Mexico - Technical Education and Training Modernization Project

Document of The World Bank Report No. 13416-ME STAFF APPRAISAL REPORT MEXICO TECHNICAL EDUCATION AND TRAINING MODERNIZATION PROJECT OCTOBER 5, 1994 Country Department II Human Resources Operations Division Latin America and the Caribbean Regional Office  CURRENCY EQUIVALENTS Currency Unit = New Peso (N$) US$1.00 = 3.38 New Pesos (August 1994) FISCAL YEAR January 1 - December 31 ACADEMIC YEAR September 1 - June 30 ACRONYMS AND ABBREVIATIONS CBT Competency-Based Training CBTIS Center for Technical High School Education in Industry and Services (Centro de Bachillerato Tecnologico Industrial y de Servicios) CEAs Accredited Testing Center (Centro de Evaluaci6n Acreditado) CECATI Training Center for Industrial Skills (Centro de Capacitaci6n para el Trabajo Industrial) CETI Center for Industrial Technical Education (Centro de Enseftanza Tecnica Industrial) CETIS Center for Technical Studies in Industry and Services (Centro de Estudios Tecnol6gicos Industriales y de Servicios) CIMO Multiple Support Service Program to MSMEs (Programa de Calidad Integral y Modernizacion) CNs Competency Committees (Comites de Normalizacion) CONALEP National System for Vocational and Technical Education (Colegio Nacional de Educaci6n Tecnica Profesional) Council Council for Normalization and Certification of Competency Standards (Consejo de Normalizaci6n y Certificaci6n de Competencias Laborales) DGE General Directorate for Employment in STPS (Direcci6n General de Empleo) DGETI General Directorate for Industrial Technical Education in SEP (Direcci6n General de Educaci6n Tecnol6gica Industrial) DGPPP General Directorate for Planning, Programming, and Budgeting in SEP (Direcci6n General de Planeaci6n, Progranaci6n, y Presupuesto) ICB International Competitive Bidding IPN National Polytechnic Institute (Instituto Politecnico Nacional) LCB Local Competitive Bidding LIB Limited International Bidding MSMEs Micro, Small, and Medium-sized Enterprises NAFITA North American Free Trade Agreement NAFIN National Financing Company (Nacional Financiera, S.N. C.) NCO National Occupational Catalog NVQ National Vocational Qualifications OCs Certification Agencies (Organismo de Certificacion) PAU Project Administration Unit PROBECAT Labor Retraining Program (Programa de Becas de Capacitaci6n para Trabajadores) SBDs Standard Bidding Documents SEE State Employment Service (Servicio Estatal de Empleo) SEP Secretariat of Education (Secretarta de Educaci6n Publico) SHCP Secretariat of Finance and Public Credit (Secretar(a de Hacienda y Credito Publico) SMEs Small and Medium-sized Enterprises SNC National System of Competency Standards (Sistema Normalizado de Competencias Laborales) SNET National System of Technical Education (Sistema Nacional de Educaci6n Tecnol6gica) SOEs Statement of Expenses STPS Secretariat of Labor and Social Welfare (Secretarta del Trabajo y Previsi6n Social) TCS Skills Testing and Certification System UPC Regional Productivity Support Unit of CIMO (Unidad Promotora de Competitividad)  MEXICO TECHNICAL EDUCATION AND TRAINING MODERNIZATION PROJECT STAFF APPRAISAL REPORT TABLE OF CONTENTS LOAN AND PROJECT SUMMARY ................................ iii I. INTRODUCTION .......................................... 1 II. TECHNICAL EDUCATION AND TRAINING ...................... . 2 A. Background and Overview ..... ...................... . 2 (1) Structure of Education System ......................... 2 (2) Technical Education and Training ....................... 3 B. Issues of Vocational/Technical Education and Training ............... 5 (1) Poor Preparation of Workers for Vocational/Technical Education and Training .................................. 5 (2) Supply-Driven Programs ............................ 6 (3) Uneven Quality of Training Programs .................... 7 (4) Lack of Private Sector Involvement in the Design and Provision of Training .................................... 7 C. Government Strategy for Technical Education and Vocational Training ..... 8 (1) Primary Education Access and Quality .................... 8 (2) Technical Education and Training Access and Quality ... ....... 9 D. Lessons Learned from Past Operations . . ...................... 11 E. Rationale for Bank Involvement . . ........................... 13 III. THE PROJECT ......................... 14 A. Project Objective ...................... 14 B. Project Description ...................... 14 Component A - National System of Competency Standards, Skills Testing and Certification ................ 14 Subcomponent A. 1 - National System of Competency Standards . .14 Subcomponent A.2 - Skills Testing and Certification System ... 16 Component B - Modernization of Training Programs ...... ........ 17 Subcomponent B. 1 - Pilot Training Modernization Programs .... 17 Subcomponent B.2 - Development of Training Materials .. ..... 18 Component C - Stimulation of Demand for Competency-Based Training and Certification ............................... 19 Subcomponent C. 1 - Promotion of SNC . . 19 This report is based on thefindings of an appraisal mission which visited Mexico in June-July 1994. The mission was composed of Messrs. IMmes. Mari Minowa (Economist, Mission Leader), John Innes (Senior Economist), Joao B. Oliveira (Educator), Rosita Estrada (Operations Analyst), Vinh Nguyen (Operations Assistant), Kevin Rost (Operations Assistant), Manuel Briceflo (Training Specialist, Consultant), and Stephen Hoenack (Economist, Consultant). Peer reviewers are Messrs. Luis Pisani (LAIHR) and John Oxenharn (EDIST). Messrs. Edilberto L. Segura and Kye Woo Lee are the Department Director and Division Chief, respectively, for this operation.  - ii - Subcomponent C.2 - Pilot Testing of CBT in Enterprises ..... . . 19 Subcomponent C.3 - Training and Certification Incentives ..... . 20 Subcomponent C.4 - Program for Equipment Purchase and Instructor Training . . . . . . . . . . . . . . . . . . . . . . . . . . 21 Component D - Information Systems, Studies, and Project Administration ................................ . 22 Subcomponent D. 1 - Information Systems ...... . . . . . . . . . . 22 Subcomponent D.2 - Studies . . . . . . . . . . . . . . . . . . . . . . . . 22 Subcomponent D.3 - Project Administration ...... . . . . . . . . . 24 IV. PROJECT COSTS, PROCUREMENT, DISBURSEMENTS AND AUDITS ..... . 25 A. Project Costs and Financing ........ . . . . . . . . . . . . . . . . . . . . . . . 25 B. Procurement ........... ... . .. .. .. .. .. .. .. .. .. .. .. .. . 27 C. Disbursements ........... .. .. .. . .. .. .. .. .. . .. .. .. .. . . 30 D. Accounts and Audits ......... .. . .. . . .. . . .. . .. . . .. . . .. . . 31 V. PROJECT IMPLEMENTATION ............................... . 31 A. Project Implementation ......... . .. . . . .. . . . .. . . . .. . . . .. . . 31 B. Supervision and Mid-Term Review ....... . . . . . . . . . . . . . . . . . . . . 32 Implementation Reviews ........ . . . . . . . . . . . . . . . . . . . . . . . 32 Mid-Term Review ......... .. . .. . . .. . . .. . .. . . .. . . .. . . 33 VI. PROJECT BENEFITS AND RISKS ........ . . . . ......... . . . . . . . . . . 33 A. Project Benefits ...................................... 33 B. Project Risks ........................................ 34 VII. AGREEMENTS REACHED AND RECOMMENDATION ............... 35 ANNEXES 1. Technical Education System 2. Evaluation of CONALEP and PROBECAT Training Programs 3. National Vocational Qualifications System 4. Component A - National System of Competency Standards, Skills Testing and Certification 5. Component B - Modernization of Training Programs 6. Component C - Stimulation of Demand for Competency-Based Training and Certification 7. Implementation Plan 8. Implementation Schedule 9. Project Costs and Disbursement 10. Monitoring Indicators 11. List of Documents in Project File  MEXICO TECHBNICAL EDUCATION AND TRAINING MODERNIZATION PROJECT LOAN AND PROJECT SUMMARY Borrower Nacional Financiera, S. N. C. (NAFIN) Guarantor United Mexican States Executing Agencies Secretariat of Education (SEP), Secretariat of Labor and Social Welfare (STPS), and the Council for Normalization and Certifications of Competency Standards ("Council") Beneficiaries Workers seeking training and/or certification of their skills; employers seeking qualified employees Amount US$265 million equivalent Terms Repayment in 15 years, including 5 years of grace at the standard variable interest rate Project The objective of the proposed project is to improve the quality of Objective the technical education and training in Mexico so that it meets the critical needs of the productive sector in a flexible manner. More specifically, this objective will be achieved by: (a) providing a universal measure (a new system of competency standards and certification) with which effectiveness and quality of different training programs can be evaluated; (b) increasing the flexibility and relevancy of the training system by redesigning training programs into modular courses based on the new standards; (c) promoting private sector initiative and participation in training design and provision, through the provision of incentives to individuals and enterprises for their participation in the proposed training reform; and (d) establishing the necessary information systems and undertaking a program of studies to improve implementation of new training orientation. Project The project will consist of four components. The National Description System of Competency Standards, Skills Testing and Certification component (US$33.1 million, 8.0% of total costs including contingencies) will establish national competency standards defined by workers and employers for 20 key occupational clusters. Based on these new competency standards, a system of skills testing and certification will be established to serve as an objective evaluation tool of both worker skills and training programs. The Modernization of Training Programs component (US$152.8 million, 37.1 %) will help selected training institutions, both public and private, redesign their training courses into modular courses  - iv - based on the new competency standards, by providing for teaching materials development, instructor retraining, and equipment updating during the first phase of the project, and by expanding the support for development of training materials during the second phase. The Stimulation of Demand for Competency-Based Training and Certification component (US$208.0 million, 50.5%) will promote the benefits of the new system of competency standards and certification to potential users of the system, and will provide financial incentives to targeted individuals and firms to participate in competency-based training. The component will also provide assistance for equipment purchase and instructor training to training institutions through open competition at the national level during the second phase. The Information Systems, Studies and Project Administration component (US$18.1 million, 4.4%) will support establishment of registries of data pertaining to the new training and certification system for monitoring, evaluation, and as input into the mainstreaming second phase of the project. The component will also include a program of studies to guide project design and evaluation. Project administration through a Steering Committee and a Project Administration Unit within SEP will also be supported. Project First, the quality and relevance of training programs will improve Benefits because they will reflect the actual needs of work competencies. Disparities between skills taught and skills needed will diminish, reducing the waste in human resource investment by the Government, industries, and workers themselves. The development of programs and training materials for about 130 different training modules are expected to be financed directly through the project, which will be used in about 8,400 public and private training courses. Second, more flexible, modular training programs will increase the accessibility of skill formation and upgrading to a wide range of people. This will benefit both employers and workers, enabling workers to obtain continued training more fine-tuned to their needs, and thus increasing worker productivity. About 200,000 workers are expected to benefit from modular, training programs over the five-year life of the project. Third, skills testing and certification will provide clearer signaling and labeling of worker skills. Both workers and employers will benefit from this, since job search and hiring processes will become more efficient. Workers will also benefit from having better tools for their career planning, and employers benefit from having clearer measures with which to plan training of employees. Furthermore, a certification system which does not depend on enrolling in training institutions will provide opportunities for skill validation for those who gained skills through on-the-job learning, thus possibly leading to better jobs and higher income (approximately 160,000 people will receive support for their skills testing). Certification also facilitates mobility  v - of labor across industries and geographical areas, increasing the competitiveness of the Mexican economy. Project Risks First, the project suffers from potential complexity, involving a number of executing agencies. To mitigate this risk, the project provides for a high-level Steering Committee which will help resolve coordination problems. The project is also designed with sufficiently independent project components that can be implemented separately by the Council, SEP, and STPS, to avoid unnecessary coordination requirements. Second, the productive sector may not demonstrate sufficient interest, participation, and ownership of the proposed training reform during the implementation despite their current enthusiasm. This risk will be mitigated through (a) the Council established as an independent organization, led by private sector employers and workers; and (b) a promotion campaign and pilot training programs which would demonstrate the effectiveness of competency-based training to employers and employees alike. Furthermore, inputs from the industrial sectors, unions, and training providers have been and will be actively sought to encourage their involvement in the project. Third, there may be poor understanding of the project by the intended beneficiaries resulting in initial resistance to the project. However, the participation of industry and labor unions in establishing competency standards would help create the right conditions for successful project implementation. Poverty Category Not Applicable. Program Objective The establishment of the competency standards and certification Category system and modularization of training courses will have a potentially positive impact on the poor, first by making their participation in the training easier through shorter and less costly courses, and second by providing them with means of validating their skills acquired outside of the training system. Similarly, the gender-blind nature of the competency standards and certification system will alleviate biases against women in some of the technical occupations.  - vi - PROJECT COST SUMMARY (US$ million) LocAl Foegn )Tt A. National System of Competency Standards, Skills Testing and Certification 1. National System of Competency Standards 10.3 0.3 10.6 2. System of Skills Testing and Certification 20.5 0.0 20.5 Subtotal 30.8 0.3 31.1 B. Modernization of Training Programs 1. Pilot Training Modernization Programs 70.6 41.1 111.7 2. Development of Training Materials 6.0 24.0 30.0 Subtotal 76.6 65.1 141.7 C. Stinulation of Demand for Competency-Based Training and Certification 1. Promotion of SNC 5.9 0.5 6.4 2. Pilot Testing of SNC in Enterprises 22.8 4.1 26.9 3. Training and Certification Incentives 98.9 12.5 111.4 4. Equipment and Instructor Training 31.9 13.4 45.3 Subtotal 159.5 30.5 190.0 D. Information Systems, Studies & Project Administration 1. Information Systems 1.5 1.6 3.1 2. Studies 6.3 2.2 8.5 3. Project Administration 5.7 0.0 5.7 Subtotal 13.5 3.8 : 017*3 TOTAL Baseline Costs 280.4 99.7 380.1 Physical Contingencies 4.4 3.5 7.9 Price Contingencies 18.0 6.0 24.0 TOTAL PROJECT COSTS'" 302.8 109.2 412.0: FINANCING PLAN Local Foreign Total US$ million Government of Mexico 118.3 0.0 118.3 IBRD 155.8 109.2 265.0 Beneficiaries 28.7 0.0 28.7 TOTAL 302.8 109.2 412.0 !' Includcs duties and taxes estimnated at about USS32.8 million.  - vii - ESTIMATED DISBURSEMENTS TIMETABLE IBRD Fiscal Year 1995 7 1996 i 1997 1 1998 1 1999 1 2000 Annual 22.5" 51.3 62.7 53.0 50.9 24.6 Cumulative 22.5 73.8 136.5 189.5 240.4 265.0 Includes initial Special Account deposit US$12.0 million. Retroactive financing of up to US$10.0 million would be permitted for eligible expenditums incurred since June 28, 1994. Economic Rate of Return: Not Applicable  - viii - BASIC DATA SHEET Mexico Year A. General Country Data GNP Per Capita (US$) 3,470 1992 Area (Thousand Square Kilometers) 1,958 1992 Population Estimates (Millions) 85.0 1992 Urban Population (% of Total) 74.0 1992 Population Projection, Year 2000 99.0 1992 B. Social Indicators Crude Death Rate (per 1,000) 5.0 1992 Average Annual Rate of Population Growth (%) 2.0 1992 Total Fertility Rate 3.2 1992 Infant Mortality Rate (per 1,000 live births) 35.0 1992 Life Expectancy at Birth (years) 70.0 1992 Adult Illiteracy Rate (% of persons 15 and over) 13.0 1992 C. Labor Force Statistics Total Labor Force (Millions) 24.0 1990 Male (Millions) 18.4 1990 Female (Millions) 5.6 1990 Participation Rates Male (Age 12 and older) (%) 73.6 1992 Female (Age 12 and older) (%) 35.0 1992 D. Employment and Wage Statistics Total Employment (Millions) 23.1 1991 Distribution by Sector (%) Agriculture, Forestry and Fishing 25.8 1991 Mining and Manufacturing 12.0 1991 Construction 10.8 1991 Services and non Specified 51.4 1991 Unemployment Rate 2.9 1992 Average Daily Minimum Wage (US$) 4.19 1993 Sources: World Bank, World Development Report. 1994; STPS, World Bank, Mexico: Country Economic Memorandum: Fostering Private Sector Development in the 1990s (Volume II), 1994; Informe de Labores. 1991-1992, 1992; INEGI, Anuario Estad(stico de los Estados Unidos Mexicanos '92, 1993.  MEXICO TECHNICAL EDUCATION AND TRAINING MODERNIZATION PROJECT I. INTRODUCTION 1.1 Mexico's success in stabilizing, liberalizing and privatizing the economy has set the stage for long-term economic growth. The ratification of the North American Free Trade Agreement (NAFTA) is likely to induce changes in the Mexican industry profiles, requiring more advanced technology and more efficient and competitive production capacity to compete internationally. An educated and skilled labor force is one of the crucial factors for Mexico to sustain the economic growth led by the private sector and to successfully compete in the international market, particularly within the framework of NAFTA. The new, open economy will require workers, industries, and training systems to respond quickly to new skill requirements of the markets. Such labor mobility and flexibility can be achieved only by having reliable ways to identify skills demanded in the market and having a system of training flexible enough to respond to the changing demands and needs for new skills. The training system needs to be more responsive to the demands of the productive sector, which on its part, needs to be able to communicate its needs to the training providers; this implies the adoption of a common language that defines skill needs. According to a study that analyzed the demand and supply of technical workers, there are large imbalances between the demand and supply of technicians, skilled and unskilled workers among many occupational categories and different skill levels."' 