Morocco - Integrated Small Scale Industry Development Project

Doaumt of The World Bank IOR OFFICIAL USE ONLY Rep~t N*. 6063-MOR PROJECT PERFORMANCE AUDIT REPORT MOROCCO - INTEGRATFD PROJECT F(R SMALL-SCALE INDUSTRY DEVELOPMENT i ()n rm t ~ r ml cn Do raons E.valutionqr Depart'ron't This document bas a resricted dis~tbuion and may be sed by recipients only in the performance of thei ermal duttes. Its Coteeis may ~ot ~therwise be disciosed without World Bank authorzation. LIST OF ABBREVIATIONS BCM - Banque Commerciale Du Maroc BCP - Banque Centrale Populaire BMAO - Banque Marocaine de l'Afrique de l'Ouest BMCE - Banque Marocaine pour le Commerce Exterieur BMCI - Banque Marocaine pour le Commerce et l'Industrie BdM - Banque du Maroc (Central Bank) BNDE - Banque Nationale pour le Developpement Economique CCG - Caisse Centrale de Garantie CDM - Credit du Maroc CMCB - Companie Marocaine de Credit et de Banque EEC - European Economic Community ERR - Economie Rate of Return FRR - Financial Rate of Return MCI - Ministry of Commerce and Industry ODI - Office pour le Developpement Industriel PCR - Project Completion Report PSA - Procedure Simplifiee Acceleree SAP - Staff Appraisal Report SSI - Small Scale Industries PPAM' - Pro,ject Performance Audit Memorandum PPAR - Project Performance Audit Report SGMB - Sciete General Marocaine (le K>anqe SMDC - Soc Le te Ma rocai ne de Credit TAi - Techil sistance 1nit (of OUL) RRENCY EL' 1 VALENTS Currencv !nit = ;irnam (:d) Average exchange rates 1975 197t 1977 1978 1979 19.( 1981 192 1983 1985 As of -7ne 3, 19, ; 73,7i FUR OFFICLL ONLY THE WORLD BANK Washington. D.C. 20433 U.S.A. Oike t Owuctor-Cwwa Opeatiams Evalutant February 11, 1986 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Performance Audit Report on Morocco - Integrated Project for Small-Scale Industry Development (Loan 1687-MOR) Attached, for information, is a copy of a report entitled "Project Performance Audit Report on Morocco - Integrated Project for Small-Scale Industry Development (Loan 1687-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 OFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT MOROCCO - INTEGRATED PROJ6CT FOR SMALL-SCALE INDUSTRY DEVELOPMENT (LOAN 1687-MOR) TABLE OF CONTENTS Page No. Preface ****************************** Basic Data Sheet ............................. i Evaluation Sumrry ................................................. ii PROJECT PERFORMANCE AUDIT MEMORANDUM I. BACKGROUND .............................................. I II. OBJECTIVES OF THE BANK LOAN ....................... 2 III. PROJECT DESIGN .............. 2 Supporting Institutions ..... .e.... . .. ............ . 2 Financing Arrangements ...................... 3 IV. INSTITUTIONAL PERFORMANCE ........................ 3 The Supporting Structure ................. * ....*....... 3 The Subproject Financing Set-up .&..................... 5 Resource Mobilization ...*so ........ ... ...... .......... 6 V. LOAN UTILIZATION ........................**.........*.. 6 The Disbursement Problem ........... . ...... 6 Subprojects Financed ....... .... ..... ......... . .. . 7 VI. EFFECTIVENESS OF THE BANK'S SECTOR, APPRAISAL AND SUPERVISION WORK ......................... ......... 8 VII. CONCLUSIONS ............................................. 9 Attachment A: Comments Received from the Ministry of Finance ...... 12 Attachment B: Comments Received from the Ministry of Commerce and Industry ................. 14 Attachment C: Comments Received from the Office pour le Developpement Industrial (ODI) ..... 19 Attachment D: Comments Received from the Banque Nationale pour le Developpement Economique (BNDE) ........... 22 This docusent 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 I. Introduction ......................................... * ... 24 II. Objectives and Expectations .............................. 27 III. Project Implementation.................................... 30 IV. Institutional Impact .................................. .. 39 V. Conclusion ................ ....................... 44 Annexes: 1. Subproject by Participating Banks .........................**to. 49 2. Summary of Lending Activity and Status of Subloans ............ 50 3. Subproject Distribution by Financing Bank and Implementation Progress and Conditions . ............... 51 4. Subproject Distribution by Manufacturing Sector and Size of the Financed Firm ...................... # ......... 52 5. Quality of Technical, Administrative and Financial Management; Subproject Classification by Manufacturing Sector and Participating Banks ................ 53 6. Status of Subloan Disbursement; Subproject Distribution by Manufacturing Sector and Participating Banks ......................................... 54 7. Frequency uf Major Causes of Delay in Sub;roject Tmplementation ................. .................... ......... 55 8. Frequency of Major Causes ol: Cost overruns by anufacturing Sectr ......................... 56 9. Type of Funds Mubilized tu Cope with Cost Pverruns by Nunber f Su1orojects and Participating Banks ............ 57 10. Surv(-v f Sub prAlcts F.inanc Under the Loan; Infrmat n Cuntent ......................................... 5R - 1 - PROJECT PERFORMANCE AUDIT REPORT MOROCCO - INTEGRATED PROJECT FOR SMALL-SCALE INDUSTRY DEVELOPMENT (LOAN 1687-MOR) PREFACE This is a performance audit of the first integrated project for small-scale industry (SSI) made to the Government of Morocco. Loan 1687-MOR, for US$25 million, was approved on April 12, 1979, became effective on December 17, 1979, and was closed on December 31, 1984, the original closing date; US$7.9 million was cancelled. US$1 million of the loan was set aside for technical assistance and subsector studies, while the balance was onlent by the Government to BNDE and commercial banks to finance SSI investment projects. The Project PerformancE Audit Report consists of a Project Perfor- mance Audit Memorandum (PPAM) prepared by the Operations Evaluation Depart- ment and a Project Completion Report (PCR) prepared by the Europe, Middle East, and North Africa Projects Department. The PPAM is based on the attached PCR, the Staff Appraisal and President's reports, loan documents, the summary of the Board discussion, sector studies, economic reports, study of the project files and discussions with Bank staff. An OED mission visited Morocco in June/July 1985 and discussed the effectiveness of the Bank's assistance with Government otficials and agencies, BNDE and commercial banks, and a sample of SSI subloan recipients. Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. The PCR very ably describes che project experience, highlighting particularly the extent of achievement of subproject lending goals, as well as procedural difficulties encountered, and identifying a number of needed improvements. The PPAM comments further on these and other aspects of the project experience and draws the lessons for future Bank operations. Com- ments received from the Borrower have been taken into account in finalizing the report, and are reproduced in Attachments A, B. C and D. PROJECT PERFORMANCE AUDIT BASIC DATA SHEET MOROCCO - INTEGRATED PROJECT FOR SMALL-SCALE INDUSTRY DEVELOPMENT (LOAN 1687-MOR) LOAN POSITION As of 10/31/85 Original Disbursed Cancelled Repaid Outstanding Loan No. 1687-MOR 25.0 17.1 7.9 4.2 12.9 CUMULATIVE LOAN DISBURSEMENT FY81 FY82 FY83 FY84 (i) Planned /a 7.0 14.0 21.0 25.0 (ii) Actual 9.1 12.1 13.5 17.1 (iii) (ii) as % of (i) 13% 86% 64% 68% OTHER PROJECT DATA Original Loan Date Actual Board Approval 4/12/79 Loan/Credit Agreement 4/25/79 Effectiveness 7/25/79 12/17/79 Loan/Credit Closing 12/31/83 12/31/83 Borrower Government of Morocco Executing Agency Banque Nationale de Developpement Economique Fiscal Year of Burrower Jan 1 - Dec 31 MTSSION DATA Month/ No. of No. of Date of Year Weeks Persons Manweeks Report Appraisal 11/78 4.0 3 12.0 03/26/79 Supervision I 11/79 1.0 2 2.0 11/20/79 Supervision II 02/80 0.2 2 0.5 03/13/80 Supervision III 06/80 1.5 3 3.0 07/31/80 Supervision IV 11/80 2.5 2 3.0 12/12/80 Supervision V 05/82 2.0 1 1.0 06/11/82 Supervision VI 01/83 .0 1 1.0 02/25/83 Supervision VII 07/83 1.0 1 1.0 08/31/83 Supervision VIII 06/84 1.5 1 1.0 06/27/84 FOLLOW-ON PROJECTS(S) Small-Scale Industries Project, Lcan No. 2038-MOR approved on July 14, 1981, in the amount of US$ 70 million. /a Estimate. No documentation available on appraisal disbursement forecast. - iii - PROJECT PERFORMANCE AUDIT REPORT MOROCCO - INTEGRATED PROJECT FOR SMALL-SCALE INDUSTRY DEVELOPMENT (LOAN 1687-MOR) EVALUATION SUMMARY Introduction In order to create low-cost employment opportunities, foster entrepreneurship and encourage regional development, the Moroccan Government embarked on a program of promotion and support for small scale industries in the mid-1970s. To this end, an SSI technical assistance unit was created in the Office pour le Developpement Industriel (ODI) and an SSI Policy Making Unit was established in the Ministry of Commerce and Industry. Procedures for Central Bank rediscounting of SSI loans were simplified, and a "Credit Convention" program was established to facilitate the onlending of foreign resources to SSI through local banks. Under the latter program, the Banque Nationale pour le Developpement Economique (BNDE) reviewed subloan appraisals of commercial banks, which were then approved by a newly created Credit Committee chaired by a representative of the Ministry of Finance. To alleviate the lending conditions and collateral security requirements faced hy SSI, the government-owned Caisse Centrale de Garantie (CCG) extended partial guarantees of subloans to participating banks under the program (PPAM, paras. 1-2). Objectives The Bank began lending for SSI with a pilot project componn f US$5 million under Loan 1428-MOR to BNDE (approved in 1977) and assisted the Government in developing the structures for the Credit Convention program. After helping to supervise a BNDE-sponsored survey of SSI, the Bank approved in 1979 a USS25 million loan as its first integrated SSI project in Morocco, under the Credit Convention procedures. The main objective of the loan was to support the Government's program to develop the small scale industry. Improvements in productivity and competitiveness, and promotion of inter- industry linkages between small and large firms were related goals. Another important objective of the loan was the establishm-nt of an institutional support structure that could provide a framework to facilitate other foreign lending to Moroccan SSI (PPAM, paras. 3-9). Implementation Experience The loan was quickly cormitted, leading to a follow-up loan of USS70 million in 1981. However, there nave been disbursement protiens in part due to the deterioration of economic conditins and in par. Lic r inadequate disbursement procedures. Action was taken :i:v recent "v t - iv - improve and refine procedures. Cooperation between the technical assistance agency (ODI) and -he participating banks has been less than expected. The Credit Committee proved to be an expeditious means of approving financing and guarantees, but less so in resolving in a timely fashion important issues arising during project implementation. BNDE played an effective role as coordinating agency. Sector studies and policy work undertal--n by the Directorate of Industry, as part of its overall industrial development effort, have also benefitted small-scale enterprises (PPAM, paras. 9, 10, 13, 14, 17-21, 26). Results The loan was sectorally well distributed and created some 8,500 jobs at a cost of US$5,000, mostly in new ventures. About 20% of the firms supported were export-oriented, far exceeding original expectations. However, weaknesses in appraisal and supervision, delays in implementation, and tight repayment schedules led to repayment problems. The project was successful in introducing a number of commercial banks to SSI lending, some of which have since established SSI lending programs with their own sources of funds. It also encouraged other foreign resources to be channelled to SSI. Most of the stated institutional objectives of the project have only partially been achieved. Inadvertedly, ODI has not been able to undertake the level of technical assistance that had been originally envisaged, and only now is building up its staff. The guarantee program of CC" has not provi effective enough for commercial banks to relax their lending conditinos and security requirements. Only a few of the participating b)anks have developed satisfactory appraisal and supervision capabilities. The pr;ojct 2as rai limited success in achieving the objectives of regional d4spersion, support of the smallest enterprises, improvement. of :te n n t's institutional and technical capability to formulate SSl developmeot policies, improvement of the quality and volume of technical and managirial as-istance provided to c;51, and the development of a financial assistance nexu5 that woulo facilitate SSI's access to credit. 1'o)rtfolimonit,rtng wa; g,ner-llv i-adequate and remedial action was taken belatedly. About one third _f th outstanding subloans under the program are affected by arrears ;PPAM, paras. Y-13, 15-1?, 21-24, 28). stcinabil itv 10 ensur -tp:iN-c -velopment so to improc their financial viabil:tv, Cccess oc s:H to t7chnical as3istance in its broadest form, i.e., includ.ng aJx oi :; 11. areaa accountinc and markering as well as on nor&iv trn i m,tt-!s, tn equai iv -J p ltant or the sucess of these programs as the avaiLability of term financIng and working capitRl. Given the <:ritic1 l mortanze 4 to n acnitce, terE is need for remedial action improvo the wr"i )i t v 7ad ffectivenes of the technical :~ ~:tn~ ~i~n. rzanizational - V - and institutional arrangements, staffing and cost effectiveness. Participat- ing agencies in SSI programs should be more carefully selected, properly motivated and committed. On the other hand, subprojects need to be more fully screened, repayment schedules made realistic, disbursement procedures standardized, and supervision and collection efforts intensified (PPAM, para. 31). Findings and Lessons The project was well-conceived and innovative but not adequately designed. It has had limited success in promoting viable institutional arrangements. The performance of the subprojects financed has been mixed, but certain sectoral goals have been met. All in all, the project has been a partial success. The project experience is instructive in suggesting that: (a) when no specialized agency is involved in an SSI program, extreme care must be taken to ensure that SSI remains a priority for participating agencies; (b) when Lhe Bank relies on a technical assistance agency to support an SSI lending program, it should satisfy itself of its commitment for such support both during the implementation and operation; (c) strengthening private technical assistance delivery systems may be a viable alternative and/or a complement to public agencies; (d) when the Bank allocates loan funds for technical assistance and subsector studies, it should insure that implementing agencies are committed to making use of such facilities; (e) standard disbursement procedures need to be carefully adapted to the special needs of the SSI sector; (f) an early warning system for disbursement shortfalls on individual subprojects should be devised for apex lending schemes, to enable funds to be freed for authorization of other projects and thus to avoid later cancellation of loan funds; (g) participat- ing banks must receive an adequate spread to undertake risky SSI lending; (h) a selective appr-ach co free limi<s for participating banks should be agreed upon during loan appraisal, rather than during project implementation; (i) a third-party guarantee program is administratively costly for small loans, and other alternatives to enable banks to self-insure should be considered; and (j) unrealistic cost estimates and repayment schedules can vitiate subproject performance (PPAM, para. 32). PROJECT PERFORMANCE AUDIT MEMORANDUM MOROCCO - SMALL-SCALE INDUSTRY PROJECT (LOAN 1687-MOR) I. BACKGROUND 1. Small-scale industry (SSI) in Morocco, defined as enterprises having less than DH7 million (US$680,000) of fixed assets, employs about 110,000 people and accounts for about 20% of manufacturing value added and 4% of GDP. SSI is characterized by low capital intensity, with a unit of capital employed in small-scale industries creating on average six times as many jobs as it does in larger industries. The SSI sector is concentrated in the Casablanca region, but less so in Rabat, having more dispersion especially in the less developed South and East.1/ 2. In the mid-1970s, the Moroccan Government launched a comprehensive integrated program of assistance to SS1, which was supported by the Bank. In 1973, a special Artisan Investment Code established incentives (including a 5% interest rate rebate) for enterprises with assets less than DHS million and investment costs less than DH5,000 per job created. The Government also instituted a Simplified and Accelerated Procedure (PSA), whereby the Banque du Maroc (BdM), the Central Bank, would rediscount medium term credits of up to DH500,0UU (increased to DHi million in 1977). To qualify, an enterprise was required to have: (i) less than DH5 million of assets, (ii) sales of less than DH7.5 million, (iii) at least 40; of investment costs financed by equity, and (iv) ability to satisfy normal collateral security requirements of commercial banks. Witn Bank assistance, the Government also created a "Credit Convention" program to channel foreign resources to the SSI sector (paras. 