Sri Lanka - Second Vocational Training Project

Docunent Of The World Bank FOR OmCILa USE ONLY C R . /S ofr-CC Report No. P-4291-CE REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL DEVELOPMENT ASSOCIATION TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT OF SDR 13.0 MILLION TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A SECOND VOCATIONAL TRAINING PRCJECT April 24, 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 Currency Unit - Sri Lanka Rupee US$1.00 - SL Rs 27.40 SL Re 1.00 = US$0.036 ABBREVIATIONS AND ACRONYMS ACCSL - Association of Construction Contractors of Sri Lanka CEPB - Center for Housing, Planning and Building CITP - Construction Industry Training Project HEOTC - Heavy Equipment Operator Training Center ICTAD - Institute of Construction Industry Training and Development JTI - Junior Technical Institutes 'MGHC - Ministry of Local Government, Housing and Construction -DHE - Ministry of Higher Education -'DL - Ministry of Labor NYAE - Ministry of Youth Affairs and Enployment NAB - National Apprenticeship Board NTTTC - National Technical Teacher Training College SEC - State Engineering Corporation SDCC - State Development and Construction Corporation UDA - Urban Development Authority WDB - National Water Supply and Drainage Board FISCAL YEAR January 1 - Decenber 31  FOR OFFICIAL USE ONLY SRI LANKA SECOND VOCATIONAL TRAINING PROJECT Credit and Project Summiarv Borrower: Democratic Socialist Republic of Sri Lanka Amount: SDR 13.0 million (US$15.0 million equivalent) Terms: Standard Project Description: The goal of the project is to improve the efficiency of the construction industry in Sri Lanka. The main objectives of the project are to (a) create an institutional framework to sustain training and industry development efforts started under the first Construction Industry Project (Credit 1130-CE); (b) increase the supply of semi-skilled, skilled and managerial personnel to the industry; and (c) improve the quality of manpower going into the sector. The institutional development objective would be achieved by establishing and developing the Institute of Construction Industry Training and Development (ICTAD). The manpower supRlI objective would be achieved by training about 50,000 new and upgrading about 26,000 existing semi-skilled, skilled and managerial workers in the construc- tion industry. The quality improvement objective would be achieved by instituting an instructor training and upgrading program, revision and updating of curricula, monitoring and evaluating skill training and industry developments, and trade- testing and certifying about 40,000 skilled workers and supervisors. Risks: The project faces no special risks, and the project design provides flexibility in meeting the requirements for skill training as diagnosed by market surveys. A reduction of the demand for training in total or for any skill in particular has no implications for underutilization of staff and facilities as the project would utilize existing facilities and contract the instructors when specific courses are identified. Such changes in the demand for training may at most lead to some under- utilization of project funds. This document ha a restricd distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be discklsed without World Bank authorizaion.  -ii- Estimated Cost: L& Local foreitn Total -U US million-- Institutional Development (ICTAD) 1.14 1.40 2.54 Skill Training 8.50 4.42 12.92 Management Training 0.96 0.53 1.49 Instructor Training 0.31 0.51 0.82 Monitoring and Evaluation 0.17 0.56 0.3 Total Base Costs 11.08 7.42 18.50 Continaencies Physical 0.63 0.41 1.04 Price 2.67 2.27 4.94 Total Project Costs 14.38 10.10 24.48 Financing Plan: Local Foreien Total - -US$ millio- - IDA 5.38 9.62 15.00 UNDP 0.54 0.48 1.02 Goveryent 8.46 - 8.46 Total 14.38 10.10 24.48 Estimated Disbursements: IDA FY FY87 FY88 FY89 F FY91 FY92 FY93 FY94 FY95 _ --Us$ million Annual 0.30 4.18 3.58 1.76 1.14 1.10 1.08 1.04 1.12 Cumulative 0.30 4.48 7.76 9.52 10.66 11.76 12.84 13.88 15.00 Economic Rate of Return: Not applicable Staff Appraisal Report: No. 5958-CE, dated April 2, 1986 Navp: IBiD 19341. la Includes taxes of US$ 0.85 million equivalent.  INTERNATIONAL DEVELOPMENT ASSOCIATION REPORT AND RECOMENDKATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED CREDIT TO THE DEMOCRATIC SOCIALIST REPUBLIC OF SRI LANKA FOR A SECOND VOCATIONAL TRUANING PROJECT 1. I submit the following report and recommendation on a proposed development credit to the Democratic Socialist Republic of Sri Lanka for SDR 13.0 million (US$15.0 million equivalent) on standard IDA terms to help finance a second vocational training project. Cofinancing has been arranged with UND (3ILO) for a grant of US$1.0 million equivalent. PART I - THE ECONOMY 1/ 2. A country economic memorandum, "Sri Lanka: Recent Economic Developments and Policies for Growth" (Report No. 5628-CE, dated May 14, 1985) was distributed to the Executive Directors on May 28, 1985. Country data are provided in Annex I. 3. After almost ten years of low growth at 2.9 percent per annum, Sri Lanka, in 1977, initiated a new development strategy. It entailed a package of policy measures to liberalize the economy and allow a greater role for the private sector. These policies, supported by the IMH, were designed to: (a) reduce goverment intervention in commodity markets; (b) reduce government consumption subsidies and restore producer incentives and public savings; and (c) create a favorable environment for private (foreign and domestic) invest- ment through tax concessions, the creation of an Investment Promotion Zone, and the unification and depreciation of the exchange rate. Two important characteristics of this policy reform package were: (a) periodic increases in the domestic support price for paddy (to bring it into line with world prices) that spurred a highly positive response from paddy producers; and (b) a decline in the cost of selected subsidies and transfers from about 10 percent of GDP in 1977 to about 3 percent by 1981. 4. At the same time, the Government began to implement an ambitious public investment program centered on three major initiatives: (a) accelerated implementation of the Mahaweli Ganga Development Program, the largest multipurpose river basin development program ever undertaken in Sri Lanka; (b) establishment of a 200-square mile free trade zone to attract jJ This part is substantially unchanged from Part I of the President's Report for the Second Industrial Development Project (Report No. 4284-CE), which was approved by the Executive Directors on May 8, 1986.  -2- foreign investors located north of Colombo near the international airport; and (c) institution of a massive housing and urban renewal program focusing mainly on the Colombo metropolitan region, includi1ig the construction of a new capital complex at Kotte, a suburb of Colombo. As the public investment program gained momentum, its share in GDP jumped from 6 percent in 1977 to an average of 13 percent in 1978/79 and a peak of 19 percent in 1980. The public investment was financed in part by domestic resources (generated, in turn, by a reduction in subsidies and transfers) and, in part, by high levels of foreign aid. 5. The initial result of both the policy reforms and increastd level of investment was an impressive jump in the GDP growth rate during 1977-80 to an annual average of 6.8 percent. The growth rate subsequently declined to a more sustainable 5.3 percent in 1980-83 and 5 percent in 1984-85. Underlying the increased growth of output was the expansion of paddy production, garment exports, construction, and tourist services. The growth rate of paddy production averaged 5.7 percent a year during 1978-85 with the result that rice imports declined sharply and averaged only 10 percent of total rice consumption during that period compared to 33 percent during 1970-77. Manufactured garment exports increased from US$12 million in 1977 to an estimated US$300 million in 1985 and now account for 80 percent of non-petroleum manufactured exports. Tourist arrivals increased from 150,000 in 1977 to 400,000 in 1982. However, due to ethnic disturbances, arrivals have declined since to 320,000 in 1983/84 and an estimated 260,000 in 1985. 6. The rapid expansion in aggregate demand, led by high levels of public investment, resulted in serious financial imbalances affecting the budget and the balance of payments. The massive public investment initiated in 1977 led to increases in budgetary spending from 23 percent of GDP in 1977, to a record 43 percent in 1980. These high levels of spending, however, were not accompanied by corresponding increases in fiscal revenues. When the economy began to show serious signs of "overheating" in the early 1980s, the Government squeezed current spending by reducing subsidies and by placing limits on already inadequate public sector salaries and operation and main- tenance expenditures. But with severe limits on the extent to which these expenditures could be curtailed, the Government Was impelled to borrow heavily to finance the deficits which varied between 10 and 17 percent of GDP during 1981-85. During that period, 45 percent of the deficits were financed by foreign aid, 10 percent were financed by foreign commercial borrowings and 45 percent by domestic borrowing. 