Document of The World Bank

Transcription

1 Public Disclosure Authorized Document of The World Bank FOR OFFICIAL USE ONLY Report No. P Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$27.O MILLION TO CHARBONNAGES DU MAROC WITH THE GUARANTEE OF THE KINGDOM OF MOROCCO FOR A JERADA COAL MINE MODEPNIZATION AND EXPANSION PROJECT February 27, 1985 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may oot otherwise be disclosed without World Bank authorization.

2 KINGDOM OF MOROCCO CURRENCY EQUIVALENCY Calendar 1984 January Currency Unit - Dirhams (DH) DH US$1.00 = DH DH 1.00 = US$ FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS BNDE - Banque Nationale de D&eeloppement Economique BME - Belgian Mining Engineers BRPM - Bureau de Recherches et de Participations Minieres CCG - Caisse Centrale de Garantie CdM - Charbonnages du Maroc (the Borrower) CIOR - Cimenterie de l'oriental CNSS - Caisse Nationale de Securite Sociale KfW - Kreditanstalt fu- Wiederaufbau MEM - Ministry of Ene:,y and Mines ONAREP - Office National de Recherches et Exploitations Peitrolieres ONE - Office Nationale de l'electricite ENERGY CONVERSION FACTORS 1 kilocalorie (kcal) = British thermal units (Btu) 1 Megawatt(MW) = 1,000 kilowatts (kw) 1 ton of crude oil equivalent (TOE) = 2.00 tons of raw fines from Jerada anthracite mine (0.50 toe/t) = 1.40 tons of washed Jerada anthracite (0.50 toeit) = 1.70 tons of imported steam coal (0.59 toe/t) = 4200 kwh of electricity (245 toe/gwh) (2,500 kcal/kwh

3 FOR OMCIUL USE ONLY KINGDOM OF MOROCCO JERADA COAL MINE MODERNIZATION AND EXPANSION PROJECT LOAN AND PROJECT SUMMARY Borrower: Charbonnages du Ksroc (CdM) Guarantor: Kingdom of Morocco Amount: US$27.0 million equivalent. Terms: Payable in 15 years, including four years of grace at the Bank standard variable interest rate. CdM would pay a guarantee fee of 1.0% of the withdrawn and outstanding amount of the loan to the Government, and would bear the foreign exchange and interest rate risks. Project Description: The Project's overall objective is to develop domestic energy resources in order to reduce Morocco's oil import bill and alleviate the effect of the energy deflicit on the country's balance-of-payments. The Jerada mine project aims to strengthen CdM's organization and planning capabilities, and to increase == production from 0.8 mtpy to 1.0 mtpy by It would concentrate- production in a single mine; simplify the mine's infrastructure for increased productivity and production; and improve safety, health and working conditions. The project would comprise: (a) a drilling program to prepare underground development work and shaft sinking; (b) underground development work to prepare future mining areas and to simplify existing mining areas; Cc) sinking of an additional vertical shaft to maintain production capacity after completion of the project and depletion of CdM's smaller mines; (d) installation of underground and surface equipment to increase efficiency, production capacity and to improve safety and health; and (e) technical assistance to CdM. While, as in most projects of this type, geological, technical, and economic risks do exist, these have been minimized here by: designing an exploration program that would remove the uncertainties related to reserves and to difficult geological conditions; designing a technical assistance program that would ensure production build-up by reinforcing CdM's organizational experience and strength with mechanized coal winning; and ensuring CdM's financial viability and Jerada coal's long-term competitiveness by providing adequate markets and coal pricing policies. The main benefits of the project include: foreign exchange savings and earnings impacting positively on the country's balance of payments; a strengthening of the organizational and financial health of CdM; securing and expanding employment opportunities for the local populations of Jerada and Oujda; and improving safety and health conditions in the mine. '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.

4 - it - Project Cost Estimate: A' (US$ million) Local-' Foreign Total A. Shaft Q B. Underground Works C. Exploration D. Underground Equipment E. Surface Investments F. Auxiliary Investments " G. Technical Assistance Total Base Costs Physical Contingencies Price Contingencies Total Project Costs Increase in Working Capital Total Financing Required A" Financing Plan: External.--- US$ million)- --- Locala' Foreign Total IBRD Germany (KfW) France Internal CdM Total 24.7A' a/ Including US$2.2 million in taxes and customs duties.

5 - ili - Estimated Disbursement: (USs$ million) -- IERD Fiscal Years Annual Cumulative Economic Rate of Return: 36X Maps: IBRD 18452R1 and Staff Appraisal Report: Report no MOR dated February 12, 1985.

6 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO CHARBONNAGES DU MAROC FOR A JERADA COAL MINE MODERNIZATION AND EXPANSION PROJECT 1. I submit the following report and recommendation on a proposed loan to Charbonnages du Maroc with the Guarantee of the KinCdom of Morocco, for the equivalent of US$27.0 million, to help finance the Jerada Coal Mine and * Expansion project. The loan would have a term of 15 years, including 4 years of grace, at the Bank standard variable interest rate. The Federal Republic of Germany, through Kreditanstalt fer Wiederaufbau (KfW) would provide about US$12.9 million and the French Governm'ent would provide about US$7.6 million in cofinancing. PART I - THE ECONOMY-' 2. An economic report, entitled "Morocco: Priorities for Public Sector Investment ( )" (No MOR), was issued on June 15, Another economic report entitled "Morocco: Industrial Inoentives and Export Promotion" (No MOR) was distributed to the Board on January 11, An economic mission on financial intermediation was in Morocco in September 1983 and its report, entitled "Morocco - Financial Sector Study" (No MOR), was issued on December 12, The following section reflects the findings of an economic updating mission that went to Morocco in July 1984 to prepare a paper, entitled "Morocco: Medium-term Adjustment Policies and Prospects", for presentation to a Consultative Group meeting held in Paris in January 9-11, Country data are given in Annex I. Introduction 3. Compared with many developing countries, Morocco is well endowed with natural resources. Morocco has the world's largest and most easily recoverable phosphate reserves, which makes the phosphate sector a key export sector. Other minerals such as iron ore, manganese, lead and zinc are also exported, but in much smaller amounts. Coal and hydropower plants satisfy only a small part of the country's energy requirements, but Morocco has some uranium and oil shale resources which could become significant energy sources in the long term. There are moreover preliminary indications of natural gas reserves. Morocco also has a relatively good agricultural potential. In addition, Morocco's proximity to Europe has favored trade, tourism and labor migration with the EEC countries. 4. During the first 15 years after independence (1956), a conservative approach to economic policy predominated in Morocco, and GDP increased at an 1/ Part I is substantially the same as Part I of President's Report No. P-3918-MOR of December 4, 1984 for an Electrical and Mechanical Industries Project, except for paras , which reflect the revised macro-economic projections prepared for the recent Consultative Group meeting.

7 average rate of 4% a year in the 1960s. A relatively weak savings effort and conservative external borrowing policies permitted only a slow rise in the share of resources allocated to investment. Morocco thus entered the 1970s with no major financial imbalances, but a relatively limited growth capacity. Economic Performance in the 1970s 5. During the mid-1970s, economic policy became more ambitious. In 1974, with the sudden jump in phosphate prices, phosphate export earnings more than quadrupled, and although the petroleum import bill also quadrupled, the current account of the balance of payments remained in surplus. The Government launched a massive public investment program which brought about a significant acceleration in the rate of growth to 7.51 per year between 1973 and There was also a major expansion of expenditure on social services, which have however until now been relatively inefficient in reaching the lower income groups, particularly in the rural areas. 6. The phosphate boom, however, was shortlived and phosphate exports started falling in both volume and value as early as mid Markets for other exports as well as for tourism and labor migration were also negatively affected by the world recession. Accelerated investment, rising social expenditures and increased defense spending in response to growing tensions in the Western Sahara, soon created strong pressures on both the balance of payments and the Government budget. The Treasury deficit reached of GDP, and the current account deficit of the balance of payments, 16.5Z of GDP in To help finance the gap, Morocco borrowed heavily from the international capital market, which led to rapid increases in external debt and the debt service burden. 7. In order to redress the rapidly deteriorating financial situation, the Moroccan Government in 1978 adopted a stabilization program, with the aim of reducing internal and external deficits to sustainable levels. The program centered on reductions in investment outlays and stricter import controls but was not sustained long enough and did not address the fundamental structural weaknesses of the economy. By 1980, both fiscal and external imbalances were again substantial: the Treasury deficit remained at about 11 of GDP and the current account deficit of the balance of payments at 82 of GDP. By the end of 1980, the external debt had risen to $7 billion (not including military and short-term debt) and the debt service ratio was 272 of exports of goods and services in Recent Economic Developments 8. GDP growth has slowed down since 1978 to 2.82 a year on average, just enough to keep per capita income from falling. Agricultural value added, which rose rapidly in the sixties, has stagnated since the seventies. Despite substantial public investment, value added in manufacturing also stagnated in recent years. Construction, which had experienced intense activity during the mid-seventies, started declining steadily with the slow down in public investment after Government services have been the main source of growth since 1978.

