Transcript of meeting of the Executive Directors of the IBRD, held on Tuesday, October 7, 1980 : Argentina - Vocational Training and Technical Education Project

1 STRICTLY CONFIDENTIAL INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Tuesday, October 7, 1980 Washington, D. c. The meeting of the Executive Directors was convened at 10:00 a.rn. in the Board Room, 1818 H Street, N. w., Washington, D. c., Mr. Roberts. McNamara, Chairman, presiding. STRICTLY CONFIDENTIAL 2 C O N T E N T S ITEM PAGE  STRICTLY CONFIDENTIAL 3 P R O C E E D I N G S nm MR. McNAMARA: And we come then to the first project proposal, a proposed loan in the amount of $58 million equivalent to Argentina for a vocational training educational project. I'll ask Mr. von Loehneysen to present it to us. MR. VON LOEHNEYSEN: Mr. Chairman, Members of the Board: Argentina's industrial sector is undergoing far reachi structural reforms. The opening-up of the economy, removal of market distortions and implementation of more ration financ'al policies have dramatically changed the economic environment fo industry. Over the last four years, import tariffs declined STRICTLY CONFIDENTIAL 4 from an average 80 to 90 percent to about 35 to 40 percent. The Government plans to reduce them gradually to 20 percent by 1984. Tariff cuts combined with the exchange rate policy have encouraged imports which rose from 8 percent of GDP in the mid-1970s to 13 percent of GDP in 1979. The effects of the foreign sector policies have been exacerbated by the change from negative to positive rates of interest, preventing that Argentine firms avail themselves longer of subsidized credit. To compete successfully, Argentine producers now have to cut costs, increase efficiency and productivity, and rationalize production. Capital intensive, modernization investment has increase substantially. Moreover, the industrial sector is beginning to specialize in production lines with comparative advantage, nm,ving away from the over-diversified structure that was characteristic in the past. The ratio of industrial imports to outputs has increased sharply from 9 percent in the early , 1970s to now 25 percent of total industrial supply. Besides major involvement in the petroleum sector, foreign investment in Argentina now concentrates on manufacturing branches such as automobiles, pharmaceuticals, machinery and food processing. STRICTLY CONFIDENTIAL 5 The automobile industry is one of the best examples of the industrial restructuring process;of the 10 original firms, only four have survived which are now undertaking larg scale automation programs. The rapid changes in industrial structure and production methods set new ~equirements for skill and the skill forming process. New machinery and equipment, improved production organization and partial automation of production p»ocesses require substantial upgrading of present training levels. On the other hand, workers in branches that have only little prospects to keep pace with international competition will have to be retrained. The changes in the composition of the labor force are now beginning and will take full effect within the next five years. The present training system is insufficient to meet the challenge. While formal education is well developed and literacy is high, informal skill training is still at an incipient stage. Systematic training programs for key industrial branches are few and lack organized cooperation with industry. As a result, enterprises are forced to develop their own training programs at considerable cost and often STRICTLY CONFIDENTIAL 6 without professional guidance while most small firms are unable to afford any systematic training programs and are limited to basic on-the-job training. The situation outside Buenos Aires is particularly difficult; lack of qualified manpower has become one of the most serious impediments to industrial investment in the provinces. The development of modern training programs commensurate with the technological level the Argentine ! industrial sector needs to achieve is one of the key elementl I in reforming the education system. The proposed project would support the Government attempts to overcome these I deficiences. i Thank you, Mr. Chairman. I I MR. McNAMARA: Thank you, sir. May I have your questions and comments? Mr. Suh. MR. SUH: Thank you, Mr. Chairman. I am very pleased to support this project because especially because I am sure that it will contribute to the expansion of skilled labor and productivity increase. However, I noticed in the report that it took about 18 -- 28 months to prepare this project, which seems to be rather unusually long in a semi-industrialized countries like Argentina. I would appreciate knowing the reasons for STRICTLY CONFIDENTIAL 7 taking such a long time. Then I have a couple of queries about the high drop-out rates at mostly universities and technical schools. According to the reports, at university levels the drop-out rate is sometimes as high as 60 percent and the main reason given in the report is the university's lack of coordination with the secondary schools which produce inadequate prepara- tion for students. Does this mean that the 60 percent drop-outs are all the flunk outs? And it seems to be very difficult to see this -- the lack of coordination explains this high drop-out. In any case, I wonder in what way this project will help reducing this drop-out at the university level. Another question has to do with the high drop-out rate at technical schools, sometimes as high as 85 percent. The report gives as a main reason for the inadequate or unrealistic curricula -- curriculums and the report suggests that the private involvement -- private sector involvement at this level will improve the curriculum. It seems to me that it's also desirable to have a private sector involvement at a very high level of the CONET. So I'm wondering whether it's not desirable to STRICTLY CONFIDENTIAL 8 restore the function of the nine member Board of Directors at the CONET, which includes the representations of private sectors. Thank you. MR. McNAMARA: Yes. Mr. von Loehneysen, would you comment on these? First, why did it take 28 months to prepare? MR. VON LOEHNEYSEN: Yes, Mr. Chairman. I The fact that it took so long is an indication ..4.