Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No: 20706

IMPLEMENTATION COMPLETION REPORT(SCL-44830)

ON A

LOAN

IN THE AMOUNT OF US$ 250 MILLION EQUIVALENT

TO THE

KINGDOM OF MOROCCO

FOR

A POLICY REFORM SUPPORT LOAN (PRSL)

December 21, 2000

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

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

Pub

lic D

iscl

osur

e A

utho

rized

CURRENCY EQUIVALENTS

(Exchange Rate Effective June 2000)

Currency Unit = Dirham (DH)DH = US$

US$ 1.00 = DH 9.712

FISCAL YEARJuly 1 June 30

ABBREVIATIONS AND ACRONYMS

ADB African Development BankADS Agence de D&eeloppement SocialBAJ Barnamaj alAoulaouiyat alljtimalya (Social Priorities Program)BCP Banque Centrale PopulaireBNDE Banque Nationale pour le Developpement EconomiqueCAS Country Assistance StrategyCCG Caisse Centrale de GarantieCDM Charbonnages du MarocCNCA Caisse Nationale de Credit AgricoleDH DirhamEN Entraide NationaleEU European UnionFDI Foreign Direct InvestmentGDP Gross Domestic ProductlAM Itissalat al-Maghreb (Public Telephone Company)IBRD Intemational Bank for Reconstruction and DevelopmentIMF International Monetary FundINEJ Institut National des Etudes JudiciairesNGO Non-Government OrganizationsODEP Office d'Exploitation des PortsODI Office de Developpement IndustrielOFPPT Office de la Formation Professionelle et de la Promotion du TravailONCF Office National des Chemins de FerONDA Office National des AeroportsONE Office National de lElectriciteONEP Office National de l'Eau PotableONT Office National du TransportPAGER Programme d'Approvisionnement Groupe en Eau Potable des Populations

RuralesPBG Pacte de Bonne GestionPERG Programme d'Electrification Rurale GlobalPHRD Policy and Human Resources DevelopmentPN Promotion NationalePNCRR Programme National de Construction des Routes RuralesPPI Private Participation in InfrastructurePRSL Policy Reform Support LoanPSA Private Sector AssessmentRAM Royal Air MarocSAL Structural Adjustment LoanSEFERIF Societe d'Exploitation des Mines du RifTPI-SAL Telecommunications, Post and Information Technology Sector Adjustment Loan

WTO World Trade Organization

Vice President: Jean-Louis SarbibCountry Manager/Director: Mustapha Nabli

Task Team Leader: Ali KhadrTeam Leader at ICR: Amine Khene

FOR OFFICIAL USE ONLY

CONTENTS

Page No.1. Project Data I

2. Principal Perfornance Ratings 1

3. Assessment of Development Objective and Design, and of Quality at Entry 1

4. Achievement of Objective and Outputs 5

5. Major Factors Affecting Implementation and Outcome 10

6. Sustainability 107. Bank and Borrower Performance 11

8. Lessons Learned 12

9. Partner Comments 13

10. Additional Information 13

Annex 1. Key Performance Indicators/Log Frame Matrix 14

Annex 2. Project Costs and Financing 15

Annex 3. Economic Costs and Benefits 17Annex 4. Bank Inputs 18

Annex 5. Ratings for Achievement of Objectives/Outputs of Components 19

Annex 6. Ratings of Bank and Borrower Performance 20

Annex 7. List of Supporting Documents 21

This document has a restricted distribution and may be used by recipients only in theperformance of their official duties. Its contents may not be otherwise disclosed withoutWorld Bank authorization.

Project ID P058356 Project Name: POLICY REFORM SUPPORTeam Leader: Ali Mahmoud Khadr TL Unit: LCC3CICR Type Core ICR Report DatE December 19, 2000

1. Project Data

Name POLICY REFORM SUPPOR L/C/TF Number: SCL-44830Countr Departmen: MOROCCO Region: Middle East and North

Africa RegionSector/subsecto. ME - Economic Management

KEY DATESOriginal Revised/Actual

PCD: 08/03/1998 Effective: 06/18/99 06/18/99Appraisal: 10/23/1999 MTR: 11/11/99 11/11/99Approval: 06/01/1999 Closing: 12/31/99 12/31/99

Borrower/lImplementing Agenc:Other Partners:

STAFF Current At AppraisalVice President: Jean-Louis Sarbib Kemal DervisCountry Manage: Christian Delvoie Christian DelvoieSector Manager: Mustapha Kamel Nabli John PageTeam Leader at ICR: Amine KheneICR Primary Author: Amine Khene

2. Principal Performance Ratings

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HL=Highly Likely, L=Likely, UN=Unlikely, HUN=HighlyUnlikely, HU=Highly Unsatisfactory, H=High, SU=Substantial, M=Modest, N=Negligible)

Outcome: U

Sustainability: UN

Institutional Development Impact: M

Bank Performance: U

Borrower Performance: U

OAC (if available) ICRQuality at Entr:

Project at Risk at Any Time:

3. Assessment of Development Objective and Design, and of Quality at Entry

3. X Originc Objective:

In the context of the economic and political liberalization taking place in Morocco, the new center-leftalternance governrment, formed in early 1998 by a seven-party coalition, turned to the Bank for support indefining and leveraging a broad-based reform agenda. To this effect, the govermment requested a newapproach to Bank assistance, based on credible prior action rather than forward-looking conditionality.

