Morocco - Second Highway Project

CIRCULATING COPY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1336-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR A HIGHWAY PROJECT November 13, 1973 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Unit 1/ Dirham (Dh) US $ 1 Dh 3.90 Dh 1 US $ 0.26 Dh 1,000 = US $ 260.00 Dh l,OOO,OOO US $ 260,000 1/ Adjusted as of July 1973 Fiscal Year - Janu-ry 1 to December 31  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR A SECOND IHIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed loan to the Kingdom of Morocco for the equivalent of US$29 million to help finance a project for highway construction and maintenance. The loan would have a term of 20 years, including 4 years of grace, with interest at 7-1/4 percent per annum. PART I - THE ECONOMY 2. An economic report entitled "Current Economic Position and Prospects of Morocco' (R71-220) was distributed to the Executive Directors in September 1971. More recent economic information is given below. An economic mission visited Morocco in September 1973, and is currently preparing its report. A country data sheet is attached as Annex I. 3. Morocco's traditional social and political order has been essentially maintained since independence in 1956, despite two abortive attempts against the monarchy, while the country's economic structure has been changing grad- ually. In agriculture, the small modern sector has expanded, specializing in commercial crops mainly for export, but subsistence farming remains the main- stay of more than half of Morocco's active population. In industry, the rel- ative importance of modern manufacturing has risen slowly, but phosphate mining is still the main industrial activity. Traditional crafts and services have continued to provide substantial employment. International tourist traffic has been attracted to Morocco and tourism has become the economy's most dy- namic sector. Despite these changes, the economy remains vulnerable to droughts which from time to time set back agricultural output and incomes. With only moderate economic expansion and rapid population growth, unemploy- ment and underemployment have reached high levels. The differences in cultural and economic status between regions and population groups remain substantial. Past Developments 4. The growth of the Moroccan economy at an average annual rate of 2.7 percent barely kept pace with population increases from 1956 to 1967. Invest- ment, which showed a moderate expansion, was only about 13 percent of GNP by 1967. With the implementation of the Second Development Plan (1968-72), there was a sizeable increase in public investment. Private investment which did well during the initial years became more sluggish later because of economic and political uncertainties in 1971 and 1972. Total investment ranged between 13 and 15 percent of GNP, compared to the Plan target of 17 percent. Aided by favorable weather and consequent good crops, economic growth nonetheless ac- celerated to an average annual rate of 5.6 percent in 1967-72, thus exceeding the Plan target of 4.3 percent. Agriculture grew by 6 percent a year and manufacturing by 5.3 percent during the Second Plan period.  -2- 5. At the same time, the implementation of prudent monetary and fiscal policies resulted in a significant improvement in Morocco's financial position. Domestically, a combination of new tax measures, higher income from state en- terprises and expenditure restraint led to an increase in Government savings, but private savings remained relatively low. Externally, Morocco's balance of payments began to move into surplus in 1969 attaining a level of $75 mil- lion in 1972. Current receipts increased in the last four years by 11 per- cent annually mainly due to tourism, workers' remittances and phosphate ex- ports. Gross public capital flows also increased initially but, when invest- ment stagnated in 1972, they fell to about their old level of $130 million a year. Stagnation of investments also lowered the import of equipment goods. The improvement in Morocco's foreign accounts explains why net foreign assets climbed in December 1972 to $279 million, equivalent to 3.5 months of 1972 im- ports (goods and non-factor services). 6. Economic expansion was not enough, however, to absorb all new addi- tions to the labor force during the Second Plan period. The annual addition to the labor force is estimated at 100,000 per year. Emigration relieved the unemployment situation; an estimated 250,000 Moroccans were working outside the country in 1972 and about 30,000 workers per year emigrated during 1970- 72. Despite increases in the work relief program, there were still more than 350,000 unemployed or 15 percent of the labor force outside agriculture. The Short-Term Outlook 7. The outlook for 1973 is dominated by a poor cereals crop (about 30 percent smaller than in 1972) due to drought conditions in the southern half of the country. This has reduced farm income and slowed down the growth of domestic demand, while leaving the country with the need to import at least 1 million tons of wheat