Al -39f6 57- O...about 4% of the Government's total fiscal revenues. Conversely, investments in that sector in 1991, reached DH 3,040 million (about US$345 million equiv.), i.e. about

Document of

The World Bank

FOR OFFICIAL USE ONLY

Al -39f6 57- "OReport No. 10714-MOR

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STAFF APPRAISAL REPORT

MOROCCO

TELECOMMUNICATIONS SECTOR RESTRUCTURING PROJECT

DECEMBER 16, 1992

Industry and Energy Division

Country Department IMiddle East and North Africa Region

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

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CURRENCY AND EOUIVALENTS

Currency Unit - Moroccan Dirham (DH)US$1.00 = DH 8.80 (end-February, 1992)

DH 1.00 = US$ 0.11

WEIGHTS AND MEASURES

Metric Svstem US Svstem1 meter (m) 3.2808 Feet (ft)1 kilometer (km) 0.6214 mile (mi)1 square kilometer (km2) = 0.3861 square mile (mi2)1 metric ton (m ton) 0.9842 long ton (lg ton)1 kilogram (kg) 2.2046 pounds (lbs)

ABBREVIATIONS AND ACRONYMS

DEL - Direct Exchange (main) LineDFI - Direct Foreign InvestmentEC - European Co.munityEIB - Europear. Investment BankINPT - Institut National des Postes et T6l6communicationsISDN - Integrated Services Digital NetworkMPT - Ministry of Post and TelecommunicationsONPT - Office National des Postes et T6l6communications (National

Post and Telecommunications Authority)PERL - Public Enterprise Rehabilitation LoanVAT - Value-added tax

MOROCCO - FISCAL YEAR

January 1 - December 31

FOR OFFICIAL USE ONLY

MOROCCO

TELWCOMMUNICATIONS SECTOR RESTRUCTURING PROJECT

Loan and Prolect Summary

Borrower: National Post and Telecommunications Authority (ONPT).

Guarantor: Kingdom of Morocco.

amount: 100US1 million equivalent.

Terms: 20 yeare, including 5 years grace period, at the Bank'sstandard variable interest rate.

Proieet Obiective.and Deucrintion: The project, the second operation in Morocco's

telecommunications sector, supports: (i) the prepar&tion of thenecessary groundwork to permit liberalization of the sector'sactivities, including the enhancement of the sector'sinstitutional capacity; and (ii) the further expansion of thetelecommunications network. It would include, first, technicalassistance, training and studies designed to strengthenGovernment's institutional capabilities in respect of itsregulatory function; and, second, a time slice (1992-94) ofONPT'S multi-year investmeat program initiated in 1987 with thesupport of the Bank. Physical components of the projectinclude, inter alia, (i) about 497,000 new switching lines andrelated local networks and subscriber connections; (ii)microwave and optical fiber transmission routes; (iii)equipment to expand existing international switching gateways;(iv) trunk dialling of about 780 rural communities; and (v} anational radio frequency ccntrol center.

Proioct Benefitsand risks: General benefits to the Moroccan economy include: (i) removal

of constraints to foreign investment and private sectordevelopment, particu_arly in export-oriented andcommunications-intensive activities, at a time when Morocco isdeveloping its ties with the EEC; (ii) possibility ofdecentralizing the country's economic infrastructure; and (iii)improvements in the functioning of existing and emergingmarkets. The project will also enhance the country's socio-political development through the provision of better access tohealtn, education and government services to rural areas, andby strengthening cultural and political integration. Inaddition, the project will also serve to enhance the sector'sfiscal transfers to the Government. The main risks affectingthe project are, on the one hand, possible slippage in theformulation and implementation of sector reform, and on theother, project delays due to possible over-stretching of ONPT'sproject implementation capacity. Both risks would be mitigated

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

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by government commitment to a time bound action plan for reformand the set up of spacific project implementation arrangements,and by the inclusion in the project of an extensive technicalassistance component.

Estimated Costs ------- (US$ million)---------

Local a) Foreian Total

Switching b) 151.8 161.5 313.3Long diet. transmission 154.2 180.7 334.9Local networks 124.4 106.7 231.1Pural telecoms 32.5 45.8 78.3TA, training & studies - 15.2 15.2Data processing 8.5 12.0 20.5Miscellanecue c) 68.3 - 68.3XPT (T.A. and control center) - 3.1 3.1

Base cost ('91 prices) 539.8 525.0 1,064.8

Physical conting. 18.7 18.5 37.2Price conting. 65.5 36.1 101.6

TOTAL COST 624.0 579.6 1,203.6

-) includes indirect foreign cost (USS 54.4 million) and VAT/custom duties (USS383.5 million)b) includes date transmissionC) includes Land, buildings, and vehicles

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Financina Plan

Local Foreign Total

---------- (USS million)…IBRD 54.4 v 45.6 100.0EIB/ - 103.7 103.7

Bilateral Credits - 113.6 113.6Export Credits - 154.7 154.7Local Banks 74.1 - 74.1

Existing Loans._?L - 162.1 ;62.1

ONPT 495.5 - 495.5

TOTAL 624.0 579.6 1,203.6

IL includes indirect foreign cost of transmission and local networks./ includes First IBRD loan (No. 2798).

Estimated Disbursements

FY93 FY94 FY95 FY96 FY97 FY98------------------ (US$ million)-----------------

Annual 3.0 31.0 28.0 20.0 12.0 6.0

Cumulative 3.0 34.0 62.0 82.0 94.0 100.0

Economic Rate of Return: 32%

&ag: IBRD No. 24480

MOROCCO

TELECONMMCATIONS SECTOR RESTRUCTURING PROJECT

Table of Contents

Paae No..

I SECTOR CONTEXT

Linkages to the Economy.. .. . . . . . ... * 1Sector Organization .... .. . . . .. . . . . . . . . . . . .. . . . . . 2Demand for Telecommunications Service.. . . ............ 2Access to Service.. . . . . . . . 3Usage of Service ....... . . ........... .. . . 3Existing Facilities and Quality of Service ... . . . . . . . 4Manufacturing, Assembly and Installation Industry . . . . . . . . . . . . . . 4Postal/Financial Services . . . # . . . . . . . . . . . . . . . ..... 5Main Sectoral Issues.. .5Government Strategy and Proposed Restructuring . . . . . . . . . . . . . . . 7Bank Role . ... . . . . . . . . . . . . . . . . . 8

II THE BORROWER

organization and Management . . . . . . . . . . . . . . . . . . . . . . . . 11Staff and Training . .. .. .. .. ... .... . .11Technical Assistance.. .. . . . . . . . . 11Data Processing.. . . . . .. . . . . 12Billing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12Accounting . . . . . . . . . . . . . 12External Auditing . . . . . . . . . . . . . . . .. . . . . 13Tariffs . . . . . . . . . . . . . .. . . . . . . . 13

III THE PROGRAM AND THE PROJECT

A. Proiect Scoce . . . . . . 15Telecommunications Investment Program . . . . . . . . . . . . . . . . . 15Project Objectives .... . . . ..... . . . . . . . . . . . . . . 15Project Description .... . . . . . . . . . . . . . . . . . . . . 16

This report is based on the findings of an appreisal mission composed ofMessrs. A. Barbu (Task Hanager), P. Lecharny (Sr. Telecom. Engineer), J. Boutan(Sr. Fin. Analyst), and J. Babin (Cons.), which visited Morocco in February-March 1992. Peer reviewers were Messrs. G. Buttex and J. Cowie (AFTIE).

B. *cost and Financina . . .. .. . . .. .. . . . . . . . . *.. 17Project Cost . . . ....................... ................................... ..... 17Project Financing ............ . . . ... .. . . 18

C. Procurement and Implementation . . . . . . . . . . . . . . . . . . . . 19Procurement .... .. .. * . . . . ....... . . . 19Disbursements . . . . . . . . . . .. . . . . . . . . . . . .. .. . . . ... 21Project Implementation . . . .... ....... .... .. . . ... . 23Statua of Project Preparation ... . . . . . ....... ***...... 24Environmental and Health Aspects . .. . .. . . . . . . 24Performance Monitoring . . . . . . . . . . . . . . . . . . . . . . 25

IV FINANCIAL ASPECTS

Past Performance ... ..... . ... 26Fiscal Levies .*....... . * ....... .. . . . . . . . ...... . 27ONPT's Financial Position . ... . . . 4 .. . 28AccountB Receivable. . .......... . .. . ...... . 29Future Position . .. . . . .. . . .... 29

V PROJECT JUSTIFICATION

General Benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32Least-Cost Solution .... . . . . . . o . . . . . ... . . . . . .. . * 32Financial and Economic Rates of Return . . . . . . . . . . . . . . . . . . 32Risks . . . . . . . . . . . . . . .. . . .. . . . . . . .. . . . . . . 33

VI AGREEMENT TO BE REACWED . . . . .. .. . . . . . . . . . . . . 34

AANNXES

1 Growth in DELs and Expressed Demand . . . . . . . . . . . . . . . . . . . . 352 Performanc. Indicators (Telecommunications) .. . . .. .. . . . . . . 363 Draft Statement of Policy . . . . . . . . . . . . . . . . . .y.. . . . . . 373b Summary of Plan of Action for Reform Implementation . . . . . . . 524 Organization Chart .. . . . . .. . . . . . . . . . . . . . . . . 555 Summary of Telephone Rates ... . . . . . . . . . . . . ........ . 566 Technical Assist&nce . . . . . . . . . . . . . . . . . . 577 Description *f Physical Components of the Project . . .. .. o . . 598 ONPT. Investment Program ... . . . ... ........ ........ 629 Project Implementation Schedule . .n.t.t.on...ed ...................... . 63

10 Schedule of Bank Loan Disbursements. . . . . . . . . . . . . . .. . . 6411 ONPT. Income Statements, Yunds Flow Statements, Balance Sheoet . . . . . . 6512 Basic Data for Teleconmnunications Revenues . . . . . . . . . . . . . . Ea13 Notes and Assumptions for the Financial Forecasts, 1992-1997 . . . . . . . 7214 Rates of Return on the Program . .................... . 7415 Supervision Plan . . . . . . . . . . . * . .. .. . . . . . . . . . . . . . 7616 Documents Available in Project File . . . . . . . . . . . . . . . . . . .. 77

MOROCCO

TELECONMlNICATIONS SECTOR RESTRUCTURING PROJECT

I - SECTOR CONTEXT

Linkages to the Economv

1., LIt is now acknowledged that telecommunications, far from being luxuryconsumer services, are in fact an important economic infrastructure. With recenttechnological advances, telecommunications are becoming an integral factor of productionand a critical element in the trade of goods and services. Although multi-countrystudies have demonstrated a strong correlation betw*-ai economic development and thesupply of telecommunications services, the macro-economic impact of investments in thatsector is generally difficult to estimate. However, empirical evidence in the case ofMorocco shows that improved telecommunications are key to the country's economic andsocio-political development in severa: major areas:

i) export development and tourism, which both require reliable domestic andinternational communications;

ii) promotion of foreign investment, as international companies need goodquality communications to maintain their competitiveness;

iii) development of a dynamic service sector and of transparent and efficientmarkets (particularly in the financial area);

iv) rural development (through improved extension services and marketing) andbetter health care (emergency services etc...)

v) decentralisation of industry and government administration; and

vi) national integration and political participation.

1.2 In more tangible terms, the telecommunications sector, in spite of itscurrent underdevelopment (see below), already plays a sizeable role in Morocco'seconomy. In 1991, it provided to the Treasury about US$ 260 million equivalent, ie.about 4% of the Government's total fiscal revenues. Conversely, investments in thatsector in 1991, reached DH 3,040 million (about US$345 million equiv.), i.e. about 15%of total public investments and 1.5% of GDP; and the sector's external (mostlyconcessional) borrowings in 1991, totalled DH 1,500 million (US$ 170 million equiv.)i.e. about 15% of the country's public and publicly-guaranteed external borrowings. Inaddition to ONPT'5 16,600 employees (i.e. about 8% of total public enterprise s:aff),it is estimated that another 2,000 people are working in peripheral activities(construction and maintenance of telephone lines, as well as operation of dedicatednetworks and local manufacture of telecommunications equipment (see para. 1.10)).

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Furthermore, the proposed lioeralization of value-added services (see para. 1.3) iLexpected to lead to the creation of a sizeable number of new jobs in this potentiallyfast-growing field.

Sectc.r Organization

1.3 In accordance with Law No. 25-11-24 of November 25, 1924, and Decroe No.2.87.671 of Oct. 17, 1988, authority and control of telecommunications and postaloperations in Morocco are vested in the MinisLry of Postu & Telecommunications (MPT).Until 1983, MPT was also directly responsible for providing telecommunications andpostal services. Provision of these services and operation of the network wastransferred in 1984, to the Office National des Postes et Tel6communlcations (ONPT), anautonomous state-owned entity created pursum'nr to Law No. 1-84-8 of January 10, 1984,and Decree No. 2-84-20 of January 11, 1:' MPT retained a policy-setting andregulatory function, including responsibili 4 for the allocation and control of theradio frequency spectrum. As a public enterprise, ONPT is also subject to control bythe Ministry of Finance. Under the current legislation, ONPT has a monopoly on alltelecommunications and postal operations; however, under special exemptions, fifteendedicated networks are operated by the military and some large enterprises (OfficeNational d'Electricit5 (ONE), the electric utility, Societe Nationale de TransportsMarocains (SNTM), the transport company, Office Cherifien des Phosphates (OCP), thephosphate company, etc.). Also, a separate state-owned company, Societe Marocaine deT6ldcommunications par Cables Sous-marins (MATELCO) operates and maintains, in veryclose collaboration with ONPT, the transmission facilities of the internationalsubmarine cables linking Morocco with European and African countries. The sector atlarge also Lncludes 84 private local companies specializing in the installation ofcables and c3nnection/mLr.cenance of user terminals, as well as a handful of enterprisesinvolved ir the manufacturing of specialized telecommunications equipment (para. 1.10).

Demand for Telecommunications Service

1.4 As of December 1991, there were about 497,000 main lines (DELs) in serviceand a waiting list of 174,000 registered applicants; only 74% of expressed telephonedemand was satisfied. These figures, however, underestimate the potential demand to theextent that reliable service in Morocco is recent. This assumption has been confirmedby the fact that, on average, telephone connections have grown by 22% p.a. in the last2 years, thanks to the commissioning of new facilities under the ongoing Bank project(para. 1.21). In contrast, the historical average expressed demand has grown by only9.8% p.a. since 1977. Bank-financed consultants are undertaking a detailed survey oflong-term national telephone demand (b;sed on ONPT's current estimates, demand iscurrently projected to grow at about 16.5% p.a.). Under the proposed project, theconnection of new DELs is expected to increase by about 24% p.a., compared to an averageof about 14.6% since 1987 (23.6% in 1991). If these ambitious targets are met, 96% ofexpressed demand would be met by project completion in 1994. The project has beendesigned to allow for adjustments during implementation to reflect actual demand; inparticular, project resources can be redistributed to adjust for any supply/demandimbalances among regions. Historical and projected trends for ;elephone demand andsupply are shown in Annex 1.

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Access to Service

1.5 From 1987 to 1991, the waiting time for obtaining a tolepi one connectiondecreased from 80 to 18 months. With a population of about 25.8 million, Morocco hasa telephone density of 1.9 IDEL per 100 inhabitants, i.e significantly behind that ofneighboring countries (Algeria: 3.5) or countries with comparable GNP per capita (e.g.Jordan: 7.01 Syria: 5.2). Density is not well balanced between urban and rural areasas 75% of DELs in service are located in two big metropolitan areas (Casablanca, Rabat)and 7 large provincial cities accounting for 46% of the population, whereas 24% of DEL,are distributed in other provincial centers which account for 54% of the population, asshown in the following table:

Table 2.1: ACCESS TO TELEPHONES(As of November 15, 1991)

AREA POPULATION CONNECTED DELS PER(X) LINES (X) 100 POP.

*Casablanca, Rabat-SaLe, Kenitra 24 47 3.8

*Fes, Meknes, Agadir, Marrakech,Tanger, Oujda 22 28 2.5

-Rest of country 54 24 0.9

There are about 8900 telex subscribers; 98% of expressed demand is satisfiedand current waiting time for a telex connection is three months. Telex service isheavily concentrated in Casablanca, Rabat, Agadir, Marrakech and Tanger. However, thisservice is rapidly being superseded by facsimile and data transmiseion, and ONPT is notplanning any further expansion of the telex network. ONPT operates about 4000 payphones and public booths throughout the country. To offset the current concentrationof telecommunication services in cities and provincial centers, a plan for providing 432rural villages with automatic telephone services is being implemented. Subscriber trunkand internationa. dialing are available to 98% of subscribers, with direct access to 121countries, since end of 1991.

Usage of Service

.7 As of the end of 1991, 25,000 DELs (5%) were serving government and publicgencies, 90,000 (18%) business and professionals, 350,000 (70%) residential premises,nd 35,000 (1w) miscellaneous users. The breakdown of corresponding revenues, by userroup during 1991, was 1% for government, 27% for business and 72% for residential

premises. Average telephone usage was at the end of 1991 about 7,400 metered pulses perDEL; although it remains higher than the world average (about 5,000), it has beendecreasing (from 7,800 in 1987) as demand becomes increasingly satisfied, and isexpected to reach 6,600 by 1994; this declining trend is normal for a country with arapidly expanding network.

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Exieting Facilitieo and Oualitv of Service

1.8 Under the ongoing first part (1987-1992) of ONPT's 8-year inveatmentprogram, major improvements and modernization o,e Morocco's telecommunication facxlitiesare being achieved following the introduction of state-of-the-art digital technology inswitching and transmission. Presently, 77% of the existing telephone exchange capacityand 69% of the transmission facilities (microwaves, trunk cables and optical fiberlinks) are digitalized. The main benefits of digitalization ares lower capital andoperational costs, improvementa in the quality of service, access for subscribers toadvanced facilities (e.g. "intelligent services"), and ability to meet future ISDN1demands. With an installed switching capacity of 675,000 and about 497,000 DELs inservice, exchange capacity utilization averages 71% which is acceptable for a rapidlyexpanding network. The national long distance network consists of microwave routes (8.9millior km-circuits), coaxial cables (7,7 million km-circuits), and optical fiber links(0.3 million km-circuits). Interna '.onal service is provided through: two satelliteearth stations, one working with Intelsat t96 circuits) and the other working withArabsat (168 circuits), five submarine cables (5,200 circuits) and three microwave links(1,050 circuits). New services have recently been introduced by ONPTe a mobil6telephone network is available since 1987, with about 1500 subscribers connected and a1800 subscribers system capacity; and a new packet switching data transmission networkwas put into service in 1991. Basic data on existing telecommunication facilities arepresented in Annex 2.

1.9 Call completion ratios for local, long distance and incoming internationalcalls average about 43%, 28% and 22% respectively. These moderate levels are mainly dueto (a) the fact that 23% of the existing switching capacity remains based on theanalogue technology; and (b) congestion resulting from the lack of traffic handlingcapacity of the international switching exchange and the transmission network. Thisproblem is being addressed in the proposed project through the provision of newinternational transit exchange and the improvement of the national transmission network.The relatively high fault rate of 1 per line in service per annum, clearly indicatesthere is substantial scope for further improvement in maintenance; confirming this isthe fact that only 59.7% of defective lines are returned to service within less than 48hours. In order to address these weaknesses, the proposed project will focus onachieving a better balance between network expansion on the one hand, and networkoperation and maintenance on the other (in terms of overall expenditures as well asmanagement attention). This will be made possible by the increased use of turnkey andsupply and erect contracts for construction of local networks (see para. 3.10); it willenable ONPT's technical staff to spend less time on supervising a multitude of smallcontracts and focus instead on network operations and munagement. Detailed technicalperformance indicators are shown in Annex 2.