Acknowledging Morocco's track record of solid economic management and the Government's commitmentto future reform, and determined to show up-front support for Morocco at a crucial juncture of itsdemocratization process, the Bank responded positively and swiffly to the government's request, sending animportant signal to the investor community that political opening and economic reform go hand-in-hand inMorocco.

The specific lending instrument was a Policy Reform Support Loan (PRSL), a single-tranche operation,envisioned as the first sequence of a multi-year program of the Bank in support of the alternancegovernment reform agenda.

An outcome of the intensive dialogue between the government of Morocco (GOM) and the Bank, the PRSLhad the objective of advancing the government's broad-based economic and social reform program whichwas designed to accelerate GDP and employment growth, and to increase access to basic services andreduce poverty. Under this program, the government gave a public commitment to pursue sound economicmanagement, initiate public sector reform, encourage private sector development, and address the country'ssocial development agenda.

3.2 Revise, Objective:

Project objective was not revised.

3.: Origina Components:

To achieve its overall objective, the PRSL envisioned various objectives and actions in the areas ofmacroeconomic management, public sector reform, private sector development, and social sector reform.

Macroeconomic Management

The objectives under this component were to maintain a consistent macroeconomic policy framework,consolidate macroeconomic balances, and increase medium-term GDP growth to 6 percent in order toreduce unemployment. The budgetary policy stance aimed to achieve a gradual reduction in the deficit,from 3.5 percent of GDP in FY 97/98 to around 2 percent of GDP by FY 01/02.

This component also included preparation of measures during FY 98/99, to be implemented in subsequentbudgets, in order to ensure a sustainable increase in budgetary savings. These measures included: (i) taxmeasures (per IMF recommendations); and (ii) measures to reduce the govermment wage bill by at least twopercentage points of GDP by FY 03/04.

Public Sector Reform

The PRSL targeted three areas critical for public sector reform: (i) budgetary institutions; (ii) the civilservice; and (iii) the judiciary.

1) Budgetary institutions

For budget preparation, the objectives were to: (i) put in place institutional arrangements for annual budgetpreparation in order to ensure better medium-term strategic prioritization of public expenditures against a

- 2 -

backdrop of fiscal discipline; and (ii) prepare annual budgets on the basis of a medium-term framework, tobe detailed in the five-year Plan.

For budget execution, the objectives were to: (i) achieve more transparent and streamlined management ofexpenditures and procurement, in order to foster more efficient and effective use of resources at theministry/agency level; and (ii) ensure full implementation of the action plan designed to streamline budgetexecution (prepared under the BAJ project on the basis of prior diagnostic studies).

2) Civil service and administrative reform

The objective was to define and implement a broad-ranging civil service reform program to ensure aprogressive reduction of the central government wage bill (as a share of expenditure and of GDP) whilemaintaining service delivery levels and improving their quality.

The project was designed to begin the process of addressing impediments to staff mobility across andwithin departments, excessive centralization of decision-making authority, poor enforcement of ethicalstandards, inadequate or non-existent service standards, complexity of remuneration structures, and poorlinks between performance and advancement.

3) Judicial reform

The objectives were to: (i) enhance capacity to handle commercial litigation through the development of anetwork of specialized commercial courts and promote arbitration as an altemative mechanism forcommercial dispute resolution; (ii) restructure Ministry of Justice to provide for more streamlineddecision-making and improved service delivery, including the establishment of a new unit for userfeedback; (iii) improve incentives and conditions (including issues relating to remuneration, careerdevelopment, training, and professional status and ethics) in order to promote better performance andservice delivery among court staff; (iv) improve professional standards and training for judges, notablythrough a comprehensive restructuring of INEJ to ensure greater managerial and financial autonomy,curriculum overhaul, and greater interaction with the business environment; and (v) develop and sustain aparticipatory approach to legal and judicial reform through partnership with all legal professions.

Private Sector Development

The PRSL targeted four areas critical to successful private sector development: (i) public enterprise reformand privatization; (ii) demonopolization and private participation in infrastructure; (iii) an improvedbusiness environment; and (iv) access to finance.

1) Public enterprise reform and privatization

The objectives were to: (i) implement a comprehensive public enterprise reform and privatization programwithin the tenure of the alternance government; (ii) liquidate non-viable state-owned commercial ventures(beginning with two mining enterprises which constituted a significant part of the portfolio of non-viableenterprises) with an adequate provision for safety net measures and a settling of financial liabilities; (iii)revise the legal framework for transfer of state-owned commercial ventures to the private sector; (iv)accelerate sale of residual portfolio of state-owned enterprises previously targeted for privatization; and (v)initiate the sale of other enterprises not previously earmarked.

-3 -

2) Demonopolization and private participation in infrastructure

The objectives were to: (i) ensure that the legal, regulatory, and institutional framework encouragescompetition and efficient private participation in infrastructure; (ii) define and implement specific policymeasures to encourage greater competition in the provision of energy services; and (iii) define andimplement specific policy measures to encourage greater competition in the provision of transport servicesand improved intermodal transport.