7. The high levels of of investment also spilled over into the balance of payments. Between 1977 and 1980, import volumes grew at an average annual rate of 19 percent, while imported investment goods increased from US$83 millicn to US$493 million, and intermediate goods and petroleum imports tripled in current prices. As a result of this fairly broad-based expansion, merchandise imports as a share of GDP increased from 23 percent in 1977 to 51 percent in 1980. Export volumes, however, expanded at a much lower rate (an average annual growth rate of 5 percent between 1977 and 1980) as the decline  -3- in tree crop export volumes offset the strong growth in garment exports from firms established in the Investment Promotion Zone. Consequently, merchan- dise exports as a share of GDP increased from 21 percent in 1977 to only 26 percent in 1980. These diverse trends in the volume of trade were accom- panied by a 26 percent deterioration in the terms of trade over the same period. Rapid growth in tourism receipts and private remittances from abroad failed to offset this deterioration in the trade account, and the current account balance deteriorated from a surplus equivalent to 2.4 percent of GDP in 1977 to a record deficit equivalent to 19.8 percent of GDP in 1980. Deficits in 1978 and 1979 were more than offset by increased net aid disbursements, and Sri Lanka continued to add to international reserves. But, in 1980 the situation changed, when the current account deficit rose to $800 million. It was financed by concessional flows, use of reserves (which declined by $220 million) and recourse to commercial borrowing. 8. Realizing that a continuation of the 1980 trends would result in serious financial instability, the Government initiated an adjustment program in 1981. The measures agreed upon initially, in consultation with the IHF, included tighter overall monetary policy, a substantial reduction in govern- ment spending, and a gradual realignment of the exchange rate. The economy began to respond positively by the end of 1981 (when the current account deficit in the balance of payments declined to 13.7 percent of GDP and the budgetary deficit to 15.5 percent), but in 1982 - a year in which there were presidential elections and a referendum to extend the life of Parliament - the political resolve to continue to apply the needed policy mix weakened. As a result, both the external and internal deficits increased in 1982 (to 15.3 percent and 17.3 percent, respectively) and the GDP growth rate declined to 5.1 percent. Although policy measures did contribute to the decline in the current account deficit of the balance of payments in 1983 and 1984 (12.4 percent of GDP in 1983 and 3.7 percent in 1984), the primary factor was the improvement in the terms of trade as a result of higher tea prices. With the subsequent decline in the price of tea, the terms of trade deteriorated in 1985 and the current account deficit of the balance of payments increased to 8 percent of GDP. Furthermore, on account of lover receipts from taxes on exported tea and higher defense expenditures, the overall budget deficit increased from 10 percent of GDP in 1984 to 11 percent in 1985. Because the price of tea declined in the second half of 1985, however, its effects on the budget will mostly be felt in 1986 when the fiscal deficit may turn out to be much higher. 9. Achieving a more viable internal and external financial position are now two prime policy objectives for Sri Lanka. To improve the external position, one of the foremost requirements of government policy will be to restructure the economy towards exports rather than producing for the very limited domestic market. With the exception of garments, for which Sri Lanka has a particularly strong comparative advantage, exports have performed poorly. A major focal point for improving export performance is the tree crop sector, which, as a result of more than a decade of neglect, has experienced a stagnant level of production. This trend must be reversed.  -4- To promote export activities, a more neutral incentive framework is needed, including a foreign exchange policy that would permit the full diversity of Sri Lanka's comparative advantage to develop. 10. The Government has recently indicated its determination to pursue reforms in this sector. In 1985, it reduced the overall tax burden ou tree crops. This reduction, in combination with the management/incentive reform package for state-owned plantations implemented in early 1984, has improved incentives for producers throughout this traditionally overtaxed subsector. The Government has also introduced tariff changes, based on recommendations made in the final report of the Presidential Tariff Commission on trade taxes, aimed at reducing the overall tariff level and the variance of effec- tive protection among sectors. 11. The comparatively high levels of social welfare expenditures which the population has long enjoyed and which cannot easily be reduced, together with sharply increased defense expenditures, means that the Government must renew its efforts to improve domestic resource mobilization - especially in the public sector - to pay for these outlays. Improving-the domestic finan- cial situation will require broadening the tax base thus increasing tax revenues and reducing unproductive government expenditures. A focal point of these measures will have to be the public sector enterprises, which account for 40 percent of the value added in the non-petroleum manufacturing sector, but are a heavy burden on the budget because of high protection from external competition, administered prices for their products, their monopolistic or quasi-monopolistic position, and the inefficient use of resources. They will have to improve their management and reduce the support they obtain from the budget. 12. Throughout the entire 1978-85 period, the response of the interna- tional aid community to the Government's development efforts has been enthusiastic. Project aid was stepped up, particularly for the Accelerated Mahaveli Program. The overall level of aid commitments per year increased from US$250 million in 1977 to a record US$800 million in 1981, equivalent to US$55 per capita. Disbursements grew much more slowly so that the aid pipeline rapidly expanded to around US$1.63 billion by the end of 1981. Because implementation and domestic financial constraints required cuts in public capital spending after 1981, aid commitments declined to US$500 mil- lion in 1982, US$350 million in 1983, and US$460 million in 1984, halting further increases in the pipeline. Aid disbursements have increased steadily, from US$200 million in 1977 to US$550 million in 1984. Continued high levels of aid will depend upon donors' willingness to finance a sizeable portion of local costs, provide supplementary financing for ongoing projects, where needed, and to increase non-project aid. Local cost financing in support of Sri Lanka's resource mobilization efforts will not only provide valuable relief from budgetary pressures, but will also supplement foreign exchange resources needed to support the balance of payments.  -5-. 13. At the end of 1985, the external public debt outstanding and dis- bursed stood at an estimated US$2.7 billion, about 40 percent of GDP. Although over 70 percent of this debt 8s on concessional terms, the increased commercial financing resorted to in 1981 and 1982 contributed to the increase in the debt service payments (excluding IMF charges and repurchases) between 1962 and 1985, at which time the debt service ratio had risen to 15 percent. Assuming that the Goverment's efforts to contain the budget deficit and to implement policy measures designed to stimulate exports and efficient import substitution activities are successful, the current account deficit in the balance of payments should decline to approximately 7 percent of GDP toward the end of the decade, and the debt service ratio, after temporarily rising to almost 19 percent because of existing debt repayment cnmmitments, should drop to 15 percent in 1990. Nonetheless, the Goverinent will need to monitor carefully the level and terms of external borrowing to ensure that the country maintains a satisfactory external payments position. PART II - WORLD BANK GROUP OPERATIONS 14. Since the beginning of its operations in Sri Lanka in 1954, the World Bank has approved 12 loans totaling US$183.7 million (net of cancellations) and 38 credits totaling US$753.2 million (net of cancellations) in support of 47 projects. About 53 percent of World Bank assiatance has been for agricul- ture (irrigation, tree crops, and rural and dairy development), 17 percent for pover, 10 percent for transportation, and the remainder of 20 percent among development finance company operations, a program credit (involving the import of raw materials for industry), water supply, construction industry training, and telecommunications. Eight loans and 16 credits have been fully disbursed. Annex II contains a summary statement of World Bank Group opera- tions as of Narch 31, 1986. 