Morocco - Credit Immobilier Et Hotelier Project

Report No. 1077-MOR Appraisal of Credit Immobilier et Hotelier (CIH) Morocco April 30, 1976 Industrial Credit and Development Finance Companies Division Projects Department Europe, Middle East, and North Africa Regional Office FOR OFFICIAL USE ONLY Document of the World Bank 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. CURRENCY EQUIVALENTS (Dirhams per US Dollars) Period End of Period Period Average (DH) (DH) 1972 4.666 4.596 1973 4.290 4.107 1974 4.155 4.370 1975 4.184 4,053 February 1976 4.267 4.242 Source: IMF, International Financial Statistics April 1976. ABREVIATIONS CIH - Credit Immobilier et Hotelier CDG - Caisse de Depot et de Gestion BCP - Banque Centrale Populaire BNDE - Banque Nationale de Developpement Economique MUHTE Ministere de l'Urbanisme, de 1'Habitat, du Tourisme et de l'Environment ONMT Office Nationale Marocain du Tourisme FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY MOROCCO APPRAISAL OF THE CREDIT IMMOBILIER ET HOTELIER (CIH) TABLE OF CONTENTS Page No. SUMMARY .. . . . . . . . . * * ** * * * * * * * * * * * ... .. . I. INTRODUCTION o..........o..........**********************o1 II. MOROCCO'S TOURISM ..00................. . ... .. ..... 2 A. Tourism Development . . ........o********* 2 B. The Incentive System ...*...... ............ 3 III. CIH'S STRUCTURE ........*. 5 A. Establishment and Corporate Status ................ 5 B. Board and Committees ...................o....... 6 C. Management and Staff ............,-0-.......0... 7 D. Policies and Procedures 0............*............. 8 IV. CIH'S OPERATIONS ... .................***** ** 10 A. Characteristics of Operations .......0............ 10 B. Evaluation of Performance ......... ............... 11 V. CIH'S FINANCIAL SITUATION ........................ o ... .. 13 A. Resource Position .... . ................... ... .... 13 B. Financial Performance and Position ................ 14 C. Audit oo...........................********** 17 VI. PROSPECTS ... ....... .......... o. . o . . . .*********** 18 A. Tourism . ........... ....o .o.o... ... o ...** ********** 18 B. Operations ...... ...... ..........o.....o......... 18 C. Resource Requirements ............................ 19 D. Financial Prospects ..... . ............. ......... 20 VII. THE LOAN, ITS OBJECTIVES AND JUSTIFICATION o............ 21 VIII. RECOMMENDATIONS .. o. .... . . ..... . ... .o. .... ..... .. 22 This report was prepared by Messrs. Batzella and Diop with the assistance of Messrs. Coudol, Mitchell (Tourism) and Holye (CAD). Mr. Mattatia (consultant) from SOGELERG contributed to the elaboration of the computer model used in the tourism sector analysis (3 man-months). 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. Table of Contents (Continued) BASIC DATA Annexes 1 Moroccan Tourism Table 1 - Accommodation Capacity Table 2 - Evolution of International Arrivals Table 3 - Arrivals by Mode of Transportation Table 4 - Tourist Entries by Month 2 Shareholders Since the 1974 Capital Increase 3 Board of Directors and Executive Committee 4 Organization Chart and Main Affiliates as of December31, 1975 5 Income Statements 1971-1975 6 Balance Sheets 1971-1975 7 Financial Ratios 8 Analysis and Assessment of CIH's Loan and Equity Portfolio at end 1975 9 Analysis of Hotel Profitability and the Effects of Incentives 10 Major Assumptions for CIH's Four-Year Operational and Financial Forecasts 11 Estimated Resource Needs and Financing Plan 12 Loan Operations: Actual and Forecast 13 Projected Income Statements (1976i1979) 14 Projected Source and Application of Funds (1975-1979) 15 Balance Sheets: Actual and Projected (1975-1979) 16 Recommended Economic and Financial Appraisal Criteria for CIH- Financed Hotel Projects 17 Estimated Schedule of Disbursements for the Proposed Loan MOROCCO APPRAISAL OF THE CREDIT IMMOBILIER ET HOTELIER SUMMARY i. The Credit Immobilier et Hotelier received its first bank loan in 1970. A second loan of US$15 million was made in 1972 and is almost fully committed. This report appraises a third loan to CIH to finance the foreign exchange components of hotel projects. ii. The number of foreign tourists entering Morocco grew by 21% per annum during 1968-73, and reached about 1.2 million in 1975 after a temporary decline in arrivals in 1974. Total investment in tourism during 1968-72 amounted to DH 541 million (4.4% of gross capital formation), of which DH 477 million in 16,000 additional hotel beds. In 1973-74, DH 200 million were in- vested in new tourism projects. CIH contributed 50% of hotel investment fi- nancing. The economic impact of tourism is important. Tourism receipts con- tributed on average 10% of basic BOP receipts. Employment directly generated by tourism was estimated at 95,000 jobs in 1974, of which about 16,000 jobs were in hotels and 60,000 in handicraft production. The cost per job created in the hotel industry compares favorably with other economic sectors. iii. The 1973 Investment Code provides for a number of investment incen- tives, including a sizeable interest rebate on CIH's loans, a ten-year in- terest free Government loan equivalent to 15% of project cost, and fiscal ex- emptions. As CIH's hotel lending rate was fixed at 8.75% p.a. up to May, 1976, the effective nominal lending rate to tourism amounted to 4.50% p.a. In May, 1976, CIH was permitted to increase its hotel lending rate to 11% p.a.; the subsidized rate payable by investors is accordingly expected to in- crease shortly to 6% and thereafter up to 9% p.a. Preliminary results of a study on the effects of incentives on hotel profitability indicate the need to subject the efficacy of incentives to close scrutiny on the basis of ad- ditional studies to be carried out in the next two years. iv. Major changes took place in CIH since it was last appraised by the Bank in 1972 culminating with the appointment of a new and able President- Director General. CIH's internal organization was restructured along func- tional lines. Though still controlled by the Government, which indirectly owns over 50% of its capital, the autonomy enjoyed by CIH since the noted changes is apparent in CIH's new promotional and expansion policies. v. The quality of CIH's appraisal has notably improved. Some weak- nesses have subsisted, however, particularly as regards the market and economic aspects of hotel project appraisals. Further progress is expected. Portfolio supervision has improved considerably since 1972. vi. In the past three years, CIH has doubled its lending approvals which grew from 794 operations for DH 113 million in 1973 to 1633 operation for DH 187 million at September 30, 1975. This rapid growth is accounted for mainly - ii - by housing loans. During the period 1972 through September 1975, CIH approved hotel loans amounting to DH 145 million. Commitments were slower reflecting ups and downs in the investment climate. Equity investments grew rapidly from DH 1.3 million in 12 financing institutions in 1972 to DH 29 million in 37hat companies, mainly as a result of CIR's new promotional policies. factory financial results. vii. CIH's profits in the 1971-74 period were not in line with the growth in operations, owing to higher finance charges and administrative costs, which were not matched by a corresponding adjustment in lending rates. CIH will need to tighten loan collection procedures to avoid liquidity problems. The debt/ equity ratio has become, since mid-1975, a constraint on further expansion of CIH's operations. Since CIH's risk-taking operations are limited mainly to hotel loans, which constitute less than half of CIH's portfolio, CIH's debt/ equity ratio limit will be increased to 7.5:1. viii. CIR's housing loan portfolio is generally sound. Delays in imple- mentation of hotel projects are the main cause behind the increased hotel loan arrears; only few of them can be considered real risks. CIH's provisions (DH 7.4 million at December 31, 1975) adequately cover CIH's risk. ix. Recent trends in tourist demand indicate that visitors should con- tinue to grow faster than Morocco's hotel capacity through 1980. Two funda- mental questions have been raised: whether further investments in hotel ca- pacity are warranted from an economic standpoint; and whether the financial viability of hotels requires a continuation of the large Government incentives. Any answer at this stage is tentative. However it seems that incentives are not justified in many cases. The risk of inducing overcapacity of some types of hotels will be greatly reduced by the adoption on the part of CIH of stricter project appraisal criteria, as agreed during negotiations. Concur- rently, the Government will improve the collection and analysis of tourism statistics as a first step toward the rationalization of the incentive system. x. Housing loan commitments through December 31, 1978 are estimated at DR 774.3 million. As regards hotel loans, the pipeline of projects to be approved in the 1976-1979 period comprises 45 new hotels and 6 extensions to commit DH 258 million in hotel loans through December 31, 1978, including DH 125.8 million (US$30.4 million) in foreign exchange. A review of the proj- ects expected to be financed shows a generally good geographic, size, and category distribution, to appeal to a varied tourist clientele. xi. Domestic resources to finance housing and local cost components of hotel projects are expected to be available. For import financing, CIH's re- sources have been so far limited to Bank funds. xii. In the short run, CIR's net earnings will continue to be low, due mainly to the rising cost of resources. The Government, as well as CIH, share the view that higher earnings are necessary for CIH's continued, finan- cially sound growth. Basically, what is needed is a better spread between - iii - CIH's borrowing and lending rates. As a first step, the Government has per- mitted CIH to increase its hotel lending rate to 11% p.a. For the long run, it is the Government's objective, confirmed during negotiations, that CIH should be permitted to charge interest rates and other financial charges that will ensure it an adequate spread on its overall operations to achieve satis- factory financial results. xiii. CIH is a creditworthy institution, which remains suitable for Bank financing. A loan of US$25 million, as recommended, will enable CIH to fi- nance the foreign exchange component of economically justified hotel projects until about mid-1978.  MOROCCO APPRAISAL OF CREDIT IMMOBILIER ET HOTELIER (CIR) I. INTRODUCTION 1.01 The Credit Immobilier et Hotelier (CIH) was founded in 1920 as a mortgage bank specializing in the long-term financing of housing construction. Since 1960 it has also been practically the sole source of long-term financing for hotel projects in Morocco. The first Bank loan to CIH, of $10 million, was signed on August 12, 1970 and is now fully committed; the second Bank loan, of $15 million, was signed on June 30, 1972 and is expected to be fully committed shortly (Report DB-93a of June 1, 1972). Besides lending to CIH, the Bank has supported Morocco's tourism development through a recent $21 million loan for a tourism infrastructure project in the Bay of Agadir. 1.02 CIH has asked the Bank for further financial assistance. This report appraises a proposed third loan to CIH for the financing of the foreign exchange component of tourism projects. The inadequacy of basic statistical information makes it hard to estimate with precision the economic returns on new tourism investments. An additional issue to be addressed is whether the system of investment incentives granted by the Moroccan Government to tourism investors induces misallocation of resources. 1.03 On the basis of available information on Morocco's tourism and its development prospects, this appraisal concludes that, (a) in general, investment in further expansion of Morocco's tourism can effectively contribute to Morocco's economic development; (b) there is some excess capacity in particular types of hotels, but there are other types where expansion, even in the short- term, would seem to be economically desirable; (c) there are compelling reasons to scrutinize the efficacy of the existing incentives system; (d) the institution building aspects of the proposed loan, es- pecially as concerns the criteria to be used in vetting projects, and as concerns the improvement of statistical collection and policy analysis, are particularly important. - 2 - II. MOROCCO'S TOURISM A. Tourism Development 2.01 Morocco's tourism industry took off rapidly after 1965, when the Government included tourism among the priority sectors in the economy. De- velopments over the past ten years or so have been described in detail in CIH's appraisal report for the second Bank loan (Report DB-93a dated June 1, 1972), the latest Bank economic Report (Report 1021-MOR dated January 26, 1976), and the Appraisal Report on the Bay of Agadir Project (Report 918a-MOR dated January 21, 1976). A summary of these developments is given in Annex 1 of this report. The major aspects are given below: (a) Tourist arrivals have grown from less than 0.5 million in 1968 to about 1.2 million in 1973. This represented an annual growth of about 21% p.a., one of the highest among countries in the Mediterranean basin. After a decline in 1974, arrivals rose again in 1975. Most of the tourists come from France (22%), the USA (19%), the UK (11%) and Germany (8%). (b) Morocco's most successful tourism resorts are Agadir, Marrakech (in the South) and Casablanca (the main port of arrival). Northern resorts (Tangiers and the Mediterranean coast) are also in high demand but, as opposed to the South, have high seasonality and low occupancy rates and prices. The Center, the mountains, and the Sahara have received, so far, only a small proportion of tourists. (c) The country's hotel capacity has not increased as fast as the number of tourist arrivals; it only doubled between 1968 and 1975, to about 42,000 beds. Two-thirds of the hotels built during that period were financed by private investors. (d) Tourism investments have fallen short of the ambitious targets 'of Morocco's Economic Development Plans. This is largely due to the inadequate demand projections, which did not materialize to the extent expected by the planners. Low profitability of some types of hotels, uncertainties about the future market, the opportunities in other sectors opened up by the "moroccani- zation" laws, the poor investment climate in the early seventies in Morocco and in Europe, and the shortage of serviced land in Agadir and Marrakech, also retarded hotel investment below plan targets. Importance of Tourism in the Economy 2.02 Tourism has brought Morocco a substantial net 1/ flow of foreign exchange receipts which recently have amounted to an estimated DH 0.7 billion 1/ Tourist receipts, less foreign exchange outflows associated with opera- tion and investment in tourist enterprises. This excludes Morocco's receipts on international transport of tourists. - 3 - annually. About half of tourists' expenditures are received by hotels. The other half accrues to services, transport, handicrafts, restaurants, etc. 2.03 Another important effect of tourism is employment creation. Hotels in the narrow sense generate relatively few jobs (16,000 permanent workers were employed by hotel enterprises in 1974, with an investment cost per job of about US$15,000). But if tourist expenditures on other activities (espe- cially handicrafts) are considered, together with the indirect impacts on agricultural, manufacturing, and construction activities, it is estimated that tourist demands generate employment for as many as 170,000 persons. Organization of the Sector 2.04 The Ministry of Urbanism, Housing, Tourism and Environment (MUHTE) is responsible for proposing and implementing Morocco's tourism policies. MUHTE is also in charge of the collection and analysis of tourism statistics, vocational training of hotel personnel, overseas promotion and advertising, and the administration (partly through CIH) of the system of incentives to tourism investors. A specialized agency of MUHTE, Office National Marocain du Tourisme, also runs a number of Government owned hotels in remote areas. B. The Incentive System Background 2.05 Ever since its association with CIH, the Bank has been concerned by the high level of incentives available to hotel investors in Morocco (a des- cription of the incentive system is given in Annex 1, para. 15). Until 1973, when domestic price inflation in Morocco was low (under 4.5% p.a.) and tourism could still be considered as a young industry, large incentives could be re- garded as an efficient way of attracting investment in hotels. They may also have led to excessive increases in some types of hotel and low occupancy rates and tariffs, especially in the North. Domestic price inflation surged to 14.5% in 1974, declined to 8% on average in 1975 and seems now stabilizing around 6-7% p.a. This made the average interest rate of less than 4% paid by hotel investors on borrowed funds clearly negative, and the possibility in- creased that it would encourage uneconomic hotel investment. 2.06 When CIH approached the Bank for a third loan early in 1975, the Bank invited the Government to reconsider the incentive code which had been issued in the middle of 1973. The Government asked the Bank to withdraw its request for the time being arguing that a change in the Code less than three years after its promulgation would discourage potential investors particularly in view of the sluggishness of investments since 1973; the Government would be prepared to re- consider its incentive system only once investments picked up again. The im- plied position of the Government was that incentives remained necessary be- cause, without them, Moroccan hotels, which provide the country with high economic benefits, would not be financially viable. The Bank agreed to study the situation in order to determine whether a loan to CIH could be economically justified under the existing system of incentives, provided that other criteria for the loan were met. Assessment of the Financial and Economic Viability of Hotel Investments 2.07 To undertake the study of hotel returns, it was agreed with CIH to analyze a sample of about 20 existing hotels of different types and cate- gories, in various regions. A computer model was built to simulate financial and economic performances under different assumptions. It was understood from the beginning that fully satisfactory results could not be expected in the short run, first, because of the inadequacy of basic statistical information on Morocco's tourism, and, secondly, because the sample retained for the exercise was determined as much by the availability of sufficient data, as by represen- tativeness. To overcome these constraints would require substantial additional effort by the Government and CIH to collect and analyze meaningful statistics. At least two full years of work would be necessary. 2.08 Nevertheless, the analysis of the data derived from the sample select- ed in November 1975 has led to certain preliminary conclusions which are sum- marized in Annex 9. For some types of hotels, these findings contradict the claim that incentives are a necessary condition to assure the financial pro- fitability of economically viable hotels. In Agadir, Marrakech and Casablanca, the financial viability of hotels seems high, and might be so even without Gov- ernment incentives. The financial prospects of northern beach hotels, on the other hand, appear so poor that no conceivable level of incentives would seem to promise attractive financial returns without radical improvements in tariffs and/or occupancy rates. Some types of hotels in the interior (Fez, Meknes) might require more generous incentives if they were to be profitable at ex- isting tariff levels. There also appear to be marked differences in the pro- fitability of hotels of different categories, with 5-star and 3-star hotels outperforming 4-star hotels. 2.09 Due to the unavailability of relevant information, a full analysis of economic rates of return of the expansion of different types of hotel capa- city has not been carried out; nor could target occupancy rates and tariffs be assessed on the basis of economic optimality. Nevertheless, sufficient in- formation exists for Agadir to indicate that capacity expansion there is fully justified. On the basis of more partial criteria for other areas (Casablanca, Marrakech), it would appear that investments in those regions also would be economically justified. 