1.2 The proposed project addresses the issue of effective skills formation by establishing a system of competency standards and skills testing and certification through substantial participation of the productive sectorY These new standards would provide tools with which to assess and improve the quality and relevance of both worker skills and training programs. The project would assist public and private training institutions to redesign their courses into more flexible courses based on modular units and new competency standards. The proposed project would also address the issue of promoting the effective demand for training by workers and industries through incentives. Continuing its effort to improve the quality of technical education and training, and recognizing the Bank's comparative advantage in the area of human resource development gained through past projects, the Mexican Government has requested the Bank's support for the reform of its vocational and technical education system. 1.3 The proposed project recommends Bank financing of US$ 265 million to establish a National System of Competency Standards and Certification (Sistema Normalizado de Competencias Laborales, SNC), which will be coordinated under a new Council for Normalization and Certification of Competency Standards (Consejo de Normalizacion y Certificacion de Competencias Laborales, "Council"). The new system will promote involvement of new and existing training institutions and other governmental assistance ' The study results are sumfarizcd in "Project Implementation Details" filed in the LAC Project Files. Y "Competencies" are job behaviors typical of an occupation. Such behaviors are empirically derived and analyzed for the knowledge, and intellectual and physical skills required. The establishment of competencies for a given occupation also entails defining the frequency and criticality of a given competence. The empirical definition of competencies is usually performed through observation, interviews, job descriptions, and job analysis.  programs for labor force skills formation through competency-based training (CBT) and certification. The proposed loan is recommended for Bank financing for the following reasons: (a) The proposed project is consistent with the Bank's country assistance strategy and would complement other Bank-financed projects for enhancing sustainable economic growth, poverty alleviation, and human resources development (Chapter II); (b) The project would address critical issues of the existing training system by matching the demand and the supply of relevant skills through a detailed strategy and action plan (Chapter II); (c) The project would finance the initial steps towards development of a national capability to set up a coherent system of standards and certification by creating the necessary incentives for a demand-driven system of training and certification (Chapter III); (d) The project would create an innovative organization, the Council, led jointly by representatives of the productive sector and the relevant Government Secretariats, and responsible for ensuring active private sector participation in designing and implementing the new competency standards system (Chapter III); (e) The project would promote coordination and cooperation between the Secretariats of Education (SEP) and Labor (STPS) for productivity improvement of the Mexican labor force through reforms in pre-service, in- service, and retraining programs (Chapter V); and (f) The project would produce important economic benefits, which are expected to be far greater than the costs and risks involved (Chapter VI). I. TEClINICAL EDUCATION AND TRAINING A. Background and Overview (1) Structure of Education System 2.1 During the 1993-94 academic year, the public sector, its decentralized agencies, and private accredited institutions provided educational services to a total of about 25 million students in Mexico. The General Education Law establishes that the national educational system includes nine years of basic education, followed by upper secondary and higher education in either formal, in-class instruction or non-traditional extension programs. During the 1993-94 academic year, a total of about 14.5 million students were enrolled in six years of primary education, of which 94% were in public schools. Net enrollment rates at the primary and lower secondary levels reached 98% and 58%, respectively, in 1992. In 1993, in its effort to strengthen the basic human capital of its population, the Mexican Government extended the compulsory education from six years of primary education to nine years of basic education, consisting of six years of primary education and three years of lower secondary education (para. 2.24). In 1993-94, about 3.1 million students (72% of total  lower secondary) were enrolled in general academic middle schools, and 1.2 million students (28% of total lower secondary) in technical middle schools. 2.2 For upper secondary education (high school level), two programs are offered: (a) academic curricula, including technical specialization (bachillerato tecnologico), which is a prerequisite for higher education; and (b) technical vocational curricula (profesional tecnico), which are terminal and do not lead to higher education. Thus, those students who plan to pursue a technical career would have to choose either a vocational/technical curriculum to enter the work force upon graduation, or a technical college preparatory curriculum which qualifies graduates to enter undergraduate programs in technical fields. During 1993-94, some 1.3 million (58% of total upper secondary enrollments) were enrolled in general academic high schools (including teacher training schools) and 530,300 (24% of total upper secondary enrollments) students were enrolled in technical academic high schools, both leading to bachillerato degrees. Those who were enrolled in terminal technical professional schools were 406,500 students (18% of total upper secondary enrollments). 2.3 In addition to these programs, the national educational system also offers "job skills training" programs in a formal in-class format, with courses ranging from a few hours to three to four months. These courses have no academic prerequisites and provide job skills training for entry-level technical positions. The majority of students in job skills training programs have a primary education background. The system also encompasses adult education, including non-traditional job skills training in self-instructional formats, special education, education for indigenous and rural peoples, and open education at all levels. Figure 1 of Annex 1 presents an overview of the Mexican educational system. Figure 2 shows primary and secondary schools enrollments by type of programs for the 1993-94 academic year. (2) Technical Education and Training 2.4 Public System of Technical Education and Training. The public sector offers both formal and informal technical education and training through the SEP and STPS. SEP's Office of Undersecretary for Technological Education and Research is responsible for managing the National System of Technical Education (SNET), which offers formal technical education and training at four levels: (a) job skills training with no formal academic requirement; (b) upper-secondary (high school) level with middle school requirement; (c) undergraduate university level; and (d) graduate level. A total of 973,000 students were registered in the formal SNET system during the 1992-93 academic year, representing about 45% of upper secondary school enrollment or 3.8% of the total student enrollment in the entire education system in Mexico. Table 1 of Annex 1 summarizes the current status of the SNET, and Table 2 further disaggregates the enrollment of the SNET into different units of the system. 2.5 Formal job skills training without academic requirement prepares skilled workers, craftsmen and experts, and is provided through 196 CECATIs (Centros de Capacitaci6n para el Trabajo Industria), which enrolled 91,700 students in 1992-93. The CECATIs offer short courses ranging from 100 to 450 hours of technical skills training, both in their training centers and at the place of employment. Of the total enrollment in Mexico's formal job skills training, CECATIs' share was about 24%, with nearly 65% trained in private  - 4 - institutions and the rest in state and autonomous institutions. While CECATI programs are concentrated in the areas of industrial and manufacturing nature, private sector job skills training primarily is oriented to secretarial and service areas. 2.6 The upper-secondary level public programs further divide into (a) terminal technical/vocational programs and (b) bachillerato tecnologico programs whose graduates can proceed to university level education. The terminal vocational/technical programs enrolled 210,500 students in 1992-93 preparing them to be technicians (tecnicos profesionales). During 1992-93, enrollment in the SNET programs represented about 53% of the total enrollment of the mid-level terminal vocational/technical education track nationwide, with about 30% enrolled in private training institutions and the rest in state and other independent training institutions. Of the 210,500 students enrolled in the SNET terminal programs, 81% were enrolled in 253 CONALEP (Colegio Nacional de Educaci6n Profesional Tecnica) schools, 18% were enrolled in the system of the General Directorate for Industrial Technical Education (Direcci6n General de Educaci6n Tecnol6gica Industrial, DGETI) in either CETIS (Centro de Estudios Tecnol6gicos Industriales y de Servicios) or CBTIS (Centro de Bachillerato Tecnol6gico Industrial y de Servicios), and a small number of trainees were enrolled in IPN (Instituto Politgcnico NacionaO. These terminal programs offer 3-year courses in 164 career specializations in engineering and technology, agriculture, livestock, health science and administration. 2.7 While CETIS and CBTIS train some students who join the labor force after graduating from their terminal programs, most of their graduates obtain a technical high school diploma and continue their study in universities. A total of 464,600 students were enrolled in technical high schools in 1992-93, of which 75% were enrolled in the DGETI system (CETIS and CBTIS) and about 9% in IPN. 2.8 In addition to the formal training programs described above, the public sector provides informal training programs offering short courses to upgrade the skills of employed and unemployed adults. The informal training program is provided both in training institutions and at the work place. Table 3 of Annex 1 summarizes the status of public informal training in three different modalities. In total, about 230,000 trainees went through the informal training during 1992-93. "Pre-service" informal training is offered in training institutions of the SNET system, through short courses of 15 to 350 hours, and in-service informal training is provided as part of employer-provided training required by the Federal Labor Law. For the latter, employers often contract the SNET institutions to provide the short courses for their employees. Finally, STPS finances the PROBECAT program to retrain unemployed workers through many existing training institutions nationwide. The program finances the stipend equivalent of the regional minimum wage plus a transportation allowance during the duration of training courses, which average three months. Since 1984, the SNET system has participated in this program, training over 50,000 unemployed workers annually. 2.9 Private Technical Education and Training. Skills development of workers after entering the work place has been left principally to employers. However, training for employed workers is very limited. While large firms provide their own training programs, small and medium firms rely mostly on contracting out specific training courses in public training institutions. In all cases, training provided by employers has served only as a  - 5 - complement to the basic technical education and training provided by public training institutions. 2.10 In recent years, with the support of the Bank, the STPS has been operating two training programs: CIMO and PROBECAT. The CIMO program (Total Quality and Modernization Program) has been providing technical and financial assistance to about 14,000 micro, small and medium-sized enterprises (MSMEs) annually over the last three years in developing their human resources strategies and arranging training and retraining courses for their workers. The PROBECAT program has been assisting the retraining of unemployed workers, providing resources for training for more than 50,000 displaced workers annually over the last five years.3' 2.11 In addition to the training provided by employers in the private sector, 484 privately- managed training institutions are currently listed in the SEP's registry. The programs offered by private training institutions mostly fall into the non-manufacturing areas. The relative shares of subject areas are: secretarial and clerical (32%), computer (25%), accounting (19%), construction, trades and manufacturing (12%), services, including health and personal services (9%), and other (3%). B. Issues of Vocational/Technical Education and Training 2.12 Despite the progress made during the last 20 years, the training system in Mexico still does not meet the immediate and future requirements of both pre-employment and in-service training. The most critical weaknesses of the vocational and technical training system in Mexico are: (a) poor preparation of workers for vocational/technical education and training; (b) supply-driven programs, which lack flexibility and relevance to the changing labor market needs; (c) uneven quality of training programs, with no objective measures available to gauge the quality of outputs; and (d) lack of an adequate institutional framework for private sector involvement in the design and provision of training.4Y (1) Poor Preparation of Workers for Vocational/Technical Education and Traininge' 2.13 The existing labor force has a low level of educational attainment, about 6 years of schooling on average, while new entrants to the labor market (about 1 million people every year) have typically finished 8 years of education. Consequently, the productivity of the labor force critically depends on raising the quality of basic education, which has been subject to a progressive and continuing overhaul. Issues in primary education include: (a) low educational achievement, evidenced by a 1992 study which found that Mexican primary students mastered only 53% and 30% of the national core curriculum in Spanish and mathematics, respectively; (b) inappropriate curriculum, which had not been revised for 20 years until 1992; (c) inadequate teaching quality; (d) teacher absenteeism and misallocation, especially in rural and remote areas due to poor salaries and harsh physical conditions; (e) 2' The proposed project is designed to use the institutional infrastructure of these existing programs. Particularly, expansion and conversion of CIMO to competency-based training programs would encourage employer-provided training in MSMEs. 4' Unless otherwise stated explicitly, "private sector" in this report includes both employers sad workers. Y For a broader discussion of basic education issues, see Staff Appraisal Report No. 12529-ME, March 11, 1994, for the Second Primary Education Project.  - 6 - inadequate supervision; (f) shortage of library books and other materials and deficiencies in textbook distribution; (g) dilapidated infrastructure; (h) need for community participation to ensure teacher attendance and motivate students; and (i) inadequate managerial capacity. 2.14 The Government has been increasing investments in basic education for the improvement of its quality, especially in those southern and central states which are poor and have low educational indicators, and to extend the free compulsory basic education from six to nine years. The Bank has approved two loans to support the Government's effort in improving the quality of primary education (First and Second Primary Education projects, Ln. 3407-ME, 1991 and Ln. 3722-ME, 1994, respectively). These projects will contribute to the Mexican Government's ongoing efforts, and improve primary school students' academic achievement levels and reduce the high repetition and dropout rates within the poorest 14 of the country's 31 states and in rnarginal areas of the Federal District, contributing to raising the general human capital level, redressing some of the country's social and economic imbalances. Thus, these primary education projects would serve as the foundation for the success of the proposed project (para. 2.24). (2) Supply-Driven Programs 2.15 A predominant characteristic of the training system in Mexico is its supply orientation. Though some training programs, including courses in CONALEP, CECATIS, and CETIS, have been strengthening their ties to the productive sector, and involving them in the design of curricula, much of the training offered for both employed and unemployed workers still follows the academic model of the vocational/technical schools of SEP. Even though specific courses may be demanded by employers, the curriculum tends to be driven by academic subjects and related to obsolete occupational classifications which bear little resemblance to the needs of the current work place. Historically, one of the reasons behind the gap between training institutions and the productive sector in Mexico derived from the formal and legal separation between the concept of training for youths before entering the labor market (pre-service training, or capacitaci6n para el trabajo) and training for employed workers (in-service training, or capacitaci6n en el trabajo) established in the current Labor Law. Each type of training has been governed by SEP and STPS, respectively, without adequate coordination and complementarity between them. Because of this separation, much of the pre-employment technical and vocational training has been divorced from the skill needs of employers. Many of the degree-granting courses tend to be long and rigid programs not accessible to the majority of those already employed. Theoretical subjects and skill practices have often not been integrated and disjointed. This rigidity makes training not only long and costly, but often irrelevant and unattractive. Other consequences of such rigid, supply-oriented structures are the lack of responsiveness to changes in the labor market and the relative lack of participation by employers, which is both a cause and a consequence of this problem. The General Education Law of 1993 recognizes the need for coordination between the two secretariats in their efforts on worker training and thus establishes a basis for SNC. 2.16 On the other hand, while there exist critical needs for training, it may be difficult for the private sector to translate these needs into actual demand for training, because the demand for new skills is difficult to predict and also difficult to communicate through the existing occupational classifications. First, while in the past skill demands were concentrated  on a few technical occupations involving a relatively small number of people, emerging needs are neither limited to a small number of workers, nor can they be addressed merely through the definition of the conventional occupations. The characterization of skill needs is not only more complex, but also more extensive, involving new forms of work organization. Second, the skills that employers need are more fine tuned than in the past, as customers become more sophisticated and have higher expectation of product quality. Third, the skills that employers need change faster, due to accelerated technological changes in general and the increased importance of international competition in the new Mexican economy. There is, therefore, a role for the Government to launch a proactive strategy for technical education and training by providing mechanisms and incentives to help the productive sector identify and respond to the anticipated skill needs. 