Turkey - Non-formal Vocational Training Project

Document of The World Bank FOR OFFICIAL USE ONLY i/M. 4V?6 TO Report No. P-4385-TU REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$58.5 MILLION TO THE REPUBLIC OF TURKEY FOR A NON-FORMAL VOCATIONAL TRAINING PROJECT November 18, 1986 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.  TURKEY CURRENCY EQUIVALENTS Currency Unit Jan.1980 a/ Jan. 1982 Jan. 1983 Jan. 1984 July 1985 July 1986 USDollar TL 70.00 TL 139.60 TL 191.15 TL 309.20 TL 540.00 TL 675.0 TL 1 US$0.014 US$0.007 US$0.005 US$0.003 US$0.002 US$0.001 af Since January 1980, the rate is being adjusted for the differential inflation between Turkey and its major trading partners. In this report it is assumed that this policy will continue. FISCAL YEAR Republic of Turkey January 1 - December 31 LIST OF ABBREVIATIONS ATC Apprenticeship Training Center ATTC Adult Technical Training Center CTTC Commerce/Tourism Training Center DIEBS Directorate of Investment, Establishment and Building Services GDANE General Directorate of Apprenticeship and Non-Formal Education MOE Ministry of Education, Youth and Sports NFEI Non-Formal Education Institute NFVT Non-Formal Vocational Training OECD Organization for Economic Cooperation and Development PIU Project Implementation Unit PRF Production Revolving Funds SEE State Economic Enterprise SIS State Institute of Statistics TA Technical Assistance TSKB Industrial Development Bank of Turkey UNESCO United Nations Educational, Scientific and Cultural Organization VAT Value Added Tax WPI Wholesale Price Index WTC Women's Training Center  FOR OFFICIAL USE ONLY REPUBLIC OF TURKEY NON-FORMAL VOCATIONAL TRAING PROJECT Loan and Project Summary Borrower: Republic of Turkey Amount: US$58.5 million Terms: Seventeen years, including four years of grace, at the standard variable interest rate. Project Description: The proposed project supports the Government's efforts to increase and improve the supply of well-trained labor for manufacturing industries and to improve employment opportunities (including self employment) for people with limited education and training. The project would expand the number of training places in various institutions such as the Apprenticeship Training Centers and the Public Training Centers and would improve the quality of Non-Formal Vocational Training CNFVT) pro- grams and enhance their relevance to labor market needs through technical assistance and training in a number of critical areas: instructor training, training needs assessment, curriculum design, instructional materials development, skill testing and certification, and entrepreneurship courses. The project would also include the establishment of production revolving funds to enable the training institutions to generate addi- tional revenues through the production of items for sale. Benefit and Risks: The proposed project would make a valuable contribution towards meeting critical manpower shortages which con- strain economic growth in manufacturing industries and would also significantly increase basic skill training to improve employment opportunities for disadvantaged groups, including out-of-school youth and unemployed adults. The major quantifiable benefit of the proposed project when fully operational would be an annual output of 60,000 additional workers with industrial anld service skills. The proposed project would also improve the quality of training provided and, through establishment of the Production Revolving Funds, would produce a source of revenue to help reduce the cost of operations of the NFVT system. The proposed project would be implemented in three successive phases of approximately two years, each one comprising a set of sub-projects. The MOE has successfully identified, prepared and appraised the first phase of the project. Therefore, the risk that second and third phase sub-projects may not be well prepared according to labor market and community needs is considered minimal. This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorizacion.  Estimated Project Costs a/ (U$Killion) Local Foreign Total b/ Public Training Centers (PTCs) 3.1 20.1 23.2 Apprenticeship Training Centers (ATCs) 2.1 13.9 15.9 Adult Technical Training Centers (ATTCs) 0.3 1.9 2.2 Comerce/Tourism Training Centers (CTTCs) 0.2 1.3 1.4 Women Training Centers (WTCs) 0.2 1.4 1.6 Instructional Materials 0.8 0.4 1.3 Production Revolving Funds (PRFs) 2.0 2 Z.0 Technical Assistance (TA) 0.3 3.1 3.4 Total Baseline Costs 9.0 42.1 51.1 Contingencies Physical 0.5 1.5 2.0 Price 3.1 15.0 18.0 Total Project Costs 12.6 58.5 71.1 Financing Plan Government 12.6 - 12.6 Bank - 58.5 58.5 Total 12.6 58.5 71.1 Estimated Disbursements Bank Fiscal Year 1988 1989 1990 1991 1992 1993 1994 1995 Annual 3.5 3.0 8.0 12.5 14.5 10.5 5.0 1.5 Cumulative 3.5 6.5 14.5 27.0 41.5 52.0 57.0 58.5 Rate of Return: Not applicable. Appraisal Report: No. 6360-TU, dated November 12, 1986 Map: IBRD 19788. a! Includes about $0.2 million for taxes and duties for civil works. b/ Details of items may not add up to totals because of rounding.  INTERNATIONAL BANK FOR RECONSTRUCON AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE EBRD TO THE EXECUTIVE DIECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TURKEY FOR A NON-FORMAL VOCATIONAL TRAINING PROJECT 1. I submit the following report and recommendation on a proposed loan to the Republic of Turkey for the equivalent of US$58.5 million to finance the foreign exchange cost of a Non-Formal Vocational Training (NFVT) project. The loan would have a term of 17 years including 4 years of grace, with interest at the standard variable rate. PART I - TME ECONOMY 11 2. An economic mission visited Turkey in June 1982, and its report entitled "Turkey: Country Economic Memorandum, Recent Economic Developments and Medium-Term Prospects" (No. 4287-TU) was distributed to the Executive Directors in June 1983. The report of a mission to review the financial sector, entitled: "Turkey: Special Economic Report - Policies for the Financial Sector" (No. 4459-TU), was distributed in September 1983. A Bank mission reviewed the Government's Fifth Five-Year Development Plan (1985-89) in September 1984 and its report: "Turkey: The Vth Five-Year Plan in the Context of Structural Adjustment" (No. 5418-TU) was distributed in July 1985. 3. Turkey's area is about 780,000 square kilometers (i.e. about equal to the area of France and West Germany combined) with a population of around 50 million and GNP per capita of $1200 in 1984. The density of population is low (78 per square kilometer of agricultural land), and about 47 percent live in urban centers. Population growth (2.2 percent per annum) is below the median for middle-income countries. Despite rapid economic growth in the mid-1970s as well as emigration of workers (to Western Europe and more recently, to the Middle East), there is still substantial unemployment which, including disguised unemployment in agriculture, is estimated at about 19 percent of the civilian labor force. There is, however, little or no absolute poverty, although income distribution is skewed. There are considerable regional differences in income and large rural-urban disparities. Recent data indicate a probable increase in income inequality since the 1970s, especially a relative deterioration of the position of wage and salary earners and an improvement in the position of the trading and connercial classes, and, more generally, of capital-owners. Educational enrollment particularly at primary level, has expanded greatly, but the level of adult literacy remains relatively low compared to the European average for middle income countries. 11 Parts I and II are substantially the same as Parts I and II of the Presideut's Report for the Sir Hydropower Project (P-4529-TU) dated August 1, 1986.  4. During the L970s Turkey did not make the necessary adjustments to the shocks caused by the steep rise in oil prices, stagflation in the OECD economies, and the consequent deterioration of its terms of external trade. Until 1977 Turkey maintained high rates of economic growth by increasing public investment. The foreign exchange requirements were financed initially by workers' remittances and then increasingly by borrowing, a large part of it short-term. The rapid GNP growth came to an abrupt halt in 1977 as the massive external debt burden led to a sharp deterioration in creditworthiness, severe shortages of imports, disruptions in industrial production and a rise in unemployment. By the end of 1979, domestic inflation had also become an issue of critical importance. 