Morocco - Third Private Sector Development Project : In-Service Training

Document of The World Bank Report No. 15513-MOR STAFF APPRAISAL REPORT KINGDOM OF MOROCCO THIRD PRIVATE SECTOR DEVELOPMENT PROJECT (IN-SERVICE TRAINING) August 21, 1996 Human Resources Division Maghreb and Iran Department Middle East and North Africa Region CURRENCY EQUIVALENTS (As of November 1995) Currency Unit = Moroccan dirham (DH) US$1.0 = DH 8.3 DH 1 = US$0.120 FISCAL YEAR January 1 to December 31 (until 1995) January I to June 30 1996 July I to June 30 (as of July 1996) ABBREVIATIONS AND ACRONYMS AGEF Association des Gestionnaires et Formateurs de Personnel (Moroccan Association of Human Resources Managers) AMGE Association Marocaine des Gestionnaires de l'Energie (Moroccan Association of Energy Industries) AMICA Association Marocaine des Industries des Composants Automobiles (Moroccan Association of Automobile Components Industries) AMIP Association Marocaine des Industries Pharmaceutiques (Moroccan Association of Pharmaceutical Industries) AMITH Association Marocaine des Industries Textiles et de I 'Habillement (Moroccan Association of Textile and Clothing Industries) CE Centre d'Excellence (Training Center of Excellence) CES Comite d'Elaboration de la Strategie (Strategy Formulation Committee) CNA Competency Needs Assessment CNJA Conseil National Jeunesse et A venir (National Council for Youth and Future) COD Comit6 d'orientation de la demande (Demand Orientation Committee for FIAC Proposals) CSF Contrats Speciaux de Formation (Training Contracts Reimbursement Scheme) EA Environmental Assessment EU European Union FEDIC Fiddration des Industries du Cuir (Federation of Leather Industries) FIAC Fonds Interprofessionnel dAide au Conseil (Inter professional Fund for Assistance and Counseling) FIMME F,idration des Industries Micaniques Mktallurgiques et Electriques (Federation of Metallurgical Mechanics and Electrical Industries) GDP Gross Domestic Product GIAC Groupements Interprofessionnels d Aide au Conseil (InterProfessional Assistance and Counseling Association) ICB International Competitive Bidding IBRD International Bank for Reconstruction and Development MCI Ministry of Commerce and Industry MF Ministry of Finance MSI Micro to Small-sized Industries MVT Ministry of Vocational Training NCB National Competitive Bidding NS National Shopping OFPPT Office de la Formation Professionnelle et de la Promotion du Travail (Vocational Training and Employment Promotion Office) PA Professional Associations PSD Private Sector Development VTS Vocational Training System VTT Vocational Training Tax KINGDOM OF MOROCCO THIRD PRIVATE SECTOR DEVELOPMENT PROJECT (IN-SERVICE TRAINING) Loan and Project Summary Borrower: Kingdom of Morocco Implementing Agencies: Ministry of Vocational Training, InterProfessional Assistance and Counseling Associations (GIACs) and Vocational Training and Employment Promotion Office (OFPPT) Beneficiaries: Not applicable Poverty: Not applicable Amount: US$11.5 million FRF 60.3 million Terms: Twenty years, including a five-year grace period, at the IBRD standard Libor and Pibor interest rates respectively for the dollar loan tranche and the French Franc loan tranche. Commitment Fee: 0.75% on undisbursed loan balances beginning 60 days after signing, less any waiver. Financing Plan: See Chapter 3, Table 5 Net Present Value: US$33.5 million Environmental Rating: C Staff Appraisal Report: No. 15513-MOR Project ID N*: 38978 TABLE OF CONTENTS I. B A C K G R O U N D ................................................................................................................ 1 A . T h e E co n o m y .................................................................................................................. 1 B. The Demand for Skilled Labor......................................................................................... 2 C . T he Supply of Skilled L abor ............................................................................................ 4 D . G overnm ent Strategy ....................................................................................................... 7 E. Rationale for Bank Involvement ....................................................................................... 8 II. T H E P R O JE C T .................................................................................................I............ 10 Project Objectives and Description ..................................................................................... I0 III. PROJECT COSTS, FINANCING AND MANAGEMENT......................................... 12 A . Sum m ary of Project C osts ............................................................................................. 12 B. Management and Implementation................................................................................... 15 C . P ro cu rem ent .................................................................................................................. 15 D . D isb u rsem en t ................................................................................................................ I7 E. Accounts, Reporting and Audits..................................................................................... 19 F . Supervision and M onitoring ........................................................................................... 19 G . E nvironm ental Im pact ................................................................................................... 20 IV. EXPECTED BENEFITS AND RISKS......................................................................... 20 V. AGREEMENTS AND RECOMMENDATION............................................................. 21 LIST OF ANNEXES ANNEX 1. Steps in the preparation of a draft law on in-service training ................................ 24 ANNEX 2. Preparation of a long-term strategy and action plan for vocational training............ 26 ANNEX 3. Project impact evaluation studies: analytical approach and terms of reference ...... 28 ANNEX 4. Economic analyses.............................................................................................. 34 ANNEX 5. Project implementation and impact ...................................................................... 46 ANNEX 6. Criteria for ranking the centers and list of Centers ................................................ 47 A N N EX 7. FIA C Flow of Funds ............................................................................................ 50 ANNEX 8. Selected Information in the Project File................................................................. 52 This report is based on the findings of an appraisal mission that visited Morocco in November 1995, led by Mourad Ezzine (MN1HR), and including Mmes/Messrs. Claire Voltaire, Christine Wong (MN]HR); Jacques Mazeran, Jean-Paul Pdresson, Fr&d&ric Collomb and Pierre Goldberg (Consultants). Hong W. Tan and Julia Lane (PSD) contributed to the project economic analysis. Peer reviewers are Bruno Laporte (HDD), Joseph Bredie (AFTHR) and William Experton (LAlHR). Claudia Pardinas is the lawyer for Morocco. Ms. Roslyn G. Hees is MNIHR Division Chief and Mr. Daniel Ritchie is MNI Department Director. KINGDOM OF MOROCCO THIRD PRIVATE SECTOR DEVELOPMENT PROJECT (IN-SERVICE TRAINING) STAFF APPRAISAL REPORT I. BACKGROUND A. The Economy 1.01 Morocco emerged from an economic and financial crisis in the early 1980s to a relatively stable macroeconomic environment in the early 1990s. A steady pursuit of stringent monetary and fiscal policies reduced the budget deficit from an average of 12% of GDP in 1980-83 to 3.3% in 1993; inflation has been kept within single digits; and the foreign debt situation improved through greater mobilization of domestic resources and external debt rescheduling. Stabilization and structural reforms have resulted in a shift from Government-administered to market-determined pricing in finance and trade areas. These reforms have brought about significant improvements in the balance of payments: current account deficits declined steadily from 12% of GDP at the height of the economic crisis in 1983 to about 2% in the early 1990s. Although average GDP growth was relatively modest between 1986 and 1994, 3.3% on average, Morocco will aim for a double-digit growth of private industrial output. This would be achieved mainly through a rapid growth of exports to the European Union (EU), with which Morocco has signed a free trade agreement to be implemented over the next decade. 1.02 In recent years, however, Morocco has begun to show many signs of social and economic fragilities. Key social indicators such as literacy, primary school enrollment rates, nutritional status and access to safe water are still significantly lower than countries at a comparable stage of development, and are characterized by persistent regional and gender differences. Economic indicators show that gross investment levels have declined by four to five percentage points of GDP, urban unemployment rose to 16% and, in the past three years, the budget deficit approached 5% of GDP. Export of manufactured goods declined by 4% in the 1992-93 period, after a growth of more than 10% per annum on average between 1985 and 1992, resulting in a significant loss of EU market shares. 1.03 This deterioration in economic performance is associated not only with external and exogenous factors, such as recent droughts and recession in the EU, but also with deteriorating competitiveness. Moroccan enterprises are inadequately prepared to counterbalance both the erosion of their preferential access to the EU market and the increased competition from low-wage countries. They have been unable to quickly modernize their technologies and production processes, to diversify their production by shifting to higher quality and value-added products, and to increase the skill requirements of their jobs. Productivity, measured in value added by workers, is generally low, and has even been declining in the textile and garment industries', a major exporting sector. As a result, Morocco lost shares in the EU market to Asian competitors such as China, Indonesia and India, which achieved rapid gains in penetration, or Turkey, which consolidated its strong export performance, and Poland and the Czeck Republic, which emerged as new competitors. The productivity decline is most apparent in the Textile, Garment and Leather industries. Between 1985 and 1990, productivity (measured by the real value-added per worker) declined by 6% for Morocco, while it increased by 30% for Turkey, 38% for Malaysia, and 52% for Indonesia. -2- 1.04 Recent economic trends were reflected in the labor market by a marked increase in unemployment rates. The size of the Moroccan labor force is 8.9 million, of which 4.3 million live in urban areas where unemployment has reached 16% and affects the youth in particular. In rural areas, unemployment is lower, at around 10%, but important migration flows to large cities evidence the existence of substantial underemployment. The increase in unemployment in urban areas results primarily from low levels of labor demand and rapid expansion of the labor force. The urban labor force has been growing at a rate of almost 4% a year, driven by a population growth rate of 2.1%, and migration from rural areas as well as increasing participation rates. While a more flexible labor market regulatory system' would significantly promote employment creation, it is estimated that only an acceleration of economic growth to 6-7% per annum would create enough jobs to reduce urban unemployment to around 10%. Table 1: The Urban Labor Force by Educational Achievement and Employment Status Labor Market Total Unemployment Education Achievement Participants Unemployed Unemployed rate Less than Primary Education 2,389,379 255,545 37.5 10.7 Primary Education (6 years) 619,244 133,002 19.5 21.4 Basic Education or equiv. (9 years) 377,158 93,532 13.7 24.8 Baccalaureates or equivalent 114,439 35,740 5.2 31.2 diplomas Degrees of higher education except 135,649 41,156 6.0 30.3 Medicine Elite Schools incl. Medicine 185,570 2,833 0.4 1.5 Higher Ed. Technical Diplomas 212,415 41,735 6.1 19.6 Vocational diplomas 237,768 77,258 11.3 32.5 Undeclared 305 -- -- -- Total 4,271,927 680,801 100.0 15.9 Source: Direction de la Statistique, Urban Labor Force Survey, 1994. B. The Demand for Skilled Labor 1.05 Enterprises' lack of demand for skilled labor (and its correlate the soaring unemployment among the educated) are major characteristics of the Moroccan economy and a cause of great concern to the Government. Except for the graduates of the few elite schools that have restricted access quotas, higher, secondary (baccalaureate) and vocational education graduates have experienced record high unemployment 2 Three aspects of Moroccan labor regulations are thought to be hindering employment promotion: (a) minimum wage policies, (b) mandated non-wage labor costs, and (c) regulations governing hiring and dismissal (see World Bank report No. 14155 MOR for more details.) A new labor code dealing with these issues is being prepared by the Government. -3- rates in recent years, around 30%. At the opposite end of the skills spectrum, unemployment rate is only 10% among the labor force participants with less than primary education, slightly lower than in 1986 when it was 13%. This reflects the expansion of low skill and low productivity employment generated by small- and micro-enterprises, which have a low level of capitalization, use traditional production processes, or which operate in the informal sector. While this expansion is thought to have helped reduce poverty, in the long run it is likely to induce a further decline in the enterprises' ability to compete in international markets where Morocco's competitors are achieving rapid productivity gains. 1.06 In addition to their lack of demand for skilled labor, enterprises are reluctant to retrain their workers. The 1986 Moroccan Industrial Survey asked enterprises whether or not they trained their workers, the numbers of people trained, and how much they spent on training . Only 195 of the 4,354 firms surveyed engaged in any formal training; an incidence of 4.5%. While this incidence compares unfavorably with countries such as Colombia, Indonesia, Malaysia and Mexico (see Table 2) the pattern of training is similar: micro-enterprises are the least likely, and large firms are the most likely to train. Table 2: Percentage of Firms that Train their Workers by Firm Size Firm Size Morocco Colombia Indonesia Malaysia Mexico 1 (1986) (1992) (1992) (1994) (1992) Micro (less than 15 workers) 0.66 32.9 - 9.4 5.5 Small (between 15 and 100) 4.47 52.1 16.6 19.3 41.8 Medium (between 100 and 250) 14.29 79.3 19.9 43.7 59.0 Large (over 250) 30.60 81.3 30.9 69.5 49.0 Overall 4.69 49.6 18.9 34.7 10.8 World Bank staff estimates 1.07 Enterprises' failure to hire skilled workers, and especially to retrain, results in a substantial loss of productivity and income for workers. Training enterprises- outperform non-training ones in many ways: they are larger in terms of output and value added, export more and are much more likely to survive. A comparison between 1986 and 1993 Industrial Surveys demonstrates that 9 out of 10 firms which trained in 1986 were still operating 7 years later, compared with 3 out of 4 nontraining firms. Controlling for other observable factors, the productivity of training enterprises is 37.1% higher and their workers tend to earn 28% more than in enterprises which do not train [see economic analysis in para. 3.08 and Annex 4]. These results suggest that short, flexible and company-specific in-service training is a major instrument to build enterprises' competencies. In fact, although many Moroccan enterprises and particularly the micro- and small-sized industries (MSIs) do not always require a high proportion of technicians, nonetheless, product quality, and adaptability to changing client requirements, are critical and will determine their competitiveness4. If they are to remain competitive, they need to adapt and reinforce their competencies in 3 This survey is the only one of its kind that asked such questions. The low incidence of training among firms has been evidenced by another survey conducted among 300 enterprises in 1994 by the Association des Gestionnaires et Formateurs de Personnel (AGEF, Casablanca 1994.) 4 The private sector is predominantly made of micro-less than 15 employees-and small industries (between i5 and 100 employees), which represent 49% and 39% of the total number of firms respectively. The recent development of temporary employment suggests that, even when export-oriented, their strategy is to obtain profit through cost compression rather than technological superiority. The garment industry is a -4- a broad range of technical occupations, as well as in basic management techniques, product standards (norms, packaging, conditioning...), quality management, and even in remedial training in basic education, foreign languages, attitudes and communication skills. 