World Bank Document€¦ · document of the world bank report no. 15513-mor staff appraisal report kingdom of morocco third private sector development project (in-service training)

Document of

The World Bank

Report No. 15513-MOR

STAFF APPRAISAL REPORT

KINGDOM OF MOROCCO

THIRD PRIVATE SECTOR DEVELOPMENT PROJECT

(IN-SERVICE TRAINING)

August 21, 1996

Human Resources DivisionMaghreb and Iran DepartmentMiddle East and North Africa Region

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CURRENCY EQUIVALENTS(As of November 1995)

Currency Unit = Moroccan dirham (DH)US$ 1. 0 = DH 8.3DH I = US$0.120

FISCAL YEARJanuary 1 to December 31 (until 1995)

January I to June 30 1996July I to June 30 (as of July 1996)

ABBREVIATIONS AND ACRONYMS

AGEF Association des Gestionnaires et Formateurs de Personnel(Moroccan Association of Human Resources Managers)

AMGE Association lMarocaine des Gestionnaires de I 'Energie (NMoroccan Association of Energy Industries)AMICA Association larocaine des Industries des Composants Automobiles

(Moroccan Association of Automobile Components Industries)AMIP Association Aarocaine des Industries Pharmaceutiques (Moroccan Association of Pharmaceutical Industries)AMITH Association Marocaine des Industries Textiles et de I 'llabillement

(Moroccan Association of Textile and Clothing Industries)CE Centre d 'Excellence (Training Center of Excellence)CES Comite d'Elaboration de la Strategie (Strategy Formulation Committee)CNA Competency Needs AssessmentCNJA Conseil National Jeunesse etA venir (National Council for Youth and Future)COD Comrit d'orientation de la demande (Demand Orientation Committee for FIAC Proposals)CSF Contrats Speciaux de Eormation (Training Contracts Reimbursement Scheme)EA Environmiental AssessmentEU European UnionFEDIC Fed&ration des Industries du Cuir (Federation of Leather Industries)FIAC Fonds Interprofessionnel dAide au Conseil (Inter professional Fund for Assistance and Counseling)FIMMNE Ftid6ration des Industries iWcaniques'kktallurgiques et Electriques

(Federation of Metallurgical Mechanics and Electrical Industries)GDP Gross Domestic ProductGIAC Groupements Interprofessionnels d Aide au Conseil

(InterProfessional Assistance and Counseling Association)ICB International Competitive BiddingIBRD International Bank for Reconstruction and DevelopmentMCI Ministry of Commerce and IndustryMF Ministry of FinanceMSI Micro to Small-sized IndustriesMVT Ministry of Vocational TrainingNCB National Competitive BiddingNS National ShoppingOFPPT Office de la Formation Professionnelle et de la Promotion du Travail

(Vocational Training and Employmenit Promotion Office)PA Professional AssociationsPSD Private Sector DevelopmentVTS Vocational Training SystemVTT Vocational Training Tax

KINGDOM OF MOROCCO

THIRD PRIVATE SECTOR DEVELOPMENT PROJECT(IN-SERVICE TRAINING)

Loan and Project Summary

Borrower: Kingdom of Morocco

ImplementingAgencies: Ministry of Vocational Training, InterProfessional Assistance and Counseling

Associations (GIACs) and Vocational Training and Employment PromotionOffice (OFPPT)

Beneficiaries: Not applicable

Poverty: Not applicable

Amount: US$11.5 millionFRF 60.3 million

Terms: Twenty years, including a five-year grace period, at the IBRDstandard Libor and Pibor interest rates respectively for the dollar loan trancheand the French Franc loan tranche.

Conmmitment Fee: 0.75% on undisbursed loan balances beginning 60 days after signing, less anywaiver.

Financing Plan: See Chapter 3, Table 5

Net Present Value: US$33.5 million

EnviromnentalRating: C

Staff AppraisalReport: No. 15513-MOR

Project ID N': 38978

I

TABLE OF CONTENTS

I. BACKGROUND .............................................................. I

A. The Economy ............................................................. IB. The Demand for Skilled Labor ............................................................. 2C. The Supply of Skilled Labor ............................................................. 4D. Government Strategy ............................................................. 7E. Rationale for Bank Involvement ............................................................ 8

II. THE PROJECT .............................................................. 10

Project Objectives and Description .............................................................. 10

III. PROJECT COSTS, FINANCING AND MANAGEMENT ......................................... 12

A. Summary of Project Costs ............................................................ 12B. Management and Implementation ............................................................ 15C. Procurement ............................................................ 15D. Disbursement ............................................................ 17E. Accounts, Reporting and Audits ............................................................ 19F. Supervision and Monitoring ............................................................ 19G. Environmental Impact ............................................................ 20

IV. EXPECTED BENEFITS AND RISKS .............................................................. 20

V. AGREEM ENTS AND RECOM MENDATION ............................................................. 21

LIST OF ANNEXES

ANNEX 1. Steps in the preparation of a draft law on in-service training ............. ................... 24ANNEX 2. Preparation of a long-term strategy and action plan for vocational training ............ 26ANNEX 3. Project impact evaluation studies: analytical approach and terms of reference ...... 28ANNEX 4. Economic analyses .............................................................. 34ANNEX 5. Project implementation and impact .......................................... 46ANNEX 6. Criteria for ranking the centers and list of Centers ................... ............................. 47ANNEX 7. FIAC Flow of Funds .............................................................. 50ANNEX 8. Selected Information in the Project File .............................................................. 52

This report is based on the findings of an appraisal mission that visited Morocco in November 1995, led by Mourad Ezzine(MNIHR), and including Mmes/Messrs. Claire Voltaire, Christine Wong (MNIHR); Jacques Mazeran, Jean-Paul Peresson,Frederic Collomb and Pierre Goldberg (Consultants). Hong W. Tan and Julia Lane (PSD) contributed to the project economicanalysis. Peer reviewers are Bruno Laporte (HDD), Joseph Bredie (AFTHR) and William Experton (LAIHR). ClaudiaPardinas is the lawyer for Morocco. Ms. Roslyn G. Hees is MNIHR Division Chief and Mr. Daniel Ritchie is MNIDepartment Director.

I

KINGDOM OF MOROCCOTHIRD PRIVATE SECTOR DEVELOPMENT PROJECT

(IN-SERVICE TRAINING)STAFF APPRAISAL REPORT

I. BACKGROUND

A. The Economy

1.01 Morocco emerged from an economic and financial crisis in the early 1980s to a relatively stablemacroeconomic environment in the early 1990s. A steady pursuit of stringent monetary and fiscal policiesreduced the budget deficit from an average of 12% of GDP in 1980-83 to 3.3% in 1993; inflation has beenkept within single digits; and the foreign debt situation improved through greater mobilization of domesticresources and external debt rescheduling. Stabilization and structural reforms have resulted in a shift fromGovernment-administered to market-determined pricing in finance and trade areas. These reforms havebrought about significant improvements in the balance of payments: current account deficits declinedsteadily from 12% of GDP at the height of the economic crisis in 1983 to about 2% in the early 1990s.Although average GDP growth was relatively modest between 1986 and 1994, 3.3% on average, Moroccowill aim for a double-digit growth of private industrial output. This would be achieved mainly through arapid growth of exports to the European Union (EU), with which Morocco has signed a free tradeagreement to be implemented over the next decade.

1.02 In recent years, however, Morocco has begun to show many signs of social and economicfragilities. Key social indicators such as literacy, primary school enrollment rates, nutritional status andaccess to safe water are still significantly lower than countries at a comparable stage of development, andare characterized by persistent regional and gender differences. Economic indicators show that grossinvestment levels have declined by four to five percentage points of GDP, urban unemployment rose to16% and, in the past three years, the budget deficit approached 5% of GDP. Export of manufacturedgoods declined by 4% in the 1992-93 period, after a growth of more than 10% per annum on averagebetween 1985 and 1992, resulting in a significant loss of EU market shares.

1.03 This deterioration in economic performance is associated not only with external and exogenousfactors, such as recent droughts and recession in the EU, but also with deteriorating competitiveness.Moroccan enterprises are inadequately prepared to counterbalance both the erosion of their preferentialaccess to the EU market and the increased competition from low-wage countries. They have been unable toquickly modernize their technologies and production processes, to diversify their production by shifting tohigher quality and value-added products, and to increase the skill requirements of their jobs. Productivity,measured in value added by workers, is generally low, and has even been declining in the textile andgarment industries', a major exporting sector. As a result, Morocco lost shares in the EU market to Asiancompetitors such as China, Indonesia and India, which achieved rapid gains in penetration, or Turkey,which consolidated its strong export performance, and Poland and the Czeck Republic, which emerged asnew competitors.

The productivity decline is most apparent in the Textile, Garment and Leather industries. Between 1985 and 1990, productivity (measured bythe real value-added per worker) declined by 6% for Morocco, while it increased by 30% for Turkey, 38% for Malaysia, and 52% forIndonesia.

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1.04 Recent economic trends were reflected in the labor market by a marked increase in unemploymnentrates. The size of the Moroccan labor force is 8.9 million, of which 4.3 million live in urban areas whereunemployment has reached 16% and affects the youth in particular. In rural areas, unemployment is lower,at around 10%, but important migration flows to large cities evidence the existence of substantialunderemployment. The increase in unemployment in urban areas results primarily from low levels of labordemand and rapid expansion of the labor force. The urban labor force has been growing at a rate of almost4% a year, driven by a population growth rate of 2.1%, and migration from rural areas as well asincreasing participation rates. While a more flexible labor market regulatory system2 would significantlypromote employment creation, it is estimated that only an acceleration of economic growth to 6-7% perannum would create enough jobs to reduce urban unemployment to around 10%.

Table 1: The Urban Labor Force by Educational Achievement and Employment Status

Labor Market Total Unemployment

Education Achievement Participants Unemployed Unemployed rate

Less than Primary Education 2,389,379 255,545 37.5 10.7

Primary Education (6 years) 619,244 133,002 19.5 21.4

Basic Education or equiv. (9 years) 377,158 93,532 13.7 24.8

Baccalaureates or equivalent 114,439 35,740 5.2 31.2

diplomas

Degrees of higher education except 135,649 41,156 6.0 30.3

Medicine

Elite Schools incL. Medicine 185,570 2,833 0.4 1.5

Higher Ed. Technical Diplomas 212,415 41,735 6.1 19.6

Vocational diplomas 237,768 77,258 11.3 32.5

Undeclared 305 -- -- --

Total 4,271,927 680,801 100.0 15.9

Source: Direction de la Statistique, Urban Labor Force Survey, 1994.

B. The Demand for Skilled Labor

1.05 Enterprises' lack of demand for skilled labor (and its correlate the soaring unemployment amongthe educated) are major characteristics of the Moroccan economy and a cause of great concern to theGovernment. Except for the graduates of the few elite schools that have restricted access quotas, higher,secondary (baccalaureate) and vocational education graduates have experienced record high unemployment

2Three aspects of Moroccan labor regulations are thought to be hindering employment promotion: (a) minimum wage policies, (b) mandatednon-wage labor costs, and (c) regulations governing hiring and dismissal (see World Bank report No. 14155 MOR for more details.) A new

labor code dealing with these issues is being prepared by the Government.

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rates in recent years, around 30%. At the opposite end of the skills spectrum, unemployment rate is only10% among the labor force participants with less than primary education, slightly lower than in 1986 whenit was 13%. This reflects the expansion of low skill and low productivity employment generated by small-and micro-enterprises, which have a low level of capitalization, use traditional production processes, orwhich operate in the informal sector. While tis expansion is thought to have helped reduce poverty, in thelong run it is likely to induce a further decline in the enterprises' ability to compete in international marketswhere Morocco's competitors are achieving rapid productivity gains.

1.06 In addition to their lack of demand for skilled labor, enterprises are reluctant to retrain theirworkers. The 1986 Moroccan Industrial Survey asked enterprises whether or not they trained theirworkers, the numbers of people trained, and how much they spent on training3. Only 195 of the 4,354firms surveyed engaged in any formal training; an incidence of 4.5%. While this incidence comparesunfavorably with countries such as Colombia, Indonesia, Malaysia and Mexico (see Table 2) the pattern oftraining is similar: micro-enterprises are the least likely, and large firms are the most likely to train.

Table 2: Percentage of Firms that Train their Workers by Firm Size

Firm Size Morocco Colombia Indonesia Malaysia Mexico(1986) (1992) (1992) (1994) (1992)

Micro (less than 15 workers) 0.66 32.9 - 9.4 5.5Small (between 15 and 100) 4.47 52.1 16.6 19.3 41.8Medium (between 100 and 250) 14.29 79.3 19.9 43.7 59.0Large (over 250) 30.60 81.3 30.9 69.5 49.0Overall 4.69 49.6 18.9 34.7 10.8

World Bank staff estimates

1.07 Enterprises' failure to hire skilled workers, and especially to retrain, results in a substantial loss ofproductivity and income for workers. Training enterprises- outperform non-training ones in many ways:they are larger in terms of output and value added, export more and are much more likely to survive. Acomparison between 1986 and 1993 Industrial Surveys demonstrates that 9 out of 10 firms which trainedin 1986 were still operating 7 years later, compared with 3 out of 4 nontraining firms. Controlling for otherobservable factors, the productivity of training enterprises is 37.1% higher and their workers tend to earn28% more than in enterprises which do not train [see economic analysis im para. 3.08 and Annex 4]. Theseresults suggest that short, flexible and company-specific in-service training is a major instrument to buildenterprises' competencies. In fact, although many Moroccan enterprises and particularly the micro- andsmall-sized industries (MSIs) do not always require a high proportion of technicians, nonetheless, productquality, and adaptability to changing client requirements, are critical and will determine theircompetitiveness4. If they are to remain competitive, they need to adapt and reinforce their competencies in

This survey is the only one of its kind that asked such questions. The low incidence of training among finns has been evidenced by anothersurvey conducted among 300 enterprises in 1994 by the Association des Gestionnaires et Formnateurs de Personnel (AGEF, Casablanca1994.)

4The private sector is predominantly made of micro-less than 15 employees-and small indusgries (between 15 and 100 employees), whichrepresent 49% and 39% of the total number of fums respectively. The recent development of temporary employment suggests that, even whenexport-oriented, their strategy is to obtain profit through cost compression rather than technological superiority. The garment industry is a

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a broad range of technical occupations, as well as in basic management techniques, product standards(norms, packaging, conditioning...), quality management, and even in remedial training in basic education,foreign languages, attitudes and communication skills.

