Morocco - Review of the engineering industries

Report No. 3233-MOR FILE CO Morocco ""'U Review of the Engineering Industries November 16, 1981 Regional Projects Department Industrial Development and Finance Division Europe, Middle East and North Africa Region 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 EQUIVALENT Currency Unit = Dirham (DH) US$1.00 = DH 3.9 (1980 average) DH 5.1 (1981 - 9 month average) DH 1.00 U US$0.256 (1980 average) US$0.195 (1981 - 9 month average) ABBREVIATIONS AND ACRONYMS BNDE Banque Nationale pour le Developpement Economique EMIs Electrical and Mechanical Industries IAT Institute of Applied Technology ODI Office pour le Developpement Industriel Plan Secretariat d'Etat au Plan et au Developpement Regional SSIs Small-Scale Industries  FOR OFFICIAL USE ONLY MOROCCO REVIEW OF THE ENGINEERING INDUSTRIES Table of Contents Page No. SUMMARY, CONCLUSIONS AND RECOMMENDATIONS ....................... i-x PART A. ECONOMIC ENVIRONMENT AND INSTITUTIONAL/POLICY FRAMEWORK CHAPTER I; STRUCTURE AND PERFORMANCE TRENDS OF MANUFACTURING ... 1 Growth and Performance of the Manufacturing Sector .... ...... 1 Issues and Constraints on the Manufacturing Sector .... ...... 3 Subsectorial Priorities ......................... 6 CHAPTER II: THE POLICY AND INSTITUTIONAL FRAMEWORK OF INDUSTRY .. 9 The General Industrial Incentive Framework .... .............. 9 Major Policy Issues Affecting the Engineering Industries .... 10 Institutional Issues ........................................ 11 Reform of the Incentive System: Suggested Approach ........ 12 PART B. THE ENGINEERING INDUSTRIES CHAPTER III: STRUCTURE AND CHARACTERISTICS OF EMIs .... ......... 14 Structural Patterns and Growth Trends ....................... 14 Demand and Foreign Trade for EMI Products ................... 17 Plan Projections for Future Development ..................... 19 Metal Products and EMIs Consumer Goods (Memory Item) ....... 19 CHAPTER IV: LABOR SKILLS AND DEMAND-SUPPLY PATTERNS IN EMIs .... 21 Labor Skills ................................................ 21 Supply of Skilled Manpower .................................. 22 Projected Needs and Shortages of Manpower with EMI Skills ... 23 Recommendations ............................................. 25 This report is based on the findings of a World Bank mission which visited Morocco between April and May 1980 to review recent developments and prospects for the engineering industries. The mission consisted of Mrs. Phi Anh Plesch (Industrial Policy Specialist, DPS), Mr. Francois Ettori (Industrial Economist, IDF, mission coordinator), and Messrs. Emmanuel Forestier (Industrial Economist, IDF), Harbaksh Sethi (Mechanical Engineer, IPD), Seiffedine Bennaceur (Consultant, Electrical Engineer) and Jean Knobloch (Consultant, Electro-Mechanical Engineer and Capital Goods Specialist). This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (continued) Page No. CHAPTER V: IRON AND STEEL FOUNDRY AND FORGE .................. 27 Introduction .......................... ..................... 27 Production and Capacity Utilization .... ................... 27 Product-Mix, Market and Competitiveness ......... .. ........ 28 Technical and Technological Stand .......................... 30 Future Development and Recommendations .......... .. ........ 30 CHAPTER VI: TRANSPORT EQUIPMENT .............................. 34 Introduction .............................................. 34 Production and Capacity Utilization ........... ........... 35 Product-Mix, Market and Competitiveness ......... ......... 36 Technical and Technological Stand ............ .. .......... 38 Future Developments and Recommendations ................. . 39 CHAPTER VII: CAPITAL GOODS AND SUPPLIES ...................... 41 Introduction ......................... .................... 41 Overview of the Present Stand .............. .. ............ 41 Specific Constraints and Issues ............. .. ........... 43 Steel Structures and Platework .............. .. ........... 45 Agriculture Machinery and Implements ........... .. ........ 49 Diesel Engines ....... ................. ................... 51 Electrical Machinery and Equipment ............ .. ......... 55 CHAPTER VIII: LIGHT ELECTRICAL AND ELECTRONIC INDUSTRIES .... 58 Introduction ......................... .................... 58 Present Situation ....... ............... .................. 58 Operating Conditions in Electrical Industries ............ 60 Production Costs and Competitiveness ........... .......... 61 Review of Identified Projects under Study or Implementation 62 Recommendations for Future Development .... ............... 63 PART C. MEDIUM-TERM DEVELOPMENT AND PROJECTS IN EMIs CHAPTER IX: INVESTMENT PROSPECTS AND REVIEW OF PROJECTS IN EMIs 67 The Engineering Industries in the 1981-1985 Plan ......... 67 Avenues for Further Development and Projects Review ...... 70 Review of Capital Goods and Supplies Projects and Recommendations ....... ............... .................. 71 ANNEX: THE INCENTIVE AND POLICY FRAMEWORK ................... 76 STATISTICAL APPENDICES .......................................  MOROCCO REVIEW OF THE ENGINEERING INDUSTRIES SUMMARY CONCLUSIONS AND RECOMMENDATIONS Situation and Performance i. The development of the sector of engineering industries (or elec- trical and mechanical industries - EMIs) in Morocco is recent; it has grown significantly only after 1960. Within the modern manufacturing sector (excluding handicrafts), the engineering industries' average share during the 1973-1978 period was some 14% of employment, 16% of value added and 8.5% of approved investments. The sector remains small, representing 4.4.% of GDP and 1% of total employment in 1978. Growth of the sector's output has been higher than that of total manufacturing and GDP (10% as compared to 7.2% p.a.) during 1975-1978, partly as a result of its lower capital/ labor ratio comparatively to most other sectors. Value-added per worker in engineering industries has remained stable, at relatively high levels (about US$7,000 in 1978). The sector is essentially inward-oriented for the import-substitution of consumer goods; it is dominated by the private sector with a minor but significant influence of foreign partners or tech- nical staff. Exports of the engineering industries have been negligible, averaging 2.5% of the sector's output and 1.5% of total Moroccan exports; these exports peaked at some US$40 million in 1979, with the resumption of traditional metal exports (lead products) and the recent emergence of exports of automobile and electrical components subcontracted in Morocco by European firms. ii. About 55% of the engineering industries' output come from the manufacturing and assembly of consumer and durable goods (metal products, household utensils and appliances, automotive equipment), while the produc- tion of intermediate and capital goods account evenly for the remaining output. The production of local engineering industries contributes 75% to the total demand for EMI consumer goods, but only 10-15% to the demand for intermediate and capital goods. In particular, the subsector of foundries has been markedly under-developed, and its capacity and production declined in recent years. Due to this production structure and insufficient intra- sectorial integration resulting from institutional and policy constraints, imports of EMI goods, and especially of capital goods, have grown rapidly with total investment, peaking at 50% (US$1.8 billion) of total imports in 1977. This has put a heavy pressure on the balance of payments, and investments had to be curtailed during the 1978-1980 austerity Plan. As a consequence, EMI imports decreased to US$1.3 billion in 1979. Imports of agricultural and industrial equipment represent still two-thirds of total imports of engineering products, and imports of EMI intermediate goods one-fifth. A comparison with the structure of the manufacturing sector in similar countries suggests that the engineering industries in Morocco should make a greater contribution to the country's industrialization process and, in the medium and long terms, to the reduction of the trade gap.  - IA. - Sector Priority in the Development Plan iii. Recognizing the limits of its import-substitution policies for manufactured consumer goods and the need for a selective approach to reducing the trade gap of the manufacturing sector, the 1981-1985 Plan 1/ has readjusted the Moroccan industrial strategy by focusing on the develop- ment of industrial exports, the creation of employment at lower costs, and the development of engineering industries for the efficient import- substitution of capital goods and supplies. The development of the engineering industries had been previously overlooked largely because of their intrinsic technical complexity, the shortage of skilled labor, the short production runs and the opportunities for a more rapid development of simpler or resource-based industries. (textiles/leather for exports, cons- truction materials and food industies to meet the domestic demand, phos- phate derivatives). Development prospects for these industries may become limited by market or resources constraints. Growth rates of textiles/ leather exports towards the EEC may level off; excess capacity may emerge soon in several construction materials; and in food industries, the irre- gular agricultural supplies and the extension of the EEC with new member countries limit the prospects for large exports. The best prospects for growth are for the phosphate industries, where Morocco has a marked compa- rative advantage for exports, and the engineering industries, where a substantial potential remains for employment creation and the efficient substitution of EMI imports which could, if not abated, constrain again the balance of payments and the overall manufacturing investment. In accor- dance with Morocco's adjusted priorities in the industrial sector, the Government has undertaken a revision of its incentives and policy frame- work, and has now targetted (on an "indicative" basis) for the export and the engineering industries, respectively 55% and 15% of the total manufac- turing investments projected by the Plan. The engineering industries are thus expected to invest a total DH 3 billion (US$600 million) during 1981- 1985 and grow at 10.5% p.a., compared to about 8.5% p.a. for the whole man'ufacturing sector. The priority given to selected engineering indus- tries appears justified by their relative labor intensity and efficiency at low scale of production, and by the need to reduce the pressure of EMI imports on the balance of payments. Constraints and Issues iv. The main weaknesses of the manufacturing sector and the resulting constraints on its growth are under-utilized capacities 2/ and high pro- duction costs in the subsectors serving the domestic market, and insuffi- cient capacity and dynamism in the subsectors producing exports and capital goods. These have been largely the effects of the shortcomings in the public investment and industrial planning set-up, and of the inadequacy of the incentives and protection framework to the objectives of the industrial strategy. The protection structure and practices have built a strong bias in favor of import-substitution and production of consumer goods for the domestic market and against the subsectors producing intermediate and 1/ The Plan is indicative for the private sector. 2/ Capacity under-utilization is partly due to the current economic slowdown.  - iii - capital goods; the interrelated pricing policies of a cost-plus-type have not encouraged the protected enterprises to increase efficiency and expand exports. In the engineeering industries, custom duties alone (abstracting from the general import surtaxes of 15-20%) are high for consumer products, ranging from 20-25% up to 100-150% of c.i.f values, and drop to 10-15% on intermediate products and capital goods; moreover, the general exemptions from duties and taxes given to imports of capital goods and supplies 1/ for all investments approved under the 1973 Investment Code has reinforced the bias against the development of local capital goods and supplies indus- tries. The new Code under Government examination is expected to abolish these exemptions in part. Also, the structure of indirect taxation sur- charging the production costs in manufacturing has hampered the opportuni- ties for increasing the rate of integration of local intermediate goods into EMI end-products. Some corrective measures were taken in 1979, espe- cially a customs regulation transferring the tax and duties exemptions on imports of capital goods to the imports of raw materials and components to be used for the local production of similar end-products, but these measures have remained largely unknown and their administration complex. Finally, the special incentives to foreign investors, who should be posi- tively involved in bringing about the technological improvements and trans- fers desirable in the engineering industries especially, have been gene- rally offset by the "moroccanization" policies and administrative red tape of a highly discouraging nature. v. The weaknesses of the policy and institutional framework stem also from the poor coordination between the various administrative units respon- sible for investment review and approval, import licensing, incentives benefits (in particular, the insufficient continuity and consistency between the benefits granted to the large investments and the subsequent protection or pricing approvals) as well as from the absence of an effec- tive unit responsible for industrial policy and planning. These shortfalls have hampered the promotion of greater efficiency, the rationalization and specialization of markets and product-mix (for trucks, tractors and diesel engines in particular), and the generation of effective development strate- gies for the manufacturing subsectors and the engineering industries more particularly; significant efforts in outlining a strategy and promoting projects for the engineering industries have been made by the ODI, but its resources and capabilities still need strengthening and assistance. Other shortfalls have also made it difficult for local engineering industries to participate in large contracts for public projects. The public sector seeks to increase local participation, but Morocco lacks the engineering capability to prepare public tenders in packages specifically designed for local and foreign suppliers, respectively; consequently, the turn-key con- tracts awarded to foreign firms for large projects have generally not gene- rated the long-term industrialization effects and intrasectorial linkages that could have enhanced the development of the local engineering indus- tries. This has also discouraged these industries from responding to public tenders in an organized and competitive way. 1/ The Code's regulation that no exemption be granted to imports of capital goods which could be procured locally at prices below 120% of c.i.f prices has been applied only in some cases.  - iv - vi. Another set of constraints, specific to the engineering industries or internal to the sector's enterprises, has hampered the dynamism and efficiency of the enterprises and their potential for innovation and pro- gress. First, people trained to perform simple engineering tasks (e.g., draft or copy blueprints) are in acute shortage, public tenders do not induce the foreign suppliers to transmit technical information and blue- prints to local subcontractors, and pervasive red tape constrains all transactions abroad (e.g., licenses, royalties, remittances of foreign technicians). Second, BNDE provides some financing in only 45% of total approved manufacturing investments, and Moroccan producers of capital goods cannot offer to other investors medium/long-term credit facilities similar to the foreign suppliers credits. Finally, as a result of these cons- traints and the difficult access to the predominant and crucial public con- tracts, the private sector of engineering industries has remained largely unstructured and lacks any internal institutional system of significance vis-a-vis the financial and administrative sectors; in particular, local enterprises have not been able to organize nor associate themselves to con- tract for and monitor large orders, and had therefore difficulties to meet delivery schedules and offer competitive prices. vii. The shortage of skilled labor and of supervisory staff (foremen and technicans) at shop-floor level has constituted one critical constraint on the operations of the engineering industries, and could seriously hamper the further development of intermediate and capital goods industries which use large amounts of specialized machinery and labor. The respective pro- portions of supervisory staff and of skilled/semi-skilled workers in the total labor force of the engineering industries are about half those in developed and semi-developed countries; the gap is less critical in the electrical and capital goods industries. Taking into account the needs of other economic sectors for labor with EMI skills, it is projected that the supply of labor with mechanical skills from training facilities will remain short of the country's needs on average by some 200 technicians and foremen and 1,750 skilled/semi-skilled workers during each of the 1980-1985 years; on the other hand, the expected supply of supervisory staff and workers with electrical skills should be sufficient to meet the needs. In view of this annual shortfall equivalent to about 2% of the total labor force with EMI skills, it is recommended that the 1981-1985 Plan assign top priority to the completion of 14 Institutes of Applied Technology (IAT) and 20 voca- tional schools already planned, to the rebalancing of their training capa- cities towards mechanical skills, and to the construction of at least one additional IAT focusing exclusively on metal working (foundry) and other mechanical skills (Chapter IV). Potential and Prospects for Development viii. Despite the constraints and issues which have limited the develop- ment of its engineering industries, Morocco has substantial potential for their further development as well as a comparative advantage in selected EMI production lines. The domestic market has reached the "critical mass" level and is still partly untapped, in particular for electrical/electronic products; the labor force though insufficiently skilled is available, easily trainable and relatively cheap; technical support from foreign partners or advisers has been limited but effective, and has contributed to the good quality of management; and the country is close to and has  v preferential access to EEC, sub-saharian and Middle-East markets. More- over, the comparative advantages of Morocco have already been harnessed by handicrafts and SSIs exporting household utensils and other traditional metal products, and by some joint ventures or foreign firms subcontracting in Morocco for the export of automobile parts and components (radiators, cables, bodies), and electronic components; in the electronic industries, cheap Moroccan female labor has displayed particular aptitude, and the proximity to Europe has facilitated the transfer of recent technologies. With more liberal policies and procedures towards foreign investments, Morocco could certainly attract other subcontracting activities for exports in light engineering industries; the ambitious targets of the Integration- Compensation law for the integration rate in the automotive assembly indus- try and for "compensation" exports of local parts and components make these liberal policies and procedures necessary. ix. Morocco has also a potential, and a need dictated by economic con- siderations, for further efficient import-substitution of intermediate and capital goods using simple or intermediate technologies. Local enterprises producing capital goods and equipment have generally been efficient, rela- tively labor-intensive, and competitive with similar European imports; prices for standard local equipment (platework, nonautomotive agricultural machinery, electrical transformers) range typically between 100 and 120% of Europe fob prices, despite the relatively low scale of their operations and the penalizing duties and indirect taxes levied on their imported inputs. A first group of capital goods identified for further import-substitution are those which have domestic markets large enough to sustain economic operations and which are adapted to the country's primary needs and present capabilities. This group comprises principally non-automotive agricultural machinery (ploughs, pumps, harvesters, trailers), thermal equipment (indus- trial boilers and furnaces, driers, condensers) and other platework and structural equipment (tanks, conveyors, small cranes), railroad freight cars, and static electrical machinery (transformers, switchboards/gears, control and command panels). Also, the markets for electric rotating machines (generators and motors) and simple telephone equipment are large enough to warrant the expansion or development of local production. How- ever, modernization programs and some reorganization in the existing firms producing electric motors are required before further expansion to upgrade the efficiency of their operations and the quality of their production; moreover, the selection of telephone equipment adapted to the country's needs (in rural areas in particular) and a development strategy for this type of industry in Morocco have yet to be worked out and adopted. The imports of capital goods in this first group totalled DH 640 million (US$160 million) in 1978 and 1979, representing 7% of total imports of manufactured goods, and could be produced locally without major diffi- culties. x. The second major group of capital goods with potential for deve- lopment hinges around the diesel engines and their applications in trans- port equipment (trucks and vans), agricultural machinery (tractors), energy supply (motor pumps and compressors, electro-generating groups), and hoisting/handling machinery for construction, public works and mining (lifters, stackers, grinders, crushers, dumpers, cement mixers, excavating machines). The domestic market for diesel engines in all applications is  vi projected to reach 25-30,000 units by 1985, of which 10,000 for low-speed engines (under 33 HP) already produced in Morocco and 15-20,000 for high-speed engines in the 60-180 HP power range. Total demand for this second group, abstracting from built-up trucks and tractors 1/, is above the minimum economic size of production; imports averaged DH 190 million (US$48 million) in 1978 and 1979 which were years of moderate investment, and had reached DH 465 million (US$115 million) in the year 1977 of invest- ment peak. It is estimated that Morocco could over the next five years substitute for at least half of these imports if an appropriate investment program and development strategy for diesel engines and their applications is implemented. However, the efficient development of these production lines will require critical ingredients such as: a sufficient supply of skilled labor, an open recourse to foreign assistance and partners to provide the necessary know-how for engineering and adaptation and ensure efficiency of the operations, and the development of efficient metal indus- tries (foundry, machining, and forge if economically justified) indispen- sable for intrasectorial integration. xi. The rehabilitation, upgrading and expansion of the iron and steel foundries constitute a first priority for the development of the engineer- ing industries in Morocco, because the foundry industry is in a critical situation and should become the backbone of an integrated development of these industries. It is estimated that the domestic demand for casting would reach 40-45,000 tpy in 1985, and that 30,000 tons (twice the current output) could be produced locally to substitute for the imported castings presently used in capital supplies (valves, fittings, pumps, gears, tools) and in the transport equipment and diesel engines industries. This would, however, require that a vigorous development pro- gram be implemented, and comprehensive technical assistance provided for this subsector. Medium-term Investment Program xii. The Plan and ODI have identified so far 35 projects to be imple- mented in the engineering industries, for a total investment of DH 2.3 billion (US$450 million) representing three-fourths of the Plan's invest- ment targets for these industries during the period 1981-1985 (para. iii). Some 60% of the total EMI investments are targetted by the Plan for the basic metals and foundry subsector. It includes an integrated foundry- achining project 2/ for the production of 10,000 high-speed modular diesel engines and other automotive casting; this DH 200 million (US$40 million) project, to be undertaken by the semi-public sector, should contribute largely to remove the critical constraint previosuly mentioned. The mission has proposed, for the other engineering subsectors, investment targets slightly different from the Plan's and reflecting more adequately 1/ Under the present mechanization policies for agriculture, the domestic market for tractors peaks at 3,500 units p.a. If new policies for mechanization are adopted, the increased market could justify the resumption of local assembly of tractors. 2/ The Bank group has expressed interest in this project and assisted in drafting the terms of reference for the feasibility study.  - Vii - the priority for the development of non-electrical capital goods and the development potential of the electrical industries; each of these two sub- sectors could invest during 1981-1985 about DH 300-320 million (US$60-65 million), representing 10% of the investment envelope for the engineering industries, and grow at 10-11% p.a. xiii. For the capital goods and supplies industries specifically, the Plan has identified 20 projects, ODI studied 19 other projects, and in addition the mission has suggested for further investigation in a first phase 1/ 14 projects mainly for diversification and expansion of existing efficient firms. Among these 53 projects, some 43 are estimated to deserve particular attention in view of their economic and subsectorial priority, their projected capacity and market, and the technological accessibility of their production processes. These 43 projects represent a total investment of DH 535 million (US$110 million--excluding the foundry-diesel engines project), meeting the mission's investment targets by 87% for non- electrical capital goods and supplies and 55% for electrical industries. The achievement of these investment targets and of these projects will require a substantial effort of economic and technical feasibility studies on the part of institutions involved with engineering industries; ODI could, with appropriate technical assistance and financial resources, be instrumental in this respect, as well as in complementing BNDE financing by promotional equity participations in joint ventures where the private Moroccan investors would seek some official involvement. However, the success of the sector's development would depend on a large measure on the removal of the main sectoral constraints and on the implementation of policy measures recommended below. Recommendations and Priorities xiv. Short- and medium-term measures are recommended in the report to address the issues and assist in removing the constraints outlined above. The implementation of these measures would help increase the efficiency of the engineering industries and lay down the basis for the preparation and implementation of a development program for the important or "strategic" subsectors. xv. An ongoing review of the industrial incentive framework, under- taken by the Government with Bank assistance 2/, will serve as a basis for the reforms of the Investment and Export Codes and of the protection struc- ture. Pending the completion of this review and the gradual enactment of the reforms, some fiscal and financial instruments should be used by the Government to offset partly the prevailing bias against the engineering 1/ In a second phase of technological transfer and achievements, Morocco could investigate and study the local fabrication of energy generators of various types (solar collectors, wind mills, biomass digesters, micro hydraulic plants). 2/ The review, based on in-depth surveys of 150 industries, started in fall 1979 and would be completed by mid-1982. A Bank consultant was provided to the Ministry of Industry for that purpose.  - viii - industries and readjust the incentives disequilibria. The new Code currently under Government examination could abolish some of the present advantages enjoyed by imported capital goods (exemptions of duties and indirect taxes) when equipments can be manufactured locally, as well as those enjoyed by the over-protected industries. Advantages could be main- tained or increased for the priority subsectors 1/ and the projects which export or generate important externalities (intersectoral linkages, techno- logical transfer or upgrading). Moreover, the new Customs regulation for tax exemptions of imported materials (para. iv) could be extended to all imported inputs integrated into local capital goods. In the longer term, the reforms of the incentives framework should embody the two principles of automaticity and intersectorial equalization of incentives, and include attractive and effective incentives to foreign investors and partners bringing about technology transfers. The new Investment Code could include clauses to this effect. xvi. The Government should also provide additional incentives to the engineering industries in the form of technical assistance and institu- tional support. This entails the following: (a) the establishment, under the aegis of an appropriate financial institution (Central Bank, BNDE), of adequate medium/long-term "supplier-credit" facilities to foster the purchase of local capital goods by the investors and to assist capital goods indus- tries in financing the purchase of inputs and the sale of their final products (Chapter VII); (b) the preparation of a clear policy on local participation to public projects implementation, and the strengthening of the engineering capability within the Ministry of Industry to prepare public ten- ders designed for increased local participation; (c) the rapid establishment and operational implementation of schemes designed to provide EMIs with industrial standards and quality control, and with the Technical Assistance required to help EMIs apply and meet the standards. These activities could, in a sub- sequent phase of EMIs' development, be regrouped within a "Tech- nological Center" 2/ which would assist the local enterprises in engineering standardization and adaptation, selection and opera- tion of production technologies, building-up a local capability for engineering and adaptation, and more generally in technology transfers (Chapter VII); (d) the creation within the Ministry of Industry of a Planning Unit to be responsible for preparation of industrial development strate- gies, rationalization of markets and product-mix, and coordination between project and protection approvals; 1/ The review of the industrial incentive framework should allow to iden- tify such priority subsectors and, more generally, the industries which should enjoy these advantages. 2/ Preferably as an emanation of both public and private sectors.  - ix - (e) the urgent completion of Institutes of Applied Technology and vocational schools and the rebalancing of training capacities towards mechanical skills to alleviate the shortages of skilled labor projected for the engineering industries (Chapter IV and para. vii); and (f) the strengthening and expansion of the financial role and promo- tional activities of the institutions involved in the engineering industries (BNDE and ODI, see para. xiii). xvii. In addition, detailed recommendations specific to various sub- sectors of the engineering industries are made to help rationalize and strengthen existing activities and identify and prepare high priority projects. The major specific recommendations are: Foundries (para. 5.13) (a) prepare with technical assistance, under the aegis of the Ministry of Industry and/or ODI and in coordination with BNDE's studies on this subsector, a development plan for the foundry industry on the basis of the overall demand for castings, and develop within that broad framework modernization and/or expansion programs for the existing and contemplated foundries, with a focus on rational- ization of product-mix, economies of scale and intrasectorial linkages; (b) establish priority programs for the training and skill upgrading of foundry workers; (c) provide through the Technological Center, or another new special- ized institution, technical assistance in most aspects of foundry technology, and encourage with special measures and incentives the foundries to undertake the recommended investments and to obtain such assistance from foreign associates; Automotive Transport Equipment (paras. 6.14 and 6.15) (d) rationalize the markets and standardize the vehicles and equip- ments to unify the requirements for parts and lengthen the pro- duction runs; (e) extend through the Technological Center technical assistance for the adaptation of vehicles to accommodate local parts; (f) prepare a concrete and feasible action program for the enforcement over reasonable delays of the Integration-Compensation law for the automotive industries, such program taking into account the current capabilities of Moroccan EMIs and the delays required to expand or adapt them without negative effects on the production costs;  x Steel Structure and Platework (para. 7.16) (g) coordinate, to the largest possible extent, the program of imple- mentation of public projects with the production and delivery capacities of the local industries; Agricultural Machinery (para. 7.20) (h) implement the various identified projects preferably by diversi- fication or expansion of existing efficient firms rather than creation of new enterprise;l/ Diesel Engines (paras. 7.26 and 7.27) (i) rationalize and standardize, in agreement between the public authorities and the concerned enterprises, the markets and the product-mix of local fabrications; (j) streamline current and future productions to a limited variety of modular engines; (k) prepare programs and projects for the downward integration of modular engines into machinery and equipment accessible to the local industries; (1) extend through the Technological Center technical assistance for engineering design and adaptation of diesel engines applications; Electrical Industries (paras. 7.33 and 8.13) (m) reassess in detail the specifications of the various segments of the domestic market for electric motors and other rotating machines; (n) prepare a rehabilitation and modernization program for the firms producing electric machinery to upgrade their efficiency and production quality; (o) study the specifications of telephone equipment adapted to the needs of rural areas in particular, and prepare a strategy for the gradual development of a telephone equipment industry; and (p) simplify the customs and fiscal legislation regulating transac- tions between local and subcontracting export industries to facilitate direct purchases of electronic components by the local assembly industries from the subcontracting firms producing these components. 1/ This would apply equally to the projects for the expansion and diversi- fication of the platework industries.  