World Bank Document · 2016-07-16 · Multiple structural changes are underway including in trade facilitation, customs reform, transport sector liberalization, liberalization and

Document o f The World Bank

FOR OFFICIAL USE ONLY

Report No. 37442 - M A

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED LOAN

IN THE AMOUNT OF US$lOO MILLION EQUIVALENT (EUR 76.2 MILLION)

TO

THE KINGDOM OF MOROCCO

FOR A

WATER SECTOR DEVELOPMENT POLICY LOAN

March 22,2007

Sustainable Development Department Middle East and North Africa Region

This document has a restricted distribution and may be used by recipients only in the performance o f 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

AFD AfDB CAS CFAA CIE

CSEC

CWF

DPL

EIB EU GDP GFMIS

GOM IBRD

IMF INDH

IWRM JBIC K F W LDP LS I MAD MADRPM

M A E G

KINGDOM OF MOROCCO- GOVERNMENT FISCAL YEAR January 1"- December 31''

CURRENCY EQUIVALENTS (Exchange Rate Effective as o f August 8, 2006)

Currency Unit Moroccan Dirham Euro US$ 1.00 MAD 8.675 EUR 0.778

ABBREVIATION AND ACRONYMS

Agence Franqaise de DCveloppement Afiican Dvelopment Bank Country Assistance Strategy Country Financial Accountability Assessment Interministerial Water Commission (Commission Interministerielle de I 'Eau) High Council on Water and Climate (Conseil Supe'rieur de 1'Eau et du Climat) Commissariat for Water and Forestry (Haut Commissariat aux Eaux et For& et de Lutte Contre la Dbsertification, HCEFLCD) Development Policy Loan (Pr i t de Politique de Dbveloppement, PPD) European Investment Bank European Union Gross Domestic Product Government financial management information system Government o f Morocco International Bank for Reconstruction and Development International Monetary Fund National Human Development Initiative (Initiative nationale de de'veloppement humain) Integrated water resources management Japanese Bank for International Cooperation Kreditanstalt fir Wiederaufbau Letter o f Development Policy Large scale irrigation Moroccan Dirham Ministry o f Agriculture, Rural Development and Fisheries Ministry o f Economic and General Affairs

MATEE

MDH MFP MI MTEF NIWCP NPWC N R W OBA ONE

ONEP

ORMVA

PER PESW

P M NSP

PNE

PSP RBA

RWS SEE

wss

Ministry o f Regional Planning, Water and Environment (MinistBre de I 'Ame'nagement du Territoire, de 1'Eau et de 1 'Environnement) Mi l l ion Moroccan Dirham Ministry o f Finance and Privatization Ministry o f Interior Medium Term Expenditure Framework National irrigation water conservation plan National plan for watershed conservation Non Revenue Water Output based aid National Electricity Board (Office National d 'Electricitk) National Water Supply Board (Office National de I 'Eau Potable) Regional Irrigation Agency (Office re'gional de mise en valeur agricole) Public Expenditure Review Programmatic economic sector work (Programme d'Appui Pluriannuel, PAP) Prime Minister National Sanitation Program (Programme National d 'Assainissement) National water masteplan (Plan National de 1 'Eau) Private sector partnership River Basin Agency (Agence de Bassin Hydraulique, ABH) Rural water supply State Secretariat in charge o f water (Secre'tariat d'Etat charge' de 1 'Eau) Water supply and sanitation

Country Director: Theodore 0. Ahlers Sector Director Inger Andersen

Sector Manager: Narasimham Vijay Jagannathan

FOR OFFICIAL USE ONLY KINGDOM OF MOROCCO


TABLE OF CONTENTS

LOAN AND PROGRAM SUMMARY .......................................................................................................... i

I . INTRODUCTION ................................................................................................................................. 1

I1 . MACROECONOMIC CONTEXT ..................................................................................................... 1

111 . WATER SECTOR ISSUES AND REFORM AGENDA ................................................................... 6

GOVERNMENT PROGRAM .............................................................................................. 10 BANK SUPPORT TO THE GOVERNMENT STRATEGY ............................................................ 17

OBJECTIVE AND RATIONALE ........................................................................................ 17 LINK TO CAS ........................ ..................... ................................................................. 17 COLLABORATION WITH THE IMF AND OTHER DONORS ........................................ 18 ANALYTICAL UNDERPINNINGS .................................................................................... 20

THE PROPOSED WATER SECTOR DEVELOPMENT POLICY LOAN ................................... 21

OPERATION DESCRIPTION ............................................................................................. 21 AGREED ACTIONS AND TRIGGERS .............................................................................. 22 LOAN AMOUNT AND TRANCHING ............................................................................... 29

OPERATION IMPLEMENTATION ................................................................................................. 30

POVERTY AND SOCIAL IMPACTS ................................................................................. 30 IMPLEMENTATION. MONITORING AND EVALUATION ........................................... 31 FIDUCIARY ASPECTS ....................................................................................................... 32 DISBURSEMENT AND AUDITING .................................................................................. 34 ENVIRONMENTAL ASPECTS .......................................................................................... 34 RISKS AND RISK MITIGATION ....................................................................................... 35

IV .

V .

VI .

ANNEX 1 : SECTOR POLICY LETTER DRAFT [JULY 20061 ............................................................ 37

PLUS FRENCH TRANSLATION OF ANNEX 1 -SECTOR POLICY LETTER DRAFT

ANNEX 2: DPL PROGRAM MATRIX ....................................................................................................... 54

ANNEX 3: REFERENCES ............................................................................................................................. 63

ANNEX 4 : IMF’s NOTICE ON ARTICLE IV CONSULTATION ........................................................... 64

The loan was prepared by an IBRD team composed o f Pier Francesco Mantovani (Sr . Water Supply and Sanitation Specialist). Hassan Lamrani (Sr . Irrigation Specialist). Rosa Maria Formiga-Johnsson (Integrated Water Resources Management Consultant). Xavier Chauvot de Beauchene (Water Supply and Sanitation Specialist). Nabil Chaherli (Sr . Sector Economist). Julia Bucknall (Lead Natural Resources Mgmt . Specialist). Jose Lopez-Calix (Lead Country Economist). Rory 0’ Sullivan (Consultant). In& Fraile (Sr . Infrastructure Specialist). Rachid Bouhamidi (Financial Analyst). Raffaello Cervigni (Sr . Environmental Specialist). Meskerem Brhane (Sr . Social Development Specialist). and Khalid Boukantar (Program Assistant) . Peer reviewers were: Kulsum Ahmed (Lead Environmental Specialist) and Todd Crawford (Operations Advisor) . The team worked under the guidance of Vijay Jagannathan and Jonathan Walters (Sector Managers); Inger Andersen and Hossein Razavi (Sector Directors); Theodore Ahlers (Country Director) and Ferid Belhaj (Country Manager) .

This document has a restricted distribution and may be used by recipients only in the performance o f their off icial duties . I t s contents may not be otherwise disclosed without Wor ld Bank authorization .

Borrower Implementing Agency

Amount

Terms Tranching

Description

1

LOAN AND PROGRAM SUMMARY

KINGDOM OF MOROCCO


Government o f Morocco (GOM) The Ministry of Finance and Privatization i s the loan receiving agency. The program i s led by an interdepartmental Steering Committee (SC) under the supervision of Prime Minister’s Inter- ministerial Water Commission (CIE). DPL amount: EUR 76.2 million (US$lOO million equivalent). DPL momam forecast: EUR 304.8 million (US$400 million eauivalent) Fixed-spread loan, with 18 year maturity and a 5 year grace period. Single tranche programmatic loan (no tranching). In total, program i s designed to include four single tranche loans in as many years. The operation (or DPL) i s the first in a programmatic series o f up to four DPLs (DPL program) designed to provide annual budget support and to sustain the implementation o f a broad program o f reforms in Morocco’s water sector. The reforms aim at bringing about more efficient and sustainable water management and service delivery. The program addresses central issues in sector governance and financing, while supporting sub-sectoral reforms in resource management, irrigation, and water supply and sanitation. I t i s guided by principles of integrated resources management, as well as demand and performance management. Goals and key measures are:

Improved sector governance, through the strengthening o f policy coordination bodies (Prime Minister’s Interministerial Water Commission), the improvement of sector organization towards separation of policy and operating roles, the establishment of medium term expenditure frameworks for optimal public expenditure allocations, and the establishment of contracts for al l public operators. Completion of integrated water resources management reform, by issuance o f all decrees needed to enact the 1995 Water Law, adequate funding o f priority river basin agency missions, and launch o f pilot programs for water quality legislation enforcement and sustainable aquifer management. Improved service, infrastructure sustainability and use ef$ciency in irrigation, through the launch o f a National Irrigation Water Conservation Plan, reform and performance enhancements of public irrigation agencies, and launch of private sector participations in the operation of existing systems and for the development o f new ones. Improved access to water supply & sanitation, and increased wastewater treatment capacity, through optimized financing strategies and increased budget support for public good infrastructure (rural water supply, sanitation and pollution control, service extension to poor peri-urban areas). Tariff reform and performance management will be pursued, to

Benefits

Risks

Operation IDNumber

11

promote service equity and competitiveness, while preparing longer term sector regulation reform.

More efficient and sustainable sector policies, based on demand management, and sustained by i) optimized public expenditure allocations and financing arrangements, ii) clarified policy and operating roles, and iii) increased accountability of operators. Empowerment of river basin agencies to enact decentralized and participatory resource planning, co-fund resource conservation and protection projects, enforce “user pays/polluter pays” policies, and implement water quality enforcement and aquifer management strategies. More sustainable irrigation service and practices, with water conservation benefits, higher returns on irrigated agriculture investment and increased private sector role. More sustainable and equitable development of WSS service in rural and poor urban areas, viable development of sewerage and pollution control capacity, and improved competitiveness and accountability o f operators.

Expected benefits for each o f the four reform tracks include: 0

0

Program reforms and outcomes are vulnerable to delay risks linked to arbitrage challenges in a fragmented sector, featuring conflicting policy and expenditure interests among and within sector ministries. Calendar slippage may also result from limitations in institutional capacity to process reform actions, and from complex implementation arrangements. DPL design mitigates such risks by opting for a programmatic approach, fostering ownership, establishing reform leadership with a Prime Minister-headed CIE, identifying technical assistance needs upfront for funding by other donors, and planning for close supervision and strategic communication. The program also faces less manageable disruption risks linked to general elections in 2007 and to political arbitrages beyond the reach of sector actors. PO95840

1

IBRD PROGRAM DOCUMENT FOR A PROPOSED WATER SECTOR DEVELOPMENT POLICY LOAN

TO THE KINGDOM OF MOROCCO

I. INTRODUCTION

1 . Morocco’s water policies since independence have long focused on securing scarce and unevenly distributed resources for urban and agricultural needs, through the development of dams, large scale irrigation perimeters, and urban water supply systems. Whi le creating ‘solid infrasthcture and capable institutions, this supply-driven focus also led to neglecting parallel investments in demand management, water supply in rural areas, sanitation and pollution control. Starting in 1995 with the promulgation of the Water Law, the Government of Morocco (GOM) has sought to bring about better resource management and protection, as well as improved access and efficiency in infrastructure service.

2. Despite such vision, reform progress has been slow and Morocco’s water sector - understood as encompassing resource management, irrigation and water supply and sanitation (WSS) - remains in transition towards more efficient resource management and service. For a l l i t s infrastructure achievements, the sector faces pressing challenges, including large scale degradation and depletion o f water resources, substantial gaps in water supply and sanitation coverage, and generally inefficient water usages. Such water-related constraints contribute to limiting economic and social development opportunities across Morocco. In a context of growing budgetary restraint, severe climate change impacts, free-trade pressures on industry and agriculture, and a new emphasis, through the King’s National Human Development Initiative (INDH), on reducing inequalities in access to service, water sector modernization i s high on the Government’s agenda.

3. Building on three decades o f water project partnerships and renewed policy dialogue since 2002, GOM and the Bank envisioned that the 2005-2009 CAS would include a Water Sector Development Policy Loan (DPL) to sustain water reforms. Following DPL identification by a multidisciplinary team in October 2005, GOM confirmed that the reform program would seek advances in sector governance, resource management, irrigation, and water supply and sanitation (WSS), while ensuring continuity

# with previous sector reforms and adjustment operations.

11. MACROECONOMIC CONTEXT

Political and social issues

4. Water reform is part of an overall G O M agenda of structural reforms. Multiple structural changes are underway including in trade facilitation, customs reform, transport sector liberalization, liberalization and privatization of telecommunications, housing sector reform, financial sector reform and public sector modernization. These reforms combined with specific and targeted social strategies, which are taking place in the political context of a nascent democracy, are enhancing the economic growth as well as the country social indicators.

5 . GOM is taking stock of sustained efforts on the employment and the poverty fronts. The unemployment rate has declined steadily since 1999, falling below a historic 10 percent threshold in the first half of 2006. Unemployment remains however stubbornly high among the youth and among those holding a diploma. Poverty rates have also decreased from an estimated 19 percent in 1999 to a current estimated 15 percent. Poverty continues however to disproportionately affect rural areas, with 22% o f

2

rural households living below the poverty line (vs. 12% of urban households). Vulnerability i s also particularly high in rural Morocco, due to exposure to droughts of both rainfed and irrigated agriculture - the 2005 drought cut cereal production by half. Many social indicators are improving: Among them access to potable water has improved dramatically in rural areas over the last decade. Some education indicators have also improved, among which the illiteracy rate (57 percent), and girls’ enrollment rate (78.5 percent). In the housing sector, the number o f unfit dwellings i s yielding to the government’s slum reduction program (“ Villes sans Bidonvilles” program, supported by Bank’s Housing Sector DPL ), although aggressive effort will still be needed to keep up with new slums and unzoned neighborhoods that are mushrooming in the peri-urban and semi-rural belts o f large cities.

6. Authorities have designed specific strategies to improve social indicators including INDH, the health insurance scheme, the PAGER rural water supply (R WS) program and the education charter programs. Launched last year, INDH aims at better-targeted poverty and service access programs based on well-defined indicators and selection criteria in over 600 of the poorest urban and rural communities. I t introduces a new approach by making major stakeholders-including NGOs, local governments, and beneficiary populations-participate in the design and implementation of social programs and projects.

Economic developments

7. While expected to reach an exceptional rate above 7 percent in 2006, GDP growth has been volatile and low in the past fifteen years. Indeed, growth averaged less than 3 percent between 1990 and 2005. Such a poor performance derives from the slow diversification of the economy and the persisting exposure to a volatile, drought-vulnerable agricultural sector, which grew at an annual average o f 0.4 percent: Non-agricultural GDP grew at an annual average rate of 3.3 percent, and export growth remained in single digits. Since the 2000s, however, the economy has recovered a modest expansionary stance. New sectors, such as construction, transports, communications, electricity and water have regained dynamism leading to a higher, yet modest average growth rate o f 4.2 percent over the period. As a result of recovery, the unemployment rate has decreased from 13.6 percent in 2000 to an estimated 9 percent by end-2006.

8. The projected high growth rate of 2006 is supported by an extraordinary agricultural year, progress in reforms that enhance the overall productivity of the economy, infrastructure development and sound macroeconomic balances. Favorable weather conditions in rain-dominated crops, such as soft wheat, have resulted in the second best harvest o f the past decade. Recently adopted reforms include the approval o f a new banking law and restructuring of two-troubled state-owned banks, further tariff cuts scheduled with the European Union, the liberalization of air transport to promote tourism; the award o f two new fixed-line telephone licenses to private firms, and the approval of a new labor code that clarifies the employer-employee relationship. Successful privatization o f several state enterprises has also attracted foreign direct investment (FDI), as Morocco has become the main recipient of FDI inflows in the Maghreb countries: FDI inflows represented 6.1 percent of GDP in 2005. Among multiple infrastructure developments, new roads and the construction of the Tangier-Med port- scheduled to be finished by end-2007, are increasing not only public investment, but have an enormous potential to boost private investment in the future. External and internal balances are also sound. External balances benefit from record-high tourism receipts and remittances that offset a widening trade deficit, thus maintaining a surplus in the current account for six years in a row. International reserves remain high at close to 1 year of imports. And improvements in the fiscal account also benefit from high revenues, a lower public payroll, and tight control over expenditures (also supported by a DPL-backed Public Administration Reform Program). By end-year 2006, the projected fiscal deficit should be down to around 4.5 percent o f GDP, from an exceptionally high 6.3 percent in 2005. From the water sector perspective, the fiscal discipline promoted by GOM has resulted in a 25 % decline (about 500 MDH) in transfers to the sector (fiscal savings) in the last five years.

3

9. Low inflation has been achieved by sound monetary and debt management. Tight monetary policy i s helping contain inflationary pressures stemming from higher prices o f domestic petroleum products. Prudent monetary management has absorbed excess liquidity, while active debt management has diminished debt payments, reducing external debt exposure and improving investor confidence. However, shortages in certain food products and high energy costs may s t i l l propel inflation to 3 percent by end-year. For their part, debt swaps for investment have contributed to steadily reduce external public debt from 34 percent o f GDP in 2000 to an estimated 15 percent o f GDP in 2005, Overall, total public debt was at 71 percent o f GDP in 2005, and i s projected to reach 69 percent of GDP by 2006, supported by a lower fiscal deficit.

10. Moroccan products face tougher external competition On the external front; the worldwide abolition of quantitative restrictions on exports of textile and clothing that went into effect on January 1, 2005 has translated into a loss of 6 percent of clothing and 11 percent of hosiery in the European market during 2005. On the domestic front, the ongoing gradual reduction o f tariffs with the European Union (EU) has brought increased domestic competition from European imports. Morocco’s trade balance has worsened to 15.7 percent of GDP in 2005, up from 13 percent in 2004. In 2006, exports have regained dynamism due to growth in phosphoric acid and natural fertilizers demand, and ongoing restructuring in the clothing and apparel sectors. However, this development will not be enough to offset the rising value of imports resulting from higher prices o f o i l and other commodities. The trade deficit i s thus expected to exceed 16.5 percent of GDP.

11. Morocco has an opportunity to achieve higher growth and employment. In order to sustain the 2006 rate of growth, Government must not only build on macroeconomic stability (low inflation and a solid external position) and on i t s multi-pronged structural reform agenda, it also needs to address the constraints found in the recent Country Economic Memorandum (CEM) and in the investment climate assessment (ICA) survey. These include an anti-export bias, a rigid exchange rate regime, expensive business and personal taxation, and rigid regulations affecting skilled labor hires. These constraints are compounded by high cost and poor access of small and medium enterprises to credit, weak enforcement o f property rights, severe restrictions on access to land and low contract enforcement by the judicial system. Various corrective measures are being taken: GOM i s strengthening its monetary policy framework, as well as announcing i t s intention to move to a more flexible exchange rate regime by 2008. Wage policy remains moderate; a few actions addressing tax simplification have been adopted. Tariff barriers are being reduced under a pre-defined schedule that could get accelerated. In this respect, it i s worth noting that further 10 percent tariff dismantling a year on a few manufactured goods i s underway with the EU, and Most Favored Nation tariffs have been cut for all free traded goods with the EU. Besides, a few textile products have benefited from tariff reduction beyond the agreed schedules, and a list of imports from 34 less developed countries i s now exonerated from Customs duties. These actions will contribute to diversify the economy and increase competitiveness and investor confidence.

Medium term outlook

12. The medium term macroeconomic outlook is positive, assuming continuation of sound policies and deepened structural reforms through the transition to a new Government in 2007. Economic growth should exceed 4.5 percent on average in the medium term. Growth, especially non-agricultural, should be driven by higher domestic investment and enhanced competitiveness linked to a gradual recovery of exports and strong domestic demand. Inflation should stay below 3 percent, as long as monetary policy remains tight and fiscal consolidation i s achieved.

13. Continued structural reforms and completion of planned public investment in infrastructure (especially new roads and the opening of a new port in Tangiers by end-2007) should also foster private investment and productivity, for the beneft of export-related sectors in particular. The productive capacity of the economy should be expanded by ongoing reforms in telecommunications, air

4

transport, public administration, as well as by structural corrective actions in the energy and water sectors. A dynamic credit to the private sector, as fostered by on-going financial sector reforms (supported by a Finance Sector DPL) and an improved business environment should also help improve investor confidence. The external current account surplus should decrease, yet stay positive in view o f upward trends of workers’ remittances and tourism receipts, as well as exports recovery offseting a strong imports growth linked to scheduled tariff cuts. Increased investor confidence and the widening of regional integration would also improve the prospects for higher FDI inflows and export-oriented investments, improving Morocco’s competitiveness and external position. Finally, a gradual transition to a flexible exchange rate regime would make the economy more resilient to external shocks.

14. Fiscal consolidation should strengthen in the medium term. Authorities have adopted a medium term strategy aiming to reduce the fiscal deficit to 3 percent of GDP, and the public debt-to-GDP ratio to 66 percent, by 2008. They have already started adopting actions to curb the high wage bill, reduce the cost of energy subsidies, gradually replace inefficient food subsidies with targeted support to vulnerable groups, adopt performance budgeting within a medium-term expenditure framework, improve human resources management, reduce arrears and address contingent liabilities. Modest tax measures have already been adopted, but a more comprehensive tax reform i s expected to be completed in the near future, not only for fiscal modernization, but for growth reasons. Civil service reform should keep payroll costs decreasing until 2009. Measures to reduce energy subsidies and arrears have also been adopted. Ultimately, lower fiscal deficits should be a major determinant of strengthened debt sustainability. As a result, public debt should continue declining in terms of GDP. As the fiscal consolidation strategy achieves success, Morocco’s foreign currency debt rating i s likely to continue to improve until it reaches investment grade.

15. Major risks of shortfalls in the macro scenario are manageable. These risks include the following: (i) macro volatility to eventual droughts that might slowdown growth; (ii) an expansionary fiscal stance arising from the political transition; (iii) slower than projected exports recovery; (iv) decline in workers’ remittances or tourism receipts due to a deteriorated international security situation; and (v) terms of trade shocks. Morocco has relatively managed these risks well in the past. However, to mitigate them, authorities are already adopting several actions (see paragraph 100 below).

