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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY IMPLEMENTATION COMPLETION REPORT KINGDOM OF MOROCCO OFFICE NATIONAL DES POSTES ET TELECOMMUNICATIONS (ONPT) FIRST TELECOMMUNICATIONS PROJECT (LOAN 2798-NOR) JUNE 23, 1995 Private Sector Development, Finance and Infrastructure Division Maghreb and Iran Department Middle East and North Africa Region Report No This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

2 EXCHANGE RATES Currency Unit = Moroccan Dirham (DH) Equivalency of I US$ in DH since 1987 (Annual Average) (through Dec) 9.21 MEASURES Metric System FISCAL YEAR Government and ONPT: January 1 - December 31 ABBREVIATIONS AND ACRONYMS DEL - Direct Exchange Line (Telephone line in service) GDP - Gross Domestic Product EBRD - International Bank for Reconstruction and Development ICB - International Competitive Bidding ICR - Implementation Completion Report IMF - International Monetary Fund ONPT - Office National des Postes et Telecommunications du Maroc P&T - Posts and Telecommunications TORs - Terms of Reference (study, mission) VAT - Value added tax

3 Implementation Completion Report FOR OFFICIAL USE ONLY KINGDOM OF MOROCCO OFFICE NATIONAL DE POSTES ET TELECOMMUNICATIONS (ONPT) FIRST TELECOMMUNICATIONS PROJECT IMPLEMENTATION COMPLETION REPORT Table of Contents Page No. Preface Evaluation Summary Part I: Project Implementation Assessment A. Statement and Evaluation of Objectives B. Achievement of Objectives Sector Policies Institutional Development Physical Objectives Staff Productivity Cost of the Project Procurement Disbursements Financial Objectives C. Major Factors Affecting the Project Factors Not Generally subject to Government Control Factors generally subject to Governm ent Control Factors generally subject to ONPT Control D. Project Sustainability Project Benefits Sustainability E. Bank Performance I Preparation, Appraisal I 1 Supervision F. Borrower Performance Compliance with Loan and Guarantee Agreements Covenants-- 13 This document has a restrictedistnibution and may be used by recipients only in the performance of their ofricial duties. Its contents may not otherwise be disclosed without World Bank authorization.

4 Implementation Completion Report Page No. G. Assessment of Outcome H. Future Operation I. Key Lessons Learned Part II: Table 1: Table 2: Table 3: Table 4: Table 5(a): Table 6(a): Table 6(b): Table 7: Table 8A: Table 8B: Table 9: Table 10: Table 11: Table 12: Table 13: Statiscal Tables Summary of Assessments Related Bank Loans Project Timetable Loan Disbursements: Cumulative Estimated and Actual Operational Targets Forecast of the Operational Targets Forecast of the Financial Targets Studies Included in Project Project Costs Project Financing Internal Economic Rate of Return Status of Legal Covenants Compliance with Operational Manual Statements Bank Resources: Staff Inputs Bank Resources: Missions Appendix: Borrower Contribution to the ICR

5 IMPLEMENTATION COMPLETION REPORT MOROCCO FIRST TELECOMMUNICATIONS PROJECT (LN 2798-MOR Preface This is the Implementation Completion Report (ICR) for the First Telecommunications Project in Morocco, for which Loan 2798-MOR in the amount of US$125.0 million equivalent was approved April 27, 1987 and made effective on November 30, The loan was closed on December 31, 1994, the original closing date. In August 1988, US$9.0 million was canceled following the award of a contract to a domestic cable manufacturer, which was not in compliance with Bank procurement guidelines. The revised loan amount of US$116.0 million was fully disbursed, with the last disbursement taking place on February 28, There was no cofinancing for the project. The ICR was prepared by Philippe Lechamy of the Telecommunications and Informatics Division of the Industry and Energy Department, and reviewed by Henri Beenhakker, Acting Division Chief, Private Sector Development, Finance and Infrastructure Division, Maghreb and Iran Department (managing division) and Rene Costa, Project Advisor. The borrower provided comments that are included as an appendix to the ICR. The ICR is based on material in the project file, and its preparation was begun during the Bank's final supervision/completion mission in October The borrower contributed to preparation of the ICR by preparing a working paper incorporating a great deal of information and data, their own evaluation of project execution and providing comments on the draft ICR.

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7 Implementation Completion Report First Telecommunications Project Loan 2798-MOR MOROCCO Evaluation Summary Introduction. Prior to the First Telecommunications Project, the Bank had had no previous experience in the sector. A Bank sector study carried out in 1982 recommended sector restructuring as a prerequisite for rapid sector expansion and modernization. The Bank strategy underlying the project was to help ONPT identify and alleviate institutional and financial constraints to sector expansion. During project preparation, the legal framework for restructuring the sector was put in place, and improvement of sector organization and management was undertaken. Project Objectives. The primary objective of this project was to expand, improve and modernize Morocco's telecommunications infrastructure, with the primary emphasis on institutional development as the principal means of strengthening implementation capacity. On the basis of a large development program of needed investments put together by ONPT, the project would help to increase access to service in urban, rural and isolated areas to meet the large unsatisfied demand, improve service quality and reliability, and maximize the mobilization of fiscal resources. Due to IMF restrictions on Morocco's extemal financing, and scarcity of foreign exchange, it was agreed that the Government and ONPT would not be able carry out the large amount of investment needed to achieve the level of growth desired in the sector, all at one time. Therefore, ONPT's program of institutional improvements and physical investments were split into two phases; Phase I covered by the First Telecommunications Project, and Phase II to be covered by the ongoing Telecommunications Restructuring Project. Phase I included providing and installing telephone lines together with the associated external plant and transmission equipment, including replacement of worn out and obsolete equipment, provision of specialized services (data systems, mobile land and maritime radio communications), strengthening ONPT's subscriber line connection, maintenance and service quality monitoring capacity, and training and technical assistance. (para. 5) Implementation Experience and Results. ONPT's unfamiliarity with Bank procurement rules, given that the project was the first in the sector, did delay completion of most of the contracts financed through the loan. However, efforts made to correct the difficulties did make up most of the delay and the physical objectives of the project were realized by the project's closing date. (para. 11) The primary sector objective of expansion and modernization of the network was fully met, particularly with respect to DEL connections, telephone exchange capacity, digitilization of the network, and service access to rural areas (paras. 12, 13). Service quality objectives, however, proved to be a little too optimistic, with call completion rates

8 Implementation Completion Report ii of only 57% for local and 47% for long distance, instead of 80% and 90%, respectively, as originally projected. Maintenance rates for the local networks were close to targets, as the percentage of faults repaired within 48 hours increased from 50% to 85% with the original target being 90%. Local network reliability, measured in number of subscriber complaints per 100 DELs per year, although somewhat improved, is still high at 67% compared to the target of 30%. ONPT is aware of the problems and is taking corrective actions (para. 15). The project's sustainability is assured through ONPT's current commitment, through a performance contract (Contrat Programme ) with the Government, to continue network expansion, improve service quality and maintain adequate financial performance of its operation. The focus placed on projected performance indicators for the coming years will contribute to this and the ongoing projects' long term institutional and financial sustainability (para. 38). A comparison of the average cost per installed line unit at appraisal and at implementation, shows that actual cost at implementation, in 1991, was approximately 4% higher than estimated at appraisal. However, during the period when the network was being expanded by 419,000, the cost per line decreased by about 28% due to worldwide price reductions on telecommunications equipment as a result of technological advances and competitive procurement on the part of the borrower (para. 17). The amount of the Bank loan was appropriately tailored to finance project components less attractive for bilateral and commercial financing. Although representing only 18.5% of the original financing plan, the Bank's contribution had a significant catalytic effect on raising financing for the investment program (para. 41). One important factor that positively affected the overall cost of the project and achievement of physical objectives, was the substantial reduction of international market prices for high technology digital switching and transmission equipment. These new systems also provide better and more reliable service, and less maintenance. A factor which negatively affected the project was the difficulty in finding qualified personnel, or being able to train staff to improve their skills. As a result, domestic contractors with underqualified or improperly trained staff carried out substandard works that are now affecting the reliability of the networks (para. 31). The Government's vision for a modem Morocco provided a positive and supportive environment for the commercialization of ONPT, the reorganization of its structure and the progressive introduction of a business management culture. With the launching of the Government's privatization program in 1992, it is expected that the Government will continue to pursue a policy of sector liberalization and private sector participation in the framework of the ongoing Telecommunications Restructuring Project (para. 33). When considering the overall outcome and achievements of the project, Bank performance was satisfactory. However, considering the length of time that was required

