Uruguay - Vocational Training and Technological Development Project

Document of , E COPY The World Bank ALW FOR OFFICIAL USE ONLY Report No. 1928b-UR URUGUAY STAFF APPRAISAL REPORT ON A VOCATIONAL TRAINING AND TECHNOLOGICAL DEVELOPMENT PROJECT' May 25, 1978 Projects Department Latin America and Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS (as of April 1, 1978) Currency Unit = New Pesos (NUr$) US$1.00 = NUr$5.5 NUr$1.00 = US$0.18 NUr$1,000,000 = US$181,818 WEIGHTS AND MEASURES 2 1 hectare (ha) = 10,000 m = 2.47 acres 1 kilometer (km) 2 = 0.62 miles 1 square kilometer (km ) = 0.39 square miles 100 ha 1 kilogram (kg) = 2.20 pounds 1 liter (1) = 0.26 gallons 1,000 kg = 1 metric ton = 9.98 long ton GLOSSARY OF ABBREVIATIONS COCAP - Vocational Training Council LATU - Technological Laboratory of Uruguay CONAE - National Council of Education SEPLACODI - National Planning Secretariat UTU - Labor University of Uruguay ANCAP - National Administration of Combustibles, Alcohol and Cement UTE - Electric Power Company CREA - Regional Agricultural Extension Cooperatives CONICYT - National Council of Scientific and Technological Research CNTPI - National Center of Industrial Technology and Productivity INC - National Colonization Institute INAPE - National Fish Institute EEC - European Economic Commission ANP - National Harbor Administration AFE - State Railways Administration GOVERNMENT OF URUGUAY FISCAL YEAR January 1 - December 31  FOR OFFICIAL USE ONLY URUGUAY STAFF APPRAISAL REPORT ON A VOCATIONAL TRAINING AND TECHNOLOGICAL DEVELOPMENT PROJECT Table of Contents Page No. I. SOCIO-ECONOMIC SETTING ....... ............ . ... ..... ........ 1 The Environment .....1..................... .......... Recent Economic Development and Future Prospects ... 1 Industrialization ......... . .. . * * . ....................... * .....* ... 2 Bank Lending Strategy ...*.................**.. 3 II. APPRAISAL OF THE VOCATIONAL TRAINING COMPONENT ..... 4 A. The Education System and Development Strategy in Uruguay . ....................... . 4 Overview of the Education System .... .......... 4 Human Resource Requirements of Development .... 7 Strategy for Expansion of Vocational Training . 9 B. The Proposed Vocational Training Component .... 10 Objectives and Content ........... ............. 10 Elements of the Project .......... .............. 11 Staff ......................................... 13 Evaluation .............................................. 13 C. Cost Estimates and Financing Plan .... ......... 13 Cost Estimates ................. ............... 13 Financing Plan .. .............................. 15 D. Implementation and Disbursements .... .......... 16 Project Administration ..... ................... 16 Professional and Technical Services .... ....... 16 Implementation Schedule ..... .................. 17 Site ........... ............................... 17 This report is based on the findings of an appraisal mission which visited Uruguay in September/October 1977. The mission comprised Messrs. A. Alberti (vocational trainer), I. Matallana (architect), A. Stocker (economist), J. Singh (loan officer), J. Collell (lawyer), R. Hemingway (technical educator, consultant), M. Kamenetzky (technological development specialist, consultant), and C. Cardenas (preinvestment fund specialist, consultant). A post-appraisal mission visited Uruguay in March 1978 for a final review of project content, costing and implementation procedures. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  Table of Contents (Continued) Page No. Maintenance ................................... 17 Procurement .......................................... 17 Disbursements ................. ............... . 17 III. APPRAISAL OF THE TECHNOLOGICAL DEVELOPMENT COMPONENT 18 A. Development Strategy and Technological Choices 18 Development Strategy .......................... 18 An Overview of the Uruguayan Technological Infrastructure ..... .................. .... . . . 18 The Technological Laboratory of Uruguay (LATU) 19 B. The Proposed Technological Development Component 20 Objectives and Content ......... a ............... 20 Criteria for Selection of Sub-Sectors and Industries 21 Criteria for Selection of Research Sub-Projects 22 Reorganization and Staffing .................... 23 Evaluation ..................................... 25 C. Cost Estimates and Financing Plan .............. 25 Cost Estimates .......... .. .................... . 25 Financing Plan .................................. 26 D. Implementation and Disbursements ............ ... 28 Project Administration ......................... 28 Professional and Technical Services ............ 28 Implementation Schedule ................ . . ....... 29 Site ........................................... 29 Maintenance .................................... 29 Procurement . ................................... 29 Disbursements ...... ............................ 30 IV. BENEFITS, RISKS AND UNCERTAINTIES, EVALUATION ....... 30 Benefits ............................................ 30 Risks and Uncertainties ..... ........................ 32 Evaluation .............................................. 32 V. AGREEMENTS REACHED AND RECOMMENDATIONS .... .......... 32 Vocational Training Component ....................... 32 Technological Development Component .... ............. 34  Table of Contents (Continued) ANNEXES ANNEX I Supporting Tables and Charts T-1 Population, 1963-85 T-2 Commodity Exports, 1973-76 T-3 Exports by Destination, 1967-75 T-4 Comparative Education Indicators T-5 Public Expenditures on Education, 1974-76 T-6 Output, Employment and Productivity, 1963 and 1975, 1985 Forecast T-7 Employment, Training Needs and Supply, 1982 T-8 Output of the Vocational Training System, 1982 T-9 Technical Assistance for Vocational Training T-10 Estimated Recurrent Expenditures and Unit Costs of COCAP, 1982 T-11 Project Implementation Schedule for Vocational Training T-12 Comparative Research and Development Indicators T-13 LATU Facilities T-14 Technical Assistance for Technological Development T-15 LATU Program of Activities T-16 Percentage Contribution of Selected Industries to GDP, Exports and Employment T-17 Income Statement and Balance Sheets of LATU for 1974-76 T-18 Financial Projections of LATU for 1977-85 T-19 Project Implementation Schedule for Technological Development T-20 Capital Cost Estimates T-21 Disbursement Schedule C-1 Structure of the Education and Training System, 1977 C-2 Proposed Relationship of COCAP to Other Public and Private Entities C-3 Proposed Structure of the Vocational Training System (COCAP) C-4 Proposed Structure of LATU ANNEX 2 Selected Documents Available in the Project File MAP May 25, 1978   I. SOCIO-ECONOMIC SETTING The Environment 1.01 Uruguay is a small, medium-income developing country which is distinguishable both for its high level of urbanization and the fact that it has achieved a comparatively even distribution of income and social services. Some 83% of the 2.8 million (1975) inhabitants reside in cities and towns, making this the most heavily urbanized country in Latin America (Table T-1). About 53% of the urban population is concentrated in Montevideo, which has 20 times more people than the next largest city and is not only the administrative/ commercial capital of the country but also the center for some 80% of all industrial activities. Total population has been growing slowly at only 0.6% annually during 1963/75; it is culturally homogeneous (mostly European immigrants) and educational attainments are relatively high, as evidenced by an adult literacy rate of 94% (1975). Progressive welfare legislation and related social development policies introduced early in the present century have resulted in Uruguay's having the most even pattern of income distribution among all Latin American countries. Hence, although real per capita incomes have declined in recent years, the incidence of abject poverty is relatively low by regional standards. 1.02 Despite the notable accomplishments described above, the last two decades of Uruguayan history have been marked by virtual economic stag- nation as successive governments pursued policies which ignored the country's fundamental dependence on its agricultural resources, in favor of an indus- trialization strategy based on import substitution activities that had long since reached the limits of economic efficiency. During most of the first half of the twentieth century, the very prosperous and productive agricultural sector was able to provide the base for high income levels and extensive social benefits. In the post-World War II era, however, Uruguay encountered increasing economic difficulties in the face of deteriorating terms of trade for its agricultural exports and the growing inefficiency of its industrial structure which relied on a strategy of import substitution. Income distri- bution, consumption and protection of domestic industries were emphasized at the expense of economic growth, investment and exports. By the late 1950s most import substitution possiblities had been exhausted, and the result during the 1960s and early 1970s has been a gradual economic stag- nation, declining per capita incomes, persistent inflation, periodic balance of payments crises, and rising unemployment (6.7%, 1975) and underemployment. Recent Economic Development and Future Prospects 1.03 In 1974, Uruguay suffered a very serious balance of payments crisis triggered by the three-fold increase in the price of imported oil and the closure of the EEC market to meat imports. Nevertheless, the economy has begun to show signs of revitalization as a result of a fundamental policy reorientation initiated in July 1974, when a new economic team was appointed. Essentially, the economic team realized that long-term solutions to the country's economic problems went beyond stabilization and  required reversal of the historic inward-looking economic policies and the creation of an environment more conducive to expanding the export of Uruguay's agriculture-based products. Since then, a combined stabilization and economic reform program has been implemented, with the objectives of: (a) improving resource allocation and productive efficiency through greater reliance on the price mechanism, and (b) promoting and diversifying non-traditional exports (i.e., those other than beef and wool). Domestic price controls were lifted, interest rates on deposits and loans freed, the foreign trade and payments systems liberalized, and nontraditional exports stimulated through a tax rebate system. 1.04 Despite the continuation of generally unfavorable external factors, the economy responded to the new program with an annual average GDP growth of over 4% during 1974-76, compared with an annual decline of 0.5% during the previous four years. Nontraditional exports, particularly leather and textile manufactures, led the recovery; they generated more than 50% of total exports in 1976 (Table T-2) and were instrumental in bringing about a remarkable turnaround in the external sector in that year. The economy's fast response to a consistent set of signals from the government and the price mechanism is encouraging. If the sound fiscal, monetary and trade policies already insti- tuted are continued, the Bank estimates that an annual economic growth rate of 4.5% during 1977-82 (cf., one percent during 1971-76) will be achievable, with the expansion of both traditional and nontraditional exports providing the main stimulus for growth. Price projections for Uruguay's exports and imports indicate a notable terms of trade improvement after 1977, which should hold until 1982. Industrialization 1.05 The legacy of the import substitution policies of the past has been an inefficient industrial sector, essentially devoted to the production of final consumer goods for the small domestic market in the framework of a highly protective and cumbersome system of external trade regulations. Uruguay's size and its primarily agricultural resource endowment did not permit the creation of larger intermediate goods industries. Import substi- tution was extended even to activities where foreign exchange savings were negligible, because domestic production was strongly dependent on imported raw materials and intermediate goods. Moreover, the policy instruments employed to foster import substitution (e.g., overvalued exchange rates, import quotas, tariff protection and price controls) strangled the traditional agricultural export sectors. The consequent shortages of foreign exchange earnings resulted in low levels of raw material and capital goods imports and, therefore, chronic capacity underutilization and obsolete equipment. 1.06 According to the most recent industrial census (1968), almost 95% of the 29,370 industrial firms in Uruguay were small-scale enterprises (SSEs) which employed nine persons or less. Some four percent of the firms employed between 10-99 persons, and only 200 large-scale firms (0.7%) employed more than 100 persons each. The SSEs accounted for 42% of the total industrial labor force and produced about 20% of the industrial output, while the few large-scale firms employed 35% of the industrial labor force and generated  50% of all industrial output. The principal sub-sectors, which together accounted for more than one-half of all firms, employment and output, were textiles, shoes and clothing, foods and transport equipment. 1.07 As a consequence of the new economic reform program (para. 1.03), there has been a notable revival of manufacturing activity and exports since 1974. As part of the reform package, an Industrial Promotion Law was approved in 1974, creating the basis for stimulating capital investments through credit assistance and tax relief. A new Foreign Investment Law, designed to operate in conjunction with the Industrial Promotion Law, accords foreign investments approximately the same treatment as domestic investments, in addition to quite liberal profit remittance provisions. Uruguay has also signed trade agreements with Brazil and Argentina, which should encourage the export of manufactures to these countries. The net effect of these policies has been an acceleration in the growth of manu- facturing output from an average of -0.8% in 1971-73 to an estimated average of 6% during 1974-76. The increase in foreign sales from non-traditional exports (from US$99.4 million in 1974 to US$175 million in 1975) enabled Uruguay to maintain its overall 1975 export earnings at the 1974 level, despite the closure of the EEC market to beef imports (Tables T-2, T-3). 