5 - 5). 3. The Bank began discussing the SSI sector with the Government in 1975 and financed a pilot SSI project as a USS5 million component of the eighth loan to BNDE (1428-MOR). Initially, the Bank also helped supervise a sector survey carried out by a consultant to BNDE in 1977/78; then, in 1978, it undertook preparation and appraise in 1978 of the first Integrated Project for SSI Development. Loan 1687-MOR for US$25 million was approved in 1979 to finance the project, and is the subject of this report. A second loan exclusively for SSI financing (2C38-MOR) for LS$7& million was approved in 1981.2/ 1/ Bank Report No. 3j56-MOR, Maroc: Les Activites Artisanales et Les Petites Industries, November 27, 1984. 2/ For more details on the backgroind of Loan 1687-MOR, see the PCR (paras. 1.U1-1.11) and the Project Performance Audit Report on Loans 1(61-MOR and l4A-) tt Br t , rt rominIg. -2- II. OBJECTIVES OF THE BANK LOAN 4. The Government and the Bank became interested in promoting small- scale industries with the main objective of creating low-cost employment opportunities (especially in urban areas), developing entrepreneurship (including training of technicians), and encouraging regional development. Improvements in productivity and competitiveness of SSI and promotion of inter-industry linkages between small and large firms were related goals. The Bank's staff appraisal report (SAR) also mentioned as an important objec- tive of the loan the establishment of an institutional support structure that could provide a framework to facilitate other foreign lending to Moroccan SSI (para. 5.01). III. PROJECT DESIGN Supporting Institutions 5. No new institutions were created to carry out the objectives of the SSI project. Rather, new units or functions were established in the Ministry of Commerce and Industry and in the government-owned O&ffice pour le Developpement Industriel (nDI) and Caisse Centrale de Garantie (CCG) for the following purposes. (i) The Policy Making Unit in the Ministry of Commerce and Industry (created in 1978) would propose and supervise SSI sector studies, recommend policy changes (e.g., in the Investment Code) and administrative measures in favor of SSI, and coordinate the activities of other institutions. US60.5 million was set aside to finance the foreign exchinge costs of SSL studies and promotional activities. (ii) Established in 1973 to undertake sector studies, equity participations on behalf of the Government, and general industrial promotion, ODI created a new Technical Assistance Unit (TAU) to help SSI entrepreneurs prepare and implement investments. It was hoped that the TAU would eventually be "operating like an industrial extension service for SSIs" (SAR, para. 5.09). USS0.5 million of the loan was set aside to finance foreign specialists for OD; it was reallocated subsequently to subproject financing when the European Economic Community (EEC) provided four specialists. (iii) In order to facilitate financing for SSIs with insufficient collateral, CCG would guarantee up to 80% of each SSI sub-loan in return for a flat fee ranging from 1.25% to 3.25%. -3- Financing Arrangements 6. Subprojects submitted by any of Morocco's 15 commercial banks and BNDE would be eligible for financing under the loan, if approved by the Credit Committee, consisting of representatives from the Ministries of Finance and Industry, BdM, ODI and BNDE. BNDE was assigned the role of reviewing the appraisal reports of commercial banks on behalf of the Credit Committee -- a natural outgrowth of its role in reviewiig commercial bank applications for BdM rediscounting of medium term loans. BNDE was also expected to help improve commercial bank appraisal capabilities and, more generally, to play a key coordinating role for all aspects of the project. In return for its services as an apex institution, BNDE received a 1% commis- sion on all SSI subloans. 7. SSI borrowers received no interest rate subsidy under the project, in contrast to the subsidy for the artisanal sector of up to 5% of outstand- ing loans per annum. The banks were allowed a spread of only about 2% on the subloans, much less than their normal spread on domestic resources, and clearly inadequate to compensate for the higher administrative costs and risks of financing SSI. Exemption of SSI lending under the project from BdM credit ceil ,gs was expected to induce the banks to participate in the project. 8. Subprojects eligible for financing under the loan would normally have a maximum cost pe, jon uf rHA ,00V (USS10,000 equivalent at the time), though slightlY higher :or the mechanical and electri-il subsector. Total assets ot an eligible enterprise were also limited to DH5 mi lion (US$ 1.25 million at that time). The Bank outlined requirements for project appraisal for three target groups of enterprises based on size of total assets. Enter- prises having asset values nf :ess than DP2.5 million could he financed after less detailed appraiiii. For even smaller enterprises (less than DH500,000 of assets), BNDE and the Bank could agree to grant a free limit arrangement to participating commer1il hanks with acceptable appraisal standards. Loan allocation targets were 25% for the smallest SS1 (as defined above), and 50% for the intermediate size group of SSI. A minimum of only 20% of investment costs was required as the promoter'4 own equity contribution, while the bank would finance the estimated foreign exchange requirement of 60%, the balance being provided by a redisconitable medium term commercial bank loan. ;. INST LTUTIONAL PERFORvANCE The Supporting Structure 9. Policy Making Unit. The SSI Poli-v-making Unit established in the inistry of Commerce and Industry (MCI) had only one full-time staff member and "never succeeded in defining its own operational role" (PCR, para. 4.03). It was merged into the Division of Economic Studies wit'in MCI in 1982. The USS500,000 earmarked for SSl studies was reallocated to subproject financing. However, the Directorate of Industry did undertake an SSI survey - 4 - * i,i Ø' tI i w ri. it tves t.ment Code pro- rnni ø"'v iw. .4 c l~t rn&e~~O t encoutra3gP SS T , a nt or empLovrn - 't .q c'teS (At chme pod, i- '9 -tc ~ . is tIi ýeveI,-ument effort (t ,t n nt e (ee also ' <t ari h† restructuring and .4' aitahed An e xport promotion cent n3- rial znes tr smal, and medium - .e-s - n 4 h est.4 m of new A44j-- c:ii~;.~r r "'1n h.nin.~ci getr q-rrpd will be '.4 . 4 i -i . . .. b, r ' -hnica ! A i9s .an(e -~~ý ryasal ddi-- - nr:f i ed usefut swrk n -- ,, I .. . . i- - i 4 i..'r i . ir - a' 4noiI - 5 - 11. The Guarantee Scheme. EarIy on in nroject implementition, the existence of CCG guarantees may Mve encouriged eome 1mercial bknks to relax their normal security requirements on SS! 1a . Mwever, the banks have since lost confidence in CC, and SC ent rep eur3 te i tten required to provide additional collateral (aside from pledging proect assets), as well as to pay the front end commission for auntee, Part of the problem has been the administrative complexity 0f coordinating i third rarty guarantee program for very small loans, and to nr design and implementation arrangements of the scheme. lsv, it is toc cnstiv for ICG to make an independent investigatinn f the ris k inev 0 subloans. Guarantee schemes therefore need to charke the bnk, 'or trh Merovers) i proper fee to cover the cnscm of oiministratio", 1de less renjert, UCG guarantees were appreved automatically when the ioan itself was approved by the Credit Committee. owever, guarantee funds were to be r Wer tw vears after the deciaratien of defa t h a k haink , n;'on, nnsi ',CC of documentary proof that the bank was t.inu al PnMhIM me4sures Unsluding legal artion) ra res,e M ntAtion to be Pxcesq m åa- barklog of p = vii res -, -i - .ý . er t M SS q. N pae I e d i 12. oven under tro t Iav C1 0 s a v prf efire v fr r.jW The Cred it I1- a cclr - 1 ncd e0r been effe"~~~ BNDes r i reoi Yn vitt : 0 banks asq Ms I ben e e ati tfon iPca eP. id.~~~~~.,.,, lå . 0L- c Vb7o banks:"' Wrof........... - 6 - initiating solutions to some of the procedural problems faced by the project, "BNDE also was an efficient centralized interlocutor for the Bank supervision effort and a suitable channel for the Bank intervention on general project matters" (PCR, para. 4.07). 15. The Commercial Banks. The project was successful in introducing many commercial banks to SSI lending. However, while nine commercial banks participated in the project, only a few of them actually developed a capabil- ity of appraising and supervising SSI projects. The fault in this respect may lie mainly in the design of the project, particularly in the insufficient 2% spread allowed for the banks which, before a recent tax exemption, amounted actually to only 0.8%. Their primary motive in participating was apparently to attract new clients who would avail themselves of the banks' other, more profitable facilities and services. Some of the banks have created their own SSI lending programs, using their own funds, on which they earn better spreads without submitting to subproject controls by outside agencies. Furthermore, it was expected that an exemption of SSI lending from credit controls would be a significant inducement for bank participation. The weakness of relying on such an incentive (rather than adequate spreads, for example) has been obvious in recent years, when excess liquidity in the banking system may have contributed to the need to cancel $30 million of the second Bank SSI Loan (see also PCn, para. 3.05). Finally, the expectation that free limits could be tailored to the individual capacities of parti- cipating banks during proiect implementation proved to he unrealistic. In fact, a free limit arrangement has only been agreed upon only during 1985 in connection with the second Bank SSI loan, and the same limit (DH500,000) is to be applied to P.l participating hanks, at least initially. Resource M,bilization si. side from the tw, Bank ],ans for SSI, the Credit Convention program attracted firancing frum the %'EC Special Fund (USS2 million in 1979 and USS15 million in 1982), the Kuwait Fund (USS6 million in 1980), and the African Develup!ert Bank ("5S12 million in lQ82). This aspect of the objec- tives -f the Bank loan thus fully met expectations. V. LOAN UTILIZATION The Disbursement Problem 17. While the l0an was committed faster than expected (90% within a year of effectiveness), disbursements were slower and USS7.9 million (32%) of the ljan was eventuallv cancelled. The main reasons for cancellations was the abandonment or reduction in scooe of some projects when the general economic climate deteriorated and the unexpected appreciation of the US dollar. As the PCR mentions (para. 3.08), cancellations might have been reduced had there been an earl' darning system for disbursement shortfalls on individual subprojects. 'he urganizatIon of such a system might be con'i.dered i- Futlrz Bank -pex le-ding perations. - 7 - 18. Another reason for cancellations had to do with disbursement pro- cedures. Originally BNDE was to receive standard documentation on disburse- ments (invoices, contractors' bills, evidence of payments) against 100% of subproject expenditures and to review it against appraisal specifications. It would forward this documentation directly to the Bank only for its own subprojects. For subprojects financed by commercial banks, BNDE would submit a certified statement of expenditure to the Bank and retain the relevant documen,:ation for review by Bank supervision missions. 19. There were several problems with this system. First, it was difficult for many SSIs to obtain documentation of 100% of subproject expenditures. Also, the full amount of working capital was difficult to justify (including, for instance, finished goods and work-in-process). Secondly, commercial banks often prefinanced subloans with their own funds at more favorable spreads, and thus had little incentive to collect the support- ing documentation. Thirdly, in practice, funds were disbursed from BNDE to the commercial banks before BNDE had received the full documentation required by the Bank. 20. In 1982, the Bank introduced a number of modifications to disburse- ment procedures in an attempt to remedy the situation, e.g., only 85% of subproject expenditures had to be documented, and a certification of work completion by an engineer from BNDE or a commercial bank could be substituted for evidence of payments tn exceptional cases. Further refinements of these procedures, including submission of a simple completion report to be prepared by banks for the smallest projects (assets under DH500,000), were studied and recommended by BNDE in 1984/85. Subprojects Financed 4/ 21. The loan financed 214 subprojects generating about 8,500 jobs at an average investment cost of DH25,OOC, or about US$5,000 equivalent. Two- thirds of the subproiects were new ventures. The targeted allocation of one-fourth of the loan to the smallest projects category (assets under DH500,000) was not reached, and about 10% of the loan was reallocated from this category to the largest projects instead. The sectoral distribution of job projects was good, but the geographic distribution showed considerable concentration in Casablanca (55% of the number of subprojects) and along the Rabat-Tangiers coast. 22. BNDE financed only 10 of the subprojects; the largest participant was BCP (with 117 projects), followed by BMCI (34), BMCE (21), and SGMBC (15). The average equity contribution by project sponsors (38% of investment costs) was higher than expected at loan appraisal (the minimum for any subproject being 20%); but the average maturity was far shorter -- 4.8 years than the 9 years expected. Smaller loans generally had shorter maturities. The objective of easing the lending conditions for SSI was thus not fulfilled to the extent expected. 4/ For details sep pr'p, raras. 3.V- .15, 3.1P - 3.26. -8- 23. In 1983, in cooperation with the participating banks, BNDE carried out a survey of 143 of the subprojects. Implementation delays averaging 8 months had occurred on 86 of the subprojects (60%) and were due to adminis- trative constraints (e.g., obtaining various permits), delays in procurement of materials and equipment, construction problems, management problems, strained relations among partners, lack of financing for cost overruns, disbursement procedures, short sub-loan maturities, and inadequate appraisal and supervision by the commercial banks. Of the 121 subprojects that had started operations, 60% had incurred cost overruns due mainly to poor appraisal estimates and unexpected implementation delays. 