Morocco - Fourth Hotel Development Project

; ^ Docdncnt of TheWorldBank' FOR QFFICIAL USE ONLY Report No. 8800 PROJECT COMPLETION REPORT MOROCCO FOURTH HOTEL DEVELOPMENT PROJECT (LOA 1943-MOR) JUNE 29, 199O0t Industry and Ei~ergy' Operations Division Co4nutry Departmet II Europe. idlEatand North Africa-Regioul This document has a resxicted distrbution and may be used by redpients pMIy In the performance of' dwrofk oiL t otm n n dmn edwaw kou %rd-aka:o*t*  b3 ' * I -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ACRONYMS ANI) ABBREVITIONS GIH Credit Immobilier et Hotelier DFI Development Finance Institution MOT Ministry of Tourism SAR Staff Appraisal Report WTO World Tourism Organization CURRENCY EOUIVALENTS t. time of Project Appraisal, February, 1980) Currency Unit Dirham (DH) DH 1 US$ 0.256 USS 1 DH 3.90 'It  THE wow~~~ FR01 FfCIL" USE ONLY W&StN%toh, D.C. 20433 USA. Oft* of .9 D."-Ghewa Opwai vhaw June 29, 1990 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Project Completiou Report on Morocco Fourth Hotel Development Project (Loan 1943-MORM Attached, for informstion, is a copy of a report entitled *Project Completion Report on Morocco - Fourth Hotel Development Project (Loan 1943- MOR)' prepared by the Europe, Middle East and North Africa Regional Office. No audit of this project has been made by the Operations EvaluationlDepart- ment at this time. Attachment ibis documtent has a msuricte dlstbutlon and may be used- by reciplsnt 4iy tn he onae of their official duUiev-1tw contents may not othewwia be discose wthout *orld Bakauthorlukian  1e ~~~~ C . ,- FOR OMCIL USE ONLY PROJECT COMPLETION REPORT MOROCCO cm IV (LOAN 1943-NOR) TABLE OF CONTENTS Page No. PREFACE ..................................... ...... EVALUATION SUMMARY ... .. .... ......ii. PART I: REPORT OF THE BANK 1. 0... ... ........ Project Identity ....................................... 3 Background. ..... .................. . 3 Project Objectives and Description ......................., 4 M,ajor Issues in Project Organization and Implementation .... . .... . .. ....... 4 P-roject Results . .. ........ Project Sustainability 8.. ..** 8 Bank/Borrower Performance ....... ........... ... . 9 Lessons Learned from the Project ...... ... 10 PART II: -NO PART II RECEIVED FROM GOVERNMENT ......,............ 11 PART III: STATISTICAL INFORMATION ... ...... ........ 13 1. Related Bank Loans and/or Credits 15 2. Project Timetable ....... ..... ......... .. .16 3. Loan Disbursements ... .... ... .... 17 44 Project Costs .. ... 18 5. Project Benefits .............. - ....- ....................... 19 6. Bank Missions .. .... . e.. O.. . .. *..... . .... - 20 7. Bank Staff Inputs ........ ....... 21 8. CIH - Financial Performance Indicators, Audited Data, 1983-1987 ............. 22 9. CXH - Audited Income Statements (1983-1987) .......... .. 23 10. CIH - Audited Balance Sheets (1983-1987) .... ........... 24 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.  PROJECT (,CMPLETION REPORT MOROCCO CIR IV (LOAN 1943-MOR) PREFACE 1. This is the Project Completion Report (PCR) for the CII IV project in Morocco, for which Loan No. 1943-MOR in the amount of US$100 million was approved on January 22, 1981. The loan was close.d on December 31, 1987, two years behind schedule. It was fully disbursed and the last dis- bursement was in September 1988. 2. The PCR was jointly prepared by the Agriculture Operations Divi- sion of the Europe. Middle East and North Africa Regional Office (Preface, Eval ation Summary, Parts I and IIT). The Bank sent the Borrower Parts I and III with the request to prepare Part II, but none was received. 3. Preparation of this PCR was started during the Bank's final super- vision mission of the project in 1988, and is based, inter alia, on the Staff Appraisal and President's Reports, the Loan, Guarantee, and Project Agreements, supervision reports, correspondence between the Bank and the Borrower, and internal Bank memoranda.  - at - PROJEC? IOPLH215IBM ?POt? ZIDlUCCO ciscco cmiv (LOAN 1943-MCB) E.ALUAION UMR 1. In 1980, Morocco's tourism sector was expanding, earning -conIWderable ioreign exchange, and creating employment at an investment cost per job which was less than 40X that of the manufacturing sector (Part I, pares. 1 and 2). However, the sector faced some significant constraints--an underdeveloped institutional structure, the lack of qualified personnel, inadequate data bases for policy development, and minor financial/ organizational difficulties facing the major tourist development bank, Credit Immobilier et Hotelier (CIH). The Bank, prior to 1980, had extended three lines of credit to CIG, totalling US$ 48 million and financed an infrastructure development project for US$ 21 million. The performance of CIH under these loans generally had exceeded Bank expectations and the Bank had disbursed the loans close to or ahead of schedule (Part I, para. 4). Objectives- 2.. The objectives of the CIH IV Project were to (a) increase hotel * capacity in Morocco, (b) maximize foreign exchange and employment