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. Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
Transcript
Document ofThe 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 DivisionMaghreb and Iran DepartmentMiddle East and North Africa Region
This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld Bank authorization.
BCM Banque Commerciale du MarocBCP Banque Centrale PopulaireBMCE Banque Marocaine du Commerce ExterieurBMCI Banque Marocaine pour le Commerce et l 'IndustrieBNDE Banque Nationale pour le Developpement EconomiqueCDM Credit du MarocEMI Electrical and Mechanical IndustryITPA Industrial and Trade Policy AdjustmentMCI Ministry of Commerce and IndustrySSI Small Scale IndustrySAL Structural Adjustment LoanSGMB Soci&e Generale Marocaine des Banques
FISCAL YEAR
July 1 -June 30
Vice President Mr. Kemal DervisDirector Mr. Daniel RitchieDivision Chief Mr. Amir Al-KhafajiResponsible Staff Mr. Lorenzo Savorelli, Financial Economist
Mr. Ahmed El-Hamri, ConsultantMs. 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
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 theperformance of their official duties. Its contents may not otherwise be disclosed withoutWorld 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 IndustrialFinance Project (IFP). This project consisted of eight loans, of which seven were to private sectorcommercial banks, and one to a state-owned development bank. The original amount of the loans totaledUS$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 thePrivate Sector, Finance, and Infrastructure Division, Country Department I, of the Middle East and NorthAfrica 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 notcomplete) information on subprojects provided by each of the borrowing banks. The report has bee,n sentfor comments to the Government of Morocco and to the participating banks.
(i) The Industrial Finance Project (IFP) was part of a series of Bank projects and programsdesigned 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 supplyresponse of Morocco's export industries to the new set of incentives and policies introduced under theGovernment's economic reform program. The project's goal was to assist the Government of Moroccoin improving the financial and managerial capabilities of industrial firms operating in the export, as wellas the domestic market. Ninety-five percent of the total loan amount was disbursed over the life of theproject.
Project Objectives and Design
(ii) The objectives of the IFP were to: (a) expand and upgrade the base of Moroccan exporis andreduce the balance of payment constraints by financing investments in export oriented activities, as wellas import substitution and tourism projects; (b) promote the development of competitive market-basedfinancial institutions; and (c) strengthen the institutional framework within which financialintermediaries and other institutions concerned with export promotion operate.
(iii) The project consisted of several credit lines totaling US$170 million, which were granted toseven commercial banks and a state-owned development bank. The lines of credit were to be usedproactively by these participating banks over a commitment period of 2.5 years. The lines of credit, inturn, were extended to industrial firms to finance a variety of subprojects in the export sector. Subloanswere 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-orientedinvestments, of which up to 20 percent were for the tourism sector. Public enterprise financing waslimited to 15 percent of each credit line. A maximum of 10 percent of each line of credit was to bedevoted 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 wereto onlend the funds in local currency at the prevailing interest rates for medium and long-term credit toindustry and tourism. Eligibility criteria for the subprojects included: (a) equity should represent at least30 percent of total investment costs, and (b) project should have an internal rate of return of at least 12percent.
Evaluation of Objectives
(v) The IFP had a very balanced approach to promoting the expansion and rr.odernization ofMorocco's export industry. The project emphasized, but did not exclusively target, the investment needs
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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 betweenfirms 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 toefficiently onlend the funds to industrial firms that were embarking upon an upgrading of theirproduction and export capacity. However, specific project objectives should have been defined in regardto the sectors targeted with the greatest export potential, as well as those firms with highest integrativecapacity to integrate domestic inputs. In this light, performance indicators should also have been definedin 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 commitmentand disbursement of the credit lines was essentially due to the high demand for medium to long-termfinance in the manufacturing sector, as well as to the substantial experience in term lending acquired bythe participating banks in previous Bank-financed operations. Over 70 percent of the original loanamount (US$119 million) was disbursed by the end of FY91, far exceeding the Bank's original estimateof 6 percent. By February 1992, 95 percent of the funds had been committed and the loan was 95percent disbursed (US$162 million), with a total of 129 allocations. Five percent (US$8 million) wascanceled.
