Morocco - Electrical and Mechanical Industries Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 13224 PERFORMANCE AUDIT REPORT MOROCCO ELECTRICAL AND MECHANICAL INDUSTRIES (LOAN 2487-MOR) JUNE 29, 1994 Operations Evaluation Department 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 EOUIVALENTS Currency Unit: DH (annual average) 1985 US$1 = DH1O.0 1986 US$1 = DH9.1 1987 US$1 = DH8.3 1988 US$1 = DH8.2 1989 US$1 = DH8.4 1990 US$1 = DH8.2 1991 US$1 = DH8.7 1992 US$1 = DH8.5 ACRONYMS AND ABBREVIATIONS BCM - Banque Commerciale du Maroc BMCE - Banque Marocaine du Commerce Extérieur BMCI - Banque Marocaine pour le Commerce et l'Industrie BNDE - Banque Nationale pour le Développement Economique CDM - Crédit du Maroc DH - Dirham EMIs - Electrical and Mechanical Industries ERR - Economic Rate of Return FRR - Financial Rate of Return ODI - Office pour le Développement Industriel SGMB - Société Générale Marocaine de Banques FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-General Operations Evaluation June 29, 1994 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Performance Audit Report on Morocco - Electrical and Mechanical Industries Project (Loan 2487-MOR) Attached is the Performance Audit Report on Morocco - Electrical and Mechanical Industries Project (Loan 2487-MOR) prepared by the Operations Evaluation Department. The project aimed at supporting the industrial and technological development of the electromechanical industries (EMI's) in Morocco through term lending and institutional development. It was initially conceived in the early 1980s as part of the Bank's support to Morocco's industrial strategy of developing technologically demanding industries. By the time the project was presented to the Board, in 1985, Morocco had gone through an economic crisis which resulted in a series of reforms, ushering in a new economic environment. At the Bank, too, policy for industrial lending was shifting from financing credit lines for single subsectors to general industrial credits. In the event, institution building and technological components were dropped from the project in its final form and it was largely reduced to a line of credit. As a result of the changed economic climate, investment in EMI subsector remained very depressed throughout the 1980s and only two thirds of the loan was disbursed. Practically all subprojects were for expansion of existing low technology lines of production. The only medium-technology enterprise (manufacturing machine tools) was shut down because it could not withstand competition from imports. The project, however, did help improve the efficiency of financial sector intermediation through the increased involvement of commercial banks in the area of industrial term financing. Overall, the project outcome is rated as unsatisfactory, its sustainability uncertain, and the institutional development impact as modest. Two crucial lessons of experience were drawn from this project: (i) during a liberalization process, restructuring, rehabilitation and subsector development operations often face daunting challenges and such demanding projects should not be attempted until reforms are well established; and (ii) the diversification and deepening of industrial process need a strategic vision, a clear understanding of incentives, capabilities and institutions. Market oriented policies, though necessary, are not sufficient to promote this process, particularly in technologically demanding subsectors. Robert Picciotto by H. Eberhard K6pp Attachment 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.  FOR OFFICIAL USE ONLY PERFORMANCE AUDIT REPORT MOROCCO ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (Loan 2487-MOR) TABLE OF CONTENTS Page No. PREFA CE .............................................. i BASIC DATA SHEETS .......................................... iii EVALUATION SUMMARY ....................................... vii I. The Economic Setting ....... ............................... . 1 II. Project Background .......................................... 2 III. Project Objectives and Description ....... ....................... . 5 IV. Implementation Experience ....... ............................ . 6 V. Project Results ............................................. 7 VI. An Overall Assessment...................................... . 8 Strategic Vision......................................... . 9 Shortfall in Disbursement - The Changed Environment ........... ..I. .11 Value Added and Technology ............................... 12 Institutional Development.................................. 13 Supervision ....... ................................... 13 Compliance with Covenants ...... ........................... 14 Sustainability ....... .................................. 14 VII. Lessons Learned and Recommendations ............................ 15 ANNEX 1 Participating Commercial Banks ..................................... 17 Soci6t6 Autohall ........................................... 18 Soci6t6Batifer ............................................ 19 Soci6td Burometal........................................... 20 Cablerie Du Maroc ....... ...................................... 21 Soci6t6 Construction Electrique Appareillage De Comptage (CEAC) .......... ..... 22 Soci6td Gourvenec ....... ...................................... 23 Soci6td Madison ........................................... 24 Socidtd Mafec ............................................ 25 Maroc Aviation ........................................... 26 This Report was prepared by Farrokh Najmabadi (Task Manager) who audited the project in October 1993. Eneshi Davis provided word processing assistance. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TABLE OF CONTENTS (CONT'D) Page No. Socidtd Metaghreb ....... ....................................... 27 Socidtd Precima ....... ........................................ 28 Soci6t6 Industrille De Fourniture Automobile (SINFA) ................... ..29 SINFA Production History .................................. 30 Soci6t6 Pour Le Developpement Et L'Expansion (SODEX) ................ 31 Socidt6 De Fabrication De Cuisinieres (SOFACUIS) .................... 32 Socidt6 Morocaine De Gaz (SOMAGAZ) ........................... 33 Socidtd Technique De Materiels Agricoles (SOTHEMAG) ................. 34 Socidt6 Tuyauto ........................................... 35 Socidt6 Piles Zodiac Maghreb (Wonder Maroc) ....................... 36 Compagnie Maghrebine De Machines Outils A Metaux (C3M) .............. 37 Soci6t6 Des Industries Mecaniques Et Electriques De Fes (SIMEF) ........... 39 ANNEX 2 Repayment Performance of Subloans .............................. 41 ANNEX 3 Pipeline of EMI Projects (in Millions DH) I. Projects Promoted by ODI ............................. 42 II. Projects Identified by Commercial Banks (excluding projects with BNDE financing) .................. 43 ANNEX 4 Evolution of GDP Constant 1985 Prices ............................ 44 ANNEX 5 Evolution of Value Added in Manufacturing Subsectors .................. 45 -1- PERFORMANCE AUDIT REPORT MQROCCQ ELECTRICAL AND MECHANICAL INDUSTRIES (LOAN 2487-MOR) PREFACE 1. This is the Performance Audit Report (PAR) for the Electrical and Mechanical Industries (EMI) Project in Morocco for which the Board approved a US$25.1 million loan in January 1985. The Bank disbursed a total of US$16.2 million and the remaining US$8.9 million was cancelled. 2. The PAR was prepared by the Operations Evaluation Department (OED). An OED mission visited Morocco in October 1993 and discussed the effectiveness of the Bank's assistance with the Borrowers and the Government of Morocco. Their kind cooperation and assistance is gratefully acknowledged. 3. The PCR was prepared by the Industry and Energy Operations Division of Country Department I, MENA Region. The PAR complements the PCR by providing pertinent data on subprojects, a more elaborate assessment of the reasons behind the shortfall in disbursement and of the factors that led to the unsatisfactory outcome of this project. 4. The draft PAR was sent to the Borrowers for comments but none were received. d - iii - PERFORMANCE AUDIT REPORT MORQCCQ ELECTRICAL AND MECHANICAL INDUSTRIES (LOAN 2487-MOR) BASIC DATA SHEET LOAN POSITION (amounts in US$ million) As of February 28. 1994 Loan Original Disbursed Cancelled Re.aid Outstanding 2487-MOR 25.10 16.23 8.87 7.64 8.59 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY85 FY86 FY87 FY88 EY82 EX90 EY91 EY2M Original Plan 0.06 1.72 9.36 17.56 22.36 24.52 25.10 25.10 Actual - 3.13 5.08 11.17 14.38 17.26 17.26 16.23* Actual as of % of Planned - 80 54 64 64 70 69 65 *Includes repayment of advance to Special Account. PROJECT DATES Original Actual Reconnaissance 12/01/81 12/01/81 Appraisal 05/14/84 05/14/84 Board Approval 01/15/85 01/15/85 Signing 04/16/85 04/16/85 Effectiveness 07/15/85 01/06/86 Closing Date 12/31/90 12/31/91 - iv - STAFFINPUTS (in staffweeks) 12M 123 128 12US 1986 1211 n2H 12 12M L9M 1 J2W11 Appraisal 26.1 28.7 15.1 10.7 - - - - - - - 80.0 Post Appraisal - - -- 13.5 2.9 - - - - - - 16.4 Supervision - - - 1.8 8.3 4.3 4.9 5.0 3.1 2.6 4.0* 34.0 Total 26.1 28.7 15.1 26.0 11.2 4.3 4.9 5.0 3.1 2.6 4.0* 131.0 *PCR Estimate MISSION DATA Month/Year No. of Weeks No. of Persons Staff Weeks Appraisal 10/78-05/84 18 1-5 40 Supervison I 05/07-17/85 2.2 2 4.4 Supervision H 10/23-11/01/85 2 1 2 Supervision III 04/86 2 1 2 Supervision IV 11/8-25/87 3.6 3 10.8 Supervision V 2/12-26/89 3 2 6 Supervision VI 02/12-03/01/90 3.4 2 6.8 Supervision VII NS NS NS 2 NS= Not Specified SUPERVISION RATINGS (Form 590) Evaluation Development Legal Management Availability Y.ear vQrall Obiectives Covenants Performance EuDS 1985 - - 1986 2 1 - 2 1 1987 2 2 - 2 1 1988 2 3 - 2 1 1989 2 3 3 2 1 1990 2 2 1 2 1 1991 2 2 1 2 1 1992 2 2 1 2 1 OTHER PROJECT DATA Related Loans Project: Industrial Trade Policy Adjustment Loan H Loan No.: 2604 Amount: US$200.0 million Approval Date: 07/16/85 Project: Industrial Export Finance Loan No.: 2806 Amount: US$70.0 million Approval Date: 05/05/87 Project: Industrial Finance Loan No.: 3136-0/7 Amount: US$170.0 million Approval Date: 12/05/89  - vii - PERFORMANCE AUDIT REPORT MOROCCO ELECTRICAL AND MECHANICAL INDUSTRIES (LOAN 2487-MOR) EVALUATION SUMMARY Introduction Ministry of Commerce and Industry. 1. During the late 1970s, the Moroccan 3. Given the stagnant demand for Government began a series of studies in order to investment, reservations were expressed by the guide the industrial sector towards the Moroccan authorities about the need for a new engineering industries. This approach received line of credit. It was thought that the ongoing the endorsement of the Bank and was fully second Small Scale Industry Loan (2035-MOR) discussed in a Bank report entitled "Morocco - and the soon-to-be-signed ninth BNDE Loan Review of Engineering Industries" (Report No. (2037-MOR) would meet the needs of the 3233-MOR, 1981). The recommendations of subsector. Despite the completion of appraisal this report became the cornerstone of the by the Bank, the project remained dormant industrial strategy in the 1981-85 Development because the disagreements between the Plan. The priority given to selected engineering Government agencies and among the Bank industries was justified by the need to reduce the internal departments could not be resolved. pressure of electromechanical industry imports on the balance of payment. 