CIRCULATING COPY RESTRICTED TO BE RETURNED TO REPORTS DESK Report No. P-1072 This report is for official use only by the Bank Group and specifically authorizcd organizations or persons. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SPAIN FOR A SECOND EDUCATION PROJECT May 17, 1972 CURRENCY EQUIVALENTS (currency unit: peseta) US$ 1 = Ptas 64d47 Pta 1 = US$ 0.0155 Ptas 100 = US$ 1.55 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO SPAIN FOR A SECOND EDUCATION PROJECT 1. I submit the following report and recommendation on a proposed loan to Spain for the equivalent of US$50 million to help finance a second education project. The loan would have a term of 20 years, including 5 years of grace, with interest at 7 1/4 percent per annum. PART I - INTRODUCTION 2. The proposed loan, the Bank's ninth operation in Spain and the second for education, would bring total bank lending to $377 million. The amount outstanding and held by the Bank as of April 30, 1972 was $302.3 mil- lion. Lending in the past has been in transportation (railways: $205 mil- lion; highways: $33 million, and ports: $40 million), agriculture (live- stock: $25 million; and research: $12.7 million), and education: $12 mil- lion. Progress with Bank-financed projects has been generally satisfactory, although there have been delays in withdrawals under some loans. Annex I contains statements of Bank loans and IFC investments as at April 30, 1972, and comments on the status of individual loans. 3. Spain is among the relatively advanced countries seeking Bank funds, both in terms of income per head and degree of industrialization. The rationale for Bank lending has therefore rested largely on the need for external help in introducing reforms. The Bank has been able to help initiate significant changes in several strategic sectors of the economy - transport, agriculture and education. In view of the growing importance of industry, an industrial sector mission visited Spain in November, 1971. The mission is now preparing its report on the basis of which the possibilities for Bank lending to the industrial sector will be considered. 4. The objectives of the Bank's lending to Spain will continue to o the promotion of more economic crops and improved management, price and crc it policies in agriculture; support for the further reforms in education; and consolidation of the reform already underway in transport. To these sectors industry should soon be added in those cases where Bank lending would signi- ficantly help in rationalizing the structure of the sub-sectors selected and in improving financing mechanisms. -2- 5. The proposed Second Education Project would be the only operationi for FY 1972. Projects for ports, drainage irrigation, livestock and indus- try are in various stages of preparation. 6. IFC has made investments in three Spanish enterprises amounting in total to $13.5 million (see Annex I, page 2). The loans to Fabrica Espanola Magnetos, S.A. (FEMSA), an automotive electrical equipment manufacturer, are now fully repaid and IFC sold its FEMSA shareholding in March 1972. The loan of $7.2 million and equity investment of $2.3 million in Industrias del Papel y de la'Celulosa, S.A. (INPACSA), a pulp and paper manufacturer, are not yet effective. A number of other industrial projects are at an early stage. PART II - THE ECONOMY 7. An economic mission visited'Spain in November/December 1970 and its report (EMA-34a), dated May 20, 1971, has been distributed to the Executive Directors. A Bank mission An November 1971 reviewed industrial sector poli- cies and developments. Country data are presented in'Annex II. 8. The gradual liberalization and outward orientation of Spanish eco- nomic policies during the last decade brought about unprecedented economic growth, involving a rapid rise in average living standards and Spain's trans- formation into a predominantly industrial country. During 1960-70, GNP ex- panded in real terms on average by 7.5 percent per year, with GNP per capita, expressed in 1970 dollars, increasing from some $500 to^a'lmost $1000. In- dustry, the leading sector, grew on average by 10 percent per year during this period, one of the highest rates achieved among developing countries, and the second highest, after Japan, among OECD countries. The share of industry in GDP increased from 31 percent to 40 percent. 9. Real GNP grew by 6.8 percent in '1970, and by an estimated 5.2 per- cent in 1971, despite a considerable slackening in the expansion of manufac- turing which entered a recessionary phase in late 1970, characterized by a marked slowdown of investment and stock building. The agricultural sector led growth in 1971 with a rate probably in excess of 6.5 percent, substan- tially above long-run trends, owing mainly to favorable weather conditions. Output in service sectors expanded by an estimated 5.7 percent reflecting a record inflow of tourists, while the growth of industrial production slowed down to about 4 percent or half of that in the previous year. 10. Spain's balance of payments improved considerably in 1971. Com- modity imports rose by only 5 percent, reflecting the slowdown in economic activity, and particularly in industry. Commodity exports led by manufac- tured goods, increased by 23 percent; weakened domestic demand for indus- trial goods forced manufacturers to expand exports; additional incentives were provided by the revaluation of several European currencies. The strengthening of the trade balance was accompanied by further substantial increases in tourist earnings and workers' remittances thus leading to a -3- current account surplus of about $760 million in 1971. Due to the conti- nuing strong inflow of foreign capital, including some speculative movements, Spain's net foreign reserves rose by about $1.5 billion to a total of $3.2 billion at the end of 1971, equivalent to about 7 months of imports. 