Document ofThe World Bank

FOR OFFICIAL USE ONLY

Report No.: 20282-MOR

IMPLEMENTATION COMPLETION REPORT

KINGDOM OF MOROCCO

CONTRACTUAL SAVINGS DEVELOPMENT LOAN

(Loan No. 43400-1)

April 27, 2000

Private and Financial Sectors Development DepartmentMiddle East and North Africa Region

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

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CURRENCY EQUIVALENTSas of December 1999

Currency Unit = Dirham (DH)DH 1.00 = US$0.0997US$1.00 = DH10.031

ABBREVIATIONS AND ACRONYMS

BAM Bank Al-Maghrib (Central Bank)AfDB African Development BankBNDE Banque Nationale pour le Developpement Economique (National Bank for Economic

Development)BSF Bons des Societes Financieres (Finance Company Debentures)CD Certificat de Dep6t (Certificate of Deposit)CDG Caisse de Dep6t et de Gestion (Deposit and Management Fund)CDPQ Caisse de Dep6t et Placement du Quebec (Quebec Deposit and Investment Fund)CDVM Conseil Deontologique des Valeurs Mobilieres (Securities Ethics Council)CEN Caisse d 'Epargne Nationale (National Savings Fund)CIH Credit Immobilier et H6telier (a real estate and hotel lending facility)CIMR Caisse Interprofessionnelle Marocaine de Retraites (a pension fund)CMR Caisse Marocaine des Retraites (a pension fund)CNSS Caisse Nationale de Securite Sociale (National Social .Security Fund)CSEA Comite de Suivi des Etudes Actuarielles (Actuarial Studies Monitoring Committee)DAPS Direction des Assurances et de la Prevoyance Sociale (Social Protection and Insurance

(Department inside the Ministry of Finance)DH Moroccan Dirham (Currency)CS Contractual SavingsFCP Fonds Commun de Placement (Money-Market Mutual Fund)FEC Fonds d'Equipement Communal (local government infrastructure fund)IMF International Monetary FundFMSA Federation Marocaine des Societes d'Assurance (Moroccan Insurance Association)IFS Institutionsfinancieres specialis&es (specialized financial institutions)OCP Office Cherifien des Phosphates (Moroccan Phosphates Office)ODEP Office d'Exploitation des Ports (Port Authority)ONE' Office National d'Electricite (National Electricity Authority)ONPT Office National des Postes et T1elcommunications (National Posts and Telecommunications Office)OPCVM Organismes de Placement Collectifde Valeurs Mobilieres (mutual fund institutions)PEP Plancher d 'Effets Publics (Mandatory Treasury Placements)GDP Gross Domestic ProductRCAR Regime Collectifd 'Allocation de Retraite (a pension fund)SBVC Societe des Bourses de Valeurs de Casablanca (Casablanca Securities Exchange)TCN Titres de Creance Negociables (Negotiable Debt Instruments or Securities)

MOROCCO FISCAL YEARJuly 1- June 30

Vice President Kemal DervisGroup Manager: Christian DelvoieSector Manager: Wafik GraisTask Manager: Lorenzo Savorelli

FOR OMCIL USE ONLY

IMPLEMENTATION COMPLETION REPORT

KINGDOM OF MOROCCO

CONTRACTUAL SAVINGS DEVELOPMENT LOAN

(Loan No. 43400-1)

1. PROJECT DATA ................................................................ 1

2. PRINCIPAL PERFORMANCE RATINGS ................................................................ 1

3. ASSESSMENT OF DEVELOPMENT OBJECTIVES AND DESIGN AND OF QUALITY AT ENTRY ...............2

3.1 Original Objective ............................................................... 23.2 Original Components ............................................................... 23.3 Quality at Entry ............................................................... 2

4. ACHIEVEMENT OF OBJECTIVES AND OUTPUTS ................................................................ 3

4.1 Outcome/Achievement of Objectives ................................................................ 34.2 Output by components ............................................................... 64.3 Institutional Development Impact ............................................................... 9

5. MAJOR FACTORS AFFECTING PROJECT IMPLEMENTATION AND OUTCOME . ...................................... 9

5.1 Factors beyond the Borrower's control ............................................................... 95.2 Factors within the Borrower's control ............................................................... 10

6. SUSTAINABILITY OF THE REFORMS ............................................................... 10

7. BANK AND BORROWER PERFORMANCE ............................................................... 11

7.1 Overall Bank Performance ............................................................... 117.2 Borrower's Overall Performance ............................................................... 12

8. LESSONS LEARNED ................ 12

9. PARTNER COMMENTS ................ 13

ANNEXES: Statistical TablesAnnex 1: Table 1 Monitoring Indicators

Table 2 Amount of Reserves (in billion DH)Table 3 Securities MarketTable 4 Capital Market Issues/Listings, 1995-1998Table 5 New Company Listings on the Casablanca Stock Exchange in 1998 and 1999

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

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Table 6 Amount of Transfers from the Insurance Solidarity Fund toLiquidated Insurance Companies as ofNovember 1999 (in million DH)

Table 7 Liquidated Insurance Companies - Assets Sold (in million DH)Annex 2: Project Costs and FinancingAnnex 3: Bank InputsAnnex 4: Rating for Achievement of ObjectivesAnnex 5: Ratings of Bank and Borrower Performance

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

1. PROJECT DATA

Project identifier: P047582 Project Name: Contractual SavingsDevelopment Loan

Team leader: Lorenzo Savorelll Department. MNSPF

Type of completion report: Core ICR Date of report: 30 November 1999

Name: Contractual Savings Development LoanLoan Number: 43400; 43401Country: MoroccoRegion: North Africa and Middle EastSector: Other financial

KEY DATESOriginal Actual

PCD. 08 May 97 Effectiveness: 06/24/98Appraisal: 28 August 97 MTR.Approval: 9 June 98 Closing: 12/31/98 12/31/98

