Document of The World Bank REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN MARCC PHOSPHORE KINGDOM OF MOROCCO

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO MARCC PHOSPHORE WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A PHOSPHATE FERTILIZER EXPANSION PROJECT October 4, 1978 Report No. P-2339-MOR This document has a restricted distribution and may be used by recipients only in the performance of their offcial duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 CURRENCY EQUIVALENTS WEIGHTS AND MEASURES US $ DH 4.3 All weights and measures are in DH US $0.23 metric units Fiscal Year: Calendar Year 1 Ton (T) - 1,000 kilograms (Kg) 1 Ton (T) - 2,204 Pounds 1 Kilometer (Km) miles 1 Cubic Meter(m 3 ) US Gallons ABBREVIATIONS AND ACRONYMS BNDE CIF Comanav FAS Gazocean KfW MAP Marphocean MC OCP Banque Nationale de Developpement Economique Cost, Insurance and Freight Compagnie Marocaine de Navigation Free Alongside Ship French Partner in the Shipping Company Kreditanstalt fur Wiederaufbau Mono-Ammonium Phosphate ( ) containing 11% of N and 55% of P The Shipping Company Maroc-Chimie Company Office Cherifien des Phosphates P Phosphoric Pentoxide - Nutrient Element in Phosphatic Fertilizer TPD Metric Tons per Day

3 FOR OFFICIAL USE ONLY KINGDOM OF MOROCCO MAROC-PHOSPHORE PHOSPHATE FERTILIZER EXPANSION PROJECT LOAN AND PROJECT SUMMARY Borrower: Guarantor: Amount: Terms: Project Description: Maroc-Phosphore Kingdom of Morocco US$50 million in various currencies 14 years, including 4 years of grace with interest at 7.35 percent per annum. 1/ In addition, a fee of 2.65 percent would be charged by the Guarantor. The project consists of the expansion of the Borrower's production facilities at Safi, for which a Bank Loan of US$50 million was made in 1974 (Loan 1017-MOR), through: (a) the erection, on the site of the existing Maroc- Phosphore plant, of an additional unit to produce for export 165,000 tons per year of phosphoric acid, complete with ancillary facilities and related civil works; (b) the construction of sulfur melting units and sulfur storage facilities; and the construction of new phosphoric acid concentration and storage facilities. Once in full production, the net export value of the entire plant output will be about US$200 million per year in 1978 terms; the expansion project with an estimated financial rate of return (after taxes) of 15 percent and an economic rate of return of 19 percent, and the entire project with an estimated financial rate of return (after taxes) of 14 percent and an economic rate of return of 19 percent. No special implementation and market risks are expected. 1/ These terms are appropriate on project grounds. This document ha a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosd without World Bank authorization.

4 Project Costs: (US$ Million) Foreign Local Total Turnkey Contracts Sulfur Handling and Preparation Sulfuric Acid Unit Phosphoric Acid Concentration & Storage Phosphoric Acid Unit Electrical Installations Other Installations & Pre- Operational Expenses Spare Parts Base Cost Estimate Physical Contingencies Price Contingencies Additional Working Capital Total Project Cost Interest during Construction Total Financing Required Financing Plan (US$ Million) Foreign Local Total % Debt IBRD 50.0 _ Polish Loan Total Equity OCP* and Maroc-Phosphore Cash Generation Total Estimated Disbursements: (All in foreign exchange) (US$ Million) Annual Cumulative * Office Cherifien des Phosphates.

5 Economic Rate of Return: Expansion Project: 19 percent. Entire Project: 19 percent. Appraisal Report of the Original Project: Report No. 351-MOR, dated April 19, 1974 Industrial Projects Department (see Annex IV to this Report for a summary excerpt of the original project Report of May 17, 1974).

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7 REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO MAROC PHOSPHORE WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A PHOSPHATE FERTILIZER EXPANSION PROJECT 1. I submit the following report and recommendation on a proposed loan to Maroc-Phosphore, with the guarantee of the Kingdom of Morocco, for the equivalent of US$50 million to help finance a phosphate fertilizer expansion project. The loan would have a term of 14 years, including 4 years of grace, with interest at 7.35 percent per annum. The Government of Morocco would charge a guarantee fee of 2.65 percent per annum on the outstanding amount of the Bank loan, bringing the cost of the loan to Maroc- Phosphore to 10 percent per annum. It is expected that the Polish Government will contribute US$13.7 million equivalent towards the cost of the project with a term of 14 years including 4 years of grace with interest at 7.25 percent. PART I - THE ECONOMY 2. A report entitled "Country Economic Memorandum on Morocco" (1473-MOR) was distributed to the Executive Directors in June An economic mission visited Morocco in February/March 1978 in preparation of a basic economic mission scheduled for November The findings and conclusions of this mission are reflected in the following paragraphs. Country Data Sheets are attached as Annex I. Recent Developments 3. Over the past year, Morocco completed the return towards a parliamentary regime. Following the national consensus that had resulted from the Western Sahara issue, King Hassan II called municipal, provincial and national elections between November 1976 and April Opposition parties with platforms stressing social reform scored strongly in municipal elections in the larger cities, while at the provincial level, the rural constituencies supported Government candidates, who obtained a majority of 141 seats out of 264 in the National Assembly. The post-election Government formed in October 1977, brought back into political responsibility the Istiqlal party which had been in the opposition since 1963, and the Mouvement Populaire whose main support is in the Berber areas of the country. The new Cabinet was appointed with the explicit mandate to prepare and implement economic austerity measures, the first of which were included in the 1978 Budget Law, and to pursue the social development objectives introduced with the Development Plan. 4. Morocco's economic and financial situation has been less balanced in 1977 than in previous years. The rapid growth of investments and imports, carried over from when phosphate export receipts reached an all-time high, did not slow down despite Government restrictions, while the world

8 -2 - demand for Morocco's main exports, especially phosphate, recovered only moderately. At the same time, efforts to increase budgetary savings were insufficient to meet the continued increase in expenditures on investment and security. As a result, in 1977 Morocco registered a large resource gap (15 percent of GDP) and overall budget deficit (15 percent of GDP), not including special military import payments and offsetting external grants. To cover these deficits, Morocco sharply increased external borrowings to $1.7 billion (commitments), from $878 million in 1976 and $710 million in 1975; most were from commercial sources. Despite these borrowings, the country's net foreign assets stayed at a rather low level (1.2 months of 1977 imports by year's end). On the domestic side, external borrowings have fueled monetary expansion which remained rapid in 1977; consumer prices rose nearly 13 percent over 1976 compared to about 8 percent in the previous two years. 5. The Government intends to reverse these unfavorable trends. A first policy package was introduced with the 1978 Budget Law, which cut Government capital expenditure by DH 2 billion (4 percent of 1977 GDP), introduced tax measures which should yield an estimated DH 550 million (1 percent of 1977 GDP) and contained current expenditure in sectors other than education, health and defense. Private credit expansion was limited to 3 percent for the first six months of 1978 and a number of imports were subjected to quantitative restrictions or higher tariffs. Furthermore, following the deterioration in the balance of payments which occurred during the first six months of 1978, the Government introduced a second policy package in June It includes a number of exchange and trade measures which aim at further tightening of import controls, encouraging workers' remittances from abroad, and raising interest rates for several types of deposits. Moreover, the Government intends to further reduce its capital expenditure to DH 7 billion (DH 10 billion in 1977). These measures may cause total investment to decline by 25 percent in 1978 and result in a substantial reduction in demand for imported capital and intermediate goods. Simultaneously, favorable weather conditions during the past winter should result in record crops enabling Morocco to reduce imports, particularly of cereals, and to maintain GDP growth at around 6 percent. External demand for phosphate rock is also expected to pick up and phosphate exports may reach their 1974 peak level without a recovery of prices. As a result, Morocco's resource gap may narrow to about 9 percent of GDP in 1978, and external borrowing needs may be reduced to around $1 billion in commitment terms. 6. The Government also announced that instead of a five-year plan ( ), a three-year interim plan ( ) will be introduced in Parliament before the end of This plan will call for a reorientation emphasizing socially-oriented and directly productive and export-oriented projects. Implementation of many major public projects has been postponed including that of a steel plant at Nador. In the meantime, ministries and other Government agencies are operating under the 1978 budget law which includes projects carried over from the plan and a few new projects. 7. The policy measures described above should be effective in rebalancing the economy. They essentially mean retrenchment and will affect adversely GDP growth and employment creation. Furthermore, the Government

9 - 3 - is aware that continued prudence in financial management and project selection will probably be needed in the next two years, in order to achieve the objective of putting the economy back on a financially sound growth path for the medium term. The Government is, however, likely to adopt a policy mix which will put less emphasis on retrenchment, and give more weight to export promotion, additional tax measures, and an increase in domestic savings. Economic Development Issues and Prospects 8. Bank projections summarized in Annex I testify to the Government's keen concern of avoiding a liquidity crisis in the next two to three years. They assume sharp policy adjustments in order to keep the economy on a financially viable growth path over the long run, but also reflect the Government's desire to maintain adequate GDP and employment growth during the adjustment period, and to achieve further progress towards the country's social objectives. The projections show that investment and GDP growth will indeed have to be curtailed for the next three to four years, given the short-term constraints on savings and exports. In this period, Morocco will need substantial capital transfers from abroad to sustain the projected investment and GDP growth levels; these transfers should be on terms as favorable as possible in view of the debt service limits. Beyond 1982, Morocco's export prospects should enable it to resume rapid growth of investments, output and employment while progressively reducing the relative burden of debt and debt service. 9. In the original Plan, annual GDP growth was to average 7.5 percent, sustained by rapid export expansion (10 percent p.a.) and a doubling of investments between 1972 and Following the large windfalls in foreign exchange and domestic savings caused by high phosphate prices in , the investment target was raised to meet cost increases and some real expansion of original investment programs, and especially to undertake large capitalintensive projects geared to import substitution (in particular sugar, chemicals, shipping and steel). 10. The GDP growth target for was nearly met. Investment rose to nearly 32 percent of GDP in 1977 from less than 14 percent in In the process, Morocco built up its capacity to prepare, implement and absorb projects, not only in traditional sectors such as irrigation, importsubstitution industries and physical infrastructure, but also in new and more difficult sectors such as rainfed and small-scale agriculture, export industries, and socially-oriented programs. There is little doubt that Morocco can achieve the investment levels assumed in the Bank projections. 11. The major shortcoming in the past, and the main problem for the years ahead, concerns domestic savings, which returned in 1977 to about the same level (14 percent) as in 1972 after a brief increase to 16 percent during the phosphate windfall years. The reasons lie mainly with the low Government savings of only 4.5 percent of GDP in Successful efforts to raise current Government revenues to 23 percent of GDP in 1977 were offset by increases in current spending, partly for education and health, but particularly for price subsidies and military expenses. To increase public savings

