Morocco - Agriculture Sector Investment Loan (ASIL) Project

Tlue World . FOR OFFVICL t.,- /AJ 3fc_/fOZ- R epNo.. P-5481-MOR MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$50 MILLION TO THE KINGDOM OF MOROCCO FOR AN s AGRICULTURE SECTOR INVESTMENT LOAN JULY 29, 1991 Th dowmnt h a res*tricd dstibuton and may be used by reipiens only in the peform of tidr offica dutie. Its cotents may not otherwise be dbisced without Word Bank autoriation.  CURRENCY EOUIVALENTS Currency Unit - Dirham (DH) US$1.00 - DH 8.0 DH I - US$0.125 (as of March 1991) WEIGHTS AND MEASURES The metric system is used throughout this report GLOSSARY OF ABBREVIATIONS AER - Agriculture Expenditure Review ASAL - Agricultural Sector Adjustment Loan ASIL - Agriculture Sector Investment Loan ARA - Ministry of Agriculture and Agrarian Reform MTASAP - Medium-Term Agricultural Sector Adjustment Program O&M - Operating and Maintenance costs FISCALYA January 1 to December 31  FOR OMCIL USE ONLY KINGDOM OF MOROCCO AGRICULTURE SECTOR INVESTMENT LOAN Loan and Projeet SUmmarY Bor x ower : Kingdom of Morocco Beneficiarv : Ministry of Agriculture Amount US$50.0 million equivalent Terms 20 years including a 5-year grace period with interest at the Bank's standard variable interest rate. Qnlendine Terms Not applicable Financing Plan USS Million Government 390 Other Donors 130 IBRD (excl. ASIL) 70 IBRD ASIL 50 Total 640 Staff A.pDraisal Report: No. 9240-MOR Date: July 29, 1991 ap No, IBRD 22914 This document has a restricted distribution and may be used by recipients only in the 1.erforma.,e of their official duties. Its contents may not otherwise be disclosed without World Bank eithbr:zation.  MEMO4RANDUM AND RECONMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR AN AGRICULTURE SECTOR INVESTMENT LOAN 1. The following memorandum and recommendation on a proposed loan to Morocco for US$50 million is submitted for approval. The loan would be for 20 years including a five year grace period with interest at the standard variable rate and wvuld finance part of the Government of Morocco's Agricuiture Sector Investment Program. 2. Background. In response to mounting economic disequilibria in the early 1980s, Morocco embarked upon a medium-term program of stabilization and adjustment designed to reduce external and fiscal deficits and to reform the underlying structure of key economic and social sectors. As part of this program, public investments were cut to control the fiscal deficit and the Government embarked on a series of policy reforms at both sectoral and macro- economic levels. The Bank has supported Government's reform program through, inter alia, two agricultural sector adjustment loans (ASAL I, FY86 & ASAL II, FY88) and a structural adjustment loan in FY89. 3. The overall reform program has enjoyed considerable success and the economy grew at a rate of about 4 percent p.a. in the second half of the 1980s. Even more impressive was Morocco's growth rate in the agricultural sector which accounts for some 16 percent of GDP and 30 percent of exports. Over the same period, agricuizure grew at over 6 percent p.a. and has contributed almost a third of real GDP growth. In 1989, for the first time, agriculture exports surpassed those of phosphates to become the leading source of foreign exchange earnings. The impact of agriculture on the balance of payments was even greater than indicated by the 4 percent p.a. export growth; the increase in domestic agricultural output permitted a total reduction of 15 percent of agricultural imports during the se nd half of the eighties. Tthere has also been a rapid (over 15 percent p.a.) increase in private investments in agriculture. This remarkable performance was helped by favorable weather but owes much to successful implementation of policy reforms taken over the past several years. 