Document of TheWorld Bank FOR OFFICIAL. USE ONLY PROJECT COMPLETION REPORT MOROCCO ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) JUNE 28, 1993 Industry and Energy Division Middle East and North Africa Department I Africa Region This document has a restricted distribution and mag be used by recipients only in tbe performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS At the time of Project Appraisal (December 19841 - 1 US$ 8.5 DH ACRONYMS AND ABBREVIATIONS BCM Banque Commerciale du Maroc BCP Banque Centrale Populaire BdM Banque du Maroc BMCE Banque Marocaine du Commerce Extgrieur BMCI Banque Marocaine pour le Commerce et 1'Industrie BNDE Banque Nationale pour le DBveloppement Economique CDG Caisse de DBp6ts et Gestion CDM Credit du Maroc CMCB Compagnie Marocaine de Credit et de Banque DH Dirham EM1s Electrical and Mechanical Industries ERR Economic Rate of Return FRR Financial Rate of Return MCI Ministry of Commerce, Industry and Tourism OD1 Office pour le DQveloppement Industriel SA Special Account SGMB Societe Gdnerale Marocaine de Banques SNI SociBtB Nationale d91nvestissement SSIs Small-Scale Industries FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Office of Director-Qeneral Operatlons Evaluation June 28, 1993 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT I SUBJECT: Project Completion Report on Morocco - Electrical gnd Mechanical Industries Proiect Coan 2487-MOR) Attached is the Project Completion Report on Morocco - Electrical and Mechanical Industries (EMI) Project (Loan 2487-MOR) prepared by the Middle East and North Africa Regional Office. Part I1 was prepared by the Borrower. The PCR is of very good quality. It is well documented and provides a frank and thorough account of the implementation experience. The problems encountered in the implementation of this project are attributable to a change of policy focus in Morocco which resulted from the economic crisis in the early 1980s and the subsequent need for a stabilization program during 1983-84. With the shift in the Bank's lending from specific industrial subsectors to more general lines of credit and the introduction of trade liberalization as a part of two Industrial and Trade Policy Adjustment loans during 1983 and 1985, much of the built in support for the EM1 project was also diluted. Furthermore, procedural problems such as the setting up of a Special Account with a character other than a revolving fund and insufficient supervision led to the slow approval and disbursement of the EM1 subprojects. When the loan closed at the end of 1991, some $8.9 million (35.4%) of the loan was cancelled. Due to the non-availability of data about the subprojects it is hard to amve at definite conclusions with respect to the achievement of the project objectives. The PCR states that: "the project did not result in a sustainable framework for the development of the EM1 sector" because "the sustainable development of EMIs in Morocco will require a clear-cut industrial sector strategy covering, inter alia, the EM1 sector, and the commitment of government to this strategy". Although the project may have increased the efficiency of the financial sector intermediation, the studies program to identify EM1 investment projects was never initiated. The project is, therefore, rated as unsatisfactory with uncertain sustainability. It appears to have had partial institutional development impact. Notwithstanding the experience with this project, the EM1 may still be a subsector which can be developed to supply the EEC market as sub-contractor because of low labor cost in Morocco. In order to achieve this, the country needs to strengthen its technological base, especially in helping the private sector to improve its technological capability. In addition, it may need to revisit its trade policy with respect to the electromechanical industries. An audit is planned. Attachment This document has a restricted distribution and may be used by recipicnls only in the performance of their oficial duties. ILPcontents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USE ONLY PROJECT COMPLETION REPORT MOROCCO ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) TABLE OF CONTENTS PAGE NO . PREFACE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . i EVALUATION SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . iii PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE . . . . . . . . . . 1 Project Setting . . . . . . . . . . . . . . Project Preparation. Design and Organization Project Objectives and Description . . . . . Project Implementation Experience . . . . . Project Results . . . . . . . . . . . . . . Sustainability of Project Achievements . . . Performance of the Bank . . . . . . . . . . Performance of the Borrower . . . . . . . . Consultant Performance Project Relationships Project Documentation ... ... ... ... ... ... ... ... ... ... ... Conclusions and Lessons Learned . . . . . . PART 11: PROJECT REVIEW FROM BORROWER'S PERSPECTIVE . . . . . . . 21 PART 111: STATISTICAL INFORMATION . . . . . . . . . . . . . . . . Table 1 Related Bank Loans Table 2 Project Timetable .. .. .. .. .. .. . . . . . . . . . . . . . . . . . . . . . . . . Table 3 Cumulative Disbursements . . . . . . . . . . . . . . . Table 4 .... Implementation Indicators . . . . . . . . . . . . . . Table 5 . Project Coats . . . . . . . . . . . . . . . . . . . . Table 6 Project Financing . . . . . . . . . . . . . . . . . . Table 7 .. ProjectResults . . . . . . . . . . . . . . . . . . . Table 8 . Status of Major Project Covenants . . . . . . . . . . Table 9 . Use of Staff Resources . . . . . . . . . . . . . . . . Annex 1 Set-up and Use of the Special Account . . . . . . . . . . 32 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 . PROJECT COMPLETION REPORT MOROCCO ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) PREFACE This is the Project Completion Report (PCR) for the Electrical and Mechanical Industries Project in Morocco (EMI) for which the Board made a US$ 25.1 million loan in January 1985. The Bank disbursed a total of US$ 16.2 million out of a total of US 25.1 million (65%) and cancelled the remaining US$ 8.9 million (35%). The Industry and Energy Division of the Middle East and North Africa Region (MENA) prepared Parts I and I11 of the PCR. The Borrower prepared Part 11. The preparation of Parts I and I11 is based on information available in the Bank's project files, including the Staff Appraisal Report, the President's Report, supervision reports, as well as discussions with various staff associated with the project. PROJECT COMPLETION REPORT MOROCCO ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) Proiect Settinq i. Morocco's 1981-85development program recognized electrical andmechanical industries (EMIs) producing capital goods as an important industrial base for Morocco. But despite a promising market potential, these industries faced a number of constraints to their development, including a weak institutional framework for their promotion, a lack of sufficient engineering capacity and technical standards and an import protection structure which did not favor competition. During a four-year period (1978-841,the Bank and Moroccan authorities struggled to develop a viable project to obviate these constraints and pave the way for further EM1 sector development. The Bank appraised the Electrical and Mechanical Industries (EM11 Project initially in 1982 and did a post-appraisal in 1984. The project was approved by the Board in January 1985. Project Objectives and Descri~tion ii. The main project objectives were to support the efficient development of EMIs as a priority subsector in Morocco's development plan, promote long-term industrial lending, and strengthen the role of the Office de Developpement Industriel (ODI) in industrial promotion. In support of these objectives, the project consisted of: (a) a US$ 22 million line of credit to six commercial banks for an anticipated 40 eligible EM1 subprojects, (b) a subsidiary loan of USS3 million to OD1 comprising US$ 2.8 million for financing minority equity participation by OD1 in eligible EM1 enterprises, and US$ 200,000 to improve ODI's market analysis capability in the EM1 area through subsectoral studies. The loan also included a front-endfee of US$ 0.1 million, resulting in a total loan amount of US$ 25.1 million (para. 3-2). Imlementation Emerience iii. The implementation of the project experienced several problems. First of all, the economic setting changed and the Government began to focus on policies for export promotion rather than import substitution, which was the key sector strategy when the EM1 project was conceived. Second, in 1983-84 the Government had established a stabilization program to address the economic crisis that had resulted from a large public investment program and from diminished earnings from the export of phosphates, the county's major export commodity. These changes, combined with a subsequent shift in Bank lending from specific industrial subsectors to more general lines of credit, diverted the attention of the Government and the Bank away from the specific needs of the EM1 subsector. The project experienced delays in effectiveness, in disbursements and in meeting loan conditionality. Furthermore, the Bank did not devote sufficient attention to supervising the project, particularly in relation to the changing needs of the EM1 subsector. There also was some misunderstanding on the part of the Treasury, and within the Bank, concerning the use of the Special Account (para.4.8 and Annex 1). The Bank disbursed $16.2 million out of a total loan of $25.1 million and cancelled the remaining $ 8.9 million. The results of the project are outlined in para. 6.1. The performance of the Bank is summarized in paras. 7.1 and 7.2, and that of the Borrower in para. 8.1. The conclusions of project findings and lessons learned by the Bank and the Borrower are outlined in paras. 12.1 to 12.6. Sustainabilitv of Proiect Achievements iv. The project's main impact was in the financial sector due to its competitive onlending arrangement for the loan proceeds (paras. 3.2-3.3); previously, BNDE had held a monopoly in medium and long-termindustrial finance. This competitive arrangement has continued successfully with subsequent industrial finance projects, expanding the availability of medium and long-term funds for private investment in industry (para.6.1). The project, however, did not result in a sustainable framework for the development of the EM1 sector, given that : (a) the project design lacked a technical support and monitoring mechanism to promote and guide the private sector in establishing viable, competitive EM1 enterprises, (b) the implementation framework did not explicitly link EM1 sector development to overall industrial strategy throughout project implementation and (c) the supervisionprocess focussed more on financial sector than the industrial sector. As part of future EM1 strategy, it would be desirable for the Government to review: (a) the necessary steps required to' establish a framework for technical standards and quality control in the establishment of EMIs and (b)the problems EMIs have faced resulting from changes in macroeconomic and trade policy (para. 6.2). Lessons Learned bv the Bank A. Proiect Pre~arationand Desiun v. Avoid lending to highly technical induatriea without an institutional mechaniam for technology, technical atandardr and quality control. The project's final design did not provide a crucial component in the sustainability of EMIs in Morocco - -a framework for technical suppport and monitoring to guide the private sector in establishing viable EMIs for capital goods that could compete with imported products. The original design of the project included a component, which the Government ultimately rejected, for developing an institute of technical standards and quality control of EMIs. The establishment of such an institute may have encouraged more entrepreneurs to invest in EMIS by raising confidence in their ability to develop products which could compete with imported products. vi. Preaent a unified Bank poaition in the preparation of a project. The lack of a unified view in the Bank, combined with conflicting views in the Government on the project's objectives and content was disruptive to its preparation. The delay which resulted may have adversely affected project performance since the project originally was linked to an economic plan that had come to an end by the time the loan for the project finally became effective. vii. Make rure onlending arrangements for project fund8 are efficient and clearly delineated. In hindsight, it would have been more efficient to lend the proceeds of the loan for investment projects directly to the participating banks, giving them direct contact with the Bank in terms of project monitoring and performance evaluation. As it turned out, the Treasury, as the intermediary, was not set up to provide the required evaluation of subproject investment costs and benefits at the end of the project, as stipulated in the Loan Agreement. The Bank learned the importance of clarifying the set-upand use of Special Accounts at the time of project negotiations and identifying the parties responsible for this purpose within the Bank and on the part of the Borrower. Unfortunately, at the time of EM1 project negotiations, the Bank did not have a specific operational directive on special accounts. However, an operational directive, established in September 1990, now clarifies the purpose of SAs and specifies that the Task Manager, supported by the Loan Department and the Legal Department, has the lead responsibility to ensure that the procedures concerning the use of the SA are clear. These guidelines should help minimize some types of problems experienced with the Special Account for the EM1 project (para.4.8). Also, it would be useful for the Bank to evaluate, comparatively, the relative efficiency of locating Special Accounts for Morroco in a commercial bank, at the Central Bank or at the Treasury. B. Proiect Supervision viii. Continuously monitor the project in the context of its linkage to strategies for the overall industrial sector and the macroeconomy. When the focus of industrial sector