Morocco - Industrial Finance Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 16655 IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO INDUSTRIAL FINANCE PROJECT (Loans 31360-7 MOR) June 10, 1997 Private Sector Development, Finance and Infrastructure Division Maghreb and Iran Department Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Currency Unit = Dirham (DH) DH 1.00 = US$0.10 US$1.00 = DH 9.50 1980 1985 1990 1991 1992 1993 1994 1995 1996 DH per US$ 4.334 9.621 8.043 8.15 9.049 9.651 8.96 8.469 8.799 (end of period) DH per US$ 3.937 10.062 8.242 8.707 8.538 9.299 9.2 8.54 8.716 (period average) ABBREVIATIONS AND ACRONYMS BCM Banque Commerciale du Maroc BCP Banque Centrale Populaire BMCE Banque Marocaine du Commerce Exterieur BMCI Banque Marocaine pour le Commerce et l 'Industrie BNDE Banque Nationale pour le Developpement Economique CDM Credit du Maroc EMI Electrical and Mechanical Industry ITPA Industrial and Trade Policy Adjustment MCI Ministry of Commerce and Industry SSI Small Scale Industry SAL Structural Adjustment Loan SGMB Soci&e Generale Marocaine des Banques FISCAL YEAR July 1 -June 30 Vice President Mr. Kemal Dervis Director Mr. Daniel Ritchie Division Chief Mr. Amir Al-Khafaji Responsible Staff Mr. Lorenzo Savorelli, Financial Economist Mr. Ahmed El-Hamri, Consultant Ms. Marina Moretti, Economist  FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO INDUSTRIAL FINANCE PROJECT (Loans 31360-31367-MOR) TABLE OF CONTENTS PREFACE Evaluation Summary ......................................................................i PART 1: PROJECT IMPLEMENTATION ASSESSMENT ................................................................1 A. STATEMENT/EVALUATION OF OBJECTIVES .....................................................................1I Objectives ...........................................................I The IFP and the Bank Assistance Strategy ...........................................................2 B. ACHIEVEMENT OF OBJECTIVES ..................................................................... 3 Disbursement Performance ....................................... ..3 Targeting Performance ........................................3 Investment Performance .......................................5 Regional Distribution ........................................5 C. MAJOR FACTORS AFFECTING THE PROJECT ...............................................7 D. PROJECT SUSTAINABILITY ................................................7 E. BANK PERFORMANCE ...............................................8 F. BORROWER PERFORMANCE ............................................... X8 G. ASSESSMENT OF OUTCOME ................................................9 H. KEY LESsoNs LEARNED AND FUTURE OPERATIONS ................................................9 PART II: STATISTICAL INFORMATION .......................................... 11 ANNEX I: SUPPLEMENTARY INFORMATION .......................................... 46 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.  I  IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO INDUSTRIAL FINANCE PROJECT (Loans 31360-31367-MOR) PREFACE This is the Implementation Completion Report (ICR) for the Kingdom of Morocco's Industrial Finance Project (IFP). This project consisted of eight loans, of which seven were to private sector commercial banks, and one to a state-owned development bank. The original amount of the loans totaled US$170 million. The IFP was approved by Board on December 5, 1989, signed on February 7, 1990, and became effective on June 7, 1990 as the individual borrowers fulfilled their respective obligations. The loans closed on June 30, 1996, with US$161,876,971 disbursed for 129 allocations. This ICR was prepared by Ahmed El-Hamri, Marina Moretti, and Lorenzo Savorelli, of the Private Sector, Finance, and Infrastructure Division, Country Department I, of the Middle East and North Africa Region. It was reviewed by Amir Al-Khafaji, Division Chief, and Rene Costa, Project Advisor, Country Department I. Preparation of the ICR was based on material in the project files, including detailed (though not complete) information on subprojects provided by each of the borrowing banks. The report has bee,n sent for comments to the Government of Morocco and to the participating banks.  I  i IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO INDUSTRIAL EXPORT FINANCE PROJECT (Loans 3136-0-7-MOR) EVALUATION SUMMARY Introduction (i) The Industrial Finance Project (IFP) was part of a series of Bank projects and programs designed to support Morocco's adjustment efforts in economic diversification and export-led growth. The IFP, with 8 loans totaling US$170 million, was specifically designed to stimulate the supply response of Morocco's export industries to the new set of incentives and policies introduced under the Government's economic reform program. The project's goal was to assist the Government of Morocco in improving the financial and managerial capabilities of industrial firms operating in the export, as well as the domestic market. Ninety-five percent of the total loan amount was disbursed over the life of the project. Project Objectives and Design (ii) The objectives of the IFP were to: (a) expand and upgrade the base of Moroccan exporis and reduce the balance of payment constraints by financing investments in export oriented activities, as well as import substitution and tourism projects; (b) promote the development of competitive market-based financial institutions; and (c) strengthen the institutional framework within which financial intermediaries and other institutions concerned with export promotion operate. (iii) The project consisted of several credit lines totaling US$170 million, which were granted to seven commercial banks and a state-owned development bank. The lines of credit were to be used proactively by these participating banks over a commitment period of 2.5 years. The lines of credit, in turn, were extended to industrial firms to finance a variety of subprojects in the export sector. Subloans were also granted to enterprises that operated solely in the domestic market. (iv) The participating banks were to allocate at least 60 percent of the loan to export-oriented