15. In Sri Lanka, the IPC has a total investment of US$2.13 million equivalent in equity and US$18.69 million equivalent in loans as of Narch 31, 1986. Investments have been made so far in two textiles industries, one polypropylene bag industry, one equipment-leasing company, one hotel, and two IFC lines of credit, one of which has been extended to the government-owned Bank of Ceylon for term loans to medium-sized industries. 16. A central element of the World Bank Group's current strategy in Sri Lanka is the achievement of a more sustainable balance-of-payments posi- tion in the medium term through export promotion and import substitution in viable economic activities. The Bank Group's macroeconomic and sectoral analyses of the Sri Lankan economy indicate that achieving and maintaining external equilibrium in the context of a groving economy require major policy changes in several areas: investment priorities should be assessed more carefully than in the past; the system of economic incentives should become more consistent; the role of the public sector in manufacturing activities should be limited to clearly established priority areas; and cost recovery  -6- should be seen as complementary to, rather than conflicting vith, greater equity. in distribution. 17. Within the above framework, the Bank's lending program has been concentrating resources on directly productive sectors, such as agriculture and industry, and in support of energy and trausport infrastructure. Witbin agriculture, Bank Group strategy bad given until recently the highest priority to the expansion of paddy production and to rebabilitation of the vital tree crops subsector. Regarding tree crops, the objective has been to channel resources into an activity in which Sri Lanka has a comparative advantage. While this objective will retain its importance, the probable attainment of self-sufficiency in rice will allow the lending program to support in the future programs aimed at expanding the production of other important agricultural products for local consumption and, possibly, local processing for exports. 18. The World Bank has also provided financing for a broad range of large-, medium- and small-scale industrial enterprises, primarily in the private sector, through support of industrial development finance institutions. Future lending in the sector would continue this support, focusing on firms with export potential. It would also capitalize on the conclusions of technical assistance financed through past operations to provide support for improvement in trade and incentive policies, and for increasing the efficiency of public enterprises. 19. The Gove, ent's priority to rehabilitate rundown infrastructure and expand the capacity of existing capital stock by high priority new invest- ments is well placed and necessary in order to support expanded economic activity, particularly in the private sector. Major elements of the lending program would be directed at helping to meet the energy needs of the economy and at easing trausport bottlenecks. The World Bank has provided financing to a number of power projects for generation, transmission and distribution. The thrust of >uture operations would be decided on the basis of a comprehen- sive assessment of investmn'at needs in all three areas. However, given that the majority of high yielding sources of energy in Sri Lanka have been util- ized already, it is envisaged that the future program -would accord relative priority to energy conseriation rather than generation, through both required investments and policy measures. The old and inefficient power distribution system would be rehabilitated to reduce system losses; small but significant improvements in energy conservation would be undertaken in large energy consuming industrial/commercial units; and a study is underway to recommend measures to improve energy efficiency in the transport sector, a large con- sumer of commercial energy in Sri Lanka. Support to the transport sector would continue with rehabilitation and upgrading of the road network, institutionalizing proper maintenance methods and improving sectoral planning of policies and programs. 20. Institutional capabilities, at both the planning and implementation levels, have been strained by the recent rapid expansion of public  tcE -7- investment. Continuing maphasis would be placed on project components sup- porting institution building, human resource development, business and industrial management, and public administration. 21. The World Bank's development of a coherent lending program for Sri Lanka, and its continuous dialogue regarding the specific elements of the program and policies necessary for increasing the program's effectiveness, have been acconpanied by firm support for a substantial transfer of resources to Sri Lanka. The main grounds for this support have been the need to offset the deterioration in the world trade environment; the achievement of a high and sustained growth rate; and the tightness of the Government's budgetary situation as increased operational and maintenance requirements make demands on doaestic resources. 22. The World Bank Group, as of the end of 1984, accounted for 15.2 percent (IBRD, 2.3 percent; IDA, 12.9 percent) of Sri Lanka's total debt outstanding and disbursed, and 5.0 percent of debt service on medium- and long-term debt. The projected World Bank Group's share in total existing external debt outstanding and disbursed will increase to 18.3 percent (with IBRD's share declining to 1.9 percent) and its share in debt service will increase to about 5.4 percent, by the end of 1986. PART III - VOCATIONAL TRAINING TN THE CONSTRUCTION SECTOR Government Policies and Proerams in Vocational Traininm 23. Since 1979, the Government has invested in training programs as a necessary part of its strategy to successfully implement its industrializa- tion program. The increase in demand for skilled workers especially in engineering and construction trades within the country, and the migration of workers to the Middle East, increased the demand for technical education and vocational training. The other major decision taken by the Government was not to restrict the outflow of skilled labor from the country. Instead, a policy to expand training programs was instituted. 24. As a result, training capacities have expanded across the board, for technical manpower, instructor training, and vocational/construction training. Briefly, the network of polytechnics and Junior Technical Institutes (JTIs) of the Ministry of Higher Education (MDIE) was expanded through a Rs 500 million technical education project supported by the ADB, SIDA, and MUDP. A National Technical Teacher Training College (NTTTC) is also to be established under that project to provide pre- and in service training for instructors in MEIE institutions. This college is also expected to play a dominant role in relieving the lack of qualified instructors in the country. 25. The National Apprenticeship Board (NAB), under the Ministry of Youth Affairs and Enployment (NYAE), established an Apprenticeship Training  -8- Institute at Katubedda with assistance from the Federal Republic of Germany. The NAB with assistance from UNDP/ILO is also establishing a Technician Training Institute at Katunayake. It also administers craft training at work sites for 16-22 year old youths, and currently supervises about 10,000 trainees. NAB does no training itself, but recruits apprentices, establishes training curricula and testing standards, and carries out field inspections of training on work sites. For construction trades, there are some one-year courses, but the majority are courses sponsored under the Construction Industry Training Project (CITP - Credit 1130-CE). NAB runs a special apprenticeship scheme with an annual intake of about 500 trainees at higher levels (about 375 middle-level supervisors, plus undergraduate training in universities for about 100 upper management trainees). 26. The Ministry of Labor (ML) ha.s established seven permanent -occ- tional training centers with the assistance of the Dutch Govermient, and also plans to strengthen its institutions at Orugodawatte, Narahenpi::a and Marawila. With SIDA assistance, the MDL has established a Foreman Training Center in Colombo. In rural areas where students are dispersed over a wide geographical area, MDL operates two permanent centers and 317 very small mobile units offering courses in masonry and carpentry, metal work, and motor repair and maintenance, for about 2,700 students a year. Additional training in carpentry is provided by the Dapartment of Small Industries which operates 109 centers nationwide. 27. Several issues affect technical/vocational training in Sri Lanka. These relate to manpower, the efficiency of the vocational training system, the management of the system itself, and financing policies. As regards policy, there are four issues which warrant attention: the export of manpower, the lack of testing and certification, and the wages and benefits to staff in technical/rocational training and cost recovery. The efficiency of the system is affected by the relevance of the curriculum to market needs, the competence of instructors, the availability of training equipment and materials, and the degree to which the trainees are employed and the benefits they receive after trainirg. 