Morocco - Public Expenditure : Issues and Outlook

Document of The World Bank FOR OFFICIAL USE ONLY CONFIDENTIAL Report No. 13413-MOR KINGDOM OF MOROCCO PUBLIC EXPENDITURE: ISSUES AND OUTLOOK AUGUST 30, 1994 FILE COPY CONFIDENTIAL Report No: 13413 MOR Type: ECO Country Operations Division Country Department 1 Middle East & 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 and Exchange Rate Currency Unit = Dirham (DH) US$1.00 = DH 9.096 DH 1.00 = US$0.110 (as of June 1994) 1980 1985 1990 1991 1992 1993 June 1994 DH per US$ 4.334 9.621 8.043 8.150 9.049 9.651 9.096 (end-of-period) DH per US$ 3.937 10.062 8.242 8.707 8.538 9.299 9.222 (period average) I I Fiscal Year January 1 to December 31 CONTENTS CHAPTER 1: MAIN CONCLUSIONS ANDROADMAP......................... 1 A. M ain Message of theReport .................................... 1 B. Roadmap of theReport ........................................ 2 C. Additional Remarks andDisclaimers ............................... 3 CHAPTER 2: MOROCCO'S PUBLIC EXPENDITURE: OVERVIEW AND SELECTED ISSUES........................................ 5 A . Introduction ............................................... 6 B. The Central Government ....................................... 6 The General Budget ....................................... 7 Special Accounts, Annex Budgets, and Social Security Funds ............ 14 C. Local Governments ......................................... 17 D. Other Public Sector (OPS)Entities ............................... 22 E. Selected Public Expenditurelssues ................................ 24 Government Employment andPay ............................. 24 Defense Expenditures ..................................... 28 The Phosphates Sector ..................................... 29 Public Sector Arrears ..................................... 31 Tax Expenditures ........................................ 32 CHAPTER 3: SOCIAL SECURITY AND SAFETY NET MECHANISMS ............ 34 A. Background on the Sector and Public Expenditure ...................... 35 B. Key Sector Issues Relevant to Public Expenditure Choices ................. 37 Social Security and Related Mechanisms ......................... 38 Social Assistance Mechanisms ................................ 41 C. Medium-Term Outlook for Expenditures ............................ 42 CHAPTER 4: EDUCATION AND VOCATIONALTRAINING.................... 43 EDUCATION ............................................... 44 A. Background on the Sector and Public Expenditure ................. 44 B. Key Sector Issues Relevant to Public Expenditure Choices ............ 45 C. Medium-Term Outlook for Expenditures ....................... 48 VOCATIONAL TRAINING ...................................... 50 A. Background on the Sector and Public Expenditure ................. 50 B. Key Sector Issues Relevant to Public Expenditure Choices ............ 51 C. Medium-Term Outlook for Expenditures ....................... 53 CHAPTER 5: HEALTH ............................................ 55 A. Background on the Sector and Public Expenditure ...................... 56 B. Key Sector Issues Relevant to Public Expenditure Choices ................. 58 C. Medium-Term Outlook for Expenditures ............................ 61 CHAPTER 6: HOUSING ............ 64 A. Background on the Sector and Public Expenditure ...................... 65 B. Key Sector Issues Relevant to Public Expenditure Choices ................. 67 C. Medium-Term Outlook for Expenditures ............................ 68 CONTENTS (continued) CHAPTER 7: AGRICULTURE ........................................ 71 A. Background on the Sector and Public Expenditure ..................... 72 B. Key Sector Issues Relevant to Public Expenditure Choices ................. 77 C. Medium-Term Outlook for Expenditures ............................ 82 CHAPTER 8: TRANSPORT .. . .......................* 86 A. Background on the Sector and Public Expenditure ...................... 87 B. Key Sector Issues Relevant to Public Expenditure Choices ................. 90 Road Transport ......................................... 90 Rail Transport .......................................... 92 M aritime Transport....................................... 94 (Civil) Air Transport...................................... 96 C. Medium-Term Outlook for Expenditures ............................ 97 Rail Transport .......................................... 98 M aritime Transport....................................... 99 Air Transport .......................................... 100 CHAPTER 9: WATER SUPPLY AND SEWERAGE ......................... 102 A. Background on the Sector and Public Expenditure ..................... 103 B. Key Sector Issues Relevant to Public Expenditure Choices ................ 106 C. Medium-Term Outlook for Expenditures ........................... 111 CHAPTER 10: ENERGY .......................................... 115 A. Background on the Sector and Public Expenditure ..................... 116 B. Key Sector Issues Relevant to Public Expenditure Choices ................ 119 C. Medium-Term Outlook for Expenditures ........................... 123 CHAPTER 11: TELECOMMUNICATIONS .............................. 126 A. Background on the Sector and Public Expenditure ..................... 126 B. Key Sector Issues Relevant to Public Expenditure Choices ................ 128 C. Medium-Term Outlook for Expenditures ........................... 131 CHAPTER 12: MEETING DEVELOPMENT NEEDS SUBJECT TO MACROECONOMIC CONSTRAINTS ONEXPENDITURE .............................. 133 ANNEX 1: CLASSIFICATION OF MOROCCO'S EXPENDITURES ACCORDING TO THE IMF FUNCTIONAL CLASSIFICATION ANNEX 2: BUDGETARY PROCEDURES IN MOROCCO ANNEX 3: MEDIUM-TERM MACROECONOMIC FRAMEWORK AND CG ACCOUNTS CONTENTS (continued) TABLES Table 2.1 Summary of the Central Government Accounts ..................... 8 Table 2.2 Cross-Country Comparison of Expenditures by Function ............... 9 Table 2.3 Cross-Country Comparison of Expenditures By Economic Type ......... 13 Table 2.4 Major Special Accounts and Funding Sources ..................... 16 Table 2.5 Summary of Local Government Accounts ....................... 18 Table 2.6 Structure of Local Government Expenditures ..................... 21 Table 2.7 Transfers between the CG Budget and OPS Entities, 1990-93 ........... 23 Table 2.8 Cross Country Comparisons of Government Employment and Pay ........ 25 Table 2.9 Visible Defense Expenditures ............................... 28 Table 2.10 Public Sector Arrears Stocks (End-1993) ....................... 32 Table 3.1 Major Formal Social Security and Related Mechanisms ............... 36 Table 3.2 Major Social Assistance Mechanisms .......................... 38 Table 4.1 Summary of Public Expenditure on Education .................... 45 Table 4.2 Evolution of Student-Teacher Ratios, 1980-1993 ................... 47 Table 4.3 Incidence of Public Expenditures on Education, 1991 ................ 48 Table 4.4 Potential Impact of Policy Measures in Education .................. 50 Table 4.5 Summary of Public Expenditure on Vocational Training .............. 51 Table 5.1 Summary of Public Expenditure on Health ....................... 57 Table 5.2 Summary of Possible Medium-Term Public Expenditures Targets ........ 63 Table 6.1 Summary of Public Expenditure on Housing ..................... 66 Table 7.1 Summary of Public Expenditures in Agriculture ................... 74 Table 7.2 Public Provision in Key Agricultural Subsectors ................... 75 Table 8.1 Summary of Public Expenditure in the Transport Sector .............. 88 Table 9.1 Summary of Public Expenditure on Water Supply and Sewerage ........ 105 Table 10.1 Summary of Public Expenditure in the Energy Sector .............. 118 Table 11.1 Summary of Public Expenditure on Telecommunications ............ 128 Table 12.1 Constraints on the Medium-Term Growth of Non-interest Expenditure . .. 135 Table 12.2 Summary of Recommended Follow-up Measures ................. 141 Table A2.1 Execution of the Investment Budget Table A3.1 Summary Macroeconomic Indicators Medium Term Outlook and Resource Requirements Table A3.2 Central Government Budget FIGURES Figure 2.1 Evolution of Expenditures by Function ........................ 11 Figure 2.2 Evolution of Expenditures by Economic Type .................... 12 Figure 2.3 Composition of CG Employees ............................. 26 Figure 4.1 Incidence Per Household of Public Expenditure on Vocational Training, 1991 53 Figure 7.1 Public Expenditures in Agriculture: Non-Irrigation Outlays, Period Average 1988-94 ........................................ 73 Figure 7.2 Public Expenditures in Agriculture: Irrigation Outlays, Period Average 1989-93 ......................................... 73 CONTENTS (continued) BOXES Box 2.1 Local Government Activities and Inter-Governmental Fiscal Relations ...... 19 Box 2.2 Central Government PayScales............................... 27 Box 7.1 Budget Execution Procedures in Agriculture ....................... 78 Box 9.1 How do Present Water Tariffs Compare with Prospective Long-Run Marginal Costs? .. .... ... .. .... .... .. .... ... .. .. ... .. .. .. .. .. . 107 Box 12.1 How Much Could a Broad-Ranging Privatization Program Yield? ........ 138 REFERENCES This report is based on the contributions of a team consisting of Henri Beenhakker (transport), Mourad Ezzine (education and vocational training), Najib Guedira (health), Larbi Jaldi (housing), Jorge Larrieu (energy), Philippe Lecharny (telecommunications), Kathy Lindert (agriculture), Laura Raimondo (water supply and sewerage), and Kouassi Soman (macroeconomic framework and budgetary procedures). Valuable input was also received from, among others, Jacques Coudol, Willem Van Eeghen, Guy Ellena, Ian Goldin, Magdi Iskander, Roslyn Hees, Roumeen Islam, Julio Linares, Stewart Lindale, Michel Loir, and David Sewell. As task manager, Ali Khadr was responsible for the overall preparation of the report, and was substantially assisted in this task by Kouassi Soman. Dominique Van De Walle and Ajay Chhibber were peer reviewers for the report, which was prepared under the general direction of Mahmood Ayub (Division Chief, MN1CO), Daniel Ritchie (Director, MN1), and John Underwood (Lead Economist, MN1). Physical production of the report was managed by Brigitte Petit, with the assistance of H616ne Talon and Alexandra Bernardin. The assistance, cooperation, and input of many Government departments and public establishments in Morocco-too numerous to mention individually-is gratefully acknowledged. In particular, extensive assistance was received from the Budget, Treasury, Tax, and Public Enterprise Directorates of the Ministry of Finance. Without their help, preparation of this report would not have been possible. ABBREVIATIONS AND ACRONYMS AB Annex Budget ADN National Defense Administration ANHI Agence Nationale de lutte contre l'Habitat Insalubre BMCE Banque Marocaine pour le Commerce Extrieur (Moroccan Bank for External Trade) BRPM Bureau de Recherches et de Participations Minires (National Mining Bureau) CB Central Bank (Bank Al-Maghrib) CAS Country Assistance Strategy CDG Gisse de D9p6ts et Gestion (Specialized Financial Institution) CERED Centre d'Etudes et de Recherches Dfmographiques (Demographic Study and Research Center) CG Central Government CIMR Caisse Interprofessionnelle Marocaine de Retraite CMIM Caisse Mututelle Interprofessionnelle Marocaine CMR Caisse Marocaine de Retraite (Government Pension Fund) CNOPS Caisse Nationale des Organismes de Pr9voyance Sociale CNSS Caisse Nationale de S6curit Sociale COMANAV Compagnie Marocaine de Navigation (National Shipping Company) CSEC Conseil Supgrieur de l'Eau et du Cimat DEPP Direction des Etablissements Publics et des Participations (Directorate of Public Enterprises) DFI Direct Foreign Investment DOD Debt Outstanding and Disbursed EPA Etablissement Public d Caractre Administratif et Culturel (Administrative Public Establishment) EPIC Etablissement Public & Caractere Industriel et Commercial (Industrial and Commercial Public Enterprise) EN Entraide Nationale (National Mutual Aid) ERAC Etablissement Rggional d'Amenagement et de Construction FEC Fonds d'Equipement Communal (Municipal Finance Fund) FNAET Fonds National pour I'Acquisition et 1'Equipement des Terrains GDP Gross Domestic Product GDI Gross Domestic Investment IBP Imp6t sur les B9ndfices Professionnels IBRD International Bank for Reconstruction and Development IDA International Development Association IGR Imp6t Ggngral sur le Revenu (Personal Income Tax) IMF International Monetary Fund IS Imp6t sur les Socidtds (Corporate Profits Tax) LG Local Government LSMS Living Standards Measurement Survey MARPHOCEAN Phosphate Shipping Company MoEM Ministry of Energy and Mines MoH Ministry of Housing MoNE Minstry of National Education ABBREVIATIONS AND ACRONYMS (continued) MoPH Ministry of Public Health MoPT Ministry of Post and Telecommunications MoPW Ministry of Public Works (also covers Vocational Training) MoT Ministry of Transport OCP Office Cherifien des Phosphates (National Phosphate Company) ODEP Office d'Exploitation des Ports (National Port Authority) OFPPT Office de la Formation Professionnelle et de la Promotion du Travail (National Vocational Training Agency) ONAREP Office National de Recherche et d'Exoloitation P6trolire (National Petroleum Exploration and Production Cdmpany) ONCF Office National des Chemins de Fer (National Railway Company) ONDA Office National des Agroports (Airport Authority) ONE Office National de l'Electricit6 (National Power Company) ONEP Office National de l'Eau Potable (National Water Company) ONICL Office National Interprofessionnel des C6r6ales et L6gumineuses (National Cereals Marketing Board) ONPT Office National des Postes et T61dcommunications (National Post and Telecommunications Company) ONT Office National des Transports OPS Other Public Sector ORMVA Office Rggional de Mise en Valeur Agricole (Regional Irrigation Authority) PFI Prdl&vement Fiscal 4 l'Importation (Import Surcharge) PN Promotion Nationale (Public Works Employment Program) PSD Private Sector Development PSN Participation a la Solidaritg Nationale (National Solidarity Tax) PSPP Prl&vement Sp9cial sur les Produits Pitroliers (Special Tax on Oil and Petroleum Products) PTS Prdlavement sur Traitements et Salaires (Income Tax) RAM Royal Air Maroc (National Airline) RCAR Rggime Collectif d'Allocation de Retraite RMSM-X Revised Minimum Standard Model, Extended SA Special Treasury Account SAL Structural Adjustment Loan SAMIR Socidtg Anonyme Marocaine de l'Industrie du Raffinage (Petroleum Refinery) SCP Socidtd CUdrifienne de P9trole (Petroleum Company) SECAL Sector Adjustment Loan SDR Special Drawing Rights SFI Specialized Financial Institution SNEC Socidtd Nationale d'Equipement et de Construction SNPP Socidtg Nationale des Produits Pdtroliers TIC Taxe Intgrieure d la Consommation (Consumption Tax) VAT Value-added Tax CHAPTER 1: MAIN CONCLUSIONS AND ROADMAP A. Main Message of the Report 1.1. Morocco is now among the fortunate handful of developing countries that motivates keen interest among foreign investors. It has a thriving domestic private sector, a good recent track record of economic management and performance, and, with the exception of certain shortfalls in basic human capital development and in infrastructure, sound "fundamentals" for sustained growth over the long term. In particular, rapid growth of the type witnessed in the East Asian economies, while significantly above the annual growth of about 4 percent that Morocco has averaged in recent years, appears within reach. However, the prospects for sustaining higher growth in the future-and with it, rapid reductions in poverty and unemployment, two key policy concerns--hinge critically on accelerated investment in basic human capital and social needs, and in better infrastructure. Aside from laying the foundations for high and sustained long-term growth, broad-based basic human capital development is also critical to improving the distribution of income. 1.2. The central message of this report is in two parts. First, public expenditure and accompanying policies do not presently address the prerequisites for accelerated growth, namely basic human capital and infrastructure development, in the best possible way. In particular, Central Government expenditures, despite their comparatively high level at over a quarter of GDP, fall short on several counts. Basic services-primary education, basic health care, and water supply, for example-do not generally receive sufficient allocations, although it is predominantly in rural areas that the effects of inadequate outlays have been felt. Conversely, the State budget still bears a significant burden of spending on "high-end" services and "commercializeable" infrastructure and services, where cost recovery and physical provision of services by the private sector could be significantly increased. As a result, the incidence of public expenditure is generally inequitable and, because the State budget is over-stretched, the quality of public services is often not fully satisfactory. In some areas, public expenditures also fall short on efficiency, in that the unit costs of service delivery are high while its effectiveness in terms of outcomes is low. One apparent reason for the low cost-effectiveness in some services is an inappropriate mix between labor and non-labor inputs. This is reflected in abnormally high wage expenditures, particularly relative to non-wage recurrent expenditures. 1.3. Second, the prerequisitesfor accelerated growth stand little chance ofmaterializing under a "business as usual' approach to public expenditure management; a new, more radical approach that seeks expenditure 'load shedding', larger-scale privatization, and greater cost effectiveness is needed. Expenditures in sectors which have a direct bearing on basic human resource development and infrastructure currently amount to a little under half of the non-interest government budget. Under "business as usual" practices, meeting sector development targets that are likely to foster higher growth will probably require real increases in these expenditures of at least 7-8 percent per year over the medium term. For example, such increases in expenditures allow, inter alia, for universal enrollment of 7-year- olds by the year 2002-2003, given status quo assumptions about unit costs, internal efficiency, and the use of private education. If more ambitious targets for basic human resource development and infrastructure improvements are chosen, required growth in expenditures would of course be higher. Meanwhile, major increases in tax revenue are unlikely to be feasible (or indeed desirable). It is also unlikely that residual budgetary expenditures (which are allocated largely to general public services and public order, as well as to defense) can be significantly compressed. At the same time, to support increases in private investment, a continuing reduction in the government deficit, with the aim of sustaining a small surplus within a few years, appears desirable. However, such a deficit target m:\al\mor\pcxp\report\chitextdo Page 2 Public Expenditure: Issues and Outlook constrains total non-interest expenditures not to increase by more than 2-3 percent annually in real terms. To resolve the inconsistency among the various targets, the "business as usual" approach must be scrapped in favor of a new approach based on two principles. The first principle is to withdraw the State from activities that can be taken up equally well or better by the private sector (in many cases, this requires a strengthened regulatory framework). This extends not only to reducing annual public expenditure flows by "crowding in" private provision (as the Moroccan authorities are now aiming to do in electricity generation), but also to relinquishing ownership of asset stocks through larger-scale privatization than in the past. In particular, while commercial public utilities and enterprises are not, on average, a drain on the CG budget, their operations do not appear to yield a significant rate of return on assets. Broad-ranging privatization involving some of the major utilities and enterprises (notably in transport, energy, and telecommunications) would therefore be unlikely to entail much income loss for the Treasury; conversely, it would generate large windfalls. If used to retire domestic debt, these windfalls would enable the Treasury to reduce its interest bill and create additional fiscal space (probably of at least one percent of GDP). The additional fiscal space could then accommodate larger expenditures on activities where State intervention is essential, notably those addressing basic needs. It is critical, however, that a second principle also take root: greater cost-effectiveness and, where feasible and equitable, cost recovery in the delivery of services that the State continues to provide. For example, rationalizing staffing in parts of the education system and increasing cost recovery in urban curative health care would significantly lower the growth in government expenditures required to achieve given improvements in educational and health care outcomes. B. Roadmap of The Report 1.4. With the exception of Chapters 2 and 12, the report is organized along sector (that is, functional) rather than thematic lines. Chapter 2 gives an overview of the structure and recent evolution of public expenditures in Morocco. Its principal focus is on Central Government spending, but the local government and public enterprise sectors are also briefly examined. In addition, this chapter discusses certain key issues pertaining to Morocco's public spending, including that of government employment and pay. Chapters 3-11 contain analyses of public expenditures by sector, and cover social security and safety net mechanisms (Chapter 3), education and vocational training (Chapter 4), health (Chapter 5), housing (Chapter 6), agriculture (Chapter 7), transport (Chapter 8), water supply and sewerage (Chapter 9), energy (Chapter 10), and telecommunications (Chapter 11). Each of these chapters discusses the major issues relating to public expenditures in the sector, as well as the medium-term evolution of expenditures that is planned by authorities in Morocco (or that may be called upon to meet certain targets for provision-see however para. 1.7). In this regard, it should be noted that Morocco does not have an officially sanctioned overall public expenditure program (for example, in the form of a medium-term development plan) beyond the annual budget; consequently, it is not always clear to what extent medium- term expenditure plans espoused by sector authorities will in fact receive Government-wide go-ahead. Finally, Chapter 12 discusses the compatibility between, on the one hand, the expenditure growth that is planned (or that may be called upon) to address sector-specific development agendas and, on the other, overall budgetary targets consistent with a continuing reduction in the Treasury deficit. Chapter 12 also concludes with a summary of key recommendations. 1.5. Broadly speaking, the sector coverage focuses on 'social" sectors (including those which have a direct bearing on human resource development and basic needs, or which otherwise impact the m:ai\mr\pcxprepo1\ch1textdoc Public Expenditure: Issues and Outlook Page 3 welfare of poorer households) and "infrasturire" se irs. In general, the analysis of public expenditures in the various sectors (Chapters 3-11) addresses two principal themes. The first concerns the effectiveness of public expenditures in reducing poverty and catering to basic human resource development and related needs. The second concerns their effectiveness, or lack thereof, in abetting private sector development (through both the extent to which they are directed toward the most pressing constraints on private business and the extent to which they crowd out private investment that could more efficiently provide certain services). In addition, where relevant (mainly in Chapters 7 and 9), links between public expenditure and environmental resource management are discussed. Alongside these themes, "classic" public expenditure issues are also discussed. Such issues include the adequacy and equity of cost recovery mechanisms, the financial viability of public entities which provide services on behalf of the State, and the adequacy of outlays for operations and maintenance. C. Additional Remarks and Disclaimers 1.6. As a general principle, public expenditure should be concentrated in areas where there is a strong rationale for State intervention on either distributional or market failure grounds. Abstracting from inherited public expenditure allocation patterns and the political difficulties that may be associated with any significant reallocation, this report takes it for granted that State intervention in any given sector (and thus priority rankings for public expenditure allocations) should be based on two criteria. The first covers cases where public intervention is required to achieve a more equitable distribution of welfare among the population. State spending on poverty-alleviating social assistance mechanisms is a classic example of such intervention. The second covers case where intervention is needed to supply services (or goods) that are necessary for efficient economic performance but not (adequately) supplied by markets left to themselves. Such market "failure" can stem from many different factors. One such factor is externalities--a divergence between private and social rates of return which leads to inefficient market outcomes. A classic example arises in basic education, where it is generally recognized that social benefits (notably in terms of enhancing labor productivity and reducing fertility) extend beyond those that the individual captures. More generally, even leaving aside distributional considerations, "basic" services (such as primary education and basic preventive health care) rather than "upper-end" services (such as higher education and hospital-based curative health care) are typically those which exhibit the most significant externalities, and therefore those where the rationale for public provision and expenditure is strongest. At the same time, broad-based provision of basic services, by attacking fundamental determinants of poverty, is equity-improving. Finally, even in areas where there is a strong rationale for public intervention to correct market failure, such intervention need not always imply direct provision by the public sector. For example, public intervention is generally recognized to be required for efficient outcomes in electricity supply, but experience in a growing number of countries indicates that at least in thermal generation, independent producers can be successfully attracted and public intervention can be confined to providing the appropriate legal, institutional, and regulatory framework. 1.7. Finally, this report should not be interpreted as endorsing specific percentage increases in expenditure for any given sectors. Certain policy directions-for example, increasing access to safe water, basic health care, and primary education in rural areas--can be unambiguously endorsed. However, endorsing precise rates of increase (or decrease) for public expenditures in the various sectors is a more complex matter. Expenditure growth rates identified in the sector chapters (3-11) and the concluding chapter (12) as possibly being "required" to meet targets for provision should thus be regarded m:\aHi\mor\pcxp\rpost\chitext.doc Page 4 Public Expenditure: Issues and Outlook as purely illustrative. Two examples may help reinforce this point. In Chapter 4 (which covers education) it is argued--largely on the basis of mechanical projections-that under status quo unit cost and internal efficiency assumptions for the egi education system (at all levels), attaining universal enrollment of 7-year-olds by early next century will probably require annual real increases in the education budget of almost 4 percent over the next several years. Does this imply a firm World Bank recommendation that the entire education budget should increase at this pace? The answer is no, since there appears to be substantial scope for cost savings in the sector, so that it should be feasible to accommodate rapid increases in primary enrollment within stricter budgetary targets; this would be reflected in an increasing share of th educatibn budget allocated to'basic' education:- Similarly-, Chapter 6 (which covers housing) contains a statement to the effect that the housing needs generated by future urban population growth may require double-digit rates of increase in the housing budget. Such a statement should not be taken as implying that efforts to contain budgetary expenditures on housing below these levels (by fostering greater private provision) should slacken, and it certainly does not imply that urban housing--even that aimed at re-housing shantytown dwellers-should be favored over (say) basic infrastructure in rural areas. m:\ai\mor\pcxplreport\chitext.doc Public Expenditure: Issues and Outlook Page 5 CHAPTER 2: MOROCCO'S PUBLIC EXPENDITURE: OVERVIEW AND SELECTED ISSUES Despite a sustained reduction in the public sector deficit over the past decade-the consolidated public sector deficit in 1992 can be roughly estimated at 4.5 percent of GDP, compared with at least 10 percentage points more a decade before--the level of central government (CG) spending in Morocco remains high relative to comparable countries. General budget expenditures amount to about a quarter of GDP, and consolidated CG expenditure some four percentage points more. Education and defense receive relatively high allocations; more generally, wage expenditures are high, particularly relative to recurrent spending on goods and services. Local government (LG) expenditures, while growing, still amount to only about one-tenth of CG spending, and tend to be concentrated on municipal infrastructure and services. Other public sector (OPS) entities (which include state-owned utilities, enterprises, and agencies) are not, as a group, a major drain on the CG budget, though the net call on budgetary resources varies widely among entities. Several other points deserve mention. Above-average wage expenditures appear to be driven by employment volumes, rather than pay policy (which appears, on average, roughly appropriate); this calls for a more detailed diagnostic assessment of government staffing needs. Visible defense expenditures average about 4 percent of GDP per year which, while significantly lower than a decade ago, remains comparatively high. Mining and processing of phosphates, of which Morocco is a leading world producer and exporter, is not a drain on the CG budget, although the industry's financial health is unclear. Public sector arrears remain important; CG arrears to OPS entities, for example, stood at 1.3 percent of GDP at end-1993, although these were less than half of OPS arrears to the CG and plans to clear arrears are under implementation. FYnally, tax expenditures-implicit expenditures through tax breaks--are significant, notably in agriculture and housing. Recommended follow-up: * Review the appropriateness of maintaining distinct special Treasury accounts for a variety of functions. * Strengthen framework for recording and processing LG expenditure data. * Review CG and LG staffing needs and remuneration policy by sector and occupational stream. * Prepare a detailed assessment of the financial health and prospects of the State phosphates industry. * Extend and accelerate implementation of action plans to clear public sector arrears and prevent their recurrence. * Assess the incidence of tax expenditures, notably in the housing sector. m:\alimor\pcxp\nport\osext.doc Page 6 Public Expenditure: Issues and Outlook A. Introduction 2.1. This chapter is divided into four further sections. The first gives an overview of the level, structure, and evolution of CG expenditure in Morocco, focusing particularly on expenditures out of the general budget. The second covers LG expenditures. The third section discusses the impact on the CG budget of OPS establishments. Finally, the fourth section addresses five sets of issues which appear at least worthy of brief consideration in a review of Morocco's public expenditure, but which do not find any natural place in the later, sector-specific report structure. These concern: (i) civil service employment and pay; (ii) defense-related spending; (iii) the state-owned phosphates industry; (iv) public sector arrears; and (v) tax expenditures. 2.2. The treatment of LG and OPS expenditures in this chapter-indeed, in the report more generally-is considerably less detailed than that of CG expenditures. Conceptually, it is clear that three "layers" of public sector accounts--those of the CG, LG, and OPS sectors--can be neatly consolidated as part of a complete-flow-of-funds set of accounts for an economy. Such an exercise is, however, beyond the scope of this report. Moreover, the availability of sufficiently recent, complete, and reliable data on recurrent and investment spending of the OPS sector is at issue; data availability is likewise an issue for the LG sector. The approach followed in this chapter--as mostly elsewhere in the report--is to focus on CG expenditures. For LG expenditure, this chapter gives a broad overview of level and composition; the later sector-specific chapters also attempt to indicate the magnitude of LG spending in given sectors. Concerning OPS entities, this chapter highlights in particular the extent to the various OPS entities are a net drain on the CG budget. Where applicable, the later sector-specific chapters contain estimates of the recurrent and investment expenditures of relevant OPS entities, and discuss issues pertaining to transfers from the CG budget, as well as to their operations and investment programs. B. The Central Government 2.3. This section contains an overview of the level, structure, and recent evolution of general budget CG expenditures.' This is followed by a brief review of special accounts and annex budgets, which also figure in the CG accounts. Finally, while no attempt is made to construct an accurate estimate of consolidated CG expenditures according to the strict IMF definition, a back-of-the-envelope estimate of consolidated CG expenditures is derived.' 1/ As a rule, throughout this report and particularly in this section, the aim has been to conform to IMF definitions (the standard references are: Government Finance Statistics Yearbook, annual issues, and A Manual on Government Finance Statistics, 1986). Thus, expenditures refer to non-repayable payments (i.e., those that do not lead to an accumulation or decumulation of financial liabilities or assets), whether requited (i.e., made in return for a quid pro quo) or not. 2/ The main distinction between budgetary and consolidated CG expenditures is that the latter include expenditures of CG special accounts and certain social security fund(s), while the former do not. In the Moroccan context, this report equates budgetary CO accounts with those of the Budget G4ndral de I'Etat, which includes the accounts of all Ministries and related CG departments (40 distinct budgetary entities). To obtain consolidated CG accounts, the operations of the Comptes Spiciaux du Trisor (special Treasury accounts) and the Budgets Annexes (mini-budgets that fund specific functions, such as radio and television), as well as those of certain social security funds, would need to be added in. m:alilmor\pxp\fcporfostxLdoc Public Expenditure: Issues and Outlook Page 7 The General Budget 2.4. At over a quarter of GDP, the level of general budget spending appears fairly high relative to the size of the economy. Table 2.1, which summarizes the CG accounts for recent years, indicates that general budget expenditures average some 25-26 percent of GDP," although deficits have been relatively moderate at 2-3 percent of GDP." CG general budget spending--a crude proxy for the relative size of the CG--is a full 4 to 5 percentage points of GDP higher than the unweighted average for a sample of other middle-income countries,' although it is exceeded by four countries in the sample (see Table 2.2).6 While this observation cannot by itself be used to draw inferences about the efficiency or equity of CG expenditures, or to establish rigorously that the level of spending is "too" high,' it does at least indicate that the Moroccan Government's call on, and subsequent use of, resources is relatively less restrained than in many comparable countries. 3/ In Table 2.1, general budget expenditures are the sum of current expenditure and general budget capital expenditure. The remainder of capital expenditure as presented in Table 2.1 (labelled "other capital expenditure") is actually the balance (that is, spending net of revenue) of special accounts and annex budgets. As indicated later, actual spending through SA's and AB's is somewhat higher than this. 4/ However, forced placements by commercial banks in low-interest Treasury bonds, known as the plancher d'effets publics (remunerated at between one-third and one-half of market rates), imply an additional quasi-deficit. Using the end-1993 figure (approximately DH 14 billion) to estimate the stock of these placements, a rough estimate of the additional interest payments, and thus the additional deficit, which would be generated by paying interest at market rates would amount to about 1 billion DH, or about 0.4 percent of 1993 GDP. 5/ While there is no rigorous basis for the choice of comparator countries, an effort was made to select a sample of geographically diverse middle-income countries for which public expenditure data at least as recent as 1990 is available. 6/ Comparator country data are from the IMF Government Finance Statistics Yearbook, 1992. Data for Morocco are realized expenditures (for which a detailed breakdown by function is available for many, but not all, items); missing items were estimated on the basis on programmed expenditures as reported in annual budget documents (for which a detailed breakdown is available for almost all items). The link between realized and programmed expenditures-- straightforward in the case of recurrent expenditures, more complex in the case of capital expenditures--is discussed in detail in Annex 2. 2/ Rigorous conceptual underpinnings for determining appropriate or permissible government expenditure profiles tend to be complex and of limited operational use. One approach to determining an appropriate time-path for the level (and composition) of government expenditures involves specifying a social welfare function that the government seeks to maximize subject to resource constraints in an otherwise Laissez-Faire economy, and deriving expenditure and tax profiles that best assure this. Under such a construct, the level and composition of government expenditures would be driven, inter alia, by the pursuit of inter- and intra-generational distributional goals and/or the provision of goods and services that markets, for whatever reason, do not supply (enough of). Concerning composition, an optimal solution would be characterized by equality among social rates of return in different activities. A simpler, and more operationally useful, theoretical criterion would be to consider the class of expenditure profiles consistent with a sustainable deficit; on this, see Fischer and Easterly (1990) and World Bank (1992a), Annex M. In Chapter 12 of this report, it will be suggested that an even simpler--though naturally less rigorous--criterion requiring the medium-term evolution of expenditures to support a continued reduction in the budget deficit may be useful in setting a frame of reference. m:\ali\mor\pcxp\rport\osetextdoc Page 8 Public Expenditure: Issues and Outlook Table 2.1 - Summary of the Central Government Accounts (in pencentage of GD) Average Actual Est. Proj. 1984-89 1990 1991 1992 1993 1994 Current Revenue 21.1 23.8 23.0 26.3 26.0 26.2 Tax Revenue 19.3 20.7 20.8 23.9 22.7 23.3 Non-tax Revenue 1.7 3.1 2.2 2.4 3.3 2.9 Current Expenditure 21.7 20.1 19.9 21.4 21.4 20.9 Wages & Salaries 9.9 10.2 10.3 10.8 10.5 9.9 Other Goods & Services 2.9 2.9 2.9 3.3 3.2 3.5 Transfers 2.8 0.9 1.1 1.6 2.0 1.6 Privatization Receipts 0.0 0.0 0.0 0.0 0.8 1.2 Capital Expenditure 7.0 7.2 6.2 7.1 7.6 8.0 General Budget 6.0 5.5 4.6 4.6 5.0 5.5 - Investment Expenditure 4.7 4.7 3.8 3.8 3.9 4.5 - Capital Transfers 1.3 0.8 0.7 0.8 1.1 1.0 Other Capital Expenditure 1.1 1.7 1.7 2.5 2.6 2.5 - VAT Transfers 0.9 1.6 1.6 2.1 2.0 1.7 - Other 0.1 0.1 0.1 0.4 0.6 0.8 Deficit (-) -7.7 .3.5 -3.1 -2.2 -2.2 -1.5 Financing 7.7 3.5 3.1 2.2 2.9 1.8 Domestic Sources 4.9 -0.9 0.6 2.1 1.6 1.7 - Banking System 2.4 -1.5 0.1 1.2 0.9 1.5 - Other Domestic 2.5 0.6 0.5 0.9 0.7 0.1 External Sources 2.8 4.5 2.5 0.1 0.6 -0.2 - Net Borrowing -3.7 -3.1 -1.8 -1.3 0.3 -0.2 - Grants, Reach. & other 6.4 7.6 4.4 1.4 0.3 0.0 Mano Item: GDP (millions of DH) 154907 213803 241647 242488 255122 289762 m:\ali\mor\pexp\repot\osetext.doc ТаЫе 2,2 - Cross-Coar►tкy Comparison of ExpendIture`s Ьу Function (Budgetary CG) (in perCentBge? Gen. Serv. DefenSe Edncatioa HealW Soc. Sec. Housing Cuttare �е1 Agric. Mia., Manuf. Traosp. Other Econ. Other Tota1 Pab.Order Welfare Сотш. Rec., Fдergy FSsberies Coostnк. Соттиак. Sereices Expenditures Expeaditures Amen. ReЬg. THAILAND (1991)1% д 1Wa1) 11.8 n.9 21.1 7.4 з б г s о s о.7 9.9 о Э в 4 г.з 1 Э 7 100 U (Rd�P) 17 2.6 3.l Ll 05 0.4 0! 01 1,0 0.0 12 0.3 20 1q6 тUMBIA (1991► (% д 1ofa� ц.г s.e 1в.1 б.б 1.8 4.г гд а а 9.4 г.5 г 4 10.6 1о 7 100 U (% д CDP) 8.0 1.В 5.8 2 1 0.6 !.3 0.8 0.1 3 0 0.8 0.8 Э 4 Э 4 Э1 8 Tl7RKBY p991) (% д 1о1а� 28.7 11.6 14.6 ЭЭ 2 2 1 4 0 7 0.0 l."1 1.3 9.2 9.4 15 � tOD 0 1%dCDP) 7.7 3.1 Э.9 0.9 Об 0.4 0.2 00 05 0Э 2.5 25 42 267 кoRSA (1992) (% д bfдQ 11.4 2э.8 iZd 1 з 9.7 1 з о.7 о 4 в 1 о в 1.1 б.г ю 9 1оо о 1% д слР) 1.8 Э 9 г.в о г 1 6 о.г о.1 о 1 1.о о.! о 2 1 о з г 16 г В01тА (199р (% д гаа� эо.7 ю.8 19.1 5.г б б оз о.з ол г.7 о.г о 9 о.а 12 7 1ао о 1% д соР► 2.9 1.9 1.е о s о.б о о о о о о оз о.о о 1 о.о 1 г 9 4 [RAN (1991) (% д[да� 7.6 10 Э 22.1 6.7 6.8 4.9 2.1 2.3 Э.9 Э.4 6 4 1 q 22 2 1ро р 1% д CDP► 1 д !.9 4 о 1.2 1 г о.9 ол о.д 0.7 о в 1 г о г 4.о 181 PЮLIPP1N68 (1991) (% д 1ot.) 10 2 10.3 13.Э 4.0 2 Э 1.2 0.6 2 8 7.0 1.3 9.6 2 8 Э2.4 100 0 (% ог соР) г.1 z.1 Э.1 о в о s о г о 1 о 6 1.4 о.Э г.о о.б б.б 7D з URUCUAY (1990►1% д tatW) 2D.0 12.г 14 0 В.б 1 L9 0.2 1 1 0.2 2.9 0 8 11.6 1 Э 15.5 100.0 1% д соР, 2.7 1.7 !.9 ! s 16 О.о о! о.о о.а о.1 1 6 о.г 2 1 13.7 Яl1NGARY (1990) (% д 1ota1) 29 4 6 4 5.4 2.7 1.6 2 6 Э.2 4 7 7.0 4.2 5 4 11 2 16 1 100 0 (%dGDP) 8.7 19 1.6 0.8 05 08 09 14 21 1.2 1.6 3.Э 4.7 294 комАrпА (i99i;►1x ог готq в.г и.5 14 4 !! s 91 о.! os 1,4 в.б ►7в б о Э о 8 в 1ао о (% д CDP) 1.6 Э.7 Э.7 2 9 2 Э 0.0 0 1 0.4 1.7 4 6 1.5 0 В 2 2 ц.б SAMPLE AVERAOE (96о(eomq 1В.1 13.4 16.2 5.7 56 1.9 12 1,3 57 ЭЭ 61 4.9 168 1000 (% д CDP) Э.9 2.5 Э.2 1 2 1.0 0.4 0.3 0 3 L2 0.8 1 Э 1 2 ЭА 2D б MOROIXPOp992)(%dtofolj (q,6 16.Э г1.6 Э.9 1Я !А 1.2 О6 6.1 !,9 Э.8 4.Э 2г7 � 100.0 (%dGDP) 3.6 дА 3.3 1А 0.4 OJ 0.Э 0.2 1.5 0.5 0.9 1.1 �.б 24.6 Page 10 Public Expenditure: Issues and Outlook 2.5. Regarding the composition of expenditures hyfunction, Morocco devotes relatively large shares to education and defense. Table 2.2 presents the composition of expenditures by function for Morocco and selected other middle income countries. Given the relatively high indebtedness of the Treasury--its end-1993 domestic debt stood at about 30 percent of GDP,' and its external debt at about twice this--interest payments (captured under "other expenditures") are also relatively large. By contrast, very modest shares are devoted to general public services and public order, health, transport and communication, and other economic services.' It should be noted that the functional categories of expenditure in this section--which conform to the IMF standard breakdown, and which are mutually exhaustive--do not always match up perfectly with the sectoral categories of expenditure earmarked for analysis in Chapters 3-11 of the report (which are not mutually exhaustive). Ile functional categories used here are designed to facilitate the comparison of Moroccan data with available data for other countries; the sector breakdowns in Chapters 3-11, by contrast, are tailored to policy objectives (notably poverty reduction and private sector development) and institutional structures in Morocco. 2.6. As regards the composition of expenditure by economic type, the share devoted to wages and salaries appears particularly high. As shown in Table 2.3, the weight of wages and salaries (which amounts to over 10 percent of GDP) in total expenditures largely surpasses the average for the sample of other middle income countries." This issue is discussed further in Section E of this chapter. Larger- than-average shares are also devoted to interest payments (as already noted) and, to a lesser extent, capital expenditures." Smaller-than-average shares go to non-wage goods and services, subsidies, and current transfers. In particular, non-wage recurrent spending, particularly the non-transfer component, appears small by international standards. While not by itself conclusive, this observation suggests that inadequate outlays for operations and maintenance, identified as major problems in past sectoral analyses of public expenditure in Morocco, remain an issue; see also, for example, Chapters 5 (regarding health care) and 8 (regarding maintenance for roads). 2.7. Me fiinctional composition of budgetary expenditures in Morocco has changed significantly over the past decade or so. Figure 2. 1 traces the evolution of expenditures by function in Morocco since the early 1980's.11 Alongside a sharp decline in the overall level of budgetary CG S/ This figure excludes Treasury debt to the Central Bank. 9/ Data were not always available in sufficient detail to permit a truly reliable breakdown of expenditures by function, although the extent of misclassification is likely to be minor. 10/ Morocco's wage expenditures might appear even more of an outlier if the remuneration of temporary workers, part of which is subsumed under the "other goods and services" category, were to be fully taken into account. Ll / Capital expenditures may be overstated, as they often include spending that should be treated as recurrent (such as road maintenance outlays). 12/ Data used in constructing Figure 2.1 derive from two different sources: data for 1980-87 are from the Government Finance Statistics, while data for 1990-92 are based on reconstructions (based as closely as possible on the IMF methodology) by Bank staff. While care has been taken to ensure continuity, some inconsistencies in definition or classification may remain. Comparisons over time should therefore be viewed with caution. mAa&\mor\pcxpVtport\ozdezLdor Public Expenditure: Issues and Outlook Page 11 expenditure, from over a third of GDP in the early 1980's to about a quarter presently," major changes in terms of functional composition include: (i) a drop in the share of expenditures devoted to general public services, public order, and other economic services (this is driven, inter alia, by a reduction in subsidies, which appear under other economic services); (ii) a decline in defense expenditures; (iii) a drop in expenditures devoted to transport and communication; and (iv) an increase in other (mainly interest) expenditures. Figure 2.1: Evolution of Expenditures by Function (% of GDP) Total Expend. Others Agricult lItsheries E 909 H198447 Education 01980-83 Defense GaL Serv., Pub. Order, Oth. Eco. Sa. 0.0% .0% 10.0% is.0% 20.0% 25.0% 30.0% 35.0% 2.8. Concerning the evolution of spending by economic type, perhaps the most striking observation is that it is non-wage recurrent and capital expenditures which have borne the brunt of the drop in overall expenditures over the past decade or so. In particular, while much of the decline in non- wage recurrent spending has been brought about by a reduction in subsidies and transfers, recurrent outlays on goods and services declined steadily from about 4.5 percent of GDP during 1980-83 to 3 percent of GDP by 1990-92. Despite a ten percentage-point decline in the level of budgetary CG expenditures as a ratio of GDP between 1980-83 and 1990-92, wage expenditures as a ratio of GDP have 1/ Of course, insofar as the prices of goods and services bought by the government rose more slowly than those of goods and services bought by the rest of the economy, the budget's real call on resources would have declined more slowly than the nominal figures suggest. While no constant-price figures on the uses of GDP are compiled, according to national accounts figures, over the period 1980-92, increases in the GDP deflator consistently outpaced increases in the deflator for government value added. m:\a1imorpxp\rcpoAostcxtdoc Page 12 Public Expenditure: Issues and Outlook remained virtually unchanged since 1984-87. Figure 2.2 summarizes the temporal evolution of expenditures by economic type in Morocco. Figure 2.2: Evolution of Expenditures by Economic Type (% of GDP) Total Capital Expenditure O Average 1990-92 Interest Payments 1 vrg 949 burp -- Average 1984-87 Other Goods & Services & Transfers Average 1980-83 Wages & Salaries 0.0 5.0 10.0 15.0 20.0 25.0 30.0 35.0 m:\ali\mor\pcxp\reportlosetext.doc Public Expenditure: Issues and Outlook Page 13 Table 2.3 - Cross-Country Comparison of Expenditures by Economic Type (Budgetary CG) (in percentage) Wages and Other Goods Interest Subsidies Capital Total Salaries and Services Payments Curr. Trusf. Expend. Expend. THAILAND (1991) (% of total) 34.6 26.1 10.1 6.9 22.3 100.0 (% of GDP) 5.1 3.8 1.5 1.0 3.3 14.6 MALAYSIA (1991) (% of total) 33.5 13.0 21.7 13.5 18.3 100.0 (% of ODP) 10.1 3.9 6.5 4.1 5.5 30.1 TUNISIA (1991) (% of total) 32.6 7.5 12.0 24.6 23.3 100.0 (% of GDP) 9.3 2.1 3.4 7.0 6.7 28.6 TURKEY (1991) (% of total) 40.8 8.9 16.8 20.3 13.2 100.0 (% of GDP) 10.2 2.2 4.2 5.0 3.3 24.9 KOREA (1992) (% of total) 14.5 21.6 1.6 49.6 12.7 100.0 (% of GDP) 2.4 3.5 0.3 8.1 2.1 16.3 BOLIVIA (1991) (% of total) 51.0 25.5 10.1 7.4 5.9 100.0 (% of GDP) 4.8 2.4 0.9 0.7 0.6 9.4 IRAN (1990) (% of total) 42.6 13.5 0.0 16.7 27.1 100.0 (% of GDP) 5.9 1.9 0.0 2.3 3.8 13.9 PHILIPPINES (1991) (% of total) 30.2 15.1 31.3 5.4 17.9 100.0 (% of GDP) 5.8 2.9 6.0 1.0 3.5 19.3 URUGUAY (1990) (% of total) 35.4 17.8 15.9 17.5 13.4 100.0 (% of GDP) 4.7 2.4 2.1 2.3 1.8 13.4 HUNGARY (1990) (% of total) 11.1 33.7 10.2 40.2 4.8 100.0 (% of GDP) 3.3 9.9 3.0 11.8 1.4 29.4 ROMANIA (1991) (% of total) 28.2 19.5 0.0 37.6 14.7 100.0 (% of GDP) 7.1 4.9 0.0 9.5 3.7 25.3 SAMPLE AVERAGE (% of total) 32.2 18.4 11.8 21.8 15.8 100.0 (% of GDP) 6.2 3.6 2.5 4.8 3.2 20.5 MOROCCO (1992) (% of total) 42.4 12.6 19.8 6.5 18.7 100.0 (% of ODP) 10.4 3.11 4.9 1.6 4.6 24.6 m:\alilmor\pcxp\report\osccxt.doc Page 14 Public Erpenditure: Issues and Outlook Special Accounts. Annex Budgets. and Social Security Funds 2.9. Aside from the general budget, CG expenditures in Morocco pass through Special Treasury Accounts (SA's) in seven different categories and four Annex Budgets (AB's)." Of the nearly 100 SA's in these seven categories, most generate only minor expenditures; roughly one-fifth, however, generate expenditures exceeding DH 100 million per year, and together account for some 95 percent of total SA expenditures. Table 2.4 lists the major SA's and AB's. A single account, the Part des collectivites locales dans le produit de la TVA, used to transfer a share of VAT receipts from the CG to the LG sector (see Box 2.1 below), accounts for close to one-third of total SA expenditures. Three of the four AB's-which fund radio and television broadcasting, port operations, and land conservation and registration-account for the bulk of annex budget spending. 2.10. The proliferation of SA's and AB's suggests excessive segmentation in the CG accounts, and calls for a review of the appropriateness of maintaining these extra-budgetary devices. As will emerge in the next paragraph, many SA's in Morocco serve simply as conduits for expenditures funded by individual ministries' budgets. In such cases, SA's are little more than regular budgetary line items with extra accounting devices, although they probably serve to increase the complexity and reduce the transparency of the CG accounts. The more significant cases are those SA's or AB's to which given sources of revenue are earmarked. As a general principle, earmarking is undesirable in that, inter alia, . it contravenes the principle that revenue should be left unconstrained for allocation to the highest-return uses; in the same vein, earmarking may reinforce inertia in the budgetary allocation process, making desirable reallocations more difficult. However, earmarking may be defensible if: (i) it approximates a system of user charges (that is, those from whom the earmarked revenues are drawn are also those who benefit from the resulting expenditures); and (ii) the earmarked revenues provide a relatively stable source of funding for the purpose at hand. By way of example, in the Moroccan context the road maintenance fund (see Table 2.4) appears roughly to satisfy the criteria for defensible earmarking. In general, however, it would appear desirable to conduct a thorough review of the appropriateness of sustaining SA's (versus allowing their expenditures to revert to the general budget) in light of these general principles regarding earmarking. 2.11. A rough calculation-taking account only of the major SA's and AB's listed in Table 2.4- suggests that a further 2-3 percent of GDP would need to be added to general budget expenditures when consolidating general budget and other CG spending. A key point concerns the share of SA and AB expenditures that is funded by transfers from the general budget which themselves appear as general budget expenditures. As indicated in Table 2.4, SA and AB funds derive, in general, from three sources. The first, labelled "Type A", consists of taxes, levies, and other receipts which accrue directly to the SA 14/ An eighth category of SA, comprising over 60 separate accounts, is used by the Treasury for on-lending to, and repayment by, major OPS bodies of credits from external donors and creditors. While this category of SA, which pertains to lending minus repayments rather than expenditures, is not considered further in this section, it is important to note that substantial repayment arrears have been accumulated by some of the major public enterprises (see Section E of this chapter). m:\Ali\morlpcprport\ostextdoc Public Expenditure: Issues and Outlook Page 15 or AB in question without transiting through the general budget." The second ("Type B") source consists of transfers from the general budget, where these transfers figure as expenditures." The third ("Type C") source consists of domestic or external borrowing by the Treasury which is allocated straight to the SA or AB." Clearly, to the extent that SA and AB funds are drawn from Type B sources, adding their expenditures to those of the general budget when consolidating general budget and other CG spending would involve double-counting. SA and AB expenditures funded through Type A or Type C sources, by contrast, should be added in. In 1994, these account for about 57 percent of all SA and AB expenditures, and about 2.8 percent of projected GDP." However, it should be noted that almost two- thirds of this amount represents transfers to the LG sector; such transfers would obviously need to be netted out when consolidating CG and LG expenditures. 2.12. A rough estimate of consolidated CG expenditures that conforms to the IMF definition would be about 4 percentage points of GDP over and above general budget expenditures; comparing this estimate with that for other countries, Morocco's expenditures remain above average. The IMF definition of consolidated CG expenditures calls for the inclusion of the expenditures (net of transfers to these funds from the CG budget) of: (i) social security funds to which affiliation is mandatory; and (ii) pension funds which cater solely to, or are wholly invested with, the CG." Rough estimates of these expenditures would amount to around 2 percent of GDP." Consequently, the difference between consolidated and general budget CG expenditure amounts to at least an additional 4-5 percentage points of GDP. This order of magnitude is slightly below the average discrepancy between consolidated and budgetary CG expenditures for the group of other middle income countries listed in Tables 2.2 and 2.3, which amounts to over 6 percent of GDP. Nevertheless, because CG general budget spending is well above average, Morocco is likely to remain above average in relation to other middle-income countries as concerns 15/ An example is the road maintenance fund (for details of funding sources, see Chapter 8). Another example is the SA used for VAT transfers. A share of VAT proceeds are earmarked for this SA in annual finance laws, although the fact that in the ex post Treasury accounts the entirety of VAT receipts appear as general budget revenue sometimes leads to confusion. 16/ An example is the Fonds Sp4cial de la Pharmacie Centrale, which is funded by a transfer appearing in the Ministry of Public Health's recurrent budget. 17/ Borrowing, whether or not earmarked to a SA or AB, appear as a financing item in the general budget. 18/ The figure of 2.8 percent of GDP refers to the funds (of Types A and C) programmed to be made available to the SA's and AB's; realized SA and AB expenditures may fall somewhat short of this, hence the range of 2-3 percent of GDP given at the beginning of the paragraph. 19/ See A Manual on Government Finance Statistics, IMF, 1986, pp.15-17. 20/ This includes transfer and non-transfer expenditures of the Caisse Nationale de Sccuriti Sociale (CNSS), the Caisse Marocaine de Retraite (CMR), and the Rigime Collectifd'Allocation de Retraite (RCAR), net of CG contributions to CMR and RCAR. For details on these funds, see Chapter 3. m:alimo\pexp\rpot\osftxtdo Page 16 Public Expenditure: Issues and Outlook consolidated CG expenditures. The consolidated CG deficit, however, differs little from the CG deficit shown in Table 2.1.1 Table 2.4 - Major Special Accounts and Funding Sources Special Account/ Annex Purpose Funds Sources of Funds Budget Available (1994) (DH million) Fonds de remploi domanial Real estate purchases by CG 1020 Type B (line items in departments various departments' budgets) Fond spicial de la Pharmacie Medical (mainly drug) supply 190 Type B Centrale purchases by the Ministry of Public Health Fonds National Forestier Management of forestry resources 120 Type A and reforestation Masse des Services Financiers Funds material purchases by fiscal 130 Type A (share of tax controllers fines) Fonds de solidariti des assurances Funds insurance companies in 250 Type A (levy on distress insurance companies) Fonds de diveloppement agricole 230 Fonds de soutien t certains Funds projects of educated young 800 Type C (borrowing from promoteurs entrepreneurs the banking system) Fonds spicial pour 'entretien routier Funds road maintenance 530 Type A Part des collectivitis locales dans le Transfers a share of the VAT 5040 Type A produit de la TVA proceeds to LG's to finance their recurrent and capital expenditure Fonds spcial pour la promotion Funds tourism infrastructure 278 Type B h6telire Fonds spicial pour 'extension et la Funds maintenance and extension 160 Type A (share of judicial rdnovation des juridictions of facilities of the judiciary fines and court costs) Participation de I'Etat dans diverses Funds equity increases by the 510 Type B socidts Treasury Financement des dipenses Funds capital expenditures of the 500 Type B d'iquipement et de la lutte contre le Promotion Nationale, a public ch6mage works job-creation scheme 21/ In fact, the CG deficit shown in Table 2.1 already includes the operations of SA's and AB's, though not those of mandatory social security and government pension funds. m:\ai\mor\pezp\repon\osetextdoc Public Expenditure: Issues and Outlook Page 17 Table 2.4 - Major Special Accounts and Funding Sources Special Account/ Annex Purpose Funds Sources of Funds Budget Available (1994) (DR million) Fonds pour la promotion de I'emploi Funds job-creation schemes for 1000 Type B des jeunes young people Fonds special pour lefinancement de Initially created to help tourism 120 Type C programmes socio-conomiques industry during the Gulf war; now funds mainly low-income housing Acquisition et riparation des Funds maintenance and purchases 2200 Type B matirieLs des Forces Armies Royales of military equipment Budget annexe de la Radiodiusion Funds recurrent and capital 478 Type A (48%) and et de la Tlvision marocaine expenditures of the state Type B (52%) broadcasting system Budget annere des ports Funds operations and maintenance 163 Type A (31%) and of, and investment in, port Type B (69%) infrastructure Budget annexe de la conservation Funds land use planning and 429' Type A foncibre, du cadastre et de la registration system cartographie I ' Available funds shown in the Finance Law are higher; the difference is due to a transfer between the recurrent and capital portions of this annex budget. C. Local Governments 2.13. Though rising, the expenditures of LG units are only a little above one-tenth of CG general budget spending; consolidating the CG and LG deficits yields a figure that differs little from the CG deficit. LG activities and inter-governmental fiscal relations are described briefly in Box 2.1 below. In recent years, LG expenditures have averaged some 3 percent of GDP; the rising trend is driven mainly by growing wage expenditures (see also Section E below). Major LG sources of revenue include local taxes and transfers (mainly of about 30 percent of VAT receipts) from the CG, conceptually divided into current (dquilibre) and capital transfers. LG deficits--inclusive of transfers from the CG--are typically minor, not exceeding one-fifth of 1 percent of GDP, and for some years small surpluses are recorded. Since the CG deficits shown in Table 2.1 are measured after transfers to the LG sector, consolidating the CG and LG deficits simply involves adding these CG deficits to the LG deficits after capital transfers shown in Table 2.5. For 1992, this yields a consolidated deficit of 2.4 percent of GDP, only slightly more than the CG deficit of 2.2 percent of GDP. (It should be stressed, however, that no reliable figures are yet available for 1993 onwards to ensure that LG deficits have remained moderate.) LG deficit financing takes the form largely of borrowing from the Fonds d'Equipement Communal (FEC), a state- m:\ai\mor\pexp\repot\oswext.doc Page 18 Public Expenditure: Issues and Outlook owned local development finance institution, which is virtually the only source of borrowing for LG's.' Table 2.5 summarizes LG accounts for recent years. Table 2.5 - Summary of Local Government Accounts (In percentage of GDP) 1988 1989 1990 1991 1992 Current Revenue 1.5 1.5 1.8 2.2 2.5 Taxes and other income 1.1 1.1 1.2 1.6 1.6 Current transfers from CO 0.4 0.5 0.6 0.6 0.9 Current Expenditure 1.1 1.1 1.4 1.5 2.0 Capital Revenue 0.4 0.1 0.0 0.1 0.1 Capital Expenditure 1.2 1.5 1.6 1.4 1.4 Deficit before CO capital transfers -0.4 -0.9 -1.2 -0.6 -0.9 CO capital transfers (TVA iquipement) 0.8 1.0 1.0 0.7 0.7 Deficit after CO capital transfers (-) 0.4 0.0 -0.2 0.1 -0.2 Financing items: Net Borrowing 0.3 0.3 0.1 0.1 0.2 Asset Accum. (-) or Drawdown (+) & other -0.7 -0.3 0.1 -0.1 0.1 22/ Resources for FEC loans to LG's are typically drawn from external credits, or raised in the public financial circuit through the issuance of FEC debt instruments to the Caisse de Dip6ts et Gesdon (CDG), a state-owned fund which manages assets of the insurance companies and social security and pension funds. For details on FEC operations, see World Bank (1993b). 