3) Business environment

The objectives were to: (i) establish a legal framework providing for greater transparency of customsvaluation procedures, and further streamline customs clearance procedures and reduce delays; (ii) put inplace a legal framework to foster competitive business practices, including a progressive substantialreduction in the scope of remaining price controls; and (iii) streamline procedures for the establishment andregistration of private businesses and their assets.

4) Access to finance

The objectives were to: (i) ensure the future financial viability and efficiency of state-owned financialinstitutions to improve allocation of resources and financing to the economy; and (ii) provide a legal basisfor the efficient functioning of the micro-credit market, to increase access to finance of small and mediumsized enterprises.

Social Sector Reform

PRSL targeted six areas critical to successful reform in the social sectors: (i) poverty reduction and socialassistance; (ii) community development; (iii) basic infrastructure in rural areas; (iv) education; (v) adultliteracy; and (vi) health.

1) Poverty reduction and social assistance

The objectives were to: (i) prepare and start implementing a detailed action plan to increase access of thepoor, particularly in rural areas, to basic social and infrastructure services; (ii) implement a comprehensiverestructuring of Entraide Nationale (EN) to ensure more effective and efficient delivery of services notablythrough restraining the EN's role to the identification of needy groups, coordinating assistance and ensuringmonitoring and evaluation; and (iii) strengthen existing safety nets mechanisms.

2) Community development

The objective was to put in place a publicly funded mechanism to support low-income communitydevelopment initiatives, using participatory methods of project identification and implementation anddrawing on the capacity of NGOs.

3) Basic infrastructure in rural areas

In support of the continued efforts under way in this field, the objectives were to: (i) increase access topotable water in rural areas from about 37% of the population in 1998 to 53 percent of the population in2002; (ii) extend road access in rural areas to 58 percent of the population in 2003, compared with around40 percent in 1998; and (iii) increase household access to electricity in rural areas under the normal

- 4 -

electricity supply (PERG) program to 43 percent of the population by 2003.

4) Education

The objective was to achieve universal enrollment of children 6 to 11 years old in basic education by 2002,with special concentration on rural areas, without significantly increasing overall education expenditures,notably through redeployment of under-utilized staff resources at the secondary level.

5) Adult literacy

The objective was to put in place a flexible, publicly funded mechanism to support adult literacy programsthrough, inter alia, NGO programs and professional associations with the objective of increasing theeffectiveness of adult literacy programs.

6) Health

The objectives were to: (i) increase basic healthcare services in rural areas; (ii) ensure greatercost-effectiveness in the provision of healthcare services and pharmaceuticals; (iii) extend access to healthinsurance coverage, particularly for the poor and vulnerable; (iv) improve efficiency in hospital andhealthcare management; and (v) decentralize decision-making authority.

3.4 Revise. Components:

Project components were not revised.

3. ' Quality at Entry:

The project was not selected for a quality at entry assessment by the Bank's Quality Assurance Group.

4. Achievement of Objective and Outputs

4. Outcome/achievement of oljective:

The project achieved important results during its first year of implementation. The Bank's upfront supportof the alternance government's reform program reinforced its credibility. In this respect, it is important tonote that the African Development Bank (ADB) approved a parallel two-tranche policy-based lendingoperation in the amount of US$200 million.

The PRSL supported the government in defining and leveraging a broad-based reform program, achievingpolicymaking coherence among the coalition members, and reinforcing the discipline of the policymakingprocess across various government entities. To signify its commitment to reform and transparency, thegovermment publicized its Letter of Development Policy (LDP)- a detailed presentation of its economic andsocial reform program based on the Government's inaugural policy statement of April 17, 1998.

The government made a significant effort to enforce policymaking discipline across ministries and agencies,and to build consensus for reform among the various stakeholders. Shortly after assuming office, thegovernment took steps to contain an otherwise widening deficit for the 1997/98 fiscal year to 3.5 percent ofGDP. Its 1998/99 budget, approved by Parliament in July 1998, provided for a similar deficit level.Sound management measures (see 4.2) were also initially taken in the areas of public sector reform, private

- 5 -

sector development, and social reform. These measures helped to create significant consensus for thereforms.

Then, in the sunmmer of 1999, at the time of PRSL presentation to the Board, Morocco was suddenlyconfronted with important economic and political challenges. In July 1999, after a 38-year reign, HisMajesty King Hassan II died. And, because of severe drought, 1999 turned out to be a very badagricultural year. In this context, and given the significantly looser extemal financial constraint as a resultof large telecom privatization inflows, the Government decided to relax fiscal discipline (see 4.2) in order toenhance social stability. This weakened the momentum of the PRSL operation.

The PRSL performance was also negatively affected by the limitations of project design. The PRSL wasoriginally designed as the first in a series of similar operations over a three to five-year period. However,since the PRSL had not been discussed in the context of the Country Assistance Strategy (the CAS was duein 2000), the Board did not fully endorse the PRSL's programmatic lending approach. Hence, amid thecomplex circumstances of the simultaneous economic and political transition taking place in Morocco, theoperation, lacking a strong programmatic lending rationale, achieved important initial results that were notimplemented or followed through in a consistent manner. Implementation and follow-up of the PRSLmeasures proved to be generally difficult and slow, and lagged behind in some crucial areas, notablyadministrative and civil service reform.

As a result, and even though the project achieved important objectives, its overall outcome is assessed asmarginally unsatisfactory.

