Document of The World Bank FOR OFFICIAL USE ONLY Report No. 82304-MA INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF EURO 219.7 MILLION (US$300 MILLION EQUIVALENT) TO THE KINGDOM OF MOROCCO FOR THE FIRST INCLUSIVE GREEN GROWTH DEVELOPMENT POLICY LOAN November 22, 2013 Sustainable Development Department Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. MOROCCO GOVERNMENT FISCAL YEAR January 1 – December 31 CURRENCY EQUIVALENTS (Exchange Rate Effective as of October 31, 2013) Currency Unit = MAD 1 MAD = US$0.1214 1 US$ = MAD8.235 1 US$ = EUR0.7321 ABBREVIATIONS AND ACRONYMS ADA Agricultural Development Agency (Agence pour le Développement Agricole) ADEREE Renewable and Energy Efficiency Agency (Agence pour le Développement des Energies Renouvelables et de l’Efficacité Energétique) AFD French Development Agency (Agence Française de Développement) AfDB African Development Bank AGIRE GIZ Program on Integrated Water Resources Management in Morocco (Appui à la Gestion Intégrée des Ressources en Eau) ANDA National Agency for the Development of Aquaculture (Agence Nationale pour le Développement de l’Aquaculture) ANRE Agence Nationale de Régulation de l’Energie BAM Central Bank of Morocco (Bank Al-Maghrib) BOD Biochemical Oxygen Demand CPAR Country Procurement Assessment Review CPS Country Partnership Strategy DMN Directorate for National Meteorology (Direction de la Météorologie Nationale) DPL Development Policy Loan EIA Environmental Impact Assessment EE Energy Efficiency EU European Union FAO Food and Agriculture Organization of the United Nations FDA Agricultural Development Fund (Fonds de Développement Agricole) FDI Foreign Direct Investment FSAP Financial Sector Assessment Program GDP Gross Domestic Product GEF Global Environment Facility GHG Greenhouse Gas GG Green Growth GIZ German Development Agency GoM Government of Morocco IBRD International Bank for Reconstruction and Development ICZM Integrated Coastal Zone Management IFAD International Fund for Agricultural Development IMF International Monetary Fund INRA National Institute for Agronomic Research (Institut National de la Recherche Agronomique) IUU Illicit, Unreported and Unregulated Fishing KfW German Development Bank M&E Monitoring and Evaluation MAD Moroccan Dirham MAGG Ministry of General Affairs and Governance (Ministère des Affaires Générales et de la Gouvernance) MAPM Ministry of Agriculture and Maritime Fisheries (Ministère de l’Agriculture et de la Pêche Maritime) ii MCC Millenium Challenge Corporation MEMEE Ministry of Energy, Mines, Water and Environment (Ministère de l’Energie, des Mines, de l’Eau et de l’Environnement) MENA Middle East and North Africa MEF Ministry of Economy and Finance (Ministère de l’Economie et des Finances) MET Ministry of Infrastructure and Transportation (Ministère de l’Équipement et du Transport) MI Ministry of Interior (Ministère de l’Intérieur) MICNT Ministry of Industry, Commerce, and New Technologies (Ministère de l’Industrie, du Commerce et des Nouvelles Technologies) MW Megawatt NSDS National Sustainable Development Strategy ONCA National Agency for Agricultural Advisory Services (Office National du Conseil Agricole) OREDD Regional Observatories for the Environment and Sustainable Development (Observatoires Régionaux pour l’Environnement et le Développement Durable) PARL Public Administration Reform Loan PEFA Public Expenditure and Financial Accountability PFM Public Financial Management System PforR Program for Results PMV Green Morocco Plan (Plan Maroc Vert) PNE National Water Plan (Plan National de l’Eau) PNEEI National Program of Irrigation Water Conservation (Programme National d'Economie d'Eau en Irrigation) PPPs Public Private Partnerships PSIA Poverty and Social Impact Analysis RE Renewable Energy SCCF Special Climate Change Fund SEP Social and Economic Program SNSE National Strategy for the Water Sector (Strategie natioale du Secteur de l’Eau) SOE State-Owned Enterprise SP Social Protection TA Technical Assistance UCS Use of Country System VAT Value-Added Tax Vice President: Inger Andersen Country Director: Simon Gray Sector Director: Junaid Kamal Ahmad Sector Manager Charles Joseph Cormier Task Team Leader: Andrea Liverani iii KINGDOM OF MOROCCO FIRST INCLUSIVE GREEN GROWTH DEVELOPMENT POLICY LOAN Table of Contents   LOAN AND PROGRAM SUMMARY ..................................................................................................... v 1. INTRODUCTION AND COUNTRY CONTEXT ............................................................................... 1 2. MACROECONOMIC POLICY FRAMEWORK ............................................................................... 2 2.1 RECENT ECONOMIC DEVELOPMENTS .................................................................................. 2 2.2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY ......................................... 6 2.3 IMF RELATIONS .......................................................................................................................... 9 3. THE GOVERNMENT’S PROGRAM .................................................................................................. 9 4. THE PROPOSED OPERATION ........................................................................................................ 12 4.1 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION ......................... 12 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS .............................. 13 4.3 LINK TO CPS AND OTHER BANK OPERATIONS ................................................................ 28 4.4 CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS .................. 28 5. OTHER DESIGN AND APPRAISAL ISSUES.................................................................................. 31 5.1 POVERTY AND SOCIAL IMPACTS ......................................................................................... 31 5.2 ENVIRONMENTAL ASPECTS .................................................................................................. 33 5.3 PFM, DISBURSEMENT AND AUDITING ASPECTS .............................................................. 35 5.4 MONITORING AND EVALUATION ........................................................................................ 36 6. SUMMARY OF RISKS AND MITIGATION ................................................................................... 37 ANNEXES ANNEX 1: POLICY AND RESULTS MATRIX ................................................................................... 39 ANNEX 2: LETTER OF DEVELOPMENT POLICY.......................................................................... 41 ANNEX 3: FUND RELATIONS ANNEX .............................................................................................. 57 ANNEX 4: ENVIRONMENTAL AND SOCIAL ASPECTS .................................................................58     This Loan was prepared by an IBRD team consisting of Andrea Liverani, (TTL, MNSSD), David Olivier Treguer (Economist, AES), Xavier Chauvot de Beauchene (Senior Water and Sanitation Specialist, MNSSD), Gabriella Izzi (Agricultural Specialist, MNSSD), Khalid Messnaoui (Senior Economist, MNSED), Andrew Losos (Environmental Specialist, MNSEN), Daniel Camos (Economist, MNSSD), Dorothee Chen (Health, Nutrition and Population Specialist, MNSHH), Amal Talbi (Senior Water and Sanitation Specialist, MNSSD), Jean Charles de Daruvar (Senior Counsel, LEGAM), Hassine Hedda (Senior Finance Officer, CTRLA); Achraf Rissafi (Team Assistant, MNCMA), Marie Francoise How Yew Kin, Program Assistant (MNSSD), Maria Vagliasindi (Lead Economist, MNSSD), Ibtissam Alaoui (Communication Specialist, MNEXT), Paolo Verme (Senior Poverty Specialist), Lamyae Hanafi Benzakour (Financial Management Specialist, MNAFM), Abdoualye Keita (Senior Procurement Specialist, MNAPR), Fanny Missfeldt-Ringius (Senior Energy Economist, MNSEE), Charlotte de Fontaubert (Senior Fisheries Specialist, Consultant), Hassan Lamrani (Senior Irrigation Specialist, Consultant), Manaf Touati (Consultant, Energy Specialist); Tayeb Amegroud (Consultant, Senior Energy Specialist), Abdoul Gadiry Barry (Consultant, Economist), Philippe Bontems (Consultant, Environmental Economist), Adélaide Barbey (Consultant, Translation Services). Jean-Pierre Chauffour (Lead Economist, MNSED) helped with the preparation of the macroeconomic section. Giovanni Ruta (Senior Environemental Economist, AFTN1, Stephane Hallegatte (Senior Economist, SDNCE), Christophe Crepin (Sector Leader, EASER), and Ernesto Sanchez-Triana (Lead Environmental Specialist, LCSEN) contributed as peer reviewers. iv    SUMMARY OF PROPOSED LOAN AND PROGRAM KINGDOM OF MOROCCO FIRST INCLUSIVE GREEN GROWTH DEVELOPMENT POLICY LOAN Borrower Kingdom of Morocco Ministry of General Affairs and Governance, Ministry of Economy and Finance, Implementation Agencies Ministry of Environment IBRD Variable Spread Loan in the amount of EURO 219.7 million (US$300 Financing Data million equivalent). Operation Type The operation is the first in a programmatic series of two single tranche DPLs. The Program Development Objectives (PDOs) of the programmatic DPL series are: Program Development PDO 1. Improving the management of natural capital; Objectives PDO 2. Greening physical capital; PDO 3. Strengthening and diversifying the rural economy by leveraging human capital. - Number of regional coastal zone management plans (Schémas Régionaux d’Aménagement du Littoral)approved; - Number of regional maritime fisheries control and enforcement plans approved; - Number of aquifers (nappes) in which groundwater abstraction is regulated by an aquifer agreement among ’'large’ water consumers; - Percentage of new buildings (hospitals, residential, tertiary) built after the publication of the Decree and integrating EE requirements; - Total capacity of distributed medium- and low-tension grid-connected Result Indicators photovoltaic systems (in MW) - Total subsidy envelope to diesel, gasoline and industrial fuel (in % of GDP); - Number of industries having submitted a funding request to the Voluntary Industrial Pollution Mechanism; - Reduced industrial pollution (as measured by tons of BOD5 abated yearly); - Number of products subject to green taxes; - Share of the envelope allocated to direct seeders in the total FDA envelope allocated to seeders (traditional and direct); - Share of DMN revenues from agro-meteorological services; - Number of aquaculture sector jobs created ( gender disaggregated); - Number of ecotourism sector jobs created (gender disaggregated). Overall risk rating Substantial Operation ID P127956 v 1. INTRODUCTION AND COUNTRY CONTEXT 1. This Program Document presents the First Inclusive Green Growth Development Policy Loan to the Kingdom of Morocco in the amount of EURO 219.7 million (US$300 million equivalent). As per Government request, the proposed operation is the first in a programmatic series of two single tranche DPLs. The series builds on solid sector dialogue over several years and strong Government ownership of the program. 2. Over the last decade the country has made remarkable progress in achieving poverty reducing growth. However, given the efforts deployed by Morocco, the sustainability of its growth model can be strengthened. Steady public finance consolidation and manageable budget deficits opened up the fiscal space for sustained investment and social expenditures (37% of total public expenditures excluding debt payments). This led to robust growth patterns, a rise in per capita income and a sharp decrease in absolute poverty (3% of the population is living on less than US$1.25 per day, down from 9% in 2007). Yet several factors cast a shadow on the country’s development trajectory. First, the economy remains reliant on a natural capital base which is rapidly being eroded. Sectors such as agriculture and fisheries – which together account for nearly 20% of GDP – face resource management constraints, particularly around land and water, imperiling their future performance and growth. Second, the ‘grow now, clean up later’ model followed so far has encouraged the deployment of physical capital stocks leading to harmful lock-ins, including high costs of environmental degradation and rapidly growing energy consumption which compels the deteriorating fiscal framework. Third, vulnerability remains high, with around 17% of the population living just above the poverty line in 2012. A steady Gini coefficient (0.41) indicates a stubbornly high inequality in incomes and access to services, especially for women and rural populations. Future growth will need to better leverage the country’s human capital stocks and technological innovation, not only by addressing labor market and education shortcomings but also through investments in innovative, higher value-added sectors that relieve pressures on natural assets while creating more and better quality jobs. 3. The Government is deploying efforts to foster inclusive, sustainable growth at a crucial stage of the country’s development trajectory. The shortcomings seen above threaten the progress made so far as well as future economic potential. Awareness of the need to avoid locking the economy into unsustainable patterns has long taken root among policy makers as well as the general public. The wave of sector strategies produced over the last five years includes a strong focus on enhancing the management of natural assets, curbing pollution levels, and reducing Morocco’s reliance on fossil fuels through substantial investments in renewable energy - and to a lesser extent in energy efficiency - thus contributing to the reduction of greenhouse gas (GHG) emissions. Despite the fiscal and economic impacts of the global downturn and the social and political pressures within the region, environmental sustainability remains central to the Government’s (GoM) agenda. Recent addresses by the King, the provisions of the new Constitution, and the Government’s program underscore the need to act now, as investment decisions made today will determine growth patterns for decades to come. The Government’s program voted by Parliament on January 26, 2012 centers on the promotion of good governance, transparency, and accountability within the public sector, whilst confirming support to the environmental sustainability objectives enshrined in key sector strategies. 4. At a time of great economic and social pressures from within and outside the country, Morocco’s leadership in addressing long term sustainability concerns is uniquely remarkable in the region. The Kingdom is moving assertively towards the operationalization of its sustainable development vision, through the establishment of a reform package. In this regard, Morocco is resolutely positioning itself as a first-mover in the transition towards inclusive green growth: its experience will serve as a model for other countries in the region and beyond. 1 5. The DPL series supports a package of reforms pursuing three Program Development Objectives (PDOs). These include: (i) improving the management of natural capital; (ii) greening physical capital and (iii) strengthening and diversifying the rural economy by leveraging human capital. The proposed DPL series is in line with Government priorities and Bank Country Partnership Strategy. The DPL series is accompanied by parallel investment and programmatic financing, both ongoing and under preparation. 6. A new Government was announced on October 10, 2013. After protracted negotiations following the withdrawal of the Istiqlal Party from the coalition Government on July 9, 2013, the National Independent Rally (RNI) joined the Government. 2. MACROECONOMIC POLICY FRAMEWORK 2.1 RECENT ECONOMIC DEVELOPMENTS 7. In recent years, Morocco has been hit by a series of adverse exogenous shocks. Like other emerging countries, Morocco has suffered from the 2008 global financial crisis, although the limited financial integration of Morocco into global financial markets has contained the direct contagion effects. More serious were the effects of the subsequent food and fuel crises. With the price of Brent crude oil averaging more than US$110 per barrel in 2011-2012 and no domestic oil production, Morocco has been confronted with a major deterioration of its terms of trade. This deterioration was compounded by a significant increase in its food import bill in 2012 as a result of a severe domestic drought at a time of soaring international food prices, especially of wheat. Finally, with a strong trade exposure to the EU, Morocco has been adversely affected by the developments in the Eurozone area and subsequent slowing down of economic growth. 8. Internal and external shocks combined with significant economic rigidities have exposed the fragility of the Moroccan economy. The outburst of the global crisis hit Morocco’s economic performance, with growth of non-agriculture gross domestic product (GDP) slowing down to 3.9% on average over the years 2008-2012 compared to almost 5% during the period 2001- 2007. The continued vulnerability of the economy is in part due to its slow structural transformation. 9. Recent favorable weather conditions driving the outstanding agricultural output account for a solid economic performance in 2013. Over the first half of 2013, GDP growth reached 4.4% thanks to a 20.3% jump in agricultural production. The performance of the agricultural sector offset the slower growth of the other economic sectors, which grew by only 2.2% vs. 4.7% during the same period in 2012. The slow-down of non-agricultural sectors was mainly driven by a steep drop in public works and construction sectors (down 5.3%), a decline in water and electricity activities (down 2.6%), and a slight growth in transport (up 1.4% vs. 3.5% a year earlier), manufacturing (up 0.7% vs. 2.2 % a year earlier), and financial services (up 0.2% vs. 5.9 % a year earlier). At the same time, the telecommunications sector showed continued dynamism although at a slower pace, growing by 13.1% over the first half of 2013 compared to 23.1% a year earlier. 10. The modest economic performance of non-agricultural sectors over the first half of 2013 was mostly determined by continued sluggish external demand, but also by weakening domestic demand. Gross fixed investment declined in 2013-Q1 (down 2%), reflecting lower private and state-owned enterprises (SOEs) investment efforts particularly in the construction sector. Its recovery in 2013-Q2 (up 2.4%) seems fragile in light of the decision to cut public investment. Public consumption slowed down over the period (up 4.8% vs. 7.3% during the same period last year) in part due to receding subsidies outlays. At the same time, household consumption slightly improved (3.5% vs. 3.1%) boosted by higher wages in the public sector and easy access to consumption credit. 2 11. The Government and the Central Bank continued to demonstrate their commitment to control inflation. Inflation has been kept relatively low since the eruption of the global crisis (1.6% in average over 2008-2012), mainly thanks to price subsidies benefiting basic food and fuel products and to prudent monetary policies. In 2013, the consumer price index gained 2.2% over the months of January-September compared to 1.1% during the same period last year. The accelerating inflation mainly reflects higher prices of education and transportation services (up 6.2% and 3.7%, respectively), restaurants and hotel services (up 3.1%), and food (up 2.9%). It is worth mentioning that thanks to healthy competition, telecommunications prices continued their downward trend, although at a slower pace, regressing by 9.2% by end September 2013 after their drop of 20.8% during the same period last year. 12. The unemployment rate has been stubbornly high hovering around 9% in recent years – or about one million jobless people – despite years of respectable economic growth and declining participation rates. The modest growth in non-agriculture sectors in 2013just managed to generate enough net job positions to stabilize unemployment rate at 9%. Most of the jobs were created in services, including the public administration, and to a lesser extent in the manufacturing sector. Less than half of the Moroccan population (48.4% in the first half of 2013) is actually active (i.e., either employed or looking for a job) - one of the lowest participation rates among emerging economies. 13. The growing savings-investment gaps in the public sector since 2008 have translated into widening external current account imbalances. Against the backdrop of sluggish external demand, notably from Europe, and deteriorating terms of trade, the trade deficits increased from an average of 14.3% of GDP over 2001-2007 to around 22.4% of GDP over 2008-2012, with a peak of 24.3% of GDP in 2012. The high trade deficit last year, combined with declining tourism receipts and workers’ remittances, translated into the highest current account deficit since mid-1980s (10% of GDP). Financing rising current account deficits is becoming difficult. Indeed, despite healthy inflows of net foreign direct investment (FDI) in 2012 – thanks to foreign investors’ continued confidence in the Moroccan economy – total net external capital flows were not sufficient to finance the current account deficit. As a result, the government resorted to drawing from international reserves which declined by US$3.1 billion to reach the critical level of US$17.2 billion by end 2012, corresponding to 4.1 months of imports coverage. 14. In 2013, falling world prices of basic commodities and a slowing-down of domestic demand allowed the main external indicators to improve. Although sluggish external demand led to a drop of nominal exports by 1.5% over January-September 2013, imports also declined by 1.1%. Exports’ decline is mainly explained by the weak performance of traditional goods that has been partially offset by the good performance of high value-added products. Indeed, exports of phosphate rocks and derived products fell by 20.7%, while textiles exports lost 4.5%. At the same time, the high value-added products fared well over the period, with exports of automobile industry gaining 16%, of airplane parts jumping 17.5%, and of electronics increasing by 10.1%. On the other hand, relying totally on imported energy, Morocco benefited from the easing of world prices of imported fuels over the period (down 8% for crude oil). Other import categories receded as well, of which raw products by 20.4% and consumption goods by 4.8%. At the same time, equipment material gained 6.8% and semi-finished inputs rose by 3.2%. As a result, the trade deficit improved slightly by 0.8% over the period. Regarding services, tourism receipts gained 1.7% and workers' remittances edged up by almost 1%. Based on these overall positive developments, the current account is expected to improve over January-September 2013 compared to the same period last year. It is worth mentioning that the current account balance improved over the first half of 2013 to 9.5% of GDP. 15. On the capital account side, foreign investors continued to invest heavily in Morocco, with net FDIs growing by 24.8%. Thanks to sufficient net external capital flows, including 3 US$750 million Eurobonds issuance in May 2013, net official international reserves were consolidated by US$468 million compared to end 2012, allowing stabilizing net reserves of the Central Bank at 4.2 months of imports coverage. 16. Despite easing monetary policies, the economy continues to suffer from an under- liquid money market. To stimulate economic activity and help finance the economy—in a context of price controls and low inflation expectations—the Central Bank (BAM) decided to reduce its policy rate from 3.25% to 3% in March 2012 and to lower the money reserve requirement for banks from 6 to 4% in September 2012. BAM kept unchanged its interest and reserve requirement rates in 2013. These decisions, along with monthly BAM injections of money, aim at partially relaxing the liquidity constraints in the money market. As a result, money supply increased by 5.3% (y/y) in September 2013, mostly driven by claims on the central government (up 30.6%) and a consolidation of net international reserves (up 3.1%). At the same time, credit to the private sector, including public enterprises, increased by only 3% over the period. Households seem to be the main beneficiary of bank credit to the private sector, largely thanks to social housing funding programs supported by the government and to easy access to rather expensive consumption credit. As a result, housing credit gained 8.1% and consumption credit 2%. Credit to businesses has been sluggish, with credit to equipment edging up by 0.3%, while credit to construction companies declined by 0.8% and that to operating capital by 0.4%. As private economic agents confront difficult situation, non-performing loans increased substantially by 13.8% over the period, representing 5.6% of total bank credit to the private sector up from 5.1% a year earlier. 17. The gradual pace of public finance reforms coupled with the economic turmoil in Europe and continued high prices of commodities have eventually had their toll on Morocco’s fiscal accounts. Public finance increasingly deteriorated since the outburst of the global crisis in 2008, with the 2011 budget registering the second highest deficit in two decades reaching 6.9% of GDP. The budget deficit worsened further to 7.6% of GDP in 2012 mostly determined by record subsidy outlays peaking at 6.6% of GDP (Table 1). For the first time, the budget spent more on subsidies than on investment. Table 1. Annual subsidies in % of GDP Commodities 2007 2008 2009 2010 2011 2012 Food 1.0 1.1 0.7 0.7 0.9 0.8 Fuels 1.7 3.5 1.1 2.9 5.2 5.8 Total Subsidies 2.7 4.6 1.8 3.6 6.1 6.6 Source: Ministry of Economy and Finance 18. Over January-September 2013, falling subsidies–due to the easing in world fuel prices– could not totally offset the combined effects of bad performance of tax collection and rising wage bill and investment, leading to a worsening of main fiscal indicators. Revenues 1 recorded one of the worst performances over January-September 2013, gaining 2% only compared to an increase of 5.5% during the same period last year. Except for registration taxes (up 7.4%), personal income taxes (up 6.1%), and indirect taxes (up 1.4%) that increased, all other tax categories registered a decline. In particular, business income taxes fell by 12.2%, and customs duties decreased by 18.4%. On the expenditure side, with the exception of subsidies, all the other main expenditures items continued to increase. Despite the government's decision to rein in non- wage recurrent expenditures and capital outlays, both increased significantly over the period, by 16% and 7.8%, respectively. On a brighter note, subsidies declined by 19% as a result of lower prices of imported petroleum products and of the effects of price increases of certain petroleum 1 Revenues do not include privatization receipts, which are considered as a financing item. 4 products in June 2012 and September 2013. The wage bill increased by 3% over this period, reflecting last-year's salary increases and new hiring of civil servants. As a result, the budget deficit was contained at 5.5% of GDP, slightly above that registered during the same period last year (5.1% of GDP).The implementation of the fuel price-indexation policy starting September 16 would allow containing subsidies under their targeted level of 4.5% of GDP in 2013. This, combined with the expected slowdown in capital spending due to the government’s decision to cut investment by 25%, would keep the budget deficit around 5.5% of GDP for the whole year of 2013. 19. In a context of tight liquidity in domestic markets, financing persistently high budget deficits started to prove difficult: this forced the government to levy more funds from volatile international financial markets. Domestic and classical external borrowing from multilateral and bilateral creditors, along capital grants, proved insufficient to finance the deficit, which led the Government to raise US$750 million bonds on international financial markets in May 2013. This follows an earlier US$1.5 billion bonds issuance carried out in December 2012. As a result, the central government debt increased by 5 percentage points of GDP by September 2013 compared to September 2012, to reach 60.5% of GDP. While the central government is mostly indebted in its own currency (with a debt of only about 14% of GDP denominated in foreign exchange), the level and pace of deterioration of the debt are worrisome. In just four years, Morocco's central government debt increased by more than 12 percentage points of GDP. Without meaningful corrective measures, Morocco's current fiscal stance risks derailing the sustainability of Morocco's overall macroeconomic framework in the medium term. Table 2- Key Macroeconomic Indicators Act. Est. Proj. 2010 2011 2012 2013 2014 2015 2016 Real economy Annual percentage change, unless otherwise indicated GDP (nominal--local currency) 4.3 5.0 3.2 7.1 5.4 7.0 7.3 Real GDP 3.6 5.0 2.7 4.5 3.0 4.6 4.8 Per Capita GDP 2.4 3.6 1.3 3.5 2.0 3.6 3.9 Contributions: Consumption 1.1 5.0 3.6 4.1 2.0 3.3 3.4 Investment -0.8 1.4 -0.8 0.0 0.8 1.2 1.4 Net exports 3.4 -1.5 0.0 0.4 0.2 0.1 0.0 Imports of G&S 3.6 5.0 2.0 0.7 3.9 4.9 4.9 Exports of G&S 16.6 2.1 2.7 2.1 6.0 6.9 6.7 Unemployment rate (ILO definition) 9.1 8.9 9.0 … … … … GDP deflator 0.6 0.1 0.4 2.4 2.4 2.3 2.3 CPI (eop) 2.2 0.9 2.6 2.4 2.3 2.3 2.3 Fiscal Accounts (*) % of GDP, unless otherwise indicated Expenditures 29.9 33.1 34.6 31.9 31.2 30.5 29.9 Revenues 25.2 26.2 27.0 26.3 26.5 26.6 26.6 Central Government balance -4.7 -6.9 -7.6 -5.6 -4.7 -4.0 -3.3 Selected Monetary Accounts Base Money 4.2 6.4 4.5 6.4 … … … Credit to non-government 11.0 10.4 5.1 6.2 … … … Interest (key policy interest rate) 3.25 3.25 3.00 … … … … Balance of payments % of GDP, unless otherwise indicated Current Account Balance -4.5 -8.0 -10.0 -8.3 -7.3 -6.1 -5.4 Imports 44.3 49.9 51.6 47.1 46.7 46.1 45.8 Exports 33.4 35.8 36.3 33.9 34.6 35.4 35.9 Foreign Direct Investment, net 1.1 2.4 2.6 2.5 3.2 3.0 3.1 Gross reserves in US$, mln (eop) 23,613 20,642 17,535 17,288 … … … In months of next year’s imports 7.1 5.8 5.0 4.8 As% of short-term external debt 886 530 451 444 External Debt 29.0 29.3 34.4 36.3 38.2 38.4 38.2 Terms of Trade, change in% -3.4 4.1 -13.1 0.8 0.7 1.7 0.1 Exchange rate (average) 8.42 8.09 8.63 8.54 … … … Other memo items GDP, nominal MAD, bln 764.0 802.6 828.2 886.7 934.8 1,000.4 1,073.2 GDP, nominal US$, bln 90.8 99.2 96.0 103.8 … … … (*) Including transfers to Local Gov. and excluding privatization receipts 5 2.2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 20. While Morocco is facing growing economic and fiscal challenges, its macroeconomic policy framework has remained adequate. The macroeconomic framework is expected to remain sustainable in the medium term taking into account the key fiscal and structural reforms launched recently and those announced by the authorities in the context of the draft 2014 Budget Law under discussion in Parliament. In particular, the draft 2014 Budget Law stresses the need to continue implementing the required reforms to ensure that the macroeconomic stance remains sustainable with contained budget deficits and improved external stance. Indeed, the draft Budget Law 2014 includes measures to advance subsidies, fiscal, budgetary, and pension reforms, to pursue institutional strengthening, to consolidate competitiveness, and to develop human capital. The drive for reforms of the draft Budget Law 2014 is encouraging as the projected macroeconomic outlook and the success of the structural reforms depend more than ever on a robust fiscal consolidation, a prudent monetary policy, and comprehensive medium term reforms that support external competitiveness. Until now, the adverse effects of the global environment on Morocco have been weathered relatively well, thanks to strong economic fundamentals and sound macroeconomic policies carried out over the last decade. Yet, in contrast to when the international crisis struck in 2008, the Government has today much smaller margins for maneuver. 21. Macroeconomic prospects in the medium term will also greatly benefit from the government’s comprehensive reforms program to improve the economy’s competitiveness and the effectiveness of its sectoral policies. The current reforms to strengthen governance and justice, improve the efficiency of public investment, and deepen decentralization are critical to achieving long-lasting improvement in economic efficiency, productivity, and employment. Over the medium term, economic growth will benefit from improved contribution of net exports although domestic demand will continue playing a major role. Under these assumptions, GDP should recover to around 5% by 2016. Inflation is projected to remain under control at 2.5% or below. 22. However, there are downside risks that would hinder the economy reaching its full potential. A continued sluggish world economy, particularly in Europe, would negatively impact the medium term macroeconomic outlook through reduced prospects for exports, including tourism, workers' remittances and FDI flows. Similarly, sustained high commodity prices, a deterioration of the regional context and prolonged global financial uncertainties would have an adverse impact on Morocco's prospects. Moreover, there is a potential risk that even pre-crisis growth levels might not be sustainable over the medium term if internal demand remains the key driver of growth. 23. In line with the new constitutional requirement, the Government has further committed to fiscal stability and to progressively decrease the budget deficit to the medium term target of about 3% of GDP by 2016 through the implementation of a set of critical reforms. The key measures include: (i) continuing the reform of the universal subsidy system; (ii) implementing civil service reform, notably by introducing a ceiling on wage expenditures and a new remuneration system; (iii) accelerating the fiscal and pension reform agenda; and (iv) enhancing the efficiency of public as well as private investments. In May 2013, the authorities reduced the per-unit subsidy of wheat harvesting. In July, they adopted an ad hoc circular to make wage bill appropriations binding and limit the rollover of unspent investment appropriations. They also started implementing a mechanism to index the domestic prices of industrial fuel oil, gasoline, and diesel to world prices (see section 4.2 for more details). Furthermore, the quota of subsidized wheat was reduced by 6%. These actions will help keep the 2013 subsidy bill closer to its budget target, while significantly reducing the vulnerability of the budget to international commodity price movements. They constitute major steps toward a comprehensive subsidy reform. Consistent with lessons from international experience, the broad reform is to include cash transfers to vulnerable groups to mitigate the social impact of the reform. Finally, the Head of Government has introduced the principle of performance informed budgeting in the 2014 budget preparation circular. 