22/ For greater detail concerning the construction of LG accounts, see World Bank (1992a); Table 2.5 is based as closely as possible on the methodology used in that study. m:\ali\mor\poxp\report%osext.doc Public Expenditure: Issues and Outlook Page 19 Box 2.1: Local Government Activities and hiter-Governmental Fscal Relations In Morocco, Local Governments (Collectivitis locales) are defined to include all public authorities ata sub-national level. Since the revision of electoral boundaries in September 1992, LG units thus defined-each of which is a distinct budgetary entity- consist of: (i) 247 urban municipalities (communes urbaines) and 1237 rural communes (conmumes rurales); as well as (ii) 60 provinces and sub-provinces (provinces elprifectures). The latter group consists in effect of deconcentrated outreaches of the CG since, in contrast to the former group, their heads are centrally appointed rather than elected officials. However, they account for a significant share (close to one-third) of total LG expenditures. While decentralization of economic management and in the provision of public services is commonly cited as an explicit public policy objective in Morocco, the process is still (developmentally) in its infancy. The classic argument in favor of economic decentralization-that it offers the potential for better responsiveness and accountability in the supply of many public services- appears to be the driving force behind the initiative in Morocco. Nevertheless, LG service provision and associated expenditures are still modest in comparison with levels in most developed countries. In OECD countries, for example, it is common for sub- national governments to account for more than half of public investment; in Morocco, LG capital expenditures amount to only about one-fifth of the CG's. Services provided by LG's in Morocco extend mainly to local infrastructure (including local roads, sewers, street lighting, and municipal parks) and such services as garbage,collection and disposal, and police and fire protection. These are services recognized in both economic thought and international experience as suitable for decentralized provision, in that the benefits of the associated services-in contrast to those of such services as national defense-are typically confined to the immediate community. "Human resource" services as education and health care are also recognized to be candidates for LG provision, but the positive externalities generally associated with primary education and preventive basic health care (in that the benefits of an educated and healthy population extend beyond the immediate community) argue in favor of CG intervention. Some investment expenditure on primary education and health was transferred to LG budgets beginning in 1990. However, the amounts remain modest. More importantly, the selection and execution of the associated projects still appears to rest largely with the CC authorities; it is only responsibility for funding that falls (in name) to LG's. Finally, economic decentralization is still subject to very rigorous central oversight and control. By way of example, LG budgets are subject to Mol and MoF approval (the former has overall responsibility for LG oversight), LG applications for credit from the Fonds d'Equipement Communal are subject to Mol screening and approval, and LG budgetary execution is controlled by MoF representatives. Broadly speaking, funding for LG provision of services in Morocco derives from mechanisms that are typically in use elsewhere, albeit with certain peculiarities. Generally accepted funding mechanisms for LG activities include: (i) user fees or charges (where beneficiaries of the service in question can be identified and there are no significant externalities associated with provision); (ii) taxes levied on local residents; and (iii) transfer payments from the CG budget (notably where LG's are providing services on behalf of the CG). All are used in Morocco. User charges, local taxes (whether collected by central or local authorities) and taxes accruing to the CG but remitted to LG's according to the derivation principle typically account for over two- thirds of current revenue. The remainder of current revenue is accounted for by transfers from the CU budget. Transfers are set at a statutory 30 percent of total revenue from the value added tax (VAT), which ensures relative stability in the transfer streams. Transfers are, in general, untied-for example, they are not conditional or matching transfers-although they are divided into three broad categories which correspond loosely to different uses. The first, TVA .quilibre, covers any dissaving-that is, any excess of current expenditures over current revenue-by LG units, and has typically accounted for 35-40 percent of total VAT transfers in recent years. The disadvantage of this mechanism is that it probably incites profligacy in recurrent spending and reduced fiscal effort (although it should be noted that LG's which generate positive savings are entitled to carry such savings over to their investment budget in the following year). The 60-65 percent balance is divided between: (i) capital transfers that fund investment projects selected and executed by LG's themselves (TVA dquipement), for which an effective transfer to LG's takes place; and (ii) capital transfers that fund projects selected by the CG and executed by line Ministries or OPS entities (TVA transfert), for which no effective transfer takes place (executing agencies are credited directly). The latter category finances inter alia primary education, health care, rainfed agriculture, and rural electrification projects, as well as capital expenditures associated with labor- intensive public works employment programs. How the division between the transfert component (which grew from roughly one- fifth to almost one-third of total VAT transfers between 1990 and 1992) and iquiement component is arrived at is unclear; substantial discretion on the part of the central authorities is probably involved. As regards the allocation of the transfers among LG units, the present system is largely discretionary, but a major step forward is it planned replacement in 1995 with a transparent transfer formula, based on such variables as population size and fiscal effort. Sources: Sewell (1994) and information provided by the Ministry of the Interior. m:\ali\mor\pcxp\rmpotosetext.doc Page 20 Public Expenditure: Issues and Outlook 2.14. Available information gives only a fragmented picture of the composition of LG expenditure. The limited breakdown by function (see Table 2.6) available for non-wage recurrent and investment (but not wage) spending, indicates that expenditure is concentrated on the provision and operation of local infrastructure and amenities. Regarding composition by economic type, wage expenditures dominate the recurrent budget, as with the CG budget; at the same time, capital expenditures make up almost half of total spending, implying significantly higher fixed capital formation per unit of wage expenditure than is the case for the CG (although in many cases investment projects are executed by the CG on behalf of LG's). However, this may also be an indication that insufficient allocations are devoted to non-wage operations and maintenance outlays. It should also be noted that capital expenditures appearing in the LG accounts can be divided conceptually into two categories: (i) spending associated with projects executed by the LG's themselves; and (ii) projects executed by the CG (through the relevant line ministries) or, in some cases, public utilities, but for which funding is drawn from local collectives' budgets (this is referred to as capital expenditure "delegated" or "transferred" to the LG sector by the CG).24 24/ Strictly speaking, CG capital transfers to the LG sector (which, like current transfers represent part of the VAT intake that is earmarked for LG's) are divided into: (i) a portion that finances investment expenditures borne directly by LG's (iquipement); and (ii) a portion that finances projects executed by the CG or OPS entities on LGs' behalf (transfert). m:A\Mor\pCX\portoseWxtdoc Public Expenditure: Issues and Outlook Page 21 Table 2.6 - Structure of Local Government Expenditures (In percentage of Total) 1988 1989 1990 1991 1992 TOTAL LG EXPENDITURE 100.0 100.0 100.0 100.0 100.0 CURRENT EXPENDITURE 47.9 42.9 46.5 51.3 58.3 Wages and Salaries 25.7 24.1 24.5 29.0 31.7 Materials and Supplies 18.2 14.8 14.9 15.8 15.6 - Public utilities (electricity, water) - - 3.7 3.7 4.6 - Road maintenance & sewerage - - 2.3 2.3 2.0 - Municipal markets - - 0.1 0.1 0.1 - Hygiene & public health - - 0.3 0.3 0.3 - Maintenance of communal property - - 0.9 0.9 0.8 - Vehicles & Equipment - - 2.9 3.2 2.9 - Other material & supplies - - 4.5 5.0 4.7 - Unclassified ' - - 0.2 0.3 0.2 Interest Payments (estimated) 2.9 3.0 2.8 3.1 3.1 Subsidies 0.7 0.7 0.6 0.7 0.4 Other recurrent expenditures & adjustments 2 0.4 0.4 3.6 2.6 7.5 CAPITAL EXPENDITURE 52.1 57.1 53.5 48.7 41.7 - Vehicles & office equipment - - 6.4 5.6 5.5 - Acquisition of land & buildings - - 0.6 1.4 1.3 - Construction and major repairs - - 23.7 24.2 26.3 * Sewerage - - 1.2 0.7 0.3 * Electricity - - 2.4 1.3 0.8 * Water supply - - 0.4 0.1 0.6 * Administrative buildings - - 0.8 0.5 0.5 a Municipal markets - - 0.9 1.1 0.8 * Housing - - 0.2 0.3 0.7 * Other buildings - - 2.3 2.2 1.8 * Other construction & repairs - - 4.3 4.0 5.1 * Unclassified - - 11.2 13.9 15.6 - Integrated Investment Projects - - 20.3 16.7 8.4 - Other capital expenditures - - 2.6 0.9 0.3 Notes: ' Includes expenditures of Provinces and sub-provinces as well as of rural communes for which insufficient information is available to permit a functional classification. 2 Includes transfers to cover dissaving by certain communes. n:\ali\mor\pexp\rtport\osetat.doc Page 22 Public Expenditure: Issues and Outlook D. Other Public Sector (OPS) Entities 2.15. OPS entities-which include state-owned utilities, enterprises, agencies, and other establishments, and which account for the remainder of the non-financial public sector-remain dominant in several economic activities. As a group, OPS entities account for about one-fifth of Morocco's value added and some 4.5 percent of total investment each year. They employ some 220,000 individuals, or 5-6 percent of the urban labor force. Economic activities where OPS entities are the sole, or practically the sole, supplier include irrigation and non-irrigation water supply, electricity, telecommunications, rail and air transport services and infrastructure, port services, phosphate mining and processing, and petroleum refining.' In other activities, such as agricultural extension services, tobacco processing, vocational training, and health care services, OPS entities continue to account for a major share of value added. In terms of absolute size, a handful of the largest OPS entities make up the bulk of investment: over the period 1988-92, for example, investment spending by the 14 largest OPS entities or groups thereof,' which cover public sector activity in water supply, electricity, telecommunications, irrigation and agricultural extension services, transport, phosphates, and tobacco, amounted to DH 47.6 billion, an average of about 4.3 percent of GDP per year." Close to one-fifth of this total was financed by capital transfers (transferts d'9quipement) from the CG budget, and an additional 40 percent through domestic and external borrowing.' 2.16. As a group, OPS entities are not a major net drain on the CG (or LG) budget, although the call on budgetary resources varies widely by sector and type of entity." During the four-year period 1990-93, transfers from the CG budget to all OPS entities taken together (not just the 14 entities or groups thereof referred to in the preceding paragraph) averaged some 1.6 percent of GDP annually (see Table 2.7). Over the same period, transfers from OPS entities to the CG budget-including dividends and "monopoly rents" but excluding all regular levies and taxes as well as privatization proceeds--averaged 1.2 percent of GDP per year, resulting in (relatively stable) annual net transfers from the CG budget of 0.4 percent of GDP. However, a key observation is that about half of total OPS transfers to the CG 25/ For more details on government, OPS, and private sector shares in different activities, see World Bank (1994f), Appendix Table A. 1. Another useful, though now slightly dated, source is Lavelin International (1988). 26/ For example, Morocco's 14 Rigies Autonomes de Distribution (municipal water and power utilities) would count as one group. 27/ It should be noted that OPS entities' investment increased substantially in 1993-1994, according to preliminary and programmed figures, to DH 23 billion and 23.6 billion respectively, although the percentage of such investment funded by CG capital transfers and borrowings remained fairly stable. 28/ Part of the external borrowings would transit through the special Treasury accounts for loans (largely as a book- keeping device), but would not-unlike capital transfers-figure as CG expenditures. 29/ OPS entities' investment programs and net call on government budgetary resources is the subject of a recent note prepared by the Ministry of Finance's Direction des Etablissements Publics et des Participations (DEPP), on which the discussion here is based. See "Quelques Donn6es sur les Organismes Publics", DEPP, March 1994. It should be noted that transfers between LG's and OPS entities are negligible. m:ali\mor\pxp\rcpotVosctexLdoc Public Erpenditure: Issues and Outlook Page 23 consisted of profits from the Central Bank and qiiadi-financial public agencies." Without these, average annual CG net transfers to OPS entities would have been almost one percent of GDP." In addition, the nature and size of net transfers has varied widely across different activities. As a group, commercial public enterprises (6tablissements d caract&re industriel et commercial, or EPIC's), which include those supplying water, electricity, transport infrastructure and services, and phosphates, transferred slightly more to the CG budget than vice-versa. Moreover, the bulk of CG transfers to the EPIC's consisted of capital transfers to fund new investment; operating subsidies were negligible.' By contrast, non- commercial OPS entities (9tablissements a caract&re administratif et culturel, or EPA's), which include those providing irrigation and extension services, social assistance, health services, and vocational training, received an average of 1 percent of GDP per year in CG transfers, and transferred nothing to the CG budget." A little over half of CG transfers to EPA's took the form of operating subsidies. Table 2.7 - Transfers between the CG Budget and OPS Entities, 1990-93 (millions of DH unless otherwise indicated) OPS Entity Transfers Transfers Yearly average net transfer from CG to CG (% of GDP) Central Bank 0 4750 -0.5% Office des Changes 0 140 0.0% CDG 0 . 520 0.1% EPIC's 4983 5793 0.1% EPA's 9794 0 1.0% TOTAL 14777 11203 0.4% Source: DEPP, Ministry of Finance 2.17. A rough estimate of the consolidated public sector deficit for 1992 (taking account of the CG, LG's, and OPS entities) amounts to about 4.5 percent of GDP. Assuming that the deficit of the 14 largest OPS entities (or groups thereof) can serve as an adequate proxy for the deficit of OPS entities as a whole, the former, net of CG transfers to OPS entities, can simply be added to the consolidated CG 30/ These are the Caisse de Dgpbts et Gestion, a public agency which has the role of portfolio manager for the social security, pension, and insurance funds, and the Office des Changes, the regulatory agency for foreign exchange transactions. 31/ Excluding at least the Central Bank appears sensible, since it is not part of the non-financial public sector. 32/ There have also been (modest) transfers for recapitalization and assistance with restructuring. 33/ It should be emphasized that the ORMVA's, or regional irrigation agencies, are included under the EPA category (as that is their legal status), even though funding for them appears predominantly on the CG budget (see Chapter 7). The ORMVA's accounted for close to half of all CG transfers to EPA's. m:\ah\mor\pcxpVrport\osetxLdoc Page 24 Public Expenditure: Issues and Outlook and LG deficit (para. 2.13) to obtain an estimate of the consolidated public sector deficit. On this basis, over the period 1988-92, the OPS deficit net of CG transfers would have averaged about 1.7 percent of GDP per year.' For 1992, the estimated OPS deficit net of CG transfers amounts to 2.1 percent of GDP. Adding this figure to our estimate of the consolidated CG and LG deficit in 1992 yields an estimate of the consolidated public sector deficit of 4.5 percent of GDP." E. Selected Public Expenditure Issues Government Employment and Pay 2.18. High CG wage expenditures appear to be employment-driven rather than wage-driven. As discussed in Section B of this chapter, CG general budget spending on wages and salaries, which has exceeded 10 percent of GDP and 40 percent of total general budget spending in recent years, appears high by comparison with similarly placed countries (see also Table 2.3).' Available evidence, though cursory and fragmented, suggests that it is employment volumes, rather than per-employee earnings, which are out of line." In total, the various departments and other entities whose expenditures fall under the CG general budget presently employ some 722,000 regular staff (including military personnel). A rough breakdown by function of CG staff is shown in Figure 2.3." Resulting ratios to population and total employment-for example, 28 employees per thousand population (about 19 if all defense-related personnel is excluded)--are comparatively high; see Table 2.8. Over the period 1990-94, growth in CG employment, at an average of about 2.2 percent per year, has kept pace roughly with population growth," although more substantial new hiring in 1993-94 resulted in a 3 percent net increase in staff in 1994. Other cursory observations reinforce the initial impression that government employment might be too high on average. These include: (i) apparent underuse of teachers employed in government service, as 34/ OPS savings have been estimated as that part of investment spending that is financed by internal cashflow; total investment is then subtracted from this estimate to obtain the deficit. 35/ It should be noted that the estimate of the OPS deficit in 1993 (after taking into account CG transfers) is, at 3.6 percent of GDP, considerably higher. This would bring the estimated consolidated public sector deficit to about 6 percent of GDP in that year (assuming little change in the LG deficit vis-a-vis 1992). However, this estimate is based on OPS investment figures which are substantially larger than in 1992 and which have yet to be verified. 36/ In fact, Hewitt and Van Rijckeghem (1993) report that average CG wage expenditures accounted for 7 percent of GDP for a group of 99 countries over the period 1980-90. Morocco stands well above this average, even if only the most recent years are taken into account. 37/ It is recognized, of course, that determining the "correct" level of demand for labor services by the government is riddled with complications, as for most government activities there is no concrete basis for measuring the value of labor services (for example, by comparing with equivalent costs in the private sector). On this, see Chu and Hemming (1991), Section IV. 38/ Not counting some 9000 dvilistes engaged in civilian national service. 39/ The latest estimates of population growth are 2.2 percent in 1991, 2.1 percent in 1992, 2.0 percent in 1993, and a projected 2.0 percent in 1994. On this, see CERED (1993). m:\ali\o\xp\ep-oosxtdo Public Expenditure: Issues and Outlook Page 25 evidenced by low student-teacher ratios, notably at seconday'levels, as well as by reported discrepancies between statutory and actual classroom time (see also Chapter 4); and (ii) rapid increases in LG employment-ostensibly to support decentralization-but without any parallel downsizing of CG employment (see para. 2.20 below). 2.19. From an aggregate perspective, CG pay policy appears roughly appropriate. There is no immediate evidence that wages paid by the CG are on average too high (such that they might put upward pressure on private sector wages or generate significant rents), nor indeed any sign that they are abnormally low (such that they might impact staff morale, encourage moonlighting, or entail difficulties in retaining qualified staff). While the grading and remuneration scale is relatively complex (Box 2.2) and information is generally lacking on fringe benefits, visible earnings among CG employees (including military personnel) average almost twice the average urban wage, over twice the urban minimum wage, and more than three times the cbuntry's per capita GDP. Likewise, excessive compression of the wage scale does not appear to be a problem: remuneration at the top of the visible wage scale is over 11 times that at the bottom. However, it should be emphasized that impressionistic aggregate-level observations of this kind are no substitute for more detailed, occupation-specific analyses of government remuneration policy (see also para. 2.21 below). For instance, even if the overall wage scale does not appear out of line, it is still theoretically possible that grading and pay may be too low (or excessively compressed) for certain occupational categories, and too liberal for others. Table 2.8 - Cross-Country Comparisons of Government Employment and Pay Argentina Bolivia Botswana Egypt Ghana India Indonesia Kenya Morocco Central Govt. Employment per 19.3 23.6 22.6 25.2 20.0 4.6 7.1 18.1 27.2 '000 Population 2 Earnings as % of: - GDP per capita 1.3 NA 1.5 NA 2.1 3.8 NA 4.9 3.3 - Priv. Sect. Wages 0.9 NA 1.4 NA 0.6 1.2 NA 0.9 1.5 Local Govenment Employment per 31.2 1.4 8.0 36.5 NA 11.3 10.2 2.2 4.6 '000 Population ' Earnings as % of: - GDP per capita 1.5 NA 1.8 NA NA NA NA 4.6 2.5 - Priv. Sect. Wages 1.1 NA 1.3 NA NA NA NA 0.9 NA Notes: 'Excludes military for Argentina. 2 Estimate for Morocco pertains to 1994. sEstimate for Morocco pertains to 1993. m:\alilmor\pexp\rcport\osext.doc Page 26 Public Expenditure: Issues and Outlook Figure 2.3: Composition of CG Employees 14% Defense Health 15% Interior 34% FAucation 2.20. Regarding the LG sector, employment has grown rapidly in recent years, but LG wages are on average significantly lower than CG wages. It is difficult to conclude, even tentatively, that LG employment is too high (particularly since international comparative data are scant), although the rapid recent growth of LG staff, unmatched as it has been by any rationalization at the CG level, suggests that there may be overstaffing at the overall government level (without pre-judging the desirable allocation of staff between the two levels of government). The LG sector currently employs some 120,000 regular staff, or about 4.6 individuals per thousand population. LG hiring has grown particularly rapidly over the past 3-4 years, and the trend is planned to continue.40 However, estimates of average LG employee earnings are 2-2.5 times the per capita GDP and about 1.4 times the urban minimum wage, significantly smaller than the analogous measures for the CG. The discrepancy, despite the fact that LG's follow a grading and remuneration scale that is identical to the CG's, is probably attributable to lower average effective grading at the local level. 2.21. Despite the attraction of increasing government employment in the short term, the tentative conclusion that its level may be too high calls for a detailed diagnostic assessment of staffing needs. The Moroccan authorities may have viewed relatively liberal government hiring practices as a way of helping increase labor absorption, with attendant social benefits. As a means of limiting unemployment, however, government hiring has two serious shortcomings. First, government jobs, which cater essentially to the 40/ LG staff increased by almost 30 percent during 1991, and by 7-8 percent per year during 1992 and 1993, bringing the number of employees per thousand population from 3.2 in 1990 to 4.6 in 1993. The bulk of the 1990-93 hirings, conducted with the assistance of the Centre National pour la Jeunesse et I'Avenir and the Ministry of the Interior, were of young graduates (jeunes &ipl6nti). The trend looks set to continue, as plans call for hiring an additional 45,000 skilled staff (notably engineers, architects, computer specialists, etc.) over a five-year period. mAhto\cpqn\sWLo Public Expenditure: Issues and Outlook Page 27 better-off, are unlikely to offer much benefit in terms 6f "poverty reduction."' Second, and more importantly, rapid government job creation, by diverting resources that might otherwise be channeled towards productive investment, risks slowing economic growth-thereby aggravating the labor absorption problem-over the longer term. It would therefore appear important to launch assessments of government staffing at the earliest opportunity. Such assessments would need to be sector- or department-specific, and would review medium-term personnel needs (vis-a-vis staff presently available) at both the CG and LG levels. In parallel, the assessments would review the appropriateness of pay policy for specific occupational streams, based on such factors as comparability with private sector pay. Even if there are political constraints on downsizing government employment in the short term, such assessments would at least provide a basis for rationalizing new hiring flows, in terms of both numbers and skills mix. Box 2.2: Central Government Pay Scales Central government employee pay is based on an elaborate grading system and consists of three distinct components, with the base salary typically accounting for less than half of total remuneration. There are 12 grade ranges (grades 1-11 and a top "ungraded" range). Most grades have 10 sub-grades. However, grades 1 (the lowest grade), 10, and 11 have an extra sub-grade; the "ungraded" (highest) range has 6 sub-grades. An employee's gross-of-tax base salary (traitement de base) is calculated using an index assigned to each grade and sub-grade. Index values range from 107 (grade 1, sub-grade 1) to 870 (ungraded, sub-grade 6). The base salary is computed as: x(79.62) for x< 150 and 150(79.62)+(x-150)(50.92) for x > 150, where x denotes the index value. The base salary thus ranges fromfDH 8,519 per year (grade 1, sub- grade 1) to DH 48,605 per year (ungraded, sub-grade 6). In addition, all employees automatically receive a housing allowance (indemnit de r6sidence) of 10 percent of their base salary. Finally, all employees are entitled to supplemental compensation (r9gime indemnitaire), consisting, in general, of three components: (i) a sub-grade-invariant (except for grade 11) allocation de hirarchie administrative, ranging from DR 305 (grade 1) to DH 3,000 (ungraded) per month; (ii) an indemnit de sujtion, likewise sub-grade-invariant, ranging from DH 165 (grade.1) to DR 1000 (ungraded) per month; and (ili) for grades- 10 and above only, an indemnit d'encadrement ranging from DH 700 (grade 10, sub-grade 6) to DR 5500 (ungraded, sub-grade 6) per month. 41/ Even if government hiring did aim to target recruitment among the poor or vulnerable (which it does not), pay levels would be too high to make this practice an effective poverty reduction technique. For example, rough calculations based on realized earnings for government workers paid through the central payroll system suggest that for over 99 percent of them, their earnings would be sufficient to clear the urban poverty line, even if the household had no other source of income. Of course, the bulk of government employees have earnings that are substantially higher. m:\mor\pcxp\repot\osextdo Page 28 Public Expenditure: Issues and Outlook Defense Expenditures2 2.22. Morocco's visible defense expenditures currently amount to some 4 percent of GDP each year, and appear in the CG accounts. All such expenditures take the form of recurrent and capital spending by the National Defense Administration (ADN). Publicly available information concerning these expenditures is confined to the totals shown in Table 2.9. The ADN's wage bill covers some 220,000 regular staff (including both military personnel and civilian overhead). Most capital expenditure--that related to the purchase and major repair of equipment-transits through an ADN-managed special account, Acquisition et Rdparation des Matriels des Forces Armies Royales.' Among the advantages of passing through a special account are greater confidentiality and flexibility in budgetary execution procedures. For example, investment credits against which expenditures are not committed by year-end are not automatically cancelled, as is the case with the general budget, but can be carried over to the next year (see also Annex 2 on budgetary procedures). It is noteworthy that the ADN's capital budget for 1994 increased substantially over levels in preceding years, growing by two-thirds in nominal terms over its level in 1993. Table 2.9 - Visible Defense Expenditures (millions of DH unless otherwise speci6ed) 1990 1991 1992 1993 1994' TOTAL 8813 10005 10488 10059 11932 (% of Expenditure) 16.7% 16.9% 17.2% 14.5% - (% of GDP) 4.1% 4.1% 4.3% 3.9% 4.1% Recurrent 7285 8520 8880 8404 9430 Wages and Salaries 5949 7033 7333 6745 7213 Materials and Miscellaneous 1336 1487 1547 1660 2218 Capital 1528 1486 1609 1654 2502 ' Estimates of realized expenditures are based on ratios in past years. 2.23. Spending on defense in Morocco, while down compared with a decade ago, remains high relative to comparable countries. Ratios of visible defense expenditures to GDP or to total budgetary expenditure, or per capita, tend to be significantly higher than the average for countries with similar income levels. Table 2.2 provides a limited comparison; it should also be noted, however, that defense spending is about two percentage points of GDP lower than it was in the early 1980's (Figure 2.1). 42/ For an overview of central issues in a review of defense expenditures, see Chu and Hemming (1991), Section XIII. 43/ In other words, the bulk of ADN's general budget capital expenditures take the form of transfers to the special account (which accrue as revenue to the latter). Special account expenditures then take the form of actual spending on equipment and maintenance. m:\ali\mor\pexp\rCport\osetcxt.doc Public Expenditure: Issues and Outlook Page 29 According to more specialized sources, a broader comparison corroborates the observation that Morocco's defense expenditures tend to be above average." For example, the US Arms Control and Disarmament Agency estimates that in the late 1980's Morocco, out of a 144-country sample, ranked 55th in terms of (the absolute level of) military expenditures and 32nd in terms of the size of the armed forces, although it ranked only 88th in terms of per capita GNP. However, it is unclear whether and how this source- whose estimates of 1989 defense expenditures exceed official Moroccan figures by about one-fifth, bringing these to well over 5 percent of GDP-has attempted to capture "hidden" defense-related expenditures. Such "hidden" expenditures-funded, for example, by off-budget barter deals or by external borrowing which does not transit through the published CG accounts-have supplementedvisible defense expenditures in many other countries. Conversely, it is clear that in Morocco some of the visible defense-related spending also serves other functions (an example is expenditure on military hospitals and housing), although the share of such spending in total visible defense-related spending cannot be estimated given the information available. 2.24. Even if more detailed information concerning defense expenditures were publicly available, a detailed review of these expenditures would be categorically beyond the scope and mandate of this report. There are two main reasons for this. First, the "level" of national security which a country opts for is clearly perceived as a much more political and sensitive choice than, say, one concerning outlays on road maintenance or sewerage infrastructure. The World Bank's Articles of Agreement rule out interference in national political affairs.' Second, it is clear that the World Bank lacks the expertise to judge whether or not the "level" of security for which a country has opted is being achieved in a cost-effective way. Nevertheless, it is important that policy-makers and the public at large remain aware of the opportunity cost of defense spending. In particular, because the defense budget is so large, even minor modifications in its evolution can significantly affect the amount of funding made available for other purposes, notably to meet basic needs. To convey a clear image of the opportunity cost of defense-related spending, it appears desirable to make accounting of such spending as transparent as possible (in terms of aggregate amounts, though understandably not detailed allocation). The Phosphates Sector 2.25. The production of phosphates and derivatives, of which Morocco is a leading world producer and exporter, remains firmly entrenched in the public domain. While much less lucrative as an export commodities compared with the late 1970's, when world phosphate prices were at their peak, phosphate rock and its major derivatives still account for close to a quarter of Morocco's merchandise 44/ For more comprehensive cross-country comparisons, useful references include yearbooks of the Stockholm International Peace Research Institute, and World Military Expenditures and Arms Transfers, U.S. Arms Control and Disarmament Agency, 1990. However, as explained below, it is unclear to what extent these publications try to supplement official data sources with other (e.g., supplier-based) data on military spending. 45/ For an overview of the Bank's approach to defense-related spending, see: "Bank Work on Military Expenditures", note issued to the Board of Executive Directors under cover memorandum no. SECM91-1563, December 9, 1991. m:\ah\mor\pcxprportiostexdoc Page 30 Public Expenditure: Issues and Outlook exports." Morocco ranks second, with about a 30 percent share on world markets, as a world exporter of phosphates and derivatives. The state-owned Office Chirifien des Phosphates (OCP) group" retains a monopoly on the extraction, domestic processing, and export of Morocco's large phosphate reserves.' 2.26. OCP still accounts for a non-negligible share of public sector investment; however, no clear image of itsfinancial health can be gleaned from available material. OCP does not operate under a performance contract, its accounts are kept strictly confidential, and even general data on revenues and outlays is unavailable." However, two general observations can be garnered from available fragments of information. First, at an average of about 0.3 percent of GDP over the period 1988-92, OCP's investment expenditures are significant (they are also lumpy, varying between 0.1 and 0.6 percent of GDP), though in relative terms far less so than in the 1970's. Over 1988-92, OCP's share of the total investment program of the fourteen major OPS entities or groups thereof (para. 2.15) amounted to between 4 and 5 percent; it is expected that over the period 1993-97, OCP's share of the OPS investment program would amount to at least that, and possibly significantly more if the foreign financing for certain planned projects (Maroc Phosphore V and VI) materializes. Second, concerning financial relations with the Treasury over the past few years, the OCP group has not received any transfers, whether operating subsidies or capital transfers to fund investment, from the CG budget. Conversely, over the period 1990- 93, it transferred an average of 0.2 percent of GDP per year to the CG budget in the form of dividends and "monopoly rents". However, a major part of these transfers should be probably viewed as rents on the extraction of phosphate rock, a non-renewable resource; OCP tax payments (notably of corporate and export taxes) to the Treasury have been relatively insignificant over the past few years. This observation, coupled with the fact that OCP has built up substahtial debt service arrears (see para. 2.28 and Table 2.10 46/ World market prices of phosphate rock and derivatives have declined significantly since the late 1970's. For phosphate rock, for example, after an average annual increase of almost 16 percent per year during the 1970's, prices fell by an average of about 6 percent a year over the first half of the 1980's, and subsequently firmed by almost 4 percent per year over the second half. Since 1992, prices have again weakened by at least 20 percent. Concerning export volumes, after rapid growth over most of the 1970's, volumes fell steadily over most of the 1980's and early 1990's. Exports of phosphate rock, phosphoric acid, and phosphate-based fertilizers declined from almost 57 percent of merchandise exports in 1975 to about 25 percent in 1993; in parallel, the composition changed, with the share of phosphate rock falling steadily, reflecting downstream integration efforts. 47/ The OCP group is made up of two central components, Maroc-Phosphore (mining) and Maroc-Chimie (processing), as well as seven fully- or majority-owned subsidiaries. One such subsidiary, FERTIMA (a fertilizer producer) is slated for privatization. OCP also holds minority shares in several other companies. The OCP group employs some 30,000 individuals. 48/ Morocco's reserves of phosphate rock (inclusive of the Western Sahara) amount to an estimated 36 billion tons and are, behind the US, the world's second largest; see SRI International (1983). 49/ The recently established Ministire de la Privadsaion dilMgui aupris du Premier Ministre chargi des Entreprises d'Etat does, however, have a mandate to conduct a broad ranging management and financial audit of OCP (among other large OPS entities). Results were originally expected in the Spring of 1994, but the extent to which they will be made publicly available is unclear. m:\alilmor\poxp\rkport\osetext.doc Public Expenditure: Issues and Outlook Page 31 below),' works to dispel the notion that OCP is a "cash cow" for the Moroccan Treasury, and argues in favor of a detailed assessment of its financial health and outlook. Public Sector Arrears" 2.27. CG arrears remain signifcant, raising a risk of adverse repercussions on the economy. As shown in Table 2.10, the total end-1993 stock of CG arrears to OPS entities amounted to roughly DH 3.3 billion (about 1.3 percent of 1993 GDP). This represents a reduction relative to the end-1992 stock of DH 3.9 billion (some 1.6 percent of 1992 GDP), following the launch of an arrears clearance program. The bulk of CG arrears are in respect of consumption of electricity, water, fuel, and transport services, and can be traced to insufficient budgeting for these items over several years in succession." Consequently, CG arrears simply measure expenditures for which forced financing was in effect obtained. In general, the repercussions of expenditure arrears hinge on how economic agents respond to them. For example, suppliers of goods and services to the government may adjust their prices to reflect the implicit extra financing cost associated with late payments, reducing what can be purchased with given outlays. Such effects can be particularly serious when arrears are run up against private suppliers, where the government can exercise little moral suasion, although in Morocco CG arrears to private suppliers are reportedly minor. At best, however, arrears are likely to undermine confidence in economic management, and to start or at least perpetuate an economy wide chain of cross-arrears. 2.28. On net, however, OPS entities' arrears to the CG exceed CG arrears to them; in certain cases, CG claims on OPS entities have facilitated arrears clearance through cross-cancellation. As indicated in Table 2.10, end-1993 OPS entities' arrears to the CG amounted to some DH 8 billion (some 3.2 percent of GDP), down from the end-1992 stock of DH 12.3 billion (about 5.1 percent of GDP). In contrast to the CG's expenditure arrears, OPS entities' arrears to the Treasury concern mainly: (i) their service of Treasury-guaranteed external debt (including debt that was rescheduled but for which they were required to adhere to the original repayment schedule); and (ii) tax payments.' Under the aegis of CIPEP, an inter-ministerial commission responsible for oversight of OPS entities, a plan to clear arrears accumulated over the period 1987-92--following verification-was adopted in late 1992. CG arrears in LQ/ The payments that are in arrears correspond mostly to service payments on external debt that was rescheduled under agreement with the London Club in 1990. OCP had been required to make payments to the Treasury according to the original maturities (so that the gain from rescheduling would accrue to the Treasury). Between end-1992 and end- 1993, OCP arrears to the Treasury declined from DH 5.6 billion to DH 4.8 billion; the difference represents rescheduling by the Treasury of part of the amount owed to it by OCP. 51/ This section deals with domestic payment arrears only; no significant external arrears have been reported since the last rescheduling agreement in early 1992. 52/ By way of example, over the period 1986-90, budgeted to actual expenditures on telecommunications, water, and electricity ranged from 43 percent to 65 percent. See World Bank (1992a), Table M.S. 53/ For a complete discussion of the possible effects of expenditure arrears, see Chu and Hemming (1991), Section XXIII. 54/ Of course, OPS entities' arrears to one another are typically arrears in respect of the purchase of goods and services. m:\ah\mor\pexp\rportlaeWxLdoc Page 32 Public Expenditure: Issues and Outlook some areas, such as telecommunications and port services, have already been cleared, largely through a cross-cancellation of claims." Plans to clear CG arrears to other OPS entities, and certain OPS entities' arrears to the CG, have yet to be implemented.' A system of vouchers, introduced in 1993, is now in use by the CG in an attempt to control consumption of utilities and thereby prevent a re-emergence of arrears; this system has reportedly worked relatively well up to now. In the case of OPS entities, problems are likely to persist in several cases until tariff adjustments or clearance of other links in the chain of public sector arrears can be ensured. Table 2.10 - Public Sector Arrears Stocks (End -1993) (millions of DB unless otherwise indicated) Claims by: CG LG ONE OCP Petroleum ONCF Other OPS TOTAL MofGDP) Companies Claims on: CO - 0 276 791 730 11 1479 3287 1.3% LO 0 - 109 0 0 0 291 400 0.2% ONE 166 0 - 0 1871 0 0 2037 0.8% OCP 4750 0 258 - 0 0 0 5008 2.0% Petroleum 31 0 0 0 - 0 197 228 0.1% Companies ONCF 2191 0 271 0 0 - 28 2490 1.0% Other OPS 910 0 599 15 459 0 - 1983 0.8% TOTAL 8048 0 1513 806 3060 11 1995 15433 - (% of GDP) 3.2% 0.0% 0.6% 0.3% 1.2% 0.0% 0.8% - - Source: DEPP, Ministry of Finance Tax Expenditures 2.29. Tax expenditures in Morocco, notably in agriculture and housing, are non-negligible. One important issue in the measurement of public expenditures concerns the extent to which tax breaks fulfill public policy objectives that might otherwise be met by expenditures." Conceptually, it would be 55/ Telecommunications arrears, which had reached almost DH 1 billion by end-1992, were cleared during 1993 (see also Chapter 11). 56/ It should also be noted that cross-arrears among OPS entities are substantial, including among OPS entities not shown. For example, the Caisse de Compensation has run up substantial arrears to the oil companies. 57/ In most countries, a classic example arises in the purchase of housing, where financial incentives to households can either be provided as tax deductions on mortgage interest payments or as direct assistance (for example, in the form of grants). m:\ai\mor\pexp\report\ostext.doc Public Expenditure: Issues and Outlook Page 33 desirable that a measure of spending take into account such "tax expenditures". Tax breaks may take the form of: (i) outright exemptions that are written into the tax code and consistently applied; or (ii) special incentives that provide for deviations from the statutory tax regime on a selective regional, sector, or other basis. Of course, the measurement of tax expenditures is substantially normative, since ajudgement must be made as to the "normal" or "benchmark" tax treatment from which deviations are measured. Purely for the sake of illustration, however, rough calculations of tax expenditures--based on specific assumptions concerning benchmarks-for the agricultural and housing sectors may be worthy of brief mention. Agriculture is exempt from personal income, corporate, and (in many cases) property taxes, as well as from the value-added tax. A question arises as to the amount that is forgone by not subjecting the agricultural sector to the same average effective rate on these instruments as other sectors. A rough answer to this question-and one that is subject to very serious caveats--would be of the order of 1- 2 percent of GDP each year (see Chapter 7)." Concerning housing, recent work gives an indication of how the tax treatment of capital gains (on housing other than owner-occupied),- compares with that of other income sources (such as wages, dividends, or interest). Depending on what is taken as the benchmark tax treatment, calculations based on 1992 parameters indicate that tax expenditures devoted to (non-owner occupied) housing probably range from 0.2 to 0.7 percent of GDP per year.' These "expenditures" are significant. More importantly, there is a strong presumption that they benefit mainly the better-off; it is unlikely that explicit expenditures with regressive characteristics of this type would be accepted if proposed. 58/ Note that this does not imply that: (i) tax expenditures on agriculture are undesirable; or (ii) that the "normal" tax on agriculture should be the same as for the remainder of the economy (in fact, in most countries agriculture receives at least some kind of favorable treatment). 59/ Favorable tax treatment of owner-occupied housing is common in most countries, including Morocco (where capital gains on the sale of a housing unit are tax exempt if the asset has been held for 8 or more years). However, most countries do not grant favorable treatment to non-owner occupied housing. 60/ For a more general discussion of the favorable tax treatment of investment in land and buildings compared with other fixed assets, see Mintz et al. (1994). m:\alimor\pcxp\rcpot\ostcxt.doc Page 34 Public Erpenditure: Issues and Outlook CHAPTER 3: SOCIAL SECURITY AND SAFETY NET MECHANISMS I The public sector is dominant in the provision of formal social security and related coverage; however, such coverage is funded off-budget. Social assistance mechanisms, which are almost wholly provided by the public sector, presently cost the CG budget about 1 percent of GDP per year. Emergingfinancial imbalances among the state-owned social security, pension, and mutual insurance funds, due notably to deficient state contributions, raise the risk that large budgetary transfers will be called for to cover widening deficits in the medium term. Concerning incidence, the coverage of formal social security and related mechanisms is confined largely to the better-off in urban areas. Private provision of social security and related coverage is still nascent, but could play a key role in widening such coverage over the medium term. Existing social assistance mechanisms, many of which are not targeted to the poor and therefore not cost-effective poverty reduction instruments, do not amount to a satisfactory social safety net. To ensure the financial viability of public social security and related mechanisms, significant increases in the associated CG outlays (notably employer contributions) may be required. Overall, CG expenditures on social assistance mechanisms should at the very least be maintained in real terms; however, outlays should be reallocated in favor of well-targeted mechanisms. Recommended follow-up: * Assess the medium-term financial viability of state-owned social security and mutual insurance funds. * Implement measures to strengthen the funds'financial position; in particular, for those funds serving government employees, adjust CG employer contributions to adequate (statutory) levels. * Investigate ways to extend social security and related coverage, possibly confining mandatory public sector coverage to a 'minimalist" package and fostering private sector provision of supplemental coverage. 1/ Public expenditures covered in this chapter consist of those associated with: (i) social security and related mechanisms (defined broadly to include mechanisms offering pension, sickness, maternity, and family allowance benefits, as well as coverage for spending on health care); and (ii) social assistance mechanisms (defined broadly to include employment programs, generalized food subsidies, and food distribution programs). Social assistance mechanisms are schemes that could potentially lift the poor above the poverty line (or raise their consumption towards it) or prevent the vulnerable from falling below it (see para. 3.8). However, most mechanisms considered here only marginally augment the physical and human capital endowments of the poor. In general, both types of mechanism involve transfer payments to households (or, in certain cases, producers for the ultimate benefit of households). Payments may be on a contributory basis, as in the case of existing social security and related mechanisms, or on a nonLcontributory basis, as in the case of social assistance mechanisms. (Job-creation schemes aimed at lower-income groups are treated here as a social assistance net mechanism even though they involve payment to an individual in return for a quid pro quo (labor), and might therefore be viewed as contributory.) They may be means-tested or not, and in cash or in kind. m:\ali\nor\pxp\report\saext.doc Public Expenditure: Issues and Outlook Page 35 * Ensure more adequate finding for, and better coordination among, social assistance mechanisms that are well-targeted to the poor (such as food distribution programs), while improving their cost-effectiveness: funds can be reallocated from mechanisms that are poorly targeted, such as sugar subsidies. A. Background on the Sector and Public Expenditure 3.1. While public expenditure on social security-related and social assistance mechanisms is relatively modest in absolute terms, public sector provision of such mechanisms is predominant; formal social security and related mechanisms, which cater mainly to better-off households, are provided by state-owned social security and mutual insurance funds, rather than directly by the CG or LG's. The major entities which provide the near-totality of Morocco's formal social security and related mechanisms are listed in Table 3.1 ' Most of these entities are state-owned: state-owned entities, which make annual transfer payments of between 2 and 2.5 percent of GDP, account for close to 90 percent of coverage.3 Non-transfer recurrent and capital expenditures of these entities probably amount to 10-15 percent on top of total transfer payments. Direct CG and LG social security and related transfers to the public are negligible. However, transfers from the CG budget to certain entities-largely in the form of employer contributions-are non-negligible, presently averaging close to one-fifth of the entities' total transfer payments, or a little over 1 percent of CG general budget spending." Finally, CG recurrent and capital expenditures associated with administrative functions in social security- and social assistance-related areas are modest, amounting to less than one-fifth of 1 percent of CG general budget expenditures.' 2/ Table 3.1 excludes ancillary pension fund services provided by the Caisse Nationale de Retraite et d'Assurances, which however cater to only a limited number of individuals (perhaps some 5000). 3/ This estimate is very approximate, as different mechanisms may have overlapping coverage. A/ Specifically, CG budgetary contributions-which appear in the Charges Communes chapter of the recurrent budget-are regularly made to CMR, RCAR, and CNOPS. These transfers, which are employer contributions rather than subsidies to cover operating losses, typically fall far short of the full statutory employer contributions. 5/ Recurrent and capital expenditures associated with the social affairs (which, until late 1993, also included handicrafts), excluding transfers to the Entraide Nationale, have been used to proxy this. While the inclusion of handicrafts would tend to over-estimate the amount, it probably compensates for excluded items, such as certain expenditure items under Youth and Sports and financial oversight of social security and related functions by the Ministry of Finance's Direction de la Privoyance Sociale. m:ali\morpexp\npotssatextdo Page 36 Public Expenditure: Issues and Outlook Table 3.1 - Major Formal Social Security and Related Mechanisms Organization and Character Affiliation and Coverage Nature and Size of Contributions and Payments Caise Nationale de SicuriM Sociale (CNSS). Public Approximately 100,000 businesses and Three distinct benefit branches: (i) family allowances, social security fund serving private businesses and 800,000 employees. paying out some DH 1 billion and collecting DH 2.3 agricultural wage-earners (excluding family allowances billion in contributions in 1993; (ii) sickness, maternity, for the latter). Affiliation mandatory. and short-term disability, paying out DH 190 million and collecting some DH 130 million; and (iii) pension and long-term disability, paying out DH 1.3 billion and collecting about the same sum. Contributions (currently under revision) are based on earnings and typically split between employer and employee. Non-transfer costs were about DH 388 million in 1992; end -1992 assets amounted to some DH 7.7 billion. Caise Marocaine de Retraise (CMR). State-owned About 700,000 employees. Payments, some DH 2.1 billion in 1992, consist of social security fund, mainly for government employees; pension and long-term disability benefits, family affiliation mandatory. allowances, and sickness benefits. Contributions totalled some DH 1.9 billion in 1992, of which half came from employers (mainly the government). End-1992 assets amounted to DH 176 million. Caisse Interprofessionnele Marocaine de Retraite About 2600 businesses and 20,000 1992 benefit payments and contributions totalled (CIMR). Private supplementary pension fund open to employees. DH 618 million and DH 583 million, respectively. private businesses; affiliation voluntary. 1992 non-transfer costs were some DH 21 million. End-1992 assets were about DH 2.4 billion. Rigime Colecif d'Allocadon de Retraite (RCAR). About 170,000 employees, drawn from 1992 benefit (mainly pension) payments amounted to State-owned pension fund for contractual public sector 1160 CU departments, LU units, and some DH 147 million; contributions amounted to personnel; affiliation mandatory. OPS entities. DH 549 million. Non-transfer costs were about DH 15 million, and end-1992 assets stood at DH 6.7 billion. Miscellaneous employer-based social security funds, About 50,000 employees. No information on benefit payments or contributions. public and private; affiliation may be mandatory or voluntary. Caisse Nadonale des Organismes de Privoyance Sociale Some 900,000 employees and 2 million 1992 benefit payments (coverage for health care and (CNOPS). Association of8 state-owned mutual insurance dependents. related services) amounted to some DH 511 million. funds for public sector employees; affiliation voluntary Contributions amounted to some DH 512 million, of (except for armed forces and auxiliary forces). which DH 236 million from the CU. Non-transfer costs were DH 31 million; end-1992 assets stood at DH 267 million. CaisseMutellelmerprofessionnelleMarocaine(CMIM). About 15,000 employees and 55,000 1992 benefit payments and contributions amounted to Private mutual insurance fund serving private businesses; dependents. less than DH 1 million and to DH 50 million, affiliation voluntary. respectively. Non-transfer costs in 1992 were DH 5 million; end-1992 assets stood at DH 39 million. Employer-based mutual insurance funds; affiliation About 70,000 employees and 200,000 No information on benefit payments or contributions. typically voluntary. dependents. Private health insurance policies provided by about 20 Some 200,000 policy holders and No information on benefit payments or premium insurance companies; purchase voluntary. 500,000 dependents. collections, although health insurance premium collections account for less than 5 percent of total insurance premium collections. Sources: Guedira (1992a,b), Mouton (1988), DEPP (1990), Annuaire StatisLique du Maroc, Compte-Rendu de IActivit des Entreprises dA'ssurances etde Rdassurances et des Principaur Rigimes de Prvoyance Sociale, and information provided by CNSS and CNOPS. m:\ali\mor\pexp\rport\ssntext.doc Public Expenditure: Issues and Outlook Page 37 3.2. Social assistance mechanisms are almost wholly provided by the public sector; costs borne by the CG budget presently average about 1 percent of GDP per year. Key mechanisms, listed in Table 3.2, include price subsidies on three foodstuff items, a national mutual aid system (which also coordinates and partly finances the activities of private charitable associations), and a public works employment program.' As explained in the third column of Table 3.2, the CG provides the bulk of financing for these mechanisms and, in some cases, operates them directly. In total, public expenditure on the various social assistance mechanisms amounts to between I and 1.5 percent of GDP.' About two- thirds of this expenditure appears directly in the CG accounts, and accounts for between 3 and 4 percent of CG general budget expenditure. The remainder is covered by earmarked taxes and levies, and miscellaneous direct contributions (including foreign grants)." LG spending on social assistance programs is negligible. Formal private and foreign-supported (charitable) arm's-length provision of social assistance probably generates only modest expenditures. No estimate of expenditure associated with informal family- and community-based safety net mechanisms is available, although such mechanisms do appear to be important.' B. Key Sector Issues Relevant to Public Expenditure Choices 3.3. This section discusses key issues pertaining to the efficiency, equity, and financial viability of social security-related social assistance mechanisms. These issues have an important bearing, actual or potential, on the desirable medium-term evolution of budgetary expenditures on such mechanisms and accompanying policy measures. Regarding social security and related mechanisms, major issues concern the need to ensure their financial viability and to their extend coverage, particularly among low-income workers. The important issues relating to social assistance mechanisms include lack of cohesion and imperfect targeting, which limits their effectiveness as components of a social safety net. 6/ For additional information on social assistance mechanisms, as well as on formal social security and related mechanisms, see World Bank (1994a), Annex V. 7/ The upper figure takes account of the substantial capital expenditures on the Promotion Nationale beginning in 1993, as well as those on the Fonds pour la Promotion de l'Emploi des Jeunes beginning in 1994. 8/ CG transfers to cover price subsidies appear in the Charges Communes section of the recurrent budget. Transfers to the Entraide Nationale appear in the Ministry of Social Affairs' recurrent budget. Recurrent and capital costs of the Promotion Nationale appear in the Interior Ministry's budget. Finally, expenditures on youth employment programs appear in a budget allocated to Ministers of State. 9/ On informal social assistance mechanisms, see for example World Bank (1994a), para. 5.42 (p. 79). m:\ali\mor\pexp\rcport\ssnext.doc Page 38 Public Expenditure: Issues and Outlook TABLE 3.2 - Major Social Assistance Mechanisms Type of Mechanism and Description Activities and Coverage Expenditure and Funding Price subsidy system. Subsidy accounts are Subsidies currently apply to granulated sugar (unit Annual subsidy payments are sensitive to domestic managed by Office National Interprofessionnel des subsidy of about a third of the consumer price on harvest, and currently amount to about Criales et Igumineuses, the State Marketing domestic consumption of some 0.75 million tons), DH 1 billion for sugar and DH 700 million for Board for cereals and pulses (flour) and the Caisse edible oil (unit subsidy of about a quarter of the edible oils. Subsidy payments financed by levies de Compensation, an off-budget public subsidy fund consumer price on domestic consumption of 300 on imports of the subsidized goods (in recent years (other goods). million liters), and high-extraction wheat flour only those on cereals have been substantial) and, limited to 1 million tons). Subsidy payments are mainly, by budgetary transfers in the Charges made at the product processing stage. Consumer Communes section of the recurrent budget. About prices are currently slightly below c.i.f. import threequarters of payments are financed by prices for sugar and edible oils, but substantially budgetary transfers. above it for flour. Entraide Nationale (EN), a public national mutual Nutritional counsel and food distribution to needy Annual expenditure of approximately aid agency operating under the auspices of the mothers and infants through socio-educational DH 300 million (including the value of in-kind Ministry of Social Affairs. centers (some 145,000 beneficiaries), nurseries food transfers), of which over half is spent on (some 9000 children), educational centers for girls wages of regular (about 2000) and part-time (42,000 beneficiaries), training centers (2,000 (almost 5000) personnel. EN revenue is drawn trainees), and miscellaneous assistance to the from budgetary transfers (almost halt), earmarked handicapped (5000 beneficiaries). Also coordinates taxes, and carryover balances. Foreign grants and finances activities of muslim charity NGO's (mainly in-kind) were previously substantial (in (30,000 beneficiaries). 1990, they covered about half of total expenditure), but are now a negligible financing source. Promotion Nadonale (PN), a public works job- Job creation through labor-intensive infrastructure Annual recurrent expenditures amount to some creation program, run as a directorate of the and miscellaneous development projects, and hiring DH 300 million, spent almost entirely on wages. Ministry of Interior. Project definition and schemes to support local government functions. Capital budget habitually non-existent, but in 1993 implementation supported by local and provincial Some 10 million job days created per year, mostly boosted to a befty DH 400 million. Practically all committees. remunerated at the minimum wage. Some 70 expenditures are on the Interior Ministry's budget, percent of job creation is in rural areas. financed through general budgetary revenue. Infant food distribution scheme operating through Distribution of high-protein weaning flour Cost of actamine distributed in 1991 was about health centers operated by the Ministry of Public (actamine) to needy mothers and infants. At its DH 10 million. No information on recurrent and Health (see Chapter 5). peak in 1991, the program distributed some 650 capital costs associated with the program, but they tons to about 270,000 infants. The program was are probably minor (health centers are run in any cut back by two-thirds starting in 1992. Nutritional case). No information on program financing, impact of cutback on the poor has not been although off-budget (U.S.) donor grants are known measured, but is probably significant. to have been significant in the past and reduction probably explains program cutback. Social Security and Related Mechanisms 3.4. While the near-term financial viability of the state-owned social security, pension, and mutual insurance funds does not appear threatened, emerging financial imbalances raise the risk that large budgetary transfers will be called for to cover widening deficits in the medium term. CNSS has, on average, run significant overall surpluses over the past several years; however, some of its branches m:\ali\mor\pcXp\report\ssntextdoc Public Expenditure: Issues and Outlook Page 39 are in structural deficit."o Most other funds have fragile accounts, although they have thus far avoided major accumulated losses requiring government bailouts. All but three of CNOPS's member funds are in regular deficit, the asset base is low, and signs of emerging financial stress include severe delays in settling the claims of beneficiaries and health care establishments. The two pension funds serving public sector employees (CMR and RCAR) face a low and declining ratio of employed contributors to non- working beneficiaries; moreover, CMR is starting to run operating deficits, and its asset base is low. Perhaps most importantly, medium- and long-term prospects for the financial health of the social security- related funds are unclear. Long-term financial projections-based on expected trends in contributions and transfer payments that take rigorous account of such factors as changes in membership, the age-structure of the population, and actuarial benefit claims-are not available for most social security-related funds, although an evaluation of CNSS's financial prospects, and required adjustments in contribution rates, has reportedly been undertaken. 3.5. Emerging financial imbalances among the funds are due, inter alia, to deficient contributions. The persistent deficits among certain branches of CNSS suggest a need to revise contribution rates. Recognizing this need, the government and CNSS have recently adjusted rates, and are planning further adjustments over the coming years." Elsewhere, however, problems linger. For example, public sector employee contribution rates for health care coverage through CNOPS are linked to base earnings, but not to the supplemental indemnitis which can account for over half an employee's total pecuniary remuneration (see Section E of Chapter 2). Since recent pay increases have largely taken the form of increases in these indemnit6s, contributions have not kept pace with rising expenditure on health care." Just as importantly, employers' contributions to the pension and mutual insurance funds serving public sector employees have fallen well short of statutory rates. Annual CG contributions, for example, are determined loosely according to what is required to keep the funds financially viable in the short term." Two other factors which may be responsible for weakening financial performance among 10/ Surpluses amounted to DH 380 million, DH 665 million, and almost DH 1 billion in 1991, 1992, and 1993, respectively. However, interest on financial assets accounted for close to DH 600 million each year, so that operating results are much weaker. In addition, while the family allowance benefits branch generates large operating surpluses, the long-term (retirement) and short-term (sickness and maternity) benefits branches have been in regular deficit, even after interest on financial assets. The network of clinics operated by CNSS (which employs half of CNSS's 7000 staff and cost some DH 350 million in 1991, and DH 280 million in each of 1992 and 1993), has also helped weaken overall financial results. 11/ In 1993, contributions for eligibility for long-term (pension) benefits, two-thirds of which are covered by the employer and one-third by the employee, were increased from 5.04 percent to 7.2 percent. The percentage applies to gross earnings, up to a (revised) ceiling of DH 5000. Further increases totalling about 1 percentage point are planned in 1994 and 1995. In parallel, contributions for family allowances, covered wholly by the employer, were lowered from 10 percent to 9.4 percent. The percentage applies to gross earnings (without a cap). Plans call for a further reduction to about 8.8 percent over the next two years. 12/ In nominal terms, the contribution per affiliate fell slightly between 1990 and 1991, and climbed back to about the 1990 level in 1992. In real terms, it would therefore have declined by some 13 percent over these two years. 13/ For example, CG employer contributions to CMR have followed a jagged path unrelated to the evolution of the wage bill or the number of affiliates. In 1991, CG contributions to CMR per affiliate were less than half in nominal terms what they had been four years earlier. Regarding contributions to CNOPS, employees' share is fixed at m:alilmor\pcxplaport\ssatextdo Page 40 Public Expenditure: Issues and Outlook social security-related funds deserve mention. First, there are instances of funds straying into loss-making subsidiary activities which would be better contracted out to the private sector. The prime example is CNSS's buildup of a health care network, which now generates significant losses. Second, funds are legally required to hold the bulk of their assets with the state-owned portfolio manager, the Caisse des D6p6ts et Gestion (CDG), which channels resources exclusively to the Treasury or Treasury-backed public entities. Aside from segmenting financial markets and depriving the private sector of long-term loanable resources, these constraints on funds' placements entail rates of return on their financial assets that are probably a good four percentage points lower than market rates."' 3.6. Formal social security and related mechanisms cover only a limited segment of the population, confined largely to the better-off in urban areas. In general, the near-totality of public sector employees is adequately covered against the risk of loss of earnings due to old age, sickness, disability, and other ailments. However, in the private sector, even though social security affiliations are compulsory, coverage remains low." As a result, only about one-fifth of Morocco's overall population is covered by a formal social security mechanism. Coverage is virtually absent among the poor, and among rural inhabitants more generally, but rises to almost 50 percent among the top two expenditure deciles in urban areas."' Coverage for health care, which is non-compulsory, is even more limited: less than one-fifth of the population has any kind of coverage. Again, only better-off households are covered to any significant extent. Broader social security and related coverage (particularly among lower-income groups), which would extend safety net provisions to those who most need them, is clearly desirable on equity grounds. An extension of health benefit coverage is also needed to facilitate greater private provision of health care services as well as to ensure better cost recovery among the state hospital network (see Chapter 5). Schemes for extending coverage are in varying stages of preparation (see para. 3.7). However, to expedite broader coverage, it would also be desirable to focus on factors which might currently incite businesses to evasion. For example, it costs a private employer almost 15 percent of an employee's gross salary to abide by the mandatory CNSS social security coverage, creating a non- negligible incentive to avoid these charges. 3.7. Private sector provision of social security and related mechanisms is still nascent, but could play a key role in a blueprint for widening coverage over the medium term. Practically all social security coverage is provided by state-owned entities. Likewise, for health benefits, CMIM, employer- based mutual insurance schemes, and private policies probably account for less than a quarter of total coverage. What can be done to pave the way for greater private provision of social security and related 2.5 percent of base earnings, and statutory employer contributions are required to at least match employee contributions. In practice, however, employer contributions (from the CG) have systematically fallen short of this. 14/ For example, the average implicit rate of return on CNSS's assets held at the CDG (some DH 7.7 billion in 1993) amounted to some 9 percent. This compares with a (capped) lending rate of about 14 percent over the second half of 1993, and well over 15 percent during the first half, and deposit rates of 11-12 percent during the year. 15/ Compulsory social security was recently extended to the handicrafts sector. 16/ World Bank (1994a), Vol. H, Table 74. 