1.08 Moroccan enterprises' failure to retrain is related to two main reasons. First, MSIs, which arepredominant, rarely retrain their workers because they are less likely than large firms to access informationon training. As a result, they are either unaware of the productivity-enhancing effect of training or do notknow how to train5. Their professional associations (PA), which in other countries provide assistance indefining and implementing sector training strategies, have just started to develop and gain representativity6 .Second, many enterprises claim that they cannot afford to retrain their workers. Since 1974, Morocco hasa Vocational Training Tax (VTT), which is a 1.6% levy on total payroll earmarked to one public trainingagency, the Office de la Formation Professionnelle et de la Promotion du Travail (OFPPT.) Payrolllevies have proved to be most successful in middle-income countries in the initial stages of developingenterprise-based training by providing an effective incentive to avoid sub-optimal provision of training.Moreover, payroll levies put little burden on scarce budgetary resources. In Morocco, however, theearmarking of this tax to a single public training provider is a source of inefficiency, and inhibits in-servicetraining among enterprises by inducing a mentality of delegating responsibility to OFPPT, and reducing thewillingness of industry to take responsibility of its own vocational training initiatives. Another reason fornot training is that there are economies of scale in training, and small enterprises which only want to trainone or two workers find the cost too high.

C. The Supply of Skilled Labor

1.09 After independence, the Government of Morocco made a strong commitment to improve theeducation of the population. The main characteristics of the education and training sector are: (i) publicprovision through a highly centralized system; (ii) free access to all levels of public education; and (iii) highbudget outlays, by international standards. Private provision of education is essentially an urbanphenomenon addressing the needs of the well-off population. It is therefore small, except in vocationaleducation where it represents almost half the total enrollment. While significant progress has been achievedsince independence, enrollment levels remains insufficient by middle-income countries' standards, assuggested by in the labor force's low level of educational attainment and the excessive number of dropoutsfrom basic and secondary education.

1.10 The vocational training sector, with an enrollment of 120,000, represents one fourth of the totalsecondary education enrollment, and is the main source of skilled-worker training and retraining. Since theskilled-worker requirements of enterprises and their demand for customized training have been weak,training providers have tailored their services to the demand for pre-employment training of the largecohorts of out-of-school and unemployed youth. Training programs are mainly center-based and targetedtoward urban formal sector jobs. Both public and private institutions have been successful in attracting

typical example, squeezed between the higher technological levels and labor efficiency of Europe, and the lower labor cost of some of the newlyindustrialized countries.

For a broader discussion of the determinants of training in a number of developing countries see Enterprises Training in Developing Countries,Hong W. Tang and Geeta Batra,The World bank 1995.

The conclusions of a Bank managed study of the PAs point out that while aware of what is at stake, the PAs have very limited operationalcapacities, their functioning lacks transparency, and they have adopted a wait-and-see attitude toward the Government.

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their target clientele. The private training institutions have seen a very fast growth; their capacity hasincreased fourfold during the last decade, reaching 40,000 students in 1995. The training capacity of theOFPPT has grown from 20,000 students in 1984 to 44,000 in 1995.

1.11 Although the existence of a large informal sector distorts the results of the labor market surveysand may exaggerate the unemployment rate for vocational training graduates, there is ample evidence fromvarious sources that those graduates are increasingly facing insertion difficulties. Tracer studies carried outby the Ministry of Vocational Training (MVT) indicate that about 50% of the graduates --whether frompublic or private institutions-- remain unemployed nine months after graduation and that this search periodis getting longer7. Other surveys carried out by the Conseil National Jeunesse et Avenir (CNJA), anindependent think-tank, suggest that unemployment rates of VT graduates are actually lower than indicatedby the labor market surveys, but confirm that they have a search period much longer than for the averagejob seeker. They also suggest that VT graduates have high expectations when they start looking for a jobbut after they get a more realistic perception of the labor market, they lower their expectations, or acceptjobs unrelated to their initial skills. While these surveys do not show significant mismatches betweendemand and supply of skills, their findings indicate that the number of graduates exceeds the currententerprises' absorption capacity, and that any further capacity expansion will be economically inefficient.

1.12 The private training sector. The national training policy has been to provide neither incentives norbarriers to the development of the private training sector (proprietary institutions) beyond basic safetyregulations enforced by the municipalities. There is no formal accreditation system nor information oncurricula. There are about 800 private training schools, all are profit-seeking, operate in service-orientedtrades, and focus on pre-service training. The Government objective is to entice the private training sectorto expand further and invest in technology-oriented vocational schools, which require heavier capitalinvestments. But this is unlikely to occur without significant resource transfers from the State to theseproprietary institutions because the potential for full cost recovery is low. Among students reaching upperbasic education, those oriented to pre-service VT demonstrate lower academic achievement than thoseoriented to general secondary. Such lower achievement is correlated with lower socio-economic status,suggesting that VT students come disproportionately from poorer families.

1.13 The OFPPT. Besides its graduates' insertion difficulties, OFPPT lacks a long-term vision and ishampered by a centralized and rigid structure. OFPPT is a well-financed Government agency under theaegis of the MVT, with a tripartite --Government, enterprises and labor-- Goveming Board. A majority ofits operating funds come from the VTT, which is considered by the enterprises as a private source,. Itstraining strategies have mainly served the Government's social priorities but in recent years there has beena shift in those strategies --away from the objective of expanding capacity toward addressing the trainingrequirements of employers-- through the implementation of a two-pronged approach aimed at:

These estimates are to be used with caution since the design of the survey gives incentives for those unhappy about their employment to declarethemselves unemployed, hoping that this would help them find a job in accordance with their expectations. Private sector graduates have aslightly higher insertion rate than public sector graduates (58% remain unemployed nine months after graduation against 60%). However, theirdifference is also to be interpreted with caution because the graduates of the private sector live in urban areas, are employed mainly in thecommerce and trade sectors and, in particular, come from the well-offsocial group.

The Govemment contribution to the operating expenditures of OFPPT represent s 0.3% of total Government consumption (total Governmentoperating expenditures less debt service and transfers) and 0.8% of its capital expenditures. For comparison purposes, the Ministry ofEducation's budget represents 3 5 % of Government consumption and 10% of its capital expenditures.

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(a) creating links with enterprises at the training center level. This is being achieved by, first,the creation of a steering committee within each center, which includes a majority of privatesector representatives and has a consultative role on training programs, curricula, andexaminations, and second, by diversifying the number of training streams to cover a largerspectrum of enterprise-specific skill needs (in 1994 the number of streams reached 130); and

(b) introducing more flexibility in the use of the VTT. A scheme that partially reimbursesenterprises that carry out in-service training activities, the Contrats Speciaux de Formation(CSF) was introduced to provide incentives for enterprises to retrain their workers. Whileimplemented through OFPPT's administration, the CSF is independently managed by aprivate-public committee selected from, and supervised by, OFPPT's Board.

1.14 There is a consensus among OFPPT's board that these strategic options are right. However, boththe enterprises' and government representatives are concerned about the poor results on the ground andacknowledge that a major upgrading of OFPPT centers' govemance, curricula, and technologicalequipment is necessary to make them more responsive to enterprise training requirements. The involvementof employers at the level of the centers has been constrained primarily by the centers' lack of managerialcapacity, insufficient autonomy, as well as inadequate incentives for staff. The increase in the number ofstreams has led to excessive specialization of the graduates. This turned out to be a disadvantage on thelabor market, as well as too costly to implement because technology is increasingly complex, and thetraining needs of the enterprises are rapidly changing. Moreover, replacement of obsolete trainingequipment has been insufficient as a consequence of the heavy investments in capacity expansion of the late1980s

1.15 Finally, little has been achieved in terms of creating a balance between pre-employment trainingand upgrading of the existing labor force. The development -of the CSF scheme was hampered by lack offunds (3% of the OFPPT budget in 1994) in comparison with the allocation to the pre-service trainingactivities, low ceilings on the cumulative amount that can be reimbursed annually to a given enterprise, anda centralized operational structure. More importantly, the development of the CSF scheme presents risks toOFPPT's financial stability. Since the CSF is funded by the VTT, and the VTT is earmarked to financeOFPPT, the reimbursements made by the CSF to the enterprises are in fact deducted from OFPPT'sbudget.

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Table 3: OFPPT's Financial Resources (in Million current DH)

Average Annual1990 1991 1992 1993 1994 Increase (%)

Training Capacity 41,300 41,700 42,100 42,250 43,900 1.5Total Investment 139.9 156.5 165.5 211.8 178.8 6.3of whichGovernment contribution 113.0 144.1 148.3 181.4 145.5 6.5Grants 26.9 12.4 17.2 30.4 33.3 5.2Operating Resources 367.7 390.9 470.6 476.9 527.3 9.4of whichPayroll Tax 248.3 295.6 352.3 356.7 379.5 11.2Government subsidies 85.0 69.2 70.0 81.9 100.0 4.1Grants 31.5 23.7 43.8 33.5 40.1 6.3Miscellaneous 2.9 2.4 4.5 4.8 7.7 28.0

D. Government Strategy

1.16 The Govermment of Morocco is committed to transform its training system into an effectiveinstrument to promote labor productivity, especially for smaller enterprises. This would help foster labordemand, alleviate poverty and contribute to the development of the private sector. This would be achievedwhen most vocational training is planned, delivered and financed by employers.

1.17 Shifting responsibility and resources for training to the private sector requires a realistic andgradual reform process. Private enterprises have not yet demonstrated a very active involvement in trainingand the proprietary institutions are unlikely to diversify into technology-oriented trades. Moreover, aneffective public training system is still necessary because the public programs are, at the moment, the onlyproviders of technical training, and because they usually provide the basic skills on which further job-specific training can be structured. Finally, more radical reforms of the training system depend on broaderreforms of the funding and governance of the education and training systems. Although there iscommitment at the highest level of the State to eliminate the principle of "free of charge" education andtraining (which would provide a strong incentive to the private training sector), the Government isproceeding carefully in order to build political consensus and, in the medium-term, only limited costrecovery can be envisioned9.

1.18 Within this political framework, the MVT has made the development of in-service training itspriority in order to respond to the urgent need to upgrade the existing labor force, expand the resourcesavailable for skill development and, since in-service training is less politically sensitive than other forms oftraining, experiment and demonstrate a number of innovative and demand-oriented policies. These policiesare to:

9King Hassan II has made public these orientations in a number of speeches. In 1994, he initiated a parliamentary debate on education toaddress the problems in a more comprehensive manner. This debate was soon suspended as it was deemed inconclusive and toopoliticized. More recently, in October 1995, a policy note on education and training prepared by the Bank at his request was widely

disseminated, and gave rise to a national debate in the media.

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(a) integrate training as an important component of enterprise development strategies bystressing the importance of identifying competency needs, retraining of workers, andpooling training resources to realize economies of scale;

(b) increase the resources allocated to in-service training, with special emphasis on MSIs.As in-service training is provided through a market-oriented framework, this wouldpromote competition among training institutions and boost the private training sector;

(c) initiate further reforms of the VTT by clarifying operational and financial roles withregards to in-service training, and by reinforcing tripartite management (enterprises,labor and Government). A law would be promulgated to that effect (see para. 2.05);

(d) reinforce the responsiveness of the public training system and promote the emergence of agreater diversity of training providers. In January 1996, the Ministries of Finance andVocational Training issued a joint decree [Section 2.15 of Implementation Volume] whichsubstantially increases the autonomy of OFPPT's centers and provides a regulatoryframework for the centers and their staff to supplement their resources with the proceedsof training contracts negotiated with enterprises. In the medium-term, those public centerswhich would achieve a strong commercial orientation, high level of managerial andfinancial autonomy, and links with enterprises, could be "transferred" to the private sectorthrough a variety of formulas, such as the private concessions which are being cautiouslyexplored by the Government. A private concession, in the textile industry, has beencreated and is privately managed by the corresponding Professional Association. Themajority of its investments and equipment were provided by the State, but it is facing anumber of difficulties because Morocco lacks an adequate legal framework for the transferof public funds to privately operated educational institutions.

E. Rationale for Bank Involvement

1.19 In June 1994, the Government set up an advisory committee composed of policy makers, privatesector leaders, and the Bank, with a mandate to prepare an agenda for Private Sector Development (PSD).This agenda defines four main axes of action: (i) to establish a market-based financial system and developcapital markets; (ii) to promote private sector participation in the development of basic infrastructure andservices; (iii) to improve the skills of the labor force and remove restrictions on the labor market; and (iv)to enhance the competitiveness of the private sector in anticipation of the Free Trade Agreement with theEU.

1.20 In response, the Bank set up a program of lending and non-lending services (the PSD program)which covers the four core areas of the Government's PSD agenda. Bank intervention in vocationaltraining is therefore an integral part of the Bank's PSD program, and one of the pillars of our countryassistance strategy. It would contribute to:

(a) create a synergy between several components of the program. The PSD prograrn includescomponents which aim at inducing enterprises in acquiring new technologies and

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modemizing their manufacturing processes'0. In-service training is an integral part of thisprogram because the low-skilled workforce would not be able to adopt these newtechnologies. Conversely, this training project would rely on other components of theprogram to identify the enterprises and sectors in which training should be developed on apriority basis for competitiveness considerations;

(b) provide the necessary catalysis between the Govemment, the private sector and bilateraldonors, particularly the EU, to build support for further reforms of the vocational trainingsector; and

(c) provide the expertise needed for institutional development, particularly for the formulationof training policies and the analyses of the impact of training on enterprisecompetitiveness.

1.21 In addition, the policy framework proposed by the Govemment is consistent with the Bank'sobjectives for the sector, although less ambitious in its timing than what the Bank would recommend. TheMoroccan economy is not sufficiently advanced so that total deregulation of VT financing and deliverycould be envisaged without risking to depress growth through shortage of skills. What the Bank has beenrecommending is that the contribution to the public training sector through the VTT and State budget beprogressively reduced and replaced by an altemative demand-driven financing scheme, such as a tax rebatescheme or a training fund. Such a scheme would curb the expansion of pre-service training provision inline with labor market demand, and leave the public sector with no alternative than to sell training serviceson the market, which would assure that training programs are responsive to enterprise needs. As regardsthe role of the private sector, international experience suggests that different but equally valid strategies canemerge from similar contexts depending on social and economic perceptions, as well as economic growthpatterns. Morocco's strategy seeks to strike a balance between the educational demand of a rapidlygrowing youth population and economic efficiency by promoting the emergence of comprehensive public-private partnerships, through various financial incentives to train, and the representation of the privatesector in all institutions dealing with VT. The public-private partnership aims at achieving more efficienttraining delivery modes while ensuring high participation rates and financial stability to the sector.However, the Govemment still needs to develop a detailed action plan for its strategy, and has requested theassistance of the Bank. The Bank has assisted with the development of a strategy formulation process (seeAnnex 2) has agreed to include the cost of the necessary technical assistance among the activities to befinanced by the project, and will continue to provide its advice on sector policy issues.

10In particular, the Industrial Infrastructure Project, which is under preparation, would promote new technologies, and would develop a new

system of standards and certification for the industiy. On the other hand, the on-going Enterprises Competitiveness Study would identify"clusters" of competitive industries and make recommendations on strengthening their long-term viability in the context of the forlhcoming freetrade agreement with the EU. Finally, an on-going labor market study ainm at identifying key policy options that may facilitate laborabsorption. The field surveys for these studies are in progress and the first results are expected by the end of 1996.