8 9. In , renewed efforts were made to stabilize the Moroccan economy with the help of the IMF. In October 1980, the IMF approved a three-year Extended Fund Facility (EFF) in the amount of SDR 810 million. The EFF was suspended in 1981, however, and replaced in April 1982 by a one-year Stand-by, which was implemented as planned, but had relatively little impact on Morocco's financial performance. Throughout this period, Morocco's attempts at stabilization were severely hampered by a series of exogenous shocks: a) the 1979 increase in oil prices which aggravated an already substantial petroleum import bill ($1.2 billion in 1982); b) a severe drought, followed by a succession of poor harvests, which reduced agricultural output by about 20% in 1981 and led to substantial imports of cereals in recent years; c) the rise in international interest rates which contributed to a steep increase in debt service; and d) the international economic recession which contributed to a 30% decline in in the dollar price of rock phosphates, as well as to a fall in workers' remittances, Morocco's two principal sources of foreign exchange in the early 1980s. 10. At the same time, however, expansionary public spending policies continued to be a major source of both fiscal and external imbalance. Adoption of the Development Plan, which aimed at an ambitious GDP growth rate of 6.5% p.a., led to a substantial increase in public investment expenditures and the Treasury deficit rose from 10.7Z of GDP in 1980 to 12.3Z in ' 11. The combined impact on the balance of payments of external shocks and expansionary fiscal policies was an overall increase in the current account deficit from $1.4 billion in 1980 to $1.9 billion in 1982 (or from 8Z to 13Z of GDP). While there were some positive factors on the export side, such as the continued growth of manufactured exports, the emergence of some non-traditional exports and renewed growth in the tourism sector after the adoption of a flexible exchange rate policy in late 1980, these were more than offset by the fall in phosphate earnings and workers' remittances and the continued growth of petroleum and capital goods imports. 12. To finance its current account deficit and meet its debt amortization payments, Morocco continued to rely heavily on external borrowing. By December 1983, total external debt, including military and short-term commercial debt but excluding IMF obligations, reached an estimated $12 billion. As a result of growing debt and the rise in international interest rates, Morocco's debt service averaged $1.2 to 1.3 billion in (medium and long-term debt only, not including military debt and IMF debt). The debt service ratio in 1982 rose to 35Z of exports of goods and services. Loan commitments in averaged $2 billion a year of which $0.9 billion from official multilateral and bilateral sources. The 1983 Adjustment Program 13. In early 1983, the financial situation deteriorated rapidly and net foreign assets declined sharply, prompting the Government to tighten import restrictions in March. With freelv usable reserves virtually depleted, and 1/ Excluding changes in floating debt to suppliers ("Fonds reserves").

9 -4- the high level of external debt entailing an unsustainable debt service burden for the next few years, the Government became aware of the need to put together a package of policies, including stabilization and structural adjustment measures, which could warrant support from both the IMF and the Bank, and form the basis for a debt rescheduling operation. 14. A program prepared in mid-1983 was supported 1-y an IMF stand-by arrangement covering the second half of 1983 and calendar 1984 in an amount equivalent to SDR 300 million. Its principal objective was to reduce the current account deficit of the balance of payments from $1.9 billion in 1982 to $1.3 billion in 1983 and $1 billion in 1984 through limits on monetary expansion, reduction in-the Treasury deficit and continued use of a flexible exchange rate policy. Subsidized food pricks were increased by 17X to 60% and increases were made in the prices of fertilizers, electricity, water and petroleum products. Budgetary investment appropriations were also revised downward, substantially in line with the recommendations of the Bank report on Priorities for Public Sector Investment, so as to limit actual Treasury investment expenditures to DE 8 billion in 1983 (compared with DH 12.5 billion in 1982). The objective of the 1983 adjustment program was to reduce the overall Treasury deficit from DH 11.1 billion in 1982 to about DH 8.8 billion in d' 15. To reinforce the adjustu-nnt process, the flexible exchange rate policy initiated in 1980 was continlued in 1983 with the dirham depreciated by 17X in the 12 months since August In addition, a process of debt rescheduling was started in order to improve the debt profile and restructure it in the light of the estimated resources available for debt servicing. The Government asked for, and was granted by the Paris Club and the banks, a rescheduling of its external public debt maturing in September December In addition, at a meeting of donors in Paris in November 1983, additional balance-of-payments assistance of about $500 million was pledged for and it was agreed that a Consultative Group for aid coordination would be convened a year hence. 16. Finally, along with its stabilization effort, Morocco is making a significant start on the structural reforms needed to restore a viable balance-of-payments position in the medium term, with a package of measures to restructure incentives in order to eliminate the bias in favor of import substitution which has in recent years handicapped the growth of the export sector and hampered efficient use of resources. In January 1984, the Bank approved a $150 million Industrial and Trade Policy Adjustment Loan (ITPA) to support the first phase of this program, which included actions to reduce import protection and promote exports, in particular: a continuation of the exchange rate adjustment initiated under the IMF Stand-by, coupled with a reduction of the special import tax; reductions in import tariffs and an easing of quantitative import restrictions; broader access to duty--free inputs for exports and the rationalization of border-tax adjustments on external 1/ Excluding changes in floating debt to suppliers ("Fonds r6serv6s").

10 -5- trade under the domestic sales tax; improved administrative procedures; the elimination of export licensing in agriculture and manufacturing; improvement of the export credit and export credit insurance systems; and a significant reduction in the scope of price controls on manufactured goods. Most of the measures under this program have now been implemented. The first tranche of the- Bank loan ($75 million) was drawn in June 1984, and the second tranche in October A follow-up loan is under preparation. The second phase of the adjustment program, expected to be implemented in 1985, would continue the industrial and trade policy reforms initiated in 1984 and would extend the reform program to the financial sector. Future phases of the adjustment process could address further fiscal reform and initiate reforms in public enterprises, education and in agricultural policy. 17. The information available for 1983 and the first half of 1984 confirms that the results of the Government's adjustment program thus far have been largely positive. Exports increased by 10% in real terms in 1983 and an estimated 8% in Tourism receipts and workerb' remittances also increased sharply. On the import side, a significant contraction was achieved in 1983 as a result of the stabilization policies. In 1984, imports rebounded to some extent, partly as a result of the trade liberalization policies adopted under ITPA. There was also a considerable increase in food and petroleum imports as a result of the continuing drought. The current account deficit of the balance of payments was sharply reduced, from $1.9 billion and 12.7% of GDP in 1982 to $1.1 billion and 8.0% in 1983 (before debt relief). In 1984, despite the growth of imports, the current account deficit before debt relief is estimated to have remained at about $1.1 billion, rising to 9.7% of GDP (as against IMF program targets of $0.9 billion and 7.3% of GDP, the latter being based on expectations of substantially higher rates of GDP growth and inflation). Significant improvement was also recorded in the government budget deficit, which declined from 12.5% of GDP in 1982 to 9.1% in 1983 and 7.8% in 1984 (before debt relief), as planned under the IMF program. Simultaneously marked the fourth consecutive year of drought with its serious consequences not only for the balance of payments but also on employment, since the agricultural sector accounts for approximately 50% of total employment. The combined impact of stabilization policies and poor harvests kept GDP growth low (2.2% in 1983 and 1.6% in 1984). Medium-Term Policies and Prospects 18. A Consultative Group meeting was held in Paris on January 9-11, The Consultative Group focused on Morocco's medium-term adjustment policies and prospects. A joint Bank-IMF economic updating mission visited Morocco in July to prepare a background paper for this meeting. Both the Bank's and the Government's presentation to the Consultative Group reflected the view that a fundamental stabilization effort needs to be sustained over several years and combined with a strong program of structural adjustment in order to restore a viable external payments position and resume a satisfactory rate of growth, in view of the high external debt burden. Such a program would have as its basic aims:

11 - 6 - (i) to reduce the deficit of the balance of payments over the short and medium term through continued trade policy reforms and appropriate development strategies in the productive sectors, particularly agriculture and industry, that would increase production and promote exports and efficient import substitution; (ii) to improve the allocation of capital and the efficiency of investment, both in the public sector (through appropriate changes in investment policies) and in the private sector (through reform of the protection system and of interest rate policies); (iii) to increase the level of public sector savings through reductions in the Treasury deficit and improvements in the efficiency of public enterprises; (iv) to improve the mobilization of private savings through a reform of the financial sector involving interest rate increases, diversification of financial instruments and greater competition in the banking sector; and (v) to accelerate the rate of employment creation through better manpower planning and a revision of the protection and incentives system so as to encourage investment in labor intensive activities. 19. The medium-term projections for Morocco, based on the policies outlined above, depict a scenario of transition from inward-looking import substitution to outward-oriented export expansion. Due to the large external imbalance, the restructuring policies designed to achieved this transition must be accompanied by continued efforts to reduce domestic absorption. Policies to promote exports and increase domestic savings can be expected to bear fruit only gradually in Morocco's circumstances. This will severely limit the level of investment that can be financed for the next several years, given the constrained net amount of external financing available to Morocco, with a resulting deflationary impact on domestic demand. However, implementation of the adjustment measures, including improved export incentives, would induce an expansion of exports and a gradual acceleration of output growth toward the end of the period. 20. Export growth plays a crucial role in the projected adjustment scenario. As a result of improved export incentives and the revival of foreign markets, exports of manufactured products (including phosphate derivatives) would grow at 131 p.a on average in Exports of rock phosphates and phosphate derivatives would grow at about 92 p.a.. The overall growth rate of Morocco's exports of goods and nonfactor services in this scenario would accelerate to about 82 p.a. in constant prices in With respect to imports, the change in the structure of incentives in conjunction with the depreciation of the dirham would improve the efficiency of import substitution and reduce the reliance on imported inputs. Overall, import growth of goods and nonfactor services in this scenario would be limited to about 2% p.a. during

