Morocco - Doukkala Irrigation Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Report No. P-1746-MO] REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR THE DOUKKALA IRRIGATION PROJECT January 21, 1976 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Currency Unit = Moroccan Dirham (DH) DH 1 = US$0.258 US$ 1 = DH 3.88 Fiscal Year: January 1 to December 31  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVFLOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR THE DOUKKALA IRRIGATION PROJECT 1. I submit the following report and recommendation on a proposed loan to the Kingdom of Morocco, for the equivalent of US$30 million, to help fi- nance the Doukkala Irrigation Project. The loan would have a term of 20 years, including 5 years of grace, with interest at 8.5 perceat per annum. PART I - THE ECONOMY 2. An updating economic mission visited Morocco last April and December; its report is due to be issued by the end of January; the following paragraphs are based on the mission's principal findings. Country data are attached as Annex I. 3. During the 1968-72 Plan, Morocco succeeded in accelerating the growth of its economy and in improving the situation of its external payments. Aided substantially by good crops following favorable weather in three years out of five, real GDP growth averaged 5.6 percent per annum during the five- year period. Reflecting the sustained rise in exports during the Plan period and a slower growth of imports in 1971 and 1972, the balance of payments showed a surplus from 1969 onward. These results represented a definite im- provement over those of the preceding decade, during which the rate of real GDP growth had barely exceeded that of population growth, and the balance of payments had been a source of constant concern. These achievements were accompanied by an increase in private consumption averaging about 2 percent per capita in real terms during the five-year period. 4. From 1967 to 1970, the main growth determinants had been exports, tourism and investment, all of which rose substantially; in addition, sizeable stocks were accumulated following the exceptionally good harvest in 1968. By contrast, in 1971-72 exports and tourism together with current government spending were the major factors to sustain economic growth. During these last two years of the Plan, the investment of public and semi-public enterprises de- clined, largely because the state-owned phosphate company (OCP) had completed its expansion program. Government investment stagnated after 1968. Private investors adopted a wait-and-see attitude in the face of political developments This document has a restricted distribution and may be used by recipients only in the performnance of their official duties. Its contents may not otherwise be disclosed without World Bank authonizaon.  - 2 - in 1971 and 1972 and in the expectation of new measures to encourage invest- ment and exports. At the end of the 1968-72 Plan period, there was there- fore an urgent need to revive public and private investment. Particularly in the public sector, absorptive capacity needed to be increased by appro- priate changes in staffing and organization. 5. Following a long period of very slow growth in private consumption, social problems had to be tackled. Over the 1960-71 period, there had been a slow but perceptible decline in real per capita consumption for about one- third of the rural population. Wealth and income differences between cities and villages, among regions, and between rich and poor tended to widen. Un- employment remained high, in 1971 averaging 9 percent of the country's labor force, and ranging between 12 and 16 percent in large urban centers. 6. Recognizing these difficulties and problems, the Government began in 1971 to revise its development policies, paying increasing attention to social objectives. The changed orientations were reflected in the 1973-77 Plan which aims at (1) GDP growth of 7.5 percent per annum in real terms from 1973 to 1977, mainly through a sharp increase in public and private investment and a strategy geared strongly toward increasing exports; and (2) an improve- ment in the distribution of growth benefits among the different social groups and the various regions, in order to achieve greater equity and at the same time increase domestic demand. This improvement was to be brought about through further land distribution to poor farmers, more emphasis on the de- velopment of rainfed agriculture, "Moroccanization' of some industrial and commercial enterprises, reforms designed to make the tax system more equitable and progressive, a price and wage policy designed to enable the poorest seg- ments of the population to satisfy their essential needs, an ambitious pro- gram of low-cost housing, various measures to improve the lot of the rural poor, and increased emphasis on the development of poorest regions. 7. During the first two years of the 1973-77 Plan, the main development policies proposed in the Plan were introduced. Further, in 1974, Morocco ben- efitted from a steep rise in the price of phosphate, its main export product, which provided substantial additional resources compared to the Plan's expec- tation. The Government decided to step up investment spending for the years 1975-1977, partly to reflect cost increases for the original development pro- grams and partly to embark on additional investment projects. Recent Economic Performance 8. In 1973, exports were the only dynamic element in the economy, and real GDP grew less than 3 percent. Agricultural output declined by 11 percent due to drought. Investment rose 3 percent in real terms, because of an insuf- ficient number of fully prepared projects and because of the late publication of the 1973-77 Plan and of new investment incentives.  - 3 - 9. In 1974, by contrast, the economy registered a strong recovery (GDP grew by 10 percent) supported by all growth determinants; agricultural output rose by 14 percent, thanks to good weather conditions and expansion of irrigation: fixed investment increased by 34 percent in real terms due to public sector investment and the implementation of new incentives for semi- public and private investors, and stocks were replenished; exports (Including non-factor services) grew by 14 percent. and Government consumption rose by more than 20 percent at constant prices. 