2.10 While the soundness of the incentive system is under serious ques- tion, a basis for clear-cut recommendations on how it should be changed is lacking. In addition, any policy position on the incentives system must be necessarily coordinated with the authorities' tourism policies in general, especially those regarding price controls and regional development. - 5 - 2.11 The Bank presented these preliminary findings to the Moroccan au- thorities and CIH. It pointed out that there seem to be compelling reasons to scrutinize the efficacy of the incentive system (as well as the system of price controls) as a suitable instrument for development of tourism. Conse- quently, the following understandings were reached during negotiations: (a) The Government and CIH would undertake a more comprehensive and conclusive study of tourism development, the incentive system and tourism policies in general, by carrying out a specific work program which would cover three interrelated components: implementation of a suitable system of collec- tion and analysis of tourism statistics, including especially, data on tourism expenditures and on hotel occupancies; prep- aration of regional master plans for tourism development, taking account of the economic viability of alternative hotel development plans; refinement and extension--using a larger and better sample of hotels--of the survey initiated by the Bank, to assess the financial and economic viability of hotel investments in Morocco. Terms of reference and timeables, as well as the scope of possible Bank assistance for carrying out the work program, would be discussed during a forthcoming technical assistance mission. (b) The Government would discuss with the Bank the results of these analyses, with a view to determine whether, and how, its invest- ment code and its fiscal, price and regional development policies for hotel investment in Morocco should be revised. Ideally, in- centives should be envisaged only for categories and types of hotels which both promise high economic rates of returns and, in spite of reasonable tariff and fiscal policies, are not financially attractive. A change of the existing investment code could therefore be considered only after completion of the supporting studies and computations required (a above). These might take two years to complete (if they are to be-based upon reliable data on tourist expenditures and occupancy rates for a period of at least one year). (c) In the meantime, CIH would adopt the appraisal criteria as described in Annex 16. This should ensure that CIH funds would not finance hotel investments of dubious economic value. III. CIH'S STRUCTURE A. Establishment and Corporate Status 3.01 There have been no major changes in CIH's corporate status since it was last appraised by the Bank in 1972. Though formally a private company subject to corporate law, CIH is effectively controlled by the Government - 6 - through Caisse de Depot et de Gestion (CDG), a public sector financial insti- tution and CIH's major shareholder. Two Royal Decrees of 1962 and 1968 es- tablished CIH's function of financing tourism enterprises in addition to housing construction. The Ministry of Finance fixes the terms and conditions of CIH's loans. 3.02 Branch Offices and Affiliates. Up to 1973, all of CIH's activities were concentrated in the Casablanca headquarters. In the course of the past two years, CIH has established six regional branches to handle the processing of smaller housing loans. Tourism loans and the larger housing loans are processed at headquarters. CIH holds equity participation in a number of specialized affiliates, which were launched in the past two years mainly as a result of CIH's promotional goals (Annex 4, page 2). The most important ones are: Farah-Maghreb, a company set up to build 4,200 new hotel beds in various areas of Morocco; Sicopar, a company set up to build prefabricated housing elements in the main cities of Morocco; and Europa-Maroc, a hotel management company. CIH's President is also the Chairman of the Board of these corporations. 3.03 These affiliates have started operations only recently. Though there are no indications at this stage that they represent a special risk for CIH, one of them has considerable importance for CIH not only as an af- filiate but also as a potential major borrower! Farah Maghreb expects to fi- nance its operations with CIH funds and with the proceeds of the proposed Bank loan to CIH. Some caution is called for. In order that both CIH and the Bank may monitor further developments as closely as possible, CIH will therefore see to it that an annual audit of Farah Maghreb will be undertaken, in a manner satisfactory to the Bank, and CIH will report semi-annually to the Bank on the finances, organization, and prospects of Farah Maghreb. 3.04 Ownership and Control. CIH's share capital was increased from DH 20 million to DH 40 million in 1973, and again to DH 60 million in 1974. Annex 2 shows present ownership. About one half of CIH's share capital is owned by publicly controlled institutions, the principal of which are CDG (CIH's parent institution) and Banque du Maroc, the central bank. CDG participation in CIH's capital decreased to 17%, compared to 34% at the time of the Bank's 1972 ap- praisal. However, CDG holds, in addition to nominal shares, a large number of bearer's shares of CIH which CDG uses in stock market operations; also, some of CIH's other principal shareholders are in turn affiliates of CDG's, such as Societe Nationale d'Investissement, which increased its participation in CIH's capital to almost 10% of the total, and Compagnie Nord Africaine et Intercontinentale d'Assurance, which now holds about 3% of CIH's shares. B. Board and Committees 3.05 The public nature of CIH is reflected in the composition of CIH's Board of Directors and Executive Committee, which are both chaired by CIH's President-Director General. Of CIH's 15 Board members, only two represent the private sector; seven are public sector shareholders, three are officials - 7 - of the Ministry of Finance and two are officials of MUHTE. CIH's Executive Committee includes five members beside the chairman. Of these, three repre- sent the principal public sector shareholders (CDG, BCP and Central Bank), one represents BNDE, and one MUHTE. 3.06 In December 1972, the functions of Chairman of the Board and of the Executive Committee, and that of General Manager, were entrusted to Mr. El Fihri. Since then, the Board has become more active than before in guiding CIH's expansion policies, especially the launching of subsidiaries and the internal reorganization of the institution (paras. 3.03 and 3.09). The Board meets two or three times a year. The Executive Committee, which examines and approves all tourism loan proposals, and all other loans amounting to more than DH 100,000, meets about once a month on average. The quality of its decisions has improved considerably in the past few years, especially since the establishment, in 1974, of an internal Loan Committee, chaired by Mr. El Fihri, which screens loan proposals. The Executive Committee delegates to its chairman the power to approve non tourism loans up to DH 100,000 subject to ratification by the Committee. Authority to approve housing loans of less than DH 80,000 is delegated to the directors of the regional Branch Offices (para 3.02). C. Management and Staff 3.07 Management. At times in the past, CIH suffered from lack of contin- uity in leadership. However, in late 1972, Mr El Fihri, a former Minister of Education, was appointed President Director General and rapidly acquired firm and able command of CIH's activities. The President is assisted in his manage- ment tasks by CIH's Secretary General, Mr. Abdelhak Benkirane. Further strengthening of CIH's management, should it prove to be necessary or desira- ble, is a matter which the President is keeping under constant consideration. At present, CIH's management is adequate and effective. 3.08 Organizational Changes. The internal reorganization was begun in 1974 and completed in 1975 following the recommendations of a study undertaken by IMEG, a management consulting firm (Annex 4). The main innovations have been the .&dtablishment of regional branch offices and the regrouping of opera- tional divisions by functions rather than by sector of activity. Redistribu- tion of divisional responsibilities has created some transitional coordination problems, which are being smoothened out. By and large, the, organization is well suited to CIH's requirements. 3.09 Staff. CIH's total staff numbered 216 (including 58 professionals) at end March 1976, compared to about 80 (of whom 41 professionals) in 1972. The less than proportionate growth of professional staff is explained by the fact that the expansion of CIR's portfolio was largely due to housing loans, which require considerable clerical work. The quality of CIH's professional staff is good and steadily improving. Staff training however has been some- what neglected until recently. The newly established Training Division in CIH's Development Department has drawn up plans for seminars and training courses to be held in the near future. - 8 - D. Policies and Procedures 3.10 Policy Statement. CIH's policy statement, approved by the Board of Directors in 1974, establishes the following fundamental principles: (a) projects financed by CIH in the tourism and housing construction sectors must be financially, technically, and economically viable; they must be supervised by CIH during their entire life; (b) loans must be secured by adequate guaran- tees; (c) CIH shall provide its clients with technical assistance in the con- ception, implementation and operations phases of the projects; (d) equity par- ticipation shall not exceed either 10% of CIH's equity, or 25% of the capital of the company in which CIH takes a participation. 3.11 Housing Loans: Appraisal and Supervision. CIH has over fifty years of experience in the financing of housing construction. The procedures which have been developed are, by now, standardized and effective. 3.12 Appraisal of Hotel Projects. The quality of CIH's appraisals of hotel loans has steadily improved over the years. In most cases, the techni- cal, legal and financial aspects of projects, as well as the management arrangements made by the sponsors, are adequately covered by CIH's reports, which generally provide substantiated judgment on the merits of projects. The technical appraisal of larger hotel projects (generally those requiring investments of over DH 10 million) are reviewed by independent engineering firms. Though projects are submitted to CIH only after they are approved by the Government's Technical Committee (Annex 1, para 15), CIH is effectively in a position to exercise a positive influence on their conception, design, and organization. CIH's appraisal staff has been especially effective in obtaining from promoters that suitable management arrangements be made well in advance of the beginning of operations. 3.13 One aspect of CIH's hotel appraisals which needs improvement is the analysis of a project's marketing prospects. CIH's projections are still too often based on the optimistic expectations of the project's sponsors, for lack of adequate background information. An improvement in this area is beginning to show, as CIH is building up its own data bank. A substantial improvement at the Government level in the collection and analysis of tourism statistics is indispensable for CIH's project appraisals to become fully reliable. 3.14 CIH's appraisal reports also contain economic rate of return cal- culations. For all subprojects, whether or not financed by IBRD, a cut-off rate of 10% has been deemed adequate by the Bank considering that costs were not shadow-priced, not all tax payments were excluded from the cost estimates, and net economic benefits external to the hotel were not taken into account. Refinements in project appraisal criteria , to which CIH agreed in the course of negotiations, are discussed in Annex 16. 3.15 Supervision of Hotel Projects. A Portfolio Supervision division had been set up in CIH at the time of the 1972 Bank appraisal. However, it did not begin to operate in a systematic fashion until early 1974. The division - 9 - is now staffed with five specialists, and is headed by an able and experienced professional. About 40 of the more serious problem projects have received a thorough supervision visit of CIH's follow-up staff. Several of these visits, especially in the Tangiers area, have resulted in satisfactory arrangements for the settlement of overdues, as well as in agreements on how to remedy structural project problems, where they have been identified. These encourag- ing results have led CIH to the conclusion that each problem project is to be visited at least twice a year in the future. Routine project follow-up is now being handled by the General Inspection Bureau, which is staffed with several internal auditors. It can be concluded that, since 1972, CIH's supervision procedures and practices have taken a definite turn for the better -- with results in support of this conclusion. Improvements in this regard are expected to continue. During negotiations, both CIH and the Bank reaffirmed the importance both parties attach to this aspect of CIH's performance. 3.16 Loan Collection Procedures. This has been, traditionally, one of the weakest areas of CIH's organization. Plans to tighten collection proced- ures have been drawn up several times in the past, also in connection with negotiations of earlier Bank loans to CIR. In practice, however, collection procedures remained loose. The worsening of the arrears situation has now triggered the strong reaction of CIH's management, which has recently intro- duced a series of measures intended to reduce outstanding arrears (para 5.09). During negotiations an understanding was reached with CIH on the quarterly reporting of action taken and results achieved regarding the collection of arrears. The various measures and internal reorganization outlined in detail by CIH's management have been found by the Bank to be well designed, and likely to be effective. 3.17 Disbursement Policies. CIH's disbursement procedures are adequate. The proceeds of CIH's construction loans for hotels are made available to bor- rowers in four main tranches, plus a 10% final tranche which is withheld until the completion of work. CIH is also responsible for the disbursement of the Government interest-free loan. Funds are disbursed only following inspections of CIH's Technical Division, which ensures that the portion of the investment to be financed with the promoter's equity has been completed and paid for. Subsequent inspections ensure that each loan tranche has been utilized in accordance with the loan contract and the project's appraisal report. When a discrepancy is found between the original plans and the implementation of the project, disbursements are stopped. However, follow-up reports and recommended corrective measures were not submitted to the Bank in these cases. An under- standing was reached, during negotiations, to the effect that the Bank will, from now on, be kept informed of developments in sub-project implementation. 3.18 Procurement Procedures. Competitive bidding is not automatically required of all hotel borrowers, mainly because the design and the implementa- tion of hotel projects is normally entrusted to an architects' firm which acts as main contractor, and employs its usual suppliers. Competitive bidding is required, however, for the larger hotels, for which CIH also requires that the architects' estimates be reviewed and endorsed by independent engineering - 10 - consultants. CIH's own engineers have acquired considerable experience in construction costs and procurement practices, and are able to effectively scrutinize cost estimates and invoices on the occasion of their inspection visits (para. 3.17). Overall, CIH procurement procedures are adequate. IV. CIH'S OPERATIONS A. Characteristics of Operations Lending Operations 4.01 In the past three years, CIH has almost doubled the number of its approvals, which grew from 794 operations for DH 113 million in 1973 to 1,686 operations for DH 149 million in 1974. In the first nine months of 1975, the number of approvals has reached 1,633 for DH 187 million. This rapid growth of operations is accounted for mainly by housing loans as summarized in the table below: (DH million) December 31 Sept. 30 1972 1973 1974 1975 Hotel loans No. Amount No. Amount No. Amount No. Amount Approved - 32.5 43 50.7 28 34.5 24 27.2 Committed - 71.8 24 24.7 34 52.2 - 32.0 Disbursed - 29.7 - 47.7 - 53.5 - 37.2 Housing loans Approved 796 57.7 751 61.8 1658 114.0 1609 159.9 Committed - 51.1 - 48.2 - 101.0 - 111.9 Disbursed - 51.1 - 54.2 - 84.7 - 96.8 4.02 Housing Loans. These loans finance the construction of houses and apartment buildings, and, in some cases, commercial and office buildings, for terms varying from 10 to 15 years at a normal interest rate of 8.75%. The rate was increased to 10% in November 1975. Loans for medium-high income housing, of value exceeding DH 250,000, bore a 10% interest rate. The fi- nancing of low cost housing is handled by the Banque Centrale Populaire (BCP). 4.03 Hotel loans. Hotel loan approvals are summarized below by type of operation (in DH million). - 11 - First 9 months 1973 1974 1975 No. Amount No. Amount No. Amount Construction 12 22.1 6 19.0 6 9.9 Equipment 12 6.8 10 4.5 6 4.9 Expansion 19 21.9 12 11.0 12 12.4 Total 43 50.8 28 34.5 24 27.2 During the period 1972 through September 30, 1975, CIH approved hotel loans totalling DH 145 million. Commitments amounted to DH 181 million 1/ during the same period compared to DH 211 million during 1968-1971. Commitments during 1973-1974 reflected the ups and downs in the investment climate (see Annex 1, para. 8 for details). In 1974, 79% of CIH's loans contributed to the financing of 1,246 new beds in 4-star hotels (49%) and 3-star or below (30%). The Southern Region increased its share of CIH financing from 26% of approvals in 1973 to 58% of approvals in 1974. CIH financing also grew in Marrakech from DH 0.5 million in approvals in 1973 to DH 13 million in 1974. These changes reflect CIH's response to growing demand in those areas, and a shift from the earlier emphasis on the Mediterranean coast. Equity Investments 4.04 CIH's equity investments grew rapidly from only DH 1.3 million in 12 financial institutions (i.e. the CDG group) in 1972 to DH 29 million in 37 companies at December 31, 1975. CIH's shares in 10 of these enterprises, however, do not exceed DH 10,000 per investment. The increase in investment was mainly due to the founding of new affiliates (para. 3.02). B. Evaluation of Performance 4.05 During appraisal of the second Bank loan (No. 848-MOR) to CIH in 1972, particular stress was put on the need to strengthen the institution's management, staff and organizational structure. Objectives in those respects have been largely achieved as detailed in Chapter III. The progress made thus far should be consolidated, however, as some weaknesses in appraisal and supervision persist, and as CIH envisages major increases in its lending operations. CIH's quality of portfolio was of considerable concern at the time of the Bank's last appraisal, particularly as regards loans made to two major borrowers, Chellah Hilton and Holiday Inns, which were in arrears. Agreements reached with the Government to protect CI against risks of loss on the DH 91.3 million of loans involved have been adhered to. However, the situation of CIH's loan arrears still requires supervision and speedy collec- tion procedures. Expectations with regard to financial and operational objec- tives have in broad terms materialized. In order to help CIH better carry its development banking role, the Bank and the Government agreed on a continuing 1/ In 1972 there was a "bunching" of commitments from earlier approvals totalling DH1 72 million. - 12 - exchange of views on policy and planning matters pertaining to tourism, par- ticularly as regards the incentives system. Progress made in that area is mixed. The effectiveness of the new incentives system established in 1973, though an improvement over the previous one, still raises questions. Never- theless, considering the institutional shortcomings that were to be overcome by CIH at the time of the last Bank appraisal and the positive economic impact of CIH financed tourism investments (Chapter II and Annex 1) the record of the past four years can be considered generally good. As shown below (para. 4.06) CIH was somewhat constrained by factors over which it had little control. The 49 projects financed thus far under loan 848-MOR depict estimated economic rates of return ranging from 11% to 20%. 