Morocco - Power Project

FILE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use Report No. 26a-MOR APPRAISAL OF A POWER PROJECT OFFICE NATIONAL DE L'ELECTRICITE MOROCCO August 22, 1973 Europe, Middle East and North Africa Public Utilities Division This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization.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.  CURRENCY UNIT 1 Dirham ( DH) = 100 Centimes Moroccans (ctms) CurRENCY E)QUIVAI;ETS US$ 1 - DH4.2 US$1 million I DH4.19 million DH. US$o0.2386 DH1 million US$238,600 UNITS AND NEASURES kW= kilowatt 1mq Megawatt = 1,000 kW kWh - kilowatt hour aWh Gigawatt hour = 1 million kWh kV kilovolt kVA kilovolt-ampere MVA Megavolt-ampere - 1,000 kVrA 1 km= 1 kilometer - o.6214 mile 1 mile 1.6033 km FISCAL YEAR January 1 to December 31 ABEREVIATIONS AND ACRONYKS ONE - Office National de l'Electricite' EEM Energie Electrique du Maroc SMD = SocieteJ Marocaine de Distribution SCE Societe Che,rifienne d'Energie EdF Electricite de France  APPRAISAL OF A POWER PROJECT OFFICE NATIONAL DE L'ELECTRICITE MOROCCO Table of Contents Page No. SUMMARY AND CONCLUSIONS .. .......... ........... . . . . . . . . . . i-i 1. INTRODUCTION .................... .................... 1 2* THE SECTOR .*******...... *** ..........*..... 1 History *............................. 1 Power Sector Organization .......................... 3 Installed Capacity and Sales ..... .................. 4 The Re'gies *.... o ........o.**.*..........*....*** 5 3. THE BORROWER ................................... 6 Legal Basis .... .................................... 6 Board .. ........*...-.0 .....* . * ** .. ..*.... * ...... * 6 Organization and Management ........................ 6 Personnel . . . . . . . , . * * * * * . ... . *.* . * .* . . .*. . .* *. .*.. 6 ONE's Facilities 7........... ......*... 7 Planning .... o .............os0* .0.*.0.0................. 8 Insurance ..... ses.. *-.o...... es...................... 9 4. THE PROJECT *******************.**.*.*...*..**....b. 9 ONE's 1973-77 Investment Program ................... 9 The Bank Project ................................. . 10 Ecological Aspects ................. ....".. ..... 12 Design and Supervision . .......... .. ....... ... . ... . 12 Procurement and Disbursement ..... ..........0........ .. 12 5. JUSTIFICATION ... o.... o....... o.*.o.oo*o.*.*. 13 Growth of Power Market . . ........... .......... 13 Comparison of Alternatives .... ..................... 14 Economic Evaluation . ........................... * .... 14 Costs and Benefits ... 14 This report is based on the ffindings of a mission to Mlorocco in July 1972 compose(d of Messrs. P.R. du Mee, R.A. Ribi and H. Maeda. To update the information Messrs. W.F. Kupper and A.J.D. Hutchins visited Morocco March 18-25, 1973.  -2- TABLE OF CONTENTS (CONTINUED) Page No. Gas Turbines ......**.**.... ................** 15 Transmission Lines and Substations ....... ........... 15 Sensitivity Testing *.......................**t***. 16 6. FINANCES *..&..................................... 16 Accounting ......... o...... ........O-* 16 Financial Management .. ...... 0***.**...... ..***.0 16 Audit ..***...**.*...*e... *s******.*,*** 17 1971 Actual Financial Positions .......... ......... * , 17 Government Receivables .* ........................... 18 Inventories . . .......... . * ....... . 18 Actual and Future Operations 18 Financing Plan 1973/1977 ....................... 19 Rate of Return Covenant 20 Present Tariffs ... ..... .....0.. ......... .. . 21 7. AGREEMENT REACHED AND RECOMNDATIONS ................ 21 List of Annexes 1. Generation and Sales of Public Power Sector. 2. Breakdown of Power Sector Sales by Consumer Categories. 3. Breakdown of ONE's Sales by Consumer Categories. 4. Breakdown of ONE's Sales and Revenues. 5. Growth of Sales and Peak Demand - Actual Figures and Projections. 6. Statistical Data on the Regies. 7. Energy Cost and Tariff Study. 8. Summary of the Draft for ONE's "tCahier des Charges". 9. Personnel. 10. ONE's Investment Plan 1973-1977. 11. Cost Estimate of Bank Project. 12. List of Goods and Services to be Financed by the Loan. 13. Estimated Schedule of Disbursements. 14. Economic Justification. 15. ONE's Power Tariffs. 16. Balance Sheets. 17. Income Statements. 18. Sources and Application of Funds. 19. Notes on the Financial Statements. MAP  APPRAISAL OF A POWER PROJECT OFFICE NATIONAL DE LtELECTRICITE MOROCCO Summary and Conclusions i. This report covers the appraisal of a project to expand the genera-ion and transmission facilities of Office National de l'Electricite (ONE), the Government-owned enterprise responsible for generating electriciLy for public consumption and for distributing energy outside large cities. In large cities municipal enterprises ("regies") distribute power purchased from 0NE. ii. The proposed project is part of ON.E's 1973-1977 construction program which is estimated to cost DH 975 million (US$232 million). The Project comprises: (i) the installation of two 20-MW gas turbines at Agadir and Tangier; (ii) the construction of 563 kIn of 225-kV transmission line and one substation. (iii) the upgrading from 150 to 225 kV of 340 km of line, and the upgrading or extension of 8 existing substations. (iv) consulting services for studies of future generation expansion and tariffs. OTNE expects to commission the gas turbines in 1974 and 1975, and plans the completion of the transmission facilities by early 1976. The proposed US$25 million loan would finance the estimated foreign exchange cost of this project, the total cost of which would be DF 166 million (US$39.4 million). It would be the first Bank loan for power in Morocco. iii. The gas turbines included in the proposed project are to provide peaking capacity in Yorocco's interconnected system and to increase the reliability of supply in the Agadir and Tangier areas. The economic return on the gas turbine investment is about 11%. The proposed transmission lines and substations form part of the expansion of the main transmission system in Morocco. A new 225-kV system as compared to the extension of the existing 150-kV system is the least cost alternative for all discount rates up to 20%. The economic return on the transmission investment is at least 13%. iv. The Bank would disburse for: (i) the full CIF cost of equipment procured abroad;  - ii - (ii) 100% of the cost (less identifiable taxes) of equip- ment contracts won by Moroccan manufacturers who would be allowed a 15% preference of the CIF costs for bid evaluation; (iii) 50% of the cost of the civil works and the erection portions of the installation contracts for the gas turbines and substations and 30% of similar costs f_; the transmission lines; and (iv) the foreign exchange cost of consulting services. v. The presentation of the proposed loan to the Board of Directors of the Bank has been unusually delayed because of country reasons following the negotiations which took place in April 1973. It is recommended that retroactive financing not exceeding US$2.2 million be accepted in respect of payments against supply contracts and for engineering services that have had to be made after the date of the appraisal to avoid delaying the project. vi. Through 1971 the Government has been paying for half of ONE's major equipment costs by means of grants, and because of this, long-term debt represents only 25% of ONE's capitalization. This proportion is not expected to increase through 1977 despite borrowings of DH 353 million (US$84 million), including the proposed Bank loan. ONE's debt service requirements are conse- quently relatively modest, so that in spite of a low financial rate of return, ONE finances about 27% of its investment out of internal resources. In connection with the proposed loan, the Government and ONE have accepted the principle that ONE's tariffs should be sufficient to provide an adequate rate of return on realistically valued average net fixed assets in operation. Rates of return would be increased progressively so as to achieve at least 7% by 1981, but would be reviewed with ONE after completion of an ongoing study of the tariffs including the cost and incidence of these on the economy, expected for early 1974. vii. There are no audit requirements under Moroccan law, although a resident Ifinis-ry of Finance inspector checks and authorizes ONE's transactions. ONE has agreed to appoint independent auditors acceptable to the Bank. It has also agreed to engage a senior financial executive to eliminate existing weaknesses in financial control. viii. Jurisdiction over the Moroccan power sector is divided between two major ministries and this has resulted in difficulties and delays in overall planning and in financial and economic imbalances between the "production" and "distribution" portions of the sector. These problems have been discussed between the Bank and the government both before and after negotiations, and the government has decided to engage consultants to study the present organiza- tion of the sector and to advise and assist in the formulation of sound policies for its improvement. ix. In view of the agreements reached with the Government and ONE as set forth in Section 7, the proposed project is suitable for a Bank loan of US$25 million to ONE for 20 years including 4 years' grace.  