4. Outputs by components:

Macroeconomic Management

Government's macroeconomic policies were generally consistent with the PRSL framework during the yearfollowing its adoption. In 1998/99, budget deficit was brought down to 2.5 percent of GDP from 3.4percent of GDP the previous fiscal year, despite a disappointing growth performance due notably to a badagricultural year and deterioration of the economy's extemal competitiveness as reflected by the realappreciation of the Dirham.

However, the transitional six-month budget law for 2000, before Morocco returns to calendar fiscal yearsin January 2001, marks a clear departure from the PRSL framework: (i) the budget deficit is expected tojump to 9.7 percent of GDP (compared to the PRSL objective of 2 percent in 2002) while the wage bill isexpected to rise to 12.8 percent of GDP (compared to the PRSL objective of 10.5 percent in 2001); and (ii)budgetary savings are expected to be negative at -1.2 percent of GDP, compared to the PRSL objective of3.6 percent in 2001.

If these projections are accurate, the PRSL macroeconomic framework will cease to be relevant. In fact, thereversal of such trends seems very unlikely, particularly in the absence of a comprehensive administrativeand civil service reform.

Public Sector Reform

In the area of public sector reform, with the exception of judicial reform, implementation of the PRSLproved to be particularly difficult and slow.

- 6 -

1) Budgetary institutions

With the exception of the 1999 organic budget law, which significantly reduced the number of specialaccounts and annex budgets, and of the procurement decree, the reforms designed to establish amedium-term public expenditure and associated macroeconomic framework have remained at an early stageof implementation (e.g., studies). This is also true for measures intended to improve the expendituremanagement process (from ex ante authorization requirements to effective payment of suppliers).Specifically, the Gestion integr&e de la d6pense (GID) study has been considerably delayed, and thefindings and recommendations of the Normalisation des depenses publiques study are still not known.

2) Civil service reform

Little progress has been achieved in the crucial area of administrative and civil service reform.Government policies have fallen short of containing the wage bill, promoting administrativedecentralization, easing restriction on mobility of personnel, fostering better client relations, improvingservices to citizens, and overhauling incentives for Government employees. The Government's wage billhas not been reduced or contained. With respect to administrative decentralization, the Government has notyet approved the Charte de Deconcentration. With respect to client orientation, the Government hasapproved a Good Management Compact (Pacte de Bonne Gestion), but most of its principles andguidelines have yet to be translated into concrete measures and actions.

3) Judicial reform

In the area ofjudicial reform, implementation of PRSL measures has been fully satisfactory. Thegovernment has: (i) enhanced the capacity of the specialized commercial courts to handle commerciallitigation; (ii) restructured the Ministry of Justice to provide for more streamlined decision-making andimproved service delivery; (iii) improved incentives and conditions to promote better performance andservice delivery among court staff; (iv) improved professional standards and training for judges; and (v)developed a participatory approach to legal and judicial reform through partnership with the legalprofessions.

Private Sector Development

Although implementation has been uneven, some significant progress has been achieved in the area ofprivate sector development.

1) Public enterprise reform and privatization

The government has taken steps to strengthen govemance and performance of the enterprises remaining inthe public sector; transfer in a transparent manner the majority of the remaining portfolio of publicenterprises to the private sector, including IAM and RAM; and liquidate nonviable enterprises such asCDM and SEFERIF.

2) Private participation in infrastructure

Parliament has approved a long-awaited law abolishing the monopoly of ONT on road freight, although theabolition is deferred for two years and ONT's regulatory functions have not been clearly separated from itscommercial activities. The government has initiated a study of options for increasing competition in the

-7 -

energy sector. It has also initiated work on a strategy for increasing competition and private provision inrail, air, road and maritime transport services.

3) The business environment

The government has initiated a major customs reform. It approved a new customs code and was successfulin reducing the average time required for customs clearance to less than one day (compared to two days in1998). With Parliament's approval of a new competition law, the government has put in place a legalframework to foster competitive business practices, including a progressive substantial reduction in thescope of remaining price controls. It has also approved a single agency for the registry of intellectualproperty rights in the industrial and commercial sectors.

4) Access to finance

Important steps are being taken to ensure the financial viability and efficiency of state-owned financialinstitutions such as CNCA, CIH, CCG, and BCP. However, Parliament still has not approved the draftlegislation that transforms CNCA into a joint stock company.

In order to provide legal basis for efficient functioning of the micro-credit market, a law facilitatingnicrolending activities has been promulgated.

Social Reforms

With the exception of significant progress in the area of rural basic infrastructure, implementation hasgenerally been difficult in the social sectors.

1) Poverty reduction and Social assistance

The Government has prepared an action plan to increase access of the poor, particularly in rural areas, tobasic social and infrastructure services. It has also prepared a document detailing the Entraide Nationalelong-term development strategy, and started to implement a restructuring program for EN through: (i) theselection of provinces in which to begin implementing the restructuring program on a pilot basis; and (ii) anassessment of EN's vocational training and transfer of trainees to OFPPT programs. No information isavailable regarding the review of the necessary changes in EN's legal status, to be introduced in accordancewith the restructuring program.

2) Commnunity development

The government has initiated work on institutional arrangements to ensure operational autonomy of theSocial Development Fund (ADS). Parliament has approved the law creating ADS, but the government hasnot yet appointed its Director General.

