Morocco - Second Vocational Training Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. P-4424-MOR REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$22.3 MILLION TO THE KINGDOM OF MOROCCO FOR A SECOND VOCATIONAL TRAINING PROJECT December 15, 1986 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  CURRENCY EQUIVALENTS Average Calendar 1985 April, 1986 Currency Unit Dirhams (DH) 1 Dirham (DH) = US$0.09938 0.110 1 US Dollar (US$) = DH 10.0625 9.15 FISCAL YEAR January 1 - December 31 GLOSSARY OF ABBREVIATIONS IAT - Institute of Applied Technology MEA - Ministry of Economic Affairs MOE - Ministry of Education MOF - Ministry of Finance MOL - Ministry of Labor MOP - Ministry of Planning MPW - Ministry of Public Works, Vocational Training and Staff Training TA - Technical Assistance VTA - Vocational Training Administration VTC - Vocational Training Center  FOR OFFICIAL USE ONLY KINGDOM OF MOROCCO SECOND VOCATIONAL TRADINIG PROJECT Loan and Project Summary Borrower: The Kingdom of Morocco. Beneficiaries: The Office of Vocational Training and Employment Promotion (the Office) and the Vocational Training Administration (VTA). Amount: US$22.3 million equivalent. Terms: Twenty years, including five years of grace at the current variable interest rate. US$21.3 million equivalent of the Bank loan would be made available by the Borrower to the Office, on a grant basis. The remaining US$1.0 million would be provided in support of the VTA. The Government would bear the foreign exchange and interest rate risks on the Bank loan. Project Description: The objectives of the proposed project are to (i) improve the quality of vocational training; and (ii) reduce vocational training costs. The project would address these objectives by (i) improving instructor training; (ii) upgrading training programs; (iii) implementing measures to enhance cost recovery; (iv) improving the Office's efficiency; and (v) technical assistance and studies. Benefits and risks: The major benefits of this project are expected to be: an increase in the supply and quality of workers urgently needed in the Moroccan economy and more employment opportunities for lower income groups and females due to improvements in training programs and greater efficiency. The single identifiable risk associated with the project is that implementation could be slowed by budgetary shortages in the context of the Government's current fiscal austerity program. The Government has, however, made a firm commitment that the necessary funding will be provided, and is planning cost recovery measures which will offset Office recurrent expenditures by 1990. Significantly, Government funding for the First Vocational Training Project has been sufficient and timely. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  - (ii) * (US$ million) Estimated Project Costs: 1 Local Foreign Total 1. Vocational Training Administration (VTA) - Furniture and Equipment - 0.2 0.2 - Technical assistance 0.3 0.6 0.9 (incl. studies) Sub-total 0.3 0.8 1.1 2. Office of Vocational Training and Employment Promotion (Office) - Construction and Professional 1.7 1.5 3.2 Services (minor extensions at existing VTCs and IATs) - Furniture and Equipment 1.9 12.5 14.4 - Technical Assistance 0.3 2.0 2.3 (incl. local training & studies) Sub-total 3.9 16.0 19.9 Total base cost 4.2 16.8 21.0 Physical contingencies 0.5 1.7 2.2 Price contingencies 1.0 3.8 4.8 TOTAL PROJECT COSTS 5.7 22.3 28.0 Financing Plan: Bank - 22.3 22.3 Government 5.7 - 5.7 TOTAL 5.7 22.3 28.0 Estimated Disbursements: US$ million Bank Fiscal Year FY 87 FY 88 FY 89 FY 90 FY 91 FY 92 FY 93 Annual - 1.3 4.3 12.5 3.4 0.6 0.2 Cumulative - 1.3 5.6 18.1 21.5 22.1 22.3 Staff Appraisal Report: Report No. 6345-MOR, dated December 15, 1986. Map!R: Kingdom of Morocco, IBRD 19859. Economic Rate of Return: Not applicable. 1/ Excluding taxes and duties.  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$22.3 MILLION TO THE KINGDOM OF MOROCCO FOR A SECOND VOCATIONAL TRAINING PROJECT 1. I submit the following report and recommendation on a proposed loan to the Kingdom of Morocco, for the equivalent of US$22.3 million to help finance the Second Vocational Training Project. The proposed loan would have a term of 20 years, including 5 years of grace, at the standard variable interest rate. PART I - THE ECONOMY1' 2. An economic report, entitled "Morocco: Priorities for Public Sector Investment (1981-85)" (No. 4156-MOR), was issued on June 15, 1983. Another economic report entitled "Morocco: Industrial Incentives and Export Promotion" (No. 4893-MOR) was distributed to the Board on January 11, 1984. An economic mission on financial intermediation was in Morocco in September 1983 and its report (No. 4957-MOR) was issued on December 12, 1984. The following section reflects the findings of an economic updating mission that went to Morocco in July 1984 to prepare a paper, entitled "Morocco: Medium-term Adjustment Policies and Prospects", for presentation to a meeting of the Consultative Group for Morocco in Paris on January 9-11, 1985. Data and analysis have been updated to reflect the recent mission reviewing progress on policy adjustment loans, analyzing Public Resource Mobilization (report in preparation), and analyzing medium-term prospects for a forthcoming CEM. Country data are given in Annex I. Introduction 3. During nearly two decades after Independence in 1956, Morocco followed relatively conservative economic policies. Cautious external borrowings supplemented a weak savings effort to permit only a slow rise in investment, so that the economy grew only at about 4 percent per annum. Primary products - principally phosphates - accounted for 90 percent of merchandise exports. During the mid-1970s, after a sudden increase in phosphate prices, Morocco launched an ambitious public investment program which boosted GDP growth to 7.5 percent annually during the period 1973-77. 1/ Part I is an updated version of that presented in in the Sixth Agricultural Credit Project (Report No. P-4347-MOR of June 3, 1986). A new CEM is expected to be circulated shortly, in preparation for the Consultative Group on Morocco scheduled to be held in early February 1987.  The phosphate boom, however, began subsiding as early as mid-1975. Meanwhile, the petroleum import bill, which had quadrupled in 1974, continued to place considerable pressure on the balance of payments, and the current account deficit reached 16.5 percent of GDP in 1977. Domestically, the large public investment program and increased defense expenditures in the Western Sahara caused the treasury deficit to rise to 15.8 percent of GDP in 1977. Morocco resorted to considerable foreign borrowings to finance these deficits. 4. To redress the rapidly deteriorating financial situation, the Moroccan Government introduced a three-year stabilization program in 1978 centered on reductions in public sector outlays and stricter import controls. These reforms were only partially successful. They did little to stimulate exports. The exchange rate was kept overvalued and trade barriers were raised. They did not adequately tackle the ex,cessive budgetary exposure and made inadequate attempts to increase the efficiency of resource use. The agricultural sector failed to grow, while value-added in manufacturing declined. Meanwhile, public investment was not restrained; a number of costly, poorly-targeted social programs was expanded and investment in infrastructure was undertaken often well ahead of need. Efforts to stabilize the economy were compromised by severe external shocks - most notably the 1979 oil price increase, the rise in international interest rates, the international recession which reduced phosphate earnings and workers' remittances, and the prolonged *drought. Continued internal pressure to provide social services and affordable basic foodstuffs to a rapidly growing population put considerable strains on a budget already stretched by the need to finance expenditures in the Sahara. The 1981-85 Development Plan aimed at an ambitious 6.5 percent per annum growth rate in GDP. Notwithstanding the difficulties confronting the economy, Morocco did not appear willing to introduce a comprehensive program of policy measures which could have confronted the economic crisis. The shortcomings in the adjustment performance caused the IMF to convert a three-year EFF into a one-year Stand By Arrangement in 1982 and prevented the Bank Erom proceeding with a SAL at that time. Recent Economic Developments 5. By 1983 it had become clear thai: the Government's room to maneuver was becoming very restricted by,debt service payment requirements. In 1982 external public long-term debt (excluding military debt) had risen to about two-thirds of GDP and 235 percent of exports of goods and services while the debt service ratio reached 35 percent. Morocco was confronted with the prospect of a very large external payments gap for 1983. With exchange reserves virtually depleted and debt service rising, the Government imposed emergency import controls and budgetary cutbacks in early 1983. In November 1983 the Government entered into an 18-month standby arrangement with the IMF (SDR 300 million, or 98 percent of quota) supporting a stabilization program which included fiscal and credit restraints and a flexible exchange rate policy. Shortly thereafter, official creditors agreed to reschedule external debt interest and principal payments coming due between September 1, 1983 and December 1984, as well as arrears as of August 31, 1983. Commercial bank  -3- creditors agreed in principle to provide comparable relief on amortization. The total amount of debt relief obtained in 1983-84 under these agreements was estimated at more than $2 billion (including $575 million of relief on military debt). In November 1983, a Donors' meeting sponsored by the IMF, generated pledges of about $500 million of exceptional balance-of-payments assistance for 1983-84. To meet its fiscal targets the Government restricted public service recruitment and salary increases, raised the prices of electricity, water, petroleum products and subsidized foodstuffs (by between 17 percent and 60 percent), and cut capital outlays by one third. At the same time, it began a significant adjustment effort supported by the Bank program, along with the January 1984 ITPA I (No. P-3707-MOR), to improve its balance of payments situation with a package of measures to restructure its trade regime. This included a reduction in import taxation, an easing of quantitative restrictions, and a reduction in export licensing. Following a Financial Sector Study conducted by the Bank in 1984 (No. 4957-MOR), the Government extended these reforms to the Financial Sector with the objective of raising domestic resources and improving resource allocation. Greater flexibility was introduced in setting interest rates, measures were designed to increase competition among banks, and taxation reforms to benefit the financial sector were implemented. 