Preparing for the 21st century : strengthening the private sector in Morocco

Report No. 11894-MOR Kingdom of Morocco Preparing for the 21 st Century Strengthening the Private Sector in Morocco June 30, 1994 MNICO, Middle Fast a,ncd North Africa Regional Office Corporate Planning and CAMENA Regional Departments, IFC FOR OFFICIAL USE ONLY * - ,-- ;;- ,i.A Document of the World Bank 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  aURRENCY AND EXCHANGE RAE Currency Unit - Dirham (DH) 1982 1983 19?4 1985 1986 1987 1988 1939 1990 199 1992 1993 DH per TJS$, l - _ _ - End o'Period 6.27 j 8.061 9.55 9.62 8.71 7.8SU 8.21 8.12 8.04 8.15 9.05 9.65 DH per US$, _- 4 9 Period Average 6.02 7.11 8.81 10.06 9.10 8.36 8.21 8.49 8.24 8.71 8.54 9.30 ICAL YEAR January lst - December 31st  FOR OFFICIAL USE ONLY ABBREVIATION AND ACRONYMS AMDEC Association Marocaine dee Diplm6s Experts-Comptablee (J,'ioroccan Assocition of Chartered Public Accoumans) AMICA A"ociation Muocaie pour l'Induttrie et la Commer:e Automobile (Moroccan Association for Automotive Industry and Trade) AMIl Assocition Marocaine des Industries Textiles et de Habillement (Moroccan AsoCistion of Textile and G taza Industries) ASMELEC Asocition Profejioele des Mahands de Matdriels Electriqes. ASMEX Associatioi Marocaine des Exporteurs (Moroccan Asociation of Exporters) ATC AssociLtion Professionnelle des Transformazmrs du Cuir (Professional Association for Leher Worker) BNDE Banque Nationale pour le D&ve!oppement Economique (National BAk for Economic Devolopmet) CCG Casse Centrnle de Garantie (Central Guantee Fund) CDG Caisse de Depots at de Geation (Government Fundas Deposits and Management Agency) CDT Confederation D4mocratique du Trmvail (Democratic Worker's Confederation) CEN Caise d'Epurgne Nationale (National Savings Agency) CGEMI Confederation Cenerale Economiqcie Marocaine (Genoera Economic Confederaion of Morocco) CiI. Credit Inmobilier at H6telier (Real Estate and Tourism Credit Agency) CMM Caisse Mrocaine des Marches CNCA Caisse Nationale de Credit Agricole (National Agricultural Credit Bank) CNJA Conseil National de la Jeunesse et da i'Aveair (National Youth Council) CNSS Caisse Nationzle de Securite Sociale (National Social Security Fund) COMANAV Conpagnie Marocaine de Navigation (Moroccan Shipping Company) CPI Consumer Price Index (Indice des Prix i la Consomation) EU European Union (Union Europeenne) ERP Effective Rate of Protection EST Ecole Superieure de Technologie FDI Foreign Direct Investment (Investissements Etrangers Dirocts) FIME Federations des Industries M6tallurgiques, Mecaniques et Electriques du Maroc (Moroccan Federation of Metallurgical, Mechanical EngineeriLg and Electrical Industries) FNTBP FEd6ration Nationale du BAtiment et des Travaux Publics (National Federation of Building Industries and Public Works) GDP Gross Domestic Product (Produit Interieur Brut) GNP Gross National Product (Produit National Brut) GPBM Groupement Professionnel des Banques du Maroc (Moroccan Professional Bankers Association) IATA International Air Trasport Association EFC International Finace Corporation OCE Office de Com-ercislisation at d'Exportation (Trade and Export Board) ODEP Office d'Exploitation des Ports (National Port Authority) OFPPT Office de In Formation Professionnelle at de la Promotion du Travail (Office for Vocational Training And Employment) ONE Office National d'Electricit6 (National Power Company) ONPT Office National des Postes et Telecommunications (National Post and Telecommunications Company) ONT Office National des Transports (National Transport Company) ORMVA Office R6gional de Mise en Valour Agricole (Agricultural Regional Office) PIACE Programme d'lnformation et d'Assistance & la Creation d'Entreprises (Program of Information and Assistance for the Creation of Enterprises) PME/SME Petites at Moyennes Entreprises (Small and Medium-Scale Enterprises) RAM Royal Air Maroc SA Soci6tE Anonyme (Joint Stock Company) SMIG Salaire Minimum Inter-professionnel Ganti u s. 7M, Union Gdner&le des Travnilleur Marocains (General Union of Moromcan Workers) Union Marocaine du Travail (Moroccan Worker's Union) Value Added Tax (Taxe sur la Valeur Ajout6e) This document has a restricted distribution and may be used by recipients only in the performance L. |official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Numerous World Bank staff and consultants contributed to this report, which was supervised and drafted by Charles Humphreys. Principal contributors include Michele Cyna, Nicolette DeWitt, Ian Goldin, Mona Haddad, Ann Harrison, Roumeen Islam, Ali Khadr, and Douglas Weblh of the Bank, and Edward Coe, Housni El Ghazi, and Jean Paul Peresson, consultants. Mich of the information was collected during a mission in February 1993, which benefited from the generous support of the Moroccan administration and private sector. IFC's input was coordinated by Fares Zaki and Yasmin Saadat, and is based on a field mission to Morocco during May 1992, and represents the input of the Regional Department and FIAS. Various other staff provided advice and support, including Cynthia Angeles, Jacques Coudol, William Experton, Marc Juhel, .raj Talai, and Beemard Veuthey, as well as Mohamed Bouassami (U-NDP, Rabat) and Adnan Hassan (consultant). The work draws heavily on two companion reports on private industry and agro-industry (World Bank Reports Nos. I i557-MOR and 11727-MOR)--especially the work of Hamid Alavi, Richard Brun, Michel Debatisse, Isabelle Tsakok, a.ld Joseph Saba-- and on the Morocco Poverty Assessment prepared by Miria Pigato, with support from Guillermo Hakim. Brigitte Petit desk-topped the report.  PREPARING FOR THE 21st CENTURY: STRENGTHENIG THE PRIVATE SECTOR IN MOROCCO Table of Contents PREFACE EXECUTIVE SUMMARY ....................................... i CHAPTER I: PROFILE OF THE PRIVATE SECTOR ................... 1 A. The Public - Private Boundary .......................... 1 1. Private Business ............................... I 2. State-Owned Busmess ........................... 3 3. Government ................................. 5 B. Organization of the Private Sector ............. . 6 C. The Private Sector's Call on Factors of Production .......... . 7 D. Trends in the Private Sector ................ 9 E. Vision for the Future ............... ................. 10 CHAPTER UI: PERCEIVED CONSTRAINTS ........................ 13 A. Large, Established Finms .............................. 13 B. Foreign Investors .................................. 16 C. State-Owned Enterprises .............................. 18 D. Small and Nascent Firns .............................. 18 CHAPrR III: INCENTIVES FOR FASTER, MORE EFFICIENT PRIVATE SECTOR DEVELOPMUENT ................................ 20 A. Summary and Recommendations .......... ............... 20 B. Macroeconomic and Fiscal Incentives ....... ............... 21 C. International Trade Incentives . .......................... 25 D. Domestic Price and Market Regulations ....... .............. 31 E. Specific Investment Incentives . .......................... 34 CHIAPTER IV: RESOURCES FOR PRIVATE SECTOR EXPANSION- FINANCE ............................... 36 A. Summary and Recommendations .......... ............... 36 B. Access to Equity ................................... 38 * Domestic Equity ............................... 38 Foreign Equity ................................ 41 C. Access to Credit ................................... 44 Loans ........... .................. 44 i. Interest Rates ............................ 47  Table of Contents (continued) CHAPTER V: RESOURCES FOR PRIVATE SECTOR EXPANSION-LABOR .. 54 A. Summary and Recommendations ......................... 54 B. Costs of Labor .................................... 56 C. Barriers to Labor Mobility ............................. 60 D. Quality of the Labor Force ............................. 61 CHAEIER VI: RESOURCES FOR PRIVATE SECTOR EXPANSION-LAND ... 66 A. Summary and Recommendations ......................... 66 B. Pioperty Rights .................................... 67 C. Reai Estate Markets ................................. 68 D. Cost of Land ..................................... 68 E. Industrial Zones ................................... 70 CHAPTER VII: HARD CONSTRAINTS-PUBLIC INFRASTRUCTURE AND SERVICES ...... . 73 A. Summary and Recommendations ......................... 73 B. Description of Existing Infrastructure ...................... 75 C. Operation of Infrastructure Services ....................... 78 CHAPTER VII: SOFT CONSTRAINTS--WEAK INSTITUTIONAL ENVIRONMENT ...................................... 82 A. Summary and Recommendations ......................... 82 B. Deficiencies in the Legal Framework ....................... 84 C. Weaknesses in the Judicial System ........................ 86 D. Inadequate Financial Disclosure .......................... 88 E. Regulations ....................................... 89 F. Private Business Institutions ............................ 90 G. Institutions for Technological Deepening .................... 91 APPENDIX TABLES ........................................ 93 APPENDIX I: Information on Surveys ............................. 99 BIBLIOGRAPHY ......................................... 101  LIST OF TABLES Table 1.1: Employment statistics, 1990-91 ........................... 8 Table 1.2: Normative targets for private sector deve!opment in Morocco, 1994-2000 12 Table 2.1: Public-private perceptions of changes in factors affecting competitiveness, i984-91 ..................................... 17 Table 3.1: International comparisons of corporate income taxes .... ......... 24 Table 3.2: Evolution of average trade protection .26 Table 5.1: Average wages in Morocco, 1990-91 ....................... 56 Table 5.2: Manufacturing employment, productivity and wages, 1986-90 ........ 58 Table 5.3: Perceptions of labor supply and quality ..................... 62 Table 5.4: Indicators of skied labor shortage, 1991 .................... 63 Table 6.1: Prices of land zoned for multi-story buildings in Rabat and Casablanca . . 68 Table 7.1: International. comparison of infrastructure .............. I ..... 77 APPENDJX T'ABLES Table A.1: Private/public shares in Moroccan economy .................. 94 Table A.2: Selected national accounts indicators ....................... 