Document of The World Bank FIL COY FOR OFFICIAL USE ONLY Report No. 3014-MOR MOROCCO FOURTH LOAN TO CREDIT IMMOBILIER ET HOTELIER (CIH) STAFF APPRAISAL REPORT December 18, 1980 Regional Projects Department Europe, Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENT (Dirhams (DH) per US Dollars) Period Average 1977 4.50 1978 4.16 1979 3.90 August 1980 3.86 Source: IMF, International Financial Statistics October 1980 GLOSSARY OF ABBREVIATIONS CIH Credit Immobilier et Hotelier CDG Caisse de Depot et de Gestion BCP Banque Centrale Populaire BNDE Banque Nationale pour le Developpement Economique CNCA Caisse Nationale de Credit Agricole MOT Ministry of Tourism ONMT Office National Marocain du Tourisme WTO World Tourism Organization UNDP United Nations Development Program ONCF Office National des Chemins de Fer CMKD Consortium M4aroc-Koweitien de Developpement SICOPAR Societe Industrielle de Construction et de Participation CREFOGA Credit Foncier du Gabon SIDET Societe Immobiliare pour le D6veloppement Touristique CEN Caisse d'Epargne Nationale CASBAH Calcul Applique de Simulation Base sur l'Administration des Hotels FISCAL YEAR January 1 - December 31 This report was prepared by Messrs. Mohamadou Diop, Franco Batzella (EMPID) and Mr. Iain Christie (URB/TAS) with the assistance of Ms. Eriko Ishikawa (URB). FOR OFFICIAL USE ONLY MOROCCO APPRAISAL OF THE CREDIT IMMOBILIER ET HOTELIER (CIH) TABLE OF CONTENTS t Page No. I. INTRODUCTION ............................................. 1 II. THE TOURISM SECTOR ....................... 1 A. Recent Developments .................................. 1 B. Impact on Moroccan Economy ..... ............... 3 C. Administration and Policies ..... .............. 4 D. Performance and Prospects of Tourism Investments ..... 8 III. THE FINANCIAL SECTOR ...................................... 13 A. Introduction ........................................ 13 B. Mobilization of Private and Institutional Savings .... 14 C. Interest Rates and Cost of Capital ................... 15 IV. CIH'S STRUCTURE AND PROCEDURES .. 16 A. Establishment and Corporate Status ......... ......... 16 B. Board and Committees ....... 16 C. Management and Staff .. 17 D. Policies and Procedures .. 17 V. CIH'S OPERATIONAL PERFORMANCE AND PROSPECTS ............... 20 A. Characteristics of Operations .. 20 B. Performance Under Bank Financed Projects ............. 22 C. Prospects for CIH's Operations .. 23 VI. CIH'S FINANCIAL SITUATION AND PROSPECTS ................... 25 A. Resource Position .. 25 B. Financial Performance and Position 26 C. Quality of Loan Portfolio .. 27 D. Audit Performance .. 30 E. Resource Requirements .. 30 F. Financial Prospects .. 32 VII. THE PROJECT: LOAN BENEFITS/RISKS ......................... 33 A. Benefits and Risks ................. .. ............... 33 B. Loan Features ....................................... 34 VIII. AGREEMENTS AND RECOMMENDATIONS .............. .. ........... 35 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. Table of Contents (Continued) Annexes 1. Morocco: Evolution of Tourist Arrivals (1973-1979) 2. Morocco: Tourist Accommodation Capacity in 1978 and 1979 3. Morocco: Hotel Occupancy Rates (1978-1979) 4. Morocco: MOT Estimated Cost of Technical Assistance 5. CIH: Proposed Methodology for Appraisal 6. CIH: Loan Operations - Actual and Forecasts 7. CIH: Resource Position (September 30, 1980) 8. CIH: Audited Income Statements (1976-79) 9. CIH: Audited Balance Sheets (1976-79) 10. CIH: Financial Performance Indicators (1976-79) 11. CIH: Analysis of Loan Arrears 12. CIH: Resource Needs and Financing Plan 13. CIH: Projected Income Statements (1980-83) 14. CIH: Projected Balance Sheets (1980-83) 15. CIH: Projected Performance Indicators (1980-83) 16. CIH: Estimated Disbursement Schedule 17. Data and Documents in File MIOROCCO APPRAISAL OF CREDIT 2IMOBILIER ET HOTELIER (CIH) I. INTRODUCTION 1.01 The Credit Immobilier et Hotelier (CIII) was founded in 1920 as a mortgage bank specializing in the long-term financing of housing construction. Since 1960 it has also been practically the sole source of long-term institu- tional financing for hotel projects in Morocco. Since August 1970 the Bank has made three loans to CIH amounting to US$48.7 million 1/; the first two loans have been fully disbursed. The third loan of $25 million was signed July 2, 1976, fully committed June 1978 and disbursed November 30, 1980. Besides lending to CIH, the Bank has supported Morocco's tourism development through a $21 million loan in February 1976 for a tourism infrastructure project in the Bay of Agadir. 1.02 CIH has asked the Bank for further financial assistance. This report appraises a proposed fourth loan to CIH for the financing of the foreign exchange component of tourism projects. The project also includes a technical assistance program to the Moroccan Ministry of Tourism (MOT) and CIH with the principal objectives to: (i) finalize on-going cost/benefit studies of tourism investments; (ii) further strengthen MOT-s institutional capability with particular reference to the economic analysis of tourism projects and development of new sector policies; and (iii) provide further training to CIH staff in new economic methodology and computer based appraisal models such as CASBAH. II. THE TOURISM SECTOR 2.01 Developments in the tourism sector during 1970-79 and prospects for 1980-85 are described in recently completed studies, commissioned by the Government and prepared by the World Tourism Organization (WTO) with UNDP financing (Project file); their preparation came as a result of undertakings agreed with the Government under the CIH-III loan (1279-MOR) 2/ to improve understanding of sectoral developments (para 2.13). A summary of these developments, prospects and relevant findings is given below. A. Recent Developments 2.02 Foreign tourist arrivals grew from less than 0.5 million in 1968 to about 1.3 million in 1973. This represented an annual growth of about 23% p.a., one of the highest among countries in the Mediterranean basin. Between 1973-76, 1/ Net of cancellations. 2/ Appraisal of Credit Immobilier et Hotelier (CIH) Morocco, Report 1077-MOR dated Aprril 30, 1976. -2- the energy crisis, political developments in the Sahara to cite the most important factors, combined to reduce arrivals to 1.1 million by 1976. The tourism business picked up again in 1977 with a 29% increase in arrivals levelling off to 1.5 million in 1978 and 1979; arrivals during 1977-79 generated an estimated 5 to 6 million bednights in classified hotels and vacation villages (the official statistics show no historic trend for bed- nights as distinct from arrivals - Annex 1). 2.03 The relatively even seasonal distribution of tourist arrivals and bednights conceals sharp regional variations stemming from climatic differ- ences between the Northern Mediterranean areas (Tangiers, Al Hoceima, Nador) and the Central and Southern resorts (Fez, Casablanca, Agadir, Marrakech). In the North, sumner bednights account for 55% of the year's total compared to 25% in the South. Thus while average annual bed occupancy rates range from 50% to 60% in the Southern areas, in the North they hover around 30%. This explains the much higher profitability of tourism investments in the Central and Southern resorts. In the East and Pre-Saharan areas which account for 6% of hotel capacity, occupancy rates fall below 30%. 2.04 At end-1979, Morocco's tourist accommodation capacity amounted to 62,370 beds, of which 49,900 were in classified hotels and vacation villages, and the remaining 12,470 were in unclassified accommodations catering almost exclusively to local travelers (Annex 2). Compared to the situation at end- 1974 which was analyzed in the CIH-III loan appraisal report, about 12,000 new classified beds have been put in service at an annual average growth rate of 6% p.a.; this rate is consistent with the long range growth trend of demand (para 2.25). 2.05 Tariffs. As is the case in other Mediterranean countries, the Government imposes ceilings on the maximum prices that classified hotels are allowed to charge in Morocco, as a means to maintain international competitive- ness. Floors to minimum prices are only imposed on the top-category, 5-star hotels. Tariff ceilings, although adjusted periodically for inflation, may have kept the prices charged to individual tourists by luxury hotels somewhat below levels that market forces would have set. Furthermore, for the majority of Moroccan hotels, ceilings are unlikely to have affected their profitability significantly since group rates are negotiated competitively between hoteliers and tour operators and their market levels are well below official ceilings. Nonetheless, controls may adversely affect profitability and lead to distor- tions and resource misallocation and should be removed. The Government agrees with this position but favors a gradual approach to avoid a too sudden disrup- tion of the market. To this end, ceilings (and floors for 5-star hotels) were increased in May 1979 by 17% on average in agreement with the Bank. The Govern- ment has recently removed controls on 5-star hotels and further increased tariff ceilings by an average 18% (i.e., 25%for 4-star hotels and 15% to 10% for other categories) pending completion of on-going studies (para 2.12). Considering that price inflation rates were 8.3% in 1979 and 12% in 1980, the tariffs have increased 15% in real terms in the last 18 months. 2.06 Investments. During the 1973-77 planning period, investments in tourism were as follows: -.3- DH million Percent Hotel investments: 766.2 80.0 Infrastructures 129.8 13.6 Studies and surveys 6.2 0.6 Promotion and training 54.9 5.8 Total 957.1 100.0 The private sector accounted for 76% of new hotel investments, leading to an additional capacity of 11,862 beds; semi-public enterprises and Office National Marocain du Tourisme (ONMT) put up 12% each for the balance of hotel investments. Therefore including hotel investments, direct public sector expenditures for tourism amounted to an estimated DH 286 million in 1973-77; this amount excludes subsidies provided under the incentives system. CIH financing accounted for 50% of the total hotel investments, mostly for private and to a lesser extent semi-public promoters. As the Government will no longer directly invest in tourism, its investment expenditures are expected to decrease while the reduction of incentives (see para 2.14) and the new pro- motional tax 1/ on tourist bednights would have the net effect of reducing direct subsidies to hotels. B. Impact on the Moroccan Economy 2.07 Balance of payments. Surveys made in 1979 on the amounts and structures of tourist expenditures in Morocco and the availability of better data on tourists length of stay and bednights provide more reliable estimates of the effect of tourism on the balance of payments than were formerly possible. Gross foreign exchange receipts from tourism were estimated at DH 1.5 billion ($350 million) in 1977 compared to DH 1 billion ($250 million) in 1974, and accounted on average for 15% of Morocco's total foreign exchange receipts from goods and services in 1973-77. The import component of current expenditures associated with tourism operations is estimated at 10% of tourist receipts, thus leading to the conclusion that the net effect of tourism on Morocco's current balance amounts to a positive 90% of gross foreign exchange receipts from tourism. About 60% of tourists' expenditures accrue to hotels while the balance is distributed among handicrafts (14%), restaurants and other local services including transportation. 2.08 Employment generation. The hotel industry directly employed 18,000 people in 1977. In addition, it is estimated that indirect employment generated by tourism related activities amounted to 24,000 jobs in handicraft production and 15,000 jobs in other branches (e.g., restaurants, transportation and travel services, etc.). On the basis of available data, it is estimated 1/ One dirham per bednight is now regularly levied and earmarked for promotion. that the cost per direct job amounts to $30,000 on average for hotels financed by CIH compared to $41,400 for industrial projects financed under the BNDE-VII loan (1061-MOR) 1/; taking into account indirectly generated employment in the other low capital intensive activities mentioned, the overall cost per job created by tourism activities is below $9,000 compared to $22,500 in manufacturing industries 2/. An analysis of the economic impact of hotel projects financed by the Bank is given below (in paras 5.07-5.10). C. Administration and Policies 2.09 The Ministry of Tourism (MOT) and its parastatal ONMT are responsible for administering the tourism industry, including the investment incentive system, promoting tourism, training hotel personnel and developing tourism related infrastructures. ONMT was until 1979 solely responsible through its overseas offices for the promotion of tourism while also owning and managing a few hotels (built in the early 1960's in Morocco) on behalf of the Government through its Diafa hotel chain. This double function of ONMT coupled with its poor staffing and lack of autonomy created a lot of confusion in its activities and resulted in a poor performance. These developments eventually led to the recent decision to fully integrate ONMT's staff and functions to the MOT. Direct public sector investments in tourism have heretofore been channelled through three agencies, ONMT, Maroc-Touriste, an affiliate of Caisse de Depots et Gestion (CDG) and to a lesser extent the Office National des Chemins de Fer (ONCF), the railway agency. Both ONMT and Maroc-Touriste own and operate two hotel chains mainly in the South for the former and in the North for the latter. The relatively poor performance of ONMT and Maroc-Touriste in their tourism ventures has led to promotion of indirect public sector invest- ments in association with private interests through new corporations (e.g., Farah-Maghreb, with CDG and Kuwaiti interests, Societe Immobiliere pour le Developpement Touristique (SIDET) with BNDE and Royal Air Maroc). Direct public sector investments in hotels have now been discontinued. The System of Investment Incentives 2.10 Incentives for hotel investors are provided by the 1973 Investment Code as revised in 1980 as follows: (i) a ten-year full or partial income tax exemption depending on the project location; (ii) an interest free Govern- ment advance equivalent to 15% of the estimated investment cost, excluding land acquisition, for ten years including five years of grace; (iii) various indirect 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) since February 1980, a 2% interest rebate on hotel loans provided by CIH (para 2.14). 1/ Data on the BNDE-VIII loan (1428-MOR) sub-projects (other than SSI) suggest a higher cost per job created. 2/ See MOROCCO-SAR - Integrated Project for SSI Development (No. 2365-MOR dated March 26, 1979). - 5 - 2.11 Since the appraisal of CIH-I the Bank has expressed concern that excessive incentives may lead to over-investment in hotels and misallocation of resources. However, reliable tourism statistics, particularly the length of stay of tourists in Morocco and the amount and pattern of their expenditures in and outside hotels, were relatively deficient at the time of appraisal of the third Bank loan to CIH in 1975. Thus neither the Bank nor the Government were in a position to undertake an in-depth analysis of the costs and benefits of tourism investments in Morocco. Because of these deficiencies, the Moroccan authorities could not elaborate a rational strategy for the development of the sector, nor could they devise a sound basis for restructuring the incentives and tariff control policies. 