policy shifted more toward export promotion, the Bank's approach toward lending shifted from support of individual subsectors geared toward import-substitution, to general industrial credit lines with export promotion objectives. During this transition, the Bank should have reassessed its strategy for EMIs and modified the project accordingly. ix. Make project ratings consistent with actual project performance. The Bank did not always rate the overall performance of the EM1 project appropriately (para. 7.21, especially given the major problems it experienced in meeting the objectives established for development impact on the economy, i.e, the numbers of projects financed, related jobs created, the promotion of the EM1 subsector by ODI, etc. If Bank's staff had flagged the project as having major problems earlier, management may have taken notice of them sooner and there may have been time to take action and improve project performance. x . Place greater emphasis throughout the supervision proces8 on the ultimate beneficiaries of credit line projects. The Bank supervised the EM1 project at the same time as several other credit lines, focussing mainly on the status of commitments and disbursements of the PBs for all three credit lines. As a result, the supervision phase of the project seriously neglected the industry side of the EM1 operation, especially the reported problems potential EM1 sub- borrowers were experiencing in competition with imports (para. 4.12) and the possible linkage of these problems with macroeconomic policy changes. The Bank finally began to address these problems only toward the end of the project and produced an informal report reviewing Bank support to Moroccan industry, including EMIs. However, since the report covered a variety of Moroccan industries, its analysis of EMIs was not detailed enough and its timing was too late in the implementation of the EM1 project to have any significant effect on project performance. xi. Monitor project covenant8 clorely and take actions to eneure compliance. In this regard, supervision work on the EM1 project did not consistently monitor the status of project covenants. For example, as noted at the end of the project, there were no audits of the Special Account on file and there were audit reports on only one of the PBs. The Bank should have been more diligent in obtaining these reports. Alsa, the Bank could have exercisedits authority under the Loan Agreement to reasonably request periodic progress reports on the subprojects so that by the end of the project, the Bank would have had a better idea about the impact of its lending on the ultimate beneficiaries and the subsector. xii. Maintain centralized, complete documentation on the project, ar well ae on the related eubprojectr. There were very few full supervision reports on file, especially for a project which experienced major problems, and the reports that were on file did not: (a)consistently monitor the status of project covenants, (b)report sufficiently the activities of OD1 in the execution of its role in the.' project or (c)provide sufficient information on the perfonnance of subprojects. To be useful each supervision report should be cumulative, so that at any given point in the supervision period the reader has the latest information on each aspect of the project. Lessons for the Borrower xiii. Aeeume ownerehip reeponeibility for project8 eupported by Bank credit line8. From the outset of the project, there was disagreement in the Government about the need for the project and its design. This disagreement, the lack of Government compliance with audit covenants, insufficient attention to actual subproject resulte, and the minimal participation of OD1 in the project all indicate a lack of Government enthusiasm for the project. The Government should have (a) paid more attention to the institutional aspects of the project and the related performance of OD1 and (b) arranged for a complete ex-post evaluation of the subprojects supported by the loan. xiv. Improve internal communications and communications with participating banke. As indicated in para. 4.15, the Treasury, as an agent of the Borrower, needs to improve its communications internally and with the participating banks. This was reflected in the fact that (a) the staff preparing Part I1 of the PCR did not appear to be fully aware of the project history and (b) the participating Banks expressed some confusion, during the implementation of the project, about the availability of funds from the Special Account. - vii - X V . Recognize the importance of technical atandarda, quality control, and enterprise promotion in conjunction with the availability of financing for EM1 development. The Government chose not to include a component for the development of a Technology Center and an institute of technical standards and quality control which would have helped guide the private sector in the development of EMIs. Given the technical complexity of EMIs, the Government should view the establishment of such an institute as a priority. Also, the Borrower should have encouraged ODI, as an implementing agency of the project to take a more active role in surveying the market and promoting EM1 development, since this work was an integral part of the project and could very well have improved the project's performance. PCR Recommendations xvi. The PCR recommends that if OED decide to do a project performance audit for this project that OED review, in particular, (a) the reasons for large concellations, by three participating banks, of funds allocated to them under the loan and (b) an ex-post review of subprojects financed by the proceeds of the loan. PROJEZT COMPLETION REPORT MOROCCO ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) PART I: PROJECT REVIEW FROM BANK'S PERSPECTIVE Pro1ect Name: Electrical and Mechanical Industries Loan No: 2487-MOR Sector: Industry Subsector: Electrical and Mechanical Industries Reqional Vice Presidencv: Middle East and North Africa PROJECT SETTING 1.1 Morocco's 1981-85development program recognized electrical and mechanical industries (EMIs) producing capital goods as an important base for Morocco'a overall industrial development. These EMIs numbered about 550 and consisted of foundries, metal products, machinery and mechanical equipment, transport equipment, electrical products and measuring equipment. Labor productivity .neasured by value added per worker was relatively high, about US$7,000compared to about US$3,000 in Tunisia. However, EMIs were at a very early stage of development - - accounting for only 9% of value added in manufacturing and 11% of employment. They were operating efficiently but met only 10-15) of domestic demand, facing tough competition from imports due to low effective tariff protection. As a result, local production of EM1 capital goods amounted to only DH 1400 million in 1981, compared to imports of DH 4500 million. There seemed to be a very strong market potential for EKIs given (a) about one fourth of imported capital goods could have been produced locally without major difficulty and (b)increased EM1 exports were expected to result from joint ventures between Moroccan firms and foreign investors. 1.2 Despite a promising market potential, EMIs faced a number of constraints to their development, including a weak institutional framework for their promotion and the lack of sufficient engineering capacity and technical standards to make these industries competitive with imports. In order to establish an EM1 sector which would provide the groundwork for further industrial development,the Government needed to survey the market for EM1 products and develop a clear strategy for improving technological standards, establish temporary selective protection from imports, and make available sufficient term financing. 1.3 The Government's main institution concerned with EMIs was the Office pour le dgveloppement industriel (ODI),a public agency under the supervision of the Ministry of Cormnerce and Industry (MCI). OD1 was in charge of promoting industrial development by preparing preinvestment studies, taking equity shares in enterprises and providing extension services to EMIs requesting assistance. A major weakness of OD1 was the lack of a sufficiently strong marketing capability. On the financial side, the major issue was the need to stimulate more medium-terninvestment lending for industry and encourage competition in the banking system. The national development bank, Banque Nationale pour le Developpement Economique (BNDE),was the major lender, accounting for about 42 % of investment credit. The remaining 58% was divided among commercial banks, supplier credits and leasing. 1.4 The Bank had been assisting financial institutions in industrial development through two loans for financing small-scaleindustry (SSI)projects through the commercial banks and BNDE. The SSI 1 loan (No.1687-MOR)of US$ 25 million was channelled through nine commercial banks and BNDE and closed in July 1984. The second SSI loan (2038-MOR),which became effective in February 1983, was channelled through eleven commercial banks and BNDE. The loan was fully committed before the appraisal of the EM1 loan, indicating a fairly high demand for industrial credit. Part 111,Table 1 provides a list of previous Bank loans. PROJECT PREPARATION, DESIGN AND ORGANIZATION Overview 2.1 During a six-year period (1978-84) , the Bank and Moroccan authorities. struggled to develop a viable project in the EM1 sector. In 1978, a consultant to the Moroccan Government completed a study on prospects for the development of foundries, the automobile industry and equipment goods. Subsequently, Bank missions identified a foundry project and a truck engine project, but these projects seemed to be too limited in scope. In 1980, the Bank surveyed the status of engineering industries in Morocco. 2.2 The Bank team for the 1980 survey recommended cooperation between the Bank and the Government in improving the institutional/policy set-up, financial assistance for restructuring the foundry subsector and the establishment of a TechnoPogical Center for engineering industries, to oversee standardization, quality control and technical assistance. 2.3 During 1981-82,the Bank further discussed the findings of the EM1 sector study with the Government, proposed a project which would consist of a US$ 25 million line of credit and US$ 9.5 million for technical assistance. However, project negotiations and Board presentation experienced considerable delay due to the time required to resolve four major issues: (a) the need for a credit line component; (b) on-lending channels for the loan proceeds; (c) institutional arrangements related to the project; and (dl the appropriate level of import protection. 2.4 Between August 1982 and May 1984, there were protracted discussions on these issues within the Bank and between the Government and the Bank. Finally the Bank appraised the project a second time in May 1984 and the Board approved it on January 15, 1985. Maior Iseuea 2.5 Need f ~ ra Credit Line Com~onent. During the first project appraisal (July 1982), Moroccan authorities expressed an interest in the policy and institutional aspects of the EM1 project but were hesitant about an EM1 credit line additional to existing lines of credit for industry, without a clear justification of the need for additional credit funds. They discussed partial implementation of the EM1 project through a BNDE credit line. Also, the authorities ware considering Government appropriations for institutional components, which would have obviated the need for such components in a Bank- financed EM1 project. However, the appraisal work finally was completed along the lines originally intended except for the issue of import protection, which was to be the subject of a September 1982 mission. The report of the appraisal mission focussed on a preliminary assessment of Morocco's need for foreign exchange funds for industrial investment, the fonn and extent of BNDE's participation in the project, the identification of technical assistance needs and the design of a component to meet them. The effectiveness of the BNDE IX loan was to be a condition for BNDE participation in the EM1 project. 2.6 The meeting on the project's decision memorandum agreed that an allocation of US$ 25 million was adequate for the credit component of the loan given the appraisal mission's minimum estimate of the foreign exchange needs, potential co- financing available and the need for a cautious approach in a recessionary period. The meeting also apprcved the proposed allocation of USS9.5 million for technical assistance and institutional support but suggested that the loan documents provide for reallocation of the loan proceeds in case the Government received grant financing for these items. 2.7 During 1983-84, discussions ensued on the design of the project, with major differences of opinion emerging between the Programs and Projects Divsisions of the Bank and among Moroccan Government authorities. The Programs Division backed BNDE in its skepticism about MCI's demand estimates for EM1 investment funds and the need for a specialized EM1 credit line in addition to industrial credit lines existing at the time. BNDE pointed to lagging commitments under the small-scale industry loan and substantial uncommittted funds under the BNDE IX loan as evidence of waning industrial investment demand, asserting that MCI's demand estimates were based on outdated assumptions used in the preparation of the 1981-85 economic plan. The Ministry of Economic Affairs and the Banque du Maroc also supported BNDE's position. The Bank's Programs Division, preoccupied with the preparation of the Industrial Trade Policy Adjustment Loan (ITPAL)preferred a small Technical Assistance project focussed on upgrading the institutional capabilities of BNDE and OD1 while meeting EM1 demand investment with existing industrial lines of credit. However, MCI aaintained its stand that a separate EM1 credit line was necessary to meet a foreign exchange gap. The Bank's Projects Division did a post-appraisalmission, reviewed investment demand estimates, supportedMCI1sfindingsand indicatedthat the financing gap for EMIs would amount to US$ 25 million during 1985-87. 