96 Table A.3: Selected indicators of the external sector .................... 97 Table A.4: Selected public sector data ............................. 98 LIST OF FIGURES Figure 2.1: Strength of perceived constraints by size of firm ................ 14 Figure 2.2: Reasons for business location ........................... 15 Figure 2.3: Perceptions of prospective foreign investors .................. 16 Figure 2.4: Major difficultiLs faced by prospective entrepreneurs .... ......... 18 Figure 4.1: Trends in net foreign direct investment (FDI) ................. 42 Figure 4.2. Sources and uses of foreign direct investment in Morocco .... ...... 43 Figure 4.3: Irternational trenas in real interest rates ..................... 49 Figure 5.1: Annual real wages in Morocco .......................... 57 Figure 5.2: Distnbution of average manufacturing wages in firms, 1986 ... ..... 59 Figure 7.1: Dissatisfaction with quality of infrastructure .................. 73  $TEGTHENMNG TE PR1VATE SECTOR IN MOROCCO PREFACE How this report has been used. o Better banking rules. In mid-1993, This report was prepared during the first the government promulgated the new half of 1993, based on extensive research banking law, which will take effect and consultations in Morocco during the progressively during 1994-95. The previous year and on data available at that law establishes stricter prudential time. Following its wide distribution to regulations that define clearer criteria both public and private readers in Morocco for classifying loan risks and impose during the second half of 1993, it, and two higher provisioning coefficients companion reports on industry and against loans that are nonperforming agriculture, became the basic documents for as well as against those to clients a seminar on the private sector, organized in wnose accounts do not rr.eet she December 1993 by the government and stricter accounting rules escablished representatives of the private sector. This by the new accounting law that was seminar discussed six broad themes--tax promulgated at the end of 1993. issues, financing problems, land and infrastructure constraints, human resources, o Strengthened capital market the legal and institutional bottlenecks, and institutions. In October 1993, the the promotion of technology. The seminar's new law on capital markets became recommendations constitute a point of effective, which is a first step in departure for the formulation of a private establishing an independent securities sector development policy in Morocco. and exchange commission (Conseil Deontologique des Valeurs Major refc rms since the report was Mobilileres), reorganizing the stock drafted. The dialogue on private sector exchange, and allowing, for the first development is very active in Morocco, and time, mutual funds to help mobilize government policies evolve continually in an capital from small investors. When attempt to strengthen business conditions. they become functional sometime in Since this report was first distributed in mid- 1994, these new institutions should 1993, the government has already adopted help alleviate financial constraints some of its proposals that aim to alleviate facing business. many of the difficulties facing private business. While most of these changes have C Liberalizing foreign exchange. In been noted in the text, an upfront summary November 1993, the government indicates the scope of the effort to deal with authorized exporters and Moroccans the difficulties. The most significant resident abroad to open domestic measures deal vith financing and taxation. bank accounts denominated in fo.eign exchange, rather than in  convertible Dirhams, for up to 10 and clearly define the profession of percent of export receipts. Chartered Accountants who now become legally liable for the o Fewer distortions in the financial accuracy of certified accounts. system. In early 1994, the government lifted obligations 0 Steps to increase private provision of requiring banks to lend a minimum infrastructure. In late 1993, the of their resources to exporters, small national electricity company (ONE) businesses, and low-hicome housing launched a process to tender bids for bonds. The government has also private power plants, and several extended access to its Treasury bond foreign investors are actively seeking auctions to private companies, in participation. addition to financial institutions and state-owned enterprises. The 1994 o Strengthening the judiciary. The finance law introduced changes government has recently adopted designed to reduce distortions several measures to improve the believed to raise the cost of private , dicial environment for business, borrowing. It reduces the VAT rate including: a substantial increase in on interest payments by half, as part the 1993 budget allocation for the of a multiyear program of phasing Justice Ministry; reintroduction of 3- out the VAT on interest altogether, judge panels in 1993 in trial courts which will bring Morocco into line of initial jurisdiction to deepen with all other countries that use the competence in commercial cases; VAT system. It eliminates the tax creation of a commercial department exempt status of Treasury bonds held in the national institute of judicial by individuals; interest on such studies in anticipation of the new Treasuries will be taxed at commercial and company codes; and 10 percent in 1994 and a further tax increased training requirements for increase to 20 percent in 1995 will the legal profession. brirng their taxation into line with the taxation of other interest income. Putting the report in action. These o Reduced corporate taxation. The measures, important elements for any action 1994 finance law also reduces the program, will need to be complemented in nominal tax burden on companies, the future with a wide range of other, lowering the corporate tax (including longer-term measures discussed in the report the surtax) to 39.6 percent (a and reemphazised in June 1994 during the reduction of 2.2 percentage points) seminar held in Rabat on the theme of and introducing a front-weighted "Maroc a grande vitesse". As agreed, the accelerated depreciation procedure. government and the private sector plan to formulate a 10-15 year action plan during o Better accounting. After years of 1994, that will state the principles to guide preparation. the new accounting laws private sector development in Morocco, were promulgated at the end of 1993 summarize key objectives that would reflect and enter into force in 1994; they a shared vision, define in detail the policy establish a modern chart of accounts reforms anu institutional measures needed to  achieve these objectives, and establish a set particular, that have an immediate and of monitorable indicators to chart progress. substantiaU1 impact on government borrowing On the basis of the recommendations needs should be phased in only after careful emerging from the December 1993 seminar, assessment. Other actions, however this action plan is likely to cover the important, may have to be preceded by a following ten themes: financial sector period of institutional strengthening--for development, tax issues, foreign and example the development of nonbank domestic competition, further privatization financing for business. In addition, further including greater use of competitive studies may be needed before actions can be concessions, physical infrastructure, defined. One important topic is the size and economic zones, human resources, legal and role of the informal sector, comprised of institutional frameworks, technology, and very small-scale operators, w th a view to the collection and diffusion of data. developing policies that can inaximize the productive links between them and larger Because of the breadth of the work businesses. Another is the identification of ahead, government and business will have to factors determining competitiveness in set priorities for action, based not only on manufacturing and services and the design the severity of the problems but also on the of appropriate plans of action to raise it and relative costs and advantages of alleviating thereby boost economic growth and the difficulties. Fiscal measures, in employment.  STREGTYHEiNG THE PRIVATE NECT[OR E MORYCCO I EXECUTIVE SUMMARY i. Introduction, This report on The informal sector--which consists of very Morocco's private sector culminates over a sirall, usually individual (but not necessarily year of review and consultation with illegal) businesses--is pehrvasive and Moroccan authorities and private investors produces at least 15 percent of total GDP and workers. More importantly, it marks and a fifth of private sector output. the beginning of a new phase of Bank Group-Moroccan relations focused on iW. Government's gradual but promoting the private sector. The report is marked shift to encourage the private sector. the launching pad for the formulation of a 'rhe government has never been anti-private program of private sector development in sector in Morocco. Investment codes and Morocco, under the tripartite direction of trade protection dating from the 1970s the private sectcr, the government, and sough'. to promote and protect dormiestic bilateral and multilateral agencies. Besides fIrms, but a panoply of government briefly describing the private sector, this controls, regulations, and authorizations also report summarizes the main issues in the revealed a certain distrust of the private incentives framework and important economy. Now the government is constraints in the major factors of committed to developing the private sector, production--finance, labor, land, and domestic and foreign. Since the late 1980s, infrastructure--as well as in the overall the government has progressively increased institutional envirornent. The following the latitude for private activities, by executive summary highlights major suppressing the monopolies of several state conclusions and suggested govemment agencies, by increasingly deregulating actions. markets of all kinds, oy beginning the process of divestiture, and by measures to modemize the institutional environment. In THE PRIVATE SECTOR TODAY the 1990s it has sought to eliminate decisively the reminders of its negative ii. The private sector is alive and stance vis-a-vis foreign private investors