Morocco - Souss Groundwater Project

FULE COPY DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1616-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR THE SOUSS GROUNDWATER PROJECT April 24, 1975 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 It may not be published, quoted or cited without Bank Group authorization.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 = Moroccan Dirdarn (DH) DH 1 = Uo$0.25 U$1 = DH 4 .03 Exchange rate fluctuates with weighted average of major currencies; rate used in Appraisal Report is US$1 = IE 4000 Fiscal Year: January 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 THE SOUSS GROUNDWATER PROJECT 1. I submit the following report and recommendation on a proposed loan to the Kingdom of Morocco, for the equivalent of US$18.5 million, to help finance the Souss Groundwater Project. The loan would have a term of 20 years, including 5 years of grace, with interest at 8.5 percent per annum. PART I - THE ECONOMY 2. An economic report entitled "Current Economic Position and Prospects of Morocco" (R329 MOR, dated February 7, 1974) was distributed to the Executive Directors on March 6, 1974. The report and the following discussion of the economy are based on the findings of an economic mission which visited Morocco in September 1973. An updating economic mission is presently in the field. Country data are attached as Annex I. Past Developments 3. The overall performance of the Moroccan economy improved during the Second Five-Year Plan (1968-72), despite difficult political circumstances in 1971 and 1972. Aided by favorable weather conditions and good crops in 1968, 1971 and 1972, real GDP growth accelerated from an average annual rate of about 3 percent in 1960-67 (barely above the rate of population growth) to 5.6 percent in 1968-72, thus exceeding the modest Plan target of 4.3 percent, and permitting real gains in private per capita consumption of about 2 percent a year. At the same time, the implementation of prudent fiscal and monetary policies contributed to a significant improvement in Morocco 's domestic and external financial situation, despite shortfalls on planned capital inflows from official external sources. Government saving and investment exceeded slightly the modest Plan targets, while price stability was maintained. Fol- lowing a decade of recurring deficits, the balance of payments registered a surplus in 1969-72, mainly because of sharply rising receipts from merchandise exports, tourism and remittances by Moroccan workers in Europe. At the end of 1972, Morocco had accumulated net foreign assets of DH 1.3 billion, equiva- lent to 3.5 months' imports of goods and non-factor services at 1972 levels; these rose further to the equivalent of more than 5 months by the end of 1973. 4. Although the acceleration of GDP growth in 1968-72 was in part due to generally favorable weather conditions, it appears that the economy has moved onto a path of more rapid long-term growth. Agriculture, export in- dustries, tourism and sectors with derived demand (energy, tranaportation,  - 2 - communications and modern services) seem to have acquired a capacity for sus- tained growth. In agriculture, expansion of irrigation, increased use of key inputs in rainfed areas (improved seeds, fertilizers and timely ploughing) and a large number of trained extension personnel have generated faster growth of output. In the export sector, the phosphate company (OCP) has regained leadership in the world market as a result of internal reorganization and investment carried out during the Second Plan and the Export Trade Company (OCE), which has a monopoly over Morocco's exports of fresh and processed foodstuffs, has acquired considerable dynamism in management and marketing. Further, a relatively broad range of industries, including some sub-contract- ing companies, have emerged with a good competitive position and sizeable sales on external markets. 5. These achievements should not detract attention, however, from the serious difficulties which Morocco still had to overcome at the end of the Second Plan period. There was a need to revive private investment, which had stagnated in 1971 and 1972 mainly because investors adopted a cautious atti- tude in the light of political developments and the expectation of new incen- tives and new regulations regarding the association of Moroccan and foreign capital in business ventures ("marocanisation" laws). There was also a need co increase private savings, which remained at an insufficient level, in part Lecause of the relatively low returns on domestic financial assets. Finally, the Covernment would have to increase investment capacity in the public sector by appropriate changes in staffing and organization. 6. Difficult social problems also had to be tackled. Unemployment re- mained at a high level, averaging 9 percent of the labor force nationwide and ranging between 12 and 16 percent in large urban centers. The proportion of urban population in substandard housing was large and rising. Wealth and income differences between cities and villages, among regions, and between rich and poor were widening, while about one third of the rural population in the less fertile agricultural areas were experiencing a slow decline in real consumption. Long-Terni Development Prospects 7. Recognizing these difficulties and problems, the Government began in 1971 to revise its development policies, paying increasing attention to social objectives. Reflecting the changed orientations, the Third Five-Year Plan (1973-77) aims at: - achieving a real GDP growth of 7.5 percent per year between 1973 and 1977, mainly through a 10 percent a year rise in exports and a doubling of investment over the Plan period; and - improving distribution of