APPRAISAL OF A POER PROJECT OFFICE NATIONAL DE L'ELECTRICITE MOROCCO 1. INTRODUCTION 1.01 The proposed Bank loan of US$25 million would assist the most important power entity in Morocco, the Government owned Office National de l'Electricit4 (ONE), in financing the 1973-75 part of its 1973-77 investment program. It would be the first Bank loan for power in Morocco. 1.02 In 1971, Morocco's electric power system, with an installed capacity of 663 MW, reached about one-third of the country's 15 million people. Electricity consumption per capita was 120 kWh, about the same as in other Maghreb countries (Algeria: 130 kWh; Tunisia: 115 kWh). 1.03 Much remains to be done to provide electricity to the bulk of Morocco's population, particularly to people with modest incomes. The Government will be able to assign to this task the proper priority within its economic program only after it has formulated a comprehensive power sector policy. To this end and after prolonged discussions with the Bank, the Govern- ment has decided to engage consultants to advise the Government and the Borrower on the requirements and steps to be taken to unify and improve the organization of the power sector so as to ensure a judicious allocation of scarce capital resources available to the sector. 1.04 Bank staff conducted identification missions to Morocco in 1965-66 and 1968. As a result, the Bank suggested a study of ONE's requirements in general and particularly its capacity to generate internally a reasonable portion of its investments. EdF carried out the study in 1970, and in September 1971 updated their conclusions which, among other things, called for a new accounting system. In February/March and November 1971 Messrs. C. De Beaufort, R. Ribi and E. Wessels reviewed progress made in the implementation of the new accounting system and in the preparation of a project suitable for Bank financing. Messrs. R. Ribi, R. du Mee and H. Maeda appraised the project in July 1972. Messrs. W.F. Kfipper and A.J.D. Hutchins visited Morocco in March 18-25, 1973 to update the information for this report. 2. THE SECTOR History 2.10 Until the early sixties the public power sector of the Kingdom of Morocco consisted of four private companies, Energie Electrique du Maroc (EEM), Societe' Marocaine de Distribution (SMD), Societe Che'rifienne d'Energie  -2- (SCE), Electras Marroquies, and some small installations operated by the Ministry of the Interior. The first three companies vere founded in 1923 and owned by French interests and Electras Marroquies, also founded in the twenties, was owned by Spanish investors. 2.02 EEM was granted a concession to generate and transmit electric energy to the main load centers but progressively also distributed power to ultimate conisumers through subsidiaries with concessions outside the main cities. SI) used to purchase the bulk of the energy produced by EEM for distribution in and around the large cities, and SCE was founded to manage and maintain isolated systems owned by the Government or, in exceptional cases, by municipalities. Finally, Electras Marroquies, generated, transmitted and distributed power in Spanish Morocco (including Tangier), which was integrated into the Kingdom of Morocco in 1956. 2.03 In 1962, when SMD's concession in Casablanca expired, the muncipality of Casablanca took over those SMD assets located within its territory and created a municipal enterprise - Regie Autonome de Distribution (regie). During the subsequent years when the other concessions of SND ended, most of the other cities followed the example of Casablanca and created their own "regies" (see 2.10). 2.04 In 1963, the Government purchased the assets of EEM and transferred them together with EEM's concession to a newly-founded Government enterprise, the Office National de l'Electricite' (ONE) which also took over the distribu- tion in those cities where municipalities did not create r4gies. In 1965 the Government integrated SCE into ONE. The only entity private remaining is Electras Marroquies whose concession was substantially curtailed when, in 1967, the city of Tangier interconnected with ONEts transmission system and created a regie. 2.05 Thus today, the public power sector comprises: (i) ONE, generating practically all electric power, transmitting it to the load centers, and distributing some of this energy (i.e. about 40% of public consumption) outside the large cities; (ii) the twelve municipal regies, purchasing their power from ONE and distributing it in and around the large population centers and accounting for 58% of public consumption; (iii) Electras Marroquies, still privately owned, with limited installed capacity and distribution area in the extreme north of the country, accounting for 2% of public consumption; and (iv) the Ministry of the Interior which manages and operates small systems in about 110 isolated localities, where ONE is responsible for maintenance; however, sales in these systems do not aggregate more than 0.3% of total public consumption (see also 2.09 and Annex 1).  -3- Power Sector Organization 2.06 Although the Government nationalized the bulk of thLe power sector almost 10 years ago, there is still little coordination betweten the various power entities, and the legal, financial and economic relationship between these entities remains extremely complex. This is illustrated by the following: (i) ONE and Electras Marroquies are under the jurisdiction of the Ministry of Public Works, but the regies and thLe small systems are under the Ministry of the Interior and little coordination exists between the two ministries; (ii) up to 1971 the Government used to contribute about 50% toward ONE's investment in major plant in the form of grants. As from 1973 the Government plan is to reduce this percentage to 34%. (iii) the Government subsidizes the cost of coal supplied! to ONE from its Jerada mine. ONE pays DH55/t, which compaLres with a current production cost of about DH96/t, including depreciation and financing charges but excluding identifiable taxes and duties; (iv) while ONE earns a very low return on its invested capital and finances internally about 27% of its development program, the regies, without recourse to borrowing, currently finance 100% of their investment and generate a cash surplus as well, i.e., assuming approximate equal average capital cost requirements for the generating and for the distributing sector, the power sector as a whole internally finances at least 50% of overall power development, which is adequate but for the apparent inequities in sharing revenue; and (v) the present power tariffs which, in the main, have remained unchanged for 14 years are disparate and do not reflect the cost of supply. The Government, in the face of this confusing situation, has asked Electricite de France (EdF) under ONE's supervision to: (i) study the impact of the cost of electricity on the costs of of Moroccan products and services and on the competitiveness of Moroccan manufacturers; (ii) study the present relationship between the cost of supplying electricity (including the incidence of the local and imported fuel prices) and the tariffs; and (iii) submit proposals for possible modifications in the tariffs.  -4- This assignment whose Terms of Reference (see Annex 7) are acceptable to the Bank, is progressing satisfactorily and should be completed by the end of 1973. During negotiations the Government and ONE agreed that they would discuss with the Bank the conclusions of EdF's study and the measures they propose to take in connection with the results of this study so that ONE's rate of return can be modified appropriately by mutual agreement (see 6.11). 2.07 Authority within the sector is diffuse and ill defined due to a lack of adequate power sector legislation. Thus the scope of operations of the various power entities and the relationship between the entities are not defined. The Royal Decree that created ONE is essentially a charter of incorporation (not a law) defining in detail its role in the sector. In the past two years, ONE has prepared several drafts for the regulation of its operations, defining its rights and duties and those of its customers without, however, reaching agreement with the other interested parties. The latest draft of these regulations or "cahier des charges" (for a summary see Annex 8) is acceptable to the Government and the Bank, and ONE have agreed that the "cahier des charges" be approved as a condition of effectiveness of the loan. 2.08 The ultimate objectives of coordinating the electricity sector by subordinating the whole sector to a single authority, and of formulating one comprehensive power sector policy and legal basis, including the setting and regulation of tariffs, is unlikely to be achievable in the short term because the major question of Ministerial jurisdiction has significant political implications. After further examination of the question subsequent to the negotiations for the loan;, the government has undertaken to engage consultants to study the reorganization of the electricity sector. This study will be undertaken by EdF under the terms of reference which are accepta- ble to the Bank and will take into account the results of its ongoing tariff study and the conclusions reached in discussions with the Bank after the latter study has been completed. The Government is expected to discuss the EdF recommendations for the reorganization of the sector with the Bank prior to or in connection with any future loan that may be proposed for electricity projects. Installed Capacity and Sales 2.09 By the end of 1972 the total installed capacity in Morocco was about 870 MW of which 150 MW (i.e. about 17%) was captive plant owned mainly by large industries. A capacity of 718 MW belonged to the public power sector. Hydro plants accounted for 52% (373 MW) of this capacity. steam plants for 39% (281 MW), eiesel plants for 7% (48 MW), and gas turbine plants for 2% (16 MW). For details of sales in ONE's systems and the systems connected to it, see Annex 1. The following table shows the principal capacities and sales figures for the public supply sector.  -5- Installed Energy 1972 1972 Sales Capacity Gross 1972 sent out Sales to direct to Entity by 12/31/72 Production in 1972 Distributors Consumers (MW) (GWh) (GWh) (GW) (GWh) ONE 698 2,311 2,201 /1 1,,213 771 Regies - - - - 1,136 Electras Marroquies 16 48 47 4 38 Ministry of Interior 4 7 7 - 6 718 2,366 2,255 1 217 1,951 /1 Including GWh purchased from Maroc Chimie. Power plant losses were 4% of gross production, and transmission and distribu- tion losses 12.5%. These relatively low losses (e.g. transmission and distri- bution losses of a system of similar size in Mexico and in tlhe southern U.S. are about 15% and 10% respectively) reflect the high standards used in designing the Moroccan system and facilities. Annex 2 shows a breakdolwn of the sector's sales by category of consumers. The RJ'gies 2.10 The most important entities of the power sector besides ONE (which is described in Chapter 3) are the 12 re'gies, which are departments of muni- cipalities, and which distribute water and power (purchased from ONE) in the main urban centers. Six of these rggies, Casablanca, Rabat-Sale,. Fes, Meknes, Tangier and Marakech, with a total of 414,000 consumers in 1971, account for about 90% of electricity sales by distributors other than ONE (see Annex 6). 2.11 In 1972, the twelve regies sold about 1,136 GWh to some 500,000 consumers and employed some 1,900 persons. The re'gies pay ONE between 10 ctms (USd2.4) and 12 ctms (US42.9) per kWh. They add on to this price from 52% (Casablanca) to 94% (Tangier), and sell to their own consumers at a price varying between 16 ctms (M) (USd3.8) and 22 ctms (M) (US45.2) per kWh, and in addition to charges for consumption, consumers also make sizeable contributions in aid of construction. 2.12 In 1970 and 1971 the re'gies financed DH 83 million in expansion of their distribution facilities out of internal resources and consumers' contributions without recourse to borrowings and there was still a cash surplus of about DE 16 millior., which was available for other public services. During 1973-77 the re'gies have projections showing new construction of some DH 298 million, also to be financed entirely by internal resources and consumers' contributions. This estimate is probably over optimistic hcwever, so in practice the cash surplus on electricity operations is likely to exceed the regies' forecast of DH 20 million.  6 3. THE BORROWER Legal Basis 3.01 ONE was created as a Government-owned enterprise by a Dahir (Royal Decree) of August 5, 1963 which also vested in ONE the assets of EEM, the former concessionaire. The Royal Decree further stated that the creation of ONE did not affect existing concessions by municipalities except that, if such a concession were to expire and the municipality did not create a regie, ONE would take over distribution in that locality. ONE is responsible to the Ministry of Public Works, and the Ministry of Finance exercises control over ONE's finances in accordance with the Dahir of April 14, 1960, which equally applies to all public enterprises (see 6.04). Board 3.02 The Dahir of August 5, 1963 stipulates that ONE is to be controlled by a Board chaired by the Minister of Public Works. The five other Board members are representatives of the Ministries of the Interior, Finance, Agriculture, Industry and Labor. They are appointed by Royal Decree for three years and may be reappointed for further terms. The Board usually meets twice a year with further meetings if special circumstances arise. It limits itself to general policy and leaves all specific decisions to management. Organization and Management 3.03 ONE's management is generally satisfactory. The utility's Chief Executive is the General Manager. The incumbent, a Moroccan electrical engineer trained in France, has been ONE's General Manager since its creation. He has led ONE, without major disruption, through the difficult period which often occurs when a foreign-owned private utility is nationalized. The General Manager is assisted by a deputy who at the same time heads the training, financial, stores and procurement divisions. These are separate from the main organizational structure of ONE which consists of four major departments: Generation and Transmission, Distribution, Planning and Construction, and Administration. All the department heads now Moroccans, three of them engineers trained in France. They are competent but still rely heavily on foreign assistants, who are gradually being transferred to advisory posts as trained Moroccan specialists become available for line positions. Personnel 3.04 At the end of 1971, ONE had a total of 3,855 employees; i.e. 11 (0.3%) more than a year before, and 880 (30%) more than in 1965; at the same date, the number of foreigners (mainly French) employed by ONE was 150, or 25 less than at the end of 1970. The size of ONE's staff is reasonable. ONE has a relatively low number of customers (about 200,000 in 1971) in relation to its installed capacity, because 61% of its sales are to wholesale distributors and only 39% directly to ultimate consumers. This combined with the fact that ONE distributes in the countryside and small towns, as well as maintains much of the equipment of its major clients and  -7- the small isolated undertakings of the Ministry of the Interior (paragraph 2.05), results in a high sales per employee ratio of 0.45 GWh and a relatively low ratio of customers per employee of 55:1. In any event, both sales per employee, and customers per employee are increasing, which indicates that ONE's efficiency is improving (Annex 9). 