3) Basic infrastructure in rural areas

The government should be credited with two important decisions : (i) the 50 percent increase in budgetallocations to rural infrastructure programs, and (ii) the adoption of a long-delayed water surcharge on theupper tranches of urban consumers to increase the pace of the PAGER. As a result, the government hasincreased access to potable water in rural areas from about 37 percent of the population in 1998 to anestimated 43 percent in 2000. It has extended road access in rural areas to about 45 percent of the

-8-

population in 2000, compared with around 40 percent in 1998. It has also increased douars' access toelectricity in rural areas under the rural electricity supply program (PERG) by an average of 5 percent peryear.

4) Education

The government has extended rural schooling facilities through construction of more than 1,500 classroomsin 1998/99. In addition, a major education reform program is currently before Parliament. However, littlewas achieved with respect to staff mobility and redeployment of personnel.

5) Adult literacy

The government has created an adult literacy fund which concluded around fifty agreements, including withNGOs and the private sector.

6) Health

No major progress was made in extending health insurance coverage or ensuring affordable and adequatehealthcare for low-income households. In February 2000, a national committee chaired by the PrimeMinister was established to review this issue and make specific recommendations. The committee hascompleted its work; however, to date its recommendations have not been made public.

The Ministry of Health has carried out a survey to identify the gaps in different categories of personnel inthe 14 BAJ provinces. Ministry of Health made sustained efforts to allocate annually around 50 percent ofpersonnel new positions to BAJ provinces.

A decree has been enacted introducing user charges for services rendered by hospitals and other healthcareestablishments under Ministry of Health control; this decree and will serve as a basis for future hospitalmanagement reform. Standardized bulk purchase procedure for pharmaceuticals has been adopted andpurchases are being made according to the new procedure. Finally, national health accounts are about to becompleted.

4.3 Net Present Value/Economic rate of return:Not applicable.

4.4 Financial rate of return:Not applicable.

4.5 Institutional development imnpact:The Bank strategy for institutional development consisted of using the PRSL operation as a focal point fordeveloping consensus in favor of the reform agenda. The PRSL served as a vehicle for the articulation of acomprehensive short- to medium-term framework for economnic policy and institutional reform, and as arallying device to help push through the implementation of a first set of measures that were central to thisframework. It is important to note, in this connection, that: (i) the PRSL framework (as laid out in LDP) is,to date, the only relatively comprehensive, detailed and coherent economic framework attributable to thegovernment; and (ii) as a vehicle, the PRSL lent impetus for the implementation of some importantmeasures ( road transport liberalization, overhaul of the privatization framework, establishment of a socialfund, keeping down the 1998/99 and the 1999/00 budget deficits).

-9-

5. Major Factors Affecting Implementation and Outcome

5.] Factors outside the control of government or iinplementing agency:Implementation of the PRSL framework was hindered, at least in part, by two factors outside the control ofgovernment: (i) the death of King Hassan II in July 1999 after a 38-year reign; and (ii) persistent droughtwhich led to two successive bad agricultural years.

5.2 Factors generally subject to governzment control:Implementation of the PRSL framework was hindered by three main factors subject to government control:(i) management of the exchange rate, which did not prevent a real appreciation of the dirham, andconsequently, a deterioration of the external competitiveness of the Moroccan economy; (ii) lack ofdetermination to push ahead with administrative and civil service reform; and (iii) insufficientconsensus-building in favor of the PRSL framework among stakeholders.

5.3 Factors generally subject to inmplementing agency control.

Not applicable

5.4 Costs andfinancing:Not applicable

6. Sustainability

6.1 Rationale for sustainability rating.

Morocco's past record of very gradual reform implementation suggests that most of the reforms that beganunder the PRSL will be followed through in the long run. In particular, Morocco's Association Agreementwith the European Union should be conducive to a sustained effort aimed at bringing Morocco up to parwith its European partners, which will involve implementing many of the reforms agreed upon under thePRSL framework. The Agreement with the EU constitutes a strong incentive for deepening the approachindicated in the PRSL, and in fact has already proven to be a strong incentive for private sectordevelopment, particularly in the telecommunications sector.

However, there is some question as to the speed and depth of effective reforn implementation. Given theclose interlinkages between the four main PRSL areas, the speed and depth of implementation in each iscrucial to the success of the overall process. There are particular concerns about the consensus andmomentum still needed for reform in the area of administrative and civil service reform, where the currentspeed and depth of reform implementation are not sufficient to ensure that the PRSL framework can besustained in the medium-term.

6.2 Transition arrangement to regular operations:Not applicable.

7. Bank and Borrower Performance

Bank7.1 Lending:The preparation of the loan entailed major and rapid resource mobilization on the part of the Bank, andclose coordination among the many Bank sectors and multiple Government counterparts involved, as wellas with the African Development Bank. It also entailed intensive examination of the Bank experience andlessons leamed from past involvement in Morocco. The loan was processed on a timely schedule. Theoverall policy reform framework drawn up in the context of the PRSL did not have any inconsistencies,

- 10 -

misdiagnoses or similar flaws. However, since it became very unlikely that the PRSL would be followed bysimilar operations, its design ended up not having the strategic consistency necessary to ensuresustainability of the loan's measures. This negatively affected the overall momentum of the operation.

The Bank's performance in lending is assessed as marginally unsatisfactory.