10 - 4 - in future will require tax reform measures, which were called for in the Plan but were not implemented, and unpopular price policy decisions, such as reducing subsidies to urban consumers, farmers and industrial investors. In particular, improving domestic resource mobilization would require adjusting interest rates to reflect changes in the rate of domestic price inflation. 12. During the Plan period, exports rose by less than 2 percent p.a. in real terms (the Plan target was 10 percent). This lackluster performance was largely due to weak external demand for Morocco's main export products since 1974, especially phosphate, other minerals and agricultural products. Moreover, with some exceptions, such as textiles, export production and marketing were not sufficiently improved, and new markets were not aggressively sought; the dependence on EEC (especially French) demand continued. Yet, Morocco has considerable export potential which can be realized if product and market diversification is pursued aggressively. Export programs are under preparation especially in phosphate, its derivatives, fresh and processed foodstuffs, and tourism. For example, with regard to phosphate, Morocco and the USSR signed agreements in March 1978, under which Morocco will be able to export phosphate rock and phosphoric acid for the next thirty years in amounts possibly rising to 10 million tons per year by ; in return, the USSR will lend Morocco up to $2 billion on favorable terms to develop its phosphate export capacity and will export various commodities and goods to Morocco, including crude oil. These agreements substantially improve Morocco's long-term prospects for phosphate exports. 13. While the Government's stress on completion of high-return projects will have to be continued, a qualitative shift in investment, away from the recent emphasis on highly capital intensive, import substitution investments, as well as from some of its ambitious programs for physical infrastructure, will also be needed. A major study on industrial investment strategy which consultants are currently completing for the Government, should facilitate a better investment selection. A changed investment pattern should help both to reduce the external resource gap, and to contribute to growth and employment at lower investment and import costs than in recent years. Social Development Strategy 14. Comparatively slow economic growth and employment creation up to the early 1970's were accompanied by widening income disparities and perceptible declines in real consumption for the weaker sections of Morocco's population. The Plan set out, as a national objective, to reverse these unfavorable trends. The Government's strategy since 1973 has emphasized: (i) acceleration of employment creation; (ii) general measures aimed at reducing income disparities, and (iii) specific investment programs targetted on the least favored population groups. 15. Progress has been made towards attaining these objectives, as witnessed for example by the increased expenditures for social sectors (from DH 1.3 billion in 1972 to DH 3.7 billion in 1977). The institutions, however, often newly established to meet social sector objectives, are in many instances still fragile. Understaffing and weak policy analysis and program

11 formulation are still common. Public programs to improve productivity, collective amenities and social services are, as a result, reaching relatively small proportions of the large groups, especially in rural areas. To add to this, in the period of financial stringency ahead, Morocco will not be able to sustain the current level of expenditures on socially oriented sectors, and cuts have been made as part of the measures to re-balance the economy. 16. With the population growth rate now at about 3 percent, the pressure to provide adequate social services will increase and it will become increasingly incumbent on the Government, despite its short-term financial constraints, to intensify its effort to limit such growth. Consequently both health and family planning services will have to be quantitatively and qualitatively strengthened to meet the Government's social objectives. External Debt And Debt Service 17. Morocco has sharply increased external borrowings since 1973 (para. 4). Nearly all of the increase came from Arab and commercial sources. With a hardening of terms on new commitments, average maturity shortened from 19 to 10 years and average interest rose from 5 to 7.5 percent between 1974 and Morocco also drew on the IMF automatic credit facilities in early 1976, and obtained about US$70 million in IMF compensatory financing in August From the low levels registered in , Morocco's external debt has risen rapidly to an estimated $3.8 billion (disbursed only) at the end of 1977, and in that year debt service amounted to nearly $250 million (13 percent of exports and 10 percent of exports and workers' remittances). As a result of recent and projected borrowings, debt and debt service may be expected to increase further, and the debt service ratio may reach a peak of about 25 percent of exports and workers' remittances by , and decline progressively thereafter. The country's net foreign assets may be expected to remain at a relatively low level. Because of the expected upswing in debt service, external debt management has become more restrictive and selective in If debt service is to stay manageable, Morocco will have to continue this policy over the next few years. Additional commercial borrowing should be limited, and increased efforts should be made to seek loans on softer terms. External borrowing requirements are nonetheless likely to be sizeable. Assuming debt service should not in any year exceed 25 percent of exports and workers' remittances, Bank projections foresee average annual borrowing needs of $1.3 billion in and $1.5 billion in in terms of commitments. Beyond 1980, however, the situation should progressively improve with the Government exercising firm control over domestic demand, and good long-term prospects for exports--in particular, of assured sales of phosphate rock and phosphate derivatives. Morocco should therefore be considered creditworthy for further Bank lending. PART II - BANK GROUP OPERATIONS IN MOROCCO 18. Bank and IDA lending to Morocco has supported 37 projects, financing a total of $918.9 million (net of cancellations), of which $705 million

12 - 6 - has been lent since the beginning of FY73. IDA credits, totalling $50 million, have been made available for five projects. A Third Window loan for $25 million for the third education project was approved in March IFC investments have amounted to $12.6 million ($10.5 million after cancellations, terminations, repayments and sales). Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of August 31, 1978, and notes on the execution of ongoing IBRD/IDA projects. In some cases, delays in project implementation have been caused by management or procurement difficulties, and in 1974 cost overruns increased due to the upsurge in investment activity in Morocco and the acceleration of inflation. Overall performance in project execution however, has considerably improved during the last three years. Total disbursements as of December 31, 1977, amounted to 81 percent of original appraisal forecasts and to 85 percent of revised forecasts. 19. Past Bank Group lending has been concentrated in the agricultural and industrial sectors, which have accounted for 32 and 31 percent, respectively, of total net commitments; the balance is represented by utilities (18 percent), tourism (8 percent), roads (5 percent), education (4 percent) and urban development (2 percent). Apart from the transfer of resources to Morocco (Bank Group gross disbursements amounted to 5.5 percent of total fixed investment in ), the main objectives of lending were to foster and strengthen development institutions, provide technical assistance especially for project preparation, and increase productive capacity, particularly in order to improve the balance of payments. 20. While these objectives remain, greater emphasis is being given to prepare projects that support the Government's policy of fostering social development and improving income distribution. An increasing share of Bank Group lending will be devoted to projects directly or indirectly developing the productive capacity of the lowest urban and rural income groups and meeting their basic needs, including, possibly, Bank participation in the Government's program for promoting integrated regional development, which is under discussion. 21. Past lending for agriculture has supported irrigation development, credit and, through a first operation in FY75, improvement in the productivity of rainfed farming. Continued selective lending for irrigation is envisaged but emphasis will be increasingly given to support small farmers and the development of rainfed areas. The Fez-Karia-Tissa Agriculture Project, approved in June 1978 was the second, after the Meknes Project (Credit 555-MOR) to directly address these objectives with the added advantage of being located in the favorable cereal producing zone. An integrated rural development project, including livestock/forestry development, is under preparation in a rainfed zone in northern Morocco, as are projects aimed at extending agricultural credit to farmers and at developing production, marketing and processing of vegetables on small holdings. A Government program for promoting integrated regional development is also under discussion. 22. Projects in industry and tourism have had as key objectives increased foreign exchange earnings or savings and the improvement of sectoral policies,

13 which have taken on increased importance in view of the country's short-term resource constraints. The recently approved eighth loan to BNDE included a pilot small-scale industry component. A follow-up project to promote labor intensive investments is under preparation. The proposed loan would finance the addition of a fourth production line of phosphoric acid for the Maroc Phosphore Plant financed under Loan 1017-MOR. Continued lending for industry through the Banque Nationale pour le Developpement Economique (BNDE) is contemplated as well as further lending to Credit Immobilier et Hotelier (CIH) for tourism development. A port project is also under consideration to assist the Government's efforts to develop year-round importing facilities for Morocco's growing oil needs. 23. Previous lending for utilities has consisted of one loan for water supply, two loans for power and one engineering loan for the preparation of a sewerage project for Casablanca. A follow up project for water supply and distribution in urban centers, including distribution to low income urban consumers, is under preparation, as are a sewerage project in Agadir and a village electrification project. 24. Education continues to need attention in ensuring Morocco's development. Two credits and a loan have been made to develop secondary education and teacher training, to improve technical and vocational training, and to expand facilities in rural areas. A fourth project with emphasis on technical education has been recently negotiated. 25. The recently approved Rabat project was the first Bank-financed project in the urban sector. Follow up projects are under consideration to support the Government's program for slum upgrading and urban development through the provision of basic infrastructure, housing and social. services and the creation of employment opportunities. 26. Loan commitments from multilateral and bilateral official sources to Morocco rose from $221 million in 1975 to $294 million in 1976 and $634 million in The major sources of aid were France, Saudi Arabia, the UAE, the U.S., Germany and the Bank Group. At the end of 1977, the Bank Group's share in Morocco's outstanding and disbursed external public debt was 10 percent. The share of the Bank Group in debt service was 24 percent in 1976 and declined to 14 percent in By 1983 the Bank Group's shares in debt outstanding and in debt service are expected to be about 25 percent and 12 percent respectively. PART III - PHOSPHATE FERTILIZER AND PHOSPHORIC ACID MARKET 1/ 27. Background on the phosphate fertilizer and phosphoric acid market was provided in Part III of my Report dated May 17, 1974 (P-1449) to the 1/ Phosphoric acid, P205, an intermediate product in the manufacture of concentrate phosphatic fertilizers, is generally produced by reacting phosphate rock and sulfuric acid.