during the 1973/74 season. Short food supplies and price increases imported from abroad have also caused a bout of price infla- tion in the second half of 1973. Government investment may decline by as much as 10 percent in current prices mainly because a six-month delay in issuing the country's new development plan for 1973-77 led public agencies to postpone the start of new investment programs. Private investment may rise somewhat; it is beginning to recover currently as a result of the firmer political situation and the publication in August 1973 of new meas- ures to encourage private investment and exports of manufactures. The poor performance of agriculture and low level of investment will probably lower the rate of economic growth to around 2 or 3 percent in 1973, despite con- tinued increases in exports, tourism and workers' remittances. Morocco's financial situation remains sound. Domestically, credit expansion is mod- erate due to the sluggish growth of Government spending and private invest- ment. Externally, the continued good performance on current account resulted in a further rise in net foreign assets to $453 million at the end of August 1973. 8. These favorable financial developments may not continue much longer, however, since several factors are expected to increase the need for domestic credit expansion and to put pressure on the external accounts in coming months. There will be a pick up in public and private investment, covered in part only  by official external financing. There will a'lso he the need to import cereals, at least unti.l mid-1974, as well as internediate and eeuipmert goods. Finally, there. w'i bhe large transfers abroad by foreign farmers whose lands were ex- pronriated by the Government in Hiarch, 1973, and by foreign investors who under "inarocanization" measiures .'f ' av 1973 have to sell at least half of their shares in tee concerne4i oisinesses to Moroccan nationals. Compensa- tion measure' are being discussed with the parties concerned. Lona-ten-.De,velaent Prospects 91 Thu late 10, th. Government began a revisiun s-f its dvrelopment pttl.ci.Q .-MI, .ne.reasing attention has boeen naid to a iumhrr -f --c:Ja1 objec- tives incrlu.ding the need to expan? cdiication, improve ineome distribution and ac_p.-itn'-R! ;and refornm. These, together with the faster i'-JIsion making ap- parent re-:ently, the adoption of a n-w tax syste-m, the adoption of a new eeonoi..e .1e-elopment plan and a xev-isetl in'iestment code give hope of acceler- ateJ dvreltopment and improved performance in the longet perspective of the new plan p-rlodL 10. Th.- Third Five-Ye3r Plan (1973-17) embodies the new orientation and proposes; to sustain real. CDP growth of 7.5 percent a year from 1973 to 1977 mainlv throtugh a fast rise in goods and non-factor services exports by 10 percent a year, and a doutbling of puhlio and private investment compared to the Second Plan neriod; and to improve the distribution of growth benefits among the 1toroccan people mainly througk further land distribution in agriculture, more emphasis on dry cultivation zones, the replacemnent of foreigners with Moroccans in industry and services, more progressivity in the tax system, changes in the prices of basic agricultural commodities, and large in-reases in Government spending on social services and low const houising. In accol 1anre with the export-oriented strategy, the Plan gives priority to the seetoro contribtiting heavily to foreien exchange receipts (agriculture, fishi.ng, mi-nIng, CNood nro-essing, sub-contracting industries, transportation ar.d This in reflecte.d in the allocation of Government resources to these .-z- rn, and in the measures that were taken in August 1973 to encourage privacz, icnestment and exports. A.s a departutre from past financial orthodoxy, the rIm accents the prospect that domestic prices may rise by about 5 percent a year. _t recognizes that despite faEter growth, a continuing work program and emigration, unemployment may rise in absolute and relative terms. 11. The onbectives and strategy of the Plan generally respond to the pressiag needs of the Moroccan economyT, with the notable exception of employ- ment. 5r'wever, tho Plan's economic targets are high compared to past perform- ance and the proposed social objectives could be achieved only wiLh ex- ceptional ef0orts. Morocco has considerable potential for growth, partic- ularly i, irrigated agriculture. manufacturing and tourism. The economic  - 4 - targets seem ambitious in relation to the capabilities of the public and private sector, with the exception perhaps of the export target because ex- ternal demand for Moroccan goods and services is likely to remain strong. There is the possibility of significant shortfalls on planned public invest- ment because the 1973 outturn is much below the required level and it will take time to build up the Government's implementation capacity, particularly in the new priority sectors such as dry farming and low cost housing. Simi- larly, the private sector would have to make up for the sluggish 1973 invest- ment performance and there is doubt that the Government will be able to induce the required dynamism in the private sector. The economic mission is currently in the process of making a more detailed assessment of prosDects for investment and GDP growth. 