Morocco - Third Banque Nationale Pour Le Developpement Economique (BNDE) Project

Report No. 468 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION PROJECT PERFORMANCE AUDIT OF MOROCCO THIRD DFC LOAN (571-MOR) June 25, 1974 Operations Evaluation Department  PREFACE IBRD Loan 571-MOR to the Banque Nationale pour le Developpement Economique (BNDE) of Morocco was closed in July 1972. The following performance audit reviews actual developments against the objectives and targets stated in the Loan Agreement and the documents on the basis of which the Executive Directors approved the loan in October 1968 and assesses the effectiveness of the Bank's action in connection with the loan. For the preparation of the audit the Bank's files on the loan and on BNDE and the reports of BNDE's External Auditors were studied and a brief visit was made to Rabat focussing principally on the substantial cancellations that eventually occurred under the loan. The advice and assistance then pro- vided by BNDE is gratefully acknowledged. Note: Currency Equivalent (Dirham) Up to December 1971 US$1.00 = 5.05 DH Dec. 1971 - Feb. 1973 US$1.00 = 4.60 DH Since February 1973 US$1.00 = 4.00 DH approx.  SUMMARY The Banque Nationale pour le Developpement Economique (BNDE), founded in 1959, is virtually the sole institutional source of long-term credit for manufacturing industry in Morocco, an important factor in medium-term credit through its guarantee responsibilities and a partial source of finance for other sectors, such as tourism in the second half of the 1960s and marine transport in recent years. There are few medium- and large-scale manufacturing projects undertaken in the country over the last ten years with which it has not been associated, and, through the creation and financing of Maroc Leasing, it has also assisted smaller companies and the contracting industry. Loan 571-MOR for $15 million, signed in November 1968 and closed on schedule in July 1972, was the third out of six loans that the Bank has made to BNDE. Signature of the loan was preceded by a year or more of discus- sions and negotiations in Rabat and in Washington, about points which troubled the Bank in connection with BNDE's development: its poor profit- ability prospects, lack of discrimination in investment decisions, ex- cessive exposure in textiles, need to build up reserves and inadequate diversification of borrowings. In .face of adamant Government opposition at the time to any increase in BNDE's 7% lending rate, it was agreed that the return to BNDE's share capital would be raised by replacing one-third of all share- holdings with an increase in the Government's long-term low-interest loan to BNDE in an equivalent total amount of DH 10 million. This step was implemented as a condition of effectiveness of the Bank's loan and it was an important factor in enabling BNDE to increase its dividend rate, more quickly than expected, to 7% in 1970 and to raise for the first time in 1972 substantial subscription from private Moroccan investors to its capital; they purchased more than $1 million of rights waived by other shareholders, thereby raising their share in ownership from an insignif- icant amount to some 17%. To improve BNDE's investment appraisal and decision procedures a number of steps were agreed. A Consultative Committee of Government representatives was replaced with an Executive Committee of BNDE's Board, which would meet monthly and have substantial approval powers; it appears to have generated more discussion of investment proposals and to have worked satisfactorily. A foreign Advisor was to be recruited and a Deputy Director General appointed to overlap with his term; an Advisor was eventually appointed, but he stayed only a few months and seems to have had limited impact; six months after he had left a satisfactory Deputy was selected from within the staff and in 1972 a second Deputy was appointed and a reorganization carried out to improve inter-departmental coordination which seems to have been a major cause of the weakness in project appraisal; professional staff has been greatly strengthened from some 30 in mid-1968 to 50 by the end of 1972. Government agreed to guarantee loans for projects which BNDE was not prepared to finance - ii - on a commercial basis, and such guarantees have been given for a few projects, though seemingly not used to date. BNDE undertook to reduce its exposure in textiles, which did indeed fall from 35% of total loan portfolio at the end of 1967 to 15% by the end of 1972. Portfolio affected by arrears in excess of three months did rise significantly to reach some 5.5% of total portfolio by the end of 1972 and nearly halfof these loans, by amount, was for textile industry projects. But reserves continued to be built up and remained about 6% of total loan and equity portfolio at the end of 1972 as in 1967, consistent with Bank advice. Write-offs, which had been relatively small before 1970, rose to about $150,000 in 1972, but losses seem to have been held to lower levels than the Bank was expecting in 1967. A special review in 1972 suggested that about half of the portfolio affected by arrears at that time represented real loss risks, and a further loan- by-loan analysis of this situation is being carried out by the External Auditors this year. As regards the raising of funds from new sources BNDE has had considerable success, beginning in February 1971, in selling 15-year bearer bonds domestically, with an increasing proportion going to indi- vidual investors; by early 1974 it had so raised more than $17.5 million equivalent. On the foreign side BNDE was slower to act, mainly because of the relative attractiveness of IBRD loan terms, but