Asian Development Bank: "Skills Promotion Funds"

Four major sector-based vocational training corporations, SENAI, SENAC, SENAR and SENAT, operate throughout Brazil. All are privately managed and financed from the compulsory payroll levy assessed on employers. Established under the Brazilian Civil Code and administered by the National Federations of Employers (Industry, Commerce, Agriculture and Transport), these corporations are private associations with the exception of SENAR which has a tripartite board involving employees' representatives. As vocational training institutions (VTls), they have a particular status and are formally supervised by the Ministry of Labor's Secretariat of Vocational Education. They also maintain links with the Ministry of Education and the State Secretariats of Education. Although all of the VTls are regulated by the same laws and similar rules, there is no inter-institutional coordination.

SENAI, SENAR and SENAC (SENAT is currently in development) run 1,500 units or schools with an overall enrolment of 3.7 million. By delivering a wide range of mostly short-term training and upgrading programs for adult workers, the VTIs supply well-trained and easily employable graduates. SENAI employs 7,500 instructors within a staff contingency of 15,000 while SENAC maintains a slightly higher ratio with more than 9,000 instructors employed within a total staff contingency of 14,700.

In 1994, SENAI provided short- and medium-term training programs for more than 2.2 million trainees. Of this number, 28,000 adults over the age of 16 enrolled in SENAI's initial and upgrading courses in more than 100 trades and more than 1.8 million enrolled in the "industrial courses" offered to employees, the unemployed and disadvantaged youth. In addition, SENAI is the only VTI offering long-term industrial apprenticeship programs for approximately 90,000 youth aged 14-18. SENAI also has long-term experience in the provision of vocational education, operating 14 technical schools, with an overall enrolment of 20,000 trainees, and offering both a four-year course combining academic and technical education as well as a one to two-year course in different vocational disciplines.

The VTls are funded by the compulsory monthly levies imposed on payrolls or the production value of private and public enterprises. For example, SENAI's funds are obtained from a compulsory contribution of one percent (known as the "ordinary contribution") from industries. Those industrial corporations with over 500 employees have to pay an "additional contribution" of 0.2 percent of payroll which is paid directly to SENAI and used for special scholarship programs for technicians, managers and teachers.

Although SENAC generates approximately 30 percent of its budget by selling courses to communities rather than to enterprises, the remaining 70 percent of its revenue is levy-based. SENAR is sourced by a 2.5 percent levy imposed on production value and the funds collected are used to finance training and social programs. SENAT is financed by a levy of one percent which is also paid by autonomous workers. Both SENAI and SENAC operate exemption tax schemes or agreements which allow enterprises to operate their own training institutions or programs.

In addition, several major social security institutions are financed by compulsory contributions imposed on the economic sector. The Industry Social Service, Commerce Social Service and Transport Social Service benefit from additional payroll levies of 1.5 percent with the latter drawing one percent. Finally, the Small Business Assistance Service, which provides managerial and technical assistance to small entrepreneurs, is financed through a 1.5 percent payroll levy imposed on all sectors. An additional 2.5 percent payroll levy - the "Education Wage Tax" - is paid by all economic sectors to finance basic education. Not surprisingly, it is estimated that an employer's direct labor cost (wages) may be increased by more than 100 percent when the wide array of obligatory taxes, levies and social contributions established by law are taken into consideration.

Ordinary levy and other social security contributions are collected by the National Institute of Social Security. The Institute withholds one percent in order to recover its operating expenses before transferring the funds to the national headquarters of SENAI and SENAC. In 1995, SENAI, SENAC and SENAR raised a total of US$447 million, US$216 million and US$100 million, respectively.

Eighty-five percent of SENAI's levy-based funds are transferred to the Regional Departments under which the contributing enterprises are registered. Five percent is allocated to the National Department, two percent is transferred to the National Confederation of Industries, four percent consists of the aid fund for those Regional Departments with insufficient funds to cover their administrative and operating expenses and the remaining four percent is allocated to further SENAI's expansion plans in the north and north-east regions of Brazil.