(viii) In terms of targeting performance, the sectoral distribution of the subloans did not fully reflectIFP's original expectations. Most subloans went to industrial activities in traditional sectors, such asclothing and textiles, and food and beverages, which absorbed 66 percent of the funds. Servicesaccounted for only 3.7 percent of allocated credit. Tourism, originally targeted for 12 percent ofallocations, represented only 0.4 percent of the loan distribution. These investments have led mostly tothe expansion of productive capacity and targeted primarily small to medium enterprises. Due to thelack 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 subloansduring subsequent periods until the IFP came due. The recycling of funds did not occur, however, inpart because the Bank did not properly supervise and implement this aspect of the project. IFP loans hadrepayment terms of up to 20 years, and subloans had 5-10 years of maturity. After the initial subloanswere made, the participating banks did not have a mechanism to assist in the identification of newinvestment 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, theGovernment of Morocco started accumulating arrears in the payment of its share of the foreign exchangecosts of these loans in 1995-1996, thereby causing a slowdown in disbursements near the end of theproject.
(xi) Project sustainability. The limited information available does not allow for an evaluation ofproject sustainability. The lack of recycling of funds by the IFP may have undermined its long-termobjectives. 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 theproject design, project objectives may be compromised in the long run.
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(xii) Bank/Borrower performance. The absence of detailed reporting requirements for theBorrowers, proper monitoring of individual participating banks in their loan administration, as well asmore 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 theimplementation phase. As for the Borrowers, they were able to capitalize on their disbursementexperience 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 committedexpeditiously and met with substantial disbursement success. Subprojects that benefited from the loansfulfilled Bank criteria, and had higher rates of return (ranging from 15 to 50 percent) than the minimumrequired under the eligibility rules. PBs are financially sound, as documented by their audited financialstatemets and have moved to meet Basle criteria for bank risk-adjusted capital and provisioningrequirements. They have benefited from Bank's assistance in implementing sound financial managementof the subloans. Furthermore, BNDE was able to improve its accounting transparency and soundness asa result of Bank supervision. Based on the assessment of the PBs, this project resulted in a substantialgrowth of their credit allocation to exporting firns. However, the lack of recycling of funds has resultedin several unexpected early loan repayments. Given this assessment, the project achieved the statedobjectives within an acceptable level of success. It should however, be noted that the rating wasformulated and based upon limited information.
Immediate Portfolio Action and Lessons Learned
(xiv) The experience from IFP has provided valuable lessons for designing of the investmentcomponent of the subsequent FSDP (Financial Sector Development Project), which was approved in1991 and is still ongoing. The banks participating in FSDP were considered capable of undertakingmost subprojects without the prior approval of the Bank. Second, as financial sector reforms were beingimplemented, and given the sound financial condition of the banking system, more weight was placed inFSDP 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 wasconsidered sufficiently efficient and market-determined to justify greater flexibility in regard toeligibility criteria for individual subprojects.
(xv) In regard to the financial management aspect of the credit lines, IFP's experience has confirmedthat these are complex financial products requiring continuous supervision to ensure effectiveness of theinvestments. The recycling nature of credit line programs, in particular, requires that supervision andassistance to the borrowing banks be closely monitored; otherwise, recapitalization of the participatingbanks 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. Thisrecycling aspect must be based on participating banks' managerial and administrative performance ofsubloans, as well as on their capability to be proactively involved in identifying investmentopportunities. 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 eligibilityconditions 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 ofmacroeconomic 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'sindustries to the new set of incentives and policies introduced under the Government's economic reformprogram. The IFP aimed at helping the Government of Morocco continue improving the financial andmanagerial capabilities of industrial firms operating in the export as well as domestic markets. Theobjectives of the project were to: (a) expand and upgrade the base of Moroccan exports, and reducebalance of payments constraints, by financing investments in export-oriented industrial firms, efficientimport-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 institutionsconcerned 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 commercialbanks and a state-owned development bank, BNDE (Banque Nationale pour le DIveloppementEconomique). The individual allocations to be disbursed to each of the participating banks were asfollows: 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$12million; Wafabank US$17 million; BMCI (Banque Marocaine pour le Commerce et l'Industrie) US$12million; 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 acommitment 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 developmentof exporting skills of Moroccan private enterprises (financing of public enterprises was limited to 15percent of each credit line). Sectoral targeting included manufacturing, industrial support services, andtourism. PBs were to allocate at least 60 percent of the funds to export-oriented investments,2 of whichup to 20 percent were in the tourism sector. A maximum of 10 percent of each line was to be devoted tothe financing of equipment of leasing companies for use by industrial firms. In order to maximize thecatalytic 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 mediumand long-term credit to industry and tourism. Within these criteria, credit allocation was to be marketdetermined, 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 totalinvestment 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 additionalproduction 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 intomanufacturing -- since the mid 1980s. The IFP was part of a series of Bank projects and programs insupport of Morocco's adjustment efforts in these areas. Before the IFP, this assistance strategy had beenfollowed by a number of Bank-financed operations: (a) two Industrial Trade and Policy Adjustmentloans (ITPA), in 1984-85, for a total of US$350 million; (b) the US$25 million Electrical andMechanical Industry project (EMI), in 1985; (c) the US$240 million Public Enterprise RationalizationLoan (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 economyand putting it on a higher growth path.
