Morocco - Credit Immobilier Et Hotelier Project

104AU 7O'/ FILE COPY R E S RESTRICTED Report No. DB-61a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION APPRAISAL OF THE CREDIT IMMOBILIER ET HOTELIER MOROCCO July Z7, 1970 Development Finance Companies Department  CURRENCY EQUIVAIENTS Currency Dirham (DH) DH 5.06 - US$i 1 DH 1 5 us$ 0.198 DH 1.,000,000 U iJ$ 198,000  iMOROCCO APPRAISAL OF THE CREDIT Dh11OBILIER ET HOTELIER Table of Contents Page Paragraph SU2i1ARY i - iii i -vi I. INTRODUCTION 1 1- 3 II. TOURISM N-ARKET AND FACILITIES IN DKiOROCCO 1 - 4 4 - 11 Importance of Tourism and Recent Growth 1 - 2 4 - 6 Hotel Development 2 - 3 7- 8 Incentives to Tourism Development 3 - 9 - 11 III. CIHIS ORGANIZATION AND PROCEDURES 4 - 10 12 - 36 Background 4 - 5 12 - 15 Board and Executive Committee 5 - 16 - 17 Management 5 - 6 18 - 20 Government Role 6 - 21 - 22 Staff, Organization and Procedures 6 - 8 23 - 32 Needed Improvements in Processing Projects 8 - 10 33 - 36 IV. POLICIES_ RESOURCES A OPERATIONS 10 - 14 37 - 52 Policies 10 - 11 38 - 42 Resources 11- 12 43 - Recent Operations 12 - 14 44 - 48 BNDE Loans to CIH 14 - 49 - 50 State Programs Nlanaged by CIH 14 - 51 - 52 V. CIH'S FINANCIAL POSITION 15 - 19 53 - 68 Balance Sheets 15 - 16 53 - 58 Income and Expense Statements 17 - 59 - 60 Evaluation of Portfolio 17 - 19 61 - 68 VI. BUSINESS OUTLOOK 19 - 24 69 - 84 Housing Business 19 - 70 - Hotel Business 20 - 21 71 - 75 Resources Needed 21 - 76 - Financial Projections 21 - 24 77 - 82 VII. CONCLUSIONS 24 - 26 83 - 90 Recommendations 25 - 26 88 - 90  List of Annexes 1. Shareholders as of June 30, 1970 2. Board of Directors and Executive Committee as of June 30, 1970 3. Organization Chart, September 1969 4. Resources as of December 31, 1969 5. Summary Balance Sheets as of December 31, 1967 to 1969 6. Profit and Loss Statements for Years 1967 to 1969 7. Projected Source and Application of Funds, 1970to 1974 b. Balance Sheet as of December 31, 1969 and Projected Balance Sheets as of December 31, 1970 to 1974 9. Profit and Loss Statement for Year 1969 and Projected Profit and Loss Statements for Years 1970 to 1974 10. Financial Ratios Derived from 1969 Accounts and Projected Accounts for 1970 to 1974 11. Estimated Schedule of Disbursement for Proposed Bank Loan This report is based on the findings of two missions, one in May and the other in September 1969, to Morocco. The missions were headed by Mr. Pollan and included Messrs. Coudol of the Development Finance Com- panies Department and Oltrnanns of the Tourism Projects Department. Mr. Boyd served as a consultant on both missions. During negotiations a mission headed by Mr. Bart of the Europe, Middle East and North Africa Department and Mr. Coudol went to Morocco in June/July 1970 to make final arrangements regarding the proposed loan and to update this report.  i4OROCCO CREDIT IDfl,OBILIER ET HOTEIIER SUTMiARY i. Credit Immobilier et HIotelier (CIH) is the chosen instrument of the Moroccan Governnrpnt for financing hotels. Recent increases in receipts from tourism and the prospects for their continued grawth make the tourism sector one of high priority for liorocco, to which the Govern- ment is prepared to continue to provide both investment incentives and financial resources. CIH has received some World Bank funds indirectly, by borrowing from the Banque Nationale pour le DIeveloppement Economique, which is the beneficiary of several World Bank loans. However, because of the importance of tourism and the special position of CIH in that sector, the Government has wished that CIH borrow directly from the Bank; and, after some preliminary discussions, the proposed loan has been deve- loped. A Bank mission studied the tourism sector in Horocco in 1968. This was followed by missions to review the operations of CIH itself, and a continuing dialogue between the Government, CIH and the Bank over the past 18 months. ii. Created nearly 50 years ago to finance housing, CIH has deve- loped considerable experience in this area, which constituted its main field of activity until about 4 years ago. Since then the financing of hotels has risen rapidly and now accounts for the bulk of CIHis annual commitments and for about two-thirds of its present portfolio. An impor- tant element in the growth of CIIIIs experience in the hotel financing field has been technical assistance from the World Bank, transmitted through BNDE in the process of BNDE's relending to CIIH the proceeds of Bank loans. Even more important have been the continuing discussions of 1969 and 1970, which have already resulted in various measures to strengthen CIHOs organization and staff, in the improvement of the collec- tion of data relevant to the tourism sector, including the financial results of new hotel construction, in the sharpening of project appraisal techniques with particular regard to economic aspects of appraisal, and in better follow-up of hotel investments. Better data collection, im- proved economic appraisal and more systematic and meaningful follow-up are particularly important because the Government's incentive system for hotels, which includes rebates of interest on loans to hotels, may some- times result in misdirection of investments. The Bank plans a thorough discussion of the Government's incentive system in September, in the light of the recently completed economic mission, with a view to determining the best form of incentives which may be needed, if any, to assure the sound development of tourism facilities in Mlorocco.  - ii - iii. Government institutions are CIH's principal shareholders, and CIH is heavily dependant on official sources for its capital. More- over, official institutions and agencies predominate in its Board and Executive Committee, although private institutions have held a majority of CIH's share capital since 1967. Government influence is therefore an important factor in the determination of CIH's overall policy and may have been effective from time to time in determining particular investment decisions. Autonori,y in the conduct of its day-to-day affairs is crucial in CIHts developing into a strc.ng hotel-financing institution. There is reason to believe that greater autonomy may be expected as CIHs experience in hotel financing graws. One such reason is that, in the field of housing finances in which CIH is considered to be particularly competent, it has virtually complete autonomy. The association with the World Bank, begun in a technical way some time ago and developed in consequence of the proposed loan, should be of considerable help in developing CIHIs experience and thereby assuring its greater autonomy. CIH's management and staff are able and willing to improve their perfor- mance; and the Government and its agencies which are CIH's principal share- holders have given evidence, by the measures taken in the past year to strengthen CIH, of their willingness to allow this to happen. iv. The Bank's first reviews of CIH's performance and position showed important areas of weakness. In particular, the accounting system needed improvement; CIHts financial position was weakened as a result of unpaid claims on Government and arrears on the accounts of large hotels sponsored by CIHIs principal shareholder; an imbalance existed between the terms of CIH's obligations and the terms of its lendings. Measures have been taken in the past year and additional measures have been agreed during the negotiations which should substantially improve the situation. The accounting system has been revised and improved; agreement has been reached for payment on the Government's debts in a reasonable period and on the wiping out of arrears of the Government-sponsored hotels; and additional long-term subordinated capital is being placed at the disposal of CIH. As a result the present imbalance in CIHI's financial structure will be corrected, and CIH should have a borrowing base sufficient to enable it to borrow the additional capital needed to carry out its business forecasts for the next several years. v. CIH forecasts substantial lending for hotels, involving commitments from now until the end of 1971 of about DH 127 million, about two-thirds of which would represent the estimated value of imports. It also expects significant lending for housing. Its forecasts appear reasonable. To finance its expected business in the next 18 months,CIH needs fresh resources of about DH 175 million. The proposed Bank loan would provide DH 50 million. CIH would seek the rest from its normal, principally official, sources. A larger Bank loan might have been considered, in view of the size of prospective need and of its foreign exchange component. However, as this is a first loan to an institution which is still relatively inexperienced in its main field of operation and as important steps still need to be taken to improve the quality of CIH's performance, prudence suggests that Bank lending at this time be limited to the proposed $lo million.  - iii - vi. In the circumstances, CIH appears to be a suitable borrower and should be able to service the proposed debt to the Bank. The terms of the loan would be those norrrial to developrient finance companies, including the standard commitment charge. The free limit would be $100,000 per project, up to an aggregate of $2 million. Disbursementss which would be completed by December 31, 1973,would be made for the cif cost of imported equipment, 65% of the cost of imported equipment purchased from the shelf in HIorocco and a percentage of the cost of construction, representing its import component, which has been estimated at 11,P.  