growth benefits, mainly through further land distribution to poor farmers and more emphasis on rainfed farming in agriculture, the association of Moroccan nationals with foreigners in services and several industrial  - 3 - sub-sectors, large increases in Government spending on social services and low-cost housing, a more progressive tax system, and appropriate changes in wages and in the prices of basic agricultural commodities. Departing from the previously strict financial orthodoxy, the Plan calls for an expansionary fiscal policy and a more liberal credit policy, accepting the risk of less price stability. It recognizes that, in spite of faster economic growth, increased public works and continued emigration, unemployment may rise in absolute, and perhaps also in relative terms because the growth of the working-age population is accelerating (from 2 percent a year in the 1960's to 4 percent a year in the 1970's). 8. In accordance with its export-oriented strategy, the Plan gives priority to sectors contributing to exports; these include phosphate mining and processing by the state-owned phosphate company (OCP), as well as other mining, agriculture, fishing, food processing, subcontracting industries, tourism and transportation. This priority is reflected in the allocation of Government resources to investment in these sectors, and in the measures in- troduced in August 1973 to provide better incentives to industrial exports and private investment. Achievement of the Plan's export targets will depend on further expansion in some export sectors, which is being carried out, and on the strength of external demand. External demand for Moroccan phosphate rock has risen continuously in 1974, and the average price per ton received by Morocco increased from about $13 in 1973, to around $40 in the first half of 1974 and to more than $60 in the second half. However, due to the supply response of other producers, the price per ton may decline substantially over the period 1975-80. Demand for other Moroccan goods and services may also weaken over the next few years as a result of the economic slowdown in devel- oped countries. On balance, real export growth, which exceeded Plan expecta- tions in 1973, may probably be somewhat below Plan targets during most of 1974-77, while in current prices export receipts will exceed substantially the level envisaged in the Plan. 9. The Plan proposes significant changes in the investment strategy designed to increase labor intensity, and improve the situation of less favored groups of society and less developed areas of the country. Education, health and housing, together receive a significantly higher share of planned Government investment (23 percent) than during the Second Plan (11 percent). Among sectors, the main change concerns agriculture, for which the Plan re- duces emphasis on dam construction and favors on-farm irrigation development, intensification of rainfed cropping, improvement of animal husbandry and implementation of land reform. New incentives for private investment are less biased in favor of imported equipment than the previous system and en- courage efficient operations and location in less developed areas. In view of the higher-than-planned level of export receipts (and domestic saving), the Government is carrying out an upward revision of investment targets, the de- tails of which are not yet available.  - 4 - 10. In changing its investment strategy, Morocco is breaking new ground, and significant shortfalls on planned investment could well be experienced in new priority sectors as a result of staffing and organizational constraints, which can only be relieved gradually. Shortfalls will probably affect mainly rainfed cropping, livestock production, low-cost housing and tourism infra- structure. In addition, most of 1973 was lost for the revival of private investment, since the new incentives were introduced only in August, and the start of new public investment programs was delayed, since the Plan was is- sued only in July. However, indications are that investment picked up at a fast pace in 1974. 11. Despite the acceleration of investment and related import growth, financial resources are not expected to be a constraint in the medium term, provided increased inflows of official assistance are achieved. The strength- ening of the balance of payments since 1969 has continued in 1973, and the steep rise in the price of phosphate in 1974 has enabled the country to offset the increase in the import bill due to higher prices, in particular for petroleum. This favorable situation, however, may be eroded in later years, since the price of phosphate is likely to decline, while prices of imports and import requirements will keep rising. Nonetheless, until the end of the Plan period, phosphate and other exports, and worker's remittances, together with the expected increase in capital inflows, should provide enough foreign exchange to meet import requirements and maintain reserves at a sufficient level. On the domestic side, the phosphate company (OCP) will be able to make large, additional remittances to the Government, which should help fi- nance public investment in a non-inflationary manner. However, the Govern- ment will have to proceed with planned tax measures in order to make the tax system more responsive to economic growth and more equitable, and with planned improvements of the capital market to facilitate the mobilization of private saving and the financing of private investment. 