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II. THE PROJECT

Project Objectives & Description

2.01 Objectives. The project would improve enterprise competitiveness, retraining of the work force andupgrading of its skills. To maximize the impact of training, the project would:

(a) strengthen the capacity of professional associations and enterprises to define the skills theyneed to implement their business development strategies, with particular emphasis onmicro- and small-sized enterprises;

(b) introduce incentives for enterprises to develop in-service training;

(c) promote the responsiveness of selected public training centers which cater to the privatesector; and

(d) create an adequate legal framework for the development of in-service training andstrengthen the institutional capacity of the MVT.

2.02 Description. To achieve these objectives, the project would have the following four components:

2.03 Promotion of demand for training (6% of total base costs). This component would support thedevelopment of non-governmental inter-professional organizations (Groupements Interprofessionnelsd'Aide au Conseil, GIACs) which are being created by professional associations and federations, with themandate to inform enterprises on the importance of integrating in-service training as one of the key factorsto their competitiveness and to assist them in the definition of their skills needs. The project would supportthe start-up and operating costs of three GIACs as well as provide them with the required technicalassistance to develop their services to enterprises. These GIACs" would have access to a scheme (FondsInterprofessionnel d'Aide au Conseil, FIAC) to be established under the project, which would finance aportion of the consulting services contracted by enterprises to carry out their competency need assessments(CNA.) The FIAC would be managed by a Demand Orientation Committee (Comite d'Orientation de laDemande, COD) composed of representatives from the MVT, the Ministry of Finance (MF) the Ministryof Commerce and Industry (MCI), the presidents of the GIACs, and another representative of the privatesector designated by the President of the COD. Both the GIACs and the FIAC would be subject to theirrespective procedural manuals which define the conditions of their operation, the eligibility criteria toenterprises for the resources of the FIAC, as well as the standard auditing, reporting and monitoringrequirements [see Implementation Volume Section 2.2 for these manuals, as well as for the by-laws andoperating manual of the GIACs].

2.04 It is estimated that, during the five years of the project, each GIAC would arrange for and financeabout 120 CNAs. An estimate of the GIACs' operating costs, their revenues from enterprises' membershipfees and their expenditures can be found in the Implementation Volume [Section 2.2.7]. The total cost of

One GIAC formed by FIMME, AMICA, AMGE and AMIP (Automobiles, energy and pharmaceuticals) has been created. A secondGIAC formed by AMITH and FEDIC (textile, garment and leather industries) is being created. The third GIAC is being created bythe ASMELEC, the APEBI and the AIMTEL (Electricity, Office Technologies and Telecommunications). The creation of three otherGIACs (Building Industry, Tourism, and Fisheries) is being envisaged.

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this component is estimated at US$5.4 million, 23% of which would be financed by the enterprises throughtheir membership fees or their direct contribution, 25%, or the start-up costs, by the Government and otherdonors, and 52%, or the financing of the FIAC, by the Bank loan. Before negotiations, the Governmenttransmitted the decision creating the FIAC and the FIAC Procedural Manual, including monitoring andreporting mechanisms and auditing requirements [para.5.02(a)]. Before Board Presentation: (i) theregistered statutes of one GIAC and its procedural manual approved by its Board were officiallytransmitted to the Bank, and (ii) the members of the COD were appointed [para. 5.04(a) and (b)].

2.05 Development of in-service training (41% of total base cost.) This second component wouldsupport the development of in-service training and the evolution of the training system towards a systemwhere employers and employees take a major role in governance, where VTT funds are mutualized (i.e. de-linking the amount reimbursed to an enterprise from the level of its tax contribution), and managed by anindependent entity in which employers and employees are a majority. This would be realized in a two-stageapproach by initiating a reform of the existing enterprise training reimbursement scheme (ContratsSpeciaux de Formation, CSF) to test the principles described above and to rapidly promote both thedemand for and supply of in-service training and, in a second phase, formalize these principles in a Law onIn-Service training (see para. 2.09 below). To that end, a new Procedural Manual [see ImplementationVolume, Section 2.3.2] has been elaborated which provides for: (i) a decentralized management of the CSFthrough regional tripartite committees (enterprises, labor and Government representatives); (ii) distinctaccounting and auditing systems for the CSF; (iii) mutualization of the funds; and (iv) new eligibilitycriteria of enterprises, which favor MSIs, enterprises with an export development strategy and/or creatingemployment; and enable the private proprietary training institutions selected by enterprises to carry outtheir training to benefit from a larger share of the VTT. The projections of the evolution of reimbursementof training contracts and of the amount of the VTT allocated to that activity [see Implementation Volume,Section 1] have served as a basis to size this component.

2.06 The cost of this component is estimated at US$35.3 million, representing the total estimated valueof in-service training contracts to be partially reimbursed over the first three years of the project. Bankfinancing would represent 27% of that amount and be limited to the first three years of the project, that isprior to implementation of the new Law on in-service training. Enterprises and employees will finance thebalance through either their direct contribution or the VTT, as well as fully finance the scheme after thephasing out of Bank financing.

2.07 Before negotiations OFPPT's Board approved the restructuring of the CSF and its new ProceduralManual and before Board Presentation OFPPT's Board allocated an appropriate amount [as defined in theImplementation Volume Section 2.3.2] to the CSF scheme for the first three years of the project[para.5.04(c)].

2.08 Emergence of Centers of Excellence (51% of total base cost.) This third component wouldimprove the relevance of OFPPT and its responsiveness to enterprises' training needs. It will put a specialemphasis on in-service training by supporting the development of 36 of the 180 OFPPT centers into"Centers of Excellence" [see Implementation Volume 2.4, for a detailed description of the component, thelist and classification of Centers] selected for their potential to meet, within the project life, a set of 20criteria [Annex 6] combining student insertion performance, links with enterprises, capacity to generateincome through the provision of contractual training and counseling services to enterprises, performance inattracting workers to evening courses, and management capacity. The project will provide incentives(budgetary autonomy, statutory conditions for management of center and staff), the framework (creation of

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a steering committee composed of enterprises within each center) as well as a series of activities aimed atpromoting their responsiveness to clients [see Implementation Volume section 2.4] and the equipment, stafftraining and technical assistance needed for these centers to reach the level of excellence. The cost of thiscomponent is US$43.7 million, 17% of which would be financed by the Bank loan and the rest by theGovernment12. Bank financing would be concentrated on 17 centers and be limited to those strategic inputsdirectly related to in-service training and which determine the progression of the centers to the level ofexcellence, primarily technical assistance for assessment and upgrading of the competencies of themanagement and teaching staff, development of the centers' capacity to design training programs thataddress specific needs, for the design and development of a catalogue of evening courses, as well as thenecessary pedagogical material. Other inputs consisting in equipment necessary for the reconversion orcreation of new training streams would be financed by the Government.

2.09 Institutional Strengthening (1% of total base cost). This fourth component would strengthen thepolicy formulation capacity of the MVT by supporting (i) the elaboration of a broad strategy for thevocational training system including the roles of public and private training sectors [see terms-of-referencein Annex 2]; (ii) the process of preparation of the Law on in-service training referred to in para. 2.05 abovewhich will rely on a review of international experiences, an assessment of the Moroccan situation, and inparticular the evolution of the CSF scheme after its reorganization, and a broad consultation of all partiesinvolved in order to formalize the reform initiated under the project and clarify financial and operationalroles; and (iii) the carrying out of a series of surveys aiming at measuring the impact of training onenterprises' competitiveness (see Terms-of-reference in Annex 3). The cost of this component is estimatedat US$0.6 million, which would be entirely financed by the Bank loan. During negotiations, theGovernment gave assurances that (a) it will prepare on the basis of process and guidelines agreed uponwith the Bank, and cause the Cabinet (Conseil du Gouvernement) to approve, not later than September 30,1998, a draft Law that will translate Morocco's new policy orientations regarding in-service training, asdescribed in para. 1.18 & Annex 1, and clarify financial and operational roles of the various players in thesystem [para. 5.03 (a)]; and (b) its strategy on vocational training will be finalized by December 31, 1997and implemented thereafter [para. 5.03(b)].

III. PROJECT COSTS, FINANCING, AND MANAGEMENT

A. Summary of Project Costs

3.01 Total project costs, net of taxes, are estimated at US$95.3 million equivalent, including US$10.3million for contingencies (10%). Taxes have been estimated at US$14.3 million (12%). A summary of theproposed project costs appears in Table 4 below.

3.02 Basis for Cost Estimates. Costs for rehabilitation, funmiture, equipment and pedagogic materialsare based on average unit costs of recently awarded contracts for similar items. Costs for computers andsoftware are based on international prices and include installation and user training. Costs for specialistservices include fees, travel, accommodation and subsistence and are based on recent consultant contracts.Costs for overseas training include travel, living expenses, tuition when applicable. Detailed cost

The Governnent is actively seeking EU financing for part of this component.

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assumptions for the GIACs can be found in Section 2.2.7 of the Implementation Volume. Estimates of theevolution of demand for in-service training can be found in Section 1 of the Implementation Volume.

3.03 Contingency Allowances. Project costs include a contingency allowance for unforeseen physicalvariations applied on the third and fourth components only -- equal to US$2 million (2% of total projectcost, excluding taxes). The following rates have been applied: civil works and equipment 10%, consultantservices, training and recurrent costs 5%. Price contingencies between negotiations and project completionare estimated at US$8.3 million (9% of total costs excluding taxes). The following annual rates of priceincreases have been applied: 5.5% per year for local costs and 2.6% per year for foreign costs.

3.04 Foreign Exchange Content; The foreign exchange content is estimated as follows: rehabilitation oftraining centers (40%); pedagogical material (55%); furniture (0%); technical equipment and computers(90%); specialists and training (0% when local, 100% when overseas). The resulting total foreignexchange content is estimated at US$47.5 million, representing 50% of total project costs, excluding taxes.

3.05 Custom Duties and Taxes Imported goods classified as educational material and equipment areexempt from duties and taxes. Goods and services procured locallv average taxes of 15%.

Table 4: Project cost summary by component

(DH '000) (US$ Million)Local Foreign Total Local Foreign Total

A. Promotion of demand for training (GIACs) 27,402 17,455 44,857 3.3 2.1 5.4B. Development of in-service training (CSF) 264,860 46,740 311,600 31.9 5.6 37.5C. Development of Centers of Excellence (C.E.) 62,511 299,833 362,344 7.5 36.1 43.7D. Institutional Strengthening 1,248 3,486 4,734 0.2 0.4 0.6

Total BASE COSTS ' 356,021 367,514 723,535 42.9 44.3 87.2Physical Contingencies 2,941 13,329 16,270 0.4 1.6 2.0Price Contingencies 32,747 18,166 50,913 3.9 2.2 6.1

Total PROJECT COSTS "12 391,709 399,008 790,717 47.2 48.1 95.3

Totals may not add up due to rounding up of figuresThe amounts indicated do not include the estimated demand for in-service training services for the last two years of theproject (US$41.1 million). As described in para. 2.05(b) above, the Government has committed to prepare a law whichwill define the principles guiding the financing of in-service training.

21 Excluding an estimated US$14.3 million for taxes.

3.06 Financing. The proposed Bank loan of US$23.0 equivalent comprising (a) a tranche equal toUS$11.5 million and (b) a tranche equal to FRF 60.3 million would finance 24% of total project cost net oftaxes and duties therefore covenrng 50% of the foreign exchange needs of the project. Enterprises andemployees would contribute US$30.7 million or 32% of the project through either direct contribution or theVTT. The Govenmment contribution, which is defined as the amount budgeted by the Government(including donors' contributions) is estimated at US$41.6 million or 43% of the project costs. Retroactivefinancing up to US$1 million of the loan amount ma' finance eligible expenditures incurred after July 1,1996.

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Table 5: Financing Plan

Components by Financiers(US$ Million)

Vocational Govt. and OtherEnterprises Training Tax IBRD Donors Total

Amount % Amount % Amount % Amount % Amount %A. Promotion of demand for 1.4 23.0 - 0.0 3.1 51.9 1.5 25.1 6.0 100.0

training (GIACs)B. Development of in-service 19.0 46.8 10.3 25.4 11.3 27.8 0.0 0.0 40.5 100.0

training (CSF)C. Development of Centers of - - - 0.0 8.3 17.2 39.9 82.8 48.2 100.0

Excellence (C.E.)D. Institutional Strengthening - - - 0.0 0.6 100.0 - 0.0 0.6 100.0

Total PROJECT COSTS 20.4 21.4 10.3 10.8 23.3 24.4 41.4 43.4 95.3 100.0OF WHICH:

1. Foreign 3.4 1.5 11.3 31.8 48.1II. Local (Excl. Taxes) 16.9 8.8 11.4 10.1 47.2

Taxes are estimated at 7.0 7.3 14.3

Total PROJECT COSTSincluding taxes 27.4 10.3 22.7 49.2 109.6

3.07 Project sustainability. The resources allocated to the MVT will not be increased as a result of theproject which is an integral part of the sector strategy. The operating expenditures of the GIACs will bepartly covered by the enterprises through their membership fees, and the total subsidy provided by theGovernment to that initiative represents less than 2% of the MVT annual budget. Moreover, Governmentsupport to the GIACs aims at "jump-starting" in-service training and is not intended as a pernanentarrangement. The annual operating expenditures of the CSF are already included in OFPPT's operatingbudget. The project does not increase OFPPT's training capacity and thus does not require additionalstaffing and operating expenses. In addition there will be: (i) an increase in the VTT receipts estimated atUS$12 million at full potential as a result of the January 1996 Government decision to extend it toIndustrial and Commercial Public Enterprises (EPICs), which had traditionally been exempted; (ii) thecenters' own resources generated from sales of training and counseling services to enterprises, and whichare estimated at a minimum of US$1.3 million a year for the Centers of Excellence alone. Finally, the Lawon in-service training (para. 2.05) to be elaborated will clarifv the financing of the system and ensure itssustainability and efficiency, while permitting a progressive disengagement of the Government.

3.08 Economic Analysis. Based on the 1986 and subsequent Moroccan Industrial Surveys, analysesusing a standard production function technique were used and show that, controlling for other observablefactors, training enterprises have a value added of 37% greater than non-training ones. Based on thereported expenditures on training, the return on value added for the small- and micro-enterprises is 15%(based on their median value added). It is considerably higher for medium firms, at 43%, and higher yetfor the largest size class, at 77% 13. Similarly, the data suggest that workers in enterprises that train tendto earn 28% more than in enterprises that do not train. Based on the cost of training and the earnings of

13These rates of return should be interpreted with some caution, particularly for the largest size class. Unlike other datasets, we have no measureof firm expenditures on research and development or the extent of technology transfer. This is likely to be highly correlated with training

expenditures for the largest firms, hence overstating the rate of return to this group.

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untrained and trained workers reported in the 1986 Industrial Survey, calculations suggest that in-servicetraining yields a rate of return of 42%. The Internal Rate of Return of total project costs and benefits isestimated at 25% and its Net Present Value at US$33,527 million [see Annex 4 for detailed analyses].