6. As a result of the policies adopted since 1983, macroeconomic balances improved. The economy's resource gap shrank from 13 percent of GDP in 1982 to 7 percent in 1985 (at constant 1980 prices). This was achieved through a significant decline in the GDP share of consumption and investment relative to their high levels earlier in the 1980s. Meanwhile, import growth has been restrained by appropriate demand management and by the depreciation of the exchange rate, while the share of exports and gross domestic savings increased substantially. The Government budget deficit was reduced from 13 percent of GDP in 1982 to about 9 percent in 1985 (10 percent before taking into account the impact of external debt rescheduling on interest payments). Although the improvement stemmed chiefly from a sharp reduction in investment outlays, there was also a significant slowing down in the rate of growth of current expenditures. As was to be expected, the rate of GDP growth has been low (a little over 2 percent p.a.), reflecting the impact of stabilization policies on consumption and investment demand, along with the effect of drought on agricultural sector incomes in both 1983 and 1984. A good harvest has helped boost the growth rate to about 4.3 percent in 1985 and an estimated 5.7% in 1986. 7. The current account of the balance of payments improved considerably, reflecting both the better resource balance of the economy and the impact of the debt relief obtained by Morocco from its official creditors on interest and military debt service payments. In 1983, the external current account deficit was reduced by half, from $1.9 billion and 12.7 percent of GDP in 1982 to $873 million and 6.6 percent of GDP. The balance subsequently worsened in 1984, particularly in relation to GDP, but still remained under $1 billion. In both 1983 and 1984, about half of the roughly $1 billion improvement in the current account in relation to 1982 was attributable to debt relief. '' The net inflow of public medium and long-term capital (including grants) has  -4- declined sharply from about $1.5 billion in 1982 to an average of only $600 million during 1983-1984. In 1985, the net inflow fell to about $400 million, despite an exceptional $300 million grant from Saudi Arabia. These inflows had to be supplemented by continued debt relief along the lines of the 1983-84 debt rescheduling, and demand management policies to keep import growth under control. 8. A stand-by arrangement with the IMF was approved on September 13, 1985. A formal debt rescheduling through the Paris Club covering maturities from September 1985 to February 1987 were agreed on September 17, 1985. Ninety-five percent of the total debt due were rescheduled along lines similar to those obtained under the 1983-84 debt relief arrangement. The 1983-84 rescheduling agreement between Morocco and the commercial banks was signed, after long delays, on October 21, 1985. As a result of slippages in meeting performance criteria, however, the IMF stand-by arrangement was declared inoperative. The Government has since recognized that stronger corrective measures would be needed to keep the stabilization program on course including, in particular, restraining current expenditures and reducing subsidies on foodstuffs and public services. A new standby for December 1986 to February 1988 has been negotiated and is now in effect. The implementation of a new stabilization program attendant on gains from the Bank-supported program of sectoral adjustment and favorable external developments should enable Morocco to achieve a balance on its currenit account by 1987. Medum Term Policies and Prospect 9. Since 1983, the Government's objective of achieving viable external and fiscal positions along with satisfactory growth has been translated into aL coherent medium-term strategy to restrain domesl:ic absorption and increase the efficiency of resource allocation throughout the economy. The principal elements of Morocco's medium-term adjustment program involve a shift to outward-looking trade and exchange rate policies; far-reaching reforms of price, credit, tax and regulatory policies to remove institutional and other obstacles to efficient mobilization and use of resources in key productive sectors of the economy; considerable improvements in the efficiency of government investment; more cost-effective methods and better targetting of social programs; and a thorough overhaul of the public enterprise sector. 10. The shift to an outward-oriented development strategy is the cornerstone of Morocco's medium-term adjustment program. Continued adjustments in trade and exchange rate policies will be made to complete the reform of the overall incentive framework designed to accelerate export growth and reduce and rationalize import protection. Key instruments are to be a flexible exchange rate, the reduction and gradual elimination of the special import tax; a general reform of the tariff level and structure, with the objective of reducing the overall level of protection to 25 percent through 1/ Over $200 million in interest payments wvere rescheduled in each of the two years. In addition, the current account balance benefitted from military debt relief in the amount of $325 million in 1983 and $250 million in 1984.  -5- decreasing maximum duty rates and evening out the spread in tariff rates within and between sectors; and finally, a phasing out of quantitative restrictions on imports. Domestic price controls, which were already removed in 1983-84 on many manufactured products, are planned to be fully eliminated, in parallel with progress in import liberalization. Remaining export licensing requirements will be abolished, with exporters to be entitled to import all inputs on a duty-free basis. 11. At the same time, appropriate sector strategies for the key productive sectors, particularly agriculture and industry, will be promoted. In industry, although the development of Morocco's potential for export of phosphate fertilizers will continue to be an important objective, the contribution of this highly capital-intensive sector to employment and to the establishment of a broader industrial base through forward and backward linkages will remain limited. Moreover, a high degree of dependence on phosphate and phosphate fertilizer exports has made Morocco extremely vulnerable to cyclical fluctuations in the volatile world phosphate market. For this reason, the industrial strategy must be based on the diversification of manufactured exports, including processed foods and nontraditional manufactures where Morocco may have a comparative advantage on world markets. In agriculture, Morocco needs to continue developing an appropriate package of policies designed to overcome existing constraints to rational iland use patterns, to ensure that farmers have adequate incentives to improve farming techniques and use modern inputs, and to provide the support servi;ces needed to bring about these changes. A first Agricultural Sector Adjustment Loan (No. P-4032-MOR) supporting such policy direction was extended by the Bank in June 1985. 12. The low productivity of investment has been one of the major factors in the poor performance of the Moroccan economy in the past ten years. The allocation of capital and the efficiency of investment need to be improved considerably both in the public and in the private sector. In the private sector, the reform of the protection framework described above should go a long way towards removing distortions in investment patterns. However, it will also be necessary to review the bias in favor of capital-intensive activities inherent in the current investment incentive system, including tax exemptions and interest rate subsidies which artificially depress the cost of capital. In the public sector, increasing the efficiency of invqstment will require a considerable improvement of existing planning and, budgeting mechanisms, including better procedures for setting investment priorities, strengthening of project preparation and monitoring capability, and placing more emphasis on the economic evaluation of projects before they receive Government sanction. Policy actions to improve the public investment and enterprise framework as well as continuing reform of trade policy and a comprehensive approach to financial sector reform are supported by the Bank's second Industrial and Trade Policy Adjustment loan approved in July 1985. After some delays, the Government completed the agreed reforms, and the second tranche of this loan was released on October 29, 1986. 