Document of The World Bank FOR OFFICIAL USE ONLY Report No.8132 PROJECT PERFORMANCE AUDIT REPORT MOROCCO NINTH LOAN TO BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE (LOAN 2037-MOR) OCTOBER 26, 1989 Operations Evaluation Department 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. CURRENCY EQUIVALENTS (Yearly Averages) Name of Currency (Abbreviation): Dirham IDH) 1979: US$1 - DH 3.90 1980: US$1 = DH 3.94 1981: US$1 = DH 5.17 1982: US$1 - DH 6.02 1983: US$1 = DH 7.11 1984: US$1 - DH 8.81 1985: US$1 = DH 10.06 1986: US$1 - DH 9.10 1987: US$1 = DH 8.36 1st 3 quarters 1988: US$1 = DH 8.53 ABBREVIATIONS BNDE - Banque Nationale pour le Ddveloppement Economique CNCA - Caisse Nationale de Crddit Agricole DFI - Development Finance Institution ITPA - Industrial and Trade Policy Adjustment MTR - Medium-Term Rediscountable (loan) OED - Operations Evaluation Department PCR - Project Completion Report PERL - Public Enterprise Rationalization Loan PPAM - Project Performance Audit Memorandum PPAR - Project Performance Audit Report SAR - Staff Appraisal Report SSI - Small Scale Industry FISCAL YEAR BNDE and Government: January 1 - December 31 10E OrtsCIAL USE ONLY THE WORLD BANK Wa ngton. OC a0433 USA OpeeMm avusn October 26, 1989 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECTs Project Performance Audit Report on Morocco Ninth Loan to Banque Nationale pour le Ddveloppement Economique (Loan 2037-MOR) Attached, for information, is a copy of a report entitled *Project Performance Audit Report on Morocco - Ninth Loan to Banque Nationale pour le Ddveloppement Economique (Loan 2037-MOR)" prepared by the Operations Evaluation Department. Attachment This document has a restricted distributton and may be used by recipients only in the performance of their alfcial duties. Its contents may not otherwise be disclosed without World Bank authouiation. FOR OFFICIAL USE ONLY PROJECT PERFORMANCE AUDIT REPORT MOROCCO NINTH LOAN TO BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE (LOAN 2037-MOR) TABLE OF CONTENTS Page No. PREFACE ........................................................... i EVALUATION SUMMKARY ............................... .............. iii PROJECT PERFORMANCE AUDIT REPORT I. INTRODUCTION ........ .... .............. 1 II. PROGRESS IN MEETING STATED OBJECTIVES ................... 1 III. BNDE'S FINANCIAL PERFORMANCE - ........ .. ........ ... 2 IV. FINDINGS AND LESSONS -....................... 3 PROJECT COMPLETION REPORT PART I I. INTRODUCTION . ......... .................... 7 II. ECONOMIC BACKGROUND .............................. .o. 8 III. MANUFACTURING AND FINANCIAL SECTORS ....................... 9 IV. PROJECT OBJECTIVES, DESIGN AND IMPLEMENTATION ............. 9 V. PROJECT IMPLEMENTATION ................. ........ 10 VI. PROJECT RESULTS ........................................... 11 VII. BNDE OPERATIONS ...............................#.......... 12 VIII. PROJECT SUSTAINABILITY ........... .. .................. .0... 15 IX. USE OF BANK FUNDS UNDER LOAN 2037-MOR ..................... 17 X. CONCLUSIONS AND LESSONS ................... .*.......... #... 18 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. TABLE OF CONTENTS (cont'd) Page No. PART I Attachments 1. BNDE: Income Statements, 1983-1987 ....................... 21 2. BNDEt Balance Sheets, 1983-1987 .................*........ 22 PART II I. CHARACTERISTICS OF THE NINTH LOAN ....................... 23 II. IMPLEMENTATION OF THE LOAN ...................... . . ...... . 23 Commitments .................. * 0. . ................... . ..... .... . 24 Disbursements ........... *. ............ . .......... 25 Implementation and Follow-up ............................ 25 III. GENERAL PROGRESS OF BNDE DURING THE PERIOD 1980-85 ........ 26 Operations .............................................. 26 Resource Mobilization ............... ................. 26 Profitability ......... .... ..... 0...... ....so........ 26 IV. CONCLUSION ...... s. .*........ s*.......... so........ . .. . ... 27 PART II Annexes I. Line of Credit (2037-MOR) ....................... 28 II. 9th IBRD Credit Line (2037-MOR): Sectoral Breakdown ...... 30 III. 9th IBRD Credit Line (2037-MOR): Regional Breakdown ...... 34 IV. 9th IBRD Credit Line (2037-MOR)t Amortized Credits ....... 37 V. 9th IBRD Credit Line (2037-MOR): List of Reports and Notes ......................... ............... 38 VI. 9th IBRD Credit Line (2037-MOR): Rescheduled Loans ....... 40 VII. Comparison Between Forecast and Actual (1980-85) ..... 42 PART III Table ls Related Bank Loans ................................. 43 Table 2: Project Timetable ................................... 44 Table 3: Loan Disbursements .......... .................... . 45 Table 4s Project Implementation .............................. 45 Table 5: Status of Covenants ... s ........... . ........ . ..... 46 Table 6: Use of Bank Resources ......................... 46 ATTACHMENTS 1: Comments Received from the Ministry of Planning ........... 47 2: Comments Received from BNDE ............ ........ * ..... 49 3: Comments Received from the Ministry of Finance ............ 55 PROJECT PERFORMANCE AUDIT REPORT MOROCCO NINTH LOAN TO BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE (LOAN 2037-MOR) PREFACE 1. This is a Project Performance Audit Report (PPAR) on the ninth loan to Banque Nationale pour le Ddveloppement Economique (BNDE), in the amount of US$70.0 million, with the objectives of financing efficient industrial sub- projects and institutional strengthening. The loan was approved on July 14, 1981, and became effective on November 1, 1982, the delay being caused by a deterioration in BNDE's financial situation. The Closing Date of Decem- ber 31, 1986, was extended to June 30, 1988. The final disbursement was made on July 21, 1988. 2. The PPAR consists of the Project Performance Audit Memorandum (PPAM) prepared by the Operations Evaluation Department (OED) and the Project Com- pletion Report (PCR) jointly prepared by the Industry and Energy Operations Division of the Europe, Middle East and North Africa Regional Office (Parts I and III) and by BNDE (Part II). The PPAM is based on the attached PCR, the Staff Appraisal and President's Reports, the loan documents, the summary of the Executive Director's meeting at which the project was considered, a study of project files, and discussions with Bank staff. An OED mission visited Morocco in April/May 1987 whilst preparing the case study on BNDE for the OED report entitled *The Sustainability of Development Finance Institutions in an Evolutionary EnvironmentO (OED Report No. 7658, dated May 15, 1989); that mission reviewed, inter alia, the effectiveness of the Bank's assistance under Loan 2037-MOR. 3. The PCR provides a satisfactory account of BNDE's utilization of the loan proceeds as well as updating the information in the OED study on BNDE's operations and financial performance. The PPAR focuses on progress in meeting the project's objectives and BNDE's financial performance, and draws conclusions and lessons from the project experience. 4. Following standard OED procedures, copies of the draft PPAR were sent to the Government and the Borrower. The comments received are repro- duced as Attacbments to the PPAR. - iii - PROJECT PERFORMANCE AUDIT REPORT MOROCCO NINTH LOAN TO BANQUE NATIONALE POUR LE DEVELOPPEHENT ECONOMIQUE (LOAN 2037-MOR) EVALUATION SUMMARY Introduction 1. Banque Nationale pour le Ddveloppement Economique (BNDE) was cre- ated in 1959 at the initiative of the Government. The Government's initial majority ownership position was reduced to less than half in 1962 thanks to an IFC participation (25?) at the time of the first Bank loan. IFC's share has since, with successive capital increases, been reduced to 62, while the Government's share, directly and indirectly controlled, increased to 49?. BNDE has received nine direct loans from the Bank, the ninth, approved in 1981, being the one under review.1/ BNDE is also the administrator of two Bank-financed small scale industry nrojects and manages and participates in the Bank's 1987 Industrial Export Finance Project. Objectives 2. The main objectives of the project supported by Loan 2037-MOR were to finance efficient intermediate size industrial projects, with at least 20? of the proceeds being directed toward export-oriented projects, and to provide institutional support to BNDE (PPAM, para. 2.01). implementation Experience 3. Loan effectiveness was delayed one year by BNDE's financial crisis (PPAM, para. 2.05; PCR, Part I, para. 12). Even :-aen, loan utilization was slower than expected. Nevertheless, the loan was eventually disbursed to 69 subprojects, the majority of which are apparently operating without serious difficulty. The 20Z export-orientation goal was met (PPAM, para. 2.02; PCR, Part II, para. 5). In terms of institutional development, BNDE has emerged from its 1981182 financial crisis as a stronger institution (PPAM, para. 4.01; PCR, Part I, paras. 14-16). 1/ The experiences with the third, fourth and fifth loans are reviewed in PPARs dated June 25, 1974 (No. 468), July 25, 1975 (No. 817) and November 23, 1977 (No. 1805), respectively. No PPAR was issued for the sixth loan. The experience with the seventh and eighth loans is reviewed in a PPAR dated February 10, 1986 (No. 6058). - iv * Sustainability 4. The process of restructuring BNDE's activities and redefining its role and objectivees continues, with apparently reasonably good prospects of success. The future sustainability of BNDE, however, depends to a great extent on continued improvement and rationalization of financial sector policies (PPAM, para. 4.01; PCR, Part I, paras. 26-28).2/ Findings and Lessons 5. The objectives of the project have generally been met (PPAM, para. 4.01; PCR, Part I, para. 30). A number of lessons may be drawn from the experience with this loan. The terms of borrowed resources should match those of lent resources (both duration and interest rate structure) and development finance institutions (DFIs) should not expose themselves to foreign exchange risks (PPAM, para. 4.02; PCR, Part I, para. 31 c). A DFI should be integrated into its country's financial system instead of enjoying a specialized monopoly position (PPAM, para. 4.03; PCR, Part I, para. 32). A government-owned or controlled DFI must have independence in decision- making. This independence can provide an important second, disinterested opinion on government-sponsored investments (PPAM, para. 4.04). The experi- ence with this project confirms that institution-building is a slow process (PPAM, para. 4.05; PCR, Part I, para. 31 b). It also confirms the impor- tance of sound general economic policies in the host country for the DFI's sustainability (PPAM. para. 4.06; PCR, Part I, para. 31 a). 2/ In his telex of September 14 (Attachment 3), the representative of the Ministry of Finance rightly noted that sectoral improvements are one important factor. However, he also noted that *in an evolving environment BNDE's sustainability also and particularly depends on its ability to adjust and adapt itself to the new circumstances of the financial sector.* PROJECT PERFORMANCE AUDIT MEMORANDUM MOROCCO NINTH LOAN TO BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE (LOAN 2037-MOR) I. INTRODUCTION 1.01 This Project Performance Audit Memorandum (PPAM) is brief as the Banque Nationale pour le Ddveloppement Economique (BNDE) was chosen to be one of the case studies for the OED report *The Sustainability of Develop- ment Finance Institutions in an Evolutionary Environmento/ and as such, was subjected to a thorough review. The coverage here is limited to items of particular interest in relation to Loan 2037-MOR, especially those which might not have been fully covered in the Project Completion Report (PCR). II. PROGRESS IN MEETING STATED OBJECTIVES 2.01 The principal objectives of the project supported by the ninth loan, as stated in the Staff Appraisal Report (SAR), weret (a) the provision of foreign exchange needed to finance efficient intermediate size projects in the industrial sector. This objec- tive was a continuation of the objectives of earlier lines of credit to BNDE; (b) the promotion and financing of efficient export-oriented projects (at least 20% of the loan). The selection, evaluation and promo- tion of these projects was expected to help BNDE develop expertise in this field at a time when promoting exports was one of the Government's major objectives; and (c) to provide continued institut3-al support to BNDE by developing and strengthening its organization, especially in the area of project supervision, collection of arrears, staff training and capability in the export field. 