1.08 Looking toward the future, despite its lack of minerals and fuels, Uruguay enjoys some advantages for an export-oriented development strategy in the industrial sector. The country's comparative advantage lies in its literate labor force, its good location between the large markets of Argentina and Brazil, an adequate transport infrastructure and good natural resource endowment. The full realization of this industrial export potential will depend on the sustained implementation of a consistent set of economic policies. A good start has been made, but further action will be necessary to define a concrete long-term industrial strategy. Among the most basic requirements is the need to identify more precisely the manu- facturing sub-sectors where Uruguay's comparative advantage and market oppor- tunities are strongest, so that credit policies, fiscal incentives and other export promotion schemes can be concentrated in these areas. A re- vitalization of the country's medium- and long-term financial structure will also be necessary, and to this end the government has recently contracted a number of external credits with bilateral and multilateral sources. A major portion of these funds would be aimed at rehabilitating and renovating capital equipment and machinery which would permit more efficient and up-to-date production methods. Finally, special programs to upgrade manpower skills and provide technological support services will be necessary to underpin the government's long-term industrial strategy. 1.09 Bank Lending_Strateg. Bank assistance for industrial development in Uruguay has thus far included financing of a US$20.8 million loan (Loan No. 1176-UR) for importation of capital goods needed for renovation and expansion of plant capacity of industrial exporting enterprises and technical assistance to aid in the formulation of sound sectoral policies and to strengthen public agencies responsible for evaluation of industrial projects and export promotion. The newly proposed project aims at enhancing the  - 4 - competitiveness of Uruguayan exports by increasing labor productivity, improv- ing product quality and promoting the use of technologies well suited to the country's requirements. The project would include a national vocational training program to meet the training needs of the export-oriented industrial sector (including technical assistance for the preparation of an industrial preinvestment facility), and a technological development component to expand ongoing quality control services and assist the government and the private sector in selecting appropriate technologies for the industrial sector. The project would complement recent assistance to Uruguay from other external agencies, including: (a) a US$5 million loan from USAID, approved in 1975, for importation of capital goods for agro-industries; (b) a US$15 million industrial credit loan from the Inter-American Development Bank, approved in 1977; (c) miscellaneous technical assistance to the industrial sector from various bilateral and multilateral sources, estimated at about US$1.9 million total during 1975-76; and (d) miscellaneous technical assistance for tech- nological development from various bilateral and multilateral sources, estimated at about US$1.3 million total during 1975-76. II. APPRAISAL OF THE VOCATIONAL TRAINING COMPONENT A. The Education System and Development Strategy in Uruguay Overview of the Education System 2.01 Uruguay possesses one of the most developed education systems in Latin America, having introduced free and universal access to all levels early in the twentieth century. The structure of the formal system (Chart C-1) presently comprises two years of pre-primary, six years primary, three years common lower secondary, three years diversified or four years technical upper secondary, and three to six years higher education (including teacher training). Until 1973, four autonomous councils were directly responsible to the Minister of Education for administration of primary, secondary, technical and university education. Since passage of the 1973 Education Law, a National Council of Education (CONAE) has been responsible to the Minister of Education for the coordination of the four councils in the areas of budgeting, planning and teacher training. Each council retains responsibility for elaborating curricula and syllabi (under CONAE guidelines), administration and supervision of schools, and appointment and supervision of teaching staff. 2.02 The 1975 census shows the overall adult literacy rate to be 94%, including 95% in urban and 90% in rural areas. The gross primary school participation rate 1/ was 93% for 6-12 year olds; the female participation rate for primary education was 48%, which reflects the sex distribution of the 1/ Including overage students. See Table T-4 for other Comparative Education Indicators.  -5- population. Retention rates were low (61% for primary, 41% for general secondary and 18% for technical secondary), due more to the pressing need to find employment than to unavailability of school places. Of those who success- fully complete primary education, 83% go on to lower secondary education. Public education expenditures amounted to 2.5% of GNP in 1975, representing some 15% of total public expenditures (Table T-5). About 46% was devoted to primary education, 22% to general secondary, 12% to technical secondary, and 20% to university education. Average unit recurrent costs were as follows: Public Unit Enrollments Recurrent Costs Level Total Public (US$ of 1975) Primary /1 395,000 315,362 132 General Secondary 144,497 113,108 169 Technical Secondary 38,948 37,698 275 University /2 26,150 26,150 - /1 Includes pre-primary. /2 Estimate includes all students enrolled, including part-time. Therefore, calculation of recurrent unit costs not meaningful. 2.03 Technical and Vocational Education. Uruguay has a very extensive formal technical education system: about 22% of all secondary students are enrolled in technical programs (1976) and 18% of university students pursue courses in engineering, natural sciences and agriculture (1973). In Latin America, compared with Uruguay, only Argentina and Brazil have a higher ratio of technicians per 10,000 population and only Argentina and Mexico have more engineers and scientists per 10,000 population. Despite the considerable effort devoted to technical education, however, the system has some notable weaknesses: internal efficiency is low, linkages between the educational institutions and prospective employers are weak, and the emphasis has been almost exclusively on the preparation of young people for job entry with scant attention paid to the skill upgrading needs of the adult labor force. 2.04 Almost all technical and vocational education in Uruguay is admin- istered by the Council of Technical and Vocational Education (Labor University of Uruguay - UTU). UTU has a network of 80 schools and 70 mobile centers, which enrolled about 37,700 students in 1975; in addition, some 1,200 students were enrolled in private technical schools. The majority are adolescents studying formal courses oriented towards job entry at different levels, or towards higher education. Less than 1% of UTU's students are adults receiving skill upgrading training. UTU presently operates six kinds of schools/programs, as summarized below: (a) lower secondary (3 years), with a heavier practical content than in general lower secondary schools under the jurisdic- tion of the Secondary Education Council, oriented to pre- paration for upper technical or general secondary education or to job entry at semi-skilled worker level;  - 6 - (b) occupational post-primary (normally 2 years) for primary school graduates and lower secondary drop-outs of 14 years or more, oriented to job entry at skilled worker level or to a terminal upper secondary technical education course; (c) terminal upper secondary technical education (4 years) for graduates of common lower secondary education or occupational post-primary education, oriented to job entry at mid-technician level; (d) non-terminal upper secondary technical education (4 years) oriented to job entry at mid-technician level or to univer- sity studies; (e) in-plant adult vocational training (variable duration), oriented to skill upgrading at worker level; and (f) miscellaneous short (1-3 weeks) courses on agriculture, social promotion, home economics and the like, in the interior of the country. 2.05 UTU suffers from major internal inefficiencies. Drop-out rates in 1974 were 44%, 36%, 30%, 38% and 4% after each of the first five years of a typical six-year lower and upper secondary program (e.g., only 18% of entering students reach the sixth year). Total output in 1975 was 4,647, of whom 30% were at technician, 25% commercial and 45% skilled worker level. 2.06 Of UTU's total US$12.9 million budget in 1976, 97% was devoted to recurrent expenditures, of which 98% was for salaries. In recent years UTU has lost many of its qualified instructors due to low monthly salaries (US$130- US$275 for 20 hours equivalent of weekly teaching), which are equivalent to about one-half of salaries paid by private industry to people with comparable training. In 1975, only 14% of all instructors had been trained at the technical teachers institute. Most instructors hold several other jobs, which means that they normally lack time to prepare classes and keep abreast of their fields. Budgetary shortages have also been a major factor in restricting growth of non-formal vocational training. 2.07 UTU's external productivity is not thought to be high, although this is difficult to ascertain in the absence of systematic tracer studies or other feedback mechanisms. Despite some exceptions (e.g., the agricultural courses started in 1975 at the Agricultural Teacher Training College in Trinidad and the industrial training courses organized for the leather and clothing industries in Montevideo), UTU does not generally maintain a close relationship with employers. Courses tend to be long and are not structured to teach skills according to specific needs. 2.08 UTU has paid scant attention to upgrading needs of both the rural and urban adult labor force. Despite the importance of the agricultural sector, output from UTU schools at technician level was only 76 (1975) and at  - 7 - skilled worker level only 615 (1977). Some additional farmer training is being undertaken in an uncoordinated fashion by the private Regional Agricul- tural Extension Cooperatives (CREA), the public National Colonization Institute (INC) and the Ministry of Agriculture. With regard to industry, 266 workers received training in 1975 through UTU's in-plant courses, and public enterprises trained another 571 persons in their own in-plant schemes. However, no strategy exists for the creation of an infrastructure of supervisors/instructors in enterprises, and there has been no effort at supervisor training. Although UTU has provided some advice and prepared manuals for enterprises interested in establishing training schemes, it lacks the financial and technical capability to satisfy the growing demand for such services. In the area of management and safety, some 1,290 persons received training through the National Center for Technology and Productivity and the State Insurance Bank. Human Resource Requirements of Development (Tables T-6 and T-7) 2.09 The prevailing levels of unemployment and underemployment in Uruguay are the result of nearly two decades of economic stagnation: the agricultural sector continued to release workers to the cities at the same time that industry was unable to produce enough job opportunities. This resulted in two phenomena: (a) heavy net emigration of 200,000 people (mainly 15-24 year olds) during 1963/75, equivalent to 20% of the labor force and 7% of total population in 1975; and (b) excessive employment by the public sector of unskilled and semi-skilled personnel, now equivalent to about 23% of the total labor force (19% in the central government and 4% in autonomous public enterprises). 2.10 Precise employment data are scarce in Uruguay, but according to a sample of the 1975 census, 37% of the total population were engaged in active employment, 2% were unemployed but had previous work experience, and 0.6% were persons looking for employment for the first time. This yields an active labor force of 1,094,400 persons and an unemployment rate of 6.7%. The labor force participation rate of men was 70% and 27% for women. The latest household survey for the Department of Montevideo (45% of total population) shows a higher unemployment rate of 10.8% for the second half of 1977. About one-half of the unemployed were less than 25 years old; unemployment was fairly evenly distributed among the occupations, with construction workers being the hardest hit at 15%. 2.11 Despite the seemingly ample supply of labor in Uruguay, some indus- tries, particularly the dynamic exporting ones, are experiencing a shortage of industry-specific skills. A sample survey of 24 exporting firms, organized in March 1977 by the Planning Office and the Chamber of Industries with assistance from a Bank mission, showed that 96% of the firms interviewed had difficulty in finding adequately trained workers and were willing to pay higher wages in order to attract such workers. The coexistence of high unem- ployment with supply shortages of certain skills is partly the result of a lack of feedback from the labor market to the training system, as well as the  - 8 - heavy emigration of skilled workers and technicians. Some 95% of the firms interviewed in the survey expressed a willingness to participate in training programs in schools or factories, especially if private enterprise could play an active role in managing the scheme. 