-' two things: Number one, initially the ideas of the Bank and the ideas of the Argentine institution, CONET, with which we are implementing the project, were quite 1 different. And it took us quite some time until we reached agreement on the scope and the objectives of the project. The second reason was that we took particular care in making sure that the technical assistance package in this project is well defined and is acceptable and adaptable by the institution CONET. And these two factors together led to intensive discussions which took, as indicated, 28 months. MR. McNAMARA: Secondly, what is really the cause of the high drop-out rate in universities? Is it primarily a function of lack of coordination with secondary STRICTLY CONFIDENTIAL 9 schools and will the project address that issue? MR. VON LOEHNEYSEN: I would like to ask Mr. Apergi to answer this question. MR. McNAMARA: Surely. Mr. Apergis, what is the cause of the high drop-out rate in the universities? Is it related to lack of coordina- tion with the curriculum in secondary schools? Will the project assist in reducing it? MR. APERGIS: Yes. From what we were able to find in the appraisal part of the region is this lack of coordination. Another part are the economic difficulties which Argentina faced for about five years recently, and this caused many students to discontinue their studies and enter the labor market. On the other hand, the project would not address this issue because it is heavily concentrated in the area of vocational training, which is not immediately connected with formal education, either at the secondary or the university level. MR. McNAMARA: Then address the high drop-out rate at the technical schools. Why is it so high and reportedly at 85 percent? And would restoring the nine member Board of Directors, including private sector participation in it, STRICTLY CONFIDENTIAL 10 provide a more adequate supervision of the technical schools? MR. APERGIS: An important reason for the very high drop-out rate is that technical secondary education is essentially -- substantially cut into two pieces, the first cycle of three years and the second cycle of three years. So what we see as a drop-out rate in the unified six-year study is actually young people at about the age of 15 who abandon their studies and enter the labor market. So it's an apparent drop-out because students do not see secondary technical education as a unified education module that they have to cross from the first to the sixth grade. MR. McNAMARA: Well, presumably it leaves them with an inadequate skill for the labor market, and which is what Mr. Suh is concerned about. MR. APERGIS: Yes, absolutely. Even the people who finish the entire six years of secondary technial education also have deficiencies for the level they reach, which is the middle technician level. MR. McNAMARA: And, therefore, he asked: Would not more private sector supervision of that kind of a set of institutions improve it, such as restoration of the nine member Board of Directors and participation of the private sector? STRICTLY CONFIDENTIAL 11 MR. APERGIS: Yes, we think it would, but at this time it is simply not feasible institutionally. The Board I of Directors has been suspended and there is just one I representative of the Government there who makes the decisions\. There is some consultation on the part of the private sector, but not decision-making power. MR. McNAMARA: Thank you. Mr. Zaman. MR. SYEDUZ-ZAMAN: Thank you, Mr. Chairman. While we fully support this project, I would like to make one or two general observations on the Bank's policy regarding financing of technical education projects. What we notice is that at one end of the spectrum we have technical education projects in low-income countries, where the major objective is to develop human resources to enable people to receive better employment, at the same time I I to meet the needs of development programs, which create demandf for technical and skilled labor and workers. Then in the case of middle-income countries, we ! I have seen the Bank has financed projects to create high level trained technicians, not only to increase supply of trained people but also to help in improving quality. I have in mind here, Mr. Chairman, the case of Korea, the Korean technical education project which this Board approved about six months STRICTLY CONFIDENTIAL 12 back which is an excellent project. But this case of Argentina is somewhat more complex. It addresses several areas. Of course, one of the objectives is to increase supply of middle and high level trained technicians, but also to retrain labor and to help in labor mobility in view I i of the structural change that is taking place in the Argentin~ I industry, at the same time strengthening the institutional I I ! capacity for better planning in this field in the future. In both the cases, the Korean case and the Argentine case, the major beneficiary of this projects will be, of course, the private sector, though ultimately to help in retaining the competitiveness of the industries of these two countries. The reference that I note in these two cases, Mr. Chairman, is in the financing of the projects. I remember that in the case of the Korean project, which was a very large project -- I think if I recall correctly it was a $700 million project -- where the private sector was called upon to finance about 25 percent of the capital cost of the project. And as regards recurring cost, the entire cost was being recovered to higher fees, higher education fees, high tuition fees. STRICTLY CONFIDENTIAL 13 In the case of the Argentine project, we find no mention of the capital costs being passed over the private sector, though the private sectors were major beneficiary. It would be interesting to know whether this possibility was at all considered and why it was decided not to follow the Korean example. As regards the recurring costs, also here we notice 1 I I in the President's report that there has been some discussion~ I i with the government about a possible payroll tax on some industries, but no definite direction has been given and no agreement has been reached on this. We would like to have a little more light on this aspect of the project. And, finally, Mr. Chairman, we are happy to note that the cost of consultants for this project is only about $6,000 a month, which is quite modest compared to the numbers that