Morocco - Banque Nationale Pour Le Developpement Economique (BNDE) Project

RESTRICTE'D Report No. P-306 This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION REPORT AND RECOMMENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS OF THE BANK AND THE BOARD OF THE CORPORATION ON 1. A PROPOSED BANK LOAN TO THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE, OF MOROCCO, AND 2. A PROPOSED IFC INVESTMENT IN CAPITAL STOCK OF THE SAME INSTITUTION December 11, 1962 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL FINANCE CORPORATION REPORT AND RECOIMIENDATIONS OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS OF THE BANK AND THE BOARD OF THE CORPORATION ON 1. A PROPOSED BANK LOAN TO THE BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE, OF MOROCCO, AND 2. A PROPOSED IFC INVESTMENT IN CAPITAL STCCK OF THE SAME INSTITUTION. 1. I submit herewith the following report and recommendations with respect to a proposed Bank loan of an amount in various currencies equiva- lent to $15 million to the Banque Nationale pour le D6veloppement Economique (BNDE), and a proposed IFC investment in capital stock of BNDE of Moroccan Dirhams 7.5 million, which is the equivalent of `1.5 million. PART I - HISTORICAL 2. Morocco became independent in 1956, and joined the Bank in 1958 and IFC in 1962. While the possibility of a Bank loan to the BNDE has been under consideration for some time, the main lines of the present operation, including IFC participation and a Bank loan, were first laid out in May 1962, subject to the findings of an appraisal mission which went to Morocco at the end of July. Negotiations were held in Washington November 13-23, 1962, with Mr. Mohamed Amine Bengeloun, Director General, representing BNDE, and Mr. Gilbert Pierre, Financial Advisor of the Moroccan Ministry of Finance, representing the Government. 3. The proposed loan and investment would be the first operations by either the Bank or the Corporation in Morocco. - 2 - PART II - DESCRIPTION OF PROPOSED IFC INWESTMENT AND BANK LOAN 4. lurpose: To finance the expansion and -continued operation of a development bank which will contribute to the economic develop- ment of Morocco by providing credits and other investments for productive purposes to industrial and other enterprises in Morocco. Name of Institution: Banque Nationale pour le Developpement Economique (BNDE), a development bank in Morocco. Ownership: After completion of proposed capital in- crease, ownership of DH 30 million ( '.6 million) capital stock will be distributed as follows: Moroccan private investors 3% Foreign financial institutions and their Moroccan subsidiaries 28% Moroccan Government and its Agencies 44% IFC 25% 100% IFC and the Government will each stand ready to sell part of their shares to private Moroccan investors. As a first step, each will set aside, from their own holdings, an amount corresponding to 6% of BNDE's total shares, for such sales. Amount and Form of DH 7.5 million (1.5 million equivalent) of IFC Investment: common stock of BNDE to be subscribed at par; 25% upon each share to be paid in at time of subscription and tho balance to bc cnlled by December 31, 1963. No commitment charge. Bank Loan: Borrower: BNDE Guarantor: Kingdom of Morocco Amount: Various currencies equivalent to 1l5 million. - 3 - Purpose: To be used by BNDE for making credits and other productive investments in private industrial and, exceptionally, other enter- prises in Morocco. Interest Rate: Rate current when sub-projects are approved and parts of the Loan are credited to the Loan Account. Term: Each part of the Loan to be repayable over a term suited to the sub-project, not to exceed 15 years from date the Loan Account is credited. Repayment: In semi-annual payments on January 1 and July 1 of each year. Commitment Charge: 3/4 of 1% per annum from the time the Loan Account is credited, on the amounts so credited and not yet withdrawn. PART III - THE BANQUE NATIONALE POUP LE DEVELOPPEMENT ECONOMIQUE 5. An appraisal of the BNDE (DB 3a dated December 5, 1962) is attached (No. 1). Purposes and Policies 6. BNDE was established under Government sponsorship in mid-1959 to promote the economic development of Morocco. Its scope of operations is broad: it may grant long and medium-term loans; discount medium-term credits made by commercial banks (normally with concurrent rediscounting facilities with the Bainq du Maroc); establish enterprises on its own initiative; take equity participations; offer guarantees; and act as an agent for the State. BNDE is gradually being reoriented from a multi- purpose semi-public lending institution into an autonomous corporation specializing in industrial investment, ready to take risks on the basis of sound appraisal and experienced judgment. This reorientation is re- flected in the following policies being adopted by BNDE's Board: (a) to encourage productive investment in Morocco, chiefly in the