3.05 In recent years, ONE has been replacing expatriate staff by Moroccan personnel. This process of "moroccanization" has been progressing smoothly because the Government has allowed ONE to replace foreign employees at a reasonably slow rate. The training of a sufficient number of skilled Moroccan workers and middle echelon employees has been a major task, but ONE's training center is efficient and trained about 200 people in various technical skills in 1971. EdF has continued to train many ONE senior technicians (about 45 in 1971). However, while ONE's technical training efforts appear satisfactory, there is little or no training given in finance and accounts (see 6.03). 3.06 In the short run ONE will have problems replacing senior qualified men. In 1972 alone, about 60 French employees, or about one--third of the expatriates remaining at the end of 1971, have left. Part of this reduction was planned, but an unusually high number of senior employees chose not to renew their contracts. ONE is likely to have to seek temporary staff from EdF until Moroccans earmarked for major posts have completed their training. ONE's Facilities 3.07 By the end of 1972, ONE's generating capacity totaLled 698 MW of which 369 MW were hydro (136 MW at Bin El Ouidane, 94 MW at Afourer-, 139 MW at 17 plants oE less than 35 MW), 281 MW steam (92 MW at Roches Noires near Casa- blarnca, 165 MlW at the head of the Jerada coal mine, and 24 MW at Oujda which will be scrapped during 1973), 16 MW in one gas turbine at Siidi Kacem, and 32 MW diesel plants. 3.08 Diesel plants totaling about 7 MW are installed in isolated systems. The remaining 691 MW of ONE's installed capacity forms part of the inter- connected system, in which the 1972 peak demand was 470 MW. The relatively large difference between installed plant capacity and peak demand is due to the low firm capacity of the hydro plants because these plants depend primarily on water reserved for irrigation. Furthermore, the firm capacity, as well as the average production potential of the plants located downstream from expand- ing irrigation areas, is decreasing steadily at an annual rate of about 2 to 3% due to increasing upstream diversions. Only a small proportion of this water returns to the river in the form of drainage water. These factors combine to make the cost per kW of firm capacity (and thus ONE's rate base), and the generating cost per kWh higher than would otherwise be the case. 3.09 Until the mid-sixties hydro-electric power was ONE's main source of electricity. However, because most hydro potentials have already been ex- ploited (and are steadily decreasing in power output), and new potentials are in general either small or cannot be developed economically, ONE has had to turn to the construction of thermal plants for meeting base load demand. It  did so, based on a long-term development study carried out by EdF in 1967 in connection with the preparation of the current five-year plan. 3.10 The main item of this thermal development was the construction of a 165-MW coal fired steam plart at Jerada, the first two 55-MW units of which ONE commissioned in 1971 and the third in 1972. The plant has been engineered, supplied and erected by the U.S.S.R. Its financing was based on a barter agreement between the Moroccan and the Russian Governments as a result of which the cost of the plant is presently carried in ONE's books at DH 269 million, which includes an unusually large village for staff quarters costing some DH 23 million. The gross cost of this asset is equivalent to an overall average installed cost of US$380 per kW 1/ including the staff quarters, or US$350 1/ per kW without. This average cost further inflates ONE's rate base, and even without the village is thought to be about 20% to 25% higher than it would have been if procured under international competitive bidding. The selection of this project was influenced by the Government's desire to increase the use of coal from its Jerada coal mine so as to save foreign exchange and to provide employment; and to utilize a foreign trade credit. The plant was therefore not specifically selected on economic grounds although the Government expects that, with ONE utilizing 60% of the anticipated (increas- ed) output, the present heavy subsidy to the Jerada coal mine will be able to be phased out by the end of the decade. Planning 3.11 Planning of ONE's generation and transmission program is based on a long-term plan set up by EdF in 1967. In 1970 and 1971 ONE's engineers in collaboration with EdF, updated this comprehensive study, using a series of computer programs to simulate ONE's generating and transmission systems. At the same time, they expanded the study to include the detailed design features for the items scheduled for construction. EdF is studying a 225-kV interconnection with Algeria; th_s study is being financed by the African Development Bank. 3.12 The quality of the technical side of ONE's planning is high. However, ONE uses essentially financial rather than economic considerations in justifying its investment decisions. Nevertheless, except for Jerada (see 3.10), the main facilities constructed in the past decade seem to be also economically justified. During negotiations ONE confirmed that consultants will be employed for the planning and design of the future thermal plant to be completed during this decade, and to this end the foreign exchange cost of the studies for the Roches Noires steam unit and further gasturbines at Agadir and Tangier would be financed from the proposed loan. 1/ Calculated at the then prevailing rate of exchange of DH 4.66 = US$1 at current rates the equivalent figures would be about US$425 per kW and US$390 per kW respectively.  -9- 3.13 On the distribution side ONE's planning is satisfactory. It is carried out entirely by ONE's distribution department except for that part of rural electrification which is financed by Government contributions. This is planned jointly by ONE and the communities involved and approved by a special commission of the Ministry of Public Works. 3.14 By the end of 1971 ONE's transmission system consiisted of 340 km of lines at 225 kV, 1,665 km at 150 kV, 4,400 km at 60 kV, and 5,521 km at 22 kV, while its distribution system included 1,950 km of 5.5-kV lines and 2,760 km of low voltage lines. 3.15 All of ONE's installations appear to be in very good working condition. Insurance 3.16 ONE presently insures only its major generating plants against fire, for which the premium for 1971 was DH 0.4 million. ONE adopted this philosophy in 1968 when it was found that the cost of fire premiums on other installations would substantially exceed the value of the statistical risk involved. ONE employs a full time expatriate insurance manager, who reviews the situation from year to year and negotiates the premiums. During negotia- tions ONE agreed to insure its assets for appropriate amounts with responsible insurers against the usual risks and in accordance with sound practice. 4. THE PROJECT ONE's 1973-1977 Investment Program 4.01 The Bank project is part of the first stage of ONE"s investment program fEor the period 1973-1977 which corresponds to the Government's next five-year economic plan. ONE's program includes work on some hydro plant, 450 MW of thermal plant, 1,030 km of 225-kV lines, 15 km of 150-kV lines, 1,200 km of 60-kV lines, 1,07C MVA of 60 to 225-kV substations, and DH 175 million of distribution expansion and rural electrification (see Annex 10). This program has been defined with due regard to economy. 4.02 ONE expects to complete the following thermal plants during 1973-77: (i) two 20-MW gas turbine units, one at Agadir in 1973, the other in Tangier in 1974, followed by a second couple of 20-MW units in 1976-77 at the same locations; and (ii) the third 60-MW oil-fired steam unit at Roches Noires (1975). The other generating plants are expected to be completed after the end of the 1973-77 plan; the Kenitra steam plant (2 x 60 MW) in 1978-79, and the Mohammedia steam plant (2 x 125 MW) in 1981-82; the feasibility study of the latter plants is expected to show whether additional gas turbine plant would be required for optimum clevelopment.  - 10 - 4.03 The five-year program provides for upgrading most of the existing 150-kV transmission system to 225 kV and the extension of this 225-kV system to interconnect the major steam plants in the north-eastern corner of the country, and Casablanca and Kenitra with the main consumption centers of Casablanca, Rabat, Fes, Meknes, KeniLtra and Tangier. By 1981 only the southern system will still transmit at 150 kV to Marrakech, Agadir and other cities in that area. 4.04 Of the DH 161 million for distribution included in ONE's program, DH 100 million is for the normal extension of ONE's distribution system and DH 61 million for the electrification of small towns and villages, i.e. in population centers of less than about 10,000 inhabitants. Of the latter, part would be financed from a special fund consisting of 4% of ONE's annual revenues, which is set aside to be used mainly for reinforcement and exten- sion of existing systems in rural areas. The Government would provide the remaining required funds which would be exclusively applied to bringing electricity to new areas far from existing systems. The rural electrifica- tion part of ONE's program is ambitious, and at the time of appraisal still lacked a comprehensive development plan to allow an appropriate evaluation of its merits. 4.05 The cost estimates for the Project and program are reasonable. ONE has based them on actual costs of equipment in the world market, on facil- ities recently installed in Morocco and on bids received. Allowance for physical contingencies is adequate: up to 30% for civil works and 5% to 10% for equipment. A price escalation of 5% is considered adequate for both local and foreign exchange cost components because all main contracts have already been awarded, some of which allow escalation up to a ceiling of 5Z. Annex 10 gives an analysis of the total cost of ONE's 1973-77 investment program which is estimated at Dff 975 million (US$232 million equivalent). The Bank Project 4.06 A Bank loan of US$25.0 million to ONE for 20 years including 4 years of grace is proposed to cover the full estimated foreign exchange cost of the project. The components of ONE's 1973/77 investment program to be financed from the proposed Bank Loan are: (i) The installation of two 20 MW gas turbine units, one at Agadir, the other at Tangier, to be commissioned in 1974 and 1975; (ii) the construction of a second 225 kV line Jerada-Oujda-Meknes, a new 225-kV line Meknes-Kenitra, and the tie lines between Kenitra and the existing Rabat-Tangier line; overall length is estimated at 563 km and completion is expected by early 1975; (iii) the construction of 20 km of 225-kV line (temporarily operated at 63 kV) between the Roches Noires team plant and the Tit Mellil substation in Casablanca (1975);  (iv) the upgrading to 225 kV of the 340 km long existing 150-kV line between Casablanca and Tangier; and (v) the cornstruction of a new 225-kV substation at Kenitra, the extension of existing 225-kV substations at Oujda, Fes, Meknes, Rabat and Casablanca, and the upgrading to 225 kV of the existing 150 kV substation at Tangier; ONF expects to complete these substations in 1976. 4.07 The purpose of the gas turbine units is not only to provide peak- ing capacity but also to improve the reliability of supply in the Agadir and Tangier areas which are situated at the extremes of ONE's transmission system, both between 300 and 400 km from the main generating plants. 4.08 The 225-kV lines and substations included in the project represent that part of the 225-kV system upgrading and expansion (see 4.03) which ONE expects to construct substantially in 1973-75. They will increase the trans- mission capability to meet the expected increased load in the load centers and the increased capacity to be installed in the main thermal stations (Jerada and Roches Noires). The Jerada-Kenitra line, in particular, will allow transmission of the full capacity of Jerada (165 MW) whereas the existing first line (financed by the African Development Bank) limits trans- mission capacity to about 125 MW. At the same time the line will improve the reliability of the tie between Jerada and the main load centers. 4.09 Annex 11 gives a breakdown of the cost estimates for the project. The foretign exchange component includes the cost of all equipment of poten- tially foreign manufacturer, whether likely to be won by Moroccan manufac- turers under local preference evaluation or not (see 4.15). The following is a summary of these estimates: DH (million) US$ (million) of Total Local Foreign Total Local Foreign Total Cost Gas turbines 8.0 27.7 35.7 1.9 6.6 8.5 22 Transmission lines 22.1 29.7 51.8 5.3 7.0 12.3 31 Substations 21.0 31.3 52.3 5.0 7.5 12.5 32 Subtotal 51.1 88.7 139.8 12.2 21.1 33.3 85 Consultant Services 0.5 2.1 2.6 0.1 0.5 0.6 1 Contingencies: Physical 6.3 9.9 16.2 1.5 2.4 3.9 10 Price 2.7 4.3 7.0 0.6 1.0 1.6 4 Total Project Cost 60.6 105.0 165.6 14.4 25.0 39.4 100 Total financed by Bank - 105.0 - - 25.0 - 63  - 12 - 4.10 The cost of the gas turbines used in the above estimate corresponds to a cost of about US$185 per kW erected, excluding taxes and customs duties. This is reasonable because the high outside temperatures under which the units will operate require units of about 23-25 MW nominal capacity to generate 20 MW continuously. 4.11 The cost of the transmission part of the project is based on the results of bids received and recent construction costs. Excluding taxes and duties, this estimate is equivalent to about US$18,000 per km of single circuit 225 kV line and US$6,200 per MVA of a 100 MVA transforming/switching substation unit. These costs are considered reasonable. Ecological Aspects 4.12 The ecological impact of the gas turbines is negligible because they will both be situated on the coast outside population centers and convection air currents will make a concentration of fumes unlikely. The proposed trans- mission lines also avoid population centers and will run mostly through sparsely populated, semi-desert regions where amenity considerations are minimal. Design and Supervision 4.13 While the gas turbines will be of standard industrial type and, therefore, pre-designed by the manufacturer, ONE plans to continue designing the lines and substations using its own engineers, who are qualified to do so. ONE will also carry out construction supervision through its own personnel; this procedure is satisfactory. Procurement and Disbursement 4.14 Procurement of goods and services under the proposed loan is being made through international competitive bidding in accordance with the Bank's Guidelines for Procurement. However, the Bank's procedures had not been followed as far as the public opening of bids is concerned up to the time of negotiations because ONE had followed the official legal Moroccan requirements in this respect whereby all bids were opened in the sole presence of a statutory "Bid Analysis Commission" whose members comprise representatives of the ministries of Public Works, Finance and Industries as well as ONE. Although this is not strictly in accordance with the Bank requirements of public bid opening, Bank staff confirm that the main purpose of public opening i.e. to provide safeguards against post-opening changes in the substance of bids, was meticulously met by the rigid ONE procedures. Except for the bid opening procedure, evaluation and award proposals were in accordance with the Bank's Guidelines. During negotiations ONE agreed that the procurement procedures for outstanding con- tracts will follow the Bank's Guidelines in all respects, including bid opening procedures. 4.16 ONE evaluates bids and awards equipment contracts on the basis of a cost comparison at the place of delivery exclusive of taxes and duties (i.e., the evaluated comparative costs would, as in the past, not reflect preferential  - 13 - treaties), and takes into account a 15% preference for Moroccan manufacturers which the Government has requested. Moroccan suppliers are expected to win contracts amounting to an estimated US$11 million equivalent, mainly for transmission line towers, steel structures, civil works, and erection. The foreign currency component of these contracts would amount to about US$6.2 million equivalent. 