Morocco - Industrial Export Finance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16497 IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO INDUSTRIAL EXPORT FINANCE PROJECT (Loans 28060-28067-MOR) April 18, 1997 Private Sector Development, Finance and Infrastructure Division Maghreb and Iran Department Middle East and North Africa Regional Region 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.  CURRENCY EQUIVALENTS Currency Unit = Dirham (DH) DH1.00 = US$0.12 US$1.00 = DH8.52 1980 1985 1990 1991 1992 1993 1994 1995 DH per US$ 4.334 9.621 8.043 8.15 9.049 9.651 8.96 8.469 (end of period)__ _ _ _ _ _ _ DH per US$ 3.937 10.062 8.242 8.707 8.538 9.299 9.2 8.52 (period average) WEIGHTS AND MEASURES Metric System ABBREVIATIONS AND ACRONYMS BCM Banque Commerciale du Maroc BCP Banque Centrale Populaire BMCE Banque Marocaine du Commerce Exterieur BMCI Banque Marocaine pour le Commerce et l'Industrie BNDE Banque Nationale pour le Developpement Economique CDM Credit du Maroc SAL Structural Adjustment Loan SGMB Societe Generale Marocaine de Banque FISCAL YEAR January 1 - December 31 Vice President Mr. Kemal Dervi~ Director Mr. Daniel Ritchie Division Chief Mr. Amir AI-Khafaji Responsible Staff Mr. Lorenzo Savorelli, Financial Economist Mr. Mauro Chiesa, PSD Specialist Mr. Alexandru Munteanu, Consultant  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO INDUSTRIAL EXPORT FINANCE PROJECT (Loans 28060-28067-MOR) TABLE OF CONTENTS Page PREFACE.......................................................................................................... EVALUATION SUMMARY .i PART I: PROJECT IMPLEMENTATION ASSESSMENT .1 A. Statement/Evaluation of Objectives ..................................... 1 Objectives ............................................1 Components ............................................1 Country Strategy Role ............................................1 B. Achievement of Objectives ........................................... 2 Capacity Investments ............................................2 Quality of Investment Performance Indicators ..................... 2 Explicit Investment Performance Indicators ........................ 3 Implicit Investment Performance Indicators ........................ 4 Improving the Economic and Administrative for Framework for Exporters ............................................6 Strengthening the Institutional Capabilities of Financial and Other Institutions ............................................7 C. Major Factors Affecting the Project ...................................... 8 D. Project Sustainability ............................................8 E. Bank Performance ............................................9 F. Borrower/GOM Performance ........................................... 10 G. Assessment of Outcome ........................................... 11 H. hmmediate Portfolio Action ........................................... 11 I. Lessons Learned ........................................... 11 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.  PART II: STATISTICAL INFORM ATION .......................................... 13 Table of Contents .................................................. 13 APPENDICES .................................................. 52 A. Chart Showing Export Performance ................................ 52 B. Map of Morocco No 28373 .53  IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO INDUSTRIAL EXPORT FINANCE PROJECT (Loans 28060-28067-MOR) PREFACE This is the Implementation Completion Report (ICR) for the Industrial Export Finance Project (IEFP) loans in the Kingdom of Morocco. The eight loans are to seven private sector commercial banks and one public sector development bank and total US$70 million. Approved by the Board on May 5, 1987 and signed on July 27, 1987, effectiveness occurred between Jan. 28 and Mar. 16, 1988 as the individual borrowers fulfilled their respective obligations. The loans closed on Dec. 31, 1995, with US$66.0 million disbursed for 82 allocations. This ICR was prepared by Mauro Chiesa and Alexandru Munteanu of the Private Sector, Finance, and Infrastructure Division, Country Department I, of the Middle East and North Africa Region and was reviewed by Charles Sterling, Financial Analyst, by Amir Al-Khafaji, Division Chief, and by Rene Costa, Project Advisor, Country Department I. Preparation of the ICR was based on material in the project files and interviews with prior task managers who supervised the project and with public and private sector representatives in Morocco connected with these loans. Preparation was substantially delayed due to poor supervision of both the investment components and the institutional reform components, by both the Bank and the agencies. The report has been sent for comment to the Government of Morocco.   i IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO INDUSTRIAL EXPORT FINANCE PROJECT (Loans 28060-28067-MOR) EVALUATION SUMMARY Introduction The US$70m Industrial Export Finance Project (IEFP) was the first attempt, within an extensive financial sector development program comprising nine projects, to target both the investment needs and the institutional reform needs of the exporting community of Morocco. The IEFP met essentially all of its project timetable milestones, with the only variance being a four month delay in effectiveness. The loans were 96 percent disbursed. Based on the speed of subscription and disbursement, a subsequent project, the US$170m Industrial Finance Project (IFP) was designed for both the exporting and the domestic industrial sector. The IFP had even higher milestone and disbursement rate success. Project Objectives and Design 1. The objectives of the IEFP were to: (a) expand the base for manufactured exports, by finncing investments and helping develop export marketing capabilities; (b) strengthen the export promotion and appraisal capacities of the each borrowing bank; and (c) improve the economic and administrative conditions under which exporters operate. 