Borrower: Govemment of Morocco, Ministry of Finance

STAFF CURRENT AT APPRAISAL

Vice President: Kemal Dervi, Kemal Dervi,Regional Manager: Christian Delvoie Christian DelvoieSector Manager: Wafik Grais Nemat ShafikTeam Leader: Lorenzo Savorelli Lorenzo Savorelli2

ICR Author: Leila El Hafi

2. PRINCIPAL PERFORMANCE RATINGS

Outcome: SatisfactorySustainability: LikelyInstitutional Development Impact: SatisfactoryBank Performance: SatisfactoryBorrower Performance: Modest

QAG (if available) ICRQuality at Entry: Satisfactory SatisfactoryProgram at risk at any time: No No

Mr. Denis Chaput was Tearn Leader between September 1997 and January 1999, i.e. during negotiations, Board submission,and supervision.

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3. ASSESSMENT OF DEVELOPMENT OBJECTIVES AND DESIGN AND OF QUALITY AT ENTRY

3.1 Original Objective

The principal objective of the loan was to promote greater efficiency in mobilizing savings and inchanneling them into private investment by reforming the country's contractual savings institutions --the insurance companies, savings banks and the pension system. This objective was based on thepremise that two important elements were required to put Morocco on a stronger growth path: ahigher level of contractual savings, implying greater availability of long-term resources, and betterallocation of these resources.

The objective was and remains relevant and clear. It was established in light of the conclusions ofthe Country Assistance Strategy, which pointed to the low level of contractual savings and theinadequate supply of long-term resources as factors increasing the cost of capital and consequentlyundermining the competitiveness of the economy. The reform of the pension system and insurancecompanies was also aimed at overcoming other difficulties: the weakness of the insurance sector andthe plethora of non-transparent pension funds of doubtful viability. This objective was neitherunrealistic nor too ambitious for the Borrower, given the context at the time, where the Governmenthad decided to reinforce the regulatory and institutional framework of the financial sector.

3.2 Original Components

The proposed measures were aimed at improving the mobilization of savings by reforming theinstitutional savings system in the following ways: (a) completing the financial restructuring of theinsurance sector, and improving its solidity and image; (b) improving the efficiency, transparencyand financial viability of the existing pension system, and developing supplementary capitalizedpension funds; (c) promoting the role of CDG from deposit taker to fund manager, throughmechanisms for collecting, administering and allocating the financial resources of the pensionsystem and savings banks; and (d) strengthening capital market infrastructure and expanding therange of instruments available to institutional investors.

As things stand, for lack of viable alternatives, most of the funds collected by insurance companiesand pension funds are placed in Treasury bonds or in securities issued by financial institutions. Thevirtual absence of private, non-financial issuers in effect makes it very difficult to reallocate theselong-term resources into productive investments in the economy. The loan program thereforestressed the regulatory environment rather than specific efforts to encourage the issuance ofsecurities by the private non-financial sector.

3.3 Quality at Entry

The quality of this program at entry was satisfactory. The objectives established in the program wereconsistent with the CAS and enjoyed government support. The program's design was consideredrealistic in calling for a series of concrete steps, prior to submission to the Bank's Board, that wouldconfirm the Borrower's commitment to action over the medium term. The Bank had referred in itsReport to the President to the risk surrounding the Borrower's commitment to carry out the pensionreform. This commitment seemed in fact weakened with the change of Government. On the otherhand, the recent context shows a renewal of interest on the part of the Governmnent, and a willingnessto speed up the pace of reform.

After conducting an assessment of project quality at entry, the Quality Assurance Group concludedthat the loan was satisfactorily prepared: it was properly targeted on improving the regulatory andinstitutional setting for promoting contractual savings, and in particular long-term savings. The loanwas well designed, according to the QAG, as the first in a series of operations that over the long run

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would contribute significantly to improving the functioning of financial markets, the pension systemsand the insurance sector, and to the development of new financial instruments. The program was acomplex one, however, and in the opinion of the QAG raised questions as to the Bank's regionalcapacity to pursue further operations, as well as the Borrower's readiness to continue with the presentone.

4. ACHIEVEMENT OF OBJECTIVES AND OUTPUTS

4.1 Outcome/Achievement of Objectives

The achievement of program objectives was judged satisfactory. This judgment flows from anassessment focused on two concerns. The first was the degree of implementation of the policymeasures agreed between the Bank and the Borrower and the institutional reforms that wereundertaken; the second was the relevance of these reforms in attaining program objectives.

All policy measures associated with the program, which were prerequisites for submission of theloan to the Board for its approval, were carried out. While the loan was a single tranche operation, itcalled for medium- and long-term measures. The record on these measures, in particular thoserelating to pension reform and the legislative and regulatory framework, wasalmost completed at thedate this ICR was prepared, i.e. 18 months after signature of the loan. The major institutional impactinvolved CDG and its transformation from a deposit taker into an active funds manager, a significantaccomplishment for the program. The creation of OPVCMs to manage CEN and CNSS funds andthe indexing of yields on these funds to market rates, among other measures, represented importantprogress, and a highly positive cultural shift. The first level of appraisal is therefore consideredsatisfactory.

The second focus of concern, assessment of the relevance of actions proposed under the program asthe means of attaining the objectives in view, can be judged on the basis of performnance indicators.The positive flows generated by the technical reserves of insurance companies and pension funds area sign of improvement in both the mobilization and allocation of savings (See Annex 1).Rationalization of the insurance companies, and the enhanced transparency of the pension funds (theresult of better understanding of their workings), were essential factors in strengthening theirreserves. However, a competitive market for financial instruments has been slow to emerge. Non-financial agents are little given to issuing bonds or securities to meet their financing needs. A bondissue would require unaccustomed transparency on the part of such firms, for which bank loans arean attractive alternative, especially at a time of falling interest rates. The issuing of securities thusremains the preserve of the banks and finance companies. In any event, reform of the pensionsystem is a goal that requires a long-term approach, and it is difficult at this time to judge howrelevant the reforms proposed will prove, given the lack of an action plan (although one is expectedvery shortly). Achievement of this objective has been only partial so far, and any further advancedepends on subsequent action by both the Borrower and the Bank. The means decided on forachieving these objectives are clearly important, but may be found insufficient as far as developmentof a competitive securities market is concerned.