12 21. Given the strong constraints on the resources available, gross investment is projected to decline in the short-term from about 23Z of GDP in 1980 to about 151 in (at constant 1980 prices). It is assumed that the Government would start fewer large capital-intensive projects and restrict the allocation of investments to priority subsectors so as to improve the sectoral allocation and the efficiency of investment. Priority is to be given to projects that are export oriented, less capital intensive and which use a greater proportion of domestic resources. In addition, particular attention would have to be paid by the Government to manpower planning and to the employment effect of investments in order to prevent unemployment from rising to excessive levels. 22. An essential aim of the adjustment process would also be an increase in domestic savings. As a consequence of policies aiming at a reduction in the Treasury deficit and at an improvement in public enterprises efficiency, public savings are projected to increase significantly. In addition, improvements in the mobilization of private savings would also take place through interest rate increases and reform of the financial sector, so that the overall domestic savings rate in this scenario would rise from about 8Z in to about 15Z in The acceleration of export growth relative to import growth in conjunction with an increase in the savings ratio relative to the investment ratio would result in a steady improvement in Morocco's external payments position. Assuming that the growth of workers' remittances can be sustained, the current account would be approximately in equilibrium by Until then, however, Morocco would continue to require substantial amcunts of medium and long-term capital to cover the continuing current account deficits and meet the heavy schedule of debt repayments coming due in the next few years. Total gross capital requirements would average close to $3 billion annually in A substantial portion of these requirements could come from debt relief along the lines of the debt rescheduling obtained by Morocco from its creditors in The remainder could be obtained through normal medium and long-term inflows of new capital, if new commitments from Morocco's official lenders can be maintained at their current rate. PART II - OTHER BANK GROUP OPERATIONS IN MOROCC1-' 24. Bank lending to Morocco has supported 60 projects, financing a total of $2,415 million (net of cancellations), of which $25 million from a Third window loan. IDA credits, totalling $52.6 million, have been made available for five projects. IFC investments have amounted to $99.1 million 1/ Part II is essentially the same as Part II in the Electrical & Mechanical Industries Loan (Report No. P-3918-MOR of December 4, 1984).

13 -8- amounted to $99.1 million ($54.1 million after cancellations, terminations, repayments and sales). Annex II contains a summary statement of Bank loans and IDA credits, and of IFC investments, as of September 30, Until recently, performance in project execution has been satisfactory overall, although in some cases management problems have caused delays in project implementation, and in others insufficient tariff adjustments have affected project entities' financial performance. However, during 1983, as budgetary constraints became more severe, projects relying on the Government budget for a substantial part of financing have been seriously delayed because of inadequate budgetary allocations. The appreciation of the dollar vis-a-vis the dirham in recent years has reduced considerably reimbursable expenses in dollar terms, thus lowering disbursements vis-a-vis appraisal estimates. The ratio of disbursements to appraisal estimates averaged 49X as of September 30, 1984, low in comparison to other countries in the region. 26. The objectives of Bank Group activities in Morocco are to support (a) investments and policy reforms aimed at structural adjustment and strengthening the balance-of-payments; (b) measures to reduce the Treasury deficit; and (c) efforts to redress poverty and improve income distribution, particularly through lowering the unit costs for the delivery of basic services, in order to increase access by lower-income groups. Important structural reforms muet be undertaken in the coming years, in order to return to a path of reasonable economic growth compatible with a sustainable external payments position. A major objective of Bank economic and sector work is to provide the analytical basis for the development of specific proposals for structural reform, which in several cases may later be supported by Bank lending. The Government has requested that, in addition to ongoing work on the public investment program, the Bank assist in developing reform proposals relating to the financial sector (for which a mission visited Morocco in September 1983), public enterprises (for which a first economic mission was undertaken in spring 1984), and the education and agricultural sectors. Because severe budgetary constraints are likely to persist over the medium-term, projects now under preparation are being designed to minimize their reliance on budgetary funds. 27. Agriculture continues to represent the most important sector in Bank lending for Morocco. Past Bank lending has primarily supported rural development or irrigation projects focusing on particular geographical regions, as well as a highly successful agricultural credit program. In the future, increased attention will be given to agricultural support services at the national level, which are essential for backstopping regional development projects and would be more appropriate vehicles for addressing sectoral policy issues. Projects are under preparation in agricultural inputs distribution, research and extension services, cereals storage and marketing and irrigation management. In view of limited budgetary resources, special attention would be paid to maximizing non-budgetary financing and improving cost recovery. Sector work on agricultural incentives - fiscal, financial, pricing and institutional policies - is expected to provide recommendations on structural reforms which could lay the basis for an agriculture sector policy loan.

14 Energy and mining. The Government has given high priority to reducing the oil import bill, a major factor in the current account deficit, through development of domestic energy supplies. The Bank has supported this effort through loans for the exploration and appraisal of petroleum (primarily natural gas) and oil shale resources as well as for power generation and transmission. Future projects would assist in the development of domestic energy supplies, including gas, coal and hydropower. Through these projects as well as in our sectoral policy dialogue, efficiency Ln energy development and use would be promoted through attention to pricing, cost recovery and management issues. A pilot project to support small-scale, export-oriented mining activities in a remote, low-income region will be mcnitored with a view to its possible extension. 29. Banlk lending for infrastructure and utilities has helped to build a number of technically competent agencies in the fields oe road transportation, electricity, water supply, housing finance, and community infrastructure finance, as well as to expand the provision of essential services. Future projects will place greater emphasis on improving the productivity and efficiency of existing infrastructure through improved financial and management performance. Mobilization of private and non-bud4,.tary financing as well as improved cost recnvery in these subsectors through tariffs should help reduce the Treasury deficit. In addition to continuing support for the above-mentioned subsectors, projects are under preparation for ports, sewerage and telecommunications. 30. Industrial development in Morocco has been supported primarily through strengthening the financial and institutional resources of the Banque Nationale de Developpement Economique (BNDE), the major source of industrial medium-term credit. In addition, policy changes were introduced to widen access to credit by small-scale labor-intensive industries. Other prejects focused on phosphate processing and cement production. The Bank's efforts are now focused on the development and implementation of medium-term policy reforms aimed at encouraging exports and improving incentives to domestic production. The first phase of such reforms is supported by the recently approved Industrial and Trade Policy Adjustment (ITPA) loan, and further sectoral adjustment lending is likely in industry to support subsequent phases of the medium-term ITPA program adopted by the Government. 31. Education, health and urban development projects will increasingly concentrate on lowering unit costs in order to widen the access by low-income groups. Policy dialogue in these sectors continues to encourage the shift away from capital-irntensive investments benefitting limited clientele and the development of more cost-effective delivery systems for basic services. While previous Bank-financed projects have supported technical education, rural primary education and improved teacher training, these should be complemented by efforts to expand basic education and skill training, as well as restructuring of the formal education system, which has represented a major drain on the recurrent budget. A first health development project would test new health care delivery systems in order to improve basic health services in rural areas. Finally, the experience of projects in urban upgrading will be continued and expander., with increased efforts to mobilize private financing in order to reduce budgetary costs.

15 PART III: THE ENERGY SECTOR 32. Energy Balance. For several years, Morocco has been facing a severe and increasing imbalance between domestic production and consumption of energy resources, due to a combination of the growing energy intensification of the Moroccan economy, and a limited domestic energy resource base. Between 1975 and 1983, the energy deficit as a percentage of total consumption grew from 78 to 881. While an annual average of $1 billion worth of imported energy has largely covered this local shortage, these imports have in turn absorbed an average of 45Z to 50' of the country's annual export revenues, and have therefore had a significant negative impact on the Moroccan balance-ofpayments. 33. Over the period, commercial energy demand grew at about 7.4Z p.a. on average, slowing to 6.5X p.a. between 1975 and During this same period, the share of electricity increased as compared to that of clean liquid fuels and boiler fuels (coal, natural gas or fuel oil), and is expected to reach about 40% by Overall, demand for commercial energy is expected to increase by about 77Z between 1980 and 1995 (or from 4.7 million TOE to about 8.6 million TOE). In 1981, industry accounted for about 421 of final demand for commercial energy, transportation and services for 391, households for 15Z, and agriculture, for Morocco has a varied but limited energy resource base. Known hydrocarbon resources are small, and the production potential of the natural gas discovered in the Essaouira Basin, which' remains to be confirmed, is currently being appraised under a petroleum exploration project (Loan no MOR). While the country's hydropower potential is estimated at 1.1 million TOE per year under average hydraulic conditions, due to the severe droughts of the past few years, utilization of this capacity has seriously declined. Morocco has about 6 million TOE of proven coal reserves, and another 30 million TOE are classified as probable and/or possible at Jerada. Finally, prospects for extraction of uranium for nuclear power from the country's large phosphate deposits and for utilizing the estimated hundred billion tons of oil shale reserves currently appear unfavorable, and renewable energy sources would only make a limited contribution to energy supply. 35. The growth in energy consumption over the period was coupled to a pattern of energy supplies characterized chiefly by three main trends: a declining share of hydropower; a parallel decline in the share of coal; and a marked shift in favor of oil products, with the major proportion of this increase being accounted for by an increased supply of fuel oil. Total direct and indirect demand for fuel oil increased from 331 of the oil market in 1970 to 451 in If the present dependence on oil continues, crude oil imports could rise from 4.2 million TOE in 1983 to as much as 11.3 million TOE in 1995, entailing an increase in the oil import bill from $1.0 billion in 1981 to nearly $3.3 billion in 1995 (in 1983 dollars). However, the large proportion of Morocco's energy consumption that is now accounted for by fuel oil directly or indirectly offers a variety of opportunities for inter-fuel