industrial field; (b) to assist particularly in the financing of private industrial enterprises, and to devote the major portion of its resources to that purpose, excluding from this category any enterprise in which the Government or its agencies dir-ctly or indirectly hold 50% or more of the outstanding voting stock; (c) to assist non-private enterprises only in exceptional circum- stances, and non-industrial enterprises cnly when capital on reasonable terms cannot be obtained elsewhere; (d) to use sound investment criteria, financing only enter- prises which have a high economic priority and promise a satisfactory return on the investment; (e) to increase its activity in the promotion of the Moroccan capital market; (f) to limit investment in any one enterprise to 10% of BNDE's paid-up capital, reserves and outstanding long-term and subordinated government loan, unless that investment is covered by a State guarantee. (g) to limit any single equity participation to the smaller of (i) 10% of BNDE's equity and (ii) 25% of the share capital of the enterprise; (h) to build reserves consistent with sound financial practice. Relationshin with Government 7. The Government accords BNDE a number of financial advantages: a DH 20 million long-term loan at 4% which on liquidation would rank nari 1assu with share capital; a DH 30 million, 41y% revolving Treasury advance; important tax concessions, and a subsidy to BNDE whenever its borrowing rate exceeds 5%, in order to assure it a spread of at least 2%o. This latter sub- sidy is made necessary by the fact that the Government and BTDE have agreed that BNDE's lending rate shall not exceed 7%. 8. The limitation on the lending rate creates a danger that BNDE may be led to make uneconomic investments, and leaves it exposed to the possibility of intervention by the Government in connection with its annual subsidy. The BanP is informing the Government that it is concerned about BNTDE's interest policy, recognizes that the matter cannot be considered in isolation and there- fore hopes that, in connection with a general r-vision of to credit structure and interest rates in Norocco, it will be possible to remove the limitation on BNDE's lending rate and, hence, the interest rate subsidy. Ownershin 9. Initially controlled by the Government, BNDE's shares have been passed increasingly into private hands, and as a result of the share increase now planned the Government will be in a minority position. At present, the authorized and issued share capital is DH 20 million (US 6h. million equiva- lent), of which one-quarter has not yet been paid up. but is "xp.ctOd t6 be called before the end of 1962. BNDE has decided to increase its share capital by DH 10 million, the new issue to be subscribed by IFC (DH 7.5 mil- lion), the Moroccan Government (DH 2 million) and Morgan Guarantee Trust Co. (DH 0.5 million). BNDE's ownership before and after the capital increase is as follows: -5 - At Present Following Capital Increase DH illion DH Million Moroccan Government and semi-public agencies 11.1 55.7 13.1 43.8 Moroccan private investors 0.9 4.6 0.9 3.0 Moroccan subsidiaries of foreign institutions 2.2 11.0 2.2 7.4 Foreign institutions 5.8 28.7 6.3 20.8 IFC - - 7.5 25.0 20.0 100.0 30.0 100.0 Availability and Use of Funds 10. At June 30, 1962, BNDE's total resources amounted to about DH 79 mil- lion, consisting of DH 21 million in share capital and reserves, DH 37 million in medium and long-term borrowed funds, and DH 20 million unused of the Treasury advance. The DH 20 million subordinated Government loan in September 1962, brought overall resources to almost DH 100 million at that time. The proposed now share issue and Bank loan would bring BNDE's resources to DH 185 million. 11. From its inception until June 30, 1962, BNDE committed 23 direct loans amounting to DH 63 million. It had approved additional direct loans of DH 6 million. It had given 78 discounting commitments to commercial banks amount- ing to DH 146 million, of which DH 6 million were held in its portfolio at that date. As a result of the proposed capital increase and Bank loan, BINDE should have enough funds for its investment operations until about the end of 1964. Profits, Reserves, and Dividends 12. BNDE's profits show a satisfactory development. Gross profits were DH 0.30 million and DH 1.52 million in 1960 and 1961, respectively, and are estimated to rise to DH 2.22 million in 1962. This represents a 14.81 return on paid-in capital. Net profits after taxes for 1962 may be estimated at DH1 1.5 million, a 10% return, which is satisfactory for an institution still at the beginning of its career. The rate of return will drop temporarily after tke capital increase but should regain a satisfactory level as BNDE's operations expand. Up to now, BNDE has put all its profits in reserve and paid no divi- dends. It has obtained the approval of tax authorities to put a large part of its income