A. ECONOMIC ENVIRONMENT AND INSTITUTIONAL/POLICY FRAMEWORK CHAPTER It STRUCTURE AND PERFORMANCE TRENDS OF MANUFACTURING Growth and Performance of the Manufacturing Sector 1.01 The manufacturing sector experienced a quick growth under the 1973-1977 Plan. Its value added expanded at 7.0% p.a. in real terms in the five years between 1973 and 1977 (only 5.4% p.a. in 1968-72), at a rate close to the rate of growth of the GDP. In 1978, facing increasing finan- cial constraints, Morocco had to reassess its industrial development policy and set up an interim Austerity Plan (1978-80), and the growth of manufac- turing slowed down markedly to 4.5% during this period. The share of manu- facturing 1/ in GDP remained roughly constant between 16% and 17.5% during the seventies. 1.02 Under the 1973-77 Plan, the expansion of industry was based on a substantial increase in capital investment and a policy of generalized import-substitution, and resulted in an increasing resort to imports. The total cost of industrial projects approved under the Investment Code increased, at current prices, from DH 1.2 billion in 1968-72 to 9.6 billion in 1973-77. The imports of manufactured products increased, at current prices, by 68% between 1974 and 1977, representing 79% of total imports in 1977 (73% in 1974). 1.03 From 1977 thereon, after the international prices of phosphates dropped from their high 1974-75 levels and substantially reduced the Moroccan export earnings, the investments dropped. With the implementation of the 1978-80 Austerity Plan, the deceleration of growth was marked in the consumer goods industries and particularly strong in the vehicle assembly industries. However, the engineering industries could maintain a steady growth rate of 1% (in real terms). 1.04 By referring to projects approved or registered under the 1973 incentive law (Appendix 1.3), total employment in industry (excluding handicrafts) would be of some 236,000 in 1978 compared with some 183,000 in 1975, i.e., a growth rate of 8.8% p.a. (Appendix 1.4). However the share of the manufacturing employment in total employment has remained constant, given the relatively small number of jobs created in relation to invest- ment. 1/ Including handicrafts (defined as establishments with less than five employees).  -2- Table 1.01: MANUFACTURING COMPOSITION AND GROWTH 1975-1980 (in %) Contribution Share in Value Added Real Growth Rate to GDP Growth 1969 /1 1975 1978 1975-77 1978-80* in 1975-78 Food Processing 40.4 36.6 35.5 7.3 5 6.4 Textiles, Leather 17.1 21.1 21.7 5.4 5 4.4 EMIs 16.1 14.6 16.4 8.3 1 3.9 Construction Materials 6.0 5.9 5.3 5.5 6 0.8 Chemicals 11.8 10.9 10.6 11.7 7 1.9 Others (wood, ...) 8.6 10.9 10.5 10.6 4 1.9 TOTAL Manufacturing 100 100 100 7.3 4.5 19.3 of which Handicrafts 35* 28.6 26.8 6.6 2.4 4.4 Manufacturing VA as % of GDP 16.3 16.6 17.4 Manufactg Employment as % Total Employment n.a. 10.9 3.7 /1 Enterprises with more than ten employees only. * Estimates Source: Appendices I.1, I.2 1.05 The Moroccan manufacturing sector comprises many small enterprises which provide a large part of the total employment of the sector. Accord- ing to the 1975 industrial survey, small enterprises 1/ and handicrafts employed 56.4% of the manufacturing labor force in 1975 and contributed 40% to the manufacturing value added (Table 1.02). The handicrafts alone con- tributed between 26% and 29% to the total manufacturing value added in the 1975-79 period, of which about 9% in food industries and 11% in textiles and leather. Handicrafts contributed on average 13% to the total exports of manufactured products, and 33% to exports of textiles. Large manufac- turing enterprises, with more than fifty employees, employed 140,000 workers in 1975. The growth rate of handicrafts in the 1975-79 years has been lower than the growth rate of total manufacturing and of the modern sector. 1/ Small enterprises being defined as establishments with between five and fifty employees.  - 3 - Table 1.02: STRUCTURE OF MANUFACTURING SECTOR - 1975 Handicrafts SSIs Size (number of employees) 0-4 5-49 50 and over Total Number of Enterprises 109,255 3,393 669 113,317 Employment (000) 137.56 43.14 139.96 320.66 Value Added (million DH) 1,728 705 3,629 6,062 Value Added Per Worker (thousand DH) 12.6 16.3 25.9 18.9 Source: 1975 Industrial Survey 1.06 The growth of manufacturing during the years 1975-80 yielded to limited structural changes and the relative importance of the different sectors remained almost unchanged, except for the chemical industries which regularly expanded as compared with other sectors during the period. Traditional export-oriented subsectors like food processing and textiles did not increase their relative importance within the manufacturing sector. However, the share of production exported increased substantially in textiles and chemicals between 1975 and 1978, while it stagnated in other sectors (Table 1.03). Table 1.03: PRODUCTION, DEMAND AND FOREIGN TRADE OF MANUFACTURERS Exports as Composition Output as % of Composition Subsector % of Output of Exports Total Demand of Demand 1975 1978 1978 1975 1978 1978 Food Industries 6.5 6 32 78 88 37 Textiles, Leather 15 18 38 73 75 12 EMIs 3 2 4 20.5 23.5 27 Construction Materials 2 1 1 75 68 5 Chemicals 10 18 19 53 53 11 Others 8 6 6 70 79 7 TOTAL Manufacturing 8 8 100 59 62 100 Manufactured Exports as % Total Exports 24 37 Source: Appendices 1.5 and I.6 Issues and Constraints on the Manufacturing Sector 1.07 The 1978-80 Plan envisaged a pause in the large-scale industrial development and tried to set up a new industrial policy more adapted to the objectives and resources of the country. However, several constraints still limit the possibilities of growth of the manufacturing sector, namely;  -4- (a) the weight of imports; (b) the stagnation of labor productivity; (c) the weakness of foreign investment; and (d) the inefficiency of industrial incentives (see Chapter II for details). 1.08 Weight of Imports. Following the 1975 Government decision to adopt a systematical import-substitution approach for industrial develop- ment, the investment and the number of projects approved in the manufactur- ing sector under the 1973 incentive law, and consequently the volume of imports (particularly in capital goods and semi-finished products), increased considerably in 1976-77 (Appendices I.3, I.7 I.8 and I.9). Over- all, the import-substitution strategy did not meet the objective to get a GDP growth less dependent upon imports mainly because of the gestation period of investments; thus the share of total demand met by the local manufacturing production did not increase significantly (from 59% to 62% over 1975-1978). The weight of manufactured imports on the balance of payments has been and still remains too high, compared with the export capacity of the industrial sector. The import-substitution strategy had its major effect on the food industries, where local production almost met the domestic demand in 1978 (88%). Other sectors did not become less dependent upon imports between 1975 and 1978. In the EMIs, the share of domestic demand met by local production stagnated around 22%, and the imports of EMI goods increased considerably during the period, especially in 1976 and 1977 when they went up to about 50% of the total imports of the country. At the same time, the export performances of the EMIs remained very weak, with 2% of its production exported in 1978 (3% in 1975). In construction materials, the share of total demand met by local production dropped temporarily from 75% to 68% while it remained practically stagnant in other manufacturing sectors (textiles, chemicals). The massive increase of imports of manufactured goods from DH 6 billion in 1974 to more than DH 11 billion in 1977, was not balanced by a similar boost of exports; the exports of manufactured goods increased only from DH 1.8 billion to DH 2.1 billion from 1974 to 1977 (Appendix I.10), and the share of exports in total manufacturing output remained small, between 8% and 10% during 1975-1979. The imported consumer goods substituted have been replaced by heavier imports of intermediate and capital goods for the industries manu- facturing the substituted consumer goods (Appendix I.9). In 1978 and 1979, with the implementation of the 1978-80 Austerity Plan, the government for- sook several large projects and the industrial output stagnated in real terms in 1979. The imports of manufactured goods decreased to DH 10 bil- lion and the exports increased to DH 2.8 billion, thereby reducing to more manageable proportions the 1977 record trade gap of the manufacturing sector (DH 9.3 billion). 1.09 The future growth of the manufacturing sector will largely depend upon the capacity of industries to mobilize their export potential so that Morocco could continue importing the manufactures it needs without destab- ilizing its balance of payments dangerously. In the early eighties, Morocco should make a special effort to select the subsectors likely to be  -5- the most responsive to investments in terms of improvement of the balance of trade and employment creation (para. 1.14), and to encourage export- oriented projects which make a larger use of the country's comparative advantages, like its natural resources and/or its cheap labor force, in such sectors as chemical products derived from phosphates, food industry and textiles/leather. 1.10 Stagnation of Value Added per Worker. The scarce data avail- able 1/ all converge to indicate that the productivity of production factors (as measured, in the absence of better data, by value added per worker) did not follow an increasing trend, and suggest that it dropped in the modern sector (excluding handicrafts) by 3% in real terms from 1975 to 1978 (Table 1.04). With the exception of EMIs and textiles, the value added per worker decreased in real terms in all sectors between 1975 and 1978. The most significant drop was in construction materials, likely due to a substantial contraction of activity in construction in 1978; in food industries, the value added per worker stagnated. Given that the large volume of capital investments of 1974-77 and the resulting increase in the investment cost per worker (Appendix 1.7) should have brought about a commensurate increase in value added per worker, this decrease may be explained by: (i) a stagnation or decrease in labor productivity due to the pervasive lack of well trained technicians and foremen in manufacturing (see in Chapter IV the situation in EMIs); (ii) a higher underutilization of production capacities since 1977, due to the 1978-1980 austerity Plan; and (iii) longer gestation periods of investments, due also to the austerity Plan. Table 1.04: FACTOR PRODUCTIVITY IN MANUFACTURING Value Added Per Worker Growth Rate (1975=100) 1978/75 1975 1976 1977 1978 (in %) Food Industries 100 97 98 99 -0.6 Textiles, Leather 100 99 100 104 +4.1 EMIs 100 100 99 103 +2.7 Chemicals and Construction Materials 100 92 98 78 -22.4 TOTAL 100 97 100 97 -3.0 Source: Appendix 1.11 1/ The weakest data are those for the growth of manufacturing employment. It was estimated on the basis of the 1975 survey and the employment creations claimed by the projects approved under the Investment Code. It may be overestimated thereby, and consequently the value added per worker may be underestimated correspondingly. However, the preliminary results of the 1977 survey yield data for value added per worker which are even lower.  -6- 1.11 Weakness of Foreign Investments. Foreign investments remained limited despite the fact that they are provided with guarantees for the transfer of dividends and the repatriation of imported capital. However, they increased in recent years. Globally the direct foreign investments, which accounted for only 4% of total investments approved under the 1973 incentive law in 1975, reached 6% in 1976 and 10% in 1977 (Appendix I.12). The main sectors attracting foreign investments have been manufacturing and infrastructure. The breakdown by country of foreign investment shows that France remained the first foreign investor in Morocco between 1975 and 1978 (27.3% and 32.7% of total foreign investments) while the share of Saudi Arabia expanded quickly from 11% in 1976 to 27.6% in 1978. Various reasons may explain the scarcity of foreign participations: the moroccanization policy; the complicated administrative red tape sometimes perceived by foreign investors as inconsistent and unfair; the shortage of skilled labor; and the ineffectiveness and bias against foreign investments of the incentives of the Investment Code (see Chapter II and Annex I). Subsectoral Priorities 1.12 Morocco cannot afford to target a rapid growth for all manufactur- ing sectors in the early eighties. The main reason is the necessity for the country to (i) keep on tightening up the gap between its manufacturing imports and exports; and (ii) overcome other constraints which limit the prospects of development of the manufacturing sector (paras. 1.10 and 1.11). Clearly a selective approach is needed to identify which subsectors are in the best position to help the country reach its priority economic objectives: increase of exports; efficient import-substitution; and job creation. The 1981-85 Plan 1/ for industry recognizes the limits of the past policies followed for industrial development and the need for a selective approach. It foresees also that a more export-oriented indus- trial policy is necessary in the short and long term to meet the growing imports required to sustain a growth rate in line with the country's needs and that the industrial incentives system should be reviewed and reformed accordingly. The Plan has thus defined an industrial strategy well adapted to the country's situation, with a focus on: - the "voluntarist" development of industrial exports, through active promotion and improvement of the export incentives and policies; - the creation of employment and reduction of investment costs per job through the continued promotion of SSIs; and - the selective development of engineering industries for the efficient import-substitution of capital goods and supplies. 1.13 Industrial investment is projected to total DII 20.9 billion during 1981-1985, and industrial employment and output to increase by 60,000 and 8.4% p.a. respectively. Export-oriented investment would represent 55.5% 1/ Development Plans in Morocco assign committing targets to the public sector only; they are indicative for the private sector.  -7 - of total projected industrial investment, of which 51% for the large public projects-for phosphate derivatives and 4.5% by the small and medium ex- porting deterprises (in textiles/leather, food industries). Investment by SSIs are projected to represent 12% of total investment, contributing thereby more than 50% to employment creation in the sector; the targets for SSIs development are reasonable, and feasible given the continuing support of the Bank through its ongoing and oncoming loans for financial and tech- nical assistance to SSIs. The engineering industries would, according to the expressed objectives of the Plan, receive a higher share of industrial investment than in the recent past (15% versus 9%). 1.14 An assessment of the manufacturing subsectors based on five major indicators of their past performance (Appendix 1.13) shows that overall the textiles and the chemical industry have been the most efficient subsectors, followed by the EMIs, while other subsectors have been performing well in some respects and badly in other respects 1/. This comparative assessment of the manufacturing subsectors gives preliminary indications of the sub- sectors which should be fostered in the 1981-85 Plan. However, it is important to bear in mind that the continuation of the expansion of some of the subsectors which performed adequately in past years may be constrained by market and resource considerations in the future. Textile has been the leading subsector in terms of low investment cost per job created and high marginal propensity to export; nevertheless, the perspectives of further massive development must be carefully qualified, since growth rates of textile/clothing exports to the EEC will likely level off, and significant development of the subsector may rely on its SSIs and artisans which have exported large amounts of their textile production. Likewise, some food industries (sugar processing, oilseeds trituration, dairy industry) already face an excess capacity because of irregular supplies of agricultural raw materials; moreover, the prospects of increasing exports of agroindustrial products are diminishing with the entrance of Spain, Portugal, and Greece into the EEC. Opportunities for efficient import-substitutions may however exist, particularly in the areas of animal feed and derivatives from by-products of the sugar industry. 1.15 Finally the best prospects appear to be in the chemicals and the EMIs. The chemical industry can easily process and sell on both local and foreign markets various chemical products (fertilizers and others) derived from phosphates, where the country has a marked comparative advantage. Concerning the EMIs, the very high volume of imports (up to 60% of total manufacturing imports in 1977) suggests that a high import-substitution potential remains in this subsector, with the best opportunities in the production of selected capital goods and supplies. Likewise, exports in 1/ The five performance indicators are: value added per worker, invest- ment cost per job, labor intensity (measured by gross output per worker), marginal export/output ratio, and import-substitution poten- tial (imports as % of domestic demand). An overall indicator combining these five indicators with equal weights ranks textiles and chemicals first, EMIs third, "others" (wood, paper) fourth, food processing fifth, and lastly, construction materials.  specific products could increase significantly (as illustrated by the emerging exports from sub-contracting assembly of automobile accessories and electronic components). Several other reasons also justify a further development of the EMIs: (a) The EMIs are a supplier of all the manufacturing sectors, and a strong EMI sector manufacturing reliable products will help other sectors to increase the quality of their production and to be less dependent upon imports; (b) With 16% of the manufacturing value added, the EMIs still play a too modest role in comparison with the large demand of EMI goods from all economic sectors and the relative importance of EMIs in the manufacturing sector of other developing and semi-developed countries (Appendix I.14); (c) The investment cost per job during the 1975-78 years has been lower in the EMIs than in the other manufacturing sectors except the textiles; and (d) Further growth of the imports of EMI goods would impose an excessive burden on the balance of payments, as was the case in 1976-77, and might jeopardize the expansion of the overall manufacturing sector. For these reasons, the mission supports the Government's intention to focus on the development of the EMIs under the 1981-85 Plan. 1.16 Financing of manufacturing investments should remain one major responsibility of the Banque Nationale pour le Developpement Economique (BNDE), which has over the period 1973-78 provided financing to 45% of all approved investments in manufacturing, and contributed by its loans 20% to the total costs of these approved investments. Over the same period, approved investments in the engineering industries represented about 8% of all approved investments in manufacturing, and were financed by BNDE for an average share of 20% also. With the share of engineering industries projected to increase to 15% of all manufacturing investments during 1981-1985, BNDE should be expected to increase its efforts for project appraisal and financing in the engineering industries and to provide over 1981-1985 financing in this subsector for an amount of at least DH 600 million, as compared to DH 200 million during 1973-1978.  - 9 - CHAPTER II: THE POLICY AND INSTITUTIONAL FRAMEWORK OF THE INDUSTRIAL SECTOR The General Industrial Incentive Framework 2.01 Manufacturing activity in Morocco is influenced by three major kinds of incentives: incentives to domestic sales through tariffs protec- tion and quantitative import controls; general incentives to manufacturing investments through fiscal, financial and price regulations; and incentives to exports. The overall effects of the government's import protection policies have been first to build a strong bias in favor of import substi- tution and production for the domestic market, and second to encourage mostly the production of end products or consumer goods while providing little protection to the subsectors producing intermediate and capital goods. Price control policies, which are interrelated with the protection policies and consist of fixing either the sale price or the profit margins on a cost-plus basis for the protected activities, do not rely on any formal criterion of cost-efficiency. As for the general incentives to manufacturing investments contained in the Industry Code of 1973, they are granted in a liberal and automatic fashion to all sectors indiscriminately, and include standard items (duty and indirect tax exemption on imported capital goods, a 2 percent interest rate refund on long term loans, and income tax exemptions modulated according to regions) which have encouraged the selection of capital-intensive processes. Foreign investment is also encouraged in Morocco but only to the extent that it constitutes less than 50 percent of the equity of the company or that it is engaged exclusively in export production: the incentives to foreign investors have generally been offset by the uncertainties of the 'moroccanization" policies and by administrative red tape of a discouraging nature 1/. Recognizing the limits of the import substitution policy, the government has introduced a series of incentive measures designed to boost manufactured exports. They consist mostly of: tax holiday for export-related profits, duty-free access to imported inputs, post and preshipment export credit financing at slightly preferential rates, and export credit insurance scheme. In spite of some complexity in their administration, these incentives are credited to be a major factor behind the recent success of some export sectors (particularly textiles, clothing and leather) which are efficient and able to exploit their basic comparative advantage (cheap unskilled labor), and for which the domestic market presents limited opportunities. But overall, the subsidy element of these measures does not appear to be sufficient to offset the disincentives that export industries still face, namely: a structure and policies of protection heavily biased in favor of domestic market production; an exchange rate which was overvalued until recently and uncompetitive domestic production costs; the absence of incentives for indirect exporters (producing goods integrated downwards in the final exports); administrative red tape; and lack of technological and marketing know-how to penetrate foreign markets. A more detailed description of the general incentive framework in effect until 1981 is given in the 1979 Basic Economic Report and in Annex I. 1/ A new Code, in draft under examination by the Government, is expected to include clauses addressing these issues.  - 10 - 2.02 There has been insufficient coordination and continuity between the decisions of the various administrations and agencies responsible on one hand for project review and investment agreement, and on the other hand for import licencing and control and approval of protection/pricing appli- cations. In particular, the special benefits granted to the large projects signing a convention in the framework of the Investment Code and the sub- sequent approval of applications from these projects for adjusted protec- tion and prices do not seem to result from a comprehensive assessment and continuous monitoring of these projects' performance. The new Code under preparation and examination by the Government should include clauses to this effect, i.e. that special benefits be granted to approved projects under the condition that project promotors commit themselves to specific pricing and protection levels. These coordination problems stem from the multiplicity of agencies with ill-defined or overlapping responsibilities, and from the absence within the Government of a strong unit responsible for industrial policy and planning. 2.03 The outstanding weaknesses of the industrial sector and the con- straints on its growth, namely excessive capacities and production costs in the subsectors serving the domestic market and insufficient capacity and dynamism in the subsectors producing exports and capital goods, have been largely the effect of the shortcomings in public investment and sector planning and of the ineffectiveness of the incentives framework which has become complex. The thorough assessment of the overall impact of the incentive framework on the manufacturing sector requires a detailed study, which is under implementation with the assistance of the Bank. 1/ The following sections discuss the principal policy issues affecting the deve- lopment of the electrical and mechanical industries (EMI) in Morocco. Major Policy Issues Affecting the Engineering Industries 2.04 In the EMI sector, customs duties 2/ applied on consumer products are very high ranging from 20-50% up to 100-150%; duties on intermediate EMI products average 17% and range from 0-5% on basic foundry products to 20-35% on wires, tubes, pipes and metal structures; duties on capital goods, when levied, are more uniform in the range of 10-15%. Moreover, quantitative controls or import prohibitions are imposed on most products manufactured locally which are mainly consumer products. Thus while prac- tically EMI consumer products and a few intermediate EMI goods are assured of a very high effective protection, the category of capital goods is dis- criminated against by low absolute and relative levels of protection afforded to it, especially so when inputs receive higher nominal protection than the finished capital goods. The bias against the subsector of capital goods is further reinforced by the liberal provisions of the 1973 indus- trial Investment Code, whereby the widespread tariff and tax exemptions on imported machinery and equipment, combined with the overvaluation of the domestic currency, tend to favor imports of these equipments over 1/ The study started in Fall 1979 and completion is expected by mid-1981; a Bank consultant has been made available to the Ministry of Industry for this purpose. 2/ Not taking into account other import taxes which add 20 to 50% protec- tion to the customs duties.  - 11 - domestically-produced ones. Moreover, the Ministry of Industry does not always have in practice the possibility, in particular for large turn-key projects, to enforce the regulations of the Investment Code that no duty exemptions be granted to the importation of capital goods which can be pro- duced locally at prices not higher than 120% of the c.i.f. price. And to the extent that production techniques based on imported equipment are more adapted to imported inputs, they tend to favor the use of foreign inputs over the use of domestic inputs. All these biases have contributed to retard the emergence and growth of local EMI industries able to substitute efficiently for imports, so that Morocco still has to import more than two thirds of its needs in engineering goods. 2.05 An innovative scheme designed to encourage import substitution in the capital and intermediate goods subsectors was introduced in 1979 in the Customs Code under Article 163 bis, whereby the tax advantages granted in favor of imported end-products (under the Investment Code or for various public projects) are transferred to the import of raw materials and com- ponents to be used for the domestic production of similar end-products. This scheme opens up a new sphere of action to investors and could greatly encourage local subcontractong in the EMI sector. However, to be effec- tive, the scheme needs greater publicity, simple procedures and fair and consistent implementation; moreover, in order to assist the local foundries which have been in a critical situation (see Chapter V), the transfer of tax advantages of the scheme should not apply to imported castings. 2.06 With regard to exports, the weaknesses of the manufacturing incen- tive system affect the exports of EMI consumer products, because of the very high protection, thus the greater profitability, afforded to domestic sales. For the intermediate and capital goods, several constraints speci- fic to these types of goods hamper the development of their exports. First, skilled and semi-skilled engineering labor is scarce and thus expen- sive, which results in a partial loss of competitiveness and in difficul- ties to meet quality norms and delivery delays, both exacting sine qua non conditions for export success. Second, Moroccan producers of capital goods are put at a disadvantage vis-a-vis their foreign competitors by the lack of medium/long-term credit facilities to finance their sales locally and abroad. A significant expansion of the production and exports of engi- neering goods would require the removal of these constraints, in particular through adequate technical assistance and institutional support. Institutional Issues 2.07 Of particular relevance to the engineering industries have been the policies followed so far regarding the implementation of the large public investments and the activities of the motor vehicle assembly indus- tries. The design and implementation of the large public projects through turn-key contracts awarded to foreign firms has generally not attempted to explore nor generate the long-term industrialization effects and intrasec- torial linkages that would have enhanced the projects' impact on the deve- lopment of the engineering subsectors producing capital goods and supplies in particular; with little access to the predominant public market which is crucial for their quantitative and qualitative development, the local engineering industries have taken insufficient initiative to develop their own engineering adaptation and design capability and to respond more competitively to public tenders. As underlined in Chapter VII, initiatives  - 12 - from both the government and the local industries to develop such an engi- neering capability and, to establish a Technical Center for quality control and technological assistance would be instrumental for the development of the local constribution and value added in the industrial investment out- lays, as well as in the automative industries. A new law for "Integration and Export Compensation" in the automotive assembly industry, recently pro- mulgated, aims at boosting up the rate of local integration from 20 to 50% (see Chapter VI). However, in view of the overriding issues of market rationalization and output standardization, it is recommended that the eco- nomic effects of this bill on the final production costs of the vehicles be reviewed, and that a meaningful and feasible program be prepared for its progressive implementation. In this context a strategy to develop effi- cient and export-oriented ancillary industries is essential, and the en- couragement of small and medium enterprises should be pursued more actively because of their important role as subcontractors. 2.08 Thus, current policies have not been particularly favorable to the local engineering industries (lenient or discontinuous policy for import licencing, award of large public contracts for capital goods on the basis of ill-defined policies for local preference), nor to the involvement of foreign managers and partners. These policies have contributed to estab- lish an ambiguous climate contrary to initiative and modernization or expansion of EMI enterprises. The creation of an industrial planning unit (para 2.02) would permit to give to EMIs more active attention on the part of the public authorities, in particular through the preparation of a clear and articulated development strategy for EMIs, and also to strengthen and extend the first efforts made in this sense by the Office pour le Deve- loppement Industriel (ODI). Reforms of the Incentive System; Suggested Approach 2.09 The ongoing Bank-sponsored study of the Industrial incentive system in Morocco once completed should help to identify comparative advan- tages and development priorities in the industrial subsectors and serve as the basis for the future incentive reforms that are necessary to help the government achieve its objectives. But whatever the future orientations of a reformed incentive system are, two major principles should be followed to ensure its effectiveness: (1) the principle of the automaticity of the advantages and procedures; and (2) the principle of the equalization of incentives which consists at reducing over time the various biases that exist presently between sectors, between markets, between factors of pro- duction, between firms and between regions; this will help induce a greater efficiency in manufacturing production and a more balanced industrial growth. While the system of protection may take some time to be reformed lest it disrupt too drastically economic and industrial activities, instru- ments such as fiscal, financial and price policies, and government's insti- tutional support and technical assistance (as recommended in para. 2.07 above) can be used judiciously to equalize incentives. 2.10 For the engineering industries more specifically, some of the present advantages on the imports of capital goods (the 2% interest rebate on long-term loans, the exemption of duties and indirect taxes) should be withdrawn for those industries which are overprotected and those capital  - 13 - goods which can be manufactured locally, and maintained for the priority subsectors which export or entail important externalities (inter-sectorial linkages, technological upgrading or transfer). Moreover the extended and generalized enforcement of the Customs Code Article 163 bis (para. 2.05) and of the Investment Code regulations for local preference within a 20% overcost limit (para. 2.04) would help largely in offsetting the bias of the protection structure against engineering and capital goods industries. Finally, effective incentives could be studied and offered to foreign investors and partners bringing about transfers of technology, such as sorely needed by the engineering industries to strengthen their technical capabilities. The new Code under review by the Government could include clauses to these effects.  - 14 - PART B: THE ENGINEERING INDUSTRIES CHAPTER III: STRUCTURE AND CHARACTERISTICS OF EMIs Structural Patterns and Growth Trends 3.01 The sector of engineering industries in Morocco is recent, and most of its development took place after 1960. It regroups 6 of the 18 industrial subsectors of the Moroccan Nomenclature des Activites Economiques (NAE), namely: NAE 19: Basic metals, including foundries of ferrous and non-ferrous metals; NAE 20: Metal products (except machinery and equipment); NAE 21: Capital goods and machinery (except electrical machinery); NAE 22: Transport equipment and shipyards; NAE 23: Electrical and electronic industries; and NAE 24: Measure and control instruments. Most of the engineering production lines are currently present in Morocco's industrial structure, except for the manufacture of non-electrical machinery (subsector 382 of the International Standard Industrial Classifi- cation - see Appendix III.I); Morocco has not developed this subsector, due essentially to the high level of its technological requirements and to specific constraints and policy issues (see Chapter VII). The most impor- tant subsectors in terms of output have been the metal products (mostly consumer and durable goods) and the transport equipment (assembly of cars, commercial vehicles) subsectors, and their development has been based on the past policies of high protection for the import-substituting assembly of end-products for the local market. The output of the subsector of base metals (foundries) declined in absolute and relative terms, due to special difficulties (see Chapter V). Electrical industries have been growing rapidly (18% p.a. in real terms) and represented in 1978 some 15% of engineering industries' output, as indicated in Table 3.01 which summarizes the composition and growth pattern of the Moroccan engineering industries:  - 15 - Table 3.01: COMPOSITION AND GROWTH OF THE ENGINEERING INDUSTRIES (DH Million) Growth Rate Subsector 1969/1 1975 1978 1975-78 Output V.A. Output V.A. Output V.A. % (% p.a.) 19. Base Metals 96.9 22.3 192.2 49.6 215 42 2.8 -13.4 20. Metal products 271.2 97.8 977.6 393.7 1775 785 53.6 +18.2 21. Machinery/ equipment 118.5 40.9 217.6 82.3 345 128 8.8 +10.7 22. Transport equipment 298.1 79.2 1022.0 257.7 1275 320 21.8 -4.2 24. Measure instruments 7.8 3.4 22.5 11.3 20 10 0.7 -15.6 Sub-total 792.5 243.6 2431.9 794.6 3630 1285 87.7 +9.0 23. Electrical industries /2 111.2 29.8 312.4 88.8 625 180 12.3 +18.5 TOTAL EMIs 903.7 273.4 2744.3 883.4 4255 1465 100 +10.0 /1 Excluding enterprises with less than 10 workers /2 Excluding household appliances (subsector 21.8) Source: Appendix III.2 3.02 Detailed data (availble for 1975 only) indicate a concentration of enterprises and employment in the subsectors manufacturing consumer goods and end-products, where artisan and traditional activities have contributed a significant share to output (about one-fifth) and employment. A reclas- sification of the NAE subsectors and their subdivisions according to the nature and use of the goods (capital, intermediate, consumers) shows that capital and intermediate goods have represented about 45% of the sector's activities and have experienced rapid growths in recent years (12% p.a. in real terms), as summarized in Table 3.02;  - 16 - Table 3.02: STRUCTURE OF ENGINEERING INDUSTRIES (in percent) 1975 1978/75 No. of Artisans 1978 Growth enter- Employ- Gross Value Ouput Gross Rate prises ment Output Added Share Output (% p.a.) Mechanical capital goods 4.4 19.4 16.2 21.4 6 15 7 Electrical capital goods 0.2 2.8 5.1 5.0 - 9 27 Total capital goods 4.6 22.2 21.3 26.4 5 24 12 Metal/mechanical intermediates 4.5 17.1 18.9 19.1 2 20 14 Electrical inter- mediates - 1.9 2.0 1.7 - 2 6 Total intermediates 4.5 19.0 20.9 20.8 2 22 13 Metal/mechanical end-products 90.6 53.3 52.6 48.6 18 48 7 Electrical end- products 0.3 5.5 5.2 4.2 - 6 12 Total end-products 90.9 58.8 57.8 52.8 17 54 8 TOTAL Engineering Industries 100 100 100 100 11 100 10 of which: - - Electrical Industries 0.5 10.2 12.3 10.9 - 16 18 Source: Appendix III.2 3.03 The engineering sector in Morocco has comprised about 8,400 enter- prises and workshops, of which 170 (2% of total) have more than 50 workers; SSIs represented another 5% of enterprises in the engineering industries. Artisans (with less than 5 workers), working mostly in the subsector of metal end-products, were employing in 1975 some 9,300 workers and producing a gross output of DH 310 million representing 11% of the sector's output, as shown below:  - 17 - Table 3.03: STRUCTURE BY SIZE OF ENGINEERING INDUSTRIES (in percent) Size of Enterprise Artisans SSIs More than ALL (Number of workers) (less than 5) (5-49) 50 (Numbers) Number of enterprises 93 5 2 8,400 Employment 27 17 56 34,600 Gross output 11 15 74 2,745 MDR Value added 17 19 64 883 MDH V.A. per worker (Index) 62 117 113 100 V.A./Output ratio 47 43 28 32 Source: 1975 Industrial Survey The share of the public sector in the engineering industries has been small, confined to about twenty of the larger enterprises (in vehicle and engine assembly, electric motors, foundries principally). On the other hand, the influence of the private foreign sector has been substantial in many engineering subsectors, in particular in the subsectors 21 (machinery and equipment), 23 (electrical industries) and 20.3 (metal structures and platework); this influence appears either in the enterprises' equity (generally through minority shares) or more frequently in the management and direction of operations in the engineering industries. In particular, a number of the specialized small or medium enterprises (of the family type) with good technological level are held by foreigners. Demand and Foreign Trade for EMI Products 3.04 As a result of the concentration of engineering industries in the subsectors of consumer and metal products, the contribution of the local production to the total demand for these products has been high (at about 75%), quite low (about 10%) for capital and intermediate goods, and decreasing for durable goods due to the rapid growth of the demand for these latter goods, as indicated in Table 3.04:  - 18 - ..Table 3.04: CONTRIBUTION OF LOCAL INDUSTRIES TO TOTAL DEMAND FOR EMI GOODS (in percent) Local Contribution Growth Rate of Subsector to Total Demand Demand (% p.a.) 1969 1975 1978 1978/69 1978/75 19. Base metals/foundries 50 10 9 16.2 11.8 20. Metal products 72 73 76 11.0 11.8 21. Machinery/equipment 24 9 11 7.1 2.6 22. Transport equipment 43 26 25 8.8 1.3 23. Electrical products 24 24 29 5.6 9.2 24. Measure instruments 13 8 5 7.7 3.2 TOTAL Engineering Industries 36 20.5 23.5 10.1 6.5 Source: Appendix III.3 3.05 Metal and mechanical capital goods have represented about two- thirds of imports of EMI products and 40% of total imports of manufactured products, totalling some DH 4,695 and 3,115 million in 1977 and 1978 respectively (Appendix III.4). The most important imports have been; specialized machinery for various industries, mining and quarrying equip- ment, lifting and hoisting machinery, agricultural equipment and tractors, textile machinery, pumps and compressors. Metal and mechanical interme- diate products, representing about one-fifth of total EMI imports, com- prised essentially steel/iron long and flat primary products (about 350,000 and 150,000 tons p.a. respectively), and aluminium and copper intermediate (sheets, wires, rods, pipes). Imports of consumption and durable goods comprise essentially transport vehicles and their parts and components, and household appliances. The major imports of electrical equipment and supplies, totalling on average 11 to 12% of EMI imports, have been: elec- tric motors and generators (in decline), switchgears and switchboards, telecommunication equipment, cables, bulbs and lamps, and electronic components (for TV/radio assembly and for export processing). 3.06 The Moroccan engineering industries have exported a very small share of their production (3% in 1975 and 2% in 1978). The exports of metal and electrical products comprise principally: non-ferrous ingots (about 30,000 t p.a. of lead ingots, and emerging exports of copper), components and parts for automobiles (radiators, fuel tanks, bodies), electric and electronic components and parts (semi-conductors and transis- tors, electric cables and starting regulators for cars), and household utensils and miscellaneous metal products fabricated principally by SSIs and artisans and of the subsector 20 (Appendix III.5). The promising exports have been the automobile and electronic components and parts which have emerged significantly after 1977 under sub-contracting arrangements with large European firms. It should be noted also that more than one- fourth of the small output of subsector 24 (measure instruments) has been exported, consisting of assembled movements and parts for watches.  - 19 - Plan Projections for Future Development 3.07 The development of engineering industries, and of capital goods and supplies industries in particular, is one of the three basic objectives of the industrial strategy outlined in the Development Plan 1981-1985. Investment in the engineering industries, which averaged 9% of industrial investment in 1978-1980, is expected by the Plan to reach DH 600 million per annum on average in 1981-1985, representing 15% of total industrial investment projected for the Plan period; all projects identified so far for the public and private sectors represent 75% of the total investment for EMIs. Public and semi-public investment would focus on the least deve- loped subsector of basic metals (subsector 19) and would comprise two rela- tively large projects (a rolling mill for 420,000 tpy with a cost of DH 800 million, a 10,000 tpy foundry for high quality automative and diesel engine castings for a cost of about DH 200 million), and two lead and copper foun- dries totalling DH 800 million. Among the other engineering industries (excluding subsector 19), the projected pattern of investment and growth reflects a slight shift from metal consumer goods (subsector 20) in favor of capital goods and electrical industries. The contemplated investments are expected to generate over the period 1981-1985 a growth rate of 10.5% p.a., and employment generation of about 19,000 representing one-third of total projected employment creation in manufacturing. The Plan has also envisaged a substantial role for SSIs, which are expected to generate about 60% of total investment in the transforming engineering industries (subsec- tors 20 to 24). The production lines identified by the Plan as priorities in the engineering industries are: (i) the foundries; (ii) the commercial vehicles and tractors and related components and accessories; and (iii) the basic capital goods and supplies for industrial investments (platework, motors, engines, compressors, ...) and for rural development (agricultural implements, water and electricity supply equipment, telecommunications, ...). The broad orientations of the 1981-1985 Plan for the engineering industries pursue sound objectives and represent a first step in the right direction. The subsequent Chapters V to VIII, which review respectively the subsectors of foundries, transport equipment, capital goods and supplies, and the electrical/electronic industries, will assess the present situation and the feasibility of the development projects and prospects for these subsectors. Metal Products and Other Consumer Goods (Memory Item) 3.08 As shown earlier, the subsector of metal products (NAE 20) pro- ducing some intermediate, and mainly consumer, goods is the most developed of the engineering industries, sharing 55% in total output and supplying more than 75% of the demand for these goods. Consequently, the Plan has assigned a low priority to the further development of this subsector, which is expected during 1981-1985 to grow by 8% p.a. and to receive propor- tionately less investment than before (11 to 17% of total EMI investment as compared to 25% in 1978-80). For these reasons, and given the wide hetero- geneity of the subsector's production, this report will not review further the situation and potential of this subsector (where no major changes or  - 20 - projects 1/ are expected to take place during the coming years), except to underline again that a major feature of this subsector is the relatively high levels of production costs and of protection enjoyed by its products (20-30% average duties, corresponding to 45-55% overall tariff protection - see Chapter II and Annex I), with some exceptions as illustrated below: Table 3.05: STRUCTURE OF COSTS AND PRICES IN SELECTED METAL PRODUCTS (%) Tubes! Aluminum Cooking Metal Pipes Profiles Ranges Furniture Imported materials 45 35 36 20 Local materials/services 13 10 24 26 Indirect taxes/duties 15 10 13 11 Labor cost 5 5 14 30 Capital cost and return 22 40 13 13 Ex-Factory Price 100 100 100 100 Ex-Factory Price/Europe Price 125 130 115-130 110 Capacity utilization 35 30 90 90 Source: Mission estimates from plant visits 1/ A few projects identified in this sector for the production of inter- mediate goods and capital supplies will be reviewed in Chapter IX and Appendix IX.1.  - 21 - CHAPTER IV: LABOR SKILLS AND DEMAND--SUPPLY PATTERNS IN EMIs Labor Skills 4.01 The productivity of production factors in the engineering industries (measured by valued added per worker, cf. para. 1.10) stagnated around DH 29,000 ($7,500 in constant prices) during the period 1975-1978, and probably remained stagnant in 1979 and 1980. Given that the investment cost per worker remained rather stable meanwhile, it is likely the produc- tivity of labor in the EMIs did not improve and has in fact stagnated since 1975. The mission's general assessment from its plants visits is that there has been clearly an acute shortage of skilled labor and engineers in the engineering industries. 4.02 The structure of skills in the labor force employed in the EMIs in 1976, as given in Table 4.01, confirms the mission's assessment. Overall, the proportion of supervisory staff (management, engineers, technicians and foremen) relative to that observed in developed and semi-developed coun- tries appears low: 7.3% against 14%. 1/ The ratio is higher in the electrical/electronic industries (9.3%) and mechanical equipment and machinery (10.2%), but remains very weak in the major mechanical industries of Morocco like transport equipment (6.2%) or fabricated metal products (6.5%), and particularly in basic metal industries and foundries (4.6%). The situation is not better with respect to the proportion of skilled and semi-skilled workers in the total EMI labor force: 38.7%, which is very low compared with, for example, the 59.6% ohcerved in Tunisia the same year. This shortage of .-<illed labor and technical engineering capabili- ties in the EMIs explains for a major part the general stagnation of labor productivity in the recent years, and constitutes a major constraint to the further development of the EMIs. This constraint has resulted from the shortage of training capacity in EMIs skills in Morocco. 1/ The proportion of engineers and technicians alone in the labor force of EMIs in developed and semi-developed countries ranges normally between 6 and 9%.  - 22 - Table 4.01: SKILLS OF LABOR FORCE IN EMIs (in % of Total Labor Force - 1976) Management Technicians Skilled and Unqualified Adminis- Subsector and and Semi-Skilled Workers and trative Engineers Foremen Workers Apprentices Personnel Basic Metals 2.0 2.6 15.0 77.4 3.0 Metal Products 2.4 4.1 38.1 45.2 10.2 Equipment and Machinery 4.3 5.9 45.4 36.6 7.8 Transport Equip. 1.3 4.9 46.2 41.4 6.2 Electrical Ind. 2.9 6.4 37.7 37.9 15.1 Measuring Instruments 7.0 10.3 12.1 64.2 6.4 TOTAL EMIs 2.5 4.8 38.7 44.3 7.9 TOTAL Manufac- turing 2.3 4.2 27.6 60.3 5.6 Source:T Sample of 274 enterprises (of which 60 EMIs) selected from the 1976 industrial survey. Supply of Skilled Manpower 4.03 The total annual output of technicians and foremen trained in EMI skills (see Table 4.02) comprises 160 graduates from the already existing training institute of Ain-Borja. Concerning the skilled and semi-skilled workers, 28 vocational schools train in one year about 2,550 workers in EMI skills, representing an estimated 3% only of the total labor force with EMI skills. Moroccan authorities have been aware of the need to increase the number of technicians and foremen trained in EMI skills and to improve the skills in the engineering industries. The Government has thus decided to establish, with the assistance of an EEC financing of about DH 80 million, 14 Institutes of Applied Technology (IAT) which would supply each year, as of 1983 and more likely 1984, about 515 "shop-floor level" technicians and foremen in electrical/mechanical skills, adding up to a total annual output of 675 technicians and foremen trained in EMI skills. In addition, the Ministry of Labor has requested from the Plan that 55 vocational schools and 3 additional IATs be established under the 1981-85 Plan; it has also asked Bank assistance for financing 20 of the 55 vocational schools and the 3 additional IATs. 1/ Given that, in any event, the programmed vocational 1/ The 1981-85 Plan preliminary investment program has comprised so far the construction of the 20 vocational schools only. The Bank, before considering any further action for the financing of the 20 vocational schools and 3 IATs, has stressed the necessity for the Ministry of Labor to demonstrate the economic justification of new vocational schools and IATs.  - 23 - schools will not supply the manufacturing sector with skilled and semi- skilled graduates before 1985, their expected output is not taken into account in Table 4.02. Table 4.02: ANNUAL OUTPUT OF MANPOWER TRAINED IN EMIs SKILLS (numbers per year) 1979-1982 1983-1985 Mechanical Electrical Mechanical Electrical Skills Skills Total Skills Skills Total Technicians and Foremen 116 44 160 396 279 675 Skilled and Semi- Skilled Workers 2,000 550 2,550 2,000 550 2,550 Source: Etude d'Evaluation des Possibilites de Formation des Cadres Moyens pour l'Industrie SCET - Maroc/CEREP. Office de la Formation Professionelle et de la Promotion du Travail. 4.04 From 1986 and 1987 on, 11 technical lycees and 2 higher institutes of technology financed under the Bank fourth Education Project should pro- vide the manufacturing sector with additional technicians. The technical lycees, which should start operating in 1984, will offer three-year indus- trial and commercial courses at the upper-secondary level; the industrial courses will offer four options (industrial production, design, electro- technics and electronics) with an expected annual output of 2,180 middle- level technicians, mainly trained (85-90%) for direct entry to industry. The two higher institutes of technology which would also start operating in 1984 will provide a two-year course for higher engineering technicians. The annual output would be of 550 graduates in the mechanical, electrical and chemical engineering industries. Projected Needs and Shortages of Manpower with EMI Skills 4.05 The projections of the total number of technicians/foremen and skilled/semi-skilled workers with EMI skills which will be needed by the engineering industries and the other manufacturing sectors (which employ significant amounts of labor with EMI skills) indicate, as summarized in Table 4.03, that the output of graduates with EMI skills will be short of the needs and will remain a major constraint to the further development of the manufacturing sector and the engineering industries in particular.  - 24 - Table 4.03: PROJECTED GAP /1 OF QUALIFIED MANPOWER WITH EMIs SKILLS IN THE MANUFACTURING SECTOR IN 1980-85 (Average Numbers p.a.) 1980-82 1983-85 /2 Skilled and Skilled and Skills Technicians Semi-Skilled Technicians Semi-Skilled and. Foremen Workers and Foremen Workers Mechanical Skills 205 1,550 94 2,015 Electrical Skills 28 -40 -170 -25 /1 A positive (negative) number indicates a shortage (excess) of training capacity. /2 1983 is the first year from which the 14 ITAs would supply the labor market with graduates. Source: Appendix IV.I. 4.06 This constraint, confirmed by the various agencies and institu- tions associated with the engineering industries (plant managers, profes- sional Association of EMIs, Direction of Industry) has quantitative and qualitative aspects. More specifically: (a) The number of graduates with EMI skills to be needed by the whole manufacturing sector 1/ will not match the expected supply, and the unbalance varies according to the period and the nature of skills. 1/ The projected needs of technicians and foremen are based on two distinct projections for the years 1979-1985: the first one assumes an 10.5% growth rate of output for the EMIs (i.e., the official target for 1981-85) and a proportion of technicians and foremen equivalent to 4.8% of total labor force; the second assumes these percentages to be 9 and 8% respectively, i.e., a more conservative EMIs' output growth rate and a higher rate of technicity. The figures given in Appendix IV.1 are a weighted average of these two projections. The projected needs of the manufacturing sector for skilled and semi-skilled workers with EMI skills are based on a 8.5% p.a. growth rate for manufacturing output and 3.5% p.a. growth rate for labor productivity in the sector. The calculated gaps are minimal estimates since other sectors (agriculture, construction, energy) which employ many workers trained in mechanical/ electrical skills are not taken into account in these projections.  - 25 - (i) the Moroccan economy will face a serious and increasing shortage of qualified manpower in the mechanical skills during the whole period 1980-85. Even after 1983 when the first cohorts of students graduate from the IATs, Morocco will still be short each year of 95 technicians and foremen trained in mechanical skills (i.e., 24% of the country's 1985 training capacity) and of about 2,000 skilled and semi- skilled mechanical workers. Under these conditions, it is hard to see how the manufacturing sector and the engineering industries could meet, in the short and medium term, the growth forecast of the Plan, in particular in the Basic Metals subsector for which the 1981-85 Plan has set ambitious growth objectives; and (ii) the situation of manpower trained with electrical skills appears easier. Despite an average annual shortage of about 40 technicians and foremen in the years 1980-1982, the train- ing facilities should after 1983 provide the manufacturing sector with a sufficient number of technicians, foremen, skilled and semi-skilled workers graduated in electrical skills. However, the situation might become tighter again after 1984 in view of the needs for workers trained in electrical skills. (b) The Quality of Training and the skills of the graduates should be considerably improved. It is inadequate at present, mainly because the trainers in the training facilities generally lack scientific background and operational experience; moreover, the best ones give up their teaching jobs to join the private sector where they can increase their salaries substantially. The quality of training should increase in the short term with the technical assistance which the IATs should receive from EEC. In the longer term, some Moroccan trainees now on training in Europe will be available for teaching positions in the technical institutes and should therefore improve the current level of training. However, it will be necessary to offer them attrative salaries compared with those of private sector to retain them in the training facilities. Recommendations 4.07 The mission recommends that the government make a special effort to increase the number and the quality of labor to be trained in EMI skills at all levels (technicians and foremen, and skilled and semi-skilled workers). The respective growth rates for manufacturing value added and employment forecast by the 1981-85 Plan imply an increase of productivity of 3.5% p.a.; this increase would be quite difficult to achieve, since the capital intensity (measured by the ICOR) in the manufacturing sector is projected to decline, unless the productivity of labor itself improves markedly. To help reverse the past trends in labor productivity, the mission's specific recommendations are as follows:  - 26 - (a) In the 14 planned IATs, the following factors should be given particular attention; (i) the qualifications of trainers, who should have an academic background in engineering and at least two or three years of experience in industry, and competitive salaries with those offered by the private sector; (ii) the motivation of students, who generally lack motivation in technical studies and in the training institutes. 1/ It would be highly desirable that the best students of these institutes be allowed to enter Higher Engineering Schools after graduation; (iii) the involvement of the private sector, which should be more active in defining the needs for training and in offering jobs and training periods to the studends; and (iv) the size of the training units, which is planned to average about 20 students, should be increased to entail a more effective and economic use of the training facilities. (b) The Need for additional training institutes has been clearly established (see para. 4.06). The priority is to increase the number of technicians and foremen graduated in mechanical skills. A recent manpower planning study, which gives an overall picture of training needs for the manufacturing sector, recommends estab- lishing 3 training institutes in 1982, in addition to the 14 planned IATs. These additional institutes would provide the economy with 336 graduates in mechanical skills, and 72 in elec- trical skills, every year from 1984. These institutes seem to be carefully prepared, although the proposed number of students in electrical skills appears too high in comparison with the pro- jected needs of industry. The government has not taken any deci- sion concerning these three institutes. The mission recommends that (i) it would be appropriate to reshift towards mechanical skills part of the capacity planned for electrical skills in the 14 IATs; and (ii) the government should give its agreement for the construction of at least one of the proposed institutes which should be exclusively oriented towards mechanical skills. Moreover, Morocco needs more vocational schools in order to fill the gap in mechanical skills which is estimated to average annually some 1,850 workers between 1980 and 1985. (c) Need for in-plant training. In-plant training would be most pro- fitable in large plants where it could be done by plant engineers or external trainers from the technical institutes. It would be particularly useful for foremen who could thus build-up or improve a theoretical knowledge they often lack. 1/ As soon as a better opportunity comes up, to join the university for example, they leave these institutes.  - 27 - CHAPTER V; IRON AND STEEL FOUNDRY-FORGE Introduction 5.01 The foundry and forge subsector in Morocco is very small, contri- buting in 1978 only 2.5% to the domestic output of the engineering indus- tries. The foundry operations in the country have achieved a basic level of development; the forge activities are still in the infant stage of development and are limited to a secondary production operation of a steel foundry 1/ producing grinding medias. The development of this subsector has receded over recent years, and will continue to face serious problems unless priority attention is given to the resumption of its development. As a key backward link for the manufacturing and assembling industries, the foundry subsector plays a major role in the overall growth of engineering industries. However, in Morocco, the efficient development of this sub- sector and its integration in the engineering and other industries is hampered by many factors as discussed in the following sections. Various studies 2/ undertaken over the recent years drew the attention to the situation of the subsector and recommended integrated programs for its development; however, the absence of a well-formulated development strategy for the subsector and other market and economic factors brought adverse effects on its development. The present chapter summarizes the current situation and recommends various specific measures designed to assist in harnessing the potential of this subsector for the further development of the engineering and other industries. Production and Capacity Utilization 5.02 The foundry subsector comprises three enterprises 3/ with an industrial character and about 50 other small scale artisanal foundries. Total employment in the subsector is estimated at about 1,100. The capacity (operating at a rate of 66%) and the production of the subsector are given below: 1/ Hereafter the term foundry means both the foundry and forge activities, 2/ McKinsey: "Vers la satisfaction progressive par la production locale des besoins marocains en produits de fonderie", February 1978. Dar Al Handasah: "Rapport Sectoriel; Industrie Metallique de Base." 3/ Foundries SKHIRAT, MAROC and ONCF. Foundry TABOR, the largest in Morocco (with a 5,000 tpy capacity), went bankrupt in 1979.  - 28 - Table 5.01; -CAPACITY AND PRODUCTION OF CASTINGS IN 1979 (tons per year) Index of Production /a Capacity Production 1975 1978 1979 Iron castings 16,000 12,000) ) 139 128 95, Steel castings 2,600 1,400) Forgings 1,600 800 Non-Ferrous castings 800 500 132 135 100 Total 21,000 14,700 /a 1969 = 100 Source: Mission estimates and plants information. 5.03 The production of the foundry subsector, which had grown at about 6% per year during 1970-76, has declined since 1976. The major factors affecting this poor performance are: (i) the limited capacity of the machine building and capital goods local industry (see Chapter VII) and the substantial decline of the market for transport equipment after 1977 (Chapter VI); (ii) the absence of a development strategy and policy for the subsector, thus leading to a low degree of integration of the subsector in the overall industrial development; (iii) a shortage of skilled labor; (iv) a deficiency in technical assistance to provide new foundry techniques, thus limiting the possibility of producing high quality castings; and (v) the dearth of qualified Moroccan technicians and engineers to replace the foreign specialists who left Morocco after 1973 (see Chapter IV). Product-Mix, Market and Competitiveness 5.04 The castings produced by Moroccan foundries are of low grade and simple type, used for a wide range of applications: (i) engineering indus- tries, consuming about 40% of the national production, mainly for spare and replacement parts; (ii) transport industries, utilizing about 20% of cast- ings as parts for wagons, industrial vehicles and tractors; (iii) civil works, water and sewage system using about 25%; and (iv) mining and cement industry, accounting for about 15%. Only a small percentage (about 20%) of the castings production is used as intermediate products for further pro- cessing and subsequent assembly, whereas the remaining production finds its application either as finished products in the construction industry or as replacement and wearing parts in other industries. A majority of the production is consumed by the public and semi-public sectors. With appro- priate planning and by overcoming the constraints mentioned in para. 5.03, the foundry sector could be developed for a deeper and much wider integra- tion in the engineering industries.  - 29 - 5.05 The castings produced in Morocco are sold wholly in the domestic market, where they meet about 40% of the total demand of about 35,000 t. The rest of the demand is met through imports which are supplied either as finished components in equipment or as raw materials and semi-finished parts for further processing and assembly. Half of the imports are quality castings for other applications than engines. The mission estimates that, under a realistic policy for further development of the subsector, about 10,000 to 15,000 tons of castings presently imported (such as parts for diesel engines, pumps, hydraulic, agricultural and mechanical equipment) could be produced in the country. This would require that substantial improvements be achieved regarding key factors such as: efficient produc- tion at a competitive cost, quality control, training needs, transfer of appropriate technology, and adequate tariffs and protection. 5.06 Due to the various difficulties of this subsector mentioned in the foregoing paragraphs, the Moroccan foundries have not been able to compete successfully against imports, and ex-factory prices of local castings range from 35% to 50% above European prices. The analysis of the major components of the production costs (see Appendix V.1) shows the effects of the costs of raw materials and of labor productivity on the final price of castings. The raw material costs (including duties and taxes) account for 35-40% of the output value (and 50% of the output valued in international prices); this high percentage stems from the fact that about 60% of raw materials (such as pig iron, coke, ferrous alloys and even sand) are imported at high prices compared to international prices, due to the small size of orders and to duties and taxes of about 20% levied on these imported raw materials. On the other hand, the price of local iron and steel scraps seems low compared to international prices, as a result of the price control; however, the inferior quality of the local scrap compensates for its low price. The exploration of national resources for sands, 1/ and the establishment of an appropriate procurement mechanism to reduce costs of imports should be given priority attention. 5.07 The other major component of the production cost is labor. The average cost of labor (including social charges), which is about 50% lower than in European foundries, accounts for about 25% of the output value. However, this advantage is offset by the low productivity of operations and of labor (about half the productivity in Europe). Except for some special parts which are produced locally in short runs at very competitive prices (pump casings, flying wheels, crusher components), castings are produced often at comparatively high prices, averaging 35% and up to 50% above European prices of similar castings, and thus uncompetitive against imports of castings subject to low protection (such as those incorporated in capital goods and supplies). Against other iron/steel castings which enjoy a nominal protection rate averaging 40%, the quality of production becomes the constraining factor. 1/ Needs of foundries are estimated to total about 50,000 tpy.  - 30 - Technical and Technological Stand 5.08 The dominating foundries in Morocco till recently were either managed by, or had technical assistance from, foreign enterprises (pri- marily French). However, in the ongoing process of moroccanization of capital, the management structure has been also under change, and the dearth of Moroccan technical management and engineers has made it more difficult to ensure an effective management control and operation of the plants. It is therefore important that the government openly reiterate as a matter of policy that the moroccanization of capital should not be linked with foreign management (see para. 26 of Annex I), unless suitable staff can be identified in the country. 5.09 The foundries in Morocco produce castings which can be classified as low-technology products. Under the present organization of the main foundries with their plant layout, operating practices, labor productivity, product quality and technology adaptation, it would be difficult to upgrade the quality of castings produced in Morocco. It is thus indispensable that comprehensive technical assistance be extended through a specialized institution to impart training and assistance in various aspects of foundry technology - metallurgical, melting, casting, molding, patternmaking, etc. Furthermore, the acquisition of foreign technical assistance and technology through licensing arrangement would also be required to permit further development of the foundry industry. Future Development and Recommendations 5.10 As discussed in preceding paragraphs, the foundry industry in Morocco is in a difficult situation and not in position to meet the demand of the consuming industries. The demand of castings in Morocco is expected to increase to about 40-45,000 tons per year by 1985, of which about 30,000 tons, substituting mainly for the imported castings entering industrial products (such as diesel engines, pumps, compressors, and other industrial equipment), could be produced in the country if a vigorous development program and policy for the subsector is implemented. Given that the quality of these industrial products depend largely on the quality of the castings to be supplied locally, the production of good quality castings should be also one major objective; however, this requires that the Govern- ment sets mechanisms to overcome the constraints discussed earlier. 