World Bank Document

Document of The World Bank FILECOPY

FOR OFFICIALUSE ONLY Public Disclosure Authorized Report No.1156-MOR

Public Disclosure Authorized STAFF PROJECT REPORT

THE SIDI CHEHO-AL MASSIRA HYDRO PROJECT

MOROCCO

Public Disclosure Authorized June 11, 1976 Public Disclosure Authorized

Europe, Middle East and North Africa Regional Office

This documentbas a restrieteddistribution and may be used by recipients only ln the performanceof their officiaiduties. Its contents may not otherwisebe disclsed without World Bank authorization. CURRENCY EQUIVALENTS (April 1976)

Currency Unit Dirham (DH) DH1 = Centimes (ctm) 100 DH1 = US$0.23 DH4.38 = US$1.00 DH 1,000 = US$228.31 DH 1,000,000 (MDH1) = US$228,310 (MUS$ 0.228)

WEIGHTS AND MEASURES

1 meter (m) 3.281 feet (h) 2 1 hectare (ha; 10,000 m ) = 2.471 acres (ac) 1 square kilometyr (km2 ) 0.386 square mile (mi2 ) 1 cubic meter (m ) = 35.315 cubic feet (ft3 ) = 264.2 gallon (gal) = 6.289 barrels (bbl) = 220.0 Imperial gallons (Igal) 1 kilogram (kg) = 2.206 pounds (lb) 1 ton (t; metric; 1,000 kg) 1.100 short tons (sh tons) 1 kilowatt (kW) = 1,000 Watts (103 W) 1 Megawatt (MW) = 1,000 kW (10 W = 103 kW) 1 kilowatthour (kWh) = 1,000 Watthours (103 Wh) = 860.4 kilocalories (kcal) 1 Megawatthour (MWh) = 1,000 kilowatthours 1 kilovolt (kV) = 1,000 Volts (V) 1 kilovolt ampere (kVA) = 1,000 Volt amperes (103 VA) 1 Megavolt ampere (MVA) 1,000 kilovolt amperes 1 kilocalory (kcal) = 3.968 British thermal units (Btu) 1 ton coal equivalent (tce) = 7.106 kcal 1 Hertz (Hz) = 1 cycle/second per second; per hour; per day; per year = /s; /h; /d; /a

GLOSSARY OF ABBREVIATIONS

MTPC = Ministry of Public Works and Communications (Ministère des Travaux et des Communications)

MI = Ministry of the Interior (Ministère de l'Interieur)

ONE = National Office for Electricity (Office National de l'Electricité)

Regie = Municipal Service for Water and Power (Régie Autonome de Distribution d'Eau et d'Electricité)

ONEP = National Office for Water (Office National de l'Eau Potable)

OCP = Phosphate Mining Company (Office Chérifienne de Phosphate

CNA = National Coal Company (Charbonnages Nord-Africain)

SAMIR = Oil Refinery (Société Anonyme Marocaine Italienne de Raffinage)

SCP = Oil Ref-nery (Société Chérifienne des Petroles)

FINANCIAL YEAR = CALENDAR YEAR FOROFFICLAL USE ONLY

STAFF PROJECT REPORT

SIDI CHEHO-AL MASSIRA HYDRO PROJECT

MOROCCO

TABLE OF CONTENTS

Page No.

INTRODUCTION AND SUMMARY...... i-xiii

1. THE ENERGY SECTOR ...... l

(a) Primary Energy Resources and Development ...... l (b) The Power Subsector ...... 2

2. BORROWER AND EXECUTINC AGENCIES ...... 7

(a) Hydraulique ...... 7 Construction Experience ...... 7 (b) Office National de l'ELectricite (ONE) ...... 7 Background...... 7 Board ...... 8 Organization and Management ...... 8 Iersonnel ...... 8 'rraining ...... 9 Facilities ...... 9 Development of Facilities ...... 10 International Interconnection ...... 12 Planning ...... 12 Operations ...... 13

3. TH1E rMARKFTAND THE IIEANS T(o MtET IT ...... 16

-larket Aspects ...... 16 Access to Supply ...... 18 Forecasting ...... 18 Balance of Energy and Capacities ...... 19 Mfaximum Demand ...... 20 Satisfaction of Requirements ...... 20 Losses ...... 20 Transmission and Distribution Facilities ..... 21

Table 3-1 I1istoricand Forecast Sales of ONE and the Regies 22 Table 3-2 1iistoricand Forecast Balances of Energy and Capacities 23

This report was prepared by Messrs. W.F. Kupper (Engineer) and Y.P. Buphomene (Financial Analyst, Consultant) fron information obtained on an appraisal mission to Morocco in November/December 1975. This documenthas a restricteddistribution and may be used by recipientsonly in the performance of their officialduties. Its contents may not otherwisebe disclosedwithout Worid Bank authorization. ,TABLE 0F CONTENTS (Continued) Page No.

4. PROGRMI AND PROJECT ...... 24

(a) Construction Program 1975-1980 .24 Generating Plant .24 Transmission .24 Urban and Rural Distribution .25 Construction Program Cost .25 Economic Share of Costs of Dams .26 (b) The Project ...... 27 Description ...... 27 Background ...... 29 Objectives ...... 29 Construction and Supervision Responsibilities. 29 Project Cost ..... 30 Project Financing Plan.32 Fngineering and Supervision ...... 33 Merija Hydro Plant Study ...... 33 Dam Design and Inspection ...... 33 Implementation ...... 34 Procurement ...... 34 Construction Schedule ...... 35 Disbursements ...... 34 Operation of the Sidi Cheho Hydro Works ...... 37 Environment and Resettlement ...... 37

Table 4-1 Development Program Cost...... 38 Table 4-2 Project Cost Estimate ...... 39

5. FINANCE ...... 40

(a) Background ...... 40 (b) Past Performance ...... 40 Operating Results ...... 40 Taxes and Duties ...... 41 Rate of Return ...... 41 Receivables ...... 41 Inventories ...... 43 Valuation of Assets ...... 43 Cash Flow ...... 44 Insurance ...... 45 Financial Management Problems ...... 45 Accounting ...... 45 Budgeting ...... 45 Audit ...... 45 (c) Future Performance ...... 46 Rate of Return ...... 46 Income Statements ...... 47 Balance Sheets ...... 48 (d) Financing Plan ...... 49 Terms and Conditions of the Loan ...... 50 TABLE OF CONTENTS (Continued) Page No.

Table 5-1 Balance Sheets ...... 51 Table 5-2 Income Statements ...... 52 Table 5-3 Statement of Sources and Applications of Funds 53 Table 5-4 Borrowing 54

6. ECONOMIC ANALYSIS .55

(a) Tariffs and Rates .55 General .55 Marginal Cost of Supply .56 (b) Justification of Project .56 Optimum Development .56 River Basin Study .57 Basic Approach for Economic Study .57 Ranking of Hydro Plants .59 Comparison of Generation Development Schemes 59 Comparison of Industrial and Potable Water Developments .60 Irrigation Developments .61 Comparison of the Multipurpose Scheme "with" and "without" Sidi Cheho .62 Economic Rate of Return .62 Return on Project Components .64

Table 6-1 Multipurpose Comparison: Summary of Present Values of Costs and Cost Avoided 65 Table 6-2 Rate of Return on Investment: Summary of Present Values of Costs and Benefits 66

7. AGREEMENTS REACHED AND RECOMMENDATIONS ...... 67

ANNEX

Documents Available in Project File

MAPS

1. Morocco: Main Power System, Fossil Fuel Resources (IBRD 12065R) 2. Morocco: Development of Oum er Rbia Basin (IBRD 11853R)

SIDI CUEHO-AL MASSIRA KYDRO PROJECT

MOOROCCO

INTRODUC7?ION AND SUMMARY

I. THE ENERGY SECTOR

(a) Primary Energy Resources and Development

i. Thcl main indigenous energy resources in Morocco are coal and hydropower. Known cil deposits are nearly exhausted but exploration efforts have been intenslfied. Large deposits of bituminous schists are a possible source of oil in the long-tern but their development will be expensive. A UNDP- financed uranium exploration program is under way.

2. Eniergy demand has growa at 7% per year on average over the last 14 years with an upward trend in the growth rate, total consumption rising froam 1,975 millicn tons coal equivalent (mtce) in 1961 to 4,707 mtce in 1974. Energy use has intensified over the period and energy consumption per capita has risen from 164 kgce in 1961 to 282 kgce in 1974; however, this still leaves M4orocco near the lower end of the world range (10-12,000 kgce). Morocco is highly dependent on imported oil, the share of which in total energy consumption rose from 60% in 1961 to nearly 80% in 1974. Oil is mainly imported as crude, for refining in two refineries with a combined capacity of 3 million tons per year.

3. Moroccan forecasts of energy demand imply growth rates in the range 9-13% per year. They also foresee increasing dependence on imported oil, demand for which is expected to rise 3-4 times over the next 10 years from 3 million tons in 1974 to 10-13 million tons in 1985. The cost of oil imports by 1985 is projected at 2-6 times the 1974 figure of US$260 million, depending on the demand and cil price assumptions adopted.

4. AUl energy prices are subject to Government control. Except for petrol, the prices of petrcleum products in Morocco remained unchanged from 1962 until the end of 1975. Through a compensation account, the Government has subsidized the prices of fuel oil, gas oil and kerosene, which are typic- ally used for industrial and for low income domestic purposes, and levied special taxes on petrol. Until the sharp increase in petroleum prices in 1973, the cost of subsidies was more than offset by revenue from the special taxes; net income to the compensation account amounted to about $30 million in 1973. Following the 1973 price increases, the compensation account moved sharply into deficit, amounting to $150 million in 1974 and $115 million in 1975. At the end of 1975, the prices of petroleum products were sharply increased, by between 12.5% (petrol) and 39.1% (fuel oil). As a result, net payments from the compensation account are estimated to decline to about $23 million in 1976. The Government has informed the IMF of its intention to make supplementary adjustments to further reduce the net budgetary burden of petroleum produet subsidies in the course of 1976. In addition, it has informed the Bank of its intention to progressively eliminate subsidies to petroleum products used by ONE during the next two to three years. - ii -

5. Coal prices were held down iri the late 1960's, desDite rising costs, and as a result the National Coal Company (CNA) made increasing losses. How- ever, since then the Government has authorized three price increases totalling 104% above the 1571 level of DH 61/ton. Electricity prices are discussed in paragraphs 27-30.

6. Planned sector investment for 1973-77 is about DH 2,300 million at 1974--75 prices, more than double the 1968-72 figure of some DE 1,000 million. Some 71% of this prograniis for power system expansion, but it is al.o planned to increase petroleum-refining capacity by 3.5 million tons and to develop a new coal mine to increase ccal productîon from its present level of 700,000 tons per year to 1 million tons by 1981. In addition, DH 570 millîon would be spent on intensified exploration for oil and gas. j7. The State owns all tche capital of the main oil refining company (Societe Anonyme Marocaine Italienne de Raffinage - SAMIR) and has a 50% holding in the other (Societe Cherifienne des Petroles - SCP). A new state agency, with a 50%G holding in the main foreign distributors in petroleum products, has been set up. The State also owns 98% of the shares in CNA, and fiully owns the National Electricity Office (ONE).

8. Total employment in the energy sector, including ONE and the electricity departments of the local electricity and water distribution organiza- tions (Regies) is about 30,000. Some problems are experienced in recruiting technical and professional staff, partly because of the disparity between the lower pay scales of tihe civil service compared to the private sector.

(b) The Electric Power Subsector

9. The electric power subsector in Morocco is organized as follows:

(a) ONE, under the jurisdiction of the Ministry of Public Works and Communications (MTPC), generates 90% of the electric power in the country, transmits it tc the load centres, and distributes some of this energy (about 37% of total consumption) outside the large cities;

(b) eleven Regies, under the jurisdiction of the Ministry of the Interior (MI), purchase their power from ONE and distribute it in and around the large population centres and account for about 50% of total consumption;

(c) Electras Marroquies, a private company under the jurisdiction of MTPC, with lim.ited installed capacity and distribution area in tie extreme north of the country, accounts for 1% of total consurnption;

(d) The Ministry of the Interior operates small systems in about 10 isolated localities, for som.eof which ONE is responsIble for maintenance, and which accouat for 2% of consumption; and - iii -

(e) captive plants, most of them linked to industrial enterprises, accouat for about 10% of power generation and consumption.

Measures to improve sector organization and coordination are discussed in paragraph 32.

10. Historically, ONE has earned a low rate of return on assets and has financed only about 20% of its capital expenditures through internal cash generaticn. The Government has provided about one-third of financing for ONE's capital expenditures through increases in capital, while the balance has been financed by borrowing, mainly abroad. By contrast, the Regies usually generated cash on account of electricity sales more than sufficient funds to finance electricity distribution network expansion; the surplus has been applied to finance water distribution network expansion. In 1974, overall cash generation in the electricity sub-sector, including consumers' contributions, amounted to about 45% of electricity system investments.

11. Electricity demand has grown at about 8.5% per year since ONE's creation in 1963, with a tendency to accelerate in the latter part of the period. All the major towns and cities and about 70% of the smaller towns are electrified, but only 11% of the rural population (including residents of small towns) has public electricity supply. Total installed capacity in ONE's interconnected power system is 803 MW (49% hydro, 51% thermal). The share of hydropower in total generation has been declining (1963 - 93%, 1974 - 49%) bothi because of an increase in the share of thermal in total capacity and because the rapid growth of irrigation, which is given precedence over hydropower in water use, has reduced the generation of existing hydro plants. Main transmission is by 225, 150 and 60 kV.

12. Through a loan of $25 million in FY74 (936-MOR), the Bank helped finance part of ONE's 1973-77 capital expenditure programme for generation and transmission. The loan also included financing for studies on electricity tariffs and on the organization of the electricity subsector in Morocco. Technical performance by ONE under the project was good; the physical works were completed on schedule and at cost savings of $4 million which have since been applied to the financing of engineering studies for hydro plant developments in various parts of the country. Financial performance of ONE under Loan 936-MOR is discussed in paragraphs 27-28.

13 ONE's proposed expansion program up to 1980 is based on the assumption that demand for power from ONE's interconnected system would grow by an average of 11.5% per year from 1975 to 1980, a rate consistent with projected energy demand growth (paragraph 3). The programme provides for the installa- tion of about 650 MW of new generating capacity (about half thermal, half hydro) and construction of 3,500 km of main transmission lines. - iv -

14. Under Morocco's Third Five Year Plan (1973-77) planned investment for ONE's expansion program (including rural electrification) is about DH 1,600 million, compared with 1968-72 expenditure of about DH 600 million. Fifty-nine percent of planned investment is for generation, 23% for transmission, 4% for distribution and 9% for rural electrification. These figures do not include distribution investment by the Regies or investments by the Ministry of Interior or Electras Marroquies, for which information is not available. ONE's capital expenditures during the Fourth Plan Period (1978-82) are expected to be more than double those of the Third Plan level. e

15. Responsibility for rural electrification is divided amongst the Ministries of Public Works, the Interior and Agriculture, ONE carrying the major responsibility for implementation. Progress in extending public electricity supply to the rural areas has been slow, but the program is accelerating. Planned investment for 1973-77 amounts to DH 143 million compared with DH 57 million in 1968-72. The program is financed partly from the state budget and partly from the proceeds of a special 4.5% levy on ONE's receipts from the sale of electricity.

16. Employment in the power subsector is some 7,500, including about 4,300 for ONE. ONE's staff has increased about 6% per year since its creation in 1963 and is now almost entirely Moroccan. -v-

Il. THE PROJECT

Background

17. The Oum er Rbia is the second largest river in Morocco, and flows "rom the Middle Atlas mountains near Khenifra in a westward arc to reach the sea one hundred kilometers south of Casablanca. The potential of the river and its tributaries for the generation of electricity, for irrigation and for potable water has long been recognized. Before Independence in 1956, two major dams were constructed in the river basin - the Bin el Ouidane/Afourer complex on the el Abid river and the Im Fout dam on the Oum er Rbia - with the dual purposes of electricity generation and irrigation water supply. Smaller, single purpose regulating or diversion structures were constructed on the Oum er Rbia at Kasba Tadla (irrigation), Daourat (power) and Maachou (power) (see Maps IBRD 11853R and 12065R attached).

18. The remaining potential of the Oum er Rbia and its tributaries for multipurpose development has been reviewed several times in the past thirty years. In 1969, following suggestions made by the Bank, and in view of an increasing need to allocate water between competing demands, the Government commissioned preparation of a Master Plan for the Oum er Rbia basin, a preliminary version of which was completed in 1971 which was reviewed jointly by the Government and PAO/Bank Cooperative Programme Staff. Subsequently, water available from the Oum er Rbia's main tributaries was reallocated for upstream use; greatly increased demands for water for industrial purposes emerged as a result of plans to construct a new port and petrochemical complex on the coast near Casablanca, and more detailed reguXation studies for the existing diversion structures in the river basin became available. As a result, the Government prepared a revised Master Plan, with the assistance of consultants. FAO/Bank Cooperative Programme Staff visited Morocco in 1974 for review and discussions and the study was completed in 1975. The first stage of development under the Master Plan was the completion of irrigation development in the Doukkala and the Tadla perimeters, which could be carried eut using existing diversion structures, and which are being financed by loans from the Bank (1201-MOR, for the Doukkala), USAID (Doukkala) and the Arab Fund for Economic and Social Development (Tadla). Together with associated downstream developments of irrigation and water supply (see paragraph 37), the proposed project would form the second stage of development under the Master Plan. An integrated feasibility study for the third stage, a multipurpose dam at Dechra el Oued on the Oum er Rbia, is being financed under the Bank loan for the Doukkala project.

19. The proposed project was appraised in November, 1975.

Project Purposes and Description

20. The project is aimed at achieving the orderly development of the scarce water resources of the Oum er Rbia river, and at meeting (a) growing national needs for electricity (b) future requirements for potable and - vi - industrial water in the Atlantic coastal zone, notably as a result of the construction of a port and petrochemical complex at Jorf el Lasfar and (c) the water needs for completion of the development for irrigation of the 'lower service' in the Doukkala. Expansion of the potable and industrial water transmission and distribution system, and the irrigation developments are not part of the project but may be considered for future Bank financing. The project also aims at strengthening managerial capacity within ONE and at, achieving improved coordination in the development of the electric power subsector. It consists of:

(a) construction of the Al-Massara concrete buttress-type dam at Sidi Cheho on the Oum er Rbia river and ancillary works;

(b) construction of a 120-MW power station at the foot of the dam, including the adjacent 225-kV substation and ancillary works;

(c) construction of about 200 km of 225-kV transmission lines and the upgrading to 225 kV of the substations to be connected to such lines;

(d) preparation of preliminary designs and bid documents for the Merija compensating dam and power station downstream of Sidi Cheho.

Project execution began in November 1975. The dam would begin filling in the winter of 1978/79 and would begin operating toward the end of 1979.

Project Execution

21. Execution of the project would be the responsibility of the Hydra- ulic Directorate of the Ministry of Public Works and Communications (Hydrau- lique) and of ONE. Hydraulique is supervising construction of the dam with the assistance of consultants. ONE is supervising construction of the power station, with the assistance of consultants, and would directly supervise the substation and transmission works. Hydraulique and ONE have engaged the same consultants to carry out the preliminary studies for the Merija dam and power station respectively. Hydraulique and ONE, which are both under the authority of the Minister of Public Works, coordinate their activities relating to the project on a day-to-day basis. Similar arrangements functioned satisfactorily for the Bank-financed Idriss I (Loan 643-MOR) and Bou Regreg water supply (Loan 850-MOR) dams.

Operation and Maintenance of the Dam

22. Operation and maintenance of the dam and the power station will be primarily the responsibility of ONE. Prior to the commissioning of th dam, ONE and Hydraulique would enter into an agreement defining in detail their respective roles in the inspection, operation and maintenance of the dam. Operation of the dam will be based upon rule curves to be established by - vii -

Hydraulique in agreement with the main agencies with an interest in the release of water from the dam, notably ONE, the Ministry of Agriculture and the National Potable Water Supply Office. These rules will reflect the priorities for water use set out in the Master Plan, namely first priority to potable use, second to industrial use, third to irrigation and fourth to power generation. Economic analysis indicates that this priority ranking would maximize economic benefits from the project.

23. The dam is designed with adequate instrumentation to allow continuous monitoring of its soundness. Hydraulique would regularly inspect the dam according to sound engineering practices.

Project Cost and Financing Plan

24. Cost estimates are as follows:

Million of US$

-- Hydraulique------ONE ------Total Cost------Local Foreign Local Foreign Local Foreign Total

Land, compensation, roads and buildings 14.6 3.7 4.6 6.4 19.2 10.1 29.3 Dam and dikes 15.9 17.8 - - 15.9 17.8 33.7 Equipment 2.1 6.9 3.2 29.4 5.3 36.3 41.6 Engineering/Admin- istration 1.2 3.0 2.5 0.4 3.7 3.4 7.1 Studies 0.2 1.3 - 0.3 0.2 1.6 1.8 Taxes and duties 6.8 - 5.0 - 11.8 - 11.8 Contingencies: Physical 5.4 5.4 2.3 2.8 7.7 8.2 15.9 Price 8.8 7.8 4.3 5.0 13.1 12.8 25.9

55.0 45.9 21.9 44.3 76.9 90.2 167.1

Total 100.9 66.2 167.1

25. The total cost of the project is estimated at about $167 million, including duties and taxes. The proposed Bank loan, for $49 million would amount to 32% of total project cost net of duties and taxes, and 54 percent of the project's foreign exchange cost. It would finance the foreign exchange cost of (i) the power station and adjacent substation, (ii) transmission lines and substation upgrading, (iii) consultants services for the final designs and supervision of construction of the power station and dam and (iv) consultants services for the preliminary studies for the Merija power station and dam. That part of the Bank loan to be used to finance expenditures by ONE ($43.7 million) would be onlent by the Goverument to ONE on the same terms as the Bank Loan, and execution of the subsidiary loan agreement would be a condition of effectiveness of the Bank foan. These monies would cover the entire - viii - estimated foreign exchange cost of the items to be implemented by ONE, except for a small amount of $0.6 million for access roads and site buildings. The balance of the Bank Loan ($5.3 million) would finance the foreign exchange cost of consultants engaged by Hydraulique to supervise construction of the dam and prepare preliminary designs for the Meri;a dam. The Government is at present undertaking efforts to mobilize external financing to meet the remaining foreign exchange costs of the project ($41.2 million). The Government has confirmed that it would itself provide the substitute funds necessary for successful completion of the Project should co-financing not materialize. The Bank Loan and any other external loan would be linked by a cross-default provision. The local costs relating to the dam and the preliminary studies for the Merija dam (items to be implemented by Hydraulique), totalling $55.0 million, would be financed by the Governnent. Those relating to the power station, transmission lines, substation upgrading and the preliminary studies for the Merija power station (items to be implemented by ONE), totalling $21.9 million, would be financed by ONE.

