Morocco - Second and Third Credit Immobilier Et Hotelier Projects and Bay of Agadir Tourism Project

Document of The World Bank FO OMCIAL USE ONLY Rpwrt No. 6388 PROJECT PERFORMANCE AUDIT REPORT MOROCCO BAY OF AGADIR TOURISM PROJECT (LOAN 1202-MOR) MOROCCO SECOND AND THIRD LOANS TO CREDIT IMMOBILIER ET HOTELIER (CIR) (LOANS 848-MOR AND 1279-MOR) August 25, 1986 Operations Evaluation Department %is dogm ba a uuticld dbtugbwm md a be ad by redlpleub only In he perfomance of their el dutes. s teetes my a s eherwbe be dislosed withet WOrl Bak uthelo. FOR OFFICIAL USE ONLY THE WORLD BANK Washington. D.C. 20433 U.S.A. Office of Oector-GWeneal Opfeatons Evauatum August 25, 1986 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report: Morocco Bay of Agadir Tourism Project (Loan 1202-MOR) and Morocco Second and Third Loans to Credit Immobilier et Hotelier (CIH) (Loans 848-MOR and 1279-MOR) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Morocco Bay of Agadir Tourism Project (Loan 1202-MOR) and Morocco Second and Third Loans to Credit Immobilier et Hotelier (CIH) (Loans 848-MOR and 1279-MOR)" prepared by the Operations Evaluation Department. Attachment 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. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT MOROCCO BAY OF AGADIR TOURISM PROJECT (LOAN 1202-MOR) MOROCCO SECOND AND THIRD LOANS TO CREDIT IMMOBILIER ET HOTELIER (CIH) (LOANS 848-MOR AND 1279-MOR) TABLE OF CONTENTS Page No. Preface ............................ Basic Data Sheets ............ ...................... . iii Evaluation Summary ........................................... ix PROJECT PERFORMANCE AUDIT MEMORANDUM - LOAN 1202-MOR I. Project Objectives and Components ....................... 1 II. Project Implementation and Costs ....................... 3 III. Tourism Development .......................... ...... 8 IV. Tourism and Housing ............................. 11 V. Economic Reevaluation ................................... 12 VI. Tourism Incentives ...................................... 14 ANNEXES 1. Development of UAT Land Sales (Status as of 1981 and 1985) . 17 2. Growth of Agadir Tourist Traffic (Main Sectoral Indicators) ......................18 3. Moroccan International Tourism (Arrivals) by Countries of Origin ............................... 19 4. Travel Demand Originating from Leading European Countries ......o...............................o...... 20 5. Growth Rates and Ceilings to Foreign Travel ............. 21 6. Marketing of Agadir in Europe ........................... 23 PROJECT PERFORMANCE AUDIT MEMORANDUM - LOANS 848/1279-MOR I. Project Objectives ....................******** ** 25 II. Tourism Sector Issues ................................... 25 III. CIH's Institutional Performance ...........********o** 31 IV. Loan Utilization ......................*****o*****e 35 V. The Bank's Institution Building Efforts ........ooooo** 36 VI. Lessons of Experience .................*********o e ** *o 37 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. PROJECT COMPLETION REPORT - LOAN 1202-MOR I* Background ............................................. 40 II. Project Preparation and Appraisal ...................... 41 III. Project Implementation ............................... 43 IV. Institutional, Economic and Financial Performance ..........................o............ 50 V. Conclusions and Recommendations ........................ 53 Annexes 1. Projected and Actual Expenditures by Project Component .................................. 56 2. SONABA - Status of Land Sales .......................... 57 3. SONABA - Programming of Land Sales ..................... 58 4. Calculation of the Economic Rate of Return on UAT Component ................................... 59 Table 1 - Cost-Benefit Streams ....................... 61 Table 2 - Schedule of Land Sales and Start of Construction for Tourist Accommodation... 63 Table 3 - Schedule of Completion of Construction and Occupation of Tourism Facilities ....... 64 Table 4 - Revenues and Gross Operating Profit of Tourism-related Facilities .............. 65 5. SONABA - Balance Sheets o.....o..o.eo..oeoo.o.. oo.o..Oo 66 PROJECT COMPLETION REPORT - LOANS 848/1279-NOR I* Introduction . .**oo................oooo***o* ooo** * 68 II. The Environment *o.....................o..ooo ooo**oooo 68 III. Credit Immobilier et Hotelier ................* ***** 71 IV. The Projects ................oo***** ********* * 77 V. Conclusion ***sooo*******-ooo*******oo******oo***** 82 Annexes 1. Exchange Rates as of December 31 ..................... 84 2. Morocco: Tourist Accommodation Capacity (1975-1982) .. 85 3. Morocco: Evolution of Tourist Arrivals (1972-82) ..... 86 4. Actual and Projected Operations (1972-82) ............ 87 5. Projected and Actual Balance Sheets (1975-1982) ...... 88 6. Projected and Actual Income Statements (1975-1982) .. 89 7. Key Financial Indicators ........................... 90 8. Loan 848-NOR - Analysis of Projects Financed ........ 91 9. Loan 1279-MOR - Analysis of Projects Financed .*0..... 92 - I - PROJECT PERFORMANCE AUDIT REPORT MOROCCO BAY OF AGADIR TOURISM PROJECT (LOAN 1202-MOR) MOROCCO SECOND AND THIRD LOANS TO CREDIT IMOBILIER ET HOTELIER (CIH) (LOANS 848-MOR AND 1279-MOR) PREFACE This Project Performance Audit Report (PPAR) represents a perfor- mance audit of the Bay of Agadir Tourism Project and of the Second and the Third Loans to Credit Immobilier et Hotelier (CIH). The Bay of Agadir Tourism Project, approved on February 3, 1976, was supported by Bank Loan 1202-MOR for US$21.00 million, of which US$10.04 million was disbursed and US$10.96 million was cancelled. The Second Loan to CIH (848-MOR), approved on June 29, 1972, was for US$15.00 million, of which the entire amount was disbursed. The Third Loan to CIH (1279-MOR), approved on May 28, 1976, was for US$25.00 million, of which also the entire amount was disbursed. The PPAR consists of: (a) two Project Completion Reports (PCRs), one for the Bay of Agadir project, dated June 21, 1984, and one for the two CIH loans, dated January 27, 1984, both prepared by staff of the Europe, Middle East and North Africa Regional Office (EMENA); and (b) a joint Evaluation Summary for all three projects and two Project Performance Audit Memoranda (PPAM), one for the Bay of Agsdir project and one for the CIR projects, all of them written by the Operations Evaluation Department (OED). OED has combined the projects in one Performance Audit Report because they are interconnected. The PCR for the Bay of Agadir project reported, in mid-1984, that the project had not yet been fully implemented at that time, but that com- pletion and start of follow-up investments (primarily by the private sector, not included in project definition) were imminent. OED's processing of the loans was held up for some time to permit developments to take place as the PCR had envisaged. They did not, and ORD is now issuing the audit report. Both PCRs cover the projects' experience well, and the audit is, by and large, in agreement with their findings. To give the review of the Bay of Agadir Tourism Project greater perspective, OED expanded on points raised in the PCR and added new topics. In case of the CIH loans, OED amplified and highlighted major PCR findings and drew the lessons of project experience. - ii - OED has reviewed the PCRs against the President's Reports, the Staff Appraisal Reports, the legal documents, sector studies, economic reports, other project files and the transcripts of the Executive Directors' aeetings which considered the projects. Further, OED discussed the projects with Bank operational staff and, during a mission to Morocco in October 1985, with officials of the government and borrowers. In addition, the audit mission surveyed European Tour Operators and tourist organizations in October/November 1985 to obtain their viewpoints about Agadir's future tourism development. Following standard procedures, OED sent copies of the draft PPAR to the government and borrowers for comments. However, no comments have been received. PROJECT PERFORMANCE AUDIT BASIC DATA SHEET MOROCCO BAY OF AGADIR TOURISM PROJECT (LOAN 1202-MOR) KEY PROJECT DATA Appraisal Actual or Estimate Current Estimate TotA Project Cost (US$ million) 42.00 /a 35.00-40.00 /b Project Cost Overrun (%) 0 (5-15) Loan Amount (US$ million) 21.00 21.00 Loan Disbursed (US$ million) 21.00 10.04 Date Physical Components Completed 06/30/81 1986-87 /c Proportion of Physical Components Completed by Original Completion Date (%) 100 75 Time Overrun (%) 0 90 /d Economic Rate of Return (%) 19 /e 12 71 Financial Rate of Return (%) 9 n.a. Cumulative Estimated and Actual Disbursements (US$ million) Bank FYs: 1977 1978 1979 1980 1981 1982 1983 (i) Appraisal 0.5 2.7 8.4 15.1 19.8 21.0 21.0 (ii) Actual 0.1 1.0 2.6 7.8 8.3 9.4 10.0 (iii) Actual as % of Appraisal 20 37 30 52 42 45 48 OTHER PROJECT DATA Original Date Actual Date First Mention in Files -- 1972 Government's Application 1972 lagotiations (completed) -- 12/15/75 Board Approval -- 02/03/76 Loan Agreement -- 02/27/76 Loan Effectiveness 06/28/76 10/29/76 Loan Closing 12/31/81 12/31/81 Borrower The Kingdom of Morocco Executing Agency SONABA and Government Fiscal Year of Borrower January 1 - December 31 Follow-on Project(s) None /a Excluding land. 7V Project implementation not yet completed. Total project costs based on estimates. Actual/revised costs, expressed in Dirham (DH), are estimated to have an overrun of 15-20%. /c Audit estimate. 7-d Time overrun measured up to end-1985. 7e The return for tourism/housing infrastructure was 17%; for regional infrastructure, 28%; for all components combined, 19%. /f Return for tourism/housing infrastructure only. - iv - STAFF INPUT (Man-weeks) Banit FYs: 1972 1973 1974 1975 1976 1977 1978 Identification/ Preparation 6.4 4.5 18.0 27.0 3.4 - - Appraisal - - - 19.2 68.4 - - Supervision - - - - 6.0 14.2 18.5 Bank FYa: 1979 1980 1981 1982 1983 1984 Total Identification/ Preparation - - - - - - 59.3 Appraisal - - - - - - 87.6 Supervision 8.3 5.2 7.9 11.9 2.0 8.7 82.7 229.6 CURRENCY EXCHANGE RATES Name of Currency (Abbreviation) Dirham (DH) Appraisal Year Average, 1975 US$1 - DH 3.80 Intervening Years Average, 1976-1984 US$1 - DH 4.90 Most recent year, 1985 US$1 - DH 8.25 -v - PROJECT PERFORMANCE AUDIT BASIC DATA SHEET MOROCCO - SECOND LOAN TO CREDIT IKKOSILIER ET HOTELIER (CIR) (LOAN 848-MOR) KEY PROJECT DATA Appraisal Actual or Estimate Current Estimate Loan Amount (US$ million) 15.0 15.0 Loan Disbursed (US$ million) 15.0 15.0 Loan Cancelled (US$ million) 0.0 0.0 Cumulative Estimated and Actual Disbursements (US$ million) Bank FYs: 1975 1976 1977 1978 1979 1980 (i) Appraisal 10.3 14.2 15.0 15.0 15.0 15.0 (ii) Actual 5.7 9.2 12.4 13.4 14.8 15.0 (iii) Actual as % of Appraisal !5 65 83 89 99 100 OTHER PROJECT DATA Item Original Date Actual Date First Mention in Files n.a, Government's Application n.a. Negotiations (completed) 05/--72 Board Approval 06/29/72 Loan Agreement -- 06/30/72 Loan Effectiveness 10/02/72 11/01/72 Loan Closing 12/31/76 06/30/79 Borrower and Executing Agency Cedit Immobilier et Hotelier (CIR) Fiscal Year of Borrower January 1 - December 31 Follow-on Projects Third Loan to CIHI (1279-MOR) Fourth Loan to CIII (1943-MOR) - vi - STAFF INPUT (Man-weeks) Bank FYs: 1972 1973 1974 1975 1976 1977 1978 Identification/Preparation n.a. - - - - - - Appraisal 8.5 0.3 - - - - - Supervision 0.1 14.9 17.5 28.9 4.4 3.4 0.9 Bank FYs: 1979 1980 1981 1982 1983 1984 Total Identification/Preparation - - - - - - n.a. Appraisal - - - - - - 8.8 Supervision 0.2 - - 0.1 - 2.0 72.4 81.2 CURRENCY EXCHANGE RATES Abbreviation Dirham (DH) 1975 US$1 = DH 4.05 176 4.42 1977 4.50 1978 4.10 1979 3.80 1980 3.80 - vii - PROJECT PERFORMANCE AUDIT BASIC DATA SHEET MOROCCO - THIRD LOAN TO CREDIT IMMOBILIER ET HOTELIER (CIH) (LOAN 1279-MOR) KEY PROJECT DATA Appraisal Actual or Estimate Current Estimate Loan Amount (US$ million) 25.0 25.0 Loan Disbursed (US$ million) 25.0 25.0 Loan Cancelled (US$ million) 0.0 0.0 Cumulative Estimated and Actual Disbursements (US$ million) Bank FYs: 1977 1978 1979 1980 FY81 (i) Appraisal 0.9 5.9 16.2 24.0 25.0 (ii) Actual 2.0 9.1 18.7 24.2 25.0 (iii) Actual as % of Appraisal 222 154 115 101 100 OTHER PROJECT DATA Item Original Date Actual Date First Mention in Files na. Government's Application n.a. Negotiations (completed) 04/--/76 Board Approval 05/28/76 Loan Agreement -- 07/02/76 Loan Effectiveness 09/20/76 11/18/76 Loan Closing 12/31/80 12/31/80 Borr over Credit Immobilier et Hotelier (CIR) Fiscal Year of Borrower January 1 - December 31 Follow-on Projects Fourth Loan to CIHI (1943-MOR) - viii - STAFF INPUT (Man-weeks) Bank FYs: 1973 1974 1975 1976 1977 1978 Identification/Preparation 6.0 1.4 6.9 12.6 - - Appraisal - - - 83.9 - - Supervision - - - 1.6 14.2 39.6 Bank FYs: 1979 1980 1981 1982 1983 1984 Total Identification/Preparation - - - - - - 26.9 Appraisal - - - - - - 83.9 Supervision 12.0 1.8 - - - 0.4 69.6 T80.4 CURRENCY EXCHANGE RATE Abbreviation Dirham (DH) 1977 US$1 = DH 4.05 1978 4.10 1979 3.80 1980 3.80 1981 5.10 1982 5.90 - ix - PROJECT PERFORMANCE AUDIT REPORT MOROCCO BAY OF AGADIR TOURISM PROJECT (LOAN 1202-NOR) MOROCCO SECOND AND THIRD LOANS TO CREDIT IMMOBILIER ET HOTELIER (CIH) (LOANS 848-MOR AND 1279-MOR) EVALUATION SUMMARY Introduction Tourism has traditionally accounted for a major part of Morocco's foreign exchange earnings and employment, and for this reason, it has tradi- tionally received the government's generous financial support through various forms of investment incentives. Foreign tourist arrivals in the first half of the seventies, at the time of the projects' preparation and approval, showed a strong upward trend, indicating considerable scope for the sector's continued expansion. However, new hotel investments since the mid-1970s were flattening out, signalling an approaching disequilibrium between tourist demand and accommodation capacity and potential constraints on the sector's growth (PPAM, 848/1279-MR, para. 3). Objectives The projects under review, complementary and approved in a period of four years (1972-1976), had the principal objective of keeping the tourism sector growing. The Bay of Agadir Tourism Project (Loan 1202-MOR), approved in 1976, aimed at a substantial expansion of tourist capacity in Agadir, one of Morocco's premier resorts catering to visitors all year round. The Societe Nationale d'Amenagement de la Baie d'Agadir (SONABA), a public sector agency, was the loan beneficiary. Its functions under the project were the conversion of the only remaining major tract of land into serviced sites and the sale or lease of the land to (mostly private) hotel investors. The pro- ject also funded provision of serviced lots for construction of residential homes (PPAM, 1279-MOR, para. 3). The Second Loan (848-MOR) and the Third Loan (1279-MOR) to Credit Immobilier et Hotelier (CIR), approved iL 1972 and 1976, respectively, aimed at (i) strengthening CIH's capacity to finance (primarily private sector) hotel investments and (ii) improving the government's sector management through refinements in the collection of sector data, commissioning of regional sector plans and a review of the incentive policies in the sector. Since the sixties, CIR had become the main institutional source of long-term finance for commercial tourism development in Morocco (PPAM, 848/1279-MOR, para. 2). -x - Implementation Experience Implementation of the Bay of Agadir project was beset by various problems which have pushed the date of project completion into the future. The time overrun todate is about 90%. The project's scope and complexity and the inexperience of SONABA, the implementing agency, were factors in the delays, though they were, to some extent, anticipated. The major factor, which was and could not be foreseen and about which little could be done, was the interference of government authorities and others in management decisions over land use, project design and land sales policies. No hotel investments have been made so far, a result not due to lack of investors' interest but SONABA's inability to make land available for development. Construction of private homes is not much more advanced. No CIH funds have yet been com- mitted for hotel construction in the project area. Nonetheless, with CIH financing, major hotels were built in the meantime on the remaining parcels of land suitable for hotels. This construction increased Agadir's accommoda- tion capacity by about 300% from 1976 to 1984, at least temporarily making up for the shortfall in beds to be provided on the project site (PPAM, 1202-MOR, paras. 9-10 and 13-16; and PPAM, 848/1279-MOR, paras. 34-35). On current estimates, the costs of the Bay of Agadir project (relating only to the public sector investments for provision of serviced sites), expressed in Dirham (DH), are projected to have an overrun of 15-20%, and expressed in US dollar, an underrun of some 5-15% (because of the DH's devaluations). About 48% of the loan was disbursed. The remainder, about 52%, was cancelled due to lack of implementation progress (PPAM, 1202-MOR, para. 11). Both Bank loans to CIR were fully disbursed. Disbursement of the Second Loan to CIH was delayed by two and one-half years due to the low level of hotel investments in the first half of the seventies. Disbursement of the Third Loan was on target as investment activities increased sharply in the second half of the decade. This set the stage for the Fourth Loan to CIH (1943-MOR), approved in 1981. Subprojects located in Agadir accounted for 44% of the Second and 37% of the Third Loan to CIR (PPAM, 1202-MOR, para. 12 and PPAM, 848/1279-MOR, paras. 33-36). Supported by the Bank operations, CIH improved its (foreign) resource mobilization and the technical quality of its loan appraisals, and it developed into a mature and generally efficient institution (PPAM, 848/ 1279-MOR, paras. 20-23 and 37-40). To what extent efforts at improving the government's collection of tourism data have been successful is not fully clear, though CIH has made advances in this area in the context of streamlining its loan appraisal procedures. The government embarked on extensive regional tourism planning studies, financed through UNDP. However, like previous government planning efforts, these studies overestimated future demand for tourist facilities in Morocco. Progress on the review of incentives to the tourism sector has been - xi - slow, possibly influenced by tentative Bank positions on the subject. Even though there have been revisions in the incentive regime since the early seventies, tourism remains a sector with strong financial government support despite tight budgets and chronic overcapacity of hotels in parts of the country (PPAM, 848/1279-MOR, paras. 9-19). Results The Bay of Agadir project, as noted, has so far not increased the area's tourist capa!ity and is unlikely to make a capacity contribution before two to three years hence. In fact, it is questionable whether the full capacity planned under the project and supplemented by hotel construc- tion outside the project area in recent years will be soon needed as the demand shows signs of having been overestimated (PPAM, 1202-MOR, paras. 17-21). Given the status of implementation, the economics of the Agadir project are far from determined. If various assumptions made by the PCR, most of them referring to the future course of events, prove correct, the economic rate of return (ERR) would turn out to be around 12% (for the tourism component), against 17% projected at appraisal. However, given large uncertainties about the project, there is considerable scope for variation in the ERR (PPAM, 1202-MOR, paras. 24-27). Integration of a tourism and housing component, from the outset controversial, was a special feature of the Agadir project. Rather unneces- sary for tourism if not detracting from the project's real purpose, housing was supported under the project on the grounds that it would help making better use of the public utilities investments, reduce Agadir's housing shortage and benefit local residents through access to entertainment and sports and through social interaction with visitors (PPAM, 1202-MOR, paras. 5-6, 15 and 22-23). During a difficult period for the Moroccan economy, including the tourism sector, CIH has become more sophisticated in its appraisal work and has managed to sustain a basically sound financial position, which augurs well for its future role of supporting the commercial tourism sector. However, profitability in real, though not in nominal, terms was low, and the hotel portfolio is weak. Housing loans now make up a major part of the port- folio, with tourism representing less than 30%, a reversal of the relative shares in the early seventies. Housing loans generally perform better and are better secured. Very recently (end-1984), arrears on hotel loans repre- sented about one-third and arrears on loans with overdues of more than six moths constituted 9% of the hotel portfolio. There has been no significant change in CIH's arrears situation during 1985. Although CIH has tightened collection procedures and has obtained payments on some government guaranties on public sector hotels, lasting improvements in CIH's portfolio must await recovery of occupancy rates and the sector's profitability. This, in turn, depends in part on its lending guidelines and procedures and the government's sector policies (PPAM, 848/1279-MOR, paras. 7-8 and 25-32). - xii - Sustainability The Agadir project has yet to cover much ground to meet original expectations about economic benefits. Whether the project will ultimately perform depends on many decisions yet to be made or confirmed--decisions about the spatial layout of the area, the architectural plans, the density of development, the phasing of new hotel capacity, the type of tourist facili- ties and the image to be created. Even though most public sector investments have been completed, the project is not yet locked in strongly, as the pri- vate sector investments, the dominant investments, are yet to be made. These investments by the private sector are in the order of US$200-300 million (at current prices) against some US$35-40 million by the public sector (PPAM, 1202-MOR, paras 11 and 27). Success by CIR in tourism has been constrained by a mismatch of tourist demand and hotel capacity. Recently in Morocco, the tourist demand was lower than expected, and the build-up of hotel capacity was excessively high. However, in the case of Agadir, the issue is not overcapacity, but a temporary shortage of (peak) capacity and a delay in capacity generation. Shortfall in Morocco's tourism demand resulted, in part, from unpredictable events such as the prolonged recession of the eighties and the enduring war in the Sahara, but also from inadequate attention given to tourism promotion, a function in principle to be performed or supported by the government and other sector agencies. Excess hotel capacity was, in part, the result of policies adapted. Options to improve the performance of the CIH tourism operations are: (i) independence in its appraisal work and project approvals; (ii) considerable restraint in approvals of future hotel invest- ments and increased skepticism regarding forecasts about tourism demand; (iii) more emphasis on accommodation facilities requiring low investments, especially in Northern locations subject to highly seasonal demand (not applicable to Agadir); (iv) stronger support to tourism promotion in interna- tional markets; (v) regular updating of market ar.lyses and revisions of (short-term regional) investment strategies; and (vi) strengthening and intensification in its follow-up activities. A thorough review of the level and structure of the incentives system to determine its appropriateness would be helpful (PPAM, 848/1279-MOR, paras. 8-11, 18-19, 22-24, 30, 30-37 and 41). Findings and Lessons For almost ten years, the public sector has continuously struggled to make its contribution to the Agadir development. The experience, not surprisingly, has been that a new public sector agency (SONABA), which is subject to various forms of influence by established government entities and powerful interests, has difficulties in functioning effectively on its own. SONABA's performance came about despite (or possibly because of) the fact, that the Moroccan government holds 51% of SONABA's shares and other public or semi-public sector agencies (such as CIR) hold the remainder. Morocco's public sector has a limited role in the construction, operation and manage- ment of hotels, and this is an arrangement which deserves continuation (PPAM, 1202-MOR, para. 9). - xiii - The questions raised about Agadir's demand suggest a fresh look at when and how the project site should be fully developed. Such a review would have to be tied in with a clear understanding of the rationale for and provi- sions of the government's future incentive policies. Also incorporated into the review should bc a better appreciation of the extent to which the country economically benefits i:om foreign tourists. The PCR for the Bay of Agadir Project, for example, bases its economic analysis on a 1978 (tourist expendi- ture) survey, which for an ex-post analysis may be appropriate when primarily historic performance is at issue, but not for an ex-ante analysis which may prepare upcoming investment and policy decisions (PPAM, 1202-MOR, paras. 17-21 and 27). Provision of serviced sites may turn out to be the least demanding activity under the Agadir project. Much more, in financial and conceptual terms, will be at stake during the following stages--the ultimate physical design and functional layout of the new area and the gradual delivery of accommodation capacity. These stages would increasingly involve CIH, which may find in Agadir one of its largest financial undertakings. The size of Agadir and still open questions about the policy and sector environment in which the resort should or will evolve (including development of tourist demand) will place special demands on the DFC, emphasizing the need for a further upgrading of the quality of and capacity for its management of tourism sector lending. The projects' implementation coincided with the Bank's gradual liscontinuation of direct investments in tourism projects and partial disman- tling of its institutional capacity to effectively deal with tourism. Bank staff expertise in the sector is now dispersed and not readily accessible, even though a large number of LDCs have important tourism sectors. Whether a stronger Bank presence in tourism could have prevented the Agadir project delays, is debatable in view of the nature of problems affecting the proj- ect. However, in the audit's view, such a presence could have produced more tangible results in government tourism policies (such as policies on invest- ment incentives and tourism promotion), through a more intensified and credible policy dialogue and standard Bank sector work carried on the strength (and with budgets) of the Bank's own specialized units. The Bank, in the context of its CIH operations and related avenues, made strong efforts at dealing with government policies, but there are limits to "loading up" lending operations which primarily aim at the strengthening of a financial intermediary and much less at influencing policies at the place where policy decisions are made. Perhaps a review of how the Bank deals with tourism sector issues would be appropriate (PPAM, 1202-MOR, para. 17; and PPAM, 848/ 1279-MOR, paras. 12-19 and 37-41). In its support to the improvement of CIB's operations, the Bank was generally resourceful and effective. Issues, to which the Bank might have paid more attention during formulation of project objectives, CIH action plans or loan covenants include: regular and detailed analyses by CIH of Morocco's national and regional tourism markets, for use in its strategic investment plans; and creation of a managed fund for CIH's public sector pro- jects, to safeguard CIH's independence of decision-making and reduce problems - xiv - from such investments if they should not perform. These issues might be taken into consideration under eventual new Bank loans to CIH (PPAM, 848/ 1279-MOR, paras. 6, 23, 30 and 38-40). The objectives of the CIH loans under review related to institution building in CIH were achieved only in part. Foreign recource mobilization and the technical aspect of appraisals were improved. But key aspects of market forecasts and the quality of the hotel portfolio are in need of further improvement, while project supervision is still inadequate. The Bank's and CIH's efforts to promote sector reforms and the rationalization of investment incentives have had limited effect. Inadequacies in the under- lying data have persisted and completion of the requisite analyses have been delayed far too long. The Bank appeared not to have clear views regarding the adequacy of incentives, and it did not undertake or directly supervise a comprehensive study of the incentives issue per se, that might have resolved the tentativeness of its position on this issue7PPAM, 848/1279-MOR, paras. 