thriving. The private sector thrives in exemplified in the 1973 Moroccanization. Morocco, in almost all sectors. It is by far the dominant employer and producer, and it iv. After nearly 3 years of is increasingly the major investor. preparation, the government started Economic power is concentrated in privatizing the first set of state-owned Morocco, but market dominance seems no enterprises in late 1992. By 1996 the worse than in developing countries in government intends to sell IlI companies general: in tact. government ownership and and hotels, which--together with their market restrictions are responsible for the subsidiaries--cover nearly half of state- severest concentration of market power. owned enterprises and agencies. Subsequent  Pge u Strengthening the Pvate Secor in Morocco programs may open the strategic phosphate government has essentially liberalized the company and the several public utilities and binking sector, except for an interest rate transport companies to private capital. In ceiling on loans, a small amount of directed the interim. the government is beginning to credit until 1994 (about 4 percent of total study actions (including concession deposits), and substantial mandatory arrangements) to increase the provision of holdings of government bonds at below public services and utilities by private market rates. The government even plans to vendors. divest its shares in 4 of the 5 major state- owned banks. Liberalization did not raise v. Businessmen still face the real cost of credit; much of that structural, as well as policy .problems. adjustment was achieved in the 1980s. Medium and large businesses complain However, real lending rates (about loudest about basic factors of production-- 11 percent at the end of 1992, essentially the the hard constraints: fimance (high interest same as in 1987-88) remain much above the rates); manpower (shortages of managerial nearly zero rates in the early 1980s, and the and supervisory skilled labor); land (the high rate of indebtedness of Moroccan shortage and high cost of commercial land, companies makes higher rates more costly. especially in large cities); and While high, real interest rates do not appear infrastructure (weaknesses in physical out of line with lending and deposit rates in facilities and services). They also complain Europe, with which Morocco is connected about high income taxes, and about the notably through workers remittances and the difficult, time-consuming process of labor financing of imported inputs used in exports. management (firing workers or devising Following the liberaiization, real rates were alternative labor management strategies). often below those in France and Spain. Small businesses complain about these problems as well, but they put vii. Policy limits on domestic administrative and regulatory constraints- capital. Full interest rate liberalization -the soft constraints--near the top of their should help improve the functioning of the list; from their perspective, only high bank credit market, it is unlikely by itself to interest rates hurt more. solve the problem of undercapitalization in large firns, weak access to bank credit for small firms without much collateral, and the OEALING WITH CONSTRADJfi shortage of resources for longer terrn bank loans and bonds for business investment. Taxation of .eturns on investments is not A. Relaxing the Financial Constraint neutral and acts to divert domestic funds into real estate, agriculture, and Treasury vi. A much improved policy bonds, compared to industry and services. environment. In line with the achievement Private banks and businesses do not issue of macroeconomic stability in the 1980s--as bonds, in part because the government has evidenced by low inflation (less than the power to restrict private issues to 5 percent) and fairly constant nominal minimize competition with Treasury bonds. exchange rates, culminating in current Foreign borrowing by private companies account convertibility in early 1993, the was tightly regulated until late 1993, and in  Ssrengdtening the Prvate Sector in Morocco Page Ui any case foreign exchange controls have o Replace all pre-emptive Treasury made it impossible for borrowers to hedge financing (mandatory holdings of foreign exchange risks. Treasury borrowing Treasury bonds by banks, insurance intercepts most long-term savings before companies, and government pension they reach the banking sector, reduces the fiunds) with market-based bond issues scope for bank intermediation by absorbing-- in competition with private mandatorily and for long periods--a large companies, while continuing to share of deposits, and forces bank to charge reduce the Treasury 's share of total other borrowers higher interest rates to domestic debt. compensate for below-market rates on mandatory government bonds. These o Revise bankruptcy and related laws policies act to crowd the private sector out to facilitate lending against inventory of the financial market in the short run, but and accounts receivable (floating more importantly they discourage the charges). development of a wider array of financial market instruments needed for business o Make taxes more neutral across development. productive sectors and financial instruments as an important adjunct viii. Recommendations for to improving laws, institutions, and domestic financing. A broad program of otht, policies affecting financial meas,ires is needed to expand access to decisions. funds. These include: 0 Eliminate the interest rate ceiling (or o Implement the new 1993 capital raise it so that it is nonbinding). market laws that provide for an autonomous Stock Exchange ix. Few policy but many other insulated from government barriers to foreign capital. By the end of interference and for safeguards to 1992, Morocco had eliminated virtually all protect small stock investors. administrative barriers to foreign direct investment. Companies in almost all sectors o Strengthen laws to increasefinancial can b% 100 percent foreign-owned; disclosure for publicly traded foreigners can purchase equity shares, companies (as an adjunct to the new including in privatized state-owned accounting and auditing laws). enterprises; and repatriation of capital and earnings and payment for nonequity o Encourage the development of a investment services are now automatic. Net corporate bond market, by allowing inflows of foreign investment tripled companies to issue bonds, by between 1987-88 and 1991-92, reaching establishing appropriate regulations $0.5 billion in 1992. Although this foreign and safeguards (through the 1993 investment, at 2 percent of GDP, is twice capital markets law), and by the average rate for developing countries in provliariny tax incentives based on the late 1980s and early 1990s, it remains lor,i' uwirurities and reinvestment of less than the rate in East Asia and Latin 011 7 r1 ,;r, ' America.  Pge iv Swngthening the Pnivate Sector in Morocco x. The constraints that remain B. Improving Skilled Labor and the are systemic, faced by domestic as well as Labor Market foreign investors. Tls, the mere fact that Morocco is now open to--and wants--more xii. Increasing and reshaping the foreign investment is unlikely to attract supply of skilled labor. Moroccan firns use much foreign capital without a systematic relatively few managerial, supervisory, and private-public effort to target likely investors administrative staff, partly because many are geographically and sectorally. And this so small, and partly because such staff effort will only be effective if the appear to be so hard to find. Publicly run government continues to maintain training and education programs that pay too appropriate macroeconomic policies that will little attention to business needs, coupled make Morocco a more credible risk for with a strong desire by students to work in international investors and lenders and if the public sector, has left the private sector substantial progress is made in alleviating with too few skilled staff. The growth and other policy and structural constraints. The success of alternative training programs-- effort will also be more successful if the both privately operated schools and domestic private sector itself seeks foreign cooperative arrangements between capital, although government policy businesses and public schools--point the continues to restrict foreign bank borrowing direction for the future. The challenge is to and bond issues by domestic companies. accelerate the development of these private alternatives by changing policies--including xi. Recommendations for foreign those that ear-mark payroll taxes to public financing. Two specific actions may be agencies and that tax and control private useful: schools while failing to establish a system of equivalencies. The challenge is also to aid o Mount a special publicity effort to and encourage private businesses and overturn past negative perceptions business associations to articulate their needs and help Morocco get well above the for skilled labor and to help design and trend in capital flows to developing manage training programs. countries. xiii. Recommendations for skilled o Allow a more open capital account to labor. Five measures would help: help private businesses take advantage of recently liberalized 0 Improve the management of public access to foreign private lenders (for training institutes by increasing both example, through development of administrative autonomy and narket-based foreign exchange risk increasing business involvement. insurance). 