Morocco - Sidi Cheho-Al Massira Hydro Project

Document of The World Bank FOR OFFICIAL USE ONLY Rpot No. 5173 PROJECT COMPLETION REPORT KINGDOM CF MOROCCO SIDI CHEH)-AL MASSIRA HYDRO PROJECT (LO&N 1299-MOR) June 28, 1984 Europe, Middle East and North Africa Regional Office This dcumnent us a restricted distrbutio. and may be ued by recipients mly in the perfonmnce of Itheiw oia dubes. Its contets may not otherwise be disdosed nthwt World Bank athoriation  FOR OFFICIUL USE ONLY PROJECT COMPLETION REPORT KINGDCH OF MOROCCO Sidi Cheho Al Nassira Hydro Project Loan 1299-NOR Table of Contents Page No. PREFACE . ................................................. i BASIC DATA SHEET .................... ii HIGELIG.TS ................................................ iii I. INTRODUCTION ...................................... 1 Background .........,,,,1I Bank's Involvement in the Sector .... ............ 1 II. PROJECT PREPARATION AND APPRAISAL .... ............ 2 Project Origin ................................ . 2 Negotiations ........................ 2 Major Covenants in Loan and Project Agreements . 4 Project Description ...... ...................... 4 Project Objectives ............................. 5 III. PROJECT IMPLEMENTATION ........................... 5 Project Execution .............................. 5 Problems during Project Execution .... .......... 5 Project Financing .............................. 6 Procurement and Retroactive Financing .......... 6 Project Costs .................................. 6 Disbursements .................................. 7 Reporting ....... ............................... 7 Envirorment and Resettlement ................... 8 Performance of Consultants and Contractors ..... 8 IV. OPERATING PERFORMANCE ............................ 8 V. FINANCIAL PERFORMANCE ............................ 8 Revenue Covenant ...................... 8 Performance under the Revenue Covenant ......... 8 Accounts Receivable .............. .. ............ 10 Management Information System ......... .. ....... 11 External Audit ............. . 11 Insurance ...................................... 11 Thi document has a rest d distribution and may be used by recipients only in the performance of their official duts Its contents may not otherwise be discksed without World Bank authorization.  Table of Contents (Continued) Page No. VI. INSTITUTIONAL PERPORMANCE Performance of the Government and ONE ................... 11 VII. PROJECT JUSTIFICATION Lease Cost Alternative ........ Project Benefits .................. .. .......... 12 Economic Rate of Return ...12 VIII. PERFORMANCE OF THE BANK .. . . .13 IX. CONCLUSIONS AND LESSONS TO BE LEARNED .14 Lessons to be Learned ... ...... ........ *. * .. 14 ANNEES 2.01 - Compliance with Loan Covenants 15 3.01 - Comparison of Estimated and Actual Cost of Project .. 16 3.02 - Cumulative Disbursements - Actual vs. Estimated 17 4.01 - Estimated and Actual Generation of Electricity from Sidi Cheho ................................. 18 4.02 - Estimated and Actual Sales of Electricity .. ......... 19 5.01 - Income Statement for the Years ending December 31, 1975-1982 ...... .....o...20 5.02 - Balance Sheet for the Years ending December 31, 1975-1982 ......... .......................*.......... 21 5.03 - Sources and Applications of Funds for the Years ....22 5.04 - Actual and Forecast Key Ratios of Financial Performance ...o...o.oeo..23 7.01 - Rate of Return Calculation 24 PC mr .. . ........... APPENDIX A Comments from the Borrower ...0....25  PROJECT COMPLETION REPORT KINGDOM OF MOROCCO SIDI CHERO-AL M&SSIRA HYDRO PROJECT Loan 1299-NOR Preface The project consisted of construction of a multipurpose dam, hydroelectric plant and associated transmission link for which a loan of USt49 million was approved by the Board of Directors in June 1976. The loan became effective in July 1976, was fully disbursed and was closed in December 1981. This project completion report was prepared by the Europe, Middle East and North Africa Regional Office based on the appraisal report and other documents in the Bank's files, a completion report prepared by Office National de l'Electricite (ONE), and the Direction de l'Hydraulique and the findings of a project completion mission which visited Morocco in April-May 1983. The PCR highlights the main points on which there was major progress or lack of success, problems that arose during project implementation and the lessons that can be learned from this lending operation. In accordance with the revised procedures for project performance audit reporting, this PCR was read by the Operations Evaluation Department COED) but the project was not audited by OED staff. Following standard procedures, OED sent copies of the draft report to the Borrower and the implementing agencies. Comments received from the Borrower-are attached as Appendix A to the report.  - ii- (Loon 129914iR bn at nLIBCLIl Appraigal Total Project Cost ((US W"lon) 167.1 Z12.0 0verrun (XI - 27 Loan tAowt (tSS mdllion) 49.0 Usaused 49.0 cancel led Date Physical C_ofnts Cinleted 12179 09/ Proportion Comleted by Above DOte ( Proportion of Tim Overrun I 1 ECononic Nte or Netairn () 9.6 11.1 Financial Perforrmnc - Goe tlru 1979 but short of agreed tare thereafter. Znstitutional Performince K-: Good GOVER T: Disapfolt1ifg CoIuATwV ESTMTWmalEo acrUAL oUh (isS illieon) As or March 31 1L 122 12L 12M 1132 (1) Appraisal Estimate 9.0 150 32.0 46.5 0.0 49.0 Ili) Actual 1.1 6.3 15.1 4S.2 47.1 49.0 C1ii as 2 or (i) 11.1 42.0 47.2 97.Z 96.1 100.0 Original P9lan Revision Atal First nation in Files 0WOWS7$ Goverinnt's l pication Imlestatiorns OS/2? Q6/02/76 tard Approval 06/24/76 Loan Agrement Date 07/02176 Effectiveness Date I1/1676 Closing Date 12/13111 i2/3l/hl Borrwer eingl_ of Morocco Executing Ary oSffice National ae l*fltcricnh (SlEI and D1rctuon de 1-lydrauuimie Fiscal Year of Borrier January i- Decer 21 Follo-su Project Na Village Electrification Project LW flr 165s-s Ammant (ESS dllion) 42.0 Loan Agreoeent Date 05/2219 no. or no. of : oe of HantbJYe r ~~~~Persor- "lILak- artlY Identification 03/75 2 4 8 Prepration 33/ 7 Preaoralsal 03/f7 Appraisal 11-12175 1 2 6 22/16/75 TOTAL - S 6 14 - SuPervision 1 12/76 I 2 1 02/18/77 2 06/77 2 2 2 06/211l7 3 1/n7 I 1 I I2/217 A 03/it1 I 1 I 01/21/fl 5 05/78 2 2 1 06/21/73 6 i 22/ 2 3 12/21170 fl/Ia 2 1 2 10/30180 12VW 1 I I 01/21/al 04/31 I 2 2. 