some foreign loans on restricted terms were obtained in 1971-72 and considerable further efforts were put underway in 1973-74. IBRD lending outstanding had fallen to some 65% of total long-term borrowings by the end of 1973. Despite removal of tourism from its scope in 1970, a prospect that had caused the Bank to worry in 1968 that BNDE might have insuffi- cient business, BNDE's volume of operations grew substantially faster than projected by the Bank; about the same as projected for 1970, its total disbursements were 70% larger than projected in 1971. Disbursements out of the Bank Loan 571-MOR were, however, slower and smaller than expected largely as a result of commitment of sizeable proportions of the Bank loan against projects for which they could not in the end be used - fully or, in several cases, at all - for one reason or another and slowness in cancelling these commitments. As much as $1.6 million of commitments against the Bank loan in March 1969 were, for instance, finally cancelled only in May 1972. It is unclear how much this rather costly practice - some $3.6 million of IBRD commitments remained unutilized without contributing anything to development for some two-three years, at an eventual direct cost to BNDE of nearly $100,000 in commitment charges - was due to lengthy administrative procedures in Morocco or to BNDE's laxity in loan surveil- lance, but various measures can be taken to prevent its recurrence. Marred by this phenomenon of substantial delayed cancellations, Loan 571-MOR nonetheless seems to have made useful contributions to Morocco's substantial outperformance of its rather conservative 1968-72 development plan targets, first by the small direct contribution it made to meeting the capital requirements of expansion in manufacturing and - iii - tourism industry and second, and more importantly, by the impact of sur- rounding discussions and agreed steps in helping to build up Morocco's only industrial development bank. Some of the objectives specified in the documents proposing the loan were attained only with delay, and sharply increased inflation, combined with recent subsidy measures, have made BNDE's effective lending rate at least temporarily very inadequate, but there have been major developments over the years in line with the Bank's recommendations and, within the framework of objectives that the Bank saw for its DFC operations in 1968, it seems that the emphases selected in this case - particularly recapitalization, creation of the Executive Committee of the Board, and build-up of reserves - were well chosen and prudently pursued.  PROJECT PERFORMANCE AUDIT OF MOROCCO THIRD DFC LOAN (571-MOR) Loan 571-MOR, the third out of six loans aggregating $122 mil- lion that the Bank has extended to the Moroccan Banque Nationale pour le Developpement Economique (BNDE), was signed in November 1968, after some twelve months of arduous negotiations; it was closed in July 1972 when $11.4 million had been disbursed, the remaining $3.6 million of the ori- ginal $15.0 million having been cancelled. Introduction BNDE, founded in 1959 and associated with the Bank Group since 1962 when the Bank made its first loan and IFC took an equity participa- tion, is virtually the sole institutional source of long-term credit for manufacturing industry in Morocco. It also plays a vital role in medium- term credit for manufacturing industry insofar as the commercial banks, who take the primary risk, have to have BNDE appraisal and guarantee for such loans before they can rediscount them at the Central Bank. Most projects use credit both from BNDE direct and from the commercial banks, with a BNDE guarantee, and there are in fact few medium- and large-scale manufacturing projects undertaken in Morocco over the last ten years with which BNDE has not been associated. In the second half of the 1960s it also played an important role in channelling IBRD funds into tourism projects, and in recent years marine transport has become an important sector for BNDE financing. After considerable earlier activity in equity investment, BNDE adopted a cautious attitude in the later 1960s, but the last few years have also seen major expansion of BNDE's equity portfolio, particularly in support of marocanization of previously foreign-owned enterprises. The loan that was eventually made in November 1968 was originally requested in July 1967 when BNDE, foreseeing exhaustion within a few months of resources it then had available for commitment, urged that it be appraised for a new loan in August. The Bank was not able to field an appraisal mission until October 1967, but it also had a number of major concerns about BNDE's profitability and performance, which the appraisal mission confirmed. Principal problems, in the Bank's view, were BNDE's low profitability prospects, its lack of discrimination in investment decisions and consequent poor quality of parts of the portfolio, partic- ularly overinvestment in the textile industry which had been suffering from a weak market due to poor harvests in 1966 and 1967; the Bank felt losses threatened. It had found many of BNDE's appraisals analytically weak to the point it had rejected a number of the projects submitted for financing under earlier IBRD loans. Following the appraisal in October, therefore, measures to deal with these problems were discussed by another mission to Rabat in February 1968 and at formal loan negotiations in -2- Washington in May; a further visit to Rabat was made, in August, before a compromise was finally reached. In order to improve BNDE's profitability the Bank felt that BNDE's lending rate of 7% (with Government compensating it for the excess -over 5% on any borrowings) should