9 Implementation Completion Report iii to prepare, appraise, negotiate and finalize the project, Bank performance was less than satisfactory. ONPT's performance was highly satisfactory, particularly considering the original low level of development and the lack of experience in managing a large development project. The performance of contractors, consultants, and suppliers was satisfactory (para. 45). The projects outcome is satisfactory. It exceeded some of its physical objectives and fully achieved other major objectives. It is expected to achieve satisfactory development results with only a few shortcomings regarding the timely completion of the management improvement component, which is being taken care of under the current Telecommunications Restructuring Project (Ln MOR) (para. 47). Summary of Findings, Future Operations, and Key Lessons Learned. Project benefits are significant and higher than expected. They include: (a) a dramatic increase in both quality and coverage of telecommunications services; (b) transformation of ONPT from a government agency into a more commercially oriented entity; and (c) the splitting up of ONPT's telecommunications and postal activities in preparation for the creation of the fully autonomous Maghreb Telecommunications Company and the Postal Entity (para. 36). Building upon reforms initiated under this project, the follow on operation, the Telecommunications Restructuring Project, is pursuing and deepening the reforms through: (a) full separation of postal activities and telecommunications into two distinct legal entities; (b) set up of a regulatory structure outside of ONPT; (c) elimination of ONPT's monopoly on value added and basic services; and (d) corporatization of ONPT and opening of its equity to private capital (para. 48). A key question debated at the time of project completion was whether ONPT should continue to operate in its present form, or if its efficiency could be increased if it were totally or even partially privatized. By building a strong relationship with the borrower and the Government during project implementation, the Bank was able to convince them to develop a restructuring strategy more far reaching than if such a strategy had been discussed in the early stages of project preparation. As a result, it was decided to separate the postal and telecommunications services and privatize the accompanying services before deciding on the privatization of telecommunications (para. 51).

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13 Kingdom of Morocco Office National de Postes et Telecommunications (ONPT) First Telecommunications Project PROJECT IMPLEMENTATION ASSESSMENT A. Statement and Evaluation of Objectives 1. The first telecommunications project in Morocco, which was supported by the $125.0 million Bank Loan 2798-MOR, was implemented by the Office National des Postes et Telecommunications (ONPT) as Borrower, under the Guarantee of the Kingdom of Morocco. ONPT was created in 1984, shortly before project preparation started, as a State-owned semiautonomous operating entity under the policy guidance of the Ministry of P&T. Prior to the start of the project, the telecommunications sector in Morocco was severely constrained by lack of financial resources and adequate institutional capacity to develop and operate the system and to provide satisfactory services to the public and the economy. The sector was characterized by chronic underinvestment resulting in slow development growth, low telephone penetration (on average 1.0%) 80% of which was concentrated in urban areas, large unsatisfied expressed demand (60% of demand met), traffic congestion particularly in long distance and international services (only about 30% of call completion rate) and reduced service reliability due to obsolete facilities. 2. The primary sector objectives set up by the Government of Morocco at the onset of the project specifically addressed the modernization and expansion of the country's telecommunications infrastructure. These objectives were to increase access to service in urban, rural and isolated areas to meet the large unsatisfied demand, improve the service quality and reliability, as well as maximize the mobilization of fiscal resources. To meet these primary sector objectives, ONPT designed a large development program for the period 1987 to 1994, aimed at expanding the total installed exchange capacity from 285,000 line units at the end of 1986 to about one million in Over the period, the number of subscribers would increase from 253,000 to 820,000. This ambitious program aimed to replace obsolete facilities, introduce modern digital technologies, provide service to all parts of the country, meet 80% of the expressed demand in 1994, and provide new specialized services, particularly to the business community. 3. The project was initiated in 1985 in a monopolistic environment. No broad policy objectives or statements related to the liberalization of the sector, introduction of competition and active participation of the private sector in development and operations, were discussed and agreed with the Government. In this context, the project concept was still in line with the traditional public utilities approach. All institutional objectives were concentrated on relieving organizational, management and financial constraints existing within the newly created ONPT.

14 Implementation Completion Report 2 However, during the implementation period, a constructive dialogue started between the Bank and the Moroccan sector authorities and led toward a new policy approach to the sector issues and the definition of sector policy objectives in line with the current worldwide trends. 4. A comprehensive program of technical assistance to ONPT amounting to 100 staff months and including training and computer equipment, was integrated into the project with the specific objectives of: (a) improving the entity's overall management and organization; (b) streamlining management and organization of the telecommunications department; (c) introducing a cost accounting system; (d) carrying out a tariff study; (e) introducing management information systems and preparing a master plan for the computerization of ONPT activities; (f) reviewing staffing requirements, recruitment, and promotion policies; and (g) carrying out a comprehensive staff training program. An action plan and time schedule for implementation of this T.A. was prepared in consultation with the Bank. Furthermore, to restore ONPT's financial soundness, the Government agreed to settle its arrears due for telecommunications services in installments over the period , and provide adequate budget allocation for future consumption. Financial discipline was to be strengthened through annual audits as per Bank requirements and hidden cross-subsidies between ONPT's telecommunications and postal/financial services were to be avoided. 5. In 1987, Morocco's external financing was still subject to IMF restrictions on the average length of maturities. Scarcity of foreign exchange was a serious constraint to rapid expansion. Furthermore, ONPT's projected internal cash generation would not have been sufficient to cover the large amount of local expenditures required by fast growth, and should have been supplemented by an amount of local borrowing exceeding, at the time, the capacity of the local capital market. For these reasons, the objectives of growth were reduced while more emphasis was put on institutional objectives and the investment program was, consequently, split into two phases: Phase I starting in 1987 to be completed in 1992 and Phase II starting in 1990 to be completed in The First Telecommunications Project in Morocco, subject of this ICR, covers the investments of Phase 1. This phase included ongoing works for about 100,000 line units of switching equipment, new works under the project for about 290,000 additional line units, practically doubling the network capacity under the project, and replacement of 34,000 line units of obsolete equipment. The current Telecommunications Restructuring Project covers Phase II. Both projects are considered as a continuous operation, the operational phase of the first project sustaining the development phase of the following project. B. Achievement of Objectives. Sector Policies 6. When the project was initiated, the worldwide debate on telecommunications policy had not yet reached Morocco. However, following a Bank initiative, in early 1991, the Government hired a consultant to assist in the definition of the major sector policy changes that would be appropriate in the Moroccan context. The consultant contract was financed by the Bank through

15 Implementation Completion Report 3 the proceeds of the current Loan 2798-MOR. The outcome of the consultant review was the preparation of a Statement of Sector Policy that became the subject of the dialogue between the Bank, the Government and ONPT. On this basis, the preparation and appraisal of the ongoing Telecommunications Restructuring Project was started (Ln 557-MOR). Under the first project, a first step in the right direction was made toward the full separation within ONPT of telecommunications and postal services (see para. 8 below). Institutional Development 7. Institutional Objectives. In the framework of this project, the institutional objectives were restricted to the domain of the operating entity; they included changes in ONPT's organization and improvements in management. 8. Organization. Supported by previous consultants' studies initiated before starting the project, ONPT's internal structure had been reorganized, first in creating functional departments at the headquarters in Rabat and then in decentralizing local services operations through the creation of seven regional directorates (Casablanca, Fes, Marrakech and Rabat in 1988; Oujda and Settat in 1990; and finally Agadir in 1992). Regional training centers were also created for lowlevel technicians while high-level engineering and management personnel was centrally trained in the P&T Institute in Rabat. The most important structural change occurred in 1991 with the separation of telecommunications and postal services, and both activities became functionally and financially independent from each other. ONPT's Director General ensures appropriate management linkage between them. This separation should facilitate the future creation of the Maghreb Telecom Company (Itissalat al Maghrib) under the Telecommunications Sector Restructuring Project. In this respect, the organizational aspects of the institutional objectives as designed at project appraisal were satisfactorily reached. 9. Management. The transition from a Government administration type of management towards a commercially oriented management type, such as was targeted for ONPT, requires a completely new approach to doing business, a new corporate culture, and the introduction and implementation of modern computerized management systems and procedures. These changes required more time than previously expected. The effective start of this project component was postponed until The T.O.Rs for the management consultants were not defined during project appraisal; preparing, reviewing and discussing them with the Bank, as well as selecting and contracting the management consulting firm, was very time consuming; and the lack of continuity in the support of the financial management side of the technical assistance contributed, at least partially, to the delays in implementing the accounting component. 10. A single contract awarded to a joint venture of two consulting firms included five components, namely: (a) procurement, supplies and stores; (b) financial management and accounting; (c) human resources development; (d) commercialization, tariffs; and (e) a master plan for the computerization of ONPT's activities. The consultant services have been assessed as satisfactory by ONPT; their contribution in the form of specific recommendations is supported by