7.2 Supervision.Supervision of the loan was intensive. The method entailed assessment of follow-up to the initial measurestaken prior to Board presentation, and, more generally, of what had taken place in relation to the roadmaplaid out in the Letter of Development Policy. One minor drawback of the selected monitoring indicators wasthat they were difficult to update within the short lifespan of the loan. It is to be noted that, given the natureof the loan, all measures agreed upon at negotiations (completed in December 1998) were in factimplemented before Board presentation (June 1999), and that supervision focused largely on the extent offollow-up to these measures and adherence to the broader policy framework laid out in the Letter ofDevelopment Policy.

The Bank's performance in supervision is assessed as marginally satisfactory.

7.1 Overall Bank performance:In addition to there being no obvious flaws in the policy and reform framework drawn up in the context ofthe loan, there were no defects in design hindering assessments of implementation. Despite the task team'shigh level of expertise, and particularly a very effective task team leadership that was able to successfullymanage, in difficult circumstances, a complex multi-sector loan and coordinate among the various partnersand counterparts involved, and despite the achievement of important objectives, overall Bank performancesuffered from the ambiguity of the programmatic lending rationale of the loan. Although at the time of thesupervision mission (November 1999), the record of what had been achieved warranted an assessment ofmarginally satisfactory, the persistent lack of follow-up on these crucial reforms since that time, added tothe current fiscal slippage, now warrants a rating of marginally unsatisfactory.

Overall Bank performance is assessed as marginally unsatisfactory.

Borrower7.4 Preparation:

There was sustained dialogue and close cooperation at the time of preparation between the Bank and theGovernment. The Government managed to mobilize most relevant governmental entities in favor of theproject, and to progress in building the needed consensus with other important stakeholders.

Borrower's performance in lending is assessed as marginally satisfactory.

7.' Government implementation performance:Implementation was uneven and slow, most particularly in some areas crucial to the successfulimplementation of the Govermment's reform agenda such as administrative and civil service reforn. Anumber of measures, such as the effective creation of ADS, actually depended on follow-up measures thatstill have not been taken.

Government's implementation performance is assessed as marginally unsatisfactory.

7.6 Implementing Agency:Not applicable.

- 11 -

7. C)verall Borrowerperformance:After reasonable progress in many areas, despite significant shortcomings in some, the Borrowerperformance suffered from the lack of follow-up implementation in key structural and institutionalreforms.

Overall Borrower performance is assessed as marginally unsatisfactory.

E Lessons Learned

1. In responding promptly to the request for support by the alternance Government, the Bank made asound political decision, but may have underestimated the need to build a larger and stronger consensus infavor of the PRSL operation. An improved loan design would have helped ensure better implementation. Inthis regard:

- One option would have been a more explicit, tighter-knit, and more carefully planned programmaticapproach in the PRSL. Had this approach been followed to its logical conclusion, two things should havebeen done: (i) an interim CAS, a CAS update, or a similar instrument should have been prepared andprocessed in parallel with the operation as a vehicle for seeking Board discussion and approval of theapproach; (ii) the loan should have been more explicitly designed as a programmatic loan, with a clearerdelineation of successive sequences of measures as triggers for subsequent operations.

- Another option (not necessarily mutually exclusive from the preceding) would have been to find amechanism to build more broad-based consensus over and commitment to the PRSL framework, such as anumber of open forums to discuss the PRSL framnework and scope prior to finalizing the operation.However, this would have had to be weighed against the extra time that would have been required, and thusthe likely delay in delivering the operation as required.

- A third option (again not mutually exclusive) that might have kept implementation more on track wouldhave been follow-up with technical assistance or other projects in key areas, such as civil service reform.That would have added consistency and efficiency to the project through the enhancement of theadministration's institutional capacity. This capacity - e.g., in regard to the lengthy and difficult preparationof the Plan, or the difficulty of effectively addressing administrative and civil service reform - should havebeen improved to enable the new government to prepare and implement a broad economic and social refonnagenda while maintaining a sound macroeconomic framework.

- A fourth option would have been to make the PRSL a much more focused instrument, perhapsconcentrating the policy and reform agenda supported by the loan squarely on the issue of medium-termfiscal adjustment and institutional and structural reform measures needed to support a broader operation.Incidentally, this was exactly the design envisioned by the Government and the Bank ( in the summer of1999) for a follow-up "PRSL II". However, this choice would have diminished the impulse actually givento the implementation of a broad-based reform agenda. Trading off breadth for greater depth of coveragemay well have resulted in better implementation, but may not necessarily have been more effective from along-term development perspective.

2. Excessive pressure was exerted on staff in order to meet short deadlines, probably to the detriment of adeeper and more substantive dialogue on the many important issues addressed in the PRSL, as well as,consequently, of better government ownership of its reform agenda. Time (for dialogue and ownership aswell as for implementation) is particularly crucial to the success of difficult efforts such as administrative

- 12 -

and civil service reform.

3. One lesson to be drawn from the elaboration of the present ICR is that the choice of the Outcomerating is too limited to properly serve the purpose of an objective and fair assessment of the project.Specifically, a "Satisfactory" rating would be excessively positive whereas an "Unsatisfactory" ratingwould not do justice to a project that achieved important results under the particularly difficultcircumstances of a combined economic and political transition. Consequently, our recommendation is toadd two new ratings: "Marginally Satisfactory" and "Marginally Unsatisfactory". If such categories wereavailable, this project would have been rated "Marginally Unsatisfactory".

