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DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

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Report No. P-140 7a-ES

REPORT AND RECOMMENDATION

OF THE

PRESIDENT

TO THE

EXECUTIVE DIRECTORS

ON A

PROPOSED LOAN

TO

THE REPUBLIC OF EL SALVADOR

FOR A

SECOND EDUCATION PROJECT

May 23, 1974

This report was prepared for official use only by the Bank Group. It may not be published, quotedor cited without Bank Group authorization. The Bank Group does not accept responsibility for theaccuracy or completeness of the report.

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CURRENCY EQUIVALENTS

US$1.00 = 2.50 Colones (0)

01 = uS$o.1,o

01,ooo = $4o0.oo

01,000,000 = $hoo,ooo

FISCAL YEAR

January 1 - December 31

INTERNATIONAL BANK FOR RECCNSTRUCTION AND DEVELOPMIENT

REPORT AND RECOI;ENDATION OF THE PRESIDENTTO THE EXECUTIVE DIRECTORS ON A

PROPOSED LOAN TOTHE REPUBLIC OF EL SALVADOR

FOR A SECOND EDUCATION PROJECT

1. I submit the following report and recommendation on a proposedloan for the equivalent of US$17.0 million to the Republic of El Salvadorto help finance a second education project. The loan would have a tennof 3u years, including lCU years of grace, with interest at 7 1/4 percentper annum.

PART I - THE ECONOMY

2. A memorandum entitled "Recent Economic Development and Prospectsof El Salvador" is being distributed to the Executive Directors concurrentlywith this report. A country data sheet is attached as Annex I.

3. As discussed in the economic memorandum, the economy expandedrapidly in the 196&-67 period but slowed considerably during 1967-72. Thecountry's principal asset, a group of dynamic entrepreneurs and a laborforce with a demonstrated ability to acquire ski"lls rapidly, enabled Jheeconomy to expand its production of manufactures for the Central AmericanCommon Miarket (CACM) and of cotton exports. GDP grew by about 6.5 percent annu-ally in real terms between 1960 and 1967. Its human resources along wLth asatisfactory transport network and electric power grid gave El Salvador'sindustry a head start within the CACM. The contribution of manufacturing tothe gross domestic product increased from 1lh percent to almost l per:cent duringthe sixties. Nevertheless, the economy continued to depend heavily on coffeeand cotton as the m?jor sources of domestic production and export earnings.In 1967-69, Ps cotton prices fell and volume was reduced to half its I1I965peak level (because of disease and abandonment of marginal landF), growthof export earnings fell to only 1-2 percent annually. The ccnflict wi.thHonduras in 1,69 represented another setback for the economy. Exports tothe Common Market declined as the border with Honduras was shut off, andexpensive a1ternative arrangements had to be undertaken for shipments toNicaragua and Costa Rica. Continued low export growth and the CAGM problemsled to sharp declines in domestic saving and private investment, and realGDP growth averaged only about 4.l percent annually during 1967-1972, whichis only slightly higher than the annual population growth rate of 3.5 percent.

4. El Salvador already has one of the highest population densit:ies in tEeworld, and rapid population growth is a basic obstacle to a more satisfactoryrate and pattern of development. The 1974 population of 3.8 million is expected to

double by 1990 unless the present growth rate can be lowered. Even aasuminga continued large migration to urban centers, the per capita availabilityof cultivable land for the rural population would fall further from the pres-ent 0.3 hectare. Moreover, the resource endowment is meager; known mineralresources are scant and fiahing in the Pacific is limited to the narrow con-tinental slielf.

5. L.t the same time the benefits of economic growth have remained un-evenly distributed. Eatimates for 1965-67 indicate that the top 10 percentof income recipienta received 42 percent of total income; 2 percent of land-owners hold almost two-thirds of agricultural land; and, at the other end of thescale, about 90 percent of farms are smaller than 2 hectares. Over half ofthe labor potential in the peasant sector (which accounts for 60 percent ofthe working-age population) remains unemployed for a large part of the year,while the a,bundant labor supply has kept agricultural wages at a subsistencelevel over a long period. Most rural incomes are below $50 per capita perannum compared with the national average of $320. Poor education, health,nutrition and housing conditions further accentuate the difficult situationin the peasant sector and have stimulated migration to urban centers whereliving conditions are marginally better. According to FAO, the average percapita calorie and protein intake is among the lowest in Latin America. Theliteracy rate of the adult population is almost 80 percent in the cities butonly 40 percent in the rural areas0 It is clear that the long-term viabil-ity of the economy will depend on well-designed population policies, a moreequitable distribution of the benefits of economic growth, and better edu-cation, health, nutritional and living standards for most of the population.

6. The outlook for progress in tackling the country's main socialand economic problems has improved during the last three years. The Govern-ment's policies through the sixties were geared almost exclusively to main-taining price and balance-of-payments stability. The financial stability,of course, permitted the private sector to take advantage of the opportuni-ties offered by the creation of the Common Market and the cotton boonai. Buta low level of tax effort (about 10 percent of GDP) and weak project pre-paration limited severely the use of long-term foreign financing, and publicinvestment remained low. Supported by a large majority in Congress, theAdministration which took office in July 1972 has introduced a number ofreforms and started implementing the 1973-77 National Development Plan. Tostrengthen the institutional base necessary to implement the 1973-77 Plan,the Government in 1973: (1) created the Agricultural Development Bank (whosemain functian will be to improve the availability of credit for small farmers)and a Housing Fund; (2) strengthened the Rural Colonization Institute's capacityto support the settlement of landless farmers; and (3) placed directl!y underthe Office of the President the Community Development Organization (liOCCO). TheGovernment also approved a new forestry law which provides mechanism, to carryout reforestation and soil conservation programs on public and private lands,and is expected to approve this year an Export Development Law to promote exportsof non-traditional products to countries outside the CACM. In addition, somepublic and private institutions have started to encourage family planning andto provide advisory services in clinics. Also during 1973, a combination ofhigher export prices and improved tax administration resulted in an increase inCentral Government revenues by an unprecedented 23 percent, or more than twicethe rate of growth of GDP. The improved revenue situation facilitated an increasein capital expenditures, which rose from 2.3 percent to 3.6 percent of GDPbetween 1971 and 1973; moreover, the level of capital expenditures achieved

in 1973 was in line with the investment targets of the Development Plan.

