Morocco - Sidi Cheho - Al Massira Hydro Project

Document of FILE, COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-1848-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR THE SIDI CHEHO-AL MASSIRA HYDRO PROJECT June 11, 1976 This document has a restricted distribution and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  KINGDOM OF MOROCCO SIDI CHEHO-AL MASSIRA HYDRO PROJECT CURRENCY EQUIVALENT Currency Unit: Dirham (DH) US$1.00 = DH 4.38 US$ .23 = DH 1.00 ABBREVIATIONS ONE National Electricity Office Hydraulique Hydraulic Directorate of the Ministry of Public Works and Communications OCP Office Cherifien des Phosphates CNA National Coal Company SAMIR Socifte Anonyme Marocaine-Italienne de Raffinage SCP Socifte Cherifienne de Petroles MTPC Ministry of Public Works and Communications FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMlMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO TIIE KINGDOM OF MIOROCCO FOR THE SIDI CHEHO-AL MASSIRA HYDRO PROJECT 1. I submit the following report and recommendation for a proposed loan to the Kingdom of Morocco for the equivalent of US$49.0 million, to help fi- nance the Sidi Cheho-Al Massira Hydro project in Morocco. The loan would have a term of 20 years, including 4 1/2 years of grace, with interest at 8.85 percent per annum. PART I - TIIE ECONOMY 2. A report entitled "Current Economic Position and Prospects of Morocco" (1021-MOR, dated January 26, 1976) was distributed to the Executive Directors on February 13, 1976. An updating economic mission was in the field in the first haLf of June. 3. During the 1968-72 Plan, Morocco succeeded in accelerating the growth of its economy and in improving the situation of its external payments. Aided substantially by good crops following favorable weather in three years out of five, real GDP growth averaged 5.6 percent per annum during the five- year period. Reflecting the sustained rise in exports during the Plan period and a slower growth of imports in 1971 and 1972, the balance of payments showed a surplus from 1969 onward. These results represented a definite im- provement over those of the preceding decade, during which the rate of real GDP growth had barely exceeded that of population growth, and the balance of payments had been a source of constant concern. These achievements were ac- companied by an increase in private consumption averaging about 2 percent per capita in real terms during the five-year period. 4. From 1967 to 1970, the main growth determinants had been exports, tourism and investment, all of which rose substantially; in addition sizeable stocks were accumulated following the exceptionally good harvest in 1968. By contrast, in 1971-72, exports and tourism together with current government spending were the major factors to sustain economic prowth. During these last two years of the Plan, the investment of puhlic and semi-public enter- prises declined, largely because the state-owned phosphate company (OCP) had completed its expansion program. Government investment stagnated after 1968. Private investors adopted a wait-and-see attituide in the face of political developments in 1971 and 1972 and in the expectation of new measures to en- courage investment and exports. At the end of the 1968-72 Plan period, there was therefore an urgent need to revive public and private investment. Particularly in the public sector, absorptive capacity needed to be in- creased by appropriate changes in staffing and organization. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - 2 - 5. Following a long period of very slow growth in private consumption, social problems had to be tackled. Over the 1960-71 period, there had been a slow but perceptible decline in real per capita consumption for about one- third of the rural population. Wealth and income differences between cities and villages, among regions, and between rich and poor tended to widen. Un- employment remained high, in 1971 averaging 9 percent of the country's labor force, and ranging between 12 and 16 percent in large urban centers. 6. Recognizing these difficulties and problems, the Government began in 1971 to revise its development policies, paying increasing attention to social objectives. The changed orientations were reflected in the 1973-77 Plan which aims at (1) GDP growth of 7.5 percent per annum in real terms from 1973 to 1977, mainly through a sharp increase in public and private investment and a strategy geared strongly toward increasing exports; and (2) an improvement in the distribution of growth benefits among the different social groups and the various regions, in order to achieve greater equity and at the same time increase domestic demand. This improvement was to be brought about through further land distribution to poor farmers, more emphasis on the development of rainfed agriculture, "Moroccanization" of some industrial and commercial enterprises, a price and wage policy designed to enable the poorest segments of the population to satisfy their essential needs, an ambitious pro- gram of low-cost housing, various measures to improve the lot of the rural poor, and increased emphasis on the development of poorest regions. 7. During the first two years of the 1973-77 Plan, the main development policies proposed in the Plan were introduced. Further, in 1974, Morocco ben- efitted from a steep rise in the price of phosphate, its main export product, which provided substantial additional resources compared to the Plan's expec- tation. The Government decided to step up investment spending for the years 1975-77, partly to reflect cost increases for the development program already adopted and partly to embark on additional investment projects. Recent Economic Performance 8. In 1973, exports were the only dynamic element in the economy, and real GDP grew less than 3 percent. Agricultural output declined by 11 percent due to drought. Investment rose 3 percent in real terms, because of an insuf- ficient number of fully prepared projects and of the late publication of the 1973-77 Plan and new investment incentives. 9. In 1974, by contrast, the economy registered a strong recovery. GDP grew by 10 percent, supported by all growth determinants. Agricultural output rose by 14 percent, thanks to good weather conditions and expansion of irrigation. Fixed investment increased by 34 percent in real terms due to public sector investment and the implementation of new incentives for semi-public and private investors, and stocks were replenished. Exports (including non-factor services) grew by 14 percent. Government consumption rose by more than 20 percent at constant prices.  - 3 - 10. The revival of economic activity in 1974 was accompanied by further improvements in the balance of payments. There was a sharp increase in phos- phate export earnings from $192 million in 1973 to $932 million in 1974, due to a 345 percent rise in average export price and a 16 percent growth in quantities exported. This and a further large (52 percent) increase in workers' remittances from Europe were the main factors behind a doubling of the current surplus to $237 million in 1974, in spite of increased import payments for foodstuffs and petroleum. The current surplus enabled Morocco to increase short-term financing of its exports to facilitate sales, and to raise the level of its external reserves. These reached $454 million at the end of 1974. II. Some weak spots should be noted, however. The burden of price sub- sidies for imported foodstuffs and petroleum rose to 5.4 percent of GDP in 1974. The volume of agricultural exports declined while import requirements for wheat, sugar, edible oils and dairy products reached a high level. Short- ages of skilled manpower were increasingly felt, particularly at mid-level of technical and managerial qualifications. The level of reserves was rather low in relation to imports (2.4 months at the end of 1974). 