16 substitution. Imported oil could in the future be replaced by local and imported coal, natural gas and condensates from the Essaouira Basin, and possibly oil shale. 36. Pricing. During the past three years, the Government has undertaken a serious effort to ensure that national energy prices both encourage conservation and stimulate development of indigenous resources. To this end, oil prod,.t prices were increased to levels higher than their opportunity costs and domestic coal prices were adjusted to close to import parity levels. In addition, investment incentives have been provided for each TOE of energy conserved, and in 1982/83, most taxes and duties on imported coal were removed in order to stimulate switching from imported oil to imported coal. Electricity tariffs, on the other hand, remain far below their economic costs. In order to facilitate the financing of power investments and to stimulate more efficient use of electrical energy, tariffs should be increased and their structure rationalized. Through the implementation of ongoing projects and the preparation of future generation and distribution projects, the Bank is pursuing a dialogue with the Government on this issue. Meanwhile, the Government is reviewing gas pricing, with the intention of setting an appropriate price for all new domestic gas supplies, which would be linked to the price of alternative fuels for which the gas could substitute (fuel oil or coal). This issue is being addressed by the Bank within the context of the Essaouira petroleum exploration and appraisal project. The Coal Subsector. 37. Until 1982, demand for coal was relatively stable and was comprised mostly of imported coking coal for sugar plants and smelters, and domestic coal from the Jerada mine for use primarily in power and industry. However, increasing and substantial cost differentials between energy produced from coal and oil have encouraged industrial conversion (primarily of power and cement plants) from oil to coal. As a result, in 1983, imported coal tonnage tripled over 1982 levels (from 65,000 to 282,000 tons). In view of additional ongoing and planned plant conversions, it is estimated that by 1986, if Jerada's production levels do not increase, at least 1.5 million tons of coal would have to be imported in order to cover the gap between domestic production and total demand for coal. 38. Jerada Coal. Discovered in 1908, the Jerada coal mine is the only existing source of coal production in Morocco. Located about 60km Southwest of Oujda (covering an area of about 60km 2 ), the mine plays an important role in the local economies of both Jerada and Oujda by offering, in addition to 6,500 jobs, access to training, medical services, housing, and cultural activities. 39. Containing about 10 million tons of known and million tons of possible/probable coal reserves, Jerada coal production in 1983 totalled 750,000 tons, and is expected to reach 800,000 tons in Although Jerada anthracite has a good calorific value (5,000kcal/kg, run-of-mine, and 7,000kcal/kg, washed), it is very friable and consequently has a high proportion of fines (80%), making it suitable primarily for domestic power and

17 heavy industrial use. The coal has been primarily marketed in Morocco due to two factors. First, while of good anthracitic quality, only a small proportion is of lump anthracite, suitable for export. Secondly, most of Jerada's production is earmarked for the nearby Jerada power plant which consumed 87% of Jerada coal produced in Of total Jerada coal sold between 1970 and 1983, export sales averaged only 6.6S, while domestic sales were 93.4%. 40. During this same period, the domestic market was comprised of four groups of clients the largest of which was the Jerada mine-mouth power plant noted above, consuming between 480,000 and 690,000 tons of coal per year. The Jerada power plant is operated by the Office National de l'electricite (ONE), the public enterprise responsible for Moroccan electricity generation. The power plant, consisting of three 55MW units, supplies base load power and is interconnected with the national grid. Yearly supply of electricity is about 1100 GWh, equivalent to a coal consumption of about 700,000 tons per year. CdM has recently signed a long-term coal supply agreement with ONE acceptable to the Bank, ensuring the Jerada power plant as a continuous outlet for Jerada fines. The next largest client group includes sugar plants, which are expected to continue to consume about 40,000 tpy. Households (whose consumption has averaged 25,000-30,000 tpy), other small plants and CdM's own consumption, are expected to absorb about 40,000 tpy. The CIOR cement factory at Oujda, which has recently been converted to coal power, has indicated its willingness to purchase about 150,000 tpy of coal starting in Export sales, which have fluctuated between 18,000-90,000 tpy, are expected to average 70,000 tpy in the future. 41. Pricing. Coal prices in Morocco are reviewed and determined annually by an interministerial commission presided over by the Ministry of Economic Affairs. Between 1979 and 1983, Moroccan coal prices were adjusted on an ad-hoc basis by rates lower than those of production cost increases, resulting in negative margins between set prices and unit costs. With substantial coal price increases introduced by the Government between 1981 and 1984, this situation was reversed and the average realized price of Jerada coal in 1984 (500 DH/t) now easily covers unit production costs (442 DH/t). Even at this higher price level, Jerada's coal remains competitive throughout the Eastern region of the country, maintaining a significant comparative price advantage over imported coal. However, due to high transportation costs that would be incurred if Jerada coal were to be supplied to clients on the West coast imported coal is more competitive in that region, and is expected to continue to be so through the 1980s and early 1990s. 42. The present pricing structure for Jerada coal represents a significant improvement over past pricing policies, bringing prices close to equivalent international coal prices. However, in order to give appropriate signals to energy consumers and to prevent future Government subsidies to CdM, Jerada coal prices should be maintained at levels reflecting the opportunity c3st of coal, defined as the price of imported steam coal equivalent in heating value to Jerada coal adjusted by harbor, port handling and transportation costs. Assurances were obtained from the Government that it would review domestic coal prices and consult with the Bank on their level

18 before November 30 of each year, with the objective of maintaining the price of Jerada fines at between of their opportunity cost. The Government' would then adjust the price accordingly by not later than December 31 (Guarantee Agreement, Section 3.02 (a)). This procedure would not only ensure CdM's financial health but also provide for protection against foreign exchange risks of loan repayment because of the link of revenues to international prices. 43. Mine Characteristics. Jerada's coal seams are generally heavily folded and faulted, with folding particularly pronounced in the Southern half of the oasin, and major faults extending from North to South. Thickness of the four minable coal seams varies between 0.5 and 0.9 m, and only occasionally reaches 1 m. Possibilities for mechanized mining are relatively limitf. due to these difficult geological conditions, affecting about 35Z of coal reserves. The Jerada deposit is currently being mined by three separate underground mines: the Bassin Nord mine, the Siege IV mine (in the Secteur Est), and the Siege V mine, located in the main basin. Siege V, the newest mine, has the largest reserves (10.3 Mt) and will, in the near future, become the only supplier of coal after depletion of the Bassin Nord and Secteur Est (Siege IV) reserves. All mines use the longwall mining technique. In 1983, of an average of about 25 longwall faces in operation, only two operating in Si6ge V were semi-mechanized, and all others were non-mechanized with relatively low productivity. Coal is transported from the faces with conveyors through a network of galleries and inclined shafts, to the surface, covering an average distance of 3km. Since waste rock is mined with the thin coal seams, the average run-of-mine coal has a waste ballast of about 40Z. 44. In the past, due to inefficient planning and to financing constraints, galleries and shafts were driven as needed for immediate production. In the case of the Siege V mine, this resulted in an overly complicated underground network, impeding transportation and ventilation, and therefore productivity and safety. Without rehabilitation, modernization, and mechanization of the mine, productivity can be expected to continue to decline to less than the current rate of 800kg/manshift. Furthermore, once the Bassin Nord and Secteur Est (Siege IV) reserves are depleted (by 1986 and 1992 respectively), in the absence of expansion of the production capacity of Siege V, overall Jerada production will also decrease. Preparation of Siege V for increased production with simultaneous simplification of its underground network of galleries, improvement of working conditions, and strengthened planning capabilities are therefore the main objectives of the proposed project (para. 52). 45. A central washing plant with a capacity of at least one million tons of product, is located at the exit of the inclined shaft of Siege V. Washed coal leaves the plant by a conveyor linked directly to the Jerada power plant. The plant employs about 220 people and its operation is well-established and virtually problem-free. The plant layout and most of its equipment is appropriate for a 20Z-30Z increase in throughput. However, to ensure that with an increased throughput, ash contents of fine coal are compatible with the receiving power plant's boiler design, relatively minor investments need be made to the washing plant, including the provision of a new waste shale dump.