11. In 1971 there was a further acceleration of price and wage in- creases. Consumer prices went up by 9.7 percent during the year, compared to 6.8 percent during 1970. Notwithstanding the good harvest, increases in food prices (12.5 percent during 1971) were particularly sharp owing to price policies supporting agricultural incomes. Wage increases, estimated at more than 14 percent for 1971, were higher than in 1970 and well above official guidelines and productivity gains. Short-Term Economic Objectives 12. Government policies give first priority to stimulating the economy and consequently containment of price and wage increases remains difficult. The rediscount rate of the Bank of Spain was lowered twice during the year and has been at 5 percent since October 1971. In the public sector, variou3 measures have been taken to stimulate demand. Budgetary spending was accel- erated and subsidies for the construction of apartments were increased. To encourage private investment, a tax rebate of up to 7 percent of investment cost was offered in December 1971 for all industrial investment leading to orders prior to July 1, 1972. As a result of the more expansionary fiscal policy, the Government budget (including extra budgetary Treasury operations) has shown a deficit.of about Ptas. 26 billion ($370 million) in 1971, com- pared with a small surplus in 1970. 13. The 1972 budget continues to be expansionary. Total expenditure is forecast to increase by 13 percent over the initial 1971 appropriations. Capital expenditure would increase by 28 percent while current expenditures are expected to rise by 12 percent. Appropriations for education (14 per- cent of total budgeted expenditure) are well ahead of all other groups. Revenue is expected to accelerate but not beyond the increases in expendi- ture, and the budget deficit is expected to be of the same order of magnitude as that for 1971. Medium-Term Economic Targets 14. The Third Development Plan (1972-75) aims at an average annual growth rate of 7 percent. Projected growth is somewhat lower than that achieved in the 1960's (7.5 percent) but exceeds substantially the growth targets of previous plans. The Plan also aims to keep unemployment at its present low level of 2 percent of the labor force and to limit price increases to less than 4 percent. Contrary to previous plans it does not foresee constraints from the balance of payments. Imports of goods and services are projected to rise on average by 11 percent per year in volume (15.5 percent in value), while the projected annual growth of expdrts of goods and serv- ices is 10 percent in volume (14 percent in value). The Plan implies a con- tinuation of the rising trend of workers' remittances. These forecasts as- sume that world trade and economic development in other European countries -4- will continue the trends of the past decade and that Spanish costs and prices can be kept in line with those abroad, thus preserving Spain's international competitiveness. 15. Plan policies are designed to support important structural reforis. Emphasis is given to strengthening the industrial sector in the expectation of further economic integration with the EEC, following a Preferential Trade Agreement concluded in 1970. Other major reform areas of the Third Plan are education and urban development. For the first time, Spanish planning also includes environmental and research objectives. 16. The Plan's public investment program envisages total expenditure of $13.5 billion, of which $11.6 billion is for investment by the Government itself. Of the latter, 74 percent is allocated to five sectors: transport (25 percent), agriculture(,15 percent), education (13 percent), urban de- velopment (11 percent), and housing (10 percent). 17. The budgetary situation can be expected to impose a constraint on the attainment of these targets unless tax policy and tax administration are considerably reformed and. improved. The public sector savings ratio has been declining in recent years, and it may be difficult for the Government to raise sufficient tax revenue to meet the anticipated rise in public expenditure. 18. The share of foreign financing of the public investment programs envisaged for the Third Plan period is relatively modest, i.e. 4.8 percent. Of the total amount of $647 million, $259 million is for the transport sec- tor, (of which $174 million for RENFE), $1.24 million for agriculture and irrigation, $93 million for education, and $15 million for research and de- velopment. INI (Instituto Nacional de Industria), whose activities extend to a large number of companies in virtually all major industries, expects to raise about $155 million in foreign capital, probably through issues in the international capital markets. External Assistance 19. The net inflow of medium- and long-term capital increased from an average of about $540 million per year during 1967-69 to $676 million in 1970 and probably slightly over $700 million in 1971. Private loans to enterprises and real estate purchases rose sharply while direct investment continued at high levels. - 5 - Net Inflow of Medium- and Long-Term Foreign Capital (in $ million)1f 1967 1968 1969 1970 1971 Direct investment 180 143 187 178 - Portfolio investment 50 34 10 -12 - Real estate purchases 52 91 107 144 - Other private capital 159 111 141 384 - Eximbank loans 61 57 36 3 - Total public sector (Central Government) 33 145 24 -21 10 Total net capital inflow 535 581 505 676 710 - of which IBRD's net disbursements 