13. An exceptionally strong savings effort will be essential for the success of Morocco's adjustment process. In the private sector financial  -6- savings have been repressed in the past due to inadequate financial policies and negative real interest rates. Savings are now being encouraged through increases in deposit rates and a program of financial sector reforms to improve financial intermediation and develop the domestic money and capital markets. But the most intense savings efforts in the next few years will have to take place in the public sector, which continues to be a major source of dissaving, particularly through the Government budget. In the medium term, sustained improvement in the mobilization and utilization of resources by the public sector will require fundamental reforms in a number of key areas, including social expenditure policies, taxation, and cost recovery and efficiency in the public enterprise sector. In the social sectors, where coverage of the population is still inadequate, Government activities need to be restructured so that basic services (particularly education and health) can be delivered more effectively but at substantially lower cost. More cost-effective methods and better targeting will lbe prerequisites to a further broadening of access to these services in the future. Food and other subsidies also need to be targeted to the groups most in need rather than directed to the general population. 14. Macroeconomic projections based on the Government's reform programs indicate that it may take the better part of the next ten years for Morocco to complete its adjustment process. The growith of the economy is likely to be severely constrained in the early years of the adjustment process. However, as the restructuring measures designed to promote exports, improve resource use and increase domestic savings begin to work their effects through the economy, the external imbalance should lessen, and restraints on domestic demand could gradually be relaxed. Moreover, the growth of external demand expected to result from the trade liberalization and export promotion policies, and the switch in the composition of domestic demand from imported to domestic goods, fostered by the adjustment of relative prices, should help mitigate the temporary negative impact of slower public expenditure growth on incomes and employment. 15. The projections suggest that GDP growth is likely not to exceed 4.3% p.a. until 1990, gradually rising accelerating thereafter. Domestic demand is expected to grow very slowly until 1990, reflecting the impact of stabilization policies on both investment and consumption. Investment, which has been declining since 1978, should stabilize in real terms and in relation to GDP until about 1991, then recover strongly thereafter. Assuming that central government investment expenditures would remain constant in real terms in the medium term, the adjustments would occur primarily in the public enterpises and private sectors. Government consumption, which had grown very rapidly until recently, is projected to decline narginally in real terms and to drop by 3 percentage points in relation to GDP between 1985 and 1990. The growth of private consumption, which already slowed significantly in the early 1980s, would remain just above that of GDP in 1985-90, and decline only slightly in the 1990s. Restructuring policies should bring about an acceleration in the growth of exports of goods and nonfactor services. The acceleration of export growth would help sustain a modest recovery of imports, the overall trend of which has been downward since 1978. Imports, however, should rise much more slowly than exports between 1985 and 1990, as a result of the demand restraint and expenditure switching policies.  16. As a result of the drop in the GDP share of both investment and consumption, there should be a steady decline in the economy's resource gap. Gross domestic savings are expected to rise much faster than GDP throughout the period, initially as a result of improved savings mobilization by the public sector, and later reflecting continued substantial improvements in private savings as well. The marginal savings rate with respect to GNP will need to be relatively high (about 33 percent) in 1985-90, as a necessary., concomitant to reducing the external deficit; it should slacken slightly thereafter. High domestic savings should enable the economy to finance the recovery of investment without recourse to external savings in the early 1990s. This will be essential, since., throughout the remainder of the 1980s, the balance of payments will remain under considerable pressure because of continuing high debt service payments. By the end of the decade, reforms of the overall economic incentive framework and increased efficiency of public investment should have raised the productivity of new investment considerably, and the ICOR should drop substantially from the high levels prevailing in the early 1980s. 17. It is important to recognize that the implementation of the stabilization policies and measures for structural adjustment envisaged in this scenario will entail some transitional social costs. With population growth at about 2.5 percent p.a., GNP and consumption per capita, which have been essentially stagnant since 1980, are not likely to show much improvement in real terms until the end of the present decade. Stabilization policies and measures to increase efficiency will initially be reflected to some extent in depressed domestic demand, increased unemployment, and some decline in real incomes, particularly the real income of urban populations, Government employees, and workers in less competitive industries. On the other hand, the real income of farmers, who constitute by far the poorest segment of the population, should rise as a result of increases in agricultural producer prices and improvements in support services and marketing institutions and infrastructure. This will be particularly true of farmers in rainfed areas. The political and social, implications of these welfare shifts are likely to be significant, and to keep them manageable will be a major concern of the Government in the next few years. While the cost of not undertaking the required economic adjustments would in any case be greater in the long run, it will be important to minimize the negative short-term impact of these adjustments on the poprest groups. After 1990, as a result of the reforms undertaken in the 1980s, the economy could return gradually to a higher growth path without endangering external equilibrium. Per capita levels of income and consumption could begin to rise again, and the restoration of economic dynamism would greatly improve Morocco's ability to deal with its serious unemployment problem. 18. A steady improvement in Morocco's external payments position should result from the acceleration of export growth relative to import growth anticipated in 1986-90. The economy's negative resource balance, which averaged more than $2 billion in 1980-82, and dropped to $1.2-1.3 billion in 1983-84, is projected to decline steadily until 1990 and increase slowly thereafter. Assuming that the growth of workers' remittances can be sustained at a modest pace, the current account should improve roughly in parallel with  -8- the overall resource balance and could reach equilibrium around 1987. However, the overall balance of payments can bet expected to continue to show large deficits because of the heavy principal repayments coming due on the external debt, including substantial repayments to the IMF. Because of mounting debt service obligations, gross public long-term capital requirements are projected to average close to US$2.3 billion annually during the period 1986-90. 19. It is clear, under these circumstances, that Morocco will continue to require debt relief for several more years. The projections include the effects of the recently concluded 1985-87 debt rescheduling agreement through the Paris Club, and assume debt relief from private creditors during 1985-87, essentially along the lines of the debt reschedulings obtained in 1983-84. In addition, the model assumes additional rescheduling in 1988 but only on civilian debt.-" Normal public long-term capital inflows could be barely sufficient to cover the remaining financing requirements in 1986-88 (about US$1.1 billion annually), assuming that new loaLn commitments from Morocco's official lenders can be maintained at their current rate (about US$800 million a year). Recourse to commercial bank financing, outside of these guaranteed programs, is likely to remain constrained and gross private capital flows are expected to average about US$100-150 million per annum, probably strongly conditioned on, Jif not directly tied to, specific adjustment programs. In 1987, a financing gap of approximately US$500 million corresponding to short-term arrears (which is expected to be reduced to about $400 million at the end of the year) will be met through rescheduling. 20. In view of the continuing large capital inflows required in the next few years, the long-term external debt outstanding and disbursed would continue to rise until 1992, but would begin to stabilize thereafter. The ratio of debt outstanding and disbursed to exports of goods and services, which had risen to 268 percent in 1984, would start to decline, progressively dropping to 173 percent by 1990 and 79 percent by 1995. In the absence of debt rescheduling, the long-term debt service ratio would have risen to 57 and 74 percent of exports of goods and services in 1985 and 1986, respectively. With debt relief obtained for the period 1985-87, on the other hand, the debt service ratio could be kept at about 40 percent. Assuming no further debt relief, it would rise sharply in 1989, with repayments on the 1983-84 rescheduled maturities (including military debt) falling due, but would then start declining-gradually in the 1990s. 21. Given this difficult debt situation, Morocco's commitment to an aggressive program of structural adjustment is eissential for the country to be considered creditworthy for continued Bank lending. Bank exposure amounted to 11X of total debt outstanding in 1985, and approximately 12Z in 1986, and would increase to about 20% in 1990. 