6 Table 3- Fiscal Indicators of the Central Government (in% of GDP) 2010 2011 2012 2013 2014 2015 2016 Overall Balance -4.7 -6.9 -7.6 -5.6 -4.7 -4.0 -3.3 Primary balance -2.4 -4.6 -5.2 -3.0 -2.2 -1.5 -1.0 Total revenues (*) 25.2 26.2 27.0 26.3 26.5 26.6 26.6 Tax revenues 23.1 23.7 24.7 24.0 24.1 24.1 24.1 Taxes on goods and services 11.3 11.6 11.8 11.8 12.0 12.0 12.0 Direct taxes 8.5 8.8 9.3 8.8 8.8 8.9 8.9 Taxes on international trade 1.8 1.3 1.1 1.1 1.0 1.0 1.0 Other taxes 1.6 1.7 1.9 2.0 2.0 2.0 2.0 Special accounts, balance -0.1 0.3 0.6 0.3 0.2 0.2 0.2 Non-tax revenues 2.0 2.4 2.1 2.2 2.3 2.3 2.3 Grants, current 0.1 0.1 0.1 0.1 0.1 0.1 0.1 Expenditures (*) 29.9 33.1 34.6 31.9 31.2 30.5 29.9 Current expenditures 23.8 26.9 28.7 26.5 25.8 25.1 24.4 Wages and compensation 10.3 11.1 11.6 11.3 10.9 10.7 10.5 Goods and services 5.0 4.8 5.4 5.4 5.4 5.4 5.4 Interest payments 2.3 2.3 2.4 2.6 2.5 2.4 2.3 Subsidies 3.6 6.1 6.6 4.5 4.2 3.8 3.5 Current transfers to Local Gov. 2.6 2.7 2.7 2.7 2.8 2.8 2.8 Capital expenditures 6.2 6.2 5.9 5.4 5.4 5.4 5.4 Central Government financing 4.7 6.9 7.6 5.6 4.7 4.0 3.3 External (net) 2.1 0.9 1.8 3.5 2.7 2.4 1.7 of which grants, capital 0.0 0.2 0.1 0.8 0.8 0.8 0.7 Domestic (net) 2.6 6.0 5.8 2.1 2.0 1.6 1.6 of which privatization 0.0 0.7 0.4 0.2 0.2 0.2 0.2 (*) Including the part of VAT transferred to local governments and excluding privatization proceeds. 24. The Government's debt strategy is to diversify financing sources and take on a greater proportion of external financing. In this context, new external financing schemes are being put in place beyond the classical multilateral and bilateral sources of financing. In February 2013, the Government signed a grant agreement of US$1.25 billion over a five year period with the Kuwait Arab Economic Development Fund to support economic and social projects. In addition, the Government signed two sets of Memoranda of Understanding in March and November 2013 for a total amount of US$675 million grant, out of a total of US$1.25 billion committed by the Saudi Development Fund. Both grants are part of a strategic partnership established with the Gulf Cooperation Council countries committing US$5 billion over a five-year period. In September, Morocco received a US$100 million grant from Abu-Dhabi to finance structural projects. In August 2012, Morocco also benefited from a Precautionary and Liquidity Line (PLL) of US$6.2 billion approved by the International Monetary Fund (IMF). The PLL is part of the proactive approach of the Government to ensure that a precautionary instrument is available to be able to cope in the event of an unforeseen severe deterioration of its external balances. A second review of the PLL was successfully completed by the IMF on July 31, 2013. 25. In light of the recent measures taken by the authorities and those envisaged in the draft Budget Law 2014, the external position is expected to remain sustainable over the medium term provided that key critical reforms under implementation continue to take hold. The current account deficit is projected to progressively edge downward to around 5% of GDP in 2017 benefiting from improved export potentials and a recovery of tourism activities and workers' remittances. The latter would benefit from the anticipated progressive recovery in Europe, the main source of remittances flow to Morocco. This scenario critically assumes that Morocco would benefit from its continued reform efforts in trade and competitiveness, supported among others by the World Bank. These reforms, along with sector strategies already under implementation, would translate into higher productive private investments, including FDIs, and progressive gains in competitiveness of its exports, including tourism. Exports will also benefit from the healthy growth of major developing and BRIC countries, thanks to growing shares of Moroccan exports towards these countries. In this context, external debt is expected to follow an inverted U-path reaching a maximum at almost 37.7% of GDP in 2015 before steadily dropping thereafter, while net foreign reserves will remain at more than four months of imports. 7 26. Balance of payments financing requirements constitute a moderate concern in the medium term, given the country's relatively low outstanding external debt, the financial support from the Gulf States, access to international financial markets at favorable conditions, and still adequate foreign reserves. As the current account deficits are projected to steadily improve in the medium term, financing large share of them through traditional multilateral and bilateral credit lines along with other private capital flows, including FDIs, should not be a major constraint (Table 4). In addition, the Gulf Cooperation Council countries recently confirmed their program to invest US$5 billion over five years, mostly in the form of grants. Any remaining financing gap could be filled by tapping international financial markets. As noted above, the confirmed PLL from the IMF will continue to provide a potential precautionary instrument running to end August 2014. Table 4- BOP Financing Requirements and Sources (in US$ million) Act. Est. Proj. 2010 2011 2012 2013 2014 2015 2016 Financing Requirements 6,894 11,300 13,170 12,020 11,341 10,389 10,167 Current accounts deficit 4,078 7,986 9,555 8,614 7,964 7,018 6,613 Long-term debt amortization (exl. IMF) 2,428 2,438 2,429 2,373 2,421 2,528 2,760 Other short term capital outflows 388 876 1,186 1,034 956 842 794 Financing Sources 6,894 11,300 13,170 12,020 11,341 10,389 10,167 FDI and portfolio investments (net) 1,074 2,156 2,466 2,448 3,480 3,700 4,050 Capital grants 10 185 116 1,396 1,436 1,424 1,412 Long-term debt disbursements (exl. IMF) 4,992 4,464 6,415 7,063 6,304 5,226 5,224 Other short term capital inflows 2,024 1,863 706 915 839 728 680 Change in reserves (-=increase in reserves) -1,206 2,632 3,467 198 -718 -689 -1,199 IMF credit (net) 0 0 0 0 0 0 0 27. A comprehensive public debt sustainability analysis indicates that the fiscal framework remains sustainable although it would weaken under some medium term downside risks (Figure 1). Indeed, when the debt sustainability analysis was run under the assumption of "no-policy-change" scenario, the debt stock increased steadily over the period 2013- 2018. All the six bound tests proved sustainable over the medium term, although the debt for three of the tests remained high within the range of 61-62% of GDP, which indicates that debt sustainability remains fragile to further deterioration in Morocco's internal or external business environment. Figure 1- Central Government External Debt Sustainability (in% of GDP) Alternatives scenarios Bound tests 2 2 Bound tests: B1. Real interest rate is at baseline plus one standard deviations; B2. Real GDP growth is at baseline minus one-half standard deviation; B3. Primary balance is at baseline minus one-half standard deviation; B4. Combination of B1-B3 using one-quarter standard deviation shocks; B5. One time 30% real depreciation in 2013; B6. 10% of GDP increase in other debt-creating flows in 2013. 8 2.3 IMF RELATIONS 28. The World Bank and the International Monetary Fund collaborate closely on the monitoring of Morocco’s macroeconomic situation. Bank staff was consulted in the context of the IMF’s 2012 Article IV consultation with Morocco, which was approved by the IMF’s Board on February 1, 2013. The IMF also completed its first review of Morocco’s performance under the economic program supported by the PLL (approved on August 3, 2012 in an amount equivalent to about US$6.2 billion). A second review was successfully completed and presented to the IMF Board on July 31, 2013. Both reviews reaffirmed Morocco’s continued qualification to access PLL resources. 3. THE GOVERNMENT’S PROGRAM 29. Rising awareness of the sustainability challenges facing Morocco has led to high level ownership of the Green Growth agenda. Over the last decade Morocco made remarkable progress in achieving growth that is notably poverty-reducing, but the sustainability of its growth model remains to be consolidated. Public demands regarding overall quality of life shifted the environmental sustainability agenda from fringe policy item to national priority. In his 2009 and 2010 Throne Speeches, King Mohammed VI called for comprehensive legislation on environment management, and explicitly set “Green Growth” as a priority for government action. In addition to reinforcing the principles of good governance and protection of individual freedoms and rights, the new 2011 Constitution, through its Article 31, compels the state and its agencies to work towards ensuring equal access to a healthy environment and sustainable development. The Environment and Sustainable Development Charter 3 adopted in 2011 defines the rights and obligations of the State and citizens for the protection and preservation of the environment and the sustainable use of domestic natural resources. In May 2012, Morocco signed the OECD’s Declaration on Green Growth for a socially inclusive and environmentally sound growth, highlighting Morocco’s positioning as the MENA country with the firmest commitment to the sustainable development agenda. 30. The Government is strengthening key aspects of its environmental sustainability framework. In addition to the draft Framework Law on Environment and Sustainable Development (FLE) ─ which aims to strengthen shared ownership and institutional coordination of Government responsibilities ─ the Government is preparing a Sustainable Development Strategy 4 articulating the country’s Green Growth goals 5 and leveraging the coordinate action of individual departments and the alignment of sector strategies along common long term sustainability objectives. Legislation is underway to regulate investments in sensitive areas such as coastal zones, and to 3 http://www.environnement.gov.ma/PDFs/CNE_charte_VF.pdf 4 The drafting and approval of the National Sustainable Development Strategy (NSDS) is required under Article 14 of the draft Framework Law on Environment and Sustainable Development (FLE). This directs the Government to develop the strategy through a process of consultation and coordination, and approve it within two years of the promulgation of the FLE. Article 15 defines the overall elements of its content and objectives: a) establishing the orientations of the overall sustainable development policy of the country; b) the principles and responsibilities for its implementation; c) the framework for evaluating its results. Article 16 requires the Government, within two years of the NSDS approval, to ‘align sectoral and cross-sectoral policies and strategies’ to the ‘objectives and orientations set by the NSDS’. Although the FLE has not yet been approved by Parliament, the process towards the development of the strategy has started in earnest, though it faced delays due to the recent governmental change. The Department of Environment (which provides the secretariat to the Interministerial Committee tasked with developing the strategy) has confirmed that its expected finalization will fall in the latter part of the spring 2014. 5 The Government Program is outlined in the Letter of Development Policy (Annex 2). The National Sustainable Development Strategy, scheduled to be finalized in the spring of 2014, is expected to further flesh out and articulate the Program of Reforms. 9 improve existing legislation on critical sectors such as water. The Haut Commissariat au Plan ─ the Government Statistical and Planning Agency ─ is working towards the establishment of a system of natural capital accounting based on the collaboration with sectors such as water, environment, forestry, agriculture, and tourism, with a view to developing economic-environmental satellite accounts. On the fiscal side, together with the Ministry of Economy and Finance, the Ministry of Environment has put in place a green taxes system building on the recent introduction of taxes on plastic materials and sand extraction. 6 The FLE envisages the extension of green taxes to additional sectors and products, in line with the Government’s goal to bolster revenue mobilization to encourage pollution management. The Government is also implementing an energy subsidy reform agenda which already led to partial subsidy reductions for transport fuels in June 2012, and the recent introduction of a price adjustment mechanism. Finally, the Government aims to leverage investments in green industries and technologies to support growth and job creation in rural areas, through the emergence and expansion of sectors such as aquaculture and eco-tourism, the achievement of productivity gains in established sectors such as agriculture, and the emergence of domestic renewable energy industries and energy efficiency services. 31. Morocco’s Green Growth agenda is articulated around three key objectives: (a) ensuring the sustainability of the economy’s natural resource base; (b) encouraging a shift towards low carbon growth and low impact investments; (c) spurring innovation and job creation through investments in green sectors. These objectives lie at the core of the batch of strategies being implemented in sectors including agriculture, water, energy, tourism, and fisheries: a) The Plan Maroc Vert is Morocco’s agricultural strategy for the period 2008-2020 aiming to double the agriculture sector’s value-added and improve farmers’ incomes. It envisages a shift from a highly protected sector aiming at self-sufficiency to a dynamic and open market one which keeps food security concerns and natural resources conservation at its core. It is based on two Pillars, to account for the dualistic nature of Moroccan agriculture: Pillar I supports commercial farmers’ integration into domestic and international markets, and Pillar II focuses on small farmers in rain fed and marginal areas. Increased attention is being given to environmental and social aspects, through (i) assessments of environmental impacts in agro-food chains and implementation of related adaptation measures; (ii) investments tailored to local agro-climatic conditions including the promotion of efficient seed irrigation; (iii) the provision of improved seed practices to enhance productivity and climate change adaptation; and (iv) better provision of agro-meteorological services; b) The National Strategy for the Water Sector (Stratégie Nationale du Secteur de l’Eau – SNSE) includes the following axes : (i) Demand management to reduce water consumption in all sectors, (ii) Supply management, through mobilizing conventional and non-conventional resources, (iii) Preservation of groundwater resources, river basins and oases, (iv) Management of climate- change vulnerabilities through the strengthening of hydro-met systems, adaptation planning in the water sector, investments in flood protection and drought management, (v) Consolidation of institutional and regulatory reforms, including revision of Law 10/95 on water resource management, and (vi) Modernization of information systems and capacity building; c) Halieutis is Morocco’s comprehensive strategy for fisheries management. It specifically aims at investing in and developing the sustainability of the sector. Morocco is well aware that global fisheries are in a state of crisis and that blindly increasing catches and landings will be counterproductive. The three main axes of the strategy are sustainability, performance (increased catch quality), and competitiveness (exports of fish products are expected to almost double to US$3.1 billion). Halieutis combines a broad objective of increasing production in value terms (to more than MAD20 billion by 2020) with an overarching goal of ensuring that 95% of the species are managed sustainably. 6 Introduced in the 2013 Budget Law. 10 32. Morocco opted for a low carbon development strategy centered on green infrastructure investments. To address the challenges of energy security, sustainable development and competitiveness, the GoM formulated its energy strategy in 2009, with an update in 2011. The objectives are: availability of energy to all Moroccan households and businesses at competitive prices, energy demand management, promotion of national expertise and technological know-how, environmental protection, and climate change mitigation. To reach those objectives, the strategy aims to: (i) diversify and optimize the energy mix around reliable and competitive energy technologies, in order to reduce the share of oil to 40% by 2030; (ii) develop the national renewable energy potential; (iii) make energy efficiency improvements a national priority (induce energy savings of 12% by 2020 and 15% by 2030); (iv) develop national energy resources by intensifying hydrocarbon exploration activities and developing conventional and unconventional oil sources; and (v) integrate into the regional energy market, through enhanced cooperation and trade with other Maghreb countries and the EU. The strategy is particularly ambitious as regards renewable energy (RE), calling for a RE share of 42% of power generation capacity by 2020. Over US$2 billion have been allocated so far to meet those objectives. 33. The Government aims to leverage the job creation potential of investments in green industries. In addition to strategies aimed at increasing efficiency and supporting private investments in established sectors (the Plan Maroc Vert, with its objective of creating 1.5 million jobs by 2020, is a key example of this), growth will require a diversification of the economy’s production base. The Government sees part of future job creation in the emergence and expansion of sectors addressing clear sustainability challenges, such as aquaculture and eco-tourism, which are also relatively labor-intensive. In inscribing “Green Growth” as a clear priority for governmental action, King Mohammed VI highlighted the need to “place it at the basis of a new economy opening up opportunities for innovative sectors with a job creation potential”. The Economic, Social and Environmental Council, an official think tank established under the new Constitution and reporting directly to the King recently assessed job creation opportunities in sectors such as waste management, sanitation, and energy (CESE 2012). The National Sustainable Development Strategy (NSDS) currently in the making includes a pillar on boosting green jobs. 34. Other sector strategies already under implementation also turn sustainability concerns into job creation objectives. In addition to doubling the tourism sector’s size over a decade, the “Vision 2020” strategy aims at (i) stepping up environmental norms and standards for sector investments; (ii) developing an independent environmental monitoring system for tourism investments; (iii) introducing finance mechanisms to foster energy efficiency. The strategy supports the emergence of an eco-tourism sector aimed at generating economic activity in rural areas, thus helping diversify rural incomes into off-farm activities. Similarly, the Halieutis strategy frames the development of Morocco’s aquaculture sector within the dual objective of relieving pressure on marine resources whilst increasing production of fish products, enhancing the value of exports, and fostering job creation. In recognition of this new priority, the National Agency for the Development of Aquaculture (Agence Nationale pour le Développement de l’Aquaculture, ANDA) was established in February 2011, with four distinct objectives: (i) developing a new national strategy for aquaculture; (ii) implementing that strategy; (iii) developing specific action plans for each aquaculture sector, and (iv) promoting aquaculture and access of farmed products to markets, both domestically and internationally. Finally, Morocco aims at becoming a regional champion of the growing RE industry, not only through the production of electricity by RE power plants, but also by integrating the upstream manufacturing of equipment and the provision of services through innovation and skill development. By 2025, more than 63,000 jobs could be created in the country (22,500 in renewables and 40,500 in the energy efficiency business 7). 7 Cooperation and Training Division, MEMEE (February 9th, 2012) 11 4. THE PROPOSED OPERATION 4.1 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION 35. The proposed operation in the amount of EURO 219.7 million (US$300 million equivalent) is the first in a programmatic series of two single-tranche DPLs. The choice of a programmatic option is in line with the medium to long term nature of the reform efforts. The Government has requested that the duration of the series remain within the current government’s term of office, thus ensuring clear accountability for program implementation and outcomes. The programmatic option also responds to GoM’s interest in a follow-up operation within a 24-month horizon from the World Bank Board’s approval of this first DPL. The measures supported by the DPL series are anchored in existing sector strategies and ongoing reform agendas and fully linked to the Government’s program. Prior actions and triggers are all essential to achieving the results of the Government’s program. 36. The prior actions and triggers supported by the DPL series are anchored in existing sector strategies and ongoing reform agendas and fully aligned with the Government’s priorities, as described in the Letter of Development Policy (Annex 2). The Government’s request for an inter-sectoral design of the operation aims at leveraging the DPL series towards enhanced coordination and alignment of sector strategies around common sustainability objectives – the key goal of the National Sustainable Development Strategy under development. 37. The DPL series is structured around three program development objectives (PDOs). These include: (i) improving the management of natural capital; (ii) greening physical capital and (iii) strengthening and diversifying the rural economy by leveraging human capital. In addition to being in line with the Government’s goals and the Bank’s Country Partnership Strategy for Morocco, the operation responds to the World Bank Group’s strategic goals of ending extreme poverty and boosting shared prosperity. The sustainability of natural assets and environmental stewardship has clear equity dimensions, including from an inter-generational perspective. Growth oriented measures, particularly under PDO 3, are specifically targeted to improving incomes and livelihoods in rural areas, where a substantial part (67.5% in 2011) 8 of Morocco’s poor live. 38. The operation’s design was informed by lessons learned from past programmatic DPLs as well as in the recent CPS Progress Report. These include: i) Solid Bank-Government partnership supporting home-grown sector reforms built on strong analytical foundations. The operation’s PDOs reflect the Government’s policy priorities developed on a vast body of analytical work carried out by the Bank, external partners, and Government agencies (see Table 5); ii) A clear accountability framework supported by streamlined policy matrix rewarding priority elements in the reform program. The Government fully owns the monitoring framework and results indicators are designed to be measurable at the end of the DPL series; ; iii) Leveraging DPL support with investment and Program for Results (PforR) financing. The implementation of past DPLs shows that such instruments are effective at building sound institutional and regulatory capacity at the central government’s level but are limited in building capacity and supporting implementation at technical level, particularly locally. To this effect, in addition to the synergies with ongoing operations, the preparation of the IGG DPL series has identified implementation needs which can be accompanied by investment and/or PforR operations, in sectors such as sustainable tourism sector and coastal zone management. 8 Haut-Commissariat au Plan (2013) Morocco National MDG Report 12 iv) Particularly for multi-sectoral operations, shared ownership of the reforms by all concerned ministries, from the onset of the design of the series, and strong orientation for launching reforms. Consensus building among stakeholders, particularly the various government agencies, is crucial. Most DPLs include reforms that involve various stakeholders in different ministries and government agencies at national and local levels. Ensuring the buy-in and cooperation of the various stakeholders was therefore essential for the smooth implementation and the success of the proposed reforms. v) The Government has expressed a preference for a series with two single-tranche operations, in order to take advantage of the analysis, planning framework, implementation support and improved coherence offered by the DPL series. 4.2. PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS Improving the Management of Natural Capital 39. Pillar 1 will support GoM’s efforts to improve the management of natural resources underpinning key economic sectors. Natural capital (water, land, air, fish stocks, and ecosystems services) makes up a significant portion of Morocco’s wealth. Particularly for sectors such as agriculture, tourism, and fisheries, it requires sufficient investment, maintenance and good management to be synonymous with productivity and contribute to shared prosperity. Pillar 1 is composed of two policy areas: 1.1 Management of coastal and marine assets; and 1.2 Water sector governance. Policy Area 1.1 - Management of coastal and marine assets 40. With 56% of the population living in cities and economic activity being largely concentrated along Morocco’s extensive coastline, coastal zones are crucial to Morocco’s growth. Three major cities - Casablanca, Rabat, and Tangier - are located along the coast, and face substantial environmental risks. 9 Sectors like tourism, agriculture, fisheries, and aquaculture (which together make up roughly 32% of GDP) depend crucially on coastal ecosystems. Demographic and economic pressures, however, have increasingly led to the progressive degradation of coastal natural resources, and ecosystems. Construction, sand-mining, insufficient sewerage and solid waste collection and disposal have consequences in terms of loss of biodiversity, and degradation of ecologically-sensitive areas. Overexploitation of coastal aquifers, mostly for irrigation, also led to their salinization through seawater intrusions. Climate change and demography are expected to add to such pressures, which call for immediate and concrete adaptation measures. 41. Morocco lacks an organizing framework for integrated coastal zone management, allowing sector agencies to coordinate policies and investments and avoid conflicting uses of coastal resources. The Government has long been aware of the need to adopt such an approach, as evidenced by Morocco’s membership in a series of international agreements in support of coastal zone management and biodiversity conservation (e.g. the Regional Seas Barcelona Convention for the Protection of the Marine Environment and the Coastal Region of the Mediterranean, the Ramsar Convention for wetland conservation, and the Convention on Biological Diversity). Different drafts of the Coastal Zone Law (Loi du Littoral) have been iterated since 1996. The recent Government 9 World Bank (2011) Vulnerability to climate change and natural disasters of coastal cities of North Africa Washington DC 13 approval of the draft Law signals a crucial step towards the sustainable use of coastal resources. Following Government approval, the draft Law will be submitted to Parliament for approval and publication, upon which it will be effective. It is envisaged that the National Plan for the Management of the Coastal Zones will support the implementation of the Law and address the trade-offs in the coast’s productive utilization. 42. Morocco’s new coastal Law aims to address the trade-offs between economic considerations and the need to manage coastal resources sustainably. As such, the law puts an end to the lack of a planning framework for these crucial and vulnerable areas, allowing for arbitrary development with limited checks and balances. The need to strike a better balance between development and conservation is first laid out in general terms in the text of the law, but the details of its implementation will be worked out in two steps: first at the national level, with the design of a national management plan, and then, in more detail, through the drafting of specific management plans for each region (regional management plans). By December 2016, two regional coastal zone management plans defining local authorities’ accountability for ensuring sustainable use of coastal assets will be approved. This two-tier approach thus addresses the fundamental goal of coastal management. On the one hand, the law recognizes that coastal zones are key to vital national interests (e.g. ports, navy/security, fisheries, tourism development). On the other, it entrusts local authorities with the role of addressing the trade-offs between sector priorities and the preservation of natural assets. The value of the Law is to provide a framework to address such trade-offs. 43. The fisheries sector accounts for 2.3% of Morocco’s GDP and supports over half a million people. Sector growth is threatened ─ among others ─ by illegal fishing practices, which lead to stock collapse and directly threaten population renewals. This brings considerable hardship to fishermen who practice a responsible and sustainable activity. It also undermines efforts towards conservation and management of fish stocks, thus thwarting the objectives set by national and regional fisheries authorities for a more responsible and sustainable fisheries policy. The prohibition of illegal, unreported and unregulated (IUU) fishing is a key aspect of Morocco’s fisheries management, and fully in line with FAO International Plan of Action to Prevent, Deter, and Eliminate Illegal, Unreported and Unregulated Fishing (IUU IPOA). Morocco has always recognized that a new emphasis must be placed on increasing the effectiveness of enforcement and monitoring measures. 44. The Government is setting up a new legal and institutional framework to allow for effective monitoring and enforcement, at sea and in its ports. The law on IUU fishing, which was just adopted by the Council of Government, incorporates many of the provisions from FAO’s International Plan of Action on IUU fishing and “Port State Measures Agreement”. Following the Government approval, the draft Law will be submitted to Parliament for approval, and then publication, upon which is going to become effective. Implementation of the law itself, however, will require additional capacities and coordination efforts, going as far as the possibility of an organizational restructuring of the coordination and oversight of fisheries monitoring. The Department of Marine Fisheries (DPM) has already taken key enforcement measures by setting up and investing in a very effective Vessel Monitoring System (VMS) via satellite, which equips all vessels above a certain size with tracking beacons and follows them in real time, as well as tracking measures in order to define the legal origin of catches. In order to support the implementation of the IUU Law, a national plan is being considered. The specific measures to be undertaken as part of the proposed operation include: DPL/1 Prior Actions 1.1.1: The Council of Government (Conseil du Gouvernement) has approved the draft Law on 14 Integrated Coastal Zone Management on May 16, 2013. 1.1.2: The Council of Government has approved the draft Law on Illegal Fishing on March 28, 2013. DPL/2 Indicative Triggers 1.1.1: The Council of Government adopts the National Coastal Zone Management Plan (Plan National d’Aménagement du Littoral). 1.1.2: The Minister of Agriculture and Fisheries adopts the National Monitoring Plan for Marine Fisheries. Outcomes 1.1.1: By December 2016, two regional coastal zone management plans defining local authorities’ accountability for ensuring sustainable use of coastal assets will be approved. 1.1.2: The regional maritime fisheries control and enforcement plans will be approved in 18 regions by December 2016. Policy Area 1.2 - Water sector governance 45. Improving water sector governance is key to tackle water resources deficits. The potential of renewable water resources in Morocco is estimated at 22 billion m3 per year (18 coming from surface water and 4 from groundwater), the equivalent of 730 m3/capita/year, well below the water stress threshold of 1,000 m3/capita/year. More than half of these resources are concentrated in the northern and Sebou basins, spanning only 7% of the national area. Precipitations are very irregular and may vary in space and time within a range of 1 to 9 (e.g. 47 billion m3 in 1962-63 compared to less than 5 billion m3 in 1992-93). Of the 22 billion m3 of natural renewable water resources, 13.5 billion m3 are mobilized. Nevertheless, the country’s current deficit is estimated at 2 billion m3. Current trends of water demand will lead to an increase of this deficit. The 1995 Water Law endowed Morocco with a modern legal and institutional framework for the integrated management of water resources, by establishing the principles of decentralization (creation of Hydraulic Basin Agencies, ABH), consultation (Higher Council for Water and Climate and Provincial Water Committees), integrated planning (National Water Plan, Master Plans and Integrated Development of Water Resources basin), and protection and conservation of resources (licensing, institution of water abstraction and discharge fees on the basis of “user pays” and “polluter pays” principles). GoM has included the revision of the Water Law in its Government plan with a view to completing, updating and improving some of its provisions. The National Water Plan (Plan National de l’Eau – PNE) – currently under finalization – specifies the content of regulatory and legislative reforms set forth in the National Water Strategy (Stratégie Nationale du Secteur de l’Eau – SNSE) and defines the provisions of the Water Law that need to be amended or complemented. Among such provisions, the following aspects have particular relevance: • Clarify and simplify the procedures regulating the authorizations for the use of the Hydraulic Domain (domaine public hydraulique); • Strengthen the implication of water users’ associations in the management of groundwater resources through framework conventions (Contrats de nappes); • Clarify provisions regarding sanitation and water recycling and reuse; • Strengthen the institutional framework coordination among river basin stakeholders and water users by improving the functioning of the High Council of Water and Climate, creating river basin committees and reviewing the missions and governance structures of the river basin agencies. 