DoCument of The World Bank FOR OFFICIAL USE ONLV Report No. P-5444-H4U MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AN'D DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$150 MILLION TO THE REPUBLIC OF HUNGARY FOR A HUMAN RESOURCES PROJECT MARCH 11, 1991 This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EOUIVALENTS Currency Unit - Forint (Ft) AVERAGE EXCHANGE RATES (Forints per US$) 1985 1986 1987 1988 1989 1990 1991 US$1.00 -FT 50.1 45.8 47.0 50.4 60.8 62.0 71.0 WEIGHTS AND MEASURES Metric System US System 1 meter (m) 3.2808 Feet (ft) 1 kilometer (km) e 0.6214 mile (mi) 1 square kilometer (km) 0.3861 square mile (mi) 1 metric ton (m ton) = 0.9842 long ton (lg ton) 1 kilogram (kg) 2.2046 pounds (lbs) ABBREVIATIONS AND ACRONYMS CEF - Catching-up-with-Higher-Education-in-Europe Fund HAS - Hungarian Academy of Sciences HE - Higher Education IIF - R&D Computer Network MOE - Ministry of Culture and Education MOF - Ministry of Finance MOL - Ministry of Labor NTC - National Training Council OTKA - National Scientific Research Fund RTB - Regional Training Board SAR - Staff Appraisal Report STR - Science and Technology Research HUNGARY FISCAL YEAR January 1 - December 31 FOR OFFICIAL USE ONLY HUNGARY HUMAN RESOURCES PROJECT Loan and Project Summary Borrower: Republic of Hungary Beneficiaries: Ministry of Labor, National Training Council, the Catching. up-with-Higher-Education-in-Europe Fund (CEF) and the National Scientific Research Fund. Amount: US$150 Million Terms: Fifteen years, including a five year grace period, at the IBRD standard variable interest rate. Proiect DescriDtion: The project includes an Employment and Training Program and a Higher Education and Research Program. The Employment and Training Program would: (a) develop employment information and services to promote labor mobility; (b) improve occupational training for adults by providing support for a labor market based training system with strong links to private and public employers; and (c) initiate reform of vocational secondary schooling by developing new curricula with more general education and broader training to replace the out-dated and narrow curricula currently used in vocational schools. The Higher Education and Research Program would: (a) support the introduction of competition- based grant funding for higher eduction programs according to criteria which emphasize greater collaboration and resource sharing among institutions of higher education and research and new interdisciplinary programs; (b) develop a program of practically oriented foreign language training; and (c)support development of human resources for Science and Technology (STR) by earmarking a portion of the competition-based National Scientific Research Fund (OTKA) for younger researchers, refurbishing the stock of and improving the management of the centers of scientific instrumentation financed by OTKA, and upgrading the national R&D computer network (IIF) used by academic and industrial researchers. Financing Plan: Local Foreign Total ----------US$ millions-------- IBRD - 150.0 150.0 Government 189.8 - 189.8 TOTAL 189.8 150.0 339.8 Economic Rate of Return: Not Applicable Staff Appraisal Report: 9183-HU This document has a restricted distribution and may be used by recipients only in the ptrformaui.e of their official duties. Its contents may not otherwise be disclosed without World Bank aLithorizaon. MEMORANDUM AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF HUNGARY FOR A HUMAN RESOURCES PROJECT 1. The following memorandum and recommendation on a proposed loan to the Republic of Hungary for US$150 million is submitted for approval. The proposed loan would assist the Government in its program to alleviate 'e unemployment impact of economic restructuring and to invest in human resources so as to promote Hungary's economic and technological competitiveness. The loan would have a maturity of 15 years, including a five years grace period, at the standard variable interest rate. 2. Background. Rigid labor markets, an unresponsive training system, and fragmented and outdated higher education inappropriately linked to industry and scientific R&D, will severely constrain the success of the economic reforms and the move to a market economy. New institutions and major structural reforms are needed to address human resources issues, which include emerging unemployment, obsolescence of much of the training system, lack of management and foreign language skills, and the scientific and technological gap between Hu ary and its competitors. Manpower planning for the command economy has resulted in complex and rigid management of narrow vocational training by the Ministry of Culture and Education (MOE) alo..g with many other line ministries which supervised productive sector enterprises. A more flexible approach capable of quick adaptation to shifting market conditions is urgently needed. 