7. The medium-term outlook is for an improvement in real economic growthfrom a 4.1 percent annual average in 1967-72 to at least 6.5 percent in 1974-76.This gain will come mainly from the secondary effects on the economy of theexpected continuation of high international prices for the traditional exportcrops -- coffee, cotton, sugar and meat. Expanding exports of non-traditionalproducts to markets outside the CACM remain ocritical issue because of itsdual importance for introducing a new outward-oriented industrial straAegy andas a source of new jobs to alleviate the serious unemployment problem. Inthe longer term, scarcity of land and absence of other natural resources maylimit the growth potential, while prices for the major agricultural exportsare expected to be somewhat less favorable. Nonetheless, there is scope forconsiderable strengthening of the economy by developing industry and non-traditional agriculture aimed at world markets. The recent rise in fuel pricesis expected to raise the share of petroleum in total imports from four to sevenpercent in the coming years. However, as long as export prices remain high,the projected resource gap should remain within manageable limits over thenext two to three years.

O. To achieve the main objectives of the 1973-77 Development Plan ofexpanding and diversifying the economy while providing a more even distri-bution of bernefits will require a sharp increase in the level of public expen-ditures. Ceritral Government investment is expected to increase from 3 percentof GDP in 196b-72 to about 6 percent in the late seventies. Total publicinvesciient expenditures are projected to more than double from 1960-72 to1973-77. Agriculture (including irrigation schemes, marketing, credit pro-grams and better extension services aimed at small and medium farmers) accountsfor one-fifth of planned public investment expenditures; power, transport andtelecommunicctions absorb an additional 37 percent of the total.

9. To finance such a program, Central Government current revenueswould have to rise substantially from current levels. While the measuresmentioned in paragraph 6 above should enable the Government to achieve programtargets through 1974, additional revenue measures are expected to be necessaryduring the 1975-76 period. Recognizing this, the Govelnment is consideringthe introduction of new tax measures such as export duties on cotton andsugar, on a progressive basis to vary according to the price on the interna-tional market, a sales tax that could eventually replace the present stamp tax,and higher taxes on imported luxury goods.

External financing

10. The public external debt repayable in foreign currency amounted toUS$194 million at the end of 1973, or US$113 million excluding undisbursedcommitments. El SalvadorsB traditionally low debt-service ratio gives theGovernment some margin for borrowing abroad on conventional terms. Even assum-ing that a portion of its external borrowing is obtained on such terms, thedebt-service ratio would remain below three percent through 1976. In view,however, of El Salvador's poverty and low per capita GNP (US$320 in 1971), theserious imbalance between natural resources and population, and the uncertainlong-term prospects of its main exports, it will be desirable for El Salvadorto obtain most of the external financing required for the 1973-77 DevelopmentPlan on soft terms. For the same reasorsit will be desirable for El Salvadorto obtain financing for a large share of the costs of individual projects.Local currency financing is also justified, on the grounds that El Salvador ismaking reasonable efforts to mobilize local resources in support of its develop-ment program but requires external assistance in excess of the foreign exchangecomponent of development projects suitable for international financing.

11. Apart from the Bank, external financing has been principally pro-vided by USAID, the Inter-American Development Bank (IDB) and the CentralAmerican Bank for Economic Integration (CABEI). IDB and CABEI funds havecarried very soft terms and contained large components repayable in localcurrency. The IDB has made loans for housing, water and sewerage, ports,highways, agricultural credit, industry, higher education and municipalmarkets. TISAID has financed health centers, basic education, housirg andindustry. CABEI has financed industry and also highway and telecomrrmunica-tions projects of importance for the Central American network. The pastlending of these agencies through the end of 1973 is summarized below:

(In millions of US dollars)

IBRD IDA AID IDB CABEI

Total 94.7 13.6 56.2 10i.0 62.2of which repayable inlocal currency __ __ 1.6 86.5 /n.a.

Cumulative Lending 1950-65 50.2 8.0 27.1 32.5 7.9

Cumulative Lending 1966-73 44.5 5.6 29.L 71.5 54.3Transport -- -- 12.0 23.0Power and Telecommunications 36.8 5.6 __ 38.1 3.3Education 4.9 -- 10.1 2.0 0.5Health -- -- 2.7 -- --Housing -- -- 3.0 6.3 7.7Agriculture -- -- 6.5 11.5 1.2Industry -- -- .8 -- 17.6Others -- -- 2.0 1.6 1.0

Includes US$38.1 million for a power loan for which the Borrower hasthe option to repay in local or foreign currency.

PART II - BANK GROUP OPERATIONS

12. £1 Salvador has to date received eleven Bank loans and two IDAcredits, totalling US$108.3 million net of cancellations. The last opera-tion, a loan for a sixth power project, amounting to US$27.3 million, wassigned in April 1973. Annex II contains a summary statement of Bank loans,IDA credits and IFC investments as of April 30, 19Th and notes on theexecution of on-going projects.

13. Bank Group disbursements as a percentage of total disbursements onthe public external debt of El Salvador are expected to peak at abouit 28percent in 1980 as compared with 24 percent in 1973. The Bank Group's shareof total debt service is projected to decline slightly during the next twoyears and then to rise again to a level of about 27 percent by 1980 -- thesame as that prevailing in 1973.

16. In the past, the Bank Group assisted El Salvador in those areaswhere it had special competence or where financing on softer terms from

other deveLopment agencies was unavailable. Thus, the Bank Group financedinfrastrucc-ure investment such as power, roads and telecommunications and,to a lesser extent, education. Together with IDB and CABEI the Bank assistedthe develoJment of El Salvador's arterial highway system. A close relation-ship between the Bank and El Salvador's public power agency (CEL) helped thelatter to 1evelop into one of the most efficient power companies in CentralAmerica. 'The Bank's efforts to strengthen the institutional capacity of thenational telecommunications agency (ANTEL) has facilitated the rapidt expan-sion of that company's operations in the past three years.

