PROGRAM INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB6909 Operation Name First Economic Competitiveness Support Program Region Middle East and North Africa Country Kingdom of Morocco Sector General Industry and Trade (100%) Operation ID P127038 Lending Instrument Development Policy Lending Borrower(s) Kingdom of Morocco Implementing Agency Ministry of Economy and Finance and Ministry of General Affairs and Governance Bd. Med V. Quartier Administratif Rabat – Chellah, Morocco Tel: 212 5 37.67.75.01 to 08 Fax: 212 5 37.67.75.26 Date PID Prepared April 4, 2012 Date of Appraisal April 2, 2012 Estimated Date of Board Approval June 5, 2012 Corporate Review Decision Following the corporate review, the decision was taken to proceed with the preparation of the operation. Country and Sector Background Over the past decade, Morocco has made good progress in carrying out business environment reforms, but the actual impact of these reforms, albeit positive, has been insufficient. The private sector has responded positively to these reforms, but productivity, export diversification and technological intensity still lag other emerging countries. The key Private Sector Development indicators show a weak creative destruction in the Moroccan economy, and therefore relatively weak economic and productivity growth prospects. The need for a structural transformation of the Moroccan economy that will lead to stronger growth and job creation requires a comprehensive and coordinated set of policies in several key areas: stability of the macroeconomic environment; an improved business environment— including in the area of infrastructure and in regulatory institutions; a trade policy that supports the competitiveness of Moroccan products; a financial sector that better serves smaller firms; a labor force that is better trained and effective social protection and labor market institutions. Operation Objectives The objective of the DPL is to support policy reforms in three key areas of the Government’s comprehensive economic strategy: investment climate, trade policy/logistics, and economic governance. 1 The Morocco Economic Competitiveness Support Program development policy loan is a key activity planned in the Bank’s Country Partnership Strategy (2010-13), more specifically among its first pillar “Enhancing growth, competitiveness and employment�, while contributing significantly to the CPS cross-cutting governance theme. Accordingly the key outcomes can be summarized as follows: I. Improving the investment climate, through:  Reduced barriers to entry to SMEs by abolishing the mandatory minimum capital requirement for creating a limited liability company (SARL).  Reduced room for discretion and arbitrariness in the implementation of regulations, by upgrading, standardizing and publishing new regulatory forms for a first set of 20 priority administrative procedures identified by the public and private sector, in addition to simplifying their respective processes.  Strengthened administrative information-sharing among all agencies interacting with firms, by the implementation of a unique enterprise identifier and a central database of firms, sharing administrative information from all relevant agencies.  Reduced delays in payments to SMEs, by the adoption of a “Payment delays� law regulating that aspect of commercial contracts and defining late payment penalties. II. Furthering trade policy reform and trade facilitation, through:  Reduced tariff rates for industrial goods.  Updated and modernized legal and regulatory framework for import standards and their enforcement.  Reduced delays for trade operations by streamlining port logistics through integration of the online Portnet system. III. Improving economic governance, through:  Increased transparency and accountability in the process by which investment incentives are granted and monitored, leading to more effective government intervention, reduced discretion and better monitoring for results of industrial/investment policies.  Improved government coordination and private-sector involvement in the design, implementation and monitoring of investment climate reforms, leading to increased and more effective business environment policies.  Reduced monopolistic behavior by strengthening the competition legal framework and the Competition Council in charge of enforcing anti-trust and competition regulation. There are 10 Prior Actions identified with this operation: D1. The Inter-ministerial Committee in charge of Managing the Common Business Entity Identifier has appointed the Tax Administration to be in charge of hosting, managing and 2 operating the database centralizing the common business identification codes in accordance with Decree No 2-11-63. D2. The National Business Environment Committee (Comité National de l’Environnement des Affaires - CNEA) has approved a priority list of at least 20 administrative procedures for businesses that will be simplified and standardized. D3. The Law No 32-10 modifying the Code of Commerce and imposing minimum standards in payment delays in commercial contracts has been approved by Parliament and published in the National Gazette No. 5984 of October 6, 2011. D4. The Law No 24-10 amending the Law No 05-96 and abolishing the requirement of a minimum capital for incorporating a limited liability company (Société à responsabilité limitée - SARL) has been approved by Parliament and published in the National Gazette No 5956 bis of June 30, 2011. D5. The Ministry of Finance has issued Circular No. 5306/210 dated December 30, 2011 regarding the tariffs