Manufacturina. Assembly and Installation Industry

1.10 Morocco has a sizeable telecommunications manufacturing, assembly,installation and construction industry. It zomprises about 100 enterprises, only oneof which, Soci6t6 Nationale des T6ldcommunications (SNT) is Government-owned (SNT, whichspecializes in the installation and construction of local networks, is one of the firstenterprises set to be privatized under the Government's privatization program). Thelargest enterprise in the sector, outside of ONPT, is CGE-Maroc (a subsidiary of French

.1/ nlitegrmted Services Digital Network, which permits integration of video, data and voice transmission.

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ALCATEL) which employs 1,200 persons and assemble. cable's (about 1 million km-pair peryear) and acessories. Its annual turnover in the telecommunications seutor isestlmated at DH 130 million 2. of the other (mostly small-scale) enterprises, about 30are involved in civil works and line maintenance and 54 specialize in customer terminalinstallation (PABX's etc.) and specialized customer-related services (the import oftermlnals is free in Morocco although subject to prior Government technicalcertification).

Postal/Financial Services

1.11 Poatal services include transportation and distribution of letters andpackages, national and international express mail, rental of mail boxes and sale ofstamps. There are about 1,300 post offices throughout the country (density of 1 per20,000 inhabitants), of which 600 provide full service. The most recent product isexpress mail: international and domestic express mail is now available in 16 officesand expanded by 20% and 40% respectively in 1991. Mail is generally distributed within24 hours. Even though service is of good quality, overall mail traffic has grown slowlyover recent years (4% p.a. on average). FinancLal services provided by ONPT, includemoney orders, savings accounts (Caisse d'Epargne) and checking account services (ChequesPostaux). They have been expanding, but their role in the country's banking systemremains marginal: average balances at the 300,000 accounts opened with Cheques Postauxtotal only DH 1.6 billion (3% of total demand deposits in Morocco), which are depositedwith the Treasury; their primary purpose is to channel wages and pensions to Governmentemployees and to process paymants for various Government expenditures. Internationalpostal transferu are primarily used by Moroccans living abroad. Average balances at the620,000 savings accounts opened with the Calsse d'Epargne total DH 1.9 billion (3% oftotal savings in Morocco); until recently part of ONPT, this institution was spun offin April 1992, as a fully independent entity, authorized to provide the full range ofbanking services.

1.12 Although operaiions are carried out reasonably effectively from a technicalstandpoint, postal/financial services have generated substantial losses (DH 175 million,i.e. 47% of gross revenues, in 1991). A detailed diagnostic carried out by a Bankconsultant during project appraisal concluded that these losses were mainly due to: (i)a lack of commercial aggressiveness; (ii) insufficient postal rates; (iii)insufficient renumeration by the Government for the provision of financial services(para. 1.11); and (iv) costs associated with the opening of numerous (often uneconomic)rural post offices (the number of which doubled in 10 years). Although these actlvitiesare not central to the proposed project, which focuses primarily on theTelecommunications sector, these issues have been addressed through the proposed fundingof a program of technical assistance for the postal/financial branch (para. 3.4).

Main Sectoral Issues

1.13 The Moroccan telecommunications sector has improved dramatically over thelast few years and shows a number of strenaths: (i! as already emphasized, projectimplementation capacity has been dramatically increased, allowing for a doubling ofnetwork size in less than 5 years; (ii) this accelerated expansion of the network hasbeen based on modern digital technology, a prerequisite for efficient and reliablenetwork operation and for the development of new services; (iii) the sector does notsuffer from lack of qualified technical staff, thanks to the emphasis given to technicaltraining (locally and abroad); and (iv) the sector's overall finances have remained

CGE-Maroc is also invoived in the manufacturing of cables and components for the electric industry.

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healthy thanks to, on the one hand, telecommunications tariff levels which have enableda sizeable ix._.:.al contribution to investments (averaging 56% over the last 4 years)in spite of a heavy fiscal burden, and, on the other, access to concessional (primarilybilateral) long-term financing for imported equipment. In spite of these strengths,however, the sector is currently facing a number of constraints of a technicalinstitutional and financial nature, which are described below:

1.14 Technical and commercial performance. In spite of notable improvementachieved in recent years as a result of heavy investments, Morocco still lags behinneighboring countries and comparable countries in terms of density (1.9 per 100 pop.)demand satisfaction (only 74%) and quality of service (see para. 1.4). In addition, thlack of ONPT's commercial aggressiveness, at least until very recently, as well ainsufficient financial incentives have inhibited the development of new customeroriented services (both value-added services, e.g., data transmission, cellular, pagingetc. and "intelligent" services, e.g., call forwarding, "800" numbers, etc.).

1.15 Financial and Accounting Issues. Although, as mentioned, the sector'soverall finances remain healthy, there are several issues of a financial nature whichneed addressing. First, postal and financial services have consistently shown losses(US$20 million equiv. in 1991) which have until now been covered by profits from thetelecommunications activity. Second, Government departments have accumulatedsignificant arrears to ONPT, accounting for about 24 months of consumption. Thirdthere is so far no clear tariff policy, as the absence of cost accounting, inparticular, has prevented the design of a tariff structure based on economic criteria;in fact, empirical evidence indicates that current levels are on the high side and mighthinder users' competitiveness (see para. 4.9). Fourth, external financing of sectorinvestments, although mostly on concessional terms, has always required Governmentguarantees, accounting for a sizeable portion of Morocco's public borrowings (see para.1.2). Fifth, ONPT's management information systems are unreliable and are lacking interms of inventory management, register of fixed assets, cost accounting und budgetcontrol (para. 2.4).

1.16 Institutional Constraints. The drive of the last few years to acceleratethe expansion of the network in order to catch up with a growing demand, combined withthe sector authorities' focus on short-term operational issues had, until recently,hampered long-term planning and resulted in the absence of a clear and fully-articulatedsectoral nolicy. It is only in the last year that a high-level reflexion has beentaking place in Morocco on such issues as the respective roles of the public and privatesector and the rationale for the current monopolistic environment. In the context ofthis ref lexion, a number of critical institutional constraints have been identified.First, there is no effective and indeRendent reculation of the sector as ONPT has defacto assumed most of the regulator's functions which are, under the existing law,theoretically under the purview of M4PT (overall sector policy, pricing, conditions ofnetwork interconnection, provision of leased lines, setting of technical norms andstandards, licensing of installation contractors etc.3/). This lack of adequateregulation is not only clearly detrimental to ONPT's own efficiency under the currentmonopolistic environment, but will become simply unacceptable if parts of the sector areto be opened to competition and/or private investment, as is anticipated (see para.1.17). Second, ONPT's, and the sector's efficiency has, in the past, been significantlyhampered by the lack of management and financial autonomy; as for most publicunterprises, ONPT was subject to burdensome controls from the Ministry of Finance onday-to-day operations (ranging from involvement in all stages of procurement of goods

/ Only the management of the radio spectrum has effectively been carried out by MPI.

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and services to the hiring of personnel). These controls were particularly inefficientand costly in an extremely fast-growing and fast-changing sector where the capacity torespond quickly to rapid technological change and customers' needs is, and willincreasingly be, the key to success. In addition, the lack of clearly-stated objectivesand performance standards did not provide ONPT with sufficient incentives to improveefficiency nor the Government with ways to measure (and reward/penalize) theenterprise's performance (instead of intervening in its day-to-day management). In thecontext of the project, a number of important steps have been taken to resolve theseissues, which are discussed below (see paras. 1.17-1.20).

Government Strateav and Proposed Restructuring

1.17 The Government is aware that in order to drastically improvetelecommunications services and for Morocco to catch up with neighboring countries,increased investments alone would not be sufficient and that it has to consider aqualitative change in the way the sector is managed, following the path taken by anincreasing number of countries (both industrialized and developing) in recent years. Ahigh-level Commission was established in early 1991, with a mandate to design a newinstitutional and regulatory framework for the sector, and the Government approached theBank for assistance in this endeavor. As a result, the Government has prepared aStatement of Telecommunications Sectoral Policy. The latter prc-oses a revisedinstitutional framework for the sector, which builds upon reforms in..tiated under theBank's First Telecommunications Project. The key elements of the new framework are: (i)the separation of Posts and Telecommunications into two distinct legal entities; (ii)the setting up of a regulatory structure outside of ONPT; (iii) the elimination ofONPT's monopoly on value-added services; and (iv) the "corporatization" of ONPT (and itssuccessor enterprises) within the framework of performance contracts. The statementincludes a time bound action plan setting out key steps and target dates forstrengthening the MPT's institutional capabilities and preparing the groundwork forliberalization of the sector. The Statement of Sector Policy and Plan of Action areshown in Annex 3. In addition, the Government: (i) is evaluating alternativeinstitutional frameworks on the basis of recent international experience; (ii) hasprepared and agreed with the Bank terms of reference for consultants to assist instrengthening the regulatory function of MPT.

1.18 At this point in time, outright privatization of ONPT is not an option beingenvisaged by the Government for the following reasons: local capital markets arecurrently too thin to accommodate a private issue of ONPT's size, and foreign controlof such a large monopoly4 is not considered politically feasible in the immediatefuture. The Government prefers a gradualistic approach which involves, in a first stage(i) opening certain segments of the telecommunication sector to competition; (ii)enhancing ONPT's efficiency in the provision of basic telecommunications service undera better-regulated environment; and (iii) giving priority to the privatization ofsmaller, industrial, public enterprises under its ongoing privatization program with aview, inter alia, to develop local capital markets. This could pave the ground, at somefuture date, for opening up the ownership of one large utility such as ONPT to privatecapital.

i/ In a countly the size of Morocco where the development of the basic network (compared to services) is still the utmostpriority, snd given the current state of technology, basic telephony is and is expected to remain at least for several yeams, anatural monopoly.

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1.19 Substantial progress has already been achieved in the implementation ofreform as follows: first, ONPT's organization was revised in December 1991, toaccomplish a "do facto" separation of the Telecommunications and Postal financialbranches (para. 2.1); new managerial positions have been filled, some through externalrecruitment. Furthermore, the on-going design of new management systems, carried outwith the assistance of Bank-financed management consultants, is based on the eventualseparation of the two activities (and aims in particular at establishing separateaccounts). Second, MPT's staffing has already been strengthened to prepare it tofulfill effectively its regulator's %ole, and TORs for related external assistance havebeen agreeu during project appraisal (see above). Third, a "Contrat de Programme" hasbeen signed between ONPT and the Government and represents a major milestone in theprocess of providing ONPT with corporate autonomy and accountability.

1.20 The 'Contrat de Programme" with ONPT is a key element of the proposed reformas it provides ONPT with the corporate autonomy and accountability which areprerequisites for improvements in the sector's efficiency. The document (which coversthe 1993-1997 period) includes in particular: (i) specific (quantitative) commitmentson ONPT's part regarding telephone coverage, quality of service, overall investmentlevels, improvement of internal control systems and external audit, productivity, wagesand financial performance; (ii) commitments on the part of the Government regardingtariffs (to be kept constant in real terms); level of taxation (to be kept at currentlevels); recruitment flexibility; financial compensation of public serviceobligations; progressive elimination of a priori controls on expenditures; timelypayment of services; and access to local financial markets. For Postal/FinancialServices, the document emphasizes in particular: (i) ONPT's commitment to justify theopening of new post offices on economic grounds and (ii) the Government's commitment toremunerate the provision of financial services at their actual cost (para. 1.12). The"Contrat de Programme" provides assurances of ONPT autonomy of operation and that thesplitting of responsibilities between the Ministry and ONPT has been granted.

1.21 The Government and ONPT: (i) provided the Bank with a satisfactory Statementof Telecommunications Sectoral Policy and related Plan of Action for overall reformimplementation; and (ii) signed a Contrat de Programme. Failure by either ONPT or theGovernment to comply with their respective commitments under these documents would giverise to a suspension remedy under the Loan Agreement.

Bank Role

1.22 Previous Bank Experience and Lessons Learned. The Bank has been involved inthe sector since 1982, when it initiated a sector study which led to the creation, in1984, of ONPT (para. 2.1) and to the subsequent processing of the FirstTelecommunications Loan of USS 125 million (No. 2798-MOR, approved in April 1987). Themain objectives of the First Project, which is scheduled for completion by end-1993,were to (i) assist in the implementation of the first phase of the sector's ambitiouslong-term expansion plan (aiming at more than doubling the number of connected DELs from251,000 in 1986 to 640,000 by 1992); and (ii) help strengthen ONPT as an autonomous andefficient entity through a wide-ranging technical assistance program. After a slowstart due primarily to ONPT's lack of familiarity with Bank procedures, projectimplementation has accelerated: as of March 1992, 78% of the revised loan amount 5/ was

v US$9 million were cancelled in 1989

committed, and the loan is expected to be fully disbursed by the end of 1993 6/. Systemexpansion is only slightly behind schedule, with 497,000 DELs in service as of end-1991,compared to 525,000 targeted under the Project. The comprehensive program of technicalassistance to ONPT, was completed by June 30, 1992, included in particular: (i) a long-term demand study; (ii) a tariff study; (iii) the set up of a cost accounting system;(iv) the improvement of procurement and inventory management systems; (v) a dataprocessing long-term development plan; and (vi) the revamping of the personnel function(details in charter II).

1.23 Previous Bank experience in the telecommunications sector has shown that the paceand the scope of sector reform has varied considerably among regions and that there isno single blue print for succOes. Outright privatization, which depends on windows ofpolitical opportunity, is not always feasible nor has it led necessarily to improvedsector performance. Rather, the introduction of competition in at least some marketsegments, effective regulation, and arms-length relations between the Government and thetelecommunications utility have been found to be factors of success. A lesson derivedfrom the implementation of the Morocco PERL7, completed in 1991, is also of particularrelevance to the proposed continued Bank involvement in the sector: the ProjectCompletion Report pointed out, inter alia, that "in future [public enterpriserestructuring) operations, the Bank should continue to be mindful of the scope of changeinvolved and recognize the long period which may be required for all the elements of therestructuring operations to take hold... Thus, perhaps the foremost consideration is theGovernment's sustained commitment to the reform process, recognizing there may betemporary setbacks in meeting specific targets".

1.24 Recent and Forthcomina Bank Assistance for Sector Restructuring. In thecontext of the follow-up of the First Project, the Bank has been pursuing with the

Government a dialogue on a wide range of sectoral issues. In particular, the Bank hasbeen actively supporting the Government's efforts at sector restructuring since theirinception, as follows: (i) in early 1991, a Bank-financed expert provided advice to theGovernment in evaluating alternative institutional sector frameworks, drawing on lessonsfrom recent international experience in telecommunications sector restructuring; (ii)in the course of subsequent missions in 1991, and 1992, the Bank was instrumental in theGovernment's drafting of a Statement of Sectoral Policy which sets forth the keyelements of its proposed reform of the sector as well as Contrat de Programme with ONPT(para. 1.20); (iii) per the Bank's recommendation, the scope of the work carried outby management consultants under the First Project (para. 2.4) was reoriented to takeinto account impending changes in the sector, most particularly the proposed separationof Postal Services and Telecommunications; (iv) under the project, a technicalassistance program (based on TORe agreed with the Bank) designed to strengthenregulatory function and improve institutional capabilities will be launched; thie task

s expected to start by June 1993, for completion by November 1993); (v) the Bank hasommissioned the preparation of a long-term Telecommunications Strategic Plan Study 8/hich will, inter-alia, help ONPT revise its investment strategy to adapt to the newly-iberalized sector environment -- corresponding work initiated in March 1992, was-mpleted by October 1992; and (vi) the Bank carried out, during appraisal, a detailediagnostic of ONPT's postal/financial branch and prepared a related medium-term program

W/ Tbe relatively low disbusement percentage as of March 1992 (32%) is explained by the fact that many telecommunicationscontracts provide for final commissioning (and thus final payment) within up to one year after work completion.

D Public Enterprise Rehabilitation Loan (No. 2820-MOR, approved in June 1987), which aimed atrationalizing the role of the State in the econano.

Under funding from the Swedish Trust Fund.

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of technical assistance. The latter two Bank-sponsored actions are only the first, andmost urgently-needed, steps of a more comprehensive sector assistance program, the bulkof which would be funded by the proposed loan starting in the first half of 1993 (seepara. 3.4).

1.25 Rationale for Bank involvement. The telecommunications sector is criticalto Morocco's economy in two respects: first, because improvement in telecommunicationservice is a prerequisite to the development of a dynamic, outward-oriented economy,particularly at a time when the country is developing its ties with the EEC (para 1.1);and second because that sector accounts for a major share of the country's publicsector, be it in terms of investments (US$400 million p.a. over the next three years),foreign borrowings, or fiscal revenues. It is therefore essential that the sector bemanaged and developed in the most efficient fashion. The Bank has a key role to playin helping the sector face the new challenge of having to manage concurrently a rapidexpansion and fundamental institutional and organizational changes.

1.25 The Bank would, through its operational involvement and partial financingof a time-slice of ONPT's investment program, first, ensure that sector investments areplanned and carried out in an optimal manner. Second, it can help promote broadinstitutional reform directed, on the one hand, at improving ONPT's institutional set-up(in line with the reforms initiated under the PERL) and, on the other hand, at favoringprivate sector involvement whenever such involvement can demonstrably benefit sectordevelopment (para. 1.17). Third, the Bank would play a catalytic role in themobilization of external financing for this capital-intensive sector by: (a) providingadvice on the optimization of the sector' overall financing mix (a major share of whichcurrently consists of tied bilateral concessional loans and export credits); and (b)together with institutions which have already indicated their intereet in cofinancinga Bank project (EIB), covering ONPT's external financing gap (corresponding to theforeign cost of investment items which are not eligible for bilateral or exportfinancing), thus fulfilling its role of lender of last resort. Furthermore, the Bank'ssupport to ONPT's corporatization and greater financial autonomy is expected to enhanceits ultimate ability to access financial markets on its own standing, possibly within4-5 years.

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II - THE BORROWER

Oraanization and Manaaement

2.1 ONPT currently has a monopoly on all telecommunications and postaloperations (para. 1.3). It was established in 1984 as an "Office", an autonomous publicenterprise subject to the tutelage of the MPT. ONPT has an eight-member Board ofDirectors chaired by the Prime Minister; other members are the ministers of Finance,Interior, Planning, Economic Affairs, Industry and Transport. As for most Moroccanpublic enterprises (PEs), the Board nieets infrequently (usually only once a year) andits role remains quite limited. The Minister of P&T has been acting as Director Generalsince ONPT's creation. Until 1991, ONPT's organizational structure included two CentralDirectorates (Telecoms and Postal/Financial Services) and five common centraldepartments (Finance, Strategy, Administration, Common Services and Procurement).However, this structure was revised in December 1991 to accomplish a "de facto"separation of Telecom and Posts activities, as a prelude to the establishment of twodistinct legal entities (para. 1.17). The new organization chart is shown in Annex 4.Since the end of 1992, the relationship with the Government is governed by a "Contratde Programme" (see para 1.20).

Staff and Trainina

.2 As of December 31. 1991, ONPT had about 16,600 employees. Total staffinvolved directly or indirectly in telecommunications amounts to 10,350, equivalent to0.8 per 1,000 DELs, which compares well even with newly industrialized countriesSingapore 16, Portugal 17). In view of the future expansion of Morocco's network, ONPT

will have to hire additional staff, particularly telecommunications engineers andechnicians; it has also recently hired additional qualified managers in operations,ccounting, finance and other business areas. At project completion (1995), about15,900 staff are expected to be employed in the telecommunications activity, for a ratioof 13.7 per 1,000 DELs. Hiring and training of additional qualified staff to meet theproject requirement will be a real challenge to ONPT; it is already clear that moreflexibility in personnel policy will be required to attract staff of the necessarycaliber. Appropriate arrangements to that effect have been provided in the Contrat deProgramme signed between the Government and ONPT (para. 1.20).

