Mexico - Third Technical Training (CONALEP III) Project

AA.) Document of The World Bank FOR OFFICIAL USE ONLY Report No. 9534-ME STAFF APPRAISAL REPORT UNITED MEXICAN STATES THIRD TECHNICAL TRAINING PROJECT (CONALEP III) MAY 31, 1991 Human Resources Operations Division Country Department II Latin America and the Caribbean Regional Office This document has a restricted distribution and may be used by recipients only in the performance of their offici'al duties. Its contents may not otherwise be disclosed without World Bank authorization..  CURRENCY EQUIVALENTS (as of March 31, 1991) Currency Unit - Peso (Mex$) US$1 M Mex$2,945 Mex$1 - US$0.0003395 Mex$ million US$339.55 MEASURES 1 square meter (m2) 10.76 sq. ft. 1 kilometer (km) - 0.62 miles Fiscal Year January 1 to December 31 Academic Year September 1 - June 30 Acronyms CAPFCE: Administrative Committee of the Federal Program of School ConstructicL (Comite Administrador del Programa Federal de Construccion de Escuelas) CETs: Centers for Technological Studies (Centro de Estudios Tecnologicos) CONALEP: National System for Vocational and Technical Education (Colegio Nacional de Educacion Profesional Tecnica) ICB: International Competitive Bidding INEA: National Institute for Adult Education INEGI: National Institute of Statistics and Cartography (Instituto Nacional de Estadisticas, Geografia e Informatica) LCB: Local Competitive Bidding NAFIN: National Finance Co., Inc. (Nacional Financiera, S.N.C.) NGO: Non-Governmental Organization PNME: National Program for Modernization of Education PND: National Development 'lan PROBECAT: Scholarship Program tor Workers' Retraining PRONASOL: National Solidarity Program (Self-help program for the poor) SEP: Secretariat of Education (Secretaria de Educacion Publica) SME: Small and Medium-Sized Enterprises SPP: Secretariat of Programming and Budgeting (Secretaria de Programacion y Presupuesto) STPS: Secretariat of Labor and Social Welfare (Secretaria de Trabajo y Prevision Social)  FOR OFFICIAL USE ONLY UNITED MEXICAN STATES THIRD TECHNICAL TRAINING PROJECT (CONALEP III) Table of Contents Page No. LOAN AND PROJECT SUMMARY . . . . . . . . . . . . . . . . . .iii 1. ECONOMIC DEVELOPMENT AND TRAINING NEEDS . . . . . . . . . . . . 1 A. The Economy . . . .. . . . . . . . . . . . . . . . . . . B. The Labor Force and the Demand for Skilled Workers and Technicians . . . . . . . . . . . . 2 II. THE MIDDLE-LEVEL EDUCATION AND TRAINING SECTOR . . . . . . . . 7 A. Overview of the Education and Training System . . . . . . . 7 B. Training by Enterprises . . . . . . . . . . . . . . 9 C. National System for Vocational and Technical Education . 10 D. Government Strategy for Technical Training Development . 15 E. Previous Bank Experience and Lessons Learned . . . . . . . 17 F. Rationale for Bank Involvement . . . . . . . . . . . . . . 20 III. THE PROJECT . . . . . . . . . . . . . . .. . . 21 A. Origin of the Project . . . . . . . . . . . . . . . . . . . 21 B. Objectives ............ .... ... .... . 21 C. Project Components and Description . . . . . . . . . . . . 22 IV. PROJECT COSTS. FINANCING AND IMPLEMENTATION . . . . . . . . . . 31 A. Cost of the Project . . . . . . . . . . . . . . . . . . . . 31 B. Recurrent Cost Implications . . . . . . . . . . . . . . . . 33 C. Project Financing and Disbursement Plan . . . . . . . . . 33 D. Implementation, Procurement and Auditing . . . . . . . . . 35 E. Monitoring and Evaluation ..... . .. . ........ . 38 V. BENEFLTS AND RISKS . . . . . . . . . . . . . . . . . . . . . . 40 VI. AGREEMENTS REACHED AND RECOMMENDATIONS . . . . . . . . . . . . 42 This report is based on the findings of an appraisal mission that visited Mexico in March 1991. The mission was composed of Messrs. Wesley Hobbs (Technical Education Planner, Mission Leader), Jose Dominguez-Urosa (Economist), Jorge Quintero (Implementation Specialist) and Eutiquio Elizondo (Instructor Training Specialist). Messrs. Kye Woo Lee (Division Chief, LA2HR), George Psacharopoulos (Division Chief, LATHR), Gary Fields (Economist) and David Warren (Operations Assistant) also participated in the mission. 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.  il TAPLES Table 1.1. Labor Force . . . . . . . . . . . . . . ... . 3 Table 1.2. Labor Force - Skilled W'orkers and Technicians . . . 4 Table 2.1. Middle Level Education 1989/1990 . . . . . . . . 8 Table 3.1. Improving Training Cost Recovery/Cost Sharing During 1991-96 . . . . . . . . . . . . . . . . . . 28 Table 4.1. Proje,ct Cost Summary . . . . . . . . . . . . . . .31 Table 4.2. Unit .ost and Space Comparisons . . . . . . . . .. . 32 Table 4.3. Epected Price Increases During Implementation . . . . . . 33 Table 4.4. Implementation Schedule . . . . . . . . . . . . . 36 Table 4.5. Procurement Arrangements . . . . . . . . . . . . . . 37 Table 5.1. Regional Distribution of CONALEP Training Centers and Projocted Enrollments . . .. 40 Table 5.2. Projected Annual Enrollments and Outputs by Major Fields of Study and Type of Programs . . . . . . 41 ANNEXES Annex 1: Structure of Education and Training System (1989-90) Annex 2: The CONALEP Technical Training Program Attachment A: Employment and Earnings Attachment B: Organization Charts at Central and Local Levels Annex 3: Special Studies and Basic Terms of Reference Annnex 4: CONALEP's Strategy for Improving Cost Recover/Cost Sharing of Training Programs Attachment: CONALEP's Cost Recovery and Cost Reduction Activities (1984-90) Annex 5: Project Costing Annex 5.1: P-oject Costs by Components and Activity Annex 5.2: Project Cost Estimates by Years and Category of Expenditure Annex 5.3: Estimated Schedule of Disbursement Annex 5.4: Allocation of Loan Proceeds Annex 6: Project Implementation Annex 6.1: Technical Assistance Schedule Annex 6.2: Criteria for Targeting Schools and Programs for Assistance Under the Project Annex 6.3: Civil Works and Mobile Training Units Schedule Annex 6.4: Physical Space Factors for Design of Civil Works Annex 6.5: Furniture, Equipment and Educational Materials Procurement Schedule Annex 7: Project Monitoring Indicators Annex 8: Related Documents and Data Available in Project File Key to Ma, MA: IBRD No. 23052 - MEXICO: Third Technical Training Project  iii URITED MEXICAN STATES THIRD TECHNICAL TRAINING PROJECT LOAN AND PROJECT SUMMARY Borrowert Nacional Financiera, S.N.C. Guarantor: United Mexican States Beneficiary: National System for Vocational and Technical Education (CONALEP) Amognts US$152.0 million equivalent Trms: 17 years, including 5 years of grace, at the standard variable interest rate Proiect The overall objective of the project is to carry out the Objectives: modernization of the system; in particular, to further improve the quality, efficiency and relevance of the CONALEP system. The specific project obje3tives are to: (a) uniformly upgrade the quality of high level skills training and middle level technician training to contribute to meeting the rapidly changing needs of the labor market; (b) selectively expand the range of CONALEP's training activities in key sectors, especially in-.service upgrading training on a cost-recovery basis, and initiate a modular program in the evening to enhance skill levels of experienced and employed workers, in addition to the current emphasis or. pre-service training; and (c) strengthen the administration of CONALEP, increase efficiency and improve cost reduction/recovery plans. Systematic improvements, as well as targeting and expansion of progrems under the project, will be based on ongoing analysis and planned studies concerning the quality, efficiency and impacts of CONALEP's programs. Prolect The proposed project would achieve the above objectives Descriytiont through the implementation of three components. (a) Quality Improvements (51% of total costs) would include: (i) review and upgrading of all instructional materials and course syllabi to meet current levels of technology in 97 careers for pre-service training and 84 careers for in-service training; (ii) decentralization/upgrading of instructor training programs; and (iii) a technological services program, which would provide support to other CONALEP centers as well as to micro, small and medium enterprises, and contribute to the enhancement of teacher training quality, advanced technology pre-service training, and high level in-service training in eight selected centers. (b) Expansion of Trainina Activities (31% of total costs) would support, on the basis of a series of on-going and planned studies and assistance of specialists and community leaders: (i) training in response to demands from the maquiladora industry and the tourism sector; (ii) the Initiation of a modular program in the evening and short-term  ill upradi"6 courses for employed workers; (iii) mcbile training for marginal populations; and (*v) other minor but strategic actions such as food production and pond fish farming, joint school and in-plant cooperative technician training programs, and self--help training programs linked to productive activities. (c) Increasing Efficiency (18% of total costs) would strengthen the administration of CONALEP, increase efficiency and improve cost reduction/recovery plans through the following activities: (i) provision of the equipment production and maintenance services programs to all training centers and establishment of regional maintenance centers on eight existing training center complexes for the repair of major items and advanced technology equipment; (ii) development of a communications network, with computer modem and telefax connections throughout CONALEP's national system; (iii) strengthening CONALEP's cost accounting/recovery systems; and (iv) carrying out studies on improving the efficiency of student flows and graduate placement, and preparing an action plan for implementation. Proiect The project would: (a) produce skilled manpower and small Benefits: business services required for the restructured economy to sustain and strengthen growth, with particular emphasis on flexibility in response to the labor market needs in growth sectors, and in disadvantaged areas and populations; when the project iF fully implemented in 1996-97, the expected annual output fr-n all programs combined is projected to be some 180,000 rainees; (b) improve the quality of all instruction to meet the rapidly changing levels of technology in the workplaLe; (c) make CONALEP's training more efficient and ensure its operational and financial sustainability through expanded cooperative training links with enterprises and more diversified fin-e~ing mechanisms; and (d) contribute to the development, in the medium term, of a more rational and efficient education and training system in Mexico. Riskss There are no unusual risks associated with the project, except that, with regard to mobile training for marginal populations and the food production and pond fish farming training programs; there is a potential risk that the ultimate benefits to the targeted marginal rural populations could be minimal due to technical, credit, and marketing risks despite Government assurances that these training programs would be supported by the planned production credit through PRONASOL, marketing and training specialists. As to the risk of reduced federal financial support for CONALEP in case of new budgetary crisis, such risk would be minimized through early steps to broaden CONALEP's resources mobilization base by setting targets for cost recovery and strengthening CONALEP's relationship with the industrial and business community. The project is unlikely to have significant environmental impacts.  v Estimated Local Foreign Total Cost: * Categorv (US$ million)- Quality Improvements 32.7 53.4 86.1 Expansion of Programs 20.0 32.6 52.6 Increasing Efficiency 11.4 18.5 29.9 Project Base Cost 64.1 104.5 168.6 Physical Contingencies 3.2 5.2 8.4 Price Contingencies 10.4 17.1 27.5 TOTAL PROJECT COST 77.7 126.8 204.5 Costs excluded in-kind contributions and identifiable taxes and duties. Financing Local Foreign Total Plan: ------(US$ million)------ Government 52.5 - 52.5 Bank 25.2 126.8 152.0 TOTAL 77.7 126.8 204.5  vi Estimated Diabursements: Bank FY FY92 FY93 FY94 FY95 FY96 FY97 ----------- (USS million) -- Annual 22.3L* 32.3 32.1 29.8 24.6 10.9 Cumulative 22.3 54.6 86.7 116.5 141.1 152.0 > Includes US$10.0 million for the initial deposit to the Special Account to cover retroactive financing of US$8.0 million equivalent for el4gible expenditures incurred since January 20, 1991.  