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Table 1: Indicators

Monitoring periodEstimated Actual Estimated Actual Estimated

1997 1997 1998 1998 1999Performance IndicatorsFlow of contractual savings (CS)IGDP 2.5 2.9 3.0 3.1 3.5Treasury fmnancing from CS/flow of CS 50.0 93.5 46.0 49.4 45.0Equities & securities issues/net flow of bank credit 44.0 59.2 45.0 40.3 46.0Assumptions/Preconditions for success 3Government deficit/GDP 4.1 3.2 2.9 2.3 2.0Recurrent expenditure/Total expenditure 85.0 83.3 81.9 83.1 80.9

For the most part, these indicators were satisfactory:

Ratio of contractual savings flow/GDP: The target set for this ratio was more than met in 1997and 1998. Net accumulation of technical reserves by insurance companies and pension funds wasDH 9.1 billion in 1997 and DH 10.4 billion in 1998. The positive trend of flows in 1997 and1998 (see Table 2, Annex 1) is explained essentially by the following:

(a) Insurance companies accumulated additional technical reserves of DH 4 billion over twosuccessive years (1996/97 and 1997/98), as a result of rationalization efforts targeting theinsurance industry, which saw new technical reserve rules introduced to cover its liabilities.

(b) RCAR/CNRA increased its reserves by DH 1.7 billion in 1997 and DH 2.06 billion in 1998,thanks to the growing ranks of its members and the consequent increase in its statutory andtechnical provisions.

(c) CMR contributed DH 1.98 billion to the change in reserves recorded for 1998. UntilNovember 1996, CMR was an entity forming part of the Ministry of Finance. Since then, ithas developed as a public autonomous entity that manages its own funds.

(d) CNSS contributed some DH 1 billion to the change in reserve flows in 1997, and slightlyless in 1998 (DH 0.97 billion). It must be noted, however, that for the third year runningCNSS has failed to make any payment to CDG, although the loan program called for CNSSto transfer all its new deposits to the OPCVM "CDG-Secur," plus 10% of its stock ofexisting deposits with CDG. The increase in CNSS assets is thus due entirely to capitalizedinterest on its existing deposits.

(e) The slowdown noted in the case of CNSS can also be seen in the case of CEN, which helpedto increase reserves to DH 0.26 billion in 1998, compared to DH 0.80 billion in 1997.

(f) The deceleration was also noted in the case of internal pension schemes flows (DH 0.46billion in 1998 versus 1.21 billion in 1997).

3 Macro-economic data are running from June 1997 to June 1998 for 1997, and June 1998 to June 1999 for 1998.

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• Ratio of Treasury financing from contractual savings/flow of contractual savings: Treasuryfinancing from contractual savings almost met the objective in 1998. The trend of the ratio isfavorable, to the extent that the Treasury seems to have taken a lower proportion of contractualsavings proceeds, with a figure of 93.5 percent in 1997 and 49.4 percent in 1998. Treasury billpurchases by insurance companies, social security agencies and CDG in fact declined from 1997to 1998, dropping from DH 9.2 billion to DH 6.1 billion. At the same time, attention should bedrawn to the growing role of the OPCVMs as purchasers of Treasury bills4. This suggests that aportion of the funds that CDG, insurance companies and social security agencies traditionallyplaced in Treasury bills is now being invested indirectly through the OPCVMs.

* Ratio of equities and securities issues/net flow of bank credit The ratio stood at 59.2 percent in1997 and 40.3 percent in 1998, compared to estimates of 44 and 45 percent, respectively. Theratio for 1997 can be explained, first, by a relatively modest change in bank credit between 1996and 1997 (6.7 percent) which helped to produce a higher ratio for 1997. The net increase in bankcredit that represented DH 16.5 billion in 1998 against DH 9.5 billion in 1997 was greater in1998 (+10.8 percent). Therefore the ratio only stood at 40 percent in 1998, also because thenumerator of this ratio had a lesser increase (+DH 1 billion), with securities issues - composed ofnegotiable debt instruments5 (TCNs), bonds and equities amounting to DH 6.6 billion in 1998.Securities issues continued to be dominated in 1998 by financial institutions and companies(Credor, CIH, FEC, BNDE, Taslif). Negotiable debt instruments are, by their nature, issuedmainly by credit institutions, finance companies and, to a lesser extent, real estate companies.Tlhe volume of TCNs issued in 1998 amounts to DH 4.2 billion, compared with DH 3.3 billionthe preceding year. Equity issues amounted to DH 687 million in 1998, compared to 1.3 billionthe preceding year. There were only four such transactions in 1998, the largest being a shareissue by CIH with a value of DH 551 million. This performance is inadequate, given the scopeand diversification of opportunities that investors are seeking. The difficulties facing investorsare all the greater, given the prudential rules imposed on reserve management. In the case of themutual funds managed by CD2G (a subsidiary of CDG), on behalf of CEN and CNSS, forexample, portfolio equity risk exposure must not exceed 10 percent of net assets. This meansthat 90 percent is held in interest-bearing securities (and about 10 percent in cash or stocks). Notonly is the supply of negotiable debt instruments inadequate, but they pose problems oftransparency, given the lack of ratings (in the case of consumer credit companies, for example),and their pricing sometimes defies logic. The resulting liquidity problem does little to encouragea dynamic secondary market.

