Report No: PAD5668 PROGRAM PAPER ON A PROPOSED ADDITIONAL LOAN IN THE AMOUNT OF US$ 250 MILLION EQUIVALENT TO THE KINGDOM OF MOROCCO FOR A MOROCCO PUBLIC SECTOR PERFORMANCE (ENNAJAA) PROGRAM ADDITIONAL FINANCING ADDENDUM TO TECHNICAL ASSESSMENT Strategic relevance and technical soundness of AF & restructuring. 1. The strategic relevance and technical soundness of AF and restructuring are confirmed. The assessment reflects 1) the performance of the parent Program to date; 2) documented progress in the implementation of the PFM reforms initially supported by the parent Program in the 2024 PEFA assessment; and 3) the government efforts to broaden and deepen the implementation of the overarching policy and legal framework of PFM reforms, namely the organic law of finance (LOF). 2. After almost two years of implementation, the Program has achieved significant results towards its development objective and is disbursing satisfactorily . Progress towards achievement of the Program’s Development Objective (PDO) is rated satisfactory, as is Implementation Progress (IP) according to the latest Implementation Status and Results (ISR) report (archived on 26-Apr.-2024). The disbursement rate is at 41 percent (including 18 percent net advance). 3. AF and Restructuring build on the findings of the 2024 PEFA assessment, which reflects significant progress in PFM since the enactment of the organic law of finance (LOF), by addressing identified opportunities for improvement. The 2024 PEFA assessment highlights significant improvements of Morocco’s scores since 2015, with ratings of A or B+ across 14 indicators (Performance Indicators, PI) and improvements in 27 sub-indicators. Yet the assessment also reflects lasting weaknesses on public access to budget information; public investment management; management of public assets; public debt management; accounting and reporting; and parliamentary oversight and external auditing. Concurrently, while the performance drive instilled by the 2015 Organic Law has taken hold, it is not uniformly applied, and challenges remain. These include the application of quality standards across all ministerial departments, evaluation and accountability in relation to performance, or alignment of performance projects with key service providers (such as SOEs). Gender budgeting is being promoted, yet the tracking of related expenditures or the inclusion of gender criteria in public investment projects is still pending. Critical preparatory steps are taking place for Climate-Budgeting, but delays have been incurred in rolling it out. These challenges are to a large extent critical aspects of the Government program which the ENNAJAA PforR accompanies, yet some of which (such as PIM or public asset management) were not included in the parent operation. Table 1: Improved scoring under the 2024 PEFA assessment Indicators 2016 rating 2024 rating Budget reliability A A PI-2 on Expenditure composition outturn B+ A Budget transparency and comprehensiveness C+ B PI-5 on Budget documentation D B PI-6 on Central Gvt Operations outside financial reports B A PI-8 on Performance information for service delivery B B+ Predictability & Control in Budget Execution B B+ PI-20 on accounting for revenue B+ A PI-22 on Expenditure arrears D A PI-26 on Internal audit C B+ Table 2: Identified weaknesses and areas for improvements by the 2024 PEFA assessment 1 Indicators 2016 rating 2024 rating Budget transparency and comprehensiveness 1 Based on the draft PEFA report dated February 16, 2024. The report has received the PEFA Check and has been reviewed internally but it not published yet. PI-7 on Transfers to sub-national gvts D+ C PI-9 on public access to fiscal information C C Management of Assets and Liabilities C C PI-10 on Fiscal risk reporting B C PI-11 on Public Investment Management C C PI-12 on Public Asset Management B C PI-13 on Debt Management C C Policy-Based Fiscal Strategy & Budgeting PI-16 on Medium-Term Perspective in expenditure budgeting D+ B Accounting & Reporting C C+ PI-28 on In-year budget reports D+ C+ External scrutiny & auditing B C+ PI-30 on External auditing B C+ PI-31 on Legislative scrutiny of audit reports NA C+ 4. The AF and restructuring are also justified both by the willingness and efforts of the government to extend and deepen the reach of PFM reforms under the organic law of finance (LOF). The implementation of the 2015 Organic Law of Finance (LOF), which underpins the Program, has been successful as reflected in improvements in Morocco’s ratings in the 2024 PEFA assessment from 2015 to date. The Government of Morocco (GoM) is preparing amendments to the Organic Law of Finance in order to address some of the opportunities for improvements identified by the 2024 PEFA assessment, including on budget transparency and comprehensiveness, and public investment management. The thrust towards improved service delivery through far-reaching ongoing reforms (e.g., social protection, health etc.), pressing infrastructure needs (e.g., transport bottlenecks, hydric stress etc.) and various contextual challenges (Al Haouz Earthquake, War in Ukraine etc.) has led the GoM to bolster performance culture in public policy under the LOF and enhancing domestic revenue mobilization. Updated assessment of implementing agencies 5. The institutional set up has proved effective and remains mostly unchanged with the inclusion of two departments within the MEF. The MEF will continue to manage ENNAJAA and the addition of two of its departments to the institutional set up for implementation, the Directorate of the State domain and the Department of Public Enterprises, does not add to its complexity as both fall under the coordination responsibility of the Directorate General of Administration and General Affairs (DAAG) at the Ministry of Finance (MoF) which anchors the PMU and has ensured seamless horizontal coordination between implementing agencies to date, fostered reforms at municipal level and allowed for close monitoring of Program implementation. Updated Program definition and boundary. 