5. The liberalization and adjustment measures supported by these programs were already showing apositive impact by the second half of the 1980s. Macroeconomic and financial sector reform hadsignificantly rationalized the incentive structure in the industrial sectors, thus allowing a strong supplyresponse in the manufacturing sector to export and import liberalization. Manufactured exports grewrapidly in response to the new policy environment -- 9 percent p.a. in 1984-88 -- and were instrumentalin 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 ifMorocco were to maintain sustained growth. Given the high levels of capacity utilization in exportindustries -- estimated at over 70 percent in 1989 -- such expansion required additional investment, hencelong-term financing.3 Strong demand for long-term investment had been reflected in the rapidcommitment of the 1987 IEFP loan. IEP was rightly aimed at meeting such demand, which hadcontinued throughout 1988 and 1989. Moreover, it should be pointed out that the loan was made at timeduring Morocco's stabilization program when foreign exchange shortage was a real issue, with reservesdown to one month of imports in 1989. At the time, this was a important rationale for the loan and alsoexplained 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. In1989, only 15 percent of companies in the sector employed more than 100 workers, yet they produced 76percent of total manufacturing output, and accounted for 87 percent of all manufactured exports.4 Byputting a cap on the maximum size of subloans (US$5 million), IFP implicitly targeted enterprises ofsmall 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 ofMorocco's export industry. The project emphasized, but did not exclusively target, the investment needsof the export sector. Companies with forward linkages with the export sector (i.e., that provided inputsto exporting firms), were equally targeted, with the objective of stimulating dynamic backward andforward linkages between firms producing for the domestic market and those producing mainly forexport. This was expected to be conducive to an expanded industrial base and sustained economicgrowth. 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 Bankreport no. 12947-MNA, October 1994
4 Ibid.
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B. ACHIEVEMENT OF OBJECTIVES
Disbursement Performance
8. Lines of credit under the IFP were utilized very quickly. The success in the pace of commitmentand disbursement of the credit lines was due to the high demand for long-term finance in themanufacturing sector, as well as to the substantial experience in term lending acquired by BNDE and theparticipating commercial banks in previous Bank-financed operations. These included the alreadymentioned 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 loanamount (US$119 million) had been disbursed by the end of FY91, exceeding the Bank's originalestimate of 6 percent. By February 1992, 95 percent of funds had been committed, and the loan was 95percent disbursed (US$162 million) with a total of 129 allocations. Five percent (US$8 million) of theloan was canceled (see Table 4 in Part II of this report).
Targeting Performance
9. Sectoral targeting. The sectoral distribution of the subloans did not fully reflect IFP's originalexpectations, as Table I shows. Most subloans financed industrial activities in traditional sectors such asclothing and textiles, and food and beverages, which absorbed 66 percent of the funds. Services (mostlyin support of industry) only accounted for 3.7 percent of allocated credit. Tourism, originally targetedfor up to 12 percent of credit line allocations, accounted for a minimal share of the funds (0.4 percent).The sectoral distribution of IFP subloans can be compared with the overall distribution of bank credit inMorocco in 1991-95.5 Banking credit in this period focused largely on short-term funding (67 percentof all credit, with medium and long-term credit at 16.9 and 16.4 percent, respectively). In the short-termcredit categories, food industries accounted for 9.5 percent of total funding, textiles and clothing for 14percent, and trade for 21 percent.
Table 1. Subloans distribution by sector
Subloans Subloans(US$) (percent of total)
Clothing and Textiles 68,559,883.33 42.35Food and Beverages 38,898,420.22 24.03Other Industries (1) 47,763,601.76 29.51Services (2) 5,978,584.58 3.70Tourism 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 allowthe 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).
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not provide the Bank with details on the export content of subprojects, since such detailed reporting wasnot specifically requested in the loan conditions. With regard to the sub-borrowers (rather than thefinanced subprojects), these were mainly SMEs in the export sector, in line with IFP's objectives (seeTable 2).
Table 2. Credit allocations according to firm characteristics
Number Subloan amountof firms percent (US$ million) percent
Total investment in all industriestotal production (DH mn) 11,079 10,276 82,80 11,278 14,194new products (percent) 30.98 35.77 37.96 34.07 29.49expansion (percent) 69.02 64.23 62.04 65.93 70.51
Source: Annuaires Statistiques du Maroc, 1993-96.
