Document of The World Bank FOR OFFICIAL USE ONLY Report No. 74639-MA INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED LOAN IN THE AMOUNT OF EURO 100 MLLION (US$ 130 MILLION EQUIVALENT) TO THE KINGDOM OF MOROCCO FOR A THIRD MUNICIPAL SOLID WASTE SECTOR DEVELOPMENT POLICY LOAN February 5, 2013 Sustainable Development Department Middle East and North Africa Region This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. KINGDOM OF MOROCCO - GOVERNMENT FISCAL YEAR January 1st – December 31st CURRENCY EQUIVALENTS (Exchange Rate Effective as of November 30, 2012) Currency Unit Moroccan Dirham US$ 1.00 MAD 8.5437 EUR 1.00 MAD 11.1135 Weights and Measures Metric System ABBREVIATION AND ACRONYMS AFD French Development Agency (Agence Française de Développement) AMO Technical Assistance to Public Entity (Assistance à Maîtrise d’Ouvrage) BOCT Official Gazette for Local Governments (Bulletin Officiel des Collectivités Territoriales) BAM Central Bank of Morocco (Bank Al Maghrib) CDM Clean Development Mechanism CERs Certified Emissions Reductions CGEM General Confederation of Enterprises (Confédération Générale des Entreprises du Maroc) CN-PNDM National Commission for the National Municipal Solid Waste Management Program (Commission Nationale du Programme National des Déchets Ménagers) CPF Carbon Partnership Facility CPS Country Partnership Strategy CRCs Citizens Report Cards DE Department of Environment (Ministry of Energy, Mines, Water and Environment) DGCL General Directorate of Local Governments (Direction Générale des Collectivités Locales) DPL Development Policy Loan EC European Commission EIA Environmental Impact Assessment EMP Environmental Management Plan EPR Extended Producer Responsibility ERPA Emissions Reductions Purchase Agreement ESA Environmental and Social Audit ESIA Environmental and Social Impact Assessment FDI Foreign direct investment FEC Municipal Infrastructure Fund (Fonds d’Equipement Communal) FHII Hassan II Fund (Fonds Hassan II) FNE National Fund for Environment (Fonds National pour la protection et la mise en valeur de l’Environnement) GDP Gross Domestic Product GHG Greenhouse Gas GNFS Goods and Non-Factor Services GoM Government of Morocco GIZ German Development Agency (Deutsche Gesellschaft für Internationale Zusammenarbeit) ICR Implementation Completion and Results Report IMSWM Integrated Municipal Solid Waste Management IMF International Monetary Fund JICA Japan International Cooperation Agency KfW German Development Bank (Kreditanstalt für Wiederaufbau) LFG Landfill Gas LG Local Government (Collectivité territoriale) MAD Moroccan Dirham MAGG Ministry of General Affairs and Governance (Ministère des Affaires Générales et de la Gouvernance) MEMEE Ministry of Energy, Mines, Water and Environment (Ministère de l’Énergie, des Mines, de l’Eau et de l’Environnement) MDGs Millennium Development Goals MoHU Ministry of Housing and Urban Policy (Ministère de l’Habitat, de l’Urbanisme et de la Politique de la ville) MoEF Ministry of Economy and Finance MoI Ministry of Interior MSW Municipal Solid Waste MSWM Municipal Solid Waste Management MTEF Medium Term Expenditure Framework ONEM National Observatory of the Environment (Observatoire National de l’Environnement du Maroc) OPJ Judiciary Police Inspector (Officier de Police Judiciaire) PEFA Public Expenditure and Financial Accountability PFM Public Finance Management PJD Parti de la Justice et du Développement PLF Draft Budget Law (Projet de loi de Finances) PLL Precautionary and Liquidity Line (IMF) PNDM National Municipal Solid Waste Program (Programme National des Déchets Ménagers) PPIAF Public-Private Infrastructure Advisory Facility PSIA Poverty and Social Impact Analysis PSP Private Sector Participation SDR Safeguards Diagnostic Review SG Secretary General SMEs Small and medium enterprises SOEs State-owned Enterprises SWM Solid Waste Management TGR Kingdom’s General Treasury (Trésorerie générale du Royaume) TSC Municipal Service Tax (Taxe sur les services communaux) VAT Value Added Tax Vice President: Inger Andersen Country Director: Neil Simon Gray Sector Director: Junaid Kamal Ahmad Sector Manager: Franck Bousquet Task Team Leader: Jaafar Sadok Friaa KINGDOM OF MOROCCO THIRD MUNICIPAL SOLID WASTE SECTOR DEVELOPMENT POLICY LOAN TABLE OF CONTENTS LOAN AND PROGRAM SUMMARY 5 I. INTRODUCTION 7 II. COUNTRY CONTEXT 8 A. RECENT POLITICAL AND SOCIAL DEVELOPMENTS 8 B. RECENT ECONOMIC DEVELOPMENTS IN MOROCCO 10 C. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 12 III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES 16 A. MUNICIPAL SOLID WASTE SECTOR CONTEXT 16 B. GOVERNMENT’S REFORM PROGRAM 19 C. CONSULTATION AND PARTICIPATORY PROCESS 24 IV. BANK SUPPORT FOR THE GOVERNMENT’S PROGRAM 25 A. LINK TO CPS 25 B. COLLABORATION WITH THE IMF AND OTHER DONORS 26 C. COORDINATION WITH OTHER BANK OPERATIONS 26 D. LESSONS LEARNED 27 E. ANALYTICAL UNDERPINNINGS 29 V. THE PROPOSED THIRD MUNICIPAL SOLID WASTE SECTOR DEVELOPMENT POLICY LOAN 30 A. OPERATION DESCRIPTION 30 B. POLICY AREAS 33 POLICY AREA A – GOVERNANCE OF THE MUNICIPAL SOLID WASTE SECTOR 33 POLICY AREA B –INSTITUTIONAL AND FINANCIAL SUSTAINABILITY OF MUNICIPAL SOLID WASTE MANAGEMENT SERVICE 38 POLICY AREA C – ENVIRONMENTAL MONITORING AND CONTROL 43 POLICY AREA D – DEVELOPMENT OF RECYCLING VALUE CHAINS 46 VI. OPERATION IMPLEMENTATION 48 A. POVERTY AND SOCIAL IMPACTS 48 B. ENVIRONMENTAL ASPECTS 50 C. IMPLEMENTATION, MONITORING, AND EVALUATION 51 D. FIDUCIARY ASPECTS 51 E. DISBURSEMENT AND AUDIT 52 F. RISKS AND RISK MITIGATION 53 -3- ANNEXES ANNEX 1 – DEVELOPMENT POLICY LETTER 55 ANNEX 2 – POLICY MATRIX OF SECOND PROGRAMMATIC SERIES (DPL 3 AND 4) 68 ANNEX 3 – FUND RELATIONS NOTE 73 ANNEX 4.1 – MACROECONOMIC DEVELOPMENTS OVER THE LAST DECADE 77 ANNEX 4.2 – MOROCCO PUBLIC DEBT SUSTAINABILITY AND EXTERNAL FINANCING REQUIREMENTS 80 ANNEX 4.3 – COUNTRY AT A GLANCE 83 ANNEX 5 - SUMMARY OF POTENTIAL POVERTY AND SOCIAL IMPACTS OF EACH DPL3 PRIOR ACTION 86 LIST OF TABLES Table 1. Annual subsidies in percent of GDP.................................................................................................. 11 Table 2. Base-line Medium Term Macroeconomic Indicators ........................................................................ 12 Table 3. Financing Requirements of the Central Government ........................................................................ 14 Table 4. Objectives of the PNDM and results achieved under Phase I ........................................................... 21 Table 5. Municipal Solid Waste Sector Program Outcomes ........................................................................... 23 Table 6. Main recent analytical underpinnings................................................................................................ 30 Table 7. Prior actions of DPL 3 ....................................................................................................................... 31 Table 8. Triggers for DPL 4 ............................................................................................................................ 32 Table 9. Good Practice Principles on Conditionality ...................................................................................... 33 LIST OF FIGURES Figure 1. Main phases of the Government’s program of reforms in the solid waste sector ............................ 22 LIST OF BOXES Box 1. PNDM: National Solid Waste Program ............................................................................................... 16 Box 2. Decentralization, Regionalization and the 2011 Constitution.............................................................. 20 Box 3. Piloting a new Demand Side Governance Initiative in the MSW Sector – the Citizens’ Report Card 35 The Loan was prepared by a World Bank team consisting of Jaafar Sadok Friaa (Task Team Leader and Lead Urban Specialist), François Boulanger (Senior Urban Economist), Carolyn Winter (Senior Social Development Specialist), Mohammed Bekhechi (Lead Legal Environmental Consultant), Fadhel Ghariani (Solid Waste and Public Institutions Consultant), Renaud Paubelle (Infrastructure Specialist), Sherif Arif (Senior Environment Consultant), Gaël Grégoire (Senior Environmental Specialist), Jean-Pierre Chauffour (Lead Country Economist), Khalid El Massnaoui (Senior Economist), Najat Yamouri (Senior Social Development Specialist), Lamyae Hanafi Benzakour (Senior Financial Management Specialist), Jean Charles De Daruvar (Senior Counsel), Hassine Hedda (Finance Officer), Maya Abi Karam (Counsel), Aditi Banerjee (Economist), Bruce McPhail (Social Development Specialist, Consultant), Sylvie Pittman (Program Assistant), Sophie Hans-Moevi (Program Assistant), and Soumia Driouch (Program Assistant). -4- LOAN AND PROGRAM SUMMARY KINGDOM OF MOROCCO THIRD MUNICIPAL SOLID WASTE SECTOR DEVELOPMENT POLICY LOAN Borrower Kingdom of Morocco Implementing Ministry of Economy and Finance, Ministry of Interior, and Ministry of Energy, Agencies Mines, Water and Environment Financing Data IBRD Loan, Variable-spread loan in Euro, with 29 years maturity and a 6.5years grace period. Amount: EUR 100 million (US$ 130 million equivalent) Operation Type The proposed operation is the first in a programmatic series of two single- tranche DPLs. Main Policy Areas The policy areas supported by this programmatic series (Program) focus on: (i) strengthening governance, and particularly demand-side governance by improving accountability of service providers, transparency, access to information, and providing citizens and civil society with new and effective opportunities for engagement and voice; (ii) improving institutional and financial sustainability of the sector by professionalizing Integrated Municipal Solid Waste planning and service delivery and diversifying municipal sources of revenues; (iii) upgrading the country’s environmental monitoring and control system; and (iv) developing financially viable and socially inclusive waste recycling value chains. Key Outcome Governance of the Municipal Solid Waste Sector: Indicators  Number of municipalities implementing Citizens’ Report Cards on Municipal Solid Waste services  Percentage of extracts of contracts disclosed on BOCT web platform Institutional and Financial Sustainability of Municipal Solid Waste Service:  Percentage of waste collected professionally and disposed of in sanitary landfills  Number of inter-municipal/regional institutions (“Groupements d’Agglomération� and “Groupements de communes�) established  Percentage increase in aggregated municipal revenues compared to 2012  Decrease in the percentage of total volume of arrears (as declared by private operators) compared to the original annual total amount of Municipal Solid Waste contracts Environmental Monitoring and Control:  Percentage of Municipal Solid Waste facilities regularly inspected Development of Recycling Value Chains:  Annual amount of eco-taxes collected and allocated to the National Fund of Environment  Number of recycling projects supported through Eco-tax revenues  Number of income generating opportunities in the recycling sector for waste-pickers (disaggregated by gender) -5- Program Development The objective of this Program is to support the Government’s efforts to improve Objective(s) and the economic, environmental, and social performance of the Municipal Solid Contribution to CPS Waste sector. The proposed DPL is a key component of the CPS. It contributes to the achievement of the CPS’s second and third pillars: (ii) to improve access to and quality of services; and (iii) to ensure long term environmental sustainability in a changing climate. This operation is also fully aligned with the CPS’s cross- cutting theme of enhancing governance. Risks and Risk 1. Macroeconomic Risk. Morocco faces three exogenous macroeconomic risks: Mitigation (i) the possible deterioration of the ongoing global economic conditions - especially in Europe; (ii) the volatility of the agricultural output due to its dependence on changing climatic conditions; and (iii) continued high world prices of food and energy. Morocco could also suffer from endogenous risks, essentially those related to a slow or non-consequential implementation of the needed reforms stemming from resistance of vested interests groups or from a waning political determination to implement politically and socially sensitive policies, such as the subsidy reform. Morocco’s management and mitigation of these risks are predicated on the new Government’s strong commitment to proceed with the ongoing and envisaged reforms, including three critical measures the Government is already working on: deepening of fiscal reform, regaining control over the wage bill evolution and subsidy reform. 2. Limited willingness and capacity of LGs to implement the supported policy measures. Many of the supported policy measures provide LGs with new financial, operational and governance tools to improve the environmental and social dimensions of service delivery. However, they will remain ineffective without some level of local willingness and capacity to implement citizen report cards, develop recycling activities, liquidate and prevent arrears, introduce waste fees on large producers, etc. To mitigate this risk, the proposed operation will strengthen the incentive mechanisms currently in place through PNDM financial support. In parallel, a systematic technical assistance (AMO) is now a key component of the PNDM, particularly to ensure proper preparation and management of PSP contracts and arrears, while more sustainable mitigation of an institutional nature (asset companies, etc.) are gradually put in place. The ongoing national communication program will also contribute to improving the local decision makers’ understanding of and commitment to the reforms. 3. Weak governance and capacity to manage eco-tax revenues efficiently. The eco-tax on the plastics industry is a breakthrough in Morocco’s solid waste agenda which would contribute to transform the recycling sector and improve the social economy of MSW systems. A lack of transparency in the use of the eco-tax revenues and a deficit in engaging key players (eco-tax payers, recycling industry, LGs, and informal sector) would lead to mixed results, and prevent the scaling up of eco-taxes to other waste streams. To mitigate such risk, the Government is committed to put in place a well-governed and staffed management unit involving the above key players, to ensure transparent, efficient and result-oriented recycling activities. This is reflected in the policy matrix as trigger #8 of DPL4. Operation ID P127955 -6- INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT PROGRAM DOCUMENT FOR A PROPOSED THIRD MUNICIPAL SOLID WASTE SECTOR DEVELOPMENT POLICY LOAN I. INTRODUCTION 1. This Program Document presents a Third Municipal Solid Waste (MSW) Development Policy Loan (DPL 3) to the Kingdom of Morocco in the amount of Euro 100 million (US$ 130 million equivalent). The proposed operation follows a first programmatic series of two single tranche DPLs. The first operation (€100 million) was approved by the Board in March 2009, and the second operation (€100 million) in December 2010. 2. Per the request of the Government, this DPL 3 has been prepared as the first operation of a second programmatic series of two single tranche DPLs (the Program). This new series builds on the excellent sectoral dialogue with the Government, the overall success of the previous two operations and the need to consolidate medium-term reforms. It will be implemented in parallel with the second phase (2013- 2017) of the Government’s ongoing 15-year National Solid Waste Program (PNDM) and will support its transition to full implementation and roll-out, while focusing on the overall coherence of the sector with the new decentralization agenda. The subsequent DPL 4 is expected to be submitted for approval by January 2015. 3. During the first phase of the reform supported by the previous two DPLs, Morocco has made good progress in substantiating the sector policy and providing the necessary operational and regulatory framework for more integrated and efficient MSW systems. The required legislation in the sector is now in place, building on the enactment of Morocco’s first solid waste law in December 2006, and on a well-ingrained and effective coordination of sector policies and government actions. A transparent and result-oriented incentive mechanism is operational, allocating national financial resources to support municipalities in modernizing their MSW systems through private sector participation. Currently, about 3/4 of the urban population has access to upgraded MSW collection services provided by private operators, compared to 40 percent in 2006. This is in parallel with great achievement on the disposal practices: 32 percent of MSW collected are now being disposed of in sanitary landfills compared to 4 percent in 2006. 4. There is, however, a strong need to capitalize on the progress accomplished during the first phase of the PNDM in order to increase the impact of reforms and address emerging challenges. The PNDM is entering its second phase, while higher expectations on governance and a new regionalization/decentralization agenda set a new context for municipal service delivery. Challenges include ensuring that key players at national, regional and local levels continue to improve MSW service delivery while: (i) promoting public access to service information in order to enhance social accountability of service providers and municipal administrations; (ii) strengthening the institutional and financial framework to professionalize investment planning, infrastructure development and service management, and sustain private sector participation building on the regionalization/decentralization momentum; (iii) developing environmental control and monitoring to better support the compliance of MSW infrastructure and services with national regulations; and (iv) developing waste recycling activities in a manner that promotes income generation whilst also providing improved working conditions and opportunities for the vulnerable groups who rely on waste picking for a living, including women. This requires a comprehensive and coordinated set of policy reforms in several key areas, cutting across institutional, financial, environmental and social dimensions. -7- 5. In this context, the proposed programmatic series aims to support the Government’s efforts to improve the economic, environmental and social performance of the MSW sector. The measures supported by this DPL focus on : (a) strengthening governance, particularly demand-side governance, in the sector by improving accountability, transparency, and access to information, and by providing citizens and civil society with new and effective opportunities for engagement and voice; (b) anchoring long-term institutional and financial sustainability of the sector in line with the new decentralization agenda; (c) upgrading the country’s environmental monitoring and control system; and (d) developing a financially viable and socially inclusive waste recycling sector. 6. Bank support to the municipal solid waste sector in Morocco is among the core activities of the Bank’s Country Partnership Strategy (CPS) for the period FY10-13, in support of its second and third pillars “service delivery to citizens� and “sustainable development in a changing climate�, while contributing significantly to the cross-cutting theme of “governance�. 7. The proposed support is also completely aligned with the Bank’s new framework for engagement in Middle East and North Africa (MENA). It will contribute to: (i) strengthening demand- side governance by increasing transparency, accountability and citizens’ engagement in the sector by introducing rigorous social accountability tools such as Citizens’ Report Cards (CRCs); and strengthening municipal finance and capacity of local authorities; (ii) improving social and economic equity by providing equal access to services in urban areas, and particularly to low income and informal neighborhoods, and by ensuring that a new eco-tax will contribute to the alleviation of extreme poverty – one of the World Bank Group goals – by providing resources for waste pickers inclusion programs; and (iii) creating equitable income-generation opportunities and small enterprises (about 50,000 – 70,000 jobs over the time span of the PNDM) through the development of a financially viable waste recycling sector. Additionally, the supported program will contribute to (i) reducing environmental degradation and negative impacts on air, water resources and soil degradation as well as encouraging economic development activities like tourism, thus lifting a constraint to growth; and (ii) reducing gender disparities in terms of access to business opportunities and income-generation in recycling activities, as well as fostering women’s voice on MSW services through CRCs. 8. Finally the program is implemented in close collaboration with other partners. Although there are no co-financiers of the proposed operation, the team is working very closely with other donors involved in this sector in Morocco, including GIZ, USAID and KfW who are providing coordinated technical support. II. COUNTRY CONTEXT A. RECENT POLITICAL AND SOCIAL DEVELOPMENTS 9. The wave of democratization that swept the MENA region since the start of the Arab Spring also enveloped Morocco; although its experience has been a reasonably peaceful one with social demonstrations taking place regularly across the country during 2011 and only sporadic outbursts of violence noted. This social movement, known as the “February 20 Movement�, started with calls for political change, a curbing of corruption and a more inclusive development process. King Mohammed VI’s response was to propose, in March 2011, a broad and comprehensive package of political reforms that gathered the support of the population through a constitutional referendum held on July 1, 2011.1 The new constitution sets the basis for a more open and democratic society, provides mechanisms for the construction of a modern state of law and institutions, and lays the foundation for extended 1 The vote in favor of the proposed constitutional referendum was 98.5 percent with a participation rate of 73 percent. -8- regionalization/decentralization. Its provisions need to be concretized by several laws that the Parliament will need to adopt in the coming months. 10. The new Constitution introduces a new institutional model based on separated, balanced and complementary powers. In addition, it reinforces the principles of good governance, human rights and protection of individual freedoms, as well as increased institutional responsibility and accountability. The main changes reflected in the new Constitution are: (i) strengthening the role of Parliament through greater oversight powers over the Government; (ii) elevating the Prime Minister’s status to that of Head of Government; (iii) enhancing the independence of the judiciary as a power that is autonomous from the executive and the legislative; (iv) promoting human rights and equal opportunity for all citizens to access economic, social, environmental and social services, (v) establishment of important institutions, including the National Council for Human Rights, the Ombudsman system, the Competitiveness Council, the National Authority for Integrity and the Prevention and Fight against Corruption; (vi) establishment of the Council for Youth and Community Work; and (vii) establishment of advanced regionalization as a democratic and decentralized system of governance. 11. Transparent elections, held on November 25, 2011, were won by the Parti de la Justice et du Développement (PJD) that had traditionally been in active opposition and has seen its support steadily increasing in recent years. The PJD won 27 percent of the votes, almost twice that of the second largest political party. An intense period of discussions among political parties then followed, leading to the formation, in early January 2012, of a coalition government, with the head of the PJD becoming the Head of Government. 12. The Arab Spring protests and constitutional changes represent real pressure on the Moroccan State for meaningful and quick change. While the people seem to be willing to support the new Government and its mandate, they are indeed demanding that the new Government usher in credible and faster reforms, notably, to create more jobs and improve the quality and equity of public access to services delivered. Morocco is thus on the threshold of potentially profound social, political and economic transformation. 13. Many important tasks are awaiting the newly elected Parliament. In addition to adopting various organic laws (such as the new Budget Fundamental Law and the one planned for the organization of local governments) and establishing institutions dedicated to human rights and economic and social development, the new Parliament will need to start reforming mechanisms that govern the relationship between the legislature and the executive. The Government’s program voted by Parliament on January 26, 2012 is in line with such challenges as it centers on the rapid implementation of the new Constitution and promotes good governance, transparency, and accountability within the public sector. 14. While there has been progress on improving social indicators and decreasing the poverty rate, accelerated and more effective actions are necessary to improve lagging human development outcomes, especially for women. Morocco is likely to miss the MDGs on child mortality and maternal health and lags behind regional neighbors and countries with comparable GDP per capita in terms of the Human Development Index. The under-5 mortality rate of 38 per 1,000 live births and the maternal mortality rate of 110 per 100,000 live births are amongst the weakest in MENA (only Yemen and Djibouti score worse and unlike Morocco they are both low-income countries). Furthermore, the status of women needs to be addressed more comprehensively and with greater commitment in order to ensure real impact on women’s lives. In particular, Morocco needs to bring about significant change in the way that social services are delivered and target better those services that have a greater benefit to women (e.g. addressing the high maternal mortality rates, high women’s illiteracy, as well as very low female labor force participation). -9- B. RECENT ECONOMIC DEVELOPMENTS IN MOROCCO 15. Since 2008, Morocco2 has been hit by a number of adverse exogenous shocks. Like other emerging countries, Morocco has suffered from the global finance crisis as well as the high fuel and food prices. Given its strong trade exposure to the EU, Morocco has been particularly vulnerable to developments in the euro area and the resolution of the sovereign debt crises in Spain, Italy and other peripheral countries. Yet, even under a mild scenario of orderly resolution, Morocc o’s external demand will remain weak under the current projections for growth in the EU and other advanced economies. At the same time, prices of the main commodities have remained high, with the price of Brent crude averaging nearly US$ 113.4 in September 2012, up 18.6 percent from its lowest level of June. In addition, cereal prices have soared following droughts in the United States and Russia, which may lead to another food crisis in the coming months. Internally, Morocco has suffered from a decline in its agricultural output that has put more pressure on the balance of payments and the budget due to increasing food imports, especially cereals. 16. Despite those negative exogenous shocks, Morocco’s non-agricultural output is projected to remain robust in 2012. Over the first three quarters of 2012, while the agricultural sector suffered from insufficient rainfall resulting into a 8.8 percent drop in production, non-agricultural GDP increased by 4.5 percent, allowing GDP growth to post a positive rate (2.7 percent) although it is one of the lowest rates in a decade. Domestic demand remains the main driver of growth. Public consumption gained 5.1 percent while household consumption increased by 4.5 percent over the period benefiting from the recent wage rises and relatively low prices of non-food products. Investment increased by 3.2 percent, mostly driven by programs of social housing, public works, and industrial equipment. 17. The Government and the Central Bank have shown continued commitment to control inflation. Despite higher world prices of imported commodities, inflation has remained relatively low, mostly because of basic food and fuel subsidies and prudent monetary policy. Subsidies have allowed the Government to control consumer prices of basic food and fuels. As a result, the average consumer price index increased just marginally over the first nine months of 2012, edging up to 1.1 percent, similar to the same period last year. Among all sectors, higher food prices have contributed the most to inflation (up 2 percent). The upward adjustment of the administered prices for fuel products in June 2012 and related direct increase in transportation prices (by 2.6 percent) has had limited indirect effect so far on overall inflation. 18. Morocco’s unemployment rate has been stubbornly high despite declining participation rates. Less than half of the Moroccan population is actually active (either employed or looking for a job), which reflects one of the lowest participation rates among comparator countries. Participation rates have been steadily declining from 55.3 percent in 1999 to 48.6 percent over the first three quarters of 2012. Unemployment rate remained quasi-stable over the period, reaching 9.1 percent of the active population or about one million unemployed. Regarding the profile of the job seekers, 4 out of 5 unemployed are urban jobless, 2 out of 3 are youth aged 15-29, 1 in 4 jobless holds a university diploma, half of the unemployed look for their first jobs, and more than two third have been jobless for more than one year. 19. The economic turmoil in Europe and continued high prices of commodities have eventually had their toll on Morocco’s fiscal balance. The fiscal deficit3 deteriorated to 6.9 percent of GDP in 2011 and central government debt jumped to 53.7 percent of GDP. In 2012, the fiscal deficit is estimated to stay high. The deficit reached 5.1 percent of GDP at end-September 2012 (up from 4.2 percent of GDP during the same period last year). Given the impact on subsidies of higher world prices of basic food and fuel products, the deficit is expected to increase over the rest of the year. However, the decision of the Government to increase the prices of liquid fuel products in June 2012 (up 19.6 percent for gasoline, 14 2 See Annex 4.1 on Morocco’s macroeconomic develo pment over the last decade 3 Fiscal deficit does not include privatization receipts. -10- percent for gasoil, and 13.4 percent for industrial fuel), should help reduce the projected deficit by 0.6 percent of GDP this year and 1 percent of GDP in 2013. This measure, combined with strict controls of recurrent expenditures should contain the fiscal deficit to around 6-6.5 percent of GDP in 2012. 20. The current universal and open subsidy system and higher wage bill are increasingly testing Morocco’s record of fiscal prudence. Despite the good performance of tax collection over the first nine months of 2012 (up 5.5 percent), government revenues could not compensate for the expansion of current expenditures (up 11.3 percent), mostly due to higher subsidies and a larger public wage bill. The cost of the subsidy system (6.5 percent of GDP by end-September 2012 vs. 6.2 percent of GDP by end September 2011), along with the Government wage bill (11.5 percent of GDP, up from 10.7 percent of GDP), explain 75.3 percent of the increase in current expenditures. Subsidies and the wage bill represent 61 percent of total expenditures. Table 1. Annual subsidies in percent of GDP Est. Commodities 2007 2008 2009 2010 2011 2012 Food 0.8 1.1 0.7 0.7 1.0 1.0 Fuels 1.7 3.5 1.1 2.9 5.1 5.2 Total Subsidies 2.5 4.6 1.7 3.6 6.1 6.2 Source: Moroccan Authorities and Bank staff estimates 21. Even though deficit financing has been exclusively through domestic market, there are no apparent signs of crowding out private investment, as interest rates eased over the period. Net external financing has been negative as disbursement from multilateral creditors was very low, but is expected to scale up over the rest of the year. Overall, the central Government debt increased by 4.6 percentage points of GDP by June 2012, bringing it to about 55.3 percent of GDP– compared to 50.7 percent of GDP end-June 2011– of which 12 percent of GDP is foreign-exchange denominated. This debt level remains manageable provided the Government continues implementing the announced measures for this year to consolidate public finances, notably through reducing the unnecessary current expenditures, rationalizing transfers to public entities, including state-owned enterprises (SOEs), and improving tax collection and fighting fraud and tax evasion. 