2.02 Part II of the PCR, prepared by BNDE, indicates that BNDE on-lent the proceeds of the loan to 69 subprojects which generally met the broad criteria established for the project. Slightly over 202 of the loan pro- ceeds were on-lent to export-oriented subprojects, in line with project objectives. All but three of the subprojects appear to be operating without serious difficulty. 1/ OED Report No. 7658, dated Hay 15, 1989. In what follows, this report to referred to as the DFI Sustainability Study. -2- 2.03 The project documents are not clear as to how the Bank was to pro- vide BIDE with institutional support. The presumption is that this support was to come through the Bank's supervision missions and other interactions; no loan funds were earmarked for technical assistance, training, or similar activities. The DFI Sustainability Study notes that the Bank has given close attention to monitoring BNDE, furnishing institution-building assis- tance and, more recently, doing substantial work on the industrial and financial sectors in Morocco. Much of this support, though, came during and after BNDE's 1981/82 financial crisis. 2.04 As both the PCR and the DFI Sustainability Study observe, the Bank's appraisal of BNDE for this loan in 1980/81, when the impending finan- cial crisis was increasingly evident, was lacking in foresight and was somewhat lax. This was perhape partly because of a notion that BNDE had reached 'maturity" as an institution, and partly because the Bank was too eager to proceed with its programmed lending for Morocco, of which BNDE constituted such an important cornerstone. An example is the statement made in the SAR that "There are no special risks attached to the proposed loan.' At that time BNDE was already on the verge of a financial crisis. 2.05 The financial crisis delayed the effectiveness of the loan for a year until remedial action, described in the next section, could be taken. Even then, loan utilization was considerably slower than forecast at appraisal, with the fi-sl date for submission of subprojects to the Bank by BNDE extended four years to the end of 1987. III. BNDE'S FINANCIAL PERFORMANCE 3.01 BNDE experienced an unexpectedly strong rebound in loan demand in 1980181, just at the time that its spread on borrowed funds was dis- appearing, due to increases in the floating rates it paid, and arrears were becoming most severe. The Government agency which guaranteed many of BNDE's loans, especially those to public sector enterprises, had yet to make sig- nificant payments to BNDE on its guarantees. BNDE was also facing exchange losses on interest payments on some foreign borrowings which were not covered by the Government and had yet to confirm arrangements for the Government to take exchange risks even on Bank loans. BNDE's debt service ratio fell below 1.0 and it also lacked resources to disburse committed loans. 3.02 In violation of Supplement Letter No. 3 under the eighth Bank loan, BNDE resorted to additional floating rate borrowings abroad (in Swiss francs) without consulting the Bank. Its debt/equity ratio also exceeded the level covenanted with the Bank. As a result, effectiveness of the ninth Bank loan was postponed until (a) a financial recovery program was insti- tuted, including improvement of BNDE's profit margin on loans by increasing lending rates and instituting front end fees; (b) the Government agency made payments on guarantee commitments; and (c) an agreement was reached for Government to take the major part of the foreign exchange risks on all - 3 - BNDE's borrowings. Subsequently, but in relation to the above program, BNDE's Board passed a new Policy Statement which limited BNDE's public sector financing approvals to 251 of total approvals in any year, and lited floating rate borrowings to 25Z of total debt.21 3.03 The DFI Sustainability Study notes that these measures allowed BNDE to restore its liquidity and to begin, from 1982 onwards, to again earn an operating profit, although 1982 and 1983 earnings were largely allocated to provisions against losses. The PCR records that BNDE's earnings have increased steadily since 1984 (Part I, para. 21). In 1984, BNDE resumed paying dividends, at the rate of 82, after an interruption of three years. The PCR (Part II, para. 18) notes that the dividend for 1987 was increased to 92, and was expected to be increased again in 1988 to 101. These results are very encouraging, though profits still fall short of the goal, or *best effort condition,9 agreed upon between BNDE and the Bank in 1981 in connec- tion with the ninth loan, that BNDE's profit before taxes would be a minimum of 25Z of its net worth from 1982 onwards. IV. FINDINGS AND LESSONS 4.01 It would appear that the objectives of the project supported by the ninth loan have generally been met, though, as far as the institutional objectives are concerned, certainly not in the manner foreseen. BNDE has emerged from the financial recovery scheme of 1982 as a stronger institu- tion. The process of restructuring its activities and redefining its role and objectives continues, with apparently reasonably good prospects of suc- cess. Aa the PCR notes, though, the future sustainability of BNDE depends to a great extent on continued improvement and rationalization of financial sector policies. 4.02 The lessons that may be drawn from the experience with this loan, particularly the 1981/82 years of crisis at BNDE, reaffirm the validity of classical financial tenets, such as: - Beware of mismatching the terms of sources and uses of funds (i.e., do not borrow short and lend long, without safeguards). - Lending at fixed rates from floating rate resources is a very risky business and should be completely avoided. - DFIs should not expose themselves to unprotected foreign exchange risks. BNDE and, to some extent, the Bank either overlooked or chose to disregard these three simple, but so very important, rules in the late 1970s, and as a consequence BNDE had to be rescued from financial wreckage in the early 19808. 2/ The Bank tried to have this limit set at 152, but acquiesced to the larger figure. 4.03 As brought out in the DFI Sustainability Study and the PCR, the BND experience -- which is matched by many similar cases throughout the world -- suggests that it is preferable to have DFIs which are closely inte- grated into a country's financial system rather than institutions with such a specialized position that they almost constitute a closed-circuit system to themselves. The temptation to shield a DFI from competition probably manifests itself mostly in cases where the Government either controls the DFI or is its major shareholder. The risk is twofolds (a) the DFI grows into a complacent bureaucracy rather than an action-oriented, development- and service-minded, competitive business center; or else (b) the DFI, pro- tected by the Government, does not always act in the best interest of economic growth when unadorned opinions of an economic or investment nature are required. 4.04 Similarly, it would seem wise to endeavor to secure maximum pos- sible independence in financial, managerial and operational matters for government-controlled DFIs, and once secured, to guard that independence fiercely. Also, experience in many countries shows that governments, once they have committed themselves to certain investments or investment pro- grams, tend to lose the detachment that is essential for totally objective appraisal of the proposed investments. An independent, objective, tech- nically competent and courageous DPI can serve its country greatly by providing that so important, disinterested second opinion. 4.05 The experience with BNDE confirms that institution-building is a slow process, that the momentum must be generated within the institution itself if it is to be sustained, and that the assistance that can be given by the Bank, while at times valuable, also has clear limitations. This is especially transparent, perhaps, in matters of DFI staffing and management. The Bank can, however, take a stand, and should sometimes do so more firmly, in matters of perennial institutional weaknesses which are considered essen- tial to the sound operation of the DFI concerned. Project supervision and monitoring is such an area in BNDE. 4.06 Finally, as the DFI Sustainability Study and the PCR note, the economic impact of a DFI cannot be sustained if the general economic policies in the host country are not conducive to growth and efficiency. As has happened in Morocco, the Bank should continue to shift its focus from narrow DFI operations to broader sector operations, working directly with the government to correct any undesirable distortions in the economy. -5- PROJECT COMPLETION REPORT MOROCCO NINTH LOAN TO BANQUE RATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE (LOAN 2037-MOR) September 25, 1989 Industry and Energy Operations Division Country Department II EMENA Region PROJECT PERFORMANCE AUDIT REPORT MOROCCO NINTH LOAN TO BANQUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIQUE (LOAN 2037-MOR) I. INTRODU0I4 Project Identity Project Name: Morocco - Ninth Loan to the Banque Nationale pour le Ddveloppement Economique (BINDE). Loan Number: 2037 - NOR. Regional Unit: EMENA Region - Maghreb Department. Country: Morocco. Sector: Industrial Finance. Subsector: Industrial Development Banking. Amount: US$ 70 million. 1. The ninth Bank loan to BNDE, approved by the Bank in 1981, has been part of an in-depth review undertaken in 1987-88 by the Operations Evaluation Department (OED). This review took place in the context of the OED special study: The Suptainability of Development Finance Institutions in an Evolutionary Environment (Report No. 7678 of May 15, 1989). BNDE was selected as one of six case studies of this report (Volume 2). The case study was prepared independently by OED, reviewed by the project staff in the Maghreb Department of EMENA as well as by BNDE who fully concurred with the analysis and conclusions. This work has involved considerable research, field analysis and discussions among Bank staff. Although much broader in scope that a standard project completion report, the OED report encompasses many of its features. 2. This report will therefore essentially summarize the key issues and conclusions contained in the OED report, with a special focus on the question of the project's sustainability. Since OED covered BNDE development only through mid-1987, this PCR will also update the information on BNDE's operations and financial performance, as well as assess the utilization of Bank funds by BNDE under Loan 2037-MOR, through end-1988. A review of sub-projects and the use of Bank funds under the loan has been prepared by BNDE and can be found in Part II. II. RCOIQ7C BACKGROUND 3. Morocco's economic performance deteriorated sharply in the late 1970s under the influence of a sudden reversal in the terms of trade as a result of the plunge in phosphate prices and the second oil shock. In response, Morocco was prompted to resort increasingly to external capital markets in order to maintain its prevailing high rate of public investment. Morocco's external debt grew from US$ 1.8 billion in 1975 to US$ 13.9 billion in 1983, at which point it represented nearly 120% of GDP and 355% of foreign exchange earnings. The unanticipated rise in international interest rates in the early 1980s, compounded by the declining productivity of public investment and a prolonged drought from 1980-84, proved more than Morocco's balance of payments could endure. 