40-42). PROJECT PERFORMANCE AUDIT MEMORANDUM MOROCCO BAY OF AGADIR TOURISM PROJECT (LOAN 1202-MOR) I. PROJECT OBJECTIVES AND COMPONENTS 1. The Bank has had a longstanding association with the Moroccan tourism sector, dating back to the mid-sixties. Except for the project which is the subject of this audit memorandum, all aesistance was channeled through Moroccan development finance companies (DFCs), initially through the Banque National pour le Developpement Economique (BNDE) and subsequently through the Credit Immobilier et Hotelier (CIH). The most recent loan to CIH for tourism (1943-MOR) was made in 1980. 2. While the Bank's DFC tourism operations supported financing of infrastructure (primarily hotels) in various parts of the country, the Bay of Agadir Tourism project focused on one tourist location only - Agadir, blessed with an attractive climate all year-round, wide unspoiled beaches and proximity to historic and cultural Moroccan centers. Projecting a strong demand for Agadir, the government requested Bank assistance in 1971 and laid the ground work for a project through a UNDP financed study (Bank super- vised) which was launched in 1973. The project was appraised in 1975 and approved in 1976. 3. The project objectives were to: convert undeveloped land in Agadir into serviced sites for the construction of tourist facilities and plan Agadir's future growth as a major tourism center.1/ The project had three major components: (i) infrastructure and common facilities (streets, water, power, sewerage, telecommunication, landscaping, shopping areas, sports grounds) in a new section of the city, known as Unite d'Amenagement Touristique (UAT), adequate for construction of hotels (7,000 beds) and housekeeping apartments (2,600 beds) for tourists and homes for local residents (13,000 people); (ii) regional infrastructure and facilities (roads and a fish unloading system); and (iii) consulting services (technical assistance for project implemen- tation, studies and preparation of a follow-up project). 4. After development, the UAT land was planned to be sold or leased at market prices to private sector investors. Proceeds from the sale or lease were expected to cover all investment costs including a satisfactory return on investment. In the event that private sector investors, despite a 1/ President's Report, dated January 16, 1976 (hereafter referred to as PR, 1202-MOR), Annex III, Loan and Project Summary. -2- potential demand for new hotels, would not be forthcoming, the government would build hotels with a number of beds (estimated at appraisal at 4,200) sufficient to secure an acceptable economic rate of return on the project investments.2/ 5. Appraisal documents characterized the project as a departure from traditional patterns of isolating tourist accommodations from other loci of city life. Under the project, hotels and apartments for tourists would be grouped with housing units for the local population, and all edifices would be clustered around facilities for shopping, entertainment and sports.3/ By integrating tourism and housing, tourist "ghettos" would be avoided, better use would be made of public utilities investments, the acute housing shortage in Agadir would be reduced, and local residents would be given access to entertainment and sports and opportunity for "socially valuable interchange" with visitors.4/ There was the implication that without the two sector's physical integration, these beneficial effects could not be achieved. 6. Residential housing was aimed explicitly at middle and upper income families. However, it was explained that this assistance would also alleviate Agadir's "general" housing shortage, an apparent reference to the housing needs of lower income groups.5/ The appraisal noted that the housing component would involve no subsidies and not preempt the local government's physical capacity to supply less well-to-do citizens with water and electricity and remove their sewerage.6/ But it did not raise the question whether the project might constrain the public sector's financial and institutional capacity to support low income housing. The appraisal, 2/ Staff Appraisal Report, dated January 21, 1976 (hereafter referred to as PR, 1202-MOR), para. 4.08. 3/ PR, 1202-MOR, paras. 39-40; SAR, 1202-MOR, para. 4.01. 4/ SAR, 1202-MOR, para. 4.01. - Bank staff believe that the decision to proceed with an integrated development was also based on "consid- erations concerning Agadir's tourism demand and SONABA's financial viability" though these issues were not discussed in the appraisal documents. Tourism demand was supposed to develop better in a mixed residential/tourism setting, and the quick sale of residential land was supposed to improve the cash flow of "slow moving tourism land". - The integration of tourism and housing was also a topic at the Board. In the presentation speech, staff noted that the project should "assure a form of tourism development that integrates well into the existing environment and should give an example for future tourism schemes in Morocco". Transcript of Proceedings, dated February 3, 1976. 5/ PR, 1202-MOR, para. 40. The assumption apparently was made that in the absence of the project, middle income groups would occupy low income housing units. 6/ SAR, 1202-MOR, para. 4.09. - 3 - without offering numerical information, further disclosed that the infra- structure for the housing component would be provided at marginal cost.7/ 7. At the time of Board presentation, a land use plan and zoning regulations for the development of UAT were almost completed.!/ Completion of a detailed land use plan was expected by the end of the same year.9/ Enactment of the soning regulations was made a condition of loan effective- ness. The loan documents did not clarify the precise nature of these instru- ments of land use control, which contributed to the implementation delays.10, 8. The Societe Nationale d' Amenagement de la Bate d'Agadir (SONABA), a public sector agency set up in 1973 to promote tourism in the area, had primary responsibility for project implementation. Its shares are held the Government of Morocco (51%), BNDE (10%), CIH (10%) and other public or semi-public sector agencies. Other specialized government agencies (such as Public Works) were also involved in project implementation. For coordina- tion, the help of SONABA's Board of Directors (with representatives of all ministries involved), an ad hoc interministerial commission on Agadir tourism (chaired by the Minister of Tourism) and a local technical committee (chaired by the Governor of Agadir) was arranged.11/ II. PROJECT IMPLEMENTATION AND COSTS Implementation 9. Project implementation was beset by problems relating to SONABA's management and to interagency coordination, changes and disruptions in the government's management of the tourism sector and interference of local and 7/ SAR, 1202-MOR, Summary, iii. The inclusion in the project of a housing component and the lengthy discussion of its merits in the project docu- ments was controversial among Bank staff. Some staff expressed the opinion that the housing component should be "down played" and all references to it "as an integral part of the project (in terms of social benefits deriving from the alleviation of the Agadir housing shortage, or in terms of balanced urban planning and avoidance of 'tourist ghettos')" should be eliminated. Bank staff memorandum to files, dated November 12, 1975. 8/ PR, 1202-MOR, para. 41. 91/ PR, 1202-MOR, para. 51. 10/ PCR, 1202-MOR, para. 3.01. 11/ SAR, 1202-MOR, paras. 3.32-3.38. central authorities in SONABA's affairs.12/ The project coordinating mechanisms were not very effective. At appraisal, all project components were expected to be completed within five years after the loan agreement date (February 27, 1976), that is by early 1981.13/ Actual implementation took much longer and is in fact not yet completed. 10. The PCR notes that as of end 1981, which it (incorrsctly) takes as the projected completion date, about 75% of all infrastructure works (all project components except consulting services) were actually completed.14 / For June 1984, it records a 90% completion rate for UAT's infrastructure but no construction yet for UAT's common facilities; 100% completion of regional infrastructure, except for the fish unloading system; and completion of one of four scheduled studies.15/ To catch up with the delays on UAT's common facilities, the Bank proposed that the private sector (and not SONABA) take charge of their implemention, but at the time of the PCR's finalization, the matter had not yet been decided. So far, the time overrun on the entire project (including investments which are still expected to be implemented) is some 90%.16/ Adherence to good standards of phasing construction of hotels, homes and other buildings, to minimize disturbances to tourists, can contribute to further delays.17/ 12/ PCR, 1202-MOR, paras. 3.04-3.17 and Supervision Reports. 13/ SAR, 1202-MOR, Charts 1 and 2. 14/ PCR, 1202-MOR, para. 3.04. The Supervision Report dated October 30, 1981, Annex 3, reports, for approximately the same date, a completion rate of 80-95% for the infrastructure works exclusive of common facilities, and a 0% rate for the common facilities alone. 15/ PCR, 1202-MOR, para. 3.05. 16/ PCR, 1202-MOR, para. 3.13. 17/ A tourist resort has its own functional requirements, based on the essence of holiday making, and so has a construction site. The princi- ple of a recreational environment in a resort is incompatible with large-scale construction which generates noise, pollution, unsightly land and traffic. In fact, consumer protection acts in a number of originating countries require Tour Operators to inform holiday makers about such disturbances before a tour package is sold. Therefore, construction in UAT of residential housing and common facilities should be completed before UAT is marketed. On similar arguments, extreme care would have to be taken with the scheduling of construction of hotels, tourist apartments and any other facilities in the area. Bank staff disagree with the proposed system of construction and marketing because, in their view, it would be financially unfeasible and unlike most land development projects. -5 Costs 11. Total project costs were estimated at appraisal at about DR 157.9 million (USJ 41.2 million). Taking into account some modifications in pro- ject scopel8J/ and deletions of some items, and including costs for common facilitiesT9/ the project's revised overall costs could be in the order of DB 180-190 million, implying an overrun (in DH) of 15-20%. The revised costs in US$ would be in the range of US$ 35-40 million, implying an underrun (in US$) of some 5-15%, influenced by the steep devaluation of the DR since appraisal.20/ As UAT's common facilities have not yet been implemented, only about 80% of the revised total costs of course are "actual" at this time. In accordance with the project definition, project costs account only for the public sector's contribution zo UAT's development as a fully operational tourist zone. The private sector investments, in the order of five to eight times the public sector amount, are still outstanding.21/ Following the SAR's example, the PCR does not specify the infrastructure costs attributable to residential housing.22/ 18/ This was partly due to the preliminary nature of engineering designs at appraisal. Another change in scope was the inclusion in the project of a tract of land, designated by the letter R. At the time of writing the PCR, it was believed that section R would be available for hotel construction. This plan has now been abandoned and instead, R will be the location for more housing units. 19/ The PCR, 1202-MOR, does not take these costs into account when calcu- lating overall "actual" costs. The costs for the common facilities were estimated at appraisal around DH 35 million; SAR, 1202-MOR, para. 3.39. 20/ The PCR, 1202-MOR, provides no table of revised US$ costs. 21/ PPAM, 1202-MOR, para. 13. 22/ The audit attempted to calculate the costs of developing the sites for residential housing, based on the PCR's economic analysis (Annex IV, Table 1 of PCR), which gives the economic costs in 1983 prices for UAT's entire infrastructure works (including the not yet implemented common facilities) and the revenues from residential land sales. SONABA was to make charges for land that reflected all its costs and some margin of profit. For reasons unclear, however, the PCR table shows total UAT infrastructure costs (for tourism and housing combined, including land and common facilities) in the order of DH 174 million, and revenues from residential land sales alone in the order of DH 225 million. The numbers are seemingly mismatched, leaving not only unresolved the question about the cost of sites for housing, but also raising questions about UAT land pricing policies, cross-subsidies from the housing to the tourism sector and the accuracy of data used in the economic analysis. Refer also to PPAM, paras. 28-30. -6- Disbursements 12, The Bank loan in the amount of US$ 21.0 million was at appraisal expected to be fully disbursed by December 31, 1981. Because of slow project progress, actual disbursement at that time was only about US$8.7 million or 44% of the appraisal target.23/ During the ensuing 12 months, the situation did not improve markedly, and the Bank's offer for a formal extension of the closing date to December 31, 1982 on condition that the borrower agree to an action plan for project completion, sale of land and other measures24/ was not taken up by the borrower. No formal extension took place, but the full loan account was anyhow kept open until December 31, 1982, when the undisbursed balance, about US$ 10.9 million, 52% of the original loan amount, was cancelled. Private Sector Investments 13. The pace of private sector investment in tourism facilities and housing was also slow due to SONABA's inability to make much progress on land sale and issue construction permits. Initially, this was the result of SONABA's inexperience in performing these functions and legal compli- cations25/. Subsequently, and more importantly, it was the result of vari- ous forms of outside interference (by central and local authorities and others) in management decisions over land use, project design and land sales policies. By mid-1981, some three years after construction was supposed to have started, only a small fraction of land earmarked for commercial devel- opment (about 10% of the land for hotels and 0.3% of land for apartments and other commercial uses), but a much larger percentage (56%) of land for indi- vidual housing had been sold.26/ The supervision mission explained that "completely absorbed by the selling procedures of residential land for indi- vidual dwellings, SONABA ... paid little attention to selling land for other usage ...".27/ By end-1983 the numbers had moderately edged up (to 22%, 0.4% and 64% respective:y).2o/ By end-1985, at the time of the audit mis- sion, they had improved further (to 44%, 0.4%-unchanged--and 84%, respec- tively) though they have still a long way to go.29/ 23/ The figures listed in the Supervision Report dated October 30, 1981 (Annex 4), refer to September 30, 1981. No further updates were provided in the operational files. The PCR itself gives no information about the phasing of actual disbursements. 24/ Bank letter to borrower dated December 3, 1981. 25/ PCR, 1202-MOR, paras. 4.03-4.04. 26/ PPAM, 1202-MOR, Annex 1, and PCR, 1202-MOR, para. 4.05. 27/ Supervision Report dated March 6, 1981, Annex 5, para. 11. 28/ PCR, 1202-MOR, Annex II. 29/ PPAM, 1202-MOR, Annex 1. - 7 - 14. Outside influences30/ on the project became strongly felt some time after 1981, resulting in the temporary suspension of land sales and the stoppage of (the limited housing) construction in the area until the King's architect had performed a "general revision" of the land development and architectural plans.31/ During the audit mission in late 1985, no cons- truction permit had yet been issued for any tourist facilities, and cons- truction of individual homes was limited to a small single digit number of units. However, it was hoped that project progress could be resumed in 1986. The architect became involved in the project because of construction of a new Royal Palace next to UAT, with completion scheduled for end 1985, according to informal sources. 15. One outcome of the revision of land development and architectural plans was the virtual spatial segregation of residential housing from UAT's other sections, primarily aimed at the tourists, contrary to the concept elaborated at appraisal of mixing them freely up. UAT's new development plans, while still awaiting final clearance and elaboration of details, now show two distinct zones: one zone adjacent to the Royal Palace and golf course, exclusively residential and occupying an estimated 40-45% of the UAT area (including zone R); and the other zone, farther away, primarily for the tourists, occupying some 55-60% of the land. If this spatial arrangement had been foreseen at appraisal, it might have been difficult to rationalize financing of residential housing (for middle and upper income families) under the Bank loan.32/ 16. The project delays adversely affected SONABA's finance and project economics, as noted in the PCR33/. Whether and to what extent the delays actually held back the construction of tourist accomodation in Agadir and left tourism demand unsatisfied, is less clear. Temporarily unable to develop UAT land, hotel investors built on still vacant land on the fringe of the project area (but still within the city boundaries) and so increased 30/ The PCR, 1202-MOR, and project files give only a partial account of these influences and how the Bank responded to them. 31/ PCR, 1202-MOR, para. 4.06. Among the functions which the architect performed was the drafting of new architectural plans for UAT's entire beach front area. The plans were not yet completed at the time of the audit mission. 32/ The audit was informed that a typical single unit home in UAT will carry a price tag of no less than US$40,000-US$50,000. Such prices, taken in the context of Morocco's per capita incomes, not only indicate that UAT housing is indeed reserved for middle and upper income families, but also that it is difficult even for middle income groups to finance a UAT home. 33/ PCR, 1202-MOR, para. 4.06. - 8 - Agadir's capacity from about 3,000 beds in 1976 to about 11,800 beds in 1985, a remarkable increase of almost 300% in less than ten years.34/ More new hotels (outside of UAT) are under construction. The new capacity out- side UAT presumably substituted for UAT which was not forthcoming. If this is so, of course, one could query whether UAT's original timing was appro- priate. III. TOURISM DEVELOPMENT 17. The project demonstrates shortcomings in the analysis of Agadir's future travel demand. Shortcomings of this kind are almost characteristic of international tourism.35/ While the appraisal made crude statements of arrivals and bed-nights (for both Morocco and Agadir), it was short on other demand statistics, and it analyzed p"tential structural changes and trends in the international tourism demand only superficially.36/ Project super- vision recognized the need for a better understanding of Agadir's future demand,37/ in particular as the project was slipping, but coverage of this topic was considered as outside its terms of reference. The PCR, concen- trating on past project performance and highlighting repercussions from project delays, also did not elaborate on the topic. The issue of Agadir's future demand, of course, is still alive as UAT is not yet fully developed 34/ SAR, 1202-MOR, para. 4.12, Table 5 and PPAM, 1202-MOR, Annex 2. In 1983, Agadir accounted for about 25% of the country's bed capacity in classified hotels; refer also to PPAM, 848/1279-MOR, para. 7.-- Financing of this expansion of Agadir's capacity represented a major share of CIH's lending activities in these years. Refer to PPAM, 848/1279-MOR, paras. 34-35. 35/ International tourism relies frequently on inadequate demand data and information. Planning, financing and supply of tourist facilities is often being undertaken with incomplete knowledge and understanding of the tourism markets. Even very basic statistics, such as the recorded tourist departures from tourism generating countries and the arrivals in receiving countries, tend to show deficiencies, despite efforts at improvements by individual governments and international tourism bodies, such as the World Travel Organisation (WTO) and tourism committees of the OECD and the European Economic Community (EEC). 36/ The Third Bank loan to CIH (1279-MOR), made in 1976, shared the same information on tourism demand. 37/ Refer, for example, to Supervision Report dated March 6, 1981, Annex 6. - 9 - and the demand analyses are now obsolete, which implies that an update of the earlier studies should be undertaken as a matter of high priority.38/ 18. Drafting of terms of reference for a new demand study are outside the scope of this report. However, in the audit's view, explicit coverage should be given in any new study to two key determinants of the demand, leisure time and discretionary incomes of prospective visitors. Agadir, and Morocco in general, are tourist destinations linked to several countries which are approaching their ceilings for international travel. The resort depends heavily for tourists on European countries, of which France, the FR of Germany and the United Kingdom (UK) more recently (1984) accounted for almost three quarters of its international visitors.39/ Already in the mid-seventies, this dependency existed40/ and should at appraisal have resulted in an analysis of these countries' ceilings for foreign travel.41/ In 1976, actual foreign travel in most of these countries42/ reached 40-50% of their capacity for foreign travel,3/ with levels in the UK and Fra ce considerably higher (87% and 72%, respectively).44/ These numbers appar- ently left less room for growth of Agadir's tourism market than the project might have relied on, and they call into question the appraisal's comments about the low vulnerability of Agadir's tourism market45/. 38/ In this context, refer also to PPAM, 848/1279-MOR, paras. 39 and 44, which discusses a larger CIH role in undertaking market analyses for hotel investments. - Bank staff are not fully convinced of the need for new demand analyses for Agadir. In their view, a much better approach to "test" the market would be an offer of land sale under a "well thought out sales/marketing policy as soon as possible." To this, the audit notes that the private sector is known to have made hotel over- investments in the past. Further, in the audit's view, an update of the demand analyses might be needed for a review and possibly modifica- tion of the land use plan for the commercial/tourism sector. 39/ PPAM, 1202-MOR, Annex 3. 40/ PPAM, 1202-MOR, Annex 3. 41/ This exercise could have curbed the high expectations which came out of unmodified linear extrapolations of past trends (annual growth rates of 21% for arrivals and 33% for bed-nights in Agadir in 1970-1974). Though steady growth of travel demand in Morocco/Agadir has been recorded in recent years, it has been insufficient to repeat the trend of the early seventies. 42/ Statistics about these countries are primarily compiled by OECD and EEC. 43/ Refer to PPAM, 1202-MOR, Annex 5. 44/ PPAM, 1202-MOR, Annex 5. 45/ SAR, 1202-MOR, Annex VI, para. 9. - 10 - 19. The same numbers also could suggest that the PCR's optimism about further growth may be unfounded and that the issue of overcapacity, well known in the Moroccan tourist industry,46, could surface in Agadir. Because of consistent growth over the last 20 years, the PCR concluded that there was "no reason to expect a slowdown in past trends".47/ If the earlier demand data were confirmed under a new study, any growth in Agadir's number of beds of more than 5% annually after 1986, a likely development, would imply that Agadir's capacity would outpace the demand from the tradi- tional countries within a few years.48/ This would have to be countered by generation of new demand, either from countries where the potential for tourism growth is still large or through agressive marketing in traditional markets and a progressive tourist product policy. Otherwise, Agadir might have to adapt to a reduced capacity utilization. 20. The discretionary incomes of traditional Agadir tourists seemingly face no immediate constraints. On the contrary, leisure spending in western industrialized countries seems to grow steadily, signalling an increased demand for more expensive holidays. However, this does not imply an oppor- tunity for a simple increase of tariffs in the destination countries, but rather a challenge to create new recreational services which lead to new tourist expenditures. Demand for new services could run parallel to a grow- ing disenchantment with resort tourism and even perhaps with the seaside holidays, which have been typical for Agadir and, for some time, the inter- national norm.49/ 21. The pricing of Agadir relative to the Canaries, its principal competitor (70,000 beds against Agadir's 12,000), has completely changed since the mid-seventies. Whereas at that time Agadir was some 50 to 100 per- centage points above the price level of the Canaries, it is now some 40 points below. In fact, Agadir is currently only about 10 points over the price level of Tunisia (Djerba) despite the Moroccan resort's definite cli- matic advantages.50/ Agadir's current prices, which are nominally at about the 1975 level, are kept low even though the peaks in demand cannot be fully accomodated. What this means is not fully clear, but the data could suggest one or more of the following: (i) Agadir's pricing structure is not ratio- nally developed; or (ii) Agadir cannot sustain the Canaries' price level 46/ Refer to PPAM, 848/1279-MOR, para. 8. 47/ PCR, 1202-MOR, para. 4.08. 48/ Refer to PPAM, 1202-MOR, Annex 5. 49/ Purchase of second homes (for retirement and vacation) and boats in tourist destinations, for example, are becoming major expenditure outlets of the trend setting social groups, absorbing an increasing proportion of their holiday budgets and time. 50/ For the 1985/86 winter season, a ground-arrangement price for a one-week stay in Agadir is quoted at US$125-140, against a price for the Canaries of US$412-450. - 11 - because of marked differences in holiday makers' preferences for the two locations; or (iii) the costs of the Moroccan tourist industry are low, possibly as a result of the prevailing tourism incentive and subsidies system5l/. One factor bearing on how the tourist perceives potential destinations could be the resort promotion which in case of the Canaries is far more agressive than in case of Agadir.52/ IV. TOURISM AND HOUSING 22. The project interpreted the social (or sociological) element underlying the integration of tourism and housing in a simplistic manner. Co-existence of foreign tourists and local residents in a joint physical setting was expected to promote social interaction, a social concept per- ceived as being desirable.53/ In the audit's view, the social content of tourism projects indeed needs careful evaluation; but physical proximity, as expressed in UAT's original zoning proposal, is not necessarily required to achieve the interaction. As the project was designed, it had not only the potential for generating social benefits, but social damage as well. The project concept of spatial integration of tourism and housing was experi- mental, in the audit's view, and not unavoidable. Social (and even other) reasons were not compelling to combine a housing with a tourism component in the same location, and even not to combine a tourism component with a hous- ing component in the same project, despite arguments made to the contrary in 51/ PPAM, 1202-MOR, paras. 28-30. To Bank staff, the weakening of Agadir prices is a serious development. However, they caution against conclusions until prices have been disaggregated into travel, hotel and related expenditures. Such a breakdown of prices was unavailable to the PCR and audit. 52/ PPAM, 1202-MOR, Annex 6. To Bank staff, lack of advertising efforts (referred to under PPAM, Annex 6) does not necessarily indicate that Agadir's marketing program is ineffective. - Insufficient promotion of other Moroccan tourist destinations, in particular to counteract weak off-season demand, is also mentioned in the audit of the CIH loans (PPAM, 848/1279-MOR, para. 6). 