24. Given the deterioration of the economic climate, the excessively tight repayment schedules, delays in implementation, and the continuing weaknesses in appraisal and supervision of subprojects, it is not surprising that more than 40% of the subprojects had at one time or another experienced repayment problems. At the end of 1983, arrears represented 16% of outstand- ing loans, while 7% of the loans (especially textiles and wood industries) were under legal proceedings. More recent data made available by CCG on the basis of all 528 "Credit Convention" loans outstanding at the end of 1984, indicated that 33% of the loans (by number) were in arrears ana that arrears represented about Lbt of outstanding1. VI. EFFECTIVENESS Of THE BANK'S SECTUR, APRAISAN. AND S'PERVlSION WORK 25. The Bank I t onIer-1 eftvrts t the rrenaration, raisal and superviqi n ,f '"s p'ri . : t 1- Sank h is ieepenen its understandi n z f 'he 5SS see ..r aI I e c-m-mencng with an Initial Conqkltant crudy in 7 vu cl>:n-c 'v1 ana.ysis of the artisanal and SSI :e,t r "n 9 0 0 :e B @ u ro rae tudi4e-, "7ndtis- trial Incentves a Epr rotn' Na-. 7-93-MOR , anoarv 11, 1984), and -f nor cc-'s FJnancial entor RePort Nf. ) 9, -MOR, December 12, 1984). A mnbT e: )f - k,conmeld'Ii : i v ,the two ; tuIes t- imprr Ve the incentives oxort--oriend o t> and thf efficiencv of the financia2 svsterr ir,e 4-nzc'nent.eA 1 vet o with the Rank's two Industr ial Trade Po:icv d iitme r a:- in 1 and 49 5---see Reports no. P-3707-MOR and P-473-MOR.not soecif icalIv directed to SSI, many ot these measure' will aftect the s't'r e;, a revi of tie role of CCG). Also, in connection wi t the 'econd SS! '1an, a .uthp )t dy )f irdiistrial incentives required ov tlhe sec-tr w411 -e 7nderta<eT by a iank-financed consultant. 26. Whini se er of the institut Io : ae a roical navations included in the f rst :ntP'race( S. :-,o '- ke I ' ters proved to be less successful. F'r inct2re, in.eniAte ilisbursement procedures impeded loan utiltzatio aol a";or ,e,: &peri . eitor: toat might other- wise have focussed n the criti:il en:1.1 -, weakns,es in the apraisal and f ollIow-uni .ina::Ic icr i1- f' k'- T- "a3 l. it~ "ti >f it o)f hinsgt I n- du-l~ s~ ILt' - a ri '~ 5r s ;c.rl 21ia i - 9 - expectations proved over-optimistic: (i) the willingness and ability of ODI to mount a full-scale extension service to SSI and its capacity to work closely with the participating banks; (ii) the receptivity of ODI and MCI to utilize Bank funding for foreign technical assistance and sector studies; (iii) the possibility of pursuing a selective approach with commercial banks based on their demonstrated capability at project work;5/ (iv) the adequacy of the spread; and (v) the effectiveness of the guarantee program. Modest improvements are being made in the last two years and sector policy issues are slowly being addressed. 27. The fundamental approach of the project was to utilize existing institutions by creating additional special units or functions for SSI. But while this avoided the delays, the legal and administrative complica- tions, and the teething problems associated with creating new institutions, it ran the risk that SSI would remain low on the list of priorities of the participating institutions. This was most obvious in the case of ODI's work in technical assistance. 'hile the Bank attempted to encourage this work by providing loan funds to ODI for technical experts, such funds have not been utilized to date. This issue has not yet been satisfactorily resolved by the Bank's supervision work, although suggestions have been made: for example, involving private consulting firms in Morocco for such work (PCR, para. 4.05). it would ai)pear that a review study specifically devoted to this issue is reqUired, which could inter alia look into the possibility of placing technical experts with BNDE and; or participating banks to build up their capabilitY of diagnosint tneir ctient,' needs and referring them to external (vubli c and or private) sources 9t tecnnical assistance. In fact, some banks 'n Ioroco ;a.e starCea small technical assistance programs for their clients, ana it would ne interesting to review their experience. AnoLher aossib if: m~ii.t he e:xte in of a small credit line for hiring privatu 2nsu1tants, is ias ben tried in sone otner projects. is, Ti IS tie first i egrated projE?ct for SSI development in Mor(-cu, a," it has only part ialLy succeeded in achieving its stated objec- tives. The institutional set-up was complicated but innovative. It was successful in introducing a uumber of commercial banks to SSI lending, some of whom have since established 9S lending programs with their own sources of funds. It also encouraged otter toreign resources to be channelled to SSI through the CrediL donvention procedures. The Credit Committee proved to be an expeditious means of approving financing and guarantees, and BNDE played an e ffective roLe as aoordinating -gencv. 5/ For instance, it may have been a mistake to leave the sensitive area of selection of commeretan hanks oe.g., or free limit treatment) to the supervision phase ot toe pr'ect, wncre it has proved impossible to implement, toe otuer hand, selecting banks for distinct ' e limits during apz'risa i&: 'a. Jelavc mewhat the loan and certainly would have cnre :s:deraniv mre Bank staf: time. - 10 - 29. Shortcomings, particularly in terms of institutional development, have nonetheless been serious. ODI has retained a very small staff devoted to SSI and thus has been unable to undertake the level of technical assistance that had been envisaged; it has only recently taken steps to build up its staff. The guarantee program of CCG has not proved effective enough for commercial banks to relax their lending conditions and security requirements. The spread and other incentives allowed to entice banks to participate were inadequate and, with a few exceptions, those that did participate have not developed satisfactory appraisal and supervision capabilities. Inappropriate disbursement procedures delayed loan utilization and absorbed considerable project supervision efforts on the part of the Bank and BNDE. Although the subprojects supported generated some 8,500 low cost jobs, wostly in new ventures and in an array of industries, about one-third of the outstanding subloans under the program as a whole is affected by arrears. 30. It is encouraging that, recently, corrective measures have been instituted to stimulate bank participation in the financing of SSI by raising their margin to 3% net of tax, expediting approvals, and simplifying the documentation required for the release of funds. Also, participating banks have been encouraged to monitor closely the subprojects financed. As a resut of these measures, loans to SSI under the Convention Credit program rose substantially during 1985 compared to 1984.6/ 'I. To ensure unimpeded develcoment and to improve their financial ~'iahtli~t, - ccess by SSs to technical assistance in its broadest form, i.e., including advice in such areas as accounting and marketing as well as on pulel, techrical matters, is often equally important for the success of these prograirz -s the availability of term financing ana working capital. Given the <tical importance of technical assistance, there is need for remedial 1.t. t;:cove the serviceability and effectiveness of the technical :assistao2e ielivery system in Morocco, by emphasizing design, organizational .-iC in<ttutional arrangements, staffing and cost effectiveness. Participat- ing av--i-ies should be more carefully selected, properly motivated and committed. Cr the other hand, subprojects need to be carefully screened, lo.v maturities lengthened, disbursement procedures standardized, and super- vision ant! colleetion efforts intensified. 32. 'he project experience is instructive in suggesting that: (a) when Qn pic1ilized agency is involved in an ,ST program, extreme care must be taken to e-sure that SSI remains a priority for participating agencies; (b) when the Bank 'elies on a technical assistance agency to support an SSI lending program, it should satisfy itself of its commitment for such support b t k during mniementation and operation; (c) strength2ning private technical assistance delivery systems may be a viable alternative and/or a complement t puhlic agencies; (d) when the Bank allocates funds for technical assis- tance and Suhsector studies, it should insure that implementing agencies are nmmitted makinq use of such facilities; (e) standard disbursement pro- f- AtrIch h ntr A .n - 11 - cedures need to be carefully adapted to the special needs of the SSI sector; (f) an early warning system for disbursement shortfalls on individual sub- projects should be devised for apex lending schemes, to enable funds to be freed for authorization of other projects and thus to avoid later cancella- tion of loan funds; (g) participating banks must receive an adequate spread in order to undertake risky SS1 lending; (h) a selective approach to free limits for participating banks should be agreed upon during appraisal, rather than during project implementation; and (i) a third-party guarantee program is administratively costly for small loans and, unless proper fees can be levied, other alternatives to enable banks to self-insure should be consid- ered. Finally, unrealistic cost estimates and tight repayment schedules, reflecting inadequate appraisals, have had inimical effects on subproject performance. - 12 - ATTACHMENT A COMMENTS RECEIVED FROM THE MINISTRY E-449/86 (1) OF FINANCE December 9, 1985 French (Morocco) PED PS:pa Rev.:JVS Translation of incoming telex from Mr. Mohamed Aissaoui, Chief, Currency and Credit Division, Ministry of Finance, Rabat, Morocco, dated December 3. 1985, addressed to Mr. Yukinori Watanabe, Operations Evaluation Department, World Bank Subject: Morocco: Project Performance Audit Report on the Small-Scale Industry Integrated Development Project (Loan 1687-MOR) Ref.: Your communication of October 9, 1985 On the above-referenced date you kindly forwarded me the draft version of the above-mentioned Project Performance Audit Report and asked for my comoents. am pleased to inform you that in my opinion the contents of said RUfl' two report seem reasonable on Lhe whole. It would be desirable, however, to par. expand on your conuents concerning the difficulties that have partially affe :ecd exeCution of :te projects by including a reference, in the Conclusicns section of the Report, to the corrective measures taken at the _ i iia,Ave the Technicat l Co=mittee, the positive results of which have 3lread.y been confirmed iuring the first nine months of 1985, the number of rrojects financed and the amount of loan (cr6dits convention) proceeds dirtributed being considerably higher than during the same period of 1984, having increased from 58 to 95 (by 64%) and from DH 39 million to DH 92 mill,on (by 136%), respectively. rhese measures include, in particular: - motivating participating banks by raising their net margin to three interest points; - 13 - - making participating banks accountable and reducing the :zjw it takes to grant small loans by introducing a free limit of DH 500,000 tn lending by these banks; - cutting the time it takes to approve loans and simplifying the documentation required for the release of funds; - encouraging participating banks to undertake the monitoring of the projects financed. Yours etc. Mohamed Aissaoui - 14 - ATTACHMENT B COMMENTS RECEIVED FROM MINISTRY OF COMMERCE AND INDUSTRY E-473/86 December 19, 1985 French (Morocco) OED JRT:cc Rev:ENMcM Ministry of Commerce and Industry Directorate of Industry Ref. No. 4098/DI/DSPN Rabat, November 21, 1985 Subject: Project Performance Audit Report: Loan 1687-MOR Reference: Your letter of October 9, 1985 Director, Operations Evaluation Department The World Bank Washington, D.C. Dear Sir: I have received your above-mentioned letter with the project performance audit report on the Small-Scale Industry Integrated Development Project (Loan 1687-MOR), for my comments. In that regard, I have the honor to send you herewith a memorandum summarizing my views on the various matters discussed in that document. Very truly yours, For the Minister of Commerce and Industry /s/ Abderrazek Mossadeq End. - 15 - Ministry of Commerce, Industry and Tourism Directorate of Industry Ref. No. 139 (?) DI/DSPN Rabat, November 14, 1985 MEMORANDUM Subject: Project Performance Audit Report on World Bank Loan 1687-MOR The project performance audit report on the Small-Scale Industry Integrated Development Project (Loan 1687-MOR) deals moi.: extensively with the activities of this Ministry as regards the SMI sector than with those of the banking system to which the management and implementation of the line of credit were entrusted. PCR (para.4.03) and PPAM The document calls the Directorate of Industry to task, in terms (para.9) refer to that are at times very severe, for having failed particularly in its duties the SSI Policy- regarding the definition of a general policy for SMI development and the making Unit in establishment of a unit concerned exclusively with that sector. the Directorate This criticism seems to be a constant theme in recent World Bank of Industry and reports, such as the two versions of document 5056-MOR on small-scale and only in connect- artisanal industries, and the first version of the document now in question. ion with its SSI As we previously mentioned (see our memoranda 175/DI/DESPN of activities while October 1, 1984 and 8/DI/DSPN of January 14, 1985), and at the risk of in exist- repeating ourselves yet again, our views on these matters are based on clear ence. and precise principles of industrial policy and administrative organization. It is our considered judgment, ir. fact, that since the industrial sector in Morocco consists mainly of SMIs (more than 80% of industrial firms), the Government's industrial development policy, as set forth in all official - 16 - documents and statements (development plan, Government decl.aaion, Finance Law and the like), responds first and foremost to the need to promote SMIs, and, as such, all efforts of the Directorate of Industry are focused on serving the interests of SMIs. It should further be noted that, contrary to the spirit of the report and more particularly its letter of introduction, the Directorate of Industry has properly carried out the tasks assigned to it under the project. Reflected It first conducted a study, with World Bank assistance, of industrial in 4ncentives, and introduced a whole range of measures such as the reform of special customs regulations (regimes economi es en dowines), revision of the protection structure, gradual reduction in maximum customs duties, para. 9 restructuring of foreign trade systems with the introduction of a system to streamline the management of the PGI [Projrarme General d'Importation -- General Importation Program], and improved analysis of requests for protection. In implementing these measures, the Directorate of course carried out all necessary baseline studies. It also made a survey in 1982 of the d'fficulties encountered by SMIs in areas such as management, financing and markets. Specific measures to stimulate the SMI sector were also taken under the 1983 code which grants SMIs, in addition to the benefits extended to industry as a whole, tax incentives in zones I and II, a bonus for the creation of new jobs and the payment of some land costs In zones III and IV. With regard to physical infrastructure, the Directorate of Industry supervised the development of some ten SMI industrial zones covering nearly 200 ha throughout the country. As part of its export promotion efforts, the Ministry of Commerce and Industry established an export promotion center (CMPE), which works - 17 - basically on behalf of small firms and is now preparing a code that will provide more attractive export incentives than in the past. The development of entrepreneurship has also been explored and a center to promote the establishment of new businesses has been set up within the Institut Superieur du Commerce et de 1'Administration des Enterprises (ISCAE). Workshops to help businesses get started will be organized there in the near future with the assistance of the Directorate of Industry, the Office for Industrial Development (ODI) and the (ILO). Reflected The ODI's Technical Assistance Unit has received enquiries from more in PPAM, than 650 promoters, of which about 100 have been assisted in putting financing para. 10, footnote plans together. It also provided assistance to more than 400 existing SMIs 3. (300 status reports, 60 in-depth diagnostic studies and 45 instances of assist,nce with procedures). The resources made available to this unit are in line with its current responsibilities and can be increased when necessary. However, we find that World Bank reports on SMIs in Morocco were in most cases merely a general and abstract recasting of the conclusions of our work. Already We agree with the World Bank that in practice the guarantee of the reflected in PPAM, Caisse Centrale de Garantie (CCC) has not allowed for any significant easing paras. 