4. Concurrent with these efforts in the preparation and appraisal of the project, another 2. During a reconnaissance missiontowards study was being conducted during 1982 and the end of 1981, the outlines of a project for the 1983 about Morocco's industrial sector. This development of the electromechanical industries study reviewed the system of industrial (EMIs) took shape and were discussed with the incentives (particularly exchange rate, tariffs, Moroccan authorities. These outlines consisted quotas and export promotion measures), taxation of a line of credit provided by the Bank and and financial sector. The study focussed on placed at the disposal of the Treasury for improving the effectiveness of import- financing the foreign exchange needs of sub- substitution policies, export incentives and the projects through BNDE and a group of mobilization and allocation of financial commercial banks; the provision of a medium resources. This study which was later published credit commercial facility by the Central Bank to as World Bank country study entitled: assist the manufacturers of the capital goods; "Morocco, Industrial Incentives and Export technical assistance for the technical and Promotion" became the basis for the policy technological screening of the sub-projects and reforms entailed in the Industrial and Trade the identification of priority subsectors for Policy Adjustment Loan (ITPAL, 2377-MOR) implementation; and, the establishment of a approved in January 1984. ITPAL was the first Standards and Quality Control Institute as well of a number of adjustment loans which were as an Industrial Planning Unit within the subsequently approved for Morocco, in the wake - viii - of the stabilization and adjustment efforts started of 25 subprojects (20 enterprises) and ODI made in 1983. use of the financing to participate in one enterprise (three of the commercial banks also Project Objectives and Description lent to this entity). Of the 25 subloans 14 were syndicated where either two or three banks 5. The project's major objective was to pooled their resources with one acting as the support the industrial and technological lead bank. The other 11 subprojects received development of EMIs in Morocco, through the loans from only one of the commercial bank. provision of financial resources for term lending The use of the Bank's loan ($16.11 million) in foreign exchange. The secondary objective generated a total investment of around $42 consisted of strengthening the Industrial million (DH 360 million) and created 1130 new Development Office's (ODI) effectiveness in jobs at an average investment per job of about industrial promotion, improving its policies and $37000. Nearly $9 million of the loan for EMI quality of its project financing and generally remained undisbursed and was, therefore, increasing the efficiency of financial sector cancelled. Of the 20 enterprises that received intermediation through the increased involvement the subloans, five are highly profitable and enjoy of commercial banks in the area of industrial sizeable cash flow; ten are modestly profitable; term financing. These objectives were supported and, five are loss-making. The most profitable by the Government's declared policy of companies are mainly engaged in either deepening the industrial base and alleviating assembly or relatively simple manufacturing. Of pressure on balance of payments through the loss-makers, the machine tools manufacturer efficient import substitution and increased export (C3M) has already discontinued operation, while of EMI products. In addition to allocating $22 the engine and motor manufacturer (SIMEF) is million for lending through six selected on the decline. commercial banks, the loans envisaged $3 million for financing equity participation by ODI An Overall Assessment in some six EMI subprojects and $.2 million for technical assistance for EMI subsector studies. 8. Despite the seemingly adequate financial and employment creation results of almost half Implementation of the subprojects, there remains a vast gap between the type of industries which received 6. The effectiveness of this loan was assistance and those that the project was delayed due mainly to many procedural and designed to create and support. While the SAR substantive matters that needed resolution. had listed 10 subprojects under consideration by Moreover, the establishment of a flawed Special ODI and 27 others accumulated by the Account at the Moroccan Treasury led to much commercial banks, it is important to note that confusion and materially affected the smooth only a few assembly or low technology implementation of the loan. Even before the fabrications were financed. Significantly, none signature of the on-lending agreements, one of of the subprojects under promotion by ODI was the commercial banks withdrew from the ever implemented. project, while another requested a reduction in its allocation by the end of 1986. Strategic Vision 7. The EMI loan was to finance around 40 9. As initially prepared (1981-82), the subprojects with a total investment cost of $43 project had all the hallmarks of a strategic million, creating 1500 jobs. In practice, because approach whereby an array of institutional and of substantial cancellations by three prospective capability building activities would guide the intermediaries, the line of credit financed a total Moroccan industry into more technologically - ix - complex areas. This strategic vision was subprojects clearly shows that the demand for overtaken by events during 1983 and thereafter. lending by commercial banks was only for Following the 1983 economic crisis, the assembly, low technology and low value added Government of Morocco and the Bank embarked fabrications. Not only were none of the projects on a program of structural reform the earmarked for ODI promotion realized, but cornerstone of which was the first ITPAL practically all the 20 subprojects which were approved in January 1984. Although many of financed by the commercial banks also fell into the reforms envisaged in the ITPAL were the expansion of existing lines of production. necessary for the promotion of competitiveness in the industrial sector, the shift of emphasis to SustainAI-ity greater import competition changed the whole climate for the development of EMIs. Despite 12. In addition to increasing the value added its apparent inconsistency with the Bank's in the industrial sector and helping the industrial lending policy, the project was taken technological development, the project was to the Board assuming that the reforms entailed expected to reduce dependence on imports of in the ITPAL 1 would prepare the ground for engineering products and capital goods and to the industrial sector to flourish, and that the provide opportunities for exports, thereby EMIs only needed financial assistance to help improving the balance of payments. In practice, them grow faster in the reformed policy the manufacturing sector has only grown at a environment. The outcome of the project rate of around 4% between 1985 and 1992. clearly shows that these were erroneous Worse still, because of the depressed state of assumptions. investments in EMIs, the growth of this subsector has been just over I per cent. The Shortfall in Disbursement project, therefore, failed to create a framework for the sustainable development of the EMI 10. While it is true that the delays in loan subsector. The project's outcome is rated as effectiveness and confusion accompanying the unsatisfactory and its sustainability is uncertain. Special Account may have affected The project has had modest institutional impact. disbursement, there is no doubt that the changed These ratings are the same as those given in the economic policy environment was at the heart of PCR. the depressed investment and, hence, the shortfall in disbursement of the line of credit. Lessons Learned and Recommendations On the one hand, the lackluster economic activity had dampened the demand for 13. A host of valuable lessons are given in investments generally; on the other, and more to the PCR. They deal with matters related to the the point, the new industrial and trade policy project preparation, design and supervision by and its unmistakable emphasis on import the Bank. They also stress the need for competition had changed the perceptions of the ownership, improved communication with the private sector, resulting in the gradual participating Banks and the recognition of the disappearance of the more technologically importance of technical standards, quality demanding subprojects from the pipeline. control and promotional activities by the borrowers. Value Added and Technology 14. Based on the Audit, another crucial 11. Although the major objective of the lesson learned from the project experience is that project was to move the Moroccan industry into the process of industrialization and the more technologically demanding high value diversification and deepening of industrial added engineering subsector, the list of financed process needs a strategic vision and a clear understanding of incentives, capabilities and liberalizing regime, restructuring, rehabilitation institutions. Market-oriented policies, though and subsector development operations often face necessary, are not sufficient to promote this daunting challenges. The lesson is that such process. An appreciation of the micro-level difficult and demanding projects should not be process of acquiring efficiency is critical to the attempted until reforms are well established. formulation of industrial policy. In technologically demanding subsectors, 17. The Bank continues its efforts to especially, this is a complex process which takes stimulate the Moroccan industrial sector. In a time and investment and can only be undertaken recent study (Report No. 11557-MOR - by the entrepreneur if assured of a reasonable Developing Private Sector Industry in Morocco), support and protection. If in the words of the the Bank takes stock of the reforms and PCR, "the sustainable development of EMIs in recommends an agenda for further action. This Morocco will require a clear-cut industrial sector agenda comprises measures: to reinforce strategy covering inter alia, the EMI sector, and incentives for investment in private the commitment of government to this strategy" manufacturing; to provide resources to industry; (paragraph 6.3), it is necessary for both the to expose industry to more import competition; Bank and the Government, to recognize the to bring about more transparency in business; implications of adopting such a clear-cut strategy and, to support institutions. This report is in the and taking the needed steps. mould of the standard Bank policy package. However, it is devoid of any strategic vision for 15. Because of internal conflicts the structural transformation and dynamic between the relevant departments of the Bank growth of the Moroccan industry other than and various agencies of the Government of expecting that such reforms will eventually elicit Morocco, the project was neither fully owned by the elusive supply response. the Borrower, nor wholeheartedly supported by the Bank. At the end, it became an uneasy 18. It may well be that Morocco no longer compromise solution which failed to provide an harbors any ambition of developing its effective bridge between conflicting views. engineering industry or that opportunities for the trade in engineering products are no longer 16. As noted above, this project was available. Morocco may even find the economic approved when significant changes were being cost of seriously entering into the EMIs introduced in the Moroccan economy and the prohibitive. Whatever the future course of Bank was shifting its policy for industrial events, it is clear that under the current policy lending from financing credit lines for single regime, the private sector does not find the EMI subsectors to general industrial credits. Since subsector appealing. then, experience has shown that under a PERFORMANCE AUDIT REPORT MORQCCQ ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) I. The Economic Setting 1. Morocco's post-independence economic development started with 15 years of conservative economic policy resulting in an average annual GDP growth of close to 4 per cent. In the early 1970s, the enormous jump in phosphate prices (along with the first oil price increase and the boom in other primary commodities) encouraged the Moroccan Government in launching an unsustainably massive public investment program based on unrealistic expectations. While the sharp increase in gross fixed investments (through higher government expenditure and public investment) helped lift the real growth rate of the GDP to 6.7 per cent in 1972-78, the sharp increase in the imports and the rapid rise in the Treasury's current expenditures in excess of current revenues led to internal and external instability. Because of the efforts to mobilize resources in the face of constraints on domestic savings, there was an increase in foreign indebtedness. 2. Realizing the gravity of the macroeconomic imbalances, the Government undertook a serious stabilization program during 1978-80, centered around demand management. This program included a devaluation of the exchange rate, reduction of the government investment and control of imports. While these efforts were somewhat successful in reducing the imbalances, the second oil price increase in 1979, combined with the increase in international interest rates and the decline in the price of phosphates brought renewed pressure on the economy. In addition, there were other financial pressures to meet defence needs, social priorities and to implement the investments of the 1981-85 Development Plan. Consequently, the overall Treasury deficit increased once again to 14 per cent of GDP in 1982 and the debt-service ratio rose to nearly 36 per cent. All this had affected the growth rate of the GDP which, between 1978 and 1982, fell to a level of 3.2 per cent per annum. 