rate on hotel loans (paragraph 50), will probably not be modified. Financial Results and Portfolio 46. CIH's accounts, in 1969 and 1970, were audited by Price Water- house and certified without qualification. The audit of CIH's 1971 ac- counts is completed. The report is expected momentarily, and the audi- tors have informed us orally that it is satisfactory. CIH's balance sheets and income statements are summarized in Annex III (page 2). For the period 1968-71, they reflect a continuing growth in CIH's volume of business, although during 1971 the portfolio increased by 16% only as compared with 45% in 1970, solely because commitments for hotel loans declined in 1970 and 1971. CIH's liquidity position is sound. As of D)ecember 31, 1971, CIH's current ratio was 1.8, about the same as at the end of 1970. At the same time, the ratio of long-term borrowing to net worth was 5:1 as compared with the 6:1 limit specified in the first and proposed second Loan Agreement. . 47. CIm's loans in arrears increased considerably during 1971. As of December 31, 1971, amounts of principal and interest overdue for more than five months represented about 3.6% of CIR's total portfolio, as com- -ared with 2.0% in 1970. The deterioration is almost exclusively attri- butalle to hotel loans and particularly to a loan of IH 30 millior to one large hotel company, whose arreats (all interest) represent about 56% of CUq's total arrears. As of December 31, 1971, the outstanding balance of the loan to this company amounted to 65% Of the total hotel portfolio af- fected by arrears over five months. Even without this loan, the increase in hotel arrears (from DE 14.3 million in 1970 to IE 26.2 million in 1971) is significant and reflects the weakness of 071's supervision in the past, the lack of.a systematic collection policy and,-to a certain extent, insufficiently thorough appraisals. CTii has recently introduced more aggressive collection procedures which should help reduce arrears consi- derably. 48. In addition to the hotel mentioned above, another major hotel client of CIE is in difficulty. The Government has an important financial inte- rest in both. (LMts financing of these companies, dating from 1967-68, repre- S4Hts- about 2L4% of its hotel portfolio and three times its net worth. The first hotel mentioned has repeatedly been in arrears over the past three years. The other client, which is involved in a legal dispute, is still benefitting from a six-year grace period on principal and interest and is not therefore delinquent; but the outcome of the dispute may affect CUH in the long run. Because the risk of loss on the loans to these com- parlies is large enough to put CIE's creditworthiness in question, the Government has paid to CIE the amount overdue from the first company and has arranged that a guarantee on the balance'of that loan will be provided to CIH. It has also guaranteed to hold CIH h6rmless from any losses on the loars to the second hotel client. These arrangements make CIH a cre&atvorthy borrower.  49, I-fI's other risks rest also essent-ally wyith its hotel portfolio,, but, except for the two cases discussed above, the portfolio is basically sound, since the bulk of C0H's hotel loans is covered by a 50% state guarantee and the mortgages securing these loans have a substantial value. On a conservative estimate, CIEts haxd core loss prospects (apart from the two mentioned oases in the previous paragraph) should not exceed DI 2.0-4.0 million. CTE's provisions Against these losses of DE 5.5 million are thus adequate. 50. Until last year, OMH automatically made provisions equivalent to the yearly increase in arrears. They were sufficient except for the problems described in the preceding paragraphs. For its 1971 acoounts, CIE started to scrutinize each of the delinquent loans in its portfolio to determine its appropriate provision. In the future, GCE will examine all its loans including those not delinquent and establish the provisions required for all foreseeable risks. 51. The problems with the two large loans referred to above, make it cleax that CIH needs to limit its exposure to individual borrowers, even though the Government continues to provide guarantees for half of each outstanding hotel loan. In future, therefore, CIH will normally limit loans to a single corporate entity not coveredb,by government or other suitable guarantees to 20% of its net worth. 52. In 1971, CIH's net profits reached IR 5.4 million as compared with DH 4.8 million for the preceding year. This represented a return of 27% on share capital and 16% on net worth, as against 24% and 16%, respectively, in 1970. Net operating income before provisions and taxes amounted to DR 11.9 million in 1971 as against DE 7.8 million in 1970. As a result of CM'Us new provisions of policy, provisions decreased in 1971 from DE 6.3 million to DR 5.5 million. Over the past four years, CIH has maintained an 8% dividend which represents a payout ratio of about 55%. Operational and Financial Projections 53. Housing loans are likely to remain an important part of C0s's operations. Buoyant demand and more liberal lending criteria are likely to lead to a significant increase in lending. In CIH's five-year forecast, commitments for housing loans are expected to rise from DR 48.5 million in 1971 to DE 55 million in 1972 and to DE 65 million in 1976. These targets have a good chance of being met. 54. CIE3's hotel financing business is also expected to increase con- siderably. Commitments are expected to rise from DE 88 million in 1972 to DE 110 million in 1976. These projections include public sector hotel projects which account for DE 22 million in the forecast of 1972 commit- ments. If the investment climate improves and the Government's tourism policy is successful, CIE's hotel lending projections appear plausible. 