14 - 8 - Executive Directors, and is attached hereto under Annex IV. The predictions made with regard to an expected decline in phosphate prices have in fact occurred and prices (about $33 per ton FAS for high grade Moroccan rock) are presently about 50 percent below the peak prices that were obtained in These high prices which remained in force throughout most of 1975 had, however, a more adverse effect on consumption growth than had been predicted so that the world phosphate consumption in 1976/77 reached only about 26.3 million nutrient tons as compared to the 31.3 million tons forecast for that year in The consumption pattern of phosphatic fertilizer has remained as predicted and presently about two thirds of such consumption occurs in North America, Western and Eastern Eurcpe including the USSR. Worldwide supply capability of phosphate fertilizers in the same year (1976/ 77) had reached about 29.3 million nutrient tons, indicating a potential supply excess of 3.0 million tons, mostly in North America and Western Europe. After the dip in the 1974/75 period, world phosphate fertilizer consumption is again expected to continue to grow at a rate of 5 percent per year through the 1980's (i.e. slightly below the 5.5 percent rate that had occurred in the period), with most of the growth taking place in Eastern Europe and the USSR and in the developing countries. It is expected that the surplus supply situation will disappear by the early 1980's and bring about a stabilization in prices of phospate rock, intermediate products, such as phosphoric acid, and finished phosphate fertilizers at above their current levels. 28. The major structural change in the trading pattern of phosphates mentioned in my 1974 Report is in fact now taking place and will accelerate. Several rock-producing countries favorably located for export--morocco being prominent among them--will continue or commence to vertically integrate production and exports of processed phosphates. For example, during the period 1971/72 to 1976/77, international trade of phosphoric acid (P ) increased by an average of 34 percent per year from 0.3 to 1.3 million tons. Therefore, demand for exportable phosphoric acid has not experienced the temporary decline in demand that phosphate rock exports did in the mid-1970's and acid prices are now at about the level predicted in 1974 ($ per ton delivered). The additions in phosphoric acid capacity over the next five years will be only marginal in North America (0.2 million tons) and Western Europe (0.1 million tons), but more substantial in Africa (1.7 million tons), Latin America and the Near East (about 1.3 million tons each), and Eastern Europe including the USSR (2.3 million tons). 29. Morocco has more than half of the world's known phosphate reserves, and in 1977 accounted for about a third of world trade in phosphate rock. It has decisively opted for the strategy of participating in the rapidly developing trade of phosphate intermediate products used in the manufacturing of high grade phosphate fertilizers. In so doing, it has sought to become a leader in bridging the gap between producing and consuming countries, while at the same time equipping itself with the necessary infrastructure such as terminals and a shipping company (see Annex IV, para. 9) to ensure ready access to markets for its intermediate products. The existing production units, located near Safi, presently have a total annual capacity of 858,000 tons of phosphoric acid, and are also equipped to produce small quantities

15 - 9 - of other phosphate intermediate or final products. The Office Cherifien des Phosphates (OCP), a state-owned company, which has the responsibility for the development of Morocco's phosphate industries, plans to expand annual production capacity at Safi to 1,518,000 tons of P205 by the mid-80's, first through this expansion project by adding a fourth line (with a capacity of 165,000 tons of P annually) to the existing Maroc-Phosphore plant, and then by building a second Maroc-Phosphore plant (with a capacity of 495,000 tons of P205 annually). In the long term, the OCP has plans to build additional units near the port of Jorf Lasfar to produce phosphoric acid, mono and di-ammonium phosphates and triple superphosphate. In view of Morocco's comparative advantage in this sector, the level of development it has achieved, and the positive market prospects, such a strategy is appropriate. The proposed project constitutes the next step in implementing this strategy while at the same time helping Morocco meet its foreign exchange needs. PART IV - THE PROJECT The Original Project 30. The proposed project would be an expansion of the original Maroc- Phosphore project approved by the Executive Directors on June 30, It consisted of the construction of a phosphatic fertilizer plant at Safi, to produce in three units annually 495,000 tons of phosphoric acid (P205), of which 371,250 tons were to be exported and the balance converted into 225,780 tons per year of monoammonium phosphate (MAP) for the domestic and export markets. Total project financing, including interest during construction and initial working capital was estimated at $155.5 million, of which about $100 million was in foreign exchange. The Bank provided a loan of $50 million to Maroc-Phosphore, an OCP subsidiary, to meet a portion of the foreign exchange cost, the balance of which was to be provided by loans from the Kreditanstalt fur Wiederaufbau (Germany) and the Banque Nationale de Developpement Economique (Morocco), and by OCP's equity contribution. The entire local cost was to be covered by equity subscribed by OCP. The detailed description of the original project, as well as the organizational, financial and procurement arrangements, were summarized in Part IV of my 1974 Report (attached hereto under Annex IV). The loan was signed on June 27, 1974, and became effective February 27, A particular aspect of the original project was that it was to be executed under a turnkey contract. After international competitive bidding, Maroc-Phosphore selected the lowest evaluated bid submitted by a consortium, headed by Friedrich Uhde GmbH (Germany), and which included Polimex-Cekop (Polimex, Poland); Lurgi Gesellschaft fur Chemie (Germany); Siemens A.G. (Germany); Nissan (Japan); and Fisons (U.K.). The contract was based on a lump sum price with an escalation clause for price increases of some of the

16 components, such as civil works, with payments in Dirhams for local cost, in Dollars for the Polimex part as per a sub-contract between Uhde and Polimex, and in Deutsche Mark for the foreign exchange balance. Project Execution 32. Implementation of the original project has largely proceeded as planned. Originally, the first two sulfuric and phosphoric acid units were scheduled for mechanical completion by November 1975, with the third unit to be completed by August Partly because of delays in the start of the civil works and of the difficult equipment delivery situation experienced internationally in the aftermath of the oil price increases in 1973 and 1974, and partly because it was subsequently considered more convenient to implement all three units simultaneously, the three units were completed practically at the same time. Physical completion of the whole plant was achieved in October 1976, i.e. two months behind schedule. Several mechanical problems occurred during the start-up and testing period, which forced the plant to be shut down, inspected, and repaired for extended periods of time. Therefore, the final acceptance of the three sulfuric/phosphoric acid units, based on the strict performance tests defined in the turnkey contract, took place only in December 1977 after all problems had been solved. Maroc- Phosphore has, however, been able to produce and sell phosphoric acid since 1976 (69,000 tons); in 1977, Maroc-Phosphore operated at about 53 percent of capacity and produced 251,000 tons. 33. The MAP unit was mechanically completed on time, but serious mechanical and process problems developed during the start-up and testing period; they are practically overcome now and in May of this year the MAP unit began production of a satisfactory product. The investment cost of the MAP unit represents about 10 percent of total plant investment cost; the lack of MAP production handicapped Maroc-Phosphore's production and export sales program, yet the phosphoric acid not used by the MAP unit easily found customers on the world market. 34. The cost of the original project, excluding working capital and interest during construction, has increased from $132.1 million to $143.7 million, i.e., by 8.7 percent. The increase in foreign exchange ($6.1 million) stems for the most part from currency realignments which have taken place, particularly the change of parity of the Deutsche Mark vis-a-vis the US Dollar since 1973 when the contract between Maroc-Phosphore and Uhde was signed. The increase in local currency ($5.4 million) is mostly attributable to higher than expected costs of civil works and labor. Total financing requirements increased by 9.3 percent from $155.5 million to $169.9 million, as interest during construction also went up with the project cost, and start-up of the first two lines was delayed by almost a year. 35. Soon after the start-up of the plant, at the end of 1976, it became apparent that the storage in the open of large quantities of powdered sulfur (after phosphate rock the second most important raw material in the production of phosphoric acid) was causing serious environmental problems. Because of

17 the proximity of the sea, spindrift produces corroding sulfuric and chloridric acids, and high winds spread the sulfur far outside its storage area causing substantial waste of sulfur and safety hazard to personnel and installations. Maroc-Phosphore, already considering the construction of a fourth line, and at a later stage that of a second plant adjacent to the existing facilities, decided to overcome this pollution problem as part of the investment needed to add the fourth line. In future, the sulfur will be melted immediately upon arrival at the site in a battery of four melting units and the liquid sulfur stored in a tank with enough capacity to feed the existing as well as the future units. Also as part of the fourth line expansion, storage for the phosphoric acid will be reorganized and improved. The Proposed Expansion Project 36. Project appraisal took place in late March/early April 1978 and negotiations were held in Washington in mid-may. The Moroccan delegation was headed by Mr. Sellam M'Hamedi, Director, Maroc-Phosphore. The expansion project consists of: (i) a fourth production line of sulfuric acid, with a capacity of 1,500 tons per day (tpd), and of phosphoric acid, with a capacity of 500 tpd, and related ancillary facilities; the fourth Maroc-Phosphore line will be identical in capacity to any of the first three, thereby increasing overall production capacity from 1,500 tpd to 2,000 tpd of phosphoric acid; and (ii) the construction of a sulfur melting facility and storage tanks for liquid sulfur, and the rearrangement of phosphoric acid concentration and storage to handle the increased output. Immediate construction of the fourth line is of a high priority for Maroc-Phosphore given the positive market prospects in derivative products in the medium and long term, and the fact that the addition of the fourth line will constitute a necessary incremental step in satisfying Maroc-Phosphore's market until the planned second Maroc- Phosphore plant, and hence the entire Safi complex, is in full production. In addition, the reorganization of the concentration and storage of phosphoric acid, and the implementation of the sulfur melting facility, will facilitate the second Maroc-Phosphore plant. The fourth line will be located next to the existing three lines, while the sulfur melting and storage facilities will be installed at the southern end of the entire complex. A second jetty now under construction at the port of Safi will handle the shipment of the increased production of the plant. 37. The expansion project is to be implemented by the same capable and competent management team of Maroc-Phosphore which executed the original project and which will also coordinate all expansion activities with that of the existing units. The project is to be implemented in 30 months, and the fourth line is expected to start commercial operations by July Cost Estimates and Proposed Financing Plan 38. Total investment costs for the expansion project, including additional working capital and exclusive of interest during construction (see Loan and Project Summary), are estimated to be $117.0 million. Total financing, including interest during construction, is $124.4 million, of which US$81.3 million, or 65 percent, is in foreign exchange. Cost estimates include the

18 lump sum price of $89.1 million for the turnkey contracts, of which $44 million would be subjected to the same price escalation clause as in the original contract. The foreign exchange costs include about $16.1 million for goods and services being contracted in Poland. 39. The proposed Bank loan of $50 million would cover 40 percent of the project's estimated total financing requirement and 62 percent of foreign exchange expenditures. It would be for 14 years with 4 years of grace. Maroc-Phosphore would pay to the Government a guarantee fee at the rate of 2.35 percent, bringing the total cost of Bank funds to Maroc-Phosphore to 10 percent. The foreign exchange risk on the Bank loan would be carried by Maroc- Phosphore. It is anticipated that debt financing for the project will be completed by a $13.7 million loan from the Polish Government with interest at 7.25 percent for 14 years including 4 years of grace. The Polish loan will cover 85 percent of the cost of Polish goods and services and is expected to be finalized by early October. Should there be a cost overrun in the project, OCP would ensure the provision of additional funds towards the cost of the project, on terms and conditions acceptable to the Bank (Shareholders' Guarantee Agreement, Section 2.02). Effectiveness of the Polish loan or any alternative loan, would be a condition of effectiveness of the proposed Bank loan (Loan Agreement, Section 8.01). The execution and delivery of the Shareholders' Guarantee Agreement on behalf of Maroc-Phosphore and OCP would be special conditions of effectiveness of the Bank loan (Loan Agreement, Section 8.01). $60.7 million of equity financing would be provided by OCP and Maroc-Phosphore cash generation. The equity would finance the local costs and the foreign exchange portion not covered by the Polish loan or the Bank loan ($17.6 million). The project would thus be financed with 51 percent debt and 49 percent equity, and Maroc-Phosphore has agreed to maintain its overall debt to equity ratio at 55:45, as was stipulated under the original project (Loan Agreement, Section 5.08). Procurement and Disbursements 40. The entire Bank loan amount will be used for foreign expenditures. As was the case for the first loan, disbursement of the portion of the Bank loan ($41.0 million) financing the turnkey contracts will be made against lump sum invoices submitted by Maroc-Phosphore and in agreement with the contracts' payment schedules. To save time and standardize equipment and spare parts, as well as to make operating conditions in the expanded plant compatible with those of the existing facilities, Maroc-Phosphore is contracting directly with the same firms that built the existing facilities at the Safi complex. Maroc-Phosphore intends by early October to have entered into a turnkey contract with Polimex for the sulfur melting and storage facilities and for the sulfuric acid unit, and has already signed a lump sum contract with Siemens for the electrical installations. As for the phosphoric acid unit and the reorganization of the phosphoric acid storage facilities, contract negotiations with the original contractor Uhde did not result in an offer satisfactory to Maroc-Phosphore, due in part to the strengthening of the Deutsche Mark which served to weaken Uhde's competitive position. As a result, Maroc-Phosphore has recently concluded a favorable contract with

