Morocco - CIOR Cement Project

FILE COPY Report No. 1426-MOR Morocco: Appraisal of the CIOR Cement Project March 4, 1977 Industrial Projects Department FOR OFFICIAL USE ONLY Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Except where otherwise noted all figures are quoted in Moroccan Dirhams (DH) US$ 1 = DH 4.50 DH 1 US$0.22 WEIGHTS AND MEASURES All weights and measures are in metric units. 1 metric ton (ton) = 1,000 kilograms (kg). 1 metric ton (ton) = 2,205 pounds 1 kilometer (km) = 0.62 miles 1 meter (m) = 39.3 inches I hectare (ha) 3 2.37 acres I cubic meter (m ) = 35.31 cubic feet 1 kilo calorie (kcal) = 3.9685 BTU ABBREVIATIONS AND ACRONYMS Arab Fund Arab Fund for Economic and Social Development APCM - Associated Portland Cement Manufacturers Limited ASMAR = Cimenterie de Marrakech ASMENT = Cimenterie de Temara BEPI = Bureau d'Etudes et de Participations Industrielles CIMA = Cimenterie Maghrebine CIOR = Cimenterie de l'Oriental ODI = Office pour le Developpement Industriel ONCF = Office National des Chemins de Fer ONE = Office National de l'Electricite ONT = Office National des Transports SAMIR - Societe Anonyme Marocaine de l'Industrie du Raffinage SC IF = Societe Cherifienne de Materiel Industriel et Ferroviaire SCP = Societe Cherifienne des Petroles SNMC (A) = Societe Nationale des Materiaux de Construction (Algerian Shareholder of CIMA) SNMC = Societe Nationale des Materiaux de Construction (Maroccan Public Corporation) SORESMA = Societe pour la Promotion des Echanges Commerciaux tkm = ton-kilometer tpy - Metric Ton per Year FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY MOROCCO APPRAISAL OF THE CIOR CEMENT PROJECT Table of Contents Page No. SUMMARY AND CONCLUSIONS i- v I. ItNTRODUCTION 1 II. THE COMPAN4Y AND ITS SPONSOR 1 A. Background .......................................... 1 B. CIOR - Organization and Management .... .............. 4 C. ODI - The Shareholder ............................... 5 III. CEMENT MARKET, PRICING AND DISTRIBUTION 6 A. The Cement Market in Morocco ..... ........... 6 1. Historic Supply/Consumption in Ilorocco .... ..... 6 2. Projected Demand/Supply in Morocco .... ......... 7 3. The Market for CTOR Cement in Morocco .... ...... 9 B. Cement Distribution and Pricing in Morocco .......... 10 1. Existing Distribution System .... ............... 10 2. Transport and Distribution of CIOR Production .. 11 C. Pricing ....................... ...................... 12 IV. THE PROJECT 14 A. Scope of the Project .............. .. ................ 14 B. Raw Material Availability and Analysis .............. 15 C. Technical Description .............. .. ............... 15 1. Production Facilities .......................... 15 2. Utilities and Infrastructure .... ............... 16 D. Ecology ....................... ...................... 16 E. Manpower and Training ............. .. ................ 16 F. Project Execution and Technical Assistance .......... 17 G. Project Timing ................... ................... 17 This report was prepared by Miss Haug and Messrs. Duvivier and Cognet of the Industrial Projects Department. This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization..  Page No. V. CAPITAL COST AND FINANlCING PLAN 18 A. Capital Cost ................. 18 B. Working Capital Requirements .......... .. ........... 19 C. Financing Plan and Guarantees ......... .. ........... 20 D. Procurement .................... .................... 21 E. Allocation of Bank Loan and Disbursement ........... 22 VI. FINANCIAL ANALYSIS 22 A. Operating Costs .................. .................. 22 B. Revenues ............ 23 C. Financial Projections ....................... ........ 23 D. Break-Even Analysis .............. .. ................ 25 E. Accounting and Auditing Requirements .............. . 25 F. Financial Rate of Return ............ .. ............. 25 G. Major Risks .................... .................... 26 VII. ECONOMIC JUSTIFICATION 26 A. Economic Rate of Return ............ .. .............. 26 B. Linkages and Employment ............ .. .............. 27 C. Foreign Exchange Effects ............ .. ............. 28 D. Regional Development Impact .......... .. ............ 28 VIII. AGREEMENTS REACHED AND RECONN7ENDATIONS .... .............. 29 MAP IBRD 12528 - Location of Existing and Future Cement Plants in Morocco  ANNEXES 1 Technical Terms and Process Description 2-1 CIMA - Organization, Financial Position and Present Legal Status 2-2 CIOR - Organization and Management 2-3 CIOR - Organization Chart 2-4 ODI - Organization, Program and Financial Position 3-1 The Market for Cement in Morocco 3-2 Cement Distribution and Pricing in Morocco 3-3 Distribution and Transport of CIOR Production 4-1 Raw Material Availability and Analysis 4-2 Detailed Project Description 4-3 Plant Layout 4-4 Process Flow Chart 4-5 Utilities and Infrastructure 4-6 Ecology 4-7 Labor Force, Training and Technical Assistance 4-8 Project Implementation Schedule 5-1 Detailed Capital Cost Estimates and Procurement 5-2 Working Capital Requirements 5-3 Bank-Financed Items 5-4 Schedule of Disbursement 6-1 Production and Operating Cost Projections 6-2 Distribution Cost Projections 6-3 Notes to Financial Projections 6-4 Income Statement Projections 6-5 Source and Application of Funds Projections 6-6 Balance Sheet Projections 6-7 Financial Rate of Return and Sensitivity Analysis 6-8 Break-Even Point Analysis 7-1 Economic Rate of Return and Sensitivity Analysis 7-2 Foreign Exchange Effect 7-3 Economic Development of the Oriental Region   MOROCCO APPRAISAL OF THE CIOR CEMENT PROJECT SUMMARY AND CONCLUSIONS i. This report appraises a proposed Bank loan of US$45 million equiva- lent to help finance a cement project to be owned and operated by Cimenterie de I'Oriental (CIOR) and to be located in Northeastern Morocco (Oriental Region) near Oujda about 45 km west of the Algerian border. The plant will have a nominal capacity of 1.2 million tons per year (tpy) of Ordinary Port- land cement. CIOR is a societe anonyme under Moroccan law, wholly owned by the Office pour le Developpement Industriel (ODI), a Moroccan Government Agency. CIOR was established in 1976 to continue implementation of an iden- tical cement plant which was started by Cimenterie Maghrebine (CIMA), a Moroccan-Algerian joint venture but was discontinued by the partners. Apart from the cement plant proper, the project includes: (i) related infrastructure such as power connections, rail link and housing; (ii) dis- tribution facilities; and (iii) consulting services to strengthen CIOR's distribution function and financial management. The project is expected to commence operations in late 1978. ii. The project started in 1972 following an Intergovernmental Agree- ment between Morocco and Algeria, establishing CIMA with shares owned in equal parts by ODI of Morocco and the Societe Nationale des Materiaux de Construction (SNMC (A)), the Algerian State enterprise for building materi- als. Both shareholders were committed to each purchase half of CIMA's production and the project was therefore designed to meet the combined prospective cement demand in the adjacent border regions of both countries. The project was appraised by the Bank in 1975 and its preparation proceeded smoothly until the end of 1975 at which time CIMA had expended about US$11 million in preoperating expenses and initial payments on contracts. Early in 1976 cooperation between Algeria and Morocco on the project came to a halt and a joint capital increase could not take place. As a consequence, by June 1976 CIMA had virtually become insolvent and implementation of the joint venture stopped de facto. iii. To proceed with the project without further delay and safeguard the interests of both shareholders, the Moroccan authorities in mid-1976 created CIOR as a wholly Moroccan owned company to take over project implementation. CIMA administered by a temporary administrator, remained in existence and CIMA's assets and contracts were transferred to CIOR. Under these arrangements SNMC (A) can either recover its share in CIMA's equity by requesting the dissolution of CIMA or reenter the project at a later stage. Nevertheless, the present break-down of the joint venture arrangement implies a 'Loss of the Algerian market which was to absorb 50% of the plant output. With half of the originally intended, and geographically close, market lost in Algeria, a reduction in project size was considered. However, since such a reduction would have resulted in substantial penalty payments to suppliers  - 11 - given the advanced state of project implementation, and in view of the prospective deficit of domestic cement supply in Morocco plus the possibility that the originally joint project might be reestablished at a later stage the Moroccan authorities decided to continue the construction of the cement plant in its original scope. iv. CIOR's Board of Directors is composed of representatives from ODI and several Ministries. ODI is an agency estabished to prepare investment studies and promote industrial projects; it is wholly state-owned, and de- pends financially on the Government and local banks to support its activities by grants, treasury advances and loans. Because of ODI's financial dependence on the Government, the Government has agreed to guarantee O])I's performance under the Bank loan. v. Cement consumption in Morocco has been increasing steadily since Independence, averaging 14.5% per year in the recent past. Domestic produc- tion capacity has also been expanding substantially, but has failed to keep up with demand. In the last few years cement imports have therefore increased steadily and reached 25% of apparent consumption in 1976. On the basis of Morocco's development prospects, cement demand is expected to continue its rapid growth especially for housing, the shortage of which has become critical. It is estimated that cement demand will increase from 2.9 million tons in 1976 to about 4.5 million tons in 1980 and 6 million tons in 1985, representing an average annual growth rate of about 9% during the next decade. To meet this demand three new plants (CIOR being one of them) and expansions of exist- ing plants are under construction or planned. Notwithstanding this capacity build-up domestic supply in Morocco in the early 80's would either just about meet or fall slightly short of forecasted demand. To optimally plan further expansions of new domestic cement capacity, the Moroccan authorities agreed to undertake a detailed cement market study and to consult with the Bank on cement market prospects prior to expanding cement production capacity in Morocco. vi. In the Oriental Region, the project's most natural market, the availability of CIOR's entire production will result in a regional oversupply, for some 12 years until demand will have grown enough to absorb the plant's output. In the meantime, part of CIOR's production will be used to alleviate expected shortages in other regions of Morocco, especially around Fez and Casablanca. Transport of CIOR's cement to these regions will be by rail in unit trains on the main Oujda-Casablanca line. Transport arrangements for the project include the purchase of special wagons by the National Railway Company (ONCF) and a transport agreement between CIOR and ONCF. vii. Cement prices in Morocco are controlled by the Government which fixes the maximum prices at the ex-factory level, while control of wholesale and retail prices was only recently introduced. Ex-factory prices which remained virtually unchanged from 1958 to 1974 have been gradually increased over the last two years to about US$33/ton. This is not high, however, when compared with domestic prices in Europe and North America. Ex-factory costs of the new facilities coming on stream in Morocco after 1976 will be  - iii - substantially higher than ex-factory costs of the existing cement plants which had been built at considerably lower capital costs and are almost fully depreciated. In future ex-factory cement prices will be set at levels such as to allow each enterprise a