Morocco - Education Sector Reform Project

Documet Of The World Bank FOR OmCIAL USE ONLY AZW. 2( -A0r Rupee rN. P-4240-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPO SED LOAN IN AN AMOUNT EQUIVALENT TO US$15O MILLION TO THE KINGDOM OF MOROCCO IN SUPPORT OF AN EDUCATION SECTOR REFORM PROGRAM February 25, 1986 deu mts he a raicd disaikbe ad may be ad by zedpi. eony in the perfenumme of Sad dslm. lb cab my mea eEhwlu be dbduee wied_ WedM Bak a__wkala.  CURRENCY EQUIVALENIS Average Calendar 1985 January 15, 1986 Currency Unit - Dirhams(DH) I Dirham (DH) = US$ 0.1053 1 US Dollar (US$) = DH 9.5 FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS MEA - Ministry of Economic Affairs MOE - Ministry of Education MOF - Ministry of Finance MOL - Ministry of Labor MOP - Ministry of Planning MPW - Ministry of Public Works and Vocational Training  FOR OMCIAL USE ONLY KINGDOM OF MOROCCO EDUCATION SECTOR REFORM PROGRAM LOAN AND PROJECT SUMMARY Borrower: Kingdom of Morocco. Amount: US$150 million equivalent. Terms: 20 years including 5 years of grace, at the standard variable interest rate. Proiect Description: The proposed project would form part of a two-year phase of implementation of the Government's education sector reform program. The objectives of the reform program are to make the provision of education more equitable, more cost-effective, and more consistent with the country's medium-term development needs. At the same time, the Government is developing and implementing a number of pedagogical measures to ensure that the quality of education is maintained or improved and that the coverage of the system is extended, even as unit costs of education are reduced. More specifically, the project would assist the Borrower in improving: a) equity of education by devoting a larger share of education resources to primary and lower secondary education, with a major increase in the number of students entering and completing basic schooling (grades 1 through 9); b) the efficiency of Morocco's education system; and c) containing the growth of public expenditures on education. The Project includes a program of construction and equipping of schools, teacher training, foreign fellowships and studies in support of new educational activities. Implementation risks relate to uncertainties of public acceptance of reform program measures, and to the risk of incomplete implementation. These risks have been reduced by Government efforts to situate the reform in the context of restructuring in other areas, to put in place an appropriate structure for overseeing initial reform implementation, to plan implementation of subsequent reform actions and to take key actions in the reform program prior to negotiating the loan. [ This document has a restrctod distribution and may be used by recpients only in the performance of their official dutie.ts contents may not otherwise be disclosed without World DBnk authorizaton.  - ii- Estimated Project Costs: Millions of Current US$ Category of Expenditure Local Foreign Total Investment * Scho6l Construction 241 155 396 Equipment and Furniture 15 45 60 Subtotal 256 200 456 Recurrent Salaries and Benefits 1,123 - 1,123 Fellowships 133 32 165 Educational Materials 42 18 60 School Maintenance 25 - 25 Subtotal 1.323 50 1,373 TOTAL PHASE I COSTS 1,579 250 1.829 Financing Plan: Financing Source Local Fcreign Total Government 1,579 86 1,665 IBRD 0 164 164 of which: proposed reform loan (0) (150) (150) 4th, 5th education projects (0) (14) (14) TOTAL 1,579 250 1,829 Estimated Disbursements: Bank Fiscal Year 1986 1987 1988 1989 Annual 36.5 64.5 44.0 5.0 Cumulative 36.5 101.0 145.0 150.0 Staff Appraisal Report: Report no. 5923-MOR dated February 25, 1986. Map: Kingdom of Morocco IBRD 15252R2. Economic Rate of Return: Not applicable * Includes an inseparable element of indirect taxes amounting to approximately 15% of civil work costs, and approximately 15Z of local component of equipment a-Ad furniture.  TERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPM REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$150 MILLION TO THE KINGDOM OF MOROCCO IN SUPPORT OF AN EDUCATION SECTOR REFORM PROGRAM 1. I submit the following report and recommendation on a proposed loan to the Kingdom of Morocco for the equivalent of US$150.0 million, to support a two-year phase of implementation of an education sector reform program and help finance certain activities under the program. The loan would have a term of 20 years, including 5 years of grace, at the standard variable interest rate. PART I - THE ECONOMYL' 2. An economic report, entitled "Morocco: Priorities for Public Sector Investment (1981-85)" (No. 4156-MOR), was issued an June 15, 1983. Another econom..c report entitled "Morocco: Industrial Incentives and Export Promotion" (No. 4893-MOR) was distributed to the Board on January 11, 1984. An economic mission on financial intermediation was in Morocco in September 1983 and its report (No. 4957-MOR) was issued on December 12, 1984. The following section reflects the findings of an economic updating mission that went to Morocco in July 1984 to prepare a paper, entitled "Morocco: Medium-term Adjustment Policies and Prospects", for presentation to a meeting of the Consultative Group for Morocco in Paris on January 9-11, 1985. Data and analysis have been updated to reflect the findings of the ITPA II appraisal mission that visited Morocco in March 1985. Country data are given in Annex I. 3. During nearly two decades after Independence in 1956, Morocco followed relatively conservative economic policies. Cautious external borrowings supplemented a weak savings effort to permit only a slow rise in investment, so that the economy grew only at about 4 percent per annum. Primary products - principally phosphates - accounted for 90 percent of merchandise exports. During the mid-1970s, after a sudden increase in phosphate prices, Morocco launched an ambitious public investment program which boosted GDP growth to 7.5 percent annually during the period 1973-77. The phosphate boom, however, began subsiding as early as mid-1975. Meanwhile, the petroleum import bill, which had quadrupled in 1974, continued to place considerable pressure on the balance of payments, and the current account deficit reached 16.5 percent of GDP in 1977. Domestically, the large public investment program and increased defense expenditures in the Western Sahara caused the treasury deficit to rise to 15.8 percent of GDP in 1977. Morocco resorted to considerable foreign borrowings to finance these deficits. I/ Part I is essentially the same as Part I in the Casablanca Port Project (Report No. P-4226-MOR of February 3. 1986)  4. To redress the rapidly deteriorating financial situation, the Moroccan Government introduced a three-year stabilization program in 1978 centered on reductions in public sector outlays and stricter import controls. These reforms were only partially successful. They did little to stimulate exports. The exchange rate was kept overvalued and trade barriers were raised. They did not adequately tackle the excessive budgetary exposure and made inadequate attempts to increase the efficiency of resource use. The agricultural sector failed to grow, while value-added in manufacturing declined. Meanwhile, public investment was not restrained; a number of costly, poorly-targeted social programs were expanded and investment in infrastructure was undertaken often well ahead of need. Efforts to stabilize the economy were compromised by severe external shocks - most notably the 1979 oil price increase, the rise in international interest rates, the international recession which reduced phosphate earnings and workers' remittances, and the prolonged drought. Continued internal pressure to provide social services and affordable basic foodstuffs to a rapidly growing population put considerable strains on a budget already stretched by the need to finance expenditures in the Sahara. The 1981-85 Development Plan aimed at an ambitious 6.5 percent per annum growth rate in GDP. Notwithstanding the difficulties confronting the economy, Morocco did not appear willing to introduce a comprehensive program of policy measures which could have confronted the economic crisis. The shortcomings in the adjustment performance caused the IMF to convert a three-year EFF into a one-year Stand By Arrangement in 1982 and prevented the Bank from proceeding with a SAL at that time. Reeent Fconomic Developments 5. By 1983 it had become clear that the Government's room to maneuver was becoming very restricted by debt service payment requirements. In 1982 external public long-term debt (excluding military debt) had risen to about two-thirds of GDP and 235 percent of exports of goods and services while the debt service ratio reached 35 percent. Morocco was confronted with the prospect of a very large external payments gap for 1983. With exchange reserves virtually depleted and debt service rising, the Government imposed emergency import controls and budgetary cutbacks in early 1983. In November 1983 the Government entered into an 18-month standby agreement with the IMF (SDR 300 million, or 98 percent of quota) supporting a stabilization program which included fiscal and credit restraints and a flexible exchange rate policy. Shortly thereafter, official creditors agreed to reschedule external debt interest and principal payments coming due between September 1, 1983 and December 1984, as well as arrears as of August 31, 1983. Commercial bank creditors agreed in principle to provide comparable relief on amortization. The total amount of debt relief obtained in 1983-84 under these agreements was estimated at more than $2 billion (including $575 million of relief on military debt). In November 1983, a Donors' meeting sponsored by the IMF, generated pledges of about $500 million of exceptional balance-of-payments assistance for 1983-84. To meet its fiscal targets the Government restricted public service recruitment and salary increases, raised the prices of electricity, water, petroleum products and subsidized foodstuffs (by between  - 3 - 17 percent and 60 percent), and cut capital outlays by one third. At the same time, it began a significant adjustment effort supported by the Bank program, along with the January 1984 ITPA I (No. P-3707-MOR), to improve its balance of payments situation with a package of measures to restructure its trade regime. This included a reduction in import taxation, an easing of quantitative restrictions, and a reduction in export licensing. Following a Financial Sector Study conducted by the Bank in 1984 (No. 4957-MOR), the Government extended these reforms to the Financial Sector with the objective of raising domestic resources and improving resource allocation. Greater flexibility was introduced in setting interest rates, measures were designed to increase competition among banks, and taxation reforms to benefit the financial sector were implemented. 