4. The sector, however, still has considerable untapped growth potential and will, therefore, continue to play an important role i- Morocco's adjustment and growth strategy. The Bank and the Government concur that policy interventions should now focus on the consolidation of macro-economic stability and on the resumption of sustained investment growth. To support this, Bank strategy is to move gradually from an emphasis on adjustment lending to investment lendins. The proposed Agriculture Sector Investment Loan (ASIL) is consistent with this strategy in a sector where an adjustment program is already successfully on track. The third and final tranche of the second Agricultural Sector Adjustment Loan is expected to be released in the fall of 1991. The Gulf crisis affected the macro-economic and fiscal stability through increased oil prices (compensated by increased support from Kuwait, Saudi-Arabia and the other Gulf States), loss of revenue from tourism, and other factors. These effects are expected to be of short duration.  - 2 - 5. The two agricultural adjustment operations supporting the Government's Medium-Term Agricultural Sector Adjustment Program (MTASAP) aimed to (a) liberalize the agricultural and food pricing, marketing and trade regimes, while encouraging increases in productivity; (b) reorient the public expenditure program towards quick-maturing investments; (c) streamline essential governmental support services and transfer commercially viable ones to the private sector; (d) improve the management of natural resources; and (e) strengthen institutional capacity for sector policy formulation, analysis and performance monitoring. Progress in implementing the MTASAP has been excellent so that Morocco now generally has a highly favorable policy environment in the agricultural sector to which farmers have responded well as demonstrated by the rapid growth rate in agriculture since 1985. In a few selected areas, however, the reform process is not yet complete and further Bank support will be needed to reach the final MTASAP objectives. 6. The Government has become increasingly aware of the need to complement its sector policy reforms with reforms related to the investment process. Considerable progress on investment issues has already been made under the MTASAP: private investments in agriculture have increased rapidly, due in part to recent policy reforms, and public investments are now being concentrated in quick-maturing and high-return projects. The Government can now turn its attention to improving investment efficiency, better targeting of public investments in infrastructure and agricultural services, and continuing to ensure a policy environment that stimulates private investments. 7. Rationale for Bank Involvement. Over the past several years, and particularly during the recent Agricultural Expenditure Review (AER), the Bank has worked closely with the Government to review and shape the public investment program in the agricultural sector. The proposed ASIL would support the Ministry of Agriculture's (MARA's) entire 1991-92 investment program of roughly US$640 million. The ASIL would allow tbc Bank to continue to bring to bear its experience, in Morocco and worldwide, in investment reviews and investment loans, helping Morocco implement and monitor a sector investment program. Thus, the Bank would continue to play a role in decisions about future agricultural investment allocations, assisting in the orientation of expenditures towards sub- sectors or activities of priority, and ersuring that investments meet specific criteria such as positive economic rates of return, positive environmental impacts and positive equity effects. The ASIL would also permit the Government to avail itself of Bank expertise in undertaking institutional refcrms such as improving the efficiency of budget execution. In addition, it would provide an occasion for the Bank to encourage reforms on sensitive issues in key subsectors not presently covered by Bank operations (land use policy, agricultural education and livestock) and give additional leverage in irrigation, forestry and research & extension supported through other Bank operations. 