Morocco - Credit Immobilier Et Hotelier Project

COPY ~~~~~~Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY Repor No. P-1854-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED THIRD LOAN TO THE CREDIT IMMOBILIER ET HOTELIER WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A HOTEL DEVELOPMENT PROJECT May 14, 1976 This document has a restricted distibudon and may be used by recipients only In the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authoriuaion.  KINGDOM OF MOROCCO THIRD HOTEL DEVELOPMENT PROJECT CURRENCY EQUIVALENT Currency Unit: Dirham (DH) US$1.00 = DH 4.104 US$ .24 = DH 1.00 FISCAL YEAR January l to December 31  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT To THE EXECUTIVE DIRECTORS ON A PROPOSED THIRD LOAN TO THE CREDIT IMMOBILIER ET HOTELIER WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A HOTEL DEVELOPMENT PROJECT 1. I submit the following report and recommendation on a proposed loan to the Credit Immobilier et Hotelier (CIH) with the guarantee of the Kingdom of Morocco for the equivalent of US$25.0 million, to help finance tourism develop- ment in Morocco. Amortization would conform substantially to the aggregate of the amortization schedules applicable to the specific investment projects to be financed out of the proceeds of the loan, which would not exceed 20 years. The interest rate would be 8.5 percent per annum. PART I - THE ECONOMY 2. A report entitled "Current Economic Position and Prospects of Morocco" (1021-MOR, dated January 26, 1976) was distributed to the Executive Directors on February 13, 1976. 3. During the 1968-72 Plan, Morocco succeeded in accelerating the growth of its economy and in improving the situation of its external payments. Aided substantially by good crops following favorable weather in three years out of five, real GOP growth averaged 5.6 percent per annum during the five- year period. Reflecting the sustained rise in exports during the Plan period and a slower growth of imports in 1971 and 1972, the balance of payments showed a surplus from 1969 onward. These results represented a definite im- provement over those of the preceding decade, during which the rate of real GDP growth had barely exceeded that of population growth, and the balance of payments had been a source of constant concern. These achievements were ac- companied by an increase in private consumption averaging about 2 percent per capita in real terms during the five-year period. 4. From 1967 to 1970, the main growth determinants had been exports, tourism and investment, all of which rose substantially; in addition sizeable stocks were accumulated following the exceptionally good harvest in 1968. By contrast, in 1971-72 exports and tourism together with current government spending were the major factors to sustain economic growth. During these last two years of the Plan, the investment of public and semi-public enter- prises declined, largely because the state-owned phosphate company (OCP) had completed its expansion program. Government investment stagnated after 1968. Private investors adopted a wait-and-see attitude in the face of political developments in 1971 and 1972 and in the expectation of new measures to en- courage investment and exports. At the end of the 1968-72 Plan period, there was therefore an urgent need to revive public and private investment. Particularly, in the public sector, absorptive capacity needed to be in- creased by appropriate changes in staffing and organization. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Is contents may not otherwise be disclosed without World Bank authorization.  - 2 - 5. Following a long period of very slow growth in private consumption, social problems had to be tackled. Over the 1960-71 period, there had been a slow but perceptible decline in real per capita consumption for about one- third of the rural population. Wealth and income differences between cities and villages, among regions, and between rich and poor tended to widen. Un- employment remained high, in 1971 averaging 9 percent of the country's labor force, and ranging between 12 and 16 percent in large urban centers. 6. Recognizing these difficulties and problems, the Government began in 1971 to revise its development policies, paying increasing attention to social objectives. The changed orientations were reflected in the 1973-77 Plan which aims at (1) GDP growth of 7.5 percent per annum in real terms from 1973 to 1977, mainly through a sharp increase in public and private investment and a strategy geared strongly toward increasing exports; and (2) an improvement in the distribution of growth benefits among the different social groups and the various regions, in order to achieve greater equity and at the same time increase domestic demand. This improvement was to be brought about through further land distribution to poor farmers, more emphasis on the development of rainfed agriculture, "Moroccanization" of some industrial and commercial enterprises, a price and wage policy designed to enable the poorest segments of the population to satisfy their essential needs, an ambitious pro- gram of low-cost housing, various measures to improve the lot of the rural poor, and increased emphasis on the development of poorest regions. 7. During the first two years of the 1973-77 Plan, the main development policies proposed in the Plan were introduced. Further, in 1974, Morocco ben- efitted from a steep rise in the price of phosphate, its main export product, which provided substantial additional resources compared to the Plan's expec- tation. The Government decided to step up investment spending for the years 1975-77, partly to reflect cost increases for the development program already adopted and partly to embark on additional investment projects. Recent Economic Performance 8. In 1973, exports were the only dynamic element in the economy, and real GDP grew less than 3 percent. Agricultural output declined by 11 percent due to drought. Investment rose 3 percent in real terms, because of an insuf- ficient number of fully prepared projects, the late publication of the 1973-77 Plan and new investment incentives. 