Morocco - CIOR Cement Project

Document of L]BtLE C W The World Bank IFOa ]FIFIRIC]AL USE ONLY Report No.P-1980-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CIMENTERIE DE L'ORIENTAL WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR THE CIOR CEMENT PROJECT March 9, 1977 % This dIenmmenmeuths 5 nireted distributioin mI mny be used by recipients ounly im the peIroFm5mce of| tbehr o2c1d Iduties. lls contemns may meo oJiMerwise be dseDowod wligfout World ]>na athozrz2onm.  Currency Equivalents US $ 1.0n DH 4.50 DH 1.00 ITS $ 0.22 KD 1.00 TiS $ 3.50 ABBREVIATIONS Arab Fund: Arab Fund for Economic and Social Development APCM: Associated Portland Cement Manufacturers Limited BEPI: Bureau d'Etudes et de Participations Industrielles BNDE: Banque Nationale pour le Developpement Economique CIMA: Cimenterie Maghrebine CIOR: Cimenterie de l'Oriental KD- Kuwaiti Dinar OCP* Office Cherifien des Phosphates ODI: Office pour le Developpement Tndustriel ONCF: Office National des Chemins de Fer SNMC: Socifte Nationale des Materiaux de Construction (Algerian Shareholders of CTMA) tpy: Metric Ton Per Year  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE CIMENTERIE DE L'ORIENTAL WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR THE CIOR CEMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to Cimenterie de l'Oriental (CIOR), for the equivalent of US$45 million, with the guarantee of the Kingdom of Morocco to help finance the CIOR Cement Project. The loan would have a term of 14 years, including three years of grace, with interest at 8.50 percent per annum. The Government of Morocco would charge CIOR a guarantee fee of 1.5 percent per annum on the outstanding amount of the Bank loan, bringing the cost of the loan to CIOR to 10 percent per annum. The Arab Fund for Economic and Social Development (the Arab Fund) is expected to provide parallel financing for the project in the amount of Kuwaiti Dinars (KD) 7 million (US$24.5 million equivalent, see para. 46). The Arab Fund loan would have a term of 17 years, including 3 years of grace, with interest at 6.5 percent per annum. PART I - THE ECONOMY I/ 2. A report entitled "Current Economic Position and Prospects of Morocco" (1021-MOR, dated January 26, 1976) was distributed to the Executive Directors on February 13, 1976. An updating economic mission visited Morocco in June 1976, and the following is based on this mission's findings. 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 improvement 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 govern- ment spending were the major factors to sustain economic growth. During 1/ This part has been slightly revised from President's Report No. P1966-MOR on a Third Agricultural Credit Project, dated December 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 discled without World Bank authorization.  - 2 - these last two years of the Plan, the investment of public and semi-public enterprises declined, largely because the state-owned phosphate company (OCP) had completed its expansion program. Government investment stagnated after 1968. Private investors adopted a wait-and-see attitude in the face of political developments in 1971 and 1972 and in the expectation of new measures to encourage investment and exports. At the end of the 1968-72 Plan period, there was therefore an urgent need to revive public and private investment. Particularly in the public sector, absorptive capacity needed to be increased by appropriate 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 1969-71 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 a modest program of distributing colon lands to poor farmers, more emphasis on the development of rainfed agriculture, "Moroccanization" of some industrial and commercial enterprises, a price and wage policy designed to enable the poorest segments of the population to satisfy their essential needs, an ambitious program of low-cost housing, various measures to improve the lot of the rural poor, and increased emphasis on the development of poorest regions. 7. In 1974 and 1975, Morocco benefitted from a large increase in the average export price of phosphate, its main export product, which provided substantial additional resources compared to the Plan's expectation. The Government decided to step up investment spending for the years 1975-77, and the allocations for investment by the public and semi-public sectors were increased substantially in the 1975 and 1976 Budget Laws. Part of the additional allocations were to cover investment cost increases, and a larger part to launch expanded or new investment programs. Recent Economic Performance 8. During the first three years of the 1973-77 Plan period, Morocco's overall economic performance improved substantially as compared to the past. Gross fixed investment rose sharply and reached 24 percent of GDP in 1975 or twice the 1972 level; investments in the public and semi-public sectors con- tributed strongly to this increase and there was also a good response on the  - 3 - part of private investors to the new incentives introduced in 1973. Indus- trial growth accelerated to an average annual rate of 11.5 percent for the first three years of the Plan compared to 6 percent in 1968-72, in large part because of the vigorous expansion of construction in response to rising investment demand. At the same time, increased emphasis was put on achieving the social objectives of the 1973-77 Plan with the implementation of an accelerated low-cost housing program, expanded investments in social sectors in small cities, and a program of small-scale investments in disfavored regions. In the face of import price rises, especially for wheat, sugar and edible oil, the Government also raised significantly price subsidies for these essential foodstuffs and adjusted upward legal minimum wages in agriculture and industry with a view to protecting the purchasing power of low-income groups. 