2.12. For the above reasons, agreements reached under the CIH-III loan provided for the following undertakings to improve understanding of the performance and impact of tourism activities, namely: (a) the launching of a permanent system of collecting occupancy rates on a daily basis, so as to permit an analysis of monthly occupancy rates of the different types of accommodation in different areas of the country; (b) the parallel establish- ment of surveys to analyze tourists' expenditure both inside and outside hotels, so as to ascertain the actual economic benefits of tourism and to permit the calculation of full economic rates of return of tourism investment (i.e., taking into account non-hotel activities); (c) the completion of regional tourism masterplans, to map out infrastructural requirements and feasibilities for future development of the sector; and (d) the preparation of an in-depth study of the costs and benefits of tourism investments to provide the basis for better planning and strategies and for revising as called for sector policies, including in particular investment incentives and price controls. 2.13 The Government's performance on its undertakings was slow due to lack of qualified staff in the MOT which in October 1977 was organized into a full autonomous ministry (previously it was a department of a larger Housing and Public Works Ministry) and because of frequent changes at the head of the Ministry. This delayed the processing of the proposed loan though the CIH-III loan had been committed in mid-1978. With tourism development becoming a high priority under the Three-Year Development Plan in June 1978, the pace of implementation of the agreed understandings improved with the following results: (i) collection of statistical information and reliable data on hotel occupancies and bednights: for 1978 and 1979, complete sets of such data are available for the first time and following increased staffing and the upgrading of the MOT's Studies Division, this collection is now institutionalized; (ii) a detailed tourist expenditure survey was undertaken and completed by a consulting firm (Dar Al Handasah) based on terms of reference drafted with Bank assistance; the Bank also advised the consultants on the methodology and execution of the survey. The survey provides an up to date estimate of foreign tourist expenditure and vital information on tourist motivations and socio-economic backgrounds for input in marketing and promotional activities; in addition, a permanent tourist expenditure survey patterned on the present survey is being established in the MOT by the consultant; - 6 - (iii) regional masterplan studies are being executed, albeit at a much slower pace than foreseen due to administrative delays; the Bank has provided advice on terms of reference and on the preliminary results of some of the studies. However, all the studies will not be completed before end-1980 and their coordination and future synthesis into a coherent investment program will only be possible in mid-1981; and (iv) in July 1979, and under financing of a UNDP project the WTO started the execution of two of the three phases of the study of the costs and benefits of tourism investments. The terms of reference of this study were prepared with Bank assistance. Reports on phases-I and II have been reviewed in detail with the Bank and are now completed. 2.14. These reports were found to be reliable and adequate for initiating interim policy changes by the Government and providing enough grounds for the Bank to proceed with the proposed loan. The findings of these reports have provided reliable inputs for the preparation of the present report as well as of the new Five-Year 1981-85 Development Plan. In particular, better approxi- mations of the full economic rate of return as well as financial profitability of hotels have been made (See paras 2.17-2.23). On the policy level the Government agreed and implemented the following measures: (a) The interest rebate of 5% on hotel loans by CIH has been reduced to 2%, by Ministerial decree in February 1980. As CIH's nominal interest rates have also been gradually increased from 8.75% in June 1976 to 13% and 15% (depending on terms of the loan) in 1980, effective interest rates charged to hotel borrowers have increased from 4.5% at the time the CIH-III loan was negotiated to 11% and 13%; this brings CIH lending rates to be the highest applied in Morocco (see paras 3.07-3.08). (b) Recovery of the full cost of infrastructure by charging appropriate prices on serviced land made available to hotel project promoters is now systematically sought. The policy attempts to expand to the entire sector pricing practices successfully applied under the Bank financed Bay of Agadir (SONABA) tourism infrastructure project (Loan 1202-MOR). * (c) In order to maximize economic returns on tourism investments, the MOT issued guidelines to: (i) promote hotel projects in areas where important infrastructural investments have been made (e.g., SONABA Agadir), and (ii) suspend the promotion of new hotel projects in areas with excessive capacity and for those hotel categories where average bed occupancy rates are less than 40% p.a. (e.g., principally in the North Mediterranean beaches). (d) Tariffs were substantially increased and their gradual liberation is now underway (para. 2.05). - 7 - 2.15. As pointed out in the project performance audit Report (PPAR) of the first loan (704-MOR) to CIH (see Report No. 1926 dated February 23, 1978 already circuLated to the Board of Directors), and also taking into account new findings in the WTO studies, further undertakings on sector policies and administration are required, and have been agreed to by the Government. Such undertakings are designed to better implement agreed interim measures and further rationalize the selection and orientation of new tourism investments. To that effect the MOT intends to strengthen its staffing, and improve its procedures, especially as regards planning, policy formulation and implementa- tion, marketing and promotion, infrastructural investment and particularly, the process of selection and approval of new projects to benefit from incen- tives. At the same time CIH's impact on tourism project selection will substantially increase (para. 4.10). In order to achieve these objectives, the following actions are being implemented: (a) A program of technical assistance has been devised in cooperation with the MOT and the WTO consultants to complete phase-TII of the cost/benefit study (draft document available in the Project File). The studies will be carried out by MOT and/or CIH staff, under the guidance of international experts. MOT's staff is expected to benefit from this exercise, by building up experience in economic analysis. Up to US$600,000 of the proposed loan is made available to finance the estimated foreign exchange cost of the technical assistance program (Annex 4). The technical assistance program could eventually be co-financed and executed under UNDP, and/or other possible bilateral aid sources. The Government agreed to start implementation of the technical assistance program no later than June 30, 1981 and to complete the phase III studies by December 31, 1982. (b) A "Comite Technique" 1/ of the MOT reviews all tourism projects to determine whether they should be granted the benefits of the Invest- ment Code. The Comite generally dwelt on the technical aspects of projects (e.g., adherence to hotel building standards) and did not review their financial and economic viability due to lack of quali- fied staff. In order to remedy this situation, CIH as a member of the "Comite" agreed during the course of project preparation to conduct an economic and financial pre-appraisal of projects before the Comite Technique meets, and the results of such analysis are now taken into consideration by the "Comite" when deciding whether to grant projects the benefits of the investment code. (c) The Comite Technique and the MOT have set a time limit of not more than two years for the implementation of approved projects. In the past, lack of a time limit led to excessive delays in project implementation and large cost overruns. This entailed correspondent 1/ Membership of the Comite also includes CIH, Ministries of Housing, Interior, Tourism, and Finance, and local authorities in the project location. - 8 - increases of the cost to the Government of the incentives granted as CIH was often obliged to reject and refer such projects back to the Comite Technique. The new procedures, agreed during the course of project preparation provide that certification by an approved contractor, CIH or MOT staff that building foundations have been completed, must be given within two years after approval; privileges accorded are cancelled if no certification of implementation is obtained. D. Performance and Prospects of Tourism Investments 2.16 The availability of more reliable data on tourism activities enabled the mission to carry further the analysis of hotel projects initiated in 1975-76 during the appraisal of the CIH-III loan, using the tourism project appraisal model CASBAH. The project file provides details of the financial and economic analysis of hotel investments in Morocco, notably: (i) the financial profitability of different types of hotels; (ii) the impact on financial returns of the various incentives provided under the tourism investment code, and (iii) the economic returns on different types of hotel investments taking into account the diversion effect of new capacities, and related investments on infrastructures and tourist net expenditures outside hotels (i.e., in handicrafts, entertainment, etc...). The input data for this analysis were collected from a representative sample of 19 hotels with several years of operations, financed by CIH, and on the results of a detailed survey conducted by the WTO and MOT which yielded usable data on 91 hotels; data on tourist expenditures are based on the results of four surveys by Dar Al Handasah consultants, coinciding with each tourism business season during 1978/1979. The main results and conclusions of this analysis which are reviewed below, show that (i) tourism investments, except possibly those in the North, yield adequate financial and sound economic returns, and (ii) the incentives are indeed effective in raising returns to equity, but do not appear to induce misallocation of resources. Financial Analysis 2.17 The financial as well as economic analyses are based on average regional occupancy rates achieved in 1978; hotels are assumed to reach these rates after a four year start-up period. This assumption is conservative as new hotels could be expected to outperform the sector as assumed by the WTO consultants An inflation rate of 8% p.a. has been assumed consistent with Bank projections for Morocco. Gross operating profits vary from 10% to 44% of total sales while net profits run from negative to 26% of sales. In current prices, debt service coverage is sound except for investments in the North. Financial rates of return on equity and on total investment respectively for projects ranging from 5-star to 3-star or vacation villages, are shown below for the main tourist regions: - 9 Equity Investment Regions Constant Current Constant Current Agadir 2.8 to 18.8 11.0 to 28.0 3.0 to 8.9 11 to 17.6 Marrakech 8.3 to 13.3 17.0 to 22.3 6.6 to 7.0 15.2 to 15.6 Casablanca 5.0 to 11.5 13.3 to 20.4 4.4 to 6.2 12.8 to 14.7 North Neg. Neg. to 4.2 Neg. Neg. to 6.9 2.18 The returns on investment, while not high, are consistent with experi- ence elsewhere in the Mediterranean, and provide assurances of reasonable returns to investors and lenders alike. The higher returns achieved in Marrakech reflect tariffs which are above national average (but below ceilings) and are due to a tight hotel supply situation. The somewhat lower returns in Agadir stem from higher investment costs due to anti-earthquake design require- ments. Investments in the North are clearly unprofitable given current designs and investment costs and the marked seasonality, but lighter construc- tion for seasonal business could well be profitable. Between categories, 3-star hotels and vacation villages are clearly the most profitable thus comfirming the market trend toward medium luxury family oriented accommodations. Real returns on equity for 5-star hotels tend to be low due to higher equity funding, since 5-star hotels are not eligible for the interest-free Government loan. Impact of Incentives 2.19 Under the incentive system, the typical financial plan for hotels in Morocco consists of 21-25% equity, 15% Treasury advance and 60-64% CIH long term loans for construction and equipment, net of sales tax. Sales tax, however, is paid by the investor and subsequently reimbursed. The mission calculated the impact on profitability of removing incentives assuming that the Government advance was replaced by equity funds thus modifying the initial financial plan to 60/40 debt/equity. 1/ Constant returns to equity illustrating the impact of removing incentives, together and severally, are shown below for selected hotels. 1/ A possible alternative, replacing the Government advance with a CIH loan, was also considered but rejected since it resulted in unrealistically high leverage. - 10- Agadir Casablanca Marrakech 3-star 5-star 3-star Base case 10.7 5.0 13.3 No incentives 5.0 2.8 6.4 No treasury advance 7.7 5.0 9.6 No interest subsidy 9.8 4.5 12.4 No construction tax exemption 9.5 4.3 12.2 No income tax holiday 8.4 3.6 10.4 2.20 Under the assumptions of the model, the incentives package roughly double returns to equity. Of the incentives, the treasury advance appears to be the most effective in raising financial returns (but also requires a heavy outlay of Government funds) followed by the income tax holiday. However with rapid inflation, hotels are generating profits even in the early years of operation resulting in an early income tax liability. Although probably very important to investors psychologically, the new 2% interest subsidy is of limited impact 1/ over the life of investments. The present levels of incentives are effective in increasing low equity returns. It is unlikely that removal of incentives could be offset, in the short to medium term, by higher tariffs and/or occupancies resulting from a lower rate of investment. To take an example, for the 3-star Agadir hotel above, either tariffs would have to rise 40%, or occupancies 25% (or some combination of both) to offset removal of incentives (that is, to give an IRR of 10%). 2.21 In Morocco, tourism investors expect minimum 15-20% annual returns on their investment over a relatively short horizon which translates into real IRRs of 5-10% on equity over the economic life of a project. On this basis, all the hotels analyzed here are attractive investments, save those on the North coast. The incentives package, on the other hand, is effective where IRR's fall in the 5-10% range; above that, incentives may be too liberal and below would not be sufficient to provide reasonable private profitability. Presently available data are insufficient to analyze this last question in more detail; such a study is to be carried out under Phase-III of the cost benefit studies. In any event, available evidence does not point to resource misallocation having been induced by the incentive package. Pending the results of these studies, and a review of the incentives, the present level of incentives should be maintained. 