2.6 Onlendins Arranqements for EM1 funds. During preparatory discussions for the EM1 project (June 19811, BNDE expressed a marked interest in the proposed prcject and was willing to play a substantial role in it as well as establish an internal unit specializing in EM1 subproject promotion and appraisal. However, a Bank review of the Project Brief (February 1982) noted BNDE's deteriorating financial position, which would affect its ability to absorb further Bank financing. During discussions with BNDE on its financial situation in March 1982, the Bank mentioned that it was shocked by BNDE's financial indicators at the end of 1981 and considered delaying the effectiveness of the BNDE IX Loan and suspending disbursements on BNDE VIII. The report of the project appraisal mission (August 1982) noted that the effectiveness of the BNDE IX loan would be a precondition for BNDE participation in the project. 2.9 A telex concerning BNDE participation in the project (January 1983) indicated that BNDE would be willing to participate in EM1 financing but, in financing EM1 projects from BNDE IX funds instead of a separate EM1 credit line, BNDE would not be willing to share BNDE IX funds with the commercial banks. The position of the commercial banks was not clear yet. In March 1983, the Bank reached a preliminary agreement with BNDE and the Moroccan authorities for onlending EM1 credit line funds. First, BNDE was to earmark part of the BNDE IX credit line to EM1 projects, meeting the same eligibility criteria as those under the EM1 credit line. Second, there was to be a reduction in the amount of the EM1 credit line mentioned in para. 2.8. If the commercial banks were not able to commit the entire amount, it would be available for use by BNDE, but only after BNDE had committed the funds earmarked from BNDE IX. 2.10 As in the case of project design (para. 2.71, there were also discussion in the Bank and in the Moroccan Government concerning the most appropriate on-: lending arrangements for the proceeds of the EM1 loan. MCI and the Treasury favored an expanded role for corrunercial banks considering the weaknesses of BNDE in financial organization and management, as well as deficiencies in its economic and market evaluation of subprojects. In fact, MCI, in particular, was concerned about the continuing monopoly of a weak institution for medium and long-term lending to industry. Thus the Project's design proposed placing selected commercial banks on equal footing with BNDE. BNDE viewed any further strengthening of the commercial bank's role as a threat to its continued survival. Therefore, BNDE proposed instead that it finance EM1 subloans from the existing BNDE IX loan. Then, after these funds were exhausted in two to three years, the time would be appropriate to plan a new project under the aegis of BNDE. The Bank's former Projects Department and the Ministry of Industry also felt that BNDE should onlend and administer the funds for EM1 but the Programs Department felt that the proposal would not be consistent with the policy objective of improving the efficiency in financial intermediation. 2.11 Other Institutional Aspects. In July 1981, the Government requested a Project Preparation Facility for feasibility studies to create a standardization and control agency for the industrial sector, and establish, within MCI, a planning and policy unit as well as an engineering and contracting unit. However, the Government subsequently received French assistance for feasibility studies on the standardization and control agency. Also, in late 1981, a public engineering firm was created as a joint venture of OD1 and the major Moroccan sugar mills. As a result, the Government revised its PPF request in April 1982 for US$200,000 to create the planning and policy unit within MCI. 2.12 Imwort Protection for EMIs. During project preparation one of the policy objectives that emerged with the EM1 project was the development of enterprises which could manufacture projects domestically at a price no greater than 120% of the price of comparable imports. However, the establishment of a special import tax (SIT) constituted a de fact0 devaluation of the Dirham. There was general agreement that quantitative restrictions should be abolished but there was some disagreement about whether or not additional protection of 20% would be justified on infant industry grourlds. The issue was to be dealt with in the context of industrial trade policy work in connection with the Industrial Trade Policy Adjustment Loan (ITPAL). In December 1983, the Ministry of Finance furnished the Bank with a Letter of Development Policy in connection with this loan. This statement set forth the Borrower's protection policy for industries and a description of the new system of protection was referred to in a supplementary letter attached to the Loan Agreement. The system called for a phased lowering of tariff rates not to exceed 25% by 1988. However, the Government was to examine requests for protection carefully and, if required, generally provide protection through tariffs and not quantitative restrictions. In exceptional cases, the Government would grant protection based on quantitative restrictions for the manufacture of new products, subject to a three-year limit, based on rigorous economic and financial analyses demonstrating project viability. 3. PROJECT OBJECTIVES AND DESCRIPTION Obiectives 3.1 The main project objectives were to support the efficient development of EMIs as a priority subsector in Morocco's development plan, promote long-term industrial lending,and strengthen the role of OD1 in the promotion of investment in EMI. Comonents and Loan Allocation 3.2 The Bank made a loan of US$ 25.1 million covering the following two components (US$ 25 million) plus a front-end fee (US$ 0.1 million)' (a) a line of credit of US$ 22 million on-lent to comercial banks to finance investment enterprises in the EM1 subsector; (b) a subsidiary loan of US$ 3 million on-lent to ODI, including US$ 2.8 million to finance equity participation in eligible enterprises in the EM1 subsector, and US$ 0.2 million for financing technical assistance consisting of (i) studies to identify EM1 investment projects and (ii) market analysis of investment products. I/ The figures on the breakdown of the USS 25.1 m i l l i o n are based on the SAR, rounded to the nearest USS 0.1 million. I t should be noted that i n Schedule 1 of the Loan Agreement the breakdoun of the loan proceeds i s as follows: USS 19.4 m i l l i o n i n subloans t o cunnercial banks for investment projects; US$ 2.4 m i l l i o n to 001 for investment for investment projects; US$ 0.2 m i l l i o n t o 001 for market studies; a front-end fee of USS 0.1 million; and an unallocated amount of USS 3 m i l l i o n for the Project's Special Account. Sub~roiectEliaibilitv 3.3 The US$ 22 million EM1 line of credit to six commercial banks2 was to finance the foreign exchange costs of EM1 subprojects with total investment costs not exceeding DH 50 million (US$ 5 million), which are not eligible for financing under the SSI loan and have ecollomic and financial rates of return at 12% or greater. To support the Government's emphasis on developing manufacturing in the private sector, the project limited the financing of enterprises with majority public shareholding to extensions or modernization of existing profitable enterprises, where the sub-projectswere to meet all other criteria. The Bank's share of financing was not to exceed 60% of total investment costs, representing the average estimated foreign exchange cost of a typical project that would not be eligible under the SSI lines of credit. The maturity of the subloans was to be a maximum of 12 years with a grace period of three years. The subsidiary loan to OD1 was to be US$ 3.0 million, of which US$ 2.8 million was to finance equity participations in public and private EM1 enterprises. The US$ 0.2 million for technical assistance was to finance EM1 sector studies to strengthen ODI's market analysis. Justification 3.4 The project was to provide direct support to the Government's policy of deepening the industrial base of the economy and alleviat.ingbalance of payments pressure through import substitution and increased EM1 exports. At the same' time, it was to encourage commercial banks to become more active in term financing. Also, the Project was to complement reforms to remove distortions in the financial sector, coordinate efforts to meet the specific financing needs of EMIS and strengthen the capability of the financial intermediaries to meet these needs. Technical Assistance and Studies 3.5 The project was to finance the cost of EM1 subsector studies which OD1 was to prepare with the assistance of specialized consulting firms selected in accordance with Bank guidelines. In particular, OD1 planned to hire, in 1985, an engineering consulting firm to identify specific lines of EM1 products which could be developed in Morocco. Following this phase, local or foreign firms were to prepare detailed market studies assessing the viability of the identified projects. The Bank was to review the terms of reference for these studies. 2/ The participating banks were: Barque Marocsine du C m r c e Exterieur (WCE); Banque C m r c i a l e du Haroc (BCH); C r M i t du Haroc (CDM); Banque Haro:aine pour l e Comnrce e t I'Industrie (BHCI ); Societe Generale Harocaine de Barques (SGMB); and Cbnpagnie Harocaine de C r M i t e t de Barque (CHCB). During the course of the project CMCB changed i t s name to Uafabank. 4. PROJECT IMPLEMENTATION EXPERIENCE Overview 4.1 The implementation of the project experienced numerous problems, both exogenous and endogenous to the project framework. First of all, the economic setting changed. The EM1 project was conceived (1981-82) in the context of the 1981-85 economic plan which had given a special priority to the EM1 subsector with a focus on import substitution. However, because of considerable delays in project preparation and loan effectiveness, the project really did not get going until early 1986. By that time, the Government had experienced an economic crisis and stabilization program (1983/84) which led to a reduction in public investment and consequently a lower demand for capital goods. Furthermore, there was a shift in the Government's economic focus and priorities toward export promotion and trade liberalization. These changes, combined with a subsequent shift in the Bank's industrial financing policy from financing specific subsectors to more general lines of credit, diverted the attention of the Government and the Bank away from the specific needs of the EM1 subsector and thus hampered project performance. Project supervision did not give sufficient attention to the problems of marketing the EM1 sector to investors as well as the need for technical standardization and quality control. There was some misunderstanding on the part of the Treasury concerning the use of the Special Account and the Treasury was late in accounting for the funds used under the.. project. Misunderstandings regarding procedures for using the Special Account for loan disbursement also may have diminished demand for the credit line. The project experienced delays in effectiveness, in complicance with loan conditionality and in disbursements. 4.1 The Treasury, in its review of the project (Part 11, paras. 1-41, cited three problems in the project's implementation. First, they pointed out that the loan became effective three years after initial discussions and preparation of the project. The Treasury noted that this delay, ccmbined with changing economic conditions, was responsible for a lower number of subprojects financed by the loan than originally planned, since banks were able to finance EM1 subprojects from other sources. The second problem was that the elapsed time between subproject submission and approval was too long, reaching five months in some cases, and that this delay, combined with delays in the release of funds and underutilization of the Special Account for the project, affected the mobilization of the loan proceeds. Third, between 1986 and 1989, the PBs were under the impression that they could obtain funds from the Special Account only for up to 30% of expenditures eligible for Bank financing. However, in 1989, a Bank supervision mission explained that PBs could have access to funds through the Special Account, for all expenditures eligible for financing. The Treasury noted that, subsequently, the funds in the account were used for full refinancing of the subloans, reducing the time delay in the release of funds to the PBs. Delays in Loan Effectiveness 4.3 There was about a six-month delay from the original date of loan effectiveness (July 15, 1985) due to (a) the need to resolve issues concerning the appropriate onlending interest rate for the subloans, eligibility criteria for subproject financing and the use of the special account and (b) the need for the Government to provide the Bank with documentation required for effectiveness. The Bank declared the loan effective on January 6, 1986. The delay in effectiveness resulted in significant delays of several investment projects submitted to the Bank early in 1985; they did not receive Bank approval, in some cases, for six months to one year later. 4.4 Under ITPAL 11, which the Bank approved in 1985, the effective on-lending rate was set at a maximum of 15% and the long-termdeposit rate at a minimum of 12%, leaving the financial institutions free to compete within this range. The SAR for the EM1 project had set a minimum rate but not a maximum and the Moroccan authorities were concerned that commercial banks would, in practice, charge interest at rates much higher than the minimum on-lendingrate envisaged in the Loan Agreement. Therefore, they proposed an amendment to the Loan Agreement, stipulating that interest on subloans would be less than or equal to the maximum effective interest rate applicable to medium-term rediscountable loans made to industrial enterprises by financial intermediares and at least one half percent per annun above the qualified cost of borrowing. The Bank agreed and modified the Loan Agreement. 