9. In 1974, by contrast, the economy registered a strong recovery (GDP grew by 10 percent) supported by all growth determinants; agricultural output rose by 14 percent, thanks to good weather conditions and expansion of irrigation; fixed investment increased by 34 percent in real terms due to public sector investment and the implementation of new incentives for semi- public and private investors, and stocks were replenished; exports (including non-factor services) grew by 14 percent; and Government consumption rose by more than 20 percent at constant prices.  - 3 - 10. The revival of economic activity in 1974 was accompanied by further improvements in the balance of payments. There was a sharp increase in phos- phate export earnings from $192 million in 1973 to $932 million in 1974, due to a 345 percent rise in average export price and a 16 percent growth in quantities exported. This and a further large (52 percent) increase in workers' remittances from Europe were the main factors behind a doubling of the current surplus to $237 million in 1974, in spite of increased import payments for foodstuffs and petroleum. The current surplus enabled Morocco to increase short-term financing of its exports to facilitate sales, and to raise the level of its external reserves. These reached $454 million at the end of 1974. 11. Some weak spots should be noted, however. These are: the increased burden (5.4 percent of GDP in 1974) of price subsidies for imported foodstuffs and petroleum; the volume decline of agricultural exports and the high level of import requirements for wheat, sugar, edible oils and dairy products; the increasingly felt shortage of skilled manpower, particularly at mid-level of technical and managerial qualifications; and the rather low level of reserves in relation to imports (2.4 months at the end of 1974). 12. Available indicators show that the economic and financial situation was less favorable in 1975 than it was in 1974. Two factors in particular have held back economic growth. These are: (a) a decline in phosphate ex- ports and downward pressure on phosphate prices, and (b) less favorable weather conditions in 1974/75 than in 1973/74 which caused a decline estimated at 10 percent in agricultural output. However, the growth of fixed investment and the Government's current expenditures continued at the rapid pace that began in 1974. On balance, real GDP.growth was only an estimated 2 percent in 1975. At the same time, the internal and external financial situation has tightened compared to 1974. The Government's budget showed a substantially increased overall deficit, due to sharply rising current and capital spending. Despite smaller import price rises and a substantial increase in external borrowing, the balance of payments should register for the full year a very small surplus only. Reserves would be about 2 months of 1975 imports by the end of 1975. The difficulties experienced in 1975 should be temporary. A recovery of output and exports is expected in 1976 for the agriculture and phosphate sectors, which should provide the real resources for a further increase in investment. This and greater fiscal discipline likely to be introduced with the 1976.budget law would enable the, country to ease the financial situation by comparison with 1975. Revisions to the 1973-77 Plan 13. The Government revised upward the 1973-77 Plan allocations for the years 1975-77. Government investment appropriations for the five-year period have been raised to DH 25.6 billion (about $6.4 billion) compared to the original DH 11.8 billion. Of the DH 13.8 billion increase, changes to original projects and cost increases represent DH 4.6 billion and new projects for 1975-77, DH 9.2 billion. Excluding defense, new projects fall in the following main categories:  - 4 - DH 2,500 million for regional development; Dli 1,600 million for transport and communications; DH 1,300 million for agriculture and water development; DH 400 million for industry; DH 150 million (to be raised to more than DH 300 million depend- ing on implementation capacity) for low-cost housing; and DH 200 million for social services. Since planning is indicative only for the semi-public and private sector, the above allocations do not include investments by this sector. Nevertheless, the Plan revisions contain provisions to prepare for the implementation of two large industrial complexes (chemicals and steel) in the semi-public sector, and expect a vigorous investment growth in the private sector. The State Secretariat for Planning estimates that total investment at current prices could jump from DH 4.2 billion in 1974 to DH 12.0 billion in 1977. This would enable the country to meet the original GDP growth target of 7.5 percent a year for the 1973-77 period. 14. The thrust of the Plan revisions seem justified. Indeed, the achievement of initial (especially social) Plan objectives is eminenty desir- able. Similarly, Morocco's economy has developed to a stage where heavy in- dustry should begin to find a place. The country possesses an obvious com- parative advantage in the processing of phosphates, which would tend to stabilize export earnings. However, the Plan revisions raise several issues of importance for Morocco's long-term development strategy and prospects. 15. The steep investment growth foreseen by the plan revisions could exceed the country's absorptive capacity. Following the revival noted in 1974 and 1975, investment in real terms would rise by 39 percent in 1976 and 19 percent in 1977, and continue at very high rates in following years accord- ing to the tentative plans for heavy industry. Availability of skilled man- power constraint can only be relieved gradually by training. For large in- dustrial and infrastructure projects, Morocco may be able to use foreign services more extensively than in the past, but at considerable cost. In addition, the Government will have to ensure that the increase in capital intensity implied by the moves into heavy industry would be compatible with the objectives for increasing opportunities for unskilled employment. 