Report No. 11894-MOR

Kingdom of MoroccoPreparing for the 21 st CenturyStrengthening the Private Sector in MoroccoJune 30, 1994

MNICO, Middle Fast a,ncd North Africa Regional OfficeCorporate Planning and CAMENARegional Departments, IFC

FOR OFFICIAL USE ONLY

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Document of the World Bank

This document has a restricted distribution and may be used by recipientsonly in the performance of their official duties. Its contents may not otherwisebe disclosed without World Bank authorization

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aURRENCY AND EXCHANGE RAE

Currency Unit - Dirham (DH)

1982 1983 19?4 1985 1986 1987 1988 1939 1990 199 1992 1993

DH per TJS$, l - _ _ -

End o'Period 6.27 j 8.061 9.55 9.62 8.71 7.8SU 8.21 8.12 8.04 8.15 9.05 9.65

DH per US$, _- 4 9Period Average 6.02 7.11 8.81 10.06 9.10 8.36 8.21 8.49 8.24 8.71 8.54 9.30

ICAL YEAR

January lst - December 31st

FOR OFFICIAL USE ONLY

ABBREVIATION AND ACRONYMS

AMDEC Association Marocaine dee Diplm6s Experts-Comptablee (J,'ioroccan Assocition ofChartered Public Accoumans)

AMICA A"ociation Muocaie pour l'Induttrie et la Commer:e Automobile (Moroccan Associationfor Automotive Industry and Trade)

AMIl Assocition Marocaine des Industries Textiles et de Habillement (Moroccan AsoCistionof Textile and G taza Industries)

ASMELEC Asocition Profejioele des Mahands de Matdriels Electriqes.ASMEX Associatioi Marocaine des Exporteurs (Moroccan Asociation of Exporters)ATC AssociLtion Professionnelle des Transformazmrs du Cuir (Professional Association for

Leher Worker)BNDE Banque Nationale pour le D&ve!oppement Economique (National BAk for Economic

Devolopmet)CCG Casse Centrnle de Garantie (Central Guantee Fund)CDG Caisse de Depots at de Geation (Government Fundas Deposits and Management Agency)CDT Confederation D4mocratique du Trmvail (Democratic Worker's Confederation)CEN Caise d'Epurgne Nationale (National Savings Agency)CGEMI Confederation Cenerale Economiqcie Marocaine (Genoera Economic Confederaion of

Morocco)CiI. Credit Inmobilier at H6telier (Real Estate and Tourism Credit Agency)CMM Caisse Mrocaine des MarchesCNCA Caisse Nationale de Credit Agricole (National Agricultural Credit Bank)CNJA Conseil National de la Jeunesse et da i'Aveair (National Youth Council)CNSS Caisse Nationzle de Securite Sociale (National Social Security Fund)COMANAV Conpagnie Marocaine de Navigation (Moroccan Shipping Company)CPI Consumer Price Index (Indice des Prix i la Consomation)EU European Union (Union Europeenne)ERP Effective Rate of ProtectionEST Ecole Superieure de TechnologieFDI Foreign Direct Investment (Investissements Etrangers Dirocts)FIME Federations des Industries M6tallurgiques, Mecaniques et Electriques du Maroc (Moroccan

Federation of Metallurgical, Mechanical EngineeriLg and Electrical Industries)FNTBP FEd6ration Nationale du BAtiment et des Travaux Publics (National Federation of Building

Industries and Public Works)GDP Gross Domestic Product (Produit Interieur Brut)GNP Gross National Product (Produit National Brut)GPBM Groupement Professionnel des Banques du Maroc (Moroccan Professional Bankers

Association)IATA International Air Trasport AssociationEFC International Finace CorporationOCE Office de Com-ercislisation at d'Exportation (Trade and Export Board)ODEP Office d'Exploitation des Ports (National Port Authority)OFPPT Office de In Formation Professionnelle at de la Promotion du Travail (Office for Vocational

Training And Employment)ONE Office National d'Electricit6 (National Power Company)ONPT Office National des Postes et Telecommunications (National Post and Telecommunications

Company)ONT Office National des Transports (National Transport Company)ORMVA Office R6gional de Mise en Valour Agricole (Agricultural Regional Office)PIACE Programme d'lnformation et d'Assistance & la Creation d'Entreprises (Program of

Information and Assistance for the Creation of Enterprises)PME/SME Petites at Moyennes Entreprises (Small and Medium-Scale Enterprises)RAM Royal Air MarocSA Soci6tE Anonyme (Joint Stock Company)SMIG Salaire Minimum Inter-professionnel Gantiu s. 7M, Union Gdner&le des Travnilleur Marocains (General Union of Moromcan Workers)

Union Marocaine du Travail (Moroccan Worker's Union)Value Added Tax (Taxe sur la Valeur Ajout6e)

This document has a restricted distribution and may be used by recipients only in the performance L.|official duties. Its contents may not otherwise be disclosed without World Bank authorization.

Numerous World Bank staff and consultants contributed to this report, which wassupervised and drafted by Charles Humphreys. Principal contributors include MicheleCyna, Nicolette DeWitt, Ian Goldin, Mona Haddad, Ann Harrison, Roumeen Islam, AliKhadr, and Douglas Weblh of the Bank, and Edward Coe, Housni El Ghazi, and Jean PaulPeresson, consultants. Mich of the information was collected during a mission in February1993, which benefited from the generous support of the Moroccan administration andprivate sector. IFC's input was coordinated by Fares Zaki and Yasmin Saadat, and isbased on a field mission to Morocco during May 1992, and represents the input of theRegional Department and FIAS. Various other staff provided advice and support,including Cynthia Angeles, Jacques Coudol, William Experton, Marc Juhel, .raj Talai, andBeemard Veuthey, as well as Mohamed Bouassami (U-NDP, Rabat) and Adnan Hassan(consultant). The work draws heavily on two companion reports on private industry andagro-industry (World Bank Reports Nos. I i557-MOR and 11727-MOR)--especially thework of Hamid Alavi, Richard Brun, Michel Debatisse, Isabelle Tsakok, a.ld Joseph Saba--and on the Morocco Poverty Assessment prepared by Miria Pigato, with support fromGuillermo Hakim. Brigitte Petit desk-topped the report.

PREPARING FOR THE 21st CENTURY: STRENGTHENIG THE PRIVATESECTOR IN MOROCCO

Table of Contents

PREFACE

EXECUTIVE SUMMARY ....................................... i

CHAPTER I: PROFILE OF THE PRIVATE SECTOR ................... 1

A. The Public - Private Boundary .......................... 11. Private Business ............................... I2. State-Owned Busmess ........................... 33. Government ................................. 5

B. Organization of the Private Sector ............. . 6C. The Private Sector's Call on Factors of Production .......... . 7D. Trends in the Private Sector ................ 9E. Vision for the Future ............... ................. 10

CHAPTER UI: PERCEIVED CONSTRAINTS ........................ 13

A. Large, Established Finms .............................. 13B. Foreign Investors .................................. 16C. State-Owned Enterprises .............................. 18D. Small and Nascent Firns .............................. 18

CHAPrR III: INCENTIVES FOR FASTER, MORE EFFICIENT PRIVATESECTOR DEVELOPMUENT ................................ 20

A. Summary and Recommendations .......... ............... 20B. Macroeconomic and Fiscal Incentives ....... ............... 21C. International Trade Incentives . .......................... 25D. Domestic Price and Market Regulations ....... .............. 31E. Specific Investment Incentives . .......................... 34

CHIAPTER IV: RESOURCES FOR PRIVATE SECTOR EXPANSION-FINANCE ............................... 36

A. Summary and Recommendations .......... ............... 36B. Access to Equity ................................... 38

* Domestic Equity ............................... 38Foreign Equity ................................ 41

C. Access to Credit ................................... 44Loans ........... .................. 44

i. Interest Rates ............................ 47

Table of Contents (continued)

CHAPTER V: RESOURCES FOR PRIVATE SECTOR EXPANSION-LABOR .. 54

A. Summary and Recommendations ......................... 54B. Costs of Labor .................................... 56C. Barriers to Labor Mobility ............................. 60D. Quality of the Labor Force ............................. 61

CHAEIER VI: RESOURCES FOR PRIVATE SECTOR EXPANSION-LAND ... 66

A. Summary and Recommendations ......................... 66B. Pioperty Rights .................................... 67C. Reai Estate Markets ................................. 68D. Cost of Land ..................................... 68E. Industrial Zones ................................... 70

CHAPTER VII: HARD CONSTRAINTS-PUBLIC INFRASTRUCTURE ANDSERVICES ...... . 73

A. Summary and Recommendations ......................... 73B. Description of Existing Infrastructure ...................... 75C. Operation of Infrastructure Services ....................... 78

CHAPTER VII: SOFT CONSTRAINTS--WEAK INSTITUTIONALENVIRONMENT ...................................... 82

A. Summary and Recommendations ......................... 82B. Deficiencies in the Legal Framework ....................... 84C. Weaknesses in the Judicial System ........................ 86D. Inadequate Financial Disclosure .......................... 88E. Regulations ....................................... 89F. Private Business Institutions ............................ 90G. Institutions for Technological Deepening .................... 91

APPENDIX TABLES ........................................ 93

APPENDIX I: Information on Surveys ............................. 99

BIBLIOGRAPHY ......................................... 101

LIST OF TABLES

Table 1.1: Employment statistics, 1990-91 ........................... 8Table 1.2: Normative targets for private sector deve!opment in Morocco, 1994-2000 12Table 2.1: Public-private perceptions of changes in factors affecting competitiveness,

i984-91 ..................................... 17Table 3.1: International comparisons of corporate income taxes .... ......... 24Table 3.2: Evolution of average trade protection .26Table 5.1: Average wages in Morocco, 1990-91 ....................... 56Table 5.2: Manufacturing employment, productivity and wages, 1986-90 ........ 58Table 5.3: Perceptions of labor supply and quality ..................... 62Table 5.4: Indicators of skied labor shortage, 1991 .................... 63Table 6.1: Prices of land zoned for multi-story buildings in Rabat and Casablanca . . 68Table 7.1: International. comparison of infrastructure .............. I ..... 77

APPENDJX T'ABLES

Table A.1: Private/public shares in Moroccan economy .................. 94Table A.2: Selected national accounts indicators ....................... 96Table A.3: Selected indicators of the external sector .................... 97Table A.4: Selected public sector data ............................. 98

LIST OF FIGURES

Figure 2.1: Strength of perceived constraints by size of firm ................ 14Figure 2.2: Reasons for business location ........................... 15Figure 2.3: Perceptions of prospective foreign investors .................. 16Figure 2.4: Major difficultiLs faced by prospective entrepreneurs .... ......... 18Figure 4.1: Trends in net foreign direct investment (FDI) ................. 42Figure 4.2. Sources and uses of foreign direct investment in Morocco .... ...... 43Figure 4.3: Irternational trenas in real interest rates ..................... 49Figure 5.1: Annual real wages in Morocco .......................... 57Figure 5.2: Distnbution of average manufacturing wages in firms, 1986 ... ..... 59Figure 7.1: Dissatisfaction with quality of infrastructure .................. 73

$TEGTHENMNG TE PR1VATE SECTOR IN MOROCCO

PREFACE

How this report has been used. o Better banking rules. In mid-1993,This report was prepared during the first the government promulgated the newhalf of 1993, based on extensive research banking law, which will take effectand consultations in Morocco during the progressively during 1994-95. Theprevious year and on data available at that law establishes stricter prudentialtime. Following its wide distribution to regulations that define clearer criteriaboth public and private readers in Morocco for classifying loan risks and imposeduring the second half of 1993, it, and two higher provisioning coefficientscompanion reports on industry and against loans that are nonperformingagriculture, became the basic documents for as well as against those to clientsa seminar on the private sector, organized in wnose accounts do not rr.eet sheDecember 1993 by the government and stricter accounting rules escablishedrepresentatives of the private sector. This by the new accounting law that wasseminar discussed six broad themes--tax promulgated at the end of 1993.issues, financing problems, land andinfrastructure constraints, human resources, o Strengthened capital marketthe legal and institutional bottlenecks, and institutions. In October 1993, thethe promotion of technology. The seminar's new law on capital markets becamerecommendations constitute a point of effective, which is a first step indeparture for the formulation of a private establishing an independent securitiessector development policy in Morocco. and exchange commission (Conseil

Deontologique des ValeursMajor refc rms since the report was Mobilileres), reorganizing the stock

drafted. The dialogue on private sector exchange, and allowing, for the firstdevelopment is very active in Morocco, and time, mutual funds to help mobilizegovernment policies evolve continually in an capital from small investors. Whenattempt to strengthen business conditions. they become functional sometime inSince this report was first distributed in mid- 1994, these new institutions should1993, the government has already adopted help alleviate financial constraintssome of its proposals that aim to alleviate facing business.many of the difficulties facing privatebusiness. While most of these changes have C Liberalizing foreign exchange. Inbeen noted in the text, an upfront summary November 1993, the governmentindicates the scope of the effort to deal with authorized exporters and Moroccansthe difficulties. The most significant resident abroad to open domesticmeasures deal vith financing and taxation. bank accounts denominated in

fo.eign exchange, rather than in

convertible Dirhams, for up to 10 and clearly define the profession ofpercent of export receipts. Chartered Accountants who now

become legally liable for theo Fewer distortions in the financial accuracy of certified accounts.

system. In early 1994, thegovernment lifted obligations 0 Steps to increase private provision ofrequiring banks to lend a minimum infrastructure. In late 1993, theof their resources to exporters, small national electricity company (ONE)businesses, and low-hicome housing launched a process to tender bids forbonds. The government has also private power plants, and severalextended access to its Treasury bond foreign investors are actively seekingauctions to private companies, in participation.addition to financial institutions andstate-owned enterprises. The 1994 o Strengthening the judiciary. Thefinance law introduced changes government has recently adopteddesigned to reduce distortions several measures to improve thebelieved to raise the cost of private , dicial environment for business,borrowing. It reduces the VAT rate including: a substantial increase inon interest payments by half, as part the 1993 budget allocation for theof a multiyear program of phasing Justice Ministry; reintroduction of 3-out the VAT on interest altogether, judge panels in 1993 in trial courtswhich will bring Morocco into line of initial jurisdiction to deepenwith all other countries that use the competence in commercial cases;VAT system. It eliminates the tax creation of a commercial departmentexempt status of Treasury bonds held in the national institute of judicialby individuals; interest on such studies in anticipation of the newTreasuries will be taxed at commercial and company codes; and10 percent in 1994 and a further tax increased training requirements forincrease to 20 percent in 1995 will the legal profession.brirng their taxation into line with thetaxation of other interest income.

Putting the report in action. Theseo Reduced corporate taxation. The measures, important elements for any action

1994 finance law also reduces the program, will need to be complemented innominal tax burden on companies, the future with a wide range of other,lowering the corporate tax (including longer-term measures discussed in the reportthe surtax) to 39.6 percent (a and reemphazised in June 1994 during thereduction of 2.2 percentage points) seminar held in Rabat on the theme ofand introducing a front-weighted "Maroc a grande vitesse". As agreed, theaccelerated depreciation procedure. government and the private sector plan to

formulate a 10-15 year action plan duringo Better accounting. After years of 1994, that will state the principles to guide

preparation. the new accounting laws private sector development in Morocco,were promulgated at the end of 1993 summarize key objectives that would reflectand enter into force in 1994; they a shared vision, define in detail the policyestablish a modern chart of accounts reforms anu institutional measures needed to

achieve these objectives, and establish a set particular, that have an immediate andof monitorable indicators to chart progress. substantiaU1 impact on government borrowingOn the basis of the recommendations needs should be phased in only after carefulemerging from the December 1993 seminar, assessment. Other actions, howeverthis action plan is likely to cover the important, may have to be preceded by afollowing ten themes: financial sector period of institutional strengthening--fordevelopment, tax issues, foreign and example the development of nonbankdomestic competition, further privatization financing for business. In addition, furtherincluding greater use of competitive studies may be needed before actions can beconcessions, physical infrastructure, defined. One important topic is the size andeconomic zones, human resources, legal and role of the informal sector, comprised ofinstitutional frameworks, technology, and very small-scale operators, w th a view tothe collection and diffusion of data. developing policies that can inaximize the

productive links between them and largerBecause of the breadth of the work businesses. Another is the identification of

ahead, government and business will have to factors determining competitiveness inset priorities for action, based not only on manufacturing and services and the designthe severity of the problems but also on the of appropriate plans of action to raise it andrelative costs and advantages of alleviating thereby boost economic growth andthe difficulties. Fiscal measures, in employment.

STREGTYHEiNG THE PRIVATE NECT[OR E MORYCCO

I EXECUTIVE SUMMARY

i. Introduction, This report on The informal sector--which consists of veryMorocco's private sector culminates over a sirall, usually individual (but not necessarilyyear of review and consultation with illegal) businesses--is pehrvasive andMoroccan authorities and private investors produces at least 15 percent of total GDPand workers. More importantly, it marks and a fifth of private sector output.the beginning of a new phase of BankGroup-Moroccan relations focused on iW. Government's gradual butpromoting the private sector. The report is marked shift to encourage the private sector.the launching pad for the formulation of a 'rhe government has never been anti-privateprogram of private sector development in sector in Morocco. Investment codes andMorocco, under the tripartite direction of trade protection dating from the 1970sthe private sectcr, the government, and sough'. to promote and protect dormiesticbilateral and multilateral agencies. Besides fIrms, but a panoply of governmentbriefly describing the private sector, this controls, regulations, and authorizations alsoreport summarizes the main issues in the revealed a certain distrust of the privateincentives framework and important economy. Now the government isconstraints in the major factors of committed to developing the private sector,production--finance, labor, land, and domestic and foreign. Since the late 1980s,infrastructure--as well as in the overall the government has progressively increasedinstitutional envirornent. The following the latitude for private activities, byexecutive summary highlights major suppressing the monopolies of several stateconclusions and suggested govemment agencies, by increasingly deregulatingactions. markets of all kinds, oy beginning the

process of divestiture, and by measures tomodemize the institutional environment. In

THE PRIVATE SECTOR TODAY the 1990s it has sought to eliminatedecisively the reminders of its negative

ii. The private sector is alive and stance vis-a-vis foreign private investorsthriving. The private sector thrives in exemplified in the 1973 Moroccanization.Morocco, in almost all sectors. It is by farthe dominant employer and producer, and it iv. After nearly 3 years ofis increasingly the major investor. preparation, the government startedEconomic power is concentrated in privatizing the first set of state-ownedMorocco, but market dominance seems no enterprises in late 1992. By 1996 theworse than in developing countries in government intends to sell IlI companiesgeneral: in tact. government ownership and and hotels, which--together with theirmarket restrictions are responsible for the subsidiaries--cover nearly half of state-severest concentration of market power. owned enterprises and agencies. Subsequent

Pge u Strengthening the Pvate Secor in Morocco

programs may open the strategic phosphate government has essentially liberalized thecompany and the several public utilities and binking sector, except for an interest ratetransport companies to private capital. In ceiling on loans, a small amount of directedthe interim. the government is beginning to credit until 1994 (about 4 percent of totalstudy actions (including concession deposits), and substantial mandatoryarrangements) to increase the provision of holdings of government bonds at belowpublic services and utilities by private market rates. The government even plans tovendors. divest its shares in 4 of the 5 major state-

owned banks. Liberalization did not raisev. Businessmen still face the real cost of credit; much of thatstructural, as well as policy .problems. adjustment was achieved in the 1980s.Medium and large businesses complain However, real lending rates (aboutloudest about basic factors of production-- 11 percent at the end of 1992, essentially thethe hard constraints: fimance (high interest same as in 1987-88) remain much above therates); manpower (shortages of managerial nearly zero rates in the early 1980s, and theand supervisory skilled labor); land (the high rate of indebtedness of Moroccanshortage and high cost of commercial land, companies makes higher rates more costly.especially in large cities); and While high, real interest rates do not appearinfrastructure (weaknesses in physical out of line with lending and deposit rates infacilities and services). They also complain Europe, with which Morocco is connectedabout high income taxes, and about the notably through workers remittances and thedifficult, time-consuming process of labor financing of imported inputs used in exports.management (firing workers or devising Following the liberaiization, real rates werealternative labor management strategies). often below those in France and Spain.Small businesses complain about theseproblems as well, but they put vii. Policy limits on domesticadministrative and regulatory constraints- capital. Full interest rate liberalization-the soft constraints--near the top of their should help improve the functioning of thelist; from their perspective, only high bank credit market, it is unlikely by itself tointerest rates hurt more. solve the problem of undercapitalization in

large firns, weak access to bank credit forsmall firms without much collateral, and the

OEALING WITH CONSTRADJfi shortage of resources for longer terrn bankloans and bonds for business investment.Taxation of .eturns on investments is not

A. Relaxing the Financial Constraint neutral and acts to divert domestic fundsinto real estate, agriculture, and Treasury

vi. A much improved policy bonds, compared to industry and services.environment. In line with the achievement Private banks and businesses do not issueof macroeconomic stability in the 1980s--as bonds, in part because the government hasevidenced by low inflation (less than the power to restrict private issues to5 percent) and fairly constant nominal minimize competition with Treasury bonds.exchange rates, culminating in current Foreign borrowing by private companiesaccount convertibility in early 1993, the was tightly regulated until late 1993, and in

Ssrengdtening the Prvate Sector in Morocco Page Ui

any case foreign exchange controls have o Replace all pre-emptive Treasurymade it impossible for borrowers to hedge financing (mandatory holdings offoreign exchange risks. Treasury borrowing Treasury bonds by banks, insuranceintercepts most long-term savings before companies, and government pensionthey reach the banking sector, reduces the fiunds) with market-based bond issuesscope for bank intermediation by absorbing-- in competition with privatemandatorily and for long periods--a large companies, while continuing toshare of deposits, and forces bank to charge reduce the Treasury 's share of totalother borrowers higher interest rates to domestic debt.compensate for below-market rates onmandatory government bonds. These o Revise bankruptcy and related lawspolicies act to crowd the private sector out to facilitate lending against inventoryof the financial market in the short run, but and accounts receivable (floatingmore importantly they discourage the charges).development of a wider array of financialmarket instruments needed for business o Make taxes more neutral acrossdevelopment. productive sectors and financial

instruments as an important adjunctviii. Recommendations for to improving laws, institutions, anddomestic financing. A broad program of otht, policies affecting financialmeas,ires is needed to expand access to decisions.funds. These include:

0 Eliminate the interest rate ceiling (oro Implement the new 1993 capital raise it so that it is nonbinding).

market laws that provide for anautonomous Stock Exchange ix. Few policy but many otherinsulated from government barriers to foreign capital. By the end ofinterference and for safeguards to 1992, Morocco had eliminated virtually allprotect small stock investors. administrative barriers to foreign direct

investment. Companies in almost all sectorso Strengthen laws to increasefinancial can b% 100 percent foreign-owned;

disclosure for publicly traded foreigners can purchase equity shares,companies (as an adjunct to the new including in privatized state-ownedaccounting and auditing laws). enterprises; and repatriation of capital and

earnings and payment for nonequityo Encourage the development of a investment services are now automatic. Net

corporate bond market, by allowing inflows of foreign investment tripledcompanies to issue bonds, by between 1987-88 and 1991-92, reachingestablishing appropriate regulations $0.5 billion in 1992. Although this foreignand safeguards (through the 1993 investment, at 2 percent of GDP, is twicecapital markets law), and by the average rate for developing countries inprovliariny tax incentives based on the late 1980s and early 1990s, it remainslor,i' uwirurities and reinvestment of less than the rate in East Asia and Latin011 7 r1 ,;r, ' America.

Pge iv Swngthening the Pnivate Sector in Morocco

x. The constraints that remain B. Improving Skilled Labor and theare systemic, faced by domestic as well as Labor Marketforeign investors. Tls, the mere fact thatMorocco is now open to--and wants--more xii. Increasing and reshaping theforeign investment is unlikely to attract supply of skilled labor. Moroccan firns usemuch foreign capital without a systematic relatively few managerial, supervisory, andprivate-public effort to target likely investors administrative staff, partly because many aregeographically and sectorally. And this so small, and partly because such staffeffort will only be effective if the appear to be so hard to find. Publicly rungovernment continues to maintain training and education programs that pay tooappropriate macroeconomic policies that will little attention to business needs, coupledmake Morocco a more credible risk for with a strong desire by students to work ininternational investors and lenders and if the public sector, has left the private sectorsubstantial progress is made in alleviating with too few skilled staff. The growth andother policy and structural constraints. The success of alternative training programs--effort will also be more successful if the both privately operated schools anddomestic private sector itself seeks foreign cooperative arrangements betweencapital, although government policy businesses and public schools--point thecontinues to restrict foreign bank borrowing direction for the future. The challenge is toand bond issues by domestic companies. accelerate the development of these private

alternatives by changing policies--includingxi. Recommendations for foreign those that ear-mark payroll taxes to publicfinancing. Two specific actions may be agencies and that tax and control privateuseful: schools while failing to establish a system of

equivalencies. The challenge is also to aido Mount a special publicity effort to and encourage private businesses and

overturn past negative perceptions business associations to articulate their needsand help Morocco get well above the for skilled labor and to help design andtrend in capital flows to developing manage training programs.countries.

xiii. Recommendations for skilledo Allow a more open capital account to labor. Five measures would help:

help private businesses takeadvantage of recently liberalized 0 Improve the management of publicaccess to foreign private lenders (for training institutes by increasing bothexample, through development of administrative autonomy andnarket-based foreign exchange risk increasing business involvement.insurance).

0 Facilitate the growth of privatetraining institutes, partly by puttingthem on equal footing with publicinstitutes (no taxation--especially ifthey qualify as not-for-profitinstitutions, recognizing equivalency

Srengthening the Prvate Sector in Morocco Page v

with government schools, instituting paying less than the legal minimum wagean independent certification system, (through apprentices, young workers, workand setting up funding mechanisms, sharing and shorter hours). But thesesuch as student loans, that are more practices, together with the lack of clarityneutral between private and public regarding some regulations and the widelyschools). perceived sympathy of tribunals to workers'

complaints, expose firms to discretionaryo Increase fiscal incentives and administrative sanctions. The labor market

fle-xibility for companies to provide flexibility that does exist in Morocco hascontinuous, in-service training and been paid for with needless transactionseducation (for example, allowing costs and increased uncertainty for businesscredits against the vocational and labor.training payroll tax to cover part orall of the cost of training contracted xv. Recommendations for thedirectly). unskilled labor market. While recent efforts

to revise the entire labor code have beeno Allow more flexible apprenticeships. unsuccessful, it would be advisable to move

forward on two measures that are key too Legalize private emplovyment and job improving the labor market:

placement agencies especial4v toimprove the market for skilled Increase the flexibility for dismissingworkers. workers, bv revising guidelines

(especiallY for compensation) toxiv. Removing restrictions on the minimize interference by courts andlabor market. Despite the long-standing other government agencies inregulations that closely constrain labor business-labor relations.markets for unskilled workers, these marketsappear to function surprisingly well; only Adopt measures to minimize thethe restrictions on firing staff appear to pose distortionary impaci of legalwasteful, inetficient constraints on minimlum wages, for example bybusinesses, discouraging restructuring and limiting nominal increases, byabsorbing managemilent attention. The defining broad exemptions forunskilled labor market is as flexible as it is businesses, orby simply transformingin part because the administration does not thte legal minimum into a nonbindingsystematically enforce labor regulations very indicative wage.aggressively--an approach that is encouragedby the 15-20 percent urban unemployment These recommendations are deceptivelyrate. Busine.;ses-_-Cven large ones--have a simple: their effective implementation maycertain scope for side-stepping employment require a variety of safeguards that balanceand wage regulations (by not registering the flexibility sought by employers withworkers, not paying all nonwage benefits, protecting the rights of workers. Forinstituting -kork Qharing and shorter hours, example. various kinds of unemploymentand repeilii\ siN of temporary contracts) insurance could make dismissals moreand by u!it - legally acceptable ways of palatable, provided it could be financed.

Page pi Strengthening the PWvate Sector in Morocco

However, no matter how difficult the rules, and public land ownership havereforms may be to implement, the current interacted to exacerbate scarcity artificiallyad hoc arrangements satisfy few employers and have not reduced uncertainty aboutor employees; businesses lack flexibility future access.without violating rules; and workers--especially the young, women and new xvii. Structural, not marketentrants--may be made even more problems. Past efforts to establishvulnerable. Regardless of the exact nature commercial zones away from Casablancaof the reforms, the overall objective would and to weight investment incentives in favorbe to create a labor environment in which of other regions have had no discernibleboth business and labor can function openly impact in business location decisions. Theand transparently, consistent with changing problem is more structural. Site value isbusiness realities. high in Casablanca and nearby centers

because of weaknesses elsewhere. Physicalinfrastructure is weak and connections and

C. Facing up to the Land Shortage service are hard to get (even new industrialzones are not necessarily well equipped).

xvi. The problem of land for Outside of major urban centers, local officesbusiness. Larger businesses complain that for administrative and utility services of allland--notably land well located in the kinds are less responsive to business needs.economic capital of Casablanca--is scare and And various private sector business supportexpensive. New entrepreneurs complain services have usually not yet developedmost that they cannot find commercial because business demand has not yetspace. Private education institutions have reached a critical minimum.similar complaints. Objectively, prices haverisen substantially during the 1980s, xviii. Recommendations for land.following the real estate trends started in the Five broad actions would help alleviate land1970s by the influx of foreign (mainly Arab, and space constraints faced by businesses:petroleum-related) funds. Current prices--at$75 or more per m2 in Casablanca industrial o Strengthen infrastructure and relatedand commercial areas--confirm the problem. local services generally, to widenThe land market appears to work, in part location alternatives for businesses.because property rights and registration arewell established. There is also unused land o Encourage more private developmentavailable in industrial zones elsewhere at a of industrial/commercial zones (infraction of the cost. But the land that addition to small business sitesentrepreneurs seem to want most often has associated with housingtremendous site value because it is close to developments), notably bythe commercial, financial, industrial, and eliminating preferential treatmentforadministrative axes--on sites that already public agencies and by activelyhave infiastructural connections and are seekng private involvement, whichcloser to housing and other amenities for will help assure that zones are putworkers. In addition to site value, the slow where businesses need them andprocess of zowin cities, particular zoning

Strengthening the Prsate Sector in Morocco Page vii

should improve the quality of allowed to maintain on certain corridors;installations and maintenance. and poor maintenance of infrastructure in

industrial zones by municipalities and localo Institute open access to information utility authorities.

on real estate sales prices and moreopen, public zoning procedures to xx. Restrictions on privateimprove transparency in the land provision of infrastructure services. With

market. respect to telecommunications andelectricity, the govemment has--until the

o Adopt a more neutral (and less recent exception of electricity generation and

advantageous) fiscal policy for real ancillary telecommunication services-- takenestate to reduce demand for land the approach of keeping out privatepurely as an asset. competitors and vendors, while it seeks to

upgrade public services. But even whereo Improve administrative coordination private suppliers are not excluded--as in air

to consolidate and sell (or lease) travel and port services--there is no vigorousgovernment-owned land, especially policy to treat them equally with state-owned

where large tracts are required, as enterprises and agencies. And where thein tourism. public has disinvested, as in trucking, tight

regulation remains, dating from the era ofMorocco's administered economy.

D. Strengthening Infrastructure Infrastructure is an important, unfortunate

exception to the government's otherwiseXix. The pervasive problem of clear and strong commitment to leave the

weak physical infrastnictuire. Entrepreneurs operation of the economy to the privaite

across the board, including prospective sector.foreign investors, complain aboutweaknesses of infrastructure. However, xxi. Rising need for investment.with the exception of electricity shortages Future public investments in infrastructurebrought on largely by droughts in 1991-93, appear to be tailored to moderate economicno infrastructure weakness quite brings growth at best, designed to keep pace butbusiness to a halt--it just saps productivity not necessarily to bring infrastructure closerand discourages investment. Some key to standards in other countries. If theinfrastructure facilities, like ports, have been Moroccan economy were to grow at 8-significantly upgraded during the 1980s. 10 percent, instead of 4-5 percent, there isMain complaints concern: electricity the strong risk that infrastructure wouldshortages; the narrow. uneven surface of become increasingly insufficient and thatroads, their congestion, and the infrastructural services would deteriorate.government's inappropriate regulation of To relax the existing constraint, and totrucking; unreliable phone connections, the assure that it does not reappear, additional--shortage of lines. and the disinterested especially private--investments will beattitude of th' state telecommunications needed.monopolk: hiigh cost of sea and airtranspon . that state companies are

Page Vi Strengthening the Pivate Sector in Morocco

xxii. Recommendations for distortionary as access to foreign exchangeinfastructure. To improve the quality of has become increasingly open for currentboth public and private infrastructural account transactions (full convertibility wasservices and to bring in complementary announced in 1993) and income tax ratesfinancing for upgrading and expansion, two have declined by about a fifth since the lateactions appear priority: 1980s. Most administrative marketing and

price controls have been eliminated, ando Reduce and modernize regulations several de jure monopolies of state-owned

governing the provision of enterprises have been opened to competition.infrastructural services, notably in Quantitative restrictions (QRs) on importstransport, and allow competition (which covered two-thirds of imports infrom private vendors, notably in 1980) will have been entirely eliminated bytelecommunications. early 1994, replaced with re!atively high,

but more uniform tariffs, by reference priceso Encourage private investment in all on a small share of industrial goods (less

types of infrastructure investment, than 10 percent), and by variable levies onbut especially in electricity 3 agricultural commodities and theirproduction, motorwav construction derivatives. Maximum import duties havea n d o p e r a t i o n, a n d declined from 400 to less than 50 percent bytelecommunications, by developing a 1993, and weighted ad valorem protectionsound framework for concession decreased during the 1980s and early 1990scontracts with private investors. by nearly 10 percentage points despite the

shift from QRs to tariffs. Effective rates ofprotection have declined overall since the

E. The Unfinished Agenda to ImProve early 1980s, but by 1991 they still averagedIncentives 25-30 percent. Exports are implicitly taxed,

especially where export performance hasxxiii. Many incentives much been strongest, and the incentives rate forimproved. Private sector growth depends import substitutes is 30-35 percentage pointscritically on maintaining macroeconomic higher than for exports. Overall effectivestability and incentives for efficient protection is inversely related to comparativeproductive investment. In recent years, advantage.Morocco's macroeconornic environment hasbeen characterized by low inflation (less xxv. Key remaining reforms.than 5 percent in 1986-91), a relatively Morocco is nearing the point where it hasstable nominal exchange rate following the the critical mass of policies needed for a30 percent real devaluation between 1980- quantum jump in economic perfonnance led86, and progressively smaller deficits in the by the private sector. Already, the earlygovernment budget and on the current real devaluation, coupled with a shift inaccount (both at 1.4 percent of GDP in relative incentives toward exports, helped1992). produce the tremendous growth in

manufactured exports during the 1980s.xxiv. the same time, incentives Now, two broad tasks remain:faced by thi> p1 ite sector have become less

Strengthening the Iinvate Sedor in Morocco Page ix

* Decisive action on two major policy based system is largely completed (quotasfronts. are now essentially eliminated, and

reference prices have been restricted), the* Persistent efforts to complete the level of import protection in Morocco--both

broad array of other reforms real and effective--still remains relativelyalready largely in place. high by international standards. Nominal ad

valorem protection was 37 percent in 1992xxvi. Need for decisive policy (27 percent when weighted by importaction. The government needs to lower and shares), and effective protection for importharmonize both income taxes and import substitutes was 25-30 percent in 1991.tariffs, especially if Morocco seeks to be Structurally, protection is highest (twice themore closely integrated with the European average) for metal, mechanical and electricalUnion (EU). Tax treatment affects industries, which many look to for futureactivities; exoneration for export activities export growth. This continuing importpartially explains the growth in export protection acts to discourage and restrainproduction, and favorable treatment of real imported technology, raises the cost ofestate helps explain the boom of the 1980s. inputs for other domestic producers,Firms label high taxes as the third most facilitates anti-competitive practices, andsevere constraint after high interest rates and hurts consumers--including the poorest.lack of skilled labor. Their perceptionpartially matches reality: personal and xxviii. Recommendations oncorporate income tax rates are high incentives policies. Reforms should becomparatively (with a 42 percent tax on designed to make incentives more neutralcorporate income in 1993, Morocco is at the across productive sectors, which shouldtop of the international range despite the increase the attractiveness of investment inreduction from over 50 percent in the mid- industry and tourism, relative to agriculture1980s), yet the direct tax burden effectively and real estate. Two key reforms shouldpaid by companies is at the lower end of the aim to:range in comparable countries. However,because corporate dividends are taxed twice Lower the burden of corporate(as corporate profits and at 15 percent after income taxes by at least a fourth, by:distribution), their overall tax burden ismuch heavier (over 50 percent) than interest * Reducing the tax rate to 30-(20-30 percent) or real estate gains (less 35 percent as quickly asthan 15 percent effectively), and therefore, possible while limitingbefore-tax retunm miust be correspondingly exemptions and fraud,higher to attract investors.

