Morocco - Industrial Infrastructure Project

Report No. PIC4840 Project Name Morocco-Industrial Infrastructure Project Region Middle East and North Africa Sector Industry Project ID MAGU47581 Borrower Kingdom of Morocco Implementing Agency Ministry of Commerce and Industry Avenue Mohammed V Rabat, Morocco Contact Mr. A. El Mossadeq, Secretary-General Tel: 011.212.7.76.89.33 Fax: 011.212.7.76.01.92 Date this update prepared February 1997 Date initial PID prepared September 1995 Project Appraisal Date September 1997 Projected Board Date March 1998 Preface 1. This updated PID replaces the Initial PID prepared in September 1995. This reflects the following main changes in project contents: (a) the technology development component is dropped and will be included in a future enterprise competitiveness project; and (b) the private industrial parks component no longer includes the off-site infrastructure investment component. Background 2. Morocco has made significant progress toward becoming an open and efficient economy. A policy environment conducive to private sector development has largely been put in place. Since the mid-1980s, Morocco's impressive economic growth, fueled by strong private sector export growth in the textiles and agro-industries, has been commendable. Despite this, the industrial sector is now facing the challenge of an increasingly integrated world economy and strong competition from a number of rivals. While the private sector has responded vigorously to new incentives, especially for exports, recent export gains are highly vulnerable to international competition and there remains much potential for diversification and growth. The Government of Morocco (GOM) is fully aware that in order to address this issue, a critical constraint to private investment in industry and product competitiveness, identified by the 1994 Private Sector Assessment, must be resolved: shortage of well-equipped industrial land and the associated trade facilitation, marketing, technical, and business services which impedes productive private investment. 3. Industrial Land Shortage. The GOM has actively sought to develop  industrial and commercial zones throughout the country since 1979. However, many of the existing 35 industrial zones, especially those in isolated areas, remain unattractive to industrial enterprises, as reflected in an overall occupancy rate of less than 50 percent (see 1/). On the other hand, zones near the major financial and commercial centers do not meet the growing demand for industrial land (see 2/). The administrative bottlenecks in conversion of agricultural and non-titled land into industrial land have contributed to this shortage. Equipped industrial land has been made available to enterprises at subsidized prices through public agencies (with little industrial zone management capability) that acquired, equipped and subdivided the land. But, the infrastructure that is supposed to be part of publicly developed industrial zones is seldom provided (see 3/). 4. To counter these problems and increase the supply of well-equipped and serviced industrial land, the GOM strategy has recently shifted towards creating the conditions and regulatory environment that encourages private sector development of modern industrial parks, and in the medium term, "industrial corridors" to address structural shortages of industrial land. The GOM is aware that important regulatory improvements need to be introduced to increase the supply of industrial land. These include streamlining the approval of urban plans and conversion of agricultural and non-titled land into industrial land, ensuring that long-term leases would be acceptable as collateral, fostering the development of industrial bonds issued by private developers to raise financing in the local capital markets, (see 4/) harmonizing capital gains tax to discourage land speculation, and minimizing trade barriers including lowering import duties on raw material required for industrial parks construction. 5. The GOM has recognized that industrial land shortage will be even more binding in the coming years in light of the possible free trade with the European Union (EU), and Morocco's efforts to double annual GDP growth rate and generate an average of 200,000 jobs per year, and has accordingly requested Bank support to address this constraint. Specifically, it has requested Bank assistance for: (i) improving the legal and regulatory framework and enhancing institutional capabilities for increasing the supply of industrial land and developing private industrial parks (PIPs); and (ii) developing PIPs in key locations -- Casablanca and El Jadida (see 5/). The proposed operation is a response to this request. Project Objectives 6. The main objective of the proposed project would be to alleviate a major bottleneck to private investment in industry and export development outlined in para 2. It would also support government initiatives to encourage private participation in infrastructure development, and contribute to increasing foreign direct investment. Project Description 7. Private industrial parks would be developed and managed by internationally experienced development and management companies (DMCs). The DMCs will lease the land from the GOM and sub-lease to private -2 -  enterprises (in part, eliminating the possibility of land speculation). Land purchase, particularly by tenant enterprises, at market prices would also be possible (see 6/). The DMCs will also: (i) mobilize private financing to develop the necessary infrastructure and services for the park; (ii) develop common facilities (e.g., maintenance, marketing, trade facilitation offices) and provide management and other services for the tenant enterprises; and (iii) act as liaison between enterprises and the central and local governments in such areas as trade facilitation. 