investments, of which up to 20 percent were for the tourism sector. Public enterprise financing was limited to 15 percent of each credit line. A maximum of 10 percent of each line of credit was to be devoted to the financing of equipment leasing companies. In order to maximize the impact of the loans, the size of individual subloans was limited to a maximum of US$5 million. The participating banks were to onlend the funds in local currency at the prevailing interest rates for medium and long-term credit to industry and tourism. Eligibility criteria for the subprojects included: (a) equity should represent at least 30 percent of total investment costs, and (b) project should have an internal rate of return of at least 12 percent. Evaluation of Objectives (v) The IFP had a very balanced approach to promoting the expansion and rr.odernization of Morocco's export industry. The project emphasized, but did not exclusively target, the investment needs  ii of the export sector. Enterprises with forward linkages (i.e. those that provide inputs to exporting firms) were equally targeted, with the objective of stimulating dynamic backward and forward linkages between firms producing for the domestic market and those producing mainly for export. (vi) In addition, the disbursement success of the Industrial Export Financing Project (IEFP) supported the validity of the investment objectives. Moroccan banks had demonstrated their capacity to efficiently onlend the funds to industrial firms that were embarking upon an upgrading of their production and export capacity. However, specific project objectives should have been defined in regard to the sectors targeted with the greatest export potential, as well as those firms with highest integrative capacity to integrate domestic inputs. In this light, performance indicators should also have been defined in order to monitor project success. Implementation Experience and Results (vii) Lines of credit under the IFP were utilized very quickly. The success in the pace of commitment and disbursement of the credit lines was essentially due to the high demand for medium to long-term finance in the manufacturing sector, as well as to the substantial experience in term lending acquired by the participating banks in previous Bank-financed operations. Over 70 percent of the original loan amount (US$119 million) was disbursed by the end of FY91, far exceeding the Bank's original estimate of 6 percent. By February 1992, 95 percent of the funds had been committed and the loan was 95 percent disbursed (US$162 million), with a total of 129 allocations. Five percent (US$8 million) was canceled. (viii) In terms of targeting performance, the sectoral distribution of the subloans did not fully reflect IFP's original expectations. Most subloans went to industrial activities in traditional sectors, such as clothing and textiles, and food and beverages, which absorbed 66 percent of the funds. Services accounted for only 3.7 percent of allocated credit. Tourism, originally targeted for 12 percent of allocations, represented only 0.4 percent of the loan distribution. These investments have led mostly to the expansion of productive capacity and targeted primarily small to medium enterprises. Due to the lack of data, it was not possible to evaluate the export impact achieved as a result of these investments. (ix) The participating banks were supposed to recycle the repaid funds from the initial subloans during subsequent periods until the IFP came due. The recycling of funds did not occur, however, in part because the Bank did not properly supervise and implement this aspect of the project. IFP loans had repayment terms of up to 20 years, and subloans had 5-10 years of maturity. After the initial subloans were made, the participating banks did not have a mechanism to assist in the identification of new investment opportunities. This resulted in the underutilization of the funds. Instead of being recycled, these funds were maintained as long- tern deposits, which was not an optimal use. (x) Key factors. In terms of foreign exchange risk, which was to be borne by the Borrower, the Government of Morocco started accumulating arrears in the payment of its share of the foreign exchange costs of these loans in 1995-1996, thereby causing a slowdown in disbursements near the end of the project. (xi) Project sustainability. The limited information available does not allow for an evaluation of project sustainability. The lack of recycling of funds by the IFP may have undermined its long-term objectives. The lack of export data also makes it difficult to assess the achievement of the objectives. In addition, since institutional reform in the area of trade promotion was not addressed adequately in the project design, project objectives may be compromised in the long run.  iii (xii) Bank/Borrower performance. The absence of detailed reporting requirements for the Borrowers, proper monitoring of individual participating banks in their loan administration, as well as more proactive supervision by the Bank, were factors detrimental to project sustainability. Specifically, this project should have been better supervised. Only two supervision missions took place during the implementation phase. As for the Borrowers, they were able to capitalize on their disbursement experience and have been able to play an important role in the investment program under IFP. (xiii) Assessment of Outcome. The IFP is rated satisfactory. Bank loans were committed expeditiously and met with substantial disbursement success. Subprojects that benefited from the loans fulfilled Bank criteria, and had higher rates of return (ranging from 15 to 50 percent) than the minimum required under the eligibility rules. PBs are financially sound, as documented by their audited financial statemets and have moved to meet Basle criteria for bank risk-adjusted capital and provisioning requirements. They have benefited from Bank's assistance in implementing sound financial management of the subloans. Furthermore, BNDE was able to improve its accounting transparency and soundness as a result of Bank supervision. Based on the assessment of the PBs, this project resulted in a substantial