16 Implementation Completion Report 4 documentation, manuals of procedures, systems software, etc. ONPT created ad-hoc working groups in charge of progressively implementing the consultants' recommendations; they are still in the process of completing the introduction of the new methods, procedures and associated computer systems. Some additional consultant assignments have started in the framework of the restructuring project that will support and complement the major improvements initiated under the first project. ONPT expects that the objective of commercialization will be met during the course of Regarding the introduction of a cost accounting system, the timeframe for meeting this objective turned out to be unrealistic. This objective will be met during the restructuring of ONPT. Physical Objectives 11. Implementation schedule. According to the original plan, most of the contracts to be financed though Loan 2798-MOR should have been completed by the end of However, this project being the Bank first in the sector, ONPT was not familiar with ICB procurement rules, and it took more time than anticipated to get the process started, whereas other project components not financed by the Bank experienced fewer delays. Thanks to substantial efforts, the overall physical objectives of the project were generally met by the final closing date. 12. Growth Objectives of the Network. The primary sector objective of expansion and modernization of the network as set up by the Government was fully met and even somewhat exceeded (Annex A, Table 5(a)). At the end of 1992, when the project should have been completed, ONPT had already connected 657,000 DELs compared to the initial objective of 609,000 DELs. The rate of achievement is then 108% for the period The project's original plan had a target of 820,000 connected subscriber lines (DELs) at the end of 1994; the actual number of DELs already reached 840,000 at the end of 1993 and about one million DELs are expected at the end of 1994, which give a rate of achievement of 122% for the whole period The capacity of the telephone exchanges increased by 824,000 line units of digital switching equipment, from 293,000 at the end of 1987 to 1,117,000 lines toward the end of 1994; among which 93,000 new line units were installed replacing obsolete analogue electromechanical switching equipment. The digitalization rate of the Moroccan telecommunications network compares with the most advanced industrialized countries: at the end of 1993, it reached 90% for the telephone exchanges and 88% for the long distance transmission circuits, showing that the objective of modernization of the network has also been fully reached. 14. The access to rural areas has also been improved during the project period, as 65% of the rural communities had access to telephone service at the end of The number of public telephones has increased from 476 at the start of the project to 4378 at the end of The objectives of connecting additional telex subscribers have not been reached, because, as everywhere else in the world, telex service is regressing and being replaced by facsimile and

17 Implementation Completion Report 5 higher speed data transmission. Cellular mobile telephony was introduced by ONPT in 1987 and the system had 6725 subscribers at the end of Objectives of service quality. Before implementing the project, the quality of service provided by the Moroccan telecommunications network was rather poor in all aspects, and substantial improvements have been achieved. The technical call completion rate has improved from 84 to 94% between 1987 and However, the overall commercial call completion rate, as measured from the subscriber point of view, remains around 57% for local and 47% for long distance traffic.' On this point, the original objectives of 80% and 75%, which were based on the experience of industrialized countries, were too optimistic. These objectives were downgraded for the second phase of network development. Regarding the maintenance targets of the local networks, the percentage of faults repaired in 48 hours increased from 50% to 85%, which is close to the original target of 90%. The reliability of the local networks expressed in number of subscriber complaints per 100 DELs per year remains well below the objectives. Improvements have been noted, on average the number of complaints decreased from 115% in 1987 to 67% in 1993, but this ratio is still too high when compared to the target of 30%, and particularly considering that most of the DELs are now connected through new networks. One fault per DEL every 18 months on average shows a serious problem of reliability of the local networks, namely at the distribution and subscriber installation level. Taking into account the large number of new local cable networks installed towards the end of the project period, we may assume that the great pressure resulting from the high priority given to connect new subscribers had a negative impact on the quality. ONPT is aware of the problem and corrective actions have already been planned. Staff Productivity 16. The large expansion of the telecommunications systems required a particularly sustained effort in recruiting and training new staff. The employment market in Morocco would provide a sufficient number of people willing to join ONPT, but finding qualified personnel and providing proper training was a serious challenge throughout the project period. ONPT's salaries and conditions of employment are attractive enough in the Moroccan context for most of the engineering, technical and operating staff. However, the competition from the private sector is noticeable for managers, accountants and computer specialists. Total work force employed in ONPT's telecommunications branch reached 12,632 staff at the end of 1993 compared to 6,467 at the start of the project. The objective of staff productivity expressed in number of employees per 1,000 DELs was 15.4 at the end of 1993 compared to 25.6 at the beginning of the project; it has surpassed the original target of 19, which is very satisfactory. / The technical rate refers to calls having electronically reached the subscribers' numbers dialed; the commercial rate refers to links effectively completed with the called subscribers.

18 Implementation Completion Report 6 Cost of the Project 17. At project appraisal, the Bank participated in the financing of the first five-year slice ( ) of ONPT's investment program. The second slice was scheduled to start in Due to lack of cost accounting within ONPT, changes of implementation schedules, delays of some Phase I components, and early beginnings of Phase II elements, a detailed cost analysis of each project component would be impossible. However, a comparison of the average cost per installed line unit between appraisal and implementation gives a sufficient appreciation of the overall development of the investment costs during the project implementation. At project appraisal, for a forecasted installation of 324,000 line units and a total investment outlay of $674.5 million, the average estimated cost per line was $2,081. At the end of 1991, for an actual installation of 426,000 line units at a total investment cost of $ million, the average cost per line was $2,164, or by 4% slightly above the appraisal estimated cost. Between 1992 and 1994, for an additional expansion of 419,000 lines, at a cost of $761.6 million, the average cost per line dropped to $1,551 per line, which shows a decrease of 28% compared to the previous project period and of 25% compared to the original appraisal estimates. Such substantial cost savings were the result of worldwide price reductions on telecommunications equipment made possible by technological developments, combined with competitive procurement on the part of the borrower. For the overall project period , 917,000 lines were installed at a total cost of $1.683 million (Annex A, Table 8(a)), which gives an average cost per line of $1,836, 12% below appraisal estimates. In deducting the substantial custom duties paid by ONPT on imported telecommunications equipment, the average cost per line of $1,224 compares with the worldwide averages situated between $1,000 and $1,500. Procurement 18. At project appraisal, it was estimated that about sixty contracts would cover the entire procurement of goods and services to be financed through Loan 2798-MOR and that 20 of them would be awarded locally for civil works associated with the construction and installation of local cable networks. In fact, 289 contracts were financed by the Bank, 209 of them for civil works. Such a drastic increase in the number of contracts for civil works was the result of a decision made by ONPT to reduce the size of these procurements in order to promote the participation of the local civil works contractors, who would not have the capacity to execute larger contracts. 19. The process of procurement was slow at the beginning of the project; on one hand, initial delays were caused by the Bank in reviewing and clearing the first sets of bidding documents, but on the other hand, delays were also caused by lack of experience within ONPT in preparing bidding documents suitable for international competitive bidding, and in bid evaluation. Thanks to excellent cooperation between the Bank and ONPT, the initial difficulties were overcome and then the review and clearance process went smoothly during most of the project period. To avoid initial delays and difficulties, ONPT recommends that the Bank organize procurement seminars with new borrowers. Advance procurement should be encouraged as part of project preparation.

19 Implementation Completion Report Following a decision jointly made by the Bank and ONPT in August 1988, $9.0 million was canceled from the initial loan amount of $125.0 million. This cancellation was linked to the award of a contract to a domestic cable manufacturer, which was not in compliance with Bank's procurement guidelines. Disbursements 21. No particular difficulties and no delays were encountered in the disbursement against applications for withdrawals made by ONPT in accordance with the Bank's disbursement handbook. The direct payment procedure was requested for 19 applications for withdrawal and 17 applications requested the issuance of a special commitment to cover a letter of credit. About 30% of the loan was disbursed against invoices below $500,000 through the Special Account open in a Moroccan local bank (BMCE) in accordance with Schedule 5 of the Loan Agreement. The Special Account has been replenished 20 times for a total amount of $35.9 million. In August 1993, the Bank agreed to a proposal from ONPT to reallocate the proceeds of the loan, including the amount of contingencies, in favor of category three -civil works and ducting-. However, at project completion, the percentages of the loan actually disbursed against each category were in line with the original allocation. Cumulative estimated and actual disbursements, for each Bank fiscal year are shown in Annex A, Table 4. The project was closed on December 31, 1994, as originally scheduled. Financial Objectives 22. Annual audit requirements. It was agreed between the Bank and ONPT that, because of the poor quality of the accounting system, no audit would be carried out during the first years of the project. It was only when the restructuring project was under preparation that ONPT was required to have its accounts audited in one sweep, from 1988 through The auditors wrote a disclaimer and noted down all the improvements that were needed, which were already included in the work program set down by the consultants employed to build a reliable accounting system. The auditors, who had subsequently been hired also to help adjust past accounts, from 1984 on, wrote a similar disclaimer related to the 1992 accounts. The first actual audit, performed with a view to certification within a reasonable time, concerns the 1993 accounts. 23. The 1993 report, issued in July 1994 and discussed at length with ONPT management, is concerned with a strong reinforcement of the accounting and financial system. The report contains numerous qualifications and points out to the main hurdles which block certification. Some of the ancillary accounts, which are the backbone of the accounting system, are not yet reliably linked to general accounting; they are related to fixed assets (the inventory will be completed and the assets register computerized, in the first half of 1995), subscribers' accounts (new software will be secured within the next two years) and a parts and works in progress inventory (a computerized inventory management will be set up in 1995 and a works in progress software is a requisite). ONPT's accounts are likely to receive a qualified opinion form the

