Morocco-Information Infrastructure Sector... Development Loan (IISDL) Gouvernement Nouveau Quartier Administratif Agdal/Rabat

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Project Name Region Sector Project ID Country Name Implementation Agencies Environmental Category Report No. PID8929 Morocco-Information Infrastructure Sector... Development Loan (IISDL) Middle East and North Africa Private Sector Development MAPE65736 Kingdom of Morocco Ministere des Affaires Generales du Gouvernement Nouveau Quartier Administratif Agdal/Rabat Contact: M. Monkid Mestassi Directeur des Relations Economiques Internationales Tel: Fax: Secretariat d'etat charge de la poste et des nouvelles technologies de l'information (SEPTI) Av. Moulay Hassan, Rabat Contact : M. Mimoun Aoujil Secretaire General Tel: Fax: Date PID Updated April 13, 2000 Initial PID March 30, 2000 Appraisal Date May 10, 2000 Projected Board Date August 1st, 2000 Country and Sector Background C 1. Following legislative elections in November 1997, the new Government launched an economic program that balances an emphasis on broad-based human and social development, improvement of public sector performance and private-sector-led growth with prudent macroeconomic and fiscal management.. The reduction of the fiscal deficit to 2.5 per cent of the GDP in FY 1998/99 (from 3.7 per cent in FY 97/98) confirmed the Government's commitment to fiscal discipline. Preliminary results for FY 99/00 suggest a much lower deficit than the 4 per cent approved by Parliament, due to good tax returns and higher than expected revenues from the 2nd GSM license fee, which amounted to $1.1 billion, one of the highest fee ever paid for a mobile license relative to the population size. 2. The Government has also reaffirmed its commitment to economic liberalization

2 and to the integration of Morocco into the global economy, as a strategy to generate sustainable growth, create new sources of employment and reduce social disparities. This has been particularly true for the telecommunications sector. While reforms in other sectors have lagged behind, there has been a major transformation of the telecommunications industry during the last three years. Along with these major changes, reforms laying the ground for further growth and modernization have also taken place in the IT and postal sectors. 3. The establishment of a competitive and extended information infrastructure sector (IIS), with includes the three sectors of telecommunications, information technologies (IT) and post mentioned above, has a high priority on the Government's reform agenda. The Government is convinced that the increased use of modern means of communication and information is key to the success of its development strategy. The wider range of telecommunication and postal services and the dissemination of information technologies in the economy will make Moroccan firms more competitive, bring them closer to international markets, and foster new business opportunities in urban and rural areas. It will also contribute to the achievement of development objectives in other sectors, for instance by providing computers to schools or facilitating remote-control reading of electricity meters in rural areas. 4. To achieve these objectives, the Government has launched an ambitious program of sector policy reforms. A new law on Post and Telecommunications (Law 24-96) was promulgated in August In 1998, the Secretariat charge de la Poste et des nouvelles technologies de l'information (SEPTI) presented to Parliament a comprehensive action plan for IT development in Morocco, with key priorities to promote the use of IT both in the public and private sector, and create an enabling environment for the growth of IT-related activities. Law separates post from telecommunications, and creates a joint stock company, Itissalat Al Maghrib (IAM) providing telecommunications services, and a public body, Barid Al Maghrib (BAM), providing postal services. The Law enables competition in all segments of the telecommunications market and allows for the partial or total privatization of IAM. It creates an autonomous regulatory agency for telecommunications, l'agence Nationale de Reglementation du Secteur des Telecommunications (ANRT), first of its kind in Morocco. With this modern institutional and legal framework in place, ANRT has now started to elaborate specific regulations, which will be crucial if effective competition is to materialize in the sector. It has also issued several licenses, including a second GSM license and a license for data transmission (GMPCS). Other market liberalization measures include the Government's commitment to liberalize all telecommunications services not later than January 1, 2002, under the framework on basic telecommunications of the World Trade Organization (WTO), and the opening to competition of the market for international postal courier services. The liberalization of telecommunication services and infrastructures is central to the development of IT related activities, as it provides the basis for a broadband network. 5. There has been significant progress in the telecommunications sector in recent years, with a substantial expansion and modernization of the network, and private investors have shown strong interest in the sector as demonstrated by the bids received for the second GSM license. Coverage has increased, mainly in the urban areas, bringing the overall penetration rate of fixed telephony to about 5.5 percent. The number of subscribers to the IAM GSM network has more than doubled since the end of 1998, reflecting the competitive pressure on IAM of the award of the second GSM license to the consortium Medi Telecom. However, cellular penetration is still low by international standards. Coverage remains also very low in rural areas, although some progress has been made there as well with 90 percent - 2 -