12. The financial situation may become more difficult beyond 1977, if the predicted trends in exports (with no further gains from phosphate prices) and import requirements continue. To prepare for this eventuality, Morocco needs to increase, as planned, the level of external borrowing on favorable terms from official sources, and this will require improved project prepara- tion. At the end of 1973, Morocco's external debt amounted to an estimated $977 million excluding undisbursed amounts. Service payments during 1973 re- presented onlv 8 percent of goods and non-factor services exports. Although long-term prospects are for more pressure on the balance of payments than at present and a considerable rise in the debt service ratio, to perhaps about 20 percent of exports by mid-1980's, Morocco can service substantial addition- al debt, and is therefore creditworthy for Bank lending. PART II - BANK GROUP OPERATIONS IN MOROCCO 13. Bank and IDA lending to Morocco has supported 21 projects with financing totalling $490 million (net of cancellations), of which $272 million  - 5 - has been lent since the beginning of FY 73. IDA credits, totalling $36.8 mil- lion, have been made available for four projects. IFC investments have amounted to $1.5 million. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of February 28, 1975, and notes on the ex- ecution of ongoing IBRD/IDA projects. In some cases, delays have been caused by management or procurement difficulties, and recently the risk of cost over- runs has increased due to the upsurge in investment activity in Morocco and the recent acceleration of inflation. However, performance in project execu- tion has usually been good. 14. Past Bank Group lending has been concentrated in the industrial and agricultural sectors, which together have accounted for two thirds of total net commitments; the balance is accounted for by utilities (15 percent), roads (9 percent), tourism (5 percent) and education (4 percent). Apart from the transfer of resources to Morocco (Bank Group net commitments amounted to 9.5 percent of total fixed investment over the second Five Year Plan, 1968-72), the main objectives of lending were to foster and strengthen development institutions, provide technical assistance, particularly for project prepara- tion, and increase productive capacity, particularly in order to improve the balance of payments. 15. While these objectives remain, emphasis is now also being given to supporting the new orientation of the Government's development effort in the field of income distribution. Future Bank lending will reflect this orienta- tion. Increased shares of Bank Group lending will be devoted to agriculture, education and urbanization, mainly at the expense of industry. The overall volume of lending will continue to increase, although not so rapidly as in the past, in the light of Morocco's present improved external resource posi- tion arising from the sharp increase in phosphate prices. 16. Past lending for agriculture has supported irrigation development and credit. While continued lending for irrigation is envisaged, greater emphasis will be given to supporting the improvement of rainfed farming, and lending will in general be focussed on support to small farmers. A large project, to complete irrigation development which is possible using existing diversion structures on the Oum-er-R'bia river, is now being appraised, and joint financing with the Arab Fund for Economic and Social Development is envisaged. A first project for the development of rainfed agriculture, in the Meknes region, is being negotiated. Projects for livestock/rural development in a rainfed zone in northern Morocco and for agricultural credit are being prepared. 17. Continued lending for industry and tourism through two DFC's (Banque Nationale pour le Developpement Economique and Credit Immobilier et Hotelier) will be proposed. A project for the construction of a large cement plant in the less developed northeast part of the country is being prepared, and joint financing of this project with the Arab Fund is also envisaged. As Executing Agency for a UNDP-financed study, the Bank is helping to prepare a tourism infrastructure project which would alleviate the scarcity of improved land for hotel development in the Agadir region. Projects in these sectors help to raise foreign exchange earnings and to improve sectoral policies.  - 6 - 18. A sites and services project in Casablanca is being prepared. It should contribute to solving the problem of rapid growth of slum areas. A substantial social services component is envisaged. The Bank is Executing Agency for project preparation being financed by UNDP; UNDP is also providing technical assistance for overall planning of the sector. A second water supply project is being prepared to meet the needs of several urban and rural centers. A third highway project would induce further policy changes in the transport sector. A multipurpose development, mainly for power but also with substantial irrigation and industrial and potable water supply benefits, located on the Oum-er-Rbia river, is being prepared. 19. Education is a critical bottleneck in Morocco's development. Two IDA credits have been made to improve technical and vocational training, and a third project has been appraised. 20. A consultative group for Morocco was formed in April 1967 under the chairmanship of the Bank. It includes Belgium, Canada, France, Germany, Italy, Japan, Kuwait, Spain, the U.K., the U.S., IMF, UNDP, OECD/DAC, the African Development Bank and the European Investment Bank. The last meeting of the Group, on March 28 and 29, 1974, expressed satisfaction with the im- provement in Morocco's economic performance in recent years, and the emphasis in the Third Five-Year Plan (1973-77) on improving the distribution of growth be.aefits. The next meeting of the Group is scheduled to take place in 1976. The gross inflow of official loans and grants to Morocco rose from $129 mil- lion in 1966 to $159 million (of which $18 million in grants) in 1971, but fell to $138 million in 1972 and $115 million in 1973. The major sources of aid were France, the U.S., Germany and the Bank Group. 