4. By 1983, the Government began implementing a set of extensive stabilization and adjustment policies, supported by a series of IMF standby arrangements and World Bank sectoral adjustment loans. Restrictive fiscal and monetary policies were employed to contain aggregate domestic demand, while structural reforms in trade, industry and finance, and in agriculture, education and the public enterprise sector were initiated to augment the supply response of the economy. Fiscal reforms were initiated to spur domestic resource mobilization. Debt service payments to official and commercial creditors were rescheduled, initiating a process that has already spanned five years, and is expected to continue into the future. The Government's structural adjustment program has been supported by consecutive standby arrangements with the IMF, and by seven sectoral adjustment programs, including two Industrial and Trade Policy Adjustement Loans - ITPA I and II, two Agriculture Sector Operations, an Education Sector Loan and a Public Enterprise Rationalization Loan - PERL and, most recently, a Structural Adjustment Loan financed by the Bank. 5. As a result of the pursuit of rigorous policy reforms combined with favorable external developments, macroeconomic imbalances have been substantially reduced. The overall Treasury deficit as a share of GDP fell from 11.7% in 1983 to 5.5% in 1988, while the current account, which was in deficit by 12.7% of GDP in 1982, registered a small surplus in 1988. Following protracted drought during the period 1980-84, agricultural production responded to more auspicious weather conditions, leading to a decline in food prices and imports. 6. Sweeping reforms in the trade and industrial regimes gave rise to productivity gains to labor and capital, averaging over 5% per annum, as well as a shift in external trade flows. Measures to eliminate export barriers, reduce disparities between exporting and import-substituting activities and to simplify trade procedures, have led to buoyant growth in the export of manufactured goods. Non-traditional manufactured goods now account for over 30% of total merchandize exports, compared to about 20% in 1983. Overall GDP growth averaged some 3.3% p.a. during the period, while the rate of inflation has been restrained, and was around 2.4% in 1987. - 9 - III. MANUFACTURING AND FINANCIAL SECTORS 7. Except for sectors with a high capital-labor ratio and state-owned enterprises, manufacturing is dominated by small industries and handicraft. It is characterized by strong concentration, close family ownership, low foreign yarticipation, and until the early eighties, an import substitution objective supported by protection and subsidies. By 1985, state-owned enterprises represented 45% of the manufacturing sector mainly in petroleum refining, cement, chemicals and sugar. 8. The policy pursued in the late seventies induced a considerable growth of public investment in the manufacturing sector. Steel, cement, chemicals, and a score of lighter industries were promoted under state ownership, contributing to the excessive expansion of Morocco's external borrowings. Continued high protection and overvaluation of the Dirham resulted in a prolonged stagnation of the private sector and particularly of manufactured exports. IV. PROJECT OBJECTIVES, DESIGN AND IMPLEMENTATION 9. BIRDE IX was appraised in 1980 with a view to continuing to channel Bank funds to industryl/. At that time signs of the impending worldwide financial and trade crisis were emerging but not so much as to suggest the dramatic economic downturn which became evident a few months later. Morocco's new five-year Plan (1981-85) gave high priority to the increase of manufacturing exports and it was expected that BNDE would play a major role in promoting investments in industry with a special focus on export-oriented manufacturing investment projects. At least 20% of the loan amount was expected to be allocated exclusively to export-oriented projects. This specialization in a new field required BNDE to undertake a special training effort to develop its promotion and appraisal capabilities. 10. In the early eighties, BNDE was still highly protected under existing Government policies. It had a de facto monopoly in the 11 Banque Nationale pour le D6veloppement Economique, BNDE, was created in 1959 with the support of the Bank Group, including IFC participation. Its main role was to promote industrial growth by financing productive and profitable industrial investment projects. Before 1981, the Bank had made eight loans to BNDE (totalling US$ 185 million), in the form of general lines of credit. At the time of the appraisal of the ninth loan (November 1980), BNDE was by far the predominant institutional source of long-term financing of private industry as well as an important source of funding for public sector industrial projects. Annual direct loan commitments exceeded DH 0.5 billion in 1980, financed in part from domestic long-term bonds, and in part from international sources, principally the Bank, but also over the recent past from Eurocurrency borrowings. In 1980, its staff totalled 170, including 78 professionals. - 10 - financing of industrial investments, since only its loans to industry could benefit from the various advantages of the investment code, including a substantial 2% interest rate rebate. Commercial banks could provide medium term financing, but the rediscounting of these credits had to be approved by BNDE, before Central Bank acceptance. In response to growing domestic and international inflations interest rates (centrally administered) had been increased in October 1980. As a result, BNDE effective cost of capital was set at 10% p.a. - a rate which the Bank found acceptable on the basis of its own estimate of projected inflation. The position in which BNDE was placed did not encourage it to embark on a dynamic marketing policy vis-&-vis its clientele, discouraging it from taking sound risks, and from developing and providing adequate promotional and other assistance to its clientele. The Bank had also noted a growing weakness in its economic and supervision work. The appraisal of the Bank in 1980 induced BNDE to undertake a major re-organization of its internal set-up. This untested structure (which did not address issues regarding BIDE's policy, board composition, and role) was found to be a sufficient basis to support the objectives of the loan, namely: (1) the promotion, selection, evaluation and financing of efficient export-oriented projects; and (ii) institutional strengthening. 11. In retrospect, the Bank appraisal of the ninth loan to BEDE seems to have been somewhat superficial, especially with respect to BNDE's financial strength, management and organization, its ability to withstand external pressure from financial markets, and the suitability of its policy framework (unchanged for over twenty years) to face the needs of the industrial sector. For example, while it was believed that BEDE was generally protected by the Government from the foreign exchange risk on its foreign borrowings, interest rate risks were not covered. At the same time, while BFDE's lending interest rates were fixed and administered, a significant part of its resources were borrowed internationally at floating rates. V. PROJECT IMPLEMENTATION 12. By 1982, shortly after Loan 2037 was signed, but before effectiveness, BIDE's financial situation had deteriorated very dramatically. In light of this situation, the Bank withheld effectiveness of the loan. Three basic elements were at the root of BIDE's difficulties: (i) BNDE had borrowed at floating rates and lent at fixed rates, its profitability was thus uncovered; (ii) it had not matched the terms of its borrowings (5 and 6 years for Eurodollar loans) with its lending terms (8 to 12 years), it faced accordingly increasing liquidity problems; and (iii) in spite of unverified understandings, a number of BIDE foreign lines of credit were not covered with a formal foreign exchange risk guarantee of the Government. 1/ By early 1982, BNDE had 11 This statement is not accepted in the attached telex from the representative of the Ministry of Finance (Attachment 3). After verification of the facts, we understand that only part of BIDE foreign borrowings were covered for the foreign exchange risk by the Governement. BIDE was uncovered for a large portion of its foreign liabilities. This was remedied in 1983 when a new Government guarantee was signed covering all of BNDE's foreign exchange borrowings. - 11 - no liquidity left for its current needs and was no longer able to meet its obligations. This was an opportunity for the Bank Group to reappraise BNDE in depth with the close participation of the Government and the Central Bank. Extensive measures were taken to correct the three problems mentioned above. Additional measures were also taken to consolidate BNDE management team, revise BNDE's Policy Statement in depth, and work out, with key Board members and management, a scheme to improve its organization. The Loan was declared effective in November 1982. 13. The seriousness of BIDE financial crisis in 1982 in part led the Government to seek Bank assistance to review the Financial Sector in general. This review took place in 1984. It was an appropriate forum to assess, in the context of an analysis of the overall financial sector, the role of specialized institutions in Morocco, and particularly that of BIDE. It was suggested that the best way to limit BNDE's monopoly was to induce commercial banks to take a growing share of the investment loan market, in clear competition with BNDE, while eliminating gradually all protective and monopolistic features BNDE had enjoyed so far. The Bank hoped that BNDE would re-assess its role and competitiveness on the basis of its well trained staff, its considerable experience in investment matters, and (after the 1982 rehabilitation measures) its basic financial strength to provide long-term capital. Had these assets been used in a dynamic manner, BNDE could have been better able to diversify into new directions, anticipating the needs of the industrial sector and enable it to compete in the rapidly changing domestic and international markets (particularly in view of the EEC expansion). VI. PROJECT RESULTS 14. These basic tenets were the subject of prolonged discussions between the Bank and BIDE, particularly after 1984, when a new President was appointed. When OED undertook its field review in 1987, few changes were then evident. The ORD report was therefore somewhat inconclusive as to BIDE's future role and the Bank's future association with BNDE. Since 1984 however, BNDE had been actively studying and evaluating alternative strategies, in close collaraboration with its Board, the Government or the Central Bank. Several schemes (for example with respect to the creation of a new affiliate to specialize in industrial restructuring operations) were carefully tested (often in close consultation with the Bank) but had to be abandoned. Meanwhile the necessity to enter a more competitive environment, in fields of activity which were risky and new to BNDE (e.g. commercial banking operations) required studies and research. In parallel, BNDE made considerable efforts to reassert its image in Morocco, particularly with investors. Only by 1987-88 was BNDE able to develop a coordinated and coherent scheme for its development which is currently being implemented. 