20 Implementation Completion Report 8 auditors in Full certification is expected in 1996 when cost accounting and regional accounting are in full operation. 24. Government and private receivables. One of the major difficulties of the project was getting ministries to pay their telephone bills as soon as they are due. Dirhams 1.32 billion ($155.3 million) of post and telecommunications debt prior to 1987 were repaid in six equal installments until However, the Government had accumulated new arrears from 1987 on and, at Bank's insistence on repayment being a condition of effectiveness of the new 3557-MOR loan, subsequent arrears up to the end of 1992 were settled in From 1993 on, the Government has devised a system of stamps that each ministry buys in advance: it thus opens an account with the Treasury on which ONPT draws when bills are produced. This system is effective, because ministries know that, when they are in default because they have no stamps left, their telephone lines will be suspended. 25. Private receivables have been better monitored since the commercial department was organized in The change from the bi-monthly to monthly billing period has also helped reduce the amount of receivables. However, after making an allowance for the lag time between consumption registering and cut-off date, still about 50 days, private receivables are equivalent to two months of billing, one third of which being prior to The suspension procedures are strictly followed, and to avoid endangering the working of the network from a high number of cut-offs, the lines of late payers are restricted to incoming calls. Moreover, a special effort is being made to retrieve customers' old debts. The follow-up will be tighter when the new billing and recovery software is operating, and invoices and payments are paired so that a recovery rate may be accurately calculated, elements that are expected to be in place towards the end of Budget. Budget preparation and execution have vastly improved. For the first time, in 1995, the budget will be operational at the beginning of the fiscal year. However, budget categories are still too general (seven regions, seven functional telecommunications departments, postal service and two joint departments), but more detail will be possible once a cost accounting system is set up (para. 27). 27. Cost accounting system. The 2798-MOR credit agreement had unrealistically scheduled the setting up of a cost accounting system in ONPT as early as January 1988, and at this time the accounting system was still rudimentary. Cost and regionalization accountings are expected to be in place, with the help of consultants,, around the beginning of The impact of cost accounting implementation on the accounting system will be the ability to regionalize the accounts, analyze the budget in an appropriate number of decision centers, which will extend its execution scope, and produce reliable project (works in progress) and self-investment accounts. Cost accounting will also help management make strategic decisions by comparing alternatives in production, distribution, location of activities, launching new products, tariffs and internal organization.

21 Implementation Completion Report Tariffs. The 2798-MOR credit agreement also specified that a tariff study be available in June Subscribers' accounting was not ready at that time and the study was only produced in May 1993, and its recommendations were implemented in As duration and time-of-theday tariffs already existed in the main cities, the geographical districting was reduced to four zones, but the main innovation of the study was to establish an observatory of 150,000 lines, made of a representative cross section of consumers, and a panel of 2,000 subscribers, for detailed analyses and specific studies. Following the commercial department's mastering of these new tools, consultants will help ONPT, during 1995, make full use of the panel in the analysis of economic and special facets of telecommunications and eventually make amendments to tariffs. 29. Financial indicators. Separate accounts for telecommunications and post have been prepared each year since 1990, and retrospectively since Financial indicators have been satisfactory throughout the implementation of the project (Annex A, Table 5(b)): the net internal cash generation has almost been consistently above the covenanted 45% on a three-year average (lows of 44% and 43% in 1990 and 1991, but 53%, 62% and 57% from 1992 through 1994), the debt service coverage ratio has been consistently above 2, the rate of return on investment was high, 13% in 1991 and 1992, 11% and 17% in 1993 and 1994, the debt equity ratio is around 45%. Operating cost per main connected line has increased from 1987 to 1993, but has decreased in constant prices, and operating revenue per connected line has decreased because of tariff stability, which is sound for the economy. 30. Taxes. ONPT pays monopoly taxes (10% of total revenues), company taxes (40% of income) and custom duties (1 8% of annual investment). Total taxes received by the Government from ONPT in 1993 were equivalent to about one third of its revenues for that year. C. Major Factors Affecting the Project Factors not generally subject to Government control 31. One important factor that positively affected the overall cost of the project is the substantial reduction of international market prices for the high technology digital switching and transmission equipment, which was noticeable during the project period. In addition to lower investment costs, the new technology systems provide better and more reliable services and require less maintenance, which also has a positive impact on staff productivity (Table 5(a)) and operating costs (para. 30). Although there are parts of the telecommunications infrastructure such as local distribution cable networks, ducting and associated civil works, which did not benefit from lower prices, the overall saving on the total investment costs was about 25% below the initial estimates (para. 17). 32. The job market in Morocco can easily provide the staff level required in the sector, but, the qualification and training issue becarne a real constraint for ONPT and the domestic private sector to sustaining rapid growth. For ONPT, it was particularly acute in the accounting branch (para. 24). For the private sector which was associated with the construction of civil works and

22 Implementation Completion Report 10 installation of subscribers' outside plant, the involvement of too many insufficiently trained supervisors, technicians and workers employed by domestic contractors, resulted in some substandard works now affecting the reliability of the subscribers' outside plant (para. 18). Factors generally subject to Government control 33. From the beginning of the project, a stable and pragmatic Government, with a vision for modern Morocco has gradually but consistently adopted measures aimed at making the country more open and less encumbered by central controls. During the project, those measures were supportive of the commercialization of ONPT, the reorganization of its structure and the progressive introduction of a business management's culture. To some extent, more time was required than previously expected to implement the changes and there was some reluctance to giving the telecommunications entity full administrative and financial autonomy. However, the implementation of the public enterprise rationalization program supported ONPT's reforms, and the country's long delayed privatization program was finally launched in It is now expected that the Government is more vigorously pursuing a policy of sector liberalization and private sector participation in the framework of the new Telecommunications Sector Restructuring Project. 34. The conditions of recruitment, employment, salaries and benefits of ONPT staff are defined by a personnel regulation that has applied to ONPT since March Because of this regulation, and its consequent limited administrative autonomy, ONPT was not able to compete successfully with the private sector in recruiting non-technical managers, accountants, computer specialists, etc. Difficulties in recruiting and training the required specialists posed a real challenge to the implementation of the management improvement program and were a cause of delay. Factors generally subject to ONPT control 35. Initial delays in procurement and in implementing the entity's institutional and management improvement program were also partially caused by lack of experience and a legacy of bureaucratic procedures, which appeared more difficult to eradicate than expected at project appraisal. However, ONPT successfully managed to overcome the initial difficulties, compensate for the initial delays and keep overall project implementation under control. D. Project Sustainability Project Benefits 36. The project benefits are significant and higher than expected. They include: (a) a dramatic increase in both quality and coverage of telecommunications services; (b) transformation of ONPT from a government agency into a more commercially oriented operating entity; (c) the organizational split between ONPT's telecommunications and postal activities,

23 Implementation Completion Report 11 preparing for the creation of the Maghreb Telecommunications Company (Itissalat al Maghrib), a fully autonomous telecom company ready for possible privatization, and the Postal Entity (Barid al Maghrib); and (d) a positive fiscal contribution to the State Treasury through significant payments of corporate taxes, VAT, dividends and custom duties (para 31). 37. Economic rate of return. The economic rate of return is calculated in constant prices by taking into consideration, as costs - annual investments for the project and recurrent cash expenses, and as revenues - those derived from the connections built under project financing. The scope of the project changed from construction of 324,000 lines from 1988 to 1991 to construction of 917,000 lines from 1988 to The resulting rate is 29%, which is satisfactory, compared with the projected economic rate of 26% calculated at appraisal. Sustainability 38. Most of the major physical, institutional and financial indicators have been achieved and some of them have even been exceeded. ONPT is presently committed, through a performance contract (Contrat de Programme, ) with the Government, to continue the network expansion, improve the service quality and maintain the financial performance of its operation. The focus placed on the projected performance indicators for the coming years, as stipulated in the current performance contract will contribute to both projects long-term institutional and financial sustainability. These performance indicators were discussed and agreed upon with the Bank at negotiations. E. Bank Performance Prneparation, Appraisal 39. A reconnaissance mission in March 1981 opened the dialogue between the Bank and the sector authorities, followed in November 1981 by a sector mission. The initial project brief was issued in January 1982 and the Telecommunications Sector Memorandum in October At the initial stage of project preparation, the telecommunications sector was still operated by a ministerial department of the Ministry of PTT and subject to government administrative procedures and tight financial controls of the Ministry of Finance. As a result of a sector study, the Bank and the Government agreed, during the subsequent sector review/pre-appraisal mission of January 1983, that institutional reforms would be introduced prior to a Bank project. A law creating ONPT in the form of an autonomous public establishment, was promulgated in January After a long period of stagnation in the sector, a comprehensive investment program was subsequently prepared with the assistance of consultants financed under bilateral arrangements. Following three short preparation missions in March, June and November 1984, the final project brief was issued in January 1985 and the project was appraised in April Government, and, to some extent ONPT, were rather reluctant to accept Bank conditions. A post-appraisal mission in January 1986 addressed the various pending issues such as the phasing out of the investment program, the autonomy of ONPT which was still de-facto non existent, ONPT's financial