reasonable profit under conditions of efficient operations without subsidies of any kind, except investment incentives for limited periods of time to help finance new capacities or expansions, but in any case to allow the industry as a whole to earn a reasonable return on its combined net fixed assets in operation as periodically revalued. The pricing mechanism is expected to lead to reasonable and relatively stable prices to the consumer, while maintaining the principle of reward for efficient operation and at the same time avoiding windfall profits. It would allow adjustment of cement prices with inflation and financing of investment incentives by intra- sectoral transfer payments without reliance on subsidies by the Government budget or by other sectors. The Government agreed to undertake a study in 1977 which would establish the details of setting up the above pricing mechanism. viii. CIOR has been established primarily as a cement producing company. Its distribution activities will be essentially limited to the transportation to and the operation of a few distribution terminals (still to be built) and to sales (ex-plant and ex-terminal) through existing private distribution channels starting at the wholesale level. CIOR agreed to update during 1977 existing distribution studies in consultation with the Bank and to implement the chosen distribution system as needed thereafter. ix. CIOR is employing APCM, a British cement manufacturer and consulting firm, to assist it in project preparation, detailed engineering, procurement, erection, construction supervision, start-up and training. The average cost of APCM's consulting services has been about US$3,300 per man month. At the same time, CIOR is carrying out a comprehensive training program for its technical staff, including training by APCM, foreign equipment suppliers and in Moroccan plants. To supplement this internal effort and to ensure efficient operation of the plant after commissioning, CIOR has agreed to enter by end 1977 into a technical assistance arrangement for the first operating years. x. Total financing required for the project including interest during construction, initial working capital and the pricing/distribution studies to be undertaken by the Government, is estimated at DH 818.6 million (US$182 million), 52% of which in foreign exchange. The proposed Bank loan of US$45 million equivalent will cover 47% of the project's estimated total foreign exchange requirements. It will be made to CIOR for 14 years, including 3 years of grace, at the prevailing interest rate plus a gurantee fee payable to the Government to bring total interest cost to CIOR to a 10% p.a. The remain- ing financing will be provided as: (i) DH 328 million (US$72.9 million) in equity or 40% of total financing required; (ii) Treasury advances from the Moroccan Government for 17 years including 3 years of grace totalling DH 256.5 million (US$57.1 million); and (iii) DH 31.6 million (US$7.0 million) of medium term loans from Moroccan banks for initial working capital.  - iv - xi. Procurement of civil works, equipment and services for the cement plant as well as for the distribution facilities is being carried out follow- ing ICB in accordance with the Bank's procurement guidelines. Contracts for nearly all of the plant items have been signed. The Bank loan will cover part of the foreign exchange component of (i) equipment for the plant and dis- tribution terminals; (ii) civil works for foundations and buildings; (iii) training, plant erection and commissioning, as well as consultants' services for inspection, accounting and distribution; and (iv) interest during con- struction on the Bank loan. Because of a major delay in loan processing due to the break-down of the original joint venture, retroactive financing of a maximum of US$5 million on the Bank loan is recommended. xii. CIOR's projected operating cost in 1976 terms is expected to be competitive with costs of new cement plants in Europe - North Africa - Middle East and has been estimated at US$17/ton at full production. Based on pro- spective ex-factory revenues averaging DH 180/ton in real terms in the initial years of production and decreasing thereafter to DH 150/ton with declining depreciation of preoperating expenses and financial charges, the Company's profitability and debt service coverage are adequate. The financial rate of return of the project is about 10.0% which is adequate for a cement project under price regulation. In order to establish and maintain CIOR on a sound financial basis, the Company agreed (i) to maintain at all times a debt service ratio of 1.5, a current ratio of at least 1.3 and a debt/equity ratio of not more than 60:40, (ii) not to undertake - without prior consent of the Bank - capital investments in excess of US$5 million annually until project completion, and (iii) not to pay any dividends or make any other cash distri- bution unless after such payments its current ratio is at least 1.5. To back up CIOR's commitment, ODI as shareholder and the Government agreed to guarantee CIOR's financial performance. To strengthen CIOR's financial department, an adequate accounting/budgeting and cost control system will be established with the help of consultants. xiii. The project has an economic rate of return of 13.8%. This economic return is adequate for a cement project but expectedly lower than the 16% rate of return of the original Moroccan-Algerian joint venture because of the additional transport costs for marketing initially the former Algerian share of the plant's output in regions of Morocco more distant from the plant than the original Algerian market. The annual net foreign exchange savings for the project average about US$30.0 million in real terms. The net foreign exchange savings are expected to offset the plant's foreign exchange cost after 5 years of operations. xiv. Areas of potential project risks are market and distribution. The risk of the Moroccan cement industry growing more quickly than required by domestic demand and thus possibly generating severe regional supply imbalances is being reduced by the Government's effort to monitor more  -v - closely cement market developments and the undertaking of a comprehensive distribution study in consultation with the Bank. The major risk for CIOR relates to transport and marketing of a substantial part of its output at greater distance than normal for cement. This risk is being reduced by the establishment of an appropriate distribution system and specific transport arrangements with ONCF, the Moroccan railway company. xiv. Based on the assurances and agreements spelled out in this appraisal report, the project is suitable for a Bank loan to CIOR of US$45 million for 14 years, including 3 years of grace at the prevailing interest rate plus a guarantee fee payable to the Government to bring total interest rate to CIOR to 10% p.a.   I. INTRODUCTION 1.01 This report appraises a cement project of Cimenterie de l'Oriental (CIOR), a Moroccan company. CIOR is to construct and operate a cement plant with a nominal capacity of 1.2 million metric tons per year (tpy) of Ordinary Port:Land cement and market the output thereof. The plant will be located about 45 km west of Oudja, in Morocco's Oriental Region, which borders on Algeria. CIOR is wholly owned by the Office de Developpement Industriel (ODI), a Government agency to promote industrial development in Morocco. Bank financing of US$45 million is being sought for the project which is scheduled to be completed in late 1979. 1.02 The CIOR cement plant is part of Morocco's overall program to in- crease cement production capacity from about 2.0 to 4.2 million tpy by 1980 to meet expected future domestic demand. Also, the project represents an important component of the Moroccan Government's regional development program which--in the framework of the third Five-Year Plan (1973-77)--emphasizes the economic development of the Oriental Region. The project is considered vital for the timely development of important cement-consuming sectors, such as housing, irrigation and infrastructure. 1.03 The project--originally designed as a joint venture between Algerian and Moroccan shareholders --was identified in mid-1974. The Bank assisted in its evolution and appraised the Moroccan-Algerian joint venture project in March 1975 and during short follow-up missions in July and September 1975. The Bank appraisal mission consisted of Miss Haug and Messrs. Duvivier and Cognet of the Industrial Projects Department. Shortly after invitations to carry out preliminary negotiations were issued in February 1976, cooperation between the sponsors came to a halt and processing of the project had to be discontinued. In June 1976, the Moroccan Government requested the Bank to reconsider a loan for the same cement plant under sole Moroccan ownership. In November 1976, a mission consisting of Mr. Duvivier and Messrs. Barriger and Fournier (Consultants) reappraised the project. 1.04 Technical terms used in this report are described in Annex 1. II. THE COMPANY AND ITS SPONSOR A. Background 2.01 On July 26, 1972, a convention was signed between the Algerian and Moroccan Governments to create the Cimenterie Maghrebine (CIMA) as a joint venture to construct and operate a cement plant in Morocco's Oriental Region. The intergovernmental agreement stipulated inter alia that (i) CIMA would be owned on a 50:50 basis by Moroccan and Algerian interests, (ii) the Company would be operated as a production company selling at ex-factory cost to the shareholders its entire cement output in proportion to their respective equity participations, (iii) the Algerian shareholders would pay to the Moroccan Treasury a royalty of 7% of the ex-factory cost of their share of  - 2 - production but not exceeding 7 DH/ton, (iv) the Algerian shareholders could export free of any other tax their production share from Morocco and (v) the Moroccan and Algerian shareholders were to represent each 50% of voting rights; all major decisions were to require at least the consensus of two/ thirds of voting shares, i.e. in practice the agreement of both parties was needed for Board decisions. The authorities designated simultaneously, SNMC(A)-- Societe Nationale de Materiaux de Construction, the Algerian State monopoly enterprise for construction materials and the Moroccan Bureau d'Etudes et de Participations Industrielles (BEPI), the predecessor of the Office pour le Developpement Industriel (ODI), as CIMA's shareholders; they defined in a supplementary agreement, also dated July 26, 1972, the procedures to be followed during project preparation and implementation. Details on the intergovernmental convention and the BEPI-SNMC (A) Agreement are presented in Annex 2-1. 2.02 Starting in 1973, CIMA proceeded with implementation of its task to develop and construct the cement plant. In January 1973, a contract was signed with APCM, a British consulting firm which called in a first phase for geological investigations and a full feasibility study and, in the second phase, for detailed engineering, procurement, training and project management. Suitable geological deposits were confirmed near Oudja in mid-1973; lending institutions such as the Bank and the Arab Fund were requested in 1974 to provide loan funds; the feasibility study was completed by early 1975, and first orders were placed in June 1975. By the end of that year, US$80 million or nearly half of the estimated total fixed asset costs had been committed with the approval of CIMA's Board. Following problems between the Governments of Morocco and Algeria at the end of 1975, the Algerian shareholder ceased to attend routine Board meetings, the special shareholder meetings to decide on urgently required capital increases or the annual shareholders meeting. Since all major decisions and, in particular, capital increase, purchase orders and loan contracting require the participation of both shareholders, implementation of the project as a joint venture was de facto stopped. As of May 31, 1976, CIMA had signed contracts for equipment and civil works totalling DH 483 mil- lion (US$107 million), had made payments of DH 46.5 million (IJS$10.3 million) towards these contracts and for operating expenditures, leaving a cash position of DH 13.3 million (US$3.0 million). For details see Annex 2-1, paras. 