UNITED MEXICAN STATES THIRD TECHNICAL TRAINING PROJECT " ECONOMIC DEVELOP1MENT AND TRAINING NEEDS A. The E"onomv 1.1. Mexico is making significant progress in emerging from its worst economic and financial crisis of the last 50 years. A drop in world oil prices in the early 1980s and again in 1986 had a disastrous impact on an economy that was high,, dependent on petroleum exports for foreign exchange. As a consequence, the economy fell into a deep depression and was further Durdene4 by a huge foreign debt. Growth stopped, capital investments came to a virtual halt, and inflation spiraled drastically upward reducing purchasing pover and the standard of living. Under those circumstances, the Mexican Government ended the decade of the 1980s by taking major initiatives aimed at achieving stabilization and structural transformation of its economy. The economic strategy includes significant actions to reduce the burden of debt obligations and other actions to globalize the economy and introduce greater efficiencies in public sector spending. While the economic corrections were painful, the Government prevailed. In December 1987 the anti-inflation efforts were reinforced by the Government coordinated "Economic Solidarity Pact", an agreement between the public, private and labor sectors aimed at dramatically reducing the country's inflation rate. The pact included a public sector commitment to implement orthodox fiscal management measures to eliminate inflationary financing, while the private and labor sectors would participate in negotiations and arrive at a consensus to curtail demands for wage and price hikes. The three sectors agreed to work together to minimize the recessionary elements and shortages that often accompany such programs. The result was that inflation dropped from an annual rate of nearly 160X in early 1988 to 29.92 by the end of 1990. Notwithstanding tight monetary and fiscal policies, output began to improve after 1987. Real GDP grew by 1.41 during 1988; 3.12 in 1989; and 3.91 for 1990.1 Industrial production has recorded particuiarly strong growth. It rose 72 in real terms during 1989 with the country's export-oriented maquiladora industry providing a 23Z employment increase and a 38.42 increase in value added in Mexico. In real terms consumption grew to 4.72 in 1989, compared to -0.52 in 1987, while in 1990 a growth of 3.02 was expected. Programs carried out by the Government of Mexico have also produced increases in fixed investment. Gross fixed investment has also increased steadily in recent years. Labor productivity increased by 8.4% in 1987 and 9.32 in 1988. 1.2. The Government's strategy as outlined in the 1989-1994 National Development Plan has three fundamental objectives: (a) stability of domestic conditions to improve quality of life and strengthen the economic base; (b) globalization of co-merce to stimulate market development and competition; and (c) deregulation of private sector initiatives and activity to create an environment highly favorable to capital investment and growth. The Plan calls for continued efforts to increase the annual economic growth rate to about 6Z X Data sources: Secretariat of Programming and Budgeting (SPP).  2 by the end of the period. Also, it is expected to reach an annual inflation rate of 22% for 1994, as well as an investment growth rate of 9.7% in 1994 (compared to 7.8Z in 1990). 1.3. Mexico's medlum term prospects for consolidation of economic growth are good, provided that economic management continues to be prudent, private sector confidence is restored, and the international environment remains reasonably favorable. In epite of the progress made thus far, there are still problems that must be overcome. Industrial development and foreign trade are impeded by insufficient and inadequate infrastrt?cture. In addition, while trade liberalization has brought production efficiencies in certain sectors, inadequacies in equipment and produc_ive processes still inhibit significant improvements in many enterprises. In particular, medium, smell and micro-industries face special problems adversely affecting production efficiency. Frequently, inappropriate levels of technology and qualified labor result in makeshift pror'esses that reduce their productivity. In general, these firms suffer trom inadequate organizational and administrative skills and limited competitive power. B. The Labor Force and the Demand for Skilled Workers and Technicans 1.4. While the total labor force has grown significantly (from about 7.9 million in 1950 to about 31.5 million in 1990), the proportion of workers in the primary sector declined steeply from 62% in 1950 to about 20Z in 1990. At the same time, the shares of workers in manufacturing (secondary sector) and in services (tertiary sector) have increased significantly, reaulting in an eightfold growth in the labor force in those sectors over the last 40 years (Table 1.1).  3 Table 1.1 Mexico - Labor Force Diatribution of Labor Force Labor Force Total Labor by Economic Sector Participation Consuu Year Population Force Primary Secondary Tertiary Rate (in Milliono) (in millions, followed by (S) percentages) 1950 (a) 27.40 7.94 4.95 1. 1.77 28.98 (100.00) (62.34) (15.7., (22.29) 1960 (a) 37.10 10.80 6.02 1.87 2.92 29.11 (100.00) (55.74) (17.31) (27.04) 1970 (b) 51.20 14.70 6.22 3. 19 5.29 28.71 (100.00) (42.31) (21.70) (35.99) 1980 (b) 66.84 20.40 5.61 4.88 9.91 30.52 (100.00) (27.50) (23.92) (48.58) 1990 (c) 81.14 31.47 6.46 6.68 18.33 38.78 (100.00) (20.53) (21.23) (58.25) Note: Figures may not add due to rounding (a) From census data, reported by Munoz Izquierdo. (b) Staff adjustments from census data, made in cooperation with INEGI and the Directorate General of Employment. Labor force follows 1970 census data definitions. (c) Preliminary 1990 census data. Labor force count includes 12-15 years old (about 2.5x), excluded from previous definitions. 1.5. The labor force growth trend responds to two important factors: (a) the population growth pattern two decades earlier, which also recorded the highest growth rate (3.3%); and (b) the tendency to increase participation of women in the labor force. There may also he other factors such as a recent openness leading to resurfacing of the "submerged" economy. The resulting net annual increase in the labor force is about 1.1 million per year, while the gross estimate is more than 1.5 million entrants when retirement, deaths and other attrition rates are included. The relative weight of middle level technicians and skilled workers has continued to increase, as is expected in an economy that is becoming more productive and sophisticated; the ratio of 10.5 per hundred workers in 1990 might be understated, in relative terms to the previous decades, because of the broader base used in the 1990 definition of the labor force (Table 1.1). 1.6. Table 1.2 shows that between 1970 and 1980 the proportion of skilled workers and technicians in the primary, secondary and tertiary sectors increased with time; the average proportion of skilled workers and technicians for the three sectors rose from about 85 per thousand in 1970 to about 101 per thousand in 1980. An average of about 106 was estimated at the end of 1990. Also, an increasingly higher concentration of skills in the occupational  4 profile of the secondary and tertiary sectors is observed, and this trend is expectad to continue. table 1.2 Mexico - Labor Force SkilleJ Workers aad Technicians (SW & T) Distribution of SW & T by Overall Economic Sector .bor Selected SW & T Year Force SW & T Rate PrimarY Secondary Tertia_ (W.llions) (Millions) (X) (in thousands, followed by percentages) 1970 14.70 1.25 8.49 96.41 699.89 451.77 (100.00) (7.?2) (56.08) (36.20) 1980 20.40 2.06 10.10 88.64 1,092.63 879.02 (100.00) (4.30) (53.03) (42.66) 1990 31.47 3.35 10.64 104.01 1,519.03 1,726.69 (100.00) (3.11) (45.35) (51.55) 1.7. Mexico has improved the quality of its labor force immensely. For instance, the average educational level of the population 15 years and older in 1970 was only 3.4 years of schooling. Today, it has almost doubled to an average of 6.4 years of education. 2 Considering the large numbers involved-- total enrollments in education exceed 25 million people annually--this is quite an achievement. Yet, especially in view of continuing growth in the secondary and tertiary sectors and increasing needs for skilled manpower, important issues remain to be addressed. Although primary level education now covers nearly all children in relevant age groups, the quality of primairy as well as higher levels of education needs to be improved. Furthermore, inadequate levels of productivity in the current labor fores point to needs for improvements in quality and output of pre-service, in-service and retraining programs. 1.8. Assuming that the profile of school leavers would be similar to the profile of new entrants to the labor force, an analysis of the 1978-91 cohort confirms the above findingd. The average educational level of incomers is 6.6 school-years. However, based on the educational profile of the new entrants, there is a need for accentuation of occapational training programs, both for pre-service and in-service training. 1.9. As many as 58Z of newcomers to the labor force have only primary (11%) or less than primary education (47Z), which, in a modern society like Mexico, hinders the development of an industrial and more productive 2 Salinas de Gortari, Carlos. Segundo Informe de Gobierno. 1990. Anexo. Mex: Poder Ejecutivo Federal, 1990. p. 354.  5 economy.3 Workers in this group need to acquire more general education and some technical skills in order to become more productive; and those with narrow bases of (often obsolete) skills need to be retrained in a broad range of skills. 1.10. About 23Z of tte new entrants (at least 306,000 people) have some lower or upper secorndary general education. This is a group with a sound educational base but lacking technical skills. Thus, they are natural candidates for pre-service and in-service training. Unemployment rates are higher among these secon.;ary school dropouts and graduates (30X-45x). 1.11. Problems with the third group--middle level technicians and skilled workers--are both quantitative and qualitative. The 1990 Census (Table 1.2), after excluding all professionals and high level technicians, lists more than three miilion workers (about 10.52) in the category of skilled workers and technicians. Yet only about 3.5S of the 1978 cohort (130,000 young adults) were equipped with the education and productive skills required to work as middle level technicians and skilled workers. Furthermore, only about 25,000 of these were three-year graduates from terminal technical secondary schools like CONALEP (para. 2.10) and thus could be described as truly well prepared. These numbers of middle level technicans and skilled workers are barely sufficient to meet the needs resulting from attrition of the current stock of technicians, let alone compensate for the past deficits of skilled workers and technicians. Moreover, the quality of skills and levels of productivity of workers in this category are much lower than those of their counterparts in advanced countries: foreign investors in the maquiladora industry have complained that productivity of workers in plants in the northern border territory is half that of workers in similarly equipped facilities just north of the border. Output and quality improvements in the existing training programs and additional upgrading programs are needed to augment the supply of solid middle level technicians. 1.12. Considering the economic deregulation measures taken during the present administration, and the possibility of a Free Trade Agreement with the United States of America and Canada, the current shortage of skilled workers and technicians could have serious economic consequences if left unremedied. Under the present circumstances, it would be difficult for industries to attain a sufficiently high level of productivity in order to compete successfully in the international markets. Also, productivity in the agricultural sector will need to be increased in the years to come; this will not be possible unless there is a substantial upgrading of its labor force and, among other things, appropriate access to production credit. In the health, tourism, telecommunications and transportation sectors, where Mexico 3 Further improvements in the quality and efficiency of basic education would certainly contribute to an amelioration of this situation. Indeed, other poverty problems, including unemployment and underemployment, marginalization, reliance on the informal sector, and the tendency toward early procreation, also have roots in the lack of basic education among this large part of the population. In this context, the Bank is in the final stages of preparation for projects in pre-primary and primary education.  6 has some comparative advantages, further development also depends on an adequate supply of well trained workers and skilled technicians in order to improve tha quality of services they provide. Thus, reducing the shortage of skilled workers and technicians, and improving their quality, is vital to economic growth and development. In this regard it is important to note that only a relatively few of the business, industrial and agricultural enterprises can afford the costs of train.rLg the levels of skilled manpower necessary to become competitive in international/local markets, especially when their major competitors are in developed countries where the majority of technician and skilled worker preemployment training is done by the public education system.  7 It. THE MIDDLE-LEVEL EDUCATION AND TRAINING SECTOR A. Overview of the Education and Training System 2.1. she education and training system consists of pre-primary, primary, middle and higher levels. Enrollments at the pre-primary and primary levels cover about 70% and 98Z of the corresponding school age groups, respectively. Middle level education comprises lower- and upper-middle levels. At the lower-middle level (grades 7-9), first year entrants in the sct ool year 1989/1990 constituted 83Z of all graduates from the primary level in 1989. Enrollments at this level were 4.3 million (57% of the age group) in 1989, with 70% of them attending federal schools, 22% state schools and 8% nrivate schools. 2't. The upper-middle level (grades 10-12) provides the link between love.--iddle and higher education, as well as with the labor force. This leval .omprises four major types of education and training institutions: academic, teacher training, dual purpose technical, and terminal technical. Durl.ng the 1989/1990 school year, the total enrollment at this level was about 2.1 million students, with 60% of them attending the traditional general education system, 212 the dual purpose technical education system (Bachillerato Tecnico--graduates can proceed to higher education or enter the labor force), and 19% the terminal technical education system (without further formal education, graduates are not eligible to proceed to higher education and thus must enter the labor force). Each of the above categories includes several streams or types of schools, depending on the sector served (industry, fisheries, agriculture, etc.) and on the administrative jurisdiction (federal, state, private). 