Providing specific, time-xxvii. Trade liberalization has bound fiscal incentives forincreased import competition for many broad categories of efficiencyfinns. especiall tfrom second-quality goods enhancing expenditures forno longer reo r:leJd hy QRs (although illegal all businesses (notablygoods ih',< allegedly increased). While training and a wide range ofthe taski l i,uiltig protection to a market-

Page x Strengthening the Pnvhae Sector in Morocco

technology-intensive foreign exchange. There is also the need toimprovements). create a framework to defend and to

promote domestic competition in all0 Lower total import duties (to a markets.

maximum of 25 percent) whilefurther reducing the level of effective xxx. Recommendations for relatedprotection (to perhaps 10 percent) reforns. Many of these issues are discussedand narrowing its spread, as initial in several chapters, but they can be groupedsteps towardfurther harmonization of under two broad reform priorities:import duties with the EU.

0 Deregulate prices, marketHowever, because the fiscal impact of these functioning, and business entry inproposals may be substantial (the direct tax four key activities--transport of allburden on business provides about 10 kinds, agricultural commodities, andpercent of revenues while customs duties public utilities, and foreignprovide about another 20 percent), it will be exchange.

difficult to reduce these taxes quickly (whilemaintaining budgetary stability and o Promote competition among domesticprotecting important social expenditures) companies by establishing legalwithout other, compensating measures. The standards and safeguards, and by

most important of these measures include reducing the market power of state-broadening the tax base (fewer exonerations) owned enterpnises and agencies.and restricting public spending (moreemphasis on efficiency and encouragingmore private financing of many public F. Overcoming Institutionalservices). Weakness

xxix. Need for prsistent efforts to xxxi. Coping with administrativecomplete related reforms. Additional effort weaknesses. Many businesses, butis necessary to achieve the critical mass of especially foreign investors, sense that rules,incentives that can help make the difference regulations, administrative procedures, andbetween moderate and high private sector judicial processes in Morocco are opaque, ininvestment and growth. Most of these contrast to the legal framework itself, whichshould focus on the deregulation of prices clearly sets out the usual conditions requiredand marketing with the aim of improving the by the private sector. Such opaquenessscope and operation of private markets. In leaves many investors uncertain, and they

addition to deregulation in labor and see their uncertainty justified, for example:financial markets, discussed above, priority by the gap between outdated laborshould be given to less and more appropriate regulations and practices; by delays andregulation in agrictultlre and transport where encumbrances in obtaining infrastructural

controls seem most pervasive, to services and municipal authorizations; by theliberalization of locally administered prices slow, uncertain and seemingly biasedwhere deregulation has not taken hold, and treatment in courts; and by the slowness into allowing residents to hold and trade modernizing laws. Businesses in Morocco

Strengthening the Nhwate Sector in Morocco Page xi

appear as innovative as anywhere in coping remain small, and potential investors turnwith these administrative weaknesses-- away.whether in the form of regulations that areinconsistent with a modem, competitive xxxiv. Systemic problems. It iseconomy or in the form of discretionary, unlikely that the problem is simply one ofslow responses by administrators. But the too many regulat ons, although somecreative approach has costs. regulations--including many of those

required to set up a company--date from axxxii. The costs of coping with time when government sought far moreinappropriate business regulations. In some control over private economic activities.instances, the costs of coping are bribes, but The problem is also that public services,complaints were modest; more likely are including utilities, are far from becomingactions that are, strictly speaking, illegal but consumer oriented, where investors andtolerated (undeclared labor, operating entrepreneurs are the consumers. Becausewithout all authorizations, alleged administrative weaknesses are systemic,underdeclared profits). By sidestepping correcting them will be a lengthy, complex,rules, businesses get on with business, but it multifaceted task, that must be built on aleaves them vulnerable to discretionary and process of more open consultation with theoften unpredictable enforcement, which private sector itself.exacerbates market uncertainty and may helpexplain the widely perceived reluctance of xxxv. Recommendations to reducebusinesses to g, public in their search for administrative barriers. The government--capital. The need for such grey practices no which argues that some legal anddoubt also discourages new, especially administrative problems are caused by theforeign, investors that expect to operate in a lack of diligence in the private sector itself--more transparent and predictable has nonetheless been preparing a program ofadministrative environment. administrative reformn since the 1980s and is

taking measures to improve the legalxxxiii. Worse impact on small and system. While that process continues, fourprospective businesses. Because larger specific actions--in addition to thosebusinesses can and do devise strategies to discussed above--include:cope with such uncertainty, they perceiveadministrative weaknesses as less binding o Establishing specialized commercialconstraints, although such strategies divert courts with more expeditiousresources and attention from real business procedures and specially trained(even though businesses may have judges.internalized the costs). The administrativeburden falls disproportionately on small Promoting the use of bindingbusinesses, who rank it as one their most arbitration clauses in commercialsevere constraints because they have fewer contracts.channels of recourse, including influence inhigh places. On the margin, established o Simplifying, consolidating, andbusinesses A ati rcsources, small businesses harmonizing business creation and

expansion procedures (while creating

Page xu Strcngthening the Pniva Sector in Morocco

a much larger role for private xxxvii. Improving business services.intermediaries). The task of developing and strengthening

most business services must rely mostly ono Preparing a code of administrative indirect actions, if the aim is to have these

conduct for all levels of government grow from within the private sector. Forto define standards of service to, commercial business services, the mostrather than control of, private obvious government action is to eliminatebusiness. legal or regulatory barriers where they exist

(for example, labor services, as discussedxxxvi. Weak business support above); minimizing administrative barriersservices. Although not usually singled out for the creation of new businesses will alsoby businesses as a constraint, many of the help, as many of these services will beinefficiencies and problems that businesses provided by small companies. As importantdo notice could be alleviated by a broader are measures to stimulate demand for thesearray of professional and business support services; changes in fiscal or regulatoryservices. Maintenance, repair, and policies can encourage businesses to usesubcontracting services tend to be so more of these services, and lower importgeographically concentrated that they add duties will encourage companies to seeksite value to land. Regulations have tended improved technology. For businessto retard the development of active associations the most important governmentcompetent employment agencies, financial action may be to define, clearly andbrokers and underwriters. Institutional systematically, an operative role for suchmechanisms for acquiring, diffusing and agencies in all of the government'susing modern manufacturing and other regulatory decisions and promotionbusiness technology are also weak--notably: programs affecting the private sector. Inhaphazard and insufficient infornation practice, professional associations couldchannels; a relatively limnited and outdated assume operational responsibilities. Carvingsystem of weights, measures, normns, and a place for associations is a prerequisite forstandards; and the lack of internationally their strengthening; but it may also berecognized facilities for testing, quality necessary to support their development withcontrol and product certification. some kind of public technical and financialInterprofessional business and trade assistance.associations exist usually in name only. Thelack of strong professional associationsweakens the capacity of business to THE ROAD AHEADarticulate its needs, to interact with publicagencies (for example in designing training xxxviii. Morocco approaches the mid-and education programs and in helping set 1990s having put in place significantnorrns and standards, notably for processed economic reforms that have restoredagricultural goods), and to take a proactive macroeconomic stability and significantlyrole in promoting business development (for reduced administrative economic controls.example. attracting foreign private investors These reforms have helped the countryand prospeci;.uqg foreign markets). achieve moderate, if variable, economic

growth led by private sector exports.

Sawngdaenlng dte P1rYte Sector in Morocco Page xiii

Although the reform agenda remains program could be organized around threeunfinished, and accomplishing much of what pillars:remains will depend on strengthening a widevariety of economic and financial * further privatization;institutions, the government has left nodoubt that the economic future belongs to, * a competitive, modern businessand depends on, the private sector. Both the environment; andgovernment and private business recognizethat Morocco must increasingly integrate 0 additional finance.itself with the world economy. Already, thegovernment has finished a decade its xli. The first pillar, privatization,external debt reschedulings, and has aims to accelerate the disengagement of therenewed its welcome to foreign investment. public sector from virtually all commercialIn 1993 it will begin negotiating closer activities and from the provision of manyeconomic association--possibly free trade-- public services. It would shift the boundarywith the European Community, although it between the public and private sectors byrecognizes the importance of diversifying broadening the scope for private business ininto other foreign markets and sources of two ways:private capital, notably in North Americaand Japan. This report presents a vision for o Accelerating the sale of state-ownedthe private sector and what it needs to take enterprises already identified forthe lead it has been offered. divestiture and increasing thie number

to be sold,- andxxxix. Agreeing on the guidingprinciple. This Executive Summary lays out C Allowing atd encouraging privatea broad, but far from exhaustive, array of provision of most basic publicreforms that seem most important for services and infrastructure.developing the private sector. Many are inprogress, and all are being discussed. And To set this pillar in place, the governmentthey will need to be complemented by other, should formulate an action plan for thelargely sectoral measures. As Morocco is second stage of privatization, focused onfar along in achieving the critical mass of public utilities and the "strategic" state-policies needed for self-sustaining private owned enterprises. At the same time, itsector growth, it is difficult to single out a should adopt the regulatory framework forflw policies that deserve priority. Rather, the concession agreements and similarwhat deserves priority is the development of arrangements needed to increase privatea concerted, broad-based program guided by investment and operation in public services.a single, key principle: promoting A broader privatization program wouldcompetitive private business in all support private sector development directlyeconomic activities. by increasing the scope tor private

investment. But the most important benefitsxl. Dcfining the pillars of a are indirect: improving the level and qualityprivate sect(w {Sloprnent program. This of public services--especially in

infrastructure, increasing the investment

Page xiv Strengthening the PItate Sector in Morocco

resources to expand critical public services regulations) that entrepreneurs face in(like electricity), and helping establish a creating and expanding companies in allmore competitive environment with fewer sectors. A more open, and lessentry barriers (especially in transport). The monopolistic, economy will undoubtedlysale of companies would also augment differ from Morocco's current economicpublic revenues and help compensate for tax structure, but reforms to help effect thisreductions to encourage private investment. longer term adjustment are urgent if

Morocco is to consummate its free tradexlii. The second pillar, a association with the EU before the end ofcompetitive business environment, the century.comprises two distinct elements:

xliii. The third pillar, finance, iso an open, liberal, iransparent supported by the first two, with the specific

economy; and objectives of attracting more domestic andforeign investors and of improving the

o a better enabUing environment for supply of investible fuAds (both loans andbusiness creation and expansion. equity) for business creation and expansion.

Thus, it also has two specific elements:Creating a more open, transparent economyrequires, inter alia, lower, more equitable Reducing fiscal disincentives totaxes, greater competition in all markets, private investment; andand key policies more closely harmonizedwith those of the EU and other major Comnpleting the reform of thetrading partners and competitors. Creating financial sector.a better environment for private businessinvolves appropriate institutional reform and Reducing disincentives essentially entailsstrengthening, as well as much stronger lowering the current high levels of corporatesupport for human resource development, and import taxes, which will bring MoroccoBuilding this pillar will require a potentially more in line with its major trading andwide array of fiscal, trade, administrative, investment partners and strengthen itsand regulatory refonns and measures to capacity to participate in a free tradeimprove incentives and to strengthen association with the EU. However, theseinstitutions comprising the financial, legal, reforms must be implemented within theregulatory, technological, and infrastructural constraint of macroeconomic stability, asenvw.onrment in which companies operate-- discussed below, which will require thatsome of which are included in the other ongoing efforts to broaden the tax base bepillars. In conjunction with a broader intensified. Efforts to complete the financialprogram of privatization, the government sector reforms should focus essentially onshould give priority to improving the rules liberalizing and facilitating private access toand institutions to foster competition among long-term finance. To help privatecompanies. in part by acting to minimize the companies and banks mobilize long-termbarriers (sltjh as unfair competition, finance domestically, the government needsgovernment e lusion, difficulties mobilizing to reduce restrictions on bond placements,finance, outdated and poorly administered reduce fiscal and other disincentives for

StOwngthening the Private Sector in Morocco Page xv

share capital, and act more quickly to growth and financial deepening. Keydevelop a viable financial market. To recommendations of the report--notablyfacilitate access to loanable funds, the reducing corporate taxes, lowering importgovernment should remove remaining duties, and improving critical public sectorrestrictions on foreign loans and encourage services--can only by effectivelythem by fully legalizing foreign exchange implemented within the constraint ofmarkets. Important complementary maintaining macroeconomic stability;measures aimed especially at helping smaller otherwise, the resulting inflationary andcompanies include full deregulation of other distortionary pressures risklending interest rates and regulatory and undermining the reforns anyway. Thislegal reformns to encourage lenders to macroeconomic constraint thus broadens thedevelop new lending vehicles, such as debts scope of proposed reforms and otherguaranteed by accouI.ts receivables or measures; stronger efforts will be needed,inventory. for example, to broaden the tax base, to

reallocate public funds and use them morexliv. Foundations for the pillars. efficiently, and to allow more publicMost of the policy reforms outlined above, services to be provided by the privatecoupled with continued sound macro- sector.economic management by the government,are an essential, early step in setting up the xlvi. Launching the program--pillars. They will need to be reinforced by creation of a private sector developmentlonger term measures to strengthen commission. A program for private sectoradministrative institutions, including the development is more likely to be followed ifjudiciary and municipal governments, and it is designed and closely monitored by anby well-targeted public investment, advisory group empowered to investigate,especially in infrastructure. Foreign report, and advise on progress achieved.governments and development agencies can Thus, it may be useful to create a small,help by providing technical and financial independent tripartite institutional structuresupport, both to underpin public actions and (the Private Sector Developmentto facilitate more private investment. The Commission), composed of representativesmost important responsibility lies with the of key government agencies, representativesprivate sector, not only to respond to the of the private sector, and representatives ofnew opportunities, but also to assume foreign governments and agencies supportingleadership in guiding the program. the program. The role of this commission

would be threefold: (1) to develop axlv. These pillars must be set detailed program of action for priva.e sectorfirmly in the foundation of solid, prudent development--including priorities formacroeconomic management. Above all, actions, targets and a delineation ofthe government must continue its effort to responsibilities; (2) to encourage widespreadminimize budgetary deficits and total public discussion to reach a consensus on how tosector borrowing requirements and to keep implement key actions; and (3) to monitormonetary growth in line with economic progress.

CHAPTER I: PROFILE OF THE PRIVATE SECTOR

A. The Public - Private Boundary

I. Private Business

1. The private sector--defined as private employers and producers--accounts forroughly 70-75 percent of total GDP, with the share of the public sector split equally between theadministration and independent public enterprises and agencies.' Of the approximately 400,000business entities in Morocco (in 1988), the public sector accounts for less than 700, and thefonnal private sector accounts for about 23,000. The small-scale, or informal, sector accountsfor most businesses and contributes perhaps 15 percent of GDP, or about a fifth of private sectoractivity.'

t/ Based on 1990 GDP at market prices. The split between private and state-owned enterprises is difficult as the

official national accounts distinguish only government administration and classify state-owned enterprises with

the private sector.

2/ In most statistics, the informal sector is essentially defined by size, not by legality. In Morocco, mostbusinesses that are called informal are registered, pay some taxes, and are "visible" to the administration. Many

formal businesses do not necessarily respect all regulations. Thus, the legal, or regulatory, demarcationbetween formal and informal in Morocco is hazy and appears to be less of a constraint to expansion than sizeitself.

The government usually defines the informal sector as nonagricultural businesses with specific permanentquarters but without business accounts--covering some 250,000 businesses in 1988. This definition excludes

most itinerant merchants, work within homes, and clandestine activities; based on the total number of businesslicenses and on data from the Living Stanidards Measurement Study, these other small enterprises could amount

to as many as 150,000, mostly in commerce. Together, these probably account for 15 percent or more of totalGDP. Special surveys of the construction sector, industry, retail commerce and various other services in 1984-

88 provide the following estirsates of the informal sector (percent of sector and total GDP, respectively, in

relevant year):

Construction, 1982-84(both permanent and itinerant) 50 2

Manufactufing industnes, 1988 17 3Retail commerce, 1988 44 5Other services, 1988

(other than finance) 22 3Ambulatory businesses . 2 (assumed)

Figures from Enquite Vationale sur les Entreprises Non Structurees Localis&es, 1988 and Rsazltats de I'Enquetede Struccure sur ic Secteur Bd4ment et Travaux Publics, 1983-1984 and 1984-85. See also World Bank Report

No. 1191 8-MOR. especially Annex IV, and Royaume du Maroc, Direction de la Statiscique, Les Etablissements

Economrn2ue \

Howv e'. pil atnbiguity in defining formal and informal sectors results in widely (and wildly) different estimatesof the stare ot the informal sector in the economy--with figures ranging as high as 30-40 percent and even ashigh as I' p,: r2ent

Page 2 Strengthening the Pniate Sector in Morocco

2. There is no evidence that private entrepreneurial talent is lacking in Morocco.The private sector accounts for virtually the totality of primary agricultural production (exceptvineyards), almost all construction work and commercial services, over 90 percent of tourismservices, around 80 percent of manufacturing output (excluding phosphate derivatives),70 percent of transport services, and over half of commercial bank ownership. It accounts fornearly 60 percent of fixed domestic investment. Two thirds of the deposit money banks areentirely private, and half of these have 50 percent foreign ownership. Only 2 of 18 banks andspecial financial institutions are fully government owned; both the state-owned industrial and realestate investment banks have a third or more private ownership. (See Annex Tables A. I andA.2.)

3. Broadly speaking, the manufacturing sector is extensive and diverse. Includingagroprocessing, it -omprises nearly 50,000 firms, although only 5-6,000 can be considered"formal sector" entv:rprises.3 These formal sector manufacturing firmns (of which 98 percent areprivate) comprise about a third of all businesses filing income tax returns. In manufacturing,there are some 600 majority-owned foreign firms, which account for about a quarter of privatemanufacturing value-added--despite a policy regime during the 1970s and 1980s that wasunfavorable to foreign ownership.4 The sector produces largely for the domestic market, witha quarter of production being exported--although the share exported is much higher for textilesand clothing and, to a lesser extent, phosphate-based chemicals.

4. The manufacturing sector can b- neatly bifurcated into firms producing primarilyfor the domestic market and export-oriented firms.5 Compared to those producing primarily forthe domestic market, export-oriented firms tend to be relatively newer and larger and have alower share of direct value added. By contrast, inward-oriented firms tend to be slightly olderbut smaller, comprising a larger share of state-owned enterprises. The manufacturing sector isgeographically concentrated in and around Casablanca, where infrastructure is more extensiveand there are economies of concentration. This single area accounts for roughly half ofmanufacturing output, and--at least in the mid-1980s--nearly half of industrial investment.

5. Farmers have been a strong focus for private sector development; they are treateddifferently, and more favorably, than private business in other sectors. Agricultural land is nottaxed, and registration (at least in irrigation zones) is free. Foreign invtstors cannot ownagricultural land, even after the repeal of the Moroccanization decrees, but they can lease it on

3/ The informal manufacturing sector is especially important in manufacturing consumer items that can be handledon a small scale, including garments, leather and shoes, wood products, and metalworking--where its share moutput rises to as much as 50 percent.

4/ For example, m 1973, the Moroccanization law required at least 50 percent domestic ownership of allcompanies. although the various subsequent investment codes provided incentives and guaranteed rights ofrepa:r:.n n of dividends and capital for authorized foreign investments.

5/ ,all finns that export at least 25 percent of their output are classified as export-oriented, these firmsusuali) export virtually all (85 percent on average) of their production.

Skvngthening the Pn pate Setor in Morocco Page 3

a long-term basis. Agricultural income is, and will purportedly continue to be, exonerated fromall income taxes until at least 2020. Agricultural inputs, farm loans from the state-ownedagricultural bank, and the sale of domestically produced agricultural commodities are all exemptfrom the VAT, in sharp contrast to businesses in all ot ter sectors (except small merchants). Thestate-owned agricultural credit bank generally lends to farmers at rates below those commercialbanks charge on business loans. Protection, both effective and nominal, against agriculturalimports appears to have risen during the late 1980s, while it was falling for many industrialproducts; the VAT exemption for agricultural produce increases the tariff protection. Producersof some major agricultural food staples have benefited from strict import controls and willcontinue to benefit from equivalent tariffs (on meat and milk) and variable levies (on soft wheat,sugar, and vegetable oils). The government has invested heavily in irrigation and delivers waterto farmers at fees well below the operation and maintenance costs of even the local distributionnetworks.

6. This panoply of benefits has encouraged farmers to shift into relatively low-valuecrops (cereals, oilseeds, and sugar) on irrigated land, which has reduced incentives and possibleinvestments in improving the range and quality of high-value crops. It has also hindered thedevelopment of competitive agro-industries because they are constrained to use more expensivedomestic inputs and because of the disincentives to improve the quality and range of domesticproduce.

7. However, the counterbalance of the benefits has been deep intervention by thegovernment in agricultural pricing and marketing. While domestic collection and marketing ofagricultural staples is handled mainly by the private sector, entry and operation are affected bythe allocation of quotas for oilse-d pressing and for milling the low-quality wheat flour that issubsidized. Sugar is produced by state-owned companies. For vegetable oils, low-quality wheatflour, and sugar, prices are set by the government, although these are to be liberalized in 1994.Grain imports are handled primarily by the national cereals board, and private importers requirespecial licenses. Exports of processed agricultural goods that contain any of the subsidizedcommodities require special licenses, which is not the case for other industrial exports.

8. Tourism is the principal source of income and employment in certain regions inthe south, like Marrakesh and Agadir. Agadir is also emerging as a major center forhorticultural commodities and exports.

2. State-Owned Business

9. Despite the predominant share of private ownership and operation in the Moroccaneconomy, the public sector (both the administration and public enterprises) has traditionallyexercised significant control over many private activities.

10. Regarding the 700 or so public enterprises and agencies, about two-thirds arecommercial an(! dlistrial companies, a tenth are public utility monopolies (or quasi-monopolies)and the rest 'ti. quasi-governmental bodies including regulatory agencies, universities and

Page 4 Strengthening the Private Sector in Morocco

hospitals. The government, directly and indirectly, has more than a controlling minority (onethird share in equity) in only about half of all the public enterprises, and in an even smallershare of the commercial and industrial companies. Wholly owned government companiesmonopolize basic utilities (energy, water supply, and telecommunications), railroads, airtransport, phosphate production, and petroleum refining; government-controlled companiesdominate investment banking and control virtually all of wine and tobacco processing. About30 core state-owned enterprises account for most of the output, employment and investment ofthe group (covering mainly production and distribution of water and electricity,telecommunications, rail, air and maritime transport, phosphate mining and processing, andtobacco).

11. With the exception of mainly agricultural development companies ("sociertes dela mise en valeur"), the Treasury has provided no operating subsidies for about a decade. Infact, the Treasury currently receives roughly US$1 billion a year in dividends and monopolytaxes (half is from tobacco taxes alone), as well as other income and sales taxes. Against thisamount, however, are subsidies paid to the agricultural development companies (reportedly over$100 million a year) and investment funds provided to state-owned companies (programmed atover $200 million a year in 1992-93).6

12. In line with increased emphasis on private enterprise, the government launcheda privatization program in the mid-1980s, which resulted in a 1989 law identifying 111enterprises to be sold (of which 37 are hotels), with capital worth about $1.2 billion in 1989.7Following two and a half years needed to complete the legal framework, to assure broaderownership of the program to allay political sensitivities, and to establish an evaluation and tenderprocess, the first enterprise was sold in late 1992. In less than six months, a tenth of the totalhas already been put up for sale; the government planned to sell 25 during 1993 and expects tocomplete this first phase in 1996. The program is important, and may be followed by furtherprivatization of remaining major public enterprises and utilities.

13. The government has used a variety of sale procedures, depending on thegovernment's ownership shares, various management, employment, and expansion objectives,and certain ownership restrictions (such as reserving a part of ownership for workers, and thefact that foreigners cannot own agricultural land). Some companies and hotels have been soldby open bidding and others by direct, negotiated sales; agricultural operations have been leased;a portion of shares in some companies may be sold on the Stock Exchange or reserved foremployees, while remaining shares are tendered or sold in negotiated sales. Most sales imnposecertain obligations on the purchasers, which may include modernization, expansion, andmaintaining employment.

6/ In addition. an mid-1992, the central government was a net creditor to various state-owtned agencies andcompanies, by an amount of about US$ 1.1 billion, largely the result of assuming debt and reschedulingobliga:n r.. plus tax arrears.

7/ In. Iud-.n, t'ih subsidiaries owned by these firms would bring the total state-owned firms to be affected by thepnriiat. aun to about 300, or nearly half the total number of firms and agencies in the government portfolio.

Spgthening the Pvte Setor in Morocco Page 5

14. In manufacturing, the program covers about half of the government's 80 or sofirms, accounting for about 10 percent of value-added and sales. Completion of the programwould still leave about a tenth of manufacturing GDP in government hands, mostly in phosphateprocessing. The program would entirely eliminate the government from bus transport, but notfrom sea, air, and rail transport. The first phase of privatization would also reduce governmentownership in the banking sector from nearly 60 percent to about 20 percent, and in commercialbanks from over 50 percent to about 10 percent; only the agricultural bank (out of 18) wouldremain fuUy owned by the government. In agriculture, the program aims to privatize the twoformerly monopolistic fertilizer and seed distribution companies, most of veterinary services,sugar refineries, ranches, and the cotton marketing company, but not the two large state-runfanns.

15. In tourism, the proposed privatization program aims to reduce state-ownership ofhotels by some two-thirds, to 5 percent of total tourist-class rooms, although the share of privatemanagement is unlikely to increase much beyond its current level of 95 percent. So far, twoof 37 hotels have been sold, and--in contrast to the strong bidding for state shares in the initialsales of manufacturing firms--investor interest in recent offers for tourist hotels has been limitedbecause of generally low occupancy rates.8 The perceived need for substantial renovation andpossibly expansion to make thetn competitive may depress bids below levels desired bygovernment.

16. For several of the core state-owned enterprises that are not yet proposed fordivestiture, the government has formulated a program to improve financial performance. Inaddition to a program of appropriate investments and measures to streamline govemmentregulation, the governmerit has recently mandated changes in management, allowed rateincreases, and budgeted funds to clear arrears of the central government to these companies.These efforts should help improve the delivery of important public services to the private sectorand reduce the burden of arrears owed by these state-owned enterprises.

3. Government

17. As a consumer of resources, government is not excessive--contributing about12 percent of GDP--although domestic government debt is some 35-40 percent of total domesticdebt, government budgetary receipts are 26 percent of GDP, civil servants comprise 25 percentof urban employment, and public investment (excluding state-owned enterprises) is a fifth oftotal domestic investment (see Annex Tables A.2 and A.4). Rather, the most important effectsof government on the private sector are indirect, including its control of markets, its choice ofinfrastructural investments, and its administration of regulations and laws.

8/ For t-x,: the 8.3 million bednights paid by international tourists in 1992 was slightly less than in 1987, incontrla < . 't percent increase in hotel beds.

Page 6 Strengthening the Pnvate Sector in Morocco

B. Organization of the Private Sector

18. Although Societes Anonymes (SA) are the most prevalent business organization offormal sector fiums, most Moroccan firms remain closely held, family enterprises, obtainingvirtually all of their equity from personal arrangements with family members and partners.9

Less than 75 companies are listed on the Stock Exchange, and many of thesc a,e state-ownedenterprises. The over-the-counter equities market is more active than the Stock Exchange, butit is limited to companies listed on the Exchange. There are few reported trades of shares issuedby unlisted companies.

19. The size-distribution of Moroccan industrial firms is distinctly skewed. While theaverage employment in the formal sector is about 80 workers per firm, the median, or typical,employment is only about 50. Most formal sector manufacturing firms are small--over a thirdemploy fewer than 10 workers and virtually all of these are in the domestic private sector. Thepresence of a few large manufacturing firns causes production to be highly concentrated in afew plants, especially in some subsectors. Beverages, tobacco, cement, and basic metals havethe most concentrated plant structure--with over two-thirds of output being produced in fourplants or fewer, which reflects economies of scale in cement and basic metals and concentrationof government ownership in the other subsectors. Overall, the median 2-digit manufacturingsubsector in Morocco has 40 percent of its output concentrated in four plants or fewer. Thisdegree of concentration, when account is taken of the average size of manufacturing subsectorsin Morocco, is similar to many other developing countries.

20. A smnall number of holding companies--all but one of which are privately heldMoroccan companies--reportedly own the industrial firns that account for about half ofmanufacturing value added.'° This concentration was apparently facilitated by concessionsgranted to some entrepreneurs at independence and by the sell-off of foreign shares followingthe 1973 Moroccanization law. In tourism, domestic and foreign chains manage about a quarterof total rooms, and a larger share of 4-5 star hotels and tourist villages, which account for70 percent of total capacity. The top four chains, all private, manage over half of the chain-managed tourist accommodations, but only about 15 percent of total capacity. By internationalstandards, all of the Moroccan chains are small.

21. This concentrated pattern of ownership, coupled with a concentrated industrialstructure in many industries, increases the likelihood of collusive practices and reinforces theneed for an explicit anti-trust or competition policy. A recent study of prices and domesticcompetition in Morocco provides some additional information on the effects of this

2/ NV '- percent of the informal sector manufacturing firms are either individual enterprises or socieitsdo not issue shares.

IO/ Da:. tr. the IFC.

Strengthening dhe rnu Secor in Morocco Page 7

concentration. " According to its analysis, 88 percent of the products in the consumer priceindex, and 82 percent of the articles in the wholesale price index, were traded in basicallycompetitive markets in 1986. If account were taken of imports, the percentage would probablyrise. Even in oligopolistic markets where producers and imports are more limited, case studiesreveal various forms of competition other than price, including brand name promotion,distribution networks, and after-sales service.

22. But prices among firns in these oligopolistic markets generally appear to beclosely aligned, either through tacit agreement or through price leadership by the dominant ftnn.Collaborative behavior developed (perhaps even encouraged and certainly accepted) during thelong period of government price regulation is advanced as one reason for the continued collusionin setting prices despite a more liberalized environment. On the basis of sectoral data and a fewcase studies, there is no evidence, however, that collusive behavior in concentrated marketsresulted in larger overall price increases following price deregulation than in more open markets.

23. Nonetheless, concentrated firms in specific industries allegedly erect barriers tonew entrants, including exclusionary contracts with suppliers (as in milk packaging), or specialdistribution arrangements. In many cases, firms in concentrated industries lobby strongly againstfurther import liberalization and for implicit or explicit government policies that protectmonopolies. The evidence points to two conclusions. First, various government regulationshave abetted collusive behavior and restricted competition; changing these will help competition.Second, the natural tendency of firms to shield themselves from competition will need to becountered by a set of proactive government policies to promote competition.

C. The Private Sector's Call on Factors of Production

24. The private sector owns most productive equity, but the shares vary acrosssectors. In agriculture, the private sector owns from 77 percent of cultivable land (and over90 percent if inalienable tribal lands are included). In formal sector manufacturing, privatecompanies own 73 percent of equity (and more if all registered industries are included). Equityownership varies in services. In transportation, the private operators own all trucks and abouttwo-thirds of Moroccan maritime shipping capacity but no railroad rolling stock or airplanes.In banking, private investors own 55 percent of commercial bank equity but only 10 percent ofdevelopment bank equity (see Annex Table A. 1). Private investors own over 90 percent oftourist-class hotel rooms, and most other tourist services.

25. The private sector is the largest investor, accounting for nearly 60 percent of grossfixed investment (including in agriculture), more than the 55 percent average for all developing

11/ Na'R;'; and Zouaoui.

Poe 8 Strengthening the PiWate Sector in Morocco

countries but less than the70 percent average for TABLE 1.1: Employment Statistics, 1990-91East Asia countries.' 2 (MilLions)Private investment hasclearly risen from less than Urban Rural Totalhalf of total investment as a

share of GDP in 1981-84, Estimated labor force 4.0 5.6 9.7

especially following thedecline in government Total estimated employment 3.2 5.3 8.5

investment in the mid- 1980s. Famg and ranching 5.3 5.3(See Annex Table A.2.) Private businesses 2.2 -- 2.2

Financing for the bulk of of which: nonwage 1.3 - --

private investment is State-owned businesses 0.2 -- 0.2

domestic, but foreign in- Government administration 0.8 -- 0.8

flows now account for about Estimated unemployment 0.8 0.3 1.1

15 percent, up from about _5 percent in the early 1980s,on average.' 3 The private Sources: World Bank Report No. 10157-MOR. IMF Report SM/91/49;

sector currently accounts World Bank Draft Staff Appraisal Report, "Laborsector Y aco unts Intermediation Project'. Private sector employment calculatedabout half of total domestic as a residual.

credit in Morocco, withstate-owned enterprisesaccounting for roughly

another 10 percent.' 4

26. The private sector accounts for about 90 percent of total employment. In urban

areas, the share of private sector employment is lower, at about 70 percent with industry

12/ 1990, based on gross domestic investment. See World Bank Report No. 10157-MOR, p. 27. and World Bank,Attracting Private Investment, p.14. In 1989, the private share in agriculture was 58 percent of capitalformation (excluding changes in stocks). See World Bank Report No. 9240-MOR.