15 46. Morocco’s groundwater resources are strategic to ensuring notably sustainable and stable agricultural revenues, including for small scale farmers, but over the past decades stocks have been heavily impacted. The current natural renewable water resources deficit is estimated at 2 billion m3, which is partially compensated by groundwater overexploitation, estimated at 0.86 billion m3 beyond the renewable volume of 3.4 billion m3. Water abstraction for irrigation and, to a lesser extent industry, are the main drivers for aquifer overexploitation. Irrigated agriculture makes up on average 45% of agricultural value added (75% in dry years). Much of this value added comes from groundwater irrigation, owing to its ease of access and flexible use to replace or complement the current deficit of surface water for irrigation. The Souss- Massa Region resorts primarily to groundwater irrigation for its agricultural production (80% and 40% of Morocco’s total tomatoes and citrus exports are grown here). In 2012, the abstraction volume was 650 million m3, against renewable volume of only 370 million m3 - an exploitation rate of 175%. If no conservation plan is implemented, the region’s deficit will reach 400 million m3 in 2020, causing the abandonment of 31,000 ha of irrigated land, of which 9,000 ha because of dry- out, and 21,000 ha by loss of profitability due to the rising cost of pumping. Small, low income farmers who cannot afford to deepen their wells and strengthen their pumping equipment will be the first to suffer. The Souss-Massa Region is not alone: twenty aquifers are overexploited, with Haouz Mejjate reaching 160% and Saïss 150%. The combined effects of climate change and increasing water demand from the population and productive sectors will further worsen existing trends. Between the periods of 1947-1976 and 1977-2006, the number of dry years increased four- fold and surface water intake fell on average between 15 and 20%. A recent World Bank study on climate change in Morocco shows that the expected decrease in precipitation for the period 2035- 2065 compared to the period 1971-2000 ranges from 10% to 35% depending on the region, based on the A1B climate change scenario. 47. GoM’s strategy to reduce current and future water deficits while increasing the productivity of irrigated agriculture revolves around demand side management. The focus on the demand management side is sound because the water sector in Morocco does not benefit from large subsidies for O&M 10. As such, given existing water allocation priorities in Morocco - drinking water supply, energy, then irrigation - the agriculture sector is the most impacted by water shortage and demand management in the agriculture sector is important to adapt to a future of less and more variable rainfall. Improving efficient use of water in irrigation (through the shift to drip irrigation) is a priority to increase productivity of irrigated agriculture water deficit years, which are expected to increase based on the current climate change projections for Morocco. The National Program of Irrigation Water Conservation (Programme National d’Economie de l’Eau en Irrigation, PNEEI) aims to improve agricultural revenues by supporting the conversion to more efficient irrigation practices, with the objective of equipping with drip irrigation technology an estimated 555,000 hectares of surface and sprinkler irrigation to drip irrigation (about 50% of irrigated areas), including 220,000 hectares in Large Scale Irrigation (LSI) areas (collective conversion) and 335,000 hectares in private irrigation areas (individual conversion). This program will allow to increase efficiency in the use of water resources. In this context, the Government is 10 The 2008 study on the flow of funds in the water sector concluded that the Government is contributing just a little more than what the sector generates as revenue for the State. For instance, large scale irrigation, water in Morocco is billed on a volumetric basis and the O&M cost recovery in 2010 varied between 68 and 100%, depending on the operator, with an average 76% recovery of the sustainable cost of service provision, one of the best cost recovery ratios in MENA. In addition, under the Plan Maroc Vert, the government plans to entrust the water service to a proper utility company functioning under the principle of commercial law, which will further increase these ratios. 16 planning to improve and scale up river basin contracts in order to address groundwater over- abstraction. In 2005 the Government, with support of GIZ, started a pilot for a framework convention including water users at the level of the Souss-Massa basin. The initiative helped control new drilling, although the results in terms of abstraction levels and fee payments remained below expectations. To this effect, the Department of Water, River Basin Agencies, the Ministry of Agriculture and the Ministry of Interior have started consultations with all institutional stakeholders (including from the Ministries of Agriculture and Interior) to accompany the participatory process leading to groundwater agreements (contrats de nappes) aiming to develop mutually agreed reduction of withdrawal from threatened aquifers by main water users which go beyond the targets set in the river basin management plans. Further to a recent climate change adaptation study in the Oum Er Rbia River Basin, the Bank is mobilizing TA funding to accompany the participatory process, which is key to convincing major users to reduce their consumption. The specific measures to be undertaken as part of the proposed operation include: DPL/1 Prior Action 1.2.1: The Ministers of Interior, Agriculture and Water have issued the Interministerial Circular (Circulaire) requiring the conclusion of groundwater management agreements (contrats de nappes) on November 15, 2013. DPL/2 Indicative Trigger 1.2.1: The Council of Government approves the draft Law amending the existing Water Law. Outcome 1.2.1: By December 2016, groundwater abstraction in three threatened aquifers will be regulated by groundwater agreements among large water consumers. Greening Physical Capital 48. Pillar 2 supports the Government’s objectives of reducing adverse environmental impacts of infrastructure investments and promoting low carbon growth. The long life cycle of physical capital requires close attention to current investment choices, as these will shape the type of growth trajectories for decades to come. Investing now in an infrastructure base that puts Morocco on sustainable growth paths is essential, but also involves trade-offs in terms of extra- costs to economic agents, particularly in the short term. Energy is a major challenge in this respect: the country is currently too heavily dependent on fossil fuels and the projected demand increases coming from different economic sectors (such as housing, industry, agriculture and tourism) require significant additional investment in power generation capacity. Electricity demand has been growing at an average rate of 6% per year since the 1990s, more than doubling between 1995 and 2009 (from 11 to 25 TWh). The sector is highly dependent on coal (40% of electricity production). Providing the right price signals is a prerequisite to eliminate existing distortions in consumers’ and producers’ behavior, but needs to be accompanied with interventions to smoothen the transition for economic actors. Pillar 2 is composed of two policy areas: 2.1 Low carbon growth; and 2.2 Pollution management. Policy Area 2.1 - Low carbon growth 49. Morocco’s high dependency on fossil fuels has macroeconomic and environmental implications. In 2011, the country imported 95.6% of its energy demand, equal to MAD85 billion (about US$10.3 billion), up from MAD19.1 billion (roughly US$2.3 billion) in 2002. Petroleum imports account for 20% of total imports and 50% of the current trade deficit. Energy demand 17 trends will apply increasing pressures to macroeconomic stability. With a growth rate of more than 8% in 2011 (twice GDP growth) electricity demand outperformed its already high average historical growth rates. It is expected that electricity demand will double by 2020 and again by 2030. On the environmental side, although Morocco remains a relatively low emitter at 1.5 tons of CO2 per capita for energy emissions 11, its power emission intensity (729 gCO2/kWh) is twice higher than Europe’s and 35% higher than the world’s average. Morocco’s mounting urban pollution problem has long pushed CO2 levels largely above accepted thresholds. Addressing these challenges requires steps on three fronts: encouraging energy efficiency, lowering fossil fuel subsidies, and enabling the deployment of renewable energy. 50. Morocco’s National Energy Strategy aims at generating energy savings of 12% by 2020 and of 15% by 2030. Promoting energy efficiency investments requires a solid legal, regulatory, and institutional framework in order to tackle the following constraints: high up-front costs combined with long amortization times; demand needs to be supported by regulations and programs to achieve sector specific targets; and finally, communication needs to accompany consumers’ buy-in. The 2011 Energy Efficiency Law (Law 47-09) introduced appliance labeling, mandatory energy audits in industry, energy norms for new buildings, and mandatory impact studies for large energy projects. GoM has selected the building sector as a priority area to further its overall energy efficiency (EE) policy objectives, and developed a decree on residential energy efficiency allowing for thermal regulation. Its implementation is expected to allow energy savings of 1.2 million tons of oil equivalent (toe) per year by 2020 and a reduction of GHG of 4.5 million tons of CO2 equivalents. Thermal building regulations will apply to new residential and tertiary developments and support energy efficient construction techniques for a new generation of environmentally friendly buildings. 51. Reducing petroleum products subsidies is key to ensuring energy independence, fiscal consolidation, environmental sustainability, and social inclusion. In 2012, subsidies to petroleum products (gasoline, diesel, industrial fuel, butane, and electricity generation fuel) accounted for a total of MAD 47.5 billion, equivalent to roughly US$5.5 billion and 5.7% of GDP (against less than 1.5% of GDP in 2000). Subsidy outlays encourage the inefficient consumption of fossil fuels and compound energy dependence and environmental externalities by reducing incentives to investments in energy efficiency and renewable energy. They also have fiscal and social implications. They account for most of the worsening budget deficit which is compromising macroeconomic sustainability over the medium term, and have now absorbed all the fiscal space built hard over the previous decade through sound macroeconomic management. They therefore divert resources away from productive and social investments, including for sectors such as health and education - in 2012, for the first time, the budget spent more on subsidies than on investments. Petroleum product subsidies are also largely regressive. The wealthiest 20% consume up to 35.2% of the total subsidy envelope for petroleum products (gasoline, diesel, and butane), whereas the share is 11.6% for the bottom quintile. When considering only transport fuels (gasoline and diesel), the subsidy share of the poorest quintile shrinks to less than 1%. 52. Following successive attempts to reform the subsidy system since the early 1990s, the Government announced in March 2012 its intention to proceed with a gradual but comprehensive reform. In June 2012, GoM introduced a one-off increase in the price for unleaded gasoline and diesel fuel by respectively 20 % and 16%, the sharpest single increase in fuel prices in over a decade. In August 2013, the Head of Government approved an Order introducing automatic price adjustments based on international price fluctuations for three subsidized petroleum products 11 World Bank (2013) Little Green Data Book 18 (diesel, gasoline and industrial fuel). This was accompanied by the introduction of a price hedging mechanism to cover for international price variations. 12 The new system became effective on September 16, 2013 resulting in an increase in the price of gasoline by 4.8%, diesel fuel by 8.5%, and industrial fuel-oil by 14.2%. Subsidy expenditures will be kept within the amounts set in the budget law (for 2013, these were set at MAD 0.8 per liter of gasoline, MAD 2.6 per liter of gasoil, and MAD 930 per ton of industrial fuel-oil) thus improving budget predictability. In order to minimize macroeconomic, sector and distributional impacts, the Government has developed mechanisms to support economic agents ─ notably in the transport sector ─ throughout phasing out of subsidies, including through the establishment of financial support aimed also at mitigating impacts on the most vulnerable. 53. With about 83% of consumed electricity delivered by power distribution operators, the Government aims at promoting community-owned and small-scale renewable distributed generation. Currently, the power industry is dominated by centralized power production based on carbon intensive, large scale generation. Morocco now aims to amend the scope of the established legal framework (Law 13/09) to allow for the integration of distributed renewable generation. Distributed generation regulation will allow for locally produced power, in particular through roof- mounted photovoltaic systems, to complement electricity delivered from the grid. An effective support of distributed generation policy will provide policy makers with an additional tool to push through a necessary tariff reform in the power sector. Other primary benefits of renewable distributed generation include reduction of carbon dioxide emissions, reduction of environmental and social externalities, increased energy security, peak demand mitigation, reduced system losses and helping a new green industry develop. 54. Deep electricity sector reforms have been started in order to achieve 42% of renewable energy capacity by 2020. Morocco’s power sector has experienced transformational changes during the last 20 years, evolving from a vertically integrated public monopoly to a current hybrid single buyer model characterized by the strong involvement of the private sector in power generation, and distribution management. The liberalization of green electricity generation has been initiated through Law 13/09 on Renewable Energies which guarantees access to the high voltage transmission network, thus allowing for a partially opened market for renewables to coexist with a single buyer market without competition. But the transition to a low carbon power system gives rise to new market design and regulatory issues. As Morocco moves to opening low and middle voltage renewable generation, the market design has to ensure secure and reliable supply of electricity at the least possible cost, while establishing a legal, institutional and regulatory framework to enable the right market signals to encourage investments in low or zero carbon plants. For the past ten years, Morocco has worked on the introduction of an independent energy regulator, but past attempts have been unsuccessful mainly due to the complexity of restructuring distribution activities. The Government has recently announced its intention to create an independent regulator (Agence Nationale de Régulation de l’Energie - ANRE) and has started the process to design its functions, missions and organization. The specific measures supported by the proposed operation include: 12 The Order allows for a revision of domestic prices of the selected fuel products on the 16th day of each month (M). The calculation of domestic prices is based on moving averages of world reference prices over the two preceding months (from the 13th day of month M-2 to the 12th day of month M). Domestic prices are revised upward or downward whenever the calculated price variations exceed +/-2.5% and taking into account the unit subsidy defined each year by the budget law. In case the variations are less than +/-2.5%, the existing “Fuel Price Adjustment Account” would pay/receive the difference to/from the distributors. 19 DPL/1 Prior Actions 2.1.1: The Council of Government has adopted on November 14, 2013 the Decree on energy efficiency in the building sector. 2.1.2: Order (Arrêté) No 3.69.13 dated August 19, 2013 introducing automatic price adjustments for diesel, gasoline and fuel has been published in the National Gazette No. 6182 dated August 29, 2013. DPL/2 Indicative Triggers 2.1.1: The Council of Government approves the draft Law supporting the creation of the National Agency for Energy Regulation. 2.1.2: The Council of Government adopts the decree allowing for renewable energy generation connected to the medium voltage grid. 2.1.3: The Council of Government approves the draft Law amending Law 13-09 to provide renewable energy solution for the low voltage customers. 2.1.4: The Government strengthens safety nets to temper the impact of possible energy subsidy cuts. Outcomes 2.1.1 By December 2016, (i) 50% of new buildings (hospitals, residential, tertiary) built after the publication of the Decree will integrate EE requirements and (ii) the total capacity of distributed medium- and low-tension grid-connected photovoltaic systems will reach 2 Megawatts. 2.1.2 Subsidy expenditures to diesel, gasoline, and industrial fuel will account for less than 2.5% of GDP by December 2016. Policy Area 2.2 - Pollution management 55. Industrial pollution heavily contributes to degrading the quality and productivity of natural assets, particularly water. In 2003, the Bank estimated that the total annual cost from the degradation of water quality at MAD4.3 billion in 2000, or 1.2% of GDP. Data from 2007-2008 based on 39% of the measurement points of surface water across the country show water quality to be poor or very poor mainly due to organic and bacteriological pollution. For groundwater, the rate is 44% across the country (at the level of measure stations), mostly due to salinization and nitrate pollution. This pollution affects low-income populations comparatively more, as they tend to concentrate near industrial outputs. Given the severity of the impact of industrial pollution on human health and the environment, it is urgent to complete the regulatory framework in consultation with all relevant departments and ensure its timely and effective implementation. Moreover, when carried out in the framework of optimizing industrial processes, investing in industrial depollution can lead to win-win solutions, including in terms of competitiveness. Treated wastewater can be reused in the industrial process, e.g. for cooling purposes. Organic pollution, typically from agroindustry, can be treated using a process allowing generating biogas, which can be used for heating or electricity generation, thereby reducing energy consumption and carbon footprint of the industry. In addition to establishing a network of stations monitoring the quality of both surface water and groundwater, the Government has adopted an inter-ministerial Order (arrêté) setting norms and standards for industrial wastewater treatment together with the two subsequent Orders determining respectively characteristic pollution levels from selected industrial activities and respective pollution abatement levels 13. The Government intends to set up a scheme allowing industries to benefit from financial support towards depollution investments, through the 13 In French : « Arrêté conjoint portant fixation des valeurs limites générales de rejet » ; « Arrêté conjoint portant fixation des grandeurs caractéristiques et des coefficients de pollution des activités industrielles »; and « Arrêté conjoint relatif aux rendements des dispositifs d'épurations ». 20 establishment of a Voluntary Industrial Depollution Mechanism. 56. Although Morocco started implementing the “polluter pays” principle at sector level years ago, its definite formalization only happened recently, with the introduction of Environment Framework Law. Before approving the draft Framework Law, the Government had already introduced green taxes (éco-taxes) in two sectors: (i) plastic production – in order to curb demand and develop recycling value chains; and (ii) sand extraction – to reduce environmental impacts on coastal zones. This incremental approach is partly explained by the necessity to proceed based on consensus of sector stakeholders. Through the Framework Law, the Government now intends to develop a more comprehensive approach which would allow for the extension of green taxes to other polluting products and environmentally damaging activities, whilst providing the private sector with fiscal incentives to fund sustainability investments aimed at curbing industrial pollution. The definition of additional products to be subjected to green taxes and the fiscal incentive scheme will be enshrined in the 2015 Finance Law. Specific measures to be undertaken as part of the proposed operation include: DPL/1 Prior Actions: 2.2.1: The three Orders (Arrêtés) No. 2942.13, No. 2943.13, and No. 2944.13 dated October 7, 2013 on monitoring and controlling industrial wastewater discharges in the hydraulic domain stating a) general limit values; b) characteristic values and specific coefficients; and c) minimum treatment efficiency of industrial wastewater treatment plants, have been published in the National Gazette No 6199 dated October 28, 2013. 2.2.2: The Council of Ministers has approved on March 7, 2013, the draft Framework Law on Environment and Sustainable Development setting forth, in particular, the establishment of a comprehensive green fiscal framework. DPL/2 Indicative Trigger 2.2.1: The Council of Government approves the draft 2015 Finance Law introducing green taxes and financial incentives to depollution investments . Outcome 2.2: The deployment of pollution management systems will be demonstrated by (i) at least three industries having submitted a funding request to the Voluntary Industrial Depollution Mechanism, and (ii) reduction in industrial pollution (as measured by tons of BOD5 abated yearly, from 20 to 200 by December 2016). On the fiscal side, two additional products will be subject to green taxes by December 2016. Strengthening and Diversifying the Rural Economy by Leveraging Human Capital 57. Pillar 3 supports the Government objective to: (i) strengthen the adoption of new technologies to increase agriculture’s productivity and resilience and (ii) support the establishment and growth of new sectors in rural areas. Morocco has the largest inequalities in living standards between urban and rural areas in MENA. The duality of Morocco’s growth model is largely driven by the inertias of low productivity subsistence agriculture, weak diversification, failure to leverage human capital endowments, and a high gender gap. Although Morocco’s rural population strives to participate in economic activity (in 2012,14 labor force participation rate in rural areas was 57% against 42.8% in urban areas) full economic participation faces serious constraints. Around 75% of rural labor force works in the primary sector (agriculture, fishing and forestry), a share increasing to 90% for working rural women. The concentration in low productivity agricultural activities entails significant risks of fluctuations in rural revenues due to 14 Source: Haut Commissariat au Plan 21 weather variability. This contributes to creating vast pockets of vulnerability: 40.2% of the officially employed in rural areas are unpaid family helpers, only 23.1% are paid salaries, and even less than 15% have a contract (2012 figures), while 95.5% of those employed in rural areas do not have health insurance (2011 figures). In comparative terms, the rural skilled face both high rates of under-employment (16% for rural graduates versus 9.8% for the overall rural population) and unemployment (24.7% for rural graduates versus less than 5% overall). 58. As described under Pillar 1, environmental constraints place additional limits to the growth of sectors such as agriculture, fisheries and tourism (contributing together to over 30% of GDP). Combined with the labor dynamics seen above, these constraints call for (i) technological innovations supporting the enduring resilience and increased productivity of the agricultural sector, by ensuring producers’ access to adequate agricultural services and support institutions, including for direct seeding and agro-meteorological services and (ii) the diversification of rural revenues through the establishment of sectors turning sustainability constraints into job creation opportunities, such as aquaculture and eco-tourism. PDO 3 includes two policy areas: 3.1. Green technologies in the agricultural sector; and 3.2 Diversification of rural revenues Policy Area 3.1 - Green technologies in the agricultural sector 59. With 70% of the poor living in rural areas, and half of the labor force employed in the sector, enhancing agriculture’s employment capacity is essential to Morocco’s path towards shared prosperity. Because of the limits imposed by dwindling natural capital (land and water), it is essential to ensure the sustainable intensification of the agricultural systems. Consultations held before and during DPL preparation identified “green” technologies being mature enough for adoption and able to strike a balance between increasing productivity and preserving natural resources. Direct seeding is one such technology. It entails the use of special seeding machinery which avoids plowing. The practice increases and stabilizes yields under drought conditions, controls erosion, and reduces energy requirements and thus GHG emissions. 15 60. The effective transfer of green technologies to farmers is limited by three main aspects: (i) the public agricultural research system is underfunded, understaffed, and lacks the ability to coordinate research, training, and extension; (ii) lab-to-market barriers affects the accessibility and use of research results; and (iii) farmers (especially small ones) lack the financial means and adequate knowledge to prioritize investments in green technologies. To accompany the implementation of the Plan Maroc Vert, the MAPM has revised the funding mechanism of applied research and designed a strategy to improve the quality of extension and advisory services offered to farmers. Regional Coordination Committees for Research and Development have been established to account for the diversity in needs at the local level. The recently launched National Agricultural Advisory Services Strategy proposes a mixed (public and private) system for delivering advisory services. Furthermore, the MAPM and the MEF reshaped the Agricultural Development Fund (Fonds de Développement Agricole, FDA), GoM’s principal agricultural subsidy instrument, with a view to aligning support measures with the strategic directions of the 15 Direct seeding has been widely tested worldwide as well as in Morocco, and has been tested favorably among some farmers in major grain-producing regions (Chaouia, Sais, Zaer Abda, and Gharb)Experiments in Morocco proved that direct seeding can increase production by 30 to 40%, increase soil organic matter with carbon sequestration of 1 to 4 ton/ha of CO2, and reduce annual energy consumption by up to 40 l/ha of diesel fuel (INRA, 2009). 22 Plan Maroc Vert. 16 Concerning direct seeding, the MAPM decided to pilot the support to this technology in the GEF/SCCF grant integrating climate change adaptation measures into the Plan Maroc Vert. This experience confirmed that the financial constraint imposed by high upfront capital investments costs is the main bottleneck for the widespread adoption of the technology. 17 This resulted in the design of a dedicated subsidy within the FDA as part of the proposed DPL operation. 18 61. In addition to improving seeding practices, the quality of weather information and its timely translation into relevant messages understandable to farmers is a necessary condition to increasing the resilience of the most vulnerable rural populations. Particularly in rainfed areas, hotter and drier conditions and increased climate variability are weakening the capacity of farmers’ traditional knowledge to cope. The provision of relevant agro-meteorological information depends on the existence of a well-designed and functioning physical network of weather stations, as well as institutional coordination to facilitate the mobilization of knowledge and skills necessary to translate raw data into information that can be readily used by farmers. In Morocco, the two main institutions involved are the National Meteorological Directorate (DMN) and the MAPM. The MAPM has rolled out several networks of meteorological stations within its different departments over the years. These networks were created with distinct purposes, according to the missions of different entities. In addition to having the right infrastructure in place, the institutional organization of agro-meteorological information requires a consolidation and enhancement of pre-existing networks within the MAPM, for which DMN is the key partner. DMN is ready to respond to this increased demand, also with a view to grasp development and revenue generating opportunities beyond its main revenue sources (airports). The MAPM and DMN envisaged the development of a Ministerial Performance Agreement with the MEF laying out the content and modalities of agro- meteorological service provision. Specific measures to be undertaken as part of the proposed operation include: DPL/1 Prior Action 3.1.1: Order (Arrêté) No. 3186-13 dated November 13, 2013 modifying and completing Order (Arrêté) No. 368-10 dated January 26, 2010, on subsidies for agricultural equipment, introducing a subsidy for the purchase of direct seeding equipment, has been transmitted by the Minister of Economy and Finance to the General Secretariat of the Government for publication in the National Gazette, on November 19, 2013. DPL/2 Indicative Trigger 3.1.1 The Minister of Agriculture and the Minister of Energy, Mining, Water and Environment sign the Performance Agreement between the DMN and MAPM for the provision of agro-meteorological information to the agricultural sector. Outcome 3.1.1: By December 2016, farmers’ resilience to climate change will benefit from (i) improved seeding practices, as measured by the share of the envelope allocated to direct seeders in the total FDA envelope allocated to seeders (traditional and direct) which will have increased from 0 to 16.9% and (ii) enhanced agro-meteorological services, as measured by an increase from 4% to 15% of DMN revenues from agriculture. 16 The total envelope allocated to the FDA in 2012 has been MAD2.3 billion, which is expected to increase to MAD 2.5 billion in 2013, MAD 2.6 billion in 2014 and MAD 2.8 billion in 2016, in line with the increased investments for the Plan Maroc Vert. 17 The cost of a direct seeding machine ranges from MAD 150,000 to MAD 250,000, compared to that of the traditional seeding machine of about MAD 100,000. 18 The subsidy will cover up to 50% of the cost of the seeding machine for a maximum of MAD 90,000 per unit. The FDA includes also a subsidy for the traditional seeding machine, covering up to 50% of the cost of the machine for a maximum of MAD 48,000 per unit. For small farmers organized in associations, the ceiling is increased to 70% for a maximum of MAD 67,000 per unit. 23 Policy Area 3.2 Diversification of rural revenues 62. In addition to sustained agricultural growth, rural economies require the emergence of labor intensive sectors delivering opportunities for better jobs. Unemployed and underemployed skills can be mobilized by catering to job seekers looking for higher paid and higher quality work in the formal sector, including women. Aquaculture and eco-tourism activities can deliver on these objectives, whilst contributing to alleviating the environmental pressures caused by traditional sectors such as fisheries and tourism. The development of aquaculture is one of the five pillars of GoM’s Halieutis strategy. Given known limits to meeting current and future demands for captured production, the increase in farmed output becomes both a need and an opportunity. Halieutis makes aquaculture a major driver of jobs and investments, with ambitious objectives for a sizeable scale up of the current 500 tons production. In its Halieutis Strategy GoM considers aquaculture as a growth engine, as evidenced by the establishment of the National Agency for Development of Aquaculture (ANDA) in 2011. Incentive measures are being put in place in order to attract private investments. In relation to environmental concerns, GoM has taken adequate safeguards to reduce risks. As a key step in laying out the framework for the development of the sector, and achieving Halieutis’s goals of creating hundreds of new jobs over the next five years, the technical and economic criteria setting fees for concessions farms have been established (DPL/1 prior action). 63. Similarly to aquaculture, eco-tourism combines the preservation of natural assets with the generation of local economic revenues. Overall, tourism is fundamental to Morocco’s economy. The country’s coastal and climatic resources attract a critical mass of approximately 10 million visitors annually. The sector generates significant employment with 428,000 new jobs reported in the period of 2000-2009. In 2011, tourism reportedly generated as much foreign exchange as agriculture and fishing combined. The challenge for the tourism sector is now to diversify away from seaside tourism to take advantage of the full range of Morocco’s natural assets: Morocco is endowed with 168 sites of biological and ecological interest, two national parks, and 146 natural reserves. These constitute a natural resource base from which eco-tourism activities can be developed. As one of the fastest growing sectors in the global tourism industry, with annual growth rates of 10–12%, eco-tourism can be a significant source of employment, economic growth and foreign exchange for Morocco, and support the provision to rural populations of an additional diversified source of incomes outside agriculture. But unlocking the economic benefits of ecotourism requires complementary investments in physical and human capital. As part of its ambitious strategy aimed at developing the tourism sector (“Vision 2020”), the Ministry of Tourism (MoT)’s “Qariati” Program aims to develop eco-tourism in rural areas. “Qariati” aims at expanding accommodation facilities (35,000 additional beds, from a current base of 20,000) and support infrastructure (signage, welcome/interpretation centers, tourist attractions, and thematic circuits, i.e. culinary and agribusiness trails) while fostering tourism income-generating activities. This effort is projected to generate 25,000 new direct jobs by 2020. In order to implement Qariati, an inter- ministerial MoU between the ministries of Interior, Agriculture, Handicraft, Habitat, and Youth and Sport is currently being negotiated. GoM is aware that implementation capacities at local level will be crucial to the Program’s success, and has devised a governance framework hinging around the creation of Local Development Companies (Sociétés de Développement Local) in charge of implementing the program, through public and private equity investments, which should become operational in 2014. Specific measures to be undertaken as part of the proposed operation include: DPL/1 Prior Action 3.2.1: Order (Arrêté) No.3151-13 dated November 11, 2013 establishing the technical and economic criteria setting the lease fee to be paid by aquaculture farms, has been transmitted by the Minister of Economy and Finance to the General Secretariat of the Government for publication in the National Gazette on November 15, 2013. 