8. Project Objectives. Given the sound policy framework that exists in the agricultural sector in Morocco following its successful period of aajustment, the main need at this time is to improve the overall efficiency of Morocco's investment program and to couple this with policy reforms in selected areas. Consequently, the primary objective of the proposed loan is to support a well- conceived investment program in Morocco's agricultural sector. The loan would finance MARA's 1991-92 agricultural investment program, a program which is  -3 considered satisfactory by the Bank. In the past, investment allocations have been low and subject to frequent budget cuts. Those funds that were included in the budget were frequently not available on a timely basis, lowering actual investment levels still further. Investments most at risk for cuts are those not financed by donors, yet some of these investments constitute core activities that are critical for rational development of the sector and for assisting the poorer segments of the farming community. The ASIL would help ensure the financing of such activities. It would also promote essential policy reform measures to improve the investment process by focusing on efforts to ensure the timely flow of funds, and improved monitoring and evaluation which is critical for better project selection. Finally, the proposed ASIL would continue the Bank's ongoing support for policy reforms in the irrigation and livestock sectors; these two sectors contribute to the bulk of agricultural GDP; the irrigation sector, moreover, consumes over half of MARA's budget expenditures. 9. Proiect Description. As already noted, the proposed ASIL would provide support for MARA's overall investment program in the agricultural sector; the whole of MARA's investment program would be based on selection criteria that have been agreed witb the Bank. The principal activities that the Bank would finance include: small- and large-scale irrigation; crop diversification and area development including roads; destoning and land consolidation; equipment for plant protection; forest management plans and plantation establishment; and technical equipment, vaccines and rangeland improvement for livestock. The ASIL would also support a technology development program promoting (a) better soil cultivation, seed-bed preparation and crop management through use of more appropriate tractor-drawn farm implements; (b) more efficient small-scale irrigation; (c) improved crop storage; (d) improved livestock production through better stock and feeding; (e) fruit tree planting as part of crop diversification measures; and (f) land improvement. 10. The package of policy measures supported by the ASIL includes: a) improvements in the investment process in three general areas: (i) budget execution (faster delegation of funds, better monitoring of expenditures); (ii) institution building (improving MARA's staffing and structure); and (iii) project selection (use of objective criteria for all new MARA investments); b) livestock sector reforms; and c) improved recovery of irrigation water charges. 11. Program Costs and Financing. The total cost of the program to be supported by the proposed ASIL is some US$640 million. This amount includes on- going projects supported by the Bank and other donors and which are already inscribed in Morocco's 1991-92 agricultural investment program. The two-year investment program also includes O&M and other recurrent costs items linked to specific investments. Deducting Bank and other donor projects and recurrent costs from the total cost of the program leaves a balance of US$135 million. The proposed loan would be for an amount of US$50 million and would be equivalent to the foreign exchange cost of this unfunded balance. Thus, the loan would  -4- f nanee 8 percent of the cost of the Government's tctal two-year investment program in agriculture. Retroactive financing of up to US$5 million would be provided in order to allow a timely program start-up and would cover payments for eligible expenditures made after July 1, 1990. 