growth of their credit allocation to exporting firns. However, the lack of recycling of funds has resulted in several unexpected early loan repayments. Given this assessment, the project achieved the stated objectives within an acceptable level of success. It should however, be noted that the rating was formulated and based upon limited information. Immediate Portfolio Action and Lessons Learned (xiv) The experience from IFP has provided valuable lessons for designing of the investment component of the subsequent FSDP (Financial Sector Development Project), which was approved in 1991 and is still ongoing. The banks participating in FSDP were considered capable of undertaking most subprojects without the prior approval of the Bank. Second, as financial sector reforms were being implemented, and given the sound financial condition of the banking system, more weight was placed in FSDP on improving the ability of Moroccan banks to eventually eliminate the need for government- guaranteed foreign financing. Third, due to reforms in the financial sector, resource allocation was considered sufficiently efficient and market-determined to justify greater flexibility in regard to eligibility criteria for individual subprojects. (xv) In regard to the financial management aspect of the credit lines, IFP's experience has confirmed that these are complex financial products requiring continuous supervision to ensure effectiveness of the investments. The recycling nature of credit line programs, in particular, requires that supervision and assistance to the borrowing banks be closely monitored; otherwise, recapitalization of the participating banks through long-term, government-guaranteed funds would, again, be the unintended result. (xvi) Recycling of funds is an important element that should be included in projects of this type. This recycling aspect must be based on participating banks' managerial and administrative performance of subloans, as well as on their capability to be proactively involved in identifying investment opportunities. Under the IFP, the inflexible eligibility criteria were viewed as a constraint by the sub- borrowers and contributed to the inability of the participating banks to recycle the funds. The eligibility conditions imposed should take into account the growth potential of the sub-borrowers.  I  I PART I: PROJECT IMPLEMENTATION ASSESSMENT A. STATEMENT/EVALUATION OF OBJECTIVES Objectives 1. Financing of the industrial sector is an essential ingredient of Morocco's program of macroeconomic adjustment, export-oriented growth, and financial sector reforms supported by the Bank. The Industrial Finance Project (IFP) was designed to stimulate the supply response of Morocco's industries to the new set of incentives and policies introduced under the Government's economic reform program. The IFP aimed at helping the Government of Morocco continue improving the financial and managerial capabilities of industrial firms operating in the export as well as domestic markets. The objectives of the project were to: (a) expand and upgrade the base of Moroccan exports, and reduce balance of payments constraints, by financing investments in export-oriented industrial firms, efficient import-substitution activities, and tourism projects; (b) promote the development of competitive, market- based financial institutions by supporting bank participation in industry and tourism lending; and (c) strengthen the institutional framework within which financial intermediaries and other institutions concerned with export promotion operate, and increase Morocco's export potential. 2. The project consisted of a package of credit lines totaling US$170 million to seven commercial banks and a state-owned development bank, BNDE (Banque Nationale pour le DIveloppement Economique). The individual allocations to be disbursed to each of the participating banks were as follows: BNDE US$50 million; BMCE (Banque Marocaine du Commerce Exterieur) US$40 million; BCM (Banque Commerciale du Maroc) US$25 million; BCP (Banque Centrale Populaire) US$12 million; Wafabank US$17 million; BMCI (Banque Marocaine pour le Commerce et l'Industrie) US$12 million; SGMB (Societ Generale Marocaine de Banques) US$9 million; and CDM (Credit du Maroc) US$5 million. The lines of credit were to be used proactively by the participating banks (PBs), over a commitment period of 2.5 years, to finance eligible investment subprojects of financially sound firms.' 3. Subprojects targeted the upgrading and expansion of production facilities, and the development of exporting skills of Moroccan private enterprises (financing of public enterprises was limited to 15 percent of each credit line). Sectoral targeting included manufacturing, industrial support services, and tourism. PBs were to allocate at least 60 percent of the funds to export-oriented investments,2 of which up to 20 percent were in the tourism sector. A maximum of 10 percent of each line was to be devoted to the financing of equipment of leasing companies for use by industrial firms. In order to maximize the catalytic impact of the loans, the size of individual subloans was limited to a maximum of US$5 million; PBs were to onlend the funds in local currency at the prevailing (administered) interest rates for medium and long-term credit to industry and tourism. Within these criteria, credit allocation was to be market determined, in line with Bank support for the gradual liberalization of Moroccan financial markets. Eligibility criteria for the subprojects were: (a) equity should represent at least 30 percent of total investment cost; and (b) projects should have an internal rate of return of at least 12 percent. 2 Export-oriented investments are defined as those subprojects for which over 40 percent of additional production is exported within five years of completion, or used as input in the production of export goods.  