3 of the 1,300 rural communities having at least one phone by the end of The use of modern technologies, on the other hand, has substantially enhanced network reliability, improved service quality and efficiency of operation. Nevertheless, while the sector's performance is broadly in line with other countries of the region, further progress is needed if Morocco is to reduce the gap with the EU or other countries of similar income per capita. Finally, some prices in the sector, notably for international services and cellular telephony, have experienced a strong decline, partly as a response of the historical operator to the competitive pressures brought about by the new entrant in the cellular market. 6. The IT sector is growing quickly in Morocco but remains under-developed. Value-added in IT manufacturing increased from 0.35 percent of GDP in 1995 to 0.44 percent in Internet penetration remains very low with only about 834 hosts total and 715 internet subscribers per 1 million inhabitants. Notwithstanding recent price reductions introduced by IAM, the high cost of leased lines is presently hindering Internet development and growth of downstream IT and telecomintensive services (such as electronic commerce and call centers). 7. The current public operator, BAM, operates a comprehensive transportation, delivery and retail outlet network, and controls more than 90 percent of the overall traffic volume. The postal sector, broadly defined, also includes those financial services, offered via BAM's retail outlet network. Private participation in postal business is still restricted to relatively small market niches, such as international courrier, express services, and parcel delivery in urban areas. The potential for expanding the range of available services to more customers is huge, especially for business. About 15 percent of the population is still without access to any postal pick up and delivery services. New products have been introduced, such as accelerated mail delivery and hybrid offers integrating telecommunications, electronic and traditional postal services (Cyber Post, fax). Improvements are evident in terms of revenues per employee, whereas productivity gains and quality improvements have been more modest. Finally, through the countrywide postal network, BAM reaches a population of small depositors without access to other banking services, although similarly to commercial banks, there is still there is a high concentration of large deposits at BAM (80 percent of deposits are held by less than 20 percent of depositors in large-size accounts). 8. Building on the results of the first phase of sector reforms, the Government is committed to further promote the development of telecommunication services and telecommunication related industries, advance the modernization of the postal system and foster the growth of an information technology sector. To achieve these objectives, the Government has adopted a comprehensive package of policy measures in the three sectors. In telecommunications, the Government's reform agenda emphasizes the continuation of market liberalization and the extension of telecommunication services to the poor in a cost efficient manner. An important action in this context, is the privatization of IAM. To realize the full benefits of this transaction, there is a need to accelerate policy and regulatory reforms, while ensuring that the privatization is carried out through a competitive and transparent process. In the IT sector, the priorities for the Government are to build up institutional capacity and implement the priorities outlined in the strategy for the sector. In the postal sector, the main priority to the Government is to adopt a strategy for the development of postal and financial services of the postal system, modernize the legal and institutional framework, and strengthen the capacity of BAM to perform efficiently in a progressively competitive environment. The Proposed Credit -3-