21. At the end of 1973, the Bank Group's share in Morocco's external public debt was estimated at 13.4 percent on a disbursement basis. The share of the Bank Group in debt service was 11.2 percent in 1973. By the end of the 1970's the Bank Group's share in public debt and debt service is expected to rise to about 20 percernt. PART III - AGRICULTURE IN MOROCCO 22. Agriculture is the most important economic activity in Morocco. An average of six million ha are presently cultivated each year, of which about 1/2 million ha are perennially irrigated. About 55 percent of the labor force is directly dependent upon agriculture for a livelihood. Until the recent rise in phosphate prices, the sector contributed about one third of GDP and accounted for over half of merchandise exports. Poor performance of the agricultural sector in the decade after Independence contributed to general economic stagnation, while in the years 1967-72 more rapid growth of agriculture, mainly resulting from previous large investments in the modern  - 7 - sector, was accompanied by overall economic expansion. Despite past develop- ment of irrigation, performance of the sector is particularly sensitive to the substantial variations in annual rainfall which affect much of the country. In 1972/3 and again in 1974/5, inadequate rainfall seriously affected crop production and, it is expected, overall growth performance, despite rapid expansion in mining and manufacturing. 23. Until recently, the Government's intervention in the agricultural sector concentrated on the expansion of irrigated farming, while rainfed agriculture received less attention. During the Second Five Year Plan, 26 percent of total Government development expenditure was devoted to dams and irrigated farming. Under the Third Five-Year Plan, this share is planned to decline to about 14 percent. Greater attention is being given to improvement of rainfed agriculture, livestock production, training, improvement of the extension service, credit to small farmers, research and marketlng. Farmgate prices were sharply increased in December 1973, and again in November 1974, to encourage the production of cereals, sugar, edible oil seeds and dairy products. 24. In many parts of the country, the small size and fragmentation of holdings, and complex traditional tenure systems, frequently involving joint ownership, have been major obstacles to improving agricultural productivity. The Government has taken various measures to overcome these problems, and to encourage the adoption of modern cultivation methods, particularly on lands with high production potential. First, under legislation introduced in 1963, the Government has successfully started a program of land consolidation; during the Second Five Year Plan, 1968-72, 80,000 ha benefitted. Secondly, the Government has acquired land, previously held by foreigners, for distribu- tion to the rural poor, both small farmers and landless. Two hundred and twenty thousand ha were acquired between 1963 and 1965, and legislation passed in 1973 provided for the acquisition of at least a further 326,000 ha. Under a law of 1966 (amended in December 1972) the Government is distributing this and other state-owned land to Moroccan farmers meeting competence, poverty, age and character criteria. Recipients are obliged to renounce all other rights to land, and join a Government-sponsored cooperative. Some 180,000 ha were distributed by the end of 1972, and the Plan target is to distribute a further 395,000 ha by end 1977. Thirdly, the Agricultural Investment Code enacted in 1969 gave powers to the Government to organize agricultural development in irrigated areas. The Code provides for transforma- tion of some tribal land into individually held freehold plots, prevents excessive fragmentation of holdings, and obliges farmers to follow a cropping pattern in exchange for various subsidies. 25. The legislation as a whole has been carefully designed to ensure that changes in the tenure system, particularly the transfer of foreign-owned farms to small Moroccan farmers, do not lead to declines in productivity. Implementation, however, is complex and slow due to the limits of the Govern- ment's administrative capacity. So far the land reform program has touched only a very small proportion of poor farmers (about 1 percent), and this proportion will rise to only about 5 percent with the implementation of the 1973-77 program.  - 8 - 26. Government activity in the agricultural sector in Morocco is the primary responsibility of the Ministry of Agriculture and Agrarian Reform (MARA). The Ministry's activities are concentrated in the central Director- ates of Agricultural Development and of Equipment, in provincial services which serve rainfed areas, and in largely autonomous regional development offices (ORMVA's) for irrigated areas. There are also three public institu- tions with country wide responsibilities in the sector: The National Agri- cultural Credit Bank (CNCA), the Cereals and Pulses Office (OCICL) and the Export Trade Company (OCE). Two state-owned companies are responsible for managing the land acquired by the Government from foreigners, prior to its eventual distribution under the land reform programme; the Farm Development Corporation (SODEA), established in 1972, is primarily responsible for manag- ing plantations while the Agricultural Land Management Corporation (SOGETA), established in 1973, is primarily responsible for managing the annual crop land acquired from foreign owners in March 1973. PART IV - THE PROJECT Background 27. The project is located in the upstream section of the Souss Valley in southwestern Morocco, east of the town of Taroudant. The SOuss Valley is hot and arid, and surface water resources are limited. However, the valley is endowed with major groundwater resources and adequate soils, and the local population has a reputation for hard work and entrepreneurship. Traditional irrigation, based on springs, localized accumulation of rainwater runoff, and the diversion of river flood flows, has been known for centuries. Over the last twenty years a rapid growth of irrigation based on tubewells has taken place, mainly in the downstream valley for export production of fruits and vegetables. In the last few years considerable irrigation development has also taken place in the upstream valley, particularly of large citrus planta- tions. 