* Macroeconomic assumptions (See Table 1)

The macroeconomic conditions required for the success of the program are satisfactory. Thebudget deficit turned out to be lower than the 4.1 percent of GDP estimated for FY 1998 (June1997-June 1998). In fact, it came in at 3.2 percent of GDP for FY 1998 and 2.3 percent of GDPfor FY 1999 (June 1998-June 1999). The ratio of recurrent expenditure to total expenditureamounted to 83.3 percent and 83.1 percent for FY 1998 and 1999. These healthy figures reflecthigher-than-expected revenues for FY 1999, attributable to both the good performance of directtaxes and the paying down of arrears. Expenditure was also satisfactorily contained, in terms notonly of goods and services and staffing levels but also of interest on the public debt and

4 OPCVMs and brokerage firms hold DH 9.7 billion in T-bills sold at auction, compared to holdings of zero on December 31,1996. T-bill purchases at auction by OPCVMs and brokerage firms amounted to DH 3.7 billion in 1998, against DH I billion in1997.

5 A negotiable debt instrument (titre de creance negociable) is known as a certificate of deposit if it is issued by a bank, as afinance company debenture if issued by a finance company, and as commercial paper if issued by a non-financial company.Regulations require negotiable debt instruments to be issued in unit amounts and for a fixed term.

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compensation. GDP for the year 1999 is weak. The growth rate is negative and attains -0.1percent, primarily as a result of the cyclical drought that afflicted the agriculture sector in 1999.

4.2 Output by components

Project components that were to be completed or begun prior to the Board Presentation were handled on thewhole satisfactorily, in particular with regard to the following points:

INSURANCE

Liberalization, modernization and restructuring of the insurance industry:

* Introduction of solvency monitoring criteria for insurance companies. The public instruction issued by theMinistry of Finance on March 29, 1996, and in force since January 1997, introduced these criteria and providedfor their enforcement.

* First settlement of outstanding claims against liquidated insurance companies. The first payment beforesubmission of the loan to the Board (DH 300 million) was formalized by funding commnitment approved bydecision of the Ministry of Finance.

* Liberalization of insurance prerniums. The Convention between the Minister of Finance and representatives ofthe insurance industry setting the principle, procedures and schedule for liberalizing insurance premiums in theyear 2000 was approved and signed in December 1997.

* Privatization of the state-controlled insurance company, CNIA. The company was privatized by Decree of thePrime Minister signed July 17, 1997.

* Restructuring of the public transport insurance company (CAT). The Convention between the Minister ofFinance and representatives of the insurance industry was signed in December 1997.

* Article 9 of the 1997/98 Finance Act increased the tax-exempt annual ceiling on life insurance premiums, with aview to making life insurance more attractive and enhancing its role in mobilizing long-term savings.

PENSION REFORM

Creation of conditions favorable to a medium-term reform program:

* A monitoring comnmittee (Comite de Suivi) responsible for assessing pension systems was created, complete withterms of reference, in October 1997.

* The terms of reference for the actuarial studies and financial audits of Morocco's pension schemes, prepared by theDAPS (Ministry of Finance), were provided to the Bank before submission to the Executive Board.

* Independent management of reserves of CMR was formalized by Order of the Minister of Finance on August 5,1997.

* Launching of actuarial studies of all the pension schemes, and financial audits of the four pension funds (CNSS,CMR, CIMR, RCAR) has been satisfactory, and the Bank has received the consulting contracts signed as well asthe calls for tender issued in the case of the supplementary actuarial studies and the financial audits of the pensionfunds named above.

CAISSE D'EPARGNE - CDG

Promotion of CDG as an active funds manager:An OPCVM known as FCP CDG-SECUR was created with CNSS funds deposited with CDG. It was approved bythe Minister of Finance in July 1997. The information note and the fact sheet were confirmed by the SecuritiesEthics Council (CDVM) on November 19, 1997.

+ The transfer to the OPCVM of 10 percent of the stock of CNSS deposits and of all its new deposits was noteffected within the planned time limits. The stock under management at the end of 1998 amounted to only DH 525million, whereas it should have been DH 1.3 billion. The objective was finally achieved in November 1999. Thedelay was explained by the lack of investment opportunities: opportunities to invest in diversified interest-bearingsecurities are scarce. Apart from T-bills, private sector securities issues are almost non-existent, while negotiabledebt instruments, with the exception of a few finance company bonds (BSF), certificates of deposit (CD), and somecommercial paper, continue to fall short of demand.

* The OPCVM based on CEN funds deposited with CDG was late in becoming operational. In fact, FCP CDG-Barid

.7

reached agreement with the Ministry of Finance in December 1997. The delay was due primarily to uncertaintywithin CEN about its investment powers, following restructuring of ONPT and implementation of CEN's newarticles of incorporation, which have it functioning as a dependent division of Barid Al Maghrib without legal orfinancial autonomy. A decision of the Ministry of Privatization after consultation with the Ministry of Finance inlate November 1998 finally led CEN to subscribe. As a result, the project objective of transferring 50 percent ofnew CEN deposits, and 10 percent of the outstanding stock of CEN deposits, to this OPCVM was met only at theend of 1999, rather than 1998 (assets of the OPCVM: DH 530 million).

* Setting of remuneration rates on CDG deposits by the authorities has been eliminated. The rate is now indexed tothe 5-year Treasury bond auction rate less 1.25%, for both CNSS and CEN deposits (since January 1997 andJanuary 1998, respectively).

FINANCIAL MARKETS

Improvement of the legal and regulatory structure:* Creation of a Working Conumittee to help develop a legal and regulatory frarnework, by:

- Writing draft legislation/regulations to govern portfolio management and custody of securities on behalf of thirdparties (including approval of portfolio management companies);

- Writing draft legislation/regulations goveming the creation of money-market mutual funds, with emphasis oninvestment rules for OPCVMs in the TCN market

Presentation to the Council of Govermment of legislation goveming securitization and mortgage market.