3. The economic stagnation over the past 15 years has resulted in under-investment in human resources. Some 70% of the secondary school age population is enrolled in secondary school, but nearly half of this is in narrow apprentice training with very little general secondary education beyond the primary school level. Only 15% of the university age population attends college or university, compared with at least 30% in OECD countries. Government strategy is to expand secondary and tertiary enrollments, and to initiate institutional and policy reforms, while refurbishing outmoded equipment and infrastructure at these levels. 4. Rationale for Bank Involvement. As a part of the Bank's assistance in helping Hungary move towards a market economy, the Government requested Bank assistance in a broad spectrum of human resources issues including labor markets, training, higher education and science and technology research (STR). Following extensive sector work in FY90, the Bank is now well positioned to support a broad project which provides the initial support for a larger human resources investment program. The Government sees the framework adopted in this project as useful for attracting external assistance from other donors. 2 5. Prolect Oblectives. The project would address certain priority human resources issues which constrain a successful transition to a market economy. Specific objectives are to: (a) assist unemployed workers to find jobs and enterprises to find suitable workers; (b) provide relevant training for youth and adults, especially in relation to item (a); (c) improve the rasponsiveness of higher education to the new technical and managerial demands of a market economy, with special emphasis on improving access, relevance, quality, efficiency and financing; (d) assist in narrowing the technological gap between Hungary and its competitors by expanding and reorienting the training of science and technology researchers, improving management of research and improving the linkages between the academic community and enterprises; and (e) develop foreign language competence so as to promote international economic and technological ties. Project Description 6. The EmRloyment and Training Program would provide equipment and technical assistance needed to: (a) develop employment information and services to promote labor mobility by incorporating lessons from pilot employment programs in the Third Industrial Restructuring Project (implementing agency: Ministry of Labor (MOL)); (b) improve the responsiveness of adult vocational training, by providing specialized occupational training with strong links to private and public employers and the labor market (implementing agency: the National Training Council (NTC), a new body with business, government and worker representation, whose mandate is to organize the development and delivery of training in response to market signals); and (c) improve vocational curricula for 14 - 16 year olds by converting excessively narrow vocational programs into broad based general education programs (science, mathematics, languages, etc.), coupled with training in broad clusters of occupational skills as a base for further specialized training (implementing agency: MOL). 7. The Higher Education and Research Program would assist: (a) the recently established Catching-up-with-Higher-Education-in-Europe Fund (CEF) to implement its mandate to review and select the winners of competitions for innovative and relevant higher education programs according to agreed upon criteria and procedures, and (b) the development of human resources for Science and Technology Research (STR) by supporting research grants for young scientists, improvement of scientific instrumentation centers shared by the scientific community and the development of the national R&D computer network. The criteria for selecting proposals submitted to the CEF would encourage greater collaboration and resource sharing among specialized universities and the research institutes of the Hungarian Academy of Sciences (HAS) and new inter-disciplinary programs (e.g., economics and management for engineers and scientists). This would also include support for practically oriented foreign language training programs. The STR programs would be implemented by the newly restructured National Scientific Research Fund (OTKA). 3 8. The total cost of the project is estimated at $US 339.8 million, with a foreign exchange component of $US 150.0 million (44%). A breakdown of costs and the financing plan are shown in Schedule A. Amounts and methods of procurement and of disbursements are shown in Schedule B. A timetable of key project processing events and the status of Bank Group operations in Hungary are given in Schedules C and D, respectively. The Staff Appraisal Report (SAR), No. 9183-HU, dated March 1991 is being distributed separately. 