2. The US$70m IEFP project comprised two programs: (a) a US$69.7m investment program to finance capital investments by the exporting sector and technical assistance programs for the commercial banks that borrowed and on-lent the funds; and (b) a $0.3m program to finance the training of BNDE staff to assist exporters in carrying out industrial subsector feasibility studies. The former program lent funds to seven private sector banks (60 percent of funds) and one public sector development bank (40 percent of funds) to finance: (a) capital investment plans by the exporters, (b) working capital needs of the exporters, and (c) the banks' own institutional expansion program in the area of export financing. The latter two objectives were never pursued by the exporters or the banks. To be eligible for financing under the IEFP, the capital investment projects had to: (a) have a minimum of new production capacity dedicated to the export market, (b) demonstrate a minimum IRR of 12 percent and (c) be at least 40 percent financed. The eight loans to the eight banks bore repayment terms of 15 years, while the sub-borrowers generally enjoyed terms in the 4-8 year range. The mismatch in repayment terms was designed to allow the banks to relend (or "recycle") the funds to subsequent eligible projects prior to their maturity under the 15- year IEFP loan. 3. The Government had undertaken to execute a series of reforms to achieve the third objective. This included the improvement of the fiscal, financial, and administrative environment through a VAT exemption on certain eligible goods; the earlier release of bank guarantees related  ii to imported materials; and having three Government agencies undertake reviews of procedures on documentation, industrial analysis, and export promotion. These reforms were parallel to those of the banks, with no linkage between either the public agencies or the components. The Government assumed all foreign exchange risk borne by the banks. Evaluation of Objectives 4. According to the Staff Appraisal Report (SAR), the investment program's targeting of the export sector was justified by observed underinvestment in a sector which was capable of generating foreign currency earnings at a time of foreign currency shortage. The institutional reforms were justified by observed limitations in the institutional framework in which exporters had to operate, in terms of both the administration and financial infrastructure. 5. The initial subscription and disbursement success support the validity of the investment objective, as do the subsequently observed success of exporters, the improved value-added of certain industrial sectors, and the exporting success of Morocco in general. The initial success, however unfortunately reduced the perceived need for vital supervision to ensure recycling and modification of terms to reflect the changing needs and domestic capital markets. 6. The extent of the institutional reforms needed and the time required for their implementation were both underestimated. In addition, the investment program and the institutional reform program were never linked through conditionality, as they should have been. Also, the IEFP and the IFP never supported each other through shared conditionality, even though they shared common target sectors. The institutional reform program involved several Government agencies which were not functionally linked and which had no common implementation agency. There was also a lack of any implementation or performance indicators. Implementation Experience and Results The assessment of performance was hampered by several factors, including poor supervision by the Bank (one visit during a four-year period) and poor communication of eligibility and performance criteria by the Bank. It took the Bank nine years to issue a reporting format for the investment component; the Borrowers have performed commendably, given such lateness. 7. Initial investments. The initial subprojects (82 allocations) performed superbly, exceeding both the return and the exporting eligibility criteria. Ninety-one percent of funds went into the food, textile, garment, and equipment industries, whose export value-added rose from 52 to 62 percent in the 1985-91 period. Regional distribution was diffuse and generally consistent with population distribution and lending went to both large and small businesses on a proportionate basis. Lending tended to be in small amounts, clearly skewed by the Bank's lending limit (approx. US$ 500,000). With 14 of the allocations being for common Borrowers, and practically all problem credits being either restructured or repaid, the Borrowers demonstrated good risk-sharing and management skills. Business failures were generally associated with factors exogenous to the IEFP, such as droughts, trade disputes, the Persian Gulf war and limited management skills. No funds were drawn by the banks for their training needs in the area of export finance. 