17/ While modest by European standards, this is a relatively high percentage by developing country standards. m:\ali\mor\pcxp\epot\ssntexLdoc Public Expenditure: Issues and Outlook Page 41 services, while gradually broadening coverage? For social security, one blueprint worthy of consideration would focus on extending publicly provided coverage to individuals who are not presently covered, but gradually tailor down the coverage afforded to any given individual to a "minimalist" package (i.e., one allowing expenditure levels that would just keep the household above the poverty line). This minimalist package would be mandatory and, at least in the near term, would remain a CNSS monopoly (in the longer term, abolition of the monopoly, or divestiture of state ownership, could be considered). Such a blueprint would allow for growth in private provision of (probably voluntary) coverage supplementary to the minimalist package. The recently prepared (but not yet adopted) blueprint for mandatory universal health care coverage is also founded on the principle of broad-based but modest coverage, and includes a "solidarity fund" which would finance health care coverage for the poor on a non-contributory basis. Social Assistance Mechanisms 3.8. Existing social assistance mechanisms do not amount to a satisfactory social safety net. A social safety net is defined as a device designed to keep vulnerable individuals from falling below the poverty line, and to raise people who are under the poverty line to it. This may be achieved by supplementing the household's income (either through transfers or in exchange for labor), or by reducing the household's out-of-pocket spending on a given consumption bundle. Morocco's existing social assistance mechanisms are far from adequate in meeting the functions of a satisfactory social safety net, in that they do not reach many of the poor and vulnerable. Existing social assistance mechanisms were not constructed to serve a clearly articulated poverty reduction and prevention strategy; the mechanisms are fragmented and scattered across a number of different public authorities. In addition, there is no well-established framework for interactive monitoring of the impact of these mechanisms on target populations. 3.9. Many of the existing social assistance mechanisms are not targeted specifically at the poor and are not cost-effective poverty reduction instruments. It may be unfair to evaluate the various mechanisms in terms of how cost-effectively they help the poor and vulnerable, given that many of these were originally designed and implemented with broader "social" mandates (e.g., employment creation) in mind. However, together with social security and related mechanisms-which are practically inapplicable to those in or near absolute poverty-the existing social assistance mechanisms are Morocco's only available social safety net. An assessment of their targeting and cost effectiveness is therefore necessary. Some mechanisms (or sections thereof) appear well targeted to the poor or vulnerable; these include the Promotion Nationale's rural public works employment generation projects and the Entraide Nationale's food distribution activities. Others are not; for example, subsidies on granulated sugar accrue disproportionately to urban dwellers, mostly the better-off among them." The poverty reduction impact of still others-such as the newly expanded youth employment program--is untested. While there are political constraints to reducing spending on mechanisms benefiting the non-poor, it is clear that better- targeted social assistance mechanisms could have a substantial poverty reduction impact. By way of example, it is estimated that the poverty gap (the amount that would be required to lift the consumption of all those living below the poverty line exactly to it) amounted to around DH 250 million in 1991; this sum represents less than one-tenth of public expenditure on social assistance mechanisms in that year. Of course, good targeting itself entails costs; however, targeting efforts are clearly sub-optimal at present, 18/ World Bank (1994a), Vol. II, Annex 5. m:ali\mor\pczp\rcport\santextdoc Page 42 Public Expenditure: Issues and Outlook and could be improved notably through better systems of interactive monitoring. Finally, targeting aside, a review of the cost-effectiveness of mechanisms more generally would be advisable. For example, the Entraide Nationale's staff and other overhead costs, which appear high relative to the value of (in-kind) transfers which it makes to households, offer considerable scope for efficiency increases. C. Medium-Term Outlook for Expenditures 3.10. Medium-term growth in CG budgetary outlays on social security and related mechanisms may need to average some 10 percent per year in real terms over the remainder of the decade. The key policy challenge is to ensure the long-term financial viability of social security and related mechanisms while broadening their coverage, particularly among low-income households. The financial viability of these mechanisms will depend critically on the implementation of policy packages involving: (i) comprehensive reviews, and possible adjustments, of contribution rates and benefits; (ii) rationalization of certain activities; and (iii) measures to increase rates of return on their assets towards market rates. Timely implementation of such a policy package should enable CNSS to strengthen its surplus position, avoiding any need for assistance through budgetary transfers over the foreseeable future. However, concerning the pension and mutual insurance funds which serve government employees, a key element in the policy package is to ensure adequate effective CG employer contributions to avoid shortfalls vis-a- vis statutory rates. To allow gradual compliance with this objective, the outlays on CG employer contributions will probably need to double in real terms between now and the end of the decade, even with a stable real government wage bill. 3.11. CG expenditures on social assistance mechanisms should at the very least be maintained in real terms; within this overall allocation, however, outlays on well-targeted mechanisms should expand and those on poorly targeted mechanisms contract. It appears essential in the first instance to restore food distribution programs, which have been dramatically reduced in parallel with the drop-off of in-kind foreign aid, to their levels of 3-4 years ago. Available information indicates that these programs--the cost of which is low--were well-targeted and alleviated infant malnutrition. Beyond this, the potential for extending adequately targeted programs, notably those employing unskilled rural labor and those supplying food and nutritional counsel, should be explored. However, significant extensions in these programs should be preceded by a review of ways to increase their cost effectiveness through reductions in overhead and better administration, including centralized coordination of programs and interactive monitoring of their impact on target populations. Extensions in well-targeted programs could be financed with cost savings from gradual phasing-out of programs which are clearly not well-targeted, such as the subsidy on granulated sugar." Finally, as concerns existing programs with broader social mandates (e.g., promoting youth employment), it would be advisable to test, and if necessary to improve, their targeting towards lower-income individuals. Unless their targeting can be convincingly established, it would not be advisable to increase expenditure on them at the expense of rural programs supplying the most basic needs. 19/ Concerns about the impact on the (largely urban) poor of lifting the subsidy could be mitigated by considering a compensatory system of direct transfers targeted to (say) the lowest expenditure quintile. It should also be noted that if the subsidy were abolished but the domestic producer price support for sugar crops (which is substantially above the c.i.f. import price) remained in place, domestic consumers would in effect pay a tax to domestic producers. Presently, consumers are relieved of this tax through the subsidy outlays, but this "tax relief" is regressive. m:\ali\mor\pxp\rport\ssntext.doc Public Expenditure: Issues and Oudook Page 43 CHAPTER 4: EDUCATION AND VOCATIONAL TRAINING1 Education in Morocco is still overwhelmingly public. The CG education budget, equivalent to about 5 percent of GDP each year, bears most of the total cost of education in the country. Despite large spending on education, however, Morocco falls short on outcomes, notably literacy and primary enrollment, probably because ofthe relatively low share allocated to basic education. The education system also suffers from relatively low efficiency. More importantly, the incidence of public expenditures is inequitable. Because income-linked disparities in enrollment increase the higher the level of education, the concentration of public spending on higher echelons is regressive and probably hampers long-term growth potential. Regional and gender disparities in enrollment are likewise acute, indicating an urgent need for increases in spending and complementary measures to redress imbalances. Concerning the medium-term outlook for expenditures, simulations based on status quo assumptions suggest that rapid increases in enrollment rates may require increases in public expenditure on education averaging at least 4 percent per year in real terms through 1997, with slightly lower increases thereafter. However, sensitivity analysis suggests that even modest increases in efficiency and pnvate schooling would generate substantial savings, which could be used to improve the quality of public education, or alternatively to reduce the burden on the CG budget. Recommended follow-up: * Undertake detailed diagnostic assessment of staffing requirements, notably for teachers at the secondary level, with a view to reducing unit costs. * Prioritize rapid increases in primary enrollment, particularly among girls in rural areas. * Ensure more adequate outlays on pedagogical materials at all levels. * Design and implement measures to increase cost recovery for services among the better-off in higher education. Regarding vocational training programs, public provision is still dominant, but the CG budget bears only part of the (relatively modest) associated expenditure. Public vocational training programs, which are funded by an earmarked payroll tax, appear relatively well-managed; however, it is debatable to what extent these programs are a cost-effective way of supporting economic growth. More significantly, the benefits of public expenditure on such programs accrue mainly to the better-off Concerning the 1/ This chapter is based on Ezzine (1994), and covers public expenditure associated with the provision of general education at all levels, as well as technical secondary and specialized higher education. Adult literacy programs, on which spending is negligible, are not covered in detail. Vocational training is covered in a separate section at the end of this chapter. m:\ali\mor\pcxp\repot\cdutextdoc Page 44 Public Expenditure: Issues and Outlook medium-term outlook for expenditures, two scenarios for enrollment growth in public vocational training programs are being considered by the authorities: 6 percent per year, based on the projected demand for vocational skills by employers, and 15 percent, based on the objective of a given proportion of school-leavers. However, for cost-effective use of public funds, it is important to ensure that any publicly provided vocational training is driven by employers' demand for skills, and not by 'social' considerations. Recommended follow-up: * Introduce payroll tax credits against enterprises' training-related expenditures and/or allow private suppliers of training access to payroll tax funds. * Design and introduce measures to increase cost-recovery in public vocational training programs. EDUCATION A. Background on the Sector and Public Expenditure 4.1. Education in Morocco is still overwhelmingly provided by the public sector, and the CG budget bears the lion's share--the equivalent of around 5 percent of GDP each year--of the total cost of education in the country. The CG, through the Ministry of National Education (MoNE), provides and operates basic, secondary, and higher education facilities which accommodate some 94 percent of the 4.2 million pupils and students who are currently enrolled in general education in Morocco.' Roughly a further 2 percent are accommodated in specialized higher education facilities (referred to henceforth as "elite" schools) funded by other CG departments.' The residual 4 percent receives private education, the provision of which tends to be concentrated at secondary levels in urban areas.' As in most other Middle Eastern and North African countries, public education at all levels is provided free of charge. As a result, an estimated 87 percent of the direct cost of education is borne by the public sector (the residual is borne mainly by households); however, indirect costs borne by the state, mainly maintenance grants 2/ Of the 4.2 million enrolled pupils and students, some 64 percent are enrolled in (the first cycle of) basic education (grades 1 to 6, covering ages 7 to 12), 29 percent are enrolled in upper basic and secondary education (grades 7 to 12, covering ages 13 to 18, divided into a three-year upper basic cycle and a three-year secondary cycle), and the remaining 6 percent or so in higher education. 3/ Random examples include the Ecole Nationale d'Agriculture de Mekns (which is funded by the Ministry of Agriculture), the Ecole Nationale d'Architecture (funded by the Ministry of the Interior), and the Ecole Nationale d'Indusfie Minrale (funded by the Ministry of Energy and Mines). 4/ The private sector's share is highest in secondary education (almost 8 percent in 1993), but has also reached non-negligible shares in basic education (almost 4 percent) and in higher education (some 3 percent, compared with almost nothing in 1986). m:\ali\mor\pexp\romt\cdutmxt.doc Public Expenditure: Issues and Outlook Page 45 for pupils and students, are also substantial.- Within the public sector, most of the costs associated with the provision of education appear on the CG (MoNE) budget (see Table 4. 1).' The more modest amounts appearing on LG budgets are "transferred" expenditures (LG funding, out of their VAT share entitlement, for investment in basic education projects executed by the CG). Table 4.1 - Summary of Public Expenditure on Education (millions of DR unless otherwise indicated) 1990 1991 1992 1993 1994 Central Government (MoNE) 11161 12027 12942 13820 14652 (as % of budgetary expenditure) 21.1% 20.4% 21.2% 19.9% - (as % of GDP) 5.2% 5.0% 5.3% 5.4% 5.0% Recurrent 10064 11033 11903 12633 13368 Wages and Salaries 8864 9706 10354 10981 11647 Other Recurrent 1200 1326 1549 1652 1721 Capital 1097 994 1038 1187 1285 Local Governments 518 599 642 - - (as % of ODP) 0.2% 0.2% 0.3% - B. Key Sector Issues Relevant to Public Expenditure Choices 4.2. Despite larger spending on education than in many comparable countries, Morocco falls far short on outcomes, notably literacy and primary enrollment; one apparent cause is the low share of spending allocated to basic education. Morocco's CG education budget, at about one-fifth of the total CG general budget and over 5 percent of GDP, is ahead of the average for a sample of 26 countries at a roughly comparable income level (for which the share of total spending and of GDP amounts to 17 and 4 percent, respectively), although as a share of GDP it is slightly less than the average for a separate sample of nine Arab countries. However, only about half of Morocco's population is literate, compared S/ Student maintenance grants are a particular burden on the higher education budget, where they account for 35 percent of MoNE non-wage recurrent spending. 6/ The share of education in the total CG budget has increased steadily since the second half of the 1970's, despite a reduction in overall expenditure levels since adjustment began about a decade ago (see also section B of Chapter 2). In absolute terms (adjusted for price increases using the GDP deflator), education expenditures have remained stable since the beginning of the 1980's. The share allocation of expenditures by education level has remained relatively stable since the early 1970's, and has clearly favored upper basic and secondary education, which absorbs some 47 percent of the total public spending, compared with about one-third for basic education (see also pan. 4.2). m:\ailmorpexp\repoft\cdutext.doc Page 46 Public Expenditure: Issues and Outlook with an average of some 77 percent in the 26-country sample, and net primary and secondary enrollment rates stand at some 57 and 34 percent, respectively, compared with 87 and 51 percent. (In higher education, the enrollment gap is much smaller-- 10 percent versus 14 percent.) Outcomes in Morocco can be traced at least partly to the fact that only one-third of the education budget is allocated to basic education, compared with at least 10 percentage points more for the 26-country sample. In particular, over the past decade, the development of Morocco's education system has been unbalanced: enrollment in secondary and higher education have risen rapidly and fairly steadily (at an average of 4.3 and 9.1 percent per year, respectively), but enrollment in basic education actually declined between 1983 and 1988 and did not recover to its previous level until 1991, following a vigorous Government campaign. 4.3. Morocco's education system is also characterized by relatively low efficiency. Comparatively high unit costs at the upper-basic and secondary levels, as well as substantial repetition and dropout rates throughout the system, are suggestive of inefficient resource use in public education.' One apparent explanation for the high unit costs in parts of Morocco's education system is that student- teacher ratios are currently well above those in comparable countries; moreover, actual service time put in by teachers amounts to only three-quarters of the statutory obligation.! Student-teacher ratios have declined sharply since the beginning of the 1980's at all levels of education (see Table 4.2), despite a slight recent increase in the ratio for basic education in recent years (probably due to more efficient grouping of pupils in rural areas). The decline has been most pronounced at the secondary level. Staffing rates have also increased for non-teaching staff, though less so. While this steady decline in student-teacher ratios has been at least partly driven by the need to employ a growing surplus of university graduates, it has also apparently been aimed at improving quality through class size reductions and increases in staff qualification standards. However, the quality impact of the reduction in student- teacher ratios, and particularly its cost-effectiveness, remains to be demonstrated. International experience does not suggest a strong positive correlation between small class sizes and academic outcomes; conversely, the quality impact of larger spending on pedagogical material, on which Morocco appears to fare poorly, is much more established.' Concerning internal efficiency, repetition and drop-out rates remain high in Morocco. This is in spite of a decline in recent years, following a 1985 reform establishing a two-cycle basic education system totalling 9 years. Repetition rates, for example, still amount to 13 percent of enrollment in lower basic education, 23 percent in upper-basic, and 14 percent in secondary. In addition, the high drop-out rates within cycles (rather than discontinuation after a given cycle) suggests that flow regulation occurs in a socially wasteful fashion. 7/ While in lower basic and higher education unit costs are comparable to the averages for countries with similar per capita income, unit costs at upper basic and secondary levels are about twice the averages in these other countries. V/ By contrast, the average wage per teacher in Morocco amounts to some three times the per capita GDP, which does not appear out of line. The average wage for the 26-country sample cited earlier is about 3.2 times the per capita GDP, and 3.5 times the per capita GDP in the separate sample of other Arab countries. 9/ There is at least circumstantial evidence that spending on pedagogical materials is very low in Morocco. For example, personnel-related expenditures are as high as 97 percent of the recurrent budget in basic education, 96 percent in upper-basic, and 95 percent in secondary. m:\ali\orlpexplaport\cdux.do Public Expenditure: Issues and Outlook Page 47 Table 4.2 - Evolution of StaidelitTeacier ratios, 1980-1993 1980-81 1986-87 1989-90 1992-93 Lower Basic 37.1 27.0 25.0 27.6 Upper Basic 21.3 21.1 20.7 17.1 Secondary 23.0 17.6 13.3 13.0 Source: MoNE 4.4. Income-linked disparities in enrollment grow more acute as one progresses up the education ladder; consequently, the concentration ofpublic spending on higher echelons is regressive and probably hampers long-term growth potential. While adequately represented in basic education, children from households in the two poorest quintiles of the income distribution are significantly under-represented in secondary education, and almost absent in higher education and "elite" schools. This phenomenon, coupled with a unit cost structure that rises steeply with the level of education, leads to even more marked income-related disparities in the incidence of public expenditure. For example, while public spending on education (at all levels taken together) averaged some DH 2748 per household in 1991, only an estimated DH 1735 per household accrued to the poorest quintile, while those in the richest quintile captured DH 3858 per household (see Table 4.3). Significantly, however, public spending on basic education benefits poorer households proportionately more than better-off ones, because the latter have fewer school age children and, more importantly, make greater use of private education. This indicates that greater spending on basic education--assuming, of course, that such spending successfully enrolls and retains children of poorer households-would be immediately equity-improving, quite aside from its long- term poverty reduction impact. Extending enrollment in basic education would also strengthen the foundations for sustainable growth in Morocco. There is mounting worldwide evidence to the effect that generalized basic general education has been critical in fostering growth among successful performers, such as the East Asian economies."0 By concentrating public spending on the higher echelons of the education ladder, government policy in Morocco has probably crowded out private expenditure (providing education for those who would have invested in it anyway) and neglected areas of high social return. 4.5. Regional and gender disparities in enrollment are likewise extremely pronounced, indicating an urgent need for measures addressing both the supply of and demand for schooling. Such disparities have been comprehensively documented and analyzed elsewhere;" for illustrative purposes, suffice it to note here that probability of an average rural girl accessing basic education and surviving through the fifth grade was estimated in 1991 at less than 20 percent, while the analogous probability for an urban boy was close to 90 percent. To a certain extent, these disparities are explained by shortcomings in provision--that is, supply-based factors--ranging from outright unavailability of reasonably accessible schooling facilities to more subtle factors such as the lack of provision of meals. 10/ See World Bank (1993t), in particular, pp. 192-203. It is also striking that the East Asian economies devoted a significantly larger-than-average share--typically at least two thirds-of their spending on education to basic education. 11/ See, for example, World Bank (1993h) and (1993i). m:\a1i\mor\pexp\rcport\cduexLdoc Page 48 Public Expenditure: Issues and Outlook However, demand-based factors, including parental attitudes to schooling (particularly illiteracy of mothers) and opportunity costs of sending children to school, are probably at least as important in explaining regional and gender-based disparities in enrollment." As underscored in other World Bank reports, there is an urgent need for a coordinated action plan aimed at increasing enrollment and retention, particularly among girls in rural areas; it is widely known that the associated social returns (which range from reduced fertility to better health awareness, in addition to greater employment opportunities) are substantial. However, unless careful account is taken to address all (often subtle) relevant supply and demand factors, there is a risk that public expenditures aimed at increasing enrollments will be less-than-effective. In particular, measures such as widening the availability of school meals or establishing pecuniary incentives for teachers in rural areas who persist in their teaching assignments may be warranted. Table 4.3 - Incidence of Public Expenditures on Education, 1991 Lower Basic Secondary' H. Ed. Elite Sc. Average in DH 878 1255 536 79 Share Captured by Household in Each Expenditure Quintile (as a multiple of average) Quintile 1 1.2 0.5 0.1 0.0 Quintile 2 1.1 0.8 0.1 0.0 Quintile 3 1.0 1.0 0.4 0.0 Quintile 4 0.9 1.2 1.0 0.8 Quintile 5 0.4 1.4 2.8 3.1 Source: World Bank staff estimates, based on EDESA (1993). Including upper-basic, general secondary and technical secondary. Including teacher training institutes. C. Medium-Term Outlook for Expenditures 4.6. Simulations (based on present unit cost and other system parameters) indicate that rapid increases in enrollment rates would require increases in public (essentially CG) expenditure on education averaging some 4 percent per year in real terms through 1997, declining to an average annual real growth of 3.3 and 2.5 percent, respectively, in the two ensuing five-year periods. These expenditure growth rates exceed permissible overall growth in CG expenditures (see Chapter 12). The cost 12/ For example, among the poorest expenditure group surveyed in the 1990-91 LSMS, poverty (that is, inability to forgo children's labor or earnings) was cited as the reason for not having children attend school in about two-thirds of cases. Access to schooling facilities, by contrast, was cited in less than a third of cases. m:\aliXmor\pereport\cdutxt.doc Public Expenditure: Issues and Outlook Page 49 simulations, detailed in Ezzine (1994)," target an increase in the admission rate of 7-year-olds to the first cycle of basic education from some 79 percent of the age group presently to almost 90 percent by 1997 and 100 percent by 2002, maintaining that rate thereafter. However, it should be carefully noted that the simulations are based on status quo parameter assumptions. For example, it is assumed that per-pupil costs at a given level of education-in turn based, inter alia, on assumptions about student-teacher ratios-- remain constant at present levels over the 15-year horizon. Likewise, internal efficiency parameters- promotion, repetition, and dropout rates at each level of education-are held constant at today's levels throughout the period. Other examples of parameters fixed at status quo levels include the share of upper-basic graduates who proceed totechnicaV"(versus,general) secondary schooling; and' the share of pupils or students at each level who use private schooling. While it is clear that the simulation results should be treated as no more than broadly indicative, they do provide a preliminary estimate of the medium-term costs that the CG budget is likely to have to bear if rapid increases in enrollment are sought in the face of existing efficiency patterns,"' given the projected growth in the school-age population. However, it is also clear that simply incurring the additional budgetary outlays will not automatically yield the targeted increases in enrollment; as discussed in para. 4.5, wider enrollment probably hinges on addressing a variety of demand and supply factors. 4.7. However, sensitivity analysis suggests that even relatively modest increases in efficiency and private schooling would result in substantial cost savings; such savings could be used to improve the quality of public education, or alternatively to reduce the burden on the CG budget. Table 4.4 summarizes the impact on costs of various such measures. Potential savings are measured as a percentage of base case cost projections in the year 2002-2003 (in other words, it is assumed that measures are fully implemented by that year). The results indicate that substantial savings would be generated by: (i) allowing student-teacher ratios to return to levels in the early 1980's; (ii) fostering an increase in the share of annual enrollment taken up by private schooling; and (iii) (in net terms) implementing quality- and internal efficiency-improving measures. In particular, the combined effect of these measures would be sufficient to reduce the budgetary costs of education in 2002-2003 (at 1993 prices) to around its present level, despite the universal enrollment of 7-year-olds." The sensitivity analysis also highlights that the cost of multiplying expenditures on learning materials in basic education by a factor of 2.4 is very minor, compared with the probable impact of such an increase on the quality of education. In addition, while the net effect on costs of internal efficiency improvements is relatively modest, once fully implemented they would reduce enrollment in 2003 by 105,000 pupil-years, even while keeping pupils longer at school. For example, the proportion of students who leave before completing basic education would drop from the present 21 percent to some 13 percent. As a result, the gross enrollment ratio of 1/ The model used to prepare these simulations is an adaptation of the UNESCO SIMEDUC model, and covers a 16-year horizon (the reference year, 1992-93, and three 5-year projection periods). Parameters can be set at four pivotal years, and geometric smoothing occurs between pivotal dates. 14/ Because LG expenditures have not been included in the base year cost estimates, the simulations do not provide any indication of how they will need to evolve. However, it can be assumed implicitly that LG expenditures will need to remain a constant proportion of CG expenditures; that is, they will need to grow at the same real rate. 15/ However, the combined cost-reduction impact of these measures is lower than the sum of the savings that they generate individually because of their simultaneous effect on enrollment and efficiency. m:Ai\mor\pcxpirepon\cdutcxtLdoc Page 50 Public Expenditure: Issues and Outlook the 7 to 12 age-group would rise from 66 percent currently to 91 percent in 2003 and would stabilize at around 97 percent in 2007-virtually universal basic education. Table 4.4 - Potential Impact of Policy Measures in Education POLICY MEASURE SAVINGS On % of annual csW) cost-savingR 1. Increase student-teacher ratios by 10 percent in basic education by introducing multi-grade teaching in rural areas. These increases would bring the ratios back to their level in the mid-1980's. 3.4 2. Increase student-teacher ratios by 17 percent in upper-basic and by 54 percent in secondary through greater efficiency in staffing. 6.6 cost shifOng 3. Reduce the burden on the Government budget at all levels of education by fostering an increase in the share of private education to 10 percent in basic and upper-basic, and to 20 percent in secondary and higher education. 12.3 Oualfty- and Internal efflency-enhancn 4. Increase annual non-salary, non-transfer recurrent expenditures to $12 per pupil (from about $5 per pupil currently) in basic education. -1.0 5. Reduce repetition rates to 25 percent of existing rates at all levels, and allow promotion (rather than dropout) rates to increase concomitantly. 23.9 6. Reduce drop-out rates to 50 percent of existing values at all levels over 10 years and allow promotion rates to increase concomitantly. -16.7 VOCATIONAL TRAINING A. Background on the Sector and Public Expenditure 4.8. While private vocational training programs are growing rapidly, the public sector is still dominant in the provision of these training services; however, only part of the associated expenditure appears on the CG budget. Of the estimated 123,000 or so persons currently enrolled in vocational training programs, roughly 40 percent are accommodated in programs run by the Office de la Formation Professionnelle (OFPPT), an autonomous public agency operating under the auspices of the Ministry of Public Works (MoPW). OFPPT operating and capital expenditure, which amounts to about a quarter of 1 percent of GDP, is funded mainly by transfers from the CG budget and an earmarked payroll tax on m:\ali\morpexp\repost\sdutcxt.doc Public Expenditure: Issues and Outlook Page 51 private employers. The OFPPT trains a pool of skilled workers and technicians in industrial, construction, and commercial trades, mainly for subsequent employment in the private sector. Expenditure associated with the provision of vocational training appearing on the MoPW budget, however, is smaller than this amount, and consists mainly of operating transfers to, and investment expenditures on behalf of, OFPPT, with small amounts for administrative and regulatory overhead and in-house training programs. The CG-through ministries other than the MoPW, which train prospective specialized personnel--accounts for a further one-third of enrollment. An estimate for 1991 puts the expenditure associated with these specialized training programs at about 2.4 times MoPW spending, which would imply that total expenditures on vocational training appearing on the CG budget amount to about 1.4 percent of GDP annually. Residual enrollment in vocational training programs is accounted for by private institutions; however, these tend to specialize in service-oriented vocations. Table 4.5 - Summary of Public Expenditure on Vocational Training (millions of DH, unless otherwise indicated) 1990 1991 1992 1993 Central Government (MoPW)'2 212 230 255 281 (as % of budgetary expenditure) 0.4% 0.4% 0.4% 0.4% olw operating transfers to OFPFT 85 69 70 115 o/w capital transfers to OFPPT 111 144 165 148 Other Public Sector (OFPPT) 418 496 568 611 Recurrent 307 352 403 463 Capital 111 144 165 148 Notes: 'Includes only VT-related capital expenditure of the MoPW and recurrent transfers to OFPFT. 2 Excludes spending on specialized training programs by other ministries; these probably amount to at least twice MoPW expenditures. B. Key Sector Issues Relevant to Public Expenditure Choices 4.9. Public vocational training programs do not appear to exhibit rampant inefficiency, but it is debatable whether these programs, at least in their present form, are the most efficient way to provide the skills necessary to support private sector-led growth. OFPPT's programs appear to be relatively well-managed and to allow for adequate outlays on non-staff recurrent expenditures; moreover, available information suggests that employers typically hold OFPPT graduates in relatively high regard, though they recognize that graduates are not immediately operational in the workplace. Whether OFPPT programs cater to the skilled labor needs of the economy in the most cost-effective way is more debatable; for example, indications that only some 50 percent of OFPPT graduates find a job within one m:\ali\mor\pexp\report\edut.xLdoc Page 52 Public Expenditure: Issues and Outlook year of completing a training program suggests an imperfect match between the demand for skills and their provision." (In addition, unit costs are at least twice those in general secondary and almost seven times those in basic education, though higher unit costs are normal in regard to specialized training and the unit costs of OFPPT training appears moderate when compared with those of CG-run programs.) Aside from the transfers from the CG budget, funding for OFPPT programs derives largely from the proceeds of a 1.6 percent payroll tax on (mainly private) employers." The basic question is whether, compared with such "forced" provision of vocational training services by the public sector, it might be preferable to leave investment in (largely on-the-job) worker training to employers, and instead concentrate budgetary resources on the provision of general education. For example, international experience suggests that for many vocations employers prefer to hire literate and numerate individuals who have general problem-solving skills, whom they can then impart with specific skills tailored to the firm's requirements. It may be argued, of course, that State intervention--by legislating that an amount equal to the payroll tax take is to be allocated to worker training-is needed to compensate for market failures which would entail under-investment in training by private employers (the case for State intervention on straight equity grounds, as discussed below, is much weaker). However, such intervention might be more effective if, in contrast to current practice, it allowed employers to deduct voluntarily incurred training expenditures from their payroll tax bill. Such an arrangement would ensure a closer match between the demand for skills and their provision; it would also encourage competitive provision of training. In the case of specialized vocational training programs run by government departments for their own staff, for which unit costs are substantially higher than those in OFPPT programs, it would be desirable to examine the scope for contracting out the required training. 4.10. Under present arrangements, vocational training programs are not an effective poverty reduction instrument; the benefits ofpublic expenditure on such programs accrue mainly to the better-off. Despite suggestions of an earlier study to the effect that expenditure on vocational training programs benefited mainly low-income individuals," subsequent analysis has shown that the incidence of expenditure on such programs is in fact disproportionately on the better-off. Results of the 1990-91 LSMS suggest that half of those enrolled in vocational training programs belong to the top quintile of the income distribution, compared with only 2 percent for the bottom quintile. As a result, the incidence of spending exhibits a pattern very similar to--and therefore as inequitable as--that in higher education (see 16/ However, estimates of rates at which vocational training graduates find jobs should be treated with caution, since the few tracer studies available are not based on reliable methodologies, and do not attempt to account for informal sector employment. 17/ The tax is collected on OFPPT's behalf-for a small fee-by the Caisse Nadonale de Sicuiti Sociale (CNSS). 1s/ A study commissioned by the Ministry of Public Works entitled "Evaluation du Systbme de Formation Professionnelle" estimates that 61 percent of trainees belong to low-income households. The study's conclusions are based on extrapolations from the socio-professional category of trainees' fathers, who according to the study were farmers in 25 percent of cases, blue-collar workers in 15 percent of cases, and retirees or unemployed in another 23 percent of cases. The study's conclusions are however called into question by subsequent analysis based on the results of the 1990- 91 LSMS. m:ali\mor\pexp\rpot\cdtx.do Public Expenditure: Issues and Outlook Page 53 Figure 4.1). However, the overall impact is nilch less significant, since the per-household incidence of public spending on vocational training averages only DH 69 per year, compared with DH 536 in the case of higher education. However, this does suggest that at least partial cost recovery in vocational training programs may be equity-improving. Figure 4.1: Incidence Per Household of Public Expenditure on Vocational Training, 1991 (in DII) Average Quintile I Quintile 2 Quintile 3 Quintile 4 Quintile S 0 20 40 60 80 100 120 140 160 180 Source EDESA (1993) C. Medium-Term Outlook for Expenditures 4.11. TWo scenarios for the medium-term growth of OFPPT enrollments are currently under consideration by the authorities: 6 percent per year, based on the projected demand for vocational skills by employers, and 15 percent, based on a 'social' target of absorbing a given proportion of school- leavers. No definitive government-wide decision has yet been clearly articulated concerning the target rate of expansion for publicly-provided-notably OFPPT--programs over the medium term. Likewise, there is no clear indication of how much budgetary support will be required to support any given expansion scenario, although an extension of the payroll tax to the (hitherto exempt) Etablissements Publics & Caractre Industriel et Commercial, as well as enhanced tax collection, would expected to allow some "load-shedding" by the CG budget. More significant, however, is the question of whether these planned expansion scenarios can ensure a cost-effective response to the economy's skilled labor needs; a related question concerns whether "forced" public provision of vocational training should be continued at all over the medium term. The justification for expanding public vocational training programs purely for the "social" purpose of absorbing school-leavers appears weak; the incidence of benefits would likely be regressive, and labor absorption over the longer term impeded rather than assisted. Responding in the most cost-effective way to employers' skill needs requires the closest possible match between these needs and any training programs provided by the public sector; it also requires more competitive provision of training, notably through greater private participation. Thus, while it would not be advisable to cut sources of funding for the OFPPT before alternative training mechanisms can develop, it would m:\ali\mor\pexeportedutwt.doc Page 54 Public Expenditure: Issues and Outlook be desirable to formalize a consultative process between employers' associations and the OFPPT to determine priority uses for the earmarked payroll tax funds. In parallel, it would be desirable to consider modifying existing arrangements such that: (i) enterprises received a credit against the payroll tax for training contracted to accredited public or private institutions, and possibly for certain forms of in-house on-the-job training; and (ii) funds collected through the payroll tax were no longer earmarked exclusively for OFPPT, but also could be accessed by accredited private institutions. However, ensuring that such modifications have the desired effect pre-supposes a well-developed regulatory framework in vocational training; improving the current framework should be the priority for the State. Finally, the scope for greater cost recovery in publicly-provided vocational training programs should be carefully examined, at least for those training programs where the record of prompt employment for graduates is better established. m:\ali\mor\pup\report\cdutcztdoc Public Expenditure: Issues and Outlook Page 55 CHAPTER 5: HEALTH' While private health care has grown rapidly, public sector provision remains important. Public health care and related services are provided by several autonomous establishments, but most are heavily dependent on the CG health budget, which amounts to 1 percent of GDP each year. LG spending on the provision of health care is minor. Health outcome indicators and access to services--and thus the incidence of public spending--exhibit pronounced geographical and income-related disparities, which can be traced to a highly skewed allocation of expenditure in favor of urban hospitals. Weak cost recovery, notably for urban, hospital-based curative services, has bolstered the inequitable impact of public spending and the adverse effects of inadequate non-wage recurrent outlays. Among the barriers to greater cost recovery are an under-developed health insurance system, notably for low-income households. There is also greater scope for private provision, particularly of high-end services, which could improve service quality and efficiency while freeing up budgetary resources to address basic needs. Concerning the medium-term outlook for public expenditure, rough simulations suggest that meeting reasonable health care targets will probably require real increases in budgetary outlays of at least 8 percent annually through the end of the decade. However, the adequacy of these projected expenditure requirements for the state health care network depends notably on continued expansion in private health care. Recommended follow-up: * Increase expenditure allocations for medical supplies and equipment, particularly in out-patient health centers. * Increase access to out-patient, preventive health care services, particularly in rural areas. * Finalize design and accelerate implementation of a more robust system of health care financing based on wider insurance coverage and a publicly-finded mechanism for covering the poor. * Increase cost recovery in urban curative health care services provided by public hospitals. * Examine the potential for privatizing state hospital management and ancillary services. 1/ This chapter is based on Guedira (1994), and covers public expenditure associated with the provision of health care and related services, including administrative overhead. Health care services include both preventive and curative services, whether in- or out-patient, family planning, and certain sanitary and nutritional counsel programs, as well as related services. However, expenditures associated with the provision of health insurance coverage, as well as with certain nutritional programs, are excluded here (they are covered in Chapter 3). Administrative overhead covers planning and regulatory activity, as well as the administration of health care establishments. m:\a\mor\pcxrportmft\hte.doc Page 56 Public Expenditure: Issues and Outlook A. Background on the Sector and Public Expenditure 5.1. Despite rapid growth in private provision over the past few years, the public sector remains a large supplier of health care; CGifunding amounts to about 1 percent of GDP each year. Well over a third of the total value of health care services is provided by the public sector, though it is difficult to come up with a refined estimate (see para. 5.9). Within the public sector, the CG has the dominant role in supplying and financing health care infrastructure and services. Its major functions, exercised through the Ministry of Public Health (MoPH), include planning for and regulating health sector development, directly operating a network'of health care establishments, and financing hospitals and other establishments that are autonomously run but still part of the wider state network. Health care establishments directly operated by the MoPH include non-autonomous hospitals, largely out-patient health centers, and dispensaries.2 Expenditures associated with these functions appear in the CG accounts under the MoPH budget, and currently average some 1 percent of GDP per year (see Table 5. 1).1 These expenditures include significant transfers to the Fonds SpIcial de la Pharmacie Centrale (a special Treasury account through which the MoPH purchases pharmaceuticals), and transfers to autonomous hospitals and other establishments. Aside from MoPH spending, CG spending on the provision of health care services is negligible, except (reportedly) for health-related spending under the defense budget, on which details are unavailable.' 5.2. Several autonomous public establishments provide health care and related services, though most are heavily dependent onfinding from the CG budget. Autonomously run entities which, together with health care establishments directly operated by the MoPH, make up the state network, consist of two university hospital centers (Rabat and Casablanca), nine other SEGMA hospitals,s and a handful of institutes and research centers. While these entities have the legal status of Etablissements Publics & Caract&re Administratifand, as such, maintain separate individual accounts, more than four-fifths of their expenditure is funded by transfers from the CG budget. In particular, aside from the budgetary transfers covering non-wage recurrent and capital costs (Table 5.1), the entire staff of these entities is paid through 2/ Non-autonomous hospitals, known as H6pitaux en Rigie, together with autonomously-run hospitals, number approximately 100, with a total capacity of almost 25,000 beds. Health centers (Centres de Sante), defined as health establishments with at least one physician, number about 260 in urban areas and 230 in rural areas. They offer mainly out-patient services, and have a total capacity of only some 1400 beds. Finally, dispensaries (Dispensaires), defined as establishments offering out-patient health services and staffed by nurses and other para-medical staff (but not physicians), number some 150 in urban areas and 1040 in rural areas. 3/ Over the past 25 years or so, the MoPH's budget (both recurrent and capital) has hovered in the 0.9-1.3 percent of GDP range, with a broad, though irregular, decline through 1991 and a slight rebound since. In real per capita terms, the health budget has increased by about one-third over the past 25 years. 4/ See also the discussion of defense expenditures in Section E of Chapter 2. Spending out of the defense budget on the provision of health care infrastructure and services has reportedly averaged an additional 10-15 percent over and above the MoPH budget in recent years, and is reported to have been especially high in 1993. 5/ The acronym SEGMA, which stands for Services de l'Etat G6ris de Maniare Autonome, refers to autonomous management. m:\al\mor\pczp\rcpod\hhtextdoc Public Expenditure: Issues and Outlook Page 57 the CG (MoPH) budget.' Aside from the state network, additional health care facilities and services are provided by the Caisse Nationale de Sicuritg Sociale (CNSS), the largest public security fund (see also Chapter 3),' and by some of the major public enterprises for employees and dependents. Estimates, though crude and incomplete, suggest that the expenditure associated with the provision of these additional health facilities and services amounts to about one-fifth again of MoPH expenditure (Table 5.1). Table 5.1 - Summary of Public Expenditure on Health (millions of DR unless otherwise indicated) 1990 1991 1992 1993 1994 Central Government (MoPH) 1820 2219 2368 2591 - (as % of total budgetary CG expenditure) 3.4% 3.8% 3.9% 3.7% - (as % of GDP) 0.9% 0.9% 1.0% 1.0% - Recurrent Expenditure 1599 1902 2043 2225 2358 Wages and Salaries 1155 1411 1409 1488 1590 Other Recurrent 444 491 634 737 767 olw Transfer to Pharmacy Fund 119 127 153 190 187 o/w Transfers to Hospitals and other Establishments 186 200 284 354 378 o/w Transfers to Households 34 33 35 36 38 Capital Expenditure 221 316 325 365 - o/w Transfers to Hospitals and other Establishments 5 36 26 20 30 Local Governments 39 111 206 - - (as % of GDP) 0.0% 0.0% 0.1% - - Recurrent' 19 24 25 - - Capital' 20 87 181 - - Other Public Sector - - - 456 395 (as % of ODP) - - - 0.2% 0.1% CNSS Clinics - 348 280 280 214 Public enterprise own-provided health care (estimate) - - - 176 181 Notes: 'Non-wage spending only. 2 Funding for projects executed by the CO. 6/ The total number of employees (both those working directly for the MoPH) and those working in the autonomously run health care establishments, number approximately 44,000. About one-tenth are physicians, half nursing staff and other para-medical staff, and the remainder administrative staff. 2/ CNSS operates a network of 13 clinics with a total capacity of some 1300 beds. m:\a\i\mor\pexp\rtpost\hhhtext.doc Page 58 Public Expenditure: Issues and Outlook 5.3. LGprovision of health-related services is confined to administrative functions, although expenditure appearing on the LG accounts extends beyond that associated with these functions. LG-based Bureaux Municipaux d'Hygine (municipal health departments) exercise a variety of planning and regulatory functions, including--in coordination with the MoPH-selection and oversight of local health projects. However, the expenditure associated with these functions accounts for only a negligible fraction of health-related LG spending. The remainder, itself a very small amount (about one-tenth of 1 percent of GDP in 1992, and less in preceding years), is in effect funding for CG-executed local health care programs or projects. A small portion of the VAT transfers from the CG to LG's is typically earmarked for this purpose (see also Section C of Chapter 2). It should be emphasized, however, that the health- related LG expenditure shown in Table 5.1 is probably a significant underestimate of the true sum, as possible health-related components of several LG expenditure categories (including staff costs, recurrent and capital costs for buildings and facilities, and "integrated" development projects) could not be split out. B. Key Sector Issues Relevant to Public Expenditure Choices 5.4. This section outlines key issues against which the adequacy, efficiency, and equity of past and present public spending on health care in Morocco might be judged. These issues also capture desirable focal points for, and measures complementary to, future public spending. The issues include: (i) disparities in health outcomes and in the impact of public expenditure; (ii) inadequate (and consequently inequitable) pricing and cost recovery, notably for urban, curative services; and (iii) the potential for increased efficiency of services and' savings in budgetary resources through greater private sector participation in the provision of health care. 5.5. There are pronounced geographical and income-related discrepancies in health outcome indicators and in access to health care services. Despite the absence of regularly published data distinguishing between health outcomes in rural and in urban areas, as well as more generally across regions, illustrations of such discrepancies abound.! On average, a rural inhabitant is almost 25 km from facilities where a health-related consultation can be sought, compared with less than a third that distance for an urban inhabitant. Probably as a result, fewer than 40 percent of rural inhabitants seek treatment for illness, compared with over 60 percent of urban inhabitants, and lose some two days (about 25 percent) more of potential income-generating activity each year due to illness. Infant malnutrition is about twice as prevalent in rural as in urban areas. Moreover, in both rural and urban areas, the incidence of illness, and particularly that of infant malnutrition, as well as the rate of use of health facilities, is in general strongly correlated with household income. 5.6. Disparities in health outcomes can be traced in large measure to a highly uneven allocation of public spending. Some three-fourths of MoPH recurrent spending on actual health care services (as opposed to central administrative overhead), of which the non-wage component is already inadequate in the aggregate, goes to hospitals.' (Within the allocation for hospitals, the two university 8/ See, for example, World Bank (1994a), Volume U, Tables 51-66. 9/ MoPH recurrent spending on actual health care services is defined as the sum of: (a) wage costs of staff in health care establishments, including those involved in administration; (b) spending on pharmaceuticals (through the Central Pharmacy Fund); and (c) other recurrent spending associated with health care establishments, including recurrent m:\ali\mor\pxp\rpohhtextdoc Public Expenditure: Issues and Outlook Page 59 hospital centers absorb at least half the amount.) Of the iemaining one-fourth, about two-thirds are allocated to urban health centers and dispensaries, and the remainder to rural health centers and dispensaries. The skewed distribution of expenditure is reflected in large disparities in the availability of medical personnel, supplies, and equipment among the different types of facilities.`o One corollary of the expenditure bias towards hospital-based curative services in urban areas (where less than half of Morocco's population lives and where the incidence of poverty is relatively lower), coupled with the fact that the use of public health services is positively correlated with household income, is that the benefits of public spending accrue disproportionately to better-off households. At the national level, it has been estimated that some 45 percent of recurrent MoPH spending on health care accrues to the top expenditure quintile, while the poorest 20 percent of households capture less than 7 percent of this spending." A related point is that the incidence of certain communicable diseases continues to be high, suggesting inadequate outlays for preventive, rather than curative, services. 5.7. Inadequate cost recovery, notably for urban, hospital-based curative services, has sustained and aggravated the inequitable impact of public spending as well as the adverse effects of inadequate non-wage recurrent outlays. Cost recovery in state health care establishments probably amounts to under one-tenth of operating costs. Reasons for this low average recovery rate include inadequate pricing and billing by the establishments, and tardy or incomplete payment of billed expenses by individuals and state health insurance organizations. Deficient cost recovery, coupled with the lack of adequate means-testing, has tended to perpetuate inequality in the impact of public expenditure by encouraging greater use of services by better-off households.12 Appropriate cost recovery measures, even if partial, could help rectify disparities. For example, it is estimated that if households in the top two expenditure quintiles could be made to contribute 40 percent of the hospital costs, and 10 percent of other health care establishment costs, which they presently "capture", and if these resources could be redistributed in the form of services for lower-income groups, existing inequalities in the impact of public spending would be substantially reduced." The share of public spending captured by the top expenditure components of health care projects budgeted under the MoPH's capital budget. 10/ For example, only 6 percent of physicians in the state health care establishment network, and about one-fifth of nursing and other para-medical staff, are assigned to rural health centers. 11/ See EDESA (1993). Rural households as a group capture slightly over a quarter of total expenditure, the remainder accruing to urban households. Strikingly, in rural areas there is little correlation between household income and the amount of public expenditure captured, but a very strong such correlation in urban areas. This suggests that lack of access to health infrastructure and services in rural areas is generalized. It also suggests that in urban areas, where infrastructure is better, health care is a strongly normal good. 12/ There are subtle (and probably unintended) cost-sharing mechanisms already in operation. These take the form of incomplete service provision by public health care establishments, forcing households to contribute certain inputs. For example, households are often obliged to procure the drugs or other medical supplies that are essential to proper treatment. Since better-off households can more readily procure these, they tend to use up more of the complementary resources that are available in state facilities (e.g., physicians' and nurses' services, clinic infrastructure, etc.). 13/ The calculation is a purely mechanical one for illustrative purposes, and hinges on the assumption that the recovered resources can--through ajudicious mix of spending on supplies and equipment in facilities most used by lower- income groups--be redistributed predominantly to rural rather than urban areas (55 versus 45 percent) and to the bottom m:ali\mor\pxp\rcpot\hithtex.doc Page 60 Public Expenditure: Issues and Outlook quintile as a ratio of that captured by the bottom quintile would decline from almost 7 currently to about 2.1" However, the feasibility of such cost recovery hinges on state health care establishments' adoption of improved information management and accounting practices, timely billing for the true economic cost of services, and measures to achieve acceptable collection rates. 5.8. An under-developed health insurance system is a barrier to effective cost recovery; in parallel with an extension of the system, a mechanism for covering the poor must be also be devised and implemented. Only some 15 percent of Morocco's population-about 4 million individuals, confined largely to better-off households-have any kind of health insurance coverage," and less than one-fifth of total annual expenditure on health care is presently covered by health insurance schemes (see also Chapter 3). In addition, public organizations offering health insurance, notably the Caisse Nationale des Organismes de Prevoyance Sociale (CNOPS), are financially weak, owing in part to inadequate employer contributions from the government. As a result, payment of even those medical expenses which are covered is often delayed or incomplete. Enhanced cost recovery by hospitals hinges largely on widening health insurance coverage and establishing an appropriate means-tested mechanism for covering the poor. It also hinges on financial strengthening of the state health insurance organizations, notably through adjustments in government employer contributions. Only under such conditions would hospitals have the full leeway to bill for, and ensure acceptable collection of, the true economic cost of their services. 5.9. Accelerated opening up to private provision of health care could improve service quality and efficiency while freeing up budgetary resources to address basic needs. Private provision is already sizeable and growing-the private sector now accounts for some 60 percent of health care services provided, and the number of private physicians has practically doubled over the past decade. Almost half of the country's practicing physicians (more than 7000, which translates to some 3600 population per physician) are licensed for private practice. Dentistry and pharmacies are almost entirely in private hands. However, private provision remains concentrated in the areas around Rabat and Casablanca. In addition, the number of large-scale private health care establishments with in-patient capacity remains modest." While a favorable regulatory environment has already fostered an expansion of private health care provision, more proactive spinning off of activities in, if not outright privatization of, state health facilities would be desirable. Examples of more proactive measures include: (i) greater contracting out (50 percent), fourth (40 percent) and third (10 percent) expenditure quintiles. 14/ In addition, the share of expenditure captured by rural households would rise by about 10 percentage points from the current 27 percent. If a stronger assumption of 60 percent cost recovery for hospital-based care and 20 percent for out-patient health care (again, among the top two expenditure quintiles) is adopted, the ratio would fall further to just over unity, and over 40 percent of spending would accrue to households in rural areas. 15/ Health insurance is currently voluntary in Morocco, although plans call for imminent passage of legislation making health coverage compulsory. However, the proposed mechanism(s) for implementing universal (and financially viable) health insurance coverage are less clear, although possible mechanisms have been under discussion for some time. 16/ The fact that the private sector employs only some 800-900 para-medical staff (including nursing staff) while the state health care network employs almost 24,000 such staff suggests that the private sector's in-patient capacity is small relative to the public sector. Available figures indicate that private clinics number about 120, with a total capacity of some 5000 beds (less than one-fifth that of the state network). However, these figures include facilities provided by CNSS and miscellaneous public enterprises. m:1sh\morpxp\corhbhtext.doc Public Expenditure: Issues and Oudook Page 61 of certain support services such as laboratory testing, cateiing, billing and collection; (ii) contracting out of state hospital management to the private sector; and (iii) outright privatization of some state facilities offering support services, such as the Centres Nationaux de Transfusion Sanguine and the Institut Pasteur du Maroc. Efficiency considerations aside, greater private participation in the provision of services currently provided by the public sector would likely ensure more timely and adequate billing and payments collection, leading to greater cost recovery (indeed, such cost recovery is typically critical to the viability of private provision). Consequently, natural priority areas for increased private participation would be urban curative and related services (as opposed to preventive services, particularly in rural areas), where there is a sound rationale for cost recovery on both efficiency and equity grounds." C. Medium-Term Outlook for Expenditures 5.10. Rough simulations suggest that meeting satisfactory health care targets may require substantial real increases in expenditure on the state health care network, perhaps over 8 percent annually, through the end of the decade. Based on the physical "input" (in terms of health establishments, staffing, and, implicitly, equipment and supplies) and "output" (in terms of access) targets in Table 5.2, coupled with assumptions about unit costs and efficiency improvements, totil MoPH expenditure would need to increase by an average of some 11 percent a year in real terms over the coming decade." These estimates of expenditure "requirements" should be viewed as no more than broadly indicative, as they hinge sensitively on the various assumptions used (including, as detailed in para. 5.11, assumptions concerning the growth in private provision of health care services). The targets in the scenario outlined in Table 5.2 reflect an underlying strategy of: (i) building up establishments offering predominantly out-patient care, particularly in rural areas; (ii) increasing the non-wage share in recurrent expenditures; and (iii) modest reductions in the share of expenditures on administrative overhead. The strategy also aims at more efficient use of existing state hospital facilities, although--in keeping with the objective of concentrating new public spending on rural, out-patient facilities-allowances for new public sector hospitals are very modest. Concerning financing, the base case--and perhaps overly prudent-assumption is that access of the state health care network to non-budgetary resources (through wider health insurance coverage and cost recovery) will stagnate, obliging the MoPH budget to bear the brunt of the increase. However, to the extent that broadened health insurance coverage (including an appropriate mechanism for covering the poor) and greater cost recovery can mobilize additional resources for the state health care network, the load on the MoPH budget can be lightened. By way of example, 17/ Regarding the rationale on efficiency grounds, the reasoning would be that private benefits of curative care are roughly equal to its social benefits, so that there is ample scope for cost recovery without inducing significant welfare losses. In the case of preventive care, by contrast, social benefits often exceed private benefits, so that the scope for cost recovery (and therefore operation on a commercial basis) without distorting consumption patterns is more limited. Regarding the rationale on equity grounds, cost recovery in urban areas would tend to put the burden on better-off households. 18/ Full details of this and other scenarios (including a more ambitious, but also more costly, scenario) can be found in Guedira (1994). Assumptions concerning efficiency and productivity improvements include a quadrupling of hospital- based consultations per physician and a near-threefold increase in out-patient health care services delivered per nursing staff, as well as an improvement in the average hospital bed occupancy rate from the present 54 percent to some 85 percent. m:\ah\morpxpodhMtcxLdoc Page 62 Public Expenditure: Issues and Outlook the alternative MoPH expenditure growth profile at the bottom of Table 5.2 gives an idea of the "load- shedding" that might be feasible for the CG budget if about a quarter of the annual costs of the state network could be covered by non-budgetary resources by the year 2000, compared with less than 2 percent today." 