4.06 Serious disbursement difficulties (stemming largely from an uncer- tain political climate and investors' hesitations to go ahead with project con- struction) under the first Bank loan of $10 million (704-MOR) in 1971-72 led to the cancellation of US$1.2 million. The balance of $8.8 million is now fully disbursed. The second Bank loan (848-MOR) of $15 million also suffered partly from similar difficulties and from administrative delays of the sys- tem of incentives. Commitments and disbursements have been slow, amounting to $13.0 million and $8.5 million respectively as of March 31, 1976. The creation of the Technical Committee in 1973 to coordinate work by different ministries involved in the administration and granting of incentives consid- erably reduced red tape. In late 1974 a new system was agreed with the Bank to simplify disbursement procedures on Bank loans, while strengthening its appraisal and follow-up procedures. These changes have not yet born signif- icant results partly because of a lack of experience on the part of some hotel borrowers. As new and more experienced investors enter the field of hotel investment and as CIH calls more on the assistance of its engineer- ing and hotel management affiliates as well as on other established firms, disbursements are expected to move faster than in the past. Free Limit 4.07 The free limit under the second Bank loan in 1972 to CIH was set at a low $200,000, mainly in view of the fact that the Bank had still relatively little to go on evaluating the quality of CIH's appraisals as well as the validity of those appraisals in comparison to actual project results. Since then, the Bank has gained increasing confidence in CIH's appraisal capabili- ties and, despite problems in project implementation in a number of cases, it is also apparent that Moroccan hotel investors are now much more experienced than before. One important change is the fact that a greater share of projects now being financed by CIH is for larger and more costly hotels, the planning, feasibility studies, and appraisal of which are being undertaken with greater care, and with the assistance of more sophisticated partners and consultants than before. 4.08 In view of these considerations, and taking into account the size- able cost increases of hotel projects, the proposed free limit this time is $800,000. Different from past practice, however, this limit will not apply - 13 - to the initial construction loan granted by CIH: it will apply to the total amount of the construction loan initially granted by CIH for a given project, and the estimated amount of the loan to finance hotel equipment, which is normally applied for, and usually granted, toward the end of a project's construction period. This arrangement will subject to the Bank's review and approval about one half of the number of projects to be financed with the proceeds of the loan and at least three-quarters of the amount of the Bank loan. CIH and the Bank have agreed, moreover, that the Bank should be in a position to check, also for projects below the free limit, whether the new, agreed appraisal criteria (see Annex 16) have been applied. CIH will, there- fore, give evidence to this effect in its documentation for projects below the free limit; this will be a condition of eligibility for withdrawal authoriza- tion also for small projects. Taking these factors into account, CIH's free limit has been about doubled, in real terms; a justified easing-up of pro- cedures. V. CIH'S FINANCIAL SITUATION A. Resource Position 5.01 Details on CIH's resource position are provided in Annex 11. Total resources mobilized by CIH through December 31, 1975, amounted to DH 881.0 million, more than double the DH 403.5 million figure reached on December 31, 1971, at the time of appraisal of the second Bank loan to CIH. The bulk of the increase in CIH's resources was obtained from CDG, the Central Bank and BCP. Access to the bond market is closely controlled by the Government, which sets a yearly ceiling to new issues. However, CIH has received full support from the authorities in mobilizing adequate domestic resources in the market. In 1974, a share capital increase brought in DH 20 million. The five-year notes from BCP are generally renewed at maturity, albeit at higher prevailing rates. CIH has so far been unsuccessful in its attempts to tap other sources of foreign exchange funds than the IBRD although, recently, prospects appear better judging from the response to its promotional investments (e.g. Farah- Maghreb, para 3.02). The outstanding balance of the two Bank loans totalling $25.0 million represent 8.5% of total resources in use as of December 31, 1975. 5.02 Owing to the substantial increase in housing approvals, CIH has been committing resources just as fast as they were being mobilized. Although the balance of resources available for further commitments amounted to DH 72.7 million at December 31, 1975, expected commitments through the end of 1976 would require about DH 261 million. - 14 - B. Financial Performance and Position Profitability 5.03 Although CIH achieved generally good operating results during the period 1971-1974, as shown in Annex 5, profits were not in line with the growth of operations because of higher cost of resources. Operating income grew from DH 12.7 million in 1971 to DH 14.8 million in 1974, i.e., only by 16% compared to a 65% growth of portfolio outstanding; net income to average equity decreased from 19.9% to 9.4%. During the same period, CIH's adminis- trative expenses doubled from DH 4.3 million in 1971 to DH 9.6 million in 1974, due principally to the increase of staff (para. 3.09). CIH's gross in- terest spread between lending and borrowing narrowed from 3.9% in 1972 to 3.2% in 1974 while CIH's relending rate remained fixed at 8.75%. As CIH's share capital draws dividends of 8%, 1/ payments on that account have claimed an increasing share of net profits, reaching 44% at end 1974 compared to 25.4% in 1971. Dividend payments will claim about 71% of the estimated 1975 net profits of DH 6.8 million. Consequently, until profitability can be improved, it will be difficult for CIH to increase its share capital. In order to over- come this problem, the Government has recently permitted CIH to increase to 11% its lending rate on hotel loans. In December 1975, the Government granted CIH a DH 40 million Government loan, subordinated to all conventional debts, at 6.5% p.a. for 30 years with a 10 year grace period. CIH has now increased the lending rate on all housing loans to 10% p.a. The foreign exchange risk on the Bank's loans to CIH is borne by the Government. Financial Position 5.04 Balance Sheets. CIH's audited 1971-74 balance sheets and unaudited as of December 31, 1975, are detailed in Annex 6. Total assets have steadily increased from DH 392.0 million at end 1971, to DH 693.0 million at end 1974 and DH 884.3 million as of December 31, 1975. This doubling of CIH's assets is accounted for by an increase of DH 407 million in loans and investments. Housing loan portfolio grew from DH 103 million in 1971 to DH 275 million at December 31, 1975, thus increasing its relative importance in CIH's total portfolio from 29% to 38%; hotel loans grew at a slower pace. 5.05 Liquidity. The balance sheets show an improvement in the current position with a current ratio of 1.8:1 at December 31, 1975, up from 1.5:1 at end 1974 and 1.1:1 at end 1973. However, CIH's debt service payments are much higher than its collection of loan principal installments. In 1973, the loan repayment shortfall amounted to DH 11.8 million and more than doubled to DH 26.5 million at end 1974. Although 1974 was an exceptional year due to higher than usual repayments of borrowing, there are three underlying causes to this 1/ Capital subscriptions in Morocco are entitled by law to a 5% statutory dividend to which is usually added a 3 to 3.5% premium. This law is designed to attract private savings in the capital market. - 15 - imbalance. Firstly, CIH's hotel loans enjoy up to five years of grace while most of its borrowings are repaid without grace period. I/ Secondly, CIH's borrowings are generally repayable on a constant principal installment basis whereas the loans it makes are amortized on a constant annuity basis resulting in low initial principal repayment (following long grace periods in the case of hotels). Finally, arrears on principal repayments have adversely affected the liquidity position. Although this situation has not so far unduly constrained CIH's operations, it has, to a certain extent, forced CIH to utilize new re- sources to service old debts. Though CIH can do little to remedy the situation deriving from the first two causes of imbalances, it plans to tighten loan collection procedures and to match better future loans amortization schedules with the amortization schedules of its borrowings. 5.06 Capital Structure. During the period 1972-1974 CIH's debt/equity ratio, as defined in the latest Loan Agreement with the Bank, has remained within the agreed limit of 6:1. Although CIH borrowed heavily through that period, the two share capital increases of DH 20.0 million each in 1972 and 1974 helped maintain the ratio at less than 5.5:1. As of December 31, 1975, however, additional borrowings totalling DH 191.4 million brought the debt/ equity ratio to 6.9:1, i.e., above the agreed limit. The expected high level of new commitments in housing and real estate, and to a lesser extent, in hotel investments calls for substantial new resources in 1976 and 1977. On the basis of CIH's disbursement forecast and its pipeline of new projects reviewed in Chapter VI, CIH must obtain new resources. While the Bank and CIH must come to agreement on what a prudent and reasonable equity base for CIH should be, both in the short and long run, CIH, the Government and the Bank agree that, in the future, CIH must increasingly rely on its own ability to build up its equity capital commensurate, on a prudent judgment of all factors involved, with the growth of its debt. Under current agreements with the Bank, CIH's debt/equity 2/ structure should not exceed a ratio of 6:1. 5.07 As CIH will not be in a position to increase its share capital until its net earnings begin to increase substantially, (see para. 5.03) a share capital increase cannot be undertaken until late 1977. Faced with this situation, CIH obtained from the Government, in December 1975, a loan of DH 40 million (para 5.03) subordinated, in the event of liquidation or dissolution of CIH, to all of CIH's conventional debts. It is financially safe and prudent for the Bank, as well as for other conventional creditors of CIH, to consider, for the purpose of the debt/equity limitation, the entire amount of this loan as part of CIH's "equity", and for the ratio itself to be increased. An in- crease from 6:1 to 7.5:1 has been agreed upon. During negotiations, the 1/ Exceptions are the two subordinated bond loans of DH 15 million issued in 1970 and 1971, which have a 15-year grace period each, and the two Bank loans. 2/ According to the current Loan Agreement, "equity" includes that portion of the 1970 and 1971 subordinated bond loans which falls due after the last maturity of Bank loans. - 16 - Government and CIH confirmed their intention to adopt the following recom- mendations of the Bank, which are based on an evaluation of CIH's financial situation, and particularly of its exposure to risks of losses 1/: (i) A substantial increase in share capital of at least DH 40 million 2/ will take place in two equal tranches, the first of which by end-1977, and the second, by end-1978, at the latest. (ii) The Government will permit CIH's relending rates to be man- aged in such a way as to ensure both adequate remunera- tion of share capital and reserve build-up (Chapter VI). It was informally recognized that an interest spread in the order of 3% will be needed to attain this result. As a first step, the Government would permit CIH's hotel relend- ing rate to increase to 11% by June 30, 1976; (iii) CIH will adopt all appropriate measures to reduce, before mid- 1977, the proportion of its loans affected by arrears to out- standing portfolio by at least 50% (para. 5.09); (iv) For the purpose of defining CIH's "equity", in terms of the Loan Agreement, the new, subordinated loan of DH 40 million will be reduced pro rata temporis over its 10 years grace period (1976- 1985), i.e. by one-tenth each year, so that, at the end of this period, none of this loan will be counted as "equity". 5.08 This agreement, which is considered financially prudent, will enable CIH, as far as its capital structure is concerned, to transact its projected business (Annexes 13-15) until about mid-1978, by which time the proposed Bank loan should have been fully committed. By that time, CIH's actual and pro- jected profitability should have improved sufficiently for CIH to raise additional share capital, as necessary. In order to ensure that CIH would at no time make financial commitments to an extent that would subsequently lead to a transgression of the agreed debt/equity ratio, an understanding was also reached, during negotiations, to the effect that CIH's debt/equity structure would be closely monitored not only on the basis of CIH's equity and debt outstanding at any point in time, but also taking into account CIH's undis- bursed commitments and attending projected borrowings. For this purpose, the criteria used for financial projections in this report (Annex 10) would generally be adopted. 1/ The growing importance of housing loans in CIH's portfolio (75% of pro- jected commitments through 1978; para. 6.11) whose risk is historically negligible, tends to reduce the overall risk of CIH's total loan port- folio. 2/ The amount of DH 40 million is required according to CIH's business projections. If by mid-1977 projections are substantially modified the Bank should be prepared to review its position accordingly. - 17 - 5.09 Loan and Equity Portfolio. A detailed review of CIH's portfolio is given in Annex 8. Though arrears have remained high over the past two or three years, CII's risk is not excessive; CIII remains financially creditworthy. However, the Bank has and will continue to impress upon CIH the necessity to tighten its collection procedures, impose higher penalties on loan overdues and intensify its supervision during hotel construction and follow-up there- after so as to substantially reduce future arrears. During negotiations an understanding was reached with CIH, to the effect that the following procedures will be maintained or reinforced: (a) CIH's exposure to any single company will continue to be normally limited to a maximum of 20% of CIH's unimpaired equity. (b) Penalty interest of 2% above CIH's statutory interest rate will be applied to unpaid principal and interest. (c) CIH would intensify follow-up on delinquent hotels and ac- celerate legal proceedings against them (paras 3.15 and 3.16). (d) New amortization methods, consisting of quarterly (instead of semi-annual) repayments will be gradually introduced for new hotel loans. Repayments on housing loans will gradually be changed to a monthly instalment system. Provisions Policy 5.10 In the past, provisions against doubtful loans were found by the auditors and the Bank to be generally adequate following detailed reviews by Bank missions and CIH staff of the financial situation of CIH's major bor- rowers. The Bank agreed with CIH that, starting in 1974, a case-by-case re- view of the loan portfolio would be undertaken by the auditors. This was done, although not fully satisfactorily so. Following a detailed review of the hotel loans in arrears, the provision of DH 7.4 million as of December 31, 1975, is deemed adequate to cover potential losses (Annex 8). C. Audit 5.13 CIH's financial statements are audited by the Moroccan branch of Price Waterhouse and Co. The auditors' performance has been uneven, and CIH's management is contemplating a change of auditors. - 18 - VI. PROSPECTS A. Tourism 6.01 Prospects for demand and supply are reviewed in Annex 1, paras. 16 and 17. Tourist flows in Morocco are expected to grow, over the next ten years or so, if not at the same pace as in the past, at least at a rate of about 10% p.a. By 1980, over 2 million foreign tourists are expected to visit Morocco annually. 6.02 To cope with this growth, additional investments in hotels, va- cation villages and also camping facilities are called for. Planning poli- cies, investment incentives and actions needed to optimize the economic returns from new investments are discussed in Chapter II. B. Operations Lending Operations 6.03 Housing loans. During the 1976-79 period, CIH expects its housing and other non-tourism loan approvals to total DH 1,156 million (Annex 12). In view of the past trend in housing approvals, which almost tripled between 1973 and September 1975, and of the demand backlog, CIH's expectations appear reasonable. 6.04 Hotel loans. CIH's pipeline of projects to be approved in the 1976- 79 period comprises 45 new hotels and 6 extensions of capacity to add a total of 16,584 beds to Morocco's accommodation capacity. About 19 hotels are planned as 4-star, 6 as 5-star and the remaining 26 as 3-star category, for an esti- mated total investment cost of DH 735 million, including equipment cost. The average cost per bed would reach DH 44,300 ($10,700), compared to an average $8,000 per bed in Morocco for the past two to three years, for 3-star hotels. Taking into account recent inflation of construction costs and that the cost of the 4- and 5-star hotels is higher, this estimate is reasonable. The CIH projects are concentrated in the Agadir area with 12 hotels (4,300 beds), and in Marrakech with 8 hotels (4,200 beds). In Casablanca, 8 new hotels are expected to add 3,496 beds compared to 4 hotels and 690 beds in Rabat and only 3 hotels with 516 beds in Fez. In Tangiers two projects of doubtful con- ception are planned. As regards other areas such as Oujda, Ouarzazate, etc., CIH expects to finance 8 new medium category hotels to add an estimated 1,200 units in their bed capacity. CIH's pipeline on the whole appears sound as 40 hotels (out of 45) representing 77% of the total expected investment cost (DH 562 million) would be built in the growing tourist demand areas of Morocco, and in heretofore neglected areas with good potential for growth. Moreover, the 26 units of medium category included in the pipeline should fill the gap in the pent-up demand for such accomodations. Most of the promoters are either or- ganized investment companies such as SIDET, Farah-Maghreb, SOMAKOHOTEL, or former CIH clients with several years of experience in hotel operations. Of 45 projects, 29 are sponsored by private promoters. - 19 - 6.05 Following a detailed review of investment conditions, approvals and commitments of hotel loans are projected to reach a total of DH 370 million and DH 344 million, respectively, during the 1976-1979 period; disbursements are estimated to amount to DH 268 million. The projections retained for this ap- praisal are substantially below CIH's own projections. Disbursements are ex- pected to be slightly faster than in the past, as promoters have increasingly become aware of the cost of delays, and new companies such as Promoconsult (engineering), Europa-Maroc (hotel management), Farah Maghreb, SIDET, SOMAKOHOTEL (hotel investment companies) are bringing a better expertise than was the case for projects initiated a few years ago. The use by CIH of the investment cri- teria agreed upon during negotiations for the proposed loan should result in a tigher screening of project applications. Equity Investments 6.06 CIH plans a net investment portfolio increase of DH 24 million to reach DH 55.5 million by end 1979. With perhaps one exception, the invest- ments envisaged by CIH appear sound from a promotional view point. C. Resource Requirements 6.07 As of December 31, 1975, the balance of CIH's uncommitted resources amounted to DH 72.7 million, of-which DH 8.4 million (US$2.0 million) in foreign exchange from Bank loan 848-MOR. Based on CIH's business projec- tions and on the assumptions underlying CIH's future operations (Annex 10), expected new commitments by CIH total DH 981.0 million, of which DH 244.0 million for hotel loans, through the period December 31, 1975 - December 31, 1978. The estimated foreign exchange requirements through that same period amount to DH 125.8 million (US$30.4 million 1/); this is based on CIH's assess- ment of the foreign exchange component of hotel investment costs by category of hotel as well as on an independent evaluation of these components made by a reputable international consulting firm. 2/ 6.08 To cover its commitments and disbursements, CIH issued DH 40 million in new bonds in November 1975 (15-year at 7.50%). Furthermore a Government subordinated loan of DH 40 million at 6.5% interest repayable in 30 years (including 10 years grace) was obtained in December, 1975. Based on annual bond issue authorizations which the Government allocates to CIH, an additional mobilization of DH 550 million in long-term bonds is forecast by CIH through 1/ Excluding $2.0 million of uncommitted funds from Loan 848-MOR. 2/ Based on these studies, the import component by categories are estimated as follows: 5*:37%, 4*:36%, 3*:31%, 2*:24%, 1*:20%. In view of the de- velopment of Morocco's high value-added import substituting industries, which increased the possibility to procure more goods locally than in the past, and taking account of foreign price inflation (which exceeded domestic inflation rates) the preceding assumption is acceptable for the coming 2 or 3 years. - 20 - 1978. No difficulty is foreseen in securing these bond resources and the Government has confirmed informally its intention to continue to support CIH's resource mobilization in this form. As regardsthe mobilization of medium-term funds, the market for these bonds has become tighter; thus, CIH expects to mobilize only DH 17 million in notes in 1976. 