2.3. The seemingly high degree of differentiation at the upper-middle level of public education and training does not represent a wide choice of alternatives. Instead, it manifests the historical difficulties of solving the problem of training sufficient numbers of high quality skilled workers and middle level technicians. For example, the dual purpose technical schools constituted a first attempt to train skilled workers by providing a practical ou'tlet to the labor force. However, they have not been effective in this respect, with only about 25% of the 1989-90 output obtaining gainful employment (Table 2.1). In fact, this category of education differs only slightly from the traditional general secondary education. Since 1969, the Secretariat of Education has attempted to direct sufficient numbers of trained students into the labor force through the Centers for Technological Studies (CETS), one type of terminal technical schools; yet it is estimated that only about 52% of their graduates were employed within three months of graduation in 1990 due mainly to the poor quality of training. With the establishment of CONALEP in 1978, another type of terminal technical school, the employment rate for CONALEP trainees improved further (62% in 1990).  8 TABLE 2.12 MIDDLE LEVEL EDUCATION 1989/1990 GRADUATES NO. OF TOTAL 1989/1990 EMPLOYED IN SCHOOLS ENROLLENMTS GRADUATES THREE MONTHS (THOUSANDS) (THOUSANDS) (THOUSANDS) (2) DACHILLERATO TECNICO 784 383.2 82.4 20.6 25 tRgMNAL TECHNICALs CETS8 AND OTHERS (a) 1,401 262.1 72.9 37.9 52 CONALEPS REGULAR PROGRAM (b) 252 155.3 33.2 20.7 62) UPGRADING/RETRAINING M(e) PROGRAM - 61.3 61.3(c) 50.9(d) 831 TOTAL 2,437 861.9 249.9 130.1 SOURCE: CONALEP COMPARATIVE DATA (a) CENTERS FOR TECHNOLOGICAL STUDIES (CETS); THE NATIONAL SCHOOL FOR TEACHERS OF AGRICULTURAL SUBJECTSg AND THE NATIONAL SCHOOL FOR TEACHERS OF AGRICULTURAL/LIVESTOCK TECHNOLOGY. (b) CONALEP'S ENROLLMENTS AND OUTPUTS OF THE REGULAR PROGRAMS IN THE 252 SCHOOLS IN SEPTEMBER 1989 AND JUNE 1990 RESPECTIVELY. (c) OF WHICH ABOUT 801 WERE ALREADY IN THE SKILLED WORKPORCE. Sd) NUMBER OF NEW ENTRIES TO SKILLED WORKFORCE. (a) WEIGHTED AVERAGE OF ABOUr 78Z FOR BOTH PROGRAMS. 2.4. In spite of the high level of success achieved in CONALEP's program and its contribution to the improvement of upper-middle level technical training, the terminal technical training subsector as a whole is still unable to satisfy the annual demand for skilled workers and technicians. If the country's economic and social development needs for the 19909 are to be attained, and its growth potential fully utilized, the Government, with substantial assistance of public and private enterprises and business-industrial-agricuitural associations, must promptly address the qualitative and quantitative inadequacies of technical education and training at the upper-middle level. 2.5. Higher education (grades 13-17) received about 58% of the graduates from the upper-middle level schools. Higher education includes several private and public universities of high quality. Enrollments in science and technological subjects, including medical, account for about 60% of all the students at this level. 2.6. The Mexican Government has traditionally made a reasonable effort in financing education. Although the recent crisis affected education more than other sectors, it also allowed the Government to shift funds toward high priority areas such as the improvement and expansion of upper-middle terminal training. In 1989, total expenditures on education and training amounted to about 4.4% of GDP. While the overall share of GDP allocated for general education has decreased significantly since 1982, funding for terminal technical training has been increased.  9 B. Training by Enterprises 2.7. In Mexico, explicit provisions in the Federal Labor Law make employers responsible for the training of their employees. All firms are required to establish training committees and submit training plans for their personnel for approval by the Secretariat of Labor and Social Welfare (STPS). In practice, only about half of firms actually submit such plans, and most of those who do never carry out much actual training. Private provision of pre-employment training is very limited in quantity. In qualitative terms, it is generally geared to the levels of specialized/semi-skilled/skilled workers rather than to the technician level. Cost- effective basic training of industrial technicians includes much technical/ scientific content, and thus requires a high initial investment. This is a barrier to entry for most proprietary traini'g institutions, which prefer therefore to concentrate on less capital-intensive business and administrative training. For individual industries, the risk involved in operating in-house tcaining programs of long duration (in terms of high costs and delays in producing the needed technicians, who may then move to other employers), and the difficulty in most cases of achieving adequate economies of scale in such training (especially among micro, small, and medium-sized industries, which are the main sources of employment in Mexico), deter even large firms from mounting their own basic technician training programs. Therefore, as in virtually all other countries including the most induetrialized, Mexican firms instead focus their in-house training on firm-specific and specialized topping-up training and rely for basic training on pre-employment technician training provided by public training institutions. 2.8. In the absence in Mexico of a payroll tax and fiscal incentives (e.g. deduction of in-plant training costs from taxable income of enterprises), unlike in many other countries in Latin America, to finance training, larger firms are instead prepared to sponsor individual trainees and contribute equipment and materials to share the costs of such public training institutions. While some sectors and firms do provide substantial training (for instance, the construction industry as well as some large industries--Kodak, Volkswagen and a few large maquiladoras--have in-house training centers which provide substantial basic training of skilled, semi-skilled, and specialized workers, as well as firm-specific training and upgrading of personnel at all levels including that of technicians), small- and medium-scale firms, which number about 450,000 and employ a very high percentage of the total labor force, to the extent that they provide any in-service training at all for their employees, rely mostly on contracting for specific training courses with public training institutions such as CONALEP, with a few NGOs which operate vocational schools for lower level skills, or with private providers (mainly for management training). Only a few associations of SMEs have developed joint training programs; for instance, a car dealer association in Mexico City operates a good but small auto repair training center. In all cases described, the in-plant training provided at technician level is only a complement to the basic training provided by public training institutions; overall systematic training within enterprises is at an early stage of development. 2.9. The situation in Mexico in this regard is a matter of grave concern to the Government; it is being systematically addressed for the first time through the in-service training component of the ongoing, Bank-assisted Manpower Training Project (Loan 2876-ME). However, Mexico is not the only country to have these problems; a recent survey by the Confederation of British Industries showed that  10 less than one-third of British firms had any training program whatsoever for their personnel; and less than 10 percent had a comprehensive staff training plan. Such experiences demonstrate the difficulty of inducing most enterprises to take an active role in training and the need for the public sector to devise policies and plans for providing the private sector with incentives for in-plant training. This project supports the Government's initiative to promote training by enterprises. C. National System for Vocational and Technical Education (CONALEP) 2.10. Background. In late 1978, to reform and rationalize technical secondary ee-ication and train high quality skilled workers and middle level technicians in aa,xquate quantity, the Governnment created CONALEP, a semi-autonomous agency linked to the Secretariat of Education, with the responsibility of administering new terminal technician training programs at the upper-middle education level. Since the creation of CONALEP, the terminal technical training program (grades 10-12) seems to be moving in the right direction and, with the Bank's assistance to CONALEP under two previous loans (Loans 2042-ME and 2559-ME), it has entered a period of moderate development which still continues. With a network of 252 training centers across the country, CONALEP's regular pre-service training program in 97 career areas accounts for one third of total enrollments (419,000) of the terminal technical training system and more than two thirds of to al output of terminal technical secondary schools (105,000) (Table 2.1). In addition, CONALEP trains adults who are already employed (9000 in 1989 with an increase to 23,000 in 1991) or who have had work experience but are currently unemployed (59,000 in 1989 or 28% of total enrollment, but was reduced to about 10% in 1991). All these upgrading and retraining programs in some 80 career areas are offered under training contracts with private sector enterprises, public corporations, or Government agencies on a cost-recovery basis. Its training contracts include the labor retraining programs of the Bank-financed Manpower Training Project of the Secretariat of Labor (Loan 2876-ME) and Basic Health Care Project (Loan 3272-ME) of the Secretariat of Health. CONALEP is the major training contractor and the backbone of Mexico's skills training structure. For example, CONALEP's training contracts account for about 50% of the labor retraining programs managed by the Secretariat of Labor; the remainder is contracted with some 400 other training centers. 2.11. The CONALEP program differs from other middle level technical training 4 programs in the following ways: a) its partial autonomy facilitates responsiveness to the changing needs of the productive sectors, and encourages their participation; its Board of Governors is comprised of seven business and industrial leaders serving staggered terms; b) its administration is decentralized so that operational decisions, including curriculum adaptation, are delegated to local training authorities, industrial advisory boards are established in each center to advise on course content matters, and each center and most states have a special committee (Comit6 de Vinculaci6n) to advise and assist in 4 Annex 2 presents a detailed description of the CONALEP training system.  11 setting priorities for training to be offered by CONALEP and increasing the role of the private and public productive sector in training; c) its curriculum has a practical orientation (201 general theory, 20% technical theory, and 60S technical practice) and strong emphasis on evaluation, "hands-on" experience, follow-up and feedback; d) its training programs, both regular and part-time, are strictly terminal (not for progression to higher education) and are job market oriented; e) its unique promotional activities successfully enhance the program's public image, enabling it to attract qualified students and, increasingly, to obtain significant financial support from the productive sectors; such support amounted to about US$12.9 million in 1990 or about 13.6Z of recurrent costs; f) its students pay a tuition relatively higher than that of other segments of the educational system (about 10% of the training costs); and g) its technical instructors are seconded from industry with adequate remunerations, teach part-time (typically 12-14 hours/week), and cannot belong to the Teachers' Union; this tends to prevent management-labor problems because CONALEP is not the instructors' primary employer. 2.12. Effectiveness of the CONJLEP Training System. An evaluation of CONALEP's effectiveness comprises the analysis of four aspects: (a) employment and earnings of graduates; (b) capital and recurrrent unit costs; (c) adequacy of economies of scale; and (d) internal efficiency. a) Emplovment and Earnings i) According to the results (1990) of the Graduate Tracer Studies (Encuesta de Seguimiento) initiated under the Bank-financed Second Technical Training Project (Loan 2559-ME, 1985), about 621 of the graduates of CONALEP's three-year pre-service training program found paid employment within three months of completion of the training program (Annex 2, Attachment A). Furthermore, about 84Z of them are employed in their area of training specialization. There is room for improvement, but this compares favorably with the 25% employment rate among the graduates of the dual purpose upper-secondary technical education system (Table 2.1), and with the record of more advanced countries. CONALEP will have to place more emphasis on the selection and induction of trainees, the enhancement of training program quality, adjustments in the program offering, and counseling and placement of graduates. ii) Also according to the results (1990) of the Graduate Tracer Studies, CONALEP graduates earned an average of about US$2,282 (Mex$6.7 million) per year. The four year period for which there is informatlon (1987-90) has shown a trend of steady growth in real terms of the entry level wage from the initial 1501 of minimum wage to the present level of 166% (Annex 2, Attachment A).  