5.11. However, the adequacy of the projected increases in expenditure on the state health care network depends notably on continued expansion in private sector provision of health care. Conservatively, the scenario outlined in Table 5.2 does not incorporate explicit spinning off of hospital- based facilities that are currently state-run to the private sector. Consequently, the MoPH retains responsibility for the operation (and, unless alternative financing can be generated, the funding) of the existing state hospital network. However, the scenario does hinge on continued expansion of private health care as a share of GDP, concentrated mainly in urban, curative services. Expenditure associated with private provision as a share of GDP is assumed to rise from the current 2.5 percent to some 4 percent over the next decade.' This would complement state provision of health care, bringing total (public plus private) expenditure on the provision of health care from the current 4 percent of GDP to some 5.8 percent, and almost doubling real per capita expenditure, within a decade. However, essential conditions for continued expansion in private provision (as well as for greater cost recovery in state hospitalsf is a satisfactory financing mechanism, in the form of wider health insurance, including a means- tested mechanism to fund care for low-income households. 19/ Of course, one should be careful to account for indirect budgetary contributions that might be required under such an alternative financing scenario. For example, the introduction of universal mandatory health insurance would probably require additional CG budgetary outlays, either in the form of employer contributions or in the form of transfers to fund a mechanism for covering the poor. 20/ Under the scenario the private sector's share of the value of services would drop by some 5 percentage points over the next decade, reflecting the higher public spending to expand capacity and utilization in health centers and dispensaries, and to ensure better use of existing hospital facilities. However, the private sector's share includes CNSS and enterprise-based services, which would be turned over to the private sector proper. In addition, the scenario could easily accommodate a further increase in the private sector's share through privatization of state hospitals. m:\iH\mor\pcupreport\hbhtox.doc Public Expenditure: Issues and Outlook Page 63 Table 5.2 - Summary of Possible Medium-Term Public Expenditure Targets 1993 1996 1999 2002 Public Sector (MoPH) "Input" (per 100,000 population) Rural Health Centers & Dispensaries 5.2 5.6 6.2 6.8 Urban Health Centers & Dispensaries 1.7 1.8 1.8 1.9 Hospitals 0.4 0.4 0.4 0.4 Physicians 15.9 17.5 20.0 23.8 Nursing & Other Para-medical staff 95.5 110.3 130.0 156.0 Distribution of Associated Public Sector (MoPH) Recurrent Expenditure (in %) Personnel 65 62 60 58 Other expenditures 35 38 40 43 Administration 12 11 11 10 Treatment & Training 88 89 89 90 Hospital-based 72 67 62 56 Ambulatory (Out-patient) 28 33 38 44 Urban 88 83 79 73 Rural 12 17 21 27 Public Sector (MoPH) "Output" (per 100 population per year) Physician Consultations at Health Centers and Dispensaries 22 33 48 70 Treatment by Pare-medical staff 72 122 207 350 Budat Alternative Financing Financing and Cost Recovery 1994-2002 1994-2002 Required Average Annual Real Growth in MoPH Spending 8.2% 4.4% Of which: Recurrent 7.8% 3.5% Capital 11.4% 11.4% m:\ali\mor\pczpiepot\hlthtrxt.doc Page 64 Public Expenditure: Issues and Outlook CHAPTER 6: HOUSING' CG fiunding for the provision of low-income housing, and particularly serviced lots for housing construction, as well as for mortgage subsidies, amounts to about 1 percent of the general budget annually. Actual real estate development and housing construction is carried out by autonomous public agencies, which manage programs on behalf of the CG and LG's, but also undertake their own housing development operations. Major housing-related issues include a signiftcantbacklog ofuwtitousing needs (predictably a low-income phenomenon), which have spilled over into shantytowns and other forms of non-regulation housing. Effort to track and address housing needs--and thus the incidence of public expenditure-has, however, been concentrated almost exclusively on urban areas. A related point on incidence is that a large share of the benefits of many housing-related public expenditure items (including tax expenditures) accrues to the better-off Concerning medium-term public expenditure trends, it is apparent that meeting projected housing needs in urban-to say nothing of rural--areas may require large medium-term real increases in budgetary spending, perhaps over 20 percent annually. The prospective burden on the budget could however be alleviated through such measures as selling state-owned housing and rationalizing implicit and explicit mortgage subsidies. Recommended follow-up: * Draw up and adopt an explicit policy on housing in rural areas. * Examine the potential for selling the state-owned housing stock to government employees. * Study the incidence of explicit mortgage interest subsidies and implicit tax expenditures with a view to rationalizing the system. * Review the impact of urbanization standards and zoning regulations on the cost of land. * Introduce competition from the private sector in State contracts for low-income housing developments. 1/ This chapter is based, inter alla, on Jaldi (1994), and covers public expenditure associated with the construction of housing, as well as possible prior acquisition of land and preparation of lots. Also covered are expenditures on housing mortgage subsidies. m:\ali\mor\pxp\rport\hsgtxt.doc Public Expenditure: Issues and Outlook Page 65 A. Background on the Sector and Public Expenditure 2 6.1. While the public sector accounts for only a modest share of the overall provision of housing, its role in providing low-income housing, and parricularly serviced lots for housing construction, is significant; CG expenditure associated with such provision, as well as with mortgage subsidies, amounts to about 1 percent of the general budget annually. Arm's-length public sector provision of housing encompasses: (i) serviced lots, of which a portion is typically earmarked for shantytown or slum dwellers at below-cost prices (the remainder is sold off at higher prices, as discussed below); and (ii) construction of low-income housing (or up-grading of slum or non-regulation dwellings). The public sector accounts for the near-totality of the supply of serviced lots for housing, but only a small fraction of actual housing construction.' The CG, through the Ministry of Housing (MoH), has general responsibility for conception and oversight of public sector provision, and provides partial funding for housing development programs. The bulk of the MoH capital budget (as well as spending through the Fonds National pour l'Achat et 1'Equipement des Terrains (FNAET), a special Treasury account) funds the development of lots and construction of housing, which (in addition to sales) is handled by autonomous public sector entities. It is noteworthy that CG funding for housing programs has risen significantly since 1991, following the launch of an emergency shantytown and slum re-housing program. Expenditure on the provision of housing by other CG departments (largely for their own employees) is probably modest.' The other major housing-related CG expenditure item is mortgage subsidies (which accrue to households in the form of reduced interest rates); this takes the form of Treasury transfers to the Crddit Immobilier et Hbtelier (CIH), Banque Centrale Populaire (BCP), and Caisse Nationale de Credit Agricole (CNCA), who account for almost all mortgages in Morocco.' In total, as shown in Table 6.1, CG housing-related expenditures have amounted to about one-third of 1 percent of GDP in recent years. 2/ Further background can be found in World Bank (1993c). In addition, as discussed further below, a Housing Sector strategy paper is under preparation by MNIlN. 3/ Direction de la Statistique figures indicate that in 1993, almost 97 percent of all housing construction permits were accounted for by (unincorporated) individuals, whether for own use or resale; the remainder was roughly equally split among the public sector and the (corporate) private sector. 4/ An analysis of the 1994 CG general budget by functional classification-which cuts across government departments--reveals that aside from MoH expenditure, the only direct expenditures on the provision of housing appear in the budget of the Secrftariat d'Etat Aupros du Premier Ministre Chargi des Affaires Girales for housing programs in the Sahara provinces. However, this accounts for only 1.2 percent of CG general budget direct expenditure on housing in 1994. Between 1990 and 1992, however, amounts under this item were more significant (some DH 42 million in 1990). No detail was available of the National Defense Administration's budget to allow an estimate of possible spending on housing for military personnel. As discussed later, however, the State stills owns a substantial stock of housing, which is currently rented out to State employees. 5/ Available figures indicate that CIH accounts for about 70 percent of mortgages, and BCP for most of the remainder (with a small residual share for CNCA). It should be noted that, aside from Treasury transfers to cover mortgage subsidies, the Treasury transfers non-negligible sums (not shown in Table 6.1) to cover exchange losses on foreign loans to the housing sector. m:\ali\mor\xp\report\hsgtczLdoc Page 66 Public Expenditure: Issues and Outlook Table 6.1 - Summary of Public Expenditure on Housing (millions of DR unless otherwise indicated) 1990 1991 1992 1993 1994 Central Government - 440 624 710 - (as % of CO budgetary expenditure) - 0.7% 1.0% 1.0% - (as % of ODP) - 0.2% 0.3% 0.3% - Recurrent (MoPH) 57 69 72 79 80 Wages and Salaries 50 53 60 67 68 Other Recurrent 7 15 11 12 12 Capital (MoPH) 130 174 241 331 - olw funding for ANHI - 47 104 121 200 ERAC's - 16 78 121 134 SNEC - 45 8 17 21 CO Special Account (FNAET) 50 50 120 40 120 Mortgage Subsidy Transfers - 147 191 260 - 6.2. Public sector real estate development and housing construction is handled by autonomous public agencies; these receive finding for programs carried out on behalf of the CG and LG's, but also undertake their own development operations. The main public sector developers are the Agence Nationale de lutte contre l'Habitat Insalubre (ANHI), the Soci9te Nationale d'Equipement et de Construction (SNEC), and seven regional Etablissements Rdgionaux d'Amnagement et de Construction (ERAC's). Despite some differences in their original dejure mandates, these agencies all undertake broadly similar tasks involving real estate development for housing construction and limited construction of (notably low- income) housing.' All execute housing programs on behalf of the MoH-and, to a much more limited extent, LG's-and undertake development activity on their own behalf. By way of example, the value of ANHI's on-going program stood at some DH 8.8 billion at the end of 1992; of this total, some 40 percent was accounted for by operations on behalf of the MoH, about one-half of 1 percent to operations on behalf of two LG's, and the remainder to ANHI's own program. Similarly, SNEC now manages the FNAET-funded housing development program originally begun by the MoH. Under their own-account (and, to a lesser extent, Government contract) operations, ANHI, SNEC, and the ERAC's 6/ In many cases, constructed housing is (deliberately) only partially completed and sold to households for completion by the latter. m:\ali\morlpcxp\report\bsgtext.doc Public Expenditure: Issues and Outlook , Page 67 develop lots for commercial sale, which enables them to break even on below-cost sales to low-income households (notably shantytown and slum dwellers), a cross-subsidy phenomenon known as prgquation. B. Key Sector Issues Relevant to Public Expenditure Choices 6.3. There is a significant backlog of unmet needs in housing (predictably, unmet needs are a low-income phenomenon), although efforts to track such needs have been concentrated almost exclusively on urban areas. Recent survey results indicate that in 1992 about 160,000 urban households (some 6-7 percent of the urban population) lived in shantytowns. A further one-fifth of the urban population reportedly lives in other types of non-regulation housing. It is estimated that over the past decade, the urban population has grown by an average of about 96,000 households per year; over the same period, completions of regulation housing units have averaged less than half this amount each year. At least part of the unmet need--largely among poorer households-has spilled over into non-regulation housing, including shantytowns. Results of the 1990-91 LSMS indicate that about a fifth of the urban poor live in "soft" houses (built out of traditional materials, such as mud) or shacks (built out of makeshift material). The incidence of this and other non-regulation housing is much higher among the poor than among the urban population at large.7 However, despite significant unmet housing needs in urban areas, it is clear that housing conditions in rural areas, both on average and among the rural poor, lag far behind. Well over four-fifths of the rural poor live in "soft" houses (although the prevalence of such housing is over 70 percent among the rural population at large) and, as discussed in other chapters, access to amenities such as running water, sewerage facilities, or electricity are practically non-existent. In spite of this, programs run by the MoH and public sector developers--doubtless spurred in part by the greater political visibility of urban squalor-focus almost exclusively on re-housing urban shantytown and slum dwellers, rather than on rural housing development. 6.4. A sigmficant share of the benefits of several housing-related public expenditure items (including implicit tax expenditures) accrues to the better-off. Concerning MoH outlays on housing- related programs and the proceeds of pgr6quation, these appear to be reasonably well targeted to low- income households.! However, this observation is subject to three caveats. First, the benefits of MoH outlays accrue almost entirely to urban households." Second, even among urban areas, there are substantial regional disparities in the allocation of expenditures.o And third, it is unclear whether developments for commercial sale are marketed at the prices that they would fetch on the open market, or whether buyers do in fact also receive a subsidy (albeit lesser). In the case of mortgage subsidies, by 7/l See, for example, World Bank (1994a), Volume II, Table 43. 8/ The proceeds from piriquation, which can be viewed as a public expenditure item (in the sense that it is a revenue item that would otherwise accrue to state-owned entities, and eventually to the Treasury, in the form of profits) average a substantial DH 130 million per year for on-going programs. 9/ Rural programs have been confined to a few-largely turnkey-pilot operations, involving only modest outlays. 10/ For example, recent spending appears to be skewed towards the Center-North region (which includes Fez), to which almost 40 percent of MoH spending on re-housing programs is allocated, despite its having less than 4 percent of the country's known shantytown dwellers. m:\ali\mor\pcxp\report\hgtexLdoc Page 68 Public Expenditure: Issues and Outlook contrast, a significant share of benefits accrues to the better-off." A recent study (EDESA, 1993) estimates that while about one-fifth of the subsidies accrue to households in the bottom 10 percent of the urban income distribution, almost 40 percent accrue to households in the top one-third of the income distribution (households around the middle of the income distribution tend to lose out). The mechanics are straightforward: despite their eligibility for a higher per-unit subsidy, mortgages are significantly less prevalent, and smaller in amount, among poor households. Concerning tax expenditures, on-going work in preparation for the forthcoming MNIlN Housing Sector Strategy paper estimates that in 1992, these amounted to over twice the value of explicit mortgage subsidies (and possibly a lot more, depending on the benchmark used; see Section E of Chapter 2). Tax expenditures were incurred mainly through provisions for mortgage interest deductibility and especially the low taxation of capital gains in non-owner occupied housing. While no detailed analysis has yet been undertaken of the incidence of these tax expenditures, it is likely to be very inequitable. For example, the annual value of mortgage interest deductibility amounts to about four-fifths of explicit mortgage subsidies for people who receive these explicit subsidies alone, and is likely to be much larger for higher-income households who do not receive explicit subsidies. Rough estimates of the incidence of this annual value suggest that households in regular mortgage programs, who are concentrated in middle and upper tax brackets, capture more than four times the benefits accruing to households in low-income mortgage programs. C. Medium-Term Outlook for Expenditures 6.5. Little information is available regarding concrete medium-term public expenditure plans for the housing sector; however, responding. adequately to projected needs-even without taking into account rural needs-is likely to require large increases in CG spending. While a Royal Speech in March 1994 has re-confirmed the provision of low-income housing as a priority for the State and outlined plans for providing an additional 200,000 such housing units, the program's time-frame and costs (including funding sources) are not yet clear.12 In general, however, the resource costs-not all of which will need to be shouldered by the public sector, of course--of keeping the provision of housing abreast of medium- term needs (in addition to closing the backlog of unmet needs) promise to be very substantial. By way of example, given the projected urban population growth and household profile," it is estimated that over l / Eligibility conditions for mortgage subsidies include: (i) a 5 percentage-point interest break in cases where the size of the housing unit does not exceed 100 square meters, its value does not exceed DH 150,000, and the purchaser's income does not exceed DH 36,000 per year; (ii) a 2 percentage-point interest reduction in cases where the value of the housing unit does not exceed DH 300,000, and the purchaser intends to live in or rent the unit; and (iii) for Moroccan residents abroad, a 4 percentage-point (2 percentage-point) interest break for mortgages of under DH 100,000 (DH 200,000), independently of the purchaser's income or the size and value of the housing unit purchased. 12/ It is significant that this suggests a shift in emphasis from concentration on the provision of serviced lots to the provision of completed housing units. Following the Royal Speech, commissions have been set up to cost and implement the program, as well as (more generally) to review the regulatory framework and identify ways to alleviate constraints on private sector supply of housing. 13/ Assumptions concerning the evolution of the urban population profile are based on projections by the Direction de la Statistique's CERED. They include: (i) the growth in the number of urban households, at an average of 4.1 percent per year, outpacing the urban population growth, due to the changing age profile; and (ii) a declining household size (an estimated 4.5 individuals per household by 2002, compared with about 5.2 in 1990 and 5 presently), due to a continuing m:ai\morpp\repotbsgtetdoc Public Expenditure: Issues and Outlook Page 69 the period 1994-2002, an average increase in the housing stock of about 127,000 units per year would be required to avoid a shortfall in accommodating new flows, even without providing for any reduction in the backlog of unmet needs."' This is well over twice the number of (regulation) housing units completed in recent years. While it is uncertain what share of the costs associated with any increased supply of housing the MoH budget would have to bear (MoH expenditures would presumably continue catering to the low-income segment of the market), it is possible that to meet reasonable targets the average real growth in the MoH budget through the end of the decade would need to be at least as large as that observed over the past few years (over 20 percent annually). 6.6. However, certain housing-sector-related measures could help relieve part of the overall burden that future housing needs risk imposing on the CG budget. At least three sets of measures warrant careful examination, as their impact on the CG budget could be substantial. The first and most important, already under consideration by the Moroccan authorities, concerns the possibility of selling at least part of the State-owned housing stock. Currently, the housing units in question are rented to Government employees; preliminary estimates suggest that the overall revenue yield from their sale to present tenants could amount to some DH 10 billion." The second set of measures concerns the possibility of generating savings in CG expenditures on mortgage subsidies (as well as in implicit tax expenditures) through better targeting. The targeting of explicit subsidies could, for example, be improved by replacing the current system of housing-value-related interest breaks with a system of means-tested purchase grants (these would also help overcome facilitate the securitization of mortgages, and thus help develop the mortgage market). The third set of measures concerns the possibility of a comprehensive review of the impact of urbanization standards and zoning regulations on the cost of housing, particularly the underlying land, to ensure that the right tradeoff is being struck between standards and the cost of low-income housing." decline in fertility. 14/ The "backlog" is difficult to estimate: a low-range estimate might be in the neighborhood (no pun intended) of 150,000 housing units needed to accommodate households living in shantytowns; a high-range estimate, based on what would have been required to absorb the full new flow of urban households over the past decade, would be about 500,000 housing units. At least part of this latter need, however, has been met through non-regulation housing which it would cost much less to bring up to standard than to rebuild entirely. On-going programs, including a World Bank-supported project, already provide for re-housing some 100,000 current shantytown dwellers; however, these will take several years to complete. 15/ This issue is discussed in Price Waterhouse (1993); see in particular the volume on housing. The housing units in question are managed by the Ministry of Finance's Direction du Patrimoine; billing and collection of rents (which are generally below market equivalents) is handled by the Compagnie Immobilire et Foncire Marocaine (CIFM), a subsidiary of the Caisse de Dip6ts et Gestion (CDG) that is slated for privatization. 16/ In general, the cost and availability of urban land has been a sharp constraint on housing development (as well as on industrial and commercial businesses; for a discussion of this point, see World Bank, 1994f). For a comparison of land costs in Morocco with those elsewhere, see Price Waterhouse (1994). Among the causes of the land constraint-- to be elaborated on in the forthcoming Housing Sector strategy paper-are almost certainly: (i) zoning regulations; (ii) features of the tax system which ostensibly serve to encourage land development and construction but in effect confer bigger rents on urban land; and (iii) weaknesses in the system for securing land claims and resolving disputes concerning such claims. Specifically in regard to public housing programs, it is significant that the State's once ample reserves of unused urban land, which could be provided as a cheap input into such programs, are now reportedly becoming more scarce. m:\&li\morpcxplpoft\hgtxt.doc Page 70 Public Expenditure: Issues and Outlook In addition to these measures, attention will clearly need to be concentrated on the following areas: (i) developing the mortgage market, which remains stunted (the success of this hinges on overall financial sector reform, including breakage of the closed Treasury circuit for long-term loanable funds); (ii) removing barriers to the growth of private housing developers (for example, by introducing competitive bidding for Government contracts in low-income housing programs); and (iii) strengthening the legal and regulatory framework, in particular concerning land claims. m:\ali\mor\pozp\rportlhsgtexLdoc Public Expenditure: Issues and Outlook Page 71 CHAPTER 7: AGRICULTURE Public provision is significant in many agricultural and related services, and is funded mainly (in an amount equivalent to 1.4 percent of GDP) by the CG budget. Tax expenditures are also non-negligible. Given the rural nature of poverty and the prevalence of agriculture in rural Morocco, public expenditures in agriculture are potentially a key poverty reduction instrument. Their incidence (and that of tax expenditures) has not been reliably measured, but rough estimates suggest that about one- fifth of investment spending is well targeted to poorer households. Environmental and water resources, the management of which is often closely linked with agricultural activities, are increasingly under strain; this is particularly true of water resources. However, public expenditure allocations to environmental and water resource management, while increasing, remain modest, and their impact is probably minor compared to what rationalizing water tariffs would achieve. The private sector is already well established in Moroccan agriculture, but further increases in its participation are called for, both through greater cost recovery for water use and in terms of the physical provision of certain agricultural products and services. No final plans have been drawn up concerning the overall medium-term evolution of public expenditures in agriculture, but stated priorities include allocations to the Agricultural Development Fund (FDA), and the (costly) National Irrigation Program (PNI). Since finding for the PI is likely to be drawn at least partly from reallocations in the agricultural budget, a carefid assessment ofits costs and benefits relative to those ofalternative agricultural investments is critical. Recommended follow-up: * Undertake detailed assessment of the incidence of public agricultural expenditures, including tax expenditures, on the rural poor * Prepare and implement measures to increase cost recovery in irrigation; the extra resources could be used to increase the efficiency of irrigation systems and investment in environmental protection. * Review the costs and benefits of the National Irrigation Program. * Accelerate privatization and opening to private sector provision in agriculture and agro-industry. 1/ This chapter is based on Lindert (1994). For the purposes of this chapter, the agricultural sector comprises both irrigated and rainfed productive activities. Major items of public expenditure in the sector include those on irrigation projects, rainfed land improvement works, crop production investments, integrated development projects, protection and conservation of natural resources (such as forests, soil, and watersheds), rangeland and livestock management, agricultural training and extension, and crop protection. In addition to administrative overhead and regulation, major agriculture-related support services include the operation and maintenance of agricultural investments, and research services. m:\ali\mor\pcxp\rcportlagritrxt.doc Page 72 Pubic Expenditure: Issues and Outlook A. Background on the Sector and Public Expenditure 2 7.1. Public provision remains important in many agricultural and related services, and is funded primarily by the CG budget; LG expenditures are very limited. The Ministry of Agriculture and Agricultural Development (MAMVA), which is divided into central directorates, heads public provision efforts at the CG level and accounts for the bulk of public expenditures in agriculture. MAMVA is represented by various outreach branches at the regional and local levels: in rainfed areas, 46 Provincial Directorates of Agriculture (DPA's) and 122 local offices (CT's) implement MAMVA programs in their respective areas; in most irrigated areas, publicprbgramrare implemented bynineRegional Agricultural Development Authorities (ORMVA's) and 156 local administrative and technical units of MAMVA.1 Practically all the expenditures of MAMVA's central and outreach (DPA, CT, and CMV) units, and the bulk of expenditure associated with the activities of the ORMVA's, appear in the CG accounts through MAMVA's budget; in total, these have amounted to some 1.3-1.4 percent of GDP in recent years. At the LG level, certain rural communes support limited agricultural programs through funding from their general budgets.' Other public agencies involved in the sector include the National Agricultural Credit Bank (CNCA)l and roughly a half a dozen parastatals.6 Table 7.1 summarizes capital expenditures as / Morocco's agricultural sector contributes to roughly 23 percent of GDP (17 percent excluding agro-industry), 40 percent of employment, and 30 percent of exports. Agriculture is predominantly rainfed, with 75 percent of the rural population living in rainfed areas. Cereals and pulses, mainly rainfed, occupy nearly 80 percent of all cultivated acreage. Irrigated areas constitute only 18-20 percent of total cultivable land (of around seven million hectares), although they contribute roughly a quarter of total agricultural value added. Agro-industry in Morocco, broadly defined to include agro-processing and its network of marketing and support services, has already been the subject of a major study; see World Bank (1993e). Ownership structure is diverse in agro-processing industries in Morocco; despite a growing private share, public ownership, management and control are still significant (the public sector accounts for roughly 24 and 27 percent of all agro-processing output and investment, respectively). 3/ While the ORMVA's have the legal status of administrative enterprises, they are under the technical supervision of MAMVA and most of their budget is channeled through the budget of MAMVA (although the ORMVA's also receive revenues from water charges that are independent of their MAMVA allocation). / A nominal amount (0.6 percent) of the LG share of the value added tax is set earmarked for agricultural services in the consolidated LG budget. These outlays generally fund projects executed by the CG (primarily in rainfed areas). S/ The CNCA, a financially autonomous state-owned bank, provides most of the short-, medium- and long-term financing extended to the agricultural sector (the CNCA handles about 60 percent of total agricultural lending). Roughly 65 percent of CNCA lending is directed towards rained areas. The CNCA is represented at.the.regional level by CRCA's (regional outreaches) and at the local level by the CLCA's (local outreaches). 6/ These include: (i) the National Cereals Marketing Board (ONICL), which, following a deregulation of many activities in the cereals sector, focuses on quality control, market monitoring, and coordination (it also manages the subsidy on high-extraction flour, as discussed in Chapter 3); (ii) the Agricultural Land Management Corporation (SOGETA), which specializes in the grape/wine industry, land management and the production of quality seeds, livestock and milk; (iii) the National Agricultural Development Corporation (SODEA), which manages some 70,000 hectares of land granted by the Government; (iv) the Moroccan Agricultural Products Marketing Company (COMAPRA), which specializes in cotton ginning and marketing, and the procurement of sunflower; the Agricultural Land Management Company (COMAGRI), which participates in the development of the livestock sector by making pure-bred or genetically improved animals available to herders for breeding purposes; (vi) the National Livestock Development Corporation (SNDE), which manages livestock farms for increased milk and meat production, produces fodder and introduces m:\al\mor\pcup\rcport\agritext.doc Public Expenditure: Issues and Outlook Page 73 well as recurrent outlays on personnel and goods and services for the 7 Figure 7.1 - Public Expenditures in Agriculture: agricultural sector. It is Non-Irrigation Outlays, Period Average 1988-94 noteworthy that CG expenditures in the sector have fallen over the past Z decade, from 5.6 percent [ of total CG outlays and U&7 1.7 percent of GDP during - na... the period 1984-87 to 4.6 " of CG expenditures and .. 1.3 percent of GDP during the period 1988-94. TRADUN. MM. F.ORO R C ..0. L HTMO FRDUCTIOw mrTeTIO MII.mN MPRT Figures 7.1 and 7.2 . present a breakdown of outlays (both capital and recurrent goods and services) by subsector for irrigation and non-irrigation activities. As detailed in Table 7.2, the extent of public provision in agriculture varies by subsector. While the agricultural sector as a whole is predominantly private, in certain subsectors (such as irrigation, agricultural research, training, and extension) most investment Figure 7.2 - Public Expenditures in Agriculture and services continue to Irrigation Outlays, Period Average 1989-93 be accounted for by public aa.0 95 entities. In other 900.0 90.0 17 subsectors (including crop mo aproduction and livestock), S00*0 the public sector's role has -". become more limited and 300. concentrated on the 20.* Is. 1provision of specific 10* services. am ma 1 maow bn." am"u 05tw 0&J m Cs&~ m Sao livestock breeds and techniques tailored to Moroccan agriculture. On this, see World Bank (1990a). 2/ Most public expenditures are captured in the CG (MAMVA) budgets (capital, recurrent); MAMVA allocates the necessary funds from its capital and recurrent budgets to its external services (regional and local). Unlike the capital budget and the non-wage recurrent budget, the recurrent budget for personnel (wages and salaries) is not desegregated by function or sub-sector. m:\ali\mor\pexp\report\agritextdoc Page 74 Public Expenditure: Issues and Outlook Table 7.1 - Sunmary of Public Expenditures in Agriculture (nillions of DI unless otherwise specified) Average Est. Average 1984-87 1988 1989 1990 1991 1992 1993 1994 198894 Central Government 2189 2242 2516 2931 2949 3387 3591 3883 3103 (as % of total budgetary CO spending) 5.6% 4.5% 4.5% 4.8% 4.5% 4.7% 4.7% 4.5% 4.6% (as % of GDP) 1.7% 1.2% 1.3% 1.3% 1.2% 1.4% 1.4% 1.3% 1.3% Wages and Salaries 455 347 381 411 431 505 540 568 455 Other Recurrent 588 612 633 775 803 869 953 1022 810 of which non-irrigation (%) 67% 100% 78% 77% 80% 81% 83% 100% 86% of which irrigation (%) 33% - 22% 23% 20% 19% 17% - 14% of which LSI (ORMVA's) (b) 99% - 100% 100% 100% 100% 100% - 100% MAMVA Investments (w/o FDA) 1546 1134 1367 1434 1409 1715 1825 1939 1546 of which non-irrigation (%) 39% 47% 46% 41% 51% 43% 52% 51% 48% of which irrigation (%) 61% 53% 54% 59% 49% 57% 48% 49% 52% of which LSI (ORMVA's) 2 (%) 79% 74% 87% 89% 88% 81% 83% 85% 84% Other Investments National Forestry Fund SA (FNF) - - - 100 100 110 120 120 110s Agricultural Dev. Fund (FDA) - 149 136 211 206 188 152 234 182 Local Governments - - - 26.3 23.9 63.5 - - - (as % of total budgetary CO spending) - - - .04% .04% .09% - - - Other Public ONICL - 2235 1630 1984 4507 2680 1832 - 2645s Notes: ' Actual payments for all years except 1994. For 1994, actual payments were estimated by applying a coefficient of actual/planned expenditures for 1993 to the planned expenditures for 1994. 2 ORMVA expenditures also include outlays on livestock, extension and crop production activities within their respective geographical areas. Desegregated data on these outlays are not available for an extended period. The ORMVA's receive revenues from water charges which currently represent roughly 85% of direct operating costs. Data on these revenues are not available over an extended period of time and have thus not been included in these estimates. s Averaged for available years. Source: DPAE - MAMVA, Ministry of Finance, and ONICL. SA = Special Treasury Account. m:\ali\mor\pcxp\rcpost\agritcxLdoc Public Expenditure: Issues and Outlook Page 75 Table 7.2 - Public Provision in Key Agricultural Subsectors Subsector and Public Institutions' Nature of Public Provision Private Sector Participation Livestock Public provision Main PE items in livestock include: animal health efforts: one- Many activities private (herding, etc.). Since carried out by DE in MAMVA third of budget (primarily large-scale vaccination campaigns); the 1980's, many livestock services have at CO level; MAMVA genetic improvement efforts: 20 percent; animal nutrition and experienced a shift from public-sector represented by DPA's, CT's rangeland management: 7 percent; projects in eastern provinces: domination towards increased private provision, and CMV's at the regional and one-third. Other: capital grants for private investments in particularly in animal health services and local levels. livestock through FDA. genetic improvement efforts. Crop Production. The DPV in PE concentrated on providing technical assistance, promoting Crop production (farms, etc.) is largely private. MAMVA heads efforts at CO improved technology and resistant crop varieties, providing Public role reduced with the liberalization of level; MAMVA represented by infrastructure, and supporting integrated development projects in cropping patterns in irrigated areas and the DPA's, CT's and CMV's at rainfed areas. Other: capital grants for private investment in crop transfer of responsibility for managing regional and local levels. production through FDA. contracting, input supply, and processing of industrial crops to private agro-industrialists. Forestr y and Soil PE focus on: demarcation and regeneration of natural forests, Virtually all forests are state-owned, although Conservation. Public efforts plantation establishment, watershed management, construction, harvesting is carried out by private loggers conducted by the DEFCS in equipment and maintenance outlays for forest service stations, under DEFCS supervision. Since the early MAMVA at the CO level; rehabilitation of arid zones, and the national zoo. In addition to 1980's, the CO has shifted significant regional and local Forest allocations from the MAMVA budget, the DEFCS benefits from components to LO's and the private sector. Services manage outreach significant extra-budgetary support, in particular from the National Communes have begun committing a share of efforts. Forestry Fund (FNF). revenues from the sales of forest products to regeneration and reforestation activities; land preparation and establishment of plantations is contracted out to the private sector. Agric. Training & Extension. PE concentration on: outlays for equipment and materials and Agricultural training and extension efforts are Efforts conducted by DERD in construction of buildings for the various institutes involved in largely public. Negligible participation by MAMVA at CG level; DPA's, agricultural training and extension (technical secondary schools, private sector (less than 2 percent of activities in ORMVA's, CT's and CMV's continuing education centers, the national forestry school, etc.); 1992).' manage regional and local scholarships, local extension centers. programs. Numerous public training institutes 2. Agric. Research. Main CG PE primarily includes: outlays on personnel, transport, materials Independent private sector involvement in agency: INRA. Limited and preparatory studies in support of INRA's main research agricultural research appears negligible, except research programs by DPA's programs (agriculture in arid zones, seeds, technology transfer, for the Society for Agricultural Services in & ORMVA's at regional level. fruit trees, palm and date production, and pastures). Morocco (SASMA), an apex cooperative Citrus research conducted on institution that conducts research on fruit and Royal Estates. vegetable production. Notes: 1 Following a reorganization in April 1993, the central directorates in MAMVA include: Crop Production (DPV); Livestock (DE); Education, Research and Development (DERD), which also covers extension activities; Forestry and Soil Conservation (DEFCS); Plant Protection (DPVCTRF); the Administration of Rural Engineering (AGR), which oversees three directorates: Irrigation Development and Management (AGR/DDGI), Hydro- Agricultural Works (AGRIDAHA), and Land Improvement (AGR/DAF), which covers rainfed land development efforts; Planmng and Economic Affairs (DPAE); Administrative and Judicial Affairs (DAAJ); Public Enterprises and Professional Organizations (DEPAAP); and Human Resources (DRH). In addition, MAMVA oversees the National Institute for Agricultural Research (INRA) and the Directorate of Land Conservation, Cadastre and Mapping (DCFCC), which maintains its own budget. Large-scale irrigation is the responsibility of nine Regional Agricultural Development Authorities (ORMVA's), which maintain a distinct legal identity. CG = Central Government; LG = Local Government; PE = Public Expenditure ' Other autonomous institutions conduct agricultural research, including: the Agricultural and Veterinary Institute Hassan II (IAV) in Rabat and the National College of Agriculture (ENA) in Meknes, both of which provide university level education and are overseen by the DERD. Although these agencies are financially autonomous in principle, all are supervised and primarily funded by MAMVA. 'See Price Waterhouse (1993). Other sources: World Bank (1988,1989a,1989b,1993a, and 1994g). m:\ali\mor\pcxp\report\agriteLdoc Page 76 Public Expenditure: Issues and Outlook Table 7.2 (Continued) - Public Provision in Key Agricultural Subsectors Subsector and Public Institutions Nature of Public Provision Private Sector Participation Plant Protection. Efforts led DPVCTRF provides plant protection services primarily to combat Although activities are "public service" in by the DPVCTRF in MAMVA pest populations that are frequently shifting or where reliance on nature, the Government is seeking to increase at CO level; DPVCTRF private operations would not be appropriate due to externalities. farmer participation in pest control to improve operates outreach field stations PE concentrated on rodent and bird control, pest control, the forecasts of pest attacks and assist farmers in and maintains about 30 plant provision of infrastructure, plant protection, seed quality control, detecting and identifying pests responsible for protection inspectors. and the prevention of fraud. crop damage. RaifedLandDevelopment and Main PE items include: outlays on land consolidation and Private sector involved in various stages of Land Policy. Efforts led by restructuring efforts, which seek to improve the efficiency of these efforts. For example, for destoning several agencies, including: investments and to gain economies of scale in production; efforts, heavy rocks are brought to the surface DAF, DCFCC,' and DPV at destoning, whereby heavy rocks and stones are brought to the by private contractors financed by MAMVA the CO level. surface; cadastral services; and topographical surveys. Other: and removed manually by private farmers. capital grants for private land development investments through Many land development investments undertaken FDA. by the private sector (in some cases partially financed by the FDA). SMSI. ' Efforts overseen by Since the mid-1980's, the Government has increasingly Minimal private sector participation in direct DAHA in MAMVA at the CO emphasized SMSI schemes because of their relatively lower unit SMSI development. Investments primarily level. Regional efforts costs, faster accrual of benefits and greater impact on poverty than undertaken by public sector. Development of managed by the DPA's and LSI works. Irrigation policy has also underlined the importance water user associations is being encouraged. ORMVA's in their respective of improving existing water use through rehabilitation and more geographic areas of efficient O&M of existing schemes. Main PE items include: responsibility. preparatory studies, buildings and equipment, maintenance, repairs, hydro-agricultural improvement works, and technical material. LSI. Activities undertaken by Since the mid-1980's, PE in LSI has focused on rehabilitation and Direct private sector participation in ISI nine ORMVA's which have the efficiency improvements for existing ISI schemes (reconstruction activities is minimal. Since the late 1980's, the status of administrative of irrigation distribution systems, upgrading of main canals, ORMVA's have withdrawn from commercial enterprises and are under the rehabilitation of flood irrigation systems, improvement of activities (such as mechanized cultivation technical supervision of subsurface drainage, replacement of pumping equipment, services, input supply, and veterinary services). MAMVA and financial control rehabilitation of feeder roads, etc.). Water users' associations have emerged to take of the MoF. over part of O&M from the ORMVA's. AgrilturalDevelopmentFund The FDA provides capital grants to encourage selected private Investments for which FDA grants provide (FDA). Overseen by DPAE in investments. Through its partnership with private operators, the partial funding are made by private farmers. MAMVA. Funds disbursed by FDA has four principal objectives: (i) introducing new CNCA. technologies; (ii) promoting investments that generate positive externalities; (iii) providing a transitional means for the Government to reduce its budgetary share of investments before withdrawing completely from their provision; and (iv) transferring income to the poorest farmers. FDA disbursements fall into two categories: "upstream" investments, which mainly consist of small tractors and small-scale equipment; and "downstream' investments, which mainly include larger equipment (e.g., irrigation equipment). Notes: SMSI = small- and medium-scale irrigation; LSI = large-scale irrigation; O&M = operation and maintenance. The DCFCC maintains its own budget apart from the MAMVA budget. s SMSI schemes are distinguished from large-scale schemes (LSI) by three principal factors: (i) the majority of SMSI schemes are traditional perimeters where irrigation has been practiced for many years so that farmers are familiar with at least rudimentary irrigation techniques; (ii) the size of SMSI schemes do not generally exceed 2000-3000 thousand hectares, whereas II projects cover upwards of 10,000 hectares; (iii) required investment outlays per hectare is much lower for SMSI schemes, since major civil works are not involved. m:\ali\mor\poxp\report\agritext.doc Public Expenditure: Issues and Outlook Page 77 7.2. Agricultural activities are tax-exempt; this implies non-negligible fftax expenditures"* on agriculture. Following severe droughts in the early 1980's, a Royal Decree was issued declaring agricultural income, agriculture-specific inputs, and most domestic agricultural products exempt from direct and indirect taxation.' These tax exemptions can be viewed as an additional type of public expenditure, in the sense that they forgo revenue entitlements for the State (see also Section E of Chapter 2); likewise, for example, below-normal charges for irrigation water might be viewed as a type of public expenditure. However, the choice of benchmark taxes (or charges) relative to which exemptions or concessions are granted is necessarily subjective, so that there is no correct single way to measure tax expenditures. For illustrative purposes, however, it is interesting to note that if the agricultural sector were subject to the same average effective rates on personal income, business income, and value-added taxes as non-agricultural sectors, tax expenditures might represent roughly 1-2 percent of GDP and 4- 6 percent of total CG general budget expenditures.9 A recent study of the tax incidence on Moroccan agriculture, however, demonstrates that even with a tax-exempt status, the sector bears a non-negligible economic burden of taxes and levies."o B. Key Sector Issues Relevant to Public Expenditure Choices 7.3. Key sector-wide issues relating to public expenditures in agriculture include: (i) the extent to which public expenditures address the rural nature of poverty in Morocco; (ii) protecting the environment and conserving natural resources; and (iii) boosting private sector participation and redefining the role of the State in agriculture. An additional issue concerns budgetary execution procedures in the Ministry of Agriculture; problems and recent measures taken are discussed in Box 7.1 (see also Annex 2 for a more general discussion df budgetary procedures in Morocco). The need to increase the efficiency of budgetary execution is also a pressing issue in many other sectors, including health and education. 8/ Certain processed agricultural products are, however, subject to value-added tax, as are raw products placed in cold storage. 9/ For 1993, for example, a rough estimate-probably a substantial over-estimate--indicates that the total tax revenue foregone due to the tax exempt status of agriculture was approximately DH 3.9 billion, or 1.6 percent of GDP and about 5 percent of CG expenditures. This partial equilibrium estimate applies the average effective non-agricultural personal income, corporate, and VAT tax rates to agricultural GDP (at factor cost). It does not allow for behavioral responses to these taxes, nor does it account, for example, for any resulting shift among tax brackets. 10/ See Azam (1994). The tax burden arises from transactions between the agricultural sector and the rest of the economy. To the extent that the agricultural sector purchases goods and services from, and sells its own goods to, the rest of the economy, agricultural output and income can be affected by taxes levied on other sectors. Although some of this economic burden of taxation is offset by subsidies accruing to the sector (such as irrigation water), the study finds that the total levy on the sector, net of these subsidies, a non-negligible share of agricultural GDP. It amounted to 1.68 and 4.21 percent of agricultural GDP in 1985 and 1989 respectively. (The point of reference, of course, is a situation where the economic burden of taxes on agriculture are zero, which could only be ensured if all taxes in the economy were zero. It should also be noted that other sectors of the economy may bear an economic burden that is larger than that suggested by the nominal tax charges to which they are subject.) The dramatic increase in the net burden as a share of agricultural GDP arose largely because of a pronounced fall in the share of the subsidies between the two years, from 3.4 percent to 1.26 percent. m:\ah\mor\pxp\report\agritext.doc Page 78 Public Expenditure: Issues and Outlook Box 7.1: Budget Execution Procedures in Agriculture The Agricultural Expenditure Review (World Bank, 1990a) identified several difficulties in the budget execution process. In particular, delays in the delegation of funds to the committing offices and in preparing and clearing bidding documents were identified as key constraints to the implementation of the investment program of the Ministry of Agriculture. Reforms in budgetary execution were an important focus of the First Agricultural Sector Investment Loan (ASIL I), and substantial progress has been made in this area. The delegation of funds has been accelerated through new budgetary procedures, an important step towards ensuring that funds can be used more uniformly throghout the year. Standardized bidding documents have already been prepared, approved, and distributed to the various central directorates, although there have been reports of occasional rejections of proposed contracts by the Comptroller of Expenditure Commitments (CED). The Government has recently undertaken a major study identifying remaining institutional constraints to efficient procurement, commitment, and disbursement operations (MAMVA, 1994). The study, identifies three main areas where further improvements could be made. The first area involves procedures for making commitments, filing payment orders, and disbursing funds. Problems in this area include: (a) a concentration of commitment and payment orders at the end of the year; (b) difficulties in tracing commitments and payment orders (lack of visibilitd); (c) delays in the processing of commitments and payment orders; and (d) the absence of a permanent evaluation system for relations between administrative services (services & gestion) and inspection services (services de contrOle). The second area identified by the study concerns difficulties with the organization of budget procedures, including: (a) the lack of a formal structure for administrative services involved with budget execution; (b) the lack of formal procedures for processing commitments and payment orders; and (c) cumbersome accounting procedures and the need to switch to a computerized accounting system for commitments, disbursements, and regular reporting. The final area identified by the study as requiring attention concerns inputs, such as human resources and materials, into the budget execution process. Problems identified in this area include: (a) weaknesses in training programs; (b) insufficient resources; and (c) a lack of documentation on budget procedures (laws, directives, etc.) available at administrative offices. The Ministry of Agriculture is taking several steps to redress these issues and improve the budget execution process. Based on the budget study, the DPAE has prepared and introduced a guide for establishing budget documents. Preparation and introduction of a guide for bidding documents is being supported by the Second Agricultural Sector Investment Loan (ASL II). Monitoring of the budget process has also been improved using a new computerized system that generates information regarding the status of commitments and expenditures in a timely manner. 'Contract monitoring sheets* have been prepared and introduced. Finally, concerning human resources, a target group has already been identified for training in budget execution procedures and a training program has been prepared. In 1993, 95 percent of delegations were made during the first quarter; in 1987 and 1988, by contrast, almost half of the total number of delegations were not made until the fourth quarter (45 percent and 52 percent respectively). m:Aimor\pcxp\rpoMgritext.doc Public Expenditure: Issues and Outlook Page 79 7.4. In light of the rural nature ofpoverty in Morocco, public expenditures in agriculture, the primary income-generating activity in rural areas, are potentially a key poverty reduction instrument. Poverty is increasingly a rural problem in Morocco. Close to three-quarters of the poor live in rural areas, and are typically rural wage-earners and small-scale share croppers involved in rainfed agriculture." Although precise data on the incidence of public expenditures in agriculture are generally not available, casual observation suggests that certain outlays are well-targeted to the poor, either because they are directed towards certain regions where the concentration of poverty is higher (as in the case of outlays on area development projects),. or because they are aimed at the agricultural subsectors that traditionally involve the poor (for example, investments- in'rainfed agriculture; suctras land-conisolidation efforts). In particular, rough estimates suggest that at least one-third of non-irrigation investment outlays are directly targeted to the poor." Other expenditures in agriculture could also have an indirect positive effect on the poor, by boosting productivity, raising farm incomes, and creating employment opportunities. Agricultural credit is likewise instrumental in assisting the rural poor, who are targeted for loans via the CLCA's (local branches of the CNCA).11 In recent years, public expenditures in agriculture have been increasingly aimed at rainfed areas, with probable poverty reduction benefits.1' Just under one-half of public investment in agriculture was allocated to the rainfed sector during the period 1988-1994, as compared with just over one-third during the period 1984-87. Likewise, an average of 11/ About one-fifth of Morocco's rural population falls under the poverty line; see World Bank (1994a). 12/ Investment outlays that primarily benefit segments of the agricultural sector where poorer households would likely be concentrated include those on: integrated area development projects (DH 164 million in 1994), land- consolidation efforts (DH 11 million in 1994), and investments under the FDA program (DH 101 million in 1994), which are particularly well-targeted to small farmers (who work on less than 10 hectares), such as small-scale farm equipment, land improvements, and livestock materials. Rough incidence data by farm size are available for investments under the FDA program, and it has been assumed that farm size can be used as a reasonable proxy for household income. It was not possible to do a similar estimates for the incidence of recurrent outlays because of the way in which they are categorized. In any case, it should be emphasized that this is at best a rough approximation of investment outlays that could accrue primarily to the poor. Of course, many other outlays could also benefit the poor, even disproportionately, either directly or indirectly. 13/ The CLCA's process 65 percent of all CNCA loans and make loans to about 600,000 clients, essentially small farmers, artisans, and rural women, who are means-tested for eligibility. Clients must have a fiscal income of less than DH 6,000, which corresponds roughly to an annual net farm income of less than DH 12,000 (about US$1,500). Because many farmers do not hold documented title to their land, the established lending criteria.have been based. on,anotion of fiscal income (that is, income estimated to be derived from existing land holdings plus livestock). Although CLCA lending appears to be targeted to the poor, in the sense that means-tests effectively exclude higher-income groups, it is also clear that a substantial share of potential clients do not benefit from the program (errors of exclusion). Expanding CLCA credit to these clients is constrained by the limited savings and debt service capacity of many rural families with rainfed farms of less than seven hectares, which represent roughly 75 percent of the total number of eligible clients. The majority of these rural families operate at or near subsistence level and generate very few financial surpluses. To increase the accessibility of potential clients to CLCA credit, particularly in rainfed areas, the CNCA has begun expanding its branch network, opening seasonal credit outlets, and developing a new credit policy on eligibility based on the direct assessment of farmers' credit needs and creditworthiness. On this, see World Bank (1993g). 14/ In the irrigated subsector, investments in SMSI, particularly those that rehabilitate existing traditional schemes, tend to favor the poor more than outlays on LSI projects. m:\a\mor\pcxp\rcpod\agnaxt.doc Page 80 Public Expenditure: Issues and Outlook 86 percent of non-wage recurrent expenditures were allotted to rainfed agricultural activities during the period 1988-94, as compared with 67 percent during the period 1984-87. 7.5. Morocco's environmental resources, of which the management falls largely under the agricultural sector, have been increasingly under strain in recent years. Worrisome aspects of environmental and resource degradation include deforestation, soil erosion and the impending water shortage. Forest cover is being threatened by fuelwood collection and overgrazing," resulting in extensive soil degradation. Soil erosion, in turn, is giving rise to severe off-site problems (dam siltation, clogged waterways, and damaged fisheries) in addition to often irreversible on-site consequences (loss of plant nutrients, organic matter and micro-organisms)." Yet perhaps the most important among all environmental problems is the impending water shortage (see also Chapter 9). Between 1990 and 2020, per capita renewable water resources are expected to fall by one half, from 833 cubic meters to 411 cubic meters, so that Morocco will become classified as "chronically water-stressed". Given current incentive structures, virtually all renewable water resources will be mobilized to match demand at the national level by the year 2020. Shortages are already evident in a number of river basins, as reflected in significant groundwater mining." Efficiency of water use in agriculture, which currently accounts for some 85 percent of Morocco's water use, thus presents one of the most critical challenges in agricultural development." Currently, efficiency in the use of water in agriculture-that is, the proportion of mobilized water actually reaching the farms--ranges from 36 to 53 percent." A major factor underlying the profligate and inefficient use of water is the low level of water tariffs, which do not even cover the cost of operating and maintaining irrigation infrastructure. Extensive water losses are not only economically and financially costly, they are also environmentally harmful: they contribute to soil salinity, water logging, water pollution, and the spread of water-borne diseases. 15/ Concerning fuelwood collection, it has been estimated that 85 percent of Morocco's domestic energy needs are met from firewood and agricultural wastes, equivalent to some ten million cubic meters of wood annually, worth DH 700 million (US$74 million), which clearly exceeds the national forests' sustainable yield of some three million cubic meters of wood for all purposes, and is a major cause of the on-going deforestation. As regards grazing problems, over 40 percent of Morocco's livestock range area is found in forested regions. Forest rangelands contribute more than one- sixth (DH 1 billion annually) of the national forage production. Increased population pressure has increased the amount of annual time spent by livestock on rangelands, diluted the authority of traditional institutions over collective rangeland management, and resulted in a gradual abandonment of range rotation. For greater detail, see World Bank (1989b). 16/ It is estimated that roughly one-quarter of the surface area of watersheds in Morocco has suffered from severe soil erosion, which has already led to the loss of some 800 million cubic meters of water storage capacity (out of the total of some ten billion cubic meters of nominal storage capacity of existing dams). Soil erosion, and the resulting dam siltation, causes an additional annual loss of 50 million cubic meters (or 0.5 percent of total dam capacity). 17/ Specifically, in the Tensift and Souss basins, where due to uncontrolled groundwater mining, nonrenewable groundwater resources are being depleted. 18/ For example, extrapolation from past trends suggests that by 2020 the share of agriculture will have to go down to a least 77 percent, as competition with domestic and other non-agricultural demand intensifies. For details, see World Bank (1994e). 19/ See World Bank (1994e). m:\ahmor\p.xp\rcport\agritext.doc Public Expenditure: Issues and Outlook Page 81 7.6. Concern for environmental resources is being translated into increased, though still modest, public expenditure share allocations. The share of public investment in agriculture that is being devoted to forestry and soil conservation has increased from 7.3 percent during the 1970's to 8.5 percent in the early 1980's and to 11.2 percent during the period 1988-1994. Other investments in the preservation of land resources include outlays on crop protection, rodent and bird control, and phytosanitary protection (totalling one percent of the total investment budget in agriculture in 1994). In addition, modest public expenditures support land preservation through the FDA, which finances a share of private investment in land improvements such as soil erosion control and land leveling (these total 0.5 percent of the total investment budget in agriculture- in-1994). Public,expenditures are also being used to promote more efficient water use, although their effect is probably limited in comparison with what might be achieved through pricing adjustments. Outlays geared towards more efficient water use in SMSI areas totalled 2.3 percent of the total investment budget in agriculture in 1994. In these areas, public expenditure have supported the adoption of water-saving devices and techniques to limit waste and unnecessary water loss, such as water-metering systems, lined field canals, gated pipes, mechanized brigades to control floods, and sprinkler and drip irrigation equipment. Effort has also been directed at the rehabilitation of existing SMSI schemes to improve the efficiency of water use. In addition, an environmental information system is being developed for SMSI schemes and pilot tests are being conducted for the re-use of waste water as an alternative means to expand the availability of water resources. Similar efforts are being directed at LSI (ORMVA) areas, but data regarding the breakdown of investment items are unavailable to allow an estimate of the total amount allocated to these activities. Support for water conservation is also channeled through the FDA, which finances a share of private investments in hydro-agricultural works (funds allocated for this purpose totalled 4.5 percent of the total agricultural investment budget in 1994). 7.7. Although the private sector is already well established in Moroccan agriculture, further effort to boost private sector participation, both financially (notably through increased cost recovery for water use) and in terms of the physical provision of agricultural products and services, is warranted. Unnecessary public sector involvement in the agricultural sector has proven to be costly, by placing a strain on limited budgetary resources and reducing the overall efficiency in the sector. One of the Government's principal objectives is to redefine the role of the State in agriculture by increasing reliance on the private sector and strengthening public administration through greater accountability, decentralization and increased efficiency." To achieve this, State withdrawal has been sought from the provision of many services in which the private sector has displayed an interest. However, greater effort is warranted in at least two areas. Concerning the provision of irrigation water, costs are largely borne by the public sector; private contributions are inadequate.' Water resources are owned by the State, and the view that water should be available free of charge 'is deeply rooted. in Moroccan culture. Accordingly, water is delivered free of charge to the point of primary distribution for agricultural uses. In general, charges for the use of irrigation water are well below long-run marginal costs and cover only 20/ For further discussion of these issues, see World Bank (1994g). 