0 Facilitate the growth of private training institutes, partly by putting them on equal footing with public institutes (no taxation--especially if they qualify as not-for-profit institutions, recognizing equivalency  Srengthening the Prvate Sector in Morocco Page v with government schools, instituting paying less than the legal minimum wage an independent certification system, (through apprentices, young workers, work and setting up funding mechanisms, sharing and shorter hours). But these such as student loans, that are more practices, together with the lack of clarity neutral between private and public regarding some regulations and the widely schools). perceived sympathy of tribunals to workers' complaints, expose firms to discretionary o Increase fiscal incentives and administrative sanctions. The labor market fle-xibility for companies to provide flexibility that does exist in Morocco has continuous, in-service training and been paid for with needless transactions education (for example, allowing costs and increased uncertainty for business credits against the vocational and labor. training payroll tax to cover part or all of the cost of training contracted xv. Recommendations for the directly). unskilled labor market. While recent efforts to revise the entire labor code have been o Allow more flexible apprenticeships. unsuccessful, it would be advisable to move forward on two measures that are key to o Legalize private emplovyment and job improving the labor market: placement agencies especial4v to improve the market for skilled Increase the flexibility for dismissing workers. workers, bv revising guidelines (especiallY for compensation) to xiv. Removing restrictions on the minimize interference by courts and labor market. Despite the long-standing other government agencies in regulations that closely constrain labor business-labor relations. markets for unskilled workers, these markets appear to function surprisingly well; only Adopt measures to minimize the the restrictions on firing staff appear to pose distortionary impaci of legal wasteful, inetficient constraints on minimlum wages, for example by businesses, discouraging restructuring and limiting nominal increases, by absorbing managemilent attention. The defining broad exemptions for unskilled labor market is as flexible as it is businesses, orby simply transforming in part because the administration does not thte legal minimum into a nonbinding systematically enforce labor regulations very indicative wage. aggressively--an approach that is encouraged by the 15-20 percent urban unemployment These recommendations are deceptively rate. Busine.;ses-_-Cven large ones--have a simple: their effective implementation may certain scope for side-stepping employment require a variety of safeguards that balance and wage regulations (by not registering the flexibility sought by employers with workers, not paying all nonwage benefits, protecting the rights of workers. For instituting -kork Qharing and shorter hours, example. various kinds of unemployment and repeilii\ siN of temporary contracts) insurance could make dismissals more and by u!it - legally acceptable ways of palatable, provided it could be financed.  Page pi Strengthening the PWvate Sector in Morocco However, no matter how difficult the rules, and public land ownership have reforms may be to implement, the current interacted to exacerbate scarcity artificially ad hoc arrangements satisfy few employers and have not reduced uncertainty about or employees; businesses lack flexibility future access. without violating rules; and workers-- especially the young, women and new xvii. Structural, not market entrants--may be made even more problems. Past efforts to establish vulnerable. Regardless of the exact nature commercial zones away from Casablanca of the reforms, the overall objective would and to weight investment incentives in favor be to create a labor environment in which of other regions have had no discernible both business and labor can function openly impact in business location decisions. The and transparently, consistent with changing problem is more structural. Site value is business realities. high in Casablanca and nearby centers because of weaknesses elsewhere. Physical infrastructure is weak and connections and C. Facing up to the Land Shortage service are hard to get (even new industrial zones are not necessarily well equipped). xvi. The problem of land for Outside of major urban centers, local offices business. Larger businesses complain that for administrative and utility services of all land--notably land well located in the kinds are less responsive to business needs. economic capital of Casablanca--is scare and And various private sector business support expensive. New entrepreneurs complain services have usually not yet developed most that they cannot find commercial because business demand has not yet space. Private education institutions have reached a critical minimum. similar complaints. Objectively, prices have risen substantially during the 1980s, xviii. Recommendations for land. following the real estate trends started in the Five broad actions would help alleviate land 1970s by the influx of foreign (mainly Arab, and space constraints faced by businesses: petroleum-related) funds. Current prices--at $75 or more per m2 in Casablanca industrial o Strengthen infrastructure and related and commercial areas--confirm the problem. local services generally, to widen The land market appears to work, in part location alternatives for businesses. because property rights and registration are well established. There is also unused land o Encourage more private development available in industrial zones elsewhere at a of industrial/commercial zones (in fraction of the cost. But the land that addition to small business sites entrepreneurs seem to want most often has associated with housing tremendous site value because it is close to developments), notably by the commercial, financial, industrial, and eliminating preferential treatmentfor administrative axes--on sites that already public agencies and by actively have infiastructural connections and are seekng private involvement, which closer to housing and other amenities for will help assure that zones are put workers. In addition to site value, the slow where businesses need them and process of zowin cities, particular zoning  Strengthening the Prsate Sector in Morocco Page vii should improve the quality of allowed to maintain on certain corridors; installations and maintenance. and poor maintenance of infrastructure in industrial zones by municipalities and local o Institute open access to information utility authorities. on real estate sales prices and more open, public zoning procedures to xx. Restrictions on private improve transparency in the land provision of infrastructure services. With market. respect to telecommunications and electricity, the govemment has--until the o Adopt a more neutral (and less recent exception of electricity generation and advantageous) fiscal policy for real ancillary telecommunication services-- taken estate to reduce demand for land the approach of keeping out private purely as an asset. competitors and vendors, while it seeks to upgrade public services. But even where o Improve administrative coordination private suppliers are not excluded--as in air to consolidate and sell (or lease) travel and port services--there is no vigorous government-owned land, especially policy to treat them equally with state-owned where large tracts are required, as enterprises and agencies. And where the in tourism. public has disinvested, as in trucking, tight regulation remains, dating from the era of Morocco's administered economy. D. Strengthening Infrastructure Infrastructure is an important, unfortunate exception to the government's otherwise Xix. The pervasive problem of clear and strong commitment to leave the weak physical infrastnictuire. Entrepreneurs operation of the economy to the privaite across the board, including prospective sector. foreign investors, complain about weaknesses of infrastructure. However, xxi. Rising need for investment. with the exception of electricity shortages Future public investments in infrastructure brought on largely by droughts in 1991-93, appear to be tailored to moderate economic no infrastructure weakness quite brings growth at best, designed to keep pace but business to a halt--it just saps productivity not necessarily to bring infrastructure closer and discourages investment. Some key to standards in other countries. If the infrastructure facilities, like ports, have been Moroccan economy were to grow at 8- significantly upgraded during the 1980s. 10 percent, instead of 4-5 percent, there is Main complaints concern: electricity the strong risk that infrastructure would shortages; the narrow. uneven surface of become increasingly insufficient and that roads, their congestion, and the infrastructural services would deteriorate. government's inappropriate regulation of To relax the existing constraint, and to trucking; unreliable phone connections, the assure that it does not reappear, additional-- shortage of lines. and the disinterested especially private--investments will be attitude of th' state telecommunications needed. monopolk: hiigh cost of sea and air transpon . that state companies are  Page Vi Strengthening the Pivate Sector in Morocco xxii. Recommendations for distortionary as access to foreign exchange infastructure. To improve the quality of has become increasingly open for current both public and private infrastructural account transactions (full convertibility was services and to bring in complementary announced in 1993) and income tax rates financing for upgrading and expansion, two have declined by about a fifth since the late actions appear priority: 1980s. Most administrative marketing and price controls have been eliminated, and o Reduce and modernize regulations several de jure monopolies of state-owned governing the provision of enterprises have been opened to competition. infrastructural services, notably in Quantitative restrictions (QRs) on imports transport, and allow competition (which covered two-thirds of imports in from private vendors, notably in 1980) will have been entirely eliminated by telecommunications. early 1994, replaced with re!atively high, but more uniform tariffs, by reference prices o Encourage private investment in all on a small share of industrial goods (less types of infrastructure investment, than 10 percent), and by variable levies on but especially in electricity 3 agricultural commodities and their production, motorwav construction derivatives. Maximum import duties have a n d o p e r a t i o n, a n d declined from 400 to less than 50 percent by telecommunications, by developing a 1993, and weighted ad valorem protection sound framework for concession decreased during the 1980s and early 1990s contracts with private investors. by nearly 10 percentage points despite the shift from QRs to tariffs. Effective rates of protection have declined overall since