13-20 and Tables 1-2. 2.03 At this point CIMA and its sponsors had three major options regard- ing the future of the CIMA project: (a) First, Bankruptcy and Cancellation of the Project. This measure would have involved (i) loss of the initial capital of DH 75 million to the Algerian and Moroccan shareholders; (ii) penalties payable on contracts for which irrevocable letters of credit totalling US$48 mil- lion had been opened by a Moroccan Bank; (iii) the negative effect of bankruptcy by a Government-sponsored project on Morocco's standing with the local and foreign business  - 3 - community; and (iv) the incremental cost of importing cement (estimated to be about US$10 million in foreign ex- change) to satisfy the demand of the Oujda region for at least 2 years until another Moroccan cement project could be developed to take the place of CIMA in the Oriental Region. (b) Second, Change of Project Scope by Reducing the Plant Size to 600,000 tpy. To avoid bankruptcy, CIMA or new sponsors could have tried to change the existing contracts to reduce project scope and build a 600,000 tpy cement plant to supply Morocco's Oriental Region. By choosing this alternative (i) the sponsors would have lost the economies of scale of a 1.2 million tpy plant, thus increasing unit cost of cement at least 10%, further (ii) the 600,000 tpy plant would have had to bear the full cost of contracts completed for the 1.2 million tpy plant, in particular pre-operating expenses, engineering cost and pre- liminary civil works for the larger plant, and (iii) penal- ties of up to US$20 million could have expected from can- celling part of existing contracts, since the manufacture of the mechanical equipment was far advanced. In addition, the implementation of a reduced project would have excluded any further participation by Algerian shareholders in this cement project. (c) Third, Implementation of the Original 1.2 million tpy Plant and Marketing of the Full Output in Morocco. This alternative involves (i) full responsibility for project financing by the Moroccan sponsors, (ii) additional investment cost (US$4.3 million) and distribution cost (US$6.5/ton) for marketing the original Algerian production share in Morocco, during the first 10 years of production, but no delay in project implementation or sunk investment cost due to bank- ruptcy or reduced size. Further, this option can be exercised in a manner to allow the Algerian shareholder to re-enter the joint venture at a later stage. Comparing the economic cost and benefits of the 3 alternative above, the third solution, i.e., continuing with the original project, appeared to be most advantageous, since it resulted in a 13.8% economic rate of return as compared to 12% for the reduced 600,000 tpy cement plant scope and a negative return in case of bankruptcy. 2.04 Taking into account the quantitative assessment above, it was also essential to Morocco, on whose territory the plant was being constructed, to take steps to permit the project to proceed on an orderly basis and do so in a manner which would protect the interests of the Algerian partner and pre- vent CIMA from being forced into bankruptcy. After careful study the follow- ing steps have been taken.  (a) Appointment by the Moroccan Courts of a Temporary Administrator for CIMA with the objective of preventing its impending insolvency and maintaining its corporate entity. (b) Creation of a new company, Cimenterie de l'Oriental (CIOR) fully owned by ODI, to continue implementation of the project. (c) With the agreement of all suppliers, CIOR took over all contracts signed by CIMA, but not yet completed. As to CIMA's assets consisting mainly of mobile equipment studies and investments in site clearance and other pre- operating expenses, CIMA agreed to put these assets at the disposal of CIOR. In exchange, CIOR provided CIMA with two Moroccan bank guarantees totalling DH 75 million (equal to paid-in capital) for the above contracts and costs of assets, cashable upon CIMA's request. The above steps were executed according to the normal Moroccan legal proce- dures. The details of the contract adoption and the transfer of assets are regulated in an agreement entered into by CIOR and CIMA in November 1976. 2.05 The above arrangements permit smooth continuation of the project and provide adequate protection of the interest of both CIMA shareholders. Maintaining CIMA in existence for the time being offers the advantage to allow the Algerian shareholder to reenter the project. Conversely, by preventing the bankruptcy of CIMA, these arrangements preserve in full both parties' capital contribution in the company. In the event of liquidation of CIMA, CIMA's paid-in capital would be shared equally between ODI and SNMC(A) which, under the Moroccan legislation, would be entitled to repatriate its share in foreign exchange. The Moroccan Government has indicated its willingness to let the Algerian shareholder either reenter the joint venture or benefit from the provisions of the Moroccan legislation if it wishes to repatriate its share. Similarly the above arrangements provide adequate protection to CIOR since: (i) as assets placed at CIOR's disposal by CIMA are essentially non-tangible (studies) or mobile equipment their return to CIMA would not materially affect CIOR's ability to operate the plant; and (ii) In case CIOR has to make payments to CIMA under bank guarantees, ODI and the Moroccan Government are committed in their respective Guarantee Agreements to make up for any shortage of funds preventing CIOR from either carrying out the project or meeting its financial obligations. 2.06 The Bank has obtained an independent legal opinion that the above steps comply with Moroccan legislation. This legal opinion also confirms that Moroccan exchange legislation authorizes the free convertibility and transfer of foreign capital such as SNMC(A)'s capital share, and that such legislation cannot be changed with retroactive effect.  - 5- B. CIOR - Organization and Management 2.07 CIOR was registered as a "societe anonyme" under Moroccan law on June 18, 1976, wholly owned by ODI. According to its By-Laws the Company is administered by a Board of Directors headed by a President and including at least 3 but not more than 15 members. All Board members are elected for a period of 6 years. At present, CIOR's Board consists of 10 members including 5 representatives of ODI, and representatives from the Ministries of Industry, Finance, Public Works, and the Prime Minister's Office. Mr. Benjelloun, the President of ODI and also President of CIMA, was elected President of CIOR's Board of Directors. CIOR's Board exercises the wide powers traditionally exercised by the Board of a "societe anonyme", e.g. establishment of annual and long term investment and operational plans, approval of all contracts, agreements and loans, appointment of the General Manager and approval of financial statements. 2.08 CIOR's management team includes the staff originally hired by CIMA with the exception of Mr. Tahari, the Algerian Deputy General Manager who was called back by SNMC(A) in early 1976. CIOR is headed by a General Manager, Mr. Ennadifi, a geologist by training, who is assisted by Mr. Ramzy, an Egyptian technical advisor, who brings to CIOR many years of experience in cement manufacture in the Mediterranean region. Mr. Kerrou an experienced mining engineer and the Production Manager, joined CIMA in 1974 and partici- pated in a 12-month training program in the cement plants of APCM in England. Mr. El Ayoubi has been appointed as manager for Finance and Administration and CIOR is currently recruiting a Commercial Manager. CIOR's management team has shown to be well motivated and energetic and should continue executing the project effectively, if supported by the technical assistance outlined in para. 4.11. Details of CIOR's organization and management are given in Annex 2-2 and an organization chart is presented in Annex 2-3. C. ODI - The Shareholder 2.09 ODI is a Moroccan Government agency, established in 1973 to promote industrial development in Morocco and in particular (i) to undertake pre- investment studies, (ii) to acquire equity participation in newly created industrial enterprises, and (iii) to contribute to regional development through investments in appropriate projects and cooperatives. Details on ODI's objectives, investment program and financial results are given in Annex 2-4. At present ODI promotes about 50 projects in various stages of preparation and execution, the majority being medium-sized textile, agro-industry and mechanical projects. Few of ODI's projects have started production yet. ODI can obtain funds through sales of equity participations, profits from its own operations, dividends, Government budget allocations, loans and bond issues; however, up to now, ODI has had to rely entirely on Treasury advances and other Government funds to meet its capital subscrip- tions, operational and pre-investment expenses. Under these circumstances ODI's long-term financial viability cannot be assessed; its creditworthiness for the moment rests entirely on the Government's commitment to continuing financial support.  -6- III. CEMENT MARKET, PRICING AND DISTRIBUTION A. The Cement Market in Morocco 3.01 A detailed description of the Moroccan cement market is presented in Annex 3-1 and major findings are summarized below. 1. Historic Supply/Consumption in Morocco 3.02 While cement production began in Morocco as early as 1918 at a plant in Casablanca, domestic production was first stepped ulp in the early fifties to a total capacity of 900,000 tpy with new plants in Meknes, Agadir, Tangier and Tetouan. Originally, all 5 cement plants in Morocco were con- trolled by foreign interests, in particular Lafarge, the French cement manufacturer who in the 60's owned 70% of Morocco's cement capacity. Im- plementing the Government s strategy of "Moroccanization", the Government, Moroccan banks and private Moroccan interests have acquired since 1971 majority participations in the various cement enterprises. All compensation questions were resolved and foreign partners have retained minority shares and management contracts in the existing plants as well as a new plant recently commissioned (ASMAR). 3.03 Following a temporary slowdown after independence in 1956, cement consumption in Morocco increased steadily by 6.8% per annum during 1960-67 and 14.5% p.a. during the 1967-76 period. Production capacities were grad- ually expanded to 1,000,000 tpy at Casablanca, 300,000 tpy at Agadir, 550,000 tpy at Meknes, 60,000 tpy at Tangier, and 150,000 tpy at Tetouan for a total of about 2.1 million tpy in 1975. Although the plants have been operating close to nominal capacity, domestic production has been failing to meet demand since 1971, and imports have become necessary. These reached about 25% of apparent consumption in 1976. Morocco: Apparent Cement Supply and Consumption (1960-1976) ('000 tons) Average Annual Growth Rate 1967 1971 1973 1975 1976 1967-1976 (%) Domestic Production 868 1,481 1,624 2,022 2,160 -/a 10.7 Net Imports - 101 40 207 740 /a - Net Exports 10 - - - - - Apparent Consumption 858 1,582 1,664 2,229 2,900 14.5 /a Based on 10 months actual results extrapolated. Import procedures during the early 1970's have been cumbersome and imports plus domestic production remained below actual demand. A repressed demand  thereby developed as witnessed by: (i) a black market for bagged cement, (ii) cement allocation by the authorities in provinces with severe shortages, (iii) increased production by Moroccan plants of low quality cement contain- ing an average of 20% inert additives and in some cases up to 25% of such additives, and (iv) the substantial jump of cement consumption in 1975/76 following imports of large quantities of cement. These imports were greatly facilitated by a streamlining of import procedures and the creation in early 1976 of SORESMA, a new Government agency to handle all cement imports. 