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11. Type of production financed by the subloans. As Table 2 (based on incomplete data receivedfrom the PBs) indicates, most subprojects were used to finance increased capacity in existingproductions, 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 industrialcapacity (67 percent, against 33 percent for new production). Expansion was particularly strong in theagro-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 jobcreation (45 percent of all jobs created in industry in 1991-95), followed by the chemical industry (20percent).
Investment performance
12. Explicit investment performance indicators at the subproject level were not established orincluded in the reporting process for the project. With no systematic reporting, monitoring, andsupervision at the subproject level, it is not possible to judge the success and impact of the project interms of investment performance at the micro level. Assessment of project success depends crucially oninformation on the actual performance of the subprojects in terms of production sold domestically andexported, productivity and job creation, financial and managerial performance (i.e., resources devoted toimprovements 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- andinter-industrial linkages, and employment). Concerning export performance, export volume can be usedas a benchmark for achievement of project objectives, but they are by no means the only measure ofsuccess, since (a) product quality, delivery, pricing, and distribution systems are also meaningfulbarometers of export success; and (b) external factors such as trading partners' policies may affect tradevolume (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 necessarilymean higher export volumes but can result in much healthier margins and/or better products. Financialreturn criteria should also be considered carefully when looking at investment performance, sinceinvestments 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 asmarketing and quality are also involved. Finally, the 30 percent equity benchmark is more of an inputcriterion, 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 northwestregions, which account for over 74 percent of the Moroccan population, received 84 percent of thelending. The center, with Casablanca as its industrial pole, received the largest share of the loans. Thepoorer, more arid, and less populated south generated minimal investments.
15. Credit allocation and regional bank expansion. The branch network of the PBs went from 578to 765 branches -- an increase of 187 -- during the IFP implementation period (1991-95). BCMaccounted for 35 percent of the increase -- its branches went from 117 to 183, with 20 in the centralregion 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
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34 (see tables in the Annex). These expansions were concentrated mostly in the central region and thenorthwest of Morocco, in line with regional economic activity.
Table 4. Regional distribution of subloans
Number of Loan amount Share of loan Share of total PopulationRegion subprojects (DH million) amount population growth
(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 regionalindustrial 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, thenumber of industrial firms increased by 200 entities (i.e., 3.3 percent), of which 95 were in the centraland northwest regions. Over this period, exports of manufactured goods from all firms in the central andnorthwest regions represented 75 percent of total manufacturing exports, with an average growth rate of8 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 moderatesuccess for firms in entering the manufacturing sector, since production increased by about 3.9 for thesame period.7 Data reported in the Annex similarly show that investment growth was negative in fourregions in 1991-94, though the national rate was slightly positive. This might explain the difficultiesfaced by PBs in recycling IFP funds.
Morocco: Regional industrial activity, 1991-94Growth 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 interftnmlinkages.
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C. MAJOR FACTORS AFFECTING THE PROJECT
17. Factors subject to the implementing agencies' control. PBs have been instrumental inexpediting the utilization of the Bank loans for the financing of investment subprojects, in terms of bothcommitment and disbursement. The banks' previous substantial experience in term lending, acquiredunder 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 collectionand reporting mechanisms have prevented PBs from fully benefiting from the learning curve of theselending 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 envisagedloan amounts, with most of the financing needs concentrated in the textiles and agro-industries sectorswhere Morocco had a comparative advantage. Second, Morocco was experiencing a severe balance ofpayments crisis and foreign exchange shortage and, as a result, Moroccan exporters had difficultyobtaining capital (and foreign exchange) for the purchase of imported productive machinery andequipment.
19. Loan-to-investment considerations. The IFP loans had repayment terms of up to 20 years. Thesubloans had five to ten years of maturity, according to information data provided by the PBs; the loanagreements 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. Amore timely intervention from the Bank in this matter could have helped enhance the optimal utilizationof funds by the Borrower.
20. Factors subject to the Government's control. The Government of Morocco acted as Guarantorfor all credit lines and agreed to facilitate the utilization of the Bank loans by sharing the foreignexchange risk embedded in the credit lines. During 1995 and 1996, however, the Government startedaccumulating arrears in the payment of its share of the foreign exchange costs of these sources offinance, thereby causing a slowdown in disbursements.
D. PROJECT SUSTAINABILITY
21. Available information does not allow for a full assessment of project sustainability. The firstobjective of the project, to expand the base of manufactured exports, was not specified in terms of itsimplications 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 exportperformance of subprojects financed under the IFP was in line with the overall relative increase inmanufactured exports, objectives can be considered relatively achieved based on the satisfactory pace ofutilization 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 constraintto sustainability. In fact, little progress was made in two areas of reform which were crucial to thedevelopment of exports, namely measures benefiting indirect exporters (the exporters'suppliers) andtrade facilitation.