MOROCCO APPRAISAL OF THE CREDIT IMMOBILIER ET HOTELIER I. INTRODUCTION 1. The Bank has been involved in financing hotels in Morocco since 1966. Financing occurred through loans made by the Bank to the Banque Nationale pour le Developpement Economique (BNDE), which in turn relent the proceeds to another institution, the Credit Immobilier et Hotelier (CIH). The Moroccan authorities preferred CIH to be the prime source of the loans for hotels in Morocco. However, the Bank felt that CIH was not yet a suitable borrower, considering its limited experience in hotel lending and the fact that CIH's primary activity since its creation in 1920 was the provision of mortgage and housing finance. 2. After preparatory discussions in 1965-1966, a Convention was established in September 1966 for the tri-partite arrangement referred to in paragraph 1. It was not easy to operate since the two Moroccan institu- tions, which had very different approaches and appraisal methods, had to attune themselves to one another. With the passage of time, CIH increasingly became a hotel financier and moved away from its mainly mortgage- oriented outlook.It gave increased weight to the commercial prospects and soundness of a hotel venture and achieved a measure of familiarity with the methods and operating practices of the World Bank. This process was facilitated by several visits of Bank personnel. 3. In view of this development and following discussions with Moroccan Government representatives in the spring of 1968, the Bank decided to explore the possibility of lending directly to CIH. In September/October 1968, a Bank mission ascertained the general prospects of tourism in the country over the next few years, and two subsequent missions in May and September 1969 examined CIH. The recommendations resulting from the appraisal of CIH are set forth in this report. II. TOURISM MARKET AND FACILITIES IN MOROCCO Importance of Tourism and Recent Growth 4. Situated within easy distance by air and ferry from Europe, with an equable sunny climate, 1,200 miles of Atlantic and Mediterranean coastline, and a wealth of topographical, historical and cultural assets to attract international visitors, Morocco has many resources suitable for the development of international tourist traffic. Since tourism  development is one of the economic sectors in which a substantial accelera- tion in growth rates could occur within a few years, the MIoroccan authori- ties have accorded this sector a priority second only to agriculture, in the current Five-Year Plan (1968-72). The implementation of this decisionb according to balance of payments data, has contributed to rising tourism earnings which by 1969 had become Morocco's leading source of foreign exchange. 5. The future expansion of tourism in llorocco depends essentially on the maintenance of a stable political situation, the improvement of access (especially the continued reduction of the cost of air travel and the ability to receive the larger jet aircraft), and the increasing avail- ability of well-located and reasonably priced hotels (especially at beach resorts) to meet the probable main element of growth, the European mass tourist traffic. The impact of this mass traffic in Morocco began to be felt in the early 1960s. Up to 1966, the average annual rate of growth in stop-over visitor traffic to Viorocco was about 15% a year. In 1967, due to the Middle East crisis, tourist traffic suffered a setback and only 400,000 visitors came, compared to 420,000 in 1966. However, in spite of the foreign exchange crisis in Great Britain and France, which contribute great numbers of tourists to Morocco, stop-over traffic in 1968 showed a substantial revival to 481,000. In 1969, Morocco received about 716,000 tourists of all kind (compared to 588,000 in 1968). It included 621,000 stop-over visitors staying on the average 9 days and 95,000 cruise visitors. As in the past the bulk of the traffic was from France (24%) and the UK (13%). However visitors from the US which ac- counted for only 6% of the traffic in 1963 represented over 15% of the total in 1969. The 1969 achievement has been remarkable considering that prices in M-orocco are somewhat higher than in other M5editerranean countries competing for the European tourist market, e.g. Spain, Tunisia, Turkey and Yugoslavia. 6. The Five-Year Plan forecasts 750,000 and one million stop-over visitors in 1970 and 1972 respectively, staying about 10-12 days on average. The net foreign exchange earnings accruing to the Morrocan economy from tourism are expected to grow from DH 220 million in 1967 to DH 350-45o million in 1972. There are good reasons to believe that the effect on Moroccots balance of payments will be favorable and that the returns on tourism investments will turn out to be attractive. How- ever, to quantify properly these benefits, including specific returns on hotel investments, a substantial effort to collect data is needed. Hotel Development 7. At the beginning of 1968, Morocco had roughly 20,000 hotel beds available. Since then, additions through raid - 1970 amounted to another 9, 000 beds. One characteristic of recent hotel construction in Morocco has been their relatively high cost, i.e. about $5,0.00 per bed as compared to an average of roughly $4.,000 in both Tunisia and Turkey. A considerable  - 3 - number of hotels constructed in the 1960s are of the luxury variety appealing to the wealthy tourist, while the European mass iiiarket which potentially would grow faster, prefers accommodation in lower priced hotels and pensionsLY. In these classes, the pressure on facilities is particularly heavy in the favored tourist spots along the Mediterranean, in some places on the Atlantic coast and in Morocco's historic cities, such as Fez and Marrakesh. 8. Of the 9,000 beds constructed fron; 1968 to date, 8,000 beds are in projects finanlced by CIII, which thus helped (in terms of beds) to finance almost 90Xo of Morocco's total hotel development in the period. CIH loan disbursements represent about 52% of total hotel investment since January 1, 1968, or 64% of investments sponsored by private interests. Since 1968, the categories of hotels pLaimed have incrpasinrly been for three- and fo2r-starp rather than five-star facilities. Incentives to Tourism Development 9. Although a precise assessment is impossible, the spurt in Morocco's hotel development in this decade has been5purred by Government assistance. Such assistance has been given to hotel projects approved by the State's Investment Commission. It has taken a variety of forms, including import duty exemption and tax privileges, but the leading ones among them are: a. an equipment grant (prime d'equipement) usually ranging from 10-15% of the fixed investment in a hotel project, in the form of a one-time contribution to the needed financing; b. a subsidy (4.25%) now amounting to close to one-half of the 8.75% p.a. interest payable by hotel sponsors on long-term loans from CIH. A further but indirect element of Government assistance to hotel financing is the availability of substantial Government guarantees for the loans from CIH. 10. Though it has stimulated hotel investment, the incentive system has had some negative aspects. The provision of cheap or free resources to the investor has frequently detracted from a careful assessment of invest- ment costs in relation to expected benefits from tourist traffic; further- more, traffic assumptions and occupancy ratios were pot checked out with necessary care. It is, therefore, not surprising th'at these factors have led to high per-bed investment costs and consequentl,y to high hotel rates compared to nearby competitors. Also contributing go the tendency to- wards aver-investment in hotels, are established attitudes on real estate speculation by which hotel construction is at times riewed as a source of short-term profit through over-invoicing, rather thaii as a basis Lor gain frorn corFercial operation. 1/ Moroccan hotels are given five principal classifications expressed in stars and reflected in tariffs. A 5-star hotel is in the luxury class, 3-star facilities offer comfortable accommodatioAs and 1-star appeals to the hardy.  - 4 - 11. The facts underlying these general observations on high investment costs and laxity in occupancy estimates have been reflected in some of the 25 hotel projects presented by CIH to the Bank through BISTDE. Even with the financial incentives given by the State, expected returns on share capital were either too optimistic and had to be adjusted, or were barely acceptable, i.e. in the range of 9-15% p.a. Indeed, four projects had to be rejected by the Bank because of unattractive financial prospects due to overly high investment costs. III. CIH'S ORGANIZATION AND PROCEDURES Background 12. CIH, known until 1967 as Caisse des Prets Immobilier du Maroc, was founded in 1920 by the Credit Fmncier d'Algerie et de Tunisie and the Credit Foncier de France. It developed prof.table business in financing housing for the Europeans in Morocco and later in farm purchases and improvements for Europeans. The Protectorate Government subsidized interest costs to the borrowers and CPIM became an effective instrument for encouraging land settlement. CPIM also entered, as early as 1927, into small-scale hotel financing, but total loans to hotel projects aggregated only DH 12.4 million from 1927 to the end of 1962. 13. In 1960, the Iloroccan Government assumed control of the company through the Caisse de Depot et de Gestion (CDG) 1/s which held 65% of share capital of DH 6.5 million. Public ownership was subse- quently reduced by placing CDG's shares on the Casablanca Stock Exchange. In 1967, after a share capital increase to DH 20 million (on which there is a statutory dividend of 5%), public sector ownership represented less than 50%; as of June 30, 1970, its share was 40.8%, virtually All of it held by CDG and the Bank of Morocco as shown in Annex 1. 29.3 per cent of CIH's shares were then held by private Moroccan banks and insurance cor,panies and the balance of 29.9, by s-all investors. 