be raised, but in the face of adamant Govern- ment opposition to any such adjustment at that time it suggested that Government convert 10 million DH of its 13 million DH (43%) shareholding in BNDE into a long-term low-interest subordinated loan, which would have the immediate effect of raising returns to the remaining share capital by about a third -- not enough, the Bank thought, to make BNDE shares readily marketable and thus to widen its private ownership, but a step in the right direction. The Government was prepared to make a further 10 million DH quasi-equity contribution, as recommended, but it preferred to maintain the existing balance of shareownership and it therefore suggested that all shareholdings be reduced by one-third, an equivalent total amount, with redemption in cash at par value or in ten-year fixed interest bonds. This formula of reduction in share capital compensated by an equivalent increase in the Government long-term low-interest loan was worked out and agreed in the first half of 1968 and formally approved at an Extraordinary Meeting of the shareholders June 24. Implementation of the arrangement was made a condition of effectiveness of the Bank's loan. Various measures were also agreed to strengthen BNDE's invest- ment analysis and review, and to protect it from the danger Government might require it to take the risk on 'non-bankable' projects. First, it was agreed in February 1968 that, while the full 17-member Board would continue to meet only four times a year, the Consultative Committee of Government representatives which had previously made recommendations on each proposal prior to its being voted on by mail by the Board would now be replaced with a 7-member Executive Committee of the Board, including the IFC Director and two private Directors resident in Morocco, which would meet monthly and have powers to approve primary risk commitments up to 4 million DH and all commitments, irrespective of size,for redis- countable, secondary risk credits; this step was approved by the Board May 31, 1968. Second, the Bank felt strongly that BNDE needed a foreign Advisor for at least one year to help improve its appraisal standards and, in face of Moroccan protests about the high costs involved, it even offered at one point to pay half the costs if a Bank Group staff member were recruited; having sought to make recruitment of such an Advisor a pre-condition for presenting the loan to its Board and then of loan effectiveness, the Bank finally accepted, in August, BNDE's undertaking to hire such a man before the end of 1968 - and to try to fill the long- recognized gap at the level of Deputy Director General in such a way that the appointee to the latter post would overlap with the Advisor's term of service. Third, although not accepting the Bank's suggestion that a special fund be created for financing projects which the Govern- ment might consider worthwhile while BNDE found them 'unbankable', Govern- ment did agree to provide unconditional and full guarantees for BNDE loans - 3 - to such projects. Fourth, BNDE's Director General and a Bank represen- tative signed a Minute of Negotiations which, as well as referring to the above points, also reaffirmed BNDE's objective, in its Policy Statement, to finance only projects of high economic priority and satisfactory return and to carry out the analyses necessary to ensure this. These matters, other than the dependence of loan effectiveness on implementation of the capital reduction and increase in quasi-equity, were dealt with outside the formal loan documents which did, however, in view of the Bank's concern, provide for a loan to cover only one year's likely commitments (instead of the more usual two) without any increase in BNDE's previous free limit of $150,000 on individual commitments out of IBRD funds. The Bank conceded to BNDE's insistence, in light of the difficulty of the loan negotiations, that the Loan Agreement provide for a maximum allowable debt-equity ratio of 4.5 rather than 4.0, neither of which were expected to be met for several years, but it refused to waive standard provisions, then recently introduced, regarding loan commitment charges. Financial Performance BNDE's financial performance has outpaced the projections and targets contained in the appraisal report for Loan 571-MOR, and part of its achievement must be attributed to the sound decision to restructure its capitalization in 1968. It has handled much larger volumes of business than foreseen in the rather conservative projections (assuming a flattening out), as shown in Annex Table I, despite the fact that tourism was largely removed from BNDE's scope in 1970 with the concen- tration of this responsibility on CIH (Credit Immobilier et Hotelier du Maroc). Taxation has been slightly higher than projected (although still at a relatively low rate of about 20%) but after-tax return to average equity has risen sharply from less than 7% in 1967 to over 12% in 1971 (compared with 11% projected) and 13% in 1972 (see Annex Table II). Relative to year-end share capital, after-tax income reached 22.5% in 1971, again ahead of projections, and, despite allocations to reserves about in line with the high level recommended by the Bank, BNDE was able to raise its dividend from the projected 6% to 7% for 1970 and following years and 8% in 1973. In 1972 BNDE paid a 12% stock dividend out of retained earnings and reserves and at the same time declared a rights issue of 10 million DH (50% of subscribed capital before the stock divi- dend). Many existing shareholders (including IFC) waived their rights in whole or in part, the rights were oversubscribed when sold at par on the Moroccan market, and