Morocco - Bay of Agadir Tourism Project

Document of FILE COPY The World Bank FOR OFFICIAL USE ONLY CIRCULATING COPY TO BE RETURNED TO REPORTS DESK ReportNo. P-1750-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR THE BAY OF AGADIR TOURISM PROJECT January 16, 1976 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  KINGDOM OF MOROCCO BAY OF AGADIR TOURISM PROJECT CURRENCY EQUIVALENT Currency Unit: Dirham (DH) US$1.00 = DH 3.80 US$ .26 = DH 1.00 Exchange rate fluctuates with weighted average of major currencies; rate used in Appraisal Report is US$1 = DH 3.80 FISCAL YEAR January 1 to December 31  FOR OFFICIAL USE ONLY INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESI]DENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE KINGDOM OF MOROCCO FOR THE BAY OF AGADIR TOURISM PROJECT 1. I submit the following report and recommendation on a proposed loan to the Kingdom of Morocco for the equivalent of US$211.0 million, to help fi- nance the Bay of Agadir Tourism Project. The loan would have a term of 20 years, including 5 years of grace, with int-erest at 8.5 percent per annum. PART I - THE ECONOMY 2. An updating economic mission visited Morocco last April and December; its report is due to be issued by the end of January; the following paragraphs are based on the mission's principal findings. Country data are attached as Annex I. 3. During the 1968-72 Plan, Morocco succeeded :Ln 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 GDP 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 accompanied 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 enterprises de- clined, 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 encourage 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 increased by appropriate changes in staffing and organization. This document has a restricted distribution and may be used by recipients only in the perfofmance of their official duties. Its contents may not otherwise be disclosed without Work Bank authorization.  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 improve- ment 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 deve- lopment of rainfed agriculture, "Moroccanization" of some industrial and commercial enterprises, reforms designed to make the tax system more equitable and progressive, a price and wage policy designed to enable the poorest seg- ments 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 onlv 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 exports 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% 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 risinp 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 wDuld 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 4.15 billion and new projects for 1975-77, DH 9.2 billion. Excluding defense, new projects fall in the following main categories:  DH 2,500 million for regional development; DH 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 Plan revisions seem justified overall. Indeed, the achievement of initial (especially social) Plan objectives is eminently desirable. Simi- larly, Morocco's economy has developed to a stage where heavy industry should begin to find a place. The country possesses an obvious comparative 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 countrv'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 according to the tentative plans for heavy industry. Availability of skilled manpower may restrain the pace of project preparation and implementation. The manpower constraint can only be relieved gradually by training. For large industrial and infrastructure projects, Morocco may be able to use foreign services more extensivelv 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 proups, 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 export receipts, it is likely that investment growth will still reach close to 13.5% 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 im- provement 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 initial 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 invest- ment 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, external borrowing requirements on a commitment basis would need to average more than $700 million annually in 1978-80, compared to an actual $553 million in 1974 and an estimated annual average of $540 million in 1975-77. Morocco's borrow- ing 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 wcould 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 8121 million in 1974 to some $464 million in 1980. Debt service would remain manageable, rising to 11 percent of exports (including non-factors services) in 1980, from 6 percent in 1974. The prolongation 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 r)r investment. These would lead to substantial debt service obligations, since an increasing share of external borrowing wouldl come from commercial 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.  PART II - BANK GROUP OPERATIONS IN MOROCCO 20. Bank and IDA lending to Morocco has supported 23 projects with financing totalling $520 million (net of cancellations), of which $304.5 mil- lion has been lent since the beginning of FY73, IDA credits, totalling $50.8 million, have been made available for five projects. IFC investments have amounted to $2.9 million. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of November 30, 1975, and notes on the execution of ongoing IBRD/IDA projects. In some cases, delays have been caused by management or procurement difficulties, and recently the risk of cost overruns has increased due to the upsurge in investment activity in Morocco and the recent 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 1970-7b), 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. 22. 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 developing 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 is being presented to the Execu- tive Directors. 