2 The IFP and the Bank Assistance Strategy 4. Morocco has engaged in export-led growth and economic diversification -- notably into manufacturing -- since the mid 1980s. The IFP was part of a series of Bank projects and programs in support of Morocco's adjustment efforts in these areas. Before the IFP, this assistance strategy had been followed by a number of Bank-financed operations: (a) two Industrial Trade and Policy Adjustment loans (ITPA), in 1984-85, for a total of US$350 million; (b) the US$25 million Electrical and Mechanical Industry project (EMI), in 1985; (c) the US$240 million Public Enterprise Rationalization Loan (PERL), 1987; and (d) the US$70 million Industrial Export Finance Project (IEFP), 1987. Concurrent with the IFP were the two structural adjustment loans (SAL I in 1988, and SAL II in 1992, for a total of US$475 million), focused on a broad range of measures aimed at liberalizing the economy and putting it on a higher growth path. 5. The liberalization and adjustment measures supported by these programs were already showing a positive impact by the second half of the 1980s. Macroeconomic and financial sector reform had significantly rationalized the incentive structure in the industrial sectors, thus allowing a strong supply response in the manufacturing sector to export and import liberalization. Manufactured exports grew rapidly in response to the new policy environment -- 9 percent p.a. in 1984-88 -- and were instrumental in bringing about the higher rate of economic growth (5.6 percent p.a.) that characterized this period. Despite this progress however, a continued expansion of manufactured exports remained necessary if Morocco were to maintain sustained growth. Given the high levels of capacity utilization in export industries -- estimated at over 70 percent in 1989 -- such expansion required additional investment, hence long-term financing.3 Strong demand for long-term investment had been reflected in the rapid commitment of the 1987 IEFP loan. IEP was rightly aimed at meeting such demand, which had continued throughout 1988 and 1989. Moreover, it should be pointed out that the loan was made at time during Morocco's stabilization program when foreign exchange shortage was a real issue, with reserves down to one month of imports in 1989. At the time, this was a important rationale for the loan and also explained GOM's insistence on having 60 percent of the funds target export enterprises. 6. IFP also addressed the high level of concentration of the Moroccan manufacturing sector. In 1989, only 15 percent of companies in the sector employed more than 100 workers, yet they produced 76 percent of total manufacturing output, and accounted for 87 percent of all manufactured exports.4 By putting a cap on the maximum size of subloans (US$5 million), IFP implicitly targeted enterprises of small and medium size, as data on credit line utilization clearly show (see next section). 7. Finally, IFP had a very balanced approach to promoting the expansion and modernization of Morocco's export industry. The project emphasized, but did not exclusively target, the investment needs of the export sector. Companies with forward linkages with the export sector (i.e., that provided inputs to exporting firms), were equally targeted, with the objective of stimulating dynamic backward and forward linkages between firms producing for the domestic market and those producing mainly for export. This was expected to be conducive to an expanded industrial base and sustained economic growth. Moreover, efficient import-substituting investments were also considered eligible for financing, on the grounds that they would further contribute to alleviating Morocco's balance of payment pressures. 3 See Kingdom of Morocco - Republic of Tunisia. Export Growth: Determinants and Prospects, World Bank report no. 12947-MNA, October 1994 4 Ibid.  3 B. ACHIEVEMENT OF OBJECTIVES Disbursement Performance 8. Lines of credit under the IFP were utilized very quickly. The success in the pace of commitment and disbursement of the credit lines was due to the high demand for long-term finance in the manufacturing sector, as well as to the substantial experience in term lending acquired by BNDE and the participating commercial banks in previous Bank-financed operations. These included the already mentioned credit lines under IEFP, and a number of earlier projects -- i.e., nine direct loans to BNDE, two small scale industry (SSI) projects, and the EMI project. Over 70 percent of the original loan amount (US$119 million) had been disbursed by the end of FY91, exceeding the Bank's original estimate of 6 percent. By February 1992, 95 percent of funds had been committed, and the loan was 95 percent disbursed (US$162 million) with a total of 129 allocations. Five percent (US$8 million) of the loan was canceled (see Table 4 in Part II of this report). Targeting Performance 9. Sectoral targeting. The sectoral distribution of the subloans did not fully reflect IFP's original expectations, as Table I shows. Most subloans financed industrial activities in traditional sectors such as clothing and textiles, and food and beverages, which absorbed 66 percent of the funds. Services (mostly in support of industry) only accounted for 3.7 percent of allocated credit. Tourism, originally targeted for up to 12 percent of credit line allocations, accounted for a minimal share of the funds (0.4 percent). The sectoral distribution of IFP subloans can be compared with the overall distribution of bank credit in Morocco in 1991-95.5 Banking credit in this period focused largely on short-term funding (67 percent of all credit, with medium and long-term credit at 16.9 and 16.4 percent, respectively). In the short-term credit categories, food industries accounted for 9.5 percent of total funding, textiles and clothing for 14 percent, and trade for 21 percent. Table 1. Subloans distribution by sector Subloans Subloans (US$) (percent of total) Clothing and Textiles 68,559,883.33 42.35 Food and Beverages 38,898,420.22 24.03 Other Industries (1) 47,763,601.76 29.51 Services (2) 5,978,584.58 3.70 Tourism 668,050.90 0.41 Total for sectors 161,877,240.79 100.00 (I) Cement and chemical, concrete, construction, energy, bottling, canning, packaging, horticulture, pharmaceutical, carpet manufacturing, and electronics. (2) Leasing, research, industrial and engineering services. 