8. The proposed operation would consist of partial risk guarantees to private sponsors. By covering certain non-commercial risks and contractual obligations of the GOM, guarantee mechanisms would provide comfort to private lenders (see 7/). In order to invest in industrial park development, DMCs need to mobilize financing from international (and domestic) markets. Guarantees could facilitate this financing at least until the creditworthiness of the country is well established. Guarantees would only be issued to private lenders, and would be callable only if the GOM or its agencies failed to live up to certain specified contractual obligations spelled out in the contract between the GOM and DMC. But the guarantee would not shelter private lenders from commercial risks inherent in the project. 9. In preparation of this operation and in response to GOM's request, technical assistance is being provided by the Bank through the Japan Policy and Human Resource Development Fund (PHRD) financing. The Bank's technical assistance would consist of strengthening the institutional capacity of the Ministry of Commerce and Industry and local authorities to select qualified DMCs through international competitive bidding and prepare concession contracts. The Bank has already reviewed regulatory and institutional framework, and has helped prepare bid documents and conceptual drawings of two sites (Jorf Lasfar and Nouaceur), in the context of project preparation. Follow-up work on the regulatory environment would be conducted during project preparation. Project Benefits 10. The proposed project would contribute to enhancing the competitiveness of private industrial enterprises through reducing costs of doing business (such as industrial land costs, transactions costs, and trade facilitation) and environmental and safety hazards associated with existing industrial zones. Indirect benefits include: (a) attracting foreign investment; (b) encouraging private financing and provision of industrial infrastructure; and (c) creating substantial local employment opportunities. Project Implementation 11. The proposed project will be implemented by the Ministry of Commerce and Industry, as well as private developers. The Ministry will use the services of architectural and legal firms to assist in the feasibility study, bid document preparation, bid award, construction supervision, and commissioning of the project. The project contracts will be awarded according to the Bank's ICB procurement guidelines. -3 -  Project Cost and Financing 12. Total project costs are tentatively estimated at $100 million, with a possible partial risk guarantee of $50 million. The possible use of the Bank's partial guarantee instrument will be discussed with the GOM and prospective DMCs by the preparation mission. The IFC has also shown interest in participating in the project following the selection of DMCs. Lessons Learned from Past Operations in the Country/Sector 13. The design of this project will draw on the lessons learned from the development of privately built and managed industrial parks, mainly in East Asia. Poverty Category 14. Not applicable. Environmental Aspects 15. Consistent with the requirements of OD 4.01, the project is proposed to be classified in environmental screening category "A". Program Objective Categories 16. The proposed project, by enhancing the overall competitiveness of private industrial enterprises, directly addresses a wide array of private industry development issues. 1/ The shortage of skilled labor in these isolated areas, greater distance from maintenance and port services, the lack of amenities for workers, and distance from administrative and utility centers are some of the reasons for unattractiveness of the zones. The advantage of cheap land cannot compensate for operational problems in most of the zones, especially as zones themselves seldom provide the infrastructural services usually expected. 2/ For example, 350 private investment proposals in the Tangier area are pending the establishment of more industrial zones. In addition, it is estimated that for the city of Casablanca alone, 800 hectares of new industrial land must be put in use in order to create 80,000 new employment by year 2000. By the same year, the supply of industrial land must increase by 1,300 hectares in order to sustain 235,000 employees in the industrial sector in the metropolitan area of Casablanca. A 1994 study of foreign investment climate in Morocco (by Price Waterhouse under IFC/MIGA sponsorship) indicates that the price per m2 of industrial land in Casablanca is more than double that of Tunis, and in Tangier more than double of Marseilles and Valencia. 3/ -4-  For example, in most cases, streets and access roads are constructed only as lots are sold, often with delay. Investors are often expected to contribute the funds needed to complete the construction and maintenance of public roads, which are the responsibility of the municipalities. 4/ This would require regulating the issuance and trading of these bonds by the Stock Exchange Council. 5/ Nouaceur industrial park consists of 120 hectares of flat land with slopes 2%, and is adjacent to the Casablanca Mohammed V airport. It is reached from the entrance road to the airport by passing through an industrial area presently being developed by Office National des Aeroports. On the east, the park is served by a highway between Casablanca and Marrakech. Jorf Lasfar industrial park comprises 150 hectares of flat land with slopes of 5%. It is near the Port of Jorf Lasfar south of the city of El Jadida, and is located northeast of the intersection of the divided highway to El Jadida. 6/ The modalities for reimbursing the developer for investment costs in case of land purchase by enterprises will be included in lease documents. 7/ Examples of the contractual obligations include government commitment to allow (i) foreign investment and participation, (ii) imports of raw material, capital goods, and components according to pre-specified tariff schedules, and (iii) project sponsors to purchase and remit sufficient foreign exchange at the prevailing exchange rate to service the project's private loans, as well as commitments specified in lease contracts. Contact Point: Mr. H. Alavi, Task Manager The World Bank 1818 H Street N.W. Washington D.C. 20433 Telephone No.: (202)473-2221 Fax No.: (202)522-1500 Note: This is information on an evolving project. Certain components may not necessarily be included in the final project. Processed by the Public Information Center week ending March 21, 1997 - 5 -