Morocco - Casablanca - Rabat Bulk First Water Supply Project

CIRCULATING COPY RESTRICTED TO BE RETURNED TO REPORTS DESK Report No. P-1111 F I LE COuPY 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 It may not be published, quoted or cited without Bank Group authorization.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 completeness of the report. INT9RNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION ,OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE OFFICE NATIONAL DE L'EAU POTABLE (ONEP) WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A FIRST WATER SUPPLY PROJECT June 30, 1972  CURREITCY EZUIVALF'TS DIR{A4 1 - us$ o.2]21 us$ 1 - DH 4.66  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE OFFICE NATIONAL DE L'EAU POTABLE (ONEP) WITH TIlE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A FIRST WATER SUPPLY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Office National de l'Eau Potable (ONEP) with the guarantee of the King- dom of Morocco for the equivalent of US$48 million to help finance a project for bulk water supply in the Kenitra-Rabat-Casablanca region of Morocco. The loan would have a term of twenty-five years, including five years of grace, with interest at seven and a quarter percent per annum. PART I - THE ECONOMY 2. An economic report entitled "Current Economic Position and Pro- spects of Morocco" (Sec. R 71-222) was distributed on 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 preparation. 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. Inde- pendence 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 1961. 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, business and administration, and French is the pre- vailing language in government circles, and in education above the primary level. 4. In the period since independence the traditional social and polit- ical order has been essentially maintained while the economic structure began to change gradually. Traditional subsistence rainfed agriculture still ab- sorbs more than half of the active population. A small but growing modern  - 2 - type agriculture provides a substantial part of the commercialized agricul- tural 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. 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 sec- tor of the economy. In 1971 foreign exchange 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 countryside is high and large differences 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 independence include: (i) acceleration of economic growth; (ii) preservation of social and political stability; and (iii) promotion of "Moroccanization", i.e. a larger share for Moroccan ownership and management in foreign-owned land, commer- cial and financial companies, and selected industries. 6. The moroccanization policy has been consistent but moderate. For- eign 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 for- eigners 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 con- cerns, often associated with an 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 fi- nancial institutions to reflect better the opportunity cost of capital, and increase in tariffs for water supply helping to increase public savings in that sector. 7. The political and social structures 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 accom- panied 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 constitution has been enacted and a Gov- ernment formed to prepare elections which would provide a wider basis for the next administration. The Government has increased civil servants basic salaries and workers minimum wages by 15 percent, extended family allowances, introduced a modest progressive income tax and reduced the price Oof sugar, an  -3- important consumption item of the low income classes. It intends to accel- erate the distribution of ex-colon land, to extend pension and health insurance schemes, to embark on a wide-scale replacement of slum areas, and to help set up small farms. Development Plan 8. The 1968-72 Development Plan is nearing completion and a new five- year Plan (1973-1977) is under preparation. During the present Plan period the production growth in most sectors has surpassed the Plan targets substan- tially: (percent average annual growth) Actual Plan 1968-71 Targets Agriculture 6.4 2.1 Energy 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 4.6 Total (government services excluded) 5.6 4.3 9. Results in agriculture appear better than they really were because 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 percent, well above expectations. Only mining fell below the Plan target, largely because competition on the world phosphate market depressed 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 declined due to depletion of re- socurces. The political events of mid-summer 1971 had limited immediate ef- fect on the overall growth rate. The acceleration in manufacturing output and construction activity was interrupted, but good weather helped to in- crease agricultural output. Total production increased by 5 percent in real terms, only slightly lower than that of the preceding three years. 