22. The weakening fiscal situation has been putting the balance of payments under stress. The trade deficit continued to deteriorate in 2012 due to sluggish external demand, notably from Europe, and higher world prices of imported commodities. The trade deficit increased by 10 percent over January- October 2012 compared to the same period last year. Total nominal imports increased by 6.6 percent, entirely due to higher import prices, while exports grew by 3 percent reflecting volume effect. Morocco suffered a loss of 5.6 percent in its terms of trade. Tourism receipts declined by 2.5 percent and workers’ remittances dropped 3.1 percent. The current account deficit is therefore estimated to have widened to 10 percent4 of GDP over the period; trends indicate that the annual deficit at the end of 2012 would reach 9 percent of GDP. On the capital account side, foreign direct investment (FDI) inflows grew by a healthy 4 percent during the period, thanks to foreign investors’ continued confidence in the Moroccan economy. However, total net external capital flows were not sufficient to finance the current account deficit and net international reserves declined by almost US$4 billion since end-2011 to reach the critical level of US$15.5 billion in October 2012, corresponding to 3.8 months of imports coverage. Nevertheless, the Government’s raising of US$ 1.5 billion on international financial market in December, coupled with an expected scaling up of disbursement from multilateral and bilateral financing sources should boost foreign reserves to more than 4 months of imports by the end of the year. 4 Bank staff estimates. -11- 23. To stimulate economic activity and help finance the economy, the Central Bank decided to reduce its policy rate from 3.25 percent to 3 percent in March 2012 – rate confirmed in December – and money reserve requirement for banks from 6 to 4 percent in September 2012. These decisions were taken to inject liquidity into the money market to meet financing needs of economic agents in a context of low inflation and a balance of inflationary risks tilted to the downside. As a result, money supply increased by 3.6 percent by end October 2012 (y/y), compared with a growth of 5.0 percent during the same period in 2011. Bank credit to the economy increased by 4.0 percent (compared to 7.0 percent last year), mostly driven by credit to corporate treasuries (up 10.4 percent), which in part reflects liquidity needs of businesses to compensate for large arrears overdue by the public sector. Credit to housing also increased substantially (up 5.8 percent) due to extending social housing programs backed by the government. Consumption credit jumped 11.1 percent in part because of easier access to credit and the relatively low prices of housing equipment. At the same time, credit to business equipment dropped by 1.0 percent. Non- performing loans remained at 4.3 percent of total credit to the private sector, stable over the period January- October 2012. Overall, the conduct of monetary policy has remained in line with the objective of price stability. C. MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY 24. Morocco’s macroeconomic room for maneuvering has narrowed considerably. The twin deficits that have accumulated to finance the series of adverse external shocks since 2008 have largely exhausted the room for maneuver that Morocco had built prior to these crises through prudent macroeconomic policies and management. They unveiled two main weaknesses that are endangering Morocco’s external and fiscal sustainability in case of a further deterioration of its exter nal or domestic environment. First, the low structural transformation of the economy, which hinders the prospects of a rapid increase in competitiveness, exports, and quality job generation. Second, the pursuit of highly onerous fiscal policies, such as the universal subsidy system and tax exoneration programs. These two weaknesses are contributing to the reversal of the downward trend of public debt and the depletion of foreign reserves to critical levels. 25. Macroeconomic prospects in the medium term will greatly depend on the scope, depth and pace of Morocco’s reform programs as well as developments in Europe – the main trading partner of Morocco. Morocco is expected to benefit from ongoing reforms to improve the economy’s overall competitiveness and the effectiveness of sectoral policies. The current reforms to strengthen governance and justice, consolidate public finance, and deepen decentralization are critical to achieving long-lasting improvement in economic efficiency, productivity, and employment. Under these assumptions, economic growth should recover to around 5 percent by 2015. Inflation is projected to remain under control at 2.5 percent or below. Main macroeconomic indicators are presented in the table 2 below. Table 2. Base-line Medium Term Macroeconomic Indicators Est. Projections 2010 2011 2012 2013 2014 2015 2016 Part A: Main Macro Aggregates Real annual growth rates GDP at market prices 3.6 5.0 2.5 4.5 4.9 5.2 5.4 Non-Agricultural GDP 4.5 4.9 4.1 4.1 5.3 5.7 5.9 GDP per capita 2.5 3.8 1.5 3.5 3.8 4.2 4.5 Total consumption 1.5 6.8 2.7 4.5 4.5 5.0 4.9 Gross domestic investment (GDI) -1.6 3.3 4.1 3.1 3.5 4.0 4.3 Exports (GNFS) 16.6 2.1 3.5 5.8 7.4 7.3 7.5 Imports (GNFS) 3.6 5.0 4.8 4.5 5.2 5.5 5.4 -12- Nominal GDP growth 4.3 5.0 4.5 7.1 7.6 7.8 7.9 Savings-investment balance, as percentage of GDPGross domestic investment 35.0 36.0 36.7 36.2 35.8 35.3 35.0 of which Government investment 5.8 5.9 5.2 5.4 5.5 5.6 5.7 Foreign savings 4.5 8.0 9.0 8.4 7.2 6.2 5.5 Gross national savings 30.5 27.9 27.7 27.8 28.5 29.1 29.5 Government savings (Privatization receipts 1.7 -1.0 -1.2 0.1 1.2 1.8 2.6 excl.) non-Government savings 28.9 28.9 28.9 27.8 27.3 27.3 26.9 Gross domestic savings 26.3 24.0 22.2 22.4 23.1 23.5 23.9 Prices and money GDP inflation (period average) 0.6 0.1 2.0 2.5 2.6 2.5 2.4 Annual average exchange rate (LCU/US$) 8.4 8.1 8.6 8.6 8.7 8.7 8.8 Incremental capital-output ratio (GDI based) 9.8 7.0 14.5 8.2 7.4 6.8 6.5 Money growth 4.8 6.5 5.6 7.6 8.7 8.9 9.0 Part B: Government Finance Indicators Percentage of GDP Total revenues (excl. privatization)5 25.4 25.9 25.8 26.4 26.8 26.8 26.7 of which Tax revenues 22.7 23.0 23.5 24.0 24.3 24.2 24.2 Total expenditures (incl CST) 29.9 33.0 32.3 32.0 31.4 30.8 30.1 of which wages and salaries 10.3 11.0 11.1 11.0 10.6 10.4 10.1 of which subsidies 3.6 6.1 6.2 4.4 4.0 3.6 3.3 Deficit(-)/Surplus(+) (commit. Basis) -4.7 -6.9 -6.2 -5.3 -4.4 -3.8 -3.2 Other Total Debt of Central Government/GDP 50.3 53.7 56.8 57.6 57.4 56.6 55.3 Total interest payments/Tax revenues 10.1 9.9 10.8 10.8 10.4 10.0 9.5 Part C: Balance of Payments indicators Exports of G&S (US$, mln) 30,308 35,456 36,368 38,660 42,141 45,799 49,684 Imports of G&S (US$, mln) 40,192 49,507 50,539 53,050 56,315 59,928 63,902 Remittances (US$), change in % 7.1 7.3 -7.0 9.0 10.0 9.5 9.0 Current Account balance (in % of GDP) -4.5 -8.0 -9.0 -8.4 -7.2 -6.2 -5.5 Gross reserves (CB) in months of MGNFS 5.3 5.3 4.4 4.2 4.0 3.9 4.1 Source: Government of Morocco until 2011 and World Bank staff estimates after 26. Should the underlying sources of growth be slow to materialize, growth prospects would have to be adjusted downward. A potential deterioration of world economy, particularly in Europe, would negatively impact the medium term macroeconomic outlook through reduced prospects on exports, including tourism, as well as on workers’ remittances and FDI flows. Similarly, sustained high commodity prices, a deterioration of the regional context and prolonged global financial uncertainties would have an adverse impact on Morocco’s prospects. Moreover, there is a potential risk that even pre -crisis growth levels might not be sustainable over the medium term if internal demand remains the key driver of growth. 27. In line with the new Constitutional requirement, the Government has further committed to fiscal stability and to progressively decrease the budget deficit to the medium term target of about 3 percent of GDP by 2016 through the implementation of a set of critical reforms. The key measures include:  Reforming the universal subsidy system. Fully aware of the considerable financial burden the current system imposes on public finances, the Government announced the launch of the reform of the subsidy system with the 2013 Budget law. In essence, the overall goal is to improve its efficiency through targeted social programs while progressively allowing for international market price pass-through, especially for fuel products. Currently, the key axes of the reform are: (i) progressive removal of untargeted subsidies; and (ii) identification of alternative targeted systems to support poor and vulnerable households.  Implementing civil service reform including the implementation of a new remuneration system. Following a long preparation phase, the Government has now reiterated its plans to roll out a comprehensive civil service reform including a clear and well defined remuneration system. Together with measures foreseen in the new Organic Budget law soon to be submitted to Parliament, these measures will result in better management and control of the wage bill. 5 Revenues include VAT of local governments. -13-  Accelerate the fiscal and pension reform agenda. Key fiscal reform measures include maintaining momentum of the ongoing tax reform to broaden the tax base, improving the efficiency of the VAT, strengthening tax administration, and removing unproductive tax exemptions. These measures would offset the negative impact of the reduced top rates on corporate and personal income taxes. Another key measure is the commitment to a comprehensive reform of the pension system, starting with a parametric reform of the public sector pension fund in order to ensure it has a balanced budget in the short term.  Enhancing the efficiency of public investment as well as that of the private sector . The Government strategy seeks to consolidate public investment efforts in social sectors (health, education, social housing) while working on the profitability of existing investments, mainly in sectors such as industry, agriculture and tourism. In particular, the Government plans to support high value added industries, mainly through PPP funding for training, infrastructure and logistics. Regarding SMEs, the government intends to support marketing of their products, especially abroad. 28. The Government’s debt strategy is to diversify financing sources and take on a greater proportion of external financing (Table 3). Three main factors underpin the decision of the Government to reinforce its external sources, especially multilateral and concessional. The first is linked to Morocco’s public debt maturity structure. The maturity of public debt has fallen in recent years and will fall further given that the Government mostly financed its needs through issuing short-term T-bills in the domestic market. The main reason behind this choice is to avoid affecting long-term floating rates for banks’ domestic lending to the private sector, especially housing credit, as they are indexed to primary market rates on long-term securities (10 and 15 year bonds). The second relates to the higher balance of payments needs. The third is due to the current higher borrowing requirements of the Budget, in a context of tightening liquidity of the domestic financial markets after a long period of an over-liquid money market. 29. In this context, new external financing schemes are being put in place . The most important one was the August 2012 Arrangement under Precautionary and Liquidity Line (PLL) in amount of US$6.2 billion approved by the International Monetary Fund (IMF). The PLL is part of the proactive approach of the Government to ensure new external financing lines to be able to cope, if necessary, with a deterioration of internal and external balances that would emerge from a possible worsening situation in Europe. SOEs are also seeking more external financing in line with the government policy. To this end, Office Chérifien des Phosphates (OCP) benefited from a Euro 100 million loan recently. MedZ, a subsidiary of Caisse de Dépôts et de Gestion specialized in developing industrial zones and incubating firms in emerging sectors, has benefited from Euro 150 million awarded by Agence Française de Développment (AFD) and Euro 100 million by European Investment Bank (EIB). Euro 100 million from AFD credit will be used by MedZ to early pay back domestic banking loans with onerous conditions. The Government has raised US$1.5 billion from the international market in December 2012. Table 3. Financing Requirements of the Central Government (in percent of GDP) Est. Projections 2011 2012 2013 2014 2015 2016 Financing required 16.7 17.5 17.5 16.6 15.5 14.8 Budget deficit (+) 6.9 6.2 5.3 4.3 3.8 3.2 Amortization 9.8 11.3 12.2 12.3 11.6 11.5 Domestic 9.0 10.5 11.3 11.3 10.7 10.5 External 0.8 0.9 0.9 0.9 0.9 1.0 Total Financing available 16.7 17.5 17.5 16.6 15.5 14.8 Domestic financing 14.1 14.3 14.2 13.2 12.3 11.8 External disbursement 1.5 2.1 2.3 2.4 2.5 2.4 Others (Privatization, grants,…) 1.1 1.1 1.0 1.0 0.7 0.6 Source: Government of Morocco until 2011,and World Bank staff estimates after 2011 -14- 30. Despite its deterioration in 2012, the external position is expected to remain sustainable over the medium term provided that key critical reforms under implementation take hold. As noted earlier, the current account deficit is expected to deteriorate in 2012 and to progressively edge downward to around 5.5 percent of GDP in 2016 benefiting from improved export potentials and a recovery of tourism activities and workers’ remittances. This scenario critically assumes that Morocco would benefit from its continued reform efforts in trade and competitiveness, supported among others by the World Bank. These reforms, along with sector strategies already under implementation, would translate into higher productive private investments, including FDIs, and progressive gains in competitiveness of its exports, including tourism. In this context, external debt is expected to follow an inverted U path reaching a maximum at 40.9 percent of GDP in 2016 before steadily dropping thereafter, while net foreign reserves will remain above 4 months of imports. 31. Balance of payments financing requirements constitute a moderate concern in the medium term, given the country’s relatively low outstanding external debt and still adequate foreign reserves. As the current account deficits are projected to steadily improve in the medium term, financing them through traditional multilateral and bilateral credit lines along with other private capital flows, including FDIs should not be a major constraint. In addition, the Gulf Cooperation Council countries recently confirmed their intention to invest US$5 billion over the next 5 years in FDIs. Any remaining financing gap could be filled by tapping international financial markets. The PLL from the IMF will continue to provide a useful line of credit. 32. The authorities are considering a possible move to a more formal inflation targeting system in conjunction with a more flexible exchange rate. The central bank has developed the necessary prerequisites and tools to shift to an inflation targeting framework. However, the timing of this reform should be carefully considered as it requires measures to ensure fiscal sustainability especially with regards to reforming the subsidy system so as to prevent a negative impact on financial stability. The current exchange rate regime has contributed to macroeconomic stability, yet given the rigidities of the economy, the recent trends in the current account balance would suggest that it could possibly be undermining international competitiveness. In the future, a more flexible exchange rate policy would help strengthen structural reforms to foster competitiveness and weather external shocks. 33. A comprehensive public debt sustainability analysis indicates that the fiscal framework remains sustainable although it would weaken under some medium term downside risks (see Annex 4.2), notably those related to “no policy change� assumption (A2) and growth shock (B2)6. Indeed, when the debt sustainability analysis was run under the assumption of “no-policy-change� scenario, the debt stock increased over the period 2012-2017, before inversing the trend, while under the scenario of “reduced GDP growth by half standard deviation� the debt stock steadily increases. All the other scenarios proved fully sustainable over the medium term. 34. In sum, Morocco is facing growing economic and fiscal challenges. Assuming that the ongoing key fiscal and structural reforms, including those envisaged in the 2013 Budget Law under adoption in Parliament and described above, are implemented in a timely fashion, Morocco’s macroeconomic framework would remain adequate and sustainable in the medium term. In particular, the projected macroeconomic outlook and the success of the structural reforms depend on a robust fiscal consolidation, a prudent monetary policy, and more flexible exchange rate policy over the medium term that supports external competitiveness. Until now, the adverse effects of the global environment on Morocco have been weathered relatively well, thanks to strong economic fundamentals and sound macroeconomic policies carried out over the last decade. Yet, in contrast to when the international crisis struck in 2008, the Government today has much smaller 6 See assumptions in Table 2.1 in Annex 4.2. -15- margins for maneuver. Its commitment to deepen and expand the current reform efforts is key to the prospects for a sustainable recovery of investment, growth, and employment in the years to come. III. THE GOVERNMENT’S PROGRAM AND PARTICIPATORY PROCESSES A. MUNICIPAL SOLID WASTE SECTOR CONTEXT 35. The growing rate of waste generation is putting significant pressure on municipal services, particularly from financial, managerial, environmental and social perspectives. Problems associated with municipal solid waste have increasingly been recognized as barriers to a more harmonious urbanization and overall socioeconomic development process in Morocco. Currently, the country generates about 5.3 million tons of municipal solid waste per year in urban areas and this figure is expected to reach 6.2 million by 2020 7. 36. With increasing public awareness on quality of life, environmental protection and sustainable development, the MSW agenda has become a national priority in the Kingdom. Since 2008, a three- phase 15-year National Municipal Solid Waste Program (PNDM, see box No. 1 below) is being implemented aiming at supporting municipalities to cope with the requirements of the 2006 Solid Waste Law including the modernization of their MSW systems. The total cost of the PNDM is estimated at MAD 40 billion (comprising 33 percent for investment, 62 percent for operation, and 5 percent for technical assistance). Box 1. PNDM: National Solid Waste Program PNDM National Commission PNDM Financial support to municipalities: incentive mechanism to upgrade MSWM systems A National Commission (CN-PNDM) was formed in 2009 to coordinate, supervise and monitor To help the municipalities cope with the requirements of implementation of activities under the PNDM and the the Law 28-00, the Government has decided to support sector reform program. Its mandate includes the municipalities to upgrade their management of following main tasks: municipal solid waste. The support is intended to be  Coordinate the implementation of the PNDM limited, in order to encourage municipalities to develop and propose strategic measures for the efficient their own resources, and temporary, to provide financing execution of the reform program of the MSW while measures to improve local revenues take effect. sector; The Government support has four objectives: (i)  Monitor and assess the achievements, results transparency in the allocation of funds; (ii) per-equation and progress under the PNDM and reform to alleviate disparities in local revenues; (iii) program; performance to reward good practice and innovative  Review and adopt the eligibility criteria of the projects; and (iv) the integration of environmental and financial support to the municipalities waste social considerations. Municipalities must first meet management projects under the PNDM; several eligibility criteria in their application for funds.  Review and approve funding allocation to LGs Once those have been met, allocations are determined under PNDM; based on the costs of the investment (a cost ceiling  Review and approve action programs, the applies), the quality of the proposal; and the financial partnership agreements, documents, manuals capacity of each municipality. In total, the government and guidelines for the implementation of has mobilized MAD 2 bn during the first phase (2008- PNDM’s support activities; 2012), including MAD 1 bn from Programme d’emploi  Approve and monitor the capacity building de la TVA and MAD 1 bn from State Budget. It is activities undertaken under the PNDM; expected that the level of Government’s financial 7 Hydro-Protect Consult, Étude pour l’élaboration des lignes directrices de contrôle de gestion environnementale des décharges contrôlées, (draft, 2012). -16-  Review and approve the progress reports support will be similar during the second phase (2013- prepared by the PNDM Program Management 2017) for the support of investments in sanitary landfills, Unit (PMU). in improvements to collection services, the preparation The CN-PNDM acts under the presidency of the of provincial/prefectural master-plans, and in the closure Ministry in charge of Environment (MEMEE) and is and/or rehabilitation of uncontrolled dumpsites. In composed of representatives from the Ministry of addition, the eco-tax revenues, estimated at MAD 230 Interior (MoI), Minister of Economy and Finance, million in the first year, will support the PNDM Ministry of General Affairs and Governance, and the recycling objective. Fond d’Équipement Communal (FEC). 37. During the last few years, supported by the Bank and other partners, Morocco has made good progress in providing the necessary regulatory framework for establishing the foundations for integrated and affordable municipal solid waste management systems. Tangible results include:  With the enactment of its first Solid Waste Law in 2006, Morocco benefits from a firm legislation to address the challenges of the sector through integrated solid waste management. A set of decrees has been enacted and implemented including those related to waste classification, administrative procedures and technical specifications for sanitary landfills, and procedures for the elaboration of provincial and prefectural MSW master plans.  With the establishment of the National Commission of SWM, there is now a well-ingrained and effective coordination of sector policies and government actions within the 15-year PNDM.  A result-oriented incentive mechanism is operational allocating national financial resources to support municipalities in establishing modern and integrated systems in line with the objectives of the PNDM. The growing national support to the sector is evident in the increase in financial allocation made through the state budget to this mechanism: MAD 330 million for 2010, 2011 and 2012, compared to MAD 100 million in 2008. Additionally, MAD 200 million is mobilized annually through the MoI (Programme d’Emploi de la TVA) to support the professionalization of the waste collection service and landfill operation. Financial sustainability of the sector requires, however, that improved services remain adequately funded beyond the PNDM time span.  Governed by the Law No. 54-05 relative to “gestion déléguee�, private sector participation (PSP) in the solid waste sector benefits from strong and continuous Government commitment. For the last five years, the role of the private sector has continuously grown. More than 90 cities have contracted private operators to provide street cleaning and waste collection services which benefit more than three fourths of the urban population today (compared to 40 percent in 2006). In addition, the operation of all sanitary landfills is contracted to the private sector. In most cases contracts cover design, financing, building and operations. The current market size amounts to around MAD 2 billion per year with more than 15 domestic and international firms. This translates into improved service delivery in terms of quality, cost-effectiveness and equal coverage in high, medium and low income neighborhoods.  An innovative nationwide Clean Development Mechanism (CDM) program of activities has been developed to help municipalities generate carbon assets and mobilize carbon revenues, while contributing to the climate mitigation agenda. According to estimates of the design documents, the CDM program has the potential to reduce approximately 9.6 million tons of CO2 equivalent over the period 2012-2021 in 13 different landfill sites. The Bank-managed Carbon Partnership Facility (CPF) has entered into negotiation with the FEC representing Morocco – FEC is the primary -17- provider of investment funds to Local Governments (LGs) – to purchase about 2 million Certified Emissions Reductions (CERs) over that period.  An Environmental Impact Assessment (EIA) system consistent with international good practices is now fully operational, at the national and regional levels, and contributes to the mainstreaming of social and environmental dimensions in development activities. The Government has successfully developed the necessary EIA operational tools and manuals8 for the preparation and review of the EIA system including the appropriate procedures for public consultation as well as an annual reporting of its activities and achievements9. The benefits of this upgraded EIA system spill over beyond the municipal solid waste sector.  Substantial progress has been made towards PNDM objectives in terms of sanitary disposal practices and closing/rehabilitation of open dumpsites. Today more than 32 percent of MSW collected is being disposed of in sanitary landfills compared to less than 5 percent in 2006. And out of 220 open dumpsites, 22 sites are already closed and 64 are being rehabilitated. 38. These are significant results for the first phase of the PNDM (2008-2012), which is overall on track compared to the set targets. The Government acknowledged that continued and steady progress needs to be assured to achieve the objectives set for 2022 with focus on the following key emerging challenges and opportunities which have been identified on completion of the first phase:  Demand side governance remains underdeveloped in the sector. The substantial improvements in MSW sector have been achieved through national policy directives and the increased reliance of municipalities on private waste service operators. However, citizens continue to have very limited access to information on MSW services and the PNDM. This is openly acknowledged by both national and municipal administrations. This means that opportunities to improve service providers’ accountability and performance, and service responsiveness to citizens’ needs and concerns are being missed. International experience shows that improved demand side governance and service users’ engagement is essential to efficient and effective MSW services. It is also critical in building public support for new revenue raising mechanisms, and improving households’ MSWM practices.  Service quality, cost effectiveness and affordability are still suffering from weak managerial and technical capacity at the local level with potential risks affecting the sustainability of private sector participation. During the first phase of PNDM, Government efforts were mostly dedicated to help municipalities strengthen their financial and technical capacity to plan and prepare MSW projects (including through the PPIAF-supported introduction of a new generation of bidding documents and model contracts that incorporate international good practice). Despite some improvements, most municipalities are still experiencing difficulties to prepare quality projects as well as to supervise PSP contracts and manage them day-to-day resulting in the accumulation of high amounts of arrears and a number of disputes. This is mostly due to: (a) weak municipal administration and the inability to attract/hire appropriate skills to develop and manage such complex projects/contracts; (b) interference of local politics in project preparation and management unchecked by appropriate governance mechanisms; and (c) ineffective dialogue between public and private partners coupled with a lack of a conciliation mechanism. Institutional responses to address these issues will need to be framed within the new decentralization agenda. 8 MEMEE : Référentiel sur les études d’impact sur l’environnement, http://www.environnement.gov.ma/PDFs/referentiel_eie.pdf 9 MEMEE: Rapport Annuel des Activités du Comité National des Études d’Impact sur l’Environnement pour l’année 2011, Rapport Annuel des Comités Régionaux des Études d’Impact sur l’Environnement -18-  Medium-term financial sustainability of the MSW service mostly relies on the efficiency of municipal revenue management. The MSW service is funded entirely from the municipalities’ general budgets. Both personnel charges and PSP contract fees are however classified as mandatory expenditure, which ensures that a budget cannot be approved by the MoI, the “tutelle� or supervision authority of LGs, unless they are covered by revenue. While the estimated cost of modernizing MSW systems is typically about 12 percent of municipal revenues, overall revenues for municipalities have steadily increased from 2007 to 2011 by 62 percent, thanks to the 2008 local fiscal reform. This was particularly due to the transfer of a significant portion of VAT revenues. With some individual exceptions, growth in local revenue can absorb modernization costs. Additional to the improvement in municipal revenues, opportunities exist for (i) optimizing the revenue potential of local taxes in Moroccan cities; and (ii) diversifying of service cost recovery mechanisms. Recently, the Kingdom’s General Treasury (TGR) estimated the non -captured local fiscal potential of the country to be between 50 and 100 percent of Municipal service tax revenues. Meanwhile, the existing Solid Waste law 28-00 introduced the concept of MSW service fees, which are still not in effect due to the absence of guidelines provided to the municipalities, the implementers of such fees. To promote equity, large producers of waste have been identified as the first potential target for levying of these “Redevances�.  There is no systematic monitoring and control of MSW facilities and their compliance with environmental regulations, standards and norms. Environmental sector reforms have been impressive in Morocco including the establishment of a modern EIA system supported by DPL1and 2. EIA studies are carried out and formally approved by EIA national or regional committees for any new MSW facility, depending on size. However, the implementation of Environmental Management Plans (EMPs) in the sector, including the operation of landfills, is often without systematic monitoring and control by the environmental authorities. By 2012, only one landfill has been environmentally inspected. Recent studies have also shown that there is often a lack of coordination between MEMEE and the other ministries and agencies with regard to monitoring and control responsibilities. Hence, there is no guarantee for effective mitigation of potential negative impacts on environment, public health and natural resources.  