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EUROPEAN COMMISSION country: ARMENIA Feasibility STUDY ON ESTABLISHMENT OF TRAINING FUND FOR VET SKILLS DEVELOPMENT LETTER OF Contract Number: 2009/203505 Framework Contract EuropeAid/119860/C/SV/multi Type of report: Interim Input dates: 27 April – 29 June 2009 Date of submission: 26 June 2009 Team: Reg Parr - VET Policy Expert/Team Leader Vahan Sirounyan - VET Financing Expert Aram Manukyan - VET Legislation Expert CONTENTS Page
2. How the Study was conducted 4
6. Models of National Training Funds 6 7. A National Training Fund for Armenia: Goal and Objectives 8 8. A National Training Fund in Armenia: Other Recommendations 8 9. Action to be taken 12
11. List of Annexes 13 LIST OF ABBREVIATIONS
Background 1. The EU Country Strategy Paper for Armenia, for the period 2007 – 2013, identified assistance in the reform and upgrading of the education sector in order to achieve compliance with EU standards and best practices as a top priority for strengthening democratic development, social stability and economic competitiveness. Through support for the Poverty Reduction Strategy, 2006 – 2008 the EU has assisted the Armenian Authorities in efforts to reform and strengthen the VET sector of education. Various problems remain however, not least of which is the shortage of funding for VET provision. 2. Consequently the Delegation of the EU, with the agreement of the Ministry of Education and Science (MoES), commissioned Experts from the British consultancy group Cambridge Education Consortium to examine the feasibility of the creation of a Training Fund to support the development of skills needed in the labour market. 3. This first interim report begins with an explanation how the study was conducted; it then examines current VET provision in Armenia. This is followed by an explanation of the need for a National Training Fund (NTF); it reviews various models and recommends a model feasible in, and appropriate to Armenia. Cross references are made in the text to further detail contained in the annexes. Suggested actions for the Government of Armenia are contained in section 16. How the Study was conducted 4. The Study started on 27 April 2009 and between then and 20 June 2009 the following actions were undertaken:-
Views of Key Stakeholders 5. Firstly the Study Team would like to thank the 31 stakeholders who were generous with their time and their views; this Study would not have been possible without this great support. The main views to emerge were:-
The Current Position with VET in Armenia (a brief summary)
7. Despite attempts to modernise and strengthen the VET system over recent years, significant weaknesses remain, foremost of which are (as identified by stakeholders):-
Comment: Only 45% of the costs of the current VET system are covered by the State budget; the rest is met through the payment of tuition fees. The amount of the State budget allocated to VET is significantly lower than EU averages.
Comment: Because of funding constraints buildings, equipment and training materials are inadequate; teachers are poorly paid, demoralised, ageing and with limited knowledge of modern teaching techniques or the needs of the current labour market.
Comment: There are 2 students in higher education for every one in VET (approximately 56,000 students in higher education and 28000 in VET); this proportion is the exact reverse of other European countries.
Comment: It is rare to find people over the age of 25 in State VET colleges. Some colleges do organise short, specially designed courses for mature students but this is the exception rather than the norm;
8. The weaknesses in the VET system need to be seen alongside the main features of the employment situation in Armenia; these might be summarised as follows (as identified by stakeholders):-
Comment: Official Statistics show about 77,000 people are registered unemployed. However this does not include people who own some land; the many who believe the Employment Service has nothing to offer them etc. Unofficial estimates put the “true” unemployment figure at 30 – 35% of the population of working age.
Comment: The National Statistical Service of Armenia records 20% of the workforce being engage in the “grey” economy. Unofficial estimates suggest the figure might be between 30 – 40% of the work force;.
Comment: Nearly 60% of 15 – 24 year old people are neither in employment nor studying. About 50,000 young people finish secondary education each year; most of these fail to find work because they have not the relevant qualification, knowledge, skills or attitudes needed by employers.