B. Management and Implementation

3.09 The proposed project would be implemented over a period of 5 years and is expected to becompleted by June 30, 2001, and the Loan closing date would be December 31, 2001. A detailedimplementation schedule is included in Section 2.4.10 of the Implementation Volume.

3.10 Overall coordination and monitoring of the project would be ensured by the Ministry of VocationalTraining. Responsibility for execution of the project would be as follows: (i) implementation of the firstcomponent, in line with the procedural manuals, would be the responsibility of the GIACs and of the COD;(ii) the second component would be the responsibility of the Orientation Board of the CSF would define theCSF's action plan and monitor its implementation by the Regional Commitment Committees. OFPPTwould ensure the secretariat of these two bodies as well as the processing of submissions; and (iii) the thirdcomponent would be implemented by OFPPT and the centers themselves. Staffing requirements andfunctional links between the entities involved, as well as the monitoring indicators and reportingmechanisms [see para. 2.16] have been developed as part of the procedural manuals of the GIAC, FIACand the CSF. The MVT would prepare and transmit to the Bank by April 30 and October 31 of each yearan implementation report, assessing progress to date according to the project monitoring indicators andproposing the program for the next period, including the necessary budget allocation. [para. 5.03(e)].

C. Procurement

3.11 The table below summarizes procurement arrangements for the project. With the exception ofconsultant and training services eligible for financing under the FIAC or under the CSF (see para. 3.14below), all procurement would be carried out in accordance with Bank Guidelines.

3.12 Goods. To the extent possible, and without interfering with the centers' development schedule,contracts for goods would be grouped in bid packages estimated to cost US$350,000 equivalent or more, toallow procurement of larger packages. Procurement through ICB shall be used for contracts costing morethan US$350,000 equivalent each and, is estimated to represent a total value of US$4.7 million forpurchase of training, office and computer equipment. For purposes of bid evaluation, under the ICBprocedures, local manufacturers will be granted a margin of preference in accordance with BankGuidelines. Goods estimated to cost less than US$350.000 equivalent per contract may be procuredthrough National Competitive Bidding. Other smaller contracts below US$200,000 for local purchases forstarting up the project (such as office equipment and computers for the GIACs and the Centers), audiovisual material, books and journals as well as materials and supplies could be made using nationalshopping (NS). Local suppliers are expected to obtain about 25% of the value of the goods to be financedby the Bank.

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Table 6. Procurement arrangements(total, including contingencies in US$ million equivalent)

Procurement Method

International NationalProject Element Competitive Competitive Other

Bidding Bidding N.B.F. TotalSERVICES

Consultant Services eligible for 4.4 a/ 4.4financing by the FIAC (3.0) (3.0)

Consultant & Training Serviceseligible for reimbursement by the 40.5 b/ - 40.5CSF (I 1.0) (11.0)

Other Consultant and Training 13.0 b/ 2.1 15.1Services - - (4.4) (0.0) (4.4)

EQUIPMENT 4.7 1.0 0.5 c/ 23.7 29.9(3.6) (0.6) (0.4) (0.0) (4.6)

CIVIL WORKS 4.0 4.0(0.0) (0.0)

OPERATING COSTS - - - 1.4 1.4(0.0) (0.0)

TOTAL FINANCED COSTS 4.7 1.0 58.4 31.2 95.3 d/(3.6) (0.6) (18.8) (0.0) (23.0)

Note: Figures in parenthesis are the respective amounts financed by the Bank Loan.N B.F. Not Bank Financed

a! Awarded to eligible beneficiaries and/or enterprises.b/ Procured in accordance with Bank consultant guidelines.c/ National shopping.d/ Excluding an estimated US$14.3 million of taxes.

3.13 Civil Works. The majority of contracts will be inferior to US$200,000 and therefore unlikely tointerest international bidders. National Competitive Bidding procedures (NCB), which are acceptable tothe Bank. will therefore be used. Civil works will not be financed by the Bank loan.

3.14 Consultants' Services. Studies and training other than that financed under the FIAC or the CSFwill be contracted in accordance with the Guidelines for the Use of Consultants by World Bank Borrowersand by the World Bank as Executing Agency (August 1981). The choice of procurement method forspecialist services to be partially financed by the FIAC will be left to enterprises. The average cost of a

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contract is estimated at US$8,000. To be eligible, enterprises will be required to enter a formal contractwith the consulting firm. This requirement is laid out in the procedural manual of the FIAC [see para.2.021. Moreover, the GIACs will make available to enterprises a database of qualified international andnational experts which it will constitute and periodically update through a largely advertised invitation tosubmit credentials for prequalification. Finally, to ensure a transfer of know-how and build up the capacityof human resources specialists in Morocco, partnerships of international and national consultants will beencouraged. Similarly. the choice of procurement method for training and counseling services to bepartially financed under the CSF will be left to enterprises. Based on 1994 actual figures, the average costof each contract was US$3,000. Eligibilitv criteria for partial reimbursement of training contracts toenterprises as well as the documentation to be provided by enterprises are defined in the CSF proceduralmanual [see para 2.02]. Assurances were given that contracts to be financed under the FIAC will beprocured according to the agreed FIAC Procedural Manual and that contracts to be reimbursed under theCSF will be procured according to the agreed CSF Procedural Manual [para. 5.03(d)] including therequirement that services to be financed under the Loan shall be procured at a reasonable price, accountbeing taken of the quality and competence of the parties rendering them.

3.15 Bank Prior Review of Procurement Documentation. All contracts for consulting services, trainingor studies, with the exception of that financed by the FIAC and the CSF. valued at more than US$100,000for consulting firms and US$50,000 for individual consultants and contracts for goods estimated to costmore than $350,000 will be subject to prior review bv the Bank. The Bank's prior review is expected tocover about 30% of the total Bank-financed procurement. Small consulting contracts valued belowUS$ 100,000 for consulting firms and US$50,000 for individual consultants will require prior review of theterms of reference only. Contracts for goods below US$350,000 equivalent will be subject to ex-postreview by the Bank and will be retained for review by Bank supervision missions. Contracts for consultingand training services financed under the FIAC and the CSF will be reviewed ex-post through regular auditsand supervision missions.

D. Disbursement

3.16 The annual project and loan disbursement schedules are described in the tables below. The Bankloan would be disbursed according to the categories described in Table 8.

Table 7a. Proposed Loan disbursement Schedule(US$ million)

IBRD Fiscal Year97 98 99 00 01 02

Annual 3.5 5.0 6.0 5.0 2.5 1.0Cumulative 3.5 8.5 14.5 19.5 22.0 23.0

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Table 7b. Proposed Project Disbursement Schedule(US$ million)

Project Fiscal Year97 98 99 00 01 02

Annual 11.9 26.8 30.0 18.5 5.6 2.5Cumulative 11.9 38.7 68.7 87.2 92.8 95_.3

Table 8. Loan Disbursement by category

Amount of the Amount of theCategory Loan Allocated Loan Allocated % of Expenditures to

(Expressed in (Expressed in be financedDollars) French Francs)

(1) Goods under Component 3 1,950,000 10,200,000 100% of foreign(Centers of Excellence) expenditures, of 100%

of local expenditures(ex-factory cost) and70% of localexpenditures for otheritems procured locally

(2) Consultants' services and training(a) Support to GIACS 50,000 300,000 100%(b) Centers of Excellence 1,500,000 8,000,000 100%(c) Institutional Strengthening 250,000 1,400,000 100%

(3) Sub-project Financings:

(a) FIAC 1,500,000 8,000,000 70% of the total amountof each Sub-project

(b) CSF - carrying out of in-service 2,500,000 13,000,000 35% of the total amounttraining activities of each Sub-project

paid in Fiscal Years1996, 1997 and 1998

(c) CSF - Development of training plans 1,500,000 8,000,000 70% of the total amountof each Sub-projectpaid in Fiscal Years1996, 1997 and 1998

(d) CSF - Development of training plans 750,000 4,000,000 80% of the total amounton the basis of competency needs of each Sub-projectassessments paid in Fiscal Years

1996, 1997 and 1998(4) Unallocated 1,500,000 7,400,000

TOTAL 11,500,000 60,300,000

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3.17 Documentation. Except for contracts requiring prior review, disbursements would be made againstcertified SOEs, the format of which will be agreed upon with the Bank to facilitate identification of projectcategories. Supporting documents for SOEs would be retained by the implementing agencies for at leastone year after the Bank receives the audit report for the year in which the last disbursement was made.This documentation would be made available for review by auditors and visiting staff upon request. Withregards to component A (GIAC/FIAC), and component D requests for payment of eligible expenditureswould be grouped so that disbursement requests to the Bank be superior to US$50,000 equivalent.

3.18 Special Accounts. To facilitate the timely implementation of the project, the Government wouldestablish two Special Accounts respectively for Component I and 4, and Component 2 and 3 on terms andconditions acceptable to the Bank. The authorized allocations will be respectively US$800,000 andUS$1,500,000 covering the Bank's share of 3-4 months of estimated expenditures. When the Loanbecomes effective, the Borrower may request an initial deposit to each of the two SAs not exceedingUS$400,000 and US$500,000 respectively. Additional deposit(s) may be requested when the amountscommitted and/or disbursed for each of these components reach US$3 million. The SA will be replenishedby submitting withdrawal applications to the Bank on a monthly basis, or whenever the account isdiminished by one-third, whichever is sooner. Replenishment applications submitted against the SA willinclude monthly bank statements showing account activity since the last application, a reconciliationstatement and supporting documents as required by the Bank. With regards to the counterpart fundsrelated to the CSF, a separate budget line item will be created within OFPPT's budget and funds allocatedto it annually.

E. Accounts, Reporting and Audits

3.19 The Borrower will maintain appropriate records of accounts and prepare bi-annual financial andoperating progress reports as well as an Implementation Completion Report within six months of the loanclosing date. An independent auditor acceptable to the Bank would: (a) audit project accounts; (b) applyauditing standards and procedures satisfactory to the Bank that conform to generally accepted auditingpractices; (c) carry out its auditing work in a timely manner--an annual report would be presented to theBank no later than six months after the end of each fiscal year; and (d) render an audit opinion on projectaccounts including the Special Accounts and the use of Statement of Expenses or the reason whereby suchopinion cannot be rendered and provide a financial statement of OFPPT and the associations to be created.In addition, in line with their respective procedural manuals, the GIACs and CSF will be subjected toannual audits by independent auditors. These audits will be transmitted to the Bank. With regards to theGIACs and the CSFs, monitoring indicators and reporting mechanisms acceptable to the Bank have beenagreed upon and will be transmitted annually to the Bank.

F. Supervision and Monitoring

3.20 Status of Project Preparation. Preparation of the project is well advanced. The GIAC and FIACstatutes and Procedural Manuals have been prepared, and one GIAC has been officially formed. Themarketing of this initiative has been actively pursued by the Government since appraisal. With regards tothe second component, the CSF procedural manual has been prepared and approved by the OFPPT Board.Terms of reference for the studies of the 4th component have been prepared. With regards to the Centers ofExcellence, all actions related to the first year of implementation have been defined in detail and alaunching seminar including heads of VT centers involved in the project has taken place in July 1996.

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3.21 Supervision. In the first fiscal year (FY97). one launching seminar will be planned for 9 staffweeks (sw) followed by two supervision missions a year for the remaining four years (12 sw per year)The supervision missions will focus on the progress of the objectives, targets and schedules of each sub-component based on the project indicators and expected outputs which are found in section VIII of theImplementation Volume, and will undertake corrective actions if necessary. By July 31, 1999 theGovernment will prepare a comprehensive progress report and transmit it to the Bank to be discussedduring a mid-term review to be held no later than November 30, 1999 [para. 5.03(f)]. The mid-term reviewwill not only assess the project's implementation progress in greater detail, but also to what extent theproject needs to be restructured to achieve its objectives, in particular in view of: (i) progress in theelaboration of the in-service training law and to what extent this law reflects the agreed objectives; (ii)progress in the elaboration and implementation of the sector strategy and its related action plan; and (iii)the need to modify the design of the project in the light of both the new law and the sector strategy. Asummary of key indicators to be used for overall project monitoring has been elaborated [Annex 5]. TheGovernment has provided the base line and target data for the project monitoring indicators which will beupdated annually in the progress reports throughout the duration of the project [para. 5.03(c)].

G. Environmental Impact

3.22 As currently formulated, the proposed project was reviewed under the procedures specified inO.D.4.01, Annex A: Environmental Assessment, and was determined to be in screening category C whichincludes projects that normally do not result in significant environmental impact. No EnvironmentalAssessment (EA) is expected to be conducted for this project.

IV. EXPECTED BENEFITS AND RISKS

4.01 Proiect Benefits. The proposed project would make a significant contribution to upgrading theskills of Morocco's labor force and the competitiveness of its enterprises. Major changes in policy andgovernance structure of the CSF alreadv agreed with the Government, enterprises and labor would result ina shared responsibility and financing between the main beneficiaries and a rapid increase of the number ofenterprises which retrain their workforce. The number of enterprises which would apply to the CSFscheme to retrain their workers is estimated to increase from 620 in 1994 to 2,100 by project completion,and the number of workers enrolled in the OFPPT's evening courses, from 7,700 to at least 19,000 in2001. The institutional and legal framework would also improve through the adoption of a comprehensivelaw on in-service training, the elaboration of an overall long-term VT strategy and its related action plan,and the creation of strong linkages between the selected public training centers and the enterprises. Theprofessional associations would also benefit from the project by broadening the range of services theyprovide to their members and exploiting economies of scale in training. It will also improve trainingoutcomes by taking actions on both the demand and supply sides. Finallv, the private proprietary traininginstitutions would benefit from the project through greater access to the VTT, which will promotecompetition between both public and proprietary training institutions, and thus efficiency. Over time, theproject would generate significant economic benefits to both the enterprises and the State, on a sustainedbasis, generating an internal rate of return of 25% (see economic analyses in Annex 4.)

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4.02 Project Risks. The incentives provided to the enterprises through the GIACS and FIAC aim atreducing the risk of a low demand for training. However, a persistent low demand may be a result ofsevere structural impediments to the increase of enterprises' competititveness, outside the training sphere,which would be addressed through other components of the government private sector developmentprogram. There are institutional risks involved with the GIACs, which are new structures to be createdunder the project, and particularly with the financing of in-service training, which include the reform of theCSF scheme and the enactment of a law. To reduce these risks, project preparation focused on building astrong consensus around the GIACs and the CSF scheme. This exercise led to the development of detailedprocedural manuals, including monitoring, reporting and auditing requirements, and the a posteriori controlneeded. A number of drafts of these documents were widely shared among the Government and therepresentatives of enterprises and labor unions, and following the incorporation of their comments, a finalversion was finalized with the World Bank assistance and endorsed by all of them. This should provide astrong basis for future cooperation between the stakeholders and especially for the consultative process ofpreparation of the law.