2.17 The proposed project plans to address the problem of supply-driven, inflexible training programs by helping to redesign the training programs into modular courses based on competency-based occupational standards, which would be established by the initiative of workers and employers, and thus, would reflect the true needs of the labor market (paras. 3.12-3.16 & 3.21-3.24). This proposed project also supports recent efforts of the Government to improve training curricula, where many obsolete course classifications were reorganized and consolidated to form more generally applicable core courses in several specializations. (3) Uneven Quality of Training Programs 2.18 Given the limited training traditions of the country, there is very little standardization of outputs of the training institutions. Training institutions are primarily managed by rules concerning curricula and teacher qualifications, and lack reliable and comparable standards against which to evaluate the effectiveness of different training programs. In practice, quality is known to vary a great deal across institutions and courses, but the reputation of the institutions may or may not reflect the actual quality of the programs and the competence of their graduates. Even within the public systems of CONALEP, CETIS, CBTIS or CECATI schools, the quality of training provided by each school system may vary substantially. Between them, the quality differences can be even greater. Therefore, a diploma or certificate in a given trade or occupation provided by training institutions usually does not convey much useful information to employers about individuals' skills. Nor do individuals have clear information about the quality of the training they received and its usefulness in the labor market. 2.19 The proposed project plans to address this issue by developing a system of competency standards which are objective and independent, and apply universally to all sectors and regions of the country, thus providing a uniform standard with which to evaluate the quality of training programs and skills acquired by individuals (paras. 3.4-3.8). (4) Lack of Private Sector Involvement in the Design and Provision of Training 2.20 Pre-service training has been considered an integral part of the education system, thus is governed accordingly and dominated by the public sector. Most of the technical training programs are highly subsidized by the Government. Even though there are several reasons why the Government may play a role in providing technical training, (such as economy of  scale, externality of the non-firm-specific training provision, and prohibitively high investment cost of some of the training facilities), there have not been sufficient policy measures and strategic incentives that would induce more active participation of employers in worker training. As a consequence of past policies which did not provide incentives for employers to invest in human resources development, financing of skills formation has been perceived as a responsibility of either individuals and/or the Government, and not as a responsibility of employers. In recent years, there have been some efforts to enlist involvement of the productive sector in training program design, such as the industrial advisory committees (comites de vinculaci6n) of the CONALEP system. However, such efforts still need to be expanded significantly. 2.21 The proposed project plans to address this issue of private sector participation by closely involving the private sector in the development of competency standards and the design of a certification and testing system through the major roles played by them in the Council for Normalization and Certification of Competency Standards ("Council") and Competency Committees, and through promotion programs with carefully designed financial incentives, which will decline over time. With the strong participation of employers and workers, the new Council would be the legitimate vehicle to promote the dissemination of the new system throughout the productive sector (paras. 3.4-3.6). 2.22 Nevertheless, Government participation in the proposed reform of the training system is initially required for four major reasons. First, the Government's financial support is needed to promote private sector interest in the development and utilization of standards and certification procedures. Second, the Government is also needed to ensure that conflicts of interest and representation are duly managed and arbitrated, and that necessary changes are introduced in the rules of the system at its early stages. Third, Government has an important role in the early stages to ensure that the system does not become excessively fragmented to accommodate influences of individual occupations or special interests. Fourth, given the lack of tradition and experience with these activities, and the implications it will bring to the reform of the delivery and financing of training systems, Government itself would benefit from the learning process involved. C. Government Strategy for Technical Education and Vocational Training 2.23 The Government has been launching several efforts in the area of education and training. Specifically, the Government is seeking to improve: (a) primary education access and quality; and (b) technical education and training access and quality. (1) Primary Education Access and Quality 2.24 Within the Governmenit's human capital development strategy, primary education plays the key role. Increasing access and improving quality of primary education have become the priority issues in the country, and visible progress has been made in the recent past. Since 1950, Mexico has made great strides in increasing both the access to and the quality of public education: adult illiteracy has decreased from 40% to 12%; the number of schools has tripled, the number of teachers has quintupled, and school enrollments have increased sevenfold while the total population increased only threefold. The Government has implemented over the last five years a comprehensive reform of the education sector with the  - 9 - emphasis on improving basic abilities of the population. A national plan was launched in 1989 to transform the education system, and General Education Law (Ley General de Educaci6n) was passed in 1993. Specific measures include: (a) decentralization of basic education to states (1992); (b) launching of the Teaching Career Program to foster teacher interest in professional improvement, and to offer better salaries based on refined performance evaluation (1993); (c) quality improvement through teacher upgrading, curricula updating, and the free textbooks program; (d) extension of compensatory education programs targeted to underserved population; (e) extension of school year from 187 to 200 days (1993); (f) extension of basic education from six to nine years; (g) strengthening of teacher and administrator training; (h) new emphasis on the community participation through establishment of "Councils of Social Participation" at community, municipal, and state levels; and finally (i) a substantial increase in the Government budget for education. Since productivity increase of workers through technical education and training is intrinsically dependent upon the level of general education possessed by trainees, the Government's emphasis on the improvement of primary education establishes a solid basis for the productivity increase of the Mexican labor force. (2) Technical Education and Training Access and Quality 2.25 Expansion of access to vocational/technical education and training and improvement of the quality of the training programs is the other axis of the Government's parallel strategy for productivity increase of the Mexican labor force. Faced with new labor productivity imperatives arising out of successful transformation of its economy to a market-oriented, open economy under increasing pressures of international competition, and drawing from experience and lessons learned from its existing training programs, the Government has decided to undertake a comprehensive overhaul of the country's technical education and vocational training programs. 2.26 Improving Quality. Several aspects contribute to the inadequate quality of existing training programs. As discussed in the previous section, they include: outdated curricula based on obsolete job classifications and descriptions, outmoded skills of instructors, and outdated materials and equipment, unreliable training output as these deficiencies exist at varying degrees in different training institutions, and the lack of objective measure with which to evaluate the training outcome. The Government proposes to address these issues, by establishing the SNC, which will be developed by the private sector and regularly updated after the initial setup (paras. 3.4-3.8). The SNC will serve as the objective measure against which both workers and training programs are evaluated. The system will also provide a reliable basis for updating the curricula, training materials and equipment, and instructor training (paras. 3.17 & 3.24). With more flexible training programs reflecting the needs of the labor market, in-service training of workers who are already employed can be facilitated. Links between training institutions and potential employers will be strengthened through the participation of businesses in training design and through arrangements where businesses provide practical training opportunities for trainees, thus facilitating increased use of in-plant training. These arrangements would benefit both trainees and businesses by providing more relevant practical training opportunities for the former, and by providing opportunities to observe and train potential employees before formally hiring them for the latter, thus, enabling smoother school-to-work transition.  - 10- 2.27 Since the improvement of training quality entirely depends on the change of the logic of the training system from the current supply-driven system to a demand-driven one, the Government aims to involve both employers and workers of private enterprises in the formulation of training policies, design of training programs, and their implementation. The Government has maintained dialogue with private sector representatives throughout the preparation of the proposed project, including several sessions to present the concept of competency standards, skills testing and certification to representatives of chambers of industry and commerce. Various benefits of the new system have been indicated to employers, including: an improved skill level of both new entrants to the labor force and workers already employed; better external measures of workers' skills, thus reducing the cost of hiring; and better access to continuous training of employees through shorter, modular courses better matched to the direct needs of employers. The top representatives of the private sector associations have shown strong interests in the proposed reform, and their commitment to actively participate in its implementation has been formally expressedY Benefits of the proposed new system to workers, including improved access to continuous training and skill upgrading leading to better jobs and income, and clearer definitions of job skills requirements, facilitating workers' career planning, would also be communicated through dialogues with worker representatives and promotional campaign throughout project implementation, to encourage their active participation in the project. 2.28 Improving Access. The Government expects that increased access to training programs would result from the quality improvements. The re-orientation of training programs to shorter, modular programs with more choices will increase enrollment from among those who cannot afford long courses or those who previously could not justify the investment due to the courses' low relevance content. 2.29 Stinulating Demand. Because the concepts of nationalized standards and independent testing are new to Mexico, and because the realization of their benefits would not be confined only to the enterprises adopting the SNC system and may take some time to develop even when implemented properly, incentives are necessary not only to finance the initial development cost, but also to generate early demonstration effects of the new system's positive effects. For this reason, the Government aims to provide: (a) financial and technical assistance to the industrial committees who develop the competency standards; (b) financial and technical assistance to training institutions, both private and public, which participate in redesigning their training courses; and (c) financial incentives to those individuals and firms who participate in the modular training courses and new skills testing. The Government will gradually decrease its financial and technical contribution over time to enforce greater private sector responsibility and ownership of the reform process (paras. 3.18-3.24). 2.30 To implement its strategy for the expansion of access and improvement of quality for technical education and training, the Government has made major investment along two lines: expansion and improvement of pre-service and in-service training offered by CONALEP; and expansion and improvement of worker retraining offered by STPS. The Bank has a long involvement with technical education and training in Mexico, including three loans for the Y The letter from the Business Coordination Council expressing their commitment for participation is translated in the "Project Implementation Details", which is filed in LAC Project Files.  - 11 - development of CONALEP (Technical Training projects I,II,III, Lns. 2042-ME, 1981; 2559- ME, 1985; and 3358-ME, 1991) and two loans to support retraining and labor market adjustment through the STPS: the Manpower Training project7 and the Labor Market project. D. Lessons Learned from Past Operations 2.31 Lessons. The relevant lessons which have been learned from the implementation of Bank-financed training projects, and the incorporation thereof into this project, are as follows: (a) Positive Impact of Training Programs and the Need for Targeting. The Bank's experience with both pre-service and in-service training has demonstrated their positive impact both in increasing the earnings profile of trainees and meeting the needs of private and public sector skilled employees. There is justifiable ground for making greater investment in skills training both for poverty alleviation and productivity improvement. Evaluations have been undertaken of CONALEP and of PROBECAT (Annex 2). These evaluations demonstrate the importance of careful selection of trainees if pre-service and in-service training programs are to raise earnings and increase employment opportunities. For example, in the case of PROBECAT, age, prior work experience and having economic dependents (therefore an inducement to really seek employment) were found to be important determinants of post-retraining employment and earnings outcomes. The proposed project will improve the targeting of all training programs in Mexico through the clarification of the expectations of and requirements for course entrants, achieved through the use of new competency standards. Furthermore, selection criteria of those who receive financial assistance will incorporate the results of these evaluation studies (para. 3.22). (b) Evaluation of Programs. There is an ongoing need to carefully evaluate the impact of training programs to ensure that public funds are being used cost- effectively, in particular that course content and delivery methodology are responding to the needs of the labor market. Both the evaluations of PROBECAT undertaken within the Manpower Training project and the graduate tracer studies undertaken within CONALEP III demonstrate the importance of establishing appropriate control groups and defining statistically rigorous, but small and manageable, samples to yield valid and robust results. The importance of evaluation is particularly great for the proposed project since it introduces a new system whose effectiveness has not yet been rigorously evaluated, even in countries such as the U.K. and Australia where competency-based training (CBT) has been in place for some years. The project includes several studies with which the participating entities' capacity to undertake such evaluations would be fostered (paras. 3.26-3.29). (c) Certification. Mexico has a variety of technical and vocational education programs, provided by both the public and private sector. No uniform and 2' A Project Completion Report for the Manpower Training project was issued in June, 1994.  - 12 - independent certification system exists, making it difficult to compare the effectiveness of alternative training systems. Employers have little objective information available about the skills of a graduate from these training institutions, resulting in two sets of costs: (i) to the employer, high recruitment costs and the risks of hiring a sub-standard worker; and (ii) consequent upon this, the tendency to start all graduates off at the lowest entry point, thus depressing graduates' earnings until they are able to demonstrate their competence. The tracer studies for CONALEP graduates and discussions with employers amply show this effect, with graduates' earnings growing rapidly (compared with the control group) after initial employment in a firm. The need for certification in the case of PROBECAT retraining programs for the unemployed is even stronger, as these programs are carried out by a variety of institutions, over variable course periods, with employers having little idea as to the concrete accomplishments or skills of such trainees. The external, and thus objective, certification process introduced through this project (including the creation of the SNC) will make the employment service and worker selection process more transparent, benefiting more competent workers and trainees, and reducing employers' costs in assessing the ability of potential hires (paras. 3.9-3. 