2.12 The agricultural and fisheries sector presently accounts for about 15% of GDP and directly employs 15% of the labor force. Of nearly 16 million ha. suitable for agricultural production, 94% are pastures and only 6% are used for crops. The government's development strategy envisages expanded crop production based on a mixed crop/livestock rotation system designed to raise productivity, prevent soil erosion and impro-ve soil fertility. This will entail new techniques and increased mechanization. Although UTU has offered some courses for rural workers, output has been small in relation to the size of the agricultural labor force (158,100); upgrading requirements are estimated at 7,500 rural workers annually during 1978-82 (principally for operation and maintenance of agricultural machinery). With regard to marketing of agricultural and fish products, refrigeration plants are playing an increasingly important role, but Uruguayan workers are not well trained in the basic concepts of refrigeration plant operation and maintenance. Total annual training requirements for skilled and semi-skilled workers are estimated at 45 persons. With regard to agricultural technicians, although the output of UTU schools is quite low, it appears to satisfy present demand since ranchers and farmers in Uruguay are only gradually becoming accustomed to employing such personnel. 2.13 Uruguay's industrial sector generates about 25% of GDP and provides employment to 18% of the labor force. Obsolete equipment, archaic management methods, low labor skills and outdated technology are the legacies of the prolonged protection and lack of competition of the import substitution period (Chapter I). Implementation of the government's new export-led growth strategy requires an updating of skills and technologies if Uruguayan manufacturers are to survive in competitive world markets. The textiles and garment indus- tries together employ about 13% of the industrial labor force and account for 5% of total exports; and the leather industry employs 9% of the industrial labor force and provides 20% of exports. Annual job entry training needs are 2,240 and 1,555 persons, respectively, during 1978-85. 1/ The upgrading needs amount to about 1,965 and 1,365, respectively, over the same period. 2.14 The services sector contributes about 60% of GDP and 61% of the labor force. More than one-third of service employees work for the public sector, which generated practically all additional job opportunities during 1963-75. Nevertheless, many of the autonomous state enterprises (e.g., rail- ways, ports and power) experience manpower problems. In general, low salaries result in shortages of high-level staff with consequent weaknesses in internal organization and supervision of low-skill level workers. Existing ad hoc training activities are not responding to the nature of the basic problem. 1/ Assumes annual production increases of 10%, productivity increases of 3%, and attrition rates of 3%.  -9- Strategy for Expansion of Vocational Training 2.15 To provide the training services which are essential for the successful implementation of its new economic program, in early 1977 the government established a working group of public and private representatives (Ministries of Education and Labor, National Planning Secretariat and Chamber of Industries) to prepare a plan for the development of a national vocational training system. The working group, with technical assistance financed under Loan 1176-UR, diagnosed Uruguay's most pressing training requirements and proposed the creation of an organization to provide that training. 2.16 The organization to be established would be called the Vocational Training Council (COCAP). It would be linked to the Ministry of Education, functioning as a second Council parallel to CONAE (Chart C-2). CONAE would continue to oversee the formal (including secondary and post-secondary technical) education system of Uruguay, pursuant to the 1973 Education Law (para. 2.01), while COCAP would assume jurisdiction over all non-formal urban and rural vocational programs, primarily oriented to adults in need of short- term skill training to meet specific job requirements. Hence, CONAE would arrange for the transfer from UTU to COCAP of its ongoing adult rural and industrial vocational training and in-plant training services, and would also make available to COCAP about 20 of UTU's experienced instructors and course programmers in order to assist COCAP in its start-up operations. The govern- ment provided assurances that this transfer will be effected by January 1, 1979. 2.17 COCAP's structure would include a Board of Directors, industrial advisory groups, and a full-time executing unit (Chart C-3). To ensure that COCAP becomes an effective institution capable of responding quickly and flexibly to priority training needs, provision has been made for broad representation of all interested parties, including the private sector, in its management. The Board of Directors would include one representative each of the Ministers of Labor, Industry and Energy, Agriculture and Fishing, and the National Planning Secretariat, and two representatives each of the Minister of Education, the Chamber of Industries and private agricultural institutions. The Directors of CONAE and UTU would participate in the Board as the two representatives of the Minister of Education (with the Director of CONAE chairing the Board), and this should facilitate the coordination which is always desirable between the formal and non-formal education systems in any country. However, in all other respects, COCAP would be administratively, technically and financially independent of CONAE and UTU. 2.18 Basically, the Board of COCAP would determine national training policies, approve training plans, supervise the execution of training activities, studies and related services, and administer financial resources for training. The Board would be assisted in this effort by part-time, ad hoc industrial advisory groups for each industry in which training is to be offered (e.g. textiles, clothing, leather, refrigeration). These groups would comprise representatives of the training system and the industrial or  - 10 - agricultural sector. In many cases, the representatives of the employers may be the same as those who participate in the industrial advisory groups which would work with LATU, although the decision would be up to the employers' groups concerned. Finally, a full-time executing unit, responsible to the Board, would plan, program, implement and evaluate the training services which the Board elects to provide. 2.19 The legal establishment of COCAP would take place in three stages. A decree creating COCAP, with the aforementioned structure, membership and functions will be issued. However, in accordance with the Uruguayan Constitution, such a decree could not endow COCAP with either legal personality or the right to long-term funding, attributes which can only be obtained via a full law. Therefore, as a special condition of effectiveness of the loan, legislation would be promulgated which grants COCAP legal personality and an adequate and stable long-term financing system. Finally, promulgation of all necessary regulations to implement the COCAP legislation, and the signing of a contract acceptable to the Bank between COCAP and the government covering all important aspects of project execution, would be conditions of disbursement of the vocational training component of the proposed loan. B. The Proposed Vocational Training Component Objectives and Content 2.20 The proposed project would assist the Government of Uruguay in establishing a national vocational training system to provide the manpower training which is essential for the implementation of its economic develop- ment strategy. Specifically, the project would finance the physical facili- ties and technical assistance necessary for the new Vocational Training Council - COCAP (para. 2.16) to begin operations, including: (a) construction, furnishing and equipping of one new vocational training center in Montevideo with 320 trainee places, adequate to provide training opportunities for about 2,000 workers annually; (b) provision of six mobile training units to offer training to about 6,400 persons annually in agricultural occupations; (c) provision of 9.75 man-years of specialist services and 2.5 man-years of fellowships to establish in-plant training programs for about 1,300 supervisors and 6,500 workers annually in the major public utilities, services and manufacturing enterprises; (d) provision of additional technical assistance, comprising 11 man-years of specialist services and 7 man-years of fellowships, in support of the general institutional development of the new vocational training system and to prepare a preinvestment studies fund; and  - 11 - (e) financing (US$310,000) of surveys to identify training needs in other priority sectors to be served in future stages of development of the vocational training system. 2.21 When the facilities financed by the project are in full operation in 1982, about 16,200 skilled and semi-skilled workers and supervisors woluld receive training annually (Table T-8). The vast majority (14,860) would be already employed adults in upgrading courses, with only about 8% (1,330) being new entrants to the labor force. Several different delivery modes would be used in accordance with the particular characteristics and re- quirements of each sector, including off-the-job training in a vocational training center (2,000 workers annually), mobile training (6,400) and in-plant training (7,800). Consistent with the government's industrial development strategy of stimulating the growth of the non-traditional export sectors, the training system would focus initially on the needs of the textiles, shoes and leather, and garment industries, as well as specific export-oriented agricul- tural and export-supporting service (e.g., utilities and infrastructure) enter- prises. Thereafter, the system would broaden its scope to provide manpower training as well for other priority economic activities. Elements of the Project 2.22 Vocational Training Center. The proposed project would provide for the construction, furnishing and equipping of a new building in Montevideo, which would serve as both the national headquarters of COCAP and as a training center (320 trainee places). The facilities would include 12 workshops, 5 classrooms, one library, one instructional materials production shop, and administrative areas. Courses would be offered during daytime and evenings to 2,000 skilled and semi-skilled workers and plant supervisors annually in the textiles, shoes and leather goods, garment, and refrigeration trades. These courses were selected on the basis of investigations by the working group and industrial advisory groups which were responsible for designing the new vocational training system (para. 2.15). Other courses would be based on similar labor market studies. 2.23 All courses would be based on occupational analysis and would vary in duration from 24 to 800 hours. Flexibility would be ensured through the use of short, self-contained training modules which would permit trainees to enter the system at the point appropriate to their qualifications and return for further training at later stages in their careers. To encourage workers and employers to take advantage of training programs, a system of certification would be introduced for common skilled occupations: national standards would be established, workers tested and certificates awarded. These course development and certification tasks would be the responsibility of the Technical and Planning Department of COCAP, to which some of UTU's experienced personnel would be transferred (para. 2.28). The government provided assurances that by January 1, 1980, the Ministry of Labor would assist in the placement and follow-up of COCAP's graduates, through its Employment Service (which is expected to become operational in 1978).  - 12 - 2.24 Mobile Training Units. These units would include six vehicles and sets of equipment for rural training. The program would be administered from UTU's Agricultural Teacher Training College in Trinidad. The government gave assurances that COCAP would appoint a rural training coordinator (based in Trinidad) and six regional deputy coordinators by January 1, 1979. Courses of one to three weeks' duration would be offered in 11 different occupations to about 6,400 rural workers annually: tractor repairing; farm equipment maintenance; soil preparation, pruning and grafting; forestation; cattle insemination; gestation diagnosis for cattle; sheep insemination; sheep shearing; milk production; and apiculture. A tentative training plan showing the disposition of the equipment, instructors and courses was prepared during appraisal. Specific regional training needs and the itineraries of the mobile units would be determined by the six regional deputy coordinators in consul- tation with the agronomists of the National Colonization Institute, the Plan Agropecuario, the Extension Service of the Ministry of Agriculture, and the farming enterprises. 2.25 In-Plant Training. The in-plant training program to be developed under the proposed project would provide a comprehensive range of services to enterprises in both the diagnosis of training needs and the implementa- tion of on-the-job training programs. About 1,300 training officers, supervisors and foremen would be trained annually in short courses in instructional techniques, human relations and industrial safety (and where necessary technical subjects) to prepare them for participation in subse- quent routine on-the-job training of about 6,500 workers annually. In particular, the training needs of the public ports, railways, electric power, petroleum and fishing agencies, as well as several large private manufactur- ing enterprises, would be met through in-plant training. The government gave assurances that the small in-plant training service presently operated by UTU would be transferred to COCAP by January 1, 1979. 2.26 Technical Assistance. The technical assistance to be provided under the proposed project is summarized below, with further details set forth in Table T-9: (a) 3 man-years of specialist services in the planning and organization of vocational training and supervisor training; (b) 9-3/4 man-years of specialist services and 2-1/2 man-years of fellowships for in-plant training and industrial safety; (c) 3 man-years of specialist services and 7 man-years of fellowships for textiles and leather training; (d) 2 man-years of specialist services for agricultural training; and (e) 3 man-years of specialist services for evaluation, analysis of training costs, preparation of a preinvestment fund, certification and trade testing.  - 13 - The government gave assurances that the specialists would be selected on the basis of criteria and employed on terms and conditions acceptable to the Bank; the fellowship program would be acceptable to the Bank; and suitable counter- parts would be appointed to work with all specialists. 2.27 Surveys. The proposed project would include US$310,000 to finance training needs surveys. The objective would be to identify priority sectors/ industries which would require the manpower training services of COCAP in future. The surveys would be conducted jointly by COCAP and the Ministry of Labor. The government gave assurances that the plans for each survey (including costs, terms of refcrence, and implementation program) would be submitted to the Bank for approval prior to the initiation of the survey. Staff 2.28 To establish COCAP, about 35 full-time professionals, 24 agricul- tural instructors and 22 industrial instructors, as well as supporting staff, would be required by full operation in 1982. The government gave assurances that some 20 instructors and course programmers would be transferred from existing UTU programs to COCAP by January 1, 1979, and the remainder would be new appointments. All staff would receive training through working as counterparts to the technical assistance specialists, under fellowships financed under the project, or through participating in training courses organized by the specialists. The legislation (para. 2.19) creating COCAP would provide for the establishment of appropriate salary scales and conditions of service to ensure the recruitment and retention of qualified staff. Evaluation 2.29 A system for evaluating the external and internal effectiveness of the training activities to be financed under the proposed project was developed during appraisal. The system focuses on production and wage in- increases attributable to the training programs in the relevant sectors and on unit training costs. The government gave assurances that it would begin to implement the system by July 1, 1979, and would make available to the Bank for review annual evaluation reports during 1980-82. Also, within six months of the Closing Date of the loan account, the government would send to the Bank a full completion report providing an assessment of the project, its results and the experience gained during implementation. C. Cost Estimates and Financing Plan Cost Estimates 2.30 The total cost of the vocational training component of the proposed project is estimated at US$4.9 million, as summarized below. Further details are provided in Annex 1, Table T-20.  - 14 - NUr$ ('000) 1/ US$ ('000) Items Local Foreign Total Local Foreign Total Vocational Training Center 5,325.7 3,390.7 8,716.4 968.3 616.5 1,584.8 Mobile Training Units 32.4 611.6 644.0 5.9 111.2 117.1 Technical Assistance 345.4 6,558.8 6,904.2 62.8 1,192.5 1,255.3 Studies 562.7 1,142.3 1,705.0 102.3 207.7 310.0 Project Administration 2,291.3 308.0 2,599.3 416.6 56.0 472.6 Base Cost Estimates 2/ 8,557.5 12,011.4 20,568.9 1,555.9 2,183.9 3,739.8 Contingencies - Physical (10%) 855.8 1,201.2 2,057.0 155.6 218.4 374.0 - Price (19.6%) 1,924.5 2,512.4 4,436.9 349.9 456.8 806.7 TOTAL COST 11,337.8 15,725.0 27,062.8 2,061.4 2,859.1 4,920.5 1/ US$1.00=NUr$5.5 as of April 1, 1978. 2/ Base cost estimate expressed in prices as of April 1, 1978. 2.31 Civil works costs were estimated on the basis of actual bids for the recent construction of technical education institutions in Uruguay having comparable workshop facilities. Space standards reflect detailed schedules of accommodation consistent with curricula requirements, and they are similar to standards used in other Bank-financed vocational training projects in Latin America. The estimatid cost of construction (excluding site development) averages US$228 per m of gross floor area. No provision was made for the cost of land acquisition, since an acceptable site already belonging to the government would be used (para. 2.41); site development costs were estimated at only 8% of civil works costs, as most basic services are already available at the site. Architectural designs and construction supervision would be contracted with consultant firms acceptable fo the Bank; the costs of pro- fessional services were based on prevailing fee scales in Uruguay established by the local architectural and engineering associations. Equipment costs were estimated for each teaching and administrative area, and furniture costs were estimated at 10% of the value of construction. Imported equipment and furni- ture would be exempt from customs duties, and are costed accordingly. Detailed equipment and furniture lists would be compiled during the design stage and presented for Bank approval prior to procurement. Technical assistance costs were estimated at US$55,000 per man-year of specialist services and US$12,000 per man-year of fellowships.  - 15 - 2.32 Contingency allowances have been added to the base cost estimate for: (a) unforeseen physical factors averaging 10% of the base cost esti- mate; and (b) expected annual price increases above the base cost estimate plus physical continigencies for: construction (including civil and site works and professional services), technical assistance and project administration averaging 8% during 1978, 7.5% during 1979, and 7% per year during 1980-82; and for furniture and equipment averaging 7% during 1978, 6.5% during 1979, and 6% annually during 1980-82. Total contingencies amount to US$1.2 million, equal to about 32% of the base cost estimate (Table T-20). 2.33 The total foreign exchange cost of the vocational training component of the proposed project is estimated at US$2.9 million, representing 58% of the total cost of the component. Foreign exchange costs were calculated as follows: equipment and technical assistance, 95%; studies, 67%; furniture, 40%; civil works, 18%; professional fees, 30%; project administration, 10%, and site works, 8% (Table T-20). Financing Plan 2.34 The total gcapital cost of the vocational training component of the proposed project would be met by Bank financing of US$2.9 million and a US$2.0 million budgetary contribution from the central government, as follows (in US$'000): 1978 1979 1980 1981 1982 1978-82 Bank Loan - 553.1 721.9 1,047.1 577.9 2,900.0 Government Contribution 55.6 346.1 695.7 785.7 137.4 2,020.5 TOTAL 55.6 899.2 1,417.6 1,832.8 715.3 4,920.5 The government gave assurances that it would make sufficient and timely budgetary allocations to meet the annual requirement for counterpart funds to implement the vocational training component of the proposed project. 2.35 The recurrent costs generated by the vocational training component of the proposed project would reach US$0.9 million (1977 prices) annually by 1982, when full enrollment capacity is reached (Table T-10). Costs per trainee hour of instruction are estimated at US$0.91, which is reasonable compared with the costs of similar training schemes in other Latin American countries. By way of comparison, these costs are equivalent to about 7.3% of UTU's total annual recurrent expenditures in 1977. The legislation establish- ing COCAP (para. 2.19), would provide for an acceptable long-term financing system, based primarily on earmarking of budgetary funds to cover the expected recurrent costs. The government gave assurances during negotiations that it would take, or cause COCAP to take, all necessary measures to supplement the aforementioned revenues if they prove inadequate to meet COCAP's annual operating costs.  - 16 - D. Implementation and Disbursements Project Administration 2.36 The vocational training component of the proposed project would be administered by the Vocational Training Council - COCAP (paras. 2.15-2.19, and Chart C-3). The Director of COCAP's full-time executing unit would perform the normal functions of a project director, with overall responsibility for planning, organizing, controlling and monitoring project implementation. The Director would be assisted by a full-time project implementation team, com- prising an architect, a vocational training specialist, an accountant and a procurement officer, as well as essential supporting staff. Appointment of a Director and acceptable principal staff of the project implementation team would be a condition of disbursement for the vocational training com- ponent of the project. Other departments of COCAP would also assist in project implementation, from time to time, as necessary. The salaries of the full-time project implementation team and related operating expenses, estimated at US$472,600, have been included under project administration costs. Also included are the costs of other short-term consultants who may be required to assist in equipment and furniture procurement, curriculum development and preparation of instructional materials. The government gave assurances that COCAP would maintain separate accounts for all project implementation expendi- tures; these accounts would be audited annually by auditors acceptable to the Bank and the audit reports would be made available to the Bank for review. 2.37 In the interests of promoting maximum coordination and flow of information between the vocational training and technological development components of the proposed project, the National Planning Secretariat (SEPLACODI) would designate staff responsible for monitoring the respective components. The government gave assurances that SEPLACODI would appoint at least one such liaison officer for vocational training by January 1, 1979. The Director of COCAP's full-time executing unit would be responsible for liaison with the SEPLACODI staff. Professional and Technical Services 2.38 Consultants acceptable to the Bank would be retained for all architectural and engineering design work and for construction supervision. An adequate number of qualified consulting firms are available in Uruguay for this purpose. The cost of the fees, estimated at US$102,100 has been included under professional services in the total project cost. 2.39 The government gave assurances that ad hoc technical committees would be established as needed by COCAP to review architectural designs, equipment and furniture lists and specifications and to certify that they meet economic and functional standards and costs and the educational objectives of the project, before forwarding such documents for Bank approval. These committees would probably have the same membership as the industrial advisory groups established to assist COCAP in determining sub-sectoral training needs and programs (para. 2.18).  - 17 - Implementation Schedule 2.40 For the purpose of assisting the executing unit in planning, organizing and controlling project execution, a preliminary implementation schedule was prepared during appraisal (Table T-11). COCAP would update the schedule regularly and use it as a project implementation and monitoring tool. Site 2.41 An acceptable site for the vocational training center, presently belonging to the National Education Council (CONAE), has been identified in Montevideo. The government gave2assurances during negotiations that suffi- cient land (a minimum of 3,000 m ) would be transferred to COCAP before the start of design work. The cost of demolition of a warehouse presently occupying the site has been included under project construction costs. Maintenance 2.42 The government gave assurances during negotiations that it would adequately maintain and repair all equipment, furniture and buildings provided under the project. To that effect, COCAP would prepare a maintenance handbook and include in its annual budget a sum for maintenance equivalent to at least 1% of the replacement cost of the buildings during the first four years of operation and 1.5% thereafter, and 5% of the cost of equipment and furniture. Procurement 2.43 Contracts for the procurement of furniture and equipment would be awarded on the basis of international competitive bidding in accordance with Bank guidelines, except that furniture and equipment which cannot be grouped into packages of at least US$50,000 would be procured on the basis of local procedures acceptable to the Bank. A maximum of US$120,000 in the aggregate (equivalent to about 15% of the estimated total cost of furniture and equip- ment) would be procured in this manner. Domestic furniture and equipment manufacturers tendering under international procedures would receive a margin of preference in bid evaluation of 15% of the CIF cost of competitive imports or the applicable customs duty, whichever is lower. 2.44 Civil works contracts would be awarded on the basis of competitive bidding advertised locally and in accordance with local procedures acceptable to the Bank. Since the estimated total cost of construction of the vocational training center is only US$940,000, foreign contractors are not likely to participate, although they would not be precluded from bidding. Disbursements 2.45 The proposed loan of US$2.9 million (for the vocational training component) equivalent to 58% of the total cost of US$4.9 million, would finance the foreign exchange component of US$2.9 million. The loan would finance: (a) 20% of total expenditures for construction (including civil and  - 18 - site works and professional services); (b) 100% of foreign expenditures for imports or 85% of expenditures for locally procured furniture and equipment; and (c) 100% of total expenditures for technical assistance and studies. The loan would be disbursed over a period of 4-1/2 years through December 31, 1982, with construction completed by June 30, 1982 (see para. 3.37 and Table T-21). III. APPRAISAL OF THE TECHNOLOGICAL DEVELOPMENT COMPONENT A. Development Strategy and Technological Choices Development Strategy 3.01 Until recent years, industrial development in Uruguay was based on import substitution, with heavy protection for domestic firms (Chapter I). The government's new export-oriented industrialization strategy entails the promotion of non-traditional industries, which must now compete inter- nationally for foreign markets. Not only is there the need for changes in the type and quantity of goods produced, but also in the product designs, pro- duction techniques and channels of distribution which are used. This strategy necessitates the development of an adequate indigenous capability in the areas of technological research, dissemination of information, and technical assistance to entrepreneurs. 