01/21/81 allaz IU 2 3 esI04/82 toPletsen 11 10-11/32 4 4 4 1I/16/D2 Completion 05/33 2 51 10/93 Total 24 24 27 fluT reruscE RAm saw of currency (Abbreviation) Dirhn IBM) Tear: Appralsal Year Avenrg 11976) ExCh"e Rate: USS1 = OH 4.42 Zntervairg Years Average 1977-312 USS1 U Dn 4.34 Caletion Year Average (1311) USSI = DU 5.17 October 19U3  - iii - KINGDOM OF MOROCCO SIDI CHEHO-AL MASSIRA HYDRO PROJECT Loan 1299-MOR PROJECT- COMPLETION-REPORT Highlights The project was designed to supply water for irrigation, potable and industrial use and hydroelectric generation. Other objectives were to optimize the water use in the Oum er Rbia, strengthen the decision-making V methods and procedures for the proper use of the country's water resources, strengthen ONE's managerial capabilities, formulate a comprehensive power sector policy and increase coordination between the various ministries and agencies for sound overall development of natural and human resources. No major problems affected project execution and the project was executed essentially as appraised except for modifications necessitated by changed conditions (paras. 3.01 and 3.02). The project had mixed success. While physical facilities were completed in time and without problems, achievements on institutioinal objectives were less than adequate in those areas where the Government's approval was necessary. Such was the case in regard to sector reorganization, ONE's financial performance and collection of its bills for electricity consumption by Goverment agencies and entities (paras. 5.02 to 5.09 and 6.01-6.02). Furthermore, the investment in the hydro dam is being sub-optimally used because of delays in developing the water supply scheme (para. 7.03). One reason for satisfaction is implementation of organizational changes in ONE which have made it a more efficient utility. The Bank identified the right issues at appraisal and showed flexibility in dealing with Project issues.  KINGDOM OF MOROCCO SIDI CHERO-AL MASSIRA HYDRO PROJECT Loan 1299-MOR PROJECT COMPLETION kEPORT I. INTRODUCTION Background 1.01 Morocco's power subsector is under the control of the Ministry of Energy and Mines (MEM) and the Ministry of Interior (MI). MEM supervises the operations of the Office National de l'Electricite (ONE), a Government-owned utility responsible for the generation and transmission of virtually all the publicly supplied electricity in the country, and its distribution throughout the country with the exception of the main urban centers. Distribution of electricity in the main urban areas is entrusted to publicly owned utilities (r4gies) whose operations come under the tutelage of MI. ONE sells about 601 of its production in bulk to the regies and 40% directly to final consumers. MI is responsible for the formulation of the national rural electrification program whose implementation is entrusted to ONE. Some industrial enterprises produce part of their electricity requirements and have generating sets as standby capacity or use steam generated from their industrial process. The fragmentation of the public electricity sector poses serious problems of coordination among the various entities and results in inefficient use of resources through duplication, overstocking etc. These issues were recognized as early as 1973 when the Government agreed under Loan 936-MOR to undertake a study for the reorganization of the sector. The study was completed in 1976, but its recommendations were not implemented. This project completion report is based on the appraisal report and other documents in the Bank's files, a completion report prepared by ONE and the Direction de l'Hydraulique (DH) and on information obtained by a Bank mission from ONE and DH in April-May 1983. Bank's Involvement in the Sector 1.02 Bank's involvement in the sector started in 1973 with a loin of USt25 million (Loan 936-MOR) to finance the integration of the Morocco's -ower transmission-system, the installation of two gas turbine units, and consulting services for tariff studies, the reorganization of the power subsector and future power projects. The Project was successfully completed and a project performance report was circulated to the Executive Directors in July 1982. While technical performance by ONE was good and the Project was completed on schedule, success in meeting the Project's institutional and financial objectives was mixed. ONE's financial performance fell short of the agreed targets, and its accounts receivable accumulated mainly on account of non-payment of bills by Government agencies. The wider sectoral objectives of a more rational administration of the power subsector as a whole and better tariff structures based on marginal costs were also not achieved. These objectives were addressed under the Sidi Cheho-Al Massira Multipurpose  -2- Project, the subject Project which was approved by the Bank in June 1976 (Loan 1299-MNR: US$49 million). The next Bank loan was one of US$42 million approved in 1979 to finance a rural electrification project which is now being implemented. II. PROJECT PREPARATION AND APPRAISAL Project Origin 2.01 Preliminary studies of the Al Massira site (formerly known as Sidi Cheho) on the Oum er Rbia (the second largest river in Morocco) started in 1938 and were continued in 1948 and 1953. Following suggestions by the Bank, the Government commissioned in 1969 the preparation of a master plan for the Oum er Rbia basin. This study, completed in 1971, was subsequently revised in 1974 with the assistance of consultants. An FAO/Bank cooperative program mission visited Morocco in 1974 for its review and the study was finalized in 1975. The final master plan comprised two stages, the first of which was the completion of irrigation development in the Doukkala and Tadla perimeters using existing diversion structures and the second the subject Project. A Bank mission visited Morocco in March-April 1975 to discuss with the Moroccans the economic viability of the Al Massira multipurpose dam. Appraisal took place in December 1975. 