6.09 The proposed bank loan of $25.0 million should thus cover CIH's re- quirements for commitments through mid-1978. It is hoped that by that time CIH would have succeeded to diversify its foreign borrowings. The foreign exchange risk on the proposed Bank loan to CIH will continue to be borne by the Government. D. Financial Prospects Profitability 6.10 CIH's projected income statements are summarized in Annex 13. CIH expects the trend of rising cost of its financial resources to continue in the near future, taking into account also the rising cost of Bank funds. The average cost of borrowings is expected to increase from 6.1% in 1975 to 7.3% in 1979 based on the assumptions detailed in Annex 10. 1/ Operating costs are projected to increase substantially, though salaries and wages will rise only moderately. Projected revenue assumes 11% interest on new hotel loans and 10% on new housing and other loans, representing increases of 2.25% and 1.25% respectively, on loans granted after the end of 1975. The effect of these interest rate increases on CIH's profitability would be felt only as the weight of new disbursements, particularly on hotel loans, grows in CIH's port- folio outstanding. (New disbursements as a percentage of loans outstanding would increase from 26% in 1976 to 77% in 1979; disbursements on hotel loans account, on the average, for 20% of new disbursements.) 6.11 CIH's profitability would remain satisfactory during 1975 and 1976 although, compared to 1974, a decline would be registered owing mainly to higher operating costs and, to a lesser extent, to narrowing interest spread from 3.2% to 2.9%. Net profit as a percentage of average equity would fall from 9.4% in 1974 to 7.9% in 1975 and 6.9% in 1976. Although CIH's interest spread between the average cost of borrowing and the average income on loans would register a declining trend from 3.2% in 1975 to 2.7% in 1979, CIH's profit picture is expected to improve substantially starting in 1977. Net profits are projected to reach DH 8.4 million (8.4% of average equity) in 1977, DH 10.8 million in 1978 (8.7% of average equity) and DH 13 million in 1979 (9.5% of average equity). These results would allow CIH to remunerate 1/ These assumptions do not include a possible increase in the Bank's cur- rent lending rate of 8.5%; the effect of a small increase in this rate would, however, be marginal. - 21 - adequately the projected share capital increase of DH 40 million to be com- pleted in 1978. However, additions to reserves are not commensurate with CIR's increased level of borrowings and lending, nor in line with the past four years' trend. In order to allow CIH to add a moderate DH 3.0 to 3.5 million yearly to general reserves, after paying dividends, a minimum spread of 3.0% would be needed during 1977-1979 (para 5.07). 6.12 Balance Sheets and Liquidity. CIH's assets are forecast to more than double, from about DH 884 million at December 31, 1975 to DH 1,643 million at end 1978, and DH 1,914 million at end 1979. The increase is ac- counted for mainly by a net increase of DH 966 million in the loan portfolio outstanding. Housing and other non-tourism loans will register an estimated threefold growth thus increasing their relative importance from 47% at December 31, 1975 to 64% of total loan portfolio outstanding at end 1978. Hotel loans outstanding are projected to increase only by DH 129 million, i.e., a growth of 33% during the same period (Annex 15). Liquidity remained a financial problem over the past three years. CIH's efforts to bring the terms of its debt and loan into a better balance should help in the future. The projections foresee an improvement of the debt service coverage ratio from 1.0 in 1976 to 1.3 in 1977 and onwards. VII. THE LOAN, ITS OBJECTIVES AND JUSTIFICATION 7.01 The proposed loan of $25 million is intended to provide the foreign exchange resources needed by CIH to finance the import component of most hotel development projects and other tourism related projects to be undertaken in Morocco through mid-1978. The Bank would, through this loan, finance the fo- reign exchange component of virtually all new hotel investment expected to come on stream between 1977 and 1980. In terms of hotel beds, this is esti- mated at about 10,000 new beds. 7.02 The expected economic impact of the planned Moroccan hotel expansion program remains high on the average (Annex 1). Further work is needed to come to a more precise knowledge of economic value of specific investments. Avail- able information on projects in CIH's pipeline indicates that Moroccan invest- ors are oriented toward those areas which yield high economic returns. CIH should adopt strict appraisal criteria to ensure that it would only finance economically sound projects. 7. 03 The Bank will provide, within the framework of the proposed project, assistance to the Ministry of Tourism by reviewing the terms of reference for, and discussing progress in the implementation of, the regional master planning studies on which Morocco's tourism development strategy will be based (Annex 1 paras 18-19). Secondly, the Bank obtained MUHTE's commitment to improve its system of collection and analysis of tourism statistics and to refine the survey conducted by the Bank during appraisal; it also obtained assurances from the Government, that it is prepared to review its incentive policy in light of the results of the studies described in para. 2.11. - 22 - 7.04 Beside the impact of the proposed loan in developing hotels, this project is expected to have substantial institution-building effects on CIH. The Bank's support and guidance are still needed by CIH toward the strengthen- ing of CIH's project appraisal and supervision capabilities and the consolida- tion of its financial structure. The proposed loan would demonstrate the Bank's continued confidence in CIH and should, among other things, enhance CIH's prospects of tapping new sources of financing, most likely in the Middle East, as has been the case with CIH's industrial counterpart in Morocco, BNDE. VIII. RECOMMENDATIONS 8.01 The agreements and understandings reached during negotiations with both CIH and the Moroccan authorities, as reported above, ensure, on the one hand that CIH will remain a financially sound and creditworthy institution, and, on the other hand, that Bank funds committed to this project would be allocated to hotel development projects for which high economic returns can be reasonably expected. Specifically, CIH's acceptance of the recommended appraisal criteria (Annex 16), and the authorities' stated intention to improve the system of collection and analysis of tourism statistics, and to carry out studies, in cooperation with the Bank, with a view to determine whether and how the incentive system and other tourism development policies should be revised, are particular features of this project; they represent a valid contribution by the Bank toward the development, of one of the priority sectors in the Moroccan economy. 8.02 On the basis of the above considerations, a loan of $25 million is recommended, to finance the foreign exchange components of tourism projects to be financed by CIH until about mid-1978. With the proposed loan, the Bank's contribution to the financing of CIH's lending operations would be 18% of CIH's total resources at end-1978. 8.03 The new loan would be made on the terms and conditions usually ap- plied to Bank loans to development finance companies. Its duration, however, would be geared to the rather long construction time and pay-back period of hotel investments, which require extended amortization schedules of up to 20 years, with grace periods of up to 5 years. An adjustable amortization schedule, with a maximum maturity of 20 years, is therefore recommended for the proposed loan. MOROCCO CREDIT IMMOBILIER ET HOTELIER BASIC DATA (as of December 31, 1975) Year of Establishment: Ownership (as of December 31, 1974) DH '000 Percent Moroccan public institutions 28,236 47.0 Moroccan private institutions 1/ 6,523 11.0 Moroccan individuals 54 0.1 Bearers' shares 25,187 41.9 Total Moroccan 60,000 100.0 Resource Position (Balance sheet basis December 31, 1975) DH '000 Equity 87,395 Subordinated loans 30,000 Other LT borrowings 726,692 Total resources 844,087 Loan outstanding 731,316 Investments 39,081 Total Portfolio 770,397 Available for disbursement: 73,690 Operations (DH '000) 1973 1974 1975 Approvals (9 months) Hotels 50,800 34,500 27,200 Housing and non-tourism 61,800 110,100 159,900 Totals 112,600 144,600 187,100 Commitments Hotels 24,700 52,200 32,000 Housing and non-tourism 51,300 101,000 111,700 Totals 76,000 153,200 143,700 Disbursements Hotels 47,700 53,600 47,000 * Housing and non-tourism 54,000 85,200 145,000 * Totals 101,700 138,800 192,000 1/ Including Moroccan subsidiaries of foreign owned institutions. * Estimated for 1975. Earnings Record 1973 1974 1975 Net profit as % average equity 12.2 9.4 7.7 Cash dividends as % net profit 21.6 45.2 71.0 Financial Position LT debt/year end equity 7.1 6.8 8.6 Debt/equity (IBRD) 1/ 5.5 5.4 6.9 IBRD debt as % LT debt 5.6% 8.01 8.57 Interest rates and charges Housing loans before November 1975 8.75% Housing loans after November 1975 10.0% Hotel loans: current rate 8.75% expected in future 11.0% Commitment fee 0.75% Commission on Government loans to hotels 0.50% BASIC DATA ON BANK GROUP LOANS A. Status of Bank Loans ($ million) as of March 31, 1976 Date of Interest Amount Commit- Disburse- Out- Effectiveness Rate of Loan ments ments standing 704-MOR 1/28/71 7.0 10.0 8.8 k/ 8.8 8.8 848-MOR 11/1/72 7.25 15.0 13.0 8.5 8.5 B. IFC Investments none 3/ Assuming DH 19 million in subordinated Government bonds as quasi-equity. Agreed limit is 6:1 4/ $1.2 million have been cancelled from this loan. EMENA/IC & DFC April 1976 ANNEX I Page 1 MOROCCO CREDIT IMMOBILIER ET HOTELIER MOROCCAN TOURISM A. Evolution of the Sector, 1968-1975 1. Situated within easy reach of Europe, Morocco's tourism resources include beach resorts on the Mediterranean and Atlantic coasts; architectural treasures and cultural attractions in the Imperial cities of Fez, Rabat, Meknes and Marrakesh; and the exotic atmosphere of the pre-Saharan oases, within view of the snow-capped Atlas range. Tourist Arrivals 2. The number of foreign visitors to Morocco (excluding cruise visitors) increased from 469,000 to 1,226,000 between 1968 and 1973, an annual growth rate of 21%. A 14% decline to 1,052,000 in 1974 reflected the impact of the energy crisis and the European recession. Foreign visitor arrivals rose again last year, and 1975 results may equal those registered in 1973. Tourist arrivals to Morocco are more evenly distributed over the year than arrivals to most other Mediterranean countries such as Spain and Yugoslavia. (Summer arrivals in Morocco in 1973 and 1974 accounted for only 40% of the yearly total as com- pared, for instance, to 50% in Spain and 54% in Yugoslavia.) On the other hand this conceals very large seasonal variations in arrivals to Morocco's Northern (Mediterranean and Atlantic) coasts, and more even flows to the cen- tral cities and the south Atlantic Coast (Agadir). Another index of seasonal- ity is provided by the foreign currency exchanged by tourists from one month to another. Fully 19.6% of such exchanges occur in August, and the average daily exchanges in August amounted to 231% of the annual average (average of 1973 and 1974). The corresponding figures for arrivals in hotels (average for the period 1972-1974) vary from 118% in Casablanca to 337% in M'diq and Cabo-Negro on the Mediterranean Coast (see Annex 9 for further details). 3. An analysis of the socio-economic structure of foreign tourists in Morocco conducted in 1971 showed that over 42% were professionals and 19% were clerical and blue-collar workers. The average daily expenditures of tourists, were estimated at the equivalent of $25 per day. In the period 1970-74, West- ern European countries accounted for 63% of foreign visitor arrivals in Morocco, with France (22%), the U.K. (11%) and Germany (8%) predominating. U.S. and Canadian arrivals represented 20% of the total in the period 1970-1974, com- pared to a 14% share in 1968 (Table 2). About one-third of all visitors arrive in Morocco overland, most of them from Ceuta and Melilla, the Spanish enclaves ANNEX 1 Page 2 on Morocco's Northern Coast, and almost as many again across the strait of Gilbraltar at Tangiers. A substantial portion of visitors entering Morocco in this manner are one-day excursionists. Arrivals by air average about 35% of total; their proportion is increasing due to the rapid growth of charter tourism in the Mediterranean. Accommodation Capacity 4. The country's hotel capacity doubled from 20,500 beds in 1968 to 42,000 beds in 1975, a growth rate of about 10.8% p.a.. About two-thirds of this additional capacity was built by private investors, many of them Moroccan, but including also large international groups such as Club Mediteranee and Holiday Inns. The remainder was built by public sector enterprises such as the National Railway Company, Royal Air Maroc and subsidiaries of Government-owned financial institutions. The two Bank loans to CIH in 1970 and 1972 financed the import component of the bulk of new hotel construction. There are also 16,000 spaces in camping grounds for the use of camping and caravaning visitors, most of whom arrive in their own vehicles after transiting Spain. 5. Hotels are concentrated in the Imperial cities and Casablanca (43%), the Mediterranean coast (35%) and Agadir (12%) (Table 1 gives more details). Occupancies vary greatly according to hotel locations. In major cities like Casablanca and Rabat, where visitors are predominantly business-motivated and they do not vary much seasonally, annual bed occupancies are estimated to average around 45% (and room occupancies 60-70%). Higher levels are attained in Agadir and Marrakech, the country's southernmost tourism resorts. Bed occupancies in the North on the other hand average 30%-40% over the course of the year, with considerable seasonality as in other Mediterranean destinations. 6. The break down of Morocco's hotels by category as of end 1974 is shown in Table 1. Five and four-star establishments 1/ represent over 43% of the total capacity, and over 50% in the principal tourist areas (Agadir, Fez, Tangiers, Casablanca, Marrakech, Rabat). Medium priced accommodation (3-star hotels and vacation villages) represents 38% of the total. Around 10% of total installed capacity is managed by the Club Mediterranee. The heavy concentration of Moroccan hotels in the higher, more expensive categories and in vacation villages responds to the preferences of organized tourists, both European and North American. 7. Tourism Investments. Total investment in tourism in the Second Plan period (1968-72) amounted to DH 541 million, or 4.4% of Morocco's total gross capital formation during the period. Of total investment for tourism, DH 54 1/ Moroccan hotels are given five principal classifications expressed in stars and reflected in tariffs. A 5-star hotel is in the luxury class, 3-star facilities offer comfortable accommodations and 1-star appeals to the hardy. Accommodation and meal prices are Government-controlled for all except the 5-star category. This may have been one of the reasons for the preference of many investors for 5-star hotel projects. Ceilings on prices of meals and aconmodations are periodically revised by MUHTE to take into account changes in the cost of living index, and trends in international tourism demand. ANNEX 1 Page 3 million were spent for infrastructure 1/, DH 10 million for training, and the balance, DH 477 million, were invested in construction of additional accom- modation capacity, which increased by 15,815 beds. The Plan's targets, in terms of physical achievements, were met by little over 50%: the Plan fore- saw the construction of 30,800 additional hotel beds at a cost of DH 724 mil- lion in the period 1968-72. In monetary terms, the private sector almost met (93%) the target assigned to it, while the public sector, which contributed DH 110 million to total investment in hotel construction, invested less than one third of the amount foreseen by the Plan. CIH's financing of hotel invest- ment in the period 1968-72 amounted to DH 235 million, or about one half of the total. Morocco's Third Development Plan foresaw the construction of 55,000 additional beds in the period 1973-77, at a cost of DH 1,260 million. Further investments of DH 240 million in the tourism -sector were foreseen by the Plan for infrastructure, promotion, training and other expenditures associated to tourism development. This represents about 6% of forecasted gross fixed capital formation in the period. The rate of realization of the Third Plan, however, is not likely to exceed that attained for the Second Plan. In the first two years of the new Plan, less than 5,000 new beds were added to Morocco's total accom- modation capacity; about DH 200 million were invested in new tourism projects (2.8% of total gross fixed investment in the two-year period) of which CIH financed about one half. Sluggishness of tourism investment persisted well into 1975: during the first three quar&rs of the year less than DH 80 million had been invested in new hotel construction. 8. The main reason for the shortfall in planned growth of hotel invest- ments is that the Plans' projections were not realistic, being based on number of tourist arrivals rather than hotel bednights. Although total visitor num- bers more or less met the Plans targets, bednights sold did not increase propor- tionally due to shorter than expected average lengths of stay, and higher than anticipated demand for non-hotel accommodation (e.g., camping, staying with friends and relatives). Stiff competition among Mediterranean countries may have prevented hotel prices, especially in Morocco's Northern beach resorts, from increasing in line with rapidly escalating construction and operating costs, thus reducing the short-term profitability of hotel investments below that obtainable in other sectors of the Moroccan economy. Other factors that slowed down tourism investments in Morocco were: (i) The enactment, in 1973, of moroccanization laws, which diverted Moroccan venture capital to the acquisition of shares of foreign-owned industrial and commercial enterprises; (ii) lack of basic infrastructure in Agadir and Marrakech, where serviced land is scarce; 1/ The figure quoted excludes infrastructure investments for the development of the road network (apart from road connections specifically built for tourism resorts) and investment in aviation infrastructure, under the assumption that these investments would have been undertaken even in the absence of tourism. ANNEX 1 Page 4 (iii) the recession in Europe which forced many potential foreign investors to postpone their investment plans in Morocco; and (iv) fear of Government interventions deterred enterpreneurs, es- pecially foreign ones, from investing in hotels, in which the expected pay-back period is relatively long compared to other sectors, and (v) since 1973 there have also been widespread doubts about the rate of future growth of tourist demand, given the energy crisis and the recession. Investor interest in hotels seems now to be picking up again, as reflected in CIH's pipeline of new projects (see para. 6.04). This is to a large ex- tent attributable to improvement in the general investment climate and to promotional investment efforts recently undertaken by several public-sector institutions, including CIH's own affiliate, Farah-Maghreb (see para. 3.02). Importance of Tourism in the Moroccan Economy 9. Tourism Receipts. The table below shows tourism receipts data recorded by the Exchange Office 1/, the estimates of tourism receipts used in Morocco's Balance of Payments, and the estimates provided by the MUHTE.2/ Morocco: Tourism Foreign Exchange Receipts (Million DH) Recorded by Estimate in MUHTE's Exchange Office BOP Estimate Average ) Average330 680 n.a. 1968-1973 ) 1972 484 893 1,144 1973 534 1,010 1,420 1974 768 1,067 1,502 Data officially recorded by the Exchange Office exclude parallel market trans- actions. The estimates used in Morocco's Balance of Payments (which are also prepared by the Exchange Office) are derived from the last serious sample sur- 1/ Including tourists' purchases of Moroccan currency at authorized foreign exchange dealers, credit card transactions and direct transfers from foreign tour operators. 2/ Ministere de l'Urbanisme, de 1'Habitat, du Tourisme et de l'Environnement. ANNEX 1 Page 5 vey of actual tourist expenditures 1/ and inflated by a cost of living index. The MUHTE's estimate is derived in the same general way, but with more generous assumptions. It seems reasonable to assume that the true figure lies between the BOP estimates and the official records of foreign exchange transactions. 10. Hotels collect only a limited portion of the foreign exchange expend- itures of tourists. According to the 1971 Maroc Development Study, expenditures in hotels by hotel guests represented between 30 and 42% of their total expendi- tures, depending on the hotel category. The Master Plan for Morocco's tourism development 2/ estimates tourists expenses outside hotels to vary between 49 and 69% of the total. 