The PNDM set a 20 percent recycling goal for 2022 but has not been able to achieve concrete results yet, recycling being currently estimated at about 5 percent10. Most of the existing recycling activities are informal and the PNDM has limited financial capacity to provide incentives for the development of less wasteful products and/or reducing the volume of recyclable material transported and disposed of in landfills. Hence, cost savings and job opportunities (estimated at 50,000 to 70,000 during the lifetime of the PNDM) are often missed. The adoption and inclusion of the concept of “Extended Producer Responsibility (EPR)� in the SWM legal and regulatory framework will lead to an overall reduction of environmental impacts by making consumption and production more sustainable and extending the life time of landfills. The EPR principle is commonly adopted to streamline the reduction of waste disposal and raw material use (i.e. the amount of raw/virgin material input per unit of product) and to increase resource efficiency. B. GOVERNMENT’S REFORM PROGRAM 39. In the wake of the Arab Spring, the Moroccan constitutional reform of July 2011 acknowledged the economic and political benefits of decentralization and sustainable development . Five principles drive the reform: (i) participative and local democracy; (ii) protection of environment and 10 Source: PSIA addendum (2012) -19- sustainable development; (iii) decentralization and advanced regionalization; (iv) good governance; and (v) the right to access information. In this context, the current government program (2012-2016) advocates for decentralization and local empowerment, and puts significant emphasis on public service delivery. 40. In particular, the blueprint Box 2. Decentralization, Regionalization and the 2011 Constitution from the Consultative Commission on Regionalization, applying the Since the first Charte Communale in 1976, Morocco has very gradually been subsidiarity principle, re-examined expanding the legal and administrative autonomy of local governments. Since a major overhaul of the Charte Communale in 2002, the last ten years have seen a which administrative and territorial dozen laws and many more decrees, each a small step away from centralization. levels are optimal to effectively The 2011 Constitution, largely inspired by the 2011 report of the Consultative deliver services, and called for new Committee on Advanced Regionalization (régionalisation avancée), launched by resources and increased capacity for Royal initiative, takes this further and enshrines two strong principles: the administrative autonomy of local governments (libre administration des local governments, and for collectivités locales), and subsidiarity (subsidiarité), i.e. the principle that matters strengthening support services to should be administered at the lowest tier where they can effectively be local governments from national implemented. Any transfer of competence from the State to a lower tier should be departments and their regional accompanied by the transfer of matching resources. These principles are to be branches. translated into a fundamental law on territorial governments (loi organique des collectivités territoriales), one of twenty fundamental laws that the Constitution requires to be promulgated. 41. This new phase of decentralization should keep However, since Morocco’s decentralization reality already lags the building on what have been decentralization level inscribed in pre-2011 laws, it will be critical to establish a clear roadmap on how to transform guiding constitutional principles into an Morocco’s assets in improving local effective decentralization process. Important questions to tackle include: incentive service delivery over the last two mechanisms to ensure that inter-municipal cooperation happens; what means will decades: the existence of a lively be provided to local governments to evaluate and implement new institutional market of private provision of options for service delivery; how to bring the capacity of already struggling local infrastructure and services, and the government staff to the level required; and how municipalities can use increased autonomy towards local economic development. strength of national-level operators. However, private provision is currently suffering some setbacks, partly due to (i) weak contract design and management on the public side, and (ii) governance issues. Several pilot initiatives at local level, supported by the Government, are looking at new institutional structures, such as local joint ownership companies, and regional asset companies, to remedy identified weaknesses. The upcoming Fundamental Law on Local Governments (Loi Organique des collectivités territoriales) will offer a better framework and more flexibility to set up such entities, in particular for delivery of solid waste management services for which such entities will be a key institutional instrument to strengthen sustainability. 42. This renewed focus on decentralization is also at the source of a new overarching reform agenda that will help strengthen sustainability of the SWM sector: establishing a national urban policy (Politique de la ville). In May 2012, the Ministry of Housing and Urban Policy (MoHU) held a workshop to disseminate the outputs of a series of consultations with governmental and civil society stakeholders, and formally launched Morocco’s national urban policy. Results of the consultations called for focusing on two key principles, fully consistent with the design of the reform of SWM in Morocco: (i) putting local governments at the center of the development agenda of Moroccan cities (expanding on existing or past initiatives, such as the Bank- supported technical assistance towards a National Urban Development Strategy or the Municipal Development Plans elaborated for all municipalities in 2011); and (ii) improving the urban environment. 43. In parallel, the Government adopted the Environment and Sustainable Development Charter11 which defined the rights and obligations of citizens for the protection and preservation of the environment and sustainable development, becoming the first MENA country to do so. To operationalize this Charter, a 11 http://www.environnement.gov.ma/PDFs/CNE_charte_VF.pdf -20- draft law “Projet de loi-cadre n° 99-12�12 has been recently endorsed by the Economic and Social Council and adopted by the Cabinet of Ministers (Conseil du Government). This Law will act as a reference framework to unify all actions and fill in the existing gaps. It will particularly enforce the principles introduced by the Charter including the citizens’ right to access environmental information; establish the “Police de l’Environnement� to reinforce authorities in charge of environmental control and inspection; introduce the environmental extended responsibility and the “fiscalité verte�, and promote waste reduction, reuse and recycling. 44. The reform of the MSW sector, which was triggered by the enactment of the first SWM law 28-00 in December 2006, was reconfirmed as a national priority in the new January 2012 Government program, in line with the Environment and Sustainable Development Charter. The sector reform is viewed as a core component of Morocco’s national sustainable development agenda and a key driver for improving the urban environment and service delivery. The new Government has also re-confirmed the National SWM Program (PNDM, see table 4 below) as the framework for policy coordination and governmental actions to technically and financially support municipalities – entities fully responsible for integrated MSW systems – in modernizing their MSW services. Table 4. Objectives of the PNDM and results achieved under Phase I 2008 2012 2022 (reference) (end phase 1) (objective) Percentage of urban population with access to 44 % 78 % 90% upgraded MSW collection services Percentage of MSW collected and disposed of in 10 % 32 % 100 % sanitary landfills Number of dump sites rehabilitated or closed 0 22 completed 220 64 ongoing Number of provinces/prefectures with validated 0 5 completed 66 SWM master plans 22 ongoing 46 (tender stage) Percentage of waste sorted and recycled < 5% about 5 % 20 % Source: Government of Morocco (PNDM progress report) 12 http://www.sgg.gov.ma/projets_com/5/Projet_loi_99-12_Fr.pdf -21- Figure 1. Main phases of the Government’s program of reforms in the solid waste sector Results of second phase Results of the first phase PNDM established Enactment of the first solid waste law 28.00 45. Building on the momentum gained under the first phase of the Government reform program, the second phase of the program (the Program) aims at consolidating prior achievements and addressing emerging challenges, while taking advantage of the constitutional reform. More specifically, the Program focuses, over the next five years, on four areas of reform: a. Strengthening governance of the sector, and particularly demand-side governance, by improving accountability of service providers, increasing sector transparency, ensuring open access to information, and providing citizens and civil society with new and effective opportunities for engagement and “voice�. b. Enhancing institutional and financial sustainability of the services through support to local governments in professionalizing their integrated MSW systems, augmenting their fiscal potential, introducing waste fees (redevances) as a complement to the current main funding of MSW services through municipalities’ general budget obligations, and consolidating the enabling environment for private sector participation. c. Upgrading the country’s environmental monitoring and control system through the development of the legal, institutional and regulatory frameworks, capacity building within the Environment Department, and inter-agencies coordination which would ensure proper and regular inspection and control of MSW facilities. d. Developing financially viable and socially inclusive recycling value chains through the introduction of eco-taxes on plastic packaging, establishment of a well governed system to manage eco-tax revenues, development and support to recycling/income generating activities, and social integration of vulnerable groups (specifically waste pickers) in the sector with attention being paid to women. -22- 46. Expected outcomes of the Government program are summarized in Table 5 below. Table 5. Municipal Solid Waste Sector Program Outcomes Program Outcomes Longer Term Outcomes Governance of the Municipal Solid Waste sector  Transparent management of the Municipal Solid  Improved access to information, transparency in Waste Program (PNDM) with related performance use of public money, and accountability of service indicators available to public and local decision providers toward improved MSW service delivery makers efficiency.  Key contractual arrangements between the municipality and private provider of MSW service are disclosed  Tools to collect Citizen and user of services feedback on MSW service quality and adequacy, are introduced. Institutional and Financial Sustainability of Municipal Solid Waste Management Services  Budget allocation available for a short period to  Financial capacities of municipalities improved to cover part of the incremental costs of upgrading cover the costs of MSW system modernization. municipal solid waste systems.  Service users and public benefiting from improved  Solid waste fees on large producers of waste are and integrated municipal solid waste services with progressively in put in place to support sector cost near-universal municipal waste collection services recovery. in urban areas, and 100 percent of municipal solid  Local governments are able to prepare and waste collected is disposed of in acceptable social efficiently manage solid waste projects and services and environmental conditions.  Effective inter-municipal cooperation towards better economic and environmental performance of the sector Environmental Monitoring and Control  An environmental monitoring and control system is  Higher transparency on the environmental control in place to reduce social and environmental impacts with all sanitary landfills controlled on a regular in SWM investment and operations. basis.  Environmentally and socially sound disposal  Better application of the environmental laws, practices are in place in municipalities supported by regulations, norms and standards and a sanction for the PNDM. non-compliance. Development of Recycling Value Chains  Eco-tax is introduced and additional revenues are  Economic and social performance of the sector generated to support the recycling activities improved through the creation of 50,000 - 70,000  Recycling activities are promoted in a manner to green jobs in the recycling sector incorporate the informal sector with special  20 percent of municipal solid waste collected is attention paid to gender aspects. recycled. -23- C. CONSULTATION AND PARTICIPATORY PROCESS 47. The government adopted a phased consultative approach to ensure an inclusive dialogue during the preparation of the second phase of the reform program. The objectives of such an approach were to build strong ownership of the reforms at the local and national levels, and to help various stakeholders understand development issues in the sector including the proposed policy reform program and their ensuing tradeoffs. 48. In October 2012, a two-pronged consultation process was conducted by the government to inform various stakeholders about the sector reform and to collect their views on the related development issues and priorities. The consultation process was supported by a continued online activity highlighting the results of the first phase of the reform and presenting the main components of the second phase. This process builds on the dialogue that the government has built with sector stakeholders throughout the implementation of the first phase of the program in various forms (workshops, meetings, round tables). 49. The first consultation focused on addressing specific policy measures which aim to improve the enabling environment to enhance private sector participation in the sector. The workshop brought together more than 60 representatives from relevant ministries, local authorities and private operators and led to an extremely healthy exchange of views. Discussions were guided by the recent PPIAF funded report on PSP contract management (2012) and centered on how to improve the dialogue between private and public partners as well as on the diagnostic and recommendations to address/prevent arrears of payment in the solid waste sector. Key outcomes of this consultation included validation of the diagnostic findings and immediate needs to move on the recommended policy measures. These measures include: a) better budgeting and planning processes at the municipal level to ensure adequate allocation of funds including price revision, proper estimate of MSW services, and processing of undisputed arrears; b) proactive technical support from the center to local governments to address their capacity with respect to PSP contract preparation and management; and c) the establishment of a mechanism for conciliation to improve dialogue and prevent disputes in the future. 50. The purposes of second consultation organized by the government are to a) share progress made and achievements of the first phase; and b) collect feedback on the policy measures considered under the second phase and proposed for Bank support. The consultation targeted the following constituencies: (a) Municipal and regional elected and technical officials, (b) Civil society organization representatives, (c) Academics conducting studies or research on the environment sector, (d) Specialized and non- specialized media; (e) Private operators; and (f) Public sector departments contributing to the implementation of the reform program. 51. Key aspects of this consultation included: i) Acknowledgement of the tangible results of the first phase of the PNDM and overall support to the ongoing/considered reforms; ii) Emphasis on the need to strongly promote waste reduction, reuse and recycling activities, and thus to go beyond the PNDM – Phase1 -24- – focus on improving disposal practices; iii) Emphasis on public engagement and involvement of civil society to improve accountability of public/private providers of MSW services; and iv) Strict enforcement of environmental laws to improve environmental performance of disposal facilities and help decision makers overcome the Not-In-My-Backyard syndrome. There is also a need for Research and Development to develop adaptive and innovative solutions to address particular technical issues, including leachate treatment. 52. An online consultation was also conducted on the draft Law (Loi-cadre) on Environment and Sustainable Development which aims at introducing access to information on all environmental programs and documents. Additionally, a national communication strategy is under implementation and will contribute to raise awareness at the national and local levels, and enhance citizens’ engagement and participation. IV. BANK SUPPORT FOR THE GOVERNMENT’S PROGRAM A. LINK TO CPS 53. The Bank’s support to the implementation of the Moroccan Municipal Solid Waste Management Program is detailed in the FY10-13 CPS that was discussed by the Board in January 2010. The CPS is organized around three main pillars: the first concentrates on activities that will help enhance growth, competitiveness and employment. This objective will entail efforts to foster macroeconomic stability and promote private sector development as an engine of growth. The second pillar supports the improvement in access to, and quality of, services to citizens. This will involve treating the institutional aspects of public services through appropriate public management measures with a view to reinforcing both the diagnostics (targeting) and accountability elements of service delivery. The third pillar aims at ensuring that Morocco’s development can take place along a sustainable path and address es natural resources and climate change challenges. It reflects the Government’s intention to enhance awareness about Morocco’s exposure to climate change impacts while at the same time starting to step up coordination across departments and agencies for adaptation. In addition, the CPS places a strong emphasis on the governance agenda which will be mainstreamed across the envisioned program. 54. Bank support to the reform of the solid waste sector is among the core activities of the FY10-13 CPS and the proposed DPL 3 is fully consistent with the CPS and will contribute to the achievement of the CPS’s second and third pillars (service delivery to citizens and sustainable development in a changing climate). In addition the operation fully supports the CPS’s cross cutting theme of enhancing governance. Specifically, the lending program envisaged in the CPS Progress Report prepared in May 2012 includes the proposed DPL3 operation. 55. As stated in the CPS Progress Report, the Bank’s program in Morocco has evolved during CPS implementation to encompass a greater focus on multi-sectoral operations. The DPL on SWM has significantly switched the focus from a stand-alone MSW dialogue to a more comprehensive one on environment, municipal service delivery and local governance. The proposed MSW DPL series offers a great entry point for the Bank’s dialogue on multi-sectoral engagement to support the decentralization and service delivery agendas in Morocco. 56. The proposed support is also aligned with the Bank’s new framework for engagement in MENA. It will contribute to: (i) strengthening demand-side governance by increasing transparency and citizen engagement by significantly improving public access to information on the sector, introducing rigorous accountability tools such as CRCs; and strengthening municipal finance and capacity of local authorities; (ii) improving social and economic equity by providing equal access to services in urban areas, particularly to low income and informal neighborhoods; and by introducing eco-tax instrument to contribute to the alleviation of extreme poverty – one of the World Bank Group goals – by financing development of -25- waste pickers inclusion programs; (iii) creating equitable income-generation opportunities and small enterprises (an estimated 50,000 -70,000 jobs over the PNDM life span) through the development of a financially viable waste recycling sector. Additionally, the supported program will contribute to reducing environmental degradation and negative impacts on air, water resources, and soil degradation as well as encouraging economic development activities like tourism, thus lifting a constraint to growth. The proposed DPL series will also support the gender agenda by reducing gender disparities in terms of access to business opportunities and income-generation in recycling activities (part of eco-tax revenues will be allocated to financially support gender specific activities/initiatives in the recycling sector), as well as fostering women’s voice on MSW services through CRCs. B. COLLABORATION WITH THE IMF AND OTHER DONORS 57. The World Bank and the IMF maintain close collaboration in Morocco. Regular contacts between the IMF and World Bank country teams are customary, with discussions focused on the respective work programs, country priorities, recent developments and prospects, and reflecting the growing weight of DPLs in the Bank’s Morocco portfolio. Collaboration between the Fund and the Bank has been seamless, with general understanding on the division of labor and a shared assessment of the critical macroeconomic challenges facing the country. The Fund participates in Bank project review meetings where relevant. Similarly, Bank staff were consulted during the IMF’s 2012 Article IV consultation mission to Morocco. Morocco’s most recent Article IV Consultation was discussed at the IMF’s Board in August 2012. The Chairman's statement issued by the IMF on August 3, 2012 as part of the press release on the IMF Executive Board's approval of a US$6.2 Billion Arrangement for Morocco under the PLL is provided in Annex 3. A recent IMF mission has been carried out in December 5-18, 2012 and an updated statement is expected in early February 2013. 58. The proposed operation has been prepared in consultation with the main donors active in Morocco’s environmental and solid waste agenda. GIZ funds a program in support of the environmental protection agenda in Morocco since 2006 including dedicated technical assistance to key national agencies and local governments on strengthening of the environmental control and monitoring, MSW institutional capacity development and planning; regional observatories on Environmental and sustainable development; green fiscal areas; and social inclusion and recycling activities – all of relevance to the proposed DPL. The Bank team has held extensive consultations with representatives of the GIZ, KfW and USAID, to ensure full coordination with ongoing donor supported activities and to share insights on reform priorities and constraints. C. COORDINATION WITH OTHER BANK OPERATIONS 59. The proposed programmatic series is reinforced and complemented by three parallel lending operations, which support measures to address weaknesses in the governance sector and delivery of public services at the local level. In particular, issues of decentralized service delivery have been at the core of Bank’s dialogue and support to Morocco in recent years. The proposed programmatic DPL series has been prepared in close coordination with the Second Urban Transport DPL (expected to be delivered in FY14) and incorporates the lessons learned in previous operations in the same sectors, as well as in the energy, water, and sanitation sectors, to support the Government of Morocco in translating new decentralization and local governance principles (see Box 2) into effective reforms. -26- 60. The Transparency and Accountability (Hakama) DPL: This operation, under preparation, aims to support the government’s policy reforms in three key areas: i) Strengthening the government’s accountability and performance with focus on the management of public/local resources; ii) Enhancing the government’s openness toward its citizens through new policies fostering transparency and public consultation; and iii) Improving the delivery of basic services across the public sector through e-government, corporate governance of SOEs and local governance reforms. The second and the third components offer important potential synergies with the first and second pillars of the proposed MSW Sector DPL3. Reforms on transparency and access to information, local governance, and service delivery are mutually reinforcing and closely coordinated. There are also important complementarities between the local revenue generation measures foreseen in this DPL and the broader reform of local finances and intergovernmental transfers supported by the Accountability and Transparency DPL. 61. The Second Urban Transport Sector DPL: This operation is to follow the first Urban Transport Sector DPL delivered in 2011. Both the urban transport and solid waste sector DPLs are targeting municipal services and address common challenges and issues: (i) local empowerment through better governance, (ii) inter-governmental cooperation, (iii) inter-municipal cooperation, and (iv) enhancing local capacity to plan, prepare, and implement projects, specifically through PSP, and increasing local financing capacity. Both DPLs are being closely coordinated to ensure consistency and institutional synergies. 62. The second INDH Program for Results operation which became effective on September 7, 2012, further strengthens the capacity of LGs, civil society actors, and marginalized groups, to effectively participate in decision-making processes concerning local development planning. This operation offers an excellent platform for developing socially inclusive and income generating recycling activities funded with the proposed eco-tax instrument, and targeting vulnerable groups (waste-pickers). D. LESSONS LEARNED 63. A number of important lessons relevant to the design of the proposed programmatic series DPL3and 4 emerged from the CPS Progress Report and the Implementation Completion and Results Report (ICR) for the DPL1and 2. The ICR was prepared in June 2012 and provided an overall satisfactory assessment for the two closed operations. The main results of the first series are described in para. 43 and the main lessons learned are presented below. 64. The experience of the programmatic series of the first two Municipal Solid Waste Sector DPLs has been very positive and confirms the usefulness of the DPL instrument to support the government’s reform program. Contributing factors included a long history of Bank-client dialogue on sector policies and a strong analytical foundation, which allowed the Bank to accompany the Government in a well-designed and phased program of home-grown sector reform in a complex sector. The first programmatic series was centered on a simple policy matrix to substantiate the program of reforms as an emerging political priority, with shared ownership of the reforms by the Ministries of Interior, Finance and Environment. The Government was fully committed to the program and took advantage of the analysis, planning framework, implementation support and convening power offered by a DPL program while maintaining full leadership and ownership of the reforms themselves. 65. Regular program monitoring should build on a functional and fully integrated national system. While the Government was able to provide information on the results of the first programmatic series in the context of the ICR, based on the results indicators in the policy matrix, the monitoring of the underlying sector program (PNDM) is being strengthened for the PNDM Phase 2. This will also serve as a basis for monitoring results for DPL 3and 4 and to assure that real-time information is available to correct implementation backlogs and/or lack of results. DPL 3and 4 aim at introducing a number of measures to -27- allow the Government to learn from implementation, including an ongoing strategic review of the performance of the first phase of the PNDM. 66. Sector reform can be coupled successfully with overall decentralization and improvements to local government finance. DPL1and 2 were able to lay the foundation for decentralized service delivery in the cities of Morocco through working at the LG financial level. The program focused on service delivery overall (beyond the MSW sector) and laid the foundation for improved local government budget management to reduce arrears with private sector service providers. However, there is room for improvement in this area, and DPL3and 4 will continue to place increased focus on LG budget management and transparency. These are key factors in enhancing private sector confidence and willingness to engage in the sector and increasing accountability of local authorities towards citizens. DPL 3and 4 also capitalize on lessons learned regarding local government finances and the overall financial sustainability of the SWM sector by looking at eco-taxes and SWM fees for large waste producers as means to ensure adequate funding. Coordination with other donors is also important to accompany the roll-out of reforms, as shown by the limited impact of capacity building under DPL 1and 2, compared to its need. DPL3and 4 focus on project management in LGs to mitigate this capacity shortcoming. 67. Continued coordination among ministries, national entities and municipalities is needed for sustained successful results. One of the major impacts of the first programmatic series was to mainstream coordinated planning to support the MSW reform program. This was a major milestone in the way the Government conducts business, not only in the solid waste sector but in other reform areas. The Bank was able to act as a catalyst for a new modus operandi for inter-ministerial collaboration and accompany the Government in a new spirit of openness in which the ministries were looking for partnerships but were not yet working together on cross-sectoral issues. For the DPL3and 4, CN-PNDM will continue to play this coordinating role, including the introduction of eco-taxes and the oversight of the development of the recycling value chains. 68. As the focus of the SWM reform shifts from the initiation stage, focused on large and well- resourced cities, to medium sized and smaller municipalities, the planning and management of capacity-building activities will become increasingly important. Municipalities have been benefiting from intense capacity-building support provided by the MoI as well as donors like the AFD, GIZ and KfW. Yet the capacity of regional and local institutions remains below what is needed to take the program into the next phase, including carrying out inter-communal planning. DPL3and 4 will place emphasis on the overall coherence of reforms in the sector with regionalization of support and oversight structures, coupled with targeted project management support (AMO) to LGs in the context of the PNDM. 69. Quality of service delivery and involvement of the private sector increased under the DPL 1and 2, but more needs to be done to increase cost-effectiveness and ensure funding in the longer term. While private sector participation in the MSW sector increased substantially, the capacity building and standard specifications supported by the DPL series have shown their limitations in terms of improving cost- effectiveness; more needs to be done in terms of market development. For now, the major cities have the funds necessary to contract out services, based on revenues from the municipal service tax, but as coverage rates and service standards continue to increase, new sources of funds targeted at MSW should be developed, including the eco-tax. The second programmatic series supports a number of actions intended to improve budget management, reduce LG arrears towards private sector service providers and also set in place conciliation mechanisms. -28- E. ANALYTICAL UNDERPINNINGS 70. This operation benefits from a wealth of knowledge anchored in significant analytical and technical work initiated under the previous programmatic series (DPL 1and 2) as well as a set of reports recently prepared to address emerging challenges and issues. Table 6 summarizes the main recent analytical underpinnings. Some specific information related to key analytical work is provided below. 71. The working paper on MSW fees (Redevances), has defined the general concept of such fee, analyzed the underlying legal basis, and developed the rationale to promote equity. Large producers of waste (hotels, restaurants, commercial centers, etc.) have been identified as the first potential target for levying of these “Redevances�, as they pay comparatively less local taxes than households while generating higher costs of MSW service paid by the municipality. The working paper assessed four options for implementing the MSW fee and provided guidelines. The MoI elaborated its Circular relative to implementation and the tariff setting of such fee (prior action B.2) based on two options proposed in the working paper. 