24 DPL/2 Indicative Triggers 3.2.1: The National Committee on Impact Studies validates the Directive specific to the aquaculture sector and ANDA publishes the Strategic Environmental Assessment for the Aquaculture sector. 3.2.2: At least two Local Development Entities tasked with the implementation of the national rural and eco-tourism program (Qariati) are established. Outcome 3.2: 345 new jobs in aquaculture and 1,100 new jobs in eco-tourism will be created by December 2016. 64. The operation builds on a solid and diverse body of analytical and technical work conducted by the Bank, Government and other financial and technical partners over the past years. Table 5 below lists the key analytical underpinnings by PDO and prior action. Table 5: Prior Actions and Analytical Underpinnings Prior actions Analytical Underpinnings Pillar 1: Improving the Management of Natural Assets 1.1.1 The Council of The coastal zone management reforms supported by the operation build on the report of the Government (Conseil MedWetCoast project, the Short and Medium-term Priority Environmental Action Programme du Gouvernement) (SMAP III) of the European Union, and the Adaptation aux Changements Climatiques au Maroc has approved the (ACCMA) project financed by IDRC. MedWetCoast produced research specific to the management draft Law on integrated coastal of wetlands in the Mediterranean basin, which in Morocco includes some Ramsar Convention sites zone management, on and other sites of particular interest in the northeast of the country. ACCMA, centred on the Berkane May 16, 2013. and Nador provinces of the Oriental region, was an exercise in capacity building to reinforce decision making for communities in the coastal zone under conditions of climate change. SMAP III was part of a program of technical assistance and capacity building to strengthen environmental strategy and governance to favor integrated coastal zone management approaches. The reforms directly build on the Government 2005 report A strategy for the reform of coastal management. 1.1.2 The Council of Measures under the fisheries component directly stem from the implementation of the FAO Government has International Plan of Action to Prevent, Deter, and Eliminate Illegal, Unreported and Unregulated approved the draft Fishing (IUU IPOA) and its related analytical bases. The IUU IPOA was adopted in 2001 as a Law on illegal voluntary instrument and is universally recognized as containing all the measures that states can take fishing on March 28, 2013. to address the growing threat of pirate fishing, including the actions supported by the proposed DPL series aimed at adopting and implementing a broad IUU legislation. The need to place a strong emphasis on enforcement was also confirmed in two studies completed in 2011, one on Adaptation challenges in the Fisheries sector prepared by the World Bank, in collaboration with the Department of Maritime Fisheries (Département de la Pêche Maritime, DPM), and the other on green growth in the Mediterranean (2012 MED Report: Toward Green Growth in Mediterranean Countries). 1.2.1 The Ministers The water sector governance axis builds on the seminal Water Sector Policy note (World Bank, of Interior, 2004). The Government's proposals to revise the provisions of the Water Law on the governance of Agriculture and the sector are consistent with the recommendations of the Water Sector Policy Note on the Water have issued institutional aspects: improving the functioning of the Higher Council for Water and Climate (Conseil the Interministerial Circular (Circulaire) Supérieur de l’Eau et du Climat, CSEC), creation of basins’ committees, improving the governance requiring the of the hydraulic basin agencies (Agences de Bassins Hydrauliques, ABH). Additionally, the conclusion of assessment study of Water Law 10-95 implementation (MEMEE, 2011), which encompasses four groundwater reports: (i) Diagnosis of the Water Law implementation; (ii) Analysis of the institutional context; (iii) management Evaluation of the achievement of the Water Law objectives; and (iv) Evaluation of the impacts of the agreements (contrats implementation of the Water Law; defined the main boundaries and areas for revision. Specifically de nappes) on on groundwater management, a number of Bank and country studies were conducted on groundwater November 15, 2013.. agreements. Among these studies, Impacts of Climate Change on Water Resource Management and Adaptation Measures in the Oum er Rbia River Basin, Morocco (2013) and the legal expertise for the elaboration of a groundwater management contract (2012), which shows that water availability in Morocco will be reduced as a result of climate change. Additionally, supported reforms were designed thanks to a) the GW-MATE technical assistance for sustainable groundwater management strategies (World Bank): Between 2006 and 2008, the Bank, through the GW-MATE, supported the Water Department in developing, with the water users, Action Plans for a sustainable groundwater management in three basins, which were used to design the aquifers contracts for the management of groundwater (contrats de nappes); b) advisory services for the establishment of the framework 25 convention to preserve water resources in the Souss-Massa river basin (GIZ, 2012): This study analyses strengths and weaknesses of the only groundwater contract that has been piloted in Morocco and suggest improvement avenues; c) Elaboration of a standard groundwater management contract (MEMEE, 2012): This study contains an international benchmarking of contracting arrangements for the management of groundwater resources, provides lessons in light of the Moroccan experience and proposes a standard groundwater management contract. Pillar 2 : Greening physical capital 2.1.1 The Council of The following three studies have informed the design of the prior action on energy efficiency: (i) the Government has Clean Energy Transition: stock taking of achievements and prospects in RE an EE (World Bank) adopted on report reviews achievements on RE and EE deployment in Morocco, including from the November 14, 2013 implementation of the projects financed by the World Bank which have tried to tackle key sector the Decree on energy efficiency in the issues. (ii) the study on the EE Agency reorganization (World Bank and ESMAP for ADEREE, 2008) building sector. contains recommendations for the organizational structure and mandate of the new agency; (iii) the joint report on Technical Elements of the thermal regulation in buildings in Morocco (ADEREEE, UNDP, GIZ, 2012) provides quantitative guidelines as an input to the building code decree. 2.1.2 Order (Arrêté) The following studies informed actions on reforming petroleum products subsidies: No 3.69.13 dated Recommendations for a new subsidy system for petroleum products in Morocco (Beicip Franlab for August 19, 2013 World Bank, September 2009). The report provides recommendations to develop a new introducing compensation system, while protecting the most fragile Moroccan classes. Several scenarios are automatic price adjustments for designed, with a particular attention to LPG and diesel. Subsidization of petroleum products in diesel, gasoline and Morocco (Beicip Franlab for World Bank, June 2012). The report takes stock of the current situation fuel has been and the measures already implemented to reduce the burden on the Moroccan public finances, published in the including the history of the adjustments undertaken or preconized in the compensation fund National Gazette No. computation. The Bank also provided advice based on global best practice around key analytical 6182 dated August products such as Implementing Energy Subsidy Reforms: an Overview of Key Issues (Maria 29, 2013. Vagliasindi, WB Working Paper, 2012). 19 Based on a review of 20 developing economies that have undertaken subsidies reforms, this report provides evidence that implementation of compensatory social policies and an effective communication strategy, before the changes were introduced, made a difference in securing the successful implementation of reforms. Additionally, a PREM-HD-SD team helped the government assess distributional impacts through the development of models to perform incidence analysis of the impacts of different reform scenarios proposed by the Government on macro variables (inflation, budget, poverty, etc.). Under the same activity, the Bank provided support to the development of mitigation measures, including by sharing international best practices on cash transfers (conditional and unconditional); identifying and designing key features of the cash transfer program, including program objective, conditionality, institutional arrangements, budget, benefits, payment mechanism, information campaign, Monitoring and Information System (MIS), and M&E system. Following high level workshops and study tours organized by the Bank in Mexico, Chile and Indonesia (2008), the Bank prepared at the Government's request a Targeting and Social Protection Strategy Note. A key recommendation of the Note is to reform subsidies which would free up the resources needed to scale up better targeted and more cost/efficient social protection programs. The Bank also carried out a political economy analysis of reform acceptability dynamics targeting butane subsidies based on quantitative (nationally representative survey) and qualitative techniques (interviews and focus groups). The analysis showed the limited leeway for comprehensive subsidy reform, the need for gradualism in carrying out the reform agenda, and the need for a thorough communication campaign aimed at informing the population of the very existence of the subsidy system, in addition to its benefits and disadvantages. To assess the long term welfare impacts of reforms, the Bank team is also currently helping the Haut Commissariat au Plan (HCP) and the Ministry of Energy develop a Computable General Equilibrium (CGE) model capable of assessing the longer term trade-offs (2030) involved in achieving Morocco’s ambitious renewables and efficiency objectives and carrying out subsidy reform, including in terms of distributional impacts. 2.2.1 The three Discussions on the establishment of norms and standards for industrial wastewater started in 1996, Orders (Arrêtés) No. just after the publication of the Water Law. Significant resistance from stakeholders prevented to 2942.13, No.2943.13, reach any agreement. In November 2010, Ministries of Industry, Water and Environment and Interior and No.2944.13 reached an agreement on a draft Order for general discharge norms and standards. However, the dated October 7, 2013 on monitoring process halted as Industry requested to differentiate norms and standards for direct discharges in the and controlling environment from norms and standards for indirect discharge in a municipal wastewater sewer. An industrial wastewater independent expertise was contracted in 2012. This study on establishment of norms and standard for discharges in the industrial wastewater (MEMEE, 2012) clarified the legal framework for the establishment of a 19 Additional analytical underpinnings related to this axis are described in the Poverty and Social Impacts section. 26 hydraulic domain system of norms and standard for the discharge of industrial wastewater. As indicated in paragraph stating a) general 55, recent progress on this front has allowed the Government to issue an inter-ministerial Order limit values; b) (arrêté) setting norms and standards for industrial wastewater treatment together with the two characteristic values subsequent Orders determining respectively characteristic pollution levels from selected industrial and specific coefficients; and c) activities and respective pollution abatement levels. The Bank, with other donors, is mobilizing TA minimum treatment funding to demonstrate win-win situations to be gained from integrating depollution in a broader efficiency of improvement approaches, hence hoping to address the issue for industries generating organic industrial wastewater pollutions, which include most agro-industries. treatment plants, have been published in the National Gazette No 6199 dated October 28, 2013. 2.2.2 The Council of As to the green fiscal framework axis, the German Development Cooperation (GIZ) supported a Ministers has study on Environmental Fiscal Reform which benchmarked international experiences in approved on March environmental taxation and possible avenues to introduce environmental taxes in Morocco. 7, 2013, the draft Additionally, the Bank is currently providing technical assistance to the Ministry of Environment and Framework Law on environment and the Directorates of (i) Budget; (ii) Taxes; and (iii) Customs of the Ministry of Economy and Finance sustainable to define the framework for introducing future environment taxation to additional polluting products development setting and practices. forth, in particular, the establishment of a comprehensive green fiscal framework. Pillar 3 – Strengthening and diversifying the rural economy by leveraging human capital 3.1.1 Order (Arrêté) Regarding the adoption of direct seeding, in addition to the extensive research work carried out by the No. 3186-13 dated National Institute of Agricultural Research (INRA), the Agricultural Development Agency is November 13, 2013 carrying out a study on the adoption of direct seeding in Morocco, to be completed by the end 2013. modifying and On agro-meteorological services (DPL/2 trigger), a recent Bank financed report has taken stock of the completing Order (Arrêté) No. 368-10 state of the country’s different networks of weather stations and proposed ways of organizing the dated January 26, flow of weather information to the sector. This spurred the dialogue between the Ministry of 2010, on subsidies Agriculture (MAPM) and the Directorate of National Meteorology on the performance agreement, for agricultural which is supported by a specific technical assistance, aimed at unlocking efficiency gains in the equipment, interactions between MAPM and DMN on agro-meteorological information. In order to achieve introducing a subsidy better efficiency and performance of the DMN, a study on the change of the Directorate has been for the purchase of launched: a first part has been carried out and a second part will take place. direct seeding equipment, has been transmitted by the Minister of Economy and Finance to the General Secretariat of the Government for publication in the National Gazette on November 19, 2013. 3.2.1 Order (Arrêté) The analytical work leading to the Halieutis strategy, in which GoM identified aquaculture as a No.3151-13 dated priority in increasing national production of fish products underpins the aquaculture axis. More November 11, 2013 analysis was carried out in the context of a GEF grant initiated in 2012 and targeted at pilot projects establishing the on integrated coastal zone management along the eastern Mediterranean coast of Morocco, and for technical and economic criteria which aquaculture is one of the main activities. In addition, ANDA commissioned a number of setting the lease fee technical papers and benchmark studies, including on the level at which the licensing fees should be to be paid by set. Finally, the willingness to pay of private operators for license fees was further determined aquaculture farms, through the results of various calls for bids (Appels à manifestation d’intéret) that were launched by has been transmitted ANDA. by the Minister of Economy and Finance to the General Secretariat of the Government for publication in the National Gazette on November 15, 2013. 27 4.3 LINK TO CPS AND OTHER BANK OPERATIONS 65. The operation is fully in line with the FY10-13 CPS discussed by the Board in January 2010 and the CPS progress report approved in June 2012. The proposed operation contributes directly to the achievement of the objectives of the CPS pillar III on achieving sustainable development in a changing climate and pillar I on enhancing growth, competitiveness and employment. Additionally, the proposed operation is fully aligned with the 2012 Bank’s framework for engagement in MENA and particularly with its objective of accelerating sustainable growth. The operation is aligned with the MENA Regional Update on ‘Engaging toward Shared Prosperity’ as well as the SDN Sector Update on ‘Stepping up Inclusive Green Growth’ discussed by the Board respectively on January 30 and February 3, 2013. Finally, in supporting policy measures aimed at cleaner, more efficient, resilient and socially inclusive growth, the DPL series operationalizes the conceptual framework for Inclusive Green Growth set out by the World Bank. 20 66. The proposed operation is aligned with the Bank’s policy and investment engagement in Morocco. Support to the Government’s environmental sustainability objectives remain common threads throughout recently completed and ongoing development policy operations. The IGG DPL builds on and complements the focus of the Municipal Solid Waste Sector DPL series on improving Morocco’s environmental control and management framework. IGG measures on direct seeding and agro-meteorological services are synergetic to the focus of the Plan Maroc Vert DPL series on irrigation efficiency and improving agricultural services. Additionally, the proposed IGG DPL/1 builds on several investment operations. The Ouarzazate Concentrated Solar Power project supports the renewable energy objectives supported by the IGG DPL series. The Modernization of Irrigated Agriculture in the Oum Er Rbia Basin project shares the objective of promoting the sustainable use of irrigation water to overcome current and future water deficits in line with the IGG DPL-supported reform areas on agro-meteorological services and groundwater management. The Integrated Coastal Zone Management GEF grant pilots the application of coastal zone management approaches in the country, and informed the development of legislative and regulatory actions on coastal zone management supported by the IGG DPL. The Integrating climate change adaptation in the implementation of the Plan Maroc Vert SCCF/GEF grant pilots the adoption of climate change adaptation measures in projects directed to small farmers, and the mainstreaming of the lessons learned into the national agricultural strategy. Finally, the operation’s design has considered the synergies and complementarities with three operations currently at various stages of preparation, namely: a) the Urban Transport Sector operation and its expected focus on improving air quality in cities, reducing greenhouse gas emissions, and enhancing energy efficiency, which is aligned with the IGG DPL’s objective of greening physical capital; b) the Morocco Integrated Risk Management PforR, which will finance investment and institutional measures to mitigate climate risks complementary to the IGG DPL focus on agro-meteorological services and improved seeding practices; c) the Sustainable Tourism operation, currently in pre-identification, which could extend the IGG DPL dialogue around sustainable tourism in rural areas to urban tourism. 4.4 CONSULTATIONS, COLLABORATION WITH DEVELOPMENT PARTNERS 67. The Government has consulted widely on the key policy areas supported by the operation. The first pillar of the Government consultation approach is constituted by the participatory nature of the activities of official think tanks such as the Royal Institute of Strategic 20 Inclusive Green Growth. The Pathway to Sustainable Development (World Bank 2012) 28 Studies 21 and the Economic, Social and Environmental Council, which have both produced seminal policy outputs on the green economy in 2011 and 2012 22 based on extensive consultations within and outside government aimed at sounding out attitudes and perceptions on this policy agenda. Similarly, the development of the various sector strategies supported by the operation (Water, Energy, Fisheries, and Agriculture 23) was framed around substantial consultative efforts with key sector stakeholders as well as with citizens carried out since 2009. More recently, the establishment of the National Environment Charter in 2011 was based on a broad-based participatory process including online feedback and actual consultative events throughout the country. Public interest and debate around the Government’s Green Growth agenda is evidenced by the media’s considerable attention to the subject. 68. The key legislative changes included in the DPL have been supported by specific broad-based consultative processes targeting stakeholders and beneficiaries. The draft Framework Law on the Environment and Sustainable Development, the Coastal Zone Law, and the Law on Illegal Fishing have benefited from online consultations carried out by the General Secretariat of the Government between January and June 2013 and feeding into the drafts submitted for approval to the Council of Government. The Energy Efficiency axis of the DPL is supported by the Etats Généraux de l’Efficacité Energetique - a thorough participatory process launched in the spring of 2013 and organized by the Renewable and Energy Efficiency Agency (Agence pour le Développement des Energies Renouvelables et de l’Efficacité Energétique, ADEREE) and including specific consultative commissions on energy efficiency in buildings, which will feed into the legal acts supported by the DPL. 24 The groundwater management policy area benefits from extensive participatory feedback collected during the piloting of the groundwater contract for the Souss region. In addition, numerous consultative events on groundwater contracts were organized in Rabat and locally in the context of the German technical cooperation (GIZ) Program on Integrated Water Resources Management in Morocco (Appui à la Gestion Intégrée des Resources en Eau, AGIRE 25) and the preparation of this DPL operation. The introduction of the direct seeding subsidy was the result of the extensive consultations carried out by the de-concentrated offices of the Ministry of Agriculture and Maritime Fishery (MAPM) especially with small farmers from the Chaouia – Ouardigha and the Rabat – Salé – Zemmour – Zaër regions benefitting from the Special Climate Change Fund (SCCF) / Global Environment Facility (GEF) grant integrating climate change adaptation into the national agricultural strategy of the Plan Maroc Vert (as part of the PICCPMV project financed by the World Bank and coordinated by the Agency for Agricultural Development ─ ADA). The consultations identified the high cost of the seeding machine as the main bottleneck to widespread technology adoption, coupled with the lack of knowledge of direct 21 http://www.ires.ma/en/meetings-and-debates/discussion-key-findings-study-titled-sustainability-moroccan- development-model-green-economy 22 http://www.ces.ma/Documents/PDF/Rapport%20du%20Conseil%20Economique%20et%20Social- Economie%20Verte-VF.pdf; 23 Consultations carried out in relation to the Plan Maroc Vert have been documented in the program documents of the DPL series in support to the national agricultural strategy. DPL/1 was approved by the Bank Board in March 2011 and DPL/2 in March 2013. 24 A consultative diagnostic process on energy efficiency (Etats Généraux de l’Efficacité Energétique) was launched in May 2013. Its main objective is to elaborate a national energy efficiency strategy, including associated actions plans with specific indicators. This process gathers a variety of stakeholders’ views (public and private actors operating in several sectors including building, industry, transport, agriculture, fisheries, as well as banking) on potential energy efficiency programs, institutional, legal and regulatory frameworks, promotion of capacities, and the role of national and international cooperation. http://www.aderee.ma/index.php/fr/expertise/efficacite-energetique/262-les-etats-generaux-de-lefficacite- energetique--un-projet-federateur 25 http://www.agire-maroc.org/programme-agire.html 29 seeding benefits and its impact on productivity. In addition, the private sector was involved in a roundtable on direct seeding together with representatives of farmers associations and research institutes, held in October 2013 in the Chaouia – Ouardigha region. On subsidy reform, the Government has launched a communication campaign to sensitize the public, and established consultations processes with the National Business Association (CGEM) on compensatory measures to be put in place to avoid inflationary pressures, but also seize the opportunity to accompany reforms in the transport and industrial sector. 69. Activities carried out by the Bank also contributed to gathering feedback on various aspects of the operation. In June 2012, the Bank organized a specific event on the Green Growth agenda gathering nearly 100 individuals from the Government and beyond. The event – which saw the active participation of several Ministry level figures, including the Ministry of Economy and Finance, aimed at assessing the level of consensus among key stakeholders in the context and key challenges around Green Growth at sectoral and cross-sectoral level. The event confirmed the strong focus in investing in green sectors with a view to exploiting their job creation opportunities which informed the IGG DPL’s PDO 3. The Bank also helped the Government assess the political economy of subsidy reform, through an activity designed to gather citizen feedback on the removal of butane and flour subsidies. The activity financed a national representative survey and key stakeholder interview to help the Government assess leeway on these areas, and design a related communication campaign. The CPS consultation on Green Growth held in the fall of 2013 with several CSO representatives confirmed the choice of pillars and policy areas. 70. The Government will deploy additional and dedicated consultative and citizen engagement mechanisms to support the Program. The Ministry of Environment will launch an inclusive dialogue with governmental and non-governmental counterparts in the framework of the development of its Sustainable Development Strategy which will include online consultations on the specific triggers included in the second operation of the series. The Ministry of Water has agreed to develop citizen engagement mechanisms in the framework of the groundwater management reform and industrial depollution, to be implemented with Bank support ahead of the second operation. The Green Economy Commission of the General Confederation of Moroccan Enterprises (CGEM) agreed to be associated with efforts to gather private sector concerns and suggestions on the reform program, particularly in relation to the green taxes trigger. 71. The design and preparation of the IGG DPL benefited from the support of a range of donors engaged with Morocco’s sustainability agenda. A donor coordination group on environmental, climate change, and sustainability aspects is active in Morocco under the leadership of the Ministry of Environment and Germany’s Development Cooperation. The IGG DPL has ensured alignment with GoM priorities and harmonization with external partners. The policy actions on industrial waste water, energy efficiency and energy regulation supported by the DPL also build on and complement measures included in EU budget support operations. Groundwater policy reforms also benefit from technical assistance provided by the German technical cooperation (GIZ) through the AGIRE 26 program and AFD. The AfDB’s Agriculture DPL series supports climate mitigation actions in the agriculture sector, which links with the IGG DPL’s support to direct seeding practices. The IGG DPL has leveraged the technical support of the Wealth Accounting and Valuation of Ecosystem Services initiative (WAVES) 27 – a Bank-steered multi- partner platform including several donors – to support the GoM’s objective of establishing natural capital accounts. In terms of complementarities, the exclusion of actions on forestry from the IGG 26 http://www.agire-maroc.org/programme-agire.html 27 http://www.wavespartnership.org/waves/ . WAVES donor partners include: Australia, Canada, Japan, Norway, France, the United Kingdom, as well as UNEP, UNDP and the UN Statistical Commission 30 DPL policy matrix derives from the recent finalization of a forestry sector budget support operation financed by the EU. Finally, the EU has agreed to a US$230,000 allocation to fund technical assistance activities supporting the IGG DPL series through the MENA Climate Change MDTF. The Bank will continue the dialogue with donor partners to ensure full harmonization and leverage the provision of grant funded TA as well as parallel and joint financing to support the implementation of envisaged reforms along the DPL series. 5. OTHER DESIGN AND APPRAISAL ISSUES 5.1 POVERTY AND SOCIAL IMPACTS 72. The reforms supported by the proposed operation are expected to generate positive and generalized social impacts, including for poor and vulnerable groups. In relative terms, poor and vulnerable groups are known to be more impacted by common pool problems and environmental externalities. Measures supported by the DPL aimed at improving the sustainability of natural assets and environmental stewardship are key to ensuring equity and shared prosperity, including from an inter-generational perspective. 28 Additionally, several reform areas target directly the agriculture sector, where most of Morocco’s poverty and underemployment remain. To ascertain potentially adverse impacts on specific groups, the Bank has carried out a framework poverty and social impact assessment of selected reform areas supported by the operation, including: (i) energy subsidy reform; (ii) the introduction of environmental taxes on specific polluting goods; (iii) control of illicit fishing practices; (iv) groundwater management; (v) industrial wastewater control; (vi) ICZM. Additionally, the Bank has supported GoM in assessing and addressing the potential negative impacts of future reductions of energy subsidies through dedicated TA. The main results of this body of analytical work are listed below. 73. Supported measures have a clear gender dimension. Natural resource use is socially differentiated, as is environmental vulnerability. Women play a key role in the management of natural resources, including soil, water, forests and energy, and often their traditional responsibilities as food growers, water and fuel gatherers make them more likely to be impacted by environmental degradation 29 and weather shocks, such as floods and droughts 30. Experience also shows that the resiliency of households and communities also depends greatly on women’s know how. The operation supports policies and programs that leverage women’s role, through (i) actions aimed at shielding the agricultural sector from weather shocks (e.g. groundwater management, agro-meteorological services, seeding practices) in which women have a clear role to play and (ii) measures aimed at supporting the development of eco-tourism and aquaculture investments which will provide additional job creation opportunities which rural women can benefit from. 74. Petroleum products subsidy reductions supported by the DPL/1 are expected to have a modest impact on the poor and vulnerable. Subsidy reductions increased diesel prices by 4.8%, gasoline prices by 8.5% and industrial fuel prices by 14.2%. These products account for a negligible part of the poorest households’ expenditures. An incidence analysis based on distributional impact models developed by the Bank in partnership with GoM 31 shows that (i) 28 Social Dimensions of Climate Change – Equity and Vulnerability in a Warming World, World Bank, 2010 29 Women and the environment – United Nations Environment Program, 2004 30 Gender, climate change and health. World Health Organization, 2011 31 The development of the models was carried out in the framework of a ESW/TA program supporting the Government’s overall subsidy reform agenda which, in addition to impact assessments, included (i) capacity building to MAGG regarding the establishment of a cash transfer program (design, institutional framework, beneficiary registry, payment system); (ii) political economy analysis of reform acceptability dynamics 31 expenditures on subsidized products increase only for the wealthiest households (Figure 2), and (ii) overall households real consumption decreases by less than 0.5% and by less than 0.25% for the first five deciles of households over the next three years. Poverty levels remain unchanged. The Government aims to minimize inflationary pressures by agreeing on compensatory measures with transport sector categories. The fiscal space created by the cost savings will be partly recycled into additional social and productive investments, including in public transport. Going forward, the government intends to strengthen social safety nets (DPL/2 trigger) in order to mitigate the impact of possible subsidy reductions. Figure 2: Impacts of petroleum products subsidy reductions, by decile Expected increase in HH expenditures on subsidized Expected decrease in real HH consumption following products following subsidies reductions, by decile subsidy's reduction, by decile 75. Impacts of other prior actions and triggers on the poor and vulnerable are limited. The Bank has carried out a framework PSIA to identify potential areas where impacts may arise as well as potential trade-offs. Measures to address illegal fishing will mainly impact large scale actors. Control measures will particularly benefit small scale fishermen engaged in artisanal fishery, who will benefit from increased sustainability of the marine resources upon which they depend, and who will also benefit from measures to accompany the transition. Morocco has a long history and record of consultations with its fishermen and the new surveillance measures have been discussed with and approved by the stakeholders through consultations with their representatives (the so- called “chambres maritimes”). On groundwater management agreements, key impacts stem from the introduction of water abstraction quotas which could limit water users’ revenues, but large farmers will be the primary target of these measures. As to mitigation measures, the Government has set up subsidies (up to 100% for small farmers) to water efficiency investments such as drip irrigation, which allows users to maintain crop production and revenues with more limited amounts targeting butane subsidies based; (iii) assessment of long term (2030) trade-offs of subsidy reform based on CGE modeling. Three models were developed by the Bank to assess the impact of the reform of subsidies on households and public finances in partnership with the Government of Morocco. Two models of impact analysis as technical assistance to MAG (subsim and a model in Excel) and a computable general equilibrium model with MEMEE to evaluate Morocco's energy strategy. The outputs of these models have helped to understand the potential effects of the reform of subsidies on households, particularly poor households. Products affected by the recent reform of subsidies are not commonly used by poor households. In addition, the indirect effects of this reform on prices are modest and subsidized products fundamentally important for the poor (butane, flour and sugar) are not affected by the recent reform implementation. 