1.08 Moroccan enterprises' failure to retrain is related to two main reasons. First, MSIs, which are predominant, rarely retrain their workers because they are less likely than large firms to access information on training. As a result, they are either unaware of the productivity-enhancing effect of training or do not know how to train5. Their professional associations (PA), which in other countries provide assistance in defining and implementing sector training strategies, have just started to develop and gain representativity . Second, many enterprises claim that they cannot afford to retrain their workers. Since 1974, Morocco has a Vocational Training Tax (VTT), which is a 1.6% levy on total payroll earmarked to one public training agency, the Office de la Formation Professionnelle et de la Promotion du Travail (OFPPT.) Payroll levies have proved to be most successful in middle-income countries in the initial stages of developing enterprise-based training by providing an effective incentive to avoid sub-optimal provision of training. Moreover, payroll levies put little burden on scarce budgetary resources. In Morocco, however, the earmarking of this tax to a single public training provider is a source of inefficiency, and inhibits in-service training among enterprises by inducing a mentality of delegating responsibility to OFPPT, and reducing the willingness of industry to take responsibility of its own vocational training initiatives. Another reason for not training is that there are economies of scale in training, and small enterprises which only want to train one or two workers find the cost too high. C. The Supply of Skilled Labor 1.09 After independence, the Government of Morocco made a strong commitment to improve the education of the population. The main characteristics of the education and training sector are: (i) public provision through a highly centralized system; (ii) free access to all levels of public education; and (iii) high budget outlays, by international standards. Private provision of education is essentially an urban phenomenon addressing the needs of the well-off population. It is therefore small, except in vocational education where it represents almost half the total enrollment. While significant progress has been achieved since independence, enrollment levels remains insufficient by middle-income countries' standards, as suggested by in the labor force's low level of educational attainment and the excessive number of dropouts from basic and secondary education. 1.10 The vocational training sector, with an enrollment of 120,000, represents one fourth of the total secondary education enrollment, and is the main source of skilled-worker training and retraining. Since the skilled-worker requirements of enterprises and their demand for customized training have been weak, training providers have tailored their services to the demand for pre-employment training of the large cohorts of out-of-school and unemployed youth. Training programs are mainly center-based and targeted toward urban formal sector jobs. Both public and private institutions have been successful in attracting typical example, squeezed between the higher technological levels and labor efficiency of Europe, and the lower labor cost of some of the newly industrialized countries. 5 For a broader discussion of the determinants of training in a number of developing countries see Enterprises Training in Developing Countries, Hong W. Tang and Geeta Batra,The World bank 1995. 6 The conclusions of a Bank managed study of the PAs point out that while aware of what is at stake, the PAs have very limited operational capacities, their functioning lacks transparency, and they have adopted a wait-and-see attitude toward the Government. -5 - their target clientele. The private training institutions have seen a very fast growth; their capacity has increased fourfold during the last decade, reaching 40,000 students in 1995. The training capacity of the OFPPT has grown from 20,000 students in 1984 to 44,000 in 1995. 1.11 Although the existence of a large informal sector distorts the results of the labor market surveys and may exaggerate the unemployment rate for vocational training graduates, there is ample evidence from various sources that those graduates are increasingly facing insertion difficulties. Tracer studies carried out by the Ministry of Vocational Training (MVT) indicate that about 50% of the graduates --whether from public or private institutions-- remain unemployed nine months after graduation and that this search period is getting longer7. Other surveys carried out by the Conseil National Jeunesse et Avenir (CNJA), an independent think-tank, suggest that unemployment rates of VT graduates are actually lower than indicated by the labor market surveys, but confirm that they have a search period much longer than for the average job seeker. They also suggest that VT graduates have high expectations when they start looking for a job but after they get a more realistic perception of the labor market, they lower their expectations, or accept jobs unrelated to their initial skills. While these surveys do not show significant mismatches between demand and supply of skills, their findings indicate that the number of graduates exceeds the current enterprises' absorption capacity, and that any further capacity expansion will be economically inefficient. 1.12 The private training sector. The national training policy has been to provide neither incentives nor barriers to the development of the private training sector (proprietary institutions) beyond basic safety regulations enforced by the municipalities. There is no formal accreditation system nor information on curricula. There are about 800 private training schools, all are profit-seeking, operate in service-oriented trades, and focus on pre-service training. The Government objective is to entice the private training sector to expand further and invest in technology-oriented vocational schools, which require heavier capital investments. But this is unlikely to occur without significant resource transfers from the State to these proprietary institutions because the potential for full cost recovery is low. Among students reaching upper basic education, those oriented to pre-service VT demonstrate lower academic achievement than those oriented to general secondary. Such lower achievement is correlated with lower socio-economic status, suggesting that VT students come disproportionately from poorer families. 1.13 The OFPPT. Besides its graduates' insertion difficulties, OFPPT lacks a long-term vision and is hampered by a centralized and rigid structure. OFPPT is a well-financed Government agency under the aegis of the MVT, with a tripartite --Government, enterprises and labor-- Governing Board. A majority of its operating funds come from the VTT, which is considered by the enterprises as a private source,. Its training strategies have mainly served the Government's social priorities but in recent years there has been a shift in those strategies --away from the objective of expanding capacity toward addressing the training requirements of employers-- through the implementation of a two-pronged approach aimed at: 7 These estimates are to be used with caution since the design of the survey gives incentives for those unhappy about their employment to declare themselves unemployed, hoping that this would help them find a job in accordance with their expectations. Private sector graduates have a slightly higher insertion rate than public sector graduates (58% remain unemployed nine months after graduation against 60%). However, their difference is also to be interpreted with caution because the graduates of the private sector live in urban areas, are employed mainly in the commerce and trade sectors and, in particular, come from the well-offsocial group. 8 The Government contribution to the operating expenditures of OFPPT represent s 0.3% of total Government consumption (total Government operating expenditures less debt service and transfers) and 0.8% of its capital expenditures. For comparison purposes, the Ministry of Education's budget represents 35 % of Government consumption and 10% of its capital expenditures. -6- (a) creating links with enterprises at the training center level. This is being achieved by, first, the creation of a steering committee within each center, which includes a majority of private sector representatives and has a consultative role on training programs, curricula, and examinations, and second, by diversifying the number of training streams to cover a larger spectrum of enterprise-specific skill needs (in 1994 the number of streams reached 130); and (b) introducing more flexibility in the use of the VTT. A scheme that partially reimburses enterprises that carry out in-service training activities, the Contrats Sp6ciaux de Formation (CSF) was introduced to provide incentives for enterprises to retrain their workers. While implemented through OFPPT's administration, the CSF is independently managed by a private-public committee selected from, and supervised by, OFPPT's Board. 1.14 There is a consensus among OFPPT's board that these strategic options are right. However, both the enterprises' and government representatives are concerned about the poor results on the ground and acknowledge that a major upgrading of OFPPT centers' governance, curricula, and technological equipment is necessary to make them more responsive to enterprise training requirements. The involvement of employers at the level of the centers has been constrained primarily by the centers' lack of managerial capacity, insufficient autonomy, as well as inadequate incentives for staff. The increase in the number of streams has led to excessive specialization of the graduates. This turned out to be a disadvantage on the labor market, as well as too costly to implement because technology is increasingly complex, and the training needs of the enterprises are rapidly changing. Moreover, replacement of obsolete training equipment has been insufficient as a consequence of the heavy investments in capacity expansion of the late 1980s 1.15 Finally, little has been achieved in terms of creating a balance between pre-employment training and upgrading of the existing labor force. The development -of the CSF scheme was hampered by lack of funds (3% of the OFPPT budget in 1994) in comparison with the allocation to the pre-service training activities, low ceilings on the cumulative amount that can be reimbursed annually to a given enterprise, and a centralized operational structure. More importantly, the development of the CSF scheme presents risks to OFPPT's financial stability. Since the CSF is funded by the VTT, and the VTT is earmarked to finance OFPPT, the reimbursements made by the CSF to the enterprises are in fact deducted from OFPPT's budget. -7- Table 3: OFPPT's Financial Resources (in Million current DH) Average Annual 1990 1991 1992 1993 1994 Increase (%) Training Capacity 41,300 41,700 42,100 42,250 43,900 1.5 Total Investment 139.9 156.5 165.5 211.8 178.8 6.3 of which Government contribution 113.0 144.1 148.3 181.4 145.5 6.5 Grants 26.9 12.4 17.2 30.4 33.3 5.2 Operating Resources 367.7 390.9 470.6 476.9 527.3 9.4 of which Payroll Tax . 248.3 295.6 352.3 356.7 379.5 11.2 Government subsidies 85.0 69.2 70.0 81.9 100.0 4.1 Grants 31.5 23.7 43.8 33.5 40.1 6.3 Miscellaneous 2.9 2.4 4.5 4.8 7.7 28.0 D. Government Strategy 1.16 The Government of Morocco is committed to transform its training system into an effective instrument to promote labor productivity, especially for smaller enterprises. This would help foster labor demand, alleviate poverty and contribute to the development of the private sector. This would be achieved when most vocational training is planned, delivered and financed by employers. 1.17 Shifting responsibility and resources for training to the private sector requires a realistic and gradual reform process. Private enterprises have not yet demonstrated a very active involvement in training and the proprietary institutions are unlikely to diversify into technology-oriented trades. Moreover, an effective public training system is still necessary because the public programs are, at the moment, the only providers of technical training, and because they usually provide the basic skills on which further job- specific training can be structured. Finally, more radical reforms of the training system depend on broader reforms of the funding and governance of the education and training systems. Although there is commitment at the highest level of the State to eliminate the principle of "free of charge" education and training (which would provide a strong incentive to the private training sector), the Government is proceeding carefully in order to build political consensus and, in the medium-term, only limited cost recovery can be envisioned9. 1.18 Within this political framework, the MVT has made the development of in-service training its priority in order to respond to the urgent need to upgrade the existing labor force, expand the resources available for skill development and, since in-service training is less politically sensitive than other forms of training, experiment and demonstrate a number of innovative and demand-oriented policies. These policies are to: 9 King Hassan II has made public these orientations in a number of speeches. In 1994, he initiated a parliamentary debate on education to address the problems in a more comprehensive manner. This debate was soon suspended as it was deemed inconclusive and too politicized. More recently, in October 1995, a policy note on education and training prepared by the Bank at his request was widely disseminated, and gave rise to a national debate in the media. -8- (a) integrate training as an important component of enterprise development strategies by stressing the importance of identifying competency needs, retraining of workers, and pooling training resources to realize economies of scale; (b) increase the resources allocated to in-service training, with special emphasis on MSIs. As in-service training is provided through a market-oriented framework, this would promote competition among training institutions and boost the private training sector; (c) initiate further reforms of the VTT by clarifying operational and financial roles with regards to in-service training, and by reinforcing tripartite management (enterprises, labor and Government). A law would be promulgated to that effect (see para. 2.05); (d) reinforce the responsiveness of the public training system and promote the emergence of a greater diversity of training providers. In January 1996, the Ministries of Finance and Vocational Training issued a joint decree [Section 2.15 of Implementation Volume] which substantially increases the autonomy of OFPPT's centers and provides a regulatory framework for the centers and their staff to supplement their resources with the proceeds of training contracts negotiated with enterprises. In the medium-term, those public centers which would achieve a strong commercial orientation, high level of managerial and financial autonomy, and links with enterprises, could be "transferred" to the private sector through a variety of formulas, such as the private concessions which are being cautiously explored by the Government. A private concession, in the textile industry, has been created and is privately managed by the corresponding Professional Association. The majority of its investments and equipment were provided by the State, but it is facing a number of difficulties because Morocco lacks an adequate legal framework for the transfer of public funds to privately operated educational institutions. E. Rationale for Bank Involvement 1.19 In June 1994, the Government set up an advisory committee composed of policy makers, private sector leaders, and the Bank, with a mandate to prepare an agenda for Private Sector Development (PSD). This agenda defines four main axes of action: (i) to establish a market-based financial system and develop capital markets; (ii) to promote private sector participation in the development of basic infrastructure and services; (iii) to improve the skills of the labor force and remove restrictions on the labor market; and (iv) to enhance the competitiveness of the private sector in anticipation of the Free Trade Agreement with the EU. 1.20 In response, the Bank set up a program of lending and non-lending services (the PSD program) which covers the four core areas of the Government's PSD agenda. Bank intervention in vocational training is therefore an integral part of the Bank's PSD program, and one of the pillars of our country assistance strategy. It would contribute to: (a) create a synergy between several components of the program. The PSD program includes components which aim at inducing enterprises in acquiring new technologies and -9- modernizing their manufacturing processes'o. In-service training is an integral part of this program because the low-skilled workforce would not be able to adopt these new technologies. Conversely, this training project would rely on other components of the program to identify the enterprises and sectors in which training should be developed on a priority basis for competitiveness considerations; (b) provide the necessary catalysis between the Government, the private sector and bilateral donors, particularly the EU, to build support for further reforms of the vocational training sector; and (c) provide the expertise needed for institutional development, particularly for the formulation of training policies and the analyses of the impact of training on enterprise competitiveness. 1.21 In addition, the policy framework proposed by the Government is consistent with the Bank's objectives for the sector, although less ambitious in its timing than what the Bank would recommend. The Moroccan economy is not sufficiently advanced so that total deregulation of VT financing and delivery could be envisaged without risking to depress growth through shortage of skills. What the Bank has been recommending is that the contribution to the public training sector through the VTT and State budget be progressively reduced and replaced by an alternative demand-driven financing scheme, such as a tax rebate scheme or a training fund. Such a scheme would curb the expansion of pre-service training provision in line with labor market demand, and leave the public sector with no alternative than to sell training services on the market, which would assure that training programs are responsive to enterprise needs. As regards the role of the private sector, international experience suggests that different but equally valid strategies can emerge from similar contexts depending on social and economic perceptions, as well as economic growth patterns. Morocco's strategy seeks to strike a balance between the educational demand of a rapidly growing youth population and economic efficiency by promoting the emergence of comprehensive public- private partnerships, through various financial incentives to train, and the representation of the private sector in all institutions dealing with VT. The public-private partnership aims at achieving more efficient training delivery modes while ensuring high participation rates and financial stability to the sector. However, the Government still needs to develop a detailed action plan for its strategy, and has requested the assistance of the Bank. The Bank has assisted with the development of a strategy formulation process (see Annex 2) has agreed to include the cost of the necessary technical assistance among the activities to be financed by the project, and will continue to provide its advice on sector policy issues. 