2. Projected Demand/Supply in Morocco 3.04 Projected Demand - The steady growth of the Moroccan economy during the last ten years -- illustrated by a fast growth of cement consumption and an average GDP growth of 4.9% p.a. for 1967-1972 and 6.3% for 1973-76 -- is expected to continue through the forecast period, i.e. 1985. Cement demand projections using macro-economic indicators have been made (Annex 3-1); they project that, under "most likely circumstances", cement demand in Morocco will reach about 4.5 million tons in 1980 and about 6.1 million tons in 1985. The following table summarizes the results based on various projection methods and gives a range within which future domestic cement demand is expected to fall: Morocco: Projected Cement Demand (1978-85) (million tons) 1978 1980 1982 1985 Low: Correlation with GDP - Low 3.03 3.82 4.66 5.92 Most Likely: International Comparison 3.57 4.48 5.16 6.14 High: Correlation with GDP - High 3.40 4.56 5.72 7.46 The "high" and "low" projections are based, for the 1976-1980 period on a correlation with GDP derived from 1960-1975 observations, and beyond 1980 on a linear extrapolation of demand. The most "likely" projection is based on a comparison between cement consumption/capita and GNP/capita for a broad spectrum of countries with high cement consumption at different stages of development over the 1955-75 period. The "low" projection and the "high" projection assume an annual growth rate of GDP of respectively 5.5% and 7% till 1980. These compare to the 7.5% growth target of the Third Plan (1973- 77) and the 6 to 6.5% official growth estimate for the Fourth Plan (1978-82) period. The "likely" projection assumes annual growth rates of GNP of 7% till 1980 and 6% thereafter; it thus extrapolates till 1980 the recent fast growth of consumption/capita with GNP/capita in Morocco, and follows there- after the curve derived from international comparison. This "likely" projec- tion corresponds to an annual growth rate of cement of 11.5% till 1980 and 7.5% thereafter; it appears reasonable considering past evolution and the prospects of sustained growth in one of the major cement consuming sectors, housing. Construction in this field is expected to expand substantially, spurred by the increasingly felt shortage of accomodations in Morocco.  - 8 - 3.05 Projected Supply - By the end of 1976 Morocco's domestic cement production capacity consisted of (i) about 2.1 million tpy capacity in old facilities 80% of which use the energy intensive wet-process technology and the remaining 20% using semi-dry process, and (ii) about 0.7 million tpy additional capacity in new facilities being commissioned, consisting of ex- tension of existing plants and one new plant, ASMAR. To further respond to the increasing cement demand, expansions of 3 existing plants, and 3 new dry process plants (CIOR, ASMENT and a new Casablanca plant) with a total capacity of 3.6 million tpy are under construction or planned. The expansions of Tetouan and Tangier and the new 600,000 tpy ASMENT plant near Rabat are expected to be operative before 1980, with the expansion of Agadir slightly Later. A new I million tpy project at Casablanca to be built by the Moroccan State enterprise Societe Nationale des Materiaux de Construction (SNMC), recently created, is still in an early preparation stage and is not expected to start production before 1981-82. Assuming no delays in implementation of this project, continuing operation of all old installations and a reasonable average utilization rate of 90% of nominal capacity as has generally been the case in the past, domestic production in Morocco is expected to develop as follows: Morocco: Projected Cement Production (1976-1980) ('000 tons) 1976 1978 1980 1982 1985 Existing Plants 2,160 2,605 2,790 3,220 3,220 New Plants - 195 1,420 1,960 2,610 Total Production 2,160 2,800 4,210 5,180 5,830 3.06 Projected Demand/Supply Balance Based on the above demand and supply projections, the following table shows the projected demand/supply balance through 1985. Morocco: Projected Production/Demand (1978 - 1985) ('000 tons) 1978 1980 1982 1985 Domestic Supply 2,800 4,210 5,180 5,830 Domestic Demand: - Low 3,030 3,820 4,660 5,920 - Likely /1 3,570 4,480 5,160 6,440 - High 3,400 4,560 5,720 7,460 Domestic Surplus (Deficit) - Low (230) 390 520 (90) - Likely (770) (270) 20 (610) - High (600) (350) (540) (1,630) /1 For 1978, the short-term "likely" forecast is higher than the "high" projections based on long-term trend projections.  - 9 - Assuming a "low" growth demand, domestic supply could catch up with demand in the early eighties, allowing some temporary surpluses; in practice, supply in such case would probably be smaller than indicated, by curtailing production of the old Casablanca plant, the economic operation of which is becoming questionable on account of excessive energy requirements and severe pollution. In the "most likely" and the "high" demand cases, there is a supply deficit throughout the first half of the 1980s with the exception of a brief period around 1982 when, in the "most likely" case, demand and supply are in balance. From the above data, it appears that had one half of CIOR's production gone to Algeria as originally planned, the prospective cement deficit in Morocco on a national basis would be substantially greater than shown and additional expan- sion projects had to be undertaken. On a regional basis, however, the avail- ability of half of CIOR's production to Morocco will, for the medium term resuLt in an oversupply in Morocco's Eastern Provinces as explained in paras. 3.08 to 3.09. 3.07 Thus, while overall supply and demand appear to be balanced in the early 1980s on a national basis, it is essential that further investments in cement be optimally planned with respect to location and timing. To this end, the Moroccan Ministry of Industry is setting up, within the newly-created SNMC, and with the help of foreign consultants, a system to provide continuous monitoring of the cement market. Within this system the authorities intend to undertake, as soon as the next 5-Year Development Plan (1978-82) is available, a comprehensive cement market study based inter alia on sectorial analysis. 3. The Market for CIOR Cement in Morocco 3.08 The market of the Oriental Region where CIOR will be located is presently served by existing plants of the Western regions (mostly the Meknes plant) over distances of 400 km and more, supplemented by cement imports. When the CIOR plant was originally designed, with only half its production allocated to Morocco, it was optimally located from a transport and distribu- tion point of view since the cement demand in the Oriental region (Provinces of Oujda, Nador, Figuig and Taza - IBRD Map 12528) was projected to reach about 450,000 tpy in 1980 and 700,000 tpy in 1985. This demand would have provided a rapid absorption of the Moroccan allocation. Following the change to a solely Moroccan-owned plant, the availability of half of the plant's output will result in a temporary regional oversupply even though, as indi- cated earlier, this additional supply will be needed on a national level. 3.09 Regional cement supply shortfalls will be essentially concentrated in the country's densely populated northwestern regions, Casablanca, Rabat, and Fez-Meknes. While these markets are accessible from CIOR through the main Oujda-Casablanca railway line, they are between 300 and 600 kilometers away from the plant site and will therefore be penalized with high transport costs. Nevertheless, half of CIOR's production will help offset the deficits in those other regions as shown below. However, after a period of 12 years CIOR's entire production would be required for the expanding market of the Oriental Region.  - 10- Morocco: Projected Regional Supply/Demand in the Northern Regions (000 tons) 1980 1982 1985 North-West Oriental North-West Oriental North-West Oriental Regions Region Regions Region Regions Region Demand 2,660 460 3,070 540 .3,830 680 Supply 1,980 938 2,290 1,173 2,940 1,173 Surplus - 478 - 633 - 493 (Deficit) (680) (780) - (890) 3.10 At the time the decision was taken to proceed with a solely Moroccan project, the Moroccan authorities recognized that they had to provide for satisfactory transport and distribution arrangements for the marketing of CIOR's production outside the Oriental Region. As a result, a preliminary study of transport and distribution was undertaken by CIOR and the Bank in the Fall of 1976. The result of this study as well as the necessary steps for further review and implementation of adequate distribution arrangements are indicated in paras. 3.16 to 3.19. 3.11 In addition to the market study referred to in para. 3.07, the Moroccan authorities agreed to undertake also a detailed distribution study as well as a pricing study discussed in para. 3.25. The distribution study will be undertaken prior to December 31, 1979 by the Ministry of Industry. The Government agreed to consult with the Bank on terms of reference and results of the study. 3.12 While the market and distribution studies will greatly assist Morocco in preventing future imbalances in supply and in optimizing the location of additional cement capacity, it will, as noted earlier, take a good many years for the Oriental Region demand to grow to the point where it can fully absorb CIOR's output. In order to ensure that new or expanded facilities in Morocco will not further distort the project's distribution pattern, assurances have been obtained from the Moroccan authorities to con- sult with the Bank on cement market prospects within a reasonable period prior to undertaking any significant increase in cement production capacity. B. Cement Distribution and Pricing in Morocco 1. Existing Distribution System 3.13 The Moroccan cement market is characterized by an oligopolistic situation with a large number of small individual consumers supplied by a few producers. Cement producers consider themselves as production com- panies only and typically sell all their output to independent wholesalers who, in turn, sell to retailers or directly to consumers. With this trading  - 11 - pattern, the cement companies have no influence on prices at the consumer level, no means of transport or distribution outlets of their own, and as a result little market transparency. 3.14 At present, there are about 100 wholesalers of construction mate- rials including cement. Typically, they are associated with one cement plant, do not carry stocks, but issue vouchers which enable the customer to pick up the cement at the plant or railway station. Most plants request advance or cash payment from wholesalers. Cement retailers are numerous and generally trade in a wide range of commodities. Typically, they carry small cement inventories, and own trucks enabling them to realize a substantial profit on transport. Details of the Moroccan cement distribution system are given in Annex 3-2. 3.15 None of the Moroccan cement producers own transport means. About 18% of ex-factory shipments of cement are transported by rail, 2% by vessels along the Mediterranean coast, and about 80% by truck. Road transport is closely regulated by the Office National des Transport (ONT), which controls private truck operators with trucks exceeding 5.5 tons through licensing, assigning cargos and fixing freight rates. In addition to small trucks, vehicles used by enterprises tranporting their own products are also excluded from ONT's control. ONT's tariffs are high compared to operating costs of trucks and have induced "illegal transport" and widespread ownership of trucks of less than 5.5 tons. For example, in 1973 only 12% of total cement ship- ments by trucks has been transported by ONT, the remainder being transported in small trucks, despite the experience in other countries that cement ship- ments by road are most economically handled in 10 to 20-ton trucks. Tariffs of the railway company--Office National des Chemins de Fer (ONCF) -- are about 30% below ONT tariffs on all distances exceeding 100 km. However, on back hauls, private transporters offer prices as low as DH 0.06/ton km, and thereby undercut the ONCF tariffs. Details on distribution channels and cement transport in Morocco are given in Annex 3-2. 