4.03 There is also the risk that OFPPT's efforts to better adapt to enterprises' needs fail to induce agreater implication of the private sector in its centers of excellence. This may represent the greatesteconomic risk of this project and has been addressed in a variety of ways. First, it has been recognizedsince the beginning that only a limited number of training centers have the potential to evolve into centers ofexcellence, based on the industrial and employment potentials of their catchment area, their demonstratedability to establish training links with the private sector (through the setting up of a private sector steeringcommittee,) and the preparation of self development plans. Adequate incentives were provided to the staffto increase their self-generated resources and a matrix of detailed performance indicators (Annex 7) wasdeveloped with the World Bank assistance to monitor the centers' progress against their own assessment.As regards investments, technical assistance and training of trainers and managers would be financedprimarily by the Bank loan and front-loaded to provide the centers with essential inputs to initiate thechange. Training equipment would be financed by the Government and provided only to those among the36 centers that would complete an in-depth assessment of their equipment needs and show a progressrecord in line with the objectives set in their development plans. Finally, the project approach to bringabout improvements in the system by promoting change within the public sector is much less prone to behampered by socio-political resistance than any alternative that would bypass the public sector.

V. AGREEMENTS AND RECOMMENDATION

5.01 During preparation of the project, the following actions were taken:

(a) a set of 20 criteria combining student insertion performances, links with enterprises,capacity to generate income through the provision of contractual training and counseling servicesto enterprises, performance in attracting workers to evening courses and management capacity,were developed and a definition of a Center of Excellence based on these criteria was agreed upon;[Annex 6 and Implementation Volume Section 2.4.31;

(b) all 180 OFPPT centers have been classified into 4 levels and the 36 centers selected fortheir potential to meet, within the project life, the level of Centers of Excellence. Each center

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candidate for becoming a center of excellence has elaborated a development plan in consultationwith its potential client enterprises [list of centers in Implementation Volume Section 2.4. 11

(c) a Ministerial decision to increase the autonomy of the OFPPT centers was issued inJanuary 1996 (Implementation Volume, Section 2.151;

(d) as part of the 1996 finance law, the VTT was extended to Industrial and CommercialPublic Enterprises [para. 3.07];

5.02 Before negotiations the Government transmitted:

(a) the decision creating the FIAC and the FIAC Procedural Manual, including monitoring andreporting mechanisms and auditing requirements. [para. 2.04]

(b) the OFPPT Board approval of the restructuring of the CSF and its new Procedural Manual[para. 2.07]; and

(c) the Government proposal of a satisfactory process and guidelines for preparation andprocessing of the new Law on in-service training. [para. 2.07]

5.03 During negotiations, assurances were given regarding:

(a) A Law satisfactory to the Bank on in-service training will be approved by the Cabinet(Conseil du Gouvernement) no later than September 30, 1998 [para. 2.07 and Annex 1].The Government commitment to follow an agreed process and guidelines to that end wasreflected in a supplemental letter to the loan agreement, which includes interim indicators forthe preparation of the in-service training law.

(b) The Government's strategy on vocational training will be elaborated by December 31, 1997and implemented thereafter [para. 2.09 and Annex 2]. The Government commitment tofollow an agreed process and guidelines to that end was reflected in a supplemental letter tothe loan agreement, which includes interim indicators for the elaboration of the strategy andthe implementation plan.

(c) The base line data and targets of the key indicators to be used for overall project monitoringwill be updated annually through the duration of the project [para. 3.2 1.

(d) Contracts to be financed under the FIAC will be procured according to the agreed FIACProcedural Manual, and contracts to be reimbursed under the CSF will be procured underthe agreed CSF procedural Manual [para. 3.14].

(e) The MVT would prepare and transmit to the Bank by April 30 and October 31, of each yearan annual implementation report, assessing progress to date according to project monitoringindicators and proposing the next year's program, including the necessary budgetallocations. [para. 3.10].

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(f) A mid-term review will be carried out no later than November 30, 1999. The mid-termreview will assess the project's implementation progress in greater detail, and to what extentthe project needs to be restructured to achieve its objectives, in particular in view of: (i)progress in the elaboration of the in-service training law and to what extent this law reflectsthe agreed objectives; (ii) progress in the elaboration and implementation of the sectorstrategy and action plan; and (iii) the need to modify the design of the project in the light ofboth the new law and the sector strategy [para. 3.21].

(g) Retroactive financing up to US$1 million covering the period from July 1st, 1996 to loansigning was added upon request from the Borrower [para.3.061.

(h) The Borrower opted for a variable rate loan in US dollars (50%) and French Francs (50%)[para. 3.061.

5.04 As conditions of Board Presentation:

(a) the registered statutes of the first GIAC and its Procedural Manual approved by its Boardhave been transmitted to the Bank [para. 2.04]; and

(b) the members of the COD who will oversee the FIAC have been appointed [para. 2.04].

(c) By decision of OFPPT's Board an appropriate amount (as defined in the ImplementationVolume, section 2.3.2) will be allocated to the CSF scheme for the first three years of theproject [para.2.07];

24 - Annex IPage I of 2

STEPS IN THE PREPARATION OF A DRAFT LAW ON IN-SERVICE TRAINING

Objective:

1. The objective is to formulate a draft law that institutionalizes and makes permanent the measurestaken by the Government to promote in-service vocational training. The law in question will take intoaccount the entire spectrum of issues involved in in-service training at the national level and, in particular,will: (i) clarify the organization of in-service training, (ii) define the role of the various social partners(businesses, associations and trade groups, representatives of workers, the State, communities); and (iii)identify the portion of the VTT to be earmarked to in-service training and define the mechanisms for itsfinancing. It will also reflect the general principles implemented under the Third Private SectorDevelopment Project (in-service vocational training), for which World Bank financing is envisaged. Thosegeneral principles are as follows:

- making business responsible: The State will disengage from the direct management of in-service training and keep only its super-visorv role;

- independence: establishment of an autonomous entity jointly managed by tradeorganizations and representatives of workers, whose function will be to manage the fundsallocated to in-service vocational training;

pooled financing of in-service vocational training through the allocation of a portion of theVTT.

Methodology:

2. Preparation of the law will be overseen by a steering committee set up within the Ministry ofVocational Training, whose mission will be to:

draw up an inventory and digest of studies, legal texts (and in particular the labor code)and other reports concerned with in-service training;

prepare detailed terns of reference for the experts to be engaged for the formulation of theproposed law and draft the accompanying explanatory statement;'4

ensure the interface between those experts and the other stakeholders, in particular laborand business representatives;

14 The cost of technical assistance for the preparation of the law was estimated on the basis of four months of experts as follows:I economist, lawyer/specialist in institutional issues and I specialist in human resources.

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Annex 1Page 2 of 2

organize a seminar that brings together all partners, to present the cost-benefits of theproposed alternatives as well as the experience of other countries in dealing with the sameissues.

Timetable:

3. The proposed timetable splits implementation into two phases: (i) phase 1, entailing preparation ofthe explanatory statement and a first draft of the law, lasting about one year; and (ii) the approval of thedraft law by the Cabinet (Conseil du Gouvemement).

Phase 1:

- Designation of the members of the steering committee Start-up- Preparation of expert terms of reference Start-up+2 weeks- Recruitment of consultants Start-up+2 months- Inventory and digests of existing texts and

submission of consultants' preliminary report Start-up+5 months- Approval of report (seminaire de validation) Start-up+7 months- Submission of final report, including explanatory statement

and proposed draft law Start-up+9 months- Expanded consultation on draft lawv Start-up+ 11-15 months

Phase 2:

* Approval of draft law by the Cabinet (Conseil du Gouvernement) Start-up+ 18 months

- 26 - Annex 2Page 1 of 2

PREPARATION OF A LONG-TERM STRATEGY AND ACTION PLANFOR VOCATIONAL TRAINING

Objective:

I . The Government of Morocco is convinced of the need to adapt vocational training structures: (i) byinvolving the public and private sectors in the planning, management and financing of vocational training;(ii) encouraging the expansion of private training centers; and (iii) subjecting vocational training centers tocompetition through progressive allocation of the VTT to a demand-driven financing scheme.

2. With a view to implementing these principles, the Government will launch a comprehensive studyof the issues, to be overseen by the Ministry of Vocational Training, and aimed at formulating a long-termsectoral strategy for vocational training and identifying the sequence of reforms that will facilitate itsimplementation. The studies and other necessary work preparatory to the development of the strategy willbe among activities financed under the World Bank's third loan for private sector development (in-servicetraining). No more than fourteen months after loan signature, this process should lead to the formulationby the Government of the strategy document that will be forwarded to the Bank. That strategy will serve asa foundation for the formulation of the sector's next two five-year plans.

Description of the strategy formulation process:

3. The process will begin with the appointment by the Minister of Vocational Training of a StrategyFormulation Committee (Comite d 'Elaboration de la Strategie -- CES) composed of four to eight people,each of whom would be designated individually, and the CES would be responsible for setting the pace andtimetable of the studies and works to be undertaken, formulate terms of reference for the studies to belaunched, analyze the conclusions of the various inputs and studies it contracts and, lastly, prepare asynthesis of its work, which it will send to the Government. The synthesis will include in particular adiagnostic study and proposals for modernizing the institutions, regulatory framework and the means offinancing vocational training. This first phase is expected to take eight months.

4. At the conclusion of the first phase, the Government will begin a series of consultations with thesocial partners to build a consensus on the proposed reforms and identify the means and implementationtimetable. After six months, the Government will formulate its long-term development strategy forvocational training and fonward it to the Bank for information.

Means to be allocated for preparation:

5. During the last ten years the MVT and OFPPT have carried out many comprehensive studies,several of which are still valid. The CES will have access to that documentation and will have funds tofinance the following activities:

Studies: When necessary, supplementary studies will be done in the field to expand the data of thediagnostic study, through inputs from Moroccan or expatnate experts to the analysis of constraints anddysfunctional aspects of the system, and identification of possible reforms;

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Page 2 of 2

Overseas fact-finding missions: Two overseas fact-finding missions for committee members (4 to 8 people)are planned in order to learn from the experience of other countries which, facing comparable conditions,have overcome the constraints and embarked upon similar reforms;

Seminar: Two seminars are planned in order to enable the MVT to organize consultations for consensusbuilding on the objectives of the reform.

Timetable:

Phase 1: Preparatory stage

- Appointment of CES members Start-up- End of inventory of existing studies and documentation Start-up+ 1 month- Preparation of expert TOR and program for

fact-finding missions Start-up+2 months- End of consultants' work and fact-finding missions Start-up+6 months- Submission of comprehensive report to the Ministry Start-up+8 months

Phase 2: Consultations and consensus-building

- Approval (seminaire de validation) of CES report Start-up+9 months- End of drafting of strategy document Start-up+ 12 months- Finalization and discussion of strategy with the Bank Start-up+ 14 months

Phase 3: Implementation of the strategy

- Elaboration of an Action Plan Start-up + 18 months- Discussion of the Action Plan Start-up + 20 months

with the Bank and the Donors Community (Seminar)

- 28 - Annex 3Page I of 6

Project Impact Evaluations Studies:Analytical Approach and Terms of Reference

Introduction

1. The evaluation of the project impact faces acute informational problems. There are usuallygood data on enterprises from the annual Industrial Survey and on training from the traininginstitutions, the MVT and the Ministry of Education. However, except for the 1986 Industrial Survey,there is no information on the more extensive training that occurs in the private sector--in enterprises,provided by equipment suppliers, and in private training institutions. Moreover, little is known aboutthe enterprise context in which training takes place, how decisions regarding training relate to otherenterprise strategies on investment, innovation, or work organization.

2. The purpose of this Annex is to describe the studies that will be conducted to assess the impactof the project. The Annex is organized in two sections. The first describes the analytical approach,including data needs, analyses and expected results. The second section provides detailed Terms ofReference for the studies and discusses various possible survey methods.

A. Analytical Approach

I. Overview of project

3. The in-service Training Project in Morocco is designed to improve the skills of the workforceand increase enterprise competitiveness via four project components. First, to help enterprises, MSIsin particular, identify their skill needs through competency needs assessments (CNAs) conducted bythe Groupement Interprofessionnel d'Aide au Conseil (GIACs). Second, to encourage enterprises totrain workers either in-house or in public or private training centers by providing incentives through atraining payroll levy-grant system or the Contrats Speciaux de Formation (CSF). Third, to improvethe quality and relevance of in-service training provided to enterprises by selected OFPPT trainingcenters to be rehabilitated under the project. Finally, to strengthen policy formulation capacity of theMVT and the legal framework for in-service training.

11. Data Needs for Project Impact Evaluations

4. Specific kinds of information on enterprises and its workers are required to assess whether theproject is meeting its objectives of improving workforce skills and increasing industrialcompetitiveness. Broadly, the following types of information are needed:

. First, information is needed on performance measures for two groups--one affected by anintervention or a set of policies, and one that is not (the control group)--to measure the impact ofthe intervention. In the case of enterprises, this might involve comparisons of the performance offirms that implement some type of in-service training program and the performance of firms thatdo not train. For workers, one might compare the wages, hours of work, or job turnover rates ofemployees in enterprises with and without training.

* Second, information over time should be collected on the same groups of enterprises. Becausefirms and its workers can be very heterogeneous, it is important that the impact of an interventionbe assessed by comparing post- and pre-intervention performance measures. Thus, one might

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Page 2 of 6

focus on changes over time in the productivity levels of training enterprises (or the wages of itsworkers) and compare them to the performance of the control group of non-training enterprises(and its workers).

* Third, information is needed on other contemporaneous attributes of workers and firms.Performance is shaped not only by training but by other factors such as the education, workexperience, and family background of employees, or the productive attributes of firms such asforeign or local ownership, technology, and market conditions. As such. program impacts onworkers or enterprises must be assessed net of the effects of these other variables on theirperformance.

* Finally, a scientifically-drawn sample of enterprises should be used to collect firm-levelinformation. Otherwise, the impact of the project on expanding the training efforts andcompetitiveness of enterprises--a key objective of the project--cannot be assessed. Small, non-representative samples of firms are likely to yield unreliable measures of levels and time trends intraining incidence and performance, and result in evaluation studies that are both biased andmisleading.

5. The requisite data to conduct a project evaluation study do not currently exist in Morocco andwill need to be collected systematically as part of the project. Specifically, surveys of enterprises atthe beginning, mid-term and end of the project are needed to monitor and investigate the impacts ofGIACs in helping enterprises identify skill needs and develop training plans, the role of CSF inencouraging firms to initiate or expand training programs for their workers, and the use of in-servicetraining services provided by OFPPT training centers. The program impact evaluation studiesproposed here--their objectives, data requirements, and analytical approach--are described below.

III. Analyses of Survev Results

6. The following three examples, based on analyses of similar enterprise surveys by the WorldBank, illustrate some types of analyses that are possible with these surveys and the kinds of policyquestions that can be addressed.