the E. The Unfinished Agenda to ImProve early 1980s, but by 1991 they still averaged Incentives 25-30 percent. Exports are implicitly taxed, especially where export performance has xxiii. Many incentives much been strongest, and the incentives rate for improved. Private sector growth depends import substitutes is 30-35 percentage points critically on maintaining macroeconomic higher than for exports. Overall effective stability and incentives for efficient protection is inversely related to comparative productive investment. In recent years, advantage. Morocco's macroeconornic environment has been characterized by low inflation (less xxv. Key remaining reforms. than 5 percent in 1986-91), a relatively Morocco is nearing the point where it has stable nominal exchange rate following the the critical mass of policies needed for a 30 percent real devaluation between 1980- quantum jump in economic perfonnance led 86, and progressively smaller deficits in the by the private sector. Already, the early government budget and on the current real devaluation, coupled with a shift in account (both at 1.4 percent of GDP in relative incentives toward exports, helped 1992). produce the tremendous growth in manufactured exports during the 1980s. xxiv. the same time, incentives Now, two broad tasks remain: faced by thi> p1 ite sector have become less  Strengthening the Iinvate Sedor in Morocco Page ix * Decisive action on two major policy based system is largely completed (quotas fronts. are now essentially eliminated, and reference prices have been restricted), the * Persistent efforts to complete the level of import protection in Morocco--both broad array of other reforms real and effective--still remains relatively already largely in place. high by international standards. Nominal ad valorem protection was 37 percent in 1992 xxvi. Need for decisive policy (27 percent when weighted by import action. The government needs to lower and shares), and effective protection for import harmonize both income taxes and import substitutes was 25-30 percent in 1991. tariffs, especially if Morocco seeks to be Structurally, protection is highest (twice the more closely integrated with the European average) for metal, mechanical and electrical Union (EU). Tax treatment affects industries, which many look to for future activities; exoneration for export activities export growth. This continuing import partially explains the growth in export protection acts to discourage and restrain production, and favorable treatment of real imported technology, raises the cost of estate helps explain the boom of the 1980s. inputs for other domestic producers, Firms label high taxes as the third most facilitates anti-competitive practices, and severe constraint after high interest rates and hurts consumers--including the poorest. lack of skilled labor. Their perception partially matches reality: personal and xxviii. Recommendations on corporate income tax rates are high incentives policies. Reforms should be comparatively (with a 42 percent tax on designed to make incentives more neutral corporate income in 1993, Morocco is at the across productive sectors, which should top of the international range despite the increase the attractiveness of investment in reduction from over 50 percent in the mid- industry and tourism, relative to agriculture 1980s), yet the direct tax burden effectively and real estate. Two key reforms should paid by companies is at the lower end of the aim to: range in comparable countries. However, because corporate dividends are taxed twice Lower the burden of corporate (as corporate profits and at 15 percent after income taxes by at least a fourth, by: distribution), their overall tax burden is much heavier (over 50 percent) than interest * Reducing the tax rate to 30- (20-30 percent) or real estate gains (less 35 percent as quickly as than 15 percent effectively), and therefore, possible while limiting before-tax retunm miust be correspondingly exemptions and fraud, higher to attract investors. Providing specific, time- xxvii. Trade liberalization has bound fiscal incentives for increased import competition for many broad categories of efficiency finns. especiall tfrom second-quality goods enhancing expenditures for no longer reo r:leJd hy QRs (although illegal all businesses (notably goods ih',< allegedly increased). While training and a wide range of the taski l i,uiltig protection to a market-  Page x Strengthening the Pnvhae Sector in Morocco technology-intensive foreign exchange. There is also the need to improvements). create a framework to defend and to promote domestic competition in all 0 Lower total import duties (to a markets. maximum of 25 percent) while further reducing the level of effective xxx. Recommendations for related protection (to perhaps 10 percent) reforns. Many of these issues are discussed and narrowing its spread, as initial in several chapters, but they can be grouped steps towardfurther harmonization of under two broad reform priorities: import duties with the EU. 0 Deregulate prices, market However, because the fiscal impact of these functioning, and business entry in proposals may be substantial (the direct tax four key activities--transport of all burden on business provides about 10 kinds, agricultural commodities, and percent of revenues while customs duties public utilities, and foreign provide about another 20 percent), it will be exchange. difficult to reduce these taxes quickly (while maintaining budgetary stability and o Promote competition among domestic protecting important social expenditures) companies by establishing legal without other, compensating measures. The standards and safeguards, and by most important of these measures include reducing the market power of state- broadening the tax base (fewer exonerations) owned enterpnises and agencies. and restricting public spending (more emphasis on efficiency and encouraging more private financing of many public F. Overcoming Institutional services). Weakness xxix. Need for prsistent efforts to xxxi. Coping with administrative complete related reforms. Additional effort weaknesses. Many businesses, but is necessary to achieve the critical mass of especially foreign investors, sense that rules, incentives that can help make the difference regulations, administrative procedures, and between moderate and high private sector judicial processes in Morocco are opaque, in investment and growth. Most of these contrast to the legal framework itself, which should focus on the deregulation of prices clearly sets out the usual conditions required and marketing with the aim of improving the by the private sector. Such opaqueness scope and operation of private markets. In leaves many investors uncertain, and they addition to deregulation in labor and see their uncertainty justified, for example: financial markets, discussed above, priority by the gap between outdated labor should be given to less and more appropriate regulations and practices; by delays and regulation in agrictultlre and transport where encumbrances in obtaining infrastructural controls seem most pervasive, to services and municipal authorizations; by the liberalization of locally administered prices slow, uncertain and seemingly biased where deregulation has not taken hold, and treatment in courts; and by the slowness in to allowing residents to hold and trade modernizing laws. Businesses in Morocco  Strengthening the Nhwate Sector in Morocco Page xi appear as innovative as anywhere in coping remain small, and potential investors turn with these administrative weaknesses-- away. whether in the form of regulations that are inconsistent with a modem, competitive xxxiv. Systemic problems. It is economy or in the form of discretionary, unlikely that the problem is simply one of slow responses by administrators. But the too many regulat ons, although some creative approach has costs. regulations--including many of those required to set up a company--date from a xxxii. The costs of coping with time when government sought far more inappropriate business regulations. In some control over private economic activities. instances, the costs of coping are bribes, but The problem is also that public services, complaints were modest; more likely are including utilities, are far from becoming actions that are, strictly speaking, illegal but consumer oriented, where investors and tolerated (undeclared labor, operating entrepreneurs are the consumers. Because without all authorizations, alleged administrative weaknesses are systemic, underdeclared profits). By sidestepping correcting them will be a lengthy, complex, rules, businesses get on with business, but it multifaceted task, that must be built on a leaves them vulnerable to discretionary and process of more open consultation with the often unpredictable enforcement, which private sector itself. exacerbates market uncertainty and may help explain the widely perceived reluctance of xxxv. Recommendations to reduce businesses to g, public in their search for administrative barriers. The government-- capital. The need for such grey practices no which argues that some legal and doubt also discourages new, especially administrative problems are caused by the foreign, investors that expect to operate in a lack of diligence in the private sector itself-- more transparent and predictable has nonetheless been preparing a program of administrative environment. administrative reformn since the 1980s and is taking measures to improve the legal xxxiii. Worse impact on small and system. While that process continues, four prospective businesses. Because larger specific actions--in addition to those businesses can and do devise strategies to discussed above--include: cope with such uncertainty, they perceive administrative weaknesses as less binding o Establishing specialized commercial constraints, although such strategies divert courts with more expeditious resources and attention from real business procedures and specially trained (even though businesses may have judges. internalized the costs). The administrative burden falls disproportionately on small Promoting the use of binding businesses, who rank it as one their most arbitration clauses in commercial severe constraints because they have fewer contracts. channels of recourse, including