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 first project for the development of rainfed agriculture in the Meknes region has been approved recently. Projects for livestock/rural development in a rain- fed zone in northern Morocco, for agricultural credit and for developing production of fruits and vegetables are being prenared. 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. A third line of credit for CIH is now being ap- praised. A project for the construction of a large cement plant in the less developed northeast part of the country is to be negotiated, and joint finan- cing of this project with the Arab Fund is also envisaged. The tourism in- frastructure project for which a loan is proposed here will alleviate the  -7- scarcity of improved land for hotel development in t:he Agadir Region. Proj- ects in industry and tourism help to raise foreign exchange earnings and to improve sectoral policies. 25. A sites and services project in Casablanca is being prepared. It should contribute to solvina the problem of rapid growth of slum areas. A substantial social serv:!ces 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 projnct i.s being appraised to meet the needs of several urban and rural centers. A multiDurpose development project, mainly for power but also with substantial irrigation and industrial and potable water supply benefits, located on the Oumr-er-R'bia river, 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. A proposed Third project concentrates on general education in rural areas and specific skcill training. These objectives would be pursued through a planned fourth project. 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, OEC])/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 next meeting of the Group may take place in 1976 but has not yet been scheduled. The gross inflow of official loans and grants to Morocco rose from $129 million in 1966 to $159 million (of which $18 Tmillion 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 $19O million. The major sources of aid were France, the U.S., Germany and the Bank Group. 28. At the end of 1974. 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 14.5 percent in 1973 and 12 percent in 1974. 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 attracl:ive 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 heterogeneous 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 most other Mediterranean countries.  - 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 coresponding 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 car. According to a Bank-sponsored study of Mediterranean tourism markets, recently completed for ten Bank-associated DFC's in Mediterranean countries, foreign tourist arrivals are projected to grow over the next decade at 1n.5 percent per vear for Morocco, as compared with 5 percent for the Mediterranean region as a whole. 31. The country's hotel capacitv has not increased as fast as the number of tourists; it only doubled between 1q69 and 1974 to reach 41,000 beds. About two-thirds of the hotels built during that period were financed by private in- vestors, most of them Moroccan. The remainder was financed by the Government or by oublic agencies such as the Moroccan Railways, Royal Air Maroc and Government-controlled banks. During the Second Five-Year Developmanz Plan (1968-72) hotel investment amounted to about USS115 million and represented less than 4 percent of the total gross fixed capital formation. Morocco's accommodations are concentrated in the four imperial cities and Casablanca (43 percent), the Mediterranean coast (35 percent) and Agadir (12 percent). Thev are generally of a high standard, with luxury establishments accounting for over 40 percent of the total. About 30 percent of existing accommodation is managed and operated bv 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 achieve- ments during the previous Plan period. This sluggish growth can be explained by the general slowdown in investment following the political events in 1971 and 1972, more promising investment opportunities in other sectors following the Moroccanization laws and the shortage of developed land in Agadir and Marrakesh, Morocco's top ranking tourist areas. 32. Gross foreign exchange receipts from tourists represented 21 percent: of the country's total foreign exchange earnings from the export of goods anc 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. Indirectly, some 60,000 jobs in handicraft and some 20,000 in agriculture, construction industry, transport and other services depend on the tourism sector. 33. The tourism directorate of the Ministry of UJrban Development, Housing, Tourism and Environment (MUHTE) is responsible for promoting tour- ism, administering the investment incentives system, training hotel personnel and developing tourism infrastructure. Hotel construction is primarily fi- nanced through Credit Immobilier et Hotelier (CIH), a government controlled development finance company specialized in housing and hotel lending. The 1973 Investment Code provides the following main incentives for hotel inves- tors: (i) a ten-year income tax exemption; (ii) an interest free advance covering 15 percent of the investment, excluding land acquisition, for a  - 9 - period of ten years including a five-year grace period; and (iii) an interest rebate on loans provided by CIH, resulting in an effective rate of 4.5 percent p.a. (as compared to a nominal rate of 8.75 percent). 