16. Financial resources may also restrain investment growth. The analysis of Morocco's financial prospects shows that such resources would grow relatively slowly in the next five years. Export earnings are likely to be restrained by a decline in phosphate prices, and as a result, the phosphate company's savings which are a large share (36 percent in 1974) of national savings would be restrained. Taking into account the objective and  - 5 - policies to improve consumption levels of low-income groups, the growth rate of national savings may be expected to be relatively low. In spite of planned efforts to increase budgetary savings and food import substitution, foreign exchange and national savings are likely to become a constraint on investment towards the end of the decade. 17. Despite the uncertainty over the future evolution of phosphate ex- port receipts, it is likely that investment growth will still reach close to 13.5 percent p.a. on average during the 1973-77 Plan period. It would exceed the original plan targets for 1973-77, but remain below the revised targets. Provided the volume of phosphate exports recovers in 1976, real GDP gains would average about 6.5 percent yearly during the five years. Private per capita consumption would rise by about 3.5 percent a year, which should correspond to a net improvement in the situation of low-income groups. Despite heavy external borrowing, the balance of payments would remain strong until 1977. These results would be satisfactory by comparison with the ini- tial objectives of the 1973-77 Plan for output and consumption growth, and for the balance of payments. 18. For the 1978-80 period, however, projected trends call for caution. Taking into account the absorptive capacity and resource availability con- straints, investment growth could slow down to around 10 percent a year in real terms. Such growth and assumed export increases would lead to growth of real GDP of about 7 percent a year, and of private per capita consumption of about 2.5 percent. Import requirements for consumption and especially in- vestment would grow rapidly, and with the likely deterioration in terms of trade, the economy's resource gap would widen substantially during the last three years of the decade. To cover it and service accumulated debt, ex- ternal borrowing requirements on a commitment basis would need to average more than $700 million annually in 1978-80, compared to an actual $553 mil- lion in 1974 and an estimated annual average of $540 million in 1975-77. Morocco's borrowing capacity seems sufficient to mobilize these amounts from available sources, provided the necessary effort in project preparation for external financing is made. The bulk of borrowings up to 1980 would be from official, bilateral and international sources. 19. External debt and debt service would increase as a result of pro- jected borrowings. Debt outstanding and disbursed would rise from $1.0 bil- lion at the end of 1974 to $2.6 billion at the end of 1980. Debt service would go from $121 miLlion in 1974 to some $464 million in 1980. Debt service would remain manageable, rising to 11 percent of exports (including non-factor services) in 1980, from 6 percent in 1974. The prolongatLon beyond 1980 of macro-economic trends foreseen during 1976-80 indicates that external borrow- ing requirements would remain large, due in particular to the rise in import needs for investment. These would lead to substantial debt service obliga- tions, since an increasing share of external borrowing would come from com- mercial sources. However, with an additional and feasible export effort and provided recourse to commercial sources is kept within reasonable limits, debt service would remain a manageable burden on the balance of payments.  - 6 - PART II - BA4K GROUP OPERATIONS IN MOROCCO 20. Bank and IDA lending to Morocco has supported 26 projects with financing totalling $595.5 million (net of cancellations), of which $380.5 million has been lent since the beginning of FY73. IDA credits, totalling $50.0 million, have been made available for five projects. A Third Window loan for $25 million was approved in March 1976. IFC investments have amount- ed to $4.4 million. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1976, and notes on the execution of ongoing IBRD/ID)A projects. In some cases, delays have been caused by man- agement or procurement difficulties, and in 1974 cost overruns have increased due to the upsurge in investment activity in Morocco and the acceleration of inflation. However, performance in project execution has considerably improved during the last two years. 21. Past Bank Group lending has been concentrated in the industrial and agricultural sectors, which together have accounted for 70 percent of total net commitments; the balance is accounted for by utilities (14 percent), roads (8 percent), tourism (5 percent) and education (3 percent). Apart from the transfer of resources to Morocco (Bank Group gross disbursements amounted to 5.5 percent of total fixed investment in 1970-74), the main objectives of lending were to foster and strengthen development institutions, provide tech- nical assistance, particularly for project preparation, and increase produc- tive capacity, particularly in order to improve the balance of payments. 2'. 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. An increasing share of Bank Group lending will be devoted to projects developinig directly or indirectly the productive capacity of the lowest urban and rural income groups. 