6. As a result of the policies adopted since 1983, macroeconomic balances improved. The economy's resource gap shrank from 13 percent of GDP in 1982 to 8 percent in 1984 (at constant 1980 prices). This was achieved through a significant decline in the GDP share of consumption and investment relative to their high levels earlier in the 1980s. Meanwhile, import growth has been restrained by appropriate demand management and by the depreciation of the exchange rate, while the share of exports and gross domestic savings increased substantially. The Government budget deficit was reduced from 12 percent of GDP in 1982 to about 7 percent in 1984 (8 percent before taking into account the impact of external debt rescheduling on interest payments). Although the improvement stemmed chiefly from a sharp reduction in investment outlays, there was also a significant slowing down in the rate of growth of current expenditures. As was to be expected, the rate of GDP growth has been low (a little over 2 percent p.a.), reflecting the impact of stabilization policies on consumption and investment demand, along with the effect of drought on agricultural sector incomes in both 1983 and 1984. A good harvest is expected to help boost the growth rate to about 4 percent in 1985. 7. The current account of the balance of payments improved considerably, reflecting both the better resource balance of the economy and the impact of the debt relief obtained by Morocco from its official creditors on interest and military debt service payments. In 1983, the external current account deficit was reduced by half, from $1.9 billion and 12.7 percent of GDP in 1982 to $873 million and 6.6 percent of GDP. The balance subsequently worsened in 1984, particularly in relation to GDP, but still remained under $1 billion. In both 1983 and 1984, about half of the roughly $1 billion improvement in the current account in relation to 1982 was attributable to debt relief. - -' The net inflow of public medium and long-term capital (including grants) has declined sharply from about $1.5 billion in 1982 to an average of only $400 million during 1983-1984. In 1985, the net inflow rose to about $1 billion, including an exceptional $300 million grant from Saudi Arabia. Nevertheless, these inflows had to be supplemented by continued debt relief along the lines of the 1983-84 debt rescheduling, and demand management policies to keep import growth under control. 1/ Over $200 million in interest payments were rescheduled in each of the two years. In addition, the current account balance benefitted from military debt relief in the amount of $325 million in 1983 and $250 million in 1984.  -4- 8. Further progress in reducing both external and fiscal imbalances is envisaged under a new stand-by arrangement with the IMF approved on September 13, 1985. Preliminary data indicate some slippage in fiscal performance in the first half of 1985 and disappointing results on external trade, attributed essentially to weak demand in the phosphate market. These suggest that stronger corrective measures would be needed to keep the stabilization program on course including, in particular, restraining current expenditures and reducing subsidies on foodstuffs and public services. A formal debt rescheduling through the Paris Club covering maturities from September 1985 to February 1987 was agreed on September 17, 1985. Ninety-five percent of the total debt due were rescheduled along lines similar to those obtained under the 1983-84 debt relief arrangement. The 1983-84 rescheduling agreement between Morocco and the commercial banks was signed, after long delays, on October 21, 1985. These recent developments should help Morocco reach a balance in its external accounts for the next two years. Medium Term Policies and Prospects 9. Since 1983, the Government's objective of achieving viable external and fiscal positions along with satisfactory growth has been translated into a coherent medium-term strategy to restrain domestic absorption and increase the efficiency of resource throughout the economy. The principal elements of Morocco's medium-term adjustment program involve a shift to outward-looking trade and exchange rate policies; far-reaching reforms of price, credit, tax and regulatory policies to remove institutional and other obstacles to efficient mobilization and use of resources in key productive sectors of the economy; considerable improvements in the efficiency of government investment; more cost-effective methods and better targetting of social programs; and a thorough overhaul of the public enterprise sector. 10. The shift to an outward-oriented development strategy is the cornerstone of Morocco's medium-term adjustment program. Continued adjustments in trade and exchange rate policies will be made to complete the reform of the overall incentive framework designed to accelerate export growth and reduce and rationalize import protection. Key instruments are to be a flexible exchange rate, the elimination of the special import tax (expected by January 1987); a general reform of the tariff level and structure, with the objective of reducing the overall level of protection to 25 percent through decreasing maxiumum duty rates and evening out the spread in tariff rates within and between sectors; and finally, a phasing out of quantitative restrictions on imports. Domestic price controls, which were already removed in 1983-84 on many manufactured products, are planned to be fully eliminated, in parallel with progress in import liberalization. Remaining export licensing requirements will be abolished, with exporters to be entitled to import all inputs on a duty-free basis. 11. At the same time, appropriate sector strategies for the key productive sectors, particularly agriculture and industry, will be promoted. In industry, although 'the development of Morocco's potential for export of phosphate fertilizers will continue to be an important objective, the  - 5 - contribution of this highly capital-intensive sector to employment and to the establishment of a broader industrial base through forward and backward linkages will remain limited. Moreover, a high degree of dependence on phosphate and phosphate fertilizer exports has made Morocco extremely vulnerable to cyclical fluctuations in the volatile world phosphate market. For this reason, the industrial strategy must be based on the diversification of manufactured exports, including processed foods and nontraditional manufactures where Morocco may have a comparative advantage on world markets. In agriculture, Morocco needs to continue developing an appropriate package of policies designed to overcome existing constraints to rational land use patterns, to ensure that farmers have adequate incentives to improve farming techniques and use modern inputs, and to provide the support services needed to bring about these changes. A first Agricultural Sector Adjustment Loan (No. P-4032-MOR) in line with such policy direction was extended by the Bank in June 1985. 12. The low productivity of investment has been one of the major factors in the poor performance of the Moroccan economy in the past ten years. The allocation of capital and the efficiency of investment need to be improved considerably both in the public and in the private sector. In the private sector, the reform of the protection framework described above should gc a long way towards removing distortions in investment patterns. However, it will also be necessary to review the bias in favor of capital-intensive activities inherent in the current investment incentive system, including tax exemptions and interest rate subsidies which artificially depress the cost of capital. In the publ;c sector, increasing the efficiency of investment will require a considerable improvement of existing planning and budgeting mechanisms, including better procedures for setting investment priorities, strengthening of project preparation and monitoring capability, and placing more emphasis on the economic evaluation of projects before they receive Goveroment sanction. Policy actions to improve the public investment and enterprise framework as well as continuing reform of trade policy and a comprehensive approach to financial sector reform are supported by ,.he Bank's second Ijidustrial and Trade Policy Adjustment loan approved in July 1985. 13. An exceptionally strong savings effort will be essential for the success of Morocco's adjustment process. In the private sector financial savings have been repressed in the past due to inadequate financial policies and negative real interest rates. Savings are now being encouraged through increases in deposit rates and a program of financial sector reforms to improve financial intermediation and develop the domestic money and capital markets. But the most intense savings efforts in the next few years will have to take place in the public sector, which continues to be a major source of dissaving, particularly through the Government budget. In the medium term, sustained improvement in the mobilization and utilization of resources by the public sector will require fundamental reforms in a number of key areas, including social expenditure policies, taxation, and cost recovery and efficiency in the public enterprise sector. In the social sectors, where coverage of the Dopulation is still inadequate, Government activities need to be restructured so that basic services (particularly education and health) can  -6- be delivered more effectively but at substantially lower cost. More cost-effective methods and better targeting will be prerequisites to a further broadening of access to these services in the future. Food and other subsidies also need to be targeted to the groups most in need rather than directed to the general population. 14. Macroeconomic projections based on the Government's reform programs indicate that it may take the better part of the next ten years for Morocco to complete its adjustment process and become fully creditworthy. The growth of the economy is likely to be severely constrained in the early years of the adjustment process. However, as the restructuring measures designed to promote exports, improve resource use and increase domestic savings begin to work their effects through the economy, the external imbalance should lessen, and restraints on domestic demand could gradually be relaxed. Moreover, the growth of external demand expected to result from the trade liberalization and export promotion policies, and the switch in the composition of domestic demand from imported to domestic goods, fostered by the adjustment of relative prices, should help mitigate the temporary negative impact of slower public expenditure growth on incomes and employment. 15. The projections suggest that GDP growth is likely to remain low (below 3 percent p.a.) until 1990, accelerating thereafter. Domestic demand is expected to grow very slowly until 1990, reflecting the impact of stabilization policies on both investment and consumption. Investment, which has been declining since 1978, should continue to fall in real terms and in relation to GDP until about 1987, then rise somewhat until 1990, recovering strongly thereafter. Assuming that central government investment expenditures would remain constant in real terms in the medium term, the adjustments would occur primarily in the public enterpises and private sectors. Government consumption, which had grown very rapidly until recently, is projected to decline marginally in real terms and to drop by 3 percentage points in relation to GDP between 1985 and 1990. The growth of private consumption, which already slowed significantly in the early 1980s, would remain just below that of GDP in 1985-90, and accelerate only slightly in the 1990s. Restructuring policies should bring about an acceleration in the growth of exports of goods and nonfactor services. The acceleration of export growth would help sustain a modest recovery of imports, the overall trend of which has been downward since 1978. Imports, however, should rise much more slowly than exports between 1985 and 1990, as a result of the demand restraint and expenditure switching policies. 