10. Export orientation of subprojects. The dossiers received by the Bank from the PBs do not allow the evaluation of the success of the project in terms of financing export-oriented investments -- i.e., investments with an export component equal to at least 40 percent of additional production. The PBs did 5 Source: Annuaires Statistiques du Maroc (1993-96).  4 not provide the Bank with details on the export content of subprojects, since such detailed reporting was not specifically requested in the loan conditions. With regard to the sub-borrowers (rather than the financed subprojects), these were mainly SMEs in the export sector, in line with IFP's objectives (see Table 2). Table 2. Credit allocations according to firm characteristics Number Subloan amount of firms percent (US$ million) percent Size SME 157 82.2 113.8 70.3 Large 25 13.1 45.8 28.3 Unknown 9 4.7 2.2 1.4 Total 191 100.0 161.8 100.0 Type Expansion 142 74.3 114.0 71.0 New production 49 25.7 46.6 29.0 Total 191 100.0 160.6 100.0 Market orientation Export 122 63.9 107.8 66.6 Domestic 27 14.1 14.4 8.9 Unknown 42 22.0 39.6 24.5 Total 191 100.0 161.8 100.0 Based on incomplete data provided by the PBs. Table 3. Investment in industry: new operations and expansions of productive capacity INDUSTRIES 1991 1992 1993 1994 1995 Agro-Industry total production (DH mn) 1,313 1,995 1,805 1,796 3,793 new products (percent) 26.27 22.43 20.12 35.20 29.01 expansion (percent) 73.33 77.57 79.88 64.80 70.99 Clothing-Textiles total production (DH mn) 3,046 2,275 1,556 1,831 2,556 new products (percent) 25.63 37.40 27.07 20.76 17.41 expansion (percent) 74.37 62.60 72.93 79.24 82.59 Chemical total production (DH mn) 4,351 3,071 2,368 3,960 4,012 new products (percent) 34.84 30.23 43.42 31.95 23.12 expansion (percent) 65.16 69.77 56.58 68.08 76.88 Total investment in all industries total production (DH mn) 11,079 10,276 82,80 11,278 14,194 new products (percent) 30.98 35.77 37.96 34.07 29.49 expansion (percent) 69.02 64.23 62.04 65.93 70.51 Source: Annuaires Statistiques du Maroc, 1993-96.  5 11. Type of production financed by the subloans. As Table 2 (based on incomplete data received from the PBs) indicates, most subprojects were used to finance increased capacity in existing productions, in line with the overall Moroccan trends reported in Table 3. During IFP implementation (1991-95), investment in the Moroccan industrial sector was directed toward the expansion of industrial capacity (67 percent, against 33 percent for new production). Expansion was particularly strong in the agro-industry (73 percent of total investment in the sector), clothing and textiles industry (75 percent), and the chemical industry (68 percent). The clothing and textiles sector also accounted for most job creation (45 percent of all jobs created in industry in 1991-95), followed by the chemical industry (20 percent). Investment performance 12. Explicit investment performance indicators at the subproject level were not established or included in the reporting process for the project. With no systematic reporting, monitoring, and supervision at the subproject level, it is not possible to judge the success and impact of the project in terms of investment performance at the micro level. Assessment of project success depends crucially on information on the actual performance of the subprojects in terms of production sold domestically and exported, productivity and job creation, financial and managerial performance (i.e., resources devoted to improvements of product quality, marketing, and distribution). 13. Project impact on industrial performance (on a regional scale) should, in the future be, determined in terms of meaningful micro and macroeconomic indicators (such as productivity, intra- and inter-industrial linkages, and employment). Concerning export performance, export volume can be used as a benchmark for achievement of project objectives, but they are by no means the only measure of success, since (a) product quality, delivery, pricing, and distribution systems are also meaningful barometers of export success; and (b) external factors such as trading partners' policies may affect trade volume (e.g., for textiles and food-related exports, protectionist policies in the European markets). Investments may go into distribution systems and production de-bottlenecking, which do not necessarily mean higher export volumes but can result in much healthier margins and/or better products. Financial return criteria should also be considered carefully when looking at investment performance, since investments can be joint, common, or stand-alone. Often capacity-expansion projects and new- production projects cannot be adequately measured by returns alone, since other factors such as marketing and quality are also involved. Finally, the 30 percent equity benchmark is more of an input criterion, and bears little relevance to the various sectors. Regional Distribution 14. Table 4 groups sub-borrowers by region. The table suggests that the center and northwest regions, which account for over 74 percent of the Moroccan population, received 84 percent of the lending. The center, with Casablanca as its industrial pole, received the largest share of the loans. The poorer, more arid, and less populated south generated minimal investments. 15. Credit allocation and regional bank expansion. The branch network of the PBs went from 578 to 765 branches -- an increase of 187 -- during the IFP implementation period (1991-95). BCM accounted for 35 percent of the increase -- its branches went from 117 to 183, with 20 in the central region and 14 in the center-north. Three other banks considerably expanded their regional presence: CDM increased its branches by a total of 38 (19 in the central region), BMCE by 36, and Wafabank by  6 34 (see tables in the Annex). These expansions were concentrated mostly in the central region and the northwest of Morocco, in line with regional economic activity. Table 4. Regional distribution of subloans Number of Loan amount Share of loan Share of total Population Region subprojects (DH million) amount population growth (1) (percent) (percent) (percent) Center 82 111.60 73 49 2.6 Northwest 17 16.21 11 25 3.8 East 1 2.00 1 7 3.7 South 9 6.00 4 10 6.6 Tensift 13 16.00 11 10 3.6 Total 122 151.80 100 100 3.6 (1) Regional distribution is unknown for seven out of 129 subprojects. 