23. With regard to the IFP's second and third objectives, which consist, respectively, of supportingthe development of competitive market-based financial institutions, and strengthening the institutional
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capabilities of financial and other institutions concerned with exports, project sustainability cannot befully 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 objectivewould have been achieved on more permanent basis if a supportive institutional framework allowingfinancial 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 isdependent on the long-term effects of investments on industrial structure, and on domestic and exportmarkets. Furthermore, it may be argued that economic sustainability was not optimized because ofdeficiencies in supervision and recycling of funds.
E. BANK PERFORMANCE
25. Project identification was satisfactory, however, preparation and appraisal were deficient. Theproject met the Government's development objectives by tackling structural imbalances in thesupplyside of the export sector, by helping industry respond more rapidly to the broad adjustmentpolicies 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, onlytwo supervision missions took place during the implementation phase, and more detailed reportingrequirements for the Borrower at the level of subprojects, a closer monitoring of individual bank loanadministration, and in general a more proactive supervision would have allowed the impact of thisoperation to be maximized and made it more sustainable. On the other hand, the project disbursed veryrapidly and effectively: by 1992, all credit lines were almost fully committed. This partly explains thelimited supervision effort between 1991 and 1996.
F. BORROWER PERFORMANCE
27. The Borrowers' performance was in general satisfactory. PBs have shown good performance interms 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 wasdifficult 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. Theirexperience in project evaluation proved useful in selecting subprojects according to eligibility criteriaoutlined in the loan agreement. The services provided to the sub-borrowers by the seven privatecommercial banks were generally considered satisfactory by the banks' clients, but BNDE's loanprocessing was found rather slow. Industrial firms were affected by tightening of the banks' creditrequirements, particularly with regard to collateral (a direct result of the application of the bankingprudential regulations introduced in 1993). In this regard, firms suggested that in evaluating investmentproposals, banks put more emphasis on expected returns and development potential than on collateral. Itwas also proposed that banks give more information on the range of sources of financing which could beoffered 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 providingforeign exchange risk coverage (as discussed in para. 19), the cancellation of US$8.1 million (5 percentof 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 totransform short-term resources into medium to long-term lending without having to utilize foreigncurrency lines of credit.
29. PBs audits were generally found to be satisfactory. However, in the case of BNDE, the auditwas rated unsatisfactory, since its financial performance had been weakened by the large arrears of theMinistry of Finance in terms of coverage of foreign exchange losses.8 Moreover, utilization of the creditlines by BNDE was slower. This was in part due to (a) BNDE's own procedures, implying a higher levelof 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 committedexpeditiously and met with substantial disbursement success. The project achieved the stated objectiveswithin an acceptable level of success. The IFP resulted in a substantial growth of credit allocations to theexport sector. Furthermore, increases in sales volumes, returns, and employment by the sub-borrowersreflected a positive impact of the IFP strategy. More timely instructions to the Borrowers by the Bank onrecycling of funds, and on monitoring the project and subloans would have positively affected projectsustainability.
31. The loan was instrumental in getting the banks audited by independent external auditors. Thiswas a big point of contention at the time of negotiations. It led to more reliable and accurate financialreporting, and was the first step towards moving to international standards of prudential norms andregulation (supported by the subsequent 1991 operation). The PBs acknowledge even now that the Bankraised their own appraisal standards through the subproject review system. The institutional developmentassessment 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 componentof the subsequent FSDP, which was approved in 1991 and is still ongoing. The US$235 FSDP (FinancialSector Development Project) is a hybrid project consisting of an adjustment component (US$125million) supporting a program of reforms in the financial sector; and an investment component (US$110million) providing long-term financing to private firms through credit lines to seven commercial banksand BNDE. The amounts of the loans to the participating banks -- the same banks that participated inIFP -- 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, theparticipating banks were considered mature enough to undertake most subprojects without the ex-anteapproval of the Bank; only project proposals for over US$2 million require Bank review and approvalunder FSDP. Second, as financial sector reforms were being implemented, and given the sound financialcondition of the banking system, more weight was placed in FSDP on improving the ability of Moroccanbanks to eventually eliminate the need for government-guaranteed foreign financing. Cofinancingthrough 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 andmarket-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 withIFP pointed to the need for BNDE to become more competitive and commercially viable in the rapidlychanging Moroccan financial environment. FSDP design also includes technical assistance in support ofBNDE's efforts in this area.