over $1 million equivalent (some 5.1 million DH) was raised from private Moroccan investors (including many individuals), thus raising their share in ownership of BNDE for the first time from an insignificant level to about 17%. The 1968 recapitalization seems to have gone further than the Bank then hoped to make BNDE shares marketable. BNDE is now 56% Moroccan-owned compared with 46% in 1967. Other important financial targets discussed in 1968 and presented in the Bank's appraisal report were reduction of BNDE's heavy exposure in the textile industry and rapid build-up of reserves, so as to keep them at least in constant proportion to total portfolio and preferably to in- crease them. Textiles still accounted for as much as 19% of direct lend- ing approved in 1969, but all of this was for balancing and modernization projects or expansions of existing plants. Textiles' share of total loan portfolio has fallen from nearly 35% in 1967, to 24% by the end of 1970 and 15% by the end of 1972. Through 1970 reserves and provisions grew more rapidly than expected as a proportion of total outstanding port- folio (mainly because of the slower growth of the latter). Thereafter they fell back due to more rapid portfolio growth, use of about 1.9 mil- lion DH of reserves for the 1972 stock dividend and increased write-offs of loan principal and interest - a cumulative total of only about 0.3 mil- lion DH through 1970 but nearly 0.1 million DH in 1971 and 0.6 million DH in 1972. These losses seem to be considerably less than the Bank was fearing in 1967, and as of the end of 1972, total reserves and provisions were still equivalent to about 6% of loan and equity portfolio, about the same as in 1967. The Bank's emphasis on reserve build-up seems to have been prudent. For the first time BNDE's External Auditors qualified their assessment of the company's 1972 accounts on the grounds that underlying assets in com- panies to which BNDE had lent or provided equity had not been verified 'in accordance with Anglo-Saxon auditing standards', though this seems to have been more a matter of new recognition of a long-standing fact rather than indicative of any change in the likely value of these assets. More sig- nificantly, loan arrears in excess of three months, which had been rela- tively insignificant, rose to some 8.5 million DH (including principal and interest) by the end of 1972 and portfolio affected to about 18 million DH or 5.5% of total outstanding portfolio, compared with 2.1% at the end of 1968; as much as 46% of arrears were in the textile sector, but no loans with Government guarantee (mainly to public sector industries) were in arrears. A special review carried out by BNDE and the Bank's 1972 apprai- sal missions for the sixth loan indicated that about 3% of total portfolio, or slightly more than half of the portfolio affected by arrears, represented real loss risks as of the end of 1972. BNDE's External Auditors are making a case-by-case review of loans in arrears in connection with their examin- ation of 1973 accounts. Organization Board composition has changed relatively little since 1968, and the Executive Committee then established appears to have operated as ex- pected,generating more discussion of proposals than was possible in the larger forum, more seldom convoked, of the full Board. One representa- tive of the locally established but foreign-controlled private sector in- stitutions which have held three seats on the Board and two on the Exec- utive Committee is now a Moroccan former Director General of BNDE. As Table 1 shows, the Moroccan private participation in BNDE is now suffi- ciently significant that it might be expected to be represented on the Executive Committee before long. -5- Table 1 BNDE: Ownership, Board and Executive Committee . 1967 1968 1972 % of Board % of Board Ex-Com. % of Board Ex-Com. Shares Members Shares Members Members Shares Members Members Moroccan Government 43.51 8a/ 43.23 8/ 4 38.18 71 4 Private Insts. 2.63 - 2.67 - - 0.58 - - Individuals 0.30 2 0.39 2 - 17.26 2 - 46.44 10 46.29 10 4 56.02 9 4 IFC 25.00 1 24.70 1 1 17.07 1 1 Foreign Local Institutions-/ 11.29 3 12.13 3 2 9.42 3 2 Insurance Subsids. 0.60 - 0.63 - - 0.48 - - Foreign Fin. Insts. 16.67 3 16.25 3 - 17.01 3 - 28.56 6 29.01 6 2 26.91 6 2 Total 100.00 17 100.00 17 7 100.00 16 7 a/ including BNDE's Government-appointed President and Director General, which positions were amalgamated in 1970. b/ i.e. Institutions Resident in Morocco but foreign-controlled. One of these seats on the Board and the Executive Committee is now occupied by a Moroccan. BNDE's internal organization and staffing have shown a marked ex- pansion and strenghening. Professional staff have increased from 31 in August 1968 to 35 by November 1969, 43 by the end of 1970 and 50 by th9 end of 1972. With some delay from the agreed target the foreign Advisor.1 required by the Bank was appointed early in 1969 but he resigned in Sep- tember of the same year, and it is doubtful whether he had much impact on appraisal standards. The Bank found it necessary to reject a few apprai- sals (of hotel projects) submitted in 1969 and to raise questions on a good number of others, but by the end of 1969 it was putting more emphasis on difficulties of internal inter-departmental coordination as the reason for somewhat inconsistent project appraisals and weak market analysis. 