Organization and Staffing of ONE

26. ONE has achieved good technical standards in the construction and operation of its power facilities. Measured in terms of electricity sales/ employee and customers/employee, ONE's efficiency is reasonable and continues to improve. Through an ongoing training program, ONE has been able to expand its technical staff, maintain staffing standards, and at the same time pursues a phased program for replacing expatriate personnel by Moroccan staff. ONE's main organizational and staffing weaknesses lie in the fields of accounting, budgeting and financial planning. Under Loan 936-MOR, the Bank asked that ONE engage independent external auditors and recruit a senior financial officer with overall responsibility for these matters. Independent auditors were engaged in 1973. ONE experienced difficulty in recruiting an appro- priately qualified and experienced senior financial officer, but the post was filled in May 1976 by an ONE staff member, following his completion of a training programme. ONE has also had a study of its accounting procedures carried out by consultants. As the next stage, ONE is to prepare specific proposals for the reorganization of its financial departments under the senior financial officer, and for the improvement of its accounting procedures. ONE would exchange views with the Bank on these proposals before implementing them by June 30, 1977.

ONE's Financial Position and Tariffs

27. While ONE is well-run technically, its financial position has deteriorated somewhat, despite increases in ONE's tariffs of 5% in May 1973, 5% in May 1974 and 18% in January 1976. ONE's rate of return on assets in operation declined from 2.1% in 1973 and 2% in 1974, to zero in 1975, and is expected to be less than 1% in 1976. The main reason for the decline in ONE's rate of return in 1975 was a sharp increase in average fuel cost ,er unit sold, due to extremely dry weather which reduced hydro generation. No substantial improvement is expected in 1976, despite the major rate increase - ix - in January 1976, because of the sharp increase in fuel oil and gas oil prices which took place in late 1975 and reduced the level of subsidies to petroleum products (paragraph 4). Increases in ONE's bulk rates have been passed on in full to final consumers through increases in the rates charged by the Regies, whose financial position, therefore, should still be strong. Despite some deterioration in ONE's financial position and a possible decrease in internal financing of the Regies, the overall financial position of the power subsector is estimated to be adequate but for the apparent imbalances in the sharing of revenue.

28. Under Loan 936-MOR, ONE undertook to achieve a rate of return on assets in operation of 3% in 1974, rising to 7% by 1981. However, these targets were set before the tripling of petroleum prices in late 1973, and the resultant need for sharp increases in electricity prices, if they were to reflect the higher cost of fuel. As mentioned earlier (paragraph 4), the Government introduced subsidies to petroleum products in 1973, but intends to eliminate them over the next two to three years. Any change in fuel prices from their January 1, 1976 level would immediately be fully reflected in ONE's electricity tariff. Accordingly it is reasonable to accept a somewhat lower rate of return for ONE during this adjustment period than implied by the rate of return requirement under Loan 936-MOR, while retaining the overall objective of a 7% rate of return by 1981, particularly in view of the overall satisfactory financial position of the electricity sub-sector noted above.

29. The Government and ONE have asked that ONE's financial objectives be framed in terms of a cash generation requirement rather than a rate of return target, which is reasonable in view of the rapid growth of capital expenditures foreseen for ONE over the next few years, and the resulting growth in financing requirements. ONE's average internal cash generation in any year and the preceding year would amount to at least 18% of average capital expenditures over the same two years and the next following year, until 1979, and to 20% thereafter. This definition allows ONE to take into account actual performance in the current year when formulating proposals for a tariff increase to meet the cash generation requirement in the following year, and therefore introduces automatic adjustment of tariffs to take account of the impact of rainfall conditions on ONE's average cost of generation. Each year ONE would review the adequacy of its tariffs to meet the cash generation requirement in the following year, and would submit the review, satisfactory to the Government, to the Bank by October 31. Action to meet the 1977 cash generation requirement would take place by January 1, 1977. On the basis of present fuel prices, it is estimated that application of the cash generation requirement would lead to the need for a tariff increase of 16% in 1977, but no further increase in 1978. To even out the increases, and since increases arising from changes in fuel prices are also expected, the 1977 rate increase would be limited to 10%, over and above any increases to reflect higher fuel prices. In this case, it is estimated that application of the cash generation requirement would lead to a further rate increase of about 8% at the beginning of 1978, and accordingly overall cash generation over the 1977-78 period would not be substantially affected. ONE's rates of return are estimated at 2.7% in 1977, 3.9% in 1978, 4.9% in 1979, and 6.8% in 1980. - x

30. Under Loan 936-MOR, ONE commissioned consultants to carry out a study of ONE's tariff structure. ONE has since updated the results of this study to take into account the impact of the 1973 increase in fuel prices. On this basis ONE is at present elaborating proposals for review by the Gov- ernment for the introduction of a marginal cost based tariff whose main features in relation to the present tariff structure would be (a) simplifi- cation and standardization of the tariff structure (b) a reduction in the degressivity of tariffs and (c) the modernization of tariff differentials between peak, standard and off-peak demand periods. The Government would exchange views with the Bank on progress in preparation of the new tariff structure as well as the Government's final proposal in this respect, to be elaborated by July 31, 1977.

Organization of the Power Sub-Sector

31. ONE's major category of customers are Government agencies and subdivisions, of which the most important group, accounting for 60% of ONE's sales, is the Regies. Under loan 936-MOR, the Governnent undertook to ensure that all payments for electricity and services provided to the Government by ONE would be met within 90 days, starting January 1, 1975. In order to protect ONE's cash position, rather than monitor the payment performance of individual Government agencies, the Government would ensure in the future that bills due ONE but unpaid by these agencies would at no time exceed one-sixth of the value of sales to them during the previous year.

32. With two ministries and several agencies involved in the power subsector, responsibility in the sub-sector is fragmented. There is a need to improve coordination in the Government's control over the sub-sector, to standardise codes, standards, practices and accounts, and, in some cases, to improve delineation of areas of supply. Under Loan 936-MOR, ONE commissioned consultants to undertake a study of the organization of the power sub-sector. This study was completed in March 1976, and is now being reviewed by the Government. After consultations with the various interested agencies, the Government is to formulate specific legal, administrative and other proposals for improving the organization of the electricity sub-sector by July 31, 1977; the Government would exchange views with the Bank from time to time on the progress in developing these proposals as well as on the final proposals them- selves.

Procurement

33. Procurement of the main project items is already under way. The following contracts have been let after international competitive bidding in accordance with the Bank's Guidelines for Procurement: (a) civil works for the dam (let in November, 1975) (b) hydro-mechanical equipment for the dam (March 1976) and (c) equipment and civil works for the power station (. -ril 1976). Contracts for transmission lines and substation upgrading would be let after international competitive bidding in accordance with the Bank's Guidelines for Procurement; in the evaluation of bids for these contracts, Moroccan equipment suppliers would be given a preference margin of 15%, or - xi - the prevailing customs duty, whichever is lower. Contracts for access roads and site buildings (mainly workers' housing) have been let after local competitive bidding in accordance with local procedures, which are satisfactory. Land required for the project is being acquired in accordance with Moroccan law for compulsory purchase.

34. Consultants services have been obtained in accordance with the Bank Guidelines for Use of Consultants. Under contracts signed in 1974, the Swiss consulting firm Alpinconsult prepared preliminary designs and bidding documents for the power station (on behalf of ONE and being financed under Loan 936-MOR) and for the dam (on behalf of Hydraulique). Hydraulique has extended its contract with Alpinconsult, to provide for preparation of final designs and assistance for supervision of construction of the dam, and the extension would be financed by the proposed loan. ONE has arranged to obtain assistance from Electricite de France in supervising construction of the power station. Garbe Lahmeyer International of Germany has been engaged by Hydrau- lique for the preliminary study for the Merija dam, and by ONE for the preliminary study of the Merija power station. Total consultant services (estimated base foreign cost US$5 million) would amount 76 man-years, at an average cost of US$5,500 per man-month (excluding local costs).

Disbursements

35. Disbursements, estimated to be completed by December 31, 1980, would be made against:

- 100% of foreign expenditures or 50% of local currency expenditures (representing their estimated foreign exchange content) for the power station and adjacent substation;

- 100% of foreign expenditures or, in the case of local procurement, of ex-factory price of equipment and materials for the transmission lines and upgrading of substations;

- 20% of total expenditures for civil works and erection for the transmission lines and substation upgrading;

- 100% of foreign expenditures for consultants services.

Retroactive Financing

36. As mentioned in paragraph 33, procurement of all main project components is already under way. This procedure was adopted in order to allow dam construction to take place during the 1976 dry season, in order to avoid a year's delay in project completion. Retroactive financing from the Bank loan of up to $5 million of foreign expenditures between October 1975 and signature of the loan is proposed. Of this amount, about $3.5 million relates to inital payments for the power station, made at the time of contract signature in mid- June, 1976. - xii -

Benefits and Justification

37. The main benefits from the project would be the approximate doubling of the power-associated hydro storage capacity in the country, an increase in electric power availability, and provision of water for potable, industrial and irrigation use. Taking into account the reduction of power generation from existing downstream hydro plants as a resuit of the water diversions for irrigation and industrial and potable use under the project, and future up- streain diversions for the same purposes, effective electric power generation from the project is estimated at 310 GWh in 1980, and would decline to 240-250 GWh by 1995, in which year these developments are scheduled for completion. These estimates of power generation have been calculated on the basis that the pattern of releases from the dam would be based on water demands for downstream use, to which priority has been given over power generation (paragraph 22). 0f the total of 3,300 Mm3/a presently flowing past the site, 450 Mm3 have been allocated to potable and industrial use and 800 Mm3 to irrigation. The allocation to potable and industrial water is estimated to be sufficient to meet the growth of demand in the Atlantic coastal zone up to the year 2000. The major share of this growth in demand is accounted for by the port and petrochemical complex at Jorf el Lasfar for which preliminary studies are under way and which is scheduled to be completed by 1982/3. A project including the transmission and distribution works necessary to realize the potential of the Sidi Cheho dam for potable and industrial water supply is at present being prepared, and is being considered for Bank financing. The allocation to irrigation use would be sufficient to allow the completion of irrigation development in the Lower Service of the Doukkala Perimetre through an extension of 17,000 ha. A feasibility study for this extension is available, and the projeet is also being considered for Bank financing. Further potential exists for the development of irrigation based on the Sidi Cheho dam, namely in the Upper Service of the Doukkala Perimetre. However no feasibility studies for this development have yet been prepared, and it has not been taken account of in the economic analysis of the proposed project.

38. Two measures have been used to assess the justification of the project. First, the cost of the multipurpose project was compared with the sum of costs of combinations of alternative projects which would be required to achieve equivalent benefits. Specifically these alternatives were (a) for power, a least cost alternative power system development program (a combination of hydro, steam and gas turbine plant), (b) for industrial and potable water, a smaller dam at Sidi Cheho, and (c) for irrigation, completion of irrigation development in the lower Doukkala for which an addition to the small dam for water supply under (b) would be the least cost solution. This analysis showed that the equalizing discount rate at which the Sidi Cheho cost would equal the costs of the alternatives, was 12.5%. The equ1 izing discount rate is relatively insensitive to changes in the cost streanis. Thus, the equalizing discount rate would only decline to 11% as a resu of (a) a 28% increase in capital cost of dams (b) a 14% decline in fuel savings resulting f rom hydro rather than thermal generation or (c) an increase in the cost of power plants of 40%. - xiii -

39. A second measure of the project's economic worth was obtained by preparing an ordinary rate of return estimate; the various benefits are valued in accordance with conventional procedures (i.e. sales prices for power and water, and economie prices for irrigation) and the discount rate is determined which equalizes the multipurpose scheme's costs and benefits. Assuming that prices paid represent the minimum value of the benefit to the consumers, such an approach also would provide a lower limit to the economic rate of return. The rate of return calculated in this way amounts to 9.6% and would still amount to 8% if all costs increased by 25% or benefits declined by 20%.

Environmental Impact

40. As a result of constructing the Sidi Cheho dam, a lake with a maximum area of 180 km2 will be formed. The effect on the environment is expected to be modest because soil conditions are poor in the area and little is cultivated. About 5,500 people will have to be moved. In accordance with Moroccan legislation owners of the land and the assets will be fully compensated. Discussions are at present under way between Hydrau- lique and the Ministry of Interior about the possibility of providing such compensation in the form of a resettlement scheme in adjacent areas, rather than through cash payments. Such an arrangement has been successfully implemented for people displaced as a result of construction of other dams in Morocco, and has made it easier to ensure that such people are provided with alternative long-term means of livelihood.

41. Under Loan 1201-MOR, financing is being provided for the first stage of a programme to monitor and control vector snails and incidence of bilharzia in the Province of El Jadida. Extension of irrigation, the main likely source of bilharzia, which can be carried out as a result of constructing the dam, is all Located in the El Jadida Province and would therefore be covered by this programme. In addition, however, the Ministry of Health would monitor the incidence of vector snails and bilharzia in the vicinity of the Sidi Cheho reservoir, and take appropriate control and curative measures.

1. TIIE ENERGY SECTOR

(a) Primary Energy Resources and Development

1.01 The main available energy resources in Morocco are coal and hydro- pcwer. Existing oil deposits are nearly exhausted but exploration efforts have been intensified to discover new reserves. Large deposits of bituminous schists are a possible source of oil in the long term but their development will be expensive. No conventional type uranium deposits have been discovered but a UNDP financed exploration program is underway.

1.02 Energy demand has grown at 7%/a on average (10-year doubling) over the last 14 years with an upward trend in recent years. Total consumption rose from 1,975 million tons coal equivalent (Mtce) in 1961 to 4,707 Mtce in 1974. The use of energy has intensified during this period and per capita consumption rose from 0.164 tce in 1961 to 0.282 tce in 1974. This still leaves Morocco near the lower end of the world range (0.01-12 tce).

1.03 Morocco is highly dependent on imported oil, the share of which in total energy consumption rose from 60% in 1961 to nearly 80% in 1974. Oui is mainly imported as crude for refining in two refineries with a combined capacity of 3 Mton/a. Coal production is nearing the limit of the existing capacity of about 700,000 tons/a, but is planned to increase to 1 Mton/a by 1981.

1.04 Different Moroccan forecasts of energy demand imply growth rates in the range 9-13%/a. They also foresee increasing dependence on imported oil, demand for which is projected to rise 3-4 times over the next 10 years to 10-13 Mton in 1985 compared with 3 Mton in 1974. The cost to the balance of payments of oil imports by 1985 is projected at 2-6 times the 1974 figure of MUS$260, depending on the demand and oil price assumptions adopted.

1.05. Prices of all forms of energy are subject to Government control. Except for gasoline, the prices for petroleum products remained unchanged from 1962 to the end of 1975, when they were sharply increased, ranging from 12.5% for gasoline to 39.1% for fuel oil. Despite these increases, fuel oil, kerosene and gas oil prices are still subsidised compared to international levels. These subsidies are paid from a Caisse de Compensation, which is partly financed by special taxes on gasoline. The net burden of subsidies on oil products on the Moroccan Treasury increased rapidly after 1973 and was MUS$150 in 1974 and $115 m in 1975. The net cost of oil product subsidies, following the recent price rises, are forecast at MUS$23 for 1976. Coal prices were held down in the late 1960's, despite rising costs and as a result the national coal company (Charbonnages Nord-Africains; CNA) made increasing losses. However since then, the Government has authorised a succession of price increases, totalling 104 percent above the 1971 base level of DH 61/ton. Electricity prices and their recent increases coupled to the increases in oil prices are discussed in paragraph 1.20. - 2 -

1.06 Planned sector investment for 1973-77 (updated in April 1975) is about MDH 2,300, more than double the 1968-72 figure of some MDH 1,000. Some 71% of the investment program is for electric power system expansion, and the remaining would largely cover the cost of increasing the petroleum-refining capacity by 3.5 Mton/a, modernizing existing coal mining facilities, and developing a new coal mine to reach the target output of 1 Mton/a by 1981. In addition, MDR 570 would be spent on intensified exploration for oil and gas.

1.07 Responsibility for energy is divided amongst various ministries. Apart from a system of cross-representation on the boards of the different agencies, there is no permanent machinery for coordination, which tends to be poor in consequence.

1.08 The State owns all the capital of the main oil refining company (Societe Anonyme Marocaine Italienne de Rafinage; SAMIR) and has a 50% holding in the other (Societe Cherifienne des Petroles; SCP). A new state agency, with a 50% holding in the main foreign distributors in petroleum products has been set up. The State also owns 98% of the shares in CNA.

1.09 Total employment in the sector, including the National Electricity Office and the Regies (see 1.22) is probably about 30,000. Some problems are experienced in recruiting technical and professional staff, partly because of the disparity between the pay scales of the civil service and the private sector.

1.10 Financial information on SAMIR and SCP is somewhat scanty, but analysis of the data made available suggests that both companies have experienced relatively low rates of return in recent years. Information on CNA is not available because no approved accounts have been produced since 1971.

1.11 Following the big increases in world oil prices in 1973-74, the Government appointed a special Interministerial Committee to review national energy policy. The Committee's report, presented in November 1974, recom- mended a series of specific measures designed to reduce energy consumption, but its main recommendation was that the Governent should urgently review its energy pricing policy with the object of aligning prices with the costs to the economy of supplying the various forms of energy. A first step in this direction was taken when energy prices were sharply increased in late 1975 and early 1976 (see 1.05 and 1.20).

(b) The Power Subsector

1.12 The power sector is fragmented as a result of historic developments. Power production was not effectively regulated until 1941 when it was brought under the supervision of the Directorate for Electricity. Even so, however, producers were not required, before 1956, to obtain authorization to e. ecute their expansion plans. Many decrees together with concession contracts, - 3 - operational contracts and guidelines for rural electrification (1949) regulated the sector up to nationalization in 1963, when four private companies covered most of the power activities.

1.13 From just prior to nationalization until the present, the situation developed as follows:

(i) Energie Electrique du Maroc (EEM) was the largest pre-nationalization company. It produced most of the electricity and distributed outside the main population centers. EEM's assets were acquired in 1963 by the Government and transferred to the newly created Governnent Enterprise, the Office National de l'Electricite (ONE).

(ii) The main distribution company was Societe Marocaine de Distribu- tion (SMD) which had concessions in a number of larger cities. From 1962 onward these expired and, starting with Casablanca, the largest cities created a Regie Autonome de Distribution (Regie). ONE took over in smaller cities where the municipalities did not wish to create a Regie.

(iii) The Societe Cherifienne d'Energie (SCE) managed and maintained isolated systems owned by the Government or, in exceptional cases, by Municipalities. These systems are now managed by the Minis- try of the Interior, except that ONE maintains a number of diesel stations on behalf of this Ministry.

(iv) Electras Marroquies (EM) generated, transmitted and distributed power in Spanish Morocco (including Tangier), which was integrated into the Kingdom of Morocco in 1956. In 1967 the city of Tangier, which was connected to ONE's system created its own Regie and consequently EM's concession was substantially curtailed. Dis- cussions are currently being held between the Governnent and the Spanish owners concerning the terms on which the concession would be transferred to the Government.

1.14 Essentially, the present situation is this:

(i) ONE generates 90% of all electric power in the country, transmits it to the load centers, and distributes some of this energy (about 37% of total consumption) outside the large cities;

(ii) the eleven municipal Regies purchase their power from ONE and distribute it in and around the large population centers and account for 50% of total consumption;

(iii) Electras Marroquies, still privately owned, with limited installed capacity and a distribution area in the extreme north of the country, accounts for 1% of total consumption; -4-

(iv) the Ministry of Interior which manages and operates small systems in about 110 isolated localities, accounts for 2% of total consumption; and

(v) autoproducers, most of them industrial plants, account for about 10% of the power produced in the country.

1.15 Because, the organization of the sector has not changed basically, the sector's main weak points are the following:

(i) ONE and Electras Marroquies are under the jurisdiction of the Ministry of Public Works, but the Regies and the small systems are under the Ministry of Interior and little co-ordination exists between the two ministries.

(ii) The sector is regulated by a number of decrees which are not al- ways consistent and leave many problems unsettled, such as delineation of areas of supply, duties and prerogatives of the various agencies with responsibilities in the sector including their mutual relationship, regulation of tariffs, and a common system of accounts (allowing inter alia for a complete segre- gation of municipal accounts with respect to its type of services).

(iii) The Government still subsidizes the cost of coal and fuel oil supplied to ONE and other public companies.

(iv) While ONE earns a very low rate of return on its assets in operation and finances internally less than 20% of its development program, the Regies, without recourse to borrowing, have financed 100% of their investment and generated a cash surplus as well (see 1.17).

1.16 Electricite de France (EdF) completed in 1973 for ONE a study of the impact of the cost of electricity on the cost of Moroccan products and services and of the relationship between the existing tariffs and rates and the actual costs of supply. No actions were t;ken on the recommendations and, although ONE updated this study in 1975, a further revision is required in the light of ONE's revised development program and continuously rising costs (see 6.06) and the Government is expected to adopt by June 1977 proposals, submit- ted to it by ONE, for a new tariff structure and for rates reflecting the cost of supply (see 5.33).

1.17 In 1973, after discussions with the Bank, the Government also requested EdF te study under supervision of ONE, the power sector as a whole with particular respect to its legal and administrative structure, its -rgani- zation, the coordination between authorities and the tariffs and rates in the distribution sector. This study has been completed recently but comparison with ONE's finances is difficult because the accounting methods are different. Apparently no distinction can be made between the value of electrical and other -5- municipal assets. The information provided in the EdF study has been presented on a cash basis for 1968-1974, covering 10 Regies, but the earlier years are incomplete. It is only since 1971 that financial accounts in the sector (including ONE) are reasonably consistent. Defining internal cash generation as net revenue less debt service plus consumers contributions (which, for ONE was less than 10% of investments, but for the Regies covered about 60% of the expansion program 1968-74), the total was MDH 355 for 1968-74, or 137% of the development cost of MDH 260. The program coverage ratio was still 131% in 1973, but reduced to 97% in 1974, probably partly due to the rapid rise in equipment costs in the supply countries resulting from the 1973 international oil price increases. For 1974 (no information is available on the 1975 financial performance of the Regies) the overall internal cash generation for the sector as defined above was:

Internal Cash Generation Cost Coverage MDH MDH %_

Regies 65 67 97 ONE 69 238 29

Total 134 305 44

Although a further deterioration may be expected to have occurred in 1975, the sector as a whole may presently internally finance some 35-40% of overall investment requirements taking into account the recent tariff increases, which is adequate but for the apparent inequities in sharing revenues.