generation capabilities of the tourism sector, (c) improve the information base in the sector as well as its analytical use and (d) strengthen the listituitional and financial capabilities of CIH (Part I, para. 5). To achieve these objectives, the US$ 100 million loan had four components (Part I, para. 6): (a) the financing of sub-loans for tourism projectis(US$ 99 million), (b) a cost/benefit study on tourism investments (US$ 0.6 million) and (c) training of CIH staff along with improvements and computerization of its investment appraisal capabilities (US$ 0.4 million). IJmplmnatiogn Experience The major challenge of the Project was transforming CIH into a sustainable entity that could function without further Bank assistance. The issues concern.:ng CIH's loan portfolio, finances, institutional set-up and the adequacy of information systems are outlined in Part I, para. 7. Overall, CIH and the Bank dealt with the issues in these areas successfully, enhancing the financial and institutional viability of CIH as an independent entity. CIHI approved a greater number of sub-projects than expected and loan disbursements were well above projections. Commitments, however, were below projections due in part to a delay in the expected revision of Morocco's investment code. Furthermore, the Bank conditioned the extension of the commitment date on the Implementation of certain measures to reduce arrears and expedite the tourism study. Although the Implementation of these measures delayed the loan closing by two years, they were successful and the loan was fully committed and disbursed (Part X, para. 7 and Part III, Tables 2 and 3).  iii Results 4. The loan financed 230 sub4loans to 99 companies for sub-projects 'totalling DH 1.27 billion. Of these sub-loans, 91X financed new hotels and 9% financed extensions to existing establishments. The sub-projects created an estimated 14,1') new hotel beds and 6,800 new jobs at an investment cost of US$ 48,000 each. These results were very close to SAR estimates --7,000 beds and an average investment cost per job of US$ 42,000. Furthermore, using the SAR estimated ratio of three indirect jobs (i.e. restaurants, bars sporting facilities, atc.) created for each direct one, the total estimated number of jobs created is in the order of 20,000. The economic rates of return for these sub-projects averaged 18.5% and ranged from 121 to 351. The arrears for the sub-projects amounted to only 2.41 of the value of the sub-loans. Project Sustainability _ 5. The tourism sector in Morocco, CIH, and the sub-projects that the Bank financed under the loan are sound and their future prospects are promising (Part I, paras. 20-24). CIH, as a development bank, is a solid financial institution with increasing profits and revenues. Although critical financial ratios had exhibited signs of deterioration during 1986-87, the Bank, within the Second Housing Financing Project, will seek agreements from CIH that it will maintain the ratios witbin certain levels. Moreover, the management of CIH is committed to growth through diversification of its services. The Government's support of tourism and the central role of CIH are unlikely to diminish. Ongoing financial reform in`Morocco, which may allow commercial banks to expand in the tourism sector, could affect the continued growth of CIH. However, CIH has a comparative advantage in the tourism sector and increased competition should further increase the efficiency of its operations. Lessons Learned 6, The early success of CIH depended on its monopoly position which was justified in order to establish a national institution in a risky sector and develop standards of financing and appraisal. However, the monopoly is no Longer justified (Part I, para. 27d). The demonstrated flexibility and versatility of CIH's management indicate that commercial banks and CIH may now compete for investment opportunities in an important growth sector for the economy. Although there is no single formula for the success of a development 'finance institution, efficient, independent, professional management is an important prerequisite. In addition, the development of a viable sector/portfolio information base and a system for its utilization are crucial components of a financially sound institution. The high economic and financial rates of return that resulted from the Project indicate that financial subsidies and tariff limitations are not always necessary for a sector to compete internationally.  ) -~ ~~~~~~~~~~~ I- ,o~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~I v C - -ii C ~ ~ ~ \ = i . . s v~~~~~~~1 0C~~~~~~ '~~.  - 3 - PRCWECT QPLTN T Morcc: CII I LOM l943-WR Project Identitv Project Name: CIH IV Loan Number: 1943-MOR RVP Unit: EMENA Country: Morocco Sector: Services Subsector: Tourism IASW=un 1. The Mloroccan economy, in the 1973-77 period, witnessed impressive growth rates averaging 7.3X annually. Rising investment expenditures and aggregate, consumption, combined with a worsening budget deficit, led to balance of payment problems culminating in a 1977 resource gap pf 221. The stabilization measures of 1978, with the basic tenets of reducing public expenditures as well as import and credit restrictions, resulted in a slowdown of economic growth averaging 3.11 in the period 1978-79. 