12. The loan would be disbursed against a number of specific items in the Government's investment budget, selected because: (a) they constitute priority activities; (b) they do not benefit from anly external donor financing and thus are at most risk from budget cuts; and (c) they are easy to disburse against. The loan would not provide supplementary financing to substitute for Government funds in foreign financed projects or programs, but would be disbursed against items without any donor assistance. The project would disburse funds for civii works; forest operations; equipment, tools, materials, farm inputs, breeder animals and veterinary drugs; consultant services, studies and training; and for the technology development program. A breakdown of program costs and the financing plan for MARA's budget are shown in Schedule A. Amounts and methods of procurement and of disbursements, and the disbursement schedule are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Morocco are given in Schedules C and D respectively. Tho Staff Appraisal Report, No. 9240-NOR and dated July 29, 1991, is distributed separately. 13. Environmental Imoact. The proposed ASIL has been classified a Category B project. The environmental effects have been reviewed and found to be generally positive and not in need of special monitoring except in some limited cases. Such monitoring would be applied to investments in irrigation, where for small-scale works, a system for environmental screening has already been introduced, and where for large-scale structures an environmental assessment is currently being carried out. Monitoring would also be applied in the area of reforestation with regard to the use of exotic species. Other reforestation investments would have positive environmental effects. Land development activities (such as land-levelling, destoning and road construction) would also be screened following criteria similar to those for irrigation. MARA has already established a committee chaired by the Secretary General to review all major investment projects for environmental effects. 14. Agreed Actions. At negotiations, agreement was obtained from Government that it will take the following actions: (a) use criteria agreed with the Bank in the selection of all new projects which require, inter alia, that the ERR exceeds 12 percent or be justified on other grounds and, subsequently, submit to the Bank, not later than September 30, 1991, MARA's draft agricultural investment budget for 1992 for review and comment; (b) carry out the investment and sectoral reform programs in accordance with an implementation plan satisfactory to the Bank; the plan would include such measures as delegating funds to agencies that make investments by certain target dates and reviewing progress annually with the Bank; producing monthly monitoring data on budget expenditures by certain target dates; executing an organizational study of MARA; developing and implementing a strategy to further strengthen the livestock sector and continue privatizing its services; improving accounting of irrigation water charges and preparing a plan by January 31, 1992 to improve their recovery; undertaking an impact study of the technology development program by December 31, 1992 and implementing the recommendations made by the study and agreed with the Bank; and (c) maintaining a project coordinating committee and a budget  -5- execution monitoring committee. 15. fisenefita. The project would help increase incomes in rural areas through its support of investment in infrastructure and agricultural services. This would, in turn, attract increased private sector investment in agriculture. Projects with an ERR of less than 12 percent would not be included unless Justified on other grounds. 