21/ Private sector participation is stronger for other inputs: land is largely private (roughly 77 percent of all land is in private hands, 12 percent is owned by communes, and five percent is held by military pensioners and religious orders. Just six percent is owned by the State) and the production and distribution of fertilizers, seeds and pesticides have been liberalized since the mid- to late 1980's, opening up the way for private sector participation. m:\ali\mor\pcxp\report\agritcxLdoc Page 82 Public Expenditure: Issues and Outlook about 85 percent of direct operating costs, excluding depreciation.' These low water charges represent a significant subsidy to irrigated agriculture, and an important outlay, or loss of revenue, to the State. More importantly, they fail to encourage optimal use and conservation of water. Concerning private sector provision of agricultural services and products, storage services and the provision or processing of certain outputs remain largely under State ownership or control? The public sector still accounts for roughly one-third of existing storage capacity.' Limited access to storage and a poor range of facilities remain a significant constraint for farmers and agro-industrialists; this constraint could be eased by greater competition in the provision of these services. In addition, provision or processing of certain agricultural products remains substantially in the public sector. While sugar is harvested, primarily- by' private operators, the thirteen domestic sugar mills are publicly owned.' Likewise, whereas production of oilseeds is private, collection, crushing, and refining are largely handled by the public sector. In wine production, the public sector possesses a virtual monopoly: the private sector only accounts for only 10 percent of wine production and 5 percent of exports.' C. Medium-Tern Outlook for Expenditures 7.8. While no concrete plans for the overall medium-term evolution and allocation of public expenditures in agriculture have been indicated, one stated priority concerns allocations to the Agricultural Development Fund (FDA). Since its introduction in 1986, the FDA has quickly become an important component of public investment in agriculture (in recent years, it has typically accounted for over one-tenth of the agricultural investment budget). As detailed in Table 7.2, the FDA's aims include fostering the introduction of new technologies, promoting investments that generate positive externalities, 22/ Water charges are legally divided into three parts: a volume charge to cover all direct operating costs and depreciation (exclusive of pumping costs), plus 10 percent of investment costs; a separate pumping charge that is also volume based to cover energy costs; and a land betterment levy, to recover 30 percent of initial investment costs. However, all farmers with less than five hectares of land (representing 75 percent of all farms and 84 percent of all irrigated farms) are completely exempt from these charges and farmers with between 5-20 hectares are partially exempt. For details, see World Bank (1994e). 23/ However, there has been significant State withdrawal from the provision of other basic services, notably veterinary and genetic improvement activities in the livestock sector. 24/ The Ministry of Agriculture also provides capital grants to private operators for some investments in cold- and cereal-storage through the FDA. 25/ The two refineries are private. 26/ For most other agricultural outputs, the production and marketing of most agricultural produce is largely in private hands. Cereals are produced by private farmers and processed by private millers, although the ONICL has traditionally controlled cereals marketing activities. In the livestock subsector, most production activities are private, although the State has intervened by establishing milk collection centers which are now run by cooperatives. Vegetable and citrus production and marketing is predominately private, but 20 percent is produced by parastatals. More generally, the State continues to exercise a pervasive influence over the agricultural sector through pricing and marketing policies and regulations which, inter alia, serve to limit import competition and to stabilize prices and margins. m:\ai\nor\poxp\repost\agritcxLdoo Public Expenditure: Issues and Outlook Page 83 providing a transitional means for the State to reduce its funding for agricultural investments before withdrawing completely from provision, and transferring income to the poorest farmers. The choice of investment items eligible for program grants (for example, those that are typically purchased by small farmers) helps self-target FDA outlays; ceilings are also being- introduced to limit the frequency or amount of funding that a given individual can obtain to prevent repeat financing for the same investment (for example, established technology). Authorities in MAMVA have indicated a commitment to increased FDA allocations, but the size of such increases are unclear. However, a trend in the FDA budget relative to other items is already manifest: FDA outlays rose by close to half in real terms in 1994, far more than any other subsector in agriculture (in fact, the budgets of most other subsectors declined, with the exception of forestry and soil conservation and irrigation). 7.9. A second stated priority is the (costly) National Irrigation Program (PI). The PNI was initiated in November 1992 with two primary objectives: (a) to overcome delays in the irrigation program and reach the goal of irrigating one million hectares; and (b) to put existing dam capacity, as well as that of the El Wahda dam (scheduled for completion in 1997), to use. These objectives are to be achieved by: (i) extending the irrigated area by 251,000 hectares, which represents an increase of close to 30 percent (from 871,000 hectares to 1.12 million hectares);' and (ii) rehabilitating some 204,300 hectares of existing irrigated land. While the rehabilitation component concentrates primarily on SMSI, the new areas will be virtually exclusively LSI. Planned investments under the PNI have been costed at close to DH 42 billion (at 1993 prices)." This estimate includes the capital costs of the irrigation facilities, the rehabilitation of part of the existing perimeters, and the incremental recurrent costs of support services, O&M, and debt service. Of the required expenditure, some 42 percent is to be financed directly by the CG, 36 percent through external borrowing, and 14 percent through water charges. The implication is that annual CG outlays on investment in irrigation, which averaged around DH 0.9 billion (or around 0.4 percent of GDP) during the period 1988-94, would need approximately to double to around DH 2 billion in 1993 prices (around 0.7 percent of projected 1995 GDP) during the period 1995- 2000.' This near-doubling amounts to well over a fifth of total present CG outlays in agriculture and close to 40 percent of the agricultural investment budget. Since the agricultural budget does not presently make an allowance for the PNI, total CG outlays in agriculture would have to rise substantially to accommodate its introduction while maintaining other programs. 7.10. Since at least part of the jinding for the PNI is likely to be drawn from a reallocation of CG outlays, a careful assessment of its benefits relative to those of alternative agricultural investments is critical. A thorough economic, environmental, and social assessment of the planned PNI program has not yet been conducted. Using rough assumptions, MAMVA projects that the PNI will yield an 27/ Of the planned expansion, 185,000 hectares is to supplied by existing dams and 66,000 by the El Wahda dam. 28/ Of the 204,300 hectares scheduled for rehabilitation, 138,000 hectares are planned for SMSI schemes and 66,000 hectares are intended for existing LSI projects. Of the 251,000 hectares scheduled for new irrigation projects, 235,000 are planned to involve LSI schemes and only 16,000 are intended for SMSI. 29/ For a fuller discussion of these cost estimates, see World Bank (1994e). 30/ This estimate comprises only the share of projected annual PNI costs forecasted to be covered by CG expenditures (assuming that the rest of the financing needs are met as planned). m:\ali\mor\pcxp\rcpotlagritcxLdoc Page 84 Public Expenditure: Issues and Outlook incremental DH 8 billion (at 1991 prices) per year in value added (33 percent of the agricultural value added and eight percent of total GDP in 1991, the time of the assessment)." It is also projected that income generated from the PNI will support over one million people and that the program will contribute an extra DH 3.6 billion (at 1991 prices) in export earnings." The assumptions used for these estimates are based on modest rises in input prices, real declines in energy prices, and a maintenance of producer prices (which were highly protected at the time of the assessment). However, given the overall commitment to liberalization, these assumptions require careful examination (and updating), as do assumptions regarding higher value crop production projects. In particular, the viability of such projects may be biased upward by low water tariff assumptions. Moreover, many of the LSI projects planned under the PNI have been shown to be economically marginal due to heavy clay soils or high pumping costs, or are considered risky due to land tenure complications, large holdings by absentee landlords, or the prevalence of traditional farming systems that are difficult to modernize. 7.11. Increased allocations to the FDA could have favorable effects on poverty, the environment, and private sector development; as regards outlays on the PNI, the picture is less clear. Concerning poverty reduction, many of the investments funded by FDA (for example, in small-scale equipment, certain livestock materials, land improvement, hydro-agricultural works) is undertaken by small farmers." To the extent that farm size can be used as a proxy for income levels, and hence poverty classification, the program appears to be at least partly targeted to investments that help to raise the productivity and incomes of the rural poor. (The 1990-91 LSMS, however, indicates that membership of a household headed by a wage-earner is likely to be a more reliable indicator of poverty than small farm size; see World Bank (1994a).) Under the PNI, rehabilitation of existing SMSI schemes also have the potential to reduce poverty. However, most of area to be covered by the PNI will involve LSI investments, which tend to have a lesser impact on the poor. Moreover, large numbers of poor households will not be impacted by the PNI. Regarding environmental resources, many soil conservation investments and hydro-agricultural works financed by the FDA have the potential for positive externalities in resource conservation. The environmental impact of other items financed by the FDA, however (such as investment in land clearing, destoning, breaking up the soil, and tube-well drilling), could potentially be negative. An environmental assessment of the PNI has not yet been conducted. Several factors, however, could potentially entail negative repercussions on the environment and natural resources if proper measures are not taken. Insufficient cost recovery and low water tariffs have contributed to a lack of incentives for water conservation; in certain areas targeted for PNI intervention, the limits of water availability are already being pushed. There is a risk that profligacy and consequent shortages will be aggravated in the future: by absorbing about 60 percent of the country's water resources, LSI contributes to increasing competition for, and development cost of, water resources. Moreover, for LSI schemes, environmental sustainability is at risk in a growing number of situations where soil quality is deteriorating and salinity is mounting. Given their more modest objectives, SMSI schemes generally entail fewer environmental and resource problems. Finally, as concerns private sector development, the FDA serves 31/ See MAMVA (1993). 32/ All figures in 1991 DH. 33/ For example, in 1991, 100 percent of FDA subsidies on drainage investments accrued to farms smaller than five hectares, 93 percent for investments in the control of gully erosion, 95 percent for the construction of small earth terraces, etc. m:\aiAmor\pexp\rcportlagritexLdoc Public Expenditure: Issues and Outlook Page 85 as a type of "halfway house", partially financing investments (for example, in land improvement) that were previously made by the State before transferring them entirely to the private sector.3 By contrast, the PNI is largely a public undertaking, except for the planned increases in financial contributions of farmers (which are expected to cover 14 percent of the total costs of the program). 34/ It is important to note, however, that many investments now financed by the FDA were previously undertaken by the private sector without FDA grants but were deemed eligible for the FDA program because they furthered one or more other policy objectives. m:ali\mor\pcxp\report\agritcxLdoc Page 86 Public Expenditure: Issues and Outlook CHAPTER 8: TRANSPORT I All transport-related infrastructure and many services (including rail and air transport, and some maritime transport) are provided by the public sector. Major issues in road transport include the less-than-satisfactory capacity and condition of the road network, the neglect of rural roads, and stringent public regulation of trucking. In railway operations, a recent maintenance and rehabilitation backlog owes largely to the railway company's deteriorating financial position, which in turn stems *from reductions"irr budgetary transfers and inadequate tariff adjustments. Concerning ports, investment in specialized equipment to accommodate increases in unitized traffic, rather than overall capacity increases, is the main issue. In general, port operations are satisfactory, though a dredging and rehabilitation backlog exists. Airport infrastructure is very adequate, following major investment in recent years. In terms of the future outlook for expenditures, planned investment in roads together with adequate provision for maintenance and rehabilitation (and closure of the backlog) will require an average annual increase of CG spending of some 10-15 percent in real terms through 1997. In railways, the medium-term investment program is still under debate, and required transfers from the CG budget will depend notably on tariff adjustments. However, it is critical that the investment program prioritize adequate track rehabilitation and renewal over network extensions. Budgetary fundingfor medium-term investment in and operation of port infrastructure is expected to be modest, though some increase may be called for in the near term to close a dredging and breakwater rehabilitation backlog, which is now being satisfactorily addressed. Investment by the state-owned maritime transport companies, while modest in absolute size, is expected to increase relative to its past levels, though only minor budgetary transfers from the CG are expected to be required. Required budgetary finding for medium-term investment in airport infrastructure is likewise expected to be minor. Medium-term investment plans for the airline provide for rapid expansion, but the proposed program may call for non-negligible budgetary contributions; a far preferable alternative would be to mobilize private capital. Recommended follow-up: * Increase expenditure allocations for road maintenance, notably in rural areas; this could be funded at least partly by increases in user charges. * Remove restrictions on trucking. * Adjust rail tariffs and compensation for mandated fare concessions to adequate levels. 1/ This chapter is based on Beenhakker (1993), and covers public expenditure associated with transport-related facilities as well as the provision of actual transport and related services. Transport-related facilities include roads and bridges, fixed railway installations (tracks, stations, tunnels, etc.), seaports, and airports. Provision of (passenger and merchandise) transport services covers road, rail, sea, and air transport services, as well as the associated equipment (vehicles, rolling stock, vessels, aircraft, etc.). Transport-related services include regulation and various support services. m:\ali\mor\pxp\repon\tratxt.doc Public Expenditure: Issues and Outlook Page 87 * Prioritize rehabilitation over extensions of the rail network. * Raise private capital (rather than Treasury equity) for investments in shipping and air transport by opening equity capital to private sector participation. * Examine the possibility of opening the equity capital in ports, airports, and motorways to private sector participation. A. Background on the Sector and Public Expenditure 8.1. Practically all ofMorocco's transport-related infrastructure, as well as a signficant share of transport and related support services, are provided by the public sector; most spending associated with roads appears directly in the CG accounts. Table 8.1 summarizes expenditure on transport infrastructure and services by the different public sector entities. Concerning road transport, the CG, through the Ministry of Public Works (MoPW), administers and funds the construction and maintenance of national and regional (including rural) road networks. The associated spending--which has averaged some 0.7 percent of GDP in recent years--is split between general budget outlays and a road maintenance fund (RMF), the Fonds Special pour 'Entretien Routier.' Local collectives oversee and fund the construction and maintenance of intra-community roads, and share responsibility for funding the construction and maintenance of certain rural road networks with the CG; their annual spending amounts to at least one-fifth again of the CG's, although this represents a very tentative estimate. A recently established public corporation, Autoroutes du Maroc (ADM), has now begun an investment program-- worth roughly one-third again of CG spending-to extend the country's embryonic motorway network; funding for this program is drawn largely from foreign borrowing, and the associated spending does not appear on the CG budget. Despite the public sector's predominance in administering and funding road projects, however, only a modest share of the actual work is done by force account (para. 8.9). Road transport safety and services are regulated by the Ministry of Transport (MoT) and, in one specific instance relating to trucking, the Office National des Transports (ONT), a public agency operating under MoT auspices. Regulation aside, public sector involvement in road transport services appears to be relatively modest. Trucking and inter-urban bus services are supplied largely by the private sector. Arm's-length public provision is limited to a few ONT services and local collective-owned urban bus transport systems. Own-use provision of passenger and merchandise transport by public sector entities is probably more significant, but has not been reliably estimated.' 8.2. Rail transport is fidly public, but the CG budget bears only a modest share of the associated costs. The Office National des Chemins de Fer (ONCF), a parastatal operating under MoT 2/ The RMF, a special Treasury Account under MoPW management (see also Section B of Chapter 2), was created in 1988, ostensibly to insulate maintenance expenditures from variations in budgetary outlays. Its revenue, which amounted to some DH 520 million in 1992, is drawn from three earmarked levies: (i) a fuel tax (which accounts for some 60 percent of the total); (ii) a flat vehicle registration fee; and (iii) a fee based on gross vehicle weight as a proxy for an axle-load charging basis. For further details, see World Bank (1994d). 3/ The figures in Table 8.1 do not include any estimate of own-fleet transport services by public sector entities, or any estimate of expenditures associated with the provision of bus transportation by local Rigies de Transport. m:\ali\mor\pcxp\reportrtxt.doc Page 88 Public Expenditure: Issues and Outlook auspices, has a monopoly on the provision of both infrastructure and services. With the exception of MoT regulatory overhead and capital transfers to ONCF-which together amount to about one-tenth of 1 percent of GDP each year-the associated expenditure appears entirely in ONCF accounts.' ONCF's operating and physical investment expenditures amount to around I percent of GDP each year. LG expenditure on the provision of rail transport-related infrastructure and services is negligible. To compound the public sector's predominance in the provision and funding of rail infrastructure and services, sub-contracting to the private sector of construction, maintenance, and even support services (e.g., catering) is currently minimal (para. 8.14). Table 8.1 - Summary of Public Expenditure in the Transport Sector (millions of DH unless otherwise indicated) 1989 1990 1991 1992 1993 Central Government - 2368 2364 2413 2122 (as % of CO General Budget Expenditure) 4.5% 4.0% 4.0% 3.1% (as % of ODP) - 1.1% 1.0% 1.0% 0.8% Road Transport - 1450 1471 1702 1469 Rail Transport - 206 249 242 303 Maritime Transport - 255 219 267 199 Air Transport - 457 425 202 151 L,ocal Government - 281 298 387 - (as % of GDP) - 0.1% 0.1% 0.2% - Road Transport - 281 298 387 - Other Public Sector ' 5977 7309 7382 8832 - (as % of GDP) 3.8% 3.4% 3.1% 3.6% - Road Transport 1 60 77 82 80 622 Rail Transports 1739 2109 2219 2316 2404 Maritime Transporte 772 935 934 1045 1046 Air Transports 3406 4188 4147 5392 659 Notes: 'Operating and physical investment spending only. Figures for 1989-93 are ONT recurrent and capital spending; figure for 1994 is ADM capital expenditures. sONCF recurrent and capital expenditures; figures for 1993 are estimates. *ODEP recurrent and capital expenditures and COMANAV capital expenditures. 'ONDA and RAM recurrent and capital expenditures through 1992; ONDA only for 1993. 4/ There is some own-use provision of, and spending on, rail transport (e.g., on equipment and maintenance) by the Office Chdrifien des Phosphates; however, the associated expenditure is likely to be minor in comparison with ONCF's. m:al\mo\pexplrpor\tmtextdoc Public Expenditure: Issues and Outlook Page 89 8.3. Concerning maritime transport, port facilities are provided and operated by the public sector, with associated spending appearing only partly in the CG accounts; in shipping services, the public sector retains a significant, though declining, share, but the CG budget bears little or no part of the costs. CG funding for construction and some maintenance of port infrastructure is administered through the MoPW, and the associated expenditure appears in the general (MoPW) budget as well in a separate CG mini-budget, the Budget Annexe des Ports (see also Section B of Chapter 2).' Overall, annual CG spending on ports amounts to only about one-tenth of 1 percent of GDP. The Office d'Exploitation des Ports (ODEP), the ports authority, equips and operates ports and, more recently, has accounted for an increasing share of port infrastructure maintenance and,'some, construction." The associated expenditures--currently almost half a percent of GDP each year--appear in the accounts of ODEP, which does not currently receive any budgetary transfers." Maritime passenger and selected merchandise transport services are provided by a handful of state-owned companies, which likewise do not habitually receive any budgetary transfers (despite recent increases in Treasury equity in one company).' LG spending on the provision of maritime transport infrastructure and services is negligible. 8.4. In air transport, public provision is again dominant, but the CG budget bears a declining share of the costs of airport infrastructure. The Office National des Adroports (ONDA), the airport authority, equips and operates air transport facilities (and, increasingly, accounts for the bulk of rehabilitation and extension) while Royal Air Maroc (RAM), the state-owned carrier, provides passenger and merchandise transport services." Both operate under the aegis of the MoT,' which regulates air transport. While expenditure associated with the provision of air transport infrastructure and services falls increasingly outside the CG accounts, budgetary outlays for airport construction and equipment have been non-negligible in the recent past, peaking at about one-fifth of 1 percent of GDP in 1990 and 1991 5/ Annual expenditure through the ports annex budget amounts to some DH 100 million in capital spending (about half of which is on dredging, and the remainder on breakwater maintenance and new construction) and about DH 50 million in recurrent (mainly wage) spending. Recurrent spending is covered mainly by droits de concession (concession fees) from ODEP, while capital expenditure is simply covered by a transfer from the MoPW's capital budget. 6/ In fact, the reverse is the case: ODEP transfers to the Treasury-roughly four-fifths in the form of droits de concession--have averaged some DH 50 million per year over the period 1990-93. 7/ COMANAV operates passenger liner services, while MARPHOCEAN (a fully-owned subsidiary of OCP) operates ships for the transport of phosphate rock and chemical derivatives. Two smaller state-owned companies, PETROCAB and SOFRUMA, operate specialized services for the transport of petroleum products and, citrus., Private Moroccan shippers, which account for about two-thirds of the total volume transported by Moroccan domestic shipping companies, mainly deal with passenger lines and transport for specific products such as citrus. Overall, however, Moroccan shipping lines account for only about one-fifth of total Moroccan freight. It should be noted that while state shipping companies have not typically received transfers from the CG budget, Treasury equity in COMANAV has been increased by a total of almost DH 60 million over the past 3 years, and a further DH 50 million equity increase is planned for 1994. 8/ RAM's fleet numbers 34 passenger aircraft, of which 31 are Boeings. It recently purchased a third Boeing 747 to replace one of the two older 747's. 9/ There is however a difference in legal status between RAM (which, as a sociiti de droit privi, operates under commercial law) and ONDA (which, as a public agency, does not). m:\ai\mor\pexp\rport\tmtcxLdoc Page 90 Public Expenditure: Issues and Outlook but declining more recently to less than one-tenth of 1 percent of GDP. ONDA expenditure (notably investment), by contrast, has risen sharply since 1992, and presently amounts to about a quarter of 1 percent of GDP. Concerning air transport services, RAM's operating and investment expenditures have averaged some 2 percent of GDP in recent years. LG spending on the provision of air transport infrastructure and services is negligible. B. Key Sector Issues Relevant to Public Expenditure Choices Road Transport 8.5. Key issues include: (i) the mediocre capacity and quality of the existing road network; (ii) poor maintenance of the existing rural feeder road network, despite a significant potential poverty reduction impact; (iii) unexploited opportunities for private provision of infrastructure and services (and, more generally, for greater cost recovery); and (iv) efficiency-impairing regulation of merchandise transportation. 8.6. While the overall coverage of Morocco's existing road network is fair, its capacity and condition are generally less-than-satisfactory. Road network density, though substantially lower than that in Northern Mediterranean countries, is comparable to that in similar income-level developing countries,o and the existing network connects all major economic centers. The motorway network is presently restricted to some 90 km (Rabat-Casablanca), although an additional 145 km (Rabat-Larache) are due to be completed in 1995. However, only half of the total road network is unpaved, and some two-thirds of road length in the paved network is less than 6m wide (7m is generally considered the norm for safe passing); over half is less than 4.5m wide. Perhaps most importantly, despite significant recent increases in maintenance outlays, the network's condition is indicative of a large backlog. The condition of over 40 percent of the paved road network remains classified as poor, and unpaved roads are, by and large, overlooked." Recent estimates suggest that, to reach technically optimal levels of maintenance and rehabilitation, the associated outlays would need to increase by at least one-third in real terms;` it has 10/ Morocco's (classified) network length of some 60,000 km (about half of Spain's) yields a density of slightly less than 0.1 km/km2 (including the Western Sahara), about a fifth of Spain's but comparable to that of Indonesia, Malaysia, Mexico, Thailand, and Tunisia. 11/ The proportion of the paved road network estimated to be in good condition rose from 22 percent in 1988 to 41 percent in 1992. Over the same period, the percentage of the network estimated to be in fair condition fell from 35 to 16, and that estimated to be in poor condition rose slightly from 43 to 44. However, the stability of the percentage of roads in poor condition masks a large increase in the percentage of primary roads estimated to be in poor condition, compensated for by some improvement in the condition of secondary and tertiary roads. In addition, of country's 3,710 registered bridges, over a quarter are estimated to require urgent repair. 12/ Recent studies on optimizing road maintenance recommend that the annual average effort should increase from 800 km to 1500 km for road strengthening and from 1300 km to 1500 km for rehabilitation and re-surfacing. These increases would require annual outlays on maintenance and rehabilitation (from both the general budget and the RMF) to rise from the present level of DH 1.2 billion to some DH 1.6 billion. m:\ali\morlpezp\rcpost\tmtcxtdoc Public Expenditure: Issues and Outlook Page 91 also been recommended that such increases should come in the form of increased RMF outlays." Concerns about the capacity and condition of the road network are borne out in a recent survey of businesses (CCIB, 1993), in which over a quarter of them cited the road network as a source of increased costs or reduced (owing mainly to congestion and state of disrepair). 8.7. Since road transport is by far the predominant form of transport in Morocco, keeping road capacity and quality abreast ofprojected traffic and underlying economic growth is a key medium- term challenge. Despite the country's relatively low vehicle frequency, over 90 percent of domestic passenger traffic and 75 percent of domestic freight traffic (excluding phosphates) is currently road- based." Traffic is concentrated on road links between major economic centers." Recent increases in traffic growth on the paved network have been significant (an estimated average of 7.5 percent per year over the period 1988-92, compared with just 2 percent over 1980-88), surpassing GDP growth. Similar overall traffic growth rates (7-8 percent), with even higher rates on the major road links, can be expected over the remainder of the decade. 8.8. The construction and maintenance of rural roads, which have a recognized poverty reduction impact, has until recently been an area of relative neglect. In particular, the state of existing (unpaved) rural roads is reportedly unsatisfactory in about four-fifths of cases; about one-third of these roads are impassable for at least 30 days per year. Regular maintenance is not budgeted for in most cases, and is carried out only in response to traffic emergencies. Available information, while imperfect, suggests that improving these roads would benefit communities with disproportionately high poverty rates- -for example, the 1990-91 LSMS indicates that access to an all-weather road, which averaged some 34 percent among the rural population in general (and around 40 percent for the highest expenditure groups), averaged only 16 percent among the lowest expenditure group. Experience from other countries also suggests that secure road links, by facilitating (wider) access to other basic social services and to market opportunities, are key in reducing poverty.16 However, once rehabilitation and upgrading to all- weather gravel takes place, sustainable maintenance outlays need to be provided for; in this, as well as in helping to meet the costs of building new rural roads (which can often cross tough mountainous terrain), community-level participatory schemes can be successful."' 13/ Over the past few years, the RMF appears to have (at least broadly) satisfied conditions for successful earmarking, including a link between those paying the earmarked levies and those to whom benefits from the expenditures accrue, as well as stability in the stream of expenditures. On this, see World Bank (1994d). 14/ Cyna (1993) reports that in 1988, Morocco had 35 motorized four-wheel vehicles per 1000 population. This compared favorably with Indonesia (12), but less so with Thailand (41), Tunisia (43), and Hungary (200). Since 1988, the national vehicle fleet (in which the proportion of heavy vehicles remains stable at some 30 percent) has grown at some 5 percent per year, a one percentage-point rise over growth during 1980-88. 15/ The most intensively used links are the Casablanca-Rabat motorway (18,000 vehicles per day), Rabat-Kenitra (12,600), and Rabat-Fez (7400). 16/ See, for example, World Bank (1994c), pp. 3 and 20-21. 17/ There has been limited private sector financing of road construction through users' associations. In one case, a users' association co-financed the construction of some 15 km of road length in the Tiznit region. m:ali\morpcxp\rcpottmtextdo Page 92 Public Expenditure: Issues and Outlook 8.9. Though indirect, private sector involvement in the provision of road transport infrastructure is already sigmficant; there may be medium-term potential for greater such involvement, notably on motorway links. Presently, all work associated with technical studies, new construction, rehabilitation, and periodic maintenance work is contracted out to private operators. However, direct private sector participation in financing and operating roads remains negligible. While limits on the scope for charging tolls probably restricts options for private sector provision of roads in most cases, high- traffic inter-city motorways may offer greater promise. Morocco has already taken the first steps towards commercializing inter-city roads by creating ADM and granting it a concession to operate, maintain, and collect tolls on the Rabat-Casablanca motorway." Next steps worthy of consideration would be to open ADM's share capital to the private sector and allow competitive bids to build and operate (or, in the case of segments already under construction, to operate) other inter-city motorways. Concerning the remainder of the road network, prospects for increasing cost recovery are worth examining." 8.10. While public regulation ofroad transport generates only minor administrative expenditure, removing certain restrictions would substantially increase the benefits of road transport infrastructure. The most binding restrictions pertain to trucking. In the case of arm's-length services, ONT intermediation-which entails the issuance, for a fee, of an official bill of lading to the trucker-is mandatory for every load in trucks of over 8 tons.' Licenses to operate trucks of over 8 tons, issued by the MoT, are reportedly also a binding restriction. Finally, for-hire trucking services are legally prohibited for trucks of less than 8 tons, although this restriction is understood not to have been enforced in recent months. Rail Transport 8.11. Key issues in the railways sub-sector include: (i) the recent development of an infrastructure maintenance and rehabilitation backlog; (ii) inadequate tariff adjustments for transport services, leading to poor ONCF financial performance; and (iii) unexploited potential for private sector participation in the provision of services. 8.12. Railway operations have generally been satisfactory, and have accommodated recent traffic increases; however, a maintenance backlog has developed recently. Morocco's rail network length and density is relatively low, but ONCF's traffic density, as well as the productivity of ONCF rolling stock and staff, compare favorably with even Western European levels.2" Although the use of railway 18/ The yield from these tolls amounted to some DH 70 million in 1992. 19/ A study of the possibilities for revising the basis for road user charges-through a more appropriate axle-load charging basis, for example-is on-going. 20/ Businesses operating trucks for their own account are exempt. 21/ Morocco's current network length of some 1900 km yields a network density of some .0026 km/km2. ONCF operates some 1000 trains per week, giving a traffic density of about 4 million traffic units (passenger-km plus freight ton-km). Availability ratios for ONCF's 240 locomotives (80-85 percent), 600 passenger coaches (75-80 percent), and 10,000 freight cars (about 95 percent) are high, as is the productivity of ONCF's 14,000 staff (590,000 traffic units per employee). m:\ali\mourpcXplcpWt\buttXLdoc Public Expenditure: Issues and Outlook Page 93 services--currently split roughly evenly between passenger and freight transport, excluding phosphates-- remains limited in absolute terms,' rail traffic has grown by some 4 percent per year over the past decade, slightly outpacing overall economic growth. In general, railway infrastructure and services do not appear to give rise to any significant bottlenecks. In fact, there appears to be substantial excess capacity on at least some passenger lines.' However, although satisfaction rates among businesses appear to be substantially higher than for roads, a significant number appear to view deficiencies in the rail network-notably in transporting containerized cargo at competitive prices-as a source of increased costs?' Most important, however, is that over the past five years or so, a substantial track maintenance and rehabilitation backlog has emerged. Faced with a tighter resource constraint (para. 8.13), ONCF followed the typical pattern of reducing outlays on maintenance and rehabilitation rather than on the bulkier new investment already committed. While the two new construction projects programmed for the 1988-92 period, which entailed spending of some DH 700 million, were recently completed,' less than 60 percent of originally programmed investment in track renewal (some 70 km per year) was realized during this period. 8.13. Lagging maintenance and rehabilitation stems from ONCF's deteriorating financial position, which can be attributed partly to reductions in budgetary transfers and inadequate tariff adjustments. Starting in 1988, there was a permanent decline of up to three-quarters in capital transfers from the CG budget (through the MoT) to ONCF. Measures to increase cost recovery, mainly through across-the-board passenger and freight tariff increases, government compensation for fare discounts and waivers (e.g., free transport of military personnel), and tariff increases for phosphate transport, were not implemented concurrently as had been expected, prompting the cutbacks in maintenance and rehabilitation outlays. Meanwhile, measures of ONCF's liquidity and leverage have steadily deteriorated, and its losses have risen. Its current ratio, for example, declined from 1.71 to 0.56 between 1988 and 1992,1 while its debt-equity ratio rose from 0.76 to 2.28 over the same period.' The net profit margin (net income divided by total revenue) declined from aboit -2 percent to -40 percent. In parallel, ONCF has built up arrears to the Treasury, mainly on tax and debt service payments, estimated at some DH 2.2 billion at the end of 1993. 22/ Passenger traffic amounts to 12 million passenger trips per year. Merchandise traffic amounts to some 26 million tons annually. Two-thirds of tonnage consists of phosphate rock. 21/ Capacity utilization in passenger services on average is about 50 percent. 24/ See CCIB (1993), pp. 30-32. 25/ These are: (i) the doubling of the Rabat-Kenitra line, at a cost of some DH 449 million; and (ii) construction of a rail link between Casablanca's Mohammed V airport and the city center, at a cost of some DH 264 million. 26/ The current ratio is the ratio of current liabilities (rapidly maturing debt) to current assets (those that can be most rapidly liquidated). A variant, the quick ratio (which in ONCF's case declined from 1.15 to 0.28 between 1988 and 1992), substitutes current assets less inventory for current assets. Both ratios measure an enterprise's ability to make payments in the near future. Private business standards typically require a current ratio of at least 1.5, while the Bank generally requires a current ratio of at least 1.2 and a quick ratio of 1.0 of potential beneficiaries. 27/ An indicative ceiling on an appropriate level of the debt-equity ratio would be about 1.5. m:\ali\mor*pxp\rcport\trntexLdoc Page 94 Public Expenditure: Issues and Outlook 8.14. Private sector participation in the provision andfiunding of rail infrastructure and services is currently small, although there are possibilities for increasing it. Indirect private sector participation, while non-negligible, is relatively minor. New construction is generally contracted out; remaining activities (including the fitting of rolling stock) are typically provided by force account. Direct private involvement in operating facilities or providing support services is, however, non-existent. Even catering in trains is provided by ONCF force account. Near-term options for increasing private provision extend to a range of support services; over the slightly longer term, private provision of rail services on selected routes (as distinct from the provision of track and facilities), which has been successfully fostered in other countries, could be considered.' Such actions would also provide stronger foundations for the principle of operating rail services on a commercial basis (see also para. 8.27 below). Maritime Transport 8.15. Key issues in maritime transport pertain to: (i) keeping the development of port handling capacity and methods abreast of changes in cargo composition; (ii) closing a remaining dredging and rehabilitation backlog; and (iii) the scope for increasing private provision of infrastructure services and transport services. 8.16. While existing port capacity appears able to handle present and expected future traffic flows, there is a perceived need for greater investment in specialized equipment to accommodate rapid changes in handling techniques. Currently, some 98 percent of Morocco's merchandise trade (by tonnage) transits through ports." Over 80 percent of traffic still takes the form of solid or liquid bulk cargo; however, unitized (e.g., container) traffic is growing rapidly." Overall, existing port facilities appear capable of handling recent and expected growth in traffic volumes: complaints from businesses tend to focus less on port congestion, and more on the lack of adequate facilities for handling unitized cargo, as well as on dredging backlogs and customs delays (para. 8.17)." Given that unitized traffic volumes are expected to grow at approximately double the rate for merchandise trade overall, avoiding bottlenecks requires upgrading of port infrastructure to handle these effectively. 28/ For a review of specific ways in which private provision of rail transport and related services in Morocco could be increased, see Price Waterhouse (1993). For a more general discussion of principles regarding private provision of rail transport, see World Bank (1994c), pp. 119-120. 29/ Morocco's coastline of some 3,500 km has 11 commercial ports and 9 fishing ports, which handle annual throughput of some 40 million tons of merchandise, including 0.5 million tons of seafood, and 1.4 million passengers. The 11 commercial ports have a total of 150 berths and an overall length of 21,500 m. Casablanca (some 40 percent of total traffic, diverse merchandise), Mohammedia (about 20 percent, mainly petroleum and related products), and Jorf Lasfar and Safi (over 10 percent each, mainly phosphates and related products) handle most merchandise traffic. Most passenger traffic transits through Tangier. 30/ Unitized traffic includes containerized, roll-on-roll-off, and Transpor International Rouder (TIR) traffic (trucks being ferried across the Straits of Gibraltar), which in 1992 accounted for more than 10 percent of total merchandise traffic (by tonnage), compared with about 6 percent in 1988. 31/ CCIB (1993) and Cyna (1993). m:\ali\mor\poxp\epoMtrntcxtdoc Public Expenditure: Issues and Outlook Page 95 8.17. The operation ofport infrastructure, as well as its maintenance, is generally satisfactory; a substantial dredging and rehabilitation backlog in past years in now being satisfactorily addressed. Productivity indicators for most ports--volumes handled per gang per shift, for example--have risen significantly over the past decade." High equipment availability ratios, moreover, suggest adequate attention to, and sufficient outlays on, equipment maintenance." However, some bottlenecks remain in port operations, particularly as concerns cargo documentation and clearance procedures, although recent improvements have been considerable.' The backlog of dredging and breakwater rehabilitation requirements, which had been substantial in past years, is now being closed, notably with the support of World Bank projects. 8.18. The financial state of parastatals involved in the provision of maritime transport infrastructure and services is mixed. Measures of ODEP's liquidity, leverage, and profitability, while mediocre, certainly do not show any significant deterioration in recent years.3' The financial performance of the major public shipping enterprises, COMANAV and MARPHOCEAN, is marginal. Measures of COMANAV's liquidity are satisfactory but deteriorating, while MARPHOCEAN's remain unsatisfactory. Both companies are highly leveraged, and COMANAV's profitability indicators are borderline, while MARPHOCEAN's are satisfactory.' 8.19. Private sector participation in the provision of port services, and particularly shipping services, could be widened. In port services, indirect private provision is already substantial, as most construction and maintenance of port facilities and maintenance of equipment for which ODEP is responsible is contracted out to the private sector. However, direct private provision of port services is modest, dotting such support services as pilotage and towage, line handling, and cargo warehousing. Nevertheless, Morocco has moved a long way towards commercializing port operations by creating 32/ Average productivity per gang per shift has increased by more than half since 1984 at Casablanca port; gains at other ports over the same period range from 12 percent at Safi to 40 percent at Nador. 33/ At Casablanca port, for example, equipment availability-to-demand ratios range from 94 percent for forklift trucks to over 99 percent for cranes. 34/ For example, average transit time for cargo at Casablanca port was about 10-15 days in 1992; see, for example, Chraibi and Hachami (1993). This compares with less than a third that time (and often only a few hours or less) in European and East Asian ports. A government trade facilitation committee, SIPROMAR, has for several years been concerned with reducing port transit times as part of a wider facilitation program. Recent and on-going initiatives include the introduction of simplified UN-format cargo documentation and selective container inspection by the customs administration, as well as establishing an interface between customs' SADDOC and ODEP's SIPOR computer systems to speed cargo clearance. 35/ For example, ODEP's current ratio was 0.95 in 1992, compared with 0.87 in 1998, while its debt-equity ratio was 1.4 compared with 1.96. Its net profit margin was -3.6 percent, compared with 2 percent. 36/ COMANAV had a current ratio of 1.34 in 1991, compared with almost 2 four years earlier. MARPHOCEAN's rose from 0.46 to 0.81 over the same period. Both companies currently have debt-equity ratios of about 3.5. In terms of profitability, the normalized operating ratio (operating expenses, including adequate maintenance and depreciation, as a ratio of revenue, including operating subsidies, which are nil) currently stand at about 1 and 0.75, respectively, for the two companies. A minimal performance criterion would be that the normalized operating ratio should not exceed 1 to ensure that the enterprise can at least cover its operating costs. m:\i\morpexp\report\tratext.doc Page 96 Public Expenditure: Issues and Outlook ODEP and awarding it a concession to operate port facilities (although the distinction between CG and ODEP mandates has become blurred, with the latter increasingly taking full charge of capital expenditure on actual port structures). For the future, while the scope for competitive provision of privately-owned port facilities may be limited by the presence of large sunk costs, the potential for equipping and operating port facilities through leases or concessions to private operators, as well as for opening up ODEP's capital to private sector participation, merits serious consideration. In shipping services, privatization is more straightforward, and is likely to offer efficiency improvements in addition to increasing budgetary resources. (Civil) Air Transport 8.20. While both infrastructure and transport services are satisfactory, issues meriting attention include the scope for increasing private provision of air transport-related services. 8.21. Following substantial investment in airport infrastructure over the past decade, capacity to accommodate air traffic flows is now ample in most regions. Two of the country's three major airports have been (re-)built within the past five years. Even under double-digit annual traffic growth rates, Morocco's 15 airports, particularly the three which handle four-fifths of passenger traffic," are unlikely to suffer imminent bottlenecks in accommodating either passenger or freight traffic. Casablanca's Mohammed V airport, for example, is designed to handle at least 2-3 times the present volumes (some 25,200 flights and 1.9 million passengers per year). Constraints stemming from air transport infrastructure as perceived by Moroccan businesses appear to be negligible, although regulation of air transport is occasionally cited as a source of increased costs, especially among the tourist industry." 8.22. The financial performance of sub-sector parastatals, while by no means unsatisfactory, is fragile. ONDA's record is mixed, while RAM's is relatively sound except for a high debt-equity ratio." Concerning liquidity, ONDA's current ratio has fallen below unity since 1988, while RAM's, though also declining, remains slightly above unity. Regarding leverage, both ONDA (2.8), and especially RAM (16.5), have high debt-equity ratios. In terms of profitability, RAM's performance is satisfactory-its normalized operating ratio, for example, appears to have remained stable at about 0.94. ONDA's profitability is borderline; in 1990, its operating ratio was slightly above unity. 8.23. Private sector participation in the provision andfinancing of air transport infrastructure and services is currently limited, and there is substantial scope for increasing it. While there is some sub-contracting buy ONDA for its expenditure items (notably construction, maintenance, and other services) direct provision of air transport-related services by the private sector is minimal. In the case of air transport services, for example, RAM handles all ground operations for foreign airlines in Moroccan airports. Near-term options for increasing private sector participation in provision include spinning off support services (e.g., catering and baggage handling) to the private sector. Sale of a share 37/ Casablanca (2 million passengers per year), Agadir (0.74 million), and Marrakech (0.65 million) are the three largest airports. 38/ On this, see Cyna (1993) and CCIB (1993). 39/ A capital increase of some DH 140 million for RAM from the Treasury is, however, planned for 1994. m:\ali\mor\pup\rpor\trtxLdoc Public Expenditure: Issues and Outlook Page 97 of RAM's equity (even if not a majority share in the first instance) is also an option in the short term. (Selective de-regulation of air travel to allow greater competitive pressure may also yield substantial long- term benefits to consumers and the tourism industry, as well as increasing private provision of air travel.) Beyond this, while competitive private provision of airport facilities is unlikely to be feasible, ONDA's capital could be opened up to private participation. C. Medium-Term Outlook for Expenditures Road Transport 8.24. Planned new investment in roads alongside adequate provision for maintenance and rehabilitation (and closure of the backlog) may require an average annual increase of CG spending of some 10-15 percent in real terms through 1997. Consistent with the diagnosis that problems stem mainly from the capacity and quality, rather than the coverage, of existing roads, most CG expenditure on roads would be devoted to maintenance and rehabilitation (including widening); only some 15 percent of 1995- 97 expenditure would be allocated to network extension. In particular, outlays would provide for the improvement of some 3000 km of unpaved rural roads (para. 8.8) to all-weather gravel. It should be noted, however, that since the rapid increases in CG spending would be expected to take place mainly through increase in RMF allocations, to the extent that road user charges can be increased to cover expenditure growth, the required increase in net CG spending (out of general budget revenue) would not be as large. Additionally, there is some uncertainty as to how much of the medium-term expenditure program will be financed by local collectives. The only other significant component of the medium-term public expenditure program on roads is that of ADM, which is expected to proceed with the construction of a motorway network stretching from Tangier to El Jadida. The Rabat-Larache segment, currently under construction at a total cost of some DH 2.1 billion, is planned for completion in 1995."0 Most funding for remaining phases is expected to come directly from external-mainly bilateral--funding, although such funding is not yet assured. In all, ADM investment expenditures are projected to increase from some DH 730 million in 1994 to over DH 1.8 billion by 1997; its 1993-97 investment program is expected to total some DH 5.5 billion. CG contributions-in the form of equity increases for ADM-are expected to be modest, perhaps of the order of some DH 50 million per year over the next few years. 8.25. Together with adequate medium-term budgeting of CG outlays on roads, desirable supporting actions include possible adjustments in user charges, de-regulation of trucking, and greater opening up to private sector provision. Based on the results of an on-going study, it may be necessary to adjust earmarked taxes and levies accruing to the RMF. To ensure maximum benefits from road use, it would be desirable to abolish current restrictions on trucking, including mandatory ONT intermediation. Such de-regulation would in turn forcibly streamline ONT operations (and expenditures). As a non- downsizing option in the event that compulsory intermediation is abolished, ONT is currently considering diversifying its activities (e.g., by constructing and operating roadside rest facilities)."' While ONT has 40/ This segment is funded mainly by Italian, Kuwaiti, and Arab Fund loans. 41/ Investment projects under consideration include construction of food and accommodation services along four inter-city roads at a cost of some DH 21 million, further development of the parcel service at a cost of DH 63 million, and construction of TIR terminals at a cost of DH 137 million. m:\ah\mor\pcxp\report\tmtexLdoc Page 98 Public Expenditure: Issues and Outlook commissioned an independent medium-term strategy study which should indicate whether or not such diversification merits pursuit, it is important that any new projects be preceded by rigorous cost-benefit analysis, including an analysis of the alternative of spinning such projects off to the private sector. Possibilities for opening ADM to private sector equity (or of concessions to private operators for other motorway segments) are also worth considering, as inter-city roads offer the best prospects for attracting private capital. Rail Transport 8.26. ONCF's investment program for the next few years is still under debate; adequate rates of track rehabilitation and renewal should, however, be ensured. A draft performance contract covering the next few years has long been under discussion, but as of early April 1994 had still not been finalized owing to continued disagreement about the size of the investment program and its financing, tariff adjustments, and the clearance of arrears. ONCF's end-1993 proposed draft planned for an investment program averaging over DH 1.6 billion per year over the next 4 years (almost double, in real terms, its investment spending over the period 1990-93). This proposed program would provide for a substantial increase in maintenance and rehabilitation vis-a-vis previous years and allow for moderate levels of new investment in fixed installations and rolling stock, all high-return projects. New investment in fixed installations would consist mainly of capacity increases on heavily used routes, safety installations, and electrification of certain existing routes. Economic rates of return associated with the various components of this investment program are reportedly in the 14-17 percent range. However, in sharp contrast to ONCF plans, the Ministry of Finance's DEPP-which screens investment programs prior to government approval--envisions a downsizing of ONCF's investment program for the next few years, to less than half the level proposed in the draft performance contract. It is crucial that if such downsizing takes place, expenditure cuts should affect new projects, rather than track rehabilitation and renewal (para. 8.27). 8.27. The extent to which ONCF's medium-term investment-whatever program is ultimately decided upon-can be carried out without transfers from the CG budget depends sensitively on measures to improve ONCF finances. Such measures include tariff adjustments and agreement on compensation for fare waivers and on arrears clearance.42 Tariff increases proposed by ONCF include annual increases averaging 7-8 percent over the next three years for passengers and merchandise (excluding phosphates)'3 as well as a one-time tariff increase for phosphate transport of at least 40 percent. Other measures proposed include budgetary transfers to compensate for the transport of military personnel (some DH 60 million per year), and write-off or rescheduling of ONCF arrears to the CG." Rough estimates suggest that these measures (including a one-time increase in tariffs for phosphate transport of at least 40 percent) would allow ONCF to provide adequately for operations and maintenance, and fund its proposed investment program without relying on additional transfers from the budget. However, delayed 42/ Additional measures could include an in-depth study of the competitiveness of different passenger and merchandise lines, with a view to eliminating uneconomic lines, if any. 43/ 10 percent in 1994, 8 percent in 1995, and 5 percent per year thereafter. 44/ This consists of writing off an already-rescheduled DH 1.2 billion debt to the Treasury, forgiving an additional DH 1.2 billion in principal and interest over the period 1994-2000 on remaining debt to the Treasury, and deferring payment of ONCF import duty arrears to annual installments during the period 1996-99. m:\alimor\pexp\repoM\tmtextdoc Public Expenditure: Issues and Outlook Page 99 or only partial implementation of these measures would probably call for downsizing the investment program. In this event, it is likely that several lower-priority projects' could be postponed without giving rise to major bottlenecks; the critical point, however, is to prioritize rehabilitation over new projects. Whatever decision is taken regarding ONCF arrears to the CG, it is clear that the principle of full compensation to ONCF for state-dictated fare waivers or discounts should be adhered to. More generally, it would be desirable to give ONCF greater autonomy to operate services on a commercial basis, including greater leeway to adjust tariffs (in areas where other modes of transport compete with rail transport, de-regulation of tariffs could actually be considered). Maritime Transport 8.28. ODEP is expected to continue to account for the bulk of expenditure on ports, without requiring transfers from the CG; CG spending may rise in the short-term, but would probably drop off thereafter. Aside from ensuring efficient operation of port facilities, key medium-term objectives include providing for adequate levels of dredging and infrastructure maintenance and rehabilitation, as well as for construction of new facilities to accommodate specialized, rather than overall, traffic growth. Major projects include, inter alia: (a) the completion of a container terminal at Casablanca port and a coal terminal at the port of Jorf-Lasfar; (b) the construction of a Roll-on-Roll-off berth in Tangier and, subsequently, further expansion of the facility; and (c) the construction of a new fishing port at Agadir and the expansion of several others. The precise timing of projects, and particularly the precise allocation of funding between the CG budget (including the ports annex budget) remains slightly uncertain so long as ODEP's performance contract for the next several years is not yet been finalized.' A likely scenario, however, is that ODEP's investment program, will remain roughly equal in real terms over the period 1993-97 (about DH 2.1 billion) to its level over the period 1988-92, alongside a modest real increase in recurrent (notably non-wage) expenditures. As in past years, ODEP is not expected to require any CG transfers to fund this program. CG outlays over the medium term are likely to continue to be allocated mainly to dredging and breakwater rehabilitation: completely eliminating the backlog may require expenditures (which, it may be recalled, currently amount to only about one-tenth of 1 percent of GDP) to increase by about half in real terms over a 2-3 year period. 8.29. Investment by the state-owned maritime transport companies, though remaining relatively modest, is expected to increase significantly relative to its past levels; only minor transfers from the CG are expected to be required. COMANAV's 1993-97's investment program is planned at some DH 600 million; major expenditure items include the purchase of three vessels over the next two years. However, the company is also expected to undergo financial restructuring, requiring an equity injection from the Treasury of some DH 150 million, spread over the next two years. MARPHOCEAN is also expected to acquire 3 vessels for chemicals transport over the next few years; however, no split of its 45/ Examples of such projects include, in increasing order of priority, the proposed Sidi Yahia-Mechra'a Bel Ksiri link, the electrification of the Fez-Oujda line, construction of a central platform at El Jadida, and the Kenitra-Sidi Kacem capacity increase. 46/ ODEP's previous performance contract expired at the end of 1993; a draft contract covering the next 5-year period is under discussion and is expected to be formalized at the end of 1994. The main issue relating to performance under the previous contract is a burgeoning of ODEP activities well beyond its original mandate (e.g., pleasure ports and offshore zones). m:ali\mor\pxp\rport\tratexLdoc Page 100 Public Expenditure: Issues and Outlook planned investment expenditure from that of its parent company, OCP, is currently available (see also Section E of Chapter 2). In general, insufficient information is available to allow a judgement concerning the shipping companies' proposed investment plans. However, there would appear to be little basis for injecting state equity into shipping companies without at least examining the possibility of opening their share capital up to private participation. Air Transport 8.30. The bulk of medium-term investment in air transport facilities is expected to be undertaken by ONDA; CG outlays are expected to be minor. While ONDA does not (yet) operate under a performance contract, its planned 1993-97 expenditure program continues the trend observed over the past few years of progressively transferring investment spending to its accounts rather than the CG's. ONDA's planned investment spending over the period 1993-97, at some DH 2.1 billion (approximately two-thirds higher in real terms than its 1988-92 program), provides mainly for maintenance, air traffic control equipment, runway rehabilitation, and completion of on-going projects, with only modest outlays (less than one-tenth of the program) for new expansion projects. The financing plan for this investment program is expected to draw mainly on own-generated user fee revenue and external credits. It is not expected that any CG transfers to ONDA will be required. The transfer to ONDA of the bulk of investment requirements in air transport facilities should enable a further-but small in absolute terms-- trimming down of CG spending on air transport, essentially to levels allowing for administrative and regulatory overhead.' 8.31. RAM's proposed investmentprogram provides for rapid expansion; however, the proposed program risks requiring significant CG contributions. RAM's initial draft performance contract for the next few years, which had not been signed as of April 1994,8 provides for investment expenditure totalling some DH 7.6 billion over the period 1993-97 (roughly double in real terms its investment program over the period 1988-92). Proposed investment spending would be devoted mainly to fleet expansion and completion of an aircraft maintenance center at Casablanca's Mohamed V airport,"9 which would be expected to serve several regional airlines. However, the question of (possibly substantial) CG transfers to support RAM's investment program had, by April 1994, yet to be resolved. In the absence of detailed cost-benefit information, it is difficult to pass judgement on the return associated with RAM's proposed investment program. However, as with shipping, there would appear to be little justification for CG budget contributions for ventures that have so much potential for attracting private capital (through, for example, opening RAM's equity capital to private participation). It is of course evident that 47/ In 1994, for example, MoT investment credits for air transport continued to decline. The single major line item, accounting for well over four-fifths of the total, was some DH 60 million for the purchase and installation of radio- electric equipment. 48/ RAM's previous performance.contract expired at the end of 1990. 49/ RAM has placed a firm order for 10 new generation Boeing 737's over the next five years, and has a provisional commitment to buy a further 12 such aircraft. The maintenance center, which houses an engine testing unit, is slated to become a regional maintenance facility for Boeing 737 aircraft. Construction is financed mainly by external borrowing guaranteed by the US' EXIM bank. On this, see for example "Special Report Aerospace", Middle East Economic Digest, 10 June 1994. m:\ali\mor\pcxp\repot\trntextdoc Public Expenditure: Issues and Outlook Page 101 CG payment of arrears to RAM, which amounted on net to an estimated DH 470 million at the end of 1993, should be considered separately.' 50/ It is unclear, for example, whether an equity increase by the Treasury of some DH 140 million planned for 1994 is linked to an arrears clearance plan. m:\ali\moApezp\repot\trtexLdoc Page 102 Public Erpenditure: Issues and Outlook CHAPTER 9: WATER SUPPLY AND SEWERAGE' Provision and operation of water resource, sewerage, and sanitation infrastructure remains exclusively public. The CG budget provides about one-half of 1 percent of GDP each year for water resource mobilization at the drainage basins, although there are significant additional off-budget outlays. Public utilities convey water from primary reservoirs and distribute it for household and other non-agricultural uses, and provide sewerage and sanitation services; their expenditure amounts to a little over 1 percent of GDP annually. LG provision is largely confined to sewerage and sanitation, and expenditure is modest. The key concern in the sector is the emerging water shortage, which implies rising supply costs and calls for urgent demand management and cost recovery efforts. Concerning the incidence of expenditures, access to safe water and to wastewater disposal facilities is sharply skewed against rural areas, where poverty is concentrated. In urban areas, sewerage facilities are fair, but often run down; the main issue is the near-universal absence of wastewater treatment, which gives rise to serious environmental hazards. In addition, water supply and sewerage operations remain financially weak, due partly to lagging tarifs and to government arrears. As regards the outlook for public expenditures, planned CG spending on water resources (mainly, as in the past, on dams) looks set to grow by at least two-thirds. In the conveyance and distribution ofpotable water, public utilities will continue to account for the near-totality of investment, which will probably require continuing transfers from the CG budget over the next few years. Acceptable increases in rural access to safe water and in sewerage and sanitation coverage promise to be costly, and sources offinancing for the required investments remain uncertain. Recommended follow-up: * Review investment requirements in water resource mobilization, taking into account impact of needed demand-side management measures. * Ensure that rural water supply program is kept on track and receives adequate funding. 