5

Table 1. Selected Economic Indicators (As YO of GDP, unless otherwise indicated) 2000 2003 2004 2005 2006 2007 2008 2009

Est. Proj. Proj. Proj.

I. National Accounts Gross Investment Gross National Savings

Government Investment Government Savings

Government Savings Gap Private Investment Private Savings

Private Savings Gap 11. Central Government Finances Total revenues

Foreign Savings

Tax revenue Nontax revenue (excl. privatization)

Interest Current Expenditure

Transfers to Local Gov. Capital Expenditure (Inc. FHII and Fonds Routier) Balance o f Special Accounts Primary Balance Global Balance 111. Balance of Payments

GNFS Exports GNFS Imports

Trade Balance Remittances

Current Account Balance Foreign Direct Investment (include privatization receipts) Reserves (months of GNFS imports) N. Indicators o f Credit Capacity Public Debt o f CG/GDP Public and garanteed External Debt Service/(Exports of GNFS+Remit.) EMBI + (bp, annual average)

Memo: Consumer price (%, yearly average) GDP Growth GDP (million US$) Unemployment

23.7 22.3 -1.4 3.0 0.7 2.4

20.7 21.6 -0.9

26.2 24.1 2.1

24.1 5.2 1 .a

6.0 -0.1 -0.6 -5.8

31.4 37.6 -9.7 6.5

-1.4

0.9 4.9

75.6

20.1 469.0

1.9 1 .o

33.3 13.6 21.5

24.1 27.7

3.6 2.6 1.3 1.4

21.4 26.5 -5.0

24.5 22.5 2.1

23.3 4.1 1.9

5.2 0.5

-1.1 -5.3

32.5 36.4 -9.9 8.2 3.6

5.6 10.0

69.2

17.5 273.0

1.2 5.5

43.8 11.6 19.6

25.0 26.9

1.9 2.7 1.4 1.3

22.4 25.5 -3.2

25.3 22.8

2.5 23.7

4.0 2.0

5.1 0.6

-0.9 -4.9

33.2 39.7

-13.0 8.4 1.9

3.4 9.9

66.3

12.4 167.0

1.5 4.2

50.0 10.8

25.7 28.1

2.4 2.4

2.9 23.3 28.5

-0.4

-5.2

27.2 24.9

2.3 27.5

3.8 2.1

4.9 1 .o

-2.5 -6.3

36.3 43.7

-15.7 8.8 2.4

6.1 10.0

71.6

10.2 138.0

1 .o 1.7

51.6 11.0

26.1 27.3

1.2 2.5 1 .a 0.7

23.7 25.5 -1.8

26.4 23.9 2.5

24.2 4.1 2.2

4.9 0.2.

-0.5 -4.6

37.3 45.5

-16.6 9.0 1.2

2.7 10.0

69.1

8.1 90.0

2.7 7.0

55.9 9.0

26.7 27.4

0.7 2.2 0.7 1.5

24.5 26.7 -2.2

25.7 23.7 2.0

23.7 4.1 2.2

4.4 0.5 0.0

-4.1

37.1 45.4

-16.4 9.2 0.7

3.0 9.5

68.0

8.0 90.0

3.3 3.5

60.9 8.5

27.0 27.9

0.9 2.3 1.4 0.9

24.7 26.5 -1.8

25.7 23.7

2.0 22.9 4.1 2.2

4.6 0.5 0.6

-3.5

37.9 45.7

-16.0 9.2 0.9

3.5 9.2

66.3

7.9 90.0

2.2 4.5

63.8 8.5

27.1 28.2

1.0 2.4 1.9 0.4

24.8 26.2 -1.5

25.5 23.6

1.9 22.1 4.0 2.3

4.7 0.5 0.9

-3.1

38.4 45.8

-15.8 9.2 I .o

4.0 9.0

64.4

7.8 90.0

2.2 4.6

68.1 8.5

Urban ~ 18.5 18.5 14.0 13.0 13.0 13.0 Source: Government and Staff estimates

6

111. WATER SECTOR ISSUES AND REFORM AGENDA

Key Development Issues

16. Scarcity and degradation of water resources have reached alarming levels, making demand management, and the completion of integrated water resources management (IWRM) reform, urgent policy priorities. With 700m3/capita/yr, Morocco has the highest water potential in the Maghreb, but i t s resources, consisting o f surface water (70%) and groundwater (30%), are unevenly distributed and subject to droughts. While 90% of economically accessible surface resources are already dammed, availability of per capita supplies i s fast declining in a number o f key basins, due to population and demand growth. I t i s thus estimated that 35% of Moroccans could be living in “absolute scarcity” by 2025 (less than 500m3/capita/yr). This outlook i s compounded by a 30% drop in average precipitations since 1970, which, along with more frequent droughts and floods, i s increasingly accepted as a sign o f climate change. Despite sustained investment in increasingly costly dams, surface water storage falls short of projected volumes, calling for chronic water restrictions in irrigated areas. All the while, aquifers are being depleted by unregulated agricultural pumping, and competing industrial, tourism, and domestic withdrawals.

17. Morocco i s further confronted with large scale degradation of environmental water quality. Only about 5% of urban effluents are treated before discharge, which, combined with industrial discharges, agricultural drainage, erosion and saline intrusion, contributes to nationwide contamination of water bodies, with peak environmental, economic and health impacts in the Sebou basin. In 2002, Morocco thus ranked 121st out of 122 countries in a UNESCO’s water quality survey, and in 2003 impacts o f water pollution were estimated at MAD 4,3bn, i.e. roughly 1.2% of GDP at the time. Watershed management programs to control erosion and reservoir sedimentation are not to scale compared to needs

18. The looming scarcity and quality crisis calls for aggressive demand management and pollution control policies along with more integrated development and allocation o f water resources, as part of a rational climate change adaptation strategy. Such priorities are consistent with the vision of the 1995 Water Law intended to bring about integrated, participatory and decentralized water resources management. Enactment o f this modern law i s however incomplete and ineffective, in part due, until 2002, to insufficient political will to overcome resistance to demand management, decentralization, and user-pays/polluter-pays principles. Embodying the reform, seven river basin agencies ( M A ) are in place, disempowered by overextended and yet unfunded mandates. Completion and enforcement of IWRM reform, along with medium term amendments to the Water Law, are key to restore sustainability in Morocco’s water management, and promote efficient uses and allocation of water.

1 9. Opportunities exist for higher returns on irrigation, including more efficient on-farm irrigation practices, enhanced productivity applications, and better performing irrigation services. Irrigation i s crucial for Morocco: I t contributes 7% of GDP and 50% of Morocco’s agricultural added value (10% and 75% respectively in drought years), generates over 75% of Morocco’s agricultural exports, and provides jobs to 50% o f the rural labor force. Irrigation also represents 85% o f water usage, applied to 1.6 million hectares, o f which 700,000 ha are part o f nine large scale irrigation (LSI) schemes, operated by public agricultural development agencies (ORMVA). As a consequence o f suboptimal irrigation practices, deficient water service and weak production and trade incentives, economic returns on irrigation water are low, on average 1.63 MAD/m3, without accounting for positive externalities. Improved irrigation service, coupled with modern irrigation techniques can contribute to farmers switching to higher-value crops.

20. Despite volumetric pricing and recent tariff increases, O W A s do not collect sufficient revenue to ensure adequate asset maintenance, rehabilitation and renewal while also funding their agricultural

7

Access to potable water through individual network connection Access to other sources o f potable water Access to sewerage through individual network connection Access to other forms of improved sanitation

extension public missions. The combination of poor cost-recovery and neglected asset management thus perpetuates i) unreliable service to farmers, ii) the decay of the country’s hard-won irrigation infrastructure, and iii) a substantial net drain on GOM’s budget. Such sustainability concerns contribute to the deferment o f L S I developments downstream of dams with unused reserves. ORMVA reform, with separation o f irrigation and extension activities i s widely considered as overdue, and a consensus i s emerging on selected opportunities to contract water operations through PSPs.

Urban Rural 83% 18% 100% 61%

97% 43% 70% (*) 2%

21. The potential for water conservation i s also high and largely untapped, as inefficient on-farm practices are not regulated, and less than 10% of L S I systems rely on sprinklers or drip irrigation. Aggressive incentives for technology conversion are needed to jump-start water conservation, achieve “more crops per drop”, and mitigate exposure of farmers to water shortages. Optimal conservation incentives should also contribute to a reduced rate o f groundwater depletion and, coupled with relevant market incentives, to opportunities for reallocation of water to the most productive uses. The emergence of a higher-value export-driven farming industry implies modern irrigation methods and creates the need for more efficient and demand-driven water allocation mechanisms. Due to traditional unfamiliarity with water rights, the opportunity for introduction of water market principles may only exist in the medium term.

22. Overall, while irrigation reform i s crucial to achieve water conservation and to promote higher returns in agriculture, these outcomes remain largely dependent on broader agriculture, land and trade reforms, which affect water usage and agricultural productivity. Cereal reform i s particularly important towards correcting structural productivity disincentives and improving livelihoods in rural Morocco.

23. Persisting gaps in water supply and sanitation (WSS) service coverage and near-absence of pollution control call for public-good infrastructure programs, backed by increased budget support and optimized financing strategies. Morocco features a sophisticated and complex WSS sector with relatively well performing operators (continuous service, non-revenue-water estimated at 29% on average in 2005), a strong private sector presence (concessions serve the major coastal cities), the prevalence of multi-sector utilities in larger cities (combining electricity, water and sanitation distribution) and bulk potable water production entrusted to a national water supply agency (ONEP). An outstanding feature o f Morocco’s WSS sector i s the virtual absence o f governmental subsidies: The sector i s almost entirely self-financed through tariffs, beneficiary contributions, urban-to-rural cross- subsidies, and cross-subsidies from electricity distribution. As captured in Table 2 however, major service coverage gaps exist between urban and rural areas. Access to potable water in rural areas (6 1 %) remains low by regional standards, although undergoing accelerated development from a low 14% in 1995.

Within urban areas, slums and unzoned peri-urban neighborhoods are poorly supplied, relying on informal vendors, common standpipes or unsafe wells. By comparison to water supply, sanitation service i s less well developed and of lesser quality, and wastewater treatment i s the exception. Existing studies point to strong correlation between poverty and lack of household access to water service. The service gap has become a policy focus, and GOM goals include quasi-universal WSS coverage, and substantial pollution abatement capacity.

8

24. These goals imply the development o f public good infrastructure in typically low-return segments such as rural water supply, peri-urban distribution, and wastewater treatment. In the absence o f substantial public budget grants, development o f these expansions i s fraught with challenges. Bound by government-regulated tariffs, thirteen municipal utilities (rbgies) inconsistently achieve cost-recovery and, falling short of commercial credit-worthiness, must limit their investment to beneficiary-funded network expansions. Four private concessions are wholly regulated by long-term contracts with municipalities, and are delivering on expectations o f improved service and asset management. Their vast and well delimited investment obligations are not however particularly focused on public-good, loss-making infrastructure. Electricity liberalization i s also bound to curb electricity-to-WSS cross- subsidies at play within certain multiservice regies and concessions.

25. For its part, national utility ONEP operates under a four-year Contrat-Programme with the State. While carrying a massive infrastructure development load (potable water production, WSS in secondary towns, RWS nationwide), ONEP has until now been able to rely on bulk water tariffs and surcharges on urban customers o f rigies and concessionaires to fund growing infrastructure programs and operating deficits. With the current expansion into loss-making segments and the stalling o f bulk urban sales, ONEP’s sustainability i s challenged and may not easily be restored by continued increases in bulk tariffs and surcharges. The successful cross-subsidization model of ONEP which has enabled GOM to limit direct budget support to WSS development, may also be reaching limits in terms of equity, lack o f transparence, and distorted incentives, while also contributing to uncompetitive water prices (tariffs are already 40% higher in Morocco than in Tunisia, for less developed service). High tariffs add to a risk o f uncontrolled contraction of urban water sales, jeopardizing the financing stability of the whole sector.

26. In this context, new financing strategies, including capital grants, are needed for the sound development of i) the on-going fast-track RWS program, ii) the new National Sanitation Program adopted in 2006 (MAD 44 billion over 15 years), iii) the unfunded INDH service expansion goals in slums and peri-urban areas, and iv) deferred asset management programs. Strategic aid increases for WSS programs should be accompanied by more efficient tariffs, cost optimization, targeted fiscal levies and exemptions, and new PSPs.

Institutional and governance constraints

27. A complex sector organization impairs optimal policy integration and reform progress required by new sector challenges. Morocco’s water sector has solid institutions and superior technical resources, but its configuration, summarized in Table 3, i s not efficient. The 2004 Sector Policy Note finds that policy-making and reform inconsistencies are partly linked to i) insufficient policy coordination, ii) non-strategic public expenditure allocations, iii) conflicting policy and operating interests; iv) uneven disclosure and performance accountability, and v) weak stakeholder participation. Policy-making i s centralized, with much o f the responsibility for water management resting with sectoral ministries and agencies responsible for different end-users (also see para. 34), and strong supply driven legacies. Created in 2002 to push forward IWRM reform and coordinate sector policies, the Ministry of Regional Planning, Water and Environment (MATEE) cannot assert strong leadership due to an ineffective organization, including split policy design capacities and priorities, as well as conflicting policy-making and operating interests within its Secretariat of Water (SEE). As a result, the formulation o f a unified strategy, balancing demand management and resource protection priorities with the integrated development o f new water resources i s overdue, as i s the optimization of public expenditure in the sector. Relevant reform options identified in the Policy Note include: (i) the strengthening of policy and strategy coordination within the sector, (ii) improved organization for MATEE, (iii) preparation of a unified sector policy document, (iv) a revision o f the numerous mandates of RBAs, and (v) urgent reforms to ensure effective RBA funding.

9

Table 3 : Main water sector institutions

Morocco’s water sector institutions are relatively fragmented, with policy and regulatory roles shared by: the Ministry o f Regional Planning, Water, and Environment (MATEE), harboring a ministerial level Secretariat o f Water (SEE). the Ministry of Interior (MI), the Ministry o f Agriculture, Rural Development and Fisheries (MADRPM), the Ministry o f Finance and Privatization (MFP), and the Ministry o f Economic and General Affairs (MAEG). the Commisariat for Water and Forestry (CWF)

Two policy coordination bodies exist but seldom convene: F The Interministerial Water Commission (CIE), headed by the Prime Minister, with the

participation o f the five above-mentioned ministers. The High Council on Water and Climate (CSEC), with broader representation than CIE, and occasional attendance by the King.

Policy implementation and service delivery rests with a number of operators, among which: The above-mentioned Secretariat o f Water (SEE), responsible for dam construction and O&M; Seven river basin agencies (RBA) Nine agricultural development agencies (ORMVA) in charge of large scale irrigation and agricultural extension; The national water supply agency, ONEP, in charge o f water supply strategy, bulk potable water production, distribution and sanitation in secondary towns, and reural water supply. Multisector utilities responsible for distribution in Morocco’s largest cities, including 4 private concessions and 13 municipally-controlled Rkgies.

28. Sector financing strategies and public expenditure are not consistently aligned with strategic policy goals. Optimization o f sector financing strategies and public expenditure i s fundamentally challenged by weak policy integration. Following the diagnostic o f the Sector Policy Note (2004), the efficiency of public expenditure and sector financing strategies was reviewed over the 2000-2009 decade as part o f a Sector Financing Study. Between 2000 and 2005, total water sector expenditures averaged MAD 18bn/year (of which 45% for investment) growing by 7% per year. While stable in absolute terms at about MAD 4bn per year, public budget expenditure for water (capital grants, operating subsidies or other incentives) has been steadily decreasing to about 1% o f GDP in 2005. Concurrently, direct fiscal revenues, essentially generated by WSS activities, have been growing, exceeding MAD 2.5bn in 2005, and further decreasing GOM’s net commitment to the sector. During the 2000-2005 period, irrigation was the biggest beneficiary of budget support (mostly in operating subsidies) receiving 42% o f public expenditure in the sector, followed by water resource mobilization at 37% (mostly in capital costs for dams, transfer works and wellfields). The WSS subsector only received 15% o f GOM’s aid to the sector, despite heavy new policy commitments to develop RWS, sanitation and pollution control. Looking forward, operator investment forecasts for 2007-2009 call for substantial increases in public expenditure, including for service access, water conservation and pollution control programs. With suggestions to also double the rate o f investment in new dams, the estimated financing gap exceeds MAD 1.2bn annually. In this tense context, more strategic allocation o f public expenditure i s needed along with efforts to optimize sector investment and financing strategies. Mitigating the public irrigation budget drain i s an obvious priority. Sustained investment in resource mobilization infrastructure also offers value review opportunities, considering that the natural trend o f diminishing returns o f such projects i s made worse by climate change. Beyond short-term expenditure prioritization scenarios, the Sector Financing Study recommends: (i) better integration o f sector investment strategies, (ii) implementation o f a medium term expenditure framework (MTEF) to improve the predictability and performance of public expenditure, and (iii) strategic increases or

10

reallocations in budget support. Concurrently, other financing sources should be promoted, including optimized tariff structures, operating efficiency gains, PSPs, and targeted fiscal levies and exemptions.

29. An underdeveloped regulatory framework is cause for slow gains in service efficiency and equity. Whether for dam development, irrigation service or WSS, Morocco’s public water operators generally lack clear incentives to increase performance and achieve more sustainable and equitable infrastructure service. Limited accountability for results and financial disclosure also challenges the insightfulness of investment and tariff regulation. In the WSS subsector, heterogeneous utility statutes (see paragraphs 24 and 25) and fragmented regulatory roles further impair consistent service regulation. Tariff structure optimization can be pursued to promote cost-recovery and water conservation while ensuring more equitable affordability and access to service. Despite improvements since 2003, tariffs continue to heavily subsidize consumption through an untargeted underpriced first block, whereas connections, priced at marginal cost, are uniquely expensive and downright unaffordable in poor peri-urban settings.

30. Economic regulation gaps and challenges are reviewed in the Sector Policy Note, the Sector Financing Study, and the Poverty and Social Impact Analysis, along with potential reform options. These include i) more effective tariff structures and adjustment rules, ii) proactive management o f operators’ performance (contractualization, benchmarking), iii) strategic and competitive allocation o f public funding resources, including grants, subsidies, and intra-sectoral transfers @e‘re‘quations), and iv) increased transparency and competitive pressures. Systematic, performance-based contracting of ABH, O W A s and rkgies may in particular have to become a condition towards continued subsidy allocations and tariff adjustments. The reform o f Morocco’s WSS regulatory framework i s likely to be developed around the “regulation by contract” model. Such reform i s foreseen as a complex and long- term process, involving some market and institutional restructurings, in line with decentralization reform. As part o f such regulation reform process, the establishment and enforcement of regulatory accounting and reporting standards, as well as of benchmarking capacity, are seen as short-term prerequisites. Other efficiency and accountability measures include i) management capacity building, ii) increased competition and private sector role, iii) consolidation of service perimeters, and (iv) increased consultation and participation of users and communities.

GOVERNMENT PROGRAM

GOM’s 1995-2006 water reform record

3 1. Since 1995 GOM has been pursuing sector modernization reforms towards more efficient water management and service delivery. Following decades of centralized, supply-driven sector development policies, a long-term reform process was started in 1995 with the landmark promulgation o f an innovative Water Law, upholding the principles of integrated, decentralized and participatory water resource management, and creating river basin agencies (RBA) to enact them. Between 1995 and 2004 GOM continued to demonstrate a keen ability to undertake bold and original initiatives in the water sector. Key steps have included:

The 1995 launch o f Morocco’s accelerated rural water supply (RWS) program (aka PAGER); The multi-sector concessions awarded since 1997 to private operators in Casablanca, Rabat, Tangiers and Tetouan; The sector adjustment programs engaged with European Union (EU) in 2001, and with the African Development Bank (AfDB) in 2003; The creation in 2002 o f a new Ministry o f Regional Planning, Water and Environment (MATEE),

11

The 2004 launch of a pioneering greenfield irrigation PSP project in El Guerdane.

32. Morocco’s water sector is experienced with adjustment operations. GOM’s attachment to sector reform i s illustrated by its commitment to EU’s FAS-EAU (Facilite‘ d ’Ajustement Structure1 pour le secteur de l’eau, a 2-tranche EUR 120m grant) and AfDB’s PAS-EAU (Programme d’Ajusternent Sectoriel de l’eau, a 2-tranche EUR 215m loan). The FAS-EAU was launched in 2001 to advance reforms in i) IWRM, ii) tariff regulation; iii) reallocation of investment budgets; iv) irrigation reform; v) public-private partnerships; and vi) pollution control. AfDB’s on-going PAS-EAU started in 2003, as an almost seamless extension o f EU’s conditionality matrix. These pioneering operations experienced strenuous progress, generally attributed to far-reaching bi-tranche conditionality, and limited reform leadership and implementation capacity. The operations have nevertheless been successful in sustaining GOM’s difficult reform decision-making and slow implementation, and in delivering decisive reform increments. Hindsight suggests that the reform program would have gained from more technical assistance and strategic communication. Lessons learned are further discussed in paragraph 52.

33. Spurred by CIE leadership, an acceleration of the pace of reforms is underway since 2005. Composed o f five ministers with key roles in the sector (see Table 3 above), the CIE was created in 2001 to monitor progress on the recommendations of the 9* CSEC session and to lead FAS-EAU negotiations. After years o f inactivity, it was summoned by the Prime Minister in February 2005 to take stock of uneven reform progress and of new sector diagnostics, including the Sector Policy Note. The CIE agreed on the need for short-term results, and mobilized the Administration on specific objectives, including: i) the issuance of national plans for sanitation, aquifer management, water conservation and oasis restoration; ii) the completion of IWRM reform and empowerment of river basin agencies; iii) the reform of WSS and irrigation tariffs, including strengthened tariff and performance regulation, and iv) the assessment o f new L S I systems to be developed downstream of existing unused dams. The Administration largely responded to the challenge, and as o f mid-2006 could account for:

The development, approval and budgeting of a new National Sanitation Program. A 2006 Budget Law with increased budget support for sanitation, RWS, RBAs, and to INDH. An important joint MATEE-MFP paper on approaches to resolve incompatible RBA mandates, and outlining a path to clarify policy and operating conflicts in the sector. New WSS tariff structures (9% average increase and better targeting of first block subsidies); The promulgation of a landmark new law for Public Service Delegation, establishing competitive principles and ru les for utility service outsourcing, and setting the stage for regulation reform. The decision to prepare PSP transactions for the development of L S I systems in the Gharb area, and for service provision and asset rehabilitation in the Loukkos ORMVA. The launch o f a National Debate on Water, towards drafting a unified water strategy for Morocco. The negotiated completion o f all pending reform actions under the FAS-Eau adjustment program.