10. The revival of economic activity in 1974 was accompanied by further improvements in the balance of payments. There was a sharp increase in phos- phate export earnings from $192 million in 1973 to $932 million in 1974, due to a 345 percent rise in average export price and a 16 percent growth in quantities exported. This and a further large (52 percent) increase in workers' remittances from Europe were the main factors3 behind a doubling of the current surplus to $237 million in 1974, in spite of increased import payments for foodstuffs and petroleum. The current surplus enabled Morocco to increase short-term financing of its exports to facilitate sales, and to raise the level of its external reserves. These reached $454 million at the end of 1974. 11. Some weak spots should be noted, however. These are: the increased burden (5.4 percent of GDP in 1974) of price suhsidie!; for imported foodstuffs and petroleum: the volume decline of agricultural exports and the high level of import requirements for wheat. sugar, edible oils -and dairy products; the increasingly felt shortage of skilled manpower. parti2ularly at mid-level of technical and managerial qualifications: and the rather low level of reserves in relation to imports (2.4 months at the end of 1974). 12. Available indicators show that the economic and financial situation was less favorable in 1975 than it was in 1974. Two Eactors in particular have held back economic growth. These are: (a) a dezline in phosphate exports and downward pressure on phosphate prices. ani (b) less favorable weather conditions in 1974/75 than in 1973/74 which c3used a decline estimated at 10, in agricultural output. However, th2 growth of fixed investment and the Government's current expenditures continued at the rapid pace that began in 1974. On balance, real GDP growth was only an estimated 2 percent in 1975. At the same time, the internal and external financial situation has tightened compared to 1974. The Governaent's budget showed a substantially increased overall deficit, due to sharply rising current and capital spending. Despite smaller import price rises and a substantial increase in external borrowing, the balance of payments should register for the full Year a very small surplus only. Reserves would be about 2 months of 1975 imports by the end of 1975. The difficulties exDerienced in 1975 should be temporary. A recovery of output and exports is expected in 1976 for the agriculture and phosphate sectors, which should provide the real resources for a further increase in investment. This and greater fiscal discipline likely to be introduced with the 1976 budget law would enable the countrv to ease the financial situation by comparison with 1975.  - 4- Revisions to the 1973-77 Plan 13. The Government revised upward the 1973-77 Plan allocations for the years 1975-77. Government investment appropriations for the five-year period have been raised to DH 25.6 billion (about $6.4 billion) compared to the original DH 11.8 billion. Of the DH 13.8 billion increase, changes to original projects and cost increases represent DH 4.6 billion and new projects for 1975-77, DH 9.2 billion. Excluding defense, new projects fall in the following main categories: - DH 2,500 million for regional development: - DH 1,600 million for transport and commuinications - DH 1,300 million for agriculture and water development; -- DH 400 million for industry: - DH 150 million (to be raised to more than Dli 300 million depend- ing on implementation capacity) for low--cost housing; and - DP 200 million for social services. Since planning is indicative only for the semi-public and private sector, the above allocations do not include investments by this sector. Nevertheless, the Plan revisions contain provisions to prepare for the implementation of two large industrial complexes (chemicals and steel) in the semi-public sector, and expect a vigorous investment growth in the private sector. The State Secretariat for Planning estimates that total investment at current prices could jump from DH 4.2 billion in 1974 to DH 12.0 billion in 1977. This would enable the country to meet the original GDP growth target of 7.5 percent a year for the 1973-77 period. 14. The Plan revisions seem justified overall. Indeed, the achievement of initial (especially social) Plan objectives is eminently desirable. Simi- larly, Morocco's economy has developed to a stage where heavy industry should begin to find a place. The country possesses an obvious comparative advantage in the processing of phosphates, which would tend to stabilize export earnings. However, the Plan revisions raise several issues of importance for Morocco's long-term development strategy and prospects. 15. The steep investment growth foreseen by the plan revisions could exceed the country's absorptive capacity. Following the revival noted in 1974 and 1975, investment in real terms would rise by 39 percent in 1976 and 19 percent in 1977, and continue at very high rates in following years according to the tentative plans for heavy industry. Availability of skilled manpower may restrain the pace of project preparation and implementation. The manpower constraint can only be relieved gradually by training. For large industrial and infrastructure projects, Mlorocco may be able to use foreign services more extensively than in the past, but at considerable cost. In addition, the  Government will have to ensure that the increase in capital intensity implied by the moves into heavy industry would be compatible with the objectives for increasing opportunities for unskilled employment. 16. Financial resources may also restrain invesiment growth. The analysis of Morocco's financial prospects shows that such resources would grow relatively slowly in the next five years. Export earnings are likely to be restrained by a decline in phosphate prices, an,i as a result, the phosphate company's savings which are a large share (36 percent in 1974) of national savings would be restrained. Taking into acrount the objective and policies to improve consumption levels of low-income groups, the growth rate of national savings may be expected to be relatively low. In spite of planned efforts to increase budgetary savings and food import substitution, foreign exchange and national savings are likely to become a constraint on investment towards the end of the decade. 