16. Importance of regional industrial activity. In order to assess the contribution of IFP to regional industrial investment and growth, it is necessary to refocus the analysis on regional investments trends. The figure below provides selected indicators of regional industrial activity.6 From 1991 to 1994, the number of industrial firms increased by 200 entities (i.e., 3.3 percent), of which 95 were in the central and northwest regions. Over this period, exports of manufactured goods from all firms in the central and northwest regions represented 75 percent of total manufacturing exports, with an average growth rate of 8 percent for the period. This compares with 1.7 percent export growth in Morocco as a whole in 1991- 94. The number of industrial firms in Morocco increased by 1.2 percent over this period -- a moderate success for firms in entering the manufacturing sector, since production increased by about 3.9 for the same period.7 Data reported in the Annex similarly show that investment growth was negative in four regions in 1991-94, though the national rate was slightly positive. This might explain the difficulties faced by PBs in recycling IFP funds. Morocco: Regional industrial activity, 1991-94 Growth rates of firms operating in the industrial sector o U 8 6 E0 r o E , oI- Z Regions 6 Source: Annuaires Statistiques du Maroc (1993-96). No data are available on firms exiting the industrial sector or expanding operations through interftnm linkages.  7 C. MAJOR FACTORS AFFECTING THE PROJECT 17. Factors subject to the implementing agencies' control. PBs have been instrumental in expediting the utilization of the Bank loans for the financing of investment subprojects, in terms of both commitment and disbursement. The banks' previous substantial experience in term lending, acquired under previous Bank operations such as the IEFP, have contributed to satisfactory loan utilization. However, their uneven subproject supervision record and the lack of structured information collection and reporting mechanisms have prevented PBs from fully benefiting from the learning curve of these lending operations. 18. Other factors. External factors strongly contributed to the quick utilization of the Bank loans. First, PBs had pipelines of investmnent subprojects whose financing requirements exceeded the envisaged loan amounts, with most of the financing needs concentrated in the textiles and agro-industries sectors where Morocco had a comparative advantage. Second, Morocco was experiencing a severe balance of payments crisis and foreign exchange shortage and, as a result, Moroccan exporters had difficulty obtaining capital (and foreign exchange) for the purchase of imported productive machinery and equipment. 19. Loan-to-investment considerations. The IFP loans had repayment terms of up to 20 years. The subloans had five to ten years of maturity, according to information data provided by the PBs; the loan agreements allowed five to twelve years of maturity (Schedule 5, para. 6 of the Loan Agreement). Borrowers were allowed to relend all amounts paid back by sub-borrowers but not yet due under the 20- year term of the Bank loan. However, PBs did not take full advantage of recycling opportunities. A more timely intervention from the Bank in this matter could have helped enhance the optimal utilization of funds by the Borrower. 20. Factors subject to the Government's control. The Government of Morocco acted as Guarantor for all credit lines and agreed to facilitate the utilization of the Bank loans by sharing the foreign exchange risk embedded in the credit lines. During 1995 and 1996, however, the Government started accumulating arrears in the payment of its share of the foreign exchange costs of these sources of finance, thereby causing a slowdown in disbursements. D. PROJECT SUSTAINABILITY 21. Available information does not allow for a full assessment of project sustainability. The first objective of the project, to expand the base of manufactured exports, was not specified in terms of its implications for industrial value-added and interfirm linkages (i.e., the extent of downstream benefits), both of which are essential factors of sustainability. However, assuming that the actual export performance of subprojects financed under the IFP was in line with the overall relative increase in manufactured exports, objectives can be considered relatively achieved based on the satisfactory pace of utilization of the Bank loans and the data on subprojects' and sub-borrowers' operations. 22. The absence of institutional reforms in the area of trade promotion has arguably been a constraint to sustainability. In fact, little progress was made in two areas of reform which were crucial to the development of exports, namely measures benefiting indirect exporters (the exporters'suppliers) and trade facilitation. 23. With regard to the IFP's second and third objectives, which consist, respectively, of supporting the development of competitive market-based financial institutions, and strengthening the institutional  8 capabilities of financial and other institutions concerned with exports, project sustainability cannot be fully verified. The requirement that at least 60 percent of the credit lines be onlent to finance export- oriented activities is not per se a guarantee of a sustainable support to export promotion. This objective would have been achieved on more permanent basis if a supportive institutional framework allowing financial intermediaries to take higher credit positions with exporters had been put in place. 24. Because of limitations in data availability, project objectives need to be reassessed in the future, possibly through sectoral studies, to determine the long-term impact of the IFP. Project sustainability is dependent on the long-term effects of investments on industrial structure, and on domestic and export markets. Furthermore, it may be argued that economic sustainability was not optimized because of deficiencies in supervision and recycling of funds. E. BANK PERFORMANCE 25. Project identification was satisfactory, however, preparation and appraisal were deficient. The project met the Government's development objectives by tackling structural imbalances in the supplyside of the export sector, by helping industry respond more rapidly to the broad adjustment policies implemented by the Government, and by providing industry with needed long-term credit. However, this project did not anticipate the need for loan recycling, which is crucial to sustainability. 