On the other hand, a new Insurance Code, satisfactory to the Bank, has yet to be adopted. A draft Code wasreviewed by the Bank during the loan negotiations, and the Bank had recommended certain changes,particularly to Article 201, which prohibited foreigners from holding a majority interest in the capital ofMoroccan insurance companies. As it turns out:

- The Draft Code initially adopted by the Council of Govemment retained this articleprohibiting majority ownership by foreign capital in Moroccan insurance companies. TheBank received a letter indicating adoption of the draft Code, but the Code itself was neverforwarded;

- Subsequently, the draft Code was rejected by the Council of Ministers and went through aseries of revisions, at the end of which it was no longer a Code but a more modern andcomprehensive Insurance Law covering the various branches of the industry, but excludingmutual companies as well as the measures relating to the Fonds de Garantie. This draftInsurance Law retains the article prohibiting majority foreign ownership in Moroccaninsurance companies. It was adopted by the Council of Government on December 2, 1999,but the Council of Ministers has not yet issued its final decision on the matter.

The planned medium-term components have either been put into effect late or postponed:

MEDIUM TERM COMPONENTS STATUS

INSURANCE Settlement of the claims on the liquidated insurancecompanies is not completed. The total cost of claims was

* Complete the settlement of claims on liquidated estimated at DH 3.57 billion, to be covered by a budgetedinsurance companies. State contribution of DH 2.55 billion and DH 1.02 billion in

proceeds from asset sales. An amount of DH 992 million waspaid out by the Solidarity Fund as of November 1999, out ofan available total of DR 1.047. The total of settlements by end1999 was to have been an estimated DH 2.189 billion. DH253,74 million should be paid out in the first semester of2000. According to the Borrower, this slow progress reflectsclaims still before the courts, on which rulings have not been

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MEDIUM TERM COMPONENTS STATUS

issued and on wvhich payment is therefore impossible.

* Complete the liberalization of all insurance The Convention signed between FMSA and the Ministry ofpremiums according to the schedule agreed in the Finance called for liberalization of all automobileConvention between the Ministry of Finance and premiums (and automobile civil liability premiums inthe industry. particular) by the year 2001, with a possible delay of one year

in liberalizing premiums for public passenger transit.Automobile premiums have been raised twice, in January1998 and July 1999. In other areas, premiums are generallygovernment-regulated but liberalization requires thatinsurance companies have the proper tools to be able to settheir benchmark rates.

Although a reassessment of the Solidarity Fund was planned,* Re-examine the role of the Solidarity Fund with its role is unlikely to be changed in the near future. The

a view to restructuring it and redefining its role current mechanism of compulsory contributions by insurancein the insurance sector. companies provides funds that are proving very useful for

settling the accounts of the liquidated companies. Themechanism will not be reviewed, according to DAPS, untilpremium liberalization is completed.

REFORM OF PENSION SCHEMES

* Complete actuarial studies, financial audits and a The actuarial studies and financial audits were expected to bedetailed report with an estimate of the financial completed by late December 1998. By the end of 1999,implications of various reform scenarios, leading however, most had not been, because of divergences from theto pragmatic and workable reform proposals. terms of reference set down by CSEA. Most of the pension

schemes have finalized their financial audits. However, theaudits have been performed on more or less recent financialstatements. CNSS for example has only provided financialaudits based on 1994 and 1995 financial statements.

The detailed report that was to be based on the actuarialstudies was to include an estimate of the financial implicationsof various reform scenarios, and to lead to pragmatic andworkable reform proposals. This consolidated report has neverbeen drafted, because not all the actuarial studies have beencompleted. The Department of Insurance would like to get onwith it, despite the delay in delivery of the major phases of theCMR study and although some of the information componentscalled for in the termis of reference are still missing for each ofthe pension entities. A consulting firm has been selected tohelp CSEA to draft this consolidated report, using theJapanese grant.6.

* Prepare, under Ministry of Finance oversight, a Under wayreform program and action plan based on theresults of the actuarial studies and financialaudits.

* Prepare and launch a promotional campaign tosensitize the Moroccan public to the problems of Not doneefficiency and viability not uncommon among

6 An amount of US$600,000, provided by Japan for preparation of the second contractual savings development loan

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MEDIUM TERM COMPONENTS STATUS

existing pension schemes.

* Prepare an appropriate framework for developingand capitalizing supplementary pension schemes, Not doneusing the findings of sector studies as theframework design.

CAISSES DIEPARGNE-CDG The results of the sale of CDG assets in the hotel sector weredisappointing. Apart from Hotel Dunes d'or, which was put

* Sale of CDG assets in the hotel sector up for sale by the Ministry of Privatization, other attemptedsales failed and the Ministry has returned the responsibility formanaging its hotels and finding buyers for its holdings toCDG.

FINANCIAL MARKETS The draft law on securitization was published on theOfficial Bulletin in September 1999.

* Adoption by the Council of Government of:The law on money-market OPCVMs was submitted to the

- legislation on portfolio management for third Secretary General but implementing regulations are stillparties; awaited, although they were being finalized by CDVM at the

- legislation governing money market mutual end of October 1999.funds;

- legislation/regulations on approval of portfolio The law on third-party asset management is still at the draft-mesanagement and investment approvaiofspory fo stage and will be submitted to the asset managers professionmanagement and investment advisory to get their opinion.companies.