3.02 Uruguay needs mainly to develop the technological research capability to analyze and select from amongst existing technological alter- natives and to make appropriate adaptations to local conditions. Domestic firms also require technical assistance and information services to help them in analyzing production problems and identifying possible technological solutions and potential markets. This is particularly important in the Uruguayan context because of the small size of the average industrial enter- prise; most companies cannot afford to maintain their own research and testing facilities and personnel. Technological research may also be needed to develop new technologies in cases for which none of the available tech- nological alternatives offers an adequate solution. Such cases may arise from the exploitation of indigenous raw materials from the Uruguayan flora, fauna and mineral resources or from particular problems related to the Uruguayan scale of production. An Overview of the Uruguayan Technological Infrastructure 3.03 At present, Uruguay has only a very limited domestic capability in product and process development. Although some lines of technical and managerial assistance have been developed, these serve mainly the already established large- and medium-sized industries and certain agricultural sub-sectors. There are no public or private organizations performing preinvestment studies, technological research and technical assistance, on the scale needed, for the non-traditional industrial sectors.  - 19 - 3.04 Uruguay's scientific and technological infrastructure consists of a loose network of institutions scattered among the Ministry of Industry (National Center of Industrial Technology and Productivity; Technological Laboratory of Uruguay), Ministry of Agriculture (National Fish Institute and various services for the agricultural sector (such as grain, milk, meat and grape production), Ministry of Education (Center for Scientific, Technical and Economic Documentation of the National Library; National Council of Scientific and Technological Research; National University), some laboratories within public enterprises (ANCAP; UTE) and the private sector (Uruguayan Institute of Technical Norms; Uruguayan Wool Secretariat). Unfortunately, private entrepreneurs and administrators of public enterprises do not maintain close links with academic research/scientific institutions, and the National Council of Scientific and Technological Research (CONICYT) has neither the power nor the financial resources to foster improved communications between the two groups. The National Center of Industrial Technology and Productivity (CNTPI) is oriented mainly towards management training and industrial sector studies. With the exception of the Technological Laboratory of Uruguay (LATU), the other institutions are all either task- or enterprise-specialized, or they deal mainly with the agricultural sector. Only LATU is a multi-purpose, industry-oriented public institute, providing mainly quality control services but also starting to perform some technological research, technical assistance and market information services for the industrial sector. 3.05 Table T-12 provides some indicators to compare Uruguay's human (engineers, scientists and technicians) and financial resources in the technological field with those of other countries (United States, New Zealand, Singapore, Spain, Mexico, Chile, Peru, Argentina and Brazil). The Technological Laboratory of Uruguay (LATU) 3.06 LATU was established in 1965, primarily to perform quality control services for exports benefitting from drawback incentives and technical analysis of permits for temporary imports which are to be incorporated into exports. It is quite efficient in performing those services, and it has also recently developed limited technological research and technical assistance activities for some industries (dairy products, fish, fruits and vegetables, wines, and leather and leather garments). 3.07 LATU is a semi-autonomous institution of the Ministry of Industry. It has established close relationships with the private sector through the Chamber of Industries, which is represented in its Board of Directors. The Chamber of Industries' representative acts as Vice President of LATU. The President is appointed by the Minister of Industry, who also approves LATU's yearly budget and statement of accounts. LATU's income is derived almost exclusively from three taxes: (a) 0.3% of the value of exports submitted to quality control; (b) 1% of the CIF value of goods temporarily imported as inputs into manufactured exports; and (c) 1% of the CIF value of industrial equipment introduced under tax-exempt promotional measures and whose use and final destination is controlled by LATU. LATU is also permitted to charge for services other than those mandated in the decrees establishing the aforementioned taxes. It may, for example, price its technical assistance  - 20 - services when they are not directly related to the solving of problems that prevent the export of a given lot of products. This pricing criterion is not established by law, but has simply evolved in practice by agreement with the industrialists represented on LATU's Board. Income from such services is still very limited, representing only 0.7% of total income from taxes (1976). 3.08 LATU is now operating from a readapted building in downtown Montevideo. In addition, it recently purchased a second site in the suburbs, which will be used for future expansion. With regard to staffing, LATU began with only two persons; there are now 15 professionals, 14 technicians and 20 auxiliary personnel. Of the 15 professionals, 12 have been trained abroad. 3.09 Although LATU does not presently have the human or physical infra- structure to engage actively in technological research and technical assist- ance and market information services to Uruguayan industries, it does provide the best institutional framework within which to develop such a technological capability. Because of its quality control functions, LATU is in a good position to know first-hand about the problems of the export-oriented indus- trial sectors. Its revenue base is sound, and finally, there are economies of scale to be realized in using the same general chemical and physical laboratories for routine quality control analysis, technological research, and technical assistance. B. The Proposed Technological Development Component Objectives and Content 3.10 The proposed project would assist the Government of Uruguay to develop a domestic capability in the areas of technological research, dis- semination of information and technical assistance to entrepreneurs, in support of its export-oriented industrial development strategy. Specifically, the project would assist the Technological Laboratory of Uruguay - LATU (paras. 3.06-3.09) to improve and expand its ongoing quality control and routine analytic testing, as well as to develop new capabilities to evaluate technological alternatives, perform applied research to adapt existing tech- nologies to local conditions, organize market information services and provided technical assistance to local enterprises. The project would focus mainly on the needs of the principal exporting sub-sectors (food, textiles, leather goods and process industries), with a view to improving their competitiveness in world markets. The proposed project would finance the following: (a) the construction, furnishing and equipping of one general chemical and microbiological laboratory, four sector specific laboratories, five pilot plants, a materials testing 2 laboratory and ancillary facilities (approximately 7,000 m total area);  - 21 - (b) the furnishing and equipping of a metrological laboratory and facilities for information, industrial design and packaging services; (c) the provision of mechanical and electrical equipment for LATU buildings; and (d) related technical assistance, including 12 man-years of specialist services and 24.5 man-years of fellowships. 3.11 The equipment to be provided for the metrologi,caland materials testing laboratories would help LATU improve and expand its technological capabilities and quality control services. The metrological equipment to be provided under the project will complement the equipment being installed with the support of the Organization of American States (OAS), to serve many different industrial sub-sectors in standardizing and controlling the measure- ment apparatus. The materials testing laboratory included in the project would permit LATU to extend quality control and technical assistance to the construction sector, which plays an important economic role in Uruguay (con- struction represents 4.8% of GDP and 4.5% of employment--see Table T-6). The output of the construction sector is expected to grow from US$151 million in 1975 to US$211 million in 1985 (in 1975 prices). It is estimated that about 15% of construction output, measured in terms of costs, would require the services of the materials testing laboratory. The cost of these services amounts to about 1.5% of the construction costs. The potential revenues for these services in 1985 are estimated at about US$0.5 million. This is on the basis that adequate regulations regarding quality control of construction would be issued (at present the construction industry is not paying any taxes earmarked for LATU). The amount allocated for equipment for this laboratory (US$1.2 million) would only be disbursed after a thorough assessment of demand and the preparation of suitable equipment lists. Furthermore, if, at that time the allocation for materials testing equipment in the proposed loan appears too large, the Bank would have the right to cancel the excess amounts after having assessed the requirements of other parts of the project. The government has also undertaken to ensure that this component would not dupli- cate other facilities, and to foster cooperation between LATU and other public and private institutions in the country, including the National University, in sharing materials testing equipment. Assurances on the foregoing were obtained from the government during-negotiationus. 3.12 Although the proposed loan will not finance the construction costs of LATU's new buildings, these buildings will be constructed on the basis of architectural plans acceptable to the Bank. This would ensure that the laboratory and pilot plant equipment financed under the project will be adequately accommodated, and that the mechanical and electrical equipment (e.g., heating and air conditioning machinery, emergency power generator, main transformer and switch gear) for these buildings financed under the proposed loan meet acceptable standards of efficiency and economy.  - 22 - 3.13 Table T-13 provides details regarding the number and use of the laboratories and pilot plants to be financed under the proposed project. With the exception of the metrological laboratory and the industrial design and packaging, and technological information services, all project facilities would be located at LATU's new site in the suburbs of Montevideo. The admin- istration, metrological laboratories, industrial design and technological information services would remain at the downtown Montevideo site for at least the next five years. Table T-14 provides a breakdown of the technical assis- tance to be financed under the project, by area of specialization and calendar year. Criteria for Selection of Sub-Sectors and Industries 3.14 The four sub-sectors (including 11 industries) for which new or additional facilities would be provided under the project are: food indus- tries, textiles, leather and leather products, and process industries. Table T-15 summarizes the chief problems within each of the 11 industries, the services currently offered by LATU and a tentative plan of activities. The main criteria for the selection of the sub-sectors and industries included: (a) the contribution of each to GDP, exports and employment; (b) the expected demand for services by the Uruguayan industrialists; and (c) the existence of freely available scientific and technological knowledge about the sub-sector. The industries selected accounted for about 75% of the value of total exports in 1976 and have been responsible for the major share of export growth in recent years. Moreover, these industries generated about 68% of industrial GDP and 57% of industrial employment in 1976 (Table T-16). Particular care was paid to examining the impact of the planned liberalization of the import duty structure and tax rebate system on the viability of the industries to be served by the project. With regard to demand, LATU conducted a survey of 242 Uruguayan enterprises (87 food enterprises, 5 beverage, 26 textiles, and 33 leather and leather products, 55 process industries, 11 electric and electronic, and 25 metal mechanic) to determine their interest and willingness to pay for technological research and technical assistance services. In all, of 36 exporting industries originally proposed by LATU, 11 were ultimately selected for inclusion in the project. This constitutes a reasonable program of activities for LATU's expansion in the medium-term, on a gradual basis and consistent with the institution's capabilities. Criteria for Selection of Research Sub-Projects 3.15 All research sub-projects, whether internally or externally generated, would be submitted to a thorough screening process within LATU. The appraisal of a technological research sub-project would be a continuous process, starting before the project is even designed. The screening and appraisal would be carried out by the appropriate technological division, the information and  - 23 - commercial development department, the industrial advisory group concerned, and ultimately by LATU's Board of Directors. The Board would be assisted in reviewing the research project proposals by a Management Committee (paras. 