32 of water. Additionally, water users are accompanied in the development of expertise and skills necessary in the utilization of drip irrigation by the decentralized services of the Ministry of Agriculture and the national agricultural extension agency (ONCA). 5.2 ENVIRONMENTAL ASPECTS 76. Morocco is endowed with a well-articulated legal and institutional framework for environmental protection. Over the last decade, the Government has made progress in establishing a full-fledged environmental legislation and articulating the different layers of the administration supporting it. The Law No. 12-03 approved in 2003 and its related application decrees defined the requirements for Environmental Impact Assessments (EIAs) and created review and oversight structures for implementation, such as national and regional EIA committees, as well as the procedures for public consultation and disclosure. The monitoring and control framework has also been recently strengthened through the creation of national and regional observatories for environmental protection (OREDD), and the creation of an environmental police. Donors and international development agencies, notably EU, GIZ, and AFD provide solid support to Morocco’s environmental sustainability agenda. The Government intends to broaden the scope of application of the EIA Law to other projects in order to further strengthen its scope, in particular in relation to the treatment of cumulative impacts of investments, in addition to the requirement for Strategic Environmental Assessments of sector programs, policies and strategies. 77. As per OP 8.60, the World Bank assessed whether specific country policies supported by the DPL series are likely to cause significant effects on the country’s environment, forests, and other natural resources. The assessment concluded that the policies supported by the proposed DPL are not likely to have negative impacts on the country’s natural assets (see also Annex 4). All actions supported by the proposed operation aim to enhance environmental stewardship and are likely to lead to net positive environmental outcomes: • The implementation of the coastal zone law lays the regulatory framework protecting areas that harbor fragile ecosystems and are critical to the country’s economy for their tourism and fisheries potential. • The development of the National Coastal Zone Management Plan and the regional Schemas d’Amenagement will provide further tools to strengthen the impact management framework for sector investments along the coast. • Water-related measures, including for groundwater, aim to address critical aspects of resource management needs for a country that expects its water stress condition to deteriorate even further in the coming years. Existing analytical work (see Table 5 above) demonstrates the positive environmental effects of leveraging participatory process to limit groundwater abstraction to sustainable levels, with no negative environmental impacts; • The fisheries actions aim squarely at reinforcing control over fishing activities and to prevent illegal fishing, which significantly compounds depletion of marine living resources. The marine fisheries measures supported by the DPL entail no potential adverse environmental impacts; • Energy related measures support a decrease in energy intensity of the economy and related pollution and emission impacts. The types of renewable investments enabled by the legislation in this sectors entail negligible environmental risks, as they essentially concern residential and small scale photovoltaic development, which in 33 the case of the former are impact neutral, and in the case of the latter will be subject to the provisions of the EIA Law; • Reforms related to seeding practices and improvements in the provision of agro- meteorological services will contribute to enhancing the resilience of the agricultural sector to climate change impacts, enhance conservation and reduce soil degradation. • The development of the eco-tourism sector based on robust environmental norms and standards for investments will ensure that the sought-after development of economic activities in rural and remote areas will not come at the detriment of natural assets. 78. The only significant risk of incurring negative impacts on the environment through this DPL comes from the development of the aquaculture sector. The projected growth rates of this sector indicate that a substantial expansion of aquacultural activity is foreseen between the present and 2020 (see section 4.2 above), with strong potential to continue beyond that date. While national legislation is adequate to handle environmental impact assessment for individual fish farms, the concern is the potential for cumulative impacts as large numbers of such farms begin operating, especially if in close proximity to one another and to other human and natural users of the coastal zone. 79. The environmental risk associated with aquaculture varies with the species farmed and methods used. Potential environmental impacts of aquaculture projects, including cumulative impacts on a larger scale, depend in great part on (i) the species that are being cultivated, and (ii) the way in which they are being farmed. For instance, whilst pisciculture can have serious deleterious effects if feed and antibiotics are mismanaged, shellfish and algae farming normally have beneficial impacts on the environment. This is particularly the case for ostreiculture (oyster farming), upon which most of the aquaculture industry has been built so far. In the case of traditionally more polluting activities, the prevention, identification and treatment of diseases can avoid excessive use of antibiotics - the major health and environmental risks of fish aquaculture. In addition, many of the worst environmental impacts can easily be mitigated by avoiding high-input high-output intensive systems (e.g. salmonids in raceways and cages), so one of the key decisions will be to determine what species can be farmed, and how. 80. It will be crucial for the Government to retain a clear picture of the overall size, geographic distribution, nutrient consumption, and pollution output of the aquaculture sector across the country as this expansion unfolds. Appropriate legislative authority, clear institutional responsibility and capacity to enforce the future environmental control regime are also critical to the government role in this expansion of the aquaculture industry. 32 81. In recognition of these risks, the Government is strengthening the performance of the environmental impact control framework for aquaculture investments. ANDA has already engaged the Ministry of Environment in establishing the process to address cumulative impact risks. The first step in this sense will involve a strategic environmental assessment (SEA) to be carried out by ANDA in the first quarter of 2014, followed by a set of framework environmental impacts assessments for the areas that have been identified for aquaculture development. Based on the results of the above, the Ministry of Environment will issue a specific Directive complementing the framework of the existing EIA Law by detailing specific procedures for environmental controls 32 Environmental Impact Assessment and Monitoring in Aquaculture, FAO 2009; Understanding and Applying Risk Analysis in Aquaculture, FAO, 2009 34 of aquaculture investments. The planned revisions to Moroccan legislation on environmental impacts aimed at better addressing cumulative impacts, particularly through the requirement for SEA of sector programs, will also help strengthen the control and monitoring framework for aquaculture, and leverage the assessments carried out by ANDA. The DPL/2 includes a trigger supporting the Government measures to strengthen the monitoring and control framework for aquaculture investments. The World Bank team will be monitoring progress on these aspects during DPL/1 and DPL/2 and will remain available to accompany this process and assist with any technical assistance needs that may arise from it. 82. To a lesser extent, the promotion of ecotourism also entails cumulative impact risks. To this end, the Ministry of Tourism aims to require the Local Development Companies tasked with developing the ecotourism program to develop detailed Environment Management Plans and to introduce environmental management norms and standards for standard bidding documents for ecotourism investments. 5.3 PFM, DISBURSEMENT AND AUDITING ASPECTS 83. Morocco has an overall credible, comprehensive, and transparent budget. The 2009 Public Expenditure and Financial Accountability (PEFA) review carried out by the World Bank and the EU confirmed substantial progress in Public Finance Management (PFM) reforms in Morocco. The PFM system supports the achievement of aggregate fiscal discipline, strategic allocation of resources and efficient service delivery. Main strengths include: (i) budget credibility and transparency budget, including through full publication of the annual budget; (ii) transparency of taxpayer obligations and liabilities; (iii) timeliness and regularity of Government banks account reconciliation; (iv) accurate and timely in-year budget reports covering expenditures at both commitment and payment stages; and (v) strong cash and debt management. Main PFM challenges include the following: (a) budget classification: despite its accuracy and reliability, it does not yet allow for direct tracking of program-related spending; (b) timeliness of annual statements: these are submitted for external audit 15 months after the end of the fiscal year; (c) the limited extent of legislative scrutiny of external audit reports, and (d) the insufficient frequency, scope and follow-up of audits. The Government is committed to addressing these challenges and, in order to do so, has introduced measures to: (1) move to a performance based budgeting framework, (2) develop a medium-term expenditure framework (MTEF) to assist in fiscal sustainability, (3) modernize its accounting and internal audit framework, and (4) improve revenue management. In conclusion, the strength of Morocco’s PFM system and the Government’s commitment to reform, taken together, are, in the Bank’s view, adequate to support the proposed operation. 84. The Moroccan public administration operates in a structured and reliable control environment. It presents low fiduciary risk, even though efficiency and effectiveness can be enhanced notably at the sub-national level. On procurement, the Government of Morocco approved recently (12/28/2012) a new public procurement decree which scope will extend to local governments and state owned enterprises (entreprises et établissements publics). This regulation which will become effective on January 1, 2014, addresses many of the weaknesses identified in many assessments of Moroccan procurement system, conducted by the Bank. The GoM has also launched a major reform that aims at strengthening the national procurement regulatory body (Commission des marches) to better pursue its mandate, which includes (i) the regulation of policies, documents and standards for public procurement, (ii) the coordination and oversight of training in procurement and (iii) the handling and management of complaints. 35 85. Regarding the foreign exchange management system, the IMF has not conducted a safeguard assessment of the BAM. However, the latter is audited on a yearly basis with the audit report disclosed publicly. The World Bank has received the 2009, 2010, 2011 and 2012 audits, which were unqualified, but, despite a formal request sent to the BAM Governor on March 5, 2012 with respect to DPL operations, the World Bank has not had access to the associated management letters and has therefore limited information on the foreign exchange control environment. Therefore, as with recently negotiated DPLs, a dedicated account will be established as an additional fiduciary measure to mitigate fiduciary risks. 86. Regarding disbursement and auditing, and with reference to the flow of funds, the proposed loan will follow the World Bank’s disbursement procedures for development policy lending. Upon effectiveness, the loan proceeds are disbursed in a single installment, based on satisfactory progress with the program and the appropriateness of the Borrower's macroeconomic policy framework as stipulated in the Loan Agreement. The loan proceeds will be deposited into an account forming part of the country's official foreign exchange reserves. Flow of funds (including foreign currency exchange) is subject to standard public financial management processes. The government budget is comprehensive, unified and subject to centralized treasury account. At the request of the Borrower, the loan proceeds will be deposited by the International Bank of Reconstruction and Development (IBRD) in a dedicated account acceptable to the World Bank and opened for this DPL by the Borrower that forms part of the country’s official foreign exchange reserves at the BAM, upon submission of a signed withdrawal application. The Borrower should ensure that upon the deposit of loan proceeds into said account, an equivalent amount, in the local currency, is credited to the treasury current account at the central Treasury Department. The Borrower will report to the Bank within thirty days of disbursement on the amounts deposited in the dedicated account and credited to the budget management system providing the exchange rate applied and the date of the transfer. If the proceeds of the loan are used for ineligible purposes as defined in the Loan Agreement, IBRD will require the Borrower to promptly upon notice refund an amount equal to the amount of said payment to IBRD. Amounts refunded to the Bank upon such request shall be cancelled. The loan proceeds will be administered by the MEF. 87. IBRD reserves the right to ask for a transaction audit of the dedicated account. This audit will cover the accuracy of the transactions (credits and debits) of the dedicated account, including accuracy of exchange rate conversions, confirming that the dedicated account was used only for the purposes of the operation where no other amounts have been deposited into the account. Also the auditor would have to obtain confirmation from corresponding bank(s) involved in the funds flow regarding the transaction. The time period for submission of the audit report to the World Bank is not later four months from the date the request is issued. 5.4 MONITORING AND EVALUATION 88. The Government is committed to the monitoring and evaluation framework of the program. The institutional setting to monitor the results of the operations reflects the one used for implementation, based on the tripartite steering committee and the Ministers and Departments involved. Results indicators have been fully discussed with each concerned counterpart together with the availability and quality of data. Due to the relatively short timeframe of the proposed program and the expected medium to long-term impacts of the reforms supported, part of the selected monitoring indicators and associated target values focus on measuring intermediate outcomes, rather than development gains on the ground. Support to the monitoring framework will also be an integral part of the implementation support process between the first and the second operation. The World Bank staff and technical assistance resources will be mobilized to ensure continued attention to quality and reliability of outcomes measurement, in line with the country 36 developments. The final evaluation will remain largely based on the policy reform actions and triggers, results indicators and associated target values included in the proposed Policy and Results Matrix (Annex 1). 6. SUMMARY OF RISKS AND MITIGATION 89. The overall risk to PDOs achievement is rated as substantial based on the following risk categories. • Political and governance risks to overall reform progress and PDOs achievement are substantial. Although the implementation of specific policy reforms is subject to political economy factors that may delay or derail progress, the risk of a lack of commitment to the overall reform efforts once the first operation is approved remains moderate. Commitment to the Green Growth agenda is high and is likely to remain a priority beyond the current government. Mitigation options to be deployed by the team revolve around close ministerial-level and technical collaboration during implementation. • Macroeconomic risks are substantial, and essentially of three types: (i) those related to the global economic slowdown, especially in Europe - Morocco’s most important trade partner; (ii) weather and climate shocks which have an impact on natural resource based sectors such as agriculture, fisheries and tourism, which together account for more than 30% of GDP, and (iii) commodity prices fluctuations. Exposure to these risks entails growth, fiscal and external implications. These are in turn exacerbated by structural pressures on the fiscal balance arising from the increasing costs of the subsidy system. Measures contained in the proposed DPL series, such as petroleum products subsidy reform and energy efficiency measures contribute to mitigating fiscal and commodity price risks. The DPL measures around water management, agro-meteorological services and direct-seeding mitigate weather and climate shocks to growth. • Stakeholders risks are also assessed as substantial. Capacity risks can affect the implementation of reforms beyond the specific measures addressed in the series. This is being addressed by exploring options for Bank support through complementary operations including investment operations, PforRs and technical assistance that will further enable the articulation of reforms and continue policy dialogue over the various sectors during and beyond the current operation. The Bank is already discussing options in this sense in the tourism, ICZM and energy efficiency sectors. • Sector policy and institutional risks are assessed as substantial. The operation’s design has tried to combine ambition and realism in line with the value added sought by the Government from the DPL series. Policy measures address a number of particularly sensitive reform areas such as integrated coastal zone management, the revision of the water law, industrial depollution, groundwater management, energy subsidy reform and energy regulation. Additionally, the multi- sectoral and multi-stakeholder nature of the reform program entails the risk of variable and uneven progress in achieving prior actions and timely completion of triggers. Risk mitigation revolves around (i) the sustained activity and close monitoring of progress by the multi-departmental steering committee supporting the operation, which is chaired by the MAGG, the MEF, and the Ministry of Environment, with clear sector focal point and constant engagement at senior management level. • Operational design risks are assessed as moderate. The operation’s design was informed by the need to mitigate exogenous (political, stakeholder, institutional) risks. To address political fluctuations, only actions and triggers which are fully country owned and grounded in solid dialogue were selected. The multi-sector nature of the program called for the identification of a narrow menu of key prior actions and triggers, without compromising the reform content of the operation. Specific macroeconomic risks are addressed by several prior actions and triggers. The pragmatic identification of intermediate results and related indicators enabling the measurement of 37 medium term achievements also mitigates against sector policy and institutional risks. The potential gap between de facto and de jure policy implementation will be mitigated through the development of parallel investment and programmatic financing as well as knowledge products, and monitored during supervision of DPL/1 and preparation of DPL/2. During this period, provided satisfactory progress has been made, the Bank will engage the Government in the identification of a second DPL series supporting the new CPS, with a view to supporting policy implementation over a longer time frame together with the achievement of results on the ground. • Environmental and social risks are low. The measures supported by the DPL will have net positive environmental impacts. Regarding aquaculture sector development, the Government is fully aware of related risks and is taking action to address them. The DPL-supported measures are also likely to lead to net positive social effects, including for poor and vulnerable groups. Small scale fishermen will benefit from monitoring and enforcement of conservation measures for fish stock. The measures supporting petroleum subsidy reform are not likely to lead to direct negative impacts on the poorest and vulnerable, and the Government is addressing indirect impacts by attenuating chain effects through public transport prices. The Bank’s analytical work on political economy constraints and options for addressing adverse social impacts of subsidy reform is expected to accompany the duration of the DPL series. 38 ANNEX 1: POLICY AND RESULTS MATRIX MOROCCO INCLUSIVE GREEN GROWTH DPL Baseline & Prior Actions Indicative Triggers Policy Area Target Values (DPL/1) (DPL/2) Results Indicators Program Development Objective 1. Improving the management of natural capital 1.1 Management of 1.1.1 The Council of Government 1.1.1The Council of Government # of regional coastal zone management plans (Schémas 12/2013 Baseline: 0 coastal and marine (Conseil du Gouvernement) has adopts the National Coastal Zone Régionaux d’Aménagement du Littoral) approved 12/2016 Target: 2 assets’ approved the draft Law on the Management Plan (Plan National Integrated Coastal Zone Management d’Aménagement du Littoral) on May 16, 2013. 1.1.2 The Council of Government has 1.1.2 The Minister of Agriculture # of regional maritime fisheries control and enforcement 12/2013 Baseline:0 approved the draft Law on Illegal and Fisheries adopts the National plans approved 12/2016 Target: 18 Fishing on March 28, 2013. Monitoring Plan for Marine Fisheries. 1.2 Water sector 1.2.1 The Ministers of Interior, 1.2.1 The Council of Government # of aquifers (nappes) in which groundwater abstraction 12/2013 Baseline:1 governance Agriculture and Water have issued the approves the draft Law amending is regulated by an aquifer agreement among ‘large’ water 12/2016 Target: 3 Interministerial Circular (Circulaire) the existing Water Law consumers requiring the conclusion of groundwater management agreements (contrats de nappes) on November 15, 2013.. Program Development Objective 2. Greening physical capital 2.1 Low carbon 2.1.1 The Council of Government has 2.1.1 The Council of Government % of new buildings (hospitals, residential, tertiary) built 12/2013 Baseline:0 growth adopted on November 14, 2013 the approves the draft Law creating after the publication of the Decree and integrating EE 12/2016 Target:50% Decree on energy efficiency in the the National Agency for Energy requirements; building sector. Regulation. 2.1.2 The Council of Government adopts the decree allowing for renewable energy generation connected to the medium voltage grid Total capacity of distributed medium- and low-tension 12/2013 Baseline: 0 grid-connected photovoltaic systems (in MW) 12/2016 Target : 2 2.1.3 The Council of Government approves the draft Law amending Law 13-09 to provide renewable energy solutions for low voltage customers 2.1.2 Order (Arrêté) No 3.69.13 dated 2.1.4 The Government Total subsidy envelope to diesel, gasoline and industrial 12/2012 Baseline: 3% August 19, 2013 introducing automatic strengthens safety nets to temper fuel (in% of GDP) 12/2016 Target: < 2.5% price adjustments for diesel, gasoline the impact of possible energy and fuel has been published in the subsidy cuts. National Gazette No. 6182 dated August 29, 2013. 39 MOROCCO INCLUSIVE GREEN GROWTH DPL Baseline & Prior Actions Indicative Triggers Policy Area Target Values (DPL/1) (DPL/2) Results Indicators 2.2 Pollution 2.2.1 The three Orders (Arrêtés) No. # of industries having submitted a funding request to the 12/2013 Baseline : 0 management 2942.13, No. 2943.13, and No. Voluntary Industrial Depollution Mechanism 12/2016 Target: 3 2944.13 dated October 7, 2013 on monitoring and controlling industrial wastewater discharges in the hydraulic domain stating a) general limit values; Reduction in industrial pollution (as measured by tons of 12/2013 Baseline: 20 b) characteristic values and specific BOD5 abated yearly) 12/2016 Target: 200 coefficients; and c) minimum treatment efficiency of industrial wastewater treatment plants, have been published in the National Gazette No 6199 dated October 28, 2013. 2.2.2 The Council of Ministers has 12/2013 Baseline : 2 approved on March 7, 2013, the draft 12/2016 Target : 4 2.2.1 The Council of Government # of products subject to green taxes Framework Law on environment and approves the draft 2015 Finance sustainable development setting forth, Law introducing green taxes and in particular, the establishment of a financial incentives to depollution comprehensive green fiscal investments framework. Program Development Objective 3. Strengthening and diversifying the rural economy by leveraging human capital 3.Green technologies 3.1.1 Order (Arrêté) No. 3186-13 dated 3.1.1 The Minister of Agriculture 12/2013 Baseline: 0 in the agricultural November, 13 2013 modifying and and the Minister of Energy, Share of the envelope allocated to direct seeders in the 12/2016 Target: 16.9% sector completing Order (Arrêté) No. 368-10 Mining, Water and Environment total FDA envelope allocated to seeders (traditional and dated January 26, 2010, on subsidies sign the Performance Agreement direct) for agricultural equipment, introducing between the DMN and MAPM for 12/2013: Baseline : 4% a subsidy for the purchase of direct the provision of agro- Share of DMN revenues from agro-meteorological 12/2016: Target : 15% seeding equipment, has been meteorological information to the services transmitted by the Minister of agricultural sector Economy and Finance to the General Secretariat of the Government for publication in the National Gazette, on November 19, 2013. 3.2 Diversification 3.2.1 Order (Arrêté) No.3151-13 dated 3.2.1 The National Committee on 12/2013 Baseline : 115 of rural revenues November 11, 2013 establishing the Impact Studies validates the # of aquaculture sector jobs created (2013-2016), gender 12/2016 Target: 460 technical and economic criteria setting Directive specific to the disaggregated the lease fee to be paid by aquaculture aquaculture sector and ANDA farms, has been transmitted by the publishes the Strategic Minister of Economy and Finance to Environmental Assessment for the the General Secretariat of the Aquaculture sector. Government for publication in the National Gazette, on November 15, 3.2.2 At least two Local # of ecotourism sector jobs created (2013-2016), gender 12/2013 Baseline: 0 2013. Development Entities tasked with disaggregated 12/2016 Target: 1100 the implementation of the national rural and eco-tourism program (Qariati) are established. 40 ANNEX 2: LETTER OF DEVELOPMENT POLICY 41 42 43 44 45 46 47 48 49 ‫ﺍﻟﻣﻣﻠﻛـﺔ ﺍﻟﻣﻐﺭﺑﻳــﺔ‬ --- ‫ﺭﺋﻳﺱ ﺍﻟﺣﻛﻭﻣﺔ‬ --- ‫ﺍﻟﻭﺯﺍﺭﺓ ﺍﻟﻣﻧﺗﺩﺑﺔ ﻟﺩﻯ ﺭﺋﻳﺱ ﺍﻟﺣﻛﻭﻣﺔ‬ ‫ﺍﻟﻣﻛﻠﻔﺔ ﺑﺎﻟﺷﺅﻭﻥ ﺍﻟﻌﺎﻣﺔ ﻭﺍﻟﺣﻛﺎﻣﺔ‬ Unofficial Translation November 19, 2013 Mr. Jim YONG KIM President of the World Bank 1818 H Street N.W - Washington. DC Draft RE / Letter of Development Policy on the Green Growth Program Mr. President, Morocco has undertaken and initiated over the last decade, along the path of sustainable development several reforms in which Green Growth and the new economy are crucial. In this regard, many national strategies have been triggered as part of environmental protection, preservation of ecosystems, mitigation, and adaptation to climate change, particularly in the areas of water resources, agriculture, renewable energy, transportation, and management of household waste. Although a lot of progress has been made in these areas, it is now necessary to consolidate the efforts already undertaken and to get them geared toward the continuation of efforts for the establishment of a new policy to achieve sustained economic growth, which is environment- friendly and inclusive. In an effort to reconcile economic development and environment protection, the Government is committed through its 2012-2016 program adopted by Parliament, to continuing to work towards achieving sustainable development, based on environmentally-sound economic growth. This Policy Letter aims at presenting on the one hand the current situation and challenges in terms of green growth and on the other hand, the program to be set up by the Government to improve the conditions for the implementation of Green Growth. I- STATUS OF MOROCCO’S GREEN GROWTH AGENDA: Morocco, as all developing countries, faces major and pressing sustainable development challenges and the need to preserve the environment and to respond to ecological challenges. To face up to these challenges and in accordance with its commitments, Morocco is in the process of 50 implementing programs and initiatives conducive to a transition towards green economy for sustainable development. As part of its awareness of environmental issues, Morocco adopted in 2012 the draft Framework Law on Environment and Sustainable Development, which provides: - Institutional, economic and, financial measures with a view to setting up a system of environmental governance taking into consideration environment and sustainable development in the various sector-related policies and strategies; - Legislative and regulatory provisions pertaining to the setting up of a system of financial and tax incentives seeking to encourage the financing of projects on environmental protection and the establishment of sustainable development; - An environmental tax system made up of ecological taxes and fees levied on industries known for their high level of pollution and use of natural resources. To roll out its environmental policy, Morocco has also set up a comprehensive sector-related scheme aimed at protecting the environment. The strategies focused on preserving water resources, managing household waste, fighting global warming, establishing Plan Maroc Vert for agriculture and Halieutis for fisheries, fighting pollution through large-scale promotion of renewable energy, reforming urban traffic, promoting sustainable housing, and creating carbon market instruments. In terms of water resources, the strategy aimed to address the challenge of water scarcity and adapt to the effects of global warming. This strategy has been implemented in particular through the National Program of Water Saving and Irrigation and the National Program for Sanitation and Wastewater Treatment, which aims to cope with the deterioration of water quality. The National Program for the Management of Household and Similar Wastes (PNDM)aims to ensure the collection of household waste and achieve a collection rate of at least 90 % by 2020 . Regarding the fight against global warming, a national plan was adopted. It seeks to reduce emissions of greenhouse gases at about 60 million tons of CO2eq by 2030. The plan is geared towards mitigation measures mainly related to the sectors of energy, transport, industry, waste, agriculture, forestry, and construction. Adaptation measures relate to the areas of meteorology, water, agriculture, forestry, fisheries, housing, health, and tourism. In agriculture, the Plan Maroc Vert, initiated in 2008 and aiming at turning the agricultural sector into a source of social and economic development for Morocco> It also seeks to safeguard Morocco’s food security, while taking into account the imperatives of natural resources conservation, climate change and sustainable development. Under the Halieutis strategy for the development of the marine fisheries sector, the strategy was designed in such a way as to respond to the principles of sustainable development, particularly by fighting undeclared and unregulated illegal fishing. 51 Morocco is also engaged in a policy aimed at combating pollution through the promotion of large-scale renewable energy and energy efficiency. In this regard, the energy strategy, launched in 2009, is geared towards building a low-carbon energy system sustainably meeting the energy needs of the present and future generations, and fits into the process of rehabilitating the environment and integrating sustainable development into development policies. To this effect, Morocco has adopted two major projects for the promotion of renewable energy. These projects include the installation of solar and wind power by 2020, each with a capacity of 2,000 MW, so as to meet 42% of the country's needs in electricity. With regard to the transport sector, the reform program in the field of urban transportation has been established, particularly to fight the negative social and environmental impacts, by granting tax incentives for old fleet renewal and awareness-raising to environmental issues. As far as the promotion of sustainable housing is concerned, several initiatives and measures have been undertaken, through the setting up of a handbook of best practices in energy efficiency and renewable energy in the area of urban planning and housing (2010) and the promotion of energy efficiency and renewable energy in construction. A comprehensive strategy on risk management and prevention is also being prepared with the World Bank, Swiss Cooperation, and the Global Fund for the Prevention of Natural Disasters (GFDRR) support. This strategy is built around three pillars addressing natural disasters, price volatility of commodities, and agriculture -related risks. Similarly, Morocco is currently engaged in the technical discussion platform and information exchange on new carbon market instruments to mitigate greenhouse gas emissions. It is worth noting that Morocco is a member of the Partnership for Market Readiness (PMR). Alongside with this endeavor, some financial instruments have been set up to support and encourage the green trend of the economic sectors and the territories. We can mention in this regard the National Fund for environmental protection and development to finance programs pertaining to environmental upgrading, Energy Development Fund (EDF) to support the energy strategy in the field of renewable energy and energy efficiency, the Fund for the support of Transport Reform and the Moroccan Tourism Development Fund. Further, to better take into account environmental issues, the legislative and regulatory framework has been enhanced through the adoption of legislation in the fields of water, environment, renewable energies, energy efficiency, and coastal management. On the other hand, as part of consolidating the system of environmental monitoring and sustainable development, a network of regional environment and sustainable development observatories was set up to better cope with environment-related information at the regional level, to monitor the status of the environment and sustainable development regional indicators, and to set up a platform for Environmental Compliance, as an instrument of green economy. 