23. Past lending for agriculture has supported irrigation development and credit. The Doukkala Irrigation Project has been recently approved by the Executive Directors. While continued lending for irrigation is envisaged, greater emphasis will be given to supporting the improvement of rainfed farm- ing, and lending will in general be focussed on support to small farmers. A first project for the development of rainfed agriculture in the Meknes region w.1s approved in FY1975. Projects for livestock/rural development in the rainfed zone in northern Morocco, for agricultural credit and for developing production of fruits and vegetables are being prepared. 24. Continued lending for industry and tourism through two DFC's (Banque Nationale pour le Developpement Economique and Credit Immobilier et Hotelier) will be proposed. The Bay of Agadir Tourism project has been recently ap- proved by the Executive Directors. A project for the construction of a large cement plant in the less developed northeast part of the country is envisaged. Projects in industry and tourism have as key objectives increased foreign exchange earnings or savings and the improvement of sectoral policies.  - 7 - 25. 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 Sup- ply project is being prepared to meet the needs of several urban and rural sectors. A multipurose development project on the Oum-er-R'bia river, mainly for power but also with substantial irrigation and industrial and potable water supply benefits, is being appraised. 26. Education is a critical bottleneck in Morocco's development. Two IDA credits have been made to develop secondary education and teacher training and to improve technical and vocational training. The third project has been recently approved by the Executive Directors. 27. 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., UNDP, OECD/DAC, the African Develop- ment Bank and the European Investment Bank. The last meeting of the Group, on March 28 and 29, 1974, expressed satisfaction with the improvement 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 benefits. 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 temporarily fell to $128 million in 1972 and $121 million in 1973; in 1974 the gross inflow rose again to $190 million. The major sources of aid were France, the U.S., Germany and the Bank Group. 28. At the end of 1975, the Bank Group's share in Morocco's external public debt was estimated at 17 percent on a disbursement basis. The share of the Bank Group in debt service was 12 percent in 1974 and an estimated 14 percent in 1975. By 1980 the Bank Group's shares in debt outstanding and in debt service are expected to rise to about 24 percent and 15 percent respectively. PART III - THE TOURISM SECTOR 29. Located within easy reach by car, boat and airplane from European tourist generating countries, Morocco offers attractive beaches along its extensive Mediterranean and Atlantic coasts, architectural monuments of its four imperial cities of Marrakesh, Fez, Meknes and Rabat and the unique ambiance of its pre-Saharan oases. The diversity of its tourism resources and climatic conditions attracts a heterogenous tourist clientele, including culturally motivated tourists as well as year-round beach vacationers; as a result, tourist traffic to Morocco is more evenly distributed over the year than in many other Mediterranean countries, despite high seasonal fluctua- tions in the North of the country.  - 8 - 30. The number of foreign visitors increased from 469,000 to 1,226,000 between 1968 and 1973, at an annual rate of 21 percent. A 14 percent decline in 1974 reflected the impact of the energy crisis and economic recession in Europe. Growth has resumed in 1975; in the first quarter of that year foreign visitor arrivals were 25 percent greater than in the corresponding quarter of 1974. In 1974, about 60 percent of tourists came from Western Europe and 20 percent from North America. About two-thirds of total visitors arrived in Morocco by surface transport. According to a study of Mediterranean tourism markets, recently completed for ten DFC's in Mediterranean countries, foreign tourist arrivals are projected to grow over the next decade at 10.5 percent per year for Morocco, as compared with 5 percent for the Mediterranean region as a whole. 31. The country's hotel capacity has doubled between 1968 and 1974 to reach 41,000 beds. About two-thirds of the hotels built during that period were sponsored by private investors, most of them Moroccan. The remainder was sponsored by the Government or by public agencies such as the Moroccan Railways, Royal Air Maroc and Government-controlled banks. During the Second Five-Year Development Plan (1968-72) hotel investment amounted to about US$120 million and represented slightly less than 4 percent of the total gross fixed capital formation. Morocco's hotel accommodations are generally of a high standard, with luxury establishments accounting for over 40 percent of the total. They are concentrated in the four imperial cities and Casablanca (43 percent), the Mediterranean coast (35 percent) and Agadir (12 percent). This regional distribution reflects past demand; however, current demand trends favor the southern region rather than the Mediterranean coast. About 30 per- cent of existing accommodation is managed by foreigners. The 1973-77 Development Plan called for the construction of 55,000 beds over five years. Implementation during the first two years of the Plan lagged far behind Plan objectives and achievements during the previous Plan period. However, the shortfall is essentially the result of unrealistic projections on which the objectives were based. The sluggish growth was also due to the general slowdown in investment following the political events in 1971 and 1972, more promising investment opportunities for Moroccan investors in other sectors following the Moroccanization laws, and the shortage of serviced land in Agadir and Marrakesh, Morocco's fastest growing tourist areas. 32. Gross foreign exchange receipts from tourism represented about 11 percent of the country's total foreign exchange earnings from the export of goods and non-factor services in 1974. Until phosphate prices were raised in 1973, tourism was Morocco's major foreign exchange earner. About 16,000 Moroccans are directly employed in the hotel industry. In addition, some 60,000 jobs in handicrafts and some 20,000 in agriculture, construction in- dustry, transport and other services are generated by tourism demand. 