53/ Bank staff informed the members of the Board during discussion of Loan 1279-MOR that the Bay of Agadir development "mixes the tourists and the local residents into what" they thought would "be a meaningful inter- change". Transcript of Proceedings, dated May 28, 1976. The project also intended to "stimulate social activities" within UAT on the basis of a plan, which SONABA was to prepare and discuss with the Bank within four years of loan signing. Refer to SAR, 1202-MOR, para. 3.35(v). - 12 - the appraisal.54/ UAT's original zoning plan has now been revised, intro- ducing a considerable degree of spatial segregation of tourism and housing, though it is not fully clear why the change in plan has occurred. 23. The experience with UAT and tourist resorts elsewhere suggests extreme care in attempts at physically "integrating" resort facilities with local environments. If in doubt, proven "traditional" approaches should be chosen, in particular when the scope of the tourism sector has the potential for overwhelming the local sector and when lifestyles and needs of tourists and local residents are far different. A traditional approach to the phy- sical setting may even entail a buffer zone, with low levels of activities, between the areas for tourists and local residents. Social interaction can be achieved through provision of common facilities, placed for example in the town center, for the common use of the two social groups. A modern housing development may have little appeal for foreign visitors seeking a traditional environment characteristic of the values and lifestyles of the host country, unless the housing is meant to accommodate the visitors. When large resort facilities and local habitats are nonetheless interlaced, special safeguards may be needed to preserve the recreational character of the former and prevent the imposition of undesirable regimens on the latter; otherwise, social interaction can turn into social friction. V. ECONOMIC REEVALUATION 24. At appraisal, the public sector investments in UAT were expected to produce an economic rate of return (ERR) of 17%. Gross operating profits (gop) of tourist facilities, based on a 1972 tourist expenditures survey conducted at similar Moroccan locations and other destinations,55/ were defined as the project's (gross) benefits. Bed occupancy was projected at 50% in UTA's first year of operation, rising to 60% in the third year to stay at this level for the next some twenty years. Further, the appraisal calculated the ERR for one of the project roads, 28%, and for the entire project, 19%, and made estimates of the balance of payment, employment and budgetary effects. 54/ The argument made by Bank staff (PPAM, para. 5, footnote 4) that the mixed residential/tourism areas were needed to stimulate "lower level tourism establishments (two star hotels, pensions and apartment hotels)", which in turn could help to strengthen tourism demand, seems debatable. The argument made that the housing component was a priori needed for SONABAS's financial viability is not supportable. Under the original project schedule, land sales for tourism /commercial establishments were to proceed rapidly, in which case SONABA's cash flow would have been adequate. Further, the project was supposed to eliminate subsidies (in land sales) to the tourism/ commercial sector; if this objective had been achieved, there also would have been no need to strengthen SONABA's finances through revenues from the residential sector. 55/ SAR, 1202-MOR, para. 2.09 and Annex VIII, para. 4. - 13 - 25. The PCR made an attempt at recalculating the ERR for the UAT investments, correctly noting that this was not an ex-post analysis as full implementation (which includes private sector investments) was years behind schedule. The occupancy rates were assumed to be 50% in the first year in which a hotel was put on the market and a (questionably high) 70% after the second year.56/ The result of this attempt was a 13% ERR. However, the PCR based its calculation on the assumption, no longer justified, that the subzone R57/ would be available for tourist hotels and apartments, and, having been written in early 1984, it also did not anticipate the project delays which have since occurred. Adjustment for these two factors mar- ginally lowers the PCR's economic return to about 12%.58/ 26. Another adjustment in the PCR's economic analysis might have been necessary on methodological grounds. To capture the contribution of the housing sector to the project economics, the PCR included (the full) reve- nues from land sales in the project's benefit streams.59/ This methodology could have been appropriate, if the revenues represented creation of national wealth, in this case, an increase in Agadir's housing stock. How- ever, so far, little such economic wealth has been produced by the housing component as virtually no housing construction has yet taken place and, therefore, the revenues are only money transfers (which do not count as eco- nomic benefits).60/ Nonetheless, such adjustments have only a marginal effect on the ERR of this project, as only relatively small amounts (in com- parison to aggregate benefits and costs) are involved. 27. Whatever the ERR recalculated at present, the project economics are highly uncertain. Major sources of uncertainties, already mentioned, are UAT's final date of completion and the level and structure of tourist demand. Further, UAT's ultimate capacity (measured in beds or otherwise) and its phasing has by no means yet been determined, and neither has been 56/ PCR, 1202-MOR, Annex IV. 57/ PPAM, 1202-MOR, para. 11. 58/ The reason why shifts of hotel investments and tourism benefits to later years have relatively little influence on the ERR is the comparatively small size of the upgront infrastructure investments. Of much greater significance would be a reduction in bed occupancy rates or gross operating profits. A drop o" either of them by 15%, for example, would further lower the ERR to about 10%. - Elimination of housing benefits and (what may be assumed to be) the housing costs from the ERR calculation, does not appreciably lower the ERR for the tourism component alone. This contradicts the impression created in the SAR, that the housing component would really bolster the economics of tourism investments. 59/ PCR, 1202-MOR, Annex IV, Table 1. 60/ PCR, 1202-MOR, Annex IV, Table 1. Housing benefits were claimed for the years in which payments for land were made. - 14 - the product which will be sold in the tourism market. What (gross or net) operating profits are attainable remains also to be seen. A 1978 Tourism Expenditure Survey on which the PCR based its estimates of these profits,61/ is unlikely to predict very well tourist expenditures which may not even start until some 9-10 years later (at the earliest about 1987). Hotel investment cost estimates also seem debatable. A further source of uncertainty is the tourism incentive/subsidies system, discussed below.62/ In light of these uncertainties, any current forecast of the ERR can be subject to a wide margin of variation, and the "actual" ERR, to be even- tually calculated, could show anything between a very viable and submarginal project. What seems reasonably clear, at present, is that many years will pass until the tourism component (without the housing component and regional infrastructure) will generate positive net benefits for the Moroccan econ- omy. If the PCR's reestimates of benefits and costs should become true, the tourism component would have continuous negative net benefits (total bene- fits minus total costs) during the first 15 years of its life (from 1976, the year of inception, to the early 1990s), which is a most unusual and unwelcome feature of a development project.63/ VI. TOURISM INCENTIVES 64/ 28. The SAR had reported the Bank's concern, voiced on various occa- sions, about overly liberal investment incentives which could lead to exces- sive hotel capacity.65/ The 1973 Investment Code, which was in effect at 61/ PCR, 1202-MOR, Annex IV. - At the Board meeting for CIH Loan 1279-MOR in 1976, one speaker asked questions about net foreign exchange earn- ings from tourism. Bank staff informed him that available statistics had "limited accuracy", but that the project was to "improve just those statistics", Transcript of Proceedings, dated May 28, 1976. 62/ PPAM, 1202-MOR, paras. 28-30. 63/ Even including the housing component, only three of the 15 years are marginally positive. PCR, 1202-MOR, Annex IV. 64/ The issue of tourism incentives is a recurrent theme. When CIH Loan 848-MOR was approved in 1972, members of the Board raised many ques- tions about the degree of subsidization, the risk of overinvestments and coordination of tourism policies in the Mediterranean region. The same issue resurfaced again in 1976 when the Board discussed the follow-up Loan 1279-MOR. Refer to Transcripts of Proceedings dated June 29, 1972 and May 28, 1976. For a broader discussion of the issue of incentives in the context of Morocco's entire tourism sector, refer to PPAM, 848/1279-MOR, paras. 9-19. 65/ SAR, 1202-MOR, para. 2.12. - 15 - that time, granted hotel investors (M) ten-year income tax exemptions and other forms of fiscal relief, (ii) interest-free advances of 15% of the investment (excluding land) repayable over five years after a five-year grace period, and (iii) interest rebates on CIR loans, reducing the CIH statutory rate of 8.5% at the time of appraisal to 4.5%. A typical Moroccan hotel was financed with 30% equity, a 55% CIR loan and the 15% government advance. The project contained no provisions for modifying the incentive system, but referred to an upcoming new Bank loan to CIH which would aim at improved CIH loan appraisal procedures and a new effort at improving tourism statistics, which would reduce, it was hoped, the risk of support to mar- ginal hotel ventures.66! 29. The Bank's 1984 Morocco Financial Sector Study67! noted that investment incentives, as revised in the 1983 Tourism Investment Code, were still an issue because of excess hotel capacity in many parts of the country and the government's tight budgets. The 1983 revision of the code kept many of the basic provisions, referred to in the appraisal, substantially unchanged. The sector study proposed that the incentive regime be gradually reduced and other measures be taken to make the sector less dependent on financial government support. If adopted, these recommendations could lead to a weakening of hotel investors' high demand for UAT land, possibly lead- ing to a much longer phasing in hotel construction than envisaged at appraisal or even at present. There also could be more pressure on hotel profits, with somewhat unclear effects on the necessary adjustment in Agadir's tourism product and the targeting of tourism markets. All this raises further questions about how UAT should and will be developed, how Agadir's tourism demand will actually fare and what the economic results will be. 30. SONABA's pricing of serviced land could be another source of subsidies to the hotel sector unless corrected in accordance with the provi- sions of the project. As noted above, SONABA was to eliminate such subsi- dies68/ and make charges which would produce a positive financial return on the investments. On the information furnished by the Audit Bureau MEGA, Casablanca,69/ transaction prices of hotel lots so far70/ have not fully 66/ SAR, 1202-MOR, para. 2.12. 67/ Report No. 4957-MOR. See Chapter X, paras. 10.1-10.17. 68/ At appraisal, land prices in the Agadir area were "strongly biased in favor of hotel investors" and contained "a high subsidy element". The project was "intended to correct this situation." Refer to Bank memo- randum, dated November 30, 1975. 69/ Refer to Comptabilite Analytique and, in particular, to Commentaires du Bilan et Pieces Annexes, 1984. 70/ For an end-1985 status of land sales, refer to PPAM, 1202-MOR, Annex 1. - 16 - covered costs, including costs resulting from the modifications in infra- structure works during implementation.71/ Even if they had, they would not have incorporated the costs to SONABA resulting from the still continuing project delays, and there remains the question how the cost of UAT's still not implemented common facilities will be passed on to the land buyers. Reduction or elimination of subsidy elements in land pricing is another factor of uncertainty in Agadir's future development. 71/ Catching up with continuously changing site development costs is, of course, also a difficult exercise. From 1978 to 1984, the price index of land calculated by SONABA has moved up in the following manner (1978 = 100): hotels, 119; residential housing, 114; apartments, 103; commercial activiLles, 142; public use, 133. MOROCCO BAY OF AGADIR TOURISM PROJECT (LOAN 1202-MOR) Development of UAT Land Sales (Status as of 1981 /a and 1985) Actual Sales per September 30 Total Land Offer Percentage of Sales Number of Surface Number of Surface Number of Surface Land Use lots ('000 m2) lots ('000 m2) lots ('000 m2) 1981 1985 1981 1985 1981 1985 1981 1985 1981 1985 1981 1985 I Individual housing 642 933 166 282 938 1,010 299 327 68.5 92.5 55.5 86.0 Hotels 18 26 33 190 161 - 380 436 /b 12.0 - 10.0 43.5 Apt. buildings 1 2 0.7 1 52 - 330 316 2.0 - 0.2 0.3 Commercial activities 1 1 0.05 0.05 - 3 45 34 - - 0.1 0.1 Public - - - - - 17 206 206 - - Total 204.75 473.05 1,260 1,319 16.3 35.8 /a SONABA had to temporarily discontinue the sales in 1981. /b Incl. Section "D" (beach front) with 17 ha. (39%) of the surface earmarked for hotels. Source: SONABA MOROCCO DAY OF AGADIR TOURISM PROJECT (LOAN 1202-MOR) Crowth of Agadir Tourist Traffic (Main Sectoral Indicators) Agadir International Agadir/Morocco (A/M) Agadir Bed Capacity Year Arrivals Bed Nights Arrivals ('000) Bed Capacity '000 Index ARG /a 1000 Index ARC /a Beds Index ARC /a Morocco A/M share Morocco A/M share in 2 in 2 1970 46 100 - 166 100 - 740 100 - 700 6.6 36,000 2.06 1974 119 259 21! /b 691 416 332 /b 2,806 379 312 /b 1,052 11.3 40,000 7.02 1980 261 567 122 71 2,109 /e 1,270 17% 7 9,421 /f 1,273 18! 7c 1,206 23.8 53,400 17.60 1984 328 713 5% 71 2,669 7e- 1,608 5% 7 11,763 7f 1,590 5% 7 1,335 24.6 61,100 19.30 1974-84 - 276 11% - 386 131 - 419 141 1970-84 - 713 15! - 1,608 21% - 1,590 21% /a ARC - Average annual rate of growth. /. Bed nights of nationals, 208,000 and 1970-1974. 250,000, respectively, not included. 1974-1980. If Of which in apartment houses and clubs/ 1980-1984. vacation villages 4,000 and 6,500 beds, respectively. Source: SONABA. NOR~CC BAY 0? AGADR TOURISH PROJECT (LOAN 1202-NOR) Noroccan International Tourlsm (Arrivals) by Countries of Origtn 1974 1980 1984 1974 - 1984 i Å Norocco Agadir Norocco Agadir morocco Agadir Norocco Agadir x X CR f_a 2 share Ci t share C 2 share CR s share CR s share CR t share Ci _ t CR + 2 1. r 20.6 F 42.0 F 28.2 p 38.8 F 27.4 p 34.3 E 145 UK 440 2. USA 16.5 D 12.9 UK 10.9 Se 18.5 E 12.9 D 24.6 Tun 107 /b D 427 3. Alg 14.1 Cu 10.6 E 10.2 D 14.9 UK 10.8 UK 13.5 p 69 Se 418 4. UK 10.3 UK 6.9 D 9.8 UK 9.6 D 10.0 Se 9.6 Se 63 I 190 5. D 7.8 BML 5.8 USA 5.2 BNL 8.0 USA 7.8 BNL 5.2 UK 34 BmL 146 le 6. a 2.8 USA 5.8 Se 5.0 CN 3.8 Tun 4.7 I 3.7 D 24 v 125 7. BL 2.6 Se 5.2 BL 4.9 sc 3.6 CR 3.1 BUL -25 CR -21 _d 8. Se 2.5 I 3.5 TIn 2.5 BmL 2.9 USA -40 a outrY of resdence (CR)t Prance (F), United Kingdom (UK), FR of Germany (D), Spain (2), Benelox (BNL), Scamdinavia (Se), Suitzerland (CR), Italy (I), Algerla (Ala), fmtsia (Tun). I=crease of 107 over 1980. In 1974-1980, there vas an increase of 2042; in 1980-1984, there was a decline of 58%. The traffic frm Sdtzerland decreased at that rate between 1974 and 1980; the 1980 and 1984 traffie levels øere the same. Soure: SONAMA. MOROCCO BAY OF AGADIR TOURISM PROJECT (LOAN 1202-MOR) Travel Demand originating from Leading European Countries /a Travel Propensity - Development (Z) International Travel Expen- ____________________________________ _______________________ditures 1962 In US$ /1 Generating 1965-1967 1976 - 1978 1983 Popula- tion World Ranking Ountries covered Per one of X share Abroad Outside trip of Tear Net /b Year Net /b Gross Abroad Net /b Groes Total Europe average Per in- total /c /d /C /d /d Total bab. /e FR of Germany 1966 39 1978 56 67 30 55 66 37 2.5 over 1.000 1. 6. 21.0 14 yrs Austria 1969 40 n.a. n.a. n.a. n.a. 48 68 38 3.2 over 1.700 9. 2. f 3.5 14 yrs Switzerland 1969 57 1976 70 107 n.a. 84 162 /h 50 3.0 to 800 1'. 1. 2.9 75 yrs Belgium 1966/67 34 1976 47 63 35 52 65 45 1.7 total 660 10. 4. 3.4 France 1964/65 41 1978 54 90 15 58 104 21 1.7 total 660 3. 21. 6.1 Netherlands 1964/65 54 1978 58 77 47 65 80 58 1.7 to 520 6. 7. 4.7 75 yre U.K. 1966 60 1978 61 86 16 59 87 34 3.1 over 272 /f 5. 25. 5.3 16 yrs Denmark 1967 66 1976 58 71 26 62 75 34 3.1 over 880 16. 8. 1.7 16 yr. Sweden 1967 77 1978 81 n.a. 37 83 a.&. 42 2.8 15- 550 13. 12. 2.1 65 yrs /a The difficulties of producing reliable and useful date on international tourist demand are considerable. It is even more difficult to quantify the overall tourist demand consisting both of domestic and international travel. Domestic/national tourism is a decisive component both for setting the limits for tourism demand in general and estimating potentials for travel abroad. Data on national tourism are recorded in surveys carried out by origin countries. The data in this table show, despite the non-uniform methodologies, the demand for domestic and international travel weighted by population in the origin countries. The residual potentials of tourist demand are implicit those numbers (ceiling - 100). /b Net travel propensity - number of persons who have /f 1984. made at least one trip from home per 100 (mostly over 14 years of age) population. Ll USA ranking - total: 2 (in 1970 - let); per head: 34; X share: 11.0. /c Gross travel propensity - number of trips in relation to population. /h 1980. /d Gross propensity to holiday abroad the - proportion of /I Balance of Payments Yearbook, computer tape 1983, IMF; all holidays taken abroad to population. Tourism and International Tourism in OECD Member Countries 1983. Ie Total population covered. Source: Audit Mission. - 21 - ANNEX 5 Page 1 of 2 MOROCCO BAY OF AGADIR TOURISM PROJECT (LOAN 1202-MOR) Growth Rates and Ceilings to Foreign Travel Ceilings to travel imposed by both leave periods available and population growth/decline are calculated from data on domestic and foreign travel. The results of the calculation for 1976 are: 1976 penetra- Ceilings /c tion level /d Origin Leave Nominal for foreign Countries periods /a weeks travel million available available /b (million weeks % (weeks) (million) weeks) abroad /e FR of Germany 4.4 273 102 47.5 47 France 4.8 254 28 20.1 72 Netherlands 4.7 66 24 11.6 48 UK 3.3 185 27 23.5 87 Belgium/Lux. 4.9 49 25 9.9 40 Austria 4.9 39 17 9.3 55 /a Assumes that one-third of public holidays are available for use on holiday trips. /b Leave periods x population. /c Nominal weeks reduced by allowance for non-travelling population and a shift from domestic to foreign travel. /d "Penetration levels" measure travel/holiday time spent abroad as a percentage of the ceiling for foreign travel. /e Figures from national surveys and 1977 OECD statistics. - 22 - ANNEX 5 Page 2 of 2 The ceilings to foreign travel will be reached in 1990 if foreign travel grows (in aggregate) at those rates: FR of Germany 6.5 - 9% p.a. Netherlands 7 - 9% p.a. Belgium 6.5 - 8% p.a. Austria 5 - 6.5% p.a. Since the penetration levels of UK and France were already very high in 1976 (87% and 72%, respectively), ceilings in these countries are about to be reached in the very near future. The growth rates of foreign travel are likely to be affected by the foreign travel ceilings already before 1990 since the demand usually tapers off as the ceilings are approached. By 1990, the demand for foreign travel can be expected to reach (in aggregate) the following percentages of the ceiling (100%): PR of Germany 93% Netherlands 76% Belgium/Lux. 88% Austria 100% (USA) (84%) Source: Audit Mission. - 23 - ANNEX 6 Page 1 of 2 MOROCCO BAY OF AGADIR TOURISM PROJECT (LOAN 1202-MOR) Marketing of Aadir in Europe A. Survey Layout The audit surveyed fourteen European Tour Operators in six countriesl/ to analyze the marketing of Agadir relative to other comparable destinations. The inquiries focused on: (a) retail prices to be paid by the holiday makers and (b) efforts at promoting the resorts. The tourist destinations analyzed were: Temperature Zone Dec.-March Fare in US$ Locations A 300 C 700 - 950 Caribbean I., Maldives I., Kenya, Seychelles B 220 C 400 - 440 Canary I., Agadir, Madeira C 160 C 365 - 400 Tunisia, Cyprus B. Retail Prices The comparison between competing destinations was mde on the basis of equivalent vacation packages outside the Christmas and New Year periods. The retail prices of the Canaries, Agadir's main competitor, were set at an index of 100. 1985/86 Destination Price Index Zone Canary Islands 100 B Agadir 58 B Madeira 88 B Caribbean Islands 115 A Maldive Islands 92 A Kenya 88 A Seychelles 100 A Tunisia 48 C Cyprus 45 C All surveyed Tour Operators (wholesalers) confirmed that both Agadir (12,000 beds) and the Canaries (70,000 beds) had remained seller's markets for winter season 1985/86. Both destinations operated in 1984/85 at between 95 and 100% of hotel capacity, except Las Palmas, the capital of Canaries. 1/ FR of Germany - D, United Kingdom - UK, France - F, Switzerland - CH, Austria - A, Scandinavia - Sc. - 24 - ANNEX 6 Page 2 of 2 The price index for the Caribbean region is not fully comparable with those of the other destinations because the region's rates include use of in- and out-door sport facilities and are subject to the influence of the US market which shows in general a higher price level than that of Europe. Otherwise, price information on all destinations with the same climate-appeal is comparable. The table indicates that Agadir is priced 42% below the Canaries. The price relative for 1974 was reversed (SAR, Annex VI, page 9). At that time, the Canaries were priced 48% below Agadir in France, 36% in FR of Germany, 50% in Scandinavia, and 61% in Belgium. C. Promotions The main vehicle for bringing travel packages to the attention of European holidaymakers is the travel brochure. Almost two-thirds, measured in number of pages, of the presentations reviewed by the audit are devoted to the Canaries and the Caribbean Islands. Agadir is vastly underpresented--with 5% of the pages analyzed against 18% of the beds offered. Origin Countries Destination D UK F CH A Sc Average Agadir 6 5 5 5 6 5 5 Canary Is. 45 /a 40 16 36 40 59 42 Madeira 6 6 7 9 9 2 6 Caribbean Is. 17 /a 20 32 23 21 18 21 Maldive Is. 4 3 3 6 2 - 3 Kenya 7 5 5 6 9 4 6 Seychelles 3 5 10 5 2 2 4 Tunisia 7 9 19 6 9 5 8 Cyprus 5 7 3 4 2 5 5 Total (%) 100 100 100 100 100 100 100 Share of the sample (%) 22 16 13 15 10 24 100 /a Excluding special brochures. - 25 - PROJECT PERFORMANCE AUDIT MEMORANDUM MOROCCO SECOND AND THIRD LOANS TO CREDIT IMMOBILIER ET HOTELIER (CIH) (LOANS 848-MOR and 1279-MOR) I. PROJECT OBJECTIVES 1. Credit Immobilier et Hotelier (CI) was established in 1920 primar- ily to finance residential construction. Since the 1960s it has become the main institutional source of long term finance for commercial tourism devel- opment in Morocco. About 55% of its share capital is now owned by the Mbroccan public sector, with local commercial banks and insurance companies holding most of the private shares. 2. The objectives of the two loans under review, implied under CIH 111/ and made explicit under CIH III,2/ were: (i) to finance the import component of Moroccan hotel construction and therefore encourage other for- eign lenders to do likewise; (ii) to help strengthen CIH's appraisal and supervision capabilities and financial position; and (iii) to assist the government in devising a tourism development program through improved data collection, regional planning, and economic analysis of incentives policies. II. TOURISM SECTOR ISSUES The Tourism Sector 3. Morocco is endowed with extensive beaches along the Mediterranean and Atlantic coasts and with cultural attractions such as the former imperial capitals of Fez and Marrakech. The country's tourism sector accounted for about US$500 million, or 12.4% of its gross foreign exchange receipts from goods and services in 1984. The import component of tourist expenditures has been estimated at only 10%, resulting in net foreign exchange receipts of US$450 million in 1984. In 1982, it was estimated that the tourism sector accounted for 8% of GDP and 72,000 jobs--12% of manufacturing sector employ- ment. The hotel industry, which absorbs just 60% of tourist expenditures, employed 24,000 people, while about 48,000 were employed in ancillary activi- ties, such as handicraft production, restaurants, transport and travel ser- vices, etc.3/ In 1980, the cost per direct job created was estimated to be US$30,000 for CIH's hotel projects4/ compared to US$41,400 for medium and large industries. 1/ Staff Appraisal Report (SAR 848-MOR), dated June 1, 1972. All hotel development loans to CIH are hereforth referred to in the main text under their roman numerals. 2/ Staff Appraisal Report (SAR, 1279-MOR), dated April 30, 1976. 31/ Project Completion Report (PCR, 848/1279-MOR), para. 2.06. 4/ Staff Appraisal Report (SAR, 1943-MOR), dated December 18, 1980. - 26 - 4. Tourist arrivals in Morocco, excluding Moroccans residing abroad and cruise passengers, grew from close to 0.5 million in 1968 to about 1.2 million in 1973.5/ However, that peak level was not exceeded until 1982 and 1983, when arrivals reached about 1.3 million annually.6/ These results are completely at variance with forecasts included in Government plans for the sector. For instance, the 1973-77 Five-Year Plan forecast 2.7 million tourist arrivals by 1977. Also, a 1979 study by the World Tourism Organiza- tion (WTO)7/ forecast 6-9% annual growth in arrivals beginning in 1980, while foreign arrivals actually only increased by 4% from 1979 to 1983. The stagnation in the number of foreign visitors has been offset somewhat by an increase in the average length of stay-from 6.9 days in 1978 to 7.6 days in 1983 for tourists lodging in classified hotels. Total bednights in all forms of accommodation reportedly increased from 10.5 million in 1978 to 14 million in 1983.8/ 5. The proportion of arrivals from European countries increased from 73% in 1968 to 83% in 1980, then fell off to 80% in 1983. France sent the most visitors (29% of total arrivals in 1983), followed by Spain (15%), the United Kingdom (12%) and the FR of Germany (10%). The proportion of arrivals from the American hemisphere declined from 14% in 1968 to 9% in 1983, with the U.S. accounting for about 7% of total 1983 arrivals. Other structural changes are a decline in arrivals from Scandinavian countries and an increase in the proportion of Arab visitors--to 8% in 1983.9/ 6. A 1978 analysis of the primary motivation of visitors10/ indicated that 44% of total bednights were accounted for by beach-motivated tourists, 29% by the culturally-oriented, and 11% by businessmen. The beach-motivated tourists account for a good part of the seasonality of bednight demand. In 1983, August bednights were nearly twice the level of bednights in each of the off-season months of October through February. Seasonality is most pronounced in the North, along the Mediterranean coast, primarily as a consequence of the climate, but also reflecting insufficient promotion of off-season tourism. As a result, occupancy rates are generally lower there. 5/ "Etude Economique des Investissements Touristiques, Rapport 11, Synthese," World Tourism Organization (WTO), Jan. 1980, page. 5. 6/ "Structure et Perspectives de Developpement du Tourisme Marocain," Department of Tourism, June 1984, page 48. 7/ op. cit., WTO, page 40. 8/ Op. cit., Department of Tourism, page 22. 9/ Refer also to PCR, 1202-MOR, Annex 3. 10/ op. cit., WTO, page 10. - 27 - 7. Aside from unclassified lodgings which cater almost entirely to local travelers, the capacity of Morocco's classified hotels increased significantly since the late 1960s: from about 20,500 beds in 1968 to 41,000 beds in 1974 and 60,000 beds in 1983. About 45% of total bed capacity has been in four and five star hotels (roughly the same figure for both 1973 and 1983). The Mediterranean coast accounts for 28% of total beds, followed by the Agadir region (25%), the center region, including Casablanca and Rabat (19%), and the Marrakech region (15%). The Agadir and Marrakech regions have shown the fastest growth in recent years. 