28. In 1967, the Government decided to prepare a Master Plan for the development of the Souss Valley, the main concern being to ensure a rational development of the use of the limited water resources. Under two phases of a study financed by UNDP between 1968 and 1974, the FAO and the consulting firms SCET International and GERSAR prepared a Master Plan for future development of the Souss Valley, and prepared feasibility studies for first stage invest- ment projects for the upstream and downstream areas. The proposed project is based on the feasibility study prepared for the upstream area, and was appraised in September and October 1974. The Appraisal Report, No. 720-MOR of April 22, 1975, is being distributed separately to the Executive Directors. A loan and project summary is given in Annex III. At negotiations in Washing- ton in April 1975, the Moroccan delegation was led by Mr. M. Chraibi of the Ministry of Agriculture and Agrarian Reform.  -9- Project Description 29. The purpose of the project is to increase agricultural production, provide for a rational development of irrigated agriculture in the upstream Souss valley, and ensure that a substantial share of such benefits accrue to the poorest members of the local population. The project covers twelve perimeters in the upper Souss valley (see map), an area of 7,300 ha. Three perimeters, amounting to 1,000 ha, are part of a total area of 24,000 ha in the upstream valley which is presently under traditional irrigation. The project consists of: (a) land tenure reorganization over 7,300 ha; (b) construction of about 80 km of 22 kv transmission lines and associated works; (c) the construction of a modern sprinkler irrigation system and related works over 6,300 ha and rehabilitation of existing traditional gravity irrigation systems over the remaining 1,000 ha; (d) construction of 148 km of farm access roads and 36 km of open drains; (e) construction of buildings and provision of equipment for ex- tension, training, and operation and maintenance services; (f) construction of seven milk collecting centers; (g) the provision of village infrastructure - consisting of main streets; public potable water supply; street lighting; one health centre and two dispensaries; five primary schools, each for 600 students; 20 community centres - to serve 20 villages close to the project area; and (h) provision of consultants' services for project engineering. 30. Full development of the project would be reached in 1992, 14 years after completion of construction. By that time, annual production of the main crops to be produced under the project would be approximately: 11,500 tons of wheat; 5,000 tons of citrus; 2,000 tons of olives; 940 tons of almonds; 4,000 tons of meat (liveweight); and 2,800 tons of milk. Virtually all pro- duction would be consumed within the province of Agadir. 31. There are at present three forms of land tenure in the project area: tribal land (2,400 ha), state forest land (1,450 ha) and private freehold (3,450 ha, including the 1,000 ha of traditionally irrigated land). A major reorganization of the land tenure arrangements would take place on the basis of existing Moroccan legislation, with the objectives of stabilizing land ownership and use, consolidating existing holdings, and preventing future fragmentation. The main tenure changes would be:  - 10 - (a) rights to tribal land would be transformed into joint owner- ship shares, or where holdings so created are at least 5 ha, into private freehold. No fragmentation of these ownership shares or holdings would be allowed; (b) state-owned land would be distributed to rightholders to tribal land, owners of joint ownership shares or freehold, and landless agricultural laborers, in accordance with the Land Reform legislation of 1972 (see paragraph 24). No fragmentation of holdings so created would be allowed; (c) ownership shares on former tribal land in the project area ceded to the State by beneficiaries of land distribution would be used to enlarge the shares of other former tribal rightholders; and (d) existing freehold plots on rainfed land and, to the extent possible, on traditionally irrigated land, would be consolidated; future subdivision of these plots would be subject to Government approval. These land tenure changes would be completed in time for the physical execu- tion of the project. It is estimated that 85 percent of the farms in the project area would be smaller than 6 ha, onLce these changes are implemented. Those whose tribal rights are converted into freehold and beneficiaries of land distribution would be obliged to join Government-sponsored service cooperatives. Many smallholders who do not receive additional land and those who hold ownership shares on former tribal land are also expected to opt to form cooperatives. Each cooperative would have about 50 members, and will have the objectives of bulk purchase of inputs, group ownership of equip- ment, and bulk marketing of produce. They would also serve as channels for the provision of credit and extension advice, and the implementation of con- trolled cropping patterns. Sufficient cooperative managers to meet project needs would be recruited (Section 4.05, draft Loan Agreement). 