1/ This chapter is based on Raimondo (1994), and covers public expenditure associated with: (i) water resource infrastructure and operations; and (ii) sewerage and sanitation infrastructure and operations. Water resource infrastructure and operations range from those mobilizing water at primary sources (e.g., drainage basins or groundwater sources), through those conveying water from primary sources or reservoirs to distribution centers, to those associated with subsequent distribution to households and industrial users. Spending on infrastructure and operations associated with the conveyance and distribution of irrigation water, which is covered in Chapter 7, is excluded here, except insofar as infrastructure supplying water for household and non-irrigation commercial use also serves in supplying irrigation water. However, as discussed below (para.5), irrigation accounts for the bulk (some 85 percent) of Morocco's water use, and raises urgent demand-side management issues. Sewerage and sanitation encompass the gathering of household and industrial liquid waste (including human waste), its conveyance to treatment and/or disposal sites, treatment (if any), and disposal. m:\ai\mor\pexp\repost\wswtcxLdoc Public Expenditure: Issues and Outlook Page 103 * Complete preparation of sewerage master plans and draw upfirmfinancing plans for the required investments. * Review sewerage tariffs, as well as disposal standards and their enforcement. * Open water distribution, sewerage, and sanitation services to private sector participation, in the first instance by privatizing services currently offered by the Rggies. A. Background on the Sector and Public Expenditure 9.1. The provision of water resource, sewerage, and sanitation infrastructure and services remains exclusively within the public domain; CG spending is allocated mainly to water resource mobilization at the drainage basins. Under present institutional arrangements, different public sector entities have functions which correspond loosely to the different stages of provision. The CG's major function, through the Ministry of Public Works' (MoPW) Hydraulics Administration, is to make bulk water available at the drainage basins; it therefore oversees and funds the construction, operation, and maintenance of large and medium-sized dams and primary reservoirs. Another key--though far less costly-CG function, under the auspices of the Conseil Supgrieur de l'Eau et du Climat (CSEC), is overall water resource management planning. Additional CG functions include drilling for rural groundwater sources, water quality testing and rating,' and water pollution control,' as well as administrative oversight and technical assistance for LG water supply, sewerage and sanitation operations. The bulk of CG expenditures associated with these different functions is allocated to the construction and maintenance of dams and primary reservoirs. As shown in Table 9.1, CG spending on water resource infrastructure and operations in recent years have averaged some 0.5 percent of GDP annually. This amount does not include the (modest) amounts required for inter- or supra-ministerial water resource management planning, water quality- and pollution-related functions, or overhead for oversight of, and technical assistance to, local governments.' More significantly, the amount does not include external credit- financed off-budget spending on dam construction projects, which in recent years have averaged about 2/ Nationwide water quality testing and rating programs are run by the Ministry of Public Health (MoPH). In rural areas, such programs cover periodic testing and disinfecting of wells and springs, and disinfecting water distributed through municipal networks. Such measures are complemented by sanitary education. However,, despite these,pxograms' clear potential, lack of equipment and the widespread presence of unequipped water points limits their effectiveness. Budgetary allocations for such programs have been very limited, except following exceptional events, such as cholera epidemics, and have generally been financed through bilateral or multilateral cooperation programs. 2/ Responsibility for water pollution control has traditionally been shared among the MoPW, the Mol, and the MoPH. The Mol's newly-established Under-Secretariat for the Environment (USE) is now the central environmental authority with a mandate to define, monitor, and enforce environmental standards, and to coordinate with other ministries in dealing with serious environmental issues and polluted sites. No reliable estimate is available concerning what portion of total USE expenditure can be attributed to water-, sewerage-, and sanitation-related anti-pollution activities. However, it is certain to be minor, as USE's entire budget in 1993 amounted to only DH 4.4 million. / Outlays for general overhead of the MoPW, which could not be allocated by function, have also been excluded. m:Ai\mor\pcxplrpoA\wswtext.doc Page 104 Public Expenditure: Issues and Outlook half again of the budgeted CG capital expenditure shown in Table 9.1.1 However, the amount does include capital transfers to the Office National de l'Eau Potable (ONEP), the national water utility, which have been used to finance a portion of ONEP's investment program (para. 9.2). Direct CG provision of, and spending on, sewerage and sanitation infrastructure and services is negligible. 9.2. Key functions of public utilities include conveying water from primary reservoirs and distributing it for household and other non-agricultural uses, as well as providing sewerage and sanitation services; associated expenditure amounts to a little over 1 percent of GDP annually. ONEP's chief function is to convey water from the drainage basins to primary distribution points in the major urban areas. Expenditures associated with the provision of conveyance infrastructure and services account for the bulk (typically 80-85 percent) of ONEP's investment (currently some 0.4-0.5 percent of GDP each year) and recurrent spending (about 0.2 percent of GDP). Additional mainstream ONEP functions include: (i) testing and treatment of water; (ii) direct distribution of non-irrigation water in over 200 urban centers not covered by municipal utilities; and (iii) preparation and implementation of sewerage master plans on behalf of selected LG's. Finally, ONEP provides and operates distribution infrastructure in small- and medium-sized (essentially rural) population centers and in Saharan provinces under "management contracts", with the associated expenditure now appearing in its accounts, rather than those of the relevant LG's.1 Sixteen municipal utilities, or R6gies, distribute non-irrigation water in the major urban centers. In addition, the Greater Casablanca and Agadir Rdgies have recently been transferred responsibility for provision of sewerage and sanitation, traditionally a LG domain, and eight other urban centers are expected to effect similar transfers in the near future." The Rgies' investment spending has 5/ Available information indicates that over the period 1988-92, some DH 3.18 billion in external credit (an average of about one-third of 1 percent of GDP annually), mostly on concessional terms, financed off-budget spending on dam construction projects. External funding for dam projects appears set to continue over the medium term, and significant parts of the associated CG spending may remain off-budget. An example is the El Wahda dam project in the Sebou basin, whose purposes include the supply of irrigation water for the Gharb plain, hydro-electric generation, flood protection, and, potentially, mobilization of potable water for--costly--conveyance to Casablanca. The project, on which work began in 1991 and is planned for completion in 1997, been costed at some DH 9 billion. Of this total, an estimated 60 percent is expected to be funded by external credits; much of the associated spending may be off-budget. (Conceptually, of course, there is little justification for any distinction between on-budget and off-budget spending: both should count equally as CG spending.) A/ The evolution of these management contract (contrat de grance) arrangements is revealing. Up to about 1985 (by which time ONEP was serving 24 small centers and 7 Sahara provinces), the arrangements provided for LG financing of any operating deficit and of all investment spending; this became unsustainable when lack of funds among the relevant LG's transferred the burden to ONEP's budget. In 1985, a surtax of DH 0.07 per cubic meter was levied on ONEP water sales, with the intent that the proceeds would be used to cover operating deficits; funding for investment expenditures, however, would remain the responsibility of the relevant LG's. Meanwhile, in 1990, the surtax was raised by another DH 0.05 to allow an extension of the management contract arrangements to another 94 small centers. In 1992, the surtax was raised further to DH 0.48 per cubic meter, and now finances both operating deficits and investment expenditures in the small centers (which by 1993 had risen to 154) and Saharan provinces (16 by 1993) under ONEP service. The objective of government policy is to increase the number of small centers served by about 30 each year; however, this raises questions concerning the sustainability of continuing increases in the surtax. 7/ That is, the Rigies in these two urban centers now construct and operate sewerage and sanitation infrastructure, and charge for services, so that practically all spending associated with provision appear in their accounts. m:\alimor\pexp\rport\wswtextdoc Public Expenditure: Issues and Outlook Page 105 amounted to about 0.3 percent of GDP in recent years; recurrent spending (not shown in Table 9.1) has amounted to an additional 0.2 percent of GDP annually. Table 9.1 - Summary of Public Expenditure on Water Supply and Sewerage (millions of DI unless otherwise indicated) 1990 1991 1992 1993 Central Government' 1415 1319 1194 1293 (as % of total budgetary CO spending) 2.7% 2.2% 2.0% 1.9% (as % of GDP) 0.7% 0.5% 0.5% 0.5% Recurrent 2 123 143 151 166 Capital 1292 1176 1043 1127 of which: Construction of Dams 827 749 635 538 Maintenance of Dams 94 50 59 60 Transfers to ONEP 199 190 188 300 Local Governments 116 79 98 - (as % of ODP) 0.05% 0.03% 0.04% - Recurrent' 18 20 23 - Capital ' 99 59 75 - Other Public Sector 1771 1910 2395 - (as % of GDP) 0.8% 0.8% 1.0% - ONEP' 1435 1489 1651 2018 R6gies 336 421 743 - Notes: ' Excludes expenditure on water quality testing by the Ministry of Public Health, as well as that of USE, CSEC, and the Ministry of the Interior. 2 Estimated as 30 percent of the Ministry of Public Works' recurrent spending. sExcludes recurrent spending on water operations, as these could not be split out from LOs' actual water consumption and other recurrent spending (e.g., on electricity operations). ' Estimates of investment spending are incomplete; only urban municipalities are captured. 'Recurrent and investment expenditure. 'Investment expenditure only. 9.3. While LG provision is largely confined to sewerage and sanitation, some spending on water supply also figures in the LG accounts. Sewerage and sanitation infrastructure and services are typically provided by a technical department of the relevant LG unit (in some cases, with full or partial contracting out to ONEP), except in the Greater Casablanca and Agadir areas, where such services are now the Rdgies' domain. Direct LG supply of water for household and non-irrigation commercial uses m:\ali\mor\pexp\report\wswtext.doc Page 106 Public Expenditure: Issues and Outlook is confined to small population centers that are both outside the major urban centers (so that they do not have access to R6gie services) and far from ONEP's conveyance infrastructure (so that contracting water distribution to ONEP is not presently an option). As shown in Table 9.1, LG spending on these functions is probably minor (a bottom range estimate would be about one-twentieth of 1 percent of GDP annually).' This amount includes both the costs associated with direct LG provision of relevant infrastructure and services and (up to 1992) some of the capital costs associated with service provision by ONEP on LGs' behalf (see footnote 6). B. Key Sector Issues Relevant to Public Expenditure Choices 9.4. This section briefly addresses key issues against which the adequacy, efficiency, and equity of present and past public spending on water resources, sewerage, and sanitation might be judged; these issues also provide desirable focal points for, or identify measures complementary to, future public spending. The issues include: (i) the need to manage an emerging water resource deficit and increasing costs of mobilizing and conveying water; (ii) the lack of access to safe water in rural areas, where the incidence of poverty is highest; (iii) environmental damage from untreated wastes; (iv) unexploited scope for private provision of services; and (v) financial fragility of the ROgies and (to a lesser extent) ONEP, due in part to lagging water tariffs and government arrears. 9.5. Emerging water shortages imply rising costs of supply, calling for greater demand management and cost recovery efforts. Based on supply and demand projections used by the Moroccan authorities, recent calculations indicate a country-wide deficit of some 2.5 percent of demand by the year 2020.' Moreover, under existing and planned water use, deficits are already emerging at individual basins, and giving rise to plans to construct costly infrastructure that would convey water over relatively long distances between surplus and deficit basins.10 Measures to rationalize water demand, as well as to increase cost recovery for water resource infrastructure, are therefore urgently needed. Water use for irrigation, which accounts for well over four-fifths of water demand, is the obvious focus for such measures. (The scope for rationalizing household and industrial water use appears more limited, although it will be critical to keep tariffs abreast of rising incremental supply costs.) In addition to tariff 8/ This figure is almost certain to be a substantial underestimate, as possible water supply components of several categories of expenditures (for example, on integrated development projects) could not be split out. 2/ See World Bank (1994o), Table 1. It should be noted that the supply and demand projections in-this study take current pricing for water and current efficiency of use as base case assumptions. (It should also be noted that ONEP's demand projections are substantially lower than those used in the study.) The projections in the study also assume continued growth in the irrigated perimeter and, on the supply side, continuation of the "one dam a year" paradigm. 10/ Examples of basins with emerging deficits are the Bou Regreg basin (roughly east of Casablanca) and the Tensift basin (around Marrakech). The emerging deficit in the Casablanca area, which would be aggravated following a 30 percent proposed increase of the irrigated perimeter in the Doukkala region (south of Casablanca) has given rise to plans to export water from the Sebou basin to meet part of Greater Casablanca's household and industrial demand. The proposed scheme (which has been costed at some DH 6.2 billion at 1993 prices) would involve conveying-and, at given intervals, pumping-water over a distance of several hundred km from the El Wahda dam to the Greater Casablanca area. An alternative solution, which would have involved conveying water from the lower Sebou basin to the Casablanca area- a much shorter distance-appears infeasible owing to pollution. m:\alimor\pcxp\report\wswtexLdoc Public Expenditure: Issues and Outlook Page 107 Box 9.1: How do Present Water Tanffs Compare with Prospective Long-Run Marginal Costs? An illustration for Casablanca In 1993, non-irrigation water tariffs levels in Casablanca (per cubic meter) ranged from a low of DH 1.87 to a high of DH 7.25 for domestic consumption, with intermediate levels for preferential" (mainly standpipe) and industrial uses. Applicable tariffs in DH are shown below. Domestic Consumption Tariffs Preferential Industrial Tariff Tariff For per-quarter consumption (in cubic meters) of x: 0<x<24 24<x<60 x>60 1.87 5.26 7.25 3.99 4.02 Given the consumption pattern, the average tariff collected amounted to some DH 4.3 per cubic meter. By comparison, the average incremental cost associated with investment in conveyance and distribution infrastructure (by ONEP and RAD, respectively) to sustain and extend water supply to households and businesses in the Casablanca area over the period 1994-2000 has been estimated (in 1993 prices) at some DH 6.1 per cubic meter, assuming a 10 percent discount rate. This suggests that, to keep tariffs abreast of long-run marginal costs, the average tariff over the period 1993-2000 would have to be about 30 percent higher in real terms than its 1993 level. In particular, it would appear desirable to raise tariffs for industrial uses, as there is little justification on either efficiency or equity grounds for such low tariffs. It should also be emphasized that the calculation of incremental costs makes no allowance for the costs of producing water "upstream" of conveyance: the cost of dams and primary canals, for example, is not taken into account. Source_ . World Bank (1993j), particularly Table 4-22; ArrOtO du Ministre Diligui aupr&s du Premier Ministre chargO des Affaires Economiques et Sociales No. 202, dated 26 January 1993. adjustments (which would encourage investment in more efficient irrigation methods, including field levelling), measures to rationalize water demand in irrigation include reduction of losses through leak reduction and canal lining." Concerning cost recovery, water tariffs for household and industrial use, though gradually adjusting towards levels permitting a recovery of costs associated with conveyance and distribution infrastructure and operations, are still far from allowing recovery of any portion of the costs associated with mobilizing water at the drainage basins. ONEP, for example, pays the CG nothing for the bulk water it accesses at dams, or even at primary canals. Cost recovery "upstream" of conveyance is afortiori remote in irrigation, where tariffs do not even cover the costs of conveyance and distribution infrastructure and operations. Some cost recovery for water mobilization, aside from rationalizing 11/ The gravity of water losses is underscored by the fact that some 60 percent of the water mobilized for irrigation never reaches farmers. m:\ali\mor\pexp\report\wswtext.doc Page 108 Public Expenditure: Issues and Outlook demand, could help generate resources for investments to increase the efficiency of supply." However, even if cost recovery upstream of conveyance remains nil, the long-run marginal cost of conveyance and distribution will be on a rising trend, given the projected higher-cost conveyance, implying a need for rising real tariffs (see Box 9.1). 9.6. Access to safe water and to appropriate wastewater disposal facilities is heavily skewed against rural areas, where the incidence of poverty is high. While in urban areas over 90 percent of the population has access to safe water," in rural areas over 80 percent does not.' As has been documented extensively elsewhere, access to safe water has important beneficial spillover effects on health and other welfare indicators." In addition, widening rural inhabitants' access to safe water is a good proxy for targeting the poor, given the relatively high incidence of poverty in rural areas. However, given the low population density in rural Morocco, unit costs of supplying running water are in most cases very high. Even under cost-effective provision through an appropriate mix of services, the high costs associated with enlarging rural access call for cost recovery--often facilitated through community participation schemes--in order to moderate the required increases in public expenditure (see para. 9.13 below). Similar remarks apply to sewerage: in rural areas, two-thirds of households resort to uncontrolled wastewater discharge into the environment, compared with fewer than 6 percent in urban areas." Given the lower population density and greater scope for safe dissipation of waste in rural areas, investments needed to ensure safe wastewater and human waste disposal are likely to be considerably more modest than requirements in urban areas, but, coupled with the necessary sanitary education, should be prioritized. 9.7. Sewerage facilities in urban areas are relatively well-developed (though often run down), but the near-universal absence of treatment sustains environmental hazards. Treatment plants are few, and only an estimated 2 percent of the total volume of wastewater is treated." Where adequate sewerage 12/ An example is schemes to reduce siltation (e.g., through forestry projects). Siltation has sharply reduced the useful life of several dams. 3/ In 1991, an estimated 76 percent of the urban population was served by water connections (up from 67 percent in 1985), and a further 16 percent by standpipes. The remainder obtained water from wells, vendors, or natural sources. As in rural areas, the urban poor are disproportionately hit by lack of access: fewer than 40 percent of poor households have water connections, a further 50 percent uses standpipes, and over 10 percent obtain water from other sources. 14/ According to the CSEC's 8th session document, only an estimated 3 percent of the rural population has a water connection; a further 6 percent is served by standpipes, 6 percent by equipped wells, and a further 16 percent by traditional communal wells (most of which are in need of rehabilitation). The remainder relies on traditional sources of supply (including drawings from surface water, pluvial cisterns, private wells, and vendors). 5/ See, for example, World Bank (1993d), pp. 90-91. 16/ On average, some 80 percent of urban households have sewerage connections, and a further 15 percent use septic tanks or cesspools. In rural areas, the analogous percentages are about 1 and 17, respectively. In both rural and urban areas, there is a strong positive correlation between access to adequate wastewater disposal infrastructure and household income. 17/ Morocco has approximately 37 wastewater treatment plants, roughly half of which are not presently functioning. Most plants are located in small and medium-sized urban centers (their construction has typically been financed by bilateral credits on concessional terms). The efficiency of treatment plants in operation is generally low. m:\aR\mor\pcxp\cpof\wswtWxt.doc Public Expenditure: Issues and Outlook Page 109 infrastructure exists, it typically serves only to convey wastewater outside urban perimeters, where the waste is discharged untreated into the natural environment, often with immediate effects on human welfare." A related problem is the widespread absence of proper infrastructure for industrial wastewater disposal. Coupled with the lack of standards for industrial effluent, this often leads to uncontrolled discharge of liquid waste into the immediate environment without industries having to internalize the social cost. Even where industries have access to sewerage infrastructure (that is, the pipes to dispose of liquid waste), the tariffs associated with disposal do not reflect the social costs of the waste (whether or not treatment takes place to render it harmless). Roughly speaking, tariffs are proportional to the volume of liquid waste produced, but are invariant to its noxiousness." 9.8. The current state of water and sewerage infrastructure and services imposes a moderat e constraint on private entrepreneurs. In a recent survey, a significant number of firms identified water and sewerage infrastructure and services, notably in industrial zones, as a source of increased costs or lower productivity.' Conversely, tariff levels (both for water supply and wastewater disposal) applicable to commercial uses that are low compared with long-run marginal social costs of services, may have reduced (private) costs for businesses (see also Box 9.1). This is particularly true in the case of industrial wastewater disposal, where the lack of clear standards and paucity of enforcement has led industries to avoid internalizing the full social cost of the waste created. It is also true of irrigation water use, where very low tariff levels--despite possible shortcomings in public provision--has provided a very cheap input and, on balance, probably reduced the (private) cost of doing business for farmers. 9.9. The scope for outright privatization of water supply, sewerage, and sanitation infrastructure may be limited in the near term, but there is clear potential for private provision of service distribution and related commercial activities. Experience in several water- and sewerage-related areas (notably urban piped water) suggests that private provision can result in greater efficiency and lower cost of service, notably by entrenching operation on commercial principles." It is doubtful whether making bulk water available at the drainage basins (that is, the key function currently undertaken by the CG) could be substantially opened up to private participation in the near term, although possibilities for reducing the share of works and maintenance done by force account could be examined. However, areas which could be rapidly opened up to private provision include services currently offered by the Rggies, 18/ The continuing incidence of cholera-over 2000 cases in 1993, at least half of which were in the Sebou basin- can be attributed directly to the absence of treatment and/or proper isolation of wastewater to avoid contaminating sources of drinking water or irrigation water. 19/ By way of illustration, sewerage tariffs applicable to Casablanca's RAD consist of: (i) a variable component, which for domestic users increases stepwise from nil to DH 1.3 per cubic meter (for industrial and government uses, there is a proportional tariff of DH 1.56 and 1.3 respectively); (ii) a fixed annual charge of DH 37 per household (DH 148 for industry and DH 74 for government); and (iii) a one-time connection charge (participaion au premier itablissement) which depends on a number of factors, including distance from an existing secondary network. 20/ See, for example, Cyna (1993), section IX. Complaints included those of severe delays in the installation of facilities and subsequently in maintenance and leakage repair, unreliable water pressure, and frequent blockage of sewerage systems due to unauthorized connections. 21/ See, for example, World Bank (1994c), pp. 117. For an analysis of prospects for, and regulatory barriers to, private provision of water and sanitation services in Latin America, see ARI (1994). m:alilmor\pcxplrpod\wswtxdo Page 110 Public Expenditure: Issues and Outlook such as tertiary network rehabilitation, leakage detection, and metering, if not overall provision (under concession or similar types of contract) of distribution and related services currently provided by Regies or LG's. Treatment and disposal of wastes is another natural area for private provision. However, a critical pre-requisite for substantially increasing private provision--currently lacking in water supply, sewerage, and sanitation-is an appropriate regulatory framework. For example, long-term concession contracts require, inter alia, the following elements: well-specified (and feasible) technical objectives, adequate leeway to recover costs, and laws and accounting practices that protect any long-term investment required to fulfil the terms of the concession. Presently, it would appear difficult to increase private provision of sewage treatment, since the main potential use of treated water is in irrigation, where the current structure of tariffs would generate insufficient cost recovery. Similarly, in the absence of well- defined and rigorously enforced environmental standards to generate demand for waste disposal services, it would appear difficult to attract private operators into industrial liquid waste disposal. 9.10. Financially, the Regies' water and sewerage operations remain weak, due partly to lagging tariffs and to government arrears; ONEP, though less so, is similarly affected. Despite recent adjustments, tariffs applicable to the Rdgies, which are set centrally but vary across regions,' are expected barely to cover long-run marginal costs by 1998.1 In addition, LG's, and particularly the CG, remain in substantial arrears: at end-1993, LG's owed a total of about DH 170 million, while the CG owed some DH 540 million (see also Section E of Chapter 2).' These phenomena, coupled in some cases by weak management and budgetary controls, have led Regies to defer planned network expansions and maintenance,' adopt potentially distortionary and inequitable pricing for services not subject to price 22/ Water tariff levels are published by Arriti issued by the Minister-Delegate responsible for economic incentives. Different Arr&is fix: (i) production (i.e., ex-ONEP) tariffs, which vary by region and range from some DH 0.84 per cubic meter in Meknes to almost three times that price in El Jadida; and (ii) distribution tariffs for household and industrial uses, which likewise vary across regions. For details, See for example, Arriti du Ministre Dilgu aupris du Premier Ministre charg6 des Afaires Economiques et Sociales Nos. 201 and 202, dated 26 January 1993. 23/ Household tariffs increase stepwise, according to the per-quarter consumption tranches shown in Box 9.1. Third tranche tariffs range from about DH 1.8 per cubic meter in Meknes to DH 7.3 in Casablanca. (Meknes is still served by low-cost groundwater sources, but the prospect of switching to costlier dam-based supply augurs sharp increases in the incremental average cost of production, even though costs will remain low by national standards.) Fixed charges amount to DH 30 per year, and appear insufficient to cover the cost of metering and other fixed operating costs. Other problems with the current tariff structure include: (i) an insufficiently progressive tariff structure at moderate consumption levels, with the result that benefits are captured disproportionately by better-off (mainly middle income), rather than low-income, households; (ii) exceedingly low tariffs for industrial users. Concerning the recent evolution of tariffs, increases at the distribution level, after averaging some 8 percent per year during the period 1977-89, were slightly higher in subsequent years and amounted to some 25 percent in 1993. Tariff increases for production (ex-ONEP) averaged some 9 percent per year over the period 1977-92, and about 12 percent in 1993. 24/ Figures on CG and LG arrears refer to arrears on both water and electricity operations; insufficient information was available to split these out. 25/ For example, for most Rdgies' operations efficiency (that is, percentage of water reaching the tap) either declined or remained flat over the period 1988-91. (This is in spite of the World Bank's Fourth Water Supply Project, which was dedicated to efficiency improvements.) In some cases, such as Rabat's RED, outlays for maintenance and rehabilitation sufficed to maintain relatively high levels of efficiency (around 80 percent), but at the expense of investment in expansion of the water supply network to low-income areas (this is now being addressed under the World Bank's Fifth m:Aali\mor\pexp\repost\wswtext.doc Public Expenditure: Issues and Outlook Page 111 controls,' and accumulate substantial arrears of their own (some DH 560 million at end-1993) to ONEP. Though less so than the Rgies, ONEP has similarly been faced with inadequate tariffs and government arrears. Tariff increases over the period 1989-91 fell short of those specified in the 1988-91 Contrat- Programme (performance contract), and end-1993 CG arrears stood at DH 55 million, while LG arrears stood at DH 140 million. Among other shortfalls, planned ONEP capacity increases and service extensions, notably in rural areas, were deferred, financial indicators have been weak, and ONEP has accumulated arrears of its own vis-a-vis the CG. Mounting concern over these signs of financial stress have led to measures to adjust tariffs over the medium term and, in particular, to action plans to clear arrears and prevent their re-emergence.' C. Medium-Term Outlook for Expenditures 9.11. Planned CG spending on water resources, the bulk of which will continue to be on dams, is set to grow by at least two-thirds. While the medium-term public expenditure program for water and sewerage, as with other sectors, is subject to frequent revision, a broad idea of the expenditures planned by the different public sector entities may be useful. Planned mobilization of water resources at drainage basins (the "one dam a year" paradigm), which is expected to remain within the CG's purview for the foreseeable future, entails capital expenditure requirements over the 1994-97 period that translate to an annual average some three times (in real terms) the amounts spent in recent years. However, projected capital expenditures include items that may eventually be financed off-budget: if off-budget spending in recent years is taken into account, the multiple falls to 1.7 times. The high projected capital expenditures are driven mainly by dam construction projects, with allowances for maintenance, feasibility studies, and administrative overhead. Completion of two large dam projects (El Wahda and El Hachef), begun into 1991 and expected to be completed in 1997, accounts for over 40 percent of total projected capital expenditures over the period 1993-97. Five other dam projects are expected to be started during the period; four will supply mainly non-irrigation water.' If it is assumed that the economic viability of the Water Supply Project). In other cases, such as Fez's RADEEF, the pressure of large migrant flows and need for new housing meant that expansion took precedence over maintenance; the result was a decline in efficiency of some 10 percentage points over the period, from over 60 to around 50 percent. 26/ For example, increasing the initial water connection charges to recent new customers (which, unlike the subsequent fixed and variable charge for the service, the Rdgies are free to set), many of whom have been low-income households. 27/ ONEP's performance contract for the period 1992-95 calls for continuing increases of some 12 percent per year through 1995. Thereafter, preliminary projections call for annual increases of some 15 percent per year until the year 2000. For the Roggies (distribution tariffs) agreements have been signed committing the government to medium-term tariff revisions consistent with satisfactory financial performance. An increase of some 10 percent was recently approved for 1994. 28/ The exception is the planned D'Char el Oued-ait Messaoud dam project, which would mainly supply irrigation water and for which works are planned to begin only in 1997. The four other projects are: (i) the Sidi Chahed dam, intended to supply potable water to Meknes and, potentially, for irrigation and energy generation; (ii) the El Ghrass dam, intended to supply potable water to Oujda and Taourirt, as well as to protect against flooding and reduce siltation in the Mohamed V dam downstream; (iii) the Sidi Mohamed Ben Abdellah dam, intended to supply potable water for the coastal m:\ali\nor\pcxp\report\wswtxt.doc Page 112 Public Expenditure: Issues and Outlook planned projects, as well as their timing, is robust to possible demand-side management measures, it is clear that to avoid major downsizing or delay in the investment program, CG spending will have to expand much more rapidly than in recent years, even if the practice of not counting certain external- financed expenditures in the CG accounts persists." In general, however, rigorous cost-benefit analysis of the planned projects is clearly warranted, as the viability--or at least the timing--of certain projects could hinge sensitively on whether or not demand-side measures are implemented.' 9.12. Concerning the conveyance and distribution of potable water, ONEP and the Rdgies will continue to account for the near-totality of investment; base case plans call for annual CG transfers to ONEP amounting to some DH 300 million over the next few years. ONEP's planned investment program, which averages some DH 1.9 billion (at 1992 prices) over the next four years, is devoted mainly to the construction and maintenance of conveyance infrastructure--set to increase water transfer volumes by some 120 million cubic meters per year-and distribution infrastructure in areas not served by the Rdgies. The program also allocates sharply increased amounts-some 15 percent of the total on average-to extending distribution infrastructure to small (rural) centers--the objective is 30 new centers per year-as well as, in the near term, to desalination and distribution infrastructure in the Western Sahara. It is expected to receive some DH 300 million in CG capital transfers to cover a large part of the costs associated with the investments in the small centers and Sahara provinces. The Rdgies' planned investment program, which averages a little over a third of ONEP's, allows mainly for rehabilitation and extension of distribution infrastructure. In particular, extension of distribution infrastructure is targeted to existing housing clusters that do not currently have access to service, or have access only to standpipes. Some 400,000 individuals, a large proportion of whom are likely to be low-income, are expected to be served with direct connections as a result." 9.13. Acceptable increases in rural access to safe water will be costly, but should be prioritized. Estimates of the costs associated with increasing rural inhabitants' access to safe water, a critical ingredient of a poverty reduction strategy, are available, but the robustness of financing sources--including potential contributions from the different public sector entities-is less clear. An official document prepared for the VIIIth session of the CSEC estimates that access to safe water for 80 percent of the rural corridor from Safi to Kenitra until about 2002; and (iv) the Touahr dam, intended to supply potable water to Taza as well as irrigation water for the surrounding areas. 29/ It would appear preferable to program the full cost of the projects in the medium-term CO budget, even though a portion may, as in the past, be financed off-budget directly by external credits. This is because: (i) the off-budget share cannot be reliably predicted; and (ii) more importantly, transparency would favor budgeting the full costs in the CG accounts, as there is no conceptual between these and other CG expenditures and the budget will in any case have to come up with the resources for the associated debt service. 30/ By way of illustration, at 1990 volumes an increase in the efficiency of water use in agriculture by 10 percent would have saved an amount of water sufficient to cover the entire projected increase in domestic and industrial water use expected under a conservative scenario between 1990 and 2020. This suggests that even limited demand rationalization could substantially affect calculated rates of return on investments in new water resource infrastructure. It is expected that a forthcoming in-depth study of water resource management, financed by a PHRD grant, will further clarify the scope for delaying certain future projects following demand rationalization. 31/ For further details on the investment programs of ONEP and the major Rgies, see World Bank (1993j). m:\aior\pe\port\wswtext.doc Public Expenditure: Issues and Outlook Page 113 population (through a mix of equipped wells, standpipes, and direct connections), could be assured by the year 2010 at a cost averaging some DH 625 million (at 1991 prices) per year until then.32 (The document also estimates that earlier fulfillment of the 80 percent target by the year 2005 (2000) would raise costs to an average of DH 1.2 billion (DH 2.3 billion) per year (at 1991 prices) until then, but the CSEC has opted for the 2010 scenario.) The estimates are base on the-ambitious-assumption that the recurrent costs associated with the new water supply schemes will be borne entirely by the beneficiaries through appropriate charges or participatory schemes." Concerning the financing plan for investment costs, the CSEC document assumes that 5 percent of the estimated capital outlays would be funded by beneficiaries, roughly half by the relevant LG's, and the remainder by the CG budget and OPS entities (presumably ONEP).1 There is a risk that, at least in the near term, sources of funding outside the CG funding may fall short of target (for example, rural communes, where investment needs are concentrated, face the sharpest limits in terms of revenue-raising capacity). Substantial CG resources may therefore have to be called upon. 9.14. Investment needs to ensure acceptable sewerage and sanitation coverage promise to be at least as costly as the planned expansion of rural water supply, though sources of financing remain unclear. Cost estimates associated with increased coverage of infrastructure and services for the conveyance, treatment, and disposal of wastewater are still incomplete (sewerage master plans are currently under preparation for many of the major urban agglomerations). However, rough estimates of the investment costs associated with satisfactory increases in coverage amount to an average of at least some DH I billion per year (at 1992 prices) through the end of the decade, compared with an estimated expenditure level of some DH 250 million in 1993." Already, in 1994-95, planned investment in 32/ Base case assumptions about provision that were used for costing are as follows: (i) in areas where population is highly dispersed, one equipped well would serve an average of 250 people and 25 percent of wells would be engine- driven; (ii) in centers containing 200-1000 inhabitants, 85 percent would be served by standpipes and the remainder through direct connections; and (iii) in centers containing more than 1000 inhabitants, 70 percent of the population would be served though standpipes and the remainder through direct connections. The program proposes front-loading the investment in equipped wells and developing standpipes and direct connections at a roughly even pace; intermediate targets under the program include providing almost 58 percent of the rural population with safe water by 2000 and some 72 percent by the year 2005. 33/ Recurrent costs (in 1991 prices, per cubic meter) have been estimated at DH 4.5 for equipped wells and DH 6.2 for standpipes. Comparing these costs (which would result in estimated annual expenditure of DH 280-330 per household, and DH 443-513 if the household owns livestock) with urban tariffs, it is clear that the assumption of complete coverage of the costs of operations and maintenance is ambitious, particularly given the concentration of low- income households in rural areas. 34/ Of the some DH 5.6 billion investment expenditures (at 1991 prices) to be funded by the CG and ONEP, the CSEC document suggests that DH 2.7 billion could be funded by ONEP through 2005 by way of an additional DH 0.24 per-cubic-meter surtax on water sales in existing (largely urban) distribution networks. The feasibility, as well as the efficiency and equity, of raising such sums from users, can be called into question. For a brief discussion of some of the drawbacks of cross-subsidy schemes, see "Cross-Subsidies: There should be Better Ways to Help the Poor", HRO Dissemination Notes, No. 26, April 1994. 5/ One general criterion for "satisfactory" coverage of sewerage and sanitation facilities is that the quality of fresh and marine water sources should meet specified standards that are considered appropriate and sustainable for the country and that, in the case of potable water, meet WHO requirements. m:alilmor%pcxp\seport\wswtzLdo Page 114 Public Expenditure: Issues and Outlook sewerage facilities (spread among the relevant Regies, ONEP, and some LG's) amounts to some DH 800 million; most funding for these investments is likely to come from bilateral and multilateral external financing sources. Investment planned by Casablanca's RAD, and by ONEP, on which somewhat greater detail is available, is probably representative of desirable increases in sewerage investments more broadly; it also brings out the pivotal role of-still inadequate-sewerage tariffs. While RAD's sewerage-related investment expenditures amounted to some DH 200 million in 1992 (roughly a quarter of this amount was earmarked for maintenance of its 2500 km network), its 1993-2005 investment plans call for annual investment expenditures averaging DH 335 million (at 1992 prices). Roughly four-fifths of investment expenditure would be devoted (in almost equal parts) to extending the primary and secondary sewerage network, and to treatment and de-pollution. However, RAD's ability to finance its investment program-and ensure sustainable debt service in the future--depends on adequate tariff adjustments, which have not taken place since 1987. It has been estimated that tariffs would need-- depending on adjustments in the one-time connection charge-at least to double in real terms (from the current level of DH 1.01 per cubic meter) by 1998 in order to ensure RAD's financial sustainability. ONEP's program, which provides for the implementation of sewerage master plans in 38 centers in which ONEP provides sewerage services and in which wastewater represents the most serious environmental hazards, averages some DH 540 million (at 1992 prices) over the period 1994-97, compared with only an estimated DH 12 million in 1993. m:\ali\mor\pxp\report\wswtext.doc Public Expenditure: Issues and Outlook Page 115 CHAPTER 10: ENERGY' The public sector currently provides all of Morocco's energy-related infrastructure and many energy products and related services. Services are provided by state-owned entities, notably in power and petroleum, and the CG budget provides only partial funding. A key concern in the power sector is the recent shortfall in electricity generation, which has had a substantial impact on industrial output. The deteriorating financial state of the national and local power utilities, which is caused notably by a distorted cost and pricing structure, has hindered the timely completion of planned investment projects and reduced maintenance outlays; it has also fostered the accumulation of arrears. Regarding the incidence of public expenditures, access to electricity remains heavily skewed against rural areas, where poverty is highest. Concerning the outlook for public expenditures, the Moroccan authorities' recent decision to open up to private power generation promises substantial efficiency gains and savings in budgetary resources, but success will hinge on rapid reform of the institutional and regulatory framework. Further rationalization of the public sector activity in the petroleum industry may also offer substantial efficiency gains and budgetary savings. Medium-term public investment in power would be undertaken largely by the national utility (or its unbundled successor entities); however, such investment would be mostly confined to transmission and distribution (leaving thermal generation to independent producers), and would not be expected to call for budgetary fUnding. The remainder (about one-third) of planned public investment in power transmission and distribution infrastructure would be undertaken by local utilities and, in the case of rural electrification, local collectives. In petroleum, the only significant planned public investment is in refining, which is not expected to require budgetary support; however, prospective returns are difficult to ascertain. In both power and petroleum, the government's role would be increasingly restricted to one of (sharpened) administrative oversight and regulation, in contrast to its once-important role in financing public investment. Recommended follow-up: * Accelerate preparation and implementation oflegal, regulatory, and institutional measures (including more adequate tariff schedules) in the power sector to permit I/ This chapter is based on Larrieu (1994), and covers public expenditures associated with the provision of energy- related infrastructure and production facilities, as well as the provision of energy products and related services. Major items of energy-related infrastructure and production facilities include electricity generation, transmission, and distribution facilities, as well as petroleum exploration, production, and refining facilities. Dams and reservoirs used in hydro-electric power generation, which are covered in Chapter 9, are excluded, although actual generation facilities are included. Energy products covered here include electricity and petroleum-based products, but exclude coal and other solid combustibles. Finally, in addition to administrative overhead and regulation, energy-related support services include the operation and maintenance of infrastructure, production facilities, and equipment, as well as bulk and retail distribution activities. m:ali\mor\pcxp\rcpost\coctexLdoc Page 116 Public Expenditure: Issues and Outlook public sector withdrawal from (thermal) electricity generation and possibly distribution. * Ensure that rural electrification program remains on target and receives adequate funding. * Rationalize pricing and taxation of petroleum products. * Examine possibilities for privatizing petroleum refineries. * Pursue rationalization of activities of state bodies involved in petroleum exploration and production and coal mining. A. Background on the Sector and Public Expenditure 10.1. Practically all of Morocco's energy-related infrastructure and the bulk of energy products and related services are currently provided by the public sector; most expenditure associated with the provision ofpower, however, does not appear on the CG budget. Table 10.1 summarizes the major items of energy-related expenditure by the different public sector entities. Concerning electricity, a single monolithic state-owned utility, the Office National de l'Electricitt (ONE), operates facilities accounting for some 90 percent of the country's total electricity generation.2 ONE also operates the high-voltage transmission grid, supplies municipal utilities with medium-voltage bulk electricity, accounts for about half of electricity distribution directly to end-users (mainly in areas not covered by municipal utilities), and provides miscellaneous energy-related services.' LG-owned municipal utilities, known as Rigies Autonomes de Distribution, of which ten cover major urban areas, account for the remaining half of distribution to end-users. Most public expenditure on power generation, transmission, and distribution does not therefore appear directly in the CG or LG accounts, but rather on the accounts of ONE and the Rdgies. CG expenditure associated with the provision of electricity consists mainly of that by the Ministry of Energy and Mines (MoEM), which exercises regulatory control over the energy sector (and, in particular, ONE) and has recently financed part of ONE's investment spending through budgetary transfers.' The Ministry of the Interior (Mol) exercises regulatory control over the Rdgies (which, unlike 2/ The residual is generated directly by industrial end-users, notably the Office Chrifen des Phosphates; small surplus amounts are bought by ONE. In addition, ONE imports some bulk electricity (typically less than 5 percent of domestic production) from Algeria. In 1992, Morocco's 2400 megawatt generating capacity produced some 9 billion kilo-watt hours. Production and use of electricity is, however, relatively limited in comparison with countries at a similar stage of development (para. 10.4.) 3/ For example, ONE operates supplying diesel fuel in remote areas on behalf of the Ministry of the Interior. 4/ Other recipients of MoEM transfers include ONAREP (para. 10.2) and the Bureau de Recherches et de Participations Miniares (BRPM), which serves as the holding company for state interests in the mining sector. Recipients of more modest transfers include the Centre National de l'Energie des Sciences et Techniques Nucldaires (CNESTEN), which runs an experimental nuclear energy program, and the Centre de Diveloppement d'Energie Renouvelable (CDER), whose purpose is to promote renewable energy schemes. All these public entities operate under the auspices of the MoEM. m:\almor\pcxp\seport\cntxt.doc Public Expenditure: Issues and Outlook Page 117 ONE, have not received any budgetary transfers). Other CG departments are also involved in regulation, although the associated (largely administrative) outlays are small, and have not been included in Table 10.1.1 LG expenditure associated with the provision of electricity is more substantial, but confined largely to a rural electrification program (para. 10.9). Direct private sector involvement in the provision of electricity and related services is presently negligible, but is set to grow rapidly (para. 10.10). 10.2. The petroleum industry is also presently state-dominated; again, however, much of the associated public expenditure does not appear in the CG accounts. State interests in domestic exploration for, and very modest production of, crude oil and natural gas are vested in the Office National de Recherche et d'Exploitation Pgtroliere (ONAREP), a public agency operating under MoEM auspices.' Two state-owned companies presently account for Morocco's entire refining capacity." The Socidte Anonyme Marocaine de l'Industrie et du Raffinage (SAMIR) operates a refinery with a processing capacity of some 6.5 million tons per year, while the Socidtd Ch9riftenne des Pdtroles (SCP) operates a smaller 1.2 million ton facility.! At the wholesale and retail distribution level (leaving aside bulk fuel oil sales to ONE), public sector involvement is more modest, and is declining. The state has recently sold its equity share in three distribution companies, originally held by its holding company, the Socidtd Nationale des Produits PItroliers (SNPP). The sale of state equity in another company is expected shortly; subsequently, volumes handled by state-owned concerns would decline to a negligible share.' CG expenditure associated with the provision of petroleum is confined to administrative overhead and 5/ The Ministry of Finance's Direction des Etablissemens Publics etdes Participations (DEPP) exercises financial control over ONE (but not the Rigies, which are subject to Mol oversight) as well as those of public petroleum sector entities. It also screens proposed investment programs. The Ministry of Economic Incentives, through its Prices Directorate, formulates domestic energy prices. Prices are set and controlled by an inter-ministerial committee, CIPEP, which also gives the final approval for investment programs. For a more detailed discussion of the different public sector entities involved in the power sector, see ESMAP (1994), Annex 1. 6/ In 1993, domestic crude oil production amounted to almost 11,000 tons, of which about 60 percent was accounted for by ONAREP. The remainder was produced by SCP, one of the two state-owned refining companies. Natural gas production stood at some 24 million cubic meters, of which almost 80 percent was produced by ONAREP. The residual was produced by SCP. It should be noted, however, that ONAREP's oil and gas production activities are gradually being scaled back (see para. 10.11). 2/ Up to end-1994, the domestic refining companies also have an effective monopoly-upheld through a licensing system--on imports of crude and products. Over 90 percent of domestic consumption of petroleum products (by weight) is refined locally. 8/ SAMIR is wholly state-owned; 75 percent of SCP equity is held by ONAREP on behalf of the State, with the balance held by local private and foreign investors (notably France's ELF). 9/ Companies recently privatized are Shell, CMH, Petrom, and Mobil; following those sales, private owned firms handle about 80-90 percent of sales by volume, depending on the product (excluding sales of fuel oil to ONE). Following privatization of the remaining company, Total-Mory, the share of private wholesale and retail distribution firms would rise to practically 100 percent (except for small volumes of butane). m:\alimor\pcxp\repot\coetext.doc Page 118 Public Expenditure: Issues and Outlook capital transfers to ONAREP, which figure on the MoEM's budget (Table 10. 1).1o LG outlays associated with the provision of petroleum are negligible. Table 10.1 - Summary of Public Expenditure in the Energy Sector (millions of DB unless otherwise indicated) 1989 1990 1991 1992 1993 Central Government - 514 571 485 1332 (as % of CO Expenditure) - 1.0% 1.0% 0.8% 1.9% (as % of GDP) - 0.2% 0.2% 0.2% 0.5% Recurrent - 101 107 122 124 Capital - 413 464 363 1208 of which transfers to: ONE - 79 100 .0 800 ONAREP - 197 213 200 239 BRPM - 95 100 100 100 CNESTEN - 8 19 23 23 CDER - 3 2 5 6 Ical Government' - 157 124 258 - (as % of ODP) - 0.1% 0.1% 0.1% - Other Public Sector2 - 2495 3921 4515 - (as % of ODP) - 1.2% 1.6% 1.9% - Electricity ONE 1315 2128 3458 4285 7020 Rigie - 367 463 230 - Petroleum SAMIR - - 136 229 180 SCP - - Notes: 'Sum of "ddpenses d'6quipement" and VAT allocations to PNER; possible overlap ignored. 2 Operating costs and physical investment expenditure only. 'Computed by subtracting estimated water investments from the total investment figure provided by DEPP. 10/ As explained in footnote 5, other CG entities also regulate specific parts of energy policy, such as pricing. However, as expenditures associated with such regulation are minor, no attempt has been made to include them in Table 10.1. m:\sl\mor\pexp\rpot\cactxdo Public Expenditure: Issues and Outlook Page 119 B. Key Sector Issues Relevant to Public Expenditure Choices 10.3. In evaluating Morocco's past and desirable future public spending on the provision of energy, as well as accompanying policy measures, several key issues, many inter-related, warrant attention. These include: (i) recent electricity shortages; (ii) poor financial performance among ONE and the Rgies; (iii) regional and income-related disparities in access to power; and (iv) the public authorities' recent decision to extend the scope for private provision of energy-related infrastructure and services. 10.4. Electricity generation has fallen short of demand, most notably during 1992-93, with substantial repercussions on industrial output. While Morocco's electricity production has virtually doubled over the past decade, per capita production still lags substantially behind many comparable developing countries." Over the past two years in particular, peak generating capacity has frequently fallen 100-200 megawatts short of peak demand. These shortfalls can be attributed to two sets of factors. The first, and underlying, set of factors is the combination of rapid demand growth (an estimated 7- 8 percent per year) and delays, relative to original plans, in constructing and commissioning additional generating capacity. The rapid growth in demand has been fostered by an inadequate tariff structure- including the absence of peak load pricing-and lagging tariff adjustments which, in turn, have undermined ONE's financial viability (paras. 10.6 and 10.7) and led to delays in completing planned investment projects. The second, and proximate, set of factors is that the drought-induced shortage of water during 1992, and especially 1993, reduced hydro-electric production by up to one-half. Concurrently, there was a transitory increase in demand from water pumping stations. Existing thermal generating capacity was also used more intensively, eventually leading to maintenance problems and forced shutdowns in some cases. The production shortfalls forced ONE to resort to programmed load- shedding and, over the winter of 1993-94, to MoEM-guided rotating work stoppages among industrial enterprises in the Casablanca area in an attempt to reduce peak loads. Overall, rough estimates suggest that output losses resulting from the shortages in 1993 may have amounted to as much as 1 percent of GDP. In any case, there is an overwhelming perception among businesses recently surveyed that unreliability in electricity supply has significantly raised their costs and/or lowered their productivity (Cyna, 1993; CCIB, 1993). 10.5. Power distribution system losses appear relatively minor, but spending aimed at reducing such losses would have a high rate of return. A recent study of technical losses--that is, those brought about by the physical state or characteristics of the distribution network-in the ONE and (Casablanca) RAD systems indicates that these amount to a little over 8 percent of annual power generation. While this loss rate is in line with international averages, modest spending (estimated at some DH 200 million) could reduce losses by over 1 percent; such an investment would be amortized in only six years. 10.6. ONE's deteriorating financial state, driven notably by a distorted cost and pricing structure, has hampered timely completion of planned investment projects and reduced maintenance outlays. ONE's net losses are significant and rising, and recent trends in the self-financing and debt l1/ Per capita electricity generation, though higher than Indonesia's, is significantly lower than that in Hungary, Malaysia, Mexico, Thailand, and Tunisia (Cyna, 1993). Electricity generated per unit of constant-dollar GDP, though half of Hungary's, is in the same range as for most of the other countries. m:ali\mor\pcxp\rpr\caextdo Page 120 Public Expenditure: Issues and Outlook service coverage ratios are generally unfavorable.12 Domestic fuel input costs and an archaic tariff structure are largely to blame. Overall, the level of tariffs presently falls only about 10-15 percent short of economic costs (based on c.i.f. fuel oil prices); however, heavy fuel oil, the major intermediate input in thermal electricity generation, is subject to taxes bringing its domestic ex-refinery price (over US$200 per ton) to almost three times the c.i.f. import price. In addition, the tariff structure exhibits such anomalies as higher tariffs for medium tension than for low tension electricity and, in particular, an absence of adequate peak/off-peak and seasonal pricing." During the past two years, larger fuel oil consumption by thermal plants to compensate for the shortfall in hydro-electric generation, without commensurate electricity tariff increases (adjustments over this period were limited, to a 6 percent average increase in April 1993), have aggravated ONE's liquidity problems. These have delayed planned expansion of generating capacity. To help speed the completion and commissioning (now expected by end-1994) of three 100 megawatt gas-fired generation plants at Tit-Mellil, Casablanca's industrial zone, and Tetouan, the CG has been forced to contribute a sum of DH 800 million per year in 1993 and 1994. 10.7. Arrears, both in accounts receivable and in payments, are also symptomatic of ONE's deteriorating financial state. As of end-December 1993, invoices through end-September 1993 and other receivables which remained uncollected amounted to almost 7 months of sales revenue (some 1.5 percent of 1993 GDP). Of this total, about 40 percent was owed by the Regies, mainly Casablanca's RAD (in turn, almost two-thirds of this amount represented previously rescheduled arrears). About a quarter was owed by various Offices (representing about a year of ONE invoicing to them), and about a fifth each by the CG (26 months of invoicing) and local collectives (30 months of invoicing). The balance was owed by public enterprises (7 months of invoicing), and other commercial and residential customers (2 months of invoicing). Mirroring arrears in its accounts receivable, ONE had accumulated substantial payments arrears of its own by end-1993, notably to the petroleum refineries for fuel delivery (DH 2.2 billion, or 10 months of supply), and debt service and tax payments to the Treasury." While agreements on action plans to clear major links in ONE's arrears chain have been concluded, the fragility 12/ ONE's net losses as a ratio of revenue rose from around zero in 1991 and 0.5 percent in 1992 to an estimated 6.3 percent in 1993. For 1994, early projections are for net losses of some 4 percent of revenue. ONE's self-financine ratio stood at 22 percent in 1991, 23 percent in 1992, and an estimated 25 percent in 1993. It is projected to reach only 16 percent in 1994. The debt service coverage ratio declined from 1.6 in 1991 to 1.4 in 1992 and an estimated 0.8 in 1993, but is projected to increase slightly to 1.0 in 1994. 1/ Tariff levels and structure vary by type of customer. For bulk supply to the Rigies and high- and medium- voltage end-users, charges consist of a fixed component based on maximum monthly demand and a variable component, based on quantity consumed, differentiated as between day and night usage. For agricultural users, charges consist of a fixed component based on yearly demand and a variable component, based on quantity consumed, differentiated among, day, night, summer, and winter usage. Finally, for domestic consumers, charges consist only of a variable component, aside from a one-time connection charge. For a more complete discussion of the existing tariff structure and its drawbacks, see ESMAP (1994), Annex 1. 14/ Some DH 2 billion in ONE arrears to the Treasury were converted into equity during 1993, reducing the amount owed to an estimated DH 170 million by the end of the year. m:\lilmorpxp\repoft\)cnctexLdoc Public Expenditure: Issues and Outlook Page 121 of similar action plans in the past casts some doubt as to how effective these might be." Nevertheless, more adequate CG budgeting for, and controls on, its own electricity consumption appears to have been effective in preventing the emergence of any new arrears during 1993. 10.8. Financial performance among the Regies has also generally been less-than-satisfactory, restricting resources for new investment in, and maintenance of, distribution infrastructure and equipment. In the aggregate, net losses on the Rggies' electricity distribution operations as a ratio of operating revenue amounted to some 3 percent in 1991 and 1992. With the exception of Fez's RADEEF, Rabat's RED, and Marrakech's RADEEMA, all Rggies have consistently incurred losses on their electricity operations over the past few years; Casablanca's RAD has incurred the largest losses. Losses have persisted despite a positive average margin of US$0.21 per kilowatt hour between the R6gies' tariffs and their purchase cost of electricity from ONE. Even for those Rdgies posting modest profits on electricity operations, outlays for maintenance and new investment have been severely constrained by the practice of using these profits to cross-subsidize loss-making water and sewerage operations (see also Chapter 9). 