17. Despite the uncertainty over the future evolution of phosphate export receipts, it is likely that investment growth will still reach close to 13.5% p.a. on average during the 1973-77 Plan period. It would exceed the original plan targets for 1973-77, but remain below the revised targets. Provided the volume of phosphate exports recovers in 1976 real GDP gains would average about 6.5 percent yearly during the five years. Private per capita consumption would rise by about 3.5 percent a year, which should correspond to a net im- provement in the situation of low-income groups. Despite heavy external borrowing, the balance of payments would remain strong until 1977. These results would be satisfactory by comparison with the initial objectives of the 1973-77 Plan for output and consumption growth, and for the balance of payments. 18. For the 1978-80 period, however, projected trends call for caution. Taking into account the absorptive capacity and resource availability con- straints, investment growth could slow down to around 10 percent a year in real terms. Such growth and assumed export increases would lead to growth of real GDP of about 7 percent a year, and of private per capita consumption of about 2.5 percent. Import requirements for consumptijon and especially invest- ment would grow rapidly, and with the likely deterioration in terms of trade, the economy's resource gap would widen substantially during the last three years of the decade. To cover it and service accumu:Lated debt, external borrowing requirements on a commitment basis would need to average more than $700 million annually in 1978-80, compared to an actual S553 million in 1974 and an estimated annual average of $540 million in 1975-77. Morocco's borrow- ing capacity seems sufficient to mobilize these amounts from available sources, provided the necessary effort in project preparation for external financing is made. The bulk of borrowings up to 1980 would be from official, bilateral and international sources. 19. External debt and debt service would increase as a result of pro- jected borrowings. Debt outstanding and disbursed would rise from $1.0 bil- lion at the end of 1974 to $2.6 billion at the end of 1980. Debt service would go from $121 million in 1974 to some $464 million in 1980. Debt service  would remain manageable, rising to 11 percent of exports (including non-factor services) in 1980, from 6 percent in 1974. The prolongation beyond 1980 of macro-economic trends foreseen during 1976-80 indicates that external borrow- ing requirements would remain large, due in particular to the rise in import needs for investment. These would lead to substantial debt service obligations, since an increasing share of external borrowing would come from commercial sources. However, with an additional and feasible export effort and provided recourse to commercial sources is kept within reasonable limits, debt service would remain a manageable burden on the balance of payments. PART II - BANK GROUP OPERATIONS IN MOROCCO 20. Bank and IDA lending to Morocco has supported 23 projects with financing totalling $520 million (net of cancellations), of which $304.5 mil- lion has been lent since the beginning of FY73. IDA credits, totalling $50.8 million, have been made available for five projects. IFC investments have amounted to $2.9 million. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of November 30, 1975, and notes on the execution of ongoing IBRD/IDA projects. In some cases, delays have been caused by management or procurement difficulties, and recently the risk of cost overruns has increased due to the upsurge in investment activity in Morocco and the recent acceleration of inflation. However, performance in project execution has considerably improved during the last two years. 21. Past Bank Group lending has been concentrated in the industrial and agricultural sectors, which have accounted for 70 percent of total net commit- ments; the balance is accounted for by utilities (14 percent), roads (8 per- cent), tourism (5 percent) and education (3 percent). Apart from the trans- fer of resources to Morocco (Bank Group gross disbursements amounted to 5.5 percent of total fixed investment during 1970-74), the main objectives of lending were to foster and strengthen development institutions, provide tech- nical assistance, particularly for project preparation, and increase productive capacity, particularly in order to improve the balance of payments. 22. While these objectives remain, emphasis is now also being given to supporting the new orientation of the Government's development effort in the field of income distribution. Future Bank lending will reflect this orienta- tion. An increasing share of Bank Group lending will be devoted to projects developing directly or indirectly the productive capacity of the lowest urban and rural income groups. 23. Past lending for agriculture has supported irrigation development and credit. While continued lending for irrigation is envisaged, greater emphasis will be given to supporting the improvement of rainfed farming, and lending will in general focus on support to small farmers. A first project for the development of rainfed agriculture in the Meknes region has been approved in FY 1975. Projects for livestock/rural development in a rainfed zone in northern Morocco, for agricultural credit and for developing produc- tion of fruits and vegetables are being prepared.  - 7 - 24. Continued lending for industry and tourism l:hrough two DFC's (Banque Nationale pour le Developpement Economique and Credit Immobilier et Hotelier) will be proposed. A third line of credit for CIII is now being ap- praised. A project for the construction of a large cement plant in the less developed northeast part of the country is being prepared, and joint finan- cing of this project with the Arab Fund for Economic and Social Development is envisaged. A tourism infrastructure project which would alleviate the scarcity of improved land for hotel development in the Agadir region is being presented to the Executive Directors along with the proposed project. Pro- jects in these sectors help to raise foreign exchange earnings and to improve sectoral policies. 