14. CIH's purpose and powers are governed by Royal Decrees issued in 1962 and 1968, its statutes and the general laws of the country. Under these, CIH has wide powers to lend, invest and guarantee as long as these transactions are related to construction for housing, to hotel investments and to other specifically authorized operations. 15. The 1962 Decree appointed CIH as the main Mloroccan institution for the financing of hotels; the 1968 Decree (and ordinance) 1/ Caisse de Depot et de Gestion is the depository and administrator of several public funds, most notably savings and social security funds. Through investment of these funds, CDG has a pervasive role throughout Morocco's economy, especially in financing various infrastructure activities and through participation in several affiliates including CIH, the Societe Maroc Tourist and the Societe Nationale d'Investissement.  - 5 - established the role of the Commissaire from the Ministry of Finance (see paragraph 16), the terms of CIH's loans, the level of CIH's interest rates including the related subsidies and the need for the Finance Minister's approval for raising resources. Board and Executive Committee 16. CIH's statutes fix the power and function of the Board of Directors which has extensive powers over CIH's organization, operations and policies. Decisions on loans and on other current operations, pursuant to Board directions, have been entrusted to an Executive Committee. The composition of the Board and of the Committee is shown in Annex 2. The statutes also regulate the appointment by the Board of CIH's Director General. a. CDG's Director General presides over CIH's Boardl/, which meets twice a year and has currently 14 members. Despite private sector majority in shareholdings (see paragraph 13), eight Board members come from Government departments or public sector institutions. The Board ratifies the decisions of the Executive Committee, to which it can also delegate its supervisory powers over CIHi's administration. b. More continuous supervision over CIH is exercised by the Executive Committee of five members headed by CDG's General Secretary; two members represent the Societe de Banque du Iiaghreb aul the Baanque du 'laroc; another member is the Government Coamissaire from the Finance Plinistry who has by law the right to vato any of the Committee's decisions; CIi's Director General is also a member of the Committee and functions as a non-voting secretary. The Executive Committee approves all loan proposals and other financial transactions. 17. Discussions in the Board and Committee, which meet in Rabat, instead of Casablanca where CIE has its offices, are recorded only in their most essential details, such as disposition of projects, without indicati-n that varying opinions may have been expressed. Management 18. Since 1966, Mr. Mohamed Lazrak has been CIH's Director General. A law graduate, his previous career was with the Government; he served in the Finance Ministry and more recently he was the Secretary of the Invest- ment Commission. (This Commission approves hotel and industrial projects 1/ CDG's Director General is normally Chairman of CIH$s Board. However, the appointment of CDG's present Director General, Mr. Reghai, has not yet been ratified by Royal Decree and pending it, Mr. Reghai is only acting Chairman of the Board of CIH.  for their eligibility for Government incentives). M4r. Lazrak, now 33 years old, has had a rapidly rising career. 19. 1Mr. Lazrak is assisted by his deputy, Mr. Abdelhak Benkirane, Assistant Manager, both an engineer and a law granduate, who has risen since 1965 through the ranks of CIH and is particularly concerned with the institution's internal administration, follow-up on housing operations and legal matters. CIH has twTo senior foreign advisors, for legal and financial matters. The Director General relies heavily on them, especially on the financial advisor, who did much to unravel CIH0s accounts prior to CIH's first audit in mid-1969. 20. Given CIH's relatively recent exposure to large-scale hotel financing, the management still has to gain experience in coping with the growing complexity of financing the tourism sector. Therefore, much depends on the continued presence of CIH0s advisors. But there is no doubt that CIH's Director General is committed to doing a steadily improving job. Government Role 21. CIH has an intimate relationship to Government: through its management, through its source of finance and through Government policy. CIH's Director General is a member of the small group of senior officials who exercise considerable influence over economic activity in Morocco. CIH could not step significantly out of line so far as general policy is concerned, without hampering its own access to resources, for which it depends heavily on CDG and the Banque du Maroc. What is important for CIH's future, therefore, is that the Government itself push CIH in the appropriate direction by requiring it to support a high-priority sector without undue losses to the economy, and that CIH develop into an ef- ficient institution. 22. CIH's experience in the hotel sector must grow if it is to achieve independence in day-to-day operations. CIH's long experience in housing has shown that autonomy is possible, if it operates efficiently. CIH's direct association with an outside financial institution like the World Bank can help it acquire the experience necessary to justify and to establish its independence in day-to-day activity. However progress to- wards substantial autonomy will take time and will require close watch. Staff, Organization and Procedures 23. CIH has 68 staff members, including 32 Moroccan and six foreign professional staff members; two of them are available under technical assistance programs. None of the M4oroccan staff is over 40 years of age and its experience still has to broaden. This is developing, and some  - 7 - capable officers have already emerged. Until further progress is made, key positions still need to be filled by experienced foreigners. Annex 3 contains an organization chart. 24. Since 1967, when the present Financial Advisor joined CIH (a cormpetent Belgianj who is responsible for all CIH's accounting and financial procedures), considerable changes have been introduced in the concepts and operations of CIHHs Finance Division, which includes the Cashierls and Accounting Departments. These changes affected in particuLar CIH0s accounting system which did not permit CIH to ascertain or follow up the financial consequBnces, profitability or losses, of each of its various financing activities. Since 1968, considerable progress in unra- velling CIHHs accounts has been made, as detailed in paragraph 53. The improvements introduced are being put into effect, including recacmendations made recently by CIH's auditors, which called for separation of the accounts of CIHIs hotel and housing operations. 25. CIHi's major division is the Operations Division. In it, the Hotel Credit Department created in 1967, has still to become a well-functioning group. Hotel business has been growing rapidly in recent years. The main workload in processing hotel projects had been carried by the young director of this Department, assisted by a French engineer and by two Mloroccan colleagues with little experience, until last summer, when were they supplemented by two Moroccan financial analysts and a Moroccan engineer. 26. The procedures for hotel loans, from the first application by the borrower until a loan is signed, take on the average 6 to 12 months. The procedures involve the evaluation of financial, technical and legal aspects by the Hotel Credit Department, for a fee. Meanwhile, applicatioms are made for Government grants, interest rate rebates, Government guarantee and the title documentation needed for legal mortgages. An appraisal report is then prepared for the Executive Committee. Following approval by the Committee, the client is notified and is charged a 0.75% commitment fee levied on the undisbursed part of the loan from four months after notification or the date the loan is signed, whichever is earlier. The Disbursement Department finalizes all the legal and documentary work and authority is then given to the Cashier's Department for periodic disbursement as construction progresses. The progress of projects is watched by the engineers of the Hotel Credit Department. 27. The main weaknesses of CIH's appraisal work stem partly from the dearth of detailed data on Moroccan hotel development in general, and partly from the quality of the supporting data on projects which clients furnish to CIH. The latter relates specifically to estimates of expected traffic for a specific location or hotel project. Furthermore,  - 8 - potential clients tend to exaggerate designs and inflate costs, which CIH has had difficulty in checking, in the near absence of standards for various classes of hotels and related ranges of investment costs. Better points of reference for CIH should be available some time in 1970 due to work now being done in the Ministry of Tourism with German technical assistance. As to the Hotel Credit Department itself, the staff is gaining experience and has the potential to improve further; its director is eager to improve his Department's and his personal performance. 28. Supervision of hotel projects under construction has been weak. It has been practically non-existent in regard to projects already operating. In this area, new staff members are required. The need to improve supervision is particularly striking because of the strong tendency, already noted, to over-invest in hotels. 