1/ At the old interest subsidy of 5%, which will apply to some hotels to be financed by the project, comparable IRR's on equity would be 11.7% for the 3-star Agadir hotel, 5.8% for the 5-star Casablanca hotel and 14.3% for the 3-star Marrakech hotel. The reduction in the interest subsidy from 5 to 2 points changes the equity IRR by about one point, other things being equal. - 11 - Economic Analysis 2.22 In its sub-project appraisal reports under the third loan, CIH calculated a simplified ERR consisting of in-hotel expenditures and costs adjusted for transfers. No more was possible since the data base did not at the time exist. Now, CIH is in a position to refine its economic analysis and has agreed during negotiations to submit all its hotel project appraisals to the proposed methodology outlined in Annex 5 which is based on the analysis and cut-off rate described below. The base case estimate described below (para 2.23) will be used by CIH in the future as the economic criterion of sub-project acceptability with a minimum cut-off rate of 12% for all tourism projects financed by CIH. Eowever, projects benefitting from previously granted 5% interest rebates (instead of the current 2%) would have to yield a minimum economic return of 15% for CIH to submit them for Bank financing. The ERR so calculated would reflect in-hotel costs and revenues, net expenditures outside hotels, infrastructure and diversion of demand; This rate is an acceptable proxy for the "true" ERR 1/ and provides an adequate safety margin. It would represent a considerable improvement in CIH's present appraisal methodology and is readily calculated since the data for its calculation are available from the studies started under CIH-III, as well as from the detailed reports CIH itself prepares routinely. 2.23 Not all projects to be financed under the proposed loan have been identified. For this reason, economic rates of return have been esti- mated for the "typical" hotels described in the financial analysis above, conservatively assuming that present sectoral occupancy rates will prevail for the new hotels too. Detailed definitions and assumptions for the economic calculations are in the project file. For each type of establishment under analysis, the base case economic rate of return was calculated to include net benefits inside and outside hotels, modified to take into account demand diversion and infrastructural costs. Owing to uncertainties surrounding their measurement, the price dilution effect, as well as shadow pricing of both foreign exchange and unskilled labor, are treated as sensitivity tests. As shown below, projects in Agadir, Marrakech, Rabat and Casablanca have accept- able marginal economic rates of return (12-20%), compared to the estimated opportunity cost of capital (10%). In the Mediterranean area, however, marginal ERR's are negative, except for vacation villages, and given the marked seasonality as reflected in the low occupancies, are unlikely to change: 1/ This method of calculating the ERR differs from the "true" ERR in that it includes neither shadow pricing nor price dilution impacts which tend to cancel each other out; however, the cut-off points to be adopted by CIH as eligibility criteria offer sufficient margin of security since they are 2 to 5 points above the estimated opportunity cost of capital of 10% for Morocco. A wider (by 3 percentage points) margin of security is required for projects benefitting from the 5% interest rebate on grounds that their artificially high financial attractiveness induces an increased risk of uneconomic projects slipping through the screening of CTH's economic analysis. - 12 - Base Economic Rates of Return by Hotel Category 5-star 4-star 3-star V.V. Agadir 12 13 14 20 Marrakech 13 13 12 N.A. Casablanca/Rabat 14 14 15 N.A. North 0 0 0 10 Prospects 2.24 The improvement of tourism demand in Morocco since 1977 is consis- tent with the performance in other Mediterranean destinations, and shows that the effect of inflation and high fuel prices is no longer an important factor affecting demand. The apparent erosion of the exotic appeal of Morocco is being gradually compensated for by the increase in organized tours not only to beach resorts (as had always been the case) but also the Imperial Cities (such as Fez and Marrakech) where, traditionally, the bulk of the clientele consisted of individuals. The expected increase in available accommodation capacity, especially in Marrakech, should reinforce this trend. Another new factor in the sector's development is the recent construction, especially in beach resorts, of family oriented tourism residences catering to tourists with children; this segment of the market had been largely absent from Morocco, due to lack of suitable accommodation. Finally, the Moroccan authorities and hoteliers now realize the inadequacy of their promotional efforts, and are gearing up to correct this. CIH has indicated that it would continue to assist and encourage this type of investments. 2.25 It is therefore reasonable to forecast that demand will continue to grow at least at an average annual rate close to the long-term trend observed since 1968 namely, 6% p.a. The WTO study proposes two different scenarios: a conservative growth hypothesis of 6% p.a., and an optimistic 9% p.a. growth which seems possible, if a major publicity effort was launched, particularly targetted for untapped markets (e.g., families with children; budget-minded mass-market and the circuit tourism clientele), and accommodation capacities adapted to such markets are promoted. 2.26 Projects currently under way or at an advanced stage of preparation would add 18,700 beds, or 37%, to Morocco's tourism accommodation capacity by end 1983. The realization of these projects would change significantly the structure of tourism establishments in Morocco. Firstly, the accomodation of Marrakech would grow from 5,300 to 13,200 beds, and from 11% to 20% of the country's total. This sudden increase in capacity would occur in response to current demand pressures. The size of the expansion, however, could lead to strains on the city's overall absorption capacity, both from a physical, and a socio-ecological point of view. The adoption by CIH of agreed appraisal criteria should prevent its approval of further loans, with or without Bank financing, to build hotels in Marrakech beyond those already in CIH's pipeline, until new light is cast on the prospects for further expansion of tourism in - 13 - Marrakech beyond existing and planned capacity increases. This will be analyzed in detail in the framework of Phase-III of the WTO study which will also review the social, economic, and ecological impact of further expanding tourism in Marrakech. Secondly, the capacity of Northern beach resorts will expand by only 2,000 beds in vacation villages as a consequence of the lower profitability of hotels in those areas. 2.27 The additional hotel capacity requirements for 1980-85 have been estimated taking into account existing and planned capacity, including the above projects under construction or preparation, on a region by region, category by category basis, and assuming the current occupancy rates will continue to prevail through 1984. Under the 6% p.a. growth scenario, 11,600 additional beds would be required by 1985, while in the hypothesis of a 9% p.a. growth rate, 22,500 additional beds would be needed. Assuming, however, that the new projects would bring about a distribution of capacity by regions and categories more consistent with the evolution of demand, and that success- ful efforts would be undertaken to reduce the seasonal variations of demand, an improvement in average occupancy rates can be expected. Under these conditions the projected additional capacity needed could be further reduced to 9,000 and 17,500 new beds under the two scenarios by 1985. Taking into account the gestation period of hotel investments, these projects would have to obtain the necessary financing by 1983, i.e., by the end of the commitment period of the proposed loan. In addition, since only about 70% of the projects considered under construction or at an advanced stage of preparation (and expected to bring on the market 18,500 new beds by 1983) have already obtained the necessary financing, about 5,600 beds of this category will require financing during the loan's commitment period. Thus, the conservative 6% p.a. growth assumptions would lead to 14,600 beds (i.e. 9,000 plus 5,600) requiring financing in the period 1980-83. III. THE FINANCIAL SECTOR A. Introduction 3.01. Morocco has a well developed financial sector comprising 15 commer- cial banks, 5 specialized institutions, and 2 savings banks (Caisse d'Epargne Nationale (CEN)and Cheques Postaux). Long-term finance is available princi- pally through four of the specialized institutions, CIH, the agricultural credit bank (CNCA), and the industrial bank (BNDE), all of which have received Bank loans; and the Caisse de Depots et de Gestion (CDG) a wholly-owned Government institution in charge of public fund management (e.g., pension and insurance funds, postal savings, etc.). The Banque du Maroc (BdM) is Morocco's Central Bank. The analysis of Morocco's commercial banking system provided in SAR: Integrated Project for SSI Development (Report 2365-MOR dated March 26, 1979) remains valid. This chapter focuses on resource mobilization for development lending with particular reference to CIH's resource needs. - 14 - B. Mobilization of Private and Institutional Savings 3.02 The mobilization of remunerated private individual savings is undertaken by commercial banks, the CNCA and the savings bank (CEN). Details on the volume of term deposits (up to 24 months), and other savings mobilized by these institutions are available in the project file. In 1978, DH 4373 million in such savings were mobilized compared to DH 2817 million in 1977; commercial banks accounted for 85% of the total in 1978. The major increase in savings mobilized in 1978 stems partly from better depositor interest yields applied that year. 3.03 Institutional savings are mobilized in the form of medium to long term securities subscribed to chiefly by CDG and insurance companies. The annual issues of such securities amounted to DH 838 million in 1978, compared to DH 800.6 million in 1977. The volume of Government guaranteed 10-and 15-year bonds issued by CIH, BNDE and CNCA doubled to DH 520.5 million in 1978 accounting for 62% of all issues; CIH alone issued DH 187.2 million in 15-year bonds thus accounting for 36% in 1978. CIH increased its annual securities issue to DH 257 million in 1979 and DH 240 million in 1980, suggesting that the total volume may have increased significantly. The volume of institutional savings available for long term finance is limited since its principal sources, pension funds, insurance company reserves, and social security funds have heavy recurrent commitments and depend on the relatively small number of salaried Moroccans. Stock market transactions are limited to small volume trading of bearer shares and bonds, mainly by institutional investors; private individual savers play virtually no role in stock market operations due also to the prevalence of family owned enterprises in Morocco. 3.04 The development of new easily negotiable financial instruments (e.g., small denomination bonds) or mechanisms (e.g., savings and loan schemes for housing finance) to improve the mobilization of private savings and channel them for use in productive investment is now being considered by the Moroccan authorities. The role of CIH in this regard is limited at the present time. As agreed with the Bank CIH undertook a detailed study of two savings mobilization alternatives. This study recommends the launching of an experimental public DH 25 million bond issue in 1981 and the start of a housing savings and loan scheme by CIH. The savings scheme will require some additional 30 junior professionals to be trained and will be gradually set up within a five year period following which it is expected to be fully operational. It is proposed that the six-year bearer bonds be issued at par ranging from DH 500 to DH 10,000 and with a yield that gradually increases from 8% to 8.5%, compared to an estimated cost to CIH of 8.62%. Revenue generated from these bonds would be tax-free and redemption is optional after two years through a special fund to be established in CDG. Other incentives include possible CIH ten year 8.5% loans for certain bond holders, of up to ten times the amounts subscribed with a DH 250,000 ceiling. - 15 - 3.05 The above plan to tap private savings in Morocco has a reasonable chance of being successful although traditional savers preference for liquid assets and high, short-term yielding investments (e.g. in real estate) may take time to overcome. The fact that CIH holds the enticement of possible loans to make savers future home owners and various other incentives envisaged (e.g., tax incentive) gives its plan more chances of success than in the past. C. Interest Rates and Cost of Capital 3.06 The Government determines interest rate ceilings on deposits and loans which apply to all institutional credit in Morocco. Cost to commercial banks of local currency resources present a wide range of variation, as follows: sight deposits yield no interest, except for CNCA (3%) and BCP's sight deposits in foreign exchange by emigrants (3%); short-term deposits yield from 4% for one-month deposits to 9% for deposits of up to 24 months; rediscounting facilities at the Banque du Maroc vary from 4% p.a. for export loans to 5% p.a for other medium-term loans. Interbank short-term money is also available in small amounts and its cost averaged 8.0% in 1979. Local currency 5-year notes and 10-and 15-year bonds carry interest cost of 9%, 9.5% and 10% p.a. respectively, and can be mobilized only by specialized financial institutions (CIH, BNDE, CNCA), and by large public enterprises. The cost of directly contracted foreign exchange resources is not regulated by the Govern- ment and, therefore, reflects international rates. 3.07 Lending rates, on the other hand, range from a minumum of 5% for some short-term rediscountable loans to a maximum of 14% for long-term non rediscountable loans; medium-term rediscountable loans carry an interest of 10%. CNCA-s medium term rates range from 8.5% to 10%. Nominal interest rates charged by BNDE to industrial projects are 12% p.a. for all term loans, but a majority of these projects obtain a 2% interest rebate from the Government, which reduces effective rates to 11% p.a. after commissions and taxes. CIH charges 13% for loans of up to 14 years duration and 15% for other loans bringing effective rates paid by hotel borrowers to 11% and 13% p.a., exclusive of commitment charges and fees 1/. Therefore the costs of CIH funds lent to hotel borrowers are higher than agricultural and industrial borrowing costs. CIHWs rates are expected to remain positive in real terms as the Bank projects the inflation rates for Morocco to slow down from 12% in 1980 to 11% in 1981 and 8% from 1982 onwards. 3.08 Taking into account the interest-free advance to hotel borrowers and the assumption of foreign exchange risks by Government for all borrowers, some subsidy elements are implicit in the average cost of all funds lent to hotel borrowers. However the need to prefinance the interest-free Government 1/ That is, 5% flat appraisal fee (with a DH 20,000 ceiling); 1% commitment fee on undisbursed amounts. - 16 - advance (15% of investment excluding land) with an 11.5% renewable short-term loan brings the estimated average cost of funds lent to hotel borrowers to around 8.5%, close to positive levels considering the inflation expectations. In the case of 5-star hotels, the effective cost of funds is much higher since they do not receive the 15% advance. IV. CIH-S STRUCTURE AND PROCEDURES A. Establishment and Corporate Status 4.01 There have been no major changes in CIH's corporate status since it was last appraised by the Bank in 1976. Though formally a private company subject to corporate law, CIH is effectively controlled by the Government through CDG, CIH's major shareholder. Two Royal Decrees of 1962 and 1968 established CIH's function of financing tourism enterprises in addition to housing construction. Details on CIH's organization and ownership structure are available in the project file, and its major features summarized below. 