6. The initial Program definition and boundary remain relevant as changes to the result framework fall under its scope. All changes are within Result areas 1 & 2 as initially defined. Detailed description of changes. 7. Most changes pertain to the result framework and are described in detail in the main text. A detailed updated Theory of Change is presented in tables 4 and 5 below for RA#1 and RA#2. The ToC remains the same as the parent project for RA#3. Color coding: - DLR 1.5: new DLR added by the AF - DLR 1.1: DLR from the parent project - PDO: PDO-level indicator Table 3: Detailed Theory of Change for Results Area 1 (improving the efficiency of public expenditure) RA1 Outputs Intermediary Outcomes Outcomes LT Outcomes Budget Reform and Transparency Circular (or equivalent 11 ministries2 have implemented at least Increased proportion of administrative/legal act) establishing two quality standards (in line with circular performance indicators achieved the quality standards to be met by or equivalent administrative/legal act) (PDO) and gender-related the PPs, (DLR 1.1), which includes (DLR 1.3) indicators achieved (PDO) gender Increased number of ministries adopting Summary of PPs and Citizen and using common priority indicators Budget published annually Circular (or equivalent 19 ministries have adopted Management Increased number of ministries administrative/legal act) establishing Charters (DLR 1.4) implementing their performance a model of Management Charter management charters (DLR 1.2) 16 ministries have adopted a roadmap to Improving Efficiency of Public Expenditure implement management control (DLR 1.5) Increased number of SOEs adopting management tools (DLR 1.7) Legal provision introduced to cap Special Treasury Accounts’ revenue Fiscal fragmentation reduced Special Treasury Accounts’ revenue reduced (DLR 1.6.ii) (DLR 1.6.i) Spending efficiency Open Budget Platform giving access Morocco’s score on the Open Increased to user-friendly budget Budget Survey is improved to Accountability documentation (DLR 9.2) 61/100 with the roll out of a Increased transparency action plan (DLR 9.1 transparency and 9.3) (PDO) (new) 200 civil servants trained on gender- Circular on gender-expenditure tagging Gender-sensitive budget published budgeting (DLR 2.4.i) annually 8 ministerial departments have tagged and tracked their gender-related expenditure (DLR 2.4.ii) Circular on climate budgeting (DLR Climate-sensitive budgeting piloted (DLR Climate-sensitive budget published 2.1) 2.2) annually (DLR 2.3) Regionalization Publication of a circular applying on Enhanced and improved use of and Enhanced transparency through (i) the regions three-year investment access to the local IFMIS GID system timely publication by three Regions programing (DLR 3.1) (DLR 3.4; 3.5) including Fes Meknes of The platform monitoring Regional semestrial financial and physical Development Plans, with a SDGs- public investment execution tracking module (DLR 3.4), is reports (DLR 3.3); (ii) publication of operational in at least three Regions 6 municipal and regional citizen’s (DLR 3.2) budgets (DLR 3.6) 2 Or ministerial departments. Public Procurement Public Procurement Observatory Open Contracting Data Standards Action Six OMP’s statistical reports on (OMP) operational (DLRs 4.1 and Plan adopted. procurement published (DLR 4.3) 4.2) Digitization of post-contract awarding Open Contracting Data Standards Open Contracting Data Standards documentation (DLR4.4) piloted for the Invitation to Bids Feasibility Study completed stage Public Investment Management Legal provision introduced to Improved planning and monitoring of prioritize public investments (DLR public investments through interoperability 10.1) of the PIM system with the budget programming system (DLR 10.2 and 10.3) Table 4: Detailed Theory of Change for Results Area 2 (improving public revenue management) RA2 Outputs Intermediary Outcomes Outcomes LT outcomes Data-Driven Tax Administration for Better Performance Multi-year action plan to improve tax Increased exchange of information between 60 percent of the actions Improving Public Revenue Management compliance (DLR 5.1) the DGI and key partners3 proposed to address tax National tax compliance management and Tax Compliance Risk Management compliance risks have been risk analysis unit operational (DLR 5.2) Committee is operational (DLR 5.3) subject of decision for action DGI database interoperable with key Taxpayer satisfaction survey with gender- (DLR 5.4) partners