12. The Plan assumes that sizeable increases in external financing will be obtained to supplement rising private and public savings for the financing of projected investments. The inflow of private external capital is expected to double in 1973-77 compared to 1968-72. Regarding the public investment program, the Plan calls for $1,250 million in gross external financing com- pared with $850 million during the Second Plan. This large increase implies strenuous efforts on the part of the Government to improve project preparation, particularly in the priority sectors, and aid coordination. At the end of 1972, Morocco's external public debt amaounted to an estimated $815 million on a dis- bursement basis. Service paynients on this debt decreased somewhat to a level of only 7.4 percent of goods and services exports. Morocco retains the cap- acity to service substantial additional debt, although implementation of the new Plan and other factors noted in paragraph 8 will probably put the balance of payments under more pressure than before and the debt service ratio is likely to rise to higher levels. PART II - BANK GROUP OPERATIONS IN MOROCCO 13. Bank and IDA lending to Morocco consists of 18 projects amounting to $325.2 million (net of cancellations), of which $121 million was lent over the last two years. Four projects have been financed under IDA credits total- ling $36.8 million. IFC investments amount to $2.9 million. The implementa- tion of projects is often slow to start, frequently due to cumbersome Govern- ment disbursement procedures, but with time perfonnance usually improves. The Sebou irrigation project (Loan 643-MOR of November 13, 1969 for $46 mil- lion) on which little progress was made for a long time, is a case in point. Initially, management difficulties, the slow processing of necessary land reforms and a flood of unprecedented magnitude in 1970 substantially delayed progress. At present, however, the project is showing satisfactory progress. Project implementation by the three autonomous financial institutions in agriculture, industry and tourism to which the Bank lends, is generally satisfactory. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of September 30, 1973, and notes on the execution of on-going projects.  -5- 14. The Bank Group strategy in Morocco is to support the Government in its formulation of development-oriented policies and to help it implement them particularly in rainfed agriculture and land reform, education, expansion of private enterprises and exports, employment and income distribution. Past lending has been concentrated in irrigated agriculture, private industry and to a lesser extent, education and infrastructure. When the Bank has completed its review of the new Plan, discussions will be held with the Government on how the Bank can best assist with its implementation. ,lowever, the pace at which Bank Group lending can be carried out will continue to depend largely on the speed with which the Government prepares projects and takes related policy decisions. 15. In the financing of agricultural projects the Bank has so far helped develop large scale irrigation schemes and agricultural credit and further projects are under preparation for Bank Group consideration. In this connec- tion, the Bank has stressed the importance of efficient organization of the sector, of land reform and of the development of small scale farms. The Gov- ernment has recently accelerated land distribution and is presently preparing projects for small farmers for which it is expected to seek financing. 16. Education is a critical bottleneck in Morocco's development. Two IDA credits have been made for education and a third project is under prep- aration for later consideration. The first two projects, however, have en- countered some difficulties (see Annex II) but performance has recently im- proved. A UNESCO project idetification mission, in the framework of the Bank UNESCO cooperative program, visited the country in September 1973 to review the sector's development and to help identify a third project. 17. The financing of industry and tourism has so far been extended through the two DFC's (Banque Nationale pour le Developpement Economique and Credit Immobilier et Hotelier). While these DFC's are expected to con- tinue to be main channels for Bank lending in these sectors, the Bank has recently appraised a large phosphoric acid project and is helping to prepare a tourism infrastructure project as Executing Agency for a UNDP financed study. Projects in these sectors help Morocco to enlarge its foreign ex- change earnings and provide an opportunity for the Bank to help improve sectoral policies and encourage the creation of employment opportunities. Bank involvement is thus reflected in a study of the interest rate struc- ture in Morocco and the recent enactment of a new investment code. The latest loan to BNDE (Ln 890) signed on May 14, 1973 aims at improving the consideration of employment effects of BNDE financing. 