16. As a result of the drop in the GDP share of both investment and consumption, there should be a steady decline in the economy's resource ga:,_ with a small surplus projected for 1990. Gross domestic savings are expected to rise much faster than GDP throughout the period, initially as a result of improved savings mobilization by the public sector, and later reflecting continued substantial improvements in private savings as well. The marginal savings rate with respect to GNP will need to be very high (about 50 percent) in 1985-90, as a necessary concomitant to reducing the external deficit; it should slacken slightly thereafter. High domestic savings should enable the  -7- economy to finance the recovery of investment without recourse to external savings in the early 1990s. This will be essential, since, throughout the remainder of the 1980s, the balance of payments will remain under considerable pressure because of continuing high debt service payments. By the end of the decade, reforms of the overall economic incentive framework and increased efficiency of public investment should have raised the productivity of new investment considerably, and the ICOR should drop substantially from the high levels prevailing in the early 1980s. 17. It is important to recognize that the implementation of the stabilization policies and measures for structural adjustment envisaged in this scenario will entail some transitional social costs. With population growth at about 2.5 percent p.a., GNP and consumption per capita, which have been essentially stagnant since 1980, are not likely to show much improvement in real terms until the end of the present decade. Stabilization policies and measures to increase efficiency will initially be reflected to some extent in depressed domestic demand, increased unemployment, and some decline in real incomes, particularly the real income of urban populations, Government employees, and workers in less competitive industries. On the other hand, the real income of farmers, who constitute by far the poorest segment of the population, should rise as a result of increases in agricultural producer prices and improvements in support services and marketing institutions and infrastructure. This will be particularly true of farmers in rainfed areas. The political and social implications of these welfare shifts are likely to be significant, and to keep them manageable will be a major concern of the Government in the next few years. While the cost of not undertaking the required economic adjustments would in any case be greater in the long run, it will be important to minimize the negative short-term impact of these adjustments on the poorest groups. After 1990, as a result of the reforms undertaken in the 1980s, the economy could return gradually to a higher growth path without endangering external equilibrium. Per capita levels of income and consumptio- could begin to rise again, and the restoration of economic dynamism would greatly improve Morocco's ability to deal with its serious unemployment problem. 18. A steady improvement in Morocco's external payments position should result from the acceleration of export growth relative to import growth anticipated in 1985-90. The economy's negative resource balance, which averaged more than $2 billion in 1980-82, and dropped to $1.2-1.3 billion in 1983-84, is projected to decline steadily, and virtually disappear by 1989. Assuming that the growth of workers' remittances can be sustained at a modest pace, the current account should improve roughly in parallel with the overall resource balance and could reach approximate equilibrium around 1989. Nowever, the overall balance of payments can be expected to continue to show large deficits because of the heavy principal repayments coming due on the external debt, including substantial repayments to the IMF. Because of mounting debt service obligations, gross public long-term capital requirements are projected to average close to USt2.5 billion annually during the period 1985-90.  - 8 - 19. It is clear, under these circumstances, that Morocco will-continue to require debt relief for several more years. The projections include the effects of the recently concluded 1985-87 debt rescheduling agreement through the Paris Club, and assume debt relief from private creditors during 1985-87, essentially along the lines of the debt reschedulings obtained in 1983-84.1-' Normal public long-term capital inflows could then be approximately sufficient to cover the remaining financing requirements in 1985-87 (about US$1.2 billion annually), assuming that new loan commitments from Morocco's official lenders can be maintained at their current rate (about US$800 million a year). Recourse to commercial bank financing, outside of these guaranteed programs, is likely to remain constrained and overall private capital flows are expected to remain sporadic, at US$100-300 million per annum, probably strongly conditioned on, if not directly tied to, specific adjustment programs. 20. For the years 1988-1991, Morocco is going to need around US$2 billion annually to meet its capital requirements. Providing that US$800-900 million a year are forthcoming from official creditors; and assuming a reasonable recovery of private source financing of about US$700 million a year, around US$400 million still remain to be generated each year to cover the gap. With Bank and IMF transfers stretched to the limit, Morocco's remaining firLncing requirements will have to come in the form of further debt relief, grants, or some concessional assistance. Only beginning in 1992, with debt repayments from past borrowings and successive reschedulings starting to level off, could equilibrium in the overall balance of payments appear assured on the basis of normal official capital inflows and a sustainable recourse to private financing. If the envisaged external capital flows do not materialize, the Government will have to resort to severe corrective measures to finance its resource gap. 21. In view of the continuing large capital inflows required in the next few years, the long-term external debt outstanding and disbursed would continue to rise rapidly until 1988, but would begin to stabilize thereafter. The ratio of debt outstanding and disbursed to exports of goods and services, which had risen to 260 percent in 1984, would start to decline, progressively dropping to 175 percent by 1990 and 114 percent by 1995. In the absence of debt rescheduling, the long-term debt service ratio would have risen above 50 percent of exports of goods and services in 1985 and 1986. With debt relief obtained for the period 1985-87, on the other hand, the debt service ratio could be kept manageable at 24-25 percent during the next few years. Assuming no further debt relief, it would rise sharply in 1988, with repayments on the 1983-84 rescheduled maturities (including military debt) falling due, but would then start declining gradually in the 1990s. Given this difficult debt situation, Morocco's commitment to an aggressive program of structural adjustment is essential for the country to be considered creditworthy for continued Bank lending. Bank exposure amounted to 11X of total debt outstanding in 1985, and would increase to about 17 at the end of the decade, with the current lending program. 1/ About US$230 million of military debt service payments coming due each year until 1988 are assumed to be rescheduled along the same lines as other obligations.  -9- PART H - OTHER BANK GROUP OPERATIONS Th MOROCCO JL' 22. Bank lending to Morocco has supported 65 projects, financing a total of $2,675.5 million (net of cancellations), of which $25 million from a Third window loan. IDA credits, totalling $45.2 million, have been made available for five projects. IFC investments have amounted to $104.7 million ($59.9 million after cancellations, terminations, repayments and sales). Annex II contains a sunmmary statement of Bank loans and IDA credits, and of IFC investments, as of September 30, 1985. 23. Until recently, performance in project execution has been satisfactory overall, although in some cases management problems have caused delays in project implementation, and in others insufficient tariff adjustments have affected project entities' financial performance. However, during 1983, as budgetary constraints became more severe, projects relying on the Government budget for a substantial part of financing have been seriously delayed because of inadequate budgetary allocations. The appreciation of the dollar vis-_-vis the dirbam in recent years has reduced considerably reimbursable expenses in dollar terms, thus lowering disbursements vis-A-vis appraisal estimates. The ratio of disbursements to appraisal estimates averaged 43 percent as of September 30, 1985, low in comparison to other countries in the region. 24. The objectives of Bank Group activities in Morocco are to support (a) investments and policy reforms aimed at structural adjustment and strengthening the balance-of-payments; (b) measures to reduce the Treasury deficit; and (c) efforts to redress poverty and improve income distribution, particularly through lowering the unit costs for the delivery of basic services, in order to increase access by lower-income groups. Important structural reforms must be undertaken in the coming years, in order to return to a path of reasonable economic growth compatible with a sustainable external payments position. A major objective of Bank economic and sector work is to provide the analytical basis for the development of specific proposals for structural reform, which in several cases is being supported by Bank lending. At Government's request, in addition to ongoing work on the public investment program, the Bank is assisting in developing reform proposals relating to the public enterprises. Because severe budgetary constraints are likely to persist over the medium-term, projects now under preparation or consideration, like the proposed project, are timed and designed to be consistent with the investment strategy which aims to minimize their reliance on incremental budgetary funds and, if applicable, support Morocco's efforts to reform its public enterprises. 1/ Part II is essentially the same as Part II in the Casablanca Port Project (Report No. P-4226-MOR of February 3,1986).  - 10 - 25. ARriculture continues to represent an important sector in Bank lending for Morocco. Past Bank lending has primarily supported rural development and irrigation projects focusing on particular geographical regions, in parallel with successful series of agricultural credit projects. There are no major covenants in default. Bank's operations in those fields will continue at a pace consistent with the country's investment capacity while paying special attention to maximizing non-budgetary financing and improving cost recovery. At present increased attention is being given to agricultural support services at the national level, which are essential for backstopping regional development projects. In parallel, the Bank has helped the Moroccan authorities to review the sector policy framework and to formulate its medium-term adjustment program covering investment strategy, pricing and incentive policy and role of the public sector. The recently approved Agricultural Sector loan was in support of a first phase of such a sector adjustment program and is expected to be followed by similar operations, as further specific measures to adjust the prices and incentives framework are developed. 26. Energy and mining. The Government has given high priority to reducing the oil import bill, a major factor in the current account deficit, through development of domestic energy supplies. The Bank has supported this effort through loans for the exploration and appraisal of petroleum (primarily natural gas) and oil shale resources as well as for power generation and transmission and coal mining modernization and expansion. Future projects would assist in the development of domestic energy supplies, including gas, and hydropower. Through these projects as well as in our sectoral policy dialogue, efficiency in energy development and use would be promoted through attention to pricing, cost recovery and management issues. 27. Bank lending for infrastructure and utilities has helped to build a number of technically competent agencies in the fields of road transportation, electricity, water supply, housing finance, and community infrastructure finance, as well as to expand the provision of essential services. Projects like the recently approved Port project will place greater emphasis on improving the productivity and efficiency of existing infrastructure through improved financial and management performance. Mobilization of private and non-budgetary financing as well as improved cost recovery in these subsectors through tariffs should also help reduce the Treasury deficit. In addition to continuing support for the above-mentioned subsectors, projects are under preparation for railways, sewerage and telecommunications. 28. Industrial development in Morocco has been supported in the past through strengthening the financial and institutional resources of the Banque Nationale de Diveloppement Economique (BNDE), the major source of industrial medium-term credit. In addition, policy changes were introduced to widen access to credit by small-scale labor-intensive industries. Other projects focused on phosphate processing and cement production. The Bank's efforts are now focused on the development and implementation of medium-term policy reforms aimed at encouraging exports and improving incentives to domestic production. The first phase of such reforms was supported by the Industrial  - 11 - and Trade Policy Adjustment (ITPA) loan of 1984 and was successfully implenent. Further stages of reform of trade policy, as well as a comprehensive reform of the financial sector, and policy actions on public investments and public enterprises are supported by the on-going Second Industrial and Trade Policy Adjustment Loan. 29. Education, health and urban development projects will increasingly concentrate on lowering unit costs in order to widen the access by low-income groups. Policy dialogue in these sectors continues to encourage the shift away from capital-intensive investments benefitting limited clientele and the development of more cost-effective delivery systems for basic services. While previous Bank-financed projects have supported technical education, rural primary education and improved teacher training, these are proposed to be complemented by efforts to expand basic education and skill training, as well as restructuring of the formal education system, which has represented a major drain on the recurrent budget. The recently approved first health development project will test new health care delivery systems in order to improve basic health services in rural areas. Finally, the experience of projects in urban upgrading will be continued and expanded, with increased efforts to mobilize private financing in order to reduce budgetary costs. PART m - THE EDUCATION SECTOR 30. Since Independence in 1956, the Moroccan Government has focused on expanding the nation's educational capacity beyond what was essentially only primary level (student ages 7 through 11) schooling. This effort has included expanding physical capacity, increasing the proportion of Moroccan teachers, and developing new curricula. The results of these efforts have been, i=nitially (1957-1966), an expansion of secondary education enrollments (student ages 12 through 18), followed later by significant increases (152 per year) in higher education enrollments between 1974 and 1984. Although in the past the Government had neglected support of vocational training, since 1984 it has launched a program to emphasize and allocate adequate resources to vocational training activities (for students over the age of 16) in order to address skill shortages in the country's labor market. The core of this vocational training program is the 22 new vocational training centers and mobile training units being firanced under the Bank's Vocational Training project which was approved in November, 1984. The Current oE&atiOn System 31. Morocco's education system is almost entirely funded by the national Government. Private schools only accommodate less than 4X of Morocco's students, at primary and secondary levels of education. The Ministry of Education (MOE) controls the policies and practices of general public education in the country, and regulates the performance of private educational institutions. The National Office of Vocational Training, created under the Ministry of Labor, has become the major central vocational training agency. It is now operating under the Ministry of Public Works and Vocational Training (MN).  - 12 - 32. The Moroccan education system is designed to provide general education from primary through university levels, and the opportunity for vocational training for those students not seeking university education. General education is mandatory from age 7 through age 15 for all Moroccan children, although as will be discussed in the next section, enrollments are far from 100% of eligible children at the primary and secondary levels. EnroUments in Primary and Secondary Schools 33. As a percentage of the school-age population at each level, Moroccan children for the school year 1983-84, are only enrolled at 57.3Z, 18.4S and 8.11 at the primary, lower secondary and upper secondary levels, respectively, as presented in the table below: Table 1 NET ENROLLMENT RATIOS BY LEVEL OF SCHOOLING (1983/84) (Public and Private School Enrollments, Excluding Over-Age and Under-Age Students, as a Percentage of School-Age Population at Each Level) Male Female Total Primary (grades 1-5, ages 7-11) 69.0% 45.32 57.3% Lower Secondary (grades 6-9, ages 12-15) 21.4% 15.3Z 18.4% Upper Secondary (grades 10-12, ages 16-18) 9.4% 6.7S 8.12 SOURCE: Calculated from MOE enrollment data and IBRD population estimates. NOTE: These are the latest figures from MOE. Annex I has not been updated as yet to reflect these enrollment ratios. As Table 1 illustrates, significant student dropout occurs between the primary and lower secondary levels. Also, noteworthy disparities exist between male and female enrollment at all levels. At the primary level, where fewer than half primary school-age girls attend school, a further disparity exists between girls in urban and rural environments. In rural areas girls account for less than 291 of primary school enrollments. 34. One cumulative result of Morocco's low enrollment levels in primary and secondary schools is that 651 of the population over 10 years old was reported illiterate in the country's 1982 census. Noteworthy also is the high rate of illiteracy among adult females (78X) relative to males (511). Current Isues in Moroceo's Education Sector 35. The major sector issue is the need to improve the performance of the sector in providing accessible education, while preserving the quality of  - 13- education programs and while minimizing use of scarce budgetary resources. Access of school-age children to the system is limited and the system is relatively inefficient. Overall, Government expenditures in education have increased at a rapid pace, while inefficiency of the system in terms of student flows and resource use has persisted. The MOE budget has quadrupled during the past ten years, and increased from 12.52 of the central government budget in 1975 to 21.5X in 1985. 36. Inadequate school resources. Inadequate school facility capacity has restricted significantly the access of school-age children to primary and secondary education, resulting in low enrollment levels. In addition, a lack of female teachers in rural schools has aggravated the already considerable reluctance of parents in these areas to send their girls to school, particularly after the age of puberty. Although enough female teachers are in training to address this need, a lack of suitable teacher housing in comnmuities surrounding rural schools has constrained the placement of female teachers in such schools. 37. Inefficient schools. Morocco has a serious problem of high drop out rates and class repetition at all levels of schooling. The problem is particularly acute at the primary level where only 241 of students complete the five year primary cycle in five years; 21X drop out before the fifth year, and of those students who remain, most repeat at least three classes before completing primary school. An average 8.6 years of schooling is required for each graduate of the five year primary cycle. The highest repetition occurs at the fifth primary year which 50X of students repeat (with an additional drop out rate of 12X). This is the highest reported incidence of inefficiency due to class repetition of any public school system. 38. High repetition rates in primary school are attributable principally to limited enrollment capacity in secondary schools, which restricts entry at the secondary level to those students who score highest on the test administered at the end of the fifth primary class year. To increase the likelihood that their children will score well on the test, parental influences encourage holding children back in primary school, causing them to repeat grades. Excessive repetition also occurs at the secondary school level, particularly in grade 12 where the repetition rate is almost 30X. 39. Class repetition and dropout rates are also seriously high in institutions of higher education. These phenomena at the university level are more costly than similar inefficiencies at the primary and secondary levels because unit recurrent and investment costs are much higher at the university level than at primary and secondary levels. The high incidence of class repetition and dropout at the university level results principally from the absence of failure sanctions. Since students have historically been permitted to repeat classes with full fellowships without restriction, motives for improved student performance have been absent. University entrance policies and curricula also contribute to the problem by admitting baccalaureat level students without restriction but requiring proficiencies beyond the skill levels of incoming students.  - 14 - 40. Inappropriate expansion of higher education. The past rapid expansion of capacity in higher education is no longer justified. Morocco can no longer absorb a high percentage of university graduates (particularly in liberal arts and law, which constitute 75S of university enrollments) in its employment market. In the past, the upper levels of the Government's civil service were able to absorb university graduates, but currently, the Government's foreseeable recruitment needs are largely met for the medium-term. 41. Other parts of the economy have needs for employees with specific skill training. The current expansion of vocational training capacity which is being supported by the Vocational Training Project (Ln. 2479-MOR, approved in November 1984) is designed to meet the most conspicuous of these needs particularly in industrial specializations. A study of medium-term manpower needs is being carried out by the Ministry of Planning to identify priority areas for future expansion of vocational training capacity. The micro-level counterpart of this identification of aggregate manpower needs is the process of feedback from employers to vocational training programs as to the relevance and the quality of training programs from the users' perspective. This process works effectively under the training programs of the National Office of Vocational Training. 42. The Government cannot afford the cost of a higher education system growing at the pace it has in the past five years (19X per year for recurrent expenditures). Given the high cost of university education relative to lower levels of education (e.g. unit recurrent costs are 10 times as high as in primary education), the Government, in the context of economic austerity, must reduce the inefficiencies at this level of education and must restrict access to higher education, which at present, is open to any secondary level graduate. No student fees are collected to help cover the costs of the public higher education system. The Bank's Involvement in the Sector 43. Bank group lending to Morocco's education sector has totalled $207.5 million, in the form of two credits and three loans since 1965. Over the years Bank financing has supported parts of the sector the Government agreed needed priority attention, from initial support of general education at primary and secondary levels, to current support of the country's vocational training activities. In recent years the policy dialogue in the sector has focussed on assisting the Government in developing a coherent and comprehensive program of structural reforms to improve the efficiency, financial viability and employment orientation of education at all levels. 44. The First Education Project (Cr. 79-MOR) provided for the construction and equipping of 21 MOE secondary schools. Except for three schools which were deleted from the project as a result of the Government's decision not to maintain MOE vocational education, the project was completed in June 1975. The Second Education Project (Cr. 266-MOR) provided strong support for teacher training through the establishment of 7 teacher training institutes and a national pedagogical institute, and the qualitative improvement of science and technical teaching through the provision of science  - 15 - laboratories for 6 general secondary schools, and equipment for 23 technical secondary schools. Construction and equipment were also provided for two vocational training centers and for extensions to both a forestry and an agronomy training institute. Except for the two vocational training centers and the extension to the forestry training institute, which were subsequently deleted from the project at the Government's request, the project was completed in 1979. The Third Education Project (Ln.1220-T-MOR) supported basic education by providing 47 innovative rural primary schools, 5 general secondary schools, 1 secondary teacher training institute, and assistance to the MOE in developing a more practical curriculum for primary and secondary schools. It also supported manpower training in priority areas by financing four hotel training centers under the Ministry of Tourism, one rural development center under the Ministry of Agriculture, and four paramedical training centers under the Ministry of Health. The Loan account closed in 1983. Although some of the components implemented by ministries other than the MOE were deleted because of implementation delays, all but two of the project institutions were completed. The Fourth Education Project (Ln. 1681-MOR) provides major support to the MOE in strengthening secondary and post-secondary technical education. The project is financing the construction and equipping of 11 technical secondary schools and 5 post-secondary technical institutions: 2 Higher Institutes of Technology, a College of Applied Engineering, a Technical Teacher Training College, and an extension to the mohammedia ScLaol of Engineering. The project loan account is scheduled to close at the end of 1985, but the Government has requested a one-year extension to permit project completion under Loan financing *. The Fifth Education Project (Ln. 2149-MOR) is supporting the expansion and qualitative improvement of primary and secondary education by financing the construction and equipping of 40 primary schools, 4 secondary teacher colleges, and a palckage of basic educational aids for 700 existing primary schools. The project is ongoing; the Loan Closing Date is March 31, 1988. 45. As noted by the PPAR for the First Education Project, early project implementation suffered delays due to inadequate management capacity within the MOE. Implementation by the MOE steadily improved following the creation of a separate, permanently staffed MOE project unit under the Second Education Project, and the progressive reinforcement of its staff to meet its increasing responsibilities under the subsequent three projects. The PPARs for the first and the second projects noted implementation delays, but concluded that the projects achieved their educational objectives. Implementation of project components outside the MOE, under the Second and Third Education Projects, however, experienced significant delays and, ultimately, deletion of some project components due to less developed implementation capacity in the minstries concerned-a problem which supervision could not entirely overcome. The lack of continuity in lending to these other ministries also meant that it was not possible to address implementation deficiencies in the design of subsequent projects as had been done in the MOE. In spite of significant delays in implementation of non-MOE components, the Third Project achkeved its educational objectives- including introduction of innovative curricula in the MOE project primary schools and secondary schools; based on satisfactory results in the project schools the Government is now generalizing these program. The ongoing Fourth and Fifth Projects, which involve only the * she request is currently being processed.  - 16 - MOE, are being implemented vigorously and effectively by the MOE. Some delays in implementation arose from delays in payments to contractors as a result of the Government's financial situation, but this situation has improved following the rationalization of the investment portfolio which occurred under the joint Public Investment Review. The proposed program reflects the lessons of past project experience in that it includes a suitable structure for coordination of the interministerial aspects of the reform. PART IV: THE EDUCATION SECTOR REFORM PROGRAM AND THE BANK PROJECT A. The Reform Program Program Objectives 46. As indicated in Part I, Morocco is implementing a program of medium-term economic adjustment across the major sectors of its economy. A stabilization program constraining expenditure is in place. By the year 1989, education expenditures are projected to have dropped to approximately $790 million from approximately $860 million in 1984-85, or from 221 of the Government budget in 1984-85 to 18Z in 1989, which will contribute significantly to the stabilization program. The education reform program represents an important initiative for Morocco, particularly in light of the Government's overall program of economic adjustment. The country can no longer afford, nor should it support for other reasons mentioned in Part III, the educational system as it is currently structured. 47. The education reform program is designed to increase literacy among Moroccan children of school age by improving the equity of access to basic education, to improve the efficiency of the education system, and to meet more effectively the country's employment needs through the redi-ection of a greater proportion of students into vocational training instead of general, higher education. Controlling education costs is a vital part of the country's efforts to restore fiscal balance and will be an important result of the education reform program. The overall objective of the reform program, therefore, is to establish and maintain adequate standards of educational quality, while restraining the growth of overall costs and decreasing the unit costs of education. Elements ofthe POogrmm 48. The MOE has started to undertake broad efficiency measures to reduce the financial burden of the sector on the economy, while changing the substance of and student access to, education at various levels of the system. Specifically, the Government's objective is to make available to all children basic schooling through grade 9, followed by a rigorous selection of students for subsequent studies. Included in the Government's strategy are actions which are designed to make educational activities more cost-effective. Expand Access to Basic Scliooling and Improve Basic Education Efficiency 49. At the primary and secondary levels, an initiative is underway to address problems of poor access to schools, particularly in rural areas. The  - 17 - Government has set intake and enrollment targets to measure the success of its efforts in this area, as part of its policy to achieve full enrollment in primary education by the end of the century. Measures to improve student flows throughout the system are also being instituted. 50. The program includes efforts by the Government to foster the development of private schools at the primary and secondary levels. Specifically, the MOE has begun to improve its support of private schooling in the areas of certification, quality control and pedagogical services. At this point, the reform program does not have a specific quantitative goal for private school expansion. 51. Currently the Government is conducting a building program to expand primary and lower secondary school classroom capacity. Schooling investments at higher levels are planned to be sharply curtailed. 