33. The Tourism Directorate of the Ministry of Urban Development, Hous- ing, Tourism and Environment (MUHTE) is responsible for promoting tourism, administering the investment incentLve system, training hotel personnel and  - 9 - developing tourism infrastructure. The Government is aware that inadequate planning in the past has led to an over-concentration of investment in the Mediterranean tourism resorts. To prevent a recurrence of this situation, the Tourism Directorate has undertaken to prepare regional master plans for tourism development and is hiring consultants for this purpose. The Govern- ment has confirmed its intention to keep the Bank informed of progress in the preparation of these plans. This will be recorded in a supplemental letter to the Guarantee Agreement. 34. Hotel construction is financed through the Credit Immobilier et Hotelier (CIH), a government controlled development finance company specializ- ing in housing and hotel lending. CIH was founded in 1920 as a mortgage bank for the long term financing of housing construction; it became a hotel finan- cier in 1960. CIH financed about one half of the total amount invested in hotels during the 1968-1972 National Development Plan period and the first two years of the 1973-1977 Plan. CIH has also been instrumental in promoting activities within the housing and tourism sectors, through the creation of specialized subsidiaries for construction and management of hotels and pre- fabrication of housing elements. CIH's goal of gradually withdrawing from subsidiaries, once the interest of other investors, and particularly foreign investors, has been aroused, has proven successful. 35. Incentives for hotel investors are provided by the 1973 Investment Code as follows: (i) a ten-year full or partial income tax exemption; (ii) an interest free Government advance equivalent to 15 percent of the estimated investment cost, excluding land acquisition, for ten years including five years of grace; (iii) various tax reductions, including reduced rates on real estate taxes in the early years of operation, reduced capital registration tax, and waiver of sales tax on investment inputs (but not replacements); and (iv) an interest rebate on hotel loans provided by CIH, reducing CIH's interest rate to 4.5 percent p.a. Under a proposed amendment to the 1973 law expected to be promulgated shortly,this subsidized interest rate would increase to 6 percent; CIH already has fixed its nominal rate at 11 percent to apply to all loans approved after July 1, 1976. The amendment would also allow future adjustments of the subsidized interest rate by ministerial decree rather than by law. 36. The Bank has expressed concern on several occasions that generous incentives may lead to overinvestment in hotels and misallocation of resources. Incentives are granted to investors in hotel projects which have been approved technically by IIUHTE and financially by CIH. CIH calculates an economic rate of return on all hotel investments; however, because of methodology and limited data, these calculations are not reliable. The appraisal mission conducted a survey aimed at establishing the methodological and information bases for improved economic appraisal techniques. A computer model was constructed to simulate financial and economic returns on hotel investments under different assumptions including changes in the incentives system. Definitive conclusions could not be arrived at in view of the deficiencies  - 10 - in statistical information and the difficulties met in establishing a repre- sentative sample of hotels. However, the survey findings suggest that many hotels in the southern region and in Casablanca would be financially profit- able without incentives. On the other hand, even with incentives, financial prospects of northern beach hotels would not be attractive, unless occupancy rates or tariffs were increased. IWhile the soundness of the incentive system is in question, a basis for firm recommendations on how it should be changed is still lacking. The Government has confirmed its intention (i) to establish a satisfactory system of collection and analysis of tourism statistics; (ii) to pursue and refine with CIH's assistance the survey conducted by the Bank so as to permit a more conclusive assessment of financial and economic viability of hotel investments in Morocco; and, (iii) upon completion of this assess ment in about two years and taking into account the findings of these analyses to revise as necessary its investment code and adjust fiscal and tariff policies for hotel investment in Morocco (draft supplemental letter to the Guarantee Agreement). In the meantime, CIG has confirmed its intention to adopt stricter financial and economic appraisal criteria to ensure that it would only finance economically sound projects (draft supplemental letter to the Loan Agreement). CIH would in particular apply to each project a test of the magnitude of additional capacity required against existing capacity effectively used. This test, the minimum economic occupancy rate (MEOR), represents for each type of hotel in each region a threshold beyond which additional capacity may be desirable, the existing capacity being saturated during the peak month. 