26. The project could have been supervised more often and more accurately. On the one hand, only two supervision missions took place during the implementation phase, and more detailed reporting requirements for the Borrower at the level of subprojects, a closer monitoring of individual bank loan administration, and in general a more proactive supervision would have allowed the impact of this operation to be maximized and made it more sustainable. On the other hand, the project disbursed very rapidly and effectively: by 1992, all credit lines were almost fully committed. This partly explains the limited supervision effort between 1991 and 1996. F. BORROWER PERFORMANCE 27. The Borrowers' performance was in general satisfactory. PBs have shown good performance in terms of commitments and disbursements. All financial covenants were fulfilled after some delay -- compliance by PBs with the timely provision of their annual audit reports on financial statements was difficult in the earlier years of project implementation. Capitalizing on their experience under the IEFP, PBs provided an adequate structure to channel funds to industrial and export-oriented firms. Their experience in project evaluation proved useful in selecting subprojects according to eligibility criteria outlined in the loan agreement. The services provided to the sub-borrowers by the seven private commercial banks were generally considered satisfactory by the banks' clients, but BNDE's loan processing was found rather slow. Industrial firms were affected by tightening of the banks' credit requirements, particularly with regard to collateral (a direct result of the application of the banking prudential regulations introduced in 1993). In this regard, firms suggested that in evaluating investment proposals, banks put more emphasis on expected returns and development potential than on collateral. It was also proposed that banks give more information on the range of sources of financing which could be offered to entrepreneurs, so that firms have a choice of financing alternatives for their investments. 28. In addition to the impact on credit line utilization of the Government's delays in providing foreign exchange risk coverage (as discussed in para. 19), the cancellation of US$8.1 million (5 percent of the loan) by the PBs, was due the excess liquidity in the banking system. Deposits were estimated at  9 DH 130 billion in 1995, against a demand for credit of about DH 80 billion. This enabled banks to transform short-term resources into medium to long-term lending without having to utilize foreign currency lines of credit. 29. PBs audits were generally found to be satisfactory. However, in the case of BNDE, the audit was rated unsatisfactory, since its financial performance had been weakened by the large arrears of the Ministry of Finance in terms of coverage of foreign exchange losses.8 Moreover, utilization of the credit lines by BNDE was slower. This was in part due to (a) BNDE's own procedures, implying a higher level of scrutiny by their board and credit committee; and (b) its lack of commercial dynamism. G. ASSESSMENT OF OUTCOME 30. Overall, the industrial finance project is rated satisfactory. Bank loans were committed expeditiously and met with substantial disbursement success. The project achieved the stated objectives within an acceptable level of success. The IFP resulted in a substantial growth of credit allocations to the export sector. Furthermore, increases in sales volumes, returns, and employment by the sub-borrowers reflected a positive impact of the IFP strategy. More timely instructions to the Borrowers by the Bank on recycling of funds, and on monitoring the project and subloans would have positively affected project sustainability. 31. The loan was instrumental in getting the banks audited by independent external auditors. This was a big point of contention at the time of negotiations. It led to more reliable and accurate financial reporting, and was the first step towards moving to international standards of prudential norms and regulation (supported by the subsequent 1991 operation). The PBs acknowledge even now that the Bank raised their own appraisal standards through the subproject review system. The institutional development assessment of the project is judged as partial. RI KEY LESSONS LEARNED AND FUTURE OPERATIONS 32. The experience from IFP has provided valuable lessons for designing the investment component of the subsequent FSDP, which was approved in 1991 and is still ongoing. The US$235 FSDP (Financial Sector Development Project) is a hybrid project consisting of an adjustment component (US$125 million) supporting a program of reforms in the financial sector; and an investment component (US$110 million) providing long-term financing to private firms through credit lines to seven commercial banks and BNDE. The amounts of the loans to the participating banks -- the same banks that participated in IFP -- were based, among other factors, on their performance under that project. 33. Other important lessons of IFP have also been incorporated into FSDP's design. First, the participating banks were considered mature enough to undertake most subprojects without the ex-ante approval of the Bank; only project proposals for over US$2 million require Bank review and approval under FSDP. Second, as financial sector reforms were being implemented, and given the sound financial condition of the banking system, more weight was placed in FSDP on improving the ability of Moroccan banks to eventually eliminate the need for government-guaranteed foreign financing. Cofinancing through a US$100 million IFC-led commercial syndication played a key role in FSDP in this respect. 8 The Government of Morocco did not fully protect BNDE from foreign exchange losses arising from subloans made in local currency.  