4.5 Concerning eligibility for subproject financing, the SAR required a certain minimum percentage of the estimated total cost of subprojects to be financed by "equity participations in the share capital" of the enterprise executing the subproject. The Moroccan authorities wanted to insist that before' making a loan, these equity participations be in the form of fully paid-in capital rather than subscriptions to capital. The Bank accepted this approach. 4.6 By September 16, 1985, in order to declare the loan effective, the Bank still needed to receive (a) a signed copy of the onlending agreement with ODI, (b)signed copies of the onlending agreements for not less than US$13 million for at least two PBs, (c) confirmation of the approval by ODI's Board of its policy statement and (d) legal opinions on the onlending agreements with the commercial banks and ODI. 4.7 There was also a need for additional clarifications concerning the size and operation of the special account (revolving fund) under the loan. The problems that arose in the set-up of the account and its use are discussed in paras. 4.8-4.15. Set-UD and Use of the Special Account 4.8 The EM1 project was the first project in Morocco which (a) provided for the set-up of a Special Account (SA) at the time of loan negotiations and (b) involved the use of a Special Account with the Government as the Borrower. Because the set-up and use of the Special Account in this project gave rise to misunderstandings which, as the Treasury has suggested in Part I1 of this report, may have affected the disbursement of loan proceeds, Annex 1 provides a detailed account of this issue. It explains the usual Bank procedures on the set-upand use of SA, note how the arrangements in the EM1 project differed markedly from these procedures, and discuss the impact of the procedures on the performance of the project. The main source of confusion was a two-tiered system of disbursement which the Moroccan Treasury insisted on and the Bank accepted, though with serious misgivings. Under this system, the PBs were to obrain funds from the SA fro only 30% of eligible subproject expenditures. For the remaining 70%, the PBs had to request, through the Treasury, direct payment from the Bank. The set-up and operation of the Special Account had an adverse impact on project implementation in several ways. First, the discussions about the operation of the SA, after loan negotiations had already taken place, delayed the effectiveness of the loan. Second, the initial deposit to the SA of US$ 3 million was too high. After the Bank accepted the limited use of the account, it proposed to reduce the initial deposit to the SA. However, the Bank ultimately acceded to the Treasury's request to keep it at the initial level. As a result, only US$ 2 million out of disbursements totalling US$ 16.2 million passed through the Special Account. Third, Project files indicated at least one occasion when the Loan Department replenished the SA without receiving the appropriate statement from the Treasury giving details of the transactions on the Special Account, a requirement for replenishing the account. Also, there were a couple of occasions when the Loan Department denied Treasury requests to replenish the SA because the relevant statements were lacking. Finally, the Treasury has indicated in Part I1 that some of the PBs thought they could only use the Bank loan for 30% of eligible expenditures (See Part I1 and Annex 1). Loan Commitments, Disbursements and Cancellations 4.9 The original deadline for commitments under the loan was December 31; 1987. However, by the end of April 1988, commitments amounted to less than half of the loan proceeds. There are several factors which may have been responsible for lagging commitments - - delays in loan effectiveness, increased competition from imports, technical and market difficulties in the EM1 subsector. In September 1988, the Moroccan Treasury sent to the Bank a request to cancel US$ 9.3 million, representing the uncommitted balance on the loan at that time. However, the Bank was about to approve several commitments under the loan and, at the request of the PBs, there was a deferment of the cancellation until these commitments could be approved. The Bank asked the Moroccan authorities to revise their cancellation request. The Government subsequently requested a twelve-month postponement of the commitment date to allow the PBs to fully utilize the loan proceeds. But before processing this request, the Bank asked the Treasury to propose a reallocation of the unused part of the loan among the PBs according to their projected subproject pipelines. The Treasury informed the Bank that it did not expect any of the PBs to utilize its allocation fully during the extension of the commitment date and proposed that BNDE be authorized to make use of the EM1 loan. However, the Bank for some reason did not want to include another PB at such a late stage in the project's implementation. Instead, the Bank recommended extending the commitment date to April 30 , 1989 and advised the Government to request a cancellation of the part of the loan expected to remain uncommitted by that date. 4.10 Between April 1989 and June 1991, the Bank made repeated requests to the Treasury to revise their cancellation request of September 1988, to account for the fact that amounts had been committed since that date. As of the loan closing on December 31, 1990, the Bank had disbursed about US$ 17.3 million. The last subproject disbursement took place on September 7, 1990. Between December 1990 and December 1991, the Bank made repeated requests to recover unused funds in the Special Account. In December 1991, the Treasury reimbursed the Bank so that total disbursements on the loan actually amounted to US$ 16.2; the Bank cancelled the remaining US$ 8.9 million or 359 of the original loan amount. 4.11 Project files indicate only five supervision missions between the date of loan effectiveness (January 1986) and loan closing (December 31, 1990). Out of these five supervision missions, there appears to have been only two full supervision reports (November 1987 and February 1989 , i.el a back-to-office report, an aide memoire and the usual form 590 rating the status of the project were produced. The February 1989 mission focussed on issues related to existing industrial credit lines and policy/operational recommendations for further Bank support for Moroccan industry. The mission also visited selected subprojects under the various credit lines, including EMIs, and provided an overall status report on the performance of the various PBs (i.e loan commitments and disbursements) under the project. However the report did not review comprehensively actual subproject results, i.e. a profile of economic rates of return, the number of jobs created, etc. Since the Bank always supervised the EM1 project in conjunction with other projects, the focus of supervision was on the status of loan commitments and disbursements for several credit line projects at once. None of the available supervision reports effectively supervised the technical assistance and studies planned under the project or provided a , comprehensive review of the status of the Borrower compliance with project covenants. 4.12 A mission from the Bank's Technical Department (TD) visited Morocco in August 1988 to identify possible future operations in the metallurgical, mechanical and electrical industries (MMEI) sector. This mission found that EMIs were stagnating, with capacity utilization below 50% and that the liberal trade policies under the two ITPALs had reduced incentives for EM1 expansion. The mission prepared a strategy paper which recommended (a) a review of protection policy for local industry and (b) use of available funds from the EM1 loan for consultants to prepare proposals for making Morocco an attractive offshore site for European EMIs. A subsequent mission, in March 1990, supervising several industrial credit lines including the EM1 project, recognized the need for a better linkage between industrial policy and Bank industrial projects in Morocco. The findings of this mission led the Bank to produce, in December 1990, an informal report entitled, Review of World Bank S u ~ ~ o rto Moroccan Industrv in t the 1980s: Interim ReDort. For the industrial sector as a whole, this report helped identify certain bottlenecks to industrial development in the private sector and helped to design the Financial Sector Development Project, a hybrid lending operation, with policy and credit line components. For the EM1 sector specifically, the findings of this review concurred with the draft report of the Bankrs Technical Department concerning ..he impact of trade policy on the project. The review found that lf...the Electrical and Metal sectors ...suffered particularly from liberalization. The fact that export shares were low, and firms in these sectors had large market shares is evidence that these industries were less prepared for the onset of competition and for that reason, had a lot of adjusting to do." General Economic ImDact 5.1 According to the SAR for the project, the impact of the project on the economy was to be (a) direct support to the Government policy of deepening the industrial base and (b) lessened pressure on the balance of payments through efficient import substitution and increased exports. The analysis of this impact wss out of the scope of the PCR because neither the Borrower's evaluation of the project nor available project supervision reports reported on the actual results of the subprojects. Financial Sector Imacc 5.2 The SAR noted that a project benefit for the financial sector would be the strengthening of PB capability by encouraging PBs to become more involved in term financing for industry and reinforcing their capability for subproject evaluation. The Bank helped to strengthen the PBsfmarket and economic analysis by providing a consultant to review, with the PBs, subproject appraisal reports. The project files indicate that, in most cases, subproject appraisal reports were' satisfactory. Also, the project was successful in helping to expand the availability of funds for industrial lending. As noted in para. 6.1 , the relative both the shares of medium and long-term financing and the share of commercial banks in providing this credit increased appreciably during the project's implementation period. This expansion resulted from the competition in the financial sector which the project encouraged through an onlending arrangement which did not maintain a monopolistic position for the national development bank, BNDE. Institutional Strengthenins of the Overall EM1 Subsector 5.3 The project was to provide institutional support for developing EM1 projects through improvements to ODIfs capability for project identification and preparation and funding of equity participation in selected EMIs. The main project contribution in this regard was the adoption, by ODI, of a policy statement which outlined its scope of activity, provided a framework for it and clearly identified financial and operational policies. Also, as stipulated in the Loan Agreement, OD1 hired two engineers in its EM1 department to strengthen the institution's engineering and appraisal capacity. However, the project's impact in other areas was minimal since OD1 did not use the US$ 0.2 million under the project for studies to identify specific lines of EM1 products that would be suitable for development in Morocco and financed equityparticipation in only one enterprise. Achievement of S~ecificEM1 Proiect Tarqeta 5 . 4 Since information on actual results of subprojects financed was not available, the PCR could only review the expected results of the subprojects appraised. The EM1 loan was to finance some 40 projects with a total investment cost of US$ 43 million and related subloans amounting to US$ 22 million. The project fell short of these objectives and financed 25 subprojects with subloans of US$ 16.2 million. According to the SARI the project was to create about 1500 jobs at an average investment cost per job of US$ 30,000. The expected results of subprojects actually financed, indicated the creation of about 600 jobs, less than half the target at appraisal, but the estimated average investment cost per job was close to the appraisal estimate, about US$ 31,000. The expected economic rates of return (ERR) on subprojects financed ranged from 14% to 124%. For these same projects, the estimated financial internal rates of return (FRR)ranged ftom 144 to 58%. 5.5 Neither Bank supervision missions nor the Borrower in its evaluation of the project provided an ex-post review of the above data in comparison with actual project results. In the event that OED decides to conduct a project performance audit, this PCR recommends that (a) it review and document the reasons for large cancellations of Bank's proceeds by three participating banks; (b) it prepare an ex-post analysis of subprojects. 6. SUSTAINABILITY OF PROJECT ACHIEVEMENTS 6.1 The project's main impact was in the financial sector due to its competitive onlending arrangement for the loan proceeds; previously, BNDE had held a monopoly position in medium and long-term financing. This competitive arrangement has continued successfully with subsequent industrial finance projects, expanding the availability of medium and long-term funds for private investment in industry. For example, between 1986 and 1990, the relative share of medium and long-term financing increased, as a share of total outstanding credit to the economy, from 36% to 414. At the same time, the relative share of commercial banks in providing medium and long-term credit to the economy increased from 7.6% to 11.2% . 6.2 The project did not result in a sustainable framework for the development of the EM1 sector given that (a) the project design lacked a technical support and monitoring mechanism to promote and guide the private sector in establishing viable, competitive EM1 enterprises, (b) the implementation framework did not explicitly link EM1 sector development to an overall industrial strategy and (c) the supervision process focussed more on the financial sector than on the industrial sector. Following the EM1 project, the Bank shifted its policy for industrial lending in Morocco from financing credit lines for single subsectors, such as EMIs, to general industrial credits and therefore did not plan a follow- up EM1 operation. 