3. In order to restore balance to the economy, the Government decided to renew its stabilization efforts and an agreement was reached with the IMF in September 1983. The Government also decided to adopt a series of policy measures over the medium term to remove structural constraints. As a first priority, the Government chose the area of industrial and trade policy.' This led to the I In the statement of Development Policy, the Moroccan Government had the following to say: "In order to ensure that reforms are based upon a sufficient depth of analysis, and to address the most pressing issues facing the economy, we believe it is essential to develop a series of reform programs dealing with different sectors, As a first priority, the Government has already begun to implement a program of structural reform in the area of industrial and trade policy; the objectives of this program are to improve the balance of payment through the development of exports, generate more efficient import -2- approval of the first Industrial and Trade Policy Adjustment Loan, in January 1984, followed by Agricultural Sector Adjustment Loan (June 1985), Second Industrial and Trade Policy Adjustment Loan (July 1985). Education Sector Reform Program (March 1986), Public Sector Rationalization Loan (May 1987), and Second Agricultural Sector Adjustment Loan (November 1987). After a series of loans addressing sectoral issues, the first Structural Adjustment Loan was approved in December 1988. II. Project Background 4. As far back as the second half of 1978, the Bank was conducting discussions with the Moroccan authorities concerning the development of some mechanical industries. At the time, the Government was interested in carrying out feasibility studies for subcontracting industries in the automotive sector mainly for exports as well as the further integration of the sector. In July of 1979, a Bank mission studied two reports which had been prepared for the establishment of new foundries to manufacture engine blocks and other parts for the automotive industry. After studying the various documents, the mission came to the conclusion that: (a) neither project seemed appropriate for Morocco; (b) the projects were too small to be economically viable; (c) it was not advisable to include from the beginning the manufacture of the most complicated parts of the engines and axles; and (d) the technology of casting rear axles as compared to forging them was new in the world and by using this technology the project could be exposed to technical and marketing risks.' 5. With the Bank questioning the feasibility of the above-mentioned foundry project, focus shifted to the engineering industries which had been recommended in the Bank's Industrial Sector Memorandum.' A preliminary mission concluded that the foundry subsector indeed remained the weakest link among the engineering industries. The mission, therefore, proposed the study of an investment program for restructuring this subsector, including direct financing of a large foundry (10,000 tons per annum) for automotive parts. The mission further suggested that policy and institutional constraints that were hampering the development of the subsector needed immediate attention. It also strongly recommended the establishment of a Technological Center for Engineering Industries to be in charge of standardization, quality control and technological assistance for the subsector. 6. These efforts resulted in a Bank report entitled "Morocco - Review of Engineering Industries" (Report No. 3233-MOR, November 1981) which discussed at length the positioning of these industries in the Moroccan industrial strategy. In discussing the sectors' priority in the Development Plan, the Review stated that: "Recognizing the limits of its import-substitution policies for manufactured consumer goods and the need for a selective approach to reducing the trade gap of the manufacturing sector, the 1981-85 Plan has readjusted the Moroccan industrial strategy by focussing on the development of engineering industries for the efficient import substitution of capital goods and supplies ... The substitution, and establish the basis for increased employment and growth.... Subsequent reform program, in addition to pursuing the medium-term effort in industrial and trade policy reforms, could address issues of public enterprises, reform of the financial sector, incentives and resource allocation in agriculture and reform of the system of education and training". 2 See Back-to-Office Report to Acting Division Chief, IPDD-3, dated August 2, 1979. 3 Industrial Sector Memorandum, Report No. 2714, November 1979. -3- priority given to selected engineering industries appears justified by the need to reduce the pressure of electromechanical industry imports on the balance of payments" (paragraph iii). 7. The Review further recommended that the development of the engineering subsector be provided with additional incentives in the form of technical assistance and institutional support. The most important additional incentives consisted of: a. the establishment of an adequate medium/long term "supplier-credit" facility to foster the purchase of local capital goods; b. the preparation of a clear policy on local participation in public projects; c. the rapid establishment of Institutes for Industrial Standards and Quality Control; d. the urgent completion of the Vocational Schools and the Institutes of Applied Technology; e. the strengthening and expansion of the financial role and promotional activities of the institutions involved in the engineering industries; and f. the creation, within the Ministry of Commerce and Industry, of a Planning Unit to be responsible for preparation of industrial development strategies, rationalization of markets and product-mix, and coordination between projects and protection approvals. 8. During a reconnaissance mission towards the end of 1981, the outlines of a project for the development of the electromechanical industries (EMIs) took shape and were discussed with the Moroccan authorities. These outlines consisted of a line of credit provided by the Bank and placed at the disposal of the Treasury for financing the foreign exchange needs of sub-projects through BNDE and a group of commercial banks; the provision of a medium credit commercial facility by the Central Bank to assist the manufacturers of the capital goods; technical assistance for the technical and technological screening of the sub-projects and the identification of priority subsectors for implementation; and, the establishment of a Standards and Quality Control Institute as well as an Industrial Planning Unit within the Ministry of Commerce and Industry. 9. By August 1982, some Moroccan authorities, especially the Directorate of Economic Affairs, began to express reservations about the need for an EMIs' line of credit in addition to the existing resources." The major reason for such reservation was the stagnant demand for industrial investment as experienced by BNDE and the slow progress of the second Small Scale Industry Loan (2038-MOR). Notwithstanding there reservations, the Bank proceeded with the final appraisal of the project and processed the loan internally to the yellow cover stage. The project was designed to encourage the development of efficient capital goods producing industries in Morocco as well as the strengthening of public institutions assisting the industrial sector in critical areas. The project would address the distortions of Morocco's industrialization pattern and contribute in reducing the pressure of imports of capital goods on the balance of payment deficits. 4 Back-to-Office report of the Appraisal Mission dated August 16, 1982. -4- 10. As designed, in addition to a line of credit of $25 million for the implementation of subprojects, the project provided for a package of $9.5 million in order to address institutional issues. This package comprised two subloans: $2.5 million to the Office pour le Developpement Industriel (ODI - a public entity affiliated to the Ministry of Commerce and Industry) to finance ODI's minority equity participation in about a dozen subprojects of the EMI target group; $3 million to Morocco's Central Bank to finance part of the foreign exchange cost of establishing a "suppliers' credit" facility to assist the marketing of Moroccan capital goods on domestic and foreign markets. There would also be a technical assistance component of $4 million which would be passed on by the Government as grants for: (a) ODI's institutional strengthening; (b) the establishment of an Agency for Standardization and Quality Control; and (c) the upgrading of the participating bank's appraisal capacity as well as the provision of technical and manufacturing advise to enterprises engaged in the electromechanical industries. At this stage, it was anticipated that both BNDE and participating commercial banks would utilize the line of credit and BNDE would be subject to the same rigorous subproject appraisal standards. Moreover, the foreign exchange and interest rate risks would be borne by the Government and BNDE would simply be given the responsibility for administering commitments and disbursements by the Bank and the Treasury. 11. Concurrent with these efforts in the preparation and appraisal of the project, another study was being conducted by the Bank during 1982 and 1983 about Morocco's industrial sector. This study reviewed the system of industrial incentives (particularly exchange rate, tariffs, quotas and export promotion measures), taxation and financial sector. The study focussed on improving the effectiveness of import-substitution policies, export incentives and the mobilization and allocation of financial resources.' Since the protection measures for the engineering industries was an important issue which had been lengthily discussed between the Government and the Bank, the study also provided for the protection of these industries, albeit in a somewhat diluted form (The project envisaged the reform of the industrial incentive system in such a way as to avail the electromechanical subsector of reasonable protection while ensuring its competitivity and efficiency. In practice this meant the allowance of a 20% protection margin on imported cost of similar goods and, in very special circumstances, a temporary allocation of a part of the domestic market to indigenous producers on very stringent conditions). 12. The final outlines of the project as described above was communicated to the Moroccan Government for their concurrence in November 1982. With no response from the Moroccan Government, the Bank's Programs and Projects Departments reviewed the project once again in a meeting in June 1983 and came to the conclusion that: "Given the recessionary outlook for the Moroccan economy and the surplus funds available under the second Small Scale Industries Loan, the optimal course of action I This study was later published as World Bank country study entitled: "Morocco, Industrial Incentives and Export Promotion, May 1984". It became the basis for many of the policy reforms in the Industrial and Trade Policy Adjustment Loan (2377-MOR). -5- would appear to be to reallocate part of the second SSI Loan proceeds to finance EMI subprojects. At the same time, all EMI financing under the ninth BNDE Loan would be required the same criteria as for EMI subprojects financed under the reallocated loan. Under this procedure, therefore, the Bank would not provide any fresh funds to the industrial sector in Morocco, but would ensure speedy disbursement of loans already approved.' All other aspects of the project remained intact and further loan processing was made contingent on agreement on sector development strategy and policies with Moroccan authorities. 