24 Implementation Completion Report 12 performance, settlement of Government arrears, tariff adjustment and technical assistance arrangements. Negotiations in April 1986 were not completed, some pending issues remaining unresolved, two further missions were required: one post-negotiation mission in June 1986 and one pre-board mission in November 1986, before closing the negotiations and presenting the project to the Board of Directors in April Initially, the Government sector objectives were essentially focused on developing the telecommunications infrastructure (para. 2) and the Bank spent a great deal of effort in convincing the Government as well as ONPT of the need to commercialize the telecommunications operations. It took six Bank staffyears and nine missions to Morocco, totaling 75 days in the field to put the project on the right track. Considering the final achievements of the project, the Bank was certainly right in insisting upon the Loan conditions; in this respect, the performance was standard. However, considering the length of the period which was required to prepare, appraise, negotiate and finalize the project, the performance was less than satisfactory. Particularly, considering the time spent on project preparation, the T.O.Rs for the significant technical assistance under the project should have been finalized at project appraisal or negotiation. Discussing and clearing the consultants T.O.Rs during the first stage of the supervision period partially contributed to the delays in implementing the management improvement program (para. 9). 41. In the absence of a commercial accounting system and a strong legacy of government administrative procedures within ONPT at appraisal time, it was unrealistic to urge the introduction of a cost accounting system during the period (para.10). The Bank was right in insisting upon the splitting of ONPT's original investment program into two implementation phases. With some necessary adjustments, this contributed to a balanced growth of the network still within ONPT's implementation capacity. With one exception (para. 15), the physical and financial performance indicators discussed and approved at negotiations were appropriate. The amount of the Bank loan was tailored to finance project components less attractive for bilateral and commercial financing. Although representing only 18.5% of the original financing plan, the Bank's contribution had a significant catalytic effect on raising the financing of the investment program. For the whole extended project period, the Bank's contribution represents only 7.5% of the overall investment outlay (Annex A, Table 8(b). Supervision 42. Regular supervision took place once or twice a year depending on the issues to be resolved. As shown in Annex A, Tables 12 and 13 attached, from the project start-up mission in April 1987 to the ICR mission in October 1994, eleven missions went to Morocco spending a total of 132 days in the field. From 1991, these missions were combined with the preparation, appraisal and supervision missions of the Telecommunications Sector Restructuring Project. 43. During the whole supervision period, the Bank was very supportive of ONPT's development effort. A great deal of energy and dedication was required to assist ONPT in

25 Implementation Completion Report 13 procurement; not only in assisting in the preparation, review and clearance of bidding documents and evaluation reports for goods and services financed through the Bank loan, but also in advising on the procurement of other project components. The cooperation between ONPT and the Bank's project team was excellent and minor issues were resolved without difficulties. 44. Staff continuity was assured by having the same telecom engineer as task manager and the same financial analyst during the preparation/appraisal, but the project team changed after Board approval. During the whole supervision period, project task management shifted twice. The continuity was maintained by the same telecom engineer, but two different financial analysts and one economist were involved. F. Borrower Performance 45. ONPT was the Borrower and the Government was the Guarantor. With respect to the achievement of the objectives of expanding the networks and connecting new subscribers, ONPT performance appears highly satisfactory, particularly considering the original low level of development and the lack of previous experience in managing a large development project. ONPT's highly dedicated management team deserves the credit for this achievement. However, there is a drawback to the high growth rate of the later years, as the low reliability of the outside plant (paras. 15 and 18) is the direct result of insufficient qualification and training of local contractor staff and a lack of proper ONPT supervision of final acceptance of works and installations. The problem has been acknowledged and is being corrected. Besides this exception, the performance of consultants, suppliers and contractors was satisfactory. Regarding the implementation of the institutional component (paras. 9 and 10) the performance was less than satisfactory during the first years, but once ONPT management fully understood the advantages of commercialization, thanks to the consultant studies, they fully committed themselves to its achievement. Compliance with Loan and Guarantee Agreements Covenants 46. The status of compliance to legal covenants is detailed in Table 10. The reasons for the partial compliance with the auditing requirements (Section 5.01 (a) and (b)) are explained under paras 22 to 24 above. Section 5.01 (c) has been satisfactorily complied with: the self financing rate has almost been consistently above the covenanted 45% on a three-year average (lows of 44% and 43% in 1990 and 1991, but 53%, 62% and 57% from 1992 through 1994). G. Assessment of Outcome 47. The Project outcome is satisfactory. The project exceeded some of its physical objectives and achieved other major objectives. The project is expected to achieve satisfactory development results with only a few shortcomings regarding the timely completion of the management improvement component, which is being taken care of under the current Telecommunications Restructuring Project (Ln 3557-MOR).

26 Implementation Completion Report 14 H. Future Operation 48. At the beginning of the preparation of the first project, the telecommunications sector in Morocco was characterized by a low penetration and rigid sector policy corresponding to Stage I of the reform process as presented by the IEN Department to the Board. Building upon reforms initiated during this project, the Telecommunications Sector Restructuring Project (Ln MOR) is pursuing the reform process towards Stage 2: telecommunications sector in transition. The first steps of this transition are: (a) full separation of posts and telecommunications into two distinct legal entities; (b) setting up of a regulatory structure outside of ONPT; (c) elimination of ONPT's monopoly on value added services, and later on basic services; and (d) corporatization of ONPT and opening of its equity to private capital. To support the sector reform, the new project is providing technical assistance, training, and studies to strengthen the Ministry's institutional capabilities and prepare the groundwork for sector liberalization. 49. The operational and financial objectives of the sector during the second project are presented in Annex A, Tables 6(a) and (b). They have been agreed upon at the negotiations of Loan 3557-MOR and incorporated into the performance contract between the government and ONPT. To support the realization of these objectives, the new project is also providing technical assistance in management systems, accounting and computing to complement the management improvement program initiated under the first project. Specific contracts are also being awarded to resolve the problem of the low reliability of the outside plant (paras. 15 and 18). I. Key Lessons Learned 50. The key lessons learned are as follows: (a) In view of ONPT's institutional capacity, the original objectives were set too high; splitting the investment program into two phases was, therefore, the correct action. (b) (c) Technical assistance alone is not sufficient to achieve all of the originally stated objectives. T.O.Rs for consultants and technical assistance should have been prepared in advance; advance procurement should have been allowed for. (d) Project implementation has been facilitated by the continuity of Bank staff assigned to this project. 51. ONPT is a relatively good, traditional telephone company with satisfactory financial performance. Its telephone exchange capacity increased from about 293,000 lines in 1987 to over I million in A key question debated at the time of project completion was whether the company should continue to operate in its present format or whether its improved efficiency

27 Implementation Completion Report 15 would presumable lead to the provision of services at lower tariffs. By building confident relations with the borrower and the Government during project implementation, the Bank was able to convince them to develop a restructuring strategy which is far more reaching than if it had tried to discuss it at the beginning of the Bank's involvement with them. It was decided to separate the postal and telecommunications services and privatize the value added services before making a decision on the privatization of telecommunications. Further steps are undertaken in the ongoing project, to open additional services to private sector ownership. m:vnynam\icr-vr2 doc

28 I

29 Part II Statistical Tables Table 1: Table 2: Table 3: Table 4: Table 5(a): Table 6(a): Table 6(b): Table 7: Table 8A: Table 8B: Table 9: Table 10: Table 11: Table 12: Table 13: Summary of Assessments Related Bank Loans Project Timetable Loan Disbursements: Cumulative Estimated and Actual Operational Targets Forecast of the Operational Targets Forecast of the Financial Targets Studies Included in Project Project Costs Project Financing Internal Economic Rate of Return Status of Legal Covenants Compliance with Operational Manual Statements Bank Resources: Staff Inputs Bank Resources: Missions