4.02 Branch Offices. CIH has six regional branches to reach clients in provincial centers and handle the processing of smaller housing loans. Tourism loans and the larger housing loans are processed at its Casablanca headquarters. 4.03 Ownership and Control. CIH's share capital was increased from DH 60 million in 1974 to DH 160 million in 1980. Over half (55%) of CIH's share capital is owned by publicly controlled institutions, the principal of which are CDG, (with 30%) and Banque du Maroc (with 10%). However, in addition to its nominal shares, CDG holds a large number (i.e., 25%) of bearer shares as a proxy and uses them in stock market operations. The next large groups of shareholders are twelve insurance companies with a combined holding of 20%, and commercial and financial institutions (15%). B. Board and Committees 4.04 The public nature of CIH is reflected in the composition of its Board of Directors and Executive Committee, which are both chaired by CIH's President-Director General. Of CIH's 15 Board members, four represent the private sector, and eleven public sector shareholders. The Board has dele- gated most of its powers to the Executive Committee composed of six selected Board members, besides the chairman and a non-voting Government commissioner. Of these, three represent the principal public sector shareholders, one represents BNDE, and three the Ministries of Finances, Tourism and Housing. 4.05 The Board has been active in monitoring CIH's expansion policies, especially the launching of subsidiaries. The Board meets two or three times a year. The Executive Committee, which examines and approves all - 17 - tourism loan proposals, and all other loans amounting to more than DH 150,000, meets about once a month on average. The quality of its decisions has improved in the past few years, especially since the establishment, in 1974, of an internal loan Committee, headed by CIH's President, which screens loan pro- posals. The Executive Committee delegates to its Chairman and a Managers' Committee the power to approve non tourism loans up to DH 150,000 subject to ratification by the Committee. Authority to approve housing loans equal to or less than DH 100,000 is delegated to the directors of the regional Branch Offices. C. Management and Staff 4.06 In December 1979, Mr. Othmane Slimani, former Minister of Economic Affairs, a competent career civil servant was appointed CIH's Board President and Director General. Re succeeded Mr. El Habib El Fihri who had passed away in February 1979. The President is seconded in his management tasks by CIH's deputy director general, an experienced and competent career CIH professional who handles day-to-day management and supervises a general secretariat and three operating departments. The caliber of the department heads, particu- larly the key Credit and Financial Operations directors, is high. 4.07 Staff. CIH's total staff numbered 250 (including 122 professionals) at end 1979, compared to about 216 (of whom 58 professionals) in 1976. The growth of professional staff is explained by the expansion of CIH's portfolio and the strengthening of the financial department necessitated by new account- ing procedures and the more intensive follow-up of hotels financed. The quality of CIH's professional staff is good and steadily improving. D. Policies and Procedures 4.08 Policy Statement. CIH's policy statement, approved by the Board of Directors in 1974, establishes the following fundmental principles: (a) projects financed by CIH in the tourism and housing construction sectors must be financially, technically, and economically viable; they must be supervised by CIH during their entire life; (b) loans must be secured by adequate guarantees; (c) CIH shall provide its clients with technical assistance in the conception, implementation and operations phases of the projects; (d) an equity participation shall not exceed either 10% of CIH's total equity, or 25% of the capital of the company in which CIH takes a participation, whichever is less, except in special cases explicitly authorized by the Board. Total participations must not exceed CIH's equity. As agreed with the Bank under CIH-III, CIH's single financial exposure in any hotel project is limited to 20% of its equity, except if a full guarantee from the Government or any institution acceptable to the Bank covers CIH's risk. The Board has reempha- sized CIH's primary goals of lending for housing and hotel construction and directed management to curtail equity participations and speedily proceed to - 18 - sell the remaining shares in CIH's former affiliates thereby effectively putting to an end CIH s promotional ventures.l/ 4.09. Housing loans: Appraisal and Supervision. CIR has over fifty years of experience in the financing of housing construction. The procedures which have been developed are, by now, standardized and effective. 4.10. Appraisal of Hotel Projects. The quality of CIH-s appraisals of hotel loans has steadily improved over the years. In most cases, the technical, legal and financial aspects of projects, as well as the management arrangements made by the sponsors, are adequately covered by CIH-s reports, which generally provide substantiated judgement on the merits of projects. The technical appraisal of larger hotel projects (generally those requiring investments of over DH 10 million) are normally reviewed by independent engineering firms. Although hitherto CIH starts its full appraisal only after projects are approved by the Comite Technique of MOT under the tourism investment code; in its capacity as Comite member CIH reviews the promoter-s first proposal and has this way nonetheless exercised some positive influence on their final conception, design, and organization, particularly management. Under new procedures of the Comite Technique (para 2.15 (b)) the conclusions and recom- mendations of CIH's pre-appraisal are made available prior to Comite approval, and hence CIRHs impact on project design should substantially increase. 4.11. Agreements under the CIH-III loan provided that in addition to the calculation of a simplified economic rate of return (a minimum 10% was required) CIH would also apply to each project, whenever feasible, 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 on grounds of the existing capacity being saturated at least during the peak month. The simplified economic return calculation took no account of externalities and of the dilution and diversion effects of new capacities on the existing hotel units. The MEOR was an approximate attempt to at least take care of the dilution/diversion effect; lack of reliable data precluded taking account of externalities. Agreed MEORs were estimated for each tourist region by the Bank based on preliminary data at the time of appraisal of the CIH-III loan. However, lack of reliable data particularly on bednights and hotel occupancy rates by regions and categories often impaired CIH-s market forecasts, and attempts to utilize the MEORs. This was not unforeseen and the MEORs were merely set as guidelines, not cut-off criteria. In order to further improve on the above methodology particular emphasis was put on improving CIH's analysis of tourism market prospects. 1/ In 1979 CIH divested from Safir, Farah-Maghreb, INEG and Promoconsult, all former affiliates. - 19 - 4.12 CIH achieved notable results by strengthening its staffing and management and adopting these improved financial and economic appraisal criteria. As already shown (chapter II) better data are now available, and CIH not only improved its market analysis but its staff have partly mastered the utilization of the computer based CASBAH hotel appraisal methodology. CIH now routinely utilises this model for its financial appraisals in particular and this has made it easier for the staff to concentrate on market, and economic analysis and research and make quick pre-appraisals and sensitivity analyses, prior to full appraisals and Comite approvals. These improvements make it possible to adopt new appraisal methodologies precluding use of MEORs but emphasizing economic analyses and sensitivity tests as described earlier (para 2.22 and Annex 5). In order to provide further staff training in CASBAH and other computer based economic appraisal models, up to $400,000 of the proposed loan is earmarked for technical assistance to CIH for this purpose. 4.13 Follow-up of Hotel Projects. Under the Credit Department, the Hotel Follow-up division, which began to operate in a systematic fashion in 1974, is now staffed with five specialists, and headed by an able and ex- perienced professional. The division supervises 117 hotels and 18 other tourism projects (e.g., 14 restaurants). Serious problem projects have annually received at least two visits of CIH's follow-up staff, others at least one visit. In 1979 alone 81 hotels were thus visited, including 21 problem projects. Several of these visits have resulted in satisfactory arrangements for the settlement of loan arrears as well as in agreements on how to remedy structural project problems, where they have been identified. Upon each visit the staff write detailed and good quality supervision reports, including recommendations on actions to be taken. The Follow-up division liaises closely with the Portfolio Supervision division of the Financial Department. In 1978 the Portfolio Supervision division was created and staffed with six professionals to apply new procedures agreed with the Bank to improve and accelerate hotel and housing loan collection procedures, a major weakness at the time of appraisal of the third loan. The division closely coordinates with the legal, accounting and follow-up divisions to keep up to date data on all loans in arrears, payments and pending legal actions. In the past lack of coordination seriously impaired action on loans in arrears. CIH's performance in regard to agreements to further improve loan supervision and loan collection procedures has been satisfactory. 4.14 Disbursement Policies. The proceeds of CIH's construction loans for hotels are made available to borrowers in four main tranches, plus a 10% final tranche which is withheld until the completion of work. CIH is also res- ponsible for the disbursement of the Government interest-free loan. Funds are disbursed only following field inspections by CIH's Technical Division, which ensures that the portion of the investment to be financed first with the promoter's equity and second with the Government loan has been completed and paid for. Subsequent inspections ensure that each CIH loan tranche has been utilized in accordance with the loan contract and the project's appraisal report. When a discrepancy is found between the original plans and the implementation of the project, disbursements are suspended until the promoter provides satisfactory explanations. Follow-up reports and recommended correc- tives measures are prepared by the Technical division whenever serious problems arise on project implementation. CIH's disbursement procedures are adequate. - 20 - 4.15 Procurement Procedures. International competitive bidding is not automatically required of all hotel borrowers by CIH, mainly because the joint stock hotel firms (e.g., Farah-Maghreb, SIDET, etc..) that now form the bulk of CIH's clientele usually go through local competitive biddings along guide- lines generally followed by Government procurement for public works. However, for these projects, CIH requires that the architects- plans and estimates be reviewed and endorsed by independent engineering consultants. CIH-s own engineers have acquired considerable experience in local construction cost estimates and procurement practices, and are able to effectively scrutinize cost estimates, invoices and other supporting documents provided by promoters and their contractors. Smaller clients (e.g., 2-star and 1-star hotels) however tend to execute construction through a variety of contractors includ- ing promoters' own firms; this type of clientele is nevertheless required to go through a licensed architectural firm to oversee proper execution of construction, and CIH scrutinizes their procurement practices closely. Over 90% of Bank funds finance local civil work and the balance imported hotel equipment (e.g., kitchens), and foreign contractors are not likely to bid on either of these items. Procurement under CIH financed hotel projects is satisfactory, and the Bank's procurement guidelines for DFC will continue to be applicable to CIH under the proposed loan. V. CIH-S OPERATIONAL PERFORMANCE AND PROSPECTS A. Characteristics of Operations Lending Operations 5.01 The evolution of CIH's lending operations for the past three years is detailed below (DH million). 1977 1978 1979 Hotel Loans No. Amount No. Amount No. Amount Approved 31 119.6 34 119.0 34 97.3 Committed 28 154.3 28 110.7 42 122.6 Disbursed - 103.4 - 146.8 - 98.0 Housing and other loans Approved 2973 411.7 3147 387.0 3449 413.1 Committed 2576 351.4 2731 374.6 na 415.0 Disbursed - 253.6 - 313.8 - 425.5 5.02 Housing loans. These loans finance the construction of houses and apartment buildings, and, in some cases, commercial and office buildings, for terms varying from 10 to 12 years at effective interest rates of 8% to 13% - 21 - depending on the value of the housing unit to be financed. The number of housing units financed by CIH reached 5496 in 1979 compared to 5392 in 1978. According to Bank consultants working on the basic economic report for Morocco, CIH finances less than 10% of housing units built annually in Morocco. CIH'S financing of low cost housing is funded by the Government, and its administra- tion is subcontracted by CIH to Banque Centrale Populaire (BCP). 5.03 Hotel Loans. Details on CIH's hotel loan approvals are given in the project file and summarized below by type of operation (in DH million). 1977 1978 1979 No. Inv. Loan No. Inv. Loan No. Inv. Loan Construction 13 121.9 64.5 10 175.0 86.2 9 103.6 52.5 Equipment 10 44.8 34.7 15 36.0 18.5 12 16.9 10.0 Expansion 8 35.9 20.4 9 32.7 14.2 13 53.1 34.8 Total 31 202.6 119.6 34 243.7 118.9 34 173.6 97.3 During the period 1977-1979, CIH approved hotel loans totalling DH 335.8 million compared to DH 290 million forecast at the time of appraisal of the third loan to CIH. Commitments amounted to DH 387.6 million during the same period compared to appraisal estimates of DH 278 million. CIH's levels of hotel loan approvals and commitments during 1977-1979 are 200% and 245% higher than the levels reached during 1973-76, respectively, and contributed in financing 7606 new beds for an estimated investment of DH 619.9 million. Disbursements for hotel projects followed the same pattern as commitments. This good performance by CIH stems from better appraisal procedures, a larger investment demand from better organized promoters encouraged by investment incentives and higher foreign tourist inflows. The distribution of CIH's hotel lending during the period 1977-79 is skewed towards the 4-star hotel categories in the three main tourist areas of Marrakech, Agadir and Casablanca where demand relative to existing capacity remained strong. 