2.3 Current training arrangements for engineers and technicians are satisfactory.ONPT provides higher level training through the "Institut National des Postes etT6l6communications" (INPT) in Rabat. The INPT is well organized and has adequatefaculty reeources to cope with ONPT's higher-level staff training requirements; however,it needs to modernize its facilities, upgrade its existing technical training curriculumand introduce certain management courses to train a larger number of managers. INPT iscurrently introducing a high-level Engineer curriculum under a long-term partnershipagreement with the French Ecole Nationale Sup6rieure des T6l6communlcations.

Technical Assistance

4 Since October 1990 international consultants funded under Loan 2798-MOR (para.22) have been assisting ONPT in revamping its management systems in five major areas

(for both telecoms and postal/financial services):

(a) data processing;(b) financial and accounting systems;

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(c) procurement and inventory management;(d) human resource management; and(e) tariffs.

The consultants have completed their work by June 30, 1992, with the finalization ofimplementable frameworke and related systems. In order to adapt the present systems tothe new ones, expert assistance will be required to help ONPT install recommendedsystems and procedures over the next two to three years, and corresponding funding isprovided under the proposed project.

Data processing

2.5 ONPT's data processing facilities are centralized in Rabat. The staff of 170 nowprocess the following main applications: billing and collection for telephone and telex,general accounting, postal savings accounts and postal check services. The dataprocessing plan prepared by the consultants is designed to provide more reliableservices, decentralize them and extend them to new functions. Services covered by theplan include, for telecommunications: (i) operations (lines technical management,traffic and quality of service, management of national network); (ii) investments(network planning and lines construction); and (iii) commercial (billing and collection,directory, marketing and tariff). Also covered (for both telecommunications andpostal/financial services) would be: (i) accounting and finance; (ii) human resourcemanagement; and (iii) procurement. Computer services would be decentralized to fourprovincial centers. Assistance for the implementation of the data processing plan,including specialized consulting services, training, hiring of software analysts, andpurchase of new equipment, is included in the project (see Annex 6).

Billina

2.6 Telecommunications billing is mainly computerized. The breakdown of totalconsumption between private and public sector is presently about 82-18%. Monthlybilling policy has been adopted since January 1992. A monthly cycle is expected to beintroduced u:Ser the data processing plan (see para. 2.5). Telecommunications billingand collection will be established as an ancillary system to general accounting withinthe new framework. Thus, appropriate linking procedures will be set up and anydiscrepancies between customers' accounts and general accounting which were present atthe start of computerization or crept in later on will be corrected.

Accounting

2.7 Accounting data can already provide separate financial statements for post andtelecommunications, but they are neither detailed enough nor fully reliable, givenpersistent weaknesses in ONPT's financial systems and lack of fully adequate costaccounting. The assista -e provided by the consultants aimed at addressing theseweaknesses. General accounting will use a powerful software (DBS) that will use costaccounting information and make the budgetary forecasting and follow-up process moreprecise and efficient. Decentralized ancillary accounts for customers, suppliers, fixedassets, stocks, personnel and cash and loans will be tightly linked to generalaccounting. A detailed analysis of the discrepancies between the old and the newsystems, particularly with respect to decentralized accounts, will be required in close

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coordination with the work of the external auditors, b1efore the new system isimplemented over the next two years.

External Auditing

2.8 In February 1992, ONPT hired private external auditors to audit its accounts inorder to comply with its obligations under loan No.2798-MOR (it had been agreed with theDank during earlier supervision missions that an external audit could only beefficiently carried out following completion of the accounting consultancy work). ONPThas submitted its 1991 audited accounts. It was agreed at neqotiationg that because ofthe commercial character and the autonomy of the posts and telecommunicationsmanagement, ONPT's accounts and the accounts of all project components should be auditedby external auditors acceptable to the Bank. Audited financial statements will besubmitted to the Bank within six months after the end of the financial year.

Tariffs

2.9 Current telephone tariffs consist of a base call charge of DH 0.75 per meteredpulse, a monthly subscription fee of DH 20, and a connection fee of DH 300. Tariffs arebased on periodic pulse metering, with the duration between consecutive pulses varyingfrom 6 minutes for local calls to 9 seconds for national calls of more than 500 km, andfrom 9 seconds for Maghreb countries to 1.5 seconds for America and Oceania (seedetailed schedule in Annex 5). On average, these tariffs appear high when compared toother countries. Management consultants have carried a tariff study. The tariff studyfocuses primarily on rate structure, and its preliminary recommendations are as follows:

(i) the connection (or installation) fee should generally cover the one-timecost of connecting the subscriber to the telephone exchange; in certaincircumstances it could be treated as an entry fee to the network, and itslevel would be a deterrent to potentially insolvent customers;

(ii) the monthly subscription (or rental fee) should, in principle, cover thefixed costs directly associated with the line and equipment connecting thesubscriber to the network;

(iii) the traffic related charges should progressively be less sensitive to thedistance, so the long distance tariffs can be simplified; and

(iv) off-peak traffic should get a discount to promote a better utilization ofthe network.

2.10 As agreed under Loan 2798-MOR, the consultants' final report is being jointlyreviewed with the Bank. Understandings were reached during negotiations of this Projectthat a tariff structure proposal would be furnished to the Bank by June 30, 1993, andcarried out, starting December 31, 1993, taking into account the Bank's comments.Overall average tariff levels have been so far sufficient to ensure ONPT's financialhealth and the local cost financing of sector investments (see Chapter IV). A financialcovenant under the proposed loan for a minimum self-financing ratio of 40% will, Lnteralia, prevent tariffs from being lowered to levels which would threaten sector finances

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(para. 4.9). A risk exists that tariffs may be raised excessively (adversely affectingdemand in the long run) as a consequence of Government indiscriminate and excessivetaxation. As a safeguard, limits on future tariff increases have been provided underthe Contrat de Programme which stipulates that tariffs will be kept constant in realterms at their 1992 level and that the monopoly tax will remain fixed at 10% oftelecommunications annual sales before VAT.

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III - THE PROGRAM AND TRE PROJECT

A. Proiect Scone

Telecommunications Inv&.-ment Proaram

3.1 In 1986, ONPT prepared, with Bank easistance, a telecommunications investmentprogram for the period 1987-1994 (para. 1.22). Under this program, telephone systemswitching capacity was to be increased from 286,000 lines (end-1986) to 1,081,000 lines(end-1994). Specialized new services were to be provided and domestic long distance,rural, regional and international telecommunication systenm modernized. The programprojected an average growth of DELs connections of about 19% per annum, which would meetabout 96% of projected demand for 1994, a marked improvement over the 1986 situation(59% demand satisfaction). The program was divided into two parts with the moat urgentworks to be implemented first. The first part included the ongoing first Bank projectwhich is being implemented over 1987-92. The second part is overlapping with the firstone and would be implemented over 1992-94. As the implementation of the first part waswell underway at the beginning of 1991 (86% of the projected 290,000 exchange linescapacity expansion implemented by January 1991), ONPT decided to proceed immediatelywith the second part.

3.2 The second part of ONPT's program includes, inter alia, ongoing worksconsisting of two major turnkey contracts for a total of 300,000 new lines of exchangecapacity and 130,000 new connected lines under bilateral (French and Canadian)financing. It would essentially be implemented over 1992-94. During the implementationof the second part, the projected 27% annual growth in the number of connectedsubscribers would enable ONPT to meet about 96% of projected demand by the end of 1994.This planned growth rate is reasonable and consistent with ONPT's performance during thepast two years (22% in 1990 a:.id 1991). By 1994, ONPT would have a totally digitalizednetwork throughout the country. Telephone density would be up from 1.1 in 1987 to 3.6per 100 population in 1994, which would still remain low when compared with countriesof comparable GNP. Detailed planning on a longer horizon (year 2007) is beingundertaken with the assistance of Bank consultants who completed in October 1992 aTelecommunications strategic Plan Study (para. 1.22).

Proiect Obiectives

3.3 The project aims, first, at assisting the Government in improving itsinstitutional capabilities and preparing the groundwork for sector liberalization (para1.17) through the provision of specialized expert advice and consulting services,training, and monitoring equipment and syatems. Secgnd, it aims further expandingMorocco's basic telecommunications network through partial funding of a time slice ofONPT's investment program. The latter consists of the second part of ONPT's investmentprogram to be implemented from 1992 to 1994. It will add about 406,000 new digitalizedlines of exchange capacity, replace 81,000 old analog lines by new digitalized lines andconnect 420,000 new subscribers. Automatic rural telephone services would be extended

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to about 780 new villages and international communications capability expanded.Completion of the overlay digital long distance network and new digital facilities intrunk exchanges will permit: (i) releasing most of the congested portion of the networkand (ii) provision of high quality network telecommunication services.

Proiect Descri_ption

3.4 A detailed project description is included in Annex 7. The main projectcomponents are as follows:

(a) sector restructuring and institutional strenothenino

(i) consultancy services to assist in strengthening of MPT's institutionalcapabilities, including its respective regulatory function;

(ii) computerized systems and equipment for MPT to be able to controlefficiently the radio frequency spectrum;

(iii) consultancy services and training to further enhance ONPTinstitutional capacity which started under the First Project fortelecome and, to a lesser extent, postal/financial services (detaileddescription of the proposed Technical Assistance program is includedin Annex 6); and

(iv) acquisition of computer equipment and development of related systemsfor implementation of ONPT's data processing master plan, based onrecommendations of the studies included in the Bank's First Project(para 2.5);

(b) exoansion of ONPT's network:

(i) about 487,000 digitalized lines of local (digitalized) switching andsubscriber equipment; and related switching equipment for domestictrunk exchanges (58,200 new circuits in 7 exchanges);

(ii) associated local networks and subscriber outside plant forconnection of about 420,000 new subscriber lines;

(iii) 54 digital microwaves links, 22 optical fiber trunks, and equipmentto digitalize 8 coaxial long distance cables;

(iv) equipment to expand the two international switching gateway capacity(22,300 new circuits) and the two earth stations capacity (360circuits);

(v) equipment to connect the domestic network to the two newinternational optical fiber submarine cables;

(vi) facilities for automatic services in about 780 rural areas; and(vii) specialized services such as mobile/maritime radio and data

transmission.

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B. Cogt and Financina

Proiect Cost

3.5 The total project cost is estimated at USS 1,203.6 million. The direct andindirect foreign exchange component amounts to US$ 634.0 million, (direct foreignexchange USS 579.6 million) or 53% of the total cost. About 29% of the total projectcost would be for swltching, 53% for transmission and distribution, 7% for ruraltelephony, and 11% for data procepuing, training and studies, and miscellaneousinvestments (incl. land and building). Base cost estimates are in mid-1992 prices.Unit prices for equipment works are consistent with costs obtained in contracts signedin 1991. Unit costs for consultant services average USS 20,000 per man-month, inacuordance with rates prevailing both ln Morocco and abroad for similar expertise. Theindirect foreign content for local network construction was estimated at 60% of thetotal cost for civil works and 70% for turnkey, supply and erection contracts. They arebased on world average costs for similar works and on a review of sample contracts inMorocco.

3.6 Detailed project costs are sh'ira in Annex 8 and summarized belows

Table 3.1: PROJECT COST SUMMARY

----(current US$ million) d)----Local a) Foreian Total

Switching b) 175.4 176.0 351.4Long dist. transmission 178.9 199.7 378.6Local networks 142.4 119.0 261.4Rural telecoms 38.1 51.4 89.5TA, training & studies - 16.9 16.9Data processing 10.2 13.1 23.3Miscellaneous c) 79.0 - 79.02PT (TA & Control Center) - 3.5 3.5

TOTAL COST 624.0 579.6 1,203.6

a) includes indirect foreign cost and VAT/custom duties (USS54.4 and USS383.5 million respectively, before contingencies)b) includes data transmissionc) includes land, buildings and vehiclesd) Physical contingencies have been estimated at 5X. Price contingencies are based on local inflation rates of 6X in

1992 and 1993, 7X in 1994, and 6X thereafter; and foreign inflation rates of 3% in 1992 and 4X thereafter.

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Proiect Financine

3./ The tentative project financing plan is summarized below:

Table 3.2.: PROJECT FINANCING PLAN(USs million)

ONPT Local Exist., Bitateral Export EIB/ Bank TOTALBanks Loans Credits Credits ___

Switching 175.3 - 62.5 113.6 . - - 351.4L-D transmis. 165.7 38.8 - 124.7 36.9 12.5 ZL 378.6Locat Networks 56.5 44.7 36.8 2.8 55.9 64.7 gL 261.4Rurat telecoms 38.1 - 13.3 27.2 10.9 - 89.5TA, training& studies - - 6.3 - - 10.6 16.9

Data processingequipment 10.2 - 4.4 - - 8.7 23.3

Miscellaneous 49.6 29.4 - - - 79.0NPT (TA & Contr. 3.7Center, - 3.5 3.5

TOTAL 499.1 74.1 162.1 113.6 154.7 103.7 100.0 1,203.6

1/ includes First IBRD Loan (USS80.1 miltion)2/ inctudes indirect foreign cost

3.8 The proposed IBRD loan of US$100 million will firsance 8% of the total project costand 17% of its foreign cost (16% when indirect foreign cost is included). It willfinance the direct and indirect foreign cost of goods and services which are noteligible for traditional bilaterel and export financing i.e: (i) the construction oflocal networks; (ii) small equipment and spare parts for transmission; (iii)construction of fiber optical links (under supply and erect contracts); (iv) dataprocessing equipment; (v) technical assistance, studies and training; and (vi)management systems and equipment for frequency control by MPT. A proposed loan of ECU80 million from SIB is expected to be secured to co-finance the project. Concessionalbilateral loans from France, Canada and Sweden as well as export credits from majorsupplier countries are expected to cover the bulk of the foreign cost of switching andtransmission for a total amount of about US$330 million. About US$80 Luillion is beingcommitted under Loan 2798-MOR in 1992 and 1993. ONPT would cover most of the projectlocal cost from internal funds (US$499 milliorn equivalent) complemented by loans fromlocal banks to a minor extent (due to ONPT's limited access to local capital markets).The Governments of France and Sweden have already indicated their interest in supportingsubstantial levels of financing for switching equipment through concessional --mixed--credits), although formal commitments cannot be secured since their funding istraditionally negotiated on an annual basis. Financing of switching equipment is likelyto be secured given the intense international competition for this type of equipment.Negotiations have been completed between the Moroccan Government and EIB regarding its

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co-financinq of the program. The Bank documents make provisions for remedial actions(including suspension of disbursements) in case of failure by elther ONPT or theGovernment to comply with their corresponding commitments. Retroactive finanoina forup to US$6.0 million would be provided under the Bank loan to ONPT for payments after1/1/93 under priority contracts relating to equipment and worke for local network.

C. Procurement and Imnlementation

Procurement

3.9 Procurement arrangements for the project are summarized belows

Table 3.3: PROCUREMENT A RANGEMENTS(USS NZIflon)

Project Component ICB LCB Other Total

Switching Equipment 351 351

Transmission Equipment 360 (12) 19 W 379 (12)

Local Network:. Cfvil Works 46 C6) 46 (6). Cable & Line Equipment 89 (18) 89 (18). Turn-Key Contracts 47 (20) 47 (20),Sumly and erect 78 (19) 78 (19)

conracts

Rural Telephony 90 90Land/Buitdings/Support 79 79Data process. equip. 23 (9) 23 t9)Consu1t. services 13 (7)v' 1 tFre .Cgnt Cntr., I nstrwens/ 6 WE,

0oP trainingi materlats

TOTAL 687 (78) 125 (6) 392 (16) 1,204 (100)Percent of Bank Loan 78X 6K 16X 100O

Note: Figures in parentheses represent amounts to be financed by the proposed Bank loan.

/ Figures include taxes and duties as well as good and services procured under the first Bank Loan.N Negotiated contracts, not financed by the Bank.

El Limited International Bidding.gl World Bank guidelines for selection of consultants.

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Bids will be evaluated utilizing the post-qualification procedure: this arrangement hasproved satisfactory during implementation of the First Bank Project. Equipment andworks for US$ 78.0 million (including contingencies) financed by the Bank would beprocured through ICB prosedures in accordance with the Bank's guidelines. Selection ofBank-financed consultants (US$ 10.0 million) would be carried-out in accordance withBank guidelines for use of consultants. Consultancy services are needed forinstitutional development for both ONPT and MPT. The manpower required for technicalassistance is estimated at 569 man-months; participation of local consultants isexpected, most probably in association with international consulting firms. Limitedinternational bidding procedures would be used to procure US$ 4.0 million of tools,metering instruments for regional training centers as well as radio frequency controlequipment to be financed by the loan. LIB has been selected for these packages as thereare only a limited number of suppliers. For procurement under ICB, a preference limitedto 15% of the c.i.f. price of imported goods or the customs duty, charged to non-exemptimporters, whichever is lower, would be extended to domestic manufacturers in evaluatingbids. Prior Bank review of procurement documentation would be required for: (i) all ICBcontracts and for those contracts estimated to be larger than US$ 500,000 for goods; and(ii) for securing consultants' services. About 30 contracts (out of about 50 contracts)equivalent to about US$ 92.0 million (92% of the proposed Bank loan), would be reviewed.Other Bank-financed contracts will be subject to random post-award review and all biddocumentation will be furnished together with respective contracts.

3.10 To minimize implementation delays in the construction of large localnetworks, with expansion of more than 10,000 new subscriber lines each, ONPT will useturnkey contracts2 and supply and erect contiacts!0/. This represents about 48% ofthe local network item with total costs of about US$ 132.0 million for project design,civil works (including ducts and other construction materials), cable supply anderection. Part of the indirect foreign exchange component of these works andconstruction materials, which is estimated at US$41.2 million, is proposed for Bankfinancing. Turnkey contracts for local networks would be procured through ICB inaccordance with the Bank's guidelines. The size and dispersal of civil works forrelatively small subprojects is unlikaly to attract foreign bidders. Consequently,contracts for civil works for local netwo;k construction, not to exceed US$ 500,000 eachand USS 6.0 million in total, would be procured under local competitive bidding (LCB),which is open to participation by foreign firms. The project would be advertisedinternationally; ONPT's LCB procurement procedures have been reviewed in detail duringappraisal and found satisfactory. With the experience of the first project, ONPT isfully familiarized with Bank procedures.

3.11 Procurement under cofinancing would be in accordance with the guidelines ofthe respective institutions. Negotiated contracts under bilateral financingarrangements would be used to procure USS 240.0 million (excluding custom duties) ofequipment, including 190,000 lines of digital switching equipment and multiplexingdigital transmission equipment. About US$ 60.0 million of the negotiated contracts have

21 Turnkey contrac's include network design, supply and installation of underground and aerial cables, manholesand cable duct construction and new subscriber connection.

i/ Supply and erect contracts include supply and installation of underground and aerial cables with or withoutnew subscriber connection.

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already been awarded and USS 180.0 million are currently under discussion with suppliersfrom France and Sweden for delivery in 1993-94 (para. 3.8). The award of past similarcontracts has proceeded in a satisfactory manner. The Bank will continue to be keptregularly informed about the negotiations and award of future negotiated contracts underbilateral financing.

Disbursements

3.12 Disbursement would be made against 100% of the CIF cost of imported goods,80% of the cost of goods and services procured locally (to avoid payment againstestimated local distribution margins and taxes), 70% of the cost of local network turn-key contracts and supply and erect contracts, 60% of the cost of local network civilworks (in both cases, corresponding to the estimated indirect foreign exchange cost ofsuch contracts; see para 3.5), 100% of the total costs of consultants and training, and100% of the ex-factory cost of locally-manufactured items (procured under ICB or LCB).The proposed Bank Loans totalling USS 100.0 million would be disbursed as follows:

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Table 3.4: DISBURSEMENT OF PROPOSED LOANS

Category Amount US$ % Financed('000)

1. Transmission equipment and 11,500 70% of total expenditures.associated installation and trainingservices

2. Cables, poles and associated 17,200 100% of foreign expenditures,line equipment for local networks. 100% of ex-factory cost for locally

manufactured items, and 80% oflocal expenditures for other locallypurchased items.