15. The Bank Group is planning to give increased emphasis in itslending to El Salvador to high-priority fields in which other agencies arenot equipped or willing to operate, such as education, sites and servicesfor very low income housing and family planning. In addition, the BankGroup would help in meeting the growing resource requirements in power andtelecommunications, possibly in joint operations with other agencies, andin strengthening institutions, particularly ANTEL. The possibility of Bankassistance to agriculture will be examined after completion of a sectoralanalysis planned for later this year as part of a joint IBRD, IDB and AIDagricultural and rural survey of the five Central American countries. TheBank is also exploring the possibility of lending for manufacturing industryand tourism through the Central American Bank for Economic Integration(CAdEI). Given El Salvador's level of per capita income, it is intended tocontinue to provide some IDA financing, although the bulk of Bank GJroup lend-ing would be on IBRD terms.

16. Aside from the proposed education project, the project whose prep-aration is most advanced is a sites and services project for very low incomehousing which is planned to be presented to the Executive Directors in earlyFY1975.

17. IFC has made two investments i El Salvador. The first, a $14o,000loan in 1959 to Industrial Textiles, S.A., has been completely repaid. Thesecond, a $233,000 equity investment and a $600,000 loan to Hoteles de CentroAmerica, S.A., in 1969, was for a hotel project that was completed in September1972.

PART III - THE EDUCATION SECTOREducation System

18. The formal education system comprises nine years of basic educa-tion, three years of secondary education, and courses varying in length fromtwo to seven years at the higher level.

19. The Ministry of Education has the major responsibility for formu-lating policy for and administering all formal and nonformal public educa-tion institutions except the Autonomous National University. Recent:Ly, theMinistry of Education has been reorganized and strengthened through theestablishment of the Office of Planning and Organization (ODEPOR), wlhich isresponsible for the planning, programming and budgeting of the Minisiry'sactivities in coordination with the National Planning Council. Schoolsupervision is organized in ten zones of ten circuits each and is effectivelycarried out by supervisors based in every circuit.

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Education Reform

20. ln 1967 the Government undertook a dynamic and far-reaching Educa-tion Reform aimed at improving the structure, staffing, administration andtechnology of the education system in order to enhance its responsiveness

to the countryts overall development needs. The Reform was based on the

premise that El Salvador's lack of natural resources requires an activepolicy of human resource development and that only a modern, well-organized

education system can fulfill this task. The first phase of the Reform was

implemented through the 1968-1972 Education Development Plan, and most of

the Plan's targets have been achieved. An instructional television (ITV)

program has been adopted and fully implemented in grades 7-9. With the

help of the first Bank education loan, secondary education has been expanded

and improved and its curriculum modified to provide a more vocational orien-

tation. Teacher training has been consolidated and an intensive program of

in-service teacher training implemented.

21. Despite these achievements several problems remain, the principalone being the persistence of inequality in educational opportunities betweenurban and rural areas. Schools are strongly concentrated in the cities, andmany rural communities have little or no access to schooling of any ksind.

Early dropout from the first six grades is a serious problem, particularly

in the rural areas, and the main cause is the inadequacy of school capacity.Many rural schools have only one classroom offering the first two grades,

which effectively precludes the students from further schooling. Moreover,

distances to the rural schools are long and, because of the prevailing mal-

nutrition, often prohibitive. Furthermore, the curriculum of basic educa-

tion is still too much oriented towards preparation for the next higher

stage of learning and is not adequately adapted to the basic needs of the

rural youth. Although ITV has been successfully introduced, its coverage

needs to be further extended to make it cost effective. Nonformal educa-

tion and training is offered on a limited scale and does not meet the urgent

training needs of the sizeable rural population.

22. Ihe present Education Developnent Plan covers the years 1973-1977

and gives the highest priority to the extension of education and training

opportunities for youths and adults in rural areas. School capacity in rural

areas is to be expanded, rural schools are to be utilized as community learn-

ing centers, and nonformal education and training are to be strengthened and

expanded. The Plan also stresses the need for further quality improvementsand proposes several cost-reducing measures to offset the resulting increase

of per-student costs. One of the most important of these measures is the

planned replacement of classrooms which are rented or in poor condition and

which are too small, leading to uneconomically low pupil-teacher ratios.

Basic Education

23. Basic education, covering ages 7-15, is provided free in public

schools for 72 percent of the 623,000 attending students; the remaining 28

percent attend private schools. Basic education is organized into three

cycles: the first two comprising grades 1-6 are equivalent to primary

education, while the third cycle -- grades 7-9 -- represents the lower

secondary level. In 1971 total enrollment in formal basic education (in-

cluding over-aged students) was the equivalent of 70 percent of the school-

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age populaLion (91 percent in the first two cycles, and 21 percent in thethird cycli,). The equivalent participation in the first two cycles had reached132 percenr in the cities but only 62 percent in the rural areas. The 1973-77

Educationa). Development Plan aims at halving the gap between urban and ruralparticipation rates and at providing all children with at least the fouryears of basic education required to es-tablish literacy on a permanent basis.

In order tc, accomplish the latter objecive, the Government has decided thatall small rural communities where no eduicational facilities exist and whichhave 160 or more children of school age will be provided with a two-classroomschool to offer the first four grades of basic education.

9 . The rural basic education schools will be expanded in functionto serve as community centers, particularly in the smaller communities.They are expected to serve as gathering points for community action andas centers for essential rural services, such as health and agriculturalextension, provided by other governmental agencies. In their functionas community learning centers, these schools will provide a range of oppor-tunities in basic education and in nonformal education/training (e.g.,accelerated basic education, literacy courses and work-oriented training)for out-of-school youths and adults. The programs will be supported byIT-, which is expected to function fully for grades h-6 by 1977 and forall nine giades of basic education by 1)81. Access to higher grades ofbasic education will be provided in centrally located six- and nine-gradeschools.