30

31 Table 1: Summary of Assessments A. Achievement of objectives Substantial Partial Negligible Not applicablk (4) (4) (4) (4) Macroeconomic policies O O a El Sector policies 0 a El Financial objectives a o Institutional developments El0 0 0 Physical objectives E E Ol Poverty reduction El E l Gender concerns El El Other social objectives O E 0El Environmental objectives O E El Public sector management El E El Private sector development El E El Other (specify) O E E E B. Project sustainabilitv Unlikely Uncertain ('4) ('4) ('4) C. Bank performance satisfactory Satisfact=rz Deficient (4) (4) (4) Identification E El Preparation assistance E El Appraisal El El Supervision E El Highly D. Borrower performance satisfactory Satisfaetorv Deficient (') (4) (4) Preparation El El Implementation E Pr, Covenant compliance O Erl Operation (if applicable) IY O E HighLb- E. Assessment of outcome satisfarv Satisfactory Deficient ('4) ('4) P M \WORDWfN\BU1TEX\Scoflier jp\anx-a.p2 DOC(YJ/9 5 ] El E

32 Table 2: Related Bank Loans Year of L amount Loan Title Purpose Approval ($ millions) Status Current Completed Project Completed Loan 2798-MlOR (Dec 94). To ONPT was the first Bank group operation for Public Telecommunications in Morocco Following Operations To assist in: (a) Effective since 1. Loan 3557-MOR to ONPT. restructuring the end Oct 93. Telecommunications Sector telecommunications After start-up Restructuring Project sector; and (b) delay, technical further developing assistance and the telecommuni- training cations infrastruc- services are ture in Morocco. underway. Implementation of physical component is on schedule (Dec 94). M :\WORDWMN\BUTTEXI\SCOFFIER:jp\ANX-A-P3.DOCr219\951

33 Table 3: Project Timetable Steps in project cycle Date Planned Date Actual/Latest Estimnate Identification La 04/81, 11/81, 07/82 Sector memorandum and review 10/82, 01/83 Creation of OPT 91/01/84 Preparation 03/84, 06/84, 11/84 Appraisal: - initial 03/18-04/05/85 - update Ll2 01/16-20/86 Negotiations 04/21-26/86 (incomplete) Post-negotiations missions a 06 & 11/86 Board presentation 04/21/87 Signing 05/29/87 Effectiveness 11/30/87 Credit closing 12/31/94 Project completion Id 12/31/94 La These were combined missions with sector study, review and discussion of its status and operational/developmental requirements. These activities resulted in the creation of ONPT on January 1, 1984, and in the identification and preparation of the project. Lb Pending regulatory and ongoing organizational/operational matters discussed during appraisal required updating at the end of the first full year of ONPT's operation. Le To complete negotiations and ascertain the proress on pre-board conditions on some organizational/managerial aspects concerning ONPT and its relations with government. Ld Last disbursement was made on February 28, M:kWORDWIN\BrISCOFFIER:Jp\ANX-A P4. DOq219/951

34 Table 4: Loan Disbursements: Cumulative Estimated and Actual (USS millions) FY (ending June 30) FY88 FY89 FY90 FY91 FY92 FY93 FY94 IFY95 Appraisal estimate Revised La Actual & Actual as % of revised 0% 8% 18% 37% 55% 83% 90% 100%92 estimate (Feb 28, 1995)A Date of final disbursement La An amount of $9.0 million was canceled from the initial loan amount of $125.0 million in August 1988, following a joint Bank/ONPT decision on the financing by ONPT (not the loan) of a large contract for local cables. Lb Pending some last disbursements for ongoing commitments to be made by February 28, M:\WORDWI1N\BUrEX\SCOFFIER:jp\ANX-A-P5.DOC2j3/951

35 Table 5 (a) Operational Targets (Schedule 6, Section 11 of the Loan Agreement CATEGORIES Estimat Actual Estimat Actual Estimat Actual Estimat Actual Estimat Actual Estimat Actual Estimat Actual Estimate Actual Telephone exchange capacity (lines) 340,000293,086400,000333,994490,000415,650575,000537,396660,000674,892760,000837,986870,000949,662 1,000,0001,116,800 of which replacement 16,348 23,928 46,792 48,616 54,364 63,664 81,564 93,286 Connected lines (DELs) 265,000266,187336,000278(,593390,000335,293452,000403, ,000498,289609,000657,137706,000827, ,000 1,016,756 of which cellular ,500 3,200 6,725 12,756 Telex exchange capacity (lines) 9,100 8,110 11,700 8,110 14,700 10,470 14,700 11,870 16,100 11,870 17,300 13,241 17,300 14,397 17,300 12,900 Telex lines connected (DELs) 7,100 7,112 7,900 7,319 9,100 7,553 10,500 8,657 12,000 8,941 13,500 8,637 14,000 7,676 15,000 7,100 Maintenance targets.. _._.. i) Faults reported for 100 main tel. linc ii) Percentage of faults = I - cleared in 48 hrs cleared in 7 days Percentage of average call completions i) local calls 54 * r ii) long distance calls ' v. lii) intemational _ l - outgoing incoming * 45 ** 50 ( * Staff per 1000 DELs * Data not avaiable m:\cxccl\buu.ex\tbl5(a).xls

36 Table 5 (b): Financial Targets (Schedule 6, Section 11 of the Loan Agreement) Estim. Actual Estim. Actual Estim. Actual Estim. Actual Estim. Actual Estim. Actual Estim. Actual Estim. Prev. Net intemal cash generation as % of construction i) annual rate ii) 3-year moving average Debt service coverage ratio 7 I Rate of return % Operating ratio % Debt/(Debt + Equity), in % 19 II Current ratio Private sector accounts receivable (% of billing) I Govemment accounts receivable (% of billing to Government) I - Governmcnt arrears (DH millions) on 31 December e Operating revenues per DEL Operating cost per DEL m:excelibuttex\moroccoltb5lb).xis

37 Table 6 (a) Forecast of the Operational Targets CATEGORIES Estimatc Estimatc Estimate Estimate Estimate Estimate Telephonexchange capacity (lines) 1,360,000 1,560,000 1,770,000 2,000,000 2,230,000 2,500,000 of which replacement ,000 15,000 10,000 18,000 18,000 Connected lines (DELs) 1,206,000 1,394,000 1,600,000 1,812,0002,026,000, 2,242,000 of which cellular 22,000 30,000 40,000 52,000 66,000 82,000 Telex exchange capacity (lines) 13,000 13,000 13,000 13,000 13,000 13,000 Telex lines connected (DELs) 7,600 7,400 7,200 7,000 6,800 6,600 Maintenance targets i) Faults reported for 100 main tel. lines ii) Percentage of faults = - cleared in 48 hrs cleared in 7 days Percentage of average call completions i) local calls rd ii) long distance calls iii) international - outgoing incoming Staff per 1000 DEl s 12.1 I :Xse6=\xDAlbl6(4).J

38 Table 61b) Forecasts of the financial targets Estim. Estim. Estim. Estim. Net intemal cash generation (as% of constnuction) i) annual rate ii) 3-year moving average Debt service coverage ratio Rate of retum % Operating ratio % H Debt/(debt + equity), in % Current ratio Private sector accounts receivable (% of billing) Govemment accounts receivable (% of billing to Govemment) Government arrears (DH millions) Operating revenues per DEL Operating cost per DEL m:\excel\morocco\buttex\tb6(b).xis

39 Table 7: Studies Included in Project Study - Purpose as defined at appraisal Status Impact of study 1. ONPT's Organi7ation and Management La Completed The recommended organizational ( ) set-up and measures separating P and T operations were implemented from 1988 on. 2. Telecommunications Branch Reornanization and Completed The recommended measures and SteIngthening La ( ) program/project planning and TOR: Operation and Maintenance supervision were implemented Development planning and implementation (project period). 3. Procurement and Store Management l Completed Implemented (1989 on) (1988) 4. Data Processing (DP) Master Plan L Completed Implemented in phases ( ) to ( ) be continued under second project 5. Financial Management and Accounfing Lc Completed Implemented (see 4. above) To rationalize/modernize and implement efficient ( ) commercial accounting and management systems for all ONPT'S activities. 6. Human Resources a Completed Implemented (see 4, above) To develop efficient task/responsibilities in ( ) organization, operation and personnel management. To define and plan staffhuman resources and training requirements. 7. Tariffs Study Completed Changes in tariffs and tariffrs To define tariffs policy to be used in traffic/service (1993) structure were made in provision strategy and planning in line with ONPT's Studies are being used in medium financial objectives. term development and financial planning. 8. Demand Study ad Completed Being used for planning, traffic and To identify and determine demand type, ( ) subscriber comnection forecast and characteristics and volume for all sources. management. ] These studies were undertaken during initial project appraisal, as a follow-up to ONPT'S creation. The TORs were discussed/agreed upon with the Bank. ONPT/bilateral financing were arranged for. /b The study was an offspring of study 2, to implement the development program and manage procurement/stores activities. Ic t The DP Master Plan covered all managerial, operational, financial, developmental and administrative activities of the ONPT and its various branches. Studies 5 and 6 were implementation follow-ups of the Plan. Implementation was gradual and phased under the project thoroughly. Computerization of the management information system will take place under the second project for sector restructuring. The demand study had not been discussed at appraisal. It was made as a complement to the ongoing longer-term development planning from 1992 on and to the tariff study. MA.WORDWINBUrEX\SCOFFIER.jp\ANX-A- 10 DOC[2p9/951