6.3 Although financing is available to EMIS under other industrial credits, the availability of financing is a necessary but not a sufficient for establishing viable EM1 enterprises. The sustainable development of EMIs in Morocco will require a clear-cut industrial sector strategy, covering, inter alia, the EM1 sector, and the commitment of the Government to this strategy. As part of this strategy, it would be desirable for Government to review: (a) the necessary steps required to establish a framework for technical standards and quality control in the establishment of EMIs in the private sector and (b) the problems EMIs have faced resulting from changes in macroeconomic and trade policy. 7. PERFORMANCE OF THE BANK 7.1 Initially, the Bank seems to have been committed to developing EMIs as a priority industrial subsector and struggled for several years to help the Government prepare a viable project for Bank financing. In the SAR for the EM1 project, the Bank provided a very detailed review of the demand prospects for EM1 credit, but should have specified, as a risk: (a) the potential lack of sufficient EM1 investment demand, especial1y given the concerns of BNDE about the need for a specialized EM1 credit line; (b) the competition from less risky projects for potential investors; and (c) the lack of experience of some banks in EM1 financing. Also, prior to loan effectiveness, the Bank should have taken greater precautions to clarify the procedures for using the Special Account. 7.2 Above all, the Bank did not devote sufficient attention to the supervision of this project. First, the Bank mostly supervised the project in comecticn with the preparation or supervision of other credit line projects in Morocco. Second, the supervision that did take place was not sufficiently comprehensive. It focussed mainly on the status of commitments and disbursements3 of several,' credit line projects at once, and neglected the technical assistance component for market studies, which never took place, and which possibly could have helped improve the promotion of EM1 projects. Furthermore, the Bank did not sufficiently address the impact of the changing trade regime on the project. Third, the Bank did not always rate the project appropriately. For example, in one of the few Form 590s, the Bank rated the project "2", as having moderate problems, when, at the same time it had rated the project's development impact and compliance with project covenants 113", as having major problems. Fourth, it does not appear that the Bank monitored the status of project covenants seriously. For example, the Loan Agreement required annual audits of each PB and the project's Special Account; but project files contain no audit reports on the Special Account and audit reports for only one of the six PBs. Fifth, the Bank could have been more diligent in prompting the Borrower, in the final phases of supervision,to produce an ex-postreview of the subprojects associated with the loan. Finally, the level of effort devoted to the supervision of this project seemed to reflect both the movement of the Bank from involvement in individual industries and the lack of sufficient attention to the supervision phase of the project cycle, which was widespread in the Bank. -3/ According to s t a f f involved i n project supervision, there were e x p l i c i t instructions from management to leave the broader sector issues to the Central Operating Division as part of the Second Structurai Adjustment Loan. 8. PERFORMANCE OF THE BORROWER 8.1 The Government. The Borrower of the loan for the project was the Government of Moroccon. The Government delegated, to the Treasury, (a) the onlending of the loans to the PBs and (b) the operation of the Special Account. ODI, as an agent of the Government, was to analyze the market for EM1 projects, prepare studies to identify viable EM1 investment projects and finance equity participation in selected EMIs. A review of the performance of the implementing agencies in these areas follows in paras. 8.2 and 8.3. The Government was responsible, under the Loan Agreement, for coordinating an evaluation of the project, including an analysis of investment project costs and benefits. However, the Government complied with this requirement only partially. It delegated the preparation of the evaluation to the Treasury, which concentrated its review mainly on the financial operations of the PBs and did not provide the relevant cost and benefit information on the subprojects financed. 8.2 The Treasurv. The performance of the Treasury in handling the Special Account was marginal. Over a two-year period, the Bank repeatedly requested the Treasury to revise its initial cancellation request of 1988 to account for additional loan commitments. Also, there was a delay of about a year after the loan closing date in refunding unused amounts in the Special Account. The Treasury's response to this comment, in its review of the project (Part 11, section IV, para. 2), notes that following the initial cancellation request, the Bank mentioned the possibility of reallocating the undisbursed balance to the: various PBs. In response, the Treasury contacted the PBs about their interest. Apparently the PBs were late in responding and the Treasury had to await their response before submitting a final cancellation request. 8.3 Partici~atinsBank6 (PBsl: The PBs were responsible for executing Part A of the project, the provision of subloans to EM1 enterprises for subprojects. The relative performance of the various PBs and OD1 in onlending the loan proceeds varied considerably. - 15 - Table 1: Use of EM1 Loan Funds bv PBs and OD1 Lending Initial Allocation Disburse- Percent Agency allocation adjusted ments in Share of in US for US Million Lender in million cancel- Dollars Total Dollars lation in Disburse- US Million ments Dollars BCM 5 .O 5 .O 5.3 32.9 BMCE 5.0 5.0 4.7 29.2 BMCI 2.5 2.5 2.8 17.4 WAFABANK 5 .O 1.5 1.5 9.3 I SGMB 1.5 1.5 1.2 7.5 CDM 3 .O 0 .O 0 .O 0.0 OD1 g/ 3.0 0.6 0.6 3.7 TOTAL c/ 25.0 16.1 b_L 16.1 b_L 100.0 -a/ Includes US$ 2 - 8 million for financing minority equity participation in EMIs and US$ 200,000 to improve ODI's market analysis capability through EM1 subsector studies. Percentages shares differ slightly fromthose in the source table (Part 11) due to rounding. -b/ The adjusted allocation and disbursements differ slightly from the total of USS16.2 million expected by the Bank. -c/The actual total original amout was US$ 25.1 million, including a front-end fee of USS 0.1 million. Source: Part I1 as prepared by the Borrower. Figures rounded to the nearest US$ 100,000. The disbursement levels of two PBs, BCM and BMCI, exceeded their initial allocation of the loan proceeds while BMCE disbursed about 94% of its original allocation. The underutilization of the credit line resulted from large cancellations by CDM, WAFABANK and ODI. The reasons for these large cancellations are not known. If OED decides to carry a project performance audit, the PCR recommend@ that OED review and document these reasons carefully. 8.4 0ffice pour le DOvelo~~ement Industriel (ODI). OD1 was the implementing agency for parts B and C of the project. Under Part B, OD1 was to make investments of USS2.8 million in EM1 enterprises, but OD1 actually financed equity participation in only one project, using only a.bout 21% of its initial allocation for equity participation. Under Part C, OD1 was to do studies to identify investment projects as well as market analyses of projects identified. However, these studies and analyses did not take place. 9. CONSULTANT PERFORMANCE 9.1 The project files indicate the use of a consultant industrial economist to review subprojects and help commercial banks in their appraisal york during the period May to October 1985. The consultant's report does not appear in the project files. But a memo to the files, dated May 23, 1985, indicated that the consultant made an excellent contribution and recommended keeping him for follow- up work on EM1 projects and for review of related technical and market aspects. However, the files do not indicate whether or not the consultant participated in the project after October 1985. 10. PROJECT RELATIONSHIPS 10.1 Neither the Bank nor the Government was unified in its views on the design of the project. At the time of project appraisal, there were differences of opinion within the Bank and in Morocco on market prospects for the EM1 subsector.' and the introductionof competitive financing arrangements with commercial banks. BNDE, which was in serious financial difficulty during 1982-83, did not participate in the EM1 project but did participate in the subsequent two industrial credit line projects. In addition, as outlined in para. 4.8 and Annex 1, there was an apparent misunderstanding within the Bank between the Bank and the Moroccan Treasury on the intended use of the Special Account and between the PBs and the Treasury on the mount of subproject investment eligible for financing through the Bank loan. 11. PROJECT DOClBlENTATION 11.1 There was a considerable mount of documentation on the project preparation and appraisal phases of the project, but as indicated in para. 4.18 there were very few full supervision reports. Furthermore, it appears that the files for the project are not complete. For example, there were sometimes terms of reference for a mission, but there was no mission report or other evidence that the mission actually took place. Two industrial sector reports, which were the only reports that addressed with the problems in the EM1 subsector, were not cross-referenced in the central files on the EM1 project. For some of the subprojects under the EM1 loan, there was a very useful form eummarizing the main elements of the subprojects and evaluating the appraisal report of the PB, but this was not consistently available for all subprojects. 12. CONCLUSIONS AND LESSONS LEARtD 12.1 The Bank and the Government of Morocco showed a strong commitment to building the EM1 subsector as a priority area of industrial development which justified temporary selective import protection, since an indigenous capability in mechanical and electrical industries seemed a logical prerequisite for building an industrial sector in Morocco. However, there were divisions within the Bank and among Moroccan Government authorities on both the design of the project and the onlending arrangements for subloans to EMIs. The result was a compromise on project design which did not put enough emphasis on the need for a technological framework of standards and quality control to guide the private sector in establishing new EM18 and upgrading the technology as well as expanding the capacity of existing EMIs. Furthermore, because of controversies in project preparation, and a delay in loan effectiveness, the project did not get started until nearly three and a half years after its original appraisal. By that time, the strategy of the Bank and the Government for the industrial sector had changed, resulting in a shift in the Bank's industrial lending policy away from specific subsector support and import substitution to generalized industrial credit lines for export promotion. In this process, the specific concerns for the EM1 sector were overshadowed by the broader concern for the liberalization of the economy, and promotion of the industrial sector as a whole, especially export industries. A. Lessons for the Bank 1. Proiect Preparation and Desisn 12.2. Avoidlendingto highlytechnical induetrieewithout aninrtitutional mechanism for technical etandarde and quality control. The project's final design did not provide a crucial component in the sustainability of EMIs in Morocco - - a technological framework for technical support and monitoring to guide the private sector in establishing viable EMIs for capital goods that could compete with imported products. The original design of the project included a component, which the Government ultimately rejected, for developing a Technology Center, and an institute of technical standards and quality control of EMIs. The establishment of such institutesmay have encouraged more entrepreneurs to invest in EMIs by raising confidence in their ability to develop products which could compete with imported products. 12.3. Prerent a unified Bank position in the preparation of a project, The lack of a unified view in the Bank, combined with conflicting views in the Government on the project's objectives and content was disruptive to its preparation. The delay which resulted may have adversely affected project performance since the project originally was linked to an economic plan that had come to an end by the time the loan for the project finally became effective. 12.4. Make eure onlending arrangement8 for project funde are efficient and clearly delineated. In hindsight, it would have been more efficient to lend the proceeds of the loan for investment projects directly to the participating banks, giving them direct contact with the Bank in terms of project monitoring and performance evaluation. As it turned out, the Treasury, as the onlending intermediary, was not set up to provide the required evaluation of subproject investment costs and benefits as stipulated in the Loan Agreement. The Bank learned the importance of clarifying the set-up and use of Special Accounts at the time of project negotiations and identifying the parties responsible for this purpose within the Bank and on the part of the Borrower. Unfortunately, at the time of EM1 project negotiations, the Bank did not have a specific operational directive on special accounts. However, an operational directive, established in September 1990, now clarifies the purpose of SAs and specifies that the Task Manager, supported by the Loan Department and the Legal Department, has the lead responsibility to ensure that the procedures concerning the use of the SA are clear. These guidelines should help minimize some of the types of problems experienced with the Special Account for the EM1 project (para. 4.8). Also, it would be useful for the Bank to evaluate, comparatively,the relative efficiency of locating Special Accounts for Morroco in a commercial bank, at the Central Bank or at the Treasury. 