John Foster reports on the prospects for project finance in Morocco, the second of the North African nations in this special series
Arab historians used to call Morocco Al Maghrib al Aqsa, which means 'the furthest west' and as far as the Arab world is concerned, Morocco is the westernmost outpost. Its problems with the quasi-state of Western Sahara are documented elsewhere in this magazine, but since the indigenous Berbers first met the invading Arabs under Uqba ibn Nafi and converted to Islam, Morocco became part of the greater Arab world. Even today Morocco has more association with the Arab world than with the African, being a member of the Arab League, but not a party of the African Union.
Morocco, unlike most Arab countries, has very little oil and gas resources. Instead Morocco exports minerals, energy and water. It is the world's largest exporter of phosphates, both raw phosphates and processed products, including phosphoric acid and fertilisers.
The manufacturing sector contributes approximately 17 per cent to GDP and is dominated by clothing and textiles, but there are growing electrical and mechanical sectors, especially in outsourcing from the European countries directly across the Mediterranean. The construction sector makes up 4 or 5 per cent of the economy, but the services sector is largest and most developed, which accounts for some 40 per cent of nominal GDP, and employing about 25 per cent of the workforce. There is still a large agricultural sector, and the country produces olives, has a massive fishing industry and is one of the world's largest producers and exporters of cannabis, often processed into hashish before being smuggled out of the country.
Tourism is another very important sector for Morocco and remains the main source of foreign exchange. Macroeconomic stability coupled with relatively slow economic growth has characterised the Moroccan economy over the past several years. The present government has introduced a number of important economic reforms. The economy, however, remains overly dependent on the agriculture sector. Morocco's primary economic challenge is to accelerate growth in order to reduce high levels of unemployment.
The economy's integration into the global economy is modest but growing, notably through the association agreement with the EU that came into operation on 1 March 2000, and will lead to a free-trade agreement (FTA) between Morocco and the EU by 2010. Morocco also signed a quadrilateral free-trade agreement with Tunisia, Egypt, and Jordan. FTAs with the US and Turkey came into force on 1 January 2006. Morocco is also seeking trade and investment accords with a range of states in Eastern Europe, Latin America, Africa and Asia.
Morocco has to import over 90 per cent of the energy it consumes. The country's own energy resources are limited to modest amounts of hydroelectric, wind and solar power; coal reserves that are close to depletion and negligible proven reserves of oil and gas; firewood is widely used in rural areas.
There was excitement that oil was discovered in the Haut Plateau region of the north-east in 2000 but this was an anti-climax as the amounts were negligible. Moroccans, however, are keeping their fingers crossed that oil and gas may be discovered onshore or offshore, but they will probably be in for a long wait, which might explain Morocco's steel-like grip on Western Sahara, which has much better hydrocarbon prospects.
The government is crippled with debt, high unemployment and low growth. It does not have deep pockets, and has been something of an economic backwater since the expulsion of the Barbary Pirates by the European powers and US in the 18th and 19th century. The government though has no option but to develop its infrastructure and decided that it will try to shift the responsibility of energy production to the private sector.
With demand rising, the government has turned to the private sector to provide the necessary extra supply. The state's share of electricity supply has fallen to around 35 per cent as private power stations have come on stream and the sector has been linked to foreign grids. The first private power plant was Jorf Lasfar; a US-Swiss consortium that took over two 330-megawatt units in 1997 and added two 348-megawatt units by 2001. In 2005 a $382 million 387-megawatt combined-cycle plant using gas from the Euro-Maghreb pipeline that runs from Algeria to Spain was brought on stream at Tahaddart near Asilah by a consortium comprising Siemens of Germany, Endesa of Spain and Morocco's state-owned Office National de l'Electricité (ONE). ONE also has a 463-megawatt pumped-storage plant at Afourer in central Morocco, inaugurated in 2005.
In April this year ONE invited bids for the design, supply of materials and equipment and setting up of a $215 million wind farm with a generating capacity of 25-megawatts. The utility is also preparing to evaluate bids for a much larger wind power project to be set up at Tarfaya, on the Atlantic coast near the border with Western Sahara. The Tarfaya scheme, to be carried out on a build-own-operate-transfer (BOOT) basis, aims to generate between 200-megawatt and 300-megawatt.