72. Following the PPIAF-funded development of a private sector participation strategy in the Solid Waste sector, as well as model contracts and tendering documents, during the first programmatic series, another PPIAF-funded study was conducted in 2012 to analyze the worsening accumulation of arrears of payment in MSW PSP contracts. The note established an inventory and characterization of arrears by listing the different types based on data from five pilot cities. The note presented a plan and recommendations to address and prevent conjunctural and structural backlogs. It helped the Ministry of Interior prepare two Circulars: one on the preparation of the LGs’ 2013 budget, and one specific to MSW contract arrears (prior action B.4). 73. The working paper on MSW institutional options benefited from the findings of the KfW-funded report on MSW Institutional and financial framework. The Working Paper articulated strategic institutional options for the solid waste sector in the new context of decentralization/regionalization, including ISWM principle, promotion of inter-municipal arrangements for disposal, and the implementation of local/regional public asset companies to professionalize the management and cope with the shortage of local capacity and local politics interference in contract execution. The Government intends to reflect these options in the draft Loi organique related to the organization of local governments (trigger #3). 74. The working paper on MSW recycling sector presented a rationale for the development of recycling value chains as well as key issues including articulation with current management practices and the social dimension. Based on international experience, the note proposed a phased approach to implementation, starting with the packaging plastic waste. It recommended the introduction of an eco-tax to finance the development of recycling activities and related inclusion programs, the setting up of a specific entity with attention to governance arrangements, and proposed the development of a business plan. All that helped the Government design prior action D.1 and triggers # 8 and # 9 of DPL4. -29- Table 6. Main recent analytical underpinnings DPL reform area Studies and Reports, TA activities, and Investment Projects Leading Institution Poverty and Social Impact Analysis (PSIA) phase 1(2008), phase Cross-cutting 2 (2011) and addendum (2012) WORLD BANK DPL 1 and 2 Implementation Completion and Results Report, 2012 WORLD BANK Morocco CPS- Progress Report, 2012 WORLD BANK Communication Strategy for PNDM, 2011 MEMEE A. Governance First Citizen Report Card – MSW, Témara Municipality, 2012 WORLD BANK Working paper on MSW institutional options, 2012 WORLD BANK B. Institutional and MSW Institutional and financial framework, 2011 MoI, KfW Financial sustainability MSW PSP Study, 2010 and 2012 MoI, PPIAF Working paper on MSW fees (Redevance), 2012 WORLD BANK Environmental control and monitoring study, 2011 MEMEE C. Environmental Study for the establishment of national police for environment, MEMEE monitoring and control 2012 WORLD BANK Safeguards Diagnostic Report, 2011 Working paper on MSW recycling sector, 2012 WORLD BANK D. Recycling Sector Business plan for plastic packaging waste, 2012 MEMEE, GIZ Feasibility study for Eco-tax on plastic raw materials, 2012 MEMEE V. THE PROPOSED THIRD MUNICIPAL SOLID WASTE SECTOR DEVELOPMENT POLICY LOAN A. OPERATION DESCRIPTION 75. The proposed Third Municipal Solid Waste Sector DPL (DPL3) is the first in a programmatic series of two operations which supports the Government’s policy reform in the MSW sector. This series builds on the first programmatic series of two operations delivered respectively in 2009 and 2011 and responds to the Government’s request in 2012 to help consolidate the achievements of the first phase of their PNDM. 76. The objective of this second programmatic series (DPL 3and 4) is to support the Government’s efforts to improve the economic, environmental and social performance of the municipal solid waste sector. 77. Reform areas: The supported Government’s program focuses on the following four reform areas: (i) strengthening governance, and particularly demand-side governance by improving accountability of service providers, transparency, access to information, and providing citizens and civil society with new and effective opportunities for engagement and voice; (ii) improving institutional and financial sustainability of the sector by professionalizing IMSW planning and service delivery and diversifying municipal sources of revenues; (iii) upgrading the country’s environmental monitoring and control system; and (iv) developing financially viable and socially inclusive waste recycling value chains. 78. The proposed DPL program will contribute to the Bank vision: Reducing Poverty and Boosting Shared Prosperity. Concretely, the supported policy measures and the PNDM will (i) create opportunities for vulnerable groups, in particular women, to improve their revenues and working conditions; (ii) foster job creation through the development of a vibrant solid waste recycling sector; and (iii) reduce adverse environmental impacts of existing poor disposal practices, thus improving the living conditions of the nearby poor population. Expected benefits and impacts of the proposed DPL program include: -30-  Citizens have access to national SW policy information, have much improved access to municipal level MSW projects and performance information, and have new and effective opportunities to provide feedback on service delivery;  MSW services are financed adequately over the medium term and municipalities are able to plan, develop, and manage MSW infrastructures and services;  A more conducive enabling environment is in place for sustainable and value-for-money public private partnerships in MSW service delivery;  MSW facilities do not harm the environment as they are environmentally controlled and inspected regularly according to international good practices;  Solid stream of revenues is generated, formal jobs and SMEs created, and less waste disposed in sanitary landfills because of the implementation of an efficient recycling value chain;  Urban population has access to professionalized integrated MSW services. 79. Rationale for a second programmatic series: The Government of Morocco acknowledges that the reform of the MSW sector is still young and results achieved during the first phase of the PNDM, in a multi- stakeholder environment, are still fragile. Thus, it requested the continued involvement of the Bank over the second phase to benefit from the Bank’s global knowledge, technical assistance and neutral convening power in a sector where coordination between line ministries and the Ministry of Finance is key. Besides, the new decentralization context offers great opportunities to anchor the medium term sustainability of the MSW sector, difficult to satisfy through one operation. 80. An overall agreement has been reached with the Government on the design and implementation of the reforms supported under the proposed programmatic series. The agreement on a long-term strategy, intermediate steps and immediate actions is reflected in the Letter of Sector Development Policy (Annex 1). The attached Policy Matrix (Annex 2) lists the specific objectives for each policy reform area, subsequent prior actions and triggers for DPL3 and DPL4 respectively, as well as the expected results and related monitoring indicators. 81. Table 7 and Table 8 summarize the ten policy measures agreed as prior actions for DPL3 and the nine triggers identified for DPL4, respectively. All prior actions of DPL3 are met. Table 7. Prior actions of DPL 3 A. Governance of the municipal solid waste sector A.1. The Cabinet Council (Conseil de Gouvernement) has approved on December 14, 2012, the draft of a law ( loi- cadre) on environment and sustainable development, introducing: (i) the right of any person to access environmental information ; (ii) the institutional arrangements for environmental control; and (iii) the principle of extended producer responsibility. A.2. The National Commission for the National Municipal Solid Waste Management Program has approved on October 23, 2012, the introduction of a citizen feedback tool on quality and adequacy of municipal solid waste services (“Citizens Report Cards�), as a key component of the National Municipa l Solid Waste Management Program to support local governments in building demand-side governance in the municipal solid waste service delivery. A3. The Minister of Interior has issued Circular No. 8029 dated May 23, 2012, requiring municipalities to disclose extracts of municipal solid waste service contracts in the Official Gazette for Local Governments ( Bulletin Officiel des Collectivités Territoriales). -31- B. Institutional and Financial Sustainability of Municipal Solid Waste Management Service B.1. The Minister of Energy, Mines, Water and Environment has signed on December 10, 2012, three contracts with engineering firms in order to assist local governments better prepare and manage municipal solid waste projects and contracts throughout the territory of the Borrower. B.2. The Minister of Interior has issued Circular No. D13015 dated December 17, 2012, establishing a municipal solid waste fee that could be charged by municipalities to large waste producers, in compliance with the provisions of Article 23 of Law No. 28-00 dated November 22, 2006, on solid waste management. B.3. Appropriate funding has been made available to the National Solid Waste Management Program for 2012, and the Borrower’s draft budget law for 2013 includes appropriate budget a llocation in support to the National Municipal Solid Waste Management Program. B.4. The Minister of Interior has issued Circular No. 5533 dated October 5, 2012, regarding local governments’ budget preparation, and Circular No. 17887 dated December 11, 2012, addressing the issue of arrears due by local governments under municipal solid waste service contracts, including specific instructions and guidance: (i) in order to ensure fair estimate of service costs; (ii) on price revision; and (iii) on budget arrangements regarding arrears rescheduling agreements. C. Environmental Monitoring and Control C.1. The Head of Government (Chef du Gouvernement) has issued Circular No. 27/2012 dated November 30, 2012, establishing a national information and coordination system on environmental inspections, infractions and sanctions. C2. The Minister of Energy, Mines, Water and Environment has issued Circular No. 66/2012 dated November 15, 2012, establishing within the Ministry a special unit of sworn-in environmental inspectors. D. Development of Recycling Value Chains D.1. The Cabinet Council (Conseil de Gouvernement) has approved on October 15, 2012, the Borrower’s draft budget law for 2013, which, inter alia, (i) introduces an eco-tax on plastic packaging, and (ii) amends the arrangements applicable to the National Fund for Environment (Fonds National pour la Protection et la Mise en Valeur de l’Environnement) to have such Fund receiving the revenues of the eco-tax. Table 8. Triggers for DPL 4 A. Governance of the municipal solid waste sector 1. At least 12 Regional Environment observatories are in place to monitor environmental indicators, including those related to solid waste management. 2. Adoption by the CN-PNDM of the use of Citizens Report Cards as an eligibility criterion for PNDM financial support B. Institutional and Financial Sustainability of Municipal Solid Waste Management Service 3. Cabinet Council (Conseil de Gouvernnement) has approved the draft fundamental law “loi-organique� on the reorganization of local and regional governments, confirming the full responsibility of the municipality on ISWM and instituting inter-municipal/regional entities which are able to improve MSW service planning, development and delivery. 4. The Ministry of Interior has launched a multi-year technical assistance program to support LGs in establishing inter- municipal/regional institutions for the professionalization of Municipal Solid Waste management. 5. The “Trésorier Général� issues a Decision organizing TGR advisory services to LGs to improve the management of their fiscal potential and local source of revenues. 6. Establishment of a third party conciliation mechanism for delegated municipal services -32- C. Environmental Monitoring and Control 7. Issuance of a decree for the establishment of “Police de l’Environnement� consistent with the Loi cadre on environment and sustainable development D. Development of Recycling Value Chains 8. Entity for the management of recycling value chains established and operational with effective participation of key actors (LG, eco-tax payers, recycling industry, informal sector) 9. At least 20 percent of “eco-tax� revenues are allocated to support recycling programs/activities targeting waste- pickers with specific focus on the gender dimension. Table 9. Good Practice Principles on Conditionality Ownership: This operation benefits from the excellent Customization: Customize the accountability framework and dialogue and strong country ownership built during the modalities of Bank support to country circumstances. The previous programmatic series DPL1and 2. The 2012 policy matrix and prior actionsof the proposed operation are Government program reconfirmed the National Solid Waste highly tailored to country and sector circumstances. Through Management Program (PNDM) as a country priority in 2013- this operation the Bank offers recognition and budget support 2017. It also benefits from (i) intensive consultation and for the excellent measures taken by the country to improve the coordination among key stakeholders on reform actions and environmental, social and economic performance of the MSW timing through the DPL Interdepartmental Steering Committee sector. The policy matrix reflects the government‘s priorities (SC); and (ii) comprehensive and well accepted sector work and has been designed based on the lessons learned from prior including analytical works conducted by concerned line DPLs in Morocco, particularly the first programmatic series, ministries. In addition, the reform program was prepared with and benefits from the flexibility afforded by the programmatic continued and comprehensive inputs from all concerned approach. The Bank has been flexible in both the loan amount ministries. Ownership is also ensured by timely and demand- and government‘s preferences in terms of the preparation driven analytical support. The program includes only two schedule. single tranche operations covering the current government mandate period which represents a signal of the Government’s Criticality: Choose only actions that are critical for achieving commitment to the reform and a place mark for the results as conditions for disbursement. The number of prior achievement of the planned objectives over the coming four actions has been limited to 10, which represent critical steps in years. each of the main areas of reform. Nine triggers were identified for the fourth DPL given their critical importance in unlocking Harmonization: Agree upfront with the government and other the reform process, delivering key immediate outputs and financial partners on a coordinated and accountability achieving reform outcomes. framework. The DPL operation benefited from close cooperation with GTZ, USAID and KFW, to ensure Transparency and Predictability: Conduct transparent consistency among ongoing donor-funded technical assistance progress reviews conducive to predictable and performance- and operations. Alignment of these major sector partners on based financial support. Policy reform of such a young sector the reform program objectives was also sought and achieved needs intensive supervision and progress review. The through continued consultations and progress updates. Donors’ proposed mechanisms for review are closely related to commitments to fund technical assistance, capacity building expected progress in each area of reform and will strike a activities and studies to support specific reform actions and balance between achievable results and the desired objectives results are evidence of such alignment. of the four reform areas. Substantial progress on triggers will also be assessed during supervision missions in order to begin preparation of the fourth DPL. B. POLICY AREAS POLICY AREA A – Governance of the Municipal Solid Waste Sector 82. Description: The Arab Spring propelled governments in the MENA Region to move with urgency to adopt more participatory and inclusive governance frameworks. While Morocco had begun moving towards more open governance as early as 2006 with the publishing of its Equity and Reconciliation Report, it significantly accelerated the pace of these reforms in the context of the Arab Spring. Most notably, the -33- King announced a major constitutional reform in 2011 which transferred significant legislative and executive powers to the parliament and government. A referendum held on the draft constitution in mid-2011 was adopted by an overwhelming majority. This new constitution includes, as a cornerstone of the reforms, the principles of participatory democracy, the right of citizens to information, and the responsibility of public authorities to ensure and respect citizens’ rights to engage in the development process. Article 12 of the constitution specifically provides for groups, associations and non-government organizations to contribute to the elaboration, implementation and assessment of decisions and projects of elected institutions and public authorities. The constitution also specifically promotes the inclusion of traditionally underrepresented groups in governance, most particularly women. 83. The new Constitution’s focus on good governance was further underpinned by important decentralization initiatives, referred to as “regionalization�. Regions, as important sub -national administrative units, have been granted greater powers and responsibilities so the government is brought closer to the people to facilitate participatory governance. Regionalization initiatives are supported by the National Charter for Territorial Planning which provides guidance on broad objectives and principles, and advances the implementation of participatory governance by identifying the rights of all stakeholders (private, public, NGOs) to exercise their “voice� on public policies and programs. Beyond this, regionalization is being advanced by the ongoing establishment of regional “observatories� for environmental and sustainable development. These observatories are charged with monitoring the status of environment in the region by collecting and publishing core data and performance indicators in the environmental sector. This information will be important in assessing and comparing regional progress and in making information accessible to citizens. 84. Under the regionalization agenda, local projects and partnership initiatives directly supportive of broader environmental issues and, specifically, solid waste management have been launched. Under the broader ambit of participatory governance, the collaboration of civil society and NGOs as development partners has been encouraged, including through provision of capacity building programs, promotion of knowledge exchange, and support for the development of civil society networks. 85. The solid waste sector has been at the forefront of Morocco’s shift towards a more participatory, accountable, transparent, and inclusive form of governance. It transitioned from one where performance is characterized by limited and highly inequitable coverage, and poor service quality to one that is reflecting the constitutional ideals of transparency, accountability and responsiveness to local needs. These accomplishments are a consequence of strong commitment and purpose by the Government, underpinned by technical and financial support provided by the Bank and other donors, including GIZ and KfW. The DPL series has supported the ministries’ efforts in numerous ways, with noteworthy support for efforts to improve transparency, including by supporting actions to make key policies publicly accessible. The DPLs have also underpinned efforts to improve efficiency in the sector, by facilitating the shift from the public to private service provision, and by introducing well-managed waste transit and disposal sites. Additionally, the DPLs have helped advance participatory governance in the sector by supporting public consultation on sector policies and programs with broader civil society. The DPLs have also supported work to identify vulnerable groups engaged in the sector, including female and youth waste pickers, identify and support projects to enhance their engagement and improve their income-generating opportunities in the sector. 86. Sector progress on good governance will be consolidated and advanced significantly with the support of DPL 3and 4. Indeed, the demand-side governance initiatives being advanced in the sector are the most ambitious and robust in the MENA Region. They include providing citizens with increased access to sector information, for example extracts of service contracts are now disclosed at national and municipal levels. The Government is committed to develop, for the first time, PNDM and sector performance indicators against which progress will be assessed, with this information being made publicly available. -34- 87. In parallel the Bank helped the Government mobilize technical assistance for the progressive roll-out of CRCs on municipal solid waste management in larger municipalities to make service more efficient, equitable and inclusive. This action is being taken following a successful pilot CRC experience (see Box 3). The CRC approach will allow local residents to anonymously provide both factual and perception-based information on their municipality’s service coverage and quality. Following this, citizens will have access to the survey findings and conclusions and opportunities to discuss them with their municipality. The CRCs will generally be undertaken every two years. However, the actual frequency will be determined by the level of issues and concerns reflected in the baseline CRC – where citizens’ concerns are acute, it would be appropriate to consider conducting the Report Card (or possibly a scaled-down, more focused version) the following year so progress/changes can be closely tracked. However if the Report Card findings are very positive then it may be sufficient to conduct a follow-on Report Card in three years. Box 3. Piloting a new Demand Side Governance Initiative in the MSW Sector – the Citizens’ Report Card The Ministry in charge of Environment is at the forefront of advancing good governance initiatives in Morocco and the MENA Region at large. Consistent with Morocco’s new Constitution of July 2011, which promotes an inclusive society built on participatory governance, the Department has been working decisively to improve citizens’ “voice� on this service. In support of these efforts a Citizens’ Report Card on Municipal S olid Waste Management was piloted in one urban municipality, Témara, which forms part of the larger Rabat metro area. A Citizens’ Report Card (CRC) is one of the most robust tools available for promoting good governance at the municipal level. The CRC approach supports greater municipal transparency, accountability, and responsiveness by allowing residents to express their views on service coverage and quality, obtain knowledge about their community’s perspective of service delivery, and engage with their municipality on service issues and c hallenges. CRCs are widely used across the developed and developing world, and experience attests to their effectiveness in contributing to better service provision and improved demand side governance. CRCs involve three consecutive steps. First, a statistically representative survey is undertaken in the municipality to collect factual and perception-based information from residents on the specific service/services of interest. Residents anonymously report on service coverage, quality, priorities, etc. Special efforts are made in the sampling process to ensure that all population groups – the wealthy, the poor, the vulnerable, women, etc. – are included in the survey and that they have “voice� relative to their numbers in the community. Data gathering can be supported by GIS mapping which ensures that “hotspot� areas of resident satisfaction/dissatisfaction can be identified. The data collected are analyzed and the findings presented in reports written for municipal administrators, for residents, representatives of associations/NGOs, and the media. In the second step, the survey findings are disseminated to municipal residents through numerous fora – press releases, radio, TV spots, and, most importantly, open town hall meetings between municipal representatives and residents. The third step is based on the public discussions and agreements reached at the town hall meetings. It involves the development and public dissemination of a simple, but clear, municipal-resident compact on priority areas for change and improvement. The CRC approach was piloted in Témara, a dynamic and fast growing municipality, to test the approach for possible widespread use across urban municipalities in Morocco. The pilot also provided an opportunity to build local capacity and experience with the approach and illustrated its utility. The Témara CRC gathered a wealth of data and provided new information on service coverage and quality, on the priority residents accord the service, on residents’ knowledge of waste-related pollution and health issues, and on residents’ interest in and receptiveness to new SWM approaches such as recycling. The pilot was deemed highly effective as a transparency and good governance tool. As a consequence, the Department has decided to support the progressive roll-out of the approach with Bank support under DPL3 and DPL4. 88. In sum, this policy area aims at enhancing demand-side governance in the MSW sector by i) promoting access to information; ii) fostering greater transparency; and iii) improving accountability of service providers to citizens. 89. Challenges: The MSW sector’s advancements on good governance are impressive, and position it as a leader in participatory and transparent governance, both in the country and across the Region. However, some challenges remain to be addressed including:  The need to provide continued capacity building for municipalities on participatory governance. While there is general acceptance of this principle and its constitutional underpinnings, practical experience and knowledge of how to communicate and engage with residents effectively are very limited. The proactive inclusion of women and other vulnerable groups in participatory governance continues to be a challenge.  The need for continued capacity building for residents and representative associations and NGOs on demand side governance opportunities in the MSW sector. Citizens have limited knowledge about -35- their rights to service provision and their rights to engage with municipalities on service provision issues. Civil society also has little, if any, knowledge and experience with constructive engagement approaches. It is also largely unaware of the roles and responsibilities residents have in supporting good service. The poor, vulnerable, and women are especially unaware of their rights and opportunities to make their “voice� heard.  The need for municipalities to become more transparent and adept at developing and negotiating contracts with private service providers, monitoring contractors’ compliance and performance, and providing this information to citizens.  The need to build Regional Observatories’ capacities to gather and make publicly accessible, environmental and in particular MSW sector information.  And, the need to ensure that the introduction and operation of the eco-tax and associated recycling efforts are managed in a highly transparent manner, and in a way that contributes to the improvement of the livelihoods of vulnerable informal workers, and particularly female waste pickers. 90. Ongoing Government initiatives to further advance good governance: While Morocco faces continuing challenges in further advancing good governance in the solid waste sector, the government is moving decisively to address these, including through the following steps: (a) Piloting Citizens’ Report Cards on MSW service: The CRC approach is an exact and rigorous approach supporting transparency, information flow, and citizens’ “voice�. All data and information gathered is gender disaggregated. With Bank technical assistance, the approach was piloted in one municipality (Témara Municipality in the greater Rabat metropolitan area). The selection of this municipality for the pilot was sound given its high residential and commercial densities, and highly diverse socio-economic features. Its solid waste service is provided by a private contractor. Starting in 2013 under the PNDM, the Government will roll-out the CRC approach in increasing numbers of municipalities. By 2015, the Government intends to tie PNDM financial support to the commitment of municipalities to introduce CRC as an instrument to promote accountability of service providers. The CRC exercise is a very new and innovative approach in the Solid Waste sector and, indeed, in Morocco at large; therefore, the Government acknowledges the need to progressively build confidence and competency around this approach, both in municipalities and amongst the citizens. (b) Implementing citizens’ right to access environmental information. The Government has approved the draft loi-cadre on the National Charter on Environment and Sustainable Development. This supports open access by the public to environmental information. The government has also prepared a Circular requiring the publication of PNDM program information and performance indicators on a publicly accessible website13. These efforts will be further supported by social marketing initiatives via the PNDM’s Communications Strategy and Plan which establishes important new demand-side governance precedents in the sector. These include: (i) the introduction of a “systèmes des réclamations� in the form of a hotline for grievances, as a concrete step toward the implementation of an effective Grievance Redress Mechanism; (ii) open access to information, including on information sector performance indicators; and open and regular town hall meetings between Municipalities and residents on service performance. The hotline will be further developed and implemented consistent with the ongoing PNDM Communications Strategy and Plan. (c) Broadened public access to PSP contracts. The signature of a Circular facilitating the application of Article 14 of Law 54-05 on the disclosure of extracts of MSW PSP contracts (gestion déléguée), and 13 www.minenv.gov.ma/dechets -36- of Article 58 of Law 45-08 on the disclosure of summary financial statements of delegated services by local government are significant ongoing initiatives. To support these actions, the MoI is upgrading the web platform of the LGs Official Gazette (BOCT). The web platform will trigger systematic disclosure of extracts of MSW service contracts and support disclosure of the summary financial statements. This action will have effects beyond the MSW sector and will cover all municipal services delegated to private operators. (d) Ensuring effective monitoring and benchmarking of MSW service performance. Morocco has been establishing Regional Observatories on the Environment (ONEM)14 which will gather and disseminate information on environmental issues, including SWM. ONEMs are being developed as a joint partnership between MEMEE, local and regional governments, universities and civil society. They will become regional platforms for monitoring the state of the environment at regional level and for sharing information on priority sectors, including solid waste. The government intends to establish such platforms across all Regions by January 2015. 91. Prior actions retained for DPL 3:  Prior Action A.1. The Cabinet Council (Conseil de Gouvernement) has approved on December 14, 2012 the draft of a law (loi-cadre) on environment and sustainable development, introducing: (i) the right of any person to access environmental information; (ii) the institutional arrangements for environmental control; and (iii) the principle of extended producer responsibility. The adoption of this law formalizes the commitment of the Government towards effective implementation of the National Charter of Environment aiming at the preservation of the environment and natural resources. Under this new policy and law, the Government breaks with the past practices of secrecy, and commits to respond positively to requests from civil society’s queries about access to environmental information including those related to the solid waste program and sector. Access to environmental information will also contribute to fostering greater transparency and accountability, and to building trust and civic engagement. Additionally, this law introduces major changes in order to ensure effective and transparent environmental control and supervision of potential polluters. For the first time in Morocco, it sets up the extended producers’ responsibility through the introduction of green fiscal instruments, i.e. eco-tax on plastic packaging.  