5.04 CIH's loans for hotel project carry maturities of up to 18 years, including 3 years of grace for construction, and for equipment loans 10 years with no grace; the latter are granted usually 3 years after the construction loan is made. As construction loans account on average for 80% of CIH's hotel lending, and 90% of Bank financed sub-loans, the average maturity of hotel loans is 15 1/2 years, including 2 1/2 years of grace. As a result the CIH-III loan (1279-MOR) was granted to CIH providing for maximum terms of 18 1/2 years (including apppopriate grace) for sub-loans, and a composite amortization schedule of these sub-loans. Considering that the composite amortization schedule is administratively cumbersome, the proposed loan is granted on a fixed amortization schedule basis over 17 years, including 4 years of grace. Taking into account the expected 3-year commitment period of - 22 - the proposed loan, such an amortization schedule will reflect on average the combined maturities of the sub-loans to be financed out of the proposed loan proceeds and should entail no roll-over of Bank funds. Equity Investments 5.05. CIH holds equity investments amounting to DH 94.2 million in 26 companies as of September 30, 1980, compared to DH 66.9 million in 1977. The equity investments include 4 profitable financial institutions for 2.5% of the portfolio; 7 firms in the housing construction business for 29%; 12 firms in tourism for 11%. Virtually all these firms are in their start-up phase and not profitable. 5.06 One single new company founded in 1977, the Morocco-Kuwaiti Develop- ment Consortium (CMKD) accounts for 57% of CIH's total equity investments. The CMKD's capital of DH 315 million is owned 50% by Kuwaiti Government interests, 17% by CIH, and 33% by two other Moroccan Banks. CIH'S participa- tion, which exceeds 10% of its equity, has been specifically authorized by CIH's Board. A large holding company comprising 19 corporations with shares amounting to DH 161.6 million, CMKD now controls all of CIH's former affiliates, and has been diversifying from real estate (25.3%) and tourism (23.6%) into the industrial (44.2%), commercial retail and service sectors (8.9%) in Morocco. The CMKD-s short-term prospects are however mixed since two of its larger holdings, Farah-Maghreb (15%) and SICOPAR (6.8%) are still in their construction phase. The second CIH holding of importance (DH 10 million or 11% of total investments) the Credit Foncier du Gabon (CREFOGA) is in serious difficulties due to reasons beyond CIH-s control. CIH controls 50% of CREFOGA's capital and normally nominates its managing director. Overall the quality of CIH's equity portfolio is mixed. Risks of losses, although limited, have been fully provisioned for DH 9.6 million as of September 30, 1980. In addition the CREFOGA investment is fully guaranteed by the Government. B. Performance Under Bank Financed Projects 5.07 Government actions to improve sector policies and administration, and performance thereto have been generally satisfactory, albeit two years behind schedule. A detailed review of performance under agreements with the Bank, including lessons learnt from the project performance audit report on the first loan ( No 704-MOR) to CIH was provided in chapter II. As to CIH, the preceding review of institutional and operational performance, and that of of financial performance in chapter VI show that expectations have not only been generally met but in most cases surpassed. Exceptional circumstances have temporarily worsened the arrears' situation but CIH has now the institu- tional capability to deal with that situation more effectively than in the past (para 6.10). 5.08 The Bank has made three loans to CIH totalling $48.7 million; the first two loans amounting to $23.7 million have been fully disbursed. - 23 - The third Bank loan (1279-MOR) of $25 million signed in July 1976, and effective in November 1976, was committed by June 1978, and fully disbursed November 30, 1980, ahead of schedule. 5.09 Hotel projects financed under the CIH-II loan (848-MOR) of $12.8 million numbered 56 for 8800 new beds at an actual total investment of DH 300 million ($81 million) and contributed to directly creating an estimated 2850 new jobs at a cost per job of $28,400; the latter cost/job figure does not take into account seasonal workers and indirect jobs created (i.e., during construction, in artisanat, travel activities, etc.). Estimated economic rates of return calculated on a simplified basis on these projects ranged from 11% to 20%. 5.10 Under the third loan CIH financed 29 hotel projects at an estimated total investment of DH 356 million ($ 96.2 million) for 8650 beds; the estimated number of permanent jobs to be directly created is 2885 at a cost per job of $33,350. Most of the hotel projects are still under construction or in the process of equipment, so that the above figures remain tentative. The estimated simplified economic rates of return on these projects ranged from 8% to 35% compared to the minimum 10% required. Three projects' returns ranged from 8% to 11%, fourteen had returns of 13% to 15%; and twelve had returns exceeding 15%. All projects satisfied the 12% returns on equity which most investors consider adequate as well as the 1.2:1 debt service coverage ratio. The highest economic returns were achieved in Marrakech, Agadir, and Casablanca. No projects were financed in the Northern Beach areas under the CIH-III loan. 5.11 Free Limit. The individual free limit under the last loan was set at $800,000 equivalent and defined to include both construction and the estimated equipment sub-loans to be made by CIH, irrespective of the amount to be requested from the Bank for financing. There was no aggregate free limit, and the agreed appraisal criteria applied to all sub-projects below and above the individual free limit; as a result CIH's appraisal reports differed little between free limit sub-projects and others. In view of CIH's much improved appraisal capacity the above practice is maintained but the individual free limit increased to $1,500,000 equivalent (DH 6 million) as defined above. As a result at least 25 sub-projects requiring DH 500 million in investments and $40 million in foreign exchange, i.e., 40% of the proposed loan amount, will be submitted to the Bank's detailed scrutiny. C. Prospects for CIH's Operations Housing and Other Loans 5.12 CIH's housing and related lending activities are generally con- strained only by resource availability and the processing capacity within CIH - 24 - itself; demand for housing finance is growing steadily in Morocco, particu- larly for apartment units. The Three-Year Development Plan (1978-1980) estimates demand at 70,000 units minimum annually. The bulk of future housing loans is made up of presold completed apartment development projects promoted mainly by public enterprises, CDG, municipalities and the military 1/; such projects require one appraisal and a simplified processing of grouped individual demands and thus do not imply additional staff input. Taking into account CIH's solid experience in housing finance, and the inflation of construction cost, the projected commitment of DH 2,222 million over 1980-83 implying an average growth rate of 15% p.a., is reasonable. Hotel Loans 5.13 The justification for the 14,600 beds expected to be financed by CIH in 1980-83 and based on the conservative demand growth scenario of 6% p.a., has been analyzed earlier (paras 2.25-2.27). The projects retained in this pipeline of 65 hotels imply an estimated total investment of DH 1170 million and CIH financing of DH 565 million, of which $88 million in foreign exchange; CIH will also commit DH 25 million for the equipment cost estimated at DH 44,000 (of which $7.7 million in foreign exchange) for 9 additional hotels the construction of which has been financed under the CIH-III loan (1279-MOR). With the objective of maximizing returns on existing capacities CIH expects to finance the modernization and renovation of existing hotels in key areas, such as Fez, without any increase in capacity, and a number of restaurants, sporting and other entertainment facilities designed to provide needed leisure activities for tourists in Morocco. These types of investment are particularly appropriate. Thus CIH expects to commit an additional DH 140 million, bringing total commitments over 1980-83 to DH 730 million, of which $124 million in foreign exchange. 5.14 Based on the above analysis, and taking into account the much improved quality of hotel borrowers as well as of CIH's appraisal and follow-up capability, the forecast levels of hotel approvals, commitments and disburse- ments detailed in Annex 6 are reliable. The implied 10% p.a. growth rate for hotel commitments in 1981-83 compares well with past trend and is conservative. 1/ That is, Compagnie Generale Immobiliere (CGI), Etablissements Regionaux d'Amenagement et de Construction (ERAC), and Office des Logements Militaires (OLM), among others. - 25 - VI. CIH'S FINANCIAL SITUATION AND PROSPECTS A. Resource Position 6.01 CIH's resource position (on a commitment basis) as of September 30, 1980, is detailed in Annex 7 and summarized below: DH 000 Percentage Resources Equity and provisions 214,667 9.5 Local borrowings 1,554,426 68.7 IBRD loans 180,046 8.0 Other foreign loans 313,722 13.8 Total resources 2,262,861 100.0 Applications Loans outstanding 2,270,674 Investments 105,713 Fixed and other assets 28,806 2,405,193 Deficit (142,332) Less: undisbursed commitments (144,694) Resource gap: (287,026) 6.02 Net additional resources mobilized by CIH from December 31, 1975 to September 30, 1980, amounted to DH 1381.8 million, 157% more than the DH 881.0 million figure reached on December 31, 1975, at the time of appraisal of the third Bank loan to CIH. Local currency borrowings and equity capital accounted for 78% of those resources which CIH obtained principally from bond issues (48%), BCP (11%) and Banque du Maroc (9.5%); CIH's Government guaranteed bond issues are subscribed to exclusively by institutions such as CDG and insurance companies; while 15-year bond issues of 7.5% to 8.5%, and Banque du Maroc permanent facilities at a preferential 3.50% rate, are long term resources, the balance of local borrowings (9.5%) is normally medium-term (i.e., 5 years) at 6% to 7%. In terms of equity funds CIH more than doubled its capital from DH 60 to DH 160 million (of which DH 50 million is to be paid- in by year end and is not included in the above table). On average therefore the terms of local borrowings are good and relatively tailored to CIEW s requirements. 6.03 In foreign currency resource mobilisation, CIH-s record is excellent in the period under review, as CIH contracted DH 452.8 million (US$113 million) - 26 - from four foreign institutions other than the Bank; prior to 1976 the Bank was CIH's sole source of foreign exchange. Two borrowings for 4 and 7 years amounting to $31.4 million are LIBOR indexed, and their cost reached 15% in 1979 but had little impact on CIH's profitability (para 6.05). Three other foreign borrowings ($80.6 million) are at fixed interest of 8.4% to 8.8% for 10 years. Including the third Bank loan of $25 million, it can be concluded that on average foreign resources are tailored to CIH's needs. Bank funds outstanding account for 8% and 36.5% of CIH's total and foreign resources as of September 30, 1980 compared to 8.5% and 100% at end 1975, respectively. Thus the objective of diversifying CIH's foreign exchange resources has been achieved. 6.04 The substantially increased level of lending commitments, particu- larly for housing and commercial building operations, has practically absorbed all the above resources; as a result CIH has a resource gap of DH 287 million ($72 million) as of September 30,1980. CIH has contracted DH 71.5 million ($18 million) in short-term borrowings to meet current commitments pending the payment of DH 50 million in new capital funds and the contracting of new resources. CIH's resource requirements are reviewed below (para 6.18). B. Financial Performance and Position Profitability 6.05 As shown in Annexes 8 and 10, CIH's profitability performance in 1976-79 has been good in spite of a slight decrease in 1977 resulting from a combination of increases in administrative expenses and provisions, and a narrowing interest spread (i.e., from 3.6% to 1.7%) due to higher cost of borrowings. However, the increases in CIH's nominal interest rates from 8.75% for all loans to 11% for hotel loans and 10% for housing loans, which became effective in June 1976, have begun to be felt in 1978 and resulted in a higher spread of 2.5% and a 42% increase in profits. As of September 30, 1980, CIH netted a profit of DH 13.3 million after allocating DH 26.4 million to provisions. Moreover since June 1980 all CIH loans now yield a minimum nominal interest of 13% (hotel loans of 15 years and over yield 15%). Conse- quently CIH's growing profitability trend is expected to be maintained (see para 6.23). Financial Position 6.06 CIH's audited and unaudited balance sheets for 1976-79 are summar- ized in Annex 9 and show that total assets have doubled between 1976 and 1979. Housing and associated loans have more than doubled, increasing their relative weight from 47% to 53% of total assets; in comparison hotel loans increased by 65% but declined in relative terms. 6.07 Liquidity. CIH's liquidity position improved as its current ratio increased from 1.1:1 in 1976 to 1.4:1 in 1978 due largely to a better matching of the amortization schedules of loans and borrowings. CIH is on the way to - 27 - solving the long standing problem of mismatch of the amortization schedules of its loans and borrowings. This is being achieved as a result of continued monitoring and application of better loan collection procedures as agreed with the Bank. Thus CIH has tightened its lending terms providing 12 years maxima for housing and putting a 15% interest on hotel loans of 15 years or more, compared to 15- and up to 20-year terms granted earlier for housing and hotel loans respectively at the same interest rate. 6.08 At December 31, 1979, CIH's liquidity ratio declined to 1.3:1, but improved slightly to 1.4:1 in September 1980. CIH's liquidity situation needs close and continued monitoring, taking into account however that CIH, like all financial institutions, transforms shorter term financial instruments into longer term ones and is bound at times to incur short-term manageable mis- matches in the terms of its loans and borrowings. Thus to provide for this situation agreements reached with CIH under previous loans stipulate that CIH would: (i) maintain a ratio of at least one to one between loan receipts and debt payments; (ii) calculate and project that ratio annually; and (iii) take any necessary measures to increase that ratio to the minimum required. 