19 Spie-Batignolles (France), which has extensive experience in the Safi complex, having built the adjacent phosphoric acid plant for Maroc Chimie, another OCP subsidiary, while also having been the second lowest bidder for the phosphoric acid unit in the original Maroc-Phosphore project. Because of its past experience in the Safi complex, Spie-Batignolles will assure optimal standardization thereby reducing the investment and operating costs of the expansion project. All three contracts would essentially duplicate the original turnkey contract which the Bank approved in 1974 and the terms of which were quite favorable to Maroc-Phosphore. The Bank has reviewed the Siemens and Spie- Batignolles contracts which are satisfactory and the signing of the Polimex sulfuric acid unit contract would be a condition of effectiveness of the Bank loan (Loan Agreement, Section 8.01(c)). In order to ensure an expeditious and effective execution of the project, civil works under the lump-sum contracts with Siemens and Spie-Batignolles has begun. Both contracts contain fixed payment schedules, and would hence explain the need for retroactive Bank financing for expenditures made after June 1, 1978, amounting to about $5.0 million. This constitutes about 10 percent of the Bank's loan. As a result of the protracted nature of these contract negotiations however, presentation of this loan for your approval had been postponed from June 1978, pending Maroc-Phosphore's selection of a contractor for the phosphoric acid plant. The Bank will not finance goods and services procured in Poland. For the portion not covered by the turnkey contracts which includes other equipment and spare parts ($9.0 million) also to be financed by the Bank, procurement will be through international competitive bidding except for (i) items costing less than $100,000 each, up to an aggregate amount of $2 million, and (ii) items whose availability is limited by the need for standardization of the four production units, and for which limited bidding using international shopping procedures will be followed. It is estimated that these items will not total more than $2 million. Financial Covenants 41. All financial covenants will be identical to those under the original project. Maroc-Phosphore is to maintain a debt service coverage of at least 1.4 and not to incur any debt that would increase its debt to equity ratio beyond 55:45 throughout the project life of 12 years, as envisaged for the original project. OCP (Shareholders' Guarantee Agreement, Section 2.03) and the Government (Guarantee Agreement, Section 2.02) will continue to guarantee Maroc-Phosphore's sound liquidity and financial position through the same financial covenants as for the first loan (see key financial projections below). Furthermore, Maroc-Phosphore will inform the Bank prior to undertaking any new major capital investment in manufacturing of intermediate and finished phosphate fertilizers (Loan Agreement, Section 5.06). Finally, Maroc-Phosphore will have its accounts audited by independent auditors acceptable to the Bank (Loan Agreement, Section 5.02). The project's key financial indicators are given below:

20 Key Financial Projections: (For the Original and Expansion Project) Debt/Equity Ratio 50/50 50/50 48/52 42/58 33/67 25/75 18/82 Current Ratio Debt Service Coverage Sales Volume ('000 tons) Phosphoric Acid MAP Sales Prices (1978 $ton) Phosphoric Acid MAP ($ Million) Sales Operating Costs Interest Depreciation Income Taxes Net Income Cash Flow (after Taxes) Debt Service Marketing Arrangements 42. In the past years, Maroc-Phosphore has successfully established itself as a reliable supplier of phosphoric acid from both its own production unit and by sub-contracting phosphoric acid production, and has prepared a dependable market for the time when the new production capacities of the Safi complex will be in full operation. Sales contracts have been signed with companies in Western and Eastern Europe, Brazil and India, and others are being finalized to increase sales to those countries and to open new markets in the East Asian, Pacific and South American regions. Sales commitments for the next few years exceed the production capacity of the Safi complex, and, as at present, any excess additional requirements will be subcontracted with producers in Europe and in the US. Most of the phosphoric acid is being transported in four ships owned by Marphocean, a Moroccan shipping company in which OCP has a large participation. Two additional ships are under construction and will carry Maroc-Phosphore's increased production. The average 1977 prices for Maroc-Phosphore's sales, $225 per ton of phosphoric acid FOB Safi, is expected to increase in real terms as the present surplus supply situation disappears in the early 80s; and it is expected that the equilibrium price in world markets will reach about $300 per ton in 1978 terms in the mid 1980s. Economic and Financial Rates of Return 43. The economic and financial returns of the expansion project are satisfactory, even when conservative estimates are used for revenues and

21 operating costs. The financial rate of return (after taxes) is estimated at 15 percent and the economic return at 19 percent. Despite the increase in the cost of the original project, the returns of the entire project are also high, with the financial rate of return (after taxes) estimated at 14 percent and the economic return at 19 percent (see Annex IV, paras 18 and 19 of my 1974 report). Once in full production the net export value of the entire plant will be about $200 million per year in 1978 terms. 44. In addition to its directly quantifiable economic benefits, the project will increase the external benefits already apparent during the implementation and operation of the original project. It will help increase employment levels in a region where employment alternatives are low and develop manufacturing activities particularly in the Safi region where the fishing activities are declining. With the expansion project providing employment for an additional 200 people, the entire project will provide training and job opportunities for some 1,200 people, and already the Safi complex is becoming a training center for future fertilizer or petrochemical projects in Morocco. Maroc-Phosphore will also use its experience from the original project to coordinate the implementation activities of the expansion project. Its expanding expertise in project preparation, implementation and operation, will find direct application in other OCP planned fertilizer projects in Morocco. Risks 45. No special implementation and market risks are expected. PART V - LEGAL INSTRUMENTS AND AUTHORITY 46. The draft Loan Agreement between the Bank and Maroc-Phosphore, the draft Guarantee Agreement between the Kingdom of Morocco and the Bank, the draft Shareholders' Guarantee Agreement among the Bank, the OCP and Maroc- Phosphore, and the Report of the committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. 47. Special conditions of the Project are listed in Section III of Annex III. Special conditions of effectiveness include (a) the execution and delivery of the Shareholders' Guarantee Agreement on behalf of Maroc- Phosphore and OCP (Loan Agreement, Section 8.01(a)); (b) the effectiveness of any agreement providing for loan(s) included in the financing plan agreed to between the Borrower and the Bank (Loan Agreement, Section 8.01(b)); and (c) the signing of the contract for the sulfuric acid unit (Loan Agreement, Section 8.01(c)). 48. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank.

22 PART VI - RECOMMENDATION 49. I recommend that the Executive Directors approve the proposed loan. Attachments October 4, 1978 Washington, D.C. Robert S. McNamara President by Ernest Stern

23 TABLE 3A LANO AREA (THOU KM2) MOROCCO - SOCIAL INDICATORS OATA SHEET ANqNEX 1. Page ;O;AL----.* MOROCCO MOST RECENT REFERENCE COUNTRIES (1970) AGRIC ESTIMATE*** PHILIPPINES TURKEY GREECE***I GNP PPR CAPITA (USS) POPULATION ANO VITAL STATISTICS._ _- - POPULATION (MIg-YR. MtLLION) POPULATION OENSITY PER SQUARE K7I PER SQ. KM. AGRICULTURAL LANO VITAL STATISTICS CRUDE tirth RATE (/THOU, AV) CRUDE OEATH RATE (/THOU,AV) INFANT MORTALITY RATE (/THOU) 149.OL0L LIFE EXPECTANCY AT EIRTH (YRS) GROSS REPROUCTION RATE 3:4L LIb. 1.0 POPULATION GROWTH RATE (%) TOTAL * 2.4* URBAN LL 1.5 URBAN POPULATION (% OF TOTAL) AGE STRUCTURE (PERCENT) 0 TO 14 YEARS TO 64 YEARS Si.? T YEARS ANO OVER S 2: AGE DEPENDENCY RATIO ECONOMIC DEPENOENCY RATIO al - FAMILY PLANNING ACCEPTORS (CUMULATIVE. THOU) , USERS (% OF MARRIED WOMEN). 3., EMPLOYMENT TOTAL LAsoR FORCE (THOUSANO) /A /! L. LABOR FORCE IN AGRICULTURE (x) 56.47ia.9 7i 4Z 4 5j0 55.OiL UNEMPLOYED 63.4 (s Of LASOR FORCE) a 7.6I 1-9L * INCOME DISTNISUTtON X OF PRIVATE INCOME RfC'O gy- HIaHEST 5X OF HOUSEHOLDS 18.O/C 20.0/b *. *- 32. HIMHEST 20X OF HOUSEHOLDS 43.% 449. EO al LOWEST 20X OF HOUSEHOLDS LOWEST 401 OF HOUSEOLOS l a : OISTRIDUTION OF LAND DMRRSN1P X OWNED BY TOP 10% OF OWN8RS O X OWNED BY SMALLEST 1x OMNERS t HEALTH AND NUTRITION POPULATION PER PHYSICIAN LL2O50.o POPULATION PER NUNSING PeRSON POPULATION 1770.OZI PER HOSPITAL BED 20.0O 660.0L 150.:L DER CAPITA SUPPLY Of - CALORIES (X OF REQUIREMENTS) PRO0EIN (GRAMS PER DAY) Q OF WHICH ANIMAL AND PULSE /d 1, j 52.0 LL DEATH RATE-(/THOU) AGES EDUCATtON AOJUSTED ENROLLMENT RATIO PRI1ARY SCHOOL SECONDARY SCHOOL YEARS OF SCHOOLING PROVIDED (FIRST AND SECONO LEVEL) VOCATIONAL 12.0 ENROLLMENT (% OF SECONOARY) ADULT LITERACY RATE (x) i LI 82.0 HOUSING PERSONS PER ROOM (URBAN) OCCUPIED OWELLINGS WITHOUT PIPED WATER (x) ACCESS TO ELEcrRICITY 33.0a 7t.0 6b.0 (% OF ALL DWELLINGS) RURA: DWELLINGS CONNECTED L TO ELECTRICITY (X) C'.NSU'1P7 ton RAO1O RECEIVERS (PER THOU POP) PASSEN-OER CARS (PER THODJ POP) ELECTRICITY (KWH/YR PER CAP; : U NEWSPlINT (KG/YR PER CAP) t'ote ANO- - I ON - ---l Si.S t:tes ANO DEFINITIONS ON RTVEIRSE