Comment: 40% of registered unemployed are long – term unemployed; average duration of unemployment was approximately 14 months in 2008;
Comment: And even when allocated the funds are not used in a cost-effective manner; What can a National Training Fund do to address these weaknesses? 9. Of course no NTF can overcome all these weaknesses. However a Fund, especially one involving a public/private sector partnership, could make a significant contribution to overcoming some of the weaknesses - depending upon the size of the NTF and its scope. In particular a NTF can meet many of the needs identifies by stakeholders. A NTF can help employers obtain competent specialists trained to standards they want; can promote the modernisation of training arrangements; can improve the cost-effectiveness of training and can open up training to all ages and sectors of society and thereby assist turning lifelong learning into a reality. The end result will be a better trained workforce able to contribute more effectively to greater economic competitiveness and more able to reach their full potential. Models of National Training Funds 10. There is a variety of NTF in operation throughout the world; some specific examples are recorded in annex 5. A common feature of all funds is that they are directed specifically at the needs of the labour market – not necessarily what the training institutes are at present most comfortable with nor where their expertise might lie. 11. Here we summarize the more common models in use. 11.1. Model A – Government Fund Under this model the Government allocates part of the budget to the fund which then organises training for the unemployed and for existing workers needing to upgrade their skills. Some funds additionally aim at fulfilling some (or all) of the other specific objectives recorded in section 14 below. Training costs are either paid directly by the fund or employer’s costs are re-reimbursed (in whole or part). Comment: this model can be very successful in achieving the overall goal (Improved quality and quantity of training). However it is very costly to the State budget; the beneficiaries of the training (especially the employers) are largely immune to training costs and tend to leave all decisions to the State (and then complain vociferously about skill shortages and the unsuitability of courses). This model is less favoured as economic competition grows and Governments' attempt to scale down their budgets. For Armenia this model is clearly unacceptable. The State is unable to provide sufficient funds for training the unemployed, let alone fund upgrading of employees. Furthermore increasingly Governments' are of the opinion that those who benefit most from training (e.g. the employers) should pay its costs. Additionally this model would perpetuate a current weakness in the VET system in Armenia: the lack of involvement by the social partners and the lack of accurate labour market focus for much of the training. 11.2. Model B – The Levy/Grant system This model requires employers to pay a levy (tax) to be used specifically (and only) for vocational training purposes. The tax is commonly a % of the payroll bill – 1% is normal although in some countries it is considerably higher than this. Sometimes State budgets supplement the fund to pay for specific initiatives, for example in support of lifelong learning. The levy/tax is often collected through the regular tax/VAT system and then transferred to the Fund. Typically the Fund spends its budget according to a pre-defined criteria – x% paid to employers in return for them delivering training in line with a previously approved annual training plan (there is a ceiling on how much each employer can receive); a small % is retained by the Fund to pay for VET developments/innovations; and a smaller % for the administration costs of the Fund. Normally this model is not used for arranging training of the unemployed. Comment: because payment of the levy/tax is compulsory (not for small firms however) employers are more likely to show an interest and involvement in vocational training – if only to claw back as much of the levy/tax as possible. Even a 1% levy on employers employing in excess of 5 workers can generate considerable sums for training. However for employers the levy/tax forms an additional tax burden and increases labour costs. For Armenia the additional tax burden and consequential rising of the costs of employing workers could well result in a lowering of business competitiveness and less willingness to recruit additional or replacement workers. Given the general lack of competitiveness of Armenian enterprises international agencies such as the IMF and the World Bank can be expected to oppose this model. Additionally some attempts at non-compliance can be expected and the costs of investigating these might be considerable. 11.3. Model C – Employer-based Fund The budget for this model is raised either through a mandatory system, similar to model B above, or on a voluntary basis. Normally the model is funded exclusively by employers although there is no reason in theory to prevent other organisations adding funds (e.g. the State budget). Funds are typically disbursed in a similar manner to that described under Model B above. Comment: In many countries employers paying into such a Fund are more likely to trust an employer-lead organisation to deliver what they want and in a more cost effective manner than a Government-run system. If contributions into the Fund were mandatory in Armenia similar objections to those listed under Model B would apply. 11.4. Model D – Trade union based system This is very similar to Model C above and the same advantages/disadvantages apply. 