Presentation of Country Reports

Country: Morocco

Morocco: Restructuring State Owned Enterprises Trough Privatization

 by

Dr. Najib Hajoui

Ladies and Gentlemen.

It is a great pleasure to talk to such a distinguished group of government officials, Economists, and Financial Analysts today about Morocco's privatization experience.

First of all, I would like to express my deep appreciation to the organizers of this conference NAM CSSTC and IPA and all the those who sponsored this conference.

I'd like to address 5 topics:

First, the State portfolio,

Second, Privatization and SOE restructuring,

Third, the major privatization results,

Fourth, the major concession results, and

Fifth, few privatization cases to consider. 

Let me begin with a few words about the Current situation and size of the portfolio.

The portfolio consists of firms created since the beginning of the century, minus our recent sales. It is broad based, with firms in all sectors (electricity, water, energy, construction, tele­communications, health, transportation, mining, agri­culture, banking and manufacturing). It has a heavy public service burden.

According to the most recent report, the approximately 700 state-owned enterprises, where 489 operates mainly in commercial and industrial activities, account for (see table below on SOE main indicators)

As you could observe that transfers of public enterprises to the State had reached US $0.45 billion in 2001 compared to US $0.75 billion subsidy during the same period. This witnesses the importance of transfers by the State to the public enterprises which are very superior to incomes of monopoly and dividend coming in from these entities.

Consequently, in 2001, the ratio of State transfers / SOE had globally reached equilibrium.

However, taking into account the government engagements regarding economic liberalization underlined within the framework of Morocco agreement with European Union and the dismantling of state monopoly will expose these SOE to higher degree of competition and as a result keeping and even increasing the government subsidy is crucial for the survival of some entities.

I must add that some entities will disappear because of either the end of their monopolistic position or lack of competitiveness.

For a certain number of entities, privatization or concession becomes the most appropriate alternative to position them in  competitive market.

Also public sector restructuring policy was first launched during the second half of the eighties within the framework of restructuring / rationalizing of public enterprises with the support of the World Bank.

This policy prevailed during the decade 1990-2000 and was founded on different measures particularly :

• contract  program : contractual framework defining the public enterprises engagements in the field of objectives and realization, investment program and rate of return to be reached ; on the State side : tariffs adaptability, investment and equilibrium subsidy, etc. 

• concession : delegate management of public service without sale of assets to private operator for a given period at the end of which the State get back or renew the contract.

• and finally privatization which is essentially the transfer of a company assets to a private operator. 

Privatization and Public Enterprises Restructuring  

The privatization program was launched in 1993, following the adoption of the Law 39-89 by the Parliament on 11 December 1989.

The Department of Privatization is in charge of transferring public enterprises to the private sector.

For reasons of transparency, the Law provides for implementation by three groups:

• a Privatization Minister,

• a five-member inter-ministerial Transfer Commission and

• a Valuation Authority.

Privatization operation is implemented in accordance with the following process :

1. Privatization begin with the firm audit and valuation by private contractors. Thereafter, the Minister finalizes the transaction structure, in co-operation with the Transfer Commission, and formally requests a price from the Valuation Authority. Any necessary legal, financial, or employment restructuring is dealt with during this first phase of the privatization process.

2. The Law fixes 3 transfer methods which are usually combined for a firm

• the Casablanca Stock Exchange,

• tenders,

• private placement or direct negotiation.

We rely more on open tenders and the stock market, but we can sell directly: 1) to workers, 2) to other shareholders who have a right of first refusal, or 3) to meet some social objectives.

3. Follow up of transferred firms : this concerns the contractual engagements of the buyers in the field of investments and employees during a period of at least five years.

To achieve it, the Department of Privatization made in place an investment follow up system for the five year period.

At the operational level, this follow up is materialized by regular exchange of the situation of investment program realization and by visits to the sites.

On the other hand, in the field of concession, the Department of Privatization is in charge of preparing, in consultation with other departments and public entities, legal studies and regulatory deed regarding the concession, particularly the reform underway of the law on concessions.     

Now, let me give you some numbers about what we have done so far in Morocco, to give you a little background.

To sum up,

• In nine years since we made our first sale, we sold 39 firms and 26 hotels, for a total of 65.

• We raised more than $4 Billion in revenue.

• Buyers committed to invest $750 million more. I must underline that in addition to their investment commitments, many privatized enterprises have already increased their restructuring /adaptation program of their productive units in comparison with the new order of competitiveness and globalization of exchange and markets.

• We carried out 12 sales through the Casablanca Stock Exchange, all of them subscribed from 1.6 to 9.4 times.