1. Incidence of in-service training

7. The data can be tabulated to describe the iicidence of in-service trailing in Morocco at onepoint in time, or time trends in training when two or more surveys are fielded. The tabulations willshow the principal sources of training (in-house, public or private training centers, other private sectorfirms, etc.), the main types of training given by different providers (vocationally specific, production,or quality control), and the worker groups trained. When scientifically-drawn, the sample of firms canbe weighted to yield national estimates of the incidence of training, the number of workers trained andthe kinds of training received, and training trends over time.

8. Policy issues: How prevalent is in-service training? Which employers train and which do not?Do market failures inhibit training and what is the nature of these market failures? Do Moroccan firmsunder-invest in training? What training is emphasized by firms? How important are public trainingcenters as a source of in-service training relative to the private sector? Have these patterns of trainingchanged over time?

9. Illustrative results. The World Bank study of 5 developing countries concluded that: (i) firmsthat train tend to be large, foreign-owned or joint-ventures, exporters in modern and technology-

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Page 3 of 6

intensive sectors; (ii) the most important reason for little or no training is that employers use simpletechnologies requiring few skills; (iii) however, market failures are also important -- many employersdo not train because they do not know how or what to train, they cannot internalize the benefits oftraining because of high turnover of trained workers, and they are unable to finance training; (iv) withsome exceptions (Colombia), the private sector -- the firm itself, private training centers, and suppliers-- plays a relatively more important role than the public sector in meeting in-service skill needs indeveloping countries.

2. Productivity and wage impacts of training

10. The data can be used to estimate the effects of training on the performance of employers andworkers. For employers, the productivity effect of training can be investigated within a productionfunction framework. Production functions, which relate a measure of productivity (value added) toinputs of capital (value of plant and equipment) and labor (number of workers, skill mix, hours ofwork), can be expanded to include inputs of training to estimate productivity effects by source and typeof training. Similarly, models can be used to estimate the effects of training on wage levels or theprobability of job turnover, for different groups of workers and by type and source of training.

11. Policy issues: Does training improve firm-level productivity? Which types and sources oftraining are more important in terms of their effects on productivity? Are the productivity effects oftraining similar to the wage effects of training by type of training or for different groups of workers?Who pays for the cost of training?

12. Illustrative results: The World Bank study finds evidence that: (i) training has a large positiveimpact on productivity; (ii) the productivity impact of in-house training tends to be larger than that oftraining provided by outside training providers; (iii) while training for skilled workers has a largeproductivity impact, training for unskilled workers has no measurable impact on productivity; (iv) theproductivity impact of training is actually higher among small firms where few employers train thanamong large firms most of whom train; (v) the wage effects of training resemble the productivityeffects of training -- large wage effects are found for skilled worker training but not for unskilledworkers; and (vi) the wage effects of employer investments in worker training are roughly comparableto the wage effects of investments in new technology.

3. Training and productivity changes over time

13. Following the same sample of enterprises is critical since the incidence of training,productivity and wages can change over time for reasons unrelated to the project. Thus, in programevaluations, models should be estimated to explain changes over time in these variables controlling forchanges in the other determinants of training, productivity and wage growth. The availability of panelinformation on the same firms is important for another reason, namely, the heterogeneity of firms.Because enterprises and workers have very different productivity attributes, their productivity levels atany one point in time can vary widely. As such, simply comparing the productivity levels of trainingfirms and non-training firms can be misleading. To identify the impact of introducing a trainingprogram, training should be related to changes over time in productivity levels.

14. The evaluation study of Mexico's Program of Training and Technical Assistance (CIMO) toSMIs is illustrative. As part of the evaluation, a group of SMIs that received subsidized training--thepilot group--were tracked over a three year period, and their performance compared to that of a controlgroup of SMIs that did not participate in the CIMO program. A simple comparison of the pilot and

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control groups at the end of the three year period showed no differences in the two groups'performance (a wide range of outcome measures were considered). However, the pilot group firmstended to have lower productivity prior to joining the CIMO program. When outcomes were measuredin terms of changes in productivity over time, the pilot group showed superior improvements inperformance with the productivity differential with the control group being narrowed or eliminatedentirely.

B. Terms of Reference

1. Objectives

15. The objectives are (1) to develop firm-level data bases for tracking changes over time in theincidence of in-service training, (2) to analyze the incentives of firms to train their employees, theconstraints they face in identifying skill needs and in developing in-service training programs, and theeffects of training on productivity growth and competitiveness, and (3) to assess the efficacv of trainingpolicies--the GIACs in providing CNAs and the CSF in promoting in-service training, especially amongMSIs--and, as needed, to recommend policies to improve the Moroccan training system.

II. Surveys

16. The surveys are intended to develop a broad base of firm-level information on the training andproductive activities of a sample of enterprises. The same sample of enterprises should be tracked overtim, ideally in 1996 at the beginning of the project so as to provide a benchmark, and thereafter at two-year intervals, in 1998 and in 2000, so that evaluations of training policies and support to MSIs can beconducted and policies adapted as the project progresses. Firm-level information would be collected on fivebroad areas:

1. Production: level of production and sales; exports, main products; domestic and foreign ownership;value of machinery and equipment; degree of automation; total labor inputs and hours; intermediateinputs and energy; and capacity utilization; horizontal and vertical linkages with other firms;production constraints.

2. Emplovment: current level and changes in employment over the past 2 years; structure of employmentby broad occupation including managers, engineers, technicians, skilled production and unskilledproduction, sales; gender composition of the workforce; mean years of schooling attainment by broadoccupation; job turnover rates; recruitment policies and hiring and job retention problems.

3. Compensation: average pay by occupation and gender; structure of compensation including wages andsalaries, bonuses, allowances, severance pay, and statutory payments as a percent of total wage bill.

4. Training training infrastructure and trainers; informal OJT and formal training; number of workerstrained, hours and area of training, by broad occupation, in company training programs and fromexternal training providers such as the public training centers of the OFPPT, private training institutes,equipment suppliers and buyers, and joint-venture partners. Also, policy questions on reimbursementof vocational training tax, firm's use of specific training programs and assistance, and trainingconstraints.

5. Technology: spending on technology acquisition and know-how licenses; research and development;quality control methods; new capital investment plans; problems and constraints faced in improvingtechnology and productivity.

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III. Survev Methods

17. There are three alternative survey techniques. The relative merits and demerits of each should beconsidered and a survey strategy (or combination of strategies) identified.

(1) Fielding a self-contained survey questionnaire to a scientifically-drawn random sample ofenterprises and tracking them over time. This approach will requite the assistance of the national statisticaloffice to develop a sampling frame (list of company names, addresses., contact person and telephone/faxnumbers) and survey weights that will allow the survey results to be made nationally representative. Thesample would likely be stratified by firm size because of the large numbers of MSIs relative to large firms.For analytical purposes, the sample should include a minimum of 500 firms. The Moroccan surveys canbuild on several survey instruments operationalized by the World Bank on similar human resourcesprojects in other countries. The survey can either be conducted by the national statistical office or by aprivate survey firm, which in many cases can deliver the survey in a more timely fashion.

(2) Building on existing annual firm surveys and adding a supplemental module of key questions.Many national statistical agencies, including that of Morocco, already field large, nationally representativefirm-level surveys on an ongoing, annual basis. These surveys elicit many important quantitative questionslisted above, such as differcnt firm characteristics, industry, production and inputs, book value ofmachinery, cxports, ownership structure, employment and composition. wages and salaries, etc. Theremaining information -- training, technology and policy related variables--can be elicited by adding a shortmodule to the statistical agency's survey instrument. Whether the module covers all or part of the firmsample will depend upon the budget of the project and the statistical agency's interviewer resources.

(3) Using administrative records concurrently with periodic surveys of firms. Administrativerecords from the vocational training tax (VTT) are a potentially important source of information. Thefeasibility of creating a database from VTT administrative records depends in part on how this informationis currently collected, and in part on the Moroccan government's willingness to restructure itsadministrative recording system of the Vocational Training Tax (VTT). Firms contributing to the VTTcould be required to provide the administrative agency of the OFPPT with limited information oncharacteristics of enterprises, its employment, wages, VTT contributions, training practices and bothnumbers and types of workers trained, if any. These records provide not only information on the universeof firms contributing to the VTT, but also the sampling frame needed to conduct periodic, more detailedsample surveys of firms claiming reimbursements for training as well as firms that contribute but do nottrain.

For Morocco, the second method has several distinct advantages over the others:

* It economizes on the heavy fixed costs of fielding a survey (developing the sampling frame,training survey enumerators etc.), especially one that will be repeated over time, by using theministry of industry's existing survey infrastructure and benefiting from its long experience withfirms in the survey.

* It immediately yields a large body of time-series information on the same firms in the survey. Thisinformation is important not only for characterizing the previous growth and productivityperformance of firms, which shapes their incentives to train, but also for studying the futureeconomic impacts of in-service training.

* It expedites impact evaluation studies since training questions were included in the industrialsurvey in the early 1990s. These previous training questions can be used to establish a training

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bench-mark for the new surveys to be conducted under the project, and to begin exploratoryanalyses of training impact on firm-level productivity while the new survey is being fielded.

* Finally, it will provide policymakers with important data for competitiveness studies. In additionto training data, the augmented surveys will collect, for a large nationally-representative sample offirms, data on enterprises' technology use, R & D spending, use of quality control methods,exports, and inter-firm linkages which not only shape their skill and training needs but also theirproductivity growth.

IV. Analyses and Evaluation

18. Several types of analyses and evaluations will be performed by bringing firm-level informationtogether from the five broad topic areas:

* Analysts should monitor and measure the extent and changes over time in the incidence of in-servicetraining, from the different sources of training-- in-plant training, and training provided by the differentOFPPT public training centers including centers of excellence, by private training institutes, and bvequipment suppliers and buyers--by industrial sector and by firm size, especially among small andmedium size industries (MSls) that provide workers with little or no formal training.

* Analysts should analyze the incentives of employers to train their workers, whether or not they havetraining plans, competency needs assessments done by GIACs and usefulness of such CNAs, thedemand for skills created by changing technology, exports and increased international competition, aswell as the constraints faced by firms in developing in-service training programs. These analvsesshould be used to develop or modify policies to support the training and productivity improving effortsof firms.

* Analysts should assess the effects of in-service training on alternative outcomes for firms and workers.For enterprises, the benefits include productivity growth. increased competitiveness, exports, reductionsin rejects, improvements in quality control, job retention, etc. For workers, the benefits of in-servicetraining include higher wages and salaries, bonuses, improved job safety, and greater job stability.

- Analysts should evaluate the efficacy of the vocational training tax (VTT) in promoting in-servicetraining, especially among the MSIs, by tracking their training efforts and reimbursements from thetraining fund. Firm responses to the operation of the VTT can also be used to streamlineadministrative procedures, identify and develop new "training products", and disseminate best practiceto firms about in-service training and its benefits for employers and workers.

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Economic Analyses

1. The objective of the following economic analyses for the Third Private Sector Development Projectis primarily to measure the impact of in-service training activities (which is the focus of the project) on thevalue added of enterprises and the earning of workers. Based on the findings of these analyses thefollowing sections examine (i) the rate of return to the project, (ii) an alternative project design. and (iii) theproject fiscal impact.

A- The Impact of In-service Training on Enterprises and Workers.

2. The data source is the 1986 and 1990 Moroccan Industrial Surveys. Each survey askedenterprises in the manufacturing sector detailed questions on sales, revenues, output, exports, employmentand components of value added. The 1986 survey had additional questions on in-service training: thenumber of workers trained; the duration of the training in months; and the cost of the training in DH 1,000.The 1990 survey asked questions about the capital stock in the firm. We converted all nominal values to1993 DH values for reporting purposes.

3. Any firm which reported a nonzero number of workers trained was classified as a training firm in1986. One hundred ninety five out of 4,354 firms were thus classified. Their characteristics aresummarized in Table 1.

Table 1: Characteristics of Firms by Training Decision1986 1990

Mean Characteristics Training No training Training Non trainingin 1986 in 1986

Output (OOO'DH1 993) 127,813 16,379 159,432 21,682Investment (OOO'DH1993) 7,763 939 11,207 1,082Employment 254 46 281 57Wage bill(000'DH1993) 13,645 1,582 16,821 2,229Temporary worker-days 17,407 2,500 16,973 4,243Exports(fob)(OOOO'DH1 993) 14,792 3,622 26,366 5,769.7Revenue(OOO'DH1993) 141,254 16,877 185,868 22,786Value added (OOO'DH1993) 36,612 2,717 659,793 4,353Average wage (OOO'DH1993) 43.58 21.36 51.94 32.46

Number of firms 195 4,159 186 3,567

It is obvious from this table that firms that train are larger, employ more workers, export more, and in 1986paid more than twice as much in wages as do non-training firms. This is consistent with other countries:larger firms are much more likely to train than smaller firms, and their workers earn more. They are alsomuch more likely to survive: a comparison between 1986 and 1993 Industrial Surveys demonstrates that 9out of 10 firms that trained in 1986 were still operating 7 years later, compared with 3 out of 4 nontrainingfirms (although this is highly correlated with the fact that training firms are also much larger).

4. There are a number of reasons why firms do not train, and many of these are linked to firm size.One is lack of information both about the returns to training and where to get workers trained. Smallenterprises are less likely to have access to such information than the larger ones. Another is that there areeconomies of scale in training and small firms that only want to train one or two workers find the cost too

-35- Annex 4Page 2 of 12

high. The third problem is that firms do not recoup all the gains from training: by its very nature, trainingis embodied in the worker, and when the worker leaves (or goes to another firm) he or she takes the trainingalong.

5. Training incidence varies substantially across industries, and this variation is most readilv seen byglancing at Figure 1, which shows that firms in beverage and tobacco products are the most likely to train:21% of firms in this industry train. and almost 2% of their workers go through a training program. Firmsin other industries are much less likelv to invest in training: notably firms in textiles, clothing, rubber andplastic products and food products. More detailed information is provided in the figure below.

Training Incidence by Industry

u) 25.00%

c 20.00% - = . . . :

1 15.00% _..- - : - .o . 10.00%

CO 3 5.00%-

2 0.00%0 4U 05- -3. .

0 0 6 0 b ° e af o v,_ 4 E a S ° -0 ,I - - 20J0

Industry

Figure 1

6. This difference in the incidence of training raises the question of the determinants of training.Research in other countries suggests that very similar factors determine training needs: that more maturefirms are more likely to train as are firms that have to compete intemationally in the export market and thathave more skilled workers. We have already established that Moroccan firms are like their counterparts inthat larger firms are more likely to train than smaller - Table 2 demonstrates that the determinants oftraining are the same in direction, if not in magnitude, as those of other countries. In other words, the sizeand age effects are extremely important in Morocco, as in other countries. This raises two issues related tothe point made in paragraph 2.