13. These events coincided with the intensive discussions that had been in progress between the Bank and the Moroccan Government regarding the need for adjustment of the Moroccan economy. During these discussions, the Bank had agreed that since much work had already been conducted in the field of industrial incentives and export promotion by a mixed team of specialists, the reform should start with industry and trade sectors. In fact the predominant view at the time was that the reform of these sectors took precedence over other financing activities for the support of the Moroccan industrial sector by the Bank. As noted in paragraph 11 above, in recognition of the special circumstances of the engineering industry and particularly the electrochemical industries project, the Industry and Trade Policy Adjustment Loan (ITPAL, Loan 2377-MOR) permitted the adoption of tariff and import policies that would temporarily protect new investments. Thus both the Bank and the Government of Morocco postponed their final decision on the project until after the approval of the ITPAL. After a lapse of almost a year and despite a previous decision by the Bank not to provide a fresh line of credit (see para. 12 above), both the Government and the Bank agreed to reactivate the project in June 1984. The project, stripped of a great part of its institutional and capability building aspects, was finally approved in January and signed in April 1985. III. Project Objectives and Description 14. The project's major objective was to support the industrial and technological development of EMIs in Morocco, through the provision of financial resources for medium and long term lending. The secondary objective consisted of strengthening ODI's effectiveness in industrial promotion, improving its policies and quality of its project financing and generally increasing the efficiency of financial sector intermediation through the increased involvement of commercial banks in the area of industrial term financing. These objectives were supported by the Government's declared policy of deepening the industrial base and alleviating pressure on balance of payments through efficient import substitution and increased export of EMI products. In addition to allocating $22 million for lending through six selected commercial banks -- BNDE was dropped from the list of intermediaries for this line of credit because of its access to other funds, especially the Ninth BNDE financing -- (Loan 2037-MOR), the loan envisaged $3 million for financing equity participations by ODI in around six EMI subprojects and $.2 million for technical assistance for EMI subsectoral studies. 6 Memo dated June 15, 1983, on the conclusions of the meeting. -6- 15. The six commercial banks (BCM, BMCE, BMCI, CDM, Wafabank and SGMB)' were chosen because of their demonstrated appraisal capability in medium and large term lending to industry as well as their interest in the development of the EMI sector. They had already built up a pipeline of projects. All EMI subsectors were eligible for financing under the loan, but those falling under the definition of small scale industry were excluded. It was expected that most consumer durable goods subprojects which did not have a high local value added and, hence, unlikely to meet the ERR & FRR requirements would not benefit from the loan. In addition to strict ERR & FRR requirements (12% minimum) the subproject needed to be financed with 40% equity for new projects and 30% equity for expansion schemes. All subprojects were to be approved by the Bank and their total investment costs could not exceed DH 50 million (around $5.9 at the prevailing rate of exchange). In using the funds earmarked for equity participation, the ODI was restricted to owing up to 50% of the share capital of the subproject with the Bank funds allocated to financing equity on each subproject not exceeding 35% of the share capital. In any case, the equity and loan finance from the Bank fund could not exceed 60% of the subproject costs or $2.5 million (whichever was lower). The SAR contained an indicative list of subprojects awaiting financing by ODI and the commercial banks. IV. Implementation Experience 16. The implementation of this project hit a number of snags right from the beginning: (a) There was nearly a six-month delay in loan effectiveness due mainly to many procedural matters as well as substantive issues that needed resolution before the loan could be disbursed. Among the substantive issues, there were conflicting conditions with respect to the maximum on-lending rates as prescribed in the ITPAL and the EMI loan. The minimum equity rates of 40% in subprojects was considered as subscription to capital and not as fully paid in capital. While rectifying these substantive matters other procedural problems were also straightened out and the loan became effective in January 1986. (b) The establishment of a flawed Special Account (originally intended as a revolving fund) at the Moroccan Treasury created a great deal of confusion and materially affected the smooth implementation of the loan. Under the system set up at the beginning, the participating banks could only receive 30% of the approved eligible expenditures from the Special Account while the rest would have to come directly from the Bank, through a special request from the Treasury. While the setting up of this Account caused a part of the delay in effectiveness, it acted as deterrent to participating banks some of whom thought they could only use the Bank loan for 30% of eligible expenditures. (c) Even before the signature of the on-lending agreements, one of the commercial banks -- Cr6dit du Maroc -- cancelled its $3 million allocation. Another, Wafabank cancelled $3.5 million from its original allocation ($5 million) by the BMCE - Banque Maroccaine du Commerce Exterieur; BCM - Banque Commerciale du Maroc; CDM - Crddit du Maroc; BMCI - Banque Maroccaine pour le Commerce et l'Industrie; SGMB - Socidt6 Gdndrale Maroccaine de Banques. -7- end of 1986. At the beginning of 1988, ODI also cancelled the balance of its undisbursed allocation amounting to $2.4 million. The commitment date was extended from the end of 1987 to April 30, 1989. The closing date of the loan was also moved over by one year to December 31, 1991. V. Project Results 17. The EMI loan was to finance around 40 subprojects with a total investment cost of $43 million, creating 1500 jobs. In practice, because of substantial cancellations by three prospective intermediaries, the line of credit financed a total of 25 subprojects (20 enterprises) and ODI made use of the financing to participate in one enterprise (three of the commercial banks also lent to this entity). Of the 25 subloans 14 were syndicated where either two or three banks pooled their resources with one acting as the lead bank. The other 11 subprojects received loans from only one of the commercial banks (Annex 1 - Page 1). The following Table 1 presents the use of EMI loan funds by the commercial participating banks and ODI. Table 1 Use of Funds - EMI Loan Initial Adjusted Actual Share in Allocation Allocation Disbursement Total Agency $ Million $ Million $ Million Disbursement BCM 5.0 5.0 5.26 32.6 BMCE 5.0 5.0 4.74 29.4 BMCI 2.5 2.5 2.77 17.2 Wafabank 5.0 1.5 1.55 .96 SGMB 1.5 1.5 1.22 7.6 CDM 3.0 0 0 0 ODI 3.0 .57 .57 3.6 Total 25.0 16.07 16.11 100.0 The use of the Bank's loan ($16.11 million) generated a total investment of around $42 million (DH 360 million) and created 1130 new jobs at an average investment per job of about $37000. Nearly $9 million of the loan for EMI remained undisbursed and was, therefore, cancelled. 18. Annex 1 provides some information about the enterprises that benefitted from the subloans. Except for Socidt6 des Industries Mecaniques et Electriques de Fs (SIMEF, Annex 1, page 23) which is jointly owned by ODI and the Treasury (63/37) and C3M in which ODI has minority shareholdings (Annex 1, page 21) all other investments have been made by the private sector. Of the 20 investments, all, except C3M, are for the expansion of existing activities or diversification. C3M is the only company that was newly created in 1982 for the manufacture of machine tools. Bank funds were used by ODI to finance a part of its shareholding in C3M; in addition, three commercial Banks also provided loan financing to this venture from the Bank funds. 19. Of the 20 enterprises that received the subloans, five are highly profitable and enjoy sizeable cash flow; ten are modestly profitable; and, five are loss-making. The most profitable companies are mainly engaged in either assembly or relatively simple manufacturing (repairs, furniture, LPG bottles, mufflers etc). Of the loss-makers, C3M and SIMEF are both involved in manufacturing cum assembly operations in which the local content is moderately high. The other loss-making companies (refrigerators, stoves, batteries) face strong import competition. Many moderately profitable enterprises are those which manufacture products that enjoy natural protection by virtue of the high transportation costs of imports such as pipes, tubes, steel profiles, cans and other containers, etc. The high transportation cost of imports also helps the most profitable group. By and large, the private sector companies have serviced their loans on time and six of the 25 subloans have already been repaid (Annex 1 - Page 1). As of the second half of 1993, more than 58% of the loans had been paid back (Annex 2), though this ratio varied among the commercial Banks. C3M had discontinued the repayment of its loans and the company owed nearly DH 8.7 million in principal alone to the three commercial Bank lenders. The paucity of information does not allow a rigorous reestimation of the internal rates of return but the income statements of many subprojects already show results that are inferior to the SAR's stipulated ERR of 12 per cent. VI. An Overall Assessment 20. Despite the seemingly adequate financial and employment creation results of almost half of the subprojects, there remains a vast gap between the type of industries which received assistance and those that the project was designed to create and support. In the SAR, the Bank displays a clear vision and a strategy for the development of the engineering industries in Morocco. The SAR states: "Morocco has a substantial potential and a competitive advantage for a selective development of its EMIs. Labor productivity (measured by value added per worker) in EMI is relatively high, at about $7100 as compared to Tunisia. The domestic market for electrical goods has reached a critical mass level, and is still partly untapped; the labor force is productive, easily trainable and relatively cheap; technical support from foreign partners or advisors has been effective, if limited in extent, and has contributed to good management in a number of efficient enterprises; and the proximity of the country to the Middle East, Sub-Saharan Africa and the EEC has permitted it to obtain preferential access to these markets and has facilitated the transfer of recent technologies from the EEC" (para 3.09). 21. Having established the factors behind Morocco's potential comparative advantage, the SAR then discusses the likely areas for exports such as the components for the automobile and electrical/electronic industries. It goes on to enumerate other subsector for efficient import substitution in capital goods and supplies using simple or intermediate technologies such as steel structure and platework, non-automotive agricultural machinery (ploughs, harvesters, trailers, pumps), thermal equipments (industrial boilers, furnaces, condensers, driers), lifting and handling machinery (belt conveyors, cranes), railroad freight cars and selected electrical machinery (generators and motors, switchboards, switchgears, control panels). It then suggests that Morocco could enter selectively and progressively into the production of certain capital goods of higher technology. These industries clearly -9- dovetailed closely with the priority of the 1981-85 plan which called for the development of: (a) the standard capital goods and supplies for industrial investment and rural development; (b) the foundries; and, (c) the commercial vehicles and their parts and components. Strateic Vision 22. Looking at the genesis of the project, it is clear that it was conceived at a time when the Bank still espoused the need for an industrial strategy.' As initially prepared (1981-82), the project had all the hallmarks of a strategic approach whereby not only would the country be guided into more technologically complex industries, but such a move would also be supported by an array of institutional and capability building activities as enumerated in paragraph 7 above. Thus, there was a clear understanding that the entry into more technologically demanding industries was not going to be easy and that, despite the perceived comparative advantage of Morocco, the new types of manufacturing process and techniques needed time for their mastery. The project, in its earlier version, carefully blended an ambitious strategic vision with the means of achieving its objectives by envisaging the development of human resources (vocational schools and the Institutes of Applied Technology); the establishment of an institute for Industrial Standards and Quality Control; the creation of a medium/long-term "supplier- credit" to assist the capital goods industries; the redirection of the publicly funded project towards the use of domestically manufactured materials; the establishment, within the Ministry of Industry, of a Planning Unit to be responsible for preparation of industrial development strategies; and, finally, the provision of adequate protection to the engineering industry (even quantitative restrictions) during its infancy. While both the Bank and the Government supported the institutional development aspects of this initial design, they were deadlocked on the need for the line of credit, given the still undisbursed sums existent in other loans to the industrial sector. 