Prior Action A.2. The National Commission for the National Municipal Solid Waste Management Program has approved on October 23, 2012, the introduction of a citizen feedback tool on quality and adequacy of municipal solid waste services (“Citizens Report Cards�), as a key component of the National Municipal Solid Waste Management Program to support local governments in building demand-side governance in the municipal solid waste service delivery. Demand side data, such as user perceptions on quality and satisfaction with municipal services, is absent in Morocco. In adopting this first action of its kind in Morocco, the Government demonstrated its commitment to incentivize and support municipalities to adopt such new social communication tools. Such tools extend the government’s reach to a broader set of stakeholders providing data and analysis so that an informed citizenry can effectively exercise its voice. It is expected that such action will support an effective and progressive roll-out of citizens’ feedback instrument over the second phase of PNDM (2013-2017) and beyond, hence increasing the number of urban residents in municipalities implementing CRCs on MSW services. 14 www.minenv.gov.ma/onem/index.asp http://www.cmimarseille.org/_src/UD1_UD2_Mapping/Morocco_ONEM_EN.pdf http://www.aujourdhui.ma/regions-details76453.html http://news.massolia.com/politiques/region-du-grand-casablanca-l%E2%80%99observatoire-regional-de-l%E2%80%99environnement-et-de- developpement-durable-oredd/ -37-  Prior Action A3. The Minister of Interior has issued Circular No. 8029 dated May 23, 2012, requiring municipalities to disclose extracts of municipal solid waste service contracts in the Official Gazette for Local Governments (Bulletin Officiel des Collectivités Territoriales).The Minister of Interior has issued a circular instructing municipalities to publish information related to the delegation of MSW services to the private sector, including publishing on BOCT extracts of MSW contracts signed between LG and private operators. The private sector is playing a key role in providing MSW services in Morocco and the adoption of a proactive and formalized policy of information dissemination will increase the citizenry’s confidence in private providers and will enable a more informed debate on private sector participation in this sector. Similarly, information for citizens, including through popularized documents (about 100 PSP contract extracts in Arabic), enables them to better form and express their opinions either directly or through their representatives in municipal councils regarding the scope of services, cost and quality, and private service performance. The immediate publication of extracts of PSP contracts on the BOCT web platform will also set for a good benchmark among municipalities and private operators towards more transparency of use of public money and accountability. 92. Triggers for DPL 4:  At least 12 Regional Environment observatories are in place to monitor environmental indicators, including those related to solid waste management.  Adoption by the CN-PNDM of the use of Citizens Report Cards as an eligibility criterion for PNDM financial support 93. Expected results: Governance, and particularly demand side governance, will be significantly enhanced resulting in: a) public and private MSW service providers are more accountable to informed citizens; and b) transparent use of public money in private MSW delivery. POLICY AREA B –Institutional and Financial Sustainability of Municipal Solid Waste Management Service 94. Description: The sustainability of municipal solid waste management services remains a key objective of the Government’s sector reform. The SWM service in Morocco is mostly financed from general municipal revenues (which include among others a communal services tax), for expenses like street lighting or road maintenance15. Since such services are not metered, cannot be interrupted in case of non-payment of fees, and cannot entirely be individualized (in particular street sweeping and collection through communal bins), they do not have the same compelling argument as water or electricity for being billed separately from other communal services. 95. The PNDM provides limited-in-time financial support (3 to 4 years for each eligible project, corresponding to a maximum of 30 percent of the investment costs) to accompany the transition of the sector and to encourage municipalities to modernize MSW services. After this phase of modernization, Moroccan local authorities should be able to sustain the progress made and to continuously improve the service and performance, particularly in the long run, thereby switching to modes of treatment/disposal which are more sustainable than sanitary landfilling. In effect, this requires growing existing revenue sources or creating new ones to sustain the incremental cost of modernization. 15 The SWM expenditures represent in 2011 around 12% of municipal revenues, and 97% of “communal services tax� revenues. -38- 96. This policy area aims at i) improving ISWM through support to the professionalization of MSW systems in harmony with the decentralization agenda; and ii) securing mid-term funding to cover the incremental costs of modernized MSW services once PNDM financial support ceases; and iii) improving and consolidating market competitiveness for MSW service delivery through the mitigation of risks related to PSP contract management. 97. Challenges: Analysis of the results of the first phase of PNDM shows that, while much progress has been made, including a training program with the support of GiZ that reached over 333 LGs16, measures to build the required local capacity have been insufficient. During the first phase of PNDM, Moroccan urban municipalities benefitted from a strong increase in VAT revenue at the national level, as well as improved performance of their own resources such as the housing tax, the communal services tax and the business tax. Therefore, although the global amount of revenues available to finance the service has substantially increased, financial sustainability remains at risk as evidenced by several observations:  Despite the continuation of the Government’s PNDM, the portfolio of projects to modernize treatment is waning as the largest cities have either already completed or are about to complete the construction of sanitary landfills (30 percent of the urban population is covered, and 60 percent when counting the project under development for Casablanca). This points to insufficient capacity to prepare projects for smaller cities (for which inter-municipal arrangements are even more important albeit difficult to organize).  Regarding the collection segment, the contracted cost per ton is often excessive in small municipalities, indicating again a lack of capacity to prepare and review cost-effective plans.  Arrears of payment to private operators under MSW service contracts remain high, despite recent efforts undertaken by the MoI to assist municipalities in better budgeting. This indicates dysfunctions in the market and creates risks for the future of PSP in the sector. 98. Therefore, while incentive funding is available in the short to medium term, there is a need to increase efforts to deliver projects and manage them properly in their operational phase, and to improve and consolidate market competitiveness for MSW service delivery over the long term. 99. Government actions to date and future activities to address the challenge: On Institutional Sustainability  An upcoming fundamental law - Loi organique - on the responsibilities of local governments will frame the new territorial organization for the Kingdom, and confirm SWM responsibilities. The World Bank mobilized expertise to produce a note summarizing international experience on the integration vs. vertical split of MSW. Despite possible initial gains with infrastructure completion, a vertical split of responsibilities would create strong risks to investment sustainability and would reduce the incentives of Municipalities to foster waste reduction, reuse and recycling. The MoI indicated that the loi organique, expected to be ready by 2014, would reconfirm that municipalities are fully responsible for ISWM.  Introducing inter-municipal/regional public asset companies that will enable the professionalization of planning and developing MSW infrastructure and managing MSW service delivery through PSP contracts. These companies would be based on a greater capacity to attract and retain talented staff, and to mobilize diversified financing for large investments like treatment 16 Implementation Completion and Results Report of DPL 1and 2, 2012 -39- facilities. The Bank mobilized expertise to identify a few institutional options, requiring small adjustments of existing law, which can be made in the upcoming Loi organique on LGs. Among these options, a consensus emerged among concerned Government departments that inter-municipal and/or regional asset companies would be the best option for Morocco - as such a reform would be consistent with the needs of other sectors, in particular urban transport, and the distribution of water and electricity (also supported by the Bank).  The PNDM will provide systematic project management technical assistance (AMO or Assistance à maîtrise d’ouvrage) for all projects supported by PNDM on an on-demand basis and allocate adequate financial resources. After allocating funds from the PNDM, the Government is committed to providing, beginning early 2013, on-demand AMO to municipalities to start improving project quality, PSP contract management and strengthen the investment pipeline without waiting for the more sustainable institutional solutions that will progressively be put in place (including the above mentioned public asset companies). In addition, the multi-year capacity building program initiated in the first phase of the PNDM, will be continued in the second phase.  Establishing a national program to support LGs with intergovernmental institution-building, especially for the first few pilot creations of metropolitan districts and inter-municipal arrangements (Groupements d’agglomération et Groupements de communes), and for the setting up of their asset companies. The success in building the new entities greatlydepends on such a program both because of the complexity and novelty of these processes in Morocco, and in Moroccan LGs in particular, and because of the need to capitalize nationally on the experiences of these pilots. On Financial Sustainability  The Government is committed to continue its support to the most fundamental building block of the MSW sector reform, namely, the Government’s incentive program for service modernization, through including an adequate allocation of resources for the second phase of the PNDM in the Budget laws for the coming years.  In order to reduce the incremental costs associated with certain types of waste or waste producers, the Government is strongly committed to proceed with a reform of municipal finance that would include the foreseen implementation of eco-taxes (see policy area D) and a dedicated MSW fee17 for special categories of waste or waste producers. Such fees will generate additional revenues that will provide higher financing flexibility for municipalities. In addition, they will help rebalance the current unfairness of relying on general taxation for financing the service, which makes large producers of waste (restaurants, hotels, etc.) pay disproportionately less than households in comparison to the costs they generate. A note produced with the help of Bank expertise analyzed four possible options for the base, rates, collection agents and collection methods of such a fee, each with consequences on the organization of the service, risks and advantages. Three options were selected as applicable, and the Minister of Interior has issued a Circular to guide municipalities on how to establish a municipal solid waste fee to large waste producers, in compliance with Article 23 of law 28-00 on SWM. It is expected that implementation of the dedicated fee will be progressive; both in terms of number of municipalities concerned (municipal councils have sole authority to implement the fee) and in terms of base, as only the largest producers will be targeted initially.  Support municipalities to better mobilize municipal fiscal potential. The Local Authorities’ own resources – mainly the municipal services tax, the property tax, and the business tax, the base and rates of which are defined by national law – are not optimally managed and offer a large potential for 17 The MSW fee is instituted by art. 23 of Solid Waste Law 28-00 -40- increased yield. The Kingdom’s Treasury (TGR) is developing a partnership program with LGs for on - demand advisory and technical support services to improve local resource management. The initiative will help professionalize the management of the local tax revenue chain (addressing valuation, tax base calculation, tax bill issuance, collection, etc.) and increase local revenues. The TGR will prepare a decision, to formally launch the program, and will put in place an official communication and information plan for the LGs. LGs willing to receive such support will sign a partnership convention with the TGR, which targets the signature of 10 conventions by 2014.  Improve and consolidate market competitiveness for MSW service delivery. While budgets of LGs indicate that funds are in principle available to pay private operators, preliminary analyses indicate that the political economy of contract management within LGs often leads to late payment of invoices and accumulation of arrears. More detailed analysis on the causes of this was conducted with PPIAF support, and recommendations were provided to improve the contractual relationship between LGs and operators, and especially to manage existing arrears and prevent their reoccurrence in the future. Two Circulars were signed, incorporating these recommendations.  In addition, the MoI intends to establish a conciliation mechanism to facilitate the resolution of disputes that arise during the execution of PSP contracts. Such conciliation mechanism will rely on a pre-identified third party, acceptable both to municipalities and to private operators.  Such initiatives will foster the dialogue between public and private partners and thus lead to fewer disputes between public contracting entities and private operators. Besides, the amount of accumulated arrears and the number of disputed contracts are expected to decrease. 100. Prior actions envisaged for DPL 3:  Prior Action B.1. The Minister of Energy, Mines, Water and Environment has signed on December 10, 2012 three contracts with engineering firms in order to assist local governments better prepare and manage municipal solid waste projects and contracts throughout the territory of the Borrower: This action aims at providing “just-in time� technical support and advisory services (AMO) to LG in order to ensure proper implementation and supervision of private sector participation projects. Indeed, in addition to the ongoing multi-annual capacity building and training program, the Government acknowledged the immediate need, in the short and medium term, for a more systematic support to LG in developing and managing MSW modernization projects while improving PSP environment. More specifically, this measure will help LGs contribute to the PNDM-Phase 2 goals in terms of modernization of the collection services and disposal practices in urban areas including the ratio of MSW collected professionally and disposed of in sanitary landfills to reach 66 percent by 2015.  Prior Action B.2. The Minister of Interior has issued Circular No. D13015 dated December 17, 2012, establishing a municipal solid waste fee that could be charged by municipalities to large waste producers, in compliance with the provisions of Article 23 of Law No. 28-00 dated November 22, 2006 on solid waste management: The Government continues providing its support to LGs in order to ensure the implementation of the reforms at municipal level. This circular will help guide municipalities in the implementation of the 2006 solid waste management law by providing the necessary instructions and clear procedures and modalities for applying this legislation. This new instrument will help mobilize new sources of local revenues; enhance equity in service cost coverage, and contribute to the long-term financial sustainability of solid waste management reforms. It is likely that the user charges will focus on a small number of easily- identifiable high-volume producers of household-type waste, including entities such as hotels, restaurants and offices. -41-  Prior Action B.3. Appropriate funding has been made available to the National Solid Waste Management program for 2012, and the Borrower’s draft budget law for 2013 includes appropriate budget allocation in support to the national Municipal Solid Waste Management Program: This formalizes the 2012 Government’s commitment toward the implementation of the phase 2 of PNDM and the continued support to local governments through a well-established incentive mechanism in order to (i) end current open-dumpsite practices and equip urban centers with sanitary landfills; and (ii) close or rehabilitate uncontrolled dumpsites. It represents a major GoM action aiming at reducing the environmental and social externalities of MSW systems including negative impacts on environment and natural resources. The allocations will help the municipalities, particularly the medium and small LGs, to narrow the short- and medium-term financing gap resulting from the shift of focus from waste collection to an integrated system addressing collection and sanitary disposal.  Prior Action B.4. The Minister of Interior has issued Circular No. 5533 dated October 5, 2012, regarding local governments’ budget preparation, and Circular No. 17887 dated December 11, 2012, addressing the issue of arrears due by local governments under municipal solid waste service contracts, including specific instructions and guidance: (i) in order to ensure fair estimate of service costs; (ii) on price revision; and (iii) on budget arrangements regarding arrears rescheduling agreements: This policy measure confirmed the Government’s commitment to tackle in a very systematic way the emerging issues and challenges related to the implementation and management of the private operator contracts. This Circular introduces for the first time specific instructions and guidance in order to ensure fair estimates of service costs, provision for price revisions, and budgeting of arrears rescheduling agreements. Through this instruction, it is expected that LGs will improve the way they prepare their annual budgets including proper estimates of their expenditures and commitments related to delegated solid waste services. 101. Considered triggers for DPL 4:  The Cabinet Council (Conseil de Gouvernement) has approved the draft fundamental law “loi organique� on the reorganization of local and regional governments, confirming the full responsibility of the municipality on ISWM and instituting inter-municipal/regional entities which are able to improve MSW service planning, development and delivery.  The MoI has launched a multi-year technical assistance program to support LGs in establishing inter- municipal/regional institutions for the professionalization of Municipal Solid Waste management.  The “Trésorier Général� issues a Decision organizing TGR advisory services to LGs to improve the management of their fiscal potential and local source of revenues.  Establishment of a third party conciliation mechanism for delegated municipal services. 102. Expected results: The measures related to the institutional and financial sustainability of the MSW sector will result in: (i) improved operational performance of the PNDM with 66% of MSW collected professionally and disposed of in sanitary landfills, (ii) improved capacity of LGs to finance MSW services with an increase in aggregated municipal revenues compared to 2012, and (iii) better enabling environment for PSP in the MSW sector through expected decrease in the percentage of total volume of arrears (as declared by private operators) compared to the original annual total amount of MSW contracts. -42- POLICY AREA C – Environmental Monitoring and Control 103. Description: while the EIA procedures were greatly improved during the first phase of the PNDM, the second phase aims at creating and ensuring efficient and effective operating conditions of the institutions in charge of monitoring, control and sanction for violation of the environmental rules, norms and standards established by current laws and regulations. This general mandate to monitor compliance and enforce environmental laws, regulations and standards (referred to as the “environmental control mandate�) falls within the competences of several different public entities at the national and local levels, with no effective coordination mechanism in place. 104. A large part of the environmental control mandate falls within the mission scope of the Ministry in charge of Environment (Ministry of Energy, Mines, Water and Environment, or MEMEE). MEMEE has the regulatory mandate for enforcing implementation of mitigation measures and environmental management plans related to the impacts of solid waste facilities and more generally, of solid waste management. In addition, the Ministry is also responsible for the coordination and harmonization of environmental control. 105. Challenges: Key challenges are to upgrade the monitoring and control system, to provide incentives for compliance with current rules, norms and standards, which in turn will help achieve better environmental performance in the solid waste sector. Such a system is required to: (i) provide a harmonization of procedures for environmental monitoring by all Government bodies that have a legal mandate for environmental control, (ii) adopt and implement effective monitoring procedures and tools and coordinate the bodies that have an environmental mandate, and (iii) develop and use an accessible and transparent system for communication on all control processes and outcomes including infractions reported, and legal consequences. 106. Government actions to date and future activities to address the challenge:  Upgrade the environmental monitoring and control systems. In order to carry out its regulatory mandate to enforce the rules, norms and standards concerning environmental protection, the MEMEE started to design a coordinated policy and the modalities for its implementation. In particular, a comprehensive study18 on the environmental police, which is being finalized, will identify revision to legal framework necessary to formalize the various assignments for environmental monitoring and control among the agencies involved, and will ensure their implementation. This revised legal framework will: (i) reinforce the responsibility of the environmental police within the Ministry of Environment and will lay the groundwork for its future organization and operation; and (ii) clarify and harmonize the different sector-specific mandates for environmental control established by the current laws and regulations. The recently approved draft Loi-cadre on Environment and Sustainable Development will formalize the above actions and officially establish an Environmental Police body.  A major action has been the appointment of a special unit of 25 environmental inspectors sworn in before court (“assermentés par la justice�) that are responsible for carrying out monitoring compliance inspections and reporting to their respective jurisdictions. In furtherance of Law 12-03, MEMEE is preparing to issue a Circular to create a special unit and provide the legal basis to perform the compliance monitoring inspections and environmental law enforcement by the sworn-in inspectors. Swearing in and training programs for environmental inspectors and monitors are planned for the first trimester of 2013. Additionally, an annual training program has been planned to have 60 staff sworn in as inspectors during the period 2013- 2016. 18 EDIC, Étude relative à la mise en place d’une police nationale de l’environnement, décembre 2012 -43-  A draft process framework for project monitoring and control has been prepared by the directorate of the Regulation and Control (Direction de la Réglementation et du Contrôle)19. The framework includes the preparation of a strategy for monitoring and control, the classification in accordance with the magnitude and severity of the pollution, the preparation of an annual program for monitoring and control, the preparation of inspection reports etc. A study20 for monitoring and control for MSW facilities (expected to be completed in March 2013) will inform the framework.  In parallel, the MEMEE will prepare the instruments needed to perform the mandates of environmental monitoring and control by the different agencies and ministries involved. In particular, a series of Manuals for Environmental Control, including a specific manual for the control of landfills, will be developed to provide guidance to the designated officers on the processes and outcomes of the environmental monitoring, control, and inspection in general. Once this legal framework is adopted and the overall institutional arrangements made fully operational, all MSW treatment facilities will be inspected and monitored regularly. To date only one sanitary landfill has ever been inspected.  Foster coordination between the different control entities. In order to ensure coordination and exchange of information among all control entities, the Head of the Government has issued a Circular establishing an inter-ministerial committee to identify procedures related to environmental infractions, ensure the accuracy and quality of the information, and establish a database related to infractions. The Circular designates the MEMEE as the ministry in charge of establishing and implementing environment policies on behalf of the Government.  Facilitate exchange of information between the different control entities. The MEMEE has just created and will manage a database to report on environmental inspections, infractions and sanctions including enforcement processes. This database will be accessible to the sworn-in agents, officers in charge of environmental monitoring and control, within the MEMEE as well as the other ministries involved in environment monitoring and control. It aims at covering the environmental monitoring broadly, including non-compliance situations and infractions, and will be used to measure indicators related to the effectiveness of application and compliance with the Environmental Law and when needed to help take corrective actions at both the administrative and local judicial levels. The MEMEE will publish a bi-annual brief on environmental control providing statistics and other information on non-compliance and infractions as reported in the database. A by-law will clarify the modalities to share and access information concerning environmental infractions.  Modernize the management and improve the performance of the EIA system. The MEMEE has already established within the EIA directorate a database which includes EIA administrative information (correspondences, reports, etc.) on the environment permit as well as technical information on the EIA documents and Environmental Management Plan (EMP) (often referred to as “cahiers de charges�). This system is internal to the EIA directorate. The MEMEE intends to modernize the EIA system to broaden access to all officers – within the Ministry and those officers in charge of the approval of the EIAs and the associated specifications, or in charge of environmental monitoring, control, and inspection in the provincial directorates. The reports and official statements concerning EIA approval and monitoring and control of the associated EMP or mitigation measures will allow the MEMEE to assess the performance of the EIA system and its compliance with procedures, deadlines and application of the EMP. While improving transparency, the former are also indicators to help measure the impacts of the procedures related to the EIA on both the business and investment environment. A dashboard on the performance of the EIA system will be published regularly on the web platform of the MEMEE. The use of the EIA dashboard will also be extended to 19 Division Contrôle et Contentieux, Description du processus: Assurer le contrôle, 2011 20 Hydro-Protec Consult, Étude pour l’Elaboration des lignes directrices de contrôle de Gestion Environnementale des Décharges Contrôl ées, 2012 -44- all provincial EIA committees including indicators on process, approval, and follow-up. It is expected that all regional committees will be active on the EIA platform by 2016.  Furthermore, the MEMEE is committed to improve access to environmental information for the citizens. It acknowledges that access to environmental information is critical to perform monitoring and control duties including those of non-govermental environmental protection organizations and civil society. In particular, it is considering reinforcing disclosure of the EMP (“Cahiers des Charges�) by the applicant. The EMP, approved by the MEMEE, provides the framework for the application of the mitigation measures identified in the EIA and includes a provision authorizing its disclosure on MEMEE website. 107. Prior actions envisaged for DPL 3:  Prior Action C.1. The Head of Government (Chef du Gouvernement) has issued Circular No. 27/2012 dated November 30, 2012, establishing a national information and coordination system on environmental inspections, infractions and sanctions: The Circular will enable the effective coordination and exchange of information on environmental control through the establishment of a formal coordination platform including all governmental agencies and ministries legally involved in enforcing environmental and natural resources protection laws. This coordination mechanism should (a) facilitate the exchange of information on the application of the environment laws; (b) develop joint environmental monitoring missions at the request of the Department of the environment or other administrations concerned, and (c) suggest improvements to the environmental control mechanisms. Additionally, this Circular will facilitate the proactive exchange of information through the database developed and hosted by the MEMEE on control and supervision operations, environmental infractions, etc.  Prior Action C.2. The Minister of Energy, Mines, Water and Environment has issued Circular No. 66/2012 dated November 15, 2012, establishing within the Ministry a special unit of sworn-in environmental inspectors: This Circular is a concrete action towards the upgrade of the country’s environmental control system. It will enable the organization and equipment of the Environment Department to carry out its mandates in terms of environmental control in application of the Law 12- 03. The benefits of such institutional development in terms of control will go beyond the solid waste sector to ensure that Moroccan environmental standards and norms are met during construction and operations of infrastructure and facilities subject to environmental impact study. It is expected that starting in 2013, all waste disposal facilities will be regularly inspected. 108. Considered triggers for DPL 4:  Issuance of a decree for the establishment of “Police de l’Environnement� consistent with the Loi Cadre on Environment and Sustainable Development 109. Expected results: a) Improved effective and harmonized implementation of the mandates for environmental monitoring by the MEMEE and other sectoral ministries – including monitoring, inspection, and control of implementation of EMPs associated with EIAs; and b) all solid waste treatment facilities are monitored on a regular basis. -45- POLICY AREA D – Development of Recycling Value Chains 110. Description: This is a new policy area compared to the first programmatic series of DPLs. For the past years, the recycling sector has stagnated with a rate of about 5 percent of collected waste recycled. It relied mostly on informal waste-pickers working in highly degraded health and social conditions. A pilot project at the Oum-Azza (Rabat) landfill, carried out during the first phase, succeeded in setting-up a sorting facility and in integrating 150 waste-pickers in a cooperative while offering formal and decent jobs. This experience showed the need to strengthen the financial viability and support the preparation of such socially inclusive initiatives which can help develop economic and job opportunities. 