11, 12. of the conditions required by the commercial banks which, in our opinion, should not exceed a pledging of the assets financed by the credit. Despite this, we do not feel that there is a crisis of confidence between the banks and the CCG; rather, the problem is one of difficulty with procedures. The banks can in practice enforce the CCG guarantee only two years after the due date of the last unpaid invoice and after having made every effort to ensure - 18 - collection, especially through legal channels. In any event, the Ministry of Finance is now reviewing the role of the CCG as regards the guaranteeing of SMI credit and it might be desirable for the World Bank to make its position on this specific point known to the Ministry in question. - 19 - ATTACHMENT C COMMENTS RECEIVED FROM THE OFFICE POUR LE DEVELOPPEMENT INDUSTRIEL (ODI) E-389/86 November 19, 1985 French (Morocco) OED RP:bas Director General Office pour le D6veloppement Industriel 10, rue Ghandi Rabat Morocco Mr. Yukinori Watanabe November 4, 1985 Director Operations Evaluation Department World Bank Our Ref.: DAT-BH/AK 1913 RE: Project Performance Audit Report on the Integrated Project for Small-Scale Industry Development (Loan 1687-MOR) Dear Sir: Thank you for your letter of October 9, 1985 and the draft version of the Project Performance Audit Report referred to above. The staff of ODI has studied this document closely, and, in their report, have drawn my attention to the very negative views expressed therein with respect to ODI's contribution to the program. I must point out that we were surprised by the criticisms questioning whether ODI is "properly motivated and committed," because they are unfounded. In order to be more specific, I will briefly enumerate these criticisms of our activities, and then comment as necessary. The report criticizes ODI on five points: 1. Because of the progressive reduction in its staff, ODI cannot hope to address adequately the technical assistance needs of SSI. 2. ODI has neglected SSI in favor of large projects. 3. ODI's cooperation with the banks was inadequate, especially as regards the monitoring of projects receiving SSI financing. 4. ODI did not utilize the Bank funding made available for foreign technical assistance (hiring experts). 5. Banks found ODI's project preparation work to be too general to serve as a basis for project appraisals. - 20 - We wish to make the following comments on these judgments: I. As the World Bank itself has acknowledged, the low salaries in the public sector are one of the causes of the lack of continuity in ODI's staff. This affects not only ODI, and, as things are at present, it is a factor beyond our control. In any case (as pointed out on page 31 of the Project Completion Report), since there are in Morocco more than 4,000 enterprises eligible for our assistance, DAT should not feel obliged to respond to all the applications for assistance it receives from all the owners of enterprises that consult it in all fields of expertise. Nevertheless, and in spite of this observation, the technical assistance unit has so far always responded positively to direct applications from promoters. As regards the technical assistance unit professional staff, their number has fluctuated considerably but has generally been maintained at about 10. There are currently seven professionals, but three engineers will be Reflected hired by the end of 1985, bringing the total to 10. in II. ODI is often believed to be more interested in large projects than SSI; however, although there may be some justification for this PP AM assertion with respect to equity participations, it is groundless as regards project studies. In particular, since its establishment the technical assistance unit has studied about 100 SSI projects, normally at the request of the promoters and in close cooperation with them. footnote 3. III. There are two essential reasons why ODI participates only exceptionally in monitoring missions to projects that are in arrears. First, ODI does not wish to be perceived as a collection agency by SSIs; second, it cannot recover the cost of such missions from the World Bank's line of credit, in contrast to the other participants (i.e., BNDE and the commercial banks), which receive fees for managing their project portfolio. IV. As regards foreign technical assistance, it should be borne in mind that, after the APRODI mission, ODI invited bids for such services in order to continue this program. However, the bids received were considered too high. Nevertheless, as a result of our contact with the Indian company NSIC (National Small Industries Corporation Ltd.) and the agreement confirmed by the World Bank telex of August 13, 1985, we expect to hire an Indian specialist in production management in January 1986. A draft agreement will be submitted without delay to NSIC for its approval. V. Except for minor modifications designed to bring them into line with World Bank guidelines, project studies prepared for promoters by the technical assistance unit are usually reproduced in full by the commercial banks when applying to the Technical Committee for permission to grant loans. - 21 - We trust that these few comments will enable the judgments contained in the draft version of the report to be put into perspective, and that you will take account of them in the final version. I would be pleased to provide any further information you may require. Yours, etc. /s/ Mohamed Belkhayat Director General 22 ATTACHMENT D COMMENTS RECEIVED FROM THE BANQUE NATIONALE POUR LZ DEVELOPPEMENT ECONOMIQUE (BNDE) E-449/86 (Part 2) December 9, 1985 French (Mor--co) PED PS:pa Rev.:JVS Translation of incoming telex from A. Jorio, National Economic Development Bank (BW). Rabat, Morocco, dated December 3, 1985, addressed to Mr. Yukinort Watanabe, World Bank Pleased to inform receipt of draft Project Performance Audit Report (SMI* Loan 1687-MOR), for which we thank you. This document analyzes the SMI financing system and recommends measures to improve the efficiency of this system. These measures include the following, in particular: 1. - In-depth study of the role of the Caisse Centrale de Garantie. Reflected 2. - The need to strengthen structures responsible for technical in assistance. PPAM, 3. - The need to intensify supervision of projects financed. paras. With regard to the other measures recommended by the PPAR, some have 12 and been in effect since August 1985, viz: 30. - the granting of a free limit to all banks; - the raising of the banks' margin to three points, net of all tax; - the adoption of cxpenditure documentation procedures for each individual investment program. This first series of measures has been accompanied by (1) the dissemination of the benefits of the SMI procedure and (2) a sustained coordination effort by BNDE based primarily on periodic visits to participating banks. *TN: Presumably "PMI" (SMI) should read "PI" (SSI). -23 - All these different measures are bound to have a positive imact on SMI development. The situation of SMI authorizations at the end of November is significant, total lending amounting to DR 104,908,000 compared to DR 52,066,500 for the same period of 1984. We shall discuss the various points raised above in a separate communication. Yours etc. A. Jorio PROJECT COMPLETION REPORT MOROCCO INTEGRATED PROJECT FOR SMALL-SCALE INDUSTRY DEVELOPMENT (Loan 1687-MOR) October 19, 1984 Regional Projects Department IDF Division Europe, Middle East and North Africa Region - 24 - MOROC 00 PROJECT ODMPLETION REPORT INTEGRATED PROJECT FOR SMALL-SCALE INDUSTRY DEVELOPMENT (Loan 1687-MOR) I. INTRODUCTION 1.01 Loan 1687-MOR in the amount of US$25 million was designed to support the development of small-scale industries (SSIs) in Morocco through the provision of financial and technical assistance. The loan was the first free standing Bank operation in the SSI sector in the country. However, its preparation drew on the successful experience of an SSI pilot component &ncluded in the eighth Bank loan to BNDE (Loan 1428-MOR signed on June 16, 1977) which earmarked US$5 million for the financing of SSIs as well as funds for the implementation of a sector study to identify the potential and constraints for their development. Origins of the Project 1.02 Project preparation started during the last year of Morocco's Third Economic Development Plan (1973-77). Morocco's industrial development strategy in the Second and Third Plans had given priority to large public enterprises and modern medium to large privately owned industries which benefitted from generous incentives and institutional support. Responding to changes in the country's economic environment and the pressing problem of an increased rasource gap and Treasury deficit (20.4% and 17.6% of GDP in 1977, respectively), the following Plan (1978-1980)7. called for enhanced government support to small and medium-scale industries in order to create employment at a lower cost per job and help to better integrate the existing structure of the industrial sector. 1.03 Prior to Bank involvement in the SSI sector, financing of SSI investment relied on medium-term credit for the purpose of general industrial development rediscountable at the "Banque du Maroc" (BdM), short-term rollover credit extended by the commercial banks, and funds provided by non-institutional sources such as friends and relatives, money lenders and suppliers. Although medium-term industrial bank credit was available, its use by the SSIs was very limited because of lack of information, insufficient collateral, and the commercial banks' tendency to provide more profitable short-term rollover loans. In 1973, Government took steps in the direction of easing SSIs' access to medium-term credit by establishing a simplified and accelerated procedure (PSA) which allowed the commercial banks to rediscount loans to SSIs under a simplified review by BNDE. While enhancing SSI medium- term financing, the procedure presented constraining limitations in terms of eligibility criteria (only very small projects), equity requirements (a minimum 40% of total investment) and guarantees (need for collateral). 1/ The Fourth Plan was conceived as a transitory 3 year exercise focusing on economic adjustment and public expenditure containment policies. - 25 - Moreover, it was used mainly for the establishment/development of commercial activities and professional practices rather than industrial enterprises. 1.04 The SSI pilot line of credit extended by the Bank in conjunction with the eighth loan to BNDE was designed to help remedy some of the PSA short- comings while improving the Bank's knowledge of the subsector through a limited experimental exposure. The US$5 million allocated to SSI financing were shared for onlending between BCP (US$3 million) and BNDE (US$2 million). Besides providing more suitable financial resources to small industries, the pilot scheme served as a catalyzer of ideas and helped to attract the attention of the banking community towards SSIs. The sectoral survey conducted as part of the pilot scheme helped to assess the SSI demand for medium-term financing, and to identify the most appropriate modalities to channel it to the enterprises (institutional set-up, subproject eligibility criteria, guarantee requirements, lending terms and conditions). 1.05 Until the development of the first SS1 operation, Bank involvement in the industrial sector included 8 loans to BNDE and direct lending to large public sector industries (phosphoric acid and cement). At the time of appraisal of this loan the Bank generally felt that there was a strong need for broadening Bank lending to the manufacturing sector by emphasizing cotiplementarity between large scale/capital intensive and small scale/labor intensive industries. At that time also the Bank was promoting extensively and worldwide loans geared to small enterprises, in order to foster employment and income growth In countries suffering from large unemployment problems. The Loan 1.06 Bank appiaisal of the Sh program was carried out in Noveiber 1978. The resulting lending operation was approved by the Board on April 12, i979. The Bank loan was made to the Government of Morocco (Treasury). It featured an interest rate of 7., a maturity period of 15 years including 4 years of grace and a fixed amortization schedule. The proceeds of the loan were to finance subloans to SSIs through a line of credit of US$24 million, and expenditures for SSI promotion, development aad technical assistance activities for a total amount of US$1 million. 1.07 The funds earmarked for financing SSI subprojects were to be made available on a tirst-come first-serve basis by the Treasury to BNDE and the commerc ial banks willing to participate in the program. Besides its participation in the program, BNDE was entrusted with the responsibility of administering the entire line of credit (i.e. supervision of project eligibility criteria, processing of disbursement applications, review of appraisal reports by commerc ial banks, preparation of progress reports). While no specific eligibility criteria were established to select the participating banks, these had to sign an agreement with BNDE defining the modalities of their participation. Final approval of the SSI subloans rested with an "ad hoc" SSI Credit Committee including representatives of the Treasury. Ministry of Commerce and Industry (MCI). BdM, BNDE, the Office pour le DOveloppement Industriel (ODI), and the Caisse Centrale de Garantie (CCG). The responsibility for the promotion and development activities was entrusted - 26 - to a Pblicy Making Unit for SSIs under the direct supervision of the Director of Industry in the MCI; that for the technical assistance activities to the SSI Technical Assistance Unit within ODI. 1.08 The loan was signed in April 1979. It became effective in December of the same year, four and a half months later than scheduled. Loan effectiveness had to be postponed because of delays in the issuance of legal opinions and in the signing of subsidiary agreements between the Government and BNDE on one hand and between BNDE and the participating commercial banks on the other hand. The postponement of loan effectiveness had no major negative consequences on project inlementation. It only increased pent-up demand for subproject financing. 1.09 The loan was closed on December 31, 1983, as originally envisaged. The last disbursement, however, took place on July 23, 1984 as the Bank agreed to keep the loan accounts open for a few months after the loan closing date to disburse on a number of subprojects for which the withdrawal applications could not be completed in time. The present PCR covers the period between project appraisal and July 1984. 1.10 In November 1980, prompted by the fast commitment of this loan, the Bank appraised a second SSI operation which led to a US$70 million loan (2038-MOR) signed in November 1981. The allocation of bank funds for SSI financing during the period was paralleled by that of other financial institutions, notably: - the OPEC Special Fui, two loans of Us$2 and 15 million signed in February 1979 and March 1982, respectively; - the Kuwait Furd, a loan of US$6 million signed in December 1980; and - the African Development Bank, a loan of US$12 million signed in February 1982. Also, in 1981 the European Investment Bank agreed to reallocate 15 million ECU (US$18 million equivalent) of an existing loan to Morocco to SSI financing in order to cope with a possible resource gap during 1981. At its request, the Bank agreed to assume the responsibility of supervising the US$2 million line of credit of the OPEC Special Fund. 1.11 While not directly related to the performance of Loan 1687-MOR, some of the problems experienced in the use of the above resources (in particular Loan 2038-MOR and the OPEC line of credit) are relevant to a better understanding of SSI financing and are mentioned in the present PCR. - 27 - II. OBJECTIVES AND EXPECTATIONS 2.01 In accordance with government programs in the sector and the needs of the manufacturing industry in Morocco, as identified by the Bank, the stated objectives of the project included: (i) fostering more rapid growth in productive employment in urban areas by creating through the SSIs more jobs at an average cost much lower than attained in the industrial sector in previous years; (ii) developing the industrial base of less advanced regions in the country; (iii) enhancing the development of entrepreneurship and the training of technicians with a direct experience in industrial management; (iv) assisting new and existing SSIs in increasing their productivity and competitiveness with large enterprises in local and international markets; and (v) encouraging inter-industry exchanges between small and large firms. 