95. IBasic education is conceived as the common preparatory basis forfurther lecrning and productive life. The Government is aware that a shifttowards a nore-balanced curriculum is necessary to meet the basic needs ofthe majority of the rural children for whom basic education is in factterminal ecucation. Thus, the Ministry of Education has revised the curri-culum to irclude practical activities and some basic training in techlnicalfields, gi;ing a student the option, when leaving school, of finding a jobor of continuing his education.

Secondary Education

26. EnrolLment in secondary education (grades 10-12) in 1971 was2i,Lpl(0 or 13.5 percent of the 16-18 age group. Through the First Educa-tion Project (Loan No. 609-ES of 1969), the Bank is supporting the Govern-ment's plans for expanding secondary education and broadening its curri-culum with industrial, agricultural and commercial options. The loanprovides for the construction and equipment of seventeen new secondaryschools, equipment for two technical institutions and related technicalassistance. Almost all construction and equipnent procurement under thefirst project has been completed, and all new project schools are now inoperation and employing the revised, diversified curriculum. The com-pletion of the major secondary education expansion supported by the firstproject has facilitated the shift in Government priorities towards therural basic education program to be assisted by the proposed loan.

Teacher Training

27. As part of the 1''67 Education Reform, the Government has conso-lidated all teacher training into one institution, Ciudad Normal, whichtrains new teachers for basic and secondary education and offers a varietyof upgrading courses. There are no separate programs for urban and ruralbasic education teachers, but all teachers are appointed to rural schoolsfor at least three years of their career. The training program for teachersof grades 1-6 has been modified to include preparation for the teaching ofpractical subjects and to orient the teachers for their role in cormunitydevelopmenl in the rural community schools. Also, training for basic andsecondary education will now be expanded and will include the training ofinstructors in industrial arts and home economics for grades 7-9 of basiceducation. In addition, Ciudad Normal will continue to offer in-servicetraining courses for teachers and supervisors through sunmer courses andITV programs. The training of teachers for secondary education in CiudadNormal will be limited to humanities and science. Secondary teachers inother subjects will be trained in universities and other post-secondaryinstitutions.

Nonformal Education and Training

2& Although the Education Reform of 1967 is comprehensive in itsgoals, the actual implementation has thus far been limited to formal educa-tion. Until recently, nonformal education programs consisted only ofevening courses, equivalent to formal education programs, and literacytraining. Meanwhile a new program, PEO (Programa de Educaci6n Orientada),has been developed to offer an accelerated form of basic education forout-of-school youths and adults. PEO consists of flexible courses withTTV lessons, written materials and regional counseling offices replacingthe regular classroom teacher. Such courses are now being implementedonly for the equivalent of the third cycle of basic education (grades 7-9)where ITV is fully implemented. Similar courses for the lower cycles willstart once the use of ITV is further extended.

29. Nonformal work-oriented training is limited to a small vocationaltraining center in the Ministry of Labor. A new program of nonformal ruraltraining, however, is about to be launched as part of a community develop-ment project which comprises the first step of a Government effort to beginaddressing the problems of the rural population in an integrated fashion.This new rural training program will be executed by the Ministry of Educa-tion in cocperation with FOCCO, the Government agency responsible for com-munity development, the Ministry of Agriculture and other institutionsconcerned with rural development. The main thrust of the Government'srural trair.ing strategy is to overcome the peasants' resistance to changeby organizing programs designed to facilitate the diversification of thevillage ecc.nomy and to improve rural living standards. The program willconsist of work-oriented courses for rural out-of-school youths and adultswhich will take place in the rural community schools. Instructors willmove f'rom community to community giving a variety of short courses in

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such fields as small-scale agriculture, cottage industries, rural con-struction, home economics, formation of cooperatives and use of institu-tional credit. The first three-year phase of the progran will be carriedout in the Departments of San Miguel and Morazan. After a close evaLuation,a second phase would involve a gradual expansion to cover the entirecountry. When in full operation, there will be 4,000 courses per yearattending the needs of approximately 80,000 peasants and their families.

Education Finance

30 . Public education in El Salvador is financed almost entirely by theCentral Government. Public basic education is free and tuition fees forpublic secondary and higher education are low. To equalize opportun-ities,a system of loans financed by a fund in the Central Bank has recently beeninitiated. These loans enable low-income students in secondary and highereducation tD finance living expenses.

31. in I"71 total expenditures (current plus capital) for educationin El Salvador amounted to 109 million, or 4.0 percent of GDP. Of thisamount, the Central Government contribul;ed about 80 percent, equivalent toa high 27 percent of its total budget. Expenditures for basic educationrepresent the bulk of total education expenditures (62 percent). The majorsource of external assistance for the education sector since 1967 has beenUSAID, supporting mainly ITV, curricular and administrative improvements,and the construction of basic education schools. USAID intends to limitfuture activities to technical assistance. The Bank's first project con-centrates on secondary education; IDB has made a loan for the autono.mousuniversity; and UNDP has provided technical assistance for the whole educa-tion sec-tor.

32. Government authorities are faced with the difficult problem ofexpanding education opportunities and improving the quality and relevanceof the system at a time when a high proportion of the Government budget isalready being spent on education. The 1973-77 Education Development Plan,therefore, gives emphasis to efficiency and unit-cost reductions. Schoolfacilities are to be increasingly operated on a double-shift basis. Theteacher workload, which is now only 25 periods per week, is being increasedwith additional hours being paid at half the regular hourly rate. Thismeasure is being implemented on a voluntary basis. Its implementation isfacilitated by ITV which releases teachers from part of their active teach-ing tasks. It is considered attractive by many rural teachers who do nothave alternative employment possibilities after school hours. As describedin paragraph 22 above, unnecessary recurrent expenditures on teacher salariesand rents will be avoided with the selective replacement of unsuitab'Leschool facilities.

33. C-iven the cost savings expected to arise from these measures, thefinancial impact of the overall education program is relatively mode,t.While El Salvador's public education expenditures rose from 2.5 percent ofGDP in 1963 to an estimated 3.2 percent of GDP in 1971, they are expectedto increase to about 3.7 percent in 1981. As Government revenues, evenwithout new tax measures, are expected to rise more rapidly than GDP. theeducation sector will require a slightly declining share of these revenues.The education program supported by the project, under these circumstances,should not give rise to budgetary problems or serious corflicts with otherexpenditur programs.