6.09 Capital structure. As defined in the CIH-III loan agreement with the Bank, CIH's term debt/equity ratio limit is a multiple arrived at by applying to CIH's loan and equity portfolio weights reflecting in indirect proportion the degree of risk inherent in each category of loan and equity participations: 18 for the ratio of low risk housing portfolio; and 9 for the ratio of high risk hotel and commercial building loans and all the equity participations to total portfolio. This definition better reflects CIH's creditworthiness and true debt capacity since it takes into account the following considerations: (i) CIH is a housing and hotel lending institu- tion with a predominant (i.e 55%) good quality low risk housing portfolio; (ii) all of CIH's loans are covered by solid first rank mortgage securities and by Government guarantees of up to 100%. As of December 31, 1979, CIH's debt/equity ratio thus defined was 13.8:1 compared to an actual term debt/ equity ratio of 13.2:1; CIH term debt will remain within the prescribed limit as CIH further increased its capital in 1980 (para 6.24). C. Quality of Loan Portfolio 6.10 At the time of appraisal of the third loan CIH agreed to implement measures designed to reduce in two years, and by 50%, the proportion of hotel loans outstanding affected by arrears. As detailed in Annex 11 by September 30, 1977, CIH reached the agreed target: hotel loans in arrears declined to 12.0% of total hotel loans outstanding (and 5% of total portfolio); by September 1978, however that percentage increased slightly to 13% and worsened to 26% at end 1979. Unaudited data for September 30, 1980 show that total arrears increased to DH 89 million or 4.4% of total loan portfolio ; hotel arrears amounted to DH 49.7 million i.e., 7% of hotel portfolio but the portfolio affected declined to 20% of hotel loans. - 28 - Hotel Loans 6.11 The increase in hotel arrears is partly due to the uncertain eco- nomic climate in Morocco. Although the economic slump did not directly affect tourism activities which are doing well compared to manufacturing industries, many private hotel investors have had to divert hotel generated resources to support other ailing activities. A detailed analysis of the 28 hotel borrowers in arrears as of September 30, 1980, permits the following classification by increasing order of risk of losses: Loans Affected Total Percent of No. Arrears Amounts 1/ Hotel Loans 1/ - --------(DH'000)--- 1. Special cases 4 24,593 48,423 6.0 of which: Mamounia (16,230) (29,200) 2/ (3.7) 2. Starting hotels/ in construction 4 9,863 70,324 8.9 3. Delinquent 14 6,751 24,936 3.1 4. Serious cases 6 8,461 13,420 2.0 Total 28 49,668 157,103 20.0 1/ Including arrears in principal. 2/ Excluding short-term advances amounting to DH 24 million. (a) The special cases concern borrowers whose hotels may be operating profitably but who are not honoring their obligations to CIH pending resolu- tion of legal litigations with CIH and other parties; since the Mamounia case, which constitutes the bulk of these cases has been resolved (para 6.12-14), the hotel portfolio affected by arrears has declined to 16.3% (b) The second group of hotels in pre-operating or start-up phase fell into arrears due to delays in construction, and are expected to pose no major problems in future. (c) The third group includes hotels in fair to satisfactory financial conditions; although they do not pay CIH as regularly as scheduled, they are considered safe risks. (d) In the fourth group of hotels, CIH's total exposure of DH 18.3 million (including arrears) entails probable losses as the hotels involved are not expected to resolve the structural financial problems that they face. However CIH's mortgage securities and Government guarantees would cover most - 29 - eventual losses; moreover total provisions for risk of loss on loans amounted to DH 41.1 million as of September 30, 1980 and would also largely cover eventual losses on these and other loans. 6.12 The luxury hotel Mamounia of Marrakech, which belongs to ONCF, was rented in 1977 to Safir then an affiliate of CIH. The Mamounia needed to be renovated and expanded, and to that effect CIH granted Safir an unsecured hotel loan of DH 29.2 million, and additional short-term advances cumulating to DH 24 million to cover cost overruns. Safir, which was founded by CIH in 1974 and taken over in 1978 by CMKD, has had a poor performance due to the inexperience of its staff and management, and has fallen in arrears 1/. CIH's total financial exposure in Safir amounted to DH 72.5 million, including all arrears, as of September 30, 1980, and is detailed in Annex 11. 6.13 The ONCF, a wholly Government owned agency, has terminated Safir's rental contract, temporarily taken over the management of La Mamounia and signed a contract with CIH that provides for the assumption of DH 40 million in Safir debts through a loan secured by mortgages on La Mamounia assets and Government guarantees. This loan does not exceed CIH's maximum exposure of 20% of equity and has been demonstrated in CIH's appraisal report to be well within La Mamounia's debt servicing capacity. CIH is currently negotiating with the Government and Safir's owners various financial schemes to recover DH 32.5 million still owed by Safir. 6.14 Even if CIH is unsuccessful in recovering all or part of its claims from Safir, its creditworthiness would remain good since of the remaining DH 32.5 million, DH 22.9 million are covered by specific provisions (DH 18 million of these were made in the three first quarters of 1980, still allowing net profits after taxes of DH 13.3 million). Financial projections show that next year's net profit before taxes of DH 56 million should largely suffice to cover the remaining DH 9.6 million at risk, in the event CIH would have to write off entirely its claims from Safir. In addition, since net income is taxed at a 50% rate in Morocco, and provisions (and write-offs) reduce net income, the net impact on CIH's net worth of failure of CIH to recover any of the outstanding DH 32.5 million from Safir could only be DH 4.8 million (i.e., 50% of DH 9.6 million). Housing and Commercial Loans 6.15 Arrears on CIH's housing and commercial loan portfolio amounted to DH 39.5 million (i.e., 3% of housing and commercial portfolio outstanding) as of September 30, 1980, i.e., slightly less than in 1979. These arrears are 1/ Safir manages four hotels, including the Mamounia, of which only one, the 5-star Casablanca hotel is profitable; losses are incurred in the Malabata hotel (Tangiers) and the Mamounia. - 30 - generally less than a year old and present no risks as the real estate value of CIH's mortgage securities far exceed its risk of loss on these loans. In fact CIH has never experienced any significant loss on its housing loans. However, CIH's short-term prefinancing of the construction of apartment complexes by developers such as SICOPAR, entails some risks: if developers fail to sell the built units so as to enable CIH to gradually consolidate the short-term loans into long-term individual housing loans, a liquidity problem may occur. Although the likelihood of increased unsold housing units is small considering the growing demand for housing in Morocco, and that so far CIH has not encountered any problems with these loans, they are considered in the same category of risk as hotels for the purpose of defining CIH's debt/equity ratio, and are expected to remain at their present manageable level, i.e., less than 5% of total portfolio. 6.16 CIH's hotel and housing loan portfolio can be considered of satis- factory quality but continued close monitoring is required. CIH agreed to maintain its individual financial exposure to 20% of equity and to continue the application of measures agreed under the CIH-III loan to improve the quality of portfolio, and decrease hotel arrears. The quality of the equity portfolio has been reviewed earlier (paras. 5.05-5.06). D. Audit Performance 6.17 In 1979 CIH hired new auditors, Arthur Andersen and Associates to audit its financial accounts. The financial accounts of Farah Maghreb, a CIH client whose audit is required by the Bank, have been audited in 1979 by Saba and Co., partners of Touch Ross International, reputable international auditors. The quality of CIHRs and Farah Maghreb audits is good. E. Resource Requirements 6.18 As of September 30, 1980, CIH's resource needs to cover its undis- bursed commitments amounted to DH 287 million; undisbursed commitments for hotel projects accounted for DH 150 million, ($38.0 million) to cover import components of those projects. Based on CIH's operational forecasts (para 5.12) its additional resource requirements for new commitments in October 1980 to December 83 are estimated at DH 2,485 million, of which DH 730 mil- lion for hotel lending, including undisbursed commitments. CIH's total resource requirements are estimated at DH 2,772 million; the estimated foreign exchange requirements to finance the import component of hotel projects would be $124 million. This estimate is based on the updated assessment by WTO consultants of the direct and indirect foreign exchange component of hotel investment costs by hotel category. This assessment confirms findings of - 31 - another independent evaluation of these components made earlier by a reputable international consulting firm 1!. 6.19 CIH's forecast resource requirements and financing plan for 1980-83 are as follows: Total Hotel (DH million) Resource Requirements (Oct. 1980-Dec. 1983) 2,772.0 730.0 Financing Plan Cash generation 186.8 Capital increase 100.0 Banque du Maroc 90.0 Bond issues 1,250.0 BCP and others 226.0 Private Savings (1981-82) 29.2 Subtotal 1,882.0 Foreign Borrowings 490.0 IBRD Loan (CIH-IV) 400.0 Sub-total 890.0 Total resources 2.772.0 More details on CIH's financing plan are available in Annex 12. As the Moroccan Government takes charge of managing all foreign exchange resources, CIH's financial operations are transacted exclusively in local currency. Consequently, only country balance of payments considerations 2/ and the better terms of some foreign resources, such as the Bank's, dictate the need for CIH to differentiate between local and foreign currencies when mobilizing resources. 1/ Based on these studies, the import components by categories are estimated as follows as a percentage of construction costs only: 5-star hotels-37%, 4-star hotels-36%, 2-star hotels-24%, 1-star hotels-20%. Although the development of Morocco's high value-added import substituting industries increased the possibility to procure mornot ,oods locally than in the past, foreign price inflation which exceeded domestic inflation rates largely offset the effects of locally procured goods. As a result the WTO consultants estimate the above percentages to be conservative. 2/ Housing and commercial building construction costs also include foreign exchange components. - 32 - 6.20 The mission reviewed the details and feasibility of CIH's resource mobilisation plan with the Treasury and CDG as regards bond issues and capital increases, and with Banque du Maroc as regards other local resources. The above local resource mobilisation plan reflects the conclusions of that review which resulted in a significant scaling down of CIH's business forecasts. As CIH raised DH 257 million in bonds in 1979 and DH 240 million in 1980 the forecast bond issues seem reasonable. Other local resources fall within the capacity of BCP, Banque du Maroc, and other commercial banks to provide. CIH expects to launch its first issue of DH 25 million in bearer bonds (6-year-8.5%) to be subscribed exclusively by private individuals in 1981. Should this first issue be successful, CIH would repeat its campaign annually and substi- tute the new resources to the traditiotnal ones as appropriate (see para 3.04). While the 15-year bond issues and Banque du Maroc rediscount facilities are well tailored to CIH's lending terms for hotel and housing, the other local resources do not generally exceed 5 years. The financial charges are expected to vary between 10% for bonds to 9% for other resources, excluding Banque du Maroc which charges a preferential 3.5% for its rediscounting facilities. 6.21 The DH 490 million in foreign exchange resources identified so far include DII 154 million under negotiations and expected to be contracted in 1981; the balance of resources remain at the exploration stage and CIH expects to secure them for 10 years at fixed interest charges of 8-9% p.a. A Bank loan of $100 million will finance the remaining resource gap of DTI 400 million. Taking into account that no further Bank loans to CIH for tourism are planiaed, CIH has agreed to formulate a resource mobilization strategy to secure foreign exchange funds adapted to its requirements beyond 1983. 6.22 The proposed $100 million Bank loan would cover about 14% of CIH's total resource needs in 1980-83, and 80% of the estimated foreign exchange costs of hotel and other tourism projects to be financed by CIH. F. Financial Prospects Profitability 6.23 CIH's projected income statements are summarized in Annex 13. CIH expects the trend of rising cost of ts financial resources to continue in the near future, taking into account also the rising cost of Bank funds. The average cost of borrowings is expected to increase from 7.6% in 1979 to 8.7% in 1983 based on the assumptions in the project file. Operating costs are projected to -cow in relation to operations although salaries and wages will rise at a moderate 12.5% p.a. Projected revenue assumes 13% and 15% interest on new hotel, 13% on housing and other loans; about 18% of new hotel commit- ments (i.e. DH 124 million) will be charged 15% interest. The effect of these interest rate increases on CIH's profitability would be felt only gradually as the weight of new disbursements, particularly on hotel loans, grows in CIH's portfolio outstanding; the average irncome from loans would increase from 10.8% in 1979 to 12% by 1983 giving CIH a comfortable spread of 3.5% compared to administrative expense of 0.9% of total assets on average. - 33 - CIH's profitability prospects are thus promising with return to equity expected to reach 14.0% in 1982-83 compared to 10% in 1979. As a result of this rising profitability CIH expects to increase provisions for risks from 2.5% in 1979 to 3.8% of total portfolio by 1983 while maintsining an 8% dividend on an expanded capital base. Liquidity and debt service 6.24 CIH's forecasts were prepared within the framework of the two constraints presented by the agreed new debt/equity structure based on the proportion of low and high risk loan and investment portfolio and the minimum debt service coverage ratio of 1:1 (para 6.08). As a result of its tightening of loan terms to match the true debt servicing capacity of borrowers, CIH's debt service ratio as defined in the loan agreement would remain slightly above 1.0 in 1980-81 and improve to 1.2 by 1982 and 1983. As shown in Annexes 14 and 15, the long-term debt/equity ratio, which was 12.9:1 compared to a 13.8:1 maximum allowable limit at end 1979 would decrease to 11.0:1 in 1980 following a capital increase of DH 50 million. By 1982 another capital increase of DH 50 million has been agreed to by CIH to remain within the 14:1 allowable debt/equity limit that year, and subsequently. VII. THE PROJECT: LOAN BENEFITS AND RISKS A. Benefits and Risks 7.01 The detailed assessment of the benefits of the investments to be financed under the proposed loan of $100 million is available in file. Hotels to be financed are expected to generate substantial net foreign exchange estimated at $128 million (in constant 1980 prices) by 1987 when all the hotels in the program are fully op&rational. Direct and indirect employment to be generated is estimated at a miniiutri 21,000 jobs; the estimated cost of the 7,000 direct jobs to be created is $42,000, a higher figure than in the past reflecting the increased cost of hotel construction. The net effect on Government finance is estiuated to vary from DH 79.8 million in net benefLts during the 5 to 10 year period of validity of tlie incentives, to DH 149 million afterwards; the net cost of the incentives to the budget is estimated at DH 14 million the first year. The present value of the Government's net cash flow for the project is DH 622 million at a discount rate of 10%. 