52 Nonetheless, Morocco is now facing many economic, social, and environmental challenges such as creeping urban growth and social inequalities, growing unemployment, water stress, and environmental degradation. The agricultural sector which accounts for about 15% of GDP and employs nearly 40% of the population also faces dwindling water resources, with negative impacts on agricultural productivity. Morocco is also heavily energy-dependent as it imports about 95% of its annual consumption. Similarly, the consequences of climate change jeopardize the country's natural assets ─which represent a source of employment in Morocco ─- in addition to being a threat to the population and infrastructure. In the face of such problems, Green Growth appears to be one of the answers, by combining economic development and sustainability. The economy and the environment are closely linked, as natural resources constitute one of Morocco’s strategic resources in view of the position of sectors such as agriculture and tourism in the Moroccan economy, and given also Morocco’s strategic choices with regard to its energy policy. Likewise, positioning economic and social policies on the path of Green Growth and job creation represents an opportunity for Morocco to move towards a more harmonious and sustainable socio-economic development. II- A NEW POLICY FOR GREEN GROWTH: Supporting the implementation of the Green Growth project seeks to design a coherent program aimed at strengthening the implementation of ongoing sector-related policies, mainly oriented towards the greening of growth. This program is designed primarily to improve the management of natural capital, the greening of physical capital, and the optimization of human capital in green sectors. To reach these objectives, the Government will implement initiatives on the following centerpieces: 1- Improving the management of natural capital: This axis focuses on five strategic objectives: strengthening and harmonization of the institutional framework for coastal management; strengthening of governance in the water sector; improvement of groundwater management; reinforcement of monitoring and control of the exploitation of fishing resources, and the inclusion of natural assets in the decision-making process. 53 Regarding the strengthening and harmonization of the institutional framework for coastal management, the Council of Government adopted the Draft Law on the Integrated Coastal Zone Mangement on May 16, 2013. A Decree setting forth the provisions of the Law on Coastal Zone within a National Coastal Zone Management Plan will be approved by the Council of Government. Concerning the strengthening of water sector governance, the revision process of the 1995 Water Law was launched and is set for adoption in 2015 by the Council of Government. Regarding the improvement of groundwater management, the Interministerial Circular laying down the process of setting groundwater management agreements was signed. Very soon, two groundwater management agreements will be enacted. To strengthen the monitoring and control of the exploitation of fishing resources, the Council of Government adopted the draft Law No. 15-12 pertaining to the fight against illegal unreported, and unregulated fishing on March 28, 2013. By 2015, the National Monitoring and Enforcement Plan for Marine Fisheries will be set up. In order to take into account natural assets in the decision-making process, a Ministerial Circular setting forth the terms of the establishment of a satellite environmental and economic account of forests has been launched. The program for the implementation of WAVES will soon be approved by the Inter-ministerial Committee for Environmental compliance. 2- The greening of physical capital: As part of efforts for greening physical capital, the Government has set as targets the setting up of a framework for the electricity market to support low-carbon growth, reduce water pollution in the industrial sector, and establish a framework for green taxation. For the purpose of supporting low-carbon growth, some measures will be introduced, including the following: - The adoption by the Council of Government of the Decree of Law 47-09 on energy efficiency in the Building Sector (Code du Bâtiment). In the medium term, the legislation governing the creation of the National Agency for Energy Regulation will be approved. - In the medium-term, three measures will be enacted: • The text creating the National Agency for Energy Regulation. • The decree allowing for renewable energy generation connected to the medium voltage grid • The amendment to Law 13-09 to provide renewable energy solutions for low voltage customers - Publication in the Official Gazette (Bulletin Officiel) of the Decree introducing the automatic price adjustments for diesel, gasoline, and industrial fuel on August 29, 2013. 54 In terms of reducing water pollution in the industrial sector, the following measures will be taken: In the short term, the signature of three ministerial Orders for the monitoring and control of discharges of industrial wastewater in the hydraulic field indicating the general limit values, the characteristic values and the specific coefficients and efficiency of minimum treatment of industrial wastewater plants, has been achieved. In the medium term, the operationalization of the monitoring system of wastewater discharges control in at least three basins will be introduced. In terms of sustainable development, the Council of Government adopted the draft Framework Law on Environment and Sustainable Development on March 7, 2013, stating in particular the introduction of a green tax framework. In the medium term, the draft budget Law introducing green taxes and financial incentives for investments in depollution will be approved by the Council of Government. 3 Optimization of human capital in green sectors: The last axis selected under this program supporting the introduction of a policy for green growth focuses on the optimization of human capital in green sectors. In this regard, four strategic objectives were adopted by the Government, namely: subsidies for direct seeding, the provision of agro-meteorological information service provision, fish farms, and investments in eco - tourism. To encourage innovation geared towards a resilient and productive agriculture, the following measure has been introduced: In the short term, with regard to the subsidy of direct seeding, the publication of the Order amending and supplementing Order No. 368-10 dated January 26, 2010 pertaining to subsidies for farm equipment, the introduction of a subsidy to purchase equipment for direct seeding. In the medium term, two measures will be taken: * The publication by the Ministry of Agriculture and Fisheries of the strategy to improve the marketing of certified seeds. * The signature by the Minister of Agriculture and the Minister of Energy, Mining, and Environment of the Memorandum of Understanding between the National Department of Meteorology (DMN) and the Ministry of Agriculture for the provision of agro-meteorological information. In order to promote investments to diversify rural incomes and generate better jobs, the publication process of the Order setting the technical and economic criteria for determining the fees payable by fish farms has been initiated. 55 In the medium term, at least two local development entities will be set up; they will be in charge of the implementation of the National Program for rural and eco-tourism (Qariati) . In view of the scope of this program, the Government of Morocco counts on the support of your institution through a Development Policy Loan. Thank you for the interest of the Bank in the implementation of Green Growth policy in Morocco. Best regards, Mohamed Louafa Minister Delegated by the Head of Government For Governance and General Affairs 56 ANNEX 3: FUND RELATIONS ANNEX The IMF Executive Board Completes the Second Review Under a PLL Arrangement for Morocco Press Release No. 13/290 July 31, 2013 The Executive Board of the International Monetary Fund (IMF) today completed the second review of Morocco’s performance under an economic program supported by a two-year Precautionary Liquidity Line (PLL) arrangement and reaffirmed Morocco’s continued qualification to access PLL resources. The PLL arrangement was approved on August 3, 2012 in an amount equivalent to SDR 4,117.4 million (about US$ 6.2 billion, 700% of quota, see Press Release No. 12/287). The access under the arrangement in the first year is equivalent to SDR 2,352.8 million (about US$3.6 billion, or 400% of quota), rising in the second year to the equivalent of SDR 4,117.4 million (about US$ 6.2 billion) cumulatively. The Executive Board concluded the first review on February 1, 2013. The PLL arrangement will continue to support the authorities’ home-grown reform agenda aimed at achieving higher and more inclusive economic growth by providing a useful insurance against external shocks. The PLL was introduced to meet more flexibly the liquidity needs of member countries with sound economic fundamentals and strong record of policy implementation but with some remaining vulnerabilities. The IMF’s Executive Board welcomed the authorities’ intention to continue treating the arrangement as precautionary. Following the Board’s discussion, Ms. Nemat Shafik, Deputy Managing Director and Acting Chair, issued the following statement: “The arrangement under the Fund’s Precautionary and Liquidity Line (PLL), which the authorities intend to continue to treat as precautionary, has provided Morocco with an insurance against external risks while supporting the authorities’ economic strategy. “Following the deterioration in the fiscal and external accounts in 2012, the authorities have taken significant measures to reduce vulnerabilities, despite an unfavorable external environment and a challenging regional context. Continuing efforts to build consensus and move ahead with difficult but necessary reforms will be key for preserving macroeconomic stability while promoting higher and more inclusive growth. “The authorities’ fiscal deficit target for 2013 of 5.5% of GDP remains consistent with their medium-term objective built on maintaining fiscal sustainability and supporting external adjustment. Close monitoring and firm control of spending will be needed through the rest of the year to ensure that this target is met. The planned tax reform should promote more equity and support competitiveness while generating adequate resources. Continued efforts to contain the wage and subsidy bills are important for creating space for better targeted social spending and higher capital expenditure. Recent actions to reduce subsidies are welcome in that regard, while moving ahead with a comprehensive subsidy reform will be crucial to further reducing fiscal and external vulnerabilities. Furthermore, the early adoption of a new organic budget law will be important to ensure a strong, transparent and modern fiscal framework. “Lower global commodity prices, rising exports in newly developed sectors and lower food imports have helped reduce the current account deficit, and, combined with strong capital inflows, stabilize reserves. Structural reforms to enhance competitiveness continue to be a priority to sustain these gains. Moving toward greater exchange rate flexibility supported by appropriate macroeconomic and structural policies would enhance external competitiveness and the economy’s ability to absorb shocks.” IMF COMMUNICATIONS DEPARTMENT Public Affairs Media Relations E-mail:publicaffairs@imf.orgE-mail: media@imf.org Fax: 202-623-6220 Phone: 202-623-7100 57 ANNEX 4: ENVIRONMENTAL AND SOCIAL ASPECTS 1. Background and objectives 1. Morocco is a middle income country and the most westerly of the North African countries. As one of only three countries to have both Mediterranean and Atlantic coasts, its geography spans from the coastlines, to the mountainous areas of the Atlas chain, to the Sahara. Such diversity is an invaluable asset for the country’s sustainable growth, which is affected by environmental and climatic vulnerabilities. Morocco’s economy critically depends on natural resources that are facing gradual but steady depletion, with an impact onto key sectors such as agriculture (17 % of GDP on average). The long term environmental implications of investments and growth oriented policies have not always been factored in, leading to high costs of environmental degradation and a surging energy bill impacting the fiscal and balance of payments (BoP) framework. A 2004 WB study estimated that the annual cost of environmental degradation is in the order of 3.7% of GDP. Of the total cost incurred, about 70% is from damage to health and quality of life, and 30% is from natural resource degradation. The cost of water resource degradation and inadequate sanitation and hygiene is the highest, followed by air pollution (both indoor and outdoor), coastal zone degradation, soil degradation, and inadequate solid waste management. 2. The shortcomings seen above threaten the progress made so far, as well as future economic potential. Morocco is a middle income country showing an increasing environmental awareness articulated at the highest level of the state. The Government has made efforts to address such vulnerabilities within sector strategies and has sought to mainstream the management of natural assets and low carbon investments in investment strategies. The Government’s program is promoting a shift to environmental sustainability objectives and lays out an ambitious program of legislative, fiscal and regulatory reforms, which is supported by this DPL series. In Morocco, economic vulnerability remains high, as the benefits of recent growth patterns are not fully accruing to the poor, particularly in rural areas, as demonstrated by stable Gini coefficients and persistent pockets of poverty. Consequently, one of the key components of the Government program is social sustainability. 3. In order to address the potential impacts of reforms supported by Development Policy Operations (DPOs), OP 8.60 requires the Bank to determine whether specific country policies supported by the operation are likely to a) have significant poverty and social consequences especially on poor and vulnerable groups; b) cause significant effects on the country’s environment, forests, and other natural resources. In case supported country policies incur in likely significant effects, OP 8.60 requires the Bank to summarize relevant analytic knowledge of these effects and of the borrower’s systems for reducing adverse effects and enhancing positive effects associated with the specific policies being supported. If there are significant gaps in the analysis or shortcomings in the borrower’s systems, the Bank is to describe in the Program Document how such gaps or shortcomings would be addressed before or during program implementation, as appropriate. This annex complements the information provided in the Program Document (sections 5.1 and 5.2) by looking at the correspondence between other Bank Policies OP 4.01 (Environmental Assessment) and OP 4.12 (Involuntary Resettlement), even though these two policies do not apply to Development Policy Lending. The annex first provides a general description of the national systems for environmental and social management. It then reviews the prior actions of the DPL to assess positive and negative effects. It then concludes with an overall assessment of expected DPL impacts. This annex does not attempt to make an assessment of the compliance of Morocco’s environment and social safeguard country system with Bank policies. 4. The Bank has some knowledge of Morocco’s environmental and social management systems. In 2010, the Bank conducted a Safeguard Diagnostic Review33 of Morocco’s environmental and social management systems in the context of a water sector project and specifically in relation to the application of OP 4.01 and OP 4.12. The review was supported by a comparative assessment of Morocco and other EA systems in the Middle East and North Africa (MNA) Region and by Environmental Assessment Reports and Land Acquisition Framework prepared for infrastructure projects which were reviewed and endorsed by the World Bank and other development partners. 33 Banque mondiale (2010) Revue Diagnostic des Sauvegardes (RDS) En vue de l’utilisation du Système National de Protection Environnementale et de la Procédure Nationale d’Acquisition de Terrain 58 2. Institutional and legal framework for environmental and social management 5. In general, Morocco is considered to have a relatively sound environmental assessment regulatory framework, deeply rooted and tested legal and regulatory for land acquisition for public purpose and interest, and adequate institutional capacity. Over the last 10 years the country has achieved substantial progress in developing a strategic, legislative and institutional framework for environmental management. In Morocco, Environmental Affairs are under the responsibility of the Ministry of Energy, Mines, Water and Environment (MEMEE in the French acronym). In October 2013, a junior ministerial portfolio has been created for Environmental Affairs. From an operational point of view, particularly in terms of environmental control and stewardship, local level capacity is being strengthened through the creation of sixteen Regional Observatories (Observatoires Regionaux de l’Environnement et le Developpement Durable – OREDD) and the creation of a corps of Ministry of Environment officers in charge of monitoring and control, which effectively amounts to the institution of an environmental police. The launch of the Regional Observatories aims at decentralizing the Environment Ministry’s structure at regional and provincial level, and ensuring the participation of the NGO sector and local governments in monitoring and control activities. 6. The 2010 Environment Charter defined the main lines of the country’s environmental policy. These were later enshrined in the Environmental Framework Law called for by the 2011 Constitution, as well as in the Environmental Strategy and the Sustainable Development Strategy which the Department of Environment is preparing. Based on the above, the environmental legal framework of Morocco has guidelines for the development of environmental management tools to address environmental aspects connected to development activities and investments. This environmental legal framework applies to investments and activities under the sectors covered by DPL supported policy measures. These tools include: (i) information sharing about the environmental impacts of activities, (ii) the identification and assessment of environmental impacts, notably on natural resources and sensitive habitats (Morocco has nine national parks and 160 SIBE which are the subject of the National Strategy for Biodiversity Conservation), and (iii) the monitoring and evaluation of the implementation of mitigation measures. Table 1 summarizes the major relevant environmental laws and regulations. 7. The Government’s adoption of the Environment and Sustainable Development Charter34 defined the rights and obligations of citizens for the protection and preservation of the environment and sustainable development, becoming the first MENA country to do so. To operationalize this Charter, a draft law “Projet de loi-cadre n° 99-12” 35 has been recently endorsed by the Economic and Social Council and adopted by the Cabinet of Government (Conseil du Government) and the Council of Ministers chaired by the King (a prior action supported by the DPL). This Law will act as a reference framework to unify all actions and fill in the existing gaps. It will particularly enforce the principles introduced by the Charter including the citizens’ right to access environmental information; establish the “Police de l’Environnement” to reinforce authorities in charge of environmental control and inspection; introduce the environmental extended responsibility and the “fiscalité verte”. 8. As assessed in the framework of previous Bank DPLs 36, Morocco’s Environmental Impact Assessment (EIA) system is consistent with international good practices and is fully operational, at the national and regional levels, and contributes to the mainstreaming of social and environmental dimensions in development activities. Pursuant to these assessments, it was concluded that the totality of Moroccan laws, regulations, administrative orders and guidelines applicable to EA and Involuntary Resettlement (IR) are close to the Objectives and Operational Principles of OP 4.01 and OP 4.12 and that any remaining gaps can be addressed through project-based measures without recourse to changes in Morocco legislation and regulations. For Environmental Assessments (EA), key areas for improvement in particular at the implementation stage include: a) the need for more detail in prescribed content for Environmental Management Plans (EMPs), in particular, with respect to monitoring, institutional capacity development and training measures; b) clearer requirements for consideration and assessment of alternatives including the “no project” alternative; and c) clarity as to the disclosure requirements at various stages of public consultations. The authorities have expressed their intention to 34 http://www.environnement.gov.ma/PDFs/CNE_charte_VF.pdf 35 http://www.sgg.gov.ma/projets_com/5/Projet_loi_99-12_Fr.pdf 36 See particularly the Solid Waste Management DPL series (2008-2012), the Plan Maroc Vert DPL Series (2010 and 2012), the Urban Transport DPL (2011) 59 further strengthen the framework by building on lessons learned from implementation, which may require an amendment of the EIA Law. Table 1. Morocco Environmental Laws and Regulations Law 11-03 on Environmental Protection and Management (in French : « la protection et à la mise en valeur de l'environnement ») Law 12-03 on Environmental Impact Assessment (in French : « études d'impact sur l'environnement ») Decree n°2-04-563 of November 4, 2008 on the mandates and organization of the National Committee and the Regional Committees on Environmental Impact Assessment. (in French « attributions et au fonctionnement du comité national et des comités régionaux des études d'impact sur l'environnement »). Decree n°2-04-564 of November 4, 2008 on the modalities of organization and conduct of public inquiry related to projects subjected to environmental impact assessment (in French : « modalités d’organisation et de déroulement de l’enquête publique relative aux projets soumis aux études d’impact sur l’environnement »). Arrêté n° 636-10 du 7 Rabii I 1431 (February 22, 2010) on fees for administrative services connected with the public inquiry related to projects subjected to environmental impact assessment (in French : « tarifs de rémunération des services rendus par l’administration afférents à l’enquête publique relative aux projets soumis aux études d’impact sur l’environnement »). Law n°13-03 on Air Pollution Control (in French : « relative à la lutte contre la pollution atmosphérique ») Decree n°2-09-286 du 20 Hija 1430 (8 décembre 2009) fixant les normes de qualité de l’air et les modalités de surveillance de l’air. Decree n° 2-09-631 du 23 Rajab 1431 (6 juillet 2010) fixant les valeurs limites de dégagement, d’émission ou de rejet de polluants dans l’air émanant de sources de pollution fixes et les modalités de leur contrôle. Law n° 28-00 relative à la gestion des déchets et à leur élimination Decree n° 2-07-253 du 18 juillet 2008 portant classification des déchets et fixant la liste des déchets dangereux. Decree n° 2-02-284 du 20 Hija 1430 (8 décembre 2009) fixant les procédures administratives et les prescriptions techniques relatives aux décharges contrôlées. Dahir 25 août 1914 portant réglementation des établissements insalubres, incommodes ou dangereux, tel qu’il est modifié et ses textes d’application Law n° 10-95 sur l'eau Decree n°2-97-787 du 4 février 1998 relatif aux normes de qualité des eaux et à l'inventaire du degré de pollution des eaux. Arrêt conjoint n° 1276-01 du 17 octobre 2002 portant fixation des normes de qualité des eaux destinées à l'irrigation. Arrêté n°1607-06 du 29 Joumada II 1427 (25 juillet 2006) portant fixation des valeurs limites spécifiques de rejets domestiques. Decree relatif aux déversements, écoulements, rejets, dépôts directs ou indirects dans les eaux superficielles ou souterraines. Arrêté n° 1608-06 du 29 Joumada II 1427 (25 juillet 2006) portant fixation des valeurs limites spécifiques de rejet des industries du sucre. Arrêté n°1606-06 du 29 Joumada II 1427 (25 juillet 2006) portant fixation des valeurs limites spécifiques de rejet des industries de la pâte à papier, du papier et du carton. Arrêté n° 1606-06 du 29 Joumada II 1427 (25 juillet 2006) portant fixation des valeurs limites spécifiques de rejet de la branche galvanisation à chaud relevant de l’activité du traitement de surface. Arrêté n° 1447-08 du 30 Moharrem 1430 fixant les valeurs limites spécifiques de rejet des industries de ciment. Dahir n° 1-69-170 du 25 juillet 1969 sur la défense et la restauration des sols. Law n° 08-01 relative à l'exploitation des carrières Law 13-09 of February 11, 2010 on Renewable Energies (in French : « énergies renouvelables ». Law 12-90 of 1990 on Urban Planning 9. Regarding social impacts, Morocco has a comprehensive legal framework related to social development and social management based upon constitutional provisions, laws and regulations on citizens’ social, economic and cultural rights. Morocco is equipped with numerous institutions with a mandate to hear and decide on grievances and claims related to activities covered by the reforms supported by the DPL series. These include: (i) the National Council of Human Rights (CNDH) - a constitutional, autonomous body mandated to hear any claim for violation of human rights. The CNDH is empowered to initiate legal processes in case of violations and recommends sanctions; (ii) the Institution of the Ombudsman (Le Médiateur) - a constitutional body equipped with legal and financial autonomy and independence 60 vis-à-vis the legislature, executive and the judiciary, providing citizens with an accessible appeal and grievance redress mechanism 37; (iii) the Anti-corruption and Integrity National Forum (the “Forum”), has also been elevated to constitutional body since 2011. It replaced the Central Instance for the Prevention of Corruption which was established in 2007 as a central administrative body. The Forum is an autonomous body with financial and administrative independence. Its mandates relate to coordinating, supervising and monitoring the implementation of policies to prevent and fight corruption through collecting, disseminating information in this area, and contributing to the moralization of public life and the strengthening of principles of good governance. The existence of grievance and appeal mechanisms and their recent elevation of constitutional bodies provide them with the necessary independence and financial autonomy, and expanded their powers for self-referral. 10. Regarding Involuntary Resettlement and Land Acquisition, it is a policy of the Government and its various executing agencies not to seek to expropriate land that is inhabited by households. This is considered upfront during initial investment design, by favoring sites that are included in the public domain (land owned by the Government). In case of lack of such land, the legislation requires implementing agencies to seek to acquire land through the market, thus reserving expropriation of land for public interest as a last resort option. The primary statutory instruments governing the land acquisition process in Morocco are the Constitution (Article 15) and the Land Acquisition Act for Public Interest (Loi 7-81) and its implementing decrees. The objectives stated in the Constitution and the Loi 7-81 are equivalent to some but not all of the Objectives of OP 4.12 with respect to Involuntary Resettlement (IR). 11. The legal and regulatory framework for expropriation and land acquisition for public purpose is to be understood along with other constitutional and legal provisions such as those related to: (i) equitable access to social, economic and cultural as provided under Section 5 of the 2011 Constitution; (ii) the right of citizens to enjoy the rights to health, social protection, decent housing, work, access water and a healthy environment, to education, vocational training, physical education and art, all under the Article 31 of the 2011 Constitution; (iii) gender equality and fight against discrimination against women, under article 19 of the Constitution and the 2004 Family Code which introduced substantial provisions on gender and women's rights; (iv) rights of youth and peoples with special needs under article 19 and 33 of the Constitution; and (v) the strengthening of civil society’s associations and NGOs, as part of participatory democracy, development, implementation and evaluation of decisions and projects elected institutions and governments. 12. Both the Constitution and the Loi 7-81 are consistent with the objectives of avoiding or minimizing involuntary resettlement. In addition the valuation method used in Morocco qualifies as replacement cost, as required by Table A1 of OP. 4.00. It must be noted that in practice, community lands (“Terres collectives” belonging to local communities) are never acquired through expropriation but rather bought by the Government through a contractual approach. This is a consistent approach, well documented in Morocco. Finally, it is an established fact that only unoccupied lands can be targeted for acquisition for public interest projects (road, dams, sanitation plants, schools or health facilities etc.) and displacement of persons and communities are avoided as a matter of policy. The exception in the implementation of Law 7-81 suggests that only for slums removal, displacement of persons occurred but also that it was appropriately handled, notably under Bank-financed Land Development for Low-Income Families Project, the ICR of which clearly stated that Government policies and laws fulfill Bank’s operational requirements for involuntary resettlement. This was further confirmed under a Social Housing Project undertaken in 1994 and completed in 2004. 13. In 2013, a MNA Resettlement Review (RR) composed of Bank safeguard specialists assessed Morocco’s systems in relation to resettlement and land acquisition (May 2013) in relation to ongoing Bank projects. The RR found (i) no instances of resettlement; (ii) deliberate efforts from implementing agencies to avoid land acquisition impacts; (iii) consultation with the landowners; (iv) no instances of loss of jobs; (v) minor impacts of involuntary land acquisition; (vi) adequate land compensation prices; (vii) landowners or land users able to resort to replacement land following compensation; (vi) capacity of landowners to resort to legal recourses in case of non-acceptance of compensation prices. 37 Grievances complaints and claims can be introduced to the Ombudsman through regular or registered mail, fax or internet. The Ombudsman can hear and investigate complaints and grievances of citizens, domestic or foreign individuals or legal entities against all governments and organizations which benefit from financial support of the Government. The government is obliged by law to respond in a mandatory delay to any Ombudsman process and request. The Ombudsman can use conciliation processes. To facilitate easy access for citizens and the rights of social service users, three regional offices were created and are operational and others offices are being established with regional ombudsmen. It is planned that local delegates will also be installed in the near future. 61 The RR concluded that the main gap between Morocco’s land acquisition process and OP 4.12 concerned the delays in providing compensation. Delays do not appear to be intentional, as executing agencies have an interest in prompt payment of compensation, as it allows them to obtain ownership of the land and proceed with civil works. Rather, they appear to be driven by administrative and legal bottlenecks in compensation payments such as missing documents, the recourse to the courts by the landowners themselves, a cumbersome bureaucracy, institutional constraints, and technical hurdles due to inheritance law. 3. Assessment of reform measures supported by the Inclusive Green Growth DPL 14. As required by OP 8.60, the team has conducted an assessment of the specific country policies supported by this operation to determine if any of them are likely to cause significant effects on the country’s environment, forests, and other natural resources. The section’s structure follows the policy matrix. Pillar 1. Improving the Management of Natural Capital 1.1: Management of coastal and marine assets Prior Action 1.1.1: The Council of Government (Conseil du Gouvernement) has approved the draft Law on the Integrated Coastal Zone Management on May 16, 2013. 15. Coastal environmental damage and loss of natural and cultural heritage is caused by municipal/industrial effluent discharges, oil pollution, air pollution, and urban encroachment. Ninety percent, or 930 million m3, of wastewater is discharged at sea, some of which is untreated. Erosion is threatening Morocco’s beaches. The economic potential of the coastal areas is also undervalued. Morocco’s highly urbanized population (56 percent of the population lives in cities) is largely concentrated along its long coastline, which extends from the Atlantic to the Mediterranean through the Strait of Gibraltar. The coastal zone and its related ecosystems are crucial to the country’s future growth and job creation, be it from shipping, tourism, aquaculture, fisheries or other natural resources-based activities. As a result, increases in population density and economic activity often entail serious impacts on coastal natural resources and engender conflicts between users. For instance, sand mining for construction material for use in urban infrastructure, and sewage and solid waste disposal from human settlements have become major environmental issues in the coast. In addition, conflicting uses of natural resources along the coast have resulted in salinization of aquifers, water supply issues, loss of biodiversity, and destruction of ecologically sensitive areas. 