1/ Not, in the event, a Bank staff member. - 6 - BNDE's Director General finally selected from within the staff a Deputy in March 1970. The Bank observed some improvement in inter-departmental coordination and appraisal quality in 1970-71, but some deterioration again in 1971-72. However in June 1972 the former Minister of Agricul- ture who had taken over the full running of BNDE two years earlier, com- bining the previously separate responsibilities of President and General Manager, appointed a second Deputy and in September he carried out an important reorganization, grouping departments around the two Deputies, to remove overlap of responsibilities among departments and strengthen coordination. In December 1972 a former Finance Minister took over the job of President Director General. Resources Although the delay in consummation of Loan 571-MOR was obviously inconvenient for BNDE it does not appear to have seriously hampered the growth of operations or to have greatly delayed the execution of invest- ment projects. During the long drawn out negotiations BNDE continued to submit sub-projects for Bank approval, with the result that some $5.4 million, or more than one-third of the original loan amount, could be credited to the loan account for approved sub-projects the day after the loan was declared effective, in March 1969. The loan was fully committed by March 1970, some weeks before the targeted date, and final disburse- ments occurred in July 1972, in accordance with the originally targeted closing date, although the pattern of disbursements prior to this date was considerably slower than projected. Nonetheless the efficacy of the Bank's loan was somewhat marred by the fact that nearly one-quarter of it had eventually to be cancelled, meaning that some $3.6 million of IBRD commitments remained unutilized without contri- buting anything to development for some two-three years over which period BNDE itself had to pay the Bank commitment charges at the rate of three- quarters of one percent p.a. - a total in the neighborhood of $90,000, which would, for instance, have more than paid for the foreign Advisor. This phenomenon of substan al cancellations has been characteristic of several Bank loans to BNDE- . Discussion with BNDE indicated that there were two principal reasons for these cancellations - first, that dis- bursement requests from borrowers sometimes turn out not to qualify for Bank reimbursement because the expenditures have taken place more than 90 days before submission of the sub-project to IBRD (the Bank's so-called 90-day rule, to limit retroactive financing) and, second, that prospective borrowers sometimes fail to use loans approved because of unwillingness to accept BNDE loan conditions or because of changes in their situation. The delay between loan approval and the entrepreneur's real invest- ment decision has sometimes been very long in Morocco partly as a 1/ Cancellations were insignificant on the first (1962) loan to BNDE, but they amounted to over $1.3 million out of the $17.5 million second loan in 1966 and to some $3.5 million out of the $15.0 million fourth loan in 1970. - 7 - result of complex procedures for approval by the Government's Investment Comission, and this has therefore made it difficult to know about bor- rowers' cancellations early enough to recommit the funds for new projects before the Bank's final date for commitments under the loan; as many as 11 sub-loans were cancelled in their totality (see Annex Table III). However it is unclear how much these extended procedures, or rather laxity in BNDE's loan surveillance, explain, for instance, that as much as $1.6 million of the funds originally committed for sub-projects in March 1969 were actually only cancelled in a block in May 1972 or that as many as eight of the sub-loans totally cancelled at that time were ones approved during the course of 1969. Anyway, in a recent supervision mission, these problems have been discussed with BNDE, which is making efforts to get involved in projects at an earlier stage, to make borrowers more aware of the 90-day rule, to scrutinize project estimates more fully from the point of view of their eligibility for IBRD financing, and to reach pre- liminary agreement with borrowers on loan conditions before presentation of the loan to BNDE's Board. Delays between approvals and actual invest- ments should also diminish as a result of the recent simplification of Government procedures for grant of incentives under the new Investment Code. The Bank was concerned in 1967/68 at the sharp upward trend in BNDE's dependence on Bank Group funds and during negotiations for Loan 571-MOR it was agreed that BNDE would actively seek to obtain substantial amounts of long-term funds from other sources. Little was done at first, but after further extensive discussion and Government review of policy, and with Government giving BNDE more freedom of action in connec- tion with the increase in it lending rate from 7% to 8% in July 1971 and to 9% on January 1, 1972-' (in line with the increase in domestic price inflation which averaged only 2.3% p.a. in 1968-70 but 3.9% in 1971-72), a substantial amount of long-term borrowing from other sources has been done; IBRD lending outstanding never quite reached the 77% of total long-term borrowings projected in the appraisal report for Loan 571-MOR, and this ratio has fallen in the last two years to some 65% as of the end of 1973 (see Annex Table II). Local borrowings have been in the form of 15-year bearer bonds, guaranteed by Government but with interest of 6.25% p.a. subject to income tax; between February 1971, when the first such issue was made, and the end of 1973 nearly $13 mil- lion equivalent (60 million DH) was so mobilized, and the last issue, in January 1973, was subscribed by individual investors as well as by banks 1/ Simultaneous with these interest-rate increases the Government under- took to rebate to BNDE borrowers amounts equivalent to 2 percentage points of their interest