2. _ The-tourism sector, ai which Morocco had.a geographical and cultural advantage, became important because of its potential for generating foreign exchange and employment. The sector was expected to grow at an average of 6-8X annually.. It had generated 151 of gross foreign-exchange receipts during the period 1973-77, and its investment cost per job created was 401 that of the manufacturing sector. Certain institutional deficiencies delayed the development of the tourism sector in Morocco relative to that other comparable Mediterranean countries. By the end of the seventies, the time when the CIH IV project was being prepared, the Government was liberalizing the regulations governing the sector's operations. This liberalization included rationalized incentives for tourist investments, and removal of hotel tariff ceilings and floors. 3. rn 1980, the tourism sector faced a number of constraints, particularly the still underdeveloped institutional set-up'/, the lack of qualified personnel, the lack ol! data bases that would allow the formulation of a ratioiial and forward-looking policy, and mild financial and organizational difficulties facing the country's major tourist development financial bank (Credit Immobilier et Hotelier (CIH)). A ten-year dialogue between the bank and the Moroccan Government, as well as three Bank loans directed to the sector, led to the-following recommendations for tourism sector development: '/ The Ministry of Tourism (MOT) became an independent entity as late a8 1977.  (i) increasing thas sector's capacity by financing econ)mically viable hotel investments; (ii) strengthening the sector through the development of effective methods of formulating sector plans and development strategies; (iii) enhancing NOT and CIH's institutional capabilities through improved collection of statistical data, reinforcement of investment analysis and forecasting, and rationalizing sector administration; and (iv) improving CIH's financial position through the adoption of a prudent debt/equity ratio and the diversification of sources of foreign capital. 4. Prior to 1980, the Bank had extended three lines of credit to CIH for a total of $48.7 million, and had made a $21 million loan to finance infrastructure for tourism development in the Bay of Agadir. Implementation of the past projects had indicated improvements in the institutional development of the sector and in relevant Government policies. Tne disbursement of past loans to CIH had been close to or even ahead of schedule. The second and third loans financed 85 hottls and created around 17,500 new hotel beds at the total investment cost of $1C4 million. The related sub- projects had economic rates of return ranging br ween 81 and 35X and created 5,700 jobs directly. CIH, under these lines of >d 4it, had generally exceeded expectations regarding its institutional and operatiknal performance. The direct objective of the project under review was financing additional hotel capacity over the period 1980-1983. However, from a broader perspective it represented the culmination of a ten-year dialogue be-Aten the Bank, the Government and CIH, which had resulted in the emerge. ie of the latter as a sound institution and the achievement of substantial sectoral reforms in Morocco. Proiect Sbiectives-and Description S. The objectives of the CIH tV Project (the Project) were: (a) increasing the hotel capacity of Morocco; (b) maximizing the foreign exchange and employment generation capabilities of the tourism sector; (c) deepening the informational sources relevant to the sector and utilizing these sources for analytical purposes; and (d) strengthening the institutiom.l and financial capabilities of CIH. 6. The allocation of the $100 million loan was as follows: (a) US$99 million to finance tourism projects, mostly hotels, with sub-loans administered by CIH; (b) US$0.6 million to finance a cost-benefit study on tourism investments, the third and final phase of a major study, whose first two phases were completed by the World Tourism Organization; and (c) US$0.4 million to train CIH's staff and to improve andecomputerize its investment appraisal capabilities. Najor Issues in Prpoect Organuatiron and imolementation 7. The first Bank loan to CIH in 1970 was also the Bank's first loan to the tourism sector anywhere in the world. In the subsequent ten years, not only did CIH grow into a sound development financial institution, but the Bank's lending to that sector also matured. The Project under review (incidentally,  ~~~~~~-3- the last by the Bank in that sector) utilized the accumulated experiences of the Bank, while simultaneously refining CIH into a development finance institution success story. There was a conviction in the Bank that CIH would use the substantial Bank recources efficiently. The