The additional contribution of 0.2 percent, paid by firms with more than 500 employees, is collected and directly audited by SENAI. The National Department allocates these funds for the preparation and implementation of training programs for SENAI staff and the management, technical staff and instructors of levy paying enterprises.

The Brazilian Civil Code requires that VTI financial audits must be approved by the Federal Account Court with the. VTI Fiscal Councils maintaining responsibility for detailed auditing of the Regional and National Departments.

In practice, the major Brazilian VTIs operate as training cooperatives. Rather than actually buying training services, Brazilian enterprises receive free training and upgrading courses in return for their contributions. It is difficult, therefore, to claim that the volume of training an enterprise receives from SENAI, for example, corresponds to the amount of money that the same enterprise contributed to SENAI. In addition, the centrally-provided, VTI-based training system does not leave much room for the development of enterprise-based skills training..

As such, Brazil has significantly expanded an incentive system, known as a co-financing agreement, to support the growth of enterprise-based training. The co-financing agreement is a private contract between VTI and an enterprise concerning payroll levy. Instead of paying the levy in full to the Government and obtaining training from VTI employers establish direct relationships with VTIs for that proportion of the levy to be spent on enterprise-based training.

There are two types of co-financing agreements. Exemption Agreement (EXA) includes the entitlement for exemption from the "ordinary levy contribution" and/or for partial retention the "additional contribution". The EXA usually allows enterprises spend a proportion (between 40 and 60 percent) of their payroll levy bills on training - a percentage which would otherwise be destined for SENAI. This money covers the cost of enterprise-based training primarily the recurrent costs of an enterprise's own training school EXAs are not a common practice and are used primarily by leading foreign corporations as well as major public transport, energy and water supply firms capable of running their own training schools.

A Technical and Financial Cooperation Agreement (TFC) allows enterprises to pay into VTls at a level of only 90 percent ar to retain a fixed rate (10 percent) of their payroll levy bills, provide that the money is spent primarily on on-the-job training. TFCs a more appropriate for shorter duration training and can be applied I smaller enterprises which lack their own training facilities. As such TFCs have significantly increased during the last decade.

Under both EXAs and TFCs, enterprises are offer( technical assistance for the development and implementation training programs by, for example, SENAI. EXAs also include the VTIs' responsibility for the supervision of subsidized training schools. Those enterprises involved in TFCs must also seek SENAI's approval of their annual training plans and submit month reports, indicating the number of enrolments, training hours p participant and training-related expenditures. The results of training implemented by enterprises under SENAI supervision are record (as SENAI's "indirect action").

The rapid expansion of TFCs is due to the advantages which the scheme provides for VTls and enterprises. Employers can invest a significant amount of money in enterprise-based training, without any significant bureaucratic controls. TFCs appear to be clearer and easier for enterprises to implement as funds are made available immediately, before training expenditures are incurred. This financial incentive has generated massive investment on the part of enterprises in on-the-job training especially in the technological and job safety areas. For example, in 1984, workers accounted for only 38 percent of enrolments within SENAI's "indirect action" category while the remaining 62 percent consisted of foremen, middle-level technicians and managers. By 1991, workers' participation had risen to 53 percent. Employers have also increased their investments in short-term basic education including literacy and mathematics skills development.

By allowing VTls to delegate responsibility for on-the-job training to enterprises, co-financing agreements have reduced market pressure on VTIs and guaranteed a direct flow of funds between enterprises and VTIs without government intervention. VTls benefit from a more correct assessment of enterprises' levy allocations and the flow of funds is facilitated due to fewer delays under conditions of soaring inflation.

The number of co-financing agreements has been increasing rapidly. For example, from 1980 to 1992, SENAI's co-financing agreements jumped from 13 to 31 EXAs and from two to 185 TFCs. Initially, SENAI was cautious, signing only with large enterprises employing more than 2,000 employees and running well-organized training facilities. Since 1992, SENAI has established TFCs with enterprises of any size (although most of them still have over 500 employees) and has simplified follow-up and reporting procedures.