29. CIH's disbursement procedures, based on its long experience as a mortgage bank} are well developed. Architects, who are on a Government- endorsed list, have to certify progress payments and CIH's borrowers have to show invoices of local importers or suppliers. There is an established system in CIH for assuring that disbursement is channelled to the intended use. CIH0s Disbursement Department is acquainted with the World Bank's disbursement procedures through CIH's use of IBRD loans lent to it by BEDE. 30. An aspect causing concern is CIHts laxity in following up some of its arrears. The principal cases are important projects involving CDG1, CIHs leading shareholder, and some foreign hotel chains. The officer recently put in charge of delinquencies is able and should in time do an effective job. 31. Thanks to its long experience, CIH seems competent in financing housing. The Housing Credit Department assisted by the Inspection Department, which handles the technical work, is well staffed. The Inspection Department examines the designs, plans and the architect's reliability. The Housing Credit Department evaluates the financial situation and prospects of housing borrowers. To the extent that housing loans have gone sour so far, they were easily recouped by sales of the properties concerned. These sales have been facilitated by housing scarcities in Morocco. 32. The procedure for housing loans is substantially similar to that of hotel loans. However, the emphasis in evaluating a housing (or an apartment) project is primarily on the mortgage guarantee. CIH has developed considerable experience in the evaluation of security. Needed Improvements in Processing Projects 33. CIH has agreed during negotiations on criteria and procedures to improve its appraisal technique and project supervision in three principal areas:  (i) the estimates of the market for tourism, (ii) the economic and financial return on hotel investments, and (iii) the supervision of projects under execution and in operation. 34. Assessment of Tourist Yiarket. Although tourism has grown rapidly in the past few years, ]Ytoroccols authorities cannot tell yet with precision how beneficial that development has been to the ccantry, particularly with respect to the rate of return on hotel investment. Although the various incentives provided by the State encourage investment, their economic cost and benefit cannot be estimated with accuracy. It is difficult to gauge whether hotel investment has taken place in the right place, in the right category and at the right time. Therefore, a major point in recent discussions between the Bank, the Nioroccan authorities and CIH has been the need for collection of data on tourism in hforocco. To that end, the Bank asked CIH to collect facts on the trend of tourist traffic in the past two years (including occupancy ratios in various tourist centers and seasons), expenditures made by tourists for various types of accomodation, and the origin of, as well as arrangements for, specific national tourist streams into hiorocco. CIH has taken preliminary steps to improve its knowledge of the tourism market. Two analysts have started to visit systematically the hotels owned by CIH1s borrowers and are collecting data on occupancy rates, profitability and organization. This survey covers only a very small sample of hotels (about 30) and a considerable effort is needed both to broaden the scope of the survey and to analyze the data. CIH undertook during negotiation to hire, before the end of 1970, two economists fcr this purpose. 35. Return on Hotel Investment. The prospects for return on share capital of hotels have been attractive, in view of the available incentives, even in a situation of low occupancy. It is questionable whether these incentives have been the most economic means of stimulating hotel investment. In the absence of a good basis to judge the merit of the incentives, C(IH has made arrangements, during negotiation with the Bank ,to min-Unze possible untoward effects of the system. In selecting projects for financing, CIH is now applying stricter evaluation criteria than have hitherto been applied in judging the return on investment. In essence, these new criteria require the return on the total investment in a hotel, whLether financed by share capital, loans or Government grants, to approximate what might be considered the economic cost of capital in hiorocco. A minimum internal economic rate of return of 10% per annurm was chosen for projects to be financed with Bank funds, computed on the basis of the discounted cash flow, built on well-founded estimates of hotel receipts after operating expenses (but before interest charges and income tax), and discounted over a period about equal to the estimated real life of hotels in a given category. The application of this criterion would have eliminated a number of hotel projects previously financed by CIH.  - 10 - 36. Supervision of Hotel Projects. Even with two new staff members recently appointed to this task, CIH is not yet fully equipped to supervise hotel projects under construction. During negotiation with the Bank, CIH agreed to add personnel to its Operations Division. An engineer and a quantity surveyor will be hired before the end of 1970; furthermore, an experienced architect will be hired before June 1971. These additions should allow CIH to improve the supervisian of its hotel projects. In addition, CIH has agreed to require the engagement of independent consultants, at the expense of its borrowers, to assist in the supervision of large hotel projects during construction. IV. POLICIES, RESOJRCES AND OPERATIONS 37. CIH follows different business policies on hotel loans and on housing loans. These policies are, essentially, regulated by the law of December 17, 1968 (see paragraph 15) in which relevant Government policies are also laid out. Policies 38. Hotel Loans. For hotel projects, a distinction is made between financing construction and financing equipment for the same hotel. This is a traditional pattern preferred by borrowers far tax reasons. By the 1968 law, the life of hotel loans is limited to (i) up to 20 years for construction, with up to five years' grace, and (ii) up to 10 years for equipment, with up to two years' grace. CIH applies these terms. By the same law, CIH loans (for both hotels and housing) cannot exceed 75% of the value of properties as appraised by CIH. As a matter of policy, however, CIH limits its financing to about 60% of that value. 39. All CIH loans (both for hotels and for housing) carry an interest rate of 8.75% per annur. As indicated in paragraph 9, the Government gives hotel borrowers rebates on the interest rate they must pay. Until the law of Decenber 17, 1968, there was a range of rebates, going up to 5.5% per annum. They are now uniforms and equivalent to 4.25% per annumi to CIHIs hotel borrowers. Only nine old loans for financing restaurants, out of CIH's 149 hotel loans signed up to December 1969, do not enjoy rebates. The importance of these rebates has increased over the pastiwo years, as shown-in the following table (in DH thousand): 1967 1968 1969 Interest rebate 1,045.7 4,415.2 5,57.7 Interest paid by CIH clients 3,598.9 2,564.2 5,517.3 Total interest received by CIH 4,644.6 6,979.4 11,375.0 (at 8.75S% per annum)  - 11 - The considerable increase in the rebate from 1967 to 1968 is explained by the 68% growth in hotel loans from 1967 to 1968, and by the incidence of the higher rebates on loans made during the last part of 1967 and during 1968; most of these rebates represented 5.5% per annum. Until recently CIH did not always receive payments from the Finance -iiinistry on time. Arrears amounted in December 1969 to about DH 5 million. This matter has now been given consideration by the Government and it is re- ported that since January 1, 1970 these arrears have been wiped out and interest rabtes have been transferred to CIH on the due date. 40. Under the law of 1968, the State may cover part of CIH's risk on hotel loans, and since then all hotel loans have had a State guarantee. In practice, State guarantees have usually amounted to about 50% of the outstanding balance of CIH loans; and, in some special cases where no mort- gage could be obtained on the land 1/, this guarantee was given up to 100% of outstanding loans. 41. With few exceptions CIH requires its borrower, before disbursing any portion of a hotel loan, to disburse his portion of the investment, usually about 40" of the total. This portion includes the borrower's own funds and the equipment grant. 4e2. Housing Loans. Until June 1969, CIHis evaluation of housing projecus was made on the basis of property evaluations alone. The ap- praised values of properties were usually less than 50% of their market value. In practice, housing loans did not go to the 75% of appraisal value allowed by the 1968 law, as noted in paragraph 38. At CIH's Annual General l4eeting in June 1969, policies on loans and mortgage evaluation were revised, as regards both individual dwellings and apartment buildings. The new policy permits greater flexibility in appraisal, which may take accounts of (i) the market values of the properties, (ii) the personal creditworthiness of the borrovers, and (iii), in the case of apartments, expected return on investment and debt-service coverage. As a result of this change, CIHis housing loans are expected to increase. Only loans for housing properties worth up to DH 150,000 qualify for interest rebates, which amount to 2.75%. Resources 43. As at December 31, 1969, CIH had at its disposal the following resources invested or available for investment in its own lending pro- grams (hotels, housing and the fishing fleet): 1/ MTainly due to difficulties in property registration in the former Spanish Protectorate or in regard to lands held by religious endow- ments.  - 12 - DHI million % of Total Medium- and Long-term Borrowings Outstanding Banque du Yiaroc 85.00 32.8 Medium-term bonds 30.00 11.6 Long-term bonds 97.95 37.7 BNDE loans 17.89 6.9 230.84 89.0 Other Resources State Guarantee Fund for fishing fleet 3.18 Advances from Treasury 0.26 3.44 1.3 Equity Share capital 20.00 7.7 Reserves and retained earnings 5.26 2.0 25.26 9.7 Total Resources 259.54 100.0 Annex 4 gives details of the borrowings sunmmarized above. The major feature of CII's resoures is that CIH is heavily dependent on Moroccan Government institutions as providers of funds, i.e. for over 80% of borrowed resources, for most long-term and medium-term bonds are held by CDG. Furthermore, it has no foreign resources directly available to it. The BINDE loans it obtained are, however, provided by IBRD- Recent Operations 44. Until 1967, when CIH reorganized its accounting and management information systems, it was impossible to obtain from the statistics a record of lending activities in a consistent fcrmatp giving the volume and phasing of important processing steps. Only a comparison of outstanding commitments (amounts disbursed plus undisbursed balance minus repayments) is available for a longer period of time. 45. It is interesting to note that in 1962 hotel commitments represented only 4% of CIHPs total commitments. They have grown at a compouncdd rate of about 75% per annum since then. In 1967, for the first time, hotel commitments exceeded housing commitments. The trend, since then is shown below (in DH million):  - 13 - 1967 1968 1969 a19n. -J No. Amount No. Amount No. Amount No. Amount I. Hotel Loans Applications 39 128.8 39 35.5 75 84.5 26 20.9 Approvals 35 114.5 29 37.7 55 35.0 12 16.1 Committed 26 50.0 24 45.0 53 93.8 22 14.8 Disbursed - - - 40.1 - 56.4 - 28.5 II. Housing Loans Applications 232 15.4 255 20.5 336 58.1 236 23.4 Approvals 241 12.7 278 15.7 278 20.8 170 14.3 Committed 210 12.1 274 13.5 289 17.9 138 11.0 Disbursed - - - 12.1 - 16.3 - 10.5 46. As of December 19693 CIH had signed 149 hotel loans from which about 80 hotel enterprises had benefitted. Only ten hotel projects have been rejected by CIH over the years, but important changes have been brought about by CIH's intervention, in part motivated by BNDE, either on its own account or after a project review by IBRD. 47. About 90 of CIHts 149 loan commitments were for hotel projects in the five- and four-star categories, most of them made in the past three years. Hotels financed by CIH are located mainly in Agadir (21 loans), Tangier (20 loans) and Casablanca (12 loans), in addition to those in large tourist resort areas, such as Al Hoceima, Restinga and hIohamedia. An important development in CIH hotel financing has been the impact since 1967 of large loans in its portfolio. Fifteen loans of over DH 5 million out of a total of 149 loans committed on December 31, 1969, represented more than 50% of the volume of commitments and about 60% of outstanding hotel loans at that time. Number of Loans Amount % of Total (DH millon) No. Amount Loans less than DH 5 million each 134 88.65 90 46.3 Loans over DH 5 million each 15 102.79 10 53.7 Including: Ramada Inn 4 9.75 5.1 Africa Palace 2 10.26 5.4 Holiday Inns 4 31.20 16.3 Chellah Hilton 2 30.00 15.6 Hlaroc Tourist Restinga 1 5.08 2.7 Mlaroc Tourist S.A. Rabat 1 10.00 5.2 M'Diq Vacances 1 6.50 3.4 Total commitments on hotel loans 149 191.44 100 100.0 Of which: Undisbursed commitments 28.54 14.9 Disbursed and outstanding 162.90 85.1  - 14 - 48. In housing, over 900 loans for new units of accommodation were signed between 1967 and June 30, 1970. Over one-half of the loans in housing have been for amounts up to DH 100,000 and 30% of these loans exceeded DH 200,000, including 14% for apartment buildings. Most of CIH's housing loans have been in cities, 40% in Casablanca and 25% in Rabat. BNDE Loans to CIH 49. Following the BNDE/CIH Convention of September 1966 (see para- graph 1) and under rules established since, IBRD funds have been made available for 17% to 40% of the cost of the project, depending on the classification of the hotel. This range of percentage, representing the imputed import component of the construction and equipment of a hotel, was arrived at through a study made by SOCOTEC, the leading consulting firm in Morocco in the construction field. The foreign exchange risk for loans made by BNDE to CIH with IBRD funds has been borne by the Bank of Morocco (which carries the risk for all BNDE foreign exchange loans). CIH's clients can obtain foreign exchange licenses up to the amount of the "BNDE element". 50. As of June 15, 1970, 12 projects had been financed under the arrangement with CIH, for an amount of DH 21.7 million. CIH hopes to submit 10 additional projects to BNDE for IBRD funds out of loans 660-MOR equivalent to DH 9.6 million. State Programs Managed by CIH 51. In addition to its regular operations, CIH manages for the State's account three loan programs of low-cost social housing; they are financed by State advances on special terms for low-income borrowers. CIH assumes no risk and earns a management commission of 3/4 of 1% on amounts outstanding (earlier it amounted to over 2%); this commission is more than sufficient to cover CIH's expenses for its work. Only one of these programs is active; two are running down. The active one is OPRS (Opera- tion des Prets - Regime Special) which provides cheap housing to specific categories of borrowers. CIH's involvement is limited because the day-to- day operations of this program are handled by the State-controlled Banques Centrales Populaires, which has a wide regional network of branches. CIH retains only a supervisory role and handles delinquencies. As of June 30, 1970, the OPES program represented 82% of the outstanding commitments of the three State programs, and amounted to DH 92.7 million. 52. CIH operates another State fund, which on June 30, 1970 amounted to about DH 3 million and is used to guarantee commercial bank advances for the modernization of the fishing fleet. CIH receives a fee of 3.5% per annum. On June 30, 1970, Clii's guaranteesamounted to nearly DH 0.5 million. The fund appears as a liability in CIH's balance sheet.  - 15 - V. CIHIS FINJANCIAL POSITION Balance Sheets 53. CIHts accounts were audited for the first time in the sumwer of 1969. This was done on a suggestion by the Bank, and performed by Price Waterhouse/Casablanca. The Price lWaterhouse audit covered only CIH0s 1968 accounts, with a "businessmants review" of the 1967 accounts. CIH's accounts were accepted with only very minor exceptions. Comparative balance sheets for 1967, 1968 and 1969 are shown in Annex 5. Accounts prior to 1967 cannot be reconciled with the recent statements because (i) CIH's own programs were commingled with those it managed for the account of the State and (ii) the portfolio showed amounts contracted rather than outstanding amounts disbursed. A summary follows of CIH's recent balance sheets (in DH million): Dec. 31, Dec. 31, Dec. 31, 1967 1968 1969 Assets Current assets 40.20 42.67 46.93 Long-term loans 112.56 157.00 216.56 (of which hotel loans) (61.1) (102.7) (155.36) Other assets 1.58 3.68 4.04 Total Assets 154.34 203.35 267.53 Liabilities and Net Worth Current liabilities 9.73 18.28 19.54 Long- and medium-term debts 122.43 162.41 224.32 Share capital 20.00 20.00 20.00 Reserves 2.18 2.66 3.67 Total Liabilities and Net WJorth 154.34 203.35 267.53 Total assets of CIH have increased over the past two years by almost 75%, while hotel loans grew by more than 150%. 54. Current assets as of December 31, 1969, contained relatively little cash and liquid items. So far, however, CIHRs liquidity needs have been taken care of by the Banque du Ilaroc where CIH can mobilize notes, when needed, up to a ceiling of DH 85 million. As shown in Annex 5, current assets also include "State debts" of over DH 19 million, resulting from the comming- ling of the State's with CGH1s own funds. The result of this commingling was that CIH was funding with its own resources a social housing program that it was administering for the account of the State. The debt of DH 19 million was uncovered when CIH reorganized its accounting procedures in 1967 and has since been recognized by the State. CIII now receives on this amount interest at 6;i per annum.  - 16 - 55. Another debt of the State, amounting to DH 2.9 million (in- clduing interest of about DH 1 million), is reflected in the long-term assets 1/. It represents loans made to former French landowners whose properties were taken over by the State after Moroccan independence. The Goverrnment has also acknowledged this debt and has budgeted repayment in 1970. 56. The foregoing balance sheets are net of provisions for delinquent accounts which, in accordance with CIH' s practice, are established for the full amount of delinquencies. (Paragraph 64 refers to the practice.) As of December 31, 1969, these provisions amounted to DH 7.3 million, in- cluding DH 2.3 million for arrears in housing loans and DH 4.1 million for arrears in hotel loans, of which about DH 3 million is attributable to projects sponsored by CDG (see paragraph 67). Also, as mentioned in paragraph 39, the Ministry of Finance owed CIH interest rebates which until the beginning of 1970 were usually paid late. On December 31, 1969, rebates receivable amounted to DH 4.9 million, or 92% of the total amount of interest rabates for 1969. 57. The impact of the various debts owed by the State or by enter- prises in which CDG is importantly involved, as noted in paragraphs 54 to 56 above, was the following situation at the end of 1969: DH '000 State debt stemming from social housing program 19,220 Arrears on farm loans 2,954 Arrears on CDG-sponsored loans 2,782 Rebates receivable 4,859 Total 29,815 These debts represented more than 10% of ClIH's total assets as of December 31, 1969 and were larger than CIHPs net worth of DH 23.7 mil- lion. Arrangements have been made during negotiations for a satisfactory plan for elimination of these debts, as noted in paragraph 67. 