111. As part of its strategy to upgrade MSWM in Morocco and to reach the objective of 20 percent recycling rate by 2022 as set in the PNDM, the Government acknowledged the need to transform the sector through the development of recycling value chains, and committed to implement a set of reforms, around eco-taxes, which will aim at (i) promoting integrated and sustainable SWM; (ii) organizing recycling/reuse value chains; (iii) reducing wasted raw material consumption, (iv) mitigating impacts resulting from industrial activities and upgrading of the national industry, (v) developing investment and income-generating opportunities, and (vi) extending sanitary landfill life span. 112. The value chain for plastics packaging has been identified as the first priority and will be followed by other value chains, according to environmental priorities. The MEMEE is presently working on the development of value chains related to old batteries, waste oil and tires. 113. Challenges: The development of sustainable and performing recycling value chains will face five main challenges: (i) gaining the endorsement of all actors, both public and private, concerned by the policy area, in particular the concept of “Extended Producer Responsibility� and the creation of an eco -tax; (ii) putting in place a transparent and participatory mode of governance and management of the recycling sector, in particular, managing the revenues generated by the eco-tax; (iii) coordinating the development of the recycling value chain with current practices, especially private sector participation; (iv) integrating the informal sector presently acting in this space; and (v) raising awareness among the general public about the need for and benefits of recycling. Based on international experience, several actions on legal, financial and social aspects have been identified to properly develop the value chain. 114. Government actions to date and future activities to address the challenge:  The Government decided to use the “eco-tax� instrument to finance the development of recycling value chains, starting with the plastics packaging segment of MSW. Global good practice demands the establishment of a legal foundation for the eco-tax through the introduction of the concept of “Extended Producer Responsibility� (EPR), which is based on the life cycle environmental costs of goods integrated into the market price of the products. The Moroccan Government introduced in the draft loi-cadre on Environment and Sustainable Development the EPR principle.  The new “eco-tax� has been introduced for the first time within the Budget Law of 2013 (PLF2013) for the plastics industry. A detailed feasibility study estimated the revenues generated with eco-tax on the plastics industry to be MAD 230 million for 2013 on the basis of 2.5 percent ad valorem. The list of products will be revised on an ongoing basis along with the development of the different recycling value chains. The rate may also be readjusted when needed. The application of the eco-tax is done in a way that will not affect competition between local and imported products. The revenues generated through the application of the eco-tax will be transferred to the Fonds National de l’Environnement (FNE), which will open a specific line for the management of these revenues. The draft 2013 Budget Law includes a provision to amend the FNE organizational decree to accept such new mandate. -46-  The Government has begun the preparation of a business plan for the value chain for plastics packaging to be finalized and endorsed in 2013. The "business plan" will cover the period 2013-2017 and will identify the recycling/reuse opportunities, and define the activities to be undertaken, the resources and the accompanying measures.  In parallel the Government is working on the definition of the governance arrangements of the value chain for plastics packaging. Ensuring effective management of the use of funds raised by eco-tax and building consensus and partnerships on recycling activities are considered critical for such endeavor. In accordance with good practice, different stakeholders will need to be represented: the government, local authorities, plastics industry (i.e. eco-tax payers), MSW operators, plastics material retail business, recycling/reuse industry, the informal sector and associations.  The consideration of the social dimension will be critical for the feasibility and sustainability of the recycling value chain. The Government has indicated its willingness to allocate a significant part of the “eco-tax� revenues (at least 20 percent) to the development and implementation of a social program focused on integration of waste-pickers in the recycling sector. The social program will help develop and implement recycling programs/business targeting waste-pickers, with particular focus on women. Funds will support the design and implementation of targeted training initiatives to build waste- pickers’, particularly women’s, capacities and competitive advantage in the sector. Training programs will include basic business management, the organization and operation of co-operatives, principals of separation and recycling, health practices, etc. It is estimated that recycling activities, which are labor intensive, can generate between 50,000 to 70,000 jobs by end of PNDM, replacing partially the existing informal jobs. 115. Prior actions envisaged for DPL 3:  Prior Action D.1. The Cabinet Council (Conseil de Gouvernement) has approved on October 15, 2012, the Borrower’s draft budget law for 2013, which, inter alia, (i) introduces an eco -tax on plastic packaging, and (ii) amends the arrangements applicable to the National Fund for Environment (Fonds National pour la Protection et la Mise en Valeur de l’Environnement) to have such Fund receiving the revenues of the eco-tax. This important Government action intends to support the modernization of the MSWM systems through the development of waste sorting and recycling activities. The introduced eco-tax instrument will secure a sustained stream of revenues in applying the “Extended Producer Responsibility�. The total eco-tax revenue is expected to surpass the annual budget support to LGs under PNDM and will be allocated to support the development of income generating activities, sorting plant and segregation at source, etc. These activities will contribute to achieving Morocco’s goal of waste recycling and will help LGs improve the economic and social performance of their MSWM systems. 116. Considered triggers for DPL 4:  Entity for the management of recycling value chains established and operational with effective participation of key actors (LG, eco-tax payers, recycling industry, informal sector)  At least 20 percent of “eco-tax� revenues are allocated to support recycling programs/activities targeting waste-pickers, with specific focus on the gender dimension. 117. Expected results: This policy area is expected to achieve two major results: (i) availability of financial resources to promote recycling activities, and (ii) income-generating opportunities in the recycling sector for waste pickers (disaggregated by gender) created. -47- VI. OPERATION IMPLEMENTATION A. POVERTY AND SOCIAL IMPACTS 118. The poverty and social impacts of the policies supported by the new DPL are expected to be positive. Citizens at large, especially vulnerable groups such as waste pickers (of whom women are a significant proportion), are likely to benefit from the policy measures supported through the programmatic series. Waste collection and disposal systems will become increasingly efficient, resulting in significant improvements -- in terms of hygiene, health, reduced pollution and scenic benefits -- for all citizens. Annex 5 summarizes the assessment of poverty and social impacts for each DPL3 prior action. 119. The pilot CRC undertaken revealed that citizens are widely concerned about the health and pollution effects of sub-standard waste collection; the policy reforms and program actions by supporting the modernization of MSW systems, will be directly responding to these concerns. The DPLs are also expected to have positive benefits for vulnerable groups. Residents of the very high density slum neighborhoods will benefit significantly from improved waste collection and disposal practices. And, importantly, the vulnerable who work as informal waste pickers (of whom women are a significant proportion) will benefit from the provision of basic equipment for, and training on, safe waste-picking and sorting practices. They will also benefit from the expanded and improved income-generating opportunities resulting from the introduction of recycling across the sector. The PSIA projects that these benefits will be substantial, both in terms of increased job opportunities and in terms of increased earnings. Waste pickers will also benefit from improved waste sorting infrastructure. Female waste pickers are likely to derive significant benefits given that the eco-tax will finance targeted training and capacity building to strengthen their comparative advantage in the MSW sector. 120. An addendum to the two previous Poverty and Social Impact Analysis (PSIA) undertaken shows that the introduction of an eco-tax which will fund sustainable recycling is likely to have a largely positive socio- economic impact, including on vulnerable groups associated with the sector. The eco-tax will be levied on commercial entities which manufacture recyclable products in the country, import finished recyclable products, and/or import raw materials used in producing the recyclable products. Initially, the eco-tax will be applied only to plastic products (plastic bottles, bags, plastic wrapping, etc.) and will be levied at a rate of 2.5 percent. Tax revenues will be managed by the National Environmental Fund following a 5 year business plan. The PSIA addendum estimates that the eco-tax is likely to have a limited impact on the import of raw materials and on the import of finished and semi-finished goods (in the range of -2.2 percent). The eco-tax is expected to lead to a slight (0.10 percent) increase in local production of these materials and to a very limited (0.017 percent) reduction in local consumption of these products. The estimated impact on revenues of local producers of plastic is +2.6 percent. A considerably larger increase in revenues is estimated for the sector actually using the recycled goods, amounting to around 6.5 percent in 2013-2016 and 6.9 percent in 2016- 2023. The impact on public finances resulting from the loss of VAT from reduced imports of finished and raw products will be an initial dip in the first period followed by a rise in the second period. 121. The eco-tax is expected to have only a very small and indirect impact on individuals and small service providers by way of passed-on costs from larger plastic producers. However, these very small and indirect impacts are expected to be fully mitigated through the recycling of plastic products and the consequent economic returns. Moreover, it is planned that the eco-tax will finance infrastructure for sorting of recyclables, thus avoiding any additional pressures on existing municipal budgets. 122. The PSIA addendum notes that the benefits to citizens and small service providers will be in the form of a cleaner, more hygienic, and visually attractive environment with reduced pollution. These issues are, according to the findings of the CRC on Household Solid Waste Management, accorded a very high level of importance by citizens. Indeed, residents even of slum neighborhoods express a strong interest in, -48- and support for, recycling and a significant percentage (27 percent) say they personally would be willing to pay a tax to support recycling. 123. The eco-tax will also have crucial positive socio-economic benefits for vulnerable groups associated with the sector, such as informal waste pickers, of whom a sizeable percentage are women. Tax revenues used to establish appropriate sorting and recycling facilities will improve the working condition of the waste pickers considerably. Productivity gains made in the recycling sector will lead to increased and higher income generating opportunities for the waste pickers. The PSIA estimates that the earnings of waste pickers would increase by around 11 percent each year, to about MAD 225 per day in 2023 as a result of the changes and programs introduced with the eco-tax. 124. The PSIA addendum also considers the impact of user fees which were introduced under the law 28- 00. The PNDM had planned for a gradual introduction of user fees beginning at a rate of 2 percent between 2008-2012, rising to 9 percent between 2012 and 2017, and further increasing to 18 percent between 2018 and 2023. However, the user fees for the 2008-2012 phase of PNDM amounted to only 0.5 percent and Casablanca was the only municipality to introduce them, which it did in the industrial, tourism, commercial and service sectors. User fees were not applied to households. 125. The PSIA addendum reports that the introduction of user fees for commercial and service entities will have important, and positive, equity implications. This is because the non-payment of user fees by commercial and service entities results in a distributional distortion, in that large waste generators are, in effect, subsidized by households, including poorer households. Hence, the implementation of user fees on commercial and service entities will have important redistributional effects, particularly when the revenues garnered are used to support other municipal services, including social services. Gender aspects 126. The PSIA addendum gathered and analyzed the impacts, fairly positive, of the program of reform supported by the proposed programmatic series on gender issues. The program of reform is expected to contribute to (i) foster women’s voice through CRCs and their gender disaggregated questionnaire analysis; and (ii) reduce gender disparities in income-generation in recycling activities:  Strengthening women’s “voice� and addressing their concerns about MSW services. The key demand side governance mechanism – the CRC – which is being introduced under the PNDM and which will be progressively rolled out under the DPL will help ensure better consideration of gender issues in the sector. The statistically representative surveys, which form the base of the CRCs, will gather gender disaggregated data and ensure there is good representation of women’s opinions and concerns. The measures used in publicly disseminating the CRC findings will also be designed to ensure women’s participation and interest. It is, however, notable that the pilot CRC conducted in one municipality (Témara) showed little difference of opinion and viewpoints on SWM issues between the genders.  Enhancing women waste-pickers’ working conditions and building women’s comparative advantage in the recycling sector. Women’s engagement in the MSWM sector is of particular concern in the informal sector. A sizeable percentage of informal waste pickers are women who, together with other waste pickers, have long been working in unsanitary and unhealthy conditions. They are vulnerable, earn less than their male counterparts, and their livelihoods are very tenuous. Some efforts have been made to improve the waste pickers’ working conditions but these have been limited and, to date, confined to just two municipalities. Under the new programmatic loan, twenty percent of the eco-tax will be earmarked to support initiatives to systematize and improve waste -49- pickers’ working conditions. It is estimated that more than MAD 40 million will be allocated annually to these initiatives, with these revenues being used for, amongst other things, establishing improved sorting and recycling facilities. Such improvements in income-generating equality and working conditions, including better hygienic and safer working surrounds, will have particular benefits for pregnant women and mothers who are vulnerable to infections and disease from waste. These revenues will also support targeted training for female waste pickers to build their comparative advantage as waste pickers. Training will be provided in areas such as the establishment and operation of cooperatives, good separation and recycling practices of different materials, preventive health and hygiene practices, good work practices, etc. Monitoring of the application of the earmarked eco-taxes will be gender disaggregated to ensure that women are significant beneficiaries of these programs. B. ENVIRONMENTAL ASPECTS 127. The supported reform including the retained prior actions of DPL3 are expected to have significant positive impacts on the environment, forests and natural resources. They play an important role in improving governance, ensuring the institutional and financial sustainability, strengthening monitoring and control mechanisms, and introducing recycling activities in the MSW sector. The proposed operation has been specifically designed to address environmental issues and builds on the progress of the previous two operations to enhance their positive effect on the environment. Indeed, no supported prior action has a significant adverse effect on the environment, forests, or natural resources. The implementation of the first phase of the reform program has already allowed significant improvements in the country’s environmental regulatory and institutional framework. The EIA system is now fully operational at both national and regional levels. The increasing complexity of the waste management systems and ever- higher environmental protection targets, however, increase the challenge of optimizing the solid waste management strategies and policies. 128. In the context of the proposed series, improving governance in the MSW sector would enable all stakeholders to know the “rules of the game� in advance. These include the environmental rules and regulations, and would apply to all the MSW projects in an equitable and transparent manner. Ensuring financial and institutional sustainability is at the core of environmental sustainability. Introducing market based instruments in the form of eco-taxes to improve the efficiency of resource use: (a) improves the environmental performance of the MSW sector; (b) ensures environmental compliance; and (c) aims at changing behavior in the long term. Strengthening the monitoring and control system will ensure the compliance of the SWM facilities with the applicable environmental laws and legislation, which should lead to improved economic and environmental performance of MSW facilities. Waste valorization and recycling activities will also have several positive environmental implications including reducing solid waste content, improving the life of MSW facilities, and lowering energy consumption and associated greenhouse gas emissions related to processing of raw materials. A potential adverse impact could be the establishment of large recycling enterprises. This can be addressed by preparing an EIA and developing appropriate mitigating measures for the health and safety of the workers. 129. Morocco has the appropriate environmental management capacity to address the potential adverse effects in the solid waste sector. A Safeguards Diagnostic Review (SDR) for the solid waste sector was conducted in 2011 in the context of the preparation of Morocco’s MSW carbon finance operation. The Equivalence Analysis of the SDR showed that the laws, regulations and governing investments and activities in the solid waste sector in Morocco are generally consistent with international good practices related to environmental assessment. The acceptability assessment in terms of guidelines, monitoring and enforcement and provision of human and technical resources is generally acceptable provided the gap filling measures are implemented. These gaps filling measures call for the disclosure of the environment assessment studies and the strengthening of the monitoring and enforcement systems through the formal adoption of the procedures -50- for monitoring and control and the provision of additional staff for inspection. These measures have been addressed in the third reform area related to monitoring and control (policy area C of the DPL). C. IMPLEMENTATION, MONITORING, AND EVALUATION 130. Implementation and coordination responsibilities: The same arrangements that have been put in place for the previous DPL operations will apply for the proposed operation, including the following implementation and coordination mechanisms: 131. The CN-PNDM will be responsible for the coordination, review, and evaluation of the solid waste sector reform program and the PNDM. The National Commission is led by the MEMEE and includes representatives of the Ministry of Economy and Finance, MoI, Ministry of General Affairs and Governance, and the FEC. The National Commission will, in particular, ensure progress reporting and schedule management, action documentation, inter-ministerial coordination, and proactive corrective action on non- progress actions. The National Commission will also be responsible for communication with the Bank supervision team. 132. The Program Management Unit established within the DGCL in the MoI will be in charge of day-to- day management of the PNDM including the production of bi-annual PNDM progress reports with specific attention to measure achievements and results of the sector and program of reforms. In this context, Key Performance Indicators (KPIs) have been developed. The KPIs 2012 baseline has been determined and posted on the website of the MEMEE. 133. Supervision by the Bank: Supervision missions will allow the Bank to continue providing policy advice and technical assistance to the institutions involved in the implementation of the sector’s program of reform. The Bank will continue to maintain ongoing dialogue with the relevant government ministries. 134. Monitoring and Evaluation: The monitoring and evaluation of the program and its expected results will be based on the government’s regular M&E activities. The Bank will continue to provide support to the government to strengthen M&E, improve data quality and management and enhance capacity for using development outcomes to inform policy making. D. FIDUCIARY ASPECTS 135. A Public Expenditure and Financial Accountability (PEFA) assessment was undertaken in 2009 jointly by the European Commission and the Bank. The PEFA report has confirmed substantial progress in Public Finance Management (PFM) reforms in Morocco. 136. The results, based on the PEFA ratings, indicate in particular that Morocco has an overall credible, comprehensive, and transparent budget (which is published in the Official Bulletin). The PFM system also supports the achievement of aggregate fiscal discipline, strategic allocation of resources and efficient service delivery. The main strengths of the Moroccan PFM are the following aspects: (i) credible and transparent budget; (ii) transparency of taxpayer obligations and liabilities; (iii) timeliness and regularity of reconciliation of the Government‘s bank accounts; (iv) accurate and timely in-year budget reports covering expenditures at both commitment and payment stages, and (v) strong cash and debt management. The main challenges of the Morocco PFM relate to: (i) improvement of the budget classification, since despite the level of detail, accuracy, and reliability, it does not yet allow for reliable direct tracking of program-related spending being financed under priority programs; (ii) timeliness of annual statements which are submitted for external audit 15 months after the end of the fiscal year; (iii) the limited extent of legislative scrutiny of -51- external audit reports; and (iv) the frequency and scope of audits rated average and the follow up of audit recommendations. 137. The Government is committed to addressing these challenges, and, in order to do so, has introduced measures to: (i) move to a performance based budgeting framework; (ii) develop a Medium-Term Expenditure Framework to assist in fiscal sustainability; (iii) modernize its accounting and internal audit framework; and (iv) improve revenue management. The 2009 PEFA is also contributing to the Government‘s reform process by providing information on the extent to which reforms are yielding improved performance. In addition, the Kingdom of Morocco timely publishes its annual budget on the Ministry of Economy and Finance website21 as well as in the official gazette, following adoption by Parliament. In conclusion, the strength of Morocco’s PFM system and the Government‘s commitment to reform, taken together, are, in the Bank’s view, adequate to support this DPL. 138. Foreign Exchange. No safeguard assessment of the Central Bank of Morocco (BAM) was conducted by the IMF. However, the Central Bank is audited on a yearly basis with the audit report being disclosed publicly. The 2009, 2010 and 2011 audits were unqualified. However, the World Bank was not able to review the Management Letter, and therefore has limited information on the foreign exchange control environment. The Bank should receive and review the Management Letter in order to obtain clear view on the foreign exchange environment. E. DISBURSEMENT AND AUDIT 139. With reference to the flow of funds, the proposed loan will follow the Bank’s disbursement procedures for development policy loans. Once the loan is approved by the Bank’s Board and becomes effective, the proceeds of the loan will be disbursed in compliance with the stipulated release conditions as defined in the Loan Agreement and in a single installment. The account into which the loan proceeds will be deposited forms part of the country's official foreign exchange reserves. The flow of funds (including foreign currency exchange) is subject to standard public financial processes. The Government budget is comprehensive, unified and subject to centralized Treasury account. 140. The loan proceeds will be deposited by the International Bank of Reconstruction and Development (IBRD) in a dedicated account opened by the Borrower and acceptable to the World Bank at the Central Bank of Morocco (Bank Al Maghrib), upon submission of a signed withdrawal application. Such arrangements mitigate the fiduciary risk of any possible loss or diversion of the loan proceeds from the foreign currency Bank account into which loan proceeds are deposited. 141. The Borrower should ensure that upon the deposit of loan proceeds into said account, an equivalent amount, in the local currency, is credited to the treasury current account at the Central Bank. The Borrower will report to the World Bank on the amounts deposited in the foreign currency account and credited to the budget management system. If the proceeds of the loan are used for ineligible purposes as defined in the Loan Agreement, IBRD will require the Borrower to promptly upon notice refund an amount equal to the amount of said payment to IBRD. Amounts refunded to the World Bank upon such request shall be cancelled. The loan proceeds will be administered by the Ministry of Economy and Finance (MEF). BAM MEF Budget World Bank Euro Dedicated MD Budget Morocco PFM Bank Account Account at BAM System 21 www.finances.gov.ma -52- 142. Although an audit of the use of the funds may not be required, the Bank reserves the right to ask for a transaction audit. This audit, when asked for, will cover the accuracy of the transactions i.e., receipts and payments of the dedicated account, including accuracy of exchange rate conversions; confirming that the dedicated account was used only for the purposes of the operation where no other amounts have been deposited into the account. Also, the auditor will have to obtain confirmation from corresponding bank(s) involved in the funds flow regarding the transaction. The time period for submission of the audit report to the Bank is six months from the date a request for such audit is issued. F. RISKS AND RISK MITIGATION 143. Overall, the team does not see any major sector related risks given the strong commitment of the new Government to the second phase of the reform. In addition, opportunities are offered under the recent constitutional reform, particularly in terms of governance, regionalization, sustainable development, and social inclusion, and would contribute to effective implementation of the identified policy measures. However, three types of risks have been identified that cover the macroeconomic, institutional and governance aspects. 144. Macroeconomic risk. Heightened risks to the outlook related to macroeconomic stability and fiscal balances require decisive actions to put the fiscal stance back on a sustainable path. On the one hand, Morocco faces three exogenous macroeconomic risks: (i) the possible deterioration of the ongoing global economic conditions - especially in Europe; (ii) the volatility of the agricultural output due to its dependence on changing climatic conditions; and (iii) continued high world prices of food and energy. On the other hand, Morocco could also suffer from endogenous risks, essentially those related to a slow or non- consequential implementation of the needed reforms stemming from resistance of vested interests groups or from a waning political determination to implement politically and socially sensitive policies, such as the subsidy reform. Morocco will face reduced growth prospects in case the above mentioned exogenous shocks materialize. In particular, in the event that the current European economic turmoil evolves in a recession in the order of a -1 to -1.5 percent GDP growth in 2013, World Bank estimates for Morocco indicate a reduced growth rate by half point for the same year. Should oil prices remain at current high levels, Morocco would likely see its GDP growth prospects reduced relative to the baseline scenario. This would also have important fiscal implications that pose perhaps the most significant medium term macroeconomic risk - that of deterioration of the fiscal balance which would be exacerbated by the increasing costs of the subsidy system. Morocco’s management and mitigation of these risks are predicated on the new Government’s strong commitment to proceed with the ongoing and envisaged reforms outlined earlier. The Government is also adopting specific measures in the event of a negative agricultural outcome that relate to the suspension of import duties on cereals and support to affected farmers and livestock producers. It is devising strategies to cope with potentially sustained high oil prices, including requesting World Bank support to develop mechanisms to hedge commodity price risks. More importantly, it is devising measures to mitigate the impact of subsidies on public finances to be eventually introduced in 2013 after the partial adjustment to oil prices implemented in early June 2012. In this regard, there is broad understanding that the needed consolidation of public finances will require three critical measures the Government is already working on: deepening of fiscal reform, regaining control over the wage bill evolution, and subsidy reform. 145. Limited willingness and capacity of LGs to implement the supported policy measures. LGs have been and remain the most critical segment of the reform of SWM. Many of the supported policy measures provide them with new financial, operational and governance tools to improve the environmental and social dimensions of service delivery. However, they will remain ineffective without some level of local willingness and capacity to implement CRCs, develop recycling activities, liquidate and prevent arrears, introduce waste fees on large producers, etc. To mitigate this risk, the proposed operation will strengthen the incentive mechanisms currently in place through PNDM financial support. This financial support was -53- instrumental during the first phase to bring LGs to adhere to the reform and modernize their MSW systems. In parallel, a systematic technical assistance (AMO) is now a key component of the PNDM, particularly to ensure proper preparation and management of PSP contracts and arrears. The CN-PNDM indeed approved the allocation of a significant budget to quickly start the provision of such high-level private technical assistance throughout the Kingdom while more sustainable mitigation of an institutional nature (asset companies, etc.) are gradually put in place. Thus, a comprehensive nation-wide program will support municipalities to operationalize and develop sustainable institutional solutions (like setting up metropolitan districts and public asset companies). The ongoing national communication program will also contribute to improving the local decision makers’ understanding of and commitment to the reforms. 