34. GOM’s program remains a sum of departmental agendas. CIE’s 2005 intervention notwithstanding, sector leadership remains conflicted, and sector policy coordination suffers from the lack of a balanced and unifying strategy, due to the polarization o f institutional interests in the demand management versus supply management debate. As a result, GOM’s water sector policy continues as the sum o f ministerial agendas.

MATEE champions decentralized IWRM, emphasizing better management, conservation, and restoration o f water resources over development of marginal new ones. MATEE i s keen to develop national strategies for pollution control, aquifer restoration, flood control, and oasis stabilization and implement them at the river basin scale. Independent o f MATEE’s demand management and integrated resource planning priorities, a narrow, yet influential mandate leads SEE to advocate the sustained development o f dam and transfer projects for resource mobilization.

12

The Ministry o f Interior defends local governments’ interest to improve access to WSS service, develop sanitatiodpollution control capacity, and to improve service efficiency and accountability. As such MI i s also coordinating INDH implementation. As part of a long term vision o f WSS market regulation needs, MI i s supportive of a regional consolidation of water, sanitation, and electricity distribution operators, spanning urban and rural service, as template for future regional PSPs championing Moroccan private capacities. MADWM defends L S I institutional reform aimed at simultaneously ensuring the sustainability o f irrigation water service and the improved efficiency o f irrigation systems. CWF sees to the implementation of integrated watershed management plans, as per the provisions of the National Plan for Watershed Conservation (NPWC). MFP’s priority i s to seek optimal efficiency, and ultimately a reduction, in public expenditures in the sector that would be tied to performance, and enable adjustments based on fiscal availability. MAEG’s priority i s to ensure that water service remains affordable and competitive, under effective regulation and market forces. On behalf of the PM, MAEG also serves a key coordination role.

GOM’s 2006-2009 water reform program

3 5. Moving forward, four priority reform tracks. Extensive intrasector consultations, conducted by a MAEG-led steering committee, have allowed GOM to update and detail a comprehensive water sector reform program. Such program i s detailed in the sector development policy letter and reform process matrix provided in ANNEX 1 (in French), and substantially outlined and commented in sections 36 through 40 below. The program emphasizes integrated water resource management, demand management and performance management as guiding principles. I t i s structured along four reform tracks, namely:

Strengthened sector governance and leadership Completion and enactment of IWRMreform Improved service, sustainability of assets, and productivity of applications in irrigation Better access to water and sanitation service, and increased wastewater treatment capacity.

These tracks are understood as highly integrated, with success in each track linked to gains in sector governance, and often linked to results achieved in other subsector tracks. The innovative focus on governance results from broad integration of both sectoral and non-sectoral perspectives in designing water sector reform. GOM’s decision to give CIE an active role and responsibility in reform program implementation i s also important to provide the leadership and momentum needed to facilitate decision- making and reform processing in a fragmented sector.

36. GOM’s reform program and matrix represent a compromise among sector institutions. The matrix provides a comprehensive roadmap o f expected actions and results in the four years from 2006 to 2009. A result o f intense intrasectoral consultations and debates, in part animated by the DPL preparation team, the matrix represents a hard-won compromise among institutions. I t i s as such not easily reducible, and i s used as template for the DPL program matrix. GOM’s program matrix includes columns identifying i) the need for support measures or technical assistance, and ii) the agency responsible for measure implementation. Its key planned measures are described below.

37. G O M Program, Track I: “Strengthened sector governance and leadership”. Reform provisions under this track are intended to overcome the fragmentation and legacies that affect policy-making and reform advances. Adjustments will aim at increasing the consistency of water. sector policies, by i) empowering policy coordination bodies such as CIE and CSEC, and by ii) improving sector organization towards clearer policy-making and policy implementation roles and increased policy and

13

planning integration capacities, within MATEE in particular. Adjustments wil l also aim at ensuring better alignment o f financial resources with sector policy priorities, by iii) developing medium-term expenditure frameworks (MTEF) for water sector ministries, and by iv) adapting public expenditure allocation in support o f optimized and integrated investment strategies. Accountability for implementation o f these reforms wil l rest primarily with MATEEEEE, MFP, and MAEG, with arbitrages by the Prime Minister and the CIE. Specific actions and results are listed in Table 4 below.

Table 4: GOM program for reform track #1 (also see ANNEX 1) Strengthened sector governance and leadership

Publication of revised CIE mandates. A revision o f CIE mandates by circular letter from the Primature wi l l establish CIE’s responsibility for sector policy and planning coordination, and for proposing investment priorities and public expenditure allocations. CIE wi l l be required to convene at least twice a year, and its recommendations wi l l be taken into account in the draft Budget bill o f the incoming year. I t s permanent secretariat wil l be ensured by ministry in charge o f water. CIE mandates, would be confirmed by decree in 2008. This wi l l help overcome weak sector coordination and leadership, and increase consultation on policy and expenditure arbitrages. The CSEC standing committee wil l also be reactivated. Comuletion of a sector orpanization studv : A high-level organizational assessment wil l be conducted, towards clarifying conflicts between policy and operating roles, and towards optimizing capacities for integration o f sector strategies. TORS will be established and validated in 2006 for accelerated study launch. The study wi l l be completed and submitted to CIE’s decision in 2008 for implementation in 2009. Imulementation of Medium Term Exuenditure Frameworks (MTEF): MATEEISEE have developed MTEFs in 2006 towards the 2007 Budget Law. Other sector ministries wi l l follow suit in 2007, as part o f the 2008 budgeting process. This measure i s expected to have a major impact for public expenditure predictability, optimized allocation, and performance management. Outimized uublic exuenditure and sector financinp strategies. As early as 2007 the yearly draft budget law wil l take into account CIE’s recommendations for public expenditure priorities and allocations in the sector. Also, the findings and recommendations o f the PESW’s Sector Financing Study wil l be submitted to the CIE in 2007 for decision on an action plan to optimize sector financing, to be included in the reform program and budget bi l l as early as 2008. A study o f fiscal options to alleviate financing constraints wil l also be launched, with findings submitted to CIE’s decision by 2008. Svstematic contractualization of uublic ouerators. Contracts wil l be established between GOM and public operators, raising accountability for subsidies. GOM opts for multi-year “Contrats-Plan” with ex-ante review o f major expenditure. “Contrats-Programme” may later be implemented, for ex-post expenditure audits. Contractualization varies by subsector, and i s thus dealt separately under tracks 2, 3, and 4. National water information svstem : GOM will implement a national water information system to consolidate and share for public access data on water resources, policy and programs.

38. GOM Program, Track 2: “Enactment of integrated water resource management reform” This component seeks to reform the water management and allocation system and to give institutional teeth to the 1995 Water Law, by delimiting the priority missions, establishing sustainable funding, and building the capacities o f river basin agencies (RBA). The Government also seeks to induce the launch o f strategic resource management programs, including for aquifer management and water quality enforcement in selected RBAs. Finally, the longer term process o f amending the Water L a w will also be initiated. Specific actions and results expected by GOM under this reform track are listed in Table 5 .

14

Table 5: GOM program for reform track #2 (also see ANNEX 1) Enactment of integrated water resource management reform

Refocusinp of RBA mandates. To improve RBAs ability to fulfill their primary IWRM missions, by-laws are being updated in 2006 to preclude systematic and unhnded transfer of GOM duties to RBAs for the operation and maintenance of public hydraulic works. Where relevant, hnded contracts will be established for RBAs to conduct routine maintenance of dams and flood control works. Establishment of river basin committees. GOM i s to establish river basin committees (RBC) within each RBA, by circular letter to be issued in 2006, towards enhancing user and community representation and participation in RBA decision-making. All RBCs are to be operational by 2008; Provincial and Prefectoral Water Commissions (CPPE) will be re-activated between 2006 and 2007. Preparation of “Contrats-Plan ” between GOM and RBAs. Strengthening of RBAs management systems and procedures i s to begin in 2007, towards the establishment of “Contrat-Plans” between GOM and all RBAs by 2009. Regulation of project co-financing bv RBAs. The rules under which RBAs can provide capital grant co- financing to selected water conservatiodprotection projects wil l be established in 2007, with the relevant decree published in the same year; Exuansion and consolidation of RBA funding throuph water charpes. Withdrawal charges will be published in 2006 and enforced as early as 2007 for all water users, including on individual irrigators outside of areas already covered by ORMVA-RBAs collection agreements, and on non-connected industries. Additional pollution charges will be published in 2006 and 2007, with enforcement to begin in 2007, on al l residential and industrial users, including non-connected industries. Regulation of ocean discharges bv establishment specific charpes. In a complex effort to circumvent a gap in the Water Law (only applicable to fresh water) and ensure equity among dischargers, new charges will be established for discharges in the marine environment. The relevant decree should be approved in 2007 and published in 2008. Collection from major municipal and industrial coastal dischargers will begin in 2009, and will generate substantial pollution control funds.in support of the NSP. Completed legal framework for water aualitv and pollution control repulation and enforcement. A plan to issue al l decrees needed to address specific disposal quality targets will be issued in 2006. Such plan will be enacted between 2007 and 2009, with annual issuance of relevant new by-laws. Water quality monitoring and enforcement will begin in 2007 in a pilot basin, and extended annually to other basins. Monitoring will be extended to connected industries in 2009. These measures will require TA. Development of sustainable aauifer management strategy. After selecting 2 aquifer depletion and degradation case studies in 2006, GOM will develop detailed diagnostic and restoration action plans in 2007, and propose a national strategy to CIE in 2008, towards piloting on two aquifers. Promotinp asset management of resource mobilization and hvdraulic works. A dam maintenance and rehabilitation plan i s to be issued in 2006, and begin in 2007. The development of new dam safety regulations will begin in 2007 for adoption by 2009. Dam sedimentation control will be strengthened, with finalization in 2007 of two watershed management studies, and, from 2008 on, implementation of National Watershed Management Program (PNABV) integrated projects. Integrated assessment of resource development alternatives in coastal zones and Tensift basin. In a pioneering integrated multidisciplinary effort, TORs will be validated, and a study will be launched in 2007 for the technical and economic assessment of bulk water supply alternatives (including mobilization, interbasin transfers, demand management and reallocations, reuse and desalination). Findings will be submitted to CIE’s decision in 2008. TA i s needed for TORs and study. Initiating the amendment process for the 2995 Water Law. Law optimization revisions will be submitted to CIE in 2008 and introduced in the ratification cycle in 2009. Amendments would optimize: RBA mandates; planning provisions (link between National Water Plan and River Basin Plans, roles of GOM, , RBAs, RBCs and CSEC in drafting such plans); community participation; definition of water charges; streamlining of Public Hydraulic Assets definition procedure, -e&.

-

39. GOM Program, Track #3: “Enhanced service, asset management and usage productivity in irrigation”. Under this track GOM will seek to strengthen the regulatory framework to promote water conservation, productive irrigation uses and more efficient water service by ORMVAs, including through better cots-recovery and increase private sector role. It wil l also seek to expand and improve

15

large scale irrigation service, improve cost recovery and increase the sustainability o f L S I assets. Measures that GOM i s committed to implement are summarized in Table 6 below.

Table 6: GOM program for reform track #3 (also see ANNEX 1) Enhanced service, asset management and usage productivity in irrigation

DeveloDment of a National Irrigation Water Conservation Plan (NIWCP). The accelerated development of the plan, started in 2006, will be completed and submitted to CIE decision in 2007. Endorsed as a national priority, implementation of the plan will begin in 2008. Streamlinina and increase of water effciencv subsidv awards. Improvement of on-farm water use efficiency, including through the introduction of better performing irrigation techniques, wil l be facilitated through improvement of the existing subsidy system. The drafting o f decrees amending subsidy award procedures, and raising the level of capital grant subsidies to 60% o f investment costs i s to be completed in 2006. Relevant decrees will be published in 2007. Immovement of maintenance in LSZ areas. GOM plans to increase the share of maintenance in ORMVAs budgets by an amount at least equivalent to new tariff revenues as early as 2007. Performance regulation of ORMVA ’s water service. ORMVAs will be contractually committed to improved service, cost-efficiency and asset management. A strengthening o f ORMVA management systems has begun in 2006 towards strict separation o f the irrigation and agricultural extension costs. “Contrat-Plans” between ORMVAs and GOM will be drafted in 2007 and signed in 2008. Launch of PSPs for the rehabilitation and ooeration of existing LSZ qerimetersl. Preparation of a PSP has been decided in 2006 towards delegating water service operations in the Loukkos ORMVA. TORS for transaction design will be finalized in 2006, the study will be launched in 2007 and completed in 2008, and the tender for service delegation will be launched in 2009. LSZ rehabilitation olan. A program to upgrade and rehabilitate irrigations systems in the main L S I perimeters operated by the ORMVAs i s being developed in 2006. Such plan should be approved for funding and implementation in 2007 through 2009. Enhancing the role and caDacitv of Water Users Associations in irrigation. A 2006 paper i s to clarify the role of W A S within ORMVA service areas, A study will be conducted in 2007 to prepare a transfer of irrigation planning and management to W A S in 2 pilot zones (small andor traditional perimeters). Negotiations with W A S will begin in 2008 towards tentative transfer of irrigation management in 2009. Launch of PSPs for the develooment of new LSZ Derimeters. The transaction will aim at developing irrigation downstream of existing unused dam capacity in the Gharb region. Relevant studies are to be launched in 2007 for a first tranche of the TTI Gharb perimeter, and to be completed in 2008. The bidding process for a turnkey transaction will begin in 2009.

40. GOM Program, Track #4: Improving access to WSS service, and wastewater treatment capacity (preliminaryl. G O M seeks to implement regulatory, institutional and tariff reforms that will lead to increased performance and self-finacing by the operators, as well as increased accountability to usuers and communities. GOM i s also committed to allocate increased and sustained aid to low-return, “public good” infrastructure, as part of optimized investment and financing strategies, towards improved coverage, equity and performance in WSS service and substantial gains in pollution control capacity. I t s measures are summarized in Table 7 below.

16

Table 7: GOM program for reform track #4 (also see ANNEX 1) Improving access to WSS service, and wastewater treatment capacity

Suooortina and enhancinp the sustainabilitv of Morocco’s R WS oropram. GOM i s to increase financial resources available for funding o f RWS investment, and to actually transfer all subsidies committed to as part o f Budget Laws. In 2007 a plan wi l l be developed to mitigate sustainability risks on installed RWS systems, towards finding ad implementation starting in 2008. Consistent with rural demand, GOM wi l l develop a plan in 2007 to promote the conversion o f existing standpipe-based RWS systems to network- based connection service. A strategy wil l be adopted in 2008 for implementation in 2009. A decree regulating on-site sanitation systems, important for rural areas, wi l l be drafted in 2006 for adoption in 2007. Sunoortina fhe implementation of the National Sanitation Propram. A National Sanitation Program (NSP) was formally engaged in 2006. The NSP aims at abating 60% o f pollution loads by 2010 and 80% by 2015. I t also aims at providing 80% of urban households with individual connections by 2020. GOM i s committed to reallocate an increasing share o f public subsidies to NSP in subsequent years, and to actually pay them as stipulated in Budget Law. Grant allocation criteria by wi l l also be developed in 2006, followed in 2007 by a study o f opportunities to optimize NSP’s investment and financing strategies. A water reuse good practice manual wi l l be issued in 2007, along with a capacity-building plan. A study i s planned, starting in 2007, to define a regulatory action plan required for the development o f agricultural and industrial reuse. Launch of a National Water SURR~V Conservation Plan. GOM will prepare in 2007 and start implementing in 2008 a National Water Supply Conservation Plan, geared primarily at containing non revenue water (NRW) as well as urban residential and industrial demands. Develoo financina solutions to faciliate access to WSS service in poor urban and oeri-urban areas. GOM plans to establish a needs diagnostic and an action plan in 2007, for the accelerated development, finding; and implementation in 2008 o f a national plan to increase service access in poor urban and peri- urban neighborhoods unfit for existing connection programs and pricing. Strenpthenina of the WSS reaulatorv framework. A landmark new service delegation law was passed in 2006, setting the fiamework for outsourcing o f public services to public or private utility companies. Implementation decrees wi l l be adopted in 2007, allowing strengthened contractual regulation o f operators, including public ones, to manage performance and facilitate tariff adjustments. Starting in 2006, GOM i s also to study the piloting o f multisector distribution utility consolidation at a regional scale for two zones in Morocco. A recommended action plan for the two regions wi l l be submitted to CIE’s decision in 2009. A workgroup wi l l also be established to assess sector regulation needs and options, leading to the a study o f WSS distribution regulation action plan in 2008. In the short term, a plan wi l l be implemented towards better regulatory accounting, reporting and benchmarking standards for all operators. Continued tariff reform WSS tariff reform, towards more efficient targeting o f subsidies, access promotion, and cost-recovery i s one o f the key elements o f the reform program. GOM i s committed to continuing the adaptation o f tariffs in response to changing socio-economic and financing constraints. A national WSS tariff study, inclusive o f a tariff simulator, was achieved in 2006, leading to preliminary tariff structure adjustments. Further optimization i s being assessed in 2006, for targeting o f pro-poor subsidies, increased conservation,and operational performance, and improved equity o f sector transfers and cross-subsidies, taking into account PSIA findings. Relevant decrees wi l l be drafted in 2007, for adoption in 2008. Contractual oerformance manapement of WSS ooerators. GOM i s developing a plan to upgrade management systems and contractual framework o f rkgies, moving towards greater autonomy and accountability o f “Contrat-Programmes” by 2009. GOM intends to s ign ONEP’s new “Contrat- Programme” in 2006, and upgrade performance management provisions o f the next contract.

17

IV. BANK SUPPORT TO THE GOVERNMENT STRATEGY

OBJECTIVE AND RATIONALE

4 1. The rationale for Bank involvement is rooted in renewedpolicy dialogue and in a commitment to sustain the reform agenda, while providing fiscal support. Recent analytical work provides GOM and the Bank with a shared understanding of reform needs and options in IWRM, L S I and WSS. The quality and timing of these efforts have restored the Bank’s role as a policy dialogue partner for GOM, and contributed to making water a sectoral focus o f the 2005-2009 CAS. GOM and Bank recognize that with due GOM leadership, the Bank can play a critical role in helping bring together fragmented institutions on a sustained path o f substantial reforms, and that a DPL program i s the best suited instrument to structure such commitment. A series o f up to four DPLs, designed to provide annual budget support, i s thus envisioned to sustain the incremental implementation o f an integrated program of water reforms between 2006 and 2009. The DPL series i s furthermore construed as helpful in limiting the potential reform slowdown associated with general elections in 2007.

42. The DPL approach also derives from operational experience in Morocco and in the region. Past WSS and irrigation projects, have taught the Bank how systemic progress in tariff and performance regulation i s difficult to promote through investment loans. The RWS project recently prepared with ONEP also brought home the need for a DPL to address far-reaching sustainability issues in the agency’s revenue structure and in sector financing. Rural development strategies also count on water reform as a step towards engaging more complex adjustments in the agriculture sector. Finally, the Bank’s recent flagship study of water and development in MENA recognizes that despite its problems, Morocco’s water sector i s by regional standards, dynamic and open to innovation. As such it i s perceived as able to engage in a continuum o f reforms, initially focused on institutional inefficiencies and increasingly aimed at promoting growth and employment through better water management.

43. The reform aims at more than gains in water management and service efficiency. The broad inter-ministerial scope of the DPL, and its design as an annual budget support instrument are intended to ensure that economic, non-sectoral ministries are strongly engaged, to maintain water reform focused on the “big picture” GOM goals of growth and fiscal sustainability. The governance dimension o f the DPL i s also o f strategic relevance to Morocco’s improved governance, transparency and accountability agenda. By addressing complex weaknesses in policy and expenditure coordination, the DPL-supported reform program may foster the emergence o f better practices in other infrastructure sectors. In addition, the operation will provide fiscal support to encourage authorities achieve their medium term fiscal deficit and public debt ratio targets. Looking forward, the success o f sectoral reforms, like the one on water, will depend to a significant extent on GOM’s capacity to achieve a solid fiscal stance, while reducing sectoral distortions. Fiscal strengthening will also create additional fiscal space to finance sector investments or help smooth the social cost o f other ongoing sectoral reforms.

LINK TO CAS

44. The Water Sector DPL is identijied in the CAS and rooted in its approach and objectives. The overarching goals of the 2005-2009 CAS include i) accelerated growth and j o b creation, and ii) reduction of poverty and exclusion, goals to be achieved, among other means through better governance. Under the CAS lending will primarily focus on four pillars, including: (i) competitiveness

18

and investment climate improvements, (ii) programs targeting access to basic services by poor and marginalized groups, (iii) education, and (iv) water. The “water pil1ar”of the CAS supports the strategic objective o f “Improving water management and access to water and sanitation services ”, with three main outcomes, i.e. a) Improve the legal, financial, and institutionalJi.amework of the water sector; b) Improve access to service, and [wastewater] treatment coverage in targeted basins; and, c) Improve technical andfinancial performance of water sector operators. The proposed DPL i s included in the CAS base scenario, and directly contributes to outcomes a) and c), while promoting conditions, and financing arrangements, conducive to outcome b).