18. The first transportation loan, a $14.6 million Bank/IDA blend, was for a highway project and included financing of a sector review which is now serving as a basis for future transport investments as well as recommendations on transport policy. 19. The first Bank financing of public utilities in urban areas was the $48 million Water Supply loan signed in July 1972. A second loan of $25 mil- lion for a power project was signed on October 5, 1973. By means of these two projects the Bank is trying to help the Government to bring about much  - 6 - needed improvements in the organization of public utilities. The social problems due to currently rapid urbanization are also expected to be tackled directly through a site and services project which is being prepared with the Bank's assistance. 20. A consultative Group for Morocco was formed in April, 1967. It includes Belgium, Canada, France, Germany, Italy, Kuwait, the Netherlands, Spain, the U.K., the U.S., IMF, UNDP, OECD/DAC, the African Development Bank and the European Investment Bank. The Group last met in October, 1971, when it welcomed the Government's new polices and affirmed continued support for Morocco. The next meeting of the Group is tentatively scheduled for the spring of 1974. It will consider Morocco's Third Five Year Plan (1973-77). Gross inflow of official foreign assistance to Morocco has shown a rising trend, from a total $129 million in 1966, to $168 million (of which $18 mil- lion in grants) in 1971, but temporarily fell to $126 million in 1972. The major sources of aid were the U.S., Germany, the Bank Group and France. 21. At the end of 1972, the Bank Group's share in Morocco's external public debt was 12 percent on a disbursement basis, and 25 percent including undisbursed amounts. The share of the Bank Group in debt service was 13 per- cent in 1972. Future trends in these shares will be easier to establish after the Government's program of external borrowing during the Third Plan period (1973-77) has been reviewed by the current economic mission and considered by members of the Consultative Group for Morocco in spring 1974. The Bank Group's share in public debt and debt service will in the medium term probably remain on the same level. PART III - THE TRANSPORT SECTOR IN MOROCCO 22. Morocco's transport system, largely concentrated in the coastal plain between the Atlas mountain range and the Atlantic, is reasonably well developed. Although the density of the transport network is adequate, in- vestments need to be made in rolling stock for rail, some port improvements, and especially in road improvement. The third Five-Year Plan for the trans- port sector covering the period 1973-1977 emphasizes these needs. Tne Plan has been approved at a total of DH 1,221 million. Investments in the highway sector amount to DH 412 million which is about a 50 percent increase over the actual investments of the previous plan. The objectives of the new Plan re- flect the results of the recommendations of a recent transport survey con- ducted by consultants (Bureau Central d'Etudes pour les Equipements d'Outre- tier, BCEOM). 23. The principal agency in charge of transport policy is the Ministry of Public Works and Communications (MTWC). It prepares the initial five-year plan proposals for the transport sector as a whole as well as for individual modes. The planning mechanism is by and large satisfactory, and the evalua- tion of projects is increasingly based on economic considerations.  24. Financing of transport infrastructure is provided from general public funds. However, annual revenue from highway user charges is about four times total highway expenditures (including capital costs). Since highway user charges provide a convenient tax base for the collection of general revenues and fall mainly on car owners, the present level of charges is reasonable in the Moroccan context. Railways and ports generate revenues which approximately equal their operating costs. 25. Transport policy aims to control all services offered to the public and to restrict private services which may compete with the public sector. This regulation is most strict in the rail/road freight market; the MPWC through the Office National des Transports (ONT) controls the licenses for common carrier trucks, determines freight rates and fares for rail and road transport, assigns cargoes directly to road common carriers, and issues and collects the bills for services rendered by these carriers. The existing system is costly to the Moroccan economy causing higher freight rates than under a competitive situation and resulting in low utilization of equipment and facilities which are foreign exchange intensive investments. In the transport survey the consultants have recommended complete deregulation of the industry and the Bank has opened discussions with the Government on de- regulation. The MPWC recognizes the problem and is taking an active interest in the matter. It is seeking information from other