1/ About US$206 million and US$174 million of military debt service payments coming due in 1986 and 1987, respectively, are assumed to be rescheduled along the same lines as other obligations.  PART H - OTHER BANK GROUP OPERATIONS IN MOROCCO 22. Bank Group lending to Morocco, in support of 70 projects, has totalled US$3013.4 million (net of cancellations) of which US$25 million were from a third window loan. US$2,534.3 million are currently outstanding, of which US$1,433.5 million are disbursed. These figures include IDA credits, totalling US$45.2 million, which were made available for five projects until 1975.5 million. Total IFC investments amount to US$94.5 million in 12 operations (US$90.4 million after cancellations, terminations, repayments and sales). Annex II contains a suimmary statement of Bank Group operations as of September 30, 1986. 23. In recent years, project implementation experience has been mixed. While technical and management constraints within many project entities have been overcome, shortages of budget funds since 1983, have hampered the performance of those entities which rely on the Government budget for part of their project financial requirements. Insufficient budgetary provisions pertain both to investment and current Government expenditures. Combined with rigidities in pricing policy, these shortfalls have contributed to disappointing financial performance of project entities through a build-up of arrears to private contractors and to public enterprises. Disbursement results have largely reflected the above conditions, as well as the fact that for much of the period 1984-86, appreciation of the Dollar vis-a-vis the Dirham reduced project costs and therefore reimbursable expenditures in dollar terms. To alleviate budgetary constraints and improve project implementation, Special Action Program (SAP) provisions were applied to 15 Morocco loans during this period. This contributed to improving the ratio of actual disbursements to appraisal estimates from an average of about 43% in 1984, to 54.3X in March, 1986 - close to EMENA Region averages. In FY86, total Bank disbursements to Morocco were US$375.0 million, while repayments were the equivalent of US$103.0 million. 24. The Government's constrained resource position has led to the postponement of preparation of a new Development Plan. Budget constraints have limited investment expenditures esentially to the completion of ongoing investments. In these circumstances, the Government's development strategy has been modified to concentrate on policy reforms in major economic sectors aimed at the transformation of the economy into a more efficient producer of goods and services and with greater participation in international trade and more reliance on the private sector. Reforms have been introduced in the Financial, Industrial and Trade regimes so as to improve resource use, change incentives to realize the potential for export development and to promote private and public savings. The Agricultural sector is being modernized through a restructuring of the investment program and a re-orientation of prices and incentives: support and delivery systems are being strengthened and the capacity for sector planning, policy analysis and execution reinforced. The Education system is being re-oriented to improve its balance, quality and equity of access through the promotion of primary education and vocational training; sectoral efficiency will be enhanced through measures to reduce unit costs and curb the growth of budgetary outlays. In the  - 10 recognition that the dependence of Public Enterprises on the Government budget needs to decrease, the Government has decided to change the nature and scope of its interventions in the public enterprise sector through the promotion of financial, managerial and administrative autonomy of public enterprises as well as a rationalization of the State's role in the economy. 25. The overall objectives of the Government's medium-term strategy are to restore sustainable growth rates and reduce the debt burden to manageable levels. The Bank's assistance strategy is to support Government programs which contain concrete measures to: (i) mobilize resources, particularly increase public savings; (ii) improve mechanisms for the efficient allocation, monitoring and use. of public resources; (iii) promote exports and efficient import substitution; (iv) enhance equity in the distribution of economic gains. Such support implies promnoting flexible institutional structures and enhancing the decentralization of decision-making and creating an environment which stimulates private sector investment and production. The Bank's economic and sector work program has been designed to provide the analytical basis for the structural reform programs in each of the major sectors mentioned in paragraph 24 above, and for subsequent Bank lending in each. In addition to addressing key sectoral policy issues, economic and sector work contains periodic reviews of the public investment programs to help the Government allocate its scarce resources to high priority projects. The results of the Bank's general macro-economic work, to be shared with members of the Consultative Group for Morocco early in 1987, will be supplemented by special studies on resource mobilization, on the employment situation and the impact of the overall structural adjustment program on economic activity and on the poor. Together withl the IMF, the Bank intends to evolve a medium-term framework for fiscal policies aimed at a broadening of the tax base and a rationalization of public expenditures. A recurrent element of the macro-economic dialogue is the evolution of a program to streamline and integrate investment planning and budgeting, with emphasis on appropriate resource allocation and project selection. Sectoral studies in the Energy, Urban, Population, Health and Nutrition sectors are expected to provide the basis for future operations in these areas. 26. The Bank's lending strategy for Morocco is to support Government programs which promote stabilization and structural adjustment in major economic sectors, as outlined in paragraph 25 above. Thus, sectoral policy operations will form a large part of the Bank's .assistance program. Given the resource constraints imposed by fiscal stabilization, investment proposals relying on the Government budget need to be carefully scrutinized. There is, however, scope for (i) formulating investments which redress imbalances in income distribution and in the access of the population to public services, and (ii) financing the resource needs of private sector enterprises and export industries which are being restructured so to operate efficiently within the new trade regime. Viable operations financing essential maintenance required to sustain essential service levels are also included in the strategy. Project lending will thus continue, albeit at similar constrainted levels to those characterizing the past three years of the program. Specific sectoral objectives of Bank operations can be summarized as follows:  - 11 - 27. Agriculture To permit the agricultural sector to realize its productive potential and contribute to Morocco's adjustment effort, the Government's investment strategy and sectoral policies are being revised to promote production patterns which reflects the sector's comparative advantage and reduce ineffective government intervention. Policy reforms are being supported by the Bank through phased sector adjustment loans which re-orient the prices and incentives framework, restructure the trade and marketing regimes, and rationalize public expenditures in agriculture. An optimal role for the public sector is being defined and the nature of Government interventions altered to permit an increased emphasis on policy planning and analysis. ;Project design aims to make maximum use of non-budgetary financing, increase cost recovery, and enhance institutional capability to deliver basic and commercial agricultural services. Thus, parallel to policy reforms, investments in research and extension, agricultural credit, and complementary operations aimed at rehabilitating the irrigation infrastructure are an integral part of the sectoral assistance strategy. 28. Industry, Trade and the Financial Sector. The manufacturing sector will play a pre-eminent role in the transformation of the Moroccan economy from its orientation to domestic markets and reliance on import-substituting industrial activity to an outward orientation more encouraging of exports. Policy reforms in tariff protection and for export promotion have been supported by two sectoral adjustment operations, which also instituted financial sector reforms aimed at restructuring investment incentives, encouraging savings and improving financial intermediation. Further policy reforms will be directed at balanced reductions in quantitative restrictions and tariffs, and liberalization of interest rates and bank commissions. Apart from support for policy reform, Bank lending would be directed at enterprises which respond to the country's objectives of export promotion and efficient import-substitution in efficient markets. This will entail support to financial intermediaries which provide technical and financial support to enterprises adjusting to the new trade regime. 