45. The DPL series contributes to specific CAS water pillar results. Expected CAS results promoted by the DPL series between 2007 and 2009 include:

Increased share o f public expenditure devoted to RWS and National Sanitation Program. RBAs’ collection rate for water withdrawal and water discharge charges exceeds 80% Amendment project for the 1995 Water Law established Over 5 projects co-financed by RBA in each basin. Management and financial autonomy achieved for 2 ORMVAs, including through PSPs. Full recovery o f normal O&M costs through tariffs, in 7 out o f 9 ORMVAs Tariff collection rate to exceed 80% in 7 out of 9 ORMVAs (before arrears) Improved access to WSS service in urban slums and poor peri-urban neighborhoods. New WSS tariff and performance regulation system. Water quality improvement program published and implemented for target basins by 2009.

COLLABORATION WITH THE IMF AND OTHER DONORS

46. The World Bank and the IMF maintain close collaboration in Morocco. The recently published Country Economic Memorandum (CEM) of the World Bank had contributions from IMF staff. Similarly, the last Article IV for Morocco had contribution from Bank staff. The division o f labor between the Bank and the Fund for Morocco i s straightforward: the IMF keeps i t s surveillance focused on fiscal, monetary, exchange rate and debt issues, while the Bank covers essentially selected topics o f the structural agenda-trade liberalization, civil service and public sector, water, energy, education and housing reform (in some cases in coordination with other donors, especially the European Union). In some cases both institutions work in close cooperation. This i s the case of banking and financial sector reform, debt management, and fiscal reform-while the IMF mainly covers tax policy and administration issues, the Bank mainly addresses public expenditure issues. Also in close coordination with and active participation from Bank staff, the IMF i s providing technical assistance to Morocco on multiple regional activities in the following areas: (a) business environment, reform and growth prospects: a regional seminar with Congressmen was held in Rabat in November 2005; (b) monetary and exchange rate policies: a high-level regional conference i s scheduled for 2007 to discuss issues related to a possible transition to an inflation-targeting framework; (b) regional integration and financial sector development: a regional conference on financial sector reform and prospects for regional integration in the Maghreb i s scheduled to take place in Rabat at end 2006; and (c) regional integration and trade liberalization: follow-up on the action plan adopted in the wake of the November 2005 Algiers Conference. Morocco subscribed to the IMF Special Data Dissemination Standard (SDDS) in December 2005. The Public Information Notice (PIN) on the conclusions of IMF’s Article IV Consultation mission to Morocco, as concluded in June 2006, i s provided in ANNEX 4.

47. DPL preparation was conducted in consultation with the main donors in Morocco’s water sector. Close collaboration was developed with EU and AfDB, to ensure continuity o f DPL with on-going

19

adjustment operations, and share insights on reform progress and constraints. As a result the DPL will expand on the results of the EU and AfDB operations, without undermining their commitments but seeking to better master the reform process and pace. Other donors including AFD, JBIC, KFW, EIB and MCC have been kept appraised o f DPL preparation. All donors are keen to see improvements in the regulatory and institutional framework o f the water sector, and several expressed interest in funding TA to speed-up reform enactment. As o f appraisal, the Belgian Cooperation i s funding GOM’s implementation of poverty and social impact analysis (PSIA) surveys for the anticipation and monitoring o f reform impacts, whereas AFD i s supporting a study of institutional reorganization o f the water sector. Also, KfW will support studies and TA to promote the sustainability of GOM’s sanitation strategy. Additional TA support may materialize from AfDB, EU and JICNJBIC.

RELATIONSHIP TO OTHER BANK OPERATIONS

48. The proposed DPL is the cornerstone of the CAS “water pillar”, with planned synergies with investment operations. The CAS includes investment operations in the water sector, conceived for field enactment o f DPL-supported reforms. Beyond the proposed DPL, the CAS encompasses: i) a specific investment loan (SIL) to ONEP for a RWS project (started FY06); ii) a S I L for integrated resource protection and conservation, and RBA capacity building in the Oum Er Rbiaa river basin (in preparation for FY07), iii) three output-based aid (OBA) pilots to demonstrate subsidy mechanisms enabling service connections in poor peri-urban neighborhoods o f Casablanca, Tangiers and Meknes (to start in FY07), iv) potential SILs for urban water supply and sanitation project (FYOS) and L S I modernization (FY09).

49. A three year Programmatic Economic and Sector Work (PESV is underway to support reform planning efforts. Spanning the period FY06-08, and consisting of analytical work (ESW), technical assistance (TA), and capacity building seminars, the Bank’s Water Sector PESW i s conceived as a flexible and highly integrated instrument to support GOM in medium term reform identification and action plan development. PESW activities identified thus far include 0

0

0

0

0

50.

a sector financing study (completed in FY06), a study to pilot multisector utility consolidation in two regions o f Morocco (FY07-08); technical assistance for the development o f sustainable aquifer management strategies (FY 07-08); technical assistance to optimize national sanitation investment and financing strategies (FY07-08). Up to three seminars a year for capacity building in WSS regulation and in IWRM.

Water DPL development has benefited from coordination with the Energy Sector DPL preparation, in particular on issues related to utility regulation and cross-subsidies. The proposed DPL also complements the Public Administration Reform loan (PARL), by supporting budget reform and MTEF development in the water sector. Finally, the pro-poor objectives of the DPL, towards developing access to WSS service, are in line with the Bank’s Support Project to the INDH, and with three GPOBA- funded pilots to demonstrate OBA subsidy mechanisms for WSS connection of poor households in peri- urban Casablanca, Tangiers and Meknes.

LESSONS LEARNED

5 1. The proposed DPL reflects lessons learned in the previous CAS. Lessons included i) the fact that programmatic approaches provide better flexibility to support reforms while managing risk, ii) the acknowledgement that greater attention i s to be paid to governance, and iii) the need to focus on results.

20

52. EU’s and AfDB’s experiences make the case for programmatic flexibility. With over 34 firm conditions for each o f i t s two tranches, the FAS-EAU has reached negotiated release of its second tranche in mid-2006, approximately two years behind schedule. Started in 2003, AfDB’s PAS-EAU i s also confronted with delays. In hindsight, the design o f these operations may have underestimated: i) the complexity and capacity requirements of reform measures, ii) the need for proactive supervision and technical assistance, iii) uneven ownership, and iv) the need for strategic communication. By comparison, the proposed DPL opts for a programmatic approach with reduced conditionality, and attempts a timing of loans that may be synchronous with annual budget financing. GOM commitment fees are, by the same token, minimized. Triggers are designed to sustain advances across a broad reform program, and to tolerate limited progress on a specific action, provided it i s compensated by actions in others domains, and provided the overall program i s on track.

53. Accounting for the technical assistance needs of reform and building donor support. Consultations with GOM, EU and AfDB helped focus on institutional capacity issues. A key precaution in DPL has been to identify the technical and financial support needs of the agencies in charge of reform implementation, and to make GOM explicitly responsible for the timely funding o f such needs, through donor grants or, as last resort, the general budget. GOM’s calls for TA funding are effectively engaging other donors in supporting the reform program.

54. Assist reform implementation through close supervision and continued high-level dialogue. Based on prior sector adjustment experiences, GOM solicits sustained DPL supervision by the Bank, as a means to frequently evaluate reform progress and provide support on specific issues.Close supervision i s to be coupled with a continued pursuit of high-level policy dialogue, towards mobilizing GOM leadership on reform monitoring and decision-making.

55. Strategic communication is needed to promote reform progress. Lack o f public outreach on water policy stakes may have contributed to slow reform progress in the past. Pushing the water agenda requires strategic communication to increase the level of understanding and build social and political support for the reform. A communication and participation strategy, as initiated through the National Debate on Water, i s to be continued to promote dialogue among stakeholders, to induce behavior change as well as to manage stakeholder concerns and expectations.

56. Acknowledging complexity and relying on GOM ownership. Despite extensive prior analytical work, DPL preparation has relied on GOM to design a program grounded in local capacity and political economy. Matrix development was paced to only reflect GOM’s workgroup proposals and arbitrages.

ANALYTICAL UNDERPINNINGS

57. The program has an extensive analytical foundation, in the form of recent sector work, including: the Sector Policy Note in December 2004, the Working Group on Institutional Reforms of Large Scale Irrigation in April 2004; the Water Supply and Sanitation REDI review in June 2004, the Sector Financing Study in June 2006, the Country Economic Memorandum, on “Fostering Higher Growth and Employment in the Kingdom of Morocco “ in 2006, the Poverty and Social Impact Analysis (Phase 1) in June 2006, and the Assessment of Cost of Environmental Degradation in 2003

21

These studies helped improve the sector partnership with GOM, and provided a better understanding of the political economy of the proposed reforms. Analytical work will continue with DPL implementation, as part o f the PESW framework, aimed at developing medium term reform plans.

V. THE PROPOSED WATER SECTOR DEVELOPMENT POLICY LOAN

OPERATION DESCRIPTION

58. The operation (or DPL) is the first in a program of up to four DPLs (DPL program) designed to provide annual budget support and sustain the incremental implementation of a broad program of reforms in Morocco’s water sector. By strengthening sector governance and advancing subsectoral reforms in resource management, irrigation and WSS, the DPL program aims at unlocking the development potential of Morocco’s water sector. It supports GOM’s vision o f sustainable and efficient water resource management, as well as competitive and equitable service, brought about by better integrated and executed policies. The DPL was developed in strict alignment with GOM’s reform program, to ensure full ownership of process, actions and outcomes.

59. The higher-level objective of the program is to enhance the contribution of the water sector to Morocco’s economic and social development. The specific development objectives of the DPL are to enact reform measures conducive to:

1. Improved governance, jnancing arrangements, and policy coordination in the water sector 2. Enactment of integrated water resource management towards sustainable water uses. 3. Enhanced service, asset management and usage productivity in irrigation. 4. Better access to water and sanitation service, and increased wastewater treatment capacity.

These objectives are consistent with the reform tracks o f GOM’s program. The first objective addresses sector-wide governance issues, and will be the shared responsibility of sector and economic ministries. The remaining three objectives, more clearly delimited along sub-sectoral lines o f resource management, irrigation, and WSS, are each to be owned by a lead sector ministry (i.e. MATEEEEE, MADRPM, and MI). The DPL will not alleviate the exposure of rain-fed agriculture to droughts.

60. The benefits of the program include increased efficiency; equity; financial viability, and environmental sustainability in the water sector. Such benefits may ultimately affect a l l water users and economic stakeholders, including those impacted by degraded quality or availability of water, or by uncompetitive water service. In the short-to-medium term, primary beneficiaries may however be communities lacking access to adequate water, sanitation, or irrigation service. As listed in Table 8, expected outcomes include program outcomes that can be influenced during the DPL series span, and longer-term outcomes to which the program will contribute.

6 1. The DPL program accommodates substantial flexibility to accompany the reform program. Designed to sustain change in a complex sector, GOM’s reform program i s a work in progress, bound to evolve over time. Recognizing the need for further definition of reform actions during program implementation, the programmatic DPL series design includes triggers based on yet unknown policy decisions to be made by the CIE,. This approach derives from solid alignment on objectives with a sophisticated partner, and from the inherent trust in the executive leadership o f CIE to make appropriate decisions and arbitrages for the greater good of the sector.

22

62. The reform program will benejit from the support of other donors to fund technical assistance needs, as well as from GOM commitment to strategic communication. In coordination with GOM, DPL preparation involved consultation o f other water sector donors, resulting in broad alignment on reform needs, and in commitments to fund relevant TA needs. Concurrently, GOM understands the need for a consistent communication strategy to accompany the reforms, specifically addressing different stakeholders groups, including: i) institutions, local governments, appointed and elected officials, ii) industry, iii) rural and urban users and iv) the public large (through education and public awareness campaigns). As o f November 2006, G O M has launched a high-visibility National Debate on Water to communicate water sector issues, and develop awareness and participation on water policy and reform stakes. Based on regional and thematic events scheduled through May 2007, the Debate creates an unprecedented public forum for water policy dialogue between local governements, institutions, civi l society, industry, and users, with ample media coverage. Design o f more targeted communication initiatives i s also envisioned for implementation in 2008.

Table 8. Water DPL p

Program Outcomes

Governance 1. 2.

Better consistency and coordination o f sector policies. Alignment o f financing strategies with policy priorities.

Integrated Water Resources Management 3.

4. Strengthened water quality enforcement 5.

Increased River Basin Agencies (RBA) capacity to implement IWRM missions and functions.

Strategy identified to achieve more sustainable groundwater management

Irrigation 6. 7.

8.

Improved efficiency of on-farm water uses Improved quality and asset sustainability in large scale irrigation (LSI) Outsourcing of water service in L S I engaged..

Water supply and sanitation 9. 10. Sustainable implementation of National Sanitation

1 1, Better access to WSS in poor peri-urban areas 12. Tariff and performance regulation conducive to better

Improved access to potable water supply in rural areas

Program (NSP) underway

cost-recovery and access to competitive service

g r a m outcomes

Longer term outcomes

e Legal and institutional framework enables the efficient implementation o f GOM’s sector policy based on a unified strategy.

RBAs achieving participatory water resource planning and management, and effectively promoting resource conservation and protection. Improved water resource quality Sustainable trends in groundwater management restored

e Productive application o f water in agriculture Financial and managerial autonomy of L S I water service, with outsourcing well established

Quasi-universal access to sustainable water supply service in rural and urban areas NSP results in public health and water quality gains, as well as added recycled water resources Consumers benefit from increased quality, equity and competition in WSS service

AGREED ACTIONS AND TRIGGERS

63. The DPL program matrix consists of key actions excerpted from GOM’s reform program matrix. A dozen actions or less are retained as agreed prior actions or triggers for each loan in the series, in

23

addition to the required maintenance o f a satisfactory macroeconomic framework. Prior actions and triggers for the first and second DPLs in the series (DPL 1 and DPL 2) are listed in Tables 9 and 10. Their rationale and linkage to outcomes i s conceptually illustrated in Figure 1, and discussed below.

64. As further documented in the DPL program matrix provided in ANNEX 2, milestones and conditions (in bold) are designed to track annual incremental reform process gains, compatible with annual bugdet support, adding-up, over the program duration, to significant outputs and outcomes. Milestones and triggers for DPL 3 and DPL 4 are indicative, and subject to negotiations o f ulterior DPLs.

Table 9: Prior actions towards Board presentation of DPL 1

Governance 1. Adoption o f a circular, signed by the Prime Minister, institutionalizing the Inter-ministerial water

commission (CIE), strengthening the role o f the commission towards enabling it to propose implementation and financing priorities for the water sector, and establishing a permanent secretariat for said commission.

2. Submission to the Bank of terms o f reference, in form and substance satisfactory to the Bank, for the carrying out of a study on the reorganization of the water sector with a view,to clarifying policy making and policy implementation functions and optimizing the integration of sub-sector planning.

Integrated Water Resources Management 3. Establishment, by a circular o f the Minister of Regional Planning, Water and Environment

(MATEE), o f the river basin committees for each river basin agency.

4. Publication in the Official Gazette o f the joint regulation (“arrbt?’) No. 1180-06 of June 12, 2006 o f the MATEE, the Minister o f Finance and Privatization (MFP), the Minister of Industry, Commerce and Economic Reform, the Minister of Interior (MI), the Minister o f Energy and Mining, and the Minister of Tourism, Arts and Crafts and Social Economic Affairs, establishing water pollution charges and the pollution measurement unit.

Irrigation 5. Amendment, by joint ministerial decision of the Minister of Agriculture, Rural Development and

Maritime Fisheries (MADRPM) and the MFP, the decision by the same Ministers dated May 13, 2002 governing the award o f subsidies for the upgrading of irrigation systems towards greater water efficiency, with a view to substituting the requirement for a withdrawal permit by the requirement for a withdrawal declaration.

6. Adoption o f the joint regulation (“arrQt6”) o f the MARPM, the MFP, and the MI, abrogating and replacing the regulation (“arrbt8”) No. 1994-01 November 9, 2001 governing state subsidies for equipping agricultural farms with sprinkler or micro-irrigation systems, with a view to raising to 60% the subsidy rate applicable to promote the upgrade of irrigation systems towards greater water efficiency!

7 . Adoption of the decision to increase the allocation for irrigation works maintenance of Regional Agricultural Development Agencies (ORMVA) by an amount at least equivalent to the additional revenue generated by water tariff increases, by way of transferring said amount from the ORMVA’s respective operating budgets to their respective investment budgets on account of maintenance expenditures.

24

Water Supply and Sanitation 8. Adoption o f the National Sanitation Plan (“Programme National d’ Assainissement Liquide et

d’Epuration des Eaux Usdes”) for the period 2006-2009, and establishment o f criteria for the allocation and management o f subsidies granted under said Plan.

9. Enactment o f the public services delegation Law No. 54.05 promulgated by Royal Decree (“Dahir”) No. 1-06-15 o f February 14, 2006 (“Loi relative a la gestion deldguke des services publics”), and publication in the Official Gazette o f the decree No. 2-06-362 o f August 9, 2006 for the implementation o f articles 5 and 12 o f said Law.

Table 10: Triggers towards negotiation o f DPL 2

Governance 1. Prime Minister to convene CIE twice a year, with one session to review sector-wide results and financing

needs. CIE proposals for priority programs and expenditure to be reflected in annual Budget Bil l Preparation Note.

Submit the recommendations o f the Sector Financing Study to the decision of the CIE. 2.

Integrated Water Resources Management 3. Update by-laws by which operation and maintenance (O&M) responsibility for Public Hydraulic Assets

(DPH) i s transferred to M A S .

4. Publish decree ruling the award o f capital grants by RBAs in support o f resource conservation and protection projects, consistent with other subsidy mechanisms.

Irrigation 5. Finalize the National Irrigation Water Conservation Plan (NIWCP) and submit it to CIE for decision.

Allocate adequate public fhding to NIWCP needs for 2008 as programmed.

Implement ORh4VA’s Tariff Adjustment Plans (TAP) for recovery of sustainable cost of water, while maintaining a high collection rate of service fees.

6.

Water supply and sanitation 7. Effective payment of GOM budgeted subsidies to the Rural Water Supply Program in 2007, and allocation

of adequate public fhding to RWS needs for 2008 as programmed.

Effective payment o f budgeted subsidies for the National Sanitation Program in 2007, and allocation o f adequate public finding to NSP needs for 2008 as programmed.

Finalize a strategy and program to correct the WSS service connection deficit in poor urban and peri-urban areas. Allocate adequate public finding to WSS service extension needs for 2008 as programmed.

8.

9.

26

Agreed prior actions for DPL 1

65. Verified completion of nine agreed actions, listed in Table 9, i s a prerequisite for Board presentation of the DPL. Deadline for verification i s set at February 27, 2007 for a scheduled May lst, 2007 Board presentation. At appraisal, several key actions are known or reported as completed, and al l are believed to be within reach o f duly mobilized sector institutions.

66. Agreed actions linked to governance outcomes. GOM’s comprehensive reform program for improved sector governance and leadership i s summarized in Table 4 above. Two prior actions were agreed as essential to unlock progress towards outcomes of : i) Better consistency and coordination of sector policies, and iii) better alignment o f financing strategies with policy priorities:

Agreed action I: “Issuance of a circular letter by the Prime Minister, strengthening the mandates of the Interministerial Water Commission (CIE) and establishing its permanent secretariat, enabling CIE to propose implementation and financing priorities for water programs”. New CIE mandates, revised by the Primature, will require that CIE convene at least twice a year, to review strategic sector issues and reform progress, and to recommend decisions on specific reform and policy options. CIE will also be required to review major capital projects and programs, and propose priorities for public expenditure allocation. The new mandates will require that CIE’s recommendations be taken into account in the draft Budget Bill of the incoming year. CIE agenda and materials will be prepared by a permanent secretariat headed by MATEEBEE. This agreed action i s deemed crucial to establish stronger and integrated sector leadership, to sustain sector development and GOM’s reform program. As illustrated in the DPL program matrix, effective CIE decision-making i s linked to several outputs.

Agreed action 2: “Establishment and validation of terms of reference for a sector organization study to clarify policy and operating roles and to optimize integration of sector strategies”. This self-explanatory action initiates the a l l important and urgent process o f reviewing and optimizing sector organization towards more efficient policy-making and strategies. The seemingly mundane output i s highly sensitive and represents a challenging agreed action. Terms o f reference and study implementation are expected to benefit from AFD-funded TA. An interim report, outlining institutional inefficiencies and reorganization options may be issued prior to the 2007 elections. A new organization may justify revisiting CIE’s role after DPL program closure.

67. Agreed actions linked to integrated water resource management outcomes: GOM’s IWRM reform spans a broad series o f actions, all listed in Table 5 above. Two prior actions were agreed as strategic for the outcomes o f RBA empowerment and improved water quality, namely:

Agreed action 3. “Publication of circular letter establishing river basin committees ’I. This action and subsequent milestones aim at establishing vibrant river basin committees (RBC) in every basin, for debate of water management issues and more particularly for the approval of River Basin Plans (PDAIRE). By activating the participatory dimension o f IWRM reform in Morocco, this step i s expected to strongly legitimize RBAs’ role in decentralized resource planning and management.

Agreed action 4: “Publication of decree establishing water pollution measurement units and water pollution charges ”. This much awaited action i s critical to activate water quality monitoring and pollution control enforcement, as well as to strengthen the regulatory leverage and revenue stream of RBAs. This and subsequent related actions are conducive to more empowered RBAs and to environmental water quality improvements.

27

68. Agreed actions linked to irrigation efpciency outcomes. Measures envisioned as part of GOM’s irrigation efficiency reform track are comprehensively listed in Table 6 above.

Agreed action 5: “Amendment of rules for awarding subsidies to farmers for switching to water efficient irrigation systems, by replacing the currently required water withdrawal permit with a simple water withdrawal declaration”. This action initiates the revitalization, through procedural streamlining, of GOM’s pre-existing subsidy system to promote farmer switch to efficient irrigation technology. Current rules prevent the vast majority of farmers, who draw water from non-permitted wells, from applying for water savings incentive grants. In the interest of conserving water resources, the new rule will waive the permit requirement. This and other actions set the stage for the increase in the agricultural area equipped with efficient irrigation systems. Water savings achieved through conservation may also contribute to more sustainable aquifer withdrawal rates.