52. The Government has initiated a policy of restricting class repetitions at the primary and secondary levels and intends to establish mandatory promotion rates to ensure that qualified students are not kept from entering the appropriate grade levels. Students who have repeated more than four years would be barred from continuing in public schooling. 53. Under the reform program, the basic schooling network will be extended to promote primary and secondary education in rural areas, particularly among female students. The school construction program will locate scheols appropriately to help meet this objective, and the Government will undertake studies to develop programs of multigrade teaching and other pedagogical activities to help meet this objective. Other measures will be initiated to strengthen the schooling network, particularly the provision of basic teaching aids and teacher housing facilities in remote areas to facilitate the placement of female teachers at schools in these areas. Assigning more female teachers to rural schools is expected to encourage female school attendance. 54. New pedagogical programs are being developed under the reform program to facilitate flows in basic schooling: a program in remedial instruction for students with learning problems, a program in continuous evaluation by teachers of student performance, and a program in use of standardized testing. Restrain Growth of Upper Secondary and Higher Education and Improve Efficiencr 55. The reform program will require more selectivity in student entry into higher levels of education after basic schooling. Within the education system, the options for basic education graduates will be to compete for upper secondary schooling or for vocational training to equip them with skills needed in the Moroczan employment market. Vocational training opportunities are expected to be considerably expanded under the reform program. Admissions into unper secondary schools and universities are to be restricted through enforcement of more rigorous standards of entry. Progression rates from lower to upper secondary are expected to fall from 56% to 40% by the start of the second phase of the program. University entry is expected to be reduced from 13% to 2% annual growth rates.  - 18 - 56. Class and course repetition rates in upper secondary schools and universities respectively would be limited to a maximum of two years each, as a matter of policy under the reform program. In addition, for the first time, university fellowships would be conditioned upon satisfactory performance and financial need. Control Education Costs 57. The MOE will adopt numerous actions under the reform program to control capital and recurrent costs of education and to introduce cost recovery for education. Cost control actions include adopting a more cost-effective formula for teacher training (more intensive classroom training over a shorter period of time, plus increased in-service training), using educational resources more intensively, adopting more economical norms for construction of primary school facilities and involving the private sector in the financing of education. Following are the Government's planned cost control measures: - Increased minimum teaching hours by an average of 20S over the 1984-85 year in university faculties; - strengthened private sector presence in the education sector as an alternative to public education, through the introduction of incentives for private investment in education; - adoption of a more cost-effective program of teacher training; - lower teacher training stipends; - restriction of eligibility for foreign university fellowships to specialization not available in Morocco; - reduced boarding in university facilities to lower recurrent costs of maintaining these facilities; - reduced unit costs of school construction by an average of 13% by adoption of least-cost construction norms; - development of a school maintenance program to extend the useful life of educational facilities; - improved efficiency of school administration, measured by administrative/teaching staff coefficients; - already partial cost recovery occurs through the collection of student boarding fees. Over the medium-term of the program, the Government is committed to introducing student registration fees in higher education. 58. The result of these measures, coupled with the implementation of the enrollment policies cited earlier, is expected to be a major increase in the  - 19 - number of students entering and completing basic education. In the school year 1989/90, it is projected that 75,000 more students would complete basic schooling under the reform than without it. This enrollment benefit of the reform program would rapidly grow thereafter as reform program measures affecting student flows were progressively implemented and as the higher number of students admitted to basic schooling pass from initial grades to the final grades of basic schooling. These measures are also expected to lead to a $160 million decrease in education costs overall by 1989/1990, compared to a projection of activity in the sector without the reform program, over the same time period. The projection of sector costs without the reform program is based on a disaggregated extrapolation of enrollments which, although probably not feasible under current financial constraints, indicates the consequences of maintaining current education policies. The projection illustrates well therefore, the need for a reform program. Primary education costs are expected to increase during this time period, while secondary and higher education costs are projected to decrease enough to lower total education costs. 59. The reform program as a whole will be implemented over approximately fifteen years. Implementation of the reform program is the responsibility of the MOE under the supervision of the MOE's Commission de la Reforme Educative. The Commission, which was established under the authority of the Minister of Education during preparation of the proposed project, is chaired by the MOE Secretary General for Primary and Secondary Education and comprises the Secretary General for Higher Education and the Directors of the key MOE departments involved in the reform: the departments of planning for prizary/secondary education and higher education, the line departments for primary education, secondary education, technical education, higher education, and teacher training, and the infrastructure departments for administration and personnel. 60. Coordination of reform implementation covering the various ministries involved in the reform is to be assured by the existing and active Interministerial Steering Committee. The Committee, which was established under the autbority of the Prime Minister in December 1984, is chaired by the Minister of Economic Affairs and comprises the Ministers of Education, Finance (MOF), Public Works and Vocational Training, and Planning (MOP). The Interministerial Steering Committee has established the respective roles of the ministries involved-namely, implementation of the policy reforms and the primary school building program by the MOE, provision of the necessary budgetary resources by the MOF, vocational training coordination and iupleuentatiom of the secondary school building program by the MPW, and elaboration of the development planning context of the reform by the MOP. The Comittee would continue to meet periodically during reform implementation to resolve questions of interministerial coordination as they arise. Working-level contact among the ministries involved in the reform would be asswred through technical working groups which have been established in the MM, under the coordination of the MOE's Reform Implementation Task Force. The MOE Reform Implementation Task Force has been created to assist the MOE's Comission de La Reforme Educative in supervising implementation of the  - 20 - reform. The Task Force is also to report to the Interministerial Steering Comittee and to the Bank on implementation of the reform. Assurances were obtained from the Borrower that the Committee, the Commission and the Task Force would all be maintained with membership and terms-of-reference satisfactory to the Bank. B. Te Bank Project 61. The project was appraised in April-May, 1985. Negotiations were held in Washington D.C. in January, 1986. The Moroccan delegation was headed by Mr. Hassan Belkoura of the Ministry of Economic Affairs and included representatives from the Ministries of Education, Finance, Equipment and Planning. A summary of the proposed project is provided at the beginning of thjs report and Annex III contains supplementary project data. Ratiale for Bank Involvement 62. The Bank has been involved in discussions with the Government on the education sector reform program since 1981. Discussions were held initially with the MOE on technical aspects of the reform, and were later broadened to involve other ministries and other levels of Government in a re-examination of the ultimate objectives of education in a medium-term perspective. The reform program which emerged from this process, and which the Government is committed to implement, fully embodies the recommendations made by the Bank throughout- these discussions. The purpose of the proposed loan is to support the overall reform program. Thus, the objectives of the proposed loan are the objectives of the reform--namely, to make the provision of education in the country more equitable, more cost-effective, and more consistent with the country's development needs. In order to promote rapid implementation of the reform program a Bank loan of US$150 million is proposed to support two to three years of the initial phase of program implementation. 63. During this first phase, to be supported by the proposed loan, the structure of the education reform would be put into place: the reorientation of the school system would be clearly established and supported by reallocated shares of education resources; cost recovery measures would be introduced for university studies; the recently introduced fellowship eligibility restrictions would be generalized; and a series of measures would be put into effect to improve the efficiency of use of teacher and classroom resources at each level of schooling. Programs would also be developed during this first phase for vital new pedagogical activities (including remedial instruction, career counseling, multi-grade teaching, and teacher upgrading) and for further cost efficiency measures which would be put into effect during the subsequent phase of the reform program. These measures would lead to continued improvements in quality, efficiency, and enrollments during the second phase of the reform program. 64. The reform actions to be taken under Phase II of the program consist of introducing several new pedagogical actions which are to be developed under Phase I; and continuing and reinforcing the measures to improve enrollments, student flows, and cost control which are to be introduced under Phase I. The  - 21 - Phase II reform actions would thus complement and complete the reform measures which are to be introduced earlier. At the same time, the Phase I reform measures are meritorious in their own right. 