1.18 In discussions with the Government on sectoral organization in general (in particular power and water) the Bank has stressed its views that it is not possible to develop any one part of the electricity (and water) sector without taking steps to achieve balanced development of the sector as a whole. A single authority regulating the power sector would obviously be a solution for improving the situation, but such an objective appears unlikely to be achievable in the short-term because the major question of a single Ministerial jurisdiction has significant political implications. Considerable improvements, benefitting the economy as a whole, would be possible through definition of a consistent Government policy applicable throughout the sector. The obvious vehicle for this would be the preparation of an electricity law that would codify existing law, remove inconsistencies and address aspects not regulated by existing law. The Governnent shares the Bank's concern with respect to the deficiencies in the organization of the sector, but is of the opinion that a fundamental reorganization will involve not only the Central Government but in particular local governments who will have to be closely associated in this endeavor. The Government agreed to take such steps as shall be necessary to formulate, by June 30, 1977, recommendations for the organizational improvement of the electricity sector and the Government will exchange views with the Bank on the proposals being developed for the purpose. -6-

1.19 Electricity demand has grown at about 9% since ONE's creation, with a tendency to accelerate in recent years. All the major towns and cities are electrified, but only some 10% of the rural population has public electricity supply. No rapid expansion in rural areas can be expected without considerable Government contributions. Total installed capacity in the country at the end of 1975 was about 945 MW, 825 MW of which is in the public sector, hydro capacity (396 MW) constituting about 42% of the total. Generation was about 2,840 GWh in 1975 representing a plant factor 1/ of 34%.

1.20 The cost per kWh to the consumer at the end of 1975 ranged from 9.9ctm/kWh (USe2.5/kWh) in the high and middle tension networks (mostly industry; the average price charged by ONE to the Regies was 12.Octm/kWh (USJ3.0/ kWh) to about 36 ctm/kWh (USé9/kWh) in the low tension network. All rates in ONE's networks were increased by 18% on January 1, 1976 and 13% in the networks of the Regies.

1.21 Data from the 1969 input-output table for the Moroccan economy indicate that electricity constituted less than 1% of total industrial cost for 120 branches of the economy (66% of the 181 studied), between 1 and 2% for 47 branches and more than 3% for only 14 branches (the highest is for the manufacture of cement, at 8.4%). It appears that these figures are still substantially the same because, although the share of electricity as a primary source of energy in the economy may have increased, its price has not increased commensurate with other prices. This is illustrated by the fact that for 1974 the Casablanca cost of living index was 153.2 (1962:100). Electricity cost for the same year indicated an index of 97.5 and presently would still be less than 110 (the retail tariffs were increased by 13% in early 1976).

1.22 Employment in the power subsector is some 7,500 (ONE about 4,300 and the Regies about 3,200). Training facilities for technicians and skilled workers are good.

1/ Total generation (GWh) times 100, divided by Installed Capacity (MW) times 8.76. -7-

2. BORROWER AND EXECUTINGAGENCIES

2.01 The Borrower would be the Government of Morrocco because the Project has multipurpose aspects, in which the dam, with 60% of the cost, would be a Government undertaking (through Hydraulique)and the power station only constitutes an addition to this dam. The executing agencies would be the Direction de l'Hydraulique (Hydraulique)a department of the Ministry of Public Works and Communications(Ministere des Travaux Public et des Communication,MTPC), for the dam, and Office National de l'Electricite (ONE) for the power station. A portion (US$5.3million) of the proposed loan of US$49 million would be retained by the Government for financing consulting services; the remainder (US$43.7million) would be onlent by the Government to ONE for constructionof the power station, transmissionfacilities and for consulting services, by means of a subsidiary loan agreement, on the same terms and conditions,which should have been entered into as a condition of effectivenessof the proposed loan. A Project Agreement would be signed with ONE in order to continue the direct relationshipbetween the Bank and ONE initiated under the first power loan in view of its position as autonomous agency of the Government. ONE would act as representativeof the Government and on its own behalf with respect to the execution of its part of the Project, procurementmatters, withdrawal from the proceeds of the loan and repayment of its part of the loan to the Government.

(a) Hydraulique

2.02 ConstructionExperience: This department of MTPC is considered experienced and competent in dam construction,including the successful completion of Idriss I dam at Arabat on the Inaouene river financed by Loan 643-MOR of 1969 and the Bou Regreg dam on the river of the same name, financed by Loan 850-MOR of 1972 (through ONEP), and has at its disposal various qualified consultants,such as Alpinconsult of Switzerlandwhich is responsible for preparing final designs of the Project and assisting Hydraulique in supervising execution. The same consultants,under a separate but coordinated contract have provided similar services to ONE for the design and bidding for the power station.

(b) Office National de l'Electricite (ONE)

2.03 Background: ONE was created as a Government owned enterprise by a Dahir (Royal Decree) of August 5, 1963 under the auspices of MTPC. It is responsible for practically all generation in the public sector and for distribution in those areas not supplied by the Regies and in a number of isolated centers under the jurisdictionof the Ministry of the Interior. ONE's operating functions are regulated by a "Cahier des charges" (decree of November 29, 1973) defining its rights and responsibilitiesand also those of its consumers. The Ministry of Finance exercises control over its finances through a financial controller assigned permanently to ONE'S head office. - 8 -

2.04 The Bank granted one loan to ONE in 1973 (936-MOR) for financing two 20-MW gas turbines, about 580 km of new 225-kV lines and the upgrading to 225 kV of about 340 km of 150-kV lines, together with the construction of a new and expansion of 6 existing substations. Except for the final conversion to 220 kV of the Casablanca-Tangier line (pending the installa- tion of a second gas turbine in Tangier in order to avoid interruptions of supply), the project has been completed satisfactorily at considerable savings (about US$4 million). These savings are being applied to develop- menit studies fcr 4 hydro nower stations on the Oum er Rbia and Sebou rivers.

2.05 Board: The Dahir that created ONE stipulates control by a Board chaired by the Minister of MTPC. The five other Board members are representa- tîves of the Ministries of Interior, Finance, Agriculture, Industry and Labor. These members are appointed by Royal Decree for a 3 year term which may be renewed. The Board meets twice yearly but further meetings are held if special circumstances arise; it normally limits itself to general policy and leaves day-to-day operations to ONE's management.

2.06 Since 1973, when ONE's General Manager became Minister of MTPC, the objective of maintaining the dialogue with the Ministry at Board level has not been met because the Minister also continued in his post as General Manager, although he delegated the day-to-day business to his deputy. This situation is not entirely satisfactory because it has effectively changed Board composition and has precluded rapid decision-making procedures.

2.07 Organization and Management: The Deputy General Manager presently heads the training, financial, stores and procurement divisions (which are separated from the other departments) and the four major departments: Genera- tion and Transmission, Distribution, Planning and Construction, and Adminis- tration. All department heads are competent Moroccans who, to a certain extent still, rely on foreign assistants, who are now all moved to advisory positions as trained counterpart Moroccans became available. Consultants are employed for specific assignments (e.g. studies and pover station design) in which expertise weighs heavily.

2.08 ONE management is generally satisfactory, except for some weaknesses in finance and accounting (see 5.27 through 5.29). Improvement appears necessary if ONE, in view of the accelerating financial requirements for its development -- cf which the Government would meet only one third -- would seek international financing on an increasing scale. ONE has recently appointed a finar.cial officer to head the single financial department it intends to create in order to realize such improvements (see 5.27).

2.09 Personnel: At the end of 1974, ONE had a total of 4,369 ei..ployees, including 58 expatriates (mainly French), representing an average annual growth of 6.3% since its creation. The number of foreign employees has stead-ly decreased from 350 (16% of total) in 1963 to 58 (1.3%) in 1974. Moroccaniza- tion has been progressing smoothly because Government has allowed ONE to - 9- replace foreign employees at a reasonably slow rate commensuratewith the intensive but time-consumingtraining program. By the end of the decade ONE is expected to employ some 5,000-5,200people.

2.10 MWh (1,000 kWh) sold per employee has been increasing reasonably from 462 MWh in 1963 to 543 MWh in 1974. It should be noted that because ONE is primarily a generating company selling about 88% of its production in bulk to the Regies and to larger industries, energy sold per employee is relativelyhigh (about double the figure for Algeria and Tunisia). The number of consumers per employee has also increased in relative terms from 47 in 1963 to 57 in 1974. However, in absolute terms, the number is low because ONE's main interest is generation, not distribution(about half the figures for Algeria and Tunisia). By 1980 sales may be expected to reach some 750-800 MWh/employee and consumers would number 62-65/employee.

2.11 Training: The process of Moroccanization,coupled with the continuous expansion of ONE's system, continue to constitute a major task for providing a sufficient number of qualified staff at all levels. ONE has an efficient training center at Ain Sebaa (Casablanca)with about 200 places. About 3,500 employees have been trained in various skills since 1963 (an average of almost 300 employees/a). Plans for the next 5 years envisage the training of some 750 technicians and skilled workers. For its professional engineers ONE can draw on the main engineering school in Rabat (Ecole Mohammedia d'Ingenieurs) and the Ecole des Travaux Publics in Casablanca. Because of the much higher salaries paid in the private sector, ONE has experienced some problems in retaining and attracting suitably qualified staff. However, trainees at all levels are required to remain a number of years in ONE's employment,which somewhat alleviates this problem.

2.12 In contrast with the technical training,ONE has no facilities for training of its accounting staff, except "on the job" (see 5.28).

2.13 Facilities: ONE's generating capacity developed as follows:.

…-----1965 ------1970 -…1------1975 …------Type No. No. Installed No. No. Installed No. No. installed of of of Capacity of of Capacity of of Capacity Station Stns. Units MW Stns. Units MW Stns. Units MW

Hydro 13 34 332 15 36 362 17 40 396 Steam 2 6 57 2 7 117 2 7 317 Gas- turbine - - - 1 1 16 3 3 56 Diesel 6 28 32 6 33 34 6 33 34

Total 21 68 421 24 77 529 28 83 803 - 10 -

The number of hydro stations and units is large, with an average of 10 MW per unit; however, 220 MW - comprising5 units - is concentratedin two stations on the Oued el Abid river and the average unit size in the other hydro stations is only about 5 MW. The firm hydro capacity (the minimum capacity available during peak time in a dry year) which presently is about 65% of installed capacity, is decreasing steadily, together with generation, at an annual rate of some 2-3% due to increasing upstream diversions for irrigation. The total storage capacity of reservoirs associatedwith power is about 2,400 x 106 m3 (45% in the Bin el Ouidane reservoir in the Oued el Abid river) and average hydraulicity represents 1,400 GWh/a (0.58 m3/kWh) at a plant factor of 40%. The Project will approximately double the total storage capacity associated with power and increase hydro capacity by 120 MW (30% of the 1975 hydro capacity) and 315 GWh/a (23% of the present hydro average), although generation of existing downstream plants will reduce due to diversion of Oum er Rbia waters for irrigation (Doukkala);Sidi Cheho's generation will further reduce due to upstream diversions for irrigation. Effective generation would thus decrease to some 240-250 GWh/a by the year 1995.

2.14 At the end of 1974, ONE's extensive system comprised the following lines:

1,154 km of 225-kV, 1,660 km of 150-kV, 4,230 km of 60-kV, 130 km of 30-kV 6,450 km of 22-kV, and about 3,600 km of lower voltage lines. The distributionvoltage is 127/220 V at 50 Hz, but new networks are executed at 220/380V.

2.15 All of ONE's installationsare technicallywell conceived and constructed and in good working condition.

2.16 Development of Facilities: ONE's development program in generation is summarizedbelow: - il -

1976 1977 1978 1979 1980 Beyond ------MW ------

Hydro: Existing 396 396 396 396 396 396 Under Construction 74 74 194 194 194 Planned 125 486

Subtotal Hydro 396 396 470 590 715 1,076

Steam: Existing 317 317 317 317 317 317 Under Construction 75 225 300 300 300 Planned 250

Gas turbine: Existing 56 56 56 56 56 56 Under Construction 20 80 80 80 80 80

Diesel: Existing (net of retirement) 34 10 10 10 - -

Subtotal Thermal 427 538 688 763 753 1,003

Total 823 934 1,158 1,353 468 2,079

2.17 The adequacy of this program and its costs are discussed in 3.09 through 3.11 and in 4.09 respectively. The main feature is the shift to increased investments for hydro plant in order to maximize utilization of indigenous resources in the light of the 1973/74 rise in oil prices. Never- theless, Morocco's dependence on thermal plant will continue to grow because feasible future hydro developments would probably not exceed 1,300 GWh in generation (about equal to the present hydro generation). ONE has scheduled the Dechra el Oued and the M'Dez plants for completion by 1980 in order to meet demand and energy requirements, but the Government has not yet authorized construction. It appears possible that both plants, aggregating 125 MW and a firm energy of 125 GWh/a, may not be completed in time. This may cause problems, particularly with respect to generating capability, if 1980 should be a dry year (see 3.09). For purposes of this report it has been assumed that a decision on both hydro plants will be taken soon.

2.18 Transmission development is expected to be the following: - 12 -

12-31-1974 1975-1977 1978-1982 12-31-1982 Total ------Additions ----- Total

Lines (km)

225 kV 1,154 426 840 2,420 150 kV 1,660 (160) (507) 993 60 kV 4,230 1,420 2,000 7,660

Total 7,044 1,686 2,333 11,063

Transformers (MVA) (Primary voltage)

225 kV 900 910 985 2,795 150 kV 809 - (80) 729 60 kV 1,200 153 197 1,550

Total 2,909 1,063 1,102 5,074

By the end of the decade the system would comprise approximately 2,100 km of 225 kV (an increase of almost 90% over 1974); 6,700 km of 60 kV (60%), 9,600 km of 22 kV (50%). The low voltage distribution expansion is expected to be about 50% from 3,600 km in 1971 to some 5,400 km by 1980.

2.19 The need for a national dispatch center, although not great, is growing. Studies have been initiated but no overall plan is yet available and no separate estimate of cost has been included in the development program. It appears that a dispatch center could be justified early in the next decade with the completion of the 250-MW Mohammedia thermal station (1981/82).

2.20 International Interconnection: Limited local exchanges of power between Oujda (Morocco) and Marnia (Algeria) at 22 kV have been made for a long time. A project is currently in execution for a 225-kV connection between Oujda in Morocec and Ghazaout in Algeria (which completed its part up to the border i.n 1975) following a 1972 study executed by EdF which confirmed that the link would have technical and ecolomic benefits for both countries. For Algeria, ît would assure continuity of supply to the industrial zones of Tlemcen and Ghazaout (dependent on a single circuit 225-kV line) and for both countries thermal plant operation could be optimized, spinning reserves pooled and benefits obtained in view of the different time zones. Whether this connection will be operational in the near future, given the present strained relations between the countries, is uncertain.

2.21 Planning: The outline of ONE's development program presCnLly in execution resulted from a comprehensive study made in 1971/72 in coll?bora- tion with EdF, using a series of computer programs to simulate ONE's generating and transmission systems. ONE's Planning Department now regularly - 13 - updates the study and some major changes have been made due to the reintro- duction of hydro plant. This would also require expansion of the 225-kV system: (a) south of Casablanca, in order to expand the network and connect Sidi Cheho to the grid, followed by the upstream Dechra el Oued plant and the downstream Merija plant, and (b) in the north for connecting the planned stations on the Sebou river to the west-east tie lines.

2.22 The technical quality of ONE's planning is satisfactory and the need for consulting services for overall planning is steadily decreasing. However, ONE uses financial rather than economic considerations in justifying its investment decisions and even this is occasionally frustrated by outside political decisions (dam heights are usually not optimized econo- mically with respect to the multipurpose uses but set at the highest technical level possible in order to have available optimum water resources). It is only recently that ONE, for purpose of the Project, has made an effort to prepare a least cost generation development study using the dis- cour.ted cash flow method (see Section 6). Distribution planning is carried out entirely by ONE's distribution department, except for the part of rural electrification that is financed by Government contributions. This part ia planned jointly by ONE and the communities involved and is approved by a special commission of the Minîstry of Public Works. Design features, however, are basically the same and follow ONE's Guidelines.

2.23 Operations: ONE presently operates 17 hydro stations and 11 thermal stations (see 2.13) the latter including the coal-fired station at Jerada (165 MW) in the east of the country and the oil-fired station Roches Noires (152 ffl) near Casablanca on the coast. A 60-MW unit at Roches Noires is designed to burn coal also but this has been abandoned because Jerada requirements (about 660,000 t annually) already exceed coal production (450,000 t in 1974). A large stock of coal, mined before Jerada was commissioned in 1971/72, is available to tide ONE over until production is increased as scheduled to some 800,000 t/a in 1977/78 and 1 million t/a in 1981. ONE also maintains 11 small diesel power stations (41 units wîth an effective capacity of about 4 MW) on behalf of the Ministry of the Interior, in isolated systems. ONE's generation data, fuel cost and efficiencies, for 1970 (historic) 1975 (the actual figures are expected to hardly differ from the figures presented here), 1977 (prior to commissioning of new hydro works) and 1980 (new hydro plant operational, including Sidi Cheho) at present fuel prices, are the following: - 14 -

1970 % 1975 % 1977 z 1980 Z

Generation (GWh) 1,912 100 3,034 100 3,840 100 5,105 10G of which Hydro 1,316 69 1,016 33 1,370 36 1,790 35 Thermal /1 596 31 2,018 67 2,470 64 3,315 65

Efficiencies (kcal/kWh) Coal 3,015 3,015 3,015 Fuel #2 2,935 3,000 2,663 Gasoil /2 3,620 3,630 - Overall 3,015 3,020 2,790

Fuel Cost Total (DH 106) 25 113 166 195 Per kWh sold (ctm/kWh) 1.5 4.4 5.1 4.6

/1 including several GWh purchased from industrial private plants. /2 No breakdown availabLe.

2.24 Until early 1973 when the coal price paid by ONE was increased for the first time, ONE paid DH/55 ton compared with an average production cost that was already estimated at DH 104/t in 1971. The coal price was increased by 25% in 1973, 35% in 1974 and 15% in late 1975. Until the end of 1975 fuel oil was heavily subsidized and ONE did not pay more than the 1973 price of DH 152.45/t (DH 15.40/Gcal or about US$0.89/MBtu) compared with purchase and refining cost of not less than DH 400/ton (DH 40.40/Gcal or about US$2.32/MBtu). Part of the oil price subsidies have now been removed. The present price charged to ONE for fuel oil is DR 202.05/t or DH 20.40/Geal (US$1.17/MBtu) and for coal DH 103.80/t, or DH 19.96/Gcal (US$1.14/MBtu).

2.25 Because no forecast can be made as to when, and by what steps, the Government may further raise coal and oil prices to reflect production cost, the same price has been assumed until the end of the decade and that any price increase would be passed on to the consumers automatically (see 2.26 and 5.33). The impact of fuel price increases, coupled with the steadily increasing requirements of thermal generation, on cost per kWh sold, is considerable: - 15 -

------Historic ------Forecast ------…-----Fuel Cost ------Fuel Cost------Average % of Average % of Revenue Per kWh Revenue Revenue Per kWh Revenue per kWh Sold per kWh per kWh Sold per kWh

1970 10.8 1.5 14 1975 12.6 /1 4.4 35 1971 11.0 1.4 13 1976 15.1 /1 5.1 /2,3 34 1972 10.9 1.4 13 1977 16.8 /1 5.1 30 1973 11.7 2.7 /2 23 1978 18.1 4.8 27 1974 12.5 /1 3.1 /2 25 1979 20.1 /1 4.9 /2 24 1980 23.5 4.6 20

/1 Rate increases: 5% both in 1973 and 1974, 18% in 1976, 10% in 1977, 6% in 1978, 9% in 1979, and 15% in 1980. /2 Coal price increases: 25% in 1973, 35% in 1974, 15% in 1976. /3 Fuel oil price increase: 39.1% in 1976 for fuel No. 2 and 23% for gas oil.

It can be seen from this table that the rate increases of 5% in 1973 and 1974 respectively have not kept pace with the increase in fuel prices (i.e. coal only) and that as a consequence ONE's financial position has been eroded (see 5.03). The situation was aggravated in 1975, because of an extremely dry year, which increased ONE's cost for fuels significantly. If fuel prices are raised by 1980 to production cost (which may be in the order of DH 180/t for coal -- if not more -- and about DH 400/t for fuel oil) the overall cost of fuel would be some 8.5-9.0 ctm/kWh sold. Such measures would raise effective rates by 15-20% by the end of the decade. (Refer to Section 6 for a discus- sion on ONE's tariffs and rates.)

2.26 Because (a) about 65% of all generation would be thermal until the end of the decade (and proportionally higher in the event of delays in hydro plant completion), (b) ONE's costs depend highly on wet or dry years, and (c) rate increases are coupled to an increase in fuel prices but appear to be only loosely correlated, it would be necessary that all increases in the prices of fuels above a predetermined base price are passed on automatically to the ultimate consumers (see 5.37).

2.27 Operational Indicators: Although ONE annually prepares statistical data, they are not easily accessible (except for the general technical data as published in ONE's annual Rapport d'Activite, such as capacities, demand, generation and sales) or suitable to monitor ONE's performance. ONE will include in the first Quarterly Progress Report of each year, a set of statistical data discussed during negotiations. During supervision the subject would be reviewed regularly with ONE in order to discuss and define appropriate monitoring targets and evaluation methods. - 16 -

3. THE MARKET AND THE MEANS TO MEET IT

3.01 Market Aspects: Historically the market has been substantially defined by the area of responsibility within the sector: (a) ONE generates about 90% of all electricity produced in the country and distributes about one-third of it to its own consumers which are largely non-residential (94% of ONE's sales) and located outside the main population centers, (b) the Regies do not generate but distribute about 50% of country production in the main population centers (non-residential supply is about 75% of the Regies' sales), (c) the Ministry of the Interior carries responsibility for generation and distribution in all isolated systems (2% of the market), (d) Electras Marroquies, the only privately owned company in the country has a small concession near Tangier with 1% of the market, and (e) autoproducers, who meet their own requirements and constitute about 10% of the market (some of them sell small amounts of excess energy to ONE). For 1975 the sales and share of the market on the users level is expected to be as follows:

GWh Share of the Market

ONE 1,050 37 Regies 1,425 50 Ministry of the Interior 40 2 Electras Marroquies 30 1 Autoproducers (estimate) 295 10 2,840 100

3.02 The share of the market of each of the consumer categories in ONE's interconnected system, i.e. including the Regies, has changed remarkably lit- tile in the last 10 years and little change is expected until 1980 (see Table 3-1 for detailed information): - 17 -

1965 1970 1975 1980 GWh % GWh X GWh X GWh %

Railways 61 5.6 70 4.4 95 3.8 112 2.6 Mines 220 20.2 242 15.1 481 19.4 790 18.6 Cement 63 5.8 111 6.9 170 6.9 250 5.8 Other Industry, Agriculture 439 40.5 737 45.9 1,073 43.4 2,084 48.7 Total Non Residen- tial 783 72.1 1,160 72.3 1,819 73.5 3,236 75.7 Residential 272 25.0 402 25.0 596 24.1 961 22.5 Public Lighting 32 2.9 44 2.7 60 2.4 78 1.8

Total 1,087 100.0 1,606 100.0 2,475 100.0 4,275 100.0

By 1980, the industrial and agricultural share of the market would only increase by about 2 percentage points and residential services and public lighting would decrease similarly.