3/ These include expenditures on (i) traditional handi- craft, (ii) restaurants and bars other than those in hotels, (iii) local trans- portation, (iv) other leisure services, and (v) purchases of sundries. All estimates agree in attributing about one half of tourist expenditures outside hotels in Morocco to purchases of handicraft products. Handicraft production as well as small local restaurants and shops selling miscellaneous wares to tourists are highly labor intensive: according to a recent study of the eco- nomic effects of tourism prepared by CIH, the capital/output ratio of the hotel sector is estimated at 2.7:1, while the ratio for the entire tourism sector (including handicraft and other ancillary activities) is estimated between 1.2 and 1.4. By the same token, the Bank's appraisal report of the Bay of Agadir Tourism Infrastructure Project estimates that non-hotel facilities in the pro- posed resort area will reap 40% of the benefits (net of taxes) generated by tourism, while the investments associated with these facilities will not ex- ceed 10% of the total investment cost foreseen for the development of the re- sort area (although this estimate takes account of existing excess capacity in non-hotel facilities). 11. Net Balance of Payments Effects of Tourism. Foreign exchange ex- penditures incurred by the Moroccan economy to meet tourist demand are esti- mated by the authorities not to exceed 20% of tourism receipts. Other tourism related foreign exchange expenditures include the foreign exchange component of 1/ The survey was carried out by Maroc Development, a consulting firm based in Rabat, in 1971 (Etude des consequences du Tourisme sur l'Economie Nationale). 2/ Prepared in 1974 by Institut fur Planungskybernetik, of Munich, and Steigenberger Consulting, of Frankfurt. 3/ In Tunisia, a study carried out by ONTT in 1974 estimated the percentage of expenditures outside hotels at 40-45% of the total. The percentge of tourist expenditures outside hotels in Morocco is higher than in Tunisia because a larger proportion of Moroccan than of Tunisian tourists do not stay in hotels, traditional handicraft is more fully developed in Morocco than Tunisia, individual as contrasted with package tourism is more impor- tant in Morocco than Tunisia, and Tunisian hoteliers tend to provide a wider range of "non-hotel" services than their Moroccan counterparts. ANNEX 1 Page 6 annual investments in tourism projects (net of foreign capital investments in tourism) the partial repatriation of salaries of expatriate hotel staff and of foreign investors profits, and the cost of tourism promotion abroad. These other expenditures amounted to between DH 40 million and DH 50 million yearly in the period 1968-1974. The attending net effects of tourism on Morocco's Balance of Payments are shown in the following table: (millions of Dirhams) Average 1968-72 1973 1974 Tourism receipts (Mean of official exchange records and B.0.P. estimate) +505 +772 +918 Cost of imports to meet tourists demand -101 -154 -183 Other tourism related expenditures - 41 - 40 - 50 Net effect of tourism on B.0.P. +363 +578 +685 As % of Basic B.O.P. receipts 7.1% 9.0% 5.7% This computation does not take into account two factors on which no informa- tion is available: the foreign exchange savings deriving from foregone foreign holidays of wealthy Moroccans made possible by the availability of suitable tourism facilities in the country,.and the receipts and costs associated with international air transport of tourists (including the subsidy on jet-fuel for charter flights). 12. Employment Creation. Morocco's hotels directly employed 16,000 perm- anent workers at end 1974. The investment cost per job created in the hotel sector is, on average, about DH 60,000 ($15,000). This cost compares favorably with that in other sectors of the Moroccan economy, with the exception of non- irrigated agriculture. The relative efficiency of hotels in employment crea- tion would be even greater if explicit account were taken of the long life of hotels compared to industrial investments. The employment created to satisfy the demand of tourists and the demand for tourism investments includes not only jobs in hotels, but also in handicraft production, the construction industry, leisure services, guides, travel services, catering industry, etc. According to the 1971 Maroc Developpement Study, about 60,000 people were employed in the traditional handicraft subsector to satisfy tourists' demands, and 20,000 more jobs were created in the other tourism-related activities mentioned above. 1/ Total investments associated to jobs directly created by tourism were estimated at DH 1.4 billion as of end 1971, of which DH 0.8 billion was in the hotel industry alone, and DH 0.6 billion in other branches of the tourism sector. The average investment cost per job directly created to supply tourism demand came to DH 15,000 (US$3,400). 1/ Maroc Developpement arrived at these estimates by applying sectoral data on value added per job, to the estimates of value added in handicraft production derived from its expenditure survey and the 1968 and 1969 input-output tables of the Moroccan economy. ANNEX 1 Page 7 13. Jobs indirectly generated by tourism include employment in the agri- culture and food processing sector, textiles industry, energy sector, raw materials used in handicraft (metals, leather, chemicals, etc), the construction materials industry, the automotive industry, etc. Maroc Developpement estimated that about 75,000 of such jobs were created by the intermediate tourism demand in other sectors of the economy. 14. The Master Plan for the development of Morocco's tourism, prepared in 1974, supports Maroc Developpement's findings. For the period 1974-77, the Master Plan foresees that the construction of 14,400 new hotel beds would generate (directly and indirectly) 50,000 new jobs related to the hotel sector, and roughly another 30,000 new jobs in other branches (chiefly related to the production and marketing of handicraft). 15. Subsidies to tourism investments. The system of incentives for tourism investments was modified in August, 1973, with the publication of a new investment code, which was intended to establish a less cumbersome system than the one existing since 1960. In essence, it provides for: (a) ten-year partial (50%) or full exemption (depending on the location of the project) from corporate income tax; (b) reduced rates on the capital registration taxes, the real estate tax and exoneration of purchase taxes on materials and equipment used for the construction; (c) an interest-free Treasury loan (administered by CIH) of 15% of the total cost of the investment (excluding land), repay- able in 5 years following 5 years of grace (5-star hotels are not eligible for this Treasury loan); (d) other long-term loans (10-20 years) from CIH, carrying 4.5% interest, the difference between this and CIR's official rate being paid by the Government. 1/ (e) accelerated depreciation for extensions of existing hotels. Under this incentives system, the financing plan of a typical Moroccan hotel is: 15% Government advance; 60-64% CIH long term loan; 21-25% equity. 2/. 1/ Following the recent increase in CIH's nominal hotel lending rate from 8.75% to 11%, the subsidized rate payable by investors is expected to be also increased shortly. According to a draft law now undergoing the legislative process, the Government subsidy would vary between 2% and 5% thus bringing the interest rate payable by borrowers to between 6% and 9%. 2/ Calculated on cost after incentives. The percentages on investment cost, including sales tax, are approximately 14%, 57-61%, 20-24% with the balance of around 5% being accounted for by the exoneration of the sales tax. ANNEX 1 Page 8 Government incentives for projects costing over DH 30 million are negotiated on a case-by-case basis. A project becomes eligible for the Government's incentives once it has been approved by a Technical Commmittee chaired by MUHTE and including representatives of the Finance Ministry, local administra- tions and CIH. The committee decides on the eligibility of a project exclus- ively on the basis of its meeting minimum technical and physical planning standards. The assessment of a project's financial and economic merits is left to CIH's appraisal of the loan to finance it. B. Prospects 1976-1980 16. Prospects of demand and supply. Estimates of future growth of tourism in Morocco vary widely. The Master Plan for Tourism Development fore- sees an average increase in tourist arrivals of between 7.5% and 10% p.a. from 1974 to 1977, and between 9.3% and 12.5% p.a. from 1978 to 1983. A more recent study of Mediterranean Tourism sponsored by 10 Mediterranean Development Finance Companies foresees an average increase of tourist arrivals in Morocco of 14% p.a. between 1973 and 1980 and 6.5% between 1980 and 1985. The projections of the Third Development Plan of Morocco (1973-77) which foresaw an annual growth rate in tourist arrivals of 22% during the plan period, proved overly optimis- tic. Nevertheless, it is reasonable to foresee that in the forthcoming 2-3 years, and possibly until 1980, visitor arrivals will continue to grow faster than the country's hotel accomodation capacity. About 3,000 new hotel beds were under construction in October 1975. Taking into account CIH's pipeline of new projects and the planned expansion of existing hotels (para. 6.04), and considering the average construction period for new hotels, it is likely that 3,000 to 4,000 new beds per year will be added to Morocco's hotel accomodation capacity over the next three to four years, representing a growth rate of capacity of about 7-8% p.a. Much of the existing pipeline consists of proj- ects promoted by public and semi-public bodies. Nevertheless, there is reason to expect that private Moroccan hotel investments will also increase in the near term, as financial resources in the hands of Moroccan investors in other sectors rise due to the Moroccanization policies of the early 1970's. 17. The bulk of investment programs now underway are mostly in the Southern resorts of the Agadir and Marrakech areas, where limited accomoda- tion capacity constrains visitor growth, and in Casablanca and Rabat, where tourists compete with business visitors for hotel accomodations. Some projects are planned for Northern Morocco, however, in spite of low tariffs and occupancy rates there. Other potentially successful tourism destinations, if effec- tively promoted in the appropriate markets, are the still unexploited eastern slopes of the Atlas, and the pre-Saharan Oases. 18. Planning Policies. The authorities are aware that tourism develop- ment planning has been inadequate. To remedy the situation the Tourism Di- rectorate of MUHTE solicited, in late 1975, international bids for the prep- aration of regional master plans for the development of tourism infrastructures ANNEX 1 Page 9 and facilities in the principal touristic regions of Morocco. The summary terms of reference for the regional master plans require that, in addtion to the technical and engineering studies, an economic and financial analysis of tour- ism in the regions under study be carried out. The Bank had the opportunity to comment on the preliminary terms of reference, and the Government concurred to amend them so that the economic analysis would be the starting point for the process of selecting sites, making preliminary investment decisions, and defining the size and phasing of programs. 19. The Bank has offered to provide limited technical assistance to the MUTHE aimed at: (a) setting up an effective system of statistics collection on tourism (this will be of great usefulness also to CIH in its efforts to strengthen its project appraisals, in connection with the proposed Bank loan); and (b) providing guidance in the economic analysis of tourism development prospects. The Government agreed to associate the Bank with the work program to be undertaken and at all stages to keep the Bank informed of progress and results. EMENA/IC & DFC March 1976 MOROCCO CREDIT IMMOBILIER ET HOTELIER (CIH) Accomodation Capacity 12-31-74 3-Star 5-Star U-Star & Vacation Villages 2-Star 1-Star Total No. of No. of % of Beds No. of No. of ~ of Beds No. Of 0o. Be No. of No. of % of Beds No. of No. of of Beds& No. of No. of of Beds Province Hotels Beds in Province Hotels Beds in Province Hotels Beds in Province Hotels Beds in Province Hotels Beds in Province Hotels Beds in Province Agadir 3 838 16.4 8 1,716 33.6 11 1,702 33.3 42 Sk9 10.7 10 298 5.8 4k 5,103 12.5 Al Hoceima 3 546 29.3 1 1,200 64.3 4 120 6.4 8 1,866 4.6 Beni Mellal 1 105 28.3 1 162 43.7 2 48 12.9 1 56 15.1 5 371 0.9 Casablanca 3 1,192 22.1 11 1,573 29.1 15 1,460 27.0 12 823 15.2 6 353 6.6 47 5,401 13.2 El Jadida 1 65 24.3 1 60 22.5 5 142 53.2 7 267 0.6 Fez 3 1,106 44.9 3 383 15.5 3 3k7 14.1 8 378 15.3 5 250 10.2 22 2,46 6.0 Kenitra 1 144 27.3 3 185 35.1 3 198 37.6 7 527 1.3 Khourigba 2 107 100.0 2 107 0.3 Ksar Es Souk 2 255 74.8 1 53 15.5 1 33 9.7 4 361 0.8 Marrakech 3 1,415 30.4 4 764 16.4 12 1,827 39.2 9 467 10.0 5 187 4.0 33 4,660 n1.k Meknes 1 260 11.k 1 22 1.0 8 1,094 47.9 8 679 29.7 5 230 10.0 23 2,285 5.6 Nador 1 192 100.0 1 192 0.5 Ouarzazate 5 856 66.5 2 400 31.0 1 32 2.5 8 1,288 3.2 Oujda 2 157 59.0 3 109 41.o 5 266 o.6 Rabat 2 868 31.6 4 546 19.9 8 665 24.2 7 425 15.5 k 245 8.8 25 2,749 6.7 Safi 1 1k0 k3.5 1 68 21.1 1 40 12.4 1 7k 23.0 k 322 0.8 Tangier 5 1,602 22.6 10 2,628 37.1 11 1,445 20.4 9 79k U.2 10 606 8.6 U5 7,075 17.4 Taza 1 80 53.3 2 70 46.7 3 150 o.k Tetouan 3 352 6.6 10 4,510 85.1 2 205 3.9 7 231 U.k 22 5,298 13.0 Total 20 7,281 17.9 59 10,287 25.U 90 15,355 37.6 75 4,698 11.5 71 3,111 7.6 315 40,732 100.0 Source: Ministry of Tourism August 1975 MOROCCO CREDIT IMMOBILIER ET HOTELIER (CIH) Evolution of International Arrivals 1968-1974 First half Nationality 1968 1969 1970 1971 1972 1973 1974 of 1975 French 119,131 148,986 173,795 188,173 210,626 265,989 216,422 123,470 us 56,411 94,125 117,796 136,744 195,680 185,983 173,217 66,114 Spanish 36,869 36,229 41,877 42,766 76,104 175,793 70,184 23,759 British 64,445 79,721 84,396 80,886 107,643 134,651 107,839 48,755 Algerian 28,396 46,151 60,232 66,613 91,510 105,373 147,956 30,462 German 34,724 38,551 55,405 70,703 75,144 90,440 82,157 44,391 Belgian 16,812 21,190 21,585 21,775 25,607 36,837 24,149 10,430 Dutch 16,143 23,227 25,449 24,481 29,100 36,173 33,360 13,398 Scandinavian 26,4. 31,599 29,909 20,741 32,416 32,747 29,392 18,487 Canadian 9,306 15,198 17,083 20,712 28,848 31,251 26,539 15,061 Italian 14,141 17,597 18,554 17,916 25,068 25,507 26,954 10,224 Swiss 10,911 15,431 9,792 12,690 19,484 24,533 21,256 9,783 21 Other 35,659 38,584 45,119 53,051 71,381 80,317 92, 45,322 Total 469,492 606,589 700,992 757,256 987,611 1,225,594 1,052,018 459,656 Cruisers lo6,880 95,361 105,511 91,376 131,183 147,165 133,364 39,744 Grand Total 576,372 701,950 806,503 848,632 1,118,794 1,376,759 1,185,382 499,400 1/ Official statistics include Moroccan visitors from abroad. These have been deleted from this table. Source: Ministry of Tourism August 1975 ANN E I Table 3 MOROCCO CREDIT IMMOBILIER ET HOTELIER (CIH) Arrivals by Means of Entry (968-1974) (Percentages) 1968 1969 1970 1971 1972 1973 1974 Air 34.12 34.64 31.14 37.06 33.16 32.39 35.61 Sea 1.35 36.98 39.89 32.26 33.67 28.59 33.39 Land 24.3 28.38 28.97 30.68 33.17 39.02 31.00 Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Source: Ministry of Tourism August 1975 MOROCCO CREDIT IMMOBILIER ET HOTELIER (CIH) TOURIST ENTRIES BY MONTH!' 1973 1974 Percent 1975 Percent Variation Variation Month Arrivals Percent Arrivals Percent 1974/1973 Arrivals 1975/1974 January 62,375 4.65 52.788 4.38 -15.36 62,862 +19.1 February 53,690 4.00 51,950 4.31 - 3.34 60,447 +16.4 March 73.975 5.52 75,099 6.23 + 1.51 102,324 +36.3 April 1b,016 7.76 87,075 7.23 -16.28 81,728 - 6.5 May 94,302 7.03 74,633 6.20 -20.85 95,500 +23.0 June 116,611 8.70 80,863 6.71 -30.65 103,130 +27.5 July 212,908 15.88 176,611 14.66 -17.04 212,706 +20.4 August 235,527 17.57 218,020 18.10 - 7.43 200,452 - 8.8 Septanber 160,699 11.99 122,702 10.19 -23.65 N.A. - October 82,754 6.17 92,070 7.64 +11.25 N.A. - November 59,225 4.42 70,764 5.87 +19.48 N.A. - December 84,542 6.31 102,089 8.48 +20 N.A. - TOTAL 1,340,624 100.00 1,20k 66 100.00 -10.194 +12.5% / 1/ 1973 was an exceptionally good year for Morocco's tourism sector. This was partly due to political disturbances in other Mediterranean countries competing with Morocco (Greece, Cyprus, Middle East). The slight decline in arrivals in 197k was more than compensated by higher tourist expenditures. Foreign exchange receipts from tourists, as recorded by the Exchange Office, amounted to DH 768 million in 1974, compared to DH 534 million in 1973, an increase of 44%. Data on arrivals in the first eight months of 1975 seem to indicate that the excep- tionally high 1973 level will be again attained in 1975. 2/ Arrivals data exclude cruises, but include Moroccan nationals re3iding abroad, 3/ Eight months average Source: Ministry of Tourism October 1975 ANNEX 2 CREDIT IMMOBILIER ET HOTELIER Shareholders since the 1974 capital increase Public Sector Institutions Number of Shares 5 of shares Caisse de Dép6t 84,086 17,52 Banque du Maroc h8,105 10,02 Banque Centrale Populaire 3,200 0,67 S.0.F.A.C. 1,600 0,33 Société Nationale d'Investissement 45,650 9,51 Société Centrale de Réassurance 6,848 1,44 B.M.C.E. 8,498 1,77 Maroc Investissement 6,000 1,25 Royale Marocaine d'Assurance 5,956 1,24 Compagnie Nordafricaine et Intercontinentale d'Assurance 13,944 2,91 Compagnie Africaine d'Assurance 2,000 0,42 225,887 47,06 Private Sector Institutions La Providence 800 0,17 C.0.M.A.R. 1,600 0,33 C.M.C.B. 22,010 h,59 Banque Commercial du Maroc 1,826 0,38 Crédit du Maroc 6,000 1,25 Union Bancaria Hispano Marroqui h,800 1,00 L'Entente 3,788 0,79 Caisse Interprofessionnelle Marocaine de Retraite 5,200 1,08 Mutuelle Agricole Marocaine d'Assurance 2,485 0,52 Mutuelle Centrale Marocaine d'Assurance 3,176 0,66 Compagnie Américaine d'Assurance 501 0,10 52,186 10,87 Board members 80 0,02 Private individuals 354 0,07 Bearers'shares 201,h93 41,98 80,o000 100,00 EMENA/IC&DFC December 1975 ANNEX 3 Page 1 MOROCCO CREDIT IMMOBILIER FT HOTELIER Board of Directors and Fbcecutive Committee September 30, 1975 A. Board of Directors Name Principal Positions Chairman Mr. El Habib El Fihri President Director-General Credit Inobilier et Hotelier Directors Caisse de Depots et de Represented by its General Gestion 1/ Manager, Mr. Mfedel Lahlou Banque du Maroc 1/ Represented by its Credit Manager, Mr. Jouahri Banque Marocaine du Represented by its Secretary Commerce Exteneur General, Mr. M. Jouahri Banque Centrale Populaire 1/ Represented by its General Manager, Mr. Abdelatif Laraki Banque Nationale pour le Represented by its President Developpement Economique Director General, Mr. Mustapha Faris Union Bancaria Hispano Represented by its General Marroqui Manpger, Mr. Landa Compagnie Marocaine de Represented by its President Credit et de Banque Director General, Mr. Kettani Moulay Ali Societe Nationale d'Inves- Represented by its President tissenents 1/ Director General, Mr. Mohamed Guessous Mr. Ahmed Boushabe 1/ Deputy Manager, Caisse de Depot et de Gestion Mr. Lotfallah Cheggour 1/ Director, Treasury Department Ministry of Finance Mr. Mohaned Sekkat 1/ Deputy Director, Budget, Ministry of Finance Mr. Abderrafih Bensouda 1/ Inspector, Ministry of Finance Mr. Omar Azami 1/Chief of Housing Promotion Division Ministry of Urbanism, Housing Tourism and Environment 1/ Nominated by Goverrment or Government Institutions ANNEX 3 Page 2 Mr. Mohamed Driouche 1/ Chief of Investment Division Ministry of Urbanism, Housing, Tourism and Environment Government Comissioner (not a voting Mr. Harti Hamed El Wardi menber) B. Ececutive Committee Name Principal Position Chairman Mr. El Habib El Fihri President, Director-General Credit Imnobilier et Hotelier Members Caisse de Depot et de Represented by Mr. Boushaba Gestion 1/ Deputy General Manager Banque du Maroc 1/ Represented by Mr. Alj, Depuity- Director Banque Centrale Populaire 1/ Represented by Mr. Laraki, General Manpger Ministry of Urbanism, Represented by Mr. Driouche, Housing, Tourism and Chief of Investment Division Environment 1/ Banque Nationale de Represented by its President Developpement Economique Director General, Mr. Moustapha Faris 1/ Nominated by Government or Government Institutions DTENW/ ICRDFC December 1975 MOROCCO CREDIT IMMOBILIER ET HOTELIER ORGANIZATION CHART AS OF MARCH 31, 1976 AND MAIN AFFILIATES GENERAL INSPEI CTION PRESIDENT-DIRECTOR GENERAL BUREAU (Mr. El Fibri) ASSISTANTS TO THE PRESIDENT (Mr. Aouachira) (Messrs. Rachidi I Ech-Cherif El Kettani Bennani Lazrak GENERAL SECRETARIAT Jomier) (Mr. Benkirane) CREDIT DEPARTMENT FINANCE DEPARTMENT DEVELOPMENT DEPT. (Mr. Haimar) (Mme. Zarari (Mr. Kacimi) PORTFOLIO SUPERVISION DIVISION FINANCIAL OPERATIONS DIVISION PERSONNEL DIVISION (Mr. Amor) (Mr. Rami) iMr. Zouhir) LEGAL DIVISION ,ACCOUNTING DIVISION TRAINING