Morocco - Contractual Savings Development Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No.: 20282-MOR IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO CONTRACTUAL SAVINGS DEVELOPMENT LOAN (Loan No. 43400-1) April 27, 2000 Private and Financial Sectors Development Department Middle East and North Africa 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 as of December 1999 Currency Unit = Dirham (DH) DH 1.00 = US$0.0997 US$1.00 = DH10.031 ABBREVIATIONS AND ACRONYMS BAM Bank Al-Maghrib (Central Bank) AfDB African Development Bank BNDE Banque Nationale pour le Developpement Economique (National Bank for Economic Development) BSF Bons des Societes Financieres (Finance Company Debentures) CD Certificat de Dep6t (Certificate of Deposit) CDG Caisse de Dep6t et de Gestion (Deposit and Management Fund) CDPQ Caisse de Dep6t et Placement du Quebec (Quebec Deposit and Investment Fund) CDVM Conseil Deontologique des Valeurs Mobilieres (Securities Ethics Council) CEN Caisse d 'Epargne Nationale (National Savings Fund) CIH Credit Immobilier et H6telier (a real estate and hotel lending facility) CIMR Caisse Interprofessionnelle Marocaine de Retraites (a pension fund) CMR Caisse Marocaine des Retraites (a pension fund) CNSS Caisse Nationale de Securite Sociale (National Social .Security Fund) CSEA Comite de Suivi des Etudes Actuarielles (Actuarial Studies Monitoring Committee) DAPS Direction des Assurances et de la Prevoyance Sociale (Social Protection and Insurance (Department inside the Ministry of Finance) DH Moroccan Dirham (Currency) CS Contractual Savings FCP Fonds Commun de Placement (Money-Market Mutual Fund) FEC Fonds d'Equipement Communal (local government infrastructure fund) IMF International Monetary Fund FMSA Federation Marocaine des Societes d'Assurance (Moroccan Insurance Association) IFS Institutionsfinancieres specialis&es (specialized financial institutions) OCP Office Cherifien des Phosphates (Moroccan Phosphates Office) ODEP Office d'Exploitation des Ports (Port Authority) ONE' Office National d'Electricite (National Electricity Authority) ONPT Office National des Postes et T1elcommunications (National Posts and Telecommunications Office) OPCVM Organismes de Placement Collectifde Valeurs Mobilieres (mutual fund institutions) PEP Plancher d 'Effets Publics (Mandatory Treasury Placements) GDP Gross Domestic Product RCAR Regime Collectifd 'Allocation de Retraite (a pension fund) SBVC Societe des Bourses de Valeurs de Casablanca (Casablanca Securities Exchange) TCN Titres de Creance Negociables (Negotiable Debt Instruments or Securities) MOROCCO FISCAL YEAR July 1- June 30 Vice President Kemal Dervis Group Manager: Christian Delvoie Sector Manager: Wafik Grais Task Manager: Lorenzo Savorelli  FOR OMCIL USE ONLY IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO CONTRACTUAL SAVINGS DEVELOPMENT LOAN (Loan No. 43400-1) 1. PROJECT DATA ................................................................ 1 2. PRINCIPAL PERFORMANCE RATINGS ................................................................ 1 3. ASSESSMENT OF DEVELOPMENT OBJECTIVES AND DESIGN AND OF QUALITY AT ENTRY ...............2 3.1 Original Objective ............................................................... 2 3.2 Original Components ............................................................... 2 3.3 Quality at Entry ............................................................... 2 4. ACHIEVEMENT OF OBJECTIVES AND OUTPUTS ................................................................ 3 4.1 Outcome/Achievement of Objectives ................................................................ 3 4.2 Output by components ............................................................... 6 4.3 Institutional Development Impact ............................................................... 9 5. MAJOR FACTORS AFFECTING PROJECT IMPLEMENTATION AND OUTCOME . ...................................... 9 5.1 Factors beyond the Borrower's control ............................................................... 9 5.2 Factors within the Borrower's control ............................................................... 10 6. SUSTAINABILITY OF THE REFORMS ............................................................... 10 7. BANK AND BORROWER PERFORMANCE ............................................................... 11 7.1 Overall Bank Performance ............................................................... 11 7.2 Borrower's Overall Performance ............................................................... 12 8. LESSONS LEARNED ................ 12 9. PARTNER COMMENTS ................ 13 ANNEXES: Statistical Tables Annex 1: Table 1 Monitoring Indicators Table 2 Amount of Reserves (in billion DH) Table 3 Securities Market Table 4 Capital Market Issues/Listings, 1995-1998 Table 5 New Company Listings on the Casablanca Stock Exchange in 1998 and 1999 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwis be disclosed without World Bank authorizaion.  ii Table 6 Amount of Transfers from the Insurance Solidarity Fund to Liquidated Insurance Companies as of November 1999 (in million DH) Table 7 Liquidated Insurance Companies - Assets Sold (in million DH) Annex 2: Project Costs and Financing Annex 3: Bank Inputs Annex 4: Rating for Achievement of Objectives Annex 5: Ratings of Bank and Borrower Performance 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.  