13/ Not all of foreign capital inflows finance new investment, thus this figure is an upper bound.

14/ Based on the following for 1991 (in billions DH from the Central Bank):Total domestic credit outstanding: 167.7Total domestic Treasury debt: 69.6Total credit to the economy: 98.1

These figures include lending from the Central Bank (DH 11.9 billion) and privately issued short-term paper(DH 5.2 billion): it excludes longer term bonds issued by stat -owned enterprises (about DH 6.0 billion) andlocal governments (DH 1.1 billion), almost all of which are subscribed by the public institutions. The shareof credit to state owned enterprises is estimated by assuming that: (i) loans reported to Central Bank for energy,mining, chemicals and maritime transport are to state enterprises: (ii) the 40 percent of loans not reportedbecaustn their small size are lent to private borrowers; and (iii) short-term loans from the Central Bank benefitstan l -.' enterprises, whereas the rediscount of longer tern. loant benefit pnvate exporters and smallbusin- See Bank Al-Maghnb, Rapport Annuel, 1992.

Sbwngtening the hiWate Sector in Morocco Page 9

accounting for about a fourth. Employment in the formal private sector represents perhaps athird of the total, although the exact amount is difficult to estimate." Wage employment in theurban private sector is about 40 percent, and the rest reflects entrepreneurial activity and familylabor. (See Table 1. 1.)

27. Irrigation resources are 75 percent in public hands, and govermnent investmenthas enabled the country to irrigate some 85 percent of irrigable land. Publicly owned irrigationwater is delivered free to the point of local distribution, which is fully controlled by regionalagricultural development authorities (Offices Regionaux de Mise en Valeur Agricole, ORMVAs).These authorities sell water to private farmers (at subsidized prices) and, until recently,compelled farmers to grow certain crops or provided water only to land planted in certain crops,like oilseeds or sugar, which are protected and (in the case of sugar) a key input for 11 state-owned enterprises.

D. Trends in the Private Sector

28. By most accounts, there has been a marked increase in private sector activityduring the 1980s. indicating an abundance of capable entrepreneurs prepared to invest andexpand when opportunities are made available. The number of businesses with fornalaccounting systems (and subject to corporate income taxes) increased substantially--by 25 percentduring 1984-87 following the start of the adjustment program, and by another 50 percent during1988-90 to over 23,000--following the main tax reforms. The number of formal sectormanufacturing firms increased from 4,350 in 1986 to about 6,000 in 1990--the new firms areentirely private. There is some evidence that private businesses have done better than theeconomy overall; for example, output of domestically owned private manufacturing firms grewover twice as fast during 1986-89 as did output from firms largely owned and controlled by thegovernment or foreign interests.

29. Employment has grown rapidly in the late 1980s. For example, during the 1980s,urban employment grew by over 4 percent a year overall and by about 8 percent a year inmanufacturing, notably higher than total population growth and urban migration, but not enoughto keep up with rising participation rates."6 Employment is obviously sensitive to demand, andthe analysis of employment trends since the early 1980s in manufacturing suggests that the rapidgrowth of labor-intensive export act: ities more than compensated for reductions in employment

15/ Industnal employment was about 0.5 million in the late 1980s, of which about 80 percent was in the formalsector. See World Bank Report No. 11557-MOR. The surveys of the informal sector in construction (1984)and in industnr. retail commerce, and services (1988) would give total informal employment of about 0.7million in 1990 (at 5 percent annual growth), or a third of the total private sector employment. However, the198. sur%;e' of all licensed businesses (which includes all formal and most informal businesses) gives totalemplo\ n rv of only about I million, implying substantial family or unreported employment.

16/ S.- A Riank Report No. 11918-MOR, Chapter 3.

Page 10 Strengthening the Pmvate Sector in Morocco

caused by import liberalization. ' Overall half the increase in employment in all ofmanufacturing was concentrated in two subsectors--canned and processed food and garments,the latter of which had extremely strong export growth."

E. Vision for the Futur

30. Morocco is nearing the point where it has adopted the critical mass of policiesneeded for a quantum jump in economic perfonnance led by the private sector. Already, theearly real devaluation, coupled with a shift in relative incentives toward exports, helped producethe tremendous growth in manufactured exports during the 1980s. Morocco also begins the1990s with an important opportunity to deepen its integration with the industrialized nations,notably the European Communities but also North America and Japan. Thus, the vision forMorocco's future must accord with this progressively closer association with industrializedcountries, with all the attendant requirements for more liberalized external trade to become moreefficient, more widely used industrial norms and standards to compete in export markets,stronger auditing and better financial disclosure to compete for international capital, more activeefforts to assure and promote domestic competition, and stronger measures to accelerate socialdevelopment.

31. In general, Moroccan economic growth rates in the past are a poor guide for whatthe future should be. During 1960-90, compared to 67 other developing countries, Morocco wasaverage (with an annual GDP growth rate averaging slightly above 5 percent), despite the factthat many policies in Morocco--low inflation, a low parallel exchange rate premium, and highpublic expenditure on economic services--were well above average.'9 The 1980s were generallyworse--in Morocco as elsewhere in the developing world, with GDP growth 2 percentage pointslower than in the 1970s; but the 1980s were a period of stringent adjustment with minimalforeign investment and continued recourse to rescheduling to deal with a substantial debtoverhang. In general, Morocco has underperformed, held back by repressive financial policies,inward trade biases, nonproductive public expenditures, a negative attitude toward foreigninvestment, and controls on private sector activities.

17/ A regression of changes in various sources of demand on manufacturing employment between 1984 and 1990indicates that export growth raised total employment 3-4 times as much as the same growth in domestic demand,despite the fact that only 21 percent (in 1989) of manufacturing is exported.

18/ Merchandise exports of clothing increased 15 percent a year (in constant prices) during 1986-89, not countingthe increase in subcontracting arrangements.

19/ See Thomas and Wang. Manufacturing growth in East Asia and the Pacific was over 3 timnes Morocco's annual3.8 percenr during the 1980s; on average, Moroccan manufacturing grew only two-thirds as fast as in alldevekopirg countries in that decade. Likewise, export growth, though better than developing countriesgenerali\. k.as only two-thirds as fast as in East Asia during the 1980s, with a one-third smaller share ofmanufartunng.

Srengthening the PrfWate Sector in Morocco Page 1)

32. The latter part of the 1980s provides a glimpse of what can be achieved: forexample, nonphosphate manufactured exports grew by over 15 percent a year in constant pricesduring 1986-91--taking advantage of strong export incentives; and foreign direct investmentincreased by about 150 percent in 2 years--after government virtuaLly eliminated controls.

33. The example of other countries also show what should be possible in Morocco.For example, GDP in the 9 high performing East Asian economies expanded an average of2 percentage points faster per year than in Morocco during 1960-90.

34. A normative vision for the future should be based on some overall targets for therest of the 1990s (1994-2000), and some benchmarks against which to monitor progress in theaction program designed to achieve the targets. Some targets are suggested in Table 1.2. Thesebroad targets will need to be complemented with detailed targets, plans, and responsibilities forgovernment, the private sector, and foreign partners--as part of the formulation of a privatesector action plan.

35. A sign of success would be that private investment rises from its currrent levelof 12-13 percent of GDP to 15-18 percent by the end of the century. By then, the private sectorshould account for a substantial share of electricity generation, telecommunications services,water distribution and other municipal services, and the operation of various infrastructureinstallations including ports, airports, industrial zones, and motorways--in contrast to itsnegligible share in these activities today,

36. For industry, during the remainder of the 1990s, Morocco should aim to approachdouble-digit growth of private industrial output, an even faster growth of exports, a risingcontribution of manufacturing to GDP and to exports, increased equity investment in industrialassets (and technology) especially from abroad, and more competitive products (as manifestedin more diversified export products and markets).

37. For tourism, the emerging growth strategy seeks to increase both the number oftourists (doubling non-Maghreb arrivals to 3 million per year by 2000 would represent less than5 percent annual growth since the peak year of 1987) and the share of high spending tourists.Tourism should be expected to rise as a share of GDP, and as a share of foreign exchangeearnings. Achieving these targets will require, however, strong effort and investment torestructure the sector. aimed at diversifying the tourism product, improving quality to encouragerepeated visits, and strengthening international promotional efforts. The challenge is toencourage the private sector to organize and take the lead in these tasks.

38. The targets for private sector agriculture are more difficult to set, especially ifcloser integration with the EU reduces the protection for low-value grain crops and gives greatermarket access for higher value fruits, vegetables, and processed goods.

39. (.1w ermment support for the private sector should be guided by a broad principle--neutrality f) ii..1iroeconomic incentives--including trade and tax policy--across sectors. Any

Page 12 Strengthening the Pinvate Sector in Morocco

special incentives should be aimed at encouraging more private spending in key areas, forexample deepening technology, and improving labor. Public expenditures should be increasinglycoupled with private spending to assure high quality economic infrastructure and related services,including improved basic health and education of the workforce. The rest of this reportrecommends specific government actions to strengthen the private sector in Morocco.

TABLE 1.2: Normative targets for private sector development in Morocco, 1994-2000.(Percentage change per year in constant prices, unless otherwise indicated)

Indicator Target Comments

GDP 5-7 Mid-point is about the 1973-80average; High end represents thegrowth rate achieved by 9 fast-growth East Asian economies during1960-90.

Private manufacturing 5-10 Mid-point is slightly abovedeveloping countries' average for1980-90; high end is still below EastAsian performance.

Private agriculture 2

Private tourism 10-15 Implies an increased share of GDPfrom 5 to 7-8 percent.

Exports 6-8 High end is about 2 percentagepoints above the growth in the1980s.

Nonphosphate manufactures 10-20 Compares to 16 percent growth in1986-91; needs to be at high end ifexports are to be diversified.

Nontraditional exports 30-40 By 2000; compares to 39 percent in(percent of total merchandise 1986-91; consists of manufacturesexports) excluding phosphate derivatives,

textiles, clothing, and leather goods.

Foreign direct investmnent 0.7-1.5 Compares to $0.5 billion in 1992(USS billion) (1.7 percent of GDP); high end

would be nearly 3 percent by 2000.

Private investment 15-18 Compares to 13 percent in 1986-91.(percent of (,DI'

Sbwngthening the Pfvate Sector in Morocco Page 13

CHAPTER II: PERCEIVED CONSTRAINTS

40. Surveying the private sector's perceptions of the constraints that it faces isnecessarily subjective, but a large number of independent surveys in Morocco generally reportconcordant results. The following results are drawn largely from six surveys:2 0 the"constraints" survey, the "infrastructure" survey; the "incentives" survey; the "foreign" survey;the "small business" survey; and the "prospective" (or CNJA) survey. Because the surveys usedifferent methodologies to assess the importance of constraints, numerical results are not directlycomparable across surveys, but the ranking of constraints is. In no case was the samplingrandom, and the sample composition does not usually reflect the overall composition of firnsacross sectors. Nonetheless, the convergence of results suggests that sampling biases may haverelatively little impact on the reliability of the perceptions.

A. Large. Established Firms

41. In the "constraints" survey, medium and large Moroccan entrepreneurs (mainlyrepresenting medium to large manufacturing firms in and around Casablanca) rank three factorsas most severe constraints on their businesses--two relating to key factors of production, and oneto profitability: the high cost of finance, shortages of skilled labor, and high taxes. Theseperceptions accord with reality. As discussed below, the cost of finance is high--8-9 percent inreal terms in 1991-92, especially relative to the 2 percent in the early 1980s that companies maybe using for a comparison. Income tax rates are high by international standards, despite the taxreforms and reductions by about a fifth since the late 1980s--although there are manyopportunities for exemptions, like export production. And there is clear evidence that labor,especially for middle management, is difficult to locate. (See Figure 2.1.)

42. For larger firms, a second tier of complaints focused mainly on the other primaryfactors of production--land and associated physical infrastructure, equipment and buildings, andaccess to and cost of raw materials.2' They also emphasized what they consider to be unfaircompetition from illegal or informal firms, most probably a reference to smuggled imports(including tax exempt goods for export that are sold domestically). In contrast, these firmsconsidered several potential problems to be relatively unimportant--especially relating to theadministrative and regulatory environment; these include access to finance and foreign exchange,bureaucratic redtape and licensing difficulties, insecure property rights, weak demand, anduncertainty about the policy climate. Concern about legal rights and the weak judiciary wasviewed as a middling constraint by Moroccan firms.

20/ Appene:I summanizes informnation on these surveys.

21/ A¢ss ax, raw materials at reasonable prices was a concern more of medium-sized firms than large firms.

.5~~~c

i'1 1' 1a 1 i1

~~pi: S

n oi9

tie iiiiIifluII ''l X

Strengthening the lrWate Sector in Morocco Page 15

43. Regarding infrastructure in particu-lar, the "infrastructure" survey examined infra- Figure 2.2: Reasons for Businessstructural reasons behind location decision. In location

general, entrepreneurs are much more likely to i base their decisions on access to roads and sea s toports than to airports and railroads. (SeeFigure 2.2.) Discussions indicate other factors Po U

are also important, including the proximity to auppi.s

other businesses, the ready availability of Industral

municipal services and utilities, and social Eectricit 3

amenities (notably housing for workers). These Tolophon

factors converge to give tremendous site value to ts v

the Casablanca region especially, which is Railroad

reflected both in the higher price of land and the p orU

high occupancy rate of industrial zones.Entrepreneurs polled in the infrastructure survey Labor

share the wide perception that land for business ,0 e sO 100in general (and for industry in particular) is t e.." , difficult to find and expensive. - Iapa f M bpteat twt,

44. The Confederation GeneraleEconomique Marocaine (CGEM), representing a large number of important establishedbusinesses in Morocco, has identified a number of key problems, which it has requested thegovernment to address.2 These converge with the results of the constraints survey--althoughthe CGEM puts more emphasis on the negative effects of competitive pressures--notably fromimport competition (both from trade liberalization and from illegal imports), on what it perceivesas the high cost and shortage of credit (compounded by payment delays on govetnment contractsand bad management of institutional savings), on high income taxes exacerbated by limiteddepreciation and reserve provisions and by a stronger tax administration, on high import taxeson capital goods and inputs, and on high labor costs (which it links in part to increases inminimum wages and benefits and the large number of official paid holidays) and outmoded laborlaws. In its broad inventory of constraints, the CGEM also mentions insufficiency ofinfrastructure, with particular emphasis on industrial zones, availability and cost of electricity,shortages of telephone lines, and excessive regulation of shipping. What the CGEM does notemphasize is the shortage of managerial or supervisory labor.

45. Tourism operators view the main constraint on investment and expansion as oneof competitive pressure. reflecting a tourism product that has not evolved sufficiently to attracta growing share of the market, insufficient international advertising and promotion, RAM scontrol over international air fares that are not competitive with those to alternative destinationsfor tourists, a decline in standards and quality resulting from the cash-flow shortages caused by

22/ This i mmrnrarized from its report to the Prime Mlinister on 23 September 1992, published in CEDIES-Informations. No. 1848.

Page 16 Strengthening the hivate Sector in Morocco

the recent slump, and insufficient investment in hotels to create the minimum capacity neededfor areas to become major tourist destinations. Government licensing, regulation, and ownershipwere not considered problems; in fact, there was some tendency to decry the recent delegationof pricing issues to hotel operators.

B. Foreign Investors

46. From the constraints survey, the foreign firms already operating in Moroccoemphasize constraints other than those mentioned by their Moroccan counterparts, except thatboth consider high taxes to be a serious constraint. Foreign firms consider insufficient economicinfrastructure and competition from the informal sector as more serious problems than interestrates or labor availability. These responses are consistent with a view that foreign-owned firmscan use foreign connections to overcome many constraints but continue to face those that remainrooted in Morocco (like infrastructure). In addition, foreign firms may be less likely to bewilling or able to use various informal mechanisms to sidestep taxation and controls on labor.

47. Other discussions with foreignfirms, current or potential investors in Morocco,reveal broader concerns (see Figure 2.3). Figure 2.3: Perceptions of Prospective

Relative to other countries in North Africa, the Foreign Investors ("Foreign Survey")

Middle East, and Eastern Europe, potentialinvestors rank Morocco well above average on Eeonoun cocn1Udtu -

most concerns. The exceptions are significant: LAbor relationi

below average on civil ri hts (which may Ippt =increase worries about political stability), market Rcdt pe

prospects (reflecting its smaller economy and Echange regme l

only average growth record) and restrictions on AttudeTazes

ownership (undoubtedly a carry-over from the Govtcompetancl

1970s and 1980s): barely average in termns of Trade paley _

infrastructure, political risk (in a sample where IrsKrudure

political risk is generally high), and foreign trade Politcart k

policy (despite several years of trade reform). c.< resrit =Civil libertie.

Market pro pects

48. There are also some surprising vow Averme Abe e

differences between prospective multinational MI.orcc compd other Middle Met

investors, and foreign companies already Loperating in Morocco--suggesting the reality mayin fact be worse thani the imagined. Although Isome potential foreign investors surveyed in the"foreign" survey rate Morocco highly in terms of the government's positive attitude towardforeign inv,-tymnt, some foreign-owned firms in Morocco fear that the government is not yetfully comnwtlr<! t(' the private sector (citing regulation and restricted entry in some key sectors),which i.s ria.. r rhated by strong doubts about the efficacy of legal safeguards. While potential

Sien ghening the Pivate Sector in Morocco Page 17

investors have ranked Morocco highly in terms of the fairness and clarity of laws andregulations, some foreign entrepreneurs in Morocco express a lack of confidence in the stabilityand predictability of laws affecting business (citing the long delays between approval andratification).23 Virtually all foreign firms note the inadequacy of the courts in dispute resolutionand the lack of reliable legal recourse (especially with government contracts). Finally, foreignfirmns in Morocco continually raise the problem of bureaucratic redtape, especially in terms ofwhat is viewed as a lengthy, complex, and uncoordinated administrative process of obtaininglocal government approvals needed to establish, construct, and start up a business.

49. Amongnon-French investors, TABLE 2.1: PubLic-Private Perceptions of Changes in Factors Affectingthere continues to be Competitiveness, 1984-91the constraint posed by (Average scores on a scale from +2 (increase) to -2 (decrease))language, as well as State- Private All

commercial norms and ownedindustrial standards _ =geared closely to Cost of invutsFrench practices. As Industrial land 0.71 1.44 1.38

Interest rates '' 0.81 1.41 1.32a result, although Cost of skilled labor - - - - 1.21

France provides only Quotas on inputs -0.67 0.17 0.0910 percent of foreign Tariffs on inputs -0.50 0.32 0.18

direct investment to Cost of imported inputs 0.64 1.21 1.13

developing countries Public utilities - - 1.38

overall, it provides Profitability indicators25 percent of foreign Quotas on cutput -1.33 -0.35 -0.43i n v e s t m e n t i n Import competition lb 0.50 1.22 1.07

Morocco. The Export margins 0.78 0.19

problems of non-French investors are Source: "Incentives' survey.compounded by the Notes: " Average of short- and medium-term rates.relative scarcity of /b Second-quality goods; average for all imports for all firms was 1.02.

M o r o c c a nintermediaries to actas legal and adminiistrative "confidants" and the thinness of the local supply of investment andproduction support services, like accounting, market research, and inspection.

23/ St-era' :ws. treaties (such as investment protection and double tax treaties and the recent treaty onf', .-. )n s--the Montreal Accords) and reform measures have been announced as 'accepted" but have not

i mented. The Morocco-United Kingdom double tax treaty was finalized in 1983 but was not ratifiedbv Morocco until 1991.

Page 18 Strengthening the Prvate Sector in Morocco

C. State-Owned Enterprises

50. The govemment has increasingly endeavored to assure that state-owned enterprisesin competitive sectors (like manufacturing, tourism, banking) face the same conditions as thoseowned by private entrepreneurs (state-owned enterprises and agencies in other sectors continueto enjoy some advantages, including protection from possible competition). Nonetheless, the'incentives" survey reveals some important differences in perception, which suggest in part thatstate-owned companies may continue to have a privileged status, reflecting the continuation ofspecial relationships developed in the past when they were more protected.

51. In general, since the reformn program began in the early 1980s, state-ownedmanufacturing companies systematically perceive that prices increases have been lower on theirinputs, and that trade policy has made access to their inputs easier. For those producing for thedomestic market, despite the stronger perception of quota reductions for their products, theyperceive a much lower increase in import competition. For exports, state-owned companies aremore likely to perceive that their profit margins have risen.

D. Small and Nascent Firms

52. Whereas larger firmnsfocused on a few critical issues in the Figure 2.4: Major Difficulties Faced by

constraints survey, small manufacturing Prospective Entrepreneursfirms tended to rank constraints as more ("Prospective Survey")severe in general and to identify a largernumber as major obstacles (seeFigure 2.1). In contrast with larger Commerlfirns, the smaller firms emphasized Personal equity

bureaucratic procedures (the second-ranked constraint), tax administration, Trining

registration, and licensing as importantobstacles. But they also concurred withlarger firms on production and Busilnes partner

profitability constraints: access to and costof finance, high taxes, access to land, L.nd

buildings and equipment, weakinfrastructure, and problems getting rawmaterials were perceived as problems. as Other

was what they consider unfair competitionfrom other companies operating illegally. c 25 so

Shortages of skilled labor are perceived as fPrctor o re poentnaident in

less of a constr3 innt bcause of the limiteduse of sup r TIrr personnel in smallfirms.

Strengthening the lrivate Secdor in Morocco Page 19

53. In the "prospective" survey, the Conseil National d? la Jeunesse et de I'Avenir(CNJA) surveyed 100,000 unemployed educated Moroccans, and identified about a thousand whowere seriously interested in starting their own businesses. These potential entrepreneursidentified the following main constrints: about a third of the candidates complained about thelack of a permanent place to locate their business; another fourth considered that the lack ofpersonal equity was the most serious constraint,2' and about a tenth each noted thatadministrative authorizations (presumably at the level of municipalities) or lack of knowledgeabout business in general was the most serious constraint in starting up their own businesses.Other constraints include unavailability of commercial land, inability to find partners, andinadequacy of market research. (See Figure 2.4.)

24/ In CornT Thration of the severity of the constraint on financing, the small business study noted that three-fourthsof thc' cO monpanies ranked access to financing as the principal obstacle to startup. Despite the perceptionsUt ;r y: ! tive entrepreneurs--that they lack their own equity--the small business study noted that over 70 percentot small businesses startup with only their own financing, not bank financing.

Page 20 Strengthening the hivate Sector uts Morocco

CHAPTER m: DiCENTIVES FOR FASTER. MORE EFFICIENT PRIVATESECTOR DEVELOPMENT

A. Summary and Recommendations

54. Many incentives much improved. Private sector growth depends critically onmaintaining macroeconomic stability and incentives for efficient productive investment. Inrecent years, Morocco's macroeconomic environment has been characterized by low inflation(less than 5 percent in 1986-91), a relatively stable nominal exchange rate following the30 percent real devaluation between 1980-86, and progressively smaller deficits in thegovernment budget and on the current account (both at 1.4 percent of GDP in 1992).

55. At the same time, incentives faced by the private sector have become lessdistortionary. Access to foreign exchange has become increasingly open for current accounttransactions (full convertibility for the current account was announced in early 1993 and limitedmeasures for liberalizing the capital account were introduced in late 1993). Income tax rateshave declined by about a fifth since the late 1980s. Most administrative marketing and pricecontrols have been eliminated, and several de jure monopolies of state-owned eniterprises havebeen opened to competition. Quantitative restrictions (QRs) on imports (which covered two-thirds of imports in 1980) had been replaced by 1993 with relatively high, but more uniformtariffs or by reference prices on a small share of industrial goods (less than 10 percent) andvariable levies on 3 agricultural commodities. Maximum import duties have declined from 400to less than 50 percent by 1993, and weighted ad valorem protection decreased during the 1980sand early 1990s by nearly 10 percentage points despite the shift from QRs to tariffs. Effectiverates of protection have declined overall since the early 1980s, but in 1991 they still averaged25-30 percent. Exports are effectively taxed, especially where export performance has beenstrongest, and the incentives rate for import substitutes is 30-35 percentage points higher thanfor exports. Overall effective protection is inversely related to comparative advantage.

56. Key remaining reforms. Morocco is nearing the point where it has adopted thecritical mass of policies needed for a quantum jump in economic performance led by the privatesector. Already, the early real devaluation, coupled with a shift in relative incentives towardexports, helped produce the tremendous growth in manufactured exports during the 1980s.Now, two broad tasks remain: decisive action on two or three major policy fronts; andpersistent efforts to complete the broad array of other reforms already largely in place.

57. Need for decisive policy action. The government needs to lower and harmonizeboth income taxes and import tariffs, especially if Morocco seeks to be more closely integratedwith the -U. Finns label high taxes as the third most severe constraint after high interest ratesand lack of skilled labor. Their perception partially matches reality; personal and corporateincome taxes are high comparatively (with a 42 percent tax on corporate income in 1993,Morocco i9 'ii the top of the international range despite the reduction from over 50 percent inthe mid 10'H- Because corporate dividends are taxed twice (as corporate profits before

Strengthening the Phvate Sector in Morocco Page 21

distribution and at 15 percent after distribution), the tax burden on them is much heavier (over50 percent) than on interest (20-30 percent) or real estate gains (less than 15 percent effectively).Tax exoneration for export activities partially explains the growth in export production andfavorable tax treatment of real estate helps explain the real estate boom.

58. The actual tax burden borne by business is, however, considerably less, overall,than the nominal rates might suggest. The direct taxes effectively paid by companies inMorocco are low by international standards (around 3 percent of GDP). Only distributeddividends are taxed; the distribution of share rights and capital gains are not--the lattercomprising three-quarters of total earnings. The provisions of the investment codes exempt alarge share of corporate earnings from taxation or reduce the tax rate. The fiscal cost of suchprovisions are substantial; in 1989, for example, they were estimated at 3.2 percent of totalgovernment revenue, equivalent to 0.7 percent of GDP. Finally, weak accounting laws andoutright fraud reduce the tax obligations of many businesses. The net effect of the presentsystem is to tax some firms heavily, often foreign investors, as government attempts tocompensate for the lack of revenue from other firms.

59, Trade liberalization has increased import competition for many firms, especiallyfrom second-quality goods no longer restricted by QRs (although illegal goods have alsoallegedly increased). While the task of shifting protection to a market-based system is largelycompleted (quotas are now essentially eliminated, and reference prices have been restricted),imports are highly protected--in both nominal and effective tenns--especially by internationalstandards. Nominal ad valorem protection was 37 percent in 1992 (27 percent when weightedby import shares), and effective protection for import substitutes was 25-30 percent in 1991.Structurally, protection is highest for metal, mechanical and electrical industries, which manylook to for future export growth. This continuing import protection acts to discourage andrestrain imported technology, raises the cost of inputs for other domestic producers, facilitatesanti-competitive practices, and hurts consumers--including the poorest. (See Section C, below.)

60. Persistent efforts to complete other reforms are necessary to achieve the criticalmass of incentives that can help make the difference between moderate and high private sectorinvestment and growth. Most of these deal with price and marketing deregulation, notably inagriculture and transport where controls seem most pervasive, in local price regulation whereliberalization has not takeen hold, and in creating a framework to promote competition. Manyof these issues are discuissed in subsequent chapters.

B. Macroeconomic and Fiscal Incentives

61. Achieving macroeconomic stability. Since the start of adjustment in 1984, thegovernment hlas largely succeeded in achieving macroeconomic stability, while increasingincentives for oqipon- led growth. To reduce the anti-export bias of incentives, the governmentengineere(c '5-40 percent real depreciation between 1980 and 1986. Since then,macrocceni-i, minanagement has kept the domestic inflation relatively low (about 5 percent a

Page 22 Stengthening the Prvate Sector in Morocco

year, on average), which has allowed the nominal exchange rate to stay generally stable relativeto its basket of currencies. Thus, exchange rate policy has substantially increased incentives toexport, without compromising the price stability that is most conducive to private investment andproduction. The policy was supported by public finance management that lowered thecommitment-basis central government deficit from over 11 percent of GDP in 1981-85 to1.4 percent in 1992, substantially reducing the government's call on domestic financing.Adjustment was supported by a series of rescheduling agreements starting in 1983, which helpedalleviate the external resource constraint. (See Annex Table A.4.)25

62. The Treasury's impressive fiscal stabilization is, however, fragile in two respects.First, the Treasury achieved the reduction in its deficit more by restricting public investmentsand cutting recurrent expenditures than by mobilizing revenues.2 6 Between 1980-85 and 1986-91, revenues scarcely rose while expenditures fell by 6-7 percentage points of GDP, both ininvestments and recurrent expenditures (see Table A.4). The share of expenditures allocated tothe social sectors declined slightly over the second half of the 1980's. In these sectors,investment lost ground relative to recurrent expenditures, despite an important decline inspending on consumer subsidies. Second, the compression of the Treasur, deficit has not beenmatched by similar improvement in the deficits of state-owned enterprises and municipalities,which together have continued to amount to some 2-3 percent of GDP since the early 1980's.2"The recent move toward decentralization may, in fact, exacerbate the municipal deficits.Maintaining budgetary stability, while providing the critical public services and investment andfreeing resources needed to underpin increased private sector growth, will require more carefulallocation of resources and stronger measures to improve the use of public funds. Sifnultaneousimplementation of a strategy for alleviating povcrty and improving access to basic social serviceswill increase the pressure to set public expenditure priorities carefully.

63. Move toward convertibility. In line with real and nominal depreciation, thegovemment has progressively relaxed foreign exchange controls. In early 1993, it achieved fullconvertibility of the current account,28 which minimized the negative effects of the continuingsurrender requirements for export receipts (80 percent for goods and 90 percent for services).29

25/ For example. tn 1992, debt relief lowered the deficit by 0.3 percent of GDP, from 1.7 percent.

26/ The role of external debt rescheduling in reducing the deficit was less significant, as can be seen by noting thatthe commitment-hasis deficit before debt rescheduling also declined, from over 12 percent of GDP in 1980-83to 1.7 percent of GDP in 1992.

27/ For a discussion of the evolution of these deficits, see World Bank Report No. 10157-MOR.

281 The last of the current account restrictions--prior approval for foreign exchange transactions to pay for businesstravel not already covered under existing regulations--was lifted in early 1993. See Royaume du Maroc, Officedes Changey Circulaire No. 1603.

29/ Thew' t -e re set in 1991, down from 97 percent previously. The Moroccan government argues that inagglt cio( t"nntion limits are adequate, citing the use of convertible accounts for domestic expenditures. Toallow molb ilexibility for individual exporters, however, it is considering the possibility of ailowing a market

Strengthening the Priwate Sector in Morocco Page 23

Capital account transactions by Moroccan industries and individuals were, however, tightlyrestricted until late 1993. But in the interest of developing closer integration with the worldfinancial market and of attracting additional resources from abroad, the government has begunto relax capital controls. Beginning in late 1993, companies are permitted to borrow abroadwithout a priori govemment approval; and exporters are allowed to deposit 5-10 percent of theirearnings from services and goods, respectively, in accounts denominated in foreign exchange,which is half of their authorization for conivertible dirham accounts. This change opens anopportunity for exporters to hedge against export price fluctuations using the international futuresmarket, especially important for agricultural commodities. In addition, Moroccans residentabroad can also open foreign exchange accounts in domestic banks. Moreover, for foreignentrepreneurs (including Moroccans resident abroad), the government has decontrolled almostall foreign exchange operations (including full repatriation of invested capital, unlimitedrepatriation of dividends and profits, no controls on expatriate hiring and salaries, and nocontrols on contracts with foreigners for technical assistance, management or licensing), andbanks are authorized to effect operations in both directions.30

64. Despite restrictions on the capital account for Moroccans, the capital market inMorocco has become partially integrated v ih European markets through indirect channels.3"Subcontracting payment arrangements de- -nd in part on relative interest rates--lower ratesencourage the importing finns in Europe t :etain ownership of inputs processed in Morocco andvice versa--and Moroccan workers resi ..nt in Europe decide to remit depending in part onrelative deposit rates. These effects can be important because of the substantial amountsinvolved: imported inputs used in subcontracted export production ("temporary admission"imports) amount to 25 percent of total imports, and workers remittances amount to nearly thesame share of current accoutit earnings.

65. Income taxes. In the late 1980s, the government consolidated various taxes andlowered overall income tax rates on corporations and individuals by roughly a fifth, to44 percent for corporations and an effective maximum marginal rate of 49 percent forindividuals. All agricultural primary production is exempt from any income tax. In 1993, thecorporate income tax was about 42 percent and the highest effective marginal rate for individualsabout 45 percent; in 1994, the corporate rate wvas lowered to less than 40 percent. Thesereductions in rates have been accompanied by various administrative measures to modernize taxadministration (for example, withholding) and by the introduction of alternative revenue sourcesin the form of a value-added tax, which accounted for as much revenue as all direct taxes in1991. However. the income tax rates are high by international standards (see Table 3.1), andeither discourage poteritial activities or encourage companies to seek special exemptions, invest

among con Verlihlc accounts,

30/ In 1992. thc gow.rnrnent authorized off-shore banks established by internationally reputable banks, with fulllibetnv ' . t foreign exchange operations for nonresidents.

31/ Fo. twor -t.lopment of this argument. and a more detailed look at the links between Moroccan andEui oi, :a. T.nst rates, see chapter 4.

Page 24 Strengthening the Pnvate Sector in Morocco

in sheltered activities (see below), or engage in outright tax fraud. Without such specialincentives, they especially dissuade foreign investors (who are unlikely to benefit from most ofthe exonerations under the industrial investment code, less likely to escape fiscal levies, andhave, in any case, altemnatives outside Morocco). As a result, the effective burden of incometaxes paid by companies is low by international standards--roughly 3 percent of GDP.

TABLE 3.1: International Comparisons of Corporate Income Taxes(Percent of taxable corporate income)

Greece 40 (manufacturing)Indonesia 15 - 35Malaysia 38Mexico 35Portugal 31Singapore 32 (lowered to 27 in 1993)Spain 35Thailand 30 - 35Tunisia 35Turkey 49 (but 30-40 in some instances)

Source: Taken largely from Gyovernment of Tunisia. "Pr(jet dt Etue pour I Elaboratin d un Code Unique1 ln~Ati~eftlient1 - ( eConparaisons lnternationale.. juillet 1992, and from OEC 1). OECD Economicsur"ey. - N u. , 1991 1992. Paris. 1992.