5.11 The Government has selected the foundry industry as a high priority subsector in the next Five Year Plan (1981-1985), and the mission has identified several projects in various stages of planning and study. However, no systematic approach for the proper development of this sub- sector and for the most economical allocation of production programs between its enterprises has emerged from the review of projects and from the discussions with the responsible entities. In addition to the extension of some ten existing small foundries by a total of about 6,000 tpy, 1/ the following projects are under consideration: 1/ To compensate for most of the foregone production of the Fonderie des Tabors.  - 31 - (i) under the patronage of Ministry of Industry a project with a final capacity of about 10,000 tpy of high-quality iron castings for pipe fittings and primarily for integration into the fabrication of some 10,000 diesel engines, with an investment of about US$60 million, is being prepared (para. 7.27 of Chapter VII). Bank/IFC group is involved in this project, which is expected to provide sophisticated castings for various industries, especially those producing transport equipment and other capital goods using diesel engines. A prefeasibility study is expected to be ready by 1982; (ii) a new foundry, with a capacity of about 3,000 tpy of iron cast- ings, will be established by an enterprise manufacturing electri- cal motors and diesel engines (see Chapter VIII). This project for internal integration is expected to meet the needs of the firm's existing operations for some 1,000 tpy, and to subcontract the remainder of its production in the domestic market and abroad. This project aims at integrating within the enterprise the produc- tion of some parts (for diesel engines and electrical motors) which other foundries do not produce; it aims also at the geogra- phical diversification of the subsector. The project seems somewhat attractive in view of its low investment cost 1/. The mission recommends however that its integration and regionaliza- tion benefits be compared to the gains which could be obtained from producing in specialized foundries with substantial economies of scale such as that referred to in i) above; (iii) a new foundry for producing about 2,000 tpy of malleable castings is also being considered, and needs further preparation work. the mission recommends to regroup this project together with some other foundry projects to ensure economies of scale; (iv) a new non-ferrous foundry for producing about 4,000 tpy of light alloy alluminium castings for construction hardware and household appliances (burners, stoves). It is recommended to make a detailed demand study before any further action on the implemen- tation of this project is taken; (v) a new foundry producing bathtubs, with a capacity of about 5,000 tpy, will be implemented by the private sector; (vi) a forge project with a capacity of about 1,000 tpy to produce various hand tools is also under consideration. The mission estimates that the demand of forged parts similar to those to be manufactured by this project could be higher in Morocco and recommends to evaluate the demand, and assess whether a 4,000 tpy forge, which would be better from the point of view of economies of scale, could be justified on market grounds; and 1/ Investment cost was scaled down to DH 16 million, compared to a cost of DH 25-30 million in normal circumstances. However, BNDE has withheld its decision to finance this project.  - 32 - (vii) finally, BNDE is currently reviewing the foundry subsector in order to determine investment policies and priorities in the subsector. 5.12 The foundry subsector should be expected to play, within the priorities. adopted for the engineering industries in the Plan 1981-1985, an essential role in'the progressive backward',integration of the main indus- trializing activities-and of two other priority subsectors of the engineer- ing industries (capital goods and transport equipment) in particular. How- ever, the diagnosis of the subsector's weaknesses made by consultants in 1976-1978 remains fully valid, and has been aggravated by the lock-out of the most important foundry. The development of the foundry industry is tightly constrained at present by its poor quantitative and qualitative performance, the dearth of qualified labor and technical assistance and of training facilities, and an inadequate incentives and development policy framework. The latter stems from the absence of a strong support to the subsector from the public authorities, as illustrated by volatile policies on protection and import authorizations for castings, the rigid require- ments of the public customers with respect to delivery delays of the existing foundries, all factors which have led the subsector's enterprises to adopt a passive attitude with respect to modernization and expansion investments and programs. 5.13 On the basis of the plants visits and discussions made during the sector review and of the previous studies undertaken for the subsector (see footnote to para. 5.01), the mission recommends that, in order to upgrade the subsector's capabilities and to integrate properly its activities with- in the development of the engineering industries, the public authorities (Ministry of Industry, ODI) draw, with external assistance if necessary, a new integrated program of studies and actions for the subsector along the following guidelines: (a) prepare a development plan for foundries at the level of the whole subsector and within the perspective of the overall market for castings, and develop within that broad framework projects for modernization and/or expansion of existing foundries, with the main focus on intrasectorial linkages and economies of scale (expansion rather than creation of foundries); (b) in particular, reexamine the various foundry projects identified or under study (para. 5.11), with a view to rationalize their respective product-mix and to regroup or coordinate similar pro- ductions between the most economical projects 1/; 1/ This would apply especially to the projects (i) and (ii) of para. 5.11 which are assigned to produce castings for diesel engines.  - 33 - (c) adopt during.:a{ limited period a crash program of measures 1/ and appropriate .inc'entives to help the.: foundries in acquiring tech- nical assistance (from foreign partners if necessary) in foundry technology andcLumnagement, and in undertaking the investment pro- grams which wouTld emerge from the subsector strategy of (a) above; (d) establish a specialized center to provide the industry with tech- nical and manufacturing assistance and to fulfill essential func- tions (quality control of input and output). (e) establish priority training programs to upgrade the skills of foundry workers and to supply the subsector with much-needed tech- nicians and engineers; 1/ A first measure could be to exclude all castings from the possible extension of the Article 163 bis of the Customs Code (para 2.05). Moreover, the authorities could prepare, and agree with the subsector's enterprises on, a "subsectorial contractual program", whereby the enterprises on one hand would undertake investment and reach production objectives fixed by the subsectorial development plan (point a above) and on the other hand the public authorities would commit themselves on a long-term period to provide adequate protection, technical assist- ance, incentives and to purchase for the public sector guaranteed tonnages of castings.  - 34 - CHAPTER VI: TRANSPORT EQUIPMENT Introduction 6.01 The transport equipment 1/ industry represented in 1978 the second most important subsector in Morocco's engineering industries at*d since 1970 its importance has been fluctuating with the general economic climate of the country. The subsector accounted in 1978 for around 30% of production, 22% of value added, and 20% of employment in the engineering industries. The output of the subsector grew at an average annual rate of 3.5% (in real terms) between 1970 and 1977 and amounted to DH 1,275 million in 1978. After 1977 the subsector was deeply affected by the general economic slow- down in Morocco; since then, the output declined by about 30% (in real terms). 6.02 The transport equipment industry comprises 5 significant sub- sectors, the vehicle industry being the most important and accounting for about 50% of the output of transport equipment. Table 6.01: TRANSPORT EQUIPMENT SUBSECTORS Production Index 1978 Output (1969 = 100) 1975. 1977 1978 1979 Share (%) Automobiles 136 127 107 102 36 Vehicles (trucks, buses) 97 140 82 50 49 Bicycles, motorcycles 173 103 146 151 6 Railroad rolling stock 149 196 229 129 3.5 Shipyards 143 146 133 134 4.5 Total Transport Equipment 127 132 106 91 100 Source: Direction Statistiques - Plan Secretary. There is one enterprise for automobile assembly, producing annually some 20-25,000 cars of more than a dozen types; the local market and its diver- sification are not such as to justify a further extension of this activity. On the other hand, in view of the priority given by the Government's 1981-1985 Plan to the vehicle industry and secondarily to the closely associated tractor industry, this chapter will concentrate on the 1/ This subsector includes cars, commercial vehicle (trucks, pick-ups, jeeps and buses), cycles, motorcycles, railway rolling material, repair and construction of ships, and aeronautical repair.  - 35 - vehicle/tractor industry, and evoke the situation of the vehicle acces- sories subcontracting industries. The mission findings and recommen4ations are based on the conclusions of various studies 1/ conducted on these industries, its own plant visits, and discussions with various organi- zations. Production and Capacity Utilization 6.03 Production activities of the vehicles industry in Morocco are limited to assembly of imported CKD kits, incorporating some local manufac- tured parts and accessories. There are at present seven enterprises in the country 2/ assembling trucks, pick-ups, jeeps and buses, and employing about 1,200 people. The assembly or production of tractors, which was undertaken by three firms (COMAGI, AUTO-HALL and CIMAGEC), is presently interrupted (para. 7.18, Chapter VII). The manufacturers of vehicles (including cars) and tractors, are supported by about 90 supplier companies. The enterprises producing automotive parts, accessories and vehicle equipment employ about 5,000. 6.04 The production of vehicles and tractors since 1970 is shown below: Table 6.02; PRODUCTION OF VEHICLES AND TRACTORS 1970-79 (number of units) 1972 1974 1975 1977 1978/a 1979La Pick-ups 1,535 2,311 2,769 2,982 3,650 2,000 Jeeps 402 428 575 860 2,000 Trucks 2,942 2,470 4,439 6,984 3 4,000 3,500 Buses 290 328 416 434 ' _ TOTAL 5,169 5,537 8,199 11,260 7,650 5,500 Tractors 800 1,173 833 1,000 900 800 /a Estimates based on information during mission's plant visits. The production of vehicles during 1972-76 expanded rapidly both in quanti- ties and product diversification. However, since the slow-down in the economy--leading to substantial retrenchment of investments and imports, there has been a significant reduction in the level of activity which has resulted in a heavy underutilization of the installed capacity, operating at about 35% in 1979. Most of the assembly lines of vehicles are either idle or being inefficiently used at present. 1/ McKinsey: "Vers une strategie d'industrialisation des vehicules utili- taires et des tracteurs agricoles au Maroc", February 1978. Dar Al Handasah: "Rapport Sectoriel: Materiel de transport". 2/ BERLIET-MAROC, AUTO-HALL, SODIA, SOMANI, SALDA, AETCO-LEVER and SOMACA.  - 36 - 6.05 The situation in the tractor manufacturing sector is discouraging. This branch of industry has been carrying on its activity without any firm policy framework formulated by the Government. In an agricultural country like Morocco, the uncertainties regarding what should be the correct mechanization policy for the agricultural sector had resulted in a shortage of farm tractors in Morocco (para. 7.19 in Chapter VII). In an effort to improve the situation, the Government relegated in 1977 the duties on imports of built-up tractors, which increased at the detriment of the deve- lopment of local assembling and parts-supplying industries (para. 6.08). The activity of this subsector, which was growing at about 10% during 1972-76, has drastically receded, and two-thirds of the demand of 2,500 tractors p.a. were met in 1980 by imports. The last firm operating in this subsector closed down recently. 6.06 Following the traditional pattern of the industrialization process of the vehicle industry,the production of parts and accessories in Morocco is directed primarily towards the demand of spare-parts for the existing vehicle park, and secondarily towards the integration in the production of new vehicles. The major parts produced in the country include radiators, tanks, glass products, springs, mufflers, batteries, tires, filters, elec- tric cables and other small items. The branch had a total turnover of about DH 400 million in 1978 (of which 30% sold to the local assembly plants), and its capacity is fairly well utilized. Specialized mechanical works, fabricating components and parts for the vehicle industry by machining simple castings (brake drums, flywheels, casings), are at an early stage of development and scattered over a number of small specialized firms and of workshops in larger enterprises. Machining enterprises are operating competitively without protection and could develop in closer integration with the other engineering industries for specialized jobbing. However, the development of these activities has been seriously constrained first by the shortage of highly skilled workers capable of operating spe- cialized machine-tools, and second by the lack of sectorial integration and standardization policy which have restricted the size of the domestic market and of production runs for machined parts. Product-Mix, Market and Competitiveness 6.07 During the steady growth of vehicles production in early seventies (para. 6.01), five reputed international companies (BERLIET, FORD, VOLVO, BEDFORD, DAF) established assembly plants in Morocco for the production of a wide range of products of various types. The current range of vehicles available on the market comprises: (i) five makes with 26 models of trucks over 5-tons, with about 70% of production in the 5.5-tons category for which Berliet shares about 60% of the domestic production; (ii) more than 15 makes of small trucks and vans in the 2.5 to 5-tons category (one make occupying about 50% of the market in this class); and (iii) three makes of buses, Berliet having a share of about 50% of production. The market for the agricultural tractors comprises seventeen makes with 55 models. This excessive diversification has been and remains the major constraint on the development of this subsector and on the integration and growth of the local supplying industries; the wide diversification limits the production runs, does not permit standardization and engineering adaptation, increases the investment cost in equipment and tooling, diminishes the cost competi- tiveness, and creates major problems for adequate maintenance by the after sales services.  - 37 - 6.08 The production of vehicles and tractors is essentially geared to the local market (Morocco exported during the years 1971-74 about 1,750 vehicles to China). The share of the demand met by the local production is about 80% for pick-ups and jeeps, 90% for vehicles over 5 tons, and 85% for buses. The demand of vehicles in the 2.5 to 5-tons category is met mainly through imports. Due to the shift of total vehicle demand towards this latter category, the share of the demand met by local production decreased from 87% in 1972 to about 55% at present, as shown in the following table: Table 6.03: DEMAND OF VEHICLES AND TRACTORS (number of units) 1972 1974 1975 1977 1978 1979 Vehicles Production 5,169 5,537 8,199 11,260 7,650 5,500 Imports 1,082 3,016 5,073 8,940 6,500 5,030 Exports 293 307 - 50 - 95 Demand 5,958 8,246 13,272 20,150 14,150 10,435 Tractors Production 800 1,173 833 1,000 900 800 Imports n.a. 1,533 1,337 2,000 1,700 1,900 Demand n.a. 2,706 2,170 3,000 2,600 2,700 Source: Studies referred in para. 6.02, information during mission's plant visists, and Customs Statistics. 6.09 Of the total production of parts and accessories in Morocco, about 70% is directed towards the replacement and spare parts market, about 1% is exported, and the remainder is used in various assembly lines for new vehi- cles. The local parts and accessories used in the assembly of new vehicles contribute to an integration rate of not more than 15% in the automobile assembly and of about 23% in the vehicle assembly. A further increase in integration is seriously constrained by the excessive diversification of product requirements, the need for higher technology products, and the general drawbacks of the policies followed so far (para. 6.07). However, Morocco has been successful in exporting (directly or in compensation) some automotive parts, such as car bodies and particularly radiators for which exports of DH 10 million represented 40% of the local production. 6.10 The principal inputs for the vehicles production in Morocco are imported kits in CKD and SKD condition and locally produced automotive accessories. The imported parts represent about 60% of the output value, including some 15% for duties and taxes. Locally produced parts, which have a 45% import content, weigh for 15-20% in the output value. Labor  - 38 - accounts for about 5-7% of the output value, whereas the administration charges and the factory margin share the remaining 13-20%. As the prices of the vehicles are homologated by the Government on the basis of actual costs and price increases experienced upstream are passed on to the clients, there is little incentive for the domestic suppliers and assem- blers to reduce their production costs. Moreover, the local vehicle indus- try is heavily protected against the imports of built-up vehicles, on which duties of 32.5% and other import taxes totalling an additional 15% of the CIF value are levied, as against total 25% of import duties and taxes on imported CKD kits. The output value of locally manufactured parts and accessories is on average 25% (including taxes and duties on raw materials) above European prices; the parts and components incorporating a high share of labor (40% in radiators, 60% in machining) are competitive and exported. On the whole, the final ex-factory prices of the local commercial vehicles (excluding taxes) are similar to the CIF prices of similar imports; the main reason for the competitiveness of the local assembly plants is the favorable ratio of Productivity/Wages for the labor. 6.11 Even though the local vehicle and parts manufacturing enterprises are constrained by the wide diversification and smallness of local market and the resulting small production runs, they are nevertheless well managed with modern equipment, good layout of machinery, efficient flow of mate- rial, and adequate operation techniques applicable to the local level of technology. The quality of the parts manufactured locally, which is either specified or imposed by the final local users, could be classified as high standards. Samples of local fabricated parts are tested by the foreign licensors in their European facilities before these parts are integrated in the final assembly of vehicles. Assembly lines, like those of Berliet- Maroc, are worth mentioning for their good organization and modern equip- ment. With a higher labor productivity, these facilities could be as efficient as those in European counterparts. However, there is a shortage of qualified labor and a lack of training facilities in Morocco. Pre- sently, the professional training is provided mainly by the enterprises themselves, but there exists a high turnover, as qualified workers in this field prefer to capitalize their know-how in the automobile maintenance and repair shops, which probably provide higher salaries and benefits. Technical and Technological Stand 6.12 Todate, the Moroccan vehicles industry, consisting of assembly lines and some manufacturing units producing certain basic automotive parts, is situated technologically at a semi-industrial stage, for which technical assistance is provided by foreign enterprises. However, further progress towards production of parts with a higher technological level has not made much progress over the past years in Morocco, mainly because of the smallness of local market spread over a large number of producers, the absence of standardization and adaptation, the lack of coordination and integration between the assembling and manufacturing enterprises, and the reluctance of the foreign licensors for increased local integration. To induce further integration, Government envisages to enforce a law to this effect (para. 6.13); however, it is equally essential to set up for the engineering industries and for this subsector in particular a technological center (see Chapter VII, para. 7.16) to promote engineering adaptation and standardization, and to provide technical assistance for improved manufac- turing techniques in this subsector's enterprises.  - 39 - Future Developments and Recommendations 6.13 The transport equipment industry, being one of the largest sub- sectors within the engineering industries in terms of domestic production, has been given a secondary priority by the Government in its next Five Year Plan (1981-85). It is expected to invest during that period some DH 440 million according to the Plan projections, and some DH 320 million accord- ing to the mission's estimates (see below para. 6.14 and Chapter IX, para. 9.02); this lower investment level would entail a growth rate of 10.5% p.a. The Plan projection reflects the Government's intention to increase the industrialization of this subsector, to meet 75% of the local demand for vehicles from local producers, and to increase further the integration of parts and accessories produced domestically through the enactment and enforcement of a new "Integration-Compensation" law. The text of this law would make an obligation on all vehicle assembling manufacturers in Morocco within a 2-year delay to increase the integration-compensation rate 1/ from the present 15-25% to a minimum of 40-50%, including the possibility to achieve these rates through "compensation" exports of local parts and com- ponents to the foreign companies supplying the CKD kits. The law moreover specifies minimum rates of integration/compensation of 40% for cars, pick- ups and vehicles under 5 tons, and 50% for buses, tractors and vehicles over 5 tons. 6.14 There would be no difficulty in achieving the 75% target for the coverage rate of demand, as the present installed capacity in the country is largely underutilized. On the other hand, the mission foresees possible difficulties in applying the law, particularly in achieving the proposed integration-compensation rates within the delays prescribed by the law, for the following reasons: (i) in view of the limited size of the domestic market and its exces- sive diversification (for cars in particular), it is of utmost importance that the Government address in a first phase the over- riding issue of market rationalization and vehicle/component stan- dardization, in order to unify the requirements for parts and lengthen the production runs and to avoid serious adverse effects on the final costs of assembled vehicles. The law constitutes for the public authorities a means to control and persuade enterprises to introduce rationalization and standardization in their opera- tions, and these objectives could b, stated in execution decrees for the law; (ii) given the current technical capabilities of the local EMIs and the gestation periods required to create or adapt these capabilities to the standard and quality requirements of a modern automobile industry and to complement the integration rates feasibly achievable by necessary compensation exports of parts and 1/ Defined as the ratio of: Value of local parts and components (in European prices) + FOB value of compensation exports to the; Value (in CIF prices) of complete CKD kits (for the whole vehicles).  - 40 - components, it is. also a prerequisite to build-up more solid infrastructural industries for foundry, forging and machining 1/ which could meet basic requirements in terms of delivery delays, quality and prices of domestic parts; and (iii) specific incentives and regulations should be studied and extended by the Government to manufacturers and foreign licensors to pro- mote projects in these infrastructural industries. 6.15 The mission therefore recommends that, prior to the enforcement of the law, a careful review be undertaken to assess its economic effects on the final production costs of the automotive industries (in particular on the car assembly), and that a meaningful and feasible action program be prepared to address the points (i) to (iii) raised above and to implement the law within a larger timeframe. A first step in this direction, which addresses more particularly the point (ii), would be the implementation of the large integrated project, under study under the aegis of the Ministry of Industry and ODI, for a 10,000 tpy foundry-cum--machining plant (see Chapter V) and for the fabrication of standard modular diesel engines (see para. 7.26 in the following Chapter). 1/ A 35% domestic integration rate for vehicles would necessitate that vehicles be equipped with domestic diesel engines, i.e. that the diesel engine foundry be in full operation.  - 41 - CHAPTER VII: CAPITAL GOODS AND SUPPLIES Introduction 7.01 With Gross Fixed Investments running at an average of about US$3 billion a year (some 25% of GDP) and investment in equipment and machinery averaging US$1 billion per annum, the total demand and imports for capital goods and supplies 1/ in Morocco have weighted heavily on the structure of industrial production and imports. Overall imports of industrial equipment and machinery totalled some DU 3.3 billion in 1978 and 1979, representing two-thirds of EMI imports and about one-fourth of Morocco's total imports; the demand and imports of mechanical equipment and machinery excluding the transport equipment (treated in Chapter VI) amounted DH 2.2 billion and DR 2 billion respectively in 1978. The small contribution of the local industry (10%) to the demand for non-transport equipment reflects the current situation and capacity of the local capital goods industries; its potential capabilities and contribution however could be substantially increased with a more adequate policy framework and institutional support. Overview of the Present Stand 7.02 The subsector of capital goods and supplies industries comprise about 375 enterprises, of which 175 artisanal ones have less than 5 workers and 35 only have more than 50 workers. Most of the artisanal enterprises are producing agricultural implements or small fishing boats. Half of the other enterprises and of the largest ones are in the steel structure and platework subsector. Total output of the capital goods industries amounted to DII 1 billion in 1978, with a value added of DH 390 million approxi- mately, representing one fourth of the output of the engineering industries (see Appendix VII.l). The most important activities of the metal/mechanical industries producing capital goods and supplies have been steel structures and platework, agricultural machinery and implements, assembly of diesel engines, freight wagons and shipyards; and transformers, cables, switch- boards and assembly of electric motors for the subsector's electrical industries. The contribution of this latter group to the total output of the capital goods and supplies industries increased from 24% to 36% over 1975-1978, due to a record growth rate of 29% p.a. based largely on the expansion of the industries producing transformers and switchboards. 7.03 Imports of machinery and other major capital goods (transport and electrical equipment) followed during the 1974-1979 period the trend of the overall fixed investment in the economy: more than doubling between 1974 and 1977, and decreasing by 25 to 35% in 1978-79 (see Appendix VII. 2). 1/ Capital supplies are defined as components and parts integrated within machineries and equipments, whether to be installed, replaced or maintained.  - 42 - With an elasticity of machinery imports to investment higher than one during expansion periods and lower than one in recession, imports of machinery and other capital goods have put an increasing pressure on the balance of payments, culminating at 36% of total imports in 1977. The need to readjust the external equilibria led to the curtailment of public and overall investment in the 1978-1980 austerity Plan. The level of activity of the local equipment and machinery industries receded after 1977 with that of public and overall investment, and their contribution to total investment outlays remained quite small, averaging only 6 to 7% over the period 1975-1979. 7.04 Despite its limited size and contribution, the subsector of capital goods and supplies industries has developed qualitatively a rela- tively advanced industrial structure (see Appendix VII. 3) and proved its technical capabilities through some noticeable achievements. This has been particularly so in some enterprises producing complex platework and boilers, agricultural machinery, electric transformers and cables; these enterprises are generally moroccanized in terms of their equity and associated with foreign partners or former owners, and operated by foreign engineers responsible for the technical and operational matters under various arrangements with the foreign associates. The local industries have demonstrated, on a piecemeal basis generally, their capabilities to manufacture a relatively wide range of capital goods and supplies using simple to intermediate technologies, such as: (a) general structurals and platework (tanks, vessels, containers,..); (b) industrial handling and hoisting equipment (conveyors, cranes, (c) ventilation and thermal equipment (ovens, boilers, exchanges, cyclones, ...); (d) construction and quarrying machinery (dumpers, cement mixers, grinders, ...); (e) various supplies (valves and taps, dies and molds, engines, gears and pinions, pumps, presses, ...); (f) specialized equipment and supplies for some industries (water treatment, textiles, sugar and flour mills, cement plants, mines, ...); and (g) some electrical equipment (motors, transformers, cables, switch- gears, control boards, transceiver radios). Appendix VII. 4 gives a tentative list of capital goods and supplies which have been or could be manufactured in Morocco, along with the values of corresponding imports in recent years; these imports totalled in 1978 and 1979 about DH 900 and 680 million respectively, of which a substantial share (about 50%) could be manufactured partly or totally in Morocco.  - 43 - Specific Constraints and Issues 7.05 Various factors have hampered the potential development of this subsector and of its contribution to the country's investment effort and import-substitution policy. These factors have been of four types; economic, institutional, financial and internal to the subsector's enter- prises. (a) Economic. As developed in Chapter II, this subsector has been granted a comparatively low level of protection, and the protec- tion when given is often offset by the duties and taxes levied on imported intermediates and inputs. Moreover, the arbitrariness in the administration of protection regulations and import authorizations 1/ have induced among the local enterprises some uncertainties about the Government's expressed policies and objectives for higher integration, and discouraged existing and potential entrepreneurs to invest and widen their product-mix. (b) Institutional. Despite the predominant share of the public and semi-public sectors in the total investment expenditure, the public authorities are lacking the necessary engineering resources and capabilities to prepare in an orderly and timely fashion the public tenders according to the expressed objective of the authorities to increase therein the participation of local industries (with such engineering facilities, it would be possible to split the contracts for large public projects into several packages specifically designed for local and foreign suppliers respectively, and to issue the submeque.it .eaider.s aimed at locd. suppliers in time to allow for sufficient delays for the local fabrication). This shortage, combined with the lack in the bid documents of ad-hoc specifications and selection criteria 2/ 1/ Until recently, imports could be authorized for simple components such as steel frames and structures for turn-key contracts. 2/ Association between foreign and local contractors could be encouraged by incorporating in the weighting system used for the overall evalua- tion of bids a special price weight for the components to be sub- contracted locally, in such a fashion that, ceteris paribus, the bids incorporating higher local subcontracting be given a bonus in the overall evaluation. It is essential for the success of such a scheme that the invitations for bidding indicate clearly the details of the weighting system, so that bidders can assess the consequences of the choices open to them (more or less local subcontracting versus more or less price competitivity). Moreover, the tender documents should make an obligation to the successful bidders to provide to the local associates complete blueprints of all equipments to be manufactured or assembled locally.  - 44 - designed to convince foreign suppliers to subcontract locally a maximum share of the orders, has resulted in an undue recourse to comprehensive turn-key contracts to foreign suppliers. This in turn, compounded by a discretionary application of the existing regulations for local preference 1/, has often excluded from these large contracts the local firms capable of producing equipment components at an acceptable quality and competitive price 2/, and has restrained their access to the blueprints of replicable equipment (see (d) below). (c) Financial. The attractive terms offered by the foreign suppliers for financing the turn-key projects (typically 7.5-8% interest and repayment over 8-10 years for suppliers/purchasers credits covering 80-85% of the imported components, and concessionary bilateral loans for the remaining imported part and for up to one-third of the local costs) constitute a major handicap against the Moroccan suppliers who generally request a short-term payment for their supplies due to the lack of adequate credit facilities. This factor detrimental to the local manufacturers weights heavily in all projects which are not financed locally on a medium/long term basis by BNDE 3/, as well as in the large public projects for which the Government is inclined to mobilize as much external financing as possible to reduce the burden on the budget. (d) Internal (to the enterprises). The subsector's enterprises have preferred generally to adopt a wait-and-see attitude rather than organize themselves and respond with dynamism and innovation to the challenges of the external environment. The local enter- prises, in particular in the steel structure and platework sub- sector (see paras 7.08 to 7.16), have not built up a flexible structure and a sufficient absorptive capacity to be able to contract for and monitor a large order, if necessary by forming an association under the leadership of a large enterprise; they have had thus difficulties to meet tight delivery schedules and to manufacture at competitive prices. Other external constraints 1/ Whereby imports of capital goods are not exempted from duties if the Moroccan industry can supply an equivalent good at a price lower than 120% of the CIF import price. 