44 28 36 17 4 Memorandum item Gross borrowing in capital markets (including undisbursed commitments) 20 25 76 498 There has been a marked change in the Government's attitude toward borrow- ing in international capital markets, resulting in a sharp increase in loans from financial institutions. Gross government and government guaranteed bor- rowing in international capital markets amounted to $25 million in 1969 and $76 million in 1970, but commitments jumped up to possibly $500 million in 1971. The largest single loan ($200 million) was contracted by the Govern- ment with a consortium of American banks. Also in 1971, INI borrowed $70 million through a consortium of American, European, and Japanese banks. Three privately-owned toll-road companies raised $96 million in the American and European capital markets, and the national telephone company raised $32 million. Maturities of the 1971 loans were between 5 and 7 years, while toll-road bond issues ($56 million) were for 15-year terms. 20. During FY 1963-71, Bank loans to Spain amounted to $328 million on a commitment basis, while net disbursements reached $154 million, correspond- ing to about 4 percent of total net inflows of medium- and long-term foreig. capital during that period. 21. Other important aid donors were the German Kreditanstalt fur Wiederaufbau, the French Government and Eximbank. Kreditanstalt has been active mainly in irrigation and hydraulic works, lending to the Guadalhorce- Bembezar project (DM 200 million, 1962) and the Tajo-Segura project (DM 200 million, 1970). It also provided suppliers credits for the UNINSA steelworks I/ All figures are at exchange rates prior to December 1971. -6- (DM 450 million, 1968) and for phosphate rock m'ining (DM 54 million, 1969-70). The French Govermnent helped to finance the HIFRENSA atomic power plant (FF 455 million, 1967). U.S. Export-Import Bank financing amounted to over $380 million during 1961-70, mainly used for the purchase of equipment for iron and steel ($154 million), aviation ($120 million) and power ($101'm'il- lion). 22. Total external public debt outstanding at the end of 1970 was $1,534'million, of which about $320 million was undisbursed. 1/ Debt serv- ice payments were estimated to be $264 million in 1971 equal to about 4.5 percent of total foreign exchange receipts. Including private debt service the ratio amounted to about 10 percent. Spain's debt servicing record is very good. The future debt burden is expected to remain modest and Spain remains creditworthy for borrowing in substantial amounts. PART III - THE EDUCATION SECTOR 23. In August 1970, the Spanish Cortes (Parliament) passed a sweeping educational reform law, unique both in its scope and in its potential impact on development. The law provides for a far reaching modernization of the en- tire education system over the next 10 years and initiated one of the most important public programs now under way in Spain. The reform has received' widespread support in Spain, and has also aroused great interest in other de- veloping countries, notably in South America. 24. The first phase, now under way and benefitting from a Bank loan (699-SP) made in June, 1970,' focusses on primary and general secondary edu- cation, while the second stage, which the proposed' project would assist, centers on vocational and technical education in secondary and higher educa- tion. A future third phase would include vocational training in agriculture and multi-purpose educational' centers and could possibly lead to a third Bank project. 25. Under the reform, all children between 6 and 14 years old will fol- low a common course for eight years of primary education, which includes prac- tical subjects in the last three years. Following this, students will pro- ceed either to short, intensive vocational training, or to secondary educa- tion. The present specialized types of secondary education are to be merged into a common curriculum of three years, featuring optional courses in tech- nology, home economics, commerce, and' agriculture. Career information and guidance will be provided. Final examinations will be supplemented by con- tinuous evaluation of students. For- the first time, curricula will be planned comprehensively to coordinate successive levels of education and to eliminate overlapping. Implementation of these reforms started in the academic year 1/ Valued at exchange'rates in effect since December 1971 the total out- standing increases to $1,606 million. - 7 - 1970/71 for grades 1-4 of primary education, and reached grade 5 in 1971/72; it will be extended to grade 6 of primary education and the first year of secondary education in 1972/73. 26. Formal vocational training, which enrolled approximately 183,000 students in 1970/71, has been generally inadequate, and has not supplied the practical training responsive to labor market needs. Responsibility is divided among the Ministries of Education, Labor, Commerce and Agricul- ture, as well as the Labor Syndicates and the Church. Moreover, no adminis- trative mechanism exists which would involve employers in the actual training or in adapting curricula to trends in occupational demand. Partly to com- pensate for the inefficiency of the formal system, complementary efforts were made by public and private agencies in developing non-formal vocational training. The success of this non-formal training was a major factor in adapting the labor force to changing economic conditions in the 1960s. One such scheme, the "Programa de Promocion de Obreros" was created by the Min- istry of Labor with OECD support in 1964. Under it, approximately 130,000 adult workers annually receive short intensive skill upgrading courses in industry, services and modern agriculture. 