reduction on imports of industrial products for 2012. D6. The Head of Government has issued the implementing Decree regulating anti-dumping, anti- subsidy and safeguard measures in accordance with the Law No 15-09 on Trade Defense published in the National Gazette No 5956 bis of June 30, 2011. D7. The company PORTNET in charge of operating and managing the IT system for data exchange between public authorities and private trade operators has been established by its shareholders on January 19, 2012. D8. The Head of Government has issued a Circular providing for the mandatory preparation of costs and benefits assessments of investment projects submitted to the National Investment Commission. D9. The Secretary General of the MAGG has issued a Decision dated November 21, 2011 establishing within the MAGG a Department in charge of improving the investment climate and acting as the secretariat of the National Business Environment Committee (Comité National de l’Environnement des Affaires - CNEA). D10. The Government Council has approved the draft Law modifying the Competition and Freedom of Pricing Law No 06-99, reinforcing the powers and independence of the National Competition Council (Conseil National de la Concurrence - CNC). Rationale for Bank Involvement The proposed DPL is one of the key operations outlined in the FY10-13 CPS discussed by the Board in January 2010. The CPS is designed to help Government achieve its medium term priority objectives in a flexible and responsive way. It is organized around three main pillars. The first concentrates on activities that encourage growth, competitiveness and employment, including fostering macro-economic stability and promoting private sector development as an engine of growth. The second pillar supports the improvement in access to, and quality of, public services, including the development of institutions and management systems. The third pillar aims at ensuring that Morocco’s development can be sustainable and addresses natural resources and climate change challenges. In addition, the CPS places a strong emphasis on the governance agenda which is to be mainstreamed across the Bank program. As further described below, 3 MECSP is closely connected with the planned second financial Sector DPL series and the Skills and Employment DPL series as all three underpin the first pillar of the CPS, along with operational support in the justice sector and on information and communication technologies, to support government in enhancing growth competitiveness and employment. The needed structural transformation of the private sector requires improvements in many areas. A stable macroeconomic environment; addressing factor costs issues (such as energy policy, land policy, labor costs); an improved business environment - including in the area of infrastructure and in regulatory institutions that level the playing field; a trade policy that supports the competitiveness of Moroccan products; a financial sector that better serves smaller firms; a labor force that is better trained and effective social protection and labor market institutions. Tackling this competitiveness agenda requires a comprehensive and coordinated set of policies. While progress in these areas is notable, there is a strong need to increase the impact of reforms and the response of private investors to these reforms. Even though Morocco has recently significantly improved its Doing Business ranking, weaknesses remain in the business - environment, especially in those areas like regulatory reform - that require public agency coordination, and where a gap remains between the laws as they appear on the books and how they are applied to individual investors. While export development plans are in place (Emergence and Maroc Export) and Morocco adopted an ambitious FTA agenda, some areas of the trade policy - including trade logistics and trade finance - remain to be developed. Financial sector reforms have been impressive in Morocco, but there is room for these reforms to trickle down to domestic SMEs that remain credit constrained. Finally, the employability of Moroccan workers in a changing environment remains a critical problem in the labor market: firms which need to move up the value chain to remain competitive require better trained workers currently a scarce resource according to business surveys. Improving the skills of the labor force, the functioning of labor market institutions and the effectiveness of social protection is paramount to help the structural transformation o f the Moroccan economy. The new Government’s program was articulated by the Head of Government Abdelilah Benkirane in January 2012 and covers the 2012-2016 period. The government’s program aims at improving social outcomes with a special focus on youth and families, particularly in education, health, access to services including housing, and in due course to establish targeted safety nets mechanisms as a substitute for the current ineffective subsidies. The government program also singles out enhancing growth, export potential, and investment in the country by focusing on key productive sectors (tourism, craft trade, agricultural and fisheries development), and on investment climate issues (export framework and procedures, business environment). Finally, the government will implement key cross-cutting reforms needed to deliver results in all sectors: (1) improving governance; (2) reforming public administration; and (3) deepening decentralization and deconcentration, for better service delivery. As regards good governance, the areas of future focus