10. The volume of total fixed investment increased by 6 percent annual- ly 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 percent 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 agriculture and livestock was slow. Construction of power stations is in line with Plan tar- gets. Other government investments did not differ by more than 10 percent from Plan targets except for delays in investments for urban development, health, education and communications.  -4- 11. Since the abortive coup of July 1971, many private investors seem to be awaiting the outcome of the political reorganization which is under way, and public investments have also been stagnant largely due to some re- consideration of policies and changes in cabinet and civil service. Total fixed capital formation in 1971 dropped by about 2 percent in real terms and represented 14.1 percent of GDP. Consumer demand was sustained by good crops and the social measures taken by the Government since mid-1971. The impact of these measures on government savings was offset by better performance of public enterpirses, while the good crops and remittances from emigrant workers stimulated private savings. However, total gross national savings remain around 12 percent 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 S.DR allocation, the reserve position improved and reached a level of $235 million in March 1972, equivalent to about two and a half months of imports off goods. Development Prospects 12. Appropriate fiscal, monetary and trade policies cou'ld ensure that GDP will continue to grow at about 5 percent per year until T977. However, to achieve this modest target, per capita annual consumption. would have to be limited to 1.5 percent. This would not be easy in view of the increased attention given by the Government to social progress, but would be necessary because a growth rate of 5 percent would require savings and investments to be raised from about 12 percent and 14 percent of GDP respectively to 14 per- cent and 17 percent of GDP in 1977. The other growth assumptions could prob- ably be achieved without major difficulty. On the basis of present trends, foreign aid disbursements in 1977 might be projected as follows, although the actual flows will depend on future commitments still to be made by the respec- tive donors: (million of dollars) Annual Average Actual Projection 1966/68 1969/71 1971 1977 Bilateral 112 125 144 156 USA (48) (56) (56) (36) France (39) (27) (30) (54) Germany (19) (17) (28) (17) Other Countries (6) (25) (30) (49) Bank Group 11 18 25 59 Total Gross Official Flow 123 143 169 215 Repayments 45 50 64 95 Net Official Flow 78 93 105 120  -5- 13. While the above projections appear feasible, the Government's tar- gets are likely to be more ambitious. It is considering an annual growth target of 6.5 percent for the next Five-Year Plan, and is working out its implications. These would clearly include stronger growth of gross national 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 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 per- cent in 1971 to 12 percent 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 re- strained in the long run. The share of the Bank Group in Morocco's total outstanding external debt is increasing. From about 7 percent at the end of 1968 it had reached 10 percent at the end of 1971 and may rise to 20 percent by the end of 1975. Projects already approved and those under consideration would lead to disbursements equivalent to about one-fifth of Morocco's pro- jected foreign capital needs in the mid-seventies. PART II - BANK GROUP OPERATIONS IN MRORCCO 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 million), transportation ($14.6 million), education ($10.5 million), and tourism ($17 million). Two further operations have been submitted to the Executive Direc- tors for consideration on June 29. They are a proposed loan of $15 million to the Credit Immobilier et Hotelier (CIH) for hotel financing and a proposed development credit of $10 million to Morocco together with a proposed loan of $24 million to the Caisse Nationale de Credit Agricole (CNCA) for an agricul- tural credit project. 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 in- vestments as of May 31, 1972 and notes on the execution of on-going proj- ects with particular reference to those which are encountering 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 percent per  -6- year, the rate achieved in the recent past, financing key projects in prior- ity sectors, and devising and implementing policies to limit unemployment, develop agriculture and improve urban and rural living conditions. It con- templates primarily lending from the Bank, but with some blending of IDA funds, as in the present case, 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 over the next two or three years, but this muclh depends upon Morocco's capacity to prepare projects, upon solving the difficulties encountered in creating new institutions or in improving ex- isting ones and upon finding competent management. Sectors and Projects 17. The key sectors on which the Bank concentrates its action are agri- culture, tourism, urban infrastructure, industry for export and transport. Amongst these key sectors, agriculture and urban infrastructure provide spe- cial opportunities to help devise and implement policies responding to the Government's new emphasis on social development. 