66. Differenit tax regimes apply to passive income, and rates often vary depending onwhether the taxpayer is an individual or a business. In general, interest is taxed as regularincome, cxcept that for individuals the minimum rate is usually 20 percent w ithheld (on shorterterm bank term deposits), while the maximum can in principle be limited to 30 percent (usuailyon comrnercial paper). Treasury bonds were tax-free for individuals until 1994. The 15 pcrcentnominal tax rate on (i' idenids applies only to cash distributions, not to accumulated share rightsand capital gains. thic laitter accounting for some 75 percent of share earnings. Moreover, theeffective rate cani be %irtually zero for investments under about US$40,000 when adjusted forspecial incentives for reinvestment in companies listed on the Stock Exchange. On the otherhand, shareholders get no credit for corporate income taxes already paid on profits prior to thedistribution of dividends. Thus, there may be double taxation cf equity income (for a theoreticalrate of up to 5() percetit). Capital gains in real estate are effectively taxed at less than15 percent, even including the nominal annual property tax on buildings. Arguably. for a givennominal returtnT on an investment, real estate is treated more favorably tharn either financialsavings or corur:il. ir estilent.

67. The specter of double taxation of corporate earnings allegedly discourages would-be investor- 'T, ks and further encourages companies to borrow, given that interest is fullytax dedu(0l' tidct. the tax burden itself appears to be small; actual revenue collected fromtaxes on . lends is insignificant. Total distributions are small (and cash distributions,

Strengthening the Private Sector in Morocco Page 25

which are those that are taxable, comprise only a fourth of these); and the rate applied isequivalent to the lowest rate of personal income taxes (which means that shareholders, who aremost likely to be in higher income brackets, pay less than they would if dividends were taxedas part of personal income). Moreover, making dividends tax-free could conceivably encouragedistributions, which could reduce the use of retained earnings for financing by establishedcompanies and penalize share issues by new companies that are unlikely to have significantdividends in early years.

C. International Trade Incentives

68. Import liberalization. To reinforce the reduction in the anti-export bias achievedby real depreciation and, more recently, liberalized access to foreign exchange, the governmenthas gradually moved from trade restrictions based substantially on quotas and administered pricesto import protection based almost entirely on ad valorem tariffs, which have been graduallylowered and harmonized around nine rates. The trade reforms have aimed in part to compen.satefor the increased import protection resulting from real depreciation.

69. Over the last 12 years, quota coverage has rapidly fallen and tariff protection hasbeen reduced from a range of () to 400 percent to 0-35 percent. However, the average level anddispersion of tariffs rerimains, with an effective rate of protection against imports in somemanufactuiring sectors that is nearly 50 percent or more.

70. At the beginning of the 1980s, the average import tariff was equal to 22 percent(Table 3.2); 3 adding thle other special levies in effect then raised the ad valorem protection to47 percent on average. The average import-weighted tariff, however, was equal to 9 percent(34 percent including the import levies, assuming they were levied uniformly on imports), whichsuggests higher import volumes were concentrated in sectors with lower tariffs (but probablysubject to other restrictions). In 1980, two-thirds of all imports were subject to quotarestrictions.

71. Quotas vere reduced first. Following their tightening in 1983 to deal with thebalance of payments crisis. the government introduced measures in 1984 that dramaticallyreduced quotas. By bJ41. only 13 percent of all imports required prior approval, and in 1993they were removed on xI itually all remaining goods. On tariff reform, a major accomplishmentwas to reduce the (dispersion in tariff protection particularly in the manufacturing sector,although, because of the conversion of existing quotas to tariffs, the mean level of tariffsincreased. The un%'i~tIghted tariff mean increased to about 25 percent by 1991-92, while theimport-weighted( tantl increased to about 15 percent by 1991-92. If account is taken of the

32! Ili. ;I TK' toposted (i.e.. 'book") tariffs, rather than average tariffs as measured by revenue collections.:,7 tte average tariff measured by revenue (including special import levies) has been about

-ki ahout 27 percent for the import-weighted average posted tariffs and special import levies,lag ,, ic., ause of temporary imports and exemptions granted under the investment codes.

Page 26 Stengthening the Pivate Sedor in Morocco

TABLE 3.2: Evolution of Average Trade Protection(in percent)

Unweighted Import- Special QuotaTariffs weighted Import Coverage

Tariffs LeviesE /b

1980 21.6 8.9 25.0 661982/c 21.7 8.1 25.0 581983 21.2 8.1 25.0 761984 21.2 8.0 20.0 181985 21.9 8.5 17.5 141986 22.3 10.7 17.5 151987 23.5 18.9 15.0 131988 23.8 18.8 12.5 131989 24.4 13.9 12.5 111990 24.8 14.3 12.5 111991 25.1 15.3 12.5 131992 24.5 14.5 12.5 15

Source: World Bank estimates based on data from the Ministry of External Trade, Government ofMorocco.

Notes: " Special import levies are usually subject to fewer exemptions and exonerations, including underthe investment code.

lb Percent of imports subject to lists B (subject to ministerial authorization) and C (prohih:ted)./c Data for 1981 not available.

change in special import levies, total ad-valorem trade protection fell from 47 percent on averagein 1980 to 37 percent in the early 1990s (on a weighted basis, the decline was from 34 percentto 27 percent).

72. Tariffs remain highest in manufacturing (25 percent) and lowest in the miningsector (15 percent). Contrary to the general pattern where import-weighted tariffs are lower thanunweighted average tariffs, in manufacturing import-weighted tariffs are higher, and these stayedrelatively constant during the 1980s, moving only from 29 percent to 28 percent between 1984and 1990. With the special import levies, total nominal ad valorem protection for manufacturingon average is now around 35-40 percent. Outside of agroprocessing and phosphate derivatives,most manufactured goods benefit from maximum tariffs and levies (reduced to 47 percent inmid-1993). Manufacturing has had about the average extent of quota protection; themanufacturing sectors most heavily protected by quantitative restraints were food and beverages,textiles, leather. and rubber products.

Strengthening the PhiYate Secor in Morocco Page 27

73. The current round of reforms3 3 ends in 1993, with a reduction of maximum ratesto 47.5 percent (including the special import levy)--with the exception of higher tariff equivalentsfor previous quotas on meat and milk, reductions of some intermediate rates, the elimination ofalmost all import licensing requirements, and the limitation of import reference prices to a smallrange (not exceeding 10 percent of output) of manufactured goods. In addition, variable leviesare expected to be put in place in 1994 for 3 basic agricultural goods and their derivatives(sugar, oil, and soft wheat) for which, under the current regime, imports are heavily regulated,producer plices shielded from world prices, and consumption subsidized.

74. Overall, it could be argued that the reform of quotas and tariffs did substantiallyreduce import protection (especially as it followed substantial nominal devaluation). The samesectors that had high tariff protection were also those with high quota protection, and their tariffswere largely maintained as quotas fell. In some sectors, there was only a small reduction inquotas. Many sectors where quotas fell substantially, even where tariffs were -educed inparallel, did not experience a surge in import penetration, probably because the import controlswere not binding at the time of liberalization.3 4

75. In a survey of enterprises in 1992 to evaluate changes in competition as well asthe incentive regime between 1984 and 1991,35 firms noted some increases in import competition(especially from second-quality goods but also from contraband and from used equipment forwhich tariffs are assessed on depreciated values); but they rated changes in other factors as moresignificant, including increases in the cost of land and transport, high interest rates. andincreases in the cost of skilled labor and imported inputs. Increases in import competition didnot arise so much from lower tariffs (although the maxima was reduced from 400 percent to35 percent, excluding special levies) but from reduced quota protection. Consequently, firmsperceived changes in the trade regime as they actually occurred: a smaller reduction in tariffsand a larger reduction in quota coverage.

76. During the trade reform, reference prices were used as an instrument for importprotection. A fifth of the imported products freed from ministerial authorization (List B) aresubject to reference prices. Although only 80 percent of products subject to reference prices areactually imported, for those that arm imported the reference prices in 1991 were higher than theimport price in about a third of the cases. Where the reference price is binding for imports, the

33/ As negotiated with the Bank for the Second Structural Adjustment Program.

34/ For example. in the case of clothing, quota coverage fell from 96 to 36 percent during the period 1980-91,aoingsid,' n reduction in tariffs from 75 to 45 percent. Nevertheless, the increase in import penetration. from~4 t n! r. ' .ent, was imperceptible.

35/ -rom the incentives' survey; see chapter 2; Table 2.1.

Page 28 Strengthening the Pivate Sector in Morocco

effective nominal tariff is nearly 100 percent, about doub:; the statutory maximum customsduty.'

77. International comparisons for 1987 for 82 developing countries show that averageunweighted tariffs in developing countries were 32 percent (34 percent in manufacturing).3 7

Morocco compares favorably only to South Asia (77 percent overall; 81 percent inmanufacturing). Other developing regions had much lower tariffs and other import duties in1987 than Morocco has today: 21 percent in East Asia; 26 percent for developing countries inEurope, the Middle East and North Africa; 30 percent in Sub-saharan Africa, and 34 percentin Latin America. In addition, many countries have liberalized their trade regimes since 1987.In Latin America, for example, the median tariff in the early 1990s was 15 percent, less thanhalf the Moroccan rate. Moreover, other countries have moved much faster. The typical LatinArnerican country lowered tariffs by 25 percentage points in 5 years, whereas average tariffs andimport levies in Morocco declined by only 1.5 percentage points between 1987 and 1992 andby less than 10 percentage points over a decade.38

78. Along with the changes in nominal tariffs and other import restrictions, there wasa decline in effective rates of protection (ERPs) between the early 1980s and the early 1990s.39On the basis of limited information to compare 1982 and 1991, ERPs declined in 26 out of 42products, and on average fell about 35-40 percent. There was also a reduction in the biasagainst exports.

79. Nonetheless, the manufacturing sector continues to benefit from high rates ofeffective protection against imports; the weighted average for over 200 manufacturing firms(except phosphate derivatives) was 26 percent in 1991 (31 percent if the incentives of theinvestment code are also taken into account). The preference given to import substitutes alsoremains high--the incentives rate for imports is some 30-35 percentage points higher than forexports; exports are effectively taxed in the sectors where export performance has been strongest(canned and processed foodstuffs, garmnents and leather goods, and chemicals). Moreover, thestructure of the effective protection is as damaging as its level; effective protection is inversely

36/ See Rovauone, d,l kfaroc, Ministere diu Conmmerce, (le 1 'Industrie, et de la Privatisation, "Les Incitations et laProtection.. " p '

37/ World Fanl,. '\lrld Development Renort, 1991.

38/ Alam and Ratapatirana. p.5. Countries with a large number of QRs (as in Morocco) prior to the reform tendedto achie%t. thre largest tariff reductions while largely eliminating QRs.

39/ ERPs indicate th. difference between value added in the production of a good measured at domestic prices andvalue added measured at international prices. as a ratio of the latter. Intuitively, ERPs take into account thedisparit hetveen protection levels on the final product and that on its inputs. If protection is high on the finalpr1..: hUt IM% in inputs, the effective degree of protection is much higher than indicated by the tariff rate on

.,aod T'he concept of effective protection is discussed in Horton, pp. 27-28. The results cited in thelr .m the initial report of a 1992-93 study. See Rovaume du Maroc, Minisrere du Conmerce, de

/ 'Indusrrne, er de la Privatn' _ion, "Les Incitations cr la Protection...

Strngthening the Pwvate Sector in Morocco Page 29

related to intemrational comparative advantage, which means that national resources are beingdirected into less efficient manufacturing activities (like transport equipment and various metalproducts)."0 In the metal, mechanical and electrical industries, for example, the average rate ofeffective protection was 52 percent in 1991, roughly double the national average and about ashigh as nominal protection--although the range of effective protection across these industries isquite wide. In agriculture, import protection (coupled with other policies) favors low-valuecrops like cereals, sugar, and oilseeds relative to higher value, but riskier crops like fruits andvegetables.

80. Further import liberalization is important more than simply to reduce anti-exportbiases. First, it would be the cheapest, most effective first line of defense for a more activedomestic competition policy; the ready availability of competing imports at close to world priceswill help minimize the negative effects of economic concentration and collusion. Second, itwould be a primary conduit for improving the technological content of domestic production--bothbecause it exerts pressures to adopt more efficient technology and because it facilitates accessto imported capital and internediate goods that embody better technology. Third, it wouldbenefit most domestic producers by lowering the cost of many of the capital goods they need forbusiness. Fourth, it would be a critical first step toward the export diversification needed toassure a double-digit export growth; most of the industries that provide the marginal expansionin newly industrializing countries are the ones that are most heavily protected in Morocco.Finally, it would benefit all consumers by lowering the cost of living.

81. An analysis of the efficientcy of manuifacturing fimis that mnust compete againstmore imports or against other countries in export markets confirms the value of a more openimport policy in promoting efficiency, the essential ingredient for export-led griowth and lowerdomestic prices.4 ' In general, finns with a higher export share in their total revenue have higherproductivity, because exporting firms are exposed more to international standards andcompetitive pressures and are not limited by the size of their domestic niarket. Conversely,firms producing for the domestic market have lower productivity in sectors where tariffprotection is higher, and where the share of imports in the domestic market is lower.4" Overtime, in sectors where imports have grown more, firms have become more productive.

82. Export liberalization and promotion. In addition to macroeconomic stabilitycoupled with real depreciation and a progressive move toward full convertibility, other policies

40/ For example, the average effective rate of protection is only 2 percent for industries with a domestic resourcecost less than I (denoting an international comparative advantage) but it is 35 percent for those with a domesticresource cost greater than 1. See RoYaume du Maroc, Ministere de Commerce, de I 'Industrie, et de laPrivatisation, "'I,u Incitations et 1a Protection... ". p. 20.

41/ The anal% i uses the concept of total factor productivity, which measures differences in the value-addedproduceo i- tr' in. in the same sector. taking account of varying uses of capital and labor. See for example,Solo, I i ad

42/ This patw-rr holds for textiles, clothes and shoes, where export growth has been the strongest.

PWge 30 Strengthening the Pnfvate Sector in Morocco

have helped spur export growth. Exports are not taxed, except a I percent levy mainly tofinance a government agency to control quality, labeling and packaging and trade promotion.Since 1983, export licenses have been abolished on all products except the 3 subsidizedagricultural commodities (wheat flour, sugar, vegetable oil), and administrative procedures.financing armngements, and insurance have been streamlined. The strengthening of thetemporary admission system (which was created in 1973). to allow direct and indirect exportersto import most of their inputs duty-free without prior authorization (agricultural goods used asmanufacturing inputs still require prior authorization), has substantially redticed the anti-exportbias of previous trade policies.4 3 Imports under temporary admission have increased steadilyfrom US$0.3 million or 9 percent of total imports in 1983 to nearly USS1.9 million or 25percent of merchandise imports in 1991; and about 60 percent of merchandise exports wereproduced with duty-free imports in 1991."

83. The effectiveness of these policies is evidenced ill part by the split withinmanufacturing sub-sectors between fairly recent export-oriented firms and older firms producingmostly for the domestic market, which may reflect divergent incentives for entry into the twomarkets. Exporting firms have clearly benefited from low-interest rate financing from theCentral Bank for export credit, complete exoneration from indirect taxes (facilitated throughduty-free imports of inputs) and attractive investment code benefits.4 5 In addition. theseexporting firms have benefited from subcontracting arrangements with foreign importers, whichmay lease equipment and supply materials on consignment. In contrast, firms producing for thedomestic market face more limited demand, which is likely to be further reduced by future'..port liberalization; and there are more limited investment code incentives than for exporting'.rms and few if any subcontracting arrangements with foreign partners to reduce investment andoperating costs.

84. While manufacturing in general has benefited from specific export promotionmechanisms, arrangements to aid agroprocessing exports have been more limited. Foreignexchange controls limnit the use of international hedging against market risk fromi volatileagricultural prices. Licenses are still required for exports of subsidized agriculturalcommodities. and the temiporary admission scheme for agricultural inputs used in producing

43/ For direct importers of inputs. the exemption from import duties apparently functions well, but the IFC reportsdelays for importers that import and sell intermediate goods to exporters producing under the temporaryadmissions regime The delay is apparently caused primarily by the slowness of Customs in transferring orreleasing liens coveting bank guarantees for customs liabilities of the importer. following the sale of the inputto an export manufacturer or the re-export of the intermnediate good.

44/ These percentage5 are based on adjusted figures foi nmerchandise imports and exports to include the valu" ofimported inputs that are not actually purchased (and therefore not recorded in imports) and to include the valueof the procecong of such imports prior to re-export, which is classified as service receipts.

45/ E:ipa ml mi eC for industrial investment are usually not available to firms in and around Casablanca. exceptto tt Ih' rO 'hat production is exported. In 1991, 56 percent of the projects approved under the industrialin'estilltrkt Lode were designed to export all or part of their production. Similarly, in 1989, roughly half ofI!,' -,r lp re eipts foregone by the government as a result of exonerations were attributed to export activities.

St"ngtheing the PWtte Sector in Morocco Page 31

processed agricultural exports is not automatic--as it is for other industries. Finally, thecontrolled, producer prices, which are high by international standards, of key agricultural goodsand their derivatives (notably sugar, vegetable oil, and wheat flour) reduce the competitivenessof exporters using these ingredients.4 6

85. Although tourism is a major export industry (yielding roughly 20 percent offoreign exchange receipts), it is not treated as beneficially as other export industries in terms ofdomestic taxation (hotels, restaurants and travel are subject to the VAT rate for services,14 percent), and hotel profits are taxed as provided for by the tourism investment code.However, because domestic and export consumption cannot be so easily distinguished as in theexport of goods, it may be appropriate to consider compensating incentives or to accept thatsome benefits will accrue to domestic consumers.47

D. Domestic Price and Market Regulations

86. Since the early 1980s, in line with the progressive shift from QRs to ad valoremimport protection, the government has progressively relaxed the price and marketing controlsand reduced the number of state-owned monopolies that had characterized earlier economicmanagement. Nonetheless, the deregulation of prices has been partial, as a large number ofliberalized items remain subject to review and provincial and local governments continue toregulate prices that the central government has liberalized. Several state monopolies remain,especially in transporl and utilities, and pricing and marketing in key agricultural productsremains regulated in a variety of ways. There is not yet any law aimed at promoting andprotecting domestic competition. Thus, on price and market deregulation, much remains to bedone to complete the liberalization begun in the early 1980s.

87. Domestic pricing- regulations. Under the 1971 law, all prices can be controlledby the govemment, at any stage of marketing and in various forms. In addition, prices can becontrolled by the central government (List A), provincial governments (List B), andmunicipalities (List C), the allocation depending in general on the economic and socialimportance of the product: some prices are controlled by more than one level of government.At the local level, the focus is usually on retail prices, while at the provincial level the focus isusually wholesale priccs. Principal responsibility is vested in the Ministry of Economic andSocial Affairs at the central level and in the Ministries of Interior and of Commerce and Industryfor enforcement at the provincial and local levels. Prices are usually set by commissionsconsisting mostly of government officials but including some private sector representativesselected by the government officials. Government agencies can stipulate legal sale prices orsimply set profit or commercial margins (either nominally or as a percentage of costs), which

46/ See W'vls! snn Report No. 11727-MOR, Vol. 1

47/ ll-v. rjght he feasible to exonerate hotel income tax and VAT liabilities pro rata on the basis ofint,-fi lw- %ocitors.

Page 32 Strengthening the Prvate Sector in Morocco

allows sellers to pass on increased input costs automatically unless specifically contravened bythe government. Prices in 172 product categories were controlled in 1992; nearly a third ofthese categories represented industrial products, which were controlled by national authorities--roughly half by setting ex-factory prices and half at all stages of production and marketing.48

88. During 1982-85, the government progressively relaxed the price and marketingcontrols that had characterized earlier economic management. Although only two small productcategories have been totally deregulated, about half of the regulated products in the consumerand wholesale price indexes have been liberalized. By 1986, less than 15 percent of the articlesin the CPI and wholesale price index reflccted rigidly controlled prices, the goods that remaintightly controlled represented about a third of the value of both indices.4" Currently, goodssubject to price control reportedly comprise 24 percent of those in the CPI.50

89. Because the principle of control remains, however, much of the liberalizationconsists of allowing automatic price adjustments without prior authorization, but subject toadvance notification and the possibility of ex post review. Thus liberalization is in almost allcases accompanied by "moderation agreements" (increases limited to an annual ceiling agreedbetween industry and government), automatic adjustment for increased costs of some, or all,inputs, and the use of multipliers applied to the cost of imported goods. Finally, although thecentral government has deregulated prices, many of these remain regulated at the provinciallevel. In addition, the govermnent continues to limit competition and control prices in someservices on which industries rely, notably transport and insurance.

90. Market regulation. In the past. markets were tightly regulated in Morocco. bothto facilitate price controls and to protect selected state-owned enterprises. Since the mid-1980s,however, in linte with price liberalization and the move toward a market-oriented economy, somemarkets have been progressively deregulated. The export monopoly on fruits and vegetables(OCE) was liftedi in 1986, and the private sector row accounts for 80 percen. of exports. The

48/ Prices remain directly controlled, either fully or partially. by the central government primarily for somefoodstuftf (s"'on %heats. flours and breads. edible oil, sugar. and some tea), tobacco, utilities (electricity andwater), nearl all pharmaceutical. medical and veterinary services and products. all types of petroleum fuels,newspapers and -h¶,elhooks, improved agricultural seeds, virtually all transport (except taxis). all but luxuryhotels, and %arri'm ervices (notaries. real estate commission, moving fees, guides, garbage collection), all portcosts, vehicle Insurance, and computer services. In addition, other prices are regulated by holding marginsconstant: gl> d' *egulated in this fashion mclude mainly consumer goods (yeast, baby formula, mineral waterand soda drini s. b'ap. batteries, matches, gas heaters. bicycles and mobylettes) and some inputs (agriculturalequipment. and spare parts of all sorts). Provincial governments have authority to set the prices of all fruitsvegetabl. ir. 4.. dried, canned). meat. many construction matenals (bricks, blocks, stones, plaster, sand), andtaxis, and !h-c , rntrol commercial margins on virtually all types of textiles, candles, matches. and possiblyother good, lUm there is wide vanation among provinces as to the extent of price control (usually more pricesare oritoll, r d in the interior provinces), reflecting the discretionary power of provincial regulation.

49/ ;od,l and Zouaout, pp. 10 12.

50/ i tror the Direction (e 1,a Statisrique.

Shvngthexing the Prvato Sedor inu Morocco Page 33

monopoly on urban transport was lifted in 1985-86, aiid several private bus companies have beencreated since then. In tourism, the government is in the process of devolving some regulatoryresponsibility (for example, classification, minimum hotel rates, and granting licenses) to theHotel Industry Association and the Travel Agent Associations, but air travel continues to beeffectively regulated by the national airline, RAM. The administration continues to assumeprimary responsibility for promoting tourism abroad, financed in part by special levies.Although ONT continues to regulate heavy truck transport, its intermediation is no longermandatory in major industrial areas like Casablanca and Rabat.

91. Market regulation has been especially apparent in the import, domestic pricing,production, and marketing of basic agricultural products (cereals, oilseeds, sugar, meat, andmilk) and their derivatives, although regulation varies across products. As a general rule,imports of certain types of wheat, vegetable oils, sugar and tea are tightly controlled throughimport monopolies and licensing requirements, which, however, are due for removal during1993-94.s1 The degree of price control varies among products; it remains most stringent onedible oils and sugar; but has been eliminated on milk. Municipal governments still imposeprice controls on meat.52 Commercial margins on wheat, sugar and oil continue to be controlledto enforce reference prices (which are to be replaced with tariff equivalents in 1994). Finally,production and marketing are also, as a rule, regulated. In the case of edible oils, for example,refining quotas, although tradable among refineries, restrict new entry. In the case of cereals,licensing of buying agents, traders, and industrial mills as well as access to subsidized credit forpurchase and storage (grain warrants, which have a mandated interest rate of about half currentmarket rates) restricts entry into formal marketing channels, although informal channels are quitesubstantial.53 Local governments may introduce other, ad hoc, controls on marketingarrangements.

92. There are no laws in Morocco prohibiting concentration of the direct or indirectownership of economic assets by the private sector. The use of holding companies facilitatesconcentration of assets while helping mask such concentration. The only control on unfairbusiness practices is aimed at misleading advertising; there are no regulations to control unfairactivities to prevent the establishment of competing businesses, to control collusive or predatorypricing, or to stop unfair trading practices. There is no firm evidence that the lack ofcompetition law has allowed high levels of concentration in some industrial sectors, but thereare anecdotal reports that powerful businesses have engaged in activities to restrain trade andlimit entries. Many of these reports, however, describe situations arising from or abetted by

51/ In parallel with import liberalization. variable levies are to be introduced on cereals, sugar. and oilsecds, whiletariff-equivalents (of the quotas currently in place are to be introduced on meat and milk.

52/ In the case of sugar. prices and/or margins are controlled at all levels ranging from sugar beets through refiningand final packaging. In addition, consumer prices are subsidized. In the case of fresh milk, prices were legallyfreed in 19X.' mt vAerc initially subject to a transitional "moderation agreement' which expired in February199.3

53/ For fwii, tl-nnn and other examples, see World Bank Report No 11727-MOR. Vol. 1, p. 19.

Page 34 Strengthening the nivate Seaor in Morocco

various other government laws and regulations that act to limit competition, such as pricecontrols, licensing, and protection of monopolies. There is some evidence that the concentrationof production in a few major plants has declined since the mid-1980s in some subsectors, whichis to be expected from the large increase in the number of firms. Concentration declinedespecially in the stronger export-oriented industrial subsectors.

93. The government has drafted a competition law, designed to prohibit certainrestrictive trade practices such as price-fixing, market allocation, and agreements to limitcompetition; a commission would be established to hear complaints of anti-competitive conductand to recommend that government impose penalties where warranted.5' The draft law suffersfrom three shortcomings: its limited scope (it prohibits the more serious types of anti-competitive behavior but ignores other business conduct that is potentially anti-competitive likefranchising and exclusive sales); the lack of executory powers for the commission (it can onlyadvise government ministries which will decide on action); and the lack of provisions for civilsuits by consumers or producers damaged by alleged anti-competitive behavior. Moreover,enforcing a law such as this will require substantial institutional strengthening.

E. Speciric Investment Incentives

94. Morocco has eight investment codes,55 which are also fully available to foreigninvestors except for handicrafts and maritime fishing, plus a newly adopted code for privateschools. For eligible industries and exporters, the codes provide a range of exemptions orreductions of corporate income taxes, registration taxes, and import duties on most equipmentand materials used to produce exports and on equipment used to produce domestic goods.5 6 Thecodes reiterate the repatriation guarantees for foreign investors, which exchange regulationsalready assure. In practice, almost none of the tax benefits of the code (beyond exoneration ofVAT on equipme,it and the limited-use, tax-free investment reserves) are available to industrialenterprises in the zones in and near Casablanca, where most of the existing industrial firms arelocated, unless they are exporting firms or small and medium enterprises. Small and mediumenterprises and professional services set up by qualified graduates may also receive additionalbenefits like access to a low-interest line of credit. The codes also provide for land andemployment subsidies, but few are ever paid; industries may benefit from cheaper land inindustrial zones, and hotels are often given special access to land, as well as credit through

54/ The goemrnment has reportedly also drafted a law on consumer protection.

55/ Investment codes cover industry, tourism, real estate, maritime fishing and shipping, exports, handicrafts,mining. and agriculture.

56/ There are two main exceptions to these exonerations. The special import levy on capital goods must be paidw rm I): he reimbursed over 7 years pro rata with the share of production that is exported. Import duties are

r erated at all on certain equipment and materials produced domestically (including various construction, ii and materials, some food-processing equipment, most trucks and some combustion engines, electrical

7 and motors, and office furniture).

Sbwng&ening the Ptite Sector in Morocco Page 35

government guarantees on specialized bank loans and direct, interest free Treasury loans.57 Inaddition, special advantages may be negotiated for large investments or those in certain sectors.The codes do not make adequate provision for complex foreign investments involving non-equityarrangements and do not specifically grant investment incentives for technology transfers notassociated with foreign capital flows.

95. The arrangements and incentives under the codes are currently under review withthe aim of correcting some of the deficiencies and anomalies and consolidating benefits in aunified code or directly into relevant tax and external trade laws. Although fiscal incentives donot appeal to have been very effective (compared, for example, to improved publicinfrastructure) in attracting new investment and directing it to specific industries or areas, mostproposed revisions retain the tax incentives, but would apply them uniformly to all eligiblebusinesses except firms located in greater Casablanca that do not export. In general, theproposed revisions focus on the creation or extension of businesses; special incentives areproposed only for water and power conservation. To deal with some of the specific problemsof business, special incentives might be focused on key, efficiency enhancing expenditures likein-house vocational training, acquisition of more advanced manufacturing technology, andtechnical assistance from foreign companies. The proposed code eliminates advantages promisedbut seldom delivered under existing codes (employment subsidies, government land), althoughit would retain the option for special conventions for large investments (above about $12million). One advantage of incorporating tax incentives for investment directly into the variousfiscal codes would be to eliminate prior approvals for the tax benefits; and responsibility forclaiming benefits could be made subject to enterprises filing audited tax returns consistent withnew accounting laws. Such a system would require very clear, simple and transparent eligibilitycriteria. For import duties, a widely discussed approach would be simply to minimize dutieson all capital goods in line with further import liberalization, which would eliminate the needfor special exemptions, and to continue to allow temporary admission or duty rebates for allimported inputs used in producing exports.

57/ At cutit : i- rates, these Treasury loans carry a grant element of over 60 percent, and can cover 15-20 pci, R ), i a 1;,t investment costs.

Page 36 Strengthening the PriWate Seaor in Morocco

CHAPTER IV: RESOURCES FOR PRIVATE SECTOR EXPANSION--FINANCE

A. Summary and Recommendations

96. Regarding finance, there are two stylized facts: first, larger businesses complainabout the cost of credit more than access to credit, while smaller firms face the usual constraintson access- second, most larger companies appear to be highly leveraged (which is consistent withtheir view that access to credit is not a major problem) but the economy as a whole appears tobe under-indebted. There may be fiscal disincentives to invest in company shares, the stockmarket is extremely small and antiquated in its operation, and outdated company laws and (untilrecently) accounting regulations provide relatively little protection for shareholders. Foreignequity was allowed but not actively encouraged until the early 1990s, when Morocco turnedaround its defensive posture and dramatically removed policy barriers, which at least has allowedit to gain slightly on developing countries in attracting foreign capital.

97. For nonequity financing, the basic problems stem from administrative restrictions,not so much from market imperfection. The banking system--consisting of 18 banks--appearsreasonably well-developed, substantially private, and partially foreign. Some 25-30 percent ofits lending is tied up in the Treasury, about half of which is legally required. Legal and otherconstraints cause most banks to require collateral and guarantees from outside the companies,and the lack of alternative security arrangements helps explain the access difficulties of smallcompanies. Private companies are restricted from accessing virtually all other nonequity-termfinancing outside of domestic banks.

98. Interest rates are liberalized, except for a ceiling on lending rates now indexedon the cost of bank funds. While high, rates have not risen significantly in real terms since theliberalization, and they appear to accord well with rates in comparable European markets.account taken of foreign exchange and country risks. Treasury borrowing, both from banks andoutside of banks. adds pressure to interest rates, both by its level and by its form (forcedplacements and tax-free public bonds, for example).

99. The undercapitalization of larger private businesses can only be addressed througha broad array of measures to shift relative after-tax returns on passive income in favor of equity,to facilitate access of companies to potential investors (institutional arrangements for share issuesboth via the stock market and over-the-counter arrangements), and to dramatically increase thesecurity of shareholding through a wide variety of disclosure and reporting requirements coupledwith stronger auditing standards. The efficacy of these measures rest on strengtheninginstitutions and they can be implemented only over time. In any case, however, it would beunrealistic to expect the Stock Exchange or similar share trading to meet the capital needs ofmost companies- -especially the small ones, which will remain privately held and not publiclytraded

Strngthening the Private Sector in Morocco Page 37

100. In line with the philosophy of the economic reform program in Morocco to reducedirect government intervention in economic and financial matters, the modernization of the stockmarket should seek to establish a framework and procedures for trading securities in an open.competitive and independent stock market. Thus, the government must strictly limit the powerof the central administration to intervene (either ex post or ex ante) in the management andoperations of the national securities commission, the stock exchange, and the brokerage industry(which is not automatically guaranteed by the new capital markets law). Management andoperation of the stock market must be unambiguously delegated to designated institutionsrepresenting the private sector. Similarly, the institutions managing the stock exchange shouldlimit their role to establishing and enforcing the trading environment and rules, leavingtransactions (including pricing) to listed companies, their underwriters and brokers.

101. Measures to expand bank lending must be reconciled with the view that privatecompanies are in general over-indebted (or over-leveraged), despite the problems that bankborrowing reportedly create for businesses, including high real interest rates, highcollateralization, and the shortage of term loans (which forces companies to rely too heavily onshort-term financing). Proposals to support bank lending with external credit lines must also beassessed in the context of interest rate ceilings, continuing restrictions on access by the privatesector to other credit (from domestic investors through bonds and from foreign lenders), andcontinued high borrowing demanids of the Treasury, especially at preferential rates that tax otherborrowers. Nonetheless. somie legal changes to make more operational the concept of floatingcharges on inventory and accounts receivable would expand access, especially by smallerbusinesses, to loans for operating capital from banks and to suppliers credits from otherbusinesses, and would allow the market to complement the special, preferential credit lines forsmall businesses and exporters that the Central Bank rediscounts.

102. To increase the suipply of long-term funds to private companies, the governmentshould encourage the development of the corporate bond market. In addition to appropriateregulatory and disclosure provisions, similar to those proposed for equities. fiscal incentivescould be used initially to help develop the market. For example, the tax rate on interest coulddecline with longer mnaturities, and earnings could be actualized--as in real estate--to avoid taxingthe inflationary component of bond revenue. Ir addition, tax deductions or credits could beallowed when interest earned on private bonds is reinvested in new issues, similar to the existingprovision for dividends reinvested in stocks. Finally, a more active financial market based ona more open and compettive auction of Treasury bonds may facilitate bond issues by privatecompanies.