34. In regards to financial management of the credit lines, IFP's experience has confirmed that theseare complex financial products requiring continuous supervision to ensure effectiveness of theinvestments. The recycling nature of credit line programs, in particular, requires that supervision andassistance to the borrowing banks be tight; otherwise, recapitalization of the participating banks throughlong-term, government-guaranteed funds would, again, be the unintended result. FSDP has a mixedrecord in this area, with the participating banks building on a modest recycling capacity earned inprevious Bank operations, and supervision still lacking. More thorough and frequent FSDP supervisionin the future -- beyond its closing date in end-1997 (end-1998 for BNDE) -- will be crucial to ensure thatthe lines of credit are effectively recycled into new investment projects and have the intendeddevelopmental 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 0Sector Policies 0 3 0 0
Financial Objectives Q 0 0 0Institutional Development I 0 0 0
Total l 5,450,1871 11I,784,2641 138,464,1051 156,353,671 160,937,925 161,876,972 - 170,000,000Total Percent 3.21| 69.87 81.451 91.97] 94.67| 95.22|
Figure 4: Loan Disbursements-31360-31367Graph: Cumulative actual percentages
100.00 =90.00 S
80.00
70.00 ' L31360j
L3136060.00 L16
Z so oo - Z 7/ r > ",~~~~~~~~~~~~~~~~~~~~0 L31362 -- P--L3136350.00L316
V -L31364
Q 40.00 -- O-L31365iniL3 1366
30.00 ~L31367
20.00 /
10.00
0.00.
FY90 FY91 FY92 FY93 FY94 FY95 FY96
Years
Loan Account as of March 31, 1997Loan Number: 31360
Region Name: MIDDLE EAST AND NORTH AF Country: MOROCCOCountry Dept: Office of the Director Borrower: NAT. BANK FOR ECO. DEVELOPMENTLoan Type: P - POOL LOAN Lending Type: P - PROJECT LENDINGLoan Status: 8- OTHER Lending lust: FIL - FINAN INTERMED LNLoan Rate: VLR 89- 6.94 Sector: FX - FinanceCommitment Ccy: USD Project: 5458 - INDUSTRIAL FINANCE
Approval: 5-Dec-89 First Repay: 15-May-95 Latest Disb/Adj Date: 13-Dec-93Agreement: 7-Feb-90 Last Repay: 15-Nov-09 Closing: 30-Jun-96Effective: 7-Jun-90
Loan Account as of March 31, 1997Loan Number: 31361
Region Name: MIDDLE EAST AND NORTH AF Country: MOROCCOCountry Dept: Office of the Director Borrower: BANQUE CENTRALE POPULAIRELoan Type: P - POOL LOAN Lending Type: P - PROJECT LENDINGLoan Status: 8- OTHER Lending Inst: FIL - FINAN INTERMED LNLoan Rate: VLR 89 - 6.94 Sector: FX - FinanceCommitment Ccy: USD Project: 5458 - INDUSTRIAL FINANCE
Approval: 5-Dec-89 First Repay: 15-May-95 Latest Disb/Adj Date: 25-Aug-94Agreement: 7-Feb-90 Last Repay: 15-Nov-09 Closing: 30-Jun-96Effective: 7-Jun-90
Loan Account as of March 31, 1997Loan Number: 31362
Region Name: MIDDLE EAST AND NORTH AF Country: MOROCCOCountry Dept: Office of the Director Borrower: BANQUE COMMER. DU MAROCLoan Type: P - POOL LOAN Lending Type: P - PROJECT LENDINGLoan Status: 8- OTHER Lending lust: FIL - FINAN INTERMED LNLoan Rate: VLR 89 -6.94 Sector: FX - FinanceCommitment Ccy: USD Project: 5458 - INDUSTRIAL FINANCE
Approval: 5-Dec-89 First Repay: 15-May-95 Latest Disb/Adj Date: 16-May-95
Agreement: 7-Feb-90 Last Repay: 15-Nov-09 Closing: 30-Jun-96
Effective: 7-Jun-90
Loan Account as of March 31, 1997Loan Number: 31364
Region Name: MIDDLE EAST AND NORTH AF Country: MOROCCOCountry Dept: Office of the Director Borrower: BANQUE MAR. POUR LE COMM. ET L'INDUSTRIELoan Type: P - POOL LOAN Lending Type: P - PROJECT LENDINGLoan Status: 8- OTHER Lending Inst: FIL - FINAN INTERMED LNLoan Rate: VLR 89 - 6.94 Sector: FX - FinanceCommitment Ccy: USD Project: 5458 - INDUSTRIAL FINANCE
Approval: 5-Dec-89 First Repay: 15-May-95 Latest Disb/Adj Date: 7-Dec-94