5. In response to the crisis of the late 1970s, the Turkish authorities made a major shift in development strategy in 1980, moving towards outward orientation and giving an increased role to market forces. To alleviate the balance of payments constraint and import shortages, policies were adopted to expand exports, increase workers' remittances, liberalize imports, encourage foreign investment and improve external debt management. On the domestic front, the objectives were a reduction in the inflation rate, reform of the State Economic Enterprises (SEEs), a more efficient financial sector, improved resource mobilization and better selection of investments, especially in the public sector. 6. The adjustment program, which has been supported by the Bank through five Structural Adjustment Loans, an Agricultural Sector Adjustment Loan and a Financial Sector Adjustment Loan, involves far-reaching changes in attitudes, institutions and the legal and policy framework, all of which require time to be put in place. Major structural changes have been made in the exchange rate system, the export and import regimes, the tax system, interest rate and selective credit policies and the public investment program. Implementation of the adjustment program started in January 1980, continued under a military regime during the period September 1980 - November 1983, and has since been carried out by an elected government. The Struetural Adjustment Proggram, 1980-86 7. The Turkish economy has shown an impressive response to the structural adjustment program and the outcome met or exceeded the Government's own targets through 1982. The overall performance deteriorated in 1983 due to a combination of factors (slowdown of export growth, slippages in the monetary program, shortfall in Government revenues), but improved again, except in the area of inflation and the budget deficit, in 1984. The improvement was maintained in 1985, this time including a slowdown in inflation and a reduction in the budget deficit. In 1986, while output has grown at a rapid pace and inflation has decelerated, the balance of payments position has deteriorated somewhat. 8. After expanding by 4.1 percent in 1981 and 4.6 percent in 1982, real GNP growth slowed down to 3.3 percent in 1983, due to the effects of a bad harvest, stagnant exports and lower workers' remittances. The growth rate rebounded in 1984 to 5.9 percent, mostly on account of favorable performance in agriculture (3.5 percent growth) and industry (10.1 percent growth). Merchandise exports also expanded strongly, by more than 25 percent in dollar terms. In 1985, the economy grew by about 5.1 percent, as against the program  -3- target of 5.5 percent. The slowdown in growth was most significant in agriculture (2.4 percent growth) and manufacturing (5.5 percent), due respectively to less favorable climatic conditions and slackening domestic demand. Preliminary estimates for 1986 indicate a real GNP growth rate of about 7 percent, reflecting rapid rates of growth of both industrial and agricultural production, and a sharp revival of domestic demand. On the expenditure side, the average annual real rate of growth of public fixed investment over the period 1980-84 was 3.8 percent. Estimates for 1985 indicate that public fixed investment totalled TL 3,108 billion, implying a *uch higher real growth (13.3 percent) over 1984 than programmed (5.8 percent). The growth of investment was concentrated in infrastructure energy, transportation and telecommunication. Provisional estimates for 1986 indicate a continuing rapid growth of public investment. The growth rate of private investment has fluctuated more severely, falling by 17 percent in 1980, recovering slowly, and then rising by 8.8 percent in 1984, 7.8 percent in 1985, and considerably more than this in 1986. Private consumption, after declining by 5 percent in real terms in 1980, grew by 5 percent in 1983 and 5.5 percent in 1984 before slowing down to an estimated 3.6 percent in 1985. Strict budgetary discipline contributed to a steady decline in the real rate of growth of public consumption from 8.4 percent in 1980 to 1.7 percent in 1983; however, it increased to 3.0 percent in 1984 and an estimated 3.2 percent in 1985. Preliminary estimates for 1986 indicate that the growth of both public and private consumption has accelerated to over 7 percent. 9_ During 1981-82, the Government met with considerable success in reducing the rate of inflation through a combination of fiscal, monetary and incomes policies. After peaking at 107 percent in 1980, the average annual rate of increase in the wholesale price index (WPI) decelerated to 37 percent in 1981 and 27 percent in 1982. In 1983 the downward trend was reversed and the inflation rate rose to 30 percert. Inflation accelerated further in 1984, and reached 50 percent, due to die lagged impact of the expansionary monetary policy pursued during the second half of 1983, and a significant increase in agricultural product prices, especially of fresh fruits and vegetables, as a consequence of export liberalization and higher export market prices. Other contributory factors included substantial "catch up" increases of SEE prices - since January 1984 most SEEs have effectively been allowed to set their prices freely - and higher import prices resulting from the nominal depreciation of the Turkish lira. In addition, inflationary pressures stemmed from a larger than anticipated budget deficit in 1984 as a result of a slowdown in the growth of revenues. 10. In 1985 inflation declined considerably -- the average annual rate of increase in the WPI fell to 43.2 percent, after reaching a very high level in the first quarter of 1985 (about 60 percent as of March 1985). By December 1985, the month-over-month change in the WPI (i.e. December 1985 over Decemer 1984) had correspondingly declined to 38.3 percent and by October 1986 it had dipped even further, dropping to about 28 percent. Factors causing the high inflation rate in the first quarter of 1985 were the introduction of a value added tax (VAT) in January 1985 and continued substantial increases in the prices of several key intermediate goods and inputs. Thereafter, several factors combined to lower inflationary pressures: (i) monetary growth slowed, particularly in the fourth quarter, with H2 growth declining from an annual rate of 64 percent as of September 1985 to 53 percent at year-end; (ii) by April 1985 most of the catch-up increases in the prices of SEE products appeared to have been  - 4 - completed and the rate of price adjustment abated considerably; (iii) the significant slide of the dollar, which started after March 1985, resulted in a slowing down of the nominal depreciation of the Turkish lira against the dollar and therefore in smaller increases in prices of imported products than were witnessed in 1983-84; (iv) the persistence of high real interest rates (which increased as inflation declined) helped to channel iiquidity towards savings rather than consumption and thus lowered aggregate demand; and (v) lower exports of certain agricultural products (cereals and pulses) meant that the domestic market was well supplied, thus easing inflationary pressures on food prices. The steady deceleration in the inflation rate reinforces the expectation that the Government's target rate of 25 percent for 1986 could be achieved, particularly considering the large decline in world oil prices since January 1986, and the continued weakening of the dollar relative to other international currencies. 