25. A sites' and services project in Casablanca Ls being prepared. It should contribute to solving the problem of rapid growth of slum areas. A substantial social services component is envisaged. [he Bank is executing agency for project preparation being financed by UNDP; UNDP is also providing technical assistance for overall planning of the sector. A second Water Supply project is being appraised to meet the needs of several urban and rural centers. A multipurpose development, mainly for power but also with substantial irrigation and industrial and potable wat,sr supply benefits, located on the Oum-er-R'bia river, is being appraised. 26. Education is a critical bottleneck in Moroc-o's development. Two IDA credits have been made to develop secondary education and teacher training and to improve technical and vocational training. A proposed third project concentrates on general education in rural areas and specific skill training. These objectives would be pursued through a planned fDurth project. 27. A consultative group for Morocco was formed in April 1967 under the chairmanship of the Bank. It includes Belgium, Canada, France, Germany, Italy, Japan, Kuwait, Spain, the U.K., the U.S., UNDP, IMF, OECD/DAC. the African Development Bank and the European Investment Bank. The last meeting of the Group, on March 28 and 29, 1974, expressed satisfaction with the improvement in Morocco's economic performance in recent years, and the emphasis in the Third Five-Year Plan (1973-77) on improving the distribution of growth benefits. The gross inflow of official loans and grants to Morocco rose from $129 mil- lion in 1966 to $159 million (of which $18 million in grants) in 1971, but temporarily fell to $128 million in 1972 and $121 million in 1973; in 1974 the gross inflow rose again to $190 million. The major sources of aid were France, the U.S., Germany and the Bank Group. 28. At the end of 1974, the Bank Group's share in Morocco's external public debt was estimated at 17 percent on a disbursement basis. The share of the Bank Group in debt service was 14.5 percent ir. 1973 and 12 percent in 1974. By 1980 the Bank Group's shares in debt outstanding and in debt service are expected to rise to about 24 percent and 15 percent respectively.  - 8 - PART III - AGRICULTURE IN MOROCCO 29. Agriculture is the most important economic activity in Morocco. An average of six million ha are presently cultivated each year, of which about 1/2 million ha are perennially irrigated. About 55 percent of the labor force is directly dependent upon agriculture for a livelihood. Until the recent rise in phosphate prices, the sector contributed about one third of GDP and accounted for over half of merchandise exports. Poor performance of the agricultural sector in the decade after Independence contributed to general economic stagnation, while in the years 1967-72 more rapid growth of agriculture - partly because previous large investments in the modern sector began to bear fruit - was accompanied by overall expansion. Despite past development of irrigation, performance of the sector is very sensitive to the substantial variations in annual rainfall which affect much of the country. In 1972/3 and again in 1974/5, inadequate rainfall seriously affected crop production and overall growth performance, despite rapid expansion in mining and manufacturing. 30. Until recently, the Government's intervention in the agricultural sector concentrated on the expansion of irrigated farming. During the Second Five Year Plan, 26 percent of total Government development expenditure was devoted to dams and irrigated farming. Under the Third Five-Year Plan, this share is planned to decline to about 14 percent. Greater attention is being given to improvement of rainfed agriculture, livestock production, training, improvement of the extension service, credit to small farmers, research and marketing. Farmgate prices were sharply increased in December 1973, and again in November 1974, to encourage the production of cereals, sugar, edible oil seeds and dairy products. 31. In many parts of the country, the small size and fragmentation of holdings, and complex traditional tenure systems. frequently involving joint ownership, have been major obstacles to improvinp agricultural productivity. The Government has taken various measures to overcome these problems, and to encourage the adoption of modern cultivation methods, particularly on lands with high production potential. First, under legislation introduced in 1962, the Government has successfully started a prograr of land consolidation; during the Second Five Year Plan, 1968-72, 80,000 ha benefitted. Secondly, the Government has acquired land, previously held by foreigners, for distribu- tion to the rural poor, both small farmers and landless. Two hundred and twenty thousand ha were acquired between 1963 and 1965, and legislation passed in 1973 provided for the acquisition of at least a further 326,000 ha. Under a law of 1966 (amended in December 1972) the Government is distributing this and other state-owned land to Moroccan farmers meeting competence, poverty, age and character criteria. Recipients are obliged to renounce all other rights to land and to join a Government-sponsored cooperative. Some 180,000 ha were distributed by the end of 1972, and the Plan target is to distribute a further 395,000 ha by end 1977. Thirdly the Agricultural Investment Code enacted in 1969 gave powers to the Government to organize  - 9 - agricultural development in irrigated areas. The Code provides for transforma- tion of some tribal land into individually held freehold plots, prevents exces- sive fragmentation of holdings, and obliges farmers to follow an approved cropping pattern in exchange for various subsidies. 32. The legislation as a whole has been carefully designed to ensure that changes in the tenure system, particularly the transfer of foreign-owned farms to small Moroccan farmers, do not lead to decliiies in productivity. Implementation, however, is complex and slow due to the limits of the Govern- ment's administrative capacity. So far the land reform program has touched only a very small proportion of poor farmers (about 1 percent), and this proportion will rise to only about 5 percent with the implementation of the 1973-77 program. Moreover, its impact has been concentrated in the irrigated areas. 