34. The Bank has expressed concern on several occasions that generous incentives may lead to overinvestment in hotels. Incentives are granted to investors in hotel projects which have been approved technically by MUTHE and financially by CIH. CIH also calculates an economic rate of return on all hotel investments: however, because of methodology and limited data, these calculations are not fully reliable. A recent 3ank mission which appraised a proposed third loan to CIT conducted a survey aimed at establish- ing the methodological and information bases for improved economic appraisal techniques. CIH would be expected to adopt these techniques as soon as possible while the Government would endeavor to improve the collection and analysis of tourism statistics. These measures shoulcd eventually lead to a rationalization of Morocco's hotel incentives system and reduce the risk of benefits being granted to marginally economic hotel prolects. 35. The Bank started financing tourism projects in Morocco in 1966, when it agreed that part of a loan to Banque Nationale de D)eveloppement Economique (Loan no. 447 MOR) could be relent to CIB for hotel financing. The Bank 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. A third line of credit is being appraised. In addition, the proposed third education project includes construction of a hotel training school which would supplement the five existing schools and graduate each year about 55 middle level hotel technicians and of four hotel training centers which would train about 520 lower level hotel personnel each year. Under the proposed project for tourism infrastructure the Government would be required to organize a training program for additional lower level hotel personnel in the existing Agadir hotel school. PART IV - THE PROJECT Background 36. The proposed project to provide infrastructure for new tourism devel- opment is located in Agadir, the fast growing administrative center of southern Morocco and one of the year round beach resorts closest to Europe. In 1960, Agadir was entirely destroyed by an earthquake in which 15,000 out of its popu- lation of 35,000 died. The Moroccan Government created a special agency to design and reconstruct a new city for 50,000 inhabitants. The new city was built away from the geological fault and according to anti-seismic standards. Its population grew rapidly and reached the target population of 50,000 in 1969-70. Economic activity of the Agadir Metropolitan Area is based on fish- ing, agro-industries (based largely on irrigation development in the adjoining  - 10 - Souss Valley which the Bank is supporting under Loan. No. 1123), ore processing and tourism. Tourism, virtually non-existent in 1960, has boomed since, with almost all tourism facilities concentrating in the Secteur Touristique et Balneaire, on the beach front of the city. In 1974, 4,000 hotel beds were in operation and 120,000 visitors received. The imbalance between growing demand and increase in accommodation capacity has resulted in exceptionally high occupancy levels - during the first eight months of 1975 bed occupancy rates reached 75 percent - and a high volume of demand that could not be satisfied. Considerable further growth is expected and Moroccan and foreign investors' interest in the Agadir area is strong; applications for hotel construction sites have largely remained unsatisfied for want of developed land. 37. In 1971, the Moroccan Government requested Bank assistance to finance infrastructure for the development of tourism in various areas of Morocco. In 1073 the Agadir area was selected and TNDP agreed to finance, with the Bank as executing agency, the identification of suitable zones for tourism devel- opment and the preparation of feasibility studies. As counterpart to the UNDP contribution, the Government, together with the major Moroccan financial institutions, created the Societe Nationale d'Amenagement de la Baie d'Agadir (SONABA), a public sector enterprise (owned by the Government and Government controlled financial and tourism institutions), and intended to prepare and implement tourism infrastructure projects in the Agadir area. The project was appraised in June 1975. Negotiations were held in Washington in December. The Moroccan delegation was led by Mr. R. Belkoura of the Prime Minister's Office. A report entitled "Appraisal of the Bay of Agadir Tourism Project" (918a-MOR) is being distributed to the Executive Directors separately. Annex III contains a loan and project summary. Project Description 38. The proposed project is intended to assist the Government in dev- eloping Agadir into a major tourisnm area and to use it as a stimulus to foster further planned growth of the Greater Agadir Area. The project would consist of (i) infrastructure works and public facilities for the development of a new tourism section on 260 hectares, adjacent to Agadir's existing section, and known as Unite d'Ameragement Touristique (UAT), on which 7,000 hotel beds and 2,600 housing urits are expected to be constructed; (ii) regional infra- structure and facilities for the development of Greater Agadir and its tourism assets; and (iii) related studies. 39. The planning concept proposed for the new tourism section represents a departure from traditional patterns, where hotels for tourists are self contained and isolated from other activities. This is particularly the case for the existing tourism section in Agadir, whose development has proceeded in a ribbon-fashion along the beach and has been characterizedd by segregation of hotels from each other and from other types of activities. Hotels in the new tourism section would be smaller, intermingled with apartments for tour- ists and housing nnits for the local population, and clustered around shop- ping and entertainment facilities.  - 11 - 40. The proposed combination of infrastructure for tourism and housing facilities is justified by the project's location within the urban area and by the intention of making better use of public utilities investment neces- sary for the hotel component. Although the housing program would be designed mainly for the upper and middle income groups, it would also alleviate the general shortage of housing in the Agadir area. The number of housing units in the project zone would represent 6 percent of the incremental housing de- mand in the Greater Agadir Area during the period of project implementation (1975-84). Improved lots would be sold under the project at prices in line with those expected to prevail on the market. These prices would fully cover all investment costs and a reasonable return to SONABA. 