• More than 6,000 workers, 6,322 to be exact, bought almost 1.4 million shares in the firms where they work. Workers have become owners through our program. Let me note that workers pay for shares, with a 15% discount.

• Foreign investors do appreciate Morocco. Trough privatization, they account for 78% of total revenue. They bought 18 firms and 5 hotels. Foreign investors include some of the world’s leading industrial and financial investors.

• Among the foreign industrial buyers figure Holderbank, the Swiss cement group; Dragofina, an Italian petroleum company; Courtaulds, the UK textile producer; Lesaffre, the French yeast manufacturer; FRAM, the French tour operator; the UK-based Shell Petroleum International, the US's Mobil Corporation, the French Total Outre-Mer, Saudi, Corral Petroleum, Spanish Martial Ucin, and the French telecom group Vivendi Universal.

• Key foreign financial investors include: Samba Finance, Morgan Stanley, Morgan Grenfell, Quantum Emerging Growth Fund, the Morocco Fund, Banque Pictet and Framlington Maghreb Fund.

Throughout all this operations our aim was  better management of former state owned companies and enhanced distribution of wealth (both socially and regionally).

Before I move to the major concession results, I would like to talk about the Iceberg Principle.

Morocco's portfolio was partly made up of large holding companies and their subsidiaries. Selling the holding extended privatization beyond the firms named in the law. Taking into account the privatizables' portfolio holdings, we expect privatization to indirectly touch on over 300 firms, over and above the listed 114. This should allow us to reduce the portfolio by about 40%.

The tender or public offer documents mention the subsidiaries as a strong selling point. When we sold the largest such holding, SNI, all the advertising and related newspaper stories stressed its 41 subsidiaries. However, we did not stress that by selling those subsidiaries, we reduced the state portfolio indirectly.

Concession results

As far as concession is concerned, this phenomena is far from being new to Morocco. It emerged first during the twenties and concerned notably water and electricity distribution and urban transportation.

It is worth mentioning that the boom of the concession process coincided with that of privatization by the beginning of the nineties.     

In addition to its privatization program, Morocco has achieved some successful concession projects in different sectors and is launching more.

Production of electricity:

This sector seems to be the most privileged activity for the private sector. Many concession projects are concluded or about to be.

Jorf Lasfar thermal power unit is now operated by a consortium of CMS Energy of Dearborn, Michigan and the Swiss ABB. The US OPIC provided guarantees. Actually the third and the forth unity were programmed to start last year in June and December respectively.

Completion, by European private operators (French-Danish consortium), of a wind farm of 50 MW of Koudia El Beida in Tetouan, northern Morocco. This project consists of setting up 80 windmill. This unity started production last year.

Pre-selection of firms that are going to be asked to submit their offers pertaining to building and operating three wind farms of 200 MW two in Tanger and one in Tarfaya for a period of 20 years. Request for proposal will be launched shortly.

Building and operating a power station using natural gas with 350 to 470 MW capacity in Tahadart ( near Tanger ). Evaluation of technical offers is underway.

Building and operating of power station using energy with capacity of 196 MW in Ain Beni Mathar (Oujda). Evaluation of offers is underway.

Distribution of water and electricity:

Recently, Vivendi group won a concession to distribute water and electricity in Tanger and Tetouan. Similarly, few years ago, Lyonnaise des Eaux won concession in Casablanca and REDAL group in Rabat-Salé. Concession in other cities (Fès, Meknès, Oujda, Marrakech and Agadir) should follow. For each city an international tender is scheduled to be launched in the coming months.

Drinking water conveyance:

Concession of  conveyance of Oum Er-Rabia water was granted to Oum Er-Rabia water Company in April 2000.

Highways:

Concessions granted to Autoroutes Du Maroc “ADM” concerns several highways connecting several Moroccan cities.

Completion of works on Rabat-Fès (167 km) ;

Completion of works on Larache-Sidi Lyamani (28 km) ;

Completion of works on Casablanca-Settat (57 km) ;

Works underway and programmed to be completed in 2002 on bypass of Casablanca (27 km).

Last year additional concessions were awarded to ADM concerning

Casabanca-El Jadida (90 km) programmed to be completed in 2003-2005 ;

Sidi Lyamani-Tanger (45 km) programmed to be completed in 2002 ;

Fnideq-Tetouan was launched in April 2000.

Post office and telecommunications:

The main operations relate to awarding of the second license GSM,  three VSAT licenses and two GMPCS licenses (Global Mobile Personnel Communication System). Many authorizations were granted pertaining to radio and satellite equipment and setting up independent electric radio network.