11. In the fiscal area, progress has been uneven- During 1980-82 the budget deficit declined from 5.3 to 1.7 percent of GTIP, but increased to almost 5 percent of GNP in 1984, due mainly to a disappointing performance in raising tax revenues. In 1985, however, the budget deficit is estimated to have been TL 621 billion or 2.2 percent of GNP, a significant improvement over 1984. This is largely because the Government took several measures in 1985 to increase revenues, the most important of which was the introduction of VAT. In its first year, VAT collections amounted to about TL 1 trillion, significantly above the target. Other tax measures which were adopted included substantial increases in various fixed charges and duties and large increases in penalties for overdue tax payments. As a result of these measures, budget revenues rose from 15.4 percent of GNP in 1984 to 16.9 percent in 1985, and are estimated at over 18 percent of GNP in 1986, reversing the downward trend in revenues over the previous three years. Government expenditures decreased from 20.3 percent of GNP in 1984 to an estimated 19.2 percent in 1985, but have increased in 1986 to an estimated 20.5 percent of GNP. 12. Progress has also been made in rationalizing interest rates and reforming the banking system. Since 1981, interest rates on time deposits at commercial banks have been positive in real terms. Time deposits have been yielding a positive real return since early 1984. Positive deposit interest rates have resulted in a steady growth in deposits, about 10 percent per annum in real terms in 1984 and 1985. Improvements in incentives for savings were accompanied by administrative reforms of the banking system, the enactment of a new banking law, and measures to revitalize the capital market. 13. While positive real interest rates have provided an incentive to save, they have also meant high borrowing costs. Effective nominal interest rates range from 60 to 80 percent on non-preferential credits, in part because of the impact of high liquidity and reserve requirements, the option which commercial banks have to invest in high-yielding government bonds, and high intermediation costs. The Government took a number of steps in 1985 to reduce the interest rate differentials between preferential and non-preferential credits: in particular, the preferential interest rate for export credits was discontinued in January 1985, while, during the year, interest rates for larger agricultural loans and for loans to SEEs were increased from 28 and 22 percent to 34 and 35 percent, respectively. The narrowing of the gap between interest rates on preferential and non-preferential credits, together with the decrease effected in the amount of preferential credits, is expected to increase the general availability of credit and exert a downward pressure on non-preferential interest rates.  - 5 - 14. Improvements in the balance of payments were substantial between 1980 and 1982, with the current account deficit decreasing from $3.4 billion (5.7 percent of GNP) in 1980 to $0.9 billion (1.6 percent of GNP) in 1982. In 1983 the current account deficit increased to $1.9 billion, as merchandise exports stagnated and workers' remittances fell by one-third. These developments were reversed in 1984 as exports increased by over 25 percent in dollar terms to reach $7.4 billion. Remittances, too, registered a higher than expected increase, reaching $1.8 billion (up by 19 percent over 1983). Merchandise imports grew by more than 16 percent to reach $10.3 billion. As a result of these developments, both the trade and the current account deficits declined as compared to 1983. 1985 witnessed a further strong improvement of the balance of payments situation. Merchandise exports grew by 12 percent (in dollar terms) in 1985, while merchandise imports increased by 9 percent. Among the iavisibles, tourism revenues and investment income from abroad increased significantly compared to 1984 and previous years. Workers' remittances, on the other hand, declined by 5 percent. The current account deficit in 1985 is estimated at about $1.0 billion, or about 1.9 percent of GNP. In 1986, the current account deficit is expected to widen to about $1.5 billion as a result of the rapid growth of capital goods imports and a decline of exports to both the Middle East as well as the OECD market. 15. Merchandise export performance was impressive throughout the 1980-85 period, during which exports registered an average annual rate of increase of about 21 percent in dollar terms. This growth has been led by the manufacturing sector and has involved a rise in the share of exports to the Middle Eastern countries. Industrial exports, composed primarily of processed foods and textiles, have risen from 32 percent of total exports in 1980 to more than 72 percent in 1985. These results were achieved by a combination of indirect measures (flexible exchange rate policy, import liberalization) as well as direct measures (tax rebates, preferential credits) to enhance the relative profitability of exports and offset the traditional bias towards production for the domestic market. Successful penetration of the Middle Eastern markets has brought their share in total Turkish exports from 17 percent in 1980 to around 40 percent in the 1983-85 period. 16. On the import side, the 1982-83 period was marked by a relative stability in the growth of merchandise imports, as prices of both oil and non-oil imports declined, and the volume rate of growth remained moderate. In 1984, however, merchandise imports increased substantially. The increase was most pronounced in some of the groups (e.g. raw materials and consumer goods) that have been subjected to major liberalization through a lowering of tariff rates and a significant removal of quantitative restrictions. In 1985, as domestic demand eased, and the initial effects of pent-up demand for importables released by import liberalization weakened, the rate of import growth decreased to about one-half of the level recorded in 1984. While total imports are expected to fall in 1986 due to the oil price decline, non-oil import growth is estimated to have accelerated, led particularly by the rise in capital goods imports. Mediun-Term Prospects 17. The Fifth Five-Year Development Plan (1985-89), which was approved by the Grand National Assembly in June 1984, reaffirms the Government's determination to pursue an outward-oriented development strategy and to liberalize the economy by relying increasingly on market forces. The public  - 6 - sector is targeted to play a supportive role by concentrating its investments in infrastructure rather than manufacturing, while the private sector is to be encouraged to play a leading role in the growth of manufacturing and exports. Some of the key targets are: (i) an average annual GNP growth rate of 6.3 percent; (ii) an average annual real rate of growth of merchandise exports of 10.6 percent; (iii) an average annual real rate of growth of 10.9 percent in private investment and 6.8 percent in public investment; (iv) a declining external debt service ratio, from 26 percent in 1984 to around 18 percent in 1989; and (v) a decreasing rate of inflation reaching 10 percent p.a. in 1989. 18. While the overall thrust of the Plan is in accord with the goals of the structural adjustment program, the Plan targets, if viewed collectively and in the light of the developments in 1984 and 1985, appear somewhat ambitious and likely to strain domestic resources (especially in the public sector) as well as have an adverse impact on the external balance. Accordingly, the Government is adjusting the annual programs to ensure that they remain compatible with the fight against inflation and with a growth strategy comensurate with the Government's ability to generate resources. 19. The recent decline in international oil prices has significantly reduced Turkey's oil import bill in 1986 and has beer, instrumental in reducing inflation and generating a rapid rate of output growth. However, the reduced purchasing power of Turkey's oil exporting trading partners has resulted in a sharp decline of exports to these countries, to a large extent offsetting the gains from reduced oil imports. Over the medium term, Turkey's success at continuing its export drive will depend on its ability to substitute exports from the Middle East to other developing countries and to sustain its export growth to the OECD market. Given the uncertainty associated with the oil price and export projections and in order to emphasize inflation control and a greater build-up of foreign exchange reserves, we have been cautious in revisiog GDP growth targets significantly at this time. 20. The Bank's projections indicate a GDP growth of 5.6 percent p.a. on average for the 1986-90 period. Following the rapid GNP growth experienced in 1986, relatively slower growth is forseen initially before some acceleration in the outer years. The inflaticn targets in the Bank's projections are also more conservative compared to the Plan targets, implying a reduction from about 43 percent in 1985 to around 18 percent in 1990. Key economic variables in the Bank's projections for the period 1986-90 are presented in Table 1.  -7- t'. Table 1: IUEY - SEW) EOOIC WICfS, 1964-90 Real Growth Rate Average Real Gowth Rate 1985 1990 (Z) (2) Units (Eat.) (Proj.) 19. 196d5 195-W90 GCI /a 1985 IL bil 27514.0 35879.0 5.8 5.1 5.4 Apiciltue " 4748.0 5667.0 3.5 2.8 3.6 Inusaty " 7899.0 10590.0 9.3 5.5 6.7 Services " 13123.0 17000.0 5.8 4.4 5.4 Ctonmti " 22334.O 29U59.0 4.8 3.5 5.5 Find invesait 5169.0 7225.0 3.B 10.9 7.0 Exports of goods (fob) Curr S nil 8255.0 11645.0 34.6 10.1 4.4 Imports of goods (D ll230.0 150D0.0 18.0 7.2 6.4 Trae balare -2975.0 -3355.0 Workers' remitta 1714.0 1680.8 Curreut accmxt balwe -1013.0 -1148.0 Ratio. Invesumit/GIP Z 19.4 23.0 Dmietic savirgs/GEP 1 16.0 21.0 VDorts of goods/G1P X 15.0 16.0 Current sct. deficit/GIP Z 1.9 1.6 Dibt service ratio /b X 34.7 33.0 Public fixed imuwestznt total fixd investet Z 58.8 56.5 /a At .mket pricee. Cawnts are expressed at factor cost. /b Total debt service (excludirg short-ter.o)/exports of gpods and NFS plus workers' ramittanes. Source: STO, Bank eat intes.  - 8 - 21. Achievement of these growth rates will depend primarily on the performance of agriculture and manufacturing. This in turn will depend to a large extent on the Government's determination to constrain the growth of the public sector in line with resources and to create a more favorable investment climate for the private sector. This translates into a projected real growth in public fixed investment of about 3.9 percent p.a. on average for the 1987-90 period. In light of the developments in 1985 and 1986, this implies a much tighter control of public investment. The comparable figure for the growth of private fixed investment is 10.6 percent p.a. The projections allow for a modest increase of per capita consumption of slightly above 3.0 percent p.a. on average over the period 1987-90. 22. Merchandise exports are projected to grow at an average rate of 6.9 percent per annum in real terms during 1987-90. This assumes the maintenance of a realistic exchange rate, further import liberalization and the ability of Turkish exporters to take advantage of higher expected growth in the OECD market. Merchandise imports are projected to grow at an average annual rate of about 6 percent. This is consistent with the import liberalization program of the Government. On these assumptions, the current account deficit is projected at $1.1 billion in 1990 as compared to an estimated 1985 figure of $1,013 million. The projected capital account would remain manageable throughout the period, even in the face of some sharp increases in amortization payments arising from the debts rescheduled during 1978-80. 23. The medium-term scenario presented above is, of course, only one of many possibilities and is used specifically to illustrate Turkey's potential in the light of the Government's own development strategy. Given Turkey's progress in the structural adjustment program, the favorable response which this has evoked from the international financial community, and the present outlook for both lower oil prices and a decline in interest rates, the GNP growth projected in the medium-term base case scenario could be exceeded if export growth is higher than assumed and there is an improvement in the mobilization of public resources. 24. In view of the sensitivity of the projections to the assumptions regarding export growth, a downside risk case has also been developed. With Turkey's export performance heavily dependent on exogenous factors, a slower growth of merchandise exports (an average of under 5 percent p.a. over the 1987-90 period) coupled with lower mobilization of public resources (3 percent lower revenues than envisaged under the base case scenario) would lead to a more difficult but still manageable balance of payments situation, a lower GDP growth and a higher debt service ratio. In such a situation the Government would have less chance of absorbing the unemployed and improving tangibly the average standard of living. However, if the Government in such circumstances were to resort to a high growth strategy, then it could witness a repeat of the situation which prevailed in the 1970s which led to a debt crisis. It is unlikely that the Governrent would risk such a situation. It is therefore more probable - even if exogenous developments are unfavorable - that the Government would continue with the structural adjustment program as implemented to date.  -9- External Debt and Creditworthiness 25. At the end of 1978, Turkey had $7.2 billion in short-term debt and $7.0 billion in medium and long-term debt. Between 1978 and 1980, Turkey rescheduled some $9.2 billion of outstanding obligations through a series of rescheduling arrangements concluded with official and commercial creditors. Following the resolution of the debt crisis, inflows were mostly from official sources - OECD countries, the World Bank and the IMF. Since 1983 commitments from commercial banks nave outstripped those from official sources and have reached an estimated level of $2.4 billion by end-1985. Of the estimated total debt outstanding of $25.4 billion (including IMP) at end-1985, medium and long-term debt accounted for about 74 percent. Short-term debt as a percentage of total debt outstanding fell from 51 percent in 1978 to about 11 percent in 1982, then increased to an estimated 26 percent in 1985. Much of this growth in the stock of short-term debt is due to the inflows associated with the Dresdner Bank scheme. I/ At end-1985, the outstanding liabilities associated with the Dresdner scheme amounted to $2.7 billion, constituting 40 percent of short-term external obligations. Inf lows from the Dresdner scheme have been steadily growing with few withdrawals, which is clearly a reflection of increased confidence in the Government's economic policies. The Government is sensitive, however, to the build-up of short-term debt and intends to limit its share of total debt in the medium term. Based on the growth scenario outlined in paras. 19-2i, debt outstanding and disbursed as a percentage of GDP is projected to fall from an estimated 46 percent in 1985 to 43 percent in 1990. This translates into a forecast of total debt outstanding in 1990 of $34 billion, with short-term debt constituting about 26 percent of the total. 26- The debt service ratio for medium and long-term credits increased from about 26 percent in 1984 to an estima,ed 31 percent in 19S-5, mostly as a result of Large repayments of rescheduled debt falling due- Debt service obligations are expected to be on average about $4.3 billion a year durinig 1986-90, a quarter of which is attributable to service obligations on rescheduled debt. However, the debt service ratio is projected to decrease to about 25 perceut in 1990, due largely to the projected rate of export growth. The debt burden should remain manageable provided current policies are successfully implemented, the export drive is sustained, and Turkey continues to receive support from international commercial and official sources. Confidence in Turkey's overall economic performance, its stable record in meeting debt servicing obligations and its improved debt management, encouraged commercial banks to commit about $1.9 billion of medium-term credits in 1985. Through August 1986, about half of the $1.5 billion borrowed from comnmrcial banks consisted of medium and long-term loans. Several major Zmerican, European, Japanese and Middle Eastern banks have been involved in these operations. lf Under this scheme the Dresdner Bank collects deposits f-om Turkish workers in West Germany and auttomatically places these funds at the disposition of the Central Bank of Turkey, which guarantees the deposits and pays an interest rate commensurate with the Euro-market rate.  - 10 - 27. Turkey's economic program has been supported by the IMF through a series of standby arrangements during 1980-84. The Government did not ask for a new standby in 1985. The Government's decision seems to reflect the view that the favorable economic developments in 1985 indicate that Turkey has "graduated" from the IMF's program and that the IMF presence through Article IV consultations and periodic staff visits to review the economic performance should suffice for purposes of maintaining international confidence. PART II - BANK GROUP OPERATIONS IN TURKEY 28. Through September 30. 