146. Weak governance and capacity to manage the use of eco-tax revenues efficiently. The eco-tax on the plastics industry is a breakthrough in Morocco’s solid waste agenda which would contribute to transform the recycling sector and improve the social economy of MSW systems. The lack of transparency in the use of the eco-tax revenues and the deficit in engaging key players (eco-tax payers, recycling industry, LGs, and informal sector) may lead to mixed results, and prevent the scaling up of eco-taxes to other waste streams. To mitigate such risk, the Government is committed to put in place a well-governed and staffed management unit involving the above key players, to ensure transparent, efficient and result-oriented recycling activities. This is reflected in the policy matrix as trigger #8. -54- ANNEX 1 – DEVELOPMENT POLICY LETTER -55- -56- -57- -58- -59- -60- -61- Translated copy KINGDOM OF MOROCCO December 31, 2012 HEAD OF GOVERNMENT Mr. JIM YONG KIM PRESIDENT OF THE WORLD BANK 1818 H Street N.W. Washington USA Development Policy Letter for the municipal solid waste sector in Morocco Mr. President, The constitutional reform of July 2011 confirms the economic and political advantages of decentralization and sustainable development and establishes the principles for reform of a number of sectors and particularly of those relating to environmental protection and improvement of the people’s living conditions. Four basic principles now underlie the Government’s action in this area: public participation and local democracy; environmental protection and sustainable development; decentralization and advanced regionalization; and good governance and the right of access to information. In this context, the Government’s 2012-2016 program advocates decentralization and local capacity- building and focuses on provision of public services and improvement of the quality of life, environmental protection and sustainable development, human development and poverty relief. To this end, several national programs are being implemented and provide the appropriate framework for partnership between the State and local authorities to address problems of access to local services focusing on their environmental and social spillovers, and to promote public participation and access to information. The National Solid Waste Program (PNDM), supported by the World Bank and other partners, is one such program. The goal of this 15-year program launched in 2008 is to assist municipalities to upgrade and integrate municipal waste management systems to achieve a better economic, environmental and social performance. By the end of 2011, financial assistance provided to municipalities for upgrading the sector, through the National Fund for the Environment and the program for use of the VAT, totaled DH 2.2 billion. Major progress and tangible results in the municipal waste sector include:  Enactment of law 28-00 on waste management, introducing the principle of integrated management of solid waste and confirming the municipality’s full responsibility for the entire process of municipal waste management; -62-  Improved policy coordination and investment planning following the establishment of the National Commission for the PNDM and creation of a mechanism for financial assistance to local authorities based on incentives for the introduction of integrated and modernized municipal waste management; this mechanism promoted transparency of financial assistance to the sector, improvement of project quality and mainstreaming of social and environmental aspects;  The definite improvement in the quality of service and of environmental performance resulting from the professionalization of management of the service, particularly through increased private sector participation in management in over 90 municipalities, representing three quarters of the urban population of Morocco, and the increase in the percentage of sanitary landfills for collected waste (32 percent at the end of 2012, compared with less than 5 percent in 2006);  Upgrading of the system of environmental impact assessment. This system is now aligned with good international practice, is operational at the national and regional levels and is thus promoting the mainstreaming of the social and environmental dimensions of all infrastructure projects (not only in the waste sector). Despite the progress made to date, the Government is aware that the reform of this sector is fragile and in its infancy. The Government’s program announced its determination to continue the efforts being made in this priority sector. The launch of the second phase of the PNDM, with World Bank support, will build on prior achievements, tackle new problems and reposition the sector in the context of the decentralization agenda. More specifically, this program focuses on the following four areas of reform: enhancement of governance; improvement of sustainability; upgrading of the system of environmental monitoring and oversight; and development of waste recycling activities. Governance of the waste sector Good governance of this sector requires constructive interaction, on the basis of information available to all, between public authorities, operators (public or private) and the public regarding expectations, performance of the service (coverage, quality, regularity, recycling activities), contractual services, and the impact on health and living standard. To this end, Government action includes a series of measures and policies, including:  Adoption by the Government of draft framework legislation comprising the National Charter for the Environment and Sustainable Development, which defines the rights and obligations of citizens for the protection and preservation of the environment and for sustainable development, and includes the principles of access to environmental information, the creation of an environment police, strengthening of the authorities responsible for environmental oversight and inspection, and introduction of the principle of extended environmental responsibility.  Promotion of social accountability in particular by the introduction of civic evaluation instruments, in order to enhance transparency and encourage citizens to interact with the municipality on questions of municipal waste management. A pilot civic evaluation of waste management was conducted in the municipality of Temara. In 2013, the Government intends to start making financial assistance from the PNDM to local authorities conditional on their commitment to adopt the civic evaluation report as an instrument to promote accountability of service providers. -63-  Online posting, for the benefit of the public, of regularly updated information on the PNDM and particularly its performance indicators.  These efforts will be supported by social marketing initiatives under the PNDM communication strategy and by the introduction of a system for dealing with complaints. This will help to improve the transparency of the PNDM and to ensure the buy-in of all stakeholders.  Expanding public access to information on management contracts awarded to the private sector, by encouraging local authorities to publish information about contracts for municipal waste services. This information will also be provided via the e-platform of the Official Bulletin of Local Authorities and will be extended beyond the municipal waste sector to include all municipal services contracted to the private sector.  Creation of regional environment observatories to provide effective monitoring and a comparative analysis of management of municipal waste services. Morocco has established Regional Observatories of the Environment and Sustainable Development under a partnership between the Ministry responsible for the environment, local authorities, universities and civil society. These will be regional platforms for monitoring the state of the environment and information- sharing on priority sectors, including the municipal waste sector. The Government will establish these platforms in all the regions by January 2015. Institutional and financial sustainability of municipal waste management The Government considers the sustainability of this service to be an essential goal of the sector’s reform policy. The PNDM provides short-term assistance to help with the transition of the sector and to encourage Moroccan municipalities to modernize the service. Municipalities will need to sustain the progress made so that they are able to switch to treatment methods that are more environmentally sound than simple landfilling, in the long term,. Analysis of the results of the first phase of the PNDM shows that, although considerable progress has been made, long-term sustainability is still problematic, for the following reasons:  Despite recent efforts to clear the backlog, there are still considerable arrears in payments under contracts awarded to the private sector, showing that the market is still not functioning properly, creating competitiveness risks for future supply.  The portfolio of projects for treatment modernization is shrinking: since the larger towns already have or will soon have sanitary landfills, this means that there is insufficient project preparation capacity in the smaller towns.  The costs per ton for collection contracts are often excessive in the small municipalities, also indicating a lack of capacity for sound project preparation. In order to meet these challenges, Morocco is committed to adopting the following measures: At the institutional level,  The draft organic law on the organization of local authorities, which will redefine their public service missions, will confirm the specific competence of the municipality for integrated management of municipal waste. There will be broad consultations on the drafting of this law. -64-  Morocco chose to involve the private sector for the delivery of services, in most cases. Recent studies have shown the positive effects resulting from this choice, which the Government will continue to support.  Since the municipalities have a limited status, the Government plans to promote the creation of public asset management companies covering several municipalities and/or a region in order to professionalize planning, development of municipal waste management infrastructures and improved management of contracts awarded to the private sector. This will help to attract and retain skilled staff and to mobilize diversified financing for major investments, such as treatment facilities.  More generally, the Government will develop and start to implement in 2013 a national program of assistance to local authorities, including support for the creation of inter-municipal institutions and public asset management companies for local service provision.  Pending the gradual introduction of the more sustainable institutional solutions mentioned above, and starting in 2013, the Government will provide project management assistance under the PNDM to local authorities in order to improve project quality and management of contracts awarded to the private sector, and to expand the investment pipeline. In addition, the multi-year capacity-building program launched in the first phase of the PNDM will continue throughout the second phase. At the financial level,  The Government will continue to support the national program to encourage modernization of services, through the adequate allocation of resources during the second phase of the PNDM.  Eco taxes have been introduced for certain types of waste and some large waste producers in order to: (i) reduce the imbalance in the service financing system caused by omitting the considerable costs connected with certain types of waste or certain categories of waste producers; (ii) allow greater flexibility in matching local authorities’ revenue to the cost of the service; and (iii) encourage reduction of environmental spillovers.  In order to mobilize the untapped potential of certain local taxes, the General Treasury of the Kingdom is designing, jointly with local governments, a program for the provision of consultancy services and technical assistance to improve the management of local resources. This initiative will help to professionalize the process of management of local tax revenue (assessment, calculation of taxation base, preparation of tax lists, collection, etc.) and to increase local revenue. Concerning the competitiveness of the market for municipal waste management services:  The Ministry of the Interior has issued two circulars to deal with existing arrears and prevent future arrears to the extent possible, and plans to set up a mediation mechanism to settle any disputes that may arise in the enforcement of contracts awarded to the private sector. Mediation will be provided by a predetermined third party acceptable to both sides. Monitoring and oversight of the environment In this area, the Government’s action is designed to create and maintain conditions for the efficient and effective operation of the institutions responsible for oversight, monitoring and punishment of non- -65- compliance with the environmental norms and standards established by the laws and regulations in force. To this end, the Government has embarked on the upgrading of environmental monitoring, including:  Strengthening of the legal framework to formalize the function of monitoring and surveillance of the environment;  Creation of a unit of sworn inspectors to conduct surveillance, monitoring and oversight missions, which should develop into an environment police, as envisaged in the draft framework law comprising the National Charter of the Environment and Sustainable Development;  Development of operational tools such as oversight and surveillance guidelines, a database compiled by and accessible to all Government agents responsible for surveillance and oversight of the environment;  Improvement of public access to information as regards publication of the specifications of measures to offset environmental impacts identified by environment impact assessments and confirmed in the certificate of environmental acceptability issued by the Government authority responsible for the environment.  Creation, by circular of the Head of Government, of a system of information and coordination for controls, inspections, non-compliance and follow-up of penalties under the laws on the environment. Development of waste recycling activities In connection with the PNDM goal of recycling 20 percent of waste in 2020, the Government has introduced a series of measures designed to improve the social economy of the sector, modernize the system of municipal waste management and achieve social integration of the informal sector (wastepickers).  On October 15, 2012, the Council of Government approved the 2013 draft budget law which (i) introduces an ecotax on plastic packaging and (ii) amends the duties of the National Fund for the Environment to include management of revenue from the ecotax. This important measure is designed to support modernization of the systems of municipal waste management by developing waste sorting and recycling activities. The ecotax will be a source of revenue as a result of application of the provision concerning “extended producer responsibility�. This revenue will be used to develop the waste recycling sector.  A unit will be created in the Ministry responsible for the environment to ensure effective management of the use of funds from the ecotax, based on the principle of partnership between key actors, including the Government, local authorities, the profession, civil society and the informal sector.  In order to step up its action for the inclusion of vulnerable population groups and especially women, the Government will set aside a sizeable amount of the revenue from the ecotax on packaging to support the development and implementation of recycling projects and revenue- generating activities to benefit those groups. -66- In view of the scope of the reforms included in this program and the expected results in terms of economic, social and environmental impacts, we shall be grateful for any assistance that the Bank can provide to support this program. Very truly yours. Signed by Mohamed Najib BOULIF, Minister in charge of General Affairs and Governance, on behalf of the Head of Government. -67- ANNEX 2 – POLICY MATRIX OF SECOND PROGRAMMATIC SERIES (DPL 3 and 4) Expected Results Objectives Prior Actions (DPL3) Triggers (DPL4) and Indicators Policy Area A: Governance of the Municipal Solid Waste sector Enhance demand side governance A1. The Cabinet Council (Conseil de 1. At least 12 Regional Environment in the MSW sector by i) promoting Gouvernement) has approved on observatories are in place to monitor access to information; ii) fostering December 14, 2012, the draft of a law ( loi- environmental indicators, including greater transparency; and iii) cadre) on environment and sustainable those related to solid waste improving accountability of service development, introducing: (i) the right of management. providers to citizens. any person to access environmental information ; (ii) the institutional arrangements for environmental control; Public and private MSW service and (iii) the principle of extended producer providers are more accountable to responsibility. informed citizens A2. The National Commission for the 2. Adoption by the CN-PNDM of the Indicator: National Municipal Solid Waste use of Citizens Report Cards as an Number of municipalities Management Program has approved on eligibility criterion for PNDM financial implementing Citizens Report Cards on October 23, 2012, the introduction of a support MSW services citizen feedback tool on quality and adequacy of municipal solid waste services Baseline (2012): 0 (“Citizens Report Cards�), as a key Target (2015): 4 component of the National Municipal Source: Citizens Report Card Solid Waste Management Program to documents support local governments in building demand-side governance in the municipal solid waste service delivery. Transparent use of public money in private MSW delivery A3. The Minister of Interior has issued Indicator: Percentage of contracts Circular No. 8029 dated May 23, 2012, signed with an extract disclosed on requiring municipalities to disclose BOCT web platform extracts of municipal solid waste service contracts in the Official Gazette for Local Baseline (2012): 0 % Governments (Bulletin Officiel des Target (2015) : 100% Collectivités Territoriales). Source: BOCT (LG official Gazette) -68- Expected Results Objectives Prior Actions (DPL3) Triggers (DPL4) and Indicators Policy Area B: Institutional and Financial Sustainability of Municipal Solid Waste Management Service Improve ISWM through support to B1. The Minister of Energy, Mines, 3. Cabinet Council (Conseil de Improved operational and the professionalization of MSW Water and Environment has signed Gouvernnement) has approved the draft environmental performance of the systems in harmony with the on December 10, 2012, three contracts fundamental law “loi-organique� on the PNDM decentralization agenda with engineering firms in order to reorganization of local and regional assist local governments better governments, confirming the full Indicator: Percentage of MSW prepare and manage municipal solid responsibility of the municipality on ISWM collected professionally and disposed waste projects and contracts and instituting inter-municipal/regional of in sanitary landfills throughout the territory of the entities which are able to improve MSW Borrower. service planning, development and delivery. Baseline (2012): 32% Target (2015) : 66% Source: PNDM bi-annual Progress Report 4. The Ministry of Interior has launched a Indicator: Number of inter- multi-year technical assistance program to municipal/regional institutions support LGs in establishing inter- (“Groupements d’Agglomération et municipal/regional institutions for the groupements de communes�) professionalization of Municipal Solid Waste established management. Baseline (2012): 7 Target (2015): 15 Source: DGCL -69- Secure mid-term funding to cover B2. The Minister of Interior has Local Governments financial costs of MSW services issued Circular No. D13015 dated capacity improved to sustain MSW December 17, 2012, establishing a services municipal solid waste fee that could be charged by municipalities to large Indicator: Increase in aggregated waste producers, in compliance with municipal revenues compared to 2012 the provisions of Article 23 of Law No. 28-00 dated November 22, 2006, Baseline (2012): 0 on solid waste management. Target (2015) : +10% Source : TGR B3. Appropriate funding has been 5. The “Trésorier Général� issues a Decision made available to the National Solid organizing TGR advisory services to LGs to Waste Management Program for improve the management of their fiscal 2012, and the Borrower’s draft budget potential and local source of revenues. law for 2013 includes appropriate budget allocation in support to the National Municipal Solid Waste Management Program. Improve and consolidate market B4. The Minister of Interior has issued 6. Establishment of a third party conciliation Better enabling environment for PSP competitiveness for MSW service Circular No. 5533 dated October 5, mechanism for delegated municipal services in the sector delivery through mitigation of risks 2012, regarding local governments’ related to PSP contract budget preparation, and Circular No. Indicator: Decrease in the percentage management 17887 dated December 11, 2012, of total volume of arrears (as declared addressing the issue of arrears due by by private operators) compared to the local governments under municipal original annual total amount of MSW solid waste service contracts, contracts including specific instructions and guidance: (i) in order to ensure fair Baseline (2012): 70% estimate of service costs; (ii) on price Target (2015): 50% revision; and (iii) on budget Source: DGCL arrangements regarding arrears rescheduling agreements. -70- Expected Results Objectives Prior Actions (DPL3) Triggers (DPL4) and Indicators Policy Area C: Environmental Monitoring and Control Upgrade the country’s C1. The Head of Government ( Chef 7. Issuance of a decree for the establishment All solid waste treatment facilities environmental monitoring and du Gouvernement) has issued Circular of “Police de l’Environnement� consistent are monitored and inspected on a control system No. 27/2012 dated November 30, with the Loi cadre on environment and regular basis 2012, establishing a national sustainable development information and coordination system Indicator: Percentage of MSW facilities on environmental inspections, regularly inspected infractions and sanctions. Baseline (2012): 8 % Target (2015) :100 % Source : MEMEE C2. The Minister of Energy, Mines, Water and Environment has issued Circular No. 66/2012 dated November 15, 2012, establishing within the Ministry a special unit of sworn-in environmental inspectors. -71- Expected Results Objectives Prior Actions (DPL3) Triggers (DPL4) and Indicators Policy Area D: Development of recycling value chains Develop waste recycling value D1. The Cabinet Council (Conseil 8. Entity for the management of Financial resources available to promote chains and secure viable de Gouvernement) has approved on recycling value chains established and recycling activities sources of funding October 15, 2012, the Borrower’s operational with effective participation draft budget law for 2013, which, of key actors (LG, eco-tax payers, Indicator: annual amount of eco-taxes collected inter alia, (i) introduces an eco-tax recycling industry, informal sector) and allocated to FNE on plastic packaging, and (ii) amends the arrangements applicable Baseline (2012): 0 to the National Fund for Target (2015) : MAD 230 million Environment (Fonds National pour Source: FNE la Protection et la Mise en Valeur de l’Environnement) to have such Fund Indicator: Number of recycling projects supported receiving the revenues of the eco- through Eco-tax revenues tax. Baseline (2012): 0 Target (2015) : 10 Source: FNE Integrate informal waste- 9. At least 20 percent of “eco-tax� Improved social and environmental pickers in the recycling sector revenues are allocated to support performance of the sector recycling programs/activities targeting waste-pickers with specific focus on the gender dimension. Indicator: Number of income generating opportunities in the recycling sector for waste pickers (disaggregated by gender) Baseline (2012) : 150 Target (2015) : 1,000 Sources: PNDM Bi-annual Progress Report -72- ANNEX 3 – FUND RELATIONS NOTE Public Information Notice (PIN) No. 13/13 February 5, 2013 IMF Executive Board Concludes 2012 Article IV Consultation with Morocco On February 1, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Morocco.22 Background Morocco has a track record of strong macroeconomic policies that, over the last decade, contributed to solid growth, low inflation, comfortable external reserves, financial deepening, and poverty reduction. These favorable developments have helped Morocco cushion the impact of the international crisis and respond to pressing social needs. In the context of political transitions in many countries in the region and high social demands, a new constitution was adopted in July 2011 in order to pave the way for broad-ranging political changes and reforms, including strengthened roles for the head of government and Parliament. Morocco’s positive record helped it qualify last August for a 24-month arrangement under the Precautionary and Liquidity Line (PLL), which aims to provide insurance against external shocks. More recently, this performance has been challenged by a deteriorating external environment and, in 2012, poor rainfall. Growth is expected to slow in 2012 to 3.2 percent, largely due to a lower-than-average cereal crop, but nonagricultural GDP growth is projected to remain robust at around 4.5 percent. Headline inflation has remained subdued at 1.6 percent (year- on-year) in November 2012, despite significant increases in the prices of several subsidized energy products in June, as part of the government’s effort to contain the fiscal cost of subsidies. Core inflation (excluding food and transport) was close to zero due to the large negative contribution of lower communication tariffs. Despite relatively strong growth, unemployment has remained around 9 percent since 2010. The fiscal deficit should decline to about 6 percent of GDP in 2012, thanks to a combination of measures notably the increase in some energy-administered prices in June and the control of nonessential spending. Delays in the adoption of the 2012 budget and in disbursement of external grants resulted in lower-than- projected investment. This, in turn, helped offset the subsidy bill that reached about 6.2 percent of GDP. The 2013 budget envisions a further reduction of the deficit by 1.4 percent point of GDP to 4.7 percent of GDP. For the medium term, the authorities aim at a deficit below 3 percent of GDP. The current account deficit is expected to increase to 8.8 percent of GDP in 2012 as import growth, pushed by energy-related imports, outpaced slow export growth. Tourism receipts and remittances are projected to fall slightly relative to 2011, reflecting the deterioration in the European economy. While gross international reserves (GIR) fell steadily in 2011 and most of 2012, they stabilized at around four months of imports in the last quarter. The issuance of a US$1.5 billion sovereign bond at favorable terms in late 2012 provided additional support in this regard. 22 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.imf.org/external/np/sec/misc/qualifiers.htm. -73- Monetary conditions have remained broadly supportive. Lower international reserves had a substantial restrictive impact on bank liquidity, contributing to slowing credit growth to 7 percent in 2012. To help fill the liquidity shortage, the central bank stepped up its liquidity injection, including by extending eligible collateral for its repo. The policy interest rate was cut by 0.25 percentage point to 3 percent in March 2012 and has remained unchanged since then. In September 2012, it also cut its reserve requirements for banks by 2 percentage points to 4 percent. Morocco’s social indicators have improved over the past decade. Higher economic growth, l ower unemployment, better health and educational outcomes, better access to basic infrastructure, and a marked reduction in poverty rates are tangible evidence of the progress made in fostering inclusive growth. However, unemployment remains high particularly among the youth. The authorities’ reform agenda includes measures to boost potential growth, tackle inequalities in the distribution of income and access to health care, particularly across regions as well as reduce unemployment. Executive Board Assessment Executive Directors commended the authorities for their overall sound macroeconomic policies, which, over the past decade, have helped deliver solid growth, low inflation, and poverty reduction despite continued high youth unemployment. This strong performance has been challenged recently by external and domestic shocks in a context of pressing social demands. Directors agreed that the authorities’ program of fiscal consolidation, prudent monetary and financial policies, and structural reforms to boost competitiveness and inclusive growth and rebuild shock buffers is appropriate to deal with these challenges. They emphasized that the outlook hinges on the timely and sustained implementation of the reform agenda. Directors welcomed the fiscal consolidation envisioned in the 2013 budget and beyond to help maintain external and fiscal sustainability, while emphasizing that consolidation should be as growth-friendly as possible. They welcomed the steps being taken toward reforming the subsidy system, and called on the authorities to move ahead resolutely in this area to aid medium-term fiscal adjustment and better assist the most vulnerable groups of the population. Directors also stressed the importance of moving ahead with pension reform to ensure the system’s viability. They encouraged a careful approach to fiscal decentralization so as not to increase fiscal risks. They welcomed plans to lower the ratio of the government wage bill to GDP and accelerate tax reforms. Directors concurred that clear communications and high-quality social dialogue will be key to successful implementation of the fiscal reform agenda. Directors considered the current monetary policy stance to be appropriate. They encouraged the authorities to move toward greater exchange rate flexibility to enhance external competitiveness and the economy’s ability to absorb shocks, in coordination with other macroeconomic and structural policies. Directors called for stepped-up efforts to foster higher and more inclusive growth, including by boosting youth employment and reducing inequalities in income and in access to health care and education. They underscored the importance of structural reforms to enhance external competitiveness and diversify the export base. They welcomed planned reforms to improve the business climate and promote small and medium-sized enterprises, both crucial to accelerate private-sector-led growth. Directors noted that the financial sector remains sound overall. They commended the authorities’ efforts to further strengthen financial regulation and supervision, particularly in light of increasing international exposure -74- of Moroccan banks. In this regard, they welcomed the authorities’ interest in an Financial Sector Assessment Program update. Directors encouraged the authorities to strengthen legislation against money laundering and terrorism financing, and to intensify reforms to promote financial development and deepening. Directors agreed that Morocco continues to meet the qualification criteria for a Precautionary and Liquidity Line (PLL) arrangement. They noted that the arrangement provides useful insurance against exogenous shocks and that the program supported by the PLL is on track. Directors welcomed the authorities’ intention to continue to treat the PLL as precautionary. Public Information Notices (PINs) form part of the IMF's efforts to promote transparency of the IMF's views and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PINs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PINs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. -75- Morocco: Selected Economic Indicators, 2010–18 2010 2011 2012 2013 2014 2015 2016 2017 2018 (Annual percentage change) Output and Prices Real GDP 3.6 5.0 3.2 4.5 4.8 5.0 5.4 5.7 5.8 Real nonagricultural GDP 4.9 5.0 4.5 4.5 4.7 5.0 5.4 5.8 5.9 Consumer prices (end of period) 2.2 0.9 2.3 2.5 2.5 2.5 2.5 2.6 2.6 Consumer prices (period average) 1.0 0.9 1.3 2.4 2.5 2.5 2.5 2.6 2.6 (In percent of GDP Investment and Saving Gross capital formation 35.0 36.0 36.1 36.6 37.4 37.8 38.2 38.4 38.8 Of which: Nongovernment 31.2 31.5 31.9 31.8 31.9 32.1 32.4 32.6 32.9 Gross national savings 30.9 27.9 27.3 30.4 31.7 32.6 33.4 33.9 34.3 Of which: Nongovernment 28.9 28.5 28.4 29.4 29.5 29.5 29.7 29.9 29.9 (In percent of GDP) Public Finances Revenue 1/ 27.5 27.8 27.7 28.2 28.3 28.2 28.2 28.1 28.2 Expenditure 31.9 34.6 33.8 32.9 32.4 31.7 31.2 30.7 30.6 Budget balance -4.4 -6.8 -6.1 -4.7 -4.1 -3.5 -3.0 -2.7 -2.4 Primary balance (excluding grants) -2.3 -4.7 -3.8 -3.4 -2.7 -2.0 -1.5 -1.1 -0.8 Total government debt 51.3 54.4 58.2 59.0 59.0 58.4 57.0 55.2 53.3 (Annual percentage change; unless otherwise indicated) Monetary Sector Credit to the private sector 2/ 7.5 9.9 7.0 8.0 ... ... ... ... ... Broad money 4.8 6.5 3.3 7.9 ... ... ... ... ... Velocity of broad money 0.9 0.8 0.9 0.8 ... ... ... ... ... Three-month treasury bill rate (period average, in percent) 3/ 3.4 3.5 3.2 ... ... ... ... ... ... (In percent of GDP; unless otherwise indicated) External Sector Exports of goods (in U.S. dollars, percentage change) 26.7 21.0 -3.5 10.4 8.1 5.6 6.5 6.9 7.1 Imports of goods (in U.S. dollars, percentage change) 7.7 25.4 -1.6 5.9 5.0 5.4 5.9 6.8 7.6 Merchandise trade balance -16.4 -19.6 -20.0 -18.8 -17.8 -17.5 -17.1 -16.8 -16.7 Current account excluding official transfers -4.4 -8.4 -8.9 -7.9 -6.8 -6.4 -5.8 -5.4 -5.3 Current account including official transfers -4.1 -8.0 -8.8 -6.3 -5.7 -5.3 -4.8 -4.5 -4.5 Foreign direct investment 0.8 2.3 2.2 2.8 2.8 2.9 3.0 3.0 3.0 Total external debt 24.7 23.6 26.4 27.5 27.1 26.6 25.9 24.6 23.8 Gross reserves (in billions of U.S. dollars) 23.6 20.6 17.5 18.4 18.8 19.7 21.3 22.6 24.6 In months of next year imports of goods and services 5.7 5.1 4.1 4.1 4.0 4.0 4.0 4.0 4.1 In percent of short-term external debt (on remaining 1,546 1,222 1,037 1,091 1,112 1,168 1,259 1,339 1,455 maturity basis) Memorandum Items: Nominal GDP (in billions of U.S. dollars) 90.8 99.2 97.5 104.8 112.2 120.4 129.7 140.6 152.6 Unemployment rate (in percent) 9.1 8.9 … ... ... ... ... ... ... Net imports of energy products (in billions of U.S. dollars) -8.1 -11.2 -11.8 -11.5 -11.4 -11.3 -11.2 -11.1 -11.1 Local currency per U.S. dollar (period average) 8.4 8.1 … ... ... ... ... ... ... Real effective exchange rate (annual average, percentage change) -4.1 -1.7 … ... ... ... ... ... ... Sources: Moroccan authorities; and IMF staff estimates. 