DIVISION (Mrs. Benlali) (Mr. Ajakane) (Mr. Tazi) STUDIES AND DOCUMENTATION FEASIBI LIT STUDIES DIVISION .DIVISION (Mr. Sadik) (Mr. El Bedoui COMPUTING ACTIVITIES TECHNICAL STUDIES DIVISION AND ORGANIZATION BUREAU (Mr. M'Tougoui) (Mme. Amri) CENTRAL BUREAU OF REGIONAL BRANCH OFFICES (Mr. A. Laalej) REGIONAL BRANCH OFFICES: OUJDA: Mr. El Karzazi NUMBER OF STAFF RABAT: Mr. Guedira MANAGEMENT 8 AGADIR: Mr. Benali OFFICERS 50 TANGER: Mr. Saad JUNIOR OFFICERS 47 MARRAKECH: Mr. M. Laalej CLERKS 77 ES: Mr. Himi MESSENGERS 34 216 World Bank-16013 EMENA/IC & DFC March 1976  ANNEX 4 Page 2 MAIN AFFILIATES OF CIH CIH holds equity participation in a number of specialized subsi- diaries, which were launchedin the past two years mainly as a result of CIH's promotional goals. The most important ones are: (a) Farah-Maghreb, a company set up to build 4,200 new hotel beds in various areas of Morocco. CIH's participation in Farah-Maghreb's share capital of DH 40 million amounts now to 34% (DH 10,275,000 paid in) and is expected to further decline to 16%, following CIH's sale of shares to numerous domestic and foreign (especially Arab) investors. (b) Sicopar, with a share capital of DH 30 million, plans in the longer run to build 7 factories of prefabricated housing elements in the main cities of Morocco. Plans for the realization of two units in Casablanca and Rabat are well under way. CIH holds 50% of Sicopar's capital (DH 7,750,000 paid in), and expects to further reduce its holding to 10%. (c) Europa-Maroc, a hotel management company, which currently manages two 5-star hotels (in Casablanca and Tangiers) and plans to expand its activities in the near future. CIH's participation in Europa- Maroc's capital of DH 1.5 million is 24% (DH 357,500 paid in) (d) Promoconsult, an engineering firm specializing in the design of hotels; CIH holds 10% of Promoconsult's share capital of DH 1.0 million. EMENA/IC & DFC December 1975 ANNEX I DIT IINMI . ROTELIER jam ![M1 1971-1975 -------Aditeds December 31----- - uIsawd ted '1971 1972 1973 1975i IMCCE Interest & Commissions on: Hotel loans 21,928 25,325 28,172 30,821 37,749 Housing loans 8,862 11,007 14,283 18,389 23,986 other loans 178 129 186 1 319 4 TTM Wa-X, 50',29 66,052 Income from managed funds 1,749 1,807 1,876 583 1,866 Dividend income 87 60 114 176 332 Bank and other interest 605 390 385 188 1,269 Other income 68 77 20 253 2 4 33,177 379 ,29 71 983 EXPEEES Financial Charges on long-term borrowings 16,445 18,382 23,678 28,500 39,000 Short-term interest and charges 780 29 126 1,345 17,22 2U~5 23r 2 40,345 Personnel expenses 2,280 2,529 3,62 5,696 7,485 Other operating expense 2,051 2,342 2,974 2,463 4,441. Depreciation and amortization 772 985 1,o49 1,372 1,739 Provision for losses )766) 1,729 (971) 5,168 TOTAL EXPENSES 21,562 30,980 38323 59,178 Profil before taxes 11,915 10,721 14,065 13,06 12,805 Income tax 5,612 5,040 6 6,328 6,039 NET PROFIT 7,077666 Iapprefated earaingo begmmiag of year 4,864 5,416 4,848 6,327 6,059 Net profit for the year 6,303 5,681 7,077 6,766 Aloain:11,167 11,097 12L26 132,40k 12,825 Allocations:1 Investment Reserve 945 849 1,117 1,064 1,016 Legal Reserve 241 268 241 315 301 Dividends 1,600 1,600 1,600 3,200 4,800 Directors' profit participation 35 32 33 66 66 General Reserve 2,930 3 2.950 2,700 583 5,751 6,2149 5,91 134 6,766 Unappropriated earnings end of year 5,416 4,848 6,327 6,059 6,059 EMENA/ IC & DFC April 1976 1/ Including income brought forward from previous years (DH 2.24 million) 2/ Including expenses incurred earlier (DH 138,400) 3/ Estimated from unaudited statements MORC ANNEX 6 CREDIT INIWMLIER ET HOTELIER Summary Balance Sheets - 1971-1975 ----------Audited: December 31---------- Unaudited 1971 1972 1973 1974 1975 ASSETS Current Assets Cash and Bank 2,459 5,271 6,857 16,882 34,851 Past-due maturities of loans 1/ 17,907 20,997 30,283 42,677 52,182 Less provisions ( 4,122) (7,666) (6,833) (5,651) (7,473) Current maturities of Loans 20,408 26,818 30,117 37,912 51,535 Accrued interest 2,519 3,259 3,983 4,859 6,100 Rebates due from Government 7,404 9,496 12,ol 11,788 12,200 Other receivables 6,500 5,06 11500 15,230 5105 W1,675 d1,65 l 164,625 Investment Portfolio Hotel loans 251,722 277,046 310,387 354,641 385,377 Housing loans 103,627 139,366 169,616 208,180 275,429 Other loans 1 1 24,364 70,510 30,gj6 rM7J3 I~JI2 587,185 731,316 Less current maturities 20 4 26 818 0 1? 37 912 51,535 *8t 33k0325 679,781 Equity investments 1,087 1,318 5,077 15,469 29,871 Government bonds __ 65 2,821 3,714 4, 8 393,784 461,210 68,1456 714,257 Fixed assets (net) _ 1,492 1,826 2,370 2,581 Deferred charges (net) 855 16 1,603 2853 TOTAL ASSETS 31,997 461.035 %6.504 692,949 684,316 LIABILITIES AND EQUITIES Current Liabilities Short-term borrowings - - 7,076 6,790 Demand deposits 15,000 - - 646 Current maturities of long- 12,765 29,204 44,836 46,74o 57,874 term debt Accounts Payable 7,754 8,197 8,106 10,400 18,56 Provision for Income tax 5,617 5,040 6,645 6,328 6,039 Govermont accounts payable 1,699 - 3,143 ,20 8.499 Other current liabilities 724 _1ZA 1 91 - 235 J; -- 93,303 Long-term Debt Rediscounted notes 85,000 85,000 100,000 100,000 100,000 Medium-term notes 62,000 62,000 52,000 52,000 66,100 Bonds outstanding 114,412 113,948 172,789 255,314 342,879 Subordinated bonds 30,000 30,000 30,000 30,000 70,000 4/ Loans:- B.C.P. - 51,100 45,850 4o,600 5.350 B.N.D.E. 27,265 27,799 26,u6 23,830 21,606 I.B.R.D. 4,656 13,754 25,011 45,630 64 216 Government & CDG 8 3 4,009 26,44-W _ 51j/ 74A±Y 3B7,484~ L4A4,,U 77=3 7 756,692 Less current maturities 146 740 5 3ttA,_43 3M0M0 460M3 f2-l 7 698,818 EQUITY Share capital 20,000 40,000 40,000 60,000 60,000 Investment reserve 2,871 3,720 4,837 5,902 6,957 Legal reserve 923 1,191 1,432 1,747 2,048 General reserve 4,795 8,295 11,254 13,945 16,424 Unappropriated earnings 5,16 4 6,2 6,05 6,766 36005 58,054 63.81 87,653 92,195 TOTAL LIABILITIES & EQUITY 391,997 461,o15 546,504 692 949 8846 Includes arrears on interest Rediscountable notes at Banque du Maroc Including DH 22,320,000 from CDG Including DH 40 million Treasury advance EMENA/IC & DFC April 1976 ANNEX 7 MOROCCO CREDIT IMMOBILIER ET HOTELIER Financial Ratios 1971 1972 1973 1974 Operational Indicators Gross income as % of average total assets 9.3 9.1 8.9 8.6 Administrative Expenses as % of average total assets 1.4 1.4 1.5 1.8 Financial Expenses as % of average total assets 4.8 4.8 4.8 4.6 Income from loans as % of average loan portfolio 9.1 9.0 9.0 9.0 Cost of long-term debt as % of average long-term debt 5.4 5.1 5.7 5.8 Spread 3.7 3.9 3.3 3.2 Profitability Indicators Net profit as % of average equity 19.9 12.3 12.2 9.4 Net profit as % of share capital 31.5 14.2 18.6 11.8 Cash dividend as % of net profit 25.4 28.2 21.6 45.2 Cash dividend as % of par value share 8 8 8 8 Book value of share as % of par value share 170.0 145.1 159.6 146.0 Financial Structure Indicators Total debt/year end equity 10.5 6.9 7.6 6.9 Long-term debt/year end equity 9.6 6.7 7.1 6.5 Debt/equity (IBRD Agreement) 1/ 5.8 4.8 5.5 5.3 Interest Coverage ratio 1.6 1.6 1.6 1.5 IBRD debt as % total long- term debt 1.4 3.6 5.6 8.4 1/ Assuming DH 19 million as subordinated debt. EMENA/IC & DFC December 1975 ANNEX 8 Page 1 MOROCCO CREDIT IMMOBILIER ET HOTELIER Analysis and Assessment of CIH's Loan and Equity Portfolio at end-1975 Loan Portfolio 1. The following table summarizes the status of arrears on CIH's loan portfolio (DH million). December 31 September 30 1973 1974 1975 A. TOTAL PORTFOLIO - Total Portfolio /1 467.0 581.7 694.5 incl: housing loans (180.9) (240.7) (321.4) hotel loans (286.1) (341.0) (373.1) - Total arrears of principal and interest of over five months /2 14.2 23.9 34.2 - Total arrears as a percentage of total portfolio 3% 4.1% 4.9% B. HOTEL PORTFOLIO = Hotel arrears 8.4 15.0 16.7 - Hotel arrears as % of total portfolio 1.8% 2.6% 2.4% - Hotel arrears as % of hotel portfolio 2.9% 4.4% 4.5% - Hotel portfolio affected by arrears: (i) Amount 36.9 89.2 119.5 (ii) Percent of total portfolio 7.9% 15.3% 17.2% (iii) Percent of hotel portfolio 12.9% 26.0% 32.0% /1 Including maturities on loans of less than one year, arrears in principal and before provisions, and excluding Chellah loans (para 3). /2 CIH's loans are repayable in semi-annual installments. Loans are con- sidered in arrears when repayments are overdue by more than 5 months. Cnellan arreargare excluded (para 3). ANNEX 8 Page 2 2. Housing Portfolio. At September 30, 1975, some 5,400 loans for indi- vidual houses and apartment dwellings accounted for 36.5% of CIH's outstanding loan portfolio. Arrears on these loans amounted to DH 9.1 million in princi- pal and to DH 7.2 million in interests. These arrears are generally less than a year old and stem principally from the high semi-annual installments which put a heavy strain on individual middle to low income borrowers. Over the past fifty years CIH has never experienced a loss on housing loans which are more than adequately secured by first mortgages on valuable proper- ties. The prospects for recovery of these overdue amounts are good. 3. Hotel Portfolio. Outstanding hotel loans numbered 282 and amounted to DH 385.2 million, or 56% of total portfolio outstanding at September 30, 1975. Of this amount, loans totalling DH 91.3 million are to two major bor- rowers, Chellah Hilton and Holiday Inn (HISA), which are in difficulties. However, these loans are fully covered by special Government guarantees and present no risk to CIH. In order to avoid recurrence of such high risk cases, the Bank and CIH agreed during negotiations for the second loan to CIH that financial exposure to a single corporate entity would normally be limited to 20% of CIH's equity. Such an agreement should also be retained under the proposed loan. 4. The increase in hotel arrears partly results from (1) weak supervision and collection procedures; (ii) the timing of semi-annual installments that, for some hotels sensitive to seasonal variations, fall at the worst possible time; and (iii) delays in construction which have not enabled hotel to start their operations before the end of grace periods. Legal proceedings have been ini- tiated against several borrowers and penalty interest on overdues is set at two points above CIH's nominal lending rate. Twenty-four borrowers accounting for 21.6% of all hotel loan arrears (DH 3.6 million) are late payers who present little or no risk; their financial situation is sound and they have no more than one or two maturities in arrears. Delays in project implementation have caused 7 other borrowers to fall in arrears totalling DH 3.2 million (19.2%) as first principal payments fell due prior to start of operations. CIH is negotiating a case-by-case rescheduling of loans which at this stage appear to present no major risk. One group of 18 hotels is suffering from the effect of seasonal variations in tourist arrivals in the Northern part of Morocco and from poor promotional policies and management which have adversely affected receipts. It accounts for DH 4.8 million in arrears (29% of the total), half of which in Tangiers concerning 7 hotels. CIH has been closely following up on them, imposing managerial and organizational changes which are expected to lead to better operations and financial results. In sum the above CIH's risk on 49 borrowers can be considered moderate after analysis, and the recent upsurge in tourist business combined with CIH's tough stand have shown some positive results. However, a group of 11 borrowers, accounting for 30% of hotel loan arrears (DH 5.3 million) and with loans outstanding of DH 12.9 milion at September 30, 1975, faces more serious difficulties stemming from basic finan- cial disequilibria and poor management. CIH is studying alternative management contracts or ways and means of take-over of these hotels by its affiliates. Taking into account the fact that all hotel loans are covered by ANNEX 8 Page 3 a Government guarantee of at least 50% of the outstanding loan amount, 1/ provisions amounting to DH 7.4 million at December 31, 1975, adequately cover CIH's risk, even if the mortgage security were of low value. 5. During negotiations new unaudited data on the arrears position were provided by CIH. These data show that total arrears have decreased by 15% between September and December 1975, and by a further 9% between December 1975 and March 1976 to DH 26.1 million (3.4% of total portfolio). Hotel portfolio outstanding affected by arrears was 22% of total portfolio at December compared to 32% at September 1975; hotel arrears as a percentage of hotel portfolio stood at 3.9% in December compared to 4.5 in September 1975. While a detailed audit might challenge some of these figures, they nevertheless indicate that measures being applied by CIH to improve the quality of its portfolio are bearing significant results. The incomplete figures provided in March 1976 appear to further confirm this trend. Investment Portfolio 6. CIH's equity investments at December 31, 1974, amounted to DH 15.5 million in 21 companies. CIH's investment portfolio grew rapidly from DH 1.3 million at end 1972 to DH 5.7 million at end 1973 and DH 29.0 million at December 31, 1975. So far, the only profit-yielding investments are six financial institutions which account for 17% of total portfolio investment. The remaining enterprises are in their start-up phase. Dividend income, which amounted only to DH 60,000 at end 1972, almost tripled to DH 177,000 at end 1974 and reached DH 332,000 at December 31, 1975. 7. CIH's investments aim primarily at promoting new companies involved in tourism and housing related activities. At end 1974 eight companies accounting for 46% of the portfolio were either in their pre-operating phase or just completing their first full year of operations. As these companies get off the ground, CIH intends to sell its shares to private holders. At this stage, CIH has not yet made any provisions against its equity portfolio. This appears acceptable. EMENA/IC & DFC April, 1976 1/ The guarantee amounts to 50% for hotel construction loans, 60% for equip- ment loan and 100% when CIH holds no valid mortgage. The guarantee covers CIH's risk of loss, i.e. that portion of the loan which cannot be recovered following exhaustion of all legal collection procedures. ANNEX 9 Page 1 MOROCCO CREDIT IMMOBILIER ET HOTELIER Analysis of Hotel Profitability and the Effects of Incentives Basic Assumptions: 1. This annex analyses (a) the financial profitability of different types of Moroccan hotels, and (b) the impact of incentives upon: (i) profitability, given prices, costs, and occupancy rates, and (ii) prices and occupancy rates, when these have adjusted sufficiently to assure investors their target rates of return under different levels of incentives. Various profitability indicators have been used, of which four are reported here: the internal rates of return on (i) equity investment, (ii) total investment after income tax , (iii) total invest- ment before income tax, and the 'simple' ERR, all expressed in constant prices. The first indicates the return which the investor can expect to secure on his equity; the second measures the project's earning power more or less independent- ly of project financingl/; and the third is a first approximation to the simple ERR (it counts all indirect taxes as costs). The ERR is 'simple' since it takes no account of effects external to the hotel, nor does it include the various adjustments to prices necessary to assess the economic viability of hotel 2/ capacity expansion (see para. 2 of Annex 16 for more details on these adjustments)- Debt service, interest coverage, and 3everal other ratios were also calculated, although they are not reported here 2. Financial returns to be expected from new hotel investment projects in Morocco have been estimated using data on receipts and costs provided by UIH for a sample of 19 existing hotels, plus information on some items based on a larger sample of hotels. The composition of the sample was determined partly by the availability of detailed data and partly by the regional and category composition of CIH's pipeline of hotel projects. Using basic receipts and cost assumptions, computer simulations have been run to assess the sensi- tivity of financial profitability to changes in category, size, location. investment costs, occupancy rates, prices, inflation, operating costs, management fees, debt equity ratios, replacement costs and different hypotheses on investment incentives. Nine "base cases" have been identified to represent a range of hotel types in Morocco. Most of the sensitivity tests have been run on three cases: the Casablanca 5*, the Circuit 4* and the Agadir 3* hotel. The principal assumptions used in defining the base cases are summarized in the table on page 2. 1/ It is not completely independent since income tax paid depends upon the debt equity ratio and interest rates (see Part B of the table on page 12). 2/ The estimate of the 'simple' ERR does not exclude indirect taxes paid on current inputs into the hotel, although all indirect taxes on invest- ment (and replacement) inputs and also indirect taxes paid by the hotel are excluded from costs. 3/ The full explanation of data sources, methods, and results are included in the report of the consultant who accompanied the appraisal mission (R. Mattatia, Analyse Preliminaire de la Situation Financiere de l'Hotellerie Marocaine, SOGELERG Ingenierie, Paris, Avril 1976 (typescript).). SUMMhARY OF ASSUMPTIONS ON RECEIPTS AND COSTS Casablanca - Rabat Agadir Circuits -North 5Stars, .Stars 3 Stars 4 Starb 3 Stars VV 4 Stars 3 Stars Item 1.Capacity in beds 600 400 150 500 150 1,000 400 150 1,000 2. Investment costa/ 2.1 Cost per bed 46 35 27 39 30 28,5 36,5 24,5 25 2.2 Breakdown (befnr .port duties and sales tax) % 1. Land 6.07 8.09 10.4 10.72 11.67 7.02 6.85 2.43 3.99 2. Construction 39.88 39.02 38.1 37.9 37.5 39.48 39.54 41.42 40.75 3. Heavy equipment 22.15 21.26 21.1 21.06 20.83 21.93 21.96 23.01 22.64 4. Furniture, fittings 17.72 17.34 16.9 16.84 16.67 17.54 17.58 18.41 18.12 5. Professional fees 8.86 8.67 8.5 8.42 8.33 8.77 8.79 9.20 9.06 6. Pre-opening expenses 2.66 2.6 2.5 2.53 2.5 2.63 2.64 2.76 2.72 7. Working capital 2.66 2.6 2.5 2.53 2.5 2.63 2.64 2.76 2.72 Start-up period (years) 3 3 3 2 2 2 3 4 2 4.'Occupancy rate (on beds installed after start-up period) 4.1 'actual' 45% 45% 45% 60% 60% 60% 52% 40% (b) 30% 4.2 MEOR 65% 65% 65% 65% 65% 65% 55% 40% 30% 5.Receipts (Dhs) 5.1 room + food per bednight 82 56 40 56 40 57 56 24 53 - .2 bar per bednight 4.4 4.2 2.5 4.2 2.5 5 4.2 2.5 5 5.3 Dining room bar per bednight 13.75 8.25 8.25 8.25 8.25 - 8.25 8.25 - 5.4 Others 1. Telephone, laundry, Dh per bednight 6 4 ,8 8 .8 .4 .8 .8 .4 2. Nigtclub,Dh per bednight 8.5 3 - 2 2 - 3 - - 3. Transport,Dh per arrival - - - - - 30 - - 30 4. Commissions (% of 5.1.) 2% 2% 1% 2% 2% - - 2% - 5. Shop rentals (Dh '000) 15 10 5 5 5 - 5 5 - 6. Meals per bednight 1.2 1.2 1.2 1.4 1.4 2.0 1.0 1.4 2.0 * 7. Cost of sales 7.1 Food (Dh per meal) 11 8.8 6.8 8.8 6.6 21% c/ 8.8 6.6 21%c/ 7.2 Bar (% of sales)d/ 24% 38% 38% 38% 38% 11% a/ 38% 38% 11 a/ Excluding interest during construction and registration tax. (continued on page 3) b/ Corresponds to an occupancy rate of 90% during a 4-month season. c/ Percentage of room and food receipts ($.1) d/ Applied to 90% of nightclub bar receipts to take account of higher nightclub bar prices. SUMMARY OF ASSUMPTIONS ON RECEIPTS AND COSTS (continued) Casablanca - Rabat Agadir Circuits North 5 Stars 4 Stars; 3 Stars 4 Stars 3 Stars vv 4 Stars 3 Stars VV Item .other items 8.1 Publilcity (% of receipts) 1 % 1 % 0,5 % 1 % 1 % - 2 % 2 % - 8.2 Employees 1. Fixed employees per bed 0,5 0,45 0,35 0.425 0,16 0,25 0,5 0,16 0,25 2. Variable employees per bednight - - 0,09 0,19 - 0,19 - 3. Employees (hotel closed) . . - - - 16 8.3 Labor expense (e) 8.3 1. Fixed 16/ma day 31.0 33.0 16.7 22.3 26 13.5 20 26 13.5 2. Variakle, D/man day - - - 8.33 8.33 - - .-33 - 8.4 Telephone, laundry, misc. 1. Telephone, laundry (%5.4J- 6e % 60 % 60 % 60 % 60 % 60 % 60 % 60 % 60 % 2. Transport (%5.4.3) - - - - 50 % - - 50 z 8.5 Water, fuel, electricity 1. Variable, Lh per bednight 4,1 3.3 2.7 2.7 2.7 2.7 7.4 2.7 2.7 2. Fixed, Dh per bed f/ - - - - - - - - 0.1 8.6 Maintenance 1. Fixed, Dh per bed avail.pa 0,55 0,41 0,27 0,41 0, 27 0,27 0,82 0,27 0,27 2. Fixed, Dh per bed f/ - - - - - - - - 0,14 3. Variable - Dh per bednight 1,9 1,6 1,4 1,6 1,4 1,4 2,7 1,4 2,7 8.7 Folklore, orchestra(Dhs/year) - - - 50- 50 50 50 20 20 8.8 Renewals, insurances, misc. 1. % of receipts 1,5 1 1,5 % 1,5 % 1,5 % 1,5 % 1,5 % 1,5 % 1,5 % 1,5 % 2. % of investment cost 1,5 % 1,5 % 1,5 % 1,5 % 1,5 % 1,5 % 1,5 % 1,5 % 1,5 2 8.9 Sales tax 4 % 4 % 4 % 4 % 4 % 4 Z 4 % 4 % 4 Z 9. Replacements (% of invest. cost)h 2,7 % 2,6 % 2,6 % 2,5 % 2,5 % 2,7 % 2,7 % 2,8 % 22 ! e/ Takes account of scale of hotel. Includes social security and non-wage labor costs (food, clothing, medical). f/ Dh per bed installed per day during period when hotel is closed. \o F/ During period when hotel is open. h/ After 5 years of operation, this corresponds to 1.5% of construction cost, 3% of heavy equipment, and 8% of furniture and fittings. ANNEX 9 Page 1 3. All of the 'base' cases have been calculated with inflation of all tangible costs at 7% per annum. Municipal taxes (which are based upon rental value of the property) have been aboumea to increase at 3.5% p.a. 4. bince occupancy rates have a particular significance for the analysis, it is worthwhile describing the origin of these estimates in considerable detail. Two occupancy rates are o particular concern for the analysis: the 'current' occupancy rate, and the "minimum economic occupancy rate" (MEOR). Information is lacking to estimate the economically optimal occupancy rate (see Annex 16). 