19 Sector Orxanization. 46. The Ministry of Energy and Mines (MEM) has overall responsibility for the planning, coordination and policy-making of Morocco's energy sector. As such, MEM also is responsible for supervising most of the energy-related public enterprises, including: the ONAREP for hydrocarbon and oil shale exploration and development, the ONE, for electricity generation and CdM for coal exploration and development. ONE generates about 901 of the electric power in the country, transmits it to load centers, and distributes 402 of its production outside urban areas. In this capacity, it operates all power plants in Morocco. Distribution of power in large urban areas is the responsibility of the water and electricity Regies, autonomous public enterprises supervised by the Ministry of the Interior. In the coal subsector, CdM is responsible for coal exploration, development, and production. While CdM is also directly responsible for export marketing, its subsidiary, SOCOCHARBO, handles domestic coal marketing. Given the recent increased importance of coal imports to the Moroccan economy (para. 37), SOCOCHARBO's role has grown and it is presently the nation's primary coal importer. 47. The Borrower. Originally a joint French-Moroccan company, CdM is now 991 Government-owned, through the Bureau de Recherches et de Participations Minieres (BRPM). CdM is a stock corporation (Soci6te Anonyme), with a Board of Directors consisting of 14 representatives of public institutions including the BRPM, the Ministries of Finance, Energy and Mines, Planning, and Equipment, and the Governor of the Province of Oujda. It operates as a public enterprise and is subject to financial controls similar to those applicable to public enterprises. Its head office, located in Rabat, maintains contact with the Government and comprises in addition to the chief executive, the functions of sales, procurement, administration and finance. 48. At end-1983, of CdM's 6,500 employees, 80 worked in Rabat, and 6,420 were employed at Jerada. The company's staff consists largely of mine workers (891); of the others, 101 are foremen, and only 1X are managers and engineers. The company has suffered in the past from high turnover among both, workers and managerial staff. In the first instance, dependence on migrant labor contributed to a 20-25S turnover rate. At the managerial and engineering level, turnover rates have been high due to the remoteness of the Jerada location and to limited career development prospects. Present management has recognized these problems and the situation has improved substantially owing to salary increases and to the provision of new housing facilities since Training programs are maintained for unskilled and skilled labor, up to the foreman level. Because CdM has had no difficulty in recruiting a sufficient number of experienced key workers and lower level supervisors, execution of daily production tasks has not suffered from the high staff turnover rates. On the other hand, establishment of a consistent long-term mine development program has been difficult due to frequent senior management changes and to the fact that the mine management had functioned in a highly centralized manner, without sufficient delegation to middle-level managers. Organizational changes to remedy ths situation are underway (para. 61).

20 Financial Viability. As a result of the operating losses experienced by CdM during the past four years, (para. 41), the company built up arrears on amounts due to Caisse Nationale de Securite Sociale (CNSS), Caisse Centrale de Garantie (CCG), and BNDE, and was forced to reduce investments for rehabilitation and modernization of the Jerada mine, thereby decreasing productivity. In 1983, CdM started negotiations on rescheduling its accumulated debt (about DH 170 million in 1983). In November 1983, it concluded an agreement with CNSS to reschedule DH 100 million due over 20 years without interest, but indexed to the price of Jerada coal. This debt rescheduling, coupled with higher coal prices in 1984, has improved CdM's liquidity position considerably. Nevertheless, CdM's 1984 cash flow was insufficient to cover outstanding amounts, making it necessary to reschedule the remaining DH 70 million debt. In January 1985, thle Government agreed to pay CdM debts due to CCC out of unused 1984 budget allocations to CdM (about DH 25 million). CdM's debt to BNDE (DH 45 million) was rescheduled over 20 years, and it was agreed that CCG would pay BNDE the accumulated interest, amounting to about DH 10 million. These measures for the financial restructuring of CdM were reviewed during negotiations and found satisfactory by the Bank. 50. Government Strategy and Bank Role. The Government's primary policy objective in the energy sector is to ensure necessary supplies of energy while reducing the energy import burden on the balance-of-payments, through development of viable domestic energy resources, promotion of efficient energy use, and encouragement of inter-fuel substitution. While the increasing financial strains of the past years have considerably slowed down the pace of investments in this sector, some priority investments in oil and gas exploration and inter-fuel substitution are underway and should contribute to ease the country's balance-of-payments problems in the medium term. These financial constraints make it more urgent to improve (i) the selection and coordination of energy-related investments; (ii) the management and organization of public energy enterprises; and (iii) the efficiency of energy use, through the energy pricing structure. The proposed loan fits well into this strategy and addresses these issues within the context of the coal subsector. The Government's overall strategy for the energy sector was discussed during negotiations and was found to be satisfactory to the Bank. The dialogue between the Bank on the Government on measures to achieve these objectives, particularly as regards criteria for energy pricing, would be pursued through the preparation of future projects in the petroleum and power subsectors. PART IV. THE PROJECT Background 51. The project was [irst identified in September 1981, and prepared by Charbonnages du Maroc with the assistance of consultants (Belgian Mining Engineers - BME), funded under Loan 2114-MOR (Oil Shale Engineering). The project was appraised in July Negotiations took take place in January The Moroccan delegation was headed by Mr. Hassan Belkoura of the Prime Minister's Office. The main features of the project are outlined in the Loan and Project Summary at the beginning of this report; a Supplementary

21 Project Data Sheet, Annex III, and Maps Nos. IBRD 18452R1 and are also attached. A Staff Appraisal Report (No MOR, dated February 12, 1985) is being circulated separately. Project Obiectives and Description 52. The long-term goals of the project are: to reduce the country's balance-of-payments deficit by substituting oil imports by a competitive local energy source through modernizing coal production facilities, increasing their efficiency and maintaining an appropriate coal pricing policy; and to secure continued employment in a less developed region by preventing a decline in Jerada coal production. The propoced project will: concentrate in one mine (Si&ge V) the production capacity of two smaller, nearly depleted mines (Bassin Nord and Siege IV); expand production capacity of Siege V to one million tpy; simplify the underground network of galleries and shafts; improve health, safety, and working conditions; and improve CdM's organizational and mine planning capabilities. 53. The project consists of the following components: (a) a drilling program to prepare underground development work and shaft sinking for the Siege V mine; (b) underground development work in the Siege V mine to prepare future mining areas and to simplify existing mining areas; (c) sinking of a new vertical shaft (Shaft 3) in the west of Siege V to increase production to offset depletion of CdtM's smaller mines (i.e. to maintain overall production levels); (d) installation of underground equipment to increase efficiency, production capacity and to improve safety and health in the Siege V mine; (e) construction and installation of surface facilities and equipment for improved coal cleaning, as well as for increased supply of power and compressed air to the Siege V mine; and (f) technical assistance to CdM. 54. Drilling Program. The drilling program consists of about 25 shallow boreholes and about 15 deep boreholes in the eastern portion of the Jerada coal basin. The shallow holes will help confirm the correct location of the planned underground galleries and future mining areas. The deep holes are intended mainly to confirm the reserves and the exact positioning of the new vertical shaft (para. 5'. 55. Underground Development Work. The underground development work consists of the constructing and equipping of about 14 km of galleries and inclines. The advancing method will be conventional, and roof support will be by steel arches. 56. Sinking of New Vertical Shaft (Shaft 3). A new vertical shaft, 900 m deep with a usable diameter of 5.5 m, will be sunk in the center of the coal basin, to the northwest of the present exploitation area of Siege V (map IBRD 18453). It will be equipped with necessary lining, shaft winders, surface installations, electricity supply, and railway connections. The shaft will provide additional ventilation (air entry) to the mine, and will shorten access for material and personnel for future mine workings in the central section of Siege V. In the long-run, it may also be used as an additional outlet for coal production. Under terms of reference agreed with the Bank, BME is presently completing a study delineating the coal reserves in order to integrate the shaft's sinking and operation with the near/medium-term mine

22 workings at Siege V. The exact position of the shaft would be determined by the deep drilling program (para. 54). Assurances were obtained during negotiations that construction of the shaft would be carried out only if and to the extent the Bank received the results of the completed drilling prograand engineering studies together with a proposed program of works for the shaft sinking, and approved such program of works (Loan Agreement, Section 3.02 and Schedule 1, para. 4 (b)). 57. Installation of Underground Equipment. Undergraund equipment will be installed to mechanize mining where feasible, increase efficiency of underground transportation, improve ventilation of underground workings, and improve safety and health conditions. Due to the technical and economic constraints of mechanizing thin seam mining, CdM has restricted the mechanization program to the winning of coal by plough from only four additional longwall faces, and to the trial operation of a small tunneling machine and a coal shearer with mechanized roof support in a suitable seam section. 58. Installation of Surface Equipment. To allow the washing of very fine coal (3-6 mm size) and to assure that the mine-mouth power plant's ash limits are not exceeded, a 1,200 ton capacity raw coal bin, an additional fine coal screening station, and a 2 km conveyor to the waste dump would be installed at the washing plant. Improvements of power and compressed air supply for the mine would consist of reinforcing electric distribution lines with installation of related switches and instrumentation, and addition of a new 1,200kW compressed air station. 59. Technical Assistance. CdM and BME have signed a contract for technical assistance to provide CdM with services for follow-up, engineering and staff training required for project implementation and to strengthen CdM's organization and planning capabilities. In particular, the following areas will be covered: - semi-annual, on-site follow-up of the implementation of the proposed mine development plan and continuous monitoring of its refinement and improvement during the project completion period; - preparation of detailed studies, implementation plans and engineering assistance for CdM staff in the execution of project components which require expertise not available at Jerada, including the sinking of Shaft 3, installation of the new underground equipment and specialized procurement; and - on-the-job training for key underground managerial staff, in particular in functions such as time analysis and preparation of underground works. 60. Safety, Health, and Environment. Improved ventilation, simplification of galleries, fire prevention and safer transportation are expected to contribute significantly to the reduction of occupational diseases, accident rates and fire risks. No adverse effects on the environment would be incurred since the increased coal production is expected to be handled satisfactorily