2/ One experiment for a sugar mill showed that the local industries could provide most of all equipments of simple to intermediate technology within the limit of 20% above CIF prices. 3/ BNDE has contributed on average to 45% of all approved manufacturing investments (para 1.16), financing 20% of total investment.  - 45- hampering the internal efficiency of the enterprises have been the lack of trained people to perform simple engineering tasks (e.g. draft blueprints), the difficulties to have access to blueprints from the foreign suppliers, and the red tape with the Customs and Foreign Exchange administrations regarding technical transactions abroad (contracts with foreign licensors, payments of royalties, remittances of foreign technicians or experts). 7.06 The subsector of steel structures and plateworks contains several firms (generally owned by small foreign entrepreneurs) which are fully competitive in terms of price and quality with imports, for platework particularly, and which have exported, or could export, part of their platework production. Some of the firms producing agricultural equipment and implements (of a simple to intermediate level of technology based on small steel structures and platework) have been competitive also, with output prices ranging from 100 to 120% of FOB Europe prices (see paras 7.17 to 7.20). On the other hand, the industries producing capital goods requiring higher levels of technology and technological integration (diesel engines, electrical equipment such as motors and cables) have generally been less competitive 1/, and have been producing at prices averaging 140%, and ranging 120-160%, of European prices. Most of the inputs and materials are generally imported, and subjected therefore to taxes and duties (representing 5 to 13% of output value) which account partly for the lack of price competitiveness. Capacity utilization generally does not exceed 70% (except in some platework enterprises), and labor productivity remains somewhat low relatively to that in Europe, in particular in the assembly of diesel engines where it does not exceed 60% of European productivity and accounts for the lack of competitiveness (see Appendix VII. 5 for details). 7.07 The heterogeneity of the subsector of capital goods industries and the variety of these industries' characteristics and performances make it difficult to draw further general conclusions regarding the performance and potential of the subsector. The following sections of this chapter will review the operating modes and constraints of a selected number of capital goods industries in Morocco, identify the production lines where Morocco could have an advantage, and make recommendations for the further development of these production lines and industries. Steel structures and platework will be reviewed first (paras 7.08 - 7.16), followed by agricultural machinery and implements (paras 7.17 - 7.20, diesel engines (paras 7.21 - 7.27) and electrical machinery and equipment (paras 7.28 - 7.33). Steel Structures and Platework 7.08 Steel structurals and platework is one of the important subsectors among the engineering industries sector in Morocco, accounting for about 6% 1/ Except for power and distribution transformers (see para 7.31).  - 46 - of production and 9% of employment in this sector. This subsector has developed a somewhat advanced industrial structure in Morocco and proved its technical capabilities in the implementation of sections of several large projects. Over the years 1972-1976, this subsector has shown a rapid growth, of about 20% per annum (in current terms), but in the absence of a coordinated development planning. The mission's findings and recommenda- tions outlined in this section are largely based upon visits to important plants in this subsector, analysis of two studies 1/ conducted in recent years, and discussions with various governmental authorities and agencies. 7.09 Production and Capacity Utilization. Production of steel struc- turals and platework is scattered over a large number of enterprises (about 100 with more than 10 workers); however, six medium-size companies (CMIM, DL, ACM, SMCM, SCIM, CMN) dominate the subsector, with their production accounting for about 50% of the subsector output. The capacity of the sub- sector is estimated to be about 50,000 tpy, and the current production not exceeding 30,000 tpy. About two-third of production belongs to steel structurals and the remaining to platework. In addition to production of equipment, the major enterprises mentioned above are also involved in the installation of equipment ("montage"). The total employment in the sub- sector is about 3,500 people. After a rapid growth (para 7.08), the output of this subsector dropped considerably thereafter due to the depressed economic situation of the last two years which have had a serious impact on the subsector. A recovery in the near future depends, to a large extent, upon the volume of new investment projects and upon overcoming the various constraints discussed in paras. 7.05 and 7.11. 7.10 Product-Mix, Market and Competitiveness. The products manufac- tured in the subsector are widely diversified and are intended for a great variety of needs and directed towards a number of users. The major items produced in the subsector include: steel structurals for industrial buildings; bridges for roads and railways; towers for power distribution system; vessels and tanks for chemical and petroleum/gas industries; equip- ment such as dumpers and cement mixers for the construction industry; boilers for various industrial users; and various products and equipment for industrial plants such as cement, petroleum refining, sugar, mineral processing, etc. This broad coverage of the product-mix by the local industry, however, has limitations, due to the restricted access to foreign technical assistance and blueprints, and the capability 'of productive faci- lities to process only steel plates within a maximum thickness of 40 mm and to handle only light to medium weight products (with a maximum weight of 30 tons per piece). 1/ McKinsey; "Encourager l'industrialisation progressive et selective des biens d'equipment industriels au Maroc", February 1978. Dar Al Handasah: "Rapport Sectoriel: Ouvrages en Metaux".  - 47 - 7.11 The steel structurals and platework industry is entirely geared towards the local market, where it meets about 70% of the domestic demand in that range of product-mix currently manufactured in the country. Imports under the current investment recession amount to about 8,000 tpy for steel structures and to 6-8,000 tpy for platework and boilers. Further substitution of imports (possible for about 5,000 tpy) and manufacture of additional types of equiprment by thie capital goods industry in Morocco are constrained by the various factors analyzed in para. 7.05, and more specifically by: (i) the insufficient engineering capabilities in the subsector; (ii) the scarcity of local enterprises able to manufacture high quality goods meeting the functional specifications of specialized products; (iii) difficulties of local enterprises to manufacture custom built equipment at competitive prices (except boilers); and (iv) insufficient training facilities to provide skilled labor and engineers. 7.12 The two main inputs which determine the cost competitiveness of the subsector are raw materials and labor. Steel products, the basic raw material, are imported. Because of the small quantities ordered, the various types and qualities of steel requirements, and the need to procure materials on short notice, prices obtained for steel sheets and plates are not competitive. These raw materials account for 45-50% of the value out- DUtS. incluiding duties and taxes of about 20% on the CIF price (see Appendix VII. 6). Labor appears to be half as productive (in man hours per ton of production) as in industrialized countries, but this is compensated by the lower level of wages and social charges combined, which account for about 25% of the value of output. All in all, the competitiveness of the subsector is related to the degree of labor intensity of the manufactured products. In case of steel structurals, which involve low man-hours per ton of finished product, the local price per ton of structurals is at least 20% higher than the international price. In case of platework products (like vessels, boilers, dumpers), the subsector is more competitive with local prices being higher only up to 20%. 7.13 The competitiveness of the subsector is to be viewed in light of protection granted to the local manufacturers. In theory, duties and taxes amounting to about 35% are levied on imports of boilers, and 50% on imports of other structurals and platework. However, capital goods for all authorized investments can be imported without restriction 1/ and free from duties (but they still pay the special import tax of 15%). Although the 1/ The restrictive provision of the Investment Code has been seldom applied and on an ad-hoc basis.  - 48 - local manufacturers are also exempted from the production tax on the equip- ment produced for authorized investments, they have still incurred duties and taxes on their imported raw material 1/. There has been, therefore, no advantage given to local suppliers against foreign competitors. Further- more, the various constraints and institutional lacunae identified in previous paragraphs have handicapped the local manufacturers against their foreign competitors and hampered their participation in the large projects in Morocco. 7.14 Technical and Technological Stand. Thus far the development of this subsector has been largely contributed to either by foreign parent companies, providing some technical and technology assistance, or by private foreign investors managing their own companies (generally small, of a family type). Because of the heterogeneous nature of the manufactured products demanding a high level of quality, capability for technical engi- neering and adaptation is essential in this subsector. Technical assis- tance, when not provided by foreign companies to their affiliates, is thus necessary and could be made available through the creation of a specialized center (see para. 7.16) competent in engineering adaptation and product development for the engineering industries. 7.15 The technology applied in the enterprises ranges from low to medium in the scale of technological level of more developed countries. In the larger enterprises, the manufacturing processes such as flame cutting, welding, metal forming, etc. are well known, and modern devices such as positioners, manipulators, automatic welding equipment are in use. The plants and the equipment, a factor for production development, are fairly modern 2/ and in good condition. The other factor for production develop- ment, i.e. trained labor and engineers experienced in production practices to help organize the production activities, is in short supply. There is a clear lack of skilled employees at shop floor level, and thus a training program to upgrade the skill levels of labor is deemed necessary (see Chapter IV). 7.16 Future Developments and Recommendations. Based on rough assump- tions, the domestic market for steel structurals and platework is estimated to reach by 1985 about 55,000 tpy, including about 15,000 tons of those products which are currently being imported and could be supplied by the local industry if the major constraints (para 7.11) are overcome and a policy for increasing the local contribution to major investment projects is adopted. Following recommendations are made to achieve an efficient utilization of the capacity and development of this subsector: 1/ The provision of the Customs Code (Article 163) promulgated in 1979 to redress that bias (see Chapter II) has remained practically unknown and unused (except by a few public firms). 2/ Excessively so at times; the most recently established plant is equipped with a high degree of automation featuring numerical control equipment for surface processing of steel sheets and plates.  - 49 - - adjust the governmental policy and administrative mechanisms to apply effectively the existing regulations for local preference; - review the- protection tariffs and regulations applying to the product groups manufactured locally, and in particular, abolish the duties and tax exemptions on imports of products which could be manufactured locally; - institute, for public projects at least, new bid evaluation procedures to encourage foreign contractors to sub-contract locally a maximum share of standard works and equipment within the local preference overcost margins; - coordinate, to the extent possible, the program of implementation for the public projects with the production and delivery capabilities of the local manufacturers; - extend to the local manufacturers medium-term credit facilities, managed by an appropriate financial institution (Central Bank, BNDE), to finance the long lead-time in procurement of raw materials and in production and installation of the equipment produced; and - create for the engineering sector, and for this subsector in particular, a Technological Center to assist the local manu- facturers in engineering standardization and adaptation, produc- tion techniques, quality control and management. Agriculture Machinery and Implements 7.17 This subsector of the engineering industries comprises about 100 firms, essentially SSIs and artisans producing simple implements, and only three medium/large enterprises producing more elaborated equipment. Given the importance of agriculture in the Moroccan economy, the potential market is large and should offer interesting prospects to the subsector. However, the uncertainties of the agricultural policies about increased mechanization and the short falls of the protection structure have not permitted a rationalization of the market (which has been left into the hands of commercial importers) nor the development of the local industry which contributes a small 25% to the domestic market despite a substantial underutilization (estimated at least at 50%) of its production capacity. 7.18 The local production, totalling each year some 1,200-1,500 light ploughs ("cover crops") and several hundred units of various implements (tractor-drawn tanks, trailers, disc ploughs) for soil cultivation, covers a major share of the demand for this type of simple equipment. The assembly of tractors, incorporating essentially imported CKD components and at most 15-20% of local value, was pursued recently by one enterprise only  - 50 - which had to interrupt this activity 1/ despite its production capacity of 3,500 units and a current market of about 2,500 units p.a. The larger enterprises of the subsector (visited by the mission) have modern and effi- cient production facilities, good technical know-how, and the commercial dynamism necessary for survival.through diversification in the present con- ditions of the market. 7.19 Despite its 7 million ha of cultivated land, Morocco still has a small park of tractors and a low level of mechanization (the ratio of tractor per cultivated ha is less than half that in other Northern-African countries), and thus the market for tractors and other tractor-drawn imple- ments is not large enough to sustain the economic production or assembly of such equipments. The market has been open to free imports (paying only the general special import tax but no specific duties), and is dominated by importers who commercialize some 55 models of tractors in 17 different makes with inadequate services for after-sale maintenance and repair 2/. 7.20 The further development of this subsector is essentially dependent on the future mechanization policies to be applied in agriculture. If the necessary incentives and assistance are provided to farmers for purchasing mechanized equipment, it is estimated that the market for tractors could temporarily reach 6,000 units p.a. and stabilize at 3,500 units p.a., and thus justify the resumption of the local assembly of tractors and the expansion of fabrication of other implements and machinery, provided that some rationalization of the market be enforced 3/. Under such circum- stances, the development of the production of agricultural machinery would be of first priority among the engineering industries. It should focus on the type of machinery where the existing enterprises have already demon- strated technical know-how and potential for quality and price competitive- ness, such as simple implements for soil cultivation (heavy disc ploughs and light ploughs, mechanical seeders and fertilizer sprayers), harvesting machinery (except combines) and straw-bailers, and tank and other bulk trailers (for sugar beets and canes in particular). In order to avoid unfavorable terms of trade for the agricultural sector and thus to maintain the price competitiveness for such equipment, local manufacturers should be exempted from duties and taxes on their purchases of primary steel inputs and other mechanical components (either local or imported). Three projects already identified and studied by the Moroccan agencies for various agri- cultural implements (ploughs, seeders, sprayers, sprinklers, and reapers), straw-bailers and poultry-raising equipment (see review of projects in 1/ Two other enterprises engaged in tractor assembly closed down their assembly lines a few years ago. 2/ It is estimated that some 20% of the tractor park is left unutilized due to lack of maintenance and repair. 3/ Such as the obligation on commercial enterprises to guarantee full after-sale services for their products on a reasonably decentralized basis.  - 51 - Chapter IX) should be implemented with first priority, preferably as expansion/diversification of the existing successful firms rather than as creations of new plants. In the long-term, the integrated fabrication of more complex agricultural machinery and tractors could be envisaged by the most dynamic and competent firms, and undertaken with the support of the public authorities, by engineering design of machinery adapted to the standard diesel engines of modular design to be manufactured in Morocco within the framework of a long-term strategy for the development of the diesel engines industry (see following section). Diesel Engines 7.21 Introduction and General Characteristics. Diesel engines consti- tute an industrial mechanical equipment entering a wide range of investment goods used in the fields of transport, energy generation and supply, public works, industrial machines, etc. They are of a diversified nature, with a large span of speed and wide range of power (2 to few thousands H.P.). Because of their universal applications, they are produced in medium or large series, and require a good level of design, engineering and manufac- turing capabilities. The initial phase of establishing this industry in a developing country comprises the purchase of appropriate technology and the installation of assembly units. The presence of an efficient metal indus- try (foundry, forge and machining) brings about further integration through the successful transfer of production know-how and the engineering adapta- tion of various parts and components of diesel engines. This second stage necessitates in addition a combination of various elements like skilled labor, adaptation and engineering capabilities and managerial skill. In Morocco, the diesel engine industry is still in the process of establish- ment of the first phase of development. due essentially to the lack of an adequate metal industry. 7.22 Capacity and Production. The assembly of diesel engines in Morocco is undertaken by two enterprises: a private enterprise in Casablanca 1/, and a public sector enterprise in Fes. These two enter- prises employ at present about 200 people in the diesel engines manufac- turing operations of their various activities. The capacity, production and sales of the two enterprises are given below: Table 7.01; DIESEL ENGINES SITUATION - 1979 (numbers) Capacity Production Sales Private firm 4,000 2,860 2,400 Public firm 2,000 1,300 1,060 6,000 4,160 3,460 Source: Firms accounts and statistics. 1/ This firm stopped assembling diesel engines by end of 1980.  -52- The low utilization of the capacity (70%) and especially the low sales (less than 60% of the capacity) are basically a result of a slowdown in the overall economy in Morocco over the years 1977-1979. Both enterprises expect a resumption of the economic growth in the coming years, and con- sequently a rise in the demand of domestically manufactured diesel engines. 7.23 Product-Mix, Market and Competitiveness. The major applications of diesel engines in Morocco, as broadly described in Appendix VII. 7, can be classified into three major groups; (i) low-speed stationary diesel engines (1 to 2 cylinders with power under 33 HP). The local production is concentrated (95% of total production) and meets practically the full domestic demand. The import of these diesel engines is almost banned; however, some of these diesel engines are imported as an integrated part of finished products such as crushers, grinding mills, motor-pumps. Some 85% of the domestic production go to agricultural applica- tions (mainly diesel-pump sets), and the rest to local electricity generation (diesel-electric generator sets) and miscellaneous services (such as small compressors, dumpers); (ii) high-speed stationary diesel engines (3 to 6 cylinders) with power above 33 HP. The local industries, covering the lower power range (up to 60 HP), meet only about 20% of the domestic demand. The rest of demand--high power diesel engines (over 60 HP)--is met through imports which include a large number of makes and models. These diesel engines are primarily used for alternators, pumps, compressors, etc.; and (iii) high-speed non-stationary diesel engines, which are mostly imported either as SKD-kits for the transport industry (see Chapter VI) or as integrated components in imported capital goods such as material handling and public works equipment. One important characteristic of the domestically produced and imported diesel engines is the absence of standardization, which constitutes one other major constraint hampering the increase of local integration, the development of local engineering capabilities, the achievement of cost com- petitiveness, and the further growth of the local diesel engines manu- facturing industry. Notwithstanding the initial steps considered by the Government authorities for the implementation of a project for the fabrica- tion of high-speed automotive modular engines (see paras. 6.15 and 7.27), it is important and urgent to study and foster this aspect of standard- ization in all applications of diesel engines. 7.24 Following is a typical breakdown of production costs of diesel engines in Morocco:  - 53 - Table 7.02; PRODUCTION COST OF DIESEL ENGINES - 1979 Cost Category Percentage Imported parts and components 55 Local parts, components- and services 15 Duties and taxes -10 Direct labor 5 Others (administration, overheads, depreciation, margin) 15 Total 100 Source: Firms accounts. The main activities performed in the diesel engines industry in Morocco are: (i) the assembly operations with a share of 5% of production cost; and (ii) the supply of minor local parts (such as fuel tank, exhaust, fly- wheel, etc.) amounting up to 15% of production cost. Higher local integra- tion is constrained primarily by the absence of infrastructural metal industries (such as foundry, forge and machining) in Morocco, and by the smallness of the Moroccan market for the categories of engines currently produced. Given the low level of local integration (20 to 30%), the high share of CKD parts and the amount of duties and taxes levied thereupon (about 10%), the viability of local enterprises has to be maintained through protection measures against foreign co uetition. The ev-factory prices of local manufactured engines are 25 to 40% higher than European levels. 7.25 Technical and Technological Stand. The enterprises are totally dependent on their licensors not only for the acquisition of licence and CKD parts for assembly of diesel engines in Morocco, but also for the development of local integration. Given the constraints mentioned in the previous two paragraphs and the absence of local engineering adaptation capabilities, the local diesel engine industry has at present no other choice than to be largely dependent on the foreign licensors 1/. The careful implementation of the integration-compensation law in the assembly of transport equipment (see Chapter VI) and its possible extension to the assembly of other categories of diesel engines could constitute an opportunity to lessen this dependence on foreign licensors and increase the rate of local integration. 1/ This is illustrated by the following case pointed out to the mission: one of the firms had over the past years increased gradually the local integration to about 40% for a traditional series of engines which was recently discontinued by its licensor. Following the introduction of a new diesel engine series, the local integration dropped back to 20% as the local suppliers were not able to meet the material, precision and quality requirements of the replaced components and parts for the new engine series.  - 54 - 7.26 Recommendations for future development. Based on the information collected in the field, analysis of related imports statistics and the various projects identified or project ideas studied by the public authori- ties, it is roughly estimated that the total demand for diesel engines in all applications could amount in 1984-85 to 25-30,000 units, of which 10,000 for the first category (low-speed engines under 33 HP), 4-6,000 for the second category (high-speed stationary engines) and 10-12,000 for the non-stationary high-speed engines. In view of the sizes of these respec- tive markets, important intersectorial linkages as well as substantial effects on the upwards metal industries (foundry, forge, machining) could - be derived from the rational development of a diesel engine industry supplying most of the country's needs.: For these reasons, the mission strongly recommends that a working paper be prepared, in conjunction and agreement between the public authorities and the industrial enterprises concerned, to review and assess the present situation and the possible avenues to be followed for the development of the diesel engines indus- tries, with a particular focus on: (a) the rationalization and standardization of the markets and of the product-mix of Moroccan fabrications; (b) as a consequence of (a), the necessity to streamline current and future productions to a limited variety of modular engines; (c) the constraints generated by the shortfalls of the infrastructural metal industries (foundry, forge, machining) and a long-term pro- gram of action to alleviate such constraints and develop these metal industries (see Chapter V); (d) the creation of a local capability for engineering and adaptation, possibly through the Technical Center recommended for the sector (see para 7.16); and (e) the action programs and projects to be implemented for the down- ward integration of standardized/modular engines into the fabrica- tion of capital goods within reach of the local industries' capa- bilities (electrogenerating groups; motor pumps and compressors; tractors and trucks; cranes; public work equipment such as cement mixers, dumpers, excavating or levelling machinery; grinding mills and crushers for agricultural or mining purposes; handling machinery and fork lifts). 7.27 Some projects under study or preparation would help meet the future demand and remove partially some of the constraints identified above. The most important project, for which a prefeasibility study is being prepared with the assistance of the Bank and IFC, would be an integrated plant comprising a foundry and machining center with a final capacity of 10,000 tpy for sophisticated mechanical castings to be used primarily in a new assembly/production line of 10,000 non-stationary high-speed engines in the 60-180 HP power range. The mission strongly recommends that the design of the project reflect the points (a) and (b)  - 55 - outlined above regarding the rationalization and standardization of the product-mix into a line of modular engines adaptable not only to transport equipment and tractors but also to other applications of such engines (machinery for construction, public works and mining - see Appendix VII.7). Similarly, the existing diesel engine manufacturer has plans to expand its current capacity by about 50% to a total of 3,000 engines p.a. (mostly low-speed engines under 33 HP) and to increase therein the rate of local integration up to 40% through the creation of in-plant facilities (foundry, machining). It is recommended also:that this expansion be designed and implemented within the framework of the overall development plan to be prepared for the subsector (para 7.26), with again a focus on points (a) and (b), and in particular that its productions of castings and machining be coordinated with the product-mix of the large project for automotive engines. Electrical Machinery and Equipment 7.28 Introduction. Electrical machinery and equipment constitutes, within the capital goods sector, one subsector of utmost importance for the industrialization process of a country, in that it provides all.industrial installations and facilities with the standard equipment necessary for the utilization of their most common source of energy, electricity. This type of equipment is used and installed pervasively in all industries for the distribution, command and control, and use of electrical energy and comprise three main groups of machinery: (a) static equipment (power cables and transformers for inter- connection and distribution); (b) rotating machines (motors and generators/alternators); and (c) command/control equipment (switchboards, high/medium voltage circuit breakers, control panels, ...). 7.29 Capacity and Production. Despite the strict requirements for technology (high voltage switchgears and transformers) or for highly skilled manpower (alternators, complex command pannels) in the fabrication of these electrical equipments, Morocco has developed with the assistance of, or in joint ventures with, European manufacturers (CGE, Merlin-Gerin, Leroy-Somer, Colombini) a significant and dynamic industry for the produc- tion of electrical equipment and machinery. In 1978, some 20 enterprises with a total employment of 2,600 produced a gross output of DH 365 million representing 9% and 54% respectively of the engineering and electrical industries outputs.  - 56 - Table 7.03: ELECTRICAL EQUIPMENT INDUSTRIES - 1978 Out 1978/75 Enter- Employ- Produc- put Growth prises ment Capacity tion (MDH) (% p.a.) Transformers, switchgears 15 1,870 1,200 MVA 950 MVA 230 44.3 Cables and wires 3 700 8,500 T 6,050 T 130 12.1 Electric motors/ alternators 2 60 6,000 u 3,500 u 5 - Total Electrical Equipment 20 2,630 365 29.3 Source: Plant visits and mission estimates. 7.30 Product-Mix, Market and Competitiveness. The local production represents about two-thirds of the domestic demand for transformers and switchgears, and most of the imports for these types of products consist of complex circuit breakers and switchgears which are not within the capabi- lity or competitiveness of the local manufacturers. More than 85% of the domestic market for electric cables and wires are met by the local indus- tries, and only cables of a special nature or technology are imported. On the other hand, the production of electric motors and alternators is con- fined to low tension machines in the small-medium power range (up to 22 kw) for which imports are banned; the local production covers only 5 to 10% of the total domestic demand for electric motors and generators. 7.31 Raw materials (mostly imported) account for two-thirds of the out- put value in the transformers and cables industries, and labor only for 10 to 15%. Local integration is limited to the supply of a few local parts (platework casings, structures, lead and plastic insulators) and labor. Electric motors involve a higher rate of integration (15% for labor and 15-20% for locally supplied parts and machining), which can reach up to 70% in some of the motors manufactured by the major firm producing electric motors. Electric motors are sold at prices equivalent 1/ to European prices, but imports of similar motors are practically banned. The markets of local enterprises for cables have also to be maintained by protective measures, with prices on average 35-40% higher than European prices. Due 1/ Retail pricesare equivalent, and wholesale prices slightly higher (10 to 15%). Until end of 1979, motors were in fact sold at a loss at these prices.  - 57 - to the lower cost of labor which accounts for 15-20% only of output value, local transformers in general are fully competitive with Europe FOB prices 1/. 7.32 Technological Stand. The large enterprises of the subsector pro- ducing electric transformers, cables and motors are largely or totally dependent on their foreign licensors or associates for the development of local integration and for technical improvements and adaptations. Within this significant constraint, the enterprises have generally mastered fully the technologies which they have had access to; in the fabrication of elec- tric motors, however, some improvements could be achieved with regard to the production methods (winding in particular) and the general productivity of labor. 7.33 Recommendations for Future Developments. The most substantial and easily accessible parts of the domestic markets for cables and transformers have already been covered by the local producers which should seek first to increase their productivity and competitiveness, and second to diversify slightly their product-mix towards large/special transformers. Further important gains in import-substitution could be achieved in the fields of switchgears/boards and circuit breakers (imports were totalling DH 80-90 million p.a. in past years) where the comparative advantage of labor costs in Morocco could ensure price competitiveness if labor productivity is maintained at satisfactory levels. There is also a large scope for expan- sion in the production of electric motors and generators (see Appendix VII. 8 for the description and accessibility of the major applications of elec- tric motors); however, an in-depth study of the characteristics and speci- fications of the various segments of the market 2/ and their future deve- lopment is urgently required. Expansion of the product-mix of the firms towards other types or more powerful electric motors should be implemented only after they have fully mastered and improved their production methods and productivities, and consolidated the profitability and competitivity of their current activities. 1/ Prices range from US$17/kVA on average in the 25-650 kVA power range to US$10/kVA in the 650 kVA-5MVA range and to about US$6/kVA in the 5-15 MVA range. The share of labor in transformers produced in industrial- ized countries represents 30-40% of output value, due to the labor intensity of winding operations which cannot be fully automated. 2/ In that respect, there is an urgent need to modify the customs classifications into a larger number of significant industrial categories.  - 58 - CHAPTER VIII: LIGHT ELECTRICAL AND ELECTRONIC INDUSTRIES Introduction 8.01 The purpose of this chapter is to provide a picture of the present state of development of electrical and electronic industries in Morocco (excluding electrical equipment, confer Chapter VII) and to propose possible direction for future development of these industries. In a first part, the products, output and operating conditions of the subsector will be analyzed, and the various ongoing or identified projects will be reviewed. In a second part, recommendations will be proposed for the future development of the subsector. Present Situation 8.02 The figures given in the following paragraphs of this section are slightly different from the official statistics, due to the reclassification of some activities (in particular, the electrical household appliances of sub-sector 21.8 are integrated into the category of electrical consumer goods) and to the ad hoc treatment of some service activities (contracting, engineering) which were taken out from official statistics. 1/ Moreover, the general Table 8.01 summarizing below the situation of electrical and electronic industries in 1978 includes as a memo item the data for elec- trical capital goods (motors, transformers, cables, switchgears and switch- boards) which were treated in Chapter VII. 8.03 Electronic equipment industries of Morocco comprise the fabrication of transmitting/receiving radio sets and radio-telephones, and the assembly of telephone sets and small switchboards. Exports of radios are made prin- cipally to the EEC and also to African countries. Electrical intermediate goods manufactured in Morocco consist essentially of batteries (total output of about DH 35 million by 3 firms) for the domestic market and of automobile electrical components (cables, starting devices and regulators) manufactured or assembled mainly under sub-contracting arrangements for exports. Elec- tronic intermediate goods regroup also two different activities: the fabri- cation of passive components (mini-transformers, commutation relays) for domestic and export markets, and the full sub-contracting by foreign firms to their Moroccan affiliates of semi-conductors and transistors which are entirely exported. 2/ Electrical consumer and durable goods comprise 13 enterprises manufacturing standard items for the domestic market only (lamps and bulbs, dry cells, plugs and other wiring devices, refrigerators and water-heaters, and small household appliances). Manufacturing of electronic consumer goods consists essentially in the assembly of CKD kits for radios and TVs (about 100,000 TV sets and 250,000 ratio sets per annum) in 15 small and medium enterprises, with only 3 enterprises employing more than 100 workers. 1/ It is difficult to draw the line between manufacturing and service activities, because some servicing enterprises undertake assembly or wiring of their equipment, which is a manufacturing activity. For this reason, the corresponding adjustments of statistics have remained minor. 2/ See footnote 1 of Table 8.01.  - 59 - Table 8.01: ELECTRICAL AND ELECTRONIC INDUSTRIES - 1978 No. of Output enter- Employ- Output Imports Exports as % of prises ment (in million DH) Demand Electrical equipment 20 2,630 365 236 8.5 60 Electronic equipment 2 250 30 98 3.5 22 Subtotal equipment 22 2,880 395 334 12 53 Electrical intermediates 5 690 50 34 6 58 Electronic intermediates 5 850, 15 54 12 /1 5 Subtotal intermediates 10 1,540 65 88 18 35 Electrical consumer goods /2 13 1,810 90 123 - 31 Electronic consumer goods 15 1,800 130 145 - 34 Subtotal consumer goods /2 28 3,610 220 268 - 33 TOTAL /2 60 8,030 680 690 30 45 /1 Output value of exports of semi-conductors sub-contracted in Morocco (official statistics cover only subcontracting services). /2 Including sub-sector 21.8 of electrical household appliances (refrigerators). Source: Appendix VIII.l. 8.04 Imports of electrical and electronic goods and supplies (excluding capital goods) are detailed in Appendix VII.2. Following the austerity measures of 1978 and the consequent restrictions on imports of non-essential goods, imports of electrical and electronic consumer and durable goods declined from DH 340 million in 1977 to DH 215 million in 1979, contributing thereby to the expansion of the local electrical industries which experi- enced a rate of growth of 18.5% p.a. during the past five years (see para. 3.02). As said in Chapter III, most of the exports of electrical and elec- tronic goods are manufactured under sub-contracting schemes for European companies. Only one product (transmitting/receiving radio sets) among exports has been designed and fully manufactured in Morocco. In addition to the exports recorded in the official statistics, small electrical devices for wiring purposes are exported unofficially to neighboring countries. 8.05 Employment in electrical/electronic industries totals about 8,000 in 60 enterprises, all of an industrial nature, and there has been no handi- craft activity in this subsector. Enterprises producing consumer goods and durables regroup about half of the subsector's employment. A majority of women is employed in the affiliates of European firms sub-contracting for exports of semi-conductors; the quality and economic advantages of the female labor force have been particularly appreciated by the foreign investors and make this type of labor largely competitive with Asian coun- tries. Given the preponderance of assembling activities, the share of workers is generally over 80% in total employment, which is high relatively to electrical industries in other countries where the share of technical and supervisory staff is substantial.  - 60 - Operating Conditions in Electrical Industries 8.06 Production and quality standards 1/ are seriously respected in practically all enterprises visited by the mission, whether Moroccan or under foreign control; the rate of rejection is relatively high (5% on average, reaching 10 to 15% in some cases). Moreover, given that Moroccan industries use traditional marketing and design techniques, a good number of Moroccan products are more reliable and resistant than European equivalents (e.g., refrigerators, batteries). 8.07 Regarding procurement and marketing, the enterprises fall into two different groups, in broad terms; assembly industries (radios and TVs) which purchase CKD or SKD kits from wholesalers with a mark-up of 10 to 30% above direct purchase prices from manufacturers; and enterprises more struc- tured technologically, which purchase their components directly from several manufacturers put under competition for prices. Very few companies have established their own commercial and sales departments, given the tradi- tional separation in Morocco between industry and commerce and the lack of leverage of medium to small firms on the commercial networks. 2/ 8.08 Organization and methods of production in electrical industries (excluding very small enterprises) are basically of two types: (a) enterprises where technology and production processes are fully mastered, and improvements are aiming at cost-saving efficiency in all respects (small investment, cheap labor, little supervisory staff, good traditional organization, and structured methods). Enterprises under foreign control or influence generally fall into this category; and (b) in recently established Moroccan enterprises, the efforts are directed towards the acquisition of experience and know-how in pro- duction and technology, with less importance given to organization; production units are well equipped and technologies generally modern and sometimes adapted to local capabilities, but short-term return on investments is affected by the weak organization of inventories and flows. Due to the shortage of highly qualified staff, basic Research and Develop- ment or adaptation capability is generally absent; however, some enterprises producing consumer goods have started to analyze products from their compe- titors in order to adapt and improve their own products and production processes. 1/ Standards are generally French, and in some cases German or Italian. 2/ Present commercial infrastructure in Morocco relies on a few large importers or wholesalers and a large number of non-specialized retailers. Thus the investments required to compete or confront with the commercial infrastructure is generally too high for the local manu- facturers.  - 61 - Production Costs and Competitiveness 8.09 Based on information obtained from the enterprises visited in the electronic and light electrical industries, the main patterns of the cost structures and price competitiveness in the main lines of production of electrical goods are summarized'in Table 8.02. Table 8.02: STRUCTURE OF COSTS AND PRICES IN SELECTED ELECTRICAL INDUSTRIES - 1978 (IN PERCENT) Group 1 (Generally Consumer Goods) Group 2 TV Large Elec- Elec- Batte- TV/Radio Access- Appli- Lamps trical tronic ries Assembly sories ances Bulbs Fixtures Components Imported materials 20 50-55 44 53 28 33 24 Local materials/services 56 16-18 12 13 21 11 17 Indirect taxes/duties 6 16 18 16 13 6 2 Labor cost 6 7-9 12 7 18 20 44 Capital return 12 6-7 14 10 20 30 13 Ex-Factory Price 100 100 100 100 100 100 100 V.A./Output 24 29-32 44 33 51 56 59 E.F. Price/FOB Europe Price 125 115 95 95 90 85 90 Capacity utilization 70 67 75 85 90 80 66 Exports/production - - 15 5 - 20 85 Labor productivity Index /1 75 100 80 80 100 110 130 /1 Base 100 for labor productivity in similar European plants. Source: Appendix VIII.3. These patterns indicate the following major points: (a) Electrical industries comprise two groups of activities, each with significantly different characteristics; the first group comprises long established industries (such as batteries) and mainly the assembly industries producing consumer goods and durables, and the second group mainly industries manufacturing intermediate goods (fixtures and devices, sub-contracting assembly of electronic com- ponents). (b) The first group is characterized by the high share (60 to 70%) of materials costs and of imported materials 1/ therein, the low share of costs of both production factors (labor and capital) and the 1/ Except for batteries manufacturing which is based on a domestic resource (lead) which Morocco produces with a comparative advantage but sells domestically with a 50% mark-up above export prices due to the pricing policies followed for the lead-producing public enterprises.  - 62 - corresponding VA/Output ratio ranging between 30 and 40%, the low competitiveness of prices and of labor productivity, and the negli- gible amount of exports. (c) The second group of industries displays a more efficient use of Morocco's comparative advantage for labor which accounts for a significantly higher share (20 to 40%) of total cost, the VA/Output ratio is comparatively high (50 to 60%), price and labor produc- tivity are competitive, and a significant or important share of the output is exported. 8.10 Structural differences in cost patterns are important between Moroccan and European electrical industries, in particular in those assem- bling consumption goods. The following table compares for illustration purposes the production cost of a standard household appliance (refrige- rator, TV set). Table 8.03: COMPARATIVE STRUCTURES OF PRODUCTION COSTS (in percent) Cost Item Morocco Europe Materials 60 40 Direct labor 15 10 Total Direct Costs 75 50 Overheads/miscellaneous 20 25 Capital cost 5 10 Profit margin 10 15 Ex-Factory Price 110 /a 100 Ex-Factory Price/Direct Costs 1.47 2.00 /a Assuming an average of 10% overcost in Morocco for consumer goods. The low value of the ratio Ex-factory Price/Direct Cost indicates and con- firms that: (a) the technical infrastructure (engineering office, super- visory staff, R and D) and the commercial infrastructure (marketing, pro- curement) are weak; (b) materials are purchased at relatively high prices; and (c) the differential between direct and total costs, which constitutes in the industrialized countries the traditional fuel for growth, develop- ment, innovation and new market penetration, 1/ is such in Morocco as to weaken the potential for further growth and development in the electrical 1/ The Ex-Factory Price/Direct Cost ratio in Europe ranges typically as follows: 2 to 3 for intermediate products, 2 to 4 for capital goods, and 2 to 6 for consumer goods.  - 63 - industries of the assembly type, where the Ex-Factory Price/Direct Cost ratio ranges between 1.33 (TV assembly) and 1.80 (lamps, TV accessories) and reaches almost 2 in one case only (electrical fixtures). Review of Identified Projects Under Study or Implementation 8.11 The investment plans of the enterprises visited by the mission and the projects identified by other entities (e.g., ODI) for the electrical industries (except capital goods and supplies, confer Chapter VII) are sum- marized in the Appendix VIII.4. In the intermediate electrical goods, pro- jects hinge on the local market for batteries and do not raise substantial issues except for pricing of materials (see footnote 1, para. 8.09). Among the four projects under study in the electrical consumer goods, the expan- sion of one enterprise for manufacturing small office refrigerators (requi- ring substantial amounts of labor) looks attractive and promising on exports markets (North America); other projects, aiming at the local market, would be undertaken by well-managed and efficiently operated firms. Projects for electronic capital goods concern principally the local market for telephone equipment. Various small projects for interconnection equipment could even- tually be regrouped into one entity which would then become viable. On the other hand, one project for the fabrication of rural telephone switchboards (using a traditional electro-mechanical technology) does not reflect a clearly thought-out strategy; this project, originally designed five years ago for a capacity of 40,000 lines and still under discussion, has been cut down to a capacity of 6,000 lines and needs to be reassessed in light of future needs of the country and availability of qualified maintenance staff. In other electronic goods, the good quality of labor in Morocco (see para. 8.05) could attract new foreign firms for subcontracting of electronic com- ponents (semi-conductors and transistors) which requires small investments, and for assembly of TV sets (e.g., the recent plant established by Hitachi). Recommendations for Future Development 8.12 Electrical industries have grown rapidly during the past years, and their share in total manufacturing output increased from 1.6% in 1975 to 2.2% in 1978. These industries increased also their contribution to GDP from 0.26% in 1975 to 0.38% in 1978; however, this contribution remains markedly below the contribution of electrical industries in similar deve- loping countries where it averages about 0.75%. 1/ Therefore, further rapid development of electrical industries in Morocco seems a priori justified and desirable on a comparative international basis and should require from the institutions responsible for industrial promotion and development financing (ODI, BNDE) increased attention during the 1981-85 Plan which has targetted for these industries a growth rate of 10% p.a. and investments totalling DR 218 million during the Plan period; the mission has estimated investments required at DH 310 million (see para. 9.02 in Chapter IX). 1/ Yearbook of Industrial Statistics - UN 1978.  - 64 - 8.13 Though the production of electrical industries is relatively developed, it still covers only half of the local demand, which leaves room for further import-substitution in all ranges of products (capital, inter- mediate and consumer goods). But, more importantly, the development of these industries should aim essentially at increasing the availability of electrical goods on the market and at meeting a large potential demand. 1/ A number of projects have been identified by the mission which could be studied and implemented in the coming years to respond to the actual needs of the local market. These projects are briefly described as follows: (a) Electrical Consumption Goods and Durables (i) Electrical fixtures and wiring devices: the local production could be extended by two well organized enterprises to prac- tically all items, and the market could well absorb an output of about DH 20 million p.a. Investment required would amount to DH 8-10 million, with an employment creation of 300 by 1985. (ii) Dry cells: again, installed capacities could be nearly doubled and the product-mix of existing production diversified so that local output increase from DH 10 million in 1978 to DH 20 million by 1985. This expansion would require an invest- ment of DH 6 million and additional employment of 200. (iii) Household appliances; the production of electric waterheaters complementing solar water heaters could be expanded to an annual production of 30,000 electric and 10,000 solar water heaters with a total output value of DH 50 to DH 60 million, corresponding to an investment of DH 40 million and 300 workers. (iv) Batteries: the projects already identified or under study for the fabrication of battery cases and expansion of lead refine- ries will increase greatly the rate of upward integration in this industry. Further expansion could be envisaged for exports to African countries, and the production of lead in Morocco would constitute a comparative advantage; however, exports are presently hampered by the lack of price competi- tiveness. 1/ Per capita consumption of electrical goods is estimated at US$17 in Morocco in 1978, as compared to US$33 in Tunisia in the same year. Taking into account the levels of GDP per capital (US$670 and US$950 in Morocco and Tunisia) and the elasticity of demand to income of about 1.5, the official consumption remains markedly below the potential demand which is met partly by unregistered imports.  - 65 - (b) Electronic Equipment The main field of activity with potential and accessibility to the Moroccan industries would be the telephone and telecommunications equipment. As mentioned in para. 8.11, the policy of the public authorities regarding the type of equipment to be produced and the strategy for development of such an industry in Morocco has not been finalized yet, nor the characteris- tics of a possible project in this field. A gradual approach for the deve- lopment of a limited telephone industry, which could bring significant results if well executed, would be to assemble first and then manufacture the following items; (i) connection fixtures and telephone receivers, in a first phase; (ii) low capacity transmission equipment (hertzian type) and commu- tation equipment for rural or low-density areas, and trans- mission cables, in a second phase; and (iii) small private switchboards first, and public switchboards finally in the last phase. Fabrication of telephone receivers and small switchboards would require a total investment of some DH 25-30 million for an annual output of DH 60 million (including DH 5 million investment for DH 25 million output of tele- phone receivers in a first phase). (c) Electronic Components and Consumption Goods The industry producing consumption goods (radios, TVs, cassette players) has currently enough capacity to meet the "official" demand; how- ever, its commercial and technological dependence on foreign suppliers and licensors hampers its competitiveness and its integration in the local industrial structure. To overcome this situation, Morocco should study how to encourage 1/ direct purchases by these TV/radio industries from the local manufacturers of semi-conductors and integrated circuits sub-contracting for parent companies abroad; the development of sub-contracting industries by new European firms 2/ attracted in Morocco by the quality and the low cost of labor would facilitate the establishment of such direct linkages by 11 In particular the customs and fiscal legislations regulating the exchange of goods and services between local and exports industries should be revised and simplified. 2/ European manufacturers are increasingly confronted to the alternative either lose their markets into the hands of South-East Asia manufac- turers or sub-contract outside Europe in countries with cheap labor. According to one firm, Morocco offers, besides its labor, the compara- tive advantage over Asian countries of its geographical proximity to Europe which facilitates the transport of qualified technicians and thus the transfer of all technologies in a shorter period. However, positive and efficient incentives to foreign investors need to be established (cf. Chapter II).  - 66 - diversifying the possible sources of supply. Also, projects could be pro- moted and developed for the fabrication of simple passive components for the local market (antennas, casings, connectors, printed circuits, cooling boards, resistors, mini-transformers) to substitute partly to the CKD kits imported at high prices; gross output could reach DH 10 million p.a. for an investment of about DH 5 million and an additional employment of 150 workers. 8.14 In summary, recently established Moroccan firms have demonstrated that a large scope of electrical industries are technically feasible in Morocco if the key element (production organization) is adequately designed and managed. Electrical fixtures and other components (switches, fuses, circuit breakers) can be developed, as well as household appliances, to meet most of the local demand which remains potentially important. In electronic industries, the presence and development of sub-contracting affiliates of European firms can constitute an opportunity to facilitate the development of local industries by: diversification and improvement of procurements at lower prices; provision of organization models for new enterprises for the fabrication of electrical and electronic passive components; and gradual development of a local industry for telephone and other professional equip- ment.  - 67 - PART C. MEDIUM-TERM DEVELOPMENT AND PROJECTS IN THE ENGINEERING INDUSTRIES CHAPTER IX: INVESTMENT PROSPECTS AND REVIEW OF PROJECTS IN EMIs The Engineering Industries in the 1981-1985 Plan 9.01 As developed in Chapters I and III (paras. 1.13 and 3.07), the engineering industries are given by the 1981-1985 Plan a higher priority than in the past in terms of investments and growth rate. Total investment in the engineering industries is projected to reach DH 3,035 million (in constant DH), representing 15% of total manufacturing investment, and to generate a growth rate of 10.5% p.a. (in real terms) corresponding impli- citly to an ICOR of 3.0 for the subsector. The raise of this ICOR from 2 in the past 1/ to 3 in the 1981-1985 Plan stems from the long gestation period of the large investments to be undertaken in the subsector of Basic Metals and Foundries (NAE 19) where the ICOR would reach 9 (para 9.03). The engineering industries would remain a high priority subsector in terms of investment share and growth rate, as illustrated below: Table 9.01: PROJECTED PLACE OF EMIs IN THE MANUFACTURING SECTOR Recent Plan Years Projections (1977-1979) (1981-1982) Manufacturing growth rate (% p.a.) 5.8 8.4 EMIs growth rate (% p.a.) 8.2 10.6 EMI share in manufacturing investment (%) 8.6 15 Source; 1981-1985 Plan, and mission estimates. 9.02 The macro-economic disequilibria of the Moroccan economy are not expected to recede rapidly, and the potential for resource mobilization and the level of investment in the economy will remain seriously constrained during the next Plan period. It is therefore reasonable to assume that the total manufacturing investment will not exceed the level targetted by the Plan (DH 20.9 billion) and that, given the needs in other manufacturing subsectors, the engineering industries would not receive from the public sector nor attract from the private sector much more than 15% of total manu- facturing investment as projected, corresponding to the target of DH 3,035 million over the period 1981-1985. The subsectorial allocations of the investment envelope made by the Plan between the various subsectors within the engineering industries, if reflecting largely the expressed priority 1/ VA per worker and average investment cost per worker in past years were estimated respectively at DH 40 thousands and DH 80 thousands (in con- stant DH 1979) in the engineering industries.  - 68 - given to the foundries, do not reflect however to a sufficient extent the Plan's intention to foster the development of basic capital goods and supplies nor the development potential of the electrical industries (see Chapter VIII). This is illustrated in the table below, which summarizes the major characteristics of the Plan projections, as well as the outcome of an marginally different allocation of the investment envelope proposed by the mission to reflect more adequately the subsectorial priorities and develop- ment potentials within the engineering industries by reshifting expected investments from transport equipment industries (mainly automotive assembly) towards electrical and capital goods industries (subsectors NAE 21 and 23): Table 9.02: SUBSECTORIAL INVESTMENT ALLOCATIONS IN EMIs Plan Projections Mission Allocation Investment Growth Investment Subsector Share ICOR Rate Share ICOR (%) (% p.a.) (%) 19. Basic metals/foundries 59 9.0 33.8 /a 52 9.0 20. Metal products 11 0.9 8.0 17 1.5 21. Capital goods 9 2.6 10.4 10 3.0 22. Transport equipment 14 2.1 10.6 11 1.1 23. Electrical industries 7 1.4 10.1 10 2.0 24. Measure instruments (.) 4.0 4.1 (...) 3 Total EMIs 100 3.0 10.6 100 3.2 /a Value added in subsector 19 would increase from DH 70 to DH 230 million over 1981-1985. Source: 1981-1985 Plan and mission estimates - C...) less than 0.5%. 9.03 The DH 1,785 million investment projected for the subsector of basic metals and foundries (NAE 19) comprise four projects to be undertaken or sponsored by the public sector: (i) a rolling mill (SONASID) for a total cost of DH 800 million to produce 420,000 tpy of construction rods and steel wires; (ii) the integrated foundry-machining project for automotive castings (cf. Chapters V, VI and VII) which could be implemented in two phases over the 1981-1985 period for a total cost of about DH 200 million; and (iii) two non-ferrous foundries for lead (DH 285 million) and copper (DH 500 million 1/). In view of the top priority to be given to the development of the foundry subsector, and given the substantial downwards industrialization effects to be expected from the foundry/machining project, this project should be actively promoted and implemented during the Plan period on the basis of the recommendations of the ongoing feasibility study 2/. The 1/ Due to the uncertainty of this project, the mission's allocation (para and table 9.02) assumes that expenditures on the project during the Plan period would be DH 290 million only. 2/ Terms of reference were prepared with the assistance of IPD and IFC.  - 69 - Government has also given particular importance to the SONASID project for special social and regionalization reasons which go beyond the purely economic aspects of the project; it is thus most likely that this project will be implemented during the Plan. 9.04 In the other subsectors of the engineering industries, the number and amounts of identified projects represent a substantial share of the Plan's subsectorial targets, as illustrated below: Table 9.03: IDENTIFIED INVESTMENTS IN ENGINEERING INDUSTRIES Subsector (NAE) 19 20 21 22 23 Total No. of projects identified 7 7 11 6 4 35 Identified investments (DH mln) 1,785 155 152 111 76 2,280 Plan investment targets (DH mln) 1,785 320 265 440 215 3,035 Identified investments as % of Plan targets 100 49 57 25 35 75 (40) /a /a Percentage for subsectors 20 to 23. Source: Appendix IX.l. The Office pour le Developpement Industriel (ODI) has been the major agency responsible for the identification of industrial projects and their promo- tion in the private sector. It has, in line with the Plan's priorities, increased its efforts towards the engineering industries, and has contri- buted largely to the identification 11 of the Plan's 33 projects and initiated the study (at the prefeasibility or feasibility stage) of some of these projects. Abstracting from the major public projects of subsector 19, the Plan and ODI have thus identified some 30 projects for a total invest- ment cost of about DH 500 million representing 40% of all investments targetted for the engineering industries outside the subsector of basic metals (19); this achievement reflects a noticeable improvement in the pre- paration of the Plan and the promotion of the engineering industries' priority. However, most of the identified projects still need supporting feasibility studies and adequate technical preparation which should give primary consideration to: (a) the overall policy issues (protection, market rationalization) which have constrained the development of some subsectors; (b) the critical shortage of engineering capabilities and high-medium level manpower with EMI skills; (c) the need to prepare and design projects within a general framework of subsectorial strategies (foundries, vehicles, diesel engines, capital goods); and 1/ Partly on the basis of the studies undertaken during the previous years by consultants (McKinsey and Dar Al Handasah).  - 70 - (d) the degree of technological feasibility and accessibility of the proposed projects in view of the current industrial infrastructure in Morocco. Avenues for Further Development and Projects Review 9.05 A meaningful review of the projects and project ideas already iden- tified or studied in Morocco needs that each project be assessed not only within the general perspective of its own subsector's strategy and planning, but also in the light of an articulated set of development priorities between the subsectors of the engineering industries. The broad priorities selected by the 1981-1985 Plan for the engineering industries are, as detailed in Chapter III; (i) the foundries; (ii) the standard capital goods and supplies for industrial investment and rural development; and (iii) the commercial vehicles and their parts and components. The foundries constitute definitely the top priority for the development of the engineering industries, first because the foundry industry in Morocco is in a critical situation, and secondly because foundries are the backbone of any significant integrated development of the engineering industries in general, and particularly of the two other priority subsectors where good quality castings are definitely required for standard capital supplies, automotive parts and diesel engines in all their applications. On the other hand, the importance given by the Plan to the industries producing commer- cial vehicles and their components should be viewed only as a by-product of the foundries' priority in that the development of foundries and diesel engines fabrication could entail higher levels of integration in these industries; moreover, a rational and economic development path of the indus- tries producing commercial vehicles would require that serious policies issues be addressed in the first instance (see Chapter VI). 9.06 Capital goods and supplies industries constitute also within the engineering industries an indisputable priority for development, in view of the pressure of corresponding imports on the balance of payments and of the resulting constraints put on future industrial investment and development by the shortcoming of local industries to supply a substantial share of these goods. Given the very wide range of products, activities and technologies encompassed by the capital goods industries, the selective development of these industries should be guided by clearly defined intrasectorial sub- priorities reflecting both the country's general needs and its capabilities. The mission recommends, on the basis of its discussions with the authorities and institutions concerned with this subsector and of its review and assess- ment of available documents and reports, that the promotion of projects and the development strategies in the capital goods industries be articulated on the following intrasectorial subpriorities (in decreasing order of importance):  - 71 - lst- Agricultural equipment and machinery, with the focus on: disc ploughs, mechanical seeders and fertilizer sprayers, irrigation pumps, harvesting machinery (except combines) and straw-bailers, tank and bulk trailers, and tractors if mechanization policies for agriculture are eventually implemented; 2nd- Diversification of platework industries, with a view to produce, or further substitute to imports of: industrial boilers and ovens, heat exchangers and driers, condensers, large tanks and vessels, shutterings and scaffolds; 3rd- Electrical machinery (for distribution, command and power), with the priority on: motors and alternators, distribution cables and transformers, switchboards and control panels, electro-pumps, electro-generating groups; 4th- Hoisting and handling equipment for construction, public work and mining, such as: small cranes, excavating machinery, dumpers, cement mixers, winches, overhead cranes, lifters, conveyors, stackers, grinders and crushers, rotating drums; 5th- Wood-working machines (planers, saws, lathes, combines); and 6th- Simple machine-tools for metals (drills, bow-drills, folders). Review of Capital Goods and Supplies Projects and Recommendations 9.07 Some 39 projects for the production of capital goods and supplies have been identified by the 1981-1985 Plan, or previously studied by ODI and its consultants. A preliminary review of these projects is made in Table 9.04, which gives the projects basic characteristics (capacity, investment, gross output), their economic priority in light of the subpriorities given above, conservative estimates of the markets, a crude assessment of the technological accessibility of the production processes, and broad indica- tions or remarks on the projects' issues or implementation constraints. The Table 9.04 comprises also 14 project ideas suggested in a first phase 1/ by the mission to be further investigated and studied, by ODI in particular. The following table 9.05 summarizes in operational terms this review of projects: 1/ To these 14 project ideas could be added the consideration of standard machinery (similar to mining and public work machinery) to be used on a possible large-scale project for oil shales in Morocco. The mission suggests that, in a second phase of technological transfer and achieve- ment, Morocco investigate and study the local fabrication of energy generators of various types (solar collectors, wind mills, biomass digesters, micro hydraulic plants).   1 577 197 1979 Marketsep. ps se e s ecsl 1. 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Na_.a te 3 Acesii Ins _od Mice seece seA gosO leececs so. ~~~~~ ~~~~~~~~99.1 e.. 139.4 en5.o t3.3 lObs IDO 2I- 1 c 1,sti c Rsecsaats ste tertistoec mIsts, IBSOlOn~~~~~~~~~~"00 100.9 130,on-u 110.4 15006 A3.i "a3,050 A,0ou 10 iS 't-c-siht ciki, sossOrirs Onei~~~~~~~1- Osese tad ietn 71 rccen-cecccociog scus,ps ~~~~~~~~1,6lOn 24.2 1i670n 01.0 1,570a 20.9 1,500cc 1,5Gb. 10 15 ,tc_co .Nl HOlci itegst tte d'lecI ec .c c leeao Isaus rel ucr" set psoos 3632 101: ~ ~ icOT c. t 410 ne M, 45003 40MT 20 lt Aec-eeIa l.occen Mhseccesorcpec02'.12 kl-te bois- 'b'nt--ee-ts'' 0453 1.0 205 11.2 1854 10.2 202' 2AMT 7.5 - IS ...s .......e Le crolti T .... .0-1- ~~~~~3500 4.1 265T 3.4 40cc 5.6 3380 JOOT 2O - - Petlonas-kle ho aai-esetole sseno e killed tio.bI Snail crstetorscere 303,00, 10.7 216,000o 10.M i4O,00n 9.0 200,000uh 250.002a MAcceesthie Ausepse tOa t os u200,es0`n250c0ste lIr 07cc, Ic hersires. eclochgcses sn. ~~~~ ~ ~ ~~~~64.4 e. 70.4 cs. 86.4 I.5.. s.0 9 hocsotla,,e DIcOi_ pe_d...totes oke.Rqi 20 9e..otts Acil-e 11,356T 234.2 5,MccT 73. 3 5,7500 75.6 4,000T0 t,00T0D 40 A--3l l scat ...crcs,dlce eedroc) 465T 10. 1,025T 17.1 1756 16.0 40070~ 9007 2PIat...ck fete Ida' allh.7 21 Acctcerssclrcostre2.034 63.1 1,725t 54.8 1,920, ,5o.7 3,Oe -te- tclte. i -- lca II- Icceett, ILOch OcateuospehtisiussC ptt ctat,c seats -- sd Ocre3010 4.9 290T 2.7 1637 2.2 200eT, 1009 2 0 Accessiblo A--,cc-s1c- 2O Osliceoa relli,- ecce, 14,620T 144.3 2.259T 15.0 4hobTO 4. N 3. SiOecT 2bOe 10 05 A-tasitla Rboh fpoiai-ustOe 2 3 cleecrcoe-er 14,700'~ "5.0 10,103, 71.4 15,'c0s 20.3 Tobcaasscsc-a Oaasfcset dOstcl-o...i- tocsteisrltc ot nob clog sin' , 1I.