3.03 ONE's and the Regies comparative share of their combined market, historically and forecast, is the following:

1965 1970 1975 1980 ONE Regies ONE Regies ONE Regies ONE Regies …______------% of Sales ------…------

Railways 100 - 100 - 100 - 100 - Mines 100 - 100 - 100 - 100 - Ceement 13 87 14 86 17 83 51 49 Other Industry, Agriculture 32 68 33 67 30 70 31 69 Total Non Residen- tial 55 45 49 51 51 49 52 48 Residential 10 90 16 84 19 81 21 79 Public Lighting 16 84 25 75 25 75 26 74 Total 43 57 40 60 43 57 45 55

Since 1965 industrial plants have tended to be constructed near urban centers because of convenient access to the labour market and other facilities and therefore ONE's non-residential share of the market dropped accordingly. How- ever a slight improvement is expected, due to an increase in mining efforts (predominantly phosphate) and construction of cement plants both of which, by nature of location of natural resources, are normally outside urban areas. The continuous relative increase in residential supplies reflects ONE's spread into rural areas, including accelerated connection to the main system of rural centers already electrified. - 18 -

3.04 Access to Supply: No comprehensive national figures by numbers and proportion of the population having access to electricity are available. However the following table shows 1971 and 1974 figures for the proportion of rural households in ONE's supply area which are provided with electricity.

1971 Households 1974 Households Total Served by Total Served by ONE ONE 1,000 1,000 % 1,000 1,000 %

Rural Areas Rural Communities 1,801 51 43 1,968 74 4 Minor Centers 122 81 66 133 93 70 Medium Villages 77 49 64 84 58 69 Larger Villages 30 20 67 33 23 70

Total 2,030 201 10 2,218 249 11

Because access to supply in the major urban centers and adjacent communities supplied by the Regies is easier and the population density far higher, the national figures should be appreciably higher than indicated above. ONE's total number of consumers has increased from 116,000 in 1965 to about 248,000 in 1974, i.e. at an average growth rate of 8.8%/a. The number of bulk consumers (including the 11 Regies) increased from 710 to 1,378 over the same period, the latter representing 94% of ONE's total sales.

3.05 Forecasting: For forecasting ONE uses statistical extrapolation, based on past trends of sales to each class of consumer, adjusted to take account of major expected new loads. This has resulted in the assumption of a steady 8% average growth rate up to 1972, although actual increases have been rather erratic as shown in the following table providing ONE's and the Regies combined sales for two five-year periods:

1965-1970 1970-1975 Sales Growth Rate Sales Growth Rate GWh % GWh %

1965 1,087 1970 1,606 1966 1,167 7.3 1971 1,727 7.5 1967 1,196 2.4 1972 1,907 10.4 1968 1,348 12.7 1973 2,161 13.3 1969 1,488 10.4 1974 2,287 5.8 1970 1,606 7.9 1975 2,475 8.2 Average 8.1 Average 9.0

The average 1965-1975 growth rate was 8.6% compared wtth a statistical trend of 8.8%, indicating, together with the above figures, a modest growth a.celera- tion. It should be noted that the 1975 growth was suppressed when, due eo the march to the then Spanish Sahara, many industries came to a virtual stand-still. - 19 -

3.06 ONE, assisted by the Regies, has recently made an extensive survey of the market which resulted in estimated retail sales of 4,840 GWh by 1980 to both its own and the Regies consumers, representing an average annual growth of about 14% over 1975. It was considered prudent during appraisal to reduce the 1980 estimate by about 12% to 4,275 GWh and adjust intermediate years accordingly, in order to take into account the possible effects of future tariff increases, possible delays in industrial load materializing, and to avoid, to the extent possible, overstatement of ONE's financial results. This results in an average growth rate for 1975-1980 of 11.5% broken down as follows:

Sales Growth Rate GWh %

1975 2,475 1976 2,810 13.5 1977 3,155 12.3 1978 3,580 13.5 1979 3,930 9.8 1980 4,275 8.8 1975-1980 11.5

The rather high growth rate through 1978 is attributed firstly (1976) to the return to normal conditions in industry and secondly (1977/78) to the completion of a relatively large number of industrial plants by the end of the current 5-year plan. It appears probable that, due to unforseen delays in completion of industrial plant, the 1978 growth rate may be somewhat lower and the 1979/80 growth rates correspondingly higher; this would not materially affect the average results for the 5-year period.

3.07 Balance of Energy and Capacities: Historic and forecast data on market requirements in the ONE/Regies interconnected system up to 1980 are shown in Table 3-2, which is summarized as follows:

1965 % 1970 % 1975 % 1980 %

Sales (GWh) 1,087 1,606 2,475 4,275 Losses (GWh) 226 17.2 306 16.0 559 18.4 830 16.3 Generation (GWh) 1,313 1,912 3,034 5,105 of which: Hydro 1,168 89 1,316 69 1,016 33 1,790 35 Thermal 144 il 592 31 2,015 67 3,310 65 Purchases 1 4 3 5 Maximum Demand (MW) 272 384 600 955 Load Factor (%) 55 57 58 61 Installed Capacity 414 528 803 1,468 (MW) of which: Hydro 332 80 362 68 396 49 715 49 Thermal 82 20 166 32 407 51 753 51 Plant Factor (%) 36 41 43 40 Capacity Margin: MW 142 145 203 513 % 34 27 25 35 - 20 -

The above table highlights the sharp decrease in the relative importance of hydro generation from 89% in 1965 to some 43% in 1975 (assuming that 1975 has been an average hydro year; in fact it was extremely dry and hydro generation constituted only 33% of total generation). A further decline to 35% by 1980 is expected. Hydro capacity, of course, reduces accordingly, but in a lesser degree because of its peaking plant characteristics.

3.08 Maximum Demand: As can be observed in the above table, maximum demand has grown somewhat less than generation (1965-1970: 7.1%/a for maximum demand and 7.8%/a for generation; 1970-1975: 9.3%/a and 9.7%/a); indicating a slow but steady increase in load factor reflecting the increasing share of industry in the market. This trend is expected to continue through 1980 (955 MW), when the load factor would average 61% and demand would grow at an average of 9.7%/a during 1975-1980 compared with 11.0%/a for generation.

3.09 Satisfaction of Requirements: With the planned additions to the generation plant, the capacity margin (i.e. reserves) level, which has been steadily decreasing since 1965, is expected to increase again to about 35% by 1980. However, ONE's main problem is not capacity (para. 4.03) but rather the possibility of a shortfall in generating capability during a dry year (one in 20), as can be observed in the following table which assumes the outage (maintenance and forced) of one 60-MW and one 75-MW thermal unit (reducing thermal capacity from 753 MW to 618 MW):

1980 MW GWh

Hydro, Effective 470 950 Thermal 618 4,080 (65% of 715 MW, year average) Available 1,088 5,030

Required (955) (5,105)

Margin 133 -75

The capacity margin (with outage of 135 MW' would be about 9% of total installed capacity (1,468 MW), which is reasonable and allows for some unforseen slippage in plant completion. However, energy capability would be insufficient for 1980 (even with a prudent maintenance schedule or somewhat better hydrology during the year); the capability would be marginal and further plant (Mohammedia 2x125 MW) is needed by 1981/82.

3.10 Losses: Overall Losses have historically been modest and are expected to remain so through 1980: - 21 -

----- 1975 - - 1980 - GWh % of Generation GWh % of Generation Sales 2,475 81.7 4,275 83.7

Losses:

Station Require- ments 210 6.9 340 6.7

Transmission: 225/150 kV 80 2.6 67 1.3 60/30 kV 119 3.9 183 3.6 22/5.5 kV 40 1.3 62 1.2

Distribution: ONE 15 0.5 23 0.5 Regies 95 3.1 155 3.0

Generation 3,034 100.0 5,105 100.0

Although these relatively low losses reflect, on the one hand, the high design standards of the Moroccan power facilities, some over-investment may be present.

3.11 Transmission and Distribution Facilities: Expansion of these facilities would be commensurate with the expected growth rate of about 11% for the remainder of the decade, i.e. deducting an estimated growth in existing systems of 3-4%, networks would be extended some 6-7% annually on the average until 1980; that is: 60-225 kV from about 7,000 km (1974) to about 10,000 km and related transformer capacity from 2,900 MVA (1974) to about 4,400 MVA 22 kV from 6,450 km (1974) to about 9,600 km and low voltage distribution lines from about 3,600 km to some 5,400 km. This correlates reasonably well with ONE's expansion plan (see 2.18). HISTORIC AND FORECAST SATES OF OSNEAND REGIES

1965 -1980 (GWh)

1975 / 195(6 1977 1978 1979 1980 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974

A. Total

1,407 1,520 1,715 1,877 2,125 2,317 2,525 ONE to Regies 695 734 751 861 863 1,063 1,105 1,213 1,333 965 1.050 1,195 1,388 1,580 1,753 1,905 ONE to its ows Consu=ers 464 484 509 552 682 643 691 771 895 2,372 2,570 2,910 3,265 3,705 4,070 46430 Total (aee C) 1,159 1,218 1,260 1,413 1,545 1,679 1,796 1,984 2,228 (85) (95) (100) (i-Lmo (125) (140) (155) 1,..es of Regies (72) (51) (64) (65) (57) (73) (69) (77) (67) 2 161 75 2810 31 55 3,580 3,930 462(5 Total to Tltimate Consoaers 1,087 1,167 1,196 , 1 , 772'7 1,907

B. Breahdown by Consu=er Category Eigh and Mediu=Voltage (150-5.5 kV) 85 89 95 97 100 103 107 112 Railways 61 64 66 67 66 70 75 80 481 530 590 655 725 790 ydning 220 239 238 254 253 242 273 320 383 429 170 180 195 215 235 250 Cernent 63 66 72 80 90 111 114 117 124 145 Other Industry, Com=erce, Agricu lture 942 1.010 1.143 1,350 1,617 1.793 1,958 and Other 405 440 456 530 606 688 714 793 918 1,756 1,950 2,235 2,590 2,860 3,110 Subtota1 (1) 749 809 832 931 1,015 1,111 1,176 1,310 1,510 1,605

Low Voltae (220 V 380 V 4Q3 544 570 5S6 720 774 828 890 961 SesAdenti, Cmaereil 272 286 294 337 382 402 451 42 44 48 49 51 55 60 65 67 70 73 78 Pablic Lighting 32 33 33 38 6 126 52 55 5 57 .3 75 79 92 107 Agricultural Ruapiag ang Mills 34 39 37 42 49 49 719 86 9 20 9,0 67 Subtotal (2) 338 358 364 617 473 495 551 597 651 682 23475 2_810 3,155 3,580 3,930 4,275 , Total (1) & (2) 1,(87 1.167 1,196 1,S48 1,488 1,606 1,727 1,907 2,161 2,287 Î C. Brekadoen for ONE HiRh and Medi= Voilta e 85 89 95 97 100 103 107 112 Trensportation 61 64 66 67 66 70 75 80 429 481 530 598 655 725 790 Mining 220 239 238 254 253 242 273 320 383 26 28 4o 58 80 108 128 Ce-mnt 8 9 10 9 12 15 16 17 19 Other Ind.stry, Commerce, Agriooltore 301 348 42o 492 533 560 and Other 132 126 134 151 253 224 229 238 284 283 1,407 1,520 1.715 1,877 2,125 2,317 2,525 Regies 695 734 751 861 863 1,036 1,105 1,213 1,333 2,625 2,730 3,065 3,655 3,79° 4,115 Sobtotal (1) 1,116 1,172 1,199 1,342 1,447 1,587 1,692 1,868 2,104 2,234

Low Volite (220 V; 380 V) 103 110 130 168 165 181 200 M6idential, Cmeerctal 28 29 4i 48 66 64 72 82 91 15 15 16 17 18 19 20 Public Lighting 5 6 8 9 13 il 13 14 14 20 20 34 55 67 80 95 Agricoltoral Pomping and Mills 10 il 12 14 19 17 19 20 19 145 180 220 250 280 315 SobtotaI (2) 43 46 61 71 98 92 104 116 124 138 2,570 2,910 3,265 3,705 4,070 4,43o Total (1) and (2) 1,159 1,218 1,260 1,613 l,s45 1,679 1,796 1,984 2,228 2,372

D. Breakdown for ReRies medima Voltage (60-5.5 kV) 142 140 137 135 127 122 Ceonent 55 57 62 71 78 96 98 100 105 119 Other Industry, Ccsmerce, Agriculture 930 1,125 1,260 1.398 asnd Other 273 314 322 379 353 464 491 555 634 659 709 795 1,067 1,260 1,387 1,520 Subtotal (1) 328 381 384 450 431 560 589 655 739 778 851 935

Lo, Voltage 709 761 244 257 253 289 316 338 379 411 453 467 486 590 626 663 Peisdential, Commercial 50 52 54 58 Lighting 27 27 25 29 29 33 35 35 37 40 45 49 Public 41 24 25 27 31 Agricultural Pomping and Mills 24 28 25 28 30 32 33 35 37 37 43 700 740 790 850 Subtotal (2) 295 312 303 346 375 403 447 681 527 544 574 680 Total (1) and (2) 623 693 687 796 80 963 1, 1136 1286 1,

O/ONE generation and total sales ae"hit.ric, nAtail are aNailable for s f E and the Regies.

February 19, 1976 HISTORIC AND FORE0CASTBALIANCES OF ENERGYAND CAPACITIES (ONE's Interoannected System)

------Historic------Forecaet------_--_------1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 197 1977 1978 1979 1980

Tnterooneoeted Syste 64I6r(GWhitoi tlimnate Consumaers

OIIE 347 484 509 552 682 643 691 771 895 965 1,050 1,195 1,388 1,580 1,753 1,905 Regles 740 683 687 796 806 963 1,036 1,136 1 266 1 322 1,425 1,615 1,757 2 000 2 177 2 370 Total (1) 1,067 î,T7 lî,iî lî,i î, 1, 1,727 1,907 2,1 1 l 2,2 F,75687 Tl5I8 3,580 . 3,930

Looses

ONE(HT, MT, LT) 111 109 104 130 155 155 174 217 214 235 254 275 295 320 330 335 Regies 72 51 64 65 57 73 69 77 67 85 95 100 110 125 140 155 Station Requirements (CME) 43 60 70 72 64 78 82 115 161 173 210 240 280 315 335 340 Total 319 220 3; 7 767 325 4 337 559

Generation and Purchases

Hycro 1,168 1,018 891 1,077 1,389 1,316 1,520 1,596 1,192 1,337 1,016 1,200 1 370 1,430 1,500 1 790 Thermal 144 369 502 526 368 592 524 715 1,408 1,438 2,015 2,220 2,465 2,905 3,230 3,310 Purchases 1 41 12 7 4 8 5 3 5 3 5 5 5 5 5 Total < =(1) + (2)) 1,313 1,387 1,434 1,615 1,764 1,912 2,052 2,316 2,603 2,780 3,034 3,425 3,840 4,340 4,735 5,105

MaximuzsDemand (Mw) 272 281 292 323 349 384 418 47O 498 550 600 660 750 830 900 955

Losd Factor (%)%/ 55 56 56 57 58 57 56 56 60 58 58 58 59 60 60 61

Installed Capacities (MW)

Hydro 332 332 355 355 362 362 362 362 372 396 396 396 396 470 590 715 Steam 57 57 57 117 117 117 227 257 257 257 317 317 317 542 617 617 Gasturbines 16 16 16 16 16 16 16 36 56 76 136 136 136 136 Diesels 25 32 33 33 33 34 34 34 34 34 34 34 10 10 10 - 414 421 461 521 528 529 639 669 679 723 803 823 934 1,158 1,353 1,468

Overall Plant Factor(%) | 36 38 36 35 38 41 36 39 43 44 43 48 47 43 40 40

Capacity Margin

142 140 169 198 179 145 221 199 181 173 203 163 184 328 453 513 34 33 37 38 34 27 35 30 27 24 25 20 20 28 33 35

_1 Generation -Gh) x 100 3/ Installed capacity (MW) les maximum demand (MW)

| Capacity rjrgin MW.x 100 g/ C-nrto (Gh x 10 Installedocapacity(14Y Instaflledcapacity (Mx 8.76 Ix

April 1, 1976 - 24 -

4. PROGRAM AND PROJECT

(a) Construction Program 1975-1980

4.01 ONE's construction programs are part of the 5-year national development programs. The current program terminates in 1977 and ONE, which annually updates its forecasts and plans in order to meet the increase in demand and to allow for adequate lead time, has already outlined required developments through 1982. The main feature of this plan, in comparison with historic development, is the shift to increased investments for hydro plant in the light of the 1973- 1974 increases in world oil prices justifying the emphasis on maximum utilization of indigenous energy sources. Most existing and new hydro developments, however, include irrigation and as a consequence power generation is not only dependent on the regulation required for downstream irrigation but will progressively decrease due to growing upstream irrigation requirements.

4.02 Generating Plant: The forecast installed capacities have been shown in 2.16 above and comparing these capacities with forecast demand (para. 3.07) results in the following if the forecast is extended until the end of the next 5-year plan:

1975 1976 1977 1978 1979 1980 1981 1982

Installed Capacity (MW) 803 823 934 1,158 1,353 1,468 1,754 2,079 Maximum Demand (MW) 600 660 750 830 900 955 1,030 1,100 Capacity Margin: MW 203 163 184 328 453 513 724 979 % of Installed Capacity 25 20 20 28 33 35 41 47

4.03 The present capacity margin of 25% is low in relation to installed capacity (a margin 35-40% would not be unreasonable) taking into account the sensitivity of hydro (about 50% of installed capacity) to the effects of dry years and its dependence on irrigation water release patterns. The rather low capacity margin will persist for several years, until in 1980 a more reasonable margin of 35% is reached.

4.04 For 1981/82, the capacity margins would be rather excessive and it appears reasonable to assume, for definition of the construction expenditure schedule, that commissioning of several plants would be delayed by 1-2 years. Deferral of the decision to construct the plant in the light of the excess capacity and financial constraints may cause some delays in construction. Also for this reason, no expenditures have been assumed up to 1981 for generating plants additional to those included in the present program.

4.05 Transmission: ONE's expansion targets for transmission lines and substations have been shown above (para. 2.18). Comparing installed transformer capacity with maximum demand in MVA (assuming an average power factor of 0.8 in ONE's relatively extensive system) shows the following: - 25 -

1975 1980 1982

Maximum Demand (MVA) 750 1,200 1,380

Transformer MVA available per MVA of maximum demand 3.9 3.8 3.7

The program appears reasonable; taking into account that presently some 1,000 MVA is transformed 2 times (from 225 kV and 150 kV to 60 kV and the various intermediate tensions), the effective ratio would be in the order of 2.5 MVA/ MVA of demand.

4.06 Urban and Rural Distribution: ONE is responsible for expanding distribution outside the main urban centers (the municipal undertakings - Regies - purchase electricity in bulk from ONE) representing about 40% (1974: 965 GWh) of total retail sales (1974: 2,287 GWh) in the interconnected system. At the low voltage distribution level ONE's sales represent only about 6% (1974: 138 GWh) of retail sales. Assuming normal expansion, ONE's distribution investments can be expected to be in the order of 20% of total country investment for distribution (see 3.03), provided allowance is made for relatively higher costs of such networks compared with costs in more densely populated urban areas. However, it is difficult to evaluate the adequacy of ONE's program because each Regie plans and executes its own distribution program independently and details of these individual programs are not available. In 1974 ONE's investment in distribution was probably about 25% of the combined investments of the Regies and ONE, which appears reasonable.

4.07 Expansion in rural areas is limited because of shortages of funds and organizational complexities. Responsibility for rural areas is divided among the Ministries of Public Works, Interior, and Agriculture and Agrarian Reform, with ONE acting as executing agency. A program is defined each year by a committee representing the various ministries and ONE, within the limits of approved budgetary allocations for rural electrification in each Ministry and a contribution by ONE of 4.5% of its revenues for the sale of electricity (set by law and representing ONE's part of the rural development plans for the year). Therefore, financial rather than technical considerations determine the expansion program and this makes planning uncertain for more than one year ahead.

4.08 In any event, the rural electrification program to date is of limited scope and impact; some 11% of all households in the rural areas have access to electricity (see 3.04). No improvement can be expected without considerably increased Government contributions.

4.09 Construction Program Costa: The costs of ONE's 1975-1980 development program shown in Table 4-1 would amount to about MDH 4,200, as follows: - 26 -

1975 1976 1977 1978 1979 1980 Total ------DH Million ------

Generation Hydro 21 98 199 355 496 562 1,731 Thermal 102 186 274 238 166 147 1,113 Sub-total 123 284 473 593 662 709 2,844

Transmission 68 86 101 141 174 305 875 Distribution 30 45 48 55 65 76 319 Various 21 27 24 30 40 54 196

Total 242 442 646 819 941 1,144 4,234

The above estimate includes a price contingencyof about MDH 1,200. This contingencytakes into account: (i) price ceiling contract conditions for works in execution, (ii) some provisionsfor increased costs already included in ONE's estimate (thermal plant), and (iii) for all remaining items, including those for which the contractual ceiling is in excess of the percentagesas- sumed for the above table. Price increases were compoundedat annual rates of 14% (1976), 12% (1977-79)and 10% (1980) for local costs, and of 10% (1976), 8% (1977-79)and 7% (1980) for foreign cost.

4.10 The composition of the constructionprogram and its cost have been revised to maintain a reasonablerelation between forecast maximum demand and installed capacity (see 4.04). The major increase in constructionwould be in generating plant constitutingsome 70% of the cost of the total program, transmission and distributionphysically progressing, until the end of the decade, in approximateaccordance with past development,increased annually in approximate accordancewith load growth. Because preparatorywork for generating plant is generally managed by consultants and each station is, or would be, executed under a single or a few contracts (consultantsproviding assistance for supervising execution)ONE should have no undue difficultiesin physically managing this large program. The main constrainton its execution is expected to be financial,largely dictated by the amount of Government contributions. No forecast with respect to these constraintsand possible further reduction in the program can be made at this stage beeause: (i) the definitionof the 1978-1982national plan is still in its initial stages, (ii) direct and indirect effects of the recent and possible future economic measures (e.g. reduction in fuel subsidies, increase in power rates) can not be assessed with any degree of certainty.

4.11 Economic Share of Costs of Dams: The above program does not include any share of the cost attributableto ONE for dams or diversion tunnelN which will be executed by Hydrauliqueboth for irrigationand power purposes. Since ONE's establishmentin 1963, new dams have been constructedand complet( for irrigationpurposes. ONE has only added power stations at a later date if generationwas shown to be economicallyfeasible on the basis of the cost of the power station alone. Most of these stations were found marginal at best - 27 - at pre-1974 fuel prices, and neither the Government nor ONE contemplated including a portion of the cost of these dams in ONE's assets.