into tax-free reserves and intends to take full advantage of this concession to build reserves to an adequate level. -6- Direction and Management 13. BNDE's statutes provide for a Board of eight to twenty members. At present the Board consists of 16 members. In addition to BNDE's President and its Managing Director, there are four directors representing the Govern- ment and its agencies, three representing private Moroccan interests, one representing Moroccan subsidiaries of foreign banks, and six representing foreign financial institutions. An additional seat is to be reserved for IFC. The full Board meets infrequently, and between meetings is consulted by mail. For current advice to the management on credit operations, the Board has established a small and influential Credit Committee. 14. The Management consists of a Managing Director and his French advisor. The management appears aggressive and capable, but lacks experience in private investment financing in industry. A review of BNDE's staff and procedures is underway to determine how they can best be strengthened and what kind of addi- tional advice the Managing Director needs. Performance 15. BNDE has had a good start, but its history is too short to appraise its performance fully. It has been able to combine a cautious policy with profit-making. It has established itself as a respected institution within the Moroccan business community, and it has already made an impact on the development of the Moroccan economy. - 7 - PART IV THE PROFOSED IFC INVESTMENT 16. The Government, BNDE and ENDE's foreign shareholders have all expressed a strong wish for an IFC participation in the BNTE. The participation would facilitate the conversion of BNDE into an es- sentially private institution. It would establish a close working relationship between BNDE and IFC, increase the confidence of potential investors and be beneficial both to BNDE and to the industrial and general economic development of Morocco. 17. IFC would subscribe at par to DH 7.5 million of BNDE's DH 10 million share increase. A quarter of the value of the shares would be paid in on subscription and the remainder is expected to be called for payment by the end of 1963. All shares, whether fully or partially paid, enjoy the same rights, except that dividends are paid only on the portion of the shares paid in. The IFC investment would be con- ditional on the effectiveness of the proposed Bank loan. 18. It is the intention of IFC and the Government to sell shares of BNDE to qualified private Moroccan investors. As a first step, the Government and IFC will make arrangements for each to sell from its holdings an amount equivalent to 6% of BNDE's total share capital to private Moroccan investors. The shares thus set aside for sale would, until December 31, 1963 be sold at par. After that date the Government and IFC would together agree on the price at which the shares would be sold. The Government and IFC would from time to time discuss arrange- ments for the sale of additional shares. Upon completion of the sale of the first 6% each, the direct interest of the Government in BNDE would be reduced to 38%, IFC's participation would amount to 19%, and the holdings of private Moroccan investors would rise from 3% to 15%. However, in view of the paucity of private savings in Morocco, it is not expected that sales will take place quickly and IFC is likely to hold its shares for some time to come. 19. Under BNDE's Statutes, BNDE's Board has a right to purchase, on BNDE's behalf, shares which shareholders offer for sale. This right would be waived for sales by the Government and IFC from the shares originally set aside and for any additional sales which the Government and the IFC might agree upon. 20. An agreement among the principal shareholders, including the Government, would provide that, if and when requested by IFC, they would vote in favor of any person nominated by the IFC to BNDE's Board. This agreement would remain in force so long as IFC held at least 5% of BNDE's shares. - 8- PART V BA1NK LOAN - LEGAL INSTRUMENTS AN4D AUTHORITY 21. The following draft documents are attached: (1) Loan Agreement between the Bank and BNDE (No. 2); (2) Guarantee Agreement between the Kingdom of Morocco and the Bank (No. 3); (3) Letter from BNDE to the Bank regarding the eligibility of investment projects (No. 4); and (4) Letter from the Bank to BNDE regarding the approval of investment projects (No. 5). Also attached is the report of the Committee provided for in Article III, Section h(iii) of the Articles of Agreement of the Bank (No. 6). 