Morocco - Power Distribution Project

Document of The World Bank FOR OFFICIAL USE ONLY 4A/ q /C~ A-w C'&A Report No. P-4638-MOR MEMORANDUM AND RECOMMENDATION OF THE PR'SIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO USt90.O MILLION TO THE KINGDOM OF MOROCCO FOR A - POWER DISTRIBUTION PROJECT { January 20, 1988 Thr docment has a resicted distiuton and may be used by recpient only In the perforance of their offici duies. its content may not odherwise be dws wihot World Bank autrztion.  CURRENCY E9UIVALENTS Currency Unit = Moroccan Dirham (DH) US$1.00 = DH 8.0 (December 1987) DH 1.00 = US$0.118 DH 1,000,000 = US$117,647 PRINCIPAL ABBREVIATIONS AND ACRONYMS USED F/C - Foreign cost ICB - International competive bidding kWh - Kilowatt hour (iW90 watt hours) LCB - Local competitive bidding L/C - Local cost LIB - Limited international bidding ONE - Office National de 1'Electricite PERL - Public Enterprise Rationalization Loan FISCAL YEAR January 1 - December 31  FOR OMCIAL USE ONLY KINGDOM OF MOROCCO POWER DISTRIBUTION PROJECT Loan and Proieet Summay Borrower: Kingdom of M4orocco Beneficiaries: Office National de l'Electricite and the Regies of Casablanca, Meknes, Kenitra, Fes and Tetouan Amount: US$90.0 million equivalent Terms: Twenty years, including a five-year grace period, at the Bank's standard variable interest rate Financing Plan: ONE US$74.4 million Regies US$22.4 million IBRD US$90.0 million TOTAL US$186.8 mi'tlion Economic Rate of Return: 12.4Z Staff Appraisal Report: Report No. 6916-MOR map This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents n-:, e.f .therwise be disclosed without World Bank suthorization.  MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXEC, TIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR A POWER DISTRIBUTION PROJECT 1. The following report on a proposed loan to the Kingdom of Morocco for US$90.0 million is submitted for approval. The proposed loan would be for 20 years, including a five-year grace period, at the Bank's stansard * variable interest rate and would help finance the proposed Power Distribution Project. Background 2. Morocco became a heavily indebted country by the late 1V70s, largely because of the ending of the phosphate price boom and the costs of the war in the Sahara. An adjustment program initiated in late 1983 succeeded in reducing the current account deficit from 12.7% of GDP in 1982 to 2.1% in 1987 and the Government deficit from 12.22 of GDP in 1982 to 4.7% in 1987. GDP growth has averaged 2.2% per year since the program began, while inflation has fallen from over 10% per year to 5S in 1987. However, debt service remains high at about 12% of GDP despite substantial debt rescheduling. 3. Morocco depends on energy imports, 'nostly oil, to supply about 88% of its commercial energy requirements. In toe earlv 1980s domestic petroleum product prices reached the international level, thereby giving a large impetus to energy conservation and contributing to a substantial slowdown in the growth of energy demand. When international oil prices fell in 1986 the Goverrment decided to keep domestic prices at the previous level and use the additional revenues to reduce the Government deficit. In 1987 prices for all petrole'un prod'icts (except liquified petroleum gates% and coal were above the international level and electricity prices were above long-run marginal cost. 4. because of the taxes paid by the power subsector on oil, imported equipment and on value added, and because of action under the Public Enterprise Rationalization Loan (PERL) to raise electricity prices and reduce Government contributions to the power subsector, the latter is now a large net contributor to the Government treasury. At the same time, it has only partly emerged from financial difficulties experienced since 1981 as a result of increased fuel expenses due to a drought which reduced hydroelectricity generation, large financial arrears by the Government's administrative subdivisions and agencies, and a failure to increase adequately the margins between the Regies' buying and selling prices to compensate for increased operating expenses caused by inflation. Actions under the proposed Project to address these problems would not only improve the financial performance of the power subsector entities, they would assure an increase in its net financial contribution to the Government. Despite these measures, and since electricity supply is capital intensive, the power  - 2 - subsector will need to make large investments and borrow from abroad to supply growing demand caused by forecast economic growth. 5. Morocco has the fifth lowest per capita consumption of electricity in the EMENA Region (343 kWh in 1986), and less than 50 percent of the population has access to electricity. The main entity in the power subsector in Morocco is the Office National de 1'Electricit6 (ONE), a government-owned utility. ONE generates about 88 percent of Morocco's electricity supply with industries producing most of the remaining 12 percent, mainly for own use. ONE is responsible for all transmission of electricity and distributes about 47 percent directly to final consumers. It sells the remaining 53 percent to 10 publicly-owned utilities IRegies) entrusted with distribution of electricity in the main urban areas. Rationale for Bank Involvement 6. The proposed Project forms an integral part of the Borrower's twin strategies of supporting a technically and economically efficient expansion of the power system on the one hand, and improved financial performance and management of major public enterprises on the other. As such, in addition to continuing the long-standing dialogue on specific issnies in the power subsector, this Project has been prepared in close collaboration with and builds upon the recently-approved Public Enterprise Rationalization Loan (PERL) and the National Water Supply Rehabilitation Project. These three operations together provide an integrated package of support for policy and institutional reform in the power subsector and the water sector. Thus the PERL provides an overall framework for increasing the administrative and financial autonomy of public entities, reducing the fiscal arrears of the Government to these bodies, and strengthening the institutional framework for management of the public enterprise sector. It also includes specific commitments to raise electricity prices and to undertake studies to develop coordinated least-cost investment programs for OJJE and the Regies and to define an electricity tariff structure based c-a economic cost. The Project contains specific measures to reinforce the actions initiated under PERL to reduce the financial arrears owed to and by the power subsector entities and to ensure that ONE's financial performance is satisfactory (especially for the period after the disbursement of PERL); it would also support the sustained implementation of the recommendations for investment planning and price reform that will be made by the investment and tariff studies. The Project was also prepared in coordination with the National Water Supply Rehabilitation Project, which contains measures benefiting the electricity as well as the water departments of the Regies including providing improvements in procurement decisions, and the