12 On a national basis, the National Urban Employment Survey (Encuesta Nacional de Empleo Urbano [ENEU], Third Quarter of 1989) further confirmed that "technicians", including CONALEP's graduates, have higher average earnings than those with other types of upper secondary education (Bachillerato) and lower secondary education. In addition, according to ENEU, unemployment among secondary school dropouts and graduates is 45%. iii) The Graduate Tracer Studies currently in use do not provide information about stability in employment for CONALEP's graduates beyond the initial three months following graduation; an assessment of employer satisfaction, though, can serve to a certain extent as a proxy. According to the 1990 survey, about 92Z of the employers, representing nine different economic sectors, who have hired CONALEP graduates expressed consistently over the four year period that the training of these employees was "good" or "excellent"; dissatisfied employers were less than 1%. Since employers tend not to dismiss workers with whom they are satisfied, it is very probable that those workers hired are retained beyond the initial three months. Moreover, based on the fact that most employers were satisfied with the training of CONALEP graduates, it is also quite likely that such employers hire additional graduates, beyond the 622 mentioned in (i) above, after the first three months. iv) The Graduate Tracer Studies provide no information about salary levels or changes in the employment conditions resulting from the variety of shorter courses (in-service programs) that CONALEP offers. However, there are separate studies and estimates on their levels of employment and earnings after training. The Mid- Term Review Report and a special Bank follow-up study (1991) of the impact of the Bank-financed Manpower Training Project (Loan 2876-ME) confirms that some 77% of unemployed workers who had some prior work experience and were retrained under the project obtained employment within three months of completion of training;5 the proportion of those employed graduates whose earnings became higher than the minimum wage rose from 26% before training to about 40% after 3 months of training, and further to 50% after 6 months of training. CONALEP's overall placement performance, including the retraining of those unemployed before the course, is estimated at about 78Z (weighted average for all the courses) (Annex 2, Attachment A). 5 The employment rate is much smaller (44%) for those trainees who have had no prior work experience (i.e., who were not the intended target groups of the training programs). This group comprises 33% of total trainees.  13 b) Unit Costs i) In 1990, total direct cost per CONALEP trainee was about US$500 (Mex$1.3 million in constant pesos of 1988). This figure includes all direct annual operational expenditures, including cash contributions made by the productive sector. This total unit cost (TUC) also includes capital costs, which were calculated using the standard (straight line) amortization method (useful life: 10 years for equipment and 20 years for buildings; 0 salvage value for both). The number of trainees were calculated into a full- time trainee equivalent (of about 1400 hours/year). Total unit cost per physical person, which is lower, was also computed (about US$400/year, or less than Mex$1 million). ii) The above-mentioned TUCs compare very favorably with those of general and technical upper secondary education systems (Mex$1.2 million and Mex$1.8 million, respectively, on a per student basis in 19886). This economical unit cost is one of the major strengths of the CONALEP training oystem; in many other countries, the unit cost of the conventional technical secondary education system is often twice that of general secondary education, or higher. The major factor for this economical unit cost is that most CONALEP instructors have been released by the private sector for teaching at CONALEP centers, and CONALEP pays them only fees on an hourly basis. iii) While graduate income shows a steady increase over the last four years, unit costs show a decreasing trend over a 10 year period. Since 1987, total unit costs per full time student equivalent have stabilized at the current level of about Mex$1.3 million in constant pesos of 1988. c) Adequacv of Economies of Scale i) The statistical analysis of unit costs per center showed that about 57 of 252 centers had a per-student admiaistrative unit cost that exceeded the average plus one full standard deviation of the system. In practical terms, this means that about 9% of the total enrollment accounts for more than 20% of administrative expenditures--i.e., potential inefficiencies exceeding Mex$2 million/year per student were disguised within the excellent overall unit cost of the system. ii) Further, CONALEP undertook a study of operational expenditures by center, on a full-time student equivalent basis, since some centers may already have reduced their high unit costs by expanding significantly the training programs. This second round of analysis reduced the number of high-cost centers from 57 to 6 The World Bank, Basic Education in Mexico, Sector Report No. 8930-ME, August 1990.  14 about 43, but with 7 having a per-student unit cost of 2.5 times the average. CONALEP will have to focus on these centers to improve economies of scale, because these centers typically hold enrollments of less than 200 regular trainees. d) Internal Efficiency i) The improvement of internal efficiency in the CONALEP system has proven to be as difficult an issue as for the rest of the educational system. The cumpletion rate for the student cohort graduating in 1990 was 52X. This percentage is about the same as the one for the academic general secondary education system. During 1990, the completion rate (i.e., the percentage of the cohort that completed the programs among those who started the program) at the dual purpose technical education system was 57%; and for the other terminal technical schools, 401. While student- flow performance is less than what would be desired, it represents a significant increase over the level ten years ago, which was estimated at about 31% for middle-level technical education. A main problem has been clearly located at the end of the first semester, when about 40% of the initial enrollment drops out, mostly to switch back to the academic stream. 2.13. In summary, the cost effectiveness of CONALEP programs is satisfactory as measured by its unit costs, on the input side, and by the placement and earnings of its graduates, on the output side. Hidden within this good record, however, is the fact that about 20% of CONALEP's centers have excessively high unit costs, a situation requiring corrective measures. While CONALEP's internal efficiency is only fair, this deficiency is not an exclusive characteristic of the system; it is deeply rooted in the cultural attitudes of Mexicans, and is similar to levels in comparable Mexican institutions, as well as in other developing countries. CONALEP has agreed to take robust measures under the current project. A specific timetable for diagnosis of the problems and policy changes to bring about a significant improvement would be established under the project. 2.14. Based on the above analysis, CONALEP's performance compares well with other training institutions both internationally and in Mexico; nonetheless, a complete assessment of its economic efficiency requires comparison of earnings and employment histories of those with training and those without training after three months and again after one year from graduation. Except for the small percentage of trainees of the retraining programs under the Manpower Training Project, an appropriate control group for CONALEP graduates (pre-service and in-service training programs) is not currently available. Such an analysis would be undertaken in the context of this project, and would be available in time for a mid-term review of the project (para. 4.22). 2.15. Although CONALEP's level of administrative efficiency, cost-recovery mechanisms and training effectiveness has improved markedly in comparison with the other middle level education and training systems in Mexico (para. 2.11) there are particular aspects that require substantial improvements. First, better management and faster communication systems are necessary in order to monitor effectively and faster the outcomes of policy improvements, manage day-to-day administration of over  15 250 training centeru across the country, maintain adequate information of the overall response to cost-recovery initiatives and decentralize maintenance for complex equipment and other support programs. In particular, CONALEP needs to establish a satisfactory cost accounting system to show the effectiveness of different types of training programs in each center. Currently, budgetary resources are not allocated by training program, neither nationally nor at each center; the accounting system does not present cost data by training program, either. Second, a major portion of its course syllabi and training materials were developed on the technological base of 1978-83 and are becoming outdated. During that period the economic atmosphere was greatly different from that of 1990-91, and the levels of technology in all sectors are now significantly higher and are rapidly changing. Consequently, CONALEP must proceed promptly in modifying and modernizing its course offerings, replacing worn-out and obsolete equipment, and planning and implementing alternative methods of training delivery, so as to optimize the utilization of human, physical and financial inputs throughout its system. When completed, the results of these actions would be made available to the other education and training systems in Mexico and other Latin American countries. Third, CONALEP will have to meet new challenges, including: (i) insufficient training opportunities and regional imbalances resulting from a rapid growth of the maquiladora industry in the northern frontier and other regions of the country, and of the tourism industry in the Pacific coastal area;> (ii) the observed tendency of increased demand for skilled workers and middle level technicians, resulting in a 40% expansion for the secondary sector between 1980 and 1990, and a 92% increase in the service sector over the same period; (iii) an increased demand for evening programs--modular and upgrading--from employed workers, especially women, who want to i.ncrease productivity or gain access to new technologies; and (iv) the demand for short-term traininLg among marginal populations, informal sectors, and those areas where fixed installations are not economical. D. Government Strategy for Techrical Training Development 2.16. Because of the amount of time and complexities involved in the creation and development of this completely new and very large training system, CONALEP was conceived as a multi-phased effort. The first phase of CONALEP's program (1979- 1984) involved creating the program, testing its major components and initiating its development. Phase II of the CONALEP program (1985-1990) consisted of an increase ib the capacity of the CONALEP system and adjustments in institutional, administrative and training aspects of the program. As part of the "Edura&ional 7 The maguiladora sector is experiencing rapid growth. Direct sector employment increased by 28% or 110,000 in 1988 alone, and another increase of 500,000 is expected by 1996. Furthermore, increasingly complex technology in production processes is resulting in corresponding increases in the numbers and quality of technicians and skilled workers required. "Direct Foreign Investment in Mexico, Past Patterns and Future Strategy" (August 1988, World Bank Report No. 7146-ME) underscores the need for training in the maquiladora sector. With regard to the tourism sector, at the end of 1938 this sector directly and indirectly employed about 0.5 million and 1.3 miliion, respectively, and is projected to employ about 0.8 million and 2.4 million, respectively, by the end of 1.996.  16 Modernization Program" (1989-94) of the current administration, the Government embarked on a major modernization program in CCNALEP. Hence, Phase III of the CONALEP program (1991-1996) will consist oft consolidation of earlier achievement.; modernization and improvements in the quality and flexibility of program offerings to meet changing needs; improvements in the articulation with the productive, education, and public sectors; upgrading of the knowledge and skills of employed and unemployed workers; and efforts to cater more to the needs of uarginal populations. 2.17. The Government's strategy as outlined in the 1989-1994 National Development strategy has three fundamental objectives: (a) stabilization of domestic conditions to improve the quality of life and strengthen the economic base of the country; (b) globalization of its commerce, stimulation of market development and strengthening of its competitive ability; and (c) deregulation of private sector initiatives and the creation of an environment highly favorable to capital investment and economic growth. It is realized that attainment of these objectives requires an integral strategy that is sensitive to the needs and demands of the population and that will permit making the best use of international advances in production and marketing technology. 