40 Table 8(a) Project Costs (in Smillion) PROJECT COMPONENTS Appraisal Estimates for 324,000 lines (l ) Actual Cost for 426,000 lines ( ) Actual Cost for 491,000 lines ( ) Actual Cost for 917,000 lines ( ) Total Costs Foreign Costs Total Total Costs Foreign Costs Total Total Costs Foreign Costs Total Total Costs Foreign Costs Total Telephone switching equipment Telex and data transmission Local networks and outside plant Long distance transmission Rural Tclephony Buildings Training and computer equipment II Consultant Services Miscellaneous Todalns Cost , Contingencies.. - Quantities Costs Total Cost , md m-\-ced\hiitsex\thlrfa).xls

41 Table 8(b): Project Financing (in S million) IBRD Appraisal Estimates for 324,000 Actual Cost for 426,000 lines Actual Cost for 491,000 lines Actual Cost for 917,000 lincs (1988 SOURCE lines (198S-1991) Percent ( ) Percent ( ) Percent 1994) Percent Foreign Foreign Foreign Foreign Local Costs Costs Total % Local Costs Costs Total % Local Costs Costs Total % Local Costs Costs Total % ,5% % % % % % Bilateral Financing % % % 'o Othcr Financing Sources _ Local Financing _ _ % % ONPT % % _ % % Total % A L6 l00% % , % rd co m :_catunedamwo.xis

42 Table 9: Internal Economic Rate of Return 1. Incremental revenues assigned to the program are based on the traffic increase brought about by investment made during the period from 1988 to 1994 (only two thirds of the investment of 1994, and therefore of the incremental income, were linked to the first project), and carried out until Incremental costs exclude depreciation, interest, deductible value-added tax, income tax. They include cost of personnel, taxes, material and services necessary for the increase of revenues. 3. Custom duties have been excluded from investnent cost. Number of Years connected lines at year end Lines connected by the project ,593 20, ,293 69, , , , , , , , , ,016, , , ,523 in dirhams milllion , , , , , , ,911 1,495-1, , ,409 2, ,293 1,097 2,390 3, ,379 1,195 2,574 3,872 1, ,372 1,372 4,444 3, ,372 1,372 4,444 3, ,372 1,372 4,444 3, ,372 1,372 4,444 3, ,372 1,372 4,444 3, ,372 1,372 4,444 3, ,372 1,372 4,444 3, ,372 1,372 4,444 3, ,372 1,372 4,444 3, ,372 4,444 3,073 Internal economic rate of return: 29.2% MWB'ETEX\SCOFFIER:\jp\ANX-A- 13. DOC[

43 Table 10: STATUS OF LEGAL COVENANTS COUNTRY: PROJECT CODE: PROJECT NAME: LOAN I. MOROCCO MAPAS420 TELECOMMUNICATIONS I 2798-MOR pvorull Prdect Rating 2 Covenant Original Revised Agrcemenl Seclion Type Stalus Fulfillmcim Date Fulfillment Date DescriptionofCovenants Comments Cruaantlec E OK Go-rnment will ensure thal acceplablc fcasibility studies will be unterlaken before making additional public sector investemcnts the telecommunications industry Loan 2798 i 04 E OK ONPT will consulh with the BANK before introducing major changes in its investmcnl program involving mote than IO/0 of its aggregate investment amount during one year; and insure that no such changes are introduced without agreenent berween ONPT anid Bank M OK ONPT will carry out the Action Plan for report progress and preset proposed targets br review with Bank by April 30 of ech year. Schedule6 F OK 3/31/89 8/31/92 Introduction of cost accounting system producing A management improvement study was complete by Part B separate financial statements tor main branehes of August Presently, sevel ONPT tearms are working activity by 3/31/8. Pro 6ormna separated financial on improving accounts, from fixed asset regisitering to statements for 1986 and 1987 to be submitted within nine budgeting. and six months respectively and end of FY. Part C Tariff studies would be completed by June A tariff study was compieted by May F OK 7/01/93 9/01/93 Qualified external auditors acceplabie to bank will audit Audit reports for the 1991 accounts were given to the ONPT accounu annually antd ONPT will furnish mdudted Bank in December A qualified audit report for the statements to Bank within 6 months after end offy 1993 accounts was submitted to the Bank in October OK Self financing tate of investnein on a 3-year moving average, on 45%/ D

44 Table I1l: Compliance with Operational Manual Statements No significant lack of compliance with applicable Bank Operational Manual Statements (OD or OPIBP) was observed under the project. Provisional unsatisfactory practices, in paxticular in the procurement process, were adequately adjusted or corrected during supervision. Statement number and title Describe and comment on lack of compliance Not Applicable Table 12: Bank Resources: Staff Inputs Stage of project cycle Planned/estimated Revised Actual La Weeks US$ Weeks US$ Weeks US$ Through appraisal L_ Appraisal-Board Board-effectiveness Supervision 140 = _==_170 a Completion Total La Data shown are actual at project completion, on February 28, Lb Includes some combined resources for sector study and related discussions/works on sector institutional status and development requirements during project identification and preparation. LM Includes extensive work on procurement processing and some combined activities for preparing the subsequent Telecommunications Sector Restructuring Project. M :\WORDWlT\BTElX\SCOFFIER: jp\anx-a-1 S.D0OC

45 Table 13: Bank Resources: Missions Performance Rating L Number Days Specialized linplemen- Develop- Stage of project cycle Month/ of In staff skills tation/ ment Types of problems Year Persons field represented La overall status impact Througb appraisal - Reconnaissance L, 3/ Eng. - Sector mission & 11/ Eng., FinA, Eco - Sector review/identification /r 1/ Eng., FinA - ONPT was created in Jan/84. - Preparation I L 3/ FinA - Preparation 2 6/ Eng. - Preparation, pre-appraisal 11/ Eng., FinA Appraisal through Board Approval - Appraisal 3/ Eng., FinA - Post-appraisal/update 11/ Eng., FinA, Eco - Negotiations 4/21-25/ Not completed - Post-negotiations 6/ Eng., FinA - - Procurement procedures (local/icb), Government arrears, Separation of P and T operations - Pre-Board 11/ Eng., FinA - - Final trenching of Phase I program Loan amount/cofmancing - Board approval 4/21/ ONPT organizational arrangements. Superision/Completion Supervision I (project start-up) 4/ Eng., FinA, Eco Supervision 2 11/ Eng.. FinA 2 - Delayed start-up of studies, technical assistance and procurement actions/bidding documents format. Supervision 3 5/ Eng., FinA 2 - Progress in implementatio now underway ONPT to use own funds for purchase of cables ($9 m canceled). (D Supervision 4 1/ Eng., FinA 2 Supervision 5 10/ Eng., FinA 2 -Slow disbursements. Opening of a special account wfll belp disbursement for local contracts for civil works. M4\WORDWIN'tCtrElSCOFFlER,jp\ANX-A-16.DOC2M9S5

46 Tablel3: Bank Resources: Missions (cont) Performance Rating Al Stage of project cycle Number Days Specialized Implemen- Develop- Types of problems Month/ of in staff skills tation/ ment Year Persons field represented La overall status impact Supervision 6 /d 1/ Mngt 2 - Sector policy/overall organization and separation of P and T activities. Supervision 7 Ld 5/ Eng., FinA, Eco 2 Supervision 8 ld 11/ Eng., FinA 2 Supervision 9 l 6/ Eng., FinA 2 Supervision 10 Le 4/ Eng., FinA SLf S Lf - Project to be satisfactorily completed by December 1994, the original closing date. Supervision I I/Completion-l 10/ Eng., FinA Sd S /f La Abbreviations: - Eng. Engineer; FinA, Financial Analyst; - Econ, Economist; - Mngt/Proct, Management/Procurement Specialist. Lb Keys to: - overall performance rating (before FY94) = I problem free; 2 - moderate; 3 - major problems; - implementation/development impact status (from FY94 on) = HS - highly satisfactory; S - satisfactory; U - unsatisfactory; HU - highly unsatisfactory. a These were combined missions for sector review and project identification/preparation. Ld These were combined missions for supervision of the first project and preparation of the subsequent Sector Restructuring Project (SRP). ad These were combined missions for supervision of the first project and supervision of SRP projea under Loan 3557-MOR. If New project performance rating is introduced (revised Form 590, see lk above). MAWR WOgD\IIUTTEX"ISCOFfMER.jpLANX-A- 1 7 DOCt2/9951W 0