33. Government activity in the agricultural sector in Morocco is the primary responsibility of the Ministry of Agriculture and Agrarian Reform (MARA). The Ministry's activities are concentrated in the central Director- ates of Agricultural Development and of Equipment, in provincial services which serve rainfed areas, and in largely autonomous regional development offices (ORMVA's) for irrigated areas. There are also three public institu- tions with country wide responsibilities in the sector: The National Agri- cultural Credit Bank (CNCA), the Cereals and Pulses Trade Office (OCICL) and the Export and Trade Company (OCE). Two state-owned companies are responsible for managing the land acquired by the Government from foreigners, prior to its eventual distribution under the land reform programmee the Farm Development Corporation (SODEA), established in 1972, is primarily responsible for managing plantations while the Agricultural Land Management Corporation (SOGETA), established in 1973, is primarily responsible for managing the annual crop land acquired from foreign owners in March 1973. PART IV - THE PROJECT Background 34. The Oum-er-Rbia is the second largest river in Morocco, and flows from the Middle Atlas mountains near Khenifra in a westward arc to reach the sea one hundred kilometres south of Casablanca. The river and its tributaries have long served as the source of irrigation waters for two separate areas of relatively dense population but limited rainfall: the Tadla plain near Beni Mellal, and the Doukkala region, south of El Jadida. Diversion works constructed before Independence - at Bin-el-Ouidane cn the El Abid and at Kasba Tadla and Im Fout on the Oum-er--Rhia -- permitted the development of modern irrigation in both these areas (See Map 11853). 35. In 1969, following suggestions made by the Bank, the Government com- missioned preparation of a Master Plan for the Oum-er-Rbia basin, a preliminary version of which was completed in 1971. Subsequently water available from the  - 10 - Oum-er-Rbia's main tributaries was reallocated for upstream use, greatly in- creased downstream demands for water for industrial purposes emerged as a re- sult of plans to construct a new port and petrochemical complex on the coast near Casablanca, and more detailed regulation sttudies for the existing diversion structures in the river basin became available. To take account of these changes, a revised Master Plan was prepared by consultants in 1974 and 1975. At the same time, with assistance from the FAO/IBRD Co-operative Programme, the same consultants prepared a feasibility study for the expansion of irri- gation in the Doukkala and the Government prepared a feasibility study for the rehabilitation of the Beni Amir Perimetre on the Tadla plain, both of which emerged as the priority investments at an early stage of preparing the revised Master Plan. The proposed project covers the Doukkala extension while the Beni Amir Rehabilitation Project is to be financed by the Arab Fund for Economic and Social Development. Both projects were appraised in April/May 1975 by a joint Bank/Arab Fund mission. The Appraisal Report, No. 915-MOR of January 9, 1976, is being distributed separately to the Executive Directors. A loan and project summary is given in Annex III. At negotiations in Washing- ton in December 1975, the Moroccan delegation was led by Mr. Oulad Chrif, Director of Equipment in the Ministry of Agriculture and Agrarian Reform. Observers from USAID, which is likely to provide co-financing for the project (paragraph 48) and from the Arab Fund also participated. Project Description 36. The purpose of the project is to provide for a rational development of irrigation in the main Oum-er-Rbia basin, increase agricultural production, and ensure that a substantial share of the benefits from increased production accrue to the poorest members of the population. The project covers an area of 15,400 ha. of land presently cultivated under unfavourable rainfed condi- tions in the Doukkala Perimetre, which is located in the Province of El Jadida (see Map 11853). The project consists of: (a) in the Doukkala: - enlargement of the main supply canal (29 km), construction of about 6 km of feeder canal and installation of automatic flow regulators- - construction of 4 electric pumping stations with a total installed capacitv of about 8,300 kw. and each with an elevated equalising reservoir~ construction of 50 km of 6O kv and 50 km of 22 kv power transmission lines and a substation for pumping stations; land preparation and consolidation: installation of 416 km of a huried pipe distribution svstem and associated mobile sprinkler equipment; 520,000 m of excavation for main drainage channels  - 11 - - 108 km of classified road rehabilitation and 85 km construction of new classified roads; - construction of farm access roads and windbreaks, - construction of buildings and provision of equipment for extension, operating, maintenance, artificial insemination and research services. and installatior. of a telephone net- work: - construction of six new milk collecting centres; - provision of village infrastructure: - provision of consulting engineering services. (b) a bilharzia control programme for the Province of El Jadidat (c) a feasibility study for irrigation, water supply and power development based on a dam at Dechra-el-Oued (see map)l (d) a feasibility study for the production, processing and marketing of fruits and vegetables in the Massa region in nsouthern Morocco. Full development of the project would be reached in 1989, ten years after completion of physical construction. By that tLme, on an indicative basis, incremental annual production of the main crops to be produced under the project would be approximately: 130,000 tons of sugar beet; 15,000 tons of milk; 54,000 tons of tomatoes; 2,000 tons of cotton; 1,300 tons of beef; 9,500 tons of wheat; and 8,700 tons of maize. Cotton and tomato production would be exported after local processing in existing i-acilities. The remaining production would he consumed within Morocco, reducing the country's reliance upon imports. Existing marketing and processing faciLities for these crops are adequate, except for milk, for which additional collecting centres will be constructed under the project, and sugar, for which the Government would under- take to construct additional processing capacity when it is required for project needs, probably in 1982 (Section 4.07 draft Loan Agreement). 