10 Third, due to reforms in the financial sector, resource allocation was considered sufficiently efficient and market-determined to justify greater flexibility in regard to eligibility criteria for individual subprojects; on these grounds, FSDP does not target any specific industrial subsector. Finally, the experience with IFP pointed to the need for BNDE to become more competitive and commercially viable in the rapidly changing Moroccan financial environment. FSDP design also includes technical assistance in support of BNDE's efforts in this area. 34. In regards to financial management of the credit lines, IFP's experience has confirmed that these are complex financial products requiring continuous supervision to ensure effectiveness of the investments. The recycling nature of credit line programs, in particular, requires that supervision and assistance to the borrowing banks be tight; otherwise, recapitalization of the participating banks through long-term, government-guaranteed funds would, again, be the unintended result. FSDP has a mixed record in this area, with the participating banks building on a modest recycling capacity earned in previous Bank operations, and supervision still lacking. More thorough and frequent FSDP supervision in the future -- beyond its closing date in end-1997 (end-1998 for BNDE) -- will be crucial to ensure that the lines of credit are effectively recycled into new investment projects and have the intended developmental result.  11 PART II: STATISTICAL INFORMATION Table 1: Summary of Assessments Table 2: Related Bank Loans/Credits Table 3: Project Timetable Table 4: Loan Disbursements: Cumulative Actual Figure 4: Loan Disbursements: Cumulative Actual Figure 5a: Loan Disbursements per Sub-Borrower Figure 5b: Loan Disbursement by Sector Table 6: List of Sub-Projects Table7: Status of Legal Covenants Table 8: Bank Resources: Missions Table 9: Geographical Distribution of Subloans: By Provinces  12 Table 1: Summary of Assessments A. Achievement of Objectives Subsantiai Pil Negigib Not plicable (/) (/) ~~~ ~ ~~~(.0 (IV' Macro Policies 0 0 Sector Policies 0 3 0 0 Financial Objectives Q 0 0 0 Institutional Development I 0 0 0 Physical Objectives 0 0 0 0 Poverty Reduction 0 0 0 0 Gender Issues Q Q 0 Other Social Objectives Q Q 0 0 Environmental Objectives Q Q 0 0 Public Sector Management E 0 0 0 Private Sector Development 0 0 0 0 Other (specify) 0 0 0 ] B. Project Sustainability Liel Unliklye Uncertain (/) (i/) (/) 0 ~~~~~~~0 0) Highly satisfactoy Satisfarv Defic C. Bank Performance 00) (5z) V. Identification 0x 0 0 Preparation Assistance n Q El Appraisal 0 0 0 Supervision 0 0 Highly satisfactor Satisfactor Deficien D. Borrower Perforrnance ) 5 ( Preparation 0 0 0 Implementation Q 0 0 Covenant Compliance 0 0 0 Operation (if applicable) 0 0 0 HhWIL HWL Haisfatoy Saisa lnacobtsX h E. Assessment of Outcome s Unsatis1= unsais 00) 0 ) (0) 0 0 0  13 Table 2: Related Bank Loans/Credits Loan/credittitle Purpose Year of Status| approval Preced ing operationsl I . Loan 1625 Development of local 10117/78 Closed on 6/3 0/1982 Phosphor expansion processing of phosphates $US50 million 2. Loan 1687 Developmentof small scale 04/12/79 Closed on 12/31/1983 Small Scale Industries I industries(SS1s) $US25 million 3. Loan 2037 Strengtheningof the Banque 07/14/81 Closed on 06/30/1988 BNDE IX Nationale pour le DeveloppementEconomique US$70 million 4. Loan 2038 Development of small scale 07/14/81 Closed on 06/30/1988 Small Scale Industries II industries (SSIs) $US70 million 5. Loan 2806 Developmentof export 05/05/87 Closed on 12/31/95 Industrial Export Finance generating productions Following operations 1. Loan 3365-3373 Strengtheningof financial 06/25/91 3365 Closed on 6/30/93 Financial Sector sector 3366-73 On-going Development $US235 million 2.Loan3463 Structural adjustments 04/30/92 Closed 12/31/93 SAL II $US275 million 3. Loan 4091 Development of private sector: 09/12/96 On-going PSD III vocational training $US23 million  14 Table 3: ProjectTimetable Steps in Project Cycle Date Planned Date Actual/ Latest Estimate Identification(Executive Project Summary) March-88 Preparation Jun/July-88 Appraisal July-89 Negotiations Oct-89 Letter of Development Policy (if applicable) NA Board Presentation 5-Dec-89 Signing 7-Feb-90 Effectiveness 7-Jun-90 First Tranche Release (if applicable) NA Midterm review (if applicable) NA Second (and Third) Tranche Release (if applicable) NA Project Completion March 1995 Loan Closing Dec 1995 June 1996  15 Implementation Completion Report Kingdom of Morocco Industrial Finance Project Table 4: Loan Disbursements - Cumulative Actual in millions of USS FY90 FY91 FY92 FY93 FY94 FY95 FY96 Total Estimated Disbursement L31360 Banque Nationale pour le Developpement Economique 50,000,000 Actual 5,450,187 19,788,016 7,649,631 10,014,918 2,376,018 0.00 0.00 Cumulative 5,450,187 25,238,203 32,887,834 42,902,752 45,278,770 45,278,770 Percent Disbursed 10.90 50.48 65.78 85.81 90.56 L31361 Banque Centrale Populaire 12,000,000 Actual 0.00 6,184,167 3,763,172 491,480 509,158 509,851 0.00 Cumulative 0.00 6,184,167 9,947,339 10,438,819 10,947,977 11,457,828 Percent Disbursed 0.00 51.53 82.89 86.99 91.23 95.48 _ L31362 Banque Commerciale du Ma aroc _ _ _= 25,000,000 Actual 0.00 23,937,076 338,500 | 360,289 0.00 0.00 0.00 Cumulative 0.00 23,937,076 24,275,576 24,635,865 24,635,865 24,635,865 Percent Disbursed 0.00 95.75 97.10 98.54 L31363 Banque Marocaine pour le Commerce Exterieur ___________ 40,000,000 Actual 0.00 29,094,920 4,315,968 3,466,489 1 621,614 133893 0.00 Cumulative 0.00 29,094,920 33,410,888 36,877,377 37,498,991 37,632,884 Percent Disbursed 0.00 72.74 83.53 92.19 93.75 94.08 L31364 Banque Marocaine pour le Commerce et l'Industrie 12,000,000 Actual 0.00 9,960,219 451,615 1,443,1541 145,012 0.00 0.00 Cumulative 0.00 9,960,219 10,411,834 11,854,988 12,000,000w 12,000,000 Percent Disbursed 0.00 83.00 86.77 98.79 100.00 L31365 Credit du Maroc _ 5,000,000 Actual 0.00 1,852,386 648,151 1290108.001 883,727 215,603 0.00 Cumulative 0.00 1,852,386 2,500,537 3,790,645 4,674,372 4,889,975| Percent Disbursed 0.00 37.05 50.01 75.81 93.49 97.80 L31366 Societe Generale Marocaine des Banques 9,000,000 Actual 0.00 8,992,616 7,384 0.00 0