18. In agriculture the proposed $34 million second financing for agri- cultural credit would help develop modern farming. The problems of tradi- tional 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 consolidation, basic infrastructure, soil preparation and credit, and could have a substan- tial effect on rural underemployment. It may be ready for consideration by FY 1974. A study of the Oum er Rbia basin development was recently com- pleted in cooperation with the Bank, and an irrigation scheme is now under preparation. Originally planned for financing in FY 1972, it has been post- poned to FY 1974 because of delays in initiating the feasibility studies. The Bank is also helping the Government define and prepare a project to de- velop the production of off-season fruits and vegetables for export. 19. Tourism has become the largest source of foreign exchange for Morocco and its further expansion should help finance the substantial imports necessary for future development. The Bank finances the Moroccan development bank for hotels (CIII) for which a second loan of $15 million was recently presented to the Executive Directors. The Bank might also well be Executing Agency for a proposed UNDP study which could lead to a tourism infrastructure project for FY 1974. Finally the Bank is helping the Government to coordinate a number of other studies and reviews of the sector. 20. Urban infrastructure projects include the present first water supply project, to be followed by a second one in FY 1974. A Bank sector mission has recently reviewed the Government's proposed urbanization policies and identi- fied 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.  -7- 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 grow- ing needs. After a first loan to finance the road between Marrakesh 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 FY 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 de- velopment, graduates arc 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 dete- rioration is allowed to continue social stability could be affected while the qualified personnel needed to insure economic expansion would be lacking. Projects for education in Morocco undoubtedly have a high priority; two cred- its 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. 1). 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, IMF, UNDP, OECD/DAC, African Development Bank and European Invest- ment Bank. At its last meeting, in October 1971, the Group welcomed Gov- ernment's new policies and affirmed continued support. PART III - THE WATER SUPPLY SECTOR CharacterLstics 25. In most of Morocco water is scarce, the summers are hot and dry, and rainfall is concentrated in the few winter months. Available water sources renewed each year amount to some 25,000 million m3 and under present techniques, about 16,000 million m3 are usable of which half is actually consumed. Water rights are frequently more important than ownership of land as a source of political and economic power. Works to control and store water date back to the very origins of Morocco and are more essential today than ever.  - 8- 26. Morocco's population is about 15 million, of which about two-thirds live in rural areas; the urban population is heavily concentrated in six cities, Casablanca, Rabat-Sale, Marrakesh, Fes, Meknes and Tangier, which have altogether a population of about 3 million. Total population growth rate is estimated to be 2.6 annually. Urban growth rate, including migration from rural areas, is estimated to be 5 percent. Overcrowding in the ancient parts of the cities (medinas) and in the more recent shanty towns (bidonvilles) at the outskirts of cities is becoming very serious. A few cases of cholera last summer underlined the danger of inadequate water supply and sewerage systems. 27. Some urban or village water supply systems date back to the Middle Ages. The medina of Fes in particular, the ancient imperial capital, still enjoys water and sewerage systems in earthenware pipes which were started in the 11th century. During the French protectorate these ancient systems were progressively replaced by modern installations. Today Morocco has some 125 piped water supply systems to which most urban middle class and lower middle class housing is connected. Parts of the medinas and' shanty towns have to rely on public pumps sometimes located at great distance. In vil- lages, water is still often provided through ancient wells,. sometimes modern- ized with pumps. In the last decade, investment in additional production and distribution capacity has been insufficient and, except in the large urban centers, maintenance has been poor. Backlogs in water supply exist through- out the country, but there is little knowledge about the extent of the prob- lem. As a rough estimate, present supply