28. Export of Nanyower. The Government has adopted a policy of encourag- ing the migration of skilled and semi-skilled workers. In 1982, 76 percent of the migrants were either skilled or semi-skilled workers. The major factor influencing migration is the high wages offered abroad. In 1983, remittances amounted to Rs 6.8 billion and were the second highest foreign exchange earner after the export of tea. While the large number of skilled and semi-skilled persons migrating to the Middle East has eased the pressure of local unemployment, it has created a number of problems for the local construction industry. There have been difficulties in recruiting competent personnel, and productivity in the construction industry has declined because the more experienced and skilled workers have been leaving. The escalation of construction costs due to the increase in wages is linked also to migration. Wi,A the -ecent drop in international oil prices, an emerging issue is whether a significant number of workers who went to the Middle East  would be compelled to return vhen their contracts expire, thereby increasing the supply of skilled workers in the local market. Nany of the returnees vill return to their original occupations as construction workers. However, preliminary data (from ILO/ARTEP) shows that the overwhelming number of returning workers normally invest their savings in land or caumercial enterprises and therefore prefer self-employment. 29. Certification. Training programs for the same trades which are conducted by various ministries differ in the level of skills imparted, and the training methodology and curriculum utilized. This lack of uniformity is aggravated by the paucity of facilities for trade testing. Employers, therefore, find it difficult to ascertain the skill levels of new recruits and prefer instead to administer their own tests and establish comensurate wage scales. 30. Salary and Benfefits. The recruitment and retention of technical personnel has been of serious concern. The situation is most evident in the training profession, because general conditions of employment and basic pay scales are more attractive in private industry. Although the problem is recognized, there has been little action to remedy the situation, largely because pay scales are part of a wider public service system. 31- Relevance of Curriculum. Some ministries have achieved a degree of success in designing training courses which reflect the needs and the requirements of the industry. However, there has been no formal system where curricula are designed in consultation with the industry, or feedback gathered on the relevance of training imparted. This shortcoming can only be corrected by institutionalizing a process whereby consultative and repre- sentative committees are appointed, which guide and advise training organiza- tions on the needs of the industry. 32. Competence of Instructors. knother problen of the training system is the lack of instructors who have the necessary industrial experience. Because the opportunities for training new instructors have been reduced during the last decade, the few who have been trained abroad, quickly leave for more lucrative employment opportunities overseas and domestically. 33. Availability of Materials. Most vocational training institutions do not have adequate supplies of consumable training materials because of budget constraints. Apart fron the funding aspects, high-quality materials are not provided in a timely way. The reliance on instructor-focused rather than trainee-centered instructional programs as well has prevented experimentation with more innovative teaching methods. 34. Coordination and Mnamsement of the Trainin- System. Technical and vocational education and training is the responsibility of a number of minis- tries and organizations. The need for coordination to avoid duplication of effort and a waste of resources is urgent. As a good example of coordination efforts, the Goverrment has cited the CITP which spans several ministries in  -10- implementing a sector-related training program. There has been no duplica- tion of effort in implementing the project, and existing training facilities are utilized wherever possible, thus obviating the need for new facilities. 35. Cost Recoverl. Sri Lanka has developed a heavily subsidized voca- tional training system. The Government's policy is to meet almost the entire capital and recurrent costs of these programs from general resources (namely, the business turnover tax, income taxes, and export duties); and at present, none of these revenues is earmarked for education and training activities and funding is based on available resources (para. 55). The 1971 NAB Act, which provides for a training levy on employers with more than 50 employees, has never been utilized to finance vocational training. The business turnover tax is seen as the means through which all employers contribute to government-sponsored training programs. Public training institutions also have a subsidized fee structure. In the technical institutes, the fees are nominal, while public in-service training institutions administer fee struc- tures that attempt to achieve full cost recovery from private sector trainees, but provide free training to public sector employees. In the private sector, there are a nu:mber of institutions which conduct specialized vocational training programs and charge realistic fees fran their clientele. There are, however, few private institutions which offer basic skill training in the construction trades. The Goverrment also has a policy of awarding stipends in some of its vocational training programs, designed to attract trainees fran poorer households. There is, however, no uniformity in the amounts paid by the different government agencies for essentially similar training. Bank Involvement in Vocational Trainin2 36. The Construction Industry Training Project (Credit 1130-CE), approved in April 1981, is the only vocational training operation supported by IDA to date. It was established under the Hinictry of Local Government, Housing and Construction OMLGHC) with the objective of developing a training program to meet the immediate requirements of skilled labor for the construction industry, as well as improving the methods and procedures in the construction industry. This project was designed to: (a) establish a unified modular training system for construction-related trades; (b) improve the use and maintenance of plant and equipment by training operators and mechanics; (c) increase the effectiveness of work planning and supervision by training middle and upper management in contract procedures, site management and quality control; and (d) strengthen the agencies and institutions involved in training for the construction industry. The project had original training targets of: (a) 45,000 workers in basic construction skills; (b) upgrading of about 9,600 existing workers in their construction skills; (c) about 1,800 workers in equipment operation and maintenance; (d) about 900 supervisors in work supervision and quality control; and (e) about 80 senior staff in improved work planning and management. With the slower rate of expansion in public works after 1980-81, the initial projections of increases in the construction workforce in the order of 15 percent per annum proved to be  -11- optimistic. The targets for manpower training in the project were therefore reduced in 1983. There were three reasons for reducing the training targets: (a) the original targets set at appraisal were too ambitious for a three-year project; (b) the project had a slow start-up, and (c) construction industry activities declined after 1981. 37. The Government established a temporary Project Cell in the Urban Development Authority (UDA) under the HLGHC. A comittee consisting of the secretaries of the ILGIC (Chairman), NYAE, Plan Implementation, MDJE, Lands and Land Development, Mahaweli Development, and IDL, was established to formulate policy and oversee the implementation of the project. The Government agreed to implement through the NAB, standardization of the selec- tion of trainees, training, testing, certification and registration of con- struction workers, supervisors and specialists. This task has been completed already and implementation is now being handled by the NAB. The Government also agreed to implement standardization of the construction industry con- tracting specifications, procedures and documentation. This was handled by a temporary National Steering Committee. The work is nov completed and has been approved by the Cabinet for implementation. 38. Under Credit 1130-CE, attempts are also being made to recover or share part of the costs of the training programs with primary and secondary beneficiaries (trainees and contractors). For example, in skill training, the CITP finances the costs for the 10-week institutional training period plus 10 weeks of the 40-week on-site phase. Contractors pay the trainees a comparable or higher stipend during the remaining 30 weeks of the supervised on-site training period. For upper and middle management courses and trade testing, fees have been levied from the inception of the project. The CITP also undertakes several activities which generate revenue as part of the training program. These practices need to be strengthened and expanded, so that the financial burden to the Government from operating these programs is substantially reduced (para. 56). 