4.12 During negotiations this issue was discussed and Goverument explained that it was the policy to utilize taxes on petroleum products to benefit the relevant sectors (e.g. taxes on petrol are used for roads). In the case of electric power, the proceeds of a 17% tax on fuel oil used by ONE are channelled to Hydraulique for use in constructing water resource projects. In this manner electricity consumers pay for a share in the cost of hydro facilities and therefore a further allocation of dam costs to ONE is not considered to be desirable as this would result in a measure of double charges to electricity consumers. While the policy is not unreasonable, it has not been possible to take account of this tax in the financial and economic forecasts because there is no specific legal basis or separate fund allocation (the taxes form part of Goverument's general revenues).

(b) The Project

4.13 Description: The Project, which will be constructed on the Oum er Rbia river not far from the main Casablanca-Marakech road (see the Main Power System Map at the end of this report) consists of the construction of:

(a) A concrete buttressed dam (volume about 340,000 m3) - to be called the Al Massira dam - with a crest elevation of 290 m above sea level, 66 m above the river bed (82 m above rock bed), crest 390 m long and 7 m wide. Four radial gates above the middle of the river bed, together with a ski-jump spoiler, constitute the spillway for 2,600 m3/s, backed-up by bottom outlets with 6 radial gates below it for 1,390 m3/s. Stop-log and vertical fixed roller gates are provided for maintenance and repair. Flood protection is against a 100 year flood which is considered sufficient in view of future upstream reservoirs.

(b) Two dikes aggregating 1,880 m in length and about 1.2 Mm3 in volume.

(c) A concrete power station at the foot of the dam, excavated in the right embankment, with 2 vertical Francis turbines (95- 126 m3/s) coupled to alternators 75 MVA, 50 Hz, cos0=0.85 and 10.5 kV. The tailrace canal, also to be excavated in the right embankment, would be 225 m long.

(d) Two transformers, 75 MVA, 10.5/225 kV, forced air cooled, which would be unit connected to the alternators, located on a plat- form over the tailrace canal immediately behind the power station.

(e) A substation, located on the right embankment, about 100 m downstream from the power station, line connected to the transformers, with a single busbar system with 5 bays (2 for alternators and 3 for outgoing lines). - 28 -

(f) Three transmission lines, fitting into a newly planned 225-kV triangle, respectively 110 km (Sidi Cheho--Tit Mellil), 50 km (Sidi Cheho-Benguerir) and 45 km (Sidi Cheho-Sidi Bennour) long. The end substations will be upgraded to 225 kV and incoming line bays added.

(g) Engineering services for Sidi Cheho, including further surveys, model testing and similar services, coordination of the final design of the Sidi Cheho dam and power station and assistance to Hydraulique and ONE for supervision of execution of the work at a total estimated (1975) cost of MDH 31 with a foreign component of about MUS$3.4 equivalent.

(h) Engineering services for surveys, preliminary design, preparation and issue of bid documents and assistance in evaluation of the bids, for the Merija compensating dam and power station downstream for Sidi Cheho at a total estimated (1975) cost of DH 8 m with a foreign component of about US$1.6 m.

4.14 The river basin above Sidi Cheho has an area of 28,500 km and the main data for river and reservoir to be formed are the following:

River

Average annual flow: 99.1 m3/s (3,126 Mm3/a) Minimum flow: 50 m3/s Ten year flood: 2,030 m3/s Hundred year flood: 3,900 m3/s Thousand year flood: 5,850 m3/s

Reservoir

Maximum area 180 km2 Normal area 155 km2

Maximum volume 3,250 Mm3 Normal volume 2,800 Mm3/a Evaporation 160 Mm3/a Live volume 2,160 Mm3 for power and 2,320 Mm3 for irrigation Reservoir silting 80 years for 600 Mm3 (without upstream regulation)

Generation 310 GWh/a (effective generation reducinR commensurate with decrease in down-stre a plant generation due to irrigation diversion and with upstream diversions) - 29 -

4.1, Background: Development of land and water resources of the Oum er Rbia Basin has been studied since 1926 and some 130,000 ha are irrigated in the basin. Studies for the Sidi Cheho dam and power station were initiated in 1938 primarily for power purposes and continued in 1948/49 and 1953/54, i.e. before ONE was created. The preliminary design comprised a concrete dam with a crest (and reservoir level) 10 m below the present design. The emphasis was shifted in the late sixties and early seventies to the design of a dam having irrigation as its main objective. Because of the dam's convenient location it would also serve to provide industrial and potable water for the coastal region, including Casablanca. The basin surveys were completed (ORSTOM-SOFRELEC of France) in 1971 and the final studies for the dam and power station, together with the design and bid decuments (by Alpinconsult of Switzerland) in June 1975. The crest was raised by 10 m to allow for maximum storage and practically full river regulation upon completion of the Dechra el Oued dam upstream of Sidi Cheho (presently in design) in order to maximize water availability.

4.16 Scarcity of water resources prompted the Governnent to prepare a "Water Resources Master Plan" for the basin with the objective of optimizing the water to the three main users (water supply, irrigation, power). The latest plan was completed in 1974/75 by SCET International of France with the assistance of the FAO/IBRD Cooperative Program, setting the main design parameters for the Dechra el Oued dam (given Sidi Cheho crest elevation) and out- lining optimized agricultural development on the basis of assuming priority ranking as follows: (1) potable and industrial water, (2) agriculture, and (3) power. The Bank has recently made a loan for the Doukkala irrigation project (Loan 1201-MOR; first phase, not dependent on Sidi Cheho) and intends to appraise a potable/industrial water project and a second phase Doukkala irrigation project in the near future. Both these latter projects would use water regulated by the Sidi Cheho dam.

4.17 Objectives: Together with the power Project discussed here, these Bank projects constitute a first step towards a more comprehensive multipurpose scheme having as the main objectives to: (a) optimize water use in the Oum er Rbia Basin to the extent practicable, (b) further strengthen the decision-making methods and procedures for the appropriate use of the country's water resources, (c) increase coordination between the various ministries and agencies (Public Works, Water Resources, Roads, Education, Public Health) for sound overall development of natural and human resources. Additionally, the proposed Project would have the objectives, (d) to formulate one comprehensive power sector policy, and (e) strengthen ONE's managerial capabilities.

4.18 Construction and Supervision Responsibilities: The dam (including hydro equipment and excavation for the power station) would be executed by Hydraulique on behalf of the Government, and the power station by ONE on its own behalf. Both Hydraulique and ONE would supervise their respective part of the Project. Project administration would be shared by ONE and Hydraulique. - 30 -

A similar arrangement functioned satisfactorily for the construction and supervision of two other similar projects financed by the Bank (Idriss I dam, Loan 643-MOR; Bou Regreg dam, Loan 850-MOR) and no major problems are expected.

4.19 Project Cost: The estimated cost of the Project is the following (see Table 4-2 for details, including the breakdown between ONE and Hydraulique): - 31 -

Local Foreign Total Local Foreign Total ------DH Million ---- US$ Million /1 ---

Project Cost

Land, indemnifications, roads, buildings 84 44 128 19.2 10.1 29.3 Dam and dikes 70 78 148 15.9 17.8 33.7 Equipment (incl. 23 159 182 5.3 36.3 41.6 Transmission) Taxes and duties 52 - 52 11.8 - 11.8

Subtotal Direct Cost 229 281 510 52.2 64.2 116.4

Engineering, Administra- tion 16 15 31 3.7 3.4 7.1 Studies 1 7 8 0.2 1.6 1.8

Subtotal Project Services 17 22 39 3.9 5.0 8.9

Contingencies Physical 27 28 55 6.1 6.4 12.5 Special risk 7 8 15 1.6 1.8 3.4 Price 57 56 113 13.1 12.8 25.9

Subtotal Contingencies 91 92 183 20.8 21.0 41.8

Total Project Cost 337 395 732 76.9 90.2 167.1

Breakdown ONE: Direct Cost 56 157 213 12.8 35.8 48.6 Project Services il 3 14 2.5 0.7 3.2 Contingencies 29 34 63 6.6 7.8 14.4

Total 96 194 290 21.9 44.3 66.2

Hydraulique: Direct Cost 173 124 297 39.4 28.4 67.8 Project Services 6 19 25 1.4 4.3 5.7 Contingencies 62 58 120 14.2 13.2 27.4

Total 241 201 442 55.0 45.9 100.9

/L Discrepancies due to roundings. - 32 -

4.20 The estîmates are based on: (a) the civil works contract for the dam already awarded to Campenon-Bernard of France, (b) the contract price for the hydromechanical equipment contract with Bouchayer, Viallet, Scheider of France and (c) the draft of the contract for the power station with Brown Boveri of Germany, and (d) Hydraulique's and ONE's estimates of indirect foreign exchange costs (about DH 120 m) for materials of which Morocco is a net importer such as cement, construction steel, reinforcing steel and fuel, and (e) a number of smaller contracts awarded after local bidding for roads and housing, and contracts for surveys (seismic) and services (power connection, telephone connection, laboratory work). When preparing their respective investment program neither Hydraulique nor ONE make consistent allowances for future price rises, except in incidental cases, or the low 5%/a apparently indicated by the Secretariat for the National Plan for the current Plan. Be- cause the civil works contract and the contract for hydro machanical equipment allow a ceiling of 14%/a on price increases which would probably exceed actual inflationary trends, a lower price contingency was assumed for these items, compounded at the annual rates assumed for the overall investment program, i.e. 14% (1976), 12% (1977-79) and 10% (1980) for local costs, and of 10% (1976), 8% (1977-79) and 7% (1980) for direct foreign expenditures under the contracts (i.e. it has been assumed that indirect foreign cost would follow the local inflationary trends). The contract for the power station has total price ceilings for each of the currencies involved, which have been included.

4.21 Physical contingencies of 7% for hydro mechanical equipment, 5% for the power station and 10% for transmission have been assumed. For civil works and local cost a physical contingency of 15% has been assumed. A special risks allowance of 10% of the base cost of the dam has been assumed in view of further measures that may be required to reinforce buttresses or the dam's base (see 4.26).

4.22 The ultimate cost of the 120 MW power station alone is estimated to be about MDH 230 (MUS$53) or US$440/kW (US$400/kW excluding taxes and duties). This appears reasonable for the relatively small hydro plant.

4.23 Project Financing Plan: The Project cost is expected to be financed as follows:

US$ Million DH Million Equivalent %

Proposed Bank Loan 215 49.0 29 Co-financing 180 41.2 25 Budget Allocations to Hydraulique 241 55.0 33 ONE's Internal Resources and Government Contributions 96 21.9 732 167.1 1.00

A Bank loan of MUS$49 is proposed. Of this, MUS$43.7 would be onlent to ONE to cover 90% of the cost of the power station and 60% of the cost of the 33 - transmission facilities (representing the estimated foreign cost of these works), and the foreign exchange cost of consulting services. The remaining MUS$5.3 would be allocated to Hydraulique to cover the foreign exchange cost of consulting services. A cofinancing loan of MUS$41.2 has been assumed to cover the remaining direct foreign exchange cost of the civil works for the dam (MUS$7.3), the hydro mechanical equipment (MUS$6.9), and the estimated indirect foreign exchange cost (MUS$27.0) of materials of which Morocco is a net importer (mainly cement, steel and fuel).

4.24 Engineering and Supervision: Alpinconsult of Switzerland will continue to be consulting engineers for the Sidi Cheho dam under an existing contract acceptable to the Bank. Under a recent contract, acceptable to the Bank, it will also make available to Hydraulique special staff to assist Hydraulique in supervising the execution of works. This firm has executed most of the surveys and the final study, design and bid documents for all of the Sidi Cheho facilities. ONE, on terms and conditions acceptable to the Bank will obtain the services of an expert from Electricite de France (EdF) for assistance in supervising execution of the power station and such services as may be required for particular tasks (factory testing and similar).

4.25 Merija Hydro Plant,Study: The proposed loan would finance the foreign exchange cost of consulting services, up to the award of the construction contract, for the Merija hydro power station downstream of Sidi Cheho. Con- sultants (Garbe Lahmeyer of Germany) have been engaged by Hydraulique and ONE under two separate but technically coordinated contracts acceptable to the Bank.

4.26 Dam Design and Inspection: Although dam design is meticulous, the Bank has expressed its concern with the design of the quartzite (metamorphosed sandstone) abutments upon which the dam will rest, since they are proposed to be formed as relatively high steps (up to 13 m). The rock under the dam is expected not to be solid but to consist of a mass of close-fitting blocks w*ith individual volume of one to several m3, and fragmented randomly, which may be of some concern under a buttress type of dam. The designers have recognized this problem and are contemplating remedial action if the foundations are found to be unsatisfactory in certain areas. Although Hydraulique con- templates measures to be taken for reinforcing lateral support of the abutments, no estimate of these costs bas been provided. For this reason a special contingency of about 10% of the basic cost of the dam has been included in the estimates for special risks, equivalent to MUS$1.6, each for local and foreign costs. This provision, however, would not be financed by the loan which - with respect to the dam - would only finance consulting services (see 4.23).

4.27 The dam design provides for satisfactory instrumentation for continuously monitoring its soundness and therefore no special provisions are required in this respect, and the hydroworks will be inspected regularly by Hydraulique in accordance with sound engineering practices. - 34 -

4.28 Implementation: The main contract for the dam was awarded in October 1975 with Bank concurrence and as of May 1976 the excauvation for the dam (except under the river) and dikes was almost completed. The contract for hydro mechanical equipment was awarded in March 1976, and for the power station (to be financed by the proposed loan), with Bank concurrence, in April 1976. The preliminary work schedule is shown on the next page. In order to schedule construction phases in accordance with the seasons and to avoid a delay of one year, contracting before loan approval was required and justified. Consequently all contract (including consulting contracts) have been awarded with Bank approval, except for transmission, covering about 90% of the proposed loan and retroactive financing is proposed not exceeding MUS$5 to cover payments made under the contract for the power station and for consulting services since October 1975.

4.29 Procurement: Procurement of goods and services under the proposed loan is being done in accordance with the Bank's Guidelines. However, Bank procedures have not been applied by Hydraulique as far as the public bid opening is concerned for the dam (which, however, would not be financed by the proposed Bank loan) because it followed the official procedures of MTPC where- by all bids are opened in the presence of a statutory bid analysis commission. This procedure provides satisfactory safeguards against post-opening changes in the substance of the bids. However, during negotiations the Government has indicated that it will inform its agencies to have no objection to future public opening of bids. ONE's procurement procedures are in accordance with the Guidelines since, including public bid opening.

4.30 The proceeds of the proposed loan would finance the estimated direct and indirect foreign cost of construction and supply contracts (see 4.31) awarded on the basis of international competitive bidding consistent with Bank Guidelines, and consulting services. A preference of 15% or applicable duties, whichever is the lesser, would be granted to Moroccan manufacturers who participate. Because Moroccan industry does not manufacture the larger equipment required for the Project (the main contracts have been awarded to foreign contractors), the Moroccan paticipation is expected to be modest (less than 10% of the Project cost), mainly confined to small local contracts not appropriate or significant enough for interaational bidding. Because material and some equipment for transmission lines and substations are manufactured in Morocco, local industry is expected to participate in the bidding for these items and win part if not all of the contracts.

4.31 Disbursements: The expected disbursements from the proposed loan would be the following, assuming that the date of effecti,eness would be January 1, 1977: CONSTRIUTION SCHEDULE

1980 1975 1976 1977 1978 1979

x . x... I . t

Dsm (Hydraulique) tngagenent Consoltnnts . _ Prelisinary Design ____ Final DesignSu o r I It

Award Civil Wo-k Contract * Excavation DBc Con-reting DBo E..cavtion5 D_kBites Dikes Construction r It.

Equipent Contract Award, End Of Guarantee Period |

Erection Powe. Station G.te- s-d Conduits

Excavationes fo Po-er Station

Power Station

Engagement Consultants: Preliminary Design Final Design, Supervision Studies: ierija (Hydralique/NiB_

Award Powe- Station Cont-aot, * End of Guarantee Period Building and Concreting Ekction cf Equil.ent _

Lines Contr-ot Anard | Ereotion I -

Substations Contract As-ard r I

,/ Gverlap, Consultants continue aork under existing contract tiat allows foc edditional -ukerv4icncvi.

June 3, 1976 - 36 -

Disbursements from Proposed Loan Cumulative Undisbursed US$ l16 % Bank Fiscal Year and Quarter

1977 March 31, 1977 9.0 84 June 30, 1977 10.0 80 1978 September 30, 1977 11.0 78 Decenber 31, 1977 12.5 75 March 31, 1978 15.0 70 June 30, 1978 19.0 62 1979 September 31, 1978 24.0 52 December 31, 1978 27.5 45 March 31, 1979 32.0 36 June 30, 1979 35.5 29 1980 September 31, 1979 39.0 22 December 31, 1979 43.0 14 March 31, 1980 46.5 7 June 30, 1980 47.0 4 1981 September 30, 1980 47.5 3 December 31, 1980 49.0

Funds from the loan account would be disbursed against:

(i) Power Station: 100% of foreign expenditures for equipment, civil work and associated services and 50% of local expenditures (the total would cover 90% of total expenditures, representing the estimated foreign exchange content).

(ii) Transmission: 100% of foreign expenditures or of local expenditures for ex-factory price of equipment procured locally for equipment and material, and 20% of local expenditures for civil works and erection (the total would cover 60% of total expenditures, representing the estimated foreign exchange content).

(iii) Consulting Services: 100% of foreign expenditures.

4.32 Hydraulique and ONE would separately take all actions required for withdrawing funds from the loan account. The Project would be completed by the end of 1979 and final payments of retention monies would be made after the 12 month guarantee period. In order to allow for some delays, the closing date would be December 31, 1981. Should the foreign exchange cost to complete the Project be less than estimated, any undisbursed amount of the proposed loan would be reallocated to consultant services for the next stage of development or, if not required for the purpose, the undisbursed amount would be cancelled at the closing date. - 37 -

4.33 Operation of the Sidi Cheho Hydro Works: Sidi Cheho's operating regime will mainly depend on the requirements for irrigation and potable water which, at this stage, are not yet defined because they depend to a large extent on the actual downstream irrigation development and, to a lesser extent, on potable water requirements in the coastal area. In the case of a jointly operated dam, Hydraulique and ONE enter into an agreement which assigns the normal day-to-day operation to ONE (the hydro facilities will be operated from the power station), inspection and maintenance of the dam facilities, and regulates all other aspects of lesser importance. Prior to commissioning of the works a similar agreement will be signed for the Sidi Cheho facilities and the Government will cause its agencies interested in the use of the water from the dam to agree with Hydraulique on the rule curves for the management of the waters (waters belong to the public domain and are administered by this Ministry, which may transfer its power to other agencies such as the Office Regional de Mise en Valeur Agricole des Doukkala).

4.34 Environmental and Resettlement: A maximum of 180 km2 of land (150 km2 under normal conditions) will be flooded of which only 1 km2 is irrigated, 29 km2 is rainfed and 150 km2 is grazing land. The net value of the crop, mainly wheat and barley amounting to an average of 2,900 t/a, is estimated at MDH 1.4/a. The total number of persons to be displaced would be about 5,500 most of which are subsistence level farmers (ownership is 95% collective and 5% private). Except for some larger houses, no assets of importance are located in the area and no archeological sites are known. Social conditions are generally poor. Moroccan law provides that owners of land and assets will be fully compensated. The compensations are set by an independent commission to be appointed shortly (the detailed survey is almost completed), comprising members selected from various ministries and local Government agencies. Dis- cussions are already underway between Hydraulique and the Ministry of the Interior for providing compensations in the form of a settlement elsewhere in the country rather than exclusive cash payments. The total amount required for compensations is expected to be about MDH 50, or about MDH 10,000 per capita, which appears reasonable, and no difficulties in this respect, or project delays, are expected.

4.35 Areas on the upper Oum er Rbia River are heavily infested with bilharzia and under the Doukkala irrigation Project (Loan 1122-MOR) an as- surance has been obtained for continued monitoring of bilharzia in the project area by the Ministry of Public Health. Although there appears to be only a small possibility that bilharzia would be endemic to Sidi Cheho reservoir (its area would annually vary by a factor of 3 and storage by a factor of 4.5 compared with the minimums), monitoring is considered essential. The Ministry of Public Health will extend its bilharzia monitoring program to include the Sidi Cheho reservoir and would take immediate action to control the vector or bilharzia should they be discovered in this area. - 38 -

TABLE 4-1

DEVELOPfENTPROGOAM COST 1975-1980

Work i Progress Beyond Total Total 1974 1975 1976 1977 1978 1979 1980 1980 1975-1980 Cost ------Million DH_-______A. Basic Costs

Hydro Stations Mousour Addabbi (1974) 30.0 1.0 1.0 31.0 Moxlay Youssouf (1974) 43.0 2.2 2.2 45.2 Idriss I 80. 34.0 43.0 13.0 7.0 105.0 105.0 Oued el Makbazine 5.0 19.0 26.0 33.0 7.0 90.0 90.0 Sidi Cheho Power Station 2.5 19.0 37.0 67.0 53.0 7.5 186.0 186.0 MNerija 0.5 2.5 5.0 10.0 22.0 35.0 25.0 75.0 100.0 D,echra el Oued 0.5 10.0 45.4 56.8 32.3 25.0 145.0 170.0 Ait Chouarit 0.5 0.5 8.6 18.3 27.4 69.7 55.3 125.0 M'Dez o.6 1.1 7.6 13.8 27.6 36.8 37.5 87.5 125.0 El Menzel 0.2 1.7 2.1 14.8 36.9 64.5 139.8 120.2 260.0 MatAatma 0.5 1.8 2.7 17.0 45.0 51.0 47.0 118.0 165.0 M' Jara 0.5 9.5 13.8 22.9 64.2 139.1 110.9 250.0 Total Hydro Stations 73.0 20.5 80.6 143.4 236.4 296.5 318.7 483.1 1,096.1 1,652.2

Steam Plant (Eacalated) Jarada 314.7 8.3 4.0 12.3 327.0 Roches Noires III 58.0 42.4 6.o 48.4 106.4 Kenitra I-IV 1.5 24.4 106.o 235.0 220.0 125.0 6e.o 28.1 770.4 800.0 Mohamsedia I, IT 0.7 4.3 7.0 23.0 30.0 55.0 95.0 385.0 214.3 600.0 Total stears Plant 374.9 79.4 123.0 258.0 250.0 180.o 155.0 413.1 1,045.4 1,833.4

Gasturbine Plant (Escalated) Tanger I, Agadir I 30.4 2.1 5.5 7.6 38.0 Tetouan T, II, Tanger II, Agadir II _ 23.0 70.0 37.0 10.0 140.0 i4o.0 Total Gasturbine Plant 30.4 25.1 75.5 37.0 10.0 147.6 178.0

Transmission 225,150 and 60 kV 154.8 69.6 72.6 7 100.0 11o0.0 120.0 270.0 550.2 975.0

Distribution Urban 10.0 21.9 20.0 22.0 25.0 17.0 115.9 115.9 Bural 13.0 15.0 16.0 17.5 20.0 21.0 102.5 102.5 Total Distribution 23.0 36.9 36.0 39.5 4s.o 38.0 218.4 218.4

Various 20.9 20.6 27.1 22.0 25.0 30.0 35.0 159.7 180.6

Sussary Generation 478.3 125.0 1,279.1 438.4 496.4 476.5 473.7 2,289.1 3,663.7 Transoiosion 194.8 69.6 72.6 78.0 100.0 110.0 120.0 270.0 550.2 975,0 Distribution 23.0 36.9 36.o 39.5 45.o 38.0 - 218.4 218.4 Various 20.9 20.6 27.1 22.0 25.0 30.0 35.0 - 159.7 180.6

Total Construction Program (Unescalated) 654.o 238.2 415.7 574.4 660.9 661.5 666.7 1,166.2 3,207.4 5,037.2

B. Amount of Escalation (1975-80) 9.8 54.3 106.6 209.1 329.5 538.3 1,244.6

Total Construction Program 1975-80 (Escalated) 246.0 467 681.o .87.0 991.0 1,2,05.0 4,462.o Deduction of Tax on Worke 4.o 25.0 35.0 50.0 50.0 60.o 224.0 'otal Program Cost Estinate 244.o 442.0 646.o 820.0 941.0 1,145.0 4,238.0

Note Escalated Cost for 1975-1980 of the Various Facilities are the Foflowing:

Generation 21t0 98.0 199.0 356.0 496.o 563.0 1,733.0 B,ydro 103.0 186.0 274.0 238.0 366.o 147.0 1,i14. Sbtotal 124.0 284.o 473.0 594.0 662.0 709.0 2,847.0

Trmnamission 69.o 86.o 101.0 141.0 174.0 305.0 876.o Distribution 30.0o 5.0 48.0 55.0 65.0 76.o 319.0 Various 21.0 27.0 24.o 30.0 40.0 54.o 196.o Total 244.o 442.o 646.o 820.0 941.o 1,144.o 4,238.0

ON1E'sContractors bave recently been exonerated from the payment of these taxes.