12. Available indicators show that the economic and financial situation was less favorable in 1975 than it was in 1974. Two factors in particular held back economic growth. There was a decline in phosphate exports and down- ward pressure on phosphate prices, and weather conditions were less favorable in 1974/75 than in 1973/74, which caused a decline estimated at 10 percent in agricultural output. However, the growth of fixed investment and the Govern- ment's current expenditures continued at the rapid pace that began in 1974. On balance, real GDP growth was only an estimated 2 percent in 1975. At the same time, the internal and external financial situation has tightened compared to 1974. The Government's budget showed a substantially increased overall deficit, due to sharply rising current and capital spending. Despite smaller import price rises and a substantial increase in external borrowing, the balance of payments registered for the full year a small surplus only. Reserves were about 2 months of 1975 imports by the end of 1975. The diffi- culties experienced in 1975 should be temporary, however. A recovery of output and exports is expected in 1976 for the agriculture and phosphate sectors, which should provide the real resources for a further increase in investment. This and greater fiscal discipline likely to be introduced with the 1976 budget law would enable the country to ease the financial situation by comparison with 1975. Revisions to the 1973-77 Plan 13. The Government revised upward the 1973-77 Plan allocations for the years 1975-77. Government investment appropriations for the five-year period were raised to DH 25.6 billion (about $6.4 billion) compared to the original DH 11.8 billion. Of the DH 13.8 billion increase, changes to original projects and cost increases represent DH 4.6 billion and new projects for 1975-77, DII 9.2 billion. Excluding defense, new projects fall in the following main categories:  DIH 2,500 million for regional development; DH 1,600 million for transport and communications; DH 1,300 million for agriculture and water development; DH 400 million for industry; - DIH 150 million (to be raised to more than DH 300 million depend- ing on implementation capacity) for low-cost housing; and - DH 200 million for social services. Since planning is indicative only for the semi-public and private sector, the above allocations do not include investments by this sector. Nevertheless, the Plan revisions contain provisions to prepare for the implementation of two large industrial complexes (chemicals and steel) in the semi-public sector, and expect a vigorous investment growth in the private sector. The State Secretariat for Planning estimates that total investment at current prices could jump from DH 4.2 billion in 1974 to DH 12.0 billion in 1977. This would enable the country to meet the original GDP growth target of 7.5 percent a year for the 1973-77 period. 14. The thrust of the Plan revisions seem justified. Indeed, the achievement of initial (especially social) Plan objectives is eminently desir- able. Similarly, Morocco's economy has developed to a stage where heavy in- dustry should begin to find a place. The country possesses an obvious com- parative advantage in the processing of phosphates, which would tend to stabilize export earnings. However, the Plan revisions raise several issues of importance for Morocco's long-term development strategy and prospects. 15. The steep investment growth foreseen by the plan revisions could exceed the country's absorptive capacity. Following the revival noted in 1974 and 1975, investment in real terms would rise by 39 percent in 1976 and 19 percent in 1977, and continue at very high rates in following years according to the tentative plans for heavy industry. The skilled manpower constraint can only be relieved gradually by training, although for large industrial and infrastructure projects, Morocco may be able to use foreign services more extensively than in the past, but at considerable cost. In addition, the Government will have to ensure that the increase in capital intensity implied by the moves into heavy industry would be compatible with the objectives for increasing opportunities for unskilled employment. 16. Financial resources may also restrain investment growth. The analysis of Morocco's financial prospects shows that such resources would grow relatively slowly in the next five years. Export earnings are likely to be restrained by a decline in phosphate prices, and as a result, the phosphate company's savings which are a large share (36 percent in 1974) of national savings would be restrained. Taking into account the objective and  policies to improve consumption levels of low-income groups, the growth rate of national savings may be expected to be relatively low. In spite of plannec efforts to increase budgetary savings and food import substitution, foreign exchange and national savings are likely to become a constraint on investment towards the end of the decade. 17. For the 1973-77 Plan period, it is likely that investment growth will reach close to 13.5 percent p.a. on average. It would thus exceed the original plan targets for 1973-77, but remain below the revised targets. Provided the volume of phosphate exports recovers in 1976, real CDP gains would average about 6.5 percent yearly during the five years. Private per capita consumption would rise by about 3.5 percent a year, which should correspond to a net improvement in the situation of low-income groups. Although relative heavy external borrowings will be needed in 1976 and 1977 under this scenario, the balance of payments would remain strong until 1977. These results would be satisfactory by comparison with the initial objectives of the 1973-77 Plan for output and consumption growth, and for the balance of payments. 18. For the 1978-80 period, however, projected trends call for caution. Taking into account the absorptive capacity and resource availability con- straints, investment growth would have to slow down, which, together with assumed export increases, would lead to growth of real GDP of not more than 7 percent a year, and of private per capita consumption of about 2.5 percent. Import requirements for consumption and especially investment would continue to rise, and with the likely deterioration in terms of trade (paragraph 16), the economy's resource gap would widen substantially during the last three years of the decade. To cover it and service accumulated debt, external borrowing requirements on a commitment basis are tentatively projected to average more than $700 million annually in 1978-80, compared to an actual $553 million in 1974 and an estimated annual average of $540 million in 1975-77. Miorocco's borrowing capacity seems sufficient to mobilize these amounts from available sources, provided the necessary effort in project preparation for external financing is made. The bulk of borrowings up to 1980 would be from official, bilateral and international sources. 