- 36 - Annex 4

Page 3 of 12

Table 2: Determinants of Traini ng: An Intern tional Comp risonMorocco Colombia Indonesia Malaysia Mexico Taiwan

Small (16-100 .56 .50 .36 .80 .50workers) (.10) (.22) (.18) (.08) (.04)Medium (101-250 .93 1.18 - .94 1.12 .69workers) (.13) (.25) (.18) (.08) (.06)Large (>250 1.46 .84 .42 1.45 1.26 .68workers) (.14) (.30) (.27) (.19) (.09) (.07)Exports .10 .37 .06 .03 .13 .26

(.08) (.16) (.05) (.07) (.05) (.03)Age .02 -.006 -.006 -.005 .001 .004

(.002) (.004) (.007) (.003) (.001) (.002)Proportion of .12 .245 -.07 1.74 .14 .37skilled workers (.11) (.49) (1.40) (.26) (.14) (.07)Constant -2.77 -.88 .99 -1.81 -1.78 -2.90

(. 11) (.343) (.89) (.33) (.14) (.07)Log likelihood -667.3 -250.81 -98.5 -1133.4 -2971.97 -4617.93Additional variables included in other countries: multi-plant status- female workers; R&D; Foreign Ownership; value ofautomatic machinery. unionization.Source: Moroccan Industrial Surveys. 1990. Tan and Batra (1995) pp. 3943.* significant at 5%standard errors between parentheses

7. The gross descriptions presented in Table I suggested that firms that train are more productive,and pay higher wages than firms that do not train. However. it is not obvious that this is due to trainingalone: clearly there are other confounding factors (such as size and the use of capital intensive techniques)which could also cause these differences. We therefore estimate a standard production function forMoroccan enterprises using the 1990 information on capital stock, value added, employment and exports.We instrument current training practices using the 1986 information creating an indicator variable forwhether or not the firm trained any workers. We also control for industry differences by means of industryfixed effects, and estimate the relationship using White's correction for heteroskedastic errors. The resultsare reported in Table 3'5 and compared with other countries.

8. Our analysis suggests that, controlling for other observable factors, training firms have a valueadded which is 37% higher than nontraining firms. This may be an overstatement, since no data areavailable on the amount of research and development and technology transfer engaged in by the firm, but iscertainly well in line with estimates for other countries - up to 44% in the comparison group we are using.

9. The strength of this training effect is not surprising. When so few firms are training, it is likelythat there are significant barriers to training in the country, and hence that those that train must have highreturns to such an investment. We have data on training expenditures, and graphically show the linkbetween training expenditures and value added in Figure 2.

1 Since there are so few microenterprises that train, we pool the micro and small categories, and use this as the omittedgroup.

-37 - Annex 4Page 4 of 12

The Relat2onship between Training and Value Added

I ~~~~~~~~~~~~015 -

I ~~~~~~~~0 0

CD °- o O ° a

a,c ° o o

I 0~~~0 0 C

0 o oCL) 0 0 ~~~~~-00~

03 0 080 0 0 0 @0

oc 0~ 00

I 0 ~~00 O 0

0

0 0 0

log Of tralning cost

Figure 2

10. We estimate this link using a production function approach. There were several measurementdifficulties involved with estimating the link between training expenditures and value added. Firstly,training expenditures are notoriously poorly reported in other datasets, so although we are not directlyaware of any problems in this dataset, the results should be interpreted with some caution. Secondly, only120 firms reported their training expenditures. We calculated the average expenditure on training perworker for those firms (DH10,920), and imputed that to those 66 firms which reported training a numberof workers, but did not report that cost.

11. There were also technical difficulties in the estimation process. It is unrealistic to assume thattraining expenditures enter into the production relationship in the same fashion as do expenditures on;apital and labor. That is, a Cobb-Douglas production function implicitly assumes that if there are zero

expenditures on either capital or labor, then output and value added must similarly be zero. Zeroexpenditures on training, however, do not similarly imply zero output. We therefore specify trainingexpenditures in 1993 DH, and include this variable directly into the production relationship16 . Thecoefficient should be read as the effect of an increase of DHl,000 on the log of value added. Since theeffect of training is likely to vary by size, we interact training expenditures by size of firm as well.

12. We report the results in Table 3. Training expenditures unambiguously increase value added, evencontrolling for employment size and capital stock. The coefficient of .00069 means that for every DH 1,000increase in training expenditures, value added in the smallest firms grew by .00069%. Since the medianvalue added of firms in this category is DH434,000, the typical firm would expect to see a first yearincrease in value added of some DH299 as a result of that initial expenditure. Similarly, the combined

16 The specification of the function is

VA= La KO eTE

The log form is:

Ln (VA) = a Ln(L) + f Ln (K) + 8 TE

a , and 8 are the respective elasticity's for Labor, Capital and Training.

- 38 - Annex 4

Page 5 of 12

effect (including the interaction effect) for the next size of firm is .00008%, and the median value addedfor this size class is DH6,455,000. Thus, although the percentage effect is smaller, the return in absoluteterms is larger: DH516 in the first year for DH1000 invested. The largest size class see the greatest DHreturn of all: their median size is DH27,173,000 and the return on a DHI1,000 investment in training isDH815.

13. There are a series of reasons to believe that market failure has occurred in the provision of trainingin Morocco. First, the incidence of training is much lower than in other countries (see table 2 in main text.)This suggests that firms in Morocco may face different sets of barriers than those in other countries.Second, the fact that the incidence is much lower for smaller firms than for larger is consistent with thesources of market failure. Small firms are less likely to have the same access to information as large firmsabout the type, quality, and source of training. They are also subject to the problem of economies of scale:there are fewer employees over which to spread the fixed cost of training. Another source of market failureis that firms face the prospect of losing trained workers, and hence losing the return on human capitalinvestment. This loss of human capital is much less likely in large firms, which typically have welldeveloped internal labor markets to retain workers: indeed turnover is less in large than in small firms.Third, if firms are rational, the return on physical and human capital should be equated. This is unlikelygiven the very high 5 year internal rate of return on training reported in table 4 below. This again suggestsmarket failure.

14. There are a series of reasons why the return to training is so high for the largest firms. Some maybe technical (measurement error, for example). Others might reflect differences in the ability of large firmsto obtain quality training, or the ability of large firms to combine training with research and development.This latter is not measured in our data, but is clearly highly correlated with the returns to training.

Table 3: Production Function with training cost measure 1/log value added

log(capital) .31(.01)

log(labor) .84*___________________________ ~~(.02)

age .02*(.001)

export .08*(.03)

training expenditures(TE) .00069*smallest firms (.002)TE*medium -.00061*

(.009)TE*large -.00066*

(.009)constant 1.85*

(.10)1R2 .79

fixed effects on size of firm; standard errors in parentheses;* means significant at 5%1/ Where TE medium and TE large are dummy variables for medium and

large firms, respectively

- 39 - Annex 4Page 6 of 12

15. Although Table 3 indicates that there is a positive return to investment in training, it is instructiveto estimate the order of magnitude of this return. The increase in value added is likely to continue for anumber of years, especially since trained workers both use the knowledge daily in completing their tasks,and because they pass their knowledge on to other workers in the enterprise. Any number of assumptionscan be made about the number of periods for which the increase lasts, and about how fast the increasedepreciates. Table 4 provides some estimates of the internal rate of return to the initial investment ontraining, based on different assumptions about how long the impact lasts and what those depreciation ratesare likely to be. We choose the median value added of firms in each category in order to estimate thisrelationship.

Table 4: Sensitivity Analysis of the Internal Rate of Return on Trainin2Depreciation Rate Small and Micro Firms Medium Firms Large irms

5 year 30 year 5 year 30 year 5 year 30 year0 15 30 4 1 67 70 75

2 14 28 -39 65 68 734 12 26 37 63 66 716 1 1 24 35 61 63 698 10 23 33 60 61 68

16. If we look at the first cell in each category, the return on value added for the small and microenterprises is 15% (based on their median value added). It is considerably higher for medium finns, at41%, and higher yet for the largest size class, at 70%. These rates of return should be interpreted withsome caution, particularly for the largest size class. Unlike other datasets, we have no measure of firmexpenditures on research and development or the extent of technology transfer. This is likely to be highlycorrelated with training expenditures for the largest firms, and hence overstating the rate of return to thisgroup.

17. We repeat the estimation using intensive techniques to deternine the effect of training onproductivity and wages. This is reported in Table 5. The effect of training on productivity is to increase itby 33%; it increases average pay by 28%.

Table 5: The effect of training on productivity and wages(using indicator variable on training) 2/

iog(productivity) log(average wage)log(capital/labor .32 .18ratio) (.01) (.01)age .01 .02

.001) (.0008)export .27 .22

(.04) (.03)train .33 .28

(.06) (.05)medium (100- .16 .20250 workers) (.04) (.03)large (250+ .18 .17workers) (.05) (.04)R2 .39 .342/ Where Train is a dummy variable for Training (all enterprises)and Medium and Large dummy variables for medium and largeenterprises, respectively.

- 40 - Annex 4Page 7 of 12

18. This enables us to verify the intemal rate of return estimate presented in Table 4 using a "short-cut" technique. As Tan and Mingat (1988) point out, the internal rate of return can also be estimated by

r = [E(T)-E(U)] / {n*E(U) + C}

where E(T) is the eamings of trained workers; E(U) refers to the eamings of untrained workers, n is theduration of training and C is the cost of training. Calculations suggest that if training were to increase theaverage wage of workers in firns that do not train by 28%, and the cost of that training is DHI 0,920, thenthis short cut method yields a rate of return of 42%: very close to the range of estimates calculated usingthe more sophisticated approach.

B - Rate of Retum to the Project and Sensitivity Analyses

19. The project generates significant economic benefits to both the enterprises and the State, on asustained basis. The project Intemal Rate of Retum (IRR) is estimated at 25% and the calculation issummarized in table 6 below. The following assumptions have been used for the computation of the projectcost and benefits:

* The costs include all capital expenditures, training costs, technical assistance, equipment,works, and physical and price contingencies.

* The incremental recurrent cost for the GIACs are already included in the project cost. Thereare no incremental recurrent cost for the project's second, third and fourth componentsbecause they do not generate additional recurrent expenditures in salaries or maintenance ofequipment and buildings.

* Three types of benefits have been considered. First, the findings summarized in para. 11above suggest that the increase in enterprises' value added resulting from the trainingactivities financed by the project's second component (CSF) can be estimated. The estimationis carried out under the assumption that all enterprises are medium-sized and that the effect oftraining continues for 5 years without any depreciation. Thus, the typical enterprise wouldexpect to see a five-year increase in value added of some DH516 as a result of an initialexpenditure in training of DH1,000.

* Second, since the project does not create additional pre-service training capacity, the retumsto pre-service training in the potential centers of excellence are not included as a benefit, andthe trainees' lost productivity during their period of training (opportunity cost) is not includedas a cost. However, as a result of the project the centers of excellence would be more relevantto enterprises' training needs, would have highly qualified trainers and modem equipment,thus they would be capable of responding to the changing needs of the labor market in aquicker and more meaningful fashion than in the current situation. Therefore, we assume thatthe average job search period of the centers of excellence's graduates would be reduced fromcurrently 10.5 months to 3 months. About 5,000 students would graduate each year from the36 centers of excellence, and eam US$2,050 per year on average. The reduction in their job-search period is worth US$ 6.5 million a year.

* Finally, the last benefit is the resources generated by the centers of excellence from sales oftraining and counseling services to enterprises (Compte Hors Budget, CHB). This benefit isestimated at a minimum of US$1.3 million a year for the centers of excellence.

* The US$ value of such costs and benefits has been estimated in constant 1994 prices, usingthe exchange rate $1 =DH8.3. The number of periods considered is 1'5 years.

- 41 - Annex 4Page 8 of 12

20. Additional benefits, not included, would be generated from the the number of workers enrolled inevening courses (from 4,000 in 1994 to at least 12,000 after 5 years), and the increase in the graduates'salary due to the likely improvement in the quality and relevance of the training they received in the centersof excellence. Moreover, it was assumed that training expenditures financed by the CSF scheme will bediscontinued after 3 years, whereas they are expected to increase after the promulgation of the in-servicetraining law, leading to an even higher IRR through reallocation of the VTT proceeds from the financing ofpre-service training to in-service training, which yields much higher returns. This last conservativeassumption is wvarranted by the institutional risk involved with the process of preparation and processing ofthe law.

Table 6: Internal Rate of Return(US$'000, 1994 prices)

Year Capital Benefit 1 Benefit 2 Benefit 3 Total Net Benef.Expenditures (CSF) (CHB) (Reduced Job Benefits

search time)1997 23,760 4,904 0 0 4,904 -18,8561998 29,898 11,918 300 400 12,618 -17,2801999 30,242 20,909 600 1,000 22,509 -7,7332000 6,883 20,909 1,000 3,000 24,909 18,0262001 4,485 20,909 1,300 6,500 28,709 24,2242002 16,004 1,300 6,500 23,804 23,8042003 8,990 1,300 6,500 16,790 16,7902004 1,300 6,500 7,800 7,8002005 1,300 6,500 7,800 7,8002006 1,300 6,500 7,800 7,8002007 1,300 6,500 7,800 7,8002008 1,300 6,500 7,800 7,8002009 1,300 6,500 7,800 7,8002010 1,300 6,500 7,800 7,8002011 1,300 6,500 7,800 7,800

IRR = 25% NPV (10%) = 33,527

21. The increases in value added resulting from a DHI,000 increase in training expenditures is thesingle most important factor which determines the magnitude of the IRR. This increase may fall short of(or exceed) the assumed value of DH516 used in the computation of the IRR due to diminishing (orincreasing) returns on training. The effect of such potential variations is shown in Figure 3 below forincreases in value added ranging from DH299 to DH815, corresponding respectively to the returns ontraining expenditures for the smallest (least efficient) and largest (most efficient) enterprise size-groups.Finally, any number of assumptions can be made about the number of period for which the effect oftraining lasts and how fast it depreciates. The assumptions made for the IRR computation seem ratherconservative and a sensitivity analysis of the return to training to these assumptions is provided in Table 4above.

-42 - Annex 4Page 9 of 12

Relashionship Between IRR and the Effect of Training onValue Added

60%

50%........ . .... .

40% .. . ... . . ....

30%........

20% ..... .... .

0%

299 516 815

Increase in Value Added tor Every DH-1000 Increase in r-E-- RI ~~~~~~~Training Expenditu res

Figure 3

C- The Development of a Least-cost Project Design

22. The project addresses the need to upgrade the Moroccan labor force. Two types of investment invocational training could effectively upgrade the labor force: expanding the capacity, quality and relevanceof pre-service training or. alternatively, promoting in-service training on a demand-driven basis. Thisproject adopts the second alternative, which is the least-cost one, for many reasons. First, the Bank'sexperience in financing the development of V.T. in Morocco clearly demonstrates that while quality pre-service vocational training is expensive (it generates substantial recurrent costs), the potential for costrecovery is low (see para. 1..12 of main text). This suggests that any expansion of pre-service trainingwould increase the Government budget burden and raises sustainability issues. Second, the utilization rateof the vocational training facilities would be maximized under the proposed project. The VT centers wouldhave much more incentives to operate twelve months a year and in the evenings, offering in-service trainingunder contracts. Finally, there are clear signals suggesting that the labor market is currently over-saturatedby VT graduates. In contrast with in-service training, the rate of return estimates for pre-service VTgraduates are very low. These rates of return are estimated in Table 7 below for the three levels ofvocational graduates based on salary and employment information collected through the MVT's tracerstudies. They are very sensitive to the average wage of apprentices. The estimates shown in the tablebelow assume that apprentices are paid 30% below the minimum wage (SMIG). The rates of return wouldbe negative if the average wage of apprentices was equal to the SMIG, and slightly higher than what isshown in the table if it was equivalent to 60% of the SMIG (which is the minimum permitted by theMoroccan legislation.)