15. In developing this scheme, BNDE first focussed on its management and organization which, in spite of the changes introduced in 1983 and in subsequent years, proved to lack sufficient decentralization and delegation of authority, and was still inadequately addressing the needs of BNDE's clients. A new organization was put in place in February 1988 which met the objective of relieving top management of day-to-day operational responsibilities, and allows for a smoother distribution of activities. This reorganization was made possible as a result of the recruitment of new managers, and of a strong emphasis on internal training. - 12 - 16. BNDE's new 1988 development strategy is based on the following assumptions. Firt, BNDE monopolistic position in the economy is in the process of disappearing altogether. Its rediscounting privileges, and its benefits under the investment code have already ceased. Overall BNDE expects to operate under the same terms and conditions as those faced by commercial banks. It is therefore taking steps to ensure that it can compete with them. It has already opened agencies to carry out all commercial banking operations required by its traditional corporate clientele (short-term and time deposits, short-, medium- and long-term credits, foreign transactions, etc.). BNDE's repeated efforts to associate itself with an existing commercial network have failed so far, in spite of two promising possibilities. It is therefore proceeding with the creation of its own network, with support of foreign technical assistance. Second, while BNDE will continue to direct its operations principally to the manufacturing sector, its objective being to deepen its service to this sector (through promotion and financial engineering services, restructuring operations, counselling, mergers and acquisitions), it also intends to be actively involved in other sectors, such as shipping and fishing, agriculture (in association with Caisse Nationale de Cridit Agricole - CNCA), tourism and hotel development and other sectors where it would be able to develop an integrated range of services which could compete with those offered by commercial banks. Specific actions have already been initiated in these new fields of activity. 17. Recent discussions held in Morocco with the business community and with commercial banks confirm that BNDE's professional capability and its image as a serious partner has been significantly restored. VII. BNDE OPERATIONS 18. Operations. BNDE's operations over the January 1983-December 1987 period are summarized in Table 1 below. Table 1: ENDE's OPERATIONS IN 1983-87 (DR million) 198L 19A4 m196 1AZ Direct Loans Approvals 276 501 699 595 722 Commitments 297 506 562 658 551 Disbursements 537 504 510 613 550 Equity Investments Approvals 0.4 8.0 3.2 15.5 15.2 Other Approvalsi MTR Loans 178 338 392 432 426 SSI Loans 48 33 75 90 81 A/ Industrial loans granted by commercial banks that BNDE reviews, approves and processes either for rediscounting by the Central Bank (NTR loans) or for financing under the Bank SSI projects (SSI loans). " 13 - Direct loans to firms constitute BIDE's main activity. Approvals were relatively low in 1983 due to the fall in public enterprise investments and BIDE's financial difficulties during that period. Partly due to BNDE's promotional efforts, approvals - principally for private investmenta - were up again in 1984 and in 1985. They slumped in 1986 and bounced back in 1987 to slightly above their 1985 level. Disbursements increased sharply in 1986 following the previous two-year rise in approvals, but decreased in 1987 partly due to expectations 2f a reduction in interest rates. As most Medium-Term Rediscountable (MTR) loans of the commercial banks are packaged with BNDE's direct loans, both types of loans followed a similar growth pattern, and MTR loans amounted to about 70% of BNDE's direct loans during the period. SSI loan approvals more than doubled in 1985, mainly as a result of the improvements introduced in the Bank-financed SSI-2 project (the spread for the banks was increased from 2% to 3% and a free-limit was introduced), and grew only marginally since. The SSI program of the Bank ended in December 1987. 19. BNDE's policy statement was amended in 1983 and sets at 75% the minimum share of loan approvals to private sector enterprises, which BIDE has since complied with. About 50% of BNDE's loans are to manufacturing firms; the rest are to energy, mining, transportation, services and leasing companies. BNDE remains the main external source of term financing to leasing companies; loans to leasing companies represented 16.3% of BNDE's portfolio at end-1987. The Casablanca region, the hub of the country's industrial activity, accounted for about 60% of BNDE's total loan approvals in 1986-87 against over 70% during 1983-85. 20. Operating procedures. BNDE's appraisal methodology is generally satisfactory. Under the second IFC loan, BNDE agreed to calculate economic rates of return (ERR) and effective rates of protection for all projects where BNDE financing exceeds DH 10 million or about US$ 1.2 million equivalent. 21. Financial situation and performance. BNDE's financial statements for 1983-87 are shown in Attachments 1 and 2, and a summary of financial indicators during this period is presented in Table 2 below. TAble 2: BNDE'S FINANCIAL INDICATORS IN 1983-87 (DR million) (As of end of period) m m 12 m Loans Outstanding 2,765 2,849 2,766 2,871 2,878 Equity Investments 126 131 140 147 156 Net Operating Profit (before provisions & taxes) 59.3 59.5 62.3 65.0 78.6 Net Profit 1.7 12.1 14.0 16.0 19.1 Net Profit/Equity (%) 1.1 7.6 8.6 6.8 8.0 Current Ratio 2.4 2.3 1.9 2.6 1.4 Long-Term Debt/Equity 10.3 10.0 10.1 9.3 8.0 - 14 - Following the financial crisis in 1981-82, BNDE's net operating profits recovered in 1983 to DH 59.3 million, but were largely allocated to provisions. BNDE resumed paying dividends only in 1984. BNDE's net profits have increased steadily since and in 1987 amounted to DH 19.1 million or 8.0% of equity. BNDE's profits have been adversely affected by the delays in the reimbursement by the Treasury of BNDE's loaes on foreign exchange borrowings covered by agreements with the Government. BNDE cannot charge interest on these arrears but it has to cover them with additional borrowings; the balance due as of December 31, 1987 was DH 449 million or over 152 of the loan portfolio.11 22. Due to the slow growth of BNDE's disbursements in recent years, the rescheduling of part of SDE's foreign debt and the mobilization of additional resources from development institutions (World Bank, IFC, ADB, KfW and the Kuwait Fund), BNDE has not borrowed much in the domestic market since 1983 and its liquidity situation has been satisfactory. Foreign borrowings (net of foreign exchange losses) at end-1987 represented 61% of BEDE's long-term resources (up from 472 at end-1985). Loans from the Bank and IFC represented about 40% of BNDE's foreign borrowings. The foreign exchange risk is covered by the Government and, since 1985, by the Foreign Exchange Risk Fund created under the ITPA-2 loan of the Bank. As noted above, in the past year, the Government has been late in paying the coverage of this risk and arrears have built up substantially. (see para. 29 d). This issue which affects also the other two specialized banks in Morocco, CIH and CNCA, is currently under review by the Government, the IMF and the Bank. BNDE's long-term debt to equity ratioll was 8.0:1 in 1987. The current ratio deteriorated in 1987 as current maturities of long-term debt more than doubled, but it is still satisfactory. 23. BNDS's portfolio. The quality of BNDE's loan portfolio continues to require careful monitoring. Its evolution between December 1983 and May 1988 is presented in Table 3 below. Table 3: NDE' S LOAN PORTFOLIO BETWEEN DECEMBER 1983 AND MAY 1988 (DH million) May (As of end of period) Ai 1291 19m lIA 1imA Loans outstanding 2,765 2,849 2,766 2,871 2,784 Loans Affected by Arrears 431 568 386 539 473 Arrears over 3 Months 287 360 281 307 296 Loans Affected/Loans (%) 15.6 19.9 14.0 18.8 17.0 Arrears/Loans (%) 10.4 12.6 10.2 10.7 10.6 Prov. for Losses/Loans (%) 6.8 7.7 8.3 9.1 10.7 Rescheduling of Arrears 94 85 79 104 1324/ Write offs 6.0 0.4 23.3 10.3 5.39/ Al Total for the period January 1st to December 31, 1987. 17- In their attached telex (Attachment 3), the representative of the Ministry of Finances indicated that "arrears outstanding as of the end .3f 1987 have been paid and the procedure for settlement of those posted as of the end of 1988 is underway. Probable loan losses at the end of 1987 were estimated by BNDE at DH 121 million. Provisions in excess of these probable loan losses are counted under equity for the calculation of the long-term debt to equity ratio. - 15 - During this period, th,. amount of arrears over 3 months fluctuated between 10.2% and 12.6% of the outstanding loan portfolio. The collection ratio varied between 85 and 95% . Significant amounts of arrears from companies undertaking restructuring plans were rescheduled; many of these companies still remain in a precarious financial situation and require close follow-up. At end-1987, 46% of the arrears were covered by guarantees from third parties (mainly the Government and the Caisse Centrale de Garantie, a public sector guaranty fund managed by the Ministry of Finance) and 22% of the arrears was interest in arrears which had not been credited to income and was maintained in a reserve account. Moreover, as of May 1988, provisions for loan losses exceeded the amount of arrears over three months. 24. BNDE's equity investments have been low in recent years due to the limits imposed by its own equity. At end-1987, BIDE had equity Investments in 44 companies, valued at DH 156 million. Fourteen of these companies, representing 31% of the investments, were in difficulty or operating at a loss. Dividends received by BNDE increased from 4.7% of total equity investments in 1982 to 8.1% in 1987. BVDE has just created a company to hold its equity investments with a view to revitalizing its portfolio of such investments. 25. Based on BIDE's unaudited statements for 1988, BIDE operations expanded considerably in 1988, reflecting both an increased demand of the private sector for investment loans and BNDE's promotional efforts. This growth is reflected principally in BNDE's dire operations; indirect refinancing of medium-term rediscountable credits of commercial banks has remained at about the same level as in 1987. Total direct approvals in 1988 were DR 1.2 billion, compared to DH 0.7 billion in 1987. About half of the loans approved in 1988 were for export-oriented projects. The two main subsectors concerned were textile and leather (23%), although chemicals (23%), food processing (24%), and electro-mechanical (12%) industries also increased. Disbursements also rose in 1988 from DH 544 to DH 760 million. BNDE expects that this trend in the growth of its commitments and disbursements would continue in 1989, given its current substantial pipeline of projets. VIII. PROJECT SUSTAINABILITY 26. In light of the progress made during the past year and a half, the lessons and benefits of our ninth loan are more precise and substantial. BNDE is now resolutely expanding and diversifying its operations and its role. It is implementing specific plans for its commercial banking activities, it has entered into a number of agreements regarding tourism activities, agriculture financing, export promotion, and financial engineering. It has given, through the creation of a new subsidiary, autonomy and dynamism to the management of its equity portfolio. For 1989, BNDE objectives are: (i) to continue the diversification of its operations and the deepening of its services; (ii) to reorganize and strengthen its lcan portfolio supervision activities - an area which accounts in part for the relatively high level of BNDE loans in arrears; and (iii) to develop its economic and sector study department. - 16 - 27. In the medium-term, BNDE's sustainability - in terms of achieving its full potential - remains a function of the ability of the financial sector to evolve from its status of dominance by the Treasury, credit constraints and low competition, to a more liberalized policy and institutional sectoral environment where competitivity and increased freedom for resource mobilization and allocation will be possible. BNDE would then be able to compete and innovate and therefore to maintain a comparative advantage; but this would require a considerable effort which will not be worth the cost if the financial sector is not liberalized further. The Government has recently indicated that credit containment is likely to be fully lifted by the end of 1989. This is a step in the direction of increasing opportunities and competition among financial institutions. Provided that BNDE is willing to redefine its development role as a leader and innovative force behind Morocco's industrial development, there would certainly be a place in the country to maintain, alongside the commercial banks, a specialized institution such as BNDE whose strength will derive from its unparalleled expertise in long-term investment, its vision, its experimentations and success in new areas, rather than from the financial privileges, incentives or monopolies it would keep on an administrative basis. 