-tceiils -it 0.,. liTlh U.Noecjta i-lea pe-e nhn d fes-itIiti -uss Ots neae di-aciali-c .d 9/0 01) 5 SOOn0 2.3 16,100, 13.3 11,4hOOc 20.2 ---- t . tOns .A--------e--Id a-----------Eond Otn- 'lc...n. tattoo 3,535T 219.5 2.240T 20.0 t,11sT 70.4 2,009Ta ltnif6ltlO ,aaul scV. tsataac.ko_e _i uac_ On stkotd seoiiotess tooter henlrre 6 Mi. ~~~~ ~~~~~3 .0 c.. 23 t. 2.0 0,00, 20OMOt A0 5t A-o-is,le A--,' saos stt'c usiasioe.tossc.elcstiee isehbio-ds) c. 17 Io. 12.75 c. 1. c ae 03 t cc.ithio (n. s'cctcosercOoe   - 73 - Table 9.05; CAPITAL GOODS AND SUPPLIES PROJECTS Identified Studied Suggested Projects (Plan) (ODI, (Mission) Total consul- tants) Number of high priority projects 7 /a 12 10 29 Number of medium priority projects 8 4 4 16 Number of low priority projects 5 3 - 8 Total number of projects 20 19 14 53 Investments for high priority projects 315 /a 150 95 /b 560 Investments for medium priority projects 125 45 45 215 Investments for low priority projects 85 50 - 135 Total investments (DH million) 525 245 140 /b 910 /a Including DH 200 million for the automotive castings foundry and diesel engines project, lb Amounts shown do not include investments for expansion/modernization of enterprises producing electric motors, transformers and cables. Source; Table 9.04 Thus 30 projects with high or medium-level economic priority could be added to the 15 projects of similar priority already identified by the Plan; these 30 projects would add a total investment of DH 335 million to the DH 440 million investments entailed by the 15 Plan projects. 9.08 Most identified projects of low priority (metal working machine- tools, simple mechanical hand-tools, fork lifts and stackers) are either non-economically viable (such as hand tools which would require a forge of 1,500 tpy capacity only) or technically unaccessible without extensive tech- nical assistance and lead periods (machine-tools, fork lifts and stackers). Among the identified projects with "medium" priority, two projects would be of marginal interest (mechanical presses) or confronted to substantial infrastructural problems (shipyard for trawlers and fishing boats). I/ Similarly, the three projects of low priority among those already the three projects of low priority among those already studied would face problems of technological accessibility (elevators and lifters, transmission chains, bearings). 1/ The location of the existing dry-dock in the port of Casablanca does not permit a rational and economical use of the facilities. In other ports, a dry-dock would have to be constructed.  - 74 - 9.09 The other 43 projects with high or medium economic priority com- prise mainly; - for agricultural equipment; the fabrication of: milk tanks, poultry-rising units, various types of implements and machinery, straw-bailers, irrigation pumps; and, as suggested by the mission, bulk trailers for harvesting on sugar peri- meters, and resumption of tractor assembly if and only if ade- quate mechanization policies are adopted for the agricultural sector; - in the metal structure and platework subsector, the moderniza- tion and diversification of existing firms for the production of: industrial furnaces and boilers, other thermal equipment (heat exchangers, driers, condensers), handling equipment (conveyors, overhead cranes); - for general industrial equipment, the fabrication of: modular diesel engines (project associated with the 10,000 tpy foundry), and some accessible applications of diesel engines such as cranes, compressors, electro-generating groups, cement mixers, grinders, excavating and earth-loading machinery, vibrating/compacting machinery for public works; - in the electrical machinery field, the diversification or modernization of existing capacities and firms for the further import-substitution of: distribution cables, small and medium-high power transformers, electric meters, switchgears/ boards and circuit breakers, and selected types of rotating machinery (motors, A.C. and D.C. generators); and - for electronic equipment, the study and implementation of a project for telephone equipment (transmission, commutation). Special attention and efforts should be given to the supply of skilled labor for all the recommended projects; more particularly, six of them which would be vulnerable to shortages of such labor are the projects for foundry and diesel engines, industrial locksmith, gears and pininons, boilers, switchboards/gears, and electric meters. Moreover, some 10 projects should require for their implementation and operation substantial amounts of tech- nical assistance directly from foreign firms or associates, particularly the projects for foundries and diesel engines, cranes, excavating/earth-loading machinery, electric motors and alternators, and telephone equipment. 9.10 Out of the 43 recommended projects, some 20 projects would be for the subsector NAE 21, with a total investment of DH 270 million representing 100% of the Plan's investment target and 87% of the mission's alternative target (para. 9.02). Twelve other projects would be undertaken by the electrical industries (NAE 23) for a total investment of DH 170 million, equivalent to 80% of the Plan's target and 55% of the mission's alternative target. To achieve these investment targets, a substantial effort of eco- nomic and technical feasibility analysis will be required during the Plan period 1981-1985 on the part of agencies and institutions responsible for,  - 75 - or concerned with, the engineering industries. The Technical Center recom- mended for the engineering industries (see Chapter VII) should, once estab- lished and operating efficiently, contribute for a dominant share to the effort of technical feasibility and engineering adaptation and design required to study and implement most of these recommended projects. In the meanwhile, one existing agency should taken over this important task; given its prior involvement in the identification of projects for the engineering industries and its knowledge of the sector, ODI would appear to be the best institution in Morocco for this purpose (para. 9.04). However, its limited human and budgetary resources would have to be substantially strengthened and complemented by a program of technical assistance designed to bring therein expertise in market assessment, economic and financial analysis, engineering adaptation and design, and technology transfer in mechanical processes. With respect to financing, the BNDE in its quality of major single source of long-term funds for manufacturing investment should be expected and prepared to allocate to the engineering industries, and these projects in particular, a higher proportion than in the past of its total commitments for manufacturing investment (8% in 1973-1978), and also to finance a higher share of the total investments of the engineering indus- tries in Morocco (which averaged 20% in 1973-1978). Similarly, ODI should be expected, and prepare itself, to strengthen its catalytic role for indus- trial promotion by identifying and putting together foreign and Moroccan partners for the implementation of important projects in the engineering industries, as well as increasing substantially its equity participations as seed investments in these projects. This expanded role should not only require technical assistance as mentioned above, but also attract financial support from domestic and external sources.   - 76 - ANNEX MOROCCO ENGINEERING INDUSTRIES THE INCENTIVE AND POLICY FRAMEWORK   - 77 - TABLE OF CONTENTS Page No. Introduction ....... ............................................ 78 Incentives to Domestic Sales ................................... 79 Customs Tariffs ...................... ...................... 79 Quantitative Import Controls ............. .. ................ 82 Export Incentives ..* ........................................... 84 Tax Holiday for Export-Related Profits ........ .. ........... 84 Duty Free Access to Imported Inputs ........................ 85 Export Financing ..................... ...................... 86 Conclusions on Export Incentives ........... .. .............. 88 Investment Incentives ......................................... .. 89 The Industrial Investment Code ............ .. ................. 89 Article 163 bis of the Customs Code .......... .. .............. 90 Government's Price Regulations ............................... 91 Moroccan Policy Toward Foreign Investment and Technology ..... 92 Conclusions and Recommendations .................................. 93  - 78 - Introduction 1. Until independence in 1956, the modern sectors of Morocco's economy were controlled almost exclusively by foreigners and foreign capital. In industry, private foreign investments were concentrated in agro-industries, construction materials, fertilizers, and mining. A very liberal trade regime dating back from the Algeciras Act of 1906 and providing for a uni- form duty rate of 10% on all imports hardly encouraged any substantial import substitution. With the event of independence and with foreign investment inflows coming to a trickle, the government introduced a series of measures designed to encourage both private and public investments with the objective to step up the country's industrialization. A new differen- tiated customs tariff system aimed at providing increased protection to domestic industry was issued in 1957; exchange controls were instituted in 1959; an Investment Code was promulgated in 1960; an import licensing system was put in place in 1967; a number of institutions were created to lend support to the industrial sector; 1/ in 1971 price controls and regulations were instituted and placed under the central authority of the newly created Direction des Prix; 2/ in 1973, a new Investment Code replaced the previous one introducing for the first time, in addition to the principle of the automaticity of the advantages, explicit incentives to exports and region- alization; finally also in 1973 the moroccanization of almost all productive activities was decreed and virtually completed by 1975. 2. The purpose of this Annext is to examine the present system of industrial incentives, in particular as it may affect the development of the Electrical and Mechanical Industries (EMI) in Morocco, a sector that the Government has indicated as receiving high priority in the Five Year Plan 1981-1985. Manufacturing production in Morocco is influenced by three major kinds of incentives: incentives to domestic sales through customs tariffs and quantitative import controls; incentives to exports; and general incen- tives to manufacturing investments through fiscal, financial and price regu- lations. Each of these incentives will be reviewed successively. It is to be noted however that a comprehensive study of the effective protection and other various indicators of the performance and comparative advantages of the manufacturing industries is presently under way in Morocco, the results of which should provide the sound data base necessary for the reform and rationalization of the incentive system so as to make it a more efficient instrument for the realization of Morocco's main objectives of industrial development. Pending the results of that study, this analysis, in its 1/ Among the most important of these were BEPI (1960), later replaced by ODI (1973) in charge of the promotion of industrial investment through government-sponsored studies and government participations; BNDE (1960), the national development finance company, for the financing of indus- trial projects; and BMCE for the financing and promotion of exports. 2/ Within the Office of the Prime Minister.  - 79 - in its own discussion of the incentive system, will simply formulate general policy recommendations and, with respect to the EMI sector, will assume that the priority given to the development of that sector is justified, based on the formal recommendations of previous Bank reports. 1/ Incentives to Domestic Sales 3. Customs Tariffs: The import tariff in Morocco comprises four elements: (a) the basic ad valorem duty rate; (b) the special import tax, increased successively from 5% in 1973, to 8% in 1977, to 12% in 1978 and to 15% in 1979; (c) the tax on products (TPS) which is an indirect tax, of normally 15%; and (d) the stamp duty, increased successively from 2% in 1973 to 4% in 1978 and to 10% in 1980. From the fiscal viewpoint, these four import taxes are levied according to the following formula; t = (1 + d) [a + b + c + c(a + b)] However, since the TIPS (c) is also levied on local products, the nominal protection rate on imports is equal to t (1 + d) a + b + c(a + b)]. Table 1 shows how the successive increases in the special import tax and the stamp duty in the past three years and designed mainly to raise fiscal revenues have boosted the levels of the final tariffs and thus the degree of protection of the domestic industry; for instance to an ad valorem import duty of 10% corresponded successively a final tariff of 18% in 1976, 21% in 1977, 26% in 1978 and 32% presently. l/ Morocco, Basic Economic Report, December 1980. Morocco, Industrial Sector Memorandum, November 1979.  - 80 - Table 1: INCIDENCE OF THE INCREASE IN THE SPECIAL IMPORT TAX AND STAMP DUTY ON THE FINAL TARIFF (Final Tariff in %) Customs Duty 1973 through Jan. 1977- Jan. 1978- As of % Jan. 1977 Dec. 1977 July 1979 July 1979 Free 5.87 9.38 14.35 18.98 5 11.73 15.25 20.33 25.30 10 17.60 21.11 26.31 31.63 15 23.46 26.98 32.29 37.95 20 29.33 32.84 38.27 44.28 25 35.19 38.71 44.25 50.60 30 41.06 44.57 50.23 56.93 50 64.52 68.03 74.15 82.23 60 76.25 79.76 86.11 94.88 100 122.79 126.68 133.95 145.48 110 134.90 138.41 145.91 158.13 150 181.82 185.33 193.75 208.73 4. Protection may be granted however, on an ad hoc basis, either ex ante in the framework of an agreement between an investor and the govern- ment, or ex post whenever a domestic producer felt that existing protection is not sufficient to continue production or to engage in new lines of pro- duction, in which case he may submit a request for tariff changes with the Ministry of Commerce and Industry. If after investigation of the production costs the request is found well justified, the Ministry recommends the level of protection that is necessary to permit local production and sends its recommendations to the Ministry of Finance for ratification. As for the implications of such protection of the efficiency of production, the authorities do not seem to abide by any strict guidelines. 5. Bearing the above in mind, duties 1/ and tariffs in Morocco follow the typtical "cascading" pattern of most countries: low or zero on raw materials, higher on intermediate goods and very high on most final consump- tion goods. The same pattern characterizes the structure of tariffs applied to the products of the electrical and mechanical engineering sector: as shown in Table 2, in 1978 the import weighted average duty rate on raw materials used in EMI industries was 1.3%; on semi-finished or intermediate products, 6.7%; on finished capital goods, 13.5%; 2/ and on finished con- sumer goods, 30.6%. Such a structure inevitably provides high nominal and effective protection to the import substitution of goods destined for final consumption. 1/ Hereafter means basic ad valorem duty rate, thus excluding the various import taxes. 2/ Except on capital goods entering investments agreed under the Investment Code, which are exempted from duties (see para. 6).  - 81 Table 2: IMPORT-WEIGHTED AVERAGE LEGAL DUTY RATES OF EMI PRODUCTS CLASSIFIED BY END-USE, 1978 Value of Import- Imports Weighted (DH Millions) Average Duty (Z) TOTAL EMIs SECTOR 5,110.0 14.1 I. Raw Materials 2.1 1.3 II. Semi-Finished and Intermediate Products 1,102.2 6.7 III. Finished Capital Goods 3,308.6 13.5 IV. Finished Consumer Goods 697.0 30.6 The highest duties (in the range of 40-70% and in a few cases up to 100- 150%) are imposed on EMI consumer products already manufactured in Morocco, and are also structured in such a way as to protect the local assembly industries. Here are such instances: Basic Duties (in %) on: CBU SKD CKD Passenger cars 90-150 20 Color TV receivers 47.5 42.5 10 Electric shavers 70 35 20 CBU: completely built-up unit. SKD: semi-knock down kit. CKD; completely knock down kit. 6. Within the category of intermediate EMI goods, duties tend also to increase with the degree of processing of the imports, ranging from 0% on the basic foundry products to 20-30% on wires, tubes, pipes and structures and to 66% on bolts and nuts. As for capital goods, tariffs appear to be more uniform, in the range of 10-15%. But legal duties certainly overstate the actual degree of protection afforded to the capital goods subsector (relative to other EMI subsectors or to manufacturing as a whole) and this because of two main facts: (1) a very substantial portion of EMI capital goods imports (about two-thirds) actually enters Morocco duty free thanks to the liberal provisions of the 1973 Investment Code, which inevitably results in actual nominal tariff rates being lower than the legal tariff rates; (2) where key inputs or components used in the production of a particular capital goods are more protected (such as through import licensing) than  - 82 - assumed by the legal tariff rates of these inputs, actual effective protec- tion of the capital goods concerned can be lower than any estimate based solely on legal tariff rates of both output and inputs. In principle, under the Investment Code, duty exemption on the import of particular capital goods is not allowed if Moroccan industry can supply similar goods at prices not higher than 120% of the c.i.f. import prices. The Ministry of Industry maintains an indicative list of all existing and potential local production of capital goods (see Annex Table 2), for which there should be no duty exemptions except if the would-be-investor proves that local supply is unreasonably inadequate in terms of price, quality and time of delivery. But in fact these provisions have been applied only on a discretionary basis, and a substantial share of imports of capital goods which could be manufactured locally have been exempted of duties, in particular in large public projects. 7. Without anticipating the results of the on-going study of the effective protection in Morocco, it is conceivable that for the majority of investment goods, the effective protection rates are below their nominal protection rates, given the widespread import duty exemptions on these goods and the 15% import duties levied on many of the parts and components incor- porated in these goods. Low protection has been one of the major reasons why import substitution has been insignificant in the capital goods sector, except in the few assembly industries that the government has decided to promote (commercial vehicles and trucks) or in the fabrication of made-to- order or bulky machinery requiring a simple technology and where transport costs provide high national protection (steel structure and platework). 8. Quantitative Import Controls. Since 1967, Morocco has maintained a very comprehensive system of import control under which all imports are classified into three lists: those in List A are not subject to any admin- istrative authorization, those in List B are subject to control and require prior authorizations, and those in List C are simply prohibited. These lists are revised yearly so as to reflect the balance of payments situation as well as the demands for protection of local industry. The evolution of imports under these three categories from 1968 to 1979 shows that overall the import licensing system has become more restrictive with 72% of the total value of imports placed under List B in 1979, compared to 55% in 1968 and 41% in 1973. The same trend characterizes more acutely the imports of capital goods where the share of licensed imports jumped from 30-40% in 1973-1978 to 81% in 1979. Similarly, some 72% of the EMI goods (in value) were imported under licensing (List B) in 1979. 9. Looking more closely at the EMI goods, the comparison of the Import Programs of 1972, 1975, 1978 and 1980 as given in Table 3 shows a notable increase in the numbers of licensing and prohibition of EMI imports: in 1980 the numbers of licensed and prohibited items (Lists B and C) have more than tripled their respective levels of 1972, and account now altogether for close to half of the total number of EMI products listed in the Customs nomenclature.  - 83 - Table 3: DISTRIBUTION OF THE NUMBER OF EMI PRODUCTS BY LISTS A, B AND C A B C Total No. of No. of No. of No. of Year items X items % items % items /1 % 1972 1776 87.1 222 10.1 40 2.0 2038 100 1975 1776 87.1 233 11.4 29 1.4 2038 100 1978 662 30.5 1244 61.0 172 8.4 2038 100 1980 1102 54.1 800 39.3 136 6.7 2038 100 /1 Assuming that the naumber of annual additions or deletion is minor so that it does not affect the percentage distribution in the years shown. Source: Programme General d'Importations, 1972, 1975, 1978, 1980. 10. While balancing of payments difficulties may be a major factor behind the increase in the number of licensed EMI items, the enlarged List C of prohibited EMI items reflects also the growing number of products for which local production exists and is deemed sufficient to supply local needs but not yet able to withstand competition from imports. Indeed, except for a few luxury items (such as pleasure boats and silverware), List C looks like an inventory of the existing local productions, consisting mostly of consumer/durable goods (household utensils and appliances, metallic office furniture, built-up articles for which local assembly exists such as tele- vision receivers, passenger cars, commercial vehicles, road tractors and motorcycles) and some parts for the assembly industry (motor engines of less than 50 HP, auto chassis fitted with engines, bodies and cabs for motor vehicles and tractors, seat belts, and frames for cycles); the EMI inter- mediate products included in List C comprise only a few articles of foundry (grills, articles of cast iron for road works) and of aluminum (structures and parts, tubes, etc. ...). Thus local production of all these C listed items (Annex Table 3) is presently enjoying full and unequivocal protection from import competition. 11. Protection resulting from import licensing is more difficult to assess for various reasons: (a) the transfer of products to List B is generally a precautionary measure prompted by balance of payments difficul- ties (which have become particularly serious in recent years), but import licenses are in principle accorded freely, in accordance with needs and practically without quotas; 1/ (b) the transfer of a product to List B can also be an "interim" measure when the government decides to grant some 1/ The 1980 Import Program includes only six products subject to quotas of which, one in the EMI sector: shovels and pickaxes the import of which is limited to DH 1.5 million.  - 84 - degree of protection to local producers of that product before deciding on an eventual revision to its tariff; licenses are then granted only when the domestic production cannot fully supply the local demand. However, the general assessment is that the administration of the import licensing is subject to a certain amount of arbitrariness from year to year. It tends to provoke, on the part of many manufacturers, substantial uncertainty about the amount of import competition they will have to deal with, and thus to discourage potential investors (both Moroccan and foreign) especially in the EMI sector where risks and stakes tend to be greater than in other tradi- tional ventures. However, import licensing is at this present stage the government's main instrument of protection for the local EMI industries, and permits, in conjunction with price control policies (described in para. 24), to administer on a case by case basis the implementation of specific goals (control inflation, check excessive profits, stimulate local production, etc.). The authorities are especially anxious not to unduly raise produc- tion costs for the whole economy by granting these industries across the board tariff protection which would be necessarily high in view of their present state of infancy. Such an approach is made still manageable by the relative smallness of the EMI sector and of the manufacturing sector in Morocco. But the increasing complexity of the tasks will make it more difficult to avoid arbitrariness, inconsistency, and the lack of impact of each policy decision taken at the micro level. Export Incentives 12. At present, the three major incentive schemes used to promote exports are tax holiday for export-related profits, duty free access to imported inputs, and credit facilities. 13. Tax Holiday for Export-Related Profits. The main provision of the Export Code, issued in 1973 1/ following the promulgation of Morocco's Second Five Year Plan (1973-77) which for the first time gave explicit priority to export promotion, is the granting of total exemption from the business profit tax (IBP) for all export-related profits realized by any producer, regardless of the firm's nationality, location, or the size of the investments. This fiscal advantage is cumulative with the general invest- ment incentives contained in the Industrial Investment Code (described in para. 20), and is granted for a ten-year period (after creation of a new enterprise or for 1973-1983 for existing enterprises). 2/ Since the scheme 1/ As part of a sweeping reform of the 1960 Investment Code which resulted in the promulgation of five different codes, one for each of the follow- ing activities: Industry, Handicraft, Export, Tourism and Shipping. 2/ As of September 1977, the advantage of total exemption from income tax has also been automatically granted for any given year to any commercial firm which has realized an export turnover of at least DH 10 million in that year. This tax incentive, also valid for ten consecutive years, was designed to promote the creation of large trading firms, which can plan an important role in boosting indirect exports from small and medium firms which are not financially or administratively equipped for export manufacturing.  - 85 - exempts the share of a producer's profits equivalent to his exports' share in total production, its potential effect is to encourage a firm producing exclusively for the domestic market to use its excess capacity and start exporting (even with a profit rate lower than on the domestic market) in order to increase its after-tax profits. Though this tax holiday is a genuine subsidy to exporters, 1/ the actual extent of the subsidy depends on the relative profitability of domestic sales which in turn depends on the degree of protection the latter receives. Moreover, it does not entail any export incentives to the firms which have already received a full exemption of profit tax under the Investment Code provisions (i.e., all those located outside the North-West region, see para. 20). The subsidy thus may not be sufficient to encourage established enterprises to export, or to attract new investors in manufacturing for export. 14. Since the advantage of the tax holiday is valid only during the first ten consecutive years of operation of a new enterprise, it will end in the next three years for many exporting enterprises which were estabilished in 1973 after the promulgation of the Investment Code. Soon the Government will be facing the important question of whether to extend the holiday period to further encourage exports. A thorough examination of the social cost-benefit of this incentive measure is needed to provide a convincing answer; nevertheless, if export promotion is to continue to be a govern- ment's priority, an extension of the holiday period to existing firms would (a) encourage them to continue to invest in export production so as to establish themselves more firmly in foreign markets or to develop new products/markets, and (b) orient towards exports other firms which can yield substantial profits only toward the end of the holiday period (and this is most likely the case of firms of the EMI sector where the maturation and learning period is longer than in most of the other sectors) to start exporting. 15. Duty Free Access to Imported Inputs. Special customs regimes, the "temporary admission" scheme and the "drawback", were legislated in 1973 to facilitate exporters' access to inputs at world market prices. The temporary admission permits the duty-and-indirect tax-free entry in Morocco of raw materials and intermediate goods for further processing and subse- quent re-exportation, and requires a bank guarantee deposit, equivalent to the total amount of duties and taxes payable, which can be waived entirely only once all imported inputs have been used, processed and re-exported. Although the procedure was initially allowed for a limited number of goods or sectors, all products (in addition to those officially listed) can at present be eligible for temporary admission provided they are authorized by the Customs Administration, which disposes of a large degree of discretion in this matter and may deny the benefit of temporary admission for exports 1/ Given that exporters are exempted from indirect taxes.  - 86 - to particular countries. 1/ The bank guarantee may now be waived gradually, proportionally to the use of bonded inputs in each export operation. The temporary admission scheme also allows for imported materials and inputs to be processed or assembled in successive stages by different processors (through the "cession" mechanism) before final re-exportation, provided the whole operation takes place within two years. Another new procedure allowed under the temporary admission scheme is the so-called "prior export" (l'exportation prealable), designed to help an industrialist capture and respond rapidly and competitively to a foreign order for finished articles that he has already manufactured from imported materials on which customs duties and taxes were paid; in such case, he may receive credit for the equivalent of the duties and taxes paid on materials embodied in these exports, credit which he can later use to import duty and tax free further amounts of the same materials. 16. The drawback regime, primarily designed for food canning indus- tries, now extends to an increasing but still limited number of sectors. Under the regime, tariffs and taxes paid on imported inputs used for export production are refunded at the time of export at average rates officially fixed by decree. Drawback rates have been fixed for 83 items belonging to 11 categories of products of the EMI sector (see Annex Table 4). The cate- gories of EMI products include: metallic furniture, household articles of steel or iron plate, or of brass, products from iron and sheet-metal works, radio telephonic and radio telegraphic broadcasting and receiving instru- ments, motor vehicles for the transport of goods, watches and watch- movements, tubes of aluminum, and metallic packing materials for canning industries. 17. Export Financing. Export activities enjoy in principle high priority in Morocco. While the Bank of Morocco puts in general strict ceilings on the limits of bank lending as part of austerity measures and of the fight against inflation, export credits benefit from an unlimited redis- counting policy and slightly preferential rates, ranging from 0.50 to 1.50% below ordinary short-term rates. The post-shipment export credit (cr4ances nees sur l'etranger), which was until 1978 the only means of export financ- ing, enjoys fixed lending rates by commercial banks at 4.5 to 6%, and is refinanced by the Bank of Morocco at a rate of 3%. Post-shipment export credits are availabl only for the period of credit that Moroccan exporters grant to thei foreign c;ents, a period which is limited to 90 days but apparently may be extended by special derogation to 120 and even 190 days. In 1978 the volume of these export credits rediscounted by the Bank of 1/ For instance, where it thinks that a guaranteed market would make the benefit redundant; or in a hypothetical case where a foreign country imposes a minimum import price too high (e.g., canned sardines in the EEC market) which forces Moroccans to export at that high price thus making unnecessary the lowering of their costs at the expense of the Treasury. So far no such arguments have been used in the processing of requests for temporary admissions, but they are applicable.  - 87 - Morocco was DH 290 million, or 19% of the value of exports of manufactured goods, and rose to DH 348.4 in the first 4 months of 1980. The pre-shipment export credits are granted on a discretionary basis to finance general and special working capital needs of the exporter, at rates fixed by law at 5.5 to 7% and rediscounted by the Bank of Morocco at a rate of 4%. Since their existence, the volume of authorized rediscounting of pre-shipment export credits amounts as of March 31, 1980, to DH 256 million, of which 4% only (or DH 10 million) was accounted for by the EMI sector (see Annex Table 5), the biggest borrowers of this type of export credits being the textiles and food canning industries. This facility is still relatively unknown to a large number of exporters who confuse it with the export credit insurance scheme and thus think that only BMCE is entitled to operate it. 18. The export insurance scheme, instituted by the government in April 1976, is designed to cover exporters from both political and commercial risks as well as from risks against insufficient returns on promotional expenses (prospection of markets, participation in fairs and exhibitions, etc.). This scheme, which is administered by BMCE, has not been much used 1/ and has not induced gregter diversification of export markets as originally expected. Decentralization of the system as well as greater flexibility would be welcome by exporters. A new insurance scheme guaran- teeing to the exporters a fixed exchange rate over a period determined by contract helps them to be more aggressive in prospecting new markets, and, of particular importance to EMI exporters, it enables them to offer credits on a term slightly longer than the traditional 90 days. But in Morocco, exporters of capital goods are not yet provided with a credit facility that would permit them to extend medium-term credits (say, two to three years, as usually practiced internationally) to their foreign buyers, and there has been some instances where the loss of a foreign order to a foreign competi- tor was allegedly due to the Moroccan exporter's uncompetitive offer of credit terms. 2/ The Government feels that Morocco's exports of capital goods are still too small 3/ to warrant the legislation of a new text, besides the fact that balance of payments difficulties would constitute a big constraint to such a lending policy. However, a flexible attitude and policies would be desirable in that respect, if Morocco's exports of capital goods are to expand in any significant way. 1/ Since its inception, until the end of 1978, only 53 policies have been purchased, and the deficit incurred by the Government and BMCE was DH 2.2 million. This lack of success is due, among others, to the monopoly situation and mainly to the insufficient flexibility of the scheme (e.g., possibility for exporters to insure only a percentage of his total export business instead of its totality as now required). 2/ Berliet-Maroc was said to have lost a market in a tropical African coun- try to Berliet-France due to the latter's offer of better terms of credit. 3/ In 1979 exports of agricultural and industrial equipment amounted to DH 12.5 million.  - 88 .AB Conclusions on Export Incentives. Morocco has in recent years slowly introduced a series of incentive measures designed to promote exports of manufactured goods. Compared to previous periods (i.e., before 1973), they represent an improvement, and are credited to be a major factor behind the recent success of some export sectors, in particular those which were already efficient and able to exploit their basic comparative advantages (abundance of primary raw materials and relatively cheap and abundant unskilled labor). Much of the export success in textiles, clothing and leather, for instance, was largely due to the possibilities to have free access, through temporary mission, to imported inputs at world market prices and desired quality. Wider publicization of the scheme and of the drawback regime as well as greater efforts at improving them should help expand their use and thus increase exports. But the subsidy element of the various incentive measures appears to be too small to offset the strong disincen- tives that exports still face, namely: a structure and policies of protec- tion heavily biased in favor of import substitution or production for the home market; an exchange rate overvalued until recently, resulting in high and uncompetitive domestic production costs; and a lack of technological and marketing know-how to penetrate foreign markets. The interest subsidy (0.5 to 1.5%) on short-term export credits is insignificant 1/ and somewhat offset by the statistical tax of 0.5% levied on all exports. Furthermore, all the exemptions of exports from duty and indirect taxes on imported inputs as well as turnover tax on export sales (while these taxes are levied on locally-sold products) are not genuine subsidies in the sense that they do not directly improve the profitability of exports relative to domestic sales; they simply help Moroccan exporters avoid double indirect taxation, both at home and abroad. Finally, Morocco still lacks an incentive scheme designed to encourage indirect exporters, i.e., enterprises that can produce efficiently intermediate goods for use in export production. If instituted, such a scheme would certainly help induce greater specialization and back- ward linkages in Moroccan industries, and in the long-term reduce the depen- dence on imported inputs of the export sector. 20. In the EMI sector, the same shortcomings of the incentive system affect the exports of EMI consumer products, because of the high protection, and thus the greater profitability, afforded to their domestic sales. The production of intermediate and capital goods does not attract private investors because of their low protection and financial returns relative to other industries, the scarcity and higher cost of skilled and semi-skilled engineering labor, and the greater technological requirements (quality con- trol and time of delivery) which are more difficult to be met without foreign assistance and are particularly exacting sine qua non conditions for export success in engineering products. 1/ The corresponding interest subsidy is about 5 to 7% in Korea and Taiwan, besides the fact that the system of export financing is much more developed there and provides all kinds of credits that are necessary for the exporters to carry out their business.  - 89 - Investment Incentives 21. The Industrial Investment Code of 1973 is remarkable by its simpli- city and liberality. It was aimed at encouraging equally all kinds of industrial investments, without distinction between sectors or markets or in the use of labor. The advantages are automatic once the investments are approved and the processes for examining and approving the applications are relatively smooth and rapid. The only two conditions of eligibility are that (i) the investment amounts to more than DH 0.1 million; and (ii) at least 50% of the capital of the applicant's enterprise belong to Moroccan citizens. The advantages include principally: - exemption from import duties (but not from the special import tax) on material machinery and equipment; - exemption from the "Tax on Products" (TPS, or indirect tax) on purchased material, machinery and equipment (whether imported or acquired locally); - exemption from annual license fee ("patente") for five years; - 2% refund of the interest charge on medium and long-term loans approved by BNDE; - guaranteed transfer of dividends and guaranteed repatriation of capital up to the amount investment by foreign investors; and - complete or partial exemption from the business profits tax ("IBP") for ten consecutive years according to the location of the enterprise (in Casablanca, no exemption but the benefit of accelerated depreciation for fiscal purposes). 22. Though the fiscal advantages were designed so as to be neutral across sectors, they still have serious biases: the tariff and tax exemp- tions on imported machinery and equipment, along with the interest subsidy and the accelerated depreciation, increase with the amount of invested capital which is thus favored against labor; secondly, they tend to favor imported capital goods against locally-produced equipment, and consequently the use of foreign inputs over the use of domestic inputs whenever produc- tion techniques based on imported equipment are more adapted to imported inputs. All these biases have a direct bearing on the development of the EMI sector, in particular on the intermediate and capital goods industries which are already discriminated against by the low relative and absolute level of protection granted to them. These combined factors have retarded the emergence and growth of local EMI industries capable to substitute for imports, so that Morocco still had to import in 1979 about 85% of its needs for capital goods.  - 90 - 23. Article 163 bis of the Customs Code. The Government, aware of these biases prejudicial to the development of the domestic capital goods sector, has introduced in the Customs and Indirect Taxation Code a new provision called Article 163 bis, which the authorities hope "will open up a new sphere of action" to investors, both Moroccan and foreign. It stipu- lates that whenever a particular product is totally or partially exempted from import duty and tax, the local manufacturer of a similar product will benefit also from total or partial exemptions on the imports of his raw materials and intermediate inputs, so that his final product can be sold in Morocco under the same fiscal advantages as imported counterparts. Thus he can take advantage of the temporary admission facility, normally reserved to exporters, to import without duty and TPS the input (raw and intermediate materials, parts or components) needed to manufacture his product "under bond", 1/ and to sell it to himself or to another industrialist in Morocco. A prior authorization from.the administration is required for all these operations. 24. The prime purpose of this new facility was to encourage import sub- stitution in the capital goods sector, at least by restoring somewhat fairly the conditions of competition between foreign and domestic suppliers which have been distorted by the liberal provisions of the Investment Code in favor of imported machinery and equipment. The effect of the Article 163 bis is to favor the import of raw materials and semi-finished goods for the local manufacture of the capital goods favored by the investment code, and thus to transfer the bias against the domestic suppliers of intermediate goods. So far only the OCE 2/ has availed itself of the new legislation, and this new provision of the Customs Code is not yet well known in Morocco or abroad. If properly advertised and implemented, it may attract foreign investors in the fabrication of machinery or other industrial equipment in which they are efficient while taking advantage of natural protection (transport costs, delay in delivery ...), and it would make the Moroccan manufacturers more competitive in bidding for parts of the major public projects that the public authorities generally contract out to foreign firms. The difficulty in the implementation of this facility is to deter- mine all related technical coefficients (e.g., wastage allowances for each of the bonded inputs) and, in case of partial duty and tax exoneration granted to the import of a final product, to assess the level of taxation for each of the inputs and components utilized so as to equalize the fiscal treatment of both the foreign and local suppliers of the product. The authorities are thus very cautious in administering this facility, and requests for its use are likely to encounter delays and red tape, which will inevitably reduce its effectiveness. 1/ "en suspension des droits de douane". 2/ Office de Commercialisation Exterieure, a public Marketing board which has the monopoly of overseas commercialization of all food and agricul- tural products from Morocco.  - 91 - 25. Government's Price Regulations. In 1971 the Government instituted a strict system of price control and regulation, which was to apply to some two hundred and forty goods and services considered as essential or impor- tant. It essentially consists of fixing either the sale price of a parti- cular product, or the absolute amount or percentage of the profit margin in the production or distribution of that product. The usual methods of regu- lation are the following: if prices are controlled at the level of ex-factory wholesale (as generally in the case of a monopoly), a fixed percentage of profit margin is applied to production costs. The same margin is authorized to the wholesale importer. At the retails level, the element which is fixed can be either the sales price, or the distribution margin (in absolute value or percentage). Eventual revision of regulated industrial prices occur only after specific requests for adjustment have been made by the manufacturers, wholesalers and retailers, and not periodically as is generally done in other categories of products. As in the case of the granting of protection to selected activities through import licensing, no strict or formal guidelines as to the efficiency implications of price policies are followed, and the procedures are reasonably flexible so as to allow prices to adjust to the evolution of production costs. The list of products subject to price controls includes about fourteen products of the EMI sector, listed in Table 4 along with the element of price which is regu- lated (net price or profit margin), and the production or distribution stages at which the control applies. The method of price fixation is explicitly stated for four products ("net price" for television receivers and "profit margin" for dry cells, household electrical appliances and radio receivers); other products can be placed under either regime, depending on the sub-categories and the reasons (cited earlier) for which price controls are applied to them. Table 4: LIST OF EMI PRODUCTS SUBJECT TO PRICE CONTROLS Stage of commercialization Element at which the regulated regulated element applies Dry cells ppm Wholesale ex-factory or importer store Household electrical apparatus ppm Wholesale ex-factory or importer store Ratio receivers ppm Wholesale ex-factory or importer store Television receivers np All stages Stoves and cooker (using gas, ppm or np All stages fuel, wood or coal) Products of metallurgy ppm or np All stages Electrical wires ppm or np All stages Electrical cables ppm or np All stages Brass foundry products ppm or np All stages Cold storage equipment ppm or np All stages Motor vehicles ppm or np All stages Cycles ppm or np All stages Miscellaneous parts ppm or np All stages ppm = percentage of profit np = net price Source: Direction des Prix, Textes Relatifs a la Reglementation et au Controle des Prix, 1978  - 92 - 26. Another aspect of government price regulations concerns the fixation of profit margins afforded to wholesale importers for some selected categories of imports, whereby the "customs value" is obtained by deducting profits, import taxes and import costs from the wholesale price at which the item will be resold locally instead of using the invoice c.i.f. value. The margins range between 15 and 25%, and may not reflect the actual profit margins made by the importers, but the customs values are never calculated lower than the c.i.f. invoice prices; thus this method of customs valuation, whenever it raises artificially the c.i.f. import price of a product, may actually grant extra protection (in addition to the protection from tariff and/or quotas) to the local producer of import substitutes. It would be advisable that the study of the industrial protection in Morocco should also take into account this system of customs valuation wherever it is applied. 27. Policy toward Foreign Investment and Technology. Under the Moroccanization Law of March 1973, all companies involved in commercial banking, insurance and service activities were required to "moroccanize", I/ i.e., to have Moroccan citizens hold at least 50% of the share capital and constitute a majority on the Board of Directors. Thus moroccanization is not nationalization but only interdiction of foreign majority ownership. Moroccanization does not apply, however, to manufacturing activities except in the following industries: EMI Manufacture/assembly of radio, television and refrigerators Sewing machines Bicycles, motorcycle assembly Automobile and tractor assembly Primary steel mill products Other Wines and spirits, and soft drinks Tanning Tobacco Fish canning Fertilizer manufacturing Cement Pharmaceuticals 1/ Moroccanization was to be completed by May 1975 and was carried out essentially through increases in capital contribution from Moroccans who could borrow from the government up to 90% of the amount needed for their participation, at preferential rates of 4% and for an average term of seven years.  - 93 - But if foreign majority-owned manufacturing enterprises are legally accepted (except for the above listed activities), they are explicitly excluded from the advantages of the 1973 Industrial Investment Code which requires Moroccan majority in shareholding for the granting of benefits 1/. It should be noted however that the Investment Code requires a Moroccan majo- rity only in the share capital ownership but not in the management board, which is an important point to would-be foreign investors for whom the con- trol of a company's equity is less important than the control of its manage- ment. On the other hand, the benefits of the Export Code are available to all enterprises, regardless of the percentage participation of foreign capital. 28. In brief, foreign investors are welcome and encouraged in Morocco, to the extent that they are minority partners or engaged in manufacturing for export, and on the whole Moroccan incentives to foreign private invest- ments seem to be adequate. However, despite the additional advantages which foreign enterprises could negotiate with the government for large-scale investment projects, 2/, the share of foreign participation in approved new industrial investments has remained low, from 4% in 1975 to 10% in 1977. Many factors have acted as deterrents: the moroccanization policy; the com- plicated administrative red tape; the investment climate and the perception of inconsistency and unfairness in the authorities' treatment of foreign investors; the shQrtage of skilled and semi-skilled labor, especially in engineering industries; the negotiation process which may turn off potential foreign investors making an international comparison of legal incentives before the choice of a location; the tight restrictions of the Office des Changes with regard to the use of foreign private credits by Moroccan enter- prises, the terms of all foreign licensing contracts, and the payments of royalties aa-d of .aiaries to foreign technicians and cadres. Che government should consider to give special incentives to the foreign investments which involve a transfer of technology, such as sorely needed in the EMI sector and most particularly in the foundry subsector. Conclusions and Recommendations 29. The ongoing Bank-sponsored study of the protection structure and of the industrial incentives system in Morocco will serve, once completed, as the basis for the future reforms that are necessary to help the government achieve its objectives. But whatever the future orientations of a reformed incentive system are, two major principles should be followed to ensure its effectiveness: (1) the principle of the automaticity of the advantages, as presently, but with well-defined criteria of eligibility; and (2) the prin- ciple of the equalization of incentives, which should reduce over time the various biases that exist presently between sectors, between markets, between factors of production, between firms and between regions, and will help induce a greater efficiency in manufacturing production and a more balanced industrial growth. The least costly approach to correcting these biases would be to proceed downward rather than upward in readjusting the level of incentives to be afforded to each sector. If the study confirms 1/ The new Code (in draft) under examination by the Government could include clauses alleviating this contraint. 2/ I.e., of more than DH 30 million.  - 94 - the perception reported therein that the EMI subsector receives a much lower effective protection rate than the rest of the manufacturing sector, narrow- ing the gap should proceed through the lowering of the highest rates rather than the raising of the lower ones. Also, the argument of infant industry protection should not lead to tariffs realignment so as to unduly raise the costs of imported intermediate and capital goods which are crucial to Morocco's productive activities, because fighting inflation to keep Morocco's cost competitiveness is as important. While the reform of the protection should be implemented over time lest it disrupt drastically the economic and industrial activities, other instruments such as fiscal, finan- cial and price policies, and the government's institutional support and technical assistance could be used judiciously to equalize incentives. In particular, some of the present advantages (e.g., the 2 percent interest subsidy on BNDE medium-term loans, and the duty-free imports of capital goods) may be withdrawn from those sectors or subsectors which are already overprotected, unless they export or involve important externalities (back- ward linkages, technological upgrading ...). 30. Correcting the bias against exports would require the following measures: a simplification and generalization of the existing schemes pro- viding a free trade regime and credit facilities to export production and sales; an extension of the regime to indirect exports to encourage the local production of inputs incorporated in exports and to upgrade the local con- tent of these exports; an exchange rate maintained at a realistic level, or greater subsidies to exports to offset the greater profitability of domestic sales; and promotion of cost-efficiency in industrial production by using world market prices as yardsticks for the appraisal of projects. Moreover, the pricing policies, whether affecting the factors of production or the output, should be adjusted to reflect their opportunity cost and to promote efficiency among firms, in order to build-up or maintain the country's long-term export capability. 31. The promotion of the engineering industries should give emphasis to their rehabilitation and restructuring in order to improve their capacity utilization 1/ and cost competitiveness. Since the public sector is the biggest investor in Morocco and constitutes potentially an important market outlet for the EMI industries, measures and initiatives should be taken by the government to give a greater access to that crucial market to the local industries, which in turn should organize themselves to be able to respond competitively to the public bids. Also, a financing scheme should be insti- tuted to provide subsidized credit to investors who purchase their capital goods from Moroccan producers. Finally, the Government should encourage foreign participations which can be a source of mutual benefits, especially in the EMI industries where technological and managerial requirements con- stitute presently the most serious constraints. Encouragement of small and medium engineering industries should be pursued, because of their important role as subcontractors specialized in specific operations in which they can be more efficient than larger firms. 1/ Compared to an average of 67% for the whole industry in 1975, the rate of capacity utilization in the machinery and equipment sector was estimated at 64%; given the recent depressed situation of the economy, this rate has probably dropped even lower.  Annex 95 - Table 1 Page 1 of 3 IMPORT-WEIGHTED AVERAGE LEGAL DUTY RATES OF EMI PRODUCTS CLASSIFIED BY END-USE - 1978 Import- Value of Weighted Imports Average (DH Millions) Duty (%) I. Raw Materials 2.1 1.3 Metallic ores 0.8 0.6 Metallic scrap and waste 1.3 1.7 II. Semi-Finished and Intermediate Products 1,102.2 6.7 Bars, rods, of iron or steel 382.4 0.3 Sheets, plates, strips, of iron or steel 273.7 0.6 Ferro-alloys, wire pellets, powders, blooms, coils 22.3 0.0 Semi-products of zinc, nickel and tin 29.9 1.3 Bars, sheets, plates and tubes, of aluminium 46.6 2.9 Semi-products of copper 61.4 4.7 Tubes and pipes of iron or steel 39.5 9.8 Semi-products of lead, magnesium, tungsten 2.3 10.6 Knives and cutting blades for machines 3.3 10.0 Parts and accessories of watches and clocks 1.7 11.2 Electric accumulators and capacitors 10.7 15.0 Electrical parts and components 7.2 15.0 Gaskets and joints for machines 10.8 15.0 Taps, cocks, valves and similar appliances 55.8 16.6 Electric signalling equipment 2.8 20.0 Parts of electric filament lamps 4.7 20.0 Metal wires excluding electrical 10.1 20.5 Miscellaneous articles of base metal 30.7 21.1 Electric wires and cables 4.0 25.0 Barbed wire, grill, chain, of iron or steel 12.8 25.5 Metal structures and tube and pipe fittings 63.2 28.0 Magnetic tapes and articles used for sound recording 4.8 36.0 Nuts and bolts 21.5 66.4 III. Finished Capital Goods 3,308.6 13.5 Ships, boats, vessels and other floating structures 316.6 0.0 Agricultural tractors 72.3 0.3  Annex -96 - Table 1 Page 2 of Import- Value of Weighted Imports Average (DH Millions) Duty (%) Aerostats and aerodynes and parts thereof 206.1 10.0 Extracting, excavating, levelling machinery 88.0 10.0 Piston engines and turbines 27.5 10.0 Moulding boxes for founding materials and other materials (plastics, rubber) 14.4 10.0 Materials for railway construction 6.4 10.0 Agricultural machinery 38.9 10.1 Textile machinery 119.0 10.3 Railway and tramway, locomotive, rolling stock and parts thereof 14.9 10.8 Refrigerating equipment 25.7 11.1 Boilers 73.3 11.2 Machinery for crushing, grinding or agglomerating 128.8 12.0 Commercial motor vehicles CKD 148.8 12.0 Pumps and compressors 116.8 12.0 Machine tools 92.8 13.7 Non agricultural tractors 12.9 13.7 Transformers 40.9 13.9 Parts for machinery 16.6 14.0 Transmission shafts, gears, pulleys 57.4 15.0 Machinery and apparatus for food processing industries 37.1 15.0 Air conditioning apparatus 33.1 15.0 Works trucks, mechanically propelled 24.6 15.0 Ball, roller or needle roller bearings 13.9 15.0 Generators and electric motors 101.3 15.1 Miscellaneous machinery and apparatus nes. 517.1 15.2 Agricultural implements and tools 16.2 15.2 Electronic components 7.9 15.3 Lifting, handling, loading or unloading machinery 182.1 15.4 Electrical and electronic measuring, checking, controlling instruments and apparatus 34.2 16.1 Bodies and parts of commercial vehicles 3.6 16.4 Internal combustion piston engines and other engines of 12000 cm or more 86.1 16.7 Gas, liquid and electricity meters 8.3 17.9 Handtools 31.1 18.6 Telephonic and telegraphic apparatus 61.4 19.7 Electrical apparatus for leaking electrical circuits 70.4 20.0 Switchboard and control panels 18.1 20.0  Annex Table 1 97- Page 3 of 3 Import- Value of Weighted Imports Average (DH Millions) Duty (%) Radio transmission and reception apparatus 37.0 25.0 Reservoirs, tanks, vasts, containers of base metal 43.6 25.7 Industrial vehicles including trailers 137.0 30.8 Insulators and cables 23.0 31.7 Primary cells and batteries 2.4 36.6 Other capital goods for industry 201.4 17.1 IV. Finished Consumer Goods 697.0 30.6 Television receivers CKD 25.6 10.0 Radio receivers CKD 3.6 10.0 Parts of motdr vehicles 68.1 15.0 Parts of vehicles bodies 19.6 15.0 Cycles and motorcycles 63.1 19.3 Electric lamps and tubes 14.7 20.0 Passenger cars CKD 195.1 21.2 Domestic electrical appliances 52.1 23.4 Parts and accessories of radio and TV receivers 5.4 25.6 Stoves and space heating apparatus 18.0 28.8 Finished articlesof iron or steel 19.6 29.0 Other finished articles of base metal 15.4 29.1 Cutlery, blades 16.1 35.0 Domestic refrigerators 11.4 39.1 Instruments and apparatus, watches and clocks 19.1 41.4 Television receivers SKD 1.3 42.5 Radio and television receivers CBU (completely built-up) 42.9 44.9 Articles used for domestic purposes, of base metal 61.3 77.2 New passenger jars, with capacity of less than 1800 cm 13.4 90.0 New passenger jars, with capacity of more than 1800 cm 3.7 110.0 New passenger ars, with capacity of more than 2200 cm 5.2 150.0 Other finished consumer goods 22.3 22.1 Source: Office des changes - Service statistique  Annex - 98 - Table 2 LISTE NON EXHAUSTIVE DES PRINCIPAUX BIENS D'EQUIPEMENT FABRIQUES (OU SUSCEPTIBLES D'ETRE) AU MAROC 1. Materiel de stockage, de transport et de manutention Wagons en alliage leger pour le transport des phosphates Wagons citernes pour produits petroliers Berlines pour le transport de minerai Bacs, cuves, reservoirs de stockage Silos, tremies pour mines et industries Citernes et remorques - citernes Remorques et semi-remorques Bennes basculantes, chariots basculeurs Ponts roulants, portiques, monte-charges, chariots, monorails, elevateurs, grues portuaires Convoyeurs a bande transporteuse Rampes dVextraction de minerai Camions, tracteurs routiers, autocars et autobus 2. Appareils de chauffage et de ventilation Chaudieres Fours a cuire le pain Fours rotatifs, fours a chaux (sucreries) Installations de ventilation d'usines 3. Materiels electrigues Transformateurs de puissance Fils et cables electriques Moteurs electriques asynchrones Postes prefabriques moyenne tension tableau,basse tension, armoires de contro'le et de signalisation, pupitre de commande, postes mobiles Equipements electroniques pour l'industrie Emetteurs, emetteurs-recepteurs radio 4. Appareils de mesure Balances Ponts - bascules 5. Divers Charpentesmetalliques Mobilier metallique Tuyauterie industrielle Cellules de flottation pour laverie de minerai Moteurs stationnaires puissance inferieure a 50 CV Betonnieres  - 99 - Annex Table 3 Page 1 of 3 LIST OF PROHIBITED IMPORTS (LIST C) FOR THE ENGINEERING INDUSTRIES PRODUCTS - 1980 Customs Code Description 73.14.10 Iron and steel wire of other than high carbon or alloy steel 73.26 Twisted hoop or single flat wires, barbed or not, of iron or steel Ex73.27.59 Grill of iron or steel, galvanized or not Ex73.36.11 Gas stoves for domestic purposes Ex73.36.19 Other domestic equipment using gas or liquid fuel, of iron or steel 73.38.48 Enamelled domestic utensils Ex73.40.10 Articles of cast iron for road works 73.40.61 Small cigar boxes of iron or steel 74.18.11 Domestic utensils of copper Ex74.18.19 Fancy articles, of silver or gold 74.19.31 76.08 (except Structures and parts of structures, plates, shapes, tubes, Ex76.08.20 sections, etc... of aluminum Ex76.08.90) 76.15.20/51 Other articles of aluminum Ex76.15.21 Pressure cookers 76.16.51 Fancy articles of aluminum 76.16.71/79/81/89 Cosmetic boxes, etc. 80.06.10 Fancy articles, of tin 82.09.10/20/30/40 Knives, of ivory, silver or gold 82.10.10 Knive blades, of silver or gold 82.14.91/95 Tableware of silver or gold; of ivory or turtle shell 82.15.10/50 Handles of silver or gold; of ivory or turtle shell  Annex -00 inn Table 3 Page 2 o: 83.04 Filing cabinets of base metal 83.12.00 Metallic frames for photographs EX84.06.79 Internal combustion engines, of 50 CV or less, 2000 f/mn 84.15.31 Domestic refrigerators 84.15.41/49 Furniture for refrigerators or refrigerating equipment 84.18.46 Ex84.19.11/19/50/99 Dishwashing and cleaning machines (except parts) Ex.86.22.91 Cranes for loading and unloading, for merchandise of 5/10 tons or less, and parts Ex86.20.10 Weighing machines (except parts) Ex84.40.11 Ironing machines, second hand 84.40.21/29/30/50 Domestic washing machines 84.40.89 Machinery and machines for drying laundry 84.51.10 Portable typewriters Ex84.58.00 Automatic vending machines (except for stamps) 85.06.30 Floor polishing machines 85.06.70 Fans for household use 85.06.80 Other electro-mechanical machinery for domestic use 85.07.11/15/19/51 Electric shavers and hair clippers 85.12.53/55 Electric stoves and other domestic machinery 85.15.22/23/24 Radio-broadcasting apparatus, portable and for vehicles 85.15.25 Color television receivers, built-up 81.01.91 Road tractors 87.02.32 Auto chassis fitted with engines of 3000 cm3 or more 87.02.34 All-weather motor vehicles  Annex Table 3 - 101 - Page 3 of 3 87.02.35/38/43/47 Passenger cars, including sport cars, new 87.02.36/39/45/49 Passenger cars, including sport cars, second hand 87.02.57/59/67/ Motor vehicles for the transport of persons, or of 68/69 goods with3capacity of 5 tons or less, with cylinders of 3000 cm or more, built-up 87.02.71 to 89 Motor vehicles for the transport of goods, with capacity (except 87.02.86) of more than 5 tons (except vehicles for use in mining and quarries) 87.04 (except Chissis for motor vehicles fitted with engines of 2800 Ex87.04.91 cm or less, or with internal combustion piston engines Ex87.04.99) of 2500 cm3 or more, or with electric engines 87.05 Bodies and cabs for motor vehicles and tractors Ex87.06.91 Seat belts for motor vehicles 87.09.10/30/51/59 Motorcycles 87.10.00 Cycles, not motorized 87.12.71 Frames for cycles, their parts and accessories 87.14.11 to 25 ) Other vehicles, not mechanically propelled 87.14.40/45 ) 87.14.59/60/72 ) Ex87.14.51 Tank trailers, except for the transport of gases 89.01.55 ) 89.01.61 ) Ex89.01.81 ) Pleasure boats Ex89.01.85 ) 89.01.91 )  Annex - 102 - Table 4 Page 1 of 2 Drawback Rates for EMI Products Exported Rates in Dirhams per 100 kgs. exported A. Metallic furniture Desks and filing cabinet 1.74 Drawers 1.71 Shelves 1.63 Shelves 1.66 Closets 1.72 B. Household articles of steel or iron plate Enameled 6.23. Galvanized 2.77 C. Products from iron works 5.04 D. Products from sheet-metal works 1.44 E. Radio telephonic and radio telegraphic broadcasting and receiving instruments /a Receiver, CBL 53 BLU 336.51 Transmitter-receiver, CBL 52, BLU, battery operated 522.64 if " CBL 52, BLU, electrical 597.71 if it CER 202 AM 182.83 Transmitter, CEMT 2002, 3 baies HF 4,547.58 it if "I 4 "I f" 5,104.51 if if if 5 II *f 5,774.72 Transmitter-receiver, CBL 101 976.55 it it CBL III 1,309.41 Radiography transmitter, CET 1002/2002, 3 baies HF 4,560.85 if it CBT " 4 " " 5,261.87 is iG CBT " 5 " HF 5,965.71 Automatic alarm transmitter 27.61 F. Motor vehicles for the transport of goods Berliet trucks, GAK 3 sirona 525.00 It It GLR 160 2,400.00 Volvo trucks 1,104.00 G. Watches and watch-movements (23 rates for diff. items) 0.44 to 2.82 H. Teapots made of brass Big size .36 Medium size .33 Small size .32  Annex - 103- Table 4 Page 2 of 2 I. Other articles, made of brass (19 rates for different items) 0.12 to 2.35 J. Tubes of aluminum / (10 rates for different dimensions) 5.8 to 11.64 K. Packing materials for canning industries Tin plate 3.46 Tin 45.74 Aluminum 15.18 /a Rates per unit exported /B Per 1000 tubes exported Source: Ministere des Finances, Code des Douanes et Imp"ots Indirect, 1978 edition.  Annex Table 5 - 104 - T - AUTHORIZED REDISCOUNTING OF PRE-SHIPNENT EXPORT CREDITS (OUTSTANDING AS OF MARCH 1980) Sector Amount (DH Million) Agricultural products 42.85 Mining/raw materials 10.00 Food industries 99.18 Textiles/leather 64.68 Chemicals/rubber 15.55 Construction materials 2.50 Miscellaneous (wood, paper, ...) 9.90 Engineering industries 10.45 of which: Non-ferrous metals 4.00 Platework 0.30 Metal products 0.45 Automobiles 1.50 Electronic products 3.40 Watches 0.30 Iron scraps 0.50 Manufacturing: Total 202.26 TOTAL 255.11 Source: Banque du Maroc - Direction du Credit  - 105 - STATISTICAL APPENDICES  MOROCCO - GROWTH OF VALUE ADDED MAROC - CROISSANCE DU PIB (in percent based on levels in constant prices) (en pourcentages, sur la base des valeurs aux prix constants) 1975-1977 1977-1979 1975-1979 Growth Rate/ Growth Rate/ Growth Rate/ Contribution Taux de Taux de Taux de to GDP Growth/ croissance croissance croissance Contribution a (p.a.) (p.a.) (p.a.) la croissance du PIB Agriculture -2,1 5.4 1.6 4.5 Agriculture Mining 10.4 6.1 8.3 13.6 Industries extratives Energy, public utilities 12.5 17.9 15.2 7.8 Electricite et eau a.' Manufacturing 7.3 3.7 5.2 15.1 Industries manufacturieres Food processing 7.3 4.8 5.1 4.1 IAA Textiles, leather 5.4 0.0 2.1 0.6 Textile/cuir EMIs 8.3 8.1 8.2 3.0 TIE Construction materials 5.5 -4.4 0.05 0.1 Materiaux de construction Chemicals 11.7 0.6 6.0 1.8 Chimie caoutchouc Other 10.6 9.3 9.9 1.9 Divers Handicrafts 6.6 2.4 4.5 3.6 Artisanat Construction 17.9 -12.0 1.9 2.0 Batiment et T.P. Services 10.4 3.8 7.0 54.2 Services Import taxes 14.8 -6.0 3.9 2.8 Droits et taxes sur > importations '0 GDP at market prices 8.6 3.0 5.7 100.0 PIB aux prix du marche Source: State Secretary of Plan/ .4 S-E Secr6tariat d'Etat au Plan  MOROCCO - SECTORAL SHARES IN GDP MAROC - DISTRIBUTION DU PIB PAR SECTEUR (in percent based on levels in current prices) (en pourcentage, sur la base des valeurs aux prix courants) 1969 1975 1978 Agriculture 19.7 17.4 18.1 Agriculture Mining 3.6 9.1 4.7 Industries extractives Energy, public utilities 3.8 2.6 2.7 ElectricitE et eau Manufacturing /1 16.3 16.6 17.4 Industries manufacturieres /1 Construction 4.1 6.5 7.9 Batiment et T.P. Services 49.1 43.1 44.3 Services Import taxes 3.4 4.1 5.3 Droits et taxes sur importations GDP at market prices 100.0 100.0 100.0 PIB aux prix du marche /1 Including handicrafts/Comprenant artisanat. 0 Structure of Value Added in Manufacturing (%) Structure de la valeur ajoutee dans les industries manufacturieres (%) 1975 1976 1977 1978 1979 /2 Agricultural and food 27.3 27.2 25.5 27.1 27.1 Industries agricoles et processing alimentaires Textiles, leather 10.1 10.3 10.3 10.6 10.0 Textile, confection EMIs 12.0 12.4 13.8 14.2 14.2 IMEs Construction materials 5.4 5.2 5.3 4.7 5.4 Materiaux de construction Chemicals 10.5 11.1 10.8 10.3 10.3 Chimie-caoutchouc Others 6.1 6.3 6.7 6.3 6.6 Divers Handicrafts /_ 28.6 27.5 27.6 26.8 26.4 Artisanat /1 Total 100.0 100.0 100.0 100.0 100.0 Total /1 Handicrafts being defined as enterprises employing less than five years. /2 Preliminary estimates.  - 108 - Appendix I.3 MOROCCO - EMPLOYMENT CREATION /1 IN MANUFACTL'RING MAROC - CREATION D'EMPLOIS /1 DANS LES INDUSTRIES MANUFACTURIERES 1973 1974 1975 1976 1977 1978 1979 1980 Mechanical and electrical 500 1,000 1,600 2,900 4,200 4,200 5,600 5,400 Industries mecaniques et electriques Chemical, construction, n.iscel. 1,200 2,600 5,500 9,100 11,100 7,400 5,900 S,700 Chimie, construction, divers Textile and leather 2,700 4,100 6,200 8,000 6,300 4,500 4,400 7,100 Textile et confection Agricultural and food Industries agricoles et processing 2,100 3,300 2,800 5,800 4,200 5,000 2,900 5,800 alimentaires Total manufacturing 6,500 11,000 16,000 25,900 25,800 21,100 18,800 27,000 Total industries manufacturi&res EMI as % of total 7.7 9.1 9.4 11.0 16.1 IMF en . du total des industries manufacturing manufacturieres /1 Figures refer to approvals or registration under the 1973 incentive law, not to actual creation. Chiffres se rapportent aux approbations ou aux enregistrements sous la loi d'incitation 1973, et non creation d'emplois reellement effectues.