8. The Borrowing Banks were supposed to recycle the repaid funds from the initial subloans during subsequent periods until the IEFP loan came due. This did not occur as the Bank did not properly supervise and implement the process. There was also no mechanism within the IEFP loan  iii structure to limit this variance, and to control the inherent interest of the Borrowing Banks in benefiting from long-term deposits, which they were not required to either relend or prepay. As domestic interest rates were substantially higher than the IEFP rates, the interest arbitrage was also attractive. The result was that the IEFP essentially recapitalized seven private sector banks and one public sector development bank with long-term deposits, the proceeds of which did not serve the intended purpose. 9. Institutional reforms. Modest design features, lack of performance indicators, no centralized or linked implementation agency, lack of supervision, no communication with other aid agencies, and no linkage to subsequent operations all undermined implementation and the assessment thereof. Anecdotal evidence suggests that some reforms occurred, albeit very late. The institutional reforms were intended to facilitate the export community's access to new markets. Given the initial success of the investment program and the lateness of the reforms, the additional export capacity financed by the IEFP may not have enabled exporters to access foreign markets, but displaced domestic markets instead. 10. Sustainability. Sampled results from the portfolio of initial subloans indicate that the loans supported, (a) higher value-added industrial sectors, (b) well-managed sub-borrowers, and (c) a generally robust expansion of the export sector during the implementation period of 1989-93. The lack of recycling of funds by the IEFP and the tardy implementation of sectoral reforms by the GOM, however, suggests that additional opportunities for sustainable development were not pursued. 11. Bank/Borrower performance. The number of Moroccan public institutions involved in the sectoral reform program, the number of Moroccan banks involved in the investment program, the size of each subloan, and the high supervision needs of the recycling program suggests that projects such as the IEFP are high-maintenance assets. The lack of supervision and communication by the Bank is therefore not acceptable. The Borrowers' commendable responses to our tardy requests for information suggest that the capacity existed to cooperate, had the Bank only required it. Assessment of Outcome 12. The IEFP is rated unsatisfactory overall. This reflects (a) the initial satisfactory outcome of the investment program, which unfortunately was not supervised and implemented by the Bank during the subsequent recycling period; and (b) the poor design of the institutional reform program and the poor supervision and implementation thereof by the Bank. Immediate Portfolio Action and Lessons Learned 13. IEFP. The US$66m, 15-year loans started repayment in 1991 and will finish in 2002. The remaining terms are no longer competitive with the local market. Pre-payment penalties should be waived so as to encourage pre-payment and free up the GOM counter-guarantee for worthier needs. 14. IFP. The US$169m, 20-year loans were signed in 1990 and have a 20-year repayment term, leaving a substantially larger potential for amendments and recycling so as to avoid the errors and costs of the IEFP. Post-closing date supervision and implementation of a loan recycling program are recommended so as to meet the original objectives for the term and to avoid  iv recapitalizing domestic private sector institutions with foreign currency and tying up a valuable counter-guarantee. If no interest is expressed, the Bank should encourage pre-payment as above. Lessons Learned 15. * Institutional reform components which deal with a variety of agencies require a central implementing agency, interlinked and realistic components, performance indicators, linkage with other aid agencies, and supervision. * Recycling of funds is an excellent loan feature, but one that requires continuous communication and supervision, often beyond closing dates, if its potential is to be achieved. *Mid-term reviews and 'retrofitting" of the various terms on an as needed basis could, in the future avoid many of the problems described above.  I IMPLEMENTATION COMPLETION REPORT MOROCCO INDUSTRIAL EXPORT FINANCE PROJECT (LOANS 28060-28067 - MOR) PART I: PROJECT IMPLFMENTATION ASSESSMENT A. Statement/Evaluation of Obiectives Objectives 1. The Industrial Export Finance Project (IEFP, or 'the project') was designed to help develop the capacity of export-oriented industries and reform the institutional framework in which they must function. In line with the Industrial and Trade Policy Adjustment (ITPA) program, its objectives were to continue improving the economic and administrative framework, with a particular focus on exporters. Specifically, the project's objectives were to: (a) expand the base of manufactured exports, by financing investments in export industries and helping develop export marketing capabilities; (b) improve the economic and administrative conditions under which exporters operate and overcome the anti-export bias that prevailed in the country; and (c) strengthen the promotion and appraisal capabilities of financial and other institutions concemed with export sector expansion. Components 2. The project consisted of two components: an investment component and a technical assistance component. In aggregate, there were eight Bank loans totaling US$70 million. US$69.7 million was in the form of lines of credit to eight financial