countries, notably France and has started its own study of this issue. Three experts to be financed under the proposed project, will assist the MPWC with this study. All in- terested parties in Morocco, including users and private unlicenced carriers, are to meet at a Government-sponsored colloquium in March 1974 to decide on a strategy to improve the service provided by the industry. During negotia- tions the Government agreed to continue the dialogue with the Bank on the deregulation issue. Highways 26. The highway network is basically well developed, consisting of some 51,500 km of roads of which about 21,500 km are paved and a further 4,000 km are earthroads of good serviceability. It is generally adequate in coverage and length, but design characteristics are becoming insufficient to handle growing traffic. The vehicle fleet, fuel consumption and traffic on the network have grown since 1965 at an average annual rate of about 6 percent; they are expected to increase at about the same rate in the future. On aver- age, vehicle density is relatively high with the heaviest concentration of traffic on trunk roads in the northern half of the Atlantic coastal plain. Many roads have deteriorated and are below standard for current traffic, so that a backlog of highway investments has accumulated. A start on improve- ment works was made with the rehabilitation and modernization of the most important roads in greatest need under the First Highway Project (Loan 642- MOR and Credit 167-MOR of November 13, 1969 for $7.3 million each or a total of $14.6 million). 27. The MTWC has responsibility for the maintenance and development of the primary and secondary road network. Its efficiency has recently been improved through the establishment of a Directorate for Roads which replaced two regional offices previously in charge of these operations. For highway  - 8 - planning, project preparation and for supervision the ?IPWC relies on a tech- nical office. The MPWC does not as a matter of policy undertake departmental construction of roads. All construction, reconstruction and improvement works are carried out by contractors. In addition to large contractors the Moroccan road construction industry includes a number of small contractors who use labor almost exclusively and work mostly on periodic maintenance or as sub- contractors for larger contractors on construction. An additional feature of the industry is the Government-sponsored "Promotion Nationale" which pro- vides the equivalent of about 26,000 full time jobs annually on technically simple road projects with high inputs of unskilled labor such as the recon- struction of tertiary roads. Railways 28. The railways are government owned and run by the Office National des Chemins de Fer (ONCF) under the jurisdiction of the MPWC. The system comprises 1,178 km of standard gauge track, of which 730 km are electrified, including 161 km of double track carrying phosphate from KLouribga to Casablanca. The track in general is in reasonable condition; however, roll- ing stock and locomotives, except on the phosphate line, are inadequate for present traffic. The Government is contemplating investments in rolling stock, locomotives and some track renewal. 29. The backbone of railway business is the movement of bulk commodities, in particular of phosphates (63 percent of total freight carried). The modal split of passenger and freight traffic between rail and road is highly regulated by the Government. Overall, the railways make a small financial profit, al- though this is based on inadequate provisions for depreciation of fixed assets. Ports 30. Morocco has six major ports which in 1970 handled a total of 18.5 million tons of cargo. Present port capacity is adequate and operations are efficient. Some renewal and reconstruction are required, but no major port improvements are needed in the near future. The ports of Casablanca and Mohammedia are administered by a separate Director of Ports, while the others are administered by the MPWC. The Government is considering establishing an autonomous port authority for all ports. Airports 31. Morocco is served by eight airports with regularly scheduled flights. Besides these main airports tl-here are a number of smaller airfields. The Gov- ernment plans to raise the standard of the airports at Tangier and Fes to ac- commodate transoceanic flights in support of the expansion of the tourist in- dustry. The country is servecd by its own international airline providing service to Europe. The importance of air transport in Morocco is closely linked with the growth of the tourist industry which accounted for about 90 percent of total passengers in recent years. Total air passenger traffic increased by 11.5 percent annually during 1962-1970 to over one million. Airport administration is carried out by a separate agency of MPWC.  -9 - PART IV - THE PROJECT 32. A report entitled "Appraisal of a Second Highway Project Morocco (143a-MOR)" is beinig distributed separately. A loan and project summary is attached as Annex III. The proposed Second Hlighway Project was appraised in November/December 1972. Negotiations were held in Washington on October 1 to 5. The Borrower was represented by Mr. Lukasch, Director of the Budget, Ministry of Finance and Mr. Kabbaj, Director of Roads, Ministry of Public Works and Communications. Description 33. The Government of Morocco, in agreement with the Bank, contracted consultants in 1971 to carry out detailed engineering for the Casablanca- Rabat expressway for which a feasibility study financed under the first high- way project had shown a satisfactory Economic Return (ER). A Bank identifi- cation mission in September 1972 recommended the construction of the irst phase of the expressway, the improvement of various road sections, purchases of highway maintenance equipment, traffic studies and technical assistance. The proposed project thus provides a continuation to the rehabilitation and modernization of important roads and the replacement of obsolete maintenance equipment begun under the first highway project. 34. The proposed project is a key element in the Government's develop- ment plan for the road network and supports the Bank Group's lending strategy (para 14) throughi institution building and by improving road transport for agricultural exports and tourism. In particular, the project is designed to improve several roads, mostly in the coastal plain, which carry high traffic volumes, including a major part of agricultural exports and tourist traffic. It aims at improving maintenance administration and overall transport and project planning through the establishment of a Central Equipment Division within the Directorate of Roads and a transportation planning office in the tiPWC. 35. The proposed project comprises: (i) construction of two lanes of the uncompleted part (33 km) of Primary Road 36 (RP 36) from Casablanca to Rabat; (ii) improvement of sections, totalling 679 km, of 17 primary and secondary roads; (iii) purchase of highway maintenance equipment; (iv) traffic studies in Casablanca and Rabat; (v) the establishment of a transportation planning office in the MPWC; and (vi) detailed engineering of two road sections.  10 - 36. The estimated total cost of the project, including contingencies, is equivalent to $43 million. The propcsed loan of $29 million would finance 67 percent of estimated total project costs, eqluivalent to the estimated for- eign exchange component. Detailed cost estimates are summarized in Annex III. The MPWC, assisted by consultants, will bear the main responsibility for the execution of the project: it will supervise the construction and improvement works, for which it is staffed adequately, and qualified consultants will un- dertake the traffic and transport studies and the technical assistance. 37. Both highway construction and improvement works are scheduled to start in the first half of 1974 and be completed by the end of 1976. The contracts for maintenance equipment will providle for one third to be de- livered during the second half of 1974 and the rest by the middle of 1975. Consulting services will start in the beginning of 1974 arnd be completed 18 months later, i.e. end of 1975. 38. The detailed engineering study of the Kenitra-Larache road would be financed retroactively under the proposed project. Construction of this road was expected to be included in the project but due to budgetary limita- tions the Government has decided to postporne construction for the time being. Construction of RP 36 (Casablanca-Rabat) 39. All traffic between Casablanca, the commercial center of the country, and Rabat, the capital, as well as between the south and north of the country, is at present served by a railway and two roads Located in a traffic corridor of a maximum width of 5 km. Traffic on these roads has been increasing by about 11 percent annually. In iew of the poor traffic conditions on the two roads, the Government in the :Late 1950's decided to link both cities through a modern expressway. Since then, a 28 km section of a two-lane highway (RP 36) has been completed at the Rabat and as part: 2f the expressway. At the Casablanca end, a section of 6.8 km has been constructed with four lanes, and an adjoining 5 km long section with two larnes. The proposed r'roject includes the completion of the missing link between the two cities consisting of -about 33 km of two- lane highway, including two interchanges, three overpasses and one underpass for the future expressway. Construction of the other two lanes and additional interchanges, underpasses and overpasses to complete the full expressway planned will be undertaken in a few years when justified by traffic growth. Improvement Works 40. The project includes road inmproveMienc works totalling 679 km on 12 primary and 5 secondary roads with a total length of about 4,300 kin, which, based on economic priority, h;ave been selected by the Government for improve- ment under the project. Thes;_ sections represent a major part of the road improvements to be undertaken during the first chree years of the third Five-Year Plan.  - 11 - PurchasesX of Highway Maintenanc Equipment 41. Under the First Highway Prc