28. In many respects, it seems that it was particularly judicious to select BNDE as a case study for addressing the issue of the sustainability of development banks. BNDE highlights particularly well all of the benefits and risks associated with the concept of development banks. The World Bank has been particularly concerned, during the past years, with the difficulties encountered by a very large number of DFCs which have not remained viable during the long and severe economic crisis of the last decade. As noted above, BNDE itself faced a rather serious crisis in 1981-82 which required considerable assistance from tho monetary authorities. This was a clear signal that the viability of specialized (as well as commercial) financial institutions tould not be sustained without rationalizing financial sector policies. Morocco undertnok a first tranche of financial reforms in the mid-eighties, with Bank assistance, under ITPA 1 and 2. While generally successful, not all of the reforms necessary could be addressed in light of Morocco's severe debt problems. Important issues still remain regarding, inter alia, the impact of the Treasury on resource allocation, interest rate policies (together with the question of allocating the risks related to Morocco's foreign exchange obligations), general credit and specific selective credit constraints, regulation and administration of the capital markets, etc. The resolution of these questions would determine the future of Morocco's specialized institutions, including that of BNDE. It is only at that stage that BNDE would be able to demonstrate whether or not DFC-type institutions like itself are sustainable in Morocco. There is also no doubt that the Bank Group, in close association with the monetary authorities and the IMF, has and will continue to play an important role in addressing this question. - 17 - II. USE OF BANK FUNDS UNDER LOAN 2037-NOR 29. Part II of this report, prepared by BNDE, reviews the implementation experience of the ninth loan in detail. This account suggests the following comments: a. The mix of sub-projects financed under the Bank loan seems overall to have been of good quality. The two main types of investments which were sought under the loan were well represented. First, mainstream Industrial investments in Morocco were well divided among the leading subsectors where Morocco has a comparative advantage, agro-industries, textile and leather chemistry, and even electro-mechanical industries for which BNDE has a stronger pipeline than the commercial banks, beneficiaries of the first Electro-Mechanical Industries (EMI) Bank loan. Secondly, and with a longer-term view, the loan aimed at testing the potential for export-oriented investments. That component proved to be very successful. In fact, while the export-oriented component was limited to US$ 14 million equivalent, other sub-projects financed under the general category met also the export-oriented component eligibility criteria. Reportedly (and on the basis of recent supervision missions), all these projects have now been completed and have started to export. This achievement was helped also considerably by the trade adjustment policies which have taken place during the past five years (ITPA program). b. BADE's supervision of its sub-projects is displaying distinct improvement. However, only 73% of the sub-projects have been the subject of supervision visits and reports over a four-year period. 1 The depth of this supervision needs improvement. BNDE's weak supervision had been an area of repeated difficulties between the Bank and IFC on the one hand and BNDE. After 12 Bank loans, one could expect that the Bank would have obtained better progress in this important area. Bank follow-up and monitoring of BEDE's supervision work appears to have been excessively lax in spite of clear recognition of this problem in every appraisal report prepared by the Bank on BNDE over the past decade. Only recently, under strong pressure from the Bank but also as a result of its portfolio deterioration, has BNDE implemented a program of supervision of its loans and investments which seems satisfactory and appears already to bear fruit in terms of a significant decrease of its arrears (the ratio of arrears to the total portfolio has decreased by nearly 3 points in the period June 1988 - March 1989). This program includes: (i) separating supervision of projects from the collection of payments and the related legal process; (ii) increasing the number of supervisory stpff; (iii) classifying companies for follow-up purposes by subsectors and according to BNDE's exposure, and, for those in arrears, to the seriousness of their problems; (iv) designing supervision programs for companies in each one of the groups defined earlier and implementing supervision guidelines; (v) 1, In their attached letter of comments (Attachment 2), BNDE suggests a more positive Bank opinion on their supervision activities. The Bank staff, while recognizing the major efforts made by BNDE over the past two years to strengthen its supervision, believes that more should be done in scope, depth, and frequency. BNDE's new strategy is in the right direction, but it seems fair to wait a few more years to assess the strength of BNDE portfolio management system while keeping supervision improvement among BNDE's institutional priorities. - 18 - distributing the portfolio among the staff of the department; and (vi) developing a reporting system to follow progress. Under the Industrial Finance Loan, which is expected to be negotiated in the near future, BNDE will have to set specific targets for the reduction of arrears, and semi-annual progress reports will be submitted to the Bank. c. Sub-projects financed under the loan seem to have been in general worthwhile investments. The wide range of investments covered under the loan and the ability of BNDE to meet the targets set under the pilot export projects component was encouraging enough to induce the Bank to prepare a full scale export finance project. d. The question raised by BNDE regarding the arrears of the Government in paying BNDE for the foreign exchange risk has been a major issue between the Bank and the Government. Those arrears (para 21) affect negatively BNDE's profitability and liquidity situation. The scheme of coverage implemented in 1986 as the result of the recommendations made in the Bank's financial report and implemented under the IPTA II loan, has been operating satisfactorily under an arrangement which guarantees BNDE a 3% intermediation margin on foreign borrowings signed after 1985. However, most of the foreign exchange losses incurred by BNDE are associated with loans contracted before 1985 which are fully covered by the Government. In order to reduce the budgetary impact of foreign exchange losses, the Government has just renegotiated with BNDE the coverage of foreign exchange losses concerning the next Bank industrial finance loan (letter ot the Ministry of Finance of June 19, 1989). Under the new acheme, agreed with the Bank and the IMF, the Government will bear the foreign exchange risk. The cost of foreign borrowings to BNDE will be equal to the cost of domestic resources of comparable maturities, the difference betieen the two being paid to a foreign exchange guarantee fund in the Treasury. This fund is expected to be self-financing over the medium-term. Further Bank lending to the specialized financial and banking institutions in Morocco would have to address this issue both in terms of the financial viability of these institutions under their existing exposure to foreign exchange risk and In terms of the impact of future schemes on their financial prospects. . CONCLUSIONS AND LESSONS 30. Shortly following approval, this loan could have appeared as a failure. By 1982, BNDE's financial situation was facing an extremely severe crisis and its internal organization seemed unable to cope with its development objectives. This crisis however was probably instrumental to the overall success BNDE-IX has achieved today. First, the loan helped finance a majority of sound investment projects and to stimulate export-oriented investment. Second, in reaction to the 1982 problems, BNDE's policies, management, organization and operations improved substantially; including the supervision activity which has just been reorganized (but will still require close attention); these aspects of BNDE deserve in 1989 a good rating. Third, this crisis probably contributed to the Government and the monetary authorities request, to the Bank, in 1983-84 to address the financial sector as a whole. Some of the major lessons and recommendations derived from the financial sector were incorporated In the adjustment programs supported by ITPA II and the SAL. - 19 - 31. The main lessons of this loan have already been outlined in the DED Report of May 15, 1989 (para.1). Some of these lessons are worth repeating here: a. The economic impact of development finance institutions specialized in long-term investment cannot be sustained if general economic policies in the country are not tonducive to growth and efficiency. In the case of Morocco, major changes have been (and are still) necessary in both the industrial and the financial sectors to allow BNDE to become more competitive, to promote exports, and to improve resource mobilization and allocation, both in the domestic and the foreign markets. Direct Bank supvort of policy reforms through financial institutions alone, as had been the objective of DFC loans until the late 1970s, has not been successful; DFCs do not have sufficient leverage on policy makers to change the economic framework. In the 1980s, the advent of adjustment lending, through the ITPA series and more recently the SAL, has already yielded tangible results. Further effort in this respect should be envisaged, for example in the areas of the system of how the Foreign Exchange Risk is covered, credit ceilings, increased liberalization of interest rates, and continuation of the program of price and trade liberalization. b. Institutional features like the Policy Statement, the Board's role and composition, BIDE's internal organization, and its strategy have to be reviewed in depth regularly. The frequency of these reviews depends essentially on the speed at which the economic environment changes as well as on the type of issues faced by the financial institution. In the case of BNDE, it should have been clear, even before the 1982 crisis, that changes were overdue. BNDE shareholders as well as its main creditors - and therefore, perhaps more than any other party involved, the Bank Group - have been derelict in continuing to give their support to BNDE without agreeing first on a new framework of policies, organization and operations. BNDE would also be well advised to keep this lesson in mind at a time when Morocco is expected to face once more important economic challenges, especially with respect to its relationship with the EEC and with the Maghreb. These expansions of Morocco's ties with its neighbors as well as the current privatization and liberalization objectives endorsed by the Government will necessarily have a significant impact on the institutional features of a development institution like BNDE. c. Basic principles of financial discipline are not always observed even by seasoned bankers. The Bank has been too lenient in allowing DFC borrowers to abandon some of these basic principles. BNDE, like many other financial institutions, gradually moved away, in the late 1970s, from a number of prudent guidelines concerning its financial equilibrium. Among these principles, the Bank should continue to focus