23. Following the 1983 economic crisis, the Government of Morocco and the Bank embarked on a program of structural reforms the cornerstone of which was the first ITPAL approved in January 1984. The ITPAL was, in turn, based almost entirely on the recommendations of the Industrial Incentives and Export Promotion Report.' Although many of the reforms envisaged in the ITPAL were necessary for the promotion of competitiveness in the industrial sector, the shift of emphasis to import competition changed the whole climate for the development of EMIs (initially based on efficient import substitution). Under these circumstances, and at a time when: (a) there was an overall shift in the industrial and trade strategy, and, (b) the demand for investment in the EMI subsector was already I As documented and stated in the OED Study of Bank Support for Industrialization in Newly Industrializing Countries (Report No. 9899 - paras 6.07 to 6.29), the Bank's approach to industrialization in the earlier years was much more concerned with strategic issues. Strategy was then defined with industrial structure and its transformation and with entry into more technologically complex industries as a major objective. This approach was largely abandoned when the incentive-based approach came to the fore. The incentive-based approach assumed that market prices provided the best guides for the development of industrial activities in most developing countries and that there was little role for "positive industrial strategy". I It should be mentioned that the Industrial Incentive and Export Promotion report and the ITPAL had both retained the protection provision for exceptional cases, but it was clear that the government's commitments had been diluted. - 10 - depressed, the project was reactivated. As post-appraised and eventually presented to the Board, the project was stripped of its institutional and capability building aspects and was reduced to a line of credit, a part of which would be on-lent to commercial banks to finance investments in the EMI subsector; and, another part on-lent to ODI to finance equity participation in eligible enterprises in the EMI subsector. The project contained only a small technical assistance subcomponent which would be used to carry out studies of the market and the identification of EMI investment projects. 24. In a telling section, (para. 12.1), the PCR laments that: "because of controversies in project preparation; and a delay in loan effectiveness, the project did not get started until nearly three and half years after its original appraisal. By that time the strategy of the Bank and the Government for the industrial sector had changed, resulting in a shift in the Bank's industrial lending policy away from specific subsector support and import substitution to generalized industrial credit lines for export promotion. In this process, the specific concerns for the EMI sector was overshadowed by the broader concern for the liberalization of the economy and the promotion of the industrial sector as a whole, especially export industries". Since the strategy changed in 1984 (long before the loan was taken to the Board), the question, therefore, is why did the Bank continue to process the loan? 25. Part of the answer to this question lies in the Bank's approach to industrialization which was previously referred to in paragraph 22 above, and part in the compromise that was reached between the conflicting views in the Banko and in the Government of Morocco. The new incentive-based approach was suspicious of a positive role for industrial strategy and emphasized that market prices provided the best guides to the development of industrial activities. Accordingly, the reforms contemplated under ITPAL 1 were considered of greater importance to set the industrial sector on an efficient growth path. Despite its apparent inconsistency with the shift in the Bank's industrial lending policy, the loan was taken to the Board as a compromise solution assuming that the reforms entailed in the ITPAL 1 would prepare the ground for the industrial sector to flourish, and that the EMIs only needed financial assistance to help them grow faster in the reformed policy environment. All the preoccupation with capability building and institutional and technological development had disappeared. Though cognizant of the absence of such capabilities (see SAR, para. 3.15), these shortcomings were not even mentioned as risks. Nor would the new reforms, by definition, pose any risk for the project (the only major risk mentioned in the project document is the receptivity of the commercial banks to the line of credit). The outcome of the project clearly shows that these were erroneous assumptions. 26. The policies pursued by many East Asian Economies -- particularly those with the most diversified and technologically advanced industrial base -- Japan, Korea, Taiwan (Province of China) - clearly indicate that domestic and export competition combined with capability building and institutional and technological development were the preferred tools for increasing efficiency, productivity and competitiveness. In these countries, import competition was introduced more carefully and in line with the acquired skills and capabilities, all supported by the necessary institutions for quality improvement. Achieving the right balance among macroeconomic policy, exposure to competition and nurturing institutional and technological development is always a difficult process, but the only proven way of achieving industrial development. 10 The project files show an unmistakable underlying tension between the views of the Programs and Projects Departments. - 11 - Shortfall in Disbursement - The Changed Environment 27. Many reasons have been advanced in Parts I and II of the PCR for explaining the shortfall in the disbursement of funds. To begin with, the project was never totally supported either by the various departments of the Bank or the concerned authorities of the Government of Morocco. The debate about the need for an EMI credit line was never satisfactorily resolved and looking back at the trials and tribulations in the early stages of project preparation, it is clear that the Ministry of Commerce and Industry, dissatisfied with the performance of BNDE and intent on opening the market for medium and large-term financing of industrial projects to the commercial Banks, was insistent on creating a separate line of credit. The project was, therefore, processed on the optimistic assumption that, based on loan applications accumulated in subproject pipeline of the commercial banks, there was sufficient demand for financing. In reality, due to reasons which will be discussed later, investment in the EMI subsector remained very depressed throughout the 1980s" (Table 2). Table 2 - Investment in Industrial Subsectors 1984 - 1991 DH Millions Average Growth rate Industrial Sector 1984 1986 1987 1988 1989 1990 1991 1991/84 Food & Agroindustries 553 970 811 1062 1496 2046 1924 19.5 Textile and Leather 717 966 786 1296 1515 1610 1942 15.3 Chemical and Pharmaceuticals 667 805 1435 1722 1843 2027 2896 23.3 Electrical and Mechanical 583 523 503 581 569 873 918 6.7 Total 2520 3264 3535 4661 5423 6556 7675 17.2 Source: Ministry of Commerce, Industry and Privatization. 28. Furthermore, some commercial banks and the ODI complained about the elapsed time between subproject submission and approval (a few projects apparently took as long as 9-13 months). " The Managers of ODI, Ministry of Commerce, Industry and Privatization and all commercial banks stated that the situation of EMIs has deteriorated in the last two years. In fact, activities in the EMI subsector shrank in 1993 as capacity utilization fell to around 40-75% for various enterprises. - 12 - A part of the delay in subproject approval may be traced to the delay in effectiveness and the need for the resolution of other matters related to interest rate and the Special Account. But the frustration created by such delays prompted one of the commercial banks to request a reduction of its allocation. In the case of ODI the long delay in securing approval of its first project -- 9 months -- and the availability of financing from the European Investment Bank at much lower interest rates dampened its enthusiasm to utilized the Bank's line of credit. The ODI did not even consider using the Bank's funds in its other equity investment (24%) in a new company (Soci6td Internationale D'Industrie et D'Ingeniere "31") which was created in 1986 for the production of microprocessors and software design. 29. Another commercial bank raised objections to the design and conditions of the loan. Firstly, it objected to the exclusion of the Small Scale Industries from the eligibility criteria, on the grounds that it would undermine its traditional role in financing the needs of these industries. Secondly, it had strong misgivings about the more onerous conditions envisaged for this line of credit as compared with the ninth BNDE loan. Such conditions, it maintained, would not allow the commercial banks to compete with BNDE because of the difference in the on-lending interest rate levels as well as the requirements that all subloans had to be sent to the Bank for approval. All in all, it could not see any advantage in this line of credit and, given its own special circumstances, it withdraw its application at the beginning of 1986. 30. In its para. 4.2, the PCR states that: "The Treasury in its review of the project (Part II, paragraphs 1-4), cited three problems in the project's implementation. First, they pointed out that the loan became effective three years after initial discussions and preparation of the project. The Treasury noted that this delay, combined with changing economic conditions, was responsible for a lower number of subprojects financed by the loan than originally planned, since banks were able to finance EMI subprojects from other sources". It is highly debatable that any financing of the subprojects indicated in the SAR (see Annex 3) by the commercial bank ever took place before the projects approval in January 1985. In fact, as discussed earlier, this period coincides with the depression of investments in EMIs as evidenced by the data in the SAR (para. 2.04) and table 2 above. There is, therefore, no doubt that the changed economic policy environment was at the heart of this shortfall investment and, hence, the disbursement of the line of credit. On the one hand, the lackluster economic activity had dampened the demand for investments generally; on the other, and more to the point, the new industrial and trade policy and its unmistakable emphasis on import competition had changed the perceptions of the private sector. Once the Moroccan industrialists received the message that progressive import liberalization was in the cards they began withdrawing the loan applications, especially for the more technologically demanding projects. Thus, the subproject pipeline for new products started to gradually disappear during 1985 and 1986.12 Value Added and Technology 31. As noted earlier, practically all 20 subprojects which were financed by the commercial banks fell into the category of expansion of existing lines of production. Of the subprojects previously accumulated in the commercial banks' pipeline (Annex 3), none that were earmarked for exports (bicycle components, car radiators, spark plugs, foundry, excavators, truck cranes), except the engine filters were pursued. In fact, the list of financed subprojects clearly shows that the demand for lending by 12 This statement was corroborated by the ODI and commercial bank managers. - 13 - commercial banks was only for assembly and low technology fabrications such as household appliances filters and electric cables. Moreover, none of the projects under promotion by the ODI was ever implemented. It is, therefore, clear that the major objective of the project which was to move the Moroccan Industry into more technologically demanding and higher value added engineering subsector was not realized. In this sense, the project was totally unsuccessful. 