27. The second phase of the education reform will reshape formal voca- tional education in accordance with the requirements of a modern industrial society. Vocational education will be shortened and divided into three dis- tinct levels for greater responsiveness to changing labor market conditions. To complement the basic knowledge acquired at each level, additional train- ing of six months to two years will be offered to those not proceeding to the next level. Transfer from any of the three vocational levels to other academic levels will be allowed, and programs to facilitate re-entry to formal education by persons in the labor force, and programs for on-going adult education will be developed for implementation during the third phase of the reform. 28. Higher education is comprised of three separate systems under the aegis of the Ministry of Education: (i) technician and university schools of three years duration, (ii) engineering schools and (iii) universities of five years duration. The crucial problems in higher education have been the lack of overall planning and the low quality of technical education. The partial autonomy of universities and the status of certain professions have limited the control of the Ministry of Education over enrollments, which in- creased during the sixties without benefit of systematic national policy ( guidance from manpower plans. 29. The reform changes the structure of higher education by dividing the five year program into cycles of three and two years. On completion of the first cycle, students who are considered unlikely to benefit from higher studies or who do not wish to continue towards a degree may pursue brief third level vocational training leading to a diploma. Other students will continue in the two year second cycle degree program of specialized studies. The new system thus provides a much needed terminal course to prepare for employment students who are unable to complete their university courses. -8- 30. Engineering education traditionally has been offered in higher technical schools, each specializing in a single branch. Between 1966 and 1968, 16 of the 29 specialized schools were consolidated to form three poly- technical universities to achieve economies of scale. 31. The B'arcelona Polytechnic University suffers from many of the prob- lems typical of'Spanish engineering education. The students are of uneven quality and few coherent curricula are available to students, as teachers plan and give 'their coursei'independently. 32. Teacher training, until recently, was offered only to prospective primary teachers in 160 three-year teacher training colleges and to prospec- tive-school inspectors and teacher trainers in five university schools of education.- No institution provided systematic secondary or vocational teacher training and research onf education was virtually non-existent. The reform would improve teaching standards at all levels through compulsory teacher training, research on teaching methods and steps to make teaching a full- time career. Institutes of Education have been established in fifteen uni- versities for training and upgrading academic teachers for basic and second- ary levels under the coordination of the National Center of Educational Re- search. The new Institutes can meet the need for academic teachers, but a crucial gap exists in vocational and technical teacher training. 33. Public expenditures on education have grown rapidly since 1960, as the State assumed increased responsibility for financing the educational system, but Central Government expenditures on education in 1970 were still only 11.2 percent of total Central Government expenditures. Private ex- penditure continues to account for about 30 percent' of total national ex- penditure on education. Public and private expenditures combined represented only 3.5 percent of GDP. 34. The Spanish Third Development Plan (1972-1975) outlines the Gov- ernment's immediate financial proposals for implementing the reform. Educa- tioni and culture will receive 11.5 percent of the total Plan allocation and 14 percent of the Central Government, which amounts to about the same pro- portion as in the Second Plan. 35. A Sector Working Paper on Education was published by the Bank in September, 1971. PART IV - THE PROJECT 36. A report. entitled "Appraisal of a Second Education,Project in Spain" (PE-44a) dated May 15, 1972 is being distributed separately. A Loan and Project Summary is attached as Annex III. A map showing the lo- cation of project items is also attached.. -9- 37. In early 1971, the government prepared plans to extend implementa- tion of the education reform to comprehensive secondary schools, vocational education and university planning, and requested Bank assistance. Following a Bank reconnaissance mission in May 1971, a project preparation and apprais- al mission visited Spain during September and October 1971. Negotiations were held in Washington from April 1-12, 1972. The Borrower was represented by Messrs. Diez-Hochleitner (Undersecretary), Villa (Director General of Pro- gramming and Investments), Lopez (Director General of Vocational Training), Utande (Project Director), and Garcia de Paredes (Architect), all from the Ministry of Education. Mr. Alvarez represented the Barcelona Polytechnic University, and Mr. de la Fuente the Ministry of Finance. 