7.02 Through this loan the Bank can also expect to have a strong and lasting institution-building impact not only on CIH but also on the M4OT. The comprehensive technical assistance programs devised under the project would continue and firm up the institutional improvements initiated under the CIII-III loan. The Government is expected to dispose of a better capability for administrative, policy and strategy formulation and implementation for tourismn. This increased capability would lead to better choice of projects and resource allocations. There are risks in that Government performance may not fully live up to expectations as witnessed under the CIH-III loan; in - 34 - particular the temptation to encourage more projects in Marrakech is strong although the proposed environmental impact study for that city may conclude that the city will soon reach its tolerance level. These risks are reduced in the light of the substantial policy changes already implemented and the commitment to improve sector policies they illustrate. B. Loan Features 7.03 The loan of $100 million is expected to be commited over a period of three years; the final date for subproject submission would be December 31, 1983, and the closing date December 31, 1985. The loan is granted on standard Bank terms and repaid on a fixed amortization schedule basis over 17 years, including 4 years of grace (para 5.04). The proceeds of the proposed loan will be relent by CIH at interest rates, net of Government rebates, of 11% for subloans of up to 14 years, and 13% for subloans of 15 years or more. A commitment fee of 1% is charged by CIH on undisbursed commitments. The Govern- ment assumes the foreign exchange risks. Procurement under the loan will follow standard Bank DFC practices as currently applied by CIH (para 4.15). The loan will finance the following: (a) Equipment: 100% of the foreign exchange cost of imported hotel equipment and 65% of the total cost of locally procured equipment previously imported or manufactured from imported components; (b) Construction: the following percentages representing the foreign exchange component of the cost of hotel construction in Morocco by hotel category: 1-star: 20%; 2-star: 24%; 3-star: 31%; 4-star: 36%; and 5-star: 37% (para 6.18); and (c) Technical Assistance: 100% of the foreign exchange cost of imported equipment, and/or the equivalent of 70% of total cost of services required for the proposed technical assistance programs to: (i) the MOT for up to an aggregate amount of $600,000, allocated as follows: consultants: $385,000; equipment: $130,000; training: $60,000; and contingencies: $25,000 (para 2.15(a)); and (ii) CIH for up to an aggregate amount of $400,000 (para 4.12). 7.04 The individual free limit is $1.5 million equivalent in construction and estimated equipment sub-loans to be made by CIH (para 5.11). All sub- projects to be financed by CIH must yield a minimum economic rate of return of 12% calculated by CIH following the methodology detailed in Annex 5 and reflected in a side letter (para 2.22). Up to a maximum of $25 million of the loan may be utilized to finance hotel projects which have benefitted from a 5% rebate, provided that such projects yield an estimated minimum economic rate of return of 15%; these projects include those, the construction of which (in progress) was financed under the CIH-III loan (1279-MOR), and for which equipment loans are required (paras 2.22 and 5.13). - 35 - VIII. AGREEMENTS AND RECOMMENDATIONS 8.01 During negotiations the principal agreements reached with the Government and CIH are as follows: (a) the proposed technical assistance programs to the MOT will be implemented no later than June 30, 1981, and the phase-III studies of the costs and benefits of tourism investments will be completed by December 31, 1983 (para. 2.15). (b) CIH will submit all of its hotel projects to an agreed appraisal methodology and will finance only projects whose estimated economic rate of return meets a minimum 12% cut-off rate (para. 2.22). (c) CIH's single financial exposure in any hotel project will be limited to 20% of its equity, except if a full guarantee from the Government or any institution acceptable to the Bank covers CIT's risk (para. 4.08). (d) CIH will maintain a minimum 1 to 1 ratio between loan receipts and debt payments, monitor and project that ratio and take appro- priate measures to maintain that ratio above the agreed minimum (para. 6.08). (e) CIH will maintain its debt/equity ratio within a limit consisting of a maultiple arrived at by applying to CIH's loan and equity portfolio weights reflecting in indirect proportion the degree of risk inherent in each category of loan and equity (18 for low risk housing loans and 9 for the remainder of loans and equity investment para. 6.09). (f) CIH will increase its share capital by DH 50 milLion in 1982 to remain within the above prescribed debt/equity ratio (para. 6.24). (g) CIH will continue to apply measures designed to reduce its arrears on loans and to improve the quality of its portfolio (para. 6.16). 8.02 On the basis of the above agreements and other understandings reached during negotiations, and in view of CIHl's demoastrated creditworthi- ness and financial requirements, a loan of $100 million is justified and recommended. MOROCCO: EVOLUTION OF TOURIST ARRIVALS (1973-80) 1/ ('000) 1973 1974 1975 1976 1977 1978 1979 1980 First First Nationality No. No. No. No. No. Year Semester Year Semester France 266 216 281 225 284 316 147 324 165 Netherlands, Belgium, Scandinavia 106 87 101 107 115 105 60 128 117 Germany and Austria 97 89 104 102 109 110 44 101 49 Spain and Portugal 181 77 57 126 157 153 71 128 66 Other Countries Western Europe 185 156 164 141 157 162 67 172 21 Americas 217 200 155 115 129 142 55 118 29 Other Countries 63 71 72 76 92 89 40 111 45 North Africans 111 156 93 (8) 21 (20) -/ 36 10 21 16 Moroccans residing abroad 115 153 218 205 365 364 127 373 n.a. TOTAL 1,341 1,205 1,245 1,105 1,428 1,477 621 1,436 508 1/ Excluding cruisers 2/ Excluding Algerians Source: Ministere du Tourisme EMENA/IDF November 1980 MOROCCO: TOURIST ACCOMMODATION CAPACITY IN 1978 (in beds) Hotels Vacation Apart. Non-Classi- P. Lioln I-star 2-star 3-star 4-star 5-star Total Village Hotel Camping fied Hotels Total - Pediterranean 867 880 1,866 3,562 1,528 8,703 5,816 378 1,760 3,918 18,815 t\orth Center 386 517 733 1,323 1,037 3,996 322 - 1,840 1,498 5,816 lastern 25 185 320 540 - 1,070 - - 264 818 1,888 Center 720 1,578 1,439 2,491 1,965 8,193 - 74 5,324 3,472 11,739 iouth Center 229 489 812 2,139 1,190 4,859 400 - 1,136 741 6,000 W iaharan 60 245 - 1,580 - 1,885 120 - 240 280 2,285 Beach 551 878 1,382 3,945 1,758 8,514 2,740 840 520 997 13,091 1/ Total 2,838 4,772 6,552 15,580 7,478 37,220 9,398 1,292 11,084 11,724 59,634 . . . . . 2/ 1 1979: 2,947 5,065 7,130 15,064 2/ 7,780 37,986 10,613 2,005 _1,084 11,724 62,368 1/ Excluding camping sites 2/ Some hotels were downgraded in 1979 Source: Ministere du Tourisme EMENA/IDF November 1980 -38- Annex 3 MOROCCO COMPARATIVE HOTEL BED OCCUPANCY DATA FOR 1978 AND 1979 Agadir Mediterranean Casablanca/Rabat Marrakech 5-star 72.9 59.0 39.9 37.2 50.0 52.5 58 57.6 4-star 52.8 56.1 36.0 38.5 53.0 53.8 63 58.2 3-star 68.6 50.5 40.0 28.0 58.0 58.3 59 46.1 2-star 50.6 53.1 37.0 33.5 57.0 58.6 48 55.8 1-star 46.6 59.7 37.0 32.5 48.0 67.7 51 41.6 Vacation Village 69.7 59.6 21.0 23.4 - - 42 59.2 Average 60.3 57.2 30.0 30.0 53.6 55 58 55.5 EMENA/IDF November 1980 - 39 - Annex 4 MOROCCO MINISTRY OF TOURISM Technical Assistance: Estimated Foreign Cost (US$) Total Disbursements Man/Month Cost 1980 1981 1982 1. Staffing Project Manager 18 90,000 20,000 60,000 10,000 Consultants 59 295,000 105,000 170,000 10,000 Sub-total 77 385,000 135,000 230,000 20,000 2. Training - 60,000 20,000 30,000 10,000 3. Equipment - 130,000 40,000 60,000 30,000 4. Miscellaneous 25,000 5,000 10,000 10,000 TOTAL 600,000 200,000 330,000 70,000 Nota: The local cost component, including salaries for 8 Moroccan counterpart staff, office space, secretarial and clerical assistance, will be borne by the Ministry of Tourism. EMENA/IDF May 1980 -40- Annex 5 Page 1 of 3 MOROCCO Outline of Methodology to be Followed in Economic Evaluation of Subprojects 1. The following is a presentation of a proposed methodology for calculation of financial and economic rates of return under the CIH-IV loan for use in CIH's appraisal reports. It is similar to that used during appraisal of the loan and its general outline is familiar to CIH staff. Details are given in the mission's report "Hotel Financial and Economic Analysis" available in the project file. The assumptions in this analysis are reasonable given presently available data but the proposed methodology should be viewed as evolving and be modified accordingly as the data base improves and as information needs change. The procedures outlined here in no way substitute for the judgment of the analyst. 2. It is understood that the analysis will be computerized using the CASBAH hotel appraisal model now routinely used by CIH in its project appraisals. A. Financial Analysis 3. The financial analysis will remain as presently calculated, that is: (a) Investment costs will be estimated by CIH's technical studies division in the light of available cost data; replacements to maintain hotel installations at a sound operating level will be included as investment costs over the life of the project; (b) Room rates and tariffs will be based on rates realized for the category in the region and available from CIi's hotel follow-up division, and should reflect discounts and commissions from posted tariffs; (c) Occupancy rates should be consistent with the market analysis and regional rates available from CIH's follow-up reports (Rapports d'Enqu^etes) and statistics of the Ministry of Tourism; CIH should provide specific justifications when occupancy rates assumptions lead to rates higher than attained by present well-managed operations; it may be necessary to program several seasons; (d) Operating costs should be based on experience in the region (as well as management company's experience, if it is a hotel chain operation), especially for manpower, salaries and other key categories such as food and beverage costs, utilities and maintenance; care should be taken to separate fixed and variable elements as well as seasonal differentials; and Annex 5 - 41 - Page 2 of 3 (e) Ratio analysis (e.g., debt service coverage, cash flow, etc.) should be shown in both constant and current terms. B. Economic Analysis 4. The economic analysis should be in constant base year prices (and will therefore not include construction price contingencies). The analysis consists of an adjustment of the financial cost and revenue flows for the hotels to reflect their economic values and adding the following two refinements not included in the financial analysis: (i) tourist expenditures outside hotel 1/ should be included in revenue streams based on data available in the Dar Al Handasah expenditures study and, eventually, the annual expenditure surveys to be undertaken by Ministry of Tourism. Investments and operating costs associated with these expenditures should normally be included as cost streams: until data are made available from regional and other phase- III studies underway, a net revenue flow of 10% may be assumed as a working hypothesis; and (ii) infrastructure investment costs (which are also expected to be calculated and available in the ongoing regional studies) represent an economic cost to be allocated in part to the project and should be added to cost streams; until detailed cost estimates are available (project by project), CIH should assume an average per bed cost allocation of DH 5,000 (in 1978 prices). 5. The economic adjustments of revenue and cost streams involve the following steps: (a) land should be valued at its opportunity cost but in the absence of a sound basis for such valuation, a rental charge as currently practised by CIH should suffice; (b) taxes and duties, which are internal transfers should be removed from all revenue and cost streams; (c) shadow pricing necessitates the disaggregation of revenues as well as investment and operating costs for application of appropriate shadow rates to various revenue and cost categories; an attachment is provided to illustrate what needs to be done to four categories: - foreign exchange - unskilled labor - taxes and duties - other domestic resources used 1/ Presently only foreign tourists; under the phase-III studies on domestic tourism, data on Moroccans' expenditures on tourism will be eventually available and taken into account accordingly. - 42 - Annex 5 Page 3 of 3 (d) diversion effect: adjustment of streams to take account of diversion which occurs when a new hotel derives some of its business at the expense of existing hotels; for the purpose diversion is assumed equivalent (in bednight terms) to those months in which hotels were in no day "full" (a hotel is assumed "full" whenever it achieves a 75% bed occupancy); in practice this means any month in which occu- pancy was less than 50% 1/. Variable operating costs associated with diversion should be removed accordingly from the cost stream. 6. In addition to the usual sensitivity tests (e.g., on costs, occu- pancy), tests of price elasticity for foreign tourism and shadow prices of foreign exchange and unskilled domestic labor may be carried out, particularly if there is evidence of regional disparities. For illustration the assump- tions used during appraisal are reflected in the attachment and are as follows: - the value used for elasticity is -5 - foreign exchange was shadow priced at 1.1 - unskilled labor was shadow priced at 0.7 7. The proposed methodology will yield ERR's taking into account hotel expenditures, outside hotel expenditures, infrastructure and diversion. The cut-off rate for project acceptability is 12% (or 15% for those projects which will benefit from a 5% interest rebate). The sensitivity tests, including price elasticity and shadow pricing of foreign exchange, demand and labor will yield estimates of the "true" ERR. Attachment EMENA/IDF May 1980 1/ Using the 75% "full" definition the mission's analysis shows that when occupancies are 50% or below, in no day of those months would hotels be full on average: this criterion yielded diversion of 15% in Agadir, 26% in Marrakech, 15% in Casa/Rabat, 45% in North. - 43- Annex 5 Attachment MOROCCO DISAGGREGATION OF HOTEL INVESTMENT AND OPERATING COSTS Foreign Unskilled Taxes Other Domestic Exchange Labor Duties Resources Shadow Rates 1.1 0.7 1.00 1.00 A. Operating Costs: Economic Values Food - - 0.060 - Imported (15%) 0.078 0.014 0.049 - Local (85%) - 0.079 - 0.77 /a 0.078 0.093 0.109 0.77 Beverages - - 0.12 - Imported (20%) 0.098 0.018 0.06 - Local (80%) - 0.070 - 0.634 0.098 0.088 0.18 0.634 Payroll 0.09 0.35 0.12 0.44 Energy 0.51 0.092 0.08 0.618 /b Local Taxes - - 1.00 - Other 0.20 0.10 0.06 0.64 B. Investment Cost: Economic Values Incorporation and Preopening - - 0.50 0.50 Construction (TPS) - - 0.06 - Raw materials (40%) - - 0.023 - Local (20%) - - - 0.180 Foreign (20%) 0.092 0.018 0.073 - Labor (60%) - - - Nonskilled (20%) - 0.18 - - Other (40%) 0.037 - - 0.337 Total Construction 0.129 0.198 0.156 0.517 Equipment - - 0.06 - Local (28.2%) - 0.027 - 0.239 Foreign (tax free) (36.0%) 0.304 0.034 - - Foreign (taxable) (35.8%) 0.167 0.019 0.15 - Total Equipment 0.471 0.08 0.21 0.239 Working Capital 0.10 - 0.03 0.37 /a Includes 5% subsidy /b Includes 30% subsidy E!FNA/IDF Mav 19R0 - 44 - Annex 6 MOROCCO CREDIT IMMOBILIER ET HOTELIER Loan Operations: Actual and Forecast (DH million) Approvals Commitments Disbursements Actual Hotels Other Total Hotels Other Total Hotels Other Total 1976 119.8 235.7 355.5 67.6 219.3 286.9 36.6 217.7 254.3 1977 119.6 411.7 531.3 154.3 351.4 505.7 103.4 253.6 357.0 1978 118.9 386.9 505.8 110.7 374.6 485.3 146.8 313.8 460.6 1979 97.3 418.1 515.4 122.6 415.0 534.6 98.0 425.5 523.5 Forecast 1980 150.0 455.0 605.0 150.0 420.0 570.0 140.0 428.0 568.0 1981 180.0 515.0 695.0 160.0 502.0 662.0 150.0 472.0 622.0 1982 200.0 606.0 806.0 180.0 580.0 760.0 180.0 549.0 729.0 1983 230.0 730.0 960.0 200.0 720.0 920.0 200.0 684.0 884.0 EMENA/IDF March 1980 - 45 - Annex 7 MOROCCO CREDIT IMMOBILIER ET HOTELIER Resource Position as of September 30, 1980 (Commitment basis) DH'000 A. EQUITY AND RETAINED EARNINGS Share capital 110,000 Reserves and provisions 104,667 214,667 B. LOCAL CURRENCY BORROWINGS Banque du Maroc 220,000 Government loans 54,780 Local bond issues 1,097,948 Local borrowings 181,698 1,554,426 C. FOREIGN CURRENCY BORROWINGS IBRD loans 180,046 Other foreign loans 313,722 493,768 TOTAL OUTSTANDING RESOURCES 2,262,861 Less: Uses of funds Loan portfolio outstanding 1/ (2,270,674) Equity and other investments (105,713) Fixed and other assets (28,806) (2.405,193) AVAILABLE FOR DISBURSEMENTS (l6? 