39. The project objectives have largely been met, but continued support is required in order to institutionalize and consolidate these achievements. The modular training system has been established, but requires that curricula and training manuals be updated to reflect changes in construction techniques as well as instructional methodology; middle and upper management training programs would have to be expanded, particularly in view of the urgent need to increase public sector efficiency and the expanding role of private sector contractors. The agencies involved in construction industry training, mainly the IE, ML and IffAE, have been assisted under the project. Coordination has been enhanced through the temporary Secretaries' Committee and Project Cell. This organizational device must now be formalized to prevent duplica- tion of programs and facilities, and to manage programs and policies which can stimulate the role of the private sector. By December 1985, 24,000 persons had been trained under the project and it is expected that a total of about 30,000 persons would be trained by project completion. Tracer studies conducted in 1983, 1984 and 1985 showed that up to 85 percent of trainees  -12- have found employment in their area of training. The 1985 study also showed that the rate of employment (permanent, self or casual) and the wage earning capacity were higher for CITP trainees than for non-CITP trained workers. On average about 35 percent of CITP-trained artisans (carpenters, plumbers, masons, electricians) found full-time permanent employment while the others were either self-enployed or operated as casual (daily) workers. The average daily wage of CITP-trained artisans was about 44 percent higher than for unskilled/untrained workers (Rs 36 per day compared with Rs 15-25). CITP-trained equipment operators and mechanics achieved almost 100 percent permanent full-time employment with average monthly vages of Rs 1,500 which is about 10 percent above the average for other permanently employed skilled workers in the private sector. Employed construction site supervisors (lower level managers) had an average monthly wage of Rs 1,368, and this compares favorably with supervisors at similar levels in the construction industry. Employment ProsDects in the Construction Industry 40. Although emigration to the Middle East has slackened and Sri Lanka's investment program has been reduced since 1982, there is still a substantial unmet demand for training, including upgrading of already employed workers. Further, there is a need to strengthen the links between training and other activities contributing to the development of the construction sector. The expected mix of new investments in the Public Investment Program (1986-1990), the Government's emphasis on better maintenance of existing capital assets, and its policy to strengthen the local private construction industry would generate a substantial demand for skilled and semi-skilled workers. Estimates of training requirements have been obtained from an analysis of the Public Investment Program (1986-1990), and an assumed breakdown of staff required for the construction and maintenance of ordinary and complex buildings, road construction and maintenance, slum and shanty development, semi-permanent and permanent housing, irrigation, water supply and drainage works. It is clear from this analysis that the skill mix needed for future investments would differ from that required in the period up to 1981, during which heavy construction in Mahaweli, the Free Trade Zone (factory construction), and the tourism (hotels) sectors expanded rapidly. The implications of the change in the investment profile are, first, that a skill gap would exist with the reduction of expatriate firms and workers in the construction sector and, second, a significant retraining effort of existing workers would have to be undertaken to meet the requirements. 41. In estimating future training requirements, factors such as worker retirement, exodus of construction workers for overseas employment, return of construction workers from overseas to employment in the sector, and the contribution of other institutional and non-institutional (apprenticeship) training were taken into account. On this basis, the estimated total train- ing need over the nine-year project period would be on the order of 120,000 persons. Allowing for training to be provided by existing institutions and programs as well as on-the-job upgrading and other informal practices, it is estimated that the residual requirements for training, to be provided under  -13- the proposed project, would amount to about 76,000, of which 50,000 would be new entrants to the sector, and 26,000 would be existing workers who are to be retrained and upgraded in specific trade areas. This would average about 8,400 workers per year (5,600 new and 2,800 existing workers). This level is slightly above the first project (Cr. 1130-CE), where the training load now averages about 6,000 per year (5,000 nev and 1,000 existing workers). It is clear that the emphasis would be on upgrading of existing workers, while the training of new entrants to the labor force would remain at present levels. IDA support through a second project, therefore, would build on the momentum gained in developing rational training programs started under the first project, while contributing to strengthening the key institutions which design and provide training. PART IV - THE PROJECT 42. The proposed project was prepared by the Ministry of Local Government, Housing and Construction. The project was appraised in August 1985 and post-appraised in December 1985. Negotiations were held in Washington D.C. from March 18-25, 1986. The Sri Lankan delegation was led by Mr. R. Paskaralingam, Secretary, NLGC. A Staff Appraisal Report entitled "Sri Lanka - Second Vocational Training Project" (Report No. 5958-CE) dated April 2, 1986, is being circulated separately to the Executive Directors. A supplementary project data sheet is attached as Annex III. Proiect Obiectives 43. The objectives of the proposed project would be to: (a) create an institutional framework to sustain training and industry development efforts started under Credit 1130-CE; (b) increase the supply of semi-skilled, skilled and managerial personnel to the industry; (c) improve the quality of manpower supplied to the sector; and (d) institute a system of cost recovery in vocational training for the construction sector. The institutional development objective would be achieved by establishing and developing the Institute for Construction Industry Training and Development (ICTAD). The manpover supply objective would be achieved by training about 50,000 new and upgrading about 26,000 existing semi-skilled, skilled and managerial workers in the construction industry. The quality improvement objective would be achieved by instituting an instructor training and upgrading program, strengthening monitoring and evaluation of training and industry development, and trade testing and certifying about 40,000 skilled workers and supervisors. The cost recovery objective would be achieved by requiring that the beneficiaries share in the training costs.  -14- Project Descrintion Institutional Development 44. Eutablishina the Institute for Construction Industry Trainina and Development (ICTAD). In order to implement the recamuendations for construc- tion industry development which were approved by the Cabinet, to build on the momentum gained in developing rational training programs and sustaining the training effort, and most important, institutionalizing the experience gained under Credit 1130-CE, the temporary Project Cell would be transformed into the Institute for Construction Industry Training and Development (ICTAD) under the UDA. This would require an increase of 17 professional level project cell staff. The Government would appoint the additional staff at the appropriate levels according to a schedule agreed vith IDA. To support the establishment and development of ICTAD, the project would finance civil works, equipment, vehicles, books, expert services, fellowships and con- sumable materials and the salaries of additional staff on a declining scale. 