1 1). (d) Public and Private Sector Linkages. Experience has shown that close collaboration is required between publicly funded training institutions and the private sector (the main employer of such graduates) to ensure that course content and graduate output match employers' needs and hence employment opportunities available. Substantial progress has been made in this area by CONALEP through the establishment of "industrial advisory committees" (comites de vinculaci6n) at national and training center levels and by the state employment services establishing similar committees at the state level to strengthen these linkages. The proposed project will deepen public and private sector partnership in two ways: (i) through the involvement of employers' and employees' organizations in a consultative process on establishing the competency standards (paras. 3.4-3.18) and the curricula (para. 3.17) for the CBT courses; and (ii) continuing this involvement through the joint monitoring and evaluation of results (para. 3.25-3.29). (e) Flexibility and Adaptability. With the economic changes engendered through Mexico's program of reform and economic liberalization and with the progressive implementation of the NAFTA accords, the pace of change in Mexico's economic structure has accelerated. This has focussed attention on the need to shift training and education programs away from rigid and lengthy courses to highly flexible and modular systems which respond to skill shortages in the labor market, from pre-service to in-service training.Y' Evaluations of existing training programs indicated that long, rigid courses F Whilst CONALEP has almady moved substantially in this direction (over the academic years 1991/92 to 1993/94, the annual output of graduates from regular programs has risen by 10,500 or 21 percent, whilst in-service worker upgrading programs have risen by 53,000 or 68 percent, and the cumulative output under modular programs has reached to 14,780), studies undertaken on these two modalities still showed that: (a) the exit points from modular training were not linked closely enough to actual skill requirements on the job; and (b) upgrading programs did not take sufficient account of the existing skill levels of workers.  - 13 - result in high dropout rates and discourage workers from obtaining skills upgrading. The move to a CBT system through this project would make a major contribution to increasing the flexibility and adaptability of training programs through redefining training in terms of job skill requirements and permitting the flexibility for workers to move through course contents at their own pace. (f) Integrating Pre-service and In-service Training - A Continuum. As in many other countries, a false dichotomy has arisen between pre-service and in- service training. In reality there is the need for a very strong link and coordination between the two with a common set of standards and curriculum. Weak pre-service training increases the cost and lowers the effectiveness of subsequent in-service training, and poor in-service training makes the skills acquired through pre-service training obsolete rapidly. In Mexico, SEP has had responsibility for the pre-service training and STPS for in-service training. Often, there has been inadequate coordination between these two agencies, and certainly there has been no unified framework for the pre-service and in- service continuum. The General Education Law rectified this issue, by setting the principles for the definition of Competency Standards and for the coordination between SEP and STPS. The proposed project will provide the unifying framework - Competency Standards and flexible CBT system that recognizes that workers need to update and change their skills throughout their working life - which emphasizes the continuum between the two dimensions of training and ensures consistency and quality of both types of training. The project will also strengthen the close relationship between SEP and STPS by making them dually responsible for project implementation (Annex 7). E. Rationale for Bank Involvement 2.32 The objectives of the proposed project are fully consistent with the Bank's country assistance strategy, presented to the Board on June 9, 1994 which emphasizes poverty alleviation, human resource development, and private sector-led growth. By supporting the Government's effort to improve the quality and accessibility of technical education and training and to encourage private sector participation in training, the project will contribute to human resources development and productivity increase of the Mexican labor force, and consequently to the continuation of the private sector-led growth. 2.33 The Bank is the major external agency assisting the Government in the development of technical and vocational education and training in Mexico. The Inter-American Development Bank has been assisting the Government in the development of science and technology through loans for training of scientists and for improvement of science and engineering faculties at the higher education level. Meanwhile, the Bank has been the major source of technical and financial assistance in the field of vocational and technical education and training at secondary or adult education level. 2.34 The proposed project would also complement the recent and current Bank-financed projects in the area of Mexico's human resources development. The proposed project would reinforce the Government's commitment to quality improvement of training programs and provide more opportunities for training to a large portion of under-educated workers. In  - 14 - light of the experience and knowledge gained through its projects in the sector, the Bank has a strong comparative advantage in supporting the Government's effort to make the training system more flexible and responsive to market needs. m. THE PROJECT A. Project Objective 3.1 The objective of the proposed project is to improve the quality of the technical education and training in Mexico so that it meets the critical needs of the productive sector in a flexible manner. More specifically, this objective will be achieved by: (a) providing a universal measure (a new system of competency standards and certification) with which effectiveness and quality of different training programs can be evaluated; (b) increasing the flexibility and relevancy of the training system by redesigning training programs into modular courses based on the new standards; (c) promoting private sector initiative and participation in training design and provision, through the provision of incentives to individuals and enterprises for their participation in the proposed training reform; and (d) establishing the necessary information systems and undertaking a program of studies to improve implementation of new training orientation. 3.2 The potential impact of the proposed project on Mexican technical training, as well as on the labor markets is far reaching, and its effects will be realized over many years. In countries with mature training systems and some experience with standards and certification, it takes from 10 to 20 years to set up a new system of occupational standards and certification. Thus, for Mexico, where concepts of independent occupational standards and certification are new, the proposed project constitutes the first phase in a long-term process of change. B. Project Description 3.3 The project objective will be attained through four closely interdependent components: (a) National System of Competency Standards (Sistema Normalizado de Competencias Laborales, SNC), Skills Testing and Certification; (b) Modernization of Training Programs; (c) Stimulation of Demand for Competency-Based Training and Certification; and (d) Information Systems, Studies, and Project Administration. The Council for Normalization and Certification of Competency Standards (Consejo de Normalizaci6n y Certificaci6n de Competencias Laborales, "Council") will be responsible for Component A, SEP for Component B, STPS for Component C, and the Council and both secretariats for their relevant activities under Component D. Component A - National System of Competency Standards, Skills Testing and Certiflcation (US$33.1 million including contingencies, 8.0% of total project costs) 3.4 Subcomponent A.1 - National System of Competency Standards (SNC) (US$11.2 million). This subcomponent will support the development of the SNC, which would be similar to systems that already exist in many other OECD countries, providing an objective set of standards by which to evaluate worker skills and set curricula for training programs.  - 15 - The British system of National Vocational Qualifications (NVQ) (Annex 3) would be used when appropriate, together with other foreign competency standards, as an input to the development of competency standards. Development of competency standards would follow the process outlined in para. 3.8 and Annex 4, section C. During appraisal, contractual arrangements regarding the purchase and use of copyrighted materials to be used for competency standards development were discussed and agreed. 3.5 To oversee the process of establishing the SNC, and to ensure coherence and consistency across competency standards of different occupations, the project will require the creation of a Council for Normalization and Certification of Competency Standards (Consejo de Normalizaci6n y Certificaci6n de Competencias Laborales, "Council"). The Council will be created through a trust (fideicomiso), which will be established by a contract between the Government and NAFIN, with SHCP and NAFIN, as grantor and trustee, respectively.2' This setup allows flexibility in the organization and operation of the Council, and most importantly allows majority control to the private sector (i.e. workers and employers of the non-government sector). The draft terms of reference of the Council and its dependent bodies are given in Annex 4*LW 3.6 The roles and composition of the different elements of the Council are as follows: (a) the Governing Board (Comiue Thcnico de FRdeicomiso)11' will be responsible for policy formulation and final approval of competency standards. It will consist of representatives from the private sector employer associations, employee organizations, and high level representatives of SEP, STPS, SHCP, and NAFIN. (b) the Executive Secretariat (Secretarta Ejecutiva),L2' headed by an Executive Secretary, will assist the Governing Board and is responsible for the implementation of its decisions. Inter alia, it will review and make recommendations on the Competency Committees proposals to the Board, promote the SNC, carry out tasks related to the operation of the certification system, supervise certification agencies (OCs, paras. 3.9-3.10 & Annex 4, section D), and maintain databases on occupational classifications, competency standards, and workers who apply for and receive certification. (c) Competency Committees (Comites de Normalizaci6n, CNs) will be established by the Council, drawing representatives of the private sector and workers to develop competency standards (para. 3.11 & Annex 4, section B). (d) a Consultative Committee (Comite Consultivo) will be established by the Council to maintain close linkages between the Council and labor unions, employers, training institutions and other interested parties by acting as a channel to express views and make inputs into the decision-making process. 2' The arrangement involves the transferring of funds or goods (patn'monio) by the grantor to the trust and the adminition by the trustee of such funds or goods through a ConutU Tt'cnico (the Council's Governing Board) for the purpose and in the manner specified in the trust agreement. For further details, see Annex 7. 0' The draft trust agreement (9/15/94 version) is filed in the LAC Project Piles. L Called 'Technical Committee" in the legal documents. Iv Called "Technical Secretariat" in the legal documents.  - 16 - 3.7 The loan would finance equipment, supplies, technical assistance, training of Council members and key staff, and, on a declining basis, incremental operating costs of the Council. As a condition of loan effectiveness, the trust agreement, satisfactory to the Bank, creating the Council will have been signed (para. 7.2(a)). As a condition of disbursement for Council expenditures, satisfactory key staff of the Council will have been appointed, and satisfactory rules and procedures of the Council will have been issued (para. 7.3). 3.8 The actual development of competency standards would be undertaken by CNs consisting of qualified workers and employers' representatives in each occupation or occupational cluster, assisted by experts in competency-based functional analysis. CN members would be selected by the Council with advice from the Consultative Committee. For each occupation or occupational cluster, the CN would carry out a detailed functional analysis with complementary support of corresponding competency standards in other countries. After field tests and revisions, the final list of competency standards would be submitted to the Council for its approval. Since standards would have no legal character, there would be no need for governmental approval or special legislation. During the five years of project implementation, a total of 20 sets of competency standards in the most critical occupational clusters will be established. During appraisal, the criteria, prioritization, and timetable for selection of occupational clusters were discussed and agreed. The first set of competency standards are expected to be approved by the Council by June 30, 1996. The loan would finance the costs of acquisition of copyrighted materials that would serve as inputs for development of Mexican standards, technical assistance and other costs of developing competency standards, operating costs, and publishing of the standards established. 3.9 Subcomponent A.2 - Skills Testing and Certification System (TCS) (US$21.9 million). Once the competency standards are established, a system of skills testing and certification will be developed. The Council would license certification agencies (Organismos de Certificaci6n, OCs), whose main function would be to certify that individuals have mastered competencies established in the standards for a given occupational cluster. The OCs would operate independently as private sector agencies under a license provided by the Council and would either develop and execute their own tests or accredit testing institutions (Centros de Evaluaci6n Acreditados, CEAs) for that purpose. It is expected that various types of institutions would eventually be authorized to become OCs, including chambers of industry and commerce, industrial and professional associations, or any organization which satisfies the requirements set by the Council. Up to four OCs will be financed by the project over the five-year life of the project. Each OC may grant certification for one or any number of occupational clusters for which competency standards have been established by the Council. 3.10 The activities of OCs include the following: (a) developing general criteria for occupational testing leading to national certification; (b) developing testing instruments; (c) testing individuals directly; (d) accrediting CEAs; (e) supervising CEAs to ensure compliance with the norms; (f) maintaining a database of certification applicants and certified workers; and (g) training examiners. Each OC's database of certification applicants would be incorporated into a national database managed by the Council, which would provide employers and employment services (Federal, State, and independent) with rapid access to the pool of qualified workers.  - 17 - 3.11 In addition, OCs may accredit training institutions, firms, or individuals as CEAs to perform testing. CEAs will use either the tests developed by the OC or their own testing mechanisms, if previously approved by the OC. Individuals passing approved tests would automatically receive a national certificate. CEAs would be set up as financially independent institutions and would generate revenues through testing fees and other related activities. The testing fees would be regulated by the Council. The Council will also supervise OCs and, indirectly, CEAs to ensure the validity of the certification process. The loan would finance the establishment of OCs, including start-up costs, training of personnel, development and validation of tests, a standardized information system, and operational costs on a declining basis. At the same time, the share of operational costs recovered by the OCs and CEAs would be progressively increased over time through fees paid by examinees and industry contributions. The project will finance a study to examine the financial solvency of the Council and OCs (para. 3.27(a)). During negotiations, agreement was confirmed that: the proposalfor the organizational structure of OCs will be provided to the Bank for comment by June 30, 1995 (para. 7. 1(a)). Component B - Modernization of Training Programs (US$152.8 million including contingencies, 37. 1 % of total project costs) 3.12 The modernization of training programs and their re-orientation toward modular courses based on competency standards (CBT) will be carried out in two phases. The first phase (Subcomponent B. 1), which would last about 18 months from loan effectiveness, consists of pilot training programs, using existing materials for modular programs in other countries and newly developed materials based on the existing ones, with the objective of testing and developing methods for implementing CBT courses in a limited number of training institutions. The second phase (Subcomponent B.2) would consolidate expertise gained and lessons learned from the first phase and implement the training modernization on a national scale, using actual competency standards which by this time will have been developed, tested, and approved (para. 3.8). 3.13 Subcomponent B.1 - Pilot Training Modernization Programs (US$118.7 million). The initial pilot phase (about 18 months) would involve three public training systems, CONALEP, CETIS and CECATI, as well as private sector training institutions associated with these public systems. The objective of the first phase is to help these training institutions acquire the technical expertise in developing and delivering CBT modules. Even though these programs would be developed before Mexican competency standards can be established for the corresponding occupations, starting the development and implementation of modular CBT programs from 1995 would provide valuable lessons to be incorporated into the second phase of the component, which would only start once the first set of competency standards are established. 3.14 The training institutions which would receive project funding during the first phase were selected based on their technical expertise and readiness to carry out the pilot, considering the following characteristics: (a) capacity to design and offer courses in the areas that the productive sector considers as high-priority for its productivity growth; (b) wide geographical coverage of the training centers; (c) existence of collaboration and coordination mechanisms with the productive sector for the development of programs; (d) existence of sufficient equipment in its workshops and laboratories that would facilitate, with  - 18 - the support of complementary equipment purchase, the implementation of CBT; and (e) quality of instructors, to be supplemented with training for the new training model, pedagogic methods, and didactic techniques. For example, CONALEP is already preparing new modular courses and is planning to offer them starting in September 1994. The CONALEP system is well suited to carry out this initial phase, because of its prior experience with modular courses, close relationship with the private sector, instructors with practical experience, relatively high quality of the programs, and its willingness to participate in the project. CECATI is also a good vehicle for the initial phase, as all of its courses are already offered in a modular format. CETIS will also start designing CBT courses for their terminal vocational and technical courses to be offered starting in September 1995. 