58. Until now CIH has been able to borrow with ease the resources it requires through CDG and the Banque du l4aroc. On December 31, 1969, medium- and long-term borrowings covered nearly 100% ofCIH's outstanding long- term loans, and the ratio of long-term debt to equity, which was only 5.5-1 at the end of 1967, exceeded 8:1 at the end of 1969. With consider- able business in sight, CIH must borrow substantial additional amounts. The pressure to borrow will be the greater because, as a result of the Decem- ber 1968 law, the average duration of CIHi's loans has grcwn to roughly 12 years, whereas the average repayment periods on its own borrowings are only about 9-10 years. 1/ The principal on this debt has been fully covered by provisions.  - 17 - Income and Expense Statements 59. CIH's income and expense statements for 1967, 1968 and 1969 is shown in Annex 6. CIH enjoys no tax privilege I/ and pays income tax on net earnings ranging between 40% and 48%. At the end of 1969, gross earnings before deduction of expenses amounted to 8.95% of average total assets. Average cost of borrowed resources was 4.03%. A summatr of CIH's income statement for 1969 follows (in DH million): A of Gross % of Average Amount Income TItal Assets Gross Income 21.08 100.00 8.95 Less: (i) Financial expenses (9.49) (45.02) (4.o3) (ii) Administrative and general expenses (4.02) (19.07) (1.71) (iii) Provisions for doubtful accounts (2.70) (12.81) (1.14) (iv) Taxes and investment reserve (2.62) (12.43) (1.11) Net Profit 2.25 10.67 0.96 1969 net profit amounted to about 11% of year-end share capital and 9.5% of year-end net worth. Administrative and general expenses of DH 4.02 million (compared to DH 3.23 million in 1967) included personnel for DH. 1.6 million, general administrative epenses for DH 1.8 million and depreciation of fixed assets for DH 0.7 million. Appropriation of CIH's 1969 earnings included a statutory dividend of DH 1 million and a supplementary dividend of DH 0.6 million; total dividends corresponded to 8b of share capital and resulted in a pay-out ratio of 71o of the 1969 net profits. This is a high ratio v given the need to build up CIH's net worth. 60. The impact of provisions for doubtful accounts, large in 1968, was even larger in 1969. Evaluation of Portfolio 61. On December 31, 1969, CIH had a long-term portfolio of DH 227.2 million (including DH 3.4 million of maturities payable within one year and DH. 7.1 million of loans receivable). This portfolio was spread over four lending programs, as follows: a. Hotel loans, which represented DH 162.9 million (72% of the total portfolio). Since 1962, when it started, this program has been the fastest growing part of CIH's portfolio, with an average growth of 75,6 per annum. / Provisions from bad debts are treated like a normal expense.  - 16 _ b. Medium-cost housing mortgage loans, which amounted to DH 61.3 million (27% of portfolio). This is the old CIH program and was the largest part of it until 1967, when the hotel program overtook it. c. Rural housin loans,which amounted to DH 2.6 million of port- folio (1.3$ of portfolio). Very important before 1960, this program is no longer operational and the portfolio has since been run down; two years ago, this activity was taken over by the Caisse Nationale du Credit Agricole. d. War damage program, also discontinued, representing an insignificant portion of CIH's portfolio. 62. In CIH's active hotel loans as of December 31, 1969, about three- quarters of the amounts of loans were for four- and five-star hotel projects; furthermore, such loans were individually large, i.e. 15 loans were over DH 5 million each (all of these but one were granted after 1967). CIH's housing portfolio of DH 61 million was scattered over more than 1,700 loans. 63. In addition to the special case of the farm loans in arrears (see paragraph 55), on June 30, 1969, long-term loans totalling DH 46.5 million (2Wa of total portfolio) were in arrears. Among these, hotel loans amounted to DH 38.0 million (23$ of hotel portfolio) and housing loans to DH 10.5 million (17% of housing portfolio). The actual arrears totalled DH 7.3 million, including DH 4.7 million for hotels, DH 1.6 million for housing and DH 1 million for rural loans. 64. The foregoing represents amounts in arrears for five months or more. In addition, DH 3.4 million was overdue on June 30, 1969 for less than five months. Like some other financial institutions in Morocco, CIH puts no particular pressure on clients for prompt payment of debt. Maturities overduie are not considered as delinquent if they are paid within six months and are not even classified as arrears until five months have elapsed. The only action taken by CIH during this period is the mailing of reminders every two months. When classifying overdues as arrears, CIH makes full provision for them against its income and charges penalty interest. Follow-up on arrears has not been energetic. 65. CIH has never experienced a loss on the resale of a mortgaged house or apartment. CIH considers the prospects for recovery in housing arrears satisfactory. 66. In view of the good record on housing loans, CIH's risks rest essentially with its hotel portfolio. In assessing this risk, account must be taken of (a) the value of the State guarantee covering about 60% of the face amounts of hotel loans, (b) the -eight of large loans for two hotel concerns sponsored by CDG, which together owed DH 32.6 million, and (c) the recent rapid growth of portfolio which includes new and large projects with long grace periods which are still in effect.  - 19 - 67. The position of the delinquent loans for the two CDG-sponsored hotel projects in the portfolio required prompt settlement. A settle- ment of these arrears and of the two other Government debts to CIH provided a test the Government's guarantees on CIH's hotel loans. During negotiations with the Bank, CDG and the Government agreed to a settlement. On CDG- sponsored hotel loans, a repayment will be made before December 1970 for the larger delinquent loan,on which nearly DH 3 million is overdue;while on the other loan, involving a foreign investor,a court action will be filed if an amicable settlement is not reached sooner. On its own debts the Government has agreed to repay CIH in installments; the arrears on farm loans will be entirely repaid before the end of 1970; and the State debt stemming from social housing program will be reduced to DH 12 million at the end of 1970, DH 6 million at the end of 1571 and to zero by the end of 1972. 68. Excluding the amounts overdue on the CDG-sponsored loans, amounts actually in arrears on hotel loans (about DH 2.2 million) appear to be un- important. But one has to take into account CIH's limited experience in financing and following up hotel projects, and the fact that a sizable proportion of CIH's hotel projects is still under construction. Until follow-up procedures are functioning properly, a better assessment of Miorocco's tourism market is available, and more CIH-financed hotels are operating, a portfolio review has to be focused on the actual defaulters rather than on potential problems. On this basis, the figure of 3-4%h of outstanding hotel loans affected by arrears is not bad. VI. BUSINESS OUTLOOK 69. CIH's business in the next few years will, as in the pasts be over- whelniingly loans for housing and hotels. CIH will have to continue adminis3- tering the OPRS social housing program for the State, but this 411 have little impact on CIH's organization and finances. Housing Business 70. Though the shift towards hotel loans is expected to conti- nue, housing loans-are likeyv to remain significant. The more liberal housing loan criteria introduced in June 1969 have already resulted in an increase in the number and value of applications presented to CIH. In part responding to pent-up demand, applications in 1969 and in the first six months of 1970 totalled DH 615 million, more than four times the total for 1968. For this reason, CIH expects a particularly high level of housing loan commitments in 1970. Though housing commitments in 1967 and in 1968 were low (at DH 12.1 million and DH 13.6 million respectively), it is not unreasonable to foresee commitments rising to DH 25 million each in 1970 and in 1971. Achievement of the 1S70 figure will be facilitated because 1969 approvals include loans for large programs of the Compagnie Generale Immobi- liere and the Sucreries Nationales, which will be committed in 1970.  - 20 - Hotel Business 71. Based on the hotel applications now in its hands, a large number of which have already been subjected to some scrutiny, CIHPs program from mid-1970 through the end of 1971 calls for financing 30-35 hotels, including four large hotel complexes. These hotels will have about 10,000 beds, and will be built over the period from mid-1970 through 1974. Given the his- torical average construction period of two years per hotel and the continua- tion of CIH's roughly 52 contribution to total hotel investment in the country, the CIH program implies that Morocco will have about 20,000 additional hotel beds ready for occupancy by the winter season of 1973-74. This also implies that Morocco is likely to achieve its planned target of 50,000 hotel beds by the end of the present five-year plan period, 1972. 72. On the basis of the number of beds alone, CIH's program and its implications seem reasonable. If Morocco realizes the present estimate of 750,000 stop-over visitors in 1970 it should, with effective promotion and organization, be able to reach 1 million in 1973. On the basis of this figure and an average stay of nine nights per visitor, an occupancy ratio of 50% seems attainable. This level has been exceeded in Tunisia but is generally accepted as good where traffic tends to be seasonal, as is the case in Morocco, especially in the North. 