45. ICTAD would have two major functions: (a) training and (b) industry development. A Training Division would assist existing institutions to deliver training, rather than providing training itself. The only exception would be where no other agency has the capability (or potential) to deliver training. The division would design, supervise and finance appropriate training schemes. Its training activities would be centered at the technical institutes of the MORE for craft-level training, the State Engineering Corporation (SEC) workshops for mechanic training, the Heavy Equipment Operator Training Center (HEOTC) for equipmeut operator training, and the Center for Housing, Planning and Building (CUPB) for management training at all lewels. The division would work closely with the NAB on the further development of trade standards and tests and collaborate closely with the NTTTC (when it is fully established) for the training of instructors. However, in the interim, it would develop a capability to monitor the quality of instructor training, identify gaps in the program, and assist in the development of courses, curricula, and appropriate instructional methodologies. 46. The Industry DeveLopment Division of ICTAD vould have three major functions: (a) development of technology; (b) improvement of the operating environment of the construction industry; and (c) development of private contractors. Technology development would provide information on construc- tion methods, materials, and equipment which are available in other countries and are relevant to local conditions. The encouragement of the use of local materials, the development of appropriate specifications, standards and building regulations, and the economics of substitution (local vs. foreign) would be undertaken. The improvement of the operating environment of the industry would include the collection and interpretation of construction industry statistics including price indices, manpower demand/spply, contract awards, etc. The data obtained would be used as the basis for reccmuending changes in bidding procedures, contract conditions, prequalification  -15- requirements, and regulation of foreign contractors. The development of private contractors depend in part on government action, but largely on actions by the contractors thenselves. It would be a function of the Industry Development Division to work closely with the Association of Construction Contractors of Sri Lanka (ACCSL) to determine a development strategy and to prepare a phased program for transfer of responsibility for these activities from ICTAD to ACCSL. This would be a gradual process and even when achieved, there would still be a residual role for ICTAD to play. The Government has agreed that by January 31, 1989, ICTAD would relinquish to the ACCSL all work on the registration of contractors and the promotion of the private sector in the construction industry. Manpower SuDDlv 47. Skill Training. The objective of this component is to increase the supply of skilled and semi-skilled workers for the construction industry through (a) extending training to construction trades not covered by existing training programs; (b) increasing the range of coapetencies of semi-skilled workers who have already been trained to the Grade III (semi-skilled) level; and (c) certifying the quality of skill training by testing construction workers to National Skill Standards. Approximately 72,000 skilled and semi- skilled workers out of a total of 76,000 would be trained and/or upgraded in various skill trades (para. 41), and of these only about 40,000 would be trade-tested and certified, given planned trade testing capacity (para. 50) and the existing capabilities and expected demand for these tests. Training would be provided for new entrants in craft trades, mechanics, equipment operation, various levels of management, and instructors. 48. New entrants in craft trades would be trained to the basic Grade III (semi-skilled) level while existing workers would be upgraded to either Grade II or Grade I (skilled worker). The training program for new entrants would consist of 10 weeks of institutional training followed by 4tl weeks of on-site practical training. The equipment operator program would consist of 6 weeks institutional training, followed by 200-240 hours of on-site training. For mechanics, the program is differentiated between light and heavy mechanics. In the case of heavy mechanics, the program includes 6 months of training at a center, followed by 12 weeks of on-the-job training. For light equipment mechanics, the institutional phase of the program would be reduced to 5 months. Programs to upgrade skills would be of shorter duration, modular in design, and conducted on weekends. The upgrading of equipment mechanics would be achieved by using modules of a longer duration. 49. The institutional phase of all skill training programs would be conducted at existing institutions. This gives a large degree of flexibility to the training system because it enables courses to be scheduled in response to training demands. Some civil works construction, however, would be required to provide for the storage of training materials, upgrading of existing workshops, and staff and trainee housing. The on-site or practical part of the training program would continue to be organized by the ICTAD,  -16- with assistance from the district training officers (DTOs) who are employees of the Building Department of NLGHC. Trainees are placed on building con- struction sites and supervised by both DTOT and NAB. Equipment operators and mechanics would be given supervised practical experience either at their place of employment or, for new entrants, on simulated or contracted work. Trade testing would be conducted at various technical colleges, the SEC workshop, REOTC and a National Trade Testing Centre being constructed by the Government. Course curricula, instructional manuals, and other teaching aids for all skill training, developed under Cr. 1130-CE, require revision to meet the changing needs of the construction industry. In order to support this level of skill training, the project would finance some civil works, furniture, equipment, vehicles, books, expert services, fellowships, and, on a declining basis, recurrent expenditures (consumable materials, operation and maintenance, tool kits, and salaries of additional staff). 50. Management Trainins. About 5,700 new and existing managers and supervisors of all grades in the Ministries of Highways, Mahaweli, Irrigation, MLGHC, and the private sector would be trained in programs organized by CHPB. The program would consist largely of two to five day seminars and workshops which focus on topics such as construction engineering and technology, contract management, construction planning and control, as well as financial, materials and personnel management. The Government has agreed that all upper-level management courses beginning January 1, 1990, would be financed by the trainees or their employers. Middle management training courses would be mainly upgrading the skills of existing staff in (a) specific areas of construction management, project analysis, and contract supervision, as it relates to highways, housing building, and irrigation; and (b) general areas of financial and personnel management. The program would range from short one-toreight week courses conducted at CHPB, to a special- ized degree in quantity surveying and building economics which would be carried out at the University of Moratuwa. The training of the management staff of the Highways Authority would also be a responsibility of the CHPB. Lower-level (supervisory) courses for new recruits would consist of an 8-week institutional course followed by an on-site program of 50 weeks, including a final 4-week institutional training period. Existing supervisors who are being upgraded would undergo training of from one-to-four weeks and this would be both on-the-job and institutional. Trainees would take a National Skill Standard test, developed by ICTAD and administered by NAB, at the end of their training period. While curricula, training materials and instruc- tional staff have been developed under Cr. 1130-CE, the expanded scope of training and the new clientele to be trained, require that new curricula be developed and the instructional capabilities of staff improved. In order to support the entire management/supervisory training effort, the project would finance expert services, fellowships, equipment, books, and consumable materials and the salaries of additional staff on a declining scale.  -17- Oualitv Improvement 51. Instructor Trainina. Three types of instructors would be trained: trainers of craftsmen, trainers of equipment operators, and trainers of managers. To undertake the proposed program of skill development and manage- ment improvement, approximately 235 existing instructional staff would need to be upgraded and a further 265 new staff recruited and trained. Existing skill trade instructors for the basic construction trades are employed by the N(1E and would be upgraded in both skill and instructional methodology. The courses would be of six weeks duration and be undertaken initially at the (Interim) Technical Teacher Training Centre of the MDHE, with practical trade skill upgrading being carried out in the appropriate workshops of technical colleges. The Government has ensured that by June 30, 1990, all skill-level instructor training would be transferred to the NTTTC. ICTAD would work closely with the NTTTC on the design and implementation of instructor courses for the construction trades. 