2.18. The implications of the above objectives on education in general, and upon technical training in particular, are significant. Consequently, the Secretariat of Education (SEP), with major inputs from CONALEP, set forth the specific education and training objectives to be pursued in this process of education modernization. As a result, the following specific objectives were set out in the National Development Plan for 1989-1994 to guide the process of education modernization: (a) improve the quality of the education system to assure congruence with the national development objectives; (b) elevate the educational level of the population; (c) decentralize educational administration and appropriately distribute educational opportunity in accordance with the requirements of the modernization plan and the characteristics of the diverse sectors of society; and (d) strengthen the participation of social and productive sector groups in the education process. At the same time three major lines of strategy were delineated to carry out sectoral actions: (a) streng.hen those education services which have been shown to be most effective; (b) revise and reorient those programs and services which are not appropriately responding to socioeconomic conditions; and (c) initiate education models fully appropriate to the socioeconomic needs of participants, and introduce modern scientific and technological innovatians into the education process. 2.19. With respect to technical education, the SEP's Modernization Plan emphasized the need to: (a) orient human resources development programs to meet the trained manpower requirements of the productive sectors; (b) adapt them to meet the rapid changes in science and technology; and (c) initiate flexible modes of training to provide a means for employed skilled workers and technicians to keep their technical knowledge and skills up-to-date (upgrading). As the largest and most effective technical education and training system in the country, CONALEP has been assigned the major role in the preparation and upgrading of the manpower requirements of the National Development Plan. Like the other sub-systems of the national education system, CONALEP plans to confront serious challenges for change, among which are: (a) decentralization of selected administrative services; the mode or format for providing technical training in regions and locations of greater socioeconomic needs, taking full consideration of local/regional trained manpower needs and availability of local and regional human, physical and financial  17 resources. (b) the need for innovative and flexible modalities for delivering new training programs to upgrade employed workers' skill levels and productivity, in addition to the traditional pre-service training programs; (c) the necessity to diversify the source of financing training costs through technical internships of trainees, cost sharing, full cost recovery for upgrading and other in-service programs; and (d) increasing the role of the private sector in a broad range of cooperative training activities. It is the achievement of these ends and other equally relevant ones that the proposed project addresses. E. Previous Bank Experience and Lessons Learned 2.20. Priou Exerience. The proposed project would be the third Bank operation with CONALEP. The Technical Training Project, with financing of US$90.0 million equivalent under Loan 2042-HE of July 1981, supported the first phase of CONALEP's development program (1979-84). This phase comprised: (a) constructing, furnishing and equipping of a central administrative complex and support complexe. as a base for effective management of the system; (b) constructing, furnishing and equipping of 99 (later amended to 122) training centers throughout the country with a capacity of 70,000 trainees (for the original 99 centers; 93,000 for the amended 122 center6); and (c) recruiting and training of 4100 instructors. According to the Project Performance Audit Report (No. 7136, March 1, 1988), which includes the Project Completion Report (March 31, 1986), performance for this first phase program, which was fully implemented in only 43 months, was very successful. The report states: In most areas project performance . . . has surpassed appraisal expectations. This applies to number of beneficiary centers (122 vs. 99), number of trainees (93,000 vs. 70,000), instructors trained (almost 15,000, not counting 8,900 undergoing upgrading courses, vs. 4,100) and unit cost (US$500--US$875 if donations by enterprises are taken into account--vs. US$1,000). Only the annual output figures are still lagging behind expectations, pointing to a lower than expected internal efficiency. CONALEP is vigorously addressing this problem with good initial results, although part of the difficulties are of an exogenous nature (e.g., difficult economic conditions) and thus outside CONALEP's influence. One important feature of this first phase program was that many of the training centers were donated by the pr4vate sector or the government agencies, and the Bank loan did not finance any civil works at all; this was repeated in the Bank-financed Second Technical Training Project. 2.21. The Second Technical Training Project, with financing of US$81.0 million equivalent under Loan 2559-ME of July 16, 1985, supported the second phase development program (1985-90). This program provided for: (a) constructing, furnishing and equipping of 97 (later increased to 130) additional training centers; (b) establishing of 24 furniture and equipment production units in 24 training centers by providing for revolving funds for production supplies; and (c) technical assistance to strengthen CONALEP's administrative capacity, the structure of its training programs, and the quality of its instruction. The Project Completion Report for this project (May 23, 1991), as well as discussions with a wide range of  18 employers regarding the implementation of the oecond project, show that it has been successful and that CONALEP's implementation performance was good. The major results of this phase were: (a) both quantitative and qualitative goal attainment was sign:lficantly greater tban planned; (b) a total of 130 centers, establishing an enrollmert capacity of 239,000 for CONALEP; (c) completion rates of training programs increased from 40% oni the average over the period 1979-86 to 52% and are continuing to rise; (d) operational officiency and program effective-asst are improving as a result of, inter alia, more effective use of advisory committees and business/industrial/social welfare associations; (e) quality of instruction was improved through enhancement of instructional capabilities of about 13,000 in&tructors, course syllabi improvements by specialists, introduction of pilot production training programs in 70 centers, which produced 62,000 items of equipment and furniture, and which, in addition to enhancing quality of training, had a net savings of about US$930,000; (f) CONALEP's receipt, during budget year 1990, of other cash income and donations "in kind" from non-budgetary sources (private and public enterprises and associations), amounting to a value of about US$12.9 million, and eqLal to about 14%8 of itc 1990 recurrent costs (Annex 4, Attachment); and (g) the further development of a maintenance system for buildings, furniture and equipment which, in addition to training enhancement, a-so resulted during 1990 alone in an estimated value of about US$1.05 million of maintenance activities being conducted by trainees and instructors. 2.22. Additionally, although not required under the loan, four high priority pilot training programs were successfully carried out (with government and private funding) in support of the Government's 1989-94 development plan. The major thrust of these was directed at assistance to marginal populations, micro-industry, self employment and the maquiladora industry. Regarding marginal populations, 70 low income groups in the federal district were trained in home maintenance, utilizing mobile training units constructed in CONALEP training centers, and through the actual repair of 212 selected low income homes; and 391 heads of families were trained in the 12 basic skills required for the repair and maintenance of public school furniture and utilities. With respect to self emnployment, through a seriee of supplemental courses offered for the better students in selected career programs, about 9,100 third year trainees received special training, by qualified and experienced specialists, in the various aspects of self employment development including planning, initiating, operating and marketing of goods and services for which there is an unfulfilled demand, and in the preparation of applicat'ons of credit. This program was initiated in 42 training centers in 1987-90, and in 1990 alone 103 small businesses have been established, generating employment opportunities for 326 workero directly, and 1,300 indirectly. National Finance Co., Inc. (NAFIN) has established a line of credit to assist them. As for the maquiladora industry, about 30 maquiladora enterprises benefited from CONALEP's pilot program in the training of in-plant trainers, who provided training to a total of 2,536 workers in 834 companies. Nearly all of the direct training costs were recovered from the participating enterprises. Further development of these and related priority activities would comprise significant components in the propobed project. 8 This figure represents the percentage of total 1990 recurrent costs; improvements in cost accounting under the proposed project (para 3.20) would enable refinement of these figures.  19 2.23. Lessons Learned. The major lessons learned, as a result of the experiences during implementation of the above mentioned projects are summarized as follows: a) in view of the shortcomings of the design of the Graduate Tracer Studies (such as a short fol) --up period and a lack of control groups for comparison of the eff-tiveness of CONALEP training programs), CONALEP should improve the current tracer study system and apply it to in- service training programs as well; b) in view of the still acute problem of internal inefficiency (such as low completion rates and high unit costs in some training centers), CONALEP should investigate the causes of inefficiency and take proper remedial a ;tions; c) in view of the surplus training capacity in a few agricultural programs in some more remote areas of the country, where the demand for training is not well defined, qualified personnel from professional organizations must participate in the analysis of demand and of development of programs; d) in view of observed delays in project implementation, as a result of the lack of familiarity by new CONALEP Administrators with Bank process and procedures, a short seminar on project implementation should be conducted by Bank Supervision Missions when such changes occur; e) in view of relatively rapid developments in technology in Mexico, and their iLvlications on space planning criteria and requirements for shops, 4aboratories and other support spaces, consideration must be given rc only to the expected immediate use of these spaces but their possible medium and longer term uses resulting from technological chantet; f) in view rf rapid technological changes, equipment redistribution from one centt. to another should be considered, based mainly on weekly hours of use, 6sit and type of program; and g) due to instal.lation difficulties experienced in a few institutions where large quan'. 1ties and heavy or sophisticated equipment was involved, such installaticen should be contracted to the respective suppliers. 2f24. These lessons have been duly taken into account in the design of the proposed project. In particular, the project would include an improvement in the Graduate Tracer Studies, a study on the identification of the high dropout rate at the beginning of training programs and high unit costs in some centers, strengthening of the preventive maintenance system, formulation of action plans to overcome the identified problems, and strengthening of industrial committees and advisory boards in some sectors. }.n addition, the floor plan and the list of equipment and furniture of new training facilities would take into account rapid technological changes. Remedial actions on a few agricultural training programs are also included in the proposed project. The implementation arrangements have also  20 taken into account the periodic changes in CONALEP administration and the bearing of such changes on procurement. F. Ration le for Bank Involvement 2.25. The Bank's program of support for Mexico's economic restructuring effort includes substantial assistance in the area of human resources, aiming both to remove constraints to resumed growth such as skill shortages, and to ease the pain of restructuring. The Bank's strategy for human resources development emphasizes the expansion of access to pre-primary education and improvements in the quality and efficiency of basic education (grades 1-9), especially in the poorer parts of the country, in order to provide flexibly, broadly, and generally educated manpower for the economy; training in specific skills can be provided later depending on the specific needs. In this context, the Bank is in the final stages of preparing pre- primary and primary education projects for Bank financing. In the area of non- formal training the earlier Bank support to the CONALEP training system needs to be followed up to modernize its training programs in accordance with the technology of the 1990s, through improvements in instructor training, equipment aud instructional materials, and maintenance systems. The CONALEP training system also needs to be followed up for: adjustments in its course offering on the basis of the new labor market studies; the strengthening of its linkages with private enterprises to improve the relevance of training courses; and the enhancement of the degree of financial self sufficiency. At the same time, and in synergy with the Manpower Training, the Basic Health Care, and the proposed Basic Education Projects, the proposed project would address the training needs of the poor and disadvantaged, and take another step in rationalizing and improving the efficiency and financing of the entire Mexican training system. The experience gained and the collaborative relationship developed between the Bank, NAFIN and CONALEP during the implementation of two successful earlier projects would be important assets for project implementation. Currently ongoing labor market studies under the Manpower Training Project, and investigations by other Mexican economists would provide a better basis for dimensioning and targeting of Government and Bank interventions with the project. At present, the Bank is the only external aid agency involved in technical education and training. 