payments. This did not become operative for a long time, but it was finally effectively introduced early in 1974, on a retroactive basis.. Inflation has simultaneously substantially increased so that effective real interest rates to BNDE borrowers are negative at the present time. - 8 - and insurance companies. As regards foreign sources, and leaving aside a $3 million loan from US AID at 4% interest but tied to American procurement which Government channelled to BNDE in 1970, a 46 million DH loan was obtained in 1971 from the Banque Nationale de Paris (tied to French procurement) and a 12 million DH loan for a specific project was obtained in January 1972 from the Kuwait Development Fund.! As of early 1974 further foreign borrowing was foreseen from these sources, from the African Development Bank and possibly from the Norwegian Agency for International Development and from other Arab oil-producing states. Growth of Industry and Tourism The reports presenting Loan 571-MOR for approval of the Executive Directors cited no particular broader objectives with regard to develop- ment of the industry and tourism sectors which would be primarily assisted, although they did refer to Morocco's excellent tourism prospects and the priority of the latter sector in the Government's five-year plan. As regards manufacturing industry, it was suggested that opportunities for import-substitution in consumer goods were becoming exhausted and that in- dustrial investment might shift toward food-processing and possibly some export-oriented projects. Tourism and food-processing projects did account for the largest shares of actual disbursements under the loan, 30% and 26% respectively (see Annex Table IV); more than two-thirds of the latter was in a single large sugar-mill project. Projects planned to export more than 50% of production accounted for 7% of lending approved under the loan, in two projects. The largest single borrower under the loan was Maroc Leasing, a company established at the initiative of Banque de Paris et de Pays Bas and BNDE in 1965, to lease equipment to firms and contractors of all sizes with a purchase option at the end of the lease period; it received $2.3 million of loan funds or some 20% of total disbursements. BNDE has been so dominant a factor in term-financing for manufac- turing industry (see Annex Table V) and such an important one for tour- ism that the overall performance of these sectors gives some indication of the impact of its lending. While officially estimated open unemploy- ment has remained high in Morocco at around 9%, and considerably higher still in the principal urban areas (despite substantial migration of workers to Europe), Moroccan GDP grew in real terms over the Second Plan Period (1968-72) at an average annual rate of 5.6%, significantly above the Plan target of 4.3% and more than double the annual growth rate of the preceding decade. The manufacturing sector, not stressed in the 1/ A further 20 million DH bond issue in January 1974 was oversubscribed, like the previous one. 2/ At 3.5% interest, but denominated in Kuwait Dinars; however Govern- ment bears the foreign exchange risk on this loan as on all BNDE's other foreign borrowings. - 9 - original plan strategy which had eivphasized mainly agriculture and tour- ism, also grew at about 5.6% p.a..1 and continued to account for about 12.5% of GDP. National savings rose over the Plan period from less than 11% of GNP to more than 13%, with the increase entirely accounted for by private saving. Exports of manufactured goods, ranging from canned goods to fertilizers and virtually entirely based on domestic raw materials, rose from about $35 million in 1967, or 17% of merchandise exports, to nearly $100 million in 1972, or 24%. As regards tourism, construction of accommodation and infrastructure fell short of Plan targets, but the number of foreign tourists rose at 18% p.a. to virtually meet the Plan target of 1.15 million in 1972, and gross foreign exchange receipts from tourism rose from $80 million in 1967 to about $200 million in 1972. Conclusions The potential contribution of the Bank's $15 million loan to the development of industry and tourism in Morocco was somewhat reduced by slower than expected disbursements and substantial cancellations, but it nonetheless helped usefully to meet the large capital requirements of ex- pansion in the tourism and manufacturing sectors, both of which supported Morocco's outperformance of its five-year plan targets, particularly in expansion of foreign exchange earnings. Probably more important than this financial impact of the loan has been the contribution made by nego- tiations and discussions both before and after the signature of the loan agreement to the strengthening of Morocco's single industrial development bank. Virtually all the objectives stated in the documents proposing the loan have been attained, some in larger measure than expected and others with some delay. The private Moroccan share in BNDE's ownership, its volume of business and its mobilization of domestic funds appear to have expanded substantially beyond expectations, while portfolio losses have been less than was feared. Financial performance has been better than anticipated. The Executive Committee of the Board which was created at the Bank's suggestion seems to have operated as expected, and exposure in textiles has steadily dropped, as foreseen. Organizational strengthen- ing, mobilization of alternative foreign resources and adjustment of Mor- occo's overall interest-rate structure have come slower than hoped and the Bank has remained concerned about the adequacy of BNDE's project appraisal analyses; but there is no doubt that, with the extensive further discus- sion and advice in the years following 1968, there have been major develop- ments in line with the Bank's preoccupations in these areas, although the interest rate situation has seriously deteriorated very recently, perhaps temporarily. In the framework of objectives that the Bank saw for its DFC operations at the time the loan was made, the points of emphasis selected in this case seem to have been well chosen - particularly recapitalization, creation of the Executive Committee of the Board, and build-up of reserves - and the multiple discussions preceding the loan appear to have been necessary and worthwhile. 