4.3 Institutional Development Impact

The main institutional impact of the program was to promote the role of CDG from a deposit takerinto an active funds manager. Under the terms of the Japanese grant, and as part of its cooperationwith CDPQ, CDG is now going through a strategic re-focusing. The effect of this plan will be toreinforce its management capabilities, on one hand by upgrading its human resources throughsuitable training and revised job descriptions, and on the other by reorganizing its activities andbringing its information systems up to date. CDG will then be equipped to become more active inthe capital market, where it will contribute to the liquidity not only of the stock exchange market butalso the markets for bonds and other interest-paying securities. It also expects to strengthen its roleas an investor by committing its own funds in support of projects initiated by private enterprise.

5. MAJOR FACTORS AFFECTING PROJECT IMPLEMENTATION AND OUTCOME

5.1 Factors beyond the Borrower's control

The delays and performance shortcomings noted in the program were attributable, in the case of theactuarial studies and financial audits, to the pension schemes themselves and their consultants, andwere not the direct responsibility of the Borrower.

The new Govermment had also inherited a program that had been negotiated with its predecessor.The Bank feels that the medium and long tern objectives have been affected by the change of the

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governmental team which was present during the negotiations if one considers the significant delaysor slowdown in: a) the implementation of essential measures b) the adoption of legislation (seeInsurance Code), and c) the opening and liberalization of the insurance sector upon which thenegotiating governmental team had committed.

5.2 Factors within the Borrower's control

Although significant, the delay in delivering the actuarial studies and financial audits was neveralluded to in CSEA reports. CSEA limited itself to accepting and analyzing the documents supplied,but it never took upon itself to investigate the problems, speed up the pace of work, or take othersteps.

6. SUSTAINABILITY OF THE REFORMS

That is, sustainability of the reforms that affected the insurance industry, pension schemes, and theshifting status of CDG. Sustainability must be assessed as likely for the reforms as a whole, giventhe great amount of work and investment that have been dedicated to the preparation of pensionsystem reform. Sustainability could have been judged highly likely, had not there been anyremaining uncertainties on the future implementation of these reforms once the action plan isadopted. Reforms of this type are generally controversial, often costly, and demand steady politicalsupport and perseverance.

Sustainabiity of the reforms in the insurance sector should be assured since the rationalization ofthe insurance companies and the liberalization of what are now regulated premiums, particularly inthe automobile sector have been initiated and are ongoing. In the past, the financial health ofinsurance companies was undermined by money-losing sectors like automobile insurance, but alsoby management shortcomings. Preventing companies from failing, and anticipating the financialproblems facing businesses in the sector, will be one of the roles of the insurance supervisionagency. A study aimed at defining this structure and its functioning, to be funded from the Japanesegrant, will eventually result in creation of a body of insurance supervisors responsible for enforcingthe rules.

Sustainabiity of reforms in the role of CDG: The thrust of the program was to promote the role ofCDG from that of a deposit taker to that of an active funds manager. It was also important that itshould see itself more as a partner, involving its depositors more actively. The managementcommittees now in place under this program have been designed specifically to involve depositorsmore closely, in particular CNSS and CEN. CDG sends regular reports to its depositors dealing withchanges in asset value, portfolio composition, and other important parameters (terms, sensitivity,etc.). CDG hopes to attract other resources, while retaining the loyalty of its current depositors, andto win new depositors by upgrading its management and organization (introducing third-party fundsmanagement, creating account manager positions, etc.). CDG resources in the form of deposits rosefrom DH 20 billion to DH 27.3 billion between 1995 and 1998. Compulsory deposits by CNSS andCEN still account for most of its funds (69 percent), while the share of other deposits (essentiallyfrom its branches, insurance companies, savings banks etc.) has been rising only slowly.

The change in the manner of remunerating compulsory deposits with CDG by moving the agencyfrom a government-regulated rate to a market-based return proved very timely, especially in acontext of falling interest rates. CDG has changed substantially and its relations with majordepositors like CNSS and CEN are now much more carefully managed. The pension funds are nowreorganizing, putting in place well-staffed and well-equipped departments. In due course, theapplicable regulations will have to be amended so that pension funds can autonomouslymanage theirresources and directly choose their fund managers.

11

The reform of the pension schemes is still in its early stages. In fact, no action plan for reformingthe system has yet been adopted, since the prior step, the drafting of a summary report of the existingschemes' actuarial studies is currently underway and is expected to be completed by June 2000. Itcan be confirmed at this point that most of the pension schemes have completed such studies, oftenat significant cost in light of their restricted budgets. The need to increase the transparency andexamine the viability of their systems is well understood by the different schemes. The actuarialstudies that have been sent to the World Bank are testimony to this effort. The next step will be toanalyze and consider how to optimize the schemes, and will allow the effectiveness of these firstmeasures to be assessed.

7. BANK AND BORROWER PERFORMANCE

7.1 Overall Bank Performance

The Bank's performance was satisfactory, despite the modest results with the medium-termcomponents of the program. The fact is that the Bank negotiated the loan with a governmental teamthat changed in the midst of the process. This change removed certain players whose enthusiasmwas key to the program's success.

The Bank clearly underestimated the scope of the work required and the costs involved in conductingthe actuarial studies. It was planned that the Monitoring Conmmittee should complete its work ofvalidating all the pension schemes, including the six public enterprise "company schemes", by theend of September 1998, and that it should have a full report on the status of the pension bodiesdrafted by the end of March 1999. This schedule was not very realistic, given the time taken bysome of the bodies to call for tenders. Although tenders were called internationally, several of thepension funds had little choice when it came to making a selection, because there were so fewresponses forthcoming. In several cases, moreover, the same consultants undertook several studies,and insisted on finishing their ongoing projects to CSEA specifications before starting the new ones.The result was that completion of the studies was delayed by more than a year.