19. External debt and debt service would increase as a result of pro- jected borrowings. Debt outstanding and disbursed would rise from $1.0 bil- lion at the end of 1974 to $2.6 billion at the end of 1980. Debt service would go from $121 million in 1974 to some $464 million in 1980. Debt servicE would remain manageable, rising to 11 percent of exports (including nan-factor services) in 1980, from 6 percent in 1974. The prolongation beyond 1980 of macro-economic trends foreseen during 1976-80 indicates that external borrow- ing requirements would remain large, due in particular to the rise in import needs for investment. These would lead to substantial debt service obliga- tions, since an increasing share of external borrowing would come from com- mercial sources. However, with an additional and feasible export effort and provided recourse to commercial sources is kept within reasonable limits, debt service would remain a manageable burden on the balance of payments. Morocco is therefore creditworthy for substantial additional borrowing on Bank terms.  - 6 - PART II - BANK GROUP OPERATIONS IN MOROCCO 20. Bank and IDA lending to Morocco has supported 27 projects with financing totalling $620.5 million (net of cancellations), of which $405.5 mitlion has been lent since the beginning of FY73. IDA credits, totalling $50.0 million, have been made available for five projects. A Third Window loan for $25 million for the third education project was approved in March 1976. IFC investments have amounted to $4.4 million. Annex II contains a sumnmary statement of Bank loans, IDA credits and IFC investments as of May 31, 1976, and notes on the execution of ongoing IBRD/IDA projects. In some cases, delays have been caused by management or procurement difficulties, and in 1974 cost overruns increased due to the upsurge in investment activity in Morocco and the acceleration of inflation. However, performance in project execution has considerably improved during the last two years. 21. Past Bank Group lending has been concentrated in the industrial and agricultural sectors, which together have accounted for 63 percent of total net commitments; the balance is accounted for by utilities (12 percent), tourism (11 percent), roads (7 percent) and education (7 percent). Apart fron the transfer of resources to Morocco (Bank Group gross disbursements amounted to 5.5 percent of total fixed investment in 1970-74), the main objectives of Lending were to foster and strengthen development institutions, provide technical assistance, particularly for project preparation, and increase pro- ductive capacity, particularly in order to improve the balance of payments. 22. While these objectives remain, emphasis is also being given to supporting the new orientation of the Government's development effort in the field of income distribution. An increasing share of Bank Group lending will be devoted to projects developing directly or indirectly the productive capacity of the lowest urban and rural income groups. 23. Past lending for agriculture has supported irrigation development, credit and, through a first operation in FY75, the improvement of the produc- tivity of rainfed farming. While continued lending for irrigation is envisagE greater emphasis will be given to supporting the improvement of rainfed farm- ing, and lending will in general be focussed on support to small farmers. A second irrigation project in the Doukkala region and an irrigation project wit related water supply and power benefits in the Haouz region are envisaged. Projects for livestock/rural development in the rainfed zone in northern Morocco, for credit to small farmers and for developing production of fruits and vegetables on small holdings are also being prepared. 24. Continued lending for industry and tourism through two DFC's (BanquE Nationale pour le Developpement Economique and Credit Immobilier et Hotelier) will be proposed. A project for the construction of a large cement plant in the less developed northeast part of the country is envisaged. Other proposal are being discussed, including one for a steel mill in northeast Morocco, Projects in industry and tourism have as key objectives increased foreign exchange earnings or savings and the improvement of sectoral policies.  - 7 - 25. A sites and services project in Casablanca is being prepared. It should contribute to solving the problem of rapid growth of slum areas. A substantial social services component is envisaged. The Bank is executing agency for project preparation being financed by UNDP; UNDP is also providing technical assistance for overall planning of the sector. A second Water Sup- ply project is being prepared to meet the needs of several urban and rural sectors. 26. Education is a critical bottleneck in Morocco's development. Two IDA credits have been made to develop secondary education and teacher training and to improve technical and vocational training. A third project, with empha sis on improving facilities in rural areas, was recently approved by the Execu tive Directors. A fourth project with emphasis on technical and vocational training is envisaged. 27. A consultative group for Morocco was formed in April 1967 under the chairmanship of the Bank. It includes Belgium, Canada, France, Germany, Italy Japan, Kuwait, Spain, the U.K., the U.S., UNDP, OECD/DAC, the African Develop- ment Bank and the European Investment Bank. The last meeting of the Group, on March 28 and 29, 1974, expressed satisfaction with the improvement in Morocco's economic performance in recent years, and the emphasis in the Third Five-Year Plan (1973-77) on improving the distribution of growth benefits. The gross inflow of official loans and grants to Morocco rose from $129 mil- lion in 1966 to $159 million (of which $18 million in grants) in 1971, but temporarily fell to $128 million in 1972 and $121 million in 1973; in 1974 the gross inflow rose again to $190 million. The major sources of aid were France, the U.S., Germany and the Bank Group. 28. At the end of 1975, the Bank Group's share in Morocco's external public debt was estimated at 17 percent on a disbursement basis. The share of the Bank Group in debt service was 12 percent in 1974 and an estimated 14 percent in 1975. By 1980 the Bank Group's shares in debt outstanding and in debt service are expected to rise to about 24 percent and 15 percent respectively, on the basis of the assumptions made for total external borrow- ings for the 1976-80 period (paragraphs 17 and 18). PART III - THE ENERGY SECTOR Primary Energy Resources and Development 29. The main indigenous energy resources in Morocco are coal and hydro- power. Known oil deposits are nearly exhausted but exploration efforts have been intensified. Large deposits of bituminous schists are a possible source of oil in the long-term but their development will be expensive. A UNDP-financed uranium exploration program is under way.  - 8 - 30. Energy demand has grown at 7 percent per year on average over the last 14 years with an upward trend in the growth rate, total consumption rising from 1,975 million tons coal equivalent (mtce) in 1961 to 4,707 mtce in 1974. Energy use has intensified over the period and energy consumption per capita has risen from 164 kgce in 1961 to 282 kgce in 1974; however, this still leaves Morocco near the lower end of the world range (10-12,000 kgce). Morocco is highly dependent on imported oil, the share of which in total energy consumption rose from 60% in 1961 to nearly 80% in 1974. Oil is mainly imported as crude, for refining in two refineries with a combined capacity of 3 million tons per year. 31. Moroccan forecasts of energy demand imply growth rates in the range 9-13% per year. They also foresee increasing dependence on imported oil, demand for which is expected to rise 3-4 times over the next 10 years, from 3 million tons in 1974 to 10-13 million tons in 1985. The cost of oil imports by 1985 is projected at 2-6 times the 1974 figure of US$260 million, depending on the demand and oil price assumptions adopted. 32. All energy prices are subject to Government control. Except for petrol, the prices of petroleum products in Morocco remained unchanged from 1962 until the end of 1975. Through a compensation account, the Government has subsidized the prices of fuel oil, gas oil and kerosene, which are typi- cally used for industrial and for low income domestic purposes, and levied special taxes on petrol. Until the sharp increase in petroleum prices in 1973, the cost of subsidies was more than offset by revenue from the special taxes; net income to the compensation account amounted to about $30 million in 1973. Following the 1973 price increases, the compensation account moved sharply into deficit, amounting to $150 million in 1974 and $115 million in 1975. At the end of 1975, the prices of petroleum products were sharply in- creased, by between 12.5% (petrol) and 39.1% (fuel oil). As a result, net payments from the compensation account are estimated to decline to about $23 million in 1976. The Government has informed the IMF of its intention to make supplementary adjustments to further reduce the net budgetary burden of petroleum product subsidies in the course of 1976. In addition, it has in- formed the Bank of its intention to progressively eliminate subsidies to petroleum products used by ONE during the next two to three years. 33. Coal prices were held down in the late 1960's, despite rising costs, and as a result the National Coal Company (CNA) made increasing losses. How- ever, since then the Government has authorized three price increases total- ling 104% above the 1971 level of DH 61/ton. Electricity prices are dis- cussed in paragraphs 55-58. 34. Planned sector investment for 1973-77 is about DH 2,300 million at 1974-75 prices, more than double the 1968-72 figure of some DH 1,000 million. Some 71% of this program is for power system expansion, but it is also planned to increase petroleum-refining capacity by 3.5 million tons and to develop a new coal mine to increase coal production from its present level of 700,000 tons per year to 1 million tons by 1981. In addition, DH 570 million would be spent on intensified exploration for oil and gas.  - 9 - 35. The State owns all the capital of the main oil refining company (Societe Anonyme Marocaine Italienne de Raffinage - SAMIR) and has a 50% holding in the other (Societe Cherifienne de Petroles - SCP). A new state agency, with a 50% holding in the main foreign distributors in petroleum products, has been set up. The State also owns 98% of the shares in CNA, and fully owns the National Electricity Office (ONE). 36. Total employment in the energy sector, including ONE and the elec- tricity departments of the local electricity and water distribution organiza- tions (Regies) is about 30,000. Some problems are experienced in recruiting technical and professional staff, partly because of the disparity between the lower pay scales of the civil service compared to the private sector. The Electric Power Subsector 37. The electric power subsector in Morocco is organized as follows: (a) ONE, under the jurisdiction of the Ministry of Public Works and Communications (MTPC), generates 90% of the electric power in the country, transmits it to the load centres, and distributes some of this energy (about 37% of total consump- tion) outside the large cities; (b) eleven Regies, under the jurisdiction of the Ministry of the Interior, purchase their power from ONE and dis- tribute it in and around the large population centres and account for about 50% of total consumption; (c) Electras Marroquies, a private company under the jurisdic- tion of MTPC, with limited installed capacity and distribu- tion area in the extreme north of the country, accounts for 1% of total consumption; (d) the Ministry of the Interior operates small systems in about 110 isolated localities, for some of which ONE is responsible for maintenance, and which account for 2% of consumption; and (e) captive plants, most of them linked to industrial enterprises, account for about 10% of power generation and consumption. Measures to improve sector organization and coordination are discussed in paragraph 60. 38. Historically, ONE has earned a low rate of return on assets and has financed only about 20 percent of its capital expenditures through internal cash generation. -The Government has provided about one-third of financing for ONE's capital expenditures through increases in capital, while the balance has been financed by borrowing, mainly abroad. By contrast, the Regies usually  - 10 - generated cash on account of electricity sales more than sufficient funds to finance electricity distribution network expansion; the surplus has been applied to finance water distribution network expansion. In 1974, overall cash generation in the electricity sub-sector, including consumers' contribu- tions, amounted to about 45 percent of electricity system investments. 39. Electricity demand has grown at about 8.5% per year since ONE's creation in 1963, with a tendency to accelerate in the latter part of the period. All the major towns and cities and about 70% of the smaller towns are electrified, but only 11% of the rural population (including residents of small towns) has public electricity supply. Total installed capacity in ONE's interconnected power system is 803 MW (49% hydro, 51% thermal). The share of hydropower in total generation has been declining (1963 - 93%, 1974 - 49%) both because of an increase in the share of thermal in total capacity, and because the rapid growth of irrigation, which is given precedence over hydro- power in water use, has reduced the generation of existing hydro plants. Main transmission is at 225, 150 and 60 kV. 40. Through a loan of $25 million in FY74 (936-MOR), the Bank helped finance part of ONE's 1973-77 capital expenditure programme for generation and transmission. The loan also included financing for studies on electri- city tariffs and on the organization of the electricity subsector in Morocco. Technical performance by ONE under the project was good; the physical works were completed on schedule and at cost savings of $4 million which have since been applied to the financing of engineering studies for hydro plant developments in various parts of the country. Financial performance of ONE under Loan 936-MOR is discused in paragraphs 55-56. 