Page 38 Strengthenting the Pnivate Sector in Morocco

B. Access to Eauitv

1. Domestic Equity

103. There is a wide perception, supported by evidence from banks, that the majorityof private firms are undercapitalized, with the problem being particularly acute for smallerfirms.58 In addition, there is the perception that hotels have been insufficiently maintained,which has degraded their assets, and will require recapitalization to restore their attractiveness.This suggests that most larger, established enterprises borrow too much, given their equity,which contrasts with the perception of smaller, especially newly established companies, thataccess to bank financing is a major constraint. What appears to be excessive borrowingespecially by larger bus'nesses reflects in part both the fact that loans may cost relatively lessthan equity, and that there are fiscal disincentives to equity investment.59

104. Although bank records indicate that most borrowers are generally over-indebtedcompared to international guidelines (debt-equity ratios of 5 or more), the macroeconomic datasuggest that the Moroccan economy on the whole is far from over-indebted and undercapitalized(total credit to the economy was 46 percent of nongovernment GDP in 1991), consistent withthe relatively low rate of monetization in Morocco (the ratio of broad money (M2) to GDP isabout 50 percent). Partial and not very recent information on the capital structure of corporatetax-filers, together with other indicators, suggest that the overall debt-equity ratio for theproductive sector is probably less than one.60 These dissimilar patterns (many over-indebted

581 Several commercial bankers involved in corporate finance estimate that only about 10 percent of the firms intheir portfolio have a debt-equity ratio of less than five-to-one (83 percent debt, 17 percent equity), whicb isconsidered bv most Moroccan bankers as a threshold for a sound capital structure. About 70 percent ofcompanies (including commerce and other services, as well as industry) are estimated to have a debt-equity ratioof more than ten-to-one (91 percent debt and 9 percent equity). More detailed data for 22 agroprocessingindustries from two development banks and five deposit banks show an average debt to equity ratio of 2.24(69 percent debt, 31 percent equity), well above the usual American and European prudential guideline of 1.8(65 percent debt, 35 percent equity). (Presumably, these agro-industries are abo,e average performers, as theywere presented by banks as examples of successful financial operations.) (See World Bank Report No. 11727.)Applications for benefits under the industrial investment code also shed light on the prospective financialstructure of new or expanded investments (although there are no data on how these plans are realized). For1989-90, 37 percent of the cost of the proposed investments were to be financed from capital increases andretained earnings. which would yield a debt-equity ratio of 1.7, within the prudential norm. In 1991, followingthe liberalization of credit and interest rates, the share of equity in proposed investments actually rose, to48 percent.

59/ Company' accounts may overstate the debt-equity ratio to the extent that bankers require outside collateral toreduce the nsk of lending to undercapitalized companies, If such collateral were included, the effective rateof capitalization would be higher than shown in balance sheets. entrepreneurs lacking equity either in, or outof. their companies are thus the ones facing a binding borrowtng constraint,

60/ Iw he' hanl debt of nonagricultural productive enterprises (excluding real estate and financial institutions) in 1991h')1 D)H 50-65 billion, depending on the use of small loans that are not reported in detail but comprise

near. N ; percent of the banks' portfolios. Equity is more difficult to estimate. At an assumed (and perhapsoptnmimtR;) '0 percent before-tax return, the reported dividend payments of companies filng corporate tax

Strengthening the PrWate Sector in Morocco Page 39

corporate borrowers and an under-indebted economy at large) point up the need to broadenaccess to credit by firms that banks do not now lend to (in part for sound prudential reasons butpossibly also because of regulatory restrictions). Developing effective credit instruments againstfloating charges would open access to firms without mortgage collateral and trusted personalguarantees, and raising interest ceilings on loans would allow banks to cover the higher fixedcost and risk of lending to smaller, or newer, companies.6 '

105. Sources of equity. Most equity in business is mobilized through personalarrangements. The Stock Exchange is essentially insignificant for industrial financing inMorocco, as most companies remain closely held, family businesses. Only 68 out of some23,000 formal sector businesses were quoted on the Casablanca Stock Exchange in 1991, andonly about a third of these are industries (25 companies, some of which are fully or partiallystate-owned enterprises, out of some 5-6,000 industrial companies regularly surveyed by theMinistry of Commerce and Industry).62 No new companies have been listed since 1984. Evenlisted companies limit their exposure; on average, only 6 percent of their capital is held inpublicly traded shares. Overall, the market capitalization is only about 5 percent of GDP, whichcompares to 25 percent in France and in other developing countries with emerging markets andto over 90 percent in the United Kingdom.63

106. Activity on the Exchange is similarly limited. Share transactions on the floor ofthe exchange are less than 50,000 shares and comprised 2 percent of the total value of stockexchange transactions in 1990-91. Registered off-floor share transactions (a form of over-the-counter trade) of companies listed on the Stock Exchange are larger--comprising roughly 20

returns in 1986 (DH 4 billion), coupled with capital increases reported to the Central Bank since then. suggesttotal equity of DH 3540 billion for all enterprises that file corporate income taxes. This figure undoubtedlyunderstates actual equity.

Anecdotal evidence suggests that a substantial amount of equity is held outside of these companies as householdassets (which is confirmed in part by the practice of banks to require the pledge of household collateral as wellas personal guarantees against business loans). For manufacturing firms, reported new investment yields a lowincremental capital output ratio (1.7 in 1987-89), implying a large under-reporting of new investment. Finally,the equity of small unincorporated family enterprises is not included in the estimate because it is not reportedon individual tax, returns. Thus, total productive equity in the economy may well exceed the amount of debtoutstanding.

See Roy aume dlu Maroc, Banque Al-Maghrib, Rapport Annuel, 1992 and Ministire du Plan, "ImagesEconomiques dle Enrreprises, 1986," and World Bank Report No. 11557-MOR, Annex 3.

61/ While it is legally possible to mortgage movable assets without transferring ownership (nannissement desmarchandise.N an.m tepossession), the practice could be considerably expanded by measures to simplify,facilitate, and speed possession in case of default. In addition, export shipments can also serve as the basis forloans.

62/ The lotied !-ipanies include 25 financial companies. some of which are investment companies that may haveindustt ?U ld>ngs

63/ See l t miereine Stock Markets..., p. 53.

P 40 Strengthening the Pn'wte Sector in Morocco

times more shares and 15 times more money in 1990-91. Trade in equities amounted in 1991to only 4 percent of total exchange capitalization (compared to over 90 percent for all emergingmarkets). Most on-floor trading is in government and state-owned enterprise bonds (47 issuesin total, accounting for 60 percent of the activity in 1991), not company shares. However,activity on the Stock Exchange was four and a half times higher in 1992 compared to 1991,mainly reflecting the sale of government shares in state-owned enterprises.

107. The lack of equity activity on the Stock Exchange is not necessarily an indicationthat investible funds are lacking in Morocco. In 1991, 3,300 companies were created orexpanded, with a total increase in equity ot DH 6.6 billion (compared to total share tradingregistered on the Stock Exchange of less than DH 0.5 billion). There are two recent examplesof strong investor interest in equity--the expansion of capital of a major commercial bank tobring it into line with new prudential norms, which was oversubscribed by 350 percent, and thesale of the first state-owned enterprise at 25 percent above the initial share evaluation.

108. The more probable reasons for the inactivity of the Stock Exchange include listingrules that may discourage some companies (e.g., high minimum share values), weak lawsrequiring infornation disclosure and protecting minority shareholders (exacerbated by companyaccounts that are widely perceived as unreliable), a cumbersome purchase and clearingmechanism among brokers, and a stock exchange fee structure which discourages registered on-floor transactions. Not surprisingly, there are only 14 Stock Exchange members (12 are banks),who report unprofitable operations because activity is too limited to cover fixed charges, evenwith current high commissions. In addition, the tax regime may reduce net retums to corporateinvestment more than in other investments, like land and Treasury bonds--especially forindividual shareholders.

109. The evidence on the attractiveness of equity investi.ient is mixed. The net returnon equity (after corporate taxes) in the companies listed on the stock market in 1989-91 averagedabout 17 percent, equivalent to pretax corporate profits of around 30 percent.'4 On the otherhand, there is also evidence that many enterprises are much less profitable. During 1985-87,the exit rate of firms from manufacturing was reported at about 5 percent a year (over 200 firnsa year on average). Tax statistics for 1990 show that only 42 percent of all companies filingcorporate returns declared taxable profits.65 Furthermore, 42 percent of the profitable firmsdeclared taxes inferior to the new mandatory minimum tax, introduced to help reduce corporate

64/ Figures from Central Bank reports; other data give similar results. For 22 more successful agroprocessingindustries in 1991. the average return on equity was 17 percent, with a range from 9 percent in four companiesin the largely government controlled sugar subsector to 27 percent in 3 companies handling fresh fruits andvegetables (see World Bank Report No. 11727). Deposit banks also _pparently use a threshold for financialrates of return of about 18 percent in assessing the riskiness of investment loans.

65/ For 14.18 7 companies. If inactive companies are excluded, the share of companies declaring profit rises toabout 5 r)erpcent of the total. To put these low figures in perspective, in Canada, for example, during 1977-82,oi1lX * f'. ent of companies paid taxes in at least five of the six years; see Canada, Department of Finance,Tlhe (.rp.irate Income Tax System: A Direction for Change, Ottawa. May 1985, p.18 .

S&engthening the Prvate Sector in Morocco Page 41

income tax evasion. 6 Part of this low incidence of tax payment, however, may reflectexonerations under the various investment codes and underreporting of income, rather than lowretums on investment per se.

110. Fiscal disincentives are also believed to make it difficult for companies to attractnew equity, because of the high rate of corporate taxation, together with the taxation ofdistributed dividends. However, not only is the effective burden of the corporate income taxrelatively low, but only cash dividends are subject to taxation, whereas stock rights and capitalgains, comprising the bulk of shareholder eamings, are not. Moreover, the tax rate on cashdividends is no higher than the rate for the lowest personal income tax bracket, and the effectivetax rate is virtually zero for the first US$2,000 in dividends if they are reinvested.67

111. To help increase the flow of equity to new businesses--one of the constraintsvoiced by small and nascent firms--there are two venture capital firms, established since 1990,with total equity and loan resources of DH 40 million (about US$ 5 million, less thanone percent of new equity registered annually by the Central Bank). Both firms are likely tofocus more on services than other sectors, as is usual in emerging markets in other countries.Neither firm, however, can take more than minority share positions, which, given the relativelyweak protection given minority investors under Moroccan law, may preclude them from hands-on management that has proven successful for venture capital firms elsewhere.

2. Foreign Equity

112. The 1989-90 level of US$0.2 billion was only 20 percent above the level of theearly 1980s in real terms, although the fourfold increase in FDI flows to Morocco during 1986-91 roughly matches the increase of FDI to all developing countries over the same period. Therewas a large increase in 1991--to nearly US$0.4 billion (1.4 percent of GDP), and a further riseto US$0.5 billion in 1992 (nearly 2 percent of GDP)--which compares to 0.7 percent of GDPin 1981-85. The share of foreign capital in investments authorized under the industrialinves.ment code has risen from only 8 percent in 1982 to 23 percent in 1990-91.

113. This surge in part reflects the large increase in FDI to all developing countriesin 1991-92 (see Figure 4. 1), but it also reflects the fact that by the early 1990s, Morocco hadinstituted virtually all the fonnal policies needed to attract FDI--especially for technology-intensive activities. These policies include current account convertibility, full repatriation rightsfor profits and dividends without prior authorization, no prior approvals except for investmentcode benefits (and usual business set-up authorizations), no restrictions on the use of foreign

66/ The mandatory minimum tax is 0.5 percent of gross sales.

67/ By allowing income tax credits for individuals (but not corporations) based on dividends and reinvestment inshares. tihi,. ffective tax rate on paid-out dividends is only 5 percent on the first DH 5000 in dividends (aboutU S$6(fo . oiialent to perhaps about US$12.000 in shares) and negative if these are remvested. In addition,t1i, itn tax is only 5 percent on the next DH 11,500 in dividends (about Us$1400) if they are reinvested.St, v lT! iilunons are not taxed. See Annex 10 of World Bank Report No. 11257-MOR.

Page 42 Strengthening the PrvW e Sector in Morocco

employees, no controls (since1992) on contracts covering Figure 4.1: Trends in Net Foreign Direct

licenses, trademarks, management, Investment (FDI)

and technical assistance, doubletaxation treaties with countries 0 ullon, of US$ MiHon, of US$where most investment originates, Boomembership in MIGA in 1992and, as of late 1989, no exclusions 40 -on foreign ownership except 400

agricultural land and a few other X -0/

activities,68 as well as clear .g

property rights, including for I .intellectual property. Compared 20SOO

to countries in Asia, for example, /9the foreign investment climate in e 100Morocco is extremely liberal.69

Since the end of the 1980s, therehave also been growing efforts to iC 87 Iona i9ag loo 1 1991 1992

encourage more joint ventures

(partenaiat), notably supported V Morocco V Vorldwide

by the EU. The success ofmacroeconomic stability has madeMorocco more attractiveeconomically although it remains a relatively small, limited market in the eyes of prospectiveinvestors. (See also Chapter II.)

114. About two-thirds of FDI currently originates in European countries; and a fourthof total FDI comes from France, reflecting both historical ties as well as the use of French

68/ The 1973 Moroccanization Law had limited foreign ownership to minority shares; the implementing decrees,but not the law itself, were abrogated in 1989. Activities closei to foreigners include phosphate mining andprocessing, air and rail transport, coastal fishing, telecommunications, energy and water production anddistribution, and activities deemed unsafe or harmful to public welfare. Private ownership (both domestic andforeign) in banking. tnsurance and pharmaceuticals is subject to particular entry regulations and formalities.

69/ Korea partially liberalized foreign investment in 1991 but restrictions remain in various industrial sectors,including those reserved for small businesses, and on the share of foreign equity in certain manufacturing andnonmanufactunng activities; technology inducement contracts are subject to ex post clarification. China hasrecently passed laws establishing more restrictive criteria for investments by wholly foreign-owned enterprises;firms exporting less than half of their production must, for example, use advanced technology and equipment(that is, technology having unique value to China), develop new products or upgrade and replace existingproducts. save energy and materials, or produce import substitutes. In Thailand, foreign investments must beapproved ni'l when they request incentives (but failure to win an incentive package may prohibit the companyfrom rr.irs'q'r2 in a similar venture without the incentives); however, foreign ownership is restncted to minorityshtirt s in n; tindustries, including the financial sector, commun;cations, transport, and natural resources.(Int lmAll¶t'l from various issues of East Asian Executive Reports.)

Strcngthening the Private Sector in Morocco Page 43

subsidiaries as a conduit for investments by multinationals. The Middle East has also been astrong source of capitza inflows, currently accounting for about a fifth of the total (seeFigure 4.2). The broad geographic patterns have been fairly constant since 1987-88, except thatthe share from the Middle East has declined, having been replaced largely by Spain.

Figure 4.2: Sources and Uses ofForeign Direct Investment in Morocco

1987-1988 (USt120 Million a year)

n~~m s omVramo ex_i

Iwftaukad UX5 -+otew im w :t U

By Country By Sector

MENA Counetrlsa

Saudl Aabia rLbaUAN TwaidaKuwlt AIplaIrq BahralsTurhay Laaf*

1991-1992 (USt440 Million a year)

P,aam hi FM

Uwtza \N INZA / - -u \M.v'J

f~~~~~~1 Yamv 0WA+Otkw -uS

By Country By Sector

115. Regarding the destination of FDI, manufacturing receives about a fourth, a sharethat has reincd stable since 1987-88. Real estate and tourism together now for about15 percctt a 'hairc that is less than half its earlier level. This decline has been replaced by the

Page 44 .Strent, hetnitng the 'rivate Sector in Morocco

growth in foreign investmiient in the financial sector, which noA acu ountC s for riearly a third ofinflows, some of which is probr'-Ily channeled to industry and real estate through financialholding companies. Tthe rest is spread among *arious other activities, inticuting mining.agriculture, trade, and services.

C. Access to Credit

1. Loans

116. Banks. In Morocco, there are 15 (leposit banks, generally withi significant foreignparticipation, and there are 110 apparent restrictionis on batnk charters. In addition, there arethree government-owned specialie(d development banks. (Caic Nartionale *le Credit Agricole(CNCA) lending to farninig andci agro-industries. the BanqueX '\/iWonil pour le DeveloppetnentEconomiquie (BNDE) lendingc to othier iutistries, anrd the ( !C((dit Immoilier et HWtelier (CIH)lending for housing andl hotels; under the new banking law, these (levelopnilent banks areexpected to evolve into tminversal banks. iF ur government batiks itlid (li rlg the BANDE and theCIH, are on tthe lit of' firns to lie privatizcd. which \s ill lo% et osp erollnient ownership iof totalbank equity f'roml almnost (i) percent t( ab out 21) percent os era Il. and leoae it basically with onlyone fully owned bank Th'e're are akoso a 1cw other sepcilalicdi filnanial inititiltioris. ( leasingcompanies mostlv ownied hy delposit banks. an(l 17 finaince comnpan ies proy i(ling, for exainpl xconsuimer financinig SctOoral . redit a llocations have b een almio,st coniplctelv eliminated, exceptfor so me smiall prograims aid substantiail ianiidator hol(ldinvs oft go\ enitnent bonds '' Overallceilings on hbank (redlit w%ere replaced itn carl I () I W ithI insrtiment s of inidirect monetarymanagement.

11 7. Thic go,,crnrent has also recentlY adipted tincasilres to strengthen bankingregIliation an(d superiii(sin. The govertnimilt apllproed a nes bainkinig law near te end of 1992,with promulgationi in mid I (9P3 At t hc samne t inne tihe goc inenmtit instit uted the Cooke ratio,wliich requires baniks to maintain equtity equivalent to( at least 8 percent ot' risk-weighted assets;presently, all extcpt timc %Cry sinall bank probably comniply with this ratio, taking af'ter thedistributioni of 19(J7' profits and( recent capital increases. At thc sanme thne the government has

70/ These are thO t e M I)s[p(tip etr (le ;etrion (cD(;),. \hich handltc all publv h% lield long-term funds, theCaisxne A1f", 'I1? n', aIop, 17i i( t'&A1nin. %Ohi' h pito\ idte finan' im agisiinit publi orks lnnhlacts. andthe CiaisseC'enir(lte (if ' ra! 'n (AY;. set up to guarirnte- erternat and R dorneti' toanz to puboic and private enterprises.

711 As of mndi I '' -l S mr' re,(lqiri(i to in't'st 2s per, Ctit M thit;r Cight detposiri lt-l con%srfi1ble D)H accountsand thp lf- %, I r -V-4 saq ing, in 1iri -R5 in ivx int,-re qt I ica uur% tc ortits at rate; abolt 70 percent belowmarket lend tin f a i . to lend 5 percent of their sight depOqits in Tredi-' ountable latan, to exporters and smallbtusinesss. 1f,,- iti r nontpdiscounitahle housijng ihan, at rI)Rik mrket ilt-'. to hold 1 percent of sightde p%< $~''' . '' t '1' I in lou inm( e housing hlonrd, and to tilnt: e 9 cmat qshare of qsgtit dtposits in governmenth,.O. ntlhutal bank 1 he rnandators holt(iing of ito mit,Ti-i I Itcasuti- %xias redu ed b% '7 percentagep'' ''. i t o J I% replacing them 'Aith fI !rear h'ondq at near itarlket intt-ret rates. The obligation to make

loans t' *-o--rFrs. small businesses, and housing was lifted in early 1 994.

Strengthening the Priwate Sector in Morocco Page 45

also imposed a limit on a bank's risk exposure to a single borrower (or affiliated group ofborrowers) to 7 percent of its net equity. In mid-1993, the government issued rules forclassifying credit risks based essentially on the length of arrears and the financial situation anddocumentation of the borrower, for discontinuing interest accruals, and for provisioningnonperforming loans. Because substantial preparatory work will be required to implement thesenew rules, banks will have until end-1994 to classify their assets and until end-1995 to provisionloan losses.

118. Resources for credit to industry include bank capital and deposits, reserves ofinsurance and pension funds, and various domestic bond issues and foreign loans. Most bankcapital72 is tied up in various equity participations and fixed assets, and is not used to financeloans. Deposits comprise about 80 percent of deposit bank resources, and about two-thirds ofthese are sight deposits. Including the small share of foreign loans, nearly 30 percent of depositbank resources are term (although often relatively short duration), which compares with the 20percent of term loans (over I year) in their loan portfolio to the economy (including to state-owned enterprises). However, if account is taken of deposit banks' holdings of medium andlong-tern government bonds (including the mandatory placements), total term placements areroughly equivalent 'o term resources, other than capital. The specialized banking institutions(BNDE, CIH, and CNCA) rely solely on foreign loans and domestic bonds for their loanresources; although their resources are longer term, almost a fifth of their loans are short-term(mainly seasonal agricultural loans)."3

119. In total, term resources, other than capital, in the banking sector, amounted toabout DH 55 billion in 1991, compared to DH 37 billion in term loans to the economy and aboutDH 25 billion in tenn Treasuries (of which almost two-thirds were mandatory). In summary,there is little term intennediation by the banking system (the ratio of term loans to termresources is about 1.1). Even the intermediation that does occur appears to be based onmismatched maturities, with liabilities being shorter term than assets, especially in commercialbanks. In 1991, the economy received the equivalent of roughly two-thirds of the term resourcesmobilized by the banking system, while the government absorbed the equivalent of two-fifthsof the term resources, roughly equal to the amount of government guarantees on the bonds andloans that accounted for nearly half the term mobilizations.

120. Several factors limit the capacity of banks to intermnediate maturities and reinforcethe tendency of banks to lend short term. As the ceiling on lending rates becomes binding,medium-term rates cannot rise sufficiently to establish a positively sloped yield curve forcorporate lending, although the shape of the curve in Morocco is positively sloped for Treasurybonds. Second, the lack of a deep interbank monetary market limits the scope of banks toincrease liquidity it needed and encourages them to keep short-term assets. Third, the

72/ The permRannt capital (including reserves and provisions) of commercial banks is equivalent to about 10 percentof Itol! t'it,- ea and the same share of their term loans.

73/ Ahout &") percent of CNCA loans are short-term.

Page 46 Strengthening the Prvate Sector in Morocco

weaknesses in company accounts and delays and uncertainties in the bankruptcy proceedingsincreases the risk of lending to companies, which may be minimized with short-term loans.

121. Other medium- and long-term financial savings, representing reserves of insurancecompanies, social security funds, and special public savings funds, amounted to about DH 31billion in 1990 (with little or no increase in 1991); about 60 percent of this comes from privateinsurance companies and social security funds. Although these savings are equivalent to nearlyhalf the term resources of the banking sector, most is not directly intermediated by deposit orspecialized banks--only some 15-20 percent is placed in bonds issued by the real estate bank(CIH) and the economic development bank (BADE). Nearly half is invested in term Treasuriesand municipal bonds, and only perhaps I percent is allocated to manufacturing industries.

122. The high concentration of these medium- and long-term financial savings in publicdebt reflects both legal and practical constraints. Legally, insurance companies are required toinvest 40 percent of their technical reserves in Treasury bonds, and Civil Service pension fundsare deposited directly with the Treasury; private pension funds are also mandated to hold a shareof their funds in Treasury bonds. But in practice there appear to be few alternatives that aresecure and liquid. There are no bonds other than Treasuries except for the few issued byselected state-owned enterprises and banks, and the equity market is extremely limited. Someinstitutions have invested in short-term commercial paper and directly in real estate, neither ofwhich channel term resources to industry. Thus, institutional savers usually hold more than themandatory minimum level of Treasuries.

123. Total bank lending (including that of bank-like financial institutions) to theeconomy (equivalent to 35 percent of GDP in 1991) consists of slightly more tilan half short-term loans (56 percent in 1991). Although short-term financing dominates deposit bank lending,the share has been declining recently; and deposit banks now account for nearly a third of long-termn loans, a third of which are for real estate. With the exception of the agricultural creditbank, the bank-like financial institutions (or development banks) specialize in long-term lending(over 80 percent of their loans). Loans (of all maturities above about US$10,000) in 1991 wereallocated roughly 9 percent to agriculture, 49 percent to industry. mines and energy. 8 percentto real estate investments (including tourist facilities), and 34 percent to other services. Theleasing companies finance some 6-7 percent of total fixed private investment, the bulk of whichis used for civil works and transport equipment.

124. Large- and medium-sized domestic firms and foreign firms do not consider accessto bank loans a severe constraint; small businesses do. Two factors help explain the shortageof loans to small businesses. First, business loans are made against the collateral of fixed assets,trusted personal guarantees, or other forms of irrevocable security; larger, established businessesare more likely to be able to provide such security. While it is possible to pledge inventory andother assets. the security can normally only be perfected by taking physical possession of theinventory. which is impractical for commercial and manufacturing operations with quickturnover and iuip'qsihle for accounts receivable. Moroccan law allows two types of pledges thatdo not requirc ik nial delivery of the assets: a security interest in a going concern as an entity

Stengthening the Pr;'ate Sector in Morocco Page 47

(nantissement du fonds de commerce) and a security interest in equipment (nannssement dumatirieI), both of which must be registered to be legal.74 Neither allows for the use simply ofinventory or accounts receivable as security, although the law does permit industrial warrants(nantissement de marchandises sans depossession). Moreover, as securities of any kind can onlybe enforced through the courts--sometimes only in the context of full bankruptcy--and given thelengthy period typically required to enforce loan security through the courts--up to six years ifdebtors are adept at using delaying tactics--it is not surprising the lenders prefer fixed assets thatare unlikely to depreciate or disappear and trusted personal relationships." Second, the ceilingon interest rates, where actual lending rates are all reportedly within about a half percentagepoint of the ceiling, even to prime clients, appears to leave banks insufficient margin to coverthe increased risk and proportionately higher administrative costs inherent in lending to smallcompanies.

125. Bonds and Nonbank Borrowing. Domestic businesses have limited recourse toborrowed funds outside of banks. In early 1993. private borrowing abroad remained subject toprior control (although not forbidden)--a restriction the government intends to relax. While oondissues are not legally forbidden, there is no institutional framework for their issue. In any case,issues would be subject to authorization from the Ministry of Finance (timing and amounts) tominimize competition with public issues, and to date only selected state-owned agencies haveissued bonds, all with government guarantees. For example, in 1991 3 state-owned agenciesoffered 7 bond issues worth DH 2.2 million, compared with Treasury paper issues ofDH 19.5 billion.

126. The only public issue by private companies has been short-term commercial paper,which is underwritten by banks and not subject to govemment authorization or ceilings.Originally developed in 1986 to circumvent bank credit ceilings then in effect, the amounts havebeen falling steadily. fromr DH 7 billion in 1990 to DH 3.6 billion in 1992, in the wake of theelimination of credit ceilings in late 1990.

2. Interest Rates

127. Interest rates were partially deregulated in late 1990, with lending rates on allloans subject to a cap that was one-third above the liberalized term deposit rates of commercial

74/ The first gives prtlctential rights to business assets in the event of bankruptcy: the second allows the lender toobtain a cotw1 order authorizing sale of the equipment to recover the debt.

75/ For exampie. a oomprehensive legal refonn is being developed in Bolivia to provide the framework andprocedures f(' se iuring loans against movable goods. which involves improving the registry of such securitiesand speedi?n l) iihe process for settling claims through repossession. See World Bank Report No. 10627-BO.Alnhm xst!~ !"11101'al banks ma initially heavily discount the value of collateral used to secure such floatingLhai w, uni margins should decline over time--especially as banks become more sophisticated in theLapau i! .~ assess and lend against the intrinsic value of business rather than against fixed assets and personal

Page 48 Strengthening the Pri'"ate Sector in Morocco

banks.76 Following the deregulation, the ceiling interest rate rose by 1.7 percentage points, to16 percent as of January 1993. At the same time, effective loan rates charged by commercialbanks are reported to have risen by 2-3 percentage points, from about 12 percent to about 14-15 percent. Actual rates vary among borrowers, and the rise may be less on loans byspecialized financial institutions. Borrowers are assessed a VAT of 14 percent on interest paid,which increases the effective cost of funds (rates cited here are before the VAT); farmersborrowing from the CNCA are, however, exempted from the VAT.

128. This rise in nominal interest rates is somewhat less than the 4 percentage pointrise in inflation rates between 1987-89 and 1991-92; thus real interest rates have not risen.'7

Real lending interest rates at the end of 1992 (around 11 percent in real termns) were essentiallyat the same level as in 1987-89, although the rise in real rates between the end of 1991 and 1992resulted essentially from the decline in the rate of inflation, and only slightly from the rise innomina: rates. In real terns, these rates are higher than in the mid-1980s when credit and rateswere closely regulated, and this rise helps explain the perception of businesses that the high costof finance is a serious constraint.

129. By intetniational standards, real interest rates in Morocco are not particularly high.Real lending interest rates have been lower than in France and Spain during 5 of the 9 quartersfollowing the liberalization of rates--often by as tiuch as 3-4 percentage points, by the end of1992, the ceiling lending rate in Morocco was only about I percentage point higher in real termsthan the average effective rates in France or Spain (see Figure 4.3). Real deposit interest rateshad also risen to levels roughly coriiparable to those in France and Spain at the end of 1992(roughly 8 percent). altilotigh they were notably lower in 1990-91 owing to higher inflation inMorocco. Some correlation aiontig these rates would be expected, given the strong indirectfinancial linkages caused by the deposit of earnings by Moroccans working in Europe." foreignborrowing to finance sotne of the duty-free imports used in subcontract production for export,

76/ Since the deregulatwin. there is no legal restriction on variable interest rates. subject to the ceiling. Lendinginterest rates are .till adtnmistered (at 50-75 percent of current rates) in programs that are eligible for f-tillCentral Bank rTdm&:nnuting. including export prefinancing and medium-term loans to small entrepreneurs andenterprises. and for some nonrediscountable loans. including grain storage and contract advances. Theagricultural redit hank also lends to small farmers at rates 1-3 percentage points below usual market rates,financed in raat h. for; ed placement of CV'CA bonds.

77/ Consumer pihe' rtse at an annual rate of about 3 percent in 1987-89. In 1991-92. the annual rate was7 percent %ntr ipated inflation may be at the high end of the range, although rates are falling (less than5 per,-ent *arl% 1993).

78/ 1: .t- - .niirlates from 1970-90 data suggest that a I percentage point rise in Mloroccan deposit interestrates 4reiHiHte to those abroad) would increase the inflow of workers' remittances by 1.6 percent. See WorldTlas .: ,. N 1191-NIOR. p. 26.

Strgileniug the Private Sector in Morocco Page 49

Figure 4.3: International Trends in RealInterest Rates

Real Lending Interest Rates

la x

lox U;-_;

4X-

4Q 4Q Iq *q SQ 4q iq 8sqQ 1QE q 1IQ SQ 4q q 8q sq 4Q17 881 as1 90 91t I u I

Pre-liberaz&lltIon Pout-liberalizaUon

-_Morocco E Frane Spain

Real Deposit Interest Rates

lox -

ax-

ex t ii2 4X2

4Q 4q iq sq sq g Q iq Eq SQQ Q Iq sq 3q Eq IQ Q SQ 4Q1671sa1 so I go I ml 1 9u

Pre-Uberallsatlon Post-liberalaUtlon

M _ orocco e Tranoe O Spain

Page 50 Strengthening the PWvate Sector an Morocco

and the possibility of some foreign borrowing by some importers and exporters.79 Outside ofEurope, lending rates in Thailand in 1991 were about 10 percent in real terms, compared to 5-6 percent in Morocco.

130. This partial interest rate liberalization, coupled with the lifting of credit ceilingsat the beginning of 1991, led to sharp competition among banks to attract deposits and expandtheir loan portfolio. As deposit interest rates rose from 11 percent in 1989 to about 11.6 percentin mid-1992, term deposits rose from DH 21 billion in 1989 to DH 30 billion in 1991; at thesame time, deposit bank loans to the private sector rose from DH 36 billion to DH 54 billion,despite the rise in lending rates from about 12.5 percent in late 1990 to over 15 percent by mid-1992. Although the interest rate ceiling remained largely unchanged after credit ceilings werelifted in early 1991, bankers report that the average short-term rate charged to most companiesincreased from 1-2 percentage points below the ceiling to nearly the ceiling rate itself by early1992. Banks may be further raising the effective interest rate by increasing commissions andinstituting various collateral requirements, but there is no firm evidence of this. However, banksapparently rigorously compete for good clients, which helps keep rates to prime borrowers belowthe ceiling.

131. While the interest rate ceiling may have been a critical transitional device inmoving from administered to competitive interest rates, especially before the more stringentprudential regulations of the new banking law were approved in 1992, its impact increasinglywill be to discourage banks from assessing lending opportunities in clients that are inherentlymore risky, including small businesses and farmers, as they would have no margin to cover risksby raising interest rates. The regulatory function of the ceiling, once taken over by prudentialregulation, will increasingly become a constraint for nascent businesses.

132. However, the government continues to refine the mechanism to control interestrate ceilings, in the interest of bringing about a further reduction of lending rates. In March1994, the government revamped its controls on maximum interest rates on loans, shifting froma margin over the interest rate on term deposits determined monthly (the previous multiplicativemargin had already been changed to a fixed margin in mid-1993) to one based on a basic bankrate (taux de base bancaire) (defined as the cost of funds plus a fixed margin of 4 percentagepoints to cover risks, fees, and normal profits) determined semi-a-nually, to which an additional

79/ Internationa! comparisons are complicated by different lending practices and by the difficulty selecting rates thatare comparable. Lending rates used in these comparisons are the short-term, nonrediscountable bank rates inMorocco (or the ceiling rate after the liberalization, which will overstate actual rates by some margin), the"compte.s dehiteurs " rate of banks reported by the Banque de France, and the "lending rate" for Spain reportedin the IFS. D)eposit rates are the average 6-12 month rates in Morocco and the money market rates in Franceand Spain reported in the IFS. Analysis of real rates is also difficult because results depend on the choice ofdeflator: the concurrent CPI index is used in these comparisons. In addition, lenders are probably mostinfluenmed b anticipated inflation, which may not coincide with current inflation. Despite differences ininflati(n ls!- irn Morocco, France and Spain, there is some evidence that nominal interest rates have tendedto It,(\ ' rrar,llel. especially between Spain and Morocco for lending rates and between France and Moroccofor d,rwnocr rMt(,!

Stwengthening the Pnwa Sector in Morocco Page 51

margin of up to 3.5-4 percentage points may be added. These measures reinforce governmentcontrol over interest rates, rather than advance the liberalization of the financial market, and donot yet address the issue of apparent collusion among banks. They have nonetheless beenfollowed by lower lending rates--a reduction of some 3-4 percentage points, roughly double thedecline of rates in Europe during 1993.

133. The impact of Treasury borrowing. Net lending to the Treasury declined in 1990,and, in 1991, at DH 45 billion, was only marginally higher than in 1989. The 9 percent risein 1992 mostly represents the conversion of some mandatory reserves in the Central Bank toTreasury bonds; while this increases govcrnment debt, it did not come at the expense of otherbank lending. Bank lending to the Treasury rose more slowly than to the economy at large.Between 1989 and 1991, total domestic debt of the Treasury rose by 1 percent, and loans frombanks and specialized financial institutions remained stagnant; during the same period, bankcredit to the economy rose by 38 percent. As a share of total bank credit (excluding loansrefinanced by the Central Bank), Treasury borrowing from the banking system has declined from32 percent in 1987-89 to 25 percent by the end of 1991. Although borrowing from banksincreased in 1992, it was mainly the result of the conversion of a portion of mandatory bankreserves in tl:e Central Bank into long-term government bonds issued to banks, three-fourths ofwhich were used to retire short-term government bonds and the rest to refinance Central Bankloans to the Treasury. In any case, some 46 percent of domestic Treasury debt is held outsidethe banking system, absorbing resources that might otherwise be invested directly in productivesectors; for example, the value of bonds purchased by individuals and companies is equivalentto over half the total reported equity in manufacturing firms.