Agreement: 7-Feb-90 Last Repay: 15-Nov-09 Closing: 30-Jun-96
Effective: 7-Jun-90
Loan Account as of March 31, 1997Loan Number: 31366
Region Name: MIDDLE EAST AND NORTH AF Country: MOROCCOCountry Dept: Office of the Director Borrower: SOC. GEN. MARO. DE BANQUESLoan Type: P - POOL LOAN Lending Type: P - PROJECT LENDINGLoan Status: 8- OTHER Lending Inst: FIL - FINAN INTERMED LNLoan Rate: VLR 89 - 6.94 Sector: FX - FinanceCommitment Ccy: USD Project: 5458 - INDUSTRIAL FINANCE
Approval: 5-Dec-89 First Repay: 15-May-95 Latest Disb/Adj Date: 10-Jul-91Agreement: 7-Feb-90 Last Repay: 15-Nov-09 Closing: 30-Jun-96Effective: 7-Jun-90
Loan Account as of March 31, 1997Loan Number: 31367
Region Name: MIDDLE EAST AND NORTH AF Country: MOROCCOCountry Dept: Office of the Director Borrower: WAFABANKLoan Type: P - POOL LOAN Lending Type: P - PROJECT LENDINGLoan Status: 8 - OTHER Lending Inst: FIL - FINAN INTERMED LNLoan Rate: VLR 89 - 6.94 Sector: FX - FinanceCommitment Ccy: USD Project: 5458 - INDUSTRIAL FINANCE
Clothing- Food and Other Tourism Servicesi _____-- Textiles Beverages Industries
26
Table 6: List of Sub-Projects
Legend:* _ confirmed by the borrower actual data report and matching the IBRD disbursement data base.* F file missing* INA - data unavailable* NA - non-applicable* In Column I - Number of the sub-project (projects are listed in alphabetical order).* In Column 2 - Code attributed to Sub-project* In Column 3 - Beneficiary of Sub-loan* In Column 4 - Sector of the economy* In Column 5 - Location of sub-borrower headquarters* In Column 6 - Export or Domestic oriented. If available, the percentage of export-oriented
component* In Column 7 - Large or small enterprise. Large are considered enterprises with amount of sales more
than Dh 150mm in "ann6e de croisiere'* In Column 8 - Project Cost in mDH* In Column 9 - Sub-loan Amount in mDH* In Column 10 - Description of the sub-project pursuant to two variables. The first deals with either
Production, Distribution, or Both. The second variable deals with either Quality (improvement),Expansion (of existing capacity), or Creation (of new products). The third variables appears whenthere is a combination of two of above variables (e.g., Expansion and Improvement).
* In Column 11 - Employment reflects the number of created jobs* In Column 12 - IRR - Internal Rate of Return of Sub-project• In Column 13 - Amount disbursed in mDH* In Column 14 - Amount disbursed in mUSD* In Column 15 - Terms of agreement with the bank: interest rate and term of the loan* In Column 16 - Outstanding Amount if any* In Column 17 - Loan Status (OK, restructured, non-performing)* In Column 18 - Revenues in mDH("annee de croisiere" or yearly data if available)* In Column 19 - Net Income in mDH("annee de croisiere" or yearly data if available)* In Column 20 - Cash flow in mDH ("annee de croisiere" or yearly data if available)* In Column 21 - Status of Financials classified as either Normal, Restructured or Liquid.* In Column 22 - General comments
N Code Clients of Bank Centrale Populaire Project1 2 3 4 _6 7 8 9 10 I11 12
Sub-Cost. Loan
Name Sector City E/D L/SME mDH mDH Descrip. Empl. IRR_ I IXF6 X . . : 0 confect Rabat E SME 12.0 7.0 exp/prod 682 1 IXF8 : confect Tanger E SME 16.0 10.0 exp/prod/new 1123 IIXF13 .a alimentaire Ait Melloul 100% SME 13.5 7.0 prod/new 17 30%4 I IXF4 A c . .v . alim/cons Agadir E SME 3.1 2.0 prod/exp 525 IIXF12 Benecof confect Fes 75% SME 15.5 9.0 prod/new 656 1 IF4 floi is Gazeuzes alim/boiss Agadir D/E L 26.0 7.0 prod/exp 60 26%7 I IXFIO 10 d+confect Fes 60% SME 4.3 2.2 prod/exp/new 180 40%8 I IXF14 pqiYcde s Mm Tanger SME 0.69 l IF5 Conservr 4o Marrukech alim/cons Marakech >90% SME 4.2 2.9 prod/exp 60