41. ONE's proposed expansion program up to 1980 is based on the assump- tion that demand for power from ONE's interconnected system would grow by an average of 11.5% per year from 1975 to 1980, a rate consistent with projected energy demand growth (paragraph 31). The programme provides for the installa- tion of about 650 MW of new generating capacity (about half thermal, half hydro) and construction of 3,500 km of main transmission lines. 42. Under Morocco's Third Five Year Plan (1973-77) planned investment for ONE's expansion program (including rural electrification) is about DH 1,600 million, compared with 1968-72 expenditure of about DH 600 million. Fifty-nine percent of planned investment is for generation, 23% for trans- mission, 4% for distribution and 9% for rural electrification. These figures do not include distribution investment by the Regies or investments by'the Ministry of Interior or Electras Marroquies, for which information is not available. ONE's capital expenditures during the Fourth Plan Period (1978-82) are expected to be more than double those of the Third Plan level. 43. Responsibility for rural electrification is divided amongst the Ministries of Public Works, the Interior and Agriculture, ONE carrying the major responsibility for implementation. Progress in extending public elec- tricity supply to the rural areas has been slow, but the program is acceler- ating. Planned investment for 1973-77 amounts to DH 143 million compared with  - 11 - Dil 57 million in 1968-72. The program is financed partly from the state budget and partly from the proceeds of a special 4.5% levy on ONE's receipts from the sale of electricity. 44. Employment in the power subsector is some 7,500, including about 4,300 for ONE. ONE's staff has increased about 6% per year since its crea- tion in 1973 and is now almost entirely Moroccan. PART IV - THE PROJECT Background 45. The Oum er Rbia is the second largest river in Morocco, and flows from the Middle Atlas mountains near Khenifra in a westward arc to reach the sea one hundred kilometers south of Casablanca. The potential of the river and its tributaries for the generation of electricity, for irrigation and for potable water has long been recognized. Before Independence in 1956, two major dams were built in the river basin - the Bin el Ouidane/Afourer complex on the el Abid river and the Im Fout dam on the Oum er Rbia - with the dual purposes of electricity generation and irrigation water supply. Smaller, single purpose regulating or diversion structures were constructed on the Oum er Rbia at Kasba Tadla (irrigation), Daourat (power) and Maachou (power) (see Map IBRD 11853 attached). 46. The remaining potential of the Oum er Rbia and its tributaries for multipurpose development has been reviewed several times in the past thirty years. In 1969, following suggestions made by the Bank, and in view of an increasing need to allocate water between competing demands, the Government commissioned preparation of a Master Plan for the Oum er Rbia basin, a pre- liminary version of which was completed in 1971 which was reviewed jointly by the Government and FAO/Bank Cooperative Programme staff. Subsequently, water available from the Oum er Rbia's main tributaries was reallocated for upstream use; greatly increased demands for water for industrial purposes emerged as a result of plans to construct a new port and petrochemical complex on the coast near Casablanca; and more detailed regulation studies for the existing diversion structures in the river basin became available. As a result, the Government prepared a revised Master Plan, with the assistance of consultants. FAO/Bank Cooperative Programme Staff visited Morocco in 1974 for review and discussions and the study was completed in 1975. The first stage of development under the Master Plan is the completion of irrigation develop- ment in the Doukkala and the Tadla perimeters, which can be carried out using existing diversion structures, and which are being financed by loans from the Bank (1201-MOR, for the Doukkala), USAID (Doukkala) and the Arab Fund for Economic and Social Development (Tadla). Together with associated down- stream developments of irrigation and water supply (see paragraph 65), the proposed project would form the second stage of development under the Master  - 12 - Plan. An integrated feasibility study for the third stage, a multipurpose dan at Dechra el Oued on the Oum er Rbia, is being financed under the Bank loan for the Doukkala project. 47. The proposed project was appraised in November, 1975. At negotia- tions in Washington in May, 1976 the Moroccan delegation was led by Mr. Hassan Belkoura of the Prime Minister's office. A Loan and Project Summary is at- tached as Annex III. The Staff Project Report, No. 1156-MOR of June 11, 1976, is being circulated separately to the Executive Directors. Project Purposes and Description 48. The project is aimed at achieving the orderly development of the scarce water resources of the Oum er Rbia river, and at meeting (a) grow- ing national needs for electricity (b) future requirements for potable and industrial water in the Atlantic coastal zone, notably as a result of the construction of a port and petrochemical complex at Jorf el Lasfar and (c) the water needs for completion of the development for irrigation of the area known as the 'lower service' in the Doukkala. Expansion of the potable and industrial water transmission and distribution system, and the irrigation developments are not part of the project but may be considered for future Bank financing. The project also aims at strengthening managerial capacity within ONE and at achieving improved coordination in the development of the electric power subsector. It consists of: (a) construction of the Al Massira concrete buttress-type dam at Sidi Cheho on the Oum er Rbia river and ancillary works; (b) construction of a 120-MW power station at the foot of the dam, including the adjacent 225-kV substation and ancillary works; (c) the construction of about 200 km of 225-kV transmission lines, and the upgrading to 225-kV of substations to be connected to such lines; and (d) the preparation of preliminary designs and bid documents for the Merija compensating dam and power station downstream of Sidi Cheho. Project execution began in November 1975. The dam would begin filling in the winter of 1978/79 and would begin operating towards the end of 1979. Project Execution 49. Execution of the project would be the responsibility of the Hydra- ulic Directorate of the Ministry of Public Works and Communications (Hydrau- lique) and of ONE. Hydraulique is supervising construction of the dam with the assistance of consultants. ONE is supervising construction of the  - 13 - power station, with the assistance of consultants, and would directly super- vise the substation and transmission works. Hlydraulique and ONE have engaged the same consultants to carry out the preliminary studies for the Merija dam and power station respectively. Hydraulique and ONE, which are both under the authority of the Minister of Public Works, coordinate their activities relat- ing to the project on a day-to-day basis. Similar arrangements functioned satisfactorily for the Bank-financed Idriss I (Loan 643-MOR) and Bou Regreg water supply (Loan 850-MOR) dams. Operation and Maintenance of the Dam 50. Operation and maintenance of the dam and the power station will be primarily the responsibility of ONE. Prior to the commissioning of the dam, ONE and Hydraulique would enter into an agreement defining in detail their respective roles in the inspection, operation and maintenance of the dam (Section 4.04 (c), draft Loan Agreement). Operation of the dam will be based upon rule curves to be established by Hydraulique in agreement with the main agencies with an interest in the release of water from the dam, notably ONE, the Ministry of Agriculture and the National Potable Water Supply Office (Section 4.04 (a), draft Loan Agreement). These rules will reflect the prior- ities for water use set out in the Master Plan, namely first priority to pot- able use, second to industrial use, third to irrigation and fourth to power generation. Economic analysis indicates that this priority ranking would maximize economic benefits from the project. 