1986 the Bank and IDA have lent $7,398.4 million 1/ to Turkey, through 103 projects. Agriculture accounts for 21 percent of the funds lent, industry and DFCs for 21 percent, power for 18 percent, structural adjustment and program loans for 27 percent, and urban development, transportation, education, tourism and technical assistance for the remaining 14 percentt. Disbursements for all sectors combined averaged 63 percent of appraisal estimates at the end of September 1986, which compares favorably with other countries in the region. As of September 30, 1986, IFC comiitents to Turkey totalled about $256 millicn, of which about $81 million were still held by IFC. Annex II provides a sizmuary statement of Bank loans, IDA credits and IFC investments as of September 30, 1986. 29. Bank lending is aimed at supporting Turkey's medium-term objectives of restructuring the Turkish economy by placing more reliance on market forces and adopting a more outward-oriented strategy. The main vehicle for the Bank's operational discussions with the Go-rernment has been the structural adjustment lending (SAL) program, which was completed in June 1984, and more recently the sectoral adjustment lending program. Significant progress has been achieved in the last five years, but the task of restructuring is by no means over. The current Five Year Plan involves the broadening and deepening of the adjustment process at the sectoral level. Recent economic developments have underlined the need for a continuation of the stabilization program without giving up the goals of sectoral adjustment. Hence the emphasis of Bank lending in the post-SAL period will continue to be on striking an appropriate balance between sectaral adjustment lending designed in part to be quick disbursing and supportive of policy reforms in the major sectors, and carefully formulated project lending focussing on high priority projects principally in the agriculture, energy, industry and transport sectors. 30. A series of sectoral adjustment loans for the major sectors is plnned over the next few years. A first loan for agriculture was approved in June 1985. A financial sector adjustment loan approved in June 1986 is the second of the series. Further lending of this kind would support measures to enhance the utilization of industrial capacity in the public and private sectors, keeping in view the scope for the "privatization" of publicly-held assets in the manufacturing subsectors. Other sectors where sectoral adjustment loans are likely to be developed include energy and transport, and it is expected that there would be a follow-up loan in agriculture. 1/ Net of cancellations.  - 11 - 31. Project lending, which would continue to make up the majority of the lending operations, would be designed to support and strengthen the adjustment process. Some project lending would be earmarked for the construction or rehabilitation of key projects in the energy sector. Other projects would be guided by the major policy objectives of the Government, which include generation cf foreign exchange (including improving productivity in export industries and providing essential infrastructure for exports), improvement of institutional efficiency, non-inflationary output growth and amelioration of the social costs of adjustment (including provision of social infrastructure and employment generation, with some emphasis on the least developed provinces in Eastern Turkey). 32. IFC has invested in synthetic yarns, textiles, pulp and paper, glass, aluminum, cement, iron and steel products, heavy diesel engines, motor bicycle engines, piston rings, food processing and tourism. It has also invested in the Industrial Development Bank of Turkey (TSKB) and provided guarantees for overseas contracting firms. In addition, IFC is currently providing technical assistance to the Government with respect to the development of the capital market and a regulatory framework for leasing. 33. This would be the third loan to Turkey presented to the Executive Directors in this fiscal year. Other proposed loans being processed include water supply and sewerage and urban development projects, and an energy sector adjustment loan. 34. Turkey's debt burden is projected to remain manageable throughout 1986-89 (paras. 25 and 26). The Bank Group's share of Turkey's total external debt was 14 percent in 1984, is estimated at 14.4 percent in 1985, and is expected to grow to about 18 percent by 1989. Official debt outstanding is projected to increase from $11.0 billion in 1984 to about $14 billion in 1989 and private medium and long-term debt outsL iding is projected to increase from $5.2 billion in 1984 to $7 billion in 1989. The Bank group's share of total debt service payments is projected to increase from about 13 percent in 1984, to about 17 percent in 1989. PART OII- NON FORMAL VOCATIONAL TRAING 35. Turkey's economic development strategy adopted in 1980 entails giving an increased role to market forces and promoting export-oriented industries, particularly in the private sector. This strategy, with its emphasis on improving industrial efficiency, has major implications for human resource development. In the process of supporting and modernizing export-oriented and technology based industries, constraints posed by shortages of skilled and technical manpower can result in a slower rate of innovation, problems in quality control, poor plant maintenance, and hence lower levels of productivity. Manpower projections prepared for the Industrial Schools Project (Loan 2536-TU) show that the supply from the formal vocational school system will meet approximately 86 percent of the estimated labor demand for skilled and semi-skilled manpower in the industry sector over the period 1985-95. The combined output from the industrial schools and the apprenticeship training system, even after the strengthening of the latter under the proposed project, would still fall short of the projected demand for skilled industrial manpower over the same period.  - 12 - 36. Turkey's structural adjustment program has placed a premium on the retraining of workers to match the requirements of the priority sectors, e.g. export industries. Inadequate skill levels have been identified as a key ingredient in the country's unemployment problem. A manpower survey conducted in 1984 by the State Institute of Statistics (SIS) showed that approximately half of the total registered urban unemployed have only primary education or less. By contrast, the second lowest rate of 'uemployment (7 percent) was found to be amongst the graduates of the vocational training schools run by the Ministry of Education, Youth and Sports (MOE). At present, 45 percent of pupils drop out at the end of primary education. Projections suggest that by 1990 less than 60 percent of the 12-17 age group will be in school. These children lack the basic skills which would allow them to gain employment, and given their limited general education, many well be only semi-literate. The MOE has launched three major initiatives to address some of these problems. In 1980, a major literacy campaign was undertaken, aimed at the active population between the ages of 14 and 44 with emphasis on women, slum dwellers and agricultural workers. The MOE also provides complementary courses to upgrade education levels. In addition, for people lacking functional and employable skills, such as school dropouts, the MOE provides vocational training to enhance their ability to achieve gainful employment. The Non-Formal Vocational Training (NFVT) program is designed to provide the flexibility in course offerings, levels of training, duration and location of training necessary to address specific needs of these disadvantaged target groups. 37. The General Directorate of Apprenticeship and Non Formal Education (GDANE) within the MOE is the main agency responsible for providing NFVT in Tlurkey. This Directorate oversees a network of 59 Apprenticeship Training Centers (ATCs) and 651 Public Training Centers. The apprenticeship system provides training in about 40 trades for eight hours per week for two to four years, depending upon specialization. The Public Training Centers offer courses of 4 to 8 months duration in about 150 trades. GDANE also ensures coordination within the MOE and with other public and private bodies counducting similar activities. Formal pre-service vocational training is provided through a network of industrial, commercial and tourism vocational schools. 