9. Actio is Agreed. During negotiations the Government gave assurances that: (a) the system of unemployment monitoring implemented in January 1991 would be continued on at least a quarterly basis; (b) it would review with the Bank not later than November 30 of each year the proposed NTC and RTBs budget and programs for che following fiscal year of the Borrower; (c) it would staff adequately and provide other resources to the relevant professional departments of MOL to ensure successful implementation of: (i) industrial adjustment services, occupational and educational information; (ii) aptitude and interest assessment, career information systems development and user training; and (iii) job search and development; and (d) it would staff adequately and provide other resources to the relevant professional departments of the MOL to implement the new vocational secondary school curriculum. These staff (to be appointed by Minister of Labor through internal redeployment) would act as facilitators and liaison officers across existing departments and with the staff of the MOE. They would develop terms of reference for technical assistance contracts and equipment, coordinate procurement activities among MOE, Government an,i Bank officials, monitor expenditures and provide reports to the Government and the Bank. 10. During negotiations the Government also gave assurances that it would: (a) submit to Parliament by December 31, 1991 draft laws providing for (i) the autonomy of universities and colleges and a mechanism for their normative financing, (ii) the autonomy of the HAS, and (iii) the reform of the system of advanced training for scientists and the awarding of scientific degrees; (b) carry out and review with the Bank by June 30, 1992 a feasibility study on revenue generation and cost recovery in higher education and take all measures required on its part to ensure the improvement of cost recovery on the basis of the study's recommendations, taking into consideration the comments of the Bank; and (c) use the agreed criteria, guidelines and procedures for awards of grants/allocations under the CEF, the Scientific Instrument Centers and the Young Scientists Support Program and review any futtre changes to these criteria, guidelines and procedures with the Bank before they are introduced. 11. During negotiations the Government confirmed that: (a) progress reports would be submitted semi-annually; (b) annual audits of acceptable scope and quality would be carried out by independent auditors satisfactory to the Bank; (c) annual audit reports for the preceding fiscal year would be made available to the Bank no later than by June 30th each year; and (d) a mid- term review of the project's progress would be carried out by the Bank and the Borrower by November 30, 1993. 12. Conditions of Disbursement. Disbursements for goods under the adult training component of the project would be conditional upon: (a) the NTC 4 budget having been adopted for the borrower's fiscal year ending December 31, 1991; (b) operational guidelines for regional training boards having been adopted and at least four of these boards having been established and staffed; and (c) the proposed programs and budgets of these regional training boards having been adopted for the borrower's fiscal year ending December 31, 1991. 13. Bgnefits. The major benefit would be thLe contribution this project would make to promoting a quick and flexible supply response to the transformation of the Hungarian economy. Employment services developed by the project would assist in the alleviation of unemployment and the productive redeployment of labor. Hungary's base of skilled workers and professionals would be expanded and improved to assist the country to compete successfully in a European framework. The national capacity for research and technological development, with an enhanced capability to respond to changing market needs, would be increased through the HE and STR components of the project. 14. Risks. The major risks are: (a) that the past fragmentation in the education and training system has resulted in bureaucratic vested interests which may try to preserve their spheres of control and delay implementation; and (b) newly created agencies would have inadequate experience to implement major components. The first risk is being addressed by providing a sufficient amount of financing to motivate effective cooperation and sharing of resources, thereby helping to overcome the fragmentation in the education and training system; the second risk is being addressed by incorporating technical assistance to strengthen institutional performance. 15. Recommendation. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank and recommend that the Executive Directors approve the proposed loan. Barber B. Conable President Attachments Washington, D.C. March 11, 1991 5 SCHEDULE A HUNGARY HUMAN RESOURCES PROJECT Estimated Costs and Financing Plan Local Foreign Total ----- US$ Million - Estimated Cost Improved Labor Programs 5.5 2.6 8.1 Adult Training Programs 48.0 19.8 67.8 Improved Youth Training 30.1 29.9 60.0 Higher Education and Research 45.7 58.9 104.7 Science and Technology 30.2 17.8 48.0 Total Base Costs 159.5 129.1 288.6 Physical Contingencies 9.6 7.8 17.4 Price Contingencies 20.7 13.1 33.8 Total Costs 189.8 150.0 339.8 Financing Plan Local Foreign Total ---- US$ Million ------- Government of Hungary 189.8 0.0 189.8 International Bank for Rec. & De-7. 0.0 150.0 150.0 Co-financier Total Financing Requirements 189.8 150.0 339.8 6 SCHEDULf H HUNH HUMAN RESOURCES PROJECT Procurement Method and Disbursement (USS million) Procurement Arrangements a/ USS Million 28-Feb-91 ------- ------- ------- ------- ------- 09:59 ICB LIB OTHER N/A TOTAL Foreign Investment: Technical Assistance 38.4 38.4 (32.3) (32.3) Equipment 83.3 20.8 39.6 143.8 (83.3) (20.8) (0.0) (104.2) Software (Including Books) 15.9 15.9 (11.4) (11.4) Research Support: Young Scientists Supp. Program 3.9 3.9 (2.1) (2.1) Local Costs: Construction 92.3 92.3 (0.0) (0.0) Staff, Operat. and Maintenance 45.5 45.5 (0-0) (0.0) Total Financing Requirements 83.3 20.8 190.1 45.5 339.8 Total Bank Financing (83.3) (20.8) (45.8) (0.0) (150.0) *=.==a SXna .. =..==== ======S ======= a/ Figures in brackets are the respective amounts financed by the Bank Loan I1RD Disbursement (US million) Amount of the Loan Allocated % of (Expressed in Expenditures Cateaorv Dollar Eauivalent) to be Financed (1) Goods: (a) for Adult Training 18.5 100% of foreign expenditures (C.I.F.); (b) for the other Parts 79.3 100% of local expenditures (ex-factory). of the Project (2) Consultants Services 12.5 100% of foreign costs of foreign consultancy services and of overseas fellowships. (3) Fellowships and Research Grants 21.0 100% of foreign expenditures of research grants. (4) Unallocated 18.7 Estimated IBRD Disbursement ISRD FY (USmillion) FY92 FY93 FY94 FY95 FY96 Annual 20.0 35.0 50.0 40.0 5.0 Cumulative 20.0 55.0 105.0 145.0 150.0 7 SCHEDULE C HUNGARY HUMAN RESOURCES PROJECT Timetable of Key Prolect Processinx Events (a) Time taken to prepare: 18 months (b) Prepared by: Government with Bank Assistance (c) Appraisal mission departed: October 1990 (e) Negotiations: February 1991 (f) Planned date of effectiveness: June 1991 (g) List of relevant PCRs and PPARS: None 8 SC{FD't'1.E D Page I of 2 THE STATUS OF BANK GROUP OPERATIONS IN HUNGARY A. STATEMENT OF BANK LOQNS ^ (As of Dec. 31, 1990) Loan Fiscal (Leqs Cw..1'13iOw;) No. _ 'har Buri owe_ -Project Loa--- lIrdisrsd Four loants and six B-Loans fully disbursed E65.9- Of which: SECALs, SALs and Program Loans b 2965 1988 NBtH Indtustrial Sector Adjustiuent ',O(10 (i>) 2317 1983 ROHi Industrial Energy Conservation 109.00 O.20 2510 1985 NBH Integrated Livestock 80.00 19,20 2511 1985 NBH Fine Chemicals 73.00 -0.10 2557 1985 ROH Transport (Rail/Road) 75.00 5.20 2697 1986 ROH Power 64.00 26.90 2700 1986 NBH Industrial Restructuring I 100.0G 15.70 2709 1986 NBH Industrial Energy Conserv. II 25.00 4.40 2738 1987 NBH Crop Production 100.00 12.00 2834 1987 NBH Industrial Restructuring II 150.00 53.60 2847 1987 NBH Telecommunications 70.00 23.20 2936 1988 NBH Agroprocessing Modernization 70.00 58.30 2966 1988 NBH Technology Development 50.00 31.10 3020 1989 NBH Industrial Restructuring III 140.00 123.10 3032 1989 ROH Transport II 95.00 79.10 3055 1989 NBH Energy Development-Conservation 10.00 8.00 3056 1989 OKGT S Energy Development-Oil and Gas 100.00 92.40 3191 1990 NBH Financial System Moderniz. 66.00 61.00 3228 1990 NBH SAL 260.00 100.00 3229 1990 NBH Integrated Agric. Exports 100.00 92.00 B1010 1991 ROH ECO 200.00 200.00 3264 1991 HTC Telecommunications II 150.00 150.00 Total 2,692.92 Of which: Repaid 221,59 Total now held by the Bank 2.471,94 Total undisbursed 1.155.48 a/ The status of these projects is described in a separate report on all Bank/IDA financed projects in execution, which is updated twice yearly and circulated to the Executive Directors on April 30 and October 31. ~/ Approved during or after FY80. ./ National Bank of Hungary. d/ Republic of Hungary. 4/ National Oil and Gas Trust. 9 SCIIVDVItl-. D Pagl ? (,l B. STATFMENT O(F IFC INVESTMENTS (As ot Dec. 31, 1990) Fisc.iI Type of t1s$Mll _ - z~~ Qb1ir B _u .S iin.s _ [ ' ,nl F.'i! tL 1 98 1. ;irle L'siile Mfg. 8.h 2. ?0 1I 1981 i.u Iank Bankinrg - 3.23 3.23 1989 Class Wool General Mfg. 3,4+4 1.S3 4.'47 198Q Dtnamont General Mfg. 28.84 3.76 32,60 1990 Tetra Pak Pulp and Paper 7.8, 3.21 11.08 1990 Dexter Mold Getneral Mfg. 2.97 0.93 3.90 1990 Firsv Hungary Fund Capital Markets - 7.50 7.50 1990 FAIA5 Capital Markets - 0.04 0.04 Total Gross Commitments 51.67 22.90 74.57 Less: Cancellations, terminations, exchange adjustments, repayments, write-offF and sales 12.12 - 12.12 Total Commitments now held by IFC 39.55 22.90 62.45 Total Undisbursed 12.13 2.97 15.10 Total Disbursed 27.42 19.93 47.35 March 11, 1991