2. Distribution and Transport of CIOR Production 3.16 Distribution: In 1974-75, ODI and CIMA undertook a preliminary survey to evaluate existing distribution channels and transport means in the Oriental Region. This study concluded that the Company (i) should play a greater role in marketing than the existing cement producers, (ii) use the existing wholesale-retail network in the Oriental Region, supplemented with own distribution outlets, including storage facilities, and (iii) acquire a minimum number of 20-ton trucks, including bulk carriers, to meet basic requirements for distributing cement thus improving the transport services in the Oriental Region. Details of the survey are given in Annex 3-3. 3.17 The preliminary transport and distribution study for CIOR's sales outside the Oriental Region as discussed in Annex 3-3, concluded that an optimal solution would require unit trains with special wagons operating be- tween CIOR and a few distribution terminals centrally located in major market areas and equipped with fast unloading/loading facilities. Possible major alternnatives are (i) transport in bulk and bagging cement at the terminals, or (ii) bagging at CIOR's plant and transport/handling of bags on pallets.  - 12 - Prospective locations of the terminals are the major towni of Fez, 310 km from the plant and possibly Casablanca, where agreement on distribution will be sought with other cement corporations such as SORESMA and SNMC who need to have their own facilities in these areas. A final decision on a specific solution and additional investments is to be taken in the framework of an interregional transport and marketing strategy after additional studies and consultations between the Government, CIOR, the other cement entities and ONCF (the railways) have been concluded. 3.18 To help arrive at such a decision, during April-July 1977 CIOR will update the preliminary transport and distribution study with the assistance of qualified consultants to be engaged prior to April 1, 1977, on terms of reference acceptable to the Bank. The Bank will finance the foreign exchange cost, estimated at US$50,000, of such work. CIOR has agreed to furnish to the Bank for its comments the said distribution study by July 1, 1977 and take within 6 weeks after the receipt of the Bank's comments a decision, in agree- ment with the Government as to location and type of distribution terminals to be constructed and operated by CIOR as part of the project and construct and equip the chosen terminals promptly thereafter. In addition CIOR agreed to enter into a transport agreement with ONCF on or before April 30, 1978. 3.19 Transport: Assurances have also been obtained from the Government that (i) it will cause ONCF to purchase as needed the type and number of railway wagons required to transport CIOR's production outside the Oriental Region as determined by the transport and distribution study outlined in the preceding paragraph and agreed upon by the Government and CIOR in consultation with the Bank, (ii) the Government will provide to ONCF promptly as needed, all funds required for such wagons or facilities, and (iii) the Government will cause ONCF to enter into a transport contract with CIOR on or before April 30, 1978. C. Pricing 3.20 The cement pricing system in Morocco is described in detail in Annex 3-2. Traditionally, the Government has been controlling cement prices by fixing maximum prices at the ex-factory level. These ex-factory prices have varied according to the producer, but the differentials reflect trans- port cost differences and ensure each cement plant a competitive price ad- vantage within a radius of about 200 km. The Moroccan authorities maintained unchanged ex-factory prices from 1958 to 1975 1/, ranging from 97.7/ton (US$23.3/ton) bagged cement for the Casablanca plant to DH 122.6/ton (US$29.0/ton) bagged cement for the Agadir plant. Thus, Moroccan prices averaging US$24/ton in 1975 remained low compared to domestic cement prices 1/ Except for an adjustment reflecting increased costs of bags and taxes. 2/ Including all operating cost plus depreciation and financial charges, but excluding profit and profit taxes.  - 13 - in Europe averaging US$22.0 - US$34/ton, and the cost of importing cement in Morocco which reached US$39.5/ton cif that year. Such low ex-factory prices may have had a depressive effect on new investments in the cement sector. Following two increases, in 1976, cement prices for bagged cement to whole- salers (ex-factory, including taxes) averaged DH 148/ton (US$33/ton), but cement producers realised only about DH 120/ton (US$21/ton) because of a 15% sales tax and levies for a "price equalization and compensation scheme". The Government started to levy the latter taxes in 1975 on certain producers while increasing official ex-factory prices to compensate for the high cost of imports which are sold by the Government to wholesalers at the official ex- factory price in the Casablanca area. 3.21 In the past, the strict price control on the producer level did not directly benefit the consumer. Wholesale and retail prices depend on transport costs and margins of sales agents. These intermediaries charged whatever the market could bear, resulting in up to 50% price differentials to consumers. In 1974/75, the authorities fixed profit margins of agents uniformly at DH 6/ton of cement for wholesalers and DH 10/ton of cement for retailers, thus limiting the agents profit to 3-6% of sales. 3.22 The Government presently handles cement ex-factory price increases for existing plants in an ad hoc manner and without direct concern about the producers' return on investment. As to new cement plants, the Investment Convention generally granted by the Government to investors also determines the company's ex-factory price. As a rule of thumb, the Government has set prices for new producers to enable them to earn a 10-12% return on equity and allows automatic price adjustments in case of official increases in labor rates, electricity tariffs, etc. 3.23 The production startup of the new ASMAR cement plant in 1976 and of the CIOR project in 1978 raises additional pricing problems for the Moroccan authorities: ex-factory costs 2/ for existing cement plants range from DH 75 to 100/ton, in 1976 terms, whereas for new cement plants corresponding costs of about DH 150 to 180/ton can be expected. In capital intensive industries such as cement, new plants have high unit costs as they are gradually brought up to capacity operation, while fixed costs such as amortization of preopera- ting expenses and financial charges become negligible. The Moroccan authori- ties argue that fixing prices in reference to the actual costs of the new plants would (i) earn existing producers substantial windfall profits and (ii) lead to a sudden price increase of at least 25%. 3.24 The Bank discussed in detail various cement pricing mechanisms with the Moroccan authorities. It was agreed that a pricing mechanism  - 14 - should be adopted 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 relatively stable prices for consumers, and (iii) provide an adjustment mechanism for controlled prices to reflect the impact of inflation on operating cost and in the longer run, on capital cost, ancl (iv) provide incentives for cost-conscious, efficient operation by not covering automatic- ally the cost of each producer. To achieve this objective the Moroccan authorities confirmed that (a) cement prices will be established for each cement producer or importer on the ex-factory and ex-distribution c:enter level, taking into account specific transport economies and market conditions. To ensure optimal resource allocation, it is intended to set prices to allow t:he industry as whole to earn a return of at least 10% on its combined net fixed assets in operation as period- ically revalued, and based on efficient operations. Cement prices will be fixed periodically and will be adjusted to reflect actual changes in unit costs oi- major inputs such as fuel and labor. (b) within the framework of general price levels defined under (a), the Government may grant import, invest- ment, transport and distribution incentives for new and expanding cement producers or importers. To cover such incentives, taxes will be levied on the cement industry. The Government agreed that tax revenues so obtained from cement producers would be at least as large as the expenditures for the various incentives. 3.25 Before introduction of the system described above I.t will be necessary to undertake a study to determine inter alia operat:ing proce- dures for the proposed pricing mechanism, investment incentives, original price levels, and procedures for reevaluating periodically fixed assets of the Moroccan cement industry. The Government agreed during negotia- tions to undertake by December 31, 1977 such study and consult with the Bank on its terms of references and results. IV. THE PROJECT A. Scope of the Project 4.01 The CIOR plant is one of the main industrial projects included in the Moroccan Five-Year Plan (1973-75). The project aims at import substitution  - 15 - by satisfying the growing cement demand by local production, and develop- ment of the Oriental Region, one of the less developed areas of Morocco. The project consists of the construction and operation of a cement plant at El Aioun, about 45 km West of Oujda in Northeast Morocco, close to the Algerian border, and the marketing of its output in the Oriental and Northwestern Regions. The cement plant, wiLth a nominal capacity of 1.2 milion tpy, will produce Ordinary Portland cement and possibly some special cement types. B. Raw Material Availability and Analysis 4.02 Geological investigations undertaken by APCM, a large cement pro- ducer and engineering consultant of the U.K., in 1974/75 have confirmed the availability of sufficient reserves of the two main raw materials, i.e. limestone and clay, to operate the plant at full capacity for over 50 years. The limestone which is immediately adjacent to the plant, has very little overburden and thus can be exploited by simple quarrying techniques. The c:Lay deposit is located about 7 km from the plant; it is also easily access- ible and exploitable and, below a few meters of overburden, has a fairly uniiform chemical composition. The low humidity and good quality of both limestone and clay allow production of clinker by the dry process and without additional corrective components. Gypsum which is to be added in small quantities to clinker for production of Ordinary Portland cement will be quarried from a high-grade deposit already operating about 50 km from the plant site, with 45 years recoverable reserves at CIOR's production rate. Additives required in limited amounts for the manufacture of special cement types can be purchased from other areas in Morocco, such as pozzolana, and starting in the early 80's, blast furnace slag from the SONASID steel project. Details on raw materials deposits are given in Annex 4-1. C. Technical Description 1. Production Facilities 4.03 The project will utilize, as noted above, the dry process techno- logy which offers substantial fuel savings and does not require significant amounts of water which is scarce in the area. The cement plant consists of (i) two complete lines of mill and kiln with four-stage preheater at a rated capacity of 1,800 tpd of clinker, planetary coolers and electrostatic pre- cipitators, and clinker grinding facilities, as well as (ii) auxiliary equip- ment and installations such as equipment for the limestone and clay quarries, raw material crusher and blending, stockpile, cement storage and dispatch facilities. Also included are a substation and all related electrical installations, workshops, a laboratory and a conventional control system, since the good quality of the raw material does not require sophisticated computer controls. The two medium-size kiln and mill units have been chosen instead of one 3,400 tpd clinker production line because they offer greater  - 16 - reliability of maintaining CIOR's average production level and thus outweigh possible economy of scale of larger units. A detailed plant description is contained in Annex 4-2. General plant layout and process flow charts are given in Annexes 4-3 and 4-4. 