3. Civil works for local networks. 5,500 60% of total expenditures.

4. Turn key contracts and supply 35,000 70% of total expenditures.and erect contracts for localnetworks.

5. Data processing equipment 8,000 100% of foreign expenditures,100% of ex-factory cost for otherlocally manufactured items, and80% of local expenditures forlocally purchased items.

6. Consultants' services, training 9,100 100% of expenditures.services and related equipment.

1,500 100% of foreign expenditures,100% of ex-factory cost for locally

7. Training equipment manufactured items, and 80% oflocal expenditures for other locallypurchased items.

8. Radio frequency control 2,200 100% of foreign expenditures andequipment ad software 80% of local expensitures.

9. Unallocated 10.000

Total 100,000

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3.13 The estimated disbursement schedule (Annex 10) was based on the Bank'sdisbursement profiles for Bank telecommunication projects. Disbursements are expectedto be completed by December 31, 1997. Withdrawal applications would be fullydocumented, except for eligible expenditures under contracts for goods and works valuedbelow $300,000 equivalent which would be made on the basis of certified statements ofexpenditures (SOE). Supporting documentation in these cases would be retained by theborrower for at least one year after receipt by the Bank of the audit report for theyear in which the last disbursement was made. This documentation would be madeavailable for review by the auditors and Bank staff on request. ONPT's annual financialaudits (para 2.8) would include a separate opinion on the claims submitted to the Bankon the basis of SOEs stating whether such claims were in accordance with the loanagreement. The accounts for MPT's project component would be audited yearly by externalauditors acceptable to the Bank and the audit report submitted to the Bank within 6months of the end of each fiscal year.

3.14 In order to facilitate project implementation, ONPT would establish aspecial account. The authorized allocation would be $7.0 million equivalent whichrepresents about 4 months of average estimated disbursements on the loan during the peakperiod of 1993-95. The special account would be replenished monthly (at the latestevery 4 months), or whenever one third of the amount deposited has been withdrawn,whichever occurs earlier. Documentation requirements for replenishment applicationswould follow the same procedure described in para. 3.13. In addition, monthly bankstatements detailing the transactions in the special account which have been reconciledby the borrower would accompany all replenishment requests.

Project ImDlementation

3.15 During the implementation of the ongoing project, ONPT has graduallyimproved capabilities in the areas of engineering, investment planning, detailedproject design, procurement, project management and supervision. The planning and thedetailed design of the project were executed by ONPT's staff. Technical assistance andtraining under the proposed project would help ONPT organize project management andsupervision, and improve network operations, maintenance and customer services (seedetails in Annex 6). Switching and transmission equipment will be installed by therespective suppliers. Construction of technical buildings, manholes, and cable ductswill be carried out by local private contractors. Installation of underground andaerial cables and associated equipment procured separately by ONPT will be installed byprivate local contractors under ONPT's supervision or by ONPT staff. Large turn-keycontracts for local networks will be carried out by foreign contractors/suppliers inassociation with local private contractors/suppliers. Overall project management,coordination, supervision and follow-up of various contractors' involvement, as well asacceptance tests will be carried out by ONPT staff. The project is expected to besubstantially completed by December 31, 1996. A detailed Implementation Schedule isshown in Annex 9 and a supervision plan in Annex 15. Although ambitious, this scheduleis achievab' m given ONPT's excellent implementation performance over the last two years

(para. 1.22). Given the importance of the timely implementation of sector reform, theproposed consultants' assistance to strengthen institutional capabilities should besought without delay (para 1.19)1 understandings were reached during negotiations that

ONPT would employ consultants no later than June 1, 1993. Because of MPT's budgetarylimitation, purchase of radio frequency control equipment and institutionalstrengthening technical assistance will be carried out by ONPT, on behalf of theGovernment. However, the Government will have sole responsibility to: draft the TORs

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and the bidding documents for goods, select and supervise the consultants, and evaluatethe bid offeres. In that regard, the Government and ONPT have concluded an agreement.

Status of Proiect Preparation

3.16 Preparation of the project is well advanced: bidding documents for abouthalf of the turnkey contracts, to be financed by the loan (para. 3.10) have beenprepared and are currently being reviewed by the Bank. Discussions are underway betweenONPT and foreign consultants regarding the implementation of the program for technicalassistance to ONPT (for telecoms and postal/financial services) included in the project(para. 3.4); and terms of reference have been agreed regarding the assistance oninstitutional strengthening (para. 1.22). Finally, key documents related to sectorreform (para. 1.19) have been discussed with the Bank and signed by the Moroccanauthorities.

Environmental and Health Asoects

3.17 The proposed project is expected to have significant environmental benefits,as more efficient use of telecommunications will substitute for personal transportationand correspondingly reduce environmental pollution and promote energy conservation. Inaddition, improved telecommunication services will facilitate, extension of healthservices and emergency care, especially in rural areas.

3.18 The project is expected to have only minor adverse environmental or healtheffects and has been rated "B". A review carried out during project preappraieal showedthat:

(a) underground installation of telephone cables in urban areasmostly uses corridors previously used by electricity and waterutilities, therefore avoiding the need to excavate new ground;

(b) aerial installation of telephone lines in urban areas isminimized and in any case subject to specific rules edicted bylocal municipalities concerning the preservation of culturalsites:

(c) long-distance transmission cables are laid along roads andrailways to avoid potential disputes on right of way and thedisruption of ecologically sensitive areas;

(d) modernization or expansion of micro-wave transmission capacitywill make use of existing sites and towers, whenever possible;

(e) expansion of switching capacity will take place either inexisting buildings or in new buildings to be constructed onsites currently owned by ONPT; and

(f) from en institutional standpoint, ONPT's procedures are gearedto ensure that all environment-related regulations (frommunicipalities, concerned ministries etc.) are strictlyrespected, and that its construction plans are duly approvedby the proper authority.

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Performance Monitorina

3.19 ONPT's overall performance during project implementation will be monitoredthrough selected performance indicators related to technical, operational and financialperformance, subscriber connections, service quality, and staffing (Annex 2).Continuous monitoring of project physical implementation as well as ONPT's operationaland financial performance and efficiency will assist ONPT in improving its managementcapacity and allow timely corrective actions to be taken, when necessary. ONPT willprepare annually for Bank review a comparative analysis of its actual performanceagainst the agreed target indicators. During negotiations. ONPT agreed with the Bankto: (i) take all necessary action to achieve the agreed targets; (ii) provide the Bankby June 30 of each year a report on the achievement of these targets for the previousyear and by October 30 of each year proposed revisions, if any, to the agreed targetsfor the next year; and (iii) introduce any revisions in the targets agreed with theBank.

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IV - FINANCIAL ASPECTS

Past Performance

4.1 The financial performance of ONPT's Telecommunications branch over the lastfour years is summarized below and detailed in Annex 11; it is based on a pro-formaseparation of ONPT's accounts between telecommunications and postal/financial servicesbased on an estimated allocation of the cost of common services between the twoactivities.

Table 4.1: ONPT TELECOMMUNICATIONS - PAST FINANCIAL PERFORMANCE

Years ending Dec. 31 1988 1989 1990 1991

Operating revenues (DH M) 2,139 2,382 2,785 3,209operating ratio (%) L 57 57 62 61Rate of return onbook value (%) 63 47 28 24

Self financing (%) 93 48 48 33Current ratio 3.5 2.8 2.3 1.9Debt/debt & equity (%) 15 24 31 39Debt serv. cov. (times) 8.8 6.5 4.5 3.0

IL operating expenses (inct. depreciation and taxes) as a X of operating revenues.

4.2 The above table shows a healthy growth of gross revenues, at an average rateof 14.5% p.a., in spite of the fact that the average revenue per line decreased by 8%p.a. in real terms from 1988 to 1991 (since 1985, the base call charge (taxe de base)has been raised three times, by 20% to DH 0.60 in 1987, by 17% to DH 0.70 in 1988 andmoet recently by 7% to DH 0.75 in July 1990). Annual net income, on the other hand,remained at about the same level (around DH 420 million) during the period. Thisstagnation, combined with rapidly increasing investments and an expanding asset base,as well as a greater recourse to borrowings, have led to a decrease in the rate ofreturn on (unrevalued) assets from 63% in 1988 to 24% in 1991 and in the Self-financingratio from 93% in 1988 to 48% in 1990 and 33% in 1991. Although ONPT's overall financesare not a matter for major concern, the latter figure is below the 45% thresholdprovided under Loan 2798-MOR and is explained primarily by the significant increase inONPT's fiscal burden which the Government imposed in 1991 (see below).

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Fiscal Levies

4.3 The Government taxes ONPT as it does other revenue-earning publicenterprises, in several ways: (i) property and other miscellaneous taxes (taxe urbatne,taxe d'6d11It6, patente); (ii) corporate income tax (at a rate of 40%), (iii) customsduties on imported equipment (currently averaging 43%); and (iv) value added tax (ata 12% rate up to 1991 and 19% since 1992). Up to 1991, and contrary to other publicenterprises, ONPT was not allowed to deduct VAT paid on inputs from VAT collected onrevenues from consumers on behalf of the Government. In addition, ONPT has been subjectto an ad hoc levy (taxe de monopole), the amount of which has recently been regularizedand fixed in the Contrat de Programme at 10% of telecommunications revenues before VAT(para. 2.10). The following table shows the breakdown of the various taxes levied onONPT from 1988 to 1991.

Table 4.2: ONPT - BREAKDOWN OF TAXES(DH million)

1988 1989 1990 1991

Income tax 200 224 157 185Property taxes 72 76 40 15Customs duties 184 371 507 491VAT on revenues 190 247 298 344VAT on inputs (non ded.) 202 235 317 488Nonopoly tax 220 220 220 420

TOTAL 1,068 1,373 1,539 1,943

The abcusi table shows the significant size of ONPT's overall fiscal burden which in1991, rupretanted 61% of ONPT's gross telecommunications receipt. (VAT included). Thisamount dsos not include the assumption of postal/financial losses (estimated at DH 175million in 1991) by the telecommunications branch. In addition, telecommunicationsconsumers have been subject to a supplemental 12% VAT on their bills. As a result,ONPT's savings from improved productivity have been essentially siphoned off by theGovernment rather than passed on to consumers.

4.4 Although no detailed financial analysis of ONPT's postal/financial branc. *as beencarried out, in the absence of reliable cost accounting data, pro-forma statementsindicate that this activity has consistently being making losses, ranging from DH 124million in 1989 to DH 175 million in 1991. Empirical evidence points to the lack ofappropriate remuneration on deposits with the Treasury and a costly program of openingof new post offices in rural areas as the main reasons for these losses (para. 1.12).Until now, such losses have been essentially covered by profits from ONPT'selecommunications branch.

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QNPT's Financial Position

4.5 ONPT's summarized balance sheets for the telecommunications branch at the

end of 1988 and 1991, respectively, are shown below for comparison purposes:

Table 43: ONPT - TELECOMMUNICATIONS - BALANCE SHEETS(DH mllion)

Assets ~ 2198 1221Net. Fix. Assets 2623 7622

0th. Long-Term Assets 33 78

Inventory 158 201

0th. Short-Term Assets 2170 2431

of which -Priv. Recv. (630) (1151)-Govt. Recv. (1231) (1027)

Cash and Banks 1191 1495

Total Assets 6175 11827

Liabilities

Net Worth 3965 5421

Long-Term Debt 801 3833

Short-Term Liabilities 967 2121

Net Income .442 452

Total Liabllties 6175 11827

The above figures show the impressive increase in ONPT's asset base which took

place as a result of the accelerated expansion of the telecommunications

network. Concomitant with this increase was the rise in the company's

indebtedness, which resulted from an increasing recourse to external (mostly

concessional) borrowings to finance imported equipment. Nonetheless, ONPT's

telecommunications balance sheet structure remains acceptable, with a

debt/equity and a current ratio of 39:61 and 1.9, respectively, at the end of

1991. Although fixed assets, customer receivables and inventories will need

to be revalued and/or partially written off following completion of the

revamping of ONPT's accounting system (para. 2.7), this is not expected to

have a significant negative impact on the company's balance sheet; the latter

remains basically sound, with one exception, however, which is the excessive

level of accounts receivable (see para. below).

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Accounts Receivable

4.6 By the end of 1991, private customers' receivables (53% of totalreceivables) amounted to about five month. of consumption, a commendableimprovement over the 1988 situation, but still in excess of the three monthsstipulated under loan 2798-MOR. Most importantly, at the same date,receivables from Government agencies amounted to DH 1,027 million,representing 24 months of consumption. Of this total amount, about 75% arearrears accrued in the years 1986 through 1990. Payment of arrears up to theend of 1991, have recently been made as a condition of Board presentation ofthis loan, and payment of the 1992 arrears is a condition of loaneffectiveness. Furthermore, the Contrat de Programme provides an incentivefor timely payment of future Government receivables, through a procedure bywhich delinquent customers would have their service cut-off and only beallowed to receive calls.

Future Position

4.7 ONPT's forecast financial statements are shown in Annex 12.Corresponding notes and assumptions are included in Annex 13. Table 4.4 belowshows a summary of ONPT's sources and applications of funds for the 1992-96period. It assumes that the base calling charge (taxe di base) will beincreased by 6.7% in 1993, to DH n.80 and will remain constant over the 3-yearperiod, (i.e. a reduction of about 17% in real terms), in order to allow ONPTto self-finance at least 40% of its sizeable investment program in these twoyears. This is based on the Government maintaining the monopoly tax at 10% oftelecommunications annual sales before VAT throughout the projected period (asstipulated in the Contrat de Programme, para. 2.10). It also takes intoaccount the fact that the Government has allowed ONPT to deduct, from 1992onwards, the VAT amounts paid to suppliers from the VAT amounts due to theGovernment, thereby substantially alleviating the company's overall fiscalburden (para. 4.3).

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Table 4.4: ONPT-TELECOMMUNICATIONS: SUMMARY FINANCING PLAN (1992-1996)

DH (niln) USS (mln) PercentSOURCES

Net internal cash generation 8,506 966.6 43Borrowings: 11,505 1,307.4 57

Of which:

- Proposed new IBRD loan (849) (96.5) (4)

- Other External borrowings 1/. proposed project (4,701) (534.2) (23). future works (4,402) (500.3) (22)

- Local borrowings (1,552) (176.4) (8)

Other Sources 10 1.1TOTAL SOURCES 20,021 2,275.1 100

APPLICATIONS

Construction requirements: IL 18,039 2,049.9 90

Of which:

- Proposed project (9,004) (1,023.2) (45)

- Future works (9,035) (1,026.7) (45)Other uses 480 54.5 2

Change in working capital 2L 1.502 170.7 8

TOTAL APPIUCATIONS 20,021 2,275.1 100

IL including eisting loans in the proposed project2/ including cash surplus37 excluding VAT

4.8 As shown above, ONPT's Telecommunications branch is expected toself-finance 47% of its investment requirements, in spite of continuedsubstantial fiscal transfers to the Government, thereby keeping borrowings tosustainable levels. As already mentioned (para. 3.8), the latter wouldconsist for a major part of tied external concessionary loans and exportcredits, together with credits from the Bank and multilateral co-financiers.Local borrowings would be kept wit1iin the DH 300-350 million p.e. rangeconsidered appropriate by the Treasury authorities. Based on the aboveassumptions (particularly those regarding tariffs and fiscal transfers),ONPT's overall financial performance is expected to be satisfactory during theproject implementation period. Key financial indicators are summarized inTable 4.5 below:

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Table 4.5: ONPT. TELECOMMUNICATIONS. FORECAST FINANCIAL PERFORMANCE

Years Ending Dec. 31 1993 1994

Base call charge (DH) 0.75 0.80 0.80 0.80Operating revenues (DH) 4739 6072 7298 8400operating ratio (%) 65 63 64 67Rate of return on assets(%)IL 25 27 26 23Self Financing (%) 37 48 47 44Current ratio 2.0 1.5 1.7 1.6Debt/debt & equity (%) 51 54 56 58Debt serv. cov. (times) 2.3 2.6 2.4 2.4Operat. Cost./DEL (DH) 2/ 1,548 1,416 1,327 1,270

UL partialty revalued assetsEL constant 1991 DH

4.9 Although the after tax rate of return would decline over theprojected period, mostly due to the partial revaluation of assets assumed inthe forecasts, it would still remain quite satisfactory, at 23% in 1995. Infact the direct operating cost per DEL would decline by 6% p.a. on average inreal terms, primarily as a result of reduced wages in ralation to network sizeand of productivity improvements resulting from new technology. Debt servicecoverage would remain well above 2.0 and the debt-equity ratio would notexceed a reasonable 5:62 by 1995. As under the first IBRD loan, and as ieappropriate for a company facing a bulky and increasing investment program,the key financial indicator to monitor would be the net internal contributionto investment (self-financing); ONPT has agreed to maintain, starting in 1993,a minimum internal cash generation ratio of 40% in any one year; theprospects for compliance with this ratio in any given year (and the followingone) would be reviewed by June 30 of that year and corresponding measures toensure compliance taken promptly if necessary. Close monitoring of ONPT'sannual overall performance (para. 3.18) would also ensure that tariffincreases will not be proposed to compensate for inefficiency or waste or tooffset undue increases in ONPT's already heavy (direct of indirect) fiscalburden. Finally, an investment limitation covenant (Bank to be consulted incase of an increase of 15% or more of the investment program in any one year)has been included under the proposed loan.

4.10 An important aspect of the future separation of theTelecommunications and Postal/financial branches into distinct entities 4g theneed to establish full transparency in the financial relationship betweenpostal/financial services and the Government in order to promote the formers'financial autonomy and eventual commercialization. The Contrat de Programme,signed between ONPT and the Government, clearly states the principle of thetelecoms branch's financial autonomy and the resulting elimination, startingin 1993, of its assumption of postal/financial losses.

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V - PROJECT JUSTIFICATION

General Benefits

5.1 Tne development of the telecommunications infrastructure willbenefit all sectors of Morocco's economy and will be particularly beneficialto business users and rural communities. Greater access to telecommunicationswill reduce costs of doing business in a number of ways:

(i) by foregoing unnecessary transportation;(ii) by reducing the cost of locating production outside of the main

industrial centers;(iii) by improving acceas to international markets and suppliers'

information;(iv) by improving the working of market mechanisms;(v) by providing productivity-enhancing value-added services (eg.

switched data transmission, cellular telephones, "intelligent"services etc.); and

(vi) by fostering the development of information-based services andactivities (eg. software development etc.).

5.2 Rural communities will also benefit directly from greater accessto telecommunications; isolated villages will gain better access toagricultural and health extensions services; marketing of crops will befacilitated. More generally, the decentralization of education and governmentservices will be enhanced, allowing for the reinforcement of the country'scultural and political integration.

Least-Cost Solution

5.3 The project represents the least-cost solution for providing theservice levels planned in using digital technology already introduced in thetelecommunications network. Digital equipment is produced at relatively lowcost, with much higher performance/price ratios than the previous analogtechnology. Moreover, digital technology permits the provision of cost-effective data transmission and other value-added services (existing and yetto-be-developed), which are today essential for managing modern businessinformation networks. Access to international business information networksand data integration is also dependant on digital technology. Furthermore,digitalization allows easy integration of the national network and theextension of telephone to rural areas. The timing and dimensioning of variouselements in the system as well as the design and compaxisons of alternativenetwork configurations are the result of studies made by ONPT. Thesetechnico-economic studies are based on worldwide recognized engineeringpractices and have been found satisfactory.

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Financial and Economic Rates of Return

5.4 The incremental financial rate of return on the 1992-1994investment program is defined as the discount rate that equalizes the streamof expected revenues attributable to the program ( at projected levels oftariffs) with the stream of capital and operating costs, all expressed inconstant 1992 dirhams and net of taxes and duties. It was estimated at 29%.The incremental economic rate of return on the program is defined as the samerate but using current tariffs (maintained constant in real terms) as a proxyfor the consumers, willingness to pay. That rate was estimated at 36%. Thesehigh rates of return may, to some extent, be an indication that current andprojected tariffs are too high; in any case, they do understate the fullbenefits of the program as they do not take into account all external benefitsassociated with transport substitution, increased enterprife and Governmentefficiency, economic decentralization, etc. Sensitivity analyses performedshow that the economic rate of return would remain acceptable even underunfavorable scenarios (ee Annex 14 for details).