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PART IV - THE PROJJECT

34. A report entitled "Appraisal of a Second Education Project inEl Salvador" (No. 380a-ES , dated May 15,1974) is being distributed sepa-rately. The main features of the loan and project are summarized in AnnexIII. Initial sector work in connection with the proposed project was carriedout by a UNESCO mission in February 1972. The project was prepared by theMinistry of Education, with occasional assistance by Bank Staff, and ap-praised in September-October 1973. Negotiations were held in Washingtonin April 1974. The Republic of El Salvador was represented by Dr. R. Sanchez,Minister of Education; Arq. A. Zuniga, Deputy Minister of Education; Ing. JOJnteriano, Director, Planning Office, Ministry of Education; Lic. A. Cruzman,National Planning Office; and Lic. R. Jimenez, Economic Counselor, Embassyof El Salvador, Washington.

35e. The main objective of the project is to assist El Salvador in expand-ing basic education and training opportunities in rural areas by establishinzrural community schools offering a variety of education/training activritiesfor youths and adults and by initiating a mobile, nonformal rural trainingscheme. The project will serve both social and economic ends by reachingpopulation groups which have hit,herto been neglected. It will make itpossible for these groups to participate in further work-oriented training,to diversify their economic activities, and to increase their incomes. Asecond objective of the project would be to bring about quality improvementin basic education facilities for selected urban areas. The project wouldinclude: (a) the establishr,ent of 143 new rural community schools, thereplacement of 299 unsuitable schools, the extension of 121 existing schools,the equipping of 146 workshops in rural and urban schools and the provision ofteacher housing in rural communities where existing accommodations are inade-quate; (b) expansion and upgrading of teacher training; (c) the implementationof the pilot phase of a nonformal rural training scheme; and (d) the provisionof related technical assistance. The total enrollment expansion in basic edu-cation made possible by the proposed loan would be 67,400 of which 56,000 wouldbe in the first six grades and 11,400 in grades 7-9.

36. The Bank Group's financing of primary education and nonformal ruraltraining has grown steadily in recent years and projects in Spain, Lebanonand some African countries include important components of such education andtraining. The proposed project would be the first one exclusively for primaryand nonformal education. It is increasingly accepted that a successful socio-economic development of rural areas and urban ghettos has, as one of the pre-requisites, an education and training system with some components particularlydesigned to meet the needs of the underpriviliged population groups. A country-wide distribttion of institutions would generally be required which wou.ld offerthe desirable learning opportunities to those groups. The formal or nonformaleducation and training programs of these institutions would prepare the partic-ipant -children or adolescents and often adults- to form an integral part ofthe local community. The proposed education project in El Salvador would meetthese requirements and represent an important development of the primary schoolconcept.

Basic Education

37. a. New schoolsOne hundred forty-three new schools would be established in small

rural communities where no educational facilities exist at present. Ofthese schools, 130 would contain two classrooms offering the first fourgrades of basic education on a double-shift basis. Access to the highergrades of basic education would be extended through the provision of 13centrally located rural schools which would also offer grades 5-9.

380 b. Replacement schools

The proposed replacement of 299 schools which are rented or inbad condition would include the construction, equipment and furnishing of19I two-classroom schools for grades 1-4 in the smallest rural communitiesand 89 centrally located schools offering grades 1-6 or 1-9. Another 16schools would be replaced in urban areas, with six of them to serve thebeneficiaries of the proposed Bank Group-financed sites and services pro-ject. In addition to the savings in operating costs that the replace.nentwould permit, they would provide a greatly improved environment for learn-ing: they would be less crowded and of better quality, with improved illu-mination and ventilation.

39. c. Expansion of existing schools

Additional classrooms would be provided for 40 existing ruiralschools to increase opportunities in grades 5 through 9. Thirty-nine ruraland 60 urban schools would be extended through the addition of a workcshopand laboratory.

40. d. Workshop equipment

Equipment would be provided for workshops to be constructed, bythe Government in 66 rural and 80 urban schools which already contain alaboratory. These schools together with the 125 schools which will con-tain workshops and laboratories constructed under the project, would bethe first to implement the revised, more balanced curriculum which einpha-sizes the teaching of practical subjects and science in all nine grades.

41. The size and location of each school have been determined on thebasis of a school map which provides complete information on populationspread and on the location and size of existing schools. During projectimplementation, however, new developments may occur, such as migration andnew roads, which may change the size of population and accessibility withinthe catchment areas. Thus, a final decision on the location and size ofproject schools should not be made long before the start of construction.Criteria have been established (in Schedule 6 to the draft Loan Agreement)for possible modifications of the location and size of new schools ald ex-tensions. The criteria are designed to assure that the total number of

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classrooms, workshops and laboratories is maintained at the level described inthis report and that the predominantly rural distribution will be maintained.The local community would be asked to donate the site. In cases wherel a con-venient site cannot be donated by the community, the cost of site acquisitionwill be borne by the Government. Participation by the community in wcirks suchas site development is being explored and promoted by the Ministry of Educa-tion in cooperation with FOCCO. Savings through community participation wouldaccrue to the particular community in the form of additional related works,such as teacher housing and additional equipment and furniture for communityactivities.

42. In many of the smaller rural communities teacher accommodations areunsatisfactory, which hampers participation of the teacher in community develop-ment. The Government does not normally provide teacher housing, but it hasindicated that it would begin to do so in the smaller communities provided itcan be demonstrated that by building such houses, teachers can be induced toremain in the communities beyond school hours and to become actively involvedin community development. Thirty teacher houses, therefore, would be con-structed under the project on an experimental basis. An evaluation, satis-factory to the Bank, of the results of providing these houses would be carriedout during 1975 and 1976, while the first 300 new schools and school replace-ments are being constructed. The construction of the remaining 142 new schoolsand replacements would await completion of the evaluation. To the extient justi-fied by the findings of the evaluation, additional teacher houses would becorn~ructed under the project in rural areas where adequate housing is notavailable. Should the evaluation establish that additional teacher housingis not warranted,the loan funds which have been allocated for this purpose wouldbe either reallocated for other expenditures under the project or cancelled.