4.16 Disbursement from the proposed loan would be made for the items listed in Annex 12. They would cover: (1) the full CIF cost of equipment procured abroad; (ii) the full ex-factory cost (less identifiable taxes) of equipmernt contracts won by Moroccan manufacturers tmnder the 15% local preference evaluation procedures (see 4.15); (iii) 50% (i.e. the estimated average foreign exchange component) of the civil works and erection parts of contracts for gas turbineE; or substations, and 30% for similar works for transmission lines; and (iv) the foreign exchange cost of consultant services. 4.17 In view of the urgency and time constraints of the project, the Bank has aipproved bid invitations issued in or after August 1972. The pro- cessing o; the loan has been unusually delayed mainly because of country and sector problems beyond the control of the borrower (see 2.08). The Bank, in order not to delay the project, has agreed to the award of contracts for about 80% of the project cost, which will involve a total retroactive financing of about US$2.2 million (i.e. about 9% of the foreign exchange costs of the project). 4.18 Annex 13 shows the expected schedule of loan disbursements. The proposed closing date for the loan of June 30, 1976, would allow enough time to process applications for reimbursement and provide for some slippage in the execution of the project. Any balance remaining on the loan account on completion of the Project should be cancelled provided it is not required for further studies by consultants of measures to meet ONE's continuing expansion requirements. 5. JUSTIFICATION Growth of Power Market 5.01 Since ONE was created in 1963, its sales have grown at an average rate of 7.2%. However, the increases have been erratic from year to year and appear to be relatied to the size of agricultural crops. Thus, in the dry year 1967, ONE's sales grew only by 3.4% while in 1969, when both water and crops were abundant, sales increased by nearly 10%. Nevertheless a certain pattern  - 14 - of annual growth during the past eight years becomes apparent: an average rate of 5.2% during the period 1963-1967 when thb economy grew only slowly, and a rate of 9.5% during the period 1967-1972. In forecasting maximum load and energy consumption, both known future industrial loads and past experience have been taken into account, resulting in a 9% annual increase in sales and demand (Annex 5), slightly below the average of the last 5 years. Comparison of Alternatives 5.02 Gas turbine or diesel plant is the only type of plant that can be installed in time to meet the 1975 peak demand requirements. At the estimated maximum of about 1000 hours of annual operation, gas turbine plant (which would cost about US$40 kW less to erect than diesel plant, but would operate at a higher cost of about US$mil 7/kWh) was found to be the least cost means of meeting demand up to a discount rate of 15%. 5.03 The transmission items included in the project are part of the build- up of the 225-kV system designed to interconnect ONE's main thermal plants and the main centers of consumption (see Map). They will permit full utilization of existing and planned generating capacity and also increase system reliability. The only feasible alternative would be the reinforcement and extension of the existing 150-kV system, but the 225-kV system was found to be the least cost solution at discount rates up to at least 20%. Economic Evaluation 5.04 The gas turbine and the transmission parts of the proposed project were considered separately to determine their economic rate of return (ERR), as shown in Annex 14. The following summarizes the procedures and results of this study. Costs and Benefits 5.05 For the economic evaluation of the proposed project the relevant costs are the costs to the economy. Taxes and duties have to be excluded, therefore, and shadow prices used in valuing project resource inputs whose opportunity costs differ from their money costs to ONE. The main resources required are foreign exchange, labor and fuel (coal and oil). Foreign ex- change was valued at the prevailing official exchange rate. The labor re- quired for the construction and operation of the project was valued at its estimated money wages since it will largely consist of skilled and semi- skilled grades for which there are alternative employment opportunities. The labor required for mining the coal for the Jerada steam station, on the other hand, consists mostly of unskilled workers, who would otherwise be unemployed in view of the high level of unemployment in Morocco. It was valued, therefore, at 50% of its money wage. Shadow prices were also used for coal and oil, since the opportunity costs of these resources to the economy differ from their prices to ONE. 5.06 The benefits of the project consist mainly of savings in system operating costs which it will make possible, but there are also other benefits,  - 15 - some of which are unquantifiable (see below). The benefits of the different parts of the project were compared with the respective costs; as described in Annex 14 and are summarized below. Gas Turbines 5.07 The gas turbines are primarily designed for peakinig service in the interconnected system but they will also increase the reliability of the power supply :Ln the Agadir and Tangier areas. Their installation will result in certain benefits,, quantifiable and unquantifiable, which could not be secured by any alternative means on the same timescale. The quantifiable benefits were derived by comparing the total costs to the economy over the assumed 15-year life of the turbines, given the projected load, of the system with and without the gas turbines. These benefits consist of: (i) savings in system operating costs with the gas turbines, since part of the energy which they will supply would otherwise have to be generated by captive diesel plants with higher running costs; (ii) further operating cost savings in the "with turbines" case, since they will, in "wet" years, reduce the use of' less flexible steam plants and maximize the use of the available hydro energy; and (iii) the value at the existing tariff levels (see Annex: 15) of the shortfaLlls in electricity supply below the projected requirements which would occur in certain "dry" years if the gaLs turbines were ncit installed. 5.08 The economic return on the investment in the gas turbines, which is the discount rate! which equalizes the present worths of their costs and the above benefits, was found to be about 11%. This understates the full economic return, since it takes no account of the further benefits (which could not be quantified with the data available) in the form of the reduction in power failures and associated economic losses resulting from the increased security of supply with thte gas turbines. Transmission Lines and Substations 5.09 Separate calculations were made of the economic returns on the pro- posed Jetrada-Kenitra 225-kV lines and on the short Rochies Noires-Tit Mellil line, together with their associated substation equipment. The Jerada-Kenitra lines will result in system operating savings and represent the least cost method of achieving these savings at discount rates up to at least 17%. The savings were calculated by conparing the total system costs, capital plus operating, of meeting the projected load forecast with and without the lines over their assumed life of 40 years. These savings represent the benefits of the transmission investment. The economic return was found to be 13% on the assumptions adopted. As with the gas turbines, this understates the full  - 6 return, since it takes no account of the unquantified benefits attributable to the greater security of supply with these transmission lines. A similar calculation for the Roches Noires-Tit Mellil line resulted in an economic return on this part of the project of 20%. Sensitivity Testing 5.10 The sensitivity of the calculated rates of return on the gas turbines and the Jerada-Kenitra lines was tested for variations in the main assumptions. A 10% increase or decrease in capital costs reduces or increases the return on the gas turbines by 0.7 and on the transmission lines by 0.6 percentage point. If fuel costs are 10% higher or lower the return on the turbines rises or falls 0.8 percentage point and on transmission lines 1 percentage point. A variation of plus or minus 10% in the annual rate of load growth raises or lowers the return on the turbines by 2.2 percentage points and on the lines by 2.5 percentage points. 