Risks

5.5 The main risk affecting the project is that of a slippage in theformulation and implementation of the proposed sector restructuring interalia, due to opposition from unions representing ONPT's staff. In order tomitigate that risk, two docurents have been discussed during negotiations andsigned: (i) a formal Statement of Sectoral Policy (Annex 3) and related adated Plan of Implementation of the Reform; and (ii) a Contrat de Programmebetween the Government and ONPT (para. 1.20).

5.6 Another risk is that of delays in project execution if ONPT'simplementation capacity were to be overstretched by its ambitious investmentprogram. Although real, this risk would be minimized through the use ofturnkey contracts whenever possible and appropriate (para. 3.10) and thecarrying out under the project of related training and technical assistance(particularly in the area of project management). A final risk is that someof the funding shown in the financing plan would not materialize on time. Asalready mentioned (para. 3.8), financing of switching and most transmisaionequipment is most unlikely to be lacking due to intense competition among mainsuppliers; if, however, some delays occurred on that account, timelyinvrestments in local networks (which account for a major portion of Bankfunding) would remain justified since the number of switching lines currentlyexceeds that of connected lines by a substantial margin. Failure to arrangetimely co-financing of the project would give rise to a loan suspension remedyunder ONPT's loan agreement (para 3.8).

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VI - AGREEMENTS REACHED MND RECOMMENDATIONS

6.1 It has been agreed at negotiations that:

(i) failure by either the Government or ONPT to comply with theirrespective commitments under the Statement of Sectoral Policy,(including its Plan of Action for Reform Implementation) andContrate de Programme would be an event of default under the loan(para. 1.21).

(ii) ONPT will have its accounts (as well as the Special Account andSOEs), and the accounts for all project components, auditedannually by external auditors acceptable to the Bank, and submitaudited statements to the Bank within six months of the end ofeach fiscal year (para. 2.8);

(iii) ONPT will take all necessary actions to achieve agreed:performance indicators; furnish to the Bank, before June 30 ofeach year a report on achievement of these targets and propose tothe Bank by October 31 any proposed revisions to the targets andintroduce agreed revisions for the next year (para. 3.19);

(iv) ONPT will achieve a net internal cash generation ratio of at least40% in 1993 and any subsequent year (para. 4.9); and

(vii) ONPT will consult with the Bank before introducing major changesin its investment program, involving more than 15% of theaggregate investments during any one year (para. 4.9).

6.2 As a condition of loan effectiveness:

The Government should have paid all its 1992 arrears fortelecommunications services to ONPT (para. 4.6).

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ANEX 1

MOROCCO

TELECO3OUXCATIONS SECTOR RESTRUCTURING PROJ3ECT

OFFICE NATIONAL DES POSTES ET TELECOMXUNIC2?IONS (ONPT)

Growth in DELS and Expressed Demand

I. PAST GROWTH OF TELEPHONE DELS IN SERVICE AND EXPRESSED DEMAND(1987-1994)

Year Expressed Demand Connected Satisfied Demand t&)(end) lines

1987 452,000 266,000 58.81988 491,000 286,000 58.21989 538,000 334,000 62.11990 595,000 402,000 67.61991 671,000 497,000 74.11992 775,000 660,000 85.01993 932,000 835,000 90.01994 1,062.000 1,020,000 96.0

II. FORECAST DELS IN SERVICE AND ESTIMATLD DEMAND FOR TELEPHONESERVICE

[GRAPH]

DEL's (000's) Ilephons Denasty per 100 Pop. -12001100 4.0

8000 ,

860 fe8g7 ne8n J99I9t2 3

700 600 500' 400 -I sI .

300

200 1.,.

86 87 88 89 90 91 92 93 94

11 Foroat demand Is baed on ONPT'S estimated growthphoetiven of about 3.5 Asia telephones (DZL's) per 100populatlou by and MC9

MOROCCO

TELECOMMUNICATIONS SECTOR RESTRUCTURING PROJECTOFFICE NATIONAL DES POSTES ET TELECHMMUNICATIONS (ONPT)

Performance Indicators (Telecommunications)

----------------------- Actual ------------------------ ............................ Forecast ---------------------Flc Year Ending December 31 1986 1987 1S88 1989 1990 1991 1992 1993 1994 1995 1996 1997L TECHNICAL PERFORMANCE

(a) Tephonepexhe gecapacty (000 lInes) 288 293 334 416 537 675 836 1008 1081 1310 1520 1700

(b) MaIn tslepbone ines conneded(000 DELs, auto and manual) 251 286 286 334 402 497 660 835 1020 1200 1380 1,560

(c) Telex excange capacy (ines) - 8,100 8,100 10,500 11.870 11.870 11.870 11.870 11.870 11.870 11,870 11,870

(d) Telex subscriter connected - 7,100 7.300 7,600 8.700 8.660 8.900 8.900 8,90O 8.900 8,900 8.900Pines)

(e) Mainteance targets( Fauts repoted per annum per - 115 104 106 95 101 95 88 83 70 60 50100 main :ephone ePes

4 FPent d faulls: - 61 60.9 602 592 59 68 74 78 82 84 88cered wIIn 48 hours - 91 90.8 91.1 90.9 92 97 96 S9 100 100 100- cleed wnnI 7 days

(I Merage cail conplehonWpercnage (durng buwy houms) - - - 40 41.3 429 53 56 62 65 68 70 0I) Localis - - - 21 25.4 27.9 40 48 50 53 55 57U) Long didnce cas (STD)111) InteAoncals - - - 20 22 23 32 40 43 45 46 47- OutgoIng

IL FINANCIAL PERFORMANCE

(a) Net itealicasshgenerl - - 93 48 48 33 37 48 47 44 47 45as % of constuction(b) DZA servc.cowratlrfao (_mes) - - 6.8 6.5 4.5 3.1 2.3 2.6 24 14 2.3 21(c) Rle of ret (%) - - 63 47 28 24 25 27 26 23 20 18(d) Opeai raio (%) - - 57 57 62 61 65 63 64 67 70 73(e) et/det & equfy() - - 16 24 31 39 51 54 56 58 60 615)Cuwret ratio - - 35 2.8 Z3 1.9 2.0 1.5 1.7 1.6 1.7 1.719)Prtvaco wnrev rwa (%of 33 34 30 34 38 42 33 25 26 25 25 25hlg to prte sector)(l) Gormn _ut acotatreoeevae 382 332 28t 236 212 2M0 42 33 26 25 25 25of ng to GorNMe

aL b- 26 24.5 23 20.7 2.8 19.5 16.8 14.9 1.6 1Z7 12.0Saff per 1.000 DEhI 94

0rw.d

x

- 37 -

ANNEX 3Part 1

page 1 of 15

MOROCCO


Statement of Policy for the Teleconnunication Setor

Introduction

In Morocco, the telecommunications sector is subject to considerablepressure from both business enter prises and households. Demand for telephoneservice has been boosted by demographic growth, and particularly by theincreasing concentration of the population into urban areas, so that demand hassteadily grown since the beginning of the 1980s.

Over the last 10 years, the number of telephone subscribers has grownby an average of 9% per year. However, the waiting list has expanded at as.milar rate, in spite of the considerable increases in connections in 1989(17%), 1990 (21%), and 1991 (22%). As of end-December 1991, the unmet declareddemand for telephone service stood at 174,000, compared with 497,000installations.

The pressure of demand varies from one region to another, but ismainly focused on the automated networks, since these account for 97% ofsubscribers. However, as of end-1990, such systems made up only about 16% of thetotal.

Although only 15,000 subscribers are connected to the more than 1,000manual and semiautomatic networks, these provide service for about 300 publictelephone booths located in isolated rural areas. The equipment in thesenetworks is obsolete, their quality standard is inadequate, and they are oftenconnected to the national network by long overhead links that are expensive, anddifficult to maintain.

In addition, this demand arises in a context characterized by rapidtechnological development, offering efficient solutions to the problems of therural networks and new and very useful services for both enterprises andindividuals.

These advantages - together with the productivity gains to be derivedfrom the new technology - argue in favor of an extensive modernization of thenetworks and an increase in the range of services provided. The volume ofinvestment required, therefore, will be all the larger.

In this particular context, telecommunications must be provided witha more efficient structure, a regulatory framework that will ensure that thevarious elements in both public and private networks will operate in a balancedand dynamic manner, and a monitoring system to ensure that government policy is

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ANNEX 3Part i

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enforced.

Consequently, the telecommunications sector must be restructured insuch a way that efficiency will be increased through a clearer definition of therespective roles of the parties responsible on the one hand for the formulationand enforcement of regulations, and on the other for the operation of thesystems, once the policy on infrastructure development has been negotiated withthe relevant government authorities. This reassignment of roles will enablenetwork growth to be maintained at a sufficiently high rate to satisfy the demandfor all the various services.

After a transitional phase (consisting of internal restructuring),the main components of the reforms will be the establishment of two statutorybodies (6tablisrements publics; one to be responsible for posts and the other fortelecommunications), the opening-up to competition of value-added services, anda more rational distribution of functions and responsibilities among the variousparties concerned.

To this end, the following objectives are to be achieved by the year2000:

T. obiectives

1. Imorovements in the Oualitv of Communications. throuah Modernizationof the Network and of Management and Maintenance Methods

1.1 The quality of communications will be co. aiderably improved throughprograms for modernizing switching centers, with digitization increasing from 70%in 1991 to 92% in 1994 and 100% in 2000, while transmission links will bedigitized from the level of 60% in 1991 to 85% in 1994 and 100% in 2000.

1.2 Management methods will be modernized through the installation ofcomputerized systems for managing physical, financial and human resources, andmore particularly through the more widespread use of the computerized anddecentralized management of subscriber records.

1.3 A policy of decentralized training and personnel development will beimplemented, and a maintenance system based on the various switching centers willbe established.

2. DeveloDment of Telephone Services to a Level of 7% by the Year 2000

In light of projections calculating that the population of Moroccowill be about 30 million by the end of the century, the objective will be toprovide service for about 2 million subscribers by the year 2000.

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ARNEX 3Part 1

page 3 of 15

As a result, the level of unmet demand will be reduced to 80,000 bythe year 2000, and the average time required for connections will be reduced from18 months as of end-1991 to under three months by the end of the decade, theobjective being to reduce the waiting time in large urban centers to less thanone month.

In addition to this program of connections, the number of publictelephones will be increased from 3,600 as of end-1991 to 20,000 by the year2000, an annual rate of increase of over 20%.

3. Telephone Services in Rural Areas

The target for the year 2000 is to establish 331 new networks andautomate 400 manually-operated and semiautomatic networks, thus increasing theautomation rates to 99.5% for subscribers and 73% for networks.

Almost all public booths in rural areas will be made customer-operated (250 out of the 287 in existence in 1991), and a further 250 automaticbooths will be installed in such areas, bringing the total to 500.

4. Develooment of Value-Added Services and Cellular Networ'%s

The public data transmission network will be extended to cover allmajor urban areas, and assistance will be provided to promote the activities ofservice providers. The public video transmission network will be extended.

The mobile radiotelephone system will be increased from 1,800 to20,000 subscribers and will provide coverage throughout the country. A publicvoice mail network will be established.

Also established will be closed private networks - with provisionfor access to the public network - for data transmission, video transmission andline broadcasting.

II. Sector Strateav

In response to the increasing demand for services, ONPT (the NationalOffice of Posts and Telecommunications) has drawn up a development strategy aspart of its Infrastructure Plan. This is based on der-and projections andtechnological and technical decisions on infrastructure design, systemarchitecture and service quality.

Consequently, ONPT's activities from 1992 to 2000 will be governedby a policy formulated in response to the following needs:

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ANNEX 3Part 1

page 4 of 15

5. Mitiaating the Lack of Telecommunications Services

To achieve this objective, ONPT intends to expand the followingpolicies:

Strengthening the capacity of local, long-distance and internationalinstallations, particularly through the use of fiber-optic cablesand satellite links. In particular, this will allow dedicated linesto be made available to private operators and users.

Decentralization of planning, implementation and training, byproviding the DRTs (Regional Telecommunications Directorates) withall necessary technical, physical and human resources.

Technical standardization of network design, as a means of reducinginstallation costs and time.

Modification of the regulations governing equipment installed inbuildings and lots, the main result being the generalized adoptionof prewiring. Updating of regulations governing installationsplaced underground and on public routes, in order to improvecoordination on the part of the utility services operating them.

Systematic subcontracting to private enterprises of constructionwork on local subscriber networks.

6. Reestablishing a Balance in infrastructure Distribution

There are wide disparities in existing infrastructure, as regardsboth its geographical distribution (which favors the large urban centers), andthe priorities that have been selected because of the lack of resources, causingthe large economic and industrial centere (and especially enterprises andgovernment departments) to be favored over household subscribers and the outlyingareas of cities.

This prevents optimum use of the national network, because it meansthat calls tend to be concentrated into working hours and exchanges have to beoverdesigned to deal almost exclusively with large-traffic subscribers, thusincreasing capital costs.

The problem could be solved if special efforts were devoted to

infrastructure problems, thus making it possible to satisfy the entire demandfrom enterprises (particularly in the industrial areas), and also to respond tothe more than 1 million requests from households.

As a priority, the outskirts of cities would be provided with service

by reorganizing the architecture of urban networks, reducing the distances

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ANNEX 3Part 1

page 5 of 15

necessary for making connections, streamlining distribution modes, and increasingthe number of public telephone booths.

7. Reducing the Isolation of Rural Areas

* Contit.uing the automation of systems in rural areas:

Investment has been mainly concentrated on locations situated alongthe country's main highways.

Consequently, there is still a need to increase the number ofautomatic systems in rural areas, because over 84% of telephone networks aremanual, even though almost all rural communes have cable or radio links.

The peripheral networks of exchanges that are already connected tothe national automatic system will be equipped with remote switching systems,concentrators or radio-based time-division multiple access systems (TDMA). Inparticular, the latter system will be used particularly for automating publictelephone booths designed also for receiving calls.

Improving the performance of the manual network, by the following means:

- replacement of semiautomatic rotary equipment consisting of 377automatic switching centers in rural areas (average capacity = 100lines);

increase in the capacity of local and long-distance circuits througha reallocation of the carriers registered when cable or radio linkswere established on the routes serving the automatic exchanges;

rehabilita-ion of overhead links, particularly by converting 500 kmof these links to underground installations.

8. Increasina the Reliability of Telecommunications Networks

Although the international network is comparatively reliable becauseof the diversity of transmission methods employed (i.e. satellites, underseacables, radio links and underground cables), the domestic network is oftenvulnerable because of a lack of alternative routings.

The following measures will be adopted to solve these problems:

* Diversification of types of link and alternate routings:

Stricter linkages in the network will make it possible tointerconnect the major urban centers by using various routes, thus avoiding therisk that they will be isolated as a result of breakdowns on sections of the

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infrastructure.

* Duplication of the major transmission connections:

The Casablanca/Marrakech/Agadir, Rabat/Tanger and Rabat/Oujdaconnections will be doubled by means of fiber-optic installationo.

* Decentralization of regional and national transit operation;, andextension of international transit operations:

New national transit exchanges will be established in Marrakech,Tetuan and Agadir, and the existing --as in Meknes and Oujda will be extended.The international transit exchange_ in Rabat and Casablanca will also beextended, and a new one eatablished in Tetouan.

9. Imorovino Business Relationshipos with Users

Efforts will be devoted to satisfying users by improving the qualityof service and of the information provided in response to queries.

Action at a commercia' level must precede and support the provisionof access to services and guide the process of identifying investment projectsand improvements in operations.

As new needs appear and increasingly efficient technologies aredeveloped, commercial action will serve to identify the most appropriateinitiatives for launching new products and promoting profitable services, thuscontributing to the formulation of those pricing policies that offer the greatestincentives.

The following measures will have to be adopted:

* Improvements in service quality through the replacement of the mostobsolete equipment, the modernization of maintenance tools,mechanization and computerization of network management operations.

* Introduction of a commercial operations service (to be responsiblefor relations with subscribers, dissemination of information, andthe investigation of users' complaints and the monitoring of theirorders), as a result of the extension throughout the country of thenetwork of commercial branches (increasing from five in 1991 to 100by 2000).

* Organization of commercial activities for identifying potentialcuotomers and carrying out market studies.

* Introduction of detailed billing for subscribers (to be brought into

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ANNEX 3Part 1

page 7 of 15

general use in 1998).

10. New Services

* The introduction of new services and the extension of existingfacilities will be encouraged by the appearance of new operatorsproviding services for professionals and particular groups ofsubscribers.

* This will be the case with information services and the operation ofprivate networks, either with or without access to the publicnetworks and providing for radio transmission, data transmission,video transmission and line broadcasting.

* Current regulations on network interconnections - particularly asthese apply to international systems - will be made more flexible,thus encouraging new initiatives and the establishment of serviceenterprises in telecommunications. This will inevitably have apositive impact on the development of computer applications and theintroduction of innovations benefiting both professional users andthe general public.

III. The Role of the Government

11. For the telecommunications sector to be restructured, a demarcationmust be drawn between those functions that should be fulfilled by the Governmentalone, and those relating to the provision of public services and the managementand operation of the various installations, which can be contracted out to oneor more enterprises.

Amorg its new responsibilities, the Government will be particularlyconcerned with enforcing the conditions under which services axe provided andwith acting as arbiter in any disputes that may arise from the variousoperations.

12. Consequently, the following zosponsibilities will be delegated by theGovernment to the sector's supervisory agency (in this case, the Ministry ofPosts and Telecommunications):

(a) Definition of sector policy and monitoring of the enterprises'implementation performance on the basis of the operating incomegenerated and the physical works executed.

(b) Issuance of regulations for the sector and monitoring of theirimplementation. These will apply both to the provision of servicesand the granting of permits, and to the standardization of

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ANNEX3Part 1

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equipment.

The supervisory agency will be responsible for regula'ing theconditions under which operators, private contractors and serviceproviders may exercise their activities, the conditions under whichcontracts can be granted, and the technical standards applicable tothe installation and operation of equipment. It will also beresponsible for publishing and disseminating the texts of theseregulations.

(c) Definition of pricing policy and the procedures for approvingtariffs for basic utilities.

As regards the modalities for setting telecommunications tariffs,the Government had decided in 1985 to make the Board of ONPTresponsible for this task, as part of a plan covering a specificmultiannual period.

These modalities will be defined in a performance contract betweenthe new operator and the Government.

In the case of services other than basic utilities, rates must benegotiated with the supervisory agency.

(d) Definition and monitoring of indicators of the service qualitylevels and financial performance expected from the enterprises.

The Government will be permitted to negotiate a performance contractwith each operator. This will define the duties and obligationsincumbent upon the operator, and the commitments and counterpartconditions agreed to by the Government.

(e) Consultation with other government agencies affected by any issuerelating to the operation of the networks and their interconnectionto the public network, protection from dangers to human life and tothe community, national security, and other government prioritieswith regard to telecommunications.

(f) Ensuring government representation in regional and internationaltelecommunications institutions dealing with general sector policyissues, and entering into the relevant international treaties,agreements, conventions and settlements.

(g) Managing the radio-frequency spectrum, as regards both localallocations and regional and international notifications ofassignment, in accordance with the guidelines and recommendations ofthe International Telecomn,unication Union, and protecting radioinstallations throughout the country.

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ANNEX 3Part 1

page 9 of 15

IV. Reoulation of the sector

13. Legislation will be issued defining the limits to the exclusive rolereserved to the Government, which will essentially consist of the establishmentand operation of networks.

(a) Networks

Networks established on public routes, radio networks accessible tothe public, and satellite transmission networks are the exclusive purview of theGovernment and only a public-sector agency can operate these networks.