5. The current occupancy rate is the observed rate which results from existing policies, costs, patterns of demand, and investor behavior. Estimation of this rate for Morocco is more difficult than for most other important tourist desti- nations because of the heterogeneity of Moroccan hotels, and also because the Moroccan Government does not collect and analyze information on bed and room occupancy rates. For these reasons, our estimates are probably subject to a substantial margin of error. The MEOR is the maximum annual rate which is likely to be consistent with maintaining the existing pattern or monthly arrivals/bednights. Expansion of capacity whenAoccvpancies are below the MEOR would have little or no effect on bednights realized. Hence, the MEOR is the minimum rate at which it may be economically desirable to expand hotel capacity. 6. Our estimates of the MEOR for different types of Moroccan hotels are given in the table on page 5. This table is based upon two fundamental assump- tions: a. that the current pattern of monthly bed occupancies is the same as the pattern of monthly hotel arrivals for the period 1972-1974 estimated by CIH,17 b. that the maximum monthly bed occupancy rate which does not involve turning away 'significant' amounts of demand is 8o-85%. 7. The table on page 6 summarizes estimates of current occupancy rates, as well as the MEORs retained for the analysis. The "current" occupancy rates and MEORs used for the analysis probably underestimate the 'true' figures. The rates shown in Cols. (3) and (4) have been assumed to refer to 'mature' hotels, implying lower sectoral averages (e.g. cols. (5) - (7)). The significance of this bias is that it could lead us to conclude that more incentives are necessary at the MEOR to establish financial viability than is in fact the case. It is also worth noting that the sectoral average occupancy rates corresponding to our MEORs are somewhat less than the sectoral occupancy rates used to calculate bed requirements in the Tourism Masterplan (compare Col. (8) with Cols. (5) - (7)). 1/ MEORs are overestimeted if, as is the case for Tunisia, lengths of stay in Morocco are longer at the peak than in other periods. On the other hand, if incremental demands are more evenly distributed seasonally than existing average demands, this would lend a conservative bias to the estimate. ANNEX 9 Page 5 -3- Estimat,ion of Minimum Economic Occupancy Rates (MEORa) for Moroccan Hotels beasonal Factor AM % of annual reak Implied hotel Month by data arrivals in Occu- and peak Retained peak month, 'Assumed for pancy month OR for the Region 1972-1974 Data Analysis Rate assumption Analysis a/ (1) (2) (3) (4) (5) (6) (7) Tanger 15.6 (Aug. 1.84 Tetouan. Chaouen, Larach, Azilah 16.3 " 1.92 L.!o - 85- 37- 4o 2.30 90 47 (non-residents 17.5 2.06) M'diq, Cabo-Negro 28.6 July 3.37 Mohamnedia 16.8 Aug. 1.98 Agadir, Inezgane 10.8(Mar.) 1.27 1.25 - 80 - 62 - 65 (Non-residents 11.1 " 1.31 ) 1.30 85 68 Casablanca 10.O(Aug.) (Non-residents 10.0 ) 1.18 1.18 75 64 65 Circuits Meknes & Region 17.0(Aug.) 2.00 Meknes, non-resident 21.2 2.50 80- 40- Azrou, Medelt, Ifrane, 1.O 85 57 Ksarsouk, Erfoud 14.2(April) 1.73 .00 Fez, 6idi-Harazem 12.7(Aug.) 1.50 Marrakech 1l.7(April) 1.42 1.42 80- 56- 60 (non-residents 11.7 "r) &5 60 bource: Col. (2): CIH Col. (3) = Col(2)X365 100 xD where D = days in the peak month m m Col. (5), assumed by mission, based on experience in other countries. Col. (6) = Col(5)/Col (4) a/ with a double occupancy factor (DOF) of 1.8, which is typical for hotel catering for holidaymakers, an 80% bed occupancy rate would imply an 89% room occupancy rate, and an 85% bed occupancy rate a 94% room occupancy rate. The maximum monthly occupancy for Casablanca may be somewhat lower since the presence of many businessmen there implies a lower DOF. The peak 75% monthly bed occupancy rate assumed for Casablanca in Col. (5) would be consistent with a 95% room occupancy rate and a DOF of 1.58 at the peak. A141EX 9 Page 6 Estimates of Bed Occupancy Rates of Moroccan Hotels "Current" Bed Minimum conomic Occu- Masterplan Occupancy rates pancy Rates (MEORs) Projections CIH Esti- Mission Used in Sectoral (Sectoral Occu- mates for "Base" Analysis Averages pancy rates) 1974 (sec- Rates (Mature for Growth Region and Type of toral) (Mature Hotel) Hotel) of (d) (b) (c) Hotel (a), (b) (c) (c) 10% 15% 20% (1) (2) (3) (4) (5) (6) (7) (8) North-Urban 32-54 - 60-70 -Beach ) (O 4O 38 37 36 55 -Vacation villag 20-30(f) 30() 30 29 29 28 40 South-Urban ) ) ) 55-65 Beach )53-68 )60 )65 63 63 62 70 Casablanca, Rabat 38-68 (g)5 65 62 60 59 ) ) 60-70 Fes, Meknes 36-75 52 55 52 51 5 ) Marrakech n.e. 60 57 56 55 65-70 Source: CIH, mission estimates, and Royaume du Maroc et Republique Federale de L'Allemagne, Masterplan Touristique du Maroc, (by Institut fur Planungskybernetik, bteigenberger Consulting GmbH, and Maroc Developpement), Vol. IV, Rapport de Synthese, p.5.13, Fevrier, 1975. (a) Occupancy rates on beds available rather than beds installed. (b) Variations due to category of accommodation, with higher categories generally estimated to secure lower occupancy rates. (c) Occupancy rates on beds installed. For the mission estimates, these are the rates assumed for a 'mature' hotel, after the initial start-up period of low occupancy rates has passed. (d) These calculations are made on the assumptions that occupancies and capacity have been growing at the same rates for a considerable period of time, and that the occupancy rate of hotels of different ages as a proportion of the occupancy rate of a mature hotel are as follows: btart-up occupancy rateb of new hotels as a proportion of occupancy rates of mature hotels Age of Hotel (Years) 1 2 3 4 North, Vacation village .8 .9 1.0 1.0 1.0 J star .6 .7 .8 .9 1.0 South, (all categories) .8 .9 1.0 1.0 1.0 Casablanca (all categories) .7 .8 .9 1.0 1.0 Circuits (all categories) .7 .8 .9 1.0 1.0 (e) Occupancy rate of 901' over a 120 day season. f) Data from individual firms rather than CIH. (g Includes Marrakech. ANNEX Page 7 Hotel Profitability Under Present Conditions 8. The table below bhows the calculated profitability of the "base cases" hotels under present conditions I.e., assuming "current" occupancy rates , prices and the existing incentives system.i/ The table also shows, for the Casablanca 5* results of two of the sensitivity tests, i.e., under the hypothesis of (a) increase of 10% of investment costs and (b) average yearly occupancy rate being obtained by the hotel from the first year of operations (no "start up" period). 9. These results indicate that new investments in hotels in Agadir are currently highly profitable, and in luxury hotels in Casablanca/Rabat are margin- ally profitable, both from the point of view of investors' returns on equity and from that of gross return on total investment. The high profitability of Agadir hotels is believed to be a temporary phenomenon, due to the fact that expansion of capacity has been constrained by inadequate serviced land rather than lack of profitability. ith the planned expansion of infrastructure in Agadir, it may reasonably be expected that capacity will grow relative to demand until lower profitability levels are achieved, unless there is some change in the incentives system or in the criteria employed to approve projects. At the other extreme, new investments in Northern beach resorts cannot be expected to yield adequate financial returns in spite of the incentives. This is due to the depressed prices in the area, (which are apparently even lower than the prices in Tunisian beach hotels, for example). New 4-btar hotels in the Imperial Cities of the interior (Fes, Meknes) show inadequate financial profitability, although they would become profitable with tariffs about 15,% higher than the observed average, or occupancy rates around 10 points higher. 10. Category of hotel seems to share with regional location an important role in determining profitability, and it is probable that 5-6tar hotels in the imperial cities are more profitable than 4-star hotels. The sensitivity tests show that an increase in investment cost. has a relatively minor impact on profit- ability compared to occupancy rates (see also table page 12 below). The enormous effect exercised by the low occupancy rates in the initial years of operations on rates of return serves to underline the importance of sound marketing and management of new units from their commencement. These ebtimates are based on data for a limited number of hotels, and they might change somewhat with more information. On the other hand, the basic conclusions drawn here are robust with respect to reasonable changes in many basic assumptions. Impact of Incentives on Tariffs and Occupancy Rates 11. In order to assess the possible impacts of the incentives system, we have estimated the changes in tariffs and occupancy rates which would occur for a range of 'normal,returns on capital if existing incentives were removed, under the assumption that, in the long run, investors seek an average return on their equity, in real terms, of between 10% and 20%, and the tariffs and/or occupancy rates (and accommodation capacity) would adjust to the level required to yield 1/ For the "base cases" the interest rate on CIH s loans has been assumed at 6%, since the Government may decide to increase this rate as CIH's official rate rises to 11%. Profitability of Hotels with Current Occupancy Rate, and Incentives (interest at 6%) Internal Rates of Aeturn Cases On Equity On Total Investment Simple After tax Before tax ERR Casablanca 5-btar 10.5 4.6 7.3 10.3 - with 10% increase in investment 7.3 3.2 5.7 n.C. - with no start-up period 45.8 16.7 21.3 n.c. Casablanca 4-6tar negative negative negative negative Casablanca j-btar 1.2 0.4 2.3 5.6 Agadir h-Star 16.9 6.4 9.3 11.7 Agadir 3-btar 19.7 7.6 10.4 12.6 Agadir Vacation Village(a) 15.0 5.4 14.8 17.6 Circuits 4-btar (Fes, Meknes) negative negative 0.9 4.7 Circuit 4-6tar Marrakech 7.4 3.0 5.3 8.5 North 3-6tar beach negative negative negative negative North Vacation Village(a) negative negative negative 2.3 n.c. = not calculated. a/ These are returns to investors under a leasing agreement where the lessee pays the lessor (investor) 10% of total receipts and 10% oi GOP, with a minimum rental equal to his loan repayment and 8% on his equity investment (the latter being inflated). It should be noted that the Northern Vacation Village is non- viable under these terms, since the lessee's GOP is less than the rental payment. The ERR assumes that all payments to the lessee represent gains to the economy, which is evidently untrue when the lessee is a foreign firm (eg Club Mediterran6e). ANNEX 9 Page 9 the returns sought by the investors. For each base case, rates of return on equity with and without incentives lave been plotted on charts at different levels of tariffs and occupancy rates (see Figure 1 and the Table on page 11). By plotting on these charts indifference curves representing a given level of profitability (10%, 15% and 20% return on equity), it has been possible to identify the maximum effects that the removal of the incentives system would have on tariffs (if occupancy rates were to remain constant at current levels) or on occupancy rates (if tariffs were held at the current level in real terms). The results of this analysis are "maximun" because, if incentives were actually removed, neither prices nor occupancies would remain constant, and both would change by less than the percentages shown below. The last column in the table converts the change in occupancy rates to the maximum change in capacity necessary to accommodate a given number of bednights. Put differently, the last column shows the maximum reduction in capacity which might occur with a removal of incentives to handle a given number of bednights.1/ Hotel Profitability, Incentives, and Economic Returns 12. In order to determine whether or not Morocco's tourism investment incentives are justified on economic grounds, we have analyzed the profitability, with and without incentives, of projects when the MEORs obtain, at existing tariff levels. The results of this analysis are set out in the table on page 12. 13. These results lead to the conclusion that incentives are unnecessary to provide satisfactory financial profitability at the minimum economic occupancy rates in the five-star hotels in Casablanca, and in beach hotels in Agadir. On the other hand, existing incentives are insufficient to render investments financial- ly profitable at the MEOR in northern beach hotels and four-star hotels in the Imperial Cities . Prices, even with incentives, would have to rise by 10-17% in four-star circuit hotels (depending on whether the return sought by the investor is 10% or 15%), and by 50% in three-star northern beach hotels, in order to make investment in these types of facility financially attractive at the MEOR. Imperial Cities hotels would appear tc be profitable, at current prices and their MEORs if"sectoral" occupancy rates were attained from the beginning of operations. This might be possible if the hotel is managed and marketed by a well-established chain, or a large tour operator. An in-depth cost-benefit analysis would be necessary to reach a clear-cut conclusion on the effectiveness and justification of the incentives system for Imperial Cities hotels, or even on the need to provide more generous incentives. This cannot be done on the basis of available information. 14. The results also call for the following observations concerning the effects of incentives on hotel profitability: (a) the relative weight of the different forms of investment incentives on profitability is evenly split between the interest rate subsidy and the interest free Government loan, on the one hand, and the various tax exemptions on the other; (b) the proposed - reduction in the interest rate subsidy, which would raise the rate payable by CIHt's borrowers from 4.5% to 6%, would not significantly reduce the profitability of those types of hotels which are already profitable. 1/ The bednights realized in any particular calendar year would be less in the "without incentives" case than in the "with incentives" case, of course, due to higher excess demand at the peak. ANNEX 9 Figure I: Sensitivity of Investors' Rate of Return on AgE 1 Equity Tariffs, Occupancy Rates, and page 10 Tncentives 1th Tnrntives Without Incentives (interest rate = 6%) (interest rate = 11%) AGADIR 3* Tarif Tar¥Ä1f '1, Base- ,ø -4 Base-/, 40 50 60 70 40 50 60 70 CASABLANCA 5* /x -- - k 5 - t T H- Base-- Base- Base- 34, t-t 0 1__ltk___41_ 5 T00 70 40 50 60 70 CIRCUIT 4* .Q -å - -- 1 9 /i 4 4~as U:. JIs, 40 50 60 70 40 50 60 70 Annual Bed Occupancy Rate Annual Bed Occupancy Rate Tariff = room and food receipts per bednight; Base = 1975 level(see Table on page 2). AINNEX Estimated Long-run Effects of Removing Incentives (holding expected rates of return constant) Maximum effect Malimum effect Maximum effect on on prices on occupancy capacity necessary (holding occupancy rates, (holding to handle a given rates constant at prices constant at number of bed- current levels) current levels) nights Agadir 3* hotel Expected return on equity - 10% +21% +26% -21% 15% +23% +29% -22% 20% +27% * * Circuit 4* hotel Expected return on equity - 10% +17% +22% -18% 20% Gasablanca 5* hotel Expected return on 10% +19% +19 -16% equity = 15% +21 -17% 20% +23 -19% * Tariffs and occupancy rates corresponaing to this rate of return were not calculated and could not reasonably be extrapolated for both with and without incentives cases. ANNEX 9 Page 1.2 Rates of Return on Moroccan Hotels at Minimum Economic Occupancy Rates, bensitivity to Assumptions about Incentives With With tax incen- Tax With tives and inte- Incen- Interest rest rate subsi- tives bubsidy dy only only No Incentives Interest rate assumption 46.5 6 11% 6% 11% A. Rate of Return on Equity Casablanca 5* 36.8 34.9 28.2 25.8 20.8 Casablanca 4* 14.3 12.8 6.3 8.5 3.0 Casablanca 3* 21.3 20.6 13.4 14.3 9.3 Agadir 4* 22.1 9.2 Agadir 3* 25.2 24.3 16.0 16.8 10.9 Agadir Vacation Village 19.2 6.7 Circuits 4* 2.3 neg North 3* neg. North Vacation Village neg. neg. B. Rate of Return (after tax) on Total Investment Casablanca 5* 14.0 14.2 14.9 10.9 12.1 Casablanca 4* 5.1 5.3 5.7 3.8 4.2 Casablanca 3* 8.8 8.8 9.4 6.7 7.6 Agadir 4* 8.2 7.1 Agadir 3* 9.1 9.2 9.8 6.8 7.9 Agadir Vacation Village 6.9 5.9 Circuits 4* 0.7 0.7 North 3* neg. North Vacation Village neg. 1.1 C. Rate of Return (before tax) on Total Investment Casablanca 5* 18.2 18.2 18.2 16.3 16.3 Casablanca 4* 8.0 8.0 8.0 6.5 6.5 Casablanca 3* 11.8 11.8 11.8 10.2 10.2 Agadir 4* 11.4 9 .7 Agadir 3* 12.2 12.2 12.2 10.5 10.5 Agadir Vacation Village 16.8 14.8 Circuits 4* 2.8 1.2 North 3* neg. North Vacation Village 2.3 neg. D. "Simple" ERR's: Casablanca 5 = 21.0%; Casablalca 4* = 11%; Casab anca 3* = 14.3%; Agadir 4* = 13.7%; Agadir 3* = 14.4%; Agadir Vacation Village = 19.6%: Circuit 4* = 6.2%; North 3* = negative; North Vacation Village = 2.3%. neg. = negative; blanks = not calculated.  ANNEX 10 MOROCCO Page 1 CREDIT IMMOBILIER ET HOTELIER Major Assumptions for CIH's Four Year Operational and Financial Forecasts A. Operational Forecasts Hotel Loan approvals: They are based upon a detailed review of the status of projects submitted and expected to be submitted to CIH in the next two years; Commitments: Assuming an average four-month lag between approvals and commitments, it is expected that 65% of approvals are committed the same year and 35% the following year. Disbursements: Assuming an average hotel construction period of three years and taking account of the fact that CIH starts disbursing only following a full investment of equity and Government loan funds, commitments will be disbursed as follows: 10% in the first year of commitment 40% in the second year 50% in the third year B. Financial Forecasts - Income Statements Interest on loans 8.75% for all loans outstanding up to November 1975, 10% on new housing and other loans, 11% for new hotel laons thereafter through 1979. Income on loans is computed on the average loan portfolio outstanding at the beginning and end of each fiscal year. Commission: 1.27% of annual disbursements (based on the past three years' trend). Dividend Income: Assumed to increase by 17% in 1976, 30% in 1977, and 50% in 1978 and 1979 respectively. Other Income: Includes revenue of 5% on equipment bonds interest received on bank deposits and miscellaneous income. ANNEX 10 Page 2 Interest Paid on Borrowings: The following rates were applied to the average amount of out- standing debt at the end of the year: - LT Bonds 7.50% - MT Notes 5.75% (1976), 6.00% (1977), 6.50% (1978) - BCP loans in 1975 6.80% to 7.20% - BNDE 7.50% - IBRD 7.0%,7.25% and 8.50% - Bank du Maroc 3.50% - Treasury Loans 4.50% and 6.50% - Managed funds 3.50% and 4.50% - CDG 6.50% - Other Domestic borrowings (average) 5.80% - Other LT Debt (unidentified) 8.50% (1976), 9.0% (1977-79) Other Financial Charges: Resulting from the repayment of bonds - 1.50% of the interest charged on, and 0.50% of the bonds being repaid. These charges apply only to old issues since starting in 1975 CIH handles its own issues. Operating Expenses: Salaries and Wages: have been forecast to increase by 15% in 1976, 12% in 1977 and 10% thereafter. Other Operating Expenses: include office supplies, legal fees, documentation, missions,, receptions, and upkeep and rental costs of regional offices. Estimated on a yearly basis by CIH. Depreciation: of fixed assets and amortization of financial costs related to bond issues and share capital increases are forecast at 15% and 20% respectively. Provision: for doubtful loans set at 2% on hotel loan dis- bursements and 1% on others. Income tax: as a percentage of profits before tax, calculated as follows: up to DH 500,000 40% DH 500,000 to 2.000,000 44% over DR 2.0 million 48% Investment reserve: 5% of the taxable profits between DH 50,000 and DH 150,000 and 8% of such profits abcve D-H 150,000 are allocated to the investment reserve; each year 80% of the investment reserve must by law be used for the purchase of ten-year equipment bonds yielding a 5% interest. ANNEX 10 Page 3 Appropriation of net profits: Legal reserve 5% net profit Dividends 8% of share capital Directors' fees 1.57% share capital held General reserve remaining balance. EMENA/IC & DFC April 1976 ANNEX 11 MOROCCO CREDIT IMMOBILIER ET HOTELIER Estimated Resource Needs and Financing Plan (1976-1978) RESOURCE NEEDS DH Million Expected Commitments: Total Hotels 1976 261.0 66.0 1977 330.0 88.0 1978 390.0 90.0 Total resource requirements: 981.0 244.0 of which in foreign exchange (55% hotel loans) 134.2 FINANCING Local sources: Balance available (Dec. 1975) 64.3 Cash generation (1975-1978) 50.3 Bond issues 550.0 Notes issues 17.0 Share capital increase (1977-1978) 40.0 1 721.6 Foreign Borrowings Uncommitted on Loan 848-MOR (March 31, 1976) 8.4 RESOURCE GAP 251.0 (i) In local currency 125.2 (ii) In foreign currency 125.8 (US $30.4 million) 1/ The share capital will be increased by DH 20 million each year in 1977 and 1978. EMENA/IC & DFC April 1976 MDROCCO CREDIT IHDBILLIER ET HOTELIER Loan Operations: Actual and Forecast 1/ (DR mllion) Approvals Co±amLtents Diabursm ts Actual Hotels Other Total Hotels Other Total otes Other Total 1973 50.8 61.8 112.6 24.7 51.3 76.0 47.7 54.0 101.7 1974 34.5 110.1 144.6 52.2 101.0 153.2 53.6 85.2 138.8 1975 (9 no.) 27.2 159.9 187.1 32.0 111.7 143.7 37.2 96.8 134.0 0 1975 (12 mo.) 60.0 176.0 236.0 46.0 149.o 195.0 47.0 145.0 192.0 2 1976 80.0 206.0 286.0 66.0 195.0 261.0 50.0 196.0 246.0 1977 90.0 258.0 348.0 88.0 242.o 330.0 58.0 245.0 303.0 1978 90.0 310.0 400.0 90.0 300.0 390.0 77.0 278.0 355.0 1979 110.0 382.0 492.0 100.0 335.0 U39.0 90.0 322.0 412.0 Total 1.0 1,332.0 1I762.0 390.0 1t221.0 1,611.0 322.0 1&186.0 1508.0 1/ Revised by the Mission 2/ Actual disbursements for 1975 EMENA/IC & DFC April 1976 ANNEX 13 MDRQCCo CREDIT IMNDBILIER ET HOTELIER Projected Income Statement (:Decadesr 31. 