16. Sea levels are rising as a result of anthropogenic climate warming as a result of thermal expansion of the oceans and by the addition of water to the oceans as a result of the melting and discharge of ice from mountain glaciers and ice caps and from the much larger Greenland and Antarctic ice sheets. The exact science of sea-level rise is hard to ascertain, but the most recent IPCC report released in 2007 projected a global sea level rise between 0.2 and 0.5 meters by 2100. This increase, however, will not be felt uniformly, including because of differential heating of the ocean, ocean dynamics (winds and currents), and the sources and geographical location of ice melt, as well as subsidence or uplifting of continental margins. Some areas may thus be subject to higher rise rates than others, but current sea level measurements meet or exceed the high end of that range. This suggests that a rise of one meter or more by the end of the century might be possible, and a World Bank report published in 2012, which uses a semi-empirical model, highlights that scenarios that approach 4°C warming by 2100 (2090–2099) lead to median estimates of sea-level rise of nearly 1 m above 1980–1999 levels on this time frame. Predicted climate change and sea level rise have far-reaching consequences for Morocco’s coastal areas. Over 80% of Morocco’s coastline comprises sandy shores susceptible to large variability and erosion. The problem with sea level rise is not just the relatively modest mean predicted, but its interaction with changing storm intensities and wind fields to produce sea conditions that overwhelm existing infrastructure. In the case of Morocco, low- lying large metropolises, which include Rabat, the administrative capital of the Kingdom, and Casablanca, its center of economic development, will likely be most vulnerable to such impacts. 17. Integrated Coastal Zone Management (ICZM) is now widely recognized as providing a major opportunity to address the many issues and challenges identified above. Since it offers advantages over purely sectoral approaches, 62 ICZM is widely recognized and promoted as the most appropriate process to deal with climate change, sea-level rise and other current and long-term coastal challenges. Several important aspects of ICZM can be noted with regards to climate change adaptation: a. Enhancing adaptive capacity is an important part of ICZM. b. The extent to which climate change and sea-level rise are considered in coastal management plans is one useful measure of commitment to integration and sustainability. c. Responses to sea-level rise and climate change need to be implemented in the broader context and the wider objectives of coastal planning and management. d. ICZM focuses on integrating and balancing multiple objectives in the planning process. e. Generation of equitably distributed social and environmental benefits is a key factor in ICZM process sustainability, but is difficult to achieve. f. Attention is also paid to legal and institutional frameworks that support integrative planning on local and national scales. And, g. Different social groups have contrasting, and often conflicting views on the relative priorities to be given to development, the environment and social considerations, as well as short and long-term perspectives. 18. Until very recently, Morocco still lacked an organizing framework for integrated coastal zone management. As a result, the coastal space was managed by several sectoral agencies that implemented their own policies and fostered investments independently, and with little regard for one another. With growing economic development, however, the need for such a framework became every day more dire. The Government had long been aware of the need to adopt such an approach, as evidenced by membership in a series of international agreements in support of coastal zone management and biodiversity conservation (e.g. the Regional Seas Barcelona Convention for the Protection of the Marine Environment and the Coastal Region of the Mediterranean, the Ramsar Convention for wetland conservation, and the Convention on Biological Diversity). Different drafts of the Coastal Zone Law (Loi du Littoral) have been iterated since 1996. 19. The adoption of the latest version of the Law by the Government’s Council, the Law on Zoning, Protection, Development and Conservation of Coastal Zones (ICZM Law) is a crucial step to ensure the sustainable development of the coastal zone. According to the new law, two very important new steps will have to be taken in succession: first, the drafting of the National Management Scheme for the Coastal Zone (“Schema National d’Aménagement du Littoral”), which will further define the rights and obligations of each authority, both nationally and regionally (and even locally), and then through the adoption of more adapted regional management schemes, which will recognize some of the great differences between regions in the coastal zone. 20. The coastal zone law lays the regulatory framework protecting areas that harbor fragile ecosystems and are critical to the country’s economy for their tourism and fisheries potential. Current Moroccan law governing the coastal zones is sectoral in nature and the individual ministries operating in isolation cannot produce an integrated approach to managing this critical zone among many overlapping and competing interests. This lack of integration has already produced undesirable outcomes in a number of places where tourist development has been undertaken without proper accounting for local context and without due attention to competing uses of the coastal zone. For example, the tourist station at Saidia in the Oriental region on the Mediterranean was constructed on less than optimal land and in difficult hydrological conditions next to a sensitive ecological site, is plagued with infrastructure problems and continues to operate substantially below capacity rather than acting as a generator of strong growth and employment as planned. 21. The new law will create a foundation for an integrated and ecosystem-based perspective on the management of resources and activities in the coastal zone that relies on a prescribed methodology for the creation of coastal zone management plans for each of the coastal regions. These plans will be informed by local knowledge from local communities and civic associations with interests in the coastal zone, among others. 22. The effect of the integration of planning for the coastal zone across economic sectors will be to allow a single policy instrument to balance the competing interests of one sector against another. Fishing and tourism interests may conflict in some areas and some cases. The process created by the new law allows these conflicts to be resolved in a reasoned and transparent way at the local level. Local people, who know the coast better than outsiders and whose 63 livelihoods depend on it, will be able to have input into how much tourist development to allow and how much area to set aside for agriculture or fishing. 23. The outcome of the integration of coastal zone planning at a delegated, more localized level will be to improve ownership by the populations most dependent on the coast for their livelihoods, and improve the incorporation of local concerns for sustainability into official planning. The expected outcome of this will be substantial improvements to sustainability of future coastal zone development. 24. While the environmental and social benefits of the ICZM approach adopted by Morocco through the Coastal Zone Law are easy to identify, it is much more difficult to identify any negative impacts that might arise. While it is of course possible that poor planning decisions may be made under the new delegated and decentralized structure of management schema, it is likely that decentralization and the incorporation of local knowledge will help to minimize those occurrences. It is conceivable that some leakage within Morocco might occur if one region adopts a coastal zone management scheme that sets stringent controls while a neighbouring region does not. Under such a scenario, the latter region might suffer increased environmental pressure as people seek to exploit the more lax controls on the coastal zone situated within it. However, even was this to occur, it would likely be temporary as such pressure would give local communities a strong incentive to request that their own authorities also create a management scheme. 25. Conclusion: The Coastal Zone Law is expected to improve environmental and social outcomes arising from the management of economic activity and competing priorities in the coastal zone due to the new, specific powers it provides to protect the coastal zone in its specific context, as well as powers of monitoring and enforcement. In addition, its emphasis on informed and integrated planning delegated to the regional level will allow better communication between the authorities and the communities involved. Involvement from a broad range of stakeholders is explicitly required under this Law by means of commissions which must review the National Management Scheme for the Coastal Zone and any Regional schemes created beneath it. Prior Action 1.1.2: The Council of Government has approved the draft Law on Illegal Fishing on March 28, 2013. 26. The new Law on Illegal, Unreported and Unregulated Fishing (IUU Law) marks a very important step in the further development of fisheries management in Morocco. Up to now, the Government had focused its efforts on the development of a series of management plans, often species-specific (e.g. the octopus management plan) but fishing fleets tended not to comply with many of the prescribed measures. This problem is not unique to Morocco, but rather often characterizes the development of fisheries management, where the focus on compliance and enforcement comes last, once the regulatory regime has been developed and finalized. In fact, the importance of focusing on enforcement is widely recognized and was codified in the FAO’s International Plan of Action on IUU Fishing, upon which the new Moroccan law is based. 27. The social and environmental impacts of the new law are expected to be overwhelmingly positive, particularly for the large majority of fishermen who heretofore had complied with the conservation and management measures. As a result of the entry into force of the law, and ultimately of the creation of the Enforcement Directorate within the Department of Fisheries, law-abiding fishermen can now expect that scofflaws who had gained an unfair advantage will now be interdicted under the stepped-up enforcement, which will greatly even out the playing field. Furthermore, and as result of the expected decrease in illegal fishing, its deleterious effect on fish stocks is likely to be considerably curtailed, and even reversed, which will in turn result in a much healthier resource, from which fishermen can expect to extract sustainable revenues. 28. The positive environmental impact of the law on the stocks will have also have considerable positive social impacts, since hat which is good for the fish is also very good for the fishermen. The latter will have greater certainty that the stocks will be fished sustainably, without the undermining actions of illegal fishermen, or in this case free-riders, which in turn will provide less of an incentive to increase their level of effort, in vain efforts to catch the resources before they are “stolen,” or caught illegally. 29. Before these benefits, both ecological/environmental and social, are felt, however, it is undeniable that the law will have negative social impacts on fishermen who had do far engaged in IUU fishing. In following with the model of the 64 FAO IPOA, the law puts strong emphasis on activities on the high seas, both fishing and transshipment, but in actual fact, all fishermen, from the artisanal, coastal and industrial fisheries, are ultimately likely to be impacted. Inasmuch as they were deriving some revenues from their illegal activities, former scofflaws will be impacted by the new enforcement measures, at least in the short-term. From an ecological or environmental standpoint, however, one cannot expect any negative impacts from the establishment of a new regime where the conservation measures are finally respected and enforced. 30. The social impact of the Law may be more important in the industrial fisheries, where the infractions that were carried out far at sea will now be easier to detect thanks to the brand new vessel monitoring system (VMS) recently funded and deployed by the Government. In a way, IUU fishing is going to be that much harder to pull off by the large industrialized fleets in the Moroccan Exclusive Economic Zone, but because enforcement can be expected to be rather uniform, small-scale artisanal fishermen, who are sometimes desperately poor and living hand-to-mouth may see a significant decrease in revenue in some limited instances. It should be noted, however, that the wide majority of fishermen who do not engage in IUU fishing have nothing to fear, should not be impacted economically by the implementation of the law, but rather will benefit greatly from the reduction in IUU fishing. 31. Nevertheless, the Fisheries Department is well aware of some of the costs that will be incurred as the law is implemented and is taking all possible measures to try and soften the blow of these impacts, including through comprehensive negotiations that ensure the full participation of the sector in the establishment of new conservation and management measures for all managed fisheries in which artisanal fishermen are participating (particularly octopus, red tuna, algae, swordfish). 32. In addition, the Fisheries Department has adopted a series of measures to support all fishermen, but also in particular, small-scale artisanal fishermen. Amongst these support measures are the creation of three marine protected areas for fisheries management, a very strong training and functional literacy program, a program designed to assist fishermen with gear and boat upgrades (IBHAR program, which aims at upgrading 10,600 registered boats out of 16,500 through better engines, GPS, insulated boxes, life jackets, and VHF radio), and even the construction of fishers villages and improved landing sites where, water, electricity and ice are brought to the fishermen, along with a well maintained, open market where fishermen can sell their catches at fair prices (more than 40 sites have already been developed). 33. Furthermore, a breakthrough was achieved when the Government was able to formally recognize artisanal fishermen who had previously operated informally, particularly through their total incorporation within the national social security system (Caisse Nationale de Sécurité Sociale, CNSS), thus meeting a demand that the fishermen had pressed for over decades. As a result, artisanal fishermen will be entitled to social security benefits, including pensions and health coverage, with benefits extended to their dependents. 34. Conclusion: Measures to address illegal fishing supported by the operation will mainly impact large scale actors engaged in illegal fishing practices. Control measures will particularly benefit small scale fishermen engaged in artisanal fishery, who will benefit from increased sustainability of the marine resources upon which they critically depend. The Government is also putting in place a range and who will also benefit from measures to accompany the transition. Morocco has a long history and record of consultations with its fishermen and the new surveillance measures have been discussed with and approved by the stakeholders through consultations with their representatives (the so-called “chambres maritimes”). The fisheries actions aim squarely at reinforcing control over fishing activities and to prevent illegal fishing, which significantly compounds depletion of marine living resources. The marine fisheries measures contained supported by the DPL entail no environmental risks; 1.2: Water sector governance Prior Action 1.2.1: The Ministers of Interior, Agriculture and Water have issued the Interministerial Circular (Circulaire) requiring the conclusion of groundwater management agreements (contrats de nappes) on November 15, 2013. 35. Increased water scarcity is caused in part by demographic growth, unregulated water demands (including uncontrolled groundwater pumping), and a 30% downward trend in annual rainfall since the 1970s, resulting in serial 65 droughts. The current natural renewable water resources deficit is estimated at 2 billion m3, which is partially compensated by groundwater overexploitation, estimated at 0.86 billion m3 beyond the renewable volume of 3.4 billion m3. Water abstraction for irrigation and, to a lesser extent industry, are the main drivers for aquifer overexploitation. Irrigated agriculture makes up on average 45% of agricultural value added (75% in dry years). Much of this value added comes from groundwater irrigation, owing to its ease of access and flexible use to replace or complement the current deficit of surface water for irrigation. The Souss-Massa Region resorts primarily to groundwater irrigation for its agricultural production (80% and 40% of Morocco’s total tomatoes and citrus exports are grown there). In 2012, the abstraction volume was 650 million m3, against renewable volume of only 370 million m3 - an exploitation rate of 175%. If no conservation plan is implemented, the region’s deficit will reach 400 million m3 in 2020, causing the abandonment of 31,000 ha of irrigated land, of which 9,000 ha because of dry-out, and 21,000 ha by loss of profitability due to the rising cost of pumping. Small, low income farmers who cannot afford to deepen their wells and strengthen their pumping equipment will be the first to suffer. The Souss-Massa Region is not alone: twenty aquifers are overexploited, with Haouz Mejjate reaching 160% and Saïss 150%. The combined effects of climate change and increasing water demand from the population and productive sectors will further worsen existing trends. 36. Given existing water allocation priorities in Morocco - drinking water supply, energy, then irrigation - the agriculture sector realizes that it will be the most impacted by further water shortage, with immediate negative social, economic and demographic impacts. Having experienced the crises generated by drying aquifers in the Souss area, GOM is well aware that sustainable water demand management for irrigation is critical to adapt to a future of less and more variable rainfall. It set up the National Program of Irrigation Water Conservation (Programme National d’Economie de l’Eau en Irrigation, PNEEI) to improve agricultural revenues by supporting the conversion to more efficient irrigation practices, with the objective of equipping with drip irrigation technology an estimated 555,000 hectares of surface and sprinkler irrigation to drip irrigation (about 50% of irrigated areas), including 220,000 hectares in Large Scale Irrigation (LSI) areas (collective conversion) and 335,000 hectares in private irrigation areas (individual conversion). This program will allow increasing the reliability of the water service delivery, leading to improving water efficiency and to reducing aquifer abstraction. 37. The Department of Water, River Basin Agencies, the Ministry of Agriculture and the Ministry of Interior proposed the preparation of groundwater agreements (contrats de nappes). Lessons of the first framework convention including water users at the level of the Souss-Massa basin, which started in 2005 with support from GIZ, emphasized the need to use a very comprehensive participatory process leading aiming at raising awareness and convincing at least major aquifer water users to mutually agree and enforce a reduction of withdrawal from threatened aquifers beyond the targets set in the river Basin management plans. Previous efforts from the GOM to have groundwater users declare their wells to the River Basin Agencies generated poor results, with an estimation of 30% of wells being now declared. Any regulation on groundwater abstraction, let alone the lack of withdrawal fees to the River Basin Agency, is likely to penalize the well owners who responded to this civic responsibility and to push the greater majority to hide even more their abstraction levels. These are some of the reasons why the process and methodology of engaging with the water users is critical to ensure the environmental and social benefits of this DPL-supported measure. Amongst them, the pragmatic approach to focus on the few stakeholders representing the largest share of the groundwater abstraction (80/20 rule) has a double benefit. It aims at keeping the process manageable while maximizing the withdrawal reduction. It also allows preserving small farmers, who are already the most impacted from decreasing levels to have to comply with requirements they are not likely to be able to respect without jeopardizing their livelihood. 38. Conclusion: The proposed measure is expected to generate significant positive environmental. The only potential negative impact would be delaying its implementation, as the current situation is quite critical. With respect to social aspects, this DPL-supported measure is expected to generate positive social benefits, especially on the poor and vulnerable, who would be the hardest hit by further overexploitation of aquifers because they have neither the means nor the potential for economies of scale to adapt. 66 Pillar 2. Greening Physical Capital 2.1: Low Carbon Growth 39. The energy sector is critical to the Moroccan green growth strategy. In 2011 Morocco imported 96% of its commercial energy spending Dh91 billion. The current energy profile also has important environmental consequences as oil and coal together constitute 84% of total commercial energy. Energy access is critical for the Moroccan poor, and their use of wood for fuel contributes to deforestation. If Morocco could move towards a more renewable energy profile, it could reduce the foreign exchange burden of energy imports and reduce greenhouse gas (GHG) emissions at the same time. The Government of Morocco (GOM) energy plan has three major goals: • To guarantee adequate energy supply while at the same time reducing dependence on foreign energy supplies • To limit the environmental impacts of the Moroccan growth model • To guarantee energy access to the population, especially the poor 40. Commercial energy consumption per person in Morocco is 0.52 tons of oil equivalent (TOE) per person compared with a world average of 1.86 TOE per person. Energy consumption usually reflects economic activity, so the lower level of energy per person is to a large degree a function of the income per person. In terms of energy intensity (TOE/GDP), Morocco is 0.22 compared with a world average of 0.25. Thus, Moroccan energy intensity is roughly equal to the world average, and far higher than the 0.14 of OECD countries. As countries move up the income scale, at some point they generally begin to become more efficient users of energy. The low level of energy consumption per person and the high level energy consumption per unit of income also adversely impacts Morocco’s competitive position in the global economy. 41. Morocco aims to reduce environmental and GHG emissions through the energy strategy. Lead and sulfur emissions will be reduced through new low sulfur diesel, and unleaded gasoline. The goal is to reduce GHG emissions by 2,874 kT of CO2 per year by 2030 through improved efficiency and 20,825 kT CO2 per year via increased use of renewable energy. Prior Action 2.1.1: The Council of Government has adopted on November 14, 2013 the Decree on energy efficiency in the building sector. 42. A key pillar of Moroccan energy strategy is increased energy efficiency. Policies and investments will be made to increase energy efficiency across the whole economy. These include increased fuel efficiency in the transportation fleet, usage of more high efficiency electric lighting, programs for improved building energy efficiency, increase in the efficiency of electric motors, and modernization of industrial production to increase energy efficiency and reduce pollution. 43. In 2009 the Moroccan Government committed itself to achieve 12% to 15% of energy savings by the year 2020. This ambitious target has been translated into the announcement of an energy efficiency plan aiming at the promotion of efficient end-use of energy in different economic sectors. Specifically, the energy efficiency action plan in the sector of buildings will result in reductions in primary energy use estimated to reach 1.22 million toe by 2030 38. 44. Buildings account for 36% of total energy consumption of the country. The sector is considered to be the top end- user of energy. Residential buildings contribution is estimated at 29% of the total energy consumption and tertiary sector buildings account for the remaining 7%. This component of the overall energy demand is expected to grow rapidly in the next coming years for the following two reasons: • a projected important growth in the buildings stock as a result of a number of investment plans to be carried by the government in the sectors of tourism, education, health and social housing (150,000 units per year). 38 « Les éléments techniques du projet de la réglementation thermique du bâtiment au Maroc », ADEREE, PNUD, GEF ». 67 • a rapid growth of the level of household equipment. Low prices and the wide access to electricity will trigger a rapid increase in use of domestic and electrical appliances (e.g. heating & air conditioning, water heaters, etc.). 45. In terms of avoided GHG emissions in the residential building sector39. Morocco being a country where hydrocarbons amount for a large share of power generation and energy consumption, the avoided emissions accumulated over the period of next 20 years are expected to be substantial and estimated to be about 20 Million teq of CO2. 46. As to avoided GHG emissions in the tertiary buildings sector 40, these will be significantly less than the residential ones. The table below represents avoided emissions of CO2 and energy gains with the implementation of the energy efficiency decree in each category of buildings of the tertiary sector: Avoided Emissions in kg eq of Type of Building Energy Gains in kgoe/m²/year CO2/m²/year Government 16 6 Education 14 5,2 Hospitals 20 7,5 Hotels 13 4,9 47. Conclusion: Potential negative environmental impacts from this measure are highly unlikely. On the other hand, positive environmental impacts are expected. Given that EE standards will apply only to new buildings, there is no expectation of significant social effects in terms of physical or economic displacement. In the longer term, positive social impacts are expected from reduced heating and cooling needs for households. Prior Action 2.1.2: Order (Arrêté) No 3.69.13 dated August 19, 2013 introducing automatic price adjustments for diesel, gasoline and fuel has been published in the National Gazette No. 6182 dated August 29, 2013. 48. Energy products are highly subsidized in Morocco, and the subsidy system not only distorts product prices but also places a heavy burden on the public treasury. In fact petroleum product subsidies in 2011 amounted to Dh 44.5 trillion, which represented 5.4% of GDP and 89% of the public investment budget. In many cases, the subsidy amounts to a high fraction of the product price, e.g., 68% for butane, around 45% for fuel oil, and 35% for diesel. The butane subsidy benefits all income categories with 13% going to the poorest quintile and 30% to the richest, whilst 7% of the petroleum product subsidies go to the poorest quintile and 42% to the richest. 49. Petroleum products subsidy reductions supported by DPL/1 are expected to have a modest impact on the poor and vulnerable. Subsidy reductions increased diesel prices by 4.8%, gasoline prices by 8.5% and industrial fuel prices by 14.2%. These products account for a negligible part of poorest households’ expenditures. An incidence analysis based on distributional impact models developed by the Bank in partnership with GoM41 shows that (i) expenditures on subsidized 39 Idem. 40 Idem. 41 The development of the models was carried out in the framework of a ESW/TA program supporting the Government’s overall subsidy reform agenda which, in addition to impact assessments, included (i) capacity building to MAGG regarding the establishment of a cash transfer program (design, institutional framework, beneficiary registry, payment system) ; (ii) political economy analysis of reform acceptability dynamics targeting butane subsidies based; (iii) assessment of long term (2030) trade-offs of subsidy reform based on CGE modeling. Three models were developed by the Bank to assess the impact of the reform of subsidies on households and public finances in partnership with the Government of Morocco. Two models of impact analysis as technical assistance to MAG (subsim and a model in Excel) and a computable general equilibrium model with MEMEE to evaluate Morocco's energy strategy. The outputs of these models have helped to know the (direct and / or indirect) potential effects of the reform of subsidies on households, particularly poor households. Products affected by the recent reform of subsidies are weakly used by poor households. In addition, the indirect effects of this reform on prices are modest and subsidized products fundamentally important for the poor (butane, flour and sugar) are not affected by the recent reform implementation. 68 products increase only for the wealthiest households (figure 2) and (ii) overall households real consumption decreases by less than 0.5% and by less than 0.25% for the first five deciles of households over the next three years. Poverty levels remain unchanged. 50. Recent reductions of fuel subsidies supported by the operation were achieved without any major social opposition. This was due to three key factors: A) in terms of direct effects, the subsidy reductions have actually very modest repercussions on the poorest categories (see above). B) the government is developing compensatory measures for the professional categories that are expected to be directly hit, such as passenger and merchandise transport, industrial sector, and other activities, such bakeries). For intra-urban taxis, the government is setting up a cash-for-clunker scheme whereby taxi drivers are incentivized to buy a new (and more fuel efficient) vehicle based on a discount at sale, which the government achieved thanks to bulk-purchasing, and a micro-credit scheme allowing for access to loan opportunities that they do not normally have. A similar mechanism is being discussed for other transport categories such as inter-urban busses and trucks. Additionally, regarding the subsidy reductions on industrial fuel, the Government is discussing with relevant industrial sector representatives the option of swapping HFO subsidies with support to investments in more efficient production processes. C) the government has actually mastered the communication and the participatory aspect of the reform by engaging in successful consultations with all economic categories that could potentially derail the reform at its outset. The Government believes that the next frontier of the reform will be butane – this will certainly have more serious poverty and social implications, as butane constitutes as substantial part of the poorest HH’ s budget. Figure 1: Impacts of petroleum products subsidy reductions, by decile Expected increase in HH expenditures on subsidized Expected decrease in real HH consumption following products following subsidies reductions, by decile subsidy's reduction, by decile 51. By agreeing these mitigation measures with transport sector categories ahead of the subsidy reform, the Government has so far succeeded in preventing de-subsidization to spill over on transport costs and along the value chain, thus precluding inflationary spirals from arising. The Government is also minimizing inflationary pressures through the implementation of further compensatory measures such as a cash scheme based on direct compensation of the extra- charges incurred by taxis, to be disbursed on a quarterly basis. 52. In addition to assessing the specific impacts of the subsidy reform measures supported by the operation, during preparation the Bank and the Government developed a tool to assess the environmental and economic implications of Morocco’s overall energy goals coupled with future policy action on subsidy reform. Morocco aims to create a better balance between imported and domestic energy and to progressively align domestic consumer prices to world prices. Energy subsidies would be gradually reduced over time, but with targeted subsidies for butane and diesel. The GOM also aims to move to an energy portfolio with more renewable energy coming from hydroelectricity, solar, and wind energy. The GOM also aims for natural gas to play a somewhat more important role in the future energy economy. GOM asked the World Bank to work with an interministerial group consisting of Directorate for Planning of the Department of Energy, within the Ministry of Energy, Mines, Water and Environment (MEMEE), and the High Planning Commission. 53. The group chose to adapt a computable general equilibrium (CGE) model named MANAGE (Mitigation, Adaptation, and New Technologies Applied General Equilibrium Model). MANAGE is a hybrid model in that it is a 69 prototypical CGE model but with a greater richness in technologies employed in the energy sector. Thus, the energy component has “bottom-up” features that are well integrated with the top-down CGE structure. The model is a recursive dynamic model conceived for energy and climate change research. The model has many standard characteristics of a dynamic CGE model of neoclassical economic growth with labor growth being exogenous and capital growth derived from savings and investment decisions. It uses constant elasticity of substitution (CES) functions among different inputs. Energy is assumed to be a complement of capital in the short term but a substitute in the long term. There are two vintages of capital equipment with the new capital being of higher energy efficiency than old capital. There is specific capital for solar and wind energy that cannot be used in other sectors. The model incorporates a consumer preference shift towards the newer renewable technologies. The model has the capacity for multi-input and multi-output. For example, electricity can be produced by different technologies (solar, wind, hydro, and thermal). Also, more than one product can be produced from an input, e.g., oilseeds going to vegetable oil and lamp oil and oilseed meal. The model also tracks GHG emissions throughout the economy basically with emission being a function of different kinds of fossil fuel use. Another important feature of the model is that the household is disaggregated into five households representing each quintile from poor to rich. This disaggregated household permits analysis of the impacts of the different policies on the poor as well as the entire economy. The data for this disaggregation comes from household surveys conducted in 2007. 