4. Both the Governnent and the Bank would benefit from an open debate on the PRSL. Confronting theirperspectives, sharing their views and experiences, assessing together the results of this operation in thecontext of a public seminar should help draw the best possible lessons for the future and deepen theongoing dialogue between Morocco and the Bank.

9 Partner Comments

(a) Borrower/implementing agency:POLICY REFORM SUPPORT LOAN (PRSL):

COMMENTS ON THE IMPLEMENTATION COMPLETION REPORT

Page 6:. Macroeconomic Management

Paragraph 1: The report emphasizes that in 1998/99, the budget deficit was broughtdown to 2.5 percent of GDP (from 3.4 percent of GDP the previous fiscal year), despite disappointinggrowth perfornance. It should be made clear here that the 2.5 percent deficit estimate does not takeprivatization into account. Also, the word "disappointing" should be replaced by "inadequate."

Paragraph 2: The report indicates that the budget deficit is expected to jump to 9.7percent of GDP, although the PRSL objective is to reduce it to 2 percent in 2002. The wage bill isexpected to rise to 12.8 percent of GDP (compared to the PRSL objective of 10.5 percent in 2001), andbudgetary savings are expected to be negative at -1.2 percent of GDP (compared to the PRSL objective of3.6 percent in 2001).

As this analysis is limited to the 2000 transitional budget, it does not reflect developments in themacroeconomic framework over the fiscal years of the PRSL implementation process. This is reasonenough to eliminate this paragraph, and to emphasize the considerable achievements of the 1999/2000fiscal period. Although not mentioned in the report, these achievements include reduction of the deficit (0.7percent with privatization, 2.6 percent without it), and reduction of the wage bill to 12 percent of GDP.Mention should also be made of the projections for the medium term incorporated in the now adoptedEconomic and Social Development, namely lowering of the deficit to 1.5 percent of GDP in 2004 andreduction of the wage bill to 2 percent of GDP by 2004.

Page 7: Budgetary institutions

The report notes that the Gestion integree de la depense (GID) study has been considerablydelayed, and that the findings and recommendations of the Normalisation des depenses publiques study are

- 13 -

still not known.

It should be indicated that the GID study is under way. It is to be conducted in four phases,culminating in development and introduction of the GID system in the ministries involved (Infrastructure,Agriculture, Finance, and Health) before being extended to all remaining governnent departnents. Theadministrative order to begin the research activities forning part of the first phase of the study were issuedto the consultant on September 21, 1999, and the draft report on the first phase has been endorsed by theFinance Ministry and the pilot ministries.

The Normalisation des depenses publiques study is also under way.

Page 8:

Access to finance: The report states that Parliament has still not approved the draft legislationconverting CNCA into a joint stock company.

This measure should be transferred to the CNCA emergency reorganization plan, introduced as ameans of ensuring the agency's financial viability. This plan calls in particular for: (i) the capital of thisinstitution to be increased to DH 250 million; (ii) relief measures for debt-distressed farmers; and (iii)conversion of CNCA's legal status to that of corporation with board of directors, supervisory board, andintroduction of contractual arrangements for the handling of operations dependent on specific governmentsupport. The necessary articles of incorporation have been submitted to Parliament for approval.

Restructuring of Entraide Nationale: Implementation of the restructuring program agreed onbetween the Ministry and the World Bank is going ahead quite satisfactorily. Most of its provisions havebeen acted on. The agency's Staff Rules and Regulations, which took a year to negotiate, are nowcomplete and are currently going through the process of adoption. Its organization chart is still in thecourse of negotiation.

Social Development Fund: The Director General was appointed in July 2000 and the agency iscurrently in the set-up phase. Launching of a pilot operational phase is scheduled for early 2001.

Page 9:

Health: The report states that no major progress was made in extending health insurance coverageor ensuring access to adequate health care for low-income households.

The Government has just completed drafting of two framework laws, one on compulsory healthinsurance (AMO) and one making provision for medical care for the economically disadvantaged(RAMEF). The AMO legislation focuses mainly on civil servants (central government and localgovernments), individuals who come under current CNSS arrangements, public- and private-sector retirees,self-employed individuals, and members of the liberal professions. The RAMEF legislation provides fortotal or partial payment of hospital care provided by public hospitals for low-income individuals.

Adult literacv: A total of 82 agreements have been signed and are being implemented by NGOsand the private sector.

- 14 -

Page 10: Exchange rate appreciation

The report asserts that PRSL execution was hampered by exchange rate management which failedto prevent real appreciation of the dirham and a resulting decline in the extemal competitiveness of theMoroccan economy.

It is of doubtful relevance to target the analysis here on the instrument of foreign exchange withoutconsidering other factors with a greater effect in strengthening the competitiveness of business enterprises -for instance, optimum cost management, outlet diversification, and enhanced productivity.

In addition, it would be advisable to round out this report with particulars on the steps Moroccohas taken recently in the matter of subsidies.