47 APPENDIX Borrower Contribution to the ICR

48

49 Implementation Completion Report SUMNARY OF THE FIRST PROJECT COMPLETION REPORT 1. ENVIRONMENT IN WHICH THE PROJECT WAS IMPLEMENTED To meet the challenges of a changing, complex environrment, Morocco has been making various structural adjustments since They have focussed primarily on: - Liberalizing the national economy; - Restructuring and decentralizing the public administration; - Cutting back on government spending and subsidies. To effect these changes, various measures have had to be implemented, including the following: Social measures - Increase in the minimum wage and in the coverage of benefits, including family allowances, retirement benefits, pensions, welfare benefits, and contributions to the National Social Security Fund; - Controls on the cost of private medical care and the retail price of school supplies and equipment; - Creation of a Youth Job Promotion Fund and a National Council for Youth and the Future. Economic, financial, andfiscal measures - Reform of the tax system to introduce the General Income Tax (IGR), Corporate Tax (IS), and Value Added Tax (VAT), and to revise customs duties and other import and export duties and taxes; - Reform of intermediation on the stock exchange and removal of credit limits; - Incentives for exports and for investment in agriculture, handicrafts, industry, and tourism; - Promotion of private national and foreign investment by encouraging investment banks;

50 Implementation Completion Report 2 - Creation of an off-shore financial market in Tangiers open to all kinds of financial transactions; - Creation of community securities investment organizations (OPCVMs); - Reduction of the budget deficit from 13.4% of the Gross Domestic Product in 1980 to 2.3% in 1993; - Initiation and acceleration of the process of privatizing public enterprises; - Creation of the Autonomous Institution for Export Control and Coordination; - Improvement of the balance of payments and trade deficit positions from 13.6% of GDP in 1984 to 1.8% in 1993; - Redefinition and distribution of powers and resources as part of an administrative deconcentration process. These measures had an impact on the telecommunications sector, primarily in the following ways: - Restructuring of the sector, i.e.: 1984; Creation of the Office National des Postes et Telecommunications (ONPT) in * Decentralization of telecommunications operations in 1988 by establishing regional telecommunications departments, principal commercial and technical operations centers, and commercial agencies; * Separation of telecommunications from postal and financial services in 1992; - Reducing the tax burden by lowering the rate of the corporate tax and recovery of the value added tax by the ONPT. During implementation of the project, a program contract was concluded between the government and the Office National des Postes et Telecommunications to establish the reciprocal commitments of the two parties.

51 Implementation Completion Report 3 II. RELATIONSHIP BETWEEN THE BANK AND TllE ONPT A. PROJECTINITIA TIONPHASE In this area, the Bank's assistance made it possible to: 1) Reduce substantially the time required to draw up specifications and for the Bank to approve bidding and contract documents; 2) Learn new project appraisal techniques; 3) Apply the World Bank's procurement procedures to other projects; 4) Train ONPT staff in management of World Bank-financed projects. B. DISBURSEMENTPHASE All disbursements to suppliers were made in accordance with the procedure prescribed in the disbursement handbook. In this regard, there were no delays recorded in processing the 119 withdrawal applications for direct payments and the 17 applications for special commitments to cover letters of credit. Requests for replenishment of the special account opened with the Banque Marocaine du Commerce Exterieur [Moroccan Foreign Trade Bank] to cover payments below the $500,000 limit were processed under appropriate conditions. In this connection, it is suggested that the World Bank raise this limit from $500,000 to $1,000,000 and that it reduce the period for replenishment of this account from 15 to 7 days. m. PERFORMANCE INDICATORS A. FINANCIAL INDICA TORS As far as structural indicators are concerned, the self-financing rate went from 135% in 1987 to 45% in 1994, and the debt coverage ratio dropped from 11 in 1987 to only 2.12 in These changes can be explained both by the large volume of investments and by the loans contracted by the ONPT to finance its investment program.

52 Implementation Completion Report 4 Despite this investment effort and recourse to outside financing, the debt equity and working capital ratios were maintained at extremely satisfactory levels. The debt equity ratio was 54% at the end of the 1994 fiscal year, and the working capital ratio was Although the tax burden and financial costs weighed heavily on the ONPT's cash position, performance indicators were kept at reasonable levels thanks to efforts made by government offices to settle their arrears, a reduction in collection time, and cost controls. Despite the fact that a large volume of equipment was being put into operation for the first time and was not immediately profitable, the rate of return on investments was maintained at a satisfactory level, while transfers from the ONPT to the national government in the form of taxes were relatively high. In fact, in addition to the traditional taxes, such as the urban tax, municipal tax, patenme, and corporate income tax, the ONPT pays a monopoly fee to the government. Since the ONPT does not receive the benefits of the investment code, it must pay sizeable customs duties, even though customs tariffs have gone down slightly in recent years. All the same, it is important to recognize that the fiscal reform undertaken by the government since 1986 has had some positive effects on the ONPT, by gradually reducing the corporate tax and by allowing the institution to deduct the value added tax beginning in These improvements were accomplished by adopting new collection procedures, such as the system of stamps [vignettes] for claims on government clients, the system of automatic deductions from bank accounts, and the monthly billing periods used for private customers. B. TECHNICAL INDICATORS In this area, the capacity of the exchanges was increased by 994,000 new lines, including 88,000 lines to replace obsolete or worn-out exchanges. The telephone system had a total of 1,135,000 lines in service by the end of 1994, as compared to 286,000 at the end of 1986, which reflects a project achievement rate of 113%. The digitalization rate went up to 93% at the end of 1994, giving subscribers access to services that were not available before. The number of main line units in service was 1,007,000 by the end of 1994, as compared to 252,000 at the end of This represents an increase of 755,000 lines, and a project achievement rate of 123%. The transmission network had a total of 209,132 circuits by the end of 1994, and 42,590 of them were national transmitting circuits. With the digitalization of existing coaxial cables (42%), the installation of new connections by numerical radio-relay systems (38%) and fiber optics (8%), and the installation of international submarine fiber optic cables, the digitalization rate climbed to 96% by the end of 1994, as compared to 1.6% in In addition, an ambitious program to use fiber optics on the main trunk lines in an initial phase is currently in the process of being implemented.

53 Implementation Completion Report 5 Despite this project, which has brought about a rapid expansion in the systems, equivalent to an average rate of 19% a year, the number of requests reached 104,000 at the end of However, while only 59% of the total demand was met in 1986, this rate jumped to 91% at the end of By the end of 1994, 665 rural towns were covered by automatic systems, including 599 since According to the new system of administrative districts established on September 2, 1992, about 65% of rural communities throughout the country had telephone service. The telephone density rose from about 1.14 telephones for every 100 inhabitants in 1986 to 3.86 in Moreover, the international telephone service had 4,556 direct circuits in 1994 as compared to 1,660 in 1987, and 228 automatic connections in 1994 as compared to 47 in This improvement is attributable to the fiber optic submarine cables in the Mediterranean Sea linking the country with France and Portugal, the Atlantic submarine cable providing a connection with Spain, and the underground cable to Algeria. In addition, the cellular mobile telephone system (NMT450) was opened to the public in In addition to this service, in 1994 the first phase of a new GSM digital cellular telephonic network was completed in April with a capacity of 28,000 subscribers. The total number of subscribers by the end of 1994 was 13,794. A data transmission network was set up in 1991 with an access capacity of 1,104, and there were 825 subscribers to the system as of 12/31/94. Major efforts were also made to improve the communications facilities offered to the public, by extending and modernizing the network of public telephones, which increased from 476 at the end of 1986 to 5,419 by the end of Private investors are currently operating telecommunications terminals from private locations called "teleboutiques" or "telekiosques." There were 1,075 teleboutiques, 137 telekiosques, and 6,275 terminals in service as of May 31, The quality of the service has improved considerably, both in terms of the average waiting time for a tone and the traffic flow and from the standpoint of rapid clearance of faults and the signalling rate. In practice, the signalling rate went from 120% in 1986 to 63.2% in Eightythree percent of the faults are cleared in 48 hours and 99.8% within seven (7) days, as compared to rates of 600/o and 90%, respectively, in Although these indicators fall short of what was targeted for project completion, the efforts undertaken to rehabilitate the network, improve the quality of the equipment used, and provide ongoing training for personnel are expected to result in a clear improvement in the signalling rates in It should be noted that experience in other countries which have