June 4, 1976 - 39 - TABIE 4-2 PRW08ETCOST ESTIMI8TE

------Dirbes 1,000,000 ------1T6$1,000,000 ------ONE Hydraulique Total ONE Hydraulique Total ______-_------F O R E I G N C O S T ------

Das and PUwer Station

Lend, Indemnificatione - - - - - Infrastructure (Roaud, Buildings, Services) 28 i6 44 6.4 3.7 10.1 Dues and Dikes - 78 78 - 17.8 17.8 Hydro ean the ical Bquipsent - 30 30 _ 6.9 6.9 Eleetrical Equipuent 107 - 107 24.4 - 24,4 Subtotal 3 ;129 259 30 1279 59.2

Tranemission

1ines 19 - 19 4.3 - 4.3 SusutationS 3 - 0.7 - 0.7 Subtotal 22 - 22 5.0 - 5.0

Taxes and Duties - - - - Total Direct Cout 157 124 281 35.8 28,4 64.2 Procct Services

Engineering, Administration 2 13 15 0;4 3.0 3.4 Studios 1 6 7 0.3 1.3 1.6 3 19 22 0.7 4 3 5-0 Conti gencies

hyzieeal I/ 12 16 28 2.8 3.b 6.4 Special Risks /- 8 8 - 1.8 1.8 InecialBluta 3/ 22 34 56 5.0 7.8 12.8 34 r3 n T. or! 21.O

Total Foreign (est 194 201 395 44.9 45.9 -90.2

______T. O C A C 00 S T0------______

Daemand Pwe,r Station

Land, Indemnifications - 50 50 - 11.4 11.4 Roudu, Buildings, Services 20 14 34 4.6 3.2 7.8 Duo ean Dikes - 70 70 - 15.9 15.9 Hydreand Mechanical Equipnent - 9 9 - 2.1 2.1 Electrical Equipuent . - _ Subtotal 20 143 163 4.6 32.6 37.2 Trs.nsetusios,

Lines ]3 - 13 3.0 - 3.0 Substations 1 - i 0.2 -. 2 Subtotal 14 - 14 3.2 - 3.2

Taxes and Duties 22 30 52 5,0 6.8 11.8 Total Direct Cost 56 173 229 12.8 39.4 52.2 Project Services

Engineering, Adreinistratlon 11 5 16 2.5 1.2 3.7 Stouies - i - 0.2 0.2 Il 6 17 2.5 1.4 3.9 Contingencies

Physical I/ 10 17 27 2.3 3.8 6.1 S3)ecial Risk #/- 7 7 - 1.6 1.6 Prce B,s 19 38 57 4.3 8.8 13.1 29 62 91 6.6 14.2 20.8

Total Local Cest 96 241 337 21.9 55.0 76.9

Total Project Coet OCE Hydraulique Total (NE Hydraulique Total

Foreign 194 201 395 44.3 45.9 90.2 Local 96 241 337 21.9 55.0 76.9 Total 7442 732 66.2 100.9 167.1

3/ Physical Contingency: 157 oe local crc tdirect foreign cost (Suctxeclodig land, and infrastrueture largely complets), 72. ef foreign cot.

3, Special 81ick: 10% of dae buse cout

3/ Price Cuntitgeney: a. Dam Cupounded at annuel rates of: lqt76 1977-79 180 Foreign 4F 8122 % Local 147% 12% 10% b. Pouer StOtiot: Contract price ceilisgs

May 26, 1976 - 40 -

5. FINANCE 1/

(a) Background

5.01 As with many other public utilities, ONE's financial situation and outlook is dominated by a need for capital and operating funds that is inereasing much faster than physical output. World-wide increases in construction and material cost and the demands of a major industrial expansion program have caused large increases in the cost of the construction program. Recently, increases in fuel consumption due to below-average hydro generation and local inflation have pushed up operating costs. This situation has been further aggravated by the increase in the cost of imported oil (through reduction of subsidies). The additional capital funds required have been provided by Government--mostly in the form of equity--so the investment program has co.tinued, and ONE still has a very conservative capital structure. This has enabled ONE to generate a reasonable proportion of funds from internal sources in spite of very low rates of return. Government's response to increasing operating costs has been less effective; rate increases have been small and late, and this has caused low returns. As a result, ONE has not complied with agreements reached in the first loan with respect to rates of return. ONE's future finances depend on better financial management, more prompt and systematic tariff adjustments to meet both financial and economic objectives, finding large additional (over and above the proposed Bank loan) sources of foreign exchange financing, and continued provision of capital from Governnent. Appropriate agreements regarding these matters have been reached with ONE and Government.

(b) Past Performance

5.02 Operating Results: ONE's financial position, which was stable in 1973 and 1974, deteriorated sharply in 1975, although the sales growth (GWh) increased from 6.8% in 1973 to about 8.3% in 1975. Revenues from the sale of electricity, which had increased by 12.5% in 1973 and 13.8% in 1974 (operating expenses, however, increased in 1974 by 20.5%) would only increase by 9.5% in 1975 (against 24% for operating expenses). In 1973 and 1974 the net operating income was high enough to cover interest on debt. In 1975 ONE's operating income was not sufficient even to cover the interest on debt.

5.03 A long delayed salary increase (about 16%) which occurred in 1974 contributed to the deterioration of the situation, although the staff remained almost the same in 1974 and 1975 (about 4,370). As a result labor

1/ The section covers only the financial performance of ONE. Hydraulique, the second beneficiary, is a government department which is responsible only for administration of construction of the dam, a task which it is competent to perform. Since it has no revenue earning function, a financial analysis would serve no purpose. - 41 - costs increased by 26% in 1974 (about 6% in 1973 and 1975). The 1975 situation was further worsened by the cost of fuel for thermal generation which was required to compensate for reductions in hydro generation due to an extremely dry year.

5.04 Taxes and Duties: ONE is liable for all regular taxes and duties such as income tax, sales tax, tax on service charges, and import duties. Income tax ranges from 40%-50% of net income after interest on debt and the allocation to rural electrification of 4.5% of revenue for the sales of electricity. During negotiations the Government agreed that for income tax purposes ONE's contributions to the self-insurance reserve (see 5.22) would be charged against surplus.

5.05 ONE is liable for sales tax at 6.38% of energy sales, chargeable to consumers, which is offset in a complicated way against the tax on construction charged to ONE by its contractors. The regulation has recently been changed in order to reduce the amount of the construction tax. About DH 15 million of construction tax paid by ONE for 1974/75 in excess of the new regulation will be refunded.

5.06 Tax on service charges is 7.5%. Import duties range from 10 to 45% for the equipment and material imported by ONE. In 1974 the company paid about DH 10 million in duties at an average rate of about 34%.

5.07 ONE's social security plan, which has been inherited from the previous owners, includes free medical treatment, retirement provisions, and dependency allowances. In 1974 the total cost amounted to about DH 15 million or about 20% of gross wages and salaries. This percentage is about the same as for the other companies in North Africa.

5.08 In 1973 and 1974, ONE transferred to capital about 7% of its over- head expenses. This was critized by the auditor as not sufficiently explained; however, the charge seems in line with practices accepted in European Power Companies and no change is proposed.

5.09 Rate of Return: Under the covenant in Loan 936-MOR ONE was sup- posed to attain a rate of return of 3.0% in 1974 increasing progressively to 7% in 1981. This rather low target is considered acceptable because of pricing policies in the sector which allow the Regies to self finance 100% of their network expansion (see 1.17).

5.10 In practice, ONE reached only about a 2% rate of return in 1973 and 1974; the return is expected to be nil in 1975.

5.11 Income Statements for 1973, 1974 and 1975, along with forecasts until 1980, are shown in table 5-2 . A summary is in para. 5.32.

5.12 Receivables. The receivables situation deteriorated from 1971 to 1974, but has improved somewhat since then. Total receivables increased from - 42 -

66 days of sales at the end of 1971 to 93 days at the end of 1974. Total receivables due ONE on account of electricity sales and services provided by ONE amounted to DH 90 million at the end of 1974. The situation as of December 31, 1974 was:

Equivalent Days DH Million Average Sales

Sales to Regies 32 71 Sales to Government Agencies 23 195 Sales to Other Consumers 21 87 Service Charges (all consumers) 18 Refundable taxes 16 Others (mainly suspense accounts) 10 116

5.13 The situation in respect of receivables due ONE from the Government also deteriorated from 1971 to 1974, but has improved since then. The Govern- ment did not meet its undertaking under Loan 936-MOR to ensure that all bills payable by its agencies for sales of electricity and connection services should be settled within 90 days. By March, 1976, bills from Government agencies outstanding for more than 90 days amounted to about DH 45 million, equivalent to 70 days of sales. However these amounts were concentrated in a few Government agencies, and some of them (in excess of DH 10 million) were the subject of dispute with ONE and may eventually be determined as not in arrears. More- over, the average delay in payment of electricity bills, while on the high side, has been declining. Bills outstanding for sales of power by ONE to Government agencies amounted to 96 days of sales at the end of 1974 and declined to 69 days by March 1976.

5.14 Until 1974, payment to ONE for connection charges and expansion of facilities had been slow because most of the Regies and some smaller municipalities disputed the charge, claiming that ONE's rates already cover these expenses. The dispute arose because ONE's Cahier des charges specifies only that "consumers" should be liable for such expansion charges. However a procedure to deal with this matter was agreed upon by the parties concerned in mid-1974, generally in favor of ONE, and the situation has improved; arrears due by Regies on account of connection charges are now unimportant.

5.15 Before and during appraisal and negotiations, the arrears situation was reviewed with the Government. It was agreed that the objective of an undertaking to limit arrears was to protect ONE's financial performance rather than monitor the payment performance of individual Government agencies. Ac- cordingly it was agreed that the 90-day limit on the payment of arrears included under Loan 936-MOR should be replaced by an undertaking that payments due to ONE by Government agencies (including the Regies) on account of electricity sales and connection charges should be kept below one-sixth of such sales during ONE's previous fiscal year. The Government has informed the Bank that funds have been released, and are in the process of payment to ONE to bring arrears below the sixty day level. - 43 -

5.16 The Government has recently taken measures which should lead to further reductions in arrears in future. The Prime Minister has recently issued an instruction to ministries instituting a new procedure for making budget allocations for electricity and water purchases. Under the new procedure (i) a new, separate entry has been created in the budget of all ministries and Government departments for purchasing electricity and water, thus preventing reallocation to other uses and (ii) budget allocations in any year would be based on bills paid in the preceding year.

5.17 Inventories: Materials in stock are high; about three years of requirements. This is partly due to cumbersome procurement procedures which leads to overstocking. Although some improvements are expected, the absolute level of inventories is likely to remain high for several years in view of ONE's large development program. ONE has initiated computerized procedures to monitor and take account of stocks and this is expected to reduce overstocking.

5.18 Valuation of Assets: At the end of 1974 the gross fixed assets in operation amounted to DH 2,465 million and the depreciation reserve to DH 1,118 million, or 45% of gross assets. However, ONE has not revalued its assets since 1971, and at the end of 1975 the undervaluation was estimated to be about 28%. According to the Government, under Moroccan law a revaluation of ONE's assets would raise fiscal problems which cannot be settled immediately. The matter is under study and will be reviewed in connection with the Bank's supervision of the Project. For purposes of this report, a revaluation as of 1975 has been assumed, using indexes approximating the present value of assets ranging from 1 in 1975 to 1.5 for 1970. In view of the cash generation form of earnings covenant which has been agreed (para 5.28) this approach is satisfactory. Depreciation rates, for which the straight line method is used and which are based on the expected life of assets, are satisfactory (para 5.31).

5.19 ONE's fixed assets include the cost of hydro projects built before independence but do not include any share of the cost of multi-purpose dams built after independence (see 4.11). Under the circumstances this is acceptable, but if circumstances change the matter should be reconsidered.

5.20 ONE's capital structure was as follows in 1973-1975:

1973 1974 1975 Assets (in DH millions) - Fixed assets (net value including work in progress) 1,371 1,531 1,688 - Current assets (net) 47 61 63

1,418 1,592 1,751 Liabilities - Equity 1,111 1,236 1,332 - Debt 257 294 345 - Other 50 62 74

1,418 1,592 1,751 Debt-equity ratio 19/81 19/81 20/80 - 44 -

Equity comprised 1973 1974 1975 MDH % MDH % MDH %

- Government equity 1,005 90.5 1,098 88.8 1,186 89.0 - Consumers contributions 26 2.3 41 3.4 58 4.4 - ONE surplus and other 80 7.2 97 7.8 88 6.6

1,111 100 1,236 100 1,332 100

In December 1974 the debt included:

MDH %

Foreign loans IBRD Loan 936-MOR 28 9.5 Other 63 21.4

Sub-total 91 30.9

Foreign suppliers credits 56 19.1

Local loans 147 50

294 100

Details on terms and conditions of these loans are in table 5-4.

5.21 Cash Flow: In 1974 ONE's net available surplus after paying debt service and taxes amounted to DH 54 million covering 22.6% of the DH 239 million annual construction program. In 1975 it represented only 15.6%. The following table summarizes the situation:

Program Program 1974 Coverage 1975 Coverage MDH % MDH %

Internal cash generation 111 94 Less debt service (57) (56) Net internal cash generation 54 22.6 38 15.6 Government contributions 96 93 Consumers contributions 15 17 Contributions 111 46.4 110 45.1 Borrowing 76 31.8 87 35.6 Working capital and other (2) (0.8) 9 3.7

Construction Program 239 100 244 100 - 45 -

5.22 Insurance: For several years, since terminating coverage with commercial insurers, ONE's assets have not been insured against risks such as fire, explosion, and natural calamities since ONE considers itself to be self-insured. In respect of this, ONE will in each year take a deduction against surplus to be allocated to an insurance reserve. The Bank has informed ONE that, in accordance with sound practice such deduction should be not less than the premium which would otherwise be paid to reputable insurers for covering such risks.

5.23 Financial Management Problems: Under Loan 936-MOR, ONE was to ap- point a senior financial officer to supervise both the budgeting and the accounting departments. Although there was considerable delay because ONE was unable to locate a competent candidate who was willing to serve at the salaries which ONE could offer under the civil service regulations, ONE has now appointed the chief of the accounting department to head the single financial department which will be created following completion of a study of the reorganization of its financial departments and accounting procedures, particularly budgeting and budget control. ONE has agreed to exchange views with the Bank on the results of the study, and to implement the final proposals by June 30, 1977.

5.24 Accounting: ONE's accounting systems and procedures, which were revised in 1971, are generally satisfactory. A French-style cost accounting system which was to have been implemented in 1973 has been abandoned. This appears a wise decision because, for some time to come, such a sophisticated system would be beyond the skill of the average accounting staff and unnecessarily time consuming. ONE has no facilities for training its accounting staff, except "on-the-job". It is expected that the reorganizational study will address this problem with the objective of instituting suitable accounting and administrative training compatible with the technical training of other staff.

5.25 Budgeting: Budgeting procedures are elementary and because of the lack of coordination between the budgeting division and the accounting department, it is difficult to reconcile estimates and results. No improvement can be expected, however, before a reorganization of the financial department has been achieved.

5.26 Audit: There are no requirements for Government audit of ONE's accounts but some control is exercised by the Minister of Finance through two employees of the Ministry (a "Controleur Financier" based in Rabat, and an "Agent Comptable" working in ONE's offices in Casablanca) who are responsible for the authorization of all of ONE's transactions. This type of pre facto control unnecessarily restricts the speed of ONE's growing operations and in practice materially reduces its autonomy. Under the first power project ONE agreed to have its accounts and financial statements audited by independent auditors acceptable to the Bank, and this undertaking would be extended to the proposed loan. - 46 -

5.27 ONE's future financial situation will be dominated by its need for capital to meet the requirements of its expansion program while maintaining a sound financial position. The various undertakings agreed in connection with the proposed loan are intended to assure this.

5.28 Rate of Return: During negotiations Government and ONE requested that the rate of return form of earnings covenant agreed under Loan 936-MOR be replaced with a cash generation or program coverage form of covenant, since such a covenant would be more in keeping with Moroccan financing objectives and ONE's need for expansion capital in particular. This is acceptable. ONE therefore has agreed to take all necessary measures to produce in each fiscal year starting with 1977 a program coverage of at least 18%, rising to 20% in 1980 and thereafter. In order to compensate partially for year-to-year variations in operating expenses arising from changes in the availability of hydro energy, and to measure the performance against the average of several years' capital needs, the program coverage ratio would be calculated using the average of the internal sources for the preceding year and the year in question, and the average of the capital expenditure in those two years and the next following year.

5.29 In order to monitor performance under this covenant, before October 31 of each year ONE will prepare a review, satisfactory to the Government, of the adequacy of its tariffs for the next year and will furnish the Bank with a copy of the review. For 1977 ONE will carry out the measures to be taken, before January 1, 1977. Because the Governnent intends to gradually remove, in about 2-3 years time, the remaining subsidies on petroleum products, its concern with inflationary tendencies appears warranted and the Bank has agreed that the rate increase required for 1977 would not exceed 10%, over and above any requirements to cover increases in fuel prices above the January 1, 1976 level (such increases would be passed on automatically to the consumers - para 5.33). Because of the operation of the averaging feature, this limita- tion would have no significant effect on ONE's financial performance over the 1976-80 period. Furthermore, the Government has agreed to formulate by June 30, 1977, recommendations, on the basis of proposals by ONE, for the adoption of an appropriate tariff structure. It wil exchange views with the Bank of the progress being made and on the proposals being developed.

5.30 In order to meet the program coverage ratio requirement agreed upon during negotiations it has been assumed that rates would increase by an average of 10% in 1977, 8% in 1978, 12% in 1979 and 15% in 1980.

5.31 The 1976 and following years' depreciation charges have been calculated on a revalued basis. Depreciation rates, for which the szra ght line method is used, are based on the expected life of assets and are r - sonable. This life is 50 years for civil works, buildings, dams and res,r- voirs, 30 and 35 years for mechanical and electrical equipment, 25 years for transformers, and 20 and 30 years for transmission and distribution lines. - 47 -

5.32 Income Statements: As shown in Table 5-2 sales would increase from 2,372 GWh in 1974 to 4,430 GWh in 1980, i.e. at an average rate of about 11%. The average sales price of DH 0.125/kWh in 1974 would rise to DH 0.235/kWh by 1980 (average increase 11%/a). Revenues and expenses and several performance indicators are summarized as follows:

Average 1974 1.975 1976 1977 1978 1979 1980 Growth ------DR million…------

Revenues 314 346 461 573 698 842 1070 22

Operating Expenses Personnel 90 95 105 114 125 137 151 9 Fuel 68 110 147 165 179 194 195 19 Taxes 25 29 37 45 54 64 78 21 Depreciation 84 89 137 147 164 189 216 17 Other 35 36 42 51 63 76 89 17 Transfer to Capital (15) (18) (19) (21) (21) (21) (22) 7

Total (287) (341) (449) (501) (564) (639) (707) 16

Net Revenues 27 5 12 72 134 203 363 - Interest charged to operation (14) (15) (19) (22) (32) (44) (52) 25 Net Surplus 13 (10) (7) 50 102 159 311 -

Operating Ratio (%) 91 99 97 89 81 76 65 - Return (%) 2.1 - 0.6 2.7 3.9 4.9 6.8 - Interest Coverage by Net Revenues (excluding interest 1.9 0.3 0.6 3.9 4.2 4.6 7.0 during construction)

Total operating revenues would grow at about 22%/a, compared with 16% for expenses, including depreciation. Particularly striking is the increase in fuel costs, which would level off only with the coming into operation of new hydro plants, including Sidi Cheho. Depreciation would reach DH 216 million in 1980 (compared with DH 89 million expected for 1975), i.e. about 37% of ONE's net operating income before depreciation, reflecting ONE's large investment program.

5.33 Fuel prices are assumed to remain at the present level because ONE would pass any increases directly to consumers through the implementation of appropriate automatic tariff adjustments. ONE's personnel cost has been assumed to increase by an average of 9% a year from 1974 to 1980 based on the early 1976 salary increase of 6%, and assuming further increases in 1978, (9%) in 1979 and 1980 (5% each year). These general salary increases would combine with an average increase of 2% a year in number of employees, and an average merit increase of 0.25%.

5.34 Characteristics of the future financial performance are as follows: - 48 -

------DH Million------'76 '77 '78 '79 '80 1976-80

Net available surplus 87 145 151 211 279 873

Average two-year available surplus 62 116 148 181 245 175

Construction project cost including interest during construction 453 662 847 977 1,190 4,129

Average three-year construction program 480 652 827 1,004 1,200 825

Program coverage ratio (%) 12.9 17.8 18 18 20.4 21.2

Debt service ratio /1 1.5 1.9 2.1 2.0 2.0 2.8

Average increase in tariff during the year 18 10 8 12 15 -

Resulting rate of return (%) 0.6 2.7 3.9 4.9 6.8 -

Debt equity ratio 20/80 22/78 26/74 28/72 29/71 -

/1 "Succeeding fiscal year" coverage in accordance with the debt service covenant under the proposed loan.