37. The Bank started financing tourism projects in Morocco in 1966, when it agreed that part of a loan to Banque Nationale de Developpement Economique (Loan No. 447 DIOR) could be relent to CIH for hotel financing. It has since extended two lines of credit to CIH to finance hotel construction, the first in 1970 for US$10 million and the second in 1972 for US$15 million. The Bank has recently approved the Bay of Agadir Tourism Project which will provide infrastructure for new tourism development in Agadir, the fast growing year round beach resort in southern Morocco. The Bank has also recently approved a Third Education Project which will include construction of a hotel training school to supplement five existing schools and graduate each year about 55 middle level hotel technicians; and of four hotel training centers to train about 520 lower level hotel personnel each year. PART IV - THE PROJECT 38. The proposed loan would constitute the third Bank loan to CIII. The first Bank loan of $10 million, signed on August 2, 1970, is fully committed and disbursed. The second Bank loan of $15 million, signed on June 30, 1972, is expected to be fully committed shortly. Disbursements under these two loans have been slow because of the unfavorable investment climate in the early 1970's and the difficulties encountered by CIH in obtaining adequate documentation for withdrawal applications. With the improvement of the in- vestment climate and as hotel investors are becoming more experienced, dis- bursements are expected to be faster than in the past. The proposed third  - 11 - CIH project was appraised in October 1975. Negotiations for the proposed loan were held in Washington in April, 1976. CIH was represented by its President Director General, Mr. El Fihri, and the Guarantor by Mr. Tazi, Director of the Treasury. An appraisal report on CIH (No. 1077-MOR) dated April 30, 1976, is being distributed separately. A Loan and Project Summary is attached as Annex III. Organization and Procedures 39. Though formally a private company subject to corporate law, CIH is effectively controlled by the Government through Caisse des Depots et de Gestion, a public sector financial institution which holds 17 percent of CIH's capital. CIH's share capital was increased from DH 20 million to DH 40 mil- lion in 1973 and again to DH 60 million in 1974. 40. The public nature of CIH is reflected in the composition of its Board of Directors and Executive Committee. Of CIH's 15 Board members, only two represent private shareholders; seven are representatives of public sector shareholders and five of the Ministries of Finance and of Urban Development and Tourism. The latter Ministry is also represented in the Executive Commit- tee which is composed of five members in addition to the chairman. Until December 1972, when Mr. El Fihri was appointed as President Director General, CIII suffered from lack of continuity in leadership. Since then, the Board has become more involved in monitoring and guiding CIH's policies and activi- ties. The Executive Committee examines and approves all tourism loan pro- posals and all other loans amounting to more than Dil 100,000 ($25,000). Lend- ing decisions on smaller loans are delegated to CIH's President Director Gen- eral. 41. CIH, which is comprised of three departments one each for credit, fi- nance and administration, was reorganized in 1974 following the recommendation of a management consulting firm. The main innovations have been the regroup- ing of operational divisions in the credit department by functions rather than by sector of activity and the establishment of regional branch offices, which have the authority to approve housing loans up to DH 60,000. CIH's staff is qualified and now numbers 216 including 58 professionals. 42. The appraisal of hotel projects has steadily improved over the years. In most cases, the technical, legal, financial and managerial aspects of proj- ects are adequately covered by CIH's reports. The technical appraisal of larger projects is reviewed by independent engineering firms. The weak part of CIH's hotel appraisals is the analysis of marketing prospects as a result of inadequate statistical background information. The measures to be imple- mented by the Government and CIH, as mentioned in paragraph 36, are intended to help remedy this situation. 43. Supervision of hotel projects under construction is generally satis- factory. CIlI's technical staff has acquired considerable experience in scru- tinizing cost estimates and invoices. CIH's disbursement procedures are ade- quate. The proceeds of CIH's construction loans for hotels are made available  - 12 - to borrowers in four main tranches, plus a 10 percent final tranche, which is withheld until the completion of work. Funds are disbursed only following inspections by CIH's staff. Disbursements are suspended when a discrepancy is found between the original plans and the implementation of the project. CIH has confirmed its intention to prepare and submit to the Bank follow-up reports on all projects when disbursements deviate significantly from the original schedule. 44. Supervision of hotel operations - a key issue for the last Bank loan - has greatly improved since 1972. A portfolio supervision division has been set up and is by and large operating satisfactorily. CIH has confirmed its intention to organize and staff this division so as to visit at least twice a year hotels in arrears and to send to the Bank a copy of its semi- annual supervision reports of such hotels. This will be recorded in a supple- mental letter to the Loan Agreement. Operations 45. Between January 1, 1972 and September 30, 1975, CIH approved hous- ing loans totalling DH 394 million, most of them in the medium price range, and hotel loans totalling DH 145 million. The southern region including Marrakesh increased its share of CIH hotel financing from 27 percent of ap- provals in 1973 to 95 percent in 1974. This change reflects CIH's response to growing demand in this region and a shift from the earlier emphasis on Mediterranean coast investments. CIH's equity investments grew rapidly from only DR 1.3 million in 12 financial institutions in 1972 to DR 29 million in 37 companies at end 1975. This is mainly the result of CIH's successful pro- motional activities. 