10.9. Access to electricity remains heavily skewed against rural areas, where the incidence of poverty is highest. Only some 13 percent of Morocco's rural population has an electricity connection, compared with over 90 percent in urban areas. Moreover, the poor are significantly over-represented among the rural population without access to electricity." Even among rural agglomerations no more than 30 percent of the population has access to electricity, compared with at least double that rate in neighboring Algeria and Tunisia. While it may be argued that access to electricity is not as basic a need as (say) clean water or basic health care, experience suggest that such access, if only at the community level, can significantly enhance labor productivity, arrest environmental degradation, and stem rural-urban migration, in addition to facilitating the provision of other basic infrastructure and services. These premises are partly borne out by the results of an evaluation of the socio-economic impact of the first phase of Morocco's rural electrification program during the period 1980-86, which indicated that the benefits of rural electrification had "... been substantial, particularly through transforming many of the electrified villages into economically thriving rural centers which have attracted migrants from non- electrified rural communities"." The second phase of the rural electrification program, begun in 1990 and due to extend through 1999, is intended to extend electricity connections to a further 600 rural villages and some 1.1 million people. However, only about a quarter of the planned connections have thus far been completed. Implementation delays, due in part to the assignment of responsibility for this 15/ Examples of agreements already concluded are: (i) with the Rigies, a rescheduling of end-April 1992 arrears to ONE over three years; (ii) with the CG, placement of the amount owed to ONE (some DH 276 million at end-1993) in a blocked account at the Trosorerie Ginrale du Royaume, pending final comparison (and cross-off) with ONE debts to the CG, with the balance to be repaid to ONE in the form of Treasury bonds; and (iii) with most local collectives, a rescheduling of arrears over four years. Bilateral agreements with many Offices are also under negotiation, and several are expected to be signed over the next few months. However, the fragility of these agreements is demonstrated by the Rigies' failure, over the past year, to service even the rescheduled portion of their arrears payments to ONE. 16/ Not many more rural inhabitants (an estimated 13.5 percent of the rural population) have physical access to electricity, in the sense that the infrastructure exists in their Douar of residence. See World Bank (1994a), Vol. II, Tables 49 and 50. 17/ See World Bank (1990), p. 13, and the reference cited therein. m:\alilmor\pexp\rcpon\castxt.doc Page 122 Public Expenditure: Issues and Outlook phase to local collectives (which are due to bear its entire cost, estimated at DH 2.5 billion)," argue in favor of stronger CG intervention to facilitate implementation. For rural villages that are very distant from the existing grid, small-scale renewable energy schemes offer a cost-effective way of providing inhabitants with power, with which experience in other countries has been favorable." MoEM-led donor- supported experimentation with such schemes has been on-going for at least a decade, and pilot-basis installation, often with community participation, is now being extended.' For the future, an extension of recent promotional efforts appears well worth considering. 10.10. The Moroccan authorities' recent decision to open up to, private provision, of power promises substantial efficiency gains and savings in budgetary resources; however, success will hinge on rapid reform of the institutional and regulatory framework. Plans call for inviting the first international competitive bids in the Fall of 1994 for independent power producer (IPP) construction and operation of new generation plants." The broad objective is to permit public sector (i.e., ONE) withdrawal from new investment in thermal generating capacity.' Also planned in the near term is a pilot-basis transfer of ONE's distribution network in Agadir to a private operator (through a management contract or outright transfer of infrastructure ownership). However, success in attracting IPP's and sustaining efficient performance on their part depends critically on a major overhaul of the institutional and regulatory framework in the power sector. (In the short term, there is also an urgent need to build up technical capacity to prepare bidding and power purchase agreement documents as well as to evaluate bids.) Key elements of such an overhaul, detailed (among other options) in a recent study,' include: (i) splitting ONE into three autonomous corporate entities, to unbundle the generation, transmission (including power pooling), and distribution functions; and (ii) enacting an electricity code and establishing an independent regulatory agency (which would, inter alia, safeguard adequate tariff levels and structure). In addition to implementing the measures required to attract and retain efficient private sector provision, institutional i8/ World Bank and European Investment Bank loans would finance about half the estimated investment costs. 19/ See, for example, "Solar Energy Answer to Rural Power in Africa", FPD Viewpoint Note No. 6, World Bank, April 1994. 20/ For an inventory of on-going renewable energy programs, which are coordinated on the state's behalf by CDER, see ESMAP (1994), pp. 61-62. 21/ Direct negotiations had been held with two independent power producer (IPP) consortia in the Fall of 1993 for installation of some 950 megawatts of additional capacity. However, these were abandoned in favor-of a competitive bidding process (which requires some up-front preparation). Pre-qualification of bidders has already taken place, and bidding documents are to be prepared with World Bank assistance. 22/ Regarding on-going projects, it is intended that ONE would initially retain the three 100 megawatt gas-fired generating plants (para. 10.7). However, the sale to the private sector of two adjacent coal-fired plants of 330 megawatts each (known as Jorf Lasfar I and I, expected to come on-stream in 1995) is planned; bids to construct two further plants (Jorf Lasfar m and IV) within the same plant would be sought in the same package. In the event that outright transfer of ownership finds no takers, private operation of the plants under a lease contract would be sought. It is similarly planned to contract out the construction of two combined-cycle plants of 300-500 megawatts each on a build-own-operate basis. Finally, it is expected that existing thermal generating capacity would be sold off to private operators over time. 23/ See ESMAP (1994), Chapter I. m:\alilmor\pcxp\rsport\enWtt.doc Public Expenditure: Issues and Outlook Page 123 and regulatory overhaul would also need to strengthen the framework for operations retained by the public sector, in particular by ensuring a reduction in the multiplicity of CG entities which presently regulate the power sector. 10.11. Further rationalization of the public sector activity in the petroleum industry may also offer substantial efficiency gains and budgetary savings. While the marketing and distribution of petroleum products is (or is soon to be) almost entirely in private hands, activities further upstream remain state-dominated. In the refining sector, neither state-owned company has proved to be a drain on the CG budget: both have posted positive; thougr modest,' net profits over the past few years, and SAMIR has transferred dividend payments of some DH 175 million to the Treasury over the period 1990- 93, despite substantial unsettled claims on ONE. However, the refineries' profitability hinges at least in part on present controls, including controls on the structure of ex-refinery prices for petroleum products (which substantially distort relative product prices relative to border prices) and restrictions on the import of crude oil.' Given the need to remove these controls and replace them with a more neutral system of domestic and import taxes as soon as possible,' there is a risk that if public sector control of the refineries is retained their profitability will be eroded, calling ultimately for budgetary support. Privatization of the refining facilities, already under consideration by the authorities, would avoid such an eventuality (and would actually result in a budgetary windfall), as well as increasing efficiency. Further upstream, in production and exploration, it would appear desirable to consolidate the on-going rationalization of ONAREP's activities (which, unlike the refineries, have proved to be a drain on the CG budget).' C. Medium-Term Outlook for Expenditures 10.12. Over the medium term, the bulk of public investment in power would be undertaken by ONE (or its unbundled successor entities); however, such investment would be largely confined to transmission and distribution (leaving thermal generation to IPP's), and would not be expected to call for CG budgetary transfers. Major elements of the non-generation components of ONE's most recent 24/ For example, in the case of heavy fuel oil production, while the border price (and therefore the price at which a world-class refining facility ought to make a reasonable profit margin) is less than US$70 per ton, the domestic sale price (ex-refinery) is around US$200 per ton. Most of the difference accrues to the Treasury in the form of taxes, but at least part of the difference covers the refineries' profit margins. It has been estimated that the domestic refineries' competitive disadvantage might amount to some 6 percent of border prices (ESMAP, 1994, p. 22). 25/ Licensing restrictions on petroleum imports, for example, are due to expire at the end of 1994. For a discussion of petroleum pricing and taxation reform issues and options, see ESMAP (1994), Chapter II. 26/ The rationalization of ONAREP's activities is reflected in a sharp decline in its investment over the past decade (from some DH 400 million in the mid-1980's to less than 50 million over the past three years). This reflects pursuit of a deliberate policy of re-defining ONAREP's function from one of direct participation in production (occasionally with external partners) to one of the State's promotional agent for foreign investment in petroleum exploration and production, and was formalized in the hydrocarbon code, enacted in December 1993. The redefinition of ONAREP's role was motivated largely by the fact that it was proving to be a drain on the budget, as it was heavily indebted and unable to generate sufficient own revenues. m:\ali\mor\pexp\r=pot\cncftxLdoc Page 124 Public Expenditure: Issues and Outlook 1994-98 investment plans," costed at some DH 8.3 billion (in 1993 prices) include the installation of some 1550 km of transmission lines and 940 megavolt-amperes of transformer capacity in high-voltage sub-stations. Included in the program is an underwater interconnection with Spain, with a 600 megawatt capacity. In general, investment planning appears to be based on accepted methods entailing least-cost alternatives; estimated costs associated with these expansion plans are in line with internationally accepted industry cost ranges.2 As regards generation, it remains uncertain what share of new investment the public sector will now account for. Originally, this part of the investment program, designed to commission some 1100 megawatts of additional power generating capacity by 1997," had been projected at some DH 15.1 billion (in constant prices) over the next five years. While the public sector's share in it is now expected to be small (perhaps confined to investment in new hydro-electric generation capacity, which accounts for about a quarter of the original program), ONE investment in thermal generation will likely continue at least through 1994, with associated spending of some DH 3.8 billion, about 1.3 percent of projected 1994 GDP (see also footnote 22)." Beyond 1994, the decision to leave the lion's share of new investment in generation to IPP's should allow ONE's (or its successor entities') financial state to improve, provided that adequate tariff adjustment and settlement of ONE claims is pursued. In turn, this should permit adequate coverage by ONE of recurrent (particularly maintenance) outlays, as well as spending on priority investment projects in distribution (including new metering to allow peak load pricing). 10.13. The remainder (about one-third) of planned public investment in power transmission and distribution infrastructure would be undertaken by the Rgies and, in the case of rural electrification, local collectives. Planned investment by the Rdgies in distribution infrastructure, costed at some DH 420 million (in 1993 prices) per year on average over the next 4-5 years, consists mainly of constructing distribution lines, medium-voltage sub-stations, and transformer banks. Planned investment is relatively modest vis-a-vis projected growth in sales (7 percent per year) and number of customers (4 percent per year), although--without state support, which is not envisioned--the Rggies' financing capacity is unlikely to allow much more. Measures to attract private capital into power distribution in large urban centers, the Rdgies' current domain-perhaps following the Agadir pilot scheme-would therefore be desirable. Investment costs associated with the second phase of the rural electrification program, which are projected to average some DH 470 million per year (in 1993 prices) over the next few years, are expected to be borne by local collectives, although ONE is the implementing agency. However, this portion of the public investment program--probably that with the most significant development and poverty reduction impact-appears most prone to slippage, calling for strong CG controls to ensure on-target implementation. Concerning the costing of proposed investment, both the Rggies' 27/ It should be noted that these plans were drawn up before the authorities' decision to ensure public sector withdrawal from new investment in generation. 28/ Estimated costs amount to US$300,000 per km for high-voltage transmission lines, and US$80 per kilovolt- ampere. 29/ Almost 80 percent of this investment was earmarked for the construction of thermal generating capacity construction, and the residual for hydro-electric capacity. 30/ If, starting in 1995, all new investment in generation were to be private, private investment would account for some two-thirds of annual investment in the power sector. m:Ali\mor\ptxplapost\xdc Public Expenditure: Issues and Outlook Page 125 planned investment and the rural electrification program appear cost effective: expansion of the Rigies' facilities accords with accepted industry standards, while equipment and works contracted under the national rural electrification program have been thoroughly appraised, and are undergoing supervision, in a World Bank project." 10.14. In petroleum, the only significant planned public investment is in the refneries, and is not expected to require budgetary support; however, prospective returns are difficult to ascertain. Planned investment expenditures by SAMIR, the larger refinery, average some DH 375 million (at 1993 prices) over the next three years. In particular, investment,in -a hydro-cracking,facility would, aim to adapt the refinery's output configuration to the expected change in the demand profile towards lighter products once the pipeline linking Algeria and Spain brings natural gas on-stream and displaces part of the existing domestic demand for heavy fuel oil. SCP's planned investment (notably in a pipeline linking production and refining facilities) averages some DH 320 million per year. In general, the estimated costs of proposed works and equipment appear to fall within normal industry ranges; however, the rate of return on the proposed investment projects is difficult to comment upon, given the high degree of distortion that prevails in petroleum pricing and the continuing uncertainty as to the precise timing of reform in petroleum pricing and taxation. While it is not planned that the proposed investments would require CG support in the form of budgetary transfers under any scenario, privatization of the state refining facilities, already under active consideration by the authorities, would probably best precede major investments. Further upstream, it would be desirable to continue rationalization ONAREP activities and consolidate its role (solely) as a promotional agency for attracting operators into petroleum exploration and production. This would allow a reduction over time in the substantial CG budgetary transfers to ONAREP, although over the next few years transfers comparable in size to those of the past few years will likely be required to cover its debt service. 10.15. In both power and petroleum, the CG's role would be increasingly restricted to one of (sharpened) administrative oversight and regulation, in contrast to its once-important role in financing public investment; overall, CG expenditure in these areas could thus decline significantly. Public sector withdrawal from new investment in thermal power generation should allow CG budgetary transfers to ONE to be phased out (how quickly is less easily predictable)." Similarly, in petroleum, rationalization of ONAREP's activities should allow a gradual phasing out of CG budgetary transfers. If coupled with efforts to rationalize state activities in related areas (for example, the coal mining sector, which would allow a gradual reduction in budgetary transfers to BRPM), these trends could result in savings of some DH 1 billion per year (in 1993 prices), about 1.5 percent of budgetary expenditure, even without counting possible windfalls associated with the sale of existing assets (e.g., existing ONE power generation plants and the petroleum refineries). Even after allowing for modest, growth in expenditures. associated with administrative overhead, aimed at strengthening (or creating) institutional and regulatory capacity in the MoEM or other agencies, these savings would free up significant sums which could be re-deployed to priority areas for poverty reduction (including perhaps accelerated rural electrification). 31/ See World Bank (1990). 32/ Contingent plans for continuing CG transfers of some DH 800 million per year exist; the extent to which these can be avoided depends on the speed with which changes in ONE's cost and pricing structure can be implemented, and on how quickly investment can be transferred to the private sector. m:\ah\mor\pxp\portlncexLdoc Page 126 Public Expenditure: Issues and Outlook CHAPTER 11: TELECOMMUNICATIONS I Morocco's telecommunications-related infrastructure and services are provided by a (relatively profitable) public monopoly, whose operating and investment expenditures amount to more than 2 percent of GDP. Private provision is small, and confined to non- core services. Telecommunications services have recently begun to improve rapidly, but are not yet up to the standard required to support a fast-growing economy, as reflected in entrepreneurs' perceptions. Financial performance in the sector has remained satisfactory mainly because of high (if badly structured) tariffs. Improvements in telecommunications services could be accelerated through greater private provision, but this, as well as better performance in areas remaining within the public sector, hinges on an overhaul of the institutional and regulatory framework Concerning the medium- term outlook, plans call for public investment in telecommunications to remain substantial, but flatten out somewhat after the rapid recent increases; such investment would not require budgetary support. However, even the ambitious public investment program will still leave Morocco's telecommunications in a modest position by global standards; this underscores the importance of opening up to private provision to encourage even faster growth in services. Recommended follow-up: * Prepare and implement legal, regulatory, and institutional measures required to attract and sustain private provision of telecommunications services; this includes opening the state telecommunication company's equity capital to private participation. * Implement revised telecommunications tariff structure. A. Background on the Sector and Public Expenditure 11.1. Practically all of Morocco's telecommunications-related infrastructure and services are provided by the public sector; private provision, confined to non-core services, remains negligible. A single state-owned entity, the Office National des Postes et T9l9communications (ONPT), retains a dejure monopoly on the provision of all telecom-related services. ONPT provides and operates infrastructure, as well as core and ancillary services to customers, and collects charges.' The associated expenditures, which appear in the ONPT-and not the CG-accounts, have averaged close to 2 percent of GDP in recent 1/ This chapter is based on Lecharny (1994), and covers public expenditure associated with the provision of telecommunications infrastructure and services, including administrative overhead for planning, regulation, and oversight. Broadcasting, and water and air navigation aids, are excluded. Expenditures on postal services are partly be covered by default, owing to the institutional link between postal and telecommunications services in Morocco. Z/ A small state-owned company, the Socidti Marocaine de TiUcommunications par Cdbles Sous-manrins, operates submarine cable transmission facilities linking Morocco with Europe and Africa. m:\al\mor\pprcpot\tcomtext.doc Public Expenditure: Issues and Outlook Page 127 years, and have increased perceptibly over the past two years (see Table 11.1).' Other large public enterprises--and, reportedly, a handful of foreign private firms--operate their own telecommunications network, but do not provide arm's-length services; expenditure estimates associated with such own-use provision are unavailable, but are unlikely to be significant relative to ONPT spending. CG spending associated with the provision of telecommunications services, mainly on administrative and regulatory overhead by the Ministry of Posts and Telecommunications (MoPT), is very small.' Other CG departments are also involved in regulatory oversight, but the associated expenditure is negligible.' There is no LG provision of telecom-related infrastructure and services. Domestic manufacturing and assembly of telecommunications-related equipment is substantially private, and ONPT contracts out most installation of new capacity." 3/ The expenditures shown in Table 11.1 include those associated with ONPT's provision of postal services. ONPT's postal branch also provides financial services (Chques postaux and, until recently, Caisse d'Epargne); however, funds mobilized-which are deposited at the Treasury-account for less than 5 percent of total deposits in Morocco. The Caisse d'Epargne (a savings facility) has now been spun off as a separate public entity, at least dejure. ONPT's postal and financial branch has, however, generated losses; in 1991, losses amounted to some DH 175 million, some 5.5 percent of the operating revenue of the telecommunications branch in that year. Factors underlying these losses include: (i) insufficient postal rates; (ii) Treasury remuneration on balances deposited with it by ONPT's financial branch that do not allow the latter any margin; and (iii) unviable segments of the post office network. 4/ In particular, the MoPT regulates the radio spectrum. 5/ As with other state-owed utilities and other entities, the Ministry of Finance's Direcion des Etablissements Publics et des Pardcipations (DEPP)exercises financial control over ONPT, and screens planned investment. Associated expenditures are negligible, and no attempt has been made to include them in Table 11.1. 6/ The only state-owned firm involved in manufacturing, assembly, and installation of telecom-related equipment, the Socidti Nationale des Tilcommunications (SNT), is slated for privatization. It should be noted, however, that domestic telecommunications firms account for only a small share of value added compared with ONPT. Their total employment, for example, amounts to some 2000 individuals, compared with almost 17,000 in ONPT. m:\ali\mor\pexp\npottcantcxLdcw Page 128 Public Expenditure: Issues and Outlook Table 11.1 - Summary of Public Expenditure on Telecommunications (millions of DR unless otherwise specified) 1989 1990 1991 1992 1993 1994 ONIr 2825 3421 4632 4332 6064 7024 (as % of GDP) 1.8% 1.6% 1.9% 1.8% 2.4% 2.4% Recurrent' 1036 1397 1592 ' 2108" 2684 " 3350 Capital 1789 2024 3040 2224 3380 3674 Central Government 2 - 9 9 10 23 23 (as % of CO budgetary spending) - 0.02% 0.01% 0.02% 0.03% - Recurrent - 9 9 10 12 12 Capital s - 0 0 0 11 11 Memo Item: ONFr transfer to CO 4 - 220 420 500 385 634 Notes: 'Recurrent costs excluding interest and taxes. 2Ministry of Posts and Telecommunications. Figures for 1993 and 1994 are budgetary credits, not realized expenditure. 'Dividends and monopoly rents; excludes regular taxes. B. Key Sector Issues Relevant to Public Expenditure Choices 11.2. An evaluation of Morocco's past and desirable future public spending on the provision of telecommunications-related infrastructure and services, as well as accompanying policy measures, calls for focus on several (inter-related) key issues. These include: (i) bringing telecommunications up to standards in comparable countries; (ii) ensuring efficient tariff levels while maintaining ONPT's financial performance; (iii) the potential for rapid opening up to private provision; and .(iv) overhaul of the institutional and regulatory framework. 11.3. The availability, quality, and range of telecommunications services, though increasing rapidly, is not yet commensurate with what is required to support a fast-growing economy. While Morocco's network has grown at a spectacular average of more than 25 percent per year over the past three years, telephone density, at an estimated 32 direct exchange lines per thousand inhabitants, remains substantially lower than in comparable countries, and concentrated in the areas around Rabat and Casablanca." There is a backlog of waitlisted demand (estimated at about a fifth of existing connections), 2/ Telephone densities in comparable countries include about 50 per 1000 inhabitants in Tunisia, 70 in Jordan, about 120 in Mexico and Malaysia, 18 in Hungary, and almost 270 in Portugal. m:Ali\mor\poxp\report\tcctcxLdoc Public Expenditure: Issues and Outlook Page 129 and waiting times for connections typically run several weeks or months. In terms of quality, call completion rates-again, while improving--are still low, and fault rates and time required for a return to service high." In addition, the prevalence of value-added and "intelligent" services (such as data transmission, mobile networks, paging, and toll-free number facilities) is low,' although the fact that most switching and transmission capacity is now digital could allow such services to expand rapidly. Overall, however, businesses still appear to view the state of telecommunications infrastructure and services as a relatively important constraint, although there are significant regional variations in perceptions."o A mounting body of worldwide evidence and experience suggests that good telecommunications infrastructure is becoming critical in sustainiing,growth'iff(increasingly information-intensive) economic activity and, in particular, international competitiveness; for example, export competitiveness in such industries as garments, which are key for Morocco, now hinges on fast turnaround times-which in turn depend on advanced telecommunications." Just as importantly, the extension of telecommunications services to rural areas, where coverage is presently negligible, could serve as an effective poverty reduction instrument by facilitating extensions or improvements in social services (for example, through distance education and links to interactive health care and agricultural extension information networks)." 11.4. Even while it has remained a public sector monopoly, the financial performance of telecommunications has been satisfactory, owing mainly to high (if badly structured) tarnf. Financial performance indicators of ONPT's telecommunications branch are relatively sound; its operating ratio, for example, has hovered around 60 percent in recent years." Less satisfactory (if less important) aspects of performance, which are now being addressed, include persistent losses by ONPT's postal and financial services branch (footnote 2, 3), as well as still-significant collection delays on customer accounts receivable. CG arrears to ONPT, which had risen to substantial levels in preceding years and which stood at some DH 970 million at the end of 1992, were cleared in July 1993," and improved budgeting 8/ Call completion rates average about half for local calls, a third for long distance calls, and a quarter for incoming international calls. Fault rates average about 0.9 per line in service per year; of lines experiencing faults, about two-thirds are returned to service within 48 hours. 2/ A mobile phone network was introduced in 1987 (and a global system for mobiles with a capacity of some 12,000 lines is due to be installed by the end of 1994), and a data transmission system was inaugurated in 1991. Electronic mail is being introduced on a pilot basis. 10/ In a recent study (CCIB, 1993), over a third of surveyed businesses expressed dissatisfaction with specific aspects of service provision or network reliability, citing these factors as a source of increased costs or reduced productivity. 11/ For a schematic account of the growing role of telecommunications in the world economy, see World Bank (1994b). An interesting illustration of quick turnaround times in the garments industry appears on page 9. 12/ See World Bank (1994b), pp. 11-12. 1/ A decline in the current and self-financing ratios is explained by the large investment in fixed assets over the past 3 years. 14/ Treasury arrears to ONPT were, however, mirrored by some DH 1.2 billion of ONPT arrears to the Treasury, and clearance largely involved cross-cancelling arrears. m:\ali\morXpcxp\report\c=tcxt.dom Page 130 Public Erpenditure: Issues and Outlook and control appears to have been effective in arresting the accumulation of any new CG arrears. The relatively sound financial performance of ONPT's telecommunications branch owes largely to a relatively high average level of tariffs. However, the tariff structure's present design is complex and ill-adapted to ensure maximum economic benefits to users for given cost recovery. In recognition of this problem, a revision in the tariff structure, based on the results of a recent study, is under preparation. The revision would, inter alia, reduce distance-related tariff differentials while increasing local call tariffs and introducing time-of-day peak-load tariff differentials. Average amounts collected are unlikely to change much, however, as ONPT's 1993-97 performance contract provides for average tariffs to remain constant in real terms over the period. 11.5. Opening up Morocco's telecommunications sector to private provision and privatizing existing state assets would yield substantial benefits in terms of greater range and quality of services, without necessarily stripping the CG budget of a revenue source. Rapidly changing telecommunications technology (which make notably for declining fixed costs), coupled with a changing demand pattern for telecommunications services (increasingly towards information processing and transmission services) have vastly increased the scope for competitive provision of various services." Areas of potentially competitive supply (many of which the Moroccan authorities are already considering opening up) include value-added services and-in recent months an oft-cited item--teleports. The particular advantage of private suppliers in areas where technology develops rapidly appears to be their flexibility in adapting to changes and in bringing innovations promptly to customers. Even in areas where supplier concentration appears justified by economies of scale (for example, telephone communications between two fixed points), worldwide experience broadly suggests that (possibly phased) opening up to private equity results in better long-term performance and customer satisfaction." Divestiture, quite aside from its immediate budgetary windfalls, also need not entail any reduction in fiscal intakes, if it results in more rapid expansion and improved financial performance. However, while plans to open the telecommunications sector to private provision have been under discussion for some time, measures implemented to date have been very modest (for example, calling for private development of street payphones and phone "shops"), and have attracted only modest investment. 11.6. Efficient private provision of telecommunications services, as well as better performance in areas remaining within the public sector, depends critically on an overhaul of the institutional and regulatory framework. The major institutional and regulatory reform measures that are needed have been detailed elsewhere:" in most cases--with the exception of opening ONPT's equity to private participation- the government is already committed to these measures. To attract, and sustain efficient performance among, private operators, required measures include the transfer of a number of regulatory functions which are currently de facto vested in ONPT to the MoPT (including the setting of standards, certification, and licensing of operators), and strengthening the MoPT's regulatory capacity (see also para. 11.9). Concerning ONPT itself, recommended measures include formalizing the separation of the telecommunications and postal branches into two distinct entities, strengthening institutional-notably 5/ See, for example, World Bank (1994b) and (1994c), Chapter 3. 16/ For a detailed discussion of measures to open Morocco's telecommunications sector to private provision, see Price Waterhouse (1993), particularly Volumes 2 and 4A. L7/ See, for example, World Bank (1992b) and Price Waterhouse (1993). m:\ali\mor\pexp\repotitctext.doc Public Expenditure: Issues and Outlook Page 131 accounting--capacity, and allowing private participation in the equity of the successor telecommunications entity. C. Medium-Term Outlook for Expenditures 11.7. Base case plans--which should be adapted as telecommunications are opened to private provision and equity capital-call for public investment to remain substantial, though flattening out somewhat; such investment would be undertaken by ONPT with no requirement of CG transfers. Under ONPT's 1993-97 performance contract, investment spending is projected to stabilize at some DH 3.8 billion per year in nominal terms over the next four years. Planned investment provides mainly for works and equipment to: (i) increase capacity in switching stations and in transmission between main and subsidiary centers; (ii) connect subscribers to switching stations; and (iii) expand rural phone services. The program also provides for increases in public payphones and, in particular, value-added services. If completed on target, it is estimated that the investment program would increase phone density to some 55 direct exchange lines per thousand inhabitants, by 1997.1' In rural areas, moreover, the number of phone lines--estimated at 14,000 currently--would increase almost tenfold by 1998. Overall, the proposed telecommunications investment program, which has been reviewed under an on-going World Bank project, appears to satisfy least-cost criteria; estimated costs associated with expansion are in line with internationally accepted cost ranges for the telecommunications industry (some US$1400 per line). Concerning the financing of planned ONPT expenditures, it is estimated that the 1993-97 performance contract's provision for maintaining average tariff levels in real terms should allow adequate coverage of operations and maintenance and keep increases in ONPT's borrowing requirements within sustainable limits." As in past years, no transfers from the Treasury are expected to be required.' 11.8. However, even the ambitious planned public investment program in telecommunications will still leave Morocco in a modest position by global standards; this underscores the importance of opening up to private provision to encourage even faster growth in services. Even the rapid growth envisaged under ONPT's 1993-97 investment program (an average annual increase in main lines of close to 20 percent) will not enable Morocco to catch up with fast-growing comparable countries. For example, even if the performance contract targets for telephone density increases are met, Morocco's phone density in 1998 will still be only about half that of Mexico or Malaysia in the early 1990's. To ensure that Morocco's telecommunications remain abreast of what is needed to support higher levels of economic growth, a desirable strategy would be to unbundle the provision of services and, in particular, to spin off value added services for competitive (private) supply. This would enable a progressively more corporatized (and possibly privatized) ONPT, stripped of regulatory functions (para. 11.9), to concentrate its investment effort on expanding basic phone line coverage; at the same time, competitive is/ A further target in the national telecommunications plan is to increase phone density to 61 by 1998. (Planned 1998 ONPT investment spending is about DH 4.1 billion.) 19/ For a more detailed discussion (albeit now slightly dated) of the outlook for financial indicators in ONPT's telecom branch, see World Bank (1992b), Section IV. 20/ In fact, the 1993-97 performance contract provides for the annual transfer to the Treasury of "dividends" equal to 10 percent of net income. m:\ai\mor\pcxp\rport\tcomtextdoc Page 132 Public Expenditure: Issues and Outlook provision of value-added, "intelligent", and other services (e.g., teleports) would ensure rapid spread of services and subsequent innovations to Morocco-based customers. 11.9. CG expenditure will probably need to increase rapidly to support a stronger regulatory framework however, as these are starting from a very small base, the budgetary impact will be small. To sharpen the currently blurred distinction between regulatory and operational functions in Morocco's telecommunications sector-in turn essential to support competitive private provision and efficient performance more generally--the MoPT needs to assume full responsibility for regulation. To foster the transfer, and subsequent strengthening, of regulatory functions, significant increases in CG (MoPT) outlays-possibly involving the transfer of some staff from ONPT-will likely be required. However, since (realized) expenditures of the MoPT currently amount to only some DH 20 million annually, even very substantial growth in expenditures over the next few years would have only a minor budgetary impact. M:Ali\mrpXP\rpot\tcomtxtdo Public Expenditure: Issues and Outlook Page 133 CHAPTER 12: MEETING DEVELOPMENT NEEDS SUBJECT TO MACROECONOMIC CONSTRAINTS ON EXPENDITURE The preceding chapters suggest that to respond adequately to the sector development agendas, the associated expenditures, which accounts for close to half the CG budget, may need to grow at an average of 7-8 percent annually in real terms over the medium term. This is unlikely to be consistent with continued budgetary adjustment, for which a prudent target constrains average annual real growth for CG expenditures overall not to exceed 2-3 percent. To ensure that sector development needs are adequately catered to while observing the overall budgetary constraint, there is a need to: (i) withdraw the State from activities that can be taken up equally well or better by the private sector (this inbludes larger-scale privatization, the proceeds of which could generate significant additional fiscal space); and (ii) get more out of given budgetary resources in areas where the State must continue to provide services. Under any scenario, however, the priority allocation of expenditures should be to a "core" program that addresses basic needs; fiding for such a program should be drawn mainly from reallocations. rather than increases, in the budget. To facilitate the translation of policy priorities into expenditure allocations, it would be advisable that the Government prepare a medium- term "vision" of the evolution of public expenditure. Recommended follow-up: A summary of general and sector-specific follow-up measures appears in Table 12.2 at the end of this chapter. 12.1. The analysis in preceding chapters suggests that under base case assumptions, responding adequately to the demands of rapid poverty reduction and private sector development requires almost half the CG budget to grow by some 7-8 percent annually in real terms over the next several years. By way of example, the analysis in Chapter 4 highlights that under status quo assumptions concerning efficiency and the extent of private provision, average annual real growth in CG education expenditure would need to reach almost 4 percent if the goal of near-universal schooling of 7-year-old by early next century is to be attained. Similarly, Chapter 9 suggests that, to meet the authorities' investment targets in water resource mobilization while ensuring acceptable increases in rural water supply and sewerage and sanitation coverage, annual real growth in CG outlays may need to average some 17 percent.' The bottom section of Table 12.1 shows average real growth in CG expenditures that may be required over the next few years for some of the sectors covered in Chapters 3-11, alongside the share of CG 1/ The 17 percent figure is based on the total that would be required to meet investment targets in water resource mobilization (mainly construction of dams), even though a share of this total may eventually be accounted for off-budget. Conversely, it does not allow for any major CG contributions for extensions in sewerage and sanitation infrastructure. m:\al\morlpcxp\rport\chl2textdoc Page 134 Public Expenditure: Issues and Outlook expenditures that these sectors accounted for in 1993.2 These estimates of sector expenditure "requirements" are intended to be purely illustrative; in many cases, they are based on existing efficiency patterns and rates of private provision, which it should be possible to improve upon. Altogether, a sum accounting for close to half of total CG expenditure in 1993 would need to grow at an annual average real rate of almost 8 percent to meet these sectoral "targets".' Concerning the remainder of CG expenditures (which include allocations for defense, and for general public services and public order), the analysis in this report provides little basis for estimating the rate at which they are likely to, or for judging the rate at which they should, grow. 12.2. However, to ensure consistency with continued budgetary adjustment, the average annual real growth rate of overall CG expenditures should not exceed 2-3 percent. Table 12.1 indicates that, for given assumptions about expected future tax and non-tax revenue, a profile whereby the CG deficit (or equivalently, its net financing requirement) declines gradually from a projected 1.5 percent of GDP in 1994 to near-balance by 1998 and a slight surplus thereafter would constrain non-interest CG expenditures to grow no faster than 2.5 percent per year on average in real terms through the end of the decade.' The underlying assumptions about medium-term macroeconomic performance and, in particular, tax revenue can of course be called into question; however, they are intended to serve as a prudent baseline scenario (for further details, see Annex 3, especially Table A3.1).' In particular, it has been assumed that there are limitations on growth in tax revenue. The underlying reasoning is that, while tax administration would be expected to continue improving (thereby widening the tax net), continued reductions in average and marginal tax rates (as well as rationalization of certain taxes, such as those on petroleum) aimed at stimulating investment and growth would at least partly offset the associated increases in tax revenue. It has also been assumed, based on extrapolation from the recent past, that if overall CG expenditures remain within the required envelope, the Treasury's medium-term financing needs would be met relatively easily. The implications are clear: if the constraint on the overall growth of CG expenditures is to be met, either: (i) growth of expenditures in one or more of the sectors listed at the 2/ It should be emphasized again that the "required" sectoral expenditure growth rates shown in Table 12.1 are an uncomfortable mixture of normative and positive projections. For such sectors as education and health, the growth rates are rough estimates (for a given set of assumptions) of what might be required to ensure given access rates among the population. For water resource mobilization, water supply, and sewerage, by contrast, the basis for the "required" growth in CG expenditures is the cost estimate associated with the authorities' targets for physical provision, although for some parts of the sectoral investment program it is unclear to what extent the Government as a whole is committed to its implementation in the proposed time frame. 3/ Note that the term "total CG expenditures" here refers to the sum of: (i) non-interest recurrent and capital general budget expenditure; and (ii) the balance on special accounts and annex budgets (that is, their expenditures minus any earmarked receipts). In terms of the presentation in Table 2.1, the definition of CG expenditures used here corresponds to the sum of all non-interest recurrent and capital expenditure. 4/ It must be emphasized again that this "limit" on real growth of non-interest expenditure does not in any rigorous sense define an optimal trajectory for the level of medium-term expenditures (see also footnote 7 in Chapter 2). However, it does appear desirable to adhere to a strict target concerning the CG deficit, as explained in the next paragraph. 5/ In particular, medium-term real GDP growth is projected to be slightly over 5 percent per year, and the incremental capital-to-output ratio (ICOR) is assumed to average its 1988-92 level over the period 1996-2000. m:\ali\mor\pexp\npon\chl2tut.doc Public Expenditure: Issues and Outlook Page 135 bottom of Table 12.1 must be kept below "target"; or (ii) residual expenditures must fall in real terms. Unless residual expenditures, which consist notably of those on defense and general public services and public order, can indeed be compressed to the required extent," an alternative whereby cost savings are generated and/or budgetary resources are increased must be sought. Table 12.1 - Constraints on the Mediun-Terin Growth of Non-interest Expenditure (billions of DH Unless Otherwise Specified) 1993 1994 1995 1996 1997 1998 1999 2000 Targeted Maximum Financing Need (Deficit) 5.7 4.3 3.3 2.2 1.2 0.8 -1.2 -4.5 (as % of ODP) 2.2% 1.5% 1.1% 0.6% 0.3% 0.2% -0.3% -0.9% Less: Projected Inter. Exp. 14.7 17.1 18.0 19.1 19.7 20.0 20.6 20.8 Plus: Projected Revenues 68.4 79.3 85.3 91.4 98.0 104.2 112.6 122.6 Equals: Maximum Permissible Non-interest Expenditure 59.4 66.5 70.6 74.5 79.5 85.0 90.8 97.3 - Period Average - Memo Item: 1994-2000 Average annual real increase in Maximum Permissible Non-interest Exp. 2.5% Sectoral Requirements' under Business-As-Usual % of non-interest Target CO Expenditure Annual real increase 1993 1994-2000 Total CO Expenditures 100.0% 2.5% Education 23.5% 3.7% Health 4.4% 8.2% Water Resources 2.2% 17.0% Soc. Sec. & Related Mechanisms 1.7% 10.0%, Roads 2.5% 10.0% Agriculture 6.1% 4.8% Housing 1.2% 20.0% Other ' 58.5% -1.2% Note: ' Target annual real increase calculated residually to satisfy the overall constraint on the growth of non-interest expenditure. 6/ In fact, as indicated in Section E of Chapter 2, defense expenditures have already increased substantially in 1994. m:\ali\orlxp\nportchl2txtdoc Page 136 Public Expenditure: Issues and Outlook 12.3. The rationale for a strict budget deficit target-one that is probably more stringent than the minimum required to ensure sustainability--is that resources must be released to support an expansion in private investment, which in turn is needed to underpin more rapid growth. The target deficit profile in Table 12.1 is probably more stringent than is strictly required to ensure sustainability (in other words, that the deficit does not threaten macroeconomic stability). One common sustainability criterion is that the deficit profile should not entail an increase in either the stock of (internal and external) government debt as a ratio of GDP or the stock of (high-powered) money as a ratio of GDP." Meeting this condition requires that the primary surplus' remain at least as large as the stock of government debt as a ratio of GDP multiplied by the difference between the real interest rate on the debt and GDP growth (see, for example, Fischer and Easterly, 1990). Rough calculations suggest that, under present circumstances in Morocco, this criterion would dictate a primary surplus of at least 1-1.5 percent of GDP; the actual level of the primary surplus, at some 3.5 percent of GDP, is well over this. However, several factors argue in favor of a more stringent target than preliminary calculations of what is required to ensure sustainability may dictate. Perhaps most important is that the deficit target shown in Table 12.1 would, given the expected current account deficit profile, allow the remainder of the economy (which includes LG's, public enterprises, and the private sector) to run a modest excess of investment over saving (perhaps some 0.5 percent of GDP) over the medium term; assuming that LG and public enterprise deficits can be contained within reasonable limits, the target would therefore avoid a compression of private investment substantially below private savings. A related argument is that rapid reduction in the Treasury deficit would allow an accelerated decline in the stock of domestic debt, alleviating financial repression and fostering greater efficiency in financial intermediation and investment. Finally, even restricting the argument to deficit sustainability criteria, a prudent deficit target--and thus a stringent cap on non-interest expenditures--appears warranted for two reasons. First, privatization proceeds in Morocco (which in 1993 amounted to some 0.8 percent of GDP) are accounted for "above the line", and therefore figure in the calculations of the primary surplus and the deficit. However, since privatization involves drawing down an asset, receipts stemming from it cannot be counted upon in perpetuity; there is thus a strong argument for removing these receipts from deficit calculations, particularly where sustainability criteria are concerned. Secondly, the average interest rate on government debt, which currently hovers at 6-7 percent in nominal terms (1-2 percent in real terms) may increase over the medium term as mandatory placements in Treasury paper at below-market rates are phased out over the medium term; similarly, real interest rates on external debt may increase as access to concessional funds declines relative to the past. 12.4. Ensuring that development needs are adequately provided for while observing an overall constraint on the CG (and consolidated public sector) deficit. calls for a strategy based on two principles; the first is to withdraw the State from activities that can be taken up equally well or better by the private sector. There are two dimensions to State withdrawal. The first involves reducing annual flows of CG outlays on selected activities by fostering private provision to supplement existing public services. One such activity is power generation, where the Moroccan authorities are already actively seeking independent power producer investment in new generating capacity. In the recent past, substantial budgetary transfers have been called upon to fund public investment in generating capacity; fostering 2/ It should be noted, however, that this criterion assumes, inter alia, that "steady-state" values of the relevant stocks (e.g., of government debt and money) have already been attained. 8/ The primary surplus refers to revenue minus non-interest expenditures. m:\ali\mor\pcxp\rcport\chl2text.doc Public Expenditure: Issues and Outlook Page 137 private provision will enable the CG to discontinue such outlays in the future. Other activities where greater private provision might enable partial "load shedding" by the CG budget include health care and education. It is clear, of course, that significant overhaul of the institutional and regulatory framework is a pre-requisite for significant increases in private provision.' The second dimension of State withdrawal involves relinquishing ownership of asset stocks through larger-scale privatization, whether or not the activities in question currently require support from the CG budget. A broad-ranging privatization program involving some of the major state-owned concerns in activities such as transport, energy, and telecommunications is unlikely to entail much loss in terms of future Treasury income, since the rate of return on assets in many of these concerns appears to be low."o Conversely, large-scale privatization would generate large-precisely how large is unclear, as indicated in Box 12.1-near-term revenue windfalls for the Treasury. These windfalls could be used to retire part of the Treasury's domestic debt. Among the beneficial effects of such debt retirement would be: (i) reduced financial repression and crowding out of private investment; and (ii) a lower medium-term interest bill (which would, for a given tax revenue profile, create extra "fiscal space" to accommodate larger increases in non-interest CG expenditures, notably those catering to basic needs). 12.5. The second principle is to get more out of given budgetary resources in areas where the State must continue to provide services. Even if partial private provision of services can be fostered, in certain areas significant State provision will remain essential over the longer term, whether on distributional or on market failure grounds. Such areas include, inter alia, social assistance, education, health care, basic rural infrastructure, water resource mobilization, irrigation services, and roads (other than motorways). The guiding principle for State provision in these activities should be to improve the cost-effectiveness of service delivery and supplement budgetary resources (as well as increase the equity of their incidence) through cost recovery. Improving cost-effectiveness calls for a range of different policy measures, depending on the activity in question. One set of policy measures concerns rationalization of staffing. For example, Chapter 4 indicates that moderate increases in student-teacher ratios at the secondary level could generate substantial cost savings, probably with little loss in the quality of tuition. A second set of policy measures is needed to ensure that full benefits are derived from the infrastructure, facilities, and services provided by the State; such measures include choosing the right design for infrastructure and facilities, ensuring adequate outlays for operations and maintenance, and complementary measures (e.g., informational campaigns) to attract users. For example, the benefits from providing additional rural schools will be limited if pupils, notably girls, cannot be attracted and retained; similarly, rural health centers will be of limited benefit to the population if they are constantly wanting in materials and supplies. A third set of policy measures involves carrying out rigorous cost-benefit analysis of proposed investments where benefits can be quantified, taking into account the scope for demand-side management. For example, it may be possible to delay certain costly investments in water resource mobilization by encouraging greater conservation of water in irrigation. Finally, cost recovery (or, more generally, cost sharing with communities to whom public services are provided) can often support significant extensions or improvements in services provided by the public sector for given budgetary resources. Just as importantly, cost recovery, if concentrated on services that are used 2/ For example, Chapter 10 discusses the preparatory measures required prior to inviting bids to install additional power generating capacity from independent power producers. 10/ In fact, as discussed in Section D of Chapter 2, the net contributions of EPIC's to the Treasury have been close to zero over in recent years; additionally, they have built up substantial arrears to the Treasury. m:\ai\mor\pexp\report\chl2tcxt.doc Page 138 Public Expenditure: Issues and Outlook predominantly by the better-off, can be a powerful tool for improving the targeting of public expenditures. Box 12.1: How Much Could a Bad-Ranging Privatization Prgnmn Yield? While the correct answer is undoubtedly "a lot", the short answer is that insufficient information is presently available to yield a reliable estimate. Available balance sheet information for certain state-owned enterprises (in energy, telecommunications, and transport) which could serve asa,starting pointffor.etimating the v#peqf equity, are shown below (figures are in billions of DH). State*Owned Entity Total Assets Net Fixed Assets Net Worth Office NAional de I'E2ecuicidM (ONE), 1993 27A 21.2 9.5 Office Nadonal des Poses et Tlicomniwdcaion 11.8 7.6 5.4 (ONP7), 1991 Royal AirMarac (RAM), 1992 52 1.9 0.3 Compagate Marocaine de Navihgadon 1.2 0.5 0.2 (COMANAV). 1991 Offle d'xpoit=dan des Pors (ODEP), 1992 2.6 1.2 1.1 Ofice Nadonal des Aropora (ONDA), 1990 0.52 0.13 0.14 Ofice Natdnal des Transports (ONT), 1992 1.6 0.02 0.1 1MARPHOCEAN, 1991 1.3 0.64 0.29 Office Naonal de I'Eau Powble (ONEP), 1992 7.3 4.3 4.3 Offe NAilonal des Caemins de Fer (ONCP), 12.4 6.8 3.8 1992 In spite of this information, one faces at least three problems in estimating the amount that could be generated through a large-scale privatization program. First and most importantly, of the enterprises for which data is available, the book value of assets appears in many cases to be a poor indication of their true worth, and of what they might fetch if sold. For example, based on ONE's installed generation capacity of around 2400 megawatts, the replacement value of its net fixed assets would be at least twice the quoted book value of DH 21.2 billion. Second, for some key enterprises, notably the Office Ch&rfen des Phosphates (OCP), no information on the value of equity is available. Third, for certain enterprises, it is unclear what portion of assets it might be feasible for the State to relinquish ownership of. For example, on the basis of international experience it is unlikely that ownership of power transmission infrastructure could be relinquished in the near term. Nevertheless, it is instructive to note that available book estimates of the total net worth of the enterprises listed above already amounts to some DH 25 billion, almost one-third of the Treasury's end-1993 domestic debt (excluding that to the Central Bank) of about DH 76 billion. The interest bill on domestic debt during 1993 amounted to DH 6.3 billion; assuming a pro rata reduction in interest payments alongside any debt retirement, the interest bill could decline by over DH 2 billion per year if State ownership of the assets were hypothetically relinquished, creating extra fiscal space of almost 1 percent of 1993 GDP. n #tlmr\poeeci2ext.doc Public Expenditure: Issues and Outlook Page 139 12.6. In all cases, the priority allocation of budgetary resources should be to a 'core' public expenditure program catering to basic needs. The "core" program would cater to the provision of basic education and health care, clean water, nutritional and other forms of social assistance for the needy, adequate shelter, and basic rural infrastructure, targeting rapid increases towards universal access to these services. Widening access to these basic services (particularly in rural areas, where access has traditionally been much more restricted) is critical not only to effective poverty reduction, but also to sustained economic growth and welfare improvements. It is particularly important that policy-makers take the initiative to prioritize such a core public expenditure program, given that many of the prospective beneficiaries of increased access to basic amenities have little political voice or weight. 12.7. Since Morocco'spublic (notably CG) spending is already large by international standards, expenditure reallocations-underpinned by "load-shedding' and cost savings-should be the main source of increases infinding for basic services. As emphasized throughout the report, there is substantial scope for savings in budgetary expenditures in many sectors, most notably in "commercializeable" activities (such as energy, mining, and transport), and certain human resource and social services (such as secondary and higher education, and subsidies on granulated sugar). Additional areas where important savings could be generated--notably by deferring certain planned investments-include water resource mobilization and irrigation, though such savings hinge critically on demand-side management measures. Potential "load-shedding" and cost-saving measures in the various sectors are enumerated among the recommendations summarized in Table 12.2. Two examples--chosen at random-may be useful in illustrating the potential for expenditure rationalization and the implicit tradeoffs among the various sectors. First, in 1993 and 1994, budgetary transfers to fund investment in (thermal) electricity generation amounted to more than the entire capital expenditure of the Ministry of Public Health and the Ministry of Housing put together. In principle, therefore, withdrawing the public sector from (thermal) power generation in favor of independent producers would allow major increases in outlays on (say) basic health care services without necessitating any increases in overall budgetary expenditures. Second, cost savings and load-shedding in the education sector through some of the measures outlined in Table 4.4 (increasing student-teacher ratios and fostering greater private provision of education, even without internal efficiency improvements) would be sufficient to cover (say) the entire "target" increases in health, housing, and roads taken together over the next decade, even while allowing for rapid increases in primary enrollment." 12.8. As a policy tool for prioritizing core expenditures and clarifying the potential.for expenditure reallocations, there is a strong case for articulating an (evolving) government-wide medium- term 'vision' of public expenditures which would guide annual budgetary allocations. As indicated in Chapter 1, Morocco does not presently use a multi-year framework to give overall strategic direction to public expenditure allocations. Expenditure allocations are determined on an annual cycle during preparation of the Finance Law, and are largely the result of a series of disjoint bilateral bargaining processes (see also Annex 2).12 The absence of a multi-year framework with clear strategic guidelines 11/ This assumes, for illustrative purposes, that savings in education expenditures can be generated at an even pace over the next decade, so that funds could be reallocated in increments. 