major challenge of the Project was transforming CIH into a sustainable entity that could function efficiently without further Bank assistance. The Wiues on which the Staff Appraisal Report (SAR) and the various supervision reports focused were rare)- ,problems that threatened the viability of the Project or CIH but were rather .frictions" whose solution would help to institutionalize CIH's success. These issues, and the Bank's role in them, are detailed below. Portfolio Issues S. Early on in the Project's life, there was a clear distinction drawn Vatween the publicly and privately-owned loans extended by CIH. The former category soon proved to be a problemL with arrears peaking at 45X of hotel loans. CIH was providing unwarranted treatment of Government-owned or guaranteed loans and the confusion over the official bodies responsible for the tourism sector exacerbated the problem. Parts of these arrears were due to legal disputes between CIH and public entities owning some hotels. CIH initially lacked a computerized system to provide a detailed analysis of its portfolio situation. Only in the latter part of 1984 did the institution create a separate division for loan collection. - Since one of the LQan's covenants provided that CIH keep public debt arrears below a certain level, the Bank missions seriously focused on the deteriorating portfolio situation. They arranged for meetings between CIH and the owners of the bad loans, secured agreements for-the resolution of legal problems,pursued the MOT for a better definition of inter-sectoral responsibilities, encouraged CIH to improve its loan collection mechanirms, and clo3ely monitored the implementation of the portfolio data base. The missions first threatened to stop approving sub-project applications and then conditioned the requested extension of the commitment date on the implementation of detailed measures intended to rectify the situation. It is partly to the credit of the mistlons that the arrears situation improved and is no longer a looming threat at present. Indeed, the Bank, in other loans directed to CIR (e.g Second Housing Finance loan) is closely monitoring the portfolio problem. 10. Problems of private s.vitor arrears were less serious. These were rarely a result of weak appraisals or collection mechanisms but were rather due to delays in start up and increasing costs. CIH promptly dealt with the difficulties by rescheduling some debts and instituting gradual payment schedules for those investors with long-term prospects. This problem, which never reached major proportions, improved over the life of the Project. The Bank missions found CIH's _pproach as sound and appropriate, Financial Issues 11. CIH's financial situation was consistently sound. Profitability improved despite capital increases, assets rose rapidly as the rate of sub- project approvals increased faster than anticipated, and all financial ratios  -6- were within the Bank specified Iimits. CIH, at one point, needed additional resources which it stbsequently received through a law that required all Moroccan cormercial banks to cummit 3X of their deposits to CIH bonds. Periodic liquidity crunches resulting from the Central Bank's restrictive monetary policies and the arrears situation, were often resolved through CIH's access to rediscount facilities at the Central Bank. The more fundamental problem of shorter-term liabilities being used to finance long-term assets was to be dealt with through better liability management. The problem of a DFI extending long-term loans in an economy with an underdeveloped capital market is one that transcends CIH (and indeed Morocco), and whose solution is within the realm of overall fttancial sector reform. Institutional Issues 12. Two crucial factors behind the success of CIH were tha stability of its management and its role in CIH's development. In the last 15 years, CIH has had two presidents, both of whom contributed enormously to the growth and viability of the institution. Prior to joining CIH, neither of them had any banking or tourism experience. Their views on policies, operations, strategy and management were quite Aifferent and often opposed. But they both had a common denominator: a strong desire for autonomy and growth. Autonomy was, of course, enhanced by the de-facto monopoly of CIH in hotel financing operations. Nevertheless, CIH developed innovative activities both in investment financing and in diversifying resource mobilization, which allcwed it a wider freedom of manoeuver than in the early seventies, when its policies and financial resources were almost exelusively determined by the Government and the Bank. 13. Other relevant institutional issues were CIH's project appraisal capabilities and its organizational structure. The Bank, in its previous CIH loans, provided training to CIH staff in calculating economic rates of return and devised a related computer package. Initially, data unavailability as well es the incomplete understanding of the methodology precluded the efficient utilization of the