'Negotiations 2.02 During negotiations (May 1976), the major issues were: (i) The reorganization of the finance department and the improvement of accounting procedures. The Bank had proposed that consultants be employed to formulate such a reorganization plan which should be approved by the Bank before its implementation. The Moroccans rejected that proposal; they agreed only to exchange views with the Bank on such proposals before implementing them by June 30, 1977; (ii) Settlement of overdue electricity accounts by Government agencies and offices. The accounts receivable covenant under Loan 936-MOR requiring that all power bills be paid within 90 days was superseded by a new covenant under which the Government undertook to keep the total value of bills outstanding from its agencies within two months of total sales to these agencies during the previous calendar year. Completion of legal steps to release DH 10 million and a further payment of DH 8 million were conditions of Board presentation. To comply with this covenant, the Government paid ONE an amount of DH 8 million; (iii) The Bank had proposed that (i) the targets for the rate of return (on ONE's assets in operation) under Loan 936-MOR be revised under this loan so that the 7% be achieved in 1980 instead of in 1981 and (ii) agreement on a tariff increase by January 1, 1977 sufficient to achieve the 1977 rate of return target, be a condition of effectiveness. The Moroccan delegation considered that in view of ONE's capital expansion  -3- requirements, a cash generation covenant would be more appropriate and therefore proposed that such a covenant be substituted for the rate of return covenant. They proposed a cash generation ratio of 18 percent in 1977 gradually rising to reach 20 percent in 1980 and thereafter. Following the 1973 sharp increase in petroleum prices, the Government had not passed on these increases in full to fuel consumers and was thus giving them substantial subsidies from its budget. In order to reduce their burden on the budget, the Government envisaged their total elimination by early 1978. On the basis of fuel prices prevailing at that time, it was estimated that compliance with the cash generation covenant would require a tariff increase of 16% in 1977 over and above any increase needed to meet changes arising from increased fuel prices. The Moroccan * delegation proposed evening out these increases by putting a 10 percent ceiling on the increase in electricity prices in 1977 to meet the cash generation covenant, over and above any increase necessary to offset increased fuel cost. The Bank accepted this proposal. It was estimated that the agreed cash generation targets would translate into the following rates of return on assets in operation: 2.7 % in 1977, 3.9% in 1978, 4.9% in 1979 and 6.4% in 1980, more or less in line with the targets set under Loan 936-NOR. The Moroccan delegation agreed to make the first tariff increase effective not later than January 1, 1977. However, this increase was not made a condition of effectiveness; Uiv) Allocation of joint costs of the Dam: The Moroccan delegation rejected the principle of allocating to each user the share of the cost of the dam attributable to it. In support of their position, the Moroccan delegation drew a parallel with the Government's policy for cost recovery of major public infrastructure such as roads where costs are recovered through specific taxes payable only by users (taxes on gasoline and diesel fuel) rather than user charges, an approach endorsed by the Bank under one of its highway financed projects. In the case of dams, the Government argued that the share of costs attributable to electricity is recovered through specific excise taxes levied on fuel oil and payable by ONE. This is however not wholly correct inasmuch as ONE does not fully recover such costs from electricity consumers through tariffs and has to rely regularly on Government's contribution to finance its investment program. However, the Bank accepted the Moroccan position in view of the uncertainty over the share of the cost of Sidi Cheho dam which should be allocated to power generation; (v) Organization of the Power Sector and Structure of Electricity Tariffs: Under Loan 936-MOR, studies for the reorganization of the sector and tariff structures had been financed and were completed in 1976. The Bank wanted to follow-up on these studies and proposed that the Moroccans submit proposals for the reorganization of the sector and for the implementation of a marginal cost based tariff, with deadlines for the implementation of such proposals. The Moroccan delegation however did not agree to this and as a compromise, agreed to  -4- formulate such proposals by mid-1977 and to keep the Bank informed of the progress achieved in this respect. The Government's general intention was set out in a side letter; (vi) Cofinancing: The Bank had proposed cross-effectiveness and cross-default provisions in the draft Loan Agreement as linkage witb cofinancing agreements. At the time, the Kuwait Fund was considering a loan of about US040 million to finance the foreign exchange gap but could not comuit funds until 1977. To avoid substantial delay in effectiveness, the Moroccan delegation requested, and the Bank agreed, that the cross-effectiveness and cross-default provisions be deleted and that a Government commitment to fill any financing gap be accepted instead; and (vii) Introduction of a fuel adjustment clause: The Bank proposed, and the Moroccans agreed, that an automatic fuel adjustment clause that would pass on to its customers in full any changes in ONE's cost of fuel from the January 1, 1976 level be included in the tariffs. A loan amount of US$49 million was approved by the Board of Directors on June 24, 1976. Loan signing took place in Washington on July 2, 1976 and became effective November 16, 1976 after the signing of an onlending agreement between the Government and ONE, the only condition of effectiveness, on October 25, 1976. Major Covenants in Loan and Project Agreements 2.03 A list of major covenants is given in Annex 2.01 together with the extent of compliance with them. Project Description 2.04 The project consisted of: (i) the construction of a concrete buttressed dam at Sidi Cheho on the Oum er Rbia river; (ii) a 120-MW power plant at the foot of the dam and associated substation/transformers; (iii) about 200 km of 225-KV transmission lines and the upgrading to 225-KV of the substation to be connected to such lines; (iv) engineering services during project execution; and (v) consultant's services for the preliminary studies and preparation of bid documents for the Merija dam.  -5- Project Objectives; 2.05 The main objectives of the Project were to: (i) optimize the water use in the Oum er Rbia to the extent practicable; tii) further strengthen the decision-making methods and procedures for the appropriate use of the country's water resources; (iii) increase coordination between the various ministries and agencies for sound overall development of natural and human resources; e (iv) formulate a comprehensive power sector policy; and (v) strengthen ONE's managerial capabilities. III. PROJECT IMPLEMENTATION Project Execution 3.01 The Project was executed essentially as appraised, except for the following modifications necessitated by (i) the need to take into account findings made during excavations; (ii) a change in the transmission network to adjust to the system development; (iii) additional installation of equipment to operate the hydroplant through automated dispatching system being constructed in Casablanca; and (iii) deletion of the study for the Merija dam. The Bank loan provided fumds for the study of the Merija compensating dam and associated power plant. As it turned out, adequate regulation of the river could be achieved with the existing Imfout dam. Furthermore, the development of irrigation in the project area and requirements of potable and industrial water did not materialize as originally anticipated. Thus completing the detailed design for the Merija dam and associated hydro plant became less urgent than originally thought; in fact subsequent studies demonstrated that it would be more economical to build two dams, eachi 15m high solely for energy, instead of a single 30m high dam at Merija. Det iled designs for these dams and hydro-plants have been completed and will be submitted to the Bank. All these modifications which did not affect the project substantially were made after consultation with the Bank. Problems during Project Execution 3.02 As stated earlier, no major problems affected project execution. Bowever, the following problems emerged during implementation and were satisfactorily solved by ONE: (i) soil geology problems; (ii) difficulties in communication between ONE and the contractor's staff who did not speak French;  - 6- (iii) lack of communication facilities between the project site and ONE's headquarters; (iv) lengthy and unnecessarily complicated import procedures, frequent changes in these procedures and limited validity of import authorization sometimes necessitating modification in the project execution plan; (v) typical problems encountered in erecting transmission line. in urban areas; and (vi) lack of familiarity on the part of ONE's staff with a :_ew type of material that was introduced for the 225 kV line. Except for securing financing for the dam, DH did not experience any a problem worth mentioning. Coordination between DH and ONE was satisfactory. Project Financing 3.03 At the time of negotiations, there was a foreign exchange financing gap of USS41.2 million in the project financing plan. The Kuwait Fund, the Islamic Development Fund and the OPEC Fund had been approached to provide financing to meet this gap but had not yet made any comitment. Consequently, it was agreed that pending the securing of outside financing for the dam, the Government would make available the necessary funds to bridge the foreign exchange financing gap in addition to the local funds required by DH to cover the local cost of the dam (para. 2.02 (vi)). Subsequently, the Government obtained a loan of Saudi Rials 120 million from the Islamic Development Bank to cover both the local and foreign cost of the dam and the OPEC Fund provided a loan of US$3 million to finance the hydraulic gates, to be administered by the Bank. The Bank loan was closed on December 31, 1981 and final withdrawal on the Islamic Development Bank loan took place in March 1983. 3.04 As t:ie project was being executed, it became clear that the World Bank loan would not be sufficient to cover the full foreign exchange cost of the ONE component (para. 3.06). ONE successfully negotiated a loan of UC 7.6 million with the African Development Bank to meet the financing gap. Procurement and Retroactive Financing 3.05 Goods and services financed by the Bank loan were procured in accordance with the Bank's guidelines. Procurement of all main project components following international competitive bidding was underway before negotiations. Retroactive financing of US$5 million was approved by the Bank. Project Costs 3.06 The total project cost exceeded appraisal estimates by 17.5Z (Annex 3.01) on account of the following factors (The impact of each individual factor is difficult to assess): (a) Exchange rate variation: For the hydro electric plant, the contract was specified in German DM. Subsequently, the DM appreciated substantially vis-a-vis the US dollar, the currency in which the Bank loan was denominated, and the Moroccan dirham. At the time of appraisal, the exchange rate was 1 DM - USSO.406 and DH 1.78. In  -7- Serrember 1979, these ratios were UStO.560 and DR 2.24, an increase of 38X and 26Z respectively. Because of this, the amount of the Bank loan allocated to this category was no longer sufficient to cover the foreign exchange cost of the contract; thus supplementary financing (para_ 3.04) and a reallocation between categories became necessary. This reallocation was approved by the Bank in September 1981 (para. 3A 6 (d)); (b) L-overnment fiscal policy: The Government increased customs duties and tax rates on imported equipment from an estimated 25Z to about 40Z; (c) Change in Project's scope: The final cost of the transmission network was higher than estimated at appraisal as a result of changes in the design of the network (220 km of transmission line erected against 200 km estimated at appraisal); and (d) Engineering consultant services were below the appraisal estimates since the feasibility study for the Merija compensating dam and associated hydro-electric plant was deleted. Part of the Bank loan allocated to this category (UStl.9 million) was reallocated to other categories of ONE's component for which actual cost exceeded the amounts allocated (para. 3.06 (a)). Disbursements 3.07 After initial delays in the disbursement of the Bank loan due to a circuitous procedure under which ONE had to submit applications through the Ministry of Finance, actual disbursements matched closely the appraisal estimates. However, ONE was not always informed of the actual disbursement status since the Bank was sending the advice of disbursement to the Ministry of Finance which did not pass them on to ONE. This communication gap was subsequently taken care of; at ONE's request, a duplicate of the disbursement statement was mailed to it at regular inuervals. Annex 3.02 compares actual disbursements with appraisal estimates. Reporting 3.08 ONE and DR, the project implementing agencies, were informed of the Bank's reporting requirements immediately after loan signing. In the early days of project implementation, DH used to submit its progress report through ONE which would forward a combined report to the Bank. Subsequently, DH failed to prepare its progress report and ONE had to submit a report pertaining only to its component. ONE was also required to prepare and submit each October a financial forecast satisfactory to the Government for the following years indicating the assumptions underlying the forecast and the measures proposed to achieve the covenanted cash generation ratio. These forecasts were never submitted to the Bank and forecasts were made only on the arrival of supervision missions. Both ONE and DR prepared their input for this PCR but the level of thoroughness was a great deal higher in ONE's case.  -8- Environment and Resettlement 3.09 In accordance with past practice and Government regulations concerning expropriation of private land for public interest, adequate compensation was provided to persons displaced by the flooding of the area. Because Bilharzia is prevalent in some areas of the Upper Oum er Rbia, an assurance was obtained for continued monitoring of Bilharzia by the Ministry of Public Health under the Doukkala Irrigation Project (Loan 1122-MOR) and the Sidi Cheho Multipurpose Dam. The Ministry of Public Health has faithfully kept its commitments. Performance of Consultants and Contractors 3.10 Both DH and ONE were satisfied with the performance of their consultants who did a thorough and dedicated job. DH was very satisfied with the quality of work furnished by its contractors. ONE was generally content with the performance of its contractors except for the communications problems referred to in para. 3.02. IV. OPERATING PERFORMANCE 4.01 Since its commissioning in 1980, the power plant has been operating very satisfactorily but below capacity because of the drought which has prevailed in Morocco for the last three years. To this day (10/83), the dam has not been filled. ONE's power benefits would be even less if irrigation had developed as originally anticipated, thus subordinating water release for power generation to the needs of irrigation. No technical problems have appeared on the dam, the power plant and the transmission lines. 4.02 Annex 4.01 gives the forecast and actual generation of the Sidi Cheho hydro plant which indicates that actual generation for 1980, 1981 was 45% and 55Z below the appraisal estimates because of the drought which has plagued Morocco during these years. ONE's total sales were also below appraisal estimates (Annex 4.02). V. FINANCIAL PERFORMANCE Revenue Covenant 5.01 Under the Loan Agreement, ONE agreed to a cash generation covenant replacing the rate of return covenant under Loan 936-MOR (para. 2.02 (iii)). Under this covenant, ONE agreed to take all necessary measures to achieve in each fiscal year, starting with 1977, a contribution to investment of at least 182, rising to 20% in 1980 and thereafter. The Government further undertook to cause ONE to pass on in full to its customers through automatic tariff adjustments any changes in its costs of fuel from the level of January 1, 1976. However, it was also agreed that tariff increases in any year to achieve the cash generation targets would be limited to 10% over and above that required by the increase in the prices of fuel. Performance under the Revenue Covenant 5.02 During the period 1977-1979, ONE's financial performance was substantially in line with the agreed targets. The GoverTment implemented  necessary tariff increases for ONE to cover the increases in the prices of oil and coal and to generate more or less the required contribution to ONE's investment program. 5.03 On January 1, 1977, ONE was allowed to raise its tariffs by 22.3% on average; 9.2Z of it to cover a simultaneous increase in the prices of oil and coal and 13.1% to improve its cash generation. With this tariff increase, ONE's cash contribution to construction in 1977 was 15.3Z (see Annex 5.03). Although this fell somewhat short of the required 18% cash generation, it should be considered as substantially meeting the covenant, considering the constraints. Helped by a scaled-down investment program replacing the 1978-82 five-year development plan by the less ambitious 1978-80 stabilization plan, ONE also complied with the agreed contribution requirements in 1978 and 1979, when fuel increases of about 15Z in January 1978, 25Z in January 1979 and 19% in June 1979 were more than offset by average tariff increases of 14% on January 1, 1978 (4% for fuel and 10% for cash contribution), and 22% on January 1, 1979 (122 for fuel and 10% for cash contribution). The 22X was later reduced to 16% on April 1, 1979. ONE reached self-financing levels of 24% in 1978 and 22% in 1979. 5.04 ONE's financial situation deteriorated rapidly during 1980 and thereafter. The prices of fuel-oil and gas-oil increased by 8% and 20% respectively in January 1980, and again by 50% and 32% respectively in June 1980. This raised ONE's total fuel bill by 54% in 1979 and 1980 but this increase was only partially compensated by a 26.2% average tariff increase allowed as of September 1, 1980 because the Government was reluctant to adopt measures which might lead to social unrest. Including changes in non-cash working capital owing to substantial increases in accounts receivable from Government departments, ONE's internal contribution to construction dropped to about 9% in 1980; however, excluding such changes in non-cash working capital it was 24%. 5.05 Because of the severe drought which occurred in 1981 and 1982 and the Government's reluctance to implement the necessary tariff increases which, in its view, might lead to social unrest, ONE's financial situation deteriorated further in these years, when ONE could not even meet its debt serv ce obligations from internally generated funds. This decrease in ONF s internal cash generation occurred while the Government was reducing its cc:.tribution to ONE's investment program to 25% from 34% at appraisal. These factors forced ONE to incur long-term borrowings to finance its investment program. The effect of such heavy reliance on borrowings for investment financing has started to show; ONE's debt service coverage ratio has quickly dropped from a healthy 2.8 in 1978 to 1.6 in 1980, and only 0.3 and 0.4 in 1981 and 1982 respectively. Because of this, ONE has had to request the Bank's prior approval before entering into long-term borrowing in compliance with the debt limitation covenant. In one instance, howeverP the Bank was informed only afterwards that ONE had issued bonds. While the debt service coverage and the internal cash generation ratios were deteriorating fast, a satisfactory debt/equity ratio was maintained during this period owing to the continuous injection of Government equity capital into ONE. ONE's current ratio also fell during this period but never below 1.0. 