10 In particular, the Industrial Infrastructure Project, which is under preparation, would promote new technologies, and would develop a new system of standards and certification for the industry. On the other hand, the on-going Enterprises Competitiveness Study would identify "clusters" of competitive industries and make recommendations on strengthening their long-term viability in the context of the forthcoming free trade agreement with the EU. Finally, an on-going labor market study aims at identifying key policy options that may facilitate labor absorption. The field surveys for these studies are in progress and the first results are expected by the end of 1996. - 10 - II. THE PROJECT Project Objectives & Description 2.01 Objectives. The project would improve enterprise competitiveness, retraining of the work force and upgrading of its skills. To maximize the impact of training, the project would: (a) strengthen the capacity of professional associations and enterprises to define the skills they need to implement their business development strategies, with particular emphasis on micro- and small-sized enterprises; (b) introduce incentives for enterprises to develop in-service training; (c) promote the responsiveness of selected public training centers which cater to the private sector; and (d) create an adequate legal framework for the development of in-service training and strengthen the institutional capacity of the MVT. 2.02 Description. To achieve these objectives, the project would have the following four components: 2.03 Promotion of demand for training (6% of total base costs). This component would support the development of non-governmental inter-professional organizations (Groupements Interprofessionnels d'Aide au Conseil, GIACs) which are being created by professional associations and federations, with the mandate to inform enterprises on the importance of integrating in-service training as one of the key factors to their competitiveness and to assist them in the definition of their skills needs. The project would support the start-up and operating costs of three GIACs as well as provide them with the required technical assistance to develop their services to enterprises. These GIACs" would have access to a scheme (Fonds Interprofessionnel d'Aide au Conseil, FIAC) to be established under the project, which would finance a portion of the consulting services contracted by enterprises to carry out their competency need assessments (CNA.) The FIAC would be managed by a Demand Orientation Committee (Comit d'Orientation de la Demande, COD) composed of representatives from the MVT, the Ministry of Finance (MF) the Ministry of Commerce and Industry (MCI), the presidents of the GIACs, and another representative of the private sector designated by the President of the COD. Both the GIACs and the FIAC would be subject to their respective procedural manuals which define the conditions of their operation, the eligibility criteria to enterprises for the resources of the FIAC, as well as the standard auditing, reporting and monitoring requirements [see Implementation Volume Section 2.2 for these manuals, as well as for the by-laws and operating manual of the GIACs]. 2.04 It is estimated that, during the five years of the project, each GIAC would arrange for and finance about 120 CNAs. An estimate of the GIACs' operating costs, their revenues from enterprises' membership fees and their expenditures can be found in the Implementation Volume [Section 2.2.7]. The total cost of 11 One GIAC formed by FIMME, AMICA, AMGE and AMIP (Automobiles, energy and pharmaceuticals) has been created. A second GIAC formed by AMITH and FEDIC (textile, garment and leather industries) is being created. The third GIAC is being created by the ASMELEC, the APEBI and the AIMTEL (Electricity, Office Technologies and Telecommunications). The creation of three other GIACs (Building Industry, Tourism, and Fisheries) is being envisaged. - 11 - this component is estimated at US$5.4 million, 23% of which would be financed by the enterprises through their membership fees or their direct contribution, 25%, or the start-up costs, by the Government and other donors, and 52%, or the financing of the FIAC, by the Bank loan. Before negotiations, the Government transmitted the decision creating the FIAC and the FIAC Procedural Manual, including monitoring and reporting mechanisms and auditing requirements [para.5.02(a)]. Before Board Presentation: (i) the registered statutes of one GIAC and its procedural manual approved by its Board were officially transmitted to the Bank, and (ii) the members of the COD were appointed [para. 5.04(a) and (b)]. 2.05 Development of in-service training (41% of total base cost.) This second component would support the development of in-service training and the evolution of the training system towards a system where employers and employees take a major role in governance, where VTT funds are mutualized (i.e. de- linking the amount reimbursed to an enterprise from the level of its tax contribution), and managed by an independent entity in which employers and employees are a majority. This would be realized in a two-stage approach by initiating a reform of the existing enterprise training reimbursement scheme (Contrats Spciaux de Formation, CSF) to test the principles described above and to rapidly promote both the demand for and supply of in-service training and, in a second phase, formalize these principles in a Law on In-Service training (see para. 2.09 below). To that end, a new Procedural Manual [see Implementation Volume, Section 2.3.2] has been elaborated which provides for: (i) a decentralized management of the CSF through regional tripartite committees (enterprises, labor and Government representatives); (ii) distinct accounting and auditing systems for the CSF; (iii) mutualization of the funds; and (iv) new eligibility criteria of enterprises, which favor MSIs, enterprises with an export development strategy and/or creating employment; and enable the private proprietary training institutions selected by enterprises to carry out their training to benefit from a larger share of the VTT. The projections of the evolution of reimbursement of training contracts and of the amount of the VTT allocated to that activity [see Implementation Volume, Section 1] have served as a basis to size this component. 2.06 The cost of this component is estimated at US$35.3 million, representing the total estimated value of in-service training contracts to be partially reimbursed over the first three years of the project. Bank financing would represent 27% of that amount and be limited to the first three years of the project, that is prior to implementation of the new Law on in-service training. Enterprises and employees will finance the balance through either their direct contribution or the VTT, as well as fully finance the scheme after the phasing out of Bank financing. 2.07 Before negotiations OFPPT's Board approved the restructuring of the CSF and its new Procedural Manual and before Board Presentation OFPPT's Board allocated an appropriate amount [as defined in the Implementation Volume Section 2.3.2] to the CSF scheme for the first three years of the project [para.5.04(c)]. 2.08 Emergence of Centers of Excellence (51% of total base cost.) This third component would improve the relevance of OFPPT and its responsiveness to enterprises' training needs. It will put a special emphasis on in-service training by supporting the development of 36 of the 180 OFPPT centers into "Centers of Excellence" [see Implementation Volume 2.4, for a detailed description of the component, the list and classification of Centers] selected for their potential to meet, within the project life, a set of 20 criteria [Annex 6] combining student insertion performance, links with enterprises, capacity to generate income through the provision of contractual training and counseling services to enterprises, performance in attracting workers to evening courses, and management capacity. The project will provide incentives (budgetary autonomy, statutory conditions for management of center and staff), the framework (creation of - 12 - a steering committee composed of enterprises within each center) as well as a series of activities aimed at promoting their responsiveness to clients [see Implementation Volume section 2.4] and the equipment, staff training and technical assistance needed for these centers to reach the level of excellence. The cost of this component is US$43.7 million, 17% of which would be financed by the Bank loan and the rest by the Governmentl2. Bank financing would be concentrated on 17 centers and be limited to those strategic inputs directly related to in-service training and which determine the progression of the centers to the level of excellence, primarily technical assistance for assessment and upgrading of the competencies of the management and teaching staff, development of the centers' capacity to design training programs that address specific needs, for the design and development of a catalogue of evening courses, as well as the necessary pedagogical material. Other inputs consisting in equipment necessary for the reconversion or creation of new training streams would be financed by the Government. 2.09 Institutional Strengthening (1% of total base cost). This fourth component would strengthen the policy formulation capacity of the MVT by supporting (i) the elaboration of a broad strategy for the vocational training system including the roles of public and private training sectors [see terms-of-reference in Annex 2]; (ii) the process of preparation of the Law on in-service training referred to in para. 2.05 above which will rely on a review of international experiences, an assessment of the Moroccan situation, and in particular the evolution of the CSF scheme after its reorganization, and a broad consultation of all parties involved in order to formalize the reform initiated under the project and clarify financial and operational roles; and (iii) the carrying out of a series of surveys aiming at measuring the impact of training on enterprises' competitiveness (see Terms-of-reference in Annex 3). The cost of this component is estimated at US$0.6 million, which would be entirely financed by the Bank loan. During negotiations, the Government gave assurances that (a) it will prepare on the basis of process and guidelines agreed upon with the Bank, and cause the Cabinet (Conseil du Gouvernement) to approve, not later than September 30, 1998, a draft Law that will translate Morocco's new policy orientations regarding in-service training, as described in para. 1.18 & Annex 1, and clarify financial and operational roles of the various players in the system [para. 5.03 (a)]; and (b) its strategy on vocational training will be finalized by December 31, 1997 and implemented thereafter [para. 5.03(b)]. III. PROJECT COSTS, FINANCING, AND MANAGEMENT A. Summary of Project Costs 3.01 Total project costs, net of taxes, are estimated at US$95.3 million equivalent, including US$10.3 million for contingencies (10%). Taxes have been estimated at US$14.3 million (12%). A summary of the proposed project costs appears in Table 4 below. 3.02 Basis for Cost Estimates. Costs for rehabilitation, furniture, equipment and pedagogic materials are based on average unit costs of recently awarded contracts for similar items. Costs for computers and software are based on international prices and include installation and user training. Costs for specialist services include fees, travel, accommodation and subsistence and are based on recent consultant contracts. Costs for overseas training include travel, living expenses, tuition when applicable. Detailed cost 12 The Government is actively seeking EU financing for part of this component. - 13 - assumptions for the GIACs can be found in Section 2.2.7 of the Implementation Volume. Estimates of the evolution of demand for in-service training can be found in Section I of the Implementation Volume. 3.03 Contingency Allowances. Project costs include a contingency allowance for unforeseen physical variations applied on the third and fourth components only -- equal to US$2 million (2% of total project cost, excluding taxes). The following rates have been applied: civil works and equipment 10%; consultant services, training and recurrent costs 5%. Price contingencies between negotiations and project completion are estimated at US$8.3 million (9% of total costs excluding taxes). The following annual rates of price increases have been applied: 5.5% per year for local costs and 2.6% per year for foreign costs. 3.04 Foreign Exchange Content; The foreign exchange content is estimated as follows: rehabilitation of training centers (40%); pedagogical material (55%); furniture (0%); technical equipment and computers (90%); specialists and training (0% when local, 100% when overseas). The resulting total foreign exchange content is estimated at US$47.5 million, representing 50% of total project costs, excluding taxes. 3.05 Custom Duties and Taxes Imported goods classified as educational material and equipment are exempt from duties and taxes. Goods and services procured locally average taxes of 15%. Table 4: Project cost summary by component (DH '000) (US$ Million) Local Foreign Total Local Foreign Total A. Promotion of demand for training (GIACs) 27,402 17,455 44,857 3.3 2.1 5.4 B. Development of in-service training (CSF) 264,860 46,740 311,600 31.9 5.6 37.5 C. Development of Centers of Excellence (C.E.) 62,511 299,833 362,344 7.5 36.1 43.7 D. Institutional Strengthening 1,248 3,486 4,734 0.2 0.4 0.6 Total BASE COSTS ' 356,021 367,514 723,535 42.9 44.3 87.2 Physical Contingencies 2,941 13,329 16,270 0.4 1.6 2.0 Price Contingencies 32,747 18,166 50,913 3.9 2.2 6.1 Total PROJECT COSTS 1121 391,709 399,008 790,717 47.2 48.1 95.3 Totals may not add up due to rounding up of figures The amounts indicated do not include the estimated demand for in-service training services for the last two years of the project (US$41.1 million). As described in para. 2.05(b) above, the Government has committed to prepare a law which will define the principles guiding the financing of in-service training. 2 Excluding an estimated US$14.3 million for taxes. 3.06 Financing. The proposed Bank loan of US$23.0 equivalent comprising (a) a tranche equal to US$11.5 million and (b) a tranche equal to FRF 60.3 million would finance 24% of total project cost net of taxes and duties therefore covering 50% of the foreign exchange needs of the project. Enterprises and employees would contribute US$30.7 million or 32% of the project through either direct contribution or the VTT. The Government contribution, which is defined as the amount budgeted by the Government (including donors' contributions) is estimated at US$41.6 million or 43% of the project costs. Retroactive financing up to US$1 million of the loan amount may finance eligible expenditures incurred after July 1, 1996. - 14 - Table 5: Financing Plan Components by Financiers (US$ Million) Vocational Govt. and Other Enterprises Training Tax IBRD Donors Total Amount % Amount % Amount % Amount % Amount % A. Promotion of demand for 1.4 23.0 - 0.0 3.1 51.9 1.5 25.1 6.0 100.0 training (GIACs) B. Development of in-service 19.0 46.8 10.3 25.4 11.3 27.8 0.0 0.0 40.5 100.0 training (CSF) C. Development of Centers of - - - 0.0 8.3 17.2 39.9 82.8 48.2 100.0 Excellence (C.E.) D. Institutional Strengthening - - - 0.0 0.6 100.0 - 0.0 0.6 100.0 Total PROJECT COSTS 20.4 21.4 10.3 10.8 23.3 24.4 41.4 43.4 95.3 100.0 OF WHICH: 1. Foreign 3.4 1.5 11.3 31.8 48.1 II. Local (Excl. Taxes) 16.9 8.8 11.4 10.1 47.2 Taxes are estimated at 7.0 7.3 14.3 Total PROJECT COSTS including taxes 27.4 10.3 22.7 49.2 109.6 3.07 Project sustainability. The resources allocated to the MVT will not be increased as a result of the project which is an integral part of the sector strategy. The operating expenditures of the GIACs will be partly covered by the enterprises through their membership fees, and the total subsidy provided by the Government to that initiative represents less than 2% of the MVT annual budget. Moreover, Government support to the GIACs aims at "jump-starting" in-service training and is not intended as a permanent arrangement. The annual operating expenditures of the CSF are already included in OFPPT's operating budget. The project does not increase OFPPT's training capacity and thus does not require additional staffing and operating expenses. In addition there will be: (i) an increase in the VTT receipts estimated at US$12 million at full potential as a result of the January 1996 Government decision to extend it to Industrial and Commercial Public Enterprises (EPICs), which had traditionally been exempted; (ii) the centers' own resources generated from sales of training and counseling services to enterprises, and which are estimated at a minimum of US$1.3 million a year for the Centers of Excellence alone. Finally, the Law on in-service training (para. 2.05) to be elaborated will clarify the financing of the system and ensure its sustainability and efficiency, while permitting a progressive disengagement of the Government. 