11.5. Model E – a Tripartite Fund This model, administered jointly by a governing body of equal numbers of Government representative, employers and trade unions is funded by employers either through the proceeds of a mandatory tax or a voluntary contributions system and by the State budget. It disperses its funds to employers (for approved training), to trade unions (for training in support of lifelong learning), to the Employment Service (for training the unemployed) and sometimes to training providers (for upgrading of curricula, equipment, other infrastructure items) Comment: this model has the advantage of the involvement of the social partners and is thus more likely to be receptive to the needs of the labour market than some of the other models. For Armenia its disadvantage is likely to be the general lack of previous involvement and therefore knowledge of VET by the social partners might limit their effectiveness to counter the probable conservative approach by Government representatives. Furthermore this model excludes training providers. A National Training Fund for Armenia: Goal and Objectives 12. In view of the stakeholders opinions recorded above the Study Team believes a National Training Fund for Armenia is feasible. The economic justification for a Fund is contained in Annex 4. The need for a NTF in Armenia is clear and widely supported by stakeholders:-
At present there is inadequate training (in terms of both quality and quantity) for the unemployed
14. Taking account of stakeholders views we suggest the specific objectives of a NTF for Armenia should include some or all of the following:-
A National Training Fund in Armenia: Other Recommendations 15. The following recommendations are based on the Study Team's research and consultations with stakeholders:- 15.1. We recommend the structure of a National Training Fund for Armenia should be an NGO (Foundation) created specifically for this purpose. Its prime target audiences should be people of working age and enterprises. Its Governing Body/Trustees would be nominated by the sectors shown in section 15.6 below but they would be selected for their broad vision of the skill needs of the labour market - not as representatives of the nominating body and not subservient to that body. 15.2. The functions of the NTF should be:-
Comment: What is needed is short (normally practical) courses of recognisable standards, designed specifically for the enterprise/economic sector;
15.3. Within these overall functions the Board of Trustees would decide annual business plans taking into account the needs of the labour market and the funds available. If training the unemployed is part of the remit of the NTF one would expect an annual contract to be signed between the NTF and the Employment Service specifying the funds to be transferred from the Government and the number of unemployed to be trained. The Business Plan might show the allocation of funds as a % of total income per function (e.g. x% for upgrading training; y% for modernising training arrangements etc.). The Plan should also contain a ceiling for the administrative costs of running the NTF. The Business Plan and an Annual Review of Performance against the Plan (which should include independently audited accounts in compliance with private sector standards), should be published and made widely available: transparency is essential. If the Fund contains funds from the public sector (e.g. in connection with training the unemployed) it would also be liable to audit by the Chamber of Control. 15.4. All activities sponsored by the NTF should include contractual arrangements for monitoring and evaluation. The criteria for evaluation of training courses should include demonstrable results in terms of trainees using the newly learnt skills in employment (this might take the form of tracer studies). Future training contracts should take account of the evaluation of previous similar courses. 15.5. The staff of the NTF would be few in number (perhaps 5/6) and would be direct employees of the Foundation/NGO. 15.6. The staff of the NTF would be guided by a Board of Trustees. Composition of the Board would depend on whether the Government is to be represented. After consideration of stakeholder views (the vast majority of whom believes there should not be any Government representation) the Study Team has come to the conclusion that the Board should be constructed as shown on Option 1 below. If however it is decided Government representation was required we would recommend the Board is structured as in Option 2. Obviously the number of Trustees can be varied but the Study Team strongly recommends the balance of members between the various nominating bodies is maintained as shown. Additionally the Study Team cautions against creating a large Board of Trustees: this would hinder effective, timely decision taking. Option 1 Appointment of Trustees (without Government representation)
Option 2 Appointment of Trustees (with Government representation)
15.7. Before recommending the structure of the Board of Trustees (the two options above) the Study Team gave careful thought to the suggestion from some stakeholders that the composition of the Board of NCDVET should be copied. The Team concluded however that the NTF, which would have relatively narrow/specific terms of reference, would benefit from a smaller number of members and from the inclusion of representatives of training providers. In the two membership options above therefore we have recommended a smaller membership than NCDVET and the inclusion of representatives of training providers.