54. The model uses constant difference of elasticity (CDE) structure for household demand. It is calibrated from different price and income elasticities. The CDE structure works somewhat better than the linear expenditure system often used. The model includes the current policy intervention such as the energy subsidies described above. That permits it to be used to evaluate the impact of removal of those subsidies. The model uses the Armington structure of imperfect substitution between imported and domestic goods. It assumes Morocco is a small country, and its imports and exports do not affect the world prices of goods. However, the capacity exists to introduce import and export demand functions. 55. The model makes use of the social accounting matrix (SAM) for 2007 developed by Morocco’s High Planning Commission, and complemented with data for renewable energies (solar and wind). The energy disaggregation is derived from the energy balance taken from the Ministry of Energy and integrated into the SAM. The analysis is done for a reference case and two green scenarios. The first green scenario (variant 1) retains the energy subsidies and the second eliminates the subsidies and reduces taxes to compensate for the subsidy elimination. For all three scenarios, the assumed oil price is $100/barrel, population in 2030 is 38 million, and economic growth is 5%. There is no growth in efficiency in the reference case and 1% annual efficiency growth in variants 1 and 2. Productivity growth is weak in the reference case, medium in variant 1, and high in variant 2. It is envisioned that in the future other scenarios or variants will be considered. For each modeling scenario, the following results are presented: • Structure of energy supply and demand • Energy sector production, role in the national economy, composition of imports and exports, commercial balance, and public finance • Social impacts reflected in the evolution of the living standard of the poor • Environmental impacts measured by changes in GHG emissions 56. The analysis shows that the policy scenario induces substantial CO2 emissions savings, of roughly 14 million tons annually between the reference case (130 tons) and the policy case (116 tons) – see Figure 2 below. 57. The analysis also models the social impacts of policies leading to the future achievement of Morocco’s renewable energy targets together with complete energy subsidy removal. The analysis shows that Business as Usual will have detrimental impacts on the poor and vulnerable, as the expected huge increases in energy consumption, increasing dependence on imported energy, large increases in GHG emissions, will lead to a substantial increase in the government budget burden and overall economic burden of the energy subsidies, which will constrain social expenditures. The large investments in renewable energy without addressing energy subsidies involve a reduction in economic growth due to the high cost of the renewable investments coupled with the continued energy subsidies. However, the analysis shows that the loss of energy subsidies causes different impacts by level of household income. Subsidy removal impacts are quite different in the short and long term. In the short term, economic growth is reduced, but it accelerates substantially in the long term due to the stimulus of reduced taxes and increased energy efficiency. The poorest households have moderate income changes of -2.24, -1.98, -0.02 and +0.09% in 2013, 2020, 2025, and 2030 respectively. The impact is largely to the loss of the butane subsidy, a policy which has not been implemented by the Government and that the operation does not support. 70 58. The fiscal space created by the cost savings will be partly recycled into additional social and productive investments, including in public transport. Going forward, the government intends to strengthen social safety nets (DPL/2 trigger) in order to mitigate future subsidy reductions. The institution of a cash transfer is envisioned as mechanism to mitigate eventual price increases in Butane and other subsidized food items. While the government has a clear vision to move towards price liberalization accompanied with a system of compensation to poor households, a full political consensus on the timing of such reforms has not yet been achieved. The implementation arrangements for a safety net mechanism will require a clear targeting method, a registry of poor households, and public infrastructure to register, verify eligibility, and issue payments. The World Bank team through an intra-sector (HD, PREM, SD) technical assistance, is supporting the government develop a targeting methodology, and explore potential implementation arrangements for the potential delivery of a cash transfer. In particular, the Bank is supporting the establishment of a registry of beneficiaries to be used by the future SSN program; the use of innovative technologies that could facilitate CCT and UCT to HHs; capacity building to better estimate impact on HH of the subsidy reform. Figure 2: Comparison in the evolution of CO2 emission (thousands of tons) between baseline and policy scenario Baseline scenario Policy Scenario Production emissions Autres produits pétroliers Gaz butane et propane Gasoil Essence Charbon de bois Gaz naturel Pétrole brut Charbon 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 2007 2010 2015 2020 2025 2030 71 59. Conclusion: Subsidy reduction combined with renewable energy and efficiency investments can increase economic growth and reduce GHG emissions. Environmental benefits are clearly positive. Social impacts also appear as positive, particularly if the Government utilizes the fiscal space derived from subsidy reform to strengthen social expenditures and safety nets, as envisaged by the DPL/2 trigger. 2.2: Pollution Management Prior Action 2.2.1: The three Orders (Arrêtés) No. 2942.13, No.1 2943.13, and No.2944.13 dated October 7, 2013 on monitoring and controlling industrial wastewater discharges in the hydraulic domain stating a) general limit values; b) characteristic values and specific coefficients; and c) minimum treatment efficiency of industrial wastewater treatment plants, have been published in the National Gazette No 6199 dated October 28, 2013. 60. Industrial pollution heavily contributes to degrading the quality and productivity of natural assets, particularly water. In 2003 the Bank estimated that the total annual cost from the degradation of water quality at 4.3 billion dirhams in 2000, or 1.2 percent of its GDP then. Industrial pollution (as measured by 5-day Biological Oxygen Demand or BOD5) is mostly located in the Sebou (organic pollution originating from olive oil mills and chromium pollution from tanneries) and Tensift river basins (organic pollutions and heavy metals stemming from lead, zinc and copper mining). Industrial pollution and urban waste caused by tanneries, textiles, paint factories, agro-industries, chemical manufacturing, mineral processing (copper, manganese, lead, coal, and iron), coal-based power plants, petroleum refineries, cement factories and inefficient waste management have negative impacts on human health. This pollution affects comparatively low-income population more as they tend to concentrate nearby industrial outputs, where land is comparatively cheaper and where their chances to find a job as a day-worker or recycle industrial waste is greater. 2007-2008 data based on 39 percent of the measurement points of surface water across the country show water quality to be poor or very poor mainly due to organic and to bacteriological pollution). For groundwater, the rate is 44 percent across the country, mostly due to salinization and nitrate pollution. Given the severity of the impact of industrial pollution on human health and the environment, it is urgent to complete the regulatory framework on these topics, in a way to ensure consultation with all relevant departments and its timely and effective implementation. In addition to strengthening its network of stations monitoring the quality of both surface water and groundwater, the Government has adopted an inter-ministerial Order (arrêté) setting norms and standards for industrial wastewater treatment together with the two subsequent Orders determining respectively characteristic pollution levels from selected industrial activities and respective pollution abatement levels42. 61. The DPL-supported measures aiming at regulating industrial depollution is a clear step forward with respect to improving the environment. This measure builds on the work done by the EU in this respect, and aims at weighing in to stress the importance of the issue. Although the DPL only supports a key part of the necessary regulation, it is completed by an incentive mechanism called Voluntary Mechanism for Industrial Depollution (Mécanisme Volontaire de Dépollution Industrielle), which is providing subsidies to industries investing in their wastewater treatment. Structured as an output-based aid approach, this mechanism is ensuring enforcement that infrastructure is up to the necessary standards, that it is operational and that it treats to the requested level to be able to meet the regulation. Although recently started, the mechanism is receiving proposals. The indicator for this measure has been set at actual BOD5 pollution reduction. 62. In collaboration with other partners involved in this sector (EU, UNIDO, GIZ), accompanying measures are being put in place to demonstrating the opportunities which can be generated when industrial depollution is integrated in a broader discussion on the potential for optimization of the industrial process. Demonstration has been made, including in the Moroccan context, that the construction of wastewater treatment could lead to win-win solutions. Treated wastewater can be reused in the industrial process, e.g. for cooling purposes. Organic pollution, typically from agroindustry, can be treated using a process allowing generating biogas, which can be used for heating or electricity generation, thereby reducing energy consumption and carbon footprint of the industry, in addition to improving the environment. Opportunities to combine the mandatory energy audits in industry requested by the 2011 Energy Efficiency Law (Law 47- 42 In French : « Arrêté conjoint portant fixation des valeurs limites générales de rejet » ; « Arrêté conjoint portant fixation des grandeurs caractéristiques et des coefficients de pollution des activités industrielles »; and « Arrêté conjoint relatif aux rendements des dispositifs d'épurations ». 72 09) and the depollution agenda are being explored. The implementation of these audits, as well as the implementation of the depollution and optimization improvements, would also generate a mutually beneficial economic activity. 63. Conclusion: this measure is expected to pave the way towards significant positive social impacts, with short term benefits in terms of improved competitiveness and therefore on employment, in addition to the broader positive environmental impacts linked to environmental audits, depollution and process improvements investments and potential delegated management options. Prior Action 2.2.2 The Council of Ministers has approved on March 7, 2013, the draft Framework Law on environment and sustainable development setting forth, in particular, the establishment of a comprehensive green fiscal framework. 64. The Framework Law on the Environment and Sustainable Development represents a significant step forward for Moroccan law and the Moroccan economy onto a more sustainable pathway. This law lays out broad principles which will favor more sustainable economic activity and lays out several mechanisms to aid in reaching that goal. 65. This Framework Law states the rights and responsibilities which fall to all moral and legal persons concerning the environment and sustainable development, and declares the principles that all actors from the state down through public and private corporations and communities to individual citizens must apply to the planning and execution of any kind of activity in the country. The precautionary principle is explicitly enshrined as one of the guiding tenets of this Law, as is the principle of participation of stakeholders and the public. It lays out specific actions the government will take on environmental protection and sustainable development, including the establishment of a national system of strategic environmental assessments. It mandates the creation of a national sustainable development strategy, and mandates all public entities to align their own planning and strategies with it. It also creates a number of institutional, economic and financial mechanisms to favor sustainability as a main pillar of governance. Primary among these are the enabling authorities to construct a green fiscal framework: including notably green taxation, incentives to favor sustainable products or activities consistent with sustainability, eco-labeling, and public awareness campaigns. Judicial changes are instituted to implement the Law, including systems of financial guarantees, reparations for damages, rehabilitation of affected sites and compensation for environmental damages. It also creates enforcement authorities, including an environmental police force, to monitor and enforce compliance with these principles. 66. Conclusion: The Framework Law on the Environment and Sustainable Development represents an important step forward for Morocco on both doing less harm to the environment as well as doing as much good as possible. The far- reaching authorities that it institutes for both environmental protection and sustainable development greatly strengthen the powers available to the state to reward ecologically sound development activities and to punish environmental destruction. The requirement for the elaboration of a national sustainable development strategy will help to align all of the government’s ministries and agencies around the common goal of improving the sustainability of all of Morocco’s systems. While there will be a delay of some years as these strategies are formulated and the various agencies and organs of government align their own plans and strategies in response, all of these changes tend towards greater environmental protection and a lighter footprint for Morocco’s economy overall. There is some risk of uneven application of the principles and actions prescribed by this Law, but this is not expected to result in any negative impacts on the environment or on society. Pillar 3. Strengthening and diversifying the rural economy by leveraging human capital 3.1: Green technologies in the agricultural sector Prior Action 3.1.1: Order (Arrêté) No. 3186-13 dated 13 November, 2013 modifying and completing Order (Arrêté) No. 368-10 dated January 26, 2010, on subsidies for agricultural equipment, introducing a subsidy for the purchase of direct seeding equipment, has been transmitted by the Minister of Economy and Finance to the General Secretariat of the Government for publication in the National Gazette, on November 19, 2013. 73 67. The technology of direct seeding is currently being implemented as part of the existing GEF/SCCF grant entitled “Integrating Climate Change Adaptation Measures into the Plan Maroc Vert”. The environmental impacts of the technique are discussed in the framework study of the environmental and social impact assessment framework (ESIAF) which has been prepared by the client, cleared by the World Bank, and disclosed on the website of the Agricultural Development Agency (ADA) prior to project appraisal (February 2011), as well as in the individual environmental and social impacts assessments (ESIA) for each of the three sub-projects in which the technique is used, which have been prepared by the client, cleared by the World Bank, and disclosed on the website of the ADA prior to the launching of the physical works (April 2012). 43 The conclusion of the studies is that the technique of direct seeding has essentially neutral or positive environmental impacts. 68. In an environment like Morocco, in which climate change will be largely related to a decrease of rainfall and an increase of its variability, the improved efficiency of water use of up to 60% under direct seeding can be an important adaptation measure. In terms of mitigation, direct seeding is known to on one side reduce emissions (as a consequence of reduction in energy consumption), and on the other side to increase carbon storage in the soil. Soil carbon sequestration can increase by 1 to 4 ton/ha of CO2. In Morocco, it was proved that traditional seeding results in a CO2 flux from soil to atmosphere of about 4,9 g.m-2.h-1, while direct seeding results in only 0,7 g.m-2.h-1 44. In one of the GEF/SCCF sub- projects, it was observed an increase by 6% of the organic matter in the first 10 cm of soil, which specifically contribute to the reduction of emission of organic carbon from the soil surface to the atmosphere. 69. There are multiple positive environmental impacts related to the practice of direct seeding: • Increase in soil organic matter: In Morocco, direct seeding can increase soil organic matter by 3 to 14%, depending on the type of soil, the management, and the number of years of direct seeding practice. In one of the GEF/SCCF sub-projects, it was observed for example an increase by 6% of the organic matter in the first 10 cm of soil, which also resulted in a reduction of emission of organic carbon from the soil surface to the atmosphere. • Reduction in the requirement for fertilizers: As a consequence of the increase in organic matter, there is the possibility of reducing fertilizers quantities over the medium and long term without impacting production. This is particularly true as direct seeding is often accompanied by a change in agricultural practices that support, among others, crop rotation (i.e. use of leguminous crops after cereals, with increased nitrogen fixation). • Better use of water available: As a consequence of the increase in organic matter, the soil has a higher water storage capacity. In addition to this higher retention, roots under direct seeding tend to develop more, exploring deeper soil layers, and thus reaching more water. Last but not least, less water is lost by evaporation from the soil surface compared to the traditional practice. • Increased yield: As a result of the increase in soil organic matter and better use of available water, higher yields compared to traditional seeding are to be expected under direct seeding. In Morocco, this gain in yield has been proven to vary between 30 and 40% according to the season, with a higher gain during dry years. • Erosion control: The combination of higher carbon content and presence of residues on the soil required under direct seeding results in a reduction of both wind and water erosion compared to traditional seeding. • Reduction in energy consumption: As direct seeding does not require plowing, reduction in energy consumption of up to 70% can be achieved compared to traditional seeding. This translates into a savings of about 40 l/ha of diesel fuel (INRA, 2009). 70. The chemical control of weeds through the application of herbicides prior to seeding is necessary. However, it should be noted that herbicides are also used in the traditional practice, and direct seeding is not proven to result in a substantial increase in the use of these chemicals when compared to traditional techniques. In addition, mitigation measures for herbicide use are straightforward and relatively inexpensive to implement. 43 http://www.ada.gov.ma/documentation/documentation-agence-developpement-agricole-maroc.php 44 Moussadek R, Mrabet R, Dahan R, Douaik A, Verdoodt A, Van Ranst E, Corbeels M (2011) Effect of tillage practices on the soil carbon dioxide flux during fall and spring seasons in a Mediterranean vertisol. Journal of Soil Science & Environment Management 2, 362–369. 74 71. Conclusion: There are no major negative environmental impacts related to the practice of the direct seeding. The measure will help farmers address climate change impacts by improving soil conservation. The measure will also have important social benefits in terms of increased and more stable revenues. 3.2: Diversification of rural revenues Prior Action 3.2.1: Order (Arrêté) No.3151-13 dated November 11, 2013 establishing the technical and economic criteria setting the lease fee to be paid by aquaculture farms, has been transmitted by the Minister of Economy and Finance to the General Secretariat of the Government for publication in the National Gazette, on November 15, 2013. 72. Following the creation of the National Agency for the Development of Aquaculture (ANDA in French) and the emphasis placed on aquaculture in the latest comprehensive fisheries strategy, the Government has clearly identified aquaculture as one of its priorities and is embarking on an ambitious program in support of this nascent program. The projected growth rates of this sector indicate that a substantial expansion of aquaculture activity is foreseen between the present and 2020, with strong potential to continue beyond that date. 73. From a social perspective, the only significant risk of this approach would be if new projects were to be developed in areas that have traditionally been used as landing sites by small-scale artisanal fishermen or in sites of particular ecological importance for fish stocks. This can easily be avoided and alleviated through very careful consideration of the sites in which the new projects will be launched. It should also be noted that women have so far played an important role in algae harvesting and farming and that this role can and should be replicated in larger aquaculture projects. 74. The development of this sector, however, represents the only significant risk of incurring negative impacts on the environment through this DPL. This risk varies greatly with the species farmed and methods used. Potential environmental impacts of aquaculture projects, including cumulative impacts on a larger scale, depend in great part on (i) the species that are being cultivated, and (ii) the way in which they are being farmed. For instance, whilst fish farming can have serious deleterious effects if feed and antibiotics are mismanaged, shellfish and algae farming normally have beneficial impacts on the environment. This is particularly the case for oyster farming, upon which most of the aquaculture industry has been built so far. In addition, aquaculture has the potential to help limit the pressure on overexploited stocks by bringing a whole new flow of seafood on the market. 75. In the case of traditionally more polluting activities, the prevention, identification and treatment of diseases can avoid excessive use of antibiotics - the major health and environmental risks of fish aquaculture. In addition, many of the worst environmental impacts can easily be mitigated by avoiding high-input high-output intensive systems (e.g. salmonids in raceways and cages), so one of the key decisions will be to determine what species can be farmed, and how. 76. Another very important distinction needs to be drawn between intensive and extensive aquaculture, with the former presenting much greater environmental risks than the latter. ANDA has clearly indicated that one of its objectives is to create a significant number of jobs, thus prioritizing extensive, rather than intensive aquaculture, with more emphasis on human resources than capital. It should also be noted that women have so far played an important role in algae harvesting and farming and that this role can, and should be replicated in larger aquaculture projects. 77. Nevertheless, the risks of aquaculture are very real and new projects could lead to damage on the coastal and marine environments. This is particularly true if the new projects are not appropriately sited, in areas that make the most of current conditions to maximize flushing of surrounding waters. ANDA appears to be well aware of these risks and to understand how to mitigate them, but the proof will be in the environmental standards that are developed in cooperation with the Department of Environment. 78. Another significant environmental risk lies in the siting of the projects that will be allowed to go forward. For instance, not only will the new sites depend on the natural benefits that can be drawn from the local conditions (with a very strong emphasis of currents), it is also of the utmost importance to avoid developing these projects in critical ecosystems that provide irreplaceable services for the fish stocks that are targeted by existing fishermen (e.g. breeding 75 grounds, feeding grounds, nurseries, etc.) Finally, a significant risk could arise if too many of the new projects are developed in close proximity, where the environmental impacts would be cumulative and the impacted ecosystems would not be allowed to recover. This is the origin of the concern in this DPL over the need to monitor and control cumulative impacts from the aquaculture industry. 79. While national legislation is adequate to handle environmental impact assessment for individual fish farms, the concern is the potential for cumulative impacts as large numbers of such farms begin operating, especially if in close proximity to one another and to other human and natural users of the coastal zone. 80. The DPL supports strong mitigation measures that the Government is putting in place, notably through a Strategic Environmental Assessment carried out by ANDA, and the strengthening of the environmental impact control framework through a specific Directive issued by the Ministry of Environment. Through this very close cooperation, both ANDA and the Ministry envision a two-tier procedure, where a global EIA is carried out for all future aquaculture projects, and where the risks are clearly set-up and the mitigation measures well understood. Furthermore, this global EIA will also identify clearly where future projects should be sited, what species should be farmed, and how. This will then provide a blueprint for future projects and their impact studies would be supplemental and build on the global EIA. This approach will set the parameters under which new projects should be launched and foresees the cumulative impacts of the projects coming down the line. For instance, the global EIA will clearly address areas that should be off-limits to new projects (critical and fragile ecosystems) and also start spreading out the areas in which the projects are to be developed, in order to avoid the risk incurred when they are too closely concentrated. It is also envisaged that small-scale, artisanal projects and research projects may be subject to different requirements, with a limit in volume and scale to be agreed down the line. 81. Conclusion: DPL supported measures in relation to aquaculture can yield significant social benefits in terms of job creation and revenue diversification for rural areas. Morocco’s monitoring and control framework guarantees an adequate treatment of environmental impacts from aquaculture investments. The Government is aware of gaps in the legislation related to treatment of potential cumulative impacts. The Aquaculture Development Agency and the Ministry of Environment are putting in place measures to mitigate against this risk. These measures are supported by the DPL series through a trigger for DPL/2. 4. Conclusions 82. As required under OP 8.60, the World Bank task team assessed whether specific country policies supported by the DPL series are likely to cause significant effects on the country’s environment, forests, and other natural resources. The assessment concluded that the policies supported by the proposed DPL are not likely to have negative impacts on the country’s natural assets. The body of analytical work carried out and used to prepare the operation shows that both social and environmental impacts of supported measures are negligible or absent. 83. The Inclusive Green Growth Development Policy Loan (IGG DPL) is a multi-sectoral operation targeting improvements in Morocco’s institutional structure that will help it to achieve the growth needed for development along a greener and more sustainable path. The proposed IGG DPL will help the country to transform its policies and institutions to favor an environmentally and socially sustainable “green” model of economic growth by promoting improved natural resource management and inclusion of marginalized groups in the benefits of growth. It aims to combine a number of policy initiatives together into a package which will move Morocco towards a more environmentally friendly pathway to achieving the economic growth it needs to improve the lives of its citizens. As such, all actions supported by the proposed operation aim to enhance environmental stewardship and are likely to lead to net positive environmental outcomes. 84. The reforms supported by the proposed operation are expected to generate positive and generalized social impacts, including for poor and vulnerable groups. In relative terms, poor and vulnerable groups are known to be more impacted by common pool problems and environmental externalities. No physical involuntary resettlement is envisioned and or will be implemented under the current operation. 76 85. Measures supported by the DPL aimed at improving the sustainability of natural assets and environmental stewardship are critical to ensuring equity and shared prosperity, including from an inter-generational perspective.45 Additionally, several reform areas target directly the agriculture sector, where most of Morocco’s poverty and underemployment lie. Additionally, Supported measures have a clear gender dimension. Natural resource use is socially differentiated, as is environmental vulnerability. Women play a key role in the management of natural resources, including soil, water, forests and energy, and often their traditional responsibilities as food growers, water and fuel gatherers make them more likely to be impacted by environmental degradation46 and weather shocks, such as floods and droughts 47. Experience also shows that the resiliency of households and communities also depends greatly on women’s know how. The operation supports policies and programs that leverage women’s role, through (i) actions aimed at shielding the agricultural sector from weather shocks (e.g. groundwater management, agro-meteorological services, seeding practices) in which women have a clear role to play and (ii) measures aimed at supporting the development of eco-tourism and aquaculture investments which will provide additional job creation opportunities which rural women can benefit from. 86. All actions supported by the proposed operation aim enhance environmental stewardship and are likely to lead to net positive environmental outcomes: • The implementation of the coastal zone law lays the regulatory framework protecting areas that harbor fragile ecosystems and are critical to the country’s economy for their tourism and fisheries potential. • The development of the National Coastal Zone Management Plan and the regional Schemas d’Amenagement will provide further tools to strengthen the impact management framework for sector investments along the coast. • Water-related measures, including for groundwater, aim to address critical aspects of resource management needs for a country that expects its water stress condition to deteriorate even further in the coming years. Existing analytical work demonstrates the positive environmental effects of leveraging participatory process to limit groundwater abstraction to sustainable levels, with no negative environmental impacts; • The fisheries actions aim squarely at reinforcing control over fishing activities and to prevent illegal fishing, which significantly compounds depletion of marine living resources. The marine fisheries measures supported by the DPL entail no potential adverse environmental impacts; • Energy related measures support a decrease in energy intensity of the economy and related pollution and emission impacts. The types of renewable investments enabled by the legislation in this sectors entail negligible environmental risks, as they essentially concern residential and small scale photovoltaic development, which in the case of the former are impact neutral, and in the case of the latter will be subject to the provisions of the EIA Law; • Reforms related to seeding practices and improvements in the provision of agro-meteorological services will contribute to enhancing the resilience of the agricultural sector to climate change impacts, enhance conservation and reduce soil degradation. • The development of the eco-tourism sector based on robust environmental norms and standards for investments will ensure that the sought-after development of economic activities in rural and remote areas will not come at the detriment of natural assets. 87. The only significant risk of incurring negative impacts on the environment through this DPL comes from the development of the aquaculture sector because of the potential for rapid replication on both coasts. It will be crucial for the Government to retain a clear picture of the overall size, geographic distribution, nutrient consumption, and pollution output of the aquaculture sector across the country as this expansion unfolds. Appropriate legislative authority, clear institutional responsibility and capacity to enforce the future environmental control regime are also critical to the government role in this expansion of the aquaculture industry. 48 The DPL supports a set of mitigation measures that the Government is putting in place to manage this risk, notably through a Strategic Environmental Assessment carried out by 45 Social Dimensions of Climate Change – Equity and Vulnerability in a Warming World, World Bank, 2010 46 Women and the environment – United Nations Environment Program, 2004 47 Gender, climate change and health. World Health Organization, 2011 48 Environmental Impact Assessment and Monitoring in Aquaculture, FAO 2009; Understanding and Applying Risk Analysis in Aquaculture, FAO, 2009 77 ANDA and the strengthening of the environmental impact control framework through a specific Directive issued by the Ministry of Environment. 88. In recognition of these risks, the Government is strengthening the performance of the environmental impact control framework for aquaculture investments. ANDA has already engaged the Ministry of Environment in establishing the process to address cumulative impact risks. The first step in this sense will involve a strategic environmental assessment (SEA) to be carried out by ANDA in the first quarter of 2014, followed by a set of framework environmental impacts assessments for the areas that have been identified for aquaculture development. Based on the results of the above, the Ministry of Environment will issue a specific Directive complementing the framework of the existing EIA Law by detailing specific procedures for environmental controls of aquaculture investments. The planned revisions to Moroccan legislation on environmental impacts aimed at better addressing cumulative impacts, particularly through the requirement for SEA of sector programs, will also help strengthen the control and monitoring framework for aquaculture, and leverage the assessments carried out by ANDA. The World Bank team will be monitoring progress on these aspects during DPL/1 and DPL/2 and will remain available to accompany this process and assist with any technical assistance needs that may arise from it. 78