databases disaggregated data completed Increase in targeted additional revenue collected by the DGI (PDO) Improved domestic revenue Local Tax Administration mobilization Arrêté relating to the application of Law 07- New governance framework is operational in Increase in revenue from efficiency 20 on local taxation (DLR 6.1) 400 municipalities. local taxes in the targeted Integrated Revenue Management System (DLR 6.4) municipalities (PDO) for Local Governments (Gestion Intégrée Increased municipalities’ coverage of GIR-CT de la Recette, Collectivités Territoriales - The electronic declaration and payments GIR-CT) implemented in at least 100 large system for municipal taxes is operational municipalities (DLR 6.2) (DLR6.3) Adoption of a new local taxation law improving the local tax base (DLR 6.5) 3 Selected key partners for DGI to exchange information with include customs, social security, vehicles licenses (National Authority for Road Safety [NARSA]), overseas remittances (exchange office). Multi-year action plan to improve tax Increased exchange of information between 60 percent of the actions compliance (DLR 5.1) the DGI and key partners4 proposed to address tax National tax compliance management and Tax Compliance Risk Management compliance risks have been risk analysis unit operational (DLR 5.2) Committee is operational (DLR 5.3) subject of decision for action DGI database interoperable with key Taxpayer satisfaction survey with gender- (DLR 5.4) partners databases disaggregated data completed Increase in targeted additional revenue collected by the DGI (PDO) Improved management of state’s assets and indirect revenue Arrêté relating to the application of Law 07- New governance framework is operational in Increase in revenue from 20 on local taxation (DLR 6.1) 400 municipalities. local taxes in the targeted Integrated Revenue Management System (DLR 6.4) municipalities (PDO) for Local Governments (Gestion Intégrée Increased municipalities’ coverage of GIR-CT de la Recette, Collectivités Territoriales - The electronic declaration and payments Increase in public GIR-CT) implemented in at least 100 large system for municipal taxes is operational establishments’ revenue municipalities (DLR 6.2) (DLR6.3) collection rate (DLR 5.6) Adoption of a new law on the State’s private assets (DLR 11.3.i) 90% of the State’s assets are registered (DLR 11.3) Risk-mapping of DDE’s revenue collection process (DLR 11.3.ii) Increase by 8% in revenue generated from the State’s Adoption of an action plan to reduce risks assets (DLR 11.3.iii) related to DDE’s revenue collection (DLR 11.3.ii) DDE has collected and digitized relevant data through a GIS (DLR 11.2) 4 Selected key partners for DGI to exchange information with include customs, social security, vehicles licenses (National Authority for Road Safety [NARSA]), overseas remittances (exchange office). Updated institutional capacity assessment. 8. The initial capacity assessment has proved relevant to the parent Program and remains so for AF & restructuring. Overall implementation progress under the parent Program is rated satisfactory under the latest ISR. Technical performance, fiduciary systems and M&E are also rated satisfactory while E&S system are rated moderately satisfactory. This reflects strong institutional capacity and robust coordination under the Directorate General for Administrative Affairs (DAAG) of the ministry of Finance. Further progress is needed on the operationalization of the Program Grievance Redress Mechanism and remedial measures are being discussed between the team and the client to that effect. The client is requesting technical assistance from the WB, including under a Reimbursable Advisory Services (RAS) across a range of activities and the team is exploring 1) opportunities for synergizing with ongoing technical assistance from other donors; 2) the availability of trust funds to finance Bank-Executed activities; and 3) contemplating the creation of a broad-ranged RAS to strengthen capacity. Updated assessment of the Program expenditure framework Updated result framework 9. The updated result framework is detailed in the main text. Updated economic analysis. 10. The initial economic analysis remains fully relevant. AF & restructuring will further support the implementation of program budgeting by extending the reach of the Program to public investment management and non-tax revenue: - Strengthening public investment management should contribute to improving the multiplier effect of physical capital accumulation in the public sector on growth and development. Two-thirds of the GDP expansion of the past two decades is explained by fixed capital accumulation, reflecting a sustained large investment effort led primarily by the public sector, which has resulted in a noteworthy improvement in the quality of infrastructure. Indeed, investment averaged close to 30 percent of GDP between 2000 and 2019, which compares favorably with most emerging and developing economies, with few exceptions in Asia. Yet GDP growth has been substantially lower than in other countries with comparable investment levels, such as Vietnam, India and Indonesia. This weaker growth performance is mostly due to the lower contribution of Total Factor Productivity (TFP), which on