2.02 Based on the assessed needs of the SSI sector (survey under BNDE Loan 1428-MOR) , the project was designed to pursue the above objectives by assisting Government in the threefold effort to (i) increase its institutional and technical capability of formulating SSI development policies; (ii) improve the quality and volume of technical and managerial assistance provided to SSIs; and (iii) develop a financial assistance scheme tailored to the requirements of small firms and facilitating their access to credit. 2.03 Development Policies. Bank assistance focused on strengthening the Policy-Making Unit for Small Scale Industries established in the MCI in 1978 during project preparation. It was expected that the Unit would propose and monitor the implementation of administrative measures in favor of SSIs, carry out or supervise the execution of studies on the SSI subsector, identify and propose policy changes in the Investment Code, Tax Laws, Customs Bill and other legal regulations affecting SSI development, and coordinate the activity of all institutions dealing with SSls. 2.04 Technical Assistance. The project focused on strengthening the activity of ODIV in the SSI area through its Technical Assistance Unit (TAU), also created in 1978 during project preparation. It was expected that the TAU would help potential investors to identify, prepare and implement SSI 1/ A Government semi-autonomous agency under the Ministry of Industry, ODI was established in 1973 to promote industrial development in Morocco through sectcral studies, direct government participation in industry, and general promotional activities. - 28 - investment projects (execution of feasibility studies, preparation of loan applications, selection and procurement of equipment, solution of infrastructure and administrative bottlenecks), and assist existing SSIs to improve their operations (identification and solution of production, financial, and managerial problems; identification of market outlets and/or subcontracting arrangements in local and foreign markets). 2.05 Credit Program. In addition to increasing resources for SSI development, Bank assistance was aimed at organizing and developing the operational framework for more efficient financial intermediation which could effectively reach the small enterprises all over the country. By selecting BNDE as apex institution, as well as onlender, and by extending to all commercial banks willing to participate in the program the use of the SSI line of credit, the Moroccan Government and the Bank expected to capitalize on BNDE experience in lending for industrial projects to guide and monitor the activity of the commercial banks and on the extensive network of banking outlets and contacts of these latter to promote the largest possible number and most diversified type of projects. 2.06 The onlending activity was regulated by eligibility criteria defining three categories of subprojects: - group A - very small firms; new or existing enterprises with total project cost or total net assets after expansion under DH 500,000 (US$125,000) and a cost per job created or maintained under DH 40,000 (US$10,000), in 1978 prices;-/ - group B - small firms; project cost or total net assets after expansion between DH 500,000 and DH 2,500,000 (US$625,000) and cost per job under DH 40,000; and - group C - labor intensive or decentralized medium size industries; project cost or total net assets after expansion up to DH 5,000,000 (US$1,250,000) and cost per job under DH 40,000 or DH 35,000 (US$8750) if located in the Casablanca-Mohamedia region. Reflecting subsector and regional particularities, for the group B and C industries in the mechanical and electrical subsector the cost per job ceiling was set at DH 50,000 (US$12,500) or DH 45,000 (US$11,250) if located in the Casablanca-Mohamedia region. 2.07 By setting the above eligibility criteria and by allocating to the group A and B enterprises 75% of the credit provided under the Bank loan, the Government and the Bank intended to sponsor the priority development of enterprises with total net assets after the project below DH 2.5 million, which were acknowledged to be more labor intensive and to encounter more difficulties in mobilizing medium-term financing. 1/ Prices were to be adjusted semiannually ir, accordance with price variations as shown in the average wholesale price index for Casablanca. - 29 - 2.08 Interest rates were aligned to the prevailing rates for the rest of the industrial sector which at the time of loan signing were 8% for mediun-term loans, (up to 7 years) and 9% for long-term loans..!/ To meke funds available to the commercial banks and BNDE at an effective rate consistent with the rate to the end-users, the Treasury relent them the Bank funds at a rate leaving a 2% spread to the banks. The foreign exchange risk wes assumed by Government in line with the prevailing practice for larger industrial loans in Morocco. 2.09 Given the above context, it was envisaged that, contrary to BdM policy in rediscounting medium-term industrial loans, maturities would be in line with the economic life of projects and consequently stretched up to 12 years with a 9 year average. Also, it was envisaged that loan financing would cover up to 80% of the total investment for the implementation of subprojects, with the Bank line of credit financing 60%, and complementary rediscountable mediumr-term credits another 20%. These two featureo of the credit program, with the addition of CCG guarantees on all approved subloans, aimed at the development of potentially sound projects whose implementation could have been hampered by lack of adequate credit (long repayment periods, extensive coverage) and too tight guarantee requirements (promoters' personal assets). 2.10 Overall the project was successful. As envisaged, it resulted in a development program integrating institution building with the provision of credit and technical assistance to small-scale industries. The objectives of the credit and technical assistance components were achieved to a larg;er extent than those concerning the establishment of development policies. So far, this trend applies also to the Second SSI Project under implemertation. 2.11 A detailed description of the project results and implementation problems along with specific comments on thp possible lessons to be drawn is provided in the subsequent sections of the PCR. Section III - Project Execution - emphasizes the aspects related zo the credit program component which represented the bulk of the Bank loan. Section IV - Institutional Impact - mainly discusses the results of the project's "soft" components concerning the promotion, development and provision of technical assistance to SSIs. 2.12 The preparation of this PCR draws extensively on the results of (i) a comprehensive report on the implementation status and conditions of all subprojects financed under the loan, prepared by BNDE in 1.983; and (ii) a study on small-scale and artisanal industries in Morocco Report No. 5056-MOR), prepared by the Bank 1so in 1983. 1/ This interest rates were revised upward in October 1980 to 10% and 11%, respectively. Subsequent overhaulings of the interes- rate structure in April 1982 and September 1983 did not affect the subprojects financed under the loan since commitments were already completed. By mid-1984 the rates were 12% and 14%, respectively. - 30 - III. PROJECT IMPLEMENTATION General 3.01 While preparation of the project took place in the wake of a long period of sustained growth of the manufacturing sector (average 7.2% per annum from 1973 to 1977), its implementation coincided with an initial decline and subsequent stagnation of both industrial investment and output resulting from a general deterioration of the economy of Morocco and its main European trading partners. In spite of the austerity program adopted in 1978 - 1980, the Government could not address most of the fundamental structural weaknesses of the economy with severe negative effects on the development of the country's manufacturing industry. In the early eighties the situation was aggravated by external factors such as (i) the significant appreciation of the dollar vis a vis the dirham since the beginning of 1981; and (ii) a decline in the price of the major exports (e.g. phosphate rock) as well as the contraction of some foreign markets (e.g. textiles in EEC countries). 3.02 The execution of the project was characterized by two distinct periods: - an initial phase of rapid commitment of the line of credit which, in spite of the negative economic environment was fully engaged well before December 31, 1981, the deadline established in the loan agreement; and - a subsequent phase of slow implementation of the financed subprojects, including cancellation or reduction in the scope of some of the programmed investments. The second phase resulted in slow disbursement and cancellation of part of the Bank loan proceeds. These considerations apply also to the OPEC Special Fund line of credit which was fully committed by the end of April 1981. Compliance with Project Description and Agreements 3.03 Overall the project was executed according to the description presented in the loan agreement. The proceeds of the Bank loan, however, were used for the implementation of the Credit Program Component (Part A of the Project), exclusively. The implementation of the components concerning promotion and development activities (Part B), and studies (Part D) was only partly carried out and with internal resources of the Ministry of Industry; that concerning technical assistance activities (Part C) was carried out by ODI with grants from the EEC. During project implementation the Bank and the Borrower agreed to introduce the following two changes in the execution modalities of the project: (i) a partial reallocation of the loan proceeds, in August 1980. Funds in the amount of US$2,325,000, originally allocated to the financing of the group A subprojects (very small firms) - 31 - and US$500,000, originally allocated to the financing of technical assistance activities, were shifted to the financing of group C subprojects (medium size industries). The decision was triggered by a mid-project review of the subloan demand which was limited for the very small enterprises and conversely strong for the medium size enterprises; and (ii) the introduction of new procedures to document subprojects expenditures, in September 1982. In order to facilitate the preparation of disbursement applications for the Bank loan, the Borrower was allowed to substitute to the presentation of standard expenditure documentation that of a subproject completion report certifying the execution of civil works and the acquisition of equipment. Both changes had a positive impact on the disbursement of the Bank loan proceeds. They are discussed in greater detail in other sections of this report (paras 3.15-3.25). 3.04 Compliance with loan covenants was satisfactory except for the reporting requirements. Only BNDE prepared the reports envisaged under the loan agreement although not always promptly. The commercial banks, ODI and the MCI did not or only partially met their reporting obligations. However, in 1983, the MCI assisted the Bank in preparing the comprehensive review of the SSI sector mentioned in para 2.12 which deals with SSI development policies. With respect to the auditing requirements, no audit report of the line of credit was prepared for 1979 and 1980. BNDE assumed that the audit reports on her general activities prepared under the Eighth Bank Loan to BNDE (No. 1428-MOR) also covered her obligations vis a vis of the SSI Project. This situation was rectified in 1982 when separate audit reports for the SSI Project started to be prepared for 1981 And following years. Commitments and Disbursements 3.05 Ninety percent of the line of credit was committed by December 1980, only one year after loan effectiveness and one year before the envisaged commitment deadline. This positive result is explained by the combined effects of the following main factors: (i) the existence of a considerable pent-up demand for SSI medium-term financing; (ii) the relative attractiveness of the proposed financing to SSI investors due in particular to the low equity financing requirements (20%); (iii) the expeditious procedure set up for subloan approval by the SSI-Credit Committee meeting every two weeks; and (iv) initial competition by the participating banks in using the line of credit in order to expand their activity in the area of medium-term credit and to build up a potential clientele for subsequent commercial lending during the operational phase of subprojects. Only towards the end of 1980, did the country's harsh economic situation lead to a slow down in new credit demand. By that time, the succesful commitment of the line of credit had triggered the mobilization of an additional US$120 million of external resources for financing SSI development(para 1.12). This amount would prove excessive and - 32 - would ultimately determine the joint Bank/Government- -ecision in mid-1984 to cancel US$30 million from the US$70 million of the second SSI loan to Morocco. 3.06 Commitments by BNDE and the 9 participating commercial banks extended to 214 subprojects (excluding cancellations).17 The level of commitments, by each bank ranged from DH 36 million (US$8 million)./ on 117 subprojects for BCP to DH 980,000 (US$217,000)11 on one single project for SMDC. Besides BCP, the other more active institutions were BMCI, BMCE, and SGMB each with commitments between Dh 10 - 20 million (US$4-8 million). Comm itments under the OPEC Special Fund line of credit extended to 9 projects for US$1.99 million (excluding the subsequent cancellations of 2 projects for US$642,961). 3.07 Disbursements under the loan started only in December 1980, 12 months after effectiveness. In contrast to the pace of commitments, they were characterized by delays and shortfalls throughout project implementation. At the closing of the loan accounts in July 1984, total disbursement amounted to US$17.1 million or 68% of the original loan amount of US$25 million. 3.08 These delays were mainly caused by the difficulty encountered by the participating banks in providing to BNDE the subproject expenditure documentation required for the preparation of the Bank withdrawal applications. Disbursement shortfalls were caused by: (i) the effects of the appreciation of the dollar versus the dirham; (ii) the cancellation and/or reduction in scope of a number of subprojects; and (iii) the impossibility to establish the completion reports mentioned in paragraph 3.03 above for a number of operations (refusal of project sponsors to disclose investment information and/or to allow the inspection of buildings and equipment; stoppage of operation and subsequent liquidation; etc.). It is estimated that the contribution by the above three factors to the disbursement shortfall is 20%, 60% and 20%, respectively. Disbursement shortfalls could have been limited if BNDE and the participating banks had identified early enough the savings occurring on subloans and immediately recommitted the relevant funds to new subprojects. The particular negative impact of the dollar appreciation combined with the inability of documenting all project expenditures is evident when one considers that BNDE's disbursements in dirham are close to 95% of total commitments. 