particularly, in existing and future loans to financial institutions, on the following ones: - Avoid fixed interest rate lending if the resources mobilized as counterpart funds have floating interest rate features. - Maintain a sound balance between average maturities for loans and resources. - Protect the institution against foreign exchange risk. - 20 - 32. Because of the enormous changes which have taken place worldwide in financial sectors (changes which seem in large part to be irreversible), the notion of specialized financial institutions such as DFCs is now under serious challenge. DFCs engagements exclusively in long-term financing make it difficult for them to compete with commercial banks and sustain profitability and a viable financial situation in the medium-term, unless they are granted monopolistic features and are subsidized directly or indirectly. The cost to the State of maintaining these monopolies is difficult to assess, but it is likely to be high, and aggravated by the tendency of these institutions to become less competitive, less imaginative in market development and less prudent in the management of their portfolio. One of the solutions, which is the one supported at present by BNDE, is to open up to competition and develop banking operations to include both long-term investment and commercial operations. This approach would enable the DFC to borrow and lend under the same terms and conditions as the other banking institutions. Specialization may remain in areas of comparative advantages (as opposed to monopolies), but this is a matter of internal policy, opportunities and management. The new approach taken by BNDE in line with this direction should be of keen interest to the Bank Group. Another review of this development in three to five years would be worthwhile. may 1989 Revised September 1989 - 21 - PART I Attachment 1 MOBOCCO BANQUE NATIONALE POUR LE DEVELQPPEfENT ECONOMIQUE Income Statements. 1983-1987 (OH million) 1983 im8 19m 198 19M7 Interest Income Loans 328.0 341.0 348.7 375.2 386.2 Investments & Deposits .A J1J .9 L .0.1 Total Interest Income 335.8 358.2 368.0 421.5 416.3 Interest Expenses 260.3 279.9 289.6 336.0 314.2 Net Interest Diff. Income M& ZUa I8A 15 102.1 Dividends Income 6.7 7.1 11.3 10.4 11.8 Commissions & Other Income 6.8 6.1 6.6 7.2 8.3 Net Operatina Income IM 91.4 2U 103.1 122.2 Operating Expenses: Staffing 18.1 21.5 23.1 24.5 28.5 Depreciation 1.1 0.9 1.0 1.3 2.0 Amortization Deferred Charges 3.4 3.6 2.9 3.4 3.2 Other Administrative Expenses 7.1 5A .0 8. _SAi Total Operatina Exienses 29.7 31.9 34.0 38.1 43.6 Net Operatina Profit 52 fiza M& ZUA Less: Provisions 51.5 34.1 34.3 40.3 46.3 Extraordinary Profits (4.3) (0.8) 0.4 (0.9) (4.4) Taxable Profits 3.5 24.6 28A LU ZU Less: Income Tax 1.8 12.5 14.4 7.8 8.8 Net Profits Li 12.1 14A 1U 1911 As % of Averaoe Net Assets Interest income 9.7 9.8 10.1 10.7 10.0 Interest expenses 7.5 7.7 7.9 8.5 7.5 Mt Operating income 2.6 2.5 2.6 2.6 2.9 Operating expenses 0.9 0.9 0.9 1.0 1.0 Provisions 1.5 0.9 0.9 1.0 1.1 Profit before tax 0.1 0.7 0.8 0.6 0.7 Net Profit 0.1 0.3 0.4 0.4 0.5 Return on Eauity (% 1.1 7.6 8.6 6.8 8.0 Soure: BNDE Audit Reports, 1983-87. 22 - Part I Attachment 2 BANOUE NATIONALE POUR LE DEVELOPPEMENT ECONOMIOUE Balance Sheets. 1983-1987 (DH million) As of December 31 1983 1984 1985 1986 1987 ASSEIS Current Assets Cash 284 84 55 56 41 Current Maturities of Loans 702 740 686 745 822 Receivables for FE Losses 160 204 285 327 449 Other Receivables .22 347 3 7Z8 __45 Total Current Assets 1.438 1.375 1,359 1,886 1.797 Loans & Eguity Portfolio Loans Outstanding 2,765 2,849 2.766 2,871 2,878 Less: Current Maturities (701) (740) (686) (745) (822) Equity Investments 126 131 140 147 156 Less: Provisions for Losses (9) (9) (9) (9) (11) Debentures & Government Bonds __10 _ 4 7..___j5 83 Total Net Portfolio 2,191 2.239 2,275 2,339 2,284 Exchange Loss Deferred 532 573 820 897 1,156 Net Fixed Assets 4 3 4 8 14 Net Deferred Charges 21 18 19 16 12 TOTAL ASSETS 4ll ..20 A.Z LM 5,263 LIABILITIES & SHAREHOLDERS' EOUITY Current Liabilities Current Maturities of LT Debt 424 350 434 420 887 Dividends & Taxes Payable 2 17 21 15 27 Accounts Payable & Others 12i 227 254 334 _i Total Current Liabilities 602 594 709 735 1,248 Lone-Term Debt Total Local Loans 1,828 1,710 1,587 1,475 1,236 Total Foreign Loans 1,834 1,875 2,225 2,859 3,129 Less: Current Maturities (4241 (l350) _1&41 (14201 18811 Total Lone-Term Debt 3.238 3,235 3.378 3,914 3,478 Provisions 188 22.Q 23f 2M 2t lonity Share Capital 140 140 140 210 210 Reserves 17 ty U 27 -Iff Tgtal Eguit~ 157 159 162 237 238 TOTAL LIABILITIES & EQUITY A.186 4A A.M 1dA L.2 RATID.S Loans/Net Assets (%) 75.7 78.4 75.6 67.6 70.1 Provisions/Loans (%) 6.8 17.7 8.3 9.1 10.4 Current Ratio 2.4 2.3 1.9 2.6 1.4 Long-Term Debt/Equityl/ 10.3 10.0 10.1 9.3 8.0 1, Provisions in excess of probable loan losses are included under equity. Source: BNDE Audit Reports, 1983-87. - 23 - PART II Completion Report on BNDE IX (Loan 2Q37-0R)J' 1. In total BWDE has received or benefited from 12 loans, including two loans directed to the Small Scale Industries (SSI) (Loans 1687 and 2038) and one loan to Export Industries (2806). These loans have totalled $349.5 million, including the share of commercial banks in the SSI loans. 2. This report reviews the implementation of the Bank's ninth line of credit (Loan 2037-MOR) which was made in 1981. First it summarizes the basic characteristics of the loan and then considers its economic and social impacts as well as its implications on the financial situation of BNDE during the period 1980-85. I. CHARACTERISTICS OF THE NINTH LOAN 3. This line of credit kept the momentum of previous Bank loans in supporting BNDE's financing of the industrial sector. It included however two specific innovative characteristics: (i) it supported BEDE's leasing activities, up to 20% of the loan ($14 million), and (ii) it also set aside 20% of the loan as a pilot component to finance export-oriented industries; this component reflected the Government policy to encourage exports. This pilot operation was successful enough to enable the Bank to proceed shortly thereafter in preparing an autonomous export industries loan (Loan 2806). II. IMPLEMENTATION OF THE LOAN 4. A detailed description of the use of the loan is given, subloan by subloan, in Annex 1. Overall, compared to expectations, at the end of 1988, the loan has been used as follove (US$ million). 1 This Part II is a translation of the report prepared by BIDE for the purpose of this Project Completion Report. - 24 - General Export Total Industries Industries Forecast at loan appraisal 56.0 14.0 70.0 Conitments 57.0 17.0 74.0** Disaursements 55.1 14.8 69.9 **/ Overcommitments to leave flexibility in case of cancellations; disbursements cannot exceed the amount of the loan. Commitments 5. BNDE total request for financing under the loan totalled US$ 74 million. As noted above, this include US$ 4 million to be cancelled before closing date. US$ 14 million have been committed for leasing operations. This financing has been distributed as follows: General industry 55 subprojects (80%) Export component 14 subprojects (20%) This distribution is in accordance with the objectives of the loan. 6. This financing has contributed to total investment of about DH 1.9 billion out of which DR 0.74 billion have been financed directly by BNDE (40%). The balance (60%) has been financed for 2/3 by the enterprises and 1/3 by commercial bank medium-term rediscountable credits. BNDE's multiplier effect is therefore of the order of 2.5. On the basis of appraisal estimates, this financing has contributed to the creation of about 3000 jobs. 7. As detailed in Annex 2, the main sub-sector o oncerned by these subprojects has been the agro-industry branch, representing 27% of total investment. It has been followed by the chemical industry (24%), electro-mechanical industries (15%) and textile and leather (15%). Sixty-two percent of these subprojects (Annex 3) are in the central area of Morocco, showing that Casablanca retains its primary attraction, in spite of the incentives given by the investment code for industrial regional diversification. The North-western region comes in second position with 14.5% of the subprojects. Overall extensions of existing investments prevailed over new projects with 76% and 88% of the subprojets and subloans respectively. - 25 - Diabtrsements 8. Disbursements under the ninth loan have reached US$ 55.1 million for general industrial projects and US$ 14.8 million for export-oriented projects. Thus BINDE has utilized the entire loan amount, which represents an excellent performance as compared to the past utilization of Bank loans, as shown bellow: Lan Amm toe a of use Sixth 24.0 22.9 94.4 Seventh 30.0 30.0 100.0 Eighth 45.0 34.3 76.4 Ninth 70.0 69.9 100.0 9. As a result of the increase value of the US$ dollar in terms of the Dirham, the overall disbursements have amounted to DR 623 million as opposed to DR 372 million at the time of the loan approval. Imolementation and Follow-up 10. The following observations (supported by Annexes 4, 5 and 6) are proposed: - Out of a total of 69 subprojects, 4 have been cancelled; - Eight operations have taken place under the leasing component. All have been supervised regularly by BINDE; - Thirteen subloans have been repaid, representing an aggregate financing of US$ 6.4 million. Supervision of these subprojects has been completed; - For the balance of 44 subprojects, BIDE has effected 32 follow-up supervision visits which have been recorded. 11. Supervision reports and a dozen selected financial reports of clients financed under the loan highlight financial ratios which confirm the overall sound financial performance of the enterprises under supervision. Only three subprojects are facing serious difficulties, two of them.as the result of external conditions. 12. As of January 31, 1989, the key data under the loan were the following (DH million): Total BIDE financing 743 Total outstanding 358 Arrears 24 incl: 6 million to be repaid very shortly, and 4.3 million to be rescheduled. - 26 - III. GENERAL PROGRESS OF BNDE DURING THE PERIOD 1980-85 13. The implementation of the ninth Bank loan has taken place under a very difficult period for BNDE. Indeed, BNDE's financial situation and liquidity problems were very serious and were reinforced by unstable external economic and financial situations. These factors explain the variations between the forecast and actual situation of BNDE. Ogerations 14. While the actual volume of operations has been substantially above forecast in 1980 and 1981, the opposite has taken place in 1982-84. A similar situation has affected disbursements. Resource Mobilization 15. BNDE resource mobilization forecast for 1980-85 expected that it would raise DH 1.1 billion domestically and DH 676 million externally. In fact, during the period, BNDE raised DH 1.4 billion in the domestic market. This included DH 514 million of medium-term bonds bought by the commercial banks, as a result of the approval by the Government that medium-term ratios of the commercial banks could be filled in part by these bonds. BIDE also raised more than expected in foreign loans with a total of DR 900 million. 16. This excess of resource mobilized as compared to expectations was necessary to offset the arrears of (i) the Government to cover BIDE for exchange rate '.osses, and (ii) BNDE clients who faced severe economic difficulties during the period. 17. During the same period, BIDE has reimbursed DH 4 billion in principal and interest (the forecast was DR 3.1 billion), including DH 85 million of payment under the ninth loan of the World Bank. Profitability 18. During 1980-85, BIDE financial results have been seriously below expectations. Gross profits have fallen down in 1981. However, thanks to the rehabilitation plan in 1982, results have gradually and steadily Improved since then to reach gross profit of DR 80 million in 1987. This recovery has allowed BNDB to rebuild its provisions and reserves, and to pay dividends since 1984 equal to 8% of equity; and 9% for 1987. Profits for 1988 are expected to reach DR 87 million and dividend distribution are expected to be 10%. Profitability remains somewhat constrained by the relatively high cost of resources. - 27 - IV. CONCLUSION 19. In spite of the difficult context under which the ninth loan was made, its impact has been largely positive both vith respect to BNDE as an institution and for the economy. 