73.. About 40/O of CIH's hotel projects fall into the three-star cate- gory or below; over 40% are four-star hotels. Though less pronounced than before, high categories still loom large in CIH's hotel program. The total investment required for the projects for which CIH will make commitments in the next 1& months should be around DH 260 million or about DH 26,000 per bed. This average is only slightly below that of the previous plan period (1965-67), but the reduction is in fact greater when account is taken of the roughly 20, increase in hotel construction costs since then. Nevertheless, it remains particularly important that CIH carefully investi- gate the occupancy forecasts and the construction costs of its projects, especially in hotels of higher categories. 74. CIH's hotel investment program to the end of 1971 calls for commitments of DH 127 million, in the achievement of which the principal risk of short-fall would be the failure or postponement of one or another of the large hotel complexes referred to above. This sum represents about one half of the total cost of the projects. Roughly one-third of the total cost of hotel investment is attributable to imported goods and equip- ment. Thus, about two-thirds of CIH's financing is used to cover the cost of imports. 75. The foregoing estimates of CIH's business, plus additional fore- casts for 1972-74, are reflected in the following table, which compares actual approvals, commitments and disbursements from 1967 to date and fore- casts for the next four and one-half years.  - 21 - Approvals Commitments Disbursements Housing Hotel Housing Hotel Total Housing Hotel Actual 1967 12.7 114.5 12.1 50.0 67.1 n.a. n.a. 1966 15.7 37.7 13.6 45.9 59.5 12.1 40.1 1969 19.3 52.6 20.3 93.o 114.1 19.9 78.6 1970(6mos)14.3 16.1 11.0 14.8 25.5 10.5 25.5 Estimate 1970(6mos)10.7 43.9 14.0 47.2 61.2 15.5 44.7 1970 25.0 60.0 25.0 62.0 67.0 26.0 73.2 1571 25.0 70.0 25.0 60.0 105.0 28.0 79.3 1972 30.0 60.0 26.0 70.0 98.0 30.0 70.7 1973 30.0 70.0 26.0 60.0 106.0 30.0 80.0 1974 30.0 70.0 30.0 70.0 100.0 35.0 80.0 July 1970-71 35.7 113.9 35.O 127.2 166.2 43.5 124.0 1972-74 90.0 220.0 86.o 220.0 306.0 95.0 230.7 Total 125.7 333.9 125.0 347.2 472.2 138.5 354.7 Resources Needed 76. Commitments from July 1, 1970 through 1971 will require DH 166 million. In addition, CIH needs DH 2k,.5 million to cover disbursements on commitments already made, making a total of DH 195 million. To cover this sum, it should have cash generation of about DH 10 million and it expects to obtain another DH 10 million from the proceeds of the most recent World Bank loan to BNDE. The proposed Bank loan would provide DH 50 million. CIH will then be left with a shortfall of DH 125 million. This it will seek to borrow. As in the past, CIH's principal source of capital is likely to be CDG and the Bank of Mlorocco, with 70-80% of the total coming from CDG. No doubt CIH will return to the Bank for an additional loan as soon as the proposed loan is fully committed. Full commitment may occur before the end of 1971 and the full loan should be disbursed by mid-1973, as shown in Annex 11. Whether or not CIH approaches the Bank for additional resources to complete the financing of its program until the end of 1971 will depend upon its ability to find other sources for the remaining finance it needs; but it will in any event return for assistance in financing the commitments forecast in 1972 and thereafter. Financial Projections 77. CIH's forecast of operations through 1974 are reflected in the financial projections shown in Annexes 7-10. CIH's long-term assets in the five-year period ending December 1974, will increase almost 3 times, mostly on account of hotel loans. 78. Profitability. As in the past, nearly all of CIH's income will be derived from interest payments, half of it from interest subsidies. Financial expenses are expected to be higher due to (a) the increasing weight  - 22 - of IBRD funds (including funds previously obtained through BUDE) and (b) the likelihood that funds borrowed in Morocco may become costlier; as a result, the average cost of borrowed long-term funds is expected to increase fromii 4.0% in 19'69 to about 5.h4o in 1973. Administrative expenses are expected to rise by 5-7% annually, a small increase in the face of the expected busi- ness increase. As a percentage of average total assets, administrative expenses drop from about 1.7,6 in 1569 to 0.7;6 in 1974. CIH's financial results are expected to evolve as follows: Gross Earnings Net Earnings after Interest and Taxes as >6 of as % of Average Share Average Average Total Assets Capital Equity Total Assets Actual 1969 8.95 11.25 9.01 0.96 1970 6.49 15.oo 12.05 1.G4 1971 8.60 19.97 13.80 1.03 1972 8.55 23.16 14.33 0.9u 1973 6.51 17.32 12.52 0.93 1974 8.50 19.h4 11.47 0.91 79. Financial Structure. In 1970, CIH forecasts medium- and long-term borrowings in excess of its disbursement needs and therefore its cash posi- tion is expected to improve. Furthermore, CIH has received assurance from the Government that it will pay the DH 1> million of State debt in 1970-72. In the first part of 1570, DH 5 million were already reimbursed by the Government. Consequently,- the current ratio through the end of 1972, arounting to more than 2:1, appears comfortable. Debt service co- verage offers a less attractive picture. Although interest cover- age would remain at about 1.7 through 1974, principal coverage is ex- pected to drop sharply in 1973 and 1974, to below 1.0. This deterioration of principal coverage is essentially due to the mismatching of the relatively long maturities on CIH's hotel loans with the shorter maturities of CIH's borrowings. Another striking feature in CIH's projections is the worsening of its capital structure. The ratio of long-term debt to net worth is ex- pected to increase from 8.LS in 1969 to 13.2 in 1972, levelling subsequently to about 11.0 after the contemplated share capital increase of DH 10 million in 1973. The present, to say nothing of the prospective, level is high, and calls for remedial measures. Such measures, described in paragraph 81 below., have been agreed during negotiations. 80. Care will have to be taken to assure that adequate provisions are made for bad debts. The housing portion of the portfolio should give no trouble in the future, as it has not in the past. But, as noted previously, the hotel loan portfolio has grown rapidly and will continue to do so; and it will be impossible to avoid losses even in the best of circumstances. Although a prudent assessment of loans in difficulty might suggest an amount of 10-15%o of the total portfolio, a substantial part is covered by  - 23 - government guarantees as well as by specific security. In the cirumstan- ces, bad debt provisions need to be made for only a fraction of the loans one would expect to be in difficulty. The provision made in the financial projections appear to be more than adeqaate and the excess could prudently be considered as part of CIH0s net worth. Iowever, this should be reviewed by CIH at the end of each financial year. 81. The projections focused attention on the problem of CIH's capital structure: the high level of senior debt and the imbalance between the maturity of CIH's fixed obligation and the maturity of its outstanding loans. During negotiations, various alternatives were considered to remedy these weaknesses in CIHi's financial structure and to give it a borrowing base large enough to permit the debt needed to finance the bu- siness expected in the next few years. The alternative of an immediate increase in share capital was not feasible, in view of the tight situation in the capital market of Morocco. Agreement has been reached between the Government, CDG and CIH on the following points: a. CDG would subscribe in 1970-1972 to DH 30 million of CIH bonds, on terms which would be equivalent to a 30-year loan, including 15 years of grace. b. In the event of liquidation of CIHI, these bonds would be subor- dinated to all debt incurred originally for a period of more than a year, including debt to the Banque du Maroc. co The Government would guarantee the execution of the foregoing arrangement. d. If the Banque du Maroc cancelled or reduced the facility avail- able to CIHi, tIh Government would provide long-term resources in an equivalent amount. e. To cover the debt service deficit of 1973-1974 as presently visualized, CDG would subscribe to additional 15-year bonds in the necessary amount. In view of the subordination arrangements, the new debentures issued to CDG could be considered adequate underp?nning for senior debt, and in the circumstances it would be appropriate for the Bank to consider that debt as part of the borrowing base, for purposes of calculating the limit of CIH's indebtedness. 82. Given these arrangements,.and the DH 10 million share increase which CIH plans in 1973, CIH would be able to meet all presently forecast deficits in debt service and the ratio of CIHIs long-term debt to its  - 24 - equity and subordinated debt would remain below 6. Given the nature of CIH's portfolio, which will continue to contain 20-25% of traditionally secured loans for dwelling, this ratio appears prudent, and the proposed loan agreemend would fix 6 as the limit. CIH would be contractually obliged to manage its affairs in such a wTay as to assure that no further deficit or imbalance arises. In the light of the discussions that have taken place w-Jith CIH on these matters over the past year, and of the steps taken by CIH, by CDG, its principal shareholder, and by the Government, there is adequate reason to be ccnfident in CIH's willingness and ability to conduct its financial affairs satisfactorily. VII. CONCLUSIONS 83. In five decades of existence, CIH has accumulated considerable experience in housing finance. Only in the past few years has CIH turned increasingly toward hotel financing; in those years it financed about 52% of hotel investment in M4orocco. The Moroccan authorities consider CIH the main channel of finance for the development of this high-priority economic sector. The Government has therefore provided substantial re- sources to CIH and financial incentives to CIHPs borrowers. Considering the Government's interest and involvement, both directly and through CIHIS principal shareholders,and considering the composition of CIH's Board and Executive Committee, the Government obviously exercises considerable in- fluence over CIH. While this influence may from time to time have been reflected in specific investment decisions, there is reason to believe the Government wishes to see CIH develop as a strong and autonomous de- cisionmaking body, acting, of course, within the general limit of Govern- ment policy. The proposed financing by the World Bank and the arrangements made both in preparation for end in consequence to this association, par- ticularly in improving CIH's financial position and its appraisal and super- vision of hotel projects, should greatly enhance CIH's performance and hence increase its autonomy. As the Government desires Bank support for CIH, there is an opportunity, not only to provide finance for a key sector of the Moroccan economy, but also to strengthen CIH in the process. 