32. Of the-net project area of 7,300 ha, 6,300 ha would be provided with modern sprinkler irrigation. A detailed comparison indicates an advantage to a sprinkler rather than a gravity system under the conditions of the project area. The remaining 1,000 ha already under traditional gravity irrigation are characterized by fragmentation of holdings, and by a complex structure of ownership of land, olive trees and water rights. These factors render very difficult the introduction of modern irrigation methods. Under the project, land consolidation and enlargement of the smallest holdings would be carried out to the extent possible and the existing traditional water distribution system would be rehabilitated to provide a modern gravity irrigation network. This area has been included in the project partly because construction of the modern irrigation sectors will interrupt some of the traditional surface sources of irrigatior. water, and reduce the possibility of harnessing rain- water runoff. Holders of water rights whose supply is affected by the project  - 11 - will be provided with alternative, more reliable, supplies from wells built by the Government; they would be charged only for pumping costs of such sup- plies (Section 4.08, draft Loan Agreement). Over the longer term, it is hoped that successful implementation of land consolidation and irrigation modernization as well as improved supporting services in that part of the project area which is presently traditionally irrigated would make farmers readier to accept the implementation of similar measures in a possible project to modernize the remaining 23,000 ha of traditional irrigation in the upstream valley. 33. Many potential beneficiaries of the proposed project presently live at a considerable distance from the proposed perimeters. Nine new villages would be constructed close to the project area. Houses would be built by farmers at very low cost, using traditional materials locally available. In order to provide improved living conditions in these villages as well as for 11 existing ones which would also serve the project area, the project includes the construction of village infrastructure. 34. The Master Plan for the Souss valley (paragraph 28) indicated, on the basis of a gradual reduction in the level of the aquifer, that sufficient water is available to meet present extraction, the needs of the project, and further extraction totalling at least 10 million cubic meters per year. The Ministry of Public Works would continue to monitor surface flows and ground- water levels in the Upper Souss Valley. Before the start of irrigation under the project, the Regional Agricultural Development Office for Souss-Massa (ORMVASM) would prepare a detailed inventory of present surface water use and groundwater extraction in the Upper Valley. Groundwater extraction in excess of 200 M3 per day is subject to special authorization, and ORMVASM would limit the grant of pumping permits in the upstream valley to a cumula- tive maximum of 10 million cubic meters per year until the inventory is com- pleted. In the issue of new pumping permits, ORMVASM would give priority to farmers undertaking rehabilitation of existing traditional systems (Section 4.03, draft Loan Agreement). 35. Construction of milk collecting centres is included in the project. Present plans to construct a milk processing plant at Ait Melloul and to ex- pand livestock slaughtering facilities would be implemented in time to meet the needs of the project (Section 4.10, draft Loan Agreement). Existing crop processing and marketing facilities for all other commodities are adequate to serve the project. The Regional Agricultural Credit Bank (CRCA) of Agadir and the Local Agricultural Credit Bank (CLCA) in Taroudant would meet farmers' credit needs (Section 4.07, draft Loan Agreement). Project Execution 36. ORMVASM would create a subregional office at Taroudant, with en- gineering and agricultural development staff, to serve the whole upstream Souss valley. Under the general direction of the director of ORMVASM, and with advisory support from engineering consultants, the subregional office  - 12 - would be responsible for land tenure reorganization, for the construction, operation and maintenance of the irrigation works, access roads, drains, milk collecting centres and project buildings, and for agricultural development. The post of director of the subregional office would be filled at all times by a person with qualifications and experience necessary for the successful implementation of the project (Section 3.03, draft Loan Agreement). ORMVASM's head office would provide administrative and technical support to the sub- regional office, and would be responsible for billing and collection of water charges. 37. Three Development Centres (CMVs), responsible to the director of the subregional office, would act as a depots for agricultural inputs and would be responsible for minor maintenance and repairs of the irrigation network. The CMVs would also operate the irrigation system, organize equitable allocations of water and record water use for billing purposes. Each unit of mobile sprinkler equipment would serve a group of farmers which would be responsible for its maintenance and replacement, with assistance from the CMVs. 38. Extension services would be provided by the subregional office. The managers of the cooperatives (paragraph 31) would also serve as a channel for extension advice. ORMVASM would employ the necessary agricultural exten- sion staff for the project area by December 1977, and would prepare an exten- sion programme by the time irrigation begins in October 1978 (Section 4.04, draft Loan Agreement). 