The following are not considered to fall exclusively within thepurview of the Government:

networks established in private systems or linking two privatesystems by way of a public route, provided that they comply withcertain technical conditions approved by the supervisory agency andare not connected to the general network;

- closed private networks that have received the necessary approval.

(b) Services

The Government is to have exclusive responsibility only for basicservices; namely, the telephone, telex and telegraph services. Other servicesmay be provided by competing private (and possibly public) operators, underconditions determined by the Government.

In addition, legislation will identify both the agency to beresponsible for monitoring application of the regulations, and the conditions togovern such monitoring.

(c) Suiplv and Installation of Networks and Terminals

There is totally free competition in the manufacturing, distribution,marketing and installation of equipment supplied to the public networks.

The supply and installation of approved terminals for connection tothe public network and equipment for private networks is entirely open tocompetition.

14. Conditions for the granting of permits to operate links, privatenetworks, or value-added services operated by private enterprises:

* For operating contracts, the maximum period is 15 yea2-s.

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ANNEX 3Part 1

page 10 of 15

* The contractor is required to comply with specifications setting theconditions that are to govern the activicies; in particular, theneed for the service in question to be universally accessible, andacceptance of the supervision provided for in the relevantlegislation.

* Concessions are not transferable.

15. Conditions governing the operations of private enterprises:

* compliance with all commercial, fiscal and labor regulations;

* compliance with technical regulations and spe :ifications setting theconditions under which services using tele immunications networksmay be supplied and operated.

16. Conditions governing approval for the installation of subscriberservices, networks and equipment by qualified private entrepreneurs, and approvalof subscribers' equipment and ttrminals and issuance of standards governingconnections to the network:

Without wishing to prejudge the findings of the preliminaryfeasibility studies that will determine the particular forms of operation to beemployed, and keeping in mind the revision of the regulations governing theexercise of the profession, it can be assumed that private-sector activitiescould extend beyond manufacturing, marketing and maintenance to the followingareas:

Su22lies. installation and maintenance

- Installation of telephones (PABX and key telephone systems);

- telex apparatus;

- modems and data transmission terminals;

- main and secondary telephone stations;

- mobile radiotelephones;

- private links;

- fax apparatus and automatic answering machines;

- stations requiring prepayment; metering devices.

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ANNEX 3Part 1

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SupDlies of services

- All telecommunications services, through specialized sales outlets;

- electronic mail, through switching networks or dedicated lines;

- voice mail;

- use of the general network for accessing databases;

- private networks with access to the public network, in compliancewith certain conditions.

Subcontractina and miscellaneous items

- All civil works;

- the installation and connection of cables along public routes;

- installation of all items of equipment in the general network;

- preparation of directories;

- advice and studies.

V. Pricina

17. Pricing policy on basic services and value-added services:

So far, the methodology for setting tariffs has been based on trendsin prices as a whole and comparisons with tariffs set at regional andinternational level.

The advent of a management cost accounting system that will accuratelyindicate the real cost of each of ONPT's services will enable the Office to refineits pricing by providing it with a more precise breakdown o, capital costs andallowing it to take greater account of productivity increases.

Calculation of the real costs of services will make it possible toset the price levels for new services for particular groups of users moreaccurately. This will be the case with data transmission, video transmission,mobile radiotelephones, electronic mail, dedicated lines and other computer andtelecommunications applications.

Nevertheless, ONPT's mission to provide a public service means thatit must apply a single tariff to each of its basic services, regardless of the

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ANNEX 3Part 1

page 12 of 15

location in which t.ey are supplied (even though the Office is aware that the realcosts depend on each specific situation), and provide certain services that areimportant to the community at large - whether or not these are profitable - suchas telegraph and operator-controlled telephone services. The policy of adjustingthe charges for basic services will be continued.

VI. The Institutional Reform of the Sector

18. Separation of posts and telecommunications:

The posts and telecommunications functions will be separated and,after a transitional phase of internal restructuring, they will be organized intotwo independent systems. Each of these will be made responsible for themanagement of its own operations and for its financial performance, and will bebound by the performance contract signed with the Government.

19. Legal framework for the statutory body responsible fortelecommunications, guaranteeing it administrative and financial autonomy andproviding it with its own organizational se.ructure and internal financial,accounting and personnel regulations:

The composition of the Board of the new telecommunications enterpriseshould ensure that its responsibility for guiding and monitoring strategicactivities in the field of telecommunications will be carried out efficiently.

The Board will delegate all the powers necessary for managing the newenterprise in accordance with its autonomous nature, and a form of financialmonitoring based essentially on the retrospective assessment of performance willbe applied to the enterprise's management, so that its Directorate will beallowed all the necessary freedom to manage its resources in accordance with itsdevelopment plans and the policy endorsed by the Board. The Directorate will befully responsible for managing the budget, accounts and finances of theenterprise. It will draw up the human resource development policy that appearsmost appropriate for the sector and will assume full responsibility for theoutcome of its management, under the performance contract between the enterpriseand the Government.

20. Personnel regulations and the flexibl.t salary structure:

The special nature of telecommunications - a particularly sensitivesector that employs leading-edge technology and absorbs a considerable volume ofinvestment - and the opening-up to competition of many activities in this areajustify maintaining the new enterprise's competitive-ness with regard topersonnel hiring, career davelopment and compensation.

These special conditions make it necessary for a flexible salarypolicy to be applied, in light of the enterprise'e needs, the particular

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ANNEX 3Part 1

page 13 of 15

conditions existing in the employment market, and the profiles of the personnelrequired.

21. Management tools necessary for the enterprise's commercialoperations: financial, accounting and commercial organization within theenterprise planning structures

The commercial units within the enterprise will be strengthened bythe hiring and training of technical and commercial specialists and theallocation of a special budget for promoting the enterprise, disseminatinginformation, and identifying potential clients.

The main function of the commercial units will be to define acommercial policy to be applied to pricing and the promotion of the servicesprovided for professional subscribers.

Extending the commercial network and computerizing the informationsystem that serves it will make it possible to improve the enterprise's image andincrease the efficiency of those units responsible for planning, recovery ofreceivables, etc.

The new enterprise will be provided with a commercial, accounts andfinancial management information system, together with a form of organizationthat will facilitate the establishment of systems for monitoring management andperforming internal audits.

22. Relationships between the Government and the telecommunicationsenterprises, to be governed by performance contracts:

The performance contract defines the commitments of the Governmentand the public operator over a period of years, together with the technical,economic and financial objectives assigned to the operator, and the resourcesnecessary for achieving them.

The performance contract will stipulate that financial statementswill be subject to yearly external audits.

23. Fiscal policy, and transfers to the Government:

The various operators will pay an annual user fee, to be deductedfrom operating expenses, in addition to the corporate income tax required byDahlr (Law) No. 1-86-231 of 28 Rebia II, 1407 (December 31, 1986) and variousother taxes such as the license tax on the property of self-employedprofessionals, the tax on the rental values of commercial or housing premises,property taxes levied by communes, registration fees and customs duties.

Telecommunications services will be subject to value added tax, andthe same conditions regarding deductions will apply both to professional users

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ANNEX 3Part 1

page 14 of 15

and to public and private operators, in compliance with the Appropriation Law(Lol des finances) of 1992. In order to achieve the objectives and to carry outthe reforms refered to above, the Government will take the measures set forth inthe Annex to this Statement.

ANNEX

1. The Government shall, through its Ministry of Posts andTelecommunications (MPT), strengthen its institutional capabilities with respectto regulation of the telecommunications sector, and introduce a computerizedsystem for the management and control of the radio frequency spectrum. To thisend, the Government shall maintain with ONPT arrangements pursuant to which ONPTwill be responsible for financing the consultants' services and equipmentnecessary for the carrying out of the World Bank-financed Project for theRestructuring of the Telecommunications Sector, as well as for the employment ofsu^h cos.sultants and the aquisition of such equipment, and MPT:

(a) will be solely responsible, in accordance with the procedures requiredby the World Bank for:

(i) the preparation of terms of reference for such consultanto andbidding documents for such equipment;

(ii) evaluation of the consultants' proposals and the offerssubmitted by bidders for the equipment;

(iii) the negotiations of the terms and conditions of employment ofthe consultants;

(b) will also be solely responsible: (i) for the supervision of thecarrying out by such consultants of their obligations under their contract withONPT and (ii) for the carrying out of the recommendations of the consultants; and

(c) will make available to these consultants the necessary counterparts toenable them properly to carry out their work.

2. MPT has already prepared terms of reference for the consultants whowill assist in developing the plans to strengthen its institutional capabilitiesand will prepare terms of reference satisfactory to the World Bank, not laterthan March 31, 1993, for consultants who will assist in developing thecomputerized system for the management and control of the radio frequencyspectrum. MPT will also be responsible for the preparation of bidding documentsfor the new frequency control center.

3. MPT wJll take the measures necessary to enable ONPT to:

(a) employ consultants, in accordance with the World Bank's Guidelines for

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ANNEX 3Part 1

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the Employment of Consultants, not later than June 1, 1993, to assist indeveloping MPT's institutional capabilities, and not later than September 30,1993, to assist in developing the computerized system for the management andcontrol of the radio frequency spectrum; and

(b) e..sure the preparation by these consultants, not later than November30, 1993, of plans for the strengthening of the MPT's institutional capabilities,and not later than April 30, 1994, of the computerized system; and

(c) issue, not later than December 31, 1993, the invitation to bid on thenew radio frequency control center, with the objective of putting the center intooperation not later than December 31, 1995.

4. MPT will prepare, on the basis of the recommendations of theconsultants employed to assist in strengthening MPT's institutional capabilities,and furnish to the World Bank, not later than November 30, 1993, a plan ofaction, acceptable to the World Bank, for such strengthening; and thereafter,will carry out such plan, with due diligence and efficiency.

5. The Government will:

(a) prepare and furnish to the Bank, not later than January 31, 1994, aplan of actions (including a timetable for their implementation) designed toachieve the objectives set forth in the penultimate paragraph of this Statementof Sectoral Policy and in paragraphs 13, 14, 15, 16, 18 and 19 of this Statement;and

(b) exchange views with the World Bank on this plan for its implementation.

MOROCCOTELECOMMUNICATIONS SECTOR RESTRUCTURING PROJECT

SUMMARY OF PLAN OF ACTION FOR REFORM IMPLEMENTATION

_Measures already taken 2nd Semester 1992 1st Semester 1993 2rd Semester 1993 1994 Follouing yearsSEPARATION OF . iplemp entation of .filing of remaining launching of technical implementation of discussion andPOSTAL/FINANCIAL ONPT's new vacant management assistance program for T.A. program review of anSERVICES AND organization (de facto positions PostalU financial action planTELECONMISNICATIONS separation) services implementing the

Goverrment'sintentionsconcerningtelecommica-tions

agreement on the Legislationelimination of thesuAsidization ofPostes' deficit byTelecoms

definition oftechnical assistanceprogram forpostal/financialservices

SECTOR REGULATION Term of reference terms of reference for . coipletion of . implementation . commissioning nfor consultants' assistance to management consultant's of new spectrum of frequencyassistance to setting of frequency spectrum. assistance for management control centerup regulatory setting up system.framework regulatory frameworkand agreement or asatisfactory Plan ofAction.

. Launching ofsatisfactory assistanceprogram for setting upregulatory framework.

. satisfactory plan forImplementation ofrecommendatIons

Completion of tariff . implementation of . hiring of start ofstudy recommendations consultants for frequencyspectru mnagement control center

constructioncall for bids on (IBRD

frequency control financing).center

Id F rd 1I

0 1 i-Iet tz1

U)

-2-

easures already taken 2nd Semester 1992 1st Semester 1993 2nd Semester 1993 1994 Folloting years

LIBERALIZATION OF . initial drafting of . agreement on . calls forVALUE-ADDED bid and licensing timing, forms proposals onSERVICES documents for cellular and terms of cellular paging.

and paging liberalizationfor eachindividualservice/productwith assistancefrom aboveconsultants).

. finalization of . finalization . issuance ofsatisfactory bid of satisfactory licenses fordocunents for bid document for cellular andcellular and paging. VSAT awn PR paging.

networks.

i initial drafting . calls forof bid and licensing proposals ondocuments for VSAT VSAT and PFRand PYR networks. networks.

i fssuanice oflicenses forVSAT and PUR wnetworks.

.start-up~ ofcellular andpaging networks.I.start-up ofVSAT and PUR

*CORPORATIZATION *. hiring of external . completion of . external audit of Id IdOF ONPT auditors (for 1988 to audits. accoumts (for 1992

1991 accoumts) accounts

. plan for settlement . settlement of 1986 . settlement of 1992 Id Idof 1986-90 Government Government arrears for arrears (loanarrears (and start of 1991. effectiveness).l1cplementation)

. final draft of . issuance of . provision of adequate . fulfillments of Id IdStatement of Telecoms satisfactory Statement budgets for Government respectiveSectorat Policy of Tetecoms Sectoral for Government's commitments included

Policy (by Board telephone bills in the Performancepresentation). contract and anmual

_________ _________ _ __________review.

Ga zo N)t'X

-3-

Measures already taken 2nd Semester 1992 1st Semester 1993 2nd Semester 1993 1994 Following years. initial draft of signature of Launching of technical . inplementation of id Idprotocoles d'accord satisfactory Contrats assistance program for new managementfor Telecoms and de Programme for implementation of new systems.postaltfinancial Tetecoms and management systems. . effectiveservices. postal/financial transition toservices. Raising of system of athresholds for prior posterioriapproval of control

expenditures byI_Contr6leur Financier.

lb

h rt tzxe:

MOROCCOTELECOMMUNICATIONS SECTOR RESTRUCTURING PROJECT

OFFICE NATIONAL DES POSTES & TELECOMMUNICATIONS (ONPT)Organization Chart

GenrealManager

Sodal InternalActvitirs Audil

I Social . .|Internatonal|Facilities Relations

| LnGaJ#hlts k . q P~~~SatrnateOgy6 Subskiarlaes &

. Participations

Central Diectorate Central DirectorateTelecommuncatlons Postal/ilnancral Services Ln

| Plam [ *.... .. . .. .. .. ... .... * IscUn|....... ........ .... fIseto|

Equipment || Opeations || Mlading Fi<nance Procurement | Personel | nfrmats Postal |Fi Personnel|| Logistics |Depantment Department Department Department Depanment Department Depattmont Dopanment Depatment ||Department De Dtmet

Maintenance _ nera_ Ie* on_el P Procurement

Data Conroli &Fiaca

TrNsmtwsl NetWor utme iacsg&Ps

FTrsmslo R[elations 1 Tresur MaHe3n ctte Inloatc

- 56 -

ANNEX 5

MOROCCO

OFFICE NATIONAL DES POSTES ET TELECOMMUNICATIONS IONP2!.

TELECOMMUNICATIONS SECTOR RESTRUCTURIN2 PROJECT

Summary of Teleohone Rates

Dirbams

A. Base call charge (cc) 0.75Connection charge 300.00Monthly rental 20.00Monthly maintenance charge 2.50Transfer fee 100.00Recommendation fee 25.00

B. Domestic RaLes (automatic) 1 cc per period oft

Local 360 uec.Up to 35 km 120 sec.From 35 to 65 km 60 sec.From 65 to 100 km 27 sec.From 100 to 150 km 24 sec.From 150 to 200 km 18 sec.From 200 to 300 km 15 sec.From 300 to 500 kms 12 sec.Above 500 km 9 sec.

C. International Rates (automatic) lcc per period of:

U.M.A. 10.16 sec.Africa 2.10 sec.Canada, USA 1.50 sec.Middle East 2.60 sec.Western Europe 4.00 sec.Eastern Europe 2.60 sec.

D. Tune of Day Discounts (40%)

a) Domestic calls: Weekdays from 12:00 am to 7:00 am,from Sat. 1:00 pm to Mon. 7:00 am,and Holidays.

b) International calls: Weekdays from 8:30 pm to 6:30 am,from Sat. 1:00 pm to Mon. 6:30 am,and Holidays.

- 57 -

AN X LPage I of 2

MOROCCO

TELECOMMUNICATIONS SECTOR RXSTRUCTURING PROJECT

OFFICE NATIONAL DEN POSTES ET TMECONNUNICATIONS ONPTI

Technical Assistance

1. The technical assistance (TA) component of the proposed project is aimedat: a) strengthening the regulatory expertise of the Ministry of PTT; b)supporting the institutional development of the Telecommunications Directorate(TD); c) strengthening the TD's technical skills; and (d) strengthening thePostal/Financial Services Directorate.

2. The main elements would be foreign consulting services and training in thefollowing areas:

a) TA for Ministry of P&T (MPT) for strenghtening its regulatoryexpertise and preparing itself to fulfill its new regulatory role:

(i) development of the regulatory unit of the PTT ministry.(ii) definition of structure, functions and responsibilities.(iii) preparation of licenses to public and private operators.(iv) training of expert personnel.

The total volume of this technical assistance is estimated at 24 man-months.

b) Assistance to MPT for settino up of a comDuterized freauencvspectrum manaaement system.

(i) Acquisition of specialized software.

(ii) Consultants' assistance in customizing and implementing new system(18 manmonths).

c) Institutional imorovement of ONPT's Telecommunications Directorate.

This TA component will mainly support the implementation of recommendations madein consultant studies financed under the first telecommunications project. Fourmajor areas are covered by these studies:

(i) financial and accounting systems: implementation of the recommendedaccounting and financial methodology practices and procedures, whichwill require a large number of manmonths of the main consultant andmany more for limited jobs, mostly from local consultants, as thequality of the present accounting system is poor; implementation ofthe integrated computer-based financial and managerial accountingsystem and of the financial planning system (48 manmonths).

- 58 -

ANNEX 6Page 2 of 2

(ii) procurement and inventcry management: implementation of therecommended methodologies and procedures and the associatedcomputerized system (6 manmonthe).

(iii) tariffs: implementation of the recommendations for tariff policy inaccordance with the adopted natural telecommunications strategy andcommercialization objectives (6 manmonths).

(iv) human resource management: implementation of computer-basedpersonnel management and provisional staffing systems (6 manmonths).

An additional important component is the design and initiation of amodern commercial department. In this area the main issues to be adressed are:set up of a marketing network and strategy and improvement of the customersmanagement (48 manmonthe).

d) Strenohteninq of the Telecommunications Directorate's technicalskills:

i) Improvement of the maintenance structure and implementation of thenational maintenance program (PNAM) (12 manmonths).

(ii) Development of the strategic planning unit and technical assistanceto develop computerized planning systems (12 manmonths).

(iii) Completion of the Technical Master Plan (35 manmonths).

(iv) Improvement of the 7 regional training centers (102 manmonths).

e) Technical Assistance for the Postal/Financial Services Directorate

(i) reorganization of the commercial department (30 manmonths)

(ii) setting up of new personnel management systems (36 manmonths)

(iii) creation of independent data processing department (12 manmonths)

(iv) creation of independent strategy and planning department (10manmonths)

(v) set up of traffic measurement and cost accounting systems (16manmonths)

(vi) postal and financial services pricing study (4 manmonths)

(vii) improvement in mail routing syste,.s (6 manmonths)

- 59 -ANNEX 7

Page 1 of 3

MOROCCO

TELECOMMUNICATIONS SECTOR RESTRUCTURING PROJECTOFFICE NATIONAL DES POSTES ET TELECOMMUNICATIONS (ONPTI

Description of Physical Components of the Proiect

General:

The proposed project consists primarily of ONPT's 1992-1994 investment program. Theproposed project mainly aims at the development of the local telephone network across thecountry and at increasing the network penetration into the provinces and the lessdeveloped rural areas. Under the project, the expansion of the domestic and internationallong distance network will be consequently increased to cope with the additional trafficresulting from the telephone subscriber base.

The expansion under the proposed project will further increase the coverage withcilities using the digital technology to about 92% of the total installed switching

capacity and 85% of the trunk capacity.