From 1987 to 1991, EXA- and TFC-related enrolments with SENAI increased from 158,000 to 220,000. Enrolments under the TFCs jumped from 78,000 to 126,000 for smaller enterprises, accounting for almost 40 percent of the total enrolment. Due to the short-term nature of co-financing agreements, they cover a high percentage of enrolments but have little impact over the VTIs' VET programs. For example, in 1991, EXA- and TFC-related enrolments increased to 40 percent of total enrolment but still accounted for only 13 percent of SENAI's total training time.

The increase in the number of enterprises participating in co-financing agreements has also increased the amount of revenue received by the VTIs through direct levies. For example, in 1987, SENAI received an 83 percent levy through the Federal Government and only 13 percent from enterprises under co-financing agreements. In 1992, the amount paid by enterprises under the EXAs and TFCs was estimated at 44 percent of SENAI's overall budget.

The total training expenditures of enterprises participating in TFCs, as well as the proportion of expenditures stemming from co-financing funds, has increased significantly. Enterprises that signed TFCs with SENAI spent US$4.7 million in 1987 on their training programs, 39 percent of which came from TFC funds. In 1991, the enterprises involved in the TFCs invested a much greater amount, US$8.3 million, of which 49 percent came from TFC funds. The rise in training expenditures is attributable to both the expansion of TFC contracts and to the increase in employers' training investments over and above those made to TFC funds. While the amount of training expenditures made by enterprises participating in the EXA (US$24.4 million in 1991) is higher, contributions are not likely to increase.

Despite the fact that TFCs have added flexibility to the financing of enterprise-based training, they provide relatively few options for employers. Greater flexibility and demand-driven training would require further transformation of VET financing and organization, the development of a more competitive training market in Brazil and additional steps towards the decentralization and privatization of training institutions.

The Brazilian revenue-generating levy scheme offers several important advantages over similar schemes in other countries. It provides funds for private VET institutions thus reducing the gap between training supply and demand with positive implications for the cost-effectiveness of financing. Secondly, the levy now bypasses the government budget and goes directly to the training corporations. As a result, the monetary value of the levy is protected against inflation and the financial flexibility of training institutions is improved.

The major deficiency of revenue-generating levies - their inability to provide incentives for employer training - is very apparent in Brazil. Neither SENAI nor SENAC have new incentives to offer to the steadily increasing number of industrial enterprises providing financing to the Wis. At the same time, SENAI and SENAC have monopolized the training market and, through their levy-based financing, have bound most enterprises to their brand of centrally developed, standardized training programs which provide few opportunities for shop-floor worker training. In addition, many enterprises pay a levy but are not concerned with either receiving training services or with signing a training agreement. The increase in the number of training agreements is therefore related directly to the interest of the most active employers in managing their training allocation. The number of agreements is still very small and local markets do not send strong signals to employers to train and, in general, employers show little concern for training. Such a training profile automatically reduces the number of enterprises, particularly smaller enterprises, likely to enroll in TFCs or EXAs and impairs the development of a competitive training market.

Other users of the Latin American model, such as Venezuela, Honduras and Peru, are moving towards a slightly less rigid levy scheme. Recently, Brazil also introduced training agreements designed to gradually allocate supervisory rather than provisionary functions to training institutions with respect to enterprise-based training. However, co-financing agreements, on their present scale, are hardly a long-term solution. The Brazilian levy system has been operational and successful for over fifty years and has fulfilled its major goal of strengthening national training institutions. However, these institutions have reached their growth limit and the Latin American revenue-generating levy-based model can no longer adequately serve as a lever for the improvement of training or further the development of training across the country.

Unemployment insurance funds are very common in industrialized and most transitional economies and many share certain characteristics with the classic revenue-generating levy system. For example, to enhance employer/employee financial involvement in alleviating the problem of growing unemployment, many countries have introduced unemployment insurance tax schemes which impose levies on enterprises' payrolls and employees' wages. In some countries, a proportion of unemployment insurance-based funds is allocated for financing VET institutions and enterprise-based training and retraining. Such schemes can be national and compulsory as in Denmark or voluntary as in Sweden where participating enterprises and workers are entitled to training grants or to reimbursement of their training expenditures.