38. While the previous Bank loan (699-SP) is helping to finance the first stages of the reform in basic and secondary education, the proposed project would (i) carry the reform a step further in secondary schools in selected areas of high population growth, (ii) introduce the new concept of vocational training, (iii) upgrade the training of engineers, a key factor in Spain's future development, in an expanded and reorganized Barcelona Polytechnic University, which would be relocated outside the city, (iv) fill a crucial gap in technical teacher training, and (v) reorient the training of agricultural technicians at one model agricultural institute. Technical assistance would cover vocational curricula development, technical teacher training and university planning, as well as preparation of master-plans for multi-purpose educational centers, all key areas of the education reform. 39. The proposed project, details of which are in Annex III, would in- clude: (a) design, construction and equipment of: - 39 comprehensive secondary schools - 37 vocational training centers - 1 agriculture technical institute - 1 polytechnic university - 4 institutes of education (b) equipment of the Valencia Polytechnic University; and (c) technical assistance related to items (a) and (b) above. 40. The total estimated cost is US$152.5 million, with a foreign ex- change component of US$50 million, which would be financed by the proposed loan. Unit capital costs per place, US$836 for secondary schools, US$1,440 for vocational centers, US$2,725 for the agricultural institute, and US$1,550 for the institutes of education, are within the ranges of costs of other Bank projects. The cost per place at the Barcelona Polytechnic University, US$3,730, compares with costs of previous Bank projects in engineering education (Singapor US$3,650 (1971) and Zambia US$3,720 (1969)). At full operating capacity the project institutions would require Ptas. 3.3 billion in annual operating costs per year, corresponding to about 2.0 percent of the projected recurrent budget - 10 - of the Ministry of Education by- 1980. The Barcelona Poiytechnic is expectdd to reach an annual operating budget of just over Ptas. 1 billion, or 1.9 percent of the projected higher education budget. As these project itemis have priority in the reform program it is expected that the-government will meet.its share of the project capital costs and the resulting recurrent ex- penditures. 41. The proposed 39 secondary schools would be located in major urban areas (see Map) 'and designed, equipped and staffed to serve as experimental schools for continued implementation of the first-phase of the education reform and to meet requirements-for new schools in ar&as of high population growth. 42. Thirty-seven vocational training centers would be constructed and equipped to launch vocational training reforms at first and second levels. All majoT occupational fields would be covered, except agriculture. The centers would function as pilot schools to test and demonstrate innovations for all formal vocational training in the public and private sectors. Train- ing courses would be moderidzed, replacing traditional fields with those prev- iously neglected and now essential, such as construction, catering and tourism, food-processing and electronics. The locations of the proposed centers (see Map) conform with- government priorities for regional development. 43. The Palencia Agricultural Institute-would include the design, construction, furnishing and equipping of an agricultural technician in- stitute for 360 students. It will help to meet by 1980 the foretasted anhual shortage of agricultural technicians. The institute would have a well-equipped teaching farm of about 30 irrigated ha. The Government has agreed that it will establish an Advisory Board, consisting of represen- tatives from agricultural research, extension agencies, cooperatives 'and agro-industries to review the Institute's training program periodically from the viewpoint of employers of agricultural technicians. 44. The Barcelona Polytechnic lUniversfty.would be relocated about 30 km from the center of Barcelona. The Project would assist the snew uni- versity in realizing its objectives to (a)-meet the proje6ted increase in demand for qualified engineers in the Catalonia region, (b) initiate the diploma level course for those unable to complete the degree program, dnd (c) rationalize the present system of separate schools by consolidating three specialized engineering institutes with-a combined futl'-time dnrollment of 5,290 at present. The major contribution of this ,project item, would be to upgrade the quality of engineering education and to produce eifgineers adapted to the requirements of Spanish industry. 45. The sum of $2.7 milltion for Laboratory equtjcant§anc $O.3'tiian for a-computer' center has been included for the new Polytechnic University of Valencia. This would allow students to follow a more practical cur- riculum of laboratory teaching, introduce civil and industrial engineering programs, and double enrollment from 2,000 Co 4,000 in 1980. The Government has provided assurances that enrollments will' be consistent with the na'tional plans for university education, and with its capacity to meet new teaching requirements. 46. To plan university education, the Government will establish a perma- nent technical secretariat within the National Board of Universities. This secretariat will be comprised of full-time specialists in planning, economics of education and operations research, and will prepare national plans for higher education, including engineering, in accordance with educational and economic priorities. Its first plan will be prepared within two years. 