84. Although CIH has made considerable progress in developing its hotel financing operations, further improvements are needed. To that end, arrangements have been made to strengthen staff, organization and proce- dures, especially in the Hotel Credit Department. Particular emphasis has been placed on: a. improving market studies and the assessment of occupancy estimates for individual hotel projects- b. safeguarding against cost excesses stemming from over- elaborate hotel design and construction methods;  - 25 - c. sharpening project evaluation criteria, particularly as regards (i) the professional ability of the hotel sponsors and management, and (ii) the minimum acceptable return on investment; d. intensifying follow-up on hotel projects, especially those in operation. CIH is also continuing its recent progress towards better and separate accounts for its hotel and housing operations, and recent evidence shows that CIH has become stricter in following up hotel arrears. 85. CIH housing portfolio is well protected, given both the security required and the market for housing. Hotel loans have a larger element of risk. Arrears affect about 25% of CIH's outstanding hotel loans but the bulk stems from loans to two companies sponsored by CDG. CIH's financial position is also affected by Government debts of over DH 20 million. Taking account of the arrangements made during negotiations for a settlement of these debts by CDG and the Government, CIlH's financial position appears reasonably sound, with adequate reserves to cover any losses that are now foreseeable. 86. CIH has achieved a substantial volume of lending both to housing and the hotels. In view of Morocco's attractions and the Government's support to the tourism sector, M.h has good hotel business prospects for the next few years. From mid-1970 through 1971, CIH expects to commit loans of over DH 166 million including DH 127 million for hotels. Because of the pipeline of projects before CIHI, and the expectation that the growth in tourism to Morocco will continue, CIH has a very good opportunity to realize its expectation and thereby to continue to make an important contribution to Noroccols growth. If it carries out its loan program through 1971, CIH will need new resources totalling about DH 1y5 million. As in the past, dirham resources would principally come from official sources. For the balance, CIH looks to the Bank. The proposed $10 million loan would cover about 30% of CIH's expected commitments through 1971, or 40% of its conmitments to hotels. The full amount of the loan will certainly be committed by the end of 1971, and probably much earlier. Disbursements should be completed by end of 1973. 87. To enable CIH to borrow the sums needed to finance its program, it must increase its borrowing base and must bring into balance its obligations and debt service. Suitable arrangements to this end have been made by CIH, CDG and the Government. Recommendations 88. In the light of the steps taken by CIH to improve its organization, procedure and financial position, and of the measures to which CDG and the Government have committed themselves, CIH is a suitable borrower. Since CIH would be a new borrower, and since it still has to effect improve- ments in its work, ClHts import financing needs should be covered only for approximately one year and a suitable amount would be $10 million  - 26 - (DH 50 million). The proposed loan would be disbursed to finance: a. 100% of the CIF cost of imported equipment, b. 65% of the cost of imported goods purchased in Morocco, and c. 11% of hotel construction costs, which has been estimated as its import component. Arrangements have been made for the Banque du Maroc to cover CIH0s foreign exchange risk. 89. The terms of the proposed loan would follow generally those of recent Bank loans made to development finance companies, including standard commitment charge. CIHIs senior debt would be limited to a maximum of six times a borrowing base consisting of its net worth plus subordinated debt. 90. A "free limit" of $100,000 would be set for investment projects above which the Bankts prior approval would be required for the use of Bank funds. An aggregate free limit at $2 million would be prudent. IBRD/DFC July 27, 1970  ALNNEX 1 MOROCCO CREDIT IiMMOBILIER ET HOTELIER Shareholders as of June 30, 1970 Number of % of Shares S hares Public Sector Caise de Depot et de Gestion (CDG) 42,008 26.26 Banque de Maroc 16,025 10.02 Banque Centrale Populaire 1,590 0.99 SOFAC 1,600 1.00 Societe Nationale d'Investissement (SNI) 2,000 1.25 Societe Centrale de Reassurance 2,000 1.25 Total 65,223 40.77 Private Sector La Providence 800 0.50 COMAR 1,600 1.00 Compagnie Marocaine de Credit et de Banque 6,ooo 3.75 Banque Commerciale du Maroc 1,000 0.62 Credit du Maroc 2,000 1.25 Societe Centrale de Banque 5,090 3.18 Union Maritime d'Outre-Mer 13,384 8.37 Unibank Marocaine 3,990 2.49 Banque Marocaine pour le Commerce et l'Industrie (BMCI) 2,000 1.25 Banque Marocaine de Commerce Exterieur (BMCE) 4,000 2.50 Societe de Banque du Maghreb (SBM) 7,000 4.37 Total 51,864 29.28 Others and individuals 47,913 29.95 GRAND TOTAL 160,000 100.00 IBRD/DFC July 15, 1970  ANNEX 2 Page 1 MOROCCO CREDIT IMMOBILIER ET HOTELIER Board of Directors and Executive Committee as of June 30, 1970 A, Board of Directors (Conseil d'Administration) Name (Age) Principal Position (Age) Chairman Caisse de Depots et de Represented by its Director General, Gestionk/ Mr. Abdel Kamel Reghai (31) Vice Chairman G. de Lavernette (70) Chairman, Societe Centrale de Banqae Directors Banque du Maroci/ Represented by Mr. Ahmed Bennani (4o) Union Bancaria Hispano Represented by Mr. Cella (35), Marroqui (UNIBAN) Director General Banque Centrale Populaire Represented by Mr. Hadj Omar Abdeljalil (65), President and Director General Compagnie Marocaine de Represented by Mr. Amine Benjelloun Credit et de Banque (40), Director General Ministry of Tourism Reg1 s Berland (60) Deputy Director General, Societe Centrale de Banque Yahya Ibn Toumert (36)1/ General Secretary, Caisse de Depots et de Gestion Victor Munier (65) Director General, Societe de Banque du Maghreb Kabir Skiredj (4o)1/ Head of Pension Department, Ministry of Finance Abdelhadi Alami (35)1/ Head of Insurance Department, Ministry of Finance Abbes Doukkali (38)1/ Director, Treasury Department, Ministry of Finance Abderrafih Bensouda (30)1/ Inspector, Ministry of Finance Saad Kanouni (30)1/ Inspector, Ministry of Finance 1/ Nominated by Government or Government institution.  ANNEX 2 Page 2 B. Executive Committee (Comite de Direction) Name (Age) Principal Position Full Voting Members Yahya Ibn Toumert (36)1' General Secretary, Caisse de Depots Chairman et de Gestion Victor Munier (65) Director, Societe de Banque du Maghreb Banque du Maroc- Represented by a Director Government Commissaire Mohamed Ibrahimi (35) Mihistry of Finance Non-Voting Secretary Mohamed Lazrak (33) Director General, CIH 1/ Nominated by Government or Government institution. IBRD/DFC July 15, 1970  MOROCCO: CREDIT IMMOBILIER ET HOTELIER ORGANIZATION CHART, SEPTEMBER 1969 BOARD OF DIRECTORS { ( Conseil d'Administration ) EXECUTIVE COMMITTEE Comite de Direction | DIRECTOR GENERAL ||SErCRETARIAT| (Laz rak )r BUREAU D'ORDRE H ~~~~~~~~~~~HOUSEKEEPING| I EPUTY DIRECTOR GENERAL ____ ____________ __ H ESNNEL| (Benkirane NNE DLINUECIES ( KARZAZI ) | | LEGAL ||FINANCIAL ADVISOR ADVISOR (SANTON]) (CHAMPAGNE) OPERATIONS DIVISION FINANCE DIVISION HOTEL CREDIT HOUSING CREDIT DISBURSEMENT INSPECTION CASHIER'S ACCOUNTS DEPARTMENT DEPARTMENT DEPARTMENT DEPARTMENT DEPARTMENT DEPARTMENT (TAHiRI ) REGimE GENERAL (REALISATION) ( LAALEJ) ( BENMLEH) ( SLAOUi) (AOUCHRIA) JOMIER) z 7 m X December 12,1969. IBRD - 4611(3R)  ANNEX 4 MOROCCO CREDIT IMMOBILIER ET HOTELIER Resources as of December 31, 1969 Termination of Date Loan Repay- Net Amount!/ Interest Contracted ment Period (DH'00) Equity Share Capital 2/ 20,000.0 Reserves and Surplus- 5,263.0 Total Equity 25,263.0 Borrowings (i) LT Bonds placed with CDG 503.0 4.o% 1947 1982 574.0 5.0% 1948 1983 62.5 5.5% 1948 1970 4,lo4.7 6.5% 1950 1981 1,010.0 6.5% 1950 1970 12,000.0 5.5% 1965 1975 26,ooo.o 6.0% 1967 1982 27,980.0 6.0% 1968 1983 10,000.0 6.o% 1969 1984 (ii) Other LT Bonds 15,720.0 6.25% 1969 1984 97,954.2 (iii) Banque du Maroc 85,000.0 3.5% 1969 n.s. (iv) Medium-term Bonds 30,000.0 4.75% 1968-9 1973-4 (v) BNDE Loans (IBRD Loan 571-MOR) 17,886.9 7.00% 1966-9 1983 Total Borrowings 230,841.1 Other Resources (i) Guarantee Funds for Fishing Fleet 3,176.9 (ii) Advances from Treasury 260.0 3,436.9 Total Resources 259,541.0 1/ Net of repayment and including principal payable within one year. 2/ Before allocation of earnings. IBRD/DFC July 15, 1970  M O R O C C O CREDIT IMMOBILER ET HOTELIER Suqm7 Bl Shoots aee t Deoemr }1, 1S67 to 1969 (in thousands of dirhams) Dec. 31, 1967 Dec. 31. 1968 lec. 31. 1969 Dec. 31. 19