29. Energy and Mining. Per capita demand for electricity is low in Morocco and will need to grow to support economic expansion. Bank assistance is directed at support of at least-cost investment program to meet future needs, improve subsector planning and execution capabilities, and establish an electricity code to govern intra-sectoral activities. Co-ordination of generation and distribution activities will be improved following studies to determine specific organizational restructuring needs. Reforms to reduce divergences between tariffs and marginal cost structures are being implemented. These policy and institutional changes will be introduced both through individual operations and via the Public Enterprise Rationalization Loan (PERL). For the mining sector, a diagnostic study is expected to lead to the rehabilitation, liquidation or restructuring of the publicly-owned mining holding company and its affiliates, based on a clearly defined role of the state in the mining sector. 30. The Bank's assistance strategy for infrastructure and utilities calls for combined institution-building of agencies responsible for handling transport infarstructure, water supply and sewerage, housing finance and  1 12 -- community infrastructure. The provision of essential services will be expanded through the implementation of selected projects. The overall policy environment in which the public enterprises operate in each sector will be rationalized through PERL reforms. Key elements of the reform will include progressive moves to promote financial autonomy through tariff measures, revised enterprise borrowing strategies, and increased reliance on private and non-budgetary sources of finance. 31. Social Services: Education, Health and Urban Development. The Government's overall approach to the provision of social services is to promote and expand atcess by low-income groups, especially in rural areas. In times of fiscal restraint, this requires recognition that the budgetary and unit costs of such services need to be reduced. Hence, in the Education and the Health and Nutrition sectors, emphasis would shift from capital-intensive and essentially urban-based investments which benefit a relatively limited clientele, to the development and dissemination to rural areas of more cost-effective delivery systems for essential services. With respect to urban development, the principal focus of the sectora]L strategy will be to raise the share of institutional and private savings directed towards municipal and housing finance. PART 11 - SECTORAL BACKGROUND 30. Until 1968, Morocco's Ministry of National Education's (MOE) colleges of vocational training were the nation's major source of skilled worker training. Vocational training was then removed from the MOE and has been located in a variety of ministries ever since. Currently the overall management of Morocco's national vocational training program is the responsibility of the Ministry of Public Works and Vocational Training (MPW). However, the links between the overall goals and priorities of the education sector and those of the vocational training sub-sector remain important to Morocco's economic development. Currently, the education sector is undergoing major reform to increase literacy significantly and better prepare students to be absorbed into Morocco's labor market. Vocational training is key to providing marketable skills, to students with adequate basic education as well as to those who have found that their more advanced schooling has left them with limited employment opportunity. As Morocco's industrial economy grows, so will the importance of the population's access to both education and vocational training. Manpower Demand and SuPPly 31. Morocco's total population in 1982 was 20.4 million. According to Morocco's last national census in 1982, the Moroccan labor force increased between 1971-1982 at a 4Z annual rate to 6.0 million (including an estimated 0.6 million unemployed). The rapid increase in the size of the labor force over the past ten years is due to a population expansion at an annual rate of 2.5Z, the return of Moroccan migrant labor from Europe, and higher labor force  - 13 - participation, particularly for females. The country's labor force is expected to continue to grow rapidly over the next 5 years, and appropriately, the Government has identified the need to provide relevant training opportunities to ensure that new entrants to the labor force can make productive contributions to Morocco's development. 32. The 1982 census and subsequent. surveys confirm a considerable and continuing shift in the labor force structure towards activities requiring higher skill levels, such as industry, construction and public administration. In 1971 industry and construction accounted for 15.0% of Morocco's employment; by 1985, 26.2%. 33. Industrial growth expected to occur in Morocco during the next 5 years would result from the Government instituting certain economic policy reform measures, including those advocated in the Bank's two ITPA loans. Industry currently accounts for about 30X of GDP and is projected to increase its share of GDP by 1990. A consequence of this growth would be faster increases in industrial employment. Although unemployment is high (about 10% in 1982) and increasing, employers report shortages of qualified manpower in such industrial specializations as machinery maintenance, electricity and electronics. Growth in construction in urban areas in Morocco is also expected to grow by 5-6% in real terms over the next 5 years. Construction activities currently produce 4.2X of GDP and like industry, is projected to increase as a percentage of GDP by 1990. 34. To assist the Government in obtaining more precise indicators of manpower needs, a comprehensive Bank-supported manpower study is underway with the Ministry of Planning (MOP), under financing from the recently completed Third Education Project (Ln. 1220-T-MOR) and the ongoing First Vocational Training Project (Ln. 2479-MOR). The MPW which is responsible for the planning, overseeing and regulating of vocational training programs nationwide in both the private and public sectors, used the initial findings of this study and information from the 1982 census to conduct an additional set of studies on training and employment in Morocco. These studies, which will be completed by early 1987, include: a) a survey of the number, capacities, and types of training programs throughout the public and private sectors; b) a survey of employers' perceptions of the quality of vocational training programs; and c) a tracer study on the absorption of vocational training graduates into the labor market. 35. The findings from these studies include the existence of: a) the poor education and training of the skilled labor force and the inadequate qualifications for those in middle and higher technician positions; b) quality weaknesses in the provision of vocational training in the areas of instructor training, program design, equipment supply and maintenance and in general administration; and c) poorly developed systems of recruitment of vocational training graduates, where employment offices could play a greater role in  - 14 -, placement. Overall study conclusions are that remedial actions should focus on improving the planning and management of vocational training programs and activities, and their design and execution. The findings of these studies are separately supported by previous Bank preparation and appraisal missions for the First Vocational Training project and the proposed project, and by previous sector work. 36. Expansion of vocational training capacity has been given top priority in Government plans since 1984. The MPW target to absorb into training programs between 50% and 60% of the secondary school leavers at the semi-skilled and skilled worker levels at grade 9 equivalent and some 90% at the technician level at grade 12 equivalent is reasonable given considerations regarding program capacity. These targets are expected to be reached in 1987/88 when ongoing construction of new instiltutions will be completed. At that time, demand for workers with the above training is expected to exceed supply by at least a margin of 2:1. 37. The Government plans to consider the expansion of overall throughput and capacity to try to meet demand when the results of several ongoing manpower/employment market studies are reviewed and the current national expansion plan for vocational training is updated in 1988. In the meantime, the Government plans to concentrate on addressing the qualitative issues described in para. 43 and address the problem of the disparity between supply and demand by redirecting training resources into areas of special demand (e.g. small and medium enterprises which lack their own training programs require and will receive more advanced and specially tailored programs). 