32. The fate of the only medium-technology manufacturing enterprise promoted by ODI is instructive. Compagnie Maghrebine de Machines Outils a Mataux (C3M) was created in 1982 for the development of a machine tools industry. Its output, initially lathe and milling machines, was to be mostly utilized within a reciprocal industrial cooperation framework between Morocco and Tunisia. Morocco made a similar investment for the manufacture of woodworking machinery in Tunisia. In addition to supplying the needs of these two countries, the output was to also supply the vocational training facilities in other Arab countries. While the company's total sales grew to DH 12.3 million in 1989, the enterprise never approached profitability and full capacity utilization. Operations at the factory were discontinued in early 1993 because the company became insolvent. The demise of C3M may be traced to: (a) the bankruptcy and disappearance of the foreign licenseholder; (b) the need to procure parts and components from other sources at much higher costs; (c) failure of company to find another technical collaborator/licenseholder; (d) imports of second-hand machines from European countries; and (e) predatory pricing by manufactures of machine tools from Eastern European countries. Institutional Development 33. As originally designed, this project was meant to have considerable institutional impact. It contained a number of interconnected subcomponents that were to create a network for guiding the development of the eletromechanical industries. By the time the project was submitted to the Board, much of its institutional and technological development underpinnings had, unfortunately, been eroded. The project, nonetheless, resulted in some institutional improvement. A random sampling of the project files indicated that the commercial Banks were following reasonably adequate procedures in their project appraisal. With the gradual reform of the financial sector, a keener competition developed among the commercial Banks as they became much more responsive to the interest rate structure in the market. By and large, therefore, this project had partial institutional impact as the efficiency of the financial sector intermediation improved. Supervision 34. The PCR discusses very candidly the unsatisfactory supervisions of this project (paragraph 4.11). It speaks about the inadequacy of reporting and record keeping, the inappropriate rating of the overall performance of EMI subprojects and the little time spent in the field by supervision teams on this project. Usually, the missions supervised the EMI project in conjunction with other projects, but none discussed or reported on the technical assistance and the studies planned under the project. This may be due to the strained relationship with ODI which developed early in the implementation of the project. This project is a good example of how the approval culture overwhelms the implementations and monitoring culture in the Bank. 35. The inadequate supervision is nowhere more striking than in the treatment of the Special Account. In the course of negotiations between the Bank and the Moroccan Government, the Treasury - 14 - insisted that the Special Account should not finance more than 30% of the eligible expenditures for each subproject. The reason given by the Treasury was that if it carried an amount higher than the 30% in the Special Account, it would become part of the budget and, hence, subject to administrative control. This arrangement was subsequently reflected in the subsidiary loan agreements. However, the account provided by the Borrower in Part II of the PCR does not correspond with these facts. In Section II, para. 4, the Borrower states: "... At first the Special Account was used only for prefinancing operations totalling up to 30% of the loan. This seems to be the way it was agreed with the World Bank when the loan was set up .....". Thus, an impression is left that the Bank was involved in designing these conditions. In view of the PCR's admission that, upon the insistence of the Moroccan Treasury, the Bank accepted the two-tier system of disbursement with serious misgivings (para. 4.8), it is unfortunate that the matter, which had serious implications for the project implementation, was allowed to continue for so long, without the two sides agreeing on its resolution. Compliance with Covenants 36. On the whole, the borrower has only partially complied with the covenants. It did not provide a full account of the subprojects, their costs and benefits and their contribution to the industrial sector. The borrower only partially complied with its obligation to provide the Bank with audited annual reports of the commercial banks, and there is no audit report in the project files on funds used by ODI under the project. In addition, the borrower failed to provide the Bank with an audit re-3rt on the Special Account. Sustainability 37. This project was prepared in order to support the industrial and technological development of EMIs in Morocco. These industries were in turn expected to increase the value added in the industrial sector, provide a diversified technological base, reduce the dependence on imports of engineering products and capital goods, and provide opportunities for exports, thereby improving the balance of payments. In practice, none of these objectives have been realized. The manufacturing sector has grown at a rate of only 4% between 1985 and 1992 (Annex 4). Worse still, because of the depressed state of investment in the EMIs, the growth of this subsector has been just over 1% (Annex 5). Not only did the project not succeed in terms of objectives, it also failed to create a framework for the sustainable development of the EMI subsector. However, it is highly probable that many of the beneficiary enterprises will continue with their profitable operations under the existing liberalized trade regime. 38. The project's major impact was in the financial sector because it resulted in competition among the commercial banks in their medium to long-term lending and in the breaking up of BNDE's monopoly for such loans. This competitive arrangement continued successfully with subsequent industrial finance projects, expanding the availability of funds for private investment in industry. 39. The PCR refers to two Bank missions (paragraph 4.12), one in 1988 and the other in 1990, which came to nearly identical conclusions about the problems being faced by the EMI subsector in Morocco and how liberal trade policies under the two ITPALs had reduced incentives for EMI expansion. Apparently, the strategy paper prepared by the Technical Department mission recommended the review of protection policy for local industry and the assignment of consultants to prepare proposals for making Morocco an attractive offshore site for European EMIs. The report of the second mission - 15 - also stated that import liberalization had seriously impacted the electrical and mechanical industries and that the firms in this subsector had not been given sufficient time to adjust to the new economic environment. VII. Lessons Learned and Recommendations 40. A host of valuable lessons are given in the PCR. They deal with matters related to the project preparations and design and project supervision by the Bank. They also stress the need for ownership responsibility, improved communication with the participating Banks and the recognition of the importance of technical standards, quality control and promotional activities by the borrowers. While the PCR, in several places, touches on the central issues related to the unsatisfactory outcome of this project, it seems tentative in drawing the obvious conclusions. Nonetheless, this PCR accurately points out the importance of addressing a variety of issues in the Bank's industrial policy advice, especially in connection with the need for technological support to the private sector (para. 12.2). 41. Based on the Audit, another crucial lesson learned from the project experience is that the process of industrialization and the diversification and deepening of industrial process needs a strategic vision and a clear understanding of incentives, capabilities and institutions. Market-oriented policies, though necessary, are not sufficient to promote this process. An appreciation of the micro-level process of acquiring efficiency is critical to the formulation of industrial policy. In technologically demanding subsectors, especially, this is a complex process which takes time and investment and can only be undertaken by the entrepreneur if assured of a reasonable support and protection. If in the words of the PCR, "the sustainable development of EMIs in Morocco will require a clear-cut industrial sector strategy covering inter alia, the EMI sector, and the commitment of government to this strategy" (paragraph 6.3), it is necessary for both the Bank and the Government, to recognize the implications of adopting such a clear-cut strategy and taking the needed steps. 42. Because of internal conflicts between the relevant departments of the Bank and various agencies of the Government of Morocco, the project was neither fully owned by the Borrower, nor wholeheartedly supported by the Bank. At the end, it became an uneasy compromise solution which failed to provide an effective bridge between conflicting views. 43. As noted above, this project was approved when significant changes were being introduced in the Moroccan economy and the Bank was shifting its policy for industrial lending from financing credit lines for single subsectors to general industrial credits. Since then, experience has shown that under a liberalizing regime, restructuring, rehabilitation and subsector development operations often face daunting challenges. The lesson is that such difficult and demanding projects should not be attempted until reforms are well established. 44. The Bank continues its efforts to stimulate the Moroccan industrial sector. In a recent study (Report No. 11557-MOR - Developing Private Sector Industry in Morocco), the Bank takes stock of the reforms and recommends an agenda for further action. This agenda comprises measures: to reinforce incentives for investment in private manufacturing; to provide resources to industry; to expose industry to more import competition; to bring about more transparency in business; and, to support institutions. This report is in the mould of the standard Bank policy package. However, it is devoid of any strategic vision for the structural transformation and dynamic growth of the Moroccan industry other than expecting that such reforms will eventually elicit the elusive supply response. - 16 - 45. It may well be that Morocco no longer harbors any ambition of developing its engineering industry or that opportunities for the trade in engineering products are no longer available. Morocco may even find the economic cost of seriously entering into the EMIs prohibitive. Whatever the future course of events, it is clear that under the current policy regime, the private sector does not find the EMI subsector appealing. - 17 - ANNEX 1 Page 1 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) Participating Commercial Banks BMCE BCM SGMB Wafabank BMCI TOTAL DH DH DH DH DH DH Million Million Million Million Million Million Subborrowers (Per cent) (Per cent) (Per cent) (Per cent) (Per cent) Auto Hall 14.000 (100) 14.000 Batifer 3.000 (100) 3.000 Burometal 1.530 (30) 1.887 (37) 1.683 (33) 5.100* Cablerie du Maroc 5.970 (100) 5.970 CEAC 3.1785 (63) 1.7715 (37) 4.890 Gourvenec I 4.500 (50) 4.500 (50) 9.000* Gourvenec II 2.925 (50) 2.925 (50) 5.850 Madison 3.500 (100) 3.500 Mafec 2.500(100) 2.500 Maroc Aviation 10.000 (100) 10.000 Metaghreb 1.5625 (25) 3.125 (50) 1.5625 (25) 6.250 Precima 1.500 (100) 1.500* Sinfa 6.000 (100) 6.000 Sodex I 1.440 (40) 1.080 (30) 1.080 (30) 3.600* Sodex II .900 (50) .900 (50) 1.800 Sodex 111 3.000 (50) 3.000 (50) 6.000 Sofacuis I 1.120 (40) 1.670 (60) 2.790 Sofacuis II .520 (100) .520 Somagaz 3.335 (66.6) 1.665(33.3) 5.000 Sothemag .640 (40) .960 (60) 1.600* Tuyauto 1.380(100) 1.380* Wonder Maroc 11.400 (100) 11.400 C3M 5.214 (40) 3.910 (30) 3.910 (30) 13.036 Simef I 1.240 (40) .930 (30) .930 (30) 3.100 Simef II .991 (35) .991 (35) .850 (30) 2.833 Total 39.918 43.902 10.480 13.196 23.125 130.619 *Loans totally repaid by 2nd half 1993. - 18 - ANNEX-1 Page 2 