134. Perhaps more importantly for the long-terrn development of the private sector, theway in which the Treasury borrows represses the growth of a sound, competitive financialsector. Most striking is the fact that the Treasury does not pay market rates for a substantialportion of funds borrowed. In aggregate, Treasury financing is obtained at a cost notablyinferior to the present market rate.80 On average, the Treasury paid about 3 percentage pointsless than the market rate on deposits, and roughly 7 points less than the current ceiling loan rate.Obviously obtaining mandatorily such a large part of loan funds at such low rates implies acorresponding increase in interest rates on the free market."' To the extent that lending rates are

80/ At the end of 1991 the Treasury paid deposit banks only 4.2-4.25 percent on DH 14.9 billion of obligatoryplacements (pklncher des effets publics), which represented about 15 percent of the total deposit banks assetsand a fifth of Treasury debt. On the remainder of the debt, it paid institutional investors (mostly insurancecompanies and the CDG) individuals and other bond subscribers a range of rates (from 8.5 percent to thecurrent market rate). with an average of perhaps about 11.5 percent--close to the market rate for term bankdeposits. In addition, it paid no interest on some deposits from public or private institutions. For more detailson the deficit financing, see 0. Godron and World Bank Report No. 8417-MOR.

81/ The cost of tihe distortion caused by this financial repression can be roughly approximated by calculating thedec teas' i ltn 'ding rates that would be possible if the Treasury paid market rates on all its bank loans. assumingnm <(t iu, In hank intermediation margins and that domestic rates are insuiated from international rates.B3 oadl. ~pcahng, in 1993 mandatory placements of Treasury bonds at below-market rates amounted to aboutI ' i- , ti .f income-earning assets of deposit banks, at rates about 10-11 percentage points below market

Page 52 Strengthening the P'ivate Sector in Morocco

partially linked to liberalized deposit rates--which have risen as banks compete for deposits,banks can transmit the cost associated with mandatory placements at below-market rates moreeasily and fully to private borrowers. Nonetheless, the result remains a tax on the financialsystem to help finance government operations, which both weakens the financial system andincreases the cost of funds to the productive sector. Following the partial deregulation ofinterest rates, this financial burden may have been one of the factors pushing up effective banklending rates.82 It may also be one of the factors responsible for the seemingly high bankmargins in Morocco, which appear to be roughly twice as high as in France and Spain (seeFigure 4.3).83

135. In addition to mandatory bond placements, the Treasury also offers bonds throughtwo channels: medium- and short -term, fixed denomination bonds issued to individuals andcompanies (begun in 1985); and weekly auctions of short-term bonds to banks, financialinstitutions, some insurance companies, and some large state-owned enterprises (started in 1989).The DH 10-11 billion in medium-term bonds--accounting just over half of the freely subscribedTreasuries in 1991-92--currently bear an interest rate of 11-13 percent, about 1-2 percentagepoints above the bank term deposit rate. Earnings were tax-free for individuals until 1994; andthere is a narrow market for these on the Stock Exchange. The tax-free status of bonds forindividuals (but not for companies) provided an effective yield of some 16-19 percent, wellabove bank term deposits (which are somewhat more liquid), and comparable with equityeamings;4 there is concern that this type of Treasury financing drives up the cost of capital tocompanies, by pushing up bank deposit rates (and thus pushing up the lending rate ceiling) aridby increasing thc required return on equity. The short-term bond auctions (started in 19S9)curretitly yield about 12 percent on an annual basis, issues are often undersubscribed--notsurprising in that banks can place funds at higher interest rates (although at higher risk) in loansto businesses, and that the auction is perceived as functioning poorly. In 1993. the government

lending rates and 7-8 points below usual TIreasuly bank borrowing rates, If banks were not required to holdthese bonds. or if the T1reasury remunerated them at competitive rates, commercial banks could have loweredtheir other lending rates by some two percentage points. Other pressures on deposit and lending rates. however,including rates in Europe. would affect the outcome in practice.

82/ In 1988. the mandatory placement of Treasury obligations and reserve requirements (43 percent of sightdeposits) mas hame raised the cost of loanable bank funds by over I percentage point. given the tnterest ratestructure at that time (I I percent on term deposits, 9 percent lending rate, and yields on obligatory placementsranging from I - percent). See World Bank Report No. 8417-MOR. Annexes. With the partial interest rateliberalization. the cost of mandatory placements alone may have doubled. as noted above.

83/ For the 3 fourth quarters since interest liberalization (1990-92), bank spreads in Morocco were as high as 3.5percentage points (hased on the ceiling lending rate); to the extent that banks lend at rates below' the ceiling.the spread wil he lower. In contrrst. for the same periods in France and Spain, the spreads in thc financialmarket wer- on the order of 1-1.5 percentage points.

84/ 'Ther 4f1, : w ;-ld depends only mn part on the income tax bracket. A minimum of 20 percent is withheld fornrirnlt!Ws h'.nds (which can be credited against income tax liabilities but not reimbursed). and 30 percent is

! ~-arer bonds (which liberates taxpayers from further liabilities. even if the marginal income tax*tS r !her).

Strengthening the Pnwvte Sector in Morocco Page 53

lengthened the range of maturities available (from 1 week to 15 years) and allowed "blue chip"private businesses (not simply financial institutions and certain state-owned enterprises) toparticipate in the auctions, and it plans to improve the transparency of the auction system byregularly publishing the results of each bidding session.

P'age 5 Strengthening the Private Sector in Morocco

CHAPTER V: RESOURCES FOR PRIVATE SECTOR EXPANSION--LABOR

A. Summary and Recommendations

136. The labor market for unskilled and semi-skilled labor functions reasonably wellin Morocco, despite a large number of legal rigidities. There is no apparent shortage of suchworkers, and they can be recruited locally without the need for much information onqualifications. Thus larger firms do not rank labor regulations as a major constraint, but suchregulations make doing business in Morocco more difficult than it needs to be. These rigiditiescreate a conflict between being legal and being competitive for some firms, and complicateslabor management for most firms. Firms circumvent the minimum wage and ease firingrestrictions by using temporary workers and th-rough reduced hours for permnanent workers.Many workers, even in large firms, are not registered, and nonwage benefits not always paid,practices which expose these firms to selective enforcement. Finally, the lack of clarityregarding labor regulations and the widely perceived sympathy of tribunals to workers' rights--especially regarding permanent employment, discourage restructuring and divert managementattention from other matters.

137. In contrast, firms rank the shortage of skilled labor as one of the most seriousconstraints--especially for larger firms that are more intensive users of skilled labor. Thisshortage most probably reflects weaknesses in the public education and training system to supplyskilled labor, including limitations on private provision of training. But it also reflectsinstitutional weaknesses, includ.ng the incapacity of businesses to articulate their labor needs andto support the training required and the insufficiencies of job counseling and placement. Becausethe market for skilled labor is thin, matches between employers and employees are more difficultto achieve. This structural factor, as well as various wedges created by government controls andemployment guarantees, seriously limits the capacity of the market to give the feedback neededto shift training priorities and student expectations.

138. Labor market policy. Govemment action in the labor market (especially forunskilled workers) should be guided by its objective of maximizing employment, while allowingas much flexibility as possible to entrepreneurs to respond to changing competitive pressures.Consistent with a market-oriented macroeconomic strategy, wage policy should be implementedthrough indirect actions aimed at raising overall growth and increasing labor efficiency, ratherthan being focused on the price of labor. The following policy changes would bc consistent withthis approach:

o The government should clarify conditions and procedures for firing workers, withthe aim of simplifying the process, minimizing recourse to the court system, andassuring that court decisions are more transparent and standardized with well-puhlicized procedures. To facilitate labor mobility, the government may want tolr,m the creation of an unemployment insurance scheme, or an improved system

Sbosgthmning the wva*e Sector in Morocco Page 55

of indemnity payments, which would spread the transitional costs of laborflexibility.

0 The government should minimize the distortionary impact of legal minimumwages, for example by limiting further nominal increases in the minimum(especially in light of the large recent increases), by defining broad exemptionsfor businesses (new companies, those in the free zone), or by simply transforningthe legal minimum into a nonbinding indicative wage. The change wouldfacilitate business operation (and decrease the risk of administrative intervention)without materially changing the salaries paid to most workers given the minimalenforcement today and the fact that companies already pay less than the minimumthrough the use of temporary labor and trainees and through partial layoffs ofpermanent employees, as well as simply by contracting at lower wages.

139. Labor quality. Several actions could help reduce the gap between the quality oflabor that companies need, and what is produced by the training system--both by improving themanagement of public institutions and by encouraging the development of private institutions andon-the-job training:

o The government should improve the management of public training institutions,which will require not only changes in how schools are administered (budgetaryincentives coupled with decentralized management) but perhaps more importantlymeasures to assure more representation of private employers (by creating forinaladvisory bodies and by strengthening the capacity of the private sector to providecontinuous, representative, and detailed input into the design of trainingprograms).

o The government should encourage the growth of private training institutes byrevising the legal and regulatory framework for private vocational training andhigher education schools, with the aim of eliminating their taxation, wideningtheir scope for flexibility, making their licensing and certification subject to clearcriteria administered by an independent body, and establishing an equivalencywith govemment schools. Special financing arrangements that are more neutralbetween public and private schools, such as student loans, might be envisaged.

o The government should put in place measures to encourage the increased use ofcontinuotis education for workers (especially technicians and managers and thoserequiring special technical skills) already employed in companies. A variety offiscal measuires could be envisaged, including full income tax credits for in-service training expenditures up to the amount paid in payroll training taxes(which might require that the payroll tax no longer be earmarked for the Office(f Ia Formation Professionnelle et de la Promotion du Travail (OFPPT)).

Page 56 Strengthening the Pivate Sector in Morocco

o The government should foster the development of apprenticeships. beyond the tworecently adopted programs permitting trial employment periods.

o The government should legalize and encourage private employment and placementagencies; as with the Salaire Minimum Inter-professionnel Garanti (SMIG), thechange would facilitate business operation by bringing into the open whatcurrently exists clandestinely. It would also be an important step in improvingthe labor intermediation process.

B. Costs of Labor

140. Wage levels across sectors range from about the same as per capita GNP to threetimes as much, depending on the sector, employer, and whether rural or urban (see Table 5.1).

TABLE 5.1: Average Wages in Morocco, 1990-91

Wage Category DH per year Ratio of GNP(000)' per capita'

Minimum industrial wage (January 1991) 15.0 1.7lndustry, construction, trade (urban) 18.7 2.1Other services (urban) 26.1 2.9

of which governtment administration 29,6 3.3Minimum agricultural wage (January 1991) 9.7 1.1Agricultural wage (rural) 10.9 1.2

Source: Enquete Nationale sur le.s Niveaux tie Vie, 1990-91, Direction (le la Statistique.Kingdom of Morocco.

Notes: Includes nonwage costs and benefits received directly paid by employees.1991 GNP per capita was US$1030 (World Bank Atlas methodology).

141. In prnvately owned urban manufacturing firms, average real wages declined from1985 through 1989, bhut increased significantly (13 percent) in 1990, leaving the 1990 averagemanufacturing wage across firms 10 percent below its 1985 level at constant prices. (SeeFigure 5. 1.) Over this same 5 year period, employment in private manufacturing rose by some50 percent. The increased use of temporary employees may be one of the explanations for thedecline in average wages, as temporary employees appear to be more likely to be paid lowerwages (and bcnefitq. The decline in average wages may also reflect the practice of reducingwork hotrm ' ficnnrmanent employees during times of economic slowdown--a practice reportedby many vmph'w,,rs. This decline in real wages and increase in employment in manufacturingcoincided( % ol i decline in labor productivity--measured as output per worker (see Table 5.2).

Strengthening the Pl1'a.*e Sector in Morocco Page 57

These trends suggest that wage levels affect employment in the private sector and that wagesthemselves are responsive to changes in productivity.

142. Nonwage costs raise thewage bill to employers in Morocco, andin aggregate, nonwage payments compriseabout 24 percent of total labor costs."5 t 5.1: Anausl RAW Wu In MoroeeThese are driven in part by mandatedpayroll taxes and contributions to the . .......... ... . ....... rIF"national social security fund (CaisseNaionale de Securint Sociale, CNSS), l

which now add 13.3 percent on wages up ..... .

to about DH 50,000 a year. Although 8legal social security charges appear high lby international standards, total nonwage 'u

payments do not.86 Moreover, only about20 percent of urban labor force is I 'a

registered with the national social securityfund, and small companies typically pay .... _______ .,,_ ,,,___ .,_.substantially fewer nonwage benefits thanlarger ones 1" Tut

143. The government seeks toinfluence wage levels directly by setting Iminimum wages, which are legallybinding for all employers and all employees, ircluding temporary and seasonal emplioyees--except that younger workers (under 18) can be paid as little as half the mininium and allapprentices and trainees are exempt,'" Trends in the SMIG reflect its nonautomatic adjustment;while in earlier periods it lagged behind inflation, it rose by 20 percent in real terms during

85/ 1986 industrial data Small firms paid on average only two-thirds as much, about 16 percent of total laborcosts.

86/ For example. nonwage payments are slightly lower in Pakistan (15 percent), Hong Kong and Korea (20 percentof total labor remuneration), slightly higher in Chile snd India (25 percent), and noticeably higher in Portugal(30 percent). Singapore (35 percent), Spain (30 percent), Mexico (45 percent). and Greece (55 percent).

87/ Only about 1.9 percent of licensed businesses are registered with the national social security fund, which mayhelp explain the low levels of nonwage benefits. For example, in 1986, at least 20 percent of formal industrialcompanies paid tital nonwage benefits that are below the minimum for taxes and social security benefits.

88' The minit',urn wage law dates from 1936, and establishes an hourly minimum wage. The lAw has beenP10gVF6Q1%;1 ImnOoified; a uniform national minimum was instituted in 1971, and sex differentials wereehmrn%wi ir I Q7S Although the minimum is supposed to track changes in the cost of living, its revision has1e,, t~ i, s, iz * I i trr negligible increases in the 1960s and early 1970s and quite significant increases in the lateI (JRI :

Page 58 Strngthening the Pnwate Secor in Morocco

1988-91 but fell again in 1992 by 5 percent. In comparison to the labor market in privatemanufacturing, during 1986-90, the SMIG rose by 1.7 percent a vear in real tenns, whileaverage private both mranufacturing wages and worker output fell (see Table 5.2).

144. A t1.6 times GNP per TABLE 5.2: Manufacturing employment, productivity and wages, 1986-90capita, Morocco's (Annual percentage changes)

minimum wage in Private State-owned All199 was higher manufacturing manufacturing n bwwmgthan in Mexico(1.2) and Greece(1.5) but lower Real labor costs -2.2 -0.4 -1.6than in Spain (1.7) Real output per worker -4.0 -5.0 4.0and Turkey (1.9). Workers 8.6 10.7 8.9

In comparison totrends in other Source: World Bank estimates based on data from the annual industrial surveys by thecountries, the Ministry of Commerce, Industry and Privatization. CGovernment of Morocco.Moroccan real Notes. Growth rates are compound. based on end-points. Real wages defined as

total labor costs divided by permanent employee positions plus the permanentSMIG rose by a equivalent of temporary employees.quarter during the1980s while it fellin most otherdeveloping cotuntries; t(r example, in Mexico, it fell by about half. Moreover, Morocco wasone of the few countries where the minimum wage rr -e while manufacturing wages declined inreal terrns. "

145. There is little evidence that the SAfIG is gcnerally binding for unskilled workers.In 1986, for example, at least half the manufacturing firms paid average wages to unskilledworkers that were lower than the SMIG. Women, in particular. are more likely than men to bepaid less than the minimum." Larger employers were less likely to pay below the minimum;nonetheless, about 40 percent of firns with more than 100 employees paid an average unskilledwage below the legal minimum. Since 1986, despite the substantial rise in the real minimumwage, there is no evidence that government enforcement has become more severe: in 1992,fewer than 100 firms (out of some 400-500,000 licensed businesses) were cited for infractions,involving only about I (XX) workers (out of total urban employment of some 3 million). Averageannual wages canl legally be less than the minimum, however, to the extent that child labor,trainees, and apprentices are used, and to the extent that employees work less than full-time.

89/ See Freemsan. pp. 130-31. The sample excludes countries from Asia.

90/ t in f 1986, about 65 percent of manufacturing firms employing at least a third women paid averagewagtr k-c than the minimum, while only about 40 percent of firms employing less than a third women paidlesJs thsnr the minimum.

Strengthening the Pniva Sector in Morocco Page 59

146. However, the legalminimum does appear to have a Figure 5.2: DistribuUon of Averagelarge influence on wage Manufacturing Wages In Firms, 198determination in some firms; the _ __"______am

modal value for average wage paid Rs . P Gby manufacturing frms for -unskilled labor in 1986 coincideswith the legal minimum (see . ...Figure 5.2). While a generallynormal distribution of wage levels . .. . .would be expected across firmswhere the minimum is not ...universally enforced, it isimprobable that the minimumwould be the most commonlyobserved wage unless it is eitherenforced in at least some firms oris used as a primary factor inwage determirition in manyfirms."

Po"t df fr147. Skilled workers, in . " *A" m P^contrast, are more likely to be . .,paid at least the minimum wage.on average; in 1986. for example, ... 'ILi......only 3 percent of manufacturing sfirms paid skilled workers onaverage less than the minimum. 2 ...... I*....................As with unskilled workers,however, the legal minimum a.. . .coincides with the modal value ofthe average skilled wage inmanufacturing, suggesting that it M v. :.A)serves as an effective floor foraverage skilled wages. To theextent that the minimum does set

91/ In addition, firms that feel constrained to pay the SMIG even when not justified by productivity appear tocompensate by compressing the wages at the higher end of the scae.

92/ Skilled workers are defined a.s administrative and technical upper management. middle management, skilledspecialists. and office employees. Because of the breadth of the definition, includirg a small number ofrelatively highly paid employees, it is likely thba most skillod workers receive less than the average skilled wage.However, to the extent that the minimum wage constrains employers to pay skilled workers more, it may causeemploYers to compress the slary scale for skilled workers (a phenomenon reported by some employors).

Page 60 Strengthening the P,ivate Sector in Morocco

a floor for skilled wages, it may reduce demand for skilled labor (a phenomenon noted by onelabor union).

148. To facilitate employment of skilled labor, by minimizing the constraints createdby firing restrictions and minimum wages, the government adopted laws in the early 1990s toallow businesses to hire graduates for up to 18 months, with no restrictions on wages, no socialsecurity or other taxes, no income taxes on wages, and no obligation to retain the trainee.' Theoperation of these programs is too recent to evaluate what impact they are having onemployment.

C. Barriers to Labor Mo'-..

149. The labor market functions reasonably well for unskilled and semi-skilled labor,despite substantial restrictions on wages, hiring and firing. In part, this simply reflects structuralconditions--high unemployment, local recruitment, and the minimal need for information aboutqualifications and experience. In contrast, the labor market for skilled labor functions less well,both from the narrow perspective of matching employers and employees and from the moredynamic perspective of providing the interaction and feedback needed to change trainingprograms and employee expectations. The poor functioning is partly structural; the market isrelatively thin yet national in scope, and detailed information on jobs and on skills andqualifications that are essential in matching employers and employees appears to be poorlydisseminated. These structural weaknesses have been exacerbated, not alleviated, by variousgovernment policies, including educational programs focused on preparation for governmentservice, supply-driven publicly run vocational training programs, and restrictions on privateemployment and placement services.

150. Of all the labor regulations, businesses complain most about restrictions on firing.Firing of permanent workers is tightly regulated, and any worker with more than 1 year ofservice is considered permanent (except trainees). In principle, firing is allowed if sufficientnotice is given and legal indemnities are paid; in practice, employees often seek recourse tocourts (aided by free court-appointed counsel and citations against the employer provided by theLabor Inspectorate) to demand reinstatement or larger indemnities for allegedly unjustifieddismissal. Unionized workers are also likely to strike employers that fire union members.Statistics on the number of court cases are not available, but conversations with employers, laborunions, and government officials all confirm that courts usually decide in favor of employees,creating a widely held impression in the business community that courts are sympathetic toemployees. While court decisions may reflect the merits of the cases, courts may also tend torule in favor of employees in part because there is no unemployment insurance, which couldbuffer the effect of being fired. Employers consistently complain that firing workers is costly,

93/ The ftit m.A passed in 1991 allows for a I year training period for workers witb professional certificates; thesecond, cKpected to be promulgated in 1993, will allow an 18 month training period for school graduatos. A1N WC, 1a' already allows a 6 month apprenticeship witb no pay.

Strengthening the Priete Sector in Morocco Page 61

time-consuming, and subject to arbitrary regulation--resulting in excess perv itinel that are toodifficult to fire, in the need for staff that deals solely with labor issues, and in general businessuncertainty. Existing labor regulations and practices are a constraint on improving businessefficiency.

151. Co1lective dismissal to facilitate business rt tructuring is allowed, but subject toveto by provincial govemors during a 3-month waiting period, after which businesses have theright to proceed. Because approval is usually not formally granted, however, employees oftenattempt to block the restructuring through the court system, which delays and complicates therestructuring process and reinforces business rigidities.'

152. Rigidities in shedding permanent labor make it difficult for businesses to respondto cyclical changes in demand, which reduces efficiency and their ability to compete. Ingeneral, businesses have responded by increasing their use of temporary unskilled labor. During1985-90, for example, permanent employment of unskilled workers changed very little inmanufacturing firms; while temporary unskilled workers rose by 70 percent.9 5 Ernployers alsorespond by cutting back on hours worked by permanent employees, sometimes to a minimumof a few hours per day.

153. Hiring is also regulated, but businesses do not view this as an importantconstraint. Reflecting the earlier administrative control over economic activity, the govemnment'semployment service has the legal monopoly over all hiring--but has focused specifically onunskilled jobs. In practice, a few private agencies for temporary employment are tolerated, asis direct hiring by businesses. In fact, the official employment service directly handles less than5 percent of new hiring in the urban labor force, and 90 percent is not even reported to theagency. The government created another service in 1992 with a mandate to place educatedworkers, but it is not yet operational pending definition of its legal status.

D. Qualitv of the Labor Force

154. One of the major complaints of larger businesses is the shortage of appropriatelyskilled labor in Morocco. As noted above, there is also a perceived shortage of middlemanagers and supervisors with the needed skills and capabilities, to whom managemen1t couldbe delegated. The demand has probably increased with the recent opening of Morocco to

94/ Labor shedding does, however, occur; official figures indicate that in 1990-91. an average of about 13,500workers lost their jobs. about half because of business closing and half because of reduced activity. Thisrepresents about 3 percent of the workforce in the formal industrial sector, and a larger percentage of the totalworkers actuallk reported to the Labor Inspectorate.

95/ From WVorld hiank Report No. I 1918-MOR. The overall increase in temporary employment (measured in full-time equLiilcnts) in 1985-90 was nearly 17 percent a year, compared to about 7 percent for permanentemplo' et-

Poge 62 Strengthening the Pdate Sector in Morocco

increased imports and foreign investment, and the strong incentives for exports. (SeeTable S.3.)

TABLE 5.3: Perceptions of LAbor Supply and Quality

Size of Company Skill Level Perceptions of Availability

Large and medium Higher level managers Sufficient quantity but specialized trainingsometimes ("cadres supcreurs") too theoretical

Large and medium Middle management Shortage of quantity and quality, resulting(accountants, production in part from poor specialized trainingmanagers, researchers)("cadres moyens")

All Foremen, supervisors Varies; shortages more common in newer("agents de maftrise") fields (like electronics) where professional

associations are less well established

All Skilled workers Varies; larger companies provide in-house("techniciens et training; medium and small companies faceouvriers qualifi&s") shortages in newer technology fields

All Common labor No shortages("manoeuvres")

155. As a reflection of this shortage, one of the main features of labor use byMoroccan companies is the relatively low share, of management and administrative personnel--about a third of the level found in Europe, for example.' While this low level may be partlycorrelated with the small size of the typical Moroccan company--the typical formal sectormanufacturing firm has 50 or fewer employees--it is also common in some larger, modemcompanies in Morocco, like banks.9'

96/ In 1990, labor skills employed by the productive sector were (in percent):

ManaLerial/administrative WorkforceHigher level management 4 Skilled workers 43Middle management, supervisors 6 Common labor 41Office workers 6

The ratio of managerial staff is even lower in small enterprises (estimated at 2 percent) (from PME survey).

17i A common, alternative explanation for the lack of middle management is the desire of Moroccan entrepreneursto remain in control of all aspects of their companies. While this may apply to many companies, it does notaccord with the porceptions of shortages of supervisors and skilled workers expresed by managers in manycompanies of all sizes and of shortages of managers in medium and larger companies.

Strengtsnung the niwte Sector in Morocco Pge 63

156. The shortage of skilled labor cannot be attributed to lack of public sectorresources. During 1960-90, the government spent over 5 percent of GDP on education--1-2 percentage points higher than other developing countries, on average, including five fast-growing east Asian economies.98 Much of the problem stems from the composition of trainingand its quality. For example, Morocco has about 11 engineering students per 100,000population, compared to 64 in Indonesia, 67 in Malaysia, 77 in Tunisia, 152 in Turkey, 344 inMexico, and 588 in Singapore.

157. These shortagesref ect both that not enough TABLE 5.4: Indicators of skifled labor shortage, 1991

students are being trained to (In thousands, unless otherwise indcated)

supervise and assume middlemanagement tasks (especially Skill level Demand by of workers

in more complex fields) andthat training itself is not Management (cadres superieurs) 2.3 0.9

entirely what companies need. Administration (cadres moyens) 1.5 23.3

A 1991 survey of some 6.500 Trained technicians (formationprofessionnelle) 7.2 20.9

private businesses and Other graduates 10.7 55.3100,000 unemployedgraduates in 1991 shows that TOTAL 21.7 100.4

the problem is one of qualityand composition, as thesklld laborsition,as te Source: Royaume de Maroc, Conseil National de la Jeunesse ct dequantity of silled labor IS 5 I'Avenir, 'Projet: Programme d'Urgence d'Inserion desiJeucs

times larger than the demand Dipl6mis, Rabat, mars, 1991.(see Table 5.4), althoughthere is a clear shortage ofhigher management staff.The aggregate data, however, hide the mismatch between specific needs of workers and thedesires, and presumably the skills, of the unemployed graduates. Only about 12,000 graduatesexpressed a desire to work in the private sector; fully 87 percent of the unemployed prefer towork in the public sector, which hires generally less than 15,000 per year--equivalent to only17 percent of the unemployed seeking public sector jobs. There is an expressed undersupply ofskillel labor in certain sectors, including banks, insurance, hotels and tourism. Anecdotalevidence from businessmen points to the lack of managerial skills at all levels within the poolof unemployed graduates. irrespective of their level of training and desired employment.

158. Part of the gap between the training needed and that provided is caused by theweakness of identifying what companies need and translating that into training and educationprograms. As the dominant actor in training the labor supply, the public sector bearsresponsibility for this gap in labor skills. University-level education has not focused sufficientlyon effective administrative and managerial skills, and vocational training has not focused enoughon supervisory functions. Among public sector vocational training institutions, the most

98/ See Thomas and Wang.

Page 64 Strengthening the Prvate Sector in Morocco

dominant of which is the OFPPT whose financing is assured by an eannarked payroll trainingtax of 1.6 percent (in contrast to other public agencies that rely on budgetary allocations, usuallywithin sector ministries)." Training is provided free, although there are no stipends as there arefor most university students. Since 1989, the public vocational training schools have started towork more actively with enterprises to define training needs and programs to reduce the gapbetween needs and skills; for example, the gap appears to be smallest where professionalassociations have assumed more responsibility for defining the training. ' These arrangementsare aided to a degree by a recent program in which the Vocational Training and EmploymentOffice uses proceeds of the payroll training tax to finance up to 50 percent of the cost of privatetraining incurred by businesses, but the size of the program remains small (4 percent of thebudget of OFPPT in 1992) and subject to prior authorization by a tripartite committee ofOFPPT, labor unions, and businesses. Despite the apparent conflict of interest for OFPPTbetween retaining the tax for its operating budget and paying it to other vendors, it hopes toexpand the program, in part by simply selling its own services to companies.

159. Compared to public schools, the private institutions face more severe constraints.In contrast to fully subsidized public training, they mlust charge tuition, which legally requiresthem to be treated as profit-making institutions, subject to corporate income tax; municipalitiesalso have the right to levy supplemental enrollment taxes. Accreditation is uncertain, and theirdiplomas are not recognized by the public sector. Under the current law governing privateeducation (aimed principally at primary and secondary levels), they are required to followcurricula identical to that in public schools, which deprives them of the flexibility and diversityneeded to respond to vocational and higher education needs. There is no system to establishequivalencies between public and private graduates, and the process of recognition is based onoutdated indicators (like size of perrm;anent staff). Sometimes, there are practical problemspurchasing or renting sufficient classroom space, in part because of high land costs.

160. Despite these handicaps, the private sector is playing a growing role in vocationaland post-secondary education. Roughly 40,000, or nearly a third, of vocational students aretrained in private schools, mostly in commercial and business skills where investments in heavymachinery are not needed. These schools are capable of responding more rapidly than publicschools, in part because they have greater autonomy to change curricula and in part because theymust work in close relationship with potential employers to have a successful placement rate.

99/ Two major state-owned enterprises were exempt from the payroll tax until 1993--the airline and the phosphatecompan).

100/ For example, the professional association for textiles and garments operates its own school. The leatherindustry has recently arranged with public training institutes to provide training in new leatherworking skills.The electrical professional association (ASMELEC) has recently established a training program with the nationaltechnologs school (Ecole Superieure de Technologie, EST), and the national electric parastatal to technicians.'The 4-, ,ronics multinational, SGS Thompson, has also established a training program for maintenance skillswith I ST The metals. mechanical, and electrical industrial association has established an apprenticeshipprogram with the government's vocational training office. Finally, the professional bankers association has

.i t aa n ns own training center, with support purchased from two training institutes specialized in banking.

Sengdsening the PlWate Sector in Morocco Page 65

In addition, since the mid-1980s, 37 private post-secondary schools have been licensed by theMinistry of Education--mostly in management and finance, with 1993 enrollments having grownby 70 percent in only two years, now equivalent to about 3 percent of the national total; theirrapid growth, despite tuition costs of (US$2-3,000 a year) is a reflection of their excellentphlement record.

Page 66 Strengthening the PnWate Sector in Morocco

CHAPTER VI: RESOURCES FOR PRIVATE SECTOR EXPANSION--LAND

A. Summary and Recommendations

161. Entrepreneurs consistently ranked shortages of industrial land and commercialspace as one of their important constraints; small businesses and prospective entrepreneurs(including private schools) find it one of the most constraining. As summarized by one of theleaders of the major business groups (CGEAW), industrial and commercial land is "insufficient,poorly equipped, and too expensive." While the constraint is obvious to those investing inMorocco, how to alleviate it is not. Insufficiency and cost are relative. Properly zoned,partially developed, and inexpensive industrial land lies unused in many zones because the placeof choice for the largest investors--except those in tourism and agriculture--is as close as possibleto the center of Casablanca and a few other urban centers. What is insufficient and costly island in the heart of the well-established business centers. The private sector has accorded suchland tremendous site value, and the prices reflect such site value, not market failures.Government efforts to create separate industrial zones as alternatives to existing commercialareas have been diluted by multiple objectives, and by insufficient and badly maintainedinfrastructure both in the zones and more generally; although land in these industrial zones issold cheap, i' may be costly to businesses because of inefficiencies or extra investments requiredto make the site operational.

162. Five broad recommendations could help alleviate land and space constraints facedby business:

o Better infrastructure generally would provide wider alternatives for investors,reducing the constraint caused by high site value in existing commercial andindustrial centers.

o The development of new industrial and commercial zones (zones d'activiteeconomique) needs to be driven more by the needs of businesses--locating themcloser to, not farther from, the major industrial and commercial axes, equippingthem with proper public infrastructure, and assuring that such infrastructure isadequately maintained. Facilitating private development of such zones (by sellingpublicly developed land in a more transparent process--for example, throughtenders or auctions--at market prices) and allowing more private provision ofvarious infrastructure services (through the privatization of basic utilities) wouldbe steps toward increasing the range of suitable sites and improving the qualityand responsiveness of municipal utilities. This issue is discussed in Chapter VII.

Niore transparent real estate markets could make land transactions easier andmore efficient. Two specific actions would help make the market moretransparent: open, freely available access to data on all declared sales prices; and

Strengthening thc Prie Sector in Morocco Page 67

an open zoning process with public hearings and discussions of all proposals.These steps would help minimize purely speculative pressures.

o More neutral fiscal policy toward real estate (by bringing property-related taxesmore in line with those for other investments), which could help channel demandfor assets away from land per se toward other sectors, including industry.

o Finally, the government could take more active steps in making land available tobusiness investors, both by relaxing zoning and building criteria and by sellinggovernment-owned lands where possible. The latter may be especially importantfor tourism development, where large tracts of land are needed. But it willrequire improved administrative coordination, as multiple government agenciesare often involved as landowners.

B. Proertyv Rights' 0 l

163. There are three broad classifications of land ownership: (1) privately owned land(whether registered or not); (2) government owned lands, including inalienable land madeavailable for religious purposes and land nationalized at independence; and (3) customary,collectively owned tribal land, delimited during the Protectorate, which is owned by groups butis inalienable, supervised by the Ministry of Interior, and governed by both customary law andspecial legislation. Broadly speaking, over 90 percent of usable land is owned by privateindividuals and groups. The government is in the process of selling nationalized land (mostnationalized agricultural land has been sold) and is considering the granting of individual,alienable titles to collectively owned tribal lands.

164. The Moroccan government has a national system to register real property, aprocess which essentially guarantees title. Registries are located throughout the country, andthe registration provides a mechanism for clearly identifying and transferring rights in realproperty. Countrywide, land registration has proceeded slowly. Applications are limited (some16,000 on average in 1990-91) in part because procedures are cumbersome and costly, theregistry is not computerized, and some land use--especially on urban fringes--violates zoningrequirements. Moreover, in 1990-91, titles were granted for less than half the applications.Despite the bottlenecks, the government reports that about 80 percent of land is registered inmajor urban areas and 50 percent in agriculture--encouraged by the obligatory and freeregistration of irrigated lands."0 The remaining large percentage of land that is not registered,especially in poorer agricultural areas, restricts access to credits and is one of the factors in theundeveloped land rental market in agriculture.

101/ See also Chapter Vill.