2. Utilities and Infrastructure 4.04 Utilities and infrastructure are described in greater detail in Annex 4-5 and briefly summarized below. The plant has been designed to burn heavy fuel oil or natural gas. Initially, the plant will operate on heavy fuel oil, which will be supplied by rail from the Sidi Kacem refinery some 400 km distant. Fuel price delivered at plant would at present be about DH 267/ton, i.e. it would be subsidized to the extent of about 25%. Morocco and Algeria in the past discussed the supply of natural gas to the Oriental Region. The use of natural gas as alternative fuel source would benefit Morocco and may reduce the economic cost of fuel in the plant by 20-40%. 4.05 The plant's power demand estimated at 122 million KWh per year will be supplied by the Office National de l'Electricite (ONE) from its high voltage tansmission line passing near the site. CIOR has signed a supply contract with ONE, who is constructing the two 60 kV connecting lines and the 225/60 kV and 60/11 kV substations. Water requirements estimated at 16 liter/sec are adequately supplied from a deep well operated by CIOR close to the plant. 4.06 The plant site is conveniently located alongside the main road and railway line Algeria-Oudja-Casablanca. A 2 km rail spur has been com- pleted to connect the plant to this line which CIOR will use for fuel supply and cement shipments to other regions. Housing and recreation facilities for the whole personnel, i.e. for about 440 families will be constructed at El Aioun, the nearest town located about 15 km from the plant site. A main office building and a few houses will also be constructed in Oujda for CIOR's management and commercial department. D. Ecology 4.07 The plant is located in a semi-arid area without agricultural use. Nevertheless, it is designed to meet anti-pollution standards comparable to those maintained by Western European c untries as detailed in Annex 4-6. Dust discharge will be kept below 115 mg/Nm by the use of electrostatic precipita- tors or filters at the various dust generating stages of production. Liquid effluents consisting mainly of sewerage discharge will be treated in waste treatment facilities. Appropriate noise abatement precautions have been taken into account for the noise generating mills and crushers. CIOR has agreed to (i) construct and operate the plant with due regard to ecological standards, and (ii) monitor the pollution levels after production startup. E. Manpower and Training 4.08 Cement factories are generally capital intensive. The project will therefore provide direct employment for only about 500 people, of which  - 17 - 100 are unskilled workers, at an investment cost of about US$370,000 per employee. CIOR intends to operate the plant with Moroccan personnel and a minimum of expatriate assistance. A training program for staff and skilled workers is underway and includes (i) intensive training courses by APCM, CIOR's engineering consultants, in British cement plants, (ii) short-term training by equipment suppliers in European cement production facilities, and (iii) assignments in existing plants in Morocco. Recruiting and training of technical staff started in 1974 and is proceeding satisfactorily. Details on manpower projections and training are contained in Annex 4-7. 4.09 CIOR has submitted to the Bank a detailed comprehensive recruit- ment and training program which is adequate. To ensure that recruitment and training continues satisfactorily, during negotiations, assurances have been obtained from CIOR for continuing adequate and timely arrangements for re- cruitment and training of all personnel required for production, administra- tion and distribution. F. Project Execution and Technical Assistance 4.10 CIOR has engaged APCM to provide project preparation and implementa- tion services. In a first stage, APCM carried out the geological studies, raw material analyses, the feasibility study and general plant design. In a second phase, APCM is responsible as consulting engineer for detailed engi- neering, preparation of procurement documents, bid evaluation and contract preparation, training, supervision of construction, erection and commission- ing. APCM subcontracted (i) detailed design and supervision of civil works to Oscar Faber & Co., a British consulting engineering firm, and (ii) market studies for the feasability study and infrastructure studies and the local recruitment and training study to the Moroccan consulting firm Maghreb Projects. 4.11 CIOR's contract with APCM provides an option for technical assist- ance after commissioning whereby APCM would make available 300 man month of assistance during the first five years of operations. Since CIOR's staff will be relatively inexperienced, more detailed arrangements are necessary to ensure successful operation of the plant. Therefore, CIOR has agreed to propose to the Bank by September 30, 1977, adequate technical assistance arrangements to operate the plant efficiently after commissioning and enter promptly after having received the Bank's comments into a contract satis- factory to the Bank. G. Project Timing 4.12 The project implementation schedule, initially prepared by APCM and regularly updated by APCM and CIOR is shown in Annex 4-8. Equipment delivery, construction and erection schedules are based on information provided by suppliers, APCM's experience and actual progress on the con- struction site. Accordingly, the plant is expected to start production in the third quarter of 1978. This time schedule is realistic since virtually all contracts have been signed, the main civil works started in September 1976 and erection of the mechanical equipment is just starting.  - 18 - V. CAPITAL COST AND FINANCING PLAN A. Capital Cost 5.01 Capital cost estimates are detailed in Annex 5-1 and are summarized below: Summary of Capital Cost Estimates Local Foreign Total Local Foreig / Total % ------Million DH------- ------Million US$------ Building and Civil Works 94.7 69.3 164.0 21.0 15.4 36.4 21 Infrastructure 57.5 8.8 66.3 12.8 2.0 14.8 9 Equipment and Erection /a 86.1 251.4 337.5 19.1 55.9 75.0 44 Freight 6.3 13.8 20.1 1.4 3.1 4.5 3 Preoperating Expenses 23.5 2.7 26.2 5.2 0.6 5.8 3 Engineering 5.0 11.3 16.3 1.1 2.5 3.6 2 Duties and Taxes 24.8 - 24.8 5.5 - 5.5 3 Total Base Cost 297.9 357.3 655.2 66.1 79.5 145.6 85 Physical Contingency 14.5 17.4 31.9 3.2 3.9 7.1 4 Price Escalation 30.4 20.1 50.5 6.8 4.4 11.2 7 Total Fixed Assets 342.8 394.8 737.6 76.1 87.8 163.9 96 Initial Working Capital 25.5 6.1 31.6 5.7 1.3 7.0 4 Total Cement Plant 368.3 400.9 769.2 81.8 89.1 170.9 100 Distribution Facilities 9.6 9.7 19.3 2.1 2.2 4.3 Distribution & Pricing Study 0.2 1.4 1.6 0.1 0.3 0.4 Total Project Cost 378.1 412.0 790.1 84.0 91.6 175.6 Interest During Construction 13.2 15.3 28.5 2.9 3.5 6.4 Total Financing Required 391.3 427.3 818.6 86.9 95.1 182.0 /a Including commissioning and training by suppliers. /b Includes indirect foreign exchange costs of US$4.8 minimum.  - 19 - 5.02 Cost estimates for the plant proper are based on actual contracts signed and payments made by October, 1976 for equipment, buildings and civil works. Infrastructure costs related to the plant are based on actual payments and contracts with ONE and ONCF's subcontractors who execute these project components. Cost estimates of the office and housing facilities are based on data prepared by the architectural company appointed for the design and supervision of execution of these works. Since CIOR will be granted tax concessions under the Investment Code, import taxes and duties of only 5.1% of the cif value of imported goods, 7.5% to 10% on services and 1.7% on share capital have been added. Signature of the Convention between the Government and CIOR stipulating these advantages has been confirmed. Freight and in- surance to the plant site reflect the relevant charges included in contracts signed or suppliers' quotations. The engineering item covers APCM's services for engineering and training, whereas the preoperating expenses item comprises all other CIOR expenses before startup including geological studies, and materials and supplies used during startup. Total cost of consultants' ser- vices for the project is estimated to be US$5.4 million, including US$4.1 million for the cement plant engineering at a cost of about US$3,300 per man month. 5.03 Possible omissions and changes in the project are expected to be limited because of the advanced stage of project implementation. To cover these, physical contingencies of 5% have been added to the base cost of plant equipment civil construction and infrastructure for which contracts have been signed, and not yet completed, and 10% for other cost items. Price escalation rates of 12% per annum in 1976 and 8% per annum thereafter have been applied on all project costs to the extent they are subject to price escalation except for local components of preoperating expenses for which a uniform rate of 7% per annum has been used. The resulting price contingency is only 7% of base cost plus physical contingencies, since (i) prices of most equipment contracts are fixed price contracts; and (ii) the plant will be completed less than 2 years from the date of the base cost estimate. The estimated fixed assets cost excluding infrastructure, totalling US$125 per annual ton of cement produced, compares favorably with similar new plants in other countries. The total cost estimate decreased by about 15% from the initial cost estimate prepared at the time of the appraisal of the CIMA jointventure project due to a favorable competitive market situation. 5.04 Capital cost of CIOR's additional distribution facilities are estimated between DH 18 - 20 million, depending on transport and handling alternatives selected and location of the terminals (Annex 3-3). B. Working Capital Requirements 5.05 Initial working capital requirements are estimated at DH 31.6 million, as detailed in Annex 5-2. This also includes all working capital required to operate the distribution terminals.  - 20 - C. Financing Plan and Guarantees 5.06 Total financing required of DR 818.6 million (US$182 million) including DH 28.5 million (US$6.4 million) for interest during construction will be provided as follows: Financing Plan DH Million US$ Million % Capital 328.0 72.9 40 Debt - IBRD 202.5 45.0 25 - Treasury Advances 256.5 57.1 31 - Moroccan Commercial Banks 31.6 7.0 4 Total Debt 490.6 109.1 60 Total Financing Required 818.6 182.0 100 5.07 Equity financing will amount to US$72.9 million based on a 60:40 debt/equity ratio which provides adequate capitalization for a cement proj- ect. All but DH 35 million (US$7.8 million) of CIOR's capital has been subscribed or paid in. ODI and the Moroccan Government have agreed to make available to CIOR the remaining DR 35 million when needed for timely project implementation and so as to maintain at all times a debt/equity ratio of 60:40. CIOR will carry the foreign exchange risk of the Bank loan. 5.08 The proposed Bank loan of US$45 million equivalent will be made directly to CIOR and for 14 years including 3 years of grace at the pre- vailing interest rate (8.5% p.a. at present), plus a guarantee fee (1.5% p.a.) payable to the Government of Morocco, bringing the total financial charges to CIOR to 10% per annum. The Bank loan will cover 47% of the project's foreign exchange cost. 5.09 The Government has confirmed that Treasury advances totalling DH 256.5 million (US$57.1 million equivalent) will be made available as needed to cover the remaining debt financing requirements excluding working capital. The Treasury advances will be provided at terms and conditions to be agreed upon between the Government, CIOR and the Bank. It has been assumed for the financial projections and as discussed with the Government that the Treasury advances will carry 6.5% interest p.a. and be repayable over 17 years includ- ing 3 years of grace. The Arab Fund may provide a KD 7 million loan for the project ($24.5 million equivalent) for 17 years, including 3 years of grace, with interest at 6.5% p.a. Its contribution would reduce accordingly the amount indicated for Moroccan Treasury Advances. 