5.35 Balance Sheets. Construction expenditures are based on ONE's construction program as outlined in Section 4. The 1976-80 forecast balance sheets are shown in Table 5-1, and are summarized below:

1975 1976 1977 1978 1979 1980 Assets

Fixed assets including work in progress 1,688 2,579 3,095 3,777 4,561 5,533 Current assets less creditors 63 93 73 113 121 138

Total 1,751 2,672 3,168 3,890 4,682 5,671

Liabilities

Equity /1 1,332 2,069 2,371 2,790 3,276 3,928 Debt 345 515 694 980 i,268 1,589 Other 74 88 103 120 1° 154 1,751 2,672 3,168 3,890 4,682 5,671

Annual debt service coverage 1.7 2.4 2.8 2.9 2.7 2.9 Debt equity ratio 20/80 20/80 22/78 26/74 28/72 29/71

/1 Including DH 575 million Revaluation Reserve since 1976. - 49 -

The forecast assumes that the Government contribution towards ONE's construction program would remain at not less than its present level of about 34%.

(d) Financing Plan

5.36 ONE would self-finance DH 825 million (20.6%) of its total 1976-1980 investment program of DH 4 billion. Details are shown on Table 5-3, which is summarized below:

DH Million %

1976-1980

Sources of Funds

Internal cash generation (income tax deducted) 1,406 35.2 Decrease in working capital, deposits 5 0.1 Less: Debt service (586) (14.7) Net internal cash generation 825 20.6 Contributions Government 1,531 38.3 Consumers 114 2.8 1,645 41.1

Borrowings

IBRD Loan 936-MOR 22 0.6 IBRD Proposed Loan 191 4.8 Other identified foreign loans 113 2.8 Suppliers credits 479 12.0 Unidentified future loans 725 18.1 1,530 38.3

Total Sources 4,000 100

Application of Funds

Project 286 7.2 Other construction 3,714 92.8

Total capital requirements 4,000 100

The features are:

- net internal cash generation, which was 19.7% of the total sources in 1974-75, will increase to 20.6%; - 50 -

- borrowing was 33.7% of the financing plan in 1974-75; in 1976-80 it will be 38.3%;

- government contribution was 39.1%; it would become 38.3%;

- consumers contribution was 6.6%; it would become 2.8%.

5.37 The 1976-1980 long-term borrowing comprises:

- DH 410 million provided by loans and suppliers credits existing at the end of 1975, including DH 22 million from loan 936-MOR;

- DH 395 million to be provided by foreign loans and suppliers credits for which ONE is already negotiating, including the share of the proposed Bank loan to be made available to ONE, i.e. US$43.7 million or 48% of this borrowing;

- DH 725 million still to be found (47%) either from foreign leaders, or from local sources.

5.38 Terms and Conditions of the Loan: Considering the life of the assets to be financed, the proposed Bank loan would be for a ternm of 20 years with a grace period of 4-1/2 years. Interest at 8.85% has been assumed. MiOROCCO

OFFICE NATIONAL DE L ELECTFICITE (ONE)

BALANCE SHEET (DH Million; DH 4.38 = US$1.00)

------Estîmate ------Forecast------1973 1974 1975 1976 1977 1978 1979 1980

ASSETS Fixed Assets Gross Value 2,289 2,465 2,689 3,961 4,303 4,917 5,517 6,298 Less: Depreciation 1,035 1,L18 1 208 1 814 1,962 2,127 2 319 2 538 Net fixed assets in operation 1,254 1,347 1,48 2,147 2,341 2,790 3,198 3,70 764 Work in progress 114 181 204 427 748 979 1 354 1 Total net fixed assets 1368 i,652,571 3,879 3,769 Intangible assets and others 3 3 3 5 6 8 9 9 1,371 1,531 1,8 2,579 3,095 3,777 l,561 5,533

Current Assets Inventories 35 41 48 51 60 76 101 130 Receivables - sales of energy 61 76 87 96 115 132 137 143 Other receivables 29 40 55 51 57 80 80 86 125 157 190 232 288 31 39 Cash 4 3 O 21 2 6 3 1 160 190 219 2 321

TOTAL ASSETS 1,500 1,691 1,878 2,798 3,329 4,071 4,882 5,891

LIABILITIES Equity Revaluation reserve - - - 575 575 575 575 575 Government equity 867 867 867 867 867 867 867 867 Government contribution 138 231 319 463 696 1,016 1,375 1,810 H 172 Consumers contribution 26 41 58 76 97 120 145 Spec al fund for rural electrification 60 76 95 121 154 190 232 284 ONE's Reserve for Development 20 21 (7) (33) (18) 21 82 220 1,111 1,236 1,332 9 2,371 2,790 3,276 3 ,928

Borrowing IBRD loan 936 - 27 78 100 98 93 91 87 IBRD proposed loan - - - 17 51 121 184 191 Identified foreign loans 28 64 79 144 158 168 163 149 Identified suppliers credits 57 55 60 146 299 503 467 413 Other loans 172 148 128 108 88 5 363 4 257 29 345 515 694 98 1,26 ,9

Other Long-Term Liabilities 50 62 74 88 103 120 138 154

Current Liabilities Suppliers 49 73 82 107 142 162 180 200 Others 33 26 45 1 19 1 20 20 -72 99 127 IiÉ ? 200 220

TOTAL LIABILITIES 1,500 1,691 1,878 2,798 3,329 4,071 4,882 5,891

Debt Equity Ratio 19/81 19/81 20/80 20/80 22/78 26/74 28/72 29/71

June 1976 MOROCCO

OFFICE NATIONAL DE L'ELECTRICITE (ONE)

Income Statement

(DH Million; DH4.38 = US$1.00)

---- Actual ------Estimte ------Forecast------Forecast

1973 1974 1975 1976 1977 1978 1979 1980 1976-80 Sales (GWh) - to distributors 1,332 1,407 1,520 1,715 1,877 2,125 2,317 2,525 10,559 - to ONE's consumers 895 965 1,050 1,195 1.388 1.580 1,753 1,905 7.821

TOTAL 2,227 2,372 2,570 2,910 3,265 3,705 4,070 4,430 18,380 Average Frice Per kWh Sold - to distributors c/kWh 10.9 11.8 12.0 14.2 15.6 16.8 18.9 21.7 16.9 - to others c/kWh 12.7 13.3 13.5 16.4 18.5 19.7 22.2 25.9 19.9 OVERALL 11.7 12.5 12.6 15.1 16.8 18.1 20.1 23.5 18.2 Operating Revenues j/ - sales of energy to distributors 146 167 182 243 293 257 426 548 1,867 - to other consumers 114 129 142 196 257 315 389 493 1,650

TOTAL SALES OF ENERGY 260 296 324 439 550 672 815 1,041 3,517 - other operating revenues 14 16 20 20 21 24 26 28 119

TOTAL OPERATING REVENUES 274 312 344 459 571 696 841 1,069 3,636 Operating Expeeses - labor 71 90 95 105 114 125 137 151 632 - fuel 55 68 110 147 165 179 194 195 880 - taxes (excluding income tax) 22 25 29 37 45 54 64 78 278 - other operating expenses 33 35 _6 42 51 63 76 89 321

SUBTOTAL 181 218 270 331 375 421 471 513 2,111 Less: Transferred to capital (13) (15) (18) (19) l2j) (21) (21) (22) (104)

NET OPERATING EXPENSES 168 203 252 312 354 400 450 491 2,007 Provisions for depreciation and others 80 84 89 137 147 164 189 216 853

TOTAL OPERATING EXPENSES 248 287 341 449 501 564 639 707 2,860 Net Operating Income 26 25 3 10 70 132 202 362 776 Other Incoee 2 2 2 2 2 2 1 1 8

TOTAL NET INCOME 28 27 5 12 72 134 203 363 784 Interest on Long-Term Debt 16 18 20 28 37 57 79 97 298 Less: Interest during construction (2) (4) (5) (9) (15) (25) (35) (45) fl29)

NET INTEREST CHARGEDTO OPERATION 14 14 15 19 22 32 44 52 169 NET SbRPLUS 14 13 (10) (7) 50 102 159 311 615 Allocation of net surplus - to special fund (rural electrification) il 12 14 19 23 29 34 44 149 - to ONE's Reserve for Development and other 3 1 (24) (26) 15 39 66 141 235 - to income tax - - - O 12 34 59 126 231 14 113 (10) (7) 50 102 159 311 615 Average net fixed assets in operation 1,237 1,300 1,414 2,101 2,244 2,565 2,994 3,479 'n Rate of Return 2.3% 2.1% - 0.6% 2.7% 3.9% 4.9% 6.8% ru

1/ Including sales tax 17 19 20 26 33 40 49 62

June 1976 MOROCCOQ

OFFICE NATIONAL DE L'ELECTRICTTE (ONE)

Statement of Sources sud Applications uf Fonds

(DU Million; DH4.38 = USS1.00)

Actuel Estieate ------Forecast--- Total Forecast 1974 1975 1976 1977 1978 1979 1980 1976-80

SOURCES OF FUNDS

Intersal Cash Generation Net Income 27 5 12 72 134 203 363 784 Provisions 84 89 137 147 164 189 216 853 111 94 149 219 298 392 579 1,637

Contributions Gover-ment costributions 96 93 152 241 328 367 443 1,531 Consum,ers costributions 15 17 18 21 23 25 27 114 111 110 170 262 351 392 470 1,645

Bsrrowi.g IBRD Loan 936 27 51 22 - - - - 22 IBRD proposed secusd loan 17 34 * 70 63 7 191 Other ide-tified foreign loans 41 20 68 23 17 5 - 113 Identified suppliers' credits 8 10 96 163 220 - - 479 Unidentified 1oans or credits -3 - - 25 285 414 724 76 87 203 220 332 353 421 1,529

Legs; Debt Service (iscluding i.d.c.) Amortization: Bank loans - - - 2 4 4 4 14 Other lsans 39 36 34 39 41 63 97 274 39 36 34 41 45 67 101 288 Isterest: Bank loans 1 5 8 il 15 20 23 77 Other issus 17 15 20 26 42 59 74 221 " 18 20 28 37 57 79 97 298

Total Debt Service 57 56 62 78 102 146 198 586

Net Borrowing 19 31 141 142 230 207 223 943

(Increase), Decrease in uorking capital (15) (5) (9) I (36) (11) (21) (76) Other sources of funds (deposits, etc.) 12 1i 14 16 17 18 16 81 (3) 6 S 17 (9) 7 (5) 5

TOTAL SOURCES 238 241 465 640 860 998 1,267 4,230

APPLICATION OF FUNDS Construction (excluding interest during construction) Bask Projects 4 23 51 103 93 16 286 Other Projects 239 240 419 595 717 848 1,129 3,708 239 244 442 646 820 941 1,145 3,994 Other capital empesditures - - 2 1 2 1 S 6 239 244 444 647 822 942 1,145 4,000

Incese Tax 12 34 59 126 231

TOTAL APPLICATIONS 239 244 444 659 856 1,001 1,271 4,231

Net increase in cash (1) (3) 21 (19) 4 (3) (4) (1) Cash at start of year or perid 4 3 0 21 2 6 3 0 Cash at end of period 3 a 21 2 6 3 (1) (1)

Net available surplus for the year or period 1/ 43 38 87 145 151 211 279 873 Average available surplus (previous asd current year) I/ 40 40 62 116 148 181 245 175 2/

Average construction program (previous, current, next year)i/ 314 480 652 827 1,004 1,200 825 2/ Program coverage ratio 1/ 12.7% 12.9% 17.8'!% 18.0% 18.0% 20.4% 21.27- Debt service coverage (Eimes) 1/ 1.9 2.0 1.5 1.9 2.1 2.0 2.0 2.8 2/ a

1/ Accsrding to definition i Proje-t Agreement

2/ 1976-80 average

June 1976 - 54 - Table 5-4

Borrowing

I. Existing Borrowing at the end of 1974.

1.1 Foreign Loans

. IBRD Loan 936-MOR US$25 million 7.25% outstandingUS$6,306,176 (DH equivalent27.4 million)

. Various French loans at 3.75%, 4.5%, 6.25 and 6.5%.

Outstanding: FF 24.9 million

DH equivalent22.7 million

. BAD 6% repayable from 1977 to 1993 - DH equivalent 6.2 million

. IfW 5% repayablefrom 1976 to 1993 outstandingvalue

DH 34.3 million.

1.2 SuppliersCredits (France-Russia-Hungary-U.S.A-Italy)

Interest ranging from 2.5% to 6%

Outstandingvalue DH 55.8 million

1.3 Local Loans Interest ranging from 3% to 7.10%

Outstandingvalue DH 147.3 million

II. New Borrowing

According to ONE's forecast new loans expected from 1976 to 1980 would be as follows:

- KfW DH 35 million 5% interest

- Kuwait DH 40 million 4%

- BAD 8% DH 22 million

- Proposed IBRD loan

- Supplierscredits - 8 years 7.5% as an average - DH 100 million.

- Other loans, assumed to be local, on the average basis of

15 years and 7.5% interest. - 55 -

6. ECONOMIC ANALYSIS

(a) Tariffs and Rates

6.01 General: In common with other energy prices, electricity tariffs and rates are subject to Government control. The country's tariff structure is essentially the same as it was in 1958, when it was created. Although tariffs and rates discriminate with respect to the voltage level of supply, geographical location and type of consumers and the time of the day they suffer from the following defects:

(a) they still partly reflect the 1958 cost of supply and bear little relation to present cost;

(b) they retain special privileges for certain consumers existing before ONE was created, and for certain communities that opted for integration in ONE's system and could bargain hard;

(c) the price declines in steps as consumption rises, which acts as an incentive for higher consumption rather than reduction (which should be encouraged in view of the subsidization of fuel cost and the dependency on external fuel sources).

6.02 Rates remained unchanged until 1973 and the average level of revenue per kWh remained substantially the same at 10.5-11 ctm/kWh (US$é 2.68-2.75), although the average price for certain classes of consumers actually declined because of the degressive principle underlying the tariff structure. Because the rates became increasingly out of line with ONE's costs, the rate of return on net fixed assets (which have not been revalued since 1970) steadily declined.

6.03 Rates have been raised by 5% both on May 1, 1973, and on May 1, 1974, when coal prices were also increased (35%). On January 1, 1976 ONE's rates were increased by 18%, the price of coal by 15%, fuel oil by 39.1%, and gasoil by 23%.

6.04 The targets for rate of return under Loan 986-MOR (see 5.09) have not been met because the Governnent was reluctant to allow electricity prices to rise sufficiently on the grounds that this would be inflationary. This appears dubious because the cost of electricity represents only a small fraction of costs of most industries (see 1.21).

6.05 Up to 1974, the Regies have been able to internally finance (including consumers contributions) completely their expansion program and Government assistance was not required (see 1.18). A corollary to this is that ONE's rates for bulk sales to the Regies is in fact subsidized and that ONE requires Government contributions in excess of those required if rates applied to the Regies would properly reflect costs. Although this policy is not entirely - 56 -

satisfactory (the distinction between the actual Government required financing for both ONE and the Regies is lost) it has no effect on the overall rate of return for the sector as a whole which should be considerably in excess of ONE's expected rate of return in view of the high level of internal overall financing, which may be in the order of 35-40%.

6.06 Marginal Cost of Supply: Under.the first power loan, EdF completed in 1973 a study of tariffs and the impact of the cost of electricity on the economy. In early 1975 ONE, in view of rapidly rising prices, recalculated the marginal cost of supply, reaching only slightly higher results, i.e., 11.1 ctm/kWh calculated in 1972 by EdF for high voltage supply and 12.3 ctm/kWh at the retail level. The calculation,however, was unrealisticbe- cause it assumed inflation of 5% annually only. On the basis of the findings during appraisal it appears reasonable to assume that ONE's average marginal costs (no distinction can be made, due to lack of information,between high voltage and middle voltage level) appear to range as follows:

23-25 ctm/kWh for high voltage consumers 57-60 ctm/kWh for low tension consumers 25-27 ctm/kWh average

6.07 Financial forecasts indicate that by the end of the decade average revenue per kWh would be some 20-21 ctm/kWh, somewhat below the marginal cost of supply, which is caused by the implied subsidizationof the Regies through ONE's tariffs (see 6.05). It is, however, also obvious that:

(a) ONE's operations in distributionare expensive and constitute a financial burden because it is practicallyall rural, i.e. with low population and connectiondensity and relativelypoor consumers, and

'b) cross subsidizationfor distributionto be reflected in the ultimate tariffs would be acceptable in order to maintain viable low tension rates (presentlythey are already about DH 0.36 (US$t 9,'kW),rising to DH 0.57/kWh (US$e 14/kWh) with the flat increases as assumed for 1977 and 1979), otherwise the only customers that would pay the marginal cost of supply would be the low tension consumers,which is unrealistic.

(b) Justificationof Project

E.08 Optimum Development: An optimum development program is defined as the particular program - out of a number of alternative similar programs, reasonably selected for attaining the same objectives- that shows. -sing the discounted cash flow method of comparison, the highest net benefits to the economy, i.e. the 'ighest present value of benefits (or cost avoided i appropriate cases) less costs, at a discount rate equal to the opportunity cost of capital, while paying due regard to economic and social considerationsand possible uncertainties in the assumptions for the ultimate decisions. - 57 -

6.09 River Basin Study: It is obvious that a multipurpose scheme such as the overall development of the use of water in the Oum er Rbia river basin is highly complicated and that even a computerizedapproach constitutes an approximation. An overall study for the basin was prepared in 1973-75 by SCET Internationalof France for the Ministry of Agriculture. The study seeks to optimize the size, location and timing of regulating structures taking into account the forecast requirements for potable and industrial water, irrigation and power. There are two sites for such structureson the river, at Sidi Cheho and at Dechra el Oued for each of which the dam crest could be varied. A third dam appears to be feasible at Imizdilfane (upstream from Dechra el Oued) for power purposes only.

6.10 It appeared at the time of a joint FAO/World Bank visit (July 1974) that a larger dam should be constructed at Dechra el Oued and a smaller dam at Sidi Cheho because irrigation developments in the areas to be fed by the Dechra el Oued dam would be more economic than at Sidi Cheho (Doukkala). The prepon- derant issue, however, was the allocation of waters as defined in the Master Plan. This allocation was repeatedly amended (and probably will be changed in the future) because of shifting requirements (e.g. favorable market development for phosphate cause accelerationof development plans for new plants and increased water requirements for this purpose) and regional pressures for a more favorable share of the water. To terminate the indecision and avoid conse- quential delays, the Government decided (June 1974) to construct the Sidi Cheho dam as soon as possible at maximum crest elevation. SCET subsequently optimized the Dechra el Oued dam given the Sidi Cheho elevation and the then available information on water allocation. However, once more allocations were amended and the authoritiesdecided to construct also Dechra el Oued at maximum crest elevation (+ 6 m; the original optimizing curve was rather flat and the increase appeared justified for power purposes). SCET's final cal- culations then optimized the areas to be irrigated given the dam crest elevation.

6.11 It should be noted that the SCET approach could not take completely into account ONE's development in generation with and without the Sidi Cheho and Dechra el Oued power stations because this informationbecame available only at the time of appraisal. Only the cost of fuel substitutedby the hydro facilities could be taken into account, not the capital cost of thermal plant that would be replaced by hydro plant.

6.12 Basic Approach for Economic Study:

(A) In view of the difficultiesof formulating the optimum development plan for a basin so complex as the Oum er Rbia, analysis was focussed on the Sidi Cheho facilities alone. This analysis is in three parts, and a clear distinction between the three is essential to understand the following discus- sion. The methodology is first to determine for each subproject (power, water, irrigation),or combination of subprojects,the economicallybest alternative development without the Sidi Cheho dam. These alternative subprojectsare then compared with the single multipurposeproject. The multipurposeproject is considered to be superior to the alternativesif the equalizing discount - 58 -

rate is more than the assumed opportunitycost of capital (10%). In the second analysis, the rate of return for the multipurposescheme is calculated by valuing the various benefits in accordance with conventionalprocedures (i.e. sales prices for power and water, and irrigation through economic input end cutrut prices) and determining the discount rate which equalizes the multipurpose scheme's costs and benefits. Appropriate present worth techniques and econumic valuations (to the extent data are available) are used at all stages. Vinally, the rate of return on investment for each of the sub-projects l§ d'.scussedin relation with the allocation of the dam cost.

(B) The steps in the analysis are therefore the following:

(i) Select independentor combined alternativesub-projects which could fulfill the same functions as the proposed multi-purpose proiect. For irrigationand water supply this is deternained to be a sma'llerdual purpose dam at Sidi Cheho; for power, it is an alternativedevelopment program which excludes the Sidi Cheho pro-ect. Evaluate the alternativedevelopment program for power, first ranking other possible hydro developments then combining these into alternativeprograms with various comibinationsof gas turbine and sceam plant, then compare these alternativeswith the multi-purposeproject at the assumed opportunitycost of capital.

(ii) Calculatean economic rate of return for the multi-purpose project using project costs (including the cost of the irrigationdevelopment), and value o£ growth in agricultural output and sales revenue for water and power as benefits.

(iîi) calculate the rate of return on the irrigationand water projects, and on the incrementalinvestment for power.

(C) Future upstream and downstream developmentswill affect the long- term benefits of the multi-purposeproject. In accordance with ONE's simula- UiC>fnatudies (ecvLrring1980-1995), the gross average Sidi Cheho generation wouli decline fronm3L0 GWhia initially to 240 GWh/a by 1995 due to the upstream diversions. Eeyond 995 ger:erationof existing hydro plants (including Sidi Chehc) would further reduce due te diversion of waters to new irrigation drisvelcpnceIlts,depending en the speed of realizing these developments. 'he comfarison of altertlativesassum-es that any reduction in Sidi Cheho and down- s Seegeretotian due to diversions for these future irrigationprojects would be cnarged to thcse future projects, i.e. that benefits obtained with such future projects would exceed the loss in generation benefits. Accordingly the rate of return computationsfor the Project take into account on'lythe reduction irngeneration of plants downstream of Sidi Cheho due to diversion of waters reqtired for Doukkala. - 59 -

Power

6.13 Ranking of Hydro Plants: ONE investigated which hydro station should be the first one to be completed from a power point of view, by insert- ing alternative hydro stations (excluding the cost of the dam) in a basic all thermal development scheme meeting the requirements for electricity until 1995 at growth rates of 10% and 12%. The following alternatives were studied taking irnto account the hydro stations in a sufficiently advanced stage of planning to consider them competitive with Sidi Cheho:

Alternative 1: All thermal (with or without gas turbine as the first plant to be completed, the "with" gas turbines showing least cost).