A reform of the Japanese unemployment insurance system was proposed in the early 1970s in order to utilize the experience of some European countries in the areas of "employment tax" and making tax-based funds available for HRD. In 1974, Japan's Unemployment Insurance was renamed the Employment Insurance, effectively establishing a dedicated financial account entitled "Special Services for Employment Stabilization, Workers' Vocational Abilities Development and Improvement of Workers' Welfare". With functions similar to the employment tax, a proportion of the account subsidizes employers' costs of vocational training programs and maintains public VET institutions.

In principle, this practice is similar to a training levy common in other countries. However, it differs in that it is associated with the Employment Insurance system and covers only insured employers and workers (all employers with one or more employees must join this insurance system).

Secondly, it is embedded in the Japanese environment which has historically supported the concept of "lifelong employment" and is highly conducive towards investment in HRD. The development of their employees' vocational skills is considered to be one of the most important social responsibilities of Japanese employers. Vocational skills development is normally fully financed and provided by enterprises and most, especially the larger ones, share similar philosophies and policies concerning long-term programs for employment and human resource development. world

In contrast to many Western countries, this high employer involvement in HRD takes into account the long period of time required for skill formation. Employees are encouraged to work at a company for as long as possible thus strengthening the reliability of employers' investment in human capital. As such, employer perceptions of, and actions towards, this type of investment are quite different from those in other parts of the world.

The Employment Insurance budget is divided into two accounts. Employers and workers pay equal contributions of 0.55 percent of their individual wages to the unemployment benefits account while the Government contributes one-third of the total cost of unemployment benefits and all administrative costs. The second account is contributed to by employers only and covers vocational skills development, employment stabilization and the improvement of workers' welfare. The required contribution is 0.35 percent of company payrolls, but building/construction employers have to pay an additional 0.03 percent for the improvement of working conditions and the welfare of construction workers.

The budgets for the Employment Insurance system, for both accounts and services, are subject to approval by the Diet (the Japanese Parliament). Although the budgets of the three special services fluctuate annually, in principle all three are roughly equal. For example, the FY1993 budgetary share for Vocational Skills Development Services was approximately Yen 105 billion, with Yen 90 billion stemming from the relevant account of the Employment Insurance and the residual drawn from the general government budget and from the account of the Workers Accident Compensation Insurance. Of the total budget of Yen 105 billion, Yen 79 billion (approximately US$700 million or 0.1 percent of companies' payrolls) was allocated to financing public VET institutions, training for the handicapped, international cooperation and administration. The remainder of the budget, Yen 26 million or 0.03 percent of companies' payrolls, was utilized for the promotion of HRD in the private sector.

The Vocational Abilities Development Service primarily focuses on the financing of public training institutions and the provision of financial assistance to authorized training programs for the private sector. Public VET institutions financed from this account train employees of small enterprises and the unemployed. In addition, they offer pre-employment training to regular school graduates, the majority of whom will eventually be employed by small enterprises. As such, a much greater proportion of tax-based money channeled through public VET is utilized to support enterprises, particularly small enterprises. In FY 1993, 380 public VET institutions provided training for almost 382,000 trainees of whom only 27,000 were regular school graduates.

The frameworks for authorized training were introduced by the Vocational Training Law of 1969 which formulated the social responsibilities of employers as well as national and local governments in relation to the vocational skills development of employees. Revised in 1985 and renamed the Human Resources Development Promotion Law, standards have since been revised and updated several times following technological progress. Vocational training in the private sector is authorized by the Ministry of Labor only if it is developed in accordance with the standards and guidelines of the Human Resources Development Promotion Law. The Law prescribes eligibility criteria for the authorized provision of initial training for school leavers, upgrading and retraining of employed workers and training for the unemployed. It also specifies the qualifications of trainees and instructors, course duration as well as training curricula, facilities and equipment requirements for each course and trade.

The Vocational Abilities Development Service provides subsidies and grants to encourage employers to provide both inplant training and to engage in training courses outside their companies. These incentive schemes focus mainly on small enterprises although, under certain conditions, large companies may also receive grants but with varying entitlements. The subsidies program deals mainly with training in manufacturing whereas the grants program covers the manufacturing, commerce, services and information sectors.