3.08 Economic Analysis. Based on the 1986 and subsequent Moroccan Industrial Surveys, analyses using a standard production function technique were used and show that, controlling for other observable factors, training enterprises have a value added of 37% greater than non-training ones. Based on the reported expenditures on training, the return on value added for the small- and micro-enterprises is 15% (based on their median value added). It is considerably higher for medium firms, at 43%, and higher yet for the largest size class, at 77% ". Similarly, the data suggest that workers in enterprises that train tend to earn 28% more than in enterprises that do not train. Based on the cost of training and the earnings of 13 These rates of return should be interpreted with some caution, particularly for the largest size class. Unlike other datasets, we have no measure of firm expenditures on research and development or the extent of technology transfer. This is likely to be highly correlated with training expenditures for the largest firms, hence overstating the rate of return to this group. - 15 - untrained and trained workers reported in the 1986 Industrial Survey, calculations suggest that in-service training yields a rate of return of 42%. The Internal Rate of Return of total project costs and benefits is estimated at 25% and its Net Present Value at US$33,527 million [see Annex 4 for detailed analyses]. B. Management and Implementation 3.09 The proposed project would be implemented over a period of 5 years and is expected to be completed by June 30, 2001, and the Loan closing date would be December 31, 2001. A detailed implementation schedule is included in Section 2.4.10 of the Implementation Volume. 3.10 Overall coordination and monitoring of the project would be ensured by the Ministry of Vocational Training. Responsibility for execution of the project would be as follows: (i) implementation of the first component, in line with the procedural manuals, would be the responsibility of the GIACs and of the COD; (ii) the second component would be the responsibility of the Orientation Board of the CSF would define the CSF's action plan and monitor its implementation by the Regional Commitment Committees. OFPPT would ensure the secretariat of these two bodies as well as the processing of submissions; and (iii) the third component would be implemented by OFPPT and the centers themselves. Staffing requirements and functional links between the entities involved, as well as the monitoring indicators and reporting mechanisms [see para. 2.16] have been developed as part of the procedural manuals of the GIAC, FIAC and the CSF. The MVT would prepare and transmit to the Bank by April 30 and October 31 of each year an implementation report, assessing progress to date according to the project monitoring indicators and proposing the program for the next period, including the necessary budget allocation. [para. 5.03(e)]. C. Procurement 3.11 The table below summarizes procurement arrangements for the project. With the exception of consultant and training services eligible for financing under the FIAC or under the CSF (see para. 3.14 below), all procurement would be carried out in accordance with Bank Guidelines. 3.12 Goods. To the extent possible, and without interfering with the centers' development schedule, contracts for goods would be grouped in bid packages estimated to cost US$350,000 equivalent or more, to allow procurement of larger packages. Procurement through ICB shall be used for contracts costing more than US$350,000 equivalent each and, is estimated to represent a total value of US$4.7 million for purchase of training, office and computer equipment. For purposes of bid evaluation, under the ICB procedures, local manufacturers will be granted a margin of preference in accordance with Bank Guidelines. Goods estimated to cost less than US$350.000 equivalent per contract may be procured through National Competitive Bidding. Other smaller contracts below US$200,000 for local purchases for starting up the project (such as office equipment and computers for the GIACs and the Centers), audio visual material, books and journals as well as materials and supplies could be made using national shopping (NS). Local suppliers are expected to obtain about 25% of the value of the goods to be financed by the Bank. - 16 - Table 6. Procurement arrangements (total, including contingencies in US$ million equivalent) Procurement Method International National Project Element Competitive Competitive Other Bidding Bidding N.B.F. Total SERVICES Consultant Services eligible for - - 4.4 a/ - 4.4 financing by the FIAC (3.0) (3.0) Consultant & Training Services eligible for reimbursement by the - - 40.5 b/ - 40.5 CSF (11.0) (11.0) Other Consultant and Training 13.0 b/ 2.1 15.1 Services - - (4.4) (0.0) (4.4) EQUIPMENT 4.7 1.0 0.5 c/ 23.7 29.9 (3.6) (0.6) (0.4) (0.0) (4.6) CIVIL WORKS - - - 4.0 4.0 (0.0) (0.0) OPERATING COSTS - - - 1.4 1.4 (0.0) (0.0) TOTAL FINANCED COSTS 4.7 1.0 58.4 31.2 95.3 d/ (3.6) (0.6) (18.8) (0.0) (23.0) Note: Figures in parenthesis are the respective amounts financed by the Bank Loan. N.B.F. Not Bank Financed a/ Awarded to eligible beneficiaries and/or enterprises. b/ Procured in accordance with Bank consultant guidelines. c/ National shopping. d/ Excluding an estimated US$14.3 million of taxes. 3.13 Civil Works. The majority of contracts will be inferior to US$200,000 and therefore unlikely to interest international bidders. National Competitive Bidding procedures (NCB), which are acceptable to the Bank. will therefore be used. Civil works will not be financed by the Bank loan. 3.14 Consultants' Services. Studies and training other than that financed under the FIAC or the CSF will be contracted in accordance with the Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency (August 1981). The choice of procurement method for specialist services to be partially financed by the FIAC will be left to enterprises. The average cost of a - 17- contract is estimated at US$8,000. To be eligible, enterprises will be required to enter a formal contract with the consulting firm. This requirement is laid out in the procedural manual of the FIAC [see para. 2.021. Moreover, the GIACs will make available to enterprises a database of qualified international and national experts which it will constitute and periodically update through a largely advertised invitation to submit credentials for prequalification. Finally, to ensure a transfer of know-how and build up the capacity of human resources specialists in Morocco, partnerships of international and national consultants will be encouraged. Similarly. the choice of procurement method for training and counseling services to be partially financed under the CSF will be left to enterprises. Based on 1994 actual figures, the average cost of each contract was US$3,000. Eligibility criteria for partial reimbursement of training contracts to enterprises as well as the documentation to be provided by enterprises are defined in the CSF procedural manual [see para 2.02]. Assurances were given that contracts to be financed under the FIAC will be procured according to the agreed FIAC Procedural Manual and that contracts to be reimbursed under the CSF will be procured according to the agreed CSF Procedural Manual [para. 5.03(d)] including the requirement that services to be financed under the Loan shall be procured at a reasonable price, account being taken of the quality and competence of the parties rendering them. 3.15 Bank Prior Review of Procurement Documentation. All contracts for consulting services, training or studies, with the exception of that financed by the FIAC and the CSF, valued at more than US$100,000 for consulting firms and US$50,000 for individual consultants and contracts for goods estimated to cost more than $350,000 will be subject to prior review by the Bank. The Bank's prior review is expected to cover about 30% of the total Bank-financed procurement. Small consulting contracts valued below US$100,000 for consulting firms and US$50,000 for individual consultants will require prior review of the terms of reference only. Contracts for goods below USS350,000 equivalent will be subject to ex-post review by the Bank and will be retained for review by Bank supervision missions. Contracts for consulting and training services financed under the FIAC and the CSF will be reviewed ex-post through regular audits and supervision missions. D. Disbursement 3.16 The annual project and loan disbursement schedules are described in the tables below. The Bank loan would be disbursed according to the categories described in Table 8. Table 7a. Proposed Loan disbursement Schedule (US$ million) IBRD Fiscal Year 97 98 99 00 01 02 Annual 3.5 5.0 6.0 5.0 2.5 1.0 Cumulative 3.5 8.5 14.5 19.5 22.0 23.0 - 18 - Table 7b. Proposed Project Disbursement Schedule (US$ million) Project Fiscal Year 97 98 99 00 01 02 Annual 11.9 26.8 30.0 18.5 5.6 2.5 Cumulative 1.9 38.7 68.7 87.2 92.8 95.3 Table 8. Loan Disbursement by category Amount of the Amount of the Category Loan Allocated Loan Allocated % of Expenditures to (Expressed in (Expressed in be financed Dollars) French Francs) (1) Goods under Component 3 1,950,000 10,200,000 100% of foreign (Centers of Excellence) expenditures, of 100% of local expenditures (ex-factory cost) and 70% of local expenditures for other items procured locally (2) Consultants' services and training (a) Support to GIACS 50,000 300,000 100% (b) Centers of Excellence 1,500,000 8,000,000 100% (c) Institutional Strengthening 250,000 1,400,000 100% (3) Sub-project Financings: (a) FIAC 1,500,000 8,000,000 70% of the total amount of each Sub-project (b) CSF - carrying out of in-service 2,500,000 13,000,000 35% of the total amount training activities of each Sub-project paid in Fiscal Years 1996, 1997 and 1998 (c) CSF - Development of training plans 1,500,000 8,000,000 70% of the total amount of each Sub-project paid in Fiscal Years 1996, 1997 and 1998 (d) CSF - Development of training plans 750,000 4,000,000 80% of the total amount on the basis of competency needs of each Sub-project assessments paid in Fiscal Years 1996, 1997 and 1998 (4) Unallocated 1,500,000 7,400,000 TOTAL 11,500,000 60,300,0001 - 19 - 3.17 Documentation. Except for contracts requiring prior review, disbursements would be made against certified SOEs, the format of which will be agreed upon with the Bank to facilitate identification of project categories. Supporting documents for SOEs would be retained by the implementing agencies for at least one year after the Bank receives the audit report for the year in which the last disbursement was made. This documentation would be made available for review by auditors and visiting staff upon request. With regards to component A (GIAC/FIAC), and component D requests for payment of eligible expenditures would be grouped so that disbursement requests to the Bank be superior to US$50,000 equivalent. 3.18 Special Accounts. To facilitate the timely implementation of the project, the Government would establish two Special Accounts respectively for Component I and 4, and Component 2 and 3 on terms and conditions acceptable to the Bank. The authorized allocations will be respectively US$800,000 and US$1,500,000 covering the Bank's share of 3-4 months of estimated expenditures. When the Loan becomes effective, the Borrower may request an initial deposit to each of the two SAs not exceeding US$400,000 and US$500,000 respectively. Additional deposit(s) may be requested when the amounts committed and/or disbursed for each of these components reach US$3 million. The SA will be replenished by submitting withdrawal applications to the Bank on a monthly basis, or whenever the account is diminished by one-third, whichever is sooner. Replenishment applications submitted against the SA will include monthly bank statements showing account activity since the last application, a reconciliation statement and supporting documents as required by the Bank. With regards to the counterpart funds related to the CSF, a separate budget line item will be created within OFPPT's budget and funds allocated to it annually. E. Accounts, Reporting and Audits 3.19 The Borrower will maintain appropriate records of accounts and prepare bi-annual financial and operating progress reports as well as an Implementation Completion Report within six months of the loan closing date. An independent auditor acceptable to the Bank would : (a) audit project accounts; (b) apply auditing standards and procedures satisfactory to the Bank that conform to generally accepted auditing practices; (c) carry out its auditing work in a timely manner--an annual report would be presented to the Bank no later than six months after the end of each fiscal year; and (d) render an audit opinion on project accounts including the Special Accounts and the use of Statement of Expenses or the reason whereby such opinion cannot be rendered and provide a financial statement of OFPPT and the associations to be created. In addition, in line with their respective procedural manuals, the GIACs and CSF will be subjected to annual audits by independent auditors. These audits will be transmitted to the Bank. With regards to the GIACs and the CSFs, monitoring indicators and reporting mechanisms acceptable to the Bank have been agreed upon and will be transmitted annually to the Bank. F. Supervision and Monitoring 3.20 Status of Project Preparation. Preparation of the project is well advanced. The GIAC and FIAC statutes and Procedural Manuals have been prepared, and one GIAC has been officially formed. The marketing of this initiative has been actively pursued by the Government since appraisal. With regards to the second component, the CSF procedural manual has been prepared and approved by the OFPPT Board. Terms of reference for the studies of the 4th component have been prepared. With regards to the Centers of Excellence, all actions related to the first year of implementation have been defined in detail and a launching seminar including heads of VT centers involved in the project has taken place in July 1996. - 20 - 3.21 Supervision. In the first fiscal year (FY97), one launching seminar will be planned for 9 staff weeks (sw) followed by two supervision missions a year for the remaining four years (12 sw per year) . The supervision missions will focus on the progress of the objectives, targets and schedules of each sub- component based on the project indicators and expected outputs which are found in section VIII of the Implementation Volume, and will undertake corrective actions if necessary. By July 3 1, 1999 the Government will prepare a comprehensive progress report and transmit it to the Bank to be discussed during a mid-term review to be held no later than November 30, 1999 [para. 5.03(f)]. The mid-term review will not only assess the project's implementation progress in greater detail, but also to what extent the project needs to be restructured to achieve its objectives, in particular in view of: (i) progress in the elaboration of the in-service training law and to what extent this law reflects the agreed objectives, (ii) progress in the elaboration and implementation of the sector strategy and its related action plan; and (iii) the need to modify the design of the project in the light of both the new law and the sector strategy. A summary of key indicators to be used for overall project monitoring has been elaborated [Annex 5]. The Government has provided the base line and target data for the project monitoring indicators which will be updated annually in the progress reports throughout the duration of the project [para. 5.03(c)]. G. Environmental Impact 3.22 As currently formulated, the proposed project was reviewed under the procedures specified in O.D.4.01, Annex A: Environmental Assessment, and was determined to be in screening category C which includes projects that normally do not result in significant environmental impact. No Environmental Assessment (EA) is expected to be conducted for this project. IV. EXPECTED BENEFITS AND RISKS 4.01 Proiect Benefits. The proposed project would make a significant contribution to upgrading the skills of Morocco's labor force and the competitiveness of its enterprises. Major changes in policy and governance structure of the CSF already agreed with the Government, enterprises and labor would result in a shared responsibility and financing between the main beneficiaries and a rapid increase of the number of enterprises which retrain their workforce. The number of enterprises which would apply to the CSF scheme to retrain their workers is estimated to increase from 620 in 1994 to 2,100 by project completion, and the number of workers enrolled in the OFPPT's evening courses, from 7,700 to at least 19,000 in 2001. The institutional and legal framework would also improve through the adoption of a comprehensive law on in-service training, the elaboration of an overall long-term VT strategy and its related action plan, and the creation of strong linkages between the selected public training centers and the enterprises. The professional associations would also benefit from the project by broadening the range of services they provide to their members and exploiting economies of scale in training. It will also improve training outcomes by taking actions on both the demand and supply sides. Finally, the private proprietary training institutions would benefit from the project through greater access to the VTT, which will promote competition between both public and proprietary training institutions, and thus efficiency. Over time, the project would generate significant economic benefits to both the enterprises and the State, on a sustained basis, generating an internal rate of return of 25% (see economic analyses in Annex 4.) -21 - 4.02 Project Risks. The incentives provided to the enterprises through the GIACS and FIAC aim at reducing the risk of a low demand for training. However, a persistent low demand may be a result of severe structural impediments to the increase of enterprises' competititveness, outside the training sphere, which would be addressed through other components of the government private sector development program. There are institutional risks involved with the GIACs, which are new structures to be created under the project, and particularly with the financing of