2. Proiect Su~ervision 12.5. Continuously monitor the project in the context of its linkage to strategien for the overall induntrial sector and the macroeconomy. When the focus of industrial sector policy shifted more toward export promotion, the Bank's approach toward lending shifted from support of individual subsectors geared toward import-substitution,to general industrial credit lines with export promotion objectives;during this transition, the Bank should have reassessed its strategy for EMIs and modified the project accordingly. 12.6. Make project ratings conristentwithactualprojectperformance. The Bank did not always rate the overall performance of the EM1 project appropriately (para. 7.21, especially given the major problems it experienced in meeting the objectives established for development impact on the economy, i.e, the numbers of projects financed, related jobs created, the promotion of the EM1 subsector by ODI, etc. If the Bank had flagged the project as having major problems earlier, management may have taken notice of them sooner and there may have been time to take action and improve project performance. 12.7. Place greater emphasis throughout the supervision process on the ultimate beneficiaries of credit line projects. The Bank supervised the EM1 project at the same time as several other credit lines, focussing mainly on the status of commitments and disbursements of the PBs for all three credit lines. As a result, supervision neglected to give sufficient attention to what was actually happening on the industry side of the EM1 operation, especially the reported problems potential EM1 sub-borrowers were experiencing in competition with imports (para. 4.12) and the possible linkage of these problems with macroeconomic policy changes. The Bank finally began to address these problems only toward the end of the project and produced an informal report reviewing Bank support to Moroccan industry, including EMIs. However, since the report covered various types of Moroccan industries, its analysis of EMIs was not detailed enough and its timing was too late in the implementation of the EM1 project to have any significant effect on project performance. 12.8. Monitor project covenants closely and take actions to ensure compliance. In this regard, supervision work on the EM1 project did not consistently monitor the status of project covenants. For example, as noted at the end of the project, there were no audits of the Special Account on file and there were audit reports on only one of the PBs. The Bank should have been more diligent in obtaining these reports. Also, the Bank couldhave exercised its authority under the Loan Agreement to reasonably request periodic progress reports on the subprojects so that by the end of the project, the Bank would have had a better idea about the impact of its lending on the ultimate beneficiaries and the Subsector. 12.9. Maintain centralized, complete documentation on the project overall, as well as on the related subprojects. There were very few full supervision reports on file, especially for a project which experienced major problems, and the reports that were on file did not:J (a) consistently monitor the status of project covenants, (b)report sufficiently the activities of OD1 in the execution of its role in the project or (c) provide sufficient information on the performance of subprojects. To be useful each supervision report should be cumulative, so that at any given point in the supervision period the reader has the latest information on each aspect of the project. B. Lessons for the Borrower 12.10. Assume ownership rerponaibility for projects supported by Bank credit lines. From the outset of the project, there was disagreement in the Government about the need for the project and its design. This disagreement, the lack of Government compliance with audit covenants, insufficient attention to actual subproject results, and the minimal participation of OD1 in the project all indicate a lack of Government enthusiasm for the project. The Government should have been more diligent about its "ownershipffof the project, by (a)paying more attention to the insitutional aspects of the project and the related performance of OD1 and (b) arranging for a complete ex-post evaluation of the subprojects supported by the loan. 12.11. Improve internal communicationr andcommunicationswithparticipating banks. As indicated in para. 4.15, the Treasury, as an agent of the Borrower, needs to improve its comunications internally and with the participating banks. This was reflected in the fact that (a) the staff preparing Part I1 of the PCR did not appear to be fully aware of the project history and (b) the participating Banks expressed some confusion, during the implementation of the project, about the availability of funds from the Special Account. 12.12. Recognize the importance of technicial standards, quality control, and enterprise promotion in conjunction with the availability of financing for EM1 development. The Government chose not to include a component for the development of a Technology Center and an institute of technical standards and quality control which would have help guide the private sector in the development of EMIs. Given the technical complexity of EMIs, and the fact that the EMI project funded very few new enterprisee, the Government should view the establishment of such an institute as a priority. Also, the Borrower should have encouraged ODI, as an implementing agency of the project to take a more active role in surveying the market and promoting EM1 development, since this work was an integral part of the project and could very well have improved the project's performance. - 21 - PROJECT COMPLETION REPORT J3LECTRICAI, AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) PART 11: PROJECT REVIEW FROM BORROWER'S PERSPECTIQ , I @-POST EVALUATION OF PROJECT IMPLEMENTATION ' 1. The ~ r oect i Within the framework of actions designed to promote development of the industrial sector, the Moroccan Government took advantage of the technical and financial assistance provided by the World Bank to promote the development of its electrical, metallurgical and mechanical industries (EMIs). A USS26.1 million line of credit was allocated by the World Bank, its principal aims being to: strengthen the domestic production, and reduce imports of capital goods; encourage financial intermediaries, in particular the commercial banks, to contribute to the financing of the investment operations hitherto covered solely by BNDE; strengthen the role of OD1 in industrial promotion. The loan proceeds were onlent by the Government to six commercial banks (BCM, BMCI, BMCE, SGMB, CDM, WAFRBANK) to finance long-term loans to the EMI enterprises, and also to OD1 for the financing of minority equity participations in the enterprises and of studies designed to identify and promote investment projects in the EM1 sector. 2. Proiect inmlementation Overall, through April 30, 1989 (final date for submission of subprojects for approval), the applications from the subborrowers covered 27 projects, which received approved loans totaling DH 155,460,000),equivalent to USS17,816,277, or 71.15%,of the loan amount. Of the 27 projects approved, 23 were fully completed, one project (SIMEF 11) was only partially implemented,owing to expiry of the loan period, and three other projects (SIFALAC,Verin Industrie and TVMAG) were canceled by the banks concerned. The 24 projects implemented (including the partially financed SIMEF 11) received an aggregate loan amount of DH 138,341,871,equivalent to USS16,166,588, or 64.66% of the total loan, and represent an overall investment of DH 249 million, or 7.78%of the EM1 investments approved by the Ministry of Commerce and Industry over the same loan period. This partial utilization of the loan is essentially explained by: cancellation by Credit du Maroc of its entire allocation (US53 million) even before signature of the onlending agreements; */ Translation of the original Part I1 in French, which the Borrower prepared and telefaxed to the Bank on June 6, 1992. Some of the numbers are partially illegible. cancellation of USS3.5 million by WAFABANK on December 17, 1986; cancellation by OD1 of the balance of its undisbursed allocation at January 5, 1988, a total of USS2.4 million. Thus these cancellations totaled USS8.9 million, or approximately 35.64% of the total loan amount. - I n i t i a l Allocation Disbursements allocation i n USS adjusted f o r cancellations I n USS BCM BMCE BMCI UAFABANK BGHB CDH OD1 TOTAL As shown in the above table, two banks, BCM and BMCI, exceeded their initial allocations, while BMCE's total disbursement level reached almost 95%. The fact that the credit line was underutilized is thus mainly due to the cancellations by CDM, WAFABANK and ODI. 11. JMPLEMENTATION PROBLEMS 1. Delay in loan effectiveness The EM1 loan was not effective until 1986, at least three years after the start of the discussions and negotiations among the different parties concerned (Ministryof Commerce and Industry, Ministry of Finance, the commercial banks, and the World Bank). Beyond the fact that this meant that the project had to be implemented within a setting in which the nature of the sector's problems had changed, this major delay explains why of the 40 projects originally identified, only 27 were sent to the Bank for approval. Various projects were able to be financed from other sources, which explains the USS6.5 million cancellation (26% of the credit line) by Credit du Maroc and WAFABANK. 2. Delavs in a~~rovaland release of funds The approval time on projects submitted to the World Bank was too long, in some cases reaching five months. Where OD1 was concerned, the delay in approval of its project C 3 M led it to cancel the balance of its allocation and repay in advance the amount withdrawn for this project. Mobilization of this line was also affected by the length of time taken by the World Bank to release the funds, combined with the underutilization of the Special Account at the outset. 3. Cost of loans financed out of the EM1 loan During the first year of the loan, the interest rate on EM1 loans was aligned to interest rates applied to other similar forms of credit, i.e. 14% per annum. The downswing in interest rates in 1987-1988 impacted unfavorably on the EM1 loans. The medium-term rediscountable loan rate dropped to 129, the non- rediscountable rate to 13.59, and BNDE loans to 12% (medium term) and 13% (long term). Thus recourse to the EM1 credit line turne.. out to be relatively costly, especially by comparison with the first export line and second industrial sector line from the World Bank. This explains in particular why the attempt to have other banks utilize the USS8.9 million balance did not succeed. 4. Use of the Special Account At first, the Special Account was only used for prefinancing operations totaling up to 30% of the loans. This seems to be the way it was agreed with the World Bank when the loan was set up. However, according to a Bank mission that visited Morocco in February 1989, it seemed that prefinancing out of this account could cover up to 100% of the subloans. The mission noted that the Ministry of Finance had no written document covering this possibility. It should be stressed that following this mission the resources of this account were used for full refinancing of the subloans, which considerably reduced the time involved in releasing the funds to the commercial banks. 111. PRINCIPAL LESSONS LEARNED 1. At the end of the eighties, the Moroccan EM1 association proposed certain measures geared to promotion of the sector. These proposals related essentially to the conditions of domestic and foreign trade and the development of competitiveness among the sector's enterprises. The complaints submitted by this association show that promotion of this sector at the time the line was put in place depended not only on the availability of investment project financing for the sector, but also, and principally, on the strengthening of product competitiveness and of trade, particularly foreign trade, conditions. A larger budget could have been allocated to these two aspects from the outset, or at least the undisbursed portion of the line could have been converted into relevant assistance activities. 2. There is no doubt that one of the positive aspects of this project concerns the availability of long-term resources to enable the commercial banks to finance medium and long term loans. The resultant competition between the banks and BNDE should be placed on the assets side of this project. However, we feel that it was not necessary to leave BNDE out because of this competition. Greater use would actually have been made of the loan, with quicker disbursements, had BNDE been associated with it. This is why the Ministry of Finance suggested that the World Bank allocate the balance of the line of credit to the BNDE. It should be pointed out here that over the period of utilization of this line, the lending operations undertaken by BNDE in this sector reached the following levels: BNDE Approvals in DH millions COMMENTS ON PART I OF THE PCR 1. The first part of the PCR prepared by the World Bank stresses that the Treasury was not the appropriate institution through which to channel the Special Account funds, and that the Government refrained from using this account for subsequent projects. we have the following conunents on this analysis: the small extent to which this Special Account was used is not due to the operating mechanisms set up but to misinterpretation (onboth the Bank's and the Treasury's part) of the conditions for use of this Account. When the Bank and the Treasury decided in 1989 to go beyond the 30% rule hitherto observed, this account became operational,and enabled the banks to mobilize funds within shorter periods than those that occurred when the applications for the release of funds had to go through the World Bank; the Ministry of Finance did not oppose the setting up of a special account for the two World Bank loans that the conunercial banks allocated to the financing of exports and of the industrial sector. These two loans provided for an account in foreign exchange (and not in dirhams) that the banks rejected because of a problem with interest computation: the world Bank wanted interest to run from the date of release of the funds, while the banks wanted the starting date to be that on which the funds were received. 