6. FINANCES Accounting 6.01 From its inception in 1963 through 1970 ONE recorded excellent statistics but published no financial accounts. Revenue, expenditure and accounts receivable and payable were accounted for internally. Such asset values as were available were based on incomplete records inherited from former concessionnaire companies, and inventories were controlled on a physical basis. For this reason no accounts prior to 1971 have been in- cluded in this report. 6.02 In 1971, an accounting system was implemented with the help of EdF and ONE's fixed assets were given book values as at January 1, 1971 based on replacement cost less estimated depreciation to reflect the age and expected remaining useful life of the assets. By this method ONE's first complete set of financial accounts were compiled as at December 31, 1971. EdF is currently preparing recommendations for cost accounting which ONE plans to implement in 1973. Financial Management 6.03 Although ONE has an effective engineering organization, the direction, organization and control of its financial and accounting functions are weak. During negotiations ONE agreed :o employ a financial manager at a senior level of management to improve this aspect of control and planning. The Bank out- lined the extent of his proposed responsibilities which would include account- ing, budgetary control, financial forecasting, financial advice to management and the operations of the internal audit department.  - 17 - Audit 6.04 ONE's accounts are not subjected to an annual external audit, but some control (see 3.01) is exercised by the Ministry of FinaLnce through two employees of the Ministry (a "Controleur Financier" based in Rabat, and an "Agent Comptable" working in ONE's offices in Casablanca) wh,o are responsible for the authorizaLtion of all of ONE"s transactions. This type of prefacto control unnecessarily restricts the speed of ONE's steadily growing operations and in practice materially reduces the autonomy of ONE. One has agreed to have its accounts and financial statements audited by independent auditors acceptable to the Bank. 1971 Actual Financial Positions 6.05 Annex 16 shows ONE's 1971 actual balance sheets and its forecast balance sheets for 1972 through 1977. Additional details of the assets and liabilities at December 31, 1971 are given in the "Notes on the Financial Statements" in Annex 19 and in summary show: (a) Gross fixed assets of Dh 1,972 million, whose book, value is higher than usual for power companies in developing countries, partly because of the 1971 "replacement" basis of valuation (see 6.02) and partly because of the high cost of the Jerada steam generating station (see 3.10) and the inclusion of hydro generating stations that are underutilized (see 3.08). It is estimated that the overall gross fixed assets are about 35% - 40% higher than they would have been had the above factors not applied. (b) A net current ratio of 1:3 which is reasonable, but which includes accounts receivable of DH 69 million of which DH 38 million were for electricity consumption equivalent to an overall average of 64 days sales. These include the Government's outstanding accounts of DH 16 milliot (aver- aging 192 days consumption), which is excessive (see 6.06). Inventories at DH 34 million were also somewhat high (see 6.07). (c) Equity of DH 1,011 million comprising capital of DH 867 million, representing the value of ONE's original assets at their some- what high valuation (see (a) above); DH 105 million in subse- quent contributions towards construction of which DH 85 million was from the Government for construction and DH 10 million for rural electrification; and DH 39 million of retained earnings, etc. which includes DH 22 million reserves as a "Special Fund" for rural electrification (see 4.04).  = 18 - (d) A relatively low amount of long-term borrowing of DH 301 mil- lion mostly repayable over 5 to 15 years (see Annex 19, paragraph 10). (e) A long-term liability of DH 38 million comprising consumer's deposits (DH 8 million) and the staff pension fund (DH 30 million. As at December 31, 1971 ONE's debt:equity ratio was 25:75 which is not ex- pected to alter significantly at least through 1977. ONE has agreed not to incur additional long term debt unless its debt service in any future year is expected to be covered at least 1.5 times by its net cash generation. Government Receivables 6.06 Annex 19 paragraph 6 shows that on December 31, 1971 Government departments owed ONE DH 29.8 million of which DH 15.8 million was for power consumption and the balance for unpaid installation and construction work. Some sections of the Ministry of the Interior owed the equivalent of 2.5 years' consumption, while the Department of Commerce had not paid for its elec- tricity consumption for the last five years. Lack of adequate control by ONE over receivables is due primarily to non-allocation of financial responsibility in this area. The Government has agreed to settle its past accounts with ONE by December 31, 1974, and to arrange for future bills to be settled within 90 days of their presentation. Irnventories 6.07 ONE carries heavy inventories although these were appreciably re- duced in 1971. Apart from fuel, the inventories represent several years usage of spare parts and maintenance materials (see Annex 19, paragraph 7), the re- gional engineers' main concern being to ensure availability of sufficient materials and parts. Because of the disparity in type of equipment and al- ledgely long lead times for the delivery of spares, this has resulted in an excessive build up of inventories and the financial manager will need to examine the reordering procedures with a view of reducing ONE's inventories. Actual and Future Operations 6.08 Annex 17 shows the 1971 Income Statement and those forecast for 1972 through 1977. In 1971, 1976 GWh were sold at an average price (including sales tax of 6.38%) of 12.1 ctms/kWh (US42.88/kWh) resulting in electricity sales of DH 217 million. Other revenue was DH 7 million and operating expen- ses were DH 184 million (of which DH 63 million was depreciation). The Net Operating Income was therefore DH 40 million representing a rate of return on the average net fixed assets in operation of 3.8%.  - 19 - 6.09 ONE's forecast operating results do not anticipate the recommen- dations of the ongoing EdF tariff study but are based on the existing tariffs with an expected annual increase in sales of 9%. Expenses have been examined in detail with ONE's staff and the resulting forecasts show that overall operating expenditure including depreciation is expected to increase at about 11% and 14% in 1972 and 1973 respectively because of the coming into operation of Jerada; and thereafter by about 8% annually. The resulting Net Operating Income drops from DH 40 million in 1971 to DH 3i million in 1973 before rising again to some DH 59 million by 1977. Financing Plan 197:3/1977 6.10 ONE Plani; to finance its 1973/1977 construction program by means of long term loans (36%), contributions (3%), government grants (34%) and cash generation (27%). The project comprises 17% of the program and will itself be financed 63% by the proposed loan, 34% by the Government and 3% by cash generation. This financing plan, which is shown in detail in Annex 18 is reasonable and can be simmarized as follows:  - 20 - DH (million) Project Program Sources of Furds Internal Cash Generation: /1 652 Less: Increase in Working Capital including cash (59) Del- service (336) Cash generation for capital construction 257 3%/2 27% Long Term Borrowing Proposed Bank Loan 105 63% 11% Assumed Other Borrowing: - Future foreign loan thermal generation 84 - Other foreign loans or credits 46 - Local bonds and loans 118 Subtotal Other Borrowings 248 353 - 25% /2 Contributions to construction-Government- 330 34% 34% -Consumers 35 365 - 3% Total Construction Financing 975 100% 100% Applications of Funds on Construction /3 The Project 166 17% Other 809 83% Total Estimated Construction Cost 975 100% /1 Assuming zhe maintenance of the existing tariffs. 