Teacher Training

43 . The project provides for the addition of 6 classrooms, 4 labora-tories and 4 workshops to the Government's teacher training school (CiudadNormal) to increase its capacity from 1,300 to 1,800 student places and toimprove the quality of training. This expansion would help insure an ade-quate output of teachers for basic education and academic streams of *iec-ondary education. The project would also include operating costs duringthe project implementation period for a special in-service training pro-gramo Quality improvements would come about through improved science teach-ing, through the training of teachers for grades 1-6 to deal competentlywith new practical subjects, and through the orientation of these teachersfor their role in community development.

Nonformal Rural Training

44. The project includes the equipment, vehicles and related technicalassistance for the nonformal rural training program of the Ministry ol Educa-tion, and start-up expenses for the pilot phase. As described in paragraph29 above, the pilot program would be operated in the Departmentrof San. Migueland Morazan. With each of 52 community schools to be visited about l' timesannually, there would be a total of 780 courses per year lasting ole weekeach and serving 15,000 peasants.

- 13 -

Technical Assistance

45. The project would include 1i; man years of expert services and11½ man years of fellowships to insure the proper implementation of therevised basic education curriculum and the nonformal rural training scheme.The experts would train Salvadorean counterparts and assist the Governmentin curriculum development and school administration, science and practicalsubject-teaching in basic education, organization of techniques of nonformalrural training, and evaluation techniques. The loan would also includeUS$220,000 for expenditures in preparation of a possible third educationproject.

Costs and Financing

46. The total cost of the project is estimated at US$2h.2 million,of which US$11.8 million, or 49 percent, represents the foreign exchangecostso Construction costs make up 54 percent of the total cost; furnitureand equipment, 15 percent; technical assistance, teacher training, nonformalrural training and project administration, 9.5 percent; and physical andprice contingencies, 21.5 percent. With the proposed loan amount of US$17.0million, the Bank would finance 70 percent of total project costs (US$110 8million of foreign exchange and US$5.2 million equivalent of local costs).The balance of the project costs will be borne by the Government. Basiccost estimates are in prices of January 1t974 and include the estimatedeffects of petroleum price increases. The justification for some localexpenditure financing in El Salvador is referred to in paragraph 10 above.

ProJect Entity

47. Direccion Arquitectura Educativa (DAE), the School ConstructionAgency of the Education Ministry, has been responsible for the generallysatisfactory implementation of the First Education Project. DAE would beresponsible for the construction, equipment and furniture under the proposedproject. Oficina de Planeamiento y Organizacion (ODEPOR),the Ministry ofEducation's Planning and Organization Office, would be responsible for im-plementing the technical assistance component and the teacher and nonformalrural training programs, and for coordinating the inputs of other entitiesof the Ministry of Education. Recently, DAE was expanded to include a chiefprocurement officer and a senior educator,with the latter to be secondedby the Technical-Pedagogical Service of the Ministry of Education. Inaddition, the position of a project coordinator has been established inODEPOR. Appointments to these new positions as well as to the currentlyvacant position of chief architect would be a condition of loan disburse-ment for civil works and project administration (Section 2.02(b) of the LoanAgreement). Also, assurances have been obtained from the G<overnment that theposts of DAE's key personnel will continue to be filled by suitable staffduring project execution and that new appointments to these posts would bemade in consultation with the Bank (Section 3.07 of the Loan Agreement).

- 14 -

Procurement and Disbursement

h?6 Contracts for civil works,equipment and furniture would be awardedunder international competitive bidding in ace-ordance with Bank guidelines.However, El Salvador has a competitive local construction industry andforeign contractors are unlikely to participate. Invitations for civilworks bids would, therefore only be advertised locally, but embassies wouldbe notified so that foreign bidders could participate if they wished. Fur-niture and equipment would be grouped to form sizeable packages for bulkpurchasing. Items that cannot be grouped in packages of at least US$5,000and would not in the aggregate exceed the equivalent of US$300,000 (corre,sponcding to 5 percent of the total costs of equipment and furniture) wouldbe procured in accordance with the Borrower's regular procurement proce-dures. In accordance with the Central American Agreement, suppliers fromCentral American Common Market (CACM) countries would receive a margin ofpreference of 15 percent of the c.i.f* base price or 50 percent of thetariff payable by non-CACM manufacturers,whichever is lower. DAE would beresponsible for preparing and issuing tenders, evaluating bids, ancl awardingcontracts.

49. The loan would be disbursed in four years to meet: (i) the c.i.f.cost of directly imported furniture and equipment and 85 percent of localcosts of furniture and equipment; (ii) 62 percent of the total costs ofcivil works, teacher training, nonformal rural training and project adminis-tration; and (iii) 85 percent of the total costs of technical assistance.An amount of up to US$200,000would be disbursed retroactively for expendi-ture incurred after May 1, 19i'4 for equipment required to begin implementa-tion of the pilot stage of the nonformal rural training scheme and for tech-nical assistance. The disbursement schedule for the proposed loan is indi-cated in Annex III.

PART V - LEGAL INSTRUMENTS AND AUTHORITY

50, The draft Loan Agreement between the Republic of El Salvador andthe Bank, the Report of the Committee provided for in Article III, Section X

(iii) of the Articles of Agreement and the text of a draft resolution ap-proving the proposed Loan are being distributed to the Executive Directorsseparately. The draft Loan Agreement conforms to the normal pattern ofloans for education projects.

51, I an satisfied that the proposed loan would comply with theAr les of Agreement of the Bank.