47. The effectiveness of the reform in technical and vocational educa- tion will depend on an adequate supply of properly trained teachers. To assist in providing this training, the project includes three new Institutes of Education (grades 16 and 18), at the Barcelona Polytechnic, Valencia Poly- technic and at Sevilla University; the latter would also offer training for academic teachers. In addition, a branch of the Institute of Education in Valladolid would be established at the Palencia Agricultural Institute for agricultural teacher training. When completed, the Institutes would have a capacity for 850 students (university graduates or diploma holders) in five- month courses and would graduate about 1,500 practical teachers and 200 gen- eral teachers annually. They would also offer upgrading courses during the evenings and summers annually. From 1975, when the project institutes would be in full operation, they would satisfy about 35 percent of the annual needs for agricultural teachers and vocational teachers. 48. Project Administration. The Project Unit established within the Ministry of Education to administer the first education loan will be expanded to assume overall responsibility for the second one. In order to speed up implementation, the Unit will prepare shortly a series of comprehensive crit- ical path diagrams, summarizing the major events for all parts of the project. The Director of the Unit will continue to report directly to the Under- Secretary of the Ministry of Education. 49. Under the responsibility of the Project Unit, a Project sub-unit is to be established in Barcelona which would be responsible for that part of the project related to the Barcelona Polytechnic University (BPU). The Project director of this sub-unit is to be assisted by an architect, a procurement officer and an engineering educator. The expansion of the Project Unit and establishment of the Barcelona sub-unit are conditions of effective- ness. 50. Technical Assistance and Architects' Services. Technical assistal.-, amounting to US$1.4 million, is currently being provided by the UNDP and Ford Foundation to strengthen general teacher training and research at the National Research Center for Educational Development. However, this assistance does not cover vocational curricula development, technical teacher training or university planning, three key areas of the educational reform. The proposed Project would fill this gap by including the cost of specialists and fellow- ships needed for the above areas. In addition, the cost of expert services for developing master plans for future multi-purpose educational centers is - 12 - included. Consultant architects would also be employed to assist in building design, evaluation of civil works tendering, and supervision of construcition. 51. Procurement. Contracts for civil works, furniture, and equipment would be awarded in accordance with the Bank's guidelines for international competitive bidding. It is expected that relatively few foreign firms would submit bids for civil works, which total US$73 million, since Spain has a well developed and competitive construction industry. Equipment and furni- ture, however, are expected to attract.considerable international bidding and items will be grouped so far as possible to form sizable bid packages. Local manufacturers of furniture and equipment would be allowed a preferen- tial margin of 15 percent of the c.i.f. cost of competing imports or the existing rate of duty applicable to imports from non preferred countries, whichever is lower. 52. The normal range.of import duties on the furniture is from 22 per- cent to 40 percent, and on the equipment from 0 percent to 41 percent. On furniture and equipment coming from EEC countries duties are one to six per- centage points lower. However, the Ministry of Education has informed the Bank that it would not be tbeir policy to take these preferences into account in evaluating -these bids. 53. Disbursement. The proposed loan would correspond to the foreign exchange component, estimated at about US$50 million equivalent, or approxi- mately one third of the total project cost of US$152.5 million equivalent. For equipment and furniture,, disbursements would be 100 percent of c.i.f. cost if a foreign bid won the award or 100 percent of ex-factory cost in case of a successful local bid. Civil works disbursements would be on the basis of 20 percent of total expenditures. PART V - LEGAL INSTRUMENTS AND AUTHORITY 54. The draft Loai Agreement between the Bank and Spain, the Report of the Committee provided for -in Article III, Section 4 (iii) of the Articles of Agreement and the text of a resolution approving the proposed loan are being distributed to the Executive Directors separately. The draft agree- ment generally conforms to the normal pattern for loans for education projects. 55. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 56. I recommend that the Executive Directors approve the proposed loan. Robert S. McNamara President Attachments May 17, 1972 ANNEX I Page 1 of 2 THE STATUS OF BANK GROUP OPERATIONS IN SPAIN A. STATEMENT OF BANK LOANS (as at April 30, 1972) Loan or US$ million Credit Amount (less cancellations) Number Year Borrower Purpose Bank Undisbursed Three loans fully disbursed 137.2 -- 507-SP 1967 RENFE Railways II 50.0 3.1 633-SP 1969 Spain Livestock 25.0 23.5 699-SP 1970 Spain Education 12.0 12.0 768-SP 1971 Spain Agricultural 12.7 12.3 Research 772-SP 1971 RENFE Railways III 90.0 90.0 Total 326.9 140.9 of which has been repaid 24.1 Total now outstanding 302.8 Amount sold 3.4 of which has been repaid 2.9 0.5 Total now held by Bank 302.3 Total undisbursed 140.9 ANNEX I Page 2 of 2 B. STATEMENT OF IFC INVESTMENTS (as at April .30, 1972) Amount in US$ million Year Obligor -Type of Business Loan Equity Total 1962,165, Fabrica Espafiola Automotive parts 2.50 0.86 3.36 '67 Magnetos, S.A. 1963,165 Banco del Desarrollo Development Bank - 0.59 0.59 Econ6mico EspaAol, S. A. 1972 Industrias del Papel Pulp and paper 7.20 2.32 9.52 y de la Celulosa, S.A. Total gross commitments 9.70 3.77. 