3.09 The US$17.1 million disbursed under the loan were allocated 15% (US$2.5 million) to group A subprojects, 49% (US$8.4 million) to group B subprojects and the remaining 36% (US$6.1 million) to group C subprojects. This distribution basically matched the allocation of the loan proceeds as revised in August 1980 (para 3.03). The distribution originally envisaged in the loan agreement was 25%, 50% and 25% respectively. 1/ Appraisal report had projected 200 subloans. 2/ Dollar amount based on the average exchange rate during the commitment period 1979-1981. - 33 - :haracter< :zs of Lending 3.10 lype of Investment and Sectoral Distribution. Of the 214 subloans f:.nanced under the project, about 65% corresponded to new operations and the rimaining 35% to expansions of existing enterprises. Lending was well d-stributed among industrial subsectors in the sense that its distribution bisically reflected the relative importance of the subsectors in the Moroccan economy. The subsectors which received the largest number of loans were food and beverage (28%), textiles, clothing and leather (21%), metal-mechanical (17%), wood and furniture (12%) and chemical (11%). 3.11 Investment Size. Total investment size ranged from as little as DH 80,000 (US$18,000)V to the ceiling o2 DH 5 million (US$1.1 million) .1 The average investment amounted to DH 850,000 (US$190,JU0). Subprojects in the chemical and metal mechanical sector were mainly above DH 1. million. Eighty five percent in the food and beverage sector were below DH I million. 3.12 Regional Distribution of Projects. Fifty five percent of the financeU projects were located in the Casablanca region. This was consistent with the iole of rie region as economic hub of the country and also was the resuit of greater accessibility to credit and greater dynamism by the CasabVana enterpretneurs. Projects outside the Casablanca region presented strong concentration patterns as well; 45" were located in the industrial !aa 3t'ip b"tween Rabat and Tangiers. Very few of the subprojects were r,ce nI thl southern and interior regions. r ig Stucture of PrUects. nstitutional credit financed about :7 1.illon (CSW28 -illion)± of t,ne total SSI investment carried out u-Kie he project. As a result equity participation by the project ponss I,81 S the ccrmbined project investment) was considerably 'igher than enivisa,d at appraisal K20%). While the participating banks claim that high equity f nare*g was the result of investor preferences, it is also likely that the s. o :ontinued to apply a conventional approach to their lending decisicr.; and to require substantial equity participation by their borrowers. The instittinal credit mobilized under the project consisted of the Bank loan a, well as complementary funds from BdM rediscounting facilities. The two co:rt es ontributed to the financing of projects by 49% and 13%, rewectiv' ,y ur igina ly they were expected to contribute 60% and 20% (para lerrs anc ocnk' tnens of Subloans 3, T i s o sueoans made with the hank line of credit averaged . ers fo, the projects of group A Itotal investment under DH 500,000), 5.1 year r :.'ro ectso group investments between DH 500,000 and Dli 2.5 miini . :ears tor orojects of group C (investment between DH 2.5 and TT 7Doll'r amou-.t based on the average exchange rate during the commitment - 34 - DH 5.0 million) . Only 29 loans were granted maturities exceeding 5 years and none exceeding 8 years..! These maturities were considerably shorter than those envisaged at appraisal (up to 12 years with a 9 year average). The maturities of subloans using BdM rediscounts were even shorter. Only 5 operations by BNDE and one by BMCI provided maturities exceeding 5 years. Grace periods had been also briefer than expected. The above short maturities and grace periods constituted a weakness in the implementation of the project. They did not concern industrial extension projects only but also new creations, and in both cases have often caused liquidity squeezes. 3.15 On the occasion of several supervision mission, the Bank pointed out the need of longer maturities and grace periods to meet the envisaged project objectives, in particular vis a vis the smallest SSIs. However, these efforts were frustrated by the investors' preference for relatively short repayment periods combined with the limited experience of the participating banks in medium-term project lending and consequently their reluctance to make loans exceeding 4 - 5 years. Regulations limiting BdM rediscounts to medium-term loans with maturities not exceeding 5 years contributed to the short maturities of the complementary subloans using these resources. The issue of BdM rediscounting regulations was raised at the time of appraisal and an agreement was reached that the banks would bear the responsibility of an initial mobilization of resources for the subloans exceeding 5 years until they could become rediscountable with BdM. More profitable alternative use of the resources available to the cornmerciai banks prevented, however, the achievement of the above objective. Loan Guarantees 3.16 According to the agreement signed between the part icipatn L anik Uid BNDE, the guarantees on the SSI loans should have been limited to the fixed assets and working capital financed uxier the subprojects, in order to facilitate access to credit by capable entrepreneurs unable to provide adequate collateral. In case of defaults, CCG would have intervened covering 80% of the losses incurred by the bank concerned. To qualify for CCG guarantees the banks had to pay a one time fee ranging from 1.25% to 3.25a ot the subloan principal according to the subloan duration. When called upon, the CCG guarantee was to be released two years after the initial declaration of default and provided that the bank concerned had initiated legal action against the defaulting subborrower and made all possible efforts to collect any other available guarantee. 3.17 Contrary to the original expectations, the banks actually iequirea personal securities from the SSI investors, their families or associates, thus defeating the purpose of the CCG guarantees. This was determinea v oUth a conservative approach to lending and lack of confidence in CC( bY cost participating banks.21 1/ Nine of the 29 loans exceeding 5 years were made , BND. 2/ The role of CCU -s unuer review by tie Mu'.ea uvernn wn ..'- hena i te context of th 1983-84. - 35 - Implementation of Subprojects 3.18 The analysis presented in this section is based on the results of a survey of 143 subprojects. The survey was carried out in mid-1983 by BNDE in cooperation with the commercial banks participating in the credit proeram. 3.19 Adherence to Implementation Schedule. Of the 143 subprojects surveyed, 121 (85%) were completed and operational. Of these 7 were completed ahead of schedule, 28 within the expected timeframe and the remaining 86 with an average delay of 8 months. The main causes of delay, a,, reported by the project sponsors, were: administrative constraints (e.g. construction permits, customs procedures, utility connections), procurement of construction material and equipment (e.g. delivery time, price changes, changes in suppliers), personal problems (e.g., limited time to follow project, difficulties between shareholders) , and the banks' procedures in disbursing the subloan proceeds and providing additional credit to cope with cost overruns. Delays in the implementation of several subprojects could have been limited by more attentive project preparation and tighter appraisal and supervision by the commercial banks. 3.20 Respect ol Cost Estimates. Of the project surveyed and completed, 15% had been implemented within the original cost estimates, 25% with some savings and the remaining 60% with cost overruns. Cost overruns were most frequent in the chemical and food and beverage sectors. Cost overruns mainly originated from procurement of equipment and related expenditures (installation, transport, etc.), and the construction of building including utility connections and site preparation. Another significant item affected by overruns was the underestimation of working capital needs. Cost overruns were most frequent with the subprojects presenting implementation delays and they also were largely caused by insufficient project preparation and follow-up. 3.21 Management and Staffing. The firms belonging to the textile, clothing and leather, food and beverage, and chemical sectors were the most successful in organizin their management and staffing. For all firms the recruitment of qualified technical personnel was easier than that of the financial and administrative personnel, as proved by the fact that only 3% of the surveyed units were found lacking on the first ground as against 16% on the second. 3.22 Debt Servicing.i. At the end of 1983, the analysis of the combined subloans showed that only 57% of the subloans had at all times a normal reimbursement situation. Arrears stood at about 16% of the combined outstanding balance of the subloans. Seven percent of the subloans-/ were under legal proceedings. The bank more affected by arrears was BCP which was 1/ This analysis extends to all financed subprojects. 2/ Mainiv concentrated in the textile, clothing and leather, and the wood and furnituie sectors. - 36 - also the bank which had financed smaller projects. Other banks seriously affected by arrears were BNCE and CKCB. Morocco's economic difficulties do not justify alone this situation. The poor status of the subloans is also due to inadequate subproject appraisal, insufficient follow-up during execution and initial operation, and excessively short subloan maturities. 3.23 In order to avoid further increases in subloan arrears it is essential that the enterprises be helped to redress their financial situation through the provision of technical assistance in the areas of production and financial management as well as the identification of suitable market outlets. The banks' activity in this field should be assisted by ODI and BNDE which should provide the banks indications about the suitability of rescheduling loan payments and/or providing complementary loans. A program of action to this end is being implemented (para 4.09) and will be monitored by the Bank in conjunction with the supervision of tha Second SSI Projects. The Bank is discussing with Government the possibility of increasing the existing spread of cxmerc ial banks so that they could have additional resources to carry out direct subproject supervision. - 37 - Table 1 Situation of Arrears by Subproject Group (DH 1000) Number of Amount of Outstanding subproj ects IBRD credit balance Arrears Subproj. Subloans Subloans Subloans Group Total in arrears Total in arrears Total in arrears Total % Group Al/ 99 40 15199 5941 8255 4891 2336 23.9 Group B2 91 36 47548 18253 27721 14485 6259 64.0 Group C./ 14 5 28472 7580 23005 6265 1183 12.1 Total 204 81 91219 31774 58981 25641 9778 100.0 Socioeconomic Impact of Subprojects 3.24 The 214 financed subprojects generated about 8,500 productive jobs or 70% more than the 5000 estimated at the time of appraisal. The average cost per job was DH 25,000 or US$5,000 A/ and resulted about 5-6 times less than in the overall manufacturing sector. The cost per job varied from an average DH 20,500 for the very small firms (total net assets below DH 500,000) to DH 25,200 and DH 30,300 for the firms with net assets between DH 0.5 to 2.5 million and DH 2.5 to 5.0 million, respectively. The number of jobs might even increase and the average cost per job decrease as firms, which now are in their initial operation phase, expand their activity and hire additional personnel. As envisaged at appraisal most investment projects are located in urban areas and contribute to relieve their employment problems. However, as described in para 3.13, the project only partially achieved its objective of fostering industrial decentralization from Cas--blanca-Mohamedia by financing with priority subprojects located outside this area. 3.25 The FRR of the financed subprojects as estimated by the participating banks at subproject appraisal ranged from a minimum of 14% to a maximum of 1/ Very small firms 2/ Small firms 3/ Medium size firms 4/ Dollar amount based on the average exchange rate during the implementation period of subprojects from 1980-1982. - 38 - 52% with an average rate of 29%.1' Given the cost overruns and the operational difficulties encountered by many subprojects it is likely that the actual average FRR is lower. ERRs were estimated only for the projects belonging to Group C or with total investment exceeding DH 2.5 million. On average, the ERRs were 20% higher than the relevant FRRs and substantially above the opportunity cost of capital in Morocco, estimated at 10% at the time of appraisal. 3.26 Since insufficient time has elapsed from the beginning of operations for most enterprises, no significant data are yet available on their actual sales and productivity. Houever, at least twenty percent of the firms are export oriented and it is estimated that the export share of their overall production is in the range of 30-35%. 1/ FRR was estimated only for subprojects with total investment or net assets after expansion exceeding DH 500,000. Present analysis concerns 50 subprojects totaling an investment of DH 66 million. The average FRR is based on the rate of each subproject weighted against the relevant investment cost. - 39 - IV. INSTITUTIONAL IMPACT Generi 1 4.01 Government interest and commitment to the development of SSIs during project preparation and early implementation provided momentum to the project institutional building effort. The project was instrumental to the creation of the MCI, the SSI Technical Assistance Unit in ODI, and the establishment of a more structured interaction between government agencies responsible for SSIs and the institutions financing them. The initial momentum, however, slowed down after 1981 under the effects of the persistent economic recession and a downturn in SSI investment demand. While this had some adverse effects with respect to the activity and institutional build up of the SSI Policy-Making Unit, the institutional system created by the project could continue to operate effectively with only minor changes. Organization of Project Execution 4.02 The organization was based on three main choices: (i) structuring government interventions through the activity of the specialized SSI units in the MCI and in ODI as well as the SSI Credit Committee at the Ministry of Finance; (ii) assigning to BNDE the role of administering the credit program; and (iii) opening the use of the credit facilities to all commercial banks willing to participate in the program. 4.03 The SSI Policy-Making Unit at the MCI was established with one junior economist assisted, on a part-time basis, by one other staff from the Industry Department. The Unit was organized as an independent entity reporting to the Director of Industry, directly. Performance of the Unit did not meet thr original expectations. The Unit never succee.ed in defining its own operational role within the Ministry and becoming a dynamic group of experts advising government on SSI policies arid a%tively interacting with the various institutions dealing with SSIs. In September 1982, the Unit was transferred to the Division of Economic Studies. The Bank accepted "de facto" this decision. While it offered the advantage of integrating the activities of the Unit into a more structured operational setting, it also resulted in partial loss of the Unit's identity and specialization. 4.04 The SSI Technical Assistance Unit (TAL) at ODI was started with an initial staff of 4 to reach 10 one year later at the end of 1979. Its staff was supported by 4 foreign experts financed by the European Economic Community. The TAU provided helpful technical assistance to the SSIs in the following areas. preparation of investment projects; general assessment of operating problems through individual visits; specialized assistance for the solution of production, management, accounting and financinl problems; promotion of contacts between the firms and foreign investors or customers; and - 40 - preparation of studies on specific industrial subsectors. During 1982 andl983, however, the Unit experienced a reduction of its initial level of activity due to the departure of the 4 foreign experts as well as some of its most exoerienced staff. Only at th3 beginning of 1984, the Unit had been able to partially solve its staffing problems by recruiting three new professional staff. Additional and more experienced staff are needed to ensure that the Unit will function properly and fully meet its technical assistance responsibilities. In particular, there is the need to develop a two layer structure with a pool of junior staff for dealing with routine sectoral issues and institution relathioship and of senior staff for complex consultancy referrals (e.g. market/product technical diversification, production/financial management). 