5.06 For mainly political reasons, the Government has resisted complying with the automatic tariff adjustment clause which would allow the changes in  - 10 - ONE's fuel costs to be passed on to its customers. In addition, its application without prior adjustment in the tariff structure would have led to further distortion of the tariff structure. Consequently, Ehe automatic tariff adjustment clause has not been incorporated into ONE's tariff structure and the prospects of its implementation in the near future seem rather slim. 5.07 Annexes 5.01 through 5.04 give the comparison between actuals and appraisal financial forecasts. Accounts Receivable 5.08 The high level of ONE's accounts receivable has been a perennial problem. It was the subject of lengthy discussions under Loan 936-NOR, during negotiations of this loan and in subsequent project supervision. At the heart of the problem is the poor record of Government departments, state corporations and regies in payment of electricity bills. As of December 31, 1975, accounts receivable by Government agencies represented 85 days of sales. To remedy this situation, the Government undertook under this Loan to ensure that payments due to ONE by Government agencies on account of electricity sales and connection charges would be kept below one-sixth of the sales to them during ONE's previous fiscal year. While the loan was being processed, the Government took a series of measures to improve the accounts receivable situation such as ensuring that budget allocation for electricity expenses could not be used for other expenses by Government departments and stipulating that the allocation for the following year would depend upon payments made in the previous fiscal year. The Prime Minister also issued a circular in 1976 ostensibly designed to help the electricity and water utilities collect their dues from Government offices and agencies promptly. However, the said circular had a negative effect for the two utilities inasmuch as it could be, and in fact was, interpreted as allowing delayed payment of electricity and water purchases for up to 18 months. At ONE's insistence, as a result of the Bank's urging the Prime Minister's circular was finally repealed at the end of 1982. 5.09 The accounts receivable situation is aggravated further by non-payment of electricity bills by public enterprises which are facing financial difficulties. At the end of October 1982, ONE's outstanding accounts receivable represented 4-5 months of sales (DR 660 million). With Morocco going through difficult economic times, there does not seem to be an early solution in sight. Management Information System 5.10 A recognized weakness in ONE's organization at the time of appraisal of the previous loan (Loan 936-MOR) was the lack of a proper, well structured finance department (para. 2.02 (i)). Under that loan, ONE undertook to appoint a financial manager at a senior level of management to supervise the budgeting and the accounting department. Under Loan 1299-MOR, ONE agreed to exchange views with the Bank on the results of the study of the reorganization of its financial department and to implement the final proposals by June 30, 1977. ONE has fully complied with this covenant and at present, its accounting and financial organization is good. It has competent and dedicated  - 11 - staff and has improved the quality of its accounts and developed its financial analysis techniques. Internal control is good, as is the system of financial accounting. Accounts are computerized and monthly and quarterly financial statements are produced. However, cumbersome procurement procedures have resulted in ONE's carrying a high level of inventories to avoid possible shortages. Externa xudit 5.11 The audit covenant requiring ONE to have its financial statements audited by independent auditors acceptable to the Bank and to send the audited financial statements and a copy of the audit report to the Bank not later than seven months after the end of the fiscal year has been generally complied with for all the years except for 1979 and 1981. The delay in respect of 1979 arose because of Government regulations requiring that all auditing be performed by Moroccan firms. Insurance 5.12 For quite some time in the past, ONE did not insure its assets and considered itself to be self insured. Under the subject Loan, ONE agreed to make adequate self-insurance provisions, the amount of which would be no less than what ONE would have to pay to outside insurers should it decide to do so. ONE has fulfilled this covenant. VI. INSTITUTIONAL PERFORMANCE Performance of the Government and ONE 6.01 ONE's performance under the Loan was good. It consistently tried to live up to its commitments and where it failed, as in the areas of tariffs and finances, the failure was due to circumstances beyond its control (para. 9.01). It also responded quickly to the Bank's suggestions in financial matters. On the other hand, the Government's performance in some matters was disappointing. This was particularly so in regard to the reorganization of the sector which was one of the thorniest sectoral issues on which much debate took place with no positive outcome. The Government agreed to formulate by June 1977 proposals for the reorganization of the electricity sector and exchange views with the Bank on the proposals being developed for the purpose but failed to take the agreed action. ONE had engaged an expatriate firm of consultants under the previous Loan (936-MOR) to carry out a sector reorganization study. This study was submitted to the Government but received very little consideration at the Governmental level. Also, the Bank's views on it were never sought. As a result, the same problems which were identified as arising from the fragmentation of the sector still continue unabated. Coordination between ONE and the regies and between the respective ministries is still lacking in the areas of investment planning and load forecasting, standardization of equipment and network management. 