37. All land in the project area is presently held as private freehold and is characterized by a high degree of fragmentation. Most farmers in the project area are smallholders, with present per capita incomes well below the national average, 78 percent of farmers have holdings of less than 5 ha. Under the project and in accordance with existing legislation, holdings would be consolidated in time for execution of the other project components. Future subdivision of holdings would require prior approval and would not in any case be permitted where it would lead to the formation of holdings of less than 5 ha. Land consolidation would be carried out in such a way as to permit the most efficient lavout of the irrigation system.  - 12 - 38. Irrigation would be by a sprinkler system, which is necessary be- cause of soil characteristics and undulating topography, and which is prefer- able because of the prospect of faster development, earlier returns and greater water economy than would be possible with a gravity system. 39. Considerable population movements would be necessary as a result of introducing irrigation. The project provides for creation of seven village centres, all with treated public water supply, paved roads, public lighting and a primary school. Farmers would be encouraged to move to these centres in order to benefit from the communal services. Housing at these centres would be constructed by the farmers themselves. 40. The incidence of bilharzia in the Doukkala perimeter has not been investigated, although vector snails have been found. However, experience in other irrigated areas in Morocco which have been surveyed for bilharzia (the Moulouya perimeter in north-east Morocco, and the Beni Amir perimeter) indicates that the incidence of bilharzia in the Doukkala is likely to be significant. Under the project, investigation of the incidence of bilharzia, control of vector snails and treatment of the human population would be carried out throughout the Province of El Jadida. The proposed project would provide an unfavorable environment for the development of bilharzia, since it is based on a sprinkler system. However, to ensure that project execution would not aggravate any incidence of bilharzia, its incidence would be monitored on a regular basis in the Doukkala perimeter, and any necessary steps would be taken to prevent its increase (Section 4.06, draft Loan Agreement). 41. Execution of the Beni Amir Rehabilitation project (paragraph 35) and of the proposed project would complete irrigation development possible in the main Oum-er-Rbia basin using existing diversion structures at Kasba Tadla (serving the Beni Amir) and at Im Fout (serving the Doukkala). For the longer term, the Master Plan (paragraph 35) provides for further development through the construction of dams at Sidi Cheho and Dechra-el-Oued (see Map). The dam at Sidi Cheho, which is now being appraised for Bank financing, would provide for power generation, the provision of industrial and potable water to the coastal zone, and further irrigation development in the Doukkala. The Dechra- el-Oued dam would provide electric power, potable and industrial water and water to extend the Beni Amir and Beni Moussa Irrigation Perimetres on the Tadla plain. The project would include a feasibility study by consultants for the developments based on the Dechra-el-Oued dam. 42. Irrigation development is just beginning in the Massa region in southern Morocco on the basis of the recently completed Youssef-bin-Tachfine dam. The area is particularly suited for the development of fruits and vege- tables for export to Europe, provided formidable problems of organization can be overcome. The project includes a feasibility study for the development of fruits and vegetables production and marketing for the Massa region, for which consultants would be employed by July 1, 1976 (Section 3.02(b), draft Loan Agreement).  - 13 - Project Execution 43. Execution of the project would primarily be the responsibility of the Regional Agricultural Development Office for the Doukkala (ORMVAD). ORMVAD is being reorganized to enable it to meet project needs as well as to cope with the major ongoing task of agricultural development on 27,100 ha already equipped for irrigation. A subdivision of OFMVAD has been created with a chief directly responsible to the Director, to coordinate project construc- tion. The Design and Construction Service of ORMVAD would be responsible for land consolidation and for design and supervision of construction of the irri- gation and drainage works, farm access roads, project buildings and equipment (except for research), the milk collecting centres and village infrastructure (except schools). Overall operation and major maintenance of the irrigation network would be the responsibility of a operation and maintenance subdivision of the Operation and Maintainance Service of ORMVAD. Engineering consultants would assist the Design and Construction Service in carrying out its task, and would be responsible for training staff in operation and maintenance of the irrigation system. 44. A subdivision of ORMVAD would be created by 1979 with responsibility for extension services, supported by ORMVAD's Agricultural and Livestock services. The posts of head of this subdivision, as well as of the construc- tion subdivision (paragraph 43) would at all times be filled by persons with qualifications and experience necessary for successful implementation of the project (Section 4.08(b), draft Loan Agreement). Five Development Centres (CMV's) under the authority of the extension subdivison would form the basic channel for providing extension advice to farmers. They would also be respon- sible for organising water allocation to hydrants, and for recording use of water for billing purposes. Sufficient extension and other staff would be employed to meet the needs of the project (Section 4.03(c), draft Loan Agree- ment). Each CMV would be headed by an agriculturalist, and would be staffed by agricultural agents, who together with subject matter specialists from the Agricultural and Livestock services would provide day-to-day extension advice. In accordance with the 1969 Agricultural Investment Code, farmers would follow approved cropping patterns in exchange for input subsidies. The CMVs would also act as stores for agricultural inputs and would be responsible for minor repairs to the irrigation network. 