in-service training, which include the reform of the CSF scheme and the enactment of a law. To reduce these risks, project preparation focused on building a strong consensus around the GIACs and the CSF scheme. This exercise led to the development of detailed procedural manuals, including monitoring, reporting and auditing requirements, and the a posteriori control needed. A number of drafts of these documents were widely shared among the Government and the representatives of enterprises and labor unions, and following the incorporation of their comments, a final version was finalized with the World Bank assistance and endorsed by all of them. This should provide a strong basis for future cooperation between the stakeholders and especially for the consultative process of preparation of the law. 4.03 There is also the risk that OFPPT's efforts to better adapt to enterprises' needs fail to induce a greater implication of the private sector in its centers of excellence. This may represent the greatest economic risk of this project and has been addressed in a variety of ways. First, it has been recognized since the beginning that only a limited number of training centers have the potential to evolve into centers of excellence, based on the industrial and employment potentials of their catchment area, their demonstrated ability to establish training links with the private sector (through the setting up of a private sector steering committee,) and the preparation of self development plans. Adequate incentives were provided to the staff to increase their self-generated resources and a matrix of detailed performance indicators (Annex 7) was developed with the World Bank assistance to monitor the centers' progress against their own assessment. As regards investments, technical assistance and training of trainers and managers would be financed primarily by the Bank loan and front-loaded to provide the centers with essential inputs to initiate the change. Training equipment would be financed by the Government and provided only to those among the 36 centers that would complete an in-depth assessment of their equipment needs and show a progress record in line with the objectives set in their development plans. Finally, the project approach to bring about improvements in the system by promoting change within the public sector is much less prone to be hampered by socio-political resistance than any alternative that would bypass the public sector. V. AGREEMENTS AND RECOMMENDATION 5.01 During preparation of the project, the following actions were taken: (a) a set of 20 criteria combining student insertion performances, links with enterprises, capacity to generate income through the provision of contractual training and counseling services to enterprises, performance in attracting workers to evening courses and management capacity, were developed and a definition of a Center of Excellence based on these criteria was agreed upon; [Annex 6 and Implementation Volume Section 2.4.31; (b) all 180 OFPPT centers have been classified into 4 levels and the 36 centers selected for their potential to meet, within the project life, the level of Centers of Excellence. Each center - 22 - candidate for becoming a center of excellence has elaborated a development plan in consultation with its potential client enterprises [list of centers in Implementation Volume Section 2.4. 1; (c) a Ministerial decision to increase the autonomy of the OFPPT centers was issued in January 1996 (Implementation Volume, Section 2.151; (d) as part of the 1996 finance law, the VTT was extended to Industrial and Commercial Public Enterprises [para. 3.07]; 5.02 Before negotiations the Government transmitted: (a) the decision creating the FIAC and the FIAC Procedural Manual, including monitoring and reporting mechanisms and auditing requirements. [para. 2.04] (b) the OFPPT Board approval of the restructuring of the CSF and its new Procedural Manual [para. 2.07]; and (c) the Government proposal of a satisfactory process and guidelines for preparation and processing of the new Law on in-service training. [para. 2.07] 5.03 During negotiations, assurances were given regarding: (a) A Law satisfactory to the Bank on in-service training will be approved by the Cabinet (Conseil du Gouvernement) no later than September 30, 1998 [para. 2.07 and Annex 1]. The Government commitment to follow an agreed process and guidelines to that end was reflected in a supplemental letter to the loan agreement, which includes interim indicators for the preparation of the in-service training law. (b) The Government's strategy on vocational training will be elaborated by December 31, 1997 and implemented thereafter [para. 2.09 and Annex 2]. The Government commitment to follow an agreed process and guidelines to that end was reflected in a supplemental letter to the loan agreement, which includes interim indicators for the elaboration of the strategy and the implementation plan. (c) The base line data and targets of the key indicators to be used for overall project monitoring will be updated annually through the duration of the project [para. 3.2 1. (d) Contracts to be financed under the FIAC will be procured according to the agreed FIAC Procedural Manual, and contracts to be reimbursed under the CSF will be procured under the agreed CSF procedural Manual [para. 3.14]. (e) The MVT would prepare and transmit to the Bank by April 30 and October 31, of each year an annual implementation report, assessing progress to date according to project monitoring indicators and proposing the next year's program, including the necessary budget allocations. [para. 3.10]. - 23 - (f) A mid-term review will be carried out no later than November 30, 1999. The mid-term review will assess the project's implementation progress in greater detail, and to what extent the project needs to be restructured to achieve its objectives, in particular in view of: (i) progress in the elaboration of the in-service training law and to what extent this law reflects the agreed objectives; (ii) progress in the elaboration and implementation of the sector strategy and action plan; and (iii) the need to modify the design of the project in the light of both the new law and the sector strategy [para. 3.21]. (g) Retroactive financing up to US$1 million covering the period from July 1st, 1996 to loan signing was added upon request from the Borrower [para.3.061. (h) The Borrower opted for a variable rate loan in US dollars (50%) and French Francs (50%) [para. 3.061. 5.04 As conditions of Board Presentation: (a) the registered statutes of the first GIAC and its Procedural Manual approved by its Board have been transmitted to the Bank [para. 2.04]; and (b) the members of the COD who will oversee the FIAC have been appointed [para. 2.04]. (c) By decision of OFPPT's Board an appropriate amount (as defined in the Implementation Volume, section 2.3.2) will be allocated to the CSF scheme for the first three years of the project [para.2.07]; -24- Annex I Page 1 of 2 STEPS IN THE PREPARATION OF A DRAFT LAW ON IN-SERVICE TRAINING Objective: 1. The objective is to formulate a draft law that institutionalizes and makes permanent the measures taken by the Government to promote in-service vocational training. The law in question will take into account the entire spectrum of issues involved in in-service training at the national level and, in particular, will: (i) clarify the organization of in-service training; (ii) define the role of the various social partners (businesses, associations and trade groups, representatives of workers, the State, communities); and (iii) identify the portion of the VTT to be earmarked to in-service training and define the mechanisms for its financing. It will also reflect the general principles implemented under the Third Private Sector Development Project (in-service vocational training), for which World Bank financing is envisaged. Those general principles are as follows: - making business responsible: The State will disengage from the direct management of in- service training and keep only its supervisory role; - independence: establishment of an autonomous entity jointly managed by trade organizations and representatives of workers, whose function will be to manage the funds allocated to in-service vocational training, - pooled financing of in-service vocational training through the allocation of a portion of the VTT. Methodology: 2. Preparation of the law will be overseen by a steering committee set up within the Ministry of Vocational Training, whose mission will be to: - draw up an inventory and digest of studies, legal texts (and in particular the labor code) and other reports concerned with in-service training; - prepare detailed terms of reference for the experts to be engaged for the formulation of the proposed law and draft the accompanying explanatory statement;14 - ensure the interface between those experts and the other stakeholders, in particular labor and business representatives; 14 The cost of technical assistance for the preparation of the law was estimated on the basis of four months of experts as follows: I economist, lawyer/specialist in institutional issues and 1 specialist in human resources. - 25 - Annex 1 Page 2 of 2 - organize a seminar that brings together all partners, to present the cost-benefits of the proposed alternatives as well as the experience of other countries in dealing with the same issues. Timetable: 3. The proposed timetable splits implementation into two phases: (i) phase 1, entailing preparation of the explanatory statement and a first draft of the law, lasting about one year; and (ii) the approval of the draft law by the Cabinet (Conseil du Gouvemement). Phase 1: - Designation of the members of the steering committee Start-up - Preparation of expert terms of reference Start-up+2 weeks - Recruitment of consultants Start-up+2 months - Inventory and digests of existing texts and submission of consultants' preliminary report Start-up+5 months - Approval of report (s6minaire de validation) Start-up+7 months - Submission of final report, including explanatory statement and proposed draft law Start-up+9 months - Expanded consultation on draft law Start-up+ 11-15 months Phase 2: - Approval of draft law by the Cabinet (Conseil du Gouvernement) Start-up+ 18 months -26- Annex 2 Page 1 of 2 PREPARATION OF A LONG-TERM STRATEGY AND ACTION PLAN FOR VOCATIONAL TRAINING Objective: 1. The Government of Morocco is convinced of the need to adapt vocational training structures: (i) by involving the public and private sectors in the planning, management and financing of vocational training; (ii) encouraging the expansion of private training centers; and (iii) subjecting vocational training centers to competition through progressive allocation of the VTT to a demand-driven financing scheme. 2. With a view to implementing these principles, the Government will launch a comprehensive study of the issues, to be overseen by the Ministry of Vocational Training, and aimed at formulating a long-term sectoral strategy for vocational training and identifying the sequence of reforms that will facilitate its implementation. The studies and other necessary work preparatory to the development of the strategy will be among activities financed under the World Bank's third loan for private sector development (in-service training). No more than fourteen months after loan signature, this process should lead to the formulation by the Government of the strategy document that will be forwarded to the Bank. That strategy will serve as a foundation for the formulation of the sector's next two five-year plans. Description of the strategy formulation process: 3. The process will begin with the appointment by the Minister of Vocational Training of a Strategy Formulation Committee (ComitW d'Elaboration de la Stratigie -- CES) composed of four to eight people, each of whom would be designated individually, and the CES would be responsible for setting the pace and timetable of the studies and works to be undertaken, formulate terms of reference for the studies to be launched, analyze the conclusions of the various inputs and studies it contracts and, lastly, prepare a synthesis of its work, which it will send to the Government. The synthesis will include in particular a diagnostic study and proposals for modernizing the institutions, regulatory framework and the means of financing vocational training. This first phase is expected to take eight months. 4. At the conclusion of the first phase, the Government will begin a series of consultations with the social partners to build a consensus on the proposed reforms and identify the means and implementation timetable. After six months, the Government will formulate its long-term development strategy for vocational training and forward it to the Bank for information. Means to be allocated for preparation: 5. During the last ten years the MVT and OFPPT have carried out many comprehensive studies, several of which are still valid. The CES will have access to that documentation and will have funds to finance the following activities: Studies: When necessary, supplementary studies will be done in the field to expand the data of the diagnostic study, through inputs from Moroccan or expatriate experts to the analysis of constraints and dysfunctional aspects of the system, and identification of possible reforms; -27- Annex 2 Page 2 of 2 Overseas fact-finding missions: Two overseas fact-finding missions for committee members (4 to 8 people) are planned in order to learn from the experience of other countries which, facing comparable conditions, have overcome the constraints and embarked upon similar reforms; Seminar: Two seminars are planned in order to enable the MVT to organize consultations for consensus building on the objectives of the reform. Timetable: Phase 1: Preparatory stage - Appointment of CES members Start-up - End of inventory of existing studies and documentation Start-up+ 1 month - Preparation of expert TOR and program for fact-finding missions Start-up+2 months - End of consultants' work and fact-finding missions Start-up+6 months - Submission of comprehensive report to the Ministry Start-up+8 months Phase 2: Consultations and consensus-building - Approval (seminaire de validation) of CES report Start-up+9 months - End of drafting of strategy document Start-up+ 12 months - Finalization and discussion of strategy with the Bank Start-up+ 14 months Phase 3: Implementation of the strategy - Elaboration of an Action Plan Start-up + 18 months - Discussion of the Action Plan Start-up + 20 months with the Bank and the Donors Community (Seminar) -28- Annex 3 Page 1 of 6 Project Impact Evaluations Studies: Analytical Approach and Terms of Reference Introduction 1. The evaluation of the project impact faces acute informational problems. There are usually good data on enterprises from the annual Industrial Survey and on training from the training institutions, the MVT and the Ministry of Education. However, except for the 1986 Industrial Survey, there is no information on the more extensive training that occurs in the private sector--in enterprises, provided by equipment suppliers, and in private training institutions. Moreover, little is known about the enterprise context in which training takes place, how decisions regarding training relate to other enterprise strategies on investment, innovation, or work organization. 2. The purpose of this Annex is to describe the studies that will be conducted to assess the impact of the project. The Annex is organized in two sections. The first describes the analytical approach, including data needs, analyses and expected results. The second section provides detailed Terms of Reference for the studies and discusses various possible survey methods. A. Analytical Approach I. Overview of project 3. The in-service Training Project in Morocco is designed to improve the skills of the workforce and increase enterprise competitiveness via four project components. First, to help enterprises, MSIs in particular, identify their skill needs through competency needs assessments (CNAs) conducted by the Groupement Interprofessionnel d'Aide au Conseil (GIACs). Second, to encourage enterprises to train workers either in-house or in public or private training centers by providing incentives through a training payroll levy-grant system or the Contrats Sp&ciaux de Formation (CSF). Third, to improve the quality and relevance of in-service training provided to enterprises by selected OFPPT training centers to be rehabilitated under the project. Finally, to strengthen policy formulation capacity of the MVT and the legal framework for in-service training. 11. Data Needs for Project Impact Evaluations 4. Specific kinds of information on enterprises and its workers are required to assess whether the project is meeting its objectives of improving workforce skills and increasing industrial competitiveness. Broadly, the following types of information are needed: * First, information is needed on performance measures for two groups--one affected by an intervention or a set of policies, and one that is not (the control group)--to measure the impact of the intervention. In the case of enterprises, this might involve comparisons of the performance of firms that implement some type of in-service training program and the performance of firms that do not train. For workers, one might compare the wages, hours of work, or job turnover rates of employees in enterprises with and without training. * Second, information over time should be collected on the same groups of enterprises. Because firms and its workers can be very heterogeneous, it is important that the impact of an intervention be assessed by comparing post- and pre-intervention performance measures. Thus, one might -29- Annex 3 Page 2 of 6 focus on changes over time in the productivity levels of training enterprises (or the wages of its workers) and compare them to the performance of the control group of non-training enterprises (and its workers). * Third, information is needed on other contemporaneous attributes of workers and firms. Performance is shaped not only by training but by other factors such as the education, work experience, and family background of employees, or the productive attributes of firms such as foreign or local ownership, technology, and market conditions. As such. program impacts on workers or enterprises must be assessed net of the effects of these other variables on their performance. * Finally, a scientifically-drawn sample of enterprises should be used to collect firm-level information. Otherwise, the impact of the project on expanding the training efforts and competitiveness of enterprises--a key objective of the project--cannot be assessed. Small, non- representative samples of firms are likely to yield unreliable measures of levels and time trends in training incidence and performance, and result in evaluation studies that are both biased and misleading. 