8. The average bed occupancy rate of Morocco's hotels in 1983 was only 40%.1l/ This low figure reflects primarily overbuilding in recent years as a resut of overoptimistic tourism demand forecasts. Four and five star hotels had better than average occupancy rates (about 47%) as did the Agadir region in general (55%), while the lowest rates were achieved in the Eastern region (19%) and along the highly seasonal Mediterranean coast (29%). Average bed occupancy rates are far below peak levels achieved in the mid-1970s, but they have improved slightly since 1981-82. For instance, the bed occupancy rates for Casablanca and Rabat averaged only 42% in 1983, versus 55% as late as 1979. The bed occupancy rate for Marrakech was 41% in 1983 versus a peak of 82% in 1974.12/ Government Incentives 9. Aside from its direct investments in infrastructure and hotels, the government has provided a generous package of incentives to private sector investors. Prior to 1973, these included: (i) an outright grant of up to 15% of the fixed cost of new hotel projects; (ii) a rebate of nearly half the interest charges on CIH loans--in 1972, borrowers paid only 4.5% net, while CIR's rate was 8.75%; (iii) rebate of value-added taxes and exemption from import duties on investment costs, reduction of registration taxes, exemption from local taxes, accelerated depreciation, tax exoneration on reinvested profits, and guaranteed repatriation of capital and profits for foreign investors. 13/ 10. A new Tourism Investment Code, published in August 1973, introduced the following main modifications for the reported purpose of establishing "a less cumbersome system" than the previous one: (i) the grant was replaced with a 10-year interest free government loan, including five years of grace, in amounts of again up to 15% of total investment costs, but 5-star hotels were not eligible for this benefit; and (ii) partial or full exemption, depending on location, from corporate income taxes for 10 years.14/ On balance, the average level of incentives was reduced under this Code. A 11/ 2p cit., Department of Tourism, page 15. 12/ PCR, 848/1279-MOR, para. 2.09. 13/ SAR, 848-MOR, Annex 4, page 1. 14/ SAR, 1279-MOR, Annex 1, para. 15. - 28 - technical committee, chaired by the Department of Tourism, and including representatives of the Ministry of Finance, local administrations and CIH decided on the eligibilicy of projects based on "minimum technical and phys- ical planning standards". 11. In 1980, following discussions with the Bank, the government modi- fied the incentive structure: (i) the interest rebate on CIH loans was cut to 2% of loans outstanding and CIH's interest rates were increased, appa- rently in order to bring the net cost of CIH loans more in line with Morocco's cost of capital; (ii) full infrastructure costs were thereafter to be recovered by charging appropriate prices on serviced land, thereby extend- ing to the sector as a whole a pricing practice the Bank had aimed at under the Bay of Agadir Tourism Project; (iii) in order to maximize returns on tourism investments, hotel projects were to be more selectively promoted based on demand and supply conditions and sunk costs in infrastructure; (iv) the controlled room tariff rates were increased as a first step toward their complete liberalization.15/ Many of the 1980 modifications were incorpo- rated in a revised Tourism Investment Code in 1983. This Code also specified supplementary advantages for projects in less developed regions-20% of investment costs could be financed by an interest free government loan and a 4% interest rebate was permitted on CIH loans. Finally, in contrast to a complete exoneration formerly granted in some cases, profit taxes could be reduced by only up to 50% over the first 10 years of a project's life. Sector Policies and the Bank 12. The Bank was concerned about the high level of subsidies granted to tourism investors as early as 1971, when the first loan to CIH was approved; incentives, and even the data needed for a thorough cost/benefit analysis of existing incentives, were then lacking.16! Although a number of improve- ments in data collection have been made and numerous studies have been con- ducted since then, a clear-cut analysis of the effectiveness and justifi- cation of the incentives system has not been completed.17/ Indeed, the amount of data and analysis required to make an economic judgement on this question was itself a scurce of controversy within the Bank, and perhaps contributed to some lack of coherence and tentativeness in the Bank's posi- tion on this issue over the years. 13. Subsidies and tax advantages could presumably be justified if financial returns were lower than economic returns on tourism projects. The existence of important external benefits on hotel projects in the form of revenues generated for handicrafts, restaurants, and travel services, for instance, could contribute to such a result, but they could be offset by uncaptured infrastructure costs and diversion of clients from other hotels. Even if there are net external benefits which might justify incentives on a 15/ SAR, 1943-MOR, para. 2.14. 16/ Praject Performance Audit Report Morocco-Credit Immobilier et Hotelier (CIH), dated February 23, 1976, SecM78-141 (PPAR, 704-MOR). 17/ PCR, 848/1279-MOR, para. 5.04. - 29 - "partial equilibrium" microconomic or sectoral basis, there remains the broader general equilibrium and macroeconomic policy question as to whether internalizing these externalities for the tourism sector is of sufficient priority vis-a-vis government budgetary objectives to justify the expendi- tures or foregone revenues implied. 14. Under CIH II, the Bank's approach to this issue was to comment on the incentives framework in the context of general economic reviews and evaluation of the Five Year Plan, and otherwise to rely on CIR to use the knowledge it gained through individual subproject appraisals in order to pursue policy discussions with the government. In addition, the Bank helped build a large scale computer model (called CASBAH) to aid CIH with subproject analyses. The initial results of that model were obtained in time for appraisal of CIH III, and they indicated that incentives were not necessary for satisfactory returns on hotels in Agadir, Marrakech, and Casablanca. Also, incentives did not seem an appropriate means to improve the weak finan- cial position of hotels along the Mediterranean coast. Rather, because of high seasonality, a redirection of investment toward low capital cost "vacation village" establishments seemed required, as well as a liberalisa- tion of room tariff controls and improved marketing. 15. In its discussions of these results with the Bank in 1975-76, the government insisted that it was too early to consider changes in the 1973 Tourism Investment Code, especially since investments were sluggish and far behind Plan forecasts. The Bank then proceeded with the CIH III loan when the government and CIH agreed to undertake a sector program that included: (i) more extensive data collection; (ii) preparation of regional master plans for tourism; (iii) a more detailed survey of the financial and economic viability of hotel investments; and (iv) discussion of results of the above work with the Bank with a view to revising tourism policies. As there was no financing of these studies under the loan, the Bank's role was limited. In addition to the above program, in order to netter guard against the possibility of financing uneconomic projects, more thorough economic appraisal criteria were to be applied to CIH subloans.18/ 16. The studies carried out following CIH III, including a major regional planning effort undertaken by WTO under UNDP financing, 9/ were reviewed during appraisal of CIH IV (1980). Again the Mediterranean region indicated negative economic and financial rates of return at the given incentives level, except for "vacation village" establishments. In other regions, while a wide range of rates of return were indicated, the financial returns cum incentives did not appear on the whole excessive, nor did they significantly exceed economic returns. Abolishing the existing incentives system would have on average cut in half the returns on equity in hotel investment. Therefore, the 1980 appraisal, following the February 1980 changes (para. 11), concluded that "available evidence does not point to resource misallocation having been induced by the incentive package" and thus 18/ SAR, 1279-MOR, paras. 2.05-2.11. 19 1op. Cit., WTO. - 30 - that "the present level of incentives should be maintained".20/ Further refinement of the economic analyses and related data collection was still to be undertaken and in this case funds (US$1 million) were allocated out of the CIH IV loan for this purpose. Four years later, the work is yet to be completed. 17. While room tariff ceilings, imposed by the Government to maintain Morocco's international competitiveness, did not affect negotiated group rates which were well below the ceilings, they did appear a constraint on individual room tariffs in some cases, and the Bank recommended their removal under CIH IV. The Government agreed to a gradual approach to liberalizing these controls.21/ 18. Slow growth in demand and substantial additional hotel-building in the eighties have impaired the occupancy rates and financial performance of the sector. Also, the Government has been forced to control budget deficits as part of necessary macroeconomic stabilization policies. For these reasons, and apparently not because of any new data revealing disparities between financial and economic returns to hotel investment, the Bank's 1984 Financial Sector Survey recommended eliminating room tariff controls as well as the major subsidy and tax relief programs. The survey acknowleded that financial returns would thereby be adversely affected. However, while new hotel building would decline, tourism investment could be rechanneled more appropriately to ancillary activities like restaurants, thermal baths, and second residences for foreigners' retirement homes, with new medium-term financing by Morocco's commercial banks.22/ The above measures were not included in the reforms agreed upon in connection with the Bank's two Industrial and Trade Policy Adjustment Loans.23/ 19. It would appear that the Bank might have more effectively addressed the incentives issue by taking a consistent stance and by undertaking or directing a thorough comprehensive study of this issue alone, rather than relying on more general sector studies, in some cases outside its own direct supervision, which appeared to have approached the issue from different perspectives, and perhaps contributed to inconsistencies in the Bank's position over the years. 20/ SAR, 1943-MOR, para. 2.21. 21/ SAR, 1943-MOR, para. 2.05. 22/ Morocco Financial Sector Study, Bank Report No. 4957-MOR, dated December 12, 1984, paras. 10.8-10.17. 23/ Industrial and Trade Policy Adjustnent Loan, approved 1984 (2377-MOR) and Secnd Industrial and Trade Poliel Adjustment Loan, approved 1985 (2604-MOR). - 31 - III. CIH'S INSTITUTIONAL PERFORMANCE Board, Management, and Staff 20. CIH has a Board of 15 members, on which the private sector is some- what underrepresented, having four of the Board seats while it owns 45% of CIH's share capital. A seven member Executive Committee approves all tourism loan proposals. A lack of probing of hotel projects by Executive Committee members, noted under the appraisal of CIff II24/ due to their lack of tourism experience, has apparently changed for the better.25/ However, the Board and Executive Committee did not come to grips in time with the increasing build up of excess capacity in the sector, and they do not appear to have fully insulated CIH project decisions from political pressures. 21. Following a period of disruptive management changes in the early 1970s,26/ CIH appears to have had strong and effective senior management since 1972. Since then, organizational improvements have been instituted such as an internal loan committee, regional branches and lending for com- mercial real estate development, and the quality of staff has reportedly reached high standards during a decade in which the number of staff doubled to a total of 340 in 1982. Improvements in internal coordination and infor- mation flows, as well as management training, are still needed however.27/ Appraisal Capability 22. "Because there were indications that the projected capital costs of hotels were excessive relative to the accepted standards in Morocco and that profits were being siphoned off in the construction contracts," a minimum financial rate of return of 10% (excluding subsidies) was used as an eligi- bility criterion for Bank financing under CIH 1.28/ CIH agreed to use this criterion for all its hotel projects under the second loan. Also, stemming from a requirement of the first loan, independent engineering firms reviewed the costs and design and supervised construction of CIH subprojects. Under the third loan, CIH agreed to finance only those projects for which it fore- cast: (i) after-tax returns on equity of at least 12%; (ii) returns on total investment of at least 10%; and (iii) minimum economic occupancy rates (MEOR) of 40% in the North, 55% in Fez and Meknes, 60% in Marrakech, and 65% in 24/ SAR, 848-MOR, para. 4.03. 25/ PCR, 848/1279-MOR, para. 3.02. 26/ PPAR, 704-MOR, page A7. 27/ PCR, 848/1279-MOR, paras. 3.03-3.04. 28/ SAR, 848-MOR, para. 4.08. - 32 - Casablanca, Rabat and Agadir.29/ Under the fourth loan, a 12% minimum eco- nomic rate of return was instituted, including estimates of tourist expendi- tures and infrastructure costs outside hotels, as well as diversion effects, but without price dilution effects or full shadow pricing, for which sup- porting analyses were not available.30/ 23. In a narrow technical sense, CIH's apprais?l procedures have improved over the years. However, a persistent weakness has been an inabil- ity to make sound judgements of the market forecasts for hotel investments. A further question is the independence of CIH's appraisal work and project approvals. The PCR states31/ that CIH's "lenient attitude toward public hotel investors resulted in questionable project approvals". While Govern- ment guarantees were provided for public sector hotels, a managed fund approach to such projects might have been tried to help insulate the integ- rity of the normal appraisal process. As regards private investors, prior approval of hotel investments by the government's Technical Committee was an issue raised during the previous Performance Audit of CIH I. This issue is of particular concern when the incentives approved by that Committee include direct government financing and a rebate on a CIH loan that has not yet even been appraised. Under the second loan, CIH was reportedly trying to arrange for its required independent engineering reviews to begin prior to the deci- sion of the Technical Committee. Under the fourth loan, it was agreed that CIH would undertake an economic and financial preappraisal of projects, which the Committee would take into account when deciding to approve a project for incentives.32/ It is not clear how well these measures have worked or whether CId still retains sufficient independence of decision after complet- ing its full appraisal work. Follow-Up and Collections 24. At the appraisal of the second loan, follow up was "practically non-existent".33/ At the Bank's urging, CIH established a Hotel Follow-up division in 1972, although this division did not begin operating systemati- cally until 1974. Inadequate collection procedures and insufficient atten- tion to arrears had been a perennial weakness for CIH, despite efforts by the Bank to negotiate improvements under the first three loans.34/ Major steps in this direction were finally taken in 1978, with the creation of the Port- folio Supervision division. Although CIH's subproject supervision was 29/ SAR, 1279-MOR, para. 3.14 and Annex 16, paras. 5-9. The MEOR was an annual average calculated on the basis of full room capacity utilization in the peak month, and represented an attempt to take account of diver- sion effects. 30/ SAR, 1943-MOR, para. 4.10-4.12 and Annex 5. 31/ PCR, 848/1279-MOR, para. 5.04. 32/ SAR, 1943-MOR, para. 2.15. 33/ SAR, 848-MOR, para. 4.12. - 33 - reported to be satisfactory at the time of the fourth loan appraisal,35/ it deteriorated since then. The PCR36/ reports that collection procedures are inadequate and that there is no systematic follow-up of hotel subprojects, with only three staff responsible for supervising a hotel portfolio of more than 200 projects. However, more recently the situation has somewhat improved as CIN took agreed upon steps in order to obtain extension of the commitment date for Loan CIH IV. Financial Performance 25. By 1976, when CIH III was appraised, the Bank was still CIH's only foreign source of funds. Since then, CIH has attracted financing from such other foreign sources as: the Banque Nationale de Paris, the Kuwait Interna- tional Investment Company, the Abu Dhabi Investment Company, the Libyan Arab Foreign Bank and LIBOR-indexed syndicated loans. In terms of domestic resources, in addition to its traditional sources of funds--government loans and bond issues to local commercial banks--CIH has increased its share capital from DB20 million at the end of 1971 to DH210 million at the end of 1984, and it has recently been exploring the possibility of attracting savings directly from the Moroccan public. 26. CIH's level of financing of tourism projects reflects sectoral investment trends, as it has remained the predominant source of financing for hotels over the period under review. From 1969 to 1975, its approvals remained fairly constant at about DH40 million annually, implying a decline in investment in real terms in the latter years of that period. By contrast, the Bank's 1972 appraisal had forecast an average annual level of hotel loan approvals of about DH100 million from 1972 through 1975.37/ However, CIR's tourism loan approvals then jumped to nearly DH120 million annually in 1976-78, considerably exceeding the Bank's 1976 appraisal forecasts of a DR87 million annual average for the same period.38/ This improvement reflected the buoyant investment climate at that time, as well as high occupancy rates and good financial results in the tourism sector. 27. After a small decline in 1979, tourism loan approvals resumed their growth in 1980 and 1981, reaching a peak of DH253 million in 1981, despite the country's general economic slowdown.39/ CIH's tourism lending has declined significantly since then, as the industry has been beset by over- capacity, which has been only slightly alleviated by the modest increase in 35/ SAR, 1943-MOR, para. 4.13. 36/ PCR, 848/1279-MOR, para. 3.09. 37/ SAR, 848-MOR, page. 18. 38/ SAR, 1279-1OR, Annex 12. 39/ SAR, 1943-MOR, page 44. Also, SAR, Housing Development Project (2245- MOR), dated February 8, 1983, page 39. - 34 - arrivals in the last two years. Based on available data,40/ the following table indicates CIR's actual hotel loan approvals compared to Bank appraisal forecasts in millions of constant 1972 Dirhams: 1973 1974 1975 1976 1977 1978 1979 1980 1981 Projected 90 91 92 92 56 51 58 64 70 Actual 49 29 n.a. 85 75 68 51 n.a. 108 These figures confirm the sharp increase in actual investments in real terms in 1976 and again in 1981, as well as the shift from overly optimistic to overly conservative investment levels forecast in Bank appraisal reports. 28. CIHI's total loan portfolio has grown Zrom DH356 million at the end of 1971 to DH 3,300 million at the end of 1984. However, the proportion represented by tourism loans decreased from 71% to 29% over the same period, reflecting a faster growth of housing loans. Commercial loans grew rapidly in the early 1970, but have represented a fairly constant share of the port- folio since 1975, at about 10%. 29. At December 31, 1984, total arrears amounted to DH664 million, or about 20% of the loan portfolio. However, for those loans with arrears of at least one year, the total amount of arrears was only DH156 million, or 4.7% of the loan portfolio.41/ Housing loans do not represent a serious risk for CIH because the market value of the underlying real estate, on which CIH holds mortgages, generally far exceeds the unpaid balance on its loans. Total arrears on hotel loans, however, represent almost 34% of hotel loans outstanding. The arrears on hotel loans with overdues of at least six months were 9% of the total hotel portfolio. By contrast, arrears of six months or more represented less than 4% of the hotel portfolio at the end of 1971. 30. The main reason for arrears is the poor performance of the hotel sector in recent years due to excessive build-up of capacity and slack demand. State-owned hotels have represented a significant share of CIH's arrears on hotel loans. Although the government has guaranteed these loans, payments on the guarantees have often been delayed.42/ Provisions for 40/ The forecasts for 1973-76 are taken from the SAR, 848-MOR, para. 6.05. Actual results for 1973-74 and the forecasts for 1977-79 are taken from the SAR, 1279-MOR, Annex 12. Actual results for 1976-79 and forecasts for 1980-81 are taken from the SAR, 1943-MOR, Annex 6. The actual figure for 1981 was from SAR, First Housing Loan to CIH, Annex X. These forecasts and actual results in nominal terms were deflated based on domestic price indices given in the Bank's Country Economic Memorandum, August 5, 1985, page 7. 41/ "CIR: Rapport sur les Comptes des Exercises Clos les 31 decembre 1984 et 1983," Audit Maroc - Audit Continental. 42/ PCR, 848/1279-MOR, paras. 3.08-3.10. - 35 - possible losses on hotel loans have been increased significantly over the years and appear to be adequate at 10.6% of the hotel portfolio as of December 31, 1984. Nonetheless, the quality of CIH's hotel portfolio con- tinues to be a matter of concern. 31. CIR had only DH95 million of equity investments at the end of 1984. Equity investments grew rapidly during the mid-seventies as CIH under- took a number of promotional ventures, but these have not generally performed well, and new equity participations were stopped in 1978. 32. CIH has remained consistently profitable over the years. Its administrative expenses have averaged only about 1.1% of its average total assets since 1976, versus about 1.5% in 1972-75, which is very good. Its average spread on borrowed funds has narrowed from more than 3% in 1972-74 to about 1.5% in 1983-84, which is very low. However, CIHs total debt to equity ratio increased from about 7:1 in 1972-74 to about 12:1 in 1981-84, and this increased leverage has permitted it to maintain an acceptable profitability in nominal terms despite increased levels of provisions, with net profits averaging about 10.7% of year end equity in 1981-84. However, this level of profits represents only breakeven performance in real terms, as Morocco's inflation rate has averaged nearly 10% in 1981-84. IV. LOAN UTILIZATION 43/ Loan 848-MOR 33. Because tourism investments were lower than forecast before 1976 and because of delays in construction of some hotels, the loan closing date was postponed 30 months to June 30, 1979. The loan financed 37 projects including 14 five or four-star hotels, 15 three-star hotels, 5 two- or one- star hotels, two apartment hotels and a camping site. Most of the projects were completed within appraisal cost estimates, although a few suffered cost overruns due to construction delays. An estimated 3,250 jobs were created by the subprojects at an average cost per job of about US$23,000.44/ 34. Many of these projects were expansions, including 12 that had pre- viously received loans under CIH I. Ten of the projects were located in Agadir, six in Tangiers and five in Marrakech. The Agadir subprojects accounted for about 44% of both the Bank's loan and the total costs of sub- projects financed under the loan. All the subprojects are now operational. As of December 31, 1984, six of the loans were in arrears of more thn one year, including three in Agadir, two in Tangiers, and one in Marrakech. 43/ Details in PCR, 848/1279-MOR, paras. 4.03-4.08, and 4.10. 44/ PCR, 848/1279-MOR, paras. 4.03-4.05. 45/ 0p. cit., Price Waterhouse, page 18. - 36 - Loan 1279-MOR 35. Under this loan, which was disbursed on schedule, 30 projects were financed, creating an estimated 3,750 jobs at an average cost per job of about US$29,000. The projects included 15 five- or four-star hotels, 8 three-star hotels, a single one-star hotel and 6 apartment hotels. Almost half of these projects (13) were located in Agadir, followed by 8 in Marrakech, the others being widely dispersed. The Agadir subprojects accounted for about 37% of the Bank loan and about 47% of the total costs of subprojects financed under the loan. 36. By the end of 1984, five of these projects were just starting operations and two others were experiencing severe construction delays and management difficulties.46/ Both of the latter are sponsored by the company SIDET, owned by the parastatal Royal Air Maroc and the Banque Nationale pour le Developpement Economique (BNDE). Seven of the hotel companies financed under this loan, including two repeater loans for companies financed also under Loan 848-MOR, were in arrears of more than one year as of December 31, 1984.47/ It is not clear whether the arrears problems on subloans made under CIH II and III are primarily a result of deficiencies in these projects themselves, or rather the general overcapacity that developed after addi- tional projects were financed at later dates. V. THE BANK'S INSTITUTION BUILDING EFFORTS 37. The Bank has devoted a considerable amount of staff time toward strengthening CIH's appraisal capabilities. This included detailed specifi- cation of subproject appraisal standards as part of the Bank's own appraisal work, and the supervision activity of reviewing subprojects over the free limit. In addition, the Bank participated in the development of the CASBAH computer model, which CIH now uses as part of its financial and economic appraisals of hotel investments. As a result, CIH has become more sophis- ticated in its appraisal work. 38. The Bank has also supported important measures to improve the quality of evaluations undertaken to approve projects for investment incen- tives, first by involving independent engineering firms, and secondly, through preappraisal of projects by CIH.48/ Nevertheless, there are still questions regarding the independence and effectiveness of CIH's appraisals, after incentives are already approved. Further measures that might be con- sidered in this regard are: (i) making all incentives, or at least interest rebates on CIR loans, explicitly conditional on CIR's independent appraisal and loan approval; or (ii) awaiting CIH's full appraisal before considering incentives. 46/ PCR, 848/1279-MOR, para. 4.07. 47/ Ibid. 48/ PPAM, 848/1279-MOR, para. 23. - 37 - 39. Two of the key weaknesses in CIH's project work mentioned by the Bank in 197249/ are still in need of further improvement. (i) evaluation of the market aspects of projects, and (ii) follow up.LO/ The Bank originally took the position that recruitment of a qualified individual was needed to do market evaluations, but then it counted on the government's ongoing sector studies and the development of a CIH data bank to bring about improvements. Another step that might have been required would have been for CIH to prepare its own ongoing regional market studies, perhaps updated annually. These studies could take a critical look at the forecasts made in connection with previous sector work and be more up to date; yet, at the same time they could be more comprehensive than the market evaluations included in the appraisals of individual projects. The key point is that the project-by-project approach to market analyses do not seem to have worked, and a more compre- hensive approach to evaluating bednight demand and existing capacity should have been tried. Such evaluations could have formed a basis for detailed short run hotel lending strategy papers prepared by CIH. They also could have been used as a supplement to, or replacement, of the free limit approach to subproject approvals by the Bank. 40. As regards follow-up, the Bank engaged in numerous discussions of this subject with CIH, including during loan negotiations. Further, when hotel arrears became a serious problem, the Bank discussed with the Govern- ment the guarantee of CIH loans to state-owned institutions and payments on the guarantees. It also established targets for arrears reductions with CIH and regular schedules for visiting projects. These efforts brought some improvements. Further measures that might have been taken are: (i) incl- sion of follow-up requirements as formal loan covenants, including minimum CIH staffing for follow-up work; and (ii) more detailed monitoring of CIH's follow-up efforts by the Bank through quarterly reporting requirements. 