The project will add about 406,000 new digitalized lines of exchange capacity,replace 81,000 old analog lines by new digitalized lines and connect 420,000 newsubscribers. Automatic rural telephone services would be extented to about 780 newvillages.

Local Telephone Network:

a) Switching:

Local Switching Capacitv Installed by Reaion (7)

Region 1992 1993 1994 Total

South Region 23,800 23,244 11,500 58,544

Tensift Region 8,548 25,716 5,500 39,764

Center Reqion 79,588 59,580 36,500 175,668

North West 28,590 50,304 22,500 101,394Region

North Center 20,300 16,700 12,000 49,000Region

Western Region 9,500 8,000 12,000 29,500

South Center 20,200 11,500 1,000 32,700Region

Total 190,526 195,044 101,000 486,570

- 60 -

ANNX 7Page 2 of 3

Tranoit Exchange Circuits Transit Exchange Circuits Transit Exchange Circuits

Casablanca 14,298 Tetouan 5,500 Marrakech 5,000

Rabat 12,600 Agadir 7,140 Total 58,178

Meknes 9,540 Oujda 4,100

b) Outside plant:

This project component includes expansion of local cable network representing about420,000 connected lines. It comprises civil work, construction of ducts and installationof cable systems, for the primary and secondary levels of local distribution networks andalso for inter-exchange optical fiber junction. The proposed network expansion isestimated to include about 1,965,000 kilometer of cable pai= (KmP), 8950 kilometers ofunderground duct cables (KmA), and 198 Kilometers of interexchange optical fiber cables.To facilitate timely project implementation, ONPT will make extensive use of turnkeycontracts, and supply and erect contracts. The uqe of subcontractors for civil works isnow generalized.

Region 1992 1993 1994

KM-A KM-P KM-A KM-P KM-A KM-P

CASABLANCA 700 200.000 720 210.000 730 220.000

RABAT 560 120.000 570 130.000 580 140.000

FES 390 80.000 400 90.000 400 100.000

MARRUKT* 420 60.000 430 66.000 430 70.000

SETTAT 330 50.000 340 60.000 350 70.000

OUJDA 220 50.000 230 55.000 240 60.000

AGADIR 300 40.000 300 44.000 310 50.000

Total 2.920 600.00 2.990 655.000 3.040 710.000

Subcontracted 2.482 150.00 2.542 229.50 2.584 355.000(%) - 85% 25% 85% 35% 85% S0%

Lona Distance Transmission

a) National

The transmission component under the project is mainly for thedigitalization and expansion of trunk links to handle and secure the new

- 61 - ARX 7Page 3 of 3

created traffic resulting from the new exchanges and the new connectedsubscribers. Single mode fiber cables and microwave radio links are plannedto carry 140 Mbit/a %-, the main new routes. This component comprises 20optical fiber trunks and 7 microwaves links. 4 microwaves radio links areplanned to carry 34 Mbit/" on regional interexchange trunks and 42 others tocarry 2 X 8 Mbit/s between the new primary center and switching nodes attachedto them. There will be also new 2 Mbit/s PCM systems installed on newmetallic pair cables to link remote switching units to main exchanges. 8 oldcoaxial trunk cables will be digitalized.

b) International

The two international gateways in Casablanca and Rabat will be expandedby 12,168 new circuits for Casablanca (CTI) and 10,104 for Rabat (CTI).

The earthetation connected on INTELSAT system will be expanded by 240circuits and the earth station connected on ARABSAT system by 120 circuits. Anew earth station installation for INMARSAT system is planned in 1994.

One international optical fiber submarine cable between Morocco,Portugal and France is planned for implementation in 1992, and another onebetween Morocco and Spain in 1993.

c) Data Transmission

The data transmission network in service in the five economic capitalswill be expanded to other main provincial cities.

Rural Network

This component consists of the installation of telecommunicationsautomatic service to 780 rural areas. It includes the construction of 494multi-access digital UHF radio system, 152 concentrators, 79 aerial cablessystems and 53 switching remote units. These systems will provide service torural areas through private lines or public call offices in distant andisolated locations.

Information Systems and ComDuterization

Acquisition and development of computer systems for implementation ofONPT's data processing master plan is based on recommendations of Consultantsstudies financed under the first Bank loan.

Prezuency Control Center

Procurement and installation of equipment for the purpose ofcomputerized radio-frequency management and control, including fixed andmobile monitoring stations.

- 62 -

MOROCCOA R 8TELECOMMUNICATIONS SECTOR RESTRUCTURING PROJECT

ONPT. Investment Program

(millions of const-it 1992 OH)

1992 1 1993 I 1994 I Total 1 1995 1 1996 1 1997 1 ..-- - -- - -- -I-- - -- - -- - --… - -- - -- - -- - -I-- -- - -- - -- - I-- - -I-- - -I-- - -ITQata I

ILoc. For. TotaL [Loc. For. TotaL 1Loc. For. Total ILoc. For. Totat [Total ITotatlITotat I II…-- - - - - - - - - I-- - -- - - -- - -I-- - -- - - -- - -I-- - -- - - -- - -I-- -- - -- - -- - I-- - -I-- - -I-- - -I …- - -I Switching I 395 515 910 I 384 422 806 1 503 424 9271I1282 1361 26431I1675 I 1516 I 1803 I 4994 I (of wh. VAT/customsl 330 330 I 338 338 1 332 3321I1000 0 1000 I I I I II Data Transmission I 30 35 65 I 1 1 12 23 I 13 13 26 I 54 60 114 1 I I (of wh. VAT/customsl 20 201 7 71 7 7! 34 0 34 1 I I L.D. Transmission I 386 473 859 I 352 412 764 1 500 571 10711I1238 1456 26941I940 I 856 I 563 I 2359 1I (of wh. VAT/customs! 309 3091 293 293 1 352 3521 954 0 954 1 I I I II Radiocoimmunicationls 1 14 12 261 52 66 118 1 53 57 1101 119 135 254 I I 1 I II (of wh. VAT/customs! 6 6! 33 33 1 30 301 69 0 69 1 I I 1 II Locat Networks 1 390 200 590 I 330 379 709 I 375 360 7351I1095 939 2034 I 975 I 1184 I 1196 I 3355 II (of wh. VAT/customsl 175 1751 258 258 1 268 268! 701 0 701 1 I I I II Rurat TeLecoms I 64 67 1311 109 170 279!I 113 166 279! 286 403 689! 430 1411! 423 11264 1I (of wh. VAT/customsl 35 351 63 63!1 64 64! 162 0 162!1 I I I I1 Data Processing 1 5 35 40! 40 40 80!1 30 30 60! 75 105 180!1 ! I I II Training I 0 9 9! 0 12 12!1 0 12 1.2! 0 33 33!1 1 I I 11 Stud. & TACincl. MPTI 0 32 32 I 0 56 56 ! 0 41 4iI! 0 129 129 I ! I I II Land & Buitdings I 114 0 114 I 160 0 160 1 138 0 1381I412 0 412 I I I I I1 VehicLes &office eql 56 0 56! 64 0 64!1 69 0 69! 189 0 189 1 I I I I

I Total. I 1454 1378 2832 1 1502 1569 3071 I 1794 1674 3468 I 4750 4621 9371 ! 4020 I 3967 I 3985 111972 I1 (of wh. VAT/customs! 875 875 1 992 992 1 1053 1053 ! 2920 2920 1 1247 I 1230 1 1235 1 3712 I

… ! … ……-- -- - - - - -- - - - - - - - …-- - - - -- - - -I - -- - - - - --…I - - - - - -- - - I - --I------…I------… I-- -- I

MOROCCO

TELECOMM4UNICATIONS SECTOR RESTRUCTURING PROJECT

ON?,T. Investment Program

(mitLions of current DH)

1992 I 1993 1 1994 ! TotaL 1 1995!1 1996!1 1997! 1 …-- - - -- - - - -I- - - - -- - - - -I-- - - -- - - -- -! - -- - - -- - - -I - - -I --- -- I-- -- !Total I

1Loc. For. Total hLoc. For. TotaL !Loc. For. Total ILoc. For. TotaL ITotaL ITotatl. Total I I… - - -- - -I-- - -- - - -- - -I-- - - - - -- --… - -- - - - - -- - - - -- - - - - -- I - --I--- --…-- --- I-- -… I

I Switchirg I 395 515 910 I 453 475 928 ! 635 496 11311I1483 1486 29691!2160 I 2072 ! 2612 I 6843 ! (of wh. VAT/customs! 330 0 330! 399 0 399!1 419 0 4191 1148 0 1148!1 I I I I Data Transmissi5on I 30 35 651 13 13 26!I 16 15 321 59 64 123!1 I I ! !1 (of wh.VAT/customsI 20 0 201 8 0 8! 9 0 9137 0 37!1 I 1 ! I1L.D. Trensmlsson I 386 473 859 I 415 463 879 ! 631 668 12991!1432 1604 30371I1212 ! 1170 I 816 ! 3197 I1(of wh. VAT/customs! 309 0 309! 346 0 346!1 444 0 444!1099 0 1099!1 ! I I I

I Radiocommiunicationls I 14 12 26 I 61 74 136 1 67 67 1341!142 153 295 I I I I II (of wh. VAT/customsl 6 0 61 39 0 39 138 0 38! 83 0 83!1 I I ! II Local. Networks I 390 200 590 I 389 426 816 ! 473 421 8941!1253 1047 23001I1257 I 1618 ! 1733 ! 4608 I1 (of wh. VAT/CUstoSlS 175 0 1751 304 0 304!1 338 0 338! 818 0 818 1 1 I ! I1 Rural. Tetecoms 1 64 67 131 I 129 191 320 I 1'3 194 3371!335 452 788 I 554 ! 562 I 613 I 1729 11 (of wh. VAT/customs! 35 0 35 I 74 0 74 ! e i 0 811I190 0 190 I ! I I Data Processing I 5 35 40! 47 45 92!1 38 35 73! 90 115 205!1 I I I I1 Training I 0 9 9! 0 13 13!1 0 14 14! 0 37 37!1 ! 1 ! Ii Stud. &TA(fnct. MPTI 0 32 32! 0 63 63!1 0 48 481 0 143 143!1 I I I I! Land & Buitdings I 114 0 114 I 189 0 189 I 174 0 1741I477 0 477 1 I I ! I1 VehicLesS&office eql 56 0 56! 76 0 76!1 87 0 87! 219 0 219 1 I I I I

-- - - - … -- - - -I-- - - - - - ---…- - - -- - - - --I.. .. .. . .. .. .I-- - - - -- - - - I.. . . . .. .I-- - -I …- - -I Total ! 1454 1378 2832 1 1772 1765 3537 I 2265 1958 4223 I 5491 5101 10592 ! 5183 ! 5421 ! 577 116377 I

!(of wh. VAT/customsl 875 875 I 1170 1170 ! 1329 0 1329 I 3375 0 3375 I 1669!1 1745 ! 1857!1 5270 !…-- - -- - - -I - -I -- - - - -- - - -I-- - - - -- - --… I - - - - -- - --…I - - - -- - - --I--- -- --- -- I-- - - .…. .

Iof wh. phys. cJnt. I 0 0 0!1 75 78 154!1 90 84 173!1 165 162 327!1 201!1 198!1 199!1 598!1price cont. I 0 0 0 1 195 117 312!1 381 200 581 ! 576 318 894! 1 62!1 1745 ! 1857 14564!1

….. . .. . . .. . .I-- - - - - - -…11 - - - - - - - - - . . .I.. . .I-- - -! …-- -

- 63 -

ANNEX 9

MOROCCO


OFFICE NATIONAL DES POSTES ET TELECOMMNIC-ATIONS (ONPT)

Prolect Imvlementation Schedule

Item 1992 1993 1994 1995

A. Switching equipment

1. New exchanges

2. Extension/replacement l - - -

B. Transmission eauiPment

1. Long distance system .3 ..> -l

2. RegionaL/rural systems . - -

C. Local networks

1. Equipment & installation - -

2. Civil works _ - - -

D. Miscellaneous equipment for:

* Construction -_ /instatlation/

Maintenance/trainng - -

E. Technical assistance

1. Consultants - - -

/training

F. MPT Comonent

. Consultants

. Control center _ -

Leged:Phase of Implementation: 0-- Tender issuance/contract negotiation for tied procurement;

--x-- Signing of contract;Start-up of delivery/installation/construction;Provisional acceptance, or completion.

- 64 -

lMOROCCO


OFFICE NATIONAL DES POSTES ET TELECOMMUNICATIONS (ONFf

Schedule of Bank Loan Disbursnents

(1U$ Million eauiv.)

IBRD CumulativeFY/Semester Disbursement Through

Ending in Semester Semester

FY93Dec. 31, 1992 0.0 0.0June 30, 1993 3.0 3.0

Dec. 31, 1993 16.0 19.0June 30, 1994 15.0 34.0

Dec. 31, 1994 12.0 46.0June 30, 1995 16.0 62.0

trn6Dec. 31, 1995 8.0 70.0June 30, 1996 12.0 82.0

FY97Dec. 31, 1996 4.0 86.0June 30, 1997 8.0 94.0

FY98Dec. 31, 1997 6.0 100.0

- 65 -

ANM I1

page 1 of 3

OFFICE NATIONAL DES POSTES ET TELECOMMUNICATIONS (ONPT)

Income Statements (Dirhams million)

Revtennes 12 2 2Q1221T,L | Psr I Tot Tel. |. Sr Toe.I Tel psPt Tot TeL|

Telecom. 2139 - 2139 2382 2382 2785 - 2785 3209 - 3209

Post - 212 212 - 228 228 - 2 -47 247 - 258 258

Fimancial services - 72 7n 79 79 - 98 98 - 112 112

Total Sales 2139 284 2423 2382 307 2689 2785 345 31W 3209 370 3579

OtherRevenues 10 3 13 4 1 5 6 2 8 8 3 11

Total Revenues 2149 287 2436 2386 308 2694 2791 347 3138 3217 373 3590

Charnes JI2 a Tot. Tel. PsLI To TeLl iS To. TeLl Tot.

Supplies 17 4 21 18 5 23 65 14 79 68 15 83

Personnel charges 338 280 618 394 297 691 502 361 863 540 375 915

Indirect taxes 482 37 519 543 41 584 558 42 600 779 58 837

Services 152 65 217 126 45 171 127 52 179 128 55 183

Financial charges 50 - 50 77 - 77 147 147 202 - 202

Depreciation 435 25 460 473 27 500 642 35 677 776 45 821

Provisions 14 - 14 25 - 25 61 - 61 80 - 80

Total Charges 1488 411 1899 1656 415 2071 2102 504 2606 2573 548 3121

Gross income 661 -124 537 730 -107 623 689 -157 532 644 -175 469

Profit/losses -33 -18 -51 -59 -29 -88 -140 - -140 -7 - -7

minus: Income tax 200 - 200 224 - 224 157 - 157 185 - 185

Net Income 428 .142 286 447 -136 311 392 -1S7 235 452 .17S 277

-66 - ANN IIpage 2 of 3

OFFICE NATIONAL DES POSTES ET TELECOMMICATIONS (ONPT)

Funds Flow Statements (Dirhams million)

Soumsn 22- 122Q 122Tel PSM Tot TeL| PS£ Tot. TL Tot. TeL PST TOL

Net Income 428 .142 286 447 -136 311 392 -157 235 452 -175 277

Depreciation 435 25 460 473 27 500 642 35 677 776 45 821

Provisions 14 14 25 - 25 61 - -61 80 80

Cash Flow 877 -117 760 945 -109 836 1095 *122 973 1308 -130 1178

Grants - 71 71 60 60Long-Term Borrowing 426 - 426 801 - 801 1022 l 1022 1724 - 1724

Total Sources 1303 -117 1186 1746 .109 1637 2188 -122 2066 3092 -130 2962

|ilI~n TeL| PS| Tot. TeLl Tot. T|L is. Tr.j TeLr PSf Tot

construction Expendit. 880 66 946 1789 115 1903 2024 68 2092 3040 192 3232

Fiancial ILvestment - - - 13 2 16 13 7 20 13 9 22

Reimbursemcnt & 55 - 55 80 - 80 129 - 129 305 - 305Interest Debt

Total ApplicaL 935 66 1001 1882 117 1999 2166 75 2241 3358 201 35S9

Sources minus 368 -183 185 -136 *226 -362 22 -197 -175 -266 -331 .597Applicat.

minus: Gross Var. ofWkg. Cap 443 -97 346 -292 65 -227 -94 -96 -190 -298 -79 -377

Variation Cash -75 -86 -161 156 -291 -135 116 -101 15 32 -252 -220

- 67 - AINK 1_1Page 3 of 3

OFFICE NATIONAL DES POSTES ET TELECOMMUNICATIONS (ONPT)

Balance Sheet (Dirha1ns millionx)

. _o PL Tt o.*Tt

TeL PSL TOt TeL | PSfL Tot. Tel. I Pt T TeL PSL Tot

Net. FLx Assets 2623 394 3017 4004 416 .4420 5348 486 5834 7622 624 8246

Oth. Long-Term Assets 33 - 33 48 - 48 59 10 69 78 13 91

Inventory 158 40 198 211 23 234 211 23 234 201 22 223

0th. Short-Term Assets 2170 136 2306 1995 197 2192 2316 215 2531 2431 221 2652

of which -Priv. Recv. 630 482 548 637 34 671 849 44 893 1151 57 1208-Adm. Recv. 1231 200 1431 1095 150 1245 1088 148 1236 1027 149 1176

Cash and Banks 1191 -908 283 1347 -1199 148. 1463 -1300 163 1495 -1552 -57

Total Assets 6175 -338 5837 7605 .S63 7042 9397 -566 8831 11827 .672 11135

T,iabilidles |1 2 99 2

|iaiie I Tel. | Sf.T Tot TL TLot. Tel. PSf. Tot.

Net Worth 3965 -424 3541 4450 -634 3816 4952 -730 4222 5421 -902 4519

Long-Term Debt 801 - 801 1521 - 1521 2415 - 2415 3833 - 3833

Short-Term Liabilities 967 228 1195 1162 207 1369 1638 321 i57 2121 405 2526

Net Income 442 -142 300 472 -136 336 392 .157 235 452 -175 277

Total Liabilities 6175 -338 5837 7605 .563 7042 9397 4566 8831 11827 -672 11155

-Gr-; Variation ofwyorking Cagital

Inventory 34 9 43 53 -17 36 0 0 0 -10 -1 -11

0th. Short-Term Assets 227 -137 90 -175 61 -114 321 18 339 115 6 121

Provisions 14 0 14 25 0 25 61 0 61 80 0 80

Short-Term Liabilities -168 -31 -199 195 -21 174 476 114 590 483 84 567

Var. Gross Worling 443 -97 346 -292 65 -227 -94 -96 -190 -298 -79 -377Capital

Var. Cash and Banks -75 -86 156 -291 -135 116 -101 15 32 -252 -220__:___________~~~~~~~~~~~~ --- _ _ __ - _ ..----- - --- ______________________-_______

- 68 -

AMME2 1-2page 1 of 4

OFFICE NATIONAL D)ES POSTES ET TELECOMMUNICATIONS DU MAROC (ONPT)

BASIC DATA FOR PROJECTED TELECOMMUNICATIONS REVENUES

1992 1993 1994 1995 1996 1997.... ..... .... .... .... .... _

General data

Inflation rates: GD? deftators 6.02 6.0% 7.02 6.0X 6.0% 6.021.13 1.20 1.29 1.36 1.45 1.53

MUV international 3.0X 4.0X 4.0X 4.0X 4.0% 4.0X

Physical data.............

TelephoneNb of tines: end year 660000 835000 102000O 1200000 1380000 1560000Nb of lines: mid year 580000 747500 927500 1110000 1290000 1470000

1992 1 m 1994 1995 1996 1997

Tari ffs/Consumption.................