PART VI - RECOMMENDATIONS

52. I recommend that the Executive Directors approve the proposedloan.

Robert S. McNamaraPresident

AttachinenttsMay 23, l')Y)

Piae 1 of 2

CDINS nAT&A - EL SALVADOR

2 POPULATION DENSITY20,900 km 3.68 million (mid-1971) -176 pr km

Rate of Crothb 3.7% (frm 1960 to 1970) 4per km2 of arable land

POPMLATION CHARACTERISTICS (1971) tALTH (1970)Crude Birth Rate (per 1,000) 4344 Population per physician 4,300Crude Death Rate (per 1,000) 8.1 Populatiou per hospital bad 49°Infant Nortality (per 1,000 live births) 66.8

uTioN1965) DISTRIBUTION OF iAND ONERSHIP (1970)Z of national income, highest quintile 63.5 S owned by top 107 of owners 75

lowest qui.ntile 3.5 X owned by smallest 10 of owners 6

ACCESS TO PIPED WATER (1970) ACCESS TO ELECTRICIm (19,70)X of population - urban 70.0 X of population - urban )

- rural 27.0 - rural)

NTRXTION 7 1966) EDUCATION (1970)Calorie intake as X of requirements 72.0 Adult literacy rate % 58Per capita protein intake 44.o Primary school enrollment b 74

.1/m PER CAPITA in 1971 US $ 320

GROSS NATIONAL PRODUCT IN 1972 ANNUAL RATE OF GROWTH (7a constant prices)

US $ Mln. Z 1960-65 1965-70 1 9 7 1l 197Zf/

GNP at Mharket Prices 1,138 iOO.O 6.7 4.5 44 4 4*3Gross Domestic Investment 149 13.1 11.0 -0.3 12.0 -14.0Cross National Saving 154 13.5 7.5 2.1 -11.0 31.0Current Account Balance 5 0.4Exports of Goods, NFS 333 29.3 8.7 3.5 - 0.2 15.5Imports of Goods, NFS 317 27.9 3.5 3.0 8.7 3.0

OUTPUT, LABOR FORCE ANDPRODUCTIVITY IN 197/2

3/Value Added Labor Force V. A Per Worker1WV~~~~~~~~~~~~~~~~~~~iln.~~~~~~~~~~~~~~~~~ 7.. .UsvMln b Mlnn % US $ %

Agriculture 259.7 24.8 0.51 45.5 509 54.5Industry 252.1 24.1 0.22 19.7 1,146 122.7Services 534.3 51.1 0.24 21.4 2,226 238.3Unemployed . 01 11.4

Total/Average 1.0412 100.0 0 1O.O

GOVERNMENT FINANCETotal PIablic Sector LI Central Government

(ColonesMIn.) % of GDP (Colones Mln.) 'h of GDP1972 1972 1969-71 1972 1972 1969 -71

Current Receipts 473 16.6 16.1 326 11.4 10.8Current Expenditure 370 13-0 12.6 280 8 9.5Current Surplus 103 3 67 1.6 1.3Capital Expenditures 162 5.7 4.1 89 3.3 1.8External Assistance (net) 35 1.2 0.5 36 1.3 0.3

1/ The Per Capita GNP estimate is at 1970 market prices, calculated by the same conversiontechnique as the 1972 World Atlas. All other conversions to dollars in this table areat the average exchange rate prevailing during the period covered.

J Estimate based on the projected implicit deflactor at 1962 prices.,/ Total labor forco; unemployed are not aLlocated to sector of their normal occupation.

LI Includes gross receipts and expenditurea of government entreprises.

Not availableNot applicable

ANNEX IPage 2 of 2

COUNRY DATA - EL SALVADOR

MONEY CREDIT and PRICES V66 1969 1970 1971 12 73(Million Colones outstanding end periodt

Money and Quasi Money 477 560 594 658 807 957Bank Credit to Public Sectoi net 45 96 78 92 115 83lenk Credit to Private Sector 476 567 602 680 797 982

(Percentages or Index Numbers)

Money and Quasi Money as % of GDP 23.0 23.7 22.7 24.2 28.3 29.8General Price Index (1962 - 100) 1D2.2 102.5 107.4 108.0 109.0 116.9

Annual percentage changes in:Gaaaral Price Indix -1.2 0.3 4.8 o.6 0.9 7.2lank credit to Public Sector 136.8 113.3 -18.8 17.9 25.0 -27.8lank credit to Private Sector 11.7 19.1 6.2 12.9 17.2 23.2

BALANCE OF PAYMENTS MERCHANDISE EXPORTS (AVERAGE 1970-72)

Im US 1972. 1 2 us Mln %(Millions US 8)

Exports of Goods, NFS 268 336 398 Coffee 118.5 45.5Icports of Goods, NFS 289 3S 39 Cotton 30.3 11.6Resource Gap (deficit -21 S ;14 x ugar 11.4 4.4

Shrimp 6.0 2.3Interest Payments (net) - 4 - 4 - 2 All other commodities 941 36.2Workers' Remittances - 6 - 7 - 7 Total 76F. loo.oOther Factor Payments (net)Net Transfers 17 12 14 EXTERNAL DEBT, DECEMBER 31, 19;3Balance on Current Account _14 1 -36

US $ MnDirect Foreign Investment u D gNet HLT Borrowing 1Public Debt, incl guaranteed 193

Disbursements 19 24 26 Non-Guaranteed Private DebtAmortization 12 7 Total outstanding & DisbursedSubtotal 13

Capital Grants ) . . . DEBT SERVICE RATIO for 1973Other Capital (net) ) 20 -14 3 7Other items n.e.i -20 - 2 -Increase in Reserves (+) - +20 -20 Public Debt. incl. guaranteed 5.3

Non-Guaranteed Private DebtGross Reserves (end year) 71 90 76 Total outstanding & DisbursedNet Reserves (end year) 52 73 53

RATE OF EXCHANGE IBRD/IDA LENDING,(Apri1 30, 1974) (Million U0$)

--BRD IDA

Outstanding & Disbursed 24.5 13.4Undisbursed 35.3Unchanged Since - 193L Outstanding inl. Undisbursed -1J TT-T

US $ 1.00 - Colone::; 2.5 71.00 - US $ o.4o

/ Preliminary.

2/ Ratio of Debt Service to Exports of Goods and Non-Factor Services.