Preparation of the loan was satisfactory, and the QAG paid tribute to this fact in its appraisal. Theadjustment program was judged to be well-balanced and effectively targeted, in the sense that itsobjectives were aimed at improving the regulatory and institutional framework for promotingsavings, and more specifically long-term savings, in Morocco. The fact that this operation wasdesigned as the first of a long series of operations will no doubt contribute significantly to improvingthe functioning of financial markets, the pensions systems, the insurance industry, and the emergenceof new financial instruments. The QAG expressed uncertainty, however, regarding thedetermination of the Bank, and its Regional Office, and of the Moroccan authorities to ensurecontinuity of the loan effort in further operations.

Following the disbursement of loan proceeds in June 1998, three supervisory missions took place: inDecember 1998, April 1999 and November 1999. The major problems with the loan were alreadyapparent during the first mission, at the end of which (in January 1999) the Bank sent a letter to theMinister of Finance, calling attention to delays in the preparation of the actuarial studies and thefinancial audits, and expressing the Bank's concern over the new draft insurance legislation and itsdiscrepancies with respect to the draft Code that had been discussed during project preparation. Themission of April/May 1999 found no improvement in the situation noted five months earlier. Whatthe Bank did was to respond to the request from DAPS for assistance in preparing both theconsolidated report on the actuarial studies and a pension system reform action plan by identifyingconsultants to work in the context of the Japanese grant. The Banlk's persistence eventually paid offand at the end of 1999 most of the actuarial studies and audits for the various pension schemes werein hand.

12

The issuance of the ICR was delayed since the Bank had decided to postpone it until the actionslinked to the implementation of the medium-term program could be assessed.

7.2 Borrower's Overall Performance

The overall performance of the Borrower was modest. On one hand, despite the Council ofMinisters' rejection of the Insurance Code, the conditions included in the prerequisites forsubmission of the project to the Bank's Executive Board were met. The Borrower was also expectedto attend to medium-term policy issues, however, and this called for specific and difficultpreparatory work. The Borrower addressed the regulatory portion after some delay. The draftlegislation on money-market OPCVMs has still not been approved by the Council of Government,although the working committee dealing with this issue has been in existence since December 1997,and the highly active OPCVM market is in urgent need of a proper regulatory framework.Legislation on third-party funds management is still at the drafting stage.

The delays that affected most of the program could have been reduced if it had been undertaken witha firmer degree of commitment, and if CSEA had been given more authority instead of being limitedto validating actuarial studies and financial audits. The delays in the actuarial studies delivery mighthave been reduced if these studies were performed by firms working directly under the CSEA'sresponsibility and if their costs were partly supported by the Loan. Moreover, there would appear tohave been a certain lack of coordination between the MOF and the Ministry of Employment, eventhough the Monitoring Committee was specifically set up to ensure involvement on the part of thevarious departments or ministries concemed.

It was often not easy for the Bank to obtain from the Borrower the data necessary for properunderstanding and monitoring of the program. In this respect, the recent submission of the actuarialstudies to the Bank and the Borrower's declared desire to press ahead with drafting of theconsolidated report are positive signs of a renewed interest.

8. LESSONS LEARNED

This program was highly distinctive in a number of respects. It was a quick-disbursing, single-tranche operation, and one of the first of its kind in the region in terms of its content. At the sametime, it was negotiated with a government team that changed in the mid program. There are severallessons to be drawn:

I. The Bank should re-examine the instruments it uses for loan programs where reforms arepolitically sensitive and will require a long period of gestation. In the absence of a concreteprogram of future disbursements or of a firm commitment by both the Bank and the Borrower,dialogue will be less fruitful. Yet the Bank should continue to undertake operations of this kind:on one hand, they provide an incentive for Borrowers to come to grips with the various issuesinvolved in pension reform, and on the other there may be a very high opportunity cost of failingto undertake such reforms when demographic data are so favorable.

2. Because of the Insurance Code developments, and since the Government had not comnittedduring the negotiations on the adoption of legislative texts by the Council of Ministers, the Bankshould in the future: a) ask that legislative texts be adopted by the Council of Ministers, and b)structure its operations in a different way, more precisely by waiting that essential measures areadopted before taking the project to the Board.

3. It is important that the Bank be able to adapt to shifts of context, and if necessary to revise itsexpectations regarding the degree of Borrower commitment when the officials with whom it has

13

to deal change during the course of a loan. In the case of this loan, the Government responsiblefor implementing the program had not negotiated it.

4. The Bank should also be more realistic about the length of time needed for such a far-reachingTeform program. Reform of a pension system has to be based on actuarial studies, and theserequire access to solid data. In the case of the pension schemes in this case with relativelyoutmoded management structures, these conditions were not fulfilled, since the technical dataessential for launching the studies were simply not available. The Bank should therefore makeallowance for the time and cost required to reconstitute such data.

9. PARTNER COMMENTS

The borrower has opted to send comments instead of a specific evaluation. The commentsthe Bank has not incorporated are the following:

The Moroccan authorities maintain that their commitment to pursue the reforms has not beenweakened by the change in Government. In addition, they believe that the objectives have not beenaffected by the change of the Government. They also consider there was no delay in the adoption oflegislation, specially regarding the Insurance sector, since it is following thenormal approval process(Council of Govemment, Council of Ministers, Parliament). They alsojudge that the insurance tariffliberalization is moving ahead and that insurance companies have now the proper tools to set theirbenchmark rates.

Contrary to the comments made by the Bank on the role of the CSEA (see section 5.2), theMoroccan authorities believe that the CSEA had raised the problem of delays in the provision ofactuarial studies and had reflected it in the reports sent to the World Bank, who allegedly did not takeaction. The Moroccan authorities believe that the CSEA fully used the powers it was attributed bythe Prime Minister, and as a consequence, did not fail in playing its role in accelerating the pace ofthe program.

Regarding the sustainability of reforms of the role of CDG, The Moroccan authorities disagree withthe Bank statement that applicable regulations should be amended so that pension funds canautonomously manage their resources and directly choose their fund managers since this aspect hadnot been included among the Government commitments in the CSDL.