5. The requisite data to conduct a project evaluation study do not currently exist in Morocco and will need to be collected systematically as part of the project. Specifically, surveys of enterprises at the beginning, mid-term and end of the project are needed to monitor and investigate the impacts of GIACs in helping enterprises identify skill needs and develop training plans, the role of CSF in encouraging firms to initiate or expand training programs for their workers, and the use of in-service training services provided by OFPPT training centers. The program impact evaluation studies proposed here--their objectives, data requirements, and analytical approach--are described below. III. Analyses of Survey Results 6. The following three examples, based on analyses of similar enterprise surveys by the World Bank, illustrate some types of analyses that are possible with these surveys and the kinds of policy questions that can be addressed. 1. Incidence of in-service training 7. The data can be tabulated to describe the incidence of in-service training in Morocco at one point in time, or time trends in training when two or more surveys are fielded. The tabulations will show the principal sources of training (in-house, public or private training centers, other private sector firms, etc.), the main types of training given by different providers (vocationally specific, production, or quality control), and the worker groups trained. When scientifically-drawn, the sample of firms can be weighted to yield national estimates of the incidence of training, the number of workers trained and the kinds of training received, and training trends over time. 8. Policy issues: How prevalent is in-service training? Which employers train and which do not? Do market failures inhibit training and what is the nature of these market failures? Do Moroccan firms under-invest in training? What training is emphasized by firms? How important are public training centers as a source of in-service training relative to the private sector? Have these patterns of training changed over time? 9. Illustrative results. The World Bank study of 5 developing countries concluded that: (i) firms that train tend to be large, foreign-owned or joint-ventures, exporters in modern and technology- -30- Annex 3 Page 3 of 6 intensive sectors; (ii) the most important reason for little or no training is that employers use simple technologies requiring few skills; (iii) however, market failures are also important -- many employers do not train because they do not know how or what to train, they cannot internalize the benefits of training because of high turnover of trained workers, and they are unable to finance training; (iv) with some exceptions (Colombia), the private sector -- the firm itself, private training centers, and suppliers -- plays a relatively more important role than the public sector in meeting in-service skill needs in developing countries. 2. Productivity and wage impacts of training 10. The data can be used to estimate the effects of training on the performance of employers and workers. For employers, the productivity effect of training can be investigated within a production function framework. Production functions, which relate a measure of productivity (value added) to inputs of capital (value of plant and equipment) and labor (number of workers, skill mix, hours of work), can be expanded to include inputs of training to estimate productivity effects by source and type of training. Similarly, models can be used to estimate the effects of training on wage levels or the probability of job turnover, for different groups of workers and by type and source of training. 11. Policy issues: Does training improve firm-level productivity? Which types and sources of training are more important in terms of their effects on productivity? Are the productivity effects of training similar to the wage effects of training by type of training or for different groups of workers? Who pays for the cost of training? 12. Illustrative results: The World Bank study finds evidence that: (i) training has a large positive impact on productivity; (ii) the productivity impact of in-house training tends to be larger than that of training provided by outside training providers; (iii) while training for skilled workers has a large productivity impact, training for unskilled workers has no measurable impact on productivity; (iv) the productivity impact of training is actually higher among small firms where few employers train than among large firms most of whom train; (v) the wage effects of training resemble the productivity effects of training -- large wage effects are found for skilled worker training but not for unskilled workers; and (vi) the wage effects of employer investments in worker training are roughly comparable to the wage effects of investments in new technology. 3. Training and productivity changes over time 13. Following the same sample of enterprises is critical since the incidence of training, productivity and wages can change over time for reasons unrelated to the project. Thus, in program evaluations, models should be estimated to explain changes over time in these variables controlling for changes in the other determinants of training, productivity and wage growth. The availability of panel information on the same firms is important for another reason, namely, the heterogeneity of firms. Because enterprises and workers have very different productivity attributes, their productivity levels at any one point in time can vary widely. As such, simply comparing the productivity levels of training firms and non-training firms can be misleading. To identify the impact of introducing a training program, training should be related to changes over time in productivity levels. 14. The evaluation study of Mexico's Program of Training and Technical Assistance (CIMO) to SMIs is illustrative. As part of the evaluation, a group of SMIs that received subsidized training--the pilot group--were tracked over a three year period, and their performance compared to that of a control group of SMIs that did not participate in the CIMO program. A simple comparison of the pilot and -31- Annex 3 Page 4 of 6 control groups at the end of the three year period showed no differences in the two groups' performance (a wide range of outcome measures were considered). However, the pilot group firms tended to have lower productivity prior to joining the CIMO program. When outcomes were measured in terms of changes in productivity over time, the pilot group showed superior improvements in performance with the productivity differential with the control group being narrowed or eliminated entirely. B. Terms of Reference 1. Objectives 15. The objectives are (1) to develop firm-level data bases for tracking changes over time in the incidence of in-service training, (2) to analyze the incentives of firms to train their employees, the constraints they face in identifying skill needs and in developing in-service training programs, and the effects of training on productivity growth and competitiveness, and (3) to assess the efficacy of training policies--the GIACs in providing CNAs and the CSF in promoting in-service training, especially among MSIs--and, as needed, to recommend policies to improve the Moroccan training system. I. Surveys 16. The surveys are intended to develop a broad base of firm-level information on the training and productive activities of a sample of enterprises. The same sample of enterprises should be tracked over time, ideally in 1996 at the beginning of the project so as to provide a benchmark, and thereafter at two- year intervals, in 1998 and in 2000, so that evaluations of training policies and support to MSIs can be conducted and policies adapted as the project progresses. Firm-level information would be collected on five broad areas: 1. Production: level of production and sales; exports; main products; domestic and foreign ownership; value of machinery and equipment; degree of automation; total labor inputs and hours; intermediate inputs and energy; and capacity utilization; horizontal and vertical linkages with other firms; production constraints. 2. Employment: current level and changes in employment over the past 2 years; structure of employment by broad occupation including managers, engineers, technicians, skilled production and unskilled production, sales; gender composition of the workforce; mean years of schooling attainment by broad occupation; job turnover rates; recruitment policies and hiring and job retention problems. 3. Compensation: average pay by occupation and gender; structure of compensation including wages and salaries, bonuses, allowances, severance pay, and statutory payments as a percent of total wage bill. 4. Training: training infrastructure and trainers; informal OJT and formal training; number of workers trained, hours and area of training, by broad occupation, in company training programs and from external training providers such as the public training centers of the OFPPT, private training institutes, equipment suppliers and buyers, and joint-venture partners. Also, policy questions on reimbursement of vocational training tax, firm's use of specific training programs and assistance, and training constraints. 5. Technology: spending on technology acquisition and know-how licenses; research and development; quality control methods; new capital investment plans; problems and constraints faced in improving technology and productivity. -32- Annex 3 Page 5 of 6 Ill. Survey Methods 17. There are three alternative survey techniques. The relative merits and demerits of each should be considered and a survey strategy (or combination of strategies) identified. (1) Fielding a self-contained survey questionnaire to a scientifically-drawn random sample of enterprises and tracking them over time. This approach will require the assistance of the national statistical office to develop a sampling frame (list of company names, addresses. contact person and telephone/fax numbers) and survey weights that will allow the survey results to be made nationally representative. The sample would likely be stratified by firm size because of the large numbers of MSIs relative to large firms. For analytical purposes. the sample should include a minimum of 500 firms. The Moroccan surveys can build on several survey instruments operationalized by the World Bank on similar human resources projects in other countries. The survey can either be conducted by the national statistical office or by a private survey firm, which in many cases can deliver the survey in a more timely fashion. (2) Building on existing annual firm surveys and adding a supplemental module of key questions. Many national statistical agencies, including that of Morocco, already field large, nationally representative firm-level surveys on an ongoing, annual basis. These surveys elicit many important quantitative questions listed above, such as different firm characteristics, industry, production and inputs, book value of machinery, exports, ownership structure, employment and composition, wages and salaries, etc. The remaining information -- training, technology and policy related variables--can be elicited by adding a short module to the statistical agency's survey instrument. Whether the module covers all or part of the firm sample will depend upon the budget of the project and the statistical agency's interviewer resources. (3) Using administrative records concurrently with periodic surveys of firms. Administrative records from the vocational training tax (VTT) are a potentially important source of information. The feasibility of creating a database from VTT administrative records depends in part on how this information is currently collected, and in part on the Moroccan government's willingness to restructure its administrative recording system of the Vocational Training Tax (VTT). Firms contributing to the VTT could be required to provide the administrative agency of the OFPPT with limited information on characteristics of enterprises, its employment, wages, VTT contributions, training practices and both numbers and types of workers trained, if any. These records provide not only information on the universe of firms contributing to the VTT, but also the sampling frame needed to conduct periodic, more detailed sample surveys of firms claiming reimbursements for training as well as firms that contribute but do not train. For Morocco, the second method has several distinct advantages over the others: * It economizes on the heavy fixed costs of fielding a survey (developing the sampling frame, training survey enumerators etc.), especially one that will be repeated over time, by using the ministry of industry's existing survey infrastructure and benefiting from its long experience with firms in the survey. * It immediately yields a large body of time-series information on the same firms in the survey. This information is important not only for characterizing the previous growth and productivity performance of firms, which shapes their incentives to train, but also for studying the future economic impacts of in-service training. * It expedites impact evaluation studies since training questions were included in the industrial survey in the early 1990s. These previous training questions can be used to establish a training -33 - Annex 3 Page 6 of 6 bench-mark for the new surveys to be conducted under the project, and to begin exploratory analyses of training impact on firm-level productivity while the new survey is being fielded. * Finally, it will provide policymakers with important data for competitiveness studies. In addition to training data, the augmented surveys will collect, for a large nationally-representative sample of firms, data on enterprises' technology use, R & D spending, use of quality control methods, exports, and inter-firm linkages which not only shape their skill and training needs but also their productivity growth. IV. Analyses and Evaluation 18. Several types of analyses and evaluations will be performed by bringing firm-level information together from the five broad topic areas: * Analysts should monitor and measure the extent and changes over time in the incidence of in-service training, from the different sources of training-- in-plant training, and training provided by the different OFPPT public training centers including centers of excellence, by private training institutes, and by equipment suppliers and buyers--by industrial sector and by firm size, especially among small and medium size industries (MSIs) that provide workers with little or no formal training. * Analysts should analyze the incentives of employers to train their workers, whether or not they have training plans, competency needs assessments done by GIACs and usefulness of such CNAs, the demand for skills created by changing technology, exports and increased international competition, as well as the constraints faced by firms in developing in-service training programs. These analyses should be used to develop or modify policies to support the training and productivity improving efforts of firms. * Analysts should assess the effects of in-service training on alternative outcomes for firms and workers. For enterprises, the benefits include productivity growth, increased competitiveness, exports, reductions in rejects, improvements in quality control, job retention, etc. For workers, the benefits of in-service training include higher wages and salaries, bonuses, improved job safety, and greater job stability. * Analysts should evaluate the efficacy of the vocational training tax (VTT) in promoting in-service training, especially among the MSIs, by tracking their training efforts and reimbursements from the training fund. Firm responses to the operation of the VTT can also be used to streamline administrative procedures, identify and develop new "training products", and disseminate best practice to firms about in-service training and its benefits for employers and workers. -34- Annex 4 Page 1 of 12 Economic Analyses 1. The objective of the following economic analyses for the Third Private Sector Development Project is primarily to measure the impact of in-service training activities (which is the focus of the project) on the value added of enterprises and the earning of workers. Based on the findings of these analyses the following sections examine (i) the rate of return to the project, (ii) an alternative project design, and (iii) the project fiscal impact. A- The Impact of In-service Training on Enterprises and Workers. 2. The data source is the 1986 and 1990 Moroccan Industrial Surveys. Each survey asked enterprises in the manufacturing sector detailed questions on sales, revenues, output, exports, employment and components of value added. The 1986 survey had additional questions on in-service training: the number of workers trained; the duration of the training in months; and the cost of the training in DH 1,000. The 1990 survey asked questions about the capital stock in the firm. We converted all nominal values to 1993 DH values for reporting purposes. 