13.47 less cancellations, terminations, repaymentsa-ndCsales 2.50 1.35 3.85 Total conmmitments now held by IFC 7.20 2.42 9.62 Total undisbursed 7.20 2.32 9.52 "Not yet effective Co PROJECT EXECUTION AND DISBURSEMENTS Disbursements on several loans have been proceeding at a somewhat slower pace than originally.-scheduled, but have been accelerating during the past-year. The three loans for Highways, Railways I, and Ports have now been fully disbursed. The Second Railways Loan (507-SP) is expected to be fully disbursed by the closing date of July 31, 1972. The Third Railways Project (772-SP) signed on June 30, 1971 became effective on December 29, 1971, and although no withdrawals have yet been made, the Bank has already approved $62 million worth of tenders. While disbursements under the Livestock De- velopment Loan (633-SP) of July 17, 1969 were only $1.5 million out of $25 mil- lion as of April 30, 1972, commitments by the project authorities totalled $14 million as of December 31, 1971, the funds for one sub-project area having been fully committed. Factors in the slow rate of disbursement have been initial delays in organizing the project unit .and an unprecedented drought af- fecting one of the two project areas in early 1971; implementation of the project is now proceeding satisfactorily. The loan to assist agricultural research (768-SP) became effective November 1, 1971. The project is still in the early stages of implementation, but recruiting of staff for the various research centers is proceeding well. Disbursements as of April 30, 1972 were $400,000. Initially the First Education Loan experienced administrative and legal difficulties in establishing a project unit in the Ministry of Education, but these have been overcome and the first disbursements of about $0.5 million, are expected in May 1972. ANNEX II COUNTRY DATA - SPAIN Area: 501,750 sq. km. Population (end of 1970): 33.8 million Density (end of 1970): 67 per sq. km. (census figure) Rate of Growth (1961-70): 1.06 percent Population Characteristics: Average Health: Average de Bith Rate (per 1,000) 1966-70 20.2 Population per physician 1970 770 Crude Death Rate (per 1,000) 1966-70 8.7 Population per hospital bed 1970 185 Infant Mortality (per 1,000 live births) 1966-70 24.3 Nutrition: Education: Per caoita protein intake (grammes) 1970 30,660 Adult literacy rate 1968 9L.3% Per capita meat consumption (grammes) 1970 44,700 Primary school enrolment 1970 91.0% GNP per capita: $1,010 (1971) 2/ Gross National Product 1970: A Value in U.S. $ mln Percent 1960-65 1965- 1970 GNP at market prices 32,257 100.0 GNP at market prices 7L 6 T. Gross Investment 7,381 22.9 Gross Investment 15.L 6.9 1.2 Gross National Savings 7,161 23.1 Gross National Savings 14.0 8.8 38.0 Current Account Balance 77 0.2 Outpu~t,Labor Force and Value Added 2/ Labor Force Production or Worker ty in 1970: US$ million % millions % US$ %r national average Agriculture 3,96 12. 3.75 29.6 1,056 12.0 Industry 12,590 39.6 14.70 37.1 2,679 106.6 Services 15,280 18.0 L.21 33.3 3,629 1L4.4 Total/Average 31,831 100.0 12.66 100.0 2,5114 100.0 Public Finances in 1970/71: Consolidated Public Sector (1970) Central Government 1971) Ptas. billion % of GDP % of GDP 1966-70 Ptas. billion of GDP % of GDP 1969-71 Current Receipts 519.1 22.9 2.5 317.0 13.5 131T Current Expenditures 123.7 18.7 19.7 25I.3 9.9 9.6 (incl. transfers) Current Surplus/Deficit(-) 95.1 L.2 4.8 92.7 3.6 3.7 Capital Expenditure 95.3 1.2 L.6 106.0 1.1 3.9 External Assistance (net) - - 0.1 3/ 2.2 0.1 0.1 Prices and Credit: Cost of Living Index Bank Credit to Public Sector Bank Credit to Private Sector End of year: Index %change Ptas. billion % change Ptas. billion % change 1968 101.3 2.8 19B.3 17.0 1,250.5 21.3 1969 104.8 3.5 215.3 8.6 _ 1,521.5 21.7 1970 111.9 6.8 238.5 10.8 1,718.2 l1.9 1971 122.7 9.7 266.7 11.8 2,062.7 18.0 Balance of Payments: (US$ million) Merchandise Exports: Average 1969-71 1969 1970 1971 1/ US$ million % Exports of Goods and NFS 3776 14,872 5,913 Investment Goods for the Imports of Goods and NFS 4,637 5,278 5,714 Transport Sector 185.L 7.7 Resource Gao (deficit = -) -761 -106 199 Investment Goods for Industry 207.0 8.6 Interest Payments (net) -166 -173 -187 Apparel and Footwear 197.1 8.2 Workers' Remittances 103 169 559 Books 68.h 2.8 Other Factor Payments (net) 1 -3 -25 Cars and Motorcycles 38.8 1.6 Net Transfers 129 190 217 Foodstuffs 788.2 32.7 Bal-ance on Current Account -3914 77 763 Others 921.2 38.4 Direct Foreign Investment 187 178 183 Total 2,L09.L 100.0 MSedium and Long-term Loans 201 366 246 (net) External Debt on December 31. 1970: Disbursements (227) (1418) (n.a.) US$ million Amortization (26) (52) (n.a.) Public Debt Outstanding and Official Grants - - - Disbursed 1,216.9 Other Canital (net) 117 132 281 Debt Service Ratio 1972: I,.5% Increase in Official -262 897 1,162 D So - eserves IBRD Lending, December 31. 