1. PROJECT DATA Project identifier: P047582 Project Name: Contractual Savings Development Loan Team leader: Lorenzo Savorelll Department. MNSPF Type of completion report: Core ICR Date of report: 30 November 1999 Name: Contractual Savings Development Loan Loan Number: 43400; 43401 Country: Morocco Region: North Africa and Middle East Sector: Other financial KEY DATES Original Actual PCD. 08 May 97 Effectiveness: 06/24/98 Appraisal: 28 August 97 MTR. Approval: 9 June 98 Closing: 12/31/98 12/31/98 Borrower: Govemment of Morocco, Ministry of Finance STAFF CURRENT AT APPRAISAL Vice President: Kemal Dervi, Kemal Dervi, Regional Manager: Christian Delvoie Christian Delvoie Sector Manager: Wafik Grais Nemat Shafik Team Leader: Lorenzo Savorelli Lorenzo Savorelli2 ICR Author: Leila El Hafi 2. PRINCIPAL PERFORMANCE RATINGS Outcome: Satisfactory Sustainability: Likely Institutional Development Impact: Satisfactory Bank Performance: Satisfactory Borrower Performance: Modest QAG (if available) ICR Quality at Entry: Satisfactory Satisfactory Program at risk at any time: No No Mr. Denis Chaput was Tearn Leader between September 1997 and January 1999, i.e. during negotiations, Board submission, and supervision.  2 3. ASSESSMENT OF DEVELOPMENT OBJECTIVES AND DESIGN AND OF QUALITY AT ENTRY 3.1 Original Objective The principal objective of the loan was to promote greater efficiency in mobilizing savings and in channeling them into private investment by reforming the country's contractual savings institutions -- the insurance companies, savings banks and the pension system. This objective was based on the premise that two important elements were required to put Morocco on a stronger growth path: a higher level of contractual savings, implying greater availability of long-term resources, and better allocation of these resources. The objective was and remains relevant and clear. It was established in light of the conclusions of the Country Assistance Strategy, which pointed to the low level of contractual savings and the inadequate supply of long-term resources as factors increasing the cost of capital and consequently undermining the competitiveness of the economy. The reform of the pension system and insurance companies was also aimed at overcoming other difficulties: the weakness of the insurance sector and the plethora of non-transparent pension funds of doubtful viability. This objective was neither unrealistic nor too ambitious for the Borrower, given the context at the time, where the Government had decided to reinforce the regulatory and institutional framework of the financial sector. 3.2 Original Components The proposed measures were aimed at improving the mobilization of savings by reforming the institutional savings system in the following ways: (a) completing the financial restructuring of the insurance sector, and improving its solidity and image; (b) improving the efficiency, transparency and financial viability of the existing pension system, and developing supplementary capitalized pension funds; (c) promoting the role of CDG from deposit taker to fund manager, through mechanisms for collecting, administering and allocating the financial resources of the pension system and savings banks; and (d) strengthening capital market infrastructure and expanding the range of instruments available to institutional investors. As things stand, for lack of viable alternatives, most of the funds collected by insurance companies and pension funds are placed in Treasury bonds or in securities issued by financial institutions. The virtual absence of private, non-financial issuers in effect makes it very difficult to reallocate these long-term resources into productive investments in the economy. The loan program therefore stressed the regulatory environment rather than specific efforts to encourage the issuance of securities by the private non-financial sector. 3.3 Quality at Entry The quality of this program at entry was satisfactory. The objectives established in the program were consistent with the CAS and enjoyed government support. The program's design was considered realistic in calling for a series of concrete steps, prior to submission to the Bank's Board, that would confirm the Borrower's commitment to action over the medium term. The Bank had referred in its Report to the President to the risk surrounding the Borrower's commitment to carry out the pension reform. This commitment seemed in fact weakened with the change of Government. On the other hand, the recent context shows a renewal of interest on the part of the Governmnent, and a willingness to speed up the pace of reform. After conducting an assessment of project quality at entry, the Quality Assurance Group concluded that the loan was satisfactorily prepared: it was properly targeted on improving the regulatory and institutional setting for promoting contractual savings, and in particular long-term savings. The loan was well designed, according to the QAG, as the first in a series of operations that over the long run  3 would contribute significantly to improving the functioning of financial markets, the pension systems and the insurance sector, and to the development of new financial instruments. The program was a complex one, however, and in the opinion of the QAG raised questions as to the Bank's regional capacity to pursue further operations, as well as the Borrower's readiness to continue with the present one. 4. ACHIEVEMENT OF OBJECTIVES AND