20. The loan has been fully used, though its counterpart value in dirham has nearly doubled. 21. This line of credit has been directed to the main branches of the industrial sector, in particular it has served as a strong basis to promote export-oriented industries. LINE OF CREDIT (2037-MOR) (as of January 31, 1989) I. GENERAL COMPONENT . In-dustrial_ Componen t (in l 000 DII) (in Us$ I 000) Beneficiaries * Requestd Approv AutLhoriz. Witlhdrw Appruv. Caine. INt-t Approv Dishur CIMENTS D'AGASI 13,000 13.000 13,000 13.000 2.013 >o9 1.144 1.344 COsuA 20.000 20,000 20.000 20,000 2,439 l08 2.l U 2.132 CTL MASOC LAIT 28.000 28.000 28.000 28.000 3.26) 111 3.t89 1,069 CARNAUDNMAOC i 25,00 25,000 25.000 25,000 2,881 145 2J'$6 2.136 CInETS D'AGADR 60.000 57.330 55.085 51,330 6.11 - 6.11 6.1571 COTrA~A II1 23,000 23,000 3.000 23.000 2.428 - 2,428 2.42 rIGOS 15M ~RANIn 1.914 1.200 1,914 1,200 192 21 169 169 rANTASIA 3,400 3,400 3.400 3,400 544 54 490 490 TIGIGA 1,650 1,650 1.650 1.650 216 65 211 211 C.a.s.M. iIl 9,000 9,000 9,000 9.000 1.421 2s3 1.168 1,160 C.C.MA. 12.200 9,480 12,029 9.480 1,480 - 1.488 1,488 F.I.K. 12.000 12,000 12,000 12.000 1.920 319 1.541 1,541 SARIP 2,650 2.650 2.650 2.650 $98 107 291 291 SCir 2.800 2,800 2,600 2,800 421 8 3l6 336 S.C.C. 2,000 2,000 2,517 2.800 376 89 288 287 ognI "'TIo ,000 4,140 6.000 4.140 %29 94 435 43s vEuagRe EDICALM 3.000 3,000 3.000 3,000 383 18 luI t0 SOFICOSINE 4,000 4,000 4,000 4.000 486 47 419 439 4 , MAROC STVL 3,000 3.000 3,000 3.000 365 61 303 105 MAOTEE II 3,000 3,000 3,000 3.000 365 12 314 31 IMGETEX IlIIA1ULE) - - - - 547 141 - - S.M.F.M. 9,100 9,100 9,700 9,100 1.119 11 1.002 t.00i TITAL ATLAS 2,100 2,300 2.100 2.100 265 43 22 212 1% S.f.SLAOUI 16.000 16.000 16,000 16.000 2.004 195 1.809 &,109 S.C.t. InLc 10,600 10,600 1,993 3,491 1,18 128 I,.Oh0 412 SOFImETAL 2,000 2,000 2,00 2.000 249 24 224 224 VIL0R II 5,500 5,500 $,$0 5.500 686 41 144 544 OAPIL 3,100 3,500 3.500 3,00 369 14 155 3$5 IDALE 2.000 1,650 2,000 1.650 191 - 191 19 aLITA vil 4,500 4.500 4,00 • 4.500 415 46 428 428 ANUCUIR 2,500 2,500 2,083 2,500 282 - 282 282 DELECLUSE til 2,100 2,100 1,795 2.100 212 - 212 212 TAN. DU NAOC 2.500 2,500 2.298 2,500 21" - 211 275 TAN. J. CAREL 3,600 3,600 3,600 3,600 398 - 398 398 C.I.F. 4,000 4,000 4,000 4.000 401 - 401 40) FRIGOS Nousny Fr~&ES 2.200 2,200 2.200 2.200 227 - 2i 221 SOFT II 4,000 4.000 4.000 4,000 452 - 4S2 4%2 S.M.N. DAVUN ii 8.500 8,100 8.100 8,500 1,009 - 1.009 1.009 SEFT 7,300 1,300 1,100 1,300 811 - alt all FILOC XII 4,000 4,000 4.000 4.000 479 - 4)9 419 C.G.E.M. IV 5.500 5,$00 1.500 5,500 618 - h6 AFRIQUIA 8,000 7,430 - - 161 - ?bt f)U SEPO 6.000 16.000 16,000 16.000 1,808 .,u80s i.05 0 I SIMPEL 5,000 5.000 5,000 5,000 598 - !98 98 SIø 4,000 3.344 4.000 1.144 l8 ten 108 CAMNAUD 1 1.400 11.400 11,400 11,400 1.644 1.4.44 1 $.- o mGEIL $,300 5,100 5,300 51,30 84 I 419 847 sit -t ta 36,14 378,674 1371,J14 36413 46,711 1.8 1 4?1- 4 .t 2. Leasi _Comn nent (in 1 000 DH) (in US$ 1 000) Beneficiaries Request Approv. Authoriz. itlidrad Approv. Canc. 4t Approv. Disi r. WAAIL XV 24,950 24,899 24,950 24,899 2,124 - 2,724 2,724 MIIS&AL XVIII 9,300 10,102 9,300 10.102 1,167 53 1,114 1,114 MMmIL ZIZ 12.200 11.864 13,200 11.864 1,396 9 1.303 1,303 WAA~AL EVE 19,000 19,000 19,000 19.000 2,100 43 2,057 2,057 PSGAShIL EV 30,000 30,000 30,000 30,000 3,156 8 3.01 3,011 mAOC LASIna UIII 33,000 15,200 32,000 15.200 1.583 - 1.583 1,583 SOGELCAS .; 5,000 5,000 5.000 5,000 s8 34 554 554 nAOC LASINO EXII 36,000 15,293 36,000 15.293 1.636 - 1.66 1,636 Sub-Total 168.450 131.358 168.450 131.35 14.352 310 54.042 40.042 E. -xyort _Com onen t (I n l 000 DII) (in US$ 1 000) Beneficiartes Request. Apprøv. Authoriz. Withdra Appro. Canc.. Met Apprøv. DIjsbur. MAGETEX 2,200 2200 2,200 2,200 331 60 21 211 TAT&E 1,400 1,400 1,400 1.400 186 48 t1j tis SICONE II 2,500 2,443 2,054 1.892 312 - 312 201 [S0VAL 3,300 3,300 3.300 1,662 401 - 401 177 IMAVELTA 11 3,500 3,1500 1,280 1,766 427 - 4&? 118 C.f.?. 10,000 10,008 10.000 10,000 1.121 97 1.024 1.025 ØCART til 5.200 5,200 3.932 .5,200 567 - 567 568 FRUMAT 44.000 44,000 44,000 44,000 5,064 - 5,064 5,064 SAMINE 15,000 15.000 - - 1.434 - 1,434 - TISSBOD 3,000 3,000 3,000 3.000 317 - 317 311 T"EDLEDE 3,600 2.415 - - 241 247 - O~ACI 4,000 4,000 3,205 4.000 491 - 491 491 TEX»&aD 15.000 15,000 15,000 15,000 1,795 - 8.195 1,195 S.K.l.(EN PARTIE 74.000 37,298 30,181 37,298 4,517 - 4,577 4,51 Sub-Total 146.700 148.156 119.553 127.418 17.10 205 11.0o 14.801 TOTAL 743.364 658.708 659.315 622.911 78.334 4.434 7.960 69.9o 0 - 30 - PART II Annex II Page 1 of 4 9TH IllD CIEDI? LINE (2037-101):s SUCTOUAL EAEDOUW A- LEASING INVESTMENT DIRECT /_ PROGRAM // CRmED //._%. AFABA ;.24. ? MAGHREBAIL X'::I 10.300 9.300 'XAGHREBA:L X:X .4..C -2.23w ivAFABAI.. x:: 25. 0 0 '.. 0 MAGHREBAIL X. 35.30 30.00 MAROC LEASING XXXIII 42.300 32.000 SOGELEASE iI 6.250 5.000 MAROC LEASING XXXII 43.300 36.000 208.850 168.450 B - AGRO-INDUSTRIES COSUMAR 95.700 20.000 C.T.L. - MAROC LAIT 81.210 28.000 FRIGO S.IDI BRAHIM 6.320 ..914 BENI M'"VIR 15.100 6.000 SCI IKHLEF 26.500 10.600 FRIGO HOUSNY FRERES 3.700 2.200 SEFT 18.650 7.300 SEPO 37.3-ZO 6.000 SZOF 6.4 .1300 7:GR:GRA^.3'1.5 OMAC: 14.518 4.000 FRUMAT 166.433 44.000 .EAS:NG 29.239 23.583 5~:CrA: SJ 27 169.^47 .. -31 - PART ii Annex II Page 2 of 4 - TEXTILE & LEATHER Y.AEFL L6.rC0 5.300 SOFCCS .000 NADOTEX II 7.b00 3.000 FiL.OR :: L6.380 5.5c0 OM L0.500 3.300 ._ .; :. - -.500 CR810 2.500 A7RTT MAROC 6.900 2.500 TA.NER E r- A3 CARL. E. Ä .C50 3.b00 SOFT : 10.382 4.000 -ILROC X:i 7.180 .000 MAGETEX 5.900 2.200 TATEX 2.830 1.400 SICOME II 6.900 2.500 I.MAVELTA ii 9.738 3.500 MOCARY 1II 25.400 5.200 TISBORD 4.560 3.000 TREMOLEDE 5.550 3.600 TEXNORD 35.100 15.000 IBOVAL 6.550 3.300 LEASING 50.12, 40.428 S/TOTAL 274.957 14,7% 124.628 16,81 32 - PART Ii Amex II Page 3 of 4 - CHEMISTRY & PARA-CHENICA .~~~~ .. r. .. ,;..0 ..'. D"23 6.500 S- EMI- S..TL5.2 2.0 S... .DM-3 --- 21 .ý .0 . -'2' 31.2176.337 . E- EM!I CAI.A YXROC 1 7.700 25.000 *A 3 C c iF 26.430 2.830 TRIAL ATLAS 4.155 2.100 SOFT-METAL, 5.020 2.000 .;. åmor 214 J 9.0130 ~~~~3 it2.1 1.jki s~~ 1: 1. 32 J, 2341.772 j, - 3.6 -33- PART II Amex II Page 4 of 4 - MINES & ENERGY C. M. 33:6.3_3 iC. .,.. G - TRANSPORTS COTRAMA 1I 60.160 23.000 LEASING 33.504 23.638 SI TOTAL 95.664 5,2% 51.636 6,9% 1.873.270 100% 743.364 100% TOTAL -34- PART i Annex I! Page 1 of 3 Sif 3880 CM LM (SS74fBle U UL. AWMI INVESTr1ENT DIRECT PROGRAMI CREDIT I - CE;TRAL MOROCCO WAFABAIL XV 3'.000 .4.950 KAGHRESA?' X'.II 10.800 9.300 MAGKREBA.L X:X 1..00 12.200 WAFABAIL. XVI 25.O0O 19.300 MAGRAIL XV 35.000 30.000 MAROC LEASING XXX:I 42.300 32.000 SOGELEASE 1I 6.250 5.000 MAROC LEASING XXX'I 43.300 36.000 COSLA 95."3 20.000 C.T.L. MAROC LAIT 81.... 28.000 SCI IKHLEF 26.500 10.600 FRIGO HOLSNY FRERES 3.700 2.200 SEFT 18.650 7.300 SEPO 37.300 16.000 FRUAT 166.433 44.000 4AGEFIL 16.700 5.300 FILOR 16.380 5.500 BLITA VII 9.978 4.500 DELECLUSE III 6.500 2.100 TANNERIE DU MAROC 6.900 2.500 SOFT II 10.382 4.000 MAGETEX 5.900 2.200 IXAVELTA 9.738 3.500 TISBORD 4.560 3.000 TM0LEDE 5.550 3.600 TEXNORD 35.100 15.000 CEm 28.100 2.200 SMARIP 8.982 2.650 S.C.E. 17.500 2.800 VERRERIE MEDICALE 8.375 3.000 MAR C STYLO 8.720 3.000 IDEALE 3.000 2.000 SM. DAV'. 21.894 5.500 CARNAUD MAROC 77.000 '5.000 SCIF 26.450 2.800 C. G. E. %AROC 21.400 9.000 CARNAUD i! 22.100 11.400 C.G.E. HAROC IV 13.800 5.500 SIAPEL 10. : 3.00 AFRIQULA 18.500 , 8.000 33.3CC 10.300 SAMINE 35.3c0 15.000 COTRAIA 60.10 23.000 PART II Annex II Page 2 of 3 O- RTH WEST SOFICCSINE1.5 il.•C00 TATMX 2.830 1.400 M4CARY 25.400 5.200 OVAL 6.350 3.300 S.B.S. 36.200 16.000 CI,? 14.750 4.000 TRIAL ATLAS 4.155 !.i00 SOFINETA:- 5.0202.0 s .4 1 i69.420 .000 FILROC XlI A.140 4.100 STOTAi. 282.930 116.000 III - CENTR NORTH FRICO SIDI BRAHIM 6.320 . 1.91. SIOF 6.100 4.000 TIGRIGRA 1.950 1.650 FIL Lj.500 3.506 A F N 31.820 9.700 S/TOTAL 59.690 20.64. IV - SOUTH OMACI 14.518 4.000 CIMETS D'AGCA:R 5.350 13.000 CMENTS D'AGADIR 188.810 60.000 FANTASIA 7.600 3.400 s/TOTA 263.'78 80.0 V - CENTRE SOUTH- 'NI M'TIR 15.100 6.000 .scIR 7.810 2.500 S:ComE ii 6.900 1.500 F t x 32.000 1:.000 S0TA1.810 - 36 - PART II Annex III Page 3 of 3 - TENSIFT 7ANNER?E :EAN CAREL 3.600 VIl- EAST ADOTEX 7.400 3.000 ------------------------------- -------------- TOTAL --- .873.270 743.364 .. 37 - PART il O A=ex IV 9TU l11D CEUDIT LIME (2037-M): AMLTIZED CMIEDTS DUSTRIES CEMA 1.488.000 US $ SMARIP 398.496 US $ SCIP 421.000 US S TRIAL ATLAS 255.164 US $ IDEALE 197.452 US $ C I F 406.963 US $ MACETEX 330.827 US $ TATEX 186.371 US $ SICOME 312.056 US $ IBOVAL 400.972 US $ C M T 1.121.076 US $ FANTASIA 544.000 US $ Sub-total ...... 6.438.721 US S LEASING : WAFABAIL XV 2.723.777 US S MAGHREBAIL XVIII 1.157.088 US $ MAGHREBAIL XIX 1.395.752 US S SOGELEASE II 588.235 US S Sub-totai ..... 5.664.852 US $ TOTAL 12.303.573 US S ******* *!*!*!*I 38 - PART II Annex V Page i of 9TE IBRD CREDIT LINE (2037-MOR) s LIST OF REPORTS AND NOTES Full Reports Summary Notes CIMENTS D'AGADIR COSUMAR FRIGO SIDI BRAXIX CARNAUD F. I. M. FANTASIA BENI N'TIR C.G.E. MAROC S.M.F.N. S. C. 1. F. S. E. S. V. M. A. FI L 0 R SOFICOSINE 0 K A F 1 L MANUCUIR TANNERIE JEAN CAREL TANNERIE DELECLUSE S 0 F T FRIGO NOUSNY S E P 0 S.M.M. DAVUN IB 0 V A L MAROC LAIT I M A V E L T A S. C. E. F R U M A T IKNLEF 0 M A C I S E F T T E X N O R D S. M. I. S. C. I. F. S A M I N E ame '.39.- PART II 0 Annex 7 o kPage 2 of 2 List of Statements of Leasing Companies - WAFABAIL - MAGHREBAIL - MAROC LEASING - SOGELEASE List of Statements of Other Companies - C.G.E. MAROC - SOFICOSINE - TANNERIES DELECLUSES - SENI M'TIR - VERRERIE MEDICALE AFRICAINE (V.M.A.) - CENTRALE LAITIERE MAROC-LAIT -SC I F - FANTASIA WWWWWemuauaaaWWWWaussaSase amasamaWa88WWWW auuWeas - 40- PART li Annex VI Page 1 of 2 9TH IS&D CREDIT LINE (2037-HMU>, DESC'EDULED LOANS (as of January 31. 1989; in D '000) OLTSTAND. ARREARS BENEFICIARIES LOAN DRAWINGS C *CAITA INTEF.rT TO7AL CIMENTS D'AGADIR 13.000 4.SS0 COSUMAR ;20.000 3.00C .: . - 3.Ccc.. WAPABAIL XV 24.950 - - MAGHRtPAIL WVIII 9.300 - - - MAGNREBAIL XIX 12.200 - - WAAEUAIL XVI ,19.OCO 1.900 - ZTL FARCC LAI 20.CCC 19.25C - -2- CARNAUD YAROC 25.000 9.ooc - - . M.AGHREEAIL XV 30.CCO 6.000 - - - MAROC LEAS1hG XXXIII j32.000 , 7.115 - - . :IMENTS D'AGADISi 6C.000 * 56.000 CCTRANA II: ¿3.000 17.6Z.lo - - rRIGC SIDI URANIN 1.914 - - 5.3C0 2.258 .3eC 4 4 FANTASIA 3.4C0 - TIJRICRA 1.650 207 '3 .C3 CGE MAROC 9.C00 1.000 .-- - CE.A 12.20C - r i V 12.Coo 11.4cc - 31C 3 2.65C - - 3 -CI i2.CO -- - Ea.C - -- i:.i: ;**iLR '.000.CQ( ' c - - v 3.CCC 3.COC '-5 ; 1.: 1.*- 3C*CC I' ..%J * ..C%. - - - 1-.ARCC :TjLC 3.CCO 1.900 CC - NADOTE. :i 3.000 1.Ecc - - S tM N .70 .797 -'r'AL ZTA .ICO-- 3c:ELEAJ.IE II , 5.CC0 - - - 3?st.AC::i 16.OcO 1s.Oc. iSC - 4: a C I fmiLEF 10.600 7. 1..t ..31 St. 3A1INE (Arcrt 15.CCo - - TI-.RCD 31.34C; SE -UED (3 va ' .CC--- n . pas si'.r: c::A::: 4.C-VC.,3 *: (-· .aIe 7 . C 3C 1 I • . .~ Sub-total •..... 527.164 245•305. -1•C.1. t, 5.7e5 l .c- (*) Payment expected shortly (6 780 000 DH) (**) Re-scheduling pending (4 340 000 DH) 4 PART Ii Page 2 of 2 OU:TSTANDINGs ARREARS BENEFICIARIES LOAN !DRAWINGS CAPITAL INTEETS T 0 1 A L. MAROC LEASING 36.000 4.300 - - - WXXII SOD!EAL 2.00 • - -- FILOR :1 5.500 ; 2.000 '30 250 0 M A F i L 3.500 2.900 - - - I D E A L E ..000 - 3 . A VII ..550 3.C0t - - - 2.500 1.783 400 :0 DELECLUSE 1:1 ! .1001 1.395 - - - TANNERIE DU MAROC, 2.500 2.198 :50 - 250 TAN.JENA CAREL 3.600 3.450 200 158 358 C. I. F. .000 - - FRIGOS HOUSNY' 2.200 1.958 478 101 579 SOt II 4.000 3.000 - SM DAVU4 II 1 8.500 1 - - - - s E F T 7.300 7.300 1.550 1.598 3.148 - FILROC * 4.000 1 2.750 1 250 ' - 1 250 CcE MAROC IV 5.500 3.890 - AFRIQUIA ! 