you had in recent months. It would be interesting to know whether these consultants would be Argentine consultants or expatriates from other countries. Thank you. MR. McNAMARA: Yes. Let's take the last question first and then I will ask Mr. Lerdau or others to comment on the first two questions. Mr. von Loehneysen, are the consultants at $6,000 STRICTLY CONFIDENTIAL 14 a month Argentine consultants or expatriates? MR. VON LOEHNEYSEN: We expect to have a mix of foreign consultants and Argentine consultants. And what the precise percentage will be we only can see after having looked for the consultants and got quotations, but we expect that there will be a mix. And this also explains the figure of $6,000. MR. McNA..."iARA: Yes, very good. Mr. Lerdau, would you comment on the other two questions: Why no private sector financing? MR. LERDAU: Well, Mr. Chairman, I would like to give a general answer and then turn it over to my colleagues for a more specific one. The context, of course, in Argentina right now is that the private sector is very hard pressed through -- by this process of structural adjustment, which the govern- I I ment has undertaken and which we are supporting among other -r I I in several ways, including this project. The private sector is taxed heavily and at the same time, of course, it's precisely the opening up of the economy, the reduction in not only tariff barriers but also other restrictions of trade with an attempt to make the economy more competitive, to make the industrial sector STRICTLY CONFIDENTIAL 15 particularly more competitive. Well, there are serious problems in the industrial sector right now. It did simply not seem an appropriate moment to add to the burdens on the sector. I wouldn't rule it out in future programs in Argenti a of this kind. Now, there may have been additional points MR. VON LOEHNEYSEN: Yes. The question in financial terms looks as follows: Currently, the private sector is financing about 15 to 20 percent of the financial budget of the institution CONET through the 1 percent payroll tax. Considering that CONET is mostly training people in formal secondary technical education, which is not directly related to industry but is a branch of secondary formal education, the financial participation of the private sector looks quite different because at the present time only 4 percent of the budget of CONET is being spent for direct vocational training, whereas as I was saying the private sector finances some 15 to 20 percent of the total budget I of CONET. I so right now the financial percentage of the privatt sector is much larger than the direct return it gets from I this institution. And with this project we are getting somewhat more of a balance within the institution, also STRICTLY CONFIDENTIAL 16 financially returns and financing of the private sector. MR. McNAMARA: With this project appropriate amortization of the capital and recurring costs, what would the percentage of CONET's budget devoted to direct assistance of the private sector amount to, compared to the 4 percent you mentioned? MR. VON LOEHNEYSEN: Well, we estimate that the recurrent cost of the project would increase by something it would increase CONET's budget by something like 10 percent No? MR. APERGIS: Seven percent. MR. VON LOEHNEYSEN: Seven percent. So even considering the situation after the implementation of the project, the private sector in vocational training still finances more than it gets. MR. McNAMARA: Very well. Are there other comments or questions on this? Mr. Looijen. MR. LOOIJEN: Mr. Chairman, I do welcome this project. It's the first time after a very long experience of the Bank in Argentina that we are venturing into the education sector and that ultimately it will be a success and will help Argentina. STRICTLY CONFIDENTIAL 17 I've got just one more general question as to ,e.s page Roman II. We see there that the price contingen~ this time are 44 percent and later on we get a Liberian project where it's just 3 percent, and I'm always puzzled by the large differences in price contingencies between the different kind of projects. But it's 44 -- it's extremely high in a project like this. MR. McNAMARA: Mr. Baum, would you comment? MR. BAUM: The principal fact accounting for differences like that is the length of the project period. The Liberian project has a very short life to it, because essentially of technical assistance project preparation of some studies. This is a training project which has a i much longer disbursement period. Therefore, the contingencie~ I accumulate over a much longer period of time. MR. LOOIJEN: Mr. Chairman, the period is five years, which is quite normal. So it should be 30 percent, more or less like in other projects, I think. MR. McNAMARA: We will be happy to prepare a note on that showing the details of the calculation which show both Liberia and the Argentine and send it to Mr. Looijen and anybody else who wants a copy can have it. These contingency allowances are monitored quite carefully, and they are based upon Bank-wide inflation rates STRICTLY CONFIDENTIAL 18 that are used except where there are certain circumstances that cause deviation from it. Mr. Stern? MR. STERN: Well, I just -- what Mr. Baum said, I think, is the answer. If you look at the Liberia project, which is several projects ahead yet, total disbursements are estimated to occur virtually entirely in the first year; 4. 2 'fi" fl\ ~illion out of 5 )i:lillion is expected to be disbursed in ,,,,-j_,I , one year. There is a tail end of 600,000 the second year and virtually nothing in the third year. So the only price contingency involved in Liberia is what happens in the next nine months, which is quite different from the Argentine case. MR. McNAMARA: In any case, we will prepare a brief note and we will send it to Mr. Looijen. He can look at it. If he wishes to bring the matter back to the Board, we will be happy to have it. Mr. Looijen? MR. LOOIJEN: Mr. Chairman, that perhaps is a better comparison to the Egyptian project where it's really much less. MR. McNAMARA: Well, I think the real question -- the real question -- STRICTLY CONFIDENTIAL 19 MR. LOOIJEN: And it is the same education and the same time period. MR. McNAMARA: I think the real question is why 44 here, and we will be happy to show you the calculation of the contingency.