52. The training of 282 equipment operators and mechanics instructors would take place at the REOTC, SEC and NTTTC. The courses would vary in duration, depending on the nature of the skills to be taught. The courses would be of about three months duration for instructors and six months for demonstrators. 53. In order to train instructors in management subjects a staff develop- ment program would be carried out for CHPB to increase both individual instructor as well as institutional capacity in conducting programs using appropriate teaching technology. The staff at technical colleges participat- ing in the supervisory management training would also be upgraded. It is envisaged that training links with similar staff development programs over- seas would be established. The project would finance equipment, vehicles, consumable materials, expert services, fellowships, and additional staff salaries on a declining basis to support the entire instructor training program. 54. Nonitorina and Evaluation. Under Credit 1130-CE, the Government was required to establish a monitoring and evaluation system. The monitoring of project inputs and outputs has been up-to-date and timely but evaluation has been less systematic. The Government undertock two training needs assesiments (1983 and 1985). The first provided the basis for adjusting training targets under Credit 1130-CE, while the second provided the estimates for the proposed project. The project would provide resources so that these training needs assessments can be conducted every two years during the project. The Government would conduct four training needs assessments, complete then according to an agreed schedule, and review the findings with IDA prior to their implementation. The second area of evaluation which requires assistance are tracer studies. Three tracer studies have been undertaken since 1981. The general conclusions were that 85 percent of the sample remained with the industry and that their permanent employment and wages rates were higher than those of non-CITP trainees. Under the Project,  -18- support would be provided to expand the scope of the tracer studies to include more detailed demographic and social data; migration (internal and external), and household incoame and expenditure information. Four studies would be conducted during the course of the project. The Government would complete them according to an agreed schedule and review the findings with IDA. The project would finance equipment, vehicles and technical assistance to support monitoring and evaluation. Because many project activities (train- ing targets, tracer studies, cost recovery system, NTTTC taking over instruc- tor training, devolution of activities to ACCSL) are scheduled to be reviewed within three years of project start-up, the Government would also conduct a mid-term review in January 1991. This mid-term evaluation would take stock of achievenents to date and make adjustments as necessary in light of experience during the first years of implementation. Cost Recovery 55. When fully operational in 1995, the project would require about Rs 63.58 million annually in recurrent costs. These annual recurrent expen- ditures would represent less than 1 percent (specifically, 0.43 percent) of projected total recurrent expenditures on education and training, but about 13.2 percent of projected recurrent expenditures on technical/vocational training in 1995. Since the cost recovery program started under Cr. 1130-CE is continuing under this project, the revenue generated would be used to defray a part of the operational costs. On the basis of ongoing revenue mechanisms, established under the first project, it is estimated that about Rs 9.6 million can be generated annually, which is 15 percent of projected annual recurrent expenditures under the project. The Government has hawever agreed to cover from sources other than the general budget all trainee stipend and tool kit costs by December 31, 1989, and about 50 percent of all consumable training material costs by December 31, 1994. This means that by 1994, about 50 percent of all recurrent costs of training would be covered by non-budgetary sources. 56. While the Government has acknowledged that beneficiaries (trainees and contractors) should cover a larger part of the costs of training, it has also indicated that experience would favor covering these costs by the sale of trainee products and services and a reduction of stipends, rather than reliance on fees and removal of stipends. Because of the inherent conflicts which can develop when training is fully subsumed into production, as well as the existing public budgetary constraints, all options of cost recovery must be considered in deciding how to reach the target of 50 percent cost recovery. A detailed study of the financial and economic costs and benefits of publically financed construction industry skill training, the impact on the government budget, the appropriate level of fees by course/trade area, and the proportions to be shared by trainee, Government and private sector, would be undertaken. The study is also expected to provide guidance on what stipends should be reduced or eliminated, who should receive stipends, and what level of fees can be charged for vhich courses. The Government would complete the study and review the findings with IDA by September 30, 1987.  -1 9- Technical Assistance 57. The technical assistance to be provided under the project to aasist in the accanplishment of all the above objectives, would comprise 11.0 staff- years of expatriate expert services, 96 staff-years of local expert services, 19.6 staff-years of international and regional fellowships and 121.5-staff years of local training. Project Costs 58. The total cost of the project, including duties and taxes on imported goods (US$0.85 million) is estimated at Rs 711.05 million or US$24.48 million equivalent. The estimated foreign exchange component is US$10.11 million or 41 percent of total project costs. Physical contingencies (USS1.04 million) are estimated at 6 percent of base costs of all project components and price contingencies (US$4.94 million) to cover expected price escalation at the following rates. For civil works and goods; foreign costa at 7.5 percent in 1987, 7.7 percent in 1988, 7.6 percent in 1989 and 4.5 percent in 1990-1994; and local costs at 9 percent in 1987 and 8 percent in 1988 and 7.6 percent in 1989 and 4.5 percent from 1990-1994. The foreign costs of salaries and services are calculated at 7.5 percent in 1987, 7.7 percent in 1988, 7.6 percent in 1989, and 4.5 percent from 1990-1994, and local costs at 1.0 percent froa 1987-1994. Project Financinf 59. The proposed IDA credit of SDR 13.0 million (US$15.0 million equivalent) would cover 63 percent of total project cost net of taxes. UNDP (IL0) would finance US$1.0? million, and the Government would finance the remaiing net costs of US$7.61 million (32 percent of total net costs) and all taxes. Total external financing would cover 68 percent of total project costs net of taxes. 60. Retroactive Financing: The design preparation costs for the ICTAD headquarters building was financed under Credit 1130-CE. Construction and bid documents have been completed, and contractors prequalified. The estimated expenditure for the civil works to be incurred during the period prior to credit signing is US$0.25 million. The GoverDment requested and IDA agreed to retroactively finance these costs. TleSmentation 61. Implementation of the project would be the responsibility of the I4LGHC through ICTAD. The Secretaries Committee would include the secretaries of all the ministries involved with the project, with the Secretary, M.GHC, as the Chairman. The other ministries would be Higher Education, Youth Affairs and Employment, Plan Implementation, Labor, Nahaveli Development, and Lands and Land Development, plus private sector representation. ICTAD would  -20- coordinate the training activities which span across the ministries mentioned above. The Secretaries Committee vould be responsible for (a) policy formulation; (b) approval of training and development programs; (c) reviewing and evaluating performance; (d) approving personnel and staffing policies including tems and conditions of employment of ICTAD employees; and (e) formulating administrative and operating procedures for the Institute. In addition to the Secretaries Committee, ICTAD would also constitute tvo consultative committees to advise on the broad functions of the institution. The Consultative Committee for Training would be responsible for advising ICTAD on issues of training, trade testing standardization, and curriculum development. The Consultative Committee for the Construction Industry would provide advice on issues relating to specifications, technology, msall-scale contracting, etc. Both comittees would have about 10 members each, divided equally between the public and private sectors. 