51. The dam is designed with adequate instrumentation to aLlow contin- uous monitoring of its soundness. Hydraulique would regularly inspect the dam according to sound engineering practices (Section 4.04 (b), draft Loan Agree- ment). Project Cost and Financing Plan 52. The total cost of the project is estimated at about $167 million, including duties and taxes. Detailed cost estimates are shown in Annex III. The proposed Bank loan, for $49 million, would amount to 32 percent of total project cost net of duties and taxes, and 54 percent of the project's foreign exchange cost. It would finance the foreign exchange cost of (i) the power station and adjacent substation, (ii) transmission lines and substation up- grading, (iii) consultants services for the final designs and supervision of construction of the power station and dam and (iv) consultants services for the preliminary studies for the Merija power station and dam. That part of the Bank loan to be used to finance expenditures by ONE ($43.7 million) would be onlent by the Government to ONE on the same terms as the Bank Loan (Section 3.01 (b) draft Loan Agreement), and execution of the subsidiary loan agree- ment would be a condition of effectiveness of the Bank loan. These monies would cover the entire estimated foreign exchange cost of the items to be implemented by ONE, except for a small amount of $0.6 million for access roads and site buildings. The balance of the Bank loan, ($5.3 million) would finance the foreign exchange cost of consultants engaged by Hydraulique to supervise construction of the dam and prepare preliminary designs for the Merija dam.  - 14 - 53. The Government is at present undertaking efforts to mobilize external financing to meet the remaining foreign exchange costs of the project ($41.2 million). The Government has confirmed that it would itself provide the substitute funds necessary for successful completion of the Project, should co-financing not materialize. The Bank Loan and any other external loan would be linked by a cross-default provision (Section 5.01 (c), draft Loan Agreement) The local costs relating to the dam and the preliminary studies for the Merija dam, (items to be implemented by Hydraulique) totalling $55.0 million, would be financed by the Government. Those relating to the power station, transmis- sion lines, substation upgrading and the preliminary studies for the Merija power station, (items to be implemented by ONE) totalling $21.9 million, would be financed by ONE. Organization and Staffing of ONE 54. ONE has achieved high technical standards in the construction and operation of its power facilities. Measured in terms of electricity sales/ employee and customers/employee, ONE's efficiency is reasonable and continues to improve. Through an ongoing training programme ONE has been able to expand its technical staff, maintain staffing standards, and at the same time pursue a phased programme for replacing expatriate personnel by Moroccan staff. ONE's main organizational and staffing weaknesses lie in the fields of accounting, budgeting and financial planning. Under Loan 936-MOR, the Bank asked that ONE engage independent external auditors and recruit a senior financial officer with overall responsibility for financial matters. Independent auditors were engaged in 1973. ONE experienced difficulty in recruiting an appropriately qualified and experienced senior financial officer, but the post was filled in May 1976 by an ONE staff member, following his completion of a training programme. ONE has also had a study of its accounting procedures carried out by consultants. As the next stage, ONE is to prepare specific proposals for the reorganization of its financial departments under the senior financial officer, and for the improvement of its accounting procedures. ONE would exchange views with the Bank on these proposals before implementing them by June 30, 1977 (Section 3.03, draft Project Agreement). ONE's Financial Position and Tariffs 55. While ONE is well-run technically, its financial position has deteriorated somewhat, despite increases in ONE's tariffs of 5 percent in May 1973, 5 percent in May 1974 and 18% in January, 1976. ONE's rate of return on assets in operation declined from 2.1 percent in 1973 and 2 percent in 1974, to zero in 1975, and is expected to be less than 1 percent in 1976. The main reason for the decline in ONE's rate of return in 1975 was a sharp increase in the average fuel cost per unit sold, due to extremely dry weather, which reduced hydro generation. No substantial improvement is expected in 1976, despite the major rate increase in January 1976, because of the sharp rises in fuel oil and gas oil prices which took place in late 1975 and reduced the level of subsidies to petroleum products (paragraph 32). Increases in ONE's bulk rates have been passed on in full to final consumers through increases  - 15 - in the rates charged by the Regies, whose financial position should therefore remain strong. Despite some deterioration in ONE's financial position and a possible decrease in internal financing of the Regies, the overall financial position of the power subsector is estimated to remain adequate, but for the imbalances in the sharing of revenue. 56. Under Loan 936-MOR, ONE undertook to achieve a rate of return on assets in operation of 3 percent in 1974, rising to 7 percent by 1981. How- ever, these targets were set before the tripling of petroleum prices in late 1973, and the resultant need for sharp increases in electricity prices, if they were to reflect the higher cost of fuel. As mentioned earlier (paragraph 32), the Government introduced subsidies to petroleum products in 1973, but intends to eliminate them over the next two to three years. Any change in fuel prices from their January 1, 1976 level would immediately be fully reflected in ONE's electricity tariff (Section 4.07, draft Loan Agreement). Accordingly it is reasonable to accept a somewhat lower rate of- return for ONE during this adjustment period than implied by the rate of return require- ment under Loan 936-MOR, while retaining the overall objective of a 7 percent rate of return by 1981, particularly in view of the overall satisfactory financial position of the electricity sub-sector noted above. 