45. As is the case already in the Doukkala as well as in other parts of Morocco, farmers would form co-operatives for various purposes, with assistance from the extension services. Water users associations would be formed to organize water allocation from hydrants. In addition, farmers would form groups to own, operate, maintain and replace the mobile sprinkler units. Ser- vice co-operatives would be formed to permit the bulk purchase of inputs and bulk marketing, for joint ownership of agricultural equipment, and to facili- tate the provision of extension advice and credit. The milk collection centres would also be run on a co-operative basis. 46. Organizations other than ORMVAD would be involved in the project. The Ministry of Education would supervise construction of and operate the primary schools. The Ministry of Health would elaborate and implement the  - 14 - bilharzia control programme for the Province of El Jadida. The National Elec- tricity Office would supervise construction of and maintain the power connec- ting lines, and the Roads Division of the Ministry of Public Works and Communications would supervise construction, reinforcement and maintenance of classified roads. The Agricultural Research Directorate of MARA would be responsible for the expansion under the project and continued operation of the Zemamra experimental station, which would become the main station in the region for applied research and seed production. Farmers' credit needs under the project would be met by Regional (CRCA) and local (CLCA) branches of the National Agricultural Credit Bank. The Equipment Directorate of MARA would supervise preparation of the feasibility study for multipurpose development on the basis of the dam at Dechra-el-Oued, in coordination with the National Water and Electricity Offices. OCE and the Regional Agricultural Development Office for Souss-Massa would supervise preparation of the fruits and vege- tables feasibility study. 47. A Coordination Committee would be established to provide coordina- tion between the different agencies involved in the irrigation component of the project. The Committee would meet not less than once every three months to approve quarterly progress reports, review past achievements, determine future work programmes for each of the agencies concerned, and ensure co- ordination between them (Section 3.01(b), draft Loan Agreement). The quarter- ly progress reports would provide an important vehicle for monitoring project execution. In addition, ORMVAD would monitor the evoltition of production and incomes under the project to allow evaluation of actual project benefits (Section 4.06, draft Loan Agreement). Cost Estimates and Financing Plan 48. Cost estimates are shown in Annex III and are summarised below (including import duties and local taxes) Millions of US$ Local Foreign Total Doukkala Irrigation Extension 35.6 29.2 64.8 Bilharzia Control 0.1 0.3 0.4 Dechra-el-Oued Dam Feasibility Study 0.1 0.3 0.4 Fruits and Vegetables Feasibility Study 0.1 0.2 0.3 Contingencies 16.5 12.0 28.5 TOTAL 52.4 42.0 94.4 of which, duties and taxes 18.5 - 18.5 While a final decision has not yet been taken, it is expected that parallel financing for the project will be provided by the US Agency for International Development (USAID). In the event that USAID financing is not made available for the project, the necessary funds to complete the financing plan would be p rovided by the Moroccan Government. USAID lending would be in two tranches  - 15 - of $5.0 and $8.0 million, each with a term of 40 years, including 10 years of grace, with interest at 2 percent per annum during thE: grace period and 3 percent thereafter. The USAID loans would finance (i) the cost in the United States or specified developing countries of equipment for three pumping sta- tions, the irrigation hydrants, mobile sprinkler equipment, and part of the equipment for operating and maintaining the irrigation network and for the CMVs; and (ii) 75 percent of the total cost of civil works for the pumping stations (excluding the reservoirs) and village water supply, including about $1 million of local cost financing. The equipment items were selected for USAID financing on the grounds that their procurement from the US is not ex- pected to materially increase the cost of the project. The proposed Bank loan of $30 million would be made to the Government, and would finance the estimated foreign exchange cost of the remaining project items, or about 40 percent of total project cost net of duties and taxes. The cost of farm development, consisting of purchase of livestock and agricultural inputs, and construction of stables, would be financed by contributions from farmers (excluding from the table above) and by agricultural credit made available by the CRCA and CLCA. The remaining project costs would be borne by the Government, through appropriate budgetary allocations. Recovery of Irrigation Network Costs 49. The Agricultural Investment Code of 1969 provides for the recovery from each farmer of his share of operating and maintenance costs and up to a maximum of 40 percent of the capital costs of the irr:igation network. Costs are recovered through (a) a betterment levy of DH 1,500 per hectare (b) a basic water charge which has so far been fixed at a maximum base rate of DH 29 per thousand cubic metres in other irrigation areas in Morocco and (c) a supplementary water charge to cover the cost of energy used for pumping. For holdings up to 20 ha, the first 5 ha are exempt from the betterment levy, and in addition farmers can choose to pay the levy through annual installments over 20 years, with three years grace and at four percent interest. Over the first five years of irrigated cultivation, the amount of the basic water charge is increased linearly to the full base rate. 50. ORMVAD would levy and collect, from the sta:t of irrigation, and re- view at its own initiative or the request of the Bank, charges to recover over the life of the project actual operation and maintenance costs and a reasonable share of actual capital costs, taking account of beneEiciaries incentives and capacity to pay, and subject to the limitation that, in any year after the full base rate of water charge is reached, the water charge and supplementary pump- ing charge would together cover at least actual operating and maintenance costs (Section 4.04, draft Loan Agreement). Agreement has been reached on the method of calculating the recovery charges and that the applicable share of capital costs to be recovered from farmers with more than 20 ha would be 40 percent, the