41. The Bank undertook considerable additional analyses of CIH's finan- cial situation, including review of the auditor's performance, adequacy of provisions, capital structure issues, and resource mobilization, and it made numerous recommendations on these matters over the years. These were gener- ally effective and valuable institution-building services. VI. LESSONS OF EXPERIENCE 42. The lessons from the project experience are: (i) As has been true of other DFCs, the more autonomy an institution has, the more likely it will be able to institute and maintain sound operating policies and procedures and thus to finance viable projects and maintain a strong portfolio of invest- ments. (ii) Relying on a DFC alone to pursue a policy dialogue with govern- ment, by virtue of the sector knowledge it gains through appraisal and super- vision of individual projects, does not appear to be an effective means of developing clear policy recommendations or of bringing about needed policy 49/ SAR, 848-MOR, paras. 4.11, 4.12. 50/ PCR, 848/1279-MOR, para. 3.09. - 38 - changes. (iii) When the Bank wishes to address a complex and controversial policy issue, it risks extended delays and ineffectiveness if it does not itself undertake or directly supervise a comprehensive analysis of that issue alone. More extensive sector work performed outside of the Bank's direct control, and reviewed by the Bank only as one facet of its ongoing appraisal and supervision work, may not result in a timely and definitive recommenda- tions for an improved policy. (iv) When a government body approves incen- tives that include provisions relating to a loan from a development bank, special measures may be needed to ensure the independence of the appraisal work to be undertaken by that development bank, for instance, by making the incentives specifically conditional on the appraisal results, or awaiting the development bank's full appraisal before deciding on incentives. (v) Even when government guarantees are available for public sector projects, segrega- tion of those projects from a development bank's normal operations as in a managed fund may be advisable to sustain the integrity of its normal ap- praisal processes if it has not real independent decision-making capability regarding those projects. A managed fund could also avoid later problems of delays in payments on government guarantees. (vi) Persistent weakness in the market aspects of appraisals of hotel projects may be more effectively ad- dressed in some cases through regional demand and capacity studies, rather than through the project-by-project approach. The hiring of a qualified individual, in the absence of specifying an appropriate work program, is un- likely to be a full remedy for the problem. The types of studies mentioned above could be carried out by a development bank on a regular updated basis, and should be seen as a supplement to longer range planning exercises. - 39 - PROJECT COMPLETION REPORT MOROCCO BAY OF AGADIR TOURISM PROJECT (Loan 1202-MOR) June 13, 1986 - 40 - MOROCCO BAY OF AGADIR TOURISM PROJECT (Loan 1202-MOR) I. BACKGROUND A. The Tourism Sector 1.01 Tourism in Morocco has a long tradition. Destinations such as Marrakesh, Fez, Tangiers and Agadir have catered to a well established although limited international tourist clientele since the beginning of this century. The growth of mass international tourism, however, only dates from the late 1960s when the expanding European market benefitted from improved and cheaper air transport. This coincided with a change in the supply of tourism facilities in Morocco from mainly cultural and residential to beach based destinations. The supply is now concentrated in three main destinations: (M) summer beach tourism based on the Mediterranean coast; (ii) year-round beach tourism in the southern resort of Agadir; and (iii) circuit and residential tourism located in Marrakesh, the old cities of Fez, Meknes, and Rabat, and the oases fringing the Sahara. 1.02 The number of foreign visitors to Morocco increased from about 450,000 in 1968 to 1 million in 1974 and over 1.28 million in 1982, while capacity in classified hotels increased from 20,500 beds in 1968 to 41,000 in 1974 and 57,600 in 1982. About two thirds of this capacity is the result of private investment; the remainder has been developed by the Government, either directly or through public entities such as the National Railway Company (ONCF), Royal Air Maroc, and subsidiaries of Government-owned financial institutions. 1.03 In spite of the above achievements, Government's tourism policy, however, has not always been consistent and actively pursued. High priority was first given to the tourism sector in the five-year economic plan for 1968-72. Subsequently, support for the sector diminished considerably as economic conditions deteriorated. Moreover, the Ministry of Tourism has played a limited role and numerous organizational changes have contributed in large part to the inability of the industry to take full advantage of the country's tourism potential despite recent growth. This has resulted in an inappropriate concentration of tourism facilities in specific locations (e.g., Marrakesh) or specific hotel categories (e.g., four-star hotels in Casablanca), and in lost revenues because of price control on room tariffs. An additional element, which has hampered tourism development particularly in the South, is the Sahara conflict. - 41 - B. The Role of the Bank 1.04 Involvement of the Bank Group in the tourism sector in Morocco dates back to the mid-1960s, and was primarily through the Credit Immobilier et Hi8telier (CIN), the main institution providing long-term loans to the tourism sector. Part of the proceeds from the first Bank loan (447-MOR) to the Banque Nationale pour le D6veloppement Economique (BNDE) were channeled to CIH to finance some 20 hotel projects as part of an arrangement between the two institutions. A first tourism loan (Loan 704-MOR) directly to CIH for an amount of US$10 million was signed on December 8, 1970, followed by three others in 1972 (US$15 million, Loan 848-MOR); 1976 (US$25 million, Loan 1279-MOR); and 1980 (US$100 million, Loan 1943-MOR). 1.05 The sectoral impact of Bank lending to CIH has been mainly through mobilization of financial resources, but also through substantial reductions in interest rate subsidies and improvement of CIH's organization and operations. The last CIH loan also attempted to (i) improve sectoral planning and project appraisal procedures at Government level, (ii) develop a more efficient system of information management and collection of tourism statistics, and (iii) streamline Government development policies in the sector, including incentives to investors. 1.06 Bank involvement in the financing of tourism infrastructure was first urged In 1971, when the Moroccan Government requested Bank assistance for financing a resort area in Tangiers. It was decided that the Bay of Tangiers project was unsuitable for Bank financing because of high seasonality. Instead, a decision was made to proceed with a project in the Bay of Agadir, where the demand for hotel investment appeared much higher due to the great untapped demand for year-round tourism. II. PROJECT PREPARATION AND APPRAISAL A. Project Preparation 2.01 The Bay of Agadir Project was prepared between July 1973 and May 1975, with the assistance of a UNDP grant for which the Bank was executing agency. Project preparation was carried out by a consortium composed of the French consulting firm "3ureau Central d'Etudes pour lec Equipements d'Outre-Mer" (BCEOM) and the Moroccan firm "Societe Maroc-Etudes" (SOMET). The development as proposed by the consultants was a new, self-contained tourism development on the northern side of the Bay of Agadir, which would have been very costly. The feasibility studies recommended instead an integrated residential and tourism area ("Unite d'Amnagement Touristique de Founty" or UAT-Founty) on an undeveloped beach front adjacent to the existing city, easily accessible to existing urban street and trunk infrastructure. 2.02 The underlying justification for the project lies in Agadir's attractiveness as a year round beach destination. It has the advantage of being at its best between the months of October and March, that is, when potential clientele from European countries are in winter. Although hotter in the remaining months, Agadir is also attractive because of its vast white sand - 42 - beaches. Demand grew rapidly after reconstruction following the earthquake in 1960 and continued to grow rapidly during project preparation and implementation. Hotel occupancies have shown no sign of slippage in spite of considerable expansion of capacity (from 4,000 beds in 1974, to 11,500 in 1983). 2.03 The objective of the project was to strengthen the existing tourism structure of Agadir by increasing hotel room capacity to a scale which would allow efficient operation of other tourism services, such as travel and car rental agencies, restaurants, commercial and recreational activities. Moreover, the integration between residential and tourism accommodations was to provide a more lively environment and permit a better utilization of the infrastructure facilities during the off season. B. Project Appraisal 2.04 The project was appraised in June 1975 by a mission consisting of four Bank staff members and two consultants, covering technical, financial and economic specialties on the basis of preliminary engineering studies. The project at appraisal consisted of the following components: (i) Project Area Infrastructure (Part A) - including the servicing of the land needed to accommodate the development of 7,000 hotel beds and 2,600 housing units by the private sector, and the construction of a core of common facilities for shopping, entertainment and sports to make the UAT-Founty project area attractive to investors and visitors alike; (ii) Regional Infrastructure (Part B) - to integrate the project area into the metropolitan and regional scale, including a bypass around Agadir to deflect traffic from the project area, the upgrading of a secondary road to facilitate accessibility to the Immouzzer valley, a nearby tourist attraction, and measures to reduce sea water pollution in the Bay of Agadir; and (iii) Studies (Part C) to cope with the environmental and urban development problems created by the expansion of the city of Agadir under the project. 2.05 The total project cost was estimated at DH 167 million or US$44 million equivalent, the exchange rate at the time of appraisal being DH 3.8 = US$1. The foreign exchange component, estimated at US$21 million, was to be financed by the Bank. 2.05 For implementing the project, the Government established a company, the "Societ6 pour l'Amnagement de la Baie d'Agadir" (SONABA) which was entrusted with financing and executing the proposed land development and common facilities, and subsequently selling and/or leasing them. Responsibility for operation and maintenance of the project infrastructure - 43 - facilities was allocated to those agencies entrusted with operating and maintaining similar facilities in the city, i.e., the Office National de 1'Eau Potable (ONEP) for water supply, the Office National de 1'Electricit6 (ONE) for electricity, the Municipality of Agadir for roads and sewerage and the Ministere des Postes, T6lephone et T616graphe (PTT) for telecommunications. The implementation of Parts B and C of the project was entrusted to the Ministry of Equipment and the Ministry of Housing and Tourism, respectively. III. PROJECT IMPLEMENTATION A. Effectiveness 3.01 The loan became effective on October 29, 1976, four months after the original date, due to delays in the enactment of the development plans for the project area and an adjacent tourism area (Secteur Touristique Baln6aire, STB). The fulfillment of the condition was delayed pending a decision as to what could be considered an effective document for land use control. Eventually, the Bank agreed to: (i) a "plan de snage" immediately and (ii) an understanding that the plan de zonage would be replaced by a "plan d'am6nagement" as soon as possible. In the interim, the local authority would not deliver construction permits in violation of the provisions of the agreed technical documents (cahier de charges). This delay could have been avoided by a more careful assessment of physical planning instruments and procedures in Morocco at appraisal and by the presence of a lawyer on the mission. 3.02 The other conditions of effectiveness which caused delays were: the establishment of agreements between SONABA and the National Electricity Office (ONE), the National Office for Drinking Water (ONEP) and the Ministry for Postal, Telephonic and Telegraphic Services (PTT) defining their respective roles in carrying out the project implementation (Section 6.01 (b) ); the publication of a decree allowing SONABA to enter into possession of all land included in the project area (Section 6.01(g)); and the signing of the legal opinions to be furnished by the Borrower to the Bank (Section 6.02). Delays experienced in loan effectiveness caused only marginal delays in overall project implementation. B. Covenants 3.03 The Borrower and SONABA fulfilled most loan covenants in a timely and satisfactory fashion. The main obligations which were not (or only partially) fulfilled were as noted below: (i) Loan Agreement: Under Section 4.07, the Government was to extend the jurisdiction of the Municipality of Agadir to include the project area by January 1, 1980. This has not yet been done, the delay being due to Government reluctance to carry out the extension in the absence of a general revision of the city boundaries and a reassessment of the implications for the distribution of voters. Since the Municipality of Agadir, with the approval of the Ministry of Interior, has already committed - 44 - itself to operate and maintain the project area (about 30% of the total city area), the Bank accepted postponing the original deadline for the fulfillment of the covenant until solution of the above problems; and (ii) Project Agreement: Under Section 3.03, SONABA was to prepare and furnish to the Bank semi-annual reports on the progress of the infrastructure components. In spite of repeated complaints by Bank supervision missions, reports were often prepared with delays and in asi incomplete fashion. - Section 3.04 required SONABA to prepare by February 27, 1978 a program for the promotion of investment opportunities in the project area aimed at national and foreign investors. The program was prepared in a timely fashion, but was only partially carried out because of delays in the completion of infrastructure works and in starting land sales. - Section 3.04 additionally called for the preparation by SONABA of a program for publicizing, promoting and operating the tourist facilities in the project area by February 27, 1980. To date, this covenant has not been implemented because of delays in the development of the facilities to be promoted. - Section 4.03 required that SONABA prepare and furnish to the Bank by the end of February 1977 a statement of its financial policies including the establishment of selling and leasing policies for the commercial and recreational land. This covenant was satisfactorily fulfilled with only a six-month delay. To this end, SONABA produced a comprehensive report prepared with the assistance of the French consulting firm CEGOS and its Moroccan associate SOMIFOS. However, SONABA was often less than resolute in the application of the proposed policies (timing of land sales, prices of different types of land) and often proceeded erratically. C. Project Execution 3.04 The works financed under the project were expected to be executed over a five-year period and to be completed by the end of 1981. At that time, about 75% of the infrastructure works were completed and 60% of relevant expenditures were made. The loan was, however, closed since the Bank could not reach agreement with the Government on an Action Program. L' There 1/ An action program was outlined in a letter dated December 3, 1981, with which the Moroccan authorities were unable to agree. It included the actions which are summarized as recommendations of this report (page 5.06). -45- were also numerous institutional changes which affected the project. The Ministry of Tourism, previously combined with the Ministry of Housing, was made independent in 1977, but was combined again with another ministry (Industry and Commerce) in 1982. The disruptive effects of these changes and the rapid succession of five different ministers inevitably resulted in lack of policy continuity and reduced support for SONABA's operations. An additional element which hampered project Implementation was the tendency of the local and central authorities to intervene on the company's operational and administrative decisions (paras. 3.18 and 4.06). This situation was worsened by the inability of SONABA's management to deal with the above authorities firmly and effectively. 3.05 At present, the status of project implementation is as follows: (i) infrastructure works for the development of tourism and residential sites, including a reserve site, are 90% completed; construction of hotels can take place on most sites, and construction of housing units started in October 1983; (ii) construction of the regional infrastructure component (Part B) is completed, except for the replacement of the fish unloading system in the harbor of Agadir; (iii) only the study of the Sewerage Master Plan of Agadir is completed; and (iv) construction of the common facilities has not yet started. Part A of the Project: Project Area Infrastructure 3.06 Implementation of this component was characterized by two phases: (i) a relatively dynamic inception phase from October 1976 (effectiveness date) to November 1977, during which SONABA completed its internal organization, carried out final engineering and awarded contracts for the construction of the major on-site infrastructure works; and (11) a difficult execution phase during which the first phase of infrastructure works were completed, but severe delays occurred in the implementation of remaining project components. 3.07 The implementation of infrastructure works was divided into on-site infrastructure and connections to Agadir's networks. SONABA assumed direct responsibility for executing all on-site infrastructure with the exception of the telecommunication facilities entrusted to PTT. 1/ As for the construction of the infrastructure connections, SONABA assumed responsibility for the road and sewerage works only, and assigned the execution of those for water and power to ONEP and ONE, respectively. 3.08 The Greek consulting firm Doxiadis Associates assisted SONABA in project implementation from June 1976 to June 1981. Subsequently, upon completion of its contract for professional services, it was replaced by the Moroccan firm Omnium Technique Maroc (0TM) for supervising the remaining infrastructure works. 3.09 On-Site Infrastructure. SONABA awarded infrastructure contracts for the development of the bulk of the UAT-Founty land on schedule. Because of higher than expected costs, however, the program of works defined in the final 1/ Following PTT's reorganization, the works were actually carried out by its offspring, the Soci6ti Nationale des T414communications (SNT). - 46 - design was reduced by (a) either postponing or transferring to the private sector the construction of tertiary infrastructure in some residential areas, and (b) lowering the standards for some infrastructure facilities. In 1980, SONABA decided to expand its land development program to include the servicing of the residential areas previously postponed. In 1981, it further included the development of a site originally envisaged as a reserve for later development. These decisions were based on the following factors: (i) most importantly, demand for residential land showed considerable strength; (ii) the company could achieve cost savings on the initial development program; and (iii) the progressive devaluation of the dirham versus the dollar increased the amount of works which could be implemented with the Bank loan. 3.10 The additional sites increased the on-site infrastructute program to the provision of serviced sites for the construction of about 11,500 hotel beds and 2,870 housing units, or 64% and 10% more than planned at appraisal. Except for the introduction of the reserve site, the capacity increased as the result of the finalization of the general land use plan of the UAT-Founty into detailed subdivision plans for each tourism and residential section. 3.11 Connections. The execution of the connection works from UAT-Founty development to Agadir's sewerage, water supply and telecommunication systems was carried out as originally envisaged, with only minor delays. The power connection, on the other hand, required long negotiations between SONABA and ONE. Ultimately, the two agencies agreed, with the Bank's approval, that the connection would be carried out as part of a more general expansion and rehabilitation of power transmission and distribution in the southeastern section of Agadir. This included the construction of a 40-mw transformer station and 27 km of 60-ky transmission line. SONABA contributed to the overall project cost on the basis of its estimated share of power demand of 16 mw. 3.12 The implementation of road connections was delayed by financial and technical constraints. Initially, construction of two bridges was postponed to reduce project expenditures. Subsequently, they were brought back into the project and their design had to be reviewed in light of the result of a study on the impact of flooding on the river bed. The design of the crossroad connecting the UAT-Founty development to the provincial road RP32 was the subject of controversy between the local authority and SONABA (para. 3.18), which failed to take a firm stand and go ahead with the construction of these structures. At present, one of the bridges is being constructed, but SONABA has yet to award contracts for the construction of the remaining bridge and of the crossroad. 3.13 Common Facilities. The implementation of the common facilities experienced the most serious delay and, to date, construction has yet to be started. Delays occurred mainly in the preparation of architectural designs, technical drawings and bidding documents which were only completed by the end of 1981, the official loan closing date. Given these delays and the pending closing date, the Bank suggested 'hat SONABA transfer the implementation of the common facilities to the private sector. At present, SONABA has not yet taken a decision to that effect. - 47 - Part B of the Project - Regional Infrastructure 3.14 Of the three components originally envisaged in this part of the project, the construction of the Ait Melloul Bypass and the upgrading of the tertiary road 7002 have been completed. The replacement of the present facilities for unloading fish in Agadir's harbor has been postponed because the Port Authorities and the fishermen concerned could not define proper arrangements for operating the proposed new facilities. However, the Port Authorities have carried out improvements to the existing facilities which have considerably reduced pollution. As a result, it may not be necessary to install new fish pumps. 3.15 Implementation of the Ait Melloul Bypass was carried out as agreed and the quality of construction works was satisfactory, although the overall program was completed with a delay of about 18 months. The upgrading of the tertiary road 7002 encountered difficulties arising from the bankruptcy of the initial contractor. Consequently, the contract had to be terminated and awarded to another firm. However, all works were completed satisfactorily by mid-1983, or 2.5 years later than expected. Part C of the Project - Studies 3.16 Of the four studies originally envisaged, only that concerning the preparation of the sewerage master plan for Agadir's metropolitan area was carried out and completed. The Bank's water supply and sewerage division participated in the supervision of this project component and held extensive discussions with the Agadir Delegation of Public Works for possible Bank financing of a sewerage project. This has not materialized as the Government has been unable to establish an appropriate utility agency to operate the proposed facilities. 3.17 Studies for planning the development of Agadir's metropolitan area and for preserving rural sites in the region were not carried out largely because of the institutional changes referred to in para. 3.04 which caused inordinate administrative delays. The Ministry of Housing, however, eventually did carry out some physical planning studies which partially serve the same purpose. D. Procurement 3.18 There were no significant procurement problems throughout project execution. Two issues are, however, worth mentioning. The lowest evaluated bids of a first tender for construction and equipping of UAT's internal infrastructure made in March 1977 showed 65% cost overrun with respect to consultants' estimates. In August 1977, SONABA invited all bidders to resubmit new offers based on slightly revised bidding documents. The new bids were lower (only 17% above March estimates), and were accepted by SONABA. The steps taken by SONABA in reinviting tenders and in the evaluation and comparison of bids were in accordance with Moroccan procurement procedures and did not contradict Bank/IDA guidelines nor Schedule 4 of the Loan Agreement. However, SONABA failed to report them to the Bank prior to any action. In January 1981, SONABA opened bids for the construction of the crossroad. - 48 - Contract awarding was, however, held up by the Governor of Agadir who favored the construction of a multilevel intersection costlier than that envisaged by SONABA %ith the approval of the Municipality of Agadir and the local delegation of the Ministry of Public Works. So far, the matter has not yet been resolved. E. Project Costs 3.19 A detailed comparison between appraisal and actual costs by project component is given in Annex I. The total cost for implementing part A of the project (see Table 1) amounts to DH 109.1 million (US$22.3 million). This includes about 60% of expenditures already incurred at the time of closing and the remaining expenditures needed to complete infrastructure works. The cost of on-site infrastructure and that of connection works are combined since this distinction was not considered at the time of appraisal. Final costs for the individual infrastructure components vary greatly compared to the appraisal estimates. These differences stem largely from the fact that the estimates were based on preliminary designs and that considerable changes in the scope and level of service of the individual infrastructure facilities were introduced during final design. Additional differences are due to the effects of inflation on costs as well as transfer of items between infrastructure packages (e.g., drainage facilities and landscaping works implemented under the street construction contract); differences in dollar costs reflect also the very sharp appreciation of the dollar against the dirham since appraisal. 1' 3.20 The total cost for implementing the Ait Melloul bypass (Part B) was DH 12.2 million, or 30% less than appraisal estimates. The savings for this component are ascribed to overestimates at the time of appraisal determined by expectations of high inflation and upward pressure on construction prices, which did not materialize. The total cost of the CT7002 is DH 5 million, or 16% less than envisaged at appraisal. Cost data are not very relevant because the component was appraised on the basis of a tentative program of localized improvements which was defined only during project implementation. 3.21 Total cost of the sewerage study (Part C of the project) amounted to DH 2.7 million (US$0.6 million), or 30% more than estimated at appraisal. 