- 43 - Annex 4Page 10 of 12

Table 7: Rate of return estimates for VT graduates (in DH)

Education Level Job level Average Wage Wage Additional Job-search Ratedifference of

(Annual) to Education costs/* Returnapprentices Costs/*

6 years of basic educ. Apprentice 12,700

6 years of basic educ. Skilled-worker level 1 13,596 896 44,340 784 2.0%plus 2 years of VT. (Sp6cialisation)

6 years of basic educ. Office worker 14,976 2,276 97,719 1,992 2.3%

plus 3 years upper (qualification)basic.

plus 2 years of VT.

6 years of basic educ. Skilled worker Level 3 19,080 6,380 166,788 4,307 3.7%plus 3 years upper (Technicien)

basic.plus 3 years of sec.plus 2 years of VT.

Iv Includes foregone earnings incurred because of additional time spent in training.

/** Includes foregone earnings incurred during job-search. Does not include the cost of placement services.

Sources for employment and earning data."Etude sur le Cheminement des laur6ats de /a Formation Professionnelle, Promotion 90." MVT, Rabat. 1994"Etude annuelle de suivi de l'nsertion des diplfmts de la formation professionnelle". MVT, Rabat. 1996

Sources for cost data.Morocco - Public Deficit and Economic Growth. World Bank. 1994

"Indicateurs de Gestion." OFPPT 1994.World Bank Staff Calculations.

D - Fiscal Impact Analysis

23. The project does not have any impact on the Government operating budget (see para. 3.07 of maintext.) The share of the project cost bome by the Govemment investment budget --including the Bank loanbut excluding the VT tax-- is US$67.7 million. This investment cost represents only 0.4% of the projectedGovermment's capital expenditures during the project duration. Because the project is part of theGovenmment sector strategy, it will be financed through the MVT's regular resources and thus will notrequire additional budget outlays.

24. Furthermnore, a significant portion of the project investmnent cost would be recovered by theGovermment budget through additional fiscal revenues:

* whether the increase in the enterprises' value added generated by the project would accrue tothe workers or the shareholders, it is fair to assume that about 25% of this incremental valueadded would return to the State through the income and corporate tax systems.

-44 - Annex 4Page I1 of 12

* similarly, the reduction in job search time of VT graduates would generate additional taxableincome, and thus fiscal revenues.

* 60% of the resources generated by the centers of excellence from sales of training andcounseling services to enterprises (Compte Hors Budget, CHB) are required to be reinvestedin the training centers, and thus would reduce proportionately the centers' future dependencyon public financing.

25. These benefits compensate to a large extent for the project's budgetary impact. Moreover, withadequate cost recovery policies the project has the potential to generate positive financial flows to theGovernment's budget. The investment under the third component of the project improves the quality andrelevance of both the in-service and pre-service training programs of the centers of excellence. In-servicetraining would operate on a full cost recovery basis, and based on the improved job prospects of the centersof excellence's students relative to students in "non-excellence" centers, the contribution of students to thecost of their education would be entirely justified. Based on flow of costs and benefits to the statementioned in the above paragraphs, if only 25% of the average cost per student was recovered (aboutUS$470 a year per student,) the cumulated financial benefits from increased tax revenues and cost-recovery would yield an IRR of 20% and a Net Present Value of US$14.5 million to the State. Thesecalculations are detailed in table 8 below, and figure 4 shows the sensitivity of the returns to the State inrelation with the rate of cost recovery. Assuming a discount rate for the State of 10%, Figure 4 shows thatthe Net Present Value of the Project becomes positive when only 15% of pre-service training costs arerecovered.

26. In summary, because the project leverages substantial resources from the private sector, its impacton the Govemment capital expenditures is small and should be dealt with primarily through cost recovery.

Table 8: Return to Government Expenditures(USS 000's, 1994 prices)

Year Capital Benefit 1 Benefit 2 Benefit 3 Cost-recovery Total Net Benef.Expenditures (CSF) (CHB) (Reduced Job Rate Benefits

search time) (25%)1997 9080 1,226 0 0 4,750 5,976 -3,1041998 20149 2,980 180 100 4,750 8,010 -12,1391999 17787 5,227 360 250 4,750 10,587 -7,1992000 11663 5,227 600 750 4,750 11,327 -3362001 6627 5,227 780 1,625 4,750 12,382 5,7562002 2200 4,001 780 1,625 4,750 11,156 8,9562003 2,248 780 1,625 4,750 9,403 9,4032004 780 1,625 4,750 7,155 7,1552005 780 1,625 4,750 7,155 7,1552006 780 1,625 4,750 7,155 7,1552007 780 1,625 4,750 7,155 7,1552008 780 1,625 4,750 7,155 7,1552009 780 1,625 4,750 7,155 7,1552010 780 1,625 4,750 7,155 7,1552011 780 1,625 4,750 7,155 7,155

IRR 20% NPV (10%) 14,549

a4vI AJaAOODJ ISO3

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- 46 - Annex 5

Page 1 of 1

PROJECT IMPLEMENTATION AND IMPACT

KEY MONITORING INDICATORS

A - Development Objective Indicators

1. Impact assessment of the project would be conducted in the context of the project is two majorobjectives: improve the skills of the workforce and increase enterprise competitiveness. The indicatorswhich would be monitored are: (i) labor productivity (output per worker), (ii) value added per worker, (iii)improvement in real wages, and (iv) the percentage of firms that train by size of firms. Data would becollected through the studies described in Annex 3, and more recent baseline data would be establishedduring the first year of the project when the first of the series of three surveys is undertaken. In addition,the economic analyses of Annex 4 would be updated following each survey, in order to monitor the flow ofproject benefits by estimating the increase in enterprises' value added resulting from the training activitiesfinanced by the project.

B - Other Monitoring Indicators

Indicator Baseline TargetValue 96 2000/01

GIAC 1. Number of CNA realized 3502. Percentage of MSIs among the beneficiaries 20%

CSF 3 Cumulative actual disbursement (in % of total) - 100%4. Percentage of funding requests which concern the 0% 6%

elaboration of a training plan5. Share of planned training activities among total 7% 30%6. Percentage of funding requests following a CNA 0% 5%

C.E. 7. Number of Centers classified in each category (0,1,35) (17,19,0)(Excellence, III, II, see Annex 7 for definition)

8. Share of the proceeds from contracts (compte hors 3.4 14budget) in Centers (36 centers) in millions of DH

9. Number of days of In-service Training 20,000 45,00010. Number of workers enrolled in evening courses 5,600 7,000

(Centers of Excellence only)

Annex 6Page I of 3

Criteria for Ranking the Centers

CRITERIA LEVEL 2 LEVEL3 EXCELLENCE

1. Number of workers in the catchment area of the center 10,000 10,000 10,0002. Turnover from in-service training contracts (excluding evening courses) DH70,000/year DH150,000/year DH300,000/year3. Insertion rates of graduates 40% 50% 80%4. Ratio of evening courses trainees to pre-service trainees. 0.15 0.3 0.55. Percentage of trainees in dual training programs. 15% 30% 50%6. Existence of a technical capacity in curricula development Yes Yes Yes7. Existence of a private sector steering committee Exists Exists Co-Manage8. Number of workers/days in in-service training a year 500 15009. Percentage of trainers with more than 10 years of experience who have had a skill 100% 100%

assessment10. Percentage of trainers who hiave participated in the design and/or delivery of a 25% 50%

training contractI I The training programs, training streams, technical equipment and logistics of the Yes Yes

Center have evolved as a rcsult of technical assistance12 Existence of a library Yes Yes13 Percentage of non-salary expenditures financed by the Center's own resourccs 15% 30%14 The Center has an inventory of its equipment Ycs Yes15. The Center has a repertory of associate qualified staff who can participate in Yes Yes

training activities16 Existence of a unit "contracts w ith enterprises" Yes Yes17 Existence of a trainers' training plan Yes18 All trainers whose professional skills were evaluated have a personalized training Yes

plan.19 Existence of a cost accounting system. Ycs20. The Center has the autonomy to develop its own training programs and manage its Yesown affairs (business).Only 3 criteria are requircd for Level 2.

-48- Annex 6

Page 2 of3

TIMETABLE FOR PROGRESSION TO EXCELLENCE

GraduationNo CENTRES Present Progression to Centers

Level to Level 3 of| Excellence

___ ___ ___ __ ___ ___ __ ___ ___ __ ___ ___ ___ __ ___ ___ __ ___ ___ __ ___ ___ __D ate ~ D a te~

1 Institut Superieur de Technologie Appliquee Inter-Entreprises 3 1996 19972 Institut Superieur de Gestion et d'Informatique 2 1997 19983 Institut Superieur de Technologie Appliquee Maamora 2 1997 19994 Institut de Technologie Appliquee Rte Agoural (+CQP) 2 1998 20005 Institut des Metiers du Vetement 2 1997 19996 Institut Superieur de Technologie Appliquee de Ben M' Sik 2 1999 20017 Institut Superieur Industriel de Casablanca 2 1997 19998 Institut Superieur du Batiment 2 1999 20019 Institut Superieur de Technologie Appliquee Hay Riad Rabat 2 1998 200010 Complexe de Formation de Settat 2 1998 20001 1 Institut Superieur des arts graphiques 2 1997 200012 Centre de Qualification Professionnelle Confection Tanger 2 - 7 1999 200013 Institut Superieur de Technologie Appliquee Sidi Maafa 2 - 6 1999 200214 Institut Superieur de Technologie Appliquee Sale 2 - 6 1998 200215 Institut Superieur de Technologie Appliquee Gestion Rabat 2 - 6 1998 200216 Institut Superieur de Technologie Appliquee Agadir 2 - 6 1998 200017 Institut de Technologie Appliquee Sidi Kacem 2 - 5 1997 200018 Complexe de Formation El Jadida 2 - 5 1998 200019 Institut de l'Habillement et du Textile 2 - 10 1999 200220 Institut des Techniques de l'habillement 2 - 8 1997 199921 Institut des Metiers du Cuir 2 -8 1997 199922 Institut de Technologie Appliquee Hay Adarissa 2 - 6 1998 200123 Institut de Formation en Textile 2-6 1997 199924 Institut Superieur de Technologie Appliquee Tanger 2 - 5 1998 200025 Institut Superieur de Technologie Appliquee Rte Imouzer 2 - 5 1998 200126 Complexe Marrakech 2 -5 1999 200127 Institut Superieur de Technologie Appliquee Nador 2 - 5 1999 200128 Institut superieur du Froid et du Genie Climatique 2 - 4 1999 200229 Institut Superieur de Technologie Appliquee Saniat R'Mel 2 - 4 2000 200230 Centre de Qualification Professionnelle Hay Mohammadi 2 - 4 2000 200231 Institut Superieur Industriel de Mohammddia N.C. 1999 200232 Institut de Technologie Appliqu6e Cuisine Restauration Casa N.C. 2000 200233 Institut de Technologie Appliquee Textile Tanger N.C. 2000 200234 Institut de Technologie Appliquee Confection Fes N.C. 2000 200235 Institut de Technologie Appliquee Cuisine Restauration Agadir N. C. 2000 200236 Institut de Technologie Appliquec Confection Rabat N. C. 2000 2002

- 49 - Annex 6

Page 3 of 3

TIMETABLE FOR PROGRESSION TO EXCELLENCE(Centers Financed by the Bank Loan)

| GraduationNo CENTRES Present Progression to Centers

Level to Level 3 ofExcellence

---------- ji ~~~~~~~~~~~Date DateI Institut Superieur de Gestion et d'Informatique 2 1997 1998

2 | Institut Superieur de Technologie Appliquee Maamora 2 1997 19993 Institut de Technologie Appliquee Rte Agoural 2 1998 20004 Institut Superieur Industriel de Casablanca 2 1997 19995 Institut Superieur du Batiment 2 1999 20016 Institut Superieur de Technologie Appliquee Hay Riad Rabat 2 1998 20007 ISTA Settat 2 1998 20008 Institut Superieur des arts graphiques 2 1997 20009 Institut Superieur de Technologie Appliquee Sald 2 - 6 1998 200210 Institut Superieur de Technologie Appliquee Agadir 2 - 6 1998 200011 ISTA AL Massira El Jadida 2 -5 1998 200012 Institut Superieur de Technologie Appliquee Tanger 2 - 5 1998 200013 Institut Superieur de Technologie Appliquee Rte Imouzer 2 - 5 1998 200114 ISTA Marrakech II 2 - 5 1999 200115 Centre de Qualification Professionnelle Hay Mohammadi 2 - 4 2000 2001

- 50 - Annex 7Page 1 of2

FIAC Flow of Funds

1. Payment by enterprise to consultants

Reimbursement to Enterprise 6. 2. Submission by enterpn'se to GIAC of areimbursement request for verification and approval

3. Submission to COD by GIAC for

Payment to GIAC 5. validation

4. Transmission of disbursement request by CODrepresentative to Bank for payment to GIAC

- 51 - Annex 7

Page 2 of 2

CSF Flow of Funds

1. Payment by enterprise to provider

2. Submission by enterprise to CTR of areimbursement request for verification and approval

Reimbursement to Enterprise 3. \ s -

4. Submission to OFPPT forreplenishment of special account

Replenishment ---

of special account 6. 5. Transmission of disbursement request byOFTTP representative to Bank for replenishment of

( special account

- 52 - Annex 8

Page 1 of I

SELECTED INFORMATION IN THE PROJECT FILE

I. Project Documentation

World Bank/Kingdon of Morocco: Project Implementation Volume (in French)

II. References

Office de la Formation Professionnelle Etude d'Orientation et de Developpement de laet de la Promotion du Travail! Formation Professionnelle (Novembre 1993)Groupement CIDE-Teccant/SENAI

The World Bank Morocco in the Global Economy, 1995-20 10(A Background Note)

The World Bank The Maghreb Countries and The European Union's(A Background Note) Mediterranean Initiative

World Bankl995 Morocco: Education and Training for the Twenty-first Century

World Bank 1995 Kingdom of Morocco. Country EconomicMemorandum. Towards Higher Growth andEmployment (Report No. 14155-MOR)

World Bank 1995 Claiming the Future. Choosing Prosperity in theMiddle East and North Africa

World Bank 1994 Royaume du Maroc: Depenses publiques.Probl6matique et perspectives (Report No. 13413-MOR)

World Bank 1994 Kingdom of Morocco: Costs, Financing andEfficiency of the Education System (Report No.11937-MOR)