38. To adjust vocational training programs to specific industrial requirements, the MPW, over the past 4 years, has been conducting a series of studies in areas where skill requirements have been changing. These studies investigated labor market structures and defined new job profiles at various levels. One study on the electronics industry has resulted in a plan for thorough revision of the training curricula for that industry, to be introduced in 1987/88. Additional studies in specific geographic areas, are being conducted to determine occupational patterns of the skilled labor force, particularly the self-employed. A study of employment patterns in Meknes suggests that considerable opportunities exist for self-employment for skilled laborers. The MPW plans to institutionalize r(egion-specific studies and is taking steps to put its own planning and administration on a decentralized basis which will facilitate regular conduct of the studies. The Structure of Vocational Training 39. The Office programs support both the public and private sectors, but mainly the latter. Vocational training provided by the private sector is limited and provided mainly in commercial areas. At present, practically all ministries have their own training programs, primarily at skilled worker and technician levels. Since July 1984, the MPW haLs had national responsibility for the management of vocational training. Two organizational units associated with the Ministry are responsible for the conduct of the vocational  - 15 - training functions, they are: the Vocational Training Administration (VTA) within the MPW and the Office of Vocational Training and Employment Promotion (the Office), a public enterprise under the authority of the MPW. 40. The VTA was created in 1984 as a department within the MPW with terms of reference to coordinate the vocational training effort at the national level, plan the expansion of vocational training capacity and monitor its implementation, and carry out the studies necessary to keep vocational training effective and constantly adjusted to the developing economy's needs. The VTA also has responsibility for quality control of vocational training programs in the private sector. The VTA is composed of three directorates: Planning, Vocational Training and Staff Training. The VTA plans to institutionalize region-specific studies on skill training needs for regional employment and is taking steps to put its own planning and administration on a decentralized basis which will facilitate regular conduct of the studies. Each individual ministry and training agency, including the Office, is responsible for detailed planning and budgetting as well as implementing its respective sectoral training programs within the national training policy framework established by the VTA. 41. The main role of the Office is to provide and manage a network of training programs and activities to meet the needs of the public and private sectors. The authority over the Office was transferred to the MPW in July of 1984 from the Ministry of Planning, in order to utilize MPW's extensive construction capacity for the planned expansion of the Office's training facilities. The training facilities are of three types: institutes of applied technology (IATs) for technician training, vocational training centers (VTCs) for skilled worker training, and VTCs for semi-skilled worker training. For each training institution (or for each city, if there is more than one training institution in the same city) there is an "upgrading council" (Conseil de Perfectionnement) chaired by a local employer with the director of the training institution acting as a vice-chairman and secretary of the council. The councils address specific questions concerning the training institution such as practical tests, labor market information, program feed-back and placement of graduates. They will also play a role in conducting region-specific employment studies. Office procedures exist for updating and modifying training program content in response to this feedback. Among the Office services to vocational training institutions is an "equipment maintenance service" for preventive maintenance and repair of equipment at the vocational training facilities. 42. Most vocational training in Morocco is provided for the public sector, including public enterprises. The ministries provide most of their own vocational training. In 1985-86, 20 ministries and Government agencies trained 144,000 trainees, of whom 26,000 are at the skilled worker level and 21,500 at the technician level. The Office share of those trained is 602 at the skilled worker level and 59% at the technician level. In addition, Morocco's 209 accredited private schools trained approximately 34,000 trainees mainly in the commercial field (802), half at the skilled worker level and half at the technician level.  - 16 Vocational Training lIsues 43. The four main issues in vocational training of current concern are the needs to: improve training quality, increase management efficiency, improve financing of the subsector and increase the employment equity of low-income groups through better vocational training. These issues are recognized by the Government. The proposed project, together with the First Vocational Training Project, is designed to achieve improvements in these areas. With support from the First Vocational Training Project, the Government has placed top priority on expanding vocational training capacity, and has been following an expansion plan which covers 1984-1988. However, at this point, the Government and the Bank share the view that additional assistance is needed to improve the quality of vocational training graduates, the cost-effectiveness of vocational training piograms, the efficiency of the Government's vocational training network and the equity afforded lower-income groups through the provision of vocational training programs of improved quality. 44. The quality of vocational training suffers from deficiencies in instructor training and, in some cases, the design of programs. In particular, some instructors lack industrial experience and the relevance of training programs needs improvement. The quality of training can also be improved through upgrading some of the training facilities. Most of the equipment in the older Office training centers is outdated and/or obsolete, while in a number of recently established cenl:ers equipment is incomplete. Because of this, training cannot be appropriately delivered. In addition, employment opportunities for vocational training graduates can be improved significantly through the introduction of enl:repreneurship training, and through improving the links between training institutions and employers. 45. The efficiency of program management among the various organizations providing vocational training is an area recognized under the First Vocational Training Project as needing improvement. Tle MPW launched a study under that project to address the efficiency issue, and the recent findings show a clear need for better coordination among training organizations to eliminate overlap between courses and to assist employers select job candidates by the reinforcement of trade testing and certificat:ion services. 46. The need to raise additional finances for vocational training was also recognized under the First Vocational Training Project. The MPW conducted a study to explore ways of increasing income and reducing costs for vocational training. The Government is to implement the study results in 1987, with the purpose of maintaining a policy of full recovery of recurrent costs for the Office. The major option considered for increasing the income of the Office is expanding and/or, raising the vocational training tax (a payroll tax applied to private enterprises as a percentage of the gross salaries of all employees, which is charged to these enterprises for the account of the Office). Introducing training fees is also under consideration. Cost reduction options include the! possibility of reducing the length of certain training courses and encouraging employers to participate more actively in training.  - 17 - 47. The need to increase the eiity of vocational training programs for those in low-income groups is also a priority. The present poor quality of vocational training programs means that these programs are of limited benefit to their major recipients (low income groups) in improving job-related skills. Exposure of these grouips to high quality vocational training, including training for women not only in traditionally female trades such as textiles, but also in industrial specializations such as electronics, is expected to significantly improve their income earning opportunities. Government Policies and Priorities in Vocational Training 48. Since independence in 1956, Government efforts in the education sector have focussed on expansion of the school capacity at all levels, on Moroccanization of the teaching staff and on developing new programs consistent with the needs of the economy. The Government has recently undertaken, with Bank support (Education Sector Loan, Ln No. 2664-MOR), a broad education reform program which concentrates on expanding basic schooling, improving its quality and efficiency, and orienting school leavers to vocational training, particularly at the skilled worker and technician levels. The current development of vocational training capacity focuses appropriately on specializations in which shortages of skilled manpower are constraining growth - particularly in the electromechanical industries and li trades suitable for self-employment. The Government expects to increase the skill levels of workers who are currently self-employed in order to improve their employment opportunities. (A recent study in the Meknes area indicates that only 6% of self-employed skilled and semi-skilled workers have graduated from vocational training institutions.) At this time the Government appreciates the need to take measures to ensure that quality control, management and financial support are adequate, so as not to limit the future success of vocational training in Morocco. This consideration will become increasingly important in later years as the number of vocational training graduates is expected to increase towards projected levels of market demand. Bank Role in the Sector 49. The Bank has been the most active external source of funding in the education/training sector since 1963, supporting seven education/training projects, four of which are ongoing. Most Bank lending in the sector has Iheen in support of the formal education system and, consistent with Government priorities, has evolved from an initial focus on reinforcement of general education (primary and secondary) to its current emphasis on reinforcing employment-oriented skill training, and introducing structural reforms to improve the efficiency, financial viability, and employment orientation of education at all levels. 