2.26. The Bank's strategy for non-formal training in Mexico has been two-pronged. On the one hand, in view of the predominant role played by public institutions in non-formal technical education and training, the Bank has supported the major public training institution, CONALEP, through two loans (Loans 2042-ME and 2559-ME). The proposed Third Technical Training Project will further improve the quality and efficiency of CONALEP's programs, On the other hand, in view of the lack of payroll taxes and/or fiscal and financial incentives to finance train,Lng by enterprises in general in Mexico, the Bank has supported Government efforts to provide technical assistance for enterprises either to organize in-plant training or to contract with public training institutions on a cost sharing basis (under Loan 2876-ME for the Manpower Training Project being implemented by the Secretariat of Labor). This line of support will be further followed up by strengthening the incentive system for the private enterprises to undertake training more actively. The Bank's longer term strategy for non-formal training is to assist the Government in shifting the emphasis in provision of training from the position of public sector domination to one in which private sector initiative is more actively encouraged. First steps in this direction are being supported under the proposed project.  21 III. THE PROJECT A. Origin of the Project 3.1. While informal inquiries concerning the possibilities of a third technical training project have been raised from time to time, a formal request was not made until the third quarter of FY 1989. A Bank identification mission was fielded during March 1990. This was followed by a preparation assistance mission during June 1990, and another during November 1990. A pre-appraisal mission was fielded for two weeks during January and February 1991, and was followed by the appraisal mission in March 1991. B. Obiectives 3.2. The proposed project would assist the Government in the implementation of the policies and attainment of the objectives and goals as set forth in the National Development Plan for 1989-94 (para. 2.17). These were further elaborated under the SEP's Education Modernizatinn Plan of 1989-94 and the Program for Modernization of the CONALEP (Technical Education and Training) System for 1989-94 (paras. 2.17-2.19). The general objective of the project is to carry out the overall modernization of the system in such a manner as to consolidate the quantitative and qualitative gains achieved thus far and to further improve the quality, efficiency and relevance of the CONALEP system. The specific project objectives are to: a) uniformly upgrade the quality of high level skills training and middle level technician training to contribute to meeting the rapidly changir.g needs of the labor market; b) selectively expand the range of CONALEP's training activities in key sectors, especially in-service training and on a cost-recovery basis, and initiate a modular program in the evening to enhance skill levels of mature, experienced and employed workers; and c) strengthen the administration of CONALEP, increase efficiency and improve cost reduction/recovery plans. 3.3. The proposed project differs significantly from the two previous projects in that they dealt almost entirely with the physical development of the training system and its administrative infrastructure. The proposed project deals almost entirely with improvements in the quality, efficiency and effectiveness of the system, with 69% of total project cost allocated to these components. Only 31S of total costs are allocated to expansion of training activities, of which only one half (15X of total costs) is allocated to expansion of physical spaces. Even here there is only a 6% increase in total training space. The 67% increase in total enrollment capacity would result mainly from improvements in the utilization factor of training spaces, which would be made possible by increasing the number of late afternoon and evening classes. This project would also enhance CONALEP's capacity for cost recovery/sharing from industry.  22 C. Project Components and Description 3.4. The objectives of the proposed project would be attained through three distinct but mutually supporting project components, each comprising a number of interrelated subcomponents. Systematic improvements, as well as targeting of the expansion of programs under the project, will be based on ongoing analysis as well as eleven planned studies, concerning CONALEP programs' quality, efficiency and impacts (Annex 3). In order to ensure the timely availability of the results of these studies, they will be prioritized and phased in accordance with the extent to which their information and recommendations are required in the implementation of other aspects of the project. At negotiations. the Government presented, and agreement was reached on. draft terms of reference for the eleven studies. The Government also, at negotiations. provided assurances that seven of the eleven studies would be initiated during the twelve months following loan effectiveness and completed by the date specified in the agreed terms of reference, to be available by the time of the mid-term review of the Project (para 4.22). It was further agreed that action plans. satisfactory to the Bank. would be prepared within six months of the completion of the studies to implement the studies' recommendations. Preparation and submission of final terms of reference for all studies would be a condition of effectiveness. 1. Quality Improvements (Costs: US$104.4 million, including contingencies) 3.5. On the basis of carefully designed new, ongoing and completed studies (Annex 3) at state and local levels, this component would: (i) analyze the needs for new modes of training, new training options and/or changes in or elimination/transfer of existing options, in accordance with clearly identified trained manpower needs and firm plans for the development of the productive sectors; and (ii) improve the overall quality of CONALEP's training programs (para. 2.15). Specifically, this component would comprise the following subcomponents: 3.6. (a) Instructional Materials Development. All of the course syllabi, daily lesson plans and evaluation materials for the 97 career programs, currently based upon the technology of the 1970s, would be reviewed and upgraded as necessary to reflect the technological levels of the 1990s. This would entail the development/revision of about 2300 titles and the production of about 14 million copies and would require technical assistance for the development of prototypes and the reproduction of the manuals developed. To this end, special studies in priority fields of concern have been planned and would be initiated so that the results of the studies and recommendations are available for Bank review and comment before the mid-term review (para 4.22; Annex 3). 3.7. (b) Instructor Training. This subcomponent would revamp the current ad-hoc instructor training system, and would assist in the improvement of instructor performance through the enhancement of pedagogical, scientific and technological capability. Under this subcomponent, instructors would receive short intensive pre- service methodology training and in-service training in both methodology and technology. To support this activity, an instructor training center, which would accommodate 100 instructors at one time, would be constructed, furnished and fully equipped with an appropriate reference library. This center and its regional outreach facilities located in regular training centers and in the eight  23 technological development and production-maintenance centers (paras. 3.8 and 3.19) would provide pro-service training for about 4,700 instructors and in-service pedagogical and technological training for another 4,000 instructors, including company in-plant trainers, on an annual basis. 3.8. (c) Technological Development and Assistance Centers. This subcomponent provides for the development of eight existing centers to serve as regional Technological Development and Assistance Centers (TDACs). The TDACs would provide support to: (a) other CONALEP centers, e.g., in the maintenance of advanced equipment and through the sharing of common facilities; (b) the instructor training program; and (c) micro, small, and medium sized enterprises, on a cost-reimbursement basis, in the design/construction of prototypes and sub-assemblies, and in the provision of other services. The TDACs would also contribute to qualitative improvements in CONALEP's training programs. They would provide assistance in upgrading the technological capability of training center instructors (para. 3.7). Through close contact and formal studies with national and regional productive sector enterprises and associations, and via the use of industrially qualified subject-matter specialists, the TDACS would also contribute to keeping regular and upgrading course syllabi concurrent with the evolution of technology in the workplace. Additionally, designs and production prototypes of specialized items of training equipment would be fabricated under this subcomponent by advanced students in the equipment production/training program (para. 3.19). The TDACs would also provide specialized advanced technology training through a program of selective upgrading of employed skilled workers and technicians (para. 3.12) with full cost recovery. Development of the eight centers would include supplemental construction, furnishing and equipping of existing centers. Complementary utilization of physical and human resources would be maximized under this subcomponent, because the TDACs would be developed as joint complexes with the regional maintenance centers (para. 3.19), located on sites of existing industrial training centers and sharing certain common facilities and expensive equipment. At negotiations, the Government presented, and agreement was reached on. draft operational manuals for the Technological Development and Assistance Centers. As a condition of effectiveness. the Government would provide evidence that the operational manual has been formally adopted by CONALEP and is ready for use. 2. Expansion of CONALEP's Training Activities (Costs: US$63.8 million, including contingencies) 3.9. In addition to upgrading existing programs, the proposed project would also support the selective expansion of CONALEP's training activities in key sectors, especially through in-service training and on a cost-recovery basis (para. 2.15), including: (a) training in response to demands from the maquiladora industry; (b) training for the tourism sector; (c) the initiation of a modular program in the evening and short-term upgrading courses; (d) training for unemployed workers and marginal populations; and (e) other minor but strategic actions such as training for food production and pond fish farming, and programs linked to productive activities. In accommodating these training programs, utilization of existing facilities would be optimized through the construction, furnishing and equipping of 70 additional shops, 50 laboratories, 191 classrooms and other small auxiliary spaces in 101 of the existing 252 training centers; this would comprise only a 6% space increase, but would permit a 16% increase in daytime enrollments in priority programs. This component would also support the reorientation and  24 diversification of training program offerings, in accordance with the economic and technological needs of those fields of economic activity which have heretofore not been adequately addressed, and the development of full curricular materials, teaching-learning aids and equipment for new training programs in conjunction with such reorientation and diversification. Specifically, this component comprises the following subcomponents: 3.10. (a) Trainina Assistance for the Maguiladora Sector. This subcomponent would provide higher quality manpower (through pre-service training) and upgrade the existing workforce (through in-service training) in the maquiladora sector (para. 2.15), with the assistance of maquiladora industry associations and representative enterprises. This would involve the following activities: (a) promptly carrying out a technical study to identify additional training programs to be implemented in selected training centers within the respective maquiladora zones; (b) preparing and providing full curricular materials, teaching-learning aids and equipment for the new training programs, and