influence in high places. On the margin, established o Simplifying, consolidating, and businesses A ati rcsources, small businesses harmonizing business creation and expansion procedures (while creating  Page xu Strcngthening the Pniva Sector in Morocco a much larger role for private xxxvii. Improving business services. intermediaries). The task of developing and strengthening most business services must rely mostly on o Preparing a code of administrative indirect actions, if the aim is to have these conduct for all levels of government grow from within the private sector. For to define standards of service to, commercial business services, the most rather than control of, private obvious government action is to eliminate business. legal or regulatory barriers where they exist (for example, labor services, as discussed xxxvi. Weak business support above); minimizing administrative barriers services. Although not usually singled out for the creation of new businesses will also by businesses as a constraint, many of the help, as many of these services will be inefficiencies and problems that businesses provided by small companies. As important do notice could be alleviated by a broader are measures to stimulate demand for these array of professional and business support services; changes in fiscal or regulatory services. Maintenance, repair, and policies can encourage businesses to use subcontracting services tend to be so more of these services, and lower import geographically concentrated that they add duties will encourage companies to seek site value to land. Regulations have tended improved technology. For business to retard the development of active associations the most important government competent employment agencies, financial action may be to define, clearly and brokers and underwriters. Institutional systematically, an operative role for such mechanisms for acquiring, diffusing and agencies in all of the government's using modern manufacturing and other regulatory decisions and promotion business technology are also weak--notably: programs affecting the private sector. In haphazard and insufficient infornation practice, professional associations could channels; a relatively limnited and outdated assume operational responsibilities. Carving system of weights, measures, normns, and a place for associations is a prerequisite for standards; and the lack of internationally their strengthening; but it may also be recognized facilities for testing, quality necessary to support their development with control and product certification. some kind of public technical and financial Interprofessional business and trade assistance. associations exist usually in name only. The lack of strong professional associations weakens the capacity of business to THE ROAD AHEAD articulate its needs, to interact with public agencies (for example in designing training xxxviii. Morocco approaches the mid- and education programs and in helping set 1990s having put in place significant norrns and standards, notably for processed economic reforms that have restored agricultural goods), and to take a proactive macroeconomic stability and significantly role in promoting business development (for reduced administrative economic controls. example. attracting foreign private investors These reforms have helped the country and prospeci;.uqg foreign markets). achieve moderate, if variable, economic growth led by private sector exports.  Sawngdaenlng dte P1rYte Sector in Morocco Page xiii Although the reform agenda remains program could be organized around three unfinished, and accomplishing much of what pillars: remains will depend on strengthening a wide variety of economic and financial * further privatization; institutions, the government has left no doubt that the economic future belongs to, * a competitive, modern business and depends on, the private sector. Both the environment; and government and private business recognize that Morocco must increasingly integrate 0 additional finance. itself with the world economy. Already, the government has finished a decade its xli. The first pillar, privatization, external debt reschedulings, and has aims to accelerate the disengagement of the renewed its welcome to foreign investment. public sector from virtually all commercial In 1993 it will begin negotiating closer activities and from the provision of many economic association--possibly free trade-- public services. It would shift the boundary with the European Community, although it between the public and private sectors by recognizes the importance of diversifying broadening the scope for private business in into other foreign markets and sources of two ways: private capital, notably in North America and Japan. This report presents a vision for o Accelerating the sale of state-owned the private sector and what it needs to take enterprises already identified for the lead it has been offered. divestiture and increasing thie number to be sold,- and xxxix. Agreeing on the guiding principle. This Executive Summary lays out C Allowing atd encouraging private a broad, but far from exhaustive, array of provision of most basic public reforms that seem most important for services and infrastructure. developing the private sector. Many are in progress, and all are being discussed. And To set this pillar in place, the government they will need to be complemented by other, should formulate an action plan for the largely sectoral measures. As Morocco is second stage of privatization, focused on far along in achieving the critical mass of public utilities and the "strategic" state- policies needed for self-sustaining private owned enterprises. At the same time, it sector growth, it is difficult to single out a should adopt the regulatory framework for flw policies that deserve priority. Rather, the concession agreements and similar what deserves priority is the development of arrangements needed to increase private a concerted, broad-based program guided by investment and operation in public services. a single, key principle: promoting A broader privatization program would competitive private business in all support private sector development directly economic activities. by increasing the scope tor private investment. But the most important benefits xl. Dcfining the pillars of a are indirect: improving the level and quality private sect(w {Sloprnent program. This of public services--especially in infrastructure, increasing the investment  Page xiv Strengthening the PItate Sector in Morocco resources to expand critical public services regulations) that entrepreneurs face in (like electricity), and helping establish a creating and expanding companies in all more competitive environment with fewer sectors. A more open, and less entry barriers (especially in transport). The monopolistic, economy will undoubtedly sale of companies would also augment differ from Morocco's current economic public revenues and help compensate for tax structure, but reforms to help effect this reductions to encourage private investment. longer term adjustment are urgent if Morocco is to consummate its free trade xlii. The second pillar, a association with the EU before the end of competitive business environment, the century. comprises two distinct elements: xliii. The third pillar, finance, is o an open, liberal, iransparent supported by the first two, with the specific economy; and objectives of attracting more domestic and foreign investors and of improving the o a better enabUing environment for supply of investible fuAds (both loans and business creation and expansion. equity) for business creation and expansion. Thus, it also has two specific elements: Creating a more open, transparent economy requires, inter alia, lower, more equitable Reducing fiscal disincentives to taxes, greater competition in all markets, private investment; and and key policies more closely harmonized with those of the EU and other major Comnpleting the reform of the trading partners and competitors. Creating financial sector. a better environment for private business involves appropriate institutional reform and Reducing disincentives essentially entails strengthening, as well as much stronger lowering the current high levels of corporate support for human resource development, and import taxes, which will bring Morocco Building this pillar will require a potentially more in line with its major trading and wide array of fiscal, trade, administrative, investment partners and strengthen its and regulatory refonns and measures to capacity to participate in a free trade improve incentives and to strengthen association with the EU. However, these institutions comprising the financial, legal, reforms must be implemented within the regulatory, technological, and infrastructural constraint of macroeconomic stability, as envw.onrment in which companies operate-- discussed below, which will require that some of which are included in the other ongoing efforts to broaden the tax base be pillars. In conjunction with a broader intensified. Efforts to complete the financial program of privatization, the government sector reforms should focus essentially on should give priority to improving the rules liberalizing and facilitating private access to and institutions to foster competition among long-term finance. To help private companies. in part by acting to minimize the companies and banks mobilize long-term barriers (sltjh as unfair competition, finance domestically, the government needs government e lusion, difficulties mobilizing to reduce restrictions on bond placements, finance, outdated and poorly administered reduce fiscal and other disincentives for  StOwngthening the Private Sector in Morocco Page xv share capital, and act more quickly to growth and financial deepening. Key develop a viable financial market. To recommendations of the report--notably facilitate access to loanable funds, the reducing corporate taxes, lowering import government should remove remaining duties, and improving critical public sector restrictions on foreign loans and encourage services--can only by effectively them by fully legalizing foreign exchange implemented within the constraint of markets. Important complementary maintaining macroeconomic stability; measures aimed especially at helping