23 by existing and proposed installations. Assurances were obtained during negotiations that CdM would carry out the project, and operate and maintain its facilities in accordance with health and occupational safety standards acceptable to the Bank (Loan Agreement, Sections 3.01 (a)(i) and 4.02). Project Implementation 61. The project will be implemented over six years, beginning in 1985, and is scheduled for completion by December, Overall responsibility for project coordination will rest with the Jerada mine's General Manager who will monitor the execution of specific project components by the appropriate departments within the Jerada organization. While most of the tasks to be undertaken have been performed well by Cd:l staff in the past, in view of the increased amount of work and the importance of timely implementation, some organizational improvements have recently been introduced, which would be complemented by external technical assistance. In particular, whereas in the past the General Manager had direct control over all functions, this role has been decentralized and functional responsibilities have been delegated to four second-level managers (Technical, Production, Administrative, and Planning and Studies) with clearly defined roles, who report directly to the General Manager. The Production, Technical and Administrative Managers have been appointed; a member of the technical assistance team (see below) would assist the General Manager in the tasks related to planning until the Planning Manager is trained and appointed. A Project Coordinator, attached directly to the General Manager, has been appointed to ensure timely project implementation, particularly the monitoring of procurement. Technical assistance and training will be provided to CdM in all areas where experience of Jerada staff is limited, including planning (para. 59). CdM's revised organization chart and staffing were discussed during negotiations and found satisfactory. During negotiations, assurances were obtained that CdM will carry out the project in accordance with project implementation arrangements acceptable to the Bank (Loan Agreement, Section 3.01 (a) (i)). Cost Estimates 62. Total project costs, including taxes and contingencies, are estimated at $71.7 million, of which $47.5 nillion (66S) is in foreign exchange. Taxes are estimated at about $2.2 million, and total contingencies are about $20.1 million. Incremental working capital required for the project would be $2.3 million. Total base costs net of contingencies amount to $51.6 million (in December, 1984 terms), and were estimated by BME and reviewed by the Bank. Equipment costs ($16.2 million) have been adjusted for delivery to Morocco. All other costs, including those for the new vertical shaft (Shaft 3, $15.4 million), for underground works and exploration ($12.2 million), and for small surface and auxiliary investments ($6.0 million) have been estimated on the basis of price quotations (international and local), and comparisons with similar recent and current activities. The costs for technical assistance ($1.8 million) are based on the contract signed between CdM and BME. Physical contingencies ($5.6 million) have been estimated at: 20% for the construction of Shaft 3, 10X for other works contracts, and 5% for

24 equipment. Price contingencies totalling $14.5 million have been derived on the following basis: (i) for foreign costs, 8% in 1985, 9.0Z p.a. in , and 7.5% in 1990; and, (ii) for local costs, 10 for 1985 and 8X p.a. thereafter. Total contingencies represent about 39% of base costs. Financing Plan 63. Financing of foreign costs (except as regards working capital) will be provided on a parallel co-financing basis. Selected surface works and underground equipment costing about $7.6 million would be financed under a mixed export credit from the French Government. 40% of the foreign exchange cost of contracts thus financed wotuld be covered by a loan from the French Treasury, with a maturity of 25 years including a 10-year grace period at 3Z annual interest. The remaining 607 would be financed through guaranteed suppliers' credits from commercial French banks on consensus terms. Financing for equipment for underground mechanization and transport (about $12.9 million) would be made available by the Federal Republic of Germany (KfW) to the Moroccan Government at 2Z p.a. interest and 30-year maturity, including a 10-year grace period. The proceeds would be on-lent to CdM at 67 p.a. interest, with a 15-year maturity, including a four-year grace period. Satisfactory arrangements for securing the French financing would be a condition of effectiveness of the Bank loan (Loan Agreement, Section 7.01 (a)). Failure to sign the KfW loan agreemcnt by December 31, 1985, to satisfy all conditions precedent to its effectiveness or disbursement by March 31, 1986, or to satisfy all conditions precedent to effectiveness or disbursement of the funds provided under the French credit by June 30, 1987, would be conditions of default under the Bank loan (Loan Agreement, Section 6.01 (b) and (c)). Incremental working capital ($2.3 million) and the $24.2 million in local costs will be financed by CdM itself. All interest due for project-related loans will be paid out of cash generated by CdM's expanded operations. In addition, CdM would pay a guarantee fee to the Government of 1.07 on the withdrawn and outstanding Bank loan balance (Guarantee Agreement, Section 2.03 and Loan Agreement, Section 3.01 (b)). 64 The proposed Bank loan of $27.0 million would be made to CdM, with a Government guarantee, at the Bank standard variable interest rate and 15-year maturity, including a four-year grace period. The 15-year maturity corresponds to the estimated life of the project investments. It would finance 387 of total project costs, net of taxes. CdM would bear the foreign exchange and interest rate risk on the Bank loan. CdM's Financial Position 65. CdM's 1983 debt rescheduling and higher coal prices have already had a positive impact on the company's financial position with the current ratio increasing from 0.5 in 1982, to 1.7 in In 1984, it is expected to improve further, and by 1994, due to the expected accumulation of cash surpluses, to reach 3.6. Assuming that: (i) Jerada's production remains constant between 1984 and 1985 (800,000tpy), and builds up gradually to 1,000,000 tpy by 1988; (ii) sales will equal to production; (iii) unit

25 production costs decline in real terms by 9Z between 1984 and 1989 (due mainly to the expected increase in productivity from 800 kg/manshift to 1,050 kg/ manshift); and (iv) the average realized price of coal increases by 7.7Z p.a. in nominal terms through 1989 and by 6.0% p.a. thereaf'er, the company's financial health is expected to improve substantially between 1985 and Due to depreciation deferred from 1982 and 1983 (DH 86.2 million), net income is projected to be zero during 1985 and 1986, becoming positive in 1987, and increasing rapidly thereafter. The net income/sales ratio develops favorably, from 02 to about 91. Debt service coverage remains satisfactory, fluctuating at a ratio of around 2.5, dropping to a low of 2.3 by 1989 and rising thereafter. Finally, the long-term debt/equity ratio, after deteriorating through the first three years of project implementation to 67:33 in 1987, improves thereafter to 52:48 in 1990 and to 24:76 in Financial viability, creditworthiness and a sufficient cash flow are essential elements in CdM's future performance and its ability to implement and manage the Project as scheduled. Since the major contributory factors to CdM's past financial problems were inadequate sales revenues and a resultant accumulation of debt, assurances received from the GCvernment on coal prices (para. 42) have been complemented by assurances from the Government and CdM on the following financial performance objectives: (i) CdM will maintain a debt service coverage ratio of no lpss than 1.5 (Loan Agreement, Section 5.04 (a)(i)); (ii) CdM will maintain a long-term debt/equity ratio of no more than 67:33 until January 1, 1991,and 50:50 subsequently (Guarantee Agreement, Section 3.02 (b) and Loan Agreement, Section 5.04 (a)(ii)); (iii) CdM will maintain a current ratio of no less than 1.3 (Guarantee Agreement, Section 3.02 (b) anl Loan Agreement, Section 5.05); and (iv) CdM would submit annually its investment program for the Bank's review and approval (Loan Agreement, Section 5.07). 67. Based on the same assumptions as those outlined above, the financial rate of return for the incremental costs and benefits expected under the proposed project is 241 before taxes, and 162 after taxes. Sensitivity analysis has indicated that the project's viability would decrease sharply if there were a 101 drop in revenues, making the maintenance of an adequate coal pricing policy essential to the project success (para. 42). However, the rate of return (111) even at this level of revenues would nevertheless be acceptable. An alternative rate of return on this investment has also been calculated which assumes all existing assets to be sunk costs. At 341, this is higher than the incremental rate of return because of the relatively limited investment required to continue Jerada production and to increase it from 800,000 tpy to 1,000,000 tpy. Accounting and Auditing 68. CdM's Administrative and Finance Department is subject to strict control by the Ministry of Finance, which assigns a financial controller to the enterprise. CdM accounts are generally well-organized and up-to-date, and have teen audited regularly by the Ministry of Finance. While an independent

26 prior audit of accounts is not considered necessary, CdM would in the future employ independent external auditors acceptable to the Bank. Assurances were obtained during negotiations that CdM would provide the Bank annual audited financial statements by no later than six months after the end of each fiscal.,year, with the exception of the first year of project implementation, when audited financial statements would be submitted by July 31, 1985 for CdM.FY 1984 (Loan Agreement, Section 5.02). CdM would also be required to submit to the Bank quarterly project progress reports within one month after the reporting period, and annual project progress reports by February 15 of each year (Loan Agreement, Section 3.05 (b) (iii)). Procurement and Disbursement 69. Under the proposed project, about 16 procurement packages would be financed by the Bank. Prequalification will be required for the work contracts for the construction of Shaft 3. ICB will be applied to all Bank-financed contracts exceeding t (totalling about $23.9 million) and the corresponding bidding documents will require prior Bank review. All other Bank-financed contracts, up to an aggregate amount of $1.0 million will be procured through LIB and would be subject to ex-post review by the Bank. Foreign Procurement (US$ million) IBRD Bilateral Aid --- ICB LIB Other Germany (KfW) France Total Works contracts Equipment supplies Technical assistance Total * * Excluding working capital. 70. Disbursement of the proceeds of the Bank loan would be made on the basis of (i) 100% of foreign expenditures for the following components: equipment for underground works and Shaft 3; underground and surface equipment ($11.8 million); and consultants services ($1.9 million); and (ii) 95% of total expenditures for works related to construction of Shaft 3, and drilling and construction of surface equipment ($10.6 million). Unallocated funds amount to $2.7 million. No special account would be needed for the project. An amount of $2.5 million would be made available for retroactive financing from July 31, 1984, for expenditures incurred for technical assistance and for works (Loan Agreement, Schedule 1, paragraph 4 (a)). The disbursement schedule differs somewhat from the usual country/industry profile in that the project implementation period is short. This is due to CdM's familiarity with similar procurement which should facilitate rapid project start-up.