average (2010-2019) added 0.7 percentage points of growth per year in Morocco, against 3.5 percentage points in India, 1.5 percentage points in Vietnam, and 1.1 percentage points in Indonesia. It is expected that the Program will help enhance the outcome effectiveness of capital expenditure. - Further support to tax and non-tax revenue mobilization will help address financing needs for the implementation of the New Development Model. AF & restructuring will support recent government efforts to further bolster local tax (including through the enactment of the 2021 framework law on fiscal reform) and non-tax revenue, i.e. the revenue yield of state assets (beyond innovative financing recently introduced to that effect) and revenue collection by public establishments. The AF will support the adoption and implementation of a new local tax law, which will revamp the current local tax policy and increase the local tax potential. Along with the modernization of the local tax administration governance framework and tax payment digitization, both supported by the Parent Program, these endeavors will positively impact the municipalities’ financial autonomy. On non-tax revenue, the AF will support the State’s Asset Agency (DDE) plan to reap the benefits of digitization and geographic information systems to improve assets registry and their monetization. 11. The AF will support increased revenues through non-fiscal sources. These include revenues from public establishment and non-moveable state private assets. With regards to the latter, revenues fall into two categories: (i) income from leasing, in its various forms (agricultural, urban and suburban) and sales of property, charged to the general budget; and (ii) income from real estate sales and payments by government departments for public facilities which are charged to the Fonds de Remploi Domanial (with the exception of sales of land for agrarian reform, which are charged to the Fonds de la Réforme Agraire). Under the 2022 Finance Act, the target set for the State Domains Department in terms of state revenues was set at MAD 258m. Actual revenues amounted to 27.1bn, representing an achievement rate of 1332% of the target set. This exceptional performance is explained by the proceeds from the sale of real estate assets to institutional investors within the framework of innovative financing mechanisms, worth MAD 25.07bn. 12. Innovating financing schemes are essentially asset monetization processes. Introduced by the 2019 Finance Law, they are centered on active management of the State's real estate assets and consist in selling functional buildings to institutional investors (CDG, pension fund) while preserving their public service use through long-term leases. Revenues are accounted for as non-tax incomes. Rents are paid once property titles have been exchanged creating a future liability. The buying entity uses the assets to raise money in the markets through an investment vehicle. To this end, real estate transactions involving 98 properties in the State's private domain were concluded in 2022 with real estate investment trusts (OPCI) managed by AJARINVEST, a CDG subsidiary raising an additional MAD 25.5 bn in financing (DDE Annual Report 2023). 13. According to the IMF, such schemes have generated MAD 74.3bn of revenues between 2019 and 2023 and is expected to generate MAD 35bn of revenues per year over the next three years. Considering their importance, adding more details on the planned sales in the Medium-Term Expenditure Framework would provide further assurances about the capacity to meet announced fiscal targets (IMF, Article IV, 2024). These schemes are however not supported by the AF to the extent that they are not structural and in fact depend on critical actions by authorities in order to secure asset registration. Updated expenditure framework. The detailed updated expenditure framework is presented in table 6 below. Table 5: Detailed updated expenditure framework Parent PForR AF AF Total AF2027 AF2028 Type of 2021- 2025 2026 amount RA Ministry Depart. Budget Program expenditure 2025 (Million (Million (Million (Million (Million (Million US$) US$) US$) US$) US$) US$) P115 Economic policy and MEF DB 5.7 0.5 0.5 0.5 0.5 7.7 General Budget – public finance strategy Investment and P130 Steering and MEF DAAG 84.6 4.7 4.7 4.7 4.7 103.4 Operating Management expenses (GB – P117 Execution of public RA1 MEF TGR OP) expenditure and public 32.4 0.8 0.8 0.8 0.8 35.6 accounting 3.2.0.0.1.08.006 Special Fund - MI DGCT Fès-Meknès Region 352.0 77.7 77.7 77.7 77.7 662.8 (Investment & operating) TOTAL 474.7 83.7 83.7 83.7 83.7 809.5 RA1 P116 Facilitating and MEF ADII securing trade and 47.7 0.3 0.3 0.3 0.3 48.9 consumer protection GB – OP P118 Tax revenue MEF DGI mobilization and 45.3         45.3 RA2 collection P119 Management of the 3200113003: State State Private Domain: 20 MEF DDE Reemployment   7.9 7.9 7.9 7.9 31.6 – Acquisition of Fund administrative building TOTAL 93.0 8.2 8.2 8.2 8.2 125.8 RA2 P140 Steering and MEF DAGG GB – OP 5.3 5.3 Management P124 Administrative MTNRA DRA GB – OP reform and improvement         17.0 RA3 of public services 17.0   ADD GB – OP P429 Digital Economy 35.0         35.0 TOTAL 57.3         57.3 RA 3 Total 625.0 91.9 91.9 91.9 91.9 992.6