A subsidy normally amounts to two-thirds of an employer's training costs including the maintenance of training facilities. Applications for subsidies are submitted by enterprises to governors of prefectures after completion of the authorized training programs or the end of a fiscal year.

When experiencing difficulty in providing training individually, small enterprises are encouraged to establish cooperative training associations. According to the Human Resources Development Promotion Law, such associations can receive the status of a juridical person and provide authorized training, eligible for subsidies, for their member enterprises.

Authorized training programs are conducted by both private providers and community training centers. In 1991, 1,330 private training institutions, including individual enterprises and employers' training cooperatives, enrolled 165,000 workers. In addition, 71 community vocational training centers are located throughout the country to assist employers in the implementation of HRD programs. Constructed and equipped by the Employment Promotion Corporation (EPC), which is financed from a special account of the Employment Insurance, the centers are managed by employers' training cooperatives and, as such, their authorized training programs are entitled to subsidies.

Various kinds of grants programs are available to employers who promote continuing education and training for their employees. In-plant training, outside school-based training courses and vocational skill testing are eligible for grant funding. Continuing education and training is not confined only to authorized training but can involve any type of HRD program.

The monetary value and the eligibility criteria associated with grants are both relatively complicated. A grant for outside training normally equals one-quarter of the relevant employer expenditures incurred. For example, one quarter of trainees' wages paid during their training leave and one quarter of direct training and other costs may be covered. For smaller companies with fewer than 300 workers, grants can cover up to one-third of outside training expenditures.

In terms of in-plant training, the monetary value of a grant depends on the size of the company, the age structure of its workers and the type (operational or salary) costs involved. On average, grants equal one-third of employers' training expenditures. Most grants are paid by governors of prefectures while some are paid by the 600 Public Employment Security Offices of the Ministry of Labor.

VET financing in Japan is organized via two streams: the prefectural governments and the EPC. At the prefectural level, the Department of Labor is in charge of locally provided vocational education and training and monitors and finances higher technical colleges (university colleges), vocational skills development promotion centers and training subsidies to enterprises. One quarter of the overall VET allocation for these institutions comes from the employment insurance tax which is administered by the Ministry of Labor. The remaining 75 percent is based on local taxes. Institutional budgets are based solely on training capacity and full enrolment.

The EPC is administered by the Ministry of Labor and financed entirely from employment insurance tax. Although it is decentralized towards lower-level governments, the catchment area of the EPC's regional offices does not coincide with those of the prefectures. EPC operations are independent of prefectures and no essential coordination at the local level exists. Moreover, the EPC maintains its own colleges and training centers which operate parallel to those run by prefectural governments. However, the EPC training centers are primarily for the use of the unemployed and older workers and have a much greater variety of courses. Centers receive grants which are based on, but not limited to, the number of enrolments.

The Employment Insurance system is administered by the Ministry of Labor but any major policy decisions such as revisions of the Employment Insurance Law or changes in the financial contribution ratio, qualifications of trainees, grant amounts and periods of time during which unemployment benefits are paid all require the approval of the Employment Insurance Council. With representation from employers and workers, the Employment Insurance Council enables social partners to remain informed and exert influence upon the status of the System. The Employment Safety Councils were established at national and prefectural levels under the Employment Safety Law of 1947 and the Employment Insurance Law of 1974 as advisory bodies to the Minister of Labor regarding the Employment Service and the Employment Insurance. These Councils are empowered to examine budgets, plans and programs proposed by the Ministry of Labor for the Employment Insurance system.

The practice of financing public VET institutions' initial training and upgrading programs in small enterprises through the employment insurance tax was first agreed upon by employers' organizations and unions and eventually legislated. As such, the social partners' involved in training decided to contribute financially to a special account from which most of the them would normally not expect to draw financial assistance. Therefore, a relatively narrow range of beneficiaries explains the very low rate assigned to the employment insurance tax-based allocation for training. As a result, it is difficult to expect strong involvement by employers' in the administration of tax-based funds. Firstly, the cumbersome method used to calculate tax-based training allocations tends to reduce their accountability. Secondly, many levy-paying employers in Japan do not receive any direct training-related benefits from their contributions.

EMP/SKILLS - Skills and Employability Department