1975-1979) 1974 197 5 .976 197 1978 1979 INCOME (actual) (UnAudited) Interest on loans 48,681 63,497 76,790 100,631 128,804 154,340 Commissions 1.54 2 3_028 3,896 __555 5830 IM 66,052 104 527 133,359 160,170 Net income from managed funds 3,u 1,866 7662 75 Dividend Income 176 332 390 507 760 1,140 Other income 442 3,733 2.863 3.6o6 3,517 3,681 TOTAL INOME JIM 71,983 23,78k4 109,424 13,9 16.L4 EXPENSES: Financial Interest paid 28,500 39,000 55,931 74,412 96,927 117,846 Other financial charges 1 26 1345 166 13 14 13 40,345 74,M_ 97,0717 Operationa Sa e and wages 5,760 7,485 7,860 8,803 9,684 10,652 Other operating expenses 2,464 4,441 4,960 6,082 6,626 7,223 Depreciation 1,372 1,739 1,947 2,462 3,062 3,635 Provision for doubtful loans (168 1288 1 TOTAL EXPENSES 38,389 5 721352 9297 117275o 1 INCOME BEFORE TAXES 13,341 12,805 11,632 16,127 20,748 24,974 Income taxes 6,328 6,039 5,583 7,741 9,959 11,987 NET PROFIT 7,013 6,766 6.049 10.789 12.987 APPROPRIATIONS Investment reserve 1,032 1,016 930 1,290 1,660 1,998 Legal reserve 301 301 302 419 539 649 Dividends 3,200 4,800 4,800 4,800 6,400 8,000 General reserve 2 480 649 17 1,877 2,190 2,340 6,766 8,386 10,789 12,987 RATIOS Income from loans as % of average loan portfolio: 9.0 9.3 9.3 9.7 10.0 10.0 Financial expenses as % of average LT debt 5.8 6.1 6.4 6.8 7.2 7.3 Spread 3.2 3.2 2.9 2.9 2.8 2.7 Interest coverage ratio 1.5 1.4 1.3 1.2 1.2 1.2 Net profit as % average equity 9. 7.9 1,Q 8.4 8.7 9.5 Cash dividends as % net profit 45.2 1. 79.6 57.2 74.1 61.6 Cash dividends as % par value 8.0 8.0 8.0 8.0 8.0 8.0 EMENA/IC & DFC April 1976 ANNEX 14 HD0CCO CREDIT IMIDEILIE T HOTELIER Projected Source and A lication of Funds (1975-1979) 'M 000) 1911 1276 1977g 1978 1979 SOURCES (Eatimated) Net Profit 6,766 6,049 8,386 10,789 12,987 Plus non-cash iteme - Depreciation 1,739 1,947 2,462 3,062 3.635 - Provisions 5,168 1 8 1 1 0 146 Cash reneration 13,673 * 12,233 B'5158 , Loan collections 45,413 46,240 61,800 85,240 112,870 Share capital increase -- - 20,000 20,000 - Equity investment sales 5,002 1,170 1,000 - - Borrowims: or 1bods 110,000 140,000 180,000 230,000 290,000 T notes 29,100 17,000 - - - BCP 30,000 - - - - IBED 19,200 31,000 39,000 30,000 29,000 Treasury 40,000 - - - - Unidentified 10,300 100,000 10000 0000 238,600 252,745 319,000 70, 389, TOTAL RESOURCES 302,688 309,439 414,033 490,398 519,968 APPLICATIONS Loan disbursementas: Hotel loans 47,000 50,000 58,000 77,000 90,000 Housing loans 105,000 140,000 190,000 220,000 250,000 Other loans 4000 51 000 60 000 6 000 67,000 192,00040mO Equity investments 19,460 916 ,0 Purchase of equipment bonds 910 885 1,157 1, 56 1,756 Purchase of fixed assets 900 990 1,090 1,200 1,300 Cost of bond and share issues 2,200 2,800 3,600 4,600 5,800 Dividends and fees 3,200 4,800 4,800 4,800 6,400 Incame tax 6,330 6,039 5,583 7,741 9,959 Repayment of borrowings: LT bonds 22,434 27,743 37,104 49,134 64,476 In notes 15,020 17,020 20 20 - BCP 5,250 8,250 8,250 8,250 6,250 IBRD 1,726 2,868 4,,158 4,592 4,986 BNDE 2,223 2,139 2,238 2,265 2,251 Other debts - - 7.500 15 500 18,100 TOTAL APPLICATIONS 530 278 Net Increase (decrease) in current assets 31035 (14,095) 20.873 25,380 (10,310) RATIO Debt coverage ratio: 0.90 0.96 1.26 1.26 1.38 1/ Excluding current portions of LT loans EMENA/IC & DFC April, 1976 ANNEX 15 MROCCO CREDIT IMNB-IER ST HOTELIR Balance Sheets. Actual and ProJected (December 31, 1974-1979) (DHI'000) ASSETS 1974 1975 19(6 1977 1978 1979 (Actual) (Unaudited) Current Assets Cash and bank 16,882 34,851 14,596 25,762 28,933 24,924 Past-due loan maturities 42,637 52,182 60,491 78,442 90,992 99,010 Less: Provisions (5,651) (7,473) (8,269) ( 9,654) (10,961) (12,467) Current maturities of loans 37,912 51,535 72,703 100,284) 132,786 140,982t Other receivables 28,187 33,530 32,187 ? 22,681 119,967 164,625 17l,08 29n169. 278.044 275,930 Investment Portfolio Hotel loans 354,641 385,377 423,980 473,513 514,513 5b4,959 Housing loans 208,180 275,429 401,109 547,389 717,417 894,499 Other loans 24,364 70,510 102,784 142,268 190,956 237,642 Less: current maturities (37,912) (51,535) (72,703) (100,284) (132,78) (140,982) 549.273 679,781 855,17 1,062886 1,290.100 1,556,118 Equity investments 15,469 29,871 38,372 48,990 53,492 55,492 Equipment bonds 3,714 4,605 5,274 6,820 6,424 6,954 Fixed Assets (net) 2,370 2,581 2,808 3,903 3,021 3,009 Other Assets (net) 2,156 2,853 6,053 9,075 12,396 16,686 TOTAL ASSETS 692,949 884.316 1,079,385 1,351,836 1.643.477 1 LIABILITIES Current Liabilities Short-term borrowings 6,790 10,000 9,465 - - Current maturities LT debt 46,714 57,874 61,267 104,237 126,970 133,949 Interest payable 10,400 18,056 11,594 12,616 12,928 16,323 Other current liabilities 17,579 12,164 ,633,R.186 8.915 1 4i§2 98,094 90 125,041 l, 162272 Long-Term Debt 1/ 1 ,bonds 255,314 332,579 440,353 554,115 687,319 923,510 ?T notes 52,000 66,100 65,410 65,390 65,370 45,370 Subordinated Government bonds 30,000 30,000 30,000 30,000 30,000 30,000 BCP 40,600 65,350 38,850 30,600 24,350 4,100 BNDE 23,830 21,606 17,229 14,964 12,413 7,285 IBRD 45,630 64,216 89,366 123,774 148,78E 172,388 CDG 22,320 22,320 - - - - Banque du Maroc 100,000 100,000 100,000 100,000 100,000 100,000 Gouvernment Funds 4,123 4,221 4,343 4,471 4,604 4,742 Treasury advance - 40,000 40,000 40,000 40,000 40,000 Cther LT debt - 10,300 75,000 1 245,50C 286,0 1/ 573,817 756,692 900,551 1,115,314 1,358,344 1,613,395 Less: current portion (46,740) C57,874) 527,077 698,818 Equity Share capital 60,000 60,000 60,000 80,000 100,000 100,000 Legal reserve 1,747 2,047 2,347 2,649 3,068 3,607 General reserve 13,945 16,425 16,399 16,416 18,313 18 OnA Investment reserve 5,902 6,966 7,880 8,810 10,1o01 1',025 Retained earnings 2/ 2,795 1,966 1,249 11606 4,834 84,389 8744 87,875 111,481 13-2 3,2 TOTAL LIABILITIES 692,949 8 6 1, ,85 1 LiU Li16-0 RATIOS LT debt/Year end equity 6.8 8.6 10.9 10.9 10.9 12.6 Debt/Equity (IBRD Agreement) 5.42/ 6.91/ 6.2- 7.07 7.7 9.2 IBRD debt as % of LT debt 8.0 8.5 9.3 10.1 10.0 9.8 1/ Long Term Debt is net of current maturities in the projected data (1976-1979). 2! Net of dividends and directors' fees for the year (included in "Othee current liabilities"). 3/ Current definition: including DH 19 million of the subordinated government bonds as quasi-equity. 4/ Including in quasi-equity (a) DH 17 million of the subordinated Government bonds and (b) a decreasing portion of the DH 40 million subordinated Government loan,. as explained in para. 5.07 tnd 5.08 of the text. EMENA/IC & DFC Aaiil 1976 ANNEX 16 Page 1 MOROCCO CREDIT IWMOBILIER ET HOTELIER RECOMMENDED ECONOMIC AND FINANCIAL APPRAISAL CRITERIA for CIH-FINANCED HOTEL PROJECTS Introduction 1. As reported elsewhere (para 3.12) CIH's appraisals of hotel projects have improved substantially in recent years. These improvements have included closer scrutiny of project costs, suitability of facilities for their intended market, and strength of management of proposed hotels. Unfortunately, however, projects which are sound financially and technically may not be economically viable, in part due to Morocco's system of generous investment incentives. In- sufficient information is available to make clear and complete recommendations upon desirable changes in the incentives system which would eliminate conflicts between financial and economic viability for all types of hotels in all regions of Morocco. It is possible, however, to identify practical criteria, which, if followed by CIH, would limit if not eliminate the possibility of excessive hotel investment. It is the purpose of this annex to indicate the nature of a 'complete economic criterion for hotel investments, and to describe the 'practical' criteria which are recommended in the short run. Characteristics of a "Complete" Appraisal Criterion 2. The objective of all economic appraisal criteria is to avoid investments which add more to social costs than social benefits. Implementation of "complete" criteria which involve direct calculation of all benefits and costs associated with the expansion of hotel capacity is difficult for four main reasons: a. The main objective of Government policy on tourism is to maximize the net returns from tourists' expenditures. Hotels are but one activity among many which are used by tourists. A 'complete' economic criterion for hotel investments must, therefore, take explicit account of receipts and costs external to the hotel. This presupposes the availability of sound estimates of external receipts and costs for each type of hotel (and for each type of client of a particular type of hotel) and also the adoption of adequate procedures for allocating costs of such indivisible items as infrastructures and Government training and promotional campaigns to the individual hotel. (TAere hotels are on a 'circuit', some external receipts and costs consist of receipts and costs of tourists in other types of hotels.) These problems are not in- superable, but their solutions require considerable analytical effort and also data which do not presently exist in Morocco. b. Estimating costs requires adequate information upon the cost breakdown of different items used inside and outside the hotel, estimation (with the use of the input-output table or by other methods) of the "indirect" as well as direct 'primary factors' used to satisfy tourist demands (i.e. direct and indirect value- ANNEX 16 Page 2 added of different types, foreign exchange, indirect taxes), and application of appropriate shadow prices to these demands for 'primary factors'. In addition to adequate information, this exercise demands substantial computational capacity. c. Increments in receipts due to an expandion of capacity are generallyk less than the receipts which the new capacity will receive, since without the new capacity, some tourists would be accommodated in already existing facilities. (This may be called the 'diversion effect' of new capacity.) In the context of a growing sector, this consideration takes the form of determining which of many alternative rates of capacity utilization is most likely to be optimal. d. In addition, to the extent that demand is less than perfectly elastic with respect to prices charged, the marginal receipts from the capacity expansion will be less than average receipts (i.e. a capacity expansion will result in some reduction in prices over what would have occurred without the capacity increase; in a demand growth situation, higher occupancy rates will tend to be associated with higher prices. This may be referred to as the 'revenue dilution' effect).- 3. Even with availability of the data necessary to carry out the above analyses, the desirability of carrying them out for every proposed hotel project is doubtful. As noted above, hotels are but one component in tourism development prograns which also include heavy expenditures on infrastructures, administra- tive overhe-ids by the state, and investments in 'external' tourist activities. It may well be that 'complete' economic analysis should be carried out to define programs for particular regions, or for promotion of particular types of tourism. One element of such programs would be the identification of target occupancy rates and prices for different types of hotels. The appraisal of individual hotels would then consist of ensuring that (a) they fall within the program identified and/or (b) existing occupancy rates and prices approximate the 'optimal' ones implied by the program, and/or (c) new projects secure some ERR (somehow defined) which, if achieved, would correspond to the optimum for that type of hotel in that region. Which of these, or which combination of these, should be applied would depend upon administrative convenience, and upon the desired degree of decentralization of decision-making among the tourism authori- ties, financial institutions, and individual investors. 1/ The diversion and revenue dilution effects may be ignored for projects of entirely new types in undeveloped regions which tap entirely new markets. It should be noted that hotel capacity is not homogeneous, and that addition- al capacity 'similar' to existing capacity may result in securing some new business through (a) development of new marketing channels (b) slight quali- tative differences in the product offered compared with existing hotels of th; 'same' type. ANNEX 16 Page 3 4. The statistical collection and masterplanning activities to be launched in Morocco may assist with arriving at clear strategies and programs taking account of the above considerations. In the meantime, however, it is necessary to determine whether some more approximate criteria may be found which would, if applied by CIH, ensure that clearly uneconomic projects were not approved. Minimum Economic Occupancy Rate 5. The basic concept on which the proposed criteria are based is the 'minimum economic occupancy rate' (MEOR). The MEOR is the maximum annual bed occupancy rate which is consistent with maintaining the existing monthly p tern of bed occupancies, and a room occupancy rate in the peak month of 90-95%.-L At annual occupancy rates higher than this, the proportion of bednights realized in the peak month would decline due to higher turn-away demand in the peak. At lower occupancy rates, the share of the peak months would increase (due to a reduction in turn-away demand), but the incremental bednights attributable to incremental capacity would also fall. The estimates of MEOR's are as follows: Casablanca, Rabat 65% Agadir 65% Central Circuits (Fes, Meknes) 55% Marrackech 60% Northern beach resorts 40% It is proposed that the derivation of these MEOR's be discussed with the Moroccan authorities, and that such elaborations as are possible with existing information be introduced (for example, in distinguishing MEOR's by category as well as by region), preparato3yto agreeing the exact HEOR's to be employed in appraisal of hotel projects (see para. 7 below). Rates of Return and Minimum Economic Occupancy Rates 6. An examination of various measures of return on investment at the MEOR for several types of Moroccan hotels indicates that there is no unique value of any rate of return concept which would correspond to the MEOR for all types of hotels in all regions. For some hotels, all normal financial and economic rates of return are satisfactory at the MEOR without incentives. For others, financial returns even with incentives are unsatisfactory at the MEOR (see Annex 9). In the latter cases, further analysis would be necessary to determine whether policy 1/ This corresponds to a peak month bed occupancy rate of 80-85% in most Moroccan destinations, except the business cities of Rabat and Casablanca where it probably corresponds to a peak month bed occupancy rate of 75%. These estimates are subject to a substantial margin of error, as they are based upon very imperfect information (See Annex 9). For a sample of four high class hotels catering largely to an individual clientele for which information was available on daily occupancies, the MEOR would involve capacity being fully occupied for 58 to 102 nights in the year (depending upon the hotel and upon the assumptions about maximum peak month occupancy rate). Estimated 'turn-away' demand at the MEOR for these hotels ranges between 5 bednights and 20 bednights per year per bed. ANNEX 16 Page 4 should aim at securing higher prices for these types of hotels (by holding back expansion of capacity) or whether yet additional incentives would be justified in order to make these hotels financially viable at existing tariff levels. Recommended Criteria 7. It is recommended that the CIH finance only those hotels (or hotel expansions) which: (a) are of categories and in regions where average occupancy rates can reasonably be expected to equal the MEOR by the date when the new capacity is opened for business; and (b) are financially viable on the assumptions that the hotel (i) eventually (after its start-up period of lower occu-ncy rates) achieves but does not exceed the MBOR, or the sectoral average, whichever is higher; and (ii) secures tariffs and food and bar receipts no higher than the average for its category and region. For purposes of this criterion, financial viability would mean an after tax return on equity, of at least 12%, a return on total investment of 10%,I'and a debt service ratio of 1.2 or higher. The above benchmarks for financial indicators have been determined partly on the basis of past experience with CIH's project appraisal work (financially viable hotels have been found generally to yield a rate of return higher than 10% on total investment), and partly on an estimate of the minimum financial profitability (12% on equity in real termes) required in the Moroccan con- text to ensure the continued enticement of investors in their projects. The proposed 1.2 debt service coverage ratio is deemed to be the minimum suggested by prudence, to ensure financial equilibrium of hotel enterprise. 8. Although the proposed criteria may seem 'rough' and 'arbitrary7 they shouldbe superior to existing ones. Certainly they would prevent a situation in which financial (and economic, as now calculated) viability may result from optimistic tariffs and occupancy rates based on the implicit assumption (only sometimes borne out in practice) that the hotel will succeed in drawing clientele from existing facilities. The inclusion of the 'financial' criteria under (b) above are necessary and desirable since it is important that projects be financially as well as economically viable. The criteria are not completely mechanistic, as there would be substantial scope for delicate judgments in assign- ing individual projects to appropriate reference groups. Adoption of the criteria would give added impetus to gathering reliable information on existing occupancy rates and tariffs of different types of hotels, thus improving the data base for investment planning. 1/ This is a 'financial' criterion since it does not involve deduction of any indirect taxes included in costs of investment or operation of the hotel. It is recommended that the CIH continue to calculate the "ERR" net of all indirect as well as direct taxes. The ERR will, of course, be higher than the total financial return on investment before income tax. ANNEX 16 Page 8 9. It is recommended that exceptions to these criteria should be considered only in the event of overriding considerations of a social nature (regional develop- ment, income redistribution). Estimation of receipts and costs of projects of an entirely new type, or a completely new region, would, of course, be based upon the best estimates available rather than sectoral averages. Future Criteria 10. As more reliable information becomes available, it may prove desirable to modify the above criteria. The Bank should be ready to discuss improvements and modifications in the light of additional data and analysis. EMENA/IC & DFC March 1976 ANNEX 17 CREDIT IMMOBILIER ET HOTELIER Estimated Schedule of Disbursements For the Proposed Loan Yearly Cumulative (Calendar years) disbursements disbursements (in thousands of dollars) 1976 Fourth quarter 200 200 1977 First quarter 300 500 Second quarter 400 900 Third quarter 800 1,700 Fourth quarter 1,000 2,700 1978 First quarter 1,500 4,200 Second quarter 1,700 5,900 Third quarter 2,400 8,300 Fourth quarter 2,500 10,800 1979 First quarter 2,700 13,500 Second quarter 2,700 16,200 Third quarter 2,500 18,700 Fourth quarter 2,300 21,000 1980 First quarter 1,700 22,700 Second quarter 1,300 24,000 Third quarter 700 24,700 Fourth quarter 300 25,000 Based on the assumptions set out in Annex 10. Final date of sub-project submission is June 30, 1978 and closing date is December 31, 1980. EMENA/IC & DFC April 1976