The Moroccan authorities disagree with the statement that " the delays that affected most of theprograms could have been reduced if it had been undertaken with a firmer degree of commitment...".

On the lessons learned (see section 8), the Bank is asking that future legislative texts be adopted bythe Council of Ministers. The Moroccan authorities maintain they cannot commit on the adoption oflegislation by the Council of Ministers or the Parliament.

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Annex IPage l of3

Annex 1

Table 1: Monitoring Indicators

Monitoring PeriodEstimate Actual Estimate Actual Estimate

1997 1997 1998 1998 1999Performance IndicatorsFlow of Contractual Savings (CS)/GDP (1) 2,5 2,9 3,0 3,1 3,5Treasury Financing from CS/flow of CS 50,0 93,5 46,0 49,4 45,0Equities & Securities Issues/Net Flow of Bank Credit (2) 44,0 59,2 45,0 40,3 46,0

Assumptions/Preconditions for Success 7Govenmuent Deficit/GDP 4,1 3,2 2,9 2,3 2,0Recurrent Expenditure/Total Expenditure 85,0 83,3 81,9 83,1 80,9

Table 2: Amount of Reserves (in billion DH)

1996 1997 1998Insurances Companies 28,00 32,00 36,00CNSS 11,81 12,82 13,75RCAR/CNRA 12,47 14,18 16,24CMR 0 0 1,98CIMR 3,34 3,74 4,47CEN 4,27 5,07 5,33Internal Pension Schemes 5,29 6,50 6,96

Total 65,18 74,31 84,73GDP 319 341

Table 3: Securities market

In nmillion DH 1997 1998Debt Instrurents (TCN) 3 349 4 229Bonds (excluding. the Government' s) 1 146 1 718Equities 1 142 687

Total Issued 5 637 6 634Source: CDVM and Bank Al Maghrib

7Macro-economic data are running from June 1997 to June 1998 for 1997, and June 1998 to June 1999 for 1998.

15

Annex IPage 2 of 3

Table 4: Capital Market Issues/Listings, 1995-1998

In millions of DH 1995 1996 1997 1998Issues of shares for cash:

Value at issue 159 809 895 687Number of transactions 4 4 5 4

Issues of shares for assets:Value at issue - 11 247Number of transactions - 1 1

Bonus issues:Value at issue 1354 8 711 72 77 294Number of transactions 4 7 2 2

Spin-off listings:Value at issue 527 2137 295 918Number of transactions 2 4 2 5

Source: CDVM

Table 5: New Company Listings on the Casablanca Stock Exchange in 1998 and 1999

Year of ListingCompany Name 1998 1999

La Marocaine Vie InsuranceWafa Assurances InsurancePapelera de Tetuan PackagingAluminium du Maroc MetallurgyAgma AssurancesMaghreb Oxygene EnergyAfriquia Gaz EnergyAuto Nejma . AutomobilesSource: CDVM

16

Annex 1Page 3 of 3

Table 6: Amount of Transfers from the Insurance Solidarity Fund toLiquidated Insurance Companies as of November 1999

(in million DII)

Company name Amount established Amount paid Tax arrears paidArabia 231,0 202,6 61,6Cada 119,6 119,2 3,3Remar 118,9 106,2 3,2Renaissance 269,7 255,4 11,2Victoire 308,0 308,0 18,0

Total 1047,0 991,5 97,3Source: DAPS, 1999

Table7: Liquidated Insurance Companies - Assets Sold(in million DII)Liquid Assets

Company Name Total Sold Remaining to be SoldArabia 39,9 2,9Cada 54,0 6,7Remar 88,7 168,8Renaissance 42,0 0,6Victoire 138,4 0

Total 363,0 179,1Source: DAPS, 1999

Fixed Assets

Company Total sold Remaining to be soldname

Victoire 990 NdSource: DAPS, 1999

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Annex 2Page 1 of 1

Annex 2Project Costs and Financing

Project Financing (in US$ million equivalent)

Item/source Appraisal estimate Actual/latest estimateTotal 235 279.5

Of which ADB 135 179.5Of which IBRD 100 100

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Annex 3Page I of 1

Annex 3. Bank Inputs

(a) Missions:

Stage of Project Cycle No. of Persons and Specialty Performance(e.g. 2 Economists, 1 FMS, Rating

etc.)Month/Year Count Specialty Implementation Development

l__________________________I Progress ObjectiveIdentification/PreparationFebruary 1997 6 2 Senior Financial

specialists, 2 Economists, 1Pension specialist, 1Academic

Pre-AppraisalJune 1997 5 2 Senior Financial

specialists, 2 Economists, 1Academic

Supervision .. _-

December 98 2 2 Financial specialists U SApril 99 2 1 Economist, 1 Financial U S

specialistICR

November 1999 2 1 Economist, 1 Financial U Sspecialist

(b) Staff:

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

Identification/Preparation 52.4 203.3Appraisal/Negotiation 23.0 64.3Supervision 26.0 63.4ICR 4.0 20.0Total 105.4 351.0

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Annex 4Page I of I

Annex 4. Rating for Achievements of Objectives/Outputs by Components

NotObjectives/Outputs High Substantial Modest Negligible Applicable

Macro Policies _ X

Sector Policies XPhysical XFinancial XInstitutional Development _ X

Environmental X

Social:Poverty Reduction x

Gender xOther (Specify) x

Private Sector Development -- XPublic Sector Development _ XOther (Specify) _ _

Annex 5. Ratings of Bank and Borrower Performance

HighlyHiglly atisfactory Satisfactory Unsatisfactory Unsatisfactory

Bank Performance:Lending X

Supervision XOverall _ X _

Borrower Performance:Preparation X

Government Inipleniienitatiotn Performrlanice XImplementation Agency Performance .

Overall X ...

_ D

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