65. The Bank's substantive support has been and continues to be critical to maintaining the momentum for reform and giving it visible legitimacy in the overall development program of the country. The Bank's financial support is also vital to assure timely implementation of a coherent reform program. The Bank's role in the development program and history of involvement in the education sector gives it a unique role in supporting this reform that cannot be assumed by other financiers. Projct Costs and F i 66. The project consists of the following activities to be carried out during Phase I of the reform program, which covers the period January 1986 through December 1988: (i) carrying out the Borrower's 1986-1987 primary and secondary school construction and expansion program; (ii) provision of educational materials to primary and secondary schools; (iii) carrying out of teacher training programs for primary and secondary school teachers; (iv) provision of overseas university fellowships; and (v) studies on pedagogical reformn, school efficiency, maintenance, construction norms and private education. The proposed Bank loan would finance part of the costs of these activities. Specific results expected during the project period, which are tied to Bank financing, are listed in paragraph 78. The major elements of the reform program are described in paragraphs 48-58 above and covered in detail in Chapter 3 of the SAR and its annexes. Because of its extensive nature, the reform affects in some way or another all activities of the Ministry of Education and reshapes the expenditure program of the Ministry. Total education expenditures for this period are estimated at DH 17,377 million, or US$1,829 million of which the foreign costs are estimated at US$250 million. The composition of estimated Ministry expenditures by sub-program and by category of expenditure are summarized below in Tables 2 and 3: Table 2 PHASE I - COSTS BY SUB-PROGRAM Millions of Millions of Current DH Current US$ Espenditure Item Local Foreign Total Local Foreign Total Basic Education 9,630 1,656 11,286 1,014 174 1,188 Upper Secondary Education 1,923 64 1,987 202 7 209 Teacher Training 1,181 3 1,184 124 - 124 Uniwersity Education 1,800 405 2,205 189 43 232 MOE UAministration 426 111 537 45 12 57 IBRD Fourth and Fifth Projects * 45 133 178 5 14 19 TOTAL PHASE I COSTS 15,005 2,372 17,377 1,579 250 1,829 * The IBRD Fourth and Fifth projects will provide funds for Basic Education, Upper Secondary Education, Teacher Training and University Education.  - 22 - Table 3 PHASE I- COSTS BY CATEGORY OF EXPENDITURE Millions of Millions of Current DH Current US$ Category of Expenditure Local Foreign Total Local Foreign Total Investment Primary and Secondary School Construction 2,296 1,467 3,763 241 155 396 Equipeat and Furniture: Primary & Secondary 66 200 266 7 21 28 IB8D 4th, 5th Ed Proj. 45 133 178 5 14 19 Otber 32 98 130 3 10 13 Subtotal 2.439 1.898 4.337 256 200 456 Recurrent Salaries and Benefits: Teacher Training 520 - 520 54 - 54 Other 1' 10,149 - 10,149 1,069 - 1,069 Felloships and Stipends: University Fellowships 395 303 698 41 32 73 Teacher Training Stipends 655 - 655 69 - 69 Secondary Fellowships -' 211 - 211 23 - 23 Educational Materials: Primary & Secondary 125 54 179 13 6 19 Teacher Training 6 3 9 1 - 1 Other 3/ 268 114 382 28 12 40 School Maintenance 237 - 237 25 - 25 Subtotal 12.566 474 13,040 1.323 50 1.373 TOTAL PHASE I COSTS 15.005 2.372 17,377 1.579 250 1,829 1/ Consists of salaries and benefits for the staff of primary, secondary and higher education institutions, and for MOE Administration staff. 2/ For boarding students, to offset boarding fees. 3/ University and M0E Administration.  - 23 - 67. The proposed Bank loan would finance US$150 million of the estimated US$250 million foreign exchange cost of capital and recurrent expenditures in the sector during Phase I reform program implementation. This would support the key elements of the reform program to extend primary education in rural areas, improve the efficiency and relevancy of basic education, and rationalize use of upper secondary and university education. In addition, US$14 million in financing are available under the Fourth and Fifth Education Projects to cover part of the foreign costs of new school construction and equipment1', and of studies to develop new educational programs 1'. The remaining costs during this period, amounting to an estimated US$86 million of foreign costs -nd US$1.6 billion of local costs, would be borne by the Government. Phase I Juwlemeation 68. During Phase I of the program, the structure of the education reform would be put into place: the reorientation of the school system would be clearly established and supported by reallocated shares of education resources; the recently introduced fellowship eligibility restrictions would be generalized to apply to all incoming students; and a series of measures would be put into effect to improve the efficiency of use of teacher and celassroom resources at each level of schooling 3' . Programs would also be developed under the Project during this first phase for vital new pedagogical activities (including remedial instruction, career counseling, multi-grade teaching, and teacher upgrading) and for further cost efficiency measures which would be put into effect during the subsequent phase of the reform program. These measures would lead to continuc1 improvements in quality, efficiency, and enrollments during the second phase of the reform program. Thus, the main impact of the reform during the first phase of implementation would be on enrollments and costs; new pedagogical programs developed during the first phase would be introduced during the second phase of implementation. Sast, of Phse I Preparation 69. The following reform actions have already been taken: (a) The Government has sent the Bank a policy letter documenting its comuitment to the reform program, with a Program Implementation Matrix. The education sector policy presented in the letter and the attached Matrix appear as Annex IV to this report; V/ These schools, most of which are now in operation, are for basic education, teacher training and technical education. Most of the outstanding $14 million of reimbursable expenditures represent the cost of the final complement of workshop equipment for the technical institutions financed under these projects. 2/ The Staff Appraisal Report (Annex C) details the objectives, duration and inputs of the studies to be undertaken. 31 By the end of the project period the Government is expected to have achieved the targets set forth in the Attachment to Annex IV, in addition to the conditions of second tranche release, and the completion of studies to develop new pedagogical programs.  - 24 - (b) the Government has made 1986 budgetary allocations which are adequate to support timely implementation of the Phase I school building program and the program of improved supply of educational materials in basic schooling; (c) student flows to lower secondary schools for the 1985/86 school year were improved in June 1985 in conformity with the target promotion rate for grade 5 (from about 38S to about 491); (d) the growth of upper secondary schooling was slowed in June 1985 in conformity with the target promotion rate for grade 9 (from about 571 to about 52% of the students enrolled in grade 9 in 1984-1985); (e) the growth of university education was slowed in October 1985 in conformity with the targeted 21 ceiling for annual growth of total new intakes to the university faculties; (f) teaching hours have been increased an average of 20S since the 1984-85 school year for upper secondary and university education; (g) fellowship restrictions for university studies as set forth in the attachment to the policy letter were applied in the 1985-86 year, resulting in an annual cost saving of about $10 million. 70. To assist the Borrower in carrying out the studies to develop new educational programs, it would be assisted as appropriate by consultant experts in the individual specializations being addressed by the respective studies. Qualifications, experience and terms of reference of these consultants would be to the satisfaction of the Bank and their selection would be in accordance with the Bank's guidelines. It was decided at negotiations that consultant services may be funded by technical assistance funds available under the Bank's Fifth Education Project (closing date, March 31, 1988). These services are expected to be provided beginning in April 1986. 71. In addition, the terms of reference and implementation plan for studies to develop new educational programs have been confirmed. Terms of reference for the program of studies to develop new educational programs have been prepared by the MOE and have been finalized. Assurances were obtained from the Borrower that all studies would be completed by December 1988 (except for the study on private education incentives which would be completed by the end of 1986) and that the Borrower would, on the basis of an exchange of views with the Bank, carry out the recommendations based on the studies' findings. AUlleatimn of Loan Proceeds 72. Procurement. The procurement of goods and services to be financed with Bank funds would be procured as follows:  - 25 - Table 4 PROPOSED PROCUREbMENT PROCEDURES (Total reimbursable costs, in millions of current US$; figures in parentheses are amounts to be financed by the proposed loan) Reform Program Procurement Procedure Total Category of Expenditures ICB1-' LCBP' Other Cost Prioary and Secondary School Construction and Related Services - 396 - 396 (26) (26) Primary and Secondary School Equipment, Furniture and Educational Materials 24 23 - 47 (6) (6) University Fellowships - - 73 73 (32) (32) Teacher Training -- - 124 124 (Salaries, Benefits, Stipends and (86) (86) Educational Materials) Other Program Costs ZZ - - 1,189 1,189 (0) (O) TOTAL 24 419 1,386 1,829 (6) (26) (118) (150) 1/ International Competitive Bidding and bidding through UNICEF. 21 Local Competitive Bidding. 3/ Consisting predominantly of salaries and benefits for the staff of primary, secondary and higher education institutions, and for MOE Administration staff. 73. Contracts for civil works to be reimbursed under the proposed loan would be awarded on the basis of competitive bidding advertised locally in accordance with procedures acceptable to the Bank. The bidding would be open to foreign firms. LCB is justified in light of: (a) the wide geographic dispersion of schools to be constructed; (b) the small average contract value of each school (about US$200,000); and, subsequently, (c) the demonstrated lack of interest by foreign firms, as experienced in other ongoing iBRD projects, among small, widely distributed projects. Prevailing local competitive bidding procedures are consistent with the need for economy and efficiency in the execution of the project. There are, however, a few procedures which require modifications to be acceptable to the Bank. Agreement was reached with the Government on the LCB procedures to be used for procurement under the proposed loan. Goods financed under the loan would be procured according to the Bank's ICB procedures (except for educational materials which may be procured through UNICEF) and consultant services would be procured according to Bank guidelines. Prior Bank review of procurement decisions would be required for all contracts for goods and each contract for works estimated to cost $500,000 or more.  - 26 - 74. Disbursements. Disbursements under the proposed l1an would be made as follows: (a) 65S of total expenditures on civil works and associated professional services for primary and secondary school construction; (b) 100X of foreign expenditures and 751 of local expenditures on equipment, furniture, and educational materials for primary and secondary schooling and teacher training; (c) 1001 of foreign expenditures on university fellowships (including retroactive financing from September 1, 1985); (d) 801 of recurrent expenditures on teacher training: salaries, stipends, travel and accomodation allowances in MOE teacher training institutions where payment is made before January 1, 1987 (including retroactive financing from September 1, 1985); (e) 601 of recurrent expenditures on teacher training occuring on or after January 1, 1987; and Cf) 65% of total expenditures on consultant services. A Special Account of $20 million would be established at the Borrower's Central Bank. 75. The recurrent expenditures on teacher training are deemed incremental costs to cover the training of new teachers and the retraining of teachers for new curricula under the reform program. The disbursement against these incremental costs would be made on a declining scale under phase I of program implementation. 76. In order to expedite implementation of the reform program, up to US$20 million of retroactive financing is recommended to finance expenditures on teacher training and overseas fellowships occuring between September 1, 1985 and signature of the proposed loan. A first tranche of up to US$75 million would be available for disbursement upon effectiveness, estimated at June 1, 1986. Retroactive financing is just over half of the disbursements expected to be made by June 30, 1986. Also to expedite program implementation and loan disbursement, advance contracting related to school construction (estimated at $27 million) is proposed to cover payments made after loan signature for contracts awarded after January 1, 1983 (this date represents iben appraisal of the school construction program began) in conformity with current Bank guidelines. The second tranche of US$75 million would become available upon Bank satisfaction of progress in carrying out the reform progrm and the actions cited in paragraph 78. The Bank would conduct an interim performance review no later than December 31, 1986 to establish whether reform implementation warranted release of the second tranche.  - 27 - 77. Disbursements of fellowships, training and civil works under $500,000 would be made on the basis of statements of expenditures. Full documentation on eligible expenditures would be made available to the Bank on request. Disbursement is thus scheduled to be completed by the proposed Closing Date of December 31, 1988. Comi ws of Second Tranche Release 78. Based in part on the implementation reports to be prepared by the JOR Reform Implementation Task Force, the Bank would conduct an interim perfornance review in December 1986 in order to assess whether reform program implementation progress during the first year of Phase I warranted release of the second tranche. Implementation performance in relation to all reform program targets as set forth in the policy letter and the attached Matrix, would be monitored; second tranche release would be conditioned on the Bank being satisfied with the overall progress in carrying out the reform program and that the following actions were taken: (a) construction and equipping of about 2,900 new primary school classrooms to be operational by September 1986; (b) carrying out of a program for the distribution, in accordance with guidelines satisfactory to the Bank, of educational materials to primary and secondary schools; (c) initiation of the studies included in the Project; (d) increase of the rate of promotion of students from primary to lower secondary schools such that the number of students so promoted at the end of the academic year ending in June 1986, shall be equal to about 541 of the total number of students attending the fifth grade of primary school during such academic year (up from 49% in May 1985); (e) reduction of the rate of promotion of students from lower secondary to upper secondary schools such that the number of students so promoted at the end of the academic year ending in June 1986, shall be equal to about 45 of the total number of students attending the final grade of lower secondary school during such academic year (down from 52Z in June 1985); (f) limitation of the number of students admitted in each academic year to the first year of university, to a level equal to about 1021 of the total number of students admitted to the first year of university during the preceding academic year; (g) application of eligibility criteria satisfactory to the Bank in the award of fellowships to university students;  - 28 - (h) maintenance of the average number of hours of instruction required to be provided by all university teachers at a level of 120% of the hours required during the academic year ending in June 1985; and (i) preparation of a proposed system of incentives designed to encourage the development of quality private schools. Aceoumtin and Audit 79. Agreements were obtained that the borrower will maintain accounts to record project expenditures. These would be audited annually by independent auditors acceptable to the Bank, and audit reports would be provided to the Bank within six months of the end of each fiscal year. Befit and Riks 80. The education sector reform program is expected to yield very significant development benefits for the country. It would make the provision of education more equitable, more cost-effective, and more consistent with the country's medium-term needs and resources. Some of the prospective benefits of the reform are quantifiable, as are the improved enrollment prospects and the reduced education costs. There are also a number of important potential benefits which are not quantifiable. They include the improved equity which would result from the provision of basic schoolipg where none existed in the past, the more practical orientation of education to employment needs, and the psychological benefit to students of reduced class failure and repetition. 81. The reform program also entails some risks. The most important of these is the risk of rejection by key participants in the reform-teachers, students, parents, and school administrators. The reform involves a significant change in the objectives of the education system, and will require a corresponding adjustment in public expectations of the system. By articulating Bank support for the reform program, the Government expects to facilitate public acceptance of the sensitive elements of the reform such as increased teaching hours and slower growth of university intakes. Although the reform has been well received by many groups, it could face rejection by groups who view the reform as threatening accustomed prerogatives or expectations. The Government is fully aware of this risk, and has very conscientiously sought to minimize it by situating the reform in the context of restructuring in other sectors, by involving key interest groups (including teachers' unions and political parties) in early deliberations on the reform, and by testing public receptiveness on a number of key reforms before cocmitting itself to the full reform program. Although the reform program inevitably entails some risk of public rejection, these efforts by the Government to build public acceptance of the reform have reduced that risk. 82. A second risk is that the ultimate objectives of the reform could be compromised by incomplete implementation-particularly during the second phase of the reform when a number of new educational activities are to be introduced. The reform program is complex in terms of the number, size, and inter-relationship of program actions. A number of these complementary  - 29 - actlons are essential to the success of the Phase I policy initiatives. The improved promotion rates introduced in Phase I, for example, would ultimately lead to an undesirable situation of automatic promotion unless the programs in student performance assessment and remedial instruction are successfully developed and implemented. Successful follow-up on the initial reform program actions will require sustained monitoring by the Government and by the Bank of actions to develop and implement new educational activities. To reduce this implementation risk, an appropriate composition of the Reform Implementation Task Force was confirmed at negotiations. PART V - RECOMMENDATION 83. I am satisfied that the proposed' loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed Loan. A. W. Clausen President February 20, 1986 Washington, D.C.  -30- ANNEX I Page 1 of 7 _~~~~~I _MI Rom a _ iipgdk g970o I86k U mm 36 UT. AIcWA * G*o ta _ Ci s. w0 TOTAL 444. 446 IL 4.6 I L MEAIWL?U3A1 192.7 200.1 209.2 or - ColnU C_) .. .. 760.0 1134.9 1875.9 ~& m u 3m carm (KULCSUII 0 OIL el'-ll) 116.0 174.0 24. 62.9 993. wuinum ,>n -ns IIrA* lmA 2m01A. POeWAIOmIsum-TIAR (1385ANDS) 11626.0 14966.0 ami0.o UAU IOPUUAUNX CX0O TOTAL) 29.3 4.6 42.6 49.0 67.7 POruInf in nu am (mu.L) 31.2 STATIONARY POVLATION (LL 70.0 roIUIAneO 38 2.0 PONULAIOU 01111U117 rp sq. m. 26.0 33.5 46.6 37.8 46.0 r SQ. M. AcEt. LAM 60.3 r 45 9J 470.1 91.1 POflILATIM CK E 8300U33 CZ) 0-14 u3 44., 47.5 44. 45 6 .5 1-64 3 2.5 4.2 2.0 53. 7. 65 AM AlDK 2.7 4.1 3.0 3.3 4.2 rvnATw GRmmun (x) TOTAL 2.6 2.5 2.5 2.6 2.4 .31 3.7 4.2 4.1 4.4 3. CUMor U31 RA73 CPU 5) 50.3 47.3 39.7 40.0 30.9 CRUDI D15 U21 (M 7OGS) 21.2 16.9 14.3 11.5 6.0 G303S UlPOua.al l1 3.3 3.5 as Za a.o PANEL! PLIAUI ACEPTOU. AN81 (N8S5) .. 25.1 7J.0 1ss35 (I of IUS2 W) .. .. 26.0 21.4 45.3 100101 M 013ET1 I0 Olf WOD PIODm. PR CAP2TA (199-71-100) 99.0 9U.0 75.0 95.1 109.4 Pm cwrr* un oP 013 (CZ 0 3W ) 95.0 103.0 116.0 118.2 113.2 P30231 (GRMCIR3 DAT) 60.0 65.0 79.0 77.8 69.4 0r WICII hINL AM PULSE 14.0 L3.0 14.0 17a 34.2 CalLD (CA3S 1-4) D3A2K342 374 26.4 12.0 11.2 4.6 LIVE UPIM. AT UIR (133) 46.7 30.6 52.2 57.8 44.8 IuvAIT mU5r. X (UTZ Cm 053) 160.5 13.5 98.0 96.8 N59.7 ACCsS TO sAF wA* (lCne) TOMAL 30.1 51.0 55.0 2 67.2 6*.3 URBAN 38.7 92.0 100.0 93.4 74.5 3I3*1. 19.0 28.0 25.0 45.8 44.2 A0038 TO ESCRTA, DX18011L (Z OF IPOIULaTION TOL .. 29.0 .. 45.9 5.3 uu .. n7.0 .. 63.0 73A RURAL 4.0 . 28.6 25.5 POPMLATION P3 Pr TZC 9410.0 12790.0 10750.0 f 4331.0 9.7 P. MIRSID P1ER 2740.0 160.0 7145.0 80I.2 POP: M WITAL 3U TOUL 630.0 660.0 750.0 A 621.8 32.0 5U3 450.0 10.01 543.0 422.0 33L .. 5810.0 3010.0 2511.3 2716.7 AUK=OKS PER iPrTAL UD . 15.5 17.9 23.7 27.5 111 UZC OF TOTAL 4.* 5.5 -vu3a5 4.3 4.9 RURAL 5.1 5.8 AIz 11 No. 0o 7Ums N TOL 2.2 2.4 53* .1 2 2.1 RURAL 2.3 2.6 PEaC X 0r Dor L IW3 1R11 tLUC. TotAL .. .. Ulm .. 6.4 6.0. 30UL .. ..  - 31 - ANNEX I TA' LS - 4 Page 2 of 7 T A I L t 34 - SOCMAL INDsCAe RS DAA SHUT wmcso amc os cwvzGmo AvAgE) . HOMT (tDT RECET ITT *IS MItDDLE INCOIIC LIDDLC COmE iseoLk mo7L MSTD4aT M. *AFRICA I NID EAST LAT. AMERCA CAR AMRJ ITEN m ENONIT ATIOS IARt: TOTAL 47.0 51.0 10.0 *9.- 106.7 PAL2. 67.0 67.0 96.0