4 9. Objectives. The proposed operation is designed to achieve two main objectives, in line with the Government's agenda outlined in the previous section. The first objective is to support the Government's agenda in telecommunications to deepen market liberalization, increase private participation, privatize the historical operator, extend these services to all segments of the population and strengthen the regulatory environment of the sector. The second objective is to assist the Government in the implementation of its action plan for the IT sector, and in the formulation and implementation of further reforms in the postal sector. Reforms in the IT sector will target a wider use of IT in the overall economy and promote the development of IT-related activities. Reforms in the postal sector will focus on the adoption of a national strategy and legal framework for the sector, covering both the postal services and financial services provided through the retail outlet network of the postal system. Several of these reforms aim specifically to bring communication, information and financial services through the postal network to poor and remote households. 10. Description. The proposed IISDL would be a quick disbursing operation. The proposed Bank loan of US $ 100 million would be disbursed in two tranches of equal value, linked to the implementation of reform measures specified for each tranche. The operation would support the adoption of measures in the following areas: (a) Privatization of the incumbent telecommunications operator, Itissalat Al Maghrib, (b) competition in telecommunication infrastructures and services; (c) access to telecommunications services;(d) regulatory framework in telecommunications; (e) regulatory framework for IT; (f) Inter-administration networks; (g) strategy and legal framework for the Postal Sector; (h) modernization of the postal operator Bahrid Al Maghrib, and (i) strategy for the development of the financial services of the postal system, including a proposal of several options to improve the performance of the Caisse Nationale d'epargne, which is now part of BAM. 11. Implementation. The main implementing agencies are mentioned above. The privatization of IAM will be prepared by the Ministry of Privatization. ANRT is in charge of preparing the Cahier des Charges of the privatized operator. The regulatory agency is also is responsible for preparing, submitting to the Government, and implementing the package of regulatory and administrative measures supported by the present loan in the telecommunications sector. SEPTI, for its part, will play a key role in implementing the measures for the IT and Post sector, supported under areas (e) to (h) of the loan. The Ministry of Finances will lead the commission, which include also representatives of SEPTI and BAM, in charge of supervising the study for the development of the financial services of the postal system. Each of these institutions has designated several key staff to work on the reforms to be implemented within the framework of the loan. 12. Sustainability. Several factors would help ensure the sustainability of the above reforms. First, the measures supported by the present operation are fully in line with current international trends, as many countries at various stages of development are moving toward an integrated, private sector- led and competitive Information Infrastructure sector. Second, the Government has demonstrated its commitment to pursue the reform effort, and the pro-competitive reforms adopted during the first phase of reforms have already started to bear fruits: customers have now access to a wider range of telecommunication services at more competitive rates, several hundreds of jobs have been created in telecommunications and telecommunication related industries, and the granting of the 2nd GSM license has yielded $1.1 billion in fiscal revenues. Third, the envisaged measures are expected - 4 -

5 to expand those benefits in the telecommunications sector and bring similar results in the post and IT sectors. It would also yield additional substantial fiscal gains due to the partial privatization of IAM, market enlargement and service diversification, additional license fees, and a more competitive telecommunications sector that will have a positive impact on economic activity in general. Fourth, substantial technical assistance has been mobilized under the operation to assist the Government in the formulation of the proposed reforms and in the adequate implementation of the most complex measures. 9. Environmental Aspects. This is a category "C" project. The proposed operation has no direct or significant environmental impact. In addition, this operation will not finance any investments derived from these policy reforms. 10. Program Objectives and Poverty Category. The project belongs to the Private Sector Development category since it supports a package of measures designed, for the main part, to increase the efficiency and coverage of the telecommunications, post, and IT sector through the establishment of an environment conducive to new entry and enhanced competition. It contributes to Poverty Reduction with three principal outcomes. First, these reforms will enhance the competitiveness of private firms, and actively promote stronger growth and new job opportunities in the IIS sector and in the economy in general. Second, they will facilitate the extension of telecommunication and postal services to the poor, especially in the rural areas. This, in turn, can contribute to the reduction in rural-urban disparities, because it facilitates the development of sustainable business opportunities in remote areas. Third, the policy and actions supported by the IISDL should provide the foundations for using these new means of communication and information in sectors with a strong social and economic impact such as health and education. The actual realization of this potential, however extends beyond the time horizon of this IISDL, and could be further supported in the context of future Bank Group's operations. 11. Participation. The Privatization Ministry, in charge of IAM's privatization ANRT, has issued a memorandum of information and a questionnaire addressed to interested local and foreign investors in order to get their feedback for the preparation of the transaction. It has also set up an advisory body composed of recognized legal and financial experts, which it consults on the design of the transaction. ANRT, the regulator in charge of drafting and proposing several of the regulatory measures supported by the operation has launched several seminars on key issues such as universal service. The Agency will use its Website to facilitate the communication with the public at large in addition to these seminars targeting more specific groups. Two inter-ministerial commissions, which include all concerned ministries and government agencies, have been created to supervise the formulation and implementation of the two initiatives outlined in the SEPTI's plan for the IT sector and supported by the operation. Finally, in the postal sector, the key actors: SEPTI, the Ministry of Finances and the postal operator BAM, have worked in close coordination in the elaboration of terms of references for the three studies that will be used as a basis for the elaboration and implementation of a sector strategy. Contact Points: The InfoShop The World Bank 1818 H Street, NW Washington, D.C

6 Telephone: (202) Fax: (202) Task Manager Ms. Clemencia Torres The World Bank 1818 H Street, NW Washington, D.C Telephone: (202) Note: This is information on an involving project. Certain components may not be necessarily included in the final project. Processed by the InfoShop week ending June 30,