1/ US$1.0 = DH 3.8 at appraisal versus US$1.0 = DH 8.20 as of December 1983. - 49 - Tal as COMPARISON OF APPRAISAL FORECAST AND ACTUAL PROJECT COSTS (DR and Ust '000) Appraisel Actuji1 Cost DH US$ 2 DH US$ 2 Differential (DRi) gft unrW 4g 3 100 1.28 Site preparation, streets and parking 32,359 8,518 33 j2,578 6,059 29.9 1.00 Sewerage and drainage facilities 10,430 2,742 12 26,626 6,071 24.4 2.55 Water supply 4,584 1,206 5 10,405 2,341 9.5 2.27 Power supply 16,142 4,248 19 22,885 4,936 21.0 1.42 Street lighting 4,606 1,212 5 7,101 1,501 6.5 1.54 Telecommunications 6,984 1,761 9 7,846 1,190 7.2 1.17 Landscaping 10,326 2,717 12 1,664 233 1.5 0.16 Common Faci.Lt.. ies 35.173 25I5 o - - - - Shopping centers 24,507 6,449 70 - - - - Sport and beach facilities 8,448 2,223 24 - - - - Maintenance facilities 2,218 583 6 - - - - F. Performance of Consultants 3.22 The bulk of consulting services financed under the project consisted of design and supervision of the infrastructure works. The selected international consulting firm performed in a fully professional fashion despite some tensions with SONABA's management during the last period of its assignment. The experience with the consultants appointed to prepare a study on pricing of land and promotion of land sales was satisfactory. The performance of the consultants responsible for the architectural designs of the common facilities complex was disappointing because of continuous delays partly due to the consultants themselves and partly due to continuous changing instructions given to them by SONABA. International consultants respoisible for engineering studies of the regional component and for the Agadir Sewerage Master Plan performed satisfactorily. - 50 - G. Th eank's Performance 3.23 The Bank appraised a project which made sound sense and generally assured itself that appropriate actions were taken during implementation. However, the effectiveness of land use/planning procedures may have been overestimated, hence the effectiveness delays. The Bank supervised the project about twice annually and provided detailed technical assistance on project modifications; it was also able to centralize action in Rabat, particularly on infrastructure items (water, sewerage, electricity). The Bank was firm in not extending the closing date beyond the original date, in the absence of an agreed action plan, and therefore cancelled more than half of the loan; subsequent events have confirmed the wisdom of this decision. Although the Bank paid considerable attention to redress weaknesses in SONABA's management, it was unable to remedy these problems. IV. INSTITUTIONAL. ECONOMIC AND FINANCIAL PERFORMANCE A. Institutional Aspects 4.01 Because of its integrated nature, the project could have been implemented by the municipality or by the ministerial departments in charge of infrastructure development, in particular, the then Ministry of Housing and Tourism. In order to ensure a more effective project execution and a better linkage between the development of unserviced land and its transfer to private investors for the construction of tourism, housing and commercial facilities, the Bank and Government concurred on establishing SONABA, an autonomous land development company under the responsibility of the Ministry of Housing and Tourism. This decision was also motivated by the desire to ensure that investment promotion and land sale policies be tree of political considerations and not be hampered by bureaucratic constraints. This objective was not achieved satisfactorily. 4.02 SONABA was beaded by a Director General assisted by a Secretary General. It was organized into four departmentst Administration, Technical, Financial and Commercial. At the beginning, most of the staff was relatively inexperienced to cope with the implementation and supervision of the project. Moreover, by the time of change in SONABA's Director General (November 1977), one of the major operational problem of SONABA was the lack of clarity in the duties and responsibilities of the statt. This problem was gradually solved and by 1980, SONABA became properly organized and well staffed. Although the staff of SONABA performed effectively, its management remained, however, weak. B. Land Sales and Tourism Investment Promotion 4.03 At the start of project implementation, SONABA embarked on a strong program to establish a sales department and prepare appropriate land sales and tourism investment promotion programs. In particular, SONABA prepared information on the project (including a film) and started promoting tourism - 51 - investments in Morocco and abroad. It awarded a contract to the French firm CEGOS and its Moroccan associate SOMIFOS to prepare the study defining land prices of the various types of land on the basis of their development cost and their marketability (location, construction volume and prices of alternative land supply in Agadir). It resulted in the following average baseline costs (per m in 1980 prices): Hotels - DH 145; Villa - DH 250; Apartment - DH 710; and Public Use - DH 75. Hotel land was priced not to exceed 10% of investment costs which is considered a norm in the industry. The high prices for residential land reflect the short supply of serviced land in Agadir (and Morocco in general). 4.04 Momentum was lost at the time of changes in SONABA's management. The conclusions of the studies defining land prices and sales policies were subject to continuous updating and revisions partly due to the need to reassess land development costs and market prospects, and partly to conflicting indications coming from SONABA's Board of Directors. SONABA also encountered difficulties in completing land acquisition for the project. The government law assigning SONABA the mostly public land (state, municipal and collective) included in the project area and expropriating the small portion of private land had to be amended in order to offset legal flaws. Prices had to be renegotiated because public owners concerned did not recognize the informal agreements reached with SONABA before project appraisal. 4.05 SONABA started accepting land purchase requests at the beginning of 1977. Demand proved to be strong, particularly for plots earmarked for detached and semi-detached housing. Due to the above mentioned problems, however, land sales actually started only in November 1980, and initially focused on residential plots. By mid-1981, SONABA had assigned land for some 642 residential plots for individual housing (68.5% of the total), 18 plots for hotel construction (12%), and one plot each for apartment buildings and commercial activities, and had started receiving deposits. 4.06 SONABA, however, soon had to discontinue land sales and the promotion of tourism investments because of a decision by the central government to stop any construction on the UAT-Founty until a general revision of the architectural and land development plans could be carried out by the King's architect, who had designed a new Royal Palace for construction next to the project area. SONABA was obliged to hold up signing the final sale contracts, thus jeopardizing the company's image and creating considerable concern among potential investors. Land sales were reactivated only at the beginning of 1983. -' This entailed a delay of about four years at the beginning of the construction process I and had serious consequences on the project's economic return as well as on the company's financial position. The status of land sales as of December 31, 1983, and the programming of remaining land sales are given in Annexes II and III, respectively. 1/ Except for the sea front section of the tourism area, whose development plan has yet to be completed and approved. 2/ Construction of housing units started at the beginning of 1984, and construction of hotels is now expected to start in 1985. - 52 - C. Economic Re-Evaluation 4.07 Since construction of tourism facilities is several years behind schedule in the UAT, it is not possible to calculate a rate of return ex-post. A rate of return is calculated, however, from costs that have already been incurred, and on costs and benefits projected for the remaining twenty-two years of the original thirty-year project life. The rate underestimates returns since benefit streams are truncated at 30 years from the start of the project although they are postponed to a greater extent than the cost streams. The rate of return is therefore considerably lower than would be found by re-evaluating the life of the assets, or by re-appraisal, i.e, by treating the costs already incurred as sunk costs. 4.08 Costs include the economic cost of the land (foregone agricultural output), the capital costs of infrastructure and hotel construction as well as recurrent costs related to operation and maintenance, promotion of tourism, and manpower training. Costs related to modifications of the project and costs incurred after closing but necessary for fully realizing project benefits are included. Benefits attributable to the UAT component include the benefits of the residential component (taken to be the sale price of the developed land) and incremental expenditures in the Agadir area, calculated from the gross operating profit (GOP) of the facilities benefitting from increased commerce in the area. The market assumptions are that capacity will continue to expand as in the past and that occupancy rates will remain at around 70%. Although this may appear optimistic, Agadir's hotel capacity has grown rapidly and consistently over the past 20 years, and there is no reason to expect a slowdown in past trends. On the contrary, as Agadir grows, it becomes progressively a more attractive destination. 4.09 The economic rate of return is about 13%. The economic return on the project would be sensitive to further delays in benefits, increases in construction costs, or lower revenues than expected due to less tourism activity. Rates of return reflecting variations in these assumptions are given in the table below. In addition, in order to evaluate the tourism-related aspects of the project, a rate of return is calculated without the costs and benefits attributable to residential housing, and is given below. Rate of Return () Base Estimate 12.9 One (additional) year delay in tourism receipts 11.3 Construction costs of hotels up 20% 11.3 G.O.P. of tourism facilities down 20% 10.6 Tourism-related costs and benefits (without residential land) 11.3 - 53 - The rate of return is robust given the relatively wide range of sensitivity assumptions. This is due, in part, to the fact that construction costs and to a greater extent, benefits, are scheduled to begin several years from now, and variations are thus heavily discounted. The residential land component increases the rate of return considerably, in spite of the probable underestimation arising from the use of land sales, rather than imputed rents (data on housing expected to be of comparable value were not available), in the computation of benefits. Details on the economic reevaluation of the project are given in Annex IV. D. Financial Performance of SONABA 4.10 SONABA's balance sheets are shown in Annex V for the years 1980 to 1982. No income statements are shown as all expenses were capitalized into work in progress. No accounts have been received since the closing of the project. SONABA managed its working capital reasonably well until the end of 1982 and was able to amortize disbursements on a government loan (DR 34.6 million). The interruption in land sales (para. 4.06) resulted in a deteriorating working capital position in 1983 which continues in 1984 (current liabilities being cash advances on purchase options). Projections (Annex 4, table 1) show that by the time all land is sold, SONABA will have recovered all investment costs at a profit; however, the period 1984-85 is critical as revenues and available working capital will not meet debt service requirements and other current liabilities unless the rhythm of land sales is increased through an aggressive marketing and investment promotion program as proposed in para. 5.06. V. CONCLUSIONS AND RECOMMENDATIONS 5.01 Despite delays and the serious problems which affected implementation of the project, it still has the potential to be successful if all remaining works are rapidly completed and if SONABA improves its managerial implementation capacity. The need for project facilities is clear, viz the growth of tourism activities in Agadir since the time of appraisal (4,000 hotel beds in 1975 to 13,000 at the end of 1983), and by the good performance of the sector in terms of occupancy rates and gross operating profits which remained basically stable at the level of 70% and 33%, respectively, in spite of the considerable capacity expansion. Agadir remains the leading and most profitable (financially and economically) tourism destination in the country. This promises a successful development of the UAT-Founty area which is also reflected in the increasing interest now shown by private investors in the construction of hotels and residential units there. -- 54 - A. Proiect Design 5.02 The project was designed as an integrated package of actions, including the provision of infrastructure for the development of a new hotel and residential site, together with measures aimed at preventing potential problems deriving from additional tourism activities (e.g., traffic, pollution, haphazard urban growth, protection of cultural heritage). While the project has been relatively successful in implementing infrastructure works, it has not been successful in the software and studies aspects. 5.03 Despite delays in implementation, the original development goals (7,000 hotel beds and 2,600 housing units) are likely to be exceeded by 64% and 10%, respectively, because of modifications introduced into the land use plan of the UAT-Founty during project execution and inclusion of the reserved site (para. 3.09). This increase in capacity constitutes a positive development since it will not only permit a more efficient use of the infrastructure investment but also generate additional income which will partially offset the decrease in the economic rate of return resulting from delays in the development of tourism accommodation facilities. 5.04 The main reason the studies were not completed on time can be traced to the lack of clarity in their objectives, as well as to inadequate consideration of the institutional arrangements for their implementation at appraisal. This resulted in a lack of commitment on the part of the concerned agencies, compounded by numerous institutional changes. Only the Sewerage Master Plan study was successfully implemented, since it had precise Terms of Reference prepared at the time of appraisal with clear objectives (i.e., preparation of technical documents for the execution of physical facilities). In retrospect, agreement should have been sought on the terms of reference for all studies at appraisal. B.. Institutional Arrangements 5.05 While the decision to create an independer.c tourism development agency was sound and certainly eased project implementition to some extent, it did not resolve all the potential problems nor did it fully accomplish the purpose for which it was designed. Being a government-sponsored company with exclusively public capital, SONABA could never achieve adequate freedom of action and was frequently subject to political pressures by the local and central administrations represented in its board of directors by the Minister of Tourism (President) and the Provincial Governor (Vice President). In retrospect, if possible, it would have been preferable to increase the autonomy of the company by reducing government participation and widening its capital structure to private shareholders. A more balanced representation on the board of directors might have allowed a more dynamic role for the company's management. - 55 - C. Recommendations 5.06 The potential for tourism development in Agadir has yet to be tapped by SONABA. To help tap this potential, SONABA will have to take full advantage of the interest shown by private investors in the UAT-Founty development, and take the following actions as soon as possible: (i) implement an aggressive sales and investment promotion program. This would require (a) a considerable strengthening of the sales department (e.g., recruitment of a tourism marketing specialist), and (b) assistance to investors in completing administrative procedures prior to construction; (ii) finalize the development plan of the beach front area and initiate land sales since demand by two major investors is very strong; (iii) hand over implementation of the common facilities to the private sector while offering incentives to start construction immediately; and (iv) complete remaining infrastructure works, in particular the crossroad and the bridge over the river linking UAT-Founty to STB. {{ . m B ti- - I Ei s i i s" U i i ii lø -~~~~ t uN~I 8 I ltEnd ' MM M - #8 el i @kø 1, 0 59 Ig - i = - BB -BB ~ a~BO{ -4 - I: BBBs9 ~B B B*MW B B.Ex BB§ B,Es E B I a m a I e- II *llI -I • - 57 - ac= - aY O AGADIR UaM aWAr S"AU - SFATW OF LAND SALE NO. of Revenues Plots Area of wbtal land apply Percenta2e of Sales fan Land Use Sold Land Sold No. of plots Area in ND. in Area land Sales (.) W.) (W) .) (Dii a/ Individual Housing 737 207,212 1,012 327,406 73.0 63.5 43,812,389 Hotels 12 96,649 73 436,065 16.4 22.2 5,894,970 Apearbet Buildings 2 1,177 52 315,840 3.8 0.3 236,000 Oamecial Activities 1 50 - 34,076 - 0.1 25,000 1ublic Facilities - - 17 206,098 - - IDOAL 752 305,088 - 1,319,485 - 23.1 49,968,359 j Peprmsming about 73Z of total value. Illegal script. Printout teninated by systa. - 58 - AMEX III lM00 - MY OF AGADIK 'lURISM 1MW1EC SONABA. - 1RLRIMMIG OF IAND SALES Status of land Sales as of 12/31/63 1984 1985 19W 1987 1988 1989 IOAL Individual Housing Area sold (m2) 207,212 43,963 39,2b9 36,942 - - - 327,406 land sales (DR '000)/ 43,812.4 33,738.4 15,715.6 16,623.9 - - - 109,890.2 Hotels Area sold (n3) 96,649 - 114,000 45,867 68,546 31,389 79,614 436,065 land sales (DR '000)a/ 5,595.0 4,210.5 13,338.0 6,421.4 9,264.8 3,672.5 5,732.2 48,534.4 Apartument Buildigs Area sold (m3) 1,177 47,376 63,168 78,960 63,168 31,584 30,407 315,840 land sales (DH '000)A/ 236.0 19,185.2 29,057.3 36,321.6 33,479.0 16,739.5 16,115.7 151,134.3 Comnrcial Activities Area sold (m3) 50 - 9,804 10,067 8,537 4,250 1,368 34,076 land sales (M '000)a/ 25.0 - 8,468.5 10,133.5 9,226.6 5,525.0 1,915.2 35,268.8 Public Facilities Area sold (a3) - - 3,014 105,095 15,656 8,789 73,544 206,098 Land sales (EW '000)a/ - - 301.4 10,509.5 1,565.6 878.9 7,354.4 20,609.8 1TAL Area sold Ga3) 305,088 91,939 229,275 276,931 155,907 76,012 184,933 1,319,485 land sales (DR '000)4 49,968.4 57,134.0 66,880.8 80,009.9 53,536 26,816.9 31,117.5 365,463.5 Oumlative Land Sale (%) 13.7 29.3 47.6 69.5 84.1 91.5 100 - # Including outstanding payents from previous yeas. - 59 - ANNEX IV MOROCCO - BAY OF AGADIR TOURISM PROJECT CALCULATION OF THE FCONOMIC RATE OF RETURN ON UAT COMPONENT The rate of return is estimated from costs that have already been incurred and on costs and benefits projected for the remaining twenty-two years of the original thirty year project life. It will underestimate returns since benefit streams are truncated 30 years from appraisal date, although they are postponed to a much greater extent than the cost streams. The rate of return is therefore likely to be considerably lower than would be found by re-evaluating the life of the assets, or by re-appraisal, i.e., by treating the costs already incurred as sunk costs. Schedule of Cost and Benefit Flows. Construction of tourism facilities has not started, although about one-fourth of the lots has been sold. A negligible proportion of the commercial land, and none of the land for public facilities has been sold. Accordingly, costs have been based on a revised schedule of land sales, construction activity, and occupancy (Tables 2 and 3), which assumes a lag of about three years from the time of sale to the end of construction, and a build-up of occupancy from 50% in the first year to 60% in the second and 70% in the third year and thereafter. Benefits Benefits attributed to the UAT component, apart from those related to housing, stem entirely from incremental expenditures in the Agadir area; i.e., expenditures that would not have occurred in the absence of the project. The UAT component would provide tourist accommodation, residential housing, and other facilities (shopping, restaurants, and entertainment, etc.). The benefits arising from the component, therefore, include: (i) Expenditures of tourists stayinz in the UAT. These include expenditures on lodging. food, drinks, entertainment, and other services both within and outside the UAT area; (ii) Expenditures of residents at UAT facilities. The proximity of the common recreational and commercial facilities to the new residential housing should foster additional expenditures by residents. These are projected conservatively to be one-tenth of the tourist expenditures at these facilities; and (Mi1) The benefits arising from the residential housing. In the absence of data on refts of comparable housing in the Agadir area, it is difficult to estimate the value of the shelter provided by the proposed housing. The sale price of serviced land has been used as a proxy but is likely to underestimate benefits. - 60 - It is estimated that 90% of the projected tourism activity in the UAT area will be incremental, i.e. that excess capacity exists elsewhere in Agadir that could have accommmodated 10% of the tourists expected to stay in the UAT. Accordingly, total benefits are adjusted to take this into consideration. The benefits arising from tourism-related expenditures are taken as the gross operating profit (g.o.p.) of all facilities within the UAT, and the g.o.p. of facilities outside the UAT arising from provision of services to tourists. Gross operating profit is calculated as total receipts minus operating costs. Included in operating costs are costs of sales, as well as personnel, administrative, promotional, utility and maintenance costs, non-income taxes and, if applicable, rent and service charges. Taxes that have been deducted as operating costs represent only a transfer of resources, and are therefore re-included as a stream of benefits attributable to the project. Gross operating profit for the main category of expenditures is estimated as follows: (i) accommodation facilities: g.o.p. is assumed to increase from 26 percent of total receipts in the first year of operation to 33 percent when full occupancy has been attained. (ii) other facilities: g.o.p. is assumed to be 39 percent of receipts for facilities outside the UAT, and to increase from 31 percent to 39 percent at full occupancy for facilities inside the UAT. Total receipts are calculated from average expenditures per guestnight and the number of guestnights per year, determined in turn by the occupancy rate assumptions. Estimates of average daily per capita experlitures were based on the data given in the Tourism Expenditure Survey of 1978, adjusted for the type of accommodation in the project area and for inflation. Estimated receipts and the resulting g.o.p. streams based on the occupancy schedule, are shown in Table 4. Costs Since revenues net of operatinR costs are being considered, the cost streams for the tourist facilities are limited to their capital costs. Operating and maintenance cost of nonrevenue-earning infrastructure items such as street lighting and landscaping as well as the costs of other municipal services are to be recovered by the municipality from taxes, and therefore do not appear as a separate cost stream. The cost of acquiring the land is assumed to be the value of foregone agricultural output. !&!!-&,’謬！&‘輪織郢’& 開儲一，•認勰 發• 添！。；蠱。。莖蠱．。。。。。。蘊粩蒼。。．。。。。；。。。。。．。：藝驕 i。i。。1．。。。。。。·萋藝譽。。。，，二變。。。，巷。義荔藝邊 !.&！。。i。。。。。。。豐莘若：。，，。。．喜。．0．離藝藝磋藝韋 }:;::;:::::::;;::!:::!::!:!:;:;;l〕 〕〕〕！‘〕；;!:!,！〔！! 11｝〕〕！;i!}；〕：〕．！〕一： l。l蓬。l藝壁．．…1．讓藝，。。。蠹雙讓讓．。。．…寫邊 i讓l讓．1藝奮萋鳥。，。1．。。，。。。i，讓黑。。。．。。．。。 l讓i遲藝l藝遲華雪。騷蘊1 01，二•．1．藝變●…。。．，。 :JOlla;:!,！·，!，·，,,,,!,,‘。一！····……‘, 矗IX方開婉V &Tg- 一62• 逞奮’&&&&&&&’為擊排！l&11瞧離擺黔y ，。···……。·”二”，·。。！！藝！l&i!i·！11&&&“。” 認藝”。。”’。”&&&&&’鳥’寡，響！！·遺11&i!l&1 11 認賽”.o&9.&&&&&’鵝奎對11&11矓離 寫晝”&&&&&&&&’森黠齡！i&11矓離 痲畫”。”&&&‘。。””。。發鳥’審莞i!111&1 11&11; 讓賽。”&”。”。。”。。’。發禺’藝響i!111&1 11&11; 藝醒·。”&&&&&”。”。’。發萬’審響l！響11&1 1 101 11 變醒’。’&&”。”’。。”。”萬’華豐I！蒙11 0 11!&11; 藝醒。“&.o&&&&’六擊對！!&11戴驢 遲醒。’”。。”。”。’&&’。’萬。尋黠！l遲！i&i!i&1 11 ’變藝””。”&&&&’。”&’萬”寡響！華．寫11&1 11&i霎！ 韭賽’&”。’。’”。。。””發萬’華響！遼藝I！。！i!&11! 藝蛋”&&&&&”。””。。”發萬’尋豐義！蘿l!&!11&!!! 藝醒。”&&oo&!&”發鄉露蘿！矓’l囊對鬍 症屆。”&&&”響’&’辦華熱！！。！畫嶼群 巨薑 三日．•＿,＿書忽 蘿擔綢盡！！計＿曆”審 。繡！.&-!！擺，；鑼！,!!｝〕！〔 Annex Table I mu= - DAY Dr AGAD:R TOURM POJECT WKEMLE OF LPAD SALES m STAIff OF CUSTMUM FOR TMZST -DAT= 1984 1985 1986 1987 1988 1989 1"0 MI 1992 TOUI Area sol d (W) 96649 114000 45867 «546 31389 79614 Mffi Area ta be built (m2) 63788 75240 30272 45250 20716 52545 287811 tourist r~ to be butit 1275 1505 605 905 415 1858 Start of Construction (mo. room) for sal e in: 1984 637 638 1985 375 375 1986 180 180 245 1987 270 278 365 CN w 1988 125 125 165 1989 11£ 215 Total rooms started 637 1013 $ss 1205 60 ses 480 424 5755 Constrmtion Cost (1000 om, 1983 prices) 111475 17727S 97125 210875 112000 140875 84000 73500 1,007,125 ..a t 03 cr M P-i Annex Table 2 MOROCCO - BAY OF AGADIR TOURISM PROJECT SCHEDULE OF COMPLETION OF CONSTRUCTION AND OCCUPATION OF TOURISM FACILITIES 1988 1989 1990 1991 1992 1993 1994 1995 1996 No rooms completed luring year, from t.onstruction started 1985 500 137 1986 608 405 1987 333 222 1988 725 480 1989 385 255 1990 320 485 1991 190 290 1992 _179 236 No. rooms completed each year 500 745 738 947 865 575 675 460 250 0 a Cum. no. rooms ready 500 1245 1983 2930 3795 4370 5045 5505 5755 57S$ I Occupied rooms. of rooms completed in: 1988 2S0 300 350 3S 350 350 350 350 350 350 350 1989 69 82 ) 96 304 . 65 . .5 ) 522 522 522 522 522 522 522 1990 203 243 284 ) 167__ . 233 ) 517 517 517 517 517 517 1991 111 !33 ) 155 ) 36A 4gg 3 50. ) 663 663 663 663 663 1992 240 288 336 ) 193 231 269 ) 60S 605 6S 695 199 128 153 179 ) 160 192 224 ) 403 403 403 1994 243 291 340 ) 95 114 13_ ) 473 473 1995 145 174 203 ) 8102 119 3 22 1996 125 150 175 Total rooms occupied 2 (cumulative) 250 673 1167 1789 2389 2859 3340 3695 3934 400S 4030 r MOOCCO - SAY OF AGADIR TOURISM PROJECT REVENUES AND GROSS OPERATING PROFIT OF TOURISM-RELATED FACILITIES 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 No. of rooms occupied 250 673 1167 1789 2389 2859 3340 3695 3934 4005 4030 4030 Expenditures in lodging place (am '000) 28050 75511 130939 200728 268048 320783 3747S1 414583 44S9 449365 4S217 452170 0.o.p. as % of expenditure 26 26 27 27 28 28 29 30 31 32 33 33 e.o.0. (OH1000) 7293 19633 35354 54197 7053 89819 108678 124375 13i834 143797 149216 14 216i Expenditures in UAT. outside lodging: by tourists 8487 22845 39614 60727 81095 97049 113377 125427 133539 135950 136799 136799 by non-tourists 849 2285 3961 6073 8109 9705 11338 12543 13354 13595 13680 13680 9.o.p. as % of expenditure 31 31 32 32 33 34 35 36 37 38 39 39 O.O.D. (O10001 2894 7790 1394 21176 29437 36296 4i65 496i69 54350 S627 _ 8687 5s687 Expenditures outside UAT 8486 22845 39614 60728 81094 97049 113376 125427 133540 135949 136798 136798 g.o.p. outside UAT 3310 8910 15449 23684 31627 37849 44217 48917 52081 53020 53351 53351 - 66 - MOflCCA - RAY OF AADIR TOURISM PO.1C Table I1 SONABA BALANCE SHEETS (oN million) ASSAt gg 1gg1 niM Liabilities , 11 18 Current 29.2 23.8 17.2 Current 75.3 170.8 183.7 Work in Progress 125.4 215.3 236.9 Long-term Debt 59.0 48.0 50.3 Fixed Assets 0.4 0.3 0.5 Canital Paid In 20.0 20.0 20.0 Retained earnings 0.7 0.6 .6 181.0 239.4 254.6 155.0 139.4 254.6 =XUX musuz nzrz= Table 2 kw-IN-PROGRESS 1im 1281 1981 Work in process (opening) 84.5 125.4 215.3 Purchases 19.7 73.9 5.3 Payroll 1.9 2.1 2.2 Other expenses 14.0 8.5 7.9 Interest 5.2 5.3 6.1 Depreciation 0.1 0.1 0.1 Work in Process (closing) 125.4 215.3 236.9 - 67 - PROJECT COMPLETION REPORT MOROCCO: SECOND AND THIRD LOANS TO CREDIT IMMOBILIER ST HOTELIER (CIH) LOANS 848-NOR AND 1279-MOR June 13, 1986 Regional Projects Department IDF Division Europe, Middle East and North Africa Region - 68 - PROJECT COMPLETION REPORT CREDIT IMMOBILIER ET HOTELIER Loans 848-MR and 1279-MOR I. INTRODUCTION 1.01 Credit Immobilier et 8telier (CIH) founded in 1920, was originally a housing mortgage financing institution called Caisse de Prits Immobiliers du Maroc (changed to CIH in 1967). Two Royal Decrees of 1962 and 1968 established CIH's function of financing tourism enterprises in addition to housing construction. In 1968, the Government gave private equity holders a nominal majority in CIH. The Government and public sector control was again predominant (55% of CIH's share capital) after 1980. In 1970, CIH became the first institution to receive a Bank loan devoted exclusively to hotel financing (Loan 704-MOR). 1.02 C1H is the main institution providing long-term loans to the tourism sector in Morocco. The Bank has made four tourism loans to CIH amounting to $148.8 million, net of cancellations. The fourth loan of $100 million approved by the Board in 1981 is the last Bank loan devoted exclusively to tourism projects. However, the Bank continues its association with CIH and the first urban development and housing loan (loan 2245-MOR) of $60 million was approved by the Board in 1983. 1.03 Loan 848-MOR of US$15 million was approved by the Board on July 3, 1972 and became effective on November 1, 1972. This second loan to CJH is described in Appraisal Report DB-93a dated June 1, 1972, and in the President's Report P-1109-MOR of June 19, 1972. Loan 1279-MOR of US$25 million was approved by the Board on May 28, 1976 and became effective on November 20, 1976. This third loan to CIH is described in Appraisal Report 1077-MOR of April 30, 1976, and in the President's Report P-1854-MOR of May 14, 1976. As of October 1983, Loans 848-MOR and 1279-MOR had been fully committed and disbursed with no cancellations. The closing date of Loan 848-NOR was extended by 30 months to June 30, 1979 (para 4.05); Loan 1279-NOR was fully disbursed before the closing date of December 31, 1980. 