46. Hotel loans are limited to 20 years for construction with up to five years of grace and to 10 years for equipment with no grace period. CIH finances from 50 percent to 60 percent of the investment cost of a typical hotel. The Government usually guarantees at least 50 percent of the outstand- ing loan amount. Financial Results and Portfolio 47. CIH's balance sheets and income statements reflect a doubling of total assets from DH 392 million at end 1971 to DH 884 million as of December 31, 1975. This doubling is accounted for mainly by an increase of DH 407 million in outstanding loans and investments. The housing loan portfolio increased its share in CIH's portfolio from 29 percent to 38 percent. Access to the bond market of all financial institutions is closely controlled by the Government, which sets a yearly ceiling to new issues. However, CIH has so far received full support from the authorities in mobilizing adequate resources in the market. Up to 1975, the total increase in CIH's long term resources was obtained directly or indirectly from Caisse des Depots et de Gestion, the Central Bank and Banque Centrale Populaire. In 1975, CIH placed directly a DH 110 million 15-year bond issue at 7.5 percent. CIH's medium-term resources, which represented at end 1975 about 17 percent of its outstanding borrowings,  - 13 - were obtained through the issuance of notes subscribed by commercial banks. Two increases in share capital in 1973 and 1974 financed DH 40 million of the increase in assets (about 8 percent). During the period 1972-1974 CIH's debt/equity ratio, as defined in the 1972 Loan Agreement with the Bank, has remained within the agreed limit of 6:1. During 1975, additional borrowings brought the ratio to 6.9:1. In December 1975, the Government granted to CIH a Dil 40 million loan for 20 years, including a 10-year grace period; if consi- dered as part of CIH's equity base according to the definition set forth in the 1972 Loan Agreement with the Bank, this loan would lower the ratio to 5.3:1. 48. During the period 1971-1974, while CIH achieved generally good ope- rating results, profits were not in line with the growth of operations because of higher cost of resources by comparison with the average yield of its loans; net income to average equity decreased from 19.9 percent to 9.4 percent. CIHl's current ratio increased from 1.1:1 at end 1973 to 1.8:1 at end 1975; yet be- cause of high arrears and the imbalance between borrowing and lending terms its liquidity over the past three years remained a problem. Most of CIH borrowings are in effect repayable without a grace period on a level principal basis, whereas the loans it makes are amortized on a level total payment basis with up to five years of grace for hotel loans. 49. Arrears on CIH's loans increased in 1974 and 1975. As of September 30, 1975, amounts of principal and interest overdue for more than five months represented about 4.9 percent of CIH's total portfolio, as compared with 3.6 percent as of December 31, 1971 and 3.0 percent as of December 31, 1973. Arrears on housing loans are generally less than a year old and stem prin- cipally from the heavy strain put on middle to low income borrowers by semi- annual installments. Over the past fifty years, CIH has experienced no loss on housing loans, which are more than adequately secured. Arrears on hotel loans partly result from weak collection procedures, delays in hotel construc- tion and, for some hotels which are sensitive to seasonal variations, inade- quate timing of semi-annual installments falling at periods of low cash receipts. CIH's risks on borrowers accounting for 70 percent of all hotel loan arrears can be considered moderate after analysis. However, eleven borrowers, accounting for 30 percent of hotel loan arrears (DH 5.3 million) face more serious difficulties stemming from inadequate market analysis and poor management. CIII is considering imposing new management contracts on some borrowers and rescheduling debts when justified. Since all hotel loans are covered by a first mortgage and a Government guarantee of at least 50 percent of the outstanding loan amount, CIH's provisions of DH 7.4 million against possible losses as of December 31, 1975 adequately cover its risk. 50. As a result of a series of measures already enforced by CIH, its arrears situation has considerably improved since September 30, 1975. Routine collection on overdue housing loans is now the responsibility of CIll's account- ing division which systematically resorts to outside lawyers whenever the first two reminders to the borrower have had no effect. Two recent rounds of follow-up visits to CIH's hotel clients in default, especially in the Tangiers  - 14 - and Agadir areas, have been successful. Threat of prompt recourse to legal actions, and the enforcement of penalty interest on overdues (at a rate 2 per- cent higher than CIH's unsubsidized rate) has resulted in the settlement of numerous contented cases. As a consequence, amounts of principal and interest overdue for more than five months, which represented about 4.9 percent of CIH's total portfolio on September 30, 1975, decreased to about 3.4 percent by March 31, 1976. 51. While it remains financially creditworthy, CIH should further re- duce existing arrears and their possible recurrence in the future. CIH has confirmed its intention to maintain and reinforce the measures already taken in order to reduce by at least 50 percent before December 31, 1977, as compared with September 30, 1975, the ratio of outstanding loans affected by arrears to the total portfolio and to send to the Bank quarterly progress reports on the arrears situation. CIH will apply monthly amortization schedules to its housing loans, in the first instance to those extended to civil servants, and explore and gradually apply quarterly amortization schedules for its tourism loans, provided such changes do not adversely affect the financial equilibrium of CIH's borrowers. Finally CIH's exposure to any single company would con- tinue to be limited to a maximum of 20 percent of CIH's equity (Section 3.06 of the draft Loan Agreement). Operational and Financial Projections 52. CIH expects its housing and other non-tourism loan approvals to increase from DH 176 million in 1975 to DH 382 million in 1979. In view of the past trend in housing approvals, which almost tripled between 1973 and 1975, and of the demand backlog, CIR's expectations appear reasonable. 