Alternative 2: Thermal, but including Sidi Cheho (120 MW, 310 GWh/a) on the Oum er Rbia river.

Alternative 3: Thermal, but including Dechra el Oued (75 MW, 215 GWh/a) on the Oum er Rbia river.

Alternative 4: Thermal, but including M'Dez (50 MW, 36 GWh) and Matmata (37 MW, 230 GWh/a) on the Sebou river.

6.14 ONE's conclusions, which were based on mid-1974 assumptions for costs, rank the project as follows in economic merit order: (1) Sidi Cheho, (2) Dechra el Oued, (3) M'Dez/Matmata, and (4) all thermal development. Be- cause during appraisal the 1975 costs of the Sidi Cheho facilities were found to be considerably above the 1974 assumptions, (45% for the dam and 11% for the power station), the comparison has been repeated, confirming that Sidi Cheho would rank first up to a discount rate of 26%, Dechra el Oued second up to 23% and M'Dez Matmata third up to 15%. This conclusion with respect to ranking is insensitive to variations (say ± 20%) in the main parameters (capital cost and economic cost of fuel), i.e. Sidi Cheho and Dechra el Oued rank about equal.

6.15 Comparison of Generation Development Schemes: Although the above comparison provides ranking of hydro stations, a further comparison is required of a development scheme with and without Sidi Cheho but including Dechra el Oued and M'Dez/Matmata. For this reason the following three alternatives (all exclude costs of dam/tunnel) were considered:

Alternative A: Development comprising Sidi Cheho (1980) Dechra el Oued (1982) and M'Dez/Matmata (1984) and steam-electric plant.

Alternative B1: Development without Sidi Cheho but including Dechra el Oued (1982) and M'Dez/Matmata (1984) and steam-electric plant.

Alternative B2: Similar to Alternative BI, except that the first plant to be installed would be gas turbine plant. - 60 -

Steam-electric planting-up would be in units of 125 MW (6 at the planned Mohammedia power station) followed by 250 MW (8 in two stations, one at Timahdite, one still unidentified) followed by 500 MW (1995, by which time all development programs would be equal). Satisfaction of requirements has to meet 3 criteria, investigated by ONE in simulation studies, (a) energy requirements in a 1 in 20 dry year have to be met, (b) day-time maximum demand should be met taking into account a 1 in 20 dry year and assuming that 10% of installed capacity is required as reserve during those hours, and (c) peak-time demand should be met similarly to (b) above but reserve capacity should be taken into account equal ta the sum of the largest and next largest unit. The economic cost of fuel was calculated on the basis of the 1974 spread of cost of supplies from various countries, taking into account end 1975 f.o.b. and freight prices for crude and a refinery treatment factor of 1/0.9 allowing for #2 fuel to be supplied by Moroccan refineries. This resulted in DH 413/t (US$94/t or US$11.55/bbl), but DH 400/t was used in the computations, sensitivity considerations allowing for changes in economic cost of fuel.

6.16 A comparison of Alternatives Bi and B2, as indicated above (see 6.15), shows that Alternative B2 has the least present value for discount rates of 4% and up which is insensitive to change in the main parameters. Consequently, Alternative A and Alternative B2 (representing "with" and "without" Sidi Cheho) were used for the power component in multipurpose comparison cf schemes, where also the cost of the dam is to be included.

Waater

6.17 Comparison of Industrial and Potable Water Developments: Although the plan for providing additional potable and industrial water to the coastal zone has not yet been completed, the comparison of alternative development plans would be made similarly to power: the various alternatives should all meet future requirements for water, and the demand curve as a function of time (and therefore the benefits) is equal for all alternative. On the cost side the alternatives are restricted to: (a) water supply from the Oum er Rbia river, (b) from other rivers, and (c) desalting by thermal plant (about 250 Mm3 additional water would be required by the year 2000). For assured river supply, a reservoir with a live volume of about 1,100 Mm3 would be required and the relevant dam (or dams) should be completed by about 1983. Only alternative (a) would be viable, because:

(i) The Oum er Rbia is the nearest river with adequate additional sources of water and because the site conditions on the Oum er Rbia are favorable, any structure in any other river would be more expensive if the cost for the extra pipeline length is also taken into account.

(ii) In the late eighties incremental water requirements are expL ted to exceed 10 Mm3 or 106 Igl/d increasing by at least 7%/a. To achieve this by desalting would be very expensive, the more so because the major portion of water would be required for industrial purposes (i.e. "raw" river water would be adequate). About MDH 40 (MUS$10) would have to be invested in the first - 61 -

year and proportionally higher sums in subsequent years. Conse- quently, the dam (costing some MDH 220) would pay for itself in about 4 years. The actual period would, of course, be somewhat longer, because in case of a dam being constructed, filter plants would be required for the portion of the water to be used for potable water.

6.18 In 1974 the dam required for water supply alone, was estimated to cost MDH 150 and it appears reasonable to assume that the 1975 cost would be in the order of MDH 220 (45% over 1974 cost, similar to Sidi Cheho). In accordance with the forecast requirements for the phosphate industry, the dam should be completed by 1983. The possibility that development in phosphate industry would be less rapid has also be studied; a delay of up to 5 years (1988) was assumed.

Irrigation

6.19 Irrigation Developments. The only feasible development in the area would be the second phase of Doukkala (about 17,000 ha). Without taking into account the cost of a dam for this development, or the power required for pumping for irrigation or its effect on downstream generation, the net benefit of this project at the opportunity cost of capital (10%) would be MDH 31, i.e. this would be the maximum amount (expressed in present value) that could be spent on a dam to provide about 150 Mm3 of water required for this project. A storage volume of some 350 Mm3 would probably be required to provide a reasonable security of supply, equivalent to a total reservoir volume at Sidi Cheho of about 1000 Mm3. The crest elevation would be 265 m, 20 m below the present proposed dam. The dam cost would be some 40-45% of the estimated cost (MDH 330 at 1975 prices) of the Sidi Cheho dam, i.e. some MDH 150. Even allowing for a considerable error in this assumption, it is obvious that the Doukkala Phase 2 development would not be viable as an independent project comparing its benefits (MDH 31 at 10%) with the cost of the required dam (at least MDH 100 at 10%). The project may only be viable if combined with the dam required for water or if included in the multi-purpose project.

6.20 In order to obtain the necessary storage for irrigation, the height of the dam required for water would have to be increased by 2.5 m at an estimated incremental cost of about MDH 20.

6.21 It follows from the above that the only reasonably feasible alternatives to be compared are: (i) the Dcukkala Phase 2 irrigation development using a dam jointly with the water users, combined with the least-cost power development "without" Sidi Cheho; this alternative is called the "without Sidi Cheho scheme" and, (ii) the multipurpose scheme combining irrigation, water and power; this alternative is called the "with Sidi Cheho scheme." It should be noted that in comparing the various schemes, the Doukkala Phase 2 irrigation development forms part of any of the alternatives and does not change. Consequently, when netting cost and benefit streams (subtracting net cash streams of one alternative from the net cash stream of any other alternative) all of Doukkala's costs and benefits become zero in the resulting net cash stream, except the incremental cost of the required increase in the height of - 62 -

the alternative dam for water alone. The alternative of not executing Doukkala Phase 2 has not been taken into account because (a) although cost would be avoided, benefits would also be foregone including unquantifiable large social benefits, and (b) the Project is justified without even taking into account the Doukkala irrigation development.

6.22 Comparison of the Multipurpose Scheme "with" and "without" Sidi Cheho: The net present values (cost avoided less cost) of the main components of the scheme, at various discount rates between 6% and 14% are shown in Table 6-1 together with the sensitivity to variations in the main costs and benefits. Summarized the result is:

------Discount Rate (%------10 il 12 13 14 15 ------Net Present Value (MDH)------

Cost "Without" Sidi Cheho less "with" Sidi Cheho 63 34 10 -10 -27 -41

Required variation (%) to make equalizing discount rate 9, 10 or 12%

Cost of dams +28 + 8 - 8 -22 Cost of Power Stations +40 +12 -13 -35 Fuel Savings -26 -40 - 5 + 6 +15 +26 Costs and Fuel Savings Simultaneously: (Costs +17 + 8 + 2 - 3 - 7 -11 (Fuel Savings -17 - 8 - 2 + 3 + 7 +11

6.23 The equalizing discount rate up to which the execution of the Sidi Cheho multipurpose scheme would be more economic than not executing the scheme would be 12.5%. The sensitivity to the variation in the various costs and ;enefits is modest. Practically all main (individual) parameters would have tc vary excessively to reduce the equalizing discount rate to the opportunity cost of capital (10%). The highest sensitivity is shown for a simultaneous increase in costs and an equal (percentage) reduction in cost avoided (fuel savings,. To reduce, however, the equaliz_ng discount rate to 10%, all costs would have to increase by 17% simultaneously with a decrease in fuel cost savings of 17%. This aDpears unlikely. In the event that additional water from the Oum er Rbia river for industrial/potable purposes would not be required before 1988, the equalizing discount rate would reduce to 10.4%.

6.24 Economic Rate of Return. The economic rate of return (IER) on the project (either the Sidi Cheho scheme as a whole or its parts) is the discount rate which equalizes the present values of the time streams of the attributa- ble costs and benefits over the assumed economic life of 45 years. Th costs are the capital costs including physical contingencies, but excluding taxes and price contingeacies plus the operating cost of the additional facilicies. - 63 -

The benefits consist of (a) the agricultural benefits (growth in agricultural output which would increase farmers' incomes and employment opportunities), (b) incremental sales revenue for water for industrial and potable water, (c) incremental sales revenue for power, (d) proceeds of Government taxes on each bill.

6.25 It would be desirable to use retail revenues adjusted for distribution costs as the measure of benefits for water and power but this has not been possible because information on the power distribution network investments and costs for the Regies is not available, and an ONEP/OCP study of future investment requirements for water distribution is not yet complete; therefore, wholesale prices have been used as a measure of benefits, using ONE's present bulk tariffs and an estimated raw water price of DH 0.38/m3 for ONEP. In accordance with the Master Plan it has been assumed that additional raw water would be required in the coastal area by 1983, increasing to 272Mm3/a by the year 2000. Subsequently, water requirements would increase at an annual rate of 8% until the maximum available of 450Mm3/a is reached (2007). Pumping stations would be required on both banks of the river to lift the water as well as pipe lines transporting the water by gravity to the phosphate mines and to Casablanca. The cost of these facilities (MUS$75), to be completed partly in 1983 and around the year 2000, have been taken into account. Benefits of the Doukkala Phase 2 (about 17,000 ha) agricultural development are as studied in relation to the Appraisal for the first Doukkala Irrigation Project (Loan 1201-MOR).

6.26 For calculation of the minimum IER on the total project, the decrease in Sidi Cheho's generation due to future upstream irrigation developments has not been taken into account since the value of such diversions would be at least equal to that of the power foregone. The net present values of costs and benefits and net benefits are shown in Table 6-2 together with the sensitivity of the IER to a change in the main parameters. On this basis, the IER of the Project would be 9.6%. Assuming that the prices paid by the water and power consumers represent a minimum value of the benefits, this rate of return would represent a lower limit. The IER is relatively insensitive to changes in costs and benefits of the individual subprojects, all cost would have to increase by 25% or the benefits to decrease by 20% in order to decrease the IER to 8%. On the other hand, all costs would have to decrease by 16%, or benefits to increase by 19% in order to increase the IER to 11%. A delay of 5 years in water requirements from the river would decrease the IER to 8.9%. While these rates of return are of little significance as a measure of the economic worth of the multipurpose project as a whole (unquantifiable benefits in irrigation are estimated to be substantial, and tariffs for water and power represent a minimum value of benefits), they indicate that both for water and power present prices charged to the consumers do not reflect the true cost of these services. Because present rates for water and power are estimated to be at least 20% below cost, the IER would be 10.8% if proper rates had been set. In view of the uncertainties, the probable minimum range for the IER appears to be from 9% to 11%. - 64 -

6.27 Return on Project Components. The rate of return of the subprojects have been determined by allocating to the water supply function the cost of the basic dam required for water (which would also provide sufficient water for irrigation,para. 6.20), and to power the incrementalcost of raising this dam to its final elevation. In order to reasonably estimate the rate of return of the subprojects,estimated cost increases up to 1980 have been taken into account. By that time power rates are expected to have beer. increased by a total of 50% (see 2.25) and it appears reasonable to assume a similar increase for raw water supply; since water supply would not be required before 1983 this may somewhat understate revenues for water, but no reasonable estimate can be made for the period beyond 1980. On this bases the shares of the cost of the dam and the IER of the sub-projects(assuming for irrigationthat cost and benefits would increase commensurately)would be:

Share of Dam Cost Rate of Return (%) (%) Water 67 10.1 Power 33 11.9 Irrigation 0 11.0 Overall 100 10.4

The overall rate of return calculated on the basis of 1980 prices differs only slightly from the rate of return of 9.6% calculated above (see 6.27) using constant 1976 prices. SIDI CH1xHOMI.TIPIIRPOSE HYDRO PROOlECT

zomparison or Alter-atives

Prese,> Ulaser o? bob aLI bort ana bout Aul,se- ein L.e½ 2sueltlritieo to musEs

----- WATE ANDR IRRIGATION------DAM------P ZW.3R------COST ------NET ----- Alterna- Net COST tive Net Cost Net Power AVOIDNb Sidi Develap- Net Avoidef Dam Station Discou-t ------Dom Cost ADied 2/------Cheho ment Opera- Fuel (tolumn Cbot (toloun Col-no Rate I-rign- lorer Cout tional Cout (5) + (6) (r.olumn (5)4 (tO).(îlt\ Ctmisa Nicunet tion Xater Total Cost Statitn Avoided tout Avodied + (7) +(e) (3(4)i) rS)+((7 Total (8) + (12) Rate Column (1) (2) (3) :4) i5) .6) i7 1''_ )9) (10) 11) (12) 13) 6

touts and Benefito

t +18 -1(7 -+iP5 - 94 -iii +9S -19 +463 +351 -109 -112 -221 +292 6 7 +17 +165 +177 -285 -181 +92 -i6 +397 +292 -112 -105 -217 +180 7 8 +16 +154 +170 -28" -174 +go -13 +345 +248 -112 -97 -209 +136 a 9 +l6 +147 +lh3 -277 -18 -87 -1i +303 +211 -114 - 92 -206 + 97 9 10 +15 +141 +156 -772 -163 +85 -10 +267 +179 -116 - 88 -2o4 + 63 10 Il +14 +139 +149 -<,9 -159 .83 -8 +238 s154 -120 z 84 -204 + 34 il 12 +14 I179 .I?1. -1' +81 -7 +213 +132 -122 81 -203 + 10 12 13 +13 +124 . 1- I 7 -17' -6 +193 +114 -124 - 79 -203 - 10 13 14 +13 +119 '-1h -b', -148 (7 -6 +175 + 93 -125 - 77 -202 - 27 14 15 +1? +114 +,12< -^'? -144 .75 -5 +1S9 + 86 -127 - 73 -200 - 41 15

2iau1'-aueows 4/ Snsuoltlvteu ( chtange reqgied tr ibtair. an eoyaaliîlmg disoount rate oS 8, 9, 10, 11, 12 jr 13%) thange

10 . _26 +54 n.a. +31 .17 -17 10 11 -14 ,+28 +4C +17 +18 - e2 12 -5 + 8 +17 + 5 + 2 -2 12 13 +6 - 8 -13 - 5 - 3 +3 13 14 +15 -22 -35 -13 - 7 + 7 15 +26 -32 n.a. -21 -11 +11

tq-lttinr Dis_ounù Rate: 12.5t

1/ bouts: negative (-); Costsl voided / enefllo): positive (+). Cotot of a dul required for water supply and ifnremental cout of -rest tuoreoce to make the dam add-tionally cuitabte for irrigation Doukkala Phase 2. 3/ Operational cost 'with" Sidi Cheho 1ess "without" 3idi Cheho (excluding toer).

-. o1toe 187 - .o-o (12) S2ID CHEHO MULTIPURPOSE HYIROPROJECT

EC ONObC RATE OF RETUPR (IER) )

Present Values of Costs and Benefits; Sensitivity of IER to Changes in Costs and Eenefits

Discount Rate ______T______------COSTS------BENEFITS------Net Benefits ,% Irrigation W/Water Power Dam Total Irrigation ,ater Power g! Total Coluan (9)-(5) Column (1) (2) (3) (4) (5) (6) (7) (8) (9) (la)

Costs and Benefits

6 249 152 241 294 936 372 699 488 1,559 7 223 137 230 289 879 531 531 419 1,256 377 8 200 124 218 282 824 255 407 364 1,026 202 9 184 113 208 277 782 214 315 319 848 66 10 168 103 201 272 744 181 247 281 709 -35 il 155 96 194 269 714 155 195 251 6o0 -113 12 143 88 188 265 684 133 155 224 512 -172 13 133 82 183 261 659 115 124 202 441 -218 14 125 76 177 257 635 100 100 183 383 -252 15 117 71 173 253 614 88 82. ------.168. 338 -276 Cdosb .±eu

Sensitivities 2%change required to obtain an overall rate of return of 7, 8, 9, 10, 11, and 12%) Simultaneous Change ,osts Benefits 7 n.a. n.a. n.a. n.a. -F43 n.a. n.a. -40 n.a. -30 8îs Bni 8 n.a. n.a. n.a. n.a. +25 n.a. -50 -26 -55 -20 +11 -11 9 +36 +58 +32 +24 + 8 -31 -21 -10 -21 - 8 + 4 10 -21 -34 -17 -13 - 5 +19 +14 + 7 +12 + 5 - 2 + 2 il n.a. .n.a. -58 -42 -16 n.a. +58 +25 +45 +19 - 9 + 9 12 n.a. n.a. n.a. n.a. -17 n.a. n.a. +45 n.a. +30 -14 +1

Overail rate of return 9.60,

_~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ L' Including electricity for pumping (DH 0.117/kWh). 1 | Average sales price DH 0.136/kwh (but deducting "loss" of DH (0.136 - 0.117)/kWh for sOpply to Doukkala Phase 2 irrigation and downstream effects of Doukkala Phase 2 on generating plant. 3/ + Column (10) ColumU (-T7_ iC-ourmn (9

*lunne 1976 - 67 -

7. AGREEMENTS REACHED AND RECOMMENDATIONS

Sector

7.01 The Governnent will take the necessary steps to formulate,by June 30, 1977, recommendationsfor the electricty sector organizationand, on the basis of proposals by ONE, the adoption of an appropriatetariff structure. It will exchange views with Bank of the progress being made and on the proposals being developed (1.18; 5.33).

Project

7.02 As discussed during negotiationsONE will include in its first Project Progress Report for each year a set of statisticaldata which will be reviewed regularly with ONE in order to define appropriatemonitoring targets and evaluationmethods (2.27).

7.03 The dam and its hydro facilitieswill be regularly inspectedby Hydraulique in accordancewith sound engineeringpractices (4.27).

7.04 Prior to commissioningof the Sidi Cheho facilities,the Govern- ment will cause (i) ONE and Hydraulique to enter into an agreement defining their respective role in the inspection,maintenance, and operation, and (ii) its agencies interested in the use of the waters to agree with Hydraulique on rule curves for the management of such waters (4.33).

7.05 The Government will ensure through its Ministry for Public Health that the Sidi Cheho reservoir and its connecting waters will be monitored for bilharzia and its vector and that immediatemeasures will be taken to prevent any increase in the incidenceof the disease in the area (4.35).

7.06 The Governnent will ensure that the average amount of bills due to ONE for the purchase of electricityand related services by its agencies and subdivisions,does not exceed at any time one-sixth of the total of such sales during the previous fiscal year of ONE (5.18).

Management/Finance

7.07 ONE will improve its accounting procedures and reorganize its financial services and exchange views with the Bank on the measures to be taken before implementingthem by June 30, 1977 (5.27).

7.08 ONE will take all measures required to produce, beginning in 1977, an average level of funds from internal sources in the year in question and the preceding year equal to at least 18% of the average capital expenditures during such two years and the next following year, rising to 20% in 1980 and subsequent years. The increase in rates in 1977 is limited to 10%, to which will be added any requirementsto cover increase in fuel prices above January 1, 1976 level. Before October 31 of each of its fiscal years ONE will prepare a review, satisfactoryto the Government,of the adequacy of its - 68 -

tariffs to meet the above requirementsfor the next year and will furnish the Bank with a copy of the completed review. For 1977 the measures to be taken by ONE will be carried out before January 1, 1977 (5.32; 5.33).

Condition of Effectiveness

7.09 A subsidiary loan agreement acceptable to the Bank should have been entered into (2.01).

Recommendation

7.10 Subject to the conditionsoutlined above, the project is suitable for a Bank loan with a term of 20 years, including 4-1/2 years of grace. ANNEX Page 1 of 2

MOROCCO

SIDI CHEHO-AL MASSIRA HYDRO PROJECT

Documents Available in Project File

A. PROJECT

1. FAO Draft Report of the Oum er Rbia Master Plan Review, August 13, 1974

2. Plan Directeur de l'amenagement hydraulique de la branche Oum er Rbia

Note de synthese, novembre 1974 Annexes, novembre 1974 Resume (undated)

3. Hydraulique (Alpinconsult), Avant projet detaille Volumes 1-8; Dossier des plans, juin 1975

4. Alpinconsult, Chute de Sidi Cheho Mission No. 2 avant-projet detaille de l'usine (Bordereau A, pieces ecrites)

5. ONE Rapport de factibilite. Usine Sidi Cheho, juin 1975

6. ONE Etude energetique dans le cadre du plan directeur de l'Oued Oum er Rbia

7. Justification economique de l'amenagement hydro-electrique (Sidi Cheho), octobre 1975

8. ONE Chute de Sidi Cheho; indications generales et disposition des ouvrages, octobre 1975

9. Appraisal Working Papers

B. SECTOR

1. First Power Project - Loan 936-MOR; Appraisal Report 26a-MOR, August 22, 1973

2. Etude sur le secteur de l'Energie en Maroc

(1) EdF Note, (2) Secteur energetique et l'economie; tarification (EdF), (3) Etude sur le prix d'electricite (ONE), (4) Sommaire etude d'organization du secteur (EdF), 1972-1974

3. ONE Cahier des charges (Decret 2.73.5.33 de 29 novembre, 1973)

4. ONE Inventaire des moyens de production d'energie electrique existants, en cours de realisation ou en projet au 1 janvier, 1975

5. ONE Donnees Statistiques 1974 ANNEX ÉPage 2 of 2

B. SECTOR (Cont'd)...

6. ONE Information on number of consumers, sales to consumer categories 1971 Costs Sidi Cheho, 1975-1977 plan for transmission, February 1976

7. ONE Droits de douane et taxes percus a l'importation du material

8. ONE Etude de secteur de l'Electricite, Vol. I et II (Bank Energy Sector Review 1975, ONE information) I BRD 12065R

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