smaller otherwise, the resulting inflationary and companies include full deregulation of other distortionary pressures risk lending interest rates and regulatory and undermining the reforns anyway. This legal reformns to encourage lenders to macroeconomic constraint thus broadens the develop new lending vehicles, such as debts scope of proposed reforms and other guaranteed by accouI.ts receivables or measures; stronger efforts will be needed, inventory. for example, to broaden the tax base, to reallocate public funds and use them more xliv. Foundations for the pillars. efficiently, and to allow more public Most of the policy reforms outlined above, services to be provided by the private coupled with continued sound macro- sector. economic management by the government, are an essential, early step in setting up the xlvi. Launching the program-- pillars. They will need to be reinforced by creation of a private sector development longer term measures to strengthen commission. A program for private sector administrative institutions, including the development is more likely to be followed if judiciary and municipal governments, and it is designed and closely monitored by an by well-targeted public investment, advisory group empowered to investigate, especially in infrastructure. Foreign report, and advise on progress achieved. governments and development agencies can Thus, it may be useful to create a small, help by providing technical and financial independent tripartite institutional structure support, both to underpin public actions and (the Private Sector Development to facilitate more private investment. The Commission), composed of representatives most important responsibility lies with the of key government agencies, representatives private sector, not only to respond to the of the private sector, and representatives of new opportunities, but also to assume foreign governments and agencies supporting leadership in guiding the program. the program. The role of this commission would be threefold: (1) to develop a xlv. These pillars must be set detailed program of action for priva.e sector firmly in the foundation of solid, prudent development--including priorities for macroeconomic management. Above all, actions, targets and a delineation of the government must continue its effort to responsibilities; (2) to encourage widespread minimize budgetary deficits and total public discussion to reach a consensus on how to sector borrowing requirements and to keep implement key actions; and (3) to monitor monetary growth in line with economic progress.  CHAPTER I: PROFILE OF THE PRIVATE SECTOR A. The Public - Private Boundary I. Private Business 1. The private sector--defined as private employers and producers--accounts for roughly 70-75 percent of total GDP, with the share of the public sector split equally between the administration and independent public enterprises and agencies.' Of the approximately 400,000 business entities in Morocco (in 1988), the public sector accounts for less than 700, and the fonnal private sector accounts for about 23,000. The small-scale, or informal, sector accounts for most businesses and contributes perhaps 15 percent of GDP, or about a fifth of private sector activity.' t/ Based on 1990 GDP at market prices. The split between private and state-owned enterprises is difficult as the official national accounts distinguish only government administration and classify state-owned enterprises with the private sector. 2/ In most statistics, the informal sector is essentially defined by size, not by legality. In Morocco, most businesses that are called informal are registered, pay some taxes, and are "visible" to the administration. Many formal businesses do not necessarily respect all regulations. Thus, the legal, or regulatory, demarcation between formal and informal in Morocco is hazy and appears to be less of a constraint to expansion than size itself. The government usually defines the informal sector as nonagricultural businesses with specific permanent quarters but without business accounts--covering some 250,000 businesses in 1988. This definition excludes most itinerant merchants, work within homes, and clandestine activities; based on the total number of business licenses and on data from the Living Stanidards Measurement Study, these other small enterprises could amount to as many as 150,000, mostly in commerce. Together, these probably account for 15 percent or more of total GDP. Special surveys of the construction sector, industry, retail commerce and various other services in 1984- 88 provide the following estirsates of the informal sector (percent of sector and total GDP, respectively, in relevant year): Construction, 1982-84 (both permanent and itinerant) 50 2 Manufactufing industnes, 1988 17 3 Retail commerce, 1988 44 5 Other services, 1988 (other than finance) 22 3 Ambulatory businesses . 2 (assumed) Figures from Enquite Vationale sur les Entreprises Non Structurees Localis&es, 1988 and Rsazltats de I'Enquete de Struccure sur ic Secteur Bd4ment et Travaux Publics, 1983-1984 and 1984-85. See also World Bank Report No. 1191 8-MOR. especially Annex IV, and Royaume du Maroc, Direction de la Statiscique, Les Etablissements Economrn2ue \ Howv e'. pil atnbiguity in defining formal and informal sectors results in widely (and wildly) different estimates of the stare ot the informal sector in the economy--with figures ranging as high as 30-40 percent and even as high as I' p,: r2ent  Page 2 Strengthening the Pniate Sector in Morocco 2. There is no evidence that private entrepreneurial talent is lacking in Morocco. The private sector accounts for virtually the totality of primary agricultural production (except vineyards), almost all construction work and commercial services, over 90 percent of tourism services, around 80 percent of manufacturing output (excluding phosphate derivatives), 70 percent of transport services, and over half of commercial bank ownership. It accounts for nearly 60 percent of fixed domestic investment. Two thirds of the deposit money banks are entirely private, and half of these have 50 percent foreign ownership. Only 2 of 18 banks and special financial institutions are fully government owned; both the state-owned industrial and real estate investment banks have a third or more private ownership. (See Annex Tables A. I and A.2.) 3. Broadly speaking, the manufacturing sector is extensive and diverse. Including agroprocessing, it -omprises nearly 50,000 firms, although only 5-6,000 can be considered "formal sector" entv:rprises.3 These formal sector manufacturing firmns (of which 98 percent are private) comprise about a third of all businesses filing income tax returns. In manufacturing, there are some 600 majority-owned foreign firms, which account for about a quarter of private manufacturing value-added--despite a policy regime during the 1970s and 1980s that was unfavorable to foreign ownership.4 The sector produces largely for the domestic market, with a quarter of production being exported--although the share exported is much higher for textiles and clothing and, to a lesser extent, phosphate-based chemicals. 4. The manufacturing sector can b- neatly bifurcated into firms producing primarily for the domestic market and export-oriented firms.5 Compared to those producing primarily for the domestic market, export-oriented firms tend to be relatively newer and larger and have a lower share of direct value added. By contrast, inward-oriented firms tend to be slightly older but smaller, comprising a larger share of state-owned enterprises. The manufacturing sector is geographically concentrated in and around Casablanca, where infrastructure is more extensive and there are economies of concentration. This single area accounts for roughly half of manufacturing output, and--at least in the mid-1980s--nearly half of industrial investment. 5. Farmers have been a strong focus for private sector development; they are treated differently, and more favorably, than private business in other sectors. Agricultural land is not taxed, and registration (at least in irrigation zones) is free. Foreign invtstors cannot own agricultural land, even after the repeal of the Moroccanization decrees, but they can lease it on 3/ The informal manufacturing sector is especially important in manufacturing consumer items that can be handled on a small scale, including garments, leather and shoes, wood products, and metalworking--where its share m output rises to as much as 50 percent. 4/ For example, m 1973, the Moroccanization law required at least 50 percent domestic ownership of all companies. although the various subsequent investment codes provided incentives and guaranteed rights of repa:r:.n n of dividends and capital for authorized foreign investments. 5/ ,all finns that export at least 25 percent of their output are classified as export-oriented, these firms usuali) export virtually all (85 percent on average) of their production.  Skvngthening the Pn pate Setor in Morocco Page 3 a long-term basis. Agricultural income is, and will purportedly continue to be, exonerated from all income taxes until at least 2020. Agricultural inputs, farm loans from the state-owned agricultural bank, and the sale of domestically produced agricultural commodities are all exempt from the VAT, in sharp contrast to businesses in all ot ter sectors (except small merchants). The state-owned agricultural credit bank generally lends to farmers at rates below those commercial banks charge on business loans. Protection, both effective and nominal, against agricultural imports appears to have risen during the late 1980s, while it was falling for many industrial products; the VAT exemption for agricultural produce increases the tariff protection. Producers of some major agricultural food staples have benefited from strict import controls and will continue to benefit from equivalent tariffs (on meat and milk) and variable levies (on soft wheat, sugar, and vegetable oils). The government has invested heavily in irrigation and delivers water to farmers at fees well below the operation and maintenance costs of even the local distribution networks. 