6.02 Tariffs is another area where performance fell short of expectations. The fuel adjustment clause which was agreed upon under this Loan was never introduced in the tariffs. With respect to the tariff structure itself, although some progress (simplification, removal of rebates  - 12 - ard reduction of tariff categories) has been made, the basic objective of a structure based on marginal costs has not been achieved. VII. PROJECT JUSTIFICATION 7.01 At appraisal, the economic justification of the Project involved three steps: (i) the demonstration that the Sidi Cheho Multipurpose dam constituted the least cost solution; (ii) the calculation Gf an overall economic rate of return; and (iii) the calculation of individual returns for each of the three subprojects after allocating the joint costs of the dam. Least Cost Alternative: 7.02 The least cost analysis consisted of selecting independent or combined alternative subprojects which could fulfill the same function as the multipurpose project. For irrigation and water supply, the alternative was considered to be a smaller dual purpose dam at Sidi Cheho. For power, the alternative involved the development of generation capacities to provide what would have otherwise been generated by Sidi Cheho. The project represented the least cost alternative for meeting the power, water and irrigation requirements. Given the escalation in the price of fuel which would represent the-source of energy for the alternative to Sidi Cheho, the project remains the least cost alternative to the economy. Project Benefits 7.03 The project was designed to supply water for irrigation, potable and industrial use and hydroelectric generation. Project benefits are briefly discussed below. (i) Water Supply: The Sidi Cheho multipurpose dam was designed to meet demand for potable and industrial use for the Atlantic Coast up to the years 2000 estimated at about 250 Mm3. At the time of appraisal, it was assumed that the supply of water regulated by the dam would commence in 1983 with an annual growth rate of at least 7%. However, the demand for water supply has not materialized as anticipated at appraisal and is unlikely to reach that level for quite sometime. Water use by industry was expected to stem from the port and petrochemical complex at Jorf El Lasfar, the constructions of which are behind schedule. The earliest date of their commissioning is now expected to be 1985 instead of 1983 as originally planned. With regard to potable water, a project for the supply to the city of Casablanca and other coastal towns is only being considered and is planned to be completed in 1988 under the most optimistic  - 13 - scenario. Hence, benefits from water supply accruing to the Project are substantially lower than anticipated at appraisal. As a corollary to this, capital and operating costs of the water supply scheme have been delayed. (ii) Irrigation: The Doukkala II Irrigation Project, appraised in 1977, is being implemented. Of the 16,600 ha to be irrigated with the water regulated by the Sidi Cheho dam, 9,600 ha were put in service in 1982, 3,700 ha are to be put in service this year and the remainder is expected to come under irrigation in 1984. (iii) Electric Power: The hydroelectric plant has been in service since 1980 but is operating below capacity because of the f0 drought which has plagued Morocco since 1981 (para. 4.01). Actual electricity generation is substantially higher than what it would have been under the same hydrological conditions if the other subcomponents to which the release of water is subordinated had been implemented as originally planned. Thus, ONE is advantageously operating the hydroelectric plant without needing a compensating dam. Economic Rate of Return 7.04 The ex-post economic rate of return was calculated on the basis of the methodology used at the time of appraisal but with data adjusted to reflect actual changes in costs and benefits attributable to the project. Benefits for power are calculated using existing tariffs expressed in 1976 prices and actual GWh generated for power. Future generation is assumed to be what it would be under normal hydrological year. Benefits for the agriculture component expressed in economic prices are calculated using yield patterns observed in the Doukkala I Project with actual production phased out according to the planned commissioning of the Doukkala II Project. Because of the uncertainties surrounding future demand for water and its associated capital and operating costs, the water supply component has not been taken into account for the calculation of the ex-post ERR. On the above basis, a higher ex-post ERR of 11.1L (Annex 7.01) compared to the 9.6% projected at appraisal is obtained. Such an increase is mainly attributable to the power component whose electricity tariffs increased annually by an average 4% in real terms during the period 1976-1982, while the appraisal report used the then prevailing electricity tariff kept constant in real terms. VIII. PERFORMANCE OF THE BANK U.- 8.01 The Bank performance during the appraisal of the Project and in the administration of the Loan has been generally satisfactory, although it could be faulted for not pursuing rigorously the question of reorganization of the sector. The Bank identified the right issues at appraisal and perhaps might have achieved better results if it had followed them up consistently and with vigor during the course of supervision. Bank staff maintained good relations with both ONE, DR and the Government. They also showed flexibility in dealing with issues which arose during project execution, e.g. change in project scope (para. 3.01), reallocation of funds between categories (para. 3.06). There was however a lack of continuity in the project staff supervising the Project  - 14 - owing mainly to transfers of staff on re-assignment. Nevertheless, supervision missions were mounted at regular intervals. IX. CONCLUSIONS AND LESSONS TO BE LEARNED 9.01 The Project was successfully executed and has an ex-post economic rate of return higher than the one estimated at appraisal. Institutional objectives were partially achieved. ONE's performance under the loan was satisfactory. 