16. UI!Ss. The two major risks facing the project are Government failure to provide adequate and timely budget funding and the institutional risk arising from an entrenched bureaucracy resisting changes and inert to stimulus to improve its performance. The timeliness risk is addressed directly by the ASIL through measures to accelerate the delegation of funds. The risk of adequacy of funding is reduced but not eliminated by the improved budget situation and because MARA's budget would be part of the protected priority investments. To minimize the institutional risk, the organizational reform program has been designed with transparent and monitorable targets which would be closely supervised during project implementation. 17. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber Conable President Attachments Washington, D.C. July 29, 1991  -6- schedule KINGDO3 OF N=RCCq AGRICULTUR SECTRs INVESTENT WMA Estifated 1991-1992 Prnogram Cot ot Loc-al Foreig Total US$ Million ------- A. IRRIGATION Small-scale 26 17 43 Large-scale 197 154 351 B. NON1-IRRIGATION Crop Production 30 11 41 Extension 13 8 21 Forestry 31 13 44 Livestock 20 10 30 Plant Protection 8 5 13 Education 12 8 20 Research 9 10 19 Technology Development 17 10 27 Planning 3 4 7 Land Policy _14 10 24 Total Program Costs 380 260 640 Financin2 Plan for the 1991-1992 Proggam Local Foreign Total US$ Million ------- Government 237 153 390 Other Donors 74 56 130 WB, excluding ASIL 40 30 70 WB, ASIL 22 21 50 Total 380 260 640 Includes US$80 million of taxes and duties.  -7- Schedule B Page 1 of 2 KiNGDOM OF MOROCCO AGRICULTURE SECTOR INVESTMENT LOAN Procurement Mthods and Disbursements Procureent Methods h (US$ Million) Procurement Method Project element ICB LC3 Other ^ N.A. Total Cost Civil Works - 9.2 2.2 - 11.4 - (7.8) (1.9) - (9.7) Reforestation - 4.2 - 4.2 - (3.6) (3.6) Equipment, tools, materials, farm inputs, breeder animal3, and veterinary drugs 6.0 5.0 3.6 14.6 (5.5) (4.2) (3.2) (12.9) Techn. dev. program - - 16.3 - 16.3 = - (14.7) - (14.7) Consultancy Services, - - 8.3 0.8 9.1 Studies and Training - - (8.3) (0.8) (1 Total 6.0 18.4 30.4 0.8 55.6 (5.5) (15.6) (28.1) (0.8) (50.0) Total program costs are US$640 million. Figures in table are costs of items selected for ASIL financing. Figures in parentheses are amounts disbursed by the Bank and include a prorated share of unallocated funds in the disbursement table overleaf. Force account for civil works. Local shopping for miscellaneous goods (US$1.7M) and direct purchase for animals and drugs (US$1.9N). Standard practices of purchases for Technical Development Program and Bank Guidelines for consultancies.  Sgbgdutle IS Page 2 of 2 KINGDOM OF MOROCCO AGRICULTURE SECTOR INVESTMENT LAM Procur,met Methods e m isursamants (US$ M4illion) Loan Allocation X of Expenditures (US$'000) to be financed 1. Civil Works 8,000 85X 2. Reforestation 3,000 85X 3. Equipmer.t, Tools, Materials, Farm inputs, Animals, Vet. Drugs 12,000 a) directly imported 100l of foreign b) locally manufactured 100l of ex factory c) locally procured 801 of local 4. Consultancy Services, Studies and Training 8,000 1001 5. Techn. Dev. Progr.(FDA) 14,000 95X of amounts disbursed 6. Unallocated 5.Q 50,000 Disbumrsemelnts (US$ Million) Estimated Disbursements Annual 14.0 26.0 10.0 Cumulative 14.0 40.0 50.0  KUGD1 OF MORCCO AG~RI09= IJUS=CO INVETMEN WMN Tiinetablea of INev Project ProcassiUg Events (a) Time Taken to Prepare One year (b) Prepared by Government and Bank (c) First Bank Mission June 1990 (d) Appraisal Mission Departure September 1990 (e) Negotiations May 6 - 10, 1991 (f) Planned Date o2 Effectiveness November 1991 (g) List of Relevant PCRs and PPARs  - 10 -8eouD The Status of snk Growe Oneafton in M Satement of Bank LoanW a IDA edit (As d1 uno 30, 10Wil) USSWMiiiion Amount Cr5dit No. Year fnk IDA Undisbureed 6sty-r 'An five N rWdisb fuly dibured 3,091.03 45.10 Otwhich SAL. SCAL8. and Progm Lons / 23r7 1084 K indom of Morc Ind. Tr. Pd. (SP 150.40 2gm0 1S K0ingdom of Mocco Ago. Scor I 100.00 2604 16 Kidom of Morcco Ind. Tr. Pod. Adi. n 200.00 n264 1090 Kindom of Morocco, EducaionSectr I 180.00 300c I98M Kingdom of Morocco SAL t 200.00 2120 1987 Kfngdcm of Morocco PERL I 230.86 Sub-t0ol 1030.96 2217 1983 Kingdom of Morocco Ag. 0ev. Ournee 16.00 7.13 2253 1t83 Kingdom of Moroom Smnalla Mod. lutig. 