1/ Includes changes in the balance of other special treasury accounts. 2/ Includes credit to public enterprises. 3/ Most recent data for 2012. -76- ANNEX 4.1 – MACROECONOMIC DEVELOPMENTS OVER THE LAST DECADE 1. Morocco made significant economic headways during the last decade. Growth pattern shifted to a higher level averaging 4.9 percent over 2001-2011, much higher than the average rate of the 1990s (2.8 percent). Inflation was subdued, recording less than 2 percent in average over the period. The growth and inflation performance allowed gross domestic product (GDP) per capita to almost double over the last decade to reach the equivalent of US$3,100 in 2011. The unemployment rate declined from 12.3 percent in 2000 to 8.9 percent in 2011. Absolute poverty decreased from 15.3 percent to roughly 9 percent between 2001 and 2007. Based on these achievements, Morocco gained “investment grade� rating in 2007, which was confirmed over 2009-2011 despite ongoing world economic turmoil. 2. These achievements were in part the result of sound macroeconomic policies. The steady consolidation of public finance turned fiscal deficits23 into surpluses in 2007 and 2008 (averaging 0.3 percent of GDP). The fiscal deficits widened to 2.2 percent of GDP in 2009 and 4.7 percent of GDP in 2010 but remained manageable. The Treasury total debt steadily declined from 68 percent of GDP in 2000 to 50.3 percent of GDP in 2010. Monetary policy sought to keep inflation under check while managing both liquidity and the exchange rate in an effective manner. In addition to timely adjustments of its money policy rate and reserve requirement rate, the Central Bank implemented an adequate mix of its other instruments, including foreign exchange swaps, issuance or buyback of debt securities, and the purchase or sale of securities in the secondary market. 3. Morocco’s economic improvement was also due to the implementation of ambitious structural reforms. During the last decade, Morocco liberalized a number of sectors, including transport, energy, and telecommunications. The financial sector was strengthened in support of the new dynamism of the nonagricultural sector. Ambitious sector-specific strategies were implemented to increase investment and employment opportunities. Gross investment, which used to hover around 25 percent of GDP on average in the 1990s, picked up in the 2000s to reach 38 percent of GDP in 2008 (Figure 1.0). Morocco also sought to deepen its integration into the world economy through the signing of many Free Trade Agreements culminating with the “Advanced Status� awarded by the European Union (EU) in 2008. Foreign direct investments (FDI) inflows increased to reach an average of 4.3 percent of GDP over 2006-11, thus contributing to the expansion of the country’s stock of capital. 4. Notwithstanding those economic achievements, Morocco remains confronted with important human and social challenges. Morocco’s social and human development outcomes are still below expectations. Economic vulnerability (poor and vulnerable) remains widespread, meaning that a quarter of the population–around 8 million people–is either in absolute poverty or under constant threat of falling back into poverty. The partial closure of the rural-urban income gap has not cancelled disparities: 70 percent of poverty in Morocco is still rural and in 2007 the urban poverty rate was 4.8 percent compared to 14.5 percent in rural areas. Income of the poor has been growing at a slower rate than the average income. There has been a remarkable increase in access to education, but overall illiteracy rates and gender disparity in access to secondary education remain high. Both education quality and learning outcomes lag behind those of other countries with similar income levels. Even with progress in increasing overall life expectancy and reducing average infant mortality rate, levels of infant and maternal mortality remain high, and lag Millennium Development Goals (MDG) targets. 23 Budget figures do not include privatization receipts. -77- 5. Morocco’s ongoing human and social challenges reflect the slow structural transformation of the economy. To be sure, Morocco’s production structure has gradually shifted toward services with both primary and secondary sectors’ shares in GDP declining over time. However, while the increased service orientation of the economy is emulating trends observed throughout the world, the weak performance of the manufacturing sector stems from the relatively slow modernization of the industrial sector, which also explains the performance of Moroccan exports. The latter continue to be concentrated around relatively undiversified, low knowledge, low value-added, traditional products. As a result, Morocco has not fully reaped the benefits from the market access opportunities and trade dynamics of its trading partners. Exports have been kept below potential and their contribution to growth and employment has yet to be unleashed. 6. Morocco’s slow structural transformation seems to be less due to the lack of investment than the low return on investment. Investment in Morocco appears to be less productive than in other emerging economies. Public investments are concentrated in relatively low productive projects or in projects that need time to fully mature. Indeed, a large share of public investments made over the last years has been directed to the tourism sector, phosphate related industries, energy, and infrastructure projects (highways, ports, airports, small dams, free trade zones, etc.). Investments in those sectors require time to be operational at full capacity and thus profitable. The Government has launched analytical efforts to investigate the issue and propose remedies. Figure 1.0 - Rising investment, in percent of GDP 40.0 7.0 35.0 6.0 30.0 5.0 25.0 4.0 20.0 3.0 15.0 2.0 10.0 5.0 1.0 0.0 0.0 2004 2005 2006 2007 2011 2008 2009 2010 Non-financial firms, incl SOEs Financial institutions Public Administration Households Gross investment 2011 FDI (right axis) Source: Moroccan Government and Staff estimates. -78- Figure 1.1. Growth shifted to higher path and is less volatile and less Figure 1.2. Unemployment declined, but remains high for urban dependent on agriculture (in percent) youth and educated (in percent) 13.5 80.0 25% 40% 10.5 60.0 7.5 20% 32% 40.0 unemployment rates 4.5 20.0 15% 24% 1.5 0.0 -1.5 10% 16% -20.0 -4.5 5% 8% -7.5 -40.0 -10.5 -60.0 0% 0% 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2007 2008 2009 2010 2011 2012 2002 2003 2004 2005 2006 1999 2001 2003 2005 2007 2009 2011 national (left axis) urban (left axis) GDP Agriculture (right axis) urban youth (right axis) urban educated (right axis) Figure 1.4. Public Finances have improved before the global crisis Figure 1.3. External position is deteriorating with but are now under pressure vulnerability in trade (in percent of GDP) (in percent of GDP) 15% 35% 10 32 8 30% 10% 6 22 25% percent of GDP 4 12 5% 20% 2 2 15% 0 0% -2 -8 10% -4 -5% -18 5% -6 -10% 0% -8 -28 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Est. 2012 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 Current account balance Net reserves in months of GNFS Budget deficit Wages & salaries Foreign direct investments, Gross Trade Balance (right axis) Consumer subsidies Total revenues (Right Axis) Figure 1.6. After a steady decline, Central Government debt Figure 1.5. Inflation remains subdued increased in 2011, but is sustainable in the MT Cumulated year over year (in percent) (in percent of GDP) 10.0 80.0% 8.0 70.0% 6.0 60.0% 50.0% 4.0 40.0% 2.0 30.0% 0.0 20.0% -2.0 10.0% -4.0 0.0% Oct-07 Oct-08 Oct-09 Oct-10 Oct-11 Apr-07 Jul-07 Apr-08 Jul-08 Apr-09 Jul-09 Apr-10 Jul-10 Apr-11 Jul-11 Apr-12 Jul-12 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Food Non-food CPI Foreign Domestic Total -79- ANNEX 4.2 – MOROCCO PUBLIC DEBT SUSTAINABILITY AND EXTERNAL FINANCING REQUIREMENTS Figure 2.1- External debt sustainability analysis, main scenarios 69.0 64.0 59.0 54.0 49.0 44.0 39.0 34.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Base Line Key Variables at their Historical Averages No Policy Change Figure 2.2- External debt sustainability analysis, alternative scenarios 70.0 65.0 60.0 55.0 50.0 45.0 40.0 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 B1 B2 B3 B4 B5 B6 -80- Table 2.1 Public Sector Debt Sustainability Framework, 2006-2020 (In percent of GDP, unless otherwise indicated) Est. Proj. Proj. Proj. Proj. Proj. Proj. Proj. Proj. Proj. 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 I. Baseline Projections Public sector debt 1/ 57.3 53.5 47.3 47.1 50.3 53.7 56.8 57.6 57.4 56.6 55.2 54.0 52.6 51.2 49.7 o/w foreign-currency denominated 11.3 10.7 9.9 10.7 12.1 12.4 13.1 13.6 14.1 14.7 15.0 15.1 15.1 15.0 14.8 Change in public sector debt -4.8 -3.8 -6.2 -0.2 3.2 3.4 3.1 0.8 -0.2 -0.8 -1.4 -1.3 -1.4 -1.4 -1.5 Identified debt-creating flows (4+7+12) -4.9 -5.2 -5.6 -0.9 3.4 4.2 3.5 1.2 0.1 -0.5 -1.1 -1.0 -1.0 -0.9 -0.9 Primary deficit -1.3 -3.3 -3.1 -0.2 2.4 4.6 3.6 2.7 1.8 1.4 0.9 0.9 0.8 0.8 0.8 Revenue and grants 25.1 27.4 29.7 26.0 25.4 25.9 25.8 26.4 26.8 26.8 26.7 26.7 26.7 26.7 26.7 Primary (noninterest) expenditure 23.8 24.1 26.6 25.8 27.7 30.5 29.4 29.1 28.6 28.2 27.6 27.6 27.5 27.4 27.4 Automatic debt dynamics 2/ -3.2 -1.5 -2.5 -0.7 1.0 0.2 0.3 -1.1 -1.5 -1.7 -1.8 -1.7 -1.8 -1.8 -1.9 Contribution from interest rate/growth differential 3/ -2.1 -0.5 -3.0 -0.5 0.4 -0.1 0.2 -1.2 -1.5 -1.8 -1.8 -1.8 -1.8 -1.9 -1.9 Of which contribution from real interest rate 2.3 1.0 -0.3 1.7 2.0 2.2 1.5 1.2 1.1 1.0 1.0 1.1 1.0 0.9 0.8 Of which contribution from real GDP growth -4.4 -1.5 -2.7 -2.1 -1.6 -2.4 -1.3 -2.4 -2.6 -2.8 -2.8 -2.8 -2.8 -2.8 -2.7 Contribution from exchange rate depreciation 4/ -1.1 -1.0 0.5 -0.3 0.7 0.3 0.1 0.1 0.1 0.1 0.0 0.0 0.0 0.0 0.0 Other identified debt-creating flows -0.4 -0.5 0.0 0.0 0.0 -0.7 -0.4 -0.4 -0.2 -0.2 -0.2 -0.2 0.0 0.1 0.3 Privatization receipts (negative) -0.4 -0.5 0.0 0.0 0.0 -0.7 -0.4 -0.4 -0.2 -0.2 -0.2 -0.2 -0.2 -0.1 -0.1 Recognition of implicit or contingent liabilities 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.2 Other (specify, e.g. bank recapitalization) 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.1 0.1 0.2 Residual, including asset changes (2-3) 0.1 1.5 -0.6 0.8 -0.2 -0.8 -0.4 -0.4 -0.4 -0.3 -0.3 -0.3 -0.4 -0.5 -0.6 Public sector debt-to-revenue ratio 1/ 228.6 195.5 159.2 181.2 198.6 207.6 220.1 218.2 214.1 211.5 206.8 202.5 197.3 191.9 186.4 Gross financing need 5/ 15.2 16.2 15.8 20.3 25.6 22.1 21.0 20.8 19.7 18.2 17.1 16.3 15.5 14.6 14.0 in billions of U.S. dollars 10.0 12.2 14.0 18.4 23.3 20.7 20.5 21.5 21.9 21.7 21.9 22.5 22.9 23.3 23.9 Key Macroeconomic and Fiscal Assumptions Real GDP growth (in percent) 7.8 2.7 5.6 4.8 3.6 5.0 2.5 4.5 4.9 5.2 5.4 5.5 5.6 5.7 5.7 Average nominal interest rate on public debt (in percent) 6/ 5.7 5.8 5.5 5.3 5.1 4.7 4.9 4.9 4.7 4.5 4.4 4.2 4.1 3.9 3.8 Average real interest rate (nominal rate minus change in GDP deflator, in percent) 4.2 1.9 -0.3 3.8 4.4 4.7 2.9 2.4 2.1 2.1 2.0 2.2 2.1 1.9 1.8 Nominal appreciation (increase in US dollar value of local currency, in percent) 9.4 9.6 -4.8 3.0 -5.9 -2.8 -0.5 -0.5 -0.5 -0.4 -0.2 -0.2 -0.2 -0.2 -0.2 Inflation rate (GDP deflator, in percent) 1.5 3.9 5.9 1.5 0.6 0.1 2.0 2.5 2.6 2.5 2.4 2.0 2.0 2.0 2.0 Growth of real primary spending (deflated by GDP deflator, in percent) -0.2 3.9 16.7 1.5 11.4 15.4 -1.1 3.5 3.1 3.5 3.4 5.2 5.3 5.5 5.6 Primary deficit -1.3 -3.3 -3.1 -0.2 2.4 4.6 3.6 2.7 1.8 1.4 0.9 0.9 0.8 0.8 0.8 II. Stress Tests for Public Debt Ratio A. Alternative Scenarios A1. Key variables are at their historical averages in 2011-2016 7/ 53.7 52.4 51.1 50.0 49.0 48.0 47.1 46.1 45.3 44.4 A2. No policy change (constant primary balance) in 2011-2016 53.7 57.0 59.1 61.0 62.7 64.2 65.7 64.6 63.6 62.7 B. Bound Tests B1. Real interest rate is at baseline plus one standard deviations 53.7 57.3 58.6 58.9 58.5 57.6 56.8 55.8 54.8 53.7 B2. Real GDP growth is at baseline minus one-half standard deviation 53.7 57.5 59.4 60.4 61.0 61.2 61.8 62.4 63.1 63.9 B3. Primary balance is at baseline minus one-half standard deviation 53.7 57.8 59.6 60.2 60.3 59.8 59.4 58.8 58.1 57.4 B4. Combination of B1-B3 using one-quarter standard deviation shocks 53.7 57.8 59.6 60.3 60.4 59.9 59.5 58.9 58.3 57.5 B5. One time 30 percent real depreciation in 2012 9/ 53.7 62.5 63.3 62.9 61.9 60.4 59.0 57.4 55.8 54.2 B6. 10 percent of GDP increase in other debt-creating flows in 2012 53.7 56.8 57.6 57.4 56.6 55.2 54.0 52.6 51.2 49.7 Source: Government of Morocco and staff calculation and estimate 1/ Indicate coverage of public sector, e.g., general government or nonfinancial public sector. Also whether net or gross debt is used. 2/ Derived as [(r - p(1+g) - g + ae(1+r)]/(1+g+p+gp)) times previous period debt ratio, with r = interest rate; p = growth rate of GDP deflator; g = real GDP growth rate; a = share of foreign-currency denominated debt; and e = nominal exchange rate depreciation (measured by increase in local currency value of U.S. dollar). 3/ The real interest rate contribution is derived from the denominator in footnote 2/ as r - π (1+g) and the real growth contribution as -g. 4/ The exchange rate contribution is derived from the numerator in footnote 2/ as ae(1+r). 5/ Defined as public sector deficit, plus amortization of medium and long-term public sector debt, plus short-term debt at end of previous period. 6/ Derived as nominal interest expenditure divided by previous period debt stock. 7/ The key variables include real GDP growth; real interest rate; and primary balance in percent of GDP. 8/ The implied change in other key variables under this scenario is discussed in the text. 9/ Real depreciation is defined as nominal depreciation (measured by percentage fall in dollar value of local currency) minus domestic inflation (based on GDP deflator). 10/ Assumes that key variables (real GDP growth, real interest rate, and other identified debt-creating flows) remain at the level of the last projection year. -81- Table 2.2 Morocco: External Financing requirements (in percent of GDP) Actual Est. projections 2010 2011 2012 2013 2014 2015 2016 Financing Requirements 8.3 7.1 8.7 10.1 9.6 9.9 9.4 Current account deficit 4.5 8.0 9.0 8.4 7.2 6.2 5.5 Long term amortizations 2.7 2.5 2.5 2.3 2.1 2.1 2.1 Reserves Changes of Monetary Auth. 1.2 -3.4 -2.3 0.2 0.2 0.6 1.8 Financing sources 8.3 7.1 8.7 10.1 9.6 9.9 9.4 Official capital grants 0.0 0.2 0.4 0.3 0.3 0.3 0.3 Private investment, (FDI+Portfollio) (net) 1.2 2.1 2.3 2.9 3.5 3.6 3.6 Long term Disbursements 5.5 4.5 6.7 7.2 6.0 6.4 5.8 Other capital flows 1.6 0.3 -0.7 -0.2 -0.3 -0.3 -0.3 -82- ANNEX 4.3 – COUNTRY AT A GLANCE Morocco at a glance 9/12/12 M . East Lo wer Ke y D e v e lo pm e nt Indic a t o rs & No rth middle M o ro cco A frica inco me Age distribution, 2010 ( 2 0 11) Male Female P o pulatio n, mid-year (millio ns) 32.3 331 2,51 9 75-79 Surface area (tho usand sq. km) 447 8,775 23,579 60-64 P o pulatio n gro wth (%) 1.1 1.7 1.5 Urban po pulatio n (% o f to tal po pulatio n) 57 58 39 45-49 30-34 GNI (A tlas metho d, US$ billio ns) 95.8 1,283 4,078 15-19 GNI per capita (A tlas metho d, US$ ) 2,970 3,874 1,619 GNI per capita (P P P , internatio nal $ ) 4,600 8,068 3,632 0-4 6 4 2 0 2 4 6 GDP gro wth (%) 5.0 4.3 6.9 percent of total population GDP per capita gro wth (%) 3.8 2.5 5.3 ( m o s t re c e nt e s t im a t e , 2 0 0 5 – 2 0 11) P o verty headco unt ratio at $ 1 .25 a day (P P P , %) 3 3 .. Under-5 mortality rate (per 1,000) P o verty headco unt ratio at $ 2.00 a day (P P P , %) 14 14 .. Life expectancy at birth (years) 73 72 65 90 Infant mo rtality (per 1,000 live births) 32 27 50 80 Child malnutritio n (% o f children under 5) .. 8 25 70 60 A dult literacy, male (% o f ages 15 and o lder) 69 82 80 50 A dult literacy, female (% o f ages 15 and o lder) 44 66 62 40 Gro ss primary enro llment, male (% o f age gro up) .. 106 1 10 30 Gro ss primary enro llment, female (% o f age gro up) .. 98 104 20 10 0 A ccess to an impro ved water so urce (% o f po pulatio n) 96 89 87 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 51 88 47 1990 1995 2000 2010 Moroc c o Middle Eas t & N orth Afric a a N e t A id F lo ws 19 8 0 19 9 0 2000 2 0 11 (US$ millio ns) Net ODA and o fficial aid 1,161 1,241 434 994 Growth of GDP and GDP per capita (%) To p 3 do no rs (in 2010): France 135 217 155 254 15 Euro pean Unio n Institutio ns 12 29 1 17 223 10 Japan 4 111 103 121 5 A id (% o f GNI) 5.7 4.4 1.2 1.1 0 A id per capita (US$ ) 60 51 1 5 31 -5 Lo ng- T e rm E c o no m ic T re nds -10 95 05 Co nsumer prices (annual % change) 9.4 7.0 1.9 0.9 GDP implicit deflato r (annual % change) 15.2 7.8 -0.6 0.1 GDP GDP per c apita Exchange rate (annual average, lo cal per US$ ) 3.9 8.2 10.6 8.1 Terms o f trade index (2000 = 100) 80 75 100 95 19 8 0 – 9 0 19 9 0 – 2 0 0 0 2 0 0 0 – 11 (average annual gro wth %) P o pulatio n, mid-year (millio ns) 19.4 24.2 28.8 32.3 2.2 1.8 1.0 GDP (US$ millio ns) 21,079 28,839 37,022 99,212 5.1 2.9 4.8 (% o f GDP ) A griculture 18.4 19.3 14.9 15.5 6.8 0.3 6.0 Industry 29.8 30.4 29.1 30.2 2.4 3.0 3.7 M anufacturing 15.9 18.9 17.5 15.4 3.3 2.6 2.9 Services 51.1 50.3 56.0 54.3 1.5 1.7 4.9 Ho useho ld final co nsumptio n expenditure 61.8 60.0 61.4 58.9 5.0 2.8 4.7 General go v't final co nsumptio n expenditure 18.0 16.8 18.4 18.2 5.2 2.3 4.0 Gro ss capital fo rmatio n 28.5 28.7 25.5 36.0 2.3 3.4 7.8 Expo rts o f go o ds and services 19.9 25.7 28.0 35.6 6.2 5.5 5.7 Impo rts o f go o ds and services 28.2 31.2 33.4 48.7 3.5 4.4 7.4 Gro ss savings 22.1 28.3 24.3 27.9 No te: Figures in italics are fo r years o ther than tho se specified. 2011data are preliminary. .. indicates data are no t available. a. A id data are fo r 2010. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). -83- Morocco B a la nc e o f P a ym e nt s a nd T ra de 2000 2 0 11 Governance indicators, 2000 and 2010 (US$ millio ns) To tal merchandise expo rts (fo b) 7,41 9 21,506 To tal merchandise impo rts (cif) 11,531 44,252 Voice and accountability Net trade in go o ds and services -2,085 -14,050 Political stability and absence of violence Current acco unt balance -475 -7,986 Regulatory quality as a % o f GDP -1.3 -8.0 Rule of law Wo rkers' remittances and co mpensatio n o f emplo yees (receipts) 2,161 6,423 Control of corruption Reserves, including go ld 5,138 19,657 0 25 50 75 100 C e nt ra l G o v e rnm e nt F ina nc e 2010 2000 Country's percentile rank (0-100) higher values imply better ratings (% o f GDP ) Source: Worldwide Governance Indicators (www.govindicators.org) Current revenue (including grants) 23.6 25.9 Tax revenue 21.7 23.4 Current expenditure 23.4 26.8 T e c hno lo gy a nd Inf ra s t ruc t ure 2000 2 0 10 Overall surplus/deficit -4.8 -6.9 P aved ro ads (% o f to tal) 56.4 70.3 Highest marginal tax rate (%) Fixed line and mo bile pho ne Individual .. .. subscribers (per 1 00 peo ple) 13 112 Co rpo rate .. .. High techno lo gy expo rts (% o f manufactured expo rts) 11.3 7.7 E xt e rna l D e bt a nd R e s o urc e F lo ws E nv iro nm e nt (US$ millio ns) To tal debt o utstanding and disbursed 20,674 29,585 A gricultural land (% o f land area) 69 67 To tal debt service 2,610 2,737 Fo rest area (% o f land area) 12.7 12.7 Debt relief (HIP C, M DRI) – – Terrestrial pro tected areas (% o f land area) 1.5 1.5 To tal debt (% o f GDP ) 55.8 31.6 Freshwater reso urces per capita (cu. meters) 985 917 To tal debt service (% o f expo rts) 20.3 15.0 Freshwater withdrawal (billio n cubic meters) .. .. Fo reign direct investment (net inflo ws) 470 3,178 CO2 emissio ns per capita (mt) 1.2 1.5 P o rtfo lio equity (net inflo ws) 30 486 GDP per unit o f energy use (2005 P P P $ per kg o f o il equivalent) 8.3 8.8 Composition of total external debt, 2011 Energy use per capita (kg o f o il equivalent) 356 477 Short-term, IBRD, 2,327 1,800 IDA, 12 IMF, 0 Wo rld B a nk G ro up po rt f o lio 2000 2 0 10 Private, 6,942 Other multi- (US$ millio ns) lateral, 8,036 IB RD To tal debt o utstanding and disbursed 2,837 2,468 Disbursements 138 271 P rincipal repayments 307 202 Bilateral, 7,530 Interest payments 190 52 US$ millions IDA To tal debt o utstanding and disbursed 27 13 Disbursements 0 0 P riv a t e S e c t o r D e v e lo pm e nt 2000 2 0 11 To tal debt service 2 1 Time required to start a business (days) – 12 IFC (fiscal year) Co st to start a business (% o f GNI per capita) – 15.8 To tal disbursed and o utstanding po rtfo lio 29 110 Time required to register pro perty (days) – 75 o f which IFC o wn acco unt 29 110 Disbursements fo r IFC o wn acco unt 1 2 Ranked as a majo r co nstraint to business 2000 2 0 10 P o rtfo lio sales, prepayments and (% o f managers surveyed who agreed) repayments fo r IFC o wn acco unt 7 11 A ccess to /co st o f financing .. 84.4 Tax rates .. 62.6 M IGA Gro ss expo sure – – Sto ck market capitalizatio n (% o f GDP ) 29.4 76.2 New guarantees – – B ank capital to asset ratio (%) 9.8 8.4 No te: Figures in italics are fo r years o ther than tho se specified. 2011data are preliminary. 9/12/12 .. indicates data are no t available. – indicates o bservatio n is no t applicable. Develo pment Eco no mics, Develo pment Data Gro up (DECDG). -84- Millennium Development Goals Morocco With selected targets to achieve b etween 1990 and 2015 (estimate clo sest to date sho wn, +/- 2 years) M o ro c c o G o a l 1: ha lv e t he ra t e s f o r e xt re m e po v e rt y a nd m a lnut rit io n 19 9 0 19 9 5 2000 2 0 10 P o verty headco unt ratio at $ 1 .25 a day (P P P , % o f po pulatio n) 2.5 .. 6.3 2.5 P o verty headco unt ratio at natio nal po verty line (% o f po pulatio n) 13.1 .. 15.3 8.8 Share o f inco me o r co nsumptio n to the po o rest qunitile (%) 6.6 .. 6.3 6.5 P revalence o f malnutritio n (% o f children under 5) 9.0 .. .. .. G o a l 2 : e ns ure t ha t c hildre n a re a ble t o c o m ple t e prim a ry s c ho o ling P rimary scho o l enro llment (net, %) 58 72 79 91 P rimary co mpletio n rate (% o f relevant age gro up) 51 48 57 85 Seco ndary scho o l enro llment (gro ss, %) 38 38 38 56 Yo uth literacy rate (% o f peo ple ages 1 5-24) 55 62 67 80 G o a l 3 : e lim ina t e ge nde r dis pa rit y in e duc a t io n a nd e m po we r wo m e n Ratio o f girls to bo ys in primary and seco ndary educatio n (%) 67 72 80 87 Wo men emplo yed in the no nagricultural secto r (% o f no nagricultural emplo yment) .. .. 20 22 P ro po rtio n o f seats held by wo men in natio nal parliament (%) .. 1 1 11 G o a l 4 : re duc e unde r- 5 m o rt a lit y by t wo - t hirds Under-5 mo rtality rate (per 1 ,000) 85 .. 47 38 Infant mo rtality rate (per 1,000 live births) 66 57 40 32 M easles immunizatio n (pro po rtio n o f o ne-year o lds immunized, %) 80 88 93 94 G o a l 5 : re duc e m a t e rna l m o rt a lit y by t hre e - f o urt hs M aternal mo rtality ratio (mo deled estimate, per 1 00,000 live births) 332 228 228 132 B irths attended by skilled health staff (% o f to tal) 31 34 48 83 Co ntraceptive prevalence (% o f wo men ages 1 5-49) 42 50 .. .. G o a l 6 : ha lt a nd be gin t o re v e rs e t he s pre a d o f H IV / A ID S a nd o t he r m a jo r dis e a s e s P revalence o f HIV (% o f po pulatio n ages 1 5-49) 0.1 0.1 0.1 0.1 Incidence o f tuberculo sis (per 100,000 peo ple) 110 113 95 81 Tuberculo sis case detectio n rate (%, all fo rms) 76 73 92 97 G o a l 7 : ha lv e t he pro po rt io n o f pe o ple wit ho ut s us t a ina ble a c c e s s t o ba s ic ne e ds A ccess to an impro ved water so urce (% o f po pulatio n) 75 .. 80 96 A ccess to impro ved sanitatio n facilities (% o f po pulatio n) 58 .. 68 51 Fo rest area (% o f land area) 6.8 12.7 12.7 12.7 Terrestrial pro tected areas (% o f land area) 1.2 1.5 1.5 1.5 CO2 emissio ns (metric to ns per capita) 1.0 1.1 1.2 1.5 GDP per unit o f energy use (co nstant 2005 P P P $ per kg o f o il equivalent) 9.7 8.2 8.3 8.8 G o a l 8 : de v e lo p a glo ba l pa rt ne rs hip f o r de v e lo pm e nt Telepho ne mainlines (per 1 00 peo ple) 1.6 4.2 4.9 11.7 M o bile pho ne subscribers (per 1 00 peo ple) 0.0 0.1 8.1 100.1 Internet users (per 1 00 peo ple) 0.0 0.0 0.7 49.0 Co mputer users (per 1 00 peo ple) .. .. .. 50.9 Education indicators (%) Measles immunization (% of 1-year ICT indicators (per 100 people) olds) 100 100 120 100 75 75 80 50 50 60 25 40 25 0 20 2000 2005 2010 0 0 1990 1995 2000 2010 2000 2005 2010 Primary net enrollment ratio Moroc c o Middle Eas t & N orth Afric a Fix ed + mobile s ubs c ribers Internet us ers Ratio of girls to boy s in primary & s ec ondary educ ation No te: Figures in italics are fo r years o ther than tho se specified. .. indicates data are no t available. 9/12/12 Develo pment Eco no mics, Develo pment Data Gro up (DECDG). -85- ANNEX 5 - SUMMARY OF POTENTIAL POVERTY AND SOCIAL IMPACTS OF EACH DPL3 PRIOR ACTION Poverty and Prior actions of DPL3 Rationale Social Impacts A. Governance of the municipal solid waste sector A.1. The Cabinet Council (Conseil de Gouvernement) Positive Provides the legal foundation for new has approved on December 14, 2012, the draft of a citizens’ rights and protection, including law (loi-cadre) on environment and sustainable access to environmental information development, introducing: (i) the right of any person to access environmental information; (ii) the institutional arrangements for environmental control; and (iii) the principle of extended producer responsibility. A.2. The National Commission for the National Significantly Directly provides an opportunity for Municipal Solid Waste Management Program has Positive citizens’ voice on MSW services and approved on October 23, 2012, the introduction of a builds citizens’ empowerment. Data citizen feedback tool on quality and adequacy of collected allows for careful spatial municipal solid waste services (“Citizens Report analysis and monitoring by gender, Cards�), as a key component of the National neighborhoods. Municipal Solid Waste Management Program to support local governments in building demand-side governance in the municipal solid waste service delivery. A3. The Minister of Interior has issued Circular No. Positive Will increase transparency and public 8029 dated May 23, 2012, requiring municipalities to access to information. disclose extracts of municipal solid waste service contracts in the Official Gazette for Local Governments (Bulletin Officiel des Collectivités Territoriales). B. Institutional and Financial Sustainability of MSW Services B.1. The Minister of Energy, Mines, Water and Neutral Will support more efficient MSW service Environment has signed on December 10, 2012, three delivery contracts with engineering firms in order to assist local governments better prepare and manage municipal solid waste projects and contracts throughout the territory of the Borrower. B.2. The Minister of Interior has issued Circular No. Neutral PSIA simulations estimate there will be D13015 dated December 17, 2012, establishing a positive redistributional effects resulting municipal solid waste fee that could be charged by from user fees levied on larger municipalities to large waste producers, in compliance commercial entities which produce with the provisions of Article 23 of Law No. 28-00 significant waste dated November 22, 2006, on solid waste management. B.3. Appropriate funding has been made available to Positive Adequate budget to sustain PNDM the National Solid Waste Management Program for program and objectives 2012, and the Borrower’s draft budget law for 2013 includes appropriate budget allocation in support to the National Municipal Solid Waste Management Program. B.4. The Minister of Interior has issued Circular No. Neutral Will ensure continued delivery of quality 5533 dated October 5, 2012, regarding local service -86- governments’ budget preparation, and Circular No. 17887 dated December 11, 2012, addressing the issue of arrears due by local governments under municipal solid waste service contracts, including specific instructions and guidance: (i) in order to ensure fair estimate of service costs; (ii) on price revision; and (iii) on budget arrangements regarding arrears rescheduling agreements. C. Environmental Monitoring and Control C.1. The Head of Government (Chef du Neutral Broad positive effects resulting from Gouvernement) has issued Circular No. 27/2012 dated improved environmental conditions November 30, 2012, establishing a national information and coordination system on environmental inspections, infractions and sanctions. C2. The Minister of Energy, Mines, Water and Neutral Broad positive effects resulting from Environment has issued Circular No. 66/2012 dated improved environmental conditions November 15, 2012, establishing within the Ministry a special unit of sworn-in environmental inspectors. D. Development of Recycling Value Chains D.1. The Cabinet Council (Conseil de Gouvernement) Positive PSIA analysis and simulations conclude has approved on October 15, 2012, the Borrower’s that: draft budget law for 2013, which, inter alia, (i) -earmarking of 20% of eco-tax revenues introduces an eco-tax on plastic packaging, and (ii) to support programs for the vulnerable amends the arrangements applicable to the National and for vulnerable women will Fund for Environment (Fonds National pour la significantly improve informal waste Protection et la Mise en Valeur de l’Environnement) pickers’ working conditions and lead to to have such Fund receiving the revenues of the eco- significantly increased incomes over time tax. -introduction of the eco-tax will support recycling which will result in increased employment opportunities in the sector, including in the informal sector -population, and particularly the poor, will benefit significantly from reduced pollution and improved environmental conditions -87- -88-