might account for 70-80 percent of demand in the Rabat-Casablanca zone and for some 60 percent in the interior. Organized sewerage systems exist only in the large cities, but are generally inadequate. Morocco has no major sewerage treatment facilities. Studies 28. In 1967 the Government requested the UNDP to finance an urban water supply master plan up to the year 2000 and feasibility studies for the first stage of the plan in the coastal zone between Casablanca and Kenitra. The UNDP agreed to this request in January 1968. The World Health Organization (WHO) is the executing agency. The provisional results of the feasibility studies by consultants for the first stage were used by the appraisal mission for the proposed project and the final results were reviewed before completing appraisal. A second stage of the study should be completed by the end of 1972. These studies are expected to lead to a series of projects to help eliminate the present backlog in demand for potable water. Several of these projects may be presented for Bank financing. 29. In the project area, the Atlantic coastal zone, the possibilities of further exploiting ground water sources have been almost exhausted.. 'Accord-' ingly, the master plan for the Atlantic coastal zone envisages_the use of the- three major rivers in this area, Bou Regreg, Oum er Rbia and Sebou. Of these rivers, the Bou Regreg flows only through rough and semi-mountainous territory with little potential for irrigated farming. Conversely, the Oum er Rbia and the Sebou flow through plains which are becoming Morocco's major irrigated farming areas. In the search for a satisfactory technical solution, some  -9- 20 alternatives were considered and eventually reduced to two: (a) construc- tion of a large dam on the Bou Regreg river and a pipeline to Casablanca; or (b) construction of a smaller dam at the same Bite feeding into an existing pipeline, with Casablanca's immediate needs being met by expanding transmis- sion facilities from the Oum er Rbia. The Bank initially favored the second alternative which was marginally lower in estimated cost, but the Government strongly favored the first solution, which would not draw on water which could be used for irrigation. The Bank agreed in April, 1971, to accept the flrst scheme, which the Government favored and which forms the basis for the proposed project. 30. The preparation of the proposed project illustrates the conflicts between water uses that are likely to become ever more critical in Morocco, not only between the holders of traditional water rights, but also between various sectors of the economy. These problems are further complicated by the variety of criteria which must be considered in trying to resolve such conflicts: e.g. life and health, economic return, income distribution, respect of ancient rights. The 8,000 million m3 presently consumed annually have frequently been allocated on the basis of ill-defined political and social considerations which have resulted in 7,500 million m3 for agricul- ture, 300 million m3 for human consumption and 200 million m3 for industrial use. With growing needs, it has become clear that more rational methods of allocation are needed to ensure the orderly development of the country. Several partial studies were undertaken in the past. The Bank has proposed and the Government has agreed to have an overall study undertaken for the establishment of a Water Master Plan identifying all known water resources in the country and suggesting criteria and priorities to allocate them to the various sectors of the Moroccan economy. Simultaneously a team of Moroccans would be trained and would subsequently police the execution of the Master Plan, continue to search for and identify new water resources, evaluate new water needs and periodically update the Master Plan as required. Organization and Administration 31. The structure of the water supply sector is complex due to the mul- tiplicity of authorities involved. The largest organization has hitherto been the Regle des Exploitations Industrielles (REI) a government agency which supplied water for a great number of centers but which also had other functions such as operating the government motor pool. REI was governed by a Board of Management comprising the Minister of Public Works as Chairman and three re- presentatives of other Ministries. Its general manager was closely supervised by the Ministries of Finanices and Public Works. REI personnel were largely governed by civil service regulations. This system was not conducive to ef- ficient management. 32. The second most important production and transmission agency is the French controlled private concessionnaire which supplies Casablanca. Distribution of water is the responsibility mainly of autonomous municipal agencies (Regies) in large cities and elsewhere of municipal or provincial administrations. Sewerage systems, where they exist, are also administered  - 10 - directly by the municipalities. The Ministry of Interior supervises the provinces and municipalities and, through them, the Regies, and has to ap- prove the tariffs they propose. In the rural areas it shares responsibility with the Ministry of Agriculture. The Regies, as well as REI, managed their operations more efficiently than the provincial and municipal administration, although the Regies are facing increasing financial problems because their tariffs have not been adjusted since 1959. The policies of the various Min- istries and authorities involved have not always been coordinated, leading to inefficiencies and disputes on alternative courses of action. 