package. CIH hired a number of professionals and provided them with sufficient training. It also established a detailed data base and assisted in the preparation of the tourism sector study. A review of the sub-project appraisals submitted by CIH indicates the high proficiency achieved by CIH in this regard. For each sub-project, CIH provided very detailed technical, economic, financial, legal, and marketing analyses. In addition, CIH prepared extensive quantititive simulations and qualitative judgments prior to deciding on a sub-project. It is worth mentioning that the Project's SAR realized the importance of sub-project appraisal and focused on methods to improve it through training and data base development. Close monitoring by the Bank missions was of significant value. 14. To cope with its considerable growth in the early eighties, CIH underwent, in 1984, a major reorganization, which reinforced its supervision and loan collection capabilities, and strengthened its regional offices and its ability to monitor the quality of its portfolio. The reorganization had a role in increasing the rate of project applications, improving their quality and reducing CIHI's arrears. The Bank missions assessed positively the impact of the restructuring.  -7- Informational Is sues 15. The SAR heavily focused on issues of deepening the understanding of the sector to better anticipate its trends, the profile of required services, the changes in clientele, and the outlook of demand and supply. The Project was to finance the third phase of a major study on the benefits and costs of the sactor and one of the Project's covenants was the finalization of CIH's data system. The evolution of the Project indicates the importance of this focus. For example, the portfolio situation would have improved earlier if the system of monitoring arrears had been in place promptly. Also, the aforementioned study included an investigation of the saturation of certain markets but unfortunately, the initiation of the study was delayed for three years with the consequence of high levels of investments in markets (temporarily) oversaturated (e.g. Marrakesh) leading to substantial under utilization of capacity. Better and earlier application of the Bank's appraisal methodology would have resulted from the prompt implementation of CII's data base. Furthermore, optimal long-term planning and the long gestation pariods required to design and build tourist facilities required that CIH forecast market demand for tourism and its credit. The availability of the analytical requirements for such a forecast was constrained by the informational gaps at CIH. Commitments and Disbursements 16. The SAR based its projections of disbursements and commitments on a conservative scenario of 61 annual growth in demand for tourist services over the life of the Project. The actual growth surpassed the projection with the consequence of CIH approving a greater than expected number of sub-projects. Disbursements of the Bank loan were often above projections (at one point 300X above the SAR estimate). Cc-mmitments, on the other hand, were below projection. There were several apparent reasons for the delay. One reason was the delay in the expected revision of the investment code and the pace of commitments accelerated after the March 1983 enactment of the new code. Another reason was that the Bank stopped approving sub-project applications for the Marrakesh region once its occupancy rate fell below the pre-specified minimum of 40X. Furthermore, the Bank conditioned the extension of the commitment date (from the initial late of December 31, 1983) on CIH's implementing certain measures that would reduce its arrear problems and expedite the implementation of the tourism study's third phase. It took two years for these measures to be taken, and as they were effective in solving the said problems, the Bank did extend the date till the end of 1985. By then, the Loan was fully committed. Project Results 17. The loan partially financed 99 companies receiving 230 sub-loans. The total cost of the sub-projects was DH 1.27 billion. Around 721 of the sub- projects had a cost lower than DH 5 million, with the balance above that level. Of the sub-loans, 911 financed new hotels while 91 financed extensions to already existing establishments. As anticipated, 55 of the hotels financed by the Loan were of the four-star category, 381 of the three-star  -8- category, 5X of the two-star category, and only 21 of the five-star category. 18. The maturity structure of the sub-loans was of a long-term nature averaging 10.7 years. The sub-projects created an estimated 14,100 new hotel beds and 6,800 new Jobs'/ at an estimated investm' cost per job of $48,0002I. These figures ere very close to the SAR estimate.. of 7,000 new jobs at an average investmenr "ost. eh $ 42,000 each. The sub-projects' economic rates of return averaged 18. 1 -r anged between 91 and 331. The sub-project's arrears, as of Marc( .6 1989, amounted to-only 2.41 of the total value of the sub-loans, still anoth