9. Some weaknesses appeared, however, during this period. After the five-fold increase in phosphate exports receipts between 1973 and 1974, which had led the Government to revise upward the Plan's allocations for 1975-77, expected further increases in financial resources did not materialize in 1975. Due to weakening external demand, phosphate exports decreased to 13.1 million tons, from 18.7 million tons in 1974, and prices began to drop sharply in the second half of 1975, restraining correspondingly the country's real capacity to save and to import. Unfavorable weather resulted in poor crops in 1973 and in 1975 and to meet domestic demand, food imports were increased substan- tially. In constant prices, value added by the mining and agricultural sectors returned in 1975 to levels slightly below those of 1972 despite the fast growth of other industry and services and this held back real GDP growth to about 4 percent per year in 1973-75. As a result largely of the disappoint- ing performance of phosphate exports in 1975, Morocco's internal and external finances came under pressure. The Treasury's accounts showed in 1975 an overall deficit twice the 1974 level due mainly to sharply rising capital spending and insufficient growth in budgetary savings. This contributed to inflationary pressure domestically; the cost of living index rose by nearly 8 percent in 1975. The current account of the balance of payments, which had shown a surplus of $105 million in 1973 and $237 million in 1974, registered a deficit of $546 million in 1975. 10. In 1976, GDP growth accelerated to 10 percent, thanks partly to a good cereal harvest (48 percent larger than the previous year's) and a gradual recovery of phosphate sales abroad, and partly to the continued growth momen- tum in manufacturing, construction and services. The expansionary investment policies of 1973-75 continued, and the 1976 Budget Law raised further the allocations for investments in the public and semi-public sectors. Several measures were, however, taken to curb the growth of consumption demand, in- cluding some restraint in current budgetary spending, the successful placement last summer of a DH I billion ($230 million) bond issue among the Moroccan public, and the introduction of credit restraints. These measures were in- troduced under a financial program which Morocco adopted in February 1976 in support of purchases from the International Monetary Fund in the first credit tranche and under the 1975 oil facility. Nevertheless, for the full  - 4 - year, imports registered another sizeable increase, not matched by the recovery of export receipts, and the balance of payments current account registered a deficit estimated at $1.2 billion compared to about $0.5 billion in 1975. There was however little change in the country's net foreign assets, as the deficit was covered by large increases in worker's remittances from abroad, and in net external capital inflows. Regarding the latter, Morocco has drawn on IMF facilities for a total amount of $165 million in early 1976, and it has considerably stepped up borrowings from Arab and commercial sources (see Attachment 1, page 3). An important factor in economic and financial devel- opments in 1976 were Morocco's commitments and defense expenditures in the Sahara province and their impact on Government expenditures, imports and external capital inflows. While detailed information is lacking, it appears that substantially higher Government spending and imports for military and developmental purposes were nearly offset by increased grant inflows from external sources. 11. For 1977, the Government intends to further curb the trends in con- sumption demand, particularly for imported consumer goods, and restrain sig- nificantly investment in the public and semi-public sectors, in order to keep developments in the internal and external financial situation under firm control. Measures to this effect have been taken. While 1977 would be a year of retrenchment by comparison with policies during the first four years of the 1973-77 Plan, the overall performance of the economy would be satisfactory for the Plan period as a whole. Staff estimates show that a rapid growth (between 16 and 17 percent a year) of investment would have been achieved, exceeding the original Plan targets for 1973-77. They also show relatively good gains in GDP (about 6 percent a year) and consumption (close to 3 percent a year per capita), despite the rather disappointing developments in real terms for the phosphate and agricultural sectors. Finally, national savings would have financed a larger share of 1973-77 investments than anticipated originally. A detailed performance review of the economy during 1973-77 will be under- taken by the Bank late next fiscal year, in conjunction with an assessment of Morocco's next five-year Plan (1978-82). Development Prospects 12. The Plan revisions that were introduced on the occasion of the 1975 and 1976 Budget Laws, have maintained or strengthened the investment programs designed to achieve the original economic and social objectives of the 1973-77 Plan. They have, in addition, greatly increased allocations for regional development, for low-cost housing, and especially for the launching of three industrial investment programs to be implemented over the next decade. These programs are a one-million ton steel mill and related infrastructure at Nador, a series of sugar mills and related irrigation development and several chemical and petrochemical export units based partly on phosphate. Thus, the Plan revisions will have an important spill-over effect on the next 1978-82 Plan. 13. The general thrust of the Plan revisions seems justified. Indeed, the achievement of initial (especially social) Plan objectives is eminently desirable. Similarly, Morocco's economy has developed to a stage where some  - 5 - basic industries may find a justified place. The country in particular possesses an obvious comparative advantage in the processing of phosphates, which would tend to stabilize export earnings. Similarly, it can produce at competitive cost the sugar which it would otherwise import. However, the Plan revisions raise several issues of importance for Morocco's long-term develop- ment strategy and prospects. 14. The investment level is now very close to the country's absorptive capacity, following the noted increases in 1973-76. Although training efforts have been stepped up, it is likely that shortages of skilled and experienced manpower will continue to be a problem for some years to come. While for large industrial and infrastructure projects, Morocco can use foreign services extensively, this is costly and would not be a suitable solution to meeting the needs of smaller investments in large numbers. Further investments in steel and chemical industries will generate comparatively little employment opportunities for unskilled workers. 