are multiple including access to information, reform of fiscal system, budget reform, and a profound reform of the justice sector. Improving growth and competitiveness are central to the new Government agenda for a shared economic development and job creation. Key areas of priority on the economic front that 4 this DPL series supports include strengthening the competitiveness of the economy through transversal reforms to: improve the investment climate, support SMEs and continue the trade policy reform agenda. Among others, the government’s program specifically mentions the new competition law to reinforce the independence and the powers of the Competition Council, a new investment law to incentivize entrepreneurs, the modernization of the export framework, and the simplification of administrative procedures for investment. Particular emphasis is placed on improving economic and financial governance, which is pivotal to attain the ambitious objectives of the new government’s agenda. Tentative financing Source: ($m.) Borrower/Recipient IBRD 160 Others (specifiy) Total 160 Tranches (if applicable) ($m.) First Tranche 160 Second Tranche Etc. Total 160 Institutional and Implementation Arrangements The responsibility for implementing the program rests with the Ministry of Economy and Finance and the Ministry Economic and General Affairs. Building on the positive experience accumulated over the course of several World Bank budget support operations, the two ministries will continue to take the lead in monitoring progress in implementation. The Bank staff both in HQ and in the field will continue to maintain dialogue with the key counterparts and the relevant sector ministries and will conduct periodic reviews to assess progress in implementation of the program supported by this operation as well as of the broader reform agenda pursued by the Government. In this context, dialogue and reviews will continue to focus on the outcomes of the program and eventual adjustments that may be necessary in order to take into account the latest country developments, stakeholder support, and feasible options for realizing the intended development goals. Consequently, specific attention will be devoted to monitoring indicators and goals of the program. This operation will be prepared and supervised by a field-based team located in the Bank’s Rabat office. Risks and Risk Mitigation The key risks are: 5 Political Risk. The political and social events in Morocco since the Arab Spring represent real pressure for meaningful and quick change and there are high expectations amongst the population that these reforms will have to be implemented in a credible manner. The new Government’s articulated reform agenda – and the discussions that the Bank has held with key Ministries to date – confirm that there is a credible and strong commitment to the proposed reforms. The envisaged agenda has broad support and the Government has reiterated its willingness to continue to work for the quick implementation of key measures that should not be delayed in light of political constraints. The Bank team will continue to monitor the political evolution closely and will continuously assess the potential for political developments to influence the implementation of the Bank’s program and this operation. The Bank will stand ready to adapt its assistance program, particularly with respect to specific reform measures supported by this DPL, to those additional measures and reform areas that the Government would like to implement. Macro-Economic Risk. Morocco faces three macroeconomic risks: the possible deterioration of the on-going global economic difficulties - especially in Europe, the impact of poor weather on the agricultural sector, and the continued high prices of food and energy. Should the current global economic uncertainty further deteriorate, Morocco would face reduced growth prospects. In the event that the current European stagnation evolves in a recession in the order of a -1 to – 1.5 percent GDP growth in 2012, World Bank estimates for Morocco indicate a growth rate of around 3.3 percent for the same year. Current forecasts for agriculture indicate that growth rates for 2012 could be adversely affected, even severely, by low rainfall to date with a potential impact on overall GDP growth in the order of 0.8-1.0 percent. Should oil prices remain at current levels for the year, Morocco would likely see its GDP growth prospects reduced by about 0.5 percent relative to the baseline scenario. This would also have important fiscal implications that pose perhaps the most significant medium term macroeconomic risk - that of deterioration of the fiscal balance which would be exacerbated by the increasing costs of the subsidy system. Morocco’s management and mitigation of these risks are predicated on the new Government’s strong commitment to proceed with the on-going and envisaged reforms outlined earlier. The Government is also contemplating specific measures in the event of a negative agricultural outcome that relate to the suspension of import duties on cereals and support to affected farmers and livestock producers. It is devising strategies to cope with potentially sustained high oil prices, including requesting World Bank support to develop mechanisms to hedge commodity price risks. More importantly, it is devising measures to mitigate the impact of subsidies on public finances to be eventually introduced from the last quarter of 2012. In this regard, there is broad understanding that the needed consolidation of public finances will require three critical