41. Under proposed legislation, SONABA would acquire the land whose development would be based on a land-use plan and zoning regulations which are almost completed. Zoning regulations are also being completed for the existing tourism section and are intended to curb the construction of high rise hotels in order to preserve the visual balance ol- the beach front. These regulations will also include provisions for the sale of land in the existing section at nonsubsidized prices comparable to those to be applied to the new section. Enactment of these zoning regulations for both tourism sections would be conditions of loan effectiveness (Section 6.01 of the draft Loan Agreement). 42. As an extension of Agadir's existing infrastructure and public utilities system, the project would include roads, waLking paths, parking facilities, street lighting, sewerage, water and power supply, telephone lines and green spaces. In addition, it would provide financing for a core of public facilities such as shopping, entertainment and sports activities which would make the project zone attractive to investors and visitors alike. 43. Regional infrastructure and facilities to boe financed under the project would include (i) completing Agadir's ring road to allow heavy traf- fic from the Sotuth and East to reach the harbor of Agadir without passing through the urban agglomeration and the two tourism sections of the city; (ii) upgrading a 56 km stretch of a tourism road connecting several villages in the picturesque Imouzzer valley, one of the most attractive sites in the region; and (iii) eliminating harbor pollution and risks of beach contamination by replacing primwitive water pumps used to unload fish in the port of Agadir. 44. In addition, the proposed project includes a program of technical assistance and studies intended to help the Government in planning the future growth of the Greater Agadir Area and developing methods to protect the environment increasingly threatened by the effects of urbanization. It would also include the updating and completion of master plan for the Area; and the preparation of regulations and guidelines for preservation of traditional architecture in the Imouzzer valley and other rural areas surrounding Agadir which would allow rural families to improve their dwellings. At present, only the city of Agadir is serviced bv a sewerage network. Sewage disposal is inadequate. The proposed project would finance a feasibility study for a sewerage treatment and disposal serving Greater Agadir. The project would also finance the preparation of another tourism infrastructure project.  - 12 - Project Implementation 45. Development of the new tourism section in Agadir would primarily be the responsibility of SONABA which would implement all infrastructure and building works through contractors. SONABA would conduct the detailed planning studies, supervise final engineering work, advertise requests for tenders, evaluate bids, enter into contracts and supervise all work. Consultant ser- vices would be utilized to assist SONABA in preparing the final engineering design and supervising the works in the Project Zone. For the design and construction of the water supply, electric power and telecommunications compo- nents, SONABA would contract with Office National de l'Eau Potable (ONEP), Office National de l'Electricite (ONE) and the Ministere des Postes, Tele- graphe et Telephone (PTT) respectively. Once implemented, these facilities would be operated by these specialized agencies, which are adequately orga- nized and managed to carry out these tasks. In implementing the sewerage component, SONABA would work closely with the Municipality of Agadir, which runs the existing system, and with the Province of Agadir, which is in charge of the Greater Agadir Sewerage study. 46. Coordination between SONABA and other Government agencies is ensured through an ad hoc interministerial commission at the national level chaired by the Minister of Tourism, and a local committee chaired by the Governor of Agadir. A condition of loan effectiveness would be the signing of agreements between SONABA on the one hand and ONEP, ONE, and PTT on the other hand, defining the agencies' respective technical and financial responsibilities in the construction, management and maintenance of the various infrastructure works (Section 6.01 of the draft Loan Agreement). 47. Once developed, the land and public facilities would be sold or leased by SONABA to private investors at market prices. It is expected that land revenues will cover all investment costs and provide a satisfactory rate of return to SONABA. Transactions would be subject to regulations (i) giving SONABA a preemptive re-purchase right in case the buyer of the land wishes to sell it before construction; and (ii) imposing construction deadlines and standards in order to avoid having improved land remain unbuilt and to make sure that building projects fit with the overall plan. Adoption by SONABA's board of a policy incorporating these regulations would be a condition of loan effectiveness (Section 6.01 of the draft Loan Agreement). 