Supply capacity is set to rise further. The link to Spain, opened in 1998, is being expanded to 1,400-megawatts. An 800-megawatt plant is planned at Al Wahda in the north, using Algerian gas, and several small plants are under construction to serve the phosphoric acid and oil-refining industries. Several solar-power schemes are under way; ONE plans to provide 227,000 rural homes in 4,500 remote villages with solar power. The scheme is likely to be completed during 2007. Nuclear power is also on the medium- to long-term agenda.
Natural gas is something that Morocco does have; but not much, producing a mere 50 million cubic metres a year. It is a transit country for Algerian gas to Spain and beyond as it lies on the route of the Euro-Maghreb gas pipeline and taps into this. The government has decided to increase consumption of natural gas, but it has never been a good friend of Algeria, and would hate to have to rely for power on its neighbour as it sees a Russia-Ukraine relationship arising. Instead it wants to source its needs from imported liquefied natural gas (LNG). The imports would be made through a series of LNG terminals, built and run by local and international private investors. Each terminal would cost over $500 million and Morocco would need several of them to meet the 2020 target.
Morocco has always been a net importer of money. This is especially the case in terms of project finance. Last August the African Development Bank and African Development Fund approved a $149 million loan to Morocco which will co-finance an $864 million highway infrastructure project that is expected to result in increased economic activity in the country.
The construction sector has seen strong growth in recent years, benefiting from large scale infrastructure projects such as the dredging of a deepwater port on the Mediterranean, the development of six new tourist resorts, important public housing programmes, and construction of roads, dams and power plants.
A good proxy for growth in the sector is rising production of building materials, including cement, which grew by 8.6 per cent in 2003, 5.3 per cent in 2004 and by a further 7 per cent in 2005. Consumption per head of cement, at 300 kilogrammes, is only half of Tunisia's and one-third of Portugal's, reflecting Morocco's lower rate of development, but Morocco's four cement companies, Ciments du Maroc, Holcim Maroc, Lafarge Maroc and Asement Tamara, plan to invest $660m between 2005 and 2008 to increase capacity from 10.6 million to 14.6 million tonnes per year.
Residential construction has expanded steadily in response to the shortage of affordable housing, particularly in the towns. However, financial difficulties have slowed progress in building state housing, and the government has come to rely increasingly on the private sector. Recent initiatives include setting aside 200 hectare tracts in large cities for private property development. The industry also benefited from major slum clearance and public housing programmes, which have accelerated since the May 2003 suicide bombings in Casablanca.
Middle Eastern investors, who have earned themselves a reputation for real estate development, were quick on the uptake. In October of last year, Bahrain-based Gulf Finance House (GFH) announced the launch of the initial phase of the $1.4 billion Gateway to Morocco project. The first phase of the project comprises Royal Ranches Marrakech and the Royal Resort in Tangiers. This marked the entry of GFH into Morocco and they have led the way for other Gulf-based investors.
Abdul Rahman Al Jasmi, former GFH's deputy chief executive officer said, "The Moroccan economy is experiencing a noteworthy growth as a result of the enthusiasm and continued efforts demonstrated by the country's leadership. Through this support, the Kingdom has been able to play a bigger part regionally as well as globally."
Morocco has earned a reputation among international companies as one of the more promising locations for doing business in the MENA, with much of the credit for this going to the progressive outlook fostered by King Mohammed VI. Morocco's financial services sector is regarded as the most highly developed in North Africa, and the country has ambitious plans underway to expand investment in manufacturing industry, port services and tourism.
However, according to the World Bank, "serious problems" in Morocco's financial sector have constrained the provision of credit to local firms at reasonable interest rates. Moroccan manufacturing firms are financed overwhelmingly from the owners' equity and retained earnings. A World Bank survey found that of the typical balance sheet, only 20 per cent of financing came from the banking sector. This compares unfavourably with India at 36 per cent and Thailand at 47 per cent. Lending rates also remain high, despite the fact that inflation and commercial banks' cost of capital are low. This might encourage more participation from the cash-rich banks of the Middle East.
© Banker Middle East 2007