Agreed action 6: “Prepare an amendment decree for the November 9, 2001 decree, raising to 60% the rate of subsidy for upgrading irrigation systems into water efficient systems”. This agreed action also contributes to increase incentives for farmers to invest in water efficient irrigation systems.. Existing capital subsidy rates of 40% will be raised to 60%, thereby committing GOM to more proactively invest in water conservation. This action thus also contributes to outcome 8.

Agreed action 7: “Publish the decision of increasing the share of maintenance in the ORMVA budgets by at least the amount of additional revenue afforded through tariff increases”. This innovative decision i s to establish accountability and self-sufficiency for maintenance in ORMVAs’water service operations. Along with other actions and milestones, this clause will contribute to improved quality & sustainability of service in large scale perimeters.

69. Agreed actions linked to water supply and sanitation outcomes. GOM’s reform program for the WSS subsector comprises an ambitious set o f measures aimed at developing infrastructure and service efficiency. Planned measures are listed in Table 7 above. Agreed prior actions towards DPL 1 include two major steps, i.e. :

Agreed action 8: ‘ildoption of the National Sanitation Program (IVSP) and publication of NSP’s subsidy allocation criteria”. The launch o f NSP represents a major new GOM commitment towards improving sewerage coverage and building pollution control capacity. A clarification of the rules by which priority projects will be retained to receive capital grants i s intended to ease plan implementation. The increased transparency afforded by this decree i s expected to promote access by utilities to other sources o f financing, and the readiness of donors to support implementation of the NSP. This and subsequent actions contribute to the outcomes of sustainable development of sanitation and pollution control in Morocco, and ensuing medium term improvements in public helth and environmental water quality.

Agreed action 9: “Promulgation of the Service Delegation Law, and publication of its application decree ”. This prior action represents a major achievement to promote competitive and transparent service delegation in Morocco’s WSS sector, and sets the framework for subsequent regulation reform. A CAS and DPL outcome in itself, this action contributes to the outcome of increased competitiveness in WSS service.

Triggers towards DPL 2 (also see Table 10)

70. Triggers linked to governance outcomes. Trigger 1 (PM to convene CIE twice a year, with one session to review sector-wide results and financing needs. CIE proposals for priority programs and

28

expenditure to be reflected in annual Budget Bi l l Preparation Note) verifies that CIE i s duly mobilized for sector policy coordination and budgeting needs. I t implies that CIEs collegial recommendation on strategic investment and public expenditure allocations i s explicitly recorded in the annual budget preparation cycle. This trigger contributes, along with other measures, including MTEF implementation for sector ministries and contractualization o f operators, to improved governance in the sector. This trigger i s maintained for the duration o f the program. Trigger 2 (Submit the recommendations of the Sector Financing Study to the decision of the CIE) ensures that CIE will consider action plans towards optimized public expenditure allocations, improved regulation of investments, and enhanced efficiency in service delivery.

71. Triggers linked to integrated water resource management outcomes. Trigger 3 (Update by-laws by which operation and maintenance (O&W responsibility for Public Hydraulic Assets is transferred to RBAs) guarantees that RBAs can focus their limited staff and financial resources on the intended primary IWRM missions, and not be responsible, unless so contracted, for maintenance of dams and other hydraulic works. Trigger 4 (Publish decree ruling the award of capital grants by RBAs in support of resource conservation and protection projects, consistent with other subsidy mechanisms) i s key to establish RBA capacity and role to provide investment incentives to resource protection and conservation projects.

72. Triggers linked to efficient irrigation outcomes. Trigger 5 (Finalize the National Irrigation Water Conservation Plan (NIWCP) and submit it to CIE for decision. Allocate adequate public funding to NIWCP needs for 2008 as programmed) i s of strategic importance to ensure that water conservation i s an actionable national priority, duly funded under the 2008 Budget Bill. Trigger 6 (Implement O W A 's Tariff Adjustment Plans (TAP) for recovery of sustainable cost of water, while maintaining a high collection rate of service fees) commits GOM to act on irrigation tariff adjustments towards decreasing operating subsidies to ORMVAs and achieving cost recovery in irrigation water service.

73. Triggers linked to water supply and sanitation outcomes. Three self-explanatory triggers (no. 7, 8, and 9) are retained to verify the adequate funding of the on-going Rural Water Supply Program and National Sanitation Program, as well as o f a new plan to correct the WSS service connection deficit in poor urban and peri-urban areas, consistent with respective programmed needs.

29

Table 11: Good Practice Principles on Conditionality

Principle 1: Reinforce Ownership. GOM ownership of the DPL policy matrix derives from the fact that preparation was guided by: i) sector policy recommendations issued by CIE in February 2005, ii) seamless continuity with on-going reforms and previous adjustment operations, iii) comprehensive and well-accepted prior analytical work, and iv) attentive consultation o f stakeholder institutions on reform actions and calendar. Ownership i s also ensured by the fact that the reform program was effectively developed by a representative interdepartmental Steering Committee (SC), and that DPL matrix development was paced to accommodate maturation of SC proposals and arbitrages. Ultimately, the reform program and DPL conditionality were validated by the CIE prior to DPL appraisal in November 2006. Ownership o f the DPL-backed reform process i s confirmed by the launch of a National Debate on Water to communicate reform stakes and promote stakeholder input.

Principle 2: Agree up front with the government and otherfinancial partners on a coordinated accountability framework. DPL preparation by GOM and the Bank benefited from close cooperation with EU and AfDB, to ensure detailed consistency of reform actions with prior and on-going adjustment operations. Alignment o f other major sector partners, including A D , KfW, EIB, and JBIC on program objectives was also sought and achieved through broad consultations and progress updates. Donor commitments to fund technical assistance and studies to support specific reform actions and results are evidence of such alignment.

Principle 3: Customize the accountability framework and modalities of Bank support to country circumstances The policy matrix and conditionality of the proposed operation are highly tailored to country and sector circumstances. DPL design took into account lessons learned from prior adjustment operations and policy work, and opted for the flexibility afforded by the programmatic approach. The tentative annual periodicity of the DPL series i s also intended to sustain the optimization of public expenditure allocations in successive budgets. Other provisions, in response to sector needs and GOM’s vision, have included the integration of parallel reforms in distinct sub-sectors of resources management, irrigation and WSS, the centrality o f sector governance reforms, and the crucial contribution of non-sectoral and economic ministries in reform design. Reform program incremental steps and constraints were also identified with implementing agencies, and are reflected in programmatic milestones and conditionality, as well as in the effective advance commitment of technical assistance resources. Attentive supervision, coupled with continued sector policy work (PESW), investment lending operations, and linkage to reforms in other sectors further strengthen the outcome delivery framework.

Principle 4: Choose only actions critical for achieving results as conditions for disbursement. The reform actions committed to by sector actors under the four reform tracks contribute substantially, in quality and quantity, to reform program outcomes. Milestones were designed to measure incremental progress of reform actions, compatible with an annual periodicity o f the programmatic loan series. Out of numerous milestones, nine prior actions and nine triggers were selected for their critical importance in unlocking reform processes, delivering key intermediate outputs and achieving reform outcomes. Triggers towards DPL 3 and DPL 4 are formulated for indicative purposes.

Principle 5: Conduct transparent progress reviews conducive to predictable and performance-basedfinancial support. At GOM’s own request, periodic and proactive supervision o f program progress i s planned. Supervision missions will be based on detailed indicator progress reports by GOM’s SC, coupled with continued sector policy work, and potential specialist support on specific reform implementation issues. As substantial progress on triggers and milestones ‘ is assessed, supervision missions may also allow to engage preparation o f a subsequent loan in the series, in an effort to sustain predictable annual and performance-based budget support.

LOAN AMOUNT AND TRANCHING

74. The proposed loan amount i s US$ 100 million, equivalent to EUR 76.2 million. The single tranche loan would be the f i rst in a series o f four programmatic development policy operations. The loan would be disbursed after Board approval review, i t se l f conditional on prior completion and verification o f

30

selected reform implementation steps. program will depend upon the fulfillment o f a detailed set o f trigger measures.

The negotiation o f subsequent single tranche loans in the

75. The attached draft program matrix lays out the reform program planned by GOM. Conditions for Board review o f the f i rst single DPL appear in bold under “2006 prior actions”. Triggers for subsequent DPL negotiations appear in bold under the 2007, 2008, and 2009 columns. The programmatic structure o f the operation, spanning four budget support loans over as many years, reflects a shared understanding by GOM and Bank of complex needs and partial visibility of the reform process.

VI. OPERATION IMPLEMENTATION

POVERTY AND SOCIAL IMPACTS

76. As part o f DPL preparation, phased Poverty and Social Impact Analyses (PSIA) were initiated to analyze the distributional impacts o f DPL-backed reforms affecting i) pricing and subsidies in water supply and sanitation service, and ii) pricing and subsidies in irrigation towards water conservation. The f i rst phase of these two PSIAs, based on a review and analysis of existing documentation and information, has been completed by the DPL preparation team. They included stakeholder and institutional analyses and identified the principal distributional impacts with a special focus on the poor and vulnerable, and proposed recommendations for further analysis under follow-up “phase 2” PSIAs to be conducted by GOM during DPL implementation.

77. For WSS, the PSlA focuses on documenting and assessing the stakes of tariff and subsidy reform aimed at promoting access to service by the poor as well as cost recovery and water conservation. Such reform implies reducing the revenue loss impact and consumption incentive of a heavily subsidized and untargeted first block tariff (“tranche sociale”), while making network connections more affordable, in particular through subsidies designed for poor households. The desk review assessed : (i) the impacts o f tariff adjustments on users capacity to pay and on operation and maintenance costs and operators’ cash flow, and (ii) the need and constraints for expanding connections to water supply and wastewater services. On the first item, high collection rates suggest that current tariff structures and levels, although relatively high on average terms, are generally affordable by the users they target, including for the connected poor and vulnerable. A significant concern i s however that large investment programs in the sector will further drive tariffs up in the near future, and that GOM lacks mechanisms to assess the impacts o f tariff adjustments, especially on the poor and vulnerable. The analysis concluded that, in order to maintain cost o f service at an acceptable level, further assessments of consumption patterns and capacity/willingness to pay should be conducted, and a methodology developed, for assessing impacts of future tariff increases, with a special focus on the poor and vulnerable. An even more significant concern i s revealed by the analysis o f service connection deficits. Connection charges are unsubsidized and unregulated in Morocco, and due to uneven service cost recovery through tariffs, tend to priced at or above their marginal cost. As a result, connection charges generally are very high, especially so in unzoned or peri-urban areas hard to reach by networks. Connection charges thus represent a significant and often unaffordable percentage of the annual income of poor and vulnerable households. The analysis recommends reducing the scope o f untargeted aid such as lifeline tariffs (first block “tranche sociale ”), while designing specially targeted subsidies to promote service connection for poor households. These findings will further develop in the Phase 2 PSIA, and guide GOM’s working group responsible for tariff reform design. DPL-supported measures also include the development o f a national strategy to develop network service in poor peri-urban belts. Pilot programs are planned to

31

demonstrate OBA-type connection subsidies in poor peri-urban neighborhoods in Casablanca, Tangiers and Meknes.

78. The PSLA of irrigation reform focused on the trade-offs of promoting water conservation through tarifs adjustments and subsidy to farmers to invest in efficient irrigation technology. The Phase 1 desk review this assessed: (i) farmers ability, especially poor, to adopt and finance new irrigation technologies for water conservation; and (ii) impacts of tariff adjustments on ORMVA’s operation and maintenance costs. The analysis indicated that farmers in water scarce areas are willing to pay for increased water tariffs or to convert to modern localized irrigation provided that this results in service quality improvements and productivity gains. However, the ability o f farmers to afford water tariff increases and/or the cost o f transition to modern irrigation depends on the size of their farm, their status in regards to land ownership and their productivity. The analysis stresses that the main obstacle to successful irrigation reform i s the lack o f understanding o f i t s benefits, confusion over who will gain from it and the limitations in ORMVA governance and responsiveness for its implementation. The study recommends special measures to accompany the reform process, in order to better define the responsibilities of local and regional stakeholders and to put in place a clear and transparent financial and legal framework for the implementation of the reform. I t also stresses the need for setting performance targets and objectives for each ORMVA. Moreover, it highlights the importance o f communicating about the reform to build trust in the institutions responsible for its implementation. Communication should include guidance to farmers on how to assess the benefits of the transition at the scale of their farm to create support and disseminate good practices.

79. During DPL preparation, members o f the DPL Steering Committee (SC) as well as other technical experts from the Government were actively involved in the preparation o f the preliminary or Phase 1, PSIA reports. The SC also provided comments on the draft reports which were reflected in the finalized documents. The PSIA will continue to feed into the policy dialog with the Government during DPL implementation. A more in-depth “phase 2” analysis of the poverty and social impacts o f the reform will be conducted during the implementation of the DPL and will draw on the issues identified for further study in the two preliminary reports discussed above. This research will include primary quantitative and qualitative data collection through household surveys, focus groups and key informant interviews. This work will also test hypotheses outlined in the preliminary reports and will develop new tools for monitoring the impacts o f the reforms, guide their implementation. The Government i s to take the lead in this second phase of the PSIA, with the financial support of Belgian Cooperation, and with technical guidance by the Bank DPL supervision team. The survey methodologies to be developed as part o f the Phase 2 PSIAs are also expected to allow periodic assessments of capacity and willingness to pay for service, across nationally representative samples o f consumers, in particular poor and vulnerable ones, towards informing future tariff regulation decisions by GOM.

IMPLEMENTATION, MONITORING AND EVALUATION

80. Implementation responsibilities. The Ministry o f Finance and Privatization (MFP) will be the loan recipient. Responsibility for the successful implementation of the reform program will rest with the Prime Minister’s CIE, which gathers the five key ministries involved in the water sector. Day to day responsibility for reform program coordination and monitoring will rest with the DPL Steering Committee (SC), headed by the Ministry o f Economic and General Affairs (MAEG) and including MFP, MATEEBEE, MADRPM, and MI, as well as ONEP. The SC will in particular ensure progress reporting and schedule management, action documentation, interdepartmental coordination, and proactive corrective action on non-progress items. The SC will report to the CIE on reform program progress and needs, and will be responsible for communications with the Bank supervision team. Concerns exist nevertheless as to the capacity of MAEG and of the SC to commit sufficient resources to fulfill this substantial reform program coordination and monitoring role. In their foreseen capacity as

32

head o f CIE’s permanent secrktariat, MATEELSEE are also expected to play a significant role in preparing and documenting CIE decisions on intermediary reform steps.

8 1. Supervision by the Bank. Supervision missions will allow the Bank to continue policy dialogue with the institutions involved in the reform program, and, if needed, to deploy expert staff and consultants to advise GOM in policy and technical areas relevant to the reforms. To that effect, and due to the unusual breadth o f reform scope, custom-sized supervision budgets may be justified. Up to three annual supervision missions will take place, to monitor actions and review progress in the implementation o f the DPL, and if deemed relevant by GOM and the Bank, to prepare and negotiate subsequent DPLs in the program..

82. Decision to negotiate subsequent DPLs. It i s expected that close supervision will facilitate in-depth understanding of reform program progress, delays and deviations, and allow more informed decisions towards the negotiation o f subsequent DPLs. The decision to negotiate be will thus based on verified compliance with pre-set triggers, taking into account overall progress in the Government reform program. Without altering the reform program objectives, negotiations of follow-up DPLs will allow updates of the program matrix with planned complements (actions not yet defined at program inception) or needed adjustments (program changes due to delays or policy deviation).

FIDUCIARY ASPECTS

83. A Country Financial Accounting Assessment (CFAA) was conducted in 2003, concluding that the public financial management (PFM) system features a good level of transparency and accuracy, backed by a strong Ministry o f Finance with an extensive treasury network in the country. The system features long implementation delays. The control system i s comprehensive (internal, external, ex-ante, ex-post) but requires coordination and modernization in order to provide performance-based audit and to add value. On-going integrated computerization i s expected to be effective in 2008 for its first tranche. A number of reforms i s underway for public sector integrated accounting information systems, performance based-budgeting, decentralization and de-concentration, internal control and civil service reform. These are expected to substantially improve public sector management performance.

Management of foreign exchange and funds flow arrangements

84. Foreign exchange The review of the control environment within which foreign exchange i s managed by a Country i s generally made through IMF’s Safeguards Assessment of the Central Bank . The IMF reviews the published annual audit reports and the financial statements o f the Central Bank. As Morocco has not been under IMF program for several years, the IMF has not issued such safeguards assessment and the first audit reports, but a financial statement of the Central Bank will be issued in late 2006 following a comprehensive reorganization o f the Central Bank Ai-Maghrib. The new organization rule of the central bank (decree o f November 23, 2005 - dahir n. 1-05-38 du 20 Chaoual 1426) states that the financial statements o f the bank must be audited by an independent external auditor . “commissaire aux cornptes” (article 52). That was not explicitly the case previously. In addition, the new rule establishes the principle of the control of the financial statements o f the Central Bank by the Court o f accounts. In the meantime, the World Bank knowledge o f the Central Bank fiduciary capacity was compiled during the 2003 CFAA discussions with Treasury of the Kingdom on the treasury single account management and the debt accounting and reporting system by the Central Bank. Treasury appeared satisfied with the Central Bank performance and did not raise any serious concerns to call for

33

a specific assessment. No other IMF or Bank report raises any issues with foreign exchange control at the Central Bank.

85. Credit of the loan proceeds to an account available to finance public expenditures. The DPL proceeds will be disbursed by the Bank to a dedicated account at the Central Bank. Loan proceeds will then flow into an account of the government available to finance budgeted expenditures, following the usual procedure of Bank’s loans. The country procedure for channeling public funds i s fully unified within a Treasury Single Account (TSA) system managed by the General Treasury o f the Kingdom that covers the whole public financial management circuit. The circuit has been assessed by the 2003 CFAA as sound and secure. Therefore, the procedure o f confirmation to the Bank of the transfer o f the loan’s proceeds (amount, references) to this TSA circuit will be made by a letter of confirmation.

Public financial management system.

86. Assessment of the PFM system. The assessment o f the quality and the related fiduciary risk o f Morocco’s PFM system draw upon ESWs o f recent years. The Bank has issued a PER in 2002 providing a sectoral analysis o f the public financial management system and a CFAA in 2003 assessing the entire scope of the public financial management system (budget comprehensiveness, budget preparation, execution, control, accounting and reporting, decentralization, financial relations with the public sector, audit, and parliamentary oversight). The CFAA has assessed the fiduciary risk o f the overall system as low despite some bureaucratic delays in the real functioning of the system (at the central and local level).

87. Since that period, several reforms have been carried out, in particular a first set o f improvements in the budget management more focused on results in order to increase .the accountability of budget managers. A major reform o f the control function, with the support o f the Bank, has also recently been launched in order to increase the ex ante responsibility of budget managers in their day-to-day management and simultaneously to increase the ex post control o f the expenditures. These on-going reforms are and will continue to be heavily supported by the Bank through Technical Assistance.

88. The ex ante control reform i s the most significant in terms o f fiduciary risk. The alleviation o f control calls for increased capacity by budget managers which represents a fiduciary risk for the entire PFM system. This risk i s the main reason why GOM has requested, in a letter dated May 30, 2006, a new CFAA, indicating a strong commitment to reform and a will to cooperate with the Bank. The first mission of the CFAA was launched mid-September 06 and the report should be ready up to December 2006. The government and the Bank have already agreed on the principle of an action plan which will address the modalities of the reform. Two main modalities are envisaged to master the fiduciary risk of control reform: First, a certification of the budget officers in each ministry from 2006 to 2007, and second, a gradual alleviation of the control according to the level o f certification of each ministry starting in 2007 for the most capable ministries. The reform path spans several years and the risk should be maintained at a low level. This path and its modalities will be agreed on the action plan o f the on-going CFAA, at the end of 2006, or at the very beginning o f 2007.

Links to PFM conditions

89. The principle o f the reform’s path of the main and more sensitive component of the CFAA’s action plan, namely the reform of the ex ante control, has already been agreed. Knowing also that the modalities o f this action plan will be starting to be implemented in 2007, any significant deviation from the agreed path, notably as regard to the procedures related to the certification of the budget officers in 2006-2007, should be immediately reviewed and conditionality for future operations would be considered.

34

DISBURSEMENT AND AUDITING

90. The disbursement o f the funds will follow the Bank’s simplified disbursement procedures for development policy operations. The proceeds of the loan will be disbursed in a single tranche in the amount o f US$lOO million, against satisfactory implementation o f the reform program, as well as the maintenance o f an appropriate macroeconomic policy framework. Disbursement will not be linked to any specific purchases, and no procurement requirements will be needed. Once the loan i s approved by the Board and becomes effective, the proceeds o f the loan in the amount o f US$lOO million equivalent will be deposited by IBRD in an account designated by the Borrower and acceptable to the World Bank at the Central Bank of Morocco at the request of the Borrower. If the proceeds of the loan are used for ineligible purposes as defined in the Development Loan Agreement, IBRD will require the Borrower to promptly upon notice refund an amount equal to the amount of said payment to IBRD. Amounts refunded to the Bank upon such request shall be cancelled.

ENVIRONMENTAL ASPECTS

91. Potential positive impacts. An assessment o f the potential impacts of supported policies on the environment, natural resources and forests was carried out, and concluded that the measures supported by the program are expected to have significant positive environmental impacts. Main positive impacts include (i) improvements in public health through better access to water and sanitation; (ii) improvement of water quantity and quality of rivers and aquifers; (iii) pollution reduction from domestic and industrial sources; (iv) promotion of conservation and efficient use of water resources, in particular in irrigation; (v) improved watershed management, with a special focus on dam sedimentation and water infrastructure management; and (vi) empowerment o f River Basin Agencies as implementers of integrated water resources management.