24 Poeg 2 Unleisa otherwise noced (e.$. GM? per capita sod population), data for 1960 refer Co any year between 1959 and 196k, for L970 between 1969 andd 197Z, and for 'tour Recent zucime between 1973 and It Due to emi,gration population growth rate LA lower thtan race of natural incraeae. *qr Inclcding Moroccan provinces in Western sahara. 441 foxclades Moroccan provinces in Western Sahara. PYt#nl4rAhough Creece's ClNP peor capita 4 ouch higher than chat of Mocrocco, Greece haa besot selected me en objective countrf sinca both countries aet on the Me4diterranea,n, their economies rely on the markoat-fchenism, and they are similar in productive activity, especially in agriculture. MOROCCO 1960 la 1962; /b Exciudee umreprted female helpers in agriculture; Ic on apine edtre fhoehds Id Govareuent hoapital aetablisabmens ashy;, la Persona over fi;- years of ago who can read aud write La Exclude unreported female halpers in agriculture; lbj Conamptioo empenditures of hsouseholds; hoepital ealtablishantsna only; Ld ; /a dflma iouaesholde only. 1 n Govertoent MOST RECEWj PTDATF: /s 1977 antimate; /b excludes collective and "gulch" land; In G:owermaent hospitel seteblishanents only; Id average. PHILIPPTNtS 1db7 /s As percoentge of amploymercr; /b Goversaent personnel only. TURKE 1970 /a M961 /b Excludes 17 eastern provincee; /c ; /d ; Ick Ratio of population under 15 and 65 and over the labor forces; If Civilian loabr force; ~& Includins peak season axrlcultorel unemaployment; /b Disposabie income 1968;: /1 toaclod±j easistanelt nrses and midwivesa; aj ; /I ; ~jpersons six-fearse and over who tell th;-e anua takrer that they cam read And write. GREtCE 1.97l /a R15, Septombior L9, 1976 DEr'?ftMOlS OF SOCIAL ISWICATOtSS 'oral arena - 'oal surfac lan area endinland.. -S-mepriailtendam PoPw1ation Per nursing nernon - dnaent--e Populatian dividmed by s-ber of pracriciog 1 cad feassi ardiuaa nurases, "trained' Anric. or "eartifiad" nurasa, and - 'loot recent earinacs of agfrlcaizurai area ased ramporardly or paouna- auxiliary pamreanna.4th crc'ining or experincca nantly for cropa, placuree, markat & kitccbs gardana or to ILe fallow, Polnlati nrhs Ita bad - Pepulation divided by nmbner at hoapitel beds sosilbie n pubic ad privtat general ad apacialized ClIP oari caocca boapital (lo) and - GNP? Per capita asacimaca at current nsa-rhat pricas, rehabilitation centere; excludes uraeing hones and astabliahmsoto cluaebysame for conversion esthod as World Bank ;tlsa (L basis); cuatodial and preventive care. 1960; 1970 and 1977 data. Faer capita mcni atl calorsa.of regutrments) - icapucad from energy Ponulatlon and viral atacianica e~~~~~~quivalet of nan load aup1pilac availabla in coutry p-r.apita par fey;,,d,,,i,,l Statistics Pouaco (i-year LILLion)...~~~~~~avalable suppiles caoprne. dassecin -u aof July first, if production, noc asailabla, byn-ta averge teas exports, and -ben"e in stock; nat supplies seclude onimal feed, :of twand-year seeds, quantities esclmacass; uaed 1960, 197o and 1977 data. In food proceseirng end loseea in ditaributlon; reqclrmenca were estimatd by PAO based ono phyalologinel needs for nomnal PPopaltlu activity desty and health a snara coanld- W - 'lid-year population pen square biliseter stilng anviroatanica tepeatures, body, eighta, (10 eclraral at.1to1ta.lsarea. ns0aend... dianribu,iona of Population, end allowing lot for wa.te at household level Pooulatioa d:nainy -orsqaeweo atc land - Conjuine a. above for Per Capita Supely oerosi(craeoa cv Protein content of africultural Per cepita land only. ~~~~~~~~~~~net Supply of food Per, day; oac euppcly of fond is elfined cas above; require-,a-tie for all touantrigse established up USDk itlsa Economic ticls Research Services rovlda for a airiasun -Altnasac Of 60 Rroms of tntai Protein per day, and Cija -tt' paj!r cflouand. averacs - ocaua Liv ourthe pa.r tch,aaad of 14 rerase of animal and sulan P-cein, ai-year population, or chich 10 grem ten-year Shouid -rithmssic be -nimal avargee ending in 1960 and 1970, Protein; thesa -oredards ara laster and a then flve-yaar hos of ave 75 grams rage anding af total in pratelo 1975 for Coser recant eatinata. and 21 Brase of animal protein as en average for th. warid, Proposd Crude by FA0 death rays per thousand. overage - Annusi deaths per thousand of aid-yeer in the Third World ro-od Survey. population: can-veer aritboacic averages ending in 1960 and nd fiva- Per capita protein unopiv Iron animal and ouiac - Procain cuoply Of food yeart averag enig fc1 o7r moat recant oacamare. derived Iron animals,l..c an-dpulses eatalillty LIt rat grasa par ('thool day. -1 Annual deeths of infants under one y.st of age Dsatb rats /hu aa - - Annualt pr deaths thousand per ILiv thou.and births. L. age group i-i yer to hildren in rhia age group; suggested us an Indiclatr Of AlenoaCtanCy at hi"tc(re - Avarage number' of years of life remaining at osmlnutrition. birch, cavally five-year averagea endling it 1960, 1970 and 1975 for devaloplog coancrias. iducation lrnac rpeordoccics rare - ivrega tumber of lice d&auhtera a vanan wiii beer io her Adjusted torl enrollment reproductive raiw period rnaysho - if sh eaperiancas tnrall9wtna present a.ge-pecific of all eges as pat- tannage of prinacy School-a pr pjpatr, lcueechdr frtlitr ge rsas - o er Ia five-year avsmerae ending in 1960, 1970 and 1975 hut adjusted for diffara eerao rmayooaio;frouens (or developing 'countries. i coivareal education, enrollment may eacead toot since cone Pupils PaOulation are below o%rwth race (I.) - total - Coapaund annul growth ratnu of aid-year or above cha official school -opulation age. for mane o.diustsd enrolletrti adarv achoal - Computed as above; Poaiuatc.os secondary gircuh rats (.1 -orban - Computed like growth rats of total aduaciton rsqu mre at lease four yjesrs of approved population; primary different inetrctlon, definitions of urb-an ones nay offat comparability of procidee general, vocational or teacher training data itacructiona coons countries, for puptil Urban, vopulatlon Of (7 12 to of 17 total) years of age; correspandance - Ratio of orban to ctata population; courses are generally diffsrorm secluded. Ysars of schooling aroyid.d (first mand secand levels) - Inta! year" of defninoneof rban steas may aiffect canprambilirp of data sangs cesuncries. achnolioug; at...condar. leel* octioal, inetructton my Os partielly at completely o eacludad. n tacrur lo-rcant; - Children (0-lu years), w-rhing-aa ( years) *Pctoa nolet(,o eodr)-vctoa iaiudn an rtredt (65 nld years and aver) as Percentages of mid-year population.tenla.id trlorthrpgrn ihoereidandnyors Agea deapndency ratio - Untot of population under 15 and 65 and -ovr to those leparratmar of SCaigdary Institution. hc of peaeidpnd,l ages 15 through ra 64. dciltrc ae 2 Ic-r adsr (al c.a nduia rosecdaone,d-n retio.pr - Ratio at PoPulaton -odar LI amd 615 and over ta cactag ofmcanarsoi population agedl ysar _n' oar.~ic)-pr the Labor fcrca in age group at yrear. O -- di caco 9d1 er n Fam llv aloonai - -enr toror (cumiatiya t, hou) - CAsastive timber zi acesptora goosing Of birch-control dealcas infer auspices. of national family PLanning orograd Perean oar roome <oo'oac - Aerage aumbwr Of Persons Pstr Come It onccpled atone Inception. o~~~~~~~~~~~~~oavsntlooa&l daseiioa Is ina-ban foll areas loin. 1 dwellings enluda naa-perrnannt. cses (I of osried woseni - Per`Centaes of na"ried -o,an of arc-c:ures and.mnoclplead o1l. id-beriag parts. ax i-byasi'aoa birch-ocnrol devices to all marrtda OccuPie oitnaarocaed.7s-occlpled catr cnataa ulhg -Asen ~n Same age grnoip. In urben and mruralseas ajthauc inei a or outaide piped acatr facilltlae E.Pl-ratont ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~s srarsaof all occupied dwe1lligs. loa aor force (rhaseand) - Etononminlly active persona, including armed elcric ilcigquarters aa p.tarco fttldelnsi ra n focsend onenplyd bu xocluding houaeeivea, atodenta, see.; definition rural areas. in catio wcao=tni-s are tot Comparable. qv.rsl duallingacnetdtesncilyia-cmuede Labor foc bv o us -osrcurr ('.) - gsricultural labor force (in farming, forestry, dwellings only.it ) CPtd.Sa f - l murcong and Edahatag) as pae-caoragd, f totl con frce ucapove ft of lbor farce) - lbsaployed are jsausily defined ma person aba conaumption, arle ale andotliog to take a ;ob. outc of a jab ons agiven day, rasmained Out of A JOh, Rai and aayr asaking orto cork far a ai-oltye apecified elnimim frcleafrrdoisdec period not eanseding one tado genelvral-pblc er rhonaso at p11prilac "o t-rsalue fcnlcos re yeah ksay con be conparanle between countries due ts differsan dafinlrcaaao In Outrs anud in years ch.n regiatration of radio sate was of in onasplayed affect, and source of data, e.g., employment oftice statistics. $,lpdat for reat pars cay not bs ameperebla aince moec surveys, councrian acmpulsory abolished unimpl,oointc inurance. dicenalogc. y Income dis cribution - Percentage of privacs n Casee (both In, cash and hind) baa thf.~an- sigtf phoreana so -ldesanbo~rslsc hearses. "and miltary.l received by richear 57.. richest 207., poorest 202, And poorest 4.02 of haves- -shicla... cptas c.* mu.r. g-, lcr holds.!lscrricitv (J-h/-sr -r can; - Annual con'a"sptlon cf Liodustriai. commerciel, Discrihlurimona pa.blic leand and oa...ebin private electricity In kilow.att - Percenragss of land Owned hours by per wealthiest capita, lit generaly based on production data, aithout allowance and poret for Loses 0 of ie Land srlda ownes,. but allo-- lag for Imports and aecporce of sleccrlcity. H.Alch 8.d Nurrition 4"P~~~~~~~~~~(laerint (ko/yr pe r ceop Per capita annual conamaprl/a 0 in kilogrman Population per- physician - Population divided by number of practicingetmtdfmdes-t r.ca lsm isrso n,,jt Phyoiciana qualified from a eadical school at oniveraity level. ceiver.4 st