27 Proiect Benefits and Risks 71. Economic Rate of Return. The iticremental economic rate of return for the project is estimated at 36S, and is based on production scenarios and capital and operating costs used in the financial analysis of CdM with the following exceptionis: import duties and all taxes were not taken into account and, a conversion, factor of 0.8 was applied to all local labor costs. This high rate of return, due principally to the rehabilitative nature of the project, has been found also to be most sensitive to a 101 decrease in sales revenues, whereby'the resultant ERR (242) indicates that the project remains nevertheless highly attractive. Benefits 72. The most immediately obvious and quantifiable benefit to be derived from the proposed project is the foreign exchange earnings and savings that it will provide, and the impact of these on the Moroccan balance-of-payments. In this regard, the incremental annual export earnings would increase from $0.2 million in 1985 to $3 million by 1990 (in 1984 telms). In addition, foreign exchange savings due to the use of Jerada coal by both cement and power sectors would amount to $27 million (1984 dollars) by Combined, the foreign exchange earnings and savings resulting from this project would by 1990 largely exceed the estimated $6 million (1984 dollars) in foreign debt service, and after 1990 range around 4S of Morocco's average oil import expenditures in recent years. 73. Other, less quantifiable benefits accruing from the project include the institution-building effect of the project by its contribution to the improvement in CdM's planning and management and in its general financial health, thereby preventing dependence on budgetary subsidies. In the absence of the proposed project, employment at Jerada would decline. Expanded production under the project permits maintenance of current levels of employment vital to the development of the Oujda region. The project would significantly improve health, safety and overall working conditions in the mine, and would have no adverse effect on the environment. Risks 74. The project carries geological, technical and economic risks that are prevalent in underground thin seam coal mining. The geological risks are of two kinds: lower mineable reserves than estimated, and difficult geological conditions linked with the shaft sinking. As in other mining projects, these risks cannot be fully eliminated. However, they have been minimized in this case by the incorporation of a drilling program designed to verify the continuity of geological conditions before major works are started (para. 54). In addition, 202 contingency provisions have been made for the shaft construction. The technical risaks, relating to the possibility of CdM not attaining the planned production build-up, have also been minimized by the planned reinforcement of CdM's organization and staffing and by a well specified technical assistance program (paras. 59 and 61). The economic and

28 financial risks relate to the long-term competitiveness of Jerada coal vis-&-vis imported coal. As described earlier the comparative advantage of Jerada lies in its proximity to its two main consumers (85? of production). For both the Jerada power plant and the CIOR cement factory, al&ernativp fuels would be far rostlier than Jerada coal, a trend that is expected to prevail in the future. PART V - LEGAL INSTRUMENTS AND AUTHORITY 75. The Guarantee Agreement between the Kingdom of Morocco and the Bank, the Loan Agreement between the Bank and the Charbonnages du Maroc and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank are being distributed separately to the Executive Directors. 76. Special conditions of the project are listed in Section III of Annex III. Special conditions of effectiveness include the satisfactory arrangements for securing the French financing (Loan Agreement, Section 7.01). A special condition of disbursement for the construction of the vertical shaft is Bank approval of the proposed work program for the shaft sinking (Loan Agreement, Section 3.02 and Schedule 1, para. 4(b)). 77. I am satisfied that the proposed loan would comply with the Articles oe Agreement of the Bank. PART Vl - RECOMMENDATION 78. I recommend that the Executive Directors approve the proposed Loan. A. W. Clausen President by Ernest Stern Attachments February 27, 1984 Washington, D.C. J

29 T Z A L LM X ANNEX 1 PA* I am CREW- mq.m) i.o.u i,,@lk uiyuuspstk N. AFIC NW KI L KAT RAISC A & ~ ~ ~ ~ ~ ~ ~ ~ m MTRao ETMB TOTAL AOhICULTURAI f A (ZILORANSOF munusm~~~ CI ~ KWIAUM) uumutn> ~ ~ 11. as nuus 1z7.0 *ls. 62. I " M.5S r vu cum (nun mio cmisuwni a cann POPLATIo,NI-TEA. (TUwANDs) URA POLATION C7 OF TOtAL) POPULATON PROJECTION POPULATION IN lean 2000 CXILL) 31.2 STATIONARY POPUATXON (CHI) 70.4 FOPUIATIO NOERIDISt 1.9 POPUATION nnsmn PEN sq. M PEN SQ. N. AGRI. LAND POPULATION AGe STRUCTURE (S) 0-la US ANA L POPULATIII GROWTH NATE 12) TOTAL L U CIU BIRTH NATE (PER treo) CRUX DATH RATS (ru T ) GROS REPROOCOTION RATS FAILT PLANNING ACCEPTORS. AIUAL (TNOIS) tj USERS ( op naid N) rm A N INDEX OF FOOD PROD. PER CAPITA ( 19b9-71-IpO) 99.0 a PER CAPITA SUPILT OF CALRIES CS Of EQUIRIET) PROTEINS (COAS a MY) OF VllCK ANIMAL AND PULSE A CHILD (ACE 1-A) DEATH RATE LIFE EVECT. A? SIRTH (TEARS) INFANT NHUT. NATE (PER TIROUS) ACCESS TO SE WATER COP) TOTAL MQ.e ± URIS s RURCAL S dt ACCESS TO LICRA DISPOAL (2 OF POPULATON) TOTAL., 29.0,, URIl RUAL., POPULATION PM PlSICIS Of POP. PER RUNIG PERSON t S Pop. PR OSPITAL BZD TOTAL ±* na o r RURAL f ADtiSsi101 P OSITAL CSD LL AVERAGE SRE if HOUSEHOLD TOTAL URN ** RURAL AVnAS N0. 0 PRUOM/NodE TOTAL URlA RURAL ACCESS TO ELECT. (R Of ONELINGS) TOTAL mm RURAL

30 -25 - ANNEX I T A I L! 3A FACE 2 _HROCCO - SOCIAL INDICATORS DATA SHEET MOIOCCO UPERENCC GROUPS (WEICHTED AVERAGES) a MOST (MOST RECENT ESTIMATE) /b 9IRECENT MIDDLE INCOMC RIDDLE NCOIC 196Lb m97lb- ESTIMATCE1b N. ARiCA a HID EAST LAT. MRICA A CAR ADJUSTED EHRLLMENT RATIOS PRDIARY: TOTAL MALE FEMALE '1 SECONDAY: TOTAL MRLE FERALE VOCATIONAL (Z OF SECONDARY) PUPIL-TEACHER RATIO PRIMARY SECONDARY ADULT LITEIACY RATE (C) PASSENGE CARS/THOUSAND POP / RADIO RECEIVttS/TMOUSAND POP TV RECEIVERS/THOUSAND POP NEWSPAPER (CDAILY GENERAL INIZREST) CIRCULATION PER THOUSAND POPULATION /f CINEMA ANNUAL ATTENDANCE/CAPITA Ih 2.0 7T LABOR OC rotal LABOR FORCE (THOUS) FEMALE (PERCENT) AGRICULTURE (PERCENT) INDUSTRY (PERCENT) PARTICIPATION RATE (PERCENT) TOTAL MALE FERALE ECONOHIC DEPENDENCY RATIO INCOME DISTRXSUTION PERCENT OF PRIVATE INCOQE RECEIVED BY HIGHEST 51 OF HOUSEHOLDS 16.0 It 20.0 I. HICHEST 20S OF HOUSEHOLDS ? i WWEST 201 OF HOUSEHOLDS 7.0 Wt ? LOWEST 4OS OF HOUSEHOLDS 8.O T ?, PoRVtil TARGET GROUPS EStIMATED ABSOLUTE POVERTY INCORE LEVEL (USS PER CAPITA) URBAN If RURAL ? ESTIMATED RELATIVE POVERTY INCOME LEVEL (USS PER CAP1TA) URIR' If RURAL T ESTIMTAED POP. BELOW ABSOLUTE POVERTY IXCO14E LEVEL (1) URBAN If RURAL T NOT AVAILABLE NOT APPLICABLE N O T E S /a The group averages for each indicator are popaetiu1-ueighted arithmetic means. Coverage of countries among the Indicators depends on availability of data and Is not uniform. lb Unles6 tiher1..t noted. Data for 1960 refer to any year between 1959 and 1961; -Data for 1970" between 1969 and 1971; and data for -Most Recent Estimte" between 1980 and /c Excludes the ex-spanlsh Sahara; Id 1976; /e 1977; /f 1979: L 1978; /h 1972; IA Consumption expenditure of households. JUNE. 1964