9.02 On balance, results on achievement of institutional objectives were as follows: on the positive side, ONE has developed into a mature and commercially oriented organization during the period of the loan despite the serious financial problems that emerged after 1980. There was also a meeting of the minds with ONE on most of the important sector issues such as sector reorganization, tariffs and planning. Yet, it is on these basic aspects that there was failure to achieve the project's institutional goals. The GoverDment's reluctance to raise tariffs even to keep pace with fuel costs, non-payment of ONE's bills by Government agencies and entities and Government's unwillingness to enforce such payments were at the heart of the deterioration of ONE's financial situation. Further, in spite of the availability of a tariff study and a study for the reorganization of the sector, the Gover ent did not follow-up on these. Lessons to be Learned 9.03 There are two important lessons to be learned from this lending operation: (a) When exogenous factors develop inhibiting satisfactory performance on the part of a project entity, as when severe drought occurred in 1981 and 1982 or substantial changes occurred in the country's economic situation, the Bank should review the covenants in the light of the changed conditions and the entity's ability to comply with the covenants in such conditions, and, if appropriate, set revised targets and ensure strict compliance with the revised targets. Otherwise, covenants would cease to be flexible tools for achieving realistic goals; and (b) Instead of attempting major reforms like the reorganization of the power sub-sector in one sweep under a single loan, it might be more productive if the changes sought are phased over a longer time span under several loans, and manageable components within the implementation capacity of Government and the borrower are handled under each loan.  AR 2JII m_ -d Sidi aidnI.Mmoir DraaawU'i project ftjor Coveuutta of tam Docu complia e i wih man Cavemfa of lam DOCc,en Seti.m S.. Eo Cwvemimta of ca1piAma PA. 3.03 aE dell e im d dri n pBan d cplied Vith, albet lae. A Fumice Dqernc m - to i ite naariD jiicaam ad e d in Decomb 1979. lld by a Fimce Director _waganize its finAIl aervices ad donllalmt doe dirqtIy to CE's Cwe M e. die fnl prqpsu by June 3D, 1977. Accztivg pc* m be gxesy iqpcae PA. 4.47 GE imll (1) ham its accaata av finmaMcil s.te m mafited (IL) Cgq,Iie kid, f anci Fr by izdeadrnt aulita aecptshle to tie Bdk. (2) mAmit to tie Bwk mited attns ad dccc's (2) CoW1id mid, fe 1979 ad 1981 rvPI,t by Agmet lot oE yw fn1lawift fatal yer. (3) fim,isu to dte BDk adiw fiaiial ifmuetim us (3) Carlied with. E be been copative the Bakwiy fr_m tim to tim r bly requst.L a effidinZ PA. 4A3 (a) DE iull t*e f.m ti to time anl sch newts a CPi. Mt fain 1977 to 1979 m11 be =euired to pI .c in emdi of its faal flat cmplied wi fEm 19M0 to 19Q yea, begieua in 1977. mi satae laed of fiawi fin. izm,rd aa. in di. yewr imn qmt td tzete wthil te maucding ye eiml to at loot 18 pete of the au-1 apital eMqiadtm dirii adb bec yaw *d togedier with tlhe my following eer jad proidtd,l hoe , .that (ii aw iwmme in tariff uappible in 1977. cerdin aw wdic im'cceue adapted to wA imereu M flidl prinm dul am acs an -es of 10 percet ad GOi in die yee 1980 and udueqjMt yeer, dith~ te of finds fEm iggertul m~eto be generaed dull be at lemu 2) ect PA.j 4.3 (b) GE to atiait tD die Book by tie ad of Octdnwermci yee Pat colied iddi a mantable fizwugEl p1t fEw meetig the cubi gawneatim covemm* ini dhe follazrizg yaw. PA. 44' GE. to d thi de B.k' a wAu to m baero.Aie C4lIa Wuith onct e it pima to unetazetar whomieve ha itew cubi ameratii is not mafficiant to e its debt aevice at leeet I1I2 tiin inaSWvfum ryaw. LA. 4.03 C- -e to fonulate by July 31, 197 iemovtiaw Piat cow1ied with for die electricity aector'sa cegi=ioaiml iqpcovam and an the basis of puipinis by GE fwc di adopimi of -M qVxriatE tariff oituctuzn, mIMe 'viem with the U.k an tha peupgaa being unde cowozds mxdi gaIs ad at di proposals beiog delo for f he pmzpme_ LA. 4.O& (a) Cavermit to cause has agties i itreta in die use cowliM with of die voter belmw die Al-Ibasire Dun to ngree with Ut at vile cuvea for tie ummgm-ft of E mcter PrioI tde cceiaaiaizg of die dm. L.A. 4.' (b) Covsumei to came GE ad Ut, priec to die iniaajiooing complied with of dhe dam6 to aer i(m agrm defining deir r reabPwtive ioes in dithe iSpOtCii, hntazae ad I on Of wic focilt sn mc sowr LSto a-i die efficiax.y of vdic izepetim, uommimucne ad opeatifn. LA. 4.06 ihe Uorrser dhull tw dat imaute due to CGE but NMet opumle ith tpnd by geus ad adOMMIatEmmue subdivzn oE dhe BA3Dor er ae ucc of sDles to db of electricity ad related services ahaU not at aTtim mmdai ful to on-di of die ta of surh eel. PJIz g the prWumus fet ol yawr of bEt LA. 4.0 Die BGCr sher ll came CE to p1 an in fill to its Hot caplied with Cstomers diui aunomatic tariff adjuetmet aV I 8 in de Pre ie of fuel umed t QE enrate electrcity fno *Mr levels of iu dy 1. 1976. Alt 19i3  -16 - ANNEX 3.01 MOROCCO PROJECT COMPLETION REPORT Sidi Cheho-Al Massira Hydro Project (Loan 1299-MDR) Comparison of Estimated and Actual Cost of Project (DH 00 --Appraisal Estimate- -Actual--- Local Foreign Total Local Foreign Total Land, Indemnification, Roads, Building 84 44 128 99 52 151 Dam and Dikes 70 78 148 93 114 207 Equipment (including Transmission) 23 159 182 41 230 271 Engineering, Adminis- tration Studies 17 22 39 19 26 45 Miscellaneous - - - 4 - 4 Taxes and Duties 52 - 52 87 - 87 Physical and Special Risk Contingencies 34 36 70 - - - Price Contingencies 57 56 113 63 32 95 Total Project Cost 337 395 732 406 454 860 ) August 1983 (-.  -17 - ANNEX 3.02 MOROCCO PROJECT COMPLETION REPORT Sidi Cheho-Al Massira Hydro Project (Loan 1299-MOR) Cumulative Disbursements - Actual vs. Estimated (in US$ million) Bank Fiscal Year Actual Appraisal Actual as % of and Quarter Disbursements Estimate Appraisal Estimate 1977 March 31, 1977 1.0 9.0 11.1 June 30, 1977 1.0 10.0 10.0 1978 September 30, 1977 4.0 11.0 36.4 December 31, 1977 5.0 12.5 40.0 March 31, 1978 6.3 15.0 42.0 June 30, 1978 8.4 19.0 44.2 1979 September 30, 1978 8.4 24.0 35.0 December 31, 1978 10.3 27.5 37.5 March 31, 1979 15.1 32.0 47.2 June 30, 1979 29.4 35.5 82.8 1980 September 30, 1979 36.5 39.0 -93.6 December 31, 1979 40.6 43.0 94.4 March 31, 1980 45.2 46.5 97.2 June 30, 1980 45.8 47.0 97.4 1981 September 30, 1980 46.3 47.5 97.5 December 31, 1980 46.3 49.0 94.5 March 31, 1981 47.1 49.0 96.1 June 30, 1981 47.1 49.0 96.1 1982 September 30, 1981 47.1 49.0 96.1 December 31, 1981 47.1 49.0 96.1 March 31, 1982 49.0 49.0 100 June 1983  -18 - ANNEX 4.01 NOROCCO PROJECT COMPLETION REPORT Sidi Cheho-Al Massira Hydro Project (Loan 1299-MOR) Estimated (Appraisal) and Actual Generation of Electricity from Sidi Cheho 1980--- ---1981-- Apprai- Actual Apprai- Actual sal sal Generation GWh 310 169 310 138 October 1983 l  KINGDOM OF MOROCCO PROJECT COMPLETION REPORT Sidi Cheho Al-Massira Hydro Proiect (Loan 1299-MORI Estimated (ApDraisal) and Actual Sales of Electricity