The reference here is to reform of the oilseed subsector, effective November 1, 2000. A key aim ofthis reform, introduced in conjunction with a liberalization of subsector oil prices, is to bring consumers thebenefit of more dynamic management of the equalization fund, aimed at: making a varied range of edibleoils available at a price below or equal to the current price; keeping up the income levels of sunflower seedproducers; and, by taking advantage of the potential for blends with olive oil, providing an additional outletfor national production of this commodity.

The success of this reform requires lowering import duties on oilseeds and crude oils to theminimum rate of 2 percent. Besides enabling the edible oil industry to buy supplies at a lower cost on theintemational market, this will lay the foundations for fair and healthy competition between crushers andrefiners.

The reform will be accompanied by significant customs protection for refined oils and a loweringof the protection available on oil cake. The result will be a drop in livestock feed prices, and a related dropin the price of animal proteins, particularly poultry.

Other support measures guaranteeing the success of the reform will include reimbursing farmersthe difference between the current price and the cost price of imported grain.

(b) Cqfinanciers:

(c) Other partners (NGOs/private sector):

1( Additional Information

- 15 -

Annex 1. Key Performance Indicators/Log Frame Matrix

Not applicable.

- 16 -

Annex 2. Project Costs and Financing

Project Cost by Component (in US$ million equivalent)Appraisal Actual/Latest Percentage ofEstimate Estimate Appraisal

Project Cost By Component US$ million US$ million250.00 250.00

Total Baseline Cost 250.00 250.00

Total Project Costs 250.00Total Financing Required 250.00 250.00

Project Costs by Procurement Arrangements (Appraisal Estimate) (US$ million equivalent)

Procuremen Methoo.Expenditure Category ICB NCB Otho.2 N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

3. Services 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

4. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

5. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

6. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Total 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Project Costs by Procurement Arrangements (Actual/Latest Estimatel (US$ million equival nt)

. Procuremen MethocIExpenditure Category ICB NCB Othe.2 N.B.F. Total Cost

1. Works 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

2. Goods 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

3. Services 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

4. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

- 17-

5. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

6. Miscellaneous 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Total 0.00 0.00 0.00 0.00 0.00(0.00) (0.00) (0.00) (0.00) (0.00)

Figures in parenthesis are the amounts to be financed by th Bank Loar . All costs include contingencies.

2" Includes civil works and goods to be procured through national shopping, consulting services, services of contracted

staff of the prqject management office, training, technical assistance services, and incremental operating costs related to(i) managing the project, and (ii) re-lending project funds to local government units.

Project Financing b: Componen (in US$ million equivalent)Percentage of Appraisal

Component Appraisal Estimate Actual/Latest EstimateBank Govt. CoF. Bank Govt. CoF. Bank Govt. CoF.

0.0 0.0 0.00.0 0.0 0.0

0.0 0.0 0.0

- 18 -

Annex 3: Economic Costs and Benefits

Not applicable

- 19-

Annex 4. Bank Inputs

(a) Missions:Stage of Project Cycle No. of Persons and Specialty Performance Rating

(e.g. 2 Economists, I FMS, etc.) Implementation DevelopmentMonth/Year Count Specialty Progress Objective

Identification/Preparation8 economists, S SI counsel,I evaluation officer,6 private sector devpt spec.,I procurement spec.,I public sector spec.,I population & health spec.,1 investment officer,I financial sector spec.

Appraisal/Negotiation

10 economists, S SI evaluation officer,2 human resources spec.,I population & health spec.,3 private sector devpt spec.,2 public sector mgmnt spec.,I consultant

Supervision3 economists, S SI population & health spec.

ICRI Public Sector Management S S

Specialist

(b) Staff:

Stage of Project Cycle Actual/Latest EstimateNo. Staff weeks US$ (,000)

Identification/Preparation 54.0 308.0Appraisal/Negotiation 30.5 94.0Supervision 18.2 102.0ICR 5.0 23.0Total 107.7 527.0

Total of 527.0 represents the full cost including consultants and travel.

- 20 -

Annex 5. Ratings for Achievement of Objectives/Outputs of Components(H=High, SU=Substantial, M=Modest, N-Negligible, NA=Not Applicable)

RatingFMacro policies O H O SU * M O N O NA

Sector Policies O H OSUOM O N O NA2 Physical O H OSUOM O N * NAZ Financial O H OSUOM O N * NAN Institutional Development 0 H O SU O M 0 N * NAZ Environmental O H OSUOM O N * NA

SocialZ Poverty Reduction 0 H O SU O M 0 N * NA3Gender O H OSUOM O N * NA

g Other (Please specify) OH OSUOM O N O NARural infrastructure and basic services

S Private sector development 0 H O SU * M 0 N 0 NAX Public sector mnanagement 0 H 0 SU * M 0 N 0 NAa Other (Please specify) 0 H O SU O M 0 N 0 NA

-21-

Annex 6. Ratings of Bank and Borrower Performance

(HS=Highly Satisfactory, S=Satisfactory, U=Unsatisfactory, HU=Highly Unsatisfactory)

6.1 Bank performance Rating

Z Lending OHS OS *OU OHU* Supervision OHS OS OU OHU* Overall OHS OS * U O HU

6.2 Borrowerperformance Rating

Z Preparation OHS OS O u O HUZ Government implementation performance O HS O S 0 U 0 HUEl Implementation agency performance O HS O S O U 0 HUZ Overall OHS OS *U O HU

- 22 -

Annex M List of Supporting Documents

- 23 -