34.00 11.71 2470 19S Kingdom af Morocco VOO. Tm. l 27.10 9.80 2487 INS KingdOm of Morocco iE.o. Moch. bIn. 25.10 7.84 25O8 Nse Kingdom of Morocco Jotada Coal 21.00 7.62 2572 I8S Kingodn of Morocco Health ieveopn t 28.40 14.42 268 1986 Ktingdom of Morocco Large hrgn. lmprcv. 40.00 15.22 2687 1t96 Port Authofity Pont Pro}est 22.00 9.77 2779 1987 Kingdom of Morocco Voc. Tralning U 22.30 7.27 2798 1967 ONPT Tet_commlatne I 116.00 8726 2808 1967 BNDE Wd. Exp. Finance 1 70.00 9.14 2825 1987 Kindom of Moroooo Nadt. Water Supply 60.00 52.33 282 1967 Kingdom of Marooco Great Caablanoa Sew. 60.00 80.68 *286 1988 Kingdom o Morocco Agr. Sector If 225.00 75.00 2610 1988 Kingdom of Morocco Power DistrIuon 90.00 87.78 984 1tS8 iangdom of Morocco M irrig. 11 23.00 20.83 3026 I9 Kingdom of Morocco, Rufal rimayEdatn 83.00 59.94 03 188 Kingdom of Moro Agric. 1E3 & Resa 28.00 25.71 308 I9N Kingdom of Morocco Pubic Admin. Loan 23.00 19.93 308 1989 CNCA Naia Ag. Credit 190.00 93.14 3121122 1060 CIN Houfing Fnance 80.50 14.42 3130 1900 Kidom of Morocco Indutrl Rnance 170.00 81.23 3160 1990 KingJim of Morocco Forestry 11 49.00 47.76 3168 1og0 angdom of Mwoo Highway Sect 79.00 73.57 3171 1990 Kingdomn of Mocco Health Soclor 104.00 101.00 326 t 191 Kingdom o orocco Rurl Elect 11a 114.00 114.00 3283 19t1 Kingdom of Morocco Poet Sectorlc 33.00 33.00 3294 1091 ODEP Port Sctor to 99.00 99.00 3296 1a1 Kingdom of Morocco Rural Basic Eduo. Dev. lb 146500 146,00 ' 3365 1001 Ktindom of Morocco Finanial Sector Dev. ro 23600 235.00 TOTAL 8,409.43 45.16 1,58638 Of which has benrepaid (only amartizaton) 1,201.10 6.49 Total held by Bank and IDA 4.208.33 38.67 Amount add 20.11 d which repaid 20.11 Total Undisbursed 1t638 S SAL SECALor Program Loan la Apprond afe FY80 lbiNot yst ded la Not ye efeote C:i UR8WOR-OP  - ii. - Schedule D (oaoe 2oOf 2 StaMement of IFC Investmgnts in MoLoco Ms of June. 1991) Origlnal Gross Commitment FUSa Million) Oblinator Ty Of es Loan Euiny ota 1963 Banque Nationalo pour Dvelopment Finance 44.00 270 46.70 1978 le Dev. Econ. (BNDE) 1986 1966 Societe Industrielle Agrolndustry 0.89 0.Q 1.39 de Lukus 19786 Societe deCiments Cement Production - 1.22 1.22 de Marrakech S.A. 1977 Asment de Temara S.A. Cement Production 4.75 3.57 8.32 1979 Ciments dAgadir Cement Production 14.71 - 14.71 1980 Societe Miniere du Bou Mines 12.99 2.35 15.34 Gaffer (SOMIFER) 1981 Cimenterie Nouvelle Cement Production 15.80 2.04 17.84 1982 de Casablanca 1985 FRUMAT Agroindustry 7.58 - 7.58 1987 Credit Immobiller et Financial Institution 67.15 - 67.15 1990 Hotelier (Cii 1987 Settat Filature Textie Factory 3.47 1.39 4.86 (SETAFIL) 1987 CiALGAS-Maroc S.A. Agar Production 1.00 0.30 1.30 1989 COMARIT Ferry Service 4.30 - 4.30 1991 Cerame Afrique Ceramics 3.2 1.62 4.90 Total gross commitments 179.92 15.69 195.61 Less cancellations, terminations, repayments, sales and exchange adjustments 62.41 9.26 71.67 Total commitments held by IFC 117.51 6.43 123.94 of which undisbursea 3 1.62 LE IFC net. Does not Include participants from commercial banks  (BRD 22914 - r T<lilt t ~~~~~~~~Mediterronvon Seoet ,1 r ,S, . f, f_/~~~~~~~~~~~~T 0 A td <tic L Ocea~n Si& ( j-> % '- > sx ~~~~~~~~~INVESTMENT LOAN (ASIL) /~~~~~~~~~~~~~~~~- |f mN //> z X ' O ; MOROCCOAiIRAD A ~~AVERAGE ANNUMt RAINMALUAROD IN AMIMETE& , MAIN ROAD} 400 rO~ ~ ~ ~ ~~~~~~~~~~~~~~~~~D r+ A eO* 200 r PR; cK API S 10 PR0VINa SOUNDA*IES 0 lp 1?0 moomm ~~~~~~~~~~~INTERNATIONA IOUNIWRE APOGAE 1WER0,1AMM4 MUOMMS WMCMMA28 Ir~~~~~~~~~~~~~~6 AM I19