1/ Including in manufacturing the substantial handicraft sector.  Annex Table I BNDE Operations: forecast and Actual (mi1lion Dirhams) 1967 1968 1969 1970 1971 1972 1973 FORECAST I. Direct Loans Loan Approvals 48.2 70.0 70.0 65.0 65.0 Contracts Signed 39.6 60.0 65.0 60.0 60.0 Disbursements 47.4 60.0 60.0 60.0 60.0 II. Equity Investments Approvals 2.1 2.5 3.0 3.5 3.5 Disbursements 2.4 2.5 2.5 3.0 3.0 III. Rediscountable Credits Approvals 70.6 40.0 30.0 30.0 30.0 IV. Total Approvals 120.9 112.5 103.0 98.5 98.5 ACTUAL I. Direct Loans Loan Approvals 49.9 64.2 65.5 164.7 113.3 112.8 Contracts Signed 39.6 38.4 68.5 65.0 148.9 89.4 Disbursements 47.4 32.3 42.7 61.1 96.3 97.9 II. Equity Investments Approvals 2.1 - 0.1 3.0 17.9 8.9 Disbursements 2.4 2.2 0.7 1.1 12.3 14.9 III. Rediscountable Credits Approvals 70.6 39.2 5.4 96.7 133.7 65.0 IV. Total Approvals 122.6 103.4 71.0 264.4 264.9 186.7 ANNEX TABLE II BNDE: FINANCIAL STATEKENTS AND PERFORMANCE. PROJECTED AND ACTUAL 1965-73a/ (In millions of Dirhams) Actual A lAudited) Forecast Actual (Audited) unaudited- 1 196 1969 970 1971 19 1969 1970 1971 1972/ 1973 assets & Liabilities Direct loans 107.1 134.6 162.6 199.3 234.1 267.1 297.1 172.6 188.3 218.9 275.5 328.3 398.6 rquity 8.9 15.3 17.7 19.9 22.2 25.0 27.7 20.1 20.8 21.2 32.4 47.3 S.5 less provisions 1.5 1.5 2.0 2.2 2.5 2.8 3.0 2.. 2.3 2.7 2.3 3.3 3.2 net _77 _13.8 15.7 17.7 19.7 22.2 2k" 18.0 18.5 18. 301 -Z0 =T Other 14.4 22.3 17.2 16.2 19.0 21.7 24.0 24.1 19.9 23.7 36.8 k1.0 50.4 Total 128.9 170.7 195.5 233.2 272.8 311.0 345.8 21.4.7 226.7 261.1 342.4 413.3. 500.2 Share Capital 30.0 30.0 30.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 20.0 32.4 32.4 Reserves 4.7 6.1 7.9 10.0 12.2 15.1 18.0 10.2 12.2 14.4 17.2 18.6 18.6 Legal 0.5 0T _03 7 _0.6 0.7 0.7 0.7 0.17 0.1 Rediscounts 0.2 0.3 0.3 0.4 o.4 0.5 0.5 0.4 0.k 0.5 0.6 0.8 0.9 General loan 3.3 4.5 6.1 7.9 10.0 12.5 15.3 8.1 9.9 11.8 14.2 16.4 16.3 Free loan 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 0.5 - - Investment 0.3 0.3 0.5 0.6 0.7 0.9 1.0 0.6 0.8 0.9 1.1 1.3 1.3 Surplus 1.2 1.1 0.8 0.7 0.6 0.5 0.5 0.6 0.6 0.6 0.8 0.7 0.7 Long Borrowing _ 112.4 135.5 183.5 222.8 258.0 289.9 162.6 172.5 201.1 270.4 324.2 344.9 Bonds 19.9 T72 T1T 13.9 11.2 T1 9 T E 2 77 Governmente/ 20.0 30.0 30.0 ho.o 40.0 40.0 4o.o 4o.o 4o.o 4o.0 ho.o 4o.o 4o.0 IBRD 34.4 64.2 89.1 129.6 171.6 198.6 183.6 107.0 112.7 151.3 203.7 236.0 222.9 Kuwait Fund - - - - - - - - - - - 3.8 8.0 Other - - - - - 11.0 61.0 - - - - - 13.2 Other Liabilities 18.7 21.1 21.3 19.0 17.2 17.4 17.4 21.3 21.4 25.0 34.0 37.4 103.6 cicome & Expenses Iross Income 8.1 9.7 12.2 14.6 17.2 19.4 21.6 13.6 15.0 17.3 21.5 29.2 34.5 Interest (long 4ebt) 3.5 4.5 6.2 7.2 8.2 9.8 12.4 18.6 less subsidilf o.4 0.5 0.7 0.9 1.1 1.6 2.2 3.6 net 3. "TM "T 6.9 9.0 10.8 12.5 -Z7 -7 1 M 0T2 f5o Other Expenses 2.3 2.7 3.0 3.2 3.4 3.6 3.7 3.0 3.5 o.0 5.1 6.0 Income Before P & T 7 BTT " - - -9-ij Provisions 0.2 - 0.5 0.5 0.5 0.5 0.5 0.; 0.3 o.k 0.6 1.0 Taxes 0.7 0.6 0.6 0.8 0.8 0.7 0.7 0.8 0.9 1.0 1.1h/ 1.3 Net Income 1.8 2.4 2.6 3.2 3.5 3.8 4.2 3.0 3.2 3.7 4.5 5.9 to: Legal Reserve _T . 0 = 1 T 0.1 0.L . T7T _ T Rediscount Reserve .. 0.1 ., 0.1 .. .. 0.1 0.1 .. 0.1 .. 0.1 General Loan Reserve 0.8 1.2 1.6 1.8 2.2 2.5 2.8 1.6 1.8 2.0 2.6 3.4 Investment Reserve 0.1 0.1 .. 0.1 0.1 0.1 0.1 0.1 0.2 0.1 0.2 0.2 Dividend 0.7 1.1 1.2 1.2 1.2 1.2 1.2 1.2 1.2 1.4 1.4 1.L Surplus -0.2 -0.1 -0.3 -0.1 -0.1 -0.1 -0.1 -0.1 .. .. 0.2 0.7 Loan Arrears (cver three months) rncipal n.a. n.a. n.a. n.a. 3.3 6.2 Interest o. 0.6 1.2 1.1 1.5 2.3 Total n.a. n.a. n.e. n.a. 4.8 8.5 Portfolio Affected n.a. 3.6 18.0 Affected as % -otal Portfolio n.a. 2.1 5.5 Ratios Income Before P & T Over Average Assets 2.2 2.0 2.0 2.1 1.9 1.7 1.6 2.1 2.0 2.1 2.1 2.2 2.1 Net Income to Average Equity 5.0 6.6 6.9 9.2 11.0 11.1 11.3 8.6 10.1 10.9 12.3 13.1 Net Income to Share Capital 5.9 8.0 8.7 16.0 17.5 19.0 21.0 15.0 16.0 18.5 22.5 18.2 % of Net Income Put to Reserves 61 54 54 63 66 68 71 60 63 62 69 76 Dividends Paid to Share Capital 3.0 3.5 4.0 6.0 6.0 6.0 6.0 6.0 6.0 7.0 7.0 7.0 Reserves & Provisions as % Portfolio 6.4 5.8 5.9 5.9 6.0 6.0 6.6 6.7 7.2 7.4 6.6 6.0 IBRD % of Long-Term Debt 46 57 66 71 77 (77) (63) 66 65 75 75 73 65 Long-Term Debt to Equity 2.1 3.0 3.5 6.0 6.8 7.2 7.5 5.3 5.3 5.7 7.1 6.3 6.7 Debt-Equity (Loan Agreement Definition) 2.4 2.5 3.0 4.0 h.O a/ Balance sheet and Arrears data as of the end of the year shown; Income and Expenses data for the calendar year. F/ Appraisal Report of Otober 16, 1968 for Loan 571-MOR. Z/ And before allocation of net income for the year. d/ The audit report for 1972 was qualified, as discussed in the text. j/ Subordinated long-term loans at 2% interest and with 15-year grace periods; repayment starting 1978. f/ Treasury subsidy on borrowings contracted before January 1, 1972. / Income before Provisions and Taxes. h/ Including a small amount of expenses from previous years. Annex Table III 571-MOR Sub-projects Name of project and Initial amount Decrease or Amount Project No. type of activity authorized ($) Cancellation($) Disbursed($) A-1 Etapex/Eta (hotel) 327,000.00 327,000.00 - A-2 MIDIQ Vacances (hotel) 732,000.00 157,026.47 574,973.53 A-3 Africa Hotel (hotel) 250,000.00 63,299.30 186,700.70 A-h Mines d'Aouli (lead mine) 400,000.00 136,154.86 263,845.14 A-5 Maroc Leasing IV (equipment leasing) 500,000.00 - 500,000.00 A-6 Sai M'DIQ (hotel) 540,000.00 130,532.05 409,467.95 A-7 Somatour (hotel) 515,000.00 83,673.h4 431,326.95 A-8 Fiberbag (synthetic bags) 360,000.00 360,000.00 - A-9 Chaine d'OR (hotel) 309,000.00 113,527.95 195,h72.0 A-10 Moulins Ismailia (flour mill) 200,000.00 - 200,000.00 A-11 Moulins de Meknes(flour mill) 200,000.00 117,548.60 82,451.0 A-12 Moulins de Zerhoun (flour mill) 270,000.00 128,329.39 1.41,670.61 A-13 Atlas de la Minoterie Nationale(fl.ml.)180,000.00 44,503.82 135,496.18 A-14 Ouarsazate Club Mediterranee (hotel) 276,000.00 140,503.72 135,496.28 A-15 Ste.1mobiliere El Boughaz/ETA(hotel) 392,000.00 184,126.19 207,873.81 A-16 COFITEX III(textile) 280,000.00 - 280,000.00 A-17 Societe Marocaine de Volaille (food) 760,000.00 760,000.00 - A-18 SCIF III(mechanical) 240,000.00 13,730.33 226.269.67 A-19 Orbonor (textile) 180,000.00 - 180,000.00 A-20 Samir (hotel) 364,000.00 h8,680.62 315,319.38 A-21 Maghreb-Gaz (chemicals) 200,000.00 50,159.10 149,840.90 A-22 Maroc Leasing V (leasing) 1,000,000.00 - 1,000,000.00 A-23 Doukkala Sugar Mill (food) 2,200,000.00 133,460.59 2,066,539.41 A-24 SOTEXAT (textile) 300,000.00 138,377.32 161,622.68 A-25 Filroc VI (textile) 500,000.00 25,226.31 474,773.69 A-26 Nassige al Maghreb II (textile) 400,000.00 169,935.62 230,064.38 A-27 Africa Palace II (hotel) 960,000.00 9,452.18 950,547.82 A-28 Maroc Leasing VI(leasing) 800,000.00 - 800,000.00 A-29 Les Falaises (hotel) 314,000.00 314,000.00 A-30 Carrosserie Rahali (mechanical) l60,000.00 160,000.00 - TOTAL 14,109,000.00 3,809,247.87 10,299,72.18 .........2 Annex Table III Page 2 571-MOR Sub-projects Name of project and Initial amount Decrease or Anount Project No. type of activity authorized ($) Cancellation($) Disbursed($) B-1 Agena Altair (hotel) 134,000.00 134,000.00 B-2 Palme (food) 80,000.00 80,000.00 B-3 Maropates (food) 80,000.00 17,919.38 62,080.62 B-4 SIC Metal (mechanical) 60,000.00 20,759.14 39,240.86 B-5 GUIS II (textile) 76,000.00 76,000.00 - B-6 Somati (mechanical) 68,000.00 68,000.00 - B-7 Laprophan II (chemicals) 30,400.00 10,106.26 20,293.74 B-8 Maroc Lait (food) 120,000.00 - 120,000.00 B-9 Coplastic (plastics) 120,000.00 - 120,000.00 B-10 INTEXSA (textile) 80,000.00 5,806.71 74,193.29 B-11 Impression et Cartonnage Ideale(prtng.)100,000.00 21,524.50 78,475.50 B-12 Hadi Ben Hazzou (food) 140,000.00 140,000.00 - B-13 Ste. Textile Du Nord Du Maroc(textile) 100,000.00 - 100,000.00 B-14 CIVAC/CET (hotel) 60,000.00 60,000.00 - B-15 ABC (packaging) 80,000.00 26,395.63 53,60.37 B-16 SEFITA III (textile) 120,000.00 - 120,000.00 B-17 El Manjra (mechanical) 80,000.00 17,172.36 62,827.64 B-18 Luxotex (textile) 70,000.00 - 69,844.59 B-19 IRAFAP (textile) 60,000.00 21,189.13 38,810.87 B-20 Grand Moulin Beni Ensar (food) 140,000.00 - 139,058.89 TOTAL 1,798,400.00 698,873.11 1,098,430.32 GRAND TOTAL (Projects A and B)- 15,907,400.00 4&8OE,120.98 11,398,182.50 Net 15,000,000.00 3,601,817.50 11,398,182.50 The difference between $15,907,400.00 and $4,508,120.98 is $11,399,279.02, i.e. $1,096.52 in excess of $11,398,182.50, due to the fact that disbursements for sub-projects B-18 and B-20 fell short of net commitments by $1,096.52. This amount was, therefore, also cancelled. Annex Table IV BNDE Sectorial Distribution of Projects Financed Under Loan 571-MDR Amount No. _ ($ thousands) % Manufacturing Food Processing 8 21.0 2,947 26.0 Textiles 10 26.0 1,729 15.0 Mechanical 3 7.5 328 3.0 Chemicals 2 5.0 170 1.5 Plastics 1 2.5 120 1.0 Packaging 1 2.5 54 0.5 Printing 1 2.5 78 0.7 Total 26 67.0 5,426 47.7 Mining 1 2.5 264 2.3 Leasing 3 7.5 2,300 20.0 Tourism 9 23.0 3)407 30.0 Grand Total 39 100% 11,398 100%  Annex Table V MOROCCO: Investment in Manufacturing and Mining and Investment Supported by BNDE 1965-72 (million Dirhams) Second Plan Period 1965 1966 1967 1968 1969 1970 1971 1972 (1968-72) Investment Commission Approvals (Manufacturing and Mining)- Food Processing 124.3 29.7 279.6 114.3 16.5 138.1 159.4 66.8 495.1 Textiles 57.5 103.0 157.6 19.6 41.6 26.1 23.0 17.3 127.6 Other 47.4 47.8 56.9 85.5 53.8 475.4 280.0 495.9 1390.6 Total 229.2 180.5 494.1 219.4 111.9 639.6 462.4 580.0 2013.3 BNDE Manufg Approvals 79.0 77.4 110.6 73.2 42.8 252.5 260.9 157.3 786.7 a tipleb/ 3.09 2.57 3.32 3.27 2.43 3.11 2.56 2.17 Total Mfg. Invest't 244.1 198.9 367.2 239.4 104.0 785.3 667.9 341.3 2137.9 Approvals for Other Sectors 1.7 6.2 12.2 34.9 28.2 11.9 4.0 29.4 108.4 Total Approvals 7 T=. 168T 7T .7 7IMT TS;7 Total Investment 250.9 272.0 W08.4 353.5 172.7 821.6 678.9 605.5 2432.2 BNDE as % Total Loans approved for mfg. 34 43 22 33 38 39 56 27 39 Total Mfg. Investt Supported 107 110 74 109 92 123 T hh 59 106 a/ These are the best figures available on actual manufacturing and mining investment in Morocco although they are probably overestimates (even after allowing for lags in implemen- tation) because, while almost all projects through 1972 obtained Investment Commission approval in order to benefit from incentives available, not all investment approved was actually accomplished. b/ This is the multiple between loans approved and total cost of projects so supported calculated by BNDE, on the basis of project appraisal data, for all projects approved; but application of it to the manufacturing and mining projects is not too misleading in view of the latters' importance in the total. Again all data are for approvals only. c/ i.e. Tourism and Transport.