internediaries -- one public sector development bank (BNDE) and seven commercial banks (BCM, BCP, BMCE, BMCI, CDM, SGMB, and WAFABANK) -- and US$0.3 million was intended for the training of and technical support for BNDE staff to enable them to assist exporters and carry out industrial subsector studies. The lines of credit were to finance eligible export-oriented investment projects of industrial enterprises. Table 4B shows the performance (loan disbursements) of individual banks. The technical assistance component was to finance consultant and advisory services for training BNDE's staff and provide them with technical support for undertaking studies of various industrial subsectors. Country Strategy Role 3. The IEFP was part of the Bank's long term strategy to support Morocco's industrial and trade policy adjustment process, which has been ongoing since 1983. See Table 2 for related Bank activity in Morocco. Besides the IEFP, this strategy was supported by three earlier Bank-financed operations, namely two ITPA loans and the Electrical and Mechanical Industry (EMI) Project. The implementation of the ITPA program was already having positive effects, with manufactured exports increasing by 14 percent in 1985. However, total exports of goods and nonfactor services increased by only 2.5 percent in constant prices due to the poor performance of the phosphate sector and the foreign debt of Morocco, which was substantial at 88 percent of GDP. It was felt that for Morocco to overcome the debt problem and achieve positive economic growth, manufactured exports should grow by more than 15 percent a year over the next decade.  2 The required linkage between manufactured exports and growth was correct. Manufactured exports increased by an average annual rate of 15.1 percent during 1987-90, but declined by an average annual rate of 3.4 percent during 1990-921. See Chart 1 for details. As a result, GDP grew by an average annual rate of 3.9 percent during 1988-91, and contracted by 4.4 percent in 19922. Chart 1 indicates Morocco's export experience within the elapsed timeframe of the IEFP. 4. The project's investment objective of supporting the development of export-oriented productive capacity was valid, since capacity utilization in the export industries was estimated at 75 percent in 1984 and was increasing as approval of the project approached in 1987. The sizable pipeline of export-oriented investment projects substantiated this assessment. This demand was confirmed by the rapid utilization of the lines of credit and an expanded industrial sector. This, in turn, would have provided a better-than-expected timeframe for the effectiveness of the institutional reform component, had it taken place. However, with the additional export capacity in place and no facilitating institutional reform, the new exporting capacity could not find foreign markets and may have contributed to a surplus on the domestic market, possibly explaining the recently slowing growth rate indicated in the chart. B. Achievement of Obiectives Capacity Investments 5. The success in the pace of utilization of the credit component was partially due to the substantial experience in term lending acquired by the Moroccan banks under a number of earlier Bank-financed projects. In addition, as of October 1986, there was a pent-up demand for investment credit in export-oriented projects, which was estimated at a level (US$96 million) exceeding the Bank loan amount. By January 1989, i.e., some 20 months ahead of the final date for submission of subloan applicatiors, 90 percent of the total loan amount extended as lines of credit was committed. Tables 4A and 4B indicate the rapid disbursement rate across all banks. Only two participating banks, BMCI and CDM, requested minimal extensions of the final date for submission of subloan applications, to March 31, 1991 and September 30, 1991 respectively. Because the average disbursement period for subloans under the IF (industrial finance) was approximately 16 months, these extensions did not affect the original closing date of December 31, 1995, which was maintained. With the final disbursement taking place on January 28, 1994, 94.3 percent (US$66.0 million) of the aggregate loan amount was disbursed; cancellations amounted to 5.7 percent (US$4.0 million). Table 3 provides the timetable. Quality of Investment Performance Indicators 6. The IEFP's objective of financing investments in export-oriented enterprises cannot be accurately assessed because of the lack of Bank-required data on the actual performance of subprojects in terms of absolute or relative export performance. It was required that the participating banks provide the Bank with annual reports on the implementation status of subprojects and sub-borrowers and their export performance during the three years following See Kingdom of Morocco - Republic of Tunisia. Export Growth: Determinants and Prospects, World Bank report no. 12947-MNA, October 1994. 2 See Kingdom of Morocco. Country Economic Memorandum: Toward Higher Growth and Employment, World Bank report no. 14155-MOR, September 15, 1995.  