48. SONABA's responsibilities would evolve over the life of project implementation. During the first years, its function would be mostly that of a builder. Then, its commercial function would become more important. SONABA's staff would reflect this changing character. SONABA's project implementation unit would be responsible for the physical and architectural implementation of the projects. It has already prepared a critical path network which will be reviewed with the Bank every six months; as will be its progress reports (Section 3.03 of the draft Project Agreement). It is headed by a qualified Technical Director, an engineer with experience in similar projects. Within this unit, physical planning and architecture would be coordinated by the chief  - 13 - urban planner who supervised these aspects of the UNDP financed studies. SONABA's commercial and financial division would, after the start-up years, promote the sale or lease of hotel and housing sites as well as the proposed public facilities (Section 3.04 of the draft Project Agreement). A legal and administrative division would prepare and supervise sale and lease con- tracts according to the regulations mentioned in paragraph 47, and manage personnel and equipment. 49. To guarantee completion of the project after the infrastructure in- vestment has been made, the Moroccan Government has undertaken to ensure that sufficient hotel beds will be built to attain an acceptable rate of return on infrastructure outlays; a minimum of 4,200 beds (or 60 percent of the sche- duled total) would be in operation by 1988 (Section 4.04 of the draft Loan Agreement). Such an expansion will yield an estimated economic rate of return of 13 percent. 50. The Regional Components (Agadir's ring road, Imouzzer valley road and harbor equipment) would be implemented under the responsibility of the Ministry of Public Works through its regional or specialized agencies. 51. The project would be completed over a periodl of about five years. Preparation of a detailed land use plan would be compLeted by December 1976. Final designs for infrastructure works would be completed at the latest by June 1977 and for public facilities, by February 1978.. Construction would start by August 1977 and would be completed by June 1981. Cost Estimates and Financing Plan 52. Cost estimates are shown in Annex III and are summarized below (excluding interest during construction): Millions of USS Local Foreign Total Project site 12.4 10.0 22.4 Regional infrastructure and facilities 2.2 2.1 4.3 Consultants 0.6 0.6 1.2 Contingencies 7.8 8.3 16.1 Total 23.0 21.0 44.0 Interest During Construction 3.9 - 3.9 Grand Total 26.9 21.0 47.9 53. The financing plan for the Project is as follows including interest during construction:  - 14 - (US$ million) Project site SONABA equity 5.3 Government Loans Senior Loan 9.1 Treasury Advance 7.9 Proceeds of Bank Loan 17.0 Total 39.3 Other Components Bank Loan 4.0 Government budgetary funds 4.6 Total 8.6 Grand Total 47.9 The Bank loan would be made to the Government and would finance the full foreign exchange cost of the project amounting to US$21.0 million.. The por- tion of the loan proceeds needed for the Project site would be on-lent to SONABA on the same terms and conditions as the Bank loan, while local costs, including interest during construction, would be covered by the increase of SONABA's authorized capital, the subordinated long-term Treasury advance bearing 6 percent interest and the additional Government loan having the same terms as the Bank loan. Any cost overruns incurred in the implementation of the project would be financed by the Government. Conclusion of a subsidiary loan agreement, acceptable to the Bank, between the Government and SONABA would be a condition of loan effectiveness (Section 6.01 of the draft Loan Agreement). SONABA has agreed to refrain from incurring any debt other than for the financing of the project prior to 1986 without the Bank's approval and would at all times maintain a minimum debt service coverage of 1.1 (Sections 4.03 and 4.04 of the draft Project Agreement). Depending on the actual pace of land sales, SONABA might accumulate sizable cash balances. In this case SONABA would prepay that part of the Bank loan relent to it by the Government to the extent that in any one year, the ratio of land sold in the project area to the total land intended for sale or rent exceeds the ratio of total prior repayments by SONABA of the Bank loan relent to it to the total amount of such loan. Such prepayment would be made to the extent necessary to equalize these ratios the debt service coverage covenant permitting (Sec- tion 2.09 of the draft Loan Agreement). The Government would make correspon- ding prepayment to the Bank and could equally claim prepayment of its own senior loan. SONABA's accounts would be subject to annual audits by indepen- dent auditors acceptable to the Bank (Section 4.02 of draft Project Agree- ment). Procurement 54. Civil works contracts would be tendered under international compet- itive bidding according to the Bank's guidelines. In order to permit smaller local contractors to tender for work of a size within their capabilities and  - 1 5 - also to attract foreign bidders, contracts for civil works would be tendered individually and would also be combined into bidding groups at the bidders' option. Equipment would be procured after international competitive bidding in accordance with Bank's guidelines except for purchases not exceeding US$70,000 equivalent, when procurement will be in accordance with normal government procurement procedures, which are acceptable to the Bank, provided that such purchases do not exceed an aggregate of USn500,000. A 15 percent preference margin, or the prevailing customs duty, whichever is lower, would be extended to local manufacturers in the evaluation of bids for equipment. Telecommunication equipment procured under the project would have to be com- patible with that presently used in Agadir. It is therefore proposed that PTT negotiate the purchase -with manufacturers of this equipment, subject to Bank approval. The amount involved would be about US.6On,000. 55. The consultants would be appointed by SONABA, the Ministry of Urban Development and Tourism and the local authorities following Bank guidelines. Retroactive financing amounting to about US