102/ Tribal (or coliective) agncultural land (12 percent of total) is held comtnmunally and not registered, even thoughindividual ownership was legalized in 1969.

Page 68 Strengthening the Prvate Sector in Morocco

C. Real Estate Markets

165. The real estate market appears reasonably well developed. There are almost norestrictions on ownership, and land availability and offer prices are published and available fromreal estate agents. Transactions, including a declared sales price, must be recorded for taxpurposes. Thus, the market is relatively open, with some important exceptions. Declared saleprices are not believed to represent actual sale prices in many cases, even though this constitutesa form of tax fraud. Second, even informnation on the declared sales prices is difficult to obtainbecause the registry treats it as confid-;ntial and shares it selectively. Third, until an urbanzoning plan is promulgated (which has occurred only for Casablanca), it is difficult to obtaininformation on prospective zoning and urbanization plans, which are not openly discussed priorto finalization.

D. Cost of Land

166. Land prices in major Moroccan cities have increased faster than inflation over thelast few years, with increases highest in areas zoned for multi-story buildings, and lowest forhigh-income houses (see Table 6. 1). But there is a wide range of prices within each propertycategory, depending on the exact location and specific attributes. In 1991, land zoned forcommercial buildings in Casablanca and Rabat was valued at DH 4,500 -11,000 per m2 (roughly$500-1300 per in'), representing an increase of roughly 300 percent in constant prices since1986.'°3 However, evidence for 1992-93 points to a softening of the land market and real pricedeclines at an annual rate of 15-25 percent."'4

TABLE 6.1: Prices of Land Zoned for Multi-Story Buildings in Rabat and Casablanca(000 DHIm'. unless otherwise indkcated)

1986 1987 1988 1989 1990 1991

Low End 2.0 2.5 3.5 4.0 4.3 4.5High EDd 3.0 4.0 6.0 7.3 8.5 11.0Mid-Point 1.5 3.3 4.8 5.7 6.4 7.8CPI Index 100 103 105 108 116 125

Source: Credit Immobilier et H&telier, Annual Reports.

103/ Othet dwu' suggest a much smaller increase; see Royaume du Maroc, Fiscalite lnmobilie,re p.64.

104/ LiVi t tfno. ,ue 3 septembre 1993, p. 21.

Strngthening the Prvate Sector in Morocco Page 69

167. Land in industrial zones costs less; for example, in an older industrial area ofCasablanca, parcels currently sell for DH 1,500 per ml and private land outside of zonles maygo for about as much, but this is still an increase by a factor of 8-10 over the past decade; therapid increase is partly explained by the absence of additional industrial land in the area and bythe recent zoning rules which now allow more profitable multi-story buildings. In general, aprice about half this amount (DH 650 per m2, or $75 per m2 ) might be a reasonable estimate forthe price of new industrial land in Casablanca.'05 As would be expected, businesses compensatefor the increasing cost of land by acquiring smaller plots, together with fuller utilization of thearea available.

168. These market transaction prices are some 3-5 times as high as the initial,administratively set, sale price of land in publicly developed industrial zones. For example, themedian, or typical, initial sale price for land in industrial zones nationwide is only about DH 70per m2 , and the average is about DH 100. In Casablanca, public sector developers sold parcelsfor DH 150 per m2 in 1987 and DH 300 in 1993. "

169. Many reasons account for the strong pressures on the land market that the risingprices reflect. As early as the 1970s, the inflow of funds from Middle Eastern investors seekingsafe havens is alleged to have started the price increases."w Moroccan demand for housing alsorose, fueled both by the large increase in workers' remittances (which rose about 70 percent inreal terms during 1981-91) and by the high rate of urbanization (over 2 percent a year duringthe 1980s). In the latter part of the 1980s, the economic recovery increased denmand forcommercial property and helped fuel the demand for housing. Policy also helped. In 1973, anew tourism investment code introduced a 10-12 year inteiest-free government loan for 15-20 percent of certain hotel arid related tourist investments, and provided free governmentguarantees for most of the remaining credit required. The 1981 real estate investment codeaimed to encourage private construction of housing, and during the 1980s other incentives wereintroduced for low-income housing. The fiscal laws adopted in the late 1980s tax gains from

105/ Annual rental prices for warehouses are about DH 40 per m2, roughly 5 percent of the sale prices. Informationprovided by Sefrioui. "AperVu sur l 'espace..." and from the infrastructure survey. International comparisonsof land prices are difficult because investments and intangible factors vary so widely. Nonetheless, some figurespoint to industrial land, especially on the private market in Casablanca, as being high. For example, industrialland in Tunisia is reported to range from DH 140 to DH 450 per m2, depending on whether it is subsidized ornot. In Spain, the average price of developed industrial land is reported to be DH 425 per m2, while in Franceit may be less than DH 100 per m- (see Royaume du Maroc, 'Les Incitations... ", annexe).

106/ Data from Rovaume *Iu Maroc, Ministere de l'Interieur, Programme National des Zones Industrielles, 1993;the range of prnces is DH 35 to DH 275 per m2. In the national program of industrial zones, initial sale priceswere to be established taking into account the attractiveness of zones and the objective of decentralization. This,together with unrealistic projections, meant that in the first five zones established, only about a fourth ofexpenses were covered by receipts.

107/ This is consi-urnt with the surge in nongovernment investment (private plus state-owned enterprises) observedin the mid ii 's. *vhen gross nongovemment investment rose from about 10 percent of GDP in 1970-73 tosome 2r) ,5 un! in 1975-78. See World Bank Report No. 8417-MOR, p.14.

Page 70 Strengthening the PIivate Sector in Morocco

real estate investments more favorably than interest and dividends.'"8 Not surprisingly,investment shifted in favor of real estate; during 1982-88, for example, while investment inconstant prices in equipment and machinery was declining by over 4 percent a year (in partbecause of the inflationary effects of the devaluation), investment in buildings rose at over3 percent a year in constant prices, similar to GDP growth."0

170. Other policies also increase the attractiveness of holding land as an asset. Unusedurban land is not taxed. And the slow and nontransparent zoning process in the major cities--which was started in 1984--may be a contributing factor the high demand, in that investors bidup the price of land in and around urban areas in the expectation (or with the advanceknowledge) that it will be zoned commercially. Promulgation of the official zoning plan forCasablanca in 1992 may have been a factor in the weakening of the land market there, althoughother causes are at work. "0 The zoning process is still not completed in other cities and maybe contributing to speculative pressures in these areas.

171. Against this demand are real and artificial coinstraints on the supply of land,especially for businesses that value being close to centers of commerce. In addition to specificbuilding requirements that limit flexibility in using land (for example, minimum plot size andrestrictive building requirements), reservation of land for uses other than business and housingreduces availability in a given area. To illustrate, saleable urban land in Morocco representsabout 40 percent of the total urban area, only slightly more than half the ratio in most largeurban centers in other countries (60-75 percent). Religious and Royal land create additionalconstraints, and it cannot be taken for other uses without being replaced with similar land.

E. Industrial Zones"'

172. In response to the widely felt shortage of industrial land and office space, thegovermment has actively sought to develop industrial and commercial zones throughout thecountry. "2 But because this effort also had other objectives, including generation of employment

108/ See Annex 1o. World Bank Report No. 11557-MOR.

109/ See World Bank Report No. 8417-MOR, p. 15.

110/ A study by the Centre Marocain de Conjoncture ("NVote sur l'evolurion des prix dans le domnaine immobilier, -octobre 1992) points out that housing transactions in Casablanca began to fall in 1991, prices of luxuryapartments fell by about 20 percent in the first half of 1992. and prices of all except low-income constructionare expected to fall by the same amount in 1992.

111/ This section refers to industrial zones designed for larger, industrial businesses, not the smaller commercialareas for small businesses set aside in housing developments.

112/ T he National Program for Industrial Zones was created in 1979 and apparently now covers some 50 zones(twic. as many as anticipated), in addition to the six associated with sea ports. There is also a broader programencompassing some 1028 commercial zones, including tourism, covering 34.4 thousand hectares--about half of

Siengtening the P'wite Sector in Morocco Page 71

(with amnount of land allocated sometimes being a function of employment created, rather thaninstallation requirements), promnotion of industrial development outside of the Casablanca region,and the desire to provide local governments with additional sources of revenue, tthe resultingzones often failed to satisfy the primary objective--providing well equipped industrial andcommercial land that entrepreneurs wanted."3 Virtually all developers of industrial zones havebeen agencies of the central government, local governments, or state-owned companies, butfuture developments are expected to involve a larger share of private developers, especiallyoutside of industrial zones."4

173. Many of the zones remain unattractive to producers, as reflected in an overalloccupancy rate of less than 50 percent."'" Zones in more isolated areas appear to be leastattractive, even at very low land prices, because of their distance from the major financial andcommercial centers (essentially the area around Casablanca), the shortages of appropriatelyskilled labor in these areas, greater distance from skilled maintenance services, the lack ofamenities for workers in some instances, and distance from administrative and utility centers.Benefits in the form of cheap land cannot compensate tor the increased problem of operating inmost of the zones, especially as the zones themselves seldom provide the infrastructural servicesusually expected.

174. The infrastructure that is supposed to be part of publicly developed industrialzones apparently is not always--perhaps seldom--provided. For example, streets and acc'-ssroads are apparently constructed only as lots are sold, often with a delay. In some instances,these are hardly more than poorly maintained dirt roads. Investors are often expected tocontribute the funds needed to ;omplete the construction of these public roads and to maintainthem, which are in principle the responsibility of the municipality. In at least one zone,companies themselves have built and maintain a 3 km access road."'6 Companies in industrial

which is for tourism and 40 percent for industry. So far 2.7 thousand ha have been developed and 2.1 thousandha are being developed--over 60 percent for industry alone and 20 percent for toulism.

113/ Sefrioui, "Aper(u sur / espace... ".

114/ Of the 28 industrial zones finisbed or in process in the national program, the central government wasresponsible for 7. municipal governments for 8, state-owned companies for 12, and a private group--in a smallisolated town--for one. Over a third of the area in the broader economic zones for which developers have beenidentified (covering half of the 34,400 ha in prospective program) is to be developed by private investors, abouta fourth by the central government and state-owned development companies, and the rest by local governments.See Royaume du Mlaroc, Sbminairc national sur les zones d'acnivite iconomique.

115/ Under the National Program of Industrial Zones, only 50 percent of the plots on the 600 ha in completed zonesis currently being used productively, althougb the rate varies--for example from 73 percent in Rabat to14 percent in Khemisset. Only 35 percent of the plots on the 500 ha in the zones being completed is in use.See Rolvaume du Maroc, Serninaire Aational sur les zones d'acnvite economique.

116/ The prohitkns reported by entrepreneurs do not accord with information from the Ministry of Interior on thestatus ot mifrastructure in the industrial zones. For the 16 that have been completed, the government databaseshow' that all Infrastructural investments have been completed, except in a few cases for telecommunications.

Par ne Strengthening the Pnvate Sector in Morocco

zones seem to complain the most about incomplete installation and poor maintenance of waterand sewerage services. Companies complained of requests to provide additional finance forconnections installations that should have been provided by the municipal services for which theybelieved had already paid in the purchase price of the lot. These infrastructural deficiencieshave many causes, including unrealistic financial planning, shortages of funds caused by thefailure of the Treasury to pay the subsidy component to the developer, and lack of capacity inthe municipal utility agencies to finance and build the trunk connections. Thus, to some degree,the low, initial sale price of land in industrial zones reflects the insufficiency of infrastructure,compared to industrial sites already occupied by functioning businesses.

175. As would be expected when prices are set below market prices (at least in themajor commercial areas), sales are handled through administrative decisions by governmentcommissions, based on proposed investments; they are not based on a process of competitivebidding. The fact that prices are substantially below comparable market prices, that there areminimal taxes on unbuilt land,"7 and that the requirements to build within 2 years have not beenenforced, has resulted in an underutilization of land that is sold. About half the land that hasbeen sold to private businesses in the 28 zones already or currently being developed is not usedproductively.

For the 13 being completed, infrastructural investments have been finished in a third, remain partial in a third,and are unknow%n in the rest. Differences between what entrepreneurs need, and what developers provide--including quality, may explain the divergence between perceptions and reported facts.

117/ There are two taxes on undeveloped urban commercial land: a national tax levied at 0.2-0.4 percent of themarket ;alue and a municipal tax assessed at DH 2 4 per mi. Assuming that the market price is DH 650 perm- and tnat publicly developed land sells at half this price, the real estate tax would be equivalent to about0.75 pcJ.ent of the actual market value.

Strengening the P?ae Sector in Morocco Page 73

CHAPTER VU: HARD CONSTRANT-PUBLIC INFRASTRUCTURE ANDSERVICES

A. Summary and Recommendations

176. In general, infrastructureis not the major binding constrint onprivate sector development in Morocco, Figure 7.1: Dissatisfaction with

but it is barely adequate to serve Quality of Infrastructure

existing needs and, under current public (Infrastructure Survey)

investment projections, acceleratedprivate sector growth would worsen _deficiencies in the future. Theshortages of electricity in 1992-93 P ttL _ _r_ -

illustrate how infrastructure tLat is only > S/ _

marginally adequate can suddenly Terpn gre /'b .become an important constraint. Tron *m cyl

eort doeu=tA,l

177. Regarding transport, dXr./mt tion/

Moroccan businessmen are mainly eso

concerned about roads and ports. I -- 1

Railways and airports are generally _ _ a. I

unimportant in decisions to locate . / .,,, th., at W t.

businesses, and entrepreneurs are b/ potr-tit .tb§. viwd ae faobly.

generally satisfied with railway and *airport services. (See Figure 7. 1). Ingeneral, they are satisfied with wherethe road network goes, but not with thequality of roads--especially on majorinterior axes. Perhaps more importantly than physical infrastructure itself, entrepreneurscomplain that state-owned transport cartels and/or tightly regulated transport services raisetransport costs and reduce efficiency.

178. Regarding energy, telecommunications and other municipal services, entrepreneurscomplain most vocally about the electricity shortages in 1992-93, brought on by the impact ofdrought on the marginal hydroelectric production. Overall, electricity production is low byinternational standards, output is expected to cover only 80 percent of peak demand in 1994, andprojected investments assume only moderate economic growth (5 percent a year). Bycomparative international standards, the level and quality of telecommunications infrastructureare even worse. and current investment programs will still leave Morocco behind competitorcountries. Entrepreneurs complain less about poor telecommunications, however, in partbecause they ha\ c: devised coping strategies that nonetheless reduce efficiency and deter foreign

investors. Vatlr~ and sewerage services pose the severest problems at the local level, notably

Page 74 Strengthening h Pn'vate Sector in Morocco

in industrial zones, where connections appear to be difficult to obtain and maintenance issubstandard.

179. A program to deal with the shortages and poor quality of infrastructure shouldfocus primarily on deregulation, coupled with privatization and private provision of services andcomplemented with increased public investment. Less restrictive (and more modern) regulationand more open entry generally will allow private vendors to operate more efficiently (especiallyin transport). It will open monopoly public utilities to competitior from alternative, privatesector providers--which should improve quality (as in telecommunications), as well as encourageprivate investment both in existing utilities and in expanding overall capacity. "' In addition,increased public investment will be necessary to clear the backlog of underinvestment andundermaintenance and to assure that future capacity stays ahead of growing consumption.

180. For electricity, the focus must be on more private involvement. Increasedinvestment in generating capacity will be needed, which will require the development ofconcession and subcontracting arrangements and related regulatory agencies and safeguards toencourage private sector investment. A co,ollary of any viable concession arrangement wouldbe avoiding government arrears, allowing more flexibility in setting tariffs based on the principleof commercial viability, and improving the management and accountability of the municipalelectricity distribution authorities--which currently provide poor service to businesses (especiallyin industrial zones and to new investors) and fail to meet their obligations to the nationalcompany. The program should aim for increased private management and ownership of state-owned municipal electricity companies, and increased subcontracting for certain services.

181. For telecommunications, the focus must also be on more private provision ofservices, especially private entry of competing vendors for some services rather thanprivatization per se. Substantially increased investment and much better service is urgentlyneeded to bring Morocco up to minimal international standards, and there is no soundjustification for continuing to prevent private investment in national and international services.Private telecommunication services--both basic trunk lines as well as value-added services--wouldexpand capacity while spurring the state-owned monopoly to provide more efficient service toboth business and govermment.

182. For roads and road transport, virtually all private companies expressed the needto reduce and modernize the regulations for road transport and to improve the quality of thenational road network. The issue is essentiaLly deregu)ation, not privatization (although there isa need for improved truck handling facilities). There is no sound justification to retain thevestiges of regulation in a sector as competitive as trucki:g, and deregulation of truck acquisitionand operation and freight contracting can only encourage increased private investment intransport equipment. Deregulation will also help Moroccan truckers compete against European

118/ The s r For private provision of public services has been studied by Price Waterhouse, 'Etude despoen!..'u;i. de participation du secteurprive...". The study recommends specific steps to increase the role ofthe pn%ate sector in the provisior, of infrastructure and infrastructure services.

Strengthening the PWvate Seaor in Morocco Page 75

transporters in the growth of international trucking. Most investment in rehabilitating andwidening roads will have to be public, and real budget increases may be needed. However,appropriate concession arrangements could bring private investment into motorways where trafficlevels are sufficient.

183. Sea and air transport cartels also limit the competitiveness of private exporters andtourist facilities. In line with a domestic policy to promote domestic competition, thegovernment should take clear steps to limit the scope of such cartels and defend the right ofother vendors to enter the market on competitive terms. Specifically, the national airline shouldnot have the power to set tariffs for all airlines, the national maritime shipping company shouldnot control certain routes, and more competition is needed for ferry service across the Straitsof Gibraltar. Protecting the existing cartels weakens the rest of the private sector.

184. Although port facilities are considereu largely adequate, recent rapid growth hascreated congestion in Tangier. While public investments will be needed, more could be doneto design programs to encourage more private provision of port services (like warehousing).

B. Description of Existing Infrastructure

185. Roads. The overall road density in Morocco--which is largely unchanged sinceindependence--compares favorably with similar developing countries when account is taken ofrelative GNP per capita--relatively denser than in Thailand, Malaysia, and Mexico and somewhatless than in Turkey and Tunisia; and the share that is paved also compares favorablyinternationally (see Table 7. 1). The fact that half of the roads are paved provides widegeographic access. "9 These broad comparisons confirm the perceptions of the private sector--constraints arise not from the lack of roads but from their characteristics.

186. Half of the paved roads have one lane, the main two-lane arteries are congested,and 44 percent of the network is considered in unsatisfactory condition, increasing operatingcosts, reducing safety and prolonging travel times. 120 Nearly of third of the companies in theinfrastructure survey responded that poor road quality raises their costs or lowers theirproductivity (see Figure 7. 1). For example, companies sometimes restrict travel on heavilycongested portions, and may attempt to locate closer to ports to minimize transport problems.Morocco's motorization rate is not especially low in per capita termns (when account is taken ofrelative GNP per capita). and successful economic development is likely to raise traffic growthwell above the 8.5 percent annual increase in 1986-90, which would exacerbate existingproblems of congestion. deterioration, danger, and delay. Thus, despite the problems, the

119/ Even the share of motorways in Morocco is comparable with those in Thailand and Tunisia, despite their limnitedlength (7T i,

120/ But ori . percent is in poor condition, better than Hungary (36 percent) and Indonesia (40 peicent) butslight's .s -5e than Portugal and Turkey (10 percent).

Age 76 Strengthening the Pnvae Sector in Morocco

Moroccan road network appears to have little negative impact on private development, but itcould be substantially improved on critical routes.'21

187. The Roads Directorate spends about 80 percent of its total budget onstrengthening, resurfacing and other maintenance,'" with the rest being for its program ofwidening more heavily traveled paved roads, paving rural roads, and investing in its motorwaysprogram covering the main axes Tangier, Rabat, Fez, Casablanca, Settat and El Jadida--whichcorrespond to the routes identified by private companies as being most congested. Most of themotorways program--including the final segment on the international truck route via the Straitsof Gibraltar and Tangier--remains unfunded.'23

188. Except for minor investments in industrial zones and a fe% remote rural areas,all road investment has been financed by the government. Although a state-owned company,established to built and operate the motorways, has sought to involve private investors, none hasprovided equity or loans.'"

189. Ports. Ports are important for Moroccan business--half the infrastructure sampleview ports as an important factor in locating their businesses. There are 1 1 commercial portsin Morocco, plus nine smaller ones for fishing and yachting. Casablanca handles nearly40 percent of total traffic, and another 40 percent is concentrated in 3 ports dealing inphosphates and petroleum. Port construction and policies are managed by the govemment, whileport operation and maintenance has been, since 1984, the responsibility of an autonomous state-owned port authority (ODEP). Expansion of port capacity is being based on assumed growthin traffic of 3-5 percent a year, taking into account that in aggregate capacity utilization is justover 50 percent.'2 5

121/ Truckers and businessmen also report other transport infrastructure deficiencies, including the shortage of coldstorage, refrigerated trucks, and truck stops.

122/ Prior to 1988. the funds for maintenance were insufficient or inefficiently used, as the share of unsatisfactoryroads was increased from 40 percent in 1983 to 45 percent in 1988. See World Bank Report No. 10157-MOR,p. 26.

123/ Only 217 km one third) of the total motorway program has been built or funded.

124/ The terms required for private participation were not analyzed; investors may have been dissuaded by stringentprecond:ntlns set by the government and by doubts about commercial viability, as well as the lack of substantialguaranrt - . government cofinancing.

125/ Based on National Port Master Plan Update Study.

SenfteuAg the Pvwse Sector i Morocco Page 77

TABLE 7.1: International Comparison of nfrastructure

Country GNP per Road density in Heavy goods Electricity production Phone density incapita in kM/km

2 , 1989 vehicle per 1000 in kWh per capita, phone per 1000USS. 1990 capita, 1988 1990 inhabitants, 1990"

Indor eia 570 0.11 6 244 6

| Morocco 950 0.14 10 384 19

Thailand 1420 0.14 25 809 23

Tunisia 1440 0.18 20 677 50

Turkey 1630 0.47 12 919 150

Malaysia 2320 0.12 22 1296 115

Mexico 2490 0.12 28 1326 120

H-ungary 2780 1.13 22 2693 180

Portugal 4900 0.79 82 2143 265

Note "In 199i and 1992 the number of lines in Morocco was increased by a total of 63 percent.

190. Energy. Electricity generation per capita in Morocco is lower than in many

developing countries, even wheni adjusted for Morocco's lower GNP per capita (Table 7.1), eventhough generation has been growing at 7-8 percent a year during the 1980s. Business that are

large consumers of electricity have faced power shortages since 1992, caused primarily by thedrought that cut hydroelectric production--critical for meeting marginal demand--by half and by

increased operating problems in thermoelectric plants created by more intensive use. As aresult, half the businesses in the infrastructure survey--corresponding to the large industrial

users--reported that electricity shortages are significantly cutting productivity and raising costs;this rate of criticism was twice as high as for any other type of infrastructure. The shortage ofelectricity itself has apparently been exacerbated by the poor programming and announcementof service interruption. This is expected to be a relatively short-lived crisis, until new generatorsstart operating in 1994. Future investment plans (evaluated at 2.5 percent of GDP per yearduring much of the rest of the 1990s) assume that consumption will rise about 7 percent peryear, in line with past, modest GDP growth.

191. Telecommunications. By most intemational standards, the telecommunicationsinfrastructure in Morocco is bad. At 25-30 lines per capita in the early 1990s, it lags behindcountries like Tunisia, Mexico, Malaysia, and Hungary; its ambitious investment program to

raise density to 40 lines per capita by 1994 will still leave it behind most competitors. Serviceconditions are much improved but remain bad: the average wait time for phones is 10 months

(down from 80 months in 1987), although for businesses the wait time is supposedly 2 months;

each phone line faullts at least once a year, and only about half are repaired within 2 days;

Peg. 78 Strengthening the Pnvate Sector in Morocco

completion rates range from 22 percent for incoming international calls to only 43 percent forlocal calls.

C. Operation of Infrastructure Services

192. Truck transpt. Trucks haul some 93 percent of the goods shipped in Morocco,and account for 7 percent of international transport (including roll-on, roll-off)--a share that isgrowing since Morocco signed the international trucking convention in mid-1992. The densityof heavy trucks in Morocco compares favorably with many developing countries when accountis taken of relative GNP per capita--although it is clearly lower than in Tunisia and Thailand;and entrepreneurs seldom sense shortages.'26 Truck transport for hire is entirely privatelyowned;"2' for regulatory purposes, it is organized into three groups: light trucks (under 8 tons),which are not legally allowed to transport for hire but nonetheless carry 40 percent of goodstransported;'28 heavy trucks operated by businesses for their own account, which account for37 percent of transport; and heavy trucks operated by some 1,600 private truckers, carryingabout a fourth of the traffic.

193. The government highly regulates heavy truck and bus transport. Busses arelicensed line-by-line, and each heavy truck requires a special interministerial authorization (aregulation that dates from the 1940s). Except in large cities, shippers are required to requesttrucking services through the National Transport Office (Office national des transports, ON7),whi"h then establishes a contract with a trucker. The ONT levies a 6 percent fee on the valueof all contracts--including those negotiated directly between shippers and truckers. The rationalefor such control over contracts has been to support small truck companies by assuring theyobtain part of the freight, to ensure that transport is available in all areas, and to minimize emptybackhauls. Moreover, all heavy freight traffic requires circulation permits issued by the ONT.Maximum tariffs are set by the government, but there appears to be some negotiation.

194. The control imposes costs for business. Although the government has issued moretruck authorizations than are used, they are not readily accessible to new truckers. The contractfee assessed by ONT represents payment for minimal or redundant services rendered for somebusinesses; and the circulation permit--while generally available except on weekends--causes

126/ Only 5 percent of the infrastructure survey responded that shortages of trucks raise their costs or lower theirproductivity; the main example was shortages during the citrus harvest.

127/ Only one state-owned enterprise, an intercity bus company, is involved in road transport, and it is expected tobe sold in 1993.

128/ 1This high share of small trucks reduces scale economies that could be obtained from larger trucks; see WorldBank Report No. 9712-MOR, p.4 .

S&wStkenmg dse Private Sector in Morocco Page 79

inconveniences that impede transport efficiency.' 29 Together, the iicense restrictions and ONTfee may add 10 percent to the cost of heavy truck transport, furthering aggravating the financialdifficulties of companies caused in part by low utilization rates irr posed by OAT regulations andpractices. Smaller trucks are forced to operate illegally, which exacerbates uncertainty andleaves them vulnerable to discretionary enforcement.

195. Airtransport. Royal Air Maroc (RW), Morocco's flag carrier, controls allpassenger and freight tariffs, which are based on IATA agreements with some exceptions (likereduced freight rates on selected products as determined by the government). '30 The market forregular passengers and freight is shared with other airlines but these operate under tariffs andrules acceptable to RAM. Charter passenger service and domestic air travel are open to entryalthough RAM plovides all ground services at the airports.

196. Hotel operators believo *W.&:t the high passenger fares discourage tourist visits,especially in view of dramatically lower fares since the 1980s to alternative tourist destinations.As foreign airlines cannot compete for passengers by lowering fares, they compete in part byoffering special fares on continuing travel. The high fares also penalize Moroccan businessmenin their efforts to develop export markets and foreign partners, and add one additional obstacleto foreigni investors. While the low freight rates force foreign airlines to offer lower rates, theymay also act to limit the availability of air transport for some products and for somedestinations. And by international standards, these rates are not particularly low."'

197. Port services. Four-fifths of the infrastructure sample consider that the ports donot increase their business costs--reflecting in part the large investment in ports since the 1960s,the performance of ODEP, which has improved port operation closer to European standards, andrecent and ongoing simplification and computerization of customs procedures and documentation.However, there are specific complaints--for example shortages of warehouses, insufficientfacilities for trucks, the Port Authority's monopoly on dockers, and high fees. And while recentimprovement in Customs procedures have helped reduce dwell time of cargo, it still remainshigh--about 15 days--well above the European norm of 3-4 days.'32

129/ As would be expected where licenses are restricted, there is a market in existing authorizations, which allowsholders to accrue rents that new truck owners must pay. Obtaining a new authorization requires prior purchaseof a truck, which cannot be used until the authorization is obtained, which may take up to 10 months forinternational trucking. The current license rental accounts to about 4 percent of average gross retuns on atruck. See World Bank Report No. 11727-MOR, pp. 118-122.

130/ RAM may be forced to lower the IATA fare to the US because it faces competition from cbeap connecting faresbetween Europe and the USA.

131/ Orn ffigh.s to NMarseilles, Rome, and London, air freight rates from Tunisia in 1990 were 25 to 80 percent lowerthan fr onC Casablanca. See CGEM, 'Etude des coats 4esfacteurs'.

132/ Mfan. importers noted that containers could be out of ports within a few days.

,pe 89 Strengthening the Pnate Sector is Morocco

198. Although there is no legal monopoly for the port authority, private provision ofport services is modest, and varies among ports. 33 In sorne cases, the private investment hasbeen too limited for its services -) match the quality of those that ODEP now provides.However, existing port and cargo tariffs involve price distortions, direct subsidies, and cross-subsidization, which may make substantial, new private investment unprofitable, especially giventhe guaranteed loans and government transfers to ODEP. Nor has the government definedconcession or performance agreements to encourage private investors.

199. Maritime *ransport. The monopoly of the state-owned shipping company(Compagnie Marocaine de Navigafion, COMANAV) was abolished in the 1980s, and it nowtransports only about a third of the freight handled by Moroccan shipping companies. Likewise,tariffs are no longer controlled. However, COMANAV maintains a duopoly on shipping toMarseilles (a route accounting for about a quarter of general cargo traffic with Europe via theMediterranean), for which rates are reportedly 60 percent above those paid bv shippers betweenMarseilles and Tunisia. Foreign ownwrship in maritime shipping continues to be restricted toless than 50 percent (in contrast to most other sectors), and foreign ships can transport containersonly as part of regular shipping lines, but not as part of a feeder line to a m,jor internationalcontainer terminal. There is also a duopoly on the ferry crossing at Gibraltar, which is the keylink for international road transport, where the tariff is also considered excessively high."3

200. Electricity. Electricity production and transport is the monopoly of nationalelectric office (Office National d'Electricite, ONE), and only a few large, primarily mining,companies generate for their own use. Distribution, however, is split (roughly half and half)between ONE (mostly direct, high tension connections to large industrial users) and severalgovernment-owned municipal water and electricity companies under the supervision of theMinistry of Interior. The municipal companies are responsible for most small consumers,including small businesses in industrial and commercial zones. This dual system complicateselectrical connections for businesses. Responsibility for government oversight is different forOAE and the municipalities, which complicates the development of a consistent electricity policy;and the financial health of ONE is dependent on the billing and collection of municipal entities--whose arrears to ONE amount to about a third of its annual gross sales.

201. Electricity (and other energy and utility) tariffs are set by a nationalinterninisterial price commission and are characterized by two special features: rates rise

133/ For example. private provision includes piloting and towing at Casablanca and Jorf-Lasfar, stevedoring on shipsat Casablanca and 4 other ports, and cargo handling at Kenitra.

134/ Although there is no dejure monopoly, either for freight or passengers, in mantime transport in Morocco defacto monopolies may in fact exist because of commercial practices and the relative narrowness of markets.In practvv freight forwarders and the travel agents, who usually select shipping companies for clients, areusually aftu!ated with certain shipping companies, which poses an entry barrier for new shipping companieswithout a network of freight forwarders.

SWsg*4^tng th Pnwvte Sedor in Morocco Page 81

progressively with voltage, so that industrial users pay higher rates than households;'35 and hightaxes on the petroleum and coal used to generate more than 85 percent of Morocco's electricityaccount for nearly 20 percent of ONE's generating costs.

202. The government fu.Ashed a study in 1993 to allow private investors to generateelectricity and sell it to OAE. However, the required changes in legislation, negotiations ofagreements and time needed for investments would mean that new capacity would probably notbe availabie until late in the 1990s. No consideration is being given to privatize any of thetranspoat or distribution network.

203. Telecommunications. The state-owned national post and telecommunicationsoffice (Office National des Postes et Tel&communicatons, ONPT) has a monopoly on theinstal1atioli and operation of all telecommunications services. However, in 1992 it started aprognam to allow private vendors to provide public phone services, including faxes andtelexes,136 and it has agreed to study the private provision of additional, value-added servicessuch as data transmission and paging, for which concessions might be provided after 1994.

204. The objective deficiencies in the Moroccan phone system are less apparent tobusinessmen than would be expected--only about a fourti. consider that poor services reducestheir competitiveness. These perceptions probably reflect the fact that service has improvedsince the late 1980s, that most businessmen have found acceptable alternatives, includingcouriers, radios, and car phones, and that they lack an international standard against which tojudge local service. Nonetheless, complaints are numerouls--getting fewer phone lines thanrequested, long delays (a month) in responding to service requests, ambiguous billing that issometimes subject to negotiation. Companies with foreign connectioi3s complain more thanothers, and companies in Tangier find phone service unbeambly bad. Such a high level ofdissatisfaction is unlikely except where providers are disinterested in customer concerns; ONPTdid not e !ablish a commercial department until 1992. Significantly, ONPT claims that95 percent of the complaints are unjustified.

205. Water and sewerge. Municipal utility authorities monopolize water and sewerageservices. Business complaints are most frequent in industrial zones. Installations are oftendelayed and not always satisfactorily provided, even when private companies pay the costs;water quality, pressure and delivery rates are often insufficient. Businesses also complain thatsewerage is inadequate in zones, with poor maintenance and numerous unauthorized andinadequate connections leading to blocked pipes.

135/ For companson, low tension rates are higher than in other Maghreb countries, but leas than half those inFrance. Portugal and Spain; in contrast, high tension rates are only slightly higher than France and 30 percent!ovVt Uhan those in Portugal and Spain.

136/ Bv earls 1993, it had authorized lines for 55 private vendors.

Poge 82 Strengthening the P'vate Seetor in Morocco

CHAPERI VL: SOFT CONSTRANTS--WEAK INSTIrUTIONAL ENVIRONMENT

A. Summary and Recommendations

206. The institutional environment considered in this Chapter covers the legalframework, the operation of thejudicial system, fuiancial disclosure requirements, administrativeregulations for business creation, and several private sector professional institutions.

207. The existing legal framework provides the main elements required for a privatesector economy by clearly defining real, commercial and intellectual property rights, contracts,corporate vehicles, and bankruptcy procedures. Two deficiencies in the laws help explain thefinancing problems discussed in Chapter IV: insufficient safeguards and disclosure requirementsin company laws to facilitate the development of a corporate bond and equity market; andrigidities in the credit laws that discourage recLurse to bankruptcy, encourage the usc of fixed-asset mortgage collateral, and limit the development of alt,. ,native forms of credit securitization.While these deficiencies may not pose a severe constraint to going concems in the private sector,they deter expansion and entry. And while improved laws will not, by themselves, changecorporate and banking practices immediately, they are a necessary first step in the process.