57. The Government and ONE have asked that ONE's financial objectives be framed in terms of a cash generation requirement rather than a rate of return target, which is reasonable in view of the rapid growth of capital expendi- tures foreseen for ONE over the next few years, and the resulting growth in financing requirements. ONE's average internal cash generation in any year and the preceding year would amount to at least 18 percent of average capital expenditures over the same two years and the next following year, until 1979, and to 20 percent thereafter (Section 4.03 (a), draft Project Agreement). This definition allows ONE to take into account actual performance in the current year when formulating proposals for a tariff increase to meet the cash generation requirement in the following year, and therefore introduces automa- tic adjustment of tariffs to take account of the impact of rainfall conditions on ONE's average cost of generation. Each year ONE would review the adequacy of its tariffs to meet the cash generation requirement in the following year, and would submit the review, satisfactory to the Government, to the Bank by October 31 (Section 4.03 (b), draft Project Agreement). Action to meet the 1977 cash generation requirement would take place by January 1, 1977 (Section 4.03 (d), draft Project Agreement). On the basis of present fuel prices, it is estimated that application of the cash generation requirement would lead to the need for a tariff increase of 16 percent in 1977, but no further increase in 1978. To even out the increases, and since increases arising from changes in fuel prices are also expected, the 1977 rate increase would be limited to 10 percent, over and above any increases to reflect higher fuel prices (Section 4.03 (a), draft Project Agreement). In this case, it is estimated that application of the cash generation requirement would lead to a further rate increase of about 8 percent at the beginning of 1978, and accord- ingly overall cash generation over the 1977-78 period would not be substantially affected. ONE's rates of return are estimated at 2.7 percent in 1977, 3.9 per- cent in 1978, 4.9 percent in 1979, and 6.8 percent in 1980.  - 16 - 58. Under Loan 936-MOR, ONE commissioned consultants to carry out a study of ONE's tariff structure. ONE has since updated the results of this study to take into account the impact of the 1973 increase in fuel prices. On this basis ONE is at present elaborating proposals for review by the Govern- ment for the introduction of a marginal cost based tariff whose main features in relation to the present tariff structure would be (a) simplification and standardization of the tariff structure (b) a reduction in the degressivity of tariffs and (c) the modernization of tariff differentials between peak, stand- ard and off-peak demand periods. The Government would exchange views with the Bank on progress in preparation of the new tariff structure as well as the Government's final proposals in this respect, to be elaborated by June 30, 1977 (Section 4.03, draft Loan Agreement). 59. ONE's major category of customers are Government agencies and sub- divisions, of which the most important group, accounting for 60 percent of ONE's sales, is the Regies. Under loan 936-MOR, the Government undertook to ensure that all payments for electricity and services provided by the Govern- ment by ONE would be met within 90 days, starting January 1, 1975. In order to protect ONE's cash position, rather than monitor the payment performance of individual Government agencies, the Government would in future ensure that bills due ONE but unpaid by these agencies would at no time exceed one-sixth of the value of sales to them during the previous year (Section 4.06, draft Loan Agreement). Organization of the Power Sub-Sector 60. With two ministries and several agencies involved in the power sub-sector, responsibility in the sub-sector is fragmented. There is a need to improve coordination in the Government's control over the sub-sector, to standardise codes, standards, practices and accounts, and, in some cases, to improve delineation of areas of supply. Under Loan 936-MOR, ONE commissioned consultants to undertake a study of the organization of the power sub-sector. This study was completed in March 1976, and is now being reviewed by the Government. After consultations with the various interested agencies, the Government is to formulate specific legal, administrative and other proposals for improving the organization of the electricity sub-sector by June 30, 1977; the Government would exchange views with the Bank from time to time on the progress in developing these proposals as well as on the final proposals themselves (Section 4.03, draft Loan Agreement). Procurement 61. Procurement of the main project items is already under way. The following contracts have been let after international competitive bidd'ing in accordance with the Bank's Guidelines for Procurement: (a) civil works for the dam (let in November, 1975) (b) hydro-mechanical equipment for the dam (March 1976) and (c) equipment and civil works for the power station (April 1976). Contracts for transmission lines and substation upgrading would be let after international competitive bidding in accordance with the Bank's Guide- lines for Procurement; in the evaluation of bids for these contracts, Moroccan equipment suppliers would be given a preference margin of 15 percent, or the prevailing customs duty, whichever is lower. Contracts for access roads and site buildings (mainly workers' housing) have been let after local competitive bidding in accordance with local procedures, which are satisfactory. Land  - 17 - required for the project is being acquired in accordance with Moroccan law for compulsory purchase. 62. Consultants services have been obtained in accordance with the Bank Guidelines for Use of Consultants. Under contracts signed in 1974, the Swiss consulting firm Alpinconsult prepared preliminary designs and bidding documents for the power station (on behalf of ONE and being financed under Loan 936-MOR) and for the dam (on behalf of Hlydraulique). Hydraulique has extended its contract with Alpinconsult, to provide for preparation of final designs and assistance for supervision of construction of the dam, and the extension would be financed by the proposed loan. ONE has arranged to obtain assistance from Electricite de France in supervising construction of the power station. Garbe Lahmeyer International of Germany has been engaged by lHydraulique for the preliminary study for the Merija dam, and by ONE for the preliminary study of the Merija power station. Total consultants' services (estimated base foreign cost $5.0 million) would amount to 76 manyears, at an average cost of $5,500 per man-month (excluding local costs). Disbursements 63. Disbursements, estimated to be completed by December 31, 1980, would be made against: - 100 percent of foreign expenditures or 50 percent of local currency expenditures (representing their estimated foreign exchange content) for the power station and adjacent substation; - 100 percent of foreign expenditures or, in the case of 'Local procurement, of ex-factory price of equipment and materials for the transmission lines and upgrading of substations; - 20 percent of total expenditures for civil works and erection for the transmission lines and substation upgrading; - 100 percent of foreign expenditures for consultants services. Retroactive Financing 64. As mentioned