5.10 It is intended to cover the initial working capital requirements of DH 31.6 million (US$7.0 million) through Moroccan commercial bank loans  - 21 - secured by current assets. ODI and the Government have agreed to provide funds for said working capital in the unlikely event that financing from local banks would not be forthcoming. 5.11 ONCF, the Moroccan Railway Company will require about US$3 mil- lion equivalent to purchase new railway wagons to handle CIOR's cement transport (paras. 3.16 - 3.19). Assurances have been obtained from the Government that adequate funds will be made available to ONCF promptly as needed for this purpose. 5.12 To ensure timely project completion, ODI has agreed during negotia- tions to provide a cost overrun and project completion guarantee, i.e., make available additional local or foreign exchange funds on terms and conditions satisfactory to the Bank as and when needed to promptly complete the project and in such form that CIOR can maintain the financial covenants outlined in para. 6.05. Since ODI is financially dependent on the Government, the Govern- ment has agreed to guarantee ODI's performance under its obligations detailed in paras. 5.07, 5.11 and 5.12 above. 5.13 In addition, assurances have been obtained from the shareholder (ODI) not to transfer or sell its majority shareholding in CIOR without prior approval of the Bank. D. Procurement 5.14 Procurement of civil works, equipment and services for the cement plant has been through ICB in accordance with Bank Guidelines, regardless of sources of financing. For purposes of bid evaluation, domestic equipment suppliers have been given a 15% margin of preference. In June 1975, CIMA signed four fixed price contracts with Polysius (France) (after international competitive bidding, in which Polysius was the lowest evaluated bidder) for the supply of the mechanical equipment; for its erection and commissioning; for the supply of appropriate spare parts; and for related training. A contract for site preparation was signed in September 1975 with CTRA-ENATRA, a Moroccan civil works contractor, following ICB. Contracts for the civil works, electrical equipment and process control equipment were signed re- spectively, in May 1976 with Construcos Technicos (Portugal), in June 1976 with Brown Boveri (Switzerland) and in July 1976 with COMSIP (France), also after ICB. Procurement procedures for the remaining 5 internationally bid packages for the plant (generators, inspection services, quarry equipment, workshops and laboratory equipment) were completed in 1976 and contract signed with various suppliers from the US, Japan and Western Europe. Finally the additional distribution equipment will be bid through ICB in 1977-78. 5.15 Procurement of infrastructure (water supply, electricity and rail links, housing and other social facilities) and miscellaneous mobile equipment is being carried out through competitive bidding in accordance with local procedures. These items are all being financed from Moroccan funds. Details on procurement are given in Annex 5-1.  - 22 - E. Allocation of Bank Loan and Disbursement 5.16 As detailed in Annex 5-3, the Bank loan of US$45 million equivalent will finance part of the foreign exchange cost of equipment, construction, erection, training and consulting services required by CIOR for the project. 5.17 More specifically, the US$45.0 million equivalent of the Bank loan will finance: (a) foreign exchange cost of equipment for the plant and distribution terminals, (US$20.2 million); (b) foreign exchange cost of training, plant erection and commissioning, and of consultant services for inspection, accounting assistance and distribution studies (US$4.0 million); (c) 47% of the total cost of civil works for foundations and buildings, representing the total estimated foreign exchange component (US$18.0 million); (d) interest during construction on the Bank loan (US$2.8 million). A detailed list of items to be financed by the Bank Loan is given in Annex 5-3. The Bank loan is expected to be disbursed by end of 1979 as shown in the dis- bursement schedule (Annex 5-4). 5.18 The original project was appraised in 1975 and ready for negotia- tions in January 1976. Due to the breakdown of the original joint venture, outside the influence of CIOR or the Bank, processing of a loan for this cement plant has been delayed by more than one year. Consequently, advance contracting and some retroactive financing could not entirely be avoided. Taking into account the exceptional circumstances of this project, retroa- ctive financing of up to US$5 million or 11% of the Bank loan, is recommended. VI. FINANCIAL ANALYSIS A. Operating Costs 6.01 Estimates of CIOR's operating costs and revenues are based on the production of 90% bagged and 10% bulk Ordinary Portland cement as expected during the early years of operation. CIOR's two production lines are expected to be operative by the third quarter of 1978, gradually increasing output to 98% capacity utilization by 1982 as shown in Annex 6-1. Such capacity  - 23 - utilization is conservative as it assumes only 310 operational days per year, while plants normally operate 330 days per year and use this number for establishing capacity; on such a basis CIOR's assumed capacity utilization at full production (1982) would be 92%. Distribution costs are detailed in Annex 6-2. 6.02 Operating cost projections are based on recent estimates prepared by APCM and updated on the basis of data for existing cement plants in Morocco. Projections in 1976 constant terms are given in Annex 6-1 and those in current terms in Annex 6-3. To reflect projected inflationary cost changes, it has been assumed that local costs would increase by 7% p.a. and foreign costs such as those of spares and refractories, by 10% p.a. in 1976 and 7% thereafter. Based on the present fuel oil price in Morocco, CIOR's operating costs in 1976 constant terms are projected to decrease from US$17.9/ ton cement in 1979 to US$16.6/ton in 1983 as the efficiency of the plant improves and the plant operates near capacity, whereas operating costs in current terms would reach DH 98/ton (US$22/ton) in 1979 and DH 119/ton (US$26/ton) in 1983. The removal of the present fuel subsidy in Morocco would add about DH 6.0/ton to the production cost of cement. Thus, even without this subsidy CIOR's operating cost structure meets international standards for operating costs of new cement plants. B. Revenues 6.03 Under the new pricing system discussed with the Government, ex- factory prices, investment and distribution incentives for new cement pro- ducers, and taxes would be set at such levels to allow the industry to earn a reasonable return on assets under conditions of efficient operations (para. 3.24). During the first years of production CIOR is therefore expected to receive incentive payments like the other new producers, to compensate for high initial costs due to heavy financial charges and depreciation and higher operating costs as production builds up only gradually. Conversely, thereafter these incentives would be removed and eventually taxes levied as CIOR's total production costs decrease to an average DH 180/ton (US$40) in current terms by 1982-84 as shown in Annex 6-4. Thus the financial projections use net (ex-factory) revenues equivalent to DH 180/ton in 1976 real terms for 1978-81, declining to DH 150/ton, thereafter in line with the present ex-factory prices for new cement producers in Morocco. These revenue pro- jections result in an acceptable financial situation (paras. 6.04-6.05). C. Financial Projections 6.04 Financial statements in current terms have been projected on the assumptions given in Annex 6-3. Detailed income, cash flow and balance sheet forecasts through 1988 are given in Annexes 6-4, 6-5 and 6-6 and selected items are summarized below:  - 24 - CIOR: Selected Income and Balance Sheet Items (DH million - current terms) 1978 1979 1980 1981 1982 1985 Production (1,000 tons) 195 821 938 1,055 1,173 1,173 Utilization ratio (%) a/ 49 b/ 68 78 88 98 98 Net Sales 39.8 202.8 246.9 298.0 300.1 350.5 Operating Profit 3.2 53.2 83.3 124.4 123.1 145.0 Net Profit after Taxes (Loss) (5.84) (4.37) 26.7 66.3 67.5 107.5 (as % of Net Sales) - - 11 22 22 30 Cash Generation 11.3 65.0 72.6 91.5 78.4 113.9 Dividends - - 3.2 27.0 28.2 68.1 Long-term Debt 440.6 430.4 393.2 356.9 319.95 209.75 Equity 322.2 317.8 321.0 348.0 376.2 536.5 Debt Service Coverage (times) - 1.5 1.7 1.7 1.6 2.3 Current Ratio 1.3 2.5 2.0 2.1 2.1 2.2 Debt/Equity Ratio 57:43 57:43 55:45 51:49 46:54 28:72 a/ Equivalent to a 92% capacity utilization when based on the normal 330 operating days per year rather than the assumed 310 days. b/ On the basis of 4 months production. The above table indicates that through the first full year of operation (1979), CIOR would experience small losses, partly on account of fast depre- ciation (3 years) of preoperating expenses. Starting in 1980, net profits would gradually increase and reach levels in 1981-83 sufficient to make further incentives unnecessary and allow the assumed reduction in the ex- factory sale price. Simultaneously, as full production is being reached, projected cash flow should allow the start of dividend payments. In line with the provisions of the investment convention dividend payments of 12% on equity have been assumed after the allocation of net income after taxes to the legal and investment reserves.  - 25 - 6.05 In order to establish and operate CIOR on a sound financial basis, assurances have been obtained from CIOR and its shareholder ODI, to maintain or guarantee that CIOR can maintain at all times a current ratio of at least 1.3. and a debt-service ratio of 1.5. To back up ODI's obligation, the Government will be asked to guarantee ODI's performance under a shareholder's guarantee agreement. In addition, CIOR agreed (i) not to incur any debt if this would result in a debt/equity ratio greater than 60:40, (ii) not to undertake - without prior consent of the Bank - additional capital investments of more than US$5 million annually until project completion, 1/ and (iii) not to pay any dividends or make any distribution of cash unless after such payments the Company's current ratio is at least 1.5. D. Break-Even Analysis 6.06 The profit break-even point and cash break-even point in 1980, the year in which CIOR would start repaying a portion of long term debt, would be respectively at 68% and 47% of capacity. The profit break-even point and cash break-even point in 1982 to 66% and 59% respectively. E. Accounting and Auditing Requirements 6.07 CIOR will require a first rate accounting and financial planning system to control its productivity and costs. The training of a chief accountant as part of APCM's training program is not sufficient to ensure adequate accounting standards and cost control after startup. Therefore, CIOR agreed to employ prior to June 30, 1977 on terms and conditions satis- factory to the Bank, qualified consultants who will define and implement promptly a system of general cost accounting, cost control and budgeting, as well as of financial planning on terms and conditions satisfactory to the Bank. The foreign exchange costs of these accounting consulting services, estimated at US$250,000, are included in the Bank loan (para. 5.17). In addition, CIOR will have its accounts audited annually by an independent auditing firm acceptable to the Bank. F. Financial Rate of Return 6.08 Financial rate of return calculations are in 1976 real value terms and are derived from the financial projections, i.e., they assume net ex- factory revenues in real terms equivalent DH 180/ton during 1978-81 and DH 150/ton thereafter. The rate of return is calculated for the cement plant only, i.e., revenues and costs of the transport and distribution activities are excluded from the calculations since CIOR will be reimbursed for these expenses which will, thus, not affect CIOR's rate of return. The assumptions for the calculations and for the cost/benefit streams are given in Annex 6-7. The financial rate of return is 10%; the sensitivity tests are summarized below: 1/ The project will be considered complete when production and sales over a period of at least 90 days have reached 90% of rated capacity and current ratio is at least 1.3.  - 26 - Sensitivity Tests on Financial Rate of Return Case Rate of Return (%) Base Case 10.0 Capital Cost Increase 5% 9.4 Operating Cost Increase 10% 8.6 Revenue Decrease 10% 7.5 Revenue Increase 10% 10.8 This rate of return is adequate considering that the Government wants to keep cement prices as low as possible to protect the consumer and encourage at the same time necessary capacity expansions. By contrast with sales prices main- tained throughout at the same level of DH 180/ton as in the first years of production, the rate of return increases to 12%; this is more in line with cement facilities in other countries. Another reason for the low financial return is the heavy infrastructure, largely the 440-unit housing complex, representing more than 10% of fixed asset costs, the cost of which is entirely borne by CIOR. G. Major Risks 6.09 The technical risks of this project are relatively small; they may become critical only in the unlikely event that CIOR were not to continue with its training and technical assistance program and could not retain qualified technicians and administrative staff. The major areas of potential risk are market and distribution. Under the severe pressure of growing cement demand and insufficient domestic production in the next few years, the Moroccan cement industry could, if unchecked, commit itself to the construc- tion of additional production capacity leading possibly in the mid-1980's to an oversupply if growth of cement demand would be less than expected. To avoid this risk the Government has agreed to undertake comprehensive market studies and will consult with the Bank prior to new expansions of cement production capacity (para. 3.12). The risk on account of distribution lies in the transport by rail and marketing in distant regions of Morocco of about 300,000 to 600,000 tpy of cement for an extended period of time. This risk is being reduced by the establishment of an appropriate distribution component in consultation with the Bank and based on a detailed study, and the implementa- tion of special transport arrangements with ONCF under Government auspices. VII. ECONOMIC JUSTIFICATION A. Economic Rate of Return 7.01 The economic rate of return of the project is about 13.8% in real terms. This is higher than the 10% financial return, mainly because the revenue per ton assumed in the financial projections is declining gradually  - 27 - and on average is substantially below the opportunity cost of imported cement used for the economic rate of return calculations; this cost is estimated at US$47/ton for bagged cement, including port charges and the high cost of cement transport in the Mediterranean basin averaging 20-30% of fob export prices. The economic rate of return calculations eliminate the existing subsidies on fuel (valued at US$75/ton) and electricity (valued at a cost 50% above current tariffs), shadowprice labor and take into account cost of tansport by rail, investment cost and operating of distribution facilities required to market CIOR's output in market areas outside the Oriental Region. Detailed assumptions for the calculations and the cost benefit streams are given in Annex 7-1. 7.02 The sensitivity analysis, details of which are contained in Annex 7-1, is summarized below: Sensitivity Tests on Economic Rate of Return Case Economic Rate of Return (%) Base Case 13.8 Capital Cost Increase (5%) 13.2 Plant Operating Cost Increase (10%) 12.7 Transport and Distribution Cost Increase (50%) 12.8 Revenue Increase (10%) 16.2 Revenue Decrease (10%) 11.1 Production of Blast Furnace Cement after 1984 14.7 The above economic rate of return is adequate, but not higher for the follow- ing reasons: (i) additional costs are incurred in transporting, for possibly up to 12 years, a substantial part of CIOR's production originally allocated to Algeria, to market areas more remotely located than the original Algerian market just across the border; (ii) the low opportunity cost assumed for imported cement, based on presently low export prices which do not yet fully reflect recent worldwide increases of capital and energy costs and (iii) the reduced output assumed for CIOR by taking into account only production of Ordinary Portland cement; such production could be reasonably increased by about 20% through the manufacture of cement with additives such as blast furnace cement, with a less than proportional increase in total costs. The rate of return of the project with the production of an additional 200,000 tpy by using slag from the nearby SONASID steel project for the manufacture of blast furnace cement would be 14.3%. The rate of return of the project as a joint venture supplying also Algeria was, on a comparable basis, about 16%. B. Linkages and Employment 7.03 While the plant and distribution terminals create about 500 addi- tional jobs in the long run, some 1,200 Moroccans will be employed for  - 28 - an average of 2 years during plant construction. The indirect employment effect of cement supply is difficult to quantify but is considerable in the construction industry and the tertiary sector. The ready availability of cement will induce self-help housing construction which, in Morocco, is a major factor for absorbing unemployment and improving living conditions. In theory of course, cement supply from imports as well as domestic production generate the same indirect employment effects. In practice, however, because of import regulations, port handling deficiencies and foreign. exchange re- strictions, imports do rarely meet actual demand and only domestic production can ensure continued adequate availability of supply. C. Foreign Exchange Effects 7.04 As a project aimed at import substitution, the foreign exchange savings obtained by this project is one of the major economic justifications. Details of the projected foreign exchange effects of the project are given in Annex 7-2. The net foreign exchange savings of the project, in 1976 real value terms, increase from about US$17 million in 1979 to US$;34 million per year at full production. In addition, total foreign exchange savings are expected to offset the plant's net foreign exchange cost after 5 years of production. D. Regional Development Impact 7.05 The CIOR plant is one of the major projects planned by the Govern- ment to develop the Oriental Region. Separated by the Middle Atlas and the Rif mountain area from the developed Atlantic regions where most economic activities including industry are located, the Oriental Region has suffered from its remote location and is one of the large less developed regions of Morocco. Its development will, therefore, greatly benefit from additional investment. It is estimated that about one-third of the Moroccans living abroad originate from this region where the unemployment level is substan- tially above the national average. The CIOR project will be the first cement plant in the area, thus facilitating the implementation of Morocco's invest- ment program and private construction activities. Compared to imports, cement supply from CIOR offers transport savings of DH 20-40/'ton. Morocco's development plans and major projects for the Oriental Region are presented in Annex 7-3.  - 29 - VIII. AGREEMENTS' REACHED AND RECOMMENDATION 8.01 The following major assurances and/or agreements have been obtained: (a) From the Government of Morocco: (i) to undertake a cement distribution study in consultation with the Bank (para 3.11), (ii) to consult with the Bank on cement market prospects prior to any significant increase in cement production capacity (para 3.12), (iii) to cause ONCF to implement the project's transport component, and provide to ONCF the necessary funds promptly as needed (para 3.19), (iv) to undertake by December 31, 1977, in consultation with the Bank, a cement pricing study (para 3.25) and establish and maintain an economically sound pricing mechanism (para 3.24), (v) to make available when needed for timely project imple- mentation DH 256.5 million in Treasury Advances on terms and conditions satisfactory to the Bank (para 5.09), (vi) that ODI disposes of sufficient funds to meet its obligations under para 5.07 (equity financing), para 5.10 (working capital), para 5.12 (project completion), and para 6.05 (financial covenants), and (vii) that financing for CIOR's initial working capital will be forthcoming (para 5.10). (b) From ODI Under a Shareholder Guarantee Agreement: (i) to make available when needed the remaining DH 35 million in share capital (para 5.07), (ii) to provide cost overrun and project completion guarantee (para 5.12), (iii) not to transfer or sell a majority share in CIOR without prior approval by the Bank (para 5.13), and (iv) to provide funds if needed so that CIOR can maintain the stipulated financial ratios (para 6.05). (c) From CIOR: (i) to update the transport and distribution studies with the assistance of consultants to be hired prior to April 1, 1977 on terms of references satisfactory to the Bank (para 3.18), (ii) to furnish to the Bank the resulting study by July 1, 1977 and implement a distribution system promptly thereafter in consultation with the Bank and Government (para 3.18), (iii) to sign a transport agreement with ONCF by April. 30, 1978 (para 3.18), (iv) to construct and operate the plant with due regards to ecological standards, and monitor pollution levels after production startup (para 4.07), (v) to continue making adequate and timely arrangement for personnel recruitment and training (para 4.09), (vi) to propose technical assistance arrangement for plant  - 30 - operation by September 30, 1977 and sign a contract satisfactory to the Bank promptly thereafter (para 4.11), (vii) to maintain certain financial and investment cove- nants (para 6.05), (viii) to employ prior to June 30, 1977 consultants satisfactory to the Bank to define and implement adequate accounting, cost control and financial planning systems (para 6.07), and (ix) to have its accounts audited by an independent auditing firm acceptable to the Bank (para 6.07). 8.02 Further, it will be a condition of effectiveness of the Bank loan that the Shareholder's Guarantee Agreement has been duly authorized or ratified by all necessary corporate action. 8.03 Based on the above agreements and assurances, the project provides a sound basis for a Bank loan to CIOR of US$45 million equivalent for 14 years including 3 years of grace. Industrial Projects Department March 1977  AiNEIX 1 Page 1 MOROCCO - CIOR CEMENT PRODUCT TECHNICAL TERMS AND PROCESS DESCRIPTION A. TECHNICAL TERMS The following is a list of the most common technical terms used in the cement industry: CEMENT A hydraulic binding material in the form of an amorphous powder consisting of tri- and bicalcium silicates, tricalcium aluminates and tetracalcium alumino-ferrites. Cement is produced by heating a mix of raw materials (calcerous, argillaceous and if required other silica, alumina or iron oxide- bearing materials) which transforms into cement clinker through incomplete fusion at a temperature of about 1450