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR' 1 SOCItTt AUTOHALL Location: Casablanca Type of activity: Repair and Maintenance of vehicles, tractors and agricultural machines Capital: DH 115 million Financing from Bank Funds: BMCE DH 14 million Total investment including financing from Bank Funds: DH 40 million Nature of investment: Expansion Labor Force: 460 persons INCOME STATEMENT DH Million 1988 1989 1990 1991 1992 Total Sales 409.21 460.12 573.21 801.38 753.9 Cost of Sales 310.72 338.48 407.41 573.92 541.38 Gross Margin 98.49 121.64 165.80 427.46 212.56 General and Administrative Expenses 50.98 53.47 58.73 71.72 86.35 Depreciation 9.05 4.88 12.26 25.09 9.95 Taxes and Levies 1.36 1.38 2.23 2.46 2.73 Financial Charges 14.90 11.82 8.31 8.63 21.97 Profit/(Loss) 22.20 50.09 84.27 119.56 91.56 - 19 - ANNEX 1 Page 3 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 2. SOCIITIt BATIFER Location: Casablanca (Ain Sebaa) Type of Manufacture: Steel pipes, steel profiles and corrugated roof sheeting Capital: DH 4 million Financing from Bank Funds: SGMB DH 3 million Total investment including financing from Bank Funds: DH 5.16 million Nature of investment: Expansion Labor Force: 53 persons INCOME STATEMENT DH Million 1987 1988 1989 1990 1991 1992 Total Sales 25.88 41.77 46.37 53.28 49.89 55.19 Cost of Sales 21.48 35.45 39.19 43.95 41.30 43.70 Gross Margin 4.40 6.32 7.18 9.33 8.59 11.49 General and Administrative Expenses 2.27* 2.45* 3.36* 4.66* 4.43 5.83 Taxes and Levies .22 .25 Depreciation .68 .67 .80 1.17 1.03 1.20 Financial Charges .38 1.44 2.55 1.54 4.63 3.04 Profit/(Loss) 1.07 1.76 .47 1.96 (1.72) 1.17 Includes taxes and levies The purpose of this investment was to increase the tube welding capacity by more than 100 per cent to around 12000 tons of output per year by installing a complete new tube welding line to manufacture tubes up to 21/2 inches with an enhanced speed of welding (the most modern lines are capable of welding around 100 meters per second). It was anticipated that production from the new line would start in 1989. Total sales indicate that this target was achieved and the unit now operates at 60-65% capacity utilization. The loan has already been largely repaid. This company exported nearly 530 tons of products (7% of its total production) in 1992 for around DH 4 million. - 20 - ANNEX 1 Page 4 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 3. SOCIETE BUROMETAL Location: Casablanca Type of Manufacture: Office Furniture (Desks, Chairs, Cupboards etc) Capital: DH 20 million Financing from Bank Fund: BCM DH 1.887 million BMCE DH 1.530 million BMCI DH 1.683 million Nature of investment: Expansion Labor Force: 350 persons INCOME STATEMENT 1987 1988 1990 1992 Total Sales 70.19 87.16 85.22 137.21 Cost of Sales 30.54 39.34 37.29 66.84 Gross Margin 39.65 47.82 47.93 70.37 General and Administrative Expenses 21.70 27.22 24.84 35.41 Depreciation 2.42 2.02 2.21 4.23 Taxes & Levies .73 .50 .72 .63 Financial Charges 4.11 3.89 4.31 7.23 Profit/(Loss) 10.69 14.19 15.85 22.86 - 21 ANNEX 1 Page 5 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 4. CABLERIE DU MAROC Location: Casablanca Type of Manufacture: Electric Cables Capital: DH 47.5 million Financing from Bank Funds: BMCI DH 5.97 million Total investment including financing from Bank funds: DH 10 million Nature of investment: Expansion Labor Force: 212 persons INCOME STATEMENT DH Million 1986 1987 1988 1989 1990 1991 1992 Total Sales 87.40 100.98 148.52 200.31 225.42 227.80 192.64 Cost of Sales 63.76 76.67 118.43 168.38 188.26 171.23 149.70 Gross Margin 23.64 24.31 30.09 31.93 37.16 56.57 42.94 General & Administrative Expenses 9.12 10.07 11.77 12.57 15.95 16.36 17.71 Taxes and Levies 6.91 4.28 2.70 3.70 .71 19.42 4.78 Depreciation 2.12 3.25 3.70 3.88 4.88 5.60 7.80 Financial Charges 4.35 5.43 9.86 8.64 11.74 9.11 6.79 Profit/(Loss) 1.14 1.28 2.06 3.14 3.88 6.08 5.86 - 22 - ANNEX 1 Page 6 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 5. SOCItTt CONSTRUCTION ELECTRIQUE APPAREILLAGE DE COMPTAGE (CEAC) Location: Rs Type of Manufacture: Electric Meters and Contactors Capital: DH 6 million Financing from Bank Fund: BCM DH 3.1785 million Wafabank DH 1.7115 million Total investment including financing from Bank funds: DH 8.15 million Nature of investment: Expansion Labor Force: 120 persons INCOME STATEMENT DH Million 1987 1988 1989 1990 1991 1992 Total Sales 11.97 10.55 10.82 21.37 34.32 39.59 Cost of Sales 6.95 5.39 5.38 15.20 23.69 27.66 Gross Margin 5.02 5.16 4.44 6.17 10.63 11.93 General and Administrative Expenses 1.51 2.25 3.61 3.61 4.63 6.15 Depreciation .40 .55 1.24 1.38 1.46 1.56 Taxes & Levies 1.83 1.70 1.64 .23 .27 .28 Financial Charges .23 1.13 .99 1.14 1.60 2.17 Profit/(Loss) 1.05 (.48) (3.14) (.19) 2.68 1.77 - 23 - ANNEX 1 Page 7 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 6. SOCItTt GOURVENEC Location: Mohammedia Type of Manufacture: Sheet Metal cans and containers up to 30 liters capacity Capital: DH 45 million Financing from Bank Funds (Two loans): First Loan BCM DH 4.5 million BMCE DH 4.5 million Second Loan BCM DH 2.925 million BMCE DH 2.925 million Nature of investment: Expansion Labor Force: 500 persons INCOME STATEMENT DH Million 1990 1991 1992 Total Sales 245.59 265.57 271.70 Cost of Sales 173.50 175.11 177.30 Gross Margin 72.09 90.46 94.40 General & Administrative Expenses 44.16 46.72 50.6 Depreciation 8.93 9.69 9.90 Taxes & Levies (.92) 1.68 .92 Financial Charges 23.85 25.21 20.66 Profit/(Loss) (3.94) 7.17 12.32 The company expanded its total capacity in 1979 and is now capable of fabricating metallic containers using up to 30,000 tons of sheet metal. In recent years, Gourvenec has been using nearly 18,000 tons of sheet metal and the company currently commands nearly 45% of the market. Some 80% of its production is eventually exported through the food and fishery industries. The company employed between 200 and 250 persons before expansion; it now employs upward of 500 persons. During the high canning season employment goes up to nearly 700 with the addition of temporary labor and a second shift. Gourvenec has to meet very strict quality standards demanded by the food industry. It has its own quality control laboratory headed by trained technologists. In order to keep abreast of new technology, the firm depends on its overseas collaborators and machinery suppliers. - 24 - ANNEX 1 Page 8 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 7. SOCIETE MADISON Location: Mohaimedia Type of Manufacture: Household Appliances - Refrigerators, Stoves etc Capital: DH 35 million Financing from Bank Funds: BMCE DH 3.5 million Total investment including financing from Bank funds: DH 8 million Nature of investment: Expansion Labor Force: 210 persons INCOME STATEMENT DH Million 1988 1989 1992 Total Sales 42.70 54.06 47.32 Cost of Sales 20.67 39.54 31.11 Gross Margin 22.03 14.52 16.21 General and Administrative Expenses 13.88 11.50 12.35 Depreciation 1.12 1.26 1.35 Taxes and Levies .69 1.03 .75 Financial Charges 3.63 5.25 6.11 Profit/(Loss) 2.71 (4.52) (4.35) Due to the death of the original owner, this enterprise was largely inactive during 1990 and 1991 and has now restarted its activities. Its finances remain precarious. - 25 - ANNEX I Page 9 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 8. SOCItTE MAFEC Location: Casablanca Type of Manufacture: Electric water heaters, gas stoves, gas lamps, valves for LPG bottles Capital: DH 4.04 million Financing from Bank Funds: SGMB DH 2.5 million Total Investments including financing from Bank funds: DH 4.5 million Nature of Investment: Expansion Labor Force: 125 persons INCOME STATEMENT DH Million 1989 1990 1991 1992 Total Sales 24.57 32.17 35.77 39.44 Cost of Sales 11.25 16.29 17.69 19.25 Gross Margin 13.32 15.88 18.08 20.19 General and Administrative Expenses 10.53* 12.89* 14.93* 10.83 Taxes and Levies 6.21 Depreciation .56 .64 .66 .79 Financial Charges 1.43 1.36 1.34 1.35 Profit/(Loss) .80 .99 1.15 1.01 *Includes taxes and levies Before embarking on this investment, Mafec's main activity was the manufacture of electric water heaters and related parts. The company decided to diversify into the manufacture of small domestic gas stoves and gas lamps which could also be used in camping. It also proposes to invest in a line of machines to fabricate brass pressure valves that are used in LPG bottles. It was projected that production from the new investment would begin in 1989 (360,000 prices with a valve of DH 5.4 million) and increase gradually to nearly 900,000 pieces in 1992 at a value in excess of DH 13 million). The income statement shows that the sales expectations have been realized, though the profitability remains modest. The loan is expected to be totally paid back by the end of June 1994. - 26 - ANNEX 1 Page 10 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 9. MAROC AVIATION Location: Casablanca Type of Manufacture: Maintenance, repair and subcontracting of aeronics equipments for Aerospatiale and Royal Moroccan Air Force Capital: DH 9.9 million Financing from Bank Funds: BMCI DH 10 million Total investment including financing from Bank funds: DH 16.8 million Nature of investment: Expansion Labor Force: 200 persons INCOME STATEMENT DH Million 1987 1988 1989 1990 1991 1992 Total Sales 51.33 48.02 51.02 51.82 64.55 57.90 Cost of Sales 21.43 19.48 22.74 25.15 32.92 26.19 Gross Margin 29.90 28.54 28.28 26.67 31.63 31.91 General and Administrative Expenses 19.6 18.19 17.34 18.64 21.47 21.61 Taxes and Levis 0.58 .66 .70 .48 .43 .46 Depreciation 1.75 2.03 2.08 2.32 2.40 2.32 Financial Charges 3.83 4.56 4.77 4.96 6.84 5.17 Profit/(Loss) 4.14 3.10 3.39 .27 .49 2.15 - 27 - ANNEX 1 Page 11 OF 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 10. SOCItTt METAGHREB Location: Casablanca Capital: DH 25 million Type of Manufacture: Liquified Petroleum Gas (LPG) Bottles and Valves Financing from Bank Funds: BCM DH 3.1250 million BMCE DH 1.5625 million BMC DH 1.5625 million Nature of investment: Expansion Labor Force: 200 persons INCOME STATEMENT DH Million 1989 1990 1991 1992 Total Sales 120.02 110.15 132.64 107.78 Cost of Sales 89.54 77.90 97.02 65.11 Gross Margin 30.48 32.25 35.62 42.67 General & Administrative Expenses 16.35 15.45 19.29 23.61 Depreciation 3.94 4.35 5.82 6.34 Taxes & Levies 2.53 2.54 2.08 3.76 Financial Charges 4.00 5.65 4.75 5.45 Profit/(Loss) 3.66 4.26 3.67 3.50 Exports - 6.5 2.0 24.2 As a result of the new investment in 1986, Metaghreb's production capacity increased from 800 large (12 kilograms) and 2000 small (3 kilograms) bottles per day to 1200 and 2400, respectively. The company's dominant market position (70% in 1990) is being gradually eroded as more gas distribution companies are investing in their own bottle manufacturing facilities. Since 1990, Metaghreb has been active in the export market where its sales reached DH 24.25 million in 1992. In that year the company exported 100,000 large gas bottles to Libya for a total price of around DH 20 million and the rest was made up of smaller sales to other neighbouring countries such as Algeria and Tunisia. The company continues to produce at near capacity of 350-360,000 large and 700-720,000 small gas bottles per annum. - 28 - ANNEX 1 Page 12 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 11. SOCItTt PRECIMA Location: Casablanca Type of Manufacture: Parts for Pressure Cookers Capital: DH 7 million Financing from Bank Funds: BCM DH 1.5 million Nature of investment: Expansion Labor Force: 66 INCOME STATEMENT DH Million 1989 1990 1991 Total Sales 22.90 19.39 31.23 Cost of Sales 15.09 11.43 21.17 Gross Margin 7.81 7.96 10.06 General and Administrative Expenses 4.34 5.63 7.46 Depreciation 1.36 1.42 1.43 Taxes & Levies .75 .66 .47 Financial Charges .97 .40 .34 Profit/(Loss) .38 (.15) .36 - 29 - ANNEX I Page 13 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 12. SOCIlTt INDUSTRILLE DE FOURNITURE AUTOMOBILE (SINFA) Location: Casablanca Type of Manufacture: Filters (air, oil etc) for Vehicles and Industrial Engines Capital: DH 25 million Financing from Bank funds: Wafabank DH 6 million Total investment including financing from Bank funds: DH 9.5 million Nature of investment: Expansion Labor Force: 250 persons INCOME STATEMENT DH Million 1990 1991 1992 Total Sales 40.68 51.36 55.60 Cost of Sales 23.56 24.16 27.46 Gross Margin 17.12 27.20 28.14 General and Administrative Expenses 8.71 17.78 19.45 Depreciation 1.25 3.37 3.53 Taxes and Levies .58 .27 .38 Financial Charges 2.89 5.32 4.38 Profit/(Loss) 3.69 .46 .39 - 30 - ANNEX 1 Page 14 of 24 The market for filters is estimated at around 4 million filters. Sinfa currently supplies nearly 30 per cent of this market. The