in paragraph 61, procurement of all main project compo- nents is already under way. This procedure was adopted in order to allow dam construction to take place during the 1976 dry season, in order to avoid a year's delay in project completion. Retroactive financing from the Bank loan of up to $5 million of foreign expenditures between October 1975 and signature of the loan is proposed (Paragraph 4, Schedule 1, draft Loan Agreement)'. Of this amount, about $3.5 million relates to initial payments for the power station, made at the time of contract signature in mid-June, 1976. Benefits and Justification 65. The main benefits from the project would be the approximate doubl- ing of the power-associated hydro storage capacity in the country, an increase in electric power availability, and provision of water for potable, indus- trial and irrigation use. Taking into account the reduction of power genera- tion from existing downstream hydro plants as a result of the water diver- sions for irrigation and industrial and potable use under the project, and  - 18 - future upstream diversions for the same purposes, effective electric power generation from the project is estimated at 315 GWh in 1980, and would dec- line to 240-250 GWh by 1995. These estimates of power generation have becn calculated on the basis that the pattern of releases from the dam would be based on water demands for downstream use, to which priority has been given over power generation (paragraph 50). Of the present total average flow at Sidi Cheho of 3,300 Mm3 per year, 450 Mm3 have been allocated to potable and industrial use and 800 Mm3 to irrigation. The allocation to potable and industrial water is estimated to be sufficient to meet the growth of demand in the Atlantic coastal zone up to the year 2000. The major share of this growth in demand is accounted for by the port and petrochemical complex at Jorf el Lasfar for which preliminary studies are under way and which is scheduled to be completed by 1982/3. A project including the transmission and distribution works necessary to realize the potential of the Sidi Cheho dam for potable and industrial water supply is at present being prepared, and is being considered for Bank financing. The allocation to irrigation use would be sufficient to allow the completion of irrigation development in the Lower Service of the Doukkala Perimetre through an extension of 17,000 ha. A feasibility study for this extension is available, and the project is also being considered for Bank financing. Further potential exists for the development of irrigation based on the Sidi Cheho dam, namely in the Upper Service of the Doukkala Perimetre. However no feasibility studies for this development have yet been prepared, and it has not been taken account of in the economic analysis for the pro- posed project. 66. Two measures have been used to assess the justification of the proj- ect. First, the cost of the multipurpose project was compared with the sum of costs of combinations of alternative projects which would be required to achieve equivalent benefits. Specifically these alternatives were (a) for power, a least cost alternative power system development program (a combina- tion of hydro, steam and gas turbine plant), (b) for industrial and potable water, a smaller dam at Sidi Cheho, and (c) for irrigation, completion of irrigation development in the lower Doukkala for which an addition to the small dam for water supply under (b) would be the least cost solution. This analysis showed that the equalizing discount rate at which the cost of the proposed project would equal the sum of the costs of the alternatives was 12.5 percent. The equalizing discount rate is relatively insensitive to changes in the cost streams. Thus, the equalizing discount rate would only decline to 11 percent as a result of (a) a 28 percent increase in capital cost of dams, (b) a 14 percent decline in fuel savings resulting from hydro rather than thermal generation, or (c) an increase in the cost of power plants of 40 percent. 67. A second measure of the project's economic worth was obtained by preparing an ordinary rate of return estimate; the various benefits are valued in accordance with conventional procedures (i.e. present sales prices for power and water and economic prices for irrigation) and the discount rate is determined which equalizes the multipurpose scheme's costs and benefits. Assuming that prices paid represent the minimum value of the benefit to the consumers, such an approach also would provide a lower limit to the economic  - 19 - rate of return. The rate of return calculated in this way amounts to 9.6 percent and would still amount to 8 percent if all costs increased by 25 percent or benefits declined by 20 percent. Environmental Impact 68. As a result of constructing the Sidi Cheho dam, a lake with a maxi- mum area of 180 km2 will be formed. The effect on the environment is expected to be modest because soil conditions are poor in the area and little is culti- vated. About 5,500 people will have to be moved. In accordance with Moroccan legislation, owners of the land and the assets will be fully compensated. Discussions are at present under way between Hydraulique and the Ministry of Interior about the possibility of providing such compensation in the form of a resettlement scheme in adjacent areas, rather than through cash payments. Such an arrangement has been successfully implemented for people displaced as a result of construction of other dams in Morocco, and has made it easier to ensure that such people are provided with alternative long-term means of livelihood. 69. Under Loan 1201-MOR, financing is being provided for the first stage of a programme to monitor and control vector snails and incidence of bilharzia in the Province of El Jadida. Extension of irrigation, the main likely source of bilharzia, which can be carried out as a result of constructing the dam, is all located in the El Jadida Province and would therefore be covered by this programme. In addition, however, the Ministry of Health wtuld monitor the in- cidence of vector snails and bilharzia in the vicinity of the Sidi Cheho re- servoir, and take appropriate control and curative measures (Section 4.05, draft Loan Agreement). PART V - LEGAL INSTRUMENTS AND AUTHORITY 70. The draft Loan Agreement between the Kingdom of Morocco and the Bank the draft Project Agreement between the Bank and ONE, the Report of the Commit- tee provided for in Article III Section 4(iii) of the Articles of Agreement and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. 71. Execution of a subsidiary loan agreement between the Government and ONE for that part of loan proceeds onlent to ONE would be a special condition of loan effectiveness (paragraph 52). 72. Features of the agreements of interest are described in paragraphs 50, 51, 53, 54, 56-60, 64 and 69 above. 73. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.  - 20 - PART VI - RECOMMENDATION 74. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President June 11, 1976  to at (0 43) co -4 X~ ~ ~~ ~~~~~~~ _ t: .owez o eo o4 9 9 9 o9!1 o 92 el iIiS9 < t a mv @|s * a N O O O o o t 6 - O e > _ > o N . * , N o o _ 5 O O z O e N 0 -a _ - I _ oa ooooo- o p O,O Do Oosoo oO.oo o ooo_ ___O, o . 00 :08 r o_t~ ii a - +w ~~~~~~~~~~~~~~~~~~~~~~~~~~~~r aao r s o s