8.000 1 - 3 - - - S E P 0 16.000 13.300 900* - 900 SIMAPEL 1 5.000 1 - - - - S 1 0 F 4.000 2.800 * CARMUDII 1 11.400 1 11.400 1 - - - HAGETEX • 2.200 - - - TATEX 1 1.400 1 - 1 - 1 - 3 - SICO4MEII 1.500 IB0VAL 1 3.300 - 3 - - IMAVELTA 3.500 - - - C.M1.T. 1 10.000 - 1 - 3 - MOCARY 3 5.200 1 3.377 - - 1 - FRUMAT 1 44.000 ! 40.000 1.850* 1 - ! - Sub-total 1 216.200 1 113.101 4.735 2.9 7.41,4 TOTAL 35. - 42 - PART II Anmex VII COMMPkSON ETUEEN FORECHST OD RCTUAL (1980-85) (in DH thousand) I- UPPROIULS 1980 1981 1982 1993 1984 1985 -DIRECT -Forecast 620 550 550 700 700 700 -Ractual 659 961 366 276 501 699 Uariance 39 14 184) (121) (199) (1) -I.T .R -Forecast 290 250 250 300 300 300 -Rctual 290 351 214 178 338 392 UWarance - 101 (36) (122) 38 92 -EQUITY -Forecast 10 4 4 4 - -Actual 22 1 3 8 3 Uariance 12 (1) (41) 1 (1) II- DISDURSEHMETS -BIRECT -Forecast 400 450 450 550 600 600 -Actual 396 481 177 537 501 510 Uariance (14) 31 27 (13) (96) (90) -EQUITV -Forecast 1 5 3 4 q 4 -Actual 18 2 6 - 3 8 Uariance 1M (3) 3 () 1 1 Source: BBE - 43 - Part III Table 1. Related Bank Loans Fiscal Loan Year of Title Purpose Approval Status Comments BNDE VIII DFC line of credit 1977 Closed PCR completed SSI-I Line of credit 1979 Closed PCR completed SSI-II Line of credit 1982 Implementation ITPA-I Financial Adjust. 1984 Closed PCR completed ITPA-II Financial Adjust. 1986 Closed PCR completed Export Fin. Line of credit. 1987 Implementation - 44 - Table 2. Project Timetable Date Date Date Item Planned Revised Actual -Identification June 80 June 80 June 80 -Preparation June 80 June 80 June 80 -Appraisal Mission Oct. 80 Oct. 80 Oct. 80 -Board Approval May 81 June 81 June 81 -Loan Signature July 81 Nov. 81 Nov. 81 -Loan Effectiveness Oct. 81 several Nov. 82 -Loan Closing Jun. 86 several Dec. 88 -Loan Completion Dec. 86 several Dec. 88 Comments: Slippages incurred under the last three items are essentially due to the financial crisis faced by BNDE between signature and effectiveness. This question is documented under Part I of this PCR. , 45 - Table 3. Loan Disbursements Cumulative Estimated and Actual Disbursements (US$'000) 1982 1984 1986 1988 Appraisal Estimate 4.8 48.9 68.4 70.0 Actual 0 16.7 51.8 70.0 Actual on % of Estimates 0.0 34.2 75.7 100.0 Date of final disbursement, July 21, 1988 Table 4. Project Implementation Appraisal Indicators: Estimate Actual Effectiveness 9.30.81 11.01.82 Commitment of subprojects 12.31.83 12.31.87 Closing of loan 12.31.86 6.30.88 - 46 - Table 5. Status of Covenants All covenants in the Loan and Guarantee agreements have been complied with with two major exceptions: 1. After signature of the loan in 1981, BNDE's financial situation had deteriorated to the point where general financial covenants in the Loan Agreement were invoked by the Bank to suspend effectiveness of the Loan. This aspect has been reviewed in detail in this PCR as well as the ORD report already mentioned. New agreements were made before effectiveness and have been generally complied with since November 1982. 2. As a revised condition of effectiveness, the Government confirmed its agreement to cover BNDE for the foreign exchange risk on its external borrowings. When the Treasury faced increasing financial difficulties in 1986 and subsequent years, the Treasury has been repeatedly in arrears on its payment to BEDE for exchange losses incurred. While payments have taken place from time to time, arrears have not been fully paid yet. This matter continue to be the subject of discussions between the Treasury, BNDE and the.Bank. A solution is expected by mid-1989. Table 6. Use of Bank Resources The following staff resources (in staff/weeks) were spent on the preparation and implementation of BEDE IX (with the exception of IFC and OED work as well as of the present PCR) during the period 1980-88: 12 U U JU AA AM U RZ Al Project Preparation/ Appraisal 15 83 - - - - - - - Project Supervision - - 28 26 6 15 6 3 3 No record is available on the exact number of supervision missions over the period. However, during the period 1982-83, seven missions were fielded to deal specifically with BRDE's financial crisis. Subsequently there was at least one full supervision mission each year. From March 1983 through March 1984, a senior consultant (retired Bank Director) was retained to assist BNDE in reorganizing its management, staff and operations, and revising its Policy Statement. There was also close consultations and collaboration between Bank and IFC staff, especially as IFC assisted BIDE in raising a syndicated loan in 1984. 1 1 1 - 47 - ATTACHMENT 1 Comments Received from the Ministry of Planning Tran.iation of Incoming Telex Mr. Alexander Nowicki Division Chief, Operations Evaluation Department World Bank September 5, 1989 Thank you for your letter of July 28, 1989, with which you sent me a copy of the draft report on Loan 2037-MOR. I have no special comments to make on this report. Regar'si Mohamed Bijaad Secretary General Ministry cf Planning - 49 - ATTACHMENT 2 Page 1 of 4 Comments Received from BNDE DEO/DCSP/A.G/E.L/No. 18 Rabat, September 13, 1989 IBRD Washington, D.C. For the Attention of Mr. Alexander Nowicki Division Chief, Operations Evaluation Department Subject: Project Performance Audit Report on Loan 2037-MOR. With reference to your letter of July 28, 1989, I have the honor to attach BNDE's comments on the Project Performance Audit Report on Loan 2037-MOR. I look forward to receiving the final version of this report. Yours sincerely, s/Farid Dellero Administrateur-Directeur Gfn6ral - 51 - ATTACHMENT 2 Page 2 of 4 AMENDMENTS SUGGESTED BY BNE TO CERTAIN PARAGRAPHS OF THE PROJECT PERFORMANCE AUDIT REPORT ON LOA F2037-MOR 1. EVALUATION SUMMARY Page iii RNDE was alco responsible for managing the export Zinance project, which should be taken into account by amending the end of (1) as follows: "BNDE is also the administrator of two Bank-financed small-scale industry projects, and manages and participates in the Bank's 1987 Industrial Export Finance Project." 2. PROJECT PERFORMANCE AUDIT MEMORANDUM Page 5 (Paragraph 4.01) The expression "It would appear" should be deleted and be replaced by "There are grounds for stating that the objectives.... ." Page 7 (Paragraph 4.05) Should read: "Project supervision and monitoring formed such an area in BNDE." 3. PROJECT COMPLETION REPORT Page 4 (Paragraph 10) BNDE has in fact always rendered appreciable services to its clientele and its position has never led to any deterioration of its efficiency. This paragraph should be reworded as follows: "The position in which BNDE was placed did not encourage it to embark upon a dynamic marketing policy vis-&-vis its clientele." Page 5 (Project Results) (Paragraph 14) Should read: "Since 1984, however, BNDE had been actively studying and evaluating alternative strategies, in close collaboration with its Board, the Government or the Central Bank." Pae 8 (Table 3) The year 1987 has been omitted from the table. - 52 - ATTACHMENT 2 Page 3 of 4 Page 9 (Paragraph 24) Should read: "BNDE has just created a holding company with its equity investments with a view to dynamizing its portfolio of such investments." (Paragraph 25) Delete: "....reflecting BNDE's new policy of reducing its intervention in this area." BNDE has never had such a policy, quite the contrary. (Paragraph 26) Delete: "....an area which has remained weak and which accounts in part for the relatively high level of BNDE loans in arrears"; Page 10 (Paragraph 28) Should read: "The resolution to these questions will determine the future of Morocco's banking and financial institutions. There is also no doubt that the Bank Group.....in addressing this question." The fact is, that the questions you refer to are of a general nature and concern the entire Moroccan banking and financial system. The following sentence should therefore be deleted: "It is only at that stage that BNDE would be able to demonstrate whether or not DFC-type institutions like itself are sustainable in Morocco." Page 11 (Paragraph 29(a)) Delete "seems" and read as follows: "....BNDE has a stronger pipeline than...." (Paragraph 29(b): Amend (b) to read as follows: 53 - ATTACHMENT 2 Page T-of4 "BNDE's supervision of its sub-projects is displaying distinct improvement. Seventy-three percent of the sub-projects approved under the loan (excluding leasing accompanies which are supervised in the context of credit renewal operations) have been the subject of supervision visits and reports over a four-year period. (cf. BNDE Report, page 23) The sentence "The depth of this supervision also needs improvement" should also be deleted. (Continuation of paragraph 29(B)) Should read: "Under the Industrial Finance Loan...., BNDE will have to set specific targets for reducing its arrears." Page 12 (Paragraph 29(d)) Exchange risk: It should be made clear that BNDE's disagreement concerning the amount of the exchange risk is due to the Ministry of Finance's reopening of the question of the agreements concluded between it and BNDE. (Conclusions and Lessons) (Paragraph 30) Should read: "Second;, in reaction to the 1982 problems, BNDE's policies, management, organization and operations improved substantially, including the supervision activity which has just been organized; these aspects of BNDE deserve in 1989 a good rating. - 55 - ATTACHMENT 3 Page 1 of 2 Comments Received from the Ministry of Finance Translation of Incoming Telex d.ated September 14, 199 For the attention of Mr. Alexander Novicki Division Chief, Operations Evaluation Department World Bank Subject: Project Performance Audit Report Loan 2037-MOR to BNDE Ref: Your letter of July 28, 1989 I have the honor to present my comments on the above-referenced report: 1. The report notes on pages iv and 10 that BNDE's sustainability depends on the financial sector's ability to evolve from its constraints. Certainly, any improvement of this sector can only be beneficial for BNDE and for all parties involved. The fact remains, however, that in an evolving environment BNDE's sustainability also and particularly depends on its ability to adjust and adapt itself to the new circumstances of the financial sector. 2. The report states that since 1984 BNDE had been studying strategies that it had not been able to adopt because of obstacles placed in its way by the Government, its Board and the Central Bank (page 5 of PCR). This statement does not appear justified to me since after 1983, the year in which the Declaration of General Policy was drawn up (setting out a strategy), neither the BINDE Board nor the Government received any document proposing modifications of this strategy, even though major changes were made in BNDE's environment. 3. The report cites the State's failure to cover the exchange risk relating to certain lines as one of the causes of the 1982 crisis. I would draw your attention to the fact that all BNDE borrowings subsequent to 1973 benefit from this cover without exception. Moreover, the link between coverage of the exchange risk and that crisis is not evident to me since the lags in payment of exchange losses did not really begin to impact BNDE's situation until after 1983 as a result of the financial difficulties experienced by the public finances. 4. The following pages need to be updated regarding the question of exchange risk coverage: - paragraph 22 emphasizes the existence of substantial arrears, resolution of which is under review. It should be noted that the Treasury is taking steps to settle these arrears; those outstanding as of end 1987 have been paid and the procedure for settlement of those posted as of end 1988 is under way. - 56 - ATTACHMNT 3 Page 2 of 2 - in paragraph 29(d) it is stated that a disagreament between the Government and BNDE remains on the coverage of future exchange losses. It should be noted that following the studies made with a view to rationalizing the coverage system, and in which the financial institutions were involved, an agreement has been worked out with BNDE for coverage of the exchange risk concerning the next IBRD industrial finance loan. In addition, a Ministry of Finance letter of June 19, 1989, lays down the conditions for coverage of the exchange risk in the future. Regards Abdelfattah Benmansour Assistant to Director of the Treasury Ministry of Finance