3.15 The following specialization areas have been selected for the first phase pilot program: (a) administration; (b) computer and data processing; (c) construction; (d) electronics and telecommunication; (e) maintenance; (f) metalmechanics and metallurgy; (g) auto mechanics; (h) tourism; and (i) electromechanical and electrical maintenance. These areas were selected based on the following criteria: (a) careers and courses with greater demand in the productive sector; (b) careers and courses with greater enrollment; (c) high quality of instructors teaching the courses; and (d) results of the labor market study on projection of the demand for technical workers. The private sector was consulted and actively participated in the selection of these areas. Since the main objective of the initial phase is to provide early experiences and lessons in program conversion, a study to evaluate the effectiveness of these pilot programs will be undertaken (para. 3.28(b)). 3.16 Specifically, the initial phase will consist of the following elements: (a) redesign of curricula, including changes in the syllabus and in the proportion of teacher-contact hours and self-study segments, of theory study and skill practices, and of supervised and independent practices; (b) redesign of instructional materials, including textbooks, self-study books, laboratory guides, and workshop manuals; (c) retraining of instructors based on competency standards and a new pedagogical approach; and (d) replacement of obsolete equipment, based on a careful evaluation of requirement for the new courses and the status of existing equipment. Since the pilot programs will use curricula and materials from abroad as inputs to the materials design, the copyright agreement thereto will need to be obtained before the materials can be reproduced for the classroom use. 3.17 Subcomponent B.2 - Development of Training Materials (US$34.1 million). This subcomponent will start supporting the development of training materials based on a first set of competency standards, which would have been established through Component A by June 1996 (para. 3.8). This subcomponent will finance the cost of acquisition and preparation of training materials and will be complemented, where appropriate, by support under STPS for equipment purchase and for instructor retraining (para. 3.24). Funds for teaching materials development would be allocated through a competitive process managed by the Project Administration Unit (PAU, para. 3.31 & Annex 7) within SEP. Any entity, including, but not limited to training institutions, publishing firms, and industry organizations interested in developing CBT materials would submit their proposal to SEP through the PAU, which would review and approve the proposals. During appraisal, the basic elements of a funding request were discussed and agreed (Annex 5) and will be further developed into final guidelines. During negotiations, agreement was confirmed that satisfactory final guidelines for the provision of support for training materials development would be issued by SEP hy  - 19 - September 30, 1996 (para. 7.1(b)). The project would finance the costs associated with development of new instructional materials, acquiring copyrights, related local and foreign technical assistance, and reproduction of training materials developed. It is expected that over the three-year period of the second phase, the project would finance the purchase of approximately 450 sets of written materials, 270 sets of audiovisual materials, and 45 sets of computer software. Component C - Stimulation of Demand for Competency-Based Training and Certification (US$208.0 million including contingencies, 50.5% of total project costs) 3.18 The objective of this component is to stimulate demand for the competency-based modular training courses, skills testing, and certification among employers and targeted individuals, through promotional campaigns, pilot demonstration testing, and financial incentives for both CBT and certification. This component builds upon the experience gained under the Labor Market project and will be implemented by the same agency (STPS) under the existing CIMO and PROBECAT programs. However, funding under this project will only be used for activities using the new CBT, thereby avoiding duplication. Moreover, the Labor Market project will be largely disbursed by the time that large post-pilot disbursements under this project commence in 1997. This component seeks to: (a) achieve a demonstration effect of the new system's advantages, thus facilitating early diffusion of CBT and certification throughout the user populations; (b) assist employers in planning their training programs in accordance with the new skill specifications; (c) assist target groups in obtaining access to the new CBT system; and (d) facilitate the direct participation of employers to promote user ownership and encourage feedback. 3.19 Subcomponent C.1 - Promotion of SNC (US$6.9 million). The diffusion of the new system of CBT and certification would be achieved through an integrated program of promotion activities and publicity campaigns. Promotion activities would be targeted at various levels in the private sector, including: (a) apex level employers and workers organization; (b) sectoral chambers and other employer associations, and corresponding worker organizations; (c) industry-sponsored training institutions; and (d) firms at the local level. 3.20 Promotion would occur through: (a) special meetings with the private sector; (b) participation in general council sessions, national and regional conferences and workshops; (c) dissemination of written materials; and (d) public announcements in the press, radio and television. The Council would be responsible for the promotion at the level of the apex employer associations, with other promotion activities at individual sector and firm levels conducted by the Council, CNs, the Regional Productivity Support Units of CIMO (Unidades Promotoras de Competitividad, UPCs), and PROBECAT program staff, under the overall coordination of the Council. The loan would finance the production costs of promotional literature and printed materials, videos, and diffusion through national and local media channels. 3.21 Subcomponent C.2 - Pilot Testing of CBT in Enterprises (US$28.9 million). To validate the appropriateness of the CBT programs and also to provide a strong demonstration effect in the economy, thus increasing demand for the SNC, the loan would reimburse 60% of the enterprises' costs of developing CBT programs, and implementing the training and  - 20 - certification in a sample of large firms and small and medium enterprises (SMEs). A total of 80 large firms and 320 SMEs are expected to receive this support during the five-year project life, with an estimated 10,720 workers directly benefiting from it. For 1995, four sectors have been identified as priority: tourism, metalworking, construction and telecommunications. On average two or three large enterprises and about 10 SMEs will be selected and receive support for each sector for which new competency standards are developed. The pilot testing experience will be documented and used for dissemination purposes and for input into the design of the training program. 3.22 Subcomponent C.3 - Training and Certification Incentives (US$120.4 million). Incentives in the form of stipends and/or fee reductions would be granted to selected user groups to encourage their participation in the new system. The main user groups targeted for the incentives programs would be: (a) micro, small and medium-sized enterprises (MSMEs) wishing to undertake skills training of their employees and participate in skills testing for certification; and (b) targeted population groups, including (i) youth seeking to enter the labor market without sufficient skills, (ii) unemployed and displaced workers, including women trying to re-enter the labor market, (iii) adults with educational and training deficiencies, and (iv) workers seeking skills certification. During appraisal, the selection criteria and mechanisms for granting training and testing/certification incentives for different beneficiary categories were discussed and agreed. 3.23 Three separate categories of incentives will be provided under this subcomponent as follows: (a) Incentives under CIMO (US$28.7 million) would support MSMEs to diagnose the skill needs of their employees and design appropriate CBT programs. UPCs, which are already supported through the Labor Market project, would manage this additional category of funds with the same operational rules but only when firms adopt the new CBT programs. The project would finance technical assistance for diagnosis of needs, design of training programs, and actual implementation costs of training programs as a reimbursement based on presentation of satisfactory documentation of actual costs. Disbursement of this funding category would start in 1997, when the first set of competency standards and modular training programs are expected to have been established. Incentives under CIMO are expected to provide technical assistance for 1,900 enterprises in training diagnosis and financial assistance for 9,000 CBT modules, benefiting 76,000 trainees. Consistent with the Labor Market project, this project would finance technical assistance to MSMEs and SMEs at 70% and 60%, respectively, and training at 70% and 35%, respectively, through reimbursement of the enterprises' training costs; the beneficiary enterprises would finance the balance. (b) Incentives under PROBECAT (US$62.6 million) would support targeted individuals, selected according to a criteria previously established under the Labor Market project (para. 2.31(a)) to participate in CBT courses. Similarly to the existing PROBECAT funds, the new incentives would be managed by the program staff who would evaluate the training needs of applicants and direct them to the appropriate new training courses. Though the staff assigned for this task will be located within the offices of the State Employment  - 21 - Services (SEEs) and use the physical infrastructure of the SEE, the program of stipends will be financed completely by the federal budget and the loan, without involving the state government. The beneficiaries would receive a training stipend equivalent to one minimum wage and a transportation allowance to the training facility. The actual training costs would be reimbursed directly to the training institution. Starting in July 1995 as a pilot phase, then progressing to full implementation in January 1997, this category of incentives is expected to provide scholarships to a total of 88,000 trainees over the project's life. These scholarships represent an investment in the human capital of the individuals concerned, financing the opportunity cost of the training time, acting as an incentive for enhancing skills and, as a by- product, providing social support to the families of these low-income targeted trainees and would be financed by the loan on a declining basis. (c) Certification incentives (US$20.0 million) would be provided to workers wishing to have their skills validated through the new TCS (paras. 3.9-3.11) by helping finance the cost of certification. During the first year of implementation of this incentive program (1997), the beneficiaries would receive financial assistance of 90% of the certification cost (100% in the case of the unemployed) from the loan proceeds; this percentage will decline in subsequent years. The demand for certification from individuals will be monitored and carefully evaluated at the end of 1997 to determine individuals' capacity and willingness to pay. During negotiations, agreement was reached that the results of the evaluation of the certification process and incentives program would be provided to the Bank for its review by April 30, 1998 (para. 7.1(c)). Beneficiaries of incentives under the CIMO or PROBECAT programs would also receive reimbursement for participating in the TCS, with enterprises paying the balance of costs in the case of CIMO. During the three-year period of 1997-99, certification incentives are expected to assist approximately 160,000 individual test incidences at an average unit cost of about US$100."' Strict selection criteria will be employed so that: (i) certification modules taken by any individual fit into a coherent career plan, thus avoiding financing frivolous test takers; (ii) for any one module the incentive will only be paid once providing a strong inducement for the individual to prepare seriously for the test, while an individual would be free to take the certification again at his/her own expense; and (iii) individuals not coming from CIMO, PROBECAT or training courses from recognized institutions would be subject to a simple diagnostic evaluation to determine their readiness for testing, thereby dramatically reducing the potential wastage from failed certifications. Each trainee passing the certification test will receive a module guide for future reference and the certificate itself. 3.24 Subcomponent C.4 - Program for Equipment Purchase and Instructor Training (US$51.8 million). This subcomponent will finance the purchase of training equipment and instructor training and certification necessary for the delivery of CBT courses. The 3' While this number of certifications is in absolute terms only a smnall fraction (1.2%) of all the semi-skilled and skilled workers and technicians, it is a reasonable estinate as it corresponds to an annual average of about 75% of the NVQ certificates issued in the UK over the last seven years.  - 22 - beneficiary training institutions, both public and private, will be selected through competition based on previously established criteria. During appraisal, the criteria, procedures, and timetable for the selection of beneficiaries were agreed upon, and are presented in Annex 6. The funds for equipment purchase will finance a total of 300 training centers over the period 1997 to 1999 at a maximum of US$200,000 per institution. Those centers that receive assistance for equipment purchase are required to participate in the instructor training program and will also receive funding for that purpose. However, training centers will not be required to participate in the equipment purchase program, in order to be eligible for the instructor training program. All training institutions would be responsible for maintenance of the equipment, and privately owned training institutions would provide a discount on the training provided under the project, at a rate equal to 15 percent of the equipment's value annually. Component D - Information Systems, Studies, and Project Administration (US$18.1 million including contingencies, 4.4% of total project costs)."' 3.25 Subcomponent D.1 - Information Systems (US$3.3 million). Several information systems will be developed and maintained under the project for promotion, monitoring, evaluation, and planning purposes: (a) For Component A, the following databases will be developed and maintained: (i) registry of the competency standards approved by the Council; (ii) registry of OCs, CEAs, and evaluators; and (iii) registry of the certification applicants and certified workers. (b) For Component B, SEP will develop and maintain: (i) a registry of institutions providing CBT and available CBT courses; and (ii) student enrollment data, collected from participating training institutions. The information contained in these databases would be made available for monitoring, evaluation studies, and employment services. (c) For Component C, STPS will maintain databases on: (i) CIMO MSMEs and students under CBT; and (ii) PROBECAT beneficiaries under CBT. In addition, STPS will continually update the National Occupational Catalog NCO) based on the new competency standards and will closely monitor and document the pilot training modernization programs (Subcomponent B. 1). 3.26 Subcomponent D.2 - Studies (US$8.7 million). A program of studies will be undertaken to support the development and implementation of the project. The Council, SEP, and STPS will be responsible for studies related to Components A, B, and C, respectively. During appraisal, the terms of reference for the key studies were discussed and agreed, and the timetable for studies and expected delivery periods of study results are presented in Annex 7. The results of all studies will be reviewed jointly by the Bank and the Steering Committee during the annual implementation and mid-term reviews (paras. 5.5-5.6) to determine necessary actions to be taken. The project will finance consultant services for these studies. W Description of the information systems and terms of reference for the key studies are included as Annex I to the Memorandum and Recomnendation of the President.  - 23 - 3.27 For Component A, three studies will be undertaken: (a) The Financial Solvency of the Council and OCs would be studied to determine appropriate long-term organizational and financial arrangements of the SNC. During negotiations, agreement was confirmed that for the study on financial solvency of the Council and OCs, (i) terms of reference will be provided to the Bank for comments by June 30, 1997, and (i) the final report will be provided by June 30, 1999 (para. 7. 1(d)). (b) A Basic Skills study will be supported by the project, using the job analysis methodology developed by the American College Testing service (ACT)."' This study will try to identify the basic skills and competencies generally found across occupational clusters and economic sectors in the Mexican productive sector. A test will be developed to measure the level of these basic skills possessed by the Mexican labor force, and will be applied initially in 1995 and again in 1999 with control groups (Before-After Comparison of Basic Skills). The comparison of the two test results would indicate changes, if any, in the basic skills of the Mexican labor force as a result of the introduction of CBT. During negotiations, agreement was confirmed that (i) the results of the Basic Skills study would be provided to the Bank by December 31, 1996 and (ii) the results of the Before-After Comparison of Basic Skills study, with control groups, would be provided by June 30, 1999 (para. 7.1(e)). (c) A study to determine Success Factors for Certification will seek to identify those combinations of basic skills that would contribute most to the successful acquisition of competency certificates. 