25 1-4~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~- 04~~. ~~~~.^_ VO S ~ ~ ~ i - --,,, --1.., 2 ta j :.. I I * 1 -~~~~~~~~~~~~~~~ : ~~~~~~~ ~ -. 2,^S*S. * * R R 2_._-w V_ C _ ~ ~ ~ 82 * 2 2 '- S - -A'2.g^--v * ^^ c -- en t S ^,. < 4 S I _ R o;i;--2;; ;-- - I-"-. 2, 6_ *_,S--2,2_ * ^ -'-- ^_4_ I~~~~~~~~HI -- 3 l~~~~~~~~~~~11,.. II - s- -i1*ei * v - --* i b 5 I~~~~~~~~~~~~~~ ;>f B,i_ I, "c_i S 0 ~ ~,!;szi9;. I!!j 7;'_ X -c I..!,,.,, ;- - '. t" 'M *i'" -tt=x.'_ ' S.''AS: 1 -- b '11- e

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27 ANNEX I Page 5 MOROCCO: EXTERNAL DEBT CREDITWORTHINESS ActuaI b L A. MEDIUM AtD LOt;G TERM DERT (Millions of US dollars) 1. Total DOD at year's end n.a ,257 3, Including undisbursed n.a. 1,187 3,155 4, Debt service of which interest B. DEBT BURDEN (7.) 1. Debt service/exports of G&NFS Debt serviceiexports & workers ran Debt service/gdp C. TERMS 1. Interest/prior year DOD r.a Debt service/prior year DOD n.a D. DEPENODENCY RATIOS 1. Gross disburac2encs/imports / 2. Nct/disbursements/imports (incl.nfs) I/ 3. Net disbursements/gross disbursements / E. EXPOSllRE RATIOS 1. Bank Group disb./total disb. n.a Bank Group DOD/total DOD n.a Bank Group debt service/total n.a debt service F. EXTERNAiL DEBT (DISBI1IISFD ONLY) OuLstanding December 31, 1977 (Millions of US dollars) Amount Percent 1. IBRD IDA Other internactional organizations Governments 1, Suppliers credits Financial institutions 1,56a Others Total outstanding and disbursed 3, Total outstanding including undisbursed 4, DFBT PROFILL 1. rotal dtbl service /82/Total DOD end 1977 = / Provisional percentage May 12, 1978 EMENA CPIIc

28

29 ANNEX II Page 1 of 7 A. STATEMENT OF BANK LOANS AND IDA CREDITS (as of August 31, 1978) Loan of US$ Million Credit Amount (less cancellations) Number Year Borrower Purpose Bank IDA!! Undisbursed Eleven Loans Fully disbursed Four Credits Fully disbursed Kingdom of Morocco Irrigation CIH DFC (Tourism) ONEP Water Supply ONE Power Kingdom of Morocco Highway Maroc-Phosphore Industry Kindgom of Morocco Agriculture BNDE DFC Kingdom of Morocco Agriculture Kingdom of Morocco Agriculture Kingdom of Morocco Agriculture Kingdom of Morocco Tourism T 1976 Kingdom of Morocco Education CIH DFC (Tourism) Kingdom of Morocco Power Kingdom of Morocco Agriculture CIOR Industry Kingdom of Morocco Agriculture BNDE DFC S-72/ 1977 Kingdom of Morocco Engineering / 1978 Kingdom of Morocco Urban Development / 1978 Kingdom of Morocco Fes Karia Tissa Total of which has been repaid Ill.d+/ 0.3 Total now outstanding L5L NOTES Amount sold of which has been repaid 1,3_/ Total now held by Bank and IDA Total undisbursed l Prior to exchange adjustment 2/ Signed but not yet effective 31 Signed Sept. 6, / As of July 31, 1978 B. STATEMENT OF IFC INVESTMENTS (as of August 31, 1978) Loan Equity Total 1962 BNDE Development Bank CIL Canning Factory Marrakech Cement Cement Factory Temara Cement Cement Factory Total gross commitments less cancellations, terminations repayments and sales Total commitments now held by IFC Total undisbursed

30 ANNEX II Page 2 of 7 pages C. PROJECTS IN EXECUTION 1/ Ln. No. 643 Rharb-Sebou Irrigation Project: US$46 million Loan of November 13, 1969; Date of Effectiveness: June 8, 1970; Closing Date: November 30, Progress in implementing the project was delayed by problems initially experienced with management and procurement of canalettes and severe flooding in February 1977 which caused damage to crops and irrigation works. The major project structure, Idriss 1 Dam, is completed and 29,400 ha out of a total of 35,200 ha are already equipped. Project completion is now scheduled for the end of 1978 which would require a postponement of the closing date by six months. Additional infrastructure for the project area, including a sugar cane processing factory and flood protection works, are being provided by Loan No MOR. Ln. No. 848 Second Hotel Development Project; US$15 million of June 30, 1972; Date of Effectiveness: November 1, 1972; Closing Date: December 31, Commitments and disbursements initially lagged behind expectations, due to sluggish investment activity in 1973, but the loan is now fully committed. The loan is expected to be fully disbursed before end December Ln. No. 850 Water Supply Project; US$48 million Loan of July 19, 1972; Date of Effectiveness: May 2, 1973; Closing Date: December 31, The dam which was the major component of the project was inaugurated in August All project elements are completed except for the training school, which is under construction and expected to be completed by Fall The financial position of the Borrower, Office National de l'eau Potable (ONEP), is improving following implementation of tariff increases in October 1977 and other measures the Government has under consideration. 1/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.

31 ANNEX II Page 3 of 7 pages Ln. No. 936 Power Project; US$25 million of October 5, 1973; Date of Effectiveness: January 23, 1974; Closing Date: December 31, Physical implementation of the project is complete. Savings amounting to about US$3.5 million are being applied to consultant services for feasibility studies, preliminary design and preparation of bid documents for 5 hydro stations required to alleviate Morocco's dependency on imported oil. A one year postponement of the Closing Date was granted to allow payments under these contracts. Electricity rates were increased on average by 14% on February 1, 1978, but further action is required to meet the 1978 cash contribution covenant. Ln. No. 955 Second Highway Project; US$29 million of January 11, 1974; Date of Effectiveness: May 21, 1974; Closing Date: June 30, Construction of the Rabat-Casablanca expressway which began in early about 8 months behind schedule - is now almost complete and the maintenance equipment and highway improvement programs are complete. Work on the contract for technical assistance for the establishment of a Transport Planning Office in the Ministry of Public Works is proceeding satisfactorily. Ln. No Phosphoric Acid Project; US$50.0 million of June 27, 1974; Date of Effectiveness: February 27, 1975; Closing Date: December 31, The project was mechanically completed in October 1976 and the plant is now in commercial operation. Ln. No Sebou II Development Project; US$32.0 million of June 27, 1974; Date of Effectiveness: February 28, 1975; Closing Date: June 30, The sugar cane processing factory was essentially completed on schedule in Construction of the project area roads is on schedule but work on the flood protection dykes is about 29 months behind schedule, mainly on account of uncertainties regarding the next Three-Year ( ) Plan contents, and particularly the M'Jara Dam which would make questionable the construction of the dykes. Decision from Government in this respect is expected by October The study on pollution control is now proceeding satisfactorily; however the study on the incidence of bilharzia on the Rharb plain has yet to be started. Ln. No Seventh BNDE Project; US$30 million of December 30, 1974; Date of Effectiveness: January 15, 1975; Closing Date: December 31, The loan is fully committed. with appraisal estimates. Disbursements are roughly in line

32 ANNEX II Page 4 of 7 pages Ln. No Souss Groundwater Project; US$18.5 million of June 11, 1975; Date of Effectiveness: September 26, 1975; Closing Date: June 30, The 59 wells required for new irrigated area (6,300 ha) were completed and tested one year ahead of appraisal schedule. Land clearing has been completed. Land distribution to Agrarian Reform beneficiaries has been completed in about 50 percent of the project area. Works related to the social components of the project are suffering a substantial delay. A recent issue derives from the budgetary constraints facing Morocco which have resulted in cutbacks in the operating budget and assignment of additional personnel. The impact of these changes in the Project and the determination of appropriate measures would be studied by the next supervision missions. Cr. No. 555 Meknes Agricultural Development Project; US$14.0 million of June 11, 1975; Date of Effectiveness: November 14, 1975; Closing Date: March 31, The Project initially faced substantial delays in project implementation. The studies are now underway, and commitments of funds under the project have been initiated. However project management and the coordination of project activities between the project authority and the central offices of the Ministry of Agriculture continue to require close monitoring. A revised land reform and redistribution program which meets the project's objectives is currently under discussion. Ln. No Doukkala Irrigation Project; US$30.0 million of February 27, 1976; Date of Effectiveness: July 20, 1976; Closing Date: June 30, The project includes sprinkler irrigation for 15,400 ha and infrastructure and equipment. Progress of construction is satisfactory after initial delays. The first 4,500 ha have been completed and put in service. Completion of the remainder of sectors are underway and expected to be on schedule. Ln. No Bay of Agadir Tourism Project; US$21.0 million of February 27, 1976; Date of Effectiveness: October 29, 1976; Closing Date: December 31, The project is intended to develop Agadir into a major tourism area and consists of infrastructure works and public facilities for the development of a new tourism section on 260 ha on which 7,000 hotel beds and 2,600 housing units are expected to be constructed. The project includes also regional infrastructure and facilities for the development of Agadir's tourism assets. The major project component, UAT-Forestry land development, has entered its construction phase and is expected to be completed by the end of The implementation of other components experienced some delay but could still be completed on schedule.