remaining is supplied by other manufacturers and imports. Sinfa also exported nearly 400 Thousand filters in 1992, mostly to Italy (SINFA has had stronger export performance in previous years). The production and exports of filters in recent years were as follows: SINFA - PRODUCTION HISTORY 1000s 1988 1989 1990 1991 1992 Air Filters 71 67 138 108 108 Gas Oil Filters 199 444 433 380 395 Oil Filters 463 705 632 924 751 Others 136 205 222 229 354 Total 880 1,421 1,425 1,642 1,608 Exports 74 286 738 499 398 -31 - ANNEX 1 Page 15 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 13. SOCIMtI POUR LE DtVELOPPEMENT ET L'EXPANSION - SODEX Location: Berrechid Type of Manufacture: Shock Absorbers for Vehicles, Electroplating Capital: DH 8 million Financing from Bank Funds - Three loans: First Loan BCM DH 1.44 million SGMB DH 1.08 million Wafabank DH 1.08 million Second Loan BCM DH .90 million SGMB DH .90 million Third Loan BCM DH 3.00 million SGMB DH 3.00 million Nature of investment: Expansion Labor Force: 40 persons INCOME STATEMENT 1989 1990 1991 Total Sales 20.72 30.05 26.59 Cost of Sales 11.22 16.83 14.24 Gross Margin 9.50 13.22 12.35 General & Administrative Expenses 3.41 4.54 5.23 Depreciation 1.10 1.91 1.97 Taxes & Levies .13 .19 .18 Financial Charges 1.62 2.86 3.06 Profit/(Loss) 3.23 3.72 1.90 Production (Thousand Units) 100 130 160 Exports (Thousand Units) 60 75 85 ANNEX 1 Page 16 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 14. SOCIItTI DE FABRICATION DE CUISINIERES (SOFACUIS) Location: Fs Type of manufacture: Cooking Stoves Capital: DH 10 million Financing from Bank Funds (two subloans): First loan BCM DH 1.67 million BMCE DH 1.12 million Second loan BCM DH .52 million Nature of investment: Expansion Labor Force: 140 INCOME STATEMENT DH Million 1987 1988 1989 1990 1991 Total Sales 22.15 42.11 25.06 27.99 28.08 Cost of Sales 11.75 27.44 12.78 14.54 14.91 Gross Margin 10.40 14.66 11.28 13.45 13.17 General and Administrative Expenses 5.68 8.02 5.16 5.13 4.95 Depreciation .90 1.23 1.20 1.53 1.69 Taxes and Levies 1.48 2.32 2.30 3.35 2.26 Financial Charges 2.40 3.36 2.68 2.71 3.23 Other Income or Loss .14 .43 .24 (.61) .08 Profit/(Loss) (.06) 0.17 .10 .12 1.12 Exports .04 18.6 .35 .27 .72 - 33 - ANNEX 1 Page 17 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 15. SOCItTE MAROCAINE DE GAZ (SOMAGAZ) Location: Fs Type of Manufacture: Gas Cookers and Stoves Financing from Bank Funds: BMCE DH 3.33 Million Wafabank DH 1.66 Million Total investment including financing from Bank funds: DH 9 million Nature of investment: Expansion Labor Force: 350 persons INCOME STATEMENT DH Million 1988 1989 1990 1991 1992 Total Sales 45.42 52.41 57.50 74.75 53.43 Cost of Sales 31.01 35.62 39.26 49.66 35.09 Gross Margin 14.41 16.79 18.24 25.09 18.34 General and Administrative Expenses 6.14 6.75 7.47 13.20 13.65 Depreciation .59 .90 1.45 1.37 1.63 Taxes and Levies 3.41 3.85 2.87 3.38 .43 Financial Charges 3.62 4.43 5.46 5.93 5.71 Profit/(Loss) .64 .86 .99 1.21 (3.08) - 34 - ANNEX 1 Page 18 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 16. SOCI]t TECHNIQUE DE MATERIELS AGRICOLES (SOTHEMAG) Location: Ait Melloul (Aghadir) Type of Manufacture: Vertical Irrigation Pumps Capital: DH 2 million Financing from Bank Funds: Wafabank DH .96 million BCM DH .64 million Total investment including financing from Bank funds: DH 4.5 million Nature of investment: Expansion Labor Force: 150 persons INCOME STATEMENT DH Million 1988 1989 1990 1991 Total Sales 22.39 24.22 36.31 54.48 Cost of Sales 39.59 Gross Margin 14.89 General and Administrative Expenses 5.19 Depreciation 0.71 Taxes and Levies 1.40 Financial Charges .78 Profit/(Loss) 2.34 2.73 5.11 6.81 - 35 - ANNEX 1 Page 19 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 17. SOCItTt TUYAUTQ Location: Casablanca Type of Manufacture: Exhaust Pipes and Mufflers for Automobiles Capital: DH 5 million Financing From Bank Fund: BCM DH 1.38 million Nature of investment: Expansion Labor Force: 180 Persons INCOME STATEMENT DH Million 1989 1990 1991 Total Sales 22.26 23.09 26.63 Cost of Sales 10.29 11.21 12.60 Gross Margin 11.97 12.30 14.03 General and Administrative Expenses 6.72 7.54 8.34 Depreciation .48 .51 .57 Taxes & Levies 1.90 1.70 1.93 Financial Charges .60 .48 .57 Profit/(Loss) 2.27 2.07 2.62 - 36 - ANNEX 1 Page 20 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 18. SOCItTt PILES ZODIAC MAGHREB (WONDER MAROC) Location: Tanger Type of Manufacture: Dry Batteries Capital: DH 25 million Financing from Bank Funds: BCM DH 11.4 million Nature of investment: Expansion Labor Force: 130 INCOME STATEMENT DH Million 1990 1991 1992 Total Sales 14.44 13.29 10.05 Cost of Sales 7.21 6.53 3.63 Gross Margin 7.23 6.76 6.42 General and Administrative Expenses 2.61 3.46 3.82 Depreciation 2.11 1.04 1.89 Taxes and Levies 1.75 1.54 .67 Financial Charges .89 1.50 1.32 Profit/(Loss) (.13) (.77) (1.26) - 37 - ANNEX 1 Page 21 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 19. COMPAGNIE MAGHREBINE DE MACHINES OUTILS A METAUX (C3M) Location: Fs Type of Manufacture: Lathe and Universal Milling Machines Financing from Bank Funds: ODI's Equity Participation DH 4.82 million BCM DH 3.91 million BMCE DH 5.21 million BMCI DH 3.91 million Total DH 17.85 million Labor Force: 57 INCOME STATEMENT DH Million 1987 1988 1989 1990 1991 1992 Total Sales 8.57 5.20 12.29 10.12 9.76 7.57 Cost of Sales 4.90 2.28 7.09 4.70 5.03 4.84 Gross Margin 3.67 2.92 5.20 5.42 4.73 2.73 General and Administrative Expenses 2.86 3.16 4.21 4.25 4.56 3.80 Depreciation 2.73 2.94 2.70 2.70 2.78 2.78 Financial Changes 1.39 1.33 1.81 2.07 2.79 3.01 Profit/(Loss) (3.30) (4.52) (3.53) (3.60) (5.41) (6.88) - 38 - ANNEX 1 Page 22 of 24 This company was created by ODI in 1982 for the development of a machine tools industry. Its output, initially lathe and milling machines, was to be mostly utilized within a reciprocal industrial cooperation framework between Morocco and Tunisia, with a strong backing of the Arab Industrial Investment Company (SAII) and the Economic Development Bank of Tunisia (BDET). Morocco made a similar investment for the manufacture of woodworking machinery in Tunisia. The participation of SAII meant that this project was placed in the context of the larger Arab markets outside the Maghreb region. The output was to also supply the needs of the vocational training facilities in other Arab countries. While the company's total sales grew to a peak of DH 12.3 million by 1989, the factory never approached full capacity utilization nor profitability (Table. 1 - Income Statement). Eventually a decision was made to stop production completely in early 1993 at which time the company was incapable of servicing its loans. The demise of C3M appears to have resulted from the following factors: (a) The bankruptcy and disappearance of the French licenseholder (Hernault Somva which held less than 2% of stocks) which placed the company at a great disadvantage by forcing it to procure parts and components from other sources at much higher costs. (b) Imports of second-hand traditional machine tools from European countries when the European industry progressively shifted to Numerically Controlled (NC) machines. (c) Predatory pricing by companies from Eastern Europe (Poland, Czechoslovakia and Romania) which were in great need of foreign exchange. (d) The failure of company to find a new licensor and technology partner. (e) The insistence of aid donors for vocational training projection procurement through international competitive bidding. In recent years, the company attempted to diversify into subcontracting, rehabilitation of used machinery, maintenance activities and even commercial representation of other types of machines. None of these efforts could change the inevitable closure of the factory. - 39 - ANNEX 1 Page 23 of 24 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) 20. SOCI1T1 DES INDUSTRIES MECANIQUES ET ELECTRIQUES DE FES (SIMEF) Location: Fes Type of Manufacture: Petrol Engines, Diesel Engines and Electric Motors Capital: DH 27 million (63% ODI, 37% Treasury) Financing from Bank Funds (Two loans): First Loan: BCM DH 0.93 million BMCE DH 1.24 million Wafabank DH .93 million Second Loan: BCM DH .99 million BMCE DH 2.52 million Wafabank DH .85 million Labor Force: 490 PRODUCTION HISTORY Annual Type of Product Capacity 1985 1986 1987 1988 1989 1990 50 cc Petrol Engines 60000 26150 26500 15869 15094 18754 18189 3-45 HP Diesel Engines 2500 2272 1451 1246 1723 504 932 1/-200 HP Electric Motors 15000 8297 9190 8608 8707 8469 2372 - 40 - ANNEX 1 Page 24 of 24 INCOME STATEMENT DH Million 1992 1988 1989 1990 1991 9 Months Total Sales 87.52 83.29 104.17 92.46 63.82 Cost of Sales 42.34 41.10 62.38 55.01 29.75 Gross Margin 45.18 42.39 42.79 37.45 34.07 General and Administrative Expenses 26.95 27.64 27.96 31.09 20.12 Depreciation 5.02 5.12 5.18 5.23 3.57 Taxes and Levies 1.20 1.86 1.66 1.66 1.24 Financial Charges 6.65 7.61 8.52 9.28 5.40 Profit/(Loss) 5.36 .16 (.53) (9.18) 3.74 (preliminary) - 41 - ANNEX2 Page 1 of 1 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTIES PROJECT (LOAN 2487-MOR) REPAYMENT PERFORMANCE OF SUB-LOANS DH Millions BMCE BCM SGMB WAFABANK BMCI TOTAL Total Disbursement 39.91 43.90 10.48 13.20 23.12 130.61 Total Amount Repaid As 15.52 31.98 7.07 7.29 14.00 75.86 Of 3rd Quarter 1993 Amount Outstanding 24.39 11.92 3.41 5.91 9.12 54.75 Ratio of Repayments to 38.9% 72.8% 67.5% 55.2% 60.5% 58.1% Disbursement - 42 - ANNEX 3 Page 1 of 2 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) Pipeline of EMI Projects (in Millions DM) I. Projects Promoted by ODI Total Investment Credit Approval Cost Total O.W. ODI Requirements scheduled in Product Stationary diesel engines 30 15 5 15 1985 Non-Stationary diesel engines 50 30 12.5 20 1986 Forged parts 18 10 4 8 1986 Gears and pinions 15 9 - 6 1986 Steell cables 15 8 2.5 7 1985 Refrigerator compressors 100 50 18 50 1987 Lifting machinery 20 8 - 12 1986 Maintenance shops 72 27 5 45 1986 Car batteries 30 15 - 15 1986 Telecoms. Equipment 100 N 17 U 986 Total 450 222 228 in US$ million 54.5 27 7.5 27.5 - 43 - ANNEX 3 Page 2 of 2 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) II. Projects Identified by Commercial Banks (excluding projects with BNDE financing) Period covered by the Product Total Investment Cost Credit Reauirements PjveA Household appliances 2.0 1.2 TVs/Refrigerators 4.5 L Sub-Total 6.5 3.9 First-half 1985 Electronic Components 50.0 Sub-Total 50.0 30.0 First-half 1985 Electrical Gear 10.0 7.0 Metal Saws 2.0 1.2 Bicycle components (export) 7.5 4.5 Car radiators (export) 8.0 4.8 Spark plugs (export) 10.0 6.0 Small transformers 6.0 3.6 Medical instruments 4.0 2.4 Special fasteners 3.0 1.8 Sub Total 57.5 38.3 1985-mid 1986 Hydraulic jacks 0.5 0.3 Mechanical works 5.3 Sub-Total 5.8 3.3 First-half 1985 Engine filters (export) 1.0 0.6 Maintenance shops 1.4 0.8 Electric bulbs 4.0 2.4 Electric cables 14.0 8.4 Foundry (export) 15.0 9.0 Tools and molds 4.0 2.4 Excavators (export) 10.0 6.0 Truck cranes (export) 10.0 6.0 Components for appliances 6.0 3.6 Telephone cables 5.0 3.0 Electric appliances 5.0 3.0 Stationary diesel engines 4.0 2.4 Truck dumpers 1.0 0.6 Automobile spare parts 5.0 Sub-Total 85.4 51.2 1985-mid 1986 Total II 205.2 126.7 in US$ million 25.0 15.0 -44- ANNEX 4 Page 1 of 1 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL & MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) EVOLUTION OF GDP CONSTANT 1985 PRICES Growth 1992/85 1985 1986 1987 1988 1989 1990 1991 1992 Per Cent Agriculture 14485 19801 15133 19885 20798 19404 23347 15933 1.4 Industry 26278 266526 26968 29190 28853 31573 31532 32757 3.2 Manufacturing 15504 15690 16174 17137 17031 19063 19478 20257 3.9 Services 46359 48023 49847 52450 54380 56931 58580 60798 3.9 GDP at Market Prices 87119 94350 91949 101525 104030 107908 113460 109488 3.3 ANNEX 5 Page 1 of 1 PERFORMANCE AUDIT REPORT MOROCCO - ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) EVOLLUTION OF VALUE ADDED IN MANUFACTURING SUBSECTORS CONSTANT 1985 PRICES DH Million - 1985 Prices 1985 1986 1987 1988 1989 1990 1991 Growth 1991/85 VALUE % VALUE % VALUE % VALUE % VALUE % VALUE % VALUE % Per Cent Food & Agroindustries 5180 33 5745 37 5781 36 6189 36 5881 34 6664 35 6724 35 4.4 Textile & Lather 2580 17 2758 18 2841 18 2646 15 2897 17 3295 17 3472 18 5.1 Chemicals & Pharmaceuticals 4796 31 4527 29 4766 29 5642 33 5189 30 5880 31 6112 31 4.1 Electrical & Mechanical 2948 19 2661 17 2786 17 2660 16 3063 18 3224 17 3171 16 1.2 Total 15504 100 15690 100 16174 100 17137 100 17031 100 19063 100 19478 100 3.9 Source: Ministry of Industry, Commerce and Privatization Government of Morocco.