3.28 For Component B, the following three studies would be undertaken: (a) A study on Enrollment Trends would identify (i) the areas of specialization for which the demand for training is growing and (ii) changes in the enrollment population. (b) A Comparison of Traditional versus Competency-Based Training using graduate tracer studies would evaluate the labor market performance, success rates at finding employment, and productivity of trainees under the two training modalities. During negotiations, agreement was confirmed that the consultant proposal for the Comparison of Traditional versus Competency- Based Training study would be provided to the Bank for comments by June 30, 1995 (para. 7.1(g)). (c) A study to examine CBT-Driven Changes in Training Institutions would document adaptation in training institutions resulting from the transition to CBT. L5' The National Job Analysis Study project currently carried out by the American College Testing service (ACT) under a contract with the U.S. Department of Labor is an effort to identify, across narrow occupational categories, neceasay general skills for workers to be productive in the modem U.S. labor market. Although this work is still in its first phase, its potential has been recognized; the project would support a study to adapt relevant core job competencies to the Mexican context through field testing (Mexican Job Analysis Study).  - 24 - 3.29 For Component C, STPS will undertake four studies: (a) An Evaluation of CBT in MSMEs under CIMO would analyze changes in work organization and productivity brought about as a result of the new CBT received by their workers; (b) An evaluation of the CBT Effectiveness for PROBECAT Beneficiaries would evaluate the effects on the labor market performance of the graduates of CBT compared to graduates of corresponding traditional training courses. (c) A detailed technical analysis of the CBT Impact in Pilot Enterprises would provide lessons for the mainstreaming process. (d) An Evaluation of the Certification Process and Incentives Program during 1997 would analyze the program's performance, roles played by employers and workers associations, and the flow of funds, including the analysis of trainees' ability and willingness to pay for skills testing. 3.30 Subcomponent D.3 - Project Administration (US$6.1 million). The implementation of the proposed project through three distinct entities (the Council, SEP, and STPS) poses a different set of challenges. Overall coordination of the project will rest with a Steering Committee composed of high-level representatives of SEP and STPS, the Council's Executive Secretary, and representatives of SHCP, NAFIN. The Steering Committee will be a medium for participating executing agencies to coordinate activities, adjudicate on agreements, and oversee the execution of the project. As a condition of loan effectiveness, the Steering Committee will have been established (para. 7. 2. (b)). 3.31 The STPS-managed component will be implemented by STPS staff, who have extensive experience in both operating the CIMO and PROBECAT programs and executing Bank-financed projects. The Council is to be managed mainly by the private sector (both employers and workers representatives), and relatively independently of Government input. SEP, on the other hand, will require incremental staff and operating costs to administer Component B. For this reason, the Project Administrative Unit (PAU) will be located within SEP. Beside implementing Component B, the PAU would maintain regular dialogue with the Council and STPS counterparts, carry out the principal monitoring and evaluation functions, and be the repository of project information for Bank supervision missions. Terms of reference of the Steering Committee and the PAU were discussed and agreed during appraisal; these terms of reference and the project's implementation plan are presented in Annex 7. The project will provide for start-up investment costs of the PAU and for incremental salaries and operating costs on a declining basis. During negotiations, agreement was confirmed on the terms of reference of the Steering Committee and the PAU (para. 7.1(g)). As a condition of disbursement for certain SEP expenditures, the PAU will have been established and the PAU Director and three Coordinators will have been appointed (para. 7.4).  - 25 - IV. PROJECT COSTS, PROCUREMENT, DISBURSEMENTS AND AUDITS A. Project Costs and Flnancing 4.1 The total project cost, including physical and price contingencies and taxes, is estimated at about US$412.0 million equivalent, of which an estimated US$109.2 million would be foreign exchange (26.5% of project costs); taxes amount to about US$32.8 million (7.9% of project costs). The table below summarizes the estimated costs by component. Investment costs amount to 88.8% of total costs; recurrent costs account for 11.2% of total costs. Project costs were estimated at July 1994 price levels and include physical contingencies of 5% for equipment, furniture, and for technical assistance for studies and surveys. Price contingencies are calculated at 2.2% per annum over the period 1995-99. Project Cost Summary (US$ million) LcIal Foreign Total A. National System of Competency Standards, Skills Testing and Certification 1. National System of Competency Standards 10.3 0.3 10.6 2. System of Skills Testing and Certification 20.5 0.0 20.5 Subtotal 30.8 0.3 31.1 B. Modernization of Training Programs 1. Pilot Training Modernization Programs 70.6 41.1 111.7 2. Development of Training Materials 6.0 24.0 30.0 Subtotal 76.6 65.1 141.7 C. Stimulation of Demand for Competency-Based Training and Certification 1. Promotion of SNC 5.9 0.5 6.4 2. Pilot Testing of SNC in Enterprises 22.8 4.1 26.9 3. Training and Certification Incentives 98.9 12.5 111.4 4. Equipment and Instructor Training 31.9 13.4 45.3 Subtotal 159.5 30.5 190.0 D. Information Systems, Studies & Project Administration 1. Information Systems 1.5 1.6 3.1 2. Studies 6.3 2.2 8.5 3. Project Administration 5.7 0.0 5.7 Subtotal 13.5 3.8 17.3 TOTAL Baseline Costs 280.4 99.7 380.1 Physical Contingencies 4.4 3.5 7.9 Price Contingencies 18.0 6.0 24.0 TOTAL PROJECT COSTSS 302.8 109.2 412.0 6' Includes duties and taxes estimated at about US$32.8 million.  - 26 - These inflation rates have been applied to local and foreign costs as well, assuming that currency rate adjustments would compensate for the difference between international inflation on a US dollar base and local inflation rates. Annex 9 provides a detailed breakdown of project costs. 4.2 Project cost estimates are based on recent experience with training and stipend costs. Estimated costs for minor office rehabilitation are based on detailed cost analyses of typical STPS and SEP offices. Estimated costs of computer, training, office equipment, and education materials are based on unit prices per item obtained in recent international and local purchases. Estimates for technical assistance and studies are based on current rates for local and foreign experts. Cost estimates for travel allowances and other operating costs are based on current costs and costing standards used by STPS and SEP. 4.3 Incremental Recurrent Costs. Over the implementation period, the project would add an average of about US$7.9 million per year to the combined recurrent expenditures budgets of the SEP and STPS. Taking into account the breakdown of these recurrent costs between these two secretariats, these costs represent increases of about 0.1% and 1.9% over the 1994 SEP and STPS recurrent expenditures budgets, respectively. These increases in the recurrent budget of the two secretariats involved can be readily absorbed, thus enhancing implementation and sustainability of the project programs. Incremental operating costs would be generated by salaries for incremental staff, operation and maintenance of equipment, office supplies, and travel and subsistence costs for supervision activities. Incremental recurrent costs would be financed by the Bank on a declining basis (from 75 % initially, to 25% by the end of the project). Recurrent costs under the project are estimated as follows: Incremental Recurrent Costs (US$ million) Year 1995 1996 1997 1998 1999 TOTAL SEP 2.8 7.8 8.0 8.2 8.3 35.1 STPS 0.8 1.1 1.8 3.8 3.8 11.3 Total Recurrent Costs 3.6 8.9 9.8 12.0 12.1 46.4 4.4 Sustainability. The Council is expected to become self-financing in the long run as resources for its operations will come from fees, contributions of its members as well as contractual agreements entered with the Government and other agencies. Whilst the OCs would be initially funded by the project, their operational activities should become self- financing in the long run (although not entirely under the project) through testing and other fees as well as other income-generating activities. CEAs are expected to be self-sufficient from the beginning of the project. Moreover, once the new training standards have become accepted as the norm, there will be no need to continue government incentives and promotion of the standards. Incentives costs are being financed on a declining basis under the project to facilitate this phasing out of support. 4.5 Project Financing. The project would be financed by the Bank, the Federal Government and beneficiaries (private enterprises and trainees). The Government would finance all taxes and duties, estimated at US$32.8 million, and would finance US$85.5 million of local expenditures, representing 22.5% of project costs net of taxes and duties. During negotiations, agreement was reached that the Government will provide adequate  - 27 - annual budget allocations for the project, including for 1995, and that these allocations would be reviewed annually with the Bank during project implementation reviews (para. 7.1(h)). The proposed Bank loan of US$265.0 million would finance 64.3% of total project costs, or 69.8% of project costs net of taxes and duties. The loan would finance 100% of foreign exchange expenditures and 58.8% of local expenditures, net of taxes. The loan would be made to Nacional Financiera, S.N. C. (NAFIN), which would make the funds available to STPS and SEP for the execution of the project. For the Council, the Government through SHCP as grantor will transfer to thefideicomiso some start-up funds (which cannot come from loan proceeds) and eventually other funds to reimburse the trust for eligible expenditures; the Council's allocation will come from the SEP budget, and NAFIN would administer the trust as trustee. The contribution of private enterprises and trainees participating in in-service training and skill certification, and benefiting from CIMO and technical assistance under the project would be US$28.7 million, or 10.2% of project costs net of taxes. The contribution of private enterprises and trainees would be ensured through the cost-sharing arrangements described in para. 3.23. Fmancing Plan Local Foreign Total 'US$ million Government of Mexico 118.3 0.0 118.3 IBRD 155.8 109.2 265.0 Beneficiaries 28.7 0.0 28.7 TOTAL 302.8 109.2 412.0 4.6 The actual contribution of the Government and beneficiaries is higher than stated, as a number of indirect costs, which are difficult to estimate, have not been included. These include: (a) ongoing operational support to be offered by institutions such as CIMO and PROBECAT; (b) the counterpart resources contributed by the various institutions bidding for the development of training resources; (c) volunteer time which will be donated by Board Members, industry advisors, supervisors and employers for the various committee activities; (d) financial contributions of chambers of industry and commerce to the operating expenses of the Council; and (e) expenditures by individuals taking certification tests on their own account, which, in the long run, will constitute a substantial part of the financing of the OCs and CEAs. B. Procurement 4.7 The project would include procurement of equipment for testing and certification centers and training institutions, computer equipment, office furniture, training materials, proprietary materials for certification and testing, promotion and information campaigns, incentives for training and testing, studies and consultant services. Procurement of goods would be carried out in accordance with Bank guidelines for procurement (May 1992). Detailed project procurement and disbursement procedures would be included in the operational guidelines of all relevant project executing agencies. 4.8 All procurement under international competitive bidding (ICB) and limited international bidding (LIB) will be undertaken by the Council with assistance from the PAU  - 28 - and approved by NAFIN for Component A, SEP for Component B, and STPS for Component C. Procurement for private training institutions would also follow standard Bank procedures. Procurement for OCs would be done by international or local shopping with at least three price quotations. OC's procurement packages are not expected to be greater than US$325,000 for each OC. The procurement categories for OCs would include furniture, office equipment, skill testing materials, and technical assistance. The total amount of procurement of goods, training materials and printing services for OCs would not exceed US$1.3 million (0.5% of the total loan amount), and the total amount of procurement of technical assistance for OCs would not exceed US$3.9 million (1.5% of the total loan amount) over the life of the project. Procurement Methods by Category (US$ million) Category ICB LCB Other Non-Bank TOTAL I Financed Goods and Equipment' 64.2 31.8 10.61" 0.3216/ 106.9 (57.2) (28.6) (9.5) (95.3) Training Materials 10.97" - 34.33' - 45.2 (5.3) (16.7) (22.0) Printing and Reproduction of Training 2.1 14.4 4.14' - 20.6 Materials (1.3) (9.0) (2.6) (12.9) Consultants, Studies and Technical - - 79.75' - 79.7 Assistance"' (59.8) (59.8) Scholarships, Stipends and Incentives - - 118.96/ - 118.9 (54.2) (54.2) Incremental Staff - - 25.26/ - 25.2 (14.5) (14.5) Incremental Operating Costs - - 15.56/ 15.5 (6.3) (6.3) TOTAL 77.3 46.6 289.4 0.3 412.0 (63.8) (37.6) (163.6) (0.0) (265.0) Figures in parentheses are the respective amounts financed by the Bank. / Local shopping = US$10.6 million. 2v For use of a Customs Agent. v Direct Contracting = US$23.4 million, of which US$11.4 million financed by the Bank. 4 Direct Contracting. ' Consultant Services. ~ Does not involve procurement. 7' LIB = US$10.9 million, of which US$5.3 million financed by the Bank. .' OCs = US$1.3 million, of which US$1.3 million financed by the Bank. b/ OCs = US$3.9 million, of which US$3.6 million financed by the Bank. 4.9 For ICB, all executing agencies will use the standard bidding documents (SBDs) issued by the Bank, with such modifications as agreed by the Bank to be necessary for the purpose of the project. For local competitive bidding (LCB), SBDs as agreed by the Bank  - 29 - with the Government of Mexico would be used. For the purpose of comparing foreign and local bids for goods during ICB evaluation, domestic manufacturers would be allowed a margin of preference in accordance with Bank guidelines. The Procurement Table above shows project cost breakdown by procurement methods. Annex 7 shows administration and specific procurement responsibilities and arrangements for each component. During appraisal, detailed procurement arrangements were discussed and agreed. 4.10 Goods and Equipment. Procurement includes new and replacement equipment for educational and testing centers up to an aggregate of about US$106.9 million. Approximately 61 % of this category of procurement would be procured by the SEP, 37% by STPS and the remaining 2% by the Council. Packages of furniture and equipment valued at US$150,000 or more and less than US$350,000, up to an aggregate of US$31.8 million, not expected to attract foreign bidders, would be procured using LCB procedures acceptable to the Bank. Furniture and equipment packages costing less than US$150,000 would be procured on the basis of comparison of price quotations for at least three qualified suppliers (local or international shopping), up to an aggregate of US$10.6 million. 4.11 Training Materials. Training materials would be procured by three methods: (a) materials readily available in the international market would be procured following the ICB procedures, (US$10.9 million); (b) specialized materials for which only a limited number of suppliers exist (e.g. teaching materials for CBT courses) would be procured following LIB procedures (US$10.9 million); and (c) printed materials, including the NVQs, which are proprietary and obtainable from only one source, would be procured through direct contracting with local and international sources that hold the copyright. Packages to be handled under the last method would not exceed an aggregate amount of US$23.4 million. In cases where the authors of the procured materials hold the copyright, and these materials are to be reproduced widely for use with little modification, the procuring entities would have to enter into an agreement with the copyright owner regarding the use of such materials, and contract the printing according to the procurement procedures and thresholds indicated in 4.12 below. 4.12 Printing and Reproduction of Training and Promotional Materials. Contracts for printing of materials to be used and distributed to trainees or for use for promotional and informational purposes would be procured through ICB for packages costing US$350,000 or more and through LCB in packages costing US$150,000 or more but less than US$350,000, up to an aggregate of US$14.4 million. When printing of materials obtained from only one source costs under US$150,000, direct contracting may be used up to an aggregate of US$4.1 million. 4.13 Consultants, Studies and Technical Assistance. Individual consultants and consultants firms carrying out technical assistance, training or studies would be hired following Bank Guidelines for Consultants (August 1984) fBank Guidelines for the Use of Consultants by World Bank Borrowers and by the World Bank as Executing Agency). For contracts for studies, the executing agencies would use a standard invitation package, with details amended as required for the specific study. 4.14 Prior Review. Prior review for procurement procedures and documentation would be required for all tender packages and contracts for ICB and LIB and those to be contracted  - 30 - through direct negotiation or single-source basis, as well as the first tender package and related contracts for LCB and shopping for each executing agency for: (a) goods and equipment; (b) printing of materials; and (c) non-durable training materials packages. All other packages would be subject to review in the field (ex-post) during Bank's supervision missions on the basis of random sampling. All terms of reference for technical assistance and studies would be subject to ex-ante review by the Bank. Documentation for contracts with consultants' firms valued above US$100,000 and for individual consultants valued above US$50,000 would be reviewed ex-ante by the Bank. This threshold for prior review is justified based on a careful review of estimated costs and nature of consultant services which are required for the project. About 67% in total contract value for goods, equipment, materials, and printing, and about 88% in total contract value for consulting services are expected to be subject to prior review. 