1.04 A Project Performance Audit Report of the first loan (704-MOR) to CIH was prepared by the Operations Evaluation Department and circulated to the Board in 1978 (Report No. 1926, dated February 23, 1978). 1.05 CIH cooperated fully in the preparation of this PCR, and has provided a substantial amount of its data. II. THE ENVIRONMENT A. Economic Developments 2.01 During the 1960's and early 1970's Morocco followed a conservative approach to economic policy with limited external borrowings and a very gradual increase in the share of domestic resources allocated to investment. - 69 - Towards the mid-70's a more ambitious economic strategy was developed. Starting in 1973, the Government launched an enlarged investment program which brought about a sharp acceleration in the growth of the economy. This increase in the investment program was originally sustained by a sharp increase in phosphate prices which more than offset the oil price increase in 1973. As a result, GDP grew at 6.7% p.a. during the period 1972-77, with the industrial sector leading at 8.1% p.a. The surge in phosphate demand, however, proved temporary but both investment and current expenditures continued to grow, financed increasingly from external sources, particularly commercial. By 1977, the resource gap and the Treasury deficit had reached 20.4% and 17.6% of GDP respectively. 2.02 An austerity program was adopted in 1978, aimed at reducing internal and external imbalances to sustainable levels. The Government investment program was severely cut with many projects left uncompleted or postponed, imports and private credits were restricted, the exchange rate was adjusted and tax measures were introduced to raise current revenues. The program did not, however, address some of the fundamental structural weaknesses of the economy and by 1980 severe imbalances remained. 2.03 Subsequent Government's efforts to stabilize the economy were hampered by external and internal factors (i) a severe drought in 1980-81 reduced agricultural value added by about 20% and entailed substantial imports of cereals; (ii) the significant appreciation of the dollar vis-a-vis the dirham since 1981 raised the local currency cost of imported commodities as well as of debt service payments; (iii) the rise in international interest rates further increased the debt service burden; (iv) a further decline in 1982 of world market prices for phosphates affected export earnings adversely; (v) an intensification of hostilities in the Sahara required increased military expenditures and (vi) internal pressure further expanded the provision of social services and consumer subsidies to meet the needs of a rapidly growing population. Furthermore, expenditures under the ambitious 1981-85 Development plan induced a sharp increase in Treasury disbursements. By 1982 the Treasury deficit had reached to 14.1% of GDP and the debt service ratio 36.3% of total exports and services. 2.04. In 1983, the economic situation deteriorated rapidly and net foreign assets declined sharply. With resources virtually depleted and the debt service unsustainable the need for a stabilization program was evident and the Government prepared a program aimed to reduce the balance of payments deficit from $2.0 billion in 1982 to $1.0 billion in 1984. This objective will be pursued through limits on borrowings and on monetary expansion, a flexible exchange rate policy, and reduction in Treasury deficits. The proposed program is supported by an IMF standby agreement covering the second half of 1983 and 1984. 2.05 Economic growth is likely to remain weak over the short-term, and GDP is expected to grow by about 1 to 2 percent p.a. only, in real terms in 1984 and 1985. In the medium term the pace of economic growth could accelerate to about 4% over 1985-90 provided that the Government introduces structural measures to improve the efficiency of the economy. - 70 - B. The Tourism Sector 2.06 According to most recent data, in 1982 the tourism sector's share in GDP was about 8% and employment in the sector accounted for about 72,000 (i.e., 12% of employment in the manufacturing sector) of which 24,000 directly employed in the hotel industry and the rest in other branches of tourism activity (restaurants, travel services, handicrafts...). Gross foreign exchange earnings in the same year were in excess of $300 million and accounted for approximately 81 of the country's total exports. The iaport component of current expenditures associated with tourism operations was estimated at 10% of tourism receipts. About 601 of tourism expenditures accrued to hotels; the balance was distributed among handicrafts (15%), restaurants (15%) and other services including transportation. 2.07 While tourism hospitality in Morocco has a long tradition, its actual growth into an organized industry took place during the mid-sixties with the advent of mass tourism facilitated by improved air accessibility. Government strongly supported this development and elected tourism as one of the priority economic sectors in the 1968-72 plan with a view at promoting foreign exchange earnings and regional development. Prompted by substantial investment incentives and sustained demand, total hotel accommodation capacity was more than doubled from some 20,000 beds in 1968 to 41,000 in 1973. In the same period international tourism arrivals rose from 469,000 to 1,226,000. The promising developments of the late sixties and early seventies, however, could not be furthered in the following years. While, sustained by continuous investment incentives, hotel accomodation capacity has expanded at an average yearly rate of 6-71 to 70,700 beds (of which 57,600 in classified hotels) in 1982, international tourism arrivals have been stagnant as a result of economic difficulties in the tourism generating countries as well as domestic problems such as the Sahara conflict. Also, since the mid-seventies Government commitment to tourism development has been weakened by more pressing demands in other economic sectors and by numerous organizational changes experienced by the Ministry of Tourism. 2.08 Considering the outstanding and diversified assets of the country (summer and winter beaches, historical cities, scenery and folkore) tourism arrivals in Morocco are below the country's potential, in particular when compared with the achievements of competing destinations such as Tunisia and the Canary Islands. This is particularly disturbing in view of past investments in the development of accommodation capacity which is not fully exploited (in*1982 average bed occupancy rates in classified hotels were only 39.4% as against about 501 in Tunisia) and of the foreign exchange needs of the country. 2.09 Sectoral Issues. The main issue presently faced by the tourism sector in Morocco is temporary overcapacity both in specific tourism destinations and in specific hotel categories. This problem has been determined by the fact that often capacity expansion has been too rapid and has not been matched by adequate efforts to promote the destination and to market the facilities. In Marrakech, the number of available bednights more than doubled between 1974 and 1982. The average bed occupancy which reached 82% in the peak year of 1974, thereafter declined and was estimated at 36% in 1982. In Casablanca the recent increase in the number of 4-star hotels and stagnation in business activity due to the economic crisis led to a similar, although less serious, decline with the average bed occupancy rate estimated at 45Z in 1982. - 71 - 2.10 Other issues negatively affecting the tourism sector are (i) seasonality and subsequently low bed occupancy rates at beach resort in the North Mediterranean areas (e.g., Tangier, Restinga, Al Hoceima). This problem has been compounded by inefficiencies in promoting off season tourism and new products like vacation villages, apartment hotels and secondary residences for Europeans; (ii) excessive tourism investment incentives which may have been a cause of over-investment in hotels. These incentives include in particular an interest free Government advance equivalent to 15% of the estimated investment cost to be repaid in ten years, including five years of grace, a ten-tear full or partial income tax exemption, various-indirect tax reductions and a 2% interest rebate on hotel loans provided by CIH; and (iii) Government control on hotel tariffs, except for the 5-star hotels. This prevents the sector to better adjust to the market conditions and to fully benefit from the spending capacity of international clientele (in particular the business clientele) 1/. Some of these issues like excessive investments in northern regions with strong seasonality are addressed under CIH IV (Loan 1943-MOR). C. The Financing of Tourism 2.11 Outstanding medium and long-term credits to the economy amounted to DH 7.3 billion ($1.4 billion) at the end of 1981. CIR's share was 31.5%. About DH 900 million ($169 million), almost entirely provided by CIH, was extended for tourism investments. Medium and long term lending to tourism by commercial banks is very limited although, like for industry, the banks may rediscount such loans at the Central Bank (Banque du Maroc), if reviewed and approved by CIH.Equity participations in tourism are made mainly by CIH and BNDE, their investment portfolio standing respectively at DH 95 million ($17.8 million) and DH 28 million ($5.3 million) at the end of 1981. III. CREDIT IMMOBILIER ET HOTELIER A. Ownership and Control 3.01 CIH's share capital has been increased four times since 1972, from DH 20 million to DR 210 million in 1983. Over half (55%) of CIH's share capital is owned by publicly controlled institutions, principally through Caisse de D4p8t et de Gestion and Banque du Maroc. Other large groups of shareholders include twelve insurance companies with a combined holding of 20%, and commercial and financial institutions (15%). 3.02 CIH has 15 Board members. Four represent the private sector and eleven the public sector. The Board has delegated most of its powers to the Executive Committee composed of six selected Board members, besides CIH's President and a non-voting Government commissioner. The Board of Directors and Executive Committee are both chaired by CIH's President-Director General. 1/ However for a majority of Moroccan hotels, tariff ceilings are unlikely to affect their profitability significantly since group rates are negotiated competitively between hoteliers and tour operators and the market levels are generally below official ceiling. - 72 - The Board is responsible for the overall policy of CIH. The Executive Committee, which examines and approves all tourism loan proposals, meets about once a month. The Executive Committee delegates to its chairman and a Management Committee the power to approve non-tourism loans up to DH 150.000 subject to ratification by the Committee. Members of the Executive and Management Committees are qualified professionals and both committees are operating satisfactorily. B. Management. Staff and Policies 3.03 In December 1972, six months after Loan 848-MOR was signed, Mr. El Fihri, a former Minister of Education, was appointed President-Director General. Under Mr. El Fihri's leadership, CIH strengthened its staff, diversified and expanded its operations and became a mature institution technically able to appraise and supervise complex projects (pars 4.13 and 4.14). In 1973 CIH started lending to commercial real estate operations like land improvements and construction of office buildings. Until 1973 the growth of operations was particularly significant in housing but limited in tourism in expectation of (i) new Morocanisation laws which deterred foreign investors; and (ii) the new investment Code for Tourism which was issued in August 1973. Mr. El Fihri was assisted in his management tasks by CIH's Deputy General Manager, Mr. Benkirane who still occupies the same function today. In February 1979 Mr. El Fihri passed away and Mr. Slimani, former Minister of Economic Affairs, was appointed President-Director General in December 1979. Mr. Slimani continued the policy of staff strengthening and developed further the decentralization effort initiated by his predecessor (four'additional regional branches were opened in 1982). The volume of operations continued to increase, particularly in 1981. The caliber of CIH's management including the department heads reached high standards during the period under review. 3.04 CIH's staff has more than doubled in the last ten years and has grown by 36% in the last three years. At end 1982, CIH had a total staff of 340. The growth of professional staff is explained by (i) the expansion of CIH's portfolio; and (ii) the emphasis put on low cost housing projects which has resulted in a greater number of smaller operations and the need to deal with a broader and less educated clientele. As a result of the growth of CIH's housing portfolio siace 1977, tourism activities have received relatively less attention. CIH has now to make an effort to define more accurately its role and responsibilities as Morocco's tourism development bank (para 4.14). Communication between departments and between staff and managers has somewhat suffered from this rapid growth. A major effort would be needed to improve communication and assess the information needs of each Department. Basic management information like data on the arrears situation is often produced late, although computers were introduced a few years ago to improve and speed up data processing. Another effort will have to be made with respect to training of top and middle managers who have received less attention compared to young and relatively inexperienced staff, and also in specific areas like market analysis, a persistent weakness in CIH's appraisal of tourist projects. CIH's President is aware of these needs and is taking steps to fulfill ttem. - 73 - 3.05 Policies. CIH's policy statement, approved by the Board of Directors in 1974, establishes the following fundamental principles: (a) projects financed by CIH in the tourism and housing construction sectors must be financially, technically, and economically viable; they must be supervised by CIR during their entire life; (b) loans must be secured by adequate guarantees; (c) CIH shall provide its clients with technical assistance in the conception, implementation and operations phases of the projects; (d) an equity participation shall not exceed either 10% of CIH's total equity, or 25% of the capital of the company in which CIH takes a participation, whichever is less, except in special cases explicitly authorized by the Board. Total participations must not exceed CIH's equity. In addition, CIH has decided that its financial exposure in any hotel project should normally be limited to 20% of its equity, unless full and adequate guarantees have been obtained. C. Operations 3.06 As detailed in Annex 4, during the period of rapid economic growth in 1972-77, CIH's annual approvals increased more than five-fold to reach DH 531 million ($123 million) in 1977, far above the level projected when loan 848-MOR was appraised. Hotel loans approvals which averaged DH 39 million ($9.1 million) in 1972-75 jumped to DH 122 million ($27.2 million) in 1976 as a result of the numerous incentives offered by the Investment Code issued in August 1973 (para 2.07). The substantial slowdown of the economy durinq the 1978-80 interim austerity Plan resulted in a postponement of many investment decisions and CIH's approvals remained about constant at their 1977 level. This was followed by another sharp increase in 1981 and, for housing only, in 1982, with total approvals reaching DR 710 million ($113 million) of which DH 572 million ($ 91 million) for housing. Approvals in tourism dropped to DH 66 million ($11 million) in 1982 from DH 253 million ($47 million) in 1981, most investments being held over in expectation of the new Investment Code which was issued in June 1983. Approvals in tourism are estimated at about DH 150 million ($20 million) in 1983. Beyond 1983, the level of investments in tourism and of CIH's activity in the sector will depend on (i) the Government policies in favor of development of the sector (para 2.10), and (ii) CIHI's ability to diversify its lending activities and promote new tourism products like apartment hotels and secondary residences for European retirees. D. Portfolio 3.07 CIH's total outstanding loan portfolio which reached DH 417 million ($89 million) at the end of 1972, amounted to DH 2,598 million ($414 million) as of December 31, 1982 out of which DH 1,681 million ($268 million) for housing and comnercial loans and DH 917 million ($146 million) for hotel loans. The share of housing in CIR's total portfolio increased significantly during the period under review from 33% in 1972 to 64% in 1982 as a result of Morocco's increasing urban population which has expanded at an annual growth rate of about 5% p.a. to reach over 40% of the total population in 1980 - 74 - compared to 292 in 1960. The tourism portfolio expanded rapidly during the same period at about 10% p.a. CIH's equity portfolio increased markedly during ihe period 1972-1978 from DR 1.3 million to DR 93.0 million. Since 1979, CIH has stopped taking new equity participations and has initiated a systematic disinvestment effort. The return on this portfolio has been very low, only 0.2% in 1981. CIH's equity portfolio has remained relatively small compared with its loain portfolio. 3.08. Quality of Portfolio. CIH's housing portofolio has remained sound over the period. Arrears in principal and inerest over six months amounted to DH 75 million as of December 31, 1981 or 6% of the outstanding housing portfolio. Interest rate penalties of 2% are applied to clients in arrears. These arrears present no serious risks because the real estate value of CIH's mortgage security far exceeds its risk of loss on these loans. Nevertheless, CIH must strengthen its pressure to avoid an excessive build up of arrears in this sector. The computerization of CIH clients' monthly statements, currently in process, is expected to play a decisive role in that respect. CIH's hotel portfolio, however, has remained a source of concern and has deteriorated particularly since 1978, as summarized below. CIR - Hotel Arrears (DH million) 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Hotel port- foliol/ 286 341 321 399 454 597 685 689 865 917 Total Arrears 8.4 15.0 16.7 13.4 11.8 23.5 43.0 49.6 99.1 174.3 1 in Arre2rs 2.9 4.4 5.2 3.4 2.6 3.9 6.3 7.2 11.4 19.0 I/ Figures at end September for 1975-80, end December for 1973-74 and 1981-82. Data not available for 1972. 2/ Arrears are here defined as more than six months. 3.09 As detailed below, the public sector has been the most critical factor in the deterioration of CIH's hotel portfolio, and measures to protect CIH adequately have been discussed since negotiations of Loan 848-MOR in 1972. When Loan 1279-MOR (CIH III) was appraised in 1975, measures were agreed to reduce in two years hotel loans affected by arrears by 50%. CIH reached the agreed.target in 1977. Since 1978, however, CIN's hotel portfolio has deteriorated considerably. This deterioration is essentially due to: (a) decrease in the growth of tourist arrivals from 6% p.a. over the 1975-78 period to 2% after 1978, which resulted in a decline of profitability and cash flow for many hotels. (b) considerable arrears of three state-owned groups of hotels (Holiday Inn, Chellah Hilton and Office National des Chemins de For (ONCF)) representing 47% of CIH's total hotel arrears. Although the Bank has discussed the case of these three state-owned groups with CIH and the Government for almost a decade they have never been fully resolved. The cases of Holiday Inn and Chellah Hilton were discussed during - 75 - negotiations of Loan 848-MR in 1972 and the Government provided a comitment to protect CIH from any loss on its exposure to those borrowers. Payment on Government guarantees, however, was not always timely and effective and the matter has been a constant subject of discussion during the supervision of the loan under review and particularly at negotiations of the first housing loan to CIH in 1983. The Government paid outstanding arrears for Chellah and agreed to pay the principal in arrears and outstanding for Holiday inn over a period of ten months starting in December .1983, CIH forestalling the interests in arrears. This solution, which would resolve the Holiday Inn case (CIH's largest single arrears), is satisfactory. The ONCF case involves complex legal issues 1/ which received a partial solution during negotiations of CIR IV and were expected to be fully settled during the negotiations of the Housing Loan. The proposed solution has however subsequently been thallenged by one of the parties and the issue has therefore again been raised with the Government. The Bank is requiring a satisfactory proposal for the complete resolution of ONCF arrears as a condition of extension of the last date of subproject submission of Loan 1943-MOR (December 31, 1983). (c) Inadequate collection procedures, insufficient supervision of the hotel portfolio and weak market analysis by CIH staff which has led CIN to excessive lending in locations with an overcapacity like Marrakech. There is no systematic follow up of hotel projects and, for instance, 15 supervision reports only were issued in 1983 by the 3 staff responsible for the spervision of CIH's hotel portfolio of 200 projects. CIH's management is aware of the decline, both in quality and quantity, of hotel supervision and has agreed to prepare a plan to reorganize and strengthen the follow up of its hotel portfolio. 3.10 Although CIH's total portfolio can be considered of acceptable quality given the relatively large share of its housing portofolio, the Bank has become increasingly concerned by the deterioration of CIH's hotel portfolio. The Bank stopped approving hotel subloans in Marrakech in 1982 when it appeared that overcapacity was extremely serious. In January 1983, the Bank agreed with the Government on a satisfactory plan on public sector arrears, and set specific targets for reduction of private sector arrears. CIH made a major effort to improve its hotel portfolio, forcing the sale of several hotels to recover its arrears, and the target for reduction of private sector arrears will most likely be met at the end of 1983. As for the public sector, the plan agreed early 1983 has been implemented in part only (para 3.09), due, partly, to the serious budgetary difficulties experienced by the Treasury. The Bank is encouraging the Government to resolve this issue as rapidly as possible within the framework of budgetary realities. The Bank is also advising CIH to strengthen its supervision division and provide adequate training to its staff in market aspects of hotel project appraisal. 1/ The issues are described ins Morocco- Fourth loan to Credit Umobilier at Hotelier (CIH) Staff Appraisal Report. Report No. 3014-MOR, December 18, 1980. - 76 - E. Financial Performance 1972-1982 3.11 CIH's financial statewents and key financial indicators are detailed in Annexes 5 through 7. In spite of its large arrears on its hotel portfolio, CIR's financial performance has been good during the period 1972-1982. 3.12 Profitability. More than 90% of CIH's gross income continues to come from interest on direct loans. CIH enjoyed a spread of 2.5% to 4.3% between 1972 and 1982 and profits before taxes (and after provisions) reached satisfactory levels ranging from 14% to 23%, except for a decline in 1977. Net return on equity was stable at about 8%, increasing above 10% in 1972-73 and 1981-82. CIH's administrative expenses which averaged 1.5% of total assets in 1972-77 have decreased since 1978 to or below 1%. 3.13 Financial Position. CIH's total assets increased by 632% in DH and 443% in dollar terms over the 1972-82 period from DR 461 million ($99 million) at the end of 1972 to DH 3375 million ($538 million) at end-1982, with the main increase taking place in the period 1973-78. The debt equity ratio has remained below the limits agreed with the Bank. Substantial foreign exchange resources were secured and reached 24% of total CIH's resources in 1982 as compared to 4% in 1972 (Annex 5). In 1972-73, CIH's provisions for doubtful loans were low, reaching about 1.6% of loan portfolio. In 1974, the Bank agreed with CIH that a case-by-case review of the loan portfolio would be undertaken by the auditors. This was done although not always fully satisfactorily and CIH provisions have increased regularly since 1974. CIH's provisions of DH 11 4 million (4.4% of loan portfolio) as of December 31, 1982 are adequate to cover potential losses. 3.14 CIH's sound financial performance results in good part from a cautious borrowing policy in floating rate markets. CIH's exposure in such markets remained limited and the two Eurocurrency borrowings contracted during the 1975-82 period for a total of $35 million are fully repaid. The Government regularly protected CIH from foreign exchange losses, except for 1982 and 1983 when payments have been delayed because of the Government own financial difficulties 1/. CIH's liquidity position has been sound over the 1972-82 period. However due to bad loan collections on hotel portfolio and delays in the coverage of foreign exchange risk, CIH's liquidity has become tighter in 1983 and is projected to further deteriorate in 1984 with a projected gap of DH 140 million. The question of CIR foreign exchange losses was discussed during the supervision of CIH IV and the Government agreed to pay DH 10 million to CIH before the end of 1983 and to prepare a plan of payment of the balance (DH 81 million) in 1984. The Bank will have to monitor closely the execution 'of this plan which should maintain CIH's liquidity at an acceptable level. 1/ In 1981, the Government also informed CIH that it will have to assume the foreign exchange risk on the outstanding amount of the two.Eurocurrency loans. These loans were fully repaid in 1983. - 77 - IV. THE PROJECTS A. Objectives 4.01 The objectives of Loans 848-MOR and 1279-MOR were to provide assistance to the tourism sector of Morocco. Loan 848-NOR was committed in 1973-76 at a time of sluggish demand for Morocco's tourism facilities, when the growth of CIH's portfolio was limited, at about 9.5% p.a. Loan 1279-NOR was committed in 1976-79 when the number of tourist arrivals increased (from 1.1 million in 1976 to an average 1.4 million in 1977-80) and CIR's hotel portfolio expanded quickly at 19% p.a. The $15 million Loan 848-MOR and the $25 million Loan 1279-NOR were specifically designed to: a. Provide funds to CIH to finance the import component of most of the hotels and other tourism facilities build up in Morocco during the 1973-79 period. b. Facilitate the mobilization of other foreign resources by CIH through the confidence expressed by continuing Bank lending to CIH. c. Assist in the institution building of CIH (mainly in the field of financial and economic appraisal), in order to prepare CIH for its assigned major role in financing tourism projects. d. Provide assistance to the Ministry of Tourism to define a tourism sector policy, review the system of investment incentives and improve the system of collection and analysis of tourism statistics. B. cofinancing 4.02 Over the period under review, CIH received several loans from various Moroccan and foreign institutions, including two LIBOR index Euro-dollar borrowings contracted through commerc ial banks for a total amount of $35 million. C. Use of Loan 848-MOR 4.03 The $15 million loan assisted in the financing of 37 projects with a total value of $74.4 million and employing about 3,250. The 37 projects included four 5-star hotels, ten 4-star hotels, fifteen 3-star hotels, five 2 and 1-star hotels, two apartment-hotels and one camping site. The average maturity of CIH loans for hotel projects was 15 years (including one to threeyears grace period) for construction loans and 10 years (including one year grace period) for equipment loans. The results achieved are summarized below : Loan 848-MOR ($1= DH 4.27 *) Number of projects assisted 37 Cost of projects ($ million) 74.4 Employment created 3,254 Investment cost per job created ($) 22,872 Average Internal Rate of Return 18.1% - 78 - 4.04 The 37 projects financed by Loan 848-MOR have been completed and most of them are operating satisfactorily. Four hotel projects were in arrears as of November 30, 1983. Early 1983, CIR signed a memorandum of understanding with the three hotels which had accumulated the largest arrears for the gradual repayment of DH 17.7 million in arrears and the rescheduling of part of the principal outstanding (DR 6.5 million were paid in 1983). Most of the projects financed under Loan 848-MOR were completed within CIR's cost estimates; a few projects sufferred cost overruns due to delays in construction. The results indicated above, including CIH's actions to improve loan collection for the three hotels in arrears are considered satisfactory. 