77 The Government is prepa.d to finance 34% of all of ONE's major con- struction program. /3 Excluding interest during construction, Rate of Return Cov4r.an- 6.11 On rhe basis of the existing tariffs which will, in practice, be increased after the completion of the EdF study (see 6.13), ONE's rate of return is shown as deteriorating further from the 1971 3.8% on average net fixed assets in operation, before rising to 3.5% by 1977 (see Annex 17). During negotiations ONE and the Government agreed to charge tariffs sufficient to achieve a minimum rate of return of 3% by 1974 and progressively higher rates thereafter so as to attain at least 7% by 1981. These rates will be subject to agreement between the Bank and ONE after having reviewed the recom- mendations of the EdF tariff study due to be completed in 1973.  - 21 - 6.12 Despite the low rate of return that would result from the continua- tion of the existing tariffs, Annex 17 shows that ONE would be able to finance 27% of its 1973/77 construction program from its own cash generation. This is partially due to the relatively low level and favorable terms of its borrow- ings which by 1977 carried an average interest rate of about 6.8% per annum, and partly because the ONE rates of return forecast in Annex 17 cannot real- istically be compared with the average rates of return usually achieved by power companies in general due to ONE's comparatively high as;set values (see 6.05(a)) and to the underutilization of hydro resources (see 3.08). This underutilization cannot be quantified at this stage, but if the full revaluation of the 1971 assets had not taken place and if Jerada costs had averaged US$300 per kW installed (which should have been readily achievable under conditions of international competitive bidding) the rate of return expected to be achieved through 1977 on the resulting lower rate base would have been about 7% even at the existing tariff level. Present Tariffs 6.13 ONE's tariffs today are essentially the same as thoDse of EEM which have remained unaltered since 1958. They are complicated and disparate (see Annex 15) because: (i) they attempt, in part, to reflect 1958 costs of supply which bear little relation to current prices; (ii) they take into account privileges in existence before ONE was created; (iii) certain rates are the result of hard bargaining by communities which opted to have their distribution systems integrated into ONE rather than to create a re'gie. It is expected that the Government will remedy this state of affairs as a result of the EdF study, after discussion with the Bank (paragraph 2.06). 7. AGREEMENT REACHED AND RECOMMENDATIONS 7.01 The Government has agreed: (a) To settle its past accounts with ONE by December 31, 1974, and to arrange for future bills to be settled withkin 90 days of their presentation (see 6.06). 7.02 ONE ancl the Government have agreed: (a) To reviLew the recommendations of the ongoing EdF tariff study with the Bank and to agree on an appropriate rate of return for ONE in the light of the recommendatiLons (see 2.06).  - 22 - (b) To maintain tariffs at a level sufficient to earn an annual rate of return on its average net fixed assets in operation of not less than 3% for 1974 and progres- sively higher rates for subsequent years so as to attain at least 7% by 1981, provided that, having discussed the recommendations of the ongoing EdF tariff study with the Bank; the Government, ONE and Bank may agree on such other annual rates of return as shall be required to enable ONE to finance from internal cash generation a reasonable por- tion of its expansion needs (see 6.11). 7.03 ONE has agreed: (a) To have its accounts audited by independent auditors acceptable to the Bank (see 6.04). (b) Not to incur additional long term debt unless its debt service in any future year is expected to be covered at least 1.5 times by its net cash generation (see 6.05). 7.04 Subsequent to the loan negotiations, the Government has undertaken to engage consultants (EdF) to study the organization of the electricity sector of Morocco. The terms of reference of this study are acceptable to the Bank and the Government is expected to discuss the EdF recommendations with the Bank prior to or in connection with any future Loan that may be proposed for electricity projects (see 2.08). 7.05 In view of the above agreements, the Project provides a suitable basis for a Bank loan to ONE of US$25 million for a period of 20 years in- cluding a grace period of 4 years.  MOBOCCO First Power Project (ONE) 1/ Generation and Sales of Public Power Sector 1965 1966 1967 1968 1969 1970 1971 1972 (1) Gross generation in GWh 1,318 1.387 1,393 1,603 1,757 1,908 2,o44 2,311 (2) Gross hydro generation in GWh 1,168 1,018 891 1.077 1,389 1,316 1,520 1,596 in % of (1) 89 73 64 67 79 69 74 69 (3) Gross thermal generation GWh 144 369 502 526 368 592 524 715 "1 "1 "1 in % of (1) 11 27 36 33 21 31 26 31 (4) Generation and transformation losses in GWh 43 60 70 72 64 78 82 115 in % of (1) 3.3 4.3 5.0 4.5 3.6 4.1 4.0 5.0 (5) Net generation = (1) - (4) in GWh 1,269 1,327 1,323 1,531 1,693 1,830 1,962 2,196 (6) Energy purchased in GWh 1 0 41 12 7 4 8 5 (7) Energy sent out in GWh 1.270 1.327 1.364 1,543 1.700 1.834 1.970 ?,201 (8) Transmission and distribution losses of ONE in GWh 111 109 104 130 155 155 174 217 in % of (7) 8.7 8.2 7.6 8.4 9.1 8,5 8.8 9-9 (9) Sales of ONE= (7) - (8) in GWh 1,159 .218 12 1413 1,545 1,679 1,796 1,984 (10) Sales of ONE to distributors in GWhl 812 734 751 861 863 1,036 1,105 1,213 n 11 as 11 11 in % of (9) 70 60 60 61 56 62 62 61 (11) Sales of ONE to ultimate consumers in GWh 347 484 509 552 682 643 691 771 "1 "1 ". ". "1 "1 in % of (9) 30 40 40 39 44 38 38 39 (12) Sales of distributors to ultimate consumers in GWh 740 683 687 796 806 963 1,036 1,199 (13) Total Sales to ultimate consumers = (11) + (12) in GWh 1,087 1,167 1,196 1,348 1.488 1,66 1,727 1,900 (14) Increase of sales over previous year in % 5.4 7.4 2.5 12.7 10.3 7.9 7.5 10 (15) Total transmission and distribution losses = (7) - (13) in GWh 183 160 168 195 212 228 243 301 it et n sw 1 in % of (7) 14.4 12.1 12.3 12.6 12.9 12.4 12.3 13.6 (16) Total losses = (1) - (13) in GWh 225 220 197 255 269 302 317 411 in % of (1) 17.1 15.9 14.1 15.9 15.3 15.8 15.5 .17.7 Includes only ONE's system and systems connected with that of ONE, i.e., it excludes sales in isolated systems of Electeras Marroquies and irn small systems operated hy the Ministry of Tnterior. April 1973  Wirer Power Project (ONE) Bressdown of Power Sector Sales by Consv,,r Categories GW S Of (1) GWh 1965r7 1 9 68 13W69 _ f'S) G 1970 'k or ~1; 5 of tl) 5 of (I~ GWh f ~ ;Wh ~jof(SI) OWL of (1) Total sales to ultisate coosuoers 1, J87 100 1,167 100 1, 196 100 1,348 100 i,488 1oc 1,606 100 1,727 loo High and Mediun Voltage Sales (150 - 5.5 kV) (2) Transsortatioo 61 6 64 5 66 6 67 5 66 4 70 4 75 4 (3) Kdning industry 220 20 239 20 238 20 254 19 253 17 242 15 273 16 (4) Ceont industry 63 6 66 6 72 6 80 6 90 6 III 7 114 7 (5) Other industries, coas,erce, agriculture, etc, 405 37 440 38 456 38 530 39 606 41 688 4 714 41 (6) Total high and rediu voltage snies 749 69 809 69 832 70 931 69 1,015 68 1,111 69 1,176 68 Low Voltage Sales Y110 arSd P5-KV ) (7) Residential, ooia,ercial 272 25 286 25 294 24 337 25 382 26 402 25 451 26 (8) Public lighting 32 3 33 3 33 3 38 3 42 3 44 3 48 3 (9) Agricultural pumping and Hills 34 3 39 3 37 3 42 _ 49 3 49 3 52 3 (10) Total low voltage sales 338 31 358 31 364 30 417 31 473 32 495 31 551 32 _/ T-eludes ONE's ay.tea and syateco connected with that of ONE, i.e., it excludes sales in isolated sastems of Electras Marroquies and in small systems operated by the Ministry of the Interior; 1972 detailed data not yet available. April 1973  MOROCCO First Power Project (ONE) Breakdown of ONE's Sales by Consumer Categoriesl 1966 1967 1- 9 1970 1971 GWh %e(l) GWh %of(L) GWh O (1) GWh % of )Wh Of (1) GWh % of (i) (1) Total sales 1,218 100 1,260 100 1,413 100 1,545 100 1,679 100 1,796 100 High and Medium Voltage Sales (150 - 5.5 kV) (2) Transportation 64 5 66 5 67 5 66 4 70 4 75 4 (3) Mining industry 239 29 238 19 254 18 253 16 242 14 27