33. During project preparation and loan negotiations the organization of the sector was substantially improved. The Prime Minister's Office as- sumed overall coordinating responsibility, and a new national water supply organization, Office National de l'Eau Potable (ONEP) was created. ONEP has taken over all REI's functions but will abandon as soon as feasible those which are not related to water. Its responsibilities as a bulk water sup- plier are progressively being extended over the whole country. ONEP's Board is chaired, like that of REI, by the Minister of Public Works, and comprises twenty members representing interested Ministries, provincial assemblies and some Regies. ONEP's financial autonomy has been established through a 15 percent raise in the bulk water tariff in the coastal zone, a tariff covenant (para. 41) and new regulations soon to be issued by the Minister of Finance, which would allow ONEP more freedom in its financial management while retain- ing appropriate controls against possible abuses. The Ministry of Public Works is expected to limit its control over ONEP to broad policy issues. New personnel regulations will enable ONEP to recruit and retain qualified personnel. Management consultants financed under the proposed loan would help define and implement an efficient organization for ONEP. 34. The increase in ONEP's bulk tariffs should eventually be reflected in the retail tariff of the Regies, but the information presently available is insufficient to determine the extent of the raises needed. The Government has therefore agreed to have a nationwide retail rate study carried out by consultants. The study for the coastal zone will be completed by June 30, 1973 and for the rest of the country by December 31, 1973. The Government will then consider all measures necessary to ensure that retail tariffs are reviewed and adjusted as necessary to reflect the full cost of production and distribution and to allow the Regies to finance a reasonable part of their future investments. PART IV - THE PROJECT 35. Bank staff carried out a first identification mission in September 1968, and have since then closely followed the preparation of the master plan for urban water supply and the Project. In April 1971 a Bank mission includ- ing experts in hydrology and the design of dams reviewed the WHO/UNDP feas- ibility study on the first stage of the Project. An appraisal mission visited Rabat in September and October 1971.--*Negotiations' took place in Washington from May 9 to June 7, 1972. The Moroccan delegation was headed by Mr. N. El Ghorfi, Director for Economic Cooperation, Prime Minister's Office.  36. The Project is the first stage of the implementation of the water supply master plan. It provides for bulk water production in the Atlantic Coastal Zone between Casablanca and Kenitra. It should satisfy the demand of the urban population in that area for the next ten years (2.3 million of people in 1970 rising to 3.7 million in 1980 which would then account for close to 20 percent of Morocco's total population). The project's main elements are the Bou Regreg dam, where the transmission system originates, 90 km of transmission lines to Casablanca a water treatment plant and a pump- ing station. The Project also includes the rehabilitation of the Fouarat system, which consists of the Mamora wellfield near Kenitra; a 136 km pipe- line to Casablanca via Rabat, and the Oued Mellah treatment plant near Mohammedia. A Loan and Project Summary is given in Annex III. A report entitled "Appraisal of the First Water Supply Project, Morocco, Casablanca- Rabat Water Supply" (No. PU-96) of June 15, 1972 is being circulated separate- ly to the Executive Directors. Project Execution 37. To prevent a potential water shortage in Rabat in 1974 and in Casablanca in 1975, the Government began construction of the dam in May, 1971. Construction is scheduled so that filling of the reservoir can start in the Fall of 1973, with the first heavy rainfall which normally occurs in November. The pipeline to Casablanca would be constructed in two phases: the first section terminating at Bouznika (40 kmn) to be com- pleted in 1975, and the second from Bouznika to Casablanca (44 km) in 1976. This phasing would permit an increased supply to Casablanca from 1975, through the rehabilitated Fouarat pipeline from Bouznika to Casablanca. 