92. Potential negative impacts. The above-mentioned environmental benefits of DPL-supported reforms will overwhelmingly exceed potential negative impacts. The latter are not expected to be substantial, but may nevertheless relate to (i) increased wastewater point source disposal as a consequence of sewerage network expansions (in the event of deferred investment in wastewater treatment), (ii) potential water resource overexploitation induced by increased withdrawal to meet increased water supply demand as a consequence o f water supply coverage expansion; (iv) diminished aquifer recharge in irrigated areas converted to efficient irrigation, and (iv) noise, odor and visual nuisances linked with the construction and operation o f wastewater treatment facilities. GOM i s aware of such potential negative impacts and i s working on measures and actions to mitigate them, in particular through the DPL. GOM has set the development of wastewater treatment plants (WWTP) as a national priority. I t aims at developing them in parallel with network expansion, in order to reduce negative impacts on the environment and water quality. GOM i s also considering the development o f on-site and condominia1 sanitation strategies in areas where network development i s not technically or economically justified. Furthermore, GOM i s empowering RBAs in their missions related to monitoring water withdrawals and enforcing pollution control, taking into account quality and quantity constraints, including cumulative effects, at the scale of the river basin for surface water or at the scale of the aquifer for groundwater. Potential impacts linked to noise, odor and visual nuisances are considered marginal and manageable through appropriate mitigation measures. Morocco’s legislation requires that an Environmental Impact Assessment be prepared prior to carrying out such investments and GOM consider the effective enforcement of this legislation a priority.

93. On the basis of these measures, the assessment concluded that GOM demonstrates that potential negative impacts would be addressed in a satisfactory manner. Bank supervision will follow up to ensure that these aspects are taken into consideration and relevant institutional capacity i s maintained.

35

RISKS AND RISK MITIGATION

94. Program delay risks. The reform program will put the capacities o f Morocco’s complex institutional arrangements to the test. Calendar slippage risks, linked to decision-making challenges in a fragmented sector with entrenched legacy and operator interests, are of concern. Furthermore, despite substantial experience with adjustment operations in the water sector, GOM may be underestimating the technical and administrative resources required for preparation, processing and approval o f reform measures. Calendar delays in the negotiation and disbursement o f subsequent DPLs cannot thus be excluded. DPL preparation has attempted to mitigate such risks by opting for a programmatic approach, fostering ownership, establishing reform leadership with a Prime Minister-headed interministerial water commission (CIE), identifying technical assistance needs upfront and aligning other donors to help fund such TA, and planning for close supervision and strategic communication. Fundamentally strong ownership of the reform by GOM, and the linkage of DPLs to annual budget financing needs, ensure that calendar will also contribute to minimize calendar slippage.

95. Preparedness considerations. DPL preparation team has solicited that CIE review the DPL program prior to appraisal, towards underwriting the commitments o f the DPL Steering Committee, and understanding the need to commit adequate administration resources for reform processing. Such review has occurred on November 24, 2006, and has endorsed the PPD program. Appraisal also insisted that GOM invests in necessary Steering Committee resources for program monitoring and supervision. Appraisal will assess the degree o f completion o f required prior actions, and progress made towards subsequent triggers, as well as the level o f funding secured for required technical assistance. The team has fine-tuned the proposed program matrix accordingly.

96. Program underperformance risk. Inherent to the proposed programmatic approach i s the risk of witnessing de minimis compliance with DPL conditionality, while other actions and milestones in GOM’s program are neglected. Although selective increases in conditionality may be considered for mitigation of this risk, DPL preparation opted to trust GOM’s genuine ownership of the program, and not overloading the DPL as .a budget support instrument. In any event, supervision should evaluate if overall program progress i s compatible with negotiation o f a subsequent DPL, with the added option to scale down the amount o f such loan.

97. Risks associated to public expenditure arbitrages. If continued, high-level arbitrages in favor of large multi-year resource mobilization programs may limit GOM’s ability to adequately support “public good” infrastructure, and DPL outcomes in rural, urban and peri-urban WSS access, or pollution control development may suffer. Strengthened policy and expenditure coordination measures built into the program are meant to mitigate such risk at the CIE level, but do not bar political arbitrages beyond the control o f sector actors.

98. Risks associated with development of PSPs. The pursued development o f PSPs for outsourcing of public irrigation service in selected ORMVAs i s contingent on private sector operators finding interest in the business opportunity.

99. Risks associated with continued WSS tariff reforms. Tariff reforms intended to achieve higher cost recovery, entice water conservation, and more selectively target consumption subsidies to poor households are likely to involve a certain level of public acceptance and political risk. Such risks will benefit from three levels o f mitigation, including inclusion of PSIA findings in tariff reform design, coupling o f tariff adjustments with targeted connection subsidies for the poor, and strategic communication of water value, conservation and solidarity messages. ,

36

100. Macroeconomic andfiscal sustainability risks. These include growth (and fiscal) volatility due to droughts, external risks that may worsen external balances and weakened fiscal sustainability. GOM attempts to mitigate these risks are described below.

To offset the growth volatility risk in bad agricultural years, G O M i s taking steps to diversify the economy and promote exports. These have included the adoption o f the “Emergence” program providing new incentives for exports recovery and investment promotion. As a result, the non-agricultural growth rate has exceeded 4.5 percent for three years in a row.

External r isks such as deteriorated international security situations or terms o f trade shocks may impact tourism receipts, workers remittances and exports. To mitigate such risks Morocco i s developing a comprehensive tourism strategy, and diversifying export markets, with the signing Free Trade Agreements with the U.S, Turkey and other neighboring countries.

Fiscal sustainability risks may arise from wage bill increases or from expansionary public spending in a political transition. To offset this, authorities have adopted a fiscal strategy and taken several actions (see para. 19 , while adopting measures to keep tight control o f payroll; approving additional fiscal measures in the Budget Law 2007, and building consensus around the need for a comprehensive and long awaited fiscal reform in 2007.

10 1. Unmanageable political risk. The program also faces less manageable disruption risks linked to general elections in 2007 and potential cabinet coalition reshuffling. The risks range from diminished GOM focus on water sector reform, to political incentives to postpone sensitive decisions or arbitrages. The arrival o f a new governmental coalition may be accompanied by delays - if not deviations - in the reform process. Bank’s mitigation leverage i s limited to proactive communication o f reform stakes and negotiated programmatic flexibility.

Proposed delivery schedule

Appraisal: Negotiations: Dec 4-6,2006 in Rabat Verification o f prior actions: Board presentation: May 1,2007 Effectiveness:

October 16-20,2006 and November 27-30,2006

March 16,2007

Upon receipt o f Board approval

ANNEX 1 : SECTOR

k 0 3.7 67

POLICY LETTER AND ACTION PLAN MATRIX

Monsieur Paul D. Woldowitz

'

dynarnique pour pfanouvo solide rnfrastructure en m ~~~~~~~~~ pour Ees bsoins urbains et agrrcoles

Dahs ce cadre. le Maroc a engage depuis I"ind6pendance une politique ccks ;jl reau, te qui a permis de doter b pays d'une

de ~ o ~ [ i i ~ ~ ~ ~ ~ ~ ~ at d h ~ ~ p ~ ~ ~ ~ s ~ # f l ~ ~ ~ e n ~ en eau,

dkveloppement du pays. requiert ur cansolider les effans d&ja

entreprrs et faire face a

1- LA SITUATSON DU SECTEUR DE t*EEAU

- la rbalisation de I'objectif dtr iniflion d'hectares a port& la super%% totale iriiguee B 1,4 millions d'heetarss, avec une forfa contribution a I%conomie nationale se mesurant par 45% de kj waleur ajoutbe agricole en moyenne, 75 ?4

tation des revenus des s retornbkes importantes

s services, ainsi que

- L'atimentation en eau es urbains a repr&sentb tigalernen1 une priarit4 de potitique sectoriefle, air la desserte en eau potable dans les villes et centres usbains atteint 90 %. Depuis le milieu des annBes90, I'acc8s des carnpagnes est devenue une priorit& et un programme d'Approvisionnernent en eau potable Rural dit (PACER), a &t& mis en ceuvre. Le taux d'acces a I'eau potable en milieu rirral est passb de 14 Oh en 1995 a 73 % en Juin 2006.

Depuis 1995, un processus de r6formes du secteur de I'eau a et& engag4 dans I'objectif de prornouvoir une gestion efficace et soutenable SUI le long terrne :

la loi 10f95 sur I'eau ir rnodifrb k s rnodafites institutionnetles de gestian des ressuurms en eau en intraduisant principes rnrsdernes de gestian de ressources en em, une te des diff&rh;nts usages, une gestion d&e qui est le bassin hydrographique, une concertation et une participation des diverses categories d'usagers, la mise en place d'instr ents 6eonorniques d'incitation {principe po1rusur -paysur et preteveur -pay contrdle a vavm une palice de f'eau ;

) et la mise en place d'instruments de

- I'tftlaboration du PIan Directeui d'Am8nagernenr lnt6ga6 des Ressources en Eau PDAIRE, a kt6 institubs pour rnieux planifier la gestion durable dFts ressources au nrveau du bassin dans un cadre concert& st partkipatif en vue de l'arnbfroration des conditions de vie des populations ;

- !'&labaration du Plan nations! de I'eau it 4galernent kt4 institude pour d&fink les orientations g&n@mles de la politique de I'eau et prbvoir les m6canisrnes et res instruments de mise en coh3rence f i 1'8chelle national8 des plans rkgionaux ;

- La creation des Agences de Bassin Hydraulique [ABH). pour UR@ gestion rntkgrhe d&ctmt'r;dlis&? et partkipative des ressources en ea#.

En depit de ces rkalisations, le Maruc dait faire face actuellement dux dbfis de la d&t&ioration de la qualit6 des ressources en eau, de la rarbfaction de la ressoufce sous fa pression des demandes induites par fa croissance dkrnographique et bconomique, de l'&puisement des eaux souterraines, du renchkrissernent du co6t de mobilisation el du rythme de perte de capacit6 des retmues de barrages par envasement at du risque de diminution de la rEsssource sous f'effet des changements climatiques. II dolt aussE faire face aux imperatifs did renouvellement, la rdhabititation et ie renfarcernent de I'entretien des infrastructures hydra-agricoies existantes.

Pour cela, plusieurs contraintes restent a lever tant au niveaer des SOUS- secteurs de i'eau qu'aau niveair institutiannef de la gestion de fa ressource.

Dans le dornaine de 1' t, les prrncipales contraintes ont trait ri I'accds d'assainissernent

uartiers urbains d&favonsCts, a la q n des eaux usges, r31 I'importance des d'assainissement et d'bpuration des reSSOulces en eau rnobilis&e dans certai

difficult& d'assurer

faible efficience, ne favorise pas la

la durabilite du sewice de t"eau, et n'institue pas cfairement le principe de skparation des mission de sewice public et des missiolas a caractere commercial.

Quant h la gestion des ressources en eau, elk est canfrontbe & un manque d'intkgtatlon des palitiques et pianifications secXorielles dti a une insuffisance de coordination entre les sous-secteurs, ce qui ne favorise pas une gestion rationnek et suffisanment cohbrente des ressources en eau,

En CB qui concerne le fxna ent du secteur de I'eau, des efforts budgbtaires importants ont &e ailourits par ib @pendant, la r6partition de3 ressoi..irces entre tes sow-secteurs de k a u merit am&ior&;e et optirnisek d m s fe cadre d'une mise en coh6rence des investissements publics.

Ainsi pour consatider l@s acquis et corriger 3es dysfonctionnements, le Eowvernernent est d&ernink 4 poursuivre les effarts de r&formes dans le secteur de I"eau. Dans ce cadre, des operations d'ajustements sectoriels ont et6 conclus avec I'Uatian Europ&!enne en 2QQ1 et la Banque Afri e de Ddvetoppement en 2003.

I!. STRATEGfE DU ~ ~ ~ V E R ~ E ~ E ~ T DAMS LA GESTIOhl DU SECTEUR DE

La nauwelte poi emant repose sur les du secteur J U S ~ U ' E ~ u vers %rne gestion iwe de la resswrce

p ~ ~ ~ ~ ~ ~ ~ $ be ta prtitsent axke p de la damande en eat2 et vers une mewtfsure perf a travers la mi$@ en place de rn6canisrnas institutionnels et de r&gulation du seivice

des op6ratems dans la ge

1” Amhlisrer la Srouvernance et le pilutage sectoriels

s du Premier

isation du Cornit4 conform&ment aux

tbns de I’administration du sectwr de lite des missions, rationaliser- l’actian

r la regulatian du secteut. Pour cela le de I’ann6e 2007, une etude sur

de mise en awvre de ar leur intdgration, Ies planifications sous-sectori Btude sermt prhsrmt&s

- L‘instauratton d‘une piog mation budgefaire consotidde B moyen terme liee 9 la performance. Un Ca de DBpense a Moyen T e r m (CDMT) sera mis en cmvre i~ partir de 2007 pour le Ministere de 1’Amenagement du Tarrrtsire, de i’Eau et de I’Environnement et le Secrbtariat d’Etat etendu atrx autres rninisteres intenrenant dans le se

ours au Naroc R ~ S intervanants

- le renForcement de la gauvernance et I'arnhlioration de la *stion des operateurs a travers la contractualisation : Le prrncipe de cootrat plan a 4tk retenu carme &tape interm6diaire pour preparer ies &tablissernen?s publics du secteur zt repondre aux crtteres requis pour LIR cantrat -programme tei que definit par la loi sur le cctntrdle financier des etablissernents pubtics. En ce qui cmcerne I'QNEP tin contrat-programme est en c u m de finaitsation entre I'Etat et cet organisme pour la pkriade 2006-2009 :

- Le gouuernement procedera kgalement a la mise en ( = B W T ~ d'un systeme d'infarrnation national sur I'eau qui permettra dans un premier temps de consolider et d'agreger fes informations disponibles et de mewe en place a terme uri obsawatoire de I'eau

En vue d'attaindre ces objectif$, ies axes prioritekes retenus portent sur :

- Le renforcement des agences de bassin, notarnment par fa clariffcation des rakes des ABH en vue de keur permettre de se focaliser sur leum missions d*&aluatian, de e gestion des ressources en eau et d'incjtation a ai9 H. tes ophmtions de: maintenance et cl'entretien f j seront confiees aux ABM dans un cadre convention fa nature, la cansistaance et fes modalitks de financement. Dans ce cadre, il sera procl?dc5 en 2007 B la modification des arret& de mise & disposition des agences de bassins du domaine pubfie hydtautique, pour ies adapter en consMuence

- l e renforcement des ABH passera egalement par ta preparation et la mise en place des prhalables ii i'application des contrats plans Etat/ABH en vue el'aboutir en 2QQO & fa mise en application des contrats pian pour toutes les ABH..

- I'lnstitutian par circulaire en 2006 des cornit& de bassins par zone d'action des agences en vue d'arn&tiorer la repr&?sentation des usaprs el des collectivrt&s locales au sein des organismes de bassin et dynarniser le processus de ddcision.

- La Generalisation du systcjrne de redavance aussi bien aux industries non ord6es, aux stscfeurs dome que et industriel, qu'ti t'irrigatian en dehors zones rkgies par les convexitiuns ORMVAIABM.

- tes redevaflces de d&efsernsnt en milieu rnarin seront &galernmi rEiiglernentBes, le produit g&n&ri! par ces resswrws permet de rerrfarcer les ~ESSOUIICBS dsstinkes d la tutte eontre la poilution ;

- Par ailleurs une r4fkxicm sera rnenee sur ta possibitit9 de rtjvrser les rnodatit&s et le niveau des redevances de I'eau recouvrihs par ies ABH, en vue de leur perrnettre d'am8liarer leur assiefte iinancibre.

~ la sauvegarde des nappes: la prkparation d'une strat6gie nationale pour limiter fa surexptaitalion et la pollution des nappas sera lancee en 2007. La conception finalisee de eette strategie sera pr&sentCe A la CIE en 2088, et le5 opkrations de sauvegards dans deux cas pitotes de mise en Ceuvre seront ianckes ;

- Dans le doniaine de la iutte ctrntre la poilution, le Gouvernement prendra toutes Ees dispositions ndcessaires a la mise en oeuvre regfernentation en wigueur, et dkploiera les moyens adequats pour renfclrmr et dynarniser la potice de I'eatr

- la p8rennisation du pafrin-toine hydrauiique de rnobilisation de la ressource y compris la lutte contre la $&dimentation par le renforcement des prrrgramrnes intkgrhs d'amhagement des bassins versants conforrndment aux ortentations du Plan National d'Arn8nagement des Elassins Versants, PNABV.

t'inittation du processus de revision de La lrti sur i'eau en vue d'&ia$orer un projet de loi qui pourra W e sournis A la CtE en 20Q8 et nis dans fe circuit d'approbation en 2009. La revision de la Ioi 10-95 sur I'eau et de ses textes d'application visemtt, essentielfement a revair les missions et tes attributions des agences de bassins de manihre P les rendre ptus cohbrentes B prhciser le processus de planfication pour clarifier les interfaces entre !e Plan Nationel de PEau et les PDAIRE, et le r61e de I'administration centrale chargee des ressources en eau, du cornit$ da bassin, du CSEC et des agences de bassin dans I'elaboratton de cas documents strategiques ; it renforcer la participation des usagers d'eau st des coilectivit& locales dans le$ institutions dit? coordination, de concertation et de gestion ; 9 clarifier et simplifier les proc&dures de delimitation du domaine gubljque hydraulique.

3" Arnhliorer le service. assurer la durobiiit4 des investissernetrts et rnieux valoriser l'eau dans Ies zones irrinudss

Cogicarnant la sous secteur de I'irngetion, le Gouvernernent entre@rendra des rnesures visant J'am81ioration de l'efficience d'utiiisation de I'eau d'irrigation dans les exploitations agricoles, E'arntt3liaration du recouvfernenl du coot de I'eau et le renforcement de fa maintenance et de la r6habilitation des equipements dans les ptftrimdtres publics d'irrigation, la promotion de fa delegation de la gestion du sewice de i'eau d'irrigation dans le cadre d'une vision gfobale de la refarme des QRMVA el la rkdustion du dhcalage d'4quipernent en aval des barrages existants B travers notarnrnent, le finencement dans le cadre de Partenariat Pubiic Privb.

A cet effet, la stratbgie du Gouvernement consistem A :

- lancer des 2006, la pre5paration du Plan National de I'Econamie d~ I'Eau d'lrrigation {PNEIj qui Sera Brig6 en priorit& nationate en VUE: de sa mise en euvre iit partir de 2008.

- inciter A t'utiiisation des techniques d'irrigation perrnettant I'&onornie de I'eau et sa meilleure utilisation agricole en stmplifiant les proc6dures d'actroi des subventions aimi qu'en augmentant le taux de subvention pour la reconversion oux techniques d'irrigation 4cclnames en eau.

tsapage tarifaire des ORMVA et soutenir un bon niveau

aux agriculteurs en cas

arnbliorer ies performances techniques et de gestion des ORMVA avec I'objectif de s&parer las missions service de I'eau des cornptes des autres missions en vue d'une contractualisation Etat-ORMVA et 1'6laboration de contrat-plan fixant Ees engagements EtailURMVA d&s 2007.

Prendre ta diScisian d'augrnenter ies credits d'entretien et de maintenance des psments hydro-agricoles des Offices RBgionaux de Mise en Valeur ole d'un rnonlant au moins bquivalent aux recettes gbn&r&s par les

augmentations tarifaim, moyennant la transfert de ce rnontant de ieur budget de fonctionnement A leur budget d'investrssement, au titre de la maintmance.

i

promauvoir le Partenariat public-privi! dans les grands p8rimbtres mdernes Daiis ce cadre, I'citude sur !a gestion d&l&gu&e des services d'irrigation d'un p&rirnlttre pilote sera IancPe d8s 2006 en vue de sa rdalisation en 2008 et du lancement de I'aappel d'offre pour la gestion di.legurjre en 2009. Dans cette perspective, It? programme et le plan de financement de mise ri ntveau des infrastructures d'irrigation des grands p8rirn6tres seront definis a partir de 2006.

4" Amcblioirer I'accits & i'eau potable et Si I'assainissament, st accraltre le faux d'emration

Les abjectifs que Ie Gouvernement s'est fix61 pour \e secteur de I' et de l'assainbsement, cuncernent la gen&alisatian de t'aacces a I'eau potabre en mifieii rural stu travers de la poiirsuite du programme PAGER, et le dkveloppement durable de AEP et d'assainissernent rural AEPAR , I'ambtiaration de la desserte en eau potable et assainissement en milieu urbain, spticiaiernent dans ies quartiers d6favorises et p&ri-urbains, ainsi que le dbveloppernent de capacttks d'assainissement et d'&pLJratlQn des eaux us&% tenant compte de la n@cessit& dame reduction de la pollution de la ressource. Le sous secteur de t i f distribution et de I'assatnissement canstitue ainsi Ltne campasante essentielle de la rri?forrne de madernisation du secteur et de la gestion da la dsmande.

Tout en rnesurant la complexit4 du sous-secteur et la rnctltiplicitCt des intervenants, Is Gouvernernent veillera au renforcernent du cadre de rkgulation et poursuivra la reforme de la tarification en vue de pmrnouvair la performance et t’autofinancetment d m opbrateurs du sscteur et de mieux prendre en compte I’int@r& du consammateur.

En ce qui concerne I‘assainissernent et la r&utitisation des eaux usires, un Bes a Btb engage

sources en eau de Im desserte

les actions d’optirnisatron sera Bgaiement menee A

Afin de promouvair fa rbutitisation des eaux usbes, il @st prdvu d%Iaborftr une stratrigie sur la rkutitisation des eaux usbes visant B La mise en place a partir de 2009 d’un cadre institutionriel approprik, et de dkvelopper un guide de bonnes pratiques opriraticrnnelles.

Le Gauvernement preparera kgaiemenl et rnettra en lzuvre en 2008 un pian d’Econornie de 1’Eau Potable en vue de promouvoir le$ Bconornies de f’eau potable au niveau des ap&ateurs, des industriels et des usagers,

Dans le domahe de [”AEPAR, le Gouvernernent s’engage a renforcer ies ressowees financieres pour le financement de I‘investissement AEPAR et notamment & verser tes subventions prkvues B cet efkt dam le$ lais de finances, Li &laborer et rnettre en muvm un systarne de p6rmnisation at mettre en mwre le decret sur I’assainissement autanoms.