53. CIH's pipeline of tourism projects expected to be approved in the 1976-1979 period now includes 45 new hotels and 6 hotel extensions. These projects would add a total of 16,583 beds to Morocco's current accommodation capacity. On the whole, this pipeline appears sound as 40 hotels would be built or expanded in Morocco's growing tourism demand areas such as the southern region and Casablanca and in heretofore neglected areas with good potential for growth, such as the presaharan and eastern regions. Moreover, the 26 medium category hotels included in the pipeline should fill the short- fall in the existing supply of such accommodations. Most of the promoters are experienced hotel companies. 54. To meet commitments of Dll 981 miLLion expected between January 1, 1976 - December 31, 1978, CIH would have to raise new resources of DH 858 mil- lion, after deducting uncommitted funds and self-generated resources. CIH's foreign exchange requirements for hotel financing through December 1978 are projected to amount to DH 126 million ($30.4 million). The proposed Bank loan of $25 million would cover CIII's requirements for commitments through mid-1978. It is hoped that by that time CIH would have succeeded in its ongoing efforts to diversify its foreign borrowings.  - 15 - 55. Under the last Loan Agreement with the Bank (Loan No. 848-MOR) CIH's borrowing capacity would be limited by the debt/equity ratio of 6:1 (para 47), whereas CIH is not in a position to increase its share capital until profit- ability can be improved. Considering the growing proportion in CIH's port- -folio of housing loans whose risk has traditionally been considerably smaller than that of hotel loans, a relaxation of the overall debt/equity ratio can be justified. For the proposed loan, CII would be requested to maintain a debt/equity ratio of 7.5:1, while the Government subordinated loan of DH 40 million extended in December 1975 would be considered as part of CIH's equity base; however an amount of DH 4 million from that loan would be deducted each year from Clii's equity base (Section 4.06 of the draft Loan Agreement). This would induce CIH to carry out its proposed capital increase by 1977 and 1978. 56. CIH's profitability is expected to remain low through 1976 due to higher operating costs and narrowing interest spread between the average yield of its loans and the average cost of its financial resources. However, starting in 1977, profitability is expected to improve substantially, as the effects of interest rate increases from 8.75 percent to 10 percent on new housing loans since November 1975 and from 8.75 percent to 11 percent on new hotel loans after July 1976, will be felt. This improvement would allow CIH to remunerate adequately the two projected share capital increases of DII 20 million each in 1977 and 1978. However, because of the projected declining trend of CIH's interest spread from 3.2 in 1975 to 2.7 in 1979, additions to reserves would not be commensurate with CIH's increased level of operations. The Government has agreed to ensure CIH a sufficient profitability and ade- quate liquidity by allowing in particular CIH to adjust terms of its loans and borrowings. The Government would continue to bear the foreign exchange risk (Section 3.03 of the draft Guarantee Agreement). 57. CIH's assets are forecast to almost double from about DH 884 million at end 1975 to DH 1,643 million at end 1978. Housing and other non-tourism loans would triple during this period thus increasing their relative import- ance from 46 percent to 64 percent of total loan portfolio outstanding. Hotel loans outstanding are projected to increase by only 33 percent during the same period. Terms of the Proposed Loan 58. The proposed loan to CIH would be made on the terms and conditions usual for loans to development finance companies, including the standard commitment charge. Amortization would conform substantially to the aggregate of the amortization schedules applicable to the specific investment projects to be financed out of the proceeds of the loan and would not extend beyond 20 years. In view of the improvement in CIH's appraisal capability and greater experience of its hotel borrowers as well as the inflation in costs of hotel projects since May 1972, the free limit above which Bank approval of a project is required would be raised from $200,000 to $800,000 (Section 2.02c of the draft Loan Agreement). This limit would be applied to both construction and equipment subloans for a single hotel project. The Bank would thereby review  - 16 - more than 50 percent of projects being financed out of the loan; the foreign exchange cost of these projects would represent over 75 percent of the pro- posed loan. The proposed loan would finance 100 percent of the cost financed by CIH of imported equipment; 65 percent of the cost of imported equipment or equipment assembled or processed locally from imported components purchased in Morocco (equalling its estimated foreign exchange cost) and the foreign ex- change component of construction costs. PART V - LEGAL INSTRUMENTS AND AUTHORITY 59. The draft Loan Agreement between the Bank and the Credit Immobilier et Hotelier, the draft Guarantee Agreement between the Kingdom of Morocco and the Bank, the draft supplemental letters referred to in paragraphs 33, 36 and 44 above, 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 are being distributed to the Executive Directors separately. The draft agreements conform to the normal pattern for loans for development finance companies. 60. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 61. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President May 6, 1976  o Ow U 44 0 -4 ip~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~z M: 7 'l~~~~~~~0 o o 0 0 . 00 000 00 0 -o o