50. The First Education Project (Ln. 79-MOR) provided for the construction and equipping of secondary schools. Except for three schools which were deleted from the project as a result of the Government's decision not to maintain vocational education in the MOE, the project was completed in June 1975. The Second Education Project (Ln. 266-MOR) provided support for teacher training through the establishment of teacher training institutes and  - 18 - a national pedagogical institute, and the qualitative improvement of science and technical teaching through the provision of science laboratories for general secondary schools, and equipment for technical secondary schools. Construction and equipment were also provided for two vocational training centers and for extensions to both a forestry and an agronomy training institute. Except for the two vocational trailaing centers and the extension to the forestry training institute, which were subsequently deleted from the project at the Government's request, the project was completed in 1979. The Third Education Project (Ln. 1220-T-MOR) supported basic education by providing innovative rural primary schools, general secondary schools, a secondary teacher training institute, and assistance in developing a more practical curriculum for primary and secondary schools. It also supported manpower training in priority areas by financing hotel training centers under the Ministry of Tourism, one rural development center under the Ministry of Agriculture, and four paramedical training centers under the Ministry of Health. The loan account closed in 1983. The Fourth Education Project (Ln. 1681-MOR) provides major support in strengthening secondary and post-secondary technical education. The project is financing the construction and equipping of technical secondary schools and post-secondary technical institutions. Loan closing is scheduled for December 31, 1986. A one year extension has been requested by the Government and is under consideration by the Bank. The Fifth Education Project (Ln. 2149-MOR) is supporting the expansion and qualitative improvement of. primary and secondary education by financing the construction and equipping of primary schools and secondary teacher colleges. In addition, it supports the provision of basic educational aids to 700 existing primary schools. The loan's closing date is March 31, 1988. 51. The First Vocational Training Project (Ln. 2479-MOR) extends Bank involvement to mid-level skill training to meet private sector manpower needs, particularly in the industrial sector. It also supports the development of a national training program in project identification, preparation and appraisal, an area in which current deficiencies have hampered investment planning and implementation in all sectors. 52. The most recent loan in the education/training sector is the Education Sector Loan (Ln. 2664-MOR), referenced in paragraph 48. A key element of this loan is the initiative! which is to be taken, particularly at the secondary school level, to counsel school leavers regarding opportunities for vocational training. 53. The project completion reports and related PPARs for the completed education projects with vocational training components reflect Bank experience and indicate the desirability of: (i) ensuring as adequate and complete a preparation of project components as possible prior to Board Presentation; (ii) concentrating project components in a single ministry with good implementation capacity; and (iii) close and continuous monitoring of technical assistance (TA) implementation. The design of the proposed Second Vocational Training Project is consistent with these lessons of past project implementation and the reform program. An important feature is the good  - 19 - implementation record of the VTA and the Office which would execute the project. So far, procurement of construction and equipment is one year in advance of the schedule estimated during appraisal of the First Vocational Project. PART Iv - THE PROJECT Backgmund 54. The project was appraised in April-May, 1986. Negotiations were held in Washington, D.C. in November, 1986. The Moroccan delegation was headed by Mr. Siraj Sani, of the Prime Minister's office, and included Messrs. Benmoussa, of the Office and Idaoubella of the Ministry of Finance. A summary of the proposed project is provided at the beginning of this report. Annex III contains supplementary project data and Map no. IBRD 19859 (attached) presents the locations of vocational training programs of concern to the Office. 55. Under the First Vocational Training Project, the Bank supported an active plan for the expansion of vocational training program capacity. This expansion effort will be completed next year. In the meantime, several studies over the past few years, some receiving Bank support, have indicated that the quality, not just the capacity, of vocational training needs to be improved. In keeping with Morocco's current fiscal constraints, the proposed project would improve vocational training quality with no negative effect on the country's recurrent budget. No expansion of vocational training capacity (i.e. number of training places) will directly result from this project, in an effort to limit program costs to what can be covered under the Government's cost recovery plan. Increased managerial and programmatic efficiencies expected under the project will result in increases in the output (graduates) of Office training programs. Project Objectives and Description 56. The objectives of this project are to (i) improve the quality of vocational training programs by improving instructor training, redesigning programs for students and upgrading training facilities; (ii) increase the overall efficiency with which the Office plans, oversees and regulates vocational training programs through the decentralization of these functions, training of Office staff and support of studies; (iii) improve Office finances through the implementation of cost recovery measures; and (iv) provide improved vocational training opportunities to low-income groups through better adaptation of training programs to evolving labor-market needs. The project will consist of the following components: (1) The re-equipping and refurbishing of 33 VTCs selected according to economic priority by the Office. The development of an upgraded vocational training program in electronics would be supported through the provision of technical assistance (TA) and equipment to 15 IATs.  - 20 - (2) The provision of TA for the establishment of a permanent in-service and in-plant instructor training program, periodic upgrading of vocational training courses to ensure adaptation to the needs of the economy, development of entrepreneurship skills and pre-employment training c:ourses; and the carrying out by the Office of a program to standardize and upgrade the system of trainee testing and certifical:ion; and (3) The establishment of 10 pilot training/repair service units in 10 Office VTCs in fields such as: auto maintenance and repair, buildings maintenance and repair and printing, and the extension and equipping of workshop facilities for these units. The selection of pilot VTCs was nade according to local market demand. The services of these units will be revenue producing, thus reducing recurrent costs by financing material purchases and equipment renewal. (4) The establishment of 10 Office regional coordination units and 50 sub-regional planning managemeiLt units, including the construction of facilities, provision of equipment and vehicles and local management training for coordinators and directors, and provision of mobile maintenance units to the coordination units. (5) The provision of 309 staff--months of fellowships to upgrade instructors in program design, instructor trainers for a new instructor training center, guidance counsellors for training planning and orientation, program designers in design methodology, testing specialisl:s in their field of expertise, and training managers of regional coordinating units in planning and management. (6) The carrying out by the VTA of studies to develop new programs, reduce vocational training costs and improve the overall coordination of vocational training; the provision of computer and other equipment for VTA's plalning and management, and the development of training prograns for- VTA staff; the development of an improved system of private vocational school accreditation. Project Costs and Financjg 57. The total cost of the project is estimated at about DH 256.0 million, or US$28 million equivalent. The foreign exchange costs are US$22.3 million; the local costs, US$5.7 million. Almost 95% of base project costs will support improvements within the Office; the remaining 5% is allocated to the VTA. Just over 60% is budgeted for equipping and refurbishing Office VTCs and IATs. By category of expenditure, furniture and equipment constitutes almost 70% of base project costs. Project cost estimates are for the period February, 1987 through December, 1990.  - 21 - 58. Project cost estimates include allowances for physical and price contingencies. No taxes or duties are included. Physical contingency factors are included at 10% of the project base cost. Base costs reflect prices as of November, 1986. Price escalation during the project is expected to average about 6% per year for foreign costs and about 8% per year for local costs, from 1987-1992. Total contingency allowances amont to about 33% of base costs. 