15.10. Based on the views of stakeholders the Study Team recommends the budget of the National Training Fund of Armenia3 should consist of4:-
Table 1: Possible Income to NTF from Employers Voluntary Contributions
Table 2: Possible Contribution by Employed Trainees
15.11. If the NTF did not receive funds for training the unemployed the most pessimistic projection from table 2 above is there would be funds for the training of 2000 existing employees per year. 15.12. In order to avoid displacement of costs (employers transferring their existing costs to the NTF) the Study Team suggests claims for payment out of the Fund should demonstrate that the training to be undertaken is additional to that undertaken at the employers own expense the previous year. Additionally we suggest the Fund should cover 80% of the cost of training, thus no one employer would receive more than 80% of the contributions they have made to the Fund. 15.13. Further information on the financial issues are contained in Annex 4. 15.14. The legal implications of the establishment of a NTF are as follows:-
Action to be taken 16. The Beneficiary of this Feasibility Study (the Government of Armenia, represented by the MoES) is invited to comment on/approve:-
5.1. Should employers be asked to contribute at a rate of 0.25% of gross income? - section 15.9; 5.2. Should employed trainees contribute towards training costs? If so, at a rate of 10% or 20% or a higher figure? - section 15.9. After Which? 16. Upon receipt of the decisions of the Government, the Study Team will:- (a) amend the proposal as necessary; (b) prepare detailed proposals for the necessary legislation changes; (c) prepare administrative and procedural documents for the operation of the NTF; (d) produce a step by step timed guide to the setting up of the NTF; (e) draft recommendations for possible support by international donors in the establishment of the NTF and in evaluating its performance after a suitable interval of time (2 years?) ANNEXES
5.1 Botswana 5.2 Czech Republic 5.3 Ireland 5.4 Italy 5.5 Kyrgyzstan 5.6 South Africa
7. Specific ToR ANNEX 1 – LEGISLATION REVIEWED Legislation on Education and Employment
and Unemployment 2002 Legislation on Foundations
Legislation on Tax and Finance
Government Decrees
Education and Training 2004
and Middle Professional Education 2008
from Gross Income for the Purposes of Taxation, No 753-N 1998
ANNEX 2 - REVIEW OF CURRENT VET SYSTEM, EMPLOYMENT SITUATION AND RELEVANT POLICY IN ARMENIA AN OVERSIGHT TO RA EDUCATIONAL SECTOR AND VET SYSTEM The transition period had its negative impact on Armenian educational system. Decline in the quality of education services was due to reduction of state expenditures allocated to the sector of education. Costs of consolidated budget allotted to the sector of education comprise 2, 3% of GDP, which is 2 times less than the international indicators. 65% of state educational funds are allocated to the sector of basic and secondary education. Only 16% of these funds are used to finance vocational education, and this indicator also is lower than the European indicators. There are two issues of concern in RA educational system: low remuneration and elderly age of the teaching staff. Average teaching age is increasing annually. The percentage of teachers who have had trainings is very low. Only 45% of all VET system costs is financed by the state, the rest is covered by means of education fees. The system of Vocational education and training includes:
Craftsmanship schools have 4100 students, state colleges - 28300 and private colleges - 2600 students. 67% of students are female. High percentage of female involvement is due to the fact that according to RA Law males of this age should serve in the army. Distribution of craftsmanship college students per major professions is the following: service -39%, transport - 18%, light industry 10% etc. Distribution of professions in colleges is the following: healthcare and sport - 31%, economics - 16%, pedagogy - 14%, transport and communication - 9%, etc. The base of college attendees is decreasing annually. In 1999 650000 students studied in secondary schools, while in 2004 this number decreased to 580000, and in 2008 to about 500000. The number of high school students, among them the number of boys, is decreasing even faster because of migration and evasion from military service. The ratio of college and higher education students is disproportionate. There are 56000 students in Higher educational institutions and 28000 students in colleges, while in all European countries this proportion is just the contrary and the number of college students is several times more than the number of students in higher educational institutions (HEI). The ratio between the number of students of many private HEIs and that of colleges is even worse. There are 22000 students in RA private HEIs and 2500 students in private colleges. HEI education in Armenia is considered very fashionable and necessary, and also a means for males to evade from military service. That’s why there are 175 HEI students per 10000 people and only 75 college students per 10000 people. The number of college students who are above 25 is very low. There are very few training courses for them, and in many colleges simply there are no students at this age. There are only a few colleges which have students of higher age and these colleges organize short-term courses for middle age people who are outside of the college. Main constraints and problems of VET system are the following:
RA Employment Overview During the transition period fluctuations in the employment level and structure had clear manifestations, which directly or indirectly caused increase in unemployment, revenue reduction and increase in revenue inequality. According to official statistics, in 2006 1.2 mln people (including the employed are approximately 1.2 mln.) in Armenia were economically active. About 9000 people are officially considered as unemployed, which is beyond the realistic scope. According to different calculations unemployment in Armenia is up to 30-35%. It is also worth noting that according to the existing law all farmers who have privatized lands are also considered as employed, they comprise about 46% of the employed. According to 2006 official data educational level for the economically active population is the following:
The level of non-formal employment (self-employment and unregistered employment) in Armenia is very high – 30-38% of total employment. About 80% of trade and service sector employees work without a contract. In this respect the level of shadow economy is very high; according to some calculations it is even higher than 40%. This hinders building of the portrait of the labor market, employment, professional needs, workforce demand and other factors. Statistical data on employment do not present a unified data, e.g. raise in employment does not result in reduction of unemployment, sometimes even vice-versa happens. Employment doen not provide proper minimal standard of life. The lowest unemployment level is recorded among people of 60-65 - about 19%. While the highest unemployment level is recorded among young people of 15-30, and this indicator is 43%. 55% of 15-24 year olds in Armenia is economically active, but only half of them are employed. Unemployed of this age are 27% of total unemployed in Armenia. A significant portion of young people is neither employed nor studying in any educational institution. They are approximately 35% of all young people. Approximately 50000 young people finish secondary school annually and generally fail to find an employment, as they do not have relevant knowledge and skills and did not have any preparatory training course. And those who take courses or receive formal education, do not succeed to find a fob because if the quality of education and other reasons. 60% of employed young people do not work in their profession. Studies conducted by the World Bank revealed that according to self-estimation of 51% of young people reason for their unemployment is lack of relevant qualification, skills and knowledge. Another 31% considers that they have received wrong education which is not in demand in the labor market. Young unemployed have relatively lower level of education and they also do not have either an opportunity or intention to increase their educational level. About 43% of all young people have full professional education of an educational level, including 5% - preliminary professional, 25% - secondary professional and 13% - higher education. General picture of the unemployed as per educational level is as follows:
In Armenia the ratio between job seekers and those who succeed is extremely big. There are 130000-150000 job seekers in Armenia. Only 5-8% of job seekers find a job, reason accounting for this is not only lack of workplaces but also professional non-compliance of job seekers with the requirements of the employer, their week knowledge and skills. Only 20% of them have tried to have training or increase their qualification in order to find a job. Unemployment period for the young people registered in the Employment service agencies is generally 17-19 months. Registered unemployment period for those who have a profession, such as lawyers, engineers and medical personnel, is up to 25 months. Study of the young unemployed revealed that the higher the educational level of the young unemployed the shorter the period of registered unemployment. Also if they take specific short-term trainings conducted with application of modern technology, the period of their unemployment may reduce to 3-12 months. Thus, short-term, targeted and mentored training courses are simply rescuing measures for the solution of the issue of unemployment among young people. Expressed characteristics of the unemployment in Armenia are the following: continuity, durability and prevalence among the young people and those who have low education level. The number of untrained people is very high. Also the unemployed people lack trust and reliance in the Employment Service Agencies. The Labor market is famous for its extremely high level of volume and structure inconsistency between the supply and the demand. For example late in 2006-2007 the demand for the labor force formally submitted by the employers for the next year was 1200-1300 people, about 1000 of which - with workforce specialization. Main constraints and problems of the employment sector are the following:
VET Providers in RA
ANNEX 3 - REVIEW OF FINANCIAL MECHANISMS RELEVANT TO NTF
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