12/ It should however be noted that the annual investment budget does indicate expenditure appropriations in future years-known as crAits d'engagement-where multi-year projects are concerned. While this introduces a multi-year dimension into the annual budget, it does not resolve the problems created by the absence of an overall m:\ali\mor\pcxp\rcport\chl2textdoc Page 140 Public Expenditure: Issues and Outlook regarding the evolution of public expenditure allocations tends to reinforce inertia in the budgetary appropriations process, since in the absence such guidelines the status quo tends to be the natural point of reference and starting point for bargaining. While a resurrection of the rigid former development plans is not advisable, there is thus a strong case for initiating a Government-wide process to draw up an indicative medium-term blueprint for the entire public expenditure program, perhaps as part of a broader- based charte de ddveloppement which would lay out a medium-term plan of action for the State in fostering accelerated private sector-led growth and poverty reduction. Such an expenditure blueprint, which would ideally cover a period of at least several (perhaps ten) years and could be updated annually, would establish clear links between priority policy objectives and expenditure allocations. It would also give a clearer picture of possible tradeoffs among expenditure allocations in different sectors and, by highlighting areas where substantial scope for cost savings exists, would impose greater discipline on individual Government departments to implement the necessary measures. medium-term strategic view of public expenditures. m:\ali\mor\poxp\report\chl2textdoc Public Expenditure: Issues and Outlook Page 141 Table 12.2 - Summary of Recommended Follow-up Measures Area Principal Recommendations General and Miscellaneous * Review the appropriateness of maintaining distinct special Treasury accounts for a variety of finctions. * Strengthen framework for recording and processing LG expenditure data. * Review CG and LG staffing needs and remuneration policy by sector and occupational stream. * Prepare a detailed assessment of the financial health and prospects of the State phosphates industry. * Extend and accelerate implementation of action plans to clear public sector arrears and prevent their recurrence. * Assess the incidence of tax expenditures, notably in the housing sector. * Prepare a mediun-term public expenditure program that clearly translates public policy objectives into public expenditure targets, perhaps as part of a broader charte de diveloppement. * Prepare and implement, for each sector, an action plan of legal, regulatory, and institutional measures required to encourage private sector activity; this includes preparing and implementing a broad-based privatization program covering several large public utilities and other enterprises. Social Security and Safety Net * Assess the medium-term financial viability of state-owned social security and mutual insurance Mechanisms fuds. * Implement measures to strengthen the funds' financial position; in particular, for those funds serving government employees, adjust CG employer contributions to adequate (statutory) levels. * Investigate ways to extend social security and related coverage, possibly confining mandatory public sector coverage to a "minimalist' package and fostering private sector provision of supplemental coverage. * Ensure more adequatefiundingfor, and better coordination among, social assistance mechanisms that are well-targeted to the poor (such as food distribution programs), while improving their cost-effectiveness; funds can be reallocated from mechanisms that are poorly targeted, such as sugar subsidies. Education and Vocational Training * Undertake detailed diagnostic assessment of staffing requirements, notably for teachers at the secondary level, with a,view tr reducing unit costs. * Design and implement demand- and supply-side measures to increase primary enrollment, particularly among girls in rural areas. * Ensure more adequate outlays on pedagogical materials at all levels. * Design and implement measures to increase cost recovery for services among the better-off in higher education. * Introduce payroll tax credits against enterprises' vocational training-related expenditures and/or allow private suppliers of training access to payroll tax finds. * Design and introduce measures to increase cost-recovery in public vocational training programs. m:\ah\mor\pcxp\rcport\chi2texLdoc Page 142 Public Expenditure: Issues and Outlook Table 12.2 - Sununary of Recommended Follow-up Measures Area Principal Recommendations Health * Increase expenditure allocations for medical supplies and equipment, particularly in out-patient health centers. * Increase access to out-patient, preventive health care services, particularly in rural areas. * Finalize design and accelerate implementation of a more robust system of health care financing based on wider insurance coverage and a publicly-funded mechanism for covering the poor. * Increase cost recovery in urban curative health care services provided by public hospitals. * Examine the potential for privatizing state hospital management and ancillary services. Housing * Draw up and adopt an explicit policy on housing in rural areas. * Examine the potential for selling the state-owned housing stock to government employees. * Study the incidence of explicit mortgage interest subsidies and implicit tax expenditures with a view to rationalizing the system. * Review the impact of urbanization standards and zoning regulations on the cost of land. * Introduce competition from the private sector in State contracts for low-income housing developments. Agriculture * Undertake detailed assessment of the incidence of public agricultural expenditures, including tax expenditures, on the rural poor. * Prepare and implement measures to increase cost recovery in irrigation; the extra resources could be used to increase the efficiency of irrigation systems and investment in environmental protection. * Review the costs and benefits of the National Irrigation Program. * Accelerate privatization and opening to private sector provision in agriculture and agro-industry. Transport * Increase expenditure allocations for road maintenance, notably in rural areas; this could be funded at least partly by increases in user charges. * Remove restrictions on trucking. * Adjust rail tarffs and compensation for mandated fare concessions to adequate levels. * Prioritize rehabilitation over extensions of the rail network. * Raise private capital (rather than Treasury equity) for investments in shipping and air transport by opening equity capital to private sector participation. * Examine the possibility of opening the equity capital in ports, airports, and motorways to private sector participation. m:Ah\mor\pWp\report\ch12text.doc Public Expenditure: Issues and Outlook Page 143 Table 12.2 - Sumnuary of Reconunended Follow-up Measures Area Principal Recommendations Water supply and Sewerage * Review investment requirements in water resource mobilization, taking into account impact of needed demand-side management measures. * Ensure that rural water supply program is kept on track and receives adequate funding. * Complete preparation of sewerage master plans and draw up firm financing plans for the required investments. * Review sewerage tariffs, as well as disposal standards and their enforcement. * Open water distribution, sewerage, and sanitation services to private sector participation, in the first instance by privatizing services currently offered by the Rigies. Energy * Accelerate preparation and implementation of legal, regulatory, and institutional measures (including more adequate tariff schedules) in the power sector to permit public sector withdrawal from (thermal) electricity generation and possibly distribution. * Ensure that rural electrification program remains on target and receives adequate funding. * Rationalize pricing and taxation of petroleum products. * Examine possibilities for privatizing petroleum refineries. * Pursue rationalization of activities of state bodies involved in petroleum exploration and production and coal mining. Telecommunications * Prepare and implement legal, regulatory, and institutional measures required to attract and sustain private provision of telecommunications services; this includes opening the state telecommunication company's equity capital to private participation. * Implement revised telecommunications tariff structure. m:\alilmorlpcp\repot\chl2txtdo ANNEX 1: CLASSIFICATION OF MOROCCO'S EXPENDITURES ACCORDING TO THE IMF FUNCTIONAL CLASSIFICATION A. Introduction 1. The purpose of this annex is to explain how Morocco's general budget CG expenditures have been made to fit the standard IMF classification of government expenditure.' A classification of Morocco's CG budgetary spending in recent years according to the IMF standard was required for the analysis in Chapter 2 (see Table 2.2); regrettably, however, 1987 is the most recent year for which the IMF's Government Finance Statistics provide data on Morocco's CG expenditures by function. Consequently, a functional classification of Morocco's expenditure according to the IMF standard had to be reconstructed by Bank staff. The remainder of this annex reviews the standard IMF functional expenditure categories and records which items of Morocco's expenditures have been classified in each category. It should be emphasized that the classification described here is confined to general budget expenditures; special Treasury accounts and annex budgets (see Section B of Chapter 2) are excluded. B. General Public Services and Public Order 2. Under the IMF classification, this category covers general public services (including the executive and legislative organs, financial and fiscal affairs, external affairs, foreign economic aid granted by the country, and overall planning and statistical services) and public order and safety affairs (including police and fire protection, law courts, and prison administration and operation). In the case of Morocco, recurrent and capital expenditures of the following State or Government entities have been assigned to this category: the Monarchy; Parliament; the Prime Minister's office; the Justice, Foreign, Interior,' and Finance Ministries; the General Secretariat of Government; Administrative Affairs; Services for Moroccans Resident Abroad; and Planning and Statistical services.' C. Defense 3. Under the IMF classification, this category covers military and civil defense administration and operation, foreign military aid by the country (including contributions to international peace-keeping forces), and defense- related applied research and experimental development. In the Moroccan context, all recurrent and capital expenditures of the National Defense Administration have been assigned to this category. 1/ See A Manual on Government Finance Staistics, International Monetary Fund, 1986. 2/ CG spending on a public works program (known as the Promotion Nationale) judged to benefit the rural poor, which falls within the Interior Ministry's budget, has been classified under welfare expenditures (see Section F below). Spending by the Under-Secretariat for the Environment, which also falls under the Interior Ministry's budget, has been split out and classified under housing and community amenities (although it is small). 3/ Through the summer of 1992, these services are provided by the Ministry of Planning; thereafter (through late 1993), they are provided by the Ministry of Economic and Social Affairs, but maintain a distinct budgetary allocation under the rubric "Integrated Economic and Social Programming". m:\ali\mor\pcxp\report\anncx1.doc Annex 1 Public Erpenditure: Issues and Outlook Page 2 of 4 D. Education 4. Under the IMF classification, this category covers all education affairs and services, including pre-primary, primary, -secondary (general programs, vocational, and technical), tertiary, and education services not definable by level, as well as subsidiary services to education (e.g., school meals and university lodgings). In the case of Morocco, recurrent and capital expenditures of the Ministry of National Education and those of the Ministry of Public Works and Vocational Training (Vocational Training sections only) have been assigned to this category.' E. Health 5. Under the IMF classification, this category covers hospital affairs and services, clinics, medical, dental, and para-medical practitioners, public health affairs and services, medicaments and medical equipment, and applied research related to health. In the Moroccan context, we have assigned recurrent and capital expenditures of the Ministry of Public Health (MoPH) to this category. F. Social Security and Welfare 6. Under the IMF classification, this category covers social security affairs and services (including sickness, maternity, and temporary disablement benefits, pension schemes for civil and military employees, family allowances, and unemployment compensation) and welfare services (including residential institutions for children and old and handicapped persons). In the case of Morocco, we have assigned recurrent and capital expenditures of the social affairs arm of the Ministry of Employment, Handicrafts and Social Affairs,s as well as those of the Ministry of Veteran Affairs to this category of budgetary CG expenditures. Also assigned to this category are certain pensions and other benefits paid to CG employees, as well as budgetary contributions to the Caisse Marocaine de Retraite (CMR), the Rdgime Collectif d'Allocation de Retraites (RCAR), and the Caisse Nationale des Organismes de Prdvoyance Sociale (CNOPS), which appear under the non-ministerial recurrent expenditure heading of Charges Communes. G. Housing and Community Amenities 7. Under the IMF classification, this category covers housing (including the provision of serviced lots), potable water distribution, sewerage and solid waste disposal facilities, street cleaning and lighting, and pollution abatement and control. In the Moroccan context, we have assigned the following / Recurrent expenditures associated with Vocational Training by the Ministry of Public Works and Vocational Training, as well as training expenditures by other ministries, could not be included in this functional category as insufficient information was available to break them out. i/ Employment is classified under "Other Economic Services". Expenditures on social affairs exclude capital spending on literacy programs and training, which have been classified under Education expenditures. m:\ali\mor\pcxp\rcpot\sanex1.doc Public Expenditure: Issues and Outlook Anner 1 Page 3 of 4 expenditures to this category: recurrent and capital expenditures of the Ministry of Housing; recurrent and capital expenditures for potable water distribution by the Ministry of Public Works; and recurrent and capital expenditures of the Under-Secretariat for the Environment in the Ministry of the Interior (Mol). H. Recreational, Cultural. and Religious Affairs 8. Under the IMF classification, this category covers recreational and cultural affairs and services, broadcasting and publishing, and religious and other community affairs and services. In the Moroccan context, we have assigned recurrent and capital expenditures of the Ministry of Youth and Sports, the Ministry of Culture, the Ministry of Religious Affairs, and the Information arm of the Ministry of the Interior (and Information) to this category. I. Fuel and Energy 9. Under the IMF classification, this category covers all affairs and services relating to fuel (including coal and other solid mineral fuels, petroleum and gas, nuclear fuel, and wood), and electricity and other energy sources. For Morocco, we have assigned recurrent and capital expenditures of the Ministry of Energy and Mines (energy sections only) to this category." J. Agriculture, Forestry, Fishing, and Hunting 10. Under the IMF classification, this category covers agricultural affairs and services (including agricultural land management, irrigation systems, agrarian reform and land settlement, farm prices and incomes, agricultural extension, veterinary services, and pest control), forestry, fishing, hunting, dams, and agricultural research and experimental development. In the Moroccan context, we have assigned recurrent and capital expenditures of the Ministry of Agriculture and Agricultural development (MAMVA, formerly MARA) and the Ministry of Fisheries and the Merchant Navy to this category.' Capital expenditures on the construction and maintenance of dams by the Ministry of Public Works have also been assigned to this category. K. Mining. Manufacturing, and Construction 11. Under the IMF classification, this category covers expenditures on affairs and services relating to mining and mineral resources (other than fuels), manufacturing, and construction. In the case 6/ All recurrent expenditures of the Ministry of Energy and Mines are presently assigned to this category, as they could not be split out. 7/ Insufficient information was available to split out merchant navy components of expenditures from those on fisheries, but the former are likely to be very small. m:\ali\mor\pexprcpot\annex1.doc Annex 1 Public Expenditure: Issues and Outlook Page 4 of 4 of Morocco, we have assigned the following expenditures to this category of budgetary CG expenditures: (i) mining services and affairs by Ministry of Energy and Mines; and (ii) budgetary transfers to cover interest rate subsidies and transfers to a capital equipment fund (both appear under the Charges Communes budgetary rubric). L. Transport and Communication 12. Under the IMF classification, this category includes all affairs and services relating to road, water, railway, air, and pipeline transport, and all communication affairs and services (postal, telephone, telegraph, cable, wireless, and satellites), excluding radio and television broadcasting systems. In the case of Morocco, we have assigned the following CG budgetary expenditures to this category: (i) recurrent expenditures, as well as capital expenditures on general overhead, roads, and ports of the Ministry of Public Works; (ii) recurrent and capital expenditures of the Ministry of Transport; and (iii) recurrent and capital expenditures of the Ministry of Post and Telecommunications. M. Other Economic Affairs and Services 13. Under the IMF classification, this category covers affairs and services relating to distributive trade affairs (including storage and 'warehousing), hotels and restaurants, tourism, multi- purpose development projects, and economic, commercial, and labor matters, as well as consumer subsidy payments. In the case of Morocco, we have assigned the following CG budgetary expenditures to this category: (i) recurrent and capital expenditures of the Ministries of External Trade, Foreign Investment, and Tourism, Economic Affairs, and Commerce, Industry, and Privatization, as well as the employment and handicrafts sections of the Ministry of Employment, Handicrafts, and Social Affairs; (ii) expenditures allocated to the development of the Western Sahara Provinces and General Affairs;' and (iii) miscellaneous transfers (chiefly to various off-budget funds), including exchange risk payments, transfers to the hotel development fund and the regional development fund, and, mainly, transfers to the Caisse de Compensation and the Office National Interprofessionnel des Crrales et Ugumineuses (ONICL) to cover price subsidies, under the budgetary rubric of Charges Communes. N. Other Expenditures 14. Under the IMF classification, this category covers expenditures not elsewhere classified, including interest payments and outlays for underwriting and floating government debt instruments, and transfers (not allocated to a particular function) between different levels of government. In the case of Morocco, we have assigned CG budgetary interest payments, both foreign and domestic, as well as outlays in connection with floating Treasury paper under the budgetary rubric of Charges Communes, to this category. 8/ The department in charge of development for the Western Sahara changes name to General Affairs after 1992. m:\alilmorlpczp\rcportlannex1.doc ANNEX 2: BUDGETARY PROCEDURES IN MOROCCO' A. Introduction 1. The purpose. of this annex is to describe the key steps involved in the preparation, approval and execution of the annual Finance Laws (Lois de Finances), taking account of both the recurrent (Fonctionnement) and investment (Investissement) components of the CG general budget. A diagrammatic flow-chart attached to this annex summarizes these key steps. Budgetary procedures at the LG level differ little in substance from those at the CG level. In general, procedures in Morocco are based closely on the French tradition of budgetary and accounting procedures.' B. Preparation and Approval of the Annual Budget 2. By about mid-April each year, the Ministry of Finance's Budget Directorate initiates the budget preparation process by amassing information concerning: (i) budgetary execution for the preceding year and the first quarter of the current year by sector; and (ii) the outlook for budgetary revenues, based on discussions with the Tax Directorate and the Customs Administration. Concurrently, the Finance Ministry sends a circular to other Ministries and Departments calling for their revenue and expenditure proposals for the following year. After proposals have been submitted and reviewed, the Finance Ministry drafts a budgetary framework letter (Lettre de Cadrage Macro-4conomique) addressed to all ministries and departments. This document, signed by the Prime Minister, lays out a budgetary envelope for each sector within an overall macroeconomic framework. The new procedure of sending out a budgetary framework letter has helped simplify the formal (bilateral) Review Committee' meetings that are subsequently convened with representatives from each ministry or department. The Review Committee is a negotiating forum, especially as concerns the capital budget. Ultimately, this body makes a selection among proposed projects and determines amounts to be appropriated, based on the overall budgetary constraints set out in the budgetary framework letter. Criteria for project selection include satisfactory technical and feasibility studies and, where applicable, acceptable economic rates of return. However, there is no requirement of formal compliance with the objectives of an overall plan or expenditure program, since the erstwhile constitutional requirement of a five-year National Development Plan was abolished in a September 1992 amendment. During the Review Committee process, the Ministry of Finance is the dominant force and can exercise a veto (droit d'arbitrage) if agreement cannot be reached as to budgetary appropriations for the various ministries or departments; in exceptional circumstances, disputes can be referred to the Prime Minister for arbitration. 1/ Among other sources, the content of this annex draws on an informal IMF note entitled "Note on the Preparation, Approval, and Execution of the Government Investment Budget" prepared a few years ago. 2/ For details on procedures in French-based systems, see A Manual on Government Finance Statistics, IMF, 1986, pp. 87-92. 3/ In the past, the Ministry of Planning (abolished in 1992) participated in the review of proposed investment appropriations; Planning Ministry representatives sat on the Review Committee (known at the time as Commissions Triparites). m:\ali\mor\pcxp\rcport\annex2.doc Annex 2 Public Expenditure: Issues and Outlook Page 2 of 8 3. Once the review process has taken place for each ministry or department, the Ministry of Finance's Budget Directorate prepares a draft Loi des Finances,4 which contains proposed appropriations for all Government departments, as well as targeted revenue collections, and allocations to special Treasury accounts and annex budgets. The draft Finance Law is then submitted to, and reviewed by, the Council of Government (Conseil du Gouvernement), chaired by the Prime Minister, and subsequently to the Council of Ministers (Conseil des Ministres), chaired by the King. Further changes in the draft law can be introduced as a result of this review. Once the draft law has gone through this review process, it is submitted to the Parliament (by November 1).1 In the Parliament, the draft Finance Law is reviewed by various committees, and then presented to the full plenary Assembly (Assemblie Pliniere), which votes it into law by December 31. Thereafter, the Finance Law becomes effective and is enacted and published in the official gazette (Promulgation et Publication au Bulletin Oficiel). Concurrently, a document giving the detailed breakdown of the investment budget, known informally as the Morasse Budgitaire, is issued by the Ministry of Finance. Details of the recurrent budget are.not habitually compiled as a volume. 4. Except for expenditures on wages and salaries, for which budgetary execution is centralized (see below), all credits approved for the current year (credits de paiement) must, before they can be used, go through a process of "delegation" and "notification". Delegation involves the authorizing officer in each Ministry (Ordonnateur principal ou secondaire)' legally empowering sous-ordonnateurs to commit expenditures against specific credits, and requires the approval of the expenditure commitment comptroller's office (Contrle de l'Engagement des Depenses, or CED). Notification empowers sous- ordonnateurs to authorize the issuance of payment orders against credits delegated to them, and requires the approval of the cashier's department (Trisorerie Gendrale du Royaume, or TGR). C. Execution of the Recurrent Budget 5. Wages and Salaries. Execution the part of the recurrent budget dealing with wages and salaries is almost completely centralized. All ministries and departments delegate the execution of their staff remuneration budgets to the Ministry of Finance's Direction de la Rdmundration et du Paiement des Pensions (DRPP), often still referred to as DOTI, its former acronym. Consequently, employees on the Central Government payroll are paid centrally through the computerized DRPP system without a physical transfer of funds to other ministries or departments ever taking place. The exceptions are: (a) military and para-military personnel below a given rank, who are paid in cash directly in the barracks; and 4/ The Lois des Finances, codified in Dahir no. 1-72-260 dated September 18, 1972, are the legal instruments state the nature, amount, and allocation of the Central Government's expenditure and revenue. The annual Loi des Finances is voted on by the Parliament and enacted as a law (Dahir) before the beginning of each fiscal year (which in Morocco coincides with the calendar year). 5/ This deadline was overshot during preparation of the 1994 budget, due to the change in Government during November 1993. 6/ Each Minister is the Ordonnateur principal des dpenses for his Ministry, but can delegate this function to senior civil servants (such as provincial or central directors) who then become Ordonnateurs secondaires. m:al\mo\pexp\rpodanx2.doc Public Expenditure: Issues and Outlook Annex 2 Page 3 of 8 (b) short-term personnel in diplomatic missions abroad. For these categories of staff remuneration, there is an effective transfer of funds to the relevant department. Historically, the discrepancy between ex ante budgeted wage expenditure and ex post actual wage expenditure has been minor, both in the aggregate and for individual ministries or departments. These differences are usually explained by contingencies and discrepancies between authorized positions and those actually staffed. 6. Non-Wage Recurrent Expenditure. Non-wage recurrent expenditure is divided into two categories: goods and services; and transfers and charges communes (expenditures that cut across, or cannot be allocated among, ministries or departments). For the procurement of goods and services, budgetary execution procedures depend on the amount of spending involved. For lots of goods and services under DH 100,000, no competitive tendering is required. The sous-ordonnateur in the relevant department commits funds by preparing a purchase order (bon de commande) which identifies a supplier but lists at least two alternatives. The order slip must receive CED approval (engagement); subsequently, it is sent to the selected supplier, who supplies the merchandise or service and invoices the relevant department. The debit is then recorded and checked against "standards" where applicable for any errors -or overcharges; this step is known as liquidation. Next, payment order documents are prepared and approved by both the sous-ordonnateur and the representative of the comptroller (comptable assignataire); this phase is known as ordonnancement. The package is then sent to the cashier's department (TGR) for final approval and payment (visa bon a payer). Payment of sums larger than DH 2,000 are made by bank transfer to the supplier's account as specified in the bon de commande; checks are issued for amounts up to DH 2,000. 7. For the procurement of lots of goods and services worth over DH 100,000, the procedure is similar, except that the commitment phase habitually requires competitive tendering (marchg adjudicataire). For procurement of lots exceeding DH 1 million in value, open competitive bidding (appel d'offres ouvert) must be applied, save in exceptional circumstances where the good or service is eligible for direct purchase (see below). Open competitive bidding involves, inter alia, preparing detailed bidding documents, advertising openly, and going through a formal evaluation of bids and awarding of contracts (commissions d'ouverture des plis, dejugement des offres, et d'attribution des marches publics). For procurement of lots not exceeding DH 1 million in value, a more restricted bidding process (appel d'offres restreint) may be used; the same rules apply as in competitive bidding, except that advertising may be restricted to a small number of suppliers. Finally, under certain circumstances, the procuring ministry or department can simply rely on direct agreement (entente directe) with a supplier; in this case, no proof of competitive tendering or equal and fair treatment for all prospective suppliers is required. This procedure is used in such cases as purchases of goods and services from public monopolies, and of national security- and defense-related items. 8. After a contract is awarded, remaining steps follow normal budgetary procedures. Legal commitment to the expenditure requires formal CED approval of the procurement documents, which are prepared and signed by the authorizing officer. Subsequently, the contractor is notified (ordre de service) and execution of the works (or procurement of the goods and services) commences. As the work proceeds (or as goods are delivered), the associated invoices are verified and approved by those responsible for the supervision of each contract (liquidation et ordonnancement). Upon satisfactory verification, a payment order (mandat de paiement) is prepared and sent to the cashier's department m:\ali\morlpcxp\reportlannex2.doc Annex 2 Public Expenditure: Issues and Outlook Page 4 of 8 (TGR). The latter verifies it, approves the payment (vu bond payer), and eventually liquidates the debt to the contractor through bank transfers (virement bancaire). D. Execution of the Investment Budget 9. Aside from the provisions concerning carryovers (described in the next paragraph), which pertain only to the capital budget, all-budgetaryproceduresapplicable to the-recurrent (non-wage) budget are also applicable to the investment budget. Moreover, efforts have been undertaken to standardize budgetary procedures as between the central and local Government levels. This effort has facilitated staff training and the on-going decentralization program. 10. Concerning carryovers (reports de crdit), any investment credits in the preceding year against which expenditures have already been committed (with CED approval) are eligible to be brought forward to the current year; remaining (unused) credits in the preceding year are automatically cancelled by an article in the Finance Law. All eligible carryover appropriations are automatically updated at the end of the preceding year and approved through a computerized management information system without the need for the relevant ministry or department, as was the case previously, to produce a formal document (6tat de reports) detailing the accounts for carryover appropriations. This new procedure allows the authorizing officer to proceed with the execution of expenditures committed in the preceding year without interruption.' The actual ttat de report needs only to be produced by June 1 of the current year; the document, prepared by the ordonnateur, gives the exact situation of: (i) commitments (engagements) against credits during the preceding year; and (ii) disbursements against the on-going commitments (paiements sur marches engages). E. Monitorifn and Evaluation 11. Before the reforms of the 1980's were launched, there were no provisions for systematic monitoring and evaluation of budgetary procedures and execution in Morocco. Recently, however, substantial progress has been made in terms of simplifying and increasing the efficiency of procedures to improve execution rates. Each ministry or department now has staff responsible for producing periodic (usually monthly) progress reports (tableaux de bord) which summarize both the physical and financial facets of capital budget execution. Among other advantages, this has facilitated the annual production of the 6tat de report. 12. A good indicator of improvements in budgetary execution procedures is the declining ratio of carry-overs and the improving rate of commitments and payments (see Table 1). For example, while carry-over appropriations-for all ministries and departments listed in the CG general budget taken together-averaged 53 percent of total credits (that is, new credits plus carry-over appropriations) over 7/ The former practice, abandoned 2-3 years ago, of requiring the relevant ministry or department to re-submit past budgetary allocations (against which expenditures had been committed but which had not yet given rise to actual payments) for approval before being allowed to proceed with their execution was a significant impediment to project execution. m:\ali\mor\pep\rport\anncx2.doc Public Expenditure: Issues and Outlook Anner 2 Page 5 of 8 the period 1981-85, they averaged only 23 percent of total credits by 1991-92. Similarly, CED-approved commitments reached about 86 percent of total credits in 1991-92, as compared with only about 52 percent during the period 1981-85. Part of the improvement is a mechanical corollary of the sharp reductions in the capital budget over the second half of the 1980's; however, it is also true that investment programs are more rigorously prepared and better adapted to institutional capacity and resource availability than they were a decade ago. However, there remain substantial discrepancies among execution rates for different ministries. Table A2.1 - Execution of the Investment Budget (average % Sare of Total Credits) 1981415 1986-90 1991-92* Carry-Over 52.6 29.1 23.2 Commitments 51.5 86.3 85.7 Payments 35.8 56.0 60.3 13. To further improve budgetary procedures and execution, the Moroccan authorities have requested a study to evaluate certain ministries' budgetary execution capacity, particularly where projects are financed by donor funds. The study would cover the entire budget execution cycle, from the time a contract is awarded to the time contractors' invoices are settled. This study will provide an opportunity to remove remaining administrative bottlenecks to further improve budgetary execution. A detailed study of budgetary procedures, which includes a check-list for those involved in procurement and budgetary execution, has already been prepared for the Ministry of Agriculture (see MAMVA, 1994). m:ali\mor\pczp\rcport\anncx2.doc Annex 2 PubUc Expenditure: issues and Uugook Page 6 of 8 PRINCIPALES ETAPES DU PROCESSUS BUDGETAIRE (ADMINISTRATION CENTRALE) Envoi au Ministère des Finances des propositions de recettes et de dépenses par ministère (avant le 1er juillet) Rédaction par le Ministère des Finances (avec signature du Premier Ministre) et distribution de la lettre de cadrage macro-économique aux autres ministères Commissions de négociation et arbitrage pour chaque ministère Soumission du projet de Loi de Finances au: - Conseil de Gouvernement - Conseil des Ministres Soumission au Parlement (Commissions puis Assemblée plénière, avant le 1er novembre) Vote de la Loi de Finances par le Parlement (avant le 31 décembre) Promulgation de la Loi de Finances et publication au Bulletin Officiel Dépenses de personnel : délégation de crédits à Autres dépenses courantes et d'investissement: la DRPP/DOTI édition et diffusion du document retraçant la morasse budgétaire agréée pour chaque ministère et département en ce qui concerne l'investissement A B ruùUc hsxpendauure: Issues ana Uuooi Annex .4 Page 7 of 8 A B Préparation par ministère du programme d'emploi Paieent de alareset atre tratemnts(crédits de paiement), visé par l'Ordonnateur et mensuels envoyé pour approbation: - à la Trésorerie Générale (TGR) - au Contrôleur des dépenses (CED) Fin Délégation des crédits de paiement à l'administration utilisatrice L (autorisation d'engagement) Crédits supérieurs à DH 100,000 : trois procédures de passation de marchés Crédits inférieurs à DH 100,000: préparation - appel d'offres ouvert (compétition) d'un Bon de Commande - appel d'offres restreint (restrictive) - entente directe (négociations directes) Envoi des documents du marché pour visa au contrôleur des dépenses (CED) Visa du CED Notification ordre de service au fournisseur ou à l'entreprise par l'administration contractante Exécution des travaux ou services/Livraison des fournitures c Anner 2 PubUc Expendture: Issues and Outlook Page 8 of 8 C Liquidation :calculs des débits et établissement des décomptes Vérification et ordonnancement :établissement du mandat de paiement par l'administration contractante Envoi du mandat à la Trésorerie Générale (TGR) pour visa "bon à payer" Paiements aux fournisseurs, aux entreprises par la TGR: - Montants inférieurs à DH 2,000 (chèques bancaires) - Montants supérieurs à DH 2,000 (virements bancaires) M:\Ali\mor\pexp\ABCchart.AF2 ANNEX 3: MEDIUM-TERM MACROECONOMIC FRAMEWORK AND CG ACCOUNTS A. Introduction 1. The objective of this Annex is twofold. The first is to provide a summary presentation of the macroeconomic framework which sets the context for the discussion of medium-term public expenditure trends in Chapter 12. This framework, produced with MN1CO's RMSM-X for Morocco, comprises a complete flow of funds. The second is to present a more detailed outlook--consistent with the overall macroeconomic framework--for the medium-term evolution of the CG accounts. In particular, assumptions concerning the outlook for CG revenue sources and expenditure items are explained. B. Summary of the Macroeconomic Framework 2. The medium-term outlook summarized in Table A3.1 extrapolates from performance in the recent past and hinges on relatively conservative assumptions. The outlook points to satisfactory medium-term growth prospects, continuing improvement in the country's balance of payments and debt indicators, consolidation of the long-time trend of budgetary adjustment, stable evolution of monetary aggregates, and low inflation. While this outlook may appear to do less than full justice to Morocco's medium-term potential, and while it is based on somewhat more conservative growth assumptions than the 7-8 percent growth that is set as a target in Chapter 1, the objective has been to establish a prudent base for the analysis of permissible increases in CG expenditures. 3. Output and Expenditure. A one-time boost to real GDP of at least 9 percent, driven by the expected rebound in agricultural value added after two consecutive drought years, is expected in 1994. Thereafter, growth would settle at levels attained in recent years, increasing slightly over the medium term, with the manufacturing and service sectors leading overall GDP growth at 5 and 6 percent per year, respectively. The overall expenditure composition of GDP would change little: investment would remain at about 25 percent of GDP, with modest efficiency increases (driven by larger volumes of foreign and domestic private investment), reflected in an improving ICOR, underpinning longer-term increases in growth. The share of non-government consumption would remain relatively stable, with the decline in government consumption mirroring the improvement in the resource balance and allowing for a modest increase in national savings (over the medium term, these would be almost sufficient to finance the investment required to support growth). 4. Balance of Payments. Gradual shrinkage of the current account deficit would be underpinned by an improving resource balance. Medium-term real merchandise export growth is projected at 5-6 percent per year, with manufacturing exports leading at 7 percent on average; such growth would be underpinned, inter alia, by renewed income growth in partner countries, and an increased sales drive for Moroccan exports. Tourism receipts, which account for the bulk of non-factor service exports, are assumed to follow a smooth upward path from 1993 onwards, after recovering from the ill effects of the Gulf war in 1991. Regarding imports, the overall import elasticity with respect to GDP would average unity over the medium term, although a change in composition would be expected. After reaching a high of 15 percent of total merchandise imports in 1993 owing to the drought-induced increase in cereal imports, the share of food imports would be expected to decline gradually to 11 percent by the end of the decade. In parallel, that of other consumer goods would stabilize at around 10 percent, and intermediate and capital goods would increase their share. Coupled with relatively stable interest m:\ali\mor\pcxp\rporlanned3.doc Annex 3 Public Expenditure: Issues and Outlook Page 2 of 10 payments and workers' remittances, export and import trends would sustain a gradual decline in the current account deficit, which would average below one percent of GDP over the remainder of the decade. Current account deficits, as well as continuing large debt repayments, would be financed through new borrowing and, increasingly, foreign direct investment flows (which over the medium term would be expected to increase to over 2 percent of GDP, based on the rapid increases observed over the 1991-93 period). These flows are expected to accommodate a continuing buildup of external reserves, which would stabilize at the equivalent of about six months of imports. 5. Public Finance. A continuing reduction in the CG deficit is projected over the medium term, turning into a small surplus by the end of the decade. A slight decline is projected in CG revenue as a share of GDP (details of the assumptions underlying the projections are given in the following section); the logic is that while continuing improvements in tax administration would be expected to continue broadening the tax net, any increase in tax revenue would probably be offset by continuing reductions in key tax rates (notably on personal and corporate income, and on imports). Consequently, continuing reductions in the deficit would have to be driven essentially by adjustments in expenditure. Concerning financing requirements, it is assumed that increases in borrowing directly from the public as markets for Treasury instruments develop will allow a gradual reduction in net borrowing from the monetary system. 6. Monetary Accounts. Medium-term growth in broad money is projected to stay in line with nominal GDP growth. Underlying the projections, however, is a modest but steady increase in the share of quasi-money in the broad money, and more direct borrowing from the public to finance any deficit. In parallel with the continuing reduction in (and changing composition of) the Treasury's borrowing requirement, the share of monetary system credit to CG would decline, reducing crowding out of private investment. m:al\mor\pexp\repot\annx3.doc Public Expenditure: Issues and Outlook Annex 3 Page 3 of 10 Table A3.1 - Summary Macroeconomic Indicators Medium Tenn Outlook and Resource Requirements Historical Est. - Projection-- Average 1980-83 1984-87 1988-92 1993 1994 1995 1996-2000 Rates of Change (% per year): Gross Domestic Product 3.6 4.7 3.7 0.2 9.0 4.5 5.3 Agriculture -0.7 10.3 1.8 -2.0 35.0 3.0 3.0 Industry 1.6 2.6 3.5 -1.5 3.4 4.2 4.5 (o/w manufacturing) 3.8 3.9 4.6 -2.0 3.0 4.5 5.1 Services 6.3 4.1 4.3 1.6 5.6 5.1 6.3 Per-Capita Consumption -0.9 2.8 2.1 -5.1 6.3 2.0 3.4 Domestic Inflation' 8.0 8.1 5.4 5.0 4.2 4.2 4.3 Money Stock Growth 15.3 13.9 14.9 6.0 10.7 8.9 9.7 Exports of GNFS * 4.4 4.6 4.0 -0.9 4.1 4.5 5.6 Imports of GNFS -1.8 4.8 7.3 -6.0 4.8 3.2 4.9 Ratios to GDP (%): Gross Investment 25.6 24.1 23.1 24.6 25.1 25.3 24.6 National Savings 16.1 20.3 22.0 22.7 23.4 23.9 24.0 Private Consumption 68.3 67.9 66.1 67.5 67.4 67.3 68.7 Money & Quasi-money (M2) 45.8 49.4 57.2 65.9 64.2 64.2 64.2 Total Credit Stock 52.3 55.7 58.7 58.9 56.9 56.5 53.5 (olw Private) 30.1 33.3 35.7 37.5 36.6 37.3 39.5 Exports of GNFS 19.6 23.1 23.2 22.0 21.2 21.6 22.1 Imports of GNFS 31.7 30.7 28.0 27.8 27.1 27.3 27.6 Current Account Balance -9.6 -3.7 -1.1 -1.9 -1.6 -1.4 -0.6 Government Revenue 21.6 20.3 23.6 26.8 27.4 27.0 25.3 Government Expenditure 33.8 29.2 27.5 29.0 28.9 28.1 25.3 Fiscal Deficit, commit. basis -12.2 -8.8 -3.9 -2.2 -1.5 -1.1 0.0 (olw Domestic Financing) 5.6 5.8 .1.6 1.6 1.7 1.4 0.0 External Debt Burden (%): Debt-export (DOD/XGS) 3** 286.9 364.3 281.7 251.6 235.1 218.3 172.8% Debt-GDP (DOD/GDP) 74.6 113.0 85.5 78.2 71.1 67.1 54.5% Debt Service (TDS/XGS) 37.7 31.3 25.7 31.9 32.2 30.2 25.8% Memo Items: Nominal Exchange Rate (DH/US$) 5.6 9.1 8.4 9.3 - - - Income Velocity 1.6 1.6 1.6 1.6 1.6 Five-Year ICOR' 5.2 6.1 4.8 13.4 7.4 7.0 4.9 Ext.Reserves (months of imports) 1.2 1.0 3.0 5.5 5.4 5.3 5.9 Terms of Trade Index (1980= 100) 92.1 94.7 106.4 102.6 102.7 102.8 101.5 Notes: I Implicit GDP deflator. 2 GNFS denotes Goods and Non-factor Services. External debt includes MLT, IMF, and short-term. XGS denotes exports of goods & services, and includes workers' remittances. ICOR denotes incremental capital-output ratio. m:\alimor\pexp\rportlannex3.doc Annex 3 Public Expenditure: Issues and Outlook Page 4 of 10 C. Summary of the Projected CG Accounts 7. This section explains the major assumptions underlying the projected medium-term evolution of the CG accounts, of which a summary is given in Table A3.2. The RMSM-X framework uses simple projection rules for most CG revenue and non-interest expenditure items.' As indicated previously, the projected CG accounts are part of a complete-flow-of-funds consistency framework. Revenue 8. Tax Revenue. A major achievement of Morocco's economic reform program over the past decade was to strengthen the tax system's buoyancy; this translated into a sharp increase in tax revenue from 19 to 24 percent of GDP between 1986 and 1992. Both tax reform and a strengthening of tax administration underlie these results. The major direct taxes include the Impbt Gdndral sur le Revenu (IGR), the personal income tax, and the Impbt sur les Socitds (IS), the corporate tax. The various direct tax revenue items and the projection rules applied to them are described briefly below. * The IGR was introduced in 1990 to replace several schedular taxes on income (notably the PTS and IBP, which are described below). The IGR applies to most income sources for individuals and unincorporated businesses.! The IGR originally had 7 tax brackets, with an exemption threshold of DH 12,000 per annum and a maximum rate of 52 percent to the top bracket (DH 120,000 per year and above).' The exemption threshold was increased to DH 15,000 and DH 18,000 in 1993 and 1994, respectively. In parallel, the top bracket was suppressed in 1993, and in 1994 the tax rate on the (now) top bracket (DH 90,000 per year or more) was reduced from 48 to 46 percent. Concerning the projection rule, the future evolution of IGR proceeds has been linked to non-agricultural GDP. * The IS replaced the ImpOt sur Bendfices Professionnels (IBP) in 1987 for corporate ventures. Before June 1990, IS collections were based on firms' net profits of the preceding year. Since then, a computerized estimated tax system (syst&me d'acomptes provisionnels) has been put in place, and the tax base has, over a period of three years, been adjusted to the current (rather than the preceding) year's profits. Since the IS was introduced, the tax rate was reduced three times (from 45 percent to 40 percent in 1988, to 38 percent in 1993, and to 36 percent in 1994). Concerning the projection rule, it has I/ Interest expenditures on external debt are computed by a comprehensive debt module that is based on the current debt structure, as well as future assumptions on loan commitments and terms. 2/ Exceptions include capital gains on real estate, (optionally) interest income, and any income derived from agricultural activities. 2/ It is worth noting that in 1992, those with incomes exceeding DH 200,000 (about one-half of 1 percent of the population) accounted for about 37 percent of tax revenue from the IGR; by contrast, those in the bottom three tax brackets (some 89 percent of the population) accounted for less than 15 percent of IGR revenue. m:\ali\mor\pxp\repot\annex3.doc Public Expenditure: Issues and Outlook Annex 3 Page 5 of 10 been assumed that IS proceeds will evolve stably with non-agricultural GDP (profits series, which might have served as a better base, are not readily available). * As indicated above, the IBP has been overtaken by the IS; since 1990, its share in total revenue has fallen below 2 percent. Its projection rule assumes complete phasing out within a few years. * The Prl?vement sur Raitements-et Salaires- (PTS)j,thenold schedulartax-onewages and salaries, has been replaced by the IGR. The projection rule assumes that future PTS revenue will be negligible. * The Participation d la Solidarit$ Nationale (PSN), a surcharge on the corporate profits tax rate, has been projected as a fixed ratio (10 percent, the statutory rate) of future IS tax revenue. * Other Direct Taxes include such taxes as the urban property tax and business license taxes. They have been projected residually as the difference between Total Direct Taxes (in turn projected as a stable share of GDP at factor cost) and the other taxes singled out above. 9. Indirect taxes are composed of three broad categories: (i) customs duties; (ii) domestic taxes on goods and services; and (iii) stamps and registration fees. Assumptions concerning the projections are given below. * Customs Duties, divided into Droits d'Importation (tariffs) and the Prdlvement Fiscal il l7mportation (a largely uniform tariff surcharge), have gradually declined from close to 30 percent of revenue in the early 1980's to some 19 percent in 1992, reflecting trade liberalization. In line with the objective of further lowering tariff barriers (notably towards imports from the European Union), the projection rule assumes a gradual decline in the ratio of customs duties to imports, to about 16 percent by the year 2000. * The Value-Added Tax (VAT) was introduced in 1986 to replace former turnover tax and various other low-yield taxes. For the projections, a distinction has been drawn between VAT on imports and that on domestically produced goods. Concerning the projection rule for VAT on imports, it has been assumed that the ratio. to merchandise imports would rise very modestly over the medium term, averaging a historically credible 15 percent of merchandise imports over the projection period. As regards the projection rule for VAT on domestically produced goods, non-government consumption (with an implicit rate declining over the remainder of the decade) has been used to proxy tax receipts. * The Taxe Intgrieure 4 la Consommation (TIC) is a domestic consumption tax levied on a variety of goods and services, the most important of which are petroleum products, sugar, and tobacco, which generated half of TIC receipts in 1992. From a high of 12 percent of Treasury receipts in 1980, its share declined to 8 percent by 1990, but rebounded slightly to 10 percent of revenue in 1992. In the projections, it has been assumed that, largely due to a rationalization of taxes on petroleum products, the ratio m:\ali\mor\pexplkpot\annej3.doc Anner 3 Public Expenditure: Issues and Outlook 'Page 6 of 10 of TIC receipts to non-government consumption would decline to, and stabilize at, about 3 percent. * The Prd&vement Sp9cial sur Produits PMtroliers (PSPP) is a special petroleum tax introduced in 1986. It yielded more than 13 percent of total receipts over the 1986-90 period. Since then, this ratio has declined substantially and amounted to around 7 percent of revenue (about 2 percent of GDP) in 1992. The PSPP is sensitive to international oil price and exchange rate movements, and therefore a volatile source of revenue. In the projections, it has been assumed that as a share of fuel imports, the PSPP would gradually decline to about half the current level between now and the end of the decade. 10. Non-tax revenue includes dividend and monopoly tax transfers from OCP and public entities, monetary sector profits, current transfers and grants from abroad, and other sources of income. Non-tax revenue has generally been modest, except in 1981 where it reached more than 3 percent of GDP due to large transfers from the Office CUrifien des Phosphates (OCP). Assumptions concerning non-tax revenue projections are summarized below. * OCP transfers to the Treasury are projected as a stable ratio (about 7 percent) of exports of phosphate rock and phosphoric acid. * Transfers to the Treasury by other public entities are assumed to be linked to the evolution of GDP, with a declining coefficient to reflect larger internal cash generation for their investment programs. * Concerning projections of the Treasury's share of monetary sector profits, it is assumed that 10 percent of these profits (on net) would be transferred to the budget; this amounts to roughly one-half of 1 percent of GDP each year. * Transfers from abroad are projected exogenously; it is assumed that they would register a very modest decline in real terms over the remainder of the decade. * Other non-tax receipts include income from state-owned housing and real estate, and tax fines. These sources stood at about one percent of GDP in 1992, and this coefficient is applied over the remainder of the 1990's. * Privatization receipts began in 1993 with the divestiture of state equity in 112 enterprises and other concerns. Concerning the projections, it is assumed that privatization would continue, but on a scale that remains modest (the yield would amount to some DH 3 billion per year over the period 1994-2000). Of course, as indicated in Chapter 12, larger-scale privatization could yield substantially larger amounts. m:\ali\mor\pexp\rspodanaex3.doc Public Erpenditure: Issues and Oudook Annex 3 Page 7 of 10 Table A32 - Central Government Budget (in millions of Dirhams) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Total Revenues 55550 63659 68395 79324 85269 91397 98014 104172 112594 122641 Current revenue 55550 63659 66253 75824 82269 88397 95014 101172 109594 119641 Tax revenue 50276 57932 57930 67372 718vt 76947 8257n 87M5' 94619 103260 Direct taxes 13453 16925 15431 17098 18172 19987 22026 22862 25238 27851 Patente 141 276 134 200 216 234 253 274 298 324 Business tax 5611 7212 5432 6421 7052 7764 8566 9459 10466 11602 Income tax 5282 6629 6930 7280 7524 7848 8185 8537 8896 9270 IBP 447 130 476 202 131 58 32 0 0 0 piS 191 68 24 15 3 0 0 0 0 0 PSN 727 801 648 740 749 781 815 850 886 923 Other direct taxes 1054 1809 1787 2239 2498 3302 4174 3741 4693 5732 Urban property tax 51 39 IUcense tax 16 23 Complementary tax 480 23 TPA 129 149 Majoritions 116 171 TPI 262 682 CRPF 0 10 TRPRF 0 712 Indirect taxes 36823 41007 42499 50274 53638 56960 60547 64774 69380 75410 Customs dudes 11466 12286 12556 15491 15709 17112 17978 20001 22126 24535 ImpWt VAT 7853 8333 7705 9030 10473 10593 11686 13001 13276 13494 Other indirect taxes 17504 20388 22384 25753 27457 29256 30884 31772 33979 37380 Taxes on Goods & services 14910 17748 19676 22091 21211 21498 21746 21975 22316 22698 Domestic VAT 5359 6540 6904 7728 8454 8839 9218 9590 10025 10486 Total 71C 4733 6888 7718 7855 7654 7582 7491 7383 7312 7245 Sp. petroleum tax 4818 4320 5054 6508 5104 5077 5037 5002 4979 4967 Other taxes (reg./stamps) 2594 2640 2708 3662 6245 7758 9138 9797 11663 14682 Non-tax revenue 5274 5727 8323 8452 10459 11450 12442 13537 14976 16380 olw Triasfers from Abroad 1524 1055 930 958 987 1006 1026 1047 1068 1089 Current off. grants 0 0 0 01 0- 0' or* 0' 0 0 Est. share MS profits 32 134 803 1414 1584 1813 1955 2110 2496 2723 Other non-tax revenue 3717 4538 6590 6080 7888 8630 9460 10380 11411 12568 OCP 600 510 501 542 594 633 683 738 798 863 Monopolies 2255 2301 3413 3411 3269 3147 3036 2931 2836 2749 Others 862 1727 2676 2127 4026 4850 5742 6711 7777 8957 Domaines 104 157 C. Liberatoire 64 20 Non-tax revenue n.e.i. 694 1550 m:\ai\mor\pexp\smportlannex3.doc Annex 3 Public Expenditure: Issues and Outlook Page 8 of 10 Table A3.2 (Continued) - Central Government Budget (in millions of Dirhams) 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Total Expenditure 63065 69009 74072 83659 88587 93574 99197 104934 111429 118126 Current expenditure 48058 51815 54558 60597 63976 67338 71005 75246 80140 84694 Gov't Consumption 32013 34330 34863 38801 41314 43483 46588 50338 54479 58546 Wages & salaries 24902 26281 26769 28750 29958 31246 32589 33991 35418 36906 Goods & services 7111 8049 8094 10051 11357 12238 13998 16347 19061 21640 Transfers & Subsidies 2737 3958 5039 4682 4625 4679 4766 4915 5107 5348 olw: Cons. subsidice 1192 1580 1949 1653 1488 1413 1343 1276 1212 1151 Other transfers 1545 2378 3090 3029 3137 3265 3423 3639 3895 4197 Total Interest 13308 13527 14656 17114 18037 19176 19652 19993 20554 20800 External debt 7865 7539 7909 8146 8309 8485 8722 8994 9276 9439 Domestic debt 5443 5988 6747 8968 9728 10691 10930 10999 11278 11360 Budgetary savings 7492 11844 11695 15227 18293 21059 24009 25927 29455 34947 Privatization Proceeds 0 0 2142 3500 3000 3000 3000 3000 3000 3000 Capital expenditure 15007 17194 19514 23062 24611 26236 28192 29688 31290 33432 General budget 11005 11182 12815 15792 16723 17261 17029 18685 19627 20109 Transfers to PE's 1800 1883 2802 2826 2863 2773 2288 3761 4136 3538 Budgetary mvestment 9205 9299 10013 12966 13860 14488 14741 14923 15492 16571 Other capital expenditure 4002 6012 6699 7270 7888 8976 11163 11003 11662 13322 VAT transfers to L 3824 5087 5053 5027 5678 5830 6271 6777 6990 7194 Other 1 178 925 1646 2243 2210 3146 4892 4226 4672 6128 Def.(-)/Surplus(+), com -7515 -5350 -5677 -4335 -3317 -2177 -1183 -761 1165 4515 Def.(-)/Surph(+), cash -7759 -5009 -7428 -5335 -4317 -2177 -1183 -761 1165 4515 Financing 7515 5350 7428 5335 4317 2177 1183 761 -1165 -4515 Domestic sources 1393 5072 4167 4823 4533 2163 955 -1660 691 -3555 From monetary system 250 3010 2328 4425 1615 590 600 -3284 -3179 -5791 Non Bank financing 1882 1721 3591 1398 3918 1572 354 1625 3869 2236 Domestic arrear -739 341 -1751 -1000 -1000 0 0 0 0 0 External financing 6122 278 1510 -488 -1215 is 229 2421 -1855 -961 External capital grants 4993 0 833 0 0 0 0 0 0 0 Not Drawings on loans -4460 -3174 677 -488 -1215 15 229 2421 -1855 -961 Disbursements 5174 6254 9818 10556 10702 11802 12979 14103 15310 16010 Amortization due 9634 9428 9141 11043 11917 11787 12750 11682 17165 16971 External arrears 495 0 0 0 0 0 0 0 0 0 Reschedulings 5094 3452 0 0 0 0 0 0 0 0 Memo sifms: ODP at MP 241647 242488 255122 289762 315519 345212 378419 415215 456450 502731 Primaary Balance 5793 8177 8979 12779 14720 16999 18468 19231 21719 25315 Note: ' Consists mainly of remaining balance on other special accounts and annex budgets. m:\ali\mor\pexp\report\annex3.doc Public Expenditure: Issues and Outlook Annex 3 Page 9 of 10 Expenditure 11. Between the early 1980's and the early 1990's, CG expenditures were reduced by about 10 percentage points of GDP, from 37 to 27 percent. It is primarily the reduction in expenditures that underpins the drastic reduction in the deficit during that decade. The declining trend in expenditures as a ratio of GDP is assumed to be pursued over the medium term, though at a much lower pace than in the past. The main assumptions underlying the projections for current expenditure items are summarized below. * Wage expenditures are assumed to remain constant in real terms (as measured by the GDP deflator) over the projection period. The implicit underlying assumption is that employment volumes would not increase; any increase in employment at the expense of unit pay would be undesirable. * Materials and supplies are residually derived as the difference between wage expenditures and total CG consumption (which is assumed to decline gradually as a share of GDP over the projection period). This expenditure item increases from an estimated 21 percent of CG consumption in 1994 to some 35 percent by the year 2000, reflecting more adequate outlays on operations and maintenance. * Current transfers to public enterprises and agencies, and to annex budgets, amounted to some 5 percent of total current expenditures in 1992, and are projected to remain at this ratio over the remainder of the decade. Consumer subsidies, which historically have been a major drain on the budget (reaching 3 percent of GDP in the early 1980's) but which have been substantially cut since, are projected to decline to negligible levels by the end of the decade. 12. Concerning capital expenditures, two categories can be distinguished: (i) general budget spending; and (ii) other (extra-budgetary) expenditures. General budget spending includes budgetary investment (that is, fixed capital formation) proper, and capital transfers to the para-public sector, including the Offices Rdgionaux de Mise en Valeur Agricole (ORMVA). Remaining capital expenditures are made of transfers to local governments (about 30 percent of VAT receipts), and other special account and annex budget expenditures. Assumptions regarding the medium-term evolution of the different capital expenditure items are summarized below. * Budgetary investment is assumed to remain stable at some 3 percent of GDP over the projection period. * Concerning capital transfers to public utilities, enterprises, and other entities, it has been assumed that these would average DH 3 billion over the second half of the decade, a level comparable to that planned for 1994. Again, it should be emphasized that this is intended to serve as a base case assumption. * Capital transfers to LG's are projected to evolve stably as a ratio (30 percent) of total VAT receipts over the medium term. m:\ali\mor\pcxp\nport\anu3.doc Annex 3 Public Expenditure: Issues and Outlook Page 10 of 10 * Remaining items (that is, the balance on remaining special accounts and annex budgets) are derived residually as the difference between the individual items discussed above and total capital expenditures, which are linked to GDP. Deficit Financing 13. There are two key points to highlight concerning the medium-term deficit financing assumptions. First, DH 1 billion per year is assumed to be set aside in 1994 and 1995 to clear the Treasury's (domestic) arrears. And second, domestic financing requirements are expected to decline gradually. More pronounced, however, is a trend away from borrowing from the monetary system in favor of borrowing directly from the public; underlying this is the assumption of satisfactory development of markets for Treasury instruments, which are currently embryonic. Thus, domestic non-bank financing is projected to increase gradually to about 1 percent of GDP over the second half of the decade, enabling a sharp reduction in the high stock of liabilities to the monetary system. m:\ai\mor\pexp\report\annex3.doc REFERENCES ARI - Apogee Research International (1994), "Regulatory Barriers to Private Sector Participation in Water and Sanitation Services in Latin America", study prepared for the World Bank, February 1994. Azam, J-P. (1994), "Tax Incidence on Agriculture in Morocco, 1985-89", Middle East and North Africa Discussion Paper Series No. 11, the World Bank, April 1994. Beenhakker, H. (1993), "The Transport Sector", background paper prepared for the Public Expenditure Review, World Bank mimeo., December 1993. CCIB - Chambre de Commerce et d'Industrie de Bordeaux (1993), "Infrastructures et Environnement Logistique de I'Entreprise (au Maroc)", paper prepared for the World Bank, April 1993. CERED - Centre d'Etudes et de Recherches D6mographiques (1993), Ftcondit6, Inficondite et Nouvelles Tendances Dimographiques au Maroc, Direction de la Statistique, Ministbre des Affaires Economiques et Sociales, Royaume du Maroc, 1993. Chraibi, M. and M. Hachami (1993), "Etude sur la Logistique et l'Efficacit6 du Commerce Ext6rieur: Circuit Administratif", study prepared for the Ministry of External Trade, Foreign Investment, and Tourism, March 1993. Chu, K. and R. Hemming, editors (1991), Public Expenditure Handbook. A Guide to Public Policy Issues in Developing Countries, IMF, Washington D.C., 1991. Cyna, M. (1993), "Preliminary Assessment (of Infrastructure)", background paper prepared for the Private Sector Assessment, World Bank mimeo., May 1993. DEPP - Direction des Etablissements Publics et des Participations (1990), "Rapport sur la Gestion de la Caisse Nationale de S6curit6 Sociale", Ministry of Finance, December 1990. EDESA Consulting Firm (1993), "Etude de l'Impact des D6penses Publiques Sociales sur les M6nages A Revenu Modeste", study prepared for the Ministry of Finance and the European Commission, September 1993. ESMAP (1994), Morocco: Energy Sector Institutional Development Study, Joint UNDP-World Bank Energy Sector Management Assistance Program Yellow Cover, March 1994. Ezzine, M. (1994), "Public Expenditure Review-Education and Vocational Training", background paper prepared for the Public Expenditure Review, World Bank mimeo., April 1994. Fischer, S. and W. Easterly (1990), "The Economics of the Government Budget Constraint", The World Bank Research Observer, July 1990. Guedira, M. N. (1992a), "Fonctions et Composantes du Systbme de Protection Sociale", Bulletin no. 8, Centre Marocain de Conjoncture, November 1992. Guedira, M. N. (1992b), "Histoire et R6alisations de la Mutualit6 au Maroc", paper presented to the Colloque International sur I'Histoire de la Mutualit6, Paris, December 1992. m:\aliXmor\pportkefs.doc References Public Expenditure: Issues and Outlook Page 2 of 4 Guedira, M. N. (1994), "Les D6penses Publiques de Sant6 au Maroc: Bilan et Perspectives", background paper prepared for the Public Expenditure Review, typescript, July 1994. Hewitt, D. and C. van Rijckeghem (1993), "Wage Expenditures of Central Governments", IMF mimeo., Fiscal Affairs Department, July 1993. Jaidi, L. (1994), "Les D6penses Publiques d'Habitat: Bilan et Perspectives", background paper prepared for the Public Expenditure Review, typescript, July 1994. Larrieu, J. (1994), "Public Expenditure Review-Energy Sector", background paper prepared for the Public Expenditure Review, World Bank mimeo., January 1994. Lavelin International (1988), "Evaluation et Rationalisation du Portefeuille de l'Etat (Tome II: Inventaire et Banque de Donn6es)", joint report with FIDECOM (Maroc), April 1988. Lecharny, P. (1994), "Public Expenditure Review-Telecommunications", background paper prepared for the Public Expenditure Review, World Bank mimeo., May 1994. Lindert, K. (1994), "Public Expenditure Review-Agriculture", background paper prepared for the Public Expenditure Review, World Bank mimeo., June 1994. MAMVA - Ministare de l'Agriculture et de la Mise en Valeur Agricole (1993), Le Programme National d'Irrigation: Les Objectifs Pour l'An 2000, 1993. MAMVA - Ministare de l'Agriculture et de la Mise en Valeur Agricole (1994), Etude d'Excution du Budget d'Investissement, rapport d'approfondissement des axes de r6flexion, prepared by IMEG Consultants for the Direction de la Planification et des Affaires Economiques, May 1994. Mintz, J., D. Sewell, and T. Tsiopoulos (1994), "Tax Effects on Investment in Morocco", World Bank mimeo., April 1994. Mouton, P. (1988), "Probl6mes de la Caisse Nationale de S6curit6 Sociale du Maroc", World Bank mimeo., May 1988. Price Waterhouse (1993), "Participation du Secteur Priv6 dans les Prestations de Services Publics", study commissioned by the Kingdom of Morocco and USAID, Washington DC, August 1993. Price Waterhouse (1994), "Morocco: Target Market Identification", study commissioned by the World Bank Group's Foreign Investment Advisory Service and prepared by Price Waterhouse and Plant Location International, March 1994. Pradhan, S. and V. Swaroop (1993), "Public Spending and Adjustment", Finance & Development, September 1993, pp. 28-31. m:\alikmor\pexp\MMr\porefs.doc Public Expenditure: Issues and Outlook References Page 3 of 4 Raimondo, L. (1994), "Public Expenditure Review: Water and Sewerage Sector", background paper prepared for the Public Expenditure Review, World Bank mimeo., May 1994. Sewell, D. (1994) "Morocco: Intergovernmental Fiscal Relations", paper prepared for the VIbme Colloque National des Collectivit6s Locales, World Bank typescript, May 1994. SRI International (1983), World Phosphates (Volume II: Phosphate Rock), report prepared jointly with Fertecon and Zellars-Williams, project no. 2481 , August,19831- World Bank (1988), Kingdom of Morocco: Second Small- and Medium-Scale Irrigation Project, Staff Appraisal Report No. 6902-MOR, May 1988. World Bank (1989a), Kingdom of Morocco: Agricultural Research and Extension Project, Staff Appraisal Report No. 6943-MOR, March 1989. World Bank (1989b), Kingdom ofMorocco: Second Forestry Development Project, Staff Appraisal Report No. 7752-MOR, November 1989. World Bank (1990a), Kingdom of Morocco: Agriculture Expenditure Review, Yellow Cover Report No. 8878-MOR, June 1990. World Bank (1990b), Kingdom ofMorocco: Second Rural Electrification Project, Staff Appraisal Report No. 8426-MOR, August 1990. World Bank (1992a), Kingdom of Morocco: Issues and Prospects in the Public Sector, Gray Cover Report No. 10157-MOR, June 1992. World Bank (1992b), Kingdom of Morocco: Telecommunications Sector Restructuring Project, Staff Appraisal Report No. 10714-MOR, December 1992. World Bank (1993a), Kingdom of Morocco: Second Large-Scale Irrigation Improvement Project, Staff Appraisal Report No. 10732-MOR, March 1993. World Bank (1993b), Kingdom of Morocco: First Municipal Finance Project, Staff Appraisal Report No. 11562-MOR, May 1993. World Bank (1993c), Kingdom of Morocco: Land Development Project for Low Income Families, Staff Appraisal Report No. 11693-MOR, May 1993. World Bank (1993d), World Development Report 1993 - Investing in Health, Oxford University Press, June 1993. World Bank (1993e), Kingdom of Morocco: Agro-Industrial Development, Green Cover Report No. 11727-MOR, June 1993. m:\alilmor\pcxp\rcpoA\rdfs.doc References Public Expenditure: Issues and Outlook Page 4 of 4 World Bank (1993f), The East Asian Miracle: Economic Growth and Public Policy, World Bank Policy Research Report Series, Oxford University Press, September 1993. World Bank (1993g), Kingdom of Morocco: National Rural Finance Project, Staff Appraisal Report No. 12197-MOR, October 1993. World Bank (1993h), Kingdom of Morocco: Literacy and Schooling in Rural Areas, Green Cover Report No. 12382-MOR, December 1993. World Bank (1993i), Kingdom of Morocco: Costs and Efficiency of the Education System, Green Cover Report No. 12382-MOR, December 1993. World Bank (1993j), Kingdom of Morocco: Fifth Water Supply Project, Staff Appraisal Report No. 12231-MOR, October 1993. World Bank (1994a), Kingdom of Morocco: Poverty, Adjustment, and Growth, Gray Cover Report No. 11918-MOR, January 1994. World Bank (1994b), Telecommunications Sector: Background and Bank Group Issues, booklet summarizing a joint World Bank/IFC seminar presented to the Executive Directors, February 1994. World Bank (1994c),' World Development Report 1994 - Infrastructure for Development, Oxford University Press, June 1994. World Bank (1994d), Kingdom of Morocco: Secondary, Tertiary, and Rural Roads Project, Staff Appraisal Report No. 12761-MOR (Green Cover), June 1994. World Bank (1994e), Kingdom of Morocco: Water Sector Review, Report No. 12649-MOR (Yellow Cover), June 1994. World Bank (1994f), Kingdom of Morocco: Preparing for the 21st Century - Strengthening the Private Sector in Morocco, Gray Cover Report No. 1 1894-MOR, July 1994. World Bank (1994g), Kingdom of Morocco: Second Agricultural Sector Investment Loan, Staff Appraisal Report No. 12392-MOR, May 1994. Additional useful data and reference sources used in this report include: Statistiques du Trdsor Annuaire Statistique du Maroc Le Maroc en Ouffres Les Ransports en Chuffres m:Aalimor\pcpreport\rtfs.doc