39. ORMVASM presently operates a 40 ha field demonstration centre and a farmers' training centre within the project area. Additional buildings and equipment would be provided under the project and these facilities would be integrated, under the responsibility of the director of the subregional office. The integrated centre would carry out field experiments relevant to the project, operate demonstration plots, and provide training courses for farmers, extension agents and cooperative managers. ORMVASM would pre- pare a training programme for extension staff by December 1977, and for proj- ect area farmers by October 1978 (Section 4.04, draft Loan Agreement). 40. While ORMVASM would play the major role in project execution, other agencies would be closely involved. The Ministry of the Interior would be involved in the land tenure changes through its existing responsibility for tribal land. The National Electricity Office would be responsible for com- pleting the main power network extensions, now under construction, which would serve the project, and would also construct and maintain, on ORMVASM's behalf, the power connections included in the project. The Ministry of Urbanization, Housing, Environment and Tourism would undertake construction of village infrastructure, including schools and health centers; it would also be responsible for operation and maintenance of these installations, except for the schools which would be the responsibility of the Ministry of Primary Education and for health facilities, which would be the responsibility of the Ministry of Health.  - 13 - 41. A Project Coordination Committee would be established, chaired by the Governor of Agadir and with the local representation of all government agencies involved in project implementation. The Committee's composition, powers and terms of reference would be agreed by the Bank, and it would meet not less than once every three months (Section 3.04, draft Loan Agreement). Cost Estimates and Financing Plan 42. Cost estimates are shown in Annex III and are summarized below (including import duties and local taxes): Millions of US$ Local Foreign Total Irrigation network 7.6 9.6 17.2 Agricultural management 1.2 1.1 2.3 Village infrastructure 2.1 1.6 3.7 Farm development 2.0 - 2.0 Administration and consultants 0.9 0.1 1.0 Contingencies 6.7 6.1 12.8 Total 20.5 18.5 39.0 of which, duties and taxes 6.9 - 6.9 The Bank loan would be made to the Government, and would finance the full fo- reign exchange cost of the project, amounting to $18.5 million, or 58 percent of total project cost net of duties and taxes. The cost of farm development, consisting of the construction of stables and purchase of livestock, would be borne by the farmers, with the assistance of agricultural credit made avail- able through CLCA and CRCA. The local costs of the remaining project items would be financed by the Government, through appropriate budgetary allocations. Recovery of Irrigation Network Costs 43. Moroccan legislation provides for the recovery from each farmer of his share of operating and maintenance costs and up to a maximum of 40 per- cent of the capital cost of the irrigation network. Provision is made for recovery through (a) a betterment levy of Dii 1,500 per hectare, (b) a basic water charge which so far has been fixed at a maximum base rate of DH 29 per thousand cubic meters in other irrigation areas in Morocco, and (c) a supple- mentary water charge to cover the cost of energy used for pumping. For hold- ings up to 20 ha, the first 5 ha are exempt from the betterment levy, and in addition farmers can choose to pay the levy through annual installments over 20 years, with three years grace and at four percent interest. Over the first five years of irrigated cultivation, the amount of the basic water charge is, increased linearly to the full base rate.  - 14 - 44. ORMVASM would levy and collect, from the start of irrigation in late 1977, charges to recover the full operation and maintenance cost of the irrigation network, plus a reasonable share of actual capital costs, taking account of beneficiaries' incentives and capacity to pay (Section 4.09(a), draft Loan Agreement). Using a method of calculation agreed with the Moroccan Government, and on the basis of estimates presently available, basic and supplementary water charges of DH 53 and 67 per thousand cubic meters, ex- pressed in 1974 prices, would together with the betterment levy recover full operating and maintenance costs and up to 40 percent of investment and re- placement costs for the area under sprinkler irrigation. For the rehabilitat- ed traditional sector, equivalent charges would be DH 38 and 39 per thousand cubic meters. Using a discount rate of 10 percent per year, these charges would recover 44 percent of total cost, and would account for 27 percent and 25 percent of incremental incomes arising from the project at full development for a typical 5 ha modern farm under sprinkler irrigation and a 2 ha former traditional farm respectively. For the few farms which are larger than 5 ha and liable to the betterment levy, cost recovery would account for a larger share of incremental incomes, rising to over 35 percent for a 20 ha farm. To- gether, these basic and supplementary water charges for the modern and former traditional sectors would be respectively about four and two and a half times the highest charges presently imposed under public irrigation schemes else- where in Morocco. 