2 . Paragraph 42 of Part I of the report implies that the Treasury took two years to revise a cancellation request. We would point out that: the first cancellation request in September 1988 was not in error; the amount indicated by the Treasury corresponded to allocations that were not going to be utilized, i.e. those of CDM, WAFABANK and ODI; following the cancellation request submitted by the Treasury, the world Bank mentioned the possibility of allocating this balance to other participatingbanks that had expressed interest in receiving it. The Treasury was to contact the banks on this point. Since this possibility was only partially realized, and on a date close to the final date for registration, the Treasury had to await that date to confirm its cancellation request. PROJECT COMPLETION REPORT MOROCCO + ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (LOAN 2487-MOR) PART 111: STATISTICAL INFORMATION Table 1 Related Bank Loans Amount in million LoanNo. Title US dollars 1687 1979 Small-ScaleIndustry Integrated Development Project 2377 1983 Industrial Trade Policy Adjustment Loan I 2604 1985 Industrial Trade Policy Adjustment Loan I1 2806 1987 Industrial Export Finance 3136-0/7 1989 Industrial Finance Table 2 Proiect Timetable Activity Orisinal Plan Actual Reconnaissance Appraisal Board Approval Signing Effectiveness Closing Date Table 2 Cumulative Disbursements (in US$ million) Fiscal Original Actual/Orig. w Pldn Actual (~ercen+ L 0.06 - - 1.72 3.13 9.36 5.08 17.56 11.17 22.36 14.38 24.52 17.26 25.10 17.26 25.10 16.23' repayment of advance to Special Account. PROJECT COMPLETION REPORT 0 IND TRIES PROJECT LOAN 2487-MOR Table 4 Imlementation Indicators Proiected Actual m w Full Commitment of Loan 12/31/87 04/30/89 Partial com- mitment Full Disbursement of Loan 12/31/90 US$ 8.9 million cancelled Completion of market studies through tech- nical assistance to OD1 Not Specified Not completed under the loan Table 5 pro1ect costa The Borrower did not provide the Bank with ex-post information on the actual costs of subprojects associated with the Bank Loan, as required by the Loan Agreement. la?AsA Proiect Financina The Borrower did not provide the Bank with ex-post profile of subproject financing, as required by the Loan Agreement. PROJECT COMPLETION REPORT MOROCCO: ELECTRICAL AND MECHANICAL INDUSTRIES PROJEm LOAN 2487-EIOR w Proiect Resulu A. Direct Impact Emected A&!&& No. of Subprojects 40 25 No. of Jobs Created 1500 NR Total Investment Cost (US$ million) Investment Cost Per Job (US$ thousand) A~praisalRecruirement: 12% SubDroiect Ranqe : NR Sub~roiect Averaqe : NR C. Financial Rate of Return A ~ ~ r a i s aRecruirement: 12% l Subproject Ranse: NR Suburoiect Averaqe : NR D. Technical Assistance and Studiea The project allocated US 200,000 for technical aeeietance to aeeiet OD1 in etudiee of market prospects for EM18 but the Borrower did not use theee funde. NR: Actual figures not reported by the Borrower. PROJECT COMPLETION REPORT MOROCCO: ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT LOAN 2487-MOR Table 8 Status of Maior Project Covenants * A. Loan Asreement Section: 3.01 Subject: Commitment of the Borrower to Project Objectives set forth in Schedule 2. Statue: COMPLIANCE. Section: 3.02 Subject: The Borrower to (a) make available proceeds under the loan to the Commercial Banks (CBs) under subsidiary financing agreements (b) refrain from assigning, amending, abrogating or waiving any of the Subsidiary Financing Agreements or any provision thereof, (c) maintain the protection and incentives regulatory framework for electrical and mechanical industries, and (d) exchange views from time to time with the Bank on the interest rate of subloans. Statue: COMPLIANCE. Section: 3.03 Subject: (a)The Borrower to furnish the Bank with the plans, reports studies and contract documents for Part C of the Project. (b) The Borrower to ensure the maintenance of records and procedures accurate for monitoring the progress of Part C of the Project, including the cost thereof and benefits to be derived therefrom, as well as enable Bank representatives to examine such records and furnish appropriate provisions for this in the Subsidiary Financing Agreements. (c) Upon award of any contract to be financed from the loan proceeds, the Bank may publish a description, the name and nationality of the party recieving the contract. (dl Promptly after completion of the Project, but in any event not later than six months after the Closing Date or such later date as may be agreed for this purpose between the Borrower and the Bank, the Borrower shall prepare, with the cooperation of the CBs and OD1 , furnish to the Bank a report on project execution and initial operation of the project, its cost and the benefits derived from it, including the execution and initial operation of the Investment Projects, their costs and the benefits derived the performance by the Borrower and the Bank in their respective obligations under the Loan Agreement and the performance by the Borrower and each CB and OD1 of their respective obligations under each respective Subsidiary Financing Agreement. Statue: PARTIAL COMPLIANCE. The Borrower did not include information on project costs and benefits in its review of project execution, attached as Part I1 of this report. *PCR estimation. Statue of Covenante not coneirtently monitored in the reportr of rupervirion mierione. Section: 4.01 Subject: Various provisions concerning external debt. Status: COMPLIANCE. Section: 4.02 Subject: Maintenance of separate records and accounts on the Project and submission of audit reports on the Special Account and project accounts (no later than six months at the end of each year) and any other reports reasonably requested by the Bank. Status: NON-COMPLIANCE. There are no audit reports on the Special Account in the Project files. Section: A. Accredited CB Subsidiary financing Agreements Subject: (11 Repayment terms of the CB to the Borrower; ( 2 ) Terms of the Sub-Loans. ( 3 ) Rights of the CB in making Sub-loans. (4) Maintenance of records, accounts and reporting to the Bank. Each CB to furnish the Bank with certified compies of annual audits four months at the end of the year. (5) Provisions part A of the Loan Agreement to be incorporated into Subsidiary Loan Agreements. Status: PARTIAL COMPLIANCE. There is an audit report in the Project files for only one of the CBs. There are no audit reports for the other five CBs. Section: B. OD1 Subsidiary Financing Agreement Subject: (1) Terms of OD1 repayment to the Borrower; ( 2 ) Criteria for investments; ( 3 ) Hiring of consultants for Part C (market studies) (4)Strengthening of ODI's technical appraisal capability with the hiring of two qualified and experienced engineers in its department with the responsibility for electrical and mechanical industries and adoption of operational and financial policies acceptable to the Bank and the Borrower; ( 5 ) Exercise of OD1 rights regarding investment projects. (6) Maintenance of records and accounts, reporting requirements, etc. ( 7 ) Provisions of the Loan Agreement to be included in the Financing Agreement. Status: PARTIAL COMPLIANCE. There is no audit report in the project files on funds used by OD1 under the project. PROJECT COMPLETION REPORT YOROCCO: ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT LOAN 2487-MOR Table 9 Use of Staff Reapurcea A. Allocation of Staff Time bv Staae of Proiect W c l e (in staffweeks) Neaotiationq Throuah Throuah - FY Ao~raisal Effectiveness Su~ervision Total 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 TOTAL *PCR Estimate B. Maior Proiect Mieeiona No. of Project Puruose Dates w Staffinq Status Mechanical Ind. Sector Discussions 10/78 NS 2 IND N/A Mechanical Ins. Sector Discussions 7/10-13/79 2 IND Review of 1 EC, 1FA the EM1 2 CON (ENGI Subsector 4-5/80 2 IND Discussion of EM1 Subsector Report 6/81 No. of Project Pumose D a Davs Staffinq Ststus Project Preparation 6/22-23/81 Discussions Reconnaissance Mission 12/3-10/81 7 Project Preappraisal 3/4-18/82 14 1 EC; 1 FA 1 CON NA Project Appraisal (I) 7/5-17/82 17 1 EC Phase I 1 CON (TA) NA Project Appraisal (I Phase 2 9/2 10/82 - 9 Project Appraisal (11) 4/29-5/15/84 14 1 EC; 1 FA NA Supervision 1 5/7-17/85 11 1 CON; 1 FA NR Supervision 2 10/23 -11/01/85 10 1 CON NR Discussions on Loan Effectiveness l0/85 Discussions on use of Revolving Fund 11/85 Supervision 3 04/86 NS FA NR Supervision 4 11/8-25/87 18 FA; EC; IND Supervision 5 2/12-26/89 15 20P 2 Supervision 6 2/12-3/1/90 17 OP; ENG NR Supervision 7 NS NS NS NR Abbreviations: EC=Economist; DC~DivisionChief; ENG~Engineer;CON=Consultant; FA~FinancialAnalyst; LO=Loan Officer; OP= Operations Officer; NA=Not Available; NR=Not Rated; NS=Not Specified. Proiert Ratinqa: 1-problem-free or minor problems; 2=moderate problems;3=major problems and 4rmajor problems; project unlikely to meet major objectives. Annex 1 PROJECT COMPLETION REPORT MOROCCO: ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT (EM11 LOAN 2487-MOR SET-UPAND USE OF THE SPECIAL ACCOUNT 1. The objectives of a Special Account (SA) for a Bank project are to provide the implementing agency with access to foreign and local currency to cover eligible expenditures, as well as faster processing of requests for funds and payments. For the Bank, the main advantage is the reduction of withdrawal applications sent to the Bank, especially for very small payments; instead the Borrower may justify payments with statements of expenditure for items below certain specified anlounts. The Bank designed the SA to operate as follows: (a)The Bank would make an initial deposit, equivalent to several months of project expenditures eligible for funding under the Bank loan, to a Special Account, which the Borrower would set up at an appropriate financial institution approved by the Bank. (b)After drawing down the initial deposit, the Borrower would apply to the Bank for replenishment of the account, furnishing the Bank with documentation of eligible expenditures, justifying the use of the initial advance and the need for replenishment. (c)The Borrower would use the account as a "revolvingfund1'for disbursement of the bulk of the loan, except in the case where the payment of a very expensive item which would exhaust the funds in the SA. In such a case, the Borrower would request funds for the item directly from the Loan Account at the Bank; 2. During negotiations of the EM1 loan, and between negotiations and loan effectiveness, the Moroccan Government requested a set-upand operation of the SA which differed from all the usual Bank's policy for such accounts - - in the form of currency, the location of the account and the procedure for disbursements. The divergence of the Moroccan's request from Bank specifications in these areas was as follows: (a) Currenw of Account. Bank practice called for setting up a SA in a fully convertible, stable world currency, such as US dollars, Swiss Francs, etc. The basic reasons for this policy were that the SA could then be used to cover expenditures in both local and foreign currencies and that this would help to avoid problems of reductions in the value of the SA that could arise if the SA were denominated in a local currency that devalued sharply. The Moroccan Treasury, however, requested that the SA be maintained in Morrocan Dirhams. (b) Location of the Account. Usually the location of the account was to be in the Central Bank, a designated commercial bank or another financial institution agreed to by the Bank. But during loan negotiations, the Moroccan Government insisted that the SA be located in the Treasury. (c) Disbursement Procedure. After loan negotiations, and prior to loan effectiveness, the Treasury proposed using the account for financing only up to 30% of eligible expenditures for each sub- project which the PB had appraised and which the Bank had approved. For the remaining 70% of eligible expenditures, ehe PB would claim reimbursement, through the Treasury, from the Loan Account at Bank Headquarters. The reason the Treasury gave for insisting on this arrangement was that if the Treasury carried an amount higher than the 30% in the SA, it would become part of the Government budget and subject to administrative controls which could seriously delay disbursements. 3. The Bank, at the time of loan negotiations, made formal exceptions to its policy on the use of SAs by allowing the Borrower to keep the SA in local currency at the Treasury. However, the two-tiered system of disbursement which the Treasury proposed - - 30% from the SA at the Treasury and 70% from the Loan Account at the Bank - - was not discussed at negotiations and therefore not reflected in the minutes of negotiations or the disbursement letter. In the project files; this set-upappears for the first time in the model subsidiary loan agreement sent to the Bank for review, as a condition of loan effectiveness. During the review, the Legal Department pointed out that the SA was designed as a revolving fund for the entire loan, barring exceptional circumstances such as the payment of very large items, and not just for financing the initial 30% of expenditures eligible for Bank financing. 