Call charge - CC (Dirham) 0.75 0.80 0.80 0.80 0.80 0.80Average CC per subscriber

Connections 1000 900 1215 1150 1380 1380Rental 360 480 600 700 850 1000Nation. communicat. 4500 4360 4230 4100 3940 3780Internat. communic. 2930 2725 2560 2410 2310 2220

Revenues, excL. taxes tMDH)Connections 120.0 126.0 179.8 165.6 198.7 198.7Rental 156.6 287.0 445.2 621.6 877.2 1176.0Nat. coomiunicat. 1957.5 2607.3 3138.7 3640.8 4066.1 4445.3Internat. communic. 1274.6 1629.6 1899.5 2140.1 2383.9 2610.7

Total Telephone 3508.7 4649.9 5663.2 6568.1 7525.9 8430.7Telex 186.0 155.0 140.0 120.0 100.0 90.0operat. miscellaneous 272.0 280.0 310.0 350.0 390.0 440.0

....... ........................................Total rev., excl. taxes 3966.7 5084.9 6113.2 7038.1 8015.9 8960.7VAT (122 up 91;19% from 92)) 753.7 966.1 1161.5 1337.2 1523.0 1702.5

4720.3 6051.0 7274.7 8375.3 9538.9 10663.3of which private subscr. 4109.7 5397.6 6575.6 7613.9 8671.8 9693.9

Government 610.6 653.4 699.1 761.4 867.2 969.4

Nb of employees 12892 14047 15201 16341 17485 18656Increase 12.5X 9.0X 8.2X 7.5X 7.0X 6.7X

Nb of employees/1000 DEL 22.2 18.8 16.4 14.7 13.6 12.7

- 69- ANNEX 12

page 2 of 4

OFFICE NATIONAL DES POSTES ET TELECOMMUNICATIONS DU MAROC (ONPT)

PROJECTED INCOME STATEMENTS

(DH million)

1992 1993 1994 1995 1996 1997.... .... . .... .... . .... ...... ........ .....

Revenues

Telecomm. 4720.3 6051.0 7274.7 8375.3 9538.9 10663.3Various 18.0 20.0 22.0 23.3 24.7 26.2Financial 1.0 1.0 1.0 1.1 1.1 1.2

Total 4739.3 6072.0 7297.7 8399.7 9564.8 10690.7

Charges

supplies 97.9 133.8 177.6 225.3 277.5 335.2Personnel 669.4 804.1 968.3 1147.6 !3:5.6 1592.2Value add. taxCVAT) 753.7 966.1 1161.5 1337.2 1523.0 1702.5Other indir. taxes 146.2 173.6 201.6 245.4 290.0 331.7Services 184.3 251.8 334.3 424.1 522.4 631.1Depreciation 986.9 1215.3 1487.3 1824.7 2222.6 2653.7Bad debts (51, fr. 92 on) 236.0 302.5 363.7 418.8 476.9 533.2

................. ........................................ ..............

Total 3074.5 3847.2 4694.4 5623.1 6666.2 7779.7

Operating income 1664.8 2224.8 2603.3 2776.6 2898.6 2911.0

less: income taxes 335.0 513.6 565.7 549.8 482.7 372.7inter. on LT cred. 332.1 439.3 581.7 698.3 890.4 1083.1non oper. inc. -13.0 -7.0 -4.0 0.0 0.0 0.0monopoly levy 500.0 508.5 611.3 703.8 801.6 896.1gvt's receivbles 204.1

..... -----. . ..... ..... .. ----- -----... ..w ... ..

Income to retain. earn. 306.6 770.4 848.6 S24.7 724.0 559.1

Rate of return 24.61 27.22 26.5% 23.41 20.4X 17.6XTol. rev./DEL (kDH) 8.2 8.1 7.9 7.6 7.4 7.3Operating Ratio 65X 63X 64% 671 70X 73n

Cash & banks/revenues ratio (month 6.2 3.4 3.6 3.3 3.0 2.7Total taxes (excl. cust. duties) 36.6% 35.61 34.8X 33.81 32.4X 30.91Operat. cost/DELCconst. 1991 DH) 1548 1416 1327 1270 1236 1216

- 70 -

ANNEXR 12page 3 of 4

OFFICE NATIONAL DES POSTES ET TELECOMMUNICATIONS DU X4AROC (ONPT)

PROJECTED FUNDS FLOW STATEMENTS

(DH million)1992- 1992-

1992 1993 1994 1995 1996 1997 1994 1996.... .... . .... .... . ..... .... . .. ..... .... ........ ........

Sources

Internal cash generat.Operating income 1664.8 2224.8 2603.3 2776.6 2898.6 2911.0 6492.9 12168.1Depreciation 986.9 1215.3 1487.3 1824.7 2222.6 2653.7 3689.5 m6.8ProvisionsNon oper. inc. 13.0 7.0 4.0 0.0 0.0 0.0 24.0 24.0

..... ------. ------ ......... .. ..... ------.. ------ ------....

Total int. cash gen. 2664.7 3447.0 4094.6 4601.3 5121.2 5564.7 10206.4 19928.9

Long term borrowingexternal borrowing 1378.0 1991.0 2182.0local borrowing 249.0 174.0 229.0

,...... ......... ...... ......... ...... ......... ...... ................................

Total borrowing 1627.0 2165.0 2411.0 2591.5 2710.5 2886.5 6203.0 11505.0

Subsidies 10.0 10.0 10.0e...... ......... ...... ......... ...... ......... ...... ........ .................. ...

Total sources 4301.7 5612.0 6505.6 7192.8 7831.7 8451.2 16419.4 31443.9

Applications............

Debt serviceAmortization 405.5 526.3 652.7 689.0 776.8 997.6 1584.5 3050.3Interest 281.4 394.7 535.7 698.3 890.4 1083.1 1211.8 2800.4

..... ....... .......... ...... ------... ...... ......... ...... ......... ..... ............

Total debt serv. 687.0 921.0 1188.4 1387.2 1667.2 2080.6 2796.3 5850.8

Construction expend.:

Proposed project 2832.0 3526.0 4203.0 10561.0 10561.0Future project 5183.0 5421.0 5m.0 0.0 10604.0

tess VAT/import. equip. -417.0 -518.0 -622.0 -767.0 -802.3 -814.3 -1557.0 -3126.3...... ........ ...... ......... ...... ......... ...... ......... ............ ..... ............

Total construct. expend. 2415.0 3008.0 3581.0 4416.0 4618.7 4918.7 9004.0 18038.7

Financial investments 26.0 26.0 26.0 27.6 29.2 31.0 78.0 134.8

Other applications:Income taxes 335.0 513.6 565.7 549.8 482.7 372.7 1414.3 2446.8Monopoly tax 500.0 508.5 611.3 703.8 801.6 896.1 1619.8 3125.2Loss of gvt's recbles 204.1 204.1 204.1Nisc. int. (cust., I1RD) 50.7 44.6 46.0 141.3 141.3

..... ..... . ..... ..... .... ..... ..... ... ..... ...................................

Total other appilc. 1089.8 1066.7 1223.0 1253.6 1284.2 1268.8 3379.5 5917.4

Incr.(dec.) in work. capital -659.1 -331.1 16.7 9.0 141.1 125.5 -973.5 -823.3...... ........ ...... ------... ...... ......... ------ ........ .................. .........

Total applications 3558.7 4690.6 6035.1 7093.4 7740.5 8424.6 14284.4 29118.3

..... ..... . ..... ..... .. ..... ..... .. ..... .......... .......................

Cash surplus 743.1 921.4 470.6 99... 91.2 26.6 2135.1 2325.6

Self financing (X) 36.8% 48.5% 47.0% 44.4X 47.0X 45.01 44.8X 45.21Debt service cov.(times) 2.3 2.6 2.4 2.4 2.3 2.1 2.4 2.4

- 71- ANNEX 12

page 4 of 4

OFFICE NATIONAL DES POSTES ET TELECOMMUNICATIONS DU MAROC (ONPT)

BALANCE SHEETS

(DH million)

1992 1993 1994 1995 1996 1997....... ....... .. .. . ... .... .... ......

Assets

Gross fixed assets 12130.4 14875.5 18176.7 22372.8 27017.9 31953.8Less: Depreciation 4712.1 5955.7 7478.7 9348.3 11627.0 14350.5

...... ....... ....... ......... . .... ... . ......

Met fixed assets 7418.2 8919.8 10698.0 13024.4 15390.9 17603.3

Work in progress 1684.0 2038.0 2429.0 2786.0 2924.7 3102.4

Other L-T assets 104.0 130.0 156.0 183.6 212.8 243.7

Current assets:Inventory 160.8 96.5 88.8 93.9 92.5 111.7Gross. Receiv.: goverrment 254.4 217.8 174.8 190.3 216.8 242.3

private 1369.9 1349.4 1643.9 1903.5 2167.9 2423.5.. ...... ...... ... ... --- .... .. . ..... _

Subtotal receiv. 1624.3 1567.2 1818.7 2093.8 2384.7 2665.8

Other debtors 70.7 71.4 72.1 72.8 73.6 74.3Accrued accounts 185.8 187.7 189.6 191.5 193.4 195.3

. ..... -- -- ............... ........ . . ........ ..

Total curr. assets 2041.7 1922.8 2169.2 2452.0 2744.2 3047.2

Cash & banks 2442.2 1711.3 2181.9 2281.3 2372.4 2399.1minus: cash equal. -1652.3

. ...... ....... ---- ... ............. .-..---

Total assets 12037.8 14721.9 17634.0 20727.3 23645.1 26395.6

Liabilities..... ..

Equity:Government equity 2568.0 2568.0 2568.0 2568.0 2568.0 2568.0Equipment subsidies 141.0 141.0 141.0 141.0 141.0 141.0Retained earnings 2033.5 2803.9 3652.5 4477.2 5201.2 5760.3Revaluation reserve 52.1 115.0 190.5 282.7 391.8 516.8

... ... . ............... ... .... ......... ..---- _

Total equity 4794.7 5627.9 6552.0 7468.9 8301.9 8986.1

Long term debtLong term borrowing 4966.5 6605.2 8363.5 10266.0 12199.7 14088.6Government (personnel) 88.0 88.0 88.0 88.0 88.0 88.0

... .... .... . ... .. .. ....

Total L-T debt 5054.5 6693.2 8451.5 10354.0 12287.7 14176.6

Current liabilities:Suppliers 492.5 613.5 730.3 900.6 942.0 1003.1Government taxes 1067.4 1131.5 1210.7 1283.3 1360.3 1441.9Other creditor^ 453.7 480.9 514.6 545.4 578.2 612.9Accrued accounts 175.0 175.0 175.0 175.0 175.0 175.0

---- .... ...... ...... ...... ... ..

Total curr. liabil. 2188.6 2400.8 2630.6 2904.4 3055.5 3232.9....... ....... ..... ..... .. .. .. .. ..

Total liabilities 12037.8 14721.9 17634.0 20727.3 23645.1 26395.6

Debt/debt.equity ratio 51% 54% 56% 58% 60% 61%Current ratio 2.0 1.5 1.7 1.6 1.7 1.?Earnings/equity ratio 9% 38% 30% 23% 16% 11%

- 72 -

ANNEX 13page 1 of 2

MOROCCO


OFFICE NATIONAL DES POSTES ET TELECOMMUNICATIONS (ONP3)

Notes and Assumptions for the Financial Forecasts, 1992-1997

A. INCOME STATEMENTS

1. Operating Revenues

a) Average consumption per DEL is assumed to decrease by 3% p.a.b) Connection fee revenues are based on the increase in the

number of DELs in each year.c) Telex revenues are assumed to decrease by 5% p.a. from 1993

onwards.d) VAT calculated on sales revenues at the rate of 19%.

Corresponding amount is deducted under operating expenses.e) Proportion of government customers is assumed to decrease

gradually from 14% in 1992 to 9% in 1995 and to remain at 9%thereafter.

2. ORerating Expenses

a) Supplies and services - Average cost per DEL for 1991 assumedto remain constant in real terms.

b) Personnel - Average wage per employee for 1991 assumed toincrease by 4% p.a. in real terms.

c) Depreciation - Based on weighted average rate of 9%; buildingand vehicles assumed to be revalued at local inflation rate;equipments assumed not to be revalued, due to rapidobsolescence.

d) Provision for bad debts - Assumed at 5% of sales revenues.e) Income tax - Calculated at rate of 40% of net income (after

deduction of monopoly tax).f) provision of DH 204.1 million for write-off of unrecognized

government accounts receivable in 1992.

B. EMNS FLOW STATEMENT

1. Sources

a) Borrowings - Based on drawings on existing and future loans asper program financing plan (sae Chapter 4)

- 73 -

ANNEX 13page 2 of 2

2. Applications

a) Debt service - Based on actual schedules for existing loans.Future concessional (mixed) credits assumed to carry weightedaverage interest rate of 5.8% and maturity of 16 years (with 7years average grace period). Conditions assumed for futurecommercial credits are 10% interest and 16 years maturity(with no grace period); 9% interest and 20 years maturity(with 5 years of grace) for future multilateral (co-financing)loans; and 11.2% interest and 5 years maturity (with no graceperiod) for future local loans.

b) Construction expenditures - As per investment program (seeAnnex 8). Figures are net of VAT (which is deductiblestarting 1992).

C. BALANCE SHEETS

1. Assets

a) Gross fixed assets and work in progress - Asset capitalizationbased on expected commissioning schedule for major plant andequipment. See preceding note regarding asset revaluat-on.

b) Other long-term assets - Corresponds to accumulated financialinvestments shown in the funds flow statement (participationsin Intelstat etc.).

c) Inventory - Assumed to decrease by 40% in 1993 and then toprogressively decline to 4 months of supplies by 1996.

d) Receivables - Assumed at three months of billings from 1993onwards (1994 for government receivables).

e) Other debtors - Assumed to increase by 10% p.a.f) Cash and banks - Pending the issuance of separate detailed

balance sheets for telecommunications and postal/financialservices, the start-up cash balance for telecommunicatins atend-1992 was estimated at about DH 750 million, representingabout 3 months of 0 & M and tax expenditures in that year(correspondingly, an amount of DH 1,588 million is shown as aone-time transfer to the postal/financial services branch).

2. Liabilities

a) Suppliers - Assumed to increas;e in proportion withinvestments.

b) Other creditors - Assumed to increase with inflation.

- 74 -ANNEX 14

Page 1 of 2

MOROCCO


OFFICE NATIONAL DES POSTES ET TELECOMMUNICATIONS (Q)

Rates of Return on ONPr's lvestment hrouram

For purposes of calculating the rates of return on ONPT'sinvestment program, incremental 1992 investments are based on theequivalent of DH 168 million in foreign currency and the correspondingamount in local currency. All investments for 1993 and 1994 are included.

The rates of return are calculated in constant terms and theamounts of the investments are net of custom duties and VAT. The revenuesto be considered for the calculation of the rates nf return andattributable to the investment program for the proposed period, are thosecorresponding to the new connections: a small fraction of the 1993 newconnections, about half of those of 1994, all those of 1995 and half ofthose of 1996. Revenues are calculated on a fifteen-year horizon.

The operating costs which are considered, also in constent terms,exclude depreciation and deductible VAT taxes.

The financial rate of return is calculated at projected tariffswhich are expected to decline in real terms from 1995 onwards. The resultis 25% . The economic rate of return is calculated assuming thatsubscribers would be ready to pay tariffs that would go up with inflationuntil the last additional connections of the program are fully in service,in 1996. It is a way to estimate the consumers' surplus. The result is32%.

The senstivity analysis shows a financial rate of return of 18%if, simultaneously, revenues are reduced by 10% and costs increased by 10%,and of 14% if rovenues are staggered by two years.

MOROCCO


OFFICE NATIONAL DES POSTES ET TELECOMMUNICATONS (ONPTI

RATE OF RETURN OF THE PROJECT(DH million)

Rate of return Years Cash flow Cash flow Se n s it i v it y a na.costs revemuesf irnanct costs revenueseconouiic :costs1.1revens.9casa fl.delay: 2

Financial r.r. 1992 -238.6 0.0 -238.6 -238.6 0.0 -238.6 -262.4 0.0 -262.4 -238.6Economic r.r. 3199 -2099.0 61.3 -2037.7 -2099.0 61.3 -2037.7 -2308.9 55.2 -2253.7 -2099.035.82X 1.994 -2610.8 591.2 -2019.6 -2610.8 672.1 -1938.7 -2871.9 532.1 -2339.8 -2610.8Sstv.rev.0.9;cst.1.1 199S -661.8 1743.9 1082.2 -661.8 1978.0 1316.2 -727.9 1569.6 841.6 -600.421.15X 1996 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 -72.8Sstv.rev.delay 2 1997 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1079.916.22X 1998 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1602.3

1999 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1602.32000 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1602.32001 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1602.32002 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1602.32003 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1602.32004 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1602.3 VI2005 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1602.3 12006 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1602.32007 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1602.32008 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1602.32009 -664.0 2266.3 1602.3 -664.0 2724.6 2060.6 -730.4 2039.6 1309.2 1602.3

0

- 76 -

ANNEX 15

MOROCCO


OFFICE NATIONAL DES POSTES ET TELECOMMUNICATIONS (ONPI)

Main Documnents Available in Project File

* ONPT. Pzojet de T6l6communicat.on - Etude de Faisabilite Technique de la

Deuxi&me Phase (Feb. 1991).

* ONPT. Plan de D6veloppement des T616communications 1991-94 (Nov. 1991)

* ONPT. Comptes de Synthbse Pr6visionnels Plan 1990-1994

* ONPT. Recusil de Textes sur les T616communications (Dec. 1990)

* Proposal for Strategic Plan Study for Moroccan Telecommunications -Swedtel - (Jan. 1992)

* Secteur des Postes et Services Financiers. Diagnostic et

Recommendations - Jean Babin - (May 1992)

* Protocole d'Accord entre l'Etat et l'ONPT - Draft - (March 1992)

* R6organisation de l'ONPT - (Annexe d la note de Service no. 258DG4)

(Dec. 1991)

* Restructuration du Secteur des T616communications - MG4 Associates (Apr.

199i)

- 77 -

ANNEX 16

MOROCCO


OEFIC? NATIONAL DES POSTES ET TELECOMMUNICATIONS (ONPT

Maln Documrt.a Available In Prolect File

* ONPT. Projet de Telecommunication - Etude de Faisabilite Technique de laDeuxieme Phase (Feb. 1991).

: ONPT. Plan de Developpement des Telecommunications 1991-94 (Nov. 1991)

* ONPT. Comptes de Synthbse Previsionnels Plan 1990-1994

* ONPT. Recueil de Textes sur les T6lecommunications (Dec. 1990)

* Strategic Plan Study for Moroccan Telecommunications - Swedtel - (1992)

* Secteur des Postes et Services Financiers. Diagnostic etRecommandations - Jean Babin - (May 1992)

* Contrat de Programme entre 1'Etat et l'ONPT (December 1992)

* R6organisation de l'ONPT - (Annexe a la note de Service no. 258DG4)(Dec. 1991)

* Restructuration du Secteur des Teldcommunications - MGA Associates (Apr.1991)

* TORs for Strengthening of Regulatory Function at MPT

* Various consultants' reports on TA for Improvement of Data Processing,Procurement, Human Resources Management and Cost Accounting/BillingFunctions - Sofrecom/Coopers and Lybrand (1991-1992)

* Les telecommunications marocaines a travers les chiffres - ONPT (Dec.1990)

* Tariff Study SOFRECOM (1992)

* Circulaire No 68 CAB du Premier Ministre: Rationalisation et proceduresde reglement des consommations de tdlecommunications

* Declaration de Politique Sectorielle des Tel6communications au Maroc.

IBRD 24480MOROCCO 'POWTUGAL bX ;oEste n. fPerpignan(FRANCE)MOROCCO \,Elpn Prinn Mediterranean

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OPTICAL FIBER CABLES 565/MBs PROJECI

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ANALOG SUBMARINE CABLE oKENIT

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MICROWAVES 34 MBs IN IMPLEMENTATION M/n Ft

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DECEMBER 1992