10 IIXI&31X5&51X2 12F indust/medic Fes 100% SME 52.3 35.3 prod/new 40% s
11 I IXF7 t confect Rabat 90% SME 19.0 12.0 prod/exp/impr 37% e
12 IIXF6 Macuitex confect Marrakech 90% SME 7.5 4.0 prod/exp 16813 ILI Mabret . Cas L 219.0 9.614 1IF3 $l3 indistr/const Marrakech D/E SME 9.9 6.5 prod/exp/new 24%15 1 IF2 Oa indistr/condit Casablanca D SME 16.0 11.0 prod/exp 1516 I IXF9 R confect Casablanca E SME 6.2 3.0 prod/new 0 19%17 IIXFI "db,t' indist/const Marrakech D SME 13.5 9.5 prod/new 3018 I IXFI 0&41XFI1 Tannerie Ibnou Sina industr/peaux Marrakech 50% SME 8.7 3.5 prod/new 50 21%19 I IXF3 agroalim Marrakech 100% SME 3.0 1.4 prod/exp 12720 41XF2& IXFl I agroalim/cons Marrakech 100% SME 16.7 11.7 prod/new 364 25%
Total 449.7 143.5
Total Amount Approved by IBRDFl - file incompleteFM file missingM subproject fulfillment confirmed by actual bank report
Two actual bank reports are missing (BNDE and BMCE)
3136-1
Loans (disb) Financials mDH |Comments
13 14 15 16 17 18 19 20 21 22
mDH mUSD Terms O/S Status Rev. N.I. Cash flow Status7.0 0.8 12%/67 78.0 9.2 11.1
Name Sector City E/D L/SME Cost. mDH mDH Descrip. Empl. IRRI 41XF6 Filor confection Casablanca E SME 11.5 6.8 exp/prod/new >50%2 41XFI Gecotex confection Casablanca E SME 21.8 15.2 exp/prod/new 61%
5 41XF7 MCS agroalim/cons Kenitra 100% SME 12.1 7.0 prod/exp 32%6 411 S agroalim/boiss Casablanca D/E L 25.0 17.0 prod/exp/impr 45 61%7 41FI agroalim/boiss Casablanca D/E SME 11.0 7.5 prod/exp/impr 30 33%8 31F6&41F2 agroalim/oil Fes E SME 5.6 3.9 prod/new 0 16%9
10
Total 86.9 57.4
Total Amount Approved by IBRD
2806-4Loans(disb) Financials mDH Comments
13 14 15 16 17 18 19 20 21 22
mDH mUSD Terms O/S mDH Status Rev. N.I. Cash flow Status0.4 12%/3 124.838 3.713 11.0960.8 12%/7 28.5 7.294 10.545
Agreement Section Covenant Present Original Revised Description of Commentstype status fulfillment fulfillment covenant
date date c
Loan 3.02 (a-b) 3 C NA NA Borrower shall make Sub- Satisfactory compliance.Loans under set criteria of theProject.
4.01 (b) I CD yearly Borrowerto providetheiraudited Providedwith delays.financial statements no later thansix months after the end of eachyear.
4.01(c) 9 C yearly Borrower to fulfill its obligations Satisfactory complianceregarding statements ofexpenditure (reporting and l
auditing).
Covenant types:I. Accounts/audits 8. = Indigenous people2. = Financial performance/revenue generation from beneficiaries 9. = Monitoring, review, and reporting3.= Flow and utilization of project funds 10. = Project implementation not covered by categories 1-94.= Counterpart funding 11. = Sectoral or cross-sectoral budgetary or other resource allocation5.= Management aspects of the project or executing agency 12. = Sectoral or cross-sectoral policy/ regulatory/institutional action6. = Environmental covenants 13. = Other7.= Involuntary resettlement
8. Present Status:C = covenant complied withCD = complied with after delayCP= complied with partiallyNC = not complied with
Table 8: Bank Resources: Missions
Performance RatingStage of Month/ Number of Days in Specialized Staff Implementation Development Types ofProject Cycle Year Persons Field Skills Represented Status Objectives Problems
Supervision 02/20/90 1 10 Task Manager The rating has been The development Timeliness of audit02/92 l 8 Financial Analyst satisfactory impact has also been reports02/92 1 8 Economist throughout the satisfactory.
11/95 3 14 project supervision
Completion 06/24/96 1 10 Task Manager
45
Table 9: Geographical distribution of subloans: by provinces