55. To meet commitments of about DE 795 million during 1972-76, C0I would have to raise new resources of IH 736 million, after deducting  - 14 - uncommitted funds and self-generated resources. The gap in local re- sources amounts to IH 467 million which CIII should be able to cover through recourse to public funds and increases in share capital. As to foreign resources, CIH expects to need US$54 million equivalent to finance the import component of hotel projects during 1972-76. 56. CIH's foreign exchange requirements for hotel loans for the next 18 months are forecast at US$15 million equivalent, and this would be pro- vided by the proposed Bank loan. By covering CIH's foreign exchange needs only to this extent, the Bank takes into account that although the im- provement in CTH's operations is real, it is recent and further progress is required. CIH will attempt to diversify its sources of capital so that the Bank would no longer be called upon to cover its entire re- quirement for import financing, although it may take some time tfor CIH to establish itself with other lenders. CIH is aware that possible further Bank lending would be related to its success in this regard. 57. The growing cost of resources arising from the larger share of Bank funds in CIE's borrowings will influence CMH's income. On the average, financial charges as a percentage of CIH's total assets will grow from 4.8% in 1971 to 5.5% in 1976. However, the share of administrative expenses in CIH's total income is expected to decrease steadily over the next five years, because of economies of scale. As a result, net income as compared with average total assets will remain largely unchanged at about 1%. over the next five years. Revenues derived from CIH's hotel operations are expected to remain high as compared with revenues from housing, but the latter will grow in relative importance over the next five years. CII's profitability over the next five years is expected to remain satisfactory: net profits after tax would represent 14-20% of CIH's share capital and about l10, of its net worth. 58. CIm's total assets are likely to double over the next five years. The current ratio will decline in 1973 and 1974 to 1.02 and 1.07, respec- tively, because large maturities on medium-term borrowings (five-year bonds) will be falling due in these years. However, CIH's cash position in this period will remain acceptable, provided more efficient collection procedures can be achieved. Debt service coverage would be adequate throughout the life of a second Bank loan. Dividend policy (8% of share capital) is reasonable and will allow for a satisfactory growth of reserves. 59. CIH plans two share capital increases of Dii 10 million, one in 1972 and one in 1974. The former was approved by CIH's General Assembly in 1971 and should be completed in the fall of 1972. Even with such in- creases, CIE would exceed its borrowing limit of 6:1 by the end of 1973. If an important part of CIE's loans were not covered by government guarantees, this limit would already be too high for a company like CIE which provides two thirds of its financing to a single sector. In the next few months CIH will prepare additional proposals to expand its equity so as to remain within its borroVSng limit.  - 15 - Terms of the Proposed Loan 60. The proposed loan to CIH follows the terms and conditions of recent loans to development finance companies, including the standard commitment charge. In view of the growing size of CIH's sub-projects, the free limit above which Bank approval of a project is required would be raised from $100,000 to $200,000, and the aggregate free limit would be $4 million. The Bank would thereby continue to review the bulk of the projects being financed out of the Bank loan. The proposed loan would be disbursed to finance 100% of the CIF cost of imported equipment; 65% of the cost of imported equipment or equipment assembled or processed locally from imported components, if purchased in Morocco; and the foreign ex- change component of construction costs. 61. CIH is continuing its important role in the Moroccan economy. Its new management is determined to strengthen its organization and pro- cedures. After the elimination of the specific risks in its portfolio by the measures mentioned above, CIH is creditworthy for the proposed loan. V. LEGAL INSTRUYMNTS AIND AUTHORITY 62. The draft Loan Agreement between the Bank and the Credit Immobilier et Hotelier, the draft Guarantee Agreement between the Kingdom of Morocco and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. The draft agreements conform to the normal pattern for loans for development finance companies. The effectiveness of the Agreements would be conditional on the Borrower's obtaining from the Guarantor and from the Caisse Centrale de Garantie, a governmental institution, full guarantees covering the DI 30 million loan of the Borrower described above. 63. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. VI. RECOMMDATION 64. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June 19, 1972   ANNEX I Page 1 of 2 THE STATUS OF BANK GROUP OPERATIONS IN MOROCCO A. STATEMENT OF BANK LOANS AND IDA CREDITS (as at May 31, 1972) Loan or US$ million Credit Amount (less cancellations) Number Year Borrower Purpose Bank IDA Undisbursed 329 1962 BNDE DFC 15.0 389 196h Kingdom of Morocco Agriculture 15.4 79 1965 Kingdom of Morocco Education 11.0 3.0 433 1965 Caisse Nationale de Crgdit Agricole Agriculture 9.7 - 447 1966 BNDE DFC 16.2 - 571 1968 BNDE DFC 15.0 4.3 167 1969 Kingdom of Morocco Highways 7.3 4.6 642 1969 Kingdom of Morocco Highways 7.3 7.3 6h3 1969 Kingdom of Morocco Agriculture 46.o 40.5 660 1970 BNDE DFC 15.0 5.0 70h 1970 CIH DFC(tourism) 10.0 8.7 736 1971 BNDE DFC 35.0 20.8 266 1971 Kingdom of Morocco Education 8.5 8.5 Total 18h.6 26.8 102.7 of which has been repaid 21.2 Total now outstanding 163.4 Amount sold 1.3 of which has been repaid 1.0 .3 Total now held by Bank and IDA 163.1 26.8 Total undisbursed 86.6 16.1 102.7 B. STATEMENT OF IFC INVESTMENTS (as at May 31, 1972) Amount in US$ million Year ObligOr Type of Business Loan Equity Total 1962 BNDE Development Bank - 1.0 1.0 1966 CIL Canning Factory 0.9 0.5 1.4 Total gross commitments 0.9 1.5 2.4 less cancellations, terminations repayments and sales 0.4 - 0.4 Total commitments now held by IFC 0.5 1.5 2.0 Total undisbursed - 0.1 0.1 j/ The original investment was $1.5 million; BNDE has redeemed $0.5 million in October 1968.  ANNEX I Page 2 of 2 C. Projects in Execution 1. Delays in disbursements of several loans and credits have been caused mainly by cumbersome budgetary and accounting procedures, and administrative inefficiency in submitting disbursement applications, rather than byT delays in the execution of the project. A Bank disburse- ment officer visited Morocco last November to investigate the problems and propose solutions. During the recent negotiations further improve- ments and streamlining of procedure were agreed upon. 2. Considerable delays have been, and still are, affecting the execution of the education credits (79 and 266-MOR). Disbursements under the first credit have been extremely slow and the Closing date had to be extended twice, from the original date of June 30, 1971 to March 31, 1973; disbursements under the second credit have not yet started, ten months after signing. Project implementation has been affected by inadequate management of the project unit, insufficient control of construction works, departures from agreed procedures for procurement, and lack of coordination. The higher education study needed to prepare a proposed third loan is not yet started. Despite numerous supervision missions, little progress has so far been achieved. This situation is under constant review and a new schedule for project implementation has just been sent to the Government. 3. The Sebou irrigation loan (643-MoR) is progressing satisfactorily. Redistribution of expropriated properties to small landowners started more slowly than expected because of delays in enacting the necessary legis- lation. Substantial cost increases on a number of important items are becoming apparent and as soon as they are reviewed, the Bank will discuss with the Government their consequence for the financing of the project. 4. The first highway financing (167 and 642-MOR), mainly for the Agadir-Marrakesh road, is progressing satisfactorily from a technical standpoint. However, only $2.7 million has yet been withdrawn out of a combined loan/credit amounting to $14.6 million. The Effective date was March 16, 1970, and the Closing date is February 28, 1974. The situation is being reviewed with the Government.  ANNEX II Form No. 81.02 WORLD DANK GROUP (5-7 2) COUNTRY DATA COUNTEr: HDROGOD 2 2 POPULATIONt 15.379 Million (1971) DWlS!TY per km10 AREA nrrF~~~~~~~~~~~~~~~~j~aof th 2.6 % (from 1960 to 1971) frpekmoaab ln POPULATioN CHIARcTERIISTICS: 9/ -Ptaation per phlyaician (1965 ) 12,930 Crud Bith ateTFU71,00) (1966-'70) 4STPopulation per hospital bed (l9M5) 660 Crude Death Rate (per 1,000) (1966-'70) i6.5. Infant Mortality (per 1,000 live birthe) n.a. .INCOME ISESTRIBUTIOOl: DISTRIBETEON OP LAN OWNERSHIP: (early 1960's) % of national income, lwoest qaintill n.a. 70% of land owned by top 10% ownere higheat qaintile n.0 ACCES TO OTABL WATR (% of popolatioaSn.e ACCESS TO ELECTRICITY: (% Of Population) na Urban n.e. Urban n0.0. R-1 n...~~~~~~~~~~~~~~~~~~~~~urlne NUTRITION: 7/OGNP PER CAPITA:s 242 (19171) EDUCATION: Cal' orie intake aa % of requirements (94'6) 2-Adult literacy rate n.a. 8 Per capita protein intake (grammoes) (1964-166) SN Primary school enrolment 54% (99 GROSS NATIONAL PRODUCT (1971 (: ~~~~~ANUIL AT O' ROTH% ontat icsi ON? at market prics 3,72t 1 4A1 3.05. Groso Investmenit 5514.4 5.4 8.3 -2.0 Oross National Savings 457 12.3 Current Account BalanCe -78 -2.1 %~cporto of Goodo, SF5S 742 19.9 0.7 5.3 6.7 Imports of Ooods, NSF 863 23.1 -1.0 9.6 -2.3 OUTPUJT. LABOR FORCE AND POD-umviTy iN T = Talus AddMdl/ Labor force- Value Added PrWre 105 5 Million) S (~~~~aiLos %-r SUS 5 9 f otiona overage Agriculture 1,021 26 3.67 71 C 278) C 39) Industry 907 25 0.60 12 (i1;512) (213) Servicee 1.756 47 09.1.2 is! (1,930) 21 Total/Average _3,68 10-.8 7T (tOO) PUBLIC FINANCSS IN Cenra Goer