3.17- 3.18), including the heads of departments and consultants. In particular, each technological research proposal would be carefully appraised in terms of: (a) the utility of the sub-project, measured by: (i) its relevance to economic and social objectives, particularly to maintaining or improving the international competitive- ness of Uruguayan industry; (ii) the market value and other benefits (e.g., employment generation, savings to the client) of a successful effort compared to the costs of having undertaken the research; and (iii) the transferability of the innovation/adaptation to the productive system (e.g., the user's capacity to implement the results of the tech- nological research); and (b) the efficiency with which the project may be executed, measured by: (i) the qualifications of LATU's personnel to work on the particular research problem; (ii) the appropriateness of LATU's installations for the proposed research and their availability at the time; (iii) the existence of freely available scientific and technological knowledge on the research problem; and (iv) the availability of external experts to work with LATU on the project. During negotiations, the government gave assurances that the subprojects would be selected in accordance with the abovementioned criteria. 3.16 The following sub-projects provide an illustration of the type of technological research work that is anticipated under the proposed project, in addition to routine quality control, technical assistance and information services. Examples in the dairy industry would be the development or improve- ment of local varieties of cheese; in the fruits and vegetables industry, studies on the causes of rapid deterioration of canned products, and the preparation of juices and concentrates and other beverages from indigenous varieties; in the meat industry, the use of animal glands to prepare phar- maceuticals; in the fish industry, studies on smoking, salting, canning and freezing processes; in the leather industry, improvements in the tanning and finishing of sheep skins; in the pulp and paper industry, studies on the production of paper using local wood varieties; and in the detergents, soap and cleaning products industry, studies on the use of glycerine and fatty acids derived from the meat industry and essences of local herbs. Reorganization and Staffing 3.17 Although LATU would maintain its status as a semi-autonomous institution of the Ministry of Industry and its financing system based on earmarked taxes, it would need to be reorganized internally to adapt to the number and type of new activities which it would be undertaking as a  - 24 - result of the proposed project. The main features of the new organization (Chart C-4) would be the establishment of a Management Committee; indus- trial advisory groups; and three new divisions for programming and budget- ing, technical and market information, and promotion and sales. The govern- ment gave assurances that LATU would implement this new organization scheme by January 1, 1979. 3.18 The Board of Directors would be assisted by a Management Committee integrated by the directors of the various departments and by specialists retained from time to time in the field of management of technological institutes. The establishment of industrial advisory groups at the level of the Board of Directors is designed to increase the participation of private enterprise in the management of LATU. Each group would include industrialists from the corresponding branches of the Chamber of Industries and other industrialists selected by the Board of Directors of LATU from amongst those not belonging to any association. Advisory groups are foreseen for dairy industries, fruits and vegetables, meat products, leather and leather products, textiles, glass and ceramics, wood products, pulp and paper, soaps and cleaning products, fertilizers, plastics and elastomers. Additional groups may be formed at the initiative of either LATU or the industrialists. The new programming and budgeting division would play an important role in the financial management of LATU's expansion, and the technical and market information and promotion and sales divisions would support efforts to identify LATU's non-routine services. 3.19 Quality control and technical assistance services would be performed by the relevant technological divisions. Such services and information provided to enterprises in order to help them in trouble-shooting production problems normally requires only a few days of visits to the plants by LATU staff and some minor laboratory work. Technological research activities, on the other hand, tend to be of a more long-term nature. They would be assigned to special task forces established under the management responsibility of one senior professional of LATU and including other professionals and technicians of LATU, as well as local and foreign specialists on contract. Arrangements may also be made with other local and foreign, private and public, laboratories and institutions to use their staff and facilities as needed. 3.20 The proposed expansion of LATU's activities under the project would require the employment of 115 additional personnel (e.g., from 55 to 170 by 1982). The new personnel would include 20 professionals, 45 technicians and 50 auxiliary staff. An intensive training program is planned, under which LATU's professionals would be sent abroad to work/study in industry-oriented technological institutes and foreign specialists would be brought to Uruguay. Reliance on purely academic training (e.g., not combined with practical working experiences) has been avoided to the extent possible, and the fields of expertise for which foreign specialists would be recruited have been selected on the basis of specific problem areas. The government gave assur- ances that all technical assistance specialists would be selected on the basis of criteria and appointed on terms and conditions acceptable to the Bank; the fellowship program would be acceptable to the Bank; and suitable counterparts would be assigned to work with all specialists.  - 25 - Evaluation 3.21 The impact of the technological development component of the proposed project would be subject of continuous assessment in terms of: clients contacted and requests for services received, production problems solved, income from contracts, establishment of new firms and expansion of exports attributable to LATU services. The government gave assurances that IATU would begin to implement an acceptable evaluation system by July 1, 1979, and would make available to the Bank for review annual evaluation reports during 1980-82. Also, within six months of the Closing Date of the loan account, the government would send to the Bank a full completion report providing an assessment of the project, its results and the experience gained during implementation. C. Cost Estimates and Financing Plan Cost Estimates 3.22 The total cost of the technological development component of the proposed project is estimated at US$11.5 million, as summarized below. Further details regarding physical facilities and costs by category of expenditure are provided in Table T-20. NUr$ ('000) 1/ US$('000) Items Local Foreign Total Local Foreign Total Laboratories and Pilot Plant Installations (includes mechanical and electrical equipment for buildings) 12,542.2 26,291.6 38,833.8 2,280.4 4,780.3 7,060.7 Technical Assistance and Specialist Services for Physical Plant Design 381.2 7,237.4 7,618.6 69.3 1,315.9 1,385.2 Project Administration 2,188.5 547.2 2,735.7 397.9 99.5 497.4 Base Cost Estimates 2/ 15,111.9 34,076.2 49,188.1 2,747.6 6,195.7 8,943.3 Contingencies Physical (10%) 1,511.2 3,407.6 4,918.8 274.7 619.6 894.3 Price (17.4%) 2,673.0 6,728.1 9,401.1 486.0 1,223.3 1,709.3 TOTAL COST 19,296.1 44,211.9 63,508.0 3,508.3 8,038.6 11,546.9 1/ US$1.00=NUr$5.5 as of April 1, 1978. 2/ Base cost estimate expressed in prices as of April 1, 1978.  - 26 - 3.23 Civil works costs were estimated on the basis of actual bids for expansion and adaptation of LATU's existing facilities in Montevideo during 1977. Space standards reflect schedules of accommodation developed during appraisal and are similar to those used in other technological institutes comparable to LATU. The estimated cost of construction (excluding site 2 development and mechanical and electrical equipment) averages US$300 per m of gross floor area. Architectural designs and construction supervision have been contracted with an acceptable consultant firm; additional consultants acceptable to the Bank would be contracted by the main firm for detailed engineering work. The costs of all professional services were based on prevailing fee scales in Uruguay established by the local architectural and engineering associations. Equipment costs were estimated on the basis of preliminary lists for each laboratory and pilot plant, and furniture costs were estimated at 12% of the value of construction. Imported equipment and furniture would be exempt from customs duties, and are costed accordingly. Detailed equipment and furniture lists would be compiled during the design stage and presented for Bank approval prior to procurement. Technical assistance costs were estimated at about US$57,000 per man-year of specialist services and US$21,000 per man-year of fellowships. Specialist services for physical plant design were estimated at US$60,000 per man-year. at US$60,000 per man-year. 3.24 Contingency allowances have been added to the base cost estimate for: (a) unforeseen physical factors averaging 10% of the base cost estimate; and (b) expected annual price increases above the base cost estimate plus physical contingencies for: construction (including civil and site works and professional services), technical assistance and project administration averaging 8% during 1978, 7.5% during 1979, and 7% annually during 1980-82; and for furniture and equipment averaging 7% during 1978, 6.5% during 1979, and 6% annually during 1980-82. Total contingencies amount to US$2.6 million, equal to about 29% of the base cost estimate (Table T-20). 3.25 The total foreign exchange cost of the technological development component of the proposed project is estimated at US$8.0 million, representing 70% of the total cost of the component. Foreign exchange costs were calculated as follows: equipment and technical assistance, 95%; professional services and furniture, 40%; project administration, 20%; civil works, 30%; and site development, 8% (Table T-20). Financing Plan 3.26 The total capital cost of the technological development component of the proposed project would be met by Bank financing of US$6.8 million and LATU financing of US$4.7 million (including a US$2.5 million loan from the Mortgage Bank of Uruguay for construction of the laboratories and pilot plants), as follows (in US$'000): 1978 1979 1980 1981 1982 1978-82 Bank Loan 54.9 827.7 2,238.8 2,984.1 694.5 6,800.0 LATU Contribution 594.8 1,152.5 1,416.7 1,555.8 27.1 4,746.9 TOTAL 649.7 1,980.2 3 655.5 4,539.9 721.6 11,546.9  - 27 - The government would be the Borrower vis-a-vis the Bank, but LATU would repay the government the share of the loan disbursed for the technological development component of the proposed project on terms and conditions satis- factory to the Bank. It would be a condition of disbursement of loan funds for the technole~gical development component of the project that a contract, acceptable to the Bank, covering the on-lending of funds and all other impor- tant aspects of project execution, be signed between LATU and the government. An analysis of LATU's likely income and expenditure position through 1985 (Tables T-17 and T-18) indicates that it could accept the same repayment terms as those of the Bank's loan to the government, provided the government would bear the foreign exchange risk. Receipt of satisfactory evidence that LATU has obtained the loan from the Mortgage Bank of Uruguay would also be a condition of disbursement of loan funds for the technological component of the project. The government gave assurances that LATU would: (a) make sufficient and timely budgetary contributions to meet the annual counterpart fund require- ments of the technological development component of the proposed project; and (b) furnish to the Bank for approval the proposed annual work program which would be prepared in consideration of its human and financial resources and its orientation towards export-oriented industries. 3.27 As a result of the proposed project, LATU's recurrent expenditures would quadruple during 1977-83, and thereafter would grow at an annual rate of about 1% in constant prices. LATU's revenues would grow at a slower pace, only doubling over the same period. The gap between expenditures and revenues would be met by drawing on LATU's accumulated reserves (which totalled about US$2.1 million at the end of 1976), supplemented by short-term local borrowings. From about 1987 onwards, revenues would begin to match costs. Earmarked taxes linked to Uruguay's export performance (para. 3.07) presently generate more than 95% of LATU's revenues, with the quality control tax on non-traditional exports accounting for about two-thirds of the total. Revenues from contract technological research and sales by LATU of other services paid by industry (excluding revenues from materials testing), which was equivalent to only about 0.7% of total revenues from taxes in 1976, would increase by at least 50% per year from January 1, 1980 to January 1, 1985 (as calculated in terms of the value of the nuevo peso at the date of the Loan Agreement). LATU intends that its task force services (para. 3.19) would be priced so as to recover the costs incurred. Implementation and monitoring of this decision would be heavily dependent upon LATU's adopting an improved accounting system (para. 3.28). The revenue projections from earmarked taxes are based on forecasts of Uruguay's future export performance; expenditure projections take into account the expected increase in LATU's staff (para. 3.20) and assume about a 40% real increase in average salaries to enable LATU to attract and retain highly competent staff. The government gave assurances that it would take, or would cause LATU to take, all necessary steps to: (a) establish an appropriate salary scale and conditions of service in order to attract and retain competent staff; and (b) make funds available in the event of any shortfall in revenues needed to cover LATU's operating expenses (e.g., due to unexpectedly poor export performance for a short period).  - 28 - D. Implementation and Disbursements Project Administration 3.28 LATU would be responsible for administering the technological development component of the proposed project. The Director of LATU would perform the normal functions of a project director, with responsibility for planning, organizing, controlling and monitoring project execution. The Director would be assisted by a full-time project implementation team comprising a general coordinator, an architect, an engineer, an accountant, and supporting staff. Appointment of acceptable principal staff of the project implementation team would be made by October 31, 1978. Other depart- ments of LATU would also assist in project implementation from time to time, as necessary. The salaries of the full-time project implementation team and related operating expenses, estimated at US$497,400, have been included under project administration costs. Also included are the costs of specialists for physical plant design, who will be required to assist LATU in supervising plant design, equipment procurement and installation of pilot plants and laboratory equipment (para 3.30). Their cost is estimated at US$180,000. Specialists would also be required for the revision of LATU's accounting system and in the organization of the new programming and budgeting division and information and commercial development department. The government gave assurances that LATU would implement a revised accounting system no later than January 1, 1980, and that throughout the project implementation period LATU would maintain separate accounts for all project expenditures. These accounts would be audited annually by auditors acceptable to the Bank, and the audit reports would be made available to the Bank for review. 3.29 In the interest of promoting maximum coordination and flow of information between the technological development and vocational training components of the proposed project, the National Planning Secretariat (SEPLACODI) would designate staff responsible for monitoring the respective components. The government gave assurances that SEPLACODI would appoint at least one such liaison officer for the technological development component by January 1, 1979. The Director of LATU would be responsible for liaison with the SEPLACODI staff. Professional and Technical Services 3.30 LATU has contracted the services of an acceptable firm of architects for the general design of the new laboratories and pilot plants, and for construction supervision. Given the highly specialized nature of LATU's installations, the firm itself would need to retain the services of specialists acceptable to the Bank (para. 3.28). The cost of all fees for design work and construction supervision, estimated at US$487,400, has been included under professional services in the total project cost. 3.31 The government gave assurances that LATU would organize ad hoc technical committees to review architectural designs, equipment and furniture lists, and to certify that they meet economic and functional standards and  - 29 - costs and the overall objectives of the project, before forwarding such documents for Bank approval. These committees would probably include members of the industrial advisory groups established to advise LATU's Board of Directors (para. 3.18). Implementation Schedule 3.32 For the purpose of assisting LATU in planning, organizing and con- trolling project execution, a preliminary implementation schedule was prepared during appraisal (Table T-19). LATU would update this schedule regularly and use it as a project implementation and monitoring tool. Site 3.33 LATU has acquired an acceptable site in the suburbs of Montevideo, which has area adequate for the needs of the proposed project, as well as for LATU's future expansion. Site development, financed entirely by LATU, commenced in 1977. Maintenance 3.34 The government gave assurances during negotiations that it would ensure the adequate maintenance and repair of all equipment, furniture and buildings provided under the project. To that effect, LATU should prepare a maintenance handbook and include in its annual budget a sum for maintenance equivalent to at least 1% of the replacement cost of the buildings during the first four years of operation and 1.5% thereafter, and 5% of the cost of equipment and furniture. Procurement 3.35 Contracts for the procurement of furniture and equipment would be awarded on the basis of international competitive bidding in accordance with Bank guidelines, except that furniture and equipment which cannot be grouped into packages of at least US$50,000 would be procured on the basis of local procedures acceptable to the Bank. A maximum of US$375,000 in the aggregate (equivalent to about 10% of the estimated total cost of furniture and equipment) would be procured in this manner. Domestic furniture and equipment manufacturers tendering under international procedures would receive a margin of preference in bid evaluation of 15% of the CIF cost of competitive imports or the applicable customs duty, whichever is lower. 3.36 Although the cost of buildings has been included in the total project cost, their financing would be borne entirely by LATU through a US$2.5 million loan from the Mortgage Bank of Uruguay (para. 3.26). The government gave assurances that the buildings would be appropriately designed and con- structed for the proper installation and use of the equipment and furniture financed by the World Bank and that to this effect it would submit plans, specifications and other related documents for World Bank approval. Civil works contracts, which would be financed entirely by LATU, would be awarded on the basis of local competitive bidding.  - 30 - Disbursements 3.37 The proposed loan of US$6.8 million (for the technological develop- ment component) equivalent 59% of the total cost of US$11.5 million, would finance only 85% of the foreign exchange component of US$8.0 million, as follows: (a) iuo% of foreign expenditures for imports or 85% of expendi- tures for locally procured furniture and equipment; and (b) 100% of total expenditures for technical assistance. LATU would finance the balance of (a), as well as 100% of the costs of construction (including civil and site works and professional services) and project administration. The Bank loan would be disbursed over a period of four and a half years through December 31, 1982, with physical project completion by December 31, 1981 (see para. 2.45 and Table T-21). IV. BENEFITS, RISKS AND UNCERTAINTIES, EVALUATION Benefits 4.01 Uruguay's improving economic performance in recent years has been led by the expansion of non-traditional exports, which increased from US$87 million in 1973 to nearly US$300 million in 1976. This marked change reflects the success of government policies to stimulate certain industrial sub-sectors, such as leather and textiles. At the same time, authorities have begun to dismantle Uruguay's traditional protectionism in a major effort to bring about a restructuring of the economic pattern of production. While this should help to foster increased efficiency in the exporting sectors, it will also mean that continued rapid export growth will depend increasingly on the ability of Uruguayan enterprises to compete in world markets through improved productivity and quality of output. Obsolete equipment, outdated labor skills, and archaic technological processes are important obstacles to the full realization of the country's export poten- tial. The Bank is already involved in supporting the export promotion program under Loan 1176-UR, which is providing funds for the renovation and expansion of plant capacity and for technical assistance to aid in the formulation of sound sectoral policies and to strengthen public agencies responsible for evaluation of industrial investments. The proposed project would complement and broaden these efforts through: (a) the establishment of a national vocational training system to meet the essential manpower training needs of the export and export-supporting sectors; and (b) the development of a local capability to conduct applied technological research and provide technical assistance to entrepreneurs. While these two compo- nents are to some extent independent, they are nevertheless complementary approaches to the objective of increasing Uruguay's capacity to compete in world markets and they benefit many of the same industrial sub-sectors. The National Planning Secretariat would undertake responsibility for liaison with the vocational training and technological agencies to ensure maximum flow of information between them and the rest of the public sector, while private sector involvement would be encouraged through participation in the management of both agencies.  - 31 - 4.02 Vocational Training. The proposed vocational training component would assist the government in establishing a national system (COCAP) to initially provide manpower training services to the key export and export- supporting sectors., Through the project, about 2,000 semi-skilled and skilled workers would be trained annually in a new vocational training center in Montevideo, 6,400 rural workers would receive courses through mobile training units, and 7,800 supervisors and workers would be trained under in-plant schemes. The vast majority (92%) of the 16,200 beneficiaries would be already employed adults participating in skill upgrading courses to enhance their productivity, reflecting the fact that Uruguay already has a rather extensive formal technical education system which prepares young people for job entry. Besides physical facilities and in-plant training, the project would provide extensive technical assistance to support the general institutional develop- ment of COCAP and to help the government prepare a preinvestment studies fund. Finally, surveys financed under the project would assist in identify- ing additional training needs in industries to be served in future stages of development of COCAP. 4.03 Technological Development. This component of the proposed project would assist the government in fostering the development of a domestic capability in the areas of applied technological research, technical and market information services, and technical assistance to local industrialists. Uruguay needs mainly to develop the research capability to analyze and select from amongst existing technological alternatives and to make appropriate adaptations to local conditions. Domestic firms also require technical assistance and information services to help them in analyzing production problems and identifying possible technological solutions and potential markets. This is particularly important in the Uruguayan context because of the small size of the average industrial enterprise, most of which cannot afford to maintain their own research and testing facilities and personnel. Specifically, the project would assist the Technological Laboratory of Uruguay (LATU) to improve and expand its ongoing quality control and routine analytic testing, as well as develop new capabilities in technological research and technical assistance to entrepreneurs. Four industrial sub-sectors (food, leather, textiles and process industries) would be assisted, through the establishment of laboratories and pilot plants; all installations would be designed so as to ensure maximum flexibility in their use over time. 4.04 Quantitative assessment of the benefits of investments in tech- nological research are not possible, because the work program of the research institution cannot be clearly determined in advance. Rather it will develop over time in response to the requirements of industry. Moreover, the ultimate returns to the technological research would depend also on additional indus- trial investment and marketing efforts. However, some notion of the impact of LATU's efforts may be possible by assessing the consequences of only a small increase in the value added component of manufactured exports and a corresponding decrease in the export of raw materials. For example, if 0.5% of all hides exported in 1975 had been converted into leather bags for export, the additional export earnings would cover LATU's total investment costs for the leather industries. Similarly, if 0.5% of the volume of exported wool tops had been converted into blankets, the foreign exchange earnings would cover investments by LATU for the textiles industries.  - 32 - Risks and Uncertainties 4.05 The major uncertainties for both components of the project are: (a) the broader aspects of national industrial policy; (b) the response of the private sector to the new services; and (c) the quality of the managerial and technical staff of COCAP and LATU. Industrial policy is an area over which neither COCAP nor LATU has much real control, but the performance of the government since 1974 in reversing Uruguay's historic inward-looking import substitution schemes in favor of an export-led develop- ment strategy consistent with the country's basic resource endowment bodes well for the future (Chapter 1). With regard to private sector response, the participation of industrialists in the Boards and industrial advisory groups of both COCAP (para. 2.18) and LATU (para. 3.18) should help to foster a close relationship. Finally, as regards quality of management and staff, LATU's performance to date has been good and its present personnel are well qualified for the tasks they are required to undertake. Provision would be made under the proposed project to ensure that salaries are maintained at levels adequate to attract and retain qualified staff to both agencies (paras. 2.28 and 3.27), and extensive technical assistance programs for both LATU and COCAP would provide further training and organizational support (paras. 2.26 and 3.10(b)). Evaluation 4.06 Preliminary evaluation systems were developed during appraisal for both components of the project (paras. 