15. In addition, financial constraints may in future again restrain Morocco's overall development efforts. While there is scope for increasing phosphate exports in the medium term, prospects are that the real price of phosphate will remain at best stable. Since phosphate export receipts are a major factor for Morocco's real capacity to save and import, such capacity would be restrained. Taking into account the objective and policies to improve consumption levels of low-income groups, national savings may be expected to be restrained on this account also. In spite of likely efforts to increase bud- getary savings and import substitution (particularly food), foreign exchange and national savings are likely to be constraints on investment during the next Plan period. 16. For the 1978-82 Plan period, absorptive capacity and especially resource availability therefore call for caution. Bank projections which are preliminary since the Government has not yet fixed the 1978-82 Plan's objec- tives and strategy indicate that gross fixed investment could only grow slowly in view of these constraints. Given the planned move into heavy industries, investment possibilities in other sectors would by necessity be limited. Assuming a real investment growth rate of about 3 percent per year and export growth of about 8 percent, which seems feasible in view of market prospects and cxport capacity, a GDP growth rate averaging about 6.1 percent yearly during the 1978-82 period would be likely. Despite implementation of policies to restrain consumer goods imports and likely import substitution, Morocco would experience a sizeable resource gap, and need relatively large inflows of external capital to cover it and to service accumulated debt. External borrowing requirements on a commitment basis are tentatively pro- jected to average $900 million per year in 1978-82, about two-thirds of which would be met by official multilateral and bilateral sources and the rest by commercial sources. Morocco has successfully increased external borrowings in 1974-76; loan commitments have risen to $550 million in 1974, $860 million in 1975 and $1.8 billion in 1976. Morocco should, therefore, be able to mobilize the amounts projected for 1978-82. 17. External debt and debt service would increase as a result of pro- jected borrowings. Debt outstanding and disbursed, which was $1.1 billion at the end of 1974 and an estimated $1.5 billion (19 percent of GDP) at the end  - 6- of 1975 would rise to a projected $5.0 billion (or 24 percent of GDP) by the end of 1982. Similarly, debt service payments would rise from the low 8.3 percent of exports in 1975 to a maximum of about 18 percent in 1982. Adding workers' remittances to exports, the debt service ratio was less than 7 per- cent in 1975 and would rise to 15 percent in 1982. These projected levels for debt and debt service would be high, but still within Morocco's debt carrying capacity, especially when considering the country's improved eco- nomic and social policies and its long-term export prospects, not only in phosphate rock and related products, but also in agricultural and industrial commodities for the European market. Beyond 1982, the relative burden of debt would probably tend to decline gradually as the economy's external resource gap would tend to diminish. Therefore Morocco is considered creditworthy for Bank lending. PART II - BANK GROUP OPERATIONS IN MOROCCO 18. Bank and IDA lending to Morocco has supported 29 projects, financing a total of $704.5 million (net of cancellations), of which $489.5 million has been lent since the beginning of FY73. IDA credits, totalling $50.0 million, have been made available for five projects. A Third Window loan for $25 mil- lion for the third education project was approved in March 1976. IFC invest- ments have amounted to $4.2 million. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of January 31, 1977, and notes on the execution of ongoing IBRD/IDA projects. In some cases, delays have been caused by management or procurement difficulties, and in 1974 cost overruns increased due to the upsurge in investment activity in Morocco and the acceleration of inflation. However, performance in project execution has considerably improved during the last two years. 19. Past Bank Group lending has been concentrated in the industrial and agricultural sectors, which together have accounted for 61 percent of total net commitments; the balance is accounted for by utilities (18 percent), tourism (10 percent), roads (6 percent) and education (5 percent). Apart from the transfer of resources to Morocco (Bank Group gross disbursements amounted to 5.5 percent of total fixed investment in 1970-74), the main objectives of lending were to foster and strengthen development institutions, provide tech- nical assistance, particularly for project preparation, and increase produc- tive capacity, particularly in order to improve the balance of pay,, nts. 20. While these objectives remain, emphasis is also being given to supporting the Government's development effort in income distribution. An increasing share of Bank Group lending will be devoted to projects directly or indirectly developing the productive capacity of the lowest urban and rural income groups. 21. Past lending for agriculture has supported irrigation development, credit and, through a first operation in FY75, the improvement of the produc- tivity of rainfed farming. While continued lending for irrigation is envisaged,  greater emphasis will be given to supporting the improvement of rainfed farm- ing, and lending will in general be focussed on support to small farmers. A third agricultural project was recently approved. Projects for livestock/ rural development in the rainfed zones in northern Morocco, for developing production of fruits and vegetables on small holdings and for promoting in- tegrated rural development in selected regions of Morocco are being prepared. 22. Projects in industry and tourism have as key objectives increased foreign exchange earnings or savings and the improvement of sectoral policies. In addition, the presently proposed project would contribute to correct the present regional economic disparities. Continued lending for industry and tourism through two DFC's (Banque Nationale pour le Developpement Economique- BNDE and Credit Immobilier et Hotelier-CIH) will be proposed. Proposals for industrial lending, including one for a steel mill in northeast Morocco, are under consideration. 23. A slum upgrading project in Rabat is being prepared, which should contribute to devising means for solving the problem of rapid growth of slum areas. A substantial social services component and an employment generation program are envisaged. 24. Education is a critical bottleneck in Morocco's development. Two IDA credits have been made to develop secondary education and teacher training and to improve technical and vocational training. A third project, with emphasis on improving facilities in rural areas, was recently approved by the Executive Directors. A fourth project with emphasis on technical and vocational training is under preparation. 