Four authorizations were awarded to private companies for express mail (ex. DHL, FedEx, UPS …)

Many other concession projects are under studies concerning, particularly, airports, national zoological park of Rabat, ski resort of Oukaimeden in Marrakech region and other infrastructure and transportation sectors.   

We have already placed concessions for urban transport in a number of cities. Concessions are also being given for waste management and disposal.

On the overall, we consider that the privatization process has actually pulled up the concession process/delegate management at both levels the institutional (law on concession) and the operational one (exemplary). Actually, the Department of Privatization conduct the follow up and participate at many concession projects studies.  

Main observations

To sum up, thus far the privatization program allowed for :

• reducing the state subsidy on the general budget,

• launching investment programs at both restructuring and modernizing their means of production,

• maintaining employment level for almost all privatized entities,

• having a positive impact on the development of the Casablanca Stock Exchange,

• improving Morocco’s economic situation which has attracted many foreign investors in some key sectors such as telecom, transportation, etc.,

• rising the investment levels, with the start of the privatization program and especially during last year with the transfer of 35% of Maroc Telecom,

• benefiting the Moroccan economy from the integration process to the world economy in strategic sectors with strong added value, and

• profiting Morocco from large foreign multinational’s know how in key sectors of the country.

Few successful experiences

Telecom sector : the privatization of Maroc Telecom and the awarding of the second license GSM, had an important impact on the telecommunication sector in Morocco, as demonstrated by the rapid increase of the number of subscribers :

• Second GSM operator (Meditel) : 1.2 million subscribers

This openness is actually moving to other segments in particular the fixed line phone, as I have mentioned above.

Financial sector : BMCE Bank

Since its privatization, the BMCE bank has become the leader in the Moroccan banking sector and this is for two main raisons:

• high increase of its annual cash flow, results and job creation, mainly due to the implementation of strategic restructuring plan covering its activities at national and international level.

• distinguished position in the international market by offering new services in many European capitals as well as raise of funds in the international financial markets.  

Cements : CIMENTERIES DE L’ORIENTAL

Called today HOLCIM after having finished its restructuring phase, It is actually the leader in the fabrication of cement in Morocco. Since its privatization, this firm started modernizing the industrial installations and strengthening its activities at the regional level. Also, its market shares were clearly strengthened.

Few failures

Privatization which is one of the means of restructuring public enterprises, allowed for revealing the weaknesses at a certain number of sectors which are particularly exposed to the international competition notably :

• Textile sector : public enterprises operating in this sector (SETAFIL & COTEF) failed to find buyers mainly due to the bad economic situation of the sector at both the national and the international level and the lifting of custom barriers within the framework of the European Union agreement and the signing of the multi-fiber agreement.

• Automobile sector : opening the Moroccan market and the relatively small local market have contributed to making the assembly unit SOMACA (automobile assembly company) confront the foreign competitors.

On the other hand, other industrial privatized companies, were unable to implement their restructuring plan and respect their contractual engagements at both financial and industrial level, namely the two cases SIMEF (Mechanical industries company in Fes) & ICOZ (Cotton industry in Oued Zem).

• SIMEF (Mechanical industries company in Fes)

The fact that the shareholders have not respected their contractual engagements which resulted in cessation of the  company’s activity and loss of jobs, and after several unsuccessful attempts of reconciliation between shareholders, the government had brought action against shareholders twice.

Following this procedure, SIMEF is back to the bosom of the State.    

• ICOZ (Cotton industry in Oued Zem)

 This company had financial and management problems, as well as the non realization of its contractual investment program. The government draw up and signed a draft treaty aiming at improving the financial situation of the company to give a boost to its activity.

Up till today, on a total of 65 privatized firms and hotels only 2 transferred entities to the private sector have actually known some genuine problems. 

In conclusion, Morocco had a unique privatization experience that may not necessarily be imitated elsewhere. It grew out of a particular public enterprise portfolio that had been built up from the remnants of almost a century's experience ‑ first as a Protectorate, later as an independent nation.

The Moroccan experience clearly demonstrates that

• Privatization has contributed to ease the integration of a certain number of sectors and this is due to the opening policy to foreign investors and to target certain number of strategic operators having an international vocation ;

• The main transferred activities have, in the overall, realized and in some cases exceeded the expected contractual investment program ;

In the future, it is imperative that the up coming privatization could undergo prior to privatization restructuring plan, to be better prepared for the opening of the market and for the hazards of the international competition.