208. Weaknesses in the judicial process are arguably more of an operational consiraintthan are legal deficiencies. Private businesses appear to believe that court action is slow(relative to the pace of commercial operations), unpredictable (as jurisprudence is poorlydeveloped), or biased (especially favoring labor). Court organization and procedures are nottailored to commercial exigencies, and judges are poorly trained in commercial matters. Badlogistical and administrative facilities pose physical obstacles to improved jurisprudence.Companies can sidestep some court problems by reaching settlements out of court or by usingarbitration, but the practice is not widespread.

209. To these charges of the private sector, the government offers an alternativeinterpretation that shifts some of the responsibility for the weak judicial process to the privatesector itself.'3 it argues that such factors as delaying tactics used by opposing parties in acommercial dispute, the failure of business litigants to respect established procedural deadlines,and the overloading of courts resulting from unnecessary lawsuits contribute to the slowness ofcourt action. It argues that the lack of transparency and openness in companies (especially theunreliability of their accounts) contributes to the unpredictable nature of court decisions and that,in any case, it is the responsibility of the private sector to raise allegations of judicial

137/ The Ministry of Justice believes that the criticisms of the Moroccan judicial system, as expressed by the privatesector, are overstated, reflect in part the questionable behavior of some entrepreneurs themselves. and carry therisk of actually weakening the judicial process. Moreover, it is currently engaged in a multiyear process ofrevising texts to respond better to the needs of investors and enterprises, both domestic and foreign.Cornmumn^ation from the Minister of Justice to the Minister of Economic Incentives, 14 April 1994.

Srengthening thc Pnvate Sector in Morocco Page 83

arbitrariness to higher courts. Regarding the perception of biased decisions, it believes thatjudgments in favor of workers are probably justified by the poor conditions imposed on workersby the companies involved.

210. Nonetheless, the government is acting to increase the number of courts, hasreintroduced panels of judges to broaden the range of competencies available in trial courts ofinitial jurisdiction, is setting up an internal inspectorate to improve the functioning of courts, andhas strengthened training requirements for lawyers. To further improve jurisprudence inbusiness law, the government is revising the commercial and company codes and strengtheningthe services charged with collecting and diffusing infornation on decisions by both tribunals andthe Supreme Court. Finally, it has recently oiganized training sessions to help f xpand the useof international arbitration.

211. Regarding, other elements of the institutional environment, accounting andauditing have been notoriously bad but 1992-93 laws seek to improve accounting and auditingrequirements and reorganize and strengthen the accounting profession. The need for theseimprovements is reinforced now that new laws governing capital markets are finalized.Regulations governing business creation and expansion can be described as multiple, antiquatedand redundant, exacerbating problems of administrative discretion and delay and increasing thevulnerability of companies to selective enforcement and wasteful expenditures; little progress hasbeen made in administrative reform, although the issues are being actively discussed and thereare isolated examples of progress (faster approvals under the investment codes and drasticreduction in administrative import barriers). Institutioral mechanisms for acquiring, diffusingand using modem manufacturing and other business technology are also weak--notably:haphazard and insufficient information channels; a relatively narrow and outdated system ofweights, measures, norms, and standards; and the lack of internationally recognized facilities fortesting, quality control and product certification. Finally, professional associations are mostlyweak and poorly organized, but a few--usually with external support--have set examples of whatcan be achieved, especially in terms of demand-driven vocational training.

212. Because administrative weaknesses are systemic, institutional strengthening willbe complex and lengthy, and is likely to proceed by little steps. Some of the more importantactions that could be taken include legal revisions to increase financial disclosure for publiclytraded companies and to broaden the range of bank lending instruments, which will add impetusto apply the new accounting rules. Specialized commercial courts, along with targetedpromotion of arbitratior' arrangements, could make the judicial system more helpful tobusinesses, while the longer process of improving judicial autonomy and operation takes place.

213. Measures to limit the constraint of administrative regulations should go beyondthose governing the creation and expansion of companies and should focus on all regulations thatimpinge on business operations. Many of these are discussed specifically in previous chapters.Where regulations cannot be simply eliminated, reformns could delegate some responsibility toprivate intenmediaries (notaries, accountants, lawyers) and establish guiding principles to beapplied at al! levels of public administration, including municipalities (for example, legal limits

Pe84 Strengthening toe Piwte Sector in Morocco

on waiting periods, maxima on administrative fees, and even creation of an ombudsman tomediate differences). The process of simplifying administrative procedures and of teachingofficials to be more service oriented is likely to be more effective if representatives of theprivate sector are brought in to discuss and design changes at the lowest, operational levels.

214. Finally, positive measures are needed to help strengthen and develop privateinterprofessional and trade associations, so they can shoulder a larger burden in a wide array ofactivities th}at support private businesses, and to promote the development of internationallyccrtified testing laboratories and other supporting services. One of the most irnportant measuresmay be to define an active role for such associations in the formulation and implementation ofpublic programs. However, for the associations to be able to respond, at least initiaUly, thegovernment may need to help develop programs of technical or financial assistance in organizingand managing such associations, possibly through twinning arrangements with similar privatebusiness associations in other countries. Administrative and financial reforms that will facilitatethe creation of small businesses will also help.

B. Deficiencies in the Legal Framework

215. Wnile many of the laws in Morocco's legai framework are old, dating back to theearly 1900s, the legal "pillars" required for a weu-functioning market oriented economy arelargely in place. The basic principles of property law clearly define a wide range of privateproperty rights and rules for their creation and exchange. Moroccan law recognizes the freedomof commercial enterprises to enter into contracts; commercial contract law is well developed andin principle offers businesses a predictable and efficient negotiating framework for the exclhangeof property.

216. The rules for entrepreneurs to enter into and exit from business ventures aregenerally clear. Company law provides several organizational vehicles which entrepreneurs mayuse to carry on business activities, notably limited liability joint stock companies and limitedliability partnerships; creation and dissolution of these enterprises are relatively easy. Finally,the laws on bankruptcy provide a clear mechanism for the exit of nonviable firms from themarket and for determining priorities among the different parties with claims against the firm.However, several deficiencies in the legal framework appear to impede the private sectcr'sability to invest and operate in the Moroccan economy. In addition, the law-making processpermits long delays in enacting, promulgating or revising laws which adds to the legaluncertainty, and there is no formal mechanism to solicit comments systematically from theprivate sector.

217. Property rights and registration. Moroccan law recognizes public and privateproperty; the right of an individual to own property is guaranteed by the Constitution and bylaw."3 ' Interests in real property include, in addition to outright ownership, rights of usufruct,

138/ For more detail, see Annex 5, World Bank Report No. 11557-MOR.

SweigtheS the PnvI e Sector in Morocco Page 85

rights-of-way and other encumbrances, 99-year leases and mortgages. Foreigners may ownurban but not agricultural land, although they may lease the latter. The property registrationsystem, based on the Australian "lorrens" system, provides an administrative mechanism forconclusively establishing real property rights and for removing real property from the stricturesof a complex traditional legal system. In addition to the system for registering mal property (seeChapter VI), there is one for registering commercial property, and each business must be listedin the commercial registry of its district court (with information centralized nationally), althoughnone of these registries is computerized, and information is often not current. Industrial andintellectual property rights (such as copyrights and trade names) are protected by law and themajor international conventions governing registration and use of intellectual property, whichMorocco has signed. The institutional system for registration of intellectual property isconsidered adequate. While some in the foreign business community apparently believe thatintellectual property laws are not always vigorously enforced, citing misuse of logos andtradenames, there is little evidence that actual or potential abuse of intellectual property rightspresents a significant constraint to private industrial development.

218. Commercial law. Moroccan commercial law is generally patterned after theFrench commercial code in effect at the beginning of this century; the government has beenpreparing a new code since the mid-1980s. Commercial law generally recognizes the relativefreedom of economic agents to enter into whatever contractual arrangements they deemappropriate. While contracts may be oral or written, some contracts must obey certainformalities, such as being in writing and notarized, to be valid and binding. Breaches ofcontract give rise to legal remedies, including damages, and, in some cases, specificperformance as specified under the contract. There are no specific laws governing managementcontracts and factoring and franchising agreements, although the legal profession generally viewscontract law as sufficiently flexible to accommodate these kinds of agreements. Governmentcontracts are subjected to special laws which are based on the notion of government superiorityinstead of equality between the contracting parties; for example, limits are imposed on thefreedom to negotiate the contract price, and the government retains the right unilaterally tochange the contracting party's obligations up to a specified limit.

219. Joint stock companies (societes anonymes, £4) are the most commonly usedvehicle for larger private enterpr ,es; it is the required vehicle for banks, investment firms, andreal estate finance companies. Moroccan company law allows for public offerings of shares bySAs by means of simple public notice; existing shareholders have a preemptive right to subscribeto any new shares. There are no other substantive requirements under company law regardingpublic offerings. Disclosure requirements to prospective investors regarding the company'sfinancial position are extremely limited and there appear to be no provisions in the company lawclearly defining the fiduciary duties and responsibilities of the Board of Directors towards thecompany's shareholders. (See also section C below.)

220. Protection of creditors and bankrup.cy. Although commercial law allows for thecreation and transfer of a variety of contractual obligations, it provides only limited mechanismsfor protecting or securing the rights cf creditors. Aside from the mortgage on real property,

Page 86 Strengthening the Private Sector in Morocco

which gives the mortgagee a right to foreclose on the property in the event of default by themortgagor on his debt, the principal types of security for a creditor are personal guarantees andpledges of assets giving creditors preferential claims to the pledged assets. Commercial law doesnot appear to recognize the concept of a floating charge on inventory and receivables, whichwould allow an entrepreneur to borrow for working capital needs on a rolling basis against thesecurity of such a charge.'39 Thus, commercial law acts to restrain lending to businesses byrestricting secu.-itization essentially to mortgages; bankruptcy law exacerbates the problem.

221. Bankruptcy law provides both voluntary and involuntary mechanisms for theorderly closure of non viable businesses, but it fails to protect unsecured and secured creditorsadequately in the liquidation of the ailing enterprise. First, the law contains severe disincentivesfor a debtor to invoke bankruptcy proceedings voluntarily. The completion of bankruptcyproceedings does not fully discharge an individual debtor of debts; creditors may pursue thedebtor for the balance of unpaid debts for up to 10 yeeus or until he is rehabilitated by the court,which requires full payment of his pre-bankruptcy debts or the agreement of all creditors tocancel his debts. Moreover, until rehabilitated, the debtors that are individuals lose the right tostart a new commercial business and may face additional penalties. Thus, entrepreneurs usuallyfind other means than bankruptcy to close out nonviable businesses, which limits the amount ofrisk creditors are prepared to accept in financing business activity. Second, holders ofmortgages appear to be treated differently from other secur" d creditors, as the law only allowsr-vcrtgagees to pursue claims unilaterally against the collateral once the bankruptcy proceedingsare opened; other secured assets are given preferential treatment only at the time of finaldisposition of the debtor's assets. Not surprisingly, bankruptcy procedures are rarely invoked.

C. Weaknesses in the Judicial System

222. The judicial process is widely criticized by lawyers and businesses alike for beingslow, unable to keep up with the increasing case load, and often unpredictable. Foreigninvestors (especially American, British, German, and Japanese) have little confidence in theefficiency, trnsparency or fairness of the local courts. and there is also concern that judicialdecisions take too long in commercial cases. The lack of confidence in the local courts isfrequently cited by home office managers of multinational finrs as a major reason for avoidingsignificant equity investments. T'he perceived inadequacy of courts results in higher transactioncosts incurred in devising means to avoid litigation.

139/ Two exceptions recognized by the law are security interests in equipment (nantissement du rateriel) and in thegoing concern (nantisvement du fonttv de comnmerce); these interests may be secured by registration in thecommercial registry. In addition, the pledge of merchandise, without surrendering possession, is apparentlya common commercial practice. However, even these secured interests are of limited value because it appearsthat creditors do not have the right to seize collateral without first obtaining a court order, which may be aprotracteid rr,<ess. NMoreover, in the event of the debtor's bankruptcy, a security interest in the going concernonh put' reditor ahead of other creditors when the assets are distributed, but does not appear to enable thecreditr n seize' the business.

Strengthening the Pri'wte Sector in Morocco Page 87

223. To these charges of the private sector, the government offers an alternativeinterpretation that shifts some of the responsibility for the weak judicial process to the privatesector itself. It argues that such factors as delaying tactics of opposing parties in a commercialdispute, the failure of business litigants to respect established procedural deadlines, and theoverloading of courts resulting from unnecessary lawsuits contribute to the slowness of courtaction. It argues that the lack of transparency and openness in companies (especially theunreliability of their accounts) contributes to the unpredictable nature of court decisions and that,in any case, it is the responsibility of the private sector to raise allegations of judicialarbitrariness to higher courts.

224. There are no specialized commercial courts, although the courts are divided intosections handling specific types of cases. The government has drafted a law to establishcommercial courts, and to devise better procedures for handling commercial litigation, includingevidentiary rules to speed the judicial process for commercial cases. The new system is unlikelyto be in place before the second half of the 1990s. In the meantime, the govemment is actingto increase the number of courts, has reintroduced panels of judges to broaden the range ofcompetencies available in trial courts of initial jurisdiction, and is setting up an intemalinspectorate to improve the functioning of courts.

225. Another main reason given for the weak judicial process is the failure of the legaleducation system to keep up with the increasing complexity of business transactions. Judges(and lawyers) generally receive inadequate formal, on-thejob, and continuing training in suchareas as maritime, commercial and banking law, although the law goveming entry into the legalprofession has been modified to strengthen requirements for legal training. The elimination of3-panel courts in 1974, which had provided the vehicle for in-service training of new judges,usually recruited directly from the national training institute for judges, exacerbated thecommercial weaknesses in the judiciary, although this system was reinstated in 1993 for trialcourts of initial jurisdiction.

226. The lack of administrative support needed by judges to carry out their taskseffectively--whether it be access to legal information, administrative support staff, facilities,computer equipment. or supplies--is also cited as a factor impeding the judicial process. It isalso generally felt in Morocco that the low pay of judges is inadequate to attract the elite collegelaw graduates into the judicial profession. The 1993 Finance Law provides above averageincreases for the Justice Ministry, as a step in rectifying these deficiencies.'4 0

227. Because there is no systematic publication of court decisions (except those of theSupreme Court) and no comprehensive legal reference system, and because court libraries arepoorly supplied and maintained, it is difficult for the legal system to develop a consistent clearbody of case-law. This systemic weakness, coupled with poor training of judges, reduces thepredictability of decisions and increases the uncertainty of business operations. Businesses

140/ f Xor it provides for a 38 percent increase in staff, a 29 percent increase in other operating expenses,and a ial fund to extend and renovate physical assets.

Page 88 Strengthening the Pnivate Sector in Morocco

complain that it may take as long as six years to enforce judicial decisions (although the legalprofession considers the delay is mostly caused by the slowness in obtaining final judicialdecisions, which may involve appeals to higher courts, rather than at the stage of enforcement).Nonetheless, the court clerks, who are charged with executing decisions, are generallyconsidered to be overworked, and there are proposals to license private parties for this purpose.To help rectify these deficiencies, the Ministry of Justice has recently created a serviceresponsible for collecting and disseminating court decisions related to civil and commercialcases. It has also set up an inspectorate of courts and clerks, to help strengthen the operationof the judiciary.

228. Businesses often use arbitration as an alternative to the judicial process in settlingcommercial disputes. The Civil Procedure Code allows parties to agree to submit their disputesto arbitration and Morocco has ratified the International Convention on the Settlement ofDisputes and the 1954 New York Convention on the Recognition and Execution of ArbitralAwards. Experience in resolution of disputes by international arbitration has been satisfactory.Moroccan courts have respected this Convention and several lawyers, both in Europe andMorocco, report no unusual problems with the enforcement of ar award in Morocco. However,arbitration clauses are apparently not always well-drafted, and there is doubt that the existingwell-trained cadre of Moroccan arbitrators, usually with international experience, is beingreplenished by the current legal training system. More could be done to establish a commercialarbitration service, as in Egypt. In the meantime, the government has organized relevantworkshops and conferences, as a step in broadening the use of arbitration.

D. Inadequate Financial Disclosure

229. The quality of accounts are notoriously poor in Morocco, in part because until1993 there were no legal requirements for truthful and accurate accounts, no legal requirementfor certified accounts--even for companies listed on the Stock Exchange,"' no well organizedprofession of chartered accountants with the power to license and set standards, and no facilitiesto train accountants in Morocco.'42 On the other hand, several large international accountingfirms operate in Morocco.

230. In 1992-93, following 7 years of preparation, the government adopted andpromulgated four law's to improve auditing and accounting in Morocco; these laws entered intoforce in January 1994. The new chart of accounts is based on EU standards. The law clearlyestablishes the profession of chartered accountants and empowers the association to assureadequate qualifications and standards; in parallel, it only permnits licensed chartered accountants

141/ The iegailk required annual company audits were usually no more than a statement by a statutory auditor (whois not n P -,arnly a chartered accountant) that the company has properly classified items in its income statementand he -heet.

142/ A s,. w n, train chartered accountants had been set up in 1990, although enrollment is small.

Strengthening the PMvatt Sector an Morocco Page 89

to certify audits of corporations, but also makes them legally responsible for accuracy. Tofacilitate tax filing by small businesses, the law also provides for the creation of licensedaccounting centers, with responsibility for certifying tax returns.

E. Regulations

231. There is a multiplicity of national and local regulations on establishing andoperating businesses, which is compounded by amnbiguities in their requirements and application.In setting up (and to some extent expanding) a business, entrepreneurs face the dilemma ofnegotiating the administrative thicket to complete all the formal steps for commercialestablishment, which typically takes 6 months or more, or of starting business without all theauthorizations, which leaves them vulnerable to discretionary enforcement, the threat of finesand sanctions, and possibly restricted access to some business arrangements, like bank credit.

232. Partly because of the complexity of the approval process, eleven principal stepsare required to set up a business and as many as 35 separate documents may need to becompleted and approved by central or local government agencies, as well as state-owned utilitycompanies.'43 Agencies have wide latitude in determnining their procedures, many of which aredifficult to obtain information about. The approval process may require face-to-face negotiationwith officials to whom the regulatory ambiguities give considerable discretionary power todecide what information is needed and on what criteria the decision will be made. Despite thewidely cited Royal Letter of 1989, which requires the administration to act on requests forinvestment authorization within two months, the delay can be lengthened by haggling overwhether a file is complete; nor does the two-month limit appear to be applied much beyond theapprovals under the investment code--which are a secondary step in establishing a business."The regulatory maze is obviously more of an obstacle for new, small entrepreneurs, who oftenlack training and resources.'4 5

233. In the absence of reform to simplify and harmonize regulations, and to make theirapplication more accessible and transparent, many businesses are likely to comply only partiallywith existing regulations. This leaves them vulnerable to discretionary administrativeenforcement and may limit their access to equity and to credit from banks and suppliers. It a;soprobably further concentrates business activity in trade and services rather than industry, whichrequires larger, fixed. and more visible assets. The govemment recognizes the need for a

143/ Several of the steps are antiquated practices (like manually numbering and stamping pages in company books)that could be eliminated or handled by notaries rather than officials.

144/ Examples illustrate the cost of administrative regulations. One company waited 4 years for a decision on itsrequest to produce a hazardous material and was forced to start operations with a nonbinding provisionalauthorizarl,r In many cases, entrepreneurs indicate that oLnly visits to Rabat can solve administrative problems.

145/ In th :' of 'prospective" entrepreneurs, the third most important constraint, after commercial space and-apXtsl t'-Rs administrative authorizations.

Pe 90 Strengthening the Phvate Sedor in Morocco

standardized, simplified process to establish and expand businesses, with a time-bound approvalprocess. It is planning to establish a consultative committee with members from both the publicand private sectors to formulate an agenda for administrative reform and presentrecommendations for changes in the regulatory, and legal, framework.'4

F. Private Business Institutions

234. Trade associations Professional trade associations are a key actor in defining andpossibly managing appropriate training programs, in participating in joint public-private taskforces to agree on norms, standards, regulations, and procedures that affect business operations,in establishing codes of conduct or practice in critical service areas like accounting and auditing,laboratory testing and quality control, and tourism, and in providing a conduit for the transferof technical information and managerial practices to businesses. Although there are about 150registered private professional associations in Morocco, almost all are probably too weak toserve as a conduit for market information, technology and training for their members.'47

Membership rates are low--probably under 30 percent of professionals in any given occupation.Annual budgets are small, in part because dues are not paid. As a result, there is no long-termplanning and little outreach, leadership rotates rapidly, and offices are inadequate. "' The mostpowerful of the professional industrial associations have generally received technical and othersupport from abroad, but often cater mostly to larger enterprises. A first step in usingprofessional associations as a conduit for private-government interaction would be to assess theirscope, weaknesses, and capabilities, with a view to devising means to strengthen them in thecontext of private sector development.

235. There are 26 Chambers of Commerce and Industry (plus others for agriculture andhandicrafts) that are quasi-public, receiving a large share of their budget from the governmentin the form of an earmarked share (10 percent) of the business license tax (patente). Since therecent reforms in 1992, officials are being elected as part of the political process, although someobservers remain concerned that the leadership fails to include the more dynamic representativesof Moroccan business. Plans to restructure the chambers include increased budgets (presumablyfinanced by the government) for construction and equipment; and the new accounting laws allowthe Chambers to set up licensed accounting offices to aid small businesses in filing their taxes.Several foreign chambers of commerce are also represented in Morocco.

146/ This effort is supported by IJSAID through its DYNA-PME (or small enterprise) Project.

147/ The strongest are considered by some observers to be the chartered accountants (AMDEC), the automobileindustry (AMICA). the textile industry (AMIl), the exporters association (ASMEX), the leatherworkers (ATC),the general employers associations (CGEM), the metal and mechanical industry (FIMME), the building industry(FNTBP), and the bankers association (GPBM). In general, the private tourism industry lacks a strong horizonalorganization across services and has a weak tradition of working cooperatively to achieve industry-wideobjectives

148/ Information from Housni El Ghazi, 'Agenda des RWformes.'

S58rwsg hse Phvate Sector in Morocco Page 91

236. LlbrumionL There are three main labor unions in Morocco,149 and Moroccanlaw provides to: collective bargaining agreements and guarantees the right to strike, althoughsome unions and employers have complained that guidelines for strikes are inadequate. In abroad sense, the labor unions view their role as insisting that the government enforce existinglabor regulations, especially in view of the declining administrative attention to rigidenforcement.'" Union leaders feel they are not treated seriously in the economic and socialdialogue with the government, which they perceive as less interested in helping labor than inhelping business.

237. Their over-riding substantive concern seems to be job security, rather than higherwages per se. Thus, unions appear largely opposed to measures that would facilitate more labormarket flexibility, including, for example, the new apprenticeship programs. Unions do exercisesome power in some fifns, especially to prtvent fuing of employees.

238. Consumer associations. There are only embryonic consumer associations inMorocco. Their development can be seen as important in strengthening private sector supportfor further import liberalization, for higher quality control standards foi Moroccan industry, andfor more decisive measures to defend domestic competition.

G. Institutions for Technological Deepening

239. Various problems impede the acquisition, diffusion and use of modernmanufacturing and other business technology in Morocco."'' The most important of theseinclude insufficiencies in the networks and institutions that would enable Moroccan businessesto tap into information on technology and assist them in using it to improve their performance. '52

For example, exporters need detailed information on product specifications and on themanufacturing technology required to satisfy them. In addition, the demand for bettertechnology has been weakened because the competition faced by firms in many sectors is not

149/ Union Marocaine du Travail (UMT), Union CGniraie des Travailleurs Marocains (UGiM), and ConfederationDcmocratque du Travail (CDT).

150/ For example, there are supposedly only 50 labor inspectors, ane unions allege that these inspectors view theirprimary function as reporting on labor conditions, not enforcing regulations. Labor affairs are not a separateministry but a department in a ministry with a larger mandate, including handicrafts and social affairs. Thelarge budgetary increase in 1993 is aimed at improving intermediation in the labor market and other actions,rather than increased enforcement.

151/ See World Bank Report No. 11557-MOR, especially Annex 4, and Report No. 11894-MOR, especially Annex2, which deal with technology problems in manufacturing and agro-processing. Analogous problemsundoubtedly exist in other sectors, including hotels, banking, and road transport.

152/ Other factors constrain the developmeDt and use of improved technology, including weak contacts betweenbusiness and academic research centers, weaknesses in the quality of the labor force, and weaknesses in tradeassociations: some of these are discused elsewhere in the report.

fte 92 Strengthening th Prlnate Sector hn Morocco

strong enough to force them to shift to technologically more advanced processes and products.For example, the concentrated production structure and the high nominal and effective protectionof many consumer and capital goods limit competition on the domestic market.

240. The institutional networks to improve the dissemination of technology can begrouped into three categories: infornation channels; metrology (weights and measures) andproduct and process standards; and testing and certification. The information channels inMorocco generaLly coincide with commercial contacts (foreign shareholders, equipment and inputsuppliers, purchasers). Some government agencies and several trade associations exist, but mostare not very active. Consulting services remain largely undeveloped. Thus, the flow ofinformation on technology appears to be insufficient and haphazard, which limits diffusionespecially to new and small companies that are less likely to have good foreign contacts.

241. Although the legal metrology framework to define and administer commercialweights and measures is considered largely adequate, the system for adopting national standardsappears inadequate. The process for adopting standards is slow and heavily centered ongovernment initiative and action. Many of the existing standards are outdated or inappropriate(for example, inadequate attention to quality differences in agro-industrial products).

242. Finally, the system for testing and certifying conformity with standards and qualitynorms is largely undeveloped and weak where it exists, despite the existence of some 130 testinglaboratories in Morocco that in general have adequate technical expertise. The major problemstems from the absence of an internationally recognized accreditation system, backed byextensive and recurrent testing of laboratories themselves, to assure reliability and consistencyof test results. This problem is exacerbated by policies, like subsidized state-owned laboratories,that discourage the development of a network of independent testing companies.

fmW fdng the PtNte Sedor in Moroco Page 93

APPENDIX TABLES

P~er 9 Sr.ngken*ng the Pcawge Sedor in Morocco

TABLE A.1: Private/Pubic Sbares in Moroccan Economy

_ooi Aft oi

- GDP 0.3 99 71 'iowww ina 7a 16b 77

d _Aft- c 75 .- 25

as. a.".

Cro 60 40Cold ase 33 67RI vdwi d 62 38

A_ crop

C*u 20 S0Vnn,u. win 90 10

100Milk p__di -d Pr0oiig. 10 fVegobha _S co fbowe prdudim

_ _oomin - 100 gCfeb. Oll_mb 100

_ b GDP i 50 50

M. _sdurig GDP 1, o 19 81

Rad ... 92-

scbwq and yew (p*|uSo adt dAboo.) 1 jTooi _umim 100

Cumwes GDP t 2 98

Tlwmp_t GDP I 29 71

Railways 100Intrcity pasenger bus S 92Trucking 100 kDonstic air travel 100 IInternationIl air freight n.eIntentional air pasengers

Scheduled flights 55 45Chartars 25 75

Octen shipping (total freight) 6 m 94 n

TaurVHotel ownership p 9 91Hotel mnsgement 5 95Other tourist services 100

FhamW sector

Commercial bank ownership 33 12 55Development bank ownership 86 4 10

Post-secondary students, 1992/93 97 - - 3Vocational studenu 68 - - 32

S#wugtl dhe Pnve Sector in Morocco c .455

TABLE A.A: Privatu(Public Sba ir Moinccar ico_omy (co_imaed

Nots": a. Includes govenmuent-owned lad plus religious land; Royal lands (I percent) classifid private.

b. Collective plus tribal lands gruted for military service; inalionable. The 2 sate-ownedenterprises now account for only 0.2 million ha.

c. Basd on hectres, not water. In the public ctor, a .mistry delivers wter to sate-ownedirrigation authorities,which distributes it to farmers.

d. Expected to shift to 55 private and 45 public.e. All sugar mills are state-owned, but the two refineries are private.f. Includes cooperatives.g. Public export monopoly was eliminated in 1986.i. 1990. Prorated by ownership shares of 196 state-owned companies in the government's

monitoring database, which covers 80 percent of the total value-added of all companies with anygovernment ownership. Results are sensitive to how OCP value-added is divided betweenmining and manufacturing.

j. Other parastals (mostly the phosphate mines) cogenerate about 8 percent of total electricity.k. Tightly regulated and licensed for trucks over 8 T.1. Except for one taxi-plane.m. Consists of one company focusing on European shipping.n. Of which 12 percentage points is domestic private (15 companies).O. The survey of formal sector manufacturing companies by the Ministry of Commerce and

Industry gives a higher share to state-owned enterprises (about 25 percent when account is takenof the informal sector).

p. Based on tourist-class rooms.

fPe 96 Strengtning the Phrate Setor an Morocc

TABLE A.2: Sehted Naioa Account Indialon(Averae annual percentage cbangs in conatant 1980 prices, unless otberwise indicated)

1973-80 196145 196-91 1992

GDP Growth 6.0 3.5 4.3 -3.0Of which:

Agculture 2.0 2.5 6.3 --Industry 6.2 2.5 3.5Services 7.7 4.4 4.1

Gross Fixed Investment (percent of GDP) 23.2 24.8 21.7 24.0Of which:

Central and Local Governments 7.9 6.3 4.4 4.2State-owned Enterprises -- 6.0 4.6 --Private Sector -- 12.5 12.8 --

Gross National Savings (percent of GDP) 17.4 17.1 21.9 23.6Of which:

Government Savings 1.9 -1.5 2.4 5.5Non-Government Savings 15.5 18.6 19.6 18.1

Inflation (CPI) 10.1 9.7 4.6 4.9

Real Interest Rates" 2.0'b 2.6 8.0 9.7

h Deposit money banks lending interest rate on short-term credits deflated by the consumer price index(CPI); beginning in late 1990, maximum lending rate.

tb 1979-80.

Sb 8eMh g the Pvvate Sector in Morocco Page 97

TABLE A.3: Selected lndators o the Exterra Sector(Average mual percente cbanges in constant 1980 prices, unless otherwise indicated)

196145 198691 192Mb

Import growth' -I.1 7.6 7.0

Export growth"' 4.5 6.3 0.3of which:1c

phosphates and derivatives 7.1 3.0 -11.4(31) (21) (16)

agricultural commodities -0.4 4.6(14) (15)

textiles, garments, leather products 11.3 16.8 --

(4) (8) .other manufactures"f 5.8 12.3

(15) (18) --

Factor services receipts'8 (US$ millions) 21 60 206(percent of GDP) (0.1) (0.2) (0.7)

Worker remittances (USS millions) 924 1,604 2,175(percent of GDP) (6.6) (7.2) (7.5)

Foreign direct investment (US$ millions) 93 190 498(percent of GDP) (0.6) (0.8) (1.7)

Current account balance (US$ millions) -1,298 -171 -401(percent of GDP) (-9.1) (-0.7) -1.4

Terms of trade index (1990=100) -2.3 2.3 --Real exchange rate index" (1990=100) -5.4 -2.4 --

Nominal exchange rate index'e (1990=100) -16.8 2.2 2.0

Notes: Growth rates are calculated using least square regression on trend." Goods and nonfactor services.lb Preliminary projections./c Percentage of total exports in parentheses./d Primarily value of subcontracting arrangements with foreign companies.

IC Foreign currency per DH."' Includes agro-processed goods.

Popge 98 SAiengdsUelsng the Privae Sector in Morocco

TABLE A.4: Selcted PubL;c Sector Data(Average annual percentges of GDP)

198145 1986691 1992"

Government Deficit' -11.3 -3.8 -1.4Government Revenues 21.5 21.9 25.8Extemal Public Debt'"' 81.0 88.0 70.8Extemal Government Debt/Ci 60.2 73.3 60.0Domestic Public Debt'8 16.1 27.8 25.7

IS Commitments, after debt relief.Official, and officially guaranteed.

IC Medium and long term.Id Excludes direct loans from Central Bank, which in 1989-1991 accounted for about 15 percent of

total Treasury domestic debt.Provisional.

If At constant 1991 exchange rates, the change in debt ratios is more favorable. For total externaldebt, the average ratio falls from 95.5 percent in 1981-85 to 90.1 percent in 1986-91. Forgovernment external debt, the ratio rises, but by less, from 70.2 percent in 1981-85 to 75.1 percentin 1986-91.

Seq Senikg the Pnvae Sceor u Morocco Pe 99

APPENDIX I: Information on Surveys

"Constrsats" Survey

These perceptions are based on a survey of 51 Moroccan private companies in early 1992;roughly 80 percent were medium to large manufacturing fums (more than 50 employees),located in the Casablanca area. See Annex 7, World Bank Report No. 11557-MOR. Thesample included 6 small and 11 majority-owned foreign firms.

"Infrastructure" Survey

Based on a survey of 50 furms in early 1993, of which some 70 percent are in the Casablanca-Rabat area, 80 percent are medium or large (over 100 employees), and 50 percent are inmanufacturing (with 40 percent in services and 10 percent in agriculture,). About 15 percent arestate-owned and a third foreign private owned.

"Incentives" Survey

The "incentives" survey was part of a broader study of incentivcs and protection of industry inMorocco, managed by the Ministry of Commerce and Industry. The survey covered 143 firms,divided roughly equally among: agroprocessing; textile and leather; metals, mechanical andelectrical; and chemicals. An eighth of the firms are state-controlled (more that one thirdequity), and over a quarter are foreign-controlled (more than one third equity). Nearly threefourths are in the Casablanca area. See Beighazi.

"Foreign" Survey

Based on a survey of 20 multinational corporations by the World Bank (see World Bank,Attracting Pnvate Investment, which examined investors' view of 11 countries (A1gr;Bulgaria, Czechoslovakia, Egypt, Hungary, Iran, Morocco, Poland, Romania, Russia a;ujUkraine).

"SmaU Business" Survey

The "small business" study covered the management of 100 small businesses. See El Ghazi,"Etude Analytique sur les Contraintes... ".

Page 100 Strengthening the Pinate Seaor in Morocco

"Prospective" Sur-vey

This survey was conducted as part of the Programn of Information and Assistance for theCreation of Enterprises (PLACE) which aims to develop entrepreneurial spirit in various partsof the country by assisting in the realization of projects which are still in preliminary stages.The program provides necessary technical information, assistance in preparation of requireddocuments, and other support towards realization of the projects. See CNJA, "Programmed'Informnaion... ", especially pages 50-66.

Srengthening the MPiate Sector in Morocco Page 101

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Belghazi, Saad. "Enquete Qualitative--Synthese des Principaux Resultats, " version provisoire,(prepared for Royaume du Maroc, "Les Incitations et la Protection..."). Rabat,decembre 1992.

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