25. Loan commitments from multilateral and bilateral official sources to Morocco rose from $92 million in 1973 to $425 million in 1974 and $538 million in 1975. In addition Morocco received grants totalling $40 million in 1973 and $42 million in 1974. The major sources of aid were France, Saudi Arabia, the UAE, the U.S., Germany and the Bank Group. At the end of 1976, the Bank Group's share in Morocco's outstanding and disbursed external public debt was estimated at 13 percent. The share of the Bank Group in debt service was 20 percent in 1975 and an estimated 13 percent in 1976. By 1982 the Bank Group's shares in debt outstanding and in debt service are expected to be about 17 percent and 11 percent respectively, on the basis of the assumptions made for total external borrowings for the 1976-82 period (see para 17). PART III - INDUSTRY IN MOROCCO 26. Manufacturing industry accounts for about 15 percent of GDP in Morocco. After stagnating in the mid-1960's, manufacturing output grew more rapidly during the Second Plan period (5.4 percent per year between 1968 and 1972) and during the first three years of the Third Plan (9.8 percent in 1973, 5.4 percent in 1974, and 6.2 percent in 1975). Output of the sector is geared mainly to meeting demand for consumer and basic construction goods, and growth since 1966 has been led by the food processing, motor vehicle assembly, textile  - 8 - and leather goods and construction goods subsectors. In general, manufacturing production benefits from substantial tariff and transport protection from foreign competition and is directed to meeting domestic demand. However, the growth of manufactured exports, based predominantly on domestic raw materials produced by agriculture and mining, has been rapid, averaging 19 percent from 1966 to 1975. Export incentives, including income tax exemption, and alloca- tion of foreign exchange for export production purposes, were introduced in August 1973. With notable exceptions in cement and pulp and paper manufacture and motor vehicle assembly, the sector has been characterized by a rather low degree of capacity utilization, particularly in food processing. 27. Investment in manufacturing totalled about DH 1.9 billion ($380 million) during the Second Plan period. Private sector investment, which accounted for about three-quarters of this total, grew rapidly from 1968 to 1970, but stagnated in 1971 and 1972 when private investors seemed to take a wait-and-see attitude, in view of the political situation, and in the expec- tation of new measures concerning Moroccanization and investment incentives. With stabilization of the political situation, successful implementation of Moroccanization and publication of a new Investment Code in 1973, private investment increased very sharply in 1974 and 1975. On the basis of commit- ments by the National Bank for Economic Development (BNDE), the level of private sector investment in 1976 appeared to stabilize. The Investment Code of August 1973 provides exemptions from import duties, indirect taxes on equipment purchases, and income tax for 10 years, guarantees to foreign investors regarding dividend and capital repatriation, and a 2 percent subsidy on interest payments on BNDE long-term loans. Benefits are granted automatic- ally in some sectors for investments less than DH 30 million. For large scale investments, benefits are granted on a case-by-case basis. 28. Recorded employment in manufacturing grew from 255,000 in 1960 to 366,000 in 1971, an average growth of 3.3 percent, slightly slower than the growth of output. On the basis of data gathered by BNDE, investment per job created in manufacturing - excluding small-scale activity which tends to be more labor-intensive - is of the order of $20,000. An important step in encouraging employment in manufacturing was made through the 1973 Investment Code; its incentives are less biased in favor of capital (investment grants have been eliminated) and favor less-developed regions (for example, the tax holiday does not apply to Casablanca). The Government is placing in- creasing emphasis on small-scale industry as a source of employment, and has requested Bank assistance in this field. 29. The Government establishes the policy framework for the development of manufacturing through its Ministry of Industry, acting in coordination with the Ministries of Finance and Plan and with the Prime Minister's Office. It has also participated directly in manufacturing activity. The Cherifian Phosphate Office (OCP) is responsible for mining, processing and export of phosphates and derivatives, which have been reserved to the public sector because of its importance to the economy. The Industrial Development Office (ODI) is responsible to the Minister of Industry for direct industrial promo- tion activities. ODI undertakes pre-investment studies, acquires equity shares  - 9 - in new industrial enterprises, and aims at contributing to regional development and local participation in manufacturing. Few of the projects promoted by ODI since its establishment in 1973 have yet come into production, and many are still under construction, including the CIOR project. So far ODI has been fully dependent on the Treasury for its financial resources. Cement Production in Morocco. 30. Apparent cement demand (as opposed to potential demand if supply restrictions were lifted) in Morocco has grown rapidly since 1960, averaging 9.8 percent per year. Growth in demand was particularly rapid between 1967 and 1976 (14.5 percent per year), reflecting the rapid growth of the economy and investment activity in the late 1960's and the last two years. Consump- tion growth is estimated at 30 percent in 1976, and is expected to average about 11.5 percent per year for the next few years, before tapering off to about 7 percent. On this basis, demand would reach about 4.5 million tons a year by 1980, compared to 2.2 million tons in 1975. 