updating course syllabi for related careers; (c) expanding upgrading course offerings for employed workers and, with major financial participation of respective enterprises, increasing the numbers of in- plant trainers prepared; and (d) preparing, through special training activities staffed by industrially experienced consultants, about 60 qualified instructors to conduct special courses focused on "the planning, developm-rt and management of micro-enterprises in the maquiladora sector". As a condition of effectiveness, the Government would preRare an action plan to strengthen CONALEP's advisory committee system at the state and national levels for the maguiladora sector, and to establish cost recovery/sharing and related accounting policies and criteria, satisfactory to the Bank. 3.11. (b) Training Assistance for the Tourism Sector. In support of the tourism sector (para. 2.15), this component would: (a) with the cooperation of the Secretariats of Tourism and of Labor, and with specialist assistance, quickly complete a study of the characteristics of the sector, its evolution by region and the occupational profiles for which CONALEP can assist in technical manpower preparation; (b) on the basis of the study, update all course syllabi and instructional materials for existing sectoral training programs; (c) with specialist assistance, develop new technician-level career course syllabi, instructional and eval-ation materials for hotel management, electro-mechanical maintenance for hotels, and food service management, and upgrade a program for tourist guides; (d) upgrade instructor skills; (e) initiate a modular training program, as a pilot program in four tourism training centers; (f) simultaneously with initiation of these pilot programs, mount a technical study of the demand for such modular tourism training programs in four major tourism regions; (g) with specialist assistance, prepare and provide the equipment and instructional aids/materials for new and upgraded careers/programs; and (h) in cooperation with tourism sector enterprises, reach an agreement on the types and content of in-service training programs for employed workers and offer such training programs on a cost-sharing basis. As a condition of effectiveness, the Government would preRare an action Rlan to strenathen CONALEP's advisory committee system at the state and national levels for the tourism sector, and to establish cost recoverv/sharing and related accounting Dolicies and criteria, satisfactory to the Bank. 3.12. (c) In-Service Training Programs. Under this subcomponent, the project would assist in the provision of training to: (a) about 40,000 employed skilled  25 workers annually, in modular evo-ning class programs, who wish to upgrade their skills to the technician level; and (b) about 68,000 employed workers annually in shorter courses in order to update their technical skills (Table 5.2). Training costs under this subcomponent would be cooperatively financed under agreements with specific enterprises and assoc!ations. The project would provide for financing of supplementary furniture, equipment and instructional materials development and upgrading by industrially experienced specialists. As a result of the initiation of modular technician level programs with classes in the evening for employed workers, the utilization factor of existing training center facilities would be increased by 44Z over that of 1990-91. 3.13. (d) Special Training Program for Marginal Areas. This program is directed at helping to assist urban and rural poor in improving their quality of life through training, with appropriate emphasis on the needs of women. To this effect CONALEP has entered into an agreement with the Government's National Solidarity Program (PRONASOL) and with state and municipal governments and will play a major role in providing some basic skills to the poor. Operational training costs would be financed by these entities. A system of non-loan supported student aid or stipends (becas), as in the Manpower Project under Loan 2876-ME, would be used in financing the training costs. To build upon the "self-help" attitude of community people and leaders, which has been amply demonstrated in the pilot programs which CONALEP carried out during 1989-90 (para. 2.22), community leaders would participate in program planning and operation. This component would finance the costs of: (a) specialist assistance to develop special courses of varying lengths, trainee selection criteria, training materials for productive and service activities, including courses on the development and operation of micro-enterprises and cooperative activities, designed on the basis of well-defined local and regional requirements and conditions and utilizing, wherever feasible, the community infrastructure as a supplemental training facility; with well-illustrated training materials and supported by other audio-visual aids; (b) construction and equipping in CONALEP training centers of a total of 60 mobile training units, 40 small, 15 modium and 5 large trailers and 6 traction units for moving them between training sites; with an annual total training capacity of about 5,800, for use in delivery of training in areas not served by permanent training centers; (c) special orientation courses for key training center personnel and community leaders in the development, presentation and operation of small and medium community and private investment projects; and (d) specialists to plan and carry out special studies on (i) the identification, economic feasibility and critical characteristics and needs of small rural investment projects, including the need for and availability of production credit through PRONASOL or other official credit sources, and on (ii) maximizing the effectiveness of CONALEP pre-service trainees, during their year of social service, in community assistance programs in marginal areas. At negotiations. the Government presented, and aareement was reached on. a draft operational manual for the mobile training units for use with marginal RoPulations. As a condition of effectiveness, the Government would provide evidence that the operational manual has been formally adopted by CONALEP and is ready for use. 3.14. (e) Other Strategic TraininR ProRrams. Under this subcomponent, the project would support other minor but strategic actions such as training for fisheries, food processing, pilot programs linked to productive activities, and self-employment (para. 2.22). Net expenditures on these programs--i.e.,  26 expenditures minus the corresponding cost recovery--would not excced 7% of total project costs. Programs under this subcomponent are described below. 3.15. (i) Food Production and Pond Fish Farming Program. This is one of the programs on which PRONASOL places priority emphasis in assistance to the poor and disadvantaged population. COWALEP's t:aining assistance to the rural poor in food production has been of limited success in the past, primarily due to the unavailability of appropriate production credits that would permit application of knowledge and skills gained. CONALEP has not been involved in pond fish farming; however evidence from around the world points to the high feasibility and the many benefits (including protein production, low investment and high return) of such programs. To address this issue, CONALEP would, with the assistance of appropriately qualified agricultural specialists: (a) initiate a study of factors associated with unsuccessful food production training centers and recommend curricular changes and/or transfers of programs to areas of higher demand; (b) implement these curricular changes, including special courses (such as marketing of products, the need for production credit, gaining access to it and risks involved) of varying lengths in accordance with local needs and trainees' levels of capability; (c) transfer programs with inadequate demand to areas of appropriate demand; (d) initiate pilot training programs in about 15 centers of about 18 trainees each for fresh water fish production in farm ponds; (e) properly equip such programs with training equipment and training materials, including actual ponds for fish production under realistic and economically feasible conditions; (f) properly equip all other food production and processing programs according to the same principles as in (e) above; and (g) initiate upgrading programs for about 1,500 established farmers per year during 1992-93, with a goal of up to 5,000 per year by 1996-97, with part of this group receiving training via the mobile units (para. 3.13). As a condition of effectiveness, the Government would establish an advisory committee system for the food 2roduction and pond fish farming training programs. 3.16. (ii) School and In-Plant Cooperative Technician Training Programs. The primary objectives of this program are to improve training quality and to increase student motivation and retention. Under this program the project would: (a) initiate, jointly with local enterprises and 10 training centers, pilot training programs consisting of three days per week of in-center training in technical theory and basic knowledge, and three days per week of practical work in industry, with the objective of reducing both recurrent and capital costs of training, and increasing training capacity and relevance; and (b) initiate 10 pilot training programs in which the training is provided in a center-based setting with all practical training being accomplished through the production of goods and/or services. 3.17. (iii) Self-Em2loyment Programs. The objective of this program is to promote individual or small group self-employment opportunities for CONALEP graduates, by complementing technical training with structured training by qualified specialists, in the various aspects of planning, initiating and operating, including marketing of goods and services for which there is an unfilled demand, and in the preparation and presentation of applications for credit. This series of supplemental courses offered to the better students in selected career programs was initiated in 42 training centers in 1987 as a pilot program. About 9,100 students participated in this program during 1987-89; so far, these students have established  27 103 micro-enterprises with 336 direct employees and about 1,300 indirect workers.' The project would assist in: (a) preparation of 250 additional instructor-promoters of this specific training program with the assistance of qualified and experienced managers of small enterprises; (b) upgrading of instructional materials; (c) in addition to six existing agreements, establish others with relevant federal and state government institutions for program assistance, including access to a line of credit to qualified trainees of the program; and (d) initiate special short courses for interested employed (and unemployed) workers in the existing training centers. It is expected that during 1991-97 about 30,000 third year trainees in the regular CONALEP training programs would participate, and that about 1,500 new micro- enterprises would be established with up to about 5,000 employed workers. 3. Increasina CONALEP's Efficiency and Effectiveness (Costs: US$36.3 million, including contingencies) 3.18. Through the following activities, the project would strengthen the administration of CONALEP, increase efficiency and improve cost reduction/recovery plans. 3.19. (a) Decentralization of Equipment Maintenance Services and Expansion of Production Programs. This subcomponent would assist in the full institutionalization of the buildings, furniture and equipment maintenance services Rrogram (para. 2.21). A maintenance unit would be established or strengthened in each of the 252 training centers and appropriately equipped to handle general building and ground maintenance as well as routine furniture and equipment repair at the local level. These activities would be carried out with the assistance of instructors and advanced students, with the primary objective of enhancing learning through practical experience. AddItionally, to facilitate the repair of major items and more complex equipment, eight regional maintenance centers would require supplemental construction and equipment; these centers would be developed in conjunction with the Technological Development and Assistance Centers (para. 3.8), with which they would share complexes. The project would finance such construction, furnishing and equipping of these facilities. At negotiations, the Government presented, and agreement was reached on, a revised draft operational manual for the maintenance services program; formal adoption bv CONALEP of the final manual would be a condition for effectiveness. The project would also expand to all the 252 training centers the highly successful equipment production program initiated in 70 cent.ers under the CONALEP II project, which produced over a three year period a net income of about US$930,000 over material costs (para. 2.21). The project would allocate about US$11.4 million to finance the cost of materials and supplies to establish production units for the production of CONALEP's furniture and equipment for COhALEP centers as well as other public trai:L.ng centers managed by government agencies, and for the provision of selected services. On the basis of experience in CONALEP II, it is projected that over a five year period the net income from the project would amount to about US$17.0 million or an average of about US$3.4 million per year. At negotiations, the Government presented, and agreement was reached on. a draft manual for operation of the equiRment production program; formal adoption by 9 The Mid-Term Evaluation Report (March 1991) of the Bank-financed Manpower Training Project (Loan 2876-ME) also points out that close to one third of those trainees who completed the retraining program were self-employed.  