38. Responsibility for project implementation would be shared by ONEP and the Hydraulics Department. In conformity with Moroccan practice, owner- ship of the dam will remain with the Government, but control, operation and maintenance will be vested in ONEP. Supervision of construction of the dam, of the intake tower and the tunnel is the responsibility of the Hydraulics Department, with minor assistance from consultants. A similar arrangement is functioning satisfactorily for supervision of the construction of the Bank-financed Idriss I dam (Loan 643-MOR). For supervision of construction of the pumping station, treatment plant and pipelines, ONEP will retain consultants who would also train ONEP staff and gradually transfer part of the supervisory work to these employees. 39. The total Project cost is estimated at USS104.9 million with a foreign exchange component of US$50.4 million including US$2.3 million fi- nanced bilaterally. The cost of the various elements is summarized in Annex III, page 1. Physical contingencies range from 10 percent for the dam and the pipeline to 30 percent for reconditioning of the Fouarat Scheme. Price contigencies are based on the expectation of average annual increases of 3 percent and 5 percent in local and foreign costs respectively, continuing the trend of recent years. The foreign cost components of the various civil works are estimated to range between 36 percent and 64 percent, which  - 12 - takes into account that Morocco is a net importer of fuel, cement and steel. Taxes, totalling approximately DiH 73 million (US$15.7 million) are included in the cost estimates because the Government does not intend to give tax exemptions for the Project. Financing Plan 40. Total Project costs amount to $104.9 million, including the equiv- alent of $15.7 million for taxes. The proposed Bank loan of $48 million would finance 45.8 percent of total costs; bilateral aid from France and the United States has financed $2.3 million equivalent or 2.2 percent of total costs. The Government's contribution of $40.8 million equivalent will amount to 38.9 percent of total costs, while ONEP's internal cash generation will provide the equivalent of $13.8 million or 13.1 percent of the total cost of the Project. If production taxes and customs duties paid by ONEP during the construction period are taken into account, the Government's net contribution to the Project would be about $25.1 million. The cost of the Project repre- sents about 65 percent of ONEP's estimated total capital requirements during the construction period, 1971-77. Financial Situation 41. In 1968-70, water activities showed a steadily declining operating surplus. During the same period, fixed assets were provided almost wholly by government grants and consumers' contributions; ONEP will not take over any debt. The Government and ONEP have agreed that ONEP should achieve a rate of return of not less than 1 percent until 1976, 2 percent for the period 1977-80, and 7 percent thereafter, thus allowing ONEP to make increas- ing contributions towards the cost of its future expansion. On this basis, the operating ratio is expected to fall from about 100 percent at present to about 64 percent in 1985. ONEP has also agreed that, unless the Bank other- wise agrees, it will incur no debt before 1977 and that after that year, net revenues at the time of incurrence should, before depreciation and interest, amount to at least 1.5 times the maximum future debt service. Procurement 42. All equipment supply and civil works contracts to be financed from the proposed loan have been or will be awarded on the basis of international competitive bidding. The equipment and material required for this project, except for some minor items, are not produced in Morocco. As a result of the Act of Algeciras in 1906, Morocco has no preferential tariffs despite its association with the European Economic Community. As noted in paragraph 37, advance contracting of some US$35 million was necessary because of the lead time needed to build the dam to meet water shortages expected in 1974. The main contacts have been awarded, with the approval of the Bank, to Dumez (France) for the dam, B.V.S. (France) and Waagner-Biro (Austria) for hydro- mechanical equipment (dam and intake) and Klein-Schanzlin and Becker (Germany) for pumps.  - 13 - Disbursement 43. Disbursements on the proposed loan would be for the C.I.F. price of imported equipment, and for percentages representing the estimated foreign exchange component of civil works contracts, locally procured equipment and consultants' services. Estimated disbursements are shown in Annex III. Re- troactive financing of about US$4 million is proposed for expenditures in- curred for the dam after May 1, 1971. Jus tl lfic aion 44. The Government has no option but to proceed with this large investment if it wishes to avoid serious water shortages and consequen- tial health hazards in the coastal zone within the next few years. With present retail water tariffs in Casablanca and Rabat (approximating DH 0.70/M3), unchanged for over 10 years, the projected incremental revenues from water sales provide no measure of the importance to Morocco of avoiding these shortages. Yet even at these tariffs, which are so low as to cause serious financial problems for the distribution agencies and which will have to be raised in due course in the light of the study re- ferred to in paragraph 34 above, the rate of discount which equalizes the streams of revenues and costs attributable to the project would approximate 6%. PART V. -- LEGAL INSTRUMENTS AND AUTHOPITY 45. The draft Loan Agreement between the Bank and Office National de l'Eau Potable (ONEP), 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. 