31. There are at present six cement plants in Morocco, all but one of which were originally foreign owned and built before Independence (1956). They have since been gradually transferred to majority Moroccan ownership. Cement production has grown rapidly in response to demand, through improved capacity utilization and through expansion of existing capacities. However, production did not keep pace with apparent demand in 1971-73 and 1975, making cement im- ports necessary in those years. Production is estimated at 2.2 million tons in 1976, close to full capacity, and imports in the same year amounted to about 740,000 tons. 32. To respond to the growth in demand up to 1980, extensions of most existing plants and construction of two new plants are planned. A new plant at Marrakech, of a capacity of 500,000 tons per year (tpy) in which IFC holds a participation, and small expansions of existing plants at Tetouan and Agadir came into production in 1976. Start-up of the CIOR project is expected to take place in the third quarter of 1978. Expansion of other existing plants and construction of a 600,000 tpy capacity plant in the Rabat area are in the planning stage. Depending on the realization of these plans, production capac- ity should be about 4.2 million tons in 1980, very close to projected demand. To enhance their investment planning capabilities in the sector, the Moroccan authorities are planning to carry out in the next two years a detailed national study on demand for cement, followed by a national distribution study to be carried out with the assistance of consultants. The Moroccan Government would also exchange views with the Bank on cement market projections before under- taking any significant new expansion of cement production capacity (draft Guarantee Agreement, Section 3.07). Since much of the proposed capacity increase would come from expansion projects which require relatively short lead-time, the timing of the investments could be adjusted in response to the actual evolution of the demand-supply situation, and any significant imbalance can be controlled.  - 10 - 33. Cement prices are determined by the Government at the producer level. Prices have been fixed on an individual plant basis, taking into account the characteristics of each plant and its natural regional market. Ex-factory prices were virtually frozen from 1958 until 1975, and, as a result, were substantially below the levels in other countries by 1975. At the beginning of 1975 ex-factory prices ranged from DH 98 (US$23.3) per ton in Casablanca to DH 123 (US$29) per ton in Agadir. When cement imports of about 200,000 tons became necessary in the same year, the Government subsidized cement imports to bring their prices into line with those of domestic producers. However, as a result of an increasingly keen demand for cement, the benefits of controlled producer prices and subsidized imports have not been passed on to consumers, but have rather led to increased wholesalers' markups. In May 1975, the Government increased the ex-factory prices for the Casablanca and Meknes plants by DR 10 and DH 8 per ton respectively, at the same time levying a tax in the same amount, which is used to defray part of the cost of import subsi- dies through a "caisse de compensation". The Government also introduced controls on wholesale and retail margins, limiting agents' profits to 3-6 percent of sales. After two further adjustments, ex-factory cement prices in 1976 averaged DH 148/ton (US$33) and stood at a level adequate for the next two or three years. 34. The Moroccan authorities intend to apply pricing policies which would (i) allow producers to make reasonable profits, thus ensuring that capacity expansions will be forthcoming to meet demand growth while avoiding windfall profits for individual producers,(ii) ensure reasonable and rela- tively stable prices for consumers, (iii) provide an adjustment mechanism for controlled prices to reflect the impact of inflation on operating costs and, in the longer run, on capital costs, and (iv) provide incentives for cost- conscious, efficient operation by not covering automatically the cost of each producer. The system envisaged would allow the industry as a whole to earn a return of at least 10 percent on total net fixed assets in operation as periodically revalued, and based on efficient operations. Prices will con- tinue to take into account transport costs and market conditions, and would be adjusted to reflect actual changes in unit costs of major inputs such as fuel and labor. While the Government may grant import, investment, transport and distribution incentives and subsidies, these would be financed by levies on the industry so that the system would operate without net subsidization. The operating mechanisms of the system would be determined in a study which the Government will undertake by end 1977 with the assistance of consultants and in consultation with the Bank. PART IV - THE PROJECT Background 35. Originally conceived as a joint Algerian/Moroccan venture, the project was scheduled for presentation to the Board in March 1975, when exceptional circumstances delayed its consideration by over one year. As a result, the project now presented is in an advanced stage of imple- mentation.  - 11 - 36. In July 1972, the Algerian and Moroccan Governments signed an agreement providing for the establishment of Cimenterie Maghrebine (CIMA), a Moroccan-registered private joint-stock company, to establish, own and operate a cement plant in eastern Morocco. Ownership and production of the company were to be evenly split between Algeria and Morocco with the state- owned Algerian National Construction Materials Company (SNMC) and ODI (at that time known as the Office for Industrial Studies and Investment, BEPI) as shareholders. The company was registered in December, 1972, and its by-laws adopted at a General Shareholders' Meeting. 37. In late 1973, following initial contacts between CIMA and the Bank, CIMA requested Bank assistance in monitoring preparation and in financing the project. The Arab Fund was also approached. The project was appraised between March and December 1975, construction started on the site and in- vitations to carry out preliminary negotiations were extended to all parties concerned in February 1976. Political differences between the two countries prevented the discussions from taking place, and cooperation on the proposed cement plant between Morocco and Algeria came to a halt. 38. On the grounds of CIMA's inability to operate, in view of its im- pending insolvency, and after several initiatives to initiate joint action between the two sponsoring countries to remedy the company's situation, Moroccan courts designated a temporary administrator for CIMA. A new company, CIOR, was then created with ODI as its sole shareholder to pursue the project. CIOR set out to substitute itself for CIMA in all contracts previously entered into by the latter, and CIMA was compensated with two bank guarantees payable on its request and adding up to the company's paid-in capital minus cash on hand. The legal arrangements by which the substitution took place were reviewed within the Bank and found satisfactory. Project implementation subsequently proceeded on schedule and no contractual penalty was incurred. 