En vue de rattraper le deficit de raccordernent en eau potable et assainissernent dans les qua d$favoris& urbains e! perl-urbains, la gauvernemmt procedera p 2007 B la finalisation d’un programme pour mettre en muvm des solutions

It y a iieu de sig Nationate paw le DBveloppement Hurnain tre institution, vise entre autres i”am&lioraUo populations d a w le milieu urbain, Dam c ts want B &endre l‘accQs aux s &conornique dans 264 quart-tfers S*

erte de ces quartisrs.

s sociaux de base et & renforce

De meme le programme it villes sans bidanvilfes n, men& par le Gouvernenient, inclut egalement des operations de raccordement pour Ies populations conGernkes par ce programme.

Par ailleurs, #ne &tude sur la restructuratian du secteur de fa distribution avec I’appui de VOW institution est an cours de lancernent. Cette &it$@ pernieltra de dBgager les contraintes et rnesures a entreprendre pour une configuration de projets oplimisbs avec uns vision de Muttiserwices. Cette vision perrnettra aux coliectivitQ de rdaliser un p t d’intkr6t comrnun sur un pgrimbtre regroupant plusieurs communes tout en entrainant des economies d’8chelte et &&ant la fragmentation

Sur Le plan du contrcile et d’organisation, pltlsieurs projets sont en cours de preparation et seront IancBs 8 partir de 2007 Ces projets rentrent dans le cadre institutionnet et procedural dn choix des exploriants et la mise en place de mCcantsmas de contsisle et vigutation

Ces psojets portent sur ies aspects suivants :

0 Le contrdle et ia regulation des services publics c [a lai sur la gestian dblBgu8e offre aux communes un cadre adapt& pour I’attnbution et le choix des modes de gestian des services publics. Ce cadre doit iitrc? cornplktb ef enrichi par des dispositifs instrtutionnefs r6gissant le mise en place des mkanismes d’organisation et de rkguiatton des activiths des exploitants. Le besoin de ces m$canismes est urgent pour be cas des grandes aggiomdrations dont les sewice~ sant g&r& dans le cadre des contrats de ddlOgation de service.

La contractualisation pour la gestion des services p u b l i ~ ~ quelque soit la nature juridique de l’opt5rateur au de f’exploitant du service. les relatiam avec la collectivith doivent &re contractualisbes. Cette procedure permet de fixer les objectifs %1 atteindre, la proFection des biens du service qui sont un patrimoine de la colfectivite et la ddfinition des engagements.

Dans ce cadre Bgalement. une rkffexion sera menee sur les besoins et les options de la rdgutation rnoyen terma A court terme une initiative de benchmarking de fa distribution d’eau potable et du service d’assainissement pour i’ensernble des opkiateurs publics et prtves sera fancbe pour la mesure et ia publication d’indicateurs uniformes de coGt et de performance

La r&forme du syst6nie de tarification de f’eau potable et de i’assainusement constitue 6galement un des DI1Bmsnts ct8 de la re fone d‘ensernble du secteuf de I‘eau

Les pouvorrs pubtics ont engagl depuis pfusieurs ann&$ une rdflexron sur le rearn&nagement du systeme de taification actuel et son adaptation aux nouvelles exigences de I I ~ f l ~ i r o ~ ~ ~ ~ ~ ~ ~ sclcio-beonomique et aux contraintes lii?es a la realimtron des objectifs d’une gestion intbgrke de I’eau dans fe cadre de !a loi 10-95

Ainsi une Btude nationale de !a tarification de I'eau potable- assainissement a 6th achevke en 2008 pernettant de disposer d'un diagnostic actualis& du system@ de tarikation actuet, d'un madele de sirnutation des recettes et des charges pour chacun des op8rateurs dans le secteuc de la production et de la distribution, ainsi que d'un ensenibfe de scenarios de r&am&nagernenfs tarifaires.

En outre une prerni&e phase de rbforme a &e mise en ceuvre A paftir de mars 2006 avec la publication des arr6tes tarifaires de I'eau potable cornpartant un ensemble d'arn6nagement tarifaires dont notammsnt une revalarisalim de la redevance fixe, une r6duction de la tailk de 1 *" tranche (tranche sociale) ramenee de 8 a 6m3fmois et l'alignement progre du secteur hdtelier sur le sscteur industriel I savoir le passage d'une tarification A $ranches progrtwives B un tarif unique.

Paraltt2lernenZ, un rhajustement de 3.5Or6 des tarifs de t'eau pafablle B la production a et6 applique en 2006,

tes efforts seront poursuivis a court et rnoyen terme pour tin r6amenagernent des structures tarifaires b a s k s sur un rneilleur cibtage des classes dbfavorisBes, une meilleure prise en compte de la gestion de la dernende et de la rare$& des ressoufces et I'amelioralion de t'efficacM des opbrateuts ainsi qu'une harmonisation d%s pdrdquations inter usagers ou intra sectoriiIles dans le $ens de t'&iiit& de I'acces au service.

Le Gouvernement est determine i5 tilaborer at 21 mettre en mwre des rnkcanismas de rbvision tarifaire qui. prendrant damantage en compte les critPres d'efficience et une gestion basee sur la performance et la transparence des opkrateurs.

Dans CB sens, un travail de prdparation d'aptions et de processus de reforme tarifaire sera engag4 A partir de 2006. Ce travail aboutira a !'Blaboratton des textes pour l'application de la rdfarrne et de la regulafion tarifaire qui seront retenues et a leur adoption en 2008.

Les r6suItats de I'Btude approfundie d'analyse des impacts sociaux et sur la pauvretB (PSIA) appuybe par votre institution seront pris en compte dans les

s de la rkgulation farifaire

ill. MODALITES DE SUIVI ET DE MISE EN OEUVRE

Un camit& de piialage a et& mis en place auprbs du MinisttSre charge des Affaires Ecanomiques et Generales et regroupe b s representants des departements rnlnist&rrels et organismes intswenants dans le secteut. Ce cornite qui a men6 la rkflexion sur le programme de reforme et a assure fa prbparatton du PPD, sera Bgafernent charge d'assurer le suivi de la mise en e w e de ce programme

En vue d’assbrer is suwt fier dudit programme, le cornit& fera Ie point pbriodique sur f’8tat d’avancernent de fa mise en ceuvre de ces actions et pr4parera des rapports d’4tape annuets d cet effet

L 3 3 P

w 6

d c 2 N '2

.- 0 1 I I

---I--

s!

I r ~.~

S k 0 N

W 0

I I

L e! :Lu jr .b: 4

I

& g 5: 8 s K E

:Lu E n

3 E

I

.- 6 I

a m

- 'r 5

m N

a

-

r

I

37

ANNEX 1 : SECTOR POLICY LETTER AND ACTION PLAN MATRIX

(Unofficial translation of French of original attached to minutes of negotiation of December 5, 2006, and signed December 19,2006)

Kingdom of Morocco The Prime Minister

No. 01767

Mr Paul D. Wolfowitz President of the World Bank Washington, DC, USA

Subject: Letter of Development Policy for the Water Sector

Mr President,

The water sector benefits from particular attention from Morocco’s administration. The development of water resources has indeed always been at the heart o f the nation’s economic policies, as it i s of crucial importance for irrigated agriculture and for the water and food security of the country.

Within this framework and since the country’s independence, Morocco has conducted a dynamic policy to promote access to water which included the development of a solid water mobilization and water supply infrastructure for urban and agricultural needs.

Today, this policy which has bolstered the country’s development, calls for new sector reforms to consolidate the efforts deployed so far and to meet the new challenges facing the water sector.

I. CURRENT WATER SECTOR SITUATION

Since the 196Os, the Government has given priority to developing i t s water resources. In this regard, important progress has been achieved in the water mobilization sector to satisfy the needs of the population and the development of irrigation:

- Water resource mobilization has been achieved thiough an important dam construction program which has increased the number of dams from 12 to 114. This increase has led to a 80% mobilization rate for surface water and a nine-fold increase in water storage capacity, Le., from 1.8 billion m3 to 16 billion m3 at present. The objective of developing 1 million hectares of irrigated land has been exceeded given that the total irrigated area currently represents 1.4 million hectares. Irrigation generates on average 45% of Morocco’s agricultural added-value and supports 75% of agricultural exports. Farmer revenues have also increased 5 to 13 times, depending on the specific irrigation scheme. The sectors for public works, industry, service provision and agro-industry have also registered a positive impact due to the increase in irrigated area. Urban water supply has also been a focus of sector policy as shown by the 90% potable water access rate in urban areas. Since the mid-I990s, access to rural water access has also become a priority and a Water Supply Program for Rural Populations (PAGER) was implemented. The potable access rate in rural areas increased from 14% in 1995 to 73% in June 2006.

-

-

38

In 1995, a water sector reform process was launched to promote efficient and sustainable resource management, as described below:

- Water Law No. 10/95 amended the institutional framework for water resource management with the introduction o f modern water resource management principles, an integrated approach according to type o f water use, a decentralized management scheme at the river basin level, water users’ contribution and participation, the implementation o f economic incentives (e.g., the “user pays/polluter pays” policy), and the introduction o f enforcement instruments through a “water police” force. Water Basin Plans (PDAIREs) were launched to improve sustainable water resource management at the water basin level through user participation and to improve living conditions o f the population. A National Water Plan was also initiated to define the general trend o f water sector policies and identify cohesion mechanisms and instruments needed for the integration o f regional water plans into the national framework.

- The creation o f River Basin Agencies has ensured an integrated, decentralized and participatory management style.

-

-

In spite o f the achievements cited above, Morocco must now face new challenges, namely: the degradation o f water resources; increasing water scarcity due to population growth and economic development; groundwater depletion; the increasing cost o f water mobilization; and dam capacity losses due to climatic changes and siltation. In addition, the water sector also faces o f issues o f renewal, rehabilitation and strengthening o f i t s existing infrastructure.

Thus, several constraints must be addressed, both at the water sub-sector level and in the institutional framework o f water management.

The main constraints facing the potable water and sanitation domain concern the uneven water access rate between urban areas, rural areas and poor peri-urban neighborhoods, as wel l as the severe lack o f wastewater treatment facilities, the high cost o f wastewater collection and treatment investments, and the over-burdened water mobilization schemes o f certain large cities.

Agricultural sector challenges include: the existing gap between irrigation water demands and availability o f water resource storage for this and other uses; worn out irrigation infrastructure in need o f upgrading; the dominance o f inefficient surface irrigation methods; and the limitation o f ORMVAs’ institutional framework which curtails their role in developing sustainable water service delivery and which does not clearly separate their public service and development missions from commercial water service delivery.

Water resource management i s also hampered by lack o f sector and policy planning due to poor coordination between sub-sectors, thus impeding the development o f a rational and sufficiently coherent water resource management policy.

In spite o f the State’s considerable budgetary efforts in favor o f the water sector, optimized resource reallocations between sub-sectors will be required to ensure better rationalization o f public investment.

Thus, to consolidate achievements to date and to correct malfunctions, the Government i s committed to supporting reform efforts in the water sector. Accordingly, sector adjustment operations were engaged with the European Union in 200 1 and with the African Development Bank in 2003.

39

Government support has also been instrumental in progress achieved in water sector reforms through: support to the implementation o f integrated and decentralized water resource management with seven river basins; correcting the delays incurred in implementing the Water Law; promoting the public- private partnership in irrigation, potable water supply and sanitation; and improved dialogue on water issues through the creation o f the Interministerial Water Commission.

In 2004, a water and sanitation sector review prepared with the World Bank’s help presented a diagnostic o f the water sector situation, and identified existing constraints to sustainable water resource development while formulating possible reform options.

In the aftermath of the 2004 sector review, the preparation o f the Water Sector Development Policy Loan (DPL) represents one o f the objectives o f 2006-2009 Country Assistance Strategy agreed by the Government and the World Bank. The DPL will thus support reforms planned for improved sector governance, integrated water resources management, irrigation, potable water supply and sanitation. The preparation o f the DPL i s accompanied by a multi-annual assistance program (ndlt: Programmatic Economic Sector Work) conducted with the World Bank to finance strategic activities, including studies, technical assistance and training seminars.

11. GOVERNMENT STRATEGY FOR WATER SECTOR MANAGEMENT

The new water policy initiated by the Government i s based on the following principles: (a) integrated water resource management; (b) a realignment o f sector policies, until now focused on increasing the supply and availability of water, towards management o f water demands aimed at preserving the quality and quantity o f available water resources, and towards improved operators’ performance by implementing institutional and service regulation mechanisms.

Within this framework, the main objectives o f water sector reform are to: (a) improve sector governance; (b) complete and enact integrated water resource management reform; (c) ensure better water service delivery, sustainable investments and improved productivity o f water usage in irrigated areas; (e) improve access to potable water and sanitation, and increase the levels of water treatment and purification facilities; and (g) ensure wider access to sustainable water supplies in areas lacking adequate infrastructure.

In order to achieve these objectives, the water sector reform includes a series o f structural and institutional measures which will strengthen strategy efficiency and operator performance in the sector.

1. Improve Sector Governance

Government will implement the following measures to ensure policy and strategy coordination and coherence:

0 The Interministerial Water Commission’s (CIE’s) mandate will be reactivated by a 2006 circular letter which will establish CIE’s responsibility for coordinating government programs and strategies in the water sector and for formulating proposals on sector investment and implementation priorities. CIE will convene twice a year and its recommendations will be taken into consideration for the draft budget bill o f the incoming year. CIE’s permanent secretariat will be ensured by the Ministry in charge o f water.

0 The standing committee o f the High Council on Water and Climate (CSEC) will also be reactivated according to conditions set forth in its initiating decree. Meetings will be

40

scheduled to discuss progress achieved in the application of CSEC recommendations and any other issues related to water and climate sector policies.

The water sector administration’s structure will be revised to ensure mission compatibility and to formalize sector regulations. In this regard, Government will launch a study on the water sector structure in early 2007 to clarify accountability for defining and implementing sector policies and to effectively integrate sub-sector programs. The study’s findings will be presented to CIE in 2008.

A consolidated medium-term water budget planning system will be developed. A Medium- Term Expenditure Framework (MTEF) will be implemented as o f 2007 in the Ministry o f Regional Planning, Water and Environment and in the Secretariat for Water, to be extended to other line water ministries in 2008. Thus, public budget allocations will be better monitored to effectively target state budget objectives. The budget reform currently underway in Morocco will thus coordinate contributions from sector stakeholders.

Strengthening o f governance and better operator management will be achieved through formal contracting of services. This approach was adopted as an intermediate phase to prepare public sector enterprises to meet the required criteria for contrats-programmes as set forth in the public sector financial control law. A contrat-programme between ONEP and Government i s currently being finalized for the period 2006-2009.

Government will also implement a national water information system to initially help consolidate an information database and to ultimately set up a water observatory unit.

2. Complete and enact integrated water resources management reform

In order to reach these objectives, the key actions will focus on:

Strengthening the river basin agencies (RBAs) by defining clearly their mission regarding resource monitoring, planning and management, and for the promotion o f public hydraulic assets preservation. The O&M responsibility for hydraulic assets will be transferred to RBAs by contract which will also define their scope and funding. In that context, joint by-laws transferring responsibility of public hydraulic assets to RBAs will be updated in 2007.

Preparing and establishing. prerequisites to implement “contrats-plans” between the Government and RBAs, so that by 2009 contrats-plans can be in effect for al l RBAs.

Establishing river basin committees (RBCs) for each river basin through the issuance o f a circular letter in 2006 to improve user and community representation and participation in RBA decision processes. Extending the collection of withdrawal charges to unconnected industries, households, industrial users, and irrigation users outside ORMVA/RBA conventions.

Establishing and enforcing charges for ocean discharge of wastewater, so that resulting revenues can be applied to pollution control programs.

Elaborating on the possibility to review modalities and level o f water charges recovered by RBAs to enable an increase in their financial autonomy.

41

Aquifer conservation: the preparation o f a national strategy to control aquifer overexploitation and pollution w i l l be initiated in 2007. The final design o f this strategy w i l l be submitted to CIE in 2008 and two pilot conservation operations will be launched.

Regarding water pollution control, the Government will take al l necessary measures to effectively implement existing regulations and empower formal water quality monitoring and enforcement capacities.

0 Improving the sustainability o f hydraulic assets, including through sedimentation control, by strengthening water basin development integrated programs according to the National Watershed Conservation Program.

0 Initiating a revision o f the Water Law to submit an amendment draft to CIE in 2008 and present it to Parliament’s approval in 2009. The main objectives o f the update o f the Water L a w 10-95 and i t s by-laws would be i) to update river basin agencies’ missions and resources for consistency; ii) to better specify the planning process and interface between the National Water Plan and the PDAIREs, as wel l as the roles o f the central administration entity in charge o f water resources, o f the river basin committees, o f the High Council on Water and Climate and o f river basin agencies in the preparation o f these strategic documents; iii) to strengthen water users’ and local governments’ participation in the institutions in charge o f water resource coordination, consultation, and management; and iv) to clarify and simplify the delimitation procedures for the public hydraulic assets.

3. Improve water service, ensure asset sustainability and raise use efficiency in irrigation

Regarding the irrigation sub-sector, the Government wi l l take necessary measures to : i) increase the efficiency o f on-farm irrigation water usage; ii) improve water cost recovery and asset management in public irrigation perimeters; iii) promote the outsourcing o f irrigation water service as part o f a global vision o f ORMVA reform; iv) reduce the amount o f undeveloped irrigation surfaces downstream o f existing dams, in particular through public-private financing partnerships.

In that regard, the Government’s strategy will include:

0 The preparation in 2006 o f the National Plan for Conservation o f Irrigation Water (NIWCP) which will become a national priority to be implemented from 2008 onwards;

The encouragement o f use o f irrigation techniques to save water and raise i t s on-farm use efficiency in simplifying subsidy grant procedures and increasing subsidy rate to farmer’s projects for conversion to efficient irrigation systems;

,The establishment o f a Tar i f f Adjustment Plan for ORMVAs, with a continued high collection rate o f services fees;

0 The assessment and grant o f incentives to farmers agreeing on a repayment schedule o f their whole arrears;

0 The improvement o f ORMVA technical and management performance with the objective o f separating the water service from the accounting o f other ORh4VA missions, in order to establish Contrats-Plans (CPs) in 2007 to rule mutual obligations with the State;

42

A decision to increase ORMVAs’ maintenance budgets by an amount at least equal to the revenue generated by tar i f f increases;

The promotion of public-private partnerships in L S I perimeters. In this context, the transaction preparation study for outsourcing of irrigation service in a pilot perimeter i s being launched in 2006 to be completed in 2008, and launch the bidding process for the delegation of service in scheduled for 2009.

4. Improve access to water supply and sanitation, and increase wastewater treatment capacity

Regarding the water supply and sanitation sector, the Government’s objectives are to: i) generalize access to water supply in rural areas by continuing the PAGER program and promoting the sustainability f the AEPAR rural water supply and sanitation program; ii) improve access to drinking water distribution and sanitation service in urban areas, especially in poor urban and peri-urban areas; iii) develop sanitation and wastewater treatment capacities taking into account the water pollution reduction necessity. The water supply and sanitation distribution sub-sector i s therefore an essential component of the sector modernization and demand management reforms.

While acknowledging the complexity of the sector and the multiplicity of stakeholders, the Government will strengthen the regulatory framework and pursue tariff reform in order to promote performance and increase working capital of sector operators, and to develop accountability towards consumers’ interests.

Regarding sanitation and water reuse, a National Sanitation Program (NSP) was engaged in 2006. The implementation convention of the NSP 2006 tranche was signed in June 2006. The NSP objective i s to reduce water pollution loads by 60% in 2010 and by 80% in 2015, and extend sanitation network of 80% of the urban households by 2020. The Government i s committed to support and implement this program to reach expected results. To do so, the Government will reinforce public aid to sanitation and wastewater treatment investments by reallocating financial resources to this sector. Hence, by 2006, allocated subsidies will be paid, and allocation criteria and management arrangements will be established. A study on the optimization of investment strategies and NSP financing mechanisms will be conducted starting 2007.

In order to promote wastewater reuse, a strategy will be prepared aiming at establishing, by 2009, an appropriate institutional framework, and to develop an operational best practice manual. The Government will also prepare and implement a National Drinking Water Conservation Program (NDWCP) in order to promote drinking water conservation to operators, industries and users. In regards to RWSS, the Government will increase financial resources targeting investments in RWSS and, among other things, pay subsidies planned in Finance Bills, elaborate and implement a system insuring service sustainability, and publish and enforce the by-laws related to on-site sanitation. In order to catch up on the connection deficit to WSS services in poor urban and peri-urban areas, the Government will, in 2007, finalize the preparation of a program to implement connection solutions for these areas. It i s worth noting that the National Initiative for Human Development (2006-2010), also supported by the World Bank, aims to improve conditions and quality of l i f e of urban population. To do so, projects will be implemented to increase access to basic social services and to strengthen infrastructure in 264 urban areas. The Government’s “Cities without Slums” program, led by the Government, also includes connections of population targeted by the program.

Concurrently, a study for the restructuring of water, sanitation and electricity distribution services, also supported by the World Bank, i s currently being launched. This study will allow to determine

43

constraints and measures to be implemented in order to optimize projects to aim at multi-service distribution. This new organization wi l l allow communes to regroup themselves to implement a project for their common interest while realizing economies o f scale and preventing fragmentation.

In terms o f sector oversight and organization, several projects are currently being prepared and wil l be launched in 2007. These projects are in line with the institutional and procedural framework o f selection o f operators, and will be accompanied by monitoring and regulation mechanisms. These projects touch on the following aspects:

Public service oversight and regulation: The Service Delegation L a w offers to communes an appropriate framework for the selection and award o f public service management outsourcing solutions. This framework remains to be completed and improved by institutional mechanisms to organize and regulate operators’ activities. The strengthening o f such mechanisms i s urgently needed for existing contracts o f service delegation. Contractualization o f public service management: Whatever the legal status o f the operator or service provider, their relationship with the served community wi l l have to be contractualized. This process w i l l establish the objectives to be reached, the preservation o f managed assets which remain property o f the community, and the definition o f mutual obligations.