46. The Loan Agreement is subject to the following conditions of effectiveness: (a) the enactmtent of personnel regulations, enabling ONEP to recruit and retain qualified personnel; (b) the promulgation of financial control regulations ensuring the requisite financial autonomy of ONEP. 47. The draft agreements conform to the normal pattern for loans for watcr supply projects. 48. I an satisfied that the proposed loan would comply with the Articles of Agreement of the Banlk.  - 14 - PART VI - RECOQMFNDATION 49. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments June30 , 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 1964 Kingdom of Morocco Agriculture 15.4 - 79 1965 Kingdom of Morocco Education 11.0 3.0 433 1965 Caisse Nationale de Credit 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 7.3 643 1969 Kingdom of Morocco Agriculture 46.0 40.5 660 1970 BNDE DFC 15.0 5.0 704 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 184.6 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, 1'72) 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 / 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 by 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 number of specific steps for project implementation has just been suggested 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.  Form No. 81.02 WORLD BANK GROUP COUNTRY DATA COUNTRY: MBO0M ARFA: 505,940 I. 2 ~~~~~~POPULATIONs 15.379 mdilion (1971) DENSTY pe 2k Rate or Growth 2.6 % (from 1960 to 1971 ) i =ia 111'per ofarbl ln POPUIATION CHARACTERISTICS. 9/ HALTH: Crude Bjirth Rate (p--ar- ,0O0) (1966- '70) 49.o Pouato prpysician (1965) 12,930 Crude Death Rate (per 1,000) (1966- '70) 16.S50 Population per hoapital. bed (1965 660 Infant Mortality (per 1,000 live births) 0. INCOME DISTRIBUTIO : DISTRIUETION OF LAND OWNERSHIP (early 1960's) 7. of notiol ..Inc 1., owet quArtile n.a. 70% of land owned by top 10% owners higheat qointile n. ACCESS TO POTABLE WATER % of popolati-n) n. ACCEDE TO ELECTRICITY, 1% of popolation) n.a. Urban n.e. Urbanna NUJTRITION - GNP PER1 CAPITA: 8242 0971) EDUCATION: C-alor-ie int-ake as % or requirements (1964- '66) 92." _A_dult teracy rate 0.0.a Per capita protein intake (granones) C 1964- '66) 58 Primary achool enrolment 54% 11968) GROSS NATIONAL PRODUCT (1971 ANNUAL RAEaOFtOROcej vuei-n ES $ mln. % Tw0-73 1945-70 1197 GNP at market prices ll4 .78 5o 3.0 5.1 S-B Gross Investment 535 14.4 5.4 8.3 -2.0 Gross Nation.1 Savings 457 12.3 Corrent Account Balance -78 -2.1 B~ports of Goode, UPFS 742 19.9 07 5.3 6.7 I.ports of Goods, NF'S 8323.1 -1.0 9.6 -2.3 OUTPUT. LABOR FORCE AND1 P ODETtIVYITYU TM -.7 2/ Va.lue Added!/ LaoA'n Fnrce- Value Added Per 4orher ;U 9 MillIion) 0 (us $) of national average Agriculture 1.021 28 3.67 71 C 78) ( 39) Industry 907 25 0.60 12 (1l5W0 (213) Sorvices 1 756 47 0.91 18 (I 9311) (271) Total/Average 100= 5. T18y' 100 ('7fl) PUBLIC FINANCED IN 1971 Aill Gonerrnwmwt Central Government A i Gf iP Averare 0 of 009 -verags (5829 .le) 0 of' T3P '1969 -1971 P1s $ 10) %of GDP 1969-1971 Current Recipts n.e. n.a. n.a. 672 18.0 18.7 Current Fxyenkditurno (incl. transfers) n.0. n.0.0.. 581 15.6 16.0 Current Surplus/Onficit ()211 5.7 5.5 91 2.4 2.7 Capitol Eapendituren 312 8.4 9.0 259 6.9 6.3 F.cternal Aasostance (net) L0s 2.8 2.7 63 1.7 1.5 PRICES AND CREDIT- 4 end of year: Caof ,livina in CAnablauca- 9p,'k L'n~ o P0l10 Sectoar Sank Credit to Private Sector 9ono (193-i0U) 7. changc (US In01) % change (SI $ In) changg 1965 105.5 0.5 448 17.4 521 21.7 1969 108.6 2.9 552 23.2 510 -2.2 1970 110.0 1.3 589 6.6 511 0.3 1971 114.5 4.1 602 2.2 583 14.2 Fh.3. 1971 114.3 - F.b.)l1472 120.6 5.5 BALAN1CE 0F PAYMENTS IS 1969. 1970-and 1971 10'tCNAIOUCI' EPORTS (Average nf 1969. 1970 and 1971): (millions US 1)ln51.) BAports of Goods, NFPS 667 698 742 Ph..ph.t. 113 23 Imports of Goods, NF'S 709 854 863 Cltros fralt 75 15 Resource Gap (deficit * ) 42 -156 -121 Tomatoso 32 7 Canod rih26 5 Interest Payments (net) -18 -16 -22 All other omeeodltiea 2481 SB Work ers' Remittances (Sr ... 60 63 95 Total 494 1.00 Other Factor Payments (net) -49 -44 -43 :(0j (v Net Transfers 10 9 13 lTIL P0T (Icabol/' 17 od11) Balance on Current Account -39 -144 .78 O51 51 Io~~~~~~~~~~~~~~~~lr'zers'remitte.,con 7 Direct Foreign Investment 4 19 17 CLhar11 Median and Long-tern Loans (set) 31 99 75 Disbursementsa 70 )(136 )(126 ) E(TER0IAL DEBT 0ND1 EME 308181 S, 101711 Amor tization (-39 )(-37 )(-51 )($ mi. Official Grants 29 20 18 Aedllo and Long-term Credits, Public 804 Other Capital (net) -1 28 28 No-uaatedPiat.L Increase in iet Total Reserves 21 37 720/o-urnee rvt I All other itme - 15 12 ~~~~~~~~~~~~Total Outstanding and Disbursedna Gross Official. Reserves (end lear) 114 141 174 DEBT SERVICE RTIO __ 1971____ Net Total :onervens (end yea.) 82 118 I90'D