2.29 and 3.21). In the case of COCAP, the system focuses on production and wage increases attributable to its vocational training programs. For technological development, the clients contacted by LATU and requests for services received, production problems solved, income from contracts, establishment of new firms and expansion of exports attributable to LATU services would be studied. Assurances were obtained from the government that both evaluation systems would be implemented no later than July 1, 1979, and that annual evaluation reports would be sent to the Bank for review during 1980-82. Finally, within six months of the Closing Date of the loan account, the government would send to the Bank a full completion report providing an assessment of both components of the project, their results and the experience gained during implementation. V. AGREEMENTS REACHED AND RECOMMENDATIONS Vocational Training Component 5.01 Prior to Board presentation, the Bank received satisfactory evidence from the government that the decree, acceptable to the Bank, establishing the Vocational Training Council (COCAP) has been issued (paras. 2.16 - 2.19).  - 33 - 5.02 During negotiations, the government gave assurances that: (a) by January 1, 1979, UTU will transfer to COCAP responsibility for its adult vocational training (para. 2.16) and in-plant training (para. 2.25) services, as well as about 20 experienced instructors and course programmers (paras. 2.23 and 2.28); (b) by January 1, 1980, the Ministry of Labor will assist in the placement and follow-up of graduates of COCAP through its Employment Service (para. 2.23); (c) by January 1, 1979, a rural training coordinator and six regional deputy coordinators will be appointed to administer COCAP's rural mobile training programs (para. 2.24); (d) technical assistance specialists will be selected on the basis of qualifications and will be employed on terms and conditions acceptable to the Bank; the fellowship program will be acceptable to the Bank, and suitable counterparts will be appointed to work with the specialists (para. 2.26); (e) the plans for each training survey (including cost estimates, terms of reference and implementation programs) will be submitted to the Bank for approval prior to the initiation of the survey (para. 2.27); (f) by July 1, 1979, the system to evaluate the external and internal effectiveness of COCAP's vocational training activities will be initiated, and annual evaluation reports will be made available for the Bank to review during 1980-82 (para. 2.29); (g) sufficient and timely budgetary allocations will be made to meet the annual requirement for counterpart funds to implement the vocational training component of the project (para. 2.34); (h) in the event that the revenues derived from COCAP's regular system of financing proves inadequate to cover COCAP's expected operating costs, the government will take, or will cause COCAP to take, all such action as may be necessary to supplement the regular revenues (para. 2.35); (i) COCAP will maintain separate accounts for all project implementa- tion expenditures, the accounts will be audited annually by auditors acceptable to the Bank, and the audit reports will be made avail- able to the Bank for review (para. 2.36); (j) by January 1, 1979, SEPLACODI will appoint at least one liaison officer for the vocational training component of the proposed project (para. 2.37);  - 34 - (k) consultants acceptable to the Bank will be retained for all architectural and engineering design work and for construction supervision (para. 2.38); (1) technical committees will be established as needed to review architectural designs, equipment and furniture lists and specifications and to certify that they meet economic and functional standards and costs and the educational objectives of the proposed project, before forwarding such documents for Bank approval (para. 2.39); (m) an acceptable site in Montevideo for the vocational training center will be acquired before the start of design work (para. 2.41); and (n) all equipment, furniture and buildings financed under the proposed project will be adequately maintained and repaired, and to that effect COCAP will prepare a maintenance handbook and include in its annual budget a sum for maintenance equivalent to at least 1% of the replacement cost of the buildings during the first four years of operation and 1.5% thereafter, and 5% of the cost of equipment and furniture (para. 2.42). 5.03 A special condition of effectiveness of the loan for the proposed project will be the promulgation by the government of legislation, acceptable to the Bank, which, inter alia, grants COCAP legal personality and establishes a stable and long-term financing system to cover the operating costs of the institution (para. 2.19). 5.04 The following are conditions of disbursement for the vocational training component of the proposed project: (a) the promulgation of all regulations needed to implement the legislation establishing COCAP (paras. 2.19 and 5.03); (b) the appointment to the executing unit of COCAP, on a full- time basis, of an acceptable Director, architect, vocational training specialist, accountant and procurement officer to manage project implementation (para. 2.36); and (c) the signing of a contract, acceptable to the Bank, between COCAP and the government, covering all important aspects of project execution (para. 2.19). Technological Development Component 5.05 During negotiations, the government provided assurances that: (a) it will foster cooperation between LATU and other public and private institutions in the country, including the National University, in sharing materials testing equipment; and, that LATU will retain and use its present facilities for at least the next five years (paras. 3.11 and 3.13); (b) the technological research sub-projects to be undertaken by LATU will be selected in accordance with criteria acceptable to the Bank (para. 3.15);  - 35 - (c) by January 1, 1979, LATU will implement its new organization scheme, including the establishment of specified industrial advisory groups (para. 3.17); (d) technical assistance specialists will be selected on the basis of qualifications and appointed on terms and conditions acceptable to the Bank; the fellowship program will be acceptable to the Bank; and suitable counterparts will be assigned to work with all specialists (para. 3.20); (e) by July 1, 1979, LATU will begin to implement an acceptable evaluation system, and will make available to the Bank for review annual evaluation reports during 1980-82 (para. 3.21); (f) LATU will provide adequately and timely budgetary contributions to meet the annual counterpart fund requirements of the proposed project; and, furnish to the Bank for approval the proposed annual work program which would be prepared in consideration of its human and financial resources and its orientation towards export-oriented industries (para. 3.26); (g) LATU will establish an appropriate salary scale and conditions of service in order to attract and retain competent staff; and the government will take, or will cause LATU to take, the necessary steps to make funds available in the event of any shortfall in revenues needed to cover LATU's expected operating expenses (para. 3.27); (h) by January 1, 1980, LATU will implement a revised system of accounts, and throughout the project implementation period LATU will maintain separate accounts for all project expenditures, which will be audited annually by auditors acceptable to the Bank and the audit reports will be made available to the Bank for review (para. 3.28); (i) by January 1, 1979, SEPLACODI will appoint at least one liaison officer for the technological development component of the project (para. 3.29); (j) specialists acceptable to the Bank will be retained by LATU for the review and approval of the detailed engineering drawings, the lists and specifications for equipment and furniture, the bid documents and the analysis of the bid offers, and the installation of equipment in the new buildings (paras. 3.28 and 3.30); (k) technical committees will be established by LATU as needed to review architectural designs, equipment and furniture lists and specifica- tions and to certify that they meet economic and functional standards and costs and the overall objectives of the project (para. 3.31);  - 36 - (1) all equipment, furniture and buildings financed under the proposed project will be adequately maintained and repaired, and to that effect, LATU will prepare a maintenance handbook and include in its annual budget a sum for maintenance equivalent to at least 1% of the replacement cost of the buildings during the first four years of operation and 1.5% thereafter, and 5% of the cost of equipment and furniture (para. 3.34); (m) the buildings will be appropriately designed and constructed for the proper installation and use of the equipment and furniture financed by the World Bank, and to that effect all architectural and engineering plans and other related documents will be submitted to the Bank for approval (para. 3.36); and (n) by October 31, 1978, a general coordinator, an architect, an engineer, an accountant and a procurement officer, all acceptable to the Bank, will be appointed to assist the Director of LATU in managing project implementation (para. 3.28). 5.06 The following are conditions of disbursement for the technological development component of the proposed project: (a) the Bank must receive satisfactory evidence that LATU has assessed, in consultation with both the private and public sectors, the demand for a materials testing laboratory, and, on the basis of such assess- ment, establish an equipment list for this laboratory. Should the allocation for this equipment appear to be too large, the Bank would have the right to cancel the excess amounts after having assessed the requirements of other parts of the project (para. 3.11); (b) the signing of a contract acceptable to the Bank, between LATU and the government, providing for: (i) the on-lending to LATU by the government of that share of the loan disbursed for the technological development component of the project, on the same terms as those of the proposed Bank loan to the government (except that the government would bear the foreign exchange risk); and (ii) all other important aspects of project execution (para. 3.26); (c) the receipt of satisfactory evidence that LATU has obtained the loan from the Mortgage Bank of Uruguay for the construction of the project laboratories and pilot plants (para. 3.26); and (d) the appointment of an acceptable general coordinator, architect, engineer, accountant and procurement officer to assist the Director of LATU in managing project implementation (para. 3.28). 5.07 Given the above assurances and conditions, the project constitutes a suitable basis for a Bank loan of US$9.7 million to the Republic of Uruguay for a term of 15 years including a three-year period of grace. May 25, 1978  -37- ANNEX 1 Table T-1 URUGUAY VOCATIONAL TRAINING AND TECHNOLOGICAL DEVELOPMENT PROJECT Population 1963-85 (in thousands) 1963 1975 1985 TOTAL 2,595.5 2,782.0 3,70.3/ Rural (in %) (19.2) (17.0) * Age Distribution 0-9 502.4 496.5 lo-14 222.8 253.9 15-19 205.9 235.7 20-24 192.5 204.6 25 and over 1,1471.9 1,591.3 Labor Force 1,015.5 1,094.4 GeQgraphic Population Distribution Departments: * * Montevideo 1,202.8 Artigas 52.8 Canelones 258.2 Cerro Largo 71.0 Colonia .105.4 Durazno 53.6 Flores 23.5 Florida 64.0 Lavalleja 65.8 Maldonado 61.3 Paysandu 88.0 Rio Negro 46.9 Rivera 77.1 Rocha 55.1 Salto 92.2 San Jose 79.6 Soriano 77.9 Tacuarembo 76.9 Treinta y Tres 43.4 Sources: IV and V Censo de Poblaci6n, Direcci6n General -le Estad'stica y Censos, (1975 figures are preliminary) * Not available. 1/ World Bank estimate (EPD) May 22, 1978  -38- ANNEX 1 Table T-2 URUGUAY VOCATIONAL TRAINING AND TECHNOLOGICAL DEVELOPMENT PROJECT Commodity Exports, 1973-1976 1973 1974 1975 1976 (% of Total 1973/74 1974/75 1975/76 (in current UST million) in 1976) (Annual growth rates) 1. Meat - Chilled and Frozen 125.9 142.5 82.8 121.1 - Processed Meat 0.3 0.7 2.3 7.2 - Other 0.9 1.5 3.4 5.7 Oubtotal 127.1 144.7 88.5 134.0 (24.5) 13.8 -38.8 51.4 2. Fish 0.8 1.2 3.4 5.2 ( 1.0) 50.0 183.3 52.9 3. Wool 101.1 89.1 89.1 104.5 (19.1) -11.9 0 17.3 4. Hides and Skins 29.4 28.5 21.5 37.7 ( 6.9) - 3.1 -24.6 75.3 5. Agricultural Products - Processed Rice 14.9 28.2 33.2 26.1 - Wheat - - 10.3 4.1 - Linseed Oil 3.9 5.9 7.1 8.2 - Others 13.9 20.1 22.5 60.8 Subtotal 32.7 54.2 73.1 99.2 (18.1) 65.7 34.9 35.7 6. Manufactures 6.1 - Leather Garment 4.0 10.8 19.9 35.9 - Shoes 1.5 2.9 8.9 16.4 - Other leather Manuf. 1.3 1.2 12.0 20.1 Subtotal 6.1 6.8 14.9 40.8 72.4 (13.2) 119.1 173.8 77.5 6.2 - Textiles 6.9 11.4 14.1 19.7 - Garment 0.3 0.8 2.0 7.3 Subtotal 6.2 7.2 12.2 16.1 27.0 ( 4.9) 69.4 31.9 67.7 6.3 Other 10.7 27.4 36.0 44.6 ( 8.2) 156.1 31.4 23.9 Subtotal 6.1-6.3 24.7 54.5 92.9 144.0 7. All other Goods 4.8 9.6 14.9 22.2 ( 4.1) 100.0 55.2 49.0 8. Adjustment for wool 6.1 - 0.9 3.7 - TOTAL EXPORTS 326.7 380.9 387.1 546.8 (100.0) 16.6 1.6 41.3 Source: Direcci6n General de Comercio Exterio^ May 22, 1978  -39- ANNEX 1 URUGUAY Table T-3 VOCATIONAL TRAINING AND TECHNOLOGICAL DEVELOPMENT PROJECT Exports by Destination, 1967-75 (Percentages) 1967 1968 1969 1970 1971 1972 1973 1974 1975 TOTAL 100.0 100.0 100.0 100.0 100.0 l00.0 100.0 100.0 100.0 AMERICA 18.7 23.2 22.3 21.5 26.4 16.1 13.6 40.6 36.3 1. Latin America Free Trade Association 10.8 10.5 15.3 12.5 21.4 12.4 10.0 36.3 29.2 2. U.S. 12.1 6.6 8.5 8.5 4.7 3.4 3.4 3.7 6.7 3. Central-America Common Market 0.1 - 0.1 0.1 0.2 - - - - 4. Others 0.6 0.6 0.3 0.4 0.1 0.3 0.2 0.4 0.4 EUROPE 74.4 69.3 69.4 68.8 63.0 76.3 75.2 51.2 51.5 1. European Common Market 26.3 26.7 34.1 36.7 38.6 41.4 46.6 27.7 34.0 2. European Free Trade Association 27.2 25.3 16.4 10.3 9.6 12.8 4.0 3.0 2.8 3. Eastern Europe 7.1 3.9 5.3 12.2 4.8 7.5 11.8 10.6 7.5 4. Spain 9.5 6.8 8.1 3.1 3.0 11.1 11.6 6.0 3.1 5. Others 4.5 6.6 5.5 6.5 7.0 3.5 1.2 3.7 4.1 OTHER COUNTRIES 6.9 7.5 8.3 9.7 10.6 7.6 11.2 8.4 12.2 Source: World Bank, Economic Memorandum on Uruguay (December 1977), Table 3.4 May 22, 1978  -40- URUGUAY ANNEX 1 VOCATIONAL TRAINING AND TECHNOLOGICAL DEVELOPMENT PROJECT Table T-4 Comparative Education Indicators Page 1 of 2 (May 15, 1978)