4.05. Salary limitations due to ODI's public nature constitute a major constraint to the recruitment of senior staff. As a result ODI should consider establishing contracts with Moroccan or foreigner experts. The Bank is expected to provide assistance to this end through the second SSI Project, Loan 2038-MOR. Also, in dealing with the almost 4,UO enterprises with less than 100 employees existing in Morocco, the TAU should not feel obliged to respond to all assistance requests from every visiting entrepreneur and in all areas of expertise, The TAU should establish improved links with Morocco's private consulting firms and address to them the entrepreneurs needing specialized advice and capable to pay for it. In retrospect, it would have been useful if the two Bank supported SSI projects had included provisions to strengthen the capability of private consulting firms to provide technical assistance to SSIs. Table 2 SSI Technical Assistance Unit Activity by Sectors for 1981-1984 -----------Year---------- Activity 1981 1982 1983 1984 1/ Subproject feasibility studies 15 11 14 7 Visits to enterprises 104 74 63 20 of which. indepth analysis (17) (12) (10) n.a specialized assistance (15) (10) (20) n.a Establishment of contacts with foreign investors 22 13 - 32 Preparation of subproject completion reports - - n.a 1/ First four months only. - 41 - 4.06 The SSI Credit Committee at the Ministry of Finance was created for the double purpose of (i) providing final approval to all subprojects financed under the program, and (ii) forming a "forum" where the main agencies concerned could monitor project implementation and help to solve any major problem. The Committee met regularly and formally reviewed all subprojects. A more active role in monitoring project implementation would have, however, improved the level of achievement of project goals such as the extension of subloan maturities and grace periods and the limitation of the personal guarantees requested by the commercial banks to their subborrowers. 4.07 The choice of BNDE as administrator of the line of credit was raised as an issue at the time of project preparation/appraisal in view of a potential conflict of interest with its simultaneous function of user of the credit. In retrospect, the choice proved satisfactory. The experience of BNDE in project lending to industry proved valuable in assisting the participating banks to appraise and supervise their subprojects as well as in monitoring their lending activity. BNDE also was an efficient centralized interlocutor for the Bank supervision effort and a suitable channel for the Bank intervention on general project matters. The fear that BNDE, for its privileged position, would monopolize the use of the credit facilities did not materialize, as proved by the relatively small number of projects (10) that it financed.1! 4.06 Participation to the credit prLeram by the commercial banks was suburd'inated to their signing an agreement with BNDE under which they accepted specitic obligations in terms of subproject eligibility, appraisal criteria, procuremenIt procedures, and documentation of financed expenditures. The commercial banks for the most part met these obligations, although subprojects were occasionally submitted for approval without calculation of financial rates of return as required. The agreement also included provisions for comrercial banks to stru-ture themselves to adequately carry out SSI lending. However, only three bark- actually developed an in-house capability for appraising and supervi, ng projects. The expectation that any bank willing to participate in the program could achieve the above result was optimistic, since 't lid not take into account organizational capabilities and volumes of lending needed to cover organizational costs. In retrospect it would have been preferable to apply some selection criteria for the participation of banks such as prior eKperience in medium-tetm lending, operational base, and territorial coverage. This consideration applies also to the second SSI project which follows the same organizational pattern. Systems and Procedures 4.09 In spite of the organizational difficulties encountered by a number of particiating 5anks, the project achieved positive results in developing, throgh ;ne coordonat:ion of BNDE, a specific system of subproject appraisal. Becausp of the projet, some of the part icipating banks were brought for the ftrst time -c review in - systematic way the financial and technical '?D7 lo apprcved two additional subpro'ects which were subsequently cancelled. - 42 - feasibility of subprojects and to acknowledge the need of monitoring their implementation and initial operation. The initial requirement that financial rates of return be estimated for all subprojects, was subsequently waived for the subprojects of small size with investment or total net assets after extension below DH 0.5 million. This decision which was followed also in the second SSI project, was motivated by the desire to speed up project preparation by the subproject sponsors and loan processing by the banks. The higher number of subprojects with financial problems in the small category group might indicate that the decision had some negative impact, though other reasons may be given such as the greater difficulty for small entrepreneurs to hire qualified managers and workers. 4.10 In line with the shortcomings identified in project supervision, portfolio monitoring was generally poor and it was only toward the end of 1983, when arrears reached an alarming dimension, that the participating banks, led by BNDE and with active assistance by ODI, started a systematic review of the financed subprojects in order to identify their possible problems and design measures to redress them. The review process covered about 70% of all subprojects and entailed individual site visits. ODI and BUDE carried out about 20% of these visits on behalf of the commercial banks. Unfortunately in many cases the site visits proved too late to achieve any significant result. This could have been partially avoided if an adequate subproject supervision system was established from the beginning of project implementat ion. Resource Mobilization 4.11 The mobilization of the Bank loan proceeds was conceived as the result of a three step approach. Upon subloan approval by the Credit Committee at the Ministry of Finance, BNDE would make available to the commercial bank concerned the subloan proceeds frow a special BNDE-Treasury line of credit so that the commercial bank could start disbursing to its subborrower. For the small subloans (total assets of the enterprise upon project completion below DH 1 million) , BNDh would release to the commerc ial bank all the proceeds in one initial installment; for the large subloans (total assets between DH 1 to 5 million) , it would release 50% of the proceeds immediately and the rest in subsequent installments upcn documentation of the subproject expenditures. BNDE would use this documentation as well as that for the expenditures of the small subloans to prepare applications for the withdrawal of the Bank loan proceeds. The implementation of the above process presented a number of problems. Delays in the mobilization of the Treasury resources sometimes forced the commerc ial banks to prefinance with short-term credit the initial subproject expenditures with considerable inconvenience to the invesLor. The inability of commercial banks to obtain adequate documentation of expenditures from their subborrowers and to provide such documentation to BNDE resulted in delays in the release of the subseQuent subloan instalments, thus either delaying project implementation or forcing the commercial banks to prefinance. The lack of adequate docLnentatlon or expenditures prevented BNDE (Treasury) frm withdrawing the proceeds of th e Bank loan. While the above mentioned problems do not necessarily point at design flaws in the resource mobilization mechaniGm, it is clear that - 43 - disbursement was highly dependent on bureaucratic efficiency. The need for educating the financial intermediaries and subborrowers as well as simplifying the expenditure documentation procedures was not sufficiently taken into account at project appraisal. Also, in order to reduce the burden to the Treasury to advance resources, it would have been suitable to establish a US$2-3 million revolving fund associated with the use of the Bank loan. 4.12 To make funds available to the participating banks and BNDE for onlending, the Treasury relent the funds of the SSI line of credit at a rate leaving a 2% spread to the banks. The issue of the adequacy of this spread was raised at project appraisal when it was decided that it could suffice in view of the fact that the commercial banks did not expect to generate important financial profits from SSI lending but were interested in participating in the project in view of the expected benefits in terms of technical assistance by the Government and acquisition of additional quality clientele for subsequent short term lending with an average spread of 5%. In retrospect, this assessment proved to be optimistic. While the limited spread did not discourage the banks from committing the loan, it negatively affected their willingness and capability to structure their organization for adequate project appraisal and supervision. Under the Second SSI Project which maintained the same spread, the banks appear even reluctant to use the SSI credit facilities whenever they can use more profitable resources. This matter is currently under review by the Goveriunent and the Bank in the context of the Financial Sector Review undertaken by the Bank in 1983-84. 4.13 In addition to the 2Z spread on its SSI onlending, BNDL was assigned one percentage point on all SSI onlending to cover the cost of administering the line of credit. This spread appears adequate. However BNDL has yet to confirm this assessment through an analysis of its operating costs. 4.14 The Government requested and the 3ank accepted not to use the composite amortization schedule for this project because of the large number of subloans to be financed which would have made its application complex. According to the initial expectations the difference between the maturity of the Bank loan (15 years) and the average maturity of subloans to SSIs (expected to be 9 years) would have been only 6 years. Eventually, this difference was 10 years, given the banks tendency to make shorter subloans. Accordingly the Bank loan would help the Government of Morocco to meet its short-term external resource gap with long-term resources beyond the original expectations, unless the subloan repayments are rolled over to finance other SSI investments. Because of the shorter than expected maturities of its borrowing, the SSI sector would be a lesser than expected beneficiary of Government financial incentives. - 44 - V. CONCLUSION 5.01 The project achieved most of its sectoral, institutional and operational objectives to a satisfactory degree. Above all the project represented a major source of financing for SSI development, supporting the creation/expansion of relatively small and labor intensive enterprises in most of the industrial subsectors. The project was very successful in creating mployment, the primary objective of the loan. It also had a positive impact on the modernization of SSIs and contributed to address their production toward export and import substitution consumer and intermediate goods. In general, the project succeeded in enhancing Government capability to deliver substantive technical assistance to SSI investors and operations; developing BNIE into an effective apex institution geared to administer government credit addressed to the sector; inducing several commercial banks to promote, appraise and supervise SSI investment projects; and finally, increasing cooperation between the various government agencies responsible for the development of SSIs and the financial institutions lending to them. 5.02 The project had been less successful in promoting a government coordinated policy framework responsive to SSI needs and in ensuring a satisfactory quality and level of activity by all the commercial banks participating in the credit program. Other more specific areas in which the project did not meet its original expectations were: the achievement of a more balanced regional distribution of SSI investments, an extended easing of the terms and conditions of SSI lending, and the targeting of part of the SSI credit to the very small enterprises. The implementation of the credit component also presented a number of operational problems. Some of them could be corrected during project implementation (e.g. documentation of subproject expenditures), while others should be corrected in possible future operations. Sectoral Aspects 5.03 By supporting 214 projects for a total investment in excess of DH 200 million, it is estimated that the project contributed by at least 60% to the creation of SSI fixed assets during the period of its implementation..1 In turn, actual disbursements under the Bank loan contributed to meet about 50% of the foreign exchange needs of SSI development during the same period.2/ 1/ The estimates are based on the level of commitments achieved during 1980 and 1981 with all sources of medium-term credit and on the assumption that 30% of the SSI investors did not use medium term credit for implementing their projects and recurred to either rolled over short term credit or non institutional sources of funds, exclusively. 2/ The Bank contribution to the financing of foreign exchange had been less than the estimated contribution of the project to the creation of SSI fixed assets because of the shortcomings experienced in disbursing the loan. - 45 - 5.04 The use of the credit provided under the project was well distributed among key industrial subsectors and no single one of them received more than 20-25% of the available resources. At least 20% of the output of the SSIs financed under the project is expected to be exported thus helping to generate most needed foreign exchange and to consolidate Morocco's presence on foreign markets in such sectors as textiles, footwear and leather goods. An even larger share of output is expected to substitute for imports thus also contributing to relieve the country's balance of paiment problems. 5.05 Preparation and implementation of the project contributed to increase the level of government awareness and understanding of the SSI development problems as well as to stimulate and streamline the activity of the Moroccan financial institutions in the sector. During project implementation, the Government prepared and subsequently enacted in 1983 a new Industrial Investment Code introducing for the first time specific measures to encourage the development of SSIs (e.g. incentives for employment creation) . 5.06 A final important contribution of the project to the sector is the positive impact that it had in stimulating the mobilization of additional external resources for SSI financing. Although the actual utilization of the funds has been hampered by the country's economic downturn, the interest shown by foreign lenders in SSI development is bound to have a lasting impact on the future financing of the sector. 5.07 The poor performance in channeling resources for industrial investment away from Casablanca is mitigated by the project contribution to the absorption of Casablanca's growing labor force. Also, although conspicuous, the number of subprojects financed in Casablanca was proportionally less than the share of SSIs already located in the area with respect to the rest of the country, thus at least indicating a decentralization trend. In retrospect the attempt to achieve regional development objectives under the project appears ambitious and misplaced. These objectives could be more effectively pursued through other government actions such as industrial incentive legislation (e.g. tax exemptions), provision of infrastructure and services, and decentralization of public sector industries. 