0

In this context, an analysis wi l l be conducted on the needs and options o f medium-term regulation reform. In the short term, an initiative to benchmark water and sewerage distribution services across public and private operators will be launched, towards measuring and publishing o f homogenous performance and cost indicators.

Continued water and sanitation tar i f f reform i s also a key element o f the overall water sector reform. For several years already, the authorities have engaged the conceptualization o f a restructuring o f current tar i f f systems, and their adaptation to the new socio-economic constraints and to the demands built into the integrated water resource management objectives o f the Water Law 10-95. A national study o f water and sanitation tar i f f systems has thus been completed in 2006, providing an up to date tar i f f system diagnostic, a cost and revenue simulator for each production and distribution operator, and a range o f tar i f f restructuring scenarios.

A first milestone in tar i f f reform has also become effective in March 2006 with the publication o f new potable water tar i f f decrees carrying several tar i f f adjustment provisions, including the increase o f the fixed part o f the tariff, the narrowing o f the first tar i f f block (tranche sociale) from 8 to 6 m3/month, and the gradual matching o f tar i f f structures (Le. transition from block tar i f f to single tariff) for the tourism industry with those o f general industry. Concurrently, a 3.5% increase in bulk potable water production tariffs was enacted in 2006.

These efforts will be continued in the short ad medium term to achieve tariffs structures towards better targeting o f aid to the poor, better accountability for demand management and water scarcity, improved operator efficiency, and harmonization o f cross-subsidies among users and in between sectors to promote equity and service access.

The Government i s also determined to elaborate and enact tar i f f adjustment mechanisms taking efficiency criteria into greater account, aimed at promoting operator performance and transparency. T o that effect, an initiative to update tar i f f reform options and roadmap i s engaged in 2006. This work wi l l result in the preparation o f reform implementation texts and retained tar i f f adjustment rules, to be adopted in 2008. The results o f an in-depth study o f poverty and social impacts analysis (PSIA), supported by your institution, wi l l be taken into account for the design o f tar i f f regulation reforms.

44

111. MONITORING AND IMPLEMENTATION

A Steering Committee has been created, headed by the Ministry o f Economic and General Affairs, including the ministries and agencies involved in the water sector. This Committee, which led the reform discussions and oversaw preparation o f the DPL, will also be responsible for monitoring and implementing this program. The Committee will ensure progress assessments on implementation and will submit annual progress reports. The Steering Committee i s also responsible for monitoring the multi-annual sector assistance program (PESW) prepared with the World Bank in support o f the DPL.

As main decision-maker, the Interministerial Water Commission, headed by the Prime Minister, holds a pivotal monitoring role to ensure successful implementation o f the reform.

The Government i s fully aware that cohesion and coordination o f program objectives and reform elements are crucial to ensure success. To this end, the Government i s planning to develop a communication strategy to define the messages, identify target audiences and allocate appropriate resources to achieve these goals.

The Government o f Morocco hereby reiterates its commitment to providing adequate financing, for priority programs, such as the National Irrigation Water Conservation Program, the Rural Water Supply and Sanitation Program, the National Sanitation Plan, the National Watershed Conservation Program as well as efforts underway to compensate for connection deficits in water supply and sanitation. The Government relies on World Bank support to provide an appropriate DPL loan to dynamically and successfully accompany this series o f reforms.

We are grateful for the World Bank’s interest in Morocco’s water sector.

Sincerely,

Driss Jettou Prime Minister

8

ui

8 (v

I I I

E l I I I I

Lu W C W I S # ?

r d

pz

z K

z K

5 % %

rr

.%!

B

m

0 m

m v,

d n 4

f C

m C cd

Y

5

1

L I

L

c

1

i 2

I I 3

m m

I

p S O

I

L s B 0

.- a,

E a Y

E a w m E m E 8 2 z 2 5 $

v)

c,

v a

w Q, E

0 c 0 m c

a

Y

E Y .- b

.I c,

Y

- .- E

E

a

a a

5 c, - 0 0 ..

0 a 3 0 E E e n n n

w

-

v)

I 1 1 1 1

L n I I

c '9

63

ANNEX 3: REFERENCES

1.

2.

3.

4.

5.

6. 7.

8.

9.

The World Bank and International Finance Corporation, (( Kingdom of Morocco, Country Assistance Strategy, 2005-2009 )) Report No. 3 1879-MOR, June 2005 The World Bank “Etude des Me‘canismes et Flux de Financement du Secteur de I’Eau)), Report 36475444, June 2006’. The World Bank “Royaume du Maroc, Secteur de I’Eau et de I ‘Assainissement, Note de Politique Sectorielle, D, Report 29994-MOR, December 2004 (in partnership with Agence Franpaise de Developpement)2, The World Bank “Working Group on Institutional Reforms of Large Scale Irrigation in Morocco”, April 2004 The World Bank, “Kingdom of Morocco, Recent Economic Developments in Infrastructure, Water Supply and Sanitation Sector ”, Report No. 29634-MOR June 2004. The World Bank. “Kingdom of Morocco, The Cost of Environmental Degradation” The World Bank, “Kingdom of Morocco, Project Appraisal Document for a Rural Water Supply and Sanitaion Project ” (Novemebr 2005) The World Bank “Making the Most of Scarciy, How Water Can Contribute to Growth and Development in the Middle East and North Africa”, 2006 The World Bank, “Kingdom of Morocco, Water Sector Review ” Report No. 14750-MOR, June 1995

10. MATEE (( L e Ddfi de l’Eau, Comment reussir A Nouveau ? Projet de plateforme pour le debat national sur 1’Eau D, Avril 2006

1 1. Government o f Morocco, (( Commission Interministe‘rielle de I’Eau, Bilan des re‘alisations et recommandations, Note de synthise )), F6vrier 2005

12. Government o f Morocco (( Commission Interministe‘rielle de I ’Eau, Bilan et perspectives de de‘veloppement du secteur de leaur), 22 Fevrier 2005

13. The World Bank, “Fostering Higher Growth and Employment in the Kingdom of Morocco. ‘ I A World Bank Country Study. Report No.37100-MOR Washington DC, 2006.

14. Ministere des Finances et de la Privatisation - Audit Strategique des ORMVA, Presentation to the CGDA, 30 September 2005.

15. Ministere de l’Agriculture, du DBveloppement Rural et des Peches Maritimes, “Gestion de 1 ’eau en agriculture irrigue‘e au Maroc ”, Seminaire SEMIDE Rabat, 27-28 April 2005.

aka (( Sector Financing Study” * aka (( Sector Policy Note ))

64

ANNEX 4 : IMF's NOTICE ON ARTICLE I V CONSULTATION

EXTERNAL RELATIONS DEPARTMENT

Public Information Notice (PIN) No. 06/115 EMBARGOED NOT FOR NEWSWIRE TRANSMISSION UNTIL 5:30 PM WASHINGTON TIME (2130 GMT) October 13, 2006

International Monetary Fund 700 I 9Ih Street, NW Washington, D. C. 20431 USA

IMF Executive Board Concludes 2006 Article IV Consultation with Morocco

On October 11, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Morocco.'

Background

Macroeconomic conditions continue to strengthen and the 2006 outlook is favorable, with increased private sector confidence in the Moroccan economy. A bumper crop and continued strong activity in services and construction are ushering in a recovery, following a slowdown in growth in 2005 caused by unfavorable weather conditions. The external current account is expected to rscord its sixth consecutive surplus. Strong tourism receipts, workers' remittances and the recovery of textile exports will offset the upsurge in the energy bill. External reserves, at more than US$18 billion, continue to exceed the total stock of public external debt. Price pressures remain subdued, and recent evidence suggests that the dirham is not misaligned.

The fiscal position is improving but the ratio of public debt to GDP, though declining, remains high. Despite a buoyant revenue performance, the fiscal deficit is likely to be close to the 2006 budget target of 4.1 percent of GDP (down from 5.9 percent in 2005) because of continued expenditure pressures stemming mainly from oil and food subsidies

Under Article IV of the IMFs Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities.

65

(1.6 percent and 0.8 percent of GDP in 2005, respectively). The authorities have started to implement their medium-term fiscal consolidation strategy, which aims at reducing the fiscal deficit to 3 percent of GDP and bring the publiodebt-to-GDP ratio below 60 percent. The successful 2005 voluntary early retirement scheme should help curb wage bill growth. Following the three increases that have taken place since 2005, the authorities plan on continuing to gradually align domestic prices of petroleum products with international prices. They are also designing a strategy to reduce the fiscal cost of food subsidies by better targeting them to the most vulnerable groups.

Monetary policy has adequately managed the excess liquidity conditions, and the central bank continues to strengthen the operational framework for monetary policy and its transparency.

Banking sector conditions have improved following significant write-offs of nonperforming loans and the near completion of the restructuring of two state-owned banks. The authorities have also taken steps to improve the availability, accuracy and transparency of financial information in order to strengthen financial intermediation.

Morocco has made considerable progress in trade liberalization; next steps include tackling remaining obstacles to trade and increasing trade in services.

Morocco subscribed to the Special Data Dissemination Standard in December 2005, and continues to improve the quality and dissemination of statistical data and increase the transparency of economic policy. The authorities published the recent staff mission statement and intend to publish the 2006 Article IV Staff Report.

Executive Board Assessment

Directors agreed with the thrust of the staff appraisal. They commended the authorities on their implementation of sound macroeconomic policies and structural reforms. Directors noted that, in recent years, these policies had supported the acceleration of non-agricultural growth in an environment characterized by low inflation and comfortable international reserves, and the steady rise of per capita income.

Directors viewed that, with macroeconomic conditions strengthening, short-term prospects are favorable. They shared the authorities’ view that the current sound macroeconomic environment provides an opportunity to capitalize on recent achievements and advance the reform process in order to accelerate growth to levels that would support an increase in employment and a substantial reduction in poverty. To this end, Directors supported a strategy of medium-term fiscal consolidation, enhancing the efficiency of financial intermediation, and deepening Morocco’s integration into the global economy.

Directors noted that fiscal consolidation should be the top policy priority. They agreed that Morocco’s fiscal strategy for gradually reducing the deficit to 3 percent of GDP over the medium term is appropriate. Directors welcomed the ongoing reform of the tax system and noted that a simpler and more transparent tax system and strengthened administration would help broaden the tax base and increase revenue. While they congratulated the

66

authorities on the success of the 2005 early retirement program for civil servants, Directors stressed that the credibility of the fiscal strategy will depend on the authorities' ability to curb wage bill growth and reduce the fiscal cost of oil and food subsidies. Directors urged the authorities to seize the opportunity of the 2007 budget to send a strong signal on their commitment to fiscal consolidation.

Directors supported the authorities' intention to prepare for a possible transition to a more flexible exchange rate regime. They welcomed the increased independence of the central bank, and the central bank's efforts to strengthen the monetary policy framework, with a view to possibly adopting inflation targeting in the medium term. In this context, Directors stressed the importance of further fiscal consolidation and development of money and exchange markets.

Directors commended the authorities for having taken measures to strengthen the financial sector, in line with the 2003 Financial Sector Stability Assessment, and welcomed the emphasis placed on improving the efficiency of financial intermediation. They found that the measures implemented by the central bank to improve the availability, accuracy, and transparency of financial information were helpful in this regard. Directors encouraged the authorities to develop further alternative financing instruments, such as stock and bond markets. They looked forward to the adoption of the draft anti-money laundering law that was submitted to parliament.

Directors welcomed Morocco's progress achieved in trade liberalization, including active participation in regional integration efforts, and supported the authorities' policies to further integration in the world economy. They agreed that appropriate next steps would be to tackle remaining obstacles to trade and increasing trade in services.

It is expected that the next Article IV consultation with Morocco will take place on the standard 12-month cycle.

Puhlic Information Notices (PINS) form part of the IMFs efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINS are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PI Ns are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case.

67

Table 1. Morocco: Selected Economic Indicators, 2001-07 (Quota: SDR 588.20 million)

(Population: 30.1 million: 2005) (Per capita GDP: US$i ,712; 2005) (Poverty rate: 15 pemnt; 2004)

(Main exports: textiles, phosphates and dedvatives; 2005)

2001 2002 2003 2004 2005 2006 Prel. Proj.

Output and Prces Real GDP (market prices) Nonagricultural Real GDP (market price) Consumer prices (penod average)

Gross capital fonnatlon of whlch. Nowgovernment

ol w h d x Nowgovernment

Revenue (including grants) Expenditure I/ Budget balance (commitment basis, excl. privatization) 2/ Overall balance (cash baas, incl. prhratuation) 11 Total government debt 3/

Monetary Sector Credit to the private sector Base money Broad money Velocity of broad money (level) Three-month treasury bill rate (period average, in percent)

Investment and Saving

Gross national savings

Public Finances

External Sector Exports of goods (in US$, percentage change) Imports of goods (in US$, percentage change) Merchandise trade balance Current account balance exciudtng official transfers Current account balance including official transfers Foreign direct investment Total external debt Gross msetves (in US$ millions)

In months of next year imports of goods and services Memorandum Items:

Nominal GDP (in US$ billions) Unemployment rate (in percent) 4/ Net imports of petroleum products (in US$ millions) Local currency per US. dollar (period average) Y

(Annual percentage change) 6.3 3.2 5.5 4.2 1.7 7.3 3.6 2.8 3.5 4.7 5.2 5.1 0.6 2.8 1.2 1.5 1.0 2.5

(In percent of GDP) 22.9 22.7 24.1 25.0 25.9 25.6 20.0 19.9 21.4 22.4 23.4 23.1 27.6 26.8 27.7 27.0 27.8 26.8 27.3 25.0 26.6 25.3 28.1 24.7

25.1 25.1 24.8 25.7 27.7 26.8 34.4 30.1 30.5 30.7 34.7 31.4

(In percent of GDP)

-6.2 -4.7 -5.0 -4.6 -5.9 -4.1 -4.8 -4.1 -2.7 -1.7 -4.8 -2.7 74.7 71.3 68.9 65.8 70.5 66.8

4.0 3.8 8.3 7.2 13.1 7.5 22.7 5.0 13.6 12.1 9.2 8.2 14.2 6.3 8.6 7.7 14.0 8.2 1.17 1.14 1.11 1.09 0.99 1.00 4.8 3.0 3.3 2.5 2.5 ...

(Annual percentage change, unless otherwise indicated)

(In Dement of GDP, unless othetwise indicated) -3.7 -4.6 -8.9 4.7 4.8 8.0

48.0 8,359.9

7.5

33.9 12.5

1,282 11.30

9.8 7.2

-8.5 3.8 4.1 1.3

40.1 10,008.9

7.5

36.1 11.6

1,167 11.02

11.8 13.1 20.1 25.2

3.4 1.7 3.6 1.9 5.3 1.7

35.1 30.8 13,716 16,298

8.3 8.7

43.8 50.0 11.4 10.8 963 1,639 9.57 8.87

-9.9 -13.0

7.4 14.2

-15.7 1.5 1.8 3.8

29.0 16,080

7.5

51.6 11.0

2.701 8.86

9.9 14.0

-16.9 0.9 1.2 2.2

26.1 18,768

7.9

57.2 7.7

3,590 *.'

Real ettective exchange rate (annual average, percentage change) -4.1 -0.3 -1.0 -1.2 -1.7 ... Sources: Moroccan authorities and Fund staff estimates and projections.

li Including Fonds Hassan II 2/ Excluding Fonds Hassan II 3/ It includes the net posibon vis ti vis the Central b n k outside statutoty advances. 4/ For 2006, as of enddune. 51 For 2006, as of endSeptember.

68

ANNEX 5: COUNTRY AT A GLANCE

Morocco at a dance 7/13/06

POVERTY and SOCIAL

2005 Population. mid-year (millions) GNI per capita (Atlas method, US$) GNI (Atlas method, US$ billions)

Average annual growth, 199905

Population (%) Labor force (%)

Moat recent estimate (latest year available, 199905)

Poverty (% of population below national poverty line) Urban population (% of total population) Life expectancy at birth (years) Infant mortality (per 1,000 live blrths) Child malnutrition (% of children under 5) Access to an Improved water source (% ofpopulation) Literacy (% ofpopulation age 15+) Gross primary enrollment (% of school-age population)

Male Female

KEY ECONOMIC RATIOS and LONG-TERM TRENDS

1985

GDP (US$ billions) 12.9 Gross capital formationlGDP 25.0 Exports of goods and servlceslGDP 25.3 Gross domestic savings/GDP 17.0 Gross national savingslGDP 22.1

Current account baiance/GDP Interest payments/GDP Total dabVGDP Total debt service/exports Present value of debVGDP Present value of debvexports

5 . 7 5.8

124.8 33.7

1985-95 199505 (average annual growth) GDP 2.9 3.6 GDP per capita 0.9 2.2 Exports of goods and services 7.5 4.8

Morocco

30.1 1,750 52 8

1.2 1 .o

15 55 71 40 10 81 53

112

1995

33.0 20.7 27.4 14.1 17.3

-3.6 4 2

72 2 33.4

2004

4 2 3 1 4.7

M.East Lower- & North mtddle-

Africa Income

300 2,442 1,970 1,690

592 4,116

1 .9 0.9 3.5 1.4

57 50 70 71 44 32

11 68 81 70 89

104 112 107 113 I00 111

2004 2005

5 0 0 51 9 250 2 5 6 332 3 6 2 183 190 267 288

1 9 2 4 1 2 1 5

374 3 6 0 139 151

2005 2005-09

1 8 4 2 0 8 3 2

-04 5 5

Development diamond.

Life expectancy

Gross primary

capita enrollment

I

Access to improved water source

-Morocco -_ - Lower-middle-hcome group

Economic ratios'

Trade

T

Domestic Capital savings formation

Indebtedness

-Morocco Lower-middle-income group

STRUCTURE of the ECONOMY

(% of GDP) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Imports of goods and services

Manufacturing

(average annual growth) Agriculture Industry

Services

Household final consumption expenditure General gov't final consumption expenditure Gross capital formation Imports of goods and services

Manufacturing

1985 1995 2004 2005

16.6 14.6 15.9 13.1 33.4 33.0 30.4 31.8 18.6 18.4 16.5 16.7 50.0 52.4 53.8 55.0

67.1 68.5 60.7 58.3 15.8 17.4 21.0 22.7 33.4 34.0 40.0 42.7

1985.95 1995-05 2004 2005

-0.4 3.4 1.9 -15.0 2.9 3.6 4.9 5.6 3.5 3.2 3.0 2.6 3.8 3.6 4.5 4.5

2.9 2.4 8.1 2.3 4.2 4.0 1.5 8.7 1.8 5.3 3.7 -6.3 7.1 3.9 8.8 -0.3

Growth of capital and GDP ('A) I 15 10

0 5

5 I -10 1

-GCF - O ' G D P I Growth of exports and imports (K)

l5 T I

Note: 2005 data are preliminary estimates. Group data are to 2004. * The diamonds show four key indicators in the country (in bold) compared with its income-group average. If data are missing, the diamond will

be incomplete.

69

Morocco

PRICES and GOVERNMENT FINANCE

Domestic prices (w change) Consumer prices Implicit GDP deflator

Government nnance (% of GDP, includes cunenf granfsj Current revenue Current budget balance Overall surplusldeficit inc Privatization reciepts

TRADE

(US$ millions) Total exports (fob)

Agricuiture PhoSphOmS rock Manufactures

Total imports (cif) Food Fuel and energy Capital goods

Export price index (2000=100J Import price index (2000=100j Terms of trade (2000=100j

BALANCE of PAYMENTS

(US$ millions) Exports of goods and services Imports of goods and services Resource balance

Net income Net current transfers

Current account balance

Financing items (net) Changes in net reserves

Memo: Reserves Including gold (US$ millions) Conversion rate (DEC, loca//US$J

EXTERNAL DEBT and RESOURCE FLOWS

(US$ millions) Total debt outstanding and disbursed

IBRD IDA

Total debt service IBRD IDA

Composition of net resource flows Offlcial grants Omcial creditors Private creditors Foreign direct investment (net inflows) Portfolio equity (net inflows)

World Bank program Commitments Disbursements Principal repayments Net flows Interest payments Net transfers

1885 1885

7.7 6.1 8.4 8.0

16.0 23.9 -6.6 0.1 -8.8 -3.9

1985 1985

2,268 6,871 546 1,469 479 284 477 3,754

3,921 10,011 507 1,373

1,074 1,177 649 2,186

61 100 62 122 75 82

1885 1895

3,263 9,045 4,419 11,243

-1,157 -2,199

-766 -1,318 1,064 2,330

-859 -1,186

976 204 -117 982

115 3,870 10.1 8.5

1885 1985

16,056 23,828 1,288 3,966

43 33

1,429 3,760 167 630

1 2

416 100

216 158 20 332

0 20

391 -66

379 433 307 426 87 350

220 76 81 282

139 -206

2004

1.5 1.5

25.3 -0.4 -3.4

2004

9,912 1,757

420 5,839

17,806 1,534 2,956 3,936

117 124 94

2004

16,619 19,843 -3,223

-676 4.864

964

929 -1,893

17,577 8.9

2004

18,710 2,524

21

2,970 572

1

-297 309

1,071 619

349 129 469

-340 1 04

-444

2005

1 .o 1.8

27.1 -2.5 4 . 3

2005

10,644 2,106

514 5,794

20,884 1,793 4,549 4,261

127 128 99

2005

18,758 22,567 -3,809

-321 5,387

1,257

1,105 -2,361

17,936 8.9

2005

19,724 2,438

20

3,617 582

1

3,030 133

700 350 437 -87 146

-233

-GDP deflator '-0-CPI I Export and Import levels (US$ mill.) I,r,

I O5 I W W 0 1 0 2 0 3 0 4

Exports Imports

Current account balance to GDP ( O X )

B T 5

4

3

2 1

0

1 01 02 03 W

Composition of 2005 debt (US$ mill.)

I G. 1,253 A 2,438

E' 5,987

E - Bilateral

G - Short-term

A - IBRD 6 . IDA D. Other multilateral F - Pnvate C . IMF

Development Economiw 711 3/06

Documents

World Bank Document · 2016-07-16 · Multiple structural changes are underway including in trade facilitation, customs reform, transport sector liberalization, liberalization and