, not available

not applicable

AN_EX II

Page 1 of 2

THE STATUS OF BANK GROUP OPERATIONS IN EL SALVADOR

A. STATEMENT OF BANK LOANS AND IDA CREDITS(as of April 30, 1974)

Loan orCredit Amount (less cancellations)Number Year Borrower Purpose Bank IDA Undisbursed

22 1949 Comisi6n del Rio Lempa Power 12.5 -

10 1954 Government Roads 11.1 -216 1959 Government Roads 5.0 -221 1959 Comisi6n del Rio Lempa Power 2.7 -263 1960 Comisi6n del Rio Lempa Power 3.5 -

31 1962 Government Roads - 8.0312 1963 Comisi6n del Rio Lempa Power 5.9 -358 1963 Administraci6n Nacional Communi- 9.5 -

de Telecomunicaciones cations(ANTEL)

521 1967 Government Roads 2.8 -609 1969 Government Education 4.9 - 2.3227 1971 Government Power - 5.6811 1972 ANTEL Communi- 9.5 - 8.9

cations889 1973 Comisi6n del Rio Lempa Power 27.3 - 24.1

Total (less cancellations) 94.7 13.6 35.3of which has been repaid 34.9 0.2

Total now outstanding 59.8 13.lt

Amount sold 4.1of which has been repaid 3.9 0.2

Total now held by Bank and IDA!/ 59.6 13.4

Total undisbursed 35.3 - 35-3

B. STATEMNT OF IFC INVESTMENTS7as of April 30, 1974 )

Amount in $ millionYear Obligor Loan Equity Total

1959 Industrias Textiles, S. A. O.14 - O.141969 Hoteles de Centro America, S. A. o.60 0.23 0.83

Total o.7h 0.23 0.97less sold or repaid 0.17 - 0.17

Now held 0.57 0.23 0.80

/ Prior to exchange adjustments.

ANNEX II

Page 2 of 2

C. PROJECTS IN EXECUTION

Loan/credit No.

Ln. 60Y Education Project: US$4.9 million of June 11, 1969.Closing Date: July 31, 197h.

The status of this project is described in para-graph 26 of this Report.

Ln. 811 Second Telecommunications Project: US$9.5 million ofApril 17, 1972. Closing Date: December 31, 19716.

After some initial delays in procurement of project goodswhich might delay final completion of the project by 6 to12 months, substantial progress is now being made andsignificant benefits will begin to be realized in early1975 with the commissioning of 4,000 local automatic ex-change lines. All long distance equipment should be in-stalled by November 1975. The project is expected to becompleted between June and December of 1976.

Ln. 889 Sixth Power Project: US$27.3 million of April 12,1973. Closing Date: -December 31, 1976.

Initial progress in construction of the two principalworks, the Ahuachapan geothermal plant and the Cerr6nGrande hydroelectric facility, has been satisfactory.However, difficulties in completion of the canal forgeothermal effluent from the Ahuachapan plant may de-lay its initial operation by six months and increaseits cost. Because of the effluent canal difficultiesand higher-than-expected construction costs of Cerr6nGrande, the project is now estimated to cost about8 percent more than its appraisal estimate of US$97.7million. The Borrower's request for approval of com-mercial borrowing to cover the cost overrun is beingreviewed within the Bank. The Government-appointedRelocation Commission has begun to determine policyconcerning relocation and employment of the popuLa-tion affected by the Cerr6n Grande reservoir.

L/ These notes are designed to inform the Executive Directors regardingthe progress of projects in execution, and in particular to report anyproblems which are being encountered, and the action being taken toremedy them. They should be read in this sense, and with the under-standing that they do not purport to present a balanced evaluation ofstrengths and weaknesses in project execution.

ANNEX III

Page 1 of 2

EL SALVADOR - SECOND EDUCATION PROJECT

LOAN AND PROJECT SUMMARY

BORROWER: The Republic of El Salvador.

AMOUNT: US$17.0 million.

TERMS: Payable in 30 years including ten years of grace at7 1/Li percent interest per annum.

PROJECT DESCRIPTION: (1) The establishment of 143 new rural schools, thereplacement of 299 unsuitable schools, the exten-sion of 121 existing schools and the equipping of146 workshops, all for basic education.

(2) The extension of the Government's teacher-training school by classrooms, workshops andlaboratories, and the cost of a special in-service teacher-training program.

(3) Equipnent for a country-wide mobile nonformalrural training program and its operationalcost during a pilot stage of 3 years.

(4) 15 1/2 man years of technical assistance supportservices and 11 1/2 man years of fellowships.

ESTIMATED COST: (US$ -millions)Local Foreign Total

Basic EducationNew Schools 1.83 1141 3.24Replacement schools 4.61 3.77 8.38Extended Schools 1.19 1.31 2.50Workshop Equipment 0.18 0.61 0.79

Teacher Training 0.38 0O44 0.82Nonformal Training 0.42 0.91 1.33ProJect Administration 0.96 0m24 1.20

Sub-total 9.57 8.69 18.26

Contingencies 2.88 3$11 599

Total 12-45 11.80 OZ

ANNEX III

Page 2 of 2

ESTIMATED DISBURSEMENTS: (US$ millions by calendar Year)197L 1975 1976 1977 197I

0.3 4.7 5.4 5.9 0.7Total Accummulated: 0.3 5.0 10.4 16.3 17.0

PROCUREMENT ARRANGEMENTS: Contracts for civil works, equipment and furniturewould be awarded under international competitivebidding in accordance with Bank guidelines. How-ever, El Salvador has a competitive loca'L con-struction industry and foreign contractors areunlikely to participate. Invitations for civilworks bids would therefore only be advertisedlocally, but embassies would be notified so thatforeign bidders could participate if they wished.Furniture and equipnent would be grouped to formsizable packages for bulk purchasing. If,emsthat cannot be grouped in packages of at leastUS$5,000 and would not in the aggregate exceedthe equivalent of US$300,000 (corresponding to5 percent of the total costs of equipmen-, andfurniture) would be procured in accordance withthe Borrower's regular procurement procediures.In accordance with the Central American Agreement,suppliers from Central American Common Market(CACM) countries would receive a margin of pref-erence of 15 percent of the c.i.f. base price or50 percent of the tariff payable by non-('ACMmanufacturers, whichever is lower.

APPRAISAL REPORT: Report No. 380a-ES, dated May 15, 1974.

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