5.08 Another partial shortcoming of the project consisted in a larger than envisaged use of the credit program by the larger enterprises with reallocation of 10% of the loan proceeds to this category. Due to lack of sophistication and familiarity with banking practices, the very small SSI entrepreneurs turned out to take more time and effort to reach. The limited interest spread to commercial banks certainly contributed to aggravate the situation and to discourage the banks to lend to these enterprises. institutional Aspects 5.09 The project achieved the main objectives of strengthening the Government capability to deal with the SS1 sector, providing technical assistance to SSIs and setting up an effective system to provide loan financing for their development. The positive results of the project are - 46 - particularly manifest in the creation and development within ODI of a permanent structure (SSI Technical Assistance Unit) providing services and promoting the development of SSIs, the development within BNDE of a well structured Department specifically responsible for coordinating and monitoring overall SSI lending in Morocco, and the organization at BCP and BMCI of individualized operational structures to deal with SSI lending exclusively. 5.10 The difficulties encountered by the project in streamlining the SSI policy making activity of the Ministry of Industry could have been limited and the results enhanced if the project had taken into account the unavoidable limitations of operating within a ministerial department (salary levels and organisational structure). In retrospect it would have been preferable to entrust some of the technical functions expected from the Policy Making Unit (e.g. studies, promotional actions, preparation of draft legislation) to ODI and possibly to BNDE and rely on their capability of transfering the results of their work to the Ministry of Industry for final decision and action. This approach is presently being followed with regard to the implementation of the Second SSI Project. 5.11 Besides BNDE, only 4 of the 9 commercial banks which participated in the credit program played a meaningful role in terms of number of financed SSI operations and volume of SSI lending. The same trend seems to prevail under the Second SSI Project for which the number of participating banks actually increased to 11. While opening participation to the credit program to all interested commercial banks stimulated competition during the initial phase of project implementation and possibly increased the number and type of users of the credit facilities, it also hampered the achievement of a uniform standard of subproject appraisal and supervision because of the inability of the banks with low level activity to get adequately organized for SSI lending. Limiting the participation to the credit program to the banks which can guarantee a significant level of lending and meet clearly stated eligibility requirements (i.e. staffing) would facilitate and improve future SSI operations and ensure greater compliance with policy objectives. Operational Aspects 5.12 Notwithstanding the rapidity with which the Bank loan was committed, the experience gained through the implementation of the first SSI project, and the second project as well, leads to the following main considerations on possible improvements to selected operational aspects. 5.13 The subproject eligibility criteria established under the project proved basically sound and were generally respected without major problems. However, subproject categories could have been more effectively limited to two (under DH 2.5 million, and between DH 2.5 to DH 5.0 million) and the cost per job ceiling could have been uniform without differentiation for the subprojects located in the Casablanca area. Changes along these lines were introduced under the Second SSI Project in August 1984. They are supported not only by the First SSI Project experience but also by the results of the SSI study carried out by the Bank in 1983 (para 2.12). - 47 - 5.14 The expenditure documentation required by the banks from their subborrowers was unsuitable for the expenditures concerning civil works and working capital. While, vis a vis the implication on Bank loan disbursements, this problem was partially solved during the last phase of project implementation through the introduction of the special procedure of the subproject completion reports (para 3.03), nevertheless, a permanent solution to the documentation problem must be studied for the second and future SSI projects, including the possibility of institutionalizing the special procedure for certain categories of expenditures. 5.15 The interest rate spread to commercial banks of 2% was the likely cause of some of the banks' inability to get adequately staffed and structured to appraise and supervise their subprojects. Also, it is the cause of a slower than justified commitment of the second SSI line of credit since the banks prefer to use other more profitable sources of funds (including their own liquidities) to finance SSI projects. An upward review of the spread to commercial banks should be considered to guarantee effective utilization of the credit facilities and proper operations by the participating banks. 5.16 The use of CCG to provide guarantees to the banks has not yet been really tested. However, it is evident that the commercial banks did not have confidence in the ability of CCG to honor its commitments. This led them to require personal guarantees from their subborrowers and more recently, has deterred them from lending under the SSI credit program. The use of CCG as guarantor was adopted after the Borrower's objection to the Bank proposal to set up a specific guarantee fund for the projects to be financed under the scheme. The possibility of establishing an independent guarantee fund should be reconsidered in the case of future operations if CCG could not be reorganized. 5.17 While the First SSI Project defined the framework of an integrated approach to SSI development in Morocco, the Second is testing its adaptability to changes in the economic environment (slow-down in industrial investment), in the financial sector (relative availability and cost of financial resources) , and in government socio-economic priorities (public expenditure limitations due to budgetary constraints). The combined experience of the two projects indicates that: (i) SSI development in Morocco deserves priority support for it can generate substantial employment at very low cost and with limited government intervention and subsidies; (ii) the institutional framework for SSI development established under the first project and further experimented under the second is sound and can be basically maintained for future operations; and (iii) the capability of the institutions concerned with SSI development to respond to change should be enhanced. - 48 - 5.18 The latter objective could be achieved by improving coordination among institutions (MCI, ODI, BNE, commercial banks and SSI Credit Committee) and by assigning to BNDE and ODI a more important role in reviewing and proposing SSI development policies (para 5.10). In this respect, the areas which require most attention in view of a satisfactory completion of the Second SSI Project are: (i) the definition of a program to assist the enterprises financed under the loan to streamline their initial operations (thus avoiding the deterioration of the banks' portfolio); (ii) the development of a program co promote the use of SSI credit in the changed economic environment (extension and modernisation of existing enterprises rather than the creation of new ones); and (iii) the study of measures to make SSI financing more attractive for the commercial banks (larger interest spread, more secure guarantees on bad loans, and enhanced technical assistance from ODI and BNDE). MOROCCO INTEGRATED PROJECT FOR SMALL-SCALE INDUSTRY DEVELOPMENT Loan 1687-MOR Subprojects Financed by Participating Banks Sub- Pa rt ic i- IBRD Credit 8dM Redisc. Credit project pating No. of Subprojects Total Average Average Jobs Group Bank New Ext. Total Investment Amount Maturity Amount Matur Created (DH 1000) 7H 1000) T N 1000) "A" BCP 43 20 63 19632 8804 4 2256 3.6 977 BMCI 15 7 22 6249 3284 4.8 1141 4.7 346 BMCE 8 1 9 4216 2179 5.7 696 5.0 127 SGMB - 1 1 227 100 5.0 30 5.0 40 BMAO 2 1 3 1107 538 4.7 220 3.7 58 CDM 1 - 1 494 294 5.0 275 4.0 10 Subtotal "A" 69 30 99 31925 15199 4.4 4618 4.3 1558 "B" BCP 26 24 50 43301 20026 4.9 4314 4.3 2042 1 BMCI 5 3 8 9540 5211 5.5 1480 5.4 360 4 BMCE 8 2 10 16833 8177 5.2 2563 5.0 475 % BNDE 4 2 6 5420 2895 7.2 1191 6.1 516 1 SGMB 3 9 12 11714 5696 5.0 984 4.4 565 BMAO 3 - 3 5659 2793 5.0 1108 5.0 89 CMCB 2 1 3 3636 1730 5.3 410 5.0 67 SMDC 1 - 1 1906 980 5.0 - - 80 BCM 3 - 3 5948 2110 5.0 860 5.0 399 CMD I - - 1286 825 5.0 275 4.0 81 Subtotal "B" 56 41 97 105243 50443 5.1 13185 4.7 4474 "C" BCP 3 1 4 13353 7230 5.0 570 5 930 BMCI 3 1 4 17180 8712 6.2 2028 5.5 261 BMCE 2 - 2 8493 4580 5.0 1355 4.5 184 BNDE 2 2 4 11148 5730 6.0 2310 5.0 597 SGMB 2 - 2 8173 3950 5.5 1475 5.0 190 CHCB - 1 1 2750 1500 7.0 500 5.0 235 BCH 1 - 1 5442 2500 7.0 1250 5.0 30 Subtotal "C" 13 5 18 66539 34202 5.8 9488 5.1 2427 Total 138 76 214 203707 99844 4.7 23291 4.5 8459 - 50 - ANNEX 2 MOROCCO INTEGRATED PROJECT FOR SMALL-SCALE INDUSTRY DEVELOPMENT Loan 1687-MOR Summary of Lending Activity and Status of Subloans (as of June 30, 1984) Subproject Group 1/ -A- - B- -C- Lending activity Number of subprojects 99 97 18 Lending in US$ 2 653 083 8 768 075 6 167 095 Anticipated reimbursement Number of subprojects 63 50 4 Reimbursement in DH 4 066 150 8 895 625 1 604 500 Loan resIheduling Number of subprojects 2 9 5 Rescheduled amount in DH 381 000 5 589 700 10 384 000 Complementary loans 2/ Number of subprojects 1 Amount in DF9 100 000 - Arrears Number of subprojects 40 36 5 Amount in DH 5 941 500 18 253 000 7 580 000 1/ Group A; Very small firms with total project cost or net assets after expansion under DH 500,000. Group B; Small firms with total project cost or net assets after expansion between DH 500,000 and DH 2,500,000. Group C; Labor intensive medium size firms with total project cost or net assets after expansion between DH 2,500,000 and DH 5,000,000. 2/ Other additional complementary lending was carried out under Loan 2038-MOR. - 51 - ANNEX 3 ionasnunea M USIM M Aberetect Ketrbutes t m enias Asok and a ess teste presss. Oa editseso articip. 8mber of Subgrogets act 73 met 32 met8 IS OWgS 12 m1o 3 ON 3 Colca 2 G11 2 sM I Particip. sek Subprojects Already Oerational Subprojects Net T Operaciml acP 63 1 sNcE1 275 Am= 1is SCms 12* M0 3 MCN 3 aCB 2 CN 2 SND I Total 128 ftrticip. Investmnt Program Investment Progra lavestmnt Program InVestmst Progree Bank Completed Yet to be completed Completed Tet to e Completed CP 62 1 4 6 BNI 24 3 2 3 INCL 13 2 - SCS 11 1 - SHAD 3- so 3 CA 2 CDH 2- SHDC I - Total 121 7 6 within Already Stil1 tWithin Already still Original Resist. Belo. With Original Aesist. below Forticip. With Cbst With o at CbSt OfIrgra Cost With Gbst cost Origilm lank Dorrus it E t ates Overruns Total Cost overrun Sa Betmtes veTotal Cse t acP 34 19 1 2 1 1 1 $ lt 13 3 3 2 3 IMCK 10 3 2 9C"s a 2I- -*** INAD 33 3CH 3 Total 73 30 18 - 3 2 Source; 1983 Survey of a Ample et 143 Subprojects. ，養一‘藝粩！&”誡買•：&&,’一’&&&,:&,!&&&&&&&!,,&&&&!，〕‘，。― - 53 - ANNEX 5 ~Gung mun m r~lwt"p Dm~ W- - Må. b 2^1 ffi.. 9IL r-m. r agd m~ fr b "AP? nMICAL @TAPP am FINGMUL STM Geod Acceptable kor Det a mem-*vmi 1. G~ Acceptabla ber mata mes-ova! l. Mood b neveraga ut s 13 =i 2 2 2 1 1 ena i »5 80 CM 9 4 11 17 b 3 11. - Ihetilea, Clatbift mer 14 2 l 10 2 1 4 L**thar amt 4 - 2 - 2 amt 2 - au§ I 90 1 CD11 i 23 1 U 111. - WaM b Pumiture WP 4 l i 1 2 ancl 4 1 1 2 11 2 1 2 4 3 IV. ftper b Papcr Prod. WP i i - 1 3 P££ 2 SlUtål IV 5 1 2 1 1 V. Chweicel produtte WP 3 l 1 2 1 I mel 4 1 2 1 1 1 m£ 2 2 SM5 3 3 Mo i - S/Total V 13 4 VI. Koc~ 41&c Prod. Dc P t 2 l schå i - S/Total VI 2 2 UP 10 5 1 7 7 l BNLI 3 3 1 2 3 VII. Natal mechan- Prod. BMU i - - S(> b 4 - - - 3 1 CmCh - i - SMDC i i $/Total VII 19 L3 LO VIII. Other& smel i SiTotål VIII l §cp 48 11 l 7 29 31 7 b BMCI la b 2 b 12 §NCL 11 3 1 1 S<Ms 11 1 3 1 Ajl Sectorg 3 - - 2 - 2 1 2 l CHC# l i - CDN i i i ömDC I - i - Total 96 L$ $h L2 2 L3 kumti 1983 iormy of a Sample of L4-3 Imbprojecta. - 54 - åiDEx 6 mW-s :UrsattD mlonCT 1os smi,L-EDs S4usta, sL,ArSIBT SLeIs loeI EtuB of Duble iOmbtr*id febmroject Dastrbuties by MeaStetturiU a ctor and Ibrt&i1itio bank umDImæTlf l STATUS Me Virst Antictp. natab. "Dm&l Light sera~* ~eym Case ~et ptyme I CaOm/DÆs Buimb. Co~pleted aemb. Arr**re Arreare to oate Lit&Sataen Om6. Tetal . Pd& Beverwg mCP 3 6 19 3 2 - I 39 ITo - - 3 2 3 - • DUEg - - 6 - - - - - 088 - 1 • - - - - I am - - I - - - - - GEB - 1 I - - - - 2 On - - 1 • - - - - 1/Ttalt 3 33 3 4 2 ti. -batilea. Clothieg EP 1 1 ti 7 1 I 3 - 27 & Laether IC I - 3 1 - 2 - -7 &MCE - - l I - - - 3 smi - - 2 - - - 2 W- - 1 - - - - - i 9CM - - 1 - - - - - GICB - - - 1 -- - M"- - - - - - S/TotalIl 19 10 2 3 4 II1. - Wood & Purnature SCP - - 3 4 3 - 4 -s SICI - - 3 2 - - - b BMCE - - - i - I - 1 SaDB - - i - - - - - Bn0 - - 2 - - - - - 2 S/Total III --9 7 3i3- 2 IV. - Paper b Paper Prod. BCP 2 2 i - 7 BitE - - 2 - - I - - 3 S/Total IV 32 32 i 1 - -1 V. - Gretcal Poduåcts EP - - i 2 i - I- 3 DNCI - - 3 3 - - -2 b BMCE - l 3 3--3 SGMB - - 3 - - - - 3 BM10 - - 2 - - - - - 2 S/Total V 0o- - 2 2 VI. - Noni-aetalic Produ.cts BCP - - 5 - - 6 - -- - --- SCMS - 2- - 4 S/TotalV V- - 6 - 32- V13. - Metal Mechan. Prod. DCP - - 3 20 BM.! - 3 - - -7 D8CE - - - - - - SQiB - - - - - - -AB- - - - - - SMOC- - - - - S/Total VII - -2 ii 3 VIII. - Others BiM - - - - S/Total VIII --- - - - 2 All Sectora BCP 9 33 22 12 2 117 BMCI 3- 16 b 34 i3 34 DMCE - - 11 5 3 3 - 21 SGIB - - 12 - 2 -- 13 BMeAO - - 6 - - - - 6 D0q - - 3 i - - -4 cCC - - 2 2 - - - - 4 æM - - I - - - - i SpæC - - - - - Souca 1983 Survay of a Sample of 143 hobprojects. - 55 - ANt= 7 NICCS INIGRD O? 10R SML-.E DDUSl DEFILAFAM Man 168 74tR) Pesperce of Majur Ohses of DMlay in siadiect 201.atation PAMCUTC I I US OF IMAY I EP BICI BHE SMS BM RM 0 CM SMC TRL I Procurement of equipment 21 7 4 2 1 - - - - 35 Administrative proce&res 14 9 6 2 2 - - 1 - 34 anstruction and site preparation 9 2 2 1 1 2 1 1 1 20 Persons1 reasons 10 3 - - - - - 13 Bankin procedures 2 1 4 4 - - 1 - - 12 Mmwgement and staffing 3 2 3 1 1 - - - - 10 Organization ofmoving 2 1 - - - - 3 Provisioning of production irputs - 1 1 - - - - - - 2 Sale s agreent wkutaners - 1 - - - - 1 Availability of working c ap ital 1 - - - - - 1 Odier reasons 5 5 1 - 1 - - - - 12 67 32 21 10 5 2 2 2 1 143 Souee: 1983 Survey of a Sample of 143 Sutprojects. MRGC(D MEEGMED IROET 1OR SMIL-4ALE DoUSIM DEYELMfE (lmn 16874f) Fteguene of Mkjor Oxises of (bst Overruns by Manufacturirg Sector SEC1DR I Paper SRod Thatile and 16n Metalic NBtal I and Clothig 6 Wood 6 Paper avemical Mineral Mechaical ISES o OMIM Beverage leather Harniture Products Poducts Poducts Ptoducts Ibtal I II I (bst of equipment 9 9 2 5 7 2 5 39 Gbastr./site prepar. costs 10 4 7 2 4 2 4 33 I OpeniTg epenlitures 2 1 - 1 2 1 2 9 Wbrkiag capital 1 1 - 1 2 1 3 9 Cbst of vehicles 1 1 1 - 1 - - 4 Prountional expedituzes 1 - - - 1 - - 2 htainig expenlitues - - - - 1 - - 1 Other expeditures 5 - - - - - 2 7 Ibtal 29 16 10 9 18 6 16 104 co Some: 1983 Surwey of Sample of 143 Sulpro jects. ！碧―___―一齋一n !!！〕，〕一〕！〕！!!&! 〕·！!!!！〕〕〕‘: &&&&&”寥―＿旦＿」 - 58 - A~ 10 Km M CD PROJECT GDNPLETION REPORT INTEGRATED MOJECT FOR SMUX-9CALE 1NDUSTRY DIVtLOMHT (løan 1687-NOR) Survøy of Subprojects Financed Under the Løsn belov &re reproduc*d tvo peges of the survey report to illuetrete it& format and information content. The eurvøy vas carriod out by 3NDE vith the 4*aiatance of the commercial banks. It cover# a sample of 143 or 67% of the financed oubprojects. The survey report is availeble in the project f ile. MIT ~LIMP rx lir rx se gr le c le LP. u", 12 26-9t2 lk>ý D.P. g=.:me :»k- %POL M, ILA~ m muýjul5w 52 OMWTå dam~ GMý.pý~ om Mrwt F'4~ ene~ års éw, 4^ MF d 41 G=, OW