62. The Chief Executive of ICTAD would be the Director General and three divisions for training, industry development and resource management would be established under his direction. Supervision of civil works implementation, procurement of equipment, vehicles and training materials would also be the responsibility of the Resource Management Division. Accountinm and Auditinz 63. ICTAD would prepare and maintain project accounts in accordance with sound accounting practices. Project accounts would be prepared and withdrawal applications would be supported by full documentation. Expenditures on salaries and other recurrent expenditures would be reimbursed against statements of expenditures certified by the Director General. The Goverrment has agreed that: (a) accounts and financial statements for each fiscal year would be prepared and audited by independent auditors acceptable to IDA; (b) records concerning statements of expenditure would be maintained in accordance with sound accounting practices, and retained for at least one year after the completion of the audit for the fiscal year in which the last withdrawal was made; and (ci certified copies of the audited accounts and financial statements for each fiscal year, together with the auditors report would be furnished to the Association as soon as available, but not later than nine months after the end of each fiscal year. Procurement 64. Contracts for construction of stores, workshops, staff and student housing, and ICTAD headquarters building would be awarded on the basis of LCB procedures. Because the centers are dispersed around the island, it is anticipated that 14 contracts would be awarded for the civil works program (US$2.30 million) to local contractors. Equipment and vehicles contracts (US$3.33 million, inclusive of taxes) would be awarded in accordance with ICB procedures. Local manufacturers would be given a 15 percent margin of pref- _nce. Equipment and vehicles vould be grouped to the extent possible in large packages for bulk procurement. Books financed by IDA (US$0.28  -21- million) would be purchaaed directly from distributors. Consumable training materials and trainee tool kits, would be procured through prudent shopping on the basis of three price quotations from different sources. Fellowships and technical assistance financed by UNDP would be in accordance with their guidelines. All civil works contracts over US$250,000 equivalent each, corresponding to about 75 percent of value of works, would be subject to prior IDA review. All equipment and vehicles contracts over US$100,000 equivalent each, corresponding to about 7.5 percent of value of goods would be subject to prior IDA review. Other contracts would be subject to selec- tive post-ward review. Table 1 Procurement Method I Category of $ (million)I Total 1 | Expenditure : ICB B LCB I Oth.r I NA I Cost 1/ 1 ICivil Works& I I 2.30 1 I I 2.30 1 I Prof. Fees I l (2.07)1 I t I | Furniture I I 0.17 1 1 1 0.17 1 I I I (0.13) I L I I IEquipment 1 2.97 1 1 1 1 2.97 1 I I (2.60) I j I I Vehicles 1 0.36 1 1 I 1 0.36 1 I (0.23) I _ I _ Books I I 1 0.28 1 I 0.28 1 I ___________________ 1 _l _______ I 1 (0.28) 1 1 I Technical Asst.l 2.36 1 1 1.02 1 1 3.38 1 _ I (2.36) I I I____ IConsumable 1 1 I 1 9.52 I 9.52 f M Xaterials & I I I 1 (5.43) 1 I Tool Kits l I j J I I I Incremental 1 1 I t 5.50 1 5.50 1 I Recurrent I I I 1 (1.90) I I ExDenses 1 1 1 1 1 1 I TOTAL I 5.69 1 2.47 1 1.30 1 15.02 i 24.48 1 I IDA I (5.19) 1 (2.20) 1 (0.28) 1 (7.33) 1 15.00 1 I UNDP I _ I _ |1.02 i - |1.02 I GOSL I0.501 - I - 1 7.69 1 8.46 I LI Includes contingencies and duties and taxes where applicable. NOTE: Figures in brackets are the respective amounts financed by IDA. Disbursements 65. The proposed Credit would be disbursed over a period of nine years which conforms to the disbursement profile for IDr-assisted projects in Sri Lanka. The Crelit would cover 63 percent of tocal project costs net of taxes  -22- and would finance 100 percent of expenditures for technical assistance; 90 percent of civil works and professional fees; 10O percent foreign expendi- tures for directly imported equipment, furniture, books and vehicles, 100 percent of ex-factory costs of locally manufactured goods and 80 percent if locally procured. All expenditures on salaries, consumable materials, tool kits and operation and maintenance costs would be disbursed against state- ments of expenditure on a declining basis from 80 percent in FY87-89 to 20 percent in FY94. Disbursements in respect of contracts for the equivalent of US$20,000 or less for IDA-financed items would be made against statements of expenditures certified by the Director General. The relevant documentation would be retained by ICTAD and made available to IDA representatives for review on request. Special Account 66. A Special Account of US$0.7 million equivalent is proposed for the project, representing about four months of estimated expenditures. The Special Account would be replenished based on the required documentation for eligible expenditures and would be operated in accordance with terms and conditions satisfactory to the Association. Proiect Benefits 67. Over 85 percent of all project trainees would be either new entrants or existing workers at the basic skills levels in the construction industry, and would come from lower income househoLds. Because of the employment and income benefits which will accrue to these trainees (para. 39), the project would have an impact on poverty alleviation. The project would increase the capacity of the Sri Lanka construction industry to be more productive, efficient, and capable of meeting targets in the investment program in both the public and private sector. Benefits which would accrue from the project include: (a) the addition of skilled construction workers to the industry; (b) increasing the labor productivity and efficiency of the existing con- struction personnel by up-grading their skills; (c) improving the income levels of unemployed youths by providing necessary skills so they could obtain gainful employment in the industry; and (d) increasing returns on invested capital from better and efficient use of equipment. The project would also have institutional benefits. The effectiveness and productivity of the existing training facilities would be increased, and the standards of the construction industry improved by introducing more appropriate specifications. Proiect Risks 68. There are a number of risks associated with this project. One con- cerns changes in the demand for training arising out of lower levels of construction activities or changes in the composition of skills that may be required. The project design is oriented to provide flexibility in meeting the requirements for skill training as diagnosed by the training needs  -23- surveys. A reduction of the demand f or t aining in total or for any skill in particular may at most lead to some underutilization of project funds. As the project would utilize existing facilities and contract additional instructors only when very specific courses are identified, no implications for underutilization of staff and/or facilities exist. If a larger than expected number of emigrants would return from the Middle East, the supply of certain skills will be affected and some of the envisaged training may not be required. Equally, though, some retra.ining of returnees may also be required. The concern about the recruitment and retention in service of qualified instructors is likely to be overcome by the steps undertaken during the project. These include, a systematic training program (local and foreign fellowships), training allowances and overtime pay. While there is agreement that ICTAD should not be a regulatory agency, nor attempt to preempt activities which should normally be undertaken by the private sector, there is the risk that a government agencv/institution would gradually attempt to play just such a role. The representation of the private sector on the Consultative Committees, the Administrative Order (Cabinet Memorandum) which established ICTAD, and the program to assist the ACCSL to undertaken more activities should overcome this risk. PART V - RECOMMENDATION 69. I am satisfied that the proposed credit would comply with the Articles of Agreement of the Association and recammend that the Executive Directors approve the proposed credit. A. W. Clausen President Attachments Washington D. C. April 24, 1986  - 24- ANNU I * T 1% I L & Pase 3. of 6 s t ~~- MAtL tPONYWU lOw mu (Mu 8T CC? 55mm) fl l% iwa tajk. ASIA & tAncIFIC mui aU (MA Q. a) TOT&l 63. 63.6 ISA4 RIOILTURAL 17.2 24.2 26.1 GM UK cIT U5) .. .. 330.0 27.3 1011.1 (RZLOIRAN OF OIL RQUIVALVET 122.0 132.0 123.0 283.7 5.I MOCULTIO AM YES STATIICS P0r,U0ATI0N.IDzE-Aw (nIfaAU) 939.0 12316.0 13416.0 MA POUTI (or TOTAL) 17.9 21.9 26.0 2.2 23.9 POPILTIU rP0crto2 s POPuLATI IN TE 2000 C(ELL) 21. 1 STIaI T roPoUTIO (ELL) 22.0 rPOPOLATIO I.7 POPULATION D051M PIz SQ. C. 150.7 190.8 235.0 113.5 36.9 PE SQ. NM. ASR. LANO 572.9 517.6 352.0 333.3 1591.2 POPtUATUI AGI STRUCUM (2) 0-14 iS 42.0 41.9 33.2 326. 35.2 153- nU 54.2 36.4 60.23 9.4 37.7 63 AIIDA_ 3.6 3.1 4.2 4.3 2.3 POPUlTIONU GROWTH UTZZ (X) TOTAL 2.5 2.4 1.6 2.0 2.3 UURSN 4.7 4.3 2.9 4.1 *.1 CEDE SE2MN RATE (ERR THaUS) 35.7 29.4 26.5 2.3 20.1 cWE DEAT RATE CPm Tl ) 9.2 7.3 6.0 10.2 9.4 Goss RERODUCTION &ATh 2.6 2.2 1.6 1.7 1.9 FAIRLY PUASHIN ACWODOS. ANNUAL (T3O0S) .. 55.3 100.3 usIS CZ OF SIED O) .. .. 33.0 49.4 36.3 FM AND unTIs IXS or OOD PR" PEz CAPITA U169-71-100) 93.0 103.0 141.0 l16.6 124.4 M CAPITA SUP"PL OF CALOEIES CZ Or RQUtUUZTS) 3.0 107.0 109.0