maximum possible under existing legislation; these agreements would be set out in a supplemental letter to the Loan Agreement. On the basis of the agreed method of calculation, 1975 prices and a 10 percent dis- count rate, the basic and supplementary water charges would be DH 115 and DH 32 per thousand cubic metres respectively; together, they would be about 400 percent higher than the charges presently imposed elsewhere in Morocco. Again using a discount rate of 10 percent per year, sich charges, together  - 16 - with the betterment levy, would recover 50 percent of total costs. The Gov- ernment's overall rate of recovery would be 67 percent if account is taken of incremental income tax revenue and the differences between Government-controlled farm-gate prices and the value of agricultural commodities in world trade, par- ticularly for sugar. The betterment levy and basic and supplementary charges would account for 43 and 53 percent of the increase in gross income accruing to farmers on 2 and 25 ha respectively. 51. The Government is presently undertaking, on its own initiative, a re- view of irrigation cost recovery charges throughout Morocco. The Government has indicated its intention, following the review, to implement before 1978 automatic adjustment of the basic water charge through indexing, as provided for under existing legislation. The degree of progressiveness of recovery charges is also being reviewed. In order to facilitate decisions on changes to the cost recovery charges under the Project, the Government would maintain separate accounts for capital, operating, maintenance and replacement costs for the irrigation network in the project area and for the revenues derived from each of the three recovery charges (Section 4.02(c), draft Loan Agreement). Procurement 52. The major items to be financed by the Bank loan would be procured through international competitive bidding in accordance with Bank Guidelines for Procurement, and would be grouped as far as practicable into twelve lots for tendering purposes (Annex III). A preference margin of 15 percent or the prevailing customs duty, whichever is less, would be extended to local manu- facturers in the evaluation of bids for equipment. 53. Individual purchases of equipment in amounts not exceeding $80,000 per contract and $700,000 in the aggregate, and contracts for the construction of village infrastructure, miscellaneous buildings, telephone facilities, wind- breaks and works for land consolidation, and those for the purchase of mollus- cicides and medicines, would be procured in accordance with applicable local procedures. These items are scattered throughout the project area, or involve amounts too small to attract foreign bids, or are not suitable for procurement through competitive bidding (vehicles, molluscicides). Bank staff have reviewed the local procedures and found them acceptable. There is adequate competition. Consultants services would be procured in accordance with Bank guidelines. Disbursements 54. The proposed Bank loan would be disbursed by March 1981, and would finance: (a) 60 percent of the cost of power transmission lines and related equipment; (b) 41 percent of civil works costs;  - 17 - (c) 100 percent of the foreign cost of imported goods or of the ex- factory cost of locally produced goods procured through inter- national competitive bidding, and 70 percent of other locally procured goods; and (d) 74 percent of the total cost of consultants. Retroactive Financing 55. Contracts for power supply, electromechanicel equipment for one pumping station, and consultants, awarded according tc, Bank guidelines since May 31, 1975, would qualify for retroactive financing up to a maximum of $1.5 million (paragraph 4, Schedule 2, draft Loan Agreement). Justification 56. Together with the Beni Amir Rehabilitation Plroject (paragraph 35), the project forms the first phase of a long term programme for irrigation development in the Oum-er-Rbia river basin. The main benefit would be a substantial increase in agricultural production. The project would contribute to meeting the domestic demand for sugar, milk, meat, and cereals, equivalent to about $14 million per year at full development, and would generate exports of cotton and vegetables equivalent to about $3 million per year. Incomes of the 3,300 farm families benefitting from the project would be increased by about $9 million per year, an increase of 345 percent, Employment oppor- tunities for these families would increase by about 4000 man-years per year, mainly during periods of presently low seasonal demand; employment opportunities in crop processing and other project-related activities would also be increased. At present about 95 percent of the beneficiaries rece:ive incomes of less than one-third of the national average. Through its land consolidation component, the project would eliminate fragmentation, thereby improving agricultural ef- ficiency. The rural infrastructure components of the project would improve living conditions for the project beneficiaries. Through the bilharzia con- trol programme and the monitoring of the incidence of bilharzia, the project would improve and protect rural health. The economic rate of return of the irrigation development component of the project, which accounts for 81 percent of project costs, is estimated at 11.4 percent; it would decline to 9.3 and 8.8 percent respectively if costs increased or benefil:s decreased by 20 percent. PART V - LEGAL INSTRUMENTS AND AUTHORITY 57. The draft Loan Agreement between the Kingdom of Morocco and the Bank, the Report of the Committee provided for the Arcicle III, Section 4 (iii) of the Articles of Agreement, and the text of a resolution approving the pro- posed loan are being distributed to the Executive Directors separately. 58. Features of the Agreement of special intere,t are described in paragraphs 36, 40, 42, 44, 47, 50, 51, and 55 of this report.  - 18 - 59. Establishment of the Project Coordinating Committee (paragraph 47) would be an additional condition of effectiveness (Section 6.01, draft Loan Agreement). 60. I am satisfied that the proposed loan wiould comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 61. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments January 21, 1976  Annex 1 Page 1 of 3 pages 33233 30T6n3 307 7603AR 300.06 33.31 s*.r s.. 60o.3 33504 77.6 16323 57370 33030s" 2. 353.00