3 completion of each individual subproject. No such reports were ever specified by the Bank, however; hence none was ever submitted and, in the November 1990 to December 1995 period, only one mission took place in February 1992 the principal focus of which was the subsequent loans. With no periodic and systematic monitoring of subproject implementation, particularly in terms of export performance, credit performance, manpower generation, and financial sector performance and economic sustainability, it is not possible to fully evaluate the effectiveness of this program. In December 1995 the Bank undertook a mission to verbally emphasize the information requirements. After the performance information was forwarded by the banks in April through June 1996, the Bank then issued an information outline and undertook a second mission to finalize a basic database. The Borrowers appreciated the information outline, which was the first that they had seen advanced by the Bank, but noted that much time had passed. Given such a timelag, all Borrowers performed commendably in responding to our request. Table 6 includes the responses of the Borrowers to our most recent request. The information outline was also used to emphasize the similar needs of the US$170m Industrial Project Financing Program (Loan 3136), which was signed in 1990, involved the same banks, suffered from the same supervision deficiencies, and closed on June 30, 1996. The performance criteria for the IEFP were as follows. Explicit Investment Performance Indicators 7. There were no explicit investment performance indicators. The original criteria for eligibility were that (a) at least 40 percent of the additional production attributable to the investment was to be exported, (b) the internal rate of return had to be at least 12 percent, and (c) equity funding of the project had to be at least 30 percent. The exporting volume standard was not a meaningful measure, for several reasons. External factors such as the country's trade and political policies and a severe drought hampered the textile and food-related sectors. It should also be noted that export volume is by no means the only measure of success, since product quality, delivery, pricing, and distribution systems are also meaningful barometers of export success. Furthermore, many of the investments justifiably went into distribution assets and production de- bottlenecking, which do not necessarily mean higher export volumes although they result in much healthier margins and/or better products. The financial return criteria were also questionable, since investments could be joint, common, or stand-alone. Often capacity expansion projects and 'greenfield" projects cannot be adequately measured by returns alone, since other factors such as marketing and quality are also involved. The equity benchmark is more of an input criterion, and bears little relevance to the various sectors. Most problematic is that there was never any follow- up outline or enforcement by the Bank, thereby depriving the project of the necessary adjustments to more meaningful benchmarks. 8. Under the loan agreements, the financial performance of the sub-borrowers was to be monitored for the first three years after start-up of the project; unfortunately, there was little follow-up during the 1990-95 period. Based on the information that was built from June 1996 to date, the following results show an impressive economic performance.  4 Criterion Respondents Average Current D/E* Ratio' 58 > 78 % IRR* 27 32 % New Employment* 25 100 D/E** 13 0.88:1 ('domestic revenue to export revenue ratio), as estimated by the borrowing bank) ( * * actual ratios, as reported by company) As indicated, only 13 of the subloans (SGMB and BCM) had comprehensive data for the "overall" three-year period reported. The remainder of the subloans represented partially reported data. The results, albeit not comprehensive, suggest a substantial positive economic impact. As indicated in the bar charts found in Table 6, which show revenue experiences for the sub-borrowers, there is a basis to suggest that the project is economically sustainable. Implicit Investment Performance Indicators 9. Sectoral performance. The subloans were segmented by industrial sector. The following indicates the value-added to the economy for each sector. Sector Subloans Val. Added (%/6) (%/0) 1985 1991 Food (processed) industries 12.2 26 31 Textiles and garment 73.8 16 25 Machinery, transport, and equipment 6.0 10 6 Source: World Development Report 1994. The Borrowers had a clear emphasis on textiles and garments, which increased from 16 to 25 percent of the export value-added, followed by agribusiness, which also improved. Since textiles are less prone to droughts then is agriculture, the diversification suggests an increasingly less volatile, less seasonal, and more sustainable export sector. 10. Regional distribution. The sub-borrowers were grouped pursuant to GOM 1994 census categorization and population distribution. The following table suggests that the center and northwest regions, with 56 percent of the population, received 71 percent of the lending. Many regions saw substantial lending activity, while the center, which contains Casablanca, was well  5 above average, and the poorer, more and south was well below average. Tables 14 and 15 provide a more detailed dispersion by province and region. See also Appendix B. Region Share of Population Share of Subloans (%/0) (%/0) Center 31.5 46.2 Center-North 9.6 4.3 Center-South 7.2 8.9 Northwest 24.8 24.5 East 7.3 8.0 South 9.7 2.1 Tensift 9.9 5.6 Source: Recensement 1994, Ministere charge de la population. 11. Size of sub-borrower. Dividing the sub-borrowers by sales volume, with the threshold being an annual turnover of DH150mk, lending volume was perfectly proportional to the number of transactions for each category. This was unique, since large clients tend to develop larger transactions and require larger amounts. Borrowers No. of Loans (%) Amounts (