4.15 No recent Country Procurement Assessment on Mexico is available. However, Mexico's procurement regulations (Ley de Adquisiciones y Contrataciones, January 1994), clearly authorize, as a special provision, application of procurement procedures of international financial institutions in the procurement of works, goods and services where financing of such procurement comes from the international financial institution. C. Disbursements 4.16 The proposed project would be implemented over a period of approximately five years and is expected to be completed by March 31, 2000 and closed by September 30, 2000. The proceeds of the loan would be disbursed over a 51/2 year period as shown in Annex 9. The Bank's contribution for incremental recurrent costs, on a declining basis, would help the Govemment absorb these costs. Retroactive financing of up to US$10.0 million equivalent (3.8% of the total loan amount) would be provided to help cover eligible start-up expenditures for equipment, technical assistance, and acquisition of training materials made on or after June 28, 1994, for which an extraordinary budget allocation has been made by SHCP to SEP/CONALEP in anticipation of reimbursement by the Bank. 4.17 Proceeds of the proposed loan would be disbursed against expenditures to be presented to the Bank and fully documented for goods and equipment contracts of US$350,000 or more, for consultant contracts with individuals of $50,000 or more and with firms of $100,000 or more, subject to prior review as per para. 4.14. Claims for expenditures under contracts below those amounts and other expenditures not covered by a contract, such as incentives, training costs, incremental salaries, travel allowances, etc. would be disbursed against presentation of Statements of Expenditure (SOEs), for which the supporting documentation would be retained by SEP and STPS for periodic inspection by the Bank and by external auditors. A Special Account in U.S. dollars with authorized allocation of US$19 million would be established at the Banco de Mexico. An initial allocation of US$12 million would be deposited to the Special Account. The allocation can be increased above US$12 million when the aggregate withdrawals from the Loan account reaches US$24 million. The Special Account will be replenished monthly and will be used for all transactions with a value of less than US$1.2 million. Normal documentation requirements apply, except that in addition, a copy of the bank statement from the institution holding the account detailing the transactions made and reconciled by the borrower would accompany each replenishment request.  - 31 - D. Accounts and Audits 4.18 The PAU, STPS, and NAFIN would maintain records and accounts adequate to reflect, in accordance with sound accounting practices, the resources and expenditures in connection with the execution of the project. These records would reflect the resources and expenditures in connection with the execution of the entire project. During negotiations, agreement was reached that NAFIN, SEP (including the PAU) and STPS would: (i) have the records and accounts for each fiscal year audited by independent and qualified auditors with a separate opinion provided on SOEs, in accordance with generally accepted auditing standards and procedures, and with the specific current understanding with the Mexican authorities; (ii) furnish to the Bank, no later than six months after the end of each year, a certified copy of the agreed audit reports; (iii) furnish to the Bank such other information concerning the records and accounts as well as the audit as the Bank wouldfrom time to time reasonably request (para. 7.1(i)). For all expenditures with respect to which withdrawals from the Loan Account were made on the basis of SOEs, and for all expenditures with respect to which withdrawals were made from the Special Account, SEP and STPS would provide to NAFIN all records and accounts necessary to allow the timely performance of its obligations, and to the independent auditors, both the records and the supporting documentation. V. PROJECT IMPLEMENTATION A. Project Implementation 5.1 A detailed implementation plan and schedule have been prepared (Annexes 7 & 8). For Component A, after the establishment of the Council during the first quarter of 1995, draft operational procedures are expected to be provided to the Bank no later than October 30, 1995; by the same date, the first CNs would be established. The first set of competency standards would be adopted by June 1996 and following this, the first group of OCs would be accredited and start operation by September 1996. For Component B, CONALEP will start offering modular CBT courses in September 1994, to be followed by other pilot programs in CECATIs and CETIS in September 1995. Financing of training materials development would be made open to other training institutions starting in 1997 for the project's second phase, following the establishment of the first set of competency standards in 1996. For Component C, both the CIMO and PROBECAT programs would start, in 1995, to support SMEs and targeted individuals who participate in the pilot courses in CONALEP, CECATI, and CETIS during the first phase of the project. The main incentives programs will start in 1997. At the same time, the programs to support equipment purchase and instructor retraining will be started. For Component D, several studies will be undertaken in accordance with the project implementation schedule throughout the project. Key studies include the Basic Skills study and the Comparison of Traditional versus CBT study. During negotiations, agreement was reached on the project implementation plan and schedule (para. 7.1(j)). The PAU, which will reside in SEP, will help coordinate and facilitate project activities (para. 3.31). 5.2 Project Readiness for Implementation. Project preparation has advanced without serious setbacks, and has been accelerated during the final months to the stage of readiness  - 32 - for implementation. Under the leadership of the Project Preparation Coordinator, all project implementing agencies, including STPS's Directorate of Employment (Direcci6n General de Empleo, DGE), CONALEP, DGETI, SEP's General Directorate for Training Centers (Direcci6n General de Centros de Capacitaci6n), and SEP's Special Advisors Office have successfully collaborated in the preparation of project components. Experience from existing Bank projects has also helped DGE and CONALEP in the preparation of their components. 5.3 Since the Mexican project team has maintained dialogue and consultation with private sector representatives throughout project preparation, the level of understanding and enthusiasm for the proposed project is very high among business organizations, which augurs well for Component A, the most crucial component, the establishment of the Council and its related activities. The project preparation team, in close consultation with the private sector, has already selected the occupational clusters for which competency standards will be first prepared. For Component B, similarly, the private sector has been consulted for the selection of the occupational groups under the pilot training modernization programs. CONALEP has been studying and preparing its CBT methodology for nearly a year and has already purchased sufficient materials from various foreign institutions to start offering modular CBT courses in the initial occupational areas selected under the project. CETIS and CECATIs are starting to prepare for their CBT courses, which will be offered in the 1995-96 academic year. Implementation of Component C will be greatly facilitated by the fact that DGE has successfully been implementing the Labor Market project since 1992. Since the institutional infrastructure of incentive programs is already in place (PROBECAT and CIMO), little impediment is foreseen. No difficulties are expected in the implementation of Component D, as (a) information systems and studies are technical in nature and the required technical assistance is abundant, and (b) the PAU will be small and not be burdened with a lot of functions. 5.4 Monitoring Indicators. During appraisal, monitoring indicators for project implementation and initial project impact were discussed and agreed (Annex 10). This will form an important basis for the project implementation reviews. During negotiations, agreement was confirmed on the project monitoring indicators (para. 7.1(k)). B. Supervision and Mid-Term Review 5.5 Implementation Reviews. Annual implementation reviews would be organized by SEP/STPS with the assistance of the PAU and would involve the participation of SEP/STPS senior staff, representatives of the Council, authorities from SHCP and NAFIN, and Bank staff. The purpose of the implementation reviews would be to evaluate project performance against implementation plans and agreed monitoring indicators; provide management with feedback on project achievements and issues and areas needing improvement. Each review would include: (a) analysis of the previous year's performance (i.e., performance against monitoring indicators, functioning of implementation arrangements, main issues, and remedial actions to overcome the constraints); (b) review of work plan and budget for the following year; and (c) modifications in project design, if needed, to adjust to changing circumstances. Thus the implementation reviews would provide for on-going refinements in project strategies and plans, consistent with the overall objectives of the project. These reviews would be undertaken in November of each year, based on annual project  - 33 - implementation reports prepared by the PAU for the Council, SEP, STPS, and the Bank. During negotiations, agreement was reached that (i) annual implementation reviews would be held with representatives of the Council, SEP, STPS, SHCP and NAFIN and Bank staff by November 30 of each year, starting in 1995, and (ii) the PAU would provide to the Bank implementation reports covering all project activities no later than 30 days prior to the scheduled date of the review (para. 7.1(1)). 5.6 Mid-Term Review. A mid-term review would be conducted in November 1996E' (replacing that year's annual review), following the same format as the implementation review meetings, but the analysis of project achievements would be expanded to include in- depth review of the performance of each component. The early timing of the mid-term review was chosen to coincide with the expected end of several intermediate project activities: (a) the completion of a first set of competency standards; (b) conclusion of the pilot training modernization programs; (c) final results of the CIMO and PROBECAT evaluations under the Labor Market project; (d) design and preliminary installation of several information systems; and (e) preliminary results of several studies under the various components. The mid-term review would thus be an occasion to take important decisions in preparation for the second phase of many project activities, consolidating lessons learned to make improvements in project design where needed. Because better estimates of demand for the SNC and TCS will have been obtained, the mid-term review will pay special attention to revision of project cost estimates. Other important agenda items would be the workings of the Steering Committee and the Council, and the effectiveness of inter-institutional as well as public-private cooperative arrangements. In addition, the mid-term review would result in an updated set of targets and actions for the subsequent years of project implementation. During negotiations, agreement was reached that (i) the terms of reference for the mid-term review would be provided to the Bank for comments by July 31, 1996, and (ii) the review itself would be undertaken by November 30, 1996 except for the Component B.1, for which the mid-term review would be undertaken by May 30,1997 (para. 7. 1(m)). 5.7 Supervision Requirements. Extensive and close Bank supervision would be required due to the incipient nature of a system of national competency standards in Mexico and the multi-institutional and cross-sectoral nature of the project. The supervision team would be carefully planned, combining Bank staff and consultants with specialties in education, training, labor markets and procurement. About of 53 staffweeks have been budgeted for FY95, FY96, and the first half of FY97 (including the Mid-Term Review)."' VI. PROJECT BENEFITS AND RISKS A. Project Benefits 6.1 The project's immediate outputs would be: (a) the creation of standards in a number of critical occupational areas; (b) the development of certification criteria and testing mechanisms to certify the achievement of standards by workers and graduates from training systems; (c) a national evaluation of the level of generalizable skills considered basic for the W7 Except for Component B. I for which a mid-term review would be undertaken in May 1997. Lo' A detailed supervision plan is presented as Annex 2 of the Memorandum and Recommendation of the President.  - 34 - development of Mexico's work force; (d) the development of the capacity to produce and deliver modular CBT systems; (e) the production of a number of complete instructional packages in key occupational areas, consistent with the new standards. At the same time, the project will: provide incentives for 158,000 individuals to certify competencies acquired on the job or through training system; assist micro, small and medium sized firms to develop competency-based human resources; and assist targeted individuals and firms' training through modular CBT programs. 6.2 The expected long-term benefits are even more important. Critical to the success of the program is inducing a change of logic in the entire system of training in Mexico. That change includes more intensive participation of the private sector, a emphasis on demand- driven training, and a more responsive training system which offers training of the levels and kinds demanded by firms. The use of a standard language introduced by the SNC would also facilitate and improve the communication between prospective employees and employers, as well as between training supply and demand. 6.3 The introduction of modular training would allow training institutions to become more flexible through the use of incentives to induce them to convert to the new system on a voluntary basis. At the same time, the system of certification would allow an automatic, transparent external mechanism to evaluate the quality of training institutions, and contribute to improve their quality and efficiency over time. 6.4 From an economic point of view, clearer labor market indications of worker quality and more efficient ways to identify training needs should yield substantial economic returns to the country. The new system of standards, testing and certification should provide an effective mechanism for screening an applicant's technical skills and knowledge in more precise ways. It would reduce information imperfections and thereby reduce the costs of screening and the costs of ineffective training. The system would also make employment services, wage systems and personnel management more efficient. Most importantly, economic benefits would derive from improving the overall quality and relevance of the training system. Employers would be more motivated to engage in training activities and employees would be able to certify their previously-acquired skills and find more feasible alternatives to engage in further training. B. Project Risks 6.5 The project is subject to three potential risks: (a) complexity leading to poor implementation; (b) inadequate private sector involvement; (c) resistance of interest groups due to poor understanding of the project. 6.6 Any project aiming at such ambitious goals and dealing with multiple actors in the public and private sectors, multiple issues such as standards, certification, testing and training delivery modes, and a variety of implementation agencies including training institutions and mechanisms such as CIMO and PROBECAT, as well as the establishment of new organizations to introduce a new culture of standards and certification is subject to risk. The main instrument of the project, the Council for Normalization and Certification of Competency Standards, is expressly intended to address project complexity and permit the flexibility necessary to adapt project implementation to the realities of the country. The  - 35 - Government understands its role and will enable the Council to operate so that it increases private sector ownership and responsibility. The presence of the Steering Committee will help resolve coordination problems emerging during implementation at an early stage. 6.7 The second risk is that the private sector will not assume its roles and responsibilities adequately. Employer's indifference may be more damaging than resistance. Ensuring the increasing participation, involvement, and ownership of the project is critical for project success and continuity. This is particularly challenging in Mexico where Government presence in training has been extensive and employers have been led to expect all training support to come from the Government free of charge. The project is based upon strategy to increase the authority and responsibility of employers over the Council, as well as to ensure the necessary participation of representatives from employees and unions. 6.8 The third risk is potential resistance from localized interest groups. Competency- based training, modular courses and external evaluation may be perceived negatively due to poor understanding by the intended beneficiaries. This risk will be mitigated by the fact that beneficiary institutions and individuals will participate in the project only voluntarily. In addition, the project includes a strong program of information and promotion, and the pilot demonstration of the benefits to interest groups. VII. AGREEMENTS REACHED AND RECOMMENDATION 7.1 During negotiations, agreement was confirmed and/or reached: (a) that the proposal for the organizational structure of OCs will be provided to the Bank for comment by June 30, 1995 (para. 3.11); (b) that satisfactory final guidelines for the provision of support for training materials development would be issued by SEP by September 30, 1996 (para. 3.17); (c) that the results of the evaluation of the certification process and incentives program would be provided to the Bank for its review by April 30, 1998 (para. 3.23(c)); (d) that for the study on financial solvency of the Council and OCs, (i) terms of reference will be provided to the Bank for comments by June 30, 1997, and (ii) the final report will be provided by June 30, 1999 (para. 3.27(a)); (e) that (i) the results of the Basic Skills study would be provided to the Bank by December 31, 1996 and (ii) the results of the Before-After Comparison of Basic Skills study, with control groups, would be provided by June 30, 1999 (para. 3.27(b)); (f) that the consultant proposal for the Comparison of Traditional versus Competency-Based Training study would be provided to the Bank for comments by June 30, 1995 (para. 3.28(b));  - 36 - (g) on the terms of reference of the Steering Committee and the PAU (para. 3.31); (h) that the Government will provide adequate annual budget allocations for the project, including for 1995, and that these allocations would be reviewed annually with the Bank during project implementation reviews (para. 4.5); (i) that NAFIN, SEP (including the PAU) and STPS would: (i) have the records and accounts for each fiscal year audited by independent and qualified auditors with a separate opinion provided on SOEs, in accordance with generally accepted auditing standards and procedures, and with the specific current understanding with the Mexican authorities; (ii) furnish to the Bank, no later than six months after the end of each year, a certified copy of the agreed audit reports; (iii) furnish to the Bank such other information concerning the records and accounts as well as the audit as the Bank would from time to time reasonably request (para. 4.18); (j) on the project implementation plan and schedule (para. 5.1); (k) on the project monitoring indicators (para. 5.4); (1) that (i) annual implementation reviews would be held with representatives of the Council, SEP, STPS, SHCP and NAFIN and Bank staff by November 30 of each year, starting in 1995, and (ii) the PAU would provide to the Bank implementation reports covering all project activities no later than 30 days prior to the scheduled date of the review (para. 5.5); and (m) that (i) the terms of reference for the mid-term review would be provided to the Bank for comments by July 31, 1996, and (ii) the review itself would be undertaken by November 30, 1996 (para. 5.6). 