33 ANNEX II Page 5 of 7 pages Ln. No Third Education Project; US$25.0 million of March 18, 1976; Date of Effectiveness: October 1, 1976; Closing Date: May 1, The project is designed to expand and improve primary and secondary education in rural areas and specialized training to meet urgent manpower needs in education, agriculture, health and tourism. Project implementation of physical aspects is progressing satisfactorily with the exception of the health staff training centres which are behind schedule. All sites have been selected and design development is at an advanced stage. Recruitment of experts under the technical assistance program has been slow. Ln. No Third Hotel Development Project; US$25.0 million of July 2, 1976; Date of Effectiveness: November 18, 1976; Closing Date: December 31, Implementation of the project is proceeding well. The Loan is expected to be disbursed somewhat ahead of schedule. Commitments as of March 14, 1978 amounted to $13.5 million. CIH has been successful in mobilizing foreign exchange resources other than the Bank's and in reducing outstanding arrears in accordance with understandings reached during negotiations. Ln. No Sidi Cheho - Al Massira Hydro Project; US$49.0 million of July 2, 1976; Date of Effectiveness: November 16, 1976; Closing Date: December 31, Th-e project comprises the construction of the Al-Massira concrete dam on the Oum er Rbia river, a 120-MW power station including a 225-KV substation, construction of about 200 Km of 225 Kv transmission lines, and preparation of preliminary designs and bid documents for the Merija compensating dam and power station. Procurement of the main project items is underway and physical progress of the project is satisfactory. Ln. No Third Agricultural Credit Project; US$35.0 million Loan to Caisse Nationale de Credit Agricole (CNCA) of February 7, 1977; Date of Effectiveness: August 11, 1977; Closing Date: June 30, The project aims at increasing Morocco's agricultural production and at expanding the capability of CNCA as a sound agricultural institution. The project will cover most of CNCA's program for medium- and long-term lending through August 1979 and will include related technical assistance. Disbursements of IBRD funds aim at financing on-farm investments of small farmers, cooperatives and farmers' association. Disbursements are proceeding on schedule.

34 ANNEX II Page 6 of 7 pages Ln. No CIOR Cement Project; US$45.0 million of April 29, 1977; Date of Effectiveness: July 7, 1977; Closing Date: June 30, The project comprises construction of a 1.2 million tons per year cement plant near Oujda in the Eastern Region of Morocco, and related distribution facilities. Overall project implementation is satisfactory, within original cost estimates and with a delay of about three months. Training of key personnel is almost complete, and recruitment is adequate. Ln. No Doukkala II Irrigation Project; US$41.0 million of June 16, 1977; Date of Effectiveness: December 1, 1977; Closing Date: June 30, The project aims at extending irrigation and related agricultural development in the Doukkala perimeter by 16,600 hectares; it also calls for provision of extension and credit services, and village infrastructure. Progress in implementation is generally satisfactory. Ln. No Eighth BNDE Project; US$45.0 million of June 16, 1977; Date of Effectiveness: December 21, 1977; Closing Date: September 30, The project is designed to meet part of BNDE's requirements for financing of the import component of specific industrial enterprises, and of a small-scale industry pilot project for which up to $5 million of Bank financing is included. The loan became effective on December 21, 1977 and commitments as of April 1, 1978 amounted to US$3.3 million. Ln. No. S-7 Sewerage Engineering Project; US$1.5 million of August 30, 1977; Limit Date for Effectiveness: September 29, 1978; Closing Date: April 30, The project includes the preparation of a sewerage Master Plan for the Casablanca-Mohammedia region and a priority first stage project. It would assist Morocco in developing the design and planning criteria for urban sewer systems and strengthening the institutional and financial bases for the development of this sector. Ln. No Rabat Urban Development Project; US$18.0 million of March 31, 1978; Limit Date of Effectiveness: October 31, 1978; Closing Date: March 31, The project is designed to improve living conditions of the urban poor in Rabat. It includes (i) comprehensive squatter upgrading; (ii) an experimental Sites and Services Housing Schemes; (iii) an employment generation program; (iv) community services equipment; and (v) technical assistance to strengthen the institutional arrangements and technical capabilities of the executing agencies.

35 ANNEX II Page 7 of 7 pages Ln. No Fes-Karia Tissa Agriculture Project; US$65.0 million of September 6, 1978; Limit Date for Effectiveness: December 11, 1978; Closing Date: June 30, The project aims at (i) improving the standard of living of about 33,900 farm families cultivating about 256,000 hectares in the Fes-Karia- Tissa region, and (ii) contributing to the growth of agricultural production and to a decline in Moroccan dependence on imported food commodities. These aims would be achieved through a reorganization and strengthening of agricultural services and provision of infrastructure.

36 ANNEX III SUPPLEMENTARY PROJECT DATA SHEET Section I - Timetable of Key Events (a) Time taken by the country to prepare 6 months (October 1977 the project: to March 1978) (b) Agencies which prepared the project: Maroc-Phosphore and Office Cherifien des Phosphates (OCP) (c) Project first presented to Bank: October 1977 (d) First Bank mission to review project: December 1977 (e) Departure Appraisal Mission: late March 1978 (f) Completion of negotiations: May 1978 (g) Planned date of effectiveness: April 1979 Section II - Special Bank Implementation Actions None. Section III - Special Conditions (a) Maroc-Phosphore is to maintain a debt service coverage of at least 1.4 and not to incur any debt that would increase its debt to equity ratio beyond 55:45 throughout the project life of 12 years (paras. 39 and 41). (b) Maroc-Phosphore will inform the Bank prior to undertaking any new major capital investment in manufacturing of intermediate and finished phosphate fertilizers (para. 41). (c) The execution and delivery of the Shareholders' Guarantee Agreement on behalf of Maroc-Phosphore and OCP and the effectiveness of any agreement providing for loan(s) included in the financing plan agreed to between the Borrower and the Bank would be special conditions of effectiveness of the Bank loan (para. 39 and Loan Agreement, Section 8.01). (d) The signing of the contract for the sulfuric acid unit would be a special condition of effectiveness of the proposed Bank loan (para. 40 and Loan Agreement, Section 8.01).

37 ANNEX IV Page 1 of 7 EXCERPT FROM ORIGINAL PRESIDENT'S REPORT DATED MAY 17, 1974, NO. P-1449 (Loan 1017-MOR - $50 million) PART III: MINING AND MINERAL PROCESSING IN MOROCCO General 1. Morocco is endowed with varied mineral resources. It possesses the world's largest reserves of phoshate rock (an estimated 40 billion tons) of good quality that can be easily extracted and are close to the Atlantic coast. In 1973, it was the world's third main producer of phosphate rock after the USA and the USSR, and the largest exporter with more than one third of world trade. Morocco also has sizeable reserves of coal, iron ore and pyrrhotite, as well as several other minerals, such as lead, zinc, manganese and copper. Due to obsolescent mining equipment or depletion of known deposits, their exploitation is often not competitive. 2. Minerals are state property and the Government plays a dominant role in mining and processing. The Office Cherifien des Phosphates (OCP), a stateowned company, mines and sells phosphate rock, and exercises control over phosphate processing through affiliates (Maroc Chimie and Maroc Phosphore). The Bureau de Recherches et de Participations Minieres (BRPM) is responsible for prospecting, mining and processing other minerals either alone, or in partnership with private firms. The Government grants various fiscal and other incentives to encourage private investment in the mining and processing of minerals other than phosphate. 3. Morocco continued to export most of its minerals in unprocessed form during the Second Five-Year Plan ( ), despite a Plan objective of increasing export value through processing. The growth of mineral exports averaged only 3 percent a year in current prices during the Plan period, and came entirely from phosphate. OCP invested $125 million and underwent an internal reorganization which enabled it to increase phosphate rock exports from 9.3 million tons in 1967 to 13.6 million tons in However, because of a 10 percent decline in the price of phosphate, its share in total export earnings fell from 25.4 percent in 1967 to 22.8 percent in Exports of other minerals, stagnated in volume and value mainly because of weak external demand. The Plan's processing objective was implemented in the case of phosphate-based fertilizer production and pelletisation of iron ore. Maroc Chimie, which was set up to produce fertilizer, increased its intake of phosphate to 600,000 tons in 1972 and raised its fertilizer exports from $10 million in 1967 to $14 million in 1972, despite serious technical difficulties. Production of high-grade iron ore pellets began in In 1972, mineral processing was still a small sub-sector contributing less than 7 percent of value added in the manufacturing sector. While mining and mineral processing continued to be of great importance for the balance of payments (32.2 percent of merchandise exports in 1972), their contribution to GDP (about 5 percent) and employment (about 2 percent) remained small.

38 ANNEX IV Page 2 of 7 Phosphate and Fertilizer Market 4. World production of phosphate rock rose from 40 to 90 million tons between 1960 and 1972, with the US (42 percent), the USSR (22 percent), and Morocco (16 percent) as leading producers. World export trade increased from 29.2 to 43.5 million tons between 1965 and 1972, with about two thirds of the trade going to Western and Eastern Europe; the main exporters were Morocco (31 percent of world exports), the US (29 percent), and the USSR (14 percent). The world rock supply/demand situation moved from a world wide oversupply in the late 1960s and early 1970s to a tight balance in early 1973 and a serious shortage by late 1973 as a result of increased world wide demand; the same trend applied to phosphoric acid based high grade fertilizers. Prices reflected this development; export prices for 1974 are 2.5 times to more than 3 times higher (US$45 for the highest commercial grade) than those prevailing in early The sharp increase in prices is also explained by a necessary price recovery following a depressed price situation over most of the last decade. World rock prices are expected to remain at their present (early 1974) high levels through late 1975 because coverage is, however, likely to improve from 1976 onwards; long term FOB equilibrium prices are, therefore, forecast to stabilize -- by 1976/77 -- at about 20 percent below the 1974 price levels. 5. Major structural changes have also occurred in production and trade of phosphate fertilizers in the past 10 vears. Increased demand for high grade fertilizers has induced a rapid growth in the production and trade of intermediate products, such as phosphoric acid, in which developing countries are more and more participating. The emerging trade pattern will combine increasing quantities of intermediate and finished products with raw materials, rock phosphate, and sulfur. This new trade pattern favors large units which, as it is the case in Morocco, are close to sources of raw materials and favorably located for exporting. The shortage of phosphoric acid based high grade fertilizers in recent years, combined with the increase in rock prices, resulted in a sizeable upward adjustment in prices of finished products, about 50 percent for phosphoric acid between mid-1973 and early However, the supply/demand situation is likely to improve from 1976 on, bringing a stabilization in long term prices at a level somewhat below the current level. PART IV: THE PROJECT 1. A report entitled: "Appraisal of the Maroc Phosphore Phosphoric Acid and Mono-ammonium Project" (No. 351 MOR of April 19, 1974) is being distributed separately. A loan and project summary is attached as ANNEX III. The Project was presented to the Bank in June 1971, and a formal