38. In 1985, some 900,000 persons participated in intensive NFVT courses. This degree of participation reflects a strong commitment by both the Government and trainees and has significant benefits for the economy. A number of areas have been identified in the recently issued Education and Training Sector Survey 1/ for improving the effectiveness of the NFVT system. Expansion of the apprenticeship training system, improving the quality of instructors through in-service training, improving the quality and relevance of curricula currently used in NFVT and provision of appropriate equipment and pedagogical materials in these institutions are some of the critical needs of this subsector that the proposed project is designed to address. 1/ IBiD Turkey Education and Training Sector Survey (Report No. 6249-TU), September 1986.  - 13 - The Bank's Role in Edueation and VocationalTrinin 39. The previous three Bank loans in the education sector have supported Turkey's industrial training program. The first Education Project of $13.5 million (748-TU) signed in 1971 assisted 32 four-year formal industrial schools, the Technical Teacher Training College in Ankara, the Educational Science Equipment Center, and the Education, Film, Radio and Television Center. The Project Performance Audit Report (PPAR) No. 4018 (dated June 28, 1982) noted the good educational impact of the project, with enrollments reaching the levels as anticipated at appraisal. While serious problems were noted in the design and construction of new buildings, these issues are not relevant to the current project which does not include construction of new facilities. The PPAR also noted the difficulties encountered as a result of the lack of a project implementation unit (PIU). A PIU established in the MOE under the Industrial Schools Project (Loan 2536-TU) is now functioning well and will be strengthened further in the proposed project. The second loan of $36.8 million was approved in 1984 for an Industrial Training Project (Loan 2399-TU), which aims at establishing post-secondary technican training under the Council of Higher Education and providing in-service training for technicians through the Industrial Training and Development Center. It also includes fellowship training for staff of the State Institute of Statistics responsible for the compilation and analysis of data. The third loan, made in 1985 for the Industrial Schools Project (Loan 2536-TU) for $57.7 million, supports priority industrial training programs by assisting 39 industrial schools and by strengthening the capacity of the MOE to manage the vocational training system. Implementation of both of these projects is proceeding satisfactorily. 40. As the manpower requirements of a modernized industrial sector as well as the problems of unemployment have increasingly become a priority for the Government, a broader range of skill training areas has emerged for potential Sank lending. The Bank's recent Education and Training Sector Survey (para 39), prepared in close colaboration with the Government, identified as a critical issue the need to improve NFVT in order to enhance employment opportunities for the less educated and under-privileged groups. PART IV - THE PROJECT 41. The proposed project was identified in September 1985 and prepared by the Government with the assistance of a Bank preparation mission in December, 1985. The project was appraised in April 1986. Loan negotiations took place in Washington DC from November 3 to November 7, 1986 with a Turkish delegation led by Mr. Hikmet Ulugbay, Chief Counselor for Economic and Commercial Affairs of the Turkish Embassy, Washington, D.C. and including representatives of MOE, the State Planning Organization and the Undersecretariat of the Treasury and Foreign Trade. A report entitled "Staff Appraisal Report - Turkey: Non-Formal Vocational Training Project" (No 6360-TU) dated November 12, 1986 is being circulated separately to the Executive Directors. A summary of the proposed project is provided at the beginning of this report and Annex III contains supplementary project data.  - 14 - Project Objectives 42. The proposed project has two main objectives: (a) to increase and improve the supply of well-trained labor for manufacturing industries; and (b) to improve employment and income generation opportunities for disadvantaged groups. These objectives would be achieved by improv4ng the quality of NFVT programs and enhancing their relevance to labor market needs, and by expanding the number of training places in various institutions such as the Apprenticeship Training Centers (ATC) and the Public Training Centers. Project Description 43. The proposed project consists of the following main components: (a) provision of training equipment and minor civil works for NFVT institutions to re-equip 16,600 existing places and equipping of 16,300 new places within existing facilities; (b) assistance for training program design and development, to improve the effectiveness of the in-service instructor training system, to strengthen vocational training programs through improved training needs assessment, program design, instructional materials development, skill testing and certification, and the evaluation and development of entrepreneurship courses; and (c) Introduction of about 200 Production Revolving Funds (PRFs) established for the purchase of consumable materials for NFVT institutions. Assistnce to NFVT Instutions 44. To enable the MOE to respond rapidly and flexibly to changing local and national labor market needs, the provision of training equipment and minor works for NFVT institutions would be implemented in three phases. Under the proposed approach, each phase would include several sub-projects which would mainly comprise the provision of equipment and minor works for an NFVT institution. The MOE has already prepared the first phase program consisting of a set of sub-projects estimated to cost about $12 million and these have been reviewed by the Bank during appraisal. The MOE would continue to be responsible for the identification and preparation of sub-projects for the second and third phase, using agreed criteria (para.55). As a result of the project, total enrollment in MOE institutions is expected to increase by about 85,000, producing some 60,000 additional graduates annually from 1994. 45. The proposed project would also provide minor refurbishment and training equipment to 40 Public Training Centers (see map) in the first phase, adding about 120 more centers in its subsequent two phases. The centers included in the first phase are located mainly in major industrial areas (301) and in areas of eastern Turkey (70%) where availability of facilities has been below national averages. Programs to be assisted in these centers would increase the employability and income generation opportunities amongst groups with  - 16 - 50. To improve the employability of NFVT graduates, ODANE would develop skill standards and certification procedures. The information collected through training needs assessment studies would be translated into programs conforming to industry occupational standards. National certification standards based on objective performance criteria would be developed with the participation of employers. The NFEI would prepare these guidelines and would train instructors to test skills and assess performance. The proposed project would provide technical assistance and fellowship for this component. 51. The MOE would also develop an information system for the graduates which would assist them in finding appropriate credit facilities and advisory services for those who wish to start their own businesses. The proposed project would provide specialist services to establish entrepreneurship training courses and develop cooperative arrangements with financial and extension organizations. In addition, 50 months of fellowship training would be provided to MOE staff in developing entrepreneurship development programs. 