39. By averting bankruptcy for CIMA, the cov,rse chosen preserves the stakes of both partners in the company. If SNMC wishes to withdraw its f nds, Moroccan exchange legislation allows foreign investments to be repatriated in full in convertible currencies. The Government has further indicated that the Algerian partner could resume its active participation in the project if so desired. An independent legal opinion from Morocco was obtained confirming that the steps taken comply with Moroccan legislation. The legal opinion also confirms that Moroccan legislation authorizes the free convertibility and transfer of foreign capital such as SNMC's contribution, and that such legis- lation cannot be changed with retroactive effect. These and other issues raised by the project's new arrangements were reviewed with a Moroccan delega- tion in the course of discussions held in October 1976, and a final appraisal mission took place in November. Negotiations were held in Washington in February 1977. The Moroccan delegation was led by Mr. Benjelloun, General Manager of ODI and President of CIOR. A loan and project summary is shown in Annex III. The Appraisal Report, No. 1426-MOR of March 4, 1977 is being distributed separately to the Executive Directors.  - 12 - Objectives and Description 40. The project aims at (i) satisfying the growing demand for cement in Morocco through local production, and (ii) assisting in the development of the Eastern Province, one of the less-developed regions in Morocco. The project consists of the construction and start-up of a cement plant with a nominal capacity of 1.2 million tpy of Ordinary Portland cement, located close to El Aioun, 45 km west of Oujda in the Eastern Province of Morocco (see Map 12528). Production could be expanded to 1.4 million tpy in 1985 without additional investment, when slag becomes available for production of blast furnace cement from a steel mill which is about to be constructed in Nador, at a distance of 200 km. The project also includes construction of related distribution facilities and the carrying out of national distribution and pricing studies (para 34). 41. The site is particularly well suited for cement production. The plant is being constructed adjacent to a large, high quality limestone deposit located near the surface and sufficient for more than 50 years of operation. High quality clay is available about 7 km from the plant, and gypsum will be purchased from an existing quarry about 45 km away. No special additives are required, except for the limited production of special cements. Production would be by the dry process, and the limited water requirements will be met from groundwater sources. The main east-west road runs past the plant site. Spur lines have been constructed under the project to link the plant with the main east-west electricity transmission and railway lines, both of which pass within two kilometers of the plant. The plant would burn heavy fuel oil from local refineries. The plant will be based on two medium-sized kilns and mill units. The greater reliability of this design outweighs the additional economies of scale from a single larger kiln and mill unit. Project Execution 42. Apart from the installation of the power connections, execution of the project is the responsibility of CIOR, with assistance from its British engineering consultants, Associated Portland Cement Manufacturers Ltd. (APCM), in the preparation of designs and bidding documents, evaluation of bids, con- tract preparation, training, and supervision of construction, erection and commissioning. The National Electricity Office constructed, owns and main- tains the lines and substations connecting the plant to the main power grid. The National Railway Company (ONCF) constructed, owns and maintains the rail- way spur line. Procurement began in July 1975, when contracts for equipment were let. Construction is scheduled to be completed by early 1978; production start-up is scheduled for the third quarter of 1978, and full capacity opera- tion for 1981. 43. CIOR intends to operate the plant with Moroccan personnel and a small amount of expatriate assistance. Recruitment of staff began in 1974, and all top management posts have been filled. Satisfactory initial training, organized by APCM, is under way, and CIOR is to make timely arrangements for implementation of a program for further training and recruitment (draft Loan Agreement, Section 4.01 (b)(i)). In addition, since CIOR's staff will have  - 13 - only limited experience in cement production, there is a need for technical assistance during the initial phase of plant operation. CIOR would prepare a detailed technical assistance program for comments by the Bank by September 1977, and would sign a contract for technical assistance satisfactory to the Bank promptly thereafter (draft Loan Agreement, Section 4.01 (b)(iii)). Distribution 44. Under the initial arrangements between Algeria and Morocco, the plant's 1.2 million tpy capacity was to be equally shared between the two countries. Morocco's share of 600,000 tpy would have been absorbed mostly in the Oriental region, the company's natural market. In the present circum- stances, however, Morocco will absorb CIOR's total production, and the company will have to distribute its product far beyond its natural market area. A previously planned expansion of the Meknes cement plant serving a neighboring market has consequently been postponed. It is estimated that, in 1982, of the 1.2 million tons produced by CIOR, 550,000 will be distributed in the Oriental region, and the balance around Fez (310 km from the plant) from a regional dis- tribution center supplied by rail and managed by CIOR, and in the Casablanca- Rabat-Kenitra region; all these areas are expected to have matching supply deficits. In 1985, 680,000 out of 1.2 million tons would be absorbed by the growing market of the Oriental region, and the balance by the Fez region. In subsequent years, the demand in CIOR's natural market area would progressively draw closer to the company's total production level. Detailed transport and distribution arrangements would be completed by September 1977 under a study financed from the proposed loan (draft Loan Agreement, Section 3.02 (a), (b)). The study would also determine the number and type of railway wagons to be provided and maintained by the National Railway Company (ONCF) (draft Guarantee Agreement, Section 3.05). CIOR would conclude a transport contract with ONCF by April 30, 1978 (draft Loan Agreement, Section 3.01(b); draft Guarantee Agreement, Section 3.05(iii)). Cost Estimates 45. Cost estimates are shown in Annex III and are summarized below: US$ million Local Foreign Total Base Cost (Plant Fixed Assets) 66.1 79.5 145.6 Physical Contingencies 3.2 3.9 7.1 Price Contingencies 6.8 4.4 11.2 Total Fixed Assets 76.1 87.8 163.9 Working Capital 5.7 1.3 7.0 Total 81.8 89.1 170.9 Distribution Facilities 2.1 2.2 4.3 Government Distribution & Pricing Study 0.1 0.3 0.4 Interest During Construction 2.9 3.5 6.4 Total Financing Required 86.9 95.1 182.0  - 14 - Physical contingencies are estimated for individual contracts and are in the range of 5 to 10 percent of base cost, depending on the nature of the con- tract and its stage of implementation. Price escalation rates of 14 percent per annum in 1975, 12 percent in 1976 and 8 percent thereafter have been used for contracts with escalation clauses, except for local components of preoperating expenses for which uniform rates of 7 percent per year were used. The capital cost of the plant's fixed assets, excluding related infrastructure, amounts to $125 per ton of annual installed capacity, which compares favorably with the average cost of new plants worldwide. Financing Plan 46. The base cost of the project, contingencies, and interest during construction, totalling $182 million would be financed by: (a) the proposed Bank loan of US$45 million equivalent for 14 years including 3 years of grace, with total interest cost to CIOR of 10 percent per annum, including a 1.5 percent guarantee fee payable to the Moroccan Government; (b) capital provisions by ODI amounting to the equivalent of $72.9 million. As $65.1 million have already been sub- scribed, ODI's additional obligations only amount to $7.8 million (draft Shareholder's Guarantee Agreement, Section 2.03); (c) Treasury Advances from the Moroccan Government for the equivalent of US$32.6 million, with expected terms of 17 year maturity, including 3 years of grace, and interest at 6.5 percent; (d) a KD 7 million (US$24.5 million equivalent) loan which the Arab Fund is expected to provide on terms of 17-year maturity, including 3 years of grace, with interest at 6.5 percent; and (e) Moroccan commercial bank loans in an amount of about US$7 million equivalent for the financing of working capital. Interest on the loans is expected to be around 9 percent. The Moroccan Government has agreed to provide or cause CIOR to be provided with the funds necessary to carry out the project (draft Guarantee Agreement, Section 2.02), and the Treasury Advances would be disbursed as the amounts fall due under existing contracts, unless financing is provided by another source. The Arab Fund is appraising the project and is expected to provide its loan within the next few months. Financial Position of CIOR 47. The Investment Convention signed between CIOR and the Moroccan Government, which specifies the advantages to be granted to the company under the Investment Code (see para. 27) provides that ex-factory cement prices for  - 15 - CIOR will be set at such a level as to enable the company to achieve a reasonable return on equity. The financial projections for the project have been prepared on the assumed basis of a financial rate of return of 10 percent on revalued net fixed assets, which is consistent with the Government's overall sector pricing objectives (see para. 34). Morocco's pricing system also compensates automatically for transportation cost. To preserve a strong financial position, CIOR would (i) maintain a current ratio of at least 1.3 at all times, (ii) have to obtain prior Bank consent to undertake any capital investments in excess of $5 million a year until project completion, and (iii) not pay any dividend or make any other distribution of cash not needed for operations unless after such payments a current ratio of at least 1.5 is maintained (draft Loan Agreement, Sections 5.07, 5.08). In addition, to ensure timely payment of equity contributions during project construction and maintain CIOR's long-term financial position, CIOR would maintain a debt:equity ratio of not more than 60:40 and a debt service cover- age of at least 1.5 (draft Loan Agreement, Section 5.05). ODI would ensure that CIOR has at all times the financial resources needed to meet these requirements,promptly complete the project and meet cost overruns if necessary (draft Shareholder's Guarantee Agreement, Section 2.03). On the basis of the cost estimates and financing plan presented in paragraphs 45 and 46, CIOR should have no difficulty in complying with the above provisions. Accounts 48. In order to monitor its productivity and costs CIOR will require a sound accounting and financial planning system. A chief accountant has been trained under APCM's training program. In addition, CIOR would employ by June 1977 consultant accountants, on terms and conditions satisfactory to the Bank, to set up accounting and cost control systems (draft Loan Agreement, Section 4.01(b)(ii)). The foreign exchange cost of these accountants would be financed through the proposed Bank loan. Procurement 49. Procurement of civil works, equipment and services for the cement plant itself has been carried out through International Competitive Bidding in accordance with the Bank's Guidelines for Procurement, regardless of sources of financing. For the purposes of bid evaluation, Moroccan domestic equipment suppliers were given a margin of preference equal to 15 percent or the prevailing import duty, whichever was lower. In July 1975, CIMA signed four fixed price contracts with Polysius (France), after international com- petitive bidding in which Polysius was the lowest evaluated bidder, for the supply of the mechanical equipment, for its erection and commissioning, supply of appropriate spare parts and related training. A contract for site preparation was signed in September 1975 with CTRA - ENATRA, a Moroccan civil works contractor, following international competitive bidding, while the civil works contract for buildings and foundations was awarded to Construcos Technicos (Portugal) in May 1976. The remaining contracts - for the remaining equipment items, and for inspection of equipment - were let between November 1975 and July 1976, with the exception of equipment for the distribution facilities which are still in the planning stage (see para. 44).  - 16 - 50. Consultant services for project engineering, construction super- vision, training and start-up, are being provided by APCM and financed from local funds. Consultant services for setting up the accounting system (para. 48) and for CIOR's distribution study would be contracted in accordance with the Bank Guidelines for Use of Consultants' Services. The total cost of con- sultant services is expected to amount to $5.4 million. Disbursements on Bank Loan 51. The Bank loan would finance the foreign exchange cost of the procure- ment packages recently tendered and part of the foreign exchange cost of the contracts signed with Polysius (para. 49). Financing of interest during con- struction on the Bank loan is also proposed, since CIOR is newly established and the company would have no cash generation of its own during construction of the project. The amount involved ($2.8 million) is relatively low due to the nearness of production startup which is less than 18 months away. The Bank loan, to be disbursed by the end of 1978, would finance: (i) 100 percent of the foreign exchange cost of equipment for the plant and distribution terminals, of training, erection and commissioning, inspection services, and the accounting con- sultancy ($24.2 million); (ii) 47 percent of the total cost of civil works for buildings and foundations, representing the estimated foreign exchange compo- nent ($18 million); and (iii) interest during construction on the Bank loan ($2.8 million). 52. The breakdown of the original joint-venture has delayed presentation of this loan to the Executive Directors and greatly increased the financial burden on the Moroccan sponsors, in view of the project's swift implementation. As stated in paragraph 49, nearly all important contracts have been let. In view of the exceptional circumstances surrounding the project, retroactive financing of up to $5 million for expenditures incurred since April 1, 1976 is proposed (draft Loan Agreement, Schedule 1, para. 4). Project Risks 53. The CIOR plant is conservatively designed, its raw material base has been extensively surveyed and evaluated, and the training and technical assistance programs will provide the company with adequate skilled personnel; accordingly CIOR faces only limited technical risks. Similarly, the financial risks are easy to control, as outlined in paragraph 47. The risks involved in transporting large quantities of cement over long distances are being care- fully addressed (para. 44) and are therefore limited, and so are the risks of an excessive national cement production capacity (para. 33). The risks of possible judiciary proceedings initiated by CIMA's shareholders adversely affecting the project are expected to be minimal.  - 17 - Justification 54. The project will help in developing Morocco's less-developed Eastern Province. While the direct employment impact is small (1,200 jobs during plant construction and 500 during operation), construction of the plant will improve the availability of cement and will, therefore, help to encourage labor-intensive housing development and other construction activity. 55. The country is presently experiencing an acute shortage of domes- tically produced cement and has had to import about 740,000 tons in 1976 while still not meeting total demand. Major foreign exchange savings would thus accrue to Morocco under the project. Average net foreign exchange savings in real terms are about $30 million per year. The overall economic return to the project is estimated to be 13.8 percent. It rises to 14.7 percent when the additional 200,000 tpy production of blast furnace cement after 1985 is taken into account (para. 40), and is reduced to 12.7 percent in the case of a 5 percent capital cost increase, a likely maximum given the advanced stage of project implementation. PART V - LEGAL INSTRUMENTS AND AUTHORITY 56. The draft Loan Agreement between the Bank and CIOR, the draft Share- holders' Guarantee Agreement between ODI and the Bank, the draft Guarantee Agreement between the Kingdom of Morocco and the Bank, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement, and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. 57. Features of the Agreements of special interest are described in paragraphs 32, 43, 44, 46 and 47, 48, 52 of this report. 58. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATIONS 59. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments March 9, 1977   TABLE 3A R4! I of 4 paP MOROCCO - SOCIAL INDICATORS DATA SHEET LANO AREA ITHOU KX21 ------ _______________ HOROCCO REFERENCE COUNTRIES 119701 TOTAL 446.6 MOST RECENT AGRIC. 199.4 1960 1970 ESTIMATE PHILIPPINES TURKEY GREKS* GNP PER CAPITA (USs) 190.0 300.0 470.0 230.0 480.0 1390.0 POPULATION AND VITAL STATISTICS POPULATION tMID-YR. MILLIONI 11.6 14.8 16.7 36.9 35.7 8.8 POPULATION OENSITY PER SOUARE KM. 26.0 33.0 37.0 123.0 46.0 67.0 PER SQ. KM. AGRICULTURAL LAND .. .. 78.0 / 279.0 67.0 99.0 VITAL STATISTICS AVERAGE BIRTH RATE I/THOU) 50.4 49.2 46.2 44.2 40.6 18.1 AVERAGE DEATH RATE I/THOU) 24.2 18.5 15.7 13.2 14.4 8.0 INFANT MORTALITY RATE 12THOU) 149.0j^ .. 117.0 80.0 145.0 29.6 LIFE EXPECTANCY AT BIRTH E YRSI 45.4 50.4 52.9 55.6 54.4 70.9 GROSS REPRODUCTION RATE 3.4 0 3.4 3.4 3.3 2.6 b 1.0 POPULATION GROWTH RATE (1) TOTAL 2.6 2.4& 2.4k 3.0 2.5 0.51L URBAN 6.4 4.0 5.6 3.7 4.2 1.5 URBAN POPULATION 15 OF TOTAL) 29.3 32.3 37.9 2t.6 31.2 62.6 AGE STRUCTURE IPERCENT) 0 TO 14 YEARS 44.3 46.4 46.6 ^ 45.6 41.8 24.9 15 TO 64 YEARS 51.7 51.1 50.9 / 51.6 53.9 64.0 65 YEARS AND OVER 4.0 2.5 2.5 a 2.8 4.3 11.1 AGE DEPENDENCY RATIO 0.9 1.0 1.O/a 0.9 0.9 0.6 ECONOMIC DEPENOENCY RATIO 2.0 .. 2.2 1.5 1.12. FAMILY PLANNING ACCEPTORS ICUMULATIVE, THOU) .. 68.1 216.4 354.0 USERS It OF MARRIED WOMENI .. 3.0 6.7 2.0 8.2 EMPLOYMENT TOTAL LA80R FORCE (THOUSAND) 3300.0 .* 398O.O/8. 12300.0 14500.0/d LABOR FORCE IN AGRICULTURE (I) 56.07b .. 50.07S~ 55.0/i 67.0 UNEMPLOYED (X OF LABOR FORCE) 9.05 * 9.0 : 7.0 4.06 INCOME DISTRIBUTION I OF PRIVATE INCOME REC*D BY- HIGHEST 5 OF HOUSEHOLDS .. .. .. .. 32.8/r HIGHEST 20S OF HOUSEHOLDS . .. .. .. 60.6 LOWEST 20t OF HOUSEHOLDS .. .. .. .. LOWEST 40t OF HOUSEHOLDS .. .. .. .. 9.4 DISTRIBUTION OF LAND OWNERSHIP 2 OWNED BY TOP 102 OF OWNERS . .. .. .. 53.0 X OWNED BY SMALLEST 10 OWNERS .. .. .. .. 0.9 HEALTH AND NUTRITION POPULATION PER PHYSICIAN 9700.oLa 13270.0 13830.0/ a* 2220.0 620.0 POPULATION PEP NURSING PERSON 7350.7c .. .. 188.0 0.0 POPULATION PER HOSPITAL BED 620.0: 690.0& 690.01 850.0 490.0 160.0 PER CAPITA SUPPLY OF - CALORIES (t OF REQUIREMENTSI 70.0 99.0 92.0/d 100.0 110.0 116.0 PROTEIN (GRAMS PER DAY) 43.0 64.0 62.0 45.0 78.0 99.0 -OF WHICH ANIMAL ANo PULSE .. 146.0 .. 22.0 ZZ-0 52.01