3. Any firm which reported a nonzero number of workers trained was classified as a training firm in 1986. One hundred ninety five out of 4,354 firms were thus classified. Their characteristics are summarized in Table 1. Table 1: Characteristics of Firms by Training Decision 1986 1990 Mean Characteristics Training No training Training Non training in 1986 in 1986 Output (000'DH1993) 127,813 16,379 159,432 21,682 Investment (000'DH1993) 7,763 939 11,207 1,082 Employment 254 46 281 57 Wage bill(000'DH1993) 13,645 1,582 16,821 2,229 Temporary worker-days 17,407 2,500 16,973 4,243 Exports(fob)(OOOO'DH1 993) 14,792 3,622 26,366 5,769.7 Revenue(000'DH1993) 141,254 16,877 185,868 22,786 Value added (000'DH1993) 36,612 2,717 659,793 4,353 Average wage (000'DH1993) 43.58 21.36 51.94 32.46 Number of firms 195 4,159 186 3,567 It is obvious from this table that firms that train are larger, employ more workers, export more, and in 1986 paid more than twice as much in wages as do non-training firms. This is consistent with other countries: larger firms are much more likely to train than smaller firms, and their workers earn more. They are also much more likely to survive: a comparison between 1986 and 1993 Industrial Surveys demonstrates that 9 out of 10 firms that trained in 1986 were still operating 7 years later, compared with 3 out of 4 nontraining firms (although this is highly correlated with the fact that training firms are also much larger). 4. There are a number of reasons why firms do not train, and many of these are linked to firm size. One is lack of information both about the returns to training and where to get workers trained. Small enterprises are less likely to have access to such information than the larger ones. Another is that there are economies of scale in training and small firms that only want to train one or two workers find the cost too - 35 - Annex 4 Page 2 of 12 high. The third problem is that firms do not recoup all the gains from training: by its very nature, training is embodied in the worker, and when the worker leaves (or goes to another firm) he or she takes the training along. 5. Training incidence varies substantially across industries, and this variation is most readily seen by glancing at Figure 1, which shows that firms in beverage and tobacco products are the most likely to train: 21% of firms in this industry train, and almost 2% of their workers go through a training program. Firms in other industries are much less likely to invest in training: notably firms in textiles, clothing, rubber and plastic products and food products. More detailed information is provided in the figure below. Training Incidence by Industry a 25.00% E .! a 20.00% - - -- -- -- 0 15. 00% - _ o2 10.00% - - - --- - -- o2 5.00% _ 0 0 - Industry Figure 1 6. This difference in the incidence of training raises the question of the determinants of training. Research in other countries suggests that very similar factors determine training needs: that more mature firms are more likely to train as are firms that have to compete internationally in the export market and that have more skilled workers. We have already established that Moroccan firms are like their counterparts in that larger firms are more likely to train than smaller - Table 2 demonstrates that the determinants of training are the same in direction, if not in magnitude, as those of other countries. In other words, the size and age effects are extremely important in Morocco, as in other countries. This raises two issues related to the point made in paragraph 2. -36- Annex 4 Page 3 of 12 Table 2: Determinants of Training: An International Comparison Morocco Colombia Indonesia Malaysia Mexico Taiwan Small (16-100 .56 .50 - .36 .80 .50* workers) (.10) (.22) (.18) (.08) (.04) Medium (101-250 .93 1.18 - .94 1.12 .69 workers) (.13) (.25) (.18) (.08) (.06) Large (>250 1.46 .84 .42 1.45 1.26 .68 workers) (.14) (.30) (.27) (.19) (.09) (.07) Exports .10 .37 .06 .03 .13 .26 (.08) (.16) (.05) (.07) (.05) (.03) Age .02* -.006 -.006 -.005 .001 .004 (.002) (.004) (.007) (.003) (.001) (.002) Proportion of .12 .245 -.07 1.74 .14 .37 skilled workers (.11) (.49) (1.40) (.26) (.14) (.07) Constant -2.77 -.88 .99 -1.81 -1.78 -2.90 (.11) (.343) (.89) (.33) (.14) (.07) Log likelihood -667.3 -250.81 -98.5 -1133.4 -2971.97 -4617.93 Additional variables included in other countries: multi-plant status- female workers; R&D; Foreign Ownership; value of automatic machinery; unionization. Source: Moroccan Industrial Surveys, 1990. Tan and Batra (1995) pp. 39-43. * significant at 5% standard errors between parentheses 7. The gross descriptions presented in Table I suggested that firms that train are more productive, and pay higher wages than firms that do not train. However, it is not obvious that this is due to training alone: clearly there are other confounding factors (such as size and the use of capital intensive techniques) which could also cause these differences. We therefore estimate a standard production function for Moroccan enterprises using the 1990 information on capital stock, value added, employment and exports. We instrument current training practices using the 1986 information creating an indicator variable for whether or not the firm trained any workers. We also control for industry differences by means of industry fixed effects, and estimate the relationship using White's correction for heteroskedastic errors. The results are reported in Table 315 and compared with other countries. 8. Our analysis suggests that, controlling for other observable factors, training firms have a value added which is 37% higher than nontraining firms. This may be an overstatement, since no data are available on the amount of research and development and technology transfer engaged in by the firm, but is certainly well in line with estimates for other countries - up to 44% in the comparison group we are using. 9. The strength of this training effect is not surprising. When so few firms are training, it is likely that there are significant barriers to training in the country, and hence that those that train must have high returns to such an investment. We have data on training expenditures, and graphically show the link between training expenditures and value added in Figure 2. 1 Since there are so few microenterprises that train, we pool the micro and small categories, and use this as the omitted group. -37 - Annex 4 Page 4 of 12 The Relat2onship etween Training and Value Added 15 0 0 00 O O CD 0 C 0 O - 0 0 00 .1 0 0 C 8 00 8 o 00 O O O 0 O 0 @ 00 0D 0 II I I 0 2 4 6 8 log of traaning cost Figure 2 10. We estimate this link using a production function approach. There were several measurement difficulties involved with estimating the link between training expenditures and value added. Firstly, training expenditures are notoriously poorly reported in other datasets, so although we are not directly aware of any problems in this dataset, the results should be interpreted with some caution. Secondly, only 120 firms reported their training expenditures. We calculated the average expenditure on training per worker for those firms (DHIO,920), and imputed that to those 66 firms which reported training a number of workers, but did not report that cost. 11. There were also technical difficulties in the estimation process. It is unrealistic to assume that training expenditures enter into the production relationship in the same fashion as do expenditures on capital and labor. That is, a Cobb-Douglas production function implicitly assumes that if there are zero expenditures on either capital or labor, then output and value added must similarly be zero. Zero expenditures on training, however, do not similarly imply zero output. We therefore specify training expenditures in 1993 DH, and include this variable directly into the production relationship . The coefficient should be read as the effect of an increase of DHI,000 on the log of value added. Since the effect of training is likely to vary by size, we interact training expenditures by size of firm as well. 12. We report the results in Table 3. Training expenditures unambiguously increase value added, even controlling for employment size and capital stock. The coefficient of .00069 means that for every DH 1,000 increase in training expenditures, value added in the smallest firms grew by .00069%. Since the median value added of firms in this category is DH434,000, the typical firm would expect to see a first year increase in value added of some DH299 as a result of that initial expenditure. Similarly, the combined 6 The specification of the function is VA = La KO e5TE The log form is: Ln (VA) = a Ln(L) + 0 Ln (K) + 8 TE a ,0 and 8 are the respective elasticity's for Labor, Capital and Training. -38- Annex 4 Page 5 of 12 effect (including the interaction effect) for the next size of firm is .00008%, and the median value added for this size class is DH6,455,000. Thus, although the percentage effect is smaller, the return in absolute terms is larger: DH516 in the first year for DH1000 invested. The largest size class see the greatest DH return of all: their median size is DH27,173,000 and the return on a DHI1,000 investment in training is DH815. 13. There are a series of reasons to believe that market failure has occurred in the provision of training in Morocco. First, the incidence of training is much lower than in other countries (see table 2 in main text.) This suggests that firms in Morocco may face different sets of barriers than those in other countries. Second, the fact that the incidence is much lower for smaller firms than for larger is consistent with the sources of market failure. Small firms are less likely to have the same access to information as large firms about the type, quality, and source of training. They are also subject to the problem of economies of scale: there are fewer employees over which to spread the fixed cost of training. Another source of market failure is that firms face the prospect of losing trained workers, and hence losing the return on human capital investment. This loss of human capital is much less likely in large firms, which typically have well developed internal labor markets to retain workers: indeed turnover is less in large than in small firms. Third, if firms are rational, the return on physical and human capital should be equated. This is unlikely given the very high 5 year internal rate of return on training reported in table 4 below. This again suggests market failure. 14. There are a series of reasons why the return to training is so high for the largest firms. Some may be technical (measurement error, for example). Others might reflect differences in the ability of large firms to obtain quality training, or the ability of large firms to combine training with research and development. This latter is not measured in our data, but is clearly highly correlated with the returns to training. Table 3: Production Function with training cost measure 1/ log value added log(capital) .3 l (.01) log(labor) .84* (.02) age .02* (.001) export .08* (.03) training expenditures(TE) .00069* smallest firms (.002) TE*medium -.00061* (.009) TE*large -.00066* (.009) constant 1.85* (.10) R2 .79 fixed effects on size of firm; standard errors in parentheses; * means significant at 5% 1/ Where TE medium and TE large are dummy variables for medium and large firms, respectively -39- Annex 4 Page 6 of 12 15. Although Table 3 indicates that there is a positive return to investment in training, it is instructive to estimate the order of magnitude of this return. The increase in value added is likely to continue for a number of years, especially since trained workers both use the knowledge daily in completing their tasks, and because they pass their knowledge on to other workers in the enterprise. Any number of assumptions can be made about the number of periods for which the increase lasts, and about how fast the increase depreciates. Table 4 provides some estimates of the internal rate of return to the initial investment on training, based on different assumptions about how long the impact lasts and what those depreciation rates are likely to be. We choose the median value added of firms in each category in order to estimate this relationship. Table 4: Sensitivity Analysis of the Internal Rate of Return on Training Depreciation Rate Small and Micro Firms Medium Firms Large irms 5 year 30 year 5 year 30 year 5 year 30 year 0 15 30 41 67 70 75 2 14 28 39 65 68 73 4 12 26 37 63 66 71 6 11 24 35 61 63 69 8 10 23 33 60 61 68 16. If we look at the first cell in each category, the return on value added for the small and micro enterprises is 15% (based on their median value added). It is considerably higher for medium firms, at 41%, and higher yet for the largest size class, at 70%. These rates of return should be interpreted with some caution, particularly for the largest size class. Unlike other datasets, we have no measure of firm expenditures on research and development or the extent of technology transfer. This is likely to be highly correlated with training expenditures for the largest firms, and hence overstating the rate of return to this group. 17. We repeat the estimation using intensive techniques to determine the effect of training on productivity and wages. This is reported in Table 5. The effect of training on productivity is to increase it by 33%; it increases average pay by 28%. Table 5: The effect of training on productivity and wages (using indicator variable on training) 2/ Iog(productivity) log(average wage) log(capital/labor .32 .18 ratio) (.01) (.01) age .01 .02 (.001) (.0008) export .27 .22 (.04) (.03) train .33 .28 (.06) (.05) medium (100- .16 .20 250 workers) (.04) (.03) large (250+ .18 .17 workers) (.05) (.04) R2 .39 .34 2/ Where Train is a dummy variable for Training (all enterprises) and Medium and Large dummy variables for medium and large enterprises, respectively. -40- Annex 4 Page 7 of 12 18. This enables us to verify the internal rate of return estimate presented in Table 4 using a "short- cut" technique. As Tan and Mingat (1988) point out, the internal rate of return can also be estimated by r = [E(T)-E(U)] / {n*E(U) + C} where E(T) is the earnings of trained workers; E(U) refers to the earnings of untrained workers, n is the duration of training and C is the cost of training. Calculations suggest that if training were to increase the average wage of workers in firms that do not train by 28%, and the cost of that training is DHIO,920, then this short cut method yields a rate of return of 42%: very close to the range of estimates calculated using the more sophisticated approach. B - Rate of Return to the Project and Sensitivity Analyses 19. The project generates significant economic benefits to both the enterprises and the State, on a sustained basis. The project Internal Rate of Return (IRR) is estimated at 25% and the calculation is summarized in table 6 below. The following assumptions have been used for the computation of the project cost and benefits: * The costs include all capital expenditures, training costs, technical assistance, equipment, works, and physical and price contingencies. * The incremental recurrent cost for the GIACs are already included in the project cost. There are no incremental recurrent cost for the project's second, third and fourth components because they do not generate additional recurrent expenditures in salaries or maintenance of equipment and buildings. * Three types of benefits have been considered. First, the findings summarized in para. 11 above suggest that the increase in enterprises' value added resulting from the training activities financed by the project's second component (CSF) can be estimated. The estimation is carried out under the assumption that all enterprises are medium-sized and that the effect of training continues for 5 years without any depreciation. Thus, the typical enterprise would expect to see a five-year increase in value added of some DH516 as a result of an initial expenditure in training of DHI,000. * Second, since the project does not create additional pre-service training capacity, the returns to pre-service training in the potential centers of excellence are not included as a benefit, and the trainees' lost productivity during their period of training (opportunity cost) is not included as a cost. However, as a result of the project the centers of excellence would be more relevant to enterprises' training needs, would have highly qualified trainers and modern equipment, thus they would be capable of responding to the changing needs of the labor market in a quicker and more meaningful fashion than in the current situation. Therefore, we assume that the average job search period of the centers of excellence's graduates would be reduced from currently 10.5 months to 3 months. About 5,000 students would graduate each year from the 36 centers of excellence, and earn US$2,050 per year on average. The reduction in their job- search period is worth US$ 6.5 million a year. * Finally, the last benefit is the resources generated by the centers of excellence from sales of training and counseling services to enterprises (Compte Hors Budget, CHB). This benefit is estimated at a minimum of US$1.3 million a year for the centers of excellence. * The US$ value of such costs and benefits has been estimated in constant 1994 prices, using the exchange rate $1 =DH8.3. The number of periods considered is 15 years. -41- Annex 4 Page 8 of 12 20. Additional benefits, not included, would be generated from the the number of workers enrolled in evening courses (from 4,000 in 1994 to at least 12,000 after 5 years), and the increase in the graduates' salary due to the likely improvement in the quality and relevance of the training they received in the centers of excellence. Moreover, it was assumed that training expenditures financed by the CSF scheme will be discontinued after 3 years, whereas they are expected to increase after the promulgation of the in-service training law, leading to an even higher IRR through reallocation of the VTT proceeds from the financing of pre-service training to in-service