6. This panoply of benefits has encouraged farmers to shift into relatively low-value crops (cereals, oilseeds, and sugar) on irrigated land, which has reduced incentives and possible investments in improving the range and quality of high-value crops. It has also hindered the development of competitive agro-industries because they are constrained to use more expensive domestic inputs and because of the disincentives to improve the quality and range of domestic produce. 7. However, the counterbalance of the benefits has been deep intervention by the government in agricultural pricing and marketing. While domestic collection and marketing of agricultural staples is handled mainly by the private sector, entry and operation are affected by the allocation of quotas for oilse-d pressing and for milling the low-quality wheat flour that is subsidized. Sugar is produced by state-owned companies. For vegetable oils, low-quality wheat flour, and sugar, prices are set by the government, although these are to be liberalized in 1994. Grain imports are handled primarily by the national cereals board, and private importers require special licenses. Exports of processed agricultural goods that contain any of the subsidized commodities require special licenses, which is not the case for other industrial exports. 8. Tourism is the principal source of income and employment in certain regions in the south, like Marrakesh and Agadir. Agadir is also emerging as a major center for horticultural commodities and exports. 2. State-Owned Business 9. Despite the predominant share of private ownership and operation in the Moroccan economy, the public sector (both the administration and public enterprises) has traditionally exercised significant control over many private activities. 10. Regarding the 700 or so public enterprises and agencies, about two-thirds are commercial an(! dlistrial companies, a tenth are public utility monopolies (or quasi-monopolies) and the rest 'ti. quasi-governmental bodies including regulatory agencies, universities and  Page 4 Strengthening the Private Sector in Morocco hospitals. The government, directly and indirectly, has more than a controlling minority (one third share in equity) in only about half of all the public enterprises, and in an even smaller share of the commercial and industrial companies. Wholly owned government companies monopolize basic utilities (energy, water supply, and telecommunications), railroads, air transport, phosphate production, and petroleum refining; government-controlled companies dominate investment banking and control virtually all of wine and tobacco processing. About 30 core state-owned enterprises account for most of the output, employment and investment of the group (covering mainly production and distribution of water and electricity, telecommunications, rail, air and maritime transport, phosphate mining and processing, and tobacco). 11. With the exception of mainly agricultural development companies ("sociertes de la mise en valeur"), the Treasury has provided no operating subsidies for about a decade. In fact, the Treasury currently receives roughly US$1 billion a year in dividends and monopoly taxes (half is from tobacco taxes alone), as well as other income and sales taxes. Against this amount, however, are subsidies paid to the agricultural development companies (reportedly over $100 million a year) and investment funds provided to state-owned companies (programmed at over $200 million a year in 1992-93).6 12. In line with increased emphasis on private enterprise, the government launched a privatization program in the mid-1980s, which resulted in a 1989 law identifying 111 enterprises to be sold (of which 37 are hotels), with capital worth about $1.2 billion in 1989.7 Following two and a half years needed to complete the legal framework, to assure broader ownership of the program to allay political sensitivities, and to establish an evaluation and tender process, the first enterprise was sold in late 1992. In less than six months, a tenth of the total has already been put up for sale; the government planned to sell 25 during 1993 and expects to complete this first phase in 1996. The program is important, and may be followed by further privatization of remaining major public enterprises and utilities. 13. The government has used a variety of sale procedures, depending on the government's ownership shares, various management, employment, and expansion objectives, and certain ownership restrictions (such as reserving a part of ownership for workers, and the fact that foreigners cannot own agricultural land). Some companies and hotels have been sold by open bidding and others by direct, negotiated sales; agricultural operations have been leased; a portion of shares in some companies may be sold on the Stock Exchange or reserved for employees, while remaining shares are tendered or sold in negotiated sales. Most sales imnpose certain obligations on the purchasers, which may include modernization, expansion, and maintaining employment. 6/ In addition. an mid-1992, the central government was a net creditor to various state-owtned agencies and companies, by an amount of about US$ 1.1 billion, largely the result of assuming debt and rescheduling obliga:n r.. plus tax arrears. 7/ In. Iud-.n, t'ih subsidiaries owned by these firms would bring the total state-owned firms to be affected by the pnriiat. aun to about 300, or nearly half the total number of firms and agencies in the government portfolio.  Spgthening the Pvte Setor in Morocco Page 5 14. In manufacturing, the program covers about half of the government's 80 or so firms, accounting for about 10 percent of value-added and sales. Completion of the program would still leave about a tenth of manufacturing GDP in government hands, mostly in phosphate processing. The program would entirely eliminate the government from bus transport, but not from sea, air, and rail transport. The first phase of privatization would also reduce government ownership in the banking sector from nearly 60 percent to about 20 percent, and in commercial banks from over 50 percent to about 10 percent; only the agricultural bank (out of 18) would remain fuUy owned by the government. In agriculture, the program aims to privatize the two formerly monopolistic fertilizer and seed distribution companies, most of veterinary services, sugar refineries, ranches, and the cotton marketing company, but not the two large state-run fanns. 15. In tourism, the proposed privatization program aims to reduce state-ownership of hotels by some two-thirds, to 5 percent of total tourist-class rooms, although the share of private management is unlikely to increase much beyond its current level of 95 percent. So far, two of 37 hotels have been sold, and--in contrast to the strong bidding for state shares in the initial sales of manufacturing firms--investor interest in recent offers for tourist hotels has been limited because of generally low occupancy rates.8 The perceived need for substantial renovation and possibly expansion to make thetn competitive may depress bids below levels desired by government. 16. For several of the core state-owned enterprises that are not yet proposed for divestiture, the government has formulated a program to improve financial performance. In addition to a program of appropriate investments and measures to streamline govemment regulation, the governmerit has recently mandated changes in management, allowed rate increases, and budgeted funds to clear arrears of the central government to these companies. These efforts should help improve the delivery of important public services to the private sector and reduce the burden of arrears owed by these state-owned enterprises. 3. Government 17. As a consumer of resources, government is not excessive--contributing about 12 percent of GDP--although domestic government debt is some 35-40 percent of total domestic debt, government budgetary receipts are 26 percent of GDP, civil servants comprise 25 percent of urban employment, and public investment (excluding state-owned enterprises) is a fifth of total domestic investment (see Annex Tables A.2 and A.4). Rather, the most important effects of government on the private sector are indirect, including its control of markets, its choice of infrastructural investments, and its administration of regulations and laws. 8/ For t-x,: the 8.3 million bednights paid by international tourists in 1992 was slightly less than in 1987, in contrla < . 't percent increase in hotel beds.  Page 6 Strengthening the Pnvate Sector in Morocco B. Organization of the Private Sector 18. Although Societes Anonymes (SA) are the most prevalent business organization of formal sector fiums, most Moroccan firms remain closely held, family enterprises, obtaining virtually all of their equity from personal arrangements with family members and partners.9 Less than 75 companies are listed on the Stock Exchange, and many of thesc a,e state-owned enterprises. The over-the-counter equities market is more active than the Stock Exchange, but it is limited to companies listed on the Exchange. There are few reported trades of shares issued by unlisted companies. 19. The size-distribution of Moroccan industrial firms is distinctly skewed. While the average employment in the formal sector is about 80 workers per firm, the median, or typical, employment is only about 50. Most formal sector manufacturing firms are small--over a third employ fewer than 10 workers and virtually all of these are in the domestic private sector. The presence of a few large manufacturing firns causes production to be highly concentrated in a few plants, especially in some subsectors. Beverages, tobacco, cement, and basic metals have the most concentrated plant structure--with over two-thirds of output being produced in four plants or fewer, which reflects economies of scale in cement and basic metals and concentration of government ownership in the other subsectors. Overall, the median 2-digit manufacturing subsector in Morocco has 40 percent of its output concentrated in four plants or fewer. This degree of concentration, when account is taken of the average size of manufacturing subsectors in Morocco, is similar to many other developing countries. 20. A smnall number of holding companies--all but one of which are privately held Moroccan companies--reportedly own the industrial firns that account for about half of manufacturing value added.'