45. To ensure that charges are adjusted to changes in costs, particular- ly of electricity, recovery charges would be reviewed from time to time at the Government's initiative or at the request of the Bank. To facilitate these reviews, the Government would maintain separate accounts for capital, operating, and maintenance costs for the irrigation network, and for the revenues derived from water charges (Sections 3.07(c), 4.09(a) and (b), draft Loan Agreement). Procurement 46. Contracts for civil works and equipment for the irrigation network would be divided into seven contracts: (a) tubewells; (b) one transformer and power connecting lines; (c) irrigation distribution system and associated works; (d) access roads, irrigation, drainage and protection channels and land preparation; (e) electromechanical equipment; (f) mobile sprinkler equipment and hydrauts; and (g) agricultural equipment. The total estimated value of these seven contracts, including taxes, duties and physical and price contin- gencies, is US$25.4 million equivalent. These contracts would be tendered under international competitive bidding according to the Bank's guidelines. Construction of village infrastructure, miscellaneous administrative build- ings, civil works for pumping stations and windbreaks, estimated to cost a total of US$8.7 million including taxes, duties, physical and price contin- gencies, would be let in small contracts after local competitive bidding following normal Government procedures, which are satisfactory.  - 15 - 47. Equipment for supervision, operation, maintenance and agricultural extension, estimated to cost a total of US$0.3 million, including taxes, duties and physical and price contingencies, would be procured after inter- national competitive bidding in accordance with Bank guidelines except for purchases not exceeding US$40,000 equivalent, when procurement will be in accordance with the normal government procurement procedures, which are acceptable to the Bank, provided that such purchases do not exceed an aggre- gate of US$250,000. A 15% preference margin, or the prevailing custom8 duty, whichever is lower, would be extended to local manufacturers in the evaluation of bids for equipment. 48. The engineering consultants would be appointed by ORMVASM following normal Bank procedures. Disbursements 49. The proposed Bank loan of US$18.5 million, to be disbursed by 1980, would finance: (a) 60 percent of the cost of a transformer and electricity trans- mission lines, representing the estimated foreign exchange component; (b) 44 percent of the cost of all other civil works, representing the estimated foreign exchange component; (c) 100 percent of the CIF cost of imported equipment and 70 percent of ex-factory cost of locally purchased goods; and (d) 100 percent of the foreign exchange cost of consultants. Justification 50. The main benefits from the project would be a substantial increase in agricultural production, and an improvement in rural income distribution. The project would make a major contribution to meeting local demand for live- stock products and cereals, equivalent to an annual net foreign exchange sav- ing of about $6 million at full development. Rural incomes would be increased by about $4 million a year, and the project would provide full employment for the approximately 1,700 beneficiaries and their families, and stimulate employ- ment opportunities in related activities, notably crop processing. At present about 80 percent of the beneficiaries receive incomes of less than one-third the national average. Net farm incomes would increase on average by about 500 percent in the modern sector and about 150 percent in the traditional sector. The project would meet the Government's objective to allocate a major share of the remaining water resources in the upstream valley to the poorest farmers. The project would also, through its land reform component, stabilize farm size in viable holdings, and improve land conservation and use. The basic rural infrastructure component of the project would improve living conditions for the project beneficiaries. The economic rate of return of the  - 16 - irrigation development part of the project is estimated at 10 percent. This rate would decline to 9 percent if the costs of rural infrastructure were included, or if investment costs increased by 10 percent. PART V - LEGAL INSTRUMENTS AND AUTHORITY 51. The draft Loan Agreement between the Kingdom of Morocco and the Bank, the Report of the Committee provided for in Article III, Section 4(iii) of the Articles of Agreement and the text of a resolution approving the proposed loan ate being distributed to the Executive Directors separately. 52. Features of the Agreement of special interest are described in paragraphs 31, 32, 34, 35, 36, 38, 39, 41, 44 and 45 of this report. 53. Execution of the reorganization of ORMVASM (paragraph 36) and estab- lishment of the Project Coordinating Committee (paragraph 41) would be addi- tional conditions of effectiveness (Section 6.01, draft Loan Agreement). 54. I am satisfied that the proposed loan would comply with Articles of Agreement of the Bank. PART VI - RECOMMENDATION 55. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President By J. Burke Knapp Attachments April 24, 1975  ANNEX 1 Psge 1 of 3 Pages PODUTR! DtTA-HORICRC ARIUA PcPULATIn mElIo so6,ocxva kt 15 8 uicn (mid-1972) 260 Per alcof arable land 30-I.dL INDICAd! Rafsresce Countries Morocco Phill1fpinee Turkn Fpa9c9 _ 1070 wh ~~~~ ~~1970 E GP? PER CAPITIAUSt (Alias BaSIS) /I 200 /t 270 Ic 220 ic 320 Sc 3,620 /c DEMr6.LApHlC trude earth rats (per thousand) 47Sd So Ad 45 / 38 v 16 4 Crude d..th rate (par thouand) 19 7. 17 A 12 In-ent "sotelity rote (per thous nd lion birthAs) 11.9 ! 120 A9 Life expectancy at birth (ysare) 50 50 d S55 723 Oross reoduction ret. 3.L IS 3L4 3.3 2.6 1 3 Pognilattoc growth ralte 2.7 2.7 3 25 It 1 0 Pepulstion growth rate - urban 5.3