OUTPUTS 4.1 Outcome/Achievement of Objectives The achievement of program objectives was judged satisfactory. This judgment flows from an assessment focused on two concerns. The first was the degree of implementation of the policy measures agreed between the Bank and the Borrower and the institutional reforms that were undertaken; the second was the relevance of these reforms in attaining program objectives. All policy measures associated with the program, which were prerequisites for submission of the loan to the Board for its approval, were carried out. While the loan was a single tranche operation, it called for medium- and long-term measures. The record on these measures, in particular those relating to pension reform and the legislative and regulatory framework, wasalmost completed at the date this ICR was prepared, i.e. 18 months after signature of the loan. The major institutional impact involved CDG and its transformation from a deposit taker into an active funds manager, a significant accomplishment for the program. The creation of OPVCMs to manage CEN and CNSS funds and the indexing of yields on these funds to market rates, among other measures, represented important progress, and a highly positive cultural shift. The first level of appraisal is therefore considered satisfactory. The second focus of concern, assessment of the relevance of actions proposed under the program as the means of attaining the objectives in view, can be judged on the basis of performnance indicators. The positive flows generated by the technical reserves of insurance companies and pension funds are a sign of improvement in both the mobilization and allocation of savings (See Annex 1). Rationalization of the insurance companies, and the enhanced transparency of the pension funds (the result of better understanding of their workings), were essential factors in strengthening their reserves. However, a competitive market for financial instruments has been slow to emerge. Non- financial agents are little given to issuing bonds or securities to meet their financing needs. A bond issue would require unaccustomed transparency on the part of such firms, for which bank loans are an attractive alternative, especially at a time of falling interest rates. The issuing of securities thus remains the preserve of the banks and finance companies. In any event, reform of the pension system is a goal that requires a long-term approach, and it is difficult at this time to judge how relevant the reforms proposed will prove, given the lack of an action plan (although one is expected very shortly). Achievement of this objective has been only partial so far, and any further advance depends on subsequent action by both the Borrower and the Bank. The means decided on for achieving these objectives are clearly important, but may be found insufficient as far as development of a competitive securities market is concerned.  4 Table 1: Indicators Monitoring period Estimated Actual Estimated Actual Estimated 1997 1997 1998 1998 1999 Performance Indicators Flow of contractual savings (CS)IGDP 2.5 2.9 3.0 3.1 3.5 Treasury fmnancing from CS/flow of CS 50.0 93.5 46.0 49.4 45.0 Equities & securities issues/net flow of bank credit 44.0 59.2 45.0 40.3 46.0 Assumptions/Preconditions for success 3 Government deficit/GDP 4.1 3.2 2.9 2.3 2.0 Recurrent expenditure/Total expenditure 85.0 83.3 81.9 83.1 80.9 For the most part, these indicators were satisfactory: Ratio of contractual savings flow/GDP: The target set for this ratio was more than met in 1997 and 1998. Net accumulation of technical reserves by insurance companies and pension funds was DH 9.1 billion in 1997 and DH 10.4 billion in 1998. The positive trend of flows in 1997 and 1998 (see Table 2, Annex 1) is explained essentially by the following: (a) Insurance companies accumulated additional technical reserves of DH 4 billion over two successive years (1996/97 and 1997/98), as a result of rationalization efforts targeting the insurance industry, which saw new technical reserve rules introduced to cover its liabilities. (b) RCAR/CNRA increased its reserves by DH 1.7 billion in 1997 and DH 2.06 billion in 1998, thanks to the growing ranks of its members and the consequent increase in its statutory and technical provisions. (c) CMR contributed DH 1.98 billion to the change in reserves recorded for 1998. Until November 1996, CMR was an entity forming part of the Ministry of Finance. Since then, it has developed as a public autonomous entity that manages its own funds. (d) CNSS contributed some DH 1 billion to the change in reserve flows in 1997, and slightly less in 1998 (DH 0.97 billion). It must be noted, however, that for the third year running CNSS has failed to make any payment to CDG, although the loan program called for CNSS to transfer all its new deposits to the OPCVM "CDG-Secur," plus 10% of its stock of existing deposits with CDG. The increase in CNSS assets is thus due entirely to capitalized interest on its existing deposits. (e) The slowdown noted in the case of CNSS can also be seen in the case of CEN, which helped to increase reserves to DH 0.26 billion in 1998, compared to DH 0.80 billion in 1997. (f) The deceleration was also noted in the case of internal pension schemes flows (DH 0.46 billion in 1998 versus 1.21 billion in 1997). 3 Macro-economic data are running from June 1997 to June 1998 for 1997, and June 1998 to June 1999 for 1998.  5