1971: US$ million All other items -373 11lI -11 Disbursed l .6 Undisbursed 150.3 Gross Reserves (end of year)l,282 1,817 3,209 Net Reserves (end of year) 833 1,730 3,192 Outstandirg incl. Undisbursed 326.9 Current Exchange Rate: US$1.00 = Ptas. 6L.L737 Pta. 1 - US cents 1.55 1/ Preliminary forecast 2i Bank estimates I/ 1967-69 May 16, 1972 Europe, Middle East and North Africa Department ANNEX III Page 1 SPAIN - SECOND EDUCATION PROJECT Loan and Project Summary I. Loan Summary Borrower: Spain Amount: US$50 million equivalent in various currencies. The proposed loan corresponds to the project's es- timated foreign exchange component. Amortization: Payable in 20 years including a 5-year period of grace, through semi-annual installments beginning August 15, 1977 and ending February 15, 1992. Interest Rate: 7-1/4 percent per annum. Commitment Charge: 3/4 of 1 percent. II. Project Summary Project Description: The project would be a second phase in implementing the comprehensive reform of the educational system under the General Education Law. It would (i) extend the Spanish education reforms in secondary schools in selected areas of development priority and high population growth, (ii) introduce the new concept of vocational training, (iii) up-grade the training of engineers, a key factor in Spain's future development, (iv) fill a crucial gap in teacher training institutes for vocational and technical subjects, and (v) give a new orientatio;k to training of agricultural technicians. The project comprises: 1. Design, construction, furnishing and equipping of 39 comprehensive secondary schools (esti- mated 31,600 student places), 37 vocational training centers (estimated 18,600 student places), 1 agricultural technician institute at Palencia including an experimental farm (estimated 360 student places), Barcelona ANNEX III Page 2 Polytechnic University at a new location (estimated 9,610 student places), and 4 in- stitutes for education for teacher training (estimated 850 student places). 2. Provision of educational equipment for the Valencia Polytechnic University. 3. Development of new curricula for technical, vocational and agricultural education, and liaison between industry and relevant tech- nical agencies. 4. Planning of higher education. 5. Provision of services of education specialists and of fellowships. Project Project Unit in Ministry of Education, and a Project Administration: Sub-Unit in the Barcelona Polytechnic University. Estimated Cost: US$ million Local Fore!~n Total 1. Physical Facilities 39 Comprehensive Secondary Schools 20.9 6.9 27.8 37 Vocational Training Centers 27.7 14.5 42.2 Palencia Agriculture Technician Institute 0.8 0.4 1. Barcelona Polytechnic University 29.4 14.1 43.53 Valencia Polytechnic University 1.4 2.1 3.5 Four Teacher Training Institutes 2.5 0.A 3.3 Sub-Total 82.7 38.8 121.5 2. Technical Assistance 0.2 1.2 1.4 3. Project Administration 1.2 - 1.2 4. Contingencies a) Physical 7.3 3.6 10.9 b) Price escalation 10.5 7.0 17.5 TOTAL PROJECT COST iO1.9 50.6 152.5 ANNEX III Page 3 Category of Expenditures: US$ million Local Foreign Total Component 1. Construction (including architects' fees) 60.5 12.7 73.2 2. Furniture 5.0 1.3 6.3 3. Equipment 17.2 24.9 42.0 4. Technical Assistance 0.2 1.2 1.4 5. Project Administration 1.2 - 1.2 6. Contingencies 17.8 10.6 28.4 TOTAL PROJECT COST 101.9 50.6 152.5 Financing Plan Bank Loan $50 million Government $102.5 million Total Project Cost $152.5 million Procurement: International competitive bidding for civil works, equipment and furniture. Spanish suppliers of furniture and equipment would be given a margin of preference of 15% or the customs duty applicable to non-exempt importers from non preferred countries, whichever is the lower. The normal range of import duties on the furniture is from 22 percent to 40 percent, and on the equip- ment from 0 percent to 47 percent. On furniture and equipment coming from EEC countries duties are one to six percentage points lower. However, the Ministry of Education has informed the Bank that it would not be their policy to take these preferences into account in evaluating these bids. ANNEX III Page 4 Estimated Disbursements: US$ million CY 1972 1973 1974 1975 1976 Cumulative Total 0.350 13.45 22.5 11.2 3.5 50.0 Estimated Project Completion Date: December 31, 1976 Appraisal Report: Report No. PE-44a, dated May 15, 1972. Education Projects Department. May 17, 1972 0 VOCATIONL SCHOOLS U COMPREHENSIVE SECONDARY(B Li P1I MADRID ~~~~~~a y o/ )Risccy V-I Boacaor- C-I M.do,d V-2 BRib.. C-2 Mod, dEtFROr V-3 Mod,ld C-3 Mod,.d LACOR NA V-4 M.a,,g. C-4 Mod, dA N C E V-5 S-o,II C-5 M.dn,d D ar V-6 Volencr C-6 Mod, d V-7 Md- d.1lC-rpn C-? M.d, ~ O43- V-S polencro C-S A-aniu, V-9 Vallodoihd C-9 Alk.l. d Ho...... V-IS Zon.,. C-b0 VIo-ode -TEE V-lI F-et.-t-cn C-I1 Los Ror .N.V.R V-,S V-l2 L--eoroC BARCELONA V-1S Lo Onot- C - 12 Son-l-n 0 ~ G - V ARC ANORR V-l4 L., Poinno doOnG- Cono- C-iRpoo d lbo V-I5Si.o Cru doT-noil C-I 1Sonennalat do T_oogt3 V3 C-I N IJV6 V-lA Aloon C- IS Coa-oIn1 do L CLn17o V-I7 C.d.t C-IA6 Son J-a D.,p. , V-IS Can..n C- 17 RcA,AT- V-IS SnHlao C-1lB S.ndon"ol V-20 J.-a do La Finonon SEVILLA V-21 L. L.-e C- IS S-ol1o BAR7LONA V-2 iOa- C-iS Se-lIa4) 41, -23 Al.... C-2l Son loon d A-nf-cono1 SALAMANCAk - V-iS Andolan C-22 -. Rm-nondo C- V-25 olnC-23 Conno lCa V-26bGnonodo C-2A Lebnnio V-27 Joon VALENCIAvC V-2S Lo Ca-oina C-25 AIoc- RorV V-29 B- 4dV.d ...... C-26 M-o- GADAC V- 30 El Forno C-i7 MoconngnollVLL I V-SI L. C.-.A C-28Tonel V-32Logn CAD 2 I.,IRAJ C2 V-33 Monfotto do L-nno C-i9 Codlno 2 V-iA o-anc GRANADA , V-35 Ponlocdno C-3DG .. OnanEd V-36 Von,- C-3l 13Soo-ENo V-37 V,go MALAGA ATEACHER TRAIN NO CENTEPS C-32 MSo1ago / 0 1-1 So-nIl C-33 Aloro I I- acln ASTURIAS CL L 9 I-i Polencro ~~VIZCAYA OPOLYTEHNIC LVER51TY C-35 Banocoldo ~OLYECHNC I.IVBRITV ZARAGOZA 5-1 Ronnlon- Pdyl,,&nnn C- 36 Zonagooo P-S Volonoa Polnloohoc C-37T Z-o -LAaAROrNo *A~GRICULLTURSAL INSTITVTE CANART ISLANDSV-4 - A-) Pol1-nn C-SB8 St. C-a do Ton-ifo C-39 L., Pol.no SPAI N~~~~~~~~~~~~~~~~~~ALSC SECOND EDUCATION PROJECT JEREZ 1D0 I A FEC)NTEEA *VVi4O a PV~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~FERTEVE1TIJRA KILOMETERS LASl'nrVnnnPALMAS0)010 ! l * nnnldlookaonj,,noff,Ionoa ~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~CANARY ISLANDS ;ESBRARY 1972 IBRD 3fl9