39 ANNEX IV Page 3 of 7 request to help finance the Project made in December The proposed project was appraised in February and October 1973; a follow-up mission took place in March Negotiations were held in Washington beginning January 28, The Borrower was represented by Mr. Guessous (Financial Director, Office Cherifien des Phosphates) and the Guarantor by Mr. Belghiti of the Directorate of Economic Affairs, Prime Minister's Office. 2. The Project consists in the erection of a plant near the port of Safi on the Atlantic coast, about 200 km south of Casablanca, to produce for export 371,250 tons per year of phosphoric acid (P 20 ) and 225,780 tons per year of mono-ammonium phosphate (MAP) at full capamiky. These products are key intermediates in the manufacturing of high grade phosphate fertilizers which are in great and increasing demand in world markets. The project is sponsored by the OCP and will be implemented by Maroc Phosphore. The proposed project is a key link in the Government's and OCP's strategy to participate in the rapidly emerging world trade in intermediate products used in manufacturing high grade fertilizers. 3. In 1971, the Government of Morocco and OCP requested, and the Bank agreed, that the Project be executed as a lump sum turnkey contract. The early conclusion of a turnkey contract was necessary to: (i) increase potential buyers' confidence in the Project; and (ii) obtain firm project costs essential for determining a sales strategy and starting sales negotiations; other reasons were the advantages of single responsibility in project execution and the acquisition of technical expertise in phosphoric acid production which was lacking in OCP. OCP signed a first plant construction contract in June 1973 for about two-thirds of the Project capacity, and Project execution has commenced. This first contract included provisions for project expansion. Following favorable market developments and to take advantage of an unchanged price offer, OCP, in April 1974, completed negotiations with the same supplier for a supplementary contract based on identical terms to cover, together with the first contract, the overall construction of the Project's main facilities and related infrastructure. 4. International competitive bidding was used to select the consortium which is to execute the Project at a fixed lump sum price, including an adequate escalation formula. OCP invited bids from several consortia of specialized firms, each under the leadership of one firm (the contractor) who was to have responsibility for the entire project. The Bank agreed to a three-phase selection procedure: (i) prequalification of consortia after international advertising; (ii) invitation to prequalified consortia to submit unpriced technical offers conforming to detailed tender documents; and (iii) after clarification and technical adjustments of offers; call for a lump sum price for most of the project work which, together with the technical offer, was to serve as the basis for bid evaluation. Out of thirteen responsive bids, five consortia were prequalified and asked to present price proposals. The five contractors were from the US, Belgium, France, Germany, and Japan. The lowest evaluated bid was submitted by a consortium headed by Friedrich Uhde GmbH (Uhde) of Germany. Uhde and the other members of the

40 ANNEX IV Page 4 of 7 consortium are well known and qualified firms: Polimex-Cekop (Polimex) of Poland; Lurgi Gesellschaft fuer Chemie and Huettenwesen GmbH (Lurgi); Siemens A.G. (Siemens), Nissan of Japan, and Fisons of the UK. The contract is based on a lump sum price with payments in Dirham for local cost, in clearing dollars for the Polimex part as per a sub-contract between Uhde and Polimex, and in Deutsche Mark for the remaining foreign exchange balance. A payment schedule in the three currencies was agreed and payments are specified at intervals and in amounts proportional to the contractor's expected cash outlays and work progress. Progress Execution 5. "Maroc Phosphore" was formed to build and operate the Project. The company functions as a "Societe Anonyme" under Moroccan commercial laws. Its initial authorized share capital is DH 1 million and will be increased to provide for additional equity subscriptions as execution of the Project proceeds. OCP will own all of MP's shares. MP sales, finance, and accounting functions will be managed by OCP. Plant and production management will be autonomous. OCP's General Manager is also Chairman of the MP Board. 6. Engineering, construction, erection, and start-up of the plant are the responsibility of the turnkey contractor. Following completion of the first part of the Project scheduled for October 1, 1975, commercial operations are expected to begin in January 1976, after a 3 months testing period. Facilities corresponding to the second construction contract are expected to start operations in August OCP and MP are assisted by an experienced technical advisor, Haldor Topsoe A/S of Denmark. A satisfactory organization for project execution has been developed and includes: the MP project team, the nucleus of the new company; the various OCP departments involved; the technical advisor Topsoe; the Contractor's team; and an OCP group of engineers. These arrangements are expected to ensure efficient project execution. Furthermore, given the expected difficulties in recruiting Moroccan chemical engineers, Topsoe and the Contractor, as part of their contracts with OCP, will assist in the recruitment and training -- in Morocco and abroad -- of key personnel, including expatriates if needed. 7. Since the plant will be adjacent to an existing chemical plant (Maroc Chimie), the company will benefit from existing infrastructure, with resulting cost savings. Certain additional infrastructure facilities needed for, but not part of, the Project and estimated to cost about DH 36 million (US$8 million), will be built by the appropriate Government agencies closely supervised by OCP and MP; the necessary budget allocations have been made. These facilities include: the supply of fresh water through modification of a canal, heightening of a small dam and installation of a conduit or pumping facilities; installations for handling of sulfur at the port; and railroad equipment and siding. Service tariffs, to be paid by MP, have been agreed upon with the agencies involved. Workers' housing will be provided by the regional authorities. A schedule for construction of these facilities to meet the requirements of the Project has been agreed upon with the Government (Guarantee Agreement, Section 2.04 and the Schedule thereto).

41 ANNEX IV Page 5 of 7 8. Of the principal raw materials: (i) phosphate rock will be supplied by train from OCP's Youssoufia mine under a long term supply contract with OCP the draft of which was found satisfactory by the Bank and the signature of which is a condition of effectiveness of the proposed loan (Loan Agreement, Section 9.01 (e)); (ii) sulfur will be imported in dry lump form under long term contracts; and (iii) small quantities of ammonia will be bought from various sources on a spot basis. Catalysts and chemicals will all be imported. Known rock reserves at Youssoufia are adequate to supply the Project with the same grade over more than its expected economic life of 12.5 years. 9. Phosphoric acid will be shipped from Safi to delivery points in Europe, India, and Brazil in three specialized self-unloading, ocean-going ships, equipped with rubber lined or stainless steel tanks. A shipping company, Marphocean, has been formed -- with an initial share capital of DH 4 million -- to purchase and operate the ships under Moroccan flag; Marphocean is jointly owned by the Moroccan National Shipping Company - COMANAV - (45 percent), which already owns 11 ships and has a leading role in ship chartering and sea transport of Moroccan goods, and by OCP (25 percent). The balance (30 percent) will be owned by the French ship engineering firm, GAZOCEAN, one of the world's leading firms in the shipping of liquified or pressurized gases and chemicals. The Bank is not financing the shipping facilities, but a condition of effectiveness of the loan is OCP will enter into a long term charter agreement with a carrier acceptable to the Bank (Loan Agreement, Section 9.01 (d)). Cost Estimates 10. Total investment costs for the Project, summarized in Annex III, are estimated to be DH 657 million (US$148.6 million). Total financing, including interest during construction, is DH 687 million (US$155.5 million). Cost estimates include the lump sum price of DH 405 million (US$91.6 million) for the turnkey contract. Cost estimates for all major items outside the turnkey contract have been prepared by OCP and MP were reviewed by the Bank and have been found acceptable. A price escalation clause based on a formula with reasonable estimates for increases of component prices is included in the contract. In addition, an overall contingency (18 percent of Project cost, excluding working capital and interest during construction) is included to cover unforeseeable expenditures. This is considered adequate in view of the short construction time. The foreign exchange costs include DH 55 million (US$12.6 million) for goods and services subcontracted and to be paid for in clearing dollars for Polish deliveries. Local costs include DH 18 million for taxes and registration fee. Financing Plan 11. External financing for the Project is to come jointly from the Bank and Kreditanstalt fur Wiederaufbau (KfW). While the proposed Bank loan would be made directly to MP, the KfW loan equivalent to US$26.8 million will be made to the Government following KfW's usual practice and on-lent to MP. The Bank and the KfW loans are linked by cross-effectiveness provision (Section 9.01 (b), Loan Agreement) and cross default provisions (Sections 8.02 (a) and 8.03 (a), Loan Agreement). Debt financing for the Project would be completed

42 ANNEX IV Page 6 of 7 by an US$8 million loan from BNDE. The three loans totalling US$84.8 million would finance 55 percent of the Project costs. US$70.7 of equity financing would be provided by OCP. The equity would finance the local costs, the costs of Polish supplies (US$12.6 million) which will be paid for in clearing dollars, and also US$2.7 million equivalent convertible foreign exchange costs. MP has agreed to maintain a 55:45 debt/equity ratio (Loan Agreement, Section 5.08). 12. The proposed Bank loan would cover 32 percent of project costs and 57 percent of convertible foreign exchange expenditures. It would be for 14 years with 4 years of grace. MP would pay to the Government a guarantee fee at the rate of 1-3/4 percent (Guarantee Agreement, Section 2.05), bringing the total cost of Bank funds for MP to 9 percent. The KfW loan would be made to the Government at 2 percent for 30 years, including ten years of grace, and would be on-lent to MP for the same maturity and grace period and at the same effective interest rate as the Bank loan. The BNDE loan will also be made at the same effective interest rate and conditions as the Bank loan. OCP has agreed to subscribe for, and pay in, the increased share capital of MP according to an agreed schedule (Shareholders' Guarantee Agreement, Section 2.01). In the event of a cost overrun, OCP and the Government guarantee to provide additional funds, both foreign and local, necessary to complete the Project on terms and conditions acceptable to the Bank (Guarantee Agreement, Section 2.03; Shareholders' Guarantee Agreement, Section 2.02). Disbursements 13. Disbursement of the Bank and KfW portions of the loan financing the turnkey contract will be made pro-rata against lump sum invoices submitted by MP and in agreement with the contracts payment schedule. The Bank will not finance goods and services procured in Poland. 14. OCP has so far made US$12.8 million advance payments to the contract or in convertible foreign exchange. These payments are proposed to be retroactively financed by the lenders, the BNDE loan being fully disbursed first. The proportionate Bank share will be US$3.1 million, representing about 6 percent of the Bank loan. Financial Position 15. The company is to maintain a debt service coverage of at least 1.4 and not to incur any debt that would increase its debt/equity ratio beyond 55:45 throughout the forecast period of 12 years. The Project's financial rate of return would be 16.9 percent after corporate income tax under conservative estimates regarding capital and operating cost and revenue. Technical risks of plant design and operations and risks of substantial delays or major cost overruns are considered low, owing to the contracting procedure followed and the employment of a qualified technical advisor (Topsoe). 16. OCP (Shareholders' Guarantee Agreement, Section 2.03) and the Government (Guarantee Agreement, Section 2.03) will guarantee MP's sound liquidity and financial position through financial covenants. Furthermore,