measures the Government is already working on: deepening of fiscal reform, regaining control over the wage bill evolution and indeed subsidy reform. Governance and Institutional Capacity Risk. Ensuring adequate institutional capacity to support this DPL’s reform implementation could pose a key challenge. The Government is aware of this issue and is drawing from previous reform implementation experience to identify mechanisms to address this issue and improve inter-ministerial coordination. In addition, sustained efforts have been deployed by the main donors to mobilize sizeable resources to support institutional capacity building and technical assistance needs. Improving governance 6 remains central to Morocco’s success of development efforts as there are risks posed by implementation deficiencies, political interference and a lack of transparency and accountability. Public administration reforms have taken place for more than a decade but have not yet led to tangible and visible results that can be appreciated by citizens. The new Constitution and the revision and strengthening of the country’s overall governance structure now provide the Government with a new opportunity to address past shortcomings by allowing for an enhanced framework to improve the checks and balances between the legislative, the executive and the judiciary powers, empower the key governance institutions and consolidate the principles of modern governance in Morocco. Reform of the budget process, justice reform and the new access to information right are key levers to foster greater transparency and accountability, all of which are priorities of the new Government. The Bank program remains aligned to these priorities including with this DPL as it aims to mitigate this risk through encompassing support to improving the regulatory environment, particularly as concerns business environment. A new DPL series is also under preparation to support the government on key Governance reforms. Risk specific to this operation. This DPL is focused on key structural reform that will take time to materialize in concrete and visible results. Consequently there is a risk associated with the management of increasing demands for rapid results that will need to be addressed. This risk is particularly acute in the case of the CNC, which may face strong technical and political challenges in the short and medium term in the implementation of its newly extended powers. The government is aware of this challenge and is determined to increase consultations and dialogue with all the relevant stakeholders so as to ensure the appropriate by-in with the pace of reforms and understanding of their long-term nature for implementation. For its part the Bank will support such efforts and scale up as necessary its engagement in support, assistance and participation in the policy dialogue with both Government and stakeholders. Poverty and Social Impacts and Environment Aspects The proposed operation does not support any reforms that are expected to have any significant negative distributional impacts. The focus of the operation is centered on reforms aimed at: (i) improving the investment climate; (ii) reducing trade distortions and streamlining trade logistics; and (iii) improving economic governance. Overall the successful implementation of the reforms supported by this DPL will foster SME growth, reduced deadweight losses and improved business environment thereby fostering the growth potential and job creation of the Moroccan economy. Dedicated analysis is jointly developed with the authorities -and in some instances already started- on key pillars of the program to investigate in greater detail potential distributional implications The program supported by this operation does not have any significant environmental implications. The project is a development policy loan in support of a broad program of policy and institutional reforms, for which the environmental requirements of OP/BP 8.60 apply. The policies supported by the proposed operation are unlikely to cause significant effects on the country’s environment, forests, and other natural resources. The measures supported under the operation are primarily geared toward improving the competitiveness of the Moroccan economy and the business environment and do not include an investment lending subcomponent or physical investments. All of the actions supported throughout the operation are policy oriented 7 (policy reforms for increased competitiveness of the Moroccan economy in three key areas of the Government’s comprehensive economic strategy: the investment climate, trade policy and trade logistics and economic governance) and none support direct investments, involve civil works or involve policy actions that would lead to significant environmental impact. In particular It must be noted that the proposed simplification, standardization and certification of administrative procedures for businesses supported by this operation doesn't target environmental procedures (i.e. licensing) and should not adversely impact existing standards for public health and safety and the environment. Contact point World Bank Contact: Philippe de Meneval Title: Senior Private Sector Development Specialist Tel: 212-537-636-050 Email: pdemeneval@worldbank.org Borrower Contact: Ms. Sabah Benchekroun, Ministry of General Affairs and Governance Title : Chargée de mission auprès du Premier Ministre Tel: (212-537) 677-530 Email: benchekroun@affaires-generales.gov.ma For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Web: http://www.worldbank.org/infoshop 8