59. The Bank loan would finance the foreign exchange costs of the Project ($22.3 million), or about 80% of total project costs. The foreign exchange component is based on the assumption that all labor and construction contracts, and most materials for civil works would be available locallyv equipment and furniture would be imported; and foreign consultant services would be used. The Government would finance the US$5.7 million estimated local cost of the project. The loan would be made to the Kingdom of Morocco for a term of 20 years, including 5 years of grace at the current variable interest rate. The Government would make available US$21.3 million of the loan to the Office on a grant basis. The remaining US$1.0 million would be provided to the VTA. Agreement was reached during negotiations that the Government would charge and collect from private enterprises a vocational training tax at levels sufficient to cover 100% of the Office's recurrent costs by 1990, primarily through the application of the vocational training tax. Project hnplementation 60. The project implementation period is expected to last from early 1987 to June 30, 1992. Implementation of the VTA components of the project would be the responsibility of the Directorate of Vocational Training Planning of the VTA. The Office components would be implemented under the authority of the Director General of the Office. Detailed equipment lists for the VTA and for the Office are under preparation in both organizations. These are scheduled to be finalized for Bank review by June 1987. Draft terms of reference for all consultant services, fellowship programs, programs for local training and planned seminars to be organized by both organizations, and details of the studies to be conducted by the VTA have been reviewed. Implementation schedules for consultants' services for the VTA and for the Office were agreed at negotiations. In addition, the Office agreed to furnish to the Bank, by no later than one year after loan effectiveness, an action plan for the fellowship training program which the Office would implement ci the basis of an exchange of views with the Bank. Staff of the VTA and the Office are considered adequate to manage this project. The VTA and the Office will submit quarterly progress reports on the project to the Bank. Procurement and Disbursements 61. Proposed procurement procedures are summarized in the table below:  - 22 - Proposed Procurement Procedures (Total base costs of proposed project components expressed in US$ Millions) Procurement Procedure Project component ICB LCB Other Total Cost Construction and Professional Services (minor extensions): 10 Coordination Offices - 0.809 0.072 0.881 10 Production Units - 0.340 0.029 0.369 33 VTCs - 2.759 0.244 3.003 sub-total Construction - 3.908 0.345 4.253 (1.953) (0.086)"' (2.039) Furniture and Equipment 17.466 - 1.940 19.406 (15.129) - (1.681) (16.810) Technical Assistance - - 4.313 4.313 (incl. local training, (3.509) (3.509) and studies) Total 17.466 3.908 6.598 27.972 (15.129) (1.953) (5.276) (22.358) 1/ Architects' fees. Note: Figures in parentheses are the amounts to be financed by the loan. Most (62%) of the procurement under this proposed project would be by international competitive bidding (ICB) and would be for furniture and equipment purchases estimated at US$17.5 million. Items which cannot practically be grouped in ICB bid packages of more than US$100,000 equivalent estimated value, would be procured on t'he basis of quotations from at least three qualified suppliers. These items are generally available in Morocco and would be subject to an aggregate va]Lue limit of US$2.0 million equivalent (corresponding to about 10% of the total estimated value of equipment and furniture requirements, including contingency allowances). All documentation for equipment procured under ICB would be reviewed by the Bank prior to contract award. Consultant services for the project will be provided in accordance with the current Bank "Guidelines for the Use of Consultants." 62. Contracts for civil works to be financed under the loan are estimated at approximately US$ 2.0 million, and would be awarded on the basis of local competitive bidding (LCB) in accordance with procedures acceptable to the  - 23 - Bank. This procedure is justified in view of: (a) the wide geographic distribution of institutions to be refurbished or extended; (b) the small average contract value (less than US$100,000); and, subsequently, (c) the anticipated lack of interest by foreign firms, as experienced in the ongoing Fourth and Fifth Education Projects and in the First Vocational Training Project. The LCB procedures used by the Office and the VTA are generally consistent with the need for economy and efficiency. There are, however, a few procedures which require modification in order to be acceptable to the Bank. During negotiations, an understanding was reached with the Government and the Office that LCB procedures for procurement of works financed under the proposed loan would be modified so as to be acceptable to the Bank. 63. Disbursements of the proposed loan would be made during calendar years 1987-1992 as follows: The Office (a) Civil Works: 50% of total expenditures (US$2,000,000 equivalent); (b) Furniture and Equipment (including vehicles): 100% of foreign expenditures, 100% of local expenditures (ex-factory cost) and 80% of local expenditures for other items procured locally (US$16,500,000 equivalent); and (c) Technical Assistance: Consultant services: 100% of total expenditures (US$1,400,000 equivalent) Fellowships: 100% of total expenditures (US$1,400,000 equivalent). The VTA (a) Equipment (including vehicles): 100% of foreign expenditures, 100% of local expenditures (ex-factory cost), and 80% of local expenditures for other items procured locally (US$250,000 equivalent); (b) Technical Assistance: 100% of total expenditures of consultant services (US$750,000 equivalent). 64. A special account will be opened and maintained in a financial institution acceptable to the Bank and on terms and conditions satisfactory to the Bank and will be operated in accordance with Bank guidelines. The authorized allocation of the special account would be US$400,000 equivalent. Accounts and Audits 65. Accounts and Audits. The Government would maintain accounts for the VTA component and the special account. The Office would maintain accounts to reflect its operations. These accounts and the Office financial statements  - 24 - would be audited annually in accordance with appropriate auditing principles by independent auditors acceptable to the Bank; and the VTA and the Office would each furnish to the Bank, within six months of the end of each fiscal year, certified copies of the audit reports. During negotiations, assurances to this effect were obtained from the Government and the Office. Benefits and Risks 66. By supporting improvements in the quality of vocational training in Morocco, the proposed project would make a significant contribution toward ensuring the availability of well qualified workers urgently needed in the country's labor market. In particular, the project would alleviate critical shortages of electronic technicians in industry. The project would also provide increasing employment opportunities for lower income groups who traditionally enroll in vocational training programs and for females. Female participation in vocational training programs (currently about 71) is steadily rising. 67. The Government's overall management of vocational training would be improved through this loan by strengthening the areas of cost recovery, planning and administration for vocational training. Cost reduction measures supported by the project would alleviate the Government's budgetary support of vocational training programs. The decentralization of the Office's planning and administration of vocational training should enhance program relevance and effectiveness significantly. 68. Overall, the project is expected to have no effect on the Government's recurrent budget. The most identifiable risk is that project implementation could be slowed by budgetary shortages (including lack of timely counterpart funds) in the context of the Government's current fiscal austerity program. Ongoing Bank-financed education projects, except the first vocational training project, have experienced delays from this source averaging about 12 months. However, officials in the Ministries of Economic Affairs, Finance, and Planning have recently confirmed the priority commitment of the Government to the proposed Second Vocational Training Project. This commitment has recently been confirmeid at the highest level of Government, and therefore it is foreseen that the project will be funded adequately to ensure timely implementation. PART V - RECOMMENDATION 69. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve this loan. Barber Conable President December 15, 1986 Washington, D.C.  -25 - Population : 21.4 million (1985) MNEX I GNP Per Capita: USS 610 (1985) Page 1 of 3 i0cn - ECmN0n4IC INDICATORS Amount (million US$ at Annual Growth Rates t(1 current prices) Actual Proiected Indicator 1985 i .11i1 311i 311 1284 31 / 12 312 11 3i11 112Q NATIONAL ACCOUNTS Gross domestic product a/ 11891 -1.3 6.8 2.2 2.1 4.3 5.7 3.8 4.4 3.9 4.3 Agriculture 218fr -22.9 19.9 -3.7 -.3 12.1 15.0 10.0 8.0 3.5 3.5 Industry 3776 -0.1 2.2 2.9 -1.1 2.3 8.3 4.3 6.2 5.5 5.9 Services 5929 5.8 6.1 3.7 4.6 3.3 1.5 1.5 2.0 3.0 3.5 Consumption 10497 2.0 6.0 0.1 2.7 3.1 4.3 3.3 4.3 3.5 4.0 Gross investment 2583 -11.2 6.8 -13.0 1.4 2.8 5.7 8.0 4.6 3.6 4.4 Exports of GNFS 3184 0.2 4.9 8.2 2.8 4.8 7.4 6.9 5.7 5.7 5.8 Imports of GNFS 4373 1.9 3.1 -11.3 4.3 -0.3 2.1 4.1 5.3 4.0 5.0 Gross national sav7ngs 1330 -35.1 4.0 24.7 -4.3 10.4 37.7 7.4 7.5 2.1 10.4 PRICES 1981 198 i 3 1i 31 GOP deflator (1980 = 100) 100.0 110.8 121.8 125.1 135.7 148.6 163.1 Exchange rate (USS per ON) .254 .193 .166 .141 .114 .099 .106 Share of GOP at Market Prices (M) Averaae Annual Inc co