4.05 Due to a low demand for new tourism investments in 1972-75 during the first years of Loan commitments and delays in construction of some hotels, the last date for project submission had to be extended by 28 months to July 31, 1976 and the closing date by 30 months to June 30, 1979. The loan was fully disbursed at that date. D. Use of Loan 1279-MR 4.06 The $25 million loan assisted in the financing of 30 projects with a total value of $110.4 million and employing about 3,750. The 30 projects included three 5-star hotels, twelve 4-star hotels, eight 3-star hotels, one 1 -star hotel and six apartment hotels. The average maturity and grace of CIH loans for hotel projects were similar to that of Loan 848-MOR (para 4.03). The results achieved are summarized below (details in Regional Files). Loan 1279-MOR (1 - DR 3.99 *) Number of projects assisted 30 Cost of projects ($million) 110.4 Employment created 3,757 investment cost per job created ($) 29,396 Average Internal Rate of Return 15.6 * Average exchange rate 1977-79. 4.07 All projects financed under Loan 1279-MOR are operational except two, SIDET-Merrakech and SIDET-Agadir for which serious difficulties have arisen. SIDET is a state-owned group, with Royal Air Maroc (Morocco's national airline) and BNDE (the industrial development bank) as the main shareholders. The two projects which represented a total investment of DH 86.4 million ($21.6 million) of which $6.9 million were financed under Loan 1279-MOR have suffered considerable delays in construction mainly due to a slow subscription of capital funds and poor management. Although the Agadir hotel is almost completed and the Marrakech one well advanced, SIDET has still to find a group to manage the hotels, a difficult task given the arrears of DR 27.2 million already accrued by the two projects. All other projects financed under Loan 1279-NOR are operating.with no serious difficulties although seven projects are in arrears (a satisfactory solution was found for two of them already financed under Loan 848-NOR (para 4.04)). The five other projects are in start-up period, and their profitability remains to be tested, in particular for four of them located in Marrakech where the average occupancy rate is at present below CIR's appraisal estimates. - 79 - 4.08 Disbursements followed closely the estimates made at the time of appraisal and the loan was fully disbursed before the closing date (December 31, 1980). Before that date, the last date of subproject submission was extended by one year to June 30, 1979 to provide CIH with some flexibility in the cancellation of earlier commitments and reallocation of funds to new projects. E. Impact of Bank Loans on Tourism a. Hotel Projects 4.09 The two loans under review cover the period from 1972 to 1980. CIH has made a substantial contribution to financing tourism projects during that period and its hotel portfolio increased from DU 277 million to DH 760 million. Almost all tourism projects realized during the period were financed by CIH; most of them received Bank funds. 4.10. A breakdown of the geographical distribution of the 67 projects financed under Loans 848-MOR and 1279-MOR is given below. Agadir and Marrakech received 72% of Bank lending for tourism projects under Loans 848-MOR and 1279-MOR for a total investment cost of $131 million, of which $84.5 in Agadir and $46.4 million in Marrakech. CIH's total arrears in 10 hotels financed under Loans 848-MOR and 1279-MOR reached DH 60.9 million ($8.1 million) as of May 31, 1983. Although'46% of hotel investment financed by the two loans were realized in Agadir, as compared with 25% in Marrakech, arrears are concentrated in Marrakech (36% of CIH total hotel arrears) and in other locations with low bed occupancy rates such as Tangers. Loans 848-NOR and 1279-MOR and CIH Hotel Arrears: Geographical Distribution (8'000)* Loan 84-OR Loan 1279-MOR TOTAL CIH Total ** Investment Investment Investment Hotel Arrears Cost IBRD Cost IBRD Cost IBRD (%) Marrakech 8,004 1,575 38,421 11,162 46,425 12,737 36.1 Agadir 32,340 6,441 52,122 9,316 84,462 15,757 18.7 Casablanca /Rabat 8,338 2,400 6,107 1,621 14,445 4,021 6.4 Other 25,743 4,195 13,790 2,911 39,533 7,106 38.8 Total 74,Z25 14,611 110,440 25,010 184,865 39,621 100.0 * $1 DH4.27 (average 1974-76 exchange rate) for Loan 848-MOR. $1 a DH3.99 (average 1977-79 exchange rate) for Loan 1279-MOR. ** Estimate as of May 31, 1983. - 80 - This performance is somewhat below expectations and reflect the difficulty to assess tourism market of hotel projects, both for CIH and for the Bank since eight of the ten hotel projects in arrears received "above free-limit" subloans. In particular, the Moroccan authorities, CIH and the Bank have been slow to react to the heavy concentration of hotel projects in Marrakech in the late seventies at the time the demand expanded slower than expected. This situation has been corrected and the Bank has stopped financing new hotel projects in MarrAkech in 1982. .b. Tourism Policies 4.11 When CIR II was appraised in 1972, the Bank expressed concern that excessive incentives may lead to over-investment in hotels and misallocation of resources and raised the following questions: - what was the economic returns to Morocco resulting from tourism investments; - whether the aggregate level of incentives should be increased, decreased or left unchanged; whether the particular mix of incentives should be modified; and whether the system should be made more selective in favor of specific regions and types of accommodations. However reliable tourism statistics were deficient and neither the Government nor the Bank were in a position to bring a satisfactory answer to these questions. The Moroccan authorities could not elaborate a rational strategy for the development of the sector, nor could they have a sound basis for restructuring the incentives and tariff control policies. It was therefore agreed under CIH III that ways to reduce these constraints would be studied during the commitment period of the loan, and that a policy framework would be developed by the Ministry of Tourism before a future Bank loan. In the meantime CI would adopt more stringent appraisal criteria for its projects, including the calculation of an economic rate of return and the application of a cut-off level of 10%. 4.12 As a basis for the formulation of a tourism policy framework, the Government agreed to proceed to: - the collection of statistical information and reliable data on hotel occupancies and bednights. - a detailed tourist expenditure survey to be undertaken by a consulting firm based on terms of riference drafted by the Bank. - the completion of regional master plans for the development of tourism infrastructure and facilities in the principal touristic regions of Morocco. - the preparation of an in-depth study of the cost and benefits of tourism investments (phases I and II of three phases). - 81 - These analyses were completed and data collection on hotel occupancies and bednights has been improved. The studies were instrumental in reaching an agreement with the Government in 1979 to reduce the interest rebate of 5% on hotel loans by CIH to 2% and discontinue new hotel construction in areas where average bed occupancy rates are less than 40% p.a. (mainly in the North Mediterranean beaches). However important questions remained unanswered, namely (i) the economic justification of tourism investments and in particular whether, as argued by the Government, the incentive package is justified on the ground that the economic return on tourism investment is higher than the opportunity cost of-capital; and (ii) the net impact of tourism investments and tourism receipts on the balance of payments. An in-depth cost benefit analysis to be realized jointly by CIH and the Ministry of Tourism under CIH IV is expected to provide more complete data to bring an adequate answer to these questions. The Bank will have to review carefully the extension and the results of that study in order to focus its dialogue with the Government on the more critical issues, in particular the investment incentives. c. Institutional Building and Role of CR. 4.13 The strengthening of CIH in an institution technically able to (i) appraise and supervise complex projects; and (ii) become a reliable advisor to the Government on sector policy reforms is a significant achievement of the two loans under review. 4.14 The quality of CIH's appraisals of hotel loans has steadily improved over the years. In most cases, the technical, legal and financial aspects of projects as well as the management arrangements made by the sponsors are adequately covered by CIH's reports. CIH's engineers have acquired considerable experience in construction costs and are able to effectively scrutinize cost estimates, and CIR's appraisal staff exercise a positive influence on the conception, design and organization of hotel projects. CIH's economic analysis of hotel projects has also considerably improved since 1972. While the calculation of economic rates of return was initiated under Loan 848-MOR in 1973-76 few project costs were shadow-priced, not all tax payments were excluded from the cost estimates and net economic benefits external to the hotel were not taken into account. Improvements of the economic analysis of hotel projects were agreed during the negociations of CIH III in 1976 to estimate ERRs better reflecting costs and revenues as well as diversion effects. Further improvements were achieved in the context of CIH IV with the utilization of the computer based CASBAH hotel appraisal methodology. As mentioned earlier the quality of CIH's appraisals could be further improved by a strengthening of the market analysis of projects, a field where CIH's performance has remained somewhat below expectations. 4.15 Under the two loans under review, the follow-up of hotel projects improved considerably. The Hotel Follow-up Division began to operate in a systematic fashion, under the Credit Department in 1974. Hotel projects were visited regularly and problem projects received at least two visits a year resulting in several cases in satisfactory settlements of loan arrears. In 1978 the Portfolio Supervision Division was created under the Financial Department to liaise closely with the Follow up, Legal and Accounting Divisions improve the collection of arrears and suggest appropriate legal actions. However due to a lack of coordination between the different divisions in charge of project supervision and loan recovery, the performance - 82 - of this new organization has remained bilow expectations and the quality of CIR's hotel projects supervision has somewhat deteriorated since 1980. The Bank is addressing this issue under the supervision of CIH IV (para 3.09). 4.16 As a professional and effective tourism development bank, CIN, beyond its traditional role of financing hotel projects, has a major responsibility to (i) advise the Government on appropriate policy reforms; and (ii) to promote now tourism products and projects for which a high demand exists. While CIH participated in the preparatiou pf ,tbe varip Investment Codes for.. tourism, its efforts to inutroduce sector reforms and a better selectivity in *the regional allocation of investment incentives had little influence on the Government policy. This situation, mainly due to difficult comuwnication between CIR and Government staff responsible for tourism policy, resulted from the numerous changes occurred in the tourism administration. CIH has now established a good relationship with the recently created Department of Tourism in the Ministry of Industry, Trade and Tourism (they will realize jointly part of the third phase of the cost-benefit study financed under CIH IV) and is expected to have a more effective dialogue with the Government on sector issues. To boost the promotion of new activities, CIN recently created a Comaercial Department. The activities of this department have so far been principally directed towards the housing sector. A major challenge for CIH in the mid-eighties will be to diversify its traditional tourism activity (the financing of four-star hotels) and to identify and promote actively new tourism products for the Moroccan economy and better adapted to the needs of the international clientele. V. ODNCLUSION 5.01 The two loans under review cover the period from 1972 to 1980. This period has been one of considerable changes in Morocco's economic environment. During that time CIN's assets increased more than four-fold (Annex 5), reflecting a significant drive to promote tourism and housing investments and to give CIH a central role in financing long-term investment. CIN also diversified its sources of financing while maintaining a moderate exposure in floating rate borrowings (para 3.14). Although no further tourism loan to CIH is envisaged, the Bank association with CIR continues and, with Bank assistance 1/, CIH recently took an important initiative in developing low cost housing. 5.02 Some of the quantitative targets of Loan 848-MOR - last date for project submission and closing date (para 4.05) - were not fully achieved due to unforeseen short-falls in tourism demand and investment. Quantitative targets of Loan 1279-MR -committed at a time of steady growth of tourism investment - were achieved and the loan was fully disbursed before the closing date. 5.03 The major objectives of Loans 848-MOR and 1279-MOR were achieved. The objectives of (i) developing a sizeable hotel capacity to increase foreign exchange receipts from tourism, (ii) strengthening the analytical capability of the Ministry of Tourism, and (iii' assisting in the institution-building of CIN, were in line with Government policy and were substantially met. CIH has become a professional and effective tourism development 1/ Morocco - First Housing Loan to Credit Immobilier at Rtelier Staff Appraisal Report. Report No. 4151-MOR. February 8, 1983. - 83 - financing institution (paras 4.14 and 4.15). The continuing dialogue leith and assistance to the Ministry of Tourism has had a major impact on the collection f reliable dataon' hotel occupancies and tourisi arrivals and on the analysis of tourism statistics. Inter alia it has already conviuced CIH and the Government that investment in the Marrakech areas should not continue at the rates achieved in the past. 5.04- *1he Bank,,was less successful in its effort to encourage the Government to adopt a more rational system of investment incentives in tourism, in particular because a clear-cut analysis of the effectiveness and justification of the incentives system has not been finalized (para 4.12). Although the Government regularly increased CIH's nominal interest rates to tourism and agreed to decrease the interest rate rebate on hotel loans at the time CIR IV was appraised, excessive additional incentives (e.g. Government grants) may have led to over-investments in hotel projects while low tariffs prevented the sector to fully benefit from the spending capacity of international clientele. Another matter of continuing concern is the quality of CIR's hotel portfolio. CIH's insufficient market analysis and lenient attitude toward public hotel investors resulted in questionable project approvals (in particular in Marrakech) and in the deterioration of CIH's hotel portfolio (para 3.08). 5.05 The Bank is addressing the issue of excessive incentives with the Government in the context of the Financial Sector Review and the issue of CIR's hotel portfolio through its supervision of CIR (para 3.10). The Bank nevertheless could have been more vigilant in monitoring the deterioration of CIH's hotel portfolio. It would also have been advisable to extend the loan objectives to assist Government in promoting the country's tourism assets abroad and marketing both tourism destinations and accomodation facilities. This could have contributed to improve profitability of hotel operations. 5.06 In spite of the difficulties encountered CIH has evolved into a strong and reliable financial institution in Morocco. CIH has developed during the seventies as a mature and efficient institution thanks in part, to the catalytic effect the two Bank loans had on CIH operations and policies. While the Bank's direct lending to tourism has been discontinued, the Bank's assistance to the tourism sector and to CIH continues in the context of the dialogue with the Government on sectoral adjustments and through the supervision of the fourth tourism loan (Loan 1943-MOR) and the first housing loan (Loan 2245-MOR) to 011. - 84 - Anniex 1 MROCCO Exchange Rateb as of December 31 (US l-) 1972 Dit 4.66 1973 Dit 4.20 1974 DR 4.15 1975 Dit 4.18 1976 Dit 4.48 1977 Dit 4.33 1978 Dit 3.89 1979 Dit 3.74 1980 Dit 4.33 1981 Dit 5.33 1982 Di 6.27 Source. IMF September 1983 OCC4 IWURIST ACC0Mt6TION CAPACITT 1975-1982 (in bd~) j/ Ibte l vecation Apatt Ita-Clasi- 1.2,3-star 4-etar S-ar Total Villae Mntel flad 0tel9 _otal 1975 16.338 10.387 7.657 34.582 0.309 - 11.084 53.975 1977 16.693 12.249 7.657 38.499 9.317 - 11.084 57.845 1979 15,142 15,064 7,780 37,986 10,613 2,005 11,724 62,368 1981 16.079 17.860 8.153 42.092 10.615 3.399 12.792 65.409 1982 16.5k-8 17.876 9.062 43.486 10.349 3.801 13.102 70.738 / Detåiled deta nun ava al.le tur 1972-74 Soor.e; tkniotöre du Touriaf Septed.>er 19ä3 MOROCODs Evolution of Tourist Arrivals (1972-82) 11 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Nationsality No. o. No. No. No. No. No. -n. Bo. No. no. France 211 26 216 281 225 284 316 324 341 348 399 Netherlands. Belgium, Scandinavie 87 106 87 lot 107 115 los 128 111 106 95 Cemeny and Austria 75 97 89 104 102 109 110 101 127 129 128 Spain and Portugal 76 181 77 57 126 157 153 128 135 150 199 Other Coantries Wastere Europe 127 185 156 164 141 157 162 1:72 168 206 217 S Americas 225 217 200 155 11) 129 142 18 62 73 79 n Arab Countries 57 ?1 8 Other cuontriee 71 174 227 165 84 112 125 92 70 91 85 Noroccen residing abroad 247 Its 153 218 205 365 364 173 328 361 525 TOTFAL 1.119 1,141 1.205 1.245 1.105 1.428 1.477 1.436 1.428 1.425 1.516 I/ Excluding cruisers noterce Hinisthre du Tourisme Iseptker mt 19b &I AN= 4 MOROCCO - CREDIT INDBILIER XT UitrBLIER Actual and Projected Operations 1972-82 (1O1 millions) 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982 Approval$ Projected If 130 1 4 173 236 286 348 400 492 605 695 806 Actual 100 113 145 247 357 $31 506 $16 543 .750 710 Commitment Projected 1/ 170 146 100 195 261 330 390 435 570 662 760 Actual NA 76 153 - 287 506 485 535 400 567 546 0 Oisbursements Projected 1/ 117 108 115 192 246 303 355 412 568 622 729 Actual NA 102 139 - 254 357 461 523 457 581 576 Il Projections 1972-74 according to SAN No. DB 93-a (ClII 1). Projections 1975-79 according to SAR No. 1077-HOR (CIU Ill). Projections 1980-82 according to SAK No. 3014-MOR (CI IV). September 198 UUt:t - cIKOIT7 I 18~LIAM kl $10TCI.ll2 hoeö.atodt a letue Uatence 1, 8911-8983 }/ A9K. kol. 9-6 -g £aL Åmå- ta, steG aLL EL*Át $111 EE"it <11111E... Éet MEl t É1 E"t åi Rt stå gem 92.0 173.1 180.0 209.4 229.9 283.9 288,0 490.6 288.4 39.2 64!.:4 ÖM.9 43.6 44.8 946.3 1885.2 (13 om (i6. . 8.3> <14.3) 9.3 (20.l <al.0> (m.3) til.o> (46.1) <64.9) (36.3 (87.» (46.) <114.90 013.3> lotal Cagraff agat# 7jj.8 ji- 11 194.1 220. J2.4 UU la-l mdL ga ~J Dn. lat Må 8 9 1*¥egtaeac rartteal&O Pioasng Loee 200.8 2i.4 408.1 41n.6 547.4 618.9 71.4 838.8 894.S 1349.1 83.3 8861.9 1508.4 83s.3 8866.0 1393.4 atol a... 314.8 38.4 434.0 398.9 43.3 478.8 34.3 593.8 363.0 60.9 jfl.2 39. N6.j 84.6 8063.9 91.0 Cl--rse a.. -L 202 80. 1 3is 43 1 1" &M 10.3 316 m j ~d a 30. 24.2 421. 2M.2 9 .19 e..... - 9.9 38.4 43., 49.0 66.9 33.3 93.. 33.3 .,.3 i. 9.. 94.1 ,,.0 9.. .4.2 aet h.e.o.. - - . 0.. - . 0.. (...) 9..) t6.L 1.6, <96.3> ,.6 <. - . * - 1106 . 4 lo . a.-A U rJ l _6 t~. UOthev tao . i2 zj~ ~~ ~ a vågd » uter ~ 73 ~X 8.9 6. 11.8 80. 16.4 20.-M 7 -w _T 1n lorA. As5!I£ J8g 1 .3 D 0 jog j3l j 343 IMJd 4900.9 11så42 33,6 U 18, 3334.6 336s,4 U.I&TtIts - utlItI Stt-trm hogrovig4 - - 9.3 31.3 - 83.9 - 31-1 - 13.9 30.3 24.3 33.0 3.4 4.6 11.6 akgreat inotoritieo 0 ahbt S.3 37.9 61.3 80.0 804.3 n.0 127.0 8158.3 833.1 227.6 263.3 266.0 833.8 282.8 21.3 218.4 Othar cortaet tiabi1itie . j 3.4 20.1 33.4 .j.9 60.7 .18 1.1 _1 tosta Onrant 84a6iitie 66.2 9u iu f109 9644.8 64D 842.3 »1-1 j09.6 434.9 XBGJ §38 É. 136 0 0ormtaane ~* 89.b 2.3 3.3 61.3 3.3 61.4 74.6 63.4 74. 8.? 6.6 68.3 s4.2 r8.4 m 0 .3 - Bedtecounted loto 8c.0 00.0 100.9 82l.* 400.00.0 100. 210.0 220.0 20.0 30.i 230.0 386.* 2n0.0 8t41 b~ 343.1 479.0 440.4 42s.0 619.3 541.9 . 2. 136.4 4.1 912.7 kane.4 889.3 3M4.S l344.4 16.1 95s4.6 ocker, . J8L.9 "t2. 97.3 ma itu. 36.7 194.4 nuL 183.9 214.6 MO,.4 D4.4 PWIA1 M_* Total teel sorrownaf U.6 *U j1& U!O 8439, 2d 964 8334.2 JM8 ^ ~.d 83741 t93ik 0 ijA~ n , 1990 209.0 64.2 89.4 81.9 81.8 907.4 t48.8 15s.9 11.4 14.8 Mn.2 $80.2 203.3 s0. 361.3 32.1 Other fordiga -n 349-.9.3.I ~ 9^5 j3 T areåinsr ~12 209.0 4 126.1 213 a j 24 vij »18 43364 . "g nu 48. G i tilug G$?- 6la.6 ML$3. 1211.9 1158.3 §MO0. 0 , 2Ujj 4, fIla. fIffi. 011 1MA Ä34 *£ $bomr4 capitc 40.0 60.0 60.0 60.0 80.0 80.0 100.0 110.0 L00.0 11.0 160.0 180.0 160.0 69.0 280.0 60.0 ftfor.Co 30.3 32.2 27.0 34.8 38.5 36.3 36.3 41.4 38.1 43.3 32.7 st.,. 69.0 4s.8 94.2 14. Tatal toålt ro.) 92.3 87.9 94.1 188.3 186.3 836.3 1»s.4 jjI . - 17 21,1 iml nuLA ~_ I: TIAi 1ASLIT I lckUT n8.1 084.3 1079.s :902.5 1331.9 8446.8 8641.4 1900.9 19å 3319d Mlf,# M&A id 2 & M121 =3,d Totala -4 *a antte* becauta a guedig at * Projectios ufor 1976-78 based on CI III SAR No. 107-MOR I#rkbjectiois for 1979-82 based on CIH IV SAR No. 3014-MOR / 1rojected and Actual Balance Sheets 1972-74 are available i PPAR Loan 704-MOR (Annex 3), dated February 23, 1978 (Report No. 1926). Sepeemberi1983 l ons. term debt is net of current matturities in the proiceted data (1975-1979) September 1983 eait:o- caEn1T lINMOBLSEI ET N0tEL.1E8 frojctedi and Actue luc %e statenute 1975-1982 1/ (fillions of u* 1975 1976 1977 1978 1979 tm 191 1912 hPet..a_ ,Prj At =roj• ACK XCLO. ACK. PM1r Jket ZPIL. .Att. ~l-Å att- pmRi-t.i Interest on Loané 63.9 66.1 79.8 79.6 104.5 99.6 133.4 139.5 160.2 188.2 234.5 239.8 297.0 281.9 369.0 308.6 i.idea. - - 0.4 0.4 0.5 0.2 0.8 0.2 1.1 0.2 - 0.2 - 0.2 - 0.2 Other lnom l 2.6 .9 3.6 7.3 4.4 15.4 4.3 16.9 . 13.3 24.6 19-7 8..6 171 333 .6-4 Total Incomme 66.5 72.0 83.8 87.3 109.4 11j.2 138.1 56.6 165.9 21.7 259.1 U9.7 32.6 99.2 4023 365.2 Finane ial chartge 40.6 40.3 56.1 55.3 74.6 77.1 97.1 105.5 118.0 139.7 175.1 166.4 218.8 194.2 269.4 233.5 Personnel Expense 2.7 7.5 7.9 8.5 8.8 11.6 9.7 12.3 10.7 12.9 14.4 15.5 16.2 19.4 18.2 24.5 Other Operatigt eap 2.8 4.4 5.0 3.6 6.1 6.8 6.6 4.2 7.2 5.3 6.3 4.7 7.3 7.9 8.5 B4.7 nepreeiation and amott laation 1.1 1.7 1.9 1.5 2.4 1.3 3.1 1.8 3.6 2.6 3.6 3.2 4.6 4.0 5.7 4.4 Provision for ~ 1es 3.1 5-2 1..3 3.9 1.4 5.8 1.3 14.3 1., 15.1 25:5 40-5 22-6 M-7 27.4 33-2 Total mpenmc 10.2 19.2 72.2 72.8 93.3 102.1 117.8 138.1 141.0 175,6 M24 03 2694 250-2 3292 3103 Profit sefore Taeö 16.3 12.9 11.6 14.5 16.1 12.7 20.7 18.5 24.9 26.1 34.2 29.4 56.1 49.0 73.1 54.9 0 Iacn~. Tag 7.7 6.1 5.6 6.7 7.7 5.7 10.0 8.5 12.0 13.6 16.1 16.3 26.8 26.0 35.0 31.4 MTt ul'IT 8.6 6.8 6.0 7.8 8.4 7.0 10.7 10.0 12-9 12.5 18.1 13.1 23-0 81 3l. Allocation of Net Profit meserves 4.9 1.9 1.2 2.0 3.6 2.1 4.3 3.5 4.9 3.6 4.2 4.2 5.8 3.9 7.5 4.4 Dividend* 3.6 4.8 4.8 4.8 4.8 4.p 4,4 6.4 8.0 8.8 8.8 8.8 12.8 m6 12.8 U. Director. ea 0.5 0.5 - 0. - 0.1 - 0.1 - 0.1 0.1 0.1 0.1 6 0.1 ml Ufapprojoriate 0.9 _- _- - - .0 - j0.6 1.1 1:17 19L IWAJ. 8.6 6.8 6.0 7.8 8.4 7.0 0.7 10.0 12.9 12.5 j8.1 13.1 29 3 23.0 j_1 23-5 Total Guy not dvee be.,e ok rosnding utf Projections tot IJJSMbasw, on CiI1 III SAt ho. 1071-~tui Projectimnsm kur 1979-82 ljaned on Cill IV SAR No. 3014-M8kR 1/ Pre.qte. .enJ Actu.a snco~ Statementö 1972-74 are availaise io PPAJt L.oan 704-Ut <Annma 1) dated february 23. 1978 ii Incindan dividendt tor 1900-1982 (projectiona only) .: til IMmocco - cit IUUeOBfI1a 6? 00DYE.1KI gry Finontial Indicatöra 1973 1973 1974 i17 l17 1977 1970 1979 1980 191 9 Prohitability ludIcatore 5e. profit as 1 of average equity 12.30 12.20 9.40 7.50 8.40 6.70 7.60 a.10 7.1 10.50 10.00 Profit before tax ag I of avrage @quity 23.30 23.10 17.70 14.0 15.60 12.10 14.10 16.90 15.90 22.40 23.36 caob dividend aa I of Det profit 28.20 21.60 45.20 70.60 65.50 68.20 47.90 51.30 67.30 30.0 ".& akt profit ha I of average total asset. 1.30 1.50 1.10 0.90 0.79 0.60 0.60 0.40 0.50 0.00 0.10 Operation.t l,dicator. eroas incom ab Z of 6arage o1tal asets 9.10 8.90 8.60 9. C 8.60 8.90 9.40 9.40 10.60 10.80 11.50 dinsatrative expeases as 1 of avaraga total asaft 1.40 1.50 1.80 1.50 1.20 1.30 1.00 0.90 •.90 1.00 1.30 ånacial speasea as 2 of avarage total aseta 4.80 4.80 4.60 5.10 6.00 6.00 6.30 6.40 6.30 7.00 7.40 luca iro loane as 3 of average laga port tol io 1-< 9.00 9.00 10.30 9.00 9.50 10.30 11.00 12.00 12.70 14.10 Cost of debt as 1 of avraga deht .10 5.70 5.80 6.60 6.60 7.10 7.30 7.60 7.90 8.40 9.00 Fåen cal structure ladicatore Total dbtyear-and aqutey 6.90 7.60 6.90 8.20 10.70 11.40 11. 0 13.70 1.180 12.19 12.80 toag-tar dabt/year-end equity 6.70 7.30 6.50 7.60 9.80 10.80 10.00 12.90 10.20 10.0 11.40 fann dabl a I of total les-torm debt 3.60 5.60 8.40 8.50 8.90 8.60 9.40 840 8.30 11.50 13.40 peh/aquity (19 agreameat) 4.80 5.50 5.30 5.40 5.70 7.10 8.0 12.90 10.20 10. 0 1.40 Provåglowe for lasse ou port folio s I of total port folio 1.97 1.50 1.03 1.10 1.50 0.95 1.30 1.44 1.72 a.02 4.22 loterat coveraga ratto 1.$2 1.59 1.45 1.32 1.30 1.17 1.48 1.19 1.1 1.25 1.34 september 190S Ntonmc - cnEoaT IN0106ILIE8 UT NOTELIES Loma 848-Noe - alysts of Projects vinammed (mm *000) via. mai. wattol trojet 10O &atimte of *eom Cat Jggg g F ib.f Job m LE TWILALT Narrakech 4 5555 2910 55 74 19 ALI ~B Agadir 4 7617 2024 198 95 13 R^SEL ASMN Rabat 3 1418 4418 317 63 - AWFAIE 0enn~& Targer 3 8270 750 107 102 13 M~IRA ~*~tnnedia 5 25994 16300 2.032 l89 23 &U~PA wDTEL/A4AI Agadir 5 25730 13600 2,090 240 17 SocoIIASU Tanger 4 19006 2400 351 157 12 CIvAc Agadir &*gidec 14412 2300 287 117 35 SOtUAKOE~L Agadir 4 17370 9550 1.276 153 12 somETE An Tanger 3 8915 4895 561 132 - RØTEL T"SéANTkqE-IgKNES Neaes 5 2762 1310 212 100 - 0TEL SLAZUe Tanger 4 26500 6000 720 324 17 H~TEL ADAL mcarakec th 4 9150 5500 452 119 - SEiCETE A~RA Agadir 4 12484 6700 980 149 16 LA FIalog sidt §uaadal 3 7835 1062 133 13 - SOUMSfE? OTEL T~RNIUS Oujda 4 11570 4200 422 109 13 AHIA I Aadir 3 17638 2400 346 140 15 sorW Agadir 5 30900 6000 636 286 15 TALOUJMT IWML Agadir 3 3940 1530 210 50 21 VES-NOrEL res 4 4834 2630 298 76 20 TUNSIFT Narrakech 4 16500 9000 1.361 143 23 LA Ult DE TAGER Tanger Camping2 2048 800 75 15 - NADIK ET A~OULAWAR Agadir 3 2735 1370 196 36 i7 LE NEKES Nakne# 3 5925 500 49 84 18 SOC.DES mINS DE Casablanca 3 4192 2165 Mi 61 - TEL SINDISAD Agadir 2 1706 873 80 19 - SGEPROT Tanger 2 2048 160 9 15 - ALW>UI N'IAMI FE res 2 984 360 20 10 21 EL MOIIL aabat 3 2288 1286 99 25 28 SAT CABO ECo Cabo Negro 3 1100 600 61 20 - LA~[RTI Gaonen 2 822 370 41 8 la HOTEL De PACHA Norrakech 3 - - 5 21 33 NAK l UT Inenaae I 339 180 12 6 - H&TEL §ENEKVAR Tianit 3 3222 1600 191 28 14 "lEL su" NMrrakech 3 2970 1350 159 26 20 Se NNUILIERE NKWI Agadir &.T. 3540 1500 142 38 11 SA vQ AYacKI Erfoad 3 1428 650 69 11 10 TOTAL 317767 14611 254 etb September 1983 - 92 - ANNEX 9 MOROCCD - CRBDIT INHOILIB2 T NOTRLIER Loan 1279-NOR - Analysis of Projects Financed (D 1000) IBRD via. Rate Project location Category Project CId Finascii estimaste of Naeute (No. a) ost Loans (0000) Po.of Job (1) SIDT-HARRAK9CH Marrakech 5 40120 24000 3,234 350 22 BAHIA I Agadir 3 18706 18000 268 140 13 auns WOR Agadir Club 40425 18000 2,235 405 16 FARA-MACURB KBMIVSA Kenitra 4 12275 6150 142 82 10 FARAH-MACRREB/NARRAK9CM Narrakech 4 42950 20000 2,608 266 15 **VA!A" HOTEL TBMSIFT No;rakecb 4 23600 10500 1,901 144 11 SIDST ACADIR Agadir 5 46240 21500 3,660 336 23 SIANA NARRAKRCH Marrakech 4 23322 12500 1,602 190 12 SAHARA INN' NARRAKECN Marrakech 4 8840 4420 674 95 13 Sorl" ACADIA Agadir 3 30900 6000 691 286 15 FARAl-MAGHRKB' TSVOUAN Tetonan 4 16781 6600 811 92 9 BAIlA II, ACADIR Agadir 4 44667 11500 1,2S2 40S 12 LE LIDO Casablanca 4 13450 1500 1,055 82 Is SCI LOUNAN Agadir R.T. 2573 1000 131 46 18 SAIA Agadir A.T. 4598 1910 89 31 13 LA BARAKA Temers 3 3590 1520 206 18 16 NOMsA1al Agadir 3 2925 15s0 193 31 25 FOUGHAL Oujds 3 5123 1430 95 66 23 0SIDEN P1LEU1 Agadir R.T. 2508 960 its 33 25 AG)AL-MARRAKECH Marrakech 4 9150 1100 109 120 26 SKLCAID Agadir 3 3940 570 66 s0 21 TAFOUKI-ESSAOUIRA lssaouira 1 2500 1200 161 12 10 HARAKCH HYEL Marrakech 3 5517 3290 310 111 24 SOC TouRISTiquit ag 050 28" Oued Zes 3 4146 1900 231 16 19 PARAll HAGREA Ku0URIBCA houribga 4 10000 6000 659 66 - MERVM ST SKIA Agadir R.T. 2276 1140 61 21 15 RESIDENC FARA AGADIR Agadir A.T. 3120 1900 247 38 13 S.C.I. BAIXA Marrakech 4 8950 4030 6t8 100 13 IIAIJJ DARIA Rabat 3 8917 4000 566 88 14 "OUIAY LARBI C"ABBI Agadir R.T. 4490 2260 302 31 16 TUTA, 440656 25010 3757 Cs Svptevleul. 141JI