52. In order to provide feedback on the planning, design implementation and evaluation of NFVT programs, the GDANE would conduct a mid-term evaluation study during the third year of the project to include a follow-up of graduates' employment experience. This study would be completed by June 30, 1990. To assist GDANE with this study, the project would provide specialist services. Production Revolving Funds 53. Finally, the proposed project would establish approximately 200 Project Revolving Funds (PRFs) to include the initial purchase of materials for production of items for sale. Production Revolving Funds are a well-tested financial mechanism which enables training institutions to generate additional revenues through the sale of items produced while at the same time providing practical training experience. In 1985, a total of 520 PRFs were in operation within the MOE mainly in the industrial schools and vocational schools for girls. MOE is now turning its attention to the generalization of PRFs to NFVT institutions. The Government has confirmed that PRFs will be opened or maintained with adequate financing in all institutions assisted by the project. jlect on 54. The proposed project would be implemented by the MOE under the responsibility of the Deputy Undersecretary for Technical and Vocational Education. The Management Committee, headed by the Deputy Undersecretary for Technical and Vocational Education, would make the final selection of sub-projects to be included in the second and third phases. The Project Implementation Unit (PIU) established under the Industrial Schools Project (Loan 2536-TU) would act as the secretariat to the Management Committee and would serve as liason between the MOE and the Bank. The MOE, through the provincial directorates of education, would advise individual institutions about the requirements for sub-project identification, including the items eligible for project financing.  - 15 - limited access to formal education and training. A total of 22 existing trade specializations, mainly in the areas of industry, income generation activities, construction and business services would be assisted in the first phase. The additional enrollment would be accommodated in existing training centers or through the well-established policy of the municipalities of providing additional buildings free of charge, where there is shortage of workshop space. 46. In addition, the proposed project would provide training equipment to 18 ATCs in the first phase (see map) and to some 36 additional centers in its subsequent two phases. In selecting the 18 ATCs of the first phase, particular attention was given by the MOE to the links of ATCs with surrounding industries and regional development requirements. A total of 6 trade specializations (metal machining, automotive, wood working, metal working, electrical and electronics) would be supported in the first phase, which would directly serve the needs of the major export industries. These are the basic trade specializations which are most needed in the respective regions where the ATCs are located. The demand for this type of training is consequently very high. 47. The proposed project would also provide minor refurbishment and training equipment to 3 Adult Technical Training Centers (ATICs), 10 CommercelTourism Training Centers (CTTCs) and 3 Women's Training Centers (UTCs) in the first phase (see map) and to some additional 6 ATTCs, 20 CTTCs and 15 WTCs in the next two phases. These institutions are similar to Public Training Centers but with somewhat different emphasis with regard to the curriculum and types of students attracted. In order to assist the MOE with the complex procurement needs for the estimated 270 NFVT institutions (in a large number of trade specializations), the project would include one procurement specialist and fellowships for 2 procurement officers. The procurement specialist will be appointed by October 1987. Tfraiing Program Design and Development 48. The proposed project will include technical assistance to design an improved program of in-service training for instructors and to enhance the skills of existing instructor trainers. In-service instructor training would be organized in each trade specialization in selected NFVT centers. In order to upgrade, organize and coordinate the in-service training courses run by GD&NE, the proposed project would finance expert services including the design of in-service training programs for instructors in entrepreneurship development. In addition, the proposed project would finance fellowship training for 40 key instructor training staff in specific skill areas, including in-service training program design and entrepreneurship development. 49. In order to assist the NFVT program with training needs surveys to increase the relevance of training programs to labor market needs, the proposed project would provide one specialist. The NFEI would update existing programs and prepare new ones and would provide relevant staff training. The project would also finance one specialist in program design and necessary fellowship training to study both training needs assessment and program design- The proposed project would also assist GDANE to develop local expertise in developing instructional materials, including training modules. To strengthen its capacity in this area, the project would include one curriculum specialist and finance 80 months of fellowship training.  - 17 - 55. The main directorates within the Department of Technical and Vocational Education would appraise and review individual sub-project requests for the second and third phases of the Project, using the criteria agreed upon with the Bank which were applied in the selection of subprojects for the first phase. These criteria incluLde eligibility, feasibility, and the economic and financial criteria to be applied. For the next two phases, the PIU acting as the secretariat of the Management Committee would send the proposals to the Bank for approval two and four years, respectively, into the life of the project. The Bank would review these proposals to ensure compliance with the agreed criteria, and would monitor sub-project appraisal and selection processes. The Bank would selectively review progress in carrying out sub-projects to ensure that implementation has proceeded in accordance with sub-project appraisals. 56. in addition to the functions outlined above, the functions of the PIU would primarily be those of coordinating the work of implementing departments, monitoring progress, keeping project accounts and liaising with the Bank. In addition, the PIU would be responsible for procurement of goods and services, including technical assistance. The existing Project Implementation Unit will be strengthened and maintained in accordance with an agreed staffing plan and terms of reference acceptable to the Bank (see para 47). Projet Costs and Financing 57. Project costs are estimated at $71.1 million equivalent, including about $0.2 million of taxes and duties for civil works. The proposed loan of $58.5 million would finance 100 percent of the estimated foreign exchange component or about 82 percent of total project costs, with remaining costs (US$12.6 million) financed by the Government. A physical contingency allowance of 10 percent ($2.0 million) has been added to all project items in the first phase. Price contingencies amounting to $18.0 million equivalent, or 33.9 percent of base cost plus physical contingencies, assume international inflation rates of 6.8 percent in 1987 and 1988, 7 percent in 1989, 721 percent in 1990, and 4 percent thereafter. While local costs in TL are expected to increase at a faster rate, it is assumed that the Government will maintain current exchange rate policies which compensate for differences between local and foreign price escalations. Total contingencies are $20.0 million or about 39 percent of the base cost. Equipment and goods imported for use by the Government ministries are exempt from taxes and duties. Technical assistance costs for consulting services and fellowships include salaries, housing, relocation costs, subsistence, office services, language training and overheads. 58. Recurrent costs in NFVT are very low and the incremental recurrent costs generated by the proposed expansion are expected to be approximately $1.4 million equivalent by 1994. This represents approximately 6 percent of the ME recurrent budget spent on NFVT in 1985 and 0.2 percent of the entire MOE budget in that year. However, it is estimated that the profits generated by all the PRFs opened through the project would amount to $1.1 million equivalent and would therefore cover at least 75% of the estimated additional recurrent costs generated by the project.  - 18 - Procurement and Disbursement 59. Procurement (other than for technical assistance and training) would be carried out on the basis of international competitive bidding (ICB) in accordance with the Bank's guidelines, except for: (a) Refurbishment of existing centers, (mainly PTCs) and installation of equipment, estimated to cost a total of $1.8 million would be carried out by the Directorate of Investment, Establishment and Building Services in the MOE, under force account. (b) Contracts for equipment estimated to cost less than $150,000 equivalent each, which in the aggregate would not exceed $5.0 million and which would not be expected to interest foreign suppliers because of the variety of items in each contract, would be awarded on the basis of competitive bidding advertised locally, using local competitive bidding (LCB) procedures acceptable to the Bank. (c) Sundry items not exceeding $50,000 in each contract, to an aggregate amount of $1.1 million equivalent, would be purchased locally on the basis of three quotations, in accordance with the local procurement procedures acceptable to the Bank. (d) Acquisition of technical books and modules of instructional materials estimated to cost $1.7 million (including copyright and royalty payments) would be through negotiations with publishers. Government financed translation and printing would be carried out by the Ministry's own facilities. (e) Government financed consumable materials for the PREFs, to an aggregate amount of $2.8 million, would be procured through local shopping requiring at least three quotations in accordance with local procurement procedures acceptable to the Bank. Contracts for equipment would be grouped as much as possible to form bidding packages attractive to suppliers. Technical assistance would be tendered as a comprehensive package in order to ensure an integrated approach to training systems development. This contract would be awarded in accordance with Bank procedures. Table 2 depicts the procurement arrangements for the proposed project. 60. The proposed loan would be disbursed against: (i) 100l of foreign expenditure on directly imported equipment and instructional materials and for copyright and royalty payments to permit books and instructional materials to be reproduced in Turkey; (ii) 100X of local expenditures (ex-factory) for equipment and instructional materials procured through ICB; (iii) 651 of expenditures on other locally procured equipment; and (iv) 100% of expenditures for consultants services and overseas training. The project is expected to close by December 31, 1995. Disbursements against contracts for goods and services exceeding $200,000 equivalent would be made against normal  - 19 - documentation. Disbursements against contracts below that level and for force account work would be made on the basis of Statements of Expenditures (SOE6) available for examination by Bank missions. In order to facilitate timely project implementation, a Special Account, with an initial deposit of $3 million, representing about four months projected disbursements during the peak year of disbursement, would be established in the Central Bank of Turkey. Table 2: PROCUREMENT ARRANGEMENTS Total Costs of Proposed Project Components Including Contingencies I/ ($ Millions) Procurement Method Project Element ICB LCB Other Total Cost Refurbishing 0.0 0.0 1.8 1.8 (-) (-) (-) C-) Equipment 54.3 5.0 1.1 60.4 (47.2) (4.4) (1.0) (52.6) Instructional Materials 0.0 0.0 1.7 1.7 (-) (_) (1.5) (1.5) Technical Assistance 0.0 0.0 4.4 4.4 (-) (-) (4.4) (4.4) Consumable Materials 0.0 0.0 2.8 2.8 ( ) (-) (-) C-) Total 54.3 5.0 11.8 71.1 (Bank Financing) (47.2) (4.4) (6.9) (58.5) i Figures in parentheses are the respective amounts financed by the Bank Loan. Accounting and Audit 61. The PIU would maintain separate accounts for the project in accordance with acceptable accounting practice and would prepare a detailed statement at the end of each quarter reflecting project expenditures during the period. Within 45 days after the end of each quarter, the PIU would submit copies of these statements to the Bank to facilitate supervision. Project accounts (including the Special Account) would be audited by independent auditors acceptable to the Bank, in accordance with Bank Guidelines. The Bank would be provided, within six months of the end of each fiscal year, with an audit report, including a separate opinion by the auditor on disbursements against a certified statement of expenditures.  - 20 - Benefits and Risks 62. The proposed project would make a valuable contribution towards meeting critical skilled manpower shortages which constrain economic growth in key sectors such as manufacturing industries. It would significantly improve the quantity and quality of basic skill training, enhancing employment and income generating opportunities for low income and disadvantaged groups, including out-of-school youth and unemployed adults. 63. The major quantifiable benefit of the proposed project, when fully operational, would be an annual output of 60,000 additional semi-skilled workers with industrial and service skills. In addition, the proposed project would strengthen vital services and programs in the areas of instructor training, needs assessment, program design, skill testing and certification, entrepreneurship courses and evaluation, through the provision of relevant technical assistance. The income generated through PRFs will reduce the cost of financing NFVT for the Government. 64. There is some risk that the preparation of subprojects for the second and third phases of the project may be delayed. However, the MOE has successfully identified, prepared and appraised the first phase of the project. Therefore, the risk is considered minimal. PART V - RECOMMENDATION 66. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. I recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments November 18, 1986 Washington D.C.  -21- ANNEX I paRe 1ot 2 LMy - anw m PaguleutilaXz 48.8 Iillian (196) GM' Ir Uapita: t3l20 (219114) cnx kav Ansl lrx:n (9 ! G} S at UMB Hklk. Plirr (X) willic Us$ _ (kt camse 191D prica) (at currat prices) trglicator t at pric") 19Y 190-70 197075 19q75-0 19W-4 1965 1970 1975 191*1 19H W0ILOAL MZUW114 Gia. domLstic probdt 41 49.67Z 6.6 7.5 2.8 4.7 100.0 100.0 10.0 100.0 1W.0 Agricultum 9,199 3.1 4.4 2. 2.5 30.7 26.4 26.2 21.4 Il.5 liuhtry b/ 3,952 9.5 9.5 2.8 7.4 16.6 17.2 18.0 28.0 20.1 Service 24.3D 8.2 6.0 3.7 4.6 42.9 46.5 4b.0 44.3 40.9 tib.uuqcim 42039 5.8 7.0 1.7 3.2 84.6 82.8 85.2 81.8 W4.5 Grow itwwbmnt 9,929 11.7 12.9 41.1 2.5 16.7 20.1 2l.3 2b.4 20.2 Einra of jyxda mld WS 8.5Y0 7.9 7.3 4.4 31.0 6.1 5.8 6.1 7.1 17.4 laprte of goods Nl WS W,WS 11.2 13.8 -3.1 10.0 7.4 8.7 14.5 15.2 22.1 koas sational "vast 8,533 I1.6 11.9 9.8 12.1 15.H 18.8 18.1 1t.3 17.4 Sitnp Annual Incms (Xs Ceqsitian of Nercharxliwe 'rail (13 (At comtamt 1980 prcs) (ut orrt cs) 1984 1972-75 1975-0 198Wa 1972 [975 1980 1984 *X3W,11VZ TRlE 4 mewhirdise eaprts 7,124 -6.1 2.0 29.4 IlU.0 100.0 100.0 100.0 Primry 1,9S9 -6.3 4.0 L5.5 72.6 64.1 64.0 27.9 lindstrial product 5,145 -5.8 0.9 45.3 27.4 35.9 36.0 72.1 Merchandise imports 10,757 11.2 1.2 9.5 10.0 10.0 100.0 100.U Agriculture ad livestock 418 27.9 -23.B 87.1 2.2 4.3 0.7 3.9 Minii and qusrryig 271 17.4 6.8 22.2 1.2 1.6 1.5 2.5 Petrnles 3.373 5.4 11.0 -1.2 9.9 17.1 48.8 31.3 Machinery ad equipait 2,252 24.0 -12.1 18.5 45.0 35.6 18.2 2D.1 Other industricl produts 4,443 9.9 4.5 15.1 41.7 41.4 30.5 42.2 1978 1979 1980 1981 1982 1983 1984 PRICES )ND 116 tF luAu Cup deflator (1980 - 1CI 29.0 49.4 10O.0 142.1 181.8 233.3 351.1 :fhunge rate 24.3 31.1 76.0 111.2 162.6 225.5 366.7 Exort price birv 63.0 78.2 a1.0 95.8 94.4 82.6 83.6 Isprt price ibls bl.2 71.9 I1U.0 101.2 IG0.3 93.4 94.0 'rem of trade ide 102.9 108.8 IC0.0 S.? 94.1 88.4 88.9 As 2 of CDP (at curret prices) 19b5 1970 1975 198D 1984 PUILIC FINAE (entral Govenmen) ainent reims 15.U ;22.6 22.0 19.4 15.5 (Irrent a ituze 10.0 11.8 [2.6 12.1 10.1 Surplu () or deficit (-2 -2.0 -2.3 -0.4 -5.4 -4.9 lweabt expditue 4.7 5.7 4.2 3.9 3.7 Iraufers 5.U 7.5 5.5 8.7 6.6 Foreitn fiarrmcit 1.8 [.6 0.3 1.7 1.8 19b5-70 1970-75 1975 19110 Oaf ll:IRS OF grth rate (2) b.8 7.7 2.6 4.7 GP per capita grimwh rate (Z) 4.1 5.0 0.3 2.1 I11)R 2.9 2.9 5.7 4.7 nrgiml sviw ra (t) 28.2 19.5 33.8 39.0 Import elasticity 1.7 1.8 0.5 2.1 a At mat prices; cmqxcmtc ae exnsed at faccar eoa d will rott a due to erclusion of net lairact tas and aubaidies. b/ 1zc1des qMmd ,iaryiz, mmnEfcburize, I eectrcity, Pss. md wter. ci in sccoadate with Tu*dic Gcwnum&s spacificAdaw. ahidc an not empatible with SICm's.  -22- ANNIN 1 r'"is J ..f 2 s ir GMMr, .CI*IM.. 1N uilr (ehhhtirni at amat primlE, l%ip.1.tI*fl JII.4 malhin' 111151