4 . Both the Legal Department and the Loan Department saw the potential for misunderstanding on the use of the account as well as problems in accounting; as a result, they indicated a strong preference for using the Special Account as it was originally intended. The Legal Department's position was that, although the procedure proposed by the Treasury was not in direct conflict with the Loan Agreement and did not require a special amendment to it, the intention of the agreement was not for the account to operate as the Treasury had requested. Concerned with the operational implications of the procedure, the Loan Department sent a memo to Regional project staff stating that "... There seems to be some confusion on the part of the Borrower and Bank staff associated with the project about how revolving funds usually operate. In addition, the Borrower has proposed a method of operation that is not only quite different from usual practice but calls into question the Bank's ability to properly monitor expenditures without the introduction of special procedures that would require extensive interaction between operational and financial staff in approving each withdrawal." From the perspective of the PBs, they were obliged to go to two sources of funds rather than one. Thus, for operational purposes, the twa-tiered procedure seemed to defeat the purpose of the SA, which was to facilitate disbursements, not complicate them. 5 . According to the operational Directive on SAs, established in 1990, the main responsibility for clarification of SA procedures is with the project task manager. Unfortunately, at the time of the EM1 project's preparation, the lead responsibility for clarifying SA operations was not as clear. The loan officer had proposed that the Government send a letter to the Bank detailing the operational aspects of project accounting and disbursements, though the project files contain no such letter or other document clarifying procedures. There are details of a rather complex procedure of reporting proposed in a telex from a mission in the field, but there is no indication of formal agreement on the procedure. 6. The set-up and operation of the Special Account had an adverse impact on project implementation in several ways. First, the discussions about the operation of the SA, after loan negotiations had already taken place, delayed the effectiveness of the loan. Second, the initial deposit to the SA of US$ 3 million was too high. After the Bank accepted the limited use of the account, it proposed to reduce the initial deposit to the SA. However, the Bank ultimately acceded to the Treasury's request to keep it at the initial level. As a result, only US$ 2 million out of disbursements totalling US$ 16.2 million passed through the Special Account. Third, Project files indicated at least one occasion when the Loan Department replenished the SA without receiving the appropriate statement from the Treasury giving details of the transactions on the Special Account, a requirement for replenishing the account. Also, there were a couple of occasions when the Loan Department denied Treasury requests to replenish the SA because t& relevant statements were lacking. 7. Finally, Part 11 of this report, which the Treasury prepared, indicates that there was a serious lack of communication within the Treasury, between the Treasury and the sub-borrowers,and between the Bank and the Treasury on the account's use. The Treasury states that "...Atfirst the Special Account was used only for financing operations totalling up to 30% of the loan. This seems to be the way that it was agreed with the World Bank when the loan was set up. However, according to a Bank mission that visited Morocco in February 1989, it seemed that prefinancing could cover up to 100% of the subloans. The mission noted that the Ministry of Finance had no written document covering this possibility. It should be stressed that following this mission the resources of this account were used for full refinancing of the sub10ar.s~ which considerably reduced the time involved in releasing the funds to the commercial banks..." It appears that whoever prepared Part I1 of the PCR was not aware that the 30% financing was a special condition that the Treasury had insisted upon and also may have been unaware that the subsidiary loan agreements reflected this as well. Also, the Treasury's apparent reversal of its earlier position, implies an unexplained change of Government policy, since the reason the Treasury cited for the 30% limit was that any greater amount would become part of the Government budget and would delay payments excessively. Furthermore, given the confusion surrounding the use of the Special Account, Bank supervision missions should have monitored it more carefully. Of particular note is that there are no audit reports on the Special Account in project files, while a covenant in the Loan Agreement calls for their annual submission. ~OttUnentSon Malor Proiect Missions - a/ Discussions of a consultant study on mechanical industries noting that the Bank could play a key role in sector development. -b/Discussion of alternative prospective EM1 projects in the automotive subsector. The mission concluded that none of the alternatives was appropriate for Bank financing at the time. It recommended a foundry project (8,000to 10,000 tpy) for simple automotive castings. - c/ The mission visited 37 EM1 enterprises. It recommended an investment program for the restructuring of the foundry sector and the establishment of a technological center for standardization, quality control and technical assistance. It also reviewed the policy framework for EMIs and assessed effective protection. Engineering industries had been playing a minor role in Morocco's industrial development. Subsectors producing consumer goods and other end products were more developed and benefitted from high protection, meeting a relative large share of domestic demand. However, durable goods (machinery, casting tractors, etc.) had remained underdeveloped with a growing rate of capital goods coming from imports. The mission recommended a program of cooperation between the Government and the Bank, in which the Government would implement a program of institutional and policy measures and the Bank would focus its financial assistance on certain priority subsectors,while advising the Government in improving institution mechanisms, policies and incentives for sector, administrative interventions (i.e. investment licensing and intervention) and training facilities for mid-level staff and technicians. - d/ Discussion of the draft report on the EM1 survey. Government not yet ready to discuss the preparation of a possible Bank project. -e/Representatives from the Ministry of Finance and the Ministry of Commerce and Industry zated that any possible mechanism for an EM1 project should hinge on BNDE's capacity for subproject appraisal and credit line management. Meetings with BNDE and the Prime Minister's Office resulted in informal agreement that (a) EMIs should benefit from a program of comprehensive support in line with the priority they were receiving in the 1981-85economic plan, (b) implementation of the program should begin soon, considering the deteriorating condition of EMIs, (c)the main solution seemed to be a pilot line of credit to the Treasury,managed by BNDE combined with institution-building components, and (d) BNDE would establish an internal unit specialized in EM1 subproject promotion and appraisal. -f/Design of the project largely completed by the Treasury, BNDE, the Central Bank and 3-4comercia1 banks. Additional preparation work needed to specify logistics of technical assistance. The Moroccan interagency group was to continue preparation work and finalize the technical assistance scheme for the appraisal mission. There also were meetings with the French Treasury and the Export Credit agency on co-financing possibilities. Discussions revealed that parallel financing woud be more appropriate for commercial and administrative reasons. Further discussions required for the regulation of the financing mechanism and the allocation of subprojects among various potential sources of finance. q/ Agreement with Moroccan authorities on the design of the project concerning the financing scheme, the role and importance of commercial banks, institution- building, the role and participation of OD1 in equity financing, eligibility criteria for subprojects and the principles of protection policy. The operational modalities for the proposed project to be discused further. The three outstanding issues were (a)protection policy for EMIs, (b) the role of BNDE and eligibility criteria and EM1 target groups. $/ Completion of the design of the EM1 sector loan based on the Project Brief of February 23, 1982. Last point pending finalization --operationalmodalities for applying the principles of EM1 protection--to be worked out during the industrial incentives review mission in 9/82. The mission focussed its work on three outstanding issues: (i) a preliminary assessment of Morocco's need for foreign exchange funds for industrial investment in the coming years, (ii) the fonn and extent of BNDE participation in the project and (iii) the identification of technical assistance needs and the design of a program to meet them. -i/Discussion of protection policy and pricing issues for EM1 capital goods, in accordance with the discussions and recommendations of the industrial incentives mission. i/ Discussion of the financing scheme, eligibility criteria for subprojects, updating of the foreign exchange gap for EMIs, review of the EM1 project pipeline, appraisal procedures, experience of supplier's credit and medium-tenn expos facilities and discussions on strengthening OD1 and timetable for further processing steps. -k/A consultant industrial economist reviewed, with the PBs, the pipeline of projects under consideration for financing. The terms of reference for the mission mentioned that the consultant was to prepare a report but there was no report on file. -1/A consultant industrial economist was to review subprojects with the PBs and update previous assessments of (a) the quality of the projected EM1 pipeline of projects, (b)the needs of PBs for staff training and insitutional strengthening, and (c)the desirability of improving the relationship between the appraisal and supervision units of these institutions. The terms of reference for the mission mentioned that the consultant was to prepare a report but there was no report on file. m/ Government had reviewed Bank comments on onlending agreements to the commercial banks. Commercial Banks were anxious to get on with lending operations and did not understand the reasons for the delay in effectiveness. n/ Treasury has agreed to coordinate the collection and forwarding of disbursement requests to the Bank and consolidate and monitor disbursements on the loan. There were discussions with the Ministry of Finance on the use of the special account and whether the amount could be reduced since it was to be used only for initial advances on subprojects up to 309 of eligible financing. After checking with commercial banks the Ministry indicated that the amount of US$3 million was appropriate, that there was no need for reduction and that t.heBank would receive a telex on the basis for the estimate. The onlending conventions were to be signed soon and the Government would accelerate the submission of legal opinions required for loan effectiveness. Q / Supervised in conjunction with the Export Industries Project. No supervision report on file. Q/ The Bank supervised this project along with four other projects. It is difficult to tell who actually worked on the project and for how long since there are no individual terms of reference on file. The Form 590 for the project, dated 1 2 / 1 4 / 8 i , ' was prepared by a financial analyst. According to this report, utilization of the credit line was much lower than expected. The low demand for the credit line seems to have resulted from an overall economic slowdown, increasing competition due to trade liberalization and technical and market difficulties inherent in the EM1 sector. The project received an overall rating of " 2 ." The Treasury was to request, from the PBe and ODI, estimates of their utilization over the following year, readjust allocation among banks and request cancellation of the part of the loan expected to be uncommitted. q/ The main purpose of this mission seems to have been to review the status of both the EM1 project and the Industrial Export Finance Project in order to prepare the negotiations for the Industrial Finance Project. For the EM1 Project the mission concentrated on reviewing the status of commitments/disbursements and an analysis of the relative performance of the various PBs and ODI. The Form 590 attached to the full supervision report and aide memoire is dated 8/18/88. l'he overall status of the project is rated "2" and is similar to that of the 12/87 Form 590 except for (a) the additional comment that the SSIs have access to medium-term rediscountable loans with less cumbersome procedures than those of the loans financed by the Bank and (b)a deterioration in the rating for "development impact," from "2" to "3". The report adds that the Bank approved a final extension of the comitment date to April 30, 1989. As advised by the Bank, the Treasury, in September 1988, requested cancellation of the remaining US59.3 million but held the request in order to allow for the approval of a large subproject (Autohaul) which took place in January, 1989. h e Treasury was to submit new estimates of credit line utilization and resubmit a request for cancellation. The mission reviewed, with kroccan authorities, the Bank's new procedures for the preparation of project ccmpletion reports (PCR) . It was agreed that the Treasury and BNDE would prepare the Government's part of the PCR (Part 11) and transmit it to the Bank by mid-March 1989. -r/ The terms of reference for this mission indicate that it was to review (a) the status of camitments and disbursements, (b) the amount of partial cancellation, (c) the status of the special account balance and (d) the overall status of implementation. An aide-memoire and follow-up letters are on file. There is no back-to-office report on file for this mission, as the mission's findings were incorporated instead in the draft Country Strategy Paper and Country Economic Memorandum. During a period of 17 days the two-person mission was to supervise the EM1 project along with three other projects - - Export Industry, Industrial Finance and the UNDP-funded Trade Simplification Project. a/ A memo of June 16, 1991 concerning Ihe loan account makes reference to a supervision mission in September 1990 but there are no terms of reference for this mission or a report of its findings in the project files.