28 GONALEP of the final manual would be a condition for effectiveness. While implementation of these two programs is expected to result in financial returns, the underlying objectives of this subcomponent are to enhance the quality of training, improve student motivation and retention, reduce training costs from the government approprised budget, and reduce CONALEP's capital investment costs for furniture and equipment. 3.20. (b) Improvement of CONALEP's Administrative Capacities. The improvement of communications within the system, and the upgrading and increasing of efficiency and effectiveness of the total administrative process at and between the central level and the individual training centers (para. 2.15) would be realized through the development of a communications network, with computer modem and telefax connections to each of the 252 training centers--including, notably, the eight regional facilities--and the instructor training facility, and the construction, furnishing and equipping of a main computer and communications facility at the central headquarters of CONALEP. This program would be phased in over time, and would be based on a study and experiences during the phasing-in period. Issues such as the design of the system, and whether full coverage (to all centers) is necessary, would be covered in the proposed study. 3.21. (c) Improvement of Cost Recovery/Sharing/Accounting of Training. In view of the significant successes during the last two years (Annex 4), the receipts during the first two months of 1991, and the rapid increases in the numbers of special agreements (convenios) signed with public and private enterprises and associations, CONALEP has set as its goal an increase from 13.6X of its recurrent expenditures in 1990/91 to 20.0% in 1996; this represents an average annual increase of about 15Z in real terms in CONALEP's cost recovery/cost sharing receipts over the period of 1991 to 1996. In this context, the Government has developed strategies and policies by sector/training program, for increasing cost recovery (Annex 4). The estimates for these years are shown in Table 3.1 below. Table 3.1: IFnroving Training Cost Recovery/Cost Sharing During 1991-96 1990/1 1991 1992 1993 1994 1995 1996 -U-S-S-miL-l- - - - - - - - - US$ million in vaTue - - - - - - - - - - - (In constant 1990 dollars) Cost Recovery/Sharing (Cash and In-Kind) 12.9 14.8 17.1 19.6 22.6 25.9 29.8 (X of CONALEP Recurrent Expenditures) (13.6%) (14.7%) (15.7%) (16.8%) (17.9%) (18.9%) (20.0%) (X of MarginaL Recurrent Costs of Project in 1996-97) (41.0%) Li Actual. At negotiations. the Government provided assurances that CONALEP would increase its overall cost recoverv receipts at an annual rate satisfactory to the Bank so that. by the end of calendar year 1996. such receipts will be esuivalent to 20Z of CONALEP's recurrent costs. The project would also assist CONALEP in the strengthening of its cost accounting procedures. The objective  29 would be to allow the management of CONALEP to evaluate the efficiency of various training programs--in particular, the costs of in-service training programs on an individual program or center basis--and compare them with the revenues collected from the clients. To achieve this goal, the project would finance technical assistance. ht negotiations. the Government presented. and agreement was reached on. draft terms of reference for a study on improving CONALEP's cost accounting system and cost recovery criteria and procedures: provided assurances that by loan effectiveness CONALEP would submit to the Bank for anproval final terms of reference, draft contracts for consultants and a short list of consultants to be hired: and provided assurances that the cost accounting and cost recovery study would be initiated within six months of loan effectiveness and would be completed by March 31. 1993. and that action plans on the basis of the results of the studies would be prepared satisfactory to the Bank. by June 30. 1993. CONALEP would also look into the causes of high unit costs for about 50 centers (para. 2.13). At negotiations. the Government also provided assurances that CONALEP would prepare a plan. gatisfactorv to the Bank. to take remedial actions on these high unit cost centers, by June 30, 1992. 3.22. (d) Improving Efficiency in Student Flows and Graduate Placement. The completion rates of trainees in the regular, pre-service training programs require improvement (para. 2.12). The attrition rate in the first semester, particularly during the first half, is very high. The reasons for this situation are not clearly defined, although it has been a secular problem in Mexico. Factors seemingly associated with this problem are: (a) inadequate student selection and orientation; (b) high academic/training standards; (c) relatively high tuition charges of CONALRP (Mex$70,000 contrasted to Mex$1,000 paid by public university students); and (d) the continuing strong lure of academic secondary education as a means of university entrance. In view of this situation, CONALEP would, with qualified specialist acsistance, initiate a formal study for which preliminary draft TORs have already been reviewed and approved by the Bank (Annex 3) to fully analyze the problem and take such additional corrective measures as are found feasible. While graduate placement is satisfactory (62Z of graduates start working within three months, and 84Z of those in their field of training specialization), the current CONALEP administration realizes that additional information about placement and earnings, including comparison of earnings and employment histories of those with training and those without training after three months and again after one year from graduation, would be useful to improve the effectiveness and efficiency of CONALEP programs. Thus, CONALEP has decided to introduce significant improvements in the Graduate Tracer System and has prepared terms of reference for improved tracer studies (Annex 3). The assistance of qualified consultants and the cooperation of the approximately 1,300 enterprises and associations with which CONALEP has signed agreements of cooperation (convenios) would strengthen CONALEP's placement and follow-up systems. It is also expected that an alumni association with some guidance and placement services would be formed in the near future. At negotiations. the Government presented, and agreement was reached on. draft terms of reference. Government also, at neRotiations. provided assurances that CONALEP would: submit to the Bank for approval. by loan effectiveness, the final terms of reference, draft contracts for the consultants required. and a short list of consultants to be hired. for the studies on completion rates of the  30 Pro-eervice traininft grogram and the improvement of the Graduate Tracer Svetem: initiate the studles. includina collection of data, within six months of loan effectivenesss comlete the studies by March 1993: and prepare actioA plans on the basis of the results of the studies by June 30. 1993.  31 IV. PROJECT COSTS. FINANCING AND IMPLEMENTATION A. Cost of the Prolect (see Annex 5) 4.1. Costs by Proiect Component. The total cost of CONALEP's Phase III development program is estimated at Mex$602 billion, equivalent to US$204.5 million, net of taxes and duties. The total estimated costs and foreign exchange components by main project component are summarized in Table 4.1. Table 4.1: PROJECT COST SUMMARY Prolect Costs X Local Foreign Total Foreign Total Project Compconents ---------USSmiltion------- Costs Base Costs Quality InprGvements 32.7 53.4 86.1 51.0 Expansion of Training Activities 20.0 32.6 52.6 31.0 Increasing Efficiency and Effectiveness 11.4 18.5 29.9 18.0 TOTAL BASE COSTS 64.1 104.5 168.6 62.0 100.0 Physical Contingencies 3.2 5.2 8.4 62.0 5.0 Price Contingencies 10.4 17.1 27.5 62.0 16.3 TOTAL PROJECT COSTSL _.7 126.8 204.5 62.0 121.3 La Excluding taxes and duties. Figures may not add due to rounding. 4.2. Basis of Cost Estimates. Base costs are expressed in prices of April 1, 1991. Estimated costs of civil works and furniture for the project are based upon unit prices derived from current contracts in Phase II and detailed estimates from other Mexican projects of a similar nature. Costs are adjusted to reflect regional variations within the country. Professional fees and site development costs are not calcul&ted separately. Equipment costs are derived from preliminary and final lists, and they reflect a substantial revision of equipment costs, lists and specifications, based on the experience of Phase II. 4.3. ComDarison of Unit Costs. The unit area and selected unit capital cost estimates are shown in Table 4.2. While the unit area estimates are generally comparable to those for similar projects supported by the Bank and others carried out in the Latin America and Caribbean Region, a comparison of unit cost estimates for construction of the small additions of classrooms, shops and other spaces with the construction of complete schools in other projects would have no realistic meaning and therefore is not made. Furniture and equipment costs are for the provision of supplemental furniture and equipment only.  32 TABLE 4.2: UNIT COST AND SPACE COMPARISON Item CONALEP II CONALEP III Ivemen Uit Cost ..... USS---................... Construction/n/ S 173 S 180 Furniture & Equipment Costs/Trainee Ptace 1,094 235 (Supplemental only) Investment Cost per Student (1990-91) (1996-97) when futly operational 1,474 567 (Supplemental only) Mobile Training Units (C+F+E+Tractor Share) - 7,812/trainee place Fixed Training Centers (C+F+E) 5,340/trainee place Pperational Unit Costs For total enrollments expressed in FTE: Costs at local training center level 406 Plus costs at national acninistration levet - 96 Totat Unit Costs/FTE Trainee S 502/trainee For Mobile training units - average fof 1,932 trainees during 1990 in (S 43.00/trainee marginal areas having no other training - (S 0.52/hour facilities Space Comparisons Square meters/Student 8.2m? 0.44m2 4.4. Contingency Allowances. The program cost includes a physical contingency allowance equal to 5% of the estimated baseline costs for all furniture, equipment and technical assistance, and for civil works after April 1, 1991. Physical and price increase estimates for construction and furniture are based upon the amount of construction to be performed after April 1, 1991. Project costs include price and physical contingencies for construction, furniture, equipment. production materials and technical assistance. In view of differences in the rate of price escalation bet't-en local and international market prices, price increases for local and foreign costs for civil works and technical assistance were calculated separately. It is assumed that price increases for equipment and instructional materials would follow international price trends as they would be largely procured through ICB (para. 4.14). Anticipated price increases during implementation are shown in Table 4.3. Accordingly, total US$ equivalent value of price increases during the implementation period are expected to be about 13.4X for construction, 15.8% for furniture and equipment, 17% for production supplies and 19.3% for technical assistance. Total contingencies (physical and price) are estimated at about 21.3S of baseline costs and 17.5% of total costs (Annex 5.1).  33 Table 4.3: EXPECTED PRICE INCREASES DURING IMPLEMENTATION ^ 1991 1992 1993 1994 1995 1996 Local Forei4n Local Foreig LocaLFeion Local Foreicn Local Foreion Locat Foreion Construction 7.0 6.2 4.0 4.1 3.1 3.3 2.7 2.8 2.2 2.3 1.9 2.0 EquIpment/ 7.4 6.2 4.2 4.1 3.3 3.3 2.8 2.8 2.3 2.3 2.0 2.0 Prod. Suppties Tech. Assistance 7.7 6.2 4.4 4.1 3.4 3.3 2.9 2.8 2.4 2.3 2.1 2.0 National 7.4 6.2 4.2 4.1 3.3 3.3 2.8 2.8 2.3 2.3 2.0 2.0 Y Local price increases are calculated on the basis of local costs expressed in US dollars and are calculated on basis of estimates of CIEMEX-WEFA of Septeffber 1990 and adjusted on the basis of agreed criteria of free trade between Mexico and the USA for the aligrnment of price indices. 4.5. Foreign Exchange Component. The foreign exchange component is estimated at US$126.8 million equivalent or about 62% of total project costs. The calculations of the foreign exchange component are based on assumptions that (a) all construction and relat6d professional services would be awarded to local firms, (b) all furniture would be awarded to local suppliers, and (c) 75% of equipment would be awarded to foreign suppliers. They are then adjusted ior the indirect foreign exchange component. The resulting foreign content of each catogory of expenditure is calculated at 20% for construction, 80% for furniture and equipment, 50% for production supplies and 50% for specialist assistance and fellowships. B. Recurrent Cost Implications 4.6. When fully operational in 1996-97, the additional annual recurrent costs of the project are estimated in constant 1989 pesos at about US$73 million. CONALEP's total recurrent expenditures for 1989 were US$87 million or 1.6% of the federal budget for education and culture.'0 In view of the high priority given to the proposed program, and the Government's strong commitment to expanding and improving output of technically trained manpower, it is expected that those expenditures would be met. For FY91, adequate budgetary provisions have already been made for the initiation of the proposed project. C. Proiect Financing and Disbursement Plan 4.7. Financing. The total project cost of US$204.5 million would be financed as follows: '