training, which yields much higher returns. This last conservative assumption is warranted by the institutional risk involved with the process of preparation and processing of the law. Table 6: Internal Rate of Return (US$'000, 1994 prices) Year Capital Benefit 1 Benefit 2 Benefit 3 Total Net Benef. Expenditures (CSF) (CHB) (Reduced Job Benefits search time) 1997 23,760 4,904 0 0 4,904 -18,856 1998 29,898 11,918 300 400 12,618 -17,280 1999 30,242 20,909 600 1,000 22,509 -7,733 2000 6,883 20,909 1,000 3,000 24,909 18,026 2001 4,485 20,909 1,300 6,500 28,709 24,224 2002 16,004 1,300 6,500 23,804 23,804 2003 8,990 1,300 6,500 16,790 16,790 2004 1,300 6,500 7,800 7,800 2005 1,300 6,500 7,800 7,800 2006 1,300 6,500 7,800 7,800 2007 1,300 6,500 7,800 7,800 2008 1,300 6,500 7,800 7,800 2009 1,300 6,500 7,800 7,800 2010 1,300 6,500 7,800 7,800 2011 1,300 6,500 7,800 7,800 IRR = 25% NPV (10%) = 33,527 21. The increases in value added resulting from a DH1,000 increase in training expenditures is the single most important factor which determines the magnitude of the IRR. This increase may fall short of (or exceed) the assumed value of DH516 used in the computation of the IRR due to diminishing (or increasing) returns on training. The effect of such potential variations is shown in Figure 3 below for increases in value added ranging from DH299 to DH815, corresponding respectively to the returns on training expenditures for the smallest (least efficient) and largest (most efficient) enterprise size-groups. Finally, any number of assumptions can be made about the number of period for which the effect of training lasts and how fast it depreciates. The assumptions made for the IRR computation seem rather conservative and a sensitivity analysis of the return to training to these assumptions is provided in Table 4 above. -42- Annex 4 Page 9 of 12 Relashionship Between IRR and the Effect of Training on Value Added 60% 50% 40% 30% 20% 0% 299 516 815 Increase in Value Added for Every D1000 Increase in Training Expenditures Figure 3 C- The Development of a Least-cost Project Design 22. The project addresses the need to upgrade the Moroccan labor force. Two types of investment in vocational training could effectively upgrade the labor force: expanding the capacity, quality and relevance of pre-service training or. alternatively, promoting in-service training on a demand-driven basis. This project adopts the second alternative, which is the least-cost one, for many reasons. First, the Bank's experience in financing the development of V.T. in Morocco clearly demonstrates that while quality pre- service vocational training is expensive (it generates substantial recurrent costs), the potential for cost recovery is low (see para. 1. 12 of main text). This suggests that any expansion of pre-service training would increase the Government budget burden and raises sustainability issues. Second, the utilization rate of the vocational training facilities would be maximized under the proposed project. The VT centers would have much more incentives to operate twelve months a year and in the evenings, offering in-service training under contracts. Finally, there are clear signals suggesting that the labor market is currently over-saturated by VT graduates. In contrast with in-service training, the rate of return estimates for pre-service VT graduates are very low. These rates of return are estimated in Table 7 below for the three levels of vocational graduates based on salary and employment information collected through the MVT's tracer studies. They are very sensitive to the average wage of apprentices. The estimates shown in the table below assume that apprentices are paid 30% below the minimum wage (SMIG). The rates of return would be negative if the average wage of apprentices was equal to the SMIG, and slightly higher than what is shown in the table if it was equivalent to 60% of the SMIG (which is the minimum permitted by the Moroccan legislation.) -43- Annex 4 Page 10 of 12 Table 7: Rate of return estimates for VT graduates (in DH) Education Level Job level Average Wage Wage Additional Job-search Rate difference of (Annual) to Education Costsf* Return apprentices Costs* 6 years of basic educ. Apprentice 12,700 6 years of basic educ. Skilled-worker level 1 13,596 896 44,340 784 2.0% plus 2 years of VT. (Sp6cialisation) 6 years of basic educ. Office worker 14,976 2,276 97,719 1,992 2.3% plus 3 years upper (qualification) basic. plus 2 years of VT. 6 years of basic educ. Skilled worker Level 3 19,080 6,380 166,788 4,307 3.7% plus 3 years upper (Technicien) basic. plus 3 years of sec. plus 2 years of VT. / Includes foregone earnings incurred because of additional time spent in training. /* Includes foregone earnings incurred during job-search. Does not include the cost of placement services. Sources for employment and earning data. "Etude sur le Cheminement des laur6ats de la Formation Professionnelle, Promotion 90." MVT, Rabat. 1994 "Etude annuelle de suivi de /7insertion des dipldmbs de la formation professionnelle". MVT, Rabat. 1996 Sources for cost data. Morocco - Public Deficit and Economic Growth. World Bank. 1994 "Indicateurs de Gestion." OFPPT 1994. World Bank Staff Calculations. D - Fiscal Impact Analysis 23. The project does not have any impact on the Government operating budget (see para. 3.07 of main text.) The share of the project cost borne by the Government investment budget --including the Bank loan but excluding the VT tax-- is US$67.7 million. This investment cost represents only 0.4% of the projected Government's capital expenditures during the project duration. Because the project is part of the Government sector strategy, it will be financed through the MVT's regular resources and thus will not require additional budget outlays. 24. Furthermore, a significant portion of the project investment cost would be recovered by the Government budget through additional fiscal revenues: * whether the increase in the enterprises' value added generated by the project would accrue to the workers or the shareholders, it is fair to assume that about 25% of this incremental value added would return to the State through the income and corporate tax systems. -44- Annex 4 Page 11 of 12 * similarly, the reduction in job search time of VT graduates would generate additional taxable income, and thus fiscal revenues. * 60% of the resources generated by the centers of excellence from sales of training and counseling services to enterprises (Compte Hors Budget, CHB) are required to be reinvested in the training centers, and thus would reduce proportionately the centers' future dependency on public financing. 25. These benefits compensate to a large extent for the project's budgetary impact. Moreover, with adequate cost recovery policies the project has the potential to generate positive financial flows to the Government's budget. The investment under the third component of the project improves the quality and relevance of both the in-service and pre-service training programs of the centers of excellence. In-service training would operate on a full cost recovery basis, and based on the improved job prospects of the centers of excellence's students relative to students in "non-excellence" centers, the contribution of students to the cost of their education would be entirely justified. Based on flow of costs and benefits to the state mentioned in the above paragraphs, if only 25% of the average cost per student was recovered (about US$470 a year per student,) the cumulated financial benefits from increased tax revenues and cost- recovery would yield an IRR of 20% and a Net Present Value of US$14.5 million to the State. These calculations are detailed in table 8 below, and figure 4 shows the sensitivity of the returns to the State in relation with the rate of cost recovery. Assuming a discount rate for the State of 10%, Figure 4 shows that the Net Present Value of the Project becomes positive when only 15% of pre-service training costs are recovered. 26. In summary, because the project leverages substantial resources from the private sector, its impact on the Government capital expenditures is small and should be dealt with primarily through cost recovery. Table 8: Return to Government Expenditures (US$ 000's, 1994 prices) Year Capital Benefit 1 Benefit 2 Benefit 3 Cost-recovery Total Net Benef. Expenditures (CSF) (CHB) (Reduced Job Rate Benefits search time) (25%) 1997 9080 1,226 0 0 4,750 5,976 -3,104 1998 20149 2,980 180 100 4,750 8,010 -12,139 1999 17787 5,227 360 250 4,750 10,587 -7,199 2000 11663 5,227 600 750 4,750 11,327 -336 2001 6627 5,227 780 1,625 4,750 12,382 5,756 2002 2200 4,001 780 1,625 4,750 11,156 8,956 2003 2,248 780 1,625 4,750 9,403 9,403 2004 780 1,625 4,750 7,155 7,155 2005 780 1,625 4,750 7,155 7,155 2006 780 1,625 4,750 7,155 7,155 2007 780 1,625 4,750 7,155 7,155 2008 780 1,625 4,750 7,155 7,155 2009 780 1,625 4,750 7,155 7,155 2010 780 1,625 4,750 7,155 7,155 2011 780 1,625 4,750 7,155 7,155 IRR 20% NPV (10%) = 14,549 -45- Annex 4 Page 12 of 12 Relationship Between Govemment IRR and Cost Recovery Rate 90% 80% . . 70% -..: . 60% 50% - .>< ..4% -.- 30% - - -- ~ 20% - - -M- - - - - 10% . -.. -~ 0% 10% -10% 15% 2 5 % Cost Pecovery Rate -46- Annex 5 Page 1 of 1 PROJECT IMPLEMENTATION AND IMPACT KEY MONITORING INDICATORS A - Development Objective Indicators 1. Impact assessment of the project would be conducted in the context of the project is two major objectives: improve the skills of the workforce and increase enterprise competitiveness. The indicators which would be monitored are: (i) labor productivity (output per worker), (ii) value added per worker, (iii) improvement in real wages, and (iv) the percentage of firms that train by size of firms. Data would be collected through the studies described in Annex 3, and more recent baseline data would be established during the first year of the project when the first of the series of three surveys is undertaken. In addition, the economic analyses of Annex 4 would be updated following each survey, in order to monitor the flow of project benefits by estimating the increase in enterprises' value added resulting from the training activities financed by the project. B - Other Monitoring Indicators Indicator Baseline Target Value 96 2000/01 GIAC 1. Number of CNA realized 350 2. Percentage of MSIs among the beneficiaries - 20% CSF 3 Cumulative actual disbursement (in % of total) - 100% 4. Percentage of funding requests which concern the 0% 6% elaboration of a training plan 5. Share of planned training activities among total 7% 30% 6. Percentage of funding requests following a CNA 0% 5% C.E. 7. Number of Centers classified in each category (0,1,35) (17,19,0) (Excellence, III, II, see Annex 7 for definition) 8. Share of the proceeds from contracts (compte hors 3.4 14 budget) in Centers (36 centers) in millions of DH 9. Number of days of In-service Training 20,000 45,000 10. Number of workers enrolled in evening courses 5,600 7,000 (Centers of Excellence only) Annex 6 Page 1 of 3 Criteria for Ranking the Centers CRITERIA LEVEL 2 LEVEL 3 EXCELLENCE 1. Number of workers in the catchment area of the center 10,000 10,000 10,000 2. Turnover from in-service training contracts (excluding evening courses) DH70,000/year DH150,000/year DH300,000/year 3. Insertion rates of graduates 40% 50% 80% 4. Ratio of evening courses trainees to pre-service trainees. 0.15 0.3 0.5 5. Percentage of trainees in dual training programs. 15% 30% 50% 6. Existence of a technical capacity in curricula development Yes Yes Yes 7. Existence of a private sector steering committee Exists Exists Co-Manage 8. Number of workers/days in in-service training a year 500 1500 9. Percentage of trainers with more than 10 years of experience who have had a skill 100% 100% assessment 10. Percentage of trainers who have participated in the design and/or delivery of a 25% 50% training contract 11 The training programs, training streams, technical equipment and logistics of the Yes Yes Center have evolved as a result of technical assistance 12 Existence of a library Yes Yes 13 Percentage of non-salary expenditures financed by the Center's own resources 15% 30% 14 The Center has an inventory of its equipment Yes Yes 15 The Center has a repertory of associate qualified staff who can participate in Yes Yes training activities 16 Existence of a unit "contracts with enterprises" Yes Yes 17 Existence of a trainers' training plan Yes 18 All trainers whose professional skills were evaluated have a personalized training Yes plan. 19 Existence of a cost accounting system. Yes 20. The Center has the autonomy to develop its own training programs and manage its Yes own affairs (business). Only 3 criteria are required for Level 2. -48- Annex 6 Page 2 of 3 TIMETABLE FOR PROGRESSION TO EXCELLENCE Graduation N° CENTRES Present Progression to Centers Level to Level 3 of Excellence Date Date 1 Institut Supérieur de Technologie Appliquée Inter-Entreprises 3 1996 1997 2 Institut Supérieur de Gestion et d'Informatique 2 1997 1998 3 Institut Supérieur de Technologie Appliquée Maamora 2 1997 1999 4 Institut de Technologie Appliquée Rte Agoural (+CQP) 2 1998 2000 5 Institut des Métiers du Vêtement 2 1997 1999 6 Institut Supérieur de Technologie Appliquée de Ben M'Sik 2 1999 2001 7 Institut Supérieur Industriel de Casablanca 2 1997 1999 8 Institut Supérieur du Bâtiment 2 1999 2001 9 Institut Supérieur de Technologie Appliquée Hay Riad Rabat 2 1998 2000 10 Complexe de Formation de Settat 2 1998 2000 l1 Institut Supérieur des arts graphiques 2 1997 2000 12 Centre de Qualification Professionnelle Confection Tanger 2 - 7 1999 2000 13 Institut Supérieur de Technologie Appliquée Sidi Maafa 2 - 6 1999 2002 14 Institut Supérieur de Technologie Appliquée Salé 2 - 6 1998 2002 15 Institut Supérieur de Technologie Appliquée Gestion Rabat 2 - 6 1998 2002 16 Institut Supérieur de Technologie Appliquée Agadir 2 - 6 1998 2000 17 Institut de Technologie Appliquée Sidi Kacem 2 - 5 1997 2000 18 Complexe de Formation El Jadida 2 - 5 1998 2000 19 Institut de l'Habillement et du Textile 2 - 10 1999 2002 20 Institut des Techniques de l'habillement 2 - 8 1997 1999 21 Institut des Métiers du Cuir 2-8 1997 1999 22 Institut de Technologie Appliquée Hay Adarissa 2 - 6 1998 2001 23 Institut de Formation en Textile 2-6 1997 1999 24 Institut Supérieur de Technologie Appliquée Tanger 2 - 5 1998 2000 25 Institut Supérieur de Technologie Appliquée Rte Imouzer 2 - 5 1998 2001 26 Complexe Marrakech 2-5 1999 2001 27 Institut Supérieur de Technologie Appliquée Nador 2 - 5 1999 2001 28 Institut supérieur du Froid et du Génie Climatique 2 - 4 1999 2002 29 Institut Supérieur de Technologie Appliquée Saniat R'Mel 2 - 4 2000 2002 30 Centre de Qualification Professionnelle Hay Mohammadi 2 - 4 2000 2002 31 Institut Supérieur Industriel de Mohammédia N.C. 1999 2002 32 Institut de Technologie Appliquée Cuisine Restauration Casa N.C. 2000 2002 33 Institut de Technologie Appliquée Textile Tanger N.C. 2000 2002 34 Institut de Technologie Appliquée Confection Fes N.C. 2000 2002 35 Institut de Technologie Appliquée Cuisine Restauration Agadir N. C. 2000 2002 36 Institut de Technologie Appliquée Confection Rabat N.C. 2000 2002 -49- Annex 6 Page 3 of 3 TIMETABLE FOR PROGRESSION TO EXCELLENCE (Centers Financed by the Bank Loan) Graduation N° CENTRES Present Progression to Centers Level to Level 3 of Il _________ Excellence Date Date 1 Institut Supérieur de Gestion et d'Informatique 2 1997 1998 2 Institut Supérieur de Technologie Appliquée Maamora 2 1997 1999 3 Institut de Technologie Appliquée Rte Agoural 2 1998 2000 4 Institut Supérieur Industriel de Casablanca 2 1997 1999 5 Institut Supérieur du Bâtiment 2 1999 2001 6 Institut Supérieur de Technologie Appliquée Hay Riad Rabat 2 1998 2000 7 ISTA Settat 2 1998 2000 8 Institut Supérieur des arts graphiques 2 1997 2000 9 Institut Supérieur de Technologie Appliquée Salé 2 - 6 1998 2002 10 Institut Supérieur de Technologie Appliquée Agadir 2 - 6 1998 2000 ll ISTA AL Massira El Jadida 2-5 1998 2000 12 Institut Supérieur de Technologie Appliquée Tanger 2 - 5 1998 2000 13 Institut Supérieur de Technologie Appliquée Rte Imouzer 2 - 5 1998 2001 14 ISTA Marrakech II 2-5 1999 2001 15 Centre de Qualification Professionnelle Hay Mohammadi 2 - 4 2000 2001 -50- Annex 7 Page 1 of2 FIAC Flow of Funds 1. Payment by enterprise to consultants Reimbursement to Enterprise 6. 2. Submission by enterprise to GIAC of a reimbursement request for verification and approval 3. Submission to COD by GIAC for Payment to GIAC 5. validation 4. Transmission of disbursement request by COD representative to Bank for payment to GIAC - 51- Annex 7 Page 2 of 2 CSF Flow of Funds 1. Payment by enterprise to provider 2. Submission by enterprise to CTR of a reimbursement request for verification and approval Reimbursement to Enterprise 3. (:: m, 4. Submission to OFPPT for replenishment of special account Replenishment of special account 6. 5. Transmission of disbursement request by OFTTP representative to Bank for replenishment of ( :special account -52- Annex 8 Page 1 of I SELECTED INFORMATION IN THE PROJECT FILE I. Project Documentation World Bank/Kingdon of Morocco: Project Implementation Volume (in French) II. References Office de la Formation Professionnelle Etude d'Orientation et de D6veloppement de la et de la Promotion du Travail/ Formation Professionnelle (Novembre 1993) Groupement CIDE-Teccant/SENAI The World Bank Morocco in the Global Economy, 1995-2010 (A Background Note) The World Bank The Maghreb Countries and The European Union's (A Background Note) Mediterranean Initiative World Bankl995 Morocco: Education and Training for the Twenty- first Century World Bank 1995 Kingdom of Morocco. Country Economic Memorandum. Towards Higher Growth and Employment (Report No. 14155-MOR) World Bank 1995 Claiming the Future. Choosing Prosperity in the Middle East and North Africa World Bank 1994 Royaume du Maroc: D6penses publiques. Probl6matique et perspectives (Report No. 13413- MOR) World Bank 1994 Kingdom of Morocco: Costs, Financing and Efficiency of the Education System (Report No. 11937-MOR)