7.2 As conditions of loan effectiveness: (a) The trust agreement, satisfactory to the Bank, creating the Council will have been signed (para. 3.7); and (b) The Steering Committee will have been established (para. 3.30). 7.3 As a condition of disbursement for Council expenditures: Satisfactory key staff of the Council will have been appointed, and satisfactory rules and procedures of the Council will have been issued (para. 3.7). 7.4 As a condition of disbursement for certain SEP expenditures: The PAU will have been established and the PAU Director and three Coordinators will have been appointed (para. 3.31).  - 37 - 7.5 Recommendation. Subject to compliance to the above conditions, the proposed project is suitable for a Bank loan of US$265 million equivalent to NAFIN, with the guarantee of the United Mexican States, for 15 years, including a 5-year grace period at the Bank's standard variable interest rate.  - 38 - ANNEXES 1. Technical Education System 2. Evaluation of CONALEP and PROBECAT Training Programs 3. National Vocational Qualifications System 4. Component A - National System of Competency Standards, Skills Testing and Certification 5. Component B - Modernization of Training Programs 6. Component C - Stimulation of Demand for Competency-Based Training and Certification 7. Implementation Plan 8. Implementation Schedule 9. Project Costs and Disbursement 10. Monitoring Indicators 11. List of Documents in Project File  Table 1 - Formal Training Offered by SNET, 1992-93 Educational Level Total New Educa- Instruct- Other Grad- Installations Enroll- Enroll- Schools/ Courses tional ors Person- uates Class- Labs Work- Other - Educational Modaliy ment* ment Centers Svces_ nel rooms I shops facilities Training 93,149 92,994 217 57 209 4,460 3,761 40,683 523 28 1,175 4,145 - Formal Training 93,149 92,994 217 57 209 4,460 3,761 40,683 523 28 1,175 4,145 Upper Secondary 675,082 341,796 944 331 1,354 45,170 34,312 124,680 11,342 3,090 4,970 21,260 - Terminal 210,487 109,517 264 183 413 14,934 11,461 39,061 2,916 1,025 1,415 13,968 - Technical Bachillerato 464,595 232,279 680 148 941 30,236 22,851 85,619 8,426 2,065 3,555 7,292 University 200,610 55,370 129 141 179 19,567 13,388 24,871 4,302 1,156 594 4,907 - Licenciatura 200,610 55,370 129 141 179 19,567 13,388 24,871 4,302 1,156 594 4,907 Graduate 4,136 1,128 16 168 73 1,867 815 701 59 260 23 229 - Professional 505 126 21 12 179 - Master 3,309 963 16 109 50 1,867 815 491 59 260 23 229 - Doctor 322 39 38 11 31 Total 972,977 491,288 1,306 697 1,815 71,064 52,276 190,9351 16,226 4,534 6,762 30,541 * Enrollment at the beginning of school cycle 1992-1993, Source: SEP, Essad(stica Bdsica Sistema Nacional de Educaci6n Tecnol6gica, 1992-93, Inicio de Cursos. ci  - 40 - ANNEX 1 TECHNICAL EDUCATION SYSTEM Table 2 - Enrollment by Training Institution Units of SNET, 1992-93* Educational Upper Secondary Univty. Graduate Level/ Job Skill Responsible Training Terminal Tech. Licen- Profes Master | Doctor Total Unit IBachill . ciatura sional l DGCC 91,700 91,700 % (98.44) (9.42) CONALEP 171,142 171,142 % (81.31) (17.59) DGETI 37,735 348,340 386,075 % (17.93) (74.98) (39.68) CETI 2,208 670 2,878 % (0.48) (0.33) (0.3) UECyTM 11,025 1,628 12,653 % (2.37) (0.81) (1.30) DGETA 58,404 5,853 107 64,364 % (12.57) (2.92) (3.23) (6.62) DGIT 16 133,623 311 1,058 13 135,005 % (0.01) (66.61) (61.58) (31.97) (4.04) (13.88) ODE** 1,449 1,594 4,095 1,941 7,501 % (1.56) (0.76) (0.88) (0.97) (0.77) IPN 40,523 56,895 194 1,536 73 100,815 % (8.72) (28.36) (38.42) (46.42) (22.67) (10.36) CIEA - IPN 608 236 844 % (18.37) (73.29) (0.09) TOTAL || 93,1491 210,487 464,5951 200,610 505 3,309 3221 972,977 % iI (100.0)1 (100.0) (100.0)J (100.0) (100.0)1 (100.0) (100.0)1 (100.0) * Enrollment at the beginning of school cycle 1992-1993 (Sept. '92), except for DGCC where the figures are enrollment at the first quarter of school cycle 1992-1993 (Sept. '92). ** Decentralized Institutions of the State Government with Federal participation. DGCC Direccio6n General de Centros de Capacitaci6n CONALEP Colegio Nacional de Educaci6n Profesional Tecnica DGETI Direcci6n General de Educaci6n Tecnologica Industrial CETI Centro de EnsefTanza Tecnica Industrial UECyTM Unidad de Educaci6n en Ciencia y Tecnolog(a del Mar DGETA Direcci6n General de Educaci6n Tecnol6gica Agropecuaria DGIT Direcci6n General de Institutos Tecn6logicos ODE Organismos descentralizados de los Gobiernos de los Estados con participaci6n Federal IPN lnstituto Politecnico Nacional CIEA-IPN Centro de Investigaci6n y de Estudios Avanzados del Instituto Politecnico Nacional Source: SEP, Estadfstica Bdsica Sistema Nacional de Educaci6n Tecnol6gica, 1992-93, Inicio de Cursos.  - 41- ANNEX 1 TECHNICAL EDUCATION SYSTEM Table 3 - Informal Training Offered by SNET, 1992-93 Informal Training (in training institution) Responsible No. of Courses No. of trainees No. of trainees Unit per year under ___________I j__PROBECAT UECyTM 163 4,475 DGCC 8,869 CONALEP 17,001 DGETI 6,133 DGETA 9,695 86,066 1,459 DGIT 490 [ Total IF 9,858 J1 190,541 33,952 ] Informal Training (at work place) Educational # of courses # of trainees per No. of groups Services year trained under PROBECAT CONALEP 474 9,208 269 DGCC 154 DGETA 91 DGETI 199 3,215 120 DGIT 403 9,824 Total IF 1,076 22,247 634 Note: UECyTM Unidad de Educaci6n en Ciencia y Tecnolog(a del Mar CONALEP Colegio Nacional de Educaci6n Profesional Tecnica DGETI Direccion General de Educaci6n Tecnol6gica Industrial DGIT Direcci6n General de Institutos Tecnol6gicos4 DGCC Direcci6n General de Centros de Capacitaci6n DGETA Direcci6n General de Educaci6n Tecnol6gica Agropecuaria Source: SEP, Estadstilca Bdsica Sistema Nacional de Educaci6n Tecnol6gica, 1992-93, Inicio de Cursos.  - 42 - ANNEX 1 TECHNICAL EDUCATION SYSTEM Figure 1 The National System of Education (T) 3 H T T G PROFESSIONAL MASTER'S 2 CERTIFICATE DEGREE I H 5 UNDERGRADUATE t ~~~~~~~~~~~~~3 R | ~~~~HIGH LEVEL 2 R 4 5 TECHNICAL I3 n TRIA E CIALIST ~~~~~~~~~~~2 C SPECILS TECHNICAL ||ACADEMIC |TECHNICAL I C N 14 T2 A 13 | GENERAL-TECHNICAL MIDDLE SCHOOL 1 R 12 (7JOB SKILL 11 10 6 119 PRIMARY L 8 L E 6 2 E 5 2 T 4 PRESCHOOL/KINDERGARTEN A 1 R y AGE Exit to job market YEARS NOTE: Special and adult education are not included  Grades I - 6 Grades 7 - 9 Lower Grades 10 - 12 Primary Secondary Upper Secondary General & Tele General Academic & Secondary Teacher Training Federal 318, 130 Federal 163,759 State 2,511 ,378 State 463,537 Autonolous 2,450 AutonoROus 3Z3,598 Private 300,238 Private 356,116 Primary / Total 3,132,196 Total 1,307,010 Federal 979,935 State 12,567,126 Technical Highschool : Priva.Le 922,389 Technical Secondary (Bachullerato Tecnologico) 4C Total 14,469, 450\ \ c ____________________________ Federal 125,541 ~Federal 467,995 ~1 tae ea1,025,5460 State 21,833 I _ State 1,042,460 ~~~ADtoamllRUS 7,502 I 'OO Priv\ State 41,727 460 > Private 32,967 I Total l.Z09,7Z63 \ \ Total 530,297] \o Skill TraininTerminal Job Skills Training \ \ YVocational/Technical Federal 123,924 Federal 235,100 1 State 393415 AuState 27o 00,5 AStoaot ou5 9.585 Sutoaot ous 30,358 Private 214,104 Private 113,541 i Total 391,028 Total 406,479 J 0  - 44 - ANNEX 2 EVALUATION OF CONALEP & PROBECAT EVALUATION OF CONALEP AND PROBECAT TRAINING PROGRAMS 1. This annex summarizes the findings of evaluation studies conducted for CONALEP training programs under the Third Technical Training Project (Loan 3358-ME), and also for the PROBECAT program under the Labor Market and Productivity Enhancement Project (Loan 3542-ME). Since the proposed project builds upon these existing programs, the evaluation of their effectiveness in improving the participants' performance in the labor market is an important basis for the design of the proposed, and future projects in the area of labor force skill development. A. Returns to CONALEP's Technical Training 2. Origin and Nature of CONALEP. CONALEP (National System for Vocational and Technical Education) was established in 1978 to train mid-level professional technicians. With the support of three Bank loans the system has grown rapidly over the years into the flagship technical training system in Mexico. CONALEP currently has over 250 training centers, offering over 200 course specialties with its entire teaching staff drawn from industry and the private sector. Whilst CONALEP's main emphasis is still a full-time 3-year upper secondary (grades 10 to 12) vocational education (54,500 such students graduated in 1993) i.e. pre-service training, in-service training is growing rapidly through modular training (1,700 graduates in 1993) and retraining programs for the unemployed (via PROBECAT) and already employed workers (with a combined total of 88,400 trained in 1993). In addition CONALEP now has 50 mobile training units in operation, with another 25 under construction, to provide skill upgrading to mainly self-employed workers in poor and marginalized communities. 3. Graduate Tracer Studies. On the occasion of the Appraisal of the Third Technical Training Project (Loan 3358-ME), concern was expressed in the Bank concerning the effectiveness and rate of return for vocational training both in Mexico and more generally in other countries. In order to address this issue, the current Third Technical Training Project makes provision for a statistically robust graduate tracer system. Whilst there have been some teething problems in operationalizing an adequate tracer system, the initial results are encouraging: (a) Since 1987, CONALEP has run its own annual tracer system for all graduates. The 1993 graduate tracer study shows that 63% of CONALEP graduates had secured employment within six months of graduation, 87% of whom in a position closely related to their study specialty. This placement rate compares favorably with 69% in Germany (6 months after completed apprenticeship.Y' The congruency rate (or broad match between training and work) also compares favorably with 78% among apprentices in Germany and 43% among upper !' Herget, Harmann: The transition of young people into Employment after Completion of Apprenticeship in the 'Dual System." Berlin: CEDEFOP, 1987.  -45 - ANNEX 2 EVALUATION OF CONALEP & PROBECAT secondary technical school graduates in Japan.2' Available evidence showed that their salary levels were about 10% higher than those following non- vocational education (bachillerato) to the same level. However, these results are not as statistically robust as desired, as the tracer survey relies on voluntary response to a mailed questionnaire with no follow-up of non-respondents, thereby introducing a possible bias. In the 1993, more than 21,000 students responded including some from previous cohorts. (b) To remedy these biases, a special tracer study was contracted. The numerical results were more positive than those of CONALEP's own tracer evaluation, showing 76% of graduates employed one month after graduation rising to 98% after 12 months. The study showed that the average income of the CONALEP graduates was 2.4 times the minimum salary (SM).2' Graduates incomes were shown to grow rapidly (in nominal terms) by 9% within six months and by 23% in 2 years, when comparing different cohorts of graduates in similar occupations, reflecting the high potential earnings profile of CONALEP graduates. Whilst the survey purported national coverage and representativity, less than 50% of the sample graduates responded. The results could not be considered statistically robust and moreover no measurement against a control group was undertaken due to the difficulties in obtaining data. (c) The same study included an Employers Assessment, based on a survey of a random sample of 551 employers who were questioned regarding their experience with CONALEP graduates of educational level required for their workers. Of those companies employing CONALEP graduates, 90% stated that CONALEP students were technically good or excellent. (d) To rectify the lack of data for a control group, CONALEP hired a consultant who used data from the ENEU (National Urban Employment Survey), which is undertaken monthly by INEGI (National Statistics and Geography Institute), to extract appropriate control groups relating employment and earnings to educational profiles. Using data for 1991, for the 20-24 year-old cohort (the age at which CONALEP graduates enter the labor market), the average income of a person with lower secondary education only is 2.07 SM, slightly above the national average of 1.96 SM (see table below), about 12.5% higher than that of general high school graduates. While the income of high-school graduates (bachilleres) is 2.44 SM, the income of youth with middle-level technical training (such as CONALEP) is 2.70. These results show that CONALEP graduates' earnings are 30.4% higher than lower-secondary graduates, representing an annual rate of return of 9. 1 % for each additional year of technical training; whereas bachilleres earnings have an overall gain of only 17.9% over lower- secondary school graduates earnings, or an annual rate of return of 5.6% for Y Inoue, K: The Education and Trainino of Industrial manpower in Japan. Washington: The World Bank. Staff Working Papers No.729. 1' One minimum salary is currently about US$143 per month.  - 46 - ANNEX 2 EVALUATION OF CONALEP & PROBECAT each additional year of high-school.' However, this study, could not isolate CONALEP graduates from those of other mid-level technical training programs. Nevertheless, this study is indicative of CONALEP program's cost-effectiveness because CONALEP accounts for about 40% of total national enrollments in mid- level technical training. Annual Average Incomes 1991 (expressed as multiples of the Minimum Salary - SM) Education Level Age 20-24 All Ages All Levels - 1.96 Lower-Secondary (Grades 7-9) 2.07 1.83 Mid-level Technical (Grades 10-12) 2.70 2.41 Bachillerato (Grades 10-12) 2.44 2.51 * Source: National Urban Employment Survey (ENEU), INEGI (e) 1994 Graduate Tracer Study. To improve the confidence in the data obtained a smaller and statistically robust random sample was drawn from the 1991, 1992 and 1993 cohorts.5' This tracer study seeks to measure employment outcomes and earnings of CONALEP graduates by gender, academic specialty and in comparison to alternative types of education for similar age groups (or control groups). This evaluation is currently being finalized, but preliminary results for CONALEP graduates are indicated: (i) 30.1 % had obtained employment within 1 month, and 86.6% within 6 months of graduating. Comparable employment percentages (after 6 months) from other related institutions are DGETI 82.8%, DGETA 81.7% and NMSET 82.6%; (ii) average 33% has employment upon graduating, reflecting predominantly the significant number of graduates who work and study simultaneously. It is interesting to note that for the 1993 cohort, both the percentage of graduates with employment immediately upon graduation (25%) and the average number of weeks employed prior to graduation (86.4) had declined substantially compared to 1991 36% and 105.5 respectively, reflecting the reduced creation of entry-level employment possibilities as a result of Mexico's slow economic growth in 1993; " The relationship between mid-level technical (CONALEP) and general high school (bachilleres) is reversed if the data for 'All Ages' is considered. This may reflect either: (i) improvements in the quality of, and therefore rates of return to, vocational education over time; or (ii) a higher longer-term earnings profile for those undertaking general education. The latter explanation is unlikely as it would contradict the experience of paragraph (b) which indicates rapidly increasing earnings for CONALEP graduates over time. 1' A rigorous sample was selected to give 95 % confidence levels in the results of an employment, earnings and course relevancy, by gender, cohort and geographic regions (for this purpose the country was divided into 6 regions). The sample of 1,399 graduates was 346 from the 1991 graduate cohort (24.7%), 704 from 1992 (50.3%) and 349 from the 1993 cohort (34.9%).  - 47 - ANNEX 2 EVALUATION OF CONALEP & PROBECAT (iii) 64.7% found employment related to their field of study, of whom 62% declared it was highly related; (iv) average earnings amounted to 2.45 SM per month, about 12% higher than those for bachilleratos according to the best estimates available; (v) average male earnings exceeded female earnings by N$170 per month; (vi) the evaluation demonstrated that there exists an informal ceiling income of about 3 SM (N$ 1,305 per month) which is very difficult for a CONALEP graduate, bachillerato or other recent technical education graduate to surpass. 84.7% of 1993 received incomes of 3 SM or less. Time-series analysis shows that only 15.3% of the 1993 cohort exceed this level, compared to 24.3% of the 1992 cohort and 31.3% of the 1991 cohort reflecting the importance of experience and "time on the job" as determinants of income; and (vii) average earnings for CONALEP graduates of the 1991 cohort amounted to 2.63 SM, with a median value of 2.3 SM. These significantly exceed median values of 1.6 SM for 1991 graduates at the level "medio-superior" from DGETI and NVSET, but, as expected, are significantly lower than those for "superior" of 3.5 SM and 4.5 SM for the cases of DGETI and DGETA respectively-'. B. PROBECAT's Impact on Employment and Wages 4. PROBECAT (Prograna de Becas de Capacitaci6n para Trabajadores) was established in 1984 by the Mexican government to retrain unemployed and displaced workers. The acceleration of the structural adjustment in Mexico greatly expanded the need to retrain those workers, and the program was later supported by the Bank through the Manpower Training Project (Loan 2876-ME) in 1987 with expanded scope and coverage. Since then, the program has provided short-term vocational training to over 250,000 unemployed workers, approximately 50,000 trainees per year.2' The PROBECAT program, administered through the network of state employment offices, offers training allowances equivalent to one minimum wage to unemployed workers who enter a retraining program. The allowances are paid for the duration of the course which varies from one to six months, with the majority lasting three months. The program was originally designed for displaced workers, but in practice, some 40% of the participants were unemployed workers who sought job for the first time without prior work experience. 5. To provide information on the effectiveness of the PROBECAT program as a basis for policy decision making whether to continue with the program for a longer period than