31 -26 - ANNEX I m.s.inm w nes. emiasespage 3o Mmcc.e. Olte.96iCe to Jtoe w~nooie.e.tilej.""i am as.ehi md mia.lho. It eh.ld ties he emsd CUele, -, ac *6 leit-namaliso ee0sl e.mc ic ink o.1 Oi dlodoisd goiies. ae -misp 04, iib.l.t.l ntist me eollciem the dome tim asset on. sh os oeit demerge. en.1 en 11iMo. Mimie. sko".. em lkeheweletlo anile isetdajor i is.at =i tlw2 ra f ean sic.0 Cii imtan omn all e. imp meo., -Ntep talet (a) s 5M.n.m nual. I l *almost *%.of. o n ene- t-.4t oo,t mi. Ioeee fct as5 d... liii feoit gsop.,te "MB.nb_al. A tti a MAL h tm t soe hem..1 oem. *l-maie -po ft. 4. am... Ina see I tet lien 6*6m cneto.1p psieton nonal she. InMio"".c 5. e - tslson IlWast,of stase nd em nel-..- t en,eee 10*5 *.sqglmd 54 ratlocie enma...to4 1MC c -lb..ihe. T..emantedi o "lf a9.ee se emissionsh eels -I ' - ledlmnceee. ii.. i-se sow cssp a Ails (seneca... c.i flai~~~~~~~~~~~~~~~~~~mlnntm flfta, Peetela di...olds eih. 4. pq.f m its s.d dole. loll Id Woi r.a4aeso essel g P.t. - Pipe.ehsa e tc. W1as.t tti 1.kll iiao..,i tu lisi st. o,eed...e.seoul cemnormsdbeesadnl eerm i neibncoi e-ee., pteiisa.eto o.me.ic~5i cd *loit mice' " i Is li. =9sis A. 'RoMee nclot.1e. ast. weelel.helo1 emrctlcs. haee-t. gmash. lo-it no PU CA!iYs ow tots omonis. eoowdll aco -nest an peesscesalelf HOW hy apeelesro lh.m or. altosi weiss? tee.. *tgt sa i~ie5le. teseelo.onc M.. a1 hem. -Ioie..n. Wetee elicets. ceo.) Mice0 eel. Aip.nii..ome.mcln em ad ce.simte eemoliii itti ylewe el us9 s P.es pet,c nlisi 10. poateetd n 41101C to el cedoni Iecm.lO.O. moen, alost dnlc. ' CI. et-w soodiei. I. so s isod-t. d".. ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~ M ~ ih. Omege ~WICW?t" ba! 49 Ciso I esce em oel -1Mess.6 0t..s e Inst smleltie eee.toefse fsitcl6hnloo m et- e.goi- -re omsesbtlleg.4 in. -- ieeisent. es. o s. -P a e eicds I eei smelcec. low. tin. ae ink ems.. ihe hosseeld fee issu,.-,dsl meepiect. - Ceec Paeloola ftsjm.bas ms. hwoodntwepton ec es, n och.. We eteolo.eso *M* 0096.qs o.mp a si. a that nweello, a ed i Ilie61 isollso. e-po.pieoes. ftiliqi onwtssd =as.poccnno, iilosi. tocse. Ptee..Lslo vesroete fn ntisllsq.'0" Soonds chito.-eop P5flO tan. ti- petls. to. fscells em clens locn shi aet ofmoi... ie olqicoolc,.efe an te oelm.n eslier amteea o, Aes noni, a no- ISle.F".a.kdetng,Icneta etleg sooce seoo Soc Ief1ee Coastem otchecil niselit 1. a lliic losesm In pejciom estic mob a"pefore" nt.- cosl, LaM ch-lhme o-piie or tltpou Ielaptsae0.csce 0 5CI M teem olltonili iee nnli a ielocom mcm Ic peoi, osoologe odeaoctae 0 _04911 immlm RaLm...s 01-1 ao eql n SMiohtt.io no ciihsc lo s.ase cso ot setni idsl enlm 1 n e my f I.ea MP5.40 his c sheo p6tceesnd ihts icci.6 ema to-,ssl I.eM..WMearysplsescol-ke,e as. sacale -,iss abcld s neh--ewi 2.Pf. acmnic dm win.1o tc of. ccl V." Ls o inonds. -,=eitinn.l. Fes -onwaft.# oprcaw e.nasnw Iesis lce wee.loo 4944m - Is i.. t2mi toe a belte S.es, coass oo. tisecow poseido.49.&_e.to -loaeimw toelr -ee-do is- Ice "ach M6 tie tuc 1.swccne-eelte9-ICe ho" ho octcee. sees sepsi weal1, 1.iEi.. 56, cawer4 adec eoensl cic1 cictoome o ba,.c co L poesissa h e of I noosmi ft s.c teaipon emeougceqplncqoc3. tute sei*i mitloss..- isl.lo some. l oneisa-e_tcaaeojatiiioott -Id"q.. qe d a-ooo.. t- t st si.tds0 Lic c jqjft, a 196' de.- LL. I d-idolds ileio 0 it iltc dsle t Il meta.. ose pipslosina 1100.iOU. a soil in..c%n I si.. ol Iso.-I.eais..m - -lcc..pwec a imliow L.;m- A Mise inn.0 se&.i Le- ototlep, mlditia. "o, Rocks fc teifcossc-m.esc r~~~~~~~~~o~et enien Ii al P" 9~~~~~~~~~~~~~~~~~sLiidnbt. icneolon aw t.pe gices taoeloetian.1 tel. fcseeel ton blihm per irosamond o egon.a, Is olinos dsom fcc mack 7iOtr neorno he inomgslo etc -ns MM.a m.m no ItMtoo wo oho.e aeon a Ic os. a weheln es, fntgosee m 5wIf e he antwip ssln Pewi" Iseowetse pmence ecop-alouet.i i U ia fin i i - 5*6 ls onntop t.ointo pagens, mostly ft-ooect -. am odalq to ton. tell. ae "i1ilopui1 GOSIiiiockIiUAeeiiesnipnet. deftlni.0 pi,"cnea s["a. p.ietoot, dno-" "'L.",LTon,i 1..ncilc spessoow -. t to nnlhtcadro ev of ancin m i dsaar, to cosi a ad - mees nat meo s. cn - nii liii - ~~~~~~mee pintccl4 my fi..0 oooe.neta ill fielo a. 1W. d.il. B. Myldsee pollsom i =e.ot.,.o L l-on.sei lt sonilttedcoslgeiitttndllsigw.s.seln eshon Wis. Iii ckis l-, tahe- tan it tnesei tne.. imole a0 I i~iton flm ntes o ci0060) Moeto s.o eneeoo e.. JluJinSMLm - t finsr to leai ngi.oolwesc. oo-eln tsed a dolt.oss L-R." of asn lam tansiiseoid - inns nts.im afq l.- PgylieIn em Sq. on tlobl neeti, soplo easoal,ws pwgsata glipsie ia" edtn 000. sail ade1". m. l n a e.icg iee n gmego he Sm ne. o e tint ist cm.ofi P* lq ciint f sceont. ai PCI oaltwa , alkam.00 lsooa W51Mpmsmn WnAI. le nmn ntneoes no 'a 4.6 as aepi a 0 ltnl a Ic Wm g,in* ha-im et nelson ate ii a o ecn.. Pet i,ceare sjairadb nois Z L -a Pteisdoseen In e nil. M64tsg j Mlsg tt (5,_tPontrs - ofiii - M 0 lent sac Ien Nttad sf0 dl500.9 ci PPol polt. em Sepa 10 pneon of ahola.on.weattsnti f!a fssipoie lo ~ A t I.no se vnis JUM t etr ti.t.one. a WhM ti PesiW Mmpe. A ISO. M - Psqe lgwasaw teocly -. mi.iwssata e rdca,apae,i l trb& of gem e ipo4w -l 5 L L.- ice.c aeon.- tin nlo a - aml" P"" PM5 det Spnd AWM i tiedk of 091?o awail, ie t h S o mld ia s si-. a jaeroso. a0 ore- t- iase,ma,do, _ an eco_, _ room_._ Some 11smal, p onandsa- Ic ormn I games. cto M ten ItisechearLd. p t biy, M Mod V-" F." noplri insis.n pnotl b ton 01d ns.,. Me at00mon lnsto 1"t-4snt0ot Sjenntotewm5oMAt eqfl st a LI utsr lvf I." P.M-IM 106~~~~~~~~~~~~~I S= M. a;," ;~~~ ~~~~~~-,Pet -- na (g. tieimooe Ons, -. au&.- Occall "WA~~~~~~nodkkfto, son, some -.. in a ninoe3 = - tenpl p enoses heain Pa osede.cm29;m 3 d tend Molm njs he". food afs helesolind. male ildffc oo oemdh.=f f obr MAI-.dgd rmo.- hoe. anoblo 10mm nan - oh hole sims mdm the iset,t- niod, 08 9 ustg. old, enle ~Syn is~~~~ -1 - St fto-m. 4 ul- eacks4f- F.L1.b F -)I ~ pos t- seo. oos 4o. m o Woods, and ew 016*60 SiO I p-lain.. tio -d Co sisi e onl a nitmela0 an Pw.. 0tm a sanst * ones. ofa e m cano re,a lmo M oflo- Meongm as onm of ohbom show townlsho