't) UNDISBURSED COMMITMIENTS (loan and equity) (144,694) RESOURCE GAP 9.30.1980 (287,n26) 1/ Including past-due loan maturities EMENA/IDF November 19M' 46- Annex 8 MOROCCO CREDIT IMMOBILIER ET HOTELIER Audited Income Statements: 1976-1979 (DH'000) Unaudited As of December 31 1976 1977 1978 1979 1980 (Sep. 30) INCOME Interest on loans 79,582 99,644 139,548 188,251 176,642 Dividends 1J 338 191 186 165 - Other income- 7,333 14,023 18,311 13,310 14,396 Total Income 87,253 113,858 158,045 201,726 191,038 EXPENSES Financial charges 55,296 77,091 105,543 139,695 123,244 Personnel expenses 8,495 11,576 12,275 12,913 9,900 Other operating expense 3,589 5,420 5,651 5,341 3,910 Depreciation and amortization 1,532 1,264 1,809 2,595 2,345 Provision for losses 3,868 5,778 14,272 15,062 26,443 Total Expenses 72,780 101,129 139,550 175,606 165,842 Profit before taxes 14,473 12,729 18,495 26,120 25,196 Income tax (6,667) (5,694) (8,473) (13,640) (11,919) NET PROFIT 7,800 7,035 10,022 12,480 13,277 ALLOCATIONS Reserves 2,008 2,774 2,647 4,413 - Dividends 4,800 4,800 4,800 6,600 - Directors' fees 65 65 65 65 - Unappropriated 927 604 2,510 1,402 13,277 7,800 7,035 10,022 12,480 13,277 l/ Including income brought forward from previous years EMENA/IDF November 1980 - 47 - MOROCCO Annex 9 CREDIT IMMOBILIER ET HOTELIER Audited Balance Sheets: 1976-79 (DH'000) Unaudited Dsee=ber 31 1976 1977 1978 1979 1980 DSCember 31 ~~~~~~~~~~~~~~~~~~(Sep. 30) ASSETS Cash and banks 22,021 23,630 51,755 52,152 34,272 Past due loan maturities 65,008 88,656 122,007 192,637 198,803 Less: Provision (14,684) (20,462) (34,700) (46,214) (64,061) Current loan maturities 68,913 88,931 127,580 193,020 193,020 Other receivables 53.467 81,629 109,512 101,377 267,658 Current Assets 194,725 262,384 376,154 492,972 629,692 Housing loans 477,664 651,948 831,755 1,049,691 1,129,283 Hotel loans 398,902 478,158 593,806 660,824 688,862 Commercial loans 42,134 57,194 104,355 185,841 175,432 Total Loan Portfolio 918,700 1,187,300 1,529,916 1,896,356 1,993,577 Less: current maturities (68,913) (88,931) (127,580) (193,020) (193,020) Equity investments 43,790 66,942 93,056 87,310 94,150 Government bonds 7,379 8,277 8,731 9,666 11,247 Less : Provisions - - - ( 2,822) (9,573) Total Portfolio 900,956 1,173,588 1,504,123 1,797,490 1,896,381 Fixed and other assets 6,816 10,823 20,658 24,545 26,452 TOTAL ASSETS _I102,497 1,446,795 1,900,935 2,315,007 2,552,525 LIABILITIES Short term borrowings 37,500 13,910 37,736 13,840 71,500 Current maturities of debt 79,956 74,954 151,362 227,601 236,918 Other liabilities and payables 53,445 60,714 71,748 123,628 153,954 Current Liabilities 170,901 149,578 260,846 365,074 462,372 Rediscounted notes 125,000 150,000 180,000 210,000 220,000 Government loans 65,363 67,391 65,424 58,700 54,780 Bond issues 425,097 541,943 696,418 912,742 1,097,948 Other local borrowings 175,287 189,798 194,404 218,918 185,821 Total local borrowings 790,747 949,132 1,136,246 1,396,360 1,558,549 IBRD loans 81,910 107,425 153,935 174,805 176,730 Other foreign loans 44,800 199,349 349,849 452,860 429,912 Total Eoreign Loans 126,710 306,774 503,784 627,665 606,642 Total term debt 917,457 1,255,906 1,640,030 2,024,025 2,165,191 Less: currenat maturities T(7hT,9) (74,954) (151,362) ( 227,601) (236,918) Share capital 60,000 80,000 110,000 110,000 110,000 Reserves 34,095 36,265 41,421 43,509 51,880 Equity 94,095 116,265 151,421 153.509 161,880 TOTAL LIABILITIES 1,102,497 1,446,795 1,900,935 2,315,007 2,552,525 EMENAJIDF Novemtber 1980 - 48 - Annex 10 MOROCCO CREDIT IMMOBILIER ET HOTELIER Financial Performance Indicators Sept. 1976 1977 1978 1979 1980 Operational Indicators Gross income as % of average total assets 8.6 8.8 9.3 9.6 - Administrative expenses as ,' of average total assets 1.2 1.4 1.2 0.8 - Financial expenses as % of average total assets 6.0 6.5 7.2 7.3 - Income from loans as % of average loan portfolio 9.0 8.8 9.9 10.7 - Cost of long-term debt as % of average long-term debt 6.6 7.1 7.4 7.6 - Spread 3.4 1.7 2.5 3.1 - Profitability Indicators Net profit as % of average equity 8.4 6.7 7.6 9.9 - Profit before taxes as % of average equity 15.6 12.1 14.1 18.9 - Cash dividend as % of net profit 61.5 68.2 63.8 58.1 - Cash dividend as % of par value share 8.0 8.0 8.0 8.0 - Book value of share as % of par value share 156.8 160.4 143.8 139.6 147.0 Financial Structure Indicators Total debt/year end equity 10.7 11.4 12.0 13.3 13.8 Long-term debt/year-end equity 9.8 10.8 11.3 13.2 13.4 Debt/equity (IBRD Agreement) 1/ 5.7 7.1 8.2 13.8 13.9 Interest coverage ratio 1.3 1.1 1.1 1.2 1.3 IBRD debt as % total long-term debt 8.9 8.6 9.4 8.6 8.2 Provisions for losses as % loans and equity investments 1.5 1.6 2.1 2.5 3.5 1/ Assuming DH 19 million as subordinated debt through 1978; for 1979 new debt equity definition excludes quasi-equity and maximum is 13.8 for that year. EMENA/IDF November 1980 - 49 - Annex 11 Page 1 MOROCCO CREDIT IMMOBILIER ET HOTELIER ANALYSIS OF LOAN IN ARREARS OF INTEREST AND PRINCIPAL OVER SIX MONTHS (DH million) Audited (Unaudited) December 31 September 30 1978 1979 1977 1978 1979 1980 A. TOTAL PORTFOLIO Housing and other loans 996.0 1,235.6 663.0 815.0 1,218.2 1,304.7 Hotel loans 594.0 660.8 454.0 597.0 684.5 688.9 1,590.0 1,896.4 1,117.0 1,412.0 1,902.7 1,993.6 B. TOTAL ARREARS Housing 25.3 34.8 19.5 30.2 40.3 39.5 Hotels 1/ 26.2 45.9 11.8 23.5 43.0 48.6 51.5 80.7 31.3 53.7 83.3 89.1 As % total loans 3.2% 4.3% 2.8% 3.8% 4.4% 4.4% C. HOTEL PORTFOLIO (a) Hotel Arrears 26.2 45.9 11.8 23.5 43.0 49.6 As % total portfolio 1.7% 2.4% 1.1% 1.7% 2.2% 2.4% As % hotel portfolio 4.4% 6.9% 2.6% 3.9% 6.3% 7.0% (b) Hotel Portfolio Affected by Arrears (i) Amount 87.0 187.0 55.5 83.3 220.0 157.0 (ii) As % total CIH portfolio 5.5% 9.9% 5.0% 5.9% 11.5% 7.9% (iii) As % hotel portfolio 2/ 13.9% 25.9% 11.9% 13.3% 31.0% 20% 1/ Excluding Chellah and HISA loan arrears (in 1977 only). 2/ Including arrears in principal. EMENA/IDF L10VCiid.Y'i CIH's Exposure in Mamounia/Safir (as of 9-30-1980) (DH '000) Loans Arrears 1/ Total Total Outstanding PrinciRal Interest Due Provisions Loan 23,855.0 5,340 10,889.0 40,084.0 Less: Provisions - (7,381) - (7,381) Advance 24,000 3,666 27,666.0 Less: Provisions - (11,858) (3,666) - (15,524.0) TOTAL 23,855.0 29,340 14.555 67,750 Less: Provisions (11,858.0) (11,047) (22,905.0) Un Contingent liability (ONCF rent) 4,750 Total CIH Risk: 72,500 PROVIS[OKS YOR RISKS: Provisions for Mamounia/Safir 22,905 Other provisions on: loan risks 41,156 : equity investments 9,753 Total CIH provisions for risks -73,814 Ii 1/ Including penalty interests accumulated. -51 - Annex 12 MOROCCO CREDIT IMOBILIER ET HOTELIER Estimated Resource Needs and Financing Plan (1980-1983) Import Total Hotels Component (DH million) ($'000) RESOURCE NEEDS Expected Commitments 1980 (3 months) 143.0 40.0 6,000 1981 662.0 160.0 23,800 1982 760.0 180.0 26,900 1983 920.0 200.0 30,000 Sub-total 2,485.0 580.0 86,700 Gap to be financed _287.0 150.0 37,500 Total requirements 2,772.0 730.0 124,200 FINANCING PLAN A. Local Sources: Net cash generation (1980-1983) 1/ 186.8 Bond issues (1981-83) 1,250.0 (15 years at 10% p.a.) Notes issues (1981) 16.0 (5 years at 9% p.a.) Share capital increase (1980-1982) 2/ 100.0 BCP 210.0 (5 years at 8.5% p.a.) Banque du Maroc 90.0 (permanent at 3.5% p.a.) Private savings mobilization 29.2 (5 years at 8.5% p.a.) 1,882.0 B. Foreign Borrowings 1981 Libyan borrowing ($10m) 40.0 Swiss bond issue (SF 50m) 114.0 IBRD loan ($100m) 400.0 1982 Japanese syndicated loan (Y lOb) 188.0 1983 Kuwaiti bond issue (KD lOm) 148.0 890.0 TOTAL RESOURCES 2,772 l/ Assuming that loan collections match debt principal repayments. 2/ The share capital was increased by DH 50 million in June 1980 but not yet paid-in; DH 50 million in a further capital increase has been agreed to for 1982. EMENA/IDF November 1980 - 52 - Annex 13 MOROCCO CREDIT IMIOBILIER ET HOTELIER Projected Income Statements: 1979-1983 (DH'000) As of December 31 1979 1980 1981 1982 1983 (Audited) INCOME Interest on loans 188,251 234,500 297,000 369,000 452,000 Other income 13,475 24,600 28,600 33,300 38,100 Total Income 201,726 259,100 325,600 402,300 490,100 EXPENSES Financial charges 139,695 175,100 218,850 269,427 332,630 Personnel expenses 12,913 14,400 16,200 18,200 20,500 Other operating expense 5,341 6,320 7,300 8,500 9,800 Depreciation and amortiz. 2,595 3,640 4,580 5,710 7,220 Provision for losses 15,062 25,452 22,600 27,400 32,700 Total expenses 175,606 224,912 269,530 329,237 402,850 Profit before taxes 26,120 34,188 56,070 73,063 87,250 Income tax (13,640) (16,070) (26,814) (34,970) (41,780) NET PROFIT 12,480 18,118 29,256 38,093 45,470 ALLOCATIONS Reserves 4,413 4,174 5,718 7,451 8,898 Dividends 6,600 8,800 12,800 12,800 16,800 Directors' fees 65 115 138 142 172 Unappropriated 1,402 5,029 10,600 17,700 19,600 12,480 18,118 29,256 38,093 45,470 EMENA/IDF November 19R3C Annex 4 MOROCCO CREDIT IMMOBILIER ET HOTELIER Projected Balance Sheets: 1979-83 (DH'000) 1979 1980 1981 1982 1983 ASSETS Cash and banks 52,151 34,794 60,593 65,663 70,150 Past due loan maturities 192,637 201,400 223,160 328,680 472,726 Less: Provision (46,214) (64,914) (87,514) (114,914) (147,614) Current loan maturities 193,020 250,460 301,340 381,780 481,380 Other receivables 101,418 158,721 157,508 170,178 171,473 Current Assets 493,012 508,461 655,087 831,387 1048,115 Housing loans 1049,691 1205,216 1501,385 1861,049 2242,274 Hotel loans 660,824 791,200 916,171 1063,097 1249,830 Commercial loans 185,841 224,404 309,991 421,829 551,363 Total loan Portfolio 1896,356 2220,820 2727,547 3345,975 4043,467 Less:current maturities (193,020) (250,460) (301,340) (381,780) (481,380) Equity investments 87,310 94,150 94,150 94,150 94,150 Government bonds 9,626 11,500 14,110 17,690 22,360 Less: Provisions (2,822) (9,573) (9,573) (9,573) (9,573) Net Total Portfolio 1797,450 2066,437 2524,894 3066,462 3669,024 Fixed and other assets 24,545 32,158 44,741 55,379 67,887 TOTAL ASSETS 2,315,007 2,679,056 3,224,722 3,953,228 4,785,026 LIABILITIES Short term borrowings 13,840 30,500 35,000 45,584 20,000 Current maturities of debt 227,606 262,190 233,760 277,300 375,730 Other liabilities and payables 123,628 96,908 117,402 180,102 224,680 Current liabilities 365,074 389,598 386,162 502,986 6-2,41 Rediscounted notes 210,000 220,000 250,000 280,000 310,000 Government loans 58,700 56,660 54,207 51,754 49,301 Bond issues 912,742 1128,398 1384,546 1667,698 2026,910 * Other local borrowings 218,918 185,925 248,425 253,162 259,549 Total local borrowings 1396,360 1590,983 1937,178 2252,614 2645,760 IBRD Loans 174,805 171,192 203,192 261,200 329,200 Other foreign loans 492,860 576,761 702,920 909,547 1232,707 Total foreign loans 667,665 747,953 906,112 1170,747 1561,907 Total term debt 2024,025 2338,936 2843,290 3423,361 4207,667 Less: Current maturities (227,601) (262,190) (233,760) (277,300) (375,730) Share capital 110,000 160,000 160,000 210,000 210,000 Reserves 43,509 52,712 690,030 94,181 122,679 Equity 153,509 212,712 229,030 304,181 332,679 TOTAL LIABILITIES 2,315,007 2,679,056 3,224,722 3,953,228 4,785,026 EMENA/IDF NovelDber 19'80 - 54 ~ Annex 15 MOROCCO CREDIT IMMOBILIER ET HOTELIER Forecast Performance Indicators 1979 1980 1981 1982 1983 (Actual) Operational Indicators Gross income as % of average total assets 9.6 10.4 11.0 11.2 11.2 Administrative Expenses as % of average total assets 1.0 1.0 0.9 0.9 0.8 Financial Expenses as % of average total assets 7.0 8.0 8.2 8.3 8.4 Income from loans as % of average loan portfolio 10.8 11.4 12.0 12.1 12.2 Cost of long-term debt as % of average long-term debt 7.8 7.8 8.3 8.6 8.7 Spread 3.2 3.6 3.7 3,5 3.5 Profitability Indicators Net profit as % of average equity 8.3 9.9 13.2 14.3 14.3 Profit before taxes as % of average equity 17.3 18.7 25.4 27.4 27.4 Cash dividend as % of net profit 70.1 48.6 43.8 33.6 36.9 Cash dividend as % of par value share 8.0 8.0 8.0 8.0 8.0 Book value of share as % of par value share 143.1 133.0 143.0 144.8 158.4 Financial Structure Indicators Total debt/year end equity 13.7 11.1 12.7 11.4 12.7 Long-term debt/year end equity 12.9 11.0 12.4 11.3 12.6 Debt/equity (IBRD Agreement) 13.8 14.4 14.0 14.1 14.0 Interest coverage ratio 1.2 1.3 1.3 1.3 1.3 Debt Service ratio 1/ 1.0 1.0 1.0 1.2 1.2 IBRD debt as % total long-term debt 8.6 7.3 7.1 7.6 7.8 Provisions for losses as % loans, equity and guarantees 2.5 3.2 3.4 3.6 3.8 1/ As defined in loan agreement, ratio of loan receipts to debt repayments which must not fall below 1.0 to 1. EMENA/IDF November 1980 - 55 - Annex 16 MOROCCO CREDIT IMMOBILIER ET HOTELIER Estimated Disbursement Schedule of Proposed Loan (Calendar years) Quarterly Cumulated ($'000) ($'000) 1981 Quarter III 3,000 3,000 IV 3,000 6,000 1982 Quarter I 3,500 9 500 II 4,000 13,500 III 4,500 18,000 IV 4,500 22,500 1983 Quarter I 4,500 27,000 II 4,500 31,500 III 6,000 37,500 IV 6;000 43,500 1984 Quarter I 6,500 50,000 II 6,500 56,500 III 6,500 63,000 IV 7,000 70,000 1985 Quarter I 7,500 77,500 II 7,500 85,000 III 7,500 92,500 IV 7,500 100,000 Final date of sub-project submission: December 31, 1983 Closing date: December 31, 1985 EMENA/IDF November 1980 - 56 - Annex 17 MOROCCO APPRAISAL OF CREDIT IMMOBILIER ET HOTELIER Selected Documents and Data Available in the Project File A.1 Royaume du Maroc, Ministere du Tourisme: Etude Economique des Investissements Touristiques, by World Tourism Organization - 10 volumes A.2 Royaume du Maroc, Ministere du Tourisme: Elaboration et Mise sur Pied d'Enqu^etes Permanentes sur les Depenses Touristiques au Maroc by Dar Al Handasah Consultants (3 volumes) A.3 Royaume du Maroc, Banque du Maroc: Rapports sur Exercices 1978 et 1979 A.4 Royaume du Maroc, Banque du Maroc: Etudes et Statistiques, mars 1979 A.5 Royaume du Maroc, Caisse de Depot et de Gestion: Exercices 1978 et 1979, Rapportsd'Activite B.1 PNUD: Projet du Gouvernement du Maroc - Avant Projet Document d'Assistance Technique B.2 Morocco-CIH: Lancement d'un Emprunt auvr6s du Public (1979) B.3 Morocco-CIH: Systeme d'Epargne-Logement: Mobilisation des Ressources, juin 1980 C.1 Morocco-CIH: Hotel Financial and Economic Analysis C.2 Morocco-CIH: Ownership Structure as of December 31, 1979 C.3 Morocco-CIH: Board of Directors C.4 Morocco-CIH: Executive Committee C.5 Morocco-CIH: Organization Chart as of December 31, 1979 C.6 Morocco-CIH: Characteristics of Hotel Lending Operations C.7 Morocco-CIH: Analysis of Hotel Projects Financed Under Bank Loans
Группа Всемирного банка · Staff Appraisal Report
Morocco - Fourth Hotel Development Project
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