22. The provisions of the Loan and Guarantee Agreements give the Bank substantially the same rights as it normally obtains when financing similar development banks. The following features are of particular interest: (a) All investment projects requiring finance from the Bank are, urless the Bank shall otherwise agree, subject to the Bank's prior approval (Loan Agree- ment, Section 3.02). (b) When an investment project is approved, the Loan Account will be credited with an amount not exceed- ing (i) the estimated foreign exchange cost of the project or (ii) the amount of credit or other investment made by BN%DE in the project, whichever is the smaller (Section 2.02). (c) BNDE will not incur debt with an original maturity of more than one year in excess of three times the aggregate of (i) the share capital, (ii) the outstanding amount of the long-term loan from the Moroccan Government, or any other loan con- sidered for this purpose as equity by the Bank, and (iii) surplus and free reserves (Loan Agree- ment, Section 3.05). (d) The Board of BNDE will, at its next meeting, ratify a statement of lending and investment policies which has been furnished to the Bank, and, unless the Bank and BNDE shall otherwise agree, such policies shall not be amended (Loan Agreement, Section 5.13). (e) The various conventions between BNDE and the Government (referred to collectively as the Government Agreement) may be amended only with the approval of the Bank (Loan Agreement, Section 5.10; Guarantee Agreement, Section 3.06). (f) The Government will make arrangements to protect BNDE from the exchange risk arising from the fact that BNDE will borrow from the Bank in foreign exchange and lend in dirhams (Guarantee Agreement, Section 3.08). (g) Conditions of effectiveness include the authori- zation by BNDE of the proposed new DH 10 million share issue and arrangements satisfactory to the Bank for the subscription, allotment and payment of such shares (Loan Agreement, Section 7.01). (h) The Bank would have the right to suspend or terminate the loan if IFC, under the terms of its investment agreement with BNDE, should not complete its subscription (Loan Agreement, Section 6.02(c)). PART VI - THE ECONOMY 23. A report entitled "Current Economic Position and Prospects of Morocco", No. AF2a, dated December 6, 1962 is attached (No. 7). Although this report was prepared largely on the basis of information available in Washington, the main conclusions set out in the Summary and Conclusions of the report have been confirmed by an economic mission which has recently returned from Morocco. 24. Morocco, with a population of about 12 million, and an area about the size of California, has a number of natural resources and physical advantages which give strength and variety to the economy and provide some potential for development. The climate is generally favorable to agriculture and considerable progress should be possible in raising agricultural productivity, particularly through irrigation. There are numerous mineral deposits, including rich phosphate rock in virtually inexhaustible amount. The country is relatively well equipped with modern transport, power and other facilities. A number of modern industries have been created since the end of Vorld War II. Exports are well diversified, with the largest, phosphates, representing in 1961 only about one fourth of the total. 25. During the first 6-8 years after World War II, eccncmic development was greatly stimulated by foreign (especially French) private capital and by an inflow of French and American public capital to finance infrastructure and defense installations. The approaching end of the French protectorate of Morocco and events in Algeria - 10 - transformed the capital inflow into a large outflow. French Govern- ment financial assistance was suspended in 1957 (although technical assistance continued), but U.S. aid increased and enabled the Moroccan Government to maintain the volume of public investment. 26. Since independence, one of the main concerns of the Government has been to overcome the virtual cessation of economic growth that fol- lowed the reversal of the foreign investment flow. Credit institutions and new administrative bodies to tackle agricultural problems have been set up. The development efforts are in principle coordinated within the framework of a five-year plan for the period 1960-64, but despite a high volume of public investment, the economy has failed to regain its earlier momentum. 27. After the severe crop failure of 1961 the economic situation improved in 1962, with a harvest slightly above average. The consequential rise ir agriculture incomes povided support for the continuing increase in in- dustrial production for the domestic market. Imports fell due to the re- duced need for food imports; while exports remained at the 1961 level, the trade balance improved and the fall in foreign exchange reserves was checked. Preliminary indications suggest that reserves are once again beginning to build up. Public investment and other government expenditures continued to rise, but private investment did not appear to be responding to the measures taken by government to stimulate it. 28. The end of the Algerian war has considerably altered the political climate. Morocco and France have reestablished more normal relations. French financial aid has been resumed. There are also signs of a detente in Morocco's relations with Spain. Internally, King Hassan II is fulfilling his father's promise of transforming Morocco into a consti- tutional monarchy. In a referendum held December 7, 1962, voters over- whelmingly approved Morocco's first constitution, which establishes a bicameral parliament and strong executive powers (similar to those of the French President) in the hands of the King. Role of BNDE in the Economy 29. The Moroccan five-year plan emphasizes the need to promote private industrial investment. There should indeed be substantial areas open for private initiative, Moroccan and foreign. Morocco's variety of natural resources offer considerable opportunities for processing and transforming raw materials. Moreover, a sizeable population, increasing at the relatively high rate of 2.5c per annum and often concentrated in large towns, constitutes a potential market not yet fully exploited. 30. The Government is well aware of the importance of creating a favorable investment climate. Among other steps, it has introduced a large range of financial and fiscal incentives and offered selective tariff protection for new industries. The setting up of BNDE in 1959 to fill a gap in the field of long and medium-term industrial lending was a further step in that direction. The proposed IFC participation and the new resourcen which BNDE will obtain from the proposed loan should put BNDE in a position to promote private investment in Morocco vigorously. - 11 - Creditworthiness 31. The difficult political atmosphere surrounding the events of Algeria led the Moroccan authorities to suspend, since December 1958, the payment of principal and interest due to the French Government on loans amounting in the aggregate to the equivalent of $219 million, made between 1949 and 1957 through the "Fonds de Developpement Eco- nomique et Social" (FDES). Negotiations leading to a general agree- ment on the economic and financial relations between France and Morocco are expected to include an agreement on the outstanding debt issue. In anticipation of such an agreement France has in fact resumed financial help to Morocco. Morocco's debt to other French institutions and private investors has apparently continued to be serviced. 32. Expenditures which Spain had made in the former Spanish Zone before reunification gave rise in 1957 to a debt to the Spanish Govern- ment which has remained unsettled pending the settlement of other claims and counter-claims between the two Governments. Other Spanish creditors of Morocco have apparently continued to receive payment. 33. In view of the complicated and special political circumstances surrounding the Moroccan Government's debts to the French and Spanish Governments, I do not believe that Morocco's non-payment should be con- sidered a bar to Bank lending. 34. Including the debts to the French Government, the present external debt of Morocco ancnts to the equivalent of $356 million. Service payments of $9 million a year are being made currently on $133 million of debt. If the settlement with France should result in payments on the FDES debt being resumed according to the original amortization schedules, total service would be $21 million a year. This is 6% of Morocco's 1961 exports of $345 million. This burden would not be excessive, taking into account the resources and poten- tialities of the Moroccan economy, and leaves some margin for borrowing on conventional terms. The repayment of the proposed $15 million Bank loan should be within the capacity of the Moroccan economy. PART VII - COMPLIANCE WITH THE ARTICLES OF AGREEMENT 35. I am satisfied that the proposed Bank loan complies with the requirements of the Articles of Agreement of the Bank and that the pro- posed investment by IFC complies with the requirements of the Articles of Agreement of IFC. The Moroccan Government has advised IFC that it has no objection to the proposed investment by IFC. - 12 - PART VIII - RECOTENDATIONS 36. I recommend: (a) that the proposed IF subscription to